Pilipinas Shell Petroleum Corporation

Transcription

SUBJECT TO COMPLETION
This Preliminary Prospectus and the information contained herein are subject to completion or amendment without notice. The Offer Shares may not be sold nor may an offer to buy be
accepted prior to the time that the Preliminary Prospectus is issued in final form. Under no circumstances shall this Preliminary Prospectus constitute an offer to sell or the solicitation of an
offer to buy any Offer Shares nor shall there be any offer, solicitation or sale of the Offer Shares in any jurisdiction
PRELIMINARY PROSPECTUS
DATED [], 2016
STRICTLY CONFIDENTIAL
(Incorporated with limited liability in the Republic of the Philippines)
Primary Offer and Secondary Offer of up to [300,000,000] Common Shares
with an Over-allotment Option of up to [30,000,000] Common Shares
Offer Price of up to ₱[90.0] per Share
To be listed and traded on the Main Board of The Philippine Stock Exchange, Inc.
Global Coordinator and International Bookrunner
Domestic Lead Underwriter and Domestic Bookrunner
Financial Adviser
The date of this Prospectus is [ ], 2016.
THE PHILIPPINE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE AND SHOULD BE
REPORTED IMMEDIATELY TO THE PHILIPPINE SECURITIES AND EXCHANGE
COMMISSION.
Shell House
156 Valero Street
Salcedo Village
Makati City 1227
Philippines
+63 2 8166501
http://www.pilipinas.shell.com.ph
This Prospectus relates to the offer and sale of up to [300,000,000] common shares (the Firm Offer, and such
shares, the Firm Shares), with par value of ₱1 per share (the Shares), of Pilipinas Shell Petroleum Corporation,
a corporation organized under Philippine law (the Company). The Firm Shares will comprise (i) up to
[30,000,000] new common shares to be issued and offered by the Company on a primary basis (the Primary
Offer and such common shares, the Primary Offer Shares) as further described below and (ii) up to
[270,000,000] existing common shares offered by the Selling Shareholders (as defined herein) pursuant to a
secondary offer (the Secondary Offer and such common shares, the Secondary Offer Shares). The Firm
Shares will be offered at a price of up to ₱[90.0] per Firm Share (the Offer Price). The determination of the
Offer Price is further discussed on page 48 of this Prospectus and is based on a book-building process and
discussions between the Company, J.P. Morgan Securities Plc (J.P. Morgan or the Global Coordinator and
International Bookrunner), and BPI Capital Corporation (BPI Capital or the Domestic Lead Underwriter
and Domestic Bookrunner). A total of up to [1,615,944,202] Shares will be outstanding after the Firm Offer.
The Firm Shares will represent approximately [18.6]% of the issued and outstanding capital stock of the
Company after completion of the Offer (as defined below).
Certain Selling Shareholders have granted [] or its relevant affiliate, in its role as stabilizing agent (the
Stabilizing Agent), an option exercisable in whole or in part from and including the date of listing and when
trading of the Shares commences on The Philippine Stock Exchange, Inc. (PSE) (the Listing Date) and ending
on the date 30 calendar days from and including the Listing Date to purchase up to an additional [30,000,000]
Shares at the Offer Price (the Optional Shares), on the same terms and conditions as the Firm Shares as set
forth in this Prospectus, solely to cover over-allotments, if any (the Over-allotment Option). The Overallotment Option, to the extent not fully exercised by the Stabilizing Agent, shall be deemed cancelled and the
relevant Optional Shares shall be re-delivered to the relevant Selling Shareholders. The Firm Shares and the
Optional Shares are referred to as the Offer Shares, and the offer of the Offer Shares is referred to as the Offer.
See “Plan of Distribution”. The Offer Shares will be listed and traded on the Main Board of the PSE.
Pursuant to its articles of incorporation, the Company has an authorized capital stock of ₱2,500,000,000 divided
into 2,500,000,000 Shares with a par value of ₱1 per Share, of which 1,585,944,202 Shares are outstanding as of
the date of this Prospectus. The Offer Shares are Shares of the Company.
The total proceeds to be raised by the Company from the sale of the Primary Offer Shares will be approximately
₱[2,700.0] million. The net proceeds to be raised by the Company from the sale of the Primary Offer Shares
(after deduction of estimated fees and expenses of approximately ₱525.9 million) will be approximately
₱[2,174.1] million. The Company intends to use the net proceeds from the Primary Offer to fund capital
expenditure, working capital and general corporate expenses. For a more detailed discussion of the Company’s
proposed use of proceeds, see “Use of Proceeds”. The Selling Shareholders will receive net proceeds of
approximately ₱[26,478.9] million from the sale of the Secondary Offer Shares and the Optional Shares,
assuming full exercise of the Over-allotment Option (after deducting fees and expenses payable by the Selling
Shareholders), while the Company will not receive any of such proceeds.
The Global Coordinator and International Bookrunner and the Domestic Lead Underwriter and Domestic
Bookrunner will receive a transaction fee from the Company based on a percentage of the gross proceeds from
the sale of the Offer Shares. This is inclusive of the amounts to be paid to other participating underwriters and
selling agents, where applicable. Any Firm Shares left unsubscribed after the Trading Participants and Retail
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Offer Period will be underwritten by the Global Coordinator and International Bookrunner and the Domestic
Lead Underwriter and Domestic Bookrunner. For a more detailed discussion, see “Plan of Distribution”.
Up to [207,000,000] Offer Shares (or [69]% of the Offer Shares) (the Institutional Offer Shares) are (subject
to re-allocation as described below) being offered and sold (i) outside the United States by the Global
Coordinator and International Bookrunner in offshore transactions in reliance on Regulation S (Regulation S)
under the United States Securities Act of 1933, as amended (the U.S. Securities Act) and (ii) to domestic
qualified buyers (the Domestic QBs) in the Philippines by the Domestic Lead Underwriter and Domestic
Bookrunner (collectively, the Institutional Offer).Up to [90,000,000] Offer Shares (or 30% of the Offer
Shares) (the Trading Participants and Retail Offer Shares) are (subject to re-allocation as described below)
being offered in the Philippines to all of the trading participants of the PSE (the PSE Trading Participants) and
to local small investors (the LSIs) under the Local Small Investors Program in the Philippines (the Trading
Participants and Retail Offer). The amount of Offer Shares to be made available to the PSE Trading
Participants and LSIs will be up to [60,000,000] and [30,000,000] Offer Shares, or [20]% and [10]%,
respectively, of the Offer Shares.
Up to [3,000,000] Offer Shares (or [1] % of the Offer Shares) (the Employee Tranche Offer Shares) are
(subject to re-allocation as described below) being offered in the Philippines to all the regular employees of the
Company in the Philippines who are on its payroll as of June 30, 2016 and continue to be regular employees
during the Trading Participants and Retail Offer Period (the Employee Tranche Offer).
The allocation of the Offer Shares between the Trading Participants and Retail Offer, and the Institutional Offer
and Employee Tranche Offer is subject to adjustment as may be agreed between the Global Coordinator and
International Bookrunner and the Domestic Lead Underwriter and Domestic Bookrunner. In the event of an
under-application in the Institutional Offer and Employee Tranche Offer and a corresponding over-application
in the Trading Participants and Retail Offer, Firm Shares in the Institutional Offer and Employee Tranche Offer
may be reallocated to the Trading Participants and Retail Offer. If there is an under-application in the Trading
Participants and Retail Offer and if there is a corresponding over-application in the Institutional Offer and
Employee Tranche Offer, Firm Shares in the Trading Participants and Retail Offer may be reallocated to the
Institutional Offer and Employee Tranche Offer. The reallocation shall not apply in the event of overapplication or under-application in both the Trading Participants and Retail Offer, on the one hand, and the
Institutional Offer and Employee Tranche Offer, on the other hand.
Each holder of Shares will be entitled to such dividends as may be declared by the Company’s Board of
Directors (the Board), at its sole discretion, provided that any stock dividend declaration will require the
approval of shareholders holding at least two-thirds of the Company’s total outstanding capital stock. The
Corporation Code of the Philippines, Batas Pambansa Bilang 68 (the Philippine Corporation Code), has
defined “outstanding capital stock” as the total shares of stock issued, whether paid in full or not, except
treasury shares. There can be no guarantee that the Company will pay any dividends in the future. Dividends
may be declared only from the Company’s unrestricted retained earnings. See “Dividends and Dividend Policy”.
All of the Shares issued and to be issued pursuant to the Offer have, or will have, identical rights and privileges.
The Shares may be owned by any person or entity regardless of citizenship or nationality.
The listing of the Offer Shares is subject to the approval of the PSE. An application to list the Offer Shares as
well as the rest of the Shares was approved on [], 2016 by the board of directors of the PSE. 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 this Prospectus. Such an approval for listing is permissive only
and does not constitute a recommendation or endorsement by the PSE or the Philippine Securities and Exchange
Commission (the Philippine SEC) of the Shares. Prior to the Offer, there has been no public market for the
Shares. Accordingly, there has been no market price for the Shares derived from day-to-day trading.
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Application has been made to the Philippine SEC to register the Shares under the provisions of the Securities
Regulation Code of the Philippines (SRC).
Before making an investment decision, prospective investors should carefully consider the risks associated with
an investment in the Shares. These risks include:

risks relating to the Company’s business and operations;

risks relating to the downstream oil industry;

risks relating to the Philippines;

risks relating to the Offer and the Offer Shares; and

risks relating to the presentation of certain statistical information in this Prospectus.
See the section entitled “Risk Factors” in this Prospectus, which, while not intended to be an exhaustive
enumeration of all risks, must be considered in connection with a purchase of the Offer Shares.
A REGISTRATION STATEMENT RELATING TO THESE OFFER SHARES HAS BEEN FILED
WITH THE PHILIPPINE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET
BEEN DECLARED EFFECTIVE. NO OFFER TO BUY THE OFFER SHARES CAN BE ACCEPTED
AND NO PART OF THE PURCHASE PRICE CAN BE ACCEPTED OR RECEIVED UNTIL THE
REGISTRATION STATEMENT HAS BECOME EFFECTIVE, AND ANY SUCH OFFER MAY BE
WITHDRAWN OR REVOKED, WITHOUT OBLIGATION OR COMMITMENT OF ANY KIND, AT
ANY TIME PRIOR TO NOTICE OF ITS ACCEPTANCE GIVEN AFTER THE EFFECTIVE DATE.
AN INDICATION OF INTEREST IN RESPONSE HERETO INVOLVES NO OBLIGATION OR
COMMITMENT OF ANY KIND. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY.
The Offer Shares are offered subject to the receipt and acceptance of any order by the Company and subject to
the Company’s right to reject any order in whole or in part. It is expected that the Offer Shares will be delivered
in book-entry form against payment thereof to the Philippine Depository and Trust Corporation (the PDTC) on
or about [November 10], 2016.
By:
EDGAR O. CHUA
Chairman of the Board and President of the Company
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No representation or warranty, express or implied, is made by the Company or the Global Coordinator and
International Bookrunner or the Domestic Lead Underwriter and Domestic Bookrunner, regarding the legality of
an investment in the Offer Shares under any legal, investment or similar laws or regulations. The contents of
this Prospectus are not investment, legal or tax advice. Prospective investors should consult their own counsel,
accountant and other advisors as to legal, tax, business, financial and related aspects of a purchase of the Offer
Shares. In making any investment decision regarding the Offer Shares, prospective investors must rely on their
own examination of the Company and the terms of the Offer, including the merits and risks involved. Any
reproduction or distribution of this Prospectus, in whole or in part, and any disclosure of its contents or use of
any information herein for any purpose other than considering an investment in the Offer Shares is prohibited.
THE OFFER SHARES ARE BEING OFFERED ON THE BASIS OF THIS PROSPECTUS ONLY. ANY
DECISION TO PURCHASE THE OFFER SHARES MUST BE BASED ONLY ON THE INFORMATION
CONTAINED HEREIN.
The Offer Shares have not been and will not be registered under the U.S. Securities Act and are not being
offered or sold in the United States. The Offer Shares may be subject to certain transfer restrictions as described
herein.
No person has been authorized to give any information or to make any representations other than those
contained in this Prospectus and, if given or made, such information or representations must not be relied upon
as having been authorized by the Company, the Global Coordinator and International Bookrunner, or the
Domestic Lead Underwriter and Domestic Bookrunner. This Prospectus does not constitute an offer to sell or
the solicitation of an offer to purchase any securities other than the Offer Shares or an offer to sell or the
solicitation of an offer to purchase such securities by any person in any circumstances in which such offer or
solicitation is unlawful. Neither the delivery of this Prospectus nor any sale of the Offer Shares offered hereby
shall, under any circumstances, create any implication that there has been no change in the affairs of the
Company since the date hereof or that the information contained herein is correct as of any time subsequent to
the date hereof.
The operating information used throughout this Prospectus has been calculated by the Company on the basis of
certain assumptions made by it. As a result, this operating information may not be comparable to similar
operating information reported by other companies.
The distribution of this Prospectus and the offer and sale of the Offer Shares in certain jurisdictions may be
restricted by law. The Company, the Global Coordinator and International Bookrunner, and the Domestic Lead
Underwriter and Domestic Bookrunner require persons into whose possession this Prospectus comes to inform
them about, and to observe, any such restrictions. This Prospectus does not constitute an offer of, or an
invitation to purchase, any of the Offer Shares in any jurisdiction in which such offer or invitation would be
unlawful. Each prospective purchaser of the Offer Shares must comply with all applicable laws and regulations
in force in any jurisdiction in which it purchases, offers, sells or resells the Offer Shares, or possesses and
distributes this Prospectus and must obtain any consents, approvals or permissions required for the purchase,
offer, sale or resale by it of the Offer Shares under the laws, rules and regulations in force in any jurisdiction to
which it is subject or in which it makes such purchases, offers, sales or resales, and none of the Company, the
Global Coordinator and International Bookrunner, or the Domestic Lead Underwriter and Domestic Bookrunner
shall have any responsibility therefor.
In connection with the Offer, the Stabilizing Agent or any person acting on its behalf may over-allot Optional
Shares or effect transactions with a view to supporting the market price of the Offer Shares at a level higher than
that which might otherwise prevail for a limited period after the Listing Date. However, there is no assurance
that the Stabilizing Agent (or any person acting on behalf of the Stabilizing Agent) will undertake stabilization
activities. Any stabilization activities may begin on or after the Listing Date and, if begun, may be ended at any
time, but must end no later than 30 calendar days from and including the Listing Date. Any stabilization
activities shall be done in compliance with all applicable laws, regulations and rules. The total number of Offer
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Shares which the Stabilizing Agent or any agent of it may buy to undertake any stabilizing activities shall not
exceed [10]% of the aggregate number of the Firm Shares.
The Company reserves the right to withdraw the offer and sale of Offer Shares at any time, and the Global
Coordinator and International Bookrunner and the Domestic Lead Underwriter and Domestic Bookrunner
reserve the right to reject any commitment to subscribe for the Offer Shares in whole or in part and to allot to
any prospective purchaser less than the full amount of the Offer Shares sought by such purchaser. If the Offer is
withdrawn or discontinued, the Company shall subsequently notify the Philippine SEC and the PSE. The
Global Coordinator and International Bookrunner and the Domestic Lead Underwriter and Domestic
Bookrunner and certain related entities may acquire for their own account a portion of the Offer Shares.
Each offeree of the Offer Shares, by accepting delivery of this Prospectus, agrees to the foregoing.
CONVENTIONS WHICH APPLY TO THIS PROSPECTUS
In this Prospectus, unless otherwise specified or the context otherwise requires, all references to the “Company”
are to Pilipinas Shell Petroleum Corporation. All references to “RDS” are to Royal Dutch Shell plc and its
subsidiaries. All references to the “Shell Group” are to RDS and its affiliates. All references to the “Philippines”
are references to the Republic of the Philippines. All references to the “Government” are to the national
government of the Philippines. All references to the “BSP” are references to Bangko Sentral ng Pilipinas, the
central bank of the Philippines. All references to “United States” or “US” are to the United States of America.
All references to “Peso,” “Pesos” and “₱” are to the lawful currency of the Philippines, all references to “US
dollars” and “US$” are to the lawful currency of the United States, and all references to “Euro” and “€”are to
the lawful currency of the European Union. The Company publishes its financial statements in Pesos.
This Prospectus contains translations of certain Peso amounts into US dollar amounts at specified rates solely
for the convenience of the reader. These translations should not be construed as representations that the Peso
amounts represent such US dollar amounts or could be, or could have been, converted into US dollars at the
rates indicated or at all. Unless otherwise indicated, all translations from Pesos to US dollars have been made at
a rate of ₱47.166 = US$1.00, the average rate for the purchase of US dollars for Pesos which is quoted by the
Philippine Dealing System on December 29, 2015. See “Exchange Rates” for further information regarding the
rates of exchange between the Peso and the US dollar.
The items expressed in the Glossary of Terms may be defined otherwise by appropriate government agencies or
regulations from time to time, or by conventional or industry usage.
BASIS FOR CERTAIN MARKET DATA
Certain statistical information and forecasts in this Prospectus relating to the Philippines and other data used in
this Prospectus were obtained or derived from internal surveys, market research, governmental data, publicly
available information and/or industry publications. Industry publications generally state that the information
they contain has been obtained from sources believed to be reliable. This Prospectus also contains industry
information which was prepared from available public sources and independent market research conducted by
Nexant Singapore Pte. Ltd. (Nexant) to provide an overview of the Philippine downstream oil industry in which
the Company’s businesses operate. However, there is no assurance and accordingly, the Company, Global
Coordinator and International Bookrunner and the Domestic Lead Underwriter and Domestic Bookrunner make
no representation that such information is accurate or complete. Similarly, internal surveys, industry forecasts,
market research, governmental data, publicly available information and/or industry publications have not been
independently verified by the Company or the Global Coordinator and International Bookrunner, or the
Domestic Lead Underwriter and Domestic Bookrunner and may not be accurate, complete, up-to-date, balanced
or consistent with other information compiled within or outside the Philippines. Such information should not be
relied upon in making, or refraining from making, any investment decision.
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PRESENTATION OF FINANCIAL INFORMATION
The Company’s financial statements are reported in Pesos and are prepared based on its accounting policies,
which are in accordance with the Philippine Financial Reporting Standards (PFRS) issued by the Financial
Reporting Standards Council of the Philippines. PFRS include statements named PFRS, Philippine Accounting
Standards, and Philippine Interpretations of International Financial Reporting Interpretations Committee
interpretations issued by the Financial Reporting Standards Council.
This Prospectus includes certain non-IFRS financial measures for the Company, including EBITDA, EBITDA
margins and other related ratios, and certain non-IFRS operating measures for the Company. EBIT and EBITDA
are not measurements of financial performance under IFRS or PFRS and investors should not consider them in
isolation or as an alternative to profit or loss for the year, income or loss from operations, an indicator of the
Company’s operating performance, cash flow from operating, investing and financing activities, or as a measure
of liquidity or any other measures of performance under PFRS. Because there are various EBIT and EBITDA
calculation methods, the Company’s presentation of this measure may not be comparable to similarly titled
measures used by other companies.
The Company’s fiscal year begins on January 1 and ends on December 31 of each year. SyCip Gorres Velayo &
Co. (SGV), a member firm of Ernst & Young Global Limited (EY), has audited the Company’s financial
statements as of June 30, 2016 and for the six months ended June 30, 2015 and 2016, and Isla Lipana & Co., a
member firm of PricewaterhouseCoopers International Limited (PwCIL), has audited the Company’s financial
statements as of and for the years ended December 31, 2013, 2014 and 2015, which are included in this
Prospectus.
Figures in this Prospectus have been subject to rounding adjustments. Accordingly, figures shown in the same
item of information may vary and figures which are totals may not be an arithmetic aggregate of their
components.
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements that are, by their nature, subject to significant risks and
uncertainties. These forward-looking statements include, without limitation, statements relating to:

known and unknown risks;

uncertainties and other factors that may cause the Company’s actual results, performance or achievements
to be materially different from any future results; and

performance or achievements expressed or implied by forward-looking statements.
Such forward-looking statements are based on numerous assumptions regarding the Company’s present and
future business strategies and the environment in which the Company will operate in the future. Important
factors that could cause some or all of the assumptions not to occur or cause actual results, performance or
achievements to differ materially from those in the forward-looking statements include, among other things:

changes in crude oil, other feedstocks and finished petroleum products prices;

general political, social and economic conditions in the Philippines, elsewhere in the Asia-Pacific region,
and globally;

accidents, natural disasters or other adverse incidents in the operation of the Company’s facilities;

terms on which the Company finances its working capital and capital expenditure requirements;
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
the Company’s ability to successfully implement its strategies;

the Company’s ability to commission projects without delays due to regulatory or other causes;

the Company’s ability to successfully manage future business, financial condition, results of operations
and cash flow;

changes in interest rates, inflation rates and the value of the Peso against the US dollar and other
currencies;

changes in governmental regulations, including those pertaining to regulation of the oil industry, zoning,
tax, subsidies, operational health, safety and environmental standards; and

competition in the Philippine downstream oil industry.
Additional factors that could cause the Company’s actual results, performance or achievements to differ
materially from forward-looking statements include, but are not limited to, those disclosed under “Risk Factors”
and elsewhere in this Prospectus. These forward-looking statements speak only as of the date of this Prospectus.
The Company and the Global Coordinator and International Bookrunner and the Domestic Lead Underwriter
and Domestic Bookrunner expressly disclaim any obligation or undertaking to release, publicly or otherwise,
any updates or revisions to any forward-looking statement contained herein to reflect any change in the
Company’s expectations with regard thereto or any change in events, conditions, assumptions or circumstances
on which any statement is based.
This Prospectus includes statements regarding the Company’s expectations and projections for future operating
performance and business prospects. The words “believe”, “may”, “will”, “continue”, “plan”, “expect”,
“anticipate”, “estimate”, “project”, “intend” and similar words identify forward-looking statements. In addition,
all statements other than statements of historical facts included in this Prospectus are forward-looking
statements. Statements in the Prospectus as to the opinions, beliefs and intentions of the Company accurately
reflect in all material respects the opinions, beliefs and intentions of its management as to such matters as of the
date of this Prospectus, although the Company give no assurance that such opinions or beliefs will prove to be
correct or that such intentions will not change. The Company’s actual results could differ substantially from
those anticipated in the Company’s forward-looking statements. This Prospectus discloses, under the section
“Risk Factors” and elsewhere, important factors that could cause actual results to differ materially from the
Company expectations. All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on behalf of the Company are expressly qualified in their entirety by the above
cautionary statements.
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TABLE OF CONTENTS
GLOSSARY OF TERMS ....................................................................................................................... 1 SUMMARY ............................................................................................................................................ 8 SUMMARY OF THE OFFER.............................................................................................................. 17 SUMMARY FINANCIAL AND OPERATING INFORMATION ..................................................... 26 RISK FACTORS .................................................................................................................................. 29 USE OF PROCEEDS ........................................................................................................................... 43 EXCHANGE RATES ........................................................................................................................... 45 DIVIDENDS AND DIVIDEND POLICY ........................................................................................... 46 DETERMINATION OF THE OFFER PRICE .................................................................................. 48 CAPITALIZATION ............................................................................................................................. 49 DILUTION ........................................................................................................................................... 50 SELECTED FINANCIAL AND OPERATING INFORMATION ...................................................... 51 INDUSTRY OVERVIEW .................................................................................................................... 56 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ............................................................................................................. 77 BUSINESS.......................................................................................................................................... 104 REGULATORY AND ENVIRONMENTAL MATTERS ................................................................. 139 BOARD OF DIRECTORS AND SENIOR MANAGEMENT .......................................................... 147 PRINCIPAL AND SELLING SHAREHOLDERS ............................................................................ 153 RELATED PARTY TRANSACTIONS ............................................................................................. 156 DESCRIPTION OF THE SHARES ................................................................................................... 160 THE PHILIPPINE STOCK MARKET............................................................................................... 168 PHILIPPINE FOREIGN EXCHANGE CONTROLS ........................................................................ 173 PHILIPPINE TAXATION.................................................................................................................. 174 PLAN OF DISTRIBUTION ............................................................................................................... 179 LEGAL MATTERS ............................................................................................................................ 185 INDUSTRY EXPERT ........................................................................................................................ 186 INDEX TO FINANCIAL STATEMENTS ........................................................................................ 188 viii
GLOSSARY OF TERMS
In this Prospectus, unless the context otherwise requires, the following terms shall have the meanings set out
below.
Additional Investor Shares ............................
The Offer Shares that Cornerstone Investors may be required
to purchase, subject to certain conditions, in addition to the
Cornerstone Shares.
affiliate...........................................................
A corporation that directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under the
common control of, another corporation.
applicant ........................................................
A person, whether natural or juridical, who seeks to subscribe
for the Offer Shares.
application .....................................................
An application to subscribe for Offer Shares pursuant to the
Offer.
BIR ................................................................
The Philippine Bureau of Internal Revenue.
Board .............................................................
The board of directors of the Company.
BSP ................................................................
Bangko Sentral ng Pilipinas, the central bank of the
Philippines.
CAGR ............................................................
Compound annual growth rate.
CODO ............................................................
For the purpose of this Prospectus, Company-owned-dealeroperated retail service station. Please refer to “Business 
Operations  Retail”.
commercial ....................................................
For the purpose of this Prospectus, the Company’s commercial
segment refers to its business with commercial and industrial
accounts in various sectors such as industrial, power,
manufacturing, wholesale, marine, mining, aviation, transport
and others. The Company’s commercial product portfolio
includes wholesale commercial fuels, jet fuel, lubricants and
bitumen. Please refer to “Business  Operations 
Commercial”.
the Company ..................................................
Pilipinas Shell Petroleum Corporation, a corporation organized
under Philippine law.
Cornerstone Investors ....................................
The entities listed under the “Plan of Distribution” section
which have entered into cornerstone investment agreements
with the Company, the Global Coordinator and International
Bookrunner and Domestic Lead Underwriter and Domestic
Bookrunner.
Cornerstone Shares ........................................
The Shares allocated to the Cornerstone Investors, representing
approximately []% of the Offer Shares (excluding any
Optional Shares) and forming part of the Institutional Offer.
Deli2Go .........................................................
A Shell Group-branded dine-in section in Shell Select
convenience stores that offers fresh meals and drinks. Please
refer to “Business  Operations  Retail”.
DENR ............................................................
The Philippine Department of Environment and Natural
Resources
DODO ...........................................................
Dealer-owned dealer-operated retail service station. Please
refer to “Business  Operations  Retail”.
DOE ...............................................................
The Philippine Department of Energy.
DOLE ............................................................
The Philippine Department of Labor and Employment.
Domestic Lead Underwriter and Domestic
Bookrunner ....................................................
BPI Capital Corporation.
Domestic QBs ................................................
Domestic persons or entities identified as Qualified Buyers
under Section 10.1 (L) of the SRC, namely, (i) bank; (ii)
registered investment house; (iii) insurance company; (iv)
pension fund or retirement plan maintained by the Government
or any political subdivision thereof or manage by a bank or
other persons authorized by the BSP to engage in trust
functions; (v) investment company or; (vi) Such other person
as the Philippine SEC may rule by determine as qualified
buyers, on the basis of such factors as financial sophistication,
net worth, knowledge, and experience in financial and business
matters, or amount of assets under management.
Domestic Receiving Agent ............................
Rizal Commercial Banking Corporation.
Domestic Underwriting Agreement ...............
The underwriting agreement dated [October 19], 2016 between
the Company, the Selling Shareholders and the Domestic Lead
Underwriter and Domestic Bookrunner.
EBITDA ........................................................
Earnings before
Amortization.
Employee Tranche Offer ...............................
The offer for sale of the Employee Tranche Offer Shares to all
the regular employees of the Company in the Philippines who
are on its payroll as of June 30, 2016 and continue to be regular
employees during the Trading Participants and Retail Offer
Period.
Employee Tranche Offer Shares ....................
Up to [3,000,000] Firm Shares (or [1]% of the Firm Shares) to
be offered pursuant to the Employee Tranche Offer.
Euro IV (PH) .................................................
The Philippine National Standard that requires significantly
low amounts of sulfur (0.005%) in diesel and gasoline as well
as benzene (maximum of 2% by volume) and aromatics
(maximum of 35% by volume) in gasoline.
Finished Petroleum Products .........................
For the purposes of this Prospectus, Finished Petroleum
Products include lubricants, bitumen and other refined products
that the Company imports.
2
Interest,
Taxes,
Depreciation
and
Firm Offer......................................................
The offer and sale of up to [300,000,000] common shares of
the Company.
Firm Shares ....................................................
Up to [300,000,000] Shares to be offered pursuant to the Firm
Offer.
First Closing Date ..........................................
Delivery of the Firm Shares, which is expected to occur in
Manila on or about [], 2016 or such other date as the Global
Coordinator and International Bookrunner and the Company
shall agree in writing.
GDP ...............................................................
Gross domestic product, or the monetary value of all the
finished goods and services produced within a country’s
borders, calculated on an annual basis.
Global Coordinator and International
Bookrunner ....................................................
J.P. Morgan Securities Plc.
Government ...................................................
The government of the Republic of the Philippines.
HSSE .............................................................
Health, safety, security and environment.
Institutional Offer ..........................................
The offer for sale of the Institutional Offer Shares outside the
United States by the Global Coordinator and International
Bookrunner in offshore transactions in reliance on Regulation
S under the U.S. Securities Act and to the domestic qualified
buyers in the Philippines by the Domestic Lead Underwriter
and Domestic Bookrunner.
Institutional Offer Shares...............................
Up to [207,000,000] Firm Shares, or [69] % of the Firm
Shares, being offered for sale pursuant to the Institutional
Offer.
Institutional Offer Settlement Date ................
The date on which final allocation of the Institutional Offer
Shares is to be made, expected to be on or about [November
10], 2016.
International Underwriting Agreement ..........
The underwriting agreement dated [October 19], 2016 between
the Company, the Selling Shareholders and the Global
Coordinator and International Bookrunner.
Listing Date ...................................................
The date on which trading of the Shares on the PSE begins,
expected to be on or about [November 10], 2016.
LSIs ...............................................................
Local small investors.
Lock-up Period ..............................................
A period of 180 days from the Listing Date.
LTO ...............................................................
The Philippine Land Transportation Office.
lubricants .......................................................
For the purpose of this Prospectus, the Company’s lubricant
products include industrial oil, heavy duty diesel engine oil,
motorcycle oil, passenger car motor oil, marine engine oils,
greases, and other lubricant products.
3
manufacturing, supply and distribution .........
For the purpose of this Prospectus, the Company’s
manufacturing, supply and distribution segment manages crude
oil refining, crude oil and Finished Petroleum Products
importation, and the domestic logistics requirements for the
product transfers of Refined Products and Finished Petroleum
Products. Please refer to “Business  Operations 
Manufacturing, Supply and Distribution”.
Metro Manila .................................................
The metropolitan area comprising the city of Manila, the cities
of Caloocan, Las Piñas, Navotas, Makati, Malabon,
Mandaluyong, Marikina, Muntinlupa, Parañaque, Pasay, Pasig,
Quezon City, San Juan, Taguig and Valenzuela and the
municipality of Pateros.
Minority Selling Shareholders .......................
Certain other minority shareholders that have elected to
participate in the Offer.
network efficiency .........................................
For the purposes of this Prospectus, network efficiency is
defined as market share by volume divided by market share by
number of retail service stations.
Nexant ...........................................................
Nexant Singapore Pte. Ltd.
non-fuel .........................................................
For the purposes of this Prospectus, non-fuel includes non-fuel
products and services such as lubricants offerings, convenience
retailing and other non-fuel offerings such as in-store dining
services through the Company’s own food concept, Deli2Go,
co-locator brand QSRs and ATM kiosks.
Offer ..............................................................
The offer and sale of the Offer Shares on, and subject to, the
terms and conditions stated herein.
Offer Price .....................................................
P[90.0] per Offer Share.
Offer Shares ...................................................
The Firm Shares and the Optional Shares.
Optional Shares .............................................
Up to [30,000,000] Shares to be sold by certain Selling
Shareholders and purchased by the Stabilizing Agent upon
exercise of the Over-allotment Option.
Over-allotment Option ...................................
An option granted by the Selling Shareholders to the
Stabilizing Agent, exercisable within [30] days from and
including the Listing Date, to purchase Optional Shares.
PCD ...............................................................
Philippine Central Depository.
PCD Nominee ...............................................
PCD Nominee Corporation, a corporation wholly owned by the
PDTC.
PDS ................................................................
The Philippine Dealing System.
PDS Rate .......................................................
The average rate on any particular date for the purchase of US
dollars for Pesos, which is quoted by the PDS.
PDTC .............................................................
The Philippine Depository and Trust Corporation.
4
Permit to Sell .................................................
The permit issued by the Philippine SEC granting the
effectiveness of the registration statement filed in relation to
the Offer Shares.
Pesos or P ......................................................
The lawful currency of the Philippines.
PFRS ..............................................................
Philippine Financial Reporting Standards.
Philippine Corporation Code .........................
Batas Pambansa Bilang 68 otherwise known as the Corporation
Code of the Philippines.
Philippine National ........................................
As defined under the Foreign Investment Act, means a citizen
of the Philippines, or a domestic partnership or association
wholly-owned by citizens of the Philippines, or a corporation
organized under the laws of the Philippines of which at least
60% of the capital stock outstanding and the entitlement to
vote is owned and held by citizens of the Philippines, or a
corporation organized abroad and registered to do business in
the Philippines under the Philippine Corporation Code, of
which 100% of the capital stock outstanding and the
entitlement to vote is wholly-owned by Filipinos or a trustee of
funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine national and at least
60% of the fund will accrue to the benefit of Philippine
nationals.
Philippine SEC ..............................................
The Philippine Securities and Exchange Commission.
Philippines .....................................................
Republic of the Philippines.
Primary Offer.................................................
The offer and sale of Primary Offer Shares.
Primary Offer Shares .....................................
Up to [30,000,000] new common shares to be issued and
offered by the Company pursuant to the Offer.
PSE ................................................................
The Philippine Stock Exchange, Inc.
PSE Main Board ............................................
The main board of the PSE that enables companies that meet
higher profit or other financial standards requirements to raise
funds in the market. Generally, to be listed on the PSE Main
Board, a company must have a minimum authorized capital
stock of P 500 million, of which a minimum of twenty-five
percent (25%) must be subscribed and fully paid, and show,
among others:
(i) a track record of profitable operations for three full
fiscal years prior to the filing of the listing
application;
(ii) positive shareholders’ equity in the fiscal year
immediately preceding the filing of the listing
application;
(iii) a market capitalization of at least P 500 million at
listing; and
5
(iv) operating history of at least three years prior to the
filing of the listing application.
PSE Trading Participants ...............................
Duly licensed securities brokers who are trading participants of
the PSE.
QSRs ..............................................................
Quick serve restaurants.
R&M ..............................................................
Refining and marketing.
Refined Product .............................................
For the purposes of this Prospectus, Refined Products refers to
petroleum products produced in the Tabangao Refinery, which
include naphtha, gasoline, jet fuel, kerosene, diesel, fuel oil,
LPG and sulfur. Please refer to “Business  Operations 
Manufacturing, Supply and Distribution  Refining”.
Regulation S ..................................................
Regulation S under the U.S. Securities Act.
retail ...............................................................
For the purpose of this Prospectus, the Company’s retail
segment pertains to its business that directly services end
consumers (private and commercial motorists) through retail
service stations managed by individual dealers involving the
sale of petroleum fuels and lubricants. Please refer to
“Business  Operations  Retail”.
retail service station .......................................
For the purposes of this Prospectus, retail service station
include all Shell Group-branded retail service stations.
Secondary Offer.............................................
The offer and sale of the Secondary Offer Shares.
Secondary Offer Shares .................................
Up to [270,000,000] Shares to be offered by the Selling
Shareholders pursuant to the Offer.
Selling Shareholders ......................................
Shell Overseas Investments B.V., The Insular Life Assurance
Company, Ltd., and Spathodea Campanulata, Inc as well as the
Minority Selling Shareholders. Please refer to “Principal and
Selling Shareholders”.
Shares ............................................................
The common shares of par value P1 each of the Company.
Shell Group ....................................................
Royal Dutch Shell plc and its affiliates.
Shell Select ....................................................
A Shell Group-branded convenience store. Please refer to
“Business  Operations  Retail”.
SRC ...............................................................
Securities Regulation Code of the Philippines (Republic Act
No. 8799), as amended, and its implementing rules and
regulations.
Stabilizing Agent ...........................................
[] or its relevant affiliate, in its role as stabilizing agent,
whereby it may engage in stabilization activities relating to any
over-allotment of Shares from the Selling Shareholders for a
period beginning on the Listing Date and ending on a date no
later than 30 calendar days from and including the Listing
Date.
6
Supply and Distribution Facilities .................
For the purposes of this Prospectus, Supply and Distribution
Facilities refer to the Company’s fuel terminals, lubricants
warehouses and bitumen import facilities.
throughput......................................................
For the purpose of this Prospectus, throughput refers to the
volume of crude oil, unfinished oils, and natural gas liquids or
Finished Petroleum Products that have either been received,
processed or outsold through a particular site, whether through
the Tabangao Refinery or a Supply and Distribution facility,
during the time period specified.
Trading Participants and Retail Offer ............
The offer for sale of the Trading Participants and Retail Offer
Shares to be made in the Philippines.
Trading Participants and Retail Offer Period
The date on which check payments for domestic subscriptions
under the Trading Participants and Retail Offer clear and such
domestic subscriptions are paid, expected to be on or about
[November 8, 2016].
Settlement Date .............................................
Trading Participants and Retail Offer Shares
Up to [90,000,000] of the Offer Shares being offered pursuant
to the Trading Participants and Retail Offer.
United States or US .......................................
The United States of America.
US dollars or US$ ..........................................
The lawful currency of the United States of America.
U.S. Securities Act.........................................
The United States Securities Act of 1933, as amended.
VAT ...............................................................
Value-added tax.
wholesale commercial fuels ...........................
For the purpose of this Prospectus, the Company’s wholesale
commercial fuels product portfolio includes diesel, gasoline,
kerosene, naphtha and fuel oil.
7
SUMMARY
The following summary is qualified in its entirety by, and is subject to, the more detailed information and
financial statements, including notes thereto, appearing elsewhere in this Prospectus. Capitalized terms not
defined in this summary are defined in the “Glossary of Terms,” “Risk Factors,” “Business,” or elsewhere in
this Prospectus.
OVERVIEW
The Company is one of only two integrated refining and marketing or R&M companies in the Philippines, and
constitutes the second largest retail distribution network in the country, according to Nexant. Its principal
operations comprise the production, distribution and sale of Shell Group-branded retail and commercial fuel
products, lubricants and specialty products such as bitumen.
As of June 30, 2016, the Company had a widespread nationwide network of 966 Shell Group-branded retail
service stations, comprised of 583 retail service stations in Luzon, 160 in Visayas and 223 in Mindanao, offering
fuel-based products, lubricants, non-fuel products and services such as convenience retailing as well as other
non-fuel offerings such as in-store dining services through the Company’s own food concept, Deli2Go, colocator brand quick serve restaurants (QSRs) and ATM kiosks. Branded fuel-based products include Shell VPower Nitro+, Shell FuelSave Gasoline and Shell FuelSave Diesel. Lubricant brands primarily include, among
others, Shell Helix, Shell Rimula and Shell Advance. As of June 30, 2016, the Company’s retail service station
network included 58 Shell Select convenience stores, ten Deli2Go stores and 125 co-locator brand QSRs,
including leading brands such as Jollibee, McDonald’s, KFC, Pizza Hut and Starbucks Coffee. The Company’s
non-fuel retail operations are further complemented by lubricant bay outlets offering oil change and other
maintenance and repair services.
For the year ended December 31, 2015, the Company’s retail segment generated net sales of ₱82.5 billion
(approximately US$1,749.1 million) or 52.5% of total net sales. According to Nexant, the Company’s retail
network constituted the second largest retail distribution network in the country and had the highest average
annual throughput per retail service station in the Philippines of 3.1 million liters in 2015 (against an average of
1.8 million liters per year for the other two major competitors in the Philippines) and constituted the second
largest retail distribution network in the country, resulting in increased margins and enabling the Company to
operate at a higher level of efficiency.
The Company’s commercial product portfolio includes wholesale commercial fuels, jet fuel, lubricants and
bitumen. Wholesale commercial fuel premium products include, among others, Shell FuelSave Diesel and Shell
FuelOil Plus. The wholesale commercial fuels product portfolio includes diesel, gasoline, kerosene, naphtha,
fuel oil and blended fuels. Net sales from the Company’s commercial segment for the year ended December 31,
2015 was ₱54.0 billion (approximately US$1,144.9 million), or 34.4% of total net sales. The Company is a key
supplier of wholesale commercial fuels to the manufacturing, marine, mining, power, transport and other
sectors, and counts a large number of major conglomerates operating in the Philippines as its loyal customers,
with nearly 60% of its principal supply relationships spanning over five years as of June 30, 2016.
In 2015, 72% of the total main fuels (gasoline, diesel, jet fuel, and fuel oil) the Company sold was supplied by
the recently upgraded Tabangao Refinery, and the remaining portion from imports. Additionally, as of June 30,
2016, 81% of the total main fuels sold by the Company was supplied from Tabangao Refinery. The Tabangao
Refinery, located at an intersection of major road and sea networks in the Tabangao, Batangas region
approximately 121 kilometers south of Manila, is one of only two refineries in the Philippines and has a
nameplate capacity of 110,000 barrels per day (bpd). In December 2015, the Company completed the upgrade
of the Tabangao Refinery and now manufactures Euro IV (PH) compliant fuel products. The Tabangao Refinery
operates four jetties, one of which is able to accommodate very large crude carriers (VLCCs) of up to 320,000
tons (deadweight), resulting in cost savings from economies of scale and favorable freight economics.
8
The Company distributes the Refined Products produced at the Tabangao Refinery and imported petroleum
products, including lubricants and bitumen, through its 22 fuel terminals, ten lubricants warehouses and two
bitumen import facilities spread throughout the Philippine archipelago. This includes the newly commissioned
NMIF, which enhances the Company’s distribution capability in Visayas and Mindanao. Using its extensive
supply and distribution network, the Company is able to efficiently and expeditiously supply and distribute
products to its retail and commercial customers. This extensive supply chain network reduces reliance on any
single supply point and allows the Company to maintain flexibility for its product sourcing.
The Company’s association with the Shell Group provides access to the Shell Group’s industry-leading fuel and
lubricant technology and rights to use the “SHELL” brand, which is one of the world’s most valuable and
trusted brands, in the Philippine downstream oil industry. The Shell Group supplies crude oil, feedstock and
Finished Petroleum Products to the Company under secure long-term supply contracts. Additionally, the Shell
Group also provides the Company with core information technology such as the Shell Group’s global enterprise
resourcing system for managing procurement, sales and distribution, financial reporting and other functions.
Through its decades-long track record of operating in association with the Shell Group, the Company believes it
has become a role model in the Philippines in maintaining high standards in HSSE, and has won several awards
from the Philippine Department of Labor and Employment (DOLE) for occupational safety and health, most
recently in 2014. In addition, the NMIF received an award in 2015 for achieving one million safe man-hours
with no lost time accident by the Safety Organization of the Philippines, Inc. during its 47th National Industrial
Safety Convention. The annual convention recognizes companies that exemplify best practices in occupational
safety and health. Moreover, the Company aims to make significant contributions to the communities in which it
operates, as recognized most recently by an award for the Company’s relief and rehabilitation efforts following
Typhoon Haiyan.
As of December 31, 2015, the Company had total assets of ₱66.2 billion (US$1,404.0 million), and gross sales
and profit for the year then ended were ₱168.9 billion (US$3,580.0 million) and ₱3.6 billion (US$75.3 million),
respectively. With a recently completed rights issue in 2015, the Company believes it has low gearing and a
well-capitalized balance sheet that positions it for growth opportunities.
STRENGTHS
The Company believes that its principal competitive strengths include the following:
Leading fuel retail and commercial market position.
The Company had the second largest overall market share (by volume of fuel sold) of the domestic retail fuel
market, equal to approximately 29%, based on industry data provided by Nexant. In terms of brand reputation,
the “SHELL” brand enjoys the highest overall good reputation score among the domestic retail fuel brands. It is
ahead in ranking against other petroleum brands by the general public in the Philippines. A study by The
Nielsen Company showed that of the 1,061 respondents interviewed, 89% said that Shell has an overall good
reputation.
The Company also benefits from the second largest retail distribution network in the Philippines, with 966 retail
service stations spread throughout the Philippine archipelago as of June 30, 2016, 583 in Luzon, 160 in Visayas
and 223 in Mindanao. 46% of these retail service stations are CODO retail service stations, and 54% are DODO
retail service stations. This retail network is currently focused on key metropolitan areas with strategic
expansion planned in additional urban centers and surrounding suburbs, other emerging economic regions and
growing rural trade areas.
According to Nexant, the Company’s retail service stations have the highest network efficiency of 1.9 (against
an average of 1.1 for the other two other major oil company competitors) in 2015, where network efficiency is
defined as market share by volume divided by market share by number of retail service stations. It also featured
9
the highest average annual throughput of 3.1 million liters per retail service station (against an average of 1.8
million liters per year for the two other two major competitors in the Philippines) in 2015.
In the commercial segment, the Company has a nationwide footprint to supply wholesale commercial fuels, jet
fuel, lubricants and bitumen that are either sourced from the Tabangao Refinery or imported. Leveraging this
extensive supply and distribution network allowed the Company to enjoy a significant market share in the
wholesale commercial fuels market in 2015. A key strength of the Company’s commercial segment is its strong
and long-standing relationships with a large number of major conglomerates in the Philippines built over years
of consistent product quality and value added services, such as technical consulting services and price risk
management arrangements.
Integrated, efficient and reliable manufacturing, supply and distribution chain.
The Company boasts an extensive supply chain which integrates procurement, refining, import, distribution and
marketing of Refined Products and Finished Petroleum Products. This integrated approach enables the Company
to drive value across the value chain maximize cost savings while delivering reliable fuel supply. The
Company’s upgraded Tabangao Refinery is complemented by an integrated network of 22 fuel terminals, ten
lubricants warehouses and two bitumen import facilities, including the newly commissioned NMIF, and 966
retail service stations across the country. This integrated network allows the Company to strategically optimize
the distribution and delivery of Refined Products and Finished Petroleum Products in a cost efficient manner.
The strength of this integration coupled by its combined throughput of 2,461 million liters of fuel in fuel
terminals as of June 30, 2016 as well as the Company’s ability to produce fuel oil locally allow it to also offer
commercial and retail customers volume consistency and reliability. The Company believes that the Tabangao
Refinery and the Company’s Supply and Distribution Facilities are built to the highest standard such that they
can withstand harsh climatic conditions.
The Company’s Refined Products are distributed from the Tabangao Refinery and the NMIF to the various fuel
terminals using a fleet of third-party vessels; and to retail service stations and commercial customers throughout
the Philippines using a fleet of third-party tank trucks. From the fuel terminals, bulk fuel products are hauled by
tank trucks owned by third parties to retail service stations and by tank trucks and barges owned by third parties
to commercial customers. Imported lubricants are landed onshore through container vessels and delivered from
the port to the lubricants warehouses by third party trucking services. Lubricants are delivered from lubricants
warehouses to commercial customers by outsourced trucking services. From the bitumen import facilities, bulk
and packed bitumen products are either delivered to commercial customers by outsourced bitumen trucks and
bitutainers or picked up by customers. The vessels, tank trucks, trucking services, bitumen trucks and bitutainers
are chartered mainly on term contracts from third-party owners. Using stringent selection and monitoring
standards, the Company believes that it contracts with vessel and truck operators that safeguard the security and
supply of its fuel. The Shell Group has established base standards that apply to all existing and new vehicles,
which require that all vehicles meet all presently enforced vehicle legislation and regulations applicable in the
country in which the Company operates. In addition, to meet Shell Group standards, all tanks are constructed
with either steel or aluminum, and fitted with roll over protection to provide sufficient loading capacity.
The Company’s manufacturing, supply and distribution network also benefits from its longstanding relationship
with the Shell Group. Procurement for crude oil, feedstocks and Finished Petroleum Products is around 99%
catered to by various entities within the Shell Group, a relationship that provides the Company with a reliable
supply of various types of crude oil and Finished Petroleum Products from various origins. Leveraging on the
Shell Group’s operational know-how, the Company also has a supply chain and inventory management system
built on sophisticated information technology. This is complemented by the experience and knowledge of the
Company’s employees of the unique geography of the Philippine archipelago.
A highly efficient and integrated logistics network is key to ensuring the Company’s ability to deliver reliable
fuel supply at attractive and competitive prices and optimize value across its entire business operations.
10
Well positioned to capitalize on the attractive growth in the Philippines.
The Philippines enjoys a resilient, consumption-driven economy that benefits from favorable demographics,
such as a growing working age population with increasing disposable income, according to Nexant. The country
has also seen a rise in industrialization at a rate of 4.7% in the period 2010 to 2015 and according to Nexant will
continue to grow at 4.8% over the next five years. The Philippines was one of the best performing economies in
Southeast Asia in 2015 in terms of GDP growth, according to the Nexant. Its nominal GDP and nominal GDP
per capita grew at a CAGR from 2010-2015 of 7.9% and 6.2%, respectively, according to the Economist
Intelligence Unit. Based on Nexant’s estimates, real GDP is expected to grow at a CAGR of 6.1% from 20152020, maintaining its position as the fastest growing economy in Southeast Asia.
This favorable macro-economic growth, and the resulting increased purchasing power, has fueled growth in the
use and ownership of motorized vehicles. The number of motorized vehicles in the Philippines is estimated to
grow at a CAGR of 5% from 2015-2020, according to Nexant. Industrial output and manufacturing sectors have
also seen a rise due to favorable government policies, construction of new infrastructure and increased business
activity and trade. According to the World Bank, manufacturing output is expected to grow at a CAGR of 5%
between 2015 to 2020. These factors are expected to contribute to an increase in demand for Finished Petroleum
Products in the Philippines, which is expected to increase at a CAGR of 4% between 2015 to 2020, according to
Nexant.
The Philippines consumed 143.1 million barrels of finished petroleum products in 2015, according to the DOE.
The country is a net importer of finished petroleum products with 53.6% of demand or 76.8 million barrels
being imported in 2015. The Company believes it is well positioned to take advantage of this structurally short
market for both crude and finished petroleum products, caused by limited indigenous oil reserves and
insufficient domestic refining capacity. The Company has 110,000 bpd of nameplate capacity, strategically
located supply points including 22 fuel terminals, ten lubricants warehouses and two bitumen import facilities
and 966 retail service stations throughout Philippines as of June 30, 2016, giving the Company opportunities to
capitalize on the demand and supply dynamics in the country. Through its strong distribution network and
secure and reliable supply chain, the Company is able to navigate and serve the wide spread archipelago of the
Philippines. According to Nexant, the Company supplies 24% of Philippine demand for refined products,
including imported finished petroleum products such as lubricants and bitumen, through the Tabangao Refinery
and its Supply and Distribution Facilities.
Differentiated fuel related offering and superior customer service.
Because of the scale of its manufacturing operations, as well as its affiliation with the Shell Group and access to
its fuel technology, the Company is able to provide a differentiated and comprehensive end-to-end fuel related
product offering to both retail and commercial customers. These products include a selection of premium
products, such as Shell V-Power Nitro+ and Shell V-Power Nitro+ Racing for the retail segment and Shell
FuelOil Plus and Shell FuelSave Diesel for the commercial segment, which offer consumers higher engine
performance as measured by fuel savings, cleaner emissions and other metrics.
In addition, the Company has been able to maintain its large retail market share by providing excellent customer
experience, convenient and trusted service at its retail service stations for both fuel and non-fuel offerings. The
Company also offers attractive loyalty schemes and marketing programs, such as point accumulation in
exchange for rewards and rebates schemes. Furthermore, the Company has been able to maintain relationships
with almost all major Philippine conglomerates and corporations in various industries. In terms of brand
reputation, the “SHELL” brand enjoys the highest overall good reputation score among the domestic retail fuel
brands. It is ahead in ranking against other petroleum brands by the general public in the Philippines. A study by
The Nielsen Company showed that of the 1,061 respondents interviewed, 89% said that Shell has an overall
good reputation. As of December 31, 2015, the Company has a committed commercial customer base, 35% of
which have been in supply contract relationships with the Company for over ten years, 24% have been in supply
contract relationships with the Company for over five years, 39% have been in supply contract relationships
with the Company for over one year and 2% have been in supply contract relationships with the Company for
11
less than one year. As of December 31, 2015, the Company has supply contracts with engagement terms of six
years or longer with nearly 6% of its commercial customers, while 21% of its commercial customers have
supply contract lengths of three to five years, 73% have supply contract lengths of one to three years, and 0.1%
have supply contract lengths of less than one year.
Significant non-fuel and lubricants related retail growth potential.
Convenience store retail sales grew in the Philippines at a CAGR of 8.6% from 2010-2015 and is expected to
comprise nearly 50% of total retail sales by 2020 according to a report published by Conlumino in 2016 (‘The
Future of Retailing in the Philippines to 2020’). The Company is well positioned to capture growth in this space
with its extensive retail network footprint. Through CODO retail service stations, the Company can sell not only
premium lubricant products and related services but also other non-fuel-related retail products such as food and
grocery items. Through its convenience brands, Shell Select and Deli2Go, that are licensed from the Shell
Group and are available exclusively to the Company for use in the Philippines, the Company is able to offer
fast-moving convenience store goods and in-store dining options. As of June 30, 2016, there are 48 Shell Select
only retail service stations, and ten retail service stations with both Shell Select and Deli2Go offerings.
Currently, DODO retail service stations have non-fuel offerings such as small convenience stores. The
Company does not get a share in the income of the DODO retail service stations from these non-fuel offerings.
The Company intends to extend and roll out the non-fuel offerings found at CODO retail service stations,
including Shell Select convenience retailing, to DODO retail service stations to increase the attractiveness of the
Shell Group-branded retail service stations and improve customer traffic at these stations for both fuel and nonfuel related offerings.
A significant number of the Company’s larger retail service stations sublease space to co-locators, including
leading brands such as Mini-Stop, Jollibee, McDonald’s, KFC, Pizza Hut and Starbucks. These tenants not only
provide a diversified income stream derived either from fixed lease payments or a share of such tenant’s sales
revenues and hence, optimize retail site profitability, but also increase retail traffic to which the Company can
also cross-sell its fuel and non-fuel-related products. The Company has strong and strategic alliances with these
well-established QSR chains and is well positioned to expand this footprint and value-added proposition into
more retail stations. This non-fuel customer offering is highly complementary to the Company’s core business
in fuel and serves to further enhance the Company’s network efficiency.
In addition, through its lubricants segment’s “Smaller, Bigger, Better” strategy implemented in late 2014, which
focused on having a smaller number but bigger and better distributors, the Company is able to develop its
distributorship strategy that supports its overall growth strategy. The rationalization of the number of
distributors increases the volume per distributor resulting in improved efficiency and decreased unit costs. This
strategy incentivizes the distributors to invest on fixed costs which set them up for increase in growth in the
future that would support the Company's lubricants growth vision.
Experienced management supported by Company investment in talent training, retention and continuity.
The Company benefits from being led by a management team that has significant local and international oil
industry experience. Members of the Company’s current management team have an average of 20 years’
relevant experience, an average of 23 years of which were spent in the Shell Group. They have successfully
managed the Company through various business cycles, with an extensive operating track record, as evidenced
by the overall growth, asset renewal, retail network footprint expansion and business operations of the Company
over the years. The Company has also actively invested in talent retention and continuity, with a deep reserve of
experienced and committed management team and a succession plan. Furthermore, the Company was the only
oil and energy company included in the top ten list of most desirable companies to work for in the Philippines,
based on the Top Companies Report 2015 by Jobstreet.com Philippines.
Moreover, the Company’s affiliation with the Shell Group provides members of the Company’s management
team opportunities to rotate through the management ranks of other companies of the Shell Group worldwide.
This facilitates knowledge transfer, allowing management to hone their skills and ensures consistency of the
12
Company’s managerial standards with the Shell Group’s upon their return. The Company’s management team is
also committed to operating the Company in a safe, environmentally-conscious and sustainable manner.
Over the course of its operating history, the Company’s management has consistently taken an active stance to
build a strong organization and high performance culture to deliver shareholder value by employing an
innovative and results-oriented team with a commitment to excellence.
Long term commitment and support from the Shell Group and adoption of world-class standards.
The Shell Group has a strong heritage and a long history of operations in the Philippines. This heritage and
history, coupled with the Shell Group’s prominent international profile, gives the Company a high degree of
brand recognition, customer trust and preference in the Philippines.
Its affiliation with the Shell Group gives the Company access to the Shell Group’s industry leading fuel and
lubricant technology and rights to use “SHELL”, which is one of the world’s most valuable and trusted brands,
in the Philippine downstream oil industry. It also provides the Company long-term and secure access to crude
oil and Finished Petroleum Products supplied by the Shell Group. For the six months ended June 30, 2016, the
Company purchased 96.8% of its total crude oil and non-crude feedstock requirements through SIETCO using
term supply agreements. This enables the Company to benefit from the consistency and reliability, regardless of
source, provided by the Shell Group’s single market interface approach.
Apart from providing access to its product technology and branding, the Shell Group also provides the Company
world class institutional and operational knowledge, such as management and business support, retail
development expertise, research and development and shared expert and technical support services.
By, closely following in the footsteps of the Shell Group, the Company has adopted and implements world class
standards in corporate governance and HSSE matters. All corporate actions and decisions follow clear and
effective governance standards and structures. Stringent codes of conduct are in place to ensure that the
Company’s corporate conduct is in line with the Shell Group’s core business values – honesty, integrity, respect
for people, and commitment to ethics and compliance. These standards are applicable to all employees to ensure
operational and personnel safety and extends to include third party service providers (such as charter vessels and
trucks) who are required to adhere to them. Various entities within the Company’s operations have often been
recognized for their excellence in maintaining the highest standards of safety. The Tabangao Refinery received
the Gawad Kaligtasan at Kalusugan (GKK) award of DOLE for the Company’s programs on occupational
safety and health on a number of occasions and, most recently, in 2014.
Furthermore, in 2013, the Company is one of only seven companies in the Philippines and the only domestic oil
company that has been recognized by the Integrity Initiative of the European Chamber of Commerce for
upholding the highest standards in ethical business practices.
In addition, the Company immerses itself in the communities where it operates, consistent with its corporate
social responsibilities as well as with the aim of creating jobs and opportunities for members of those
communities. These activities, such as the Company’s Country Disaster Relief and Rehabilitation Plan, the Shell
National Students Art Companion, the Shell Youth Active Chess Competition, and various local recruiting
initiatives hosted by the Company, further enhance the Company’s brand equity, which in turn generates a
multiplier effect on a triple bottom line (financial, social and environmental impact). Moreover, in 2015, the
Company was the only oil and energy company included in the top ten most desirable companies to work for in
the Philippines, based on the Top Companies Report 2015 by Jobstreet.com Philippines.
Strong balance sheet and cash flow with an attractive financial profile.
The Company has a debt to equity ratio of 0.59 as of December 31, 2015 which the Company believes is one of
the lowest among oil retail and manufacturing companies in Asia Pacific. With the completion of the Tabangao
Refinery upgrade and construction of the NMIF, the Company has now addressed its short term capital
13
expenditure requirements and freed up significant future cash flows. As a result, the Company has enhanced its
ability to meet its short-term and long-term obligations. Due to its strong cash flow profile, which was further
supported by the stock rights offering in 2015, the Company has adequate funding for other value-creating
activities such as the selective expansion of its retail service station network and improving its manufacturing
and supply network. The Company also has access to both the public and private debt markets to fund any
future growth and expansion.
The Company uses its financial resources effectively and uses third party or outsourced service contractors for
various parts of its operations. For example, the Company charters vessels and tank trucks for its primary
distribution and hires tank trucks, barges, trucking services, bitumen trucks and bitutainers for secondary
distribution. This provides the Company with flexibility with respect to its supply chain, without large capital
commitments. It maintains a mix of CODO retail service stations and DODO retail service stations to manage
its capital intensity and margin profile. Additionally, the Company enters into strategic partnerships and joint
ventures for its Supply and Distribution Facilities that allow it to minimize risks inherent within the supply
chain.
STRATEGIES
The Company’s principal strategies for achieving its growth objectives are set out below.
Selectively pursue profitable fuel opportunities in the growing Philippine market.
The Company is one of only two integrated R&M companies in the Philippines. Given its existing market
leading position, the Company is well-positioned to selectively pursue growth opportunities presented by a
Philippine market that features favorable demographics and consumption patterns.
The Company intends to do this by continuing to selectively expand its retail network in profitable urban centers
and surrounding suburbs and other emerging economic regions and growing rural trade areas. Significant
management time is spent on identifying strategic site locations given the Company’s focus on margin and
profitability. The Company expects to grow its retail network to approximately 1,220 retail service station sites
by 2020. The Company continually reviews and rationalizes its retail station network to eliminate inefficiencies
in order to ensure these objectives do not compromise its number one positions in network efficiency and
average annual throughput vis-à-vis its competitors.
It is also focused on increasing retail and commercial market penetration in key regions where the Company
possesses a cost competitive advantage, including in Visayas and Mindanao with the new NMIF. As the most
recent example of the Company’s site selection and development strategy, the NMIF was selectively chosen for
its strategic location close to southern islands of Philippines, where its addition to the already extensive portfolio
of 22 fuel terminals, ten lubricants warehouses and two bitumen import facilities allows for further optimization
in terms of lower transport costs and expected higher margins.
Furthermore, the Company targets to increase its market share by capitalizing on its leading brand preference
position, growing its base of customers and dealers through innovative loyalty programs, tactical promotions,
forging or strengthening relationships with its dealers. A differentiated fuel offering with a focus on premium
products provides an opportunity to increase the Company’s share of revenues coming from higher margin
products.
The success of the commercial business is heavily reliant on i) service reliability and product innovation or
brand, ii) long standing customer relationships, and iii) depth and talent of people. The Company expects to
grow its commercial business by reaching a broader customer universe by increasing penetration in the targeted
market segments through enhancing partnerships, increasing original equipment manufacturers (OEM)
relationships and capturing new market opportunities.
14
Optimize related product portfolio and offering to increase customer loyalty.
The Company offers both its retail and commercial customers a comprehensive set of premium and regular fuel
related products and services that are differentiated from competitive offerings on various aspects of
performance. In terms of brand reputation, the “SHELL” brand enjoys the highest overall good reputation score
among the domestic retail fuel brands. It is ahead in ranking against other petroleum brands by the general
public in the Philippines. A study by The Nielsen Company showed that of the 1,061 respondents interviewed,
89% said that Shell has an overall good reputation.
The Company plans to further expand and develop its leading market position, improve margins and increase its
customer base by: (i) inducing more customers to shift to premium fuels through, among others, a sustained
education and marketing campaign for products; (ii) leveraging its access to the Shell Group’s technological
research and development edge to continue offering technologically innovative and superior fuel related
products, such as rolling out the Shell V-Power Nitro+ family fuels; (iii) continuing to upgrade its wholesale
commercial offering through technical consulting services and price risk management arrangements; (iv)
capitalizing on its position as the sole fuel oil producer in the Philippines; and (v) expanding its loyal customer
base by sustaining the growth of its loyalty programs, developing dedicated loyalty schemes and further
enhancing the customer experience through the “Welcome to Shell” initiative, focusing on motivated staff who
are dedicated to enhancement of customer experience and world class facilities at its retail service stations.
Maintain competitive advantage through a reliable and efficient manufacturing, supply and distribution
chain.
The Company seeks to maintain and improve its integrated, reliable and cost efficient structure by maximizing
cost savings in its refinery and supply and distribution network. Accordingly, it will ensure plans to leverage the
continuing benefits of its long-term crude oil and refined product supply arrangement with the Shell Group,
which is underpinned by the Shell Group’s single market interface approach to ensure predictability of supply
regardless of source. It plans to also do so by promoting operational excellence and reliability, such as by
implementing a bottom loading system for loading refined products, conducting causal learning investigations
to prevent recurrence of operational shutdown incidents, prolonging turnaround cycles, improving energy
efficiency and flexibility, implementing margin improvement projects and capitalizing on the Tabangao
Refinery’s production and crude oil processing flexibility, which enables the Company to manage refinery
utilization and output in response to shifting market demand for products and production costs. In addition, the
Company will continue to refine and optimize its supply network (which may include adding or disposing of
supply points) to ensure sufficient and growing capacity to support the marketing businesses in a cost efficient
manner.
The Company also intends to capture the market growth by maximizing the benefits and strategic geographical
positions of its fuel terminals, including the Tabangao Refinery and the NMIF, which can accommodate larger
vessels such as VLCCs or marine risers and reduce transportation costs.
Capture market growth opportunity in the lubricant and convenience retailing markets.
The Company’s lubricant and non-fuel related offerings continue to complement and augment its fuel related
business. Given its extensive retail network, it is well-positioned to capture greater market share in the lubricant
and non-fuel related sectors. This includes plans to expand and improve its differentiated and higher margin
products such as lubricants offering through Shell Helix Oil Change+ (Shell HOC+) outlets and leveraging
Helix, Rimula and Advance as anchor brands. The Company also plans to continue with the upgrading of the
total customer experience at existing Shell retail stations through the “Welcome to Shell” new service concept.
The aim of “Welcome to Shell” is to secure brand preference leadership, improve volumes, and enhance overall
customer experience through multiple initiatives aimed at improving facilities and staff motivation as well as
upgrade retail service stations with world class restroom facilities and staff quarter improvements. Fresh and hot
foods in its Deli2Go in-store dining option offer a premium margin and additionally complement the non-fuel
retail offering. Furthermore, the Company is exploring innovative opportunities to maximize its retail network.
15
Co-locator collaboration with major fast food chains and leading brands will also be increased to complement its
convenience store offerings and maximize the use of available commercial space and offset fixed costs. The
Company employs a variety of revenue models, depending on the type of co-locator, to improve profitability.
These steps are also simultaneously aimed at increasing cross selling opportunities to offer the Company’s fuel
related retail products as a footfall to drive fuel sales and hence further enhance the Company’s network
efficiency.
Uphold the Shell Group’s high standards and maintain industry leading position for corporate
governance, HSSE matters and corporate social responsibility.
The Company aims to continue being a role model for world class corporate governance and conduct business in
an open and transparent manner, consistent with its existing corporate governance standards, which increases
brand equity for the Company.
The Company is committed to good corporate governance and overall business sustainability and success and to
that end has adopted its Manual of Corporate Governance, which requires regular review to provide an avenue
for its continuous improvement. The Company also adheres to best-in-class HSSE standards and intends to
maintain a relentless focus on its HSSE performance. Through the concept of Goal Zero (particularly, on three
focus areas of personal, process and transport safety), the Company aims to achieve “no harms and no leaks”
across all of its operations.
The Company is also focused on sustainability and environmental awareness through its HSSE and Social
Performance Policy and these standards apply to all aspects of the Company’s activities, from designing a
facility through to decommissioning a site.
The Shell Principles and HSSE standards apply not only to the Company’s employees but even to its
contractors, third party service providers and any joint ventures where it has operational accountability.
The Company will also seek to continue playing a positive role in society by contributing to sustainable
development efforts. It will continue to address community education and development efforts by funding
projects such as Project KALSADA (Kabataang Ligtas sa Sakuna at Disgrasya) and a road safety program in
partnership with various local communities for students of schools located along the roads in the vicinity of the
Tabangao Refinery and other regions.
Continuing to focus on world class talent development and retention to realize the full potential of its
people.
The Company is led by an experienced management team supported by a highly skilled and highly motivated
workforce that has been recruited through the Shell Group’s international recruitment process. International
experience enables the Company to leverage the Shell Group’s best practices in operational excellence and
performance in manufacturing, supply and distribution and marketing. The Company’s organizational structure
is based on a lean and fit-for-purpose design, which facilitates a high level of employee empowerment and
engagement between management and front-liners. The Company has been able to retain its talent, through its
commitment and focus on its people, as evidenced by its low talent attrition rate.
A key focus of the Company is to develop the Filipino workforce. The Company employed 698 people in the
Philippines as of June 30, 2016, almost all of whom are Filipino except for four employees. Further, in its effort
to develop the workforce in its dealer network, the Company runs a nationwide scholarship program, Gas Mo,
Bukas Ko (GMBK) (meaning “You fuel my future”), in partnership with Pilipinas Shell Foundation Inc.
(PSFI), aimed at upskilling service station attendants, thus enabling them to access more income opportunities.
16
SUMMARY OF THE OFFER
Issuer .......................................................................
Pilipinas Shell Petroleum Corporation, a corporation
organized under Philippine law. The trading symbol
shall be “[●]”.
Selling Shareholders ................................................
Shell Overseas Investments B.V., The Insular Life
Assurance
Company,
Ltd.
and
Spathodea
Campanulata, Inc., as well as certain other minority
shareholders that have elected to participate in the
Offer, as described in more detail in “Principal and
Selling Shareholders”.
Global Coordinator and International Bookrunner ..
J.P. Morgan Securities Plc
Bookrunner ..............................................................
BPI Capital Corporation
The Offer .................................................................
Offer of up to [300,000,000] Firm Shares, consisting
of up to [30,000,000] new Shares to be issued and
offered by the Company and up to [270,000,000]
existing Shares to be offered by the Selling
Shareholders, and an offer of up to [30,000,000]
Optional Shares pursuant to the Over-Allotment
Option (as described below).
Institutional Offer ....................................................
Up to [207,000,000] Firm Shares (or [69] % of the
Firm Shares) are (subject to reallocation as described
below) being offered and sold (i) outside the United
States in offshore transactions in offshore transactions
in reliance on Regulation S under the U.S. Securities
Act and (ii) to Domestic QBs in the Philippines. The
Optional Shares will form part of the Institutional
Offer.
Employee Tranche Offer …………………….
Up to [3,000,000] Firm Shares (or [1]% of the Firm
Shares) are (subject to reallocation as described
below) being offered and sold to all the regular
employees of the Company in the Philippines who are
on its payroll as of June 30, 2016 and continue to be
regular employees during the Trading Participants
and Retail Offer Period. Each of such regular
employee may subscribe to a minimum of [260]
Employee Tranche Offer Shares up to a maximum of
[4,290] Employee Tranche Offer Shares, subject to
pro-rata allocation.
Trading Participants and Retail Offer ......................
Up to [90,000,000] Firm Shares (or [30] % of the
Firm Shares) are (subject to reallocation as described
below) being offered in the Trading and Participants
Retail Offer in the Philippines at the Offer Price. Out
of the Trading and Participants Retail Offer,
[60,000,000] Firm Shares (or [20]% of the Firm
Shares) are being allocated to all of the PSE Trading
Participants at the Offer Price and up to [30,000,000]
Firm Shares are being allocated at the Offer Price to
LSIs. Each PSE Trading Participant shall initially be
allocated [454,540] Firm Shares and subject to
17
reallocation as may be determined by the Domestic
Lead Underwriter and Domestic Bookrunner. Based
on the initial allocation for each PSE Trading
Participant, there will be a total of [720] residual Firm
Shares to be allocated as may be determined by the
Bookrunner. Any Firm Shares allocated to the PSE
Trading Participants but not taken up by them will be
distributed by the Domestic Lead Underwriter and
Domestic Bookrunner to its clients, retail investors or
the general public. Each LSI applicant may subscribe
up to a maximum of [270] Firm Shares at the Offer
Price. Trading Participants and Retail Offer Shares
not taken up by the PSE Trading Participants, the
Bookrunner’s clients, retail investors or the general
public shall be purchased by the Domestic Lead
Underwriter and Domestic Bookrunner pursuant to
the terms and conditions of the Domestic
Underwriting Agreement and subject to agreement
between the Global Coordinator and International
Bookrunner and the Domestic Lead Underwriter and
Domestic Bookrunner on any clawback, clawforward
or other such mechanism relating to reallocation of
the Shares between the Institutional Offer [and the
Employee Tranche Offer] and the Trading
Participants and Retail Offer.
Offer Shares .............................................................
The Firm Shares and the Optional Shares.
Offer Price ...............................................................
Up to ₱[90.0] per Offer Share. The Offer Price was
determined based on a book-building process and
discussions between the Company and the Global
Coordinator and International Bookrunner and the
Bookrunner.
Over-allotment Option .............................................
[Each of the Selling Shareholders] has granted the
Stabilizing Agent and its relevant affiliates, in their
role as stabilizing agent, an option, exercisable in
whole or in part, to purchase up to [30,000,000]
Optional Shares at the Offer Price, on the same terms
and conditions as the Firm Shares as set out in this
Prospectus, to cover over-allotments, if any. The
Over-allotment Option is exercisable 30 days from
and including the Listing Date. See “Plan of
Distribution—The Over-Allotment Option.”
Trading Participants and Retail Offer Period...........
The Trading Participants and Retail Offer Period
shall begin at 9:00 a.m. (Manila time) on [October
26], 2016 and end at 12:00 noon (Manila time) on
[November 3], 2016. The Company and the Domestic
Lead Underwriter and Domestic Bookrunner reserve
the right to extend or shorten the Trading Participants
and Retail Offer Period, subject to the approval of the
Philippine SEC and the PSE.
Applications must be received by the domestic
receiving agent, Rizal Commercial Banking
18
Corporation (the Domestic Receiving Agent), not
later than 12:00 noon, Manila Time on [November 3],
2016, whether filed through a participating PSE
Trading Participant or directly with the Domestic
Lead Underwriter and Domestic Bookrunner.
Applications received thereafter or without the
required documents will be rejected. Applications
shall be considered irrevocable upon submission to a
participating PSE Trading Participant or the Domestic
Lead Underwriter and Domestic Bookrunner, and
shall be subject to the terms and conditions of the
Offer as stated in this Prospectus and in the
application. The actual subscription and/or purchase
of the Offer Shares shall become effective only upon
the actual listing of the Offer Shares on the PSE and
upon the obligations of the Domestic Lead
Underwriter and Domestic Bookrunner under the
Domestic Underwriting Agreement becoming
unconditional and not being suspended, terminated or
cancelled on or before the Listing Date in accordance
with the provisions of such agreement.
The Trading Participants and Retail Offer Shares may
be purchased by any natural person of legal age
residing in the Philippines regardless of nationality,
or any corporation, association, partnership, trust
account, fund or entity residing in and organized
under the laws of the Philippines and/or licensed to
do business in the Philippines, regardless of
nationality, subject to the Company’s right to reject
an application for subscription or purchase if the
same will cause the Company to be in breach of the
Philippine ownership requirements under relevant
Philippine laws and the 5% single person or entity
ownership limit set forth in the Oil Deregulation Law.
See “Regulatory and Environmental Matters —
Downstream Oil Industry Deregulation Act of 1998”.
Eligible Investors .....................................................
The Institutional Offer Shares are initially being
offered and sold (i) outside the United States in each
case, in offshore transactions in reliance on
Regulation S under the U.S. Securities Act and (ii) to
Domestic QBs in the Philippines. Subscription to, and
purchase of, the Institutional Offer Shares in certain
jurisdictions may be restricted by law. Foreign
investors interested in subscribing or purchasing the
Institutional Offer 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 Institutional Offer Shares will not violate the
laws of their respective jurisdictions and that they are
allowed to acquire, purchase and hold the
Institutional Offer Shares.
The Institutional Offer Shares are initially being
offered and sold (i) outside the United State in
offshore transactions in reliance on Regulation S
under the U.S. Securities Act and (ii) to Domestic
Transfer Restrictions................................................
19
QBs in the Philippines. The Offer Shares have not
been and will not be registered under the U.S.
Securities Act and are not being offered or sold in the
United States. The Offer Shares may be subject to
certain transfer restrictions as described herein.
See “Plan of Distribution—The Institutional Offer.”
Use of Proceeds .......................................................
The Company intends to use the net proceeds from
the Offer towards capital expenditure, working
capital and general corporate expenses. See “Use of
Proceeds” for details of how the total net proceeds are
expected to be applied.
Minimum Subscription ............................................
Each application must be for a minimum of [100]
Firm Shares, and thereafter, in multiples of [10] Firm
Shares. Applications for multiples of any other
number of Shares may be rejected or adjusted to
conform to the required multiple, at the Company’s
discretion.
Reallocation .............................................................
The allocation of the Firm Shares between the
Trading Participants and Retail Offer, the
Institutional Offer and the Employee Tranche Offer is
subject to further adjustment. In the event of an
under-application in the Institutional Offer and the
Employee Tranche Offer and a corresponding overapplication in the Trading Participants and Retail
Offer, Firm Shares in the Institutional Offer and the
Employee Tranche Offer may be reallocated to the
Trading Participants and Retail Offer. If there is an
under-application in the Trading Participants and
Retail Offer and if there is a corresponding overapplication in the Institutional Offer and the
Employee Tranche Offer, Firm Shares in the Trading
Participants and Retail Offer may be reallocated to
the Institutional Offer and the Employee Tranche
Offer. The reallocation shall not apply in the event of
over-application or under-application in both the
Trading Participants and Retail Offer, on the one
hand, and the Institutional Offer and Employee
Tranche Offer, on the other.
Lock-up ...................................................................
The PSE rules require an applicant company to cause
its existing shareholders owning at least 10% of the
outstanding shares of the Company not to sell, assign
or in any manner dispose of their shares for a period
of 180 days after the listing of the shares. If the Overallotment Option is not exercised, [] Shares held by
Shell Overseas Investments B.V. and [] Shares held
by The Insular Life Assurance Company, Ltd. are
subject to such 180-day lock-up. If the Overallotment Option is fully exercised, [] Shares held by
Shell Overseas Investments B.V. and [] Shares held
by The Insular Life Assurance Company, Ltd. are
subject to such 180-day lock-up.
[In addition, if there is any issuance of shares or
securities such as private placements, assets for
shares swap or a similar transaction or instruments
which lead to issuance of shares or securities such as
20
convertible bonds, warrants or a similar instrument
that are completed within 180 days prior to the start
of the offer period, and the transaction price is lower
than the Offer Price in the initial public offering, all
such shares or securities shall be subject to a lock-up
period of at least 365 days from full payment of such
shares or securities. A total of [] Shares, held by [],
will be subject to such 365-day lock-up. See “Plan of
Distribution—Lock-Up”. To implement the foregoing
lock-up requirements, the PSE requires the applicant
company to lodge the shares with the PDTC through
a Philippine Central Depository (PCD) participant for
the electronic lock-up of the shares or enter into an
escrow agreement with the trust department or
custodian unit of an independent and reputable
financial institution.]
[In addition, the Company and the Selling
Shareholders have agreed with the Global
Bookrunner that, except in connection with the Overallotment Option, none of the Company, Shell
Overseas Investments B.V., The Insular Life
Assurance Company, Ltd., Spathodea Campanulata,
Inc. or [other entities subject to lock-up to be
described], nor any person acting on their behalf,
will, without the prior written consent of the Global
Bookrunner, issue, offer, pledge, sell, contract to sell,
pledge or otherwise dispose of (or publicly announce
any such issuance, offer, sale or disposal of) any
Shares owned by it as of the Listing Date or securities
owned as of the Listing Date convertible or
exchangeable into or exercisable for any Shares or
warrants or other rights to purchase Shares or any
security or financial product whose value is
determined directly or indirectly by reference to the
price of the underlying securities, including equity
swaps, forward sales and options, for a period of
[180] days after the First Closing Date.]
[Cornerstone Investor ..............................................
[], [] and []
The Cornerstone Investors will purchase such number
of Offer Shares from the Company at the Offer Price
(the Cornerstone Shares). Subject to certain
conditions, the Cornerstone Investors may be
required to purchase a certain number of Offer Shares
through the book building process for the Offer
Shares in addition to the Cornerstone Shares (the
Additional Investor Shares).]
Registration, Listing and Trading ............................
The Company has filed an application with the
Philippine SEC for the registration and an application
with the PSE for the listing of all its outstanding
capital stock (including the Offer Shares). The
Philippine SEC issued an Order of Effectivity and
Permit to Sell on [●], 2016 and the PSE Board
approved the listing application on [●], 2016, subject
21
to compliance with certain listing conditions.
The Offer Shares are expected to be listed on the PSE
under the symbol “[●]”. See “Description of the
Shares.” All of the Offer Shares are expected to be
listed on the PSE on or about [November 10,] 2016.
Trading of the Shares that are not subject to lock-up
is expected to commence on the same date.
Dividends.................................................................
The Company is authorized to declare dividends. A
cash dividend declaration requires approval from the
Board. A stock dividend declaration requires the
further approval of shareholders representing not less
than two-thirds of the Company’s outstanding capital
stock. Dividends may be declared only from available
unrestricted retained earnings.
The Company intends to pay annual dividends in the
amount of not less than 75% of its audited net income
after tax of the previous year subject to compliance
with the requirements of applicable laws and
regulations and subject to investment plans and
financial condition. The amount of dividends will be
reviewed periodically by the Board in light of the
Company's earnings, financial condition, cash flows,
capital requirements and other considerations while
maintaining a level of capitalization that is
commercially sound and sufficient to ensure that the
Company can operate on a standalone basis.
The Company can give no assurance that it will pay
any dividends in the future. See “Dividends and
Dividend Policy.”
Procedure for Application for the Trading
Participants and Retail Offer ...................................
Application forms and signature cards may be
obtained from the Domestic Lead Underwriter and
Domestic Bookrunner, the Domestic Receiving Agent
or from any participating PSE Trading Participant.
Applicants shall complete the application form,
indicating all pertinent information such as the
applicant’s name, address, contact number, taxpayer’s
identification number, citizenship and all other
information as may be required in the application
form. Applicants shall undertake to sign all
documents and to do all necessary acts to enable them
to be registered as holders of Offer Shares. Failure to
complete the application form may result in the
rejection of the application.
If the applicant is a corporation, partnership or trust
account, the Application must be accompanied by the
following documents:

22
a certified true copy of the applicant’s latest
articles of incorporation and by-laws (or articles
of partnership in the case of a partnership) and
other constitutive documents (each as amended
to date) duly certified by its corporate secretary
(or managing partner in the case of a
partnership);

a certified true copy of the applicant’s
Philippine SEC certificate of registration or
certificate of filing amended articles of
incorporation or by-laws, as the case may be,
duly certified by its corporate secretary (or
managing partner in the case of a partnership);
and

a duly notarized corporate secretary’s certificate
(or certificate of the managing partner in the
case of a partnership) setting forth the resolution
of the applicant’s board of directors or
equivalent body authorizing the purchase of the
Offer Shares indicated in the application,
identifying the designated signatories authorized
for the purpose, including his or her specimen
signature, and certifying to the percentage of the
applicant’s capital or capital stock held by
Philippine Nationals.
Foreign corporate and institutional applicants, who
qualify as Eligible Investors, in addition to the
documents listed above, are required to submit in
quadruplicate, a representation and warranty stating
that their application will not violate the laws of their
jurisdictions of incorporation or organization, and
that they are allowed, under such laws, to acquire,
purchase and hold the Offer Shares.
Payment Terms ........................................................
The purchase price must be paid in full in Pesos upon
the submission of the duly completed and signed
application form and signature card together with the
requisite attachments.
Payment for the Offer Shares shall be made either by:
(i) a personal or corporate check drawn against an
account with a BSP authorized bank at any of its
branches located within Metro Manila; (ii) a
manager’s or cashier’s check issued by an authorized
bank; or (iii) a debit-credit instruction via Real Time
Gross Settlement (RTGS) or direct bank fund
transfer in favor of the relevant underwriter accepting
the application.
For PSE Trading Participants and LSI applicants,
only Cashier’s/Manager’s, personal or corporate
checks will be acceptable as valid mode of payment.
Checks subject to clearing periods of over three
banking days shall not be accepted. All checks should
be made payable to “[PSPC-IPO]”, crossed “Payee’s
Account Only,” and dated the same date as the
application. The applications and the related
payments will be received at any of the designated
locations as specified in the TP Guidelines and the
LSI Guidelines, to be published by the PSE prior to
the start of the Trading Participant and Retail Offer
Period.
Acceptance or Rejection of Applications for the
Trading Participants and Retail Offer ......................
“Application to Subscribe” forms are subject to
confirmation by the Domestic Lead Underwriter and
Domestic Bookrunner and the final approval of the
Company. The Company and the Domestic Lead
23
Underwriter and Domestic Bookrunner reserve the
right to accept, reject or scale down the number and
amount of Offer Shares covered by any application.
The Company and the Global Coordinator and
International Bookrunner and the Domestic Lead
Underwriter and Domestic Bookrunner have the right
to reallocate available Offer Shares in the event that
the Offer Shares are insufficient to satisfy the total
applications received. The Offer Shares will be
allotted in such a manner as the Company and the
Bookrunner may, in their sole discretion, deem
appropriate, subject to distribution guidelines of the
PSE. Applications with checks dishonored upon first
presentation and “Application to Subscribe” forms
which do not comply with terms of the Offer will be
automatically
rejected.
Notwithstanding
the
acceptance of any “Application to Subscribe” forms,
the actual subscription of the Offer Shares by the
applicant will be effective only upon the listing of the
Offer Shares at the PSE.
Refunds for the Trading Participants and Retail
Offer ........................................................................
In the event that the number of Offer Shares to be
received by an applicant, as confirmed by the
Bookrunner, is less than the number covered by its
application, or if an application is rejected by the
Company, then the applicant is entitled to a refund,
without interest, within five banking days from the
end of the offer period, all or a portion of the payment
corresponding to the number of Offer Shares wholly
or partially rejected. All refunds shall be made
through the Domestic Receiving Agent, at the
applicant’s risk.
Registration and Lodgment of Shares with PDTC ..
The Offer Shares are required to be lodged with the
PDTC. The applicant must provide the information
required for the PDTC lodgment of the Offer Shares.
The Offer Shares will be lodged with the PDTC at
least two trading days prior to the Listing Date. The
applicant may request to receive stock certificates
evidencing such applicant’s investment in the Offer
Shares through his/her broker after the Listing Date.
Any expense to be incurred by such issuance of
certificates shall be borne by the applicant.
Registration of Foreign Instruments ........................
The BSP requires that investments in shares of stock
funded by inward remittance of foreign currency be
registered with the BSP if the foreign exchange
needed to service capital repatriation or dividend
remittance will be sourced from the Philippine
banking system. The registration with the BSP of all
foreign investments in the Offer Shares shall be the
responsibility of the foreign investor. See “Philippine
Foreign Exchange Regulations.”
Tax Considerations ..................................................
See “Philippine Taxation” for further information on
the Philippine tax consequences of the purchase,
ownership and disposal of the Offer Shares.
24
Expected Timetable .................................................
The timetable of the Offer is expected to be as
follows:
Pricing and allocation of the
Institutional Offer Shares ......
[October 19],
2016
Notice of final Offer Price to
the Philippine SEC and PSE ..
[October 20],
2016
Submission of Firm Order and
Commitments by PSE Trading
Participants ............................
[October 28],
2016
Trading Participants and Retail
Offer Period ...........................
[October 26 to
November 3],
2016
Trading Participants and Retail
Offer Period Settlement Date
[November 8],
2016
Institutional Offer Settlement
Date .......................................
[November 10],
2016
Listing Date ...........................
[November 10],
2016
The dates included above are subject to the approval
of the PSE and the Philippine SEC, market and other
conditions, and may be changed.
Risks of Investing ....................................................
Before making an investment decision, prospective
investors should carefully consider the risks
associated with an investment in the Offer Shares.
Certain of these risks are discussed in the section
entitled “Risk Factors” and include: risks relating to
the Company’s business and operations, risks relating
to the downstream oil industry, risks relating to the
Philippines, risks relating to the Offer Shares and
risks associated with the presentation of certain
statistical information in this Prospectus.
25
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following tables present selected financial information of the Company. This selected data should be read in
conjunction with the independent auditors’ report and with the financial statements of the Company and notes
thereto contained in this Prospectus and the section entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”. The Company’s selected financial data as of and for the years
ended December 31, 2013, 2014 and 2015 were derived in each case from the audited financial statements of the
Company included elsewhere in this Prospectus. The Company’s financial information below should not be
considered indicative of the results of future operations. Furthermore, the translation of Peso amounts into US
dollars as of and for the year ended December 31, 2015 is provided for convenience only and is unaudited. For
readers’ convenience only, amounts in Pesos were converted to US dollars using the BSP Rate as of December
29, 2015 of ₱47.166 = US$1.00.
SUMMARY STATEMENTS OF INCOME
2013
For the year ended December 31,
2014
2015
(audited)
(₱ million)
2015
(unaudited)
(US$ million)
Gross sales ................................................................................
211,333.3
238,238.5
168,853.8
Sales discounts and rebates ......................................................
(12,484.4)
(14,153.6)
(11,876.2)
3,580.0
Net sales ...................................................................................
198,848.9
224,084.8
156,977.7
3,328.2
(225,394.2)
(139,709.6)
(2,962.1)
(251.8)
Cost of sales..............................................................................
(187,218.8)
Gross profit (loss) ...................................................................
11,630.1
(1,309.3)
17,268.1
366.1
Operating expenses ..................................................................
8,790.9
9,638.0
10,350.0
219.4
Income (Loss) from operations .............................................
2,839.1
(10,947.4)
6,918.0
146.7
Income (Loss) before income tax ..........................................
(731.0)
(12,385.5)
5,223.0
110.7
Profit (Loss) for the year .......................................................
(912.1)
(8,488.6)
3,553.2
75.3
SUMMARY BALANCE SHEETS
2013
As of December 31,
2014
2015
(audited)
(₱ million)
2015
(unaudited)
(US$ million)
Current assets ..............................................................
59,871.3
47,222.8
36,640.6
Non-current assets .......................................................
18,862.1
26,279.9
29,578.4
776.8
627.1
Total assets ...................................................................
78,733.4
73,502.7
66,219.0
1,404.0
Current liabilities ........................................................
49,838.9
52,452.6
18,886.2
400.4
Non-current liabilities .................................................
16,333.8
17,219.5
21,237.7
450.3
Total liabilities .............................................................
66,172.7
69,672.1
40,123.9
850.7
Total equity ..................................................................
12,560.7
3,830.6
26,095.1
553.3
Total liabilities and equity ..........................................
78,733.4
73,502.7
66,219.0
1,404.0
SUMMARY STATEMENTS OF CASH FLOWS
2014
2015
(audited)
(₱ million)
2013
2015
(unaudited)
(US$ million)
Net cash from (used in) operating activities ................
(5,107.9)
7,360.3
14,158.5
300.2
Net cash used in investing activities .............................
(3,201.8)
(5,645.6)
(6,244.5)
(132.4)
Net cash flow from (used in) financing activities ........
7,556.3
(192.6)
Net decrease in cash for the year ..................................
Cash at the beginning of the year .....................................
(753.5)
6,924.6
26
(3,157.7)
(9,084.3)
(1,443.0)
(1,170.3)
(24.8)
6,161.2
4,721.6
100.1
Cash at the end of the year ............................................
6,161.2
4,721.6
3,576.8
75.8
OTHER FINANCIAL DATA
Reconciliation from statutory profit for the year to EBIT and EBITDA
2013
EBIT1 ..........................................................................................
EBITDA1 ....................................................................................
527
2,234
2014
2015
(unaudited)
(₱ million)
(10,933)
6,429
(8,768)
8,062
2015
(unaudited)
(US$ million)
136.3
170.9
___________________________
1
EBIT indicates profit for the year excluding interest income, interest and finance charges (and accretion) expense and benefit
from (provision for) income tax. EBITDA indicates profit for the year excluding interest income, interest and finance charges
(and accretion) expense, benefit from (provision for) income tax and depreciation and amortization. EBIT and EBITDA are not
measurements of financial performance under IFRS or PFRS and investors should not consider them in isolation or as an
alternative to profit or loss for the year, income or loss from operations, an indicator of the Company’s operating performance,
cash flow from operating, investing and financing activities, or as a measure of liquidity or any other measures of performance
under PFRS. Because there are various EBIT and EBITDA calculation methods, the Company’s presentation of this measure
may not be comparable to similarly titled measures used by other companies. Set forth below is a reconciliation of the
Company’s profit for the year to its EBITDA and EBIT.
2013
Profit (Loss) for the year ...........................................................
Add:
(Benefit from) Provision for income tax ...............................
Finance expense .....................................................................
Depreciation and amortization ..............................................
Less:
Finance income ......................................................................
EBITDA ....................................................................................
Less:
EBIT .........................................................................................
(912)
2014
2015
(₱ million)
(8,489)
3,553
2015
(US$ million)
75.3
181
1,290
1,707
(3,897)
1,472
2,165
1,670
1,232
1,634
35.4
26.1
34.6
32
2,234
20
(8,768)
26
8,062
0.6
170.9
1,707
527
2,165
(10,933)
1,634
6,429
34.6
136.3
KEY FINANCIAL RATIOS AND OPERATING DATA
Key financial ratios
Current ratio1 ..................................................................................................
Debt to equity ratio2 .......................................................................................
Debt ratio3 .......................................................................................................
Return on assets4 ............................................................................................
Return on equity5 ............................................................................................
Return on average capital employed6.............................................................
As of/for the year ended December 31,
2014
2015
2013
(audited)
1.2013
0.9003
1.9401
3.3057
11.3639
0.5886
51.3%
54.2%
22.9%
(1.2%)
(11.6%)
5.4%
(7.3%)
(221.6%)
13.6%
1.0%
(20.3%)
13.8%
___________________________
1
2
Current ratio is computed by dividing current assets over current liabilities.
Debt to equity ratio is computed by dividing net debt (short-term and long-term borrowings and loans payable less cash) by
stockholder’s equity (exclusive of other reserves).
3
Debt ratio is computed as net debt divided by total assets.
4
Return on assets is computed as profit (loss) for the period divided by total assets.
5
Return on equity is computed as profit (loss) for the period divided by total equity.
27
6
Return on average capital employed is defined as EBIT as a percentage of the average capital employed for the period. Capital
employed consists of total equity, short-term and long-term borrowings and loans payable. Average capital is calculated as the
mean of the opening and closing balances of capital employed for that period.
Key operating data
2013
Nameplate capacity (thousand barrels per day (bpd))1 .............................................
Refinery utilization rate (%)2 .....................................................................................
Retail fuel volumes sold (million liters)3 ...................................................................
Commercial fuel volumes sold (million liters)4 .........................................................
Retail lubricants volumes sold (million liters)5 .........................................................
Commercial lubricants volumes sold (million liters)6 ...............................................
110
70.3%
2,450
2,116
11
47
2014
(unaudited)
110
60.5%
2,714
2,421
10
46
2015
110
62.9%
2,926
2,401
11
45
___________________________________
Note:
1
110,000 bpd is nameplate capacity on a calendar basis.
2
Refinery utilization rate is calculated as the ratio of total product output to the calendar day nameplate capacity.
3
Retail fuel volumes sold indicates the total volume of fuel sold through the retail business for the period.
4
Commercial fuel volumes sold indicates the total volume of wholesale commercial fuel and jet fuel sold for the period.
5
Retail lubricants volumes sold indicates the total volume of lubricants sold through the retail business for the period.
6
Commercial lubricants volumes sold indicates the total volume of lubricants sold through the wholesale and marine businesses
for the period.
28
RISK FACTORS
An investment in the Offer Shares involves a number of risks. The price of securities can and does fluctuate, and
any individual security is likely to 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. The Company’s past performance is not a guide to its future performance. There may be a large
difference between the buying price and the selling price of the Offer Shares.
Investors should carefully consider all the information contained in this Prospectus, including the risk factors
described below, before deciding to invest in the Offer Shares. The occurrence of any of the following events, or
other events not currently anticipated, could have a material adverse effect on the Company’s business
prospects, financial condition, results of operation, the market price of the Offer Shares and its ability to make
dividend distributions to shareholders. All or part of an investment in the Offer Shares could be lost.
The means by which the Company intends to address certain of the risk factors discussed herein are principally
presented under “Business — Strengths” beginning on page 105, “Business — Strategies” beginning on page
110, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on
page 77, and “Board of Directors and Senior Management” on page 147 of this Prospectus. Investors should
note, however, that many of the risks and uncertainties discussed below are entirely beyond the Company’s
control.
This risk factors discussion does not purport to disclose all of the risks and other significant aspects of investing
in the Offer Shares. Investors should undertake independent research and study the trading of securities before
commencing any trading activity. Investors may request publicly available information on the Company from
the Philippine SEC. An investor should seek professional advice if he or she is uncertain of, or has not
understood, any aspect of this Offer or the nature of risks involved in purchasing, holding and trading the
Shares. Each investor should consult his or her own counsel, accountant and other advisors as to the legal, tax,
business, financial and related aspects of an investment in the Shares.
Risks Relating to the Company’s Business and Operations
Volatility of prices for crude oil and other feedstocks, finished petroleum product prices may impact
margins and have a material adverse effect on the Company’s business, results of operations and
financial condition.
The Company’s financial results are primarily affected by the relationship, or margin, between finished
petroleum product prices and the prices of crude oil and other feedstocks. Crude, feedstocks, and Finished
Petroleum Products costs generally account for a large portion of the Company’s total cost of sales. In 2015,
crude oil, feedstock and Finished Petroleum Products (whose cost is in turn correlated with oil prices) account
for a large portion of the Company’s total cost of sales, equal to 89% of total cost of sales.
The cost to acquire crude oil and other feedstocks and the price at which the Company can ultimately sell
Finished Petroleum Products depend upon a variety of factors beyond its control. Many factors influence the
price of crude oil, including changes in global supply and demand for crude oil, international economic
conditions, global conflicts or acts of terrorism, weather conditions, domestic and foreign governmental
regulation and other factors over which the Company has no control.
Historically, international crude oil prices have been volatile, and are likely to continue to be volatile in the
future. Notably, international crude oil prices have been especially volatile in the last two years. For example,
average annual Brent crude oil prices declined from US$98.99 per barrel in 2014 to US$52.73 per barrel in
2015.
29
The Company typically holds approximately 40 to 50 days of crude oil and refined products inventory, which is
in excess of the 30-day minimum inventory requirement of the Department of Energy (DOE). Accordingly,
since the Company accounts for its inventory using the first-in-first-out method, a sharp decrease in crude oil
prices could adversely affect the Company, as it may require the Company to sell its Finished Petroleum
Products produced with higher-priced crude oil at lower prices, thereby eroding margins and increasing cost of
inventory written down to net realization value. The Company may not be able to pass crude oil price
fluctuations along to its consumers in a timely manner or at all due to regulatory restrictions or social and
competitive concerns, as discussed below. Although the Company’s refinery in Tabangao, Batangas (the
Tabangao Refinery) is capable of processing a wide range of varieties and grades of crude oil, if the Company
obtains crude oil supply at unfavorable prices, its margins and results of operations would be materially
adversely affected.
Furthermore, a sharp increase in oil prices would increase the Company’s requirements for short-term financing
for working capital and may result in higher financing costs for the Company or pose difficulties in securing
financing on favorable terms. Any difficulties in securing short-term financing for working capital, or
unfavorable pricing terms, may have a material adverse effect on the Company’s financial condition and results
of operations.
The Company is heavily dependent on its relationship with Shell Group companies as its suppliers and
direct and indirect major shareholders, who may have interests that may not be the same as those of
other shareholders.
Shell International Eastern Trading Company (SIETCO) is the Company’s principal crude and feedstocks
supplier and its single market interface to the international crude and feedstocks market. SIETCO is a division
of Shell Eastern Trading Limited (SETL). For the six months ended June 30, 2016, the Company sourced
96.8% of its crude oil and feedstocks requirements under its supply agreements with SIETCO. The Company’s
principal crude and feedstocks supply agreement with SIETCO is a term contract, under which the prices for
purchases of crude oil and other feedstocks are determined on an arm’s length basis by using reference markers
from the Mean of Platts Singapore or other similar market indexes, where feedstock costs may vary from time to
time. See “Business — Procurement”. There can be no assurance that SIETCO will be able to procure crude oil
and feedstocks at the quantities and benchmarked prices the Company requires.
Shell Overseas Investments B.V. (Shell B.V.), directly, and Royal Dutch Shell plc (RDS), indirectly, hold an
effective 68.18% of the Company’s outstanding common equity as of June 30, 2016. See “Principal and Selling
Shareholders”. Shell B.V. and RDS are not obligated to provide the Company with financial support or to
exercise its rights as a shareholder in the Company’s best interests or the best interests of the Company’s other
shareholders. Shell B.V. and RDS could have the ability to control the Company’s management and
administration, in particular, the nomination of directors to be appointed by the annual general meeting of
shareholders and the nomination of certain executive officers to be appointed by the board of directors of the
Company (the Board). As of June 30, 2016, six of the Company’s non-independent directors are employees of
the Shell Group. If the interests of Shell B.V. and RDS conflict with the interests of the Company, the Company
could be disadvantaged by the actions that Shell B.V. and RDS choose to pursue.
In addition, while the Company expects to benefit from its ongoing relationship with Shell B.V. and its
subsidiaries and affiliates through their global reach and relationships, there can be no assurance that Shell B.V.
and RDS will allow the Company to have access to such benefits in perpetuity. Shell B.V. and RDS may also, at
any time, divest all of, or its controlling, stake in the Company. There can be no assurance that Shell B.V. will
continue its current level of shareholding in the Company, or at all, or that the Shell Group will continue to
provide access to its technology and services.
If any of the Company’s material supply agreements with the Shell Group were terminated or if the Shell Group
ceases to grant the Company the license to use its trademarks or to provide the Company with access to its
technology and services or if Shell B.V. reduces or fully divests its shareholding in the Company, the
30
Company’s business, cash flow, financial condition, results of operations and prospects could be materially
adversely affected.
The Company’s business strategies need to be supported by sufficient liquidity and capital resources,
which are subject to a number of risks and uncertainties and there can be no assurance that the Company
will be able to generate sufficient cashflows from its operations or obtain adequate financing to
implement its strategies.
The Company’s business is capital intensive. Specifically, the refining of crude oil and the purchase,
construction and maintenance of machinery and equipment require access to sufficient liquidity and capital
resources to fund the Company's operating and capital expenditures. The Company’s current business strategies
include the selective expansion of its retail service station network and the improvement of its manufacturing,
supply and distribution network. See “Management’s Discussion and Analysis of Financial Condition and
Results of Operations — Capital Expenditures” for more information about the Company’s capital expenditure
plans. There can be no assurance that the Company will be able to generate sufficient cash flows from its
operations, obtain adequate financing for its planned capital expenditures or to meet its debt servicing
obligations, on acceptable terms or at all. If the Company fails to complete its planned capital expenditure
projects on time or within budget or at all, it may be unable to achieve its strategic objectives, and its business,
results of operations and financial condition could be adversely affected.
The Company’s ability to meet its liquidity needs for its operational expenses, complete its planned capital
expenditure projects and meet its debt servicing obligations will depend in part on its ability to generate
sufficient cash flows from its operations and obtain adequate additional financing. There can be no assurance
that the Company will be able to generate sufficient cash flows from its operations or obtain adequate financing
for its planned operating or capital expenditures or to meet its debt servicing obligations, on acceptable terms or
at all.
Any significant supply chain disruption, casualty loss at the Company’s facilities, or other significant
interruption in the Company’s operations, which may be caused by events beyond the Company’s
control, could adversely affect its business and results of operations and result in potential liabilities.
The Company’s operation of its integrated manufacturing, supply and distribution network, which include
refining, transporting and storing crude oil, feedstocks and other petroleum products, and implementation of its
expansion plans, including the North Mindanao Import Facility (NMIF), could be adversely affected by many
factors, including accidents, breakdown or failure of equipment, interruption in power supply, human error,
fires, explosions, release of toxic fumes, engineering and environmental problems, natural disasters, a
breakdown of the local peace and order situation and other unforeseen circumstances and problems. These types
of disruptions could result in product run-outs, facility shutdowns, equipment repair or replacement, increased
insurance costs, personal injuries, loss of life and/or unplanned inventory build-up, all of which could have a
material adverse effect on the business, results of operations and financial condition of the Company.
The Company’s operations are also subject to mechanical failures and equipment shutdowns. In such situations,
undamaged refinery processing units or other production facilities may be dependent on or interact with
damaged sections of the Company’s refinery or other facilities and, accordingly, are also subject to being shut
down. If such events occur, the Company’s production capacity may be materially and adversely affected. If the
Company’s refinery or other facilities are forced to shut down for a significant period of time, this would have a
material adverse effect on the Company earnings, results of operations and financial condition as a whole,
particularly if such event was not adequately covered by insurance. In addition, many of these operating and
other risks may cause personal injury and loss of life, severe damage to or destruction of property and
equipment and environmental damage, and may result in loss of permits or licenses, suspension of operations
and the imposition of civil or criminal penalties.
31
The Company relies upon independent third-party service providers for substantially all of its product
transport requirements and may not be able to continue to renew its contracts with these service
providers or to enter into new contracts on acceptable terms and on a timely basis.
terminals using a fleet of third-party vessels and to retail service stations and commercial customers throughout
to commercial customers.
Imported lubricants are landed onshore through container vessels and delivered directly from the port to the
lubricants warehouses by third party trucking services. Lubricants are delivered from lubricants warehouses to
commercial customers by outsourced trucking services.
From the bitumen import facilities, bulk and packed bitumen products are either delivered to commercial
customers by outsourced bitumen trucks and bitutainers or picked up by customers.
The vessels, tank trucks, trucking services, bitumen trucks and bitutainers are chartered mainly on term
contracts from third-party owners. Any deterioration in or other changes relating to its relationships with such
third parties, including changes in supply and distribution chains, could result in delayed or lost deliveries or
damaged products. Moreover, these service providers are third parties whom the Company does not control.
They may decide to increase their prices for services provided to the Company or discontinue their relationships
with the Company. There is no assurance that the Company will be able to negotiate for or maintain terms
commercially acceptable to the Company, or locate replacement service providers on a timely basis.
Delivery disruptions may also occur for reasons out of the Company’s control, such as poor handling,
transportation bottlenecks, labor strikes, and adverse climate conditions. Any occurrence of the foregoing could
materially and adversely affect the Company’s business, profitability and competitiveness.
In addition, there is no assurance that the Company will be able to coordinate its logistics strategy to the degree
necessary for the realization of its growth plans. As the Company expands its retail service station network, it
will need to ensure that it is able to secure similarly efficient distributors and service providers for an expanded
retail service station network. The Company’s failure to establish effective logistics networks could have a
material and adverse effect on its expansion plans, operating costs and its results of operations. See “Business —
Supply and Distribution Network” for details.
The Company conducts operations through joint agreements, which could reduce the Company’s degree
of control, as well as its ability to identify and manage risks.
In cases where the Company is not the sole operator of certain business operations, the Company has limited
influence over, and control of, the behavior, performance and costs of operation of such joint arrangement.
Despite not having control, the Company could still be exposed to the risks associated with these operations,
including reputational, litigation and government sanction risks, which could have a material adverse effect on
the Company’s operational performance, earnings, cash flows and financial condition.
Continued compliance or failure to comply with, or changes in, health, safety, security and environment
(HSSE) laws and regulations may adversely affect the Company’s results of operations and financial
condition.
The operations of the Company’s business are subject to a number of Philippine national and local laws and
regulations, including HSSE laws and regulations. These laws and regulations impose controls on air and water
discharges, the storage, handling, discharge and disposal of waste, the location of storage facilities, and other
aspects of the Company’s business. The Company’s products may be contaminated during any point in the
storage, handling or transportation. Failure to comply with relevant laws and regulations may result in financial
32
penalties or administrative or legal proceedings against the Company, including the revocation or suspension of
the Company’s licenses or operation of its facilities, all of which could adversely impact the Company’s brand
and reputation.
The Company has incurred, and expects to continue to incur, operating costs to comply with such laws and
regulations. In addition, the Company has made, and expects to continue to make, capital expenditures on an
ongoing basis to comply with HSSE laws and regulations. For example, the Company completed its STAR
Tabangao Refinery Euro IV Compliance or STAR TREC project in December 2015 to ensure that the Tabangao
Refinery produces fuels that comply with the Philippine National Standard specifications for the Euro 4/IV-PH
Fuels (Euro IV (PH)) standards by January 1, 2016, as mandated by the DOE. See “Regulatory and
Environmental Matters”.
There can be no assurance that the Company will be in compliance with applicable laws and regulations or will
not become involved in future litigation or other proceedings or be held responsible in any future litigation or
proceedings relating to HSSE matters, the costs of which could be material. For example, the Company is
subject to on-going litigation arising from the First Philippine Industrial Corporation (FPIC) oil pipeline
leakage in May 2010. The FPIC pipeline, which delivers fuel for the Company and Chevron Philippines Inc.
(Chevron, formerly Caltex Philippines) from Batangas to Manila, closed down after oil from a portion of the
pipeline was discovered to have leaked into the basement of the West Tower condominiums in Barangay
Bangkal, Makati City. On March 24, 2011, an environmental case was filed against FPIC, First Gen
Corporation, Chevron, and their respective directors,, along with four directors (two of whom are also officers)
of the Company, who are also directors of FPIC, and the Company. This case was later on ruled as an ordinary
civil case or damages instead of an environmental case, which ruling is subject of a separate civil case before the
Supreme Court. The Company has since asserted that it is not liable for the alleged damages suffered by the
complainants. Subsequent complaints have been filed for criminal negligence against the eleven directors of the
Company and two of its officers who were also directors of FPIC, all of whom were holding such positions at
the time of the filing of the complaints, which are currently pending preliminary investigation before the
Department of Justice. The foregoing cases are pending resolution. See “Business — Legal Proceedings — West
Tower Condominium Corporation”.
HSSE laws and regulations in the Philippines have become increasingly stringent. The Company cannot predict
the environmental legislation or regulation that will be amended or enacted in the future, how existing laws or
regulations will be enforced, administered or interpreted, or the amount of future expenditures that may be
required to comply with these laws and regulations or to respond to environmental claims. For example, in
November 2001, the City of Manila, citing concerns of safety, security and health, passed an ordinance
reclassifying the area occupied by the Company’s main storage facility and lube oil blending plant in Pandacan,
Manila, from industrial to commercial, effectively rendering its continued operation in Pandacan illegal and
necessitating a relocation of the storage facility. In August 2012, the City Council of Manila passed a further
ordinance specifically requiring owners and operators of petroleum refineries and oil depots to relocate their
facilities by the end of January 2016. Although the Company contested the implementation of the November
2001 ordinance, it has since decided to cease operations at its petroleum product storage facilities and lube oil
blending plant in Pandacan. See “Business — Legal Proceedings — Pandacan Terminal Operations”. The
introduction or inconsistent application of or changes in law and regulations relevant to the Company’s business
could have an adverse effect on the business, financial condition and results of operations of the Company.
The Company may be adversely impacted by the fluctuations in the value of the Peso against the US
dollar.
A substantial portion of the Company’s revenues is denominated in Peso, while a substantial portion of its
expenses, including crude oil purchases, is denominated in US dollars. The Company’s financial reporting
currency is the Peso, and therefore depreciation of the Peso would result in increases in the Company’s foreign
currency denominated expenses as reflected in its Peso financial statements, and could also result in foreign
exchange losses resulting from the revaluation of foreign currency denominated assets and liabilities, including
increases in the Peso amounts of the Company’s US dollar denominated debt obligations, thereby adversely
33
affecting the Company’s results of operations and financial condition. In addition, there can be no assurance that
the Company could increase its Peso-denominated product prices to offset increases in its crude oil or other
costs resulting from any depreciation of the Peso. Philippine retail fuel prices in US dollar terms declined in
2014, despite a slight devaluation of the Peso against the US dollar due to the collapse of product prices in the
second half of the year. Average per liter gasoline and diesel prices in 2014 were P52.70 (US$1.19) and P43.23
(US$0.97), respectively, as compared to the 2013 average per liter gasoline and diesel prices of P54.50
(US$1.28) and P44.79 (US$1.06), respectively. Average per liter gasoline and diesel prices in 2015 were P42.24
(US$0.93) and P29.12 (US$0.64), respectively, as compared to the six months ending in June 30, 2016 average
per liter gasoline and diesel prices of P37.55 (US$0.80) and P24.13 (US$0.52), respectively. While the
Company benefits to a limited extent from natural hedges against Peso depreciation, in that increased costs (as
reflected in Peso) of US dollar-denominated crude oil and Finished Petroleum Products can be passed on to a
limited extent to customers through increased sales prices, its exchange rate exposures are not fully protected.
There can be no assurance that the value of the Peso will not decline or continue to fluctuate significantly
against the US dollar, and any significant future depreciation of the Peso could have a material adverse effect on
the Company’s margins, results of operations and financial condition.
The Company leases all of its premises and may not be able to continue to renew these leases or to enter
into new leases in favorable locations on acceptable terms.
The Company leases the site for its head office, the Tabangao Refinery, the site for one of the Tabangao
Refinery’s jetties, the sites of several of its fuel terminals, lubricants warehouses and bitumen import facilities
(collectively, the Supply and Distribution Facilities) as well as all the sites for its company-owned-dealeroperated (CODO) retail service stations. See “Business — Properties”. A number of strategic CODO retail
service station sites, and certain leases for the Company’s Supply and Distribution Facilities, are up for renewal
in 2016 and 2017. In the event that any of the leases, including those that are up for renewal in 2016 and 2017,
are terminated prior to their expiration, or if the leases expire and are not renewed on acceptable terms or at all,
the Company will need to relocate to alternative premises. Also, the Company leases certain properties from
related parties. If the Company is unable to renew leases with related parties, it may have to enter into new
agreements with third parties. There is no assurance that the Company will be able to enter into such new
agreements on terms which are acceptable to it or at all. Relocation of any operations may cause disruptions to
the Company’s business and may require significant expenditure, and the Company cannot assure that suitable
premises on acceptable terms will be available.
Also, a continued increase in property prices in the Philippines may increase the costs that the Company incurs
in leasing locations for its manufacturing, supply and distribution and retail sites, including the strategic retail
service station sites whose leases are up for renewal in 2016 and 2017.
In addition, since the Company, being a majority foreign-owned corporation, cannot own or acquire land in the
Philippines, there is no assurance that the Company will be able to identify and lease suitable sites to deliver on
its retail network expansion strategy.
An erosion of the Shell Group’s business reputation could have a material adverse effect on the
Company’s business, ability to secure resources and license to operate in the Philippines.
The Company operates retail service stations and sells Finished Petroleum Products to retail and commercial
customers under the “SHELL” brand. “SHELL” is one of the world’s most valuable and trusted brands, and its
brand and reputation are important assets integral to the Company’s success in the Philippines. The Shell
General Business Principles (the Shell Principles) govern how the Shell Group and its individual companies
conduct their affairs, and the Shell Code of Conduct instructs employees and contractors on how to conduct
themselves in line with the Shell Principles. Real or perceived failures of governance or regulatory compliance
by any member of the Shell Group could cause consequent harm to the Company’s reputation, impact its license
to operate, reduce consumer demand for Shell Group-branded products, harm its ability to secure new resources
and contracts and limit its ability to access capital markets. Many other factors, including the materialization of
the risks discussed in several of the other risk factors, may impact the Shell Group’s reputation and could then
34
have a material adverse effect on the Company’s operational performance, earnings, cash flows and financial
condition.
The Company’s insurance coverage may not adequately protect it against possible risk of loss.
The Company’s insurance coverage includes property, marine cargo, aviation fueling liability, commercial
general liability, directors and officers and business interruption. However, these policies do not cover all
damages and potential losses, and insurance may not be available for all risks or on commercially reasonable
terms. The Company is also subject to risks of increased premiums or deductibles, reduced coverage and
additional or expanded exclusions in connection with its existing insurance policies. There can be no assurance
that operational disruptions will not occur in the future or that insurance will adequately cover the entire scope
or extent of the losses or other financial impact on the Company. To the extent that the Company suffers losses
or damages as a result of a risk for which it does not maintain insurance or which is not covered by its insurance
policies or where the cost of the losses or damages exceeds its insurance coverage, the Company will have to
bear such costs, which could have a material adverse effect on its business, financial condition and results of
operations.
The Company may fail to fulfill the terms of licenses, permits and other authorizations, or fail to renew
them on expiration, or fail to secure new licenses, permits and authorizations.
The Company is required to maintain and renew certain licenses, permits and other authorizations, including
business permits and permits concerning, for example, health and safety, environmental standards and
distribution standards. Its licenses, permits and other authorizations contain various requirements that must be
complied with to keep such licenses, permits and other authorizations valid. If the Company fails to meet the
terms of any of its licenses, permits or other authorizations necessary for its operations, these may be suspended
or terminated, leading to temporary or potentially permanent closing of facilities, temporary cessation of certain
operations, imposition of penalties and fines, or other adverse consequences. In addition, the Company cannot
be certain that any given license, permit or authorization will be deemed sufficient by the relevant governmental
authorities to fully cover activities conducted in reliance on such license, permit or authorization.
There can be no assurance that the Company will continue to be able to renew the necessary licenses, permits
and other authorizations for its facilities and activities as necessary or that such licenses, permits and other
authorizations will not be revoked. For example, the Company operates four of the Tabangao Refinery’s jetties
under permits issued by the Philippine Ports Authority (PPA). Also, the Company’s expansion plan relies
significantly on its ability to secure new licenses, permits and authorizations. In particular, its plan to build new
CODO retail service station sites and expand its retails service station network across the Philippines is reliant
on securing various local government permits. If the Company is unable to renew or obtain them or are only
able to do so on unfavorable terms, this could have a material and adverse effect on the Company’s business,
financial condition and results of operations.
In the case of a dealer-owned dealer-operated (DODO) retail service station, where the service station license,
permit or authorization is secured by the dealer, there can be no assurance that the dealers will continue to be
able to obtain or renew the necessary licenses, permits and other authorizations for its facilities and activities as
necessary or that such licenses, permits and other authorizations will not be revoked. If dealers are unable to
renew or obtain them, the results of operations of the Company may be adversely affected.
The Company, its directors and/or officers may be subject to legal, arbitral, government or regulatory
proceedings, investigations, actions or suits that could be time consuming and costly, require significant
amounts of management time and result in the diversion of significant operational resources.
The Company, its directors and/or officers may be involved in lawsuits, arbitral, governmental or regulatory
proceedings, investigations, actions, claims or suits, whether incidental to the ordinary course of its business or
otherwise. These matters are inherently unpredictable. Any actual, pending, contemplated or threatened
proceedings, investigations, actions, claims or suits against the Company, its directors and/or its officers,
35
whether meritorious or not, could be time consuming and costly, require significant amounts of management
time and result in the diversion of significant operational resources. The cost of defending any proceedings,
investigations, actions, claims or suits or their ultimate resolution may harm the Company’s business, reputation
and operating results. See “Business — Legal Proceedings”.
Due to the inherent uncertainty of the litigation process, there can be no assurance that the resolution of any
particular legal proceeding will not have a material adverse effect on the Company’s financial position, results
and operations.
The Company is involved in a number of ongoing legal cases, including material ones in relation to tax,
regulatory and other matters. Notwithstanding the Company’s view of the robustness of its position in
successfully defending or pursuing these cases, there remains an exposure that the final outcome of relevant
proceedings may be held against the Company. In aggregate this could have a material adverse impact on the
Company’s financials.
A substantial portion of the Company’s workforce is unionized and it may face labor disruptions that
would interfere with its operations.
As of June 30, 2016, the Company had approximately 698 full-time employees in its operations, approximately
23.5% of whom were covered by collective bargaining agreements. The Company believes that its relationship
with its unions has been good and has not experienced any strikes or work stoppages for more than ten years.
However, there can be no assurance that the Company’s good relationship with its unions will continue. A labor
disturbance at its facilities could have a material adverse effect on the Company’s operations. See “Business —
Employees”.
Risks Relating to the Downstream Oil Industry
Regulatory decisions, compliance with and changes in the legal, tax and regulatory environment could
adversely affect its business, results of operations and financial condition.
The Company’s operations may be impacted by changes in the legal and business environments in which it
operates, as well as the outcome of government investigations, tax disputes and audits, tax assessments and legal
proceedings. Changes that impact the business environment include pricing intervention, changes in
environmental laws, and changes in tax laws or tax rates, including changes in the manner in which ambiguity in
tax laws is interpreted and implemented. These changes could have a significant adverse financial impact on the
Company’s future operations and the way it conducts, or if it conducts, business, particularly if such changes
require significant capital investment, create additional liability or impose fines and penalties on the Company.
There is no guarantee that the Company will be able to comply with these changes, make changes to its existing
operations or services, develop new technologies, products or services, or otherwise react promptly to meet the
demand of these changes in the legal and business environments. Failing to do so could have an adverse effect
on the Company’s business, financial condition and results of operations.
Even though the local downstream oil industry is a deregulated industry, the Philippine government has
historically intervened to limit and restrict increases in the prices of petroleum products from time to time. For
example, on October 2, 2009, then President Gloria Macapagal-Arroyo declared a state of national calamity in
view of the devastation caused by typhoons “Ondoy” and “Pepeng.” President Arroyo subsequently issued
Executive Order 839 mandating that prices of petroleum products in Luzon be kept at October 15, 2009 levels
effective October 23, 2009. Any inability to pass on fluctuations in the price of crude oil or otherwise adjust
prices to reflect market changes in supply and demand may have a material adverse effect on the Company’s
business, results of operations and financial condition.
The Company’s operations are also subject to various taxes, duties and tariffs. The tax and duty structure of the
oil industry in the Philippines has undergone some key changes in recent years. For example, duties for the
import of crude oil and petroleum products into the Philippines were set at 5% in 2004, reduced to 3% in July
36
2005, then subsequently reduced to 0% with effect from July 4, 2010 (with the exception of gasoline, naphtha
and jet fuel). The sale or importation of all refined products is subject to value added tax (VAT). The
Government increased the rate to 12% in 2006. There can be no assurance that any future tax changes in the
Philippines would not have a material and adverse effect on the Company’s business, financial condition and
results of operations.
The Company’s business, financial condition and results of operations may be affected by competition.
The Company faces competition in the sale of its products in the Philippines, primarily from Petron Corporation
(Petron) as the only other Philippines-based refining and marketing (R&M) company, as well as a number of
competitors who import refined products from abroad and distribute them within the Philippines. Although the
Company differentiates its Refined Products from those of its competitors, for example through special fuel
additives to improve engine performance, the Company’s Refined Products are, by nature, commodities and as a
result, competition for Refined Products and Finished Petroleum Products is based primarily on price as
adjusted to account for differences in product specifications and transportation and distribution costs. The
Company’s competitiveness therefore depends on its ability to manage costs, maintain efficiency at its refinery
and maximize utilization of its assets and operations. Competitors may, among other strategies, invest in
increasing their refining or distribution capacity in the Philippines which could impact the Company’s sales. See
“Business – Competition”. See “Regulatory and Environmental Matters — Foreign Investment Laws and
Restrictions”. If the Company is unable to compete effectively with its competitors, its financial condition and
results of operations, as well as its business prospects could be materially adversely affected.
The Company’s profitability may be impacted by the illegal importation of petroleum products into the
Philippines and other criminal activities.
The Philippine oil industry is affected by ongoing smuggling and illegal trading of petroleum products. These
illegal activities have resulted in decreases in sales volume and sales price for legitimate oil market participants
in the Philippines. Common methods by which petroleum products are smuggled into the Philippines include
bringing the products through special economic zones and selling them tax-free outside the zones, grossly
understating the volume and value of the products to minimize tax payments and using small ships to directly
withdraw from main transport vessels while out at sea for delivery to various customers off-market. The
Company’s ability to compete effectively will depend to a degree on the proper enforcement of Philippine
regulations by the Philippine government, which is beyond the Company’s control.
The Company’s inability to respond effectively and in a timely manner to product substitution or
Government-mandated product formulations may adversely affect the Company’s business and
prospects.
As a result of past periods of high oil prices and environmental concerns, the use of alternative fuels such as
natural gas, ethanol and coco-methyl-ester fuel blends have become more attractive to the Company’s customers
in recent years. If alternative fuels become more affordable and available than petroleum products, customers
may shift from petroleum to these alternative fuels not offered by the Company, resulting in lower sales
volumes.
In addition, in recent years, the Government has enacted regulations mandating the inclusion of a specified
percentage of alternative fuels in gasoline fuels sold or distributed by every oil company, and these types of
requirements may be increased in the future. For example, Republic Act No. 9367, also known as the Biofuels
Act of 2006 (the Biofuels Act), requires all premium gasoline fuel sold by every oil company in the Philippines
to contain 10% bioethanol and to source such bioethanol locally, though this requirement has been temporarily
waived since June 2015. See “Regulatory and Environmental Matters — Environmental Laws”.
Although the Tabangao Refinery can produce a broad range of products, if the Company does not respond
effectively and in a timely manner to product substitutions or Government-mandated product formulations in the
future, its business and prospects may be adversely affected.
37
Changes in applicable accounting standards may impact the Company’s businesses, financial condition
and results of operations.
The Philippine Financial Reporting Standards Council issues, from time to time, new standards and amendments
to existing standards and interpretations. There can be no assurance that the Company’s financial condition,
results of operations or cash flows will not appear to be materially worse under the new standards. For example,
effective January 1, 2019, lessees may no longer classify their leases as either operating or finance leases in
accordance with Philippine Accounting Standard 17. Rather, lessees will be required to apply the single-asset
model. Under this model, lessees will recognize the assets and related liabilities for most leases on their balance
sheets, and subsequently, will depreciate the lease assets and recognize interest on the lease liabilities in their
profit or loss. Leases with a term of 12 months or less or for which the underlying asset is of low value are
exempted from these requirements. Being a majority foreign-owned corporation, the Company cannot own and
can only lease land in the Philippines. There can be no assurance that the Company’s financial condition and
results of operations will not be materially affected under PFRS 16. Furthermore, any failure to successfully
adopt the new standards may adversely affect the Company’s results of operations or financial condition. A
number of new standards and amendments to standards and interpretations have been effective beginning after
January 1, 2015, but have not been applied in preparing the Company’s financial statements. None of these
standards are expected to have a significant effect on the financial statements of the Company. See note 28 to
the Company’s audited financial statements as of and for the year ended December 31, 2015 included elsewhere
in this Prospectus.
Risks Relating to the Philippines
The Company’s business and sales may be negatively affected by slow growth rates and economic
instability in the Philippines and globally.
The Company derives all of its revenues from sales of its products in the Philippines. In 2015, the Company
derived 100% of its gross sales from its Philippine operations. The Company’s product demand and results of
operations have generally been influenced to a significant degree by the general state of the Philippine economy
and the overall levels of business activity in the Philippines, and the Company expects that this will continue to
be the case in the future.
Although the Philippines benefits from an investment grade rating by international credit rating agencies, 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. In addition, global financial, credit and currency markets
have, since the second half of 2008, experienced, and may continue to experience, significant dislocations and
liquidity disruptions. Furthermore, severe acute respiratory syndrome, avian influenza (commonly known as
bird flu), swine flu, or another similar disease may reemerge in the Philippines or other countries in Southeast
Asia. The Company cannot assure prospective investors that one or more of these factors will not negatively
impact Philippine consumers’ purchasing power, which could materially and adversely affect the Company’s
financial condition and results of operations.
Any downturn in the Philippine economy as a result of these or other factors may negatively affect consumer
sentiment and general business conditions in the Philippines, which may lead to a reduction in demand for the
Company’s products and materially reduce the Company’s revenues, profitability and cash flows. Moreover,
there can be no assurance that current or future Government policies will continue to be conducive to sustaining
economic growth.
Political instability, acts of terrorism or military conflict in the Philippines could have a destabilizing
effect and may have a negative effect on the Company.
In the last few years, the political diversity in the Philippines has resulted in public and military protests and
claims and investigations of misconduct of previous administrations.
38
In addition, there can be no assurance that acts of election-related or other political violence will not occur in the
future, and any such events could negatively impact the Philippine economy. Philippine presidential elections
were held on May 9, 2016 and Rodrigo Duterte took his oath as President of the Philippines on June 30, 2016.
The recent presidential elections may lead to an increase in political or social uncertainty and instability.
Further, there can be no assurance that the new administration will continue to implement the economic policies
favored by the previous administrations, including its commitment to infrastructure projects. Any potential
instability could have an adverse effect on the Philippine economy, the Company’s business, prospects, financial
condition and results of operations.
There can be no assurance that the political environment in the Philippines will stabilize and any political
instability, acts of terrorism, violent crime and similar events could have a material adverse effect on the
Company’s business, financial condition, results of operations and prospects. Further, while the Company has
stringent internal control systems in place, the high level of corruption and relatively low levels of absolute
income in some of its areas of operation make it vulnerable to fraud by its employees and counterparties.
The occurrence of natural catastrophes or electricity blackouts may materially disrupt the Company’s
operations.
The Philippines has experienced a number of major natural catastrophes in recent years, including typhoons,
volcanic eruptions, earthquakes, tsunamis, mudslides, fires, droughts and floods related to El Niño and La Niña
weather events. Natural catastrophes may disrupt the Company’s ability to produce or distribute its products and
impair the economic conditions in affected areas, as well as the overall Philippine economy. In the past, these
events have affected the Company’s operating results. There can be no assurance that the occurrence of such
catastrophes will not materially disrupt the Company’s operations in the future. The Philippines has also
experienced electricity blackouts resulting from insufficient power generation, faulty transmission lines and
other disruptions, such as typhoons or other tropical storms. These types of events may materially disrupt the
Company’s business and operations and could have a material adverse effect on the Company’s financial
condition and results of operations. However, the Company cannot assure prospective investors that the
insurance coverage it maintains for these risks will adequately compensate the Company for all damages and
economic losses resulting from natural catastrophes or electricity blackouts, including possible business
interruptions.
Territorial and other disputes with China and a number of Southeast Asian countries may disrupt the
Philippine economy and business environment.
The Philippines, China and several Southeast Asian nations have been engaged in a series of long standing
territorial disputes over certain islands in the West Philippine Sea, also known as the South China Sea. The
Philippines maintains that its claim over the disputed territories is supported by recognized principles of
international law consistent with the United Nations Convention on the Law of the Sea (UNCLOS). Despite
efforts to reach a compromise, a dispute arose between the Philippines and China over a group of small islands
and reefs known as the Scarborough Shoal. Actions taken by both sides have threatened to disrupt trade and
other ties between the two countries, including a temporary ban by China on Philippine banana imports, a
temporary suspension of tours to the Philippines by Chinese travel agencies and the rejection by China of the
Philippines’ request for arbitral proceedings administered in accordance with the UNCLOS to resolve the
disputes.
On July 12, 2016, the Permanent Court of Arbitration ruled in favor of the Philippines against China over
territorial disputes in the West Philippine Sea. The arbitral tribunal unanimously ruled, among others, that (a)
China has "no historical rights" to the resources within the sea areas falling within the “nine-dash line;” (b)
Chinese reclamation activity in the West Philippine Sea has caused irreparable damage to the environment,
obligating the Chinese government to stop further activities in the West Philippine Sea; and (c) China had
violated the Philippines’ sovereign rights in its exclusive economic zone by interfering with Philippine fishing
and petroleum exploration, constructing artificial islands, and failing to prevent Chinese fishermen from fishing
39
in the zone. However, China has said it will not recognize the ruling. With no formal enforcement mechanism in
place, the territorial dispute in the West Philippine Sea remains contentious.
There had been other occurrences of territorial disputes with Malaysia and Taiwan. In March 2013, several
hundred armed Filipino-Muslims illegally entered Malaysia in a bid to enforce an alleged historical claim on the
territory. Clashes between the Filipino-Muslim individuals and the Malaysian armed forces resulted in casualties
on both sides. Taiwan imposed economic sanctions on the Philippines as a result of an incident in May 2013,
whereby a Taiwanese fisherman was unintentionally killed by a Philippine Coast Guard ship that opened fire on
his vessel in a disputed exclusive economic zone between Taiwan and the Philippines. The sanctions were
eventually lifted after a formal apology was issued by the Government.
Should territorial disputes between the Philippines and other countries in the region continue or escalate further,
the Philippines and its economy may be disrupted and the Company’s operations could be adversely affected as
a result.
If foreign exchange controls were to be imposed, the Company’s ability to access foreign currency to
purchase raw materials and equipment and to service foreign currency denominated debt obligations,
including its obligations under the Shares, could be adversely affected.
Generally, Philippine residents may freely dispose of their foreign exchange receipts and foreign exchange may
be freely sold and purchased outside the Philippine banking system. The Monetary Board of the Bangko Sentral
ng Pilipinas (BSP), with the approval of the President of the Philippines, has statutory authority, in the
imminence of or during a foreign exchange crisis or in times of national emergency, to: (i) suspend temporarily
or restrict sales of foreign exchange; (ii) require licensing of foreign exchange transactions; or (iii) require
delivery of foreign exchange to the BSP or its designee banks. The Philippine government has, in the past,
instituted restrictions on the conversion of Pesos into foreign currency and the use of foreign exchange received
by Philippine residents to pay foreign currency obligations.
The Company purchases some critical raw materials, particularly crude oil, and some technically advanced
equipment from abroad and needs foreign currency to make these purchases. In addition, the Company has
incurred and may continue to incur foreign currency denominated obligations, including the Shares, and Pesodenominated debt obligations that are payable in foreign currency. There can be no assurance that the Philippine
government will not impose economic or regulatory controls that may restrict free access to foreign currency in
the future. Any such restrictions imposed in the future could severely curtail the Company’s ability to purchase
crude oil, materials and equipment from outside the Philippines in US dollars and its ability to make principal
and interest payments in US dollars on its foreign currency-denominated obligations, including its obligations
under the Shares, or Peso-denominated debt obligations that are payable in foreign currency, which could
materially and adversely affect its financial condition and results of operations.
Risks Relating to the Offer Shares
There can be no guarantee that the Offer Shares will be listed on the Philippine Stock Exchange (PSE).
Purchasers of Offer Shares will be required to pay for such Offer Shares on the Trading Participants and Retail
Offer Settlement Date and on the Institutional Offer Settlement Date, which are expected to be on or about
[November 8], 2016 and [November 10], 2016, respectively. There can be no guarantee that listing will occur on
the anticipated Listing Date or at all. Delays in the admission and the commencement of trading in shares on the
PSE have occurred in the past. If the PSE does not admit the Offer Shares onto the PSE, the market for the Offer
Shares will be illiquid and shareholders may not be able to trade the Offer Shares through the PSE. This may
materially and adversely affect the value of the Offer Shares.
If the Offer Shares will not be listed, any sale of such Offer Shares will be subject to capital gains tax and
documentary stamp tax. In addition, a certificate authorizing registration (CAR) from the Bureau of Internal
40
Revenue (the BIR) is required before the transfer of the Offer Shares is registered in the stock and transfer book.
See “Philippine Taxation.”
There has been no prior market for the Shares, so there may be no liquidity in the market for the Offer
Shares and the price of the Offer Shares may fall.
As there has been no prior trading in the Shares, there can be no assurance that an active market for the Offer
Shares will develop following the Offer or, if developed, that such market will be sustained.
The Offer Price has been determined after taking into consideration a number of factors including, but not
limited to, the Company’s prospects, the market prices for shares of companies engaged in related businesses
similar to that of the Company’s business and prevailing market conditions. The price at which the Shares will
trade on the PSE at any point in time after the Offer may vary significantly from the Offer Price.
The market price of the Shares may be volatile, which could cause the value of investors’ investments in
the Shares to decline.
The market price of Shares could be affected by several factors, including:

general market, political and economic conditions;

changes in the prices of crude oil, other feedstocks, and Finished Petroleum Products

changes in earnings estimates and recommendations by financial analysts;

changes in market valuations of listed stocks in general and other retail stocks in particular;

the market value of the Company’s assets;

changes to Government policy, legislation or regulations; and

general operational and business risks.
In addition, many of the risks described elsewhere in this Prospectus could materially and adversely affect the
market price of the Shares.
In part as a result of global economic downturns, the global equity markets have historically experienced price
and volume volatility that has affected the share prices of many companies. Share prices for many companies
have experienced wide fluctuations that have often been unrelated to the operating performance of those
companies. Fluctuations such as these may adversely affect the market price of the Shares.
Shareholders may be subject to limitations on minority shareholders’ rights and regulations may differ
from those in other jurisdictions.
The Company’s corporate affairs are governed by its articles of incorporation and by-laws and the Philippine
Corporation Code. The laws of the Philippines relating to the protection of interests of minority shareholders
differ in some respects from those established under the laws of other jurisdictions. The Philippine Corporation
Code, however, provides for minority shareholders protection by requiring a vote by the shareholders
representing at least two-thirds of the Company’s outstanding capital stock on issues involving major corporate
decisions. See “Description of the Shares — Fundamental Matters”. The Philippine Corporation Code also
grants shareholders an appraisal right allowing a dissenting shareholder to require the corporation to purchase
his shares in certain instances. See “Description of the Shares — Rights Relating to Shares — Appraisal
Rights”. The Philippine Corporation Code likewise prohibits the removal of a director if such action will deny
minority shareholders representation in the board of directors. It also provides for the right of minority
41
shareholders to information about corporate matters and the right to propose agenda items to the board of
directors. Derivative actions are rarely brought on behalf of companies in the Philippines. Accordingly, there
can be no assurance that minority shareholders will be able to protect their interests under current Philippine law
to the same extent or in the same manner and form as in other jurisdictions.
There can be no assurance that the Company will be able to pay dividends or maintain any given level of
dividends.
There is no assurance that the Company can or will declare dividends on the Shares in the future. Future
dividends, if any, will be at the sole discretion of the Board and will depend upon the Company’s future results
of operations and general financial condition, capital requirements, its ability to receive dividends and other
distributions and payments from its subsidiaries (if any), foreign exchange rates, legal, regulatory and
contractual restrictions, loan obligations and loan covenants, including loan obligations and loan covenants of its
subsidiaries (if any), and other factors the Board may deem relevant. Moreover, the Company’s retained
earnings includes the retained earnings of the amount of P1.1 billion representing the retained earnings of Shell
Philippines Petroleum Corporation as at June 30, 1999 upon its merger with the Company. The said amount is
available only for stock dividends. See “Dividends and Dividend Policy”.
Future sales of Shares in the public market could adversely affect the prevailing market price of the
Shares and shareholders may experience dilution in their holdings.
In order to finance the expansion of the Company’s business and operations, the Board will consider the funding
options available to them at the time, which may include the issue of new Shares. If additional funds are raised
by the Company through the issuance of new equity or equity-linked securities other than on a pro rata basis to
existing shareholders, the percentage ownership of existing shareholders may be reduced, shareholders may
experience subsequent dilution or such securities may have rights, preferences and privileges senior to those of
the Offer Shares. Furthermore, the market price of the Shares could decline as a result of future sales of
substantial amounts of the Shares in the public market or the issuance of new Shares, or the perception that such
sales, transfers or issuances may occur. This could also materially and adversely affect the prevailing market
price of the Shares or the Company’s ability to raise capital in the future at a time and at a price the Company
deems appropriate.
Future changes in the value of the Peso against the US dollar, the Euro and other currencies will affect
the foreign currency equivalent of the value of the Shares and any dividends.
Fluctuations in the exchange rate between the Peso and other currencies will affect the foreign currency
equivalent of the Peso price of the Shares on the PSE. Such fluctuations will also affect the amount in foreign
currency received upon conversion of cash dividends or other distributions paid in Pesos by the Company on,
and the Peso proceeds received from any sales of, the Shares.
Risks Associated with the Presentation of Certain Statistical Information in this Prospectus
Certain statistical information contained herein is derived from unofficial publications.
Certain statistical information in this Prospectus relating to the Philippines and the industry in which the
Company’s business operates, including statistics relating to market size, is derived from various government
and private publications. This Prospectus also contains industry information based on publicly available sources.
This information has not been independently verified and may not be accurate, complete, up-to-date or
consistent with other information compiled within or outside the Philippines. Accordingly, investors should not
place undue reliance on such information.
42
USE OF PROCEEDS
The Company estimates that net proceeds from the Primary Offer, based on an Offer Price of ₱[90.0] per Offer
Share, will be approximately ₱[2,174.1] million after deducting the applicable underwriting fees and
commissions and expenses for the Primary Offer (excluding any additional expenses that may be incurred in
relation to the Over-allotment Option) payable by the Company. The Company intends to use the net proceeds
from the Offer towards capital expenditure, working capital and general corporate expenses. Further details of
the proposed use of proceeds, based on an Offer Price of ₱[90.0] per Offer Share, are as follows:
Capital expenditure ..............................................................
Estimated
Amounts
(P millions)
[1,956.7]
Working capital and other corporate expenses ...............
[217.4]
10.0%
Estimated Net Proceeds(1) ....................................................
[2,174.1]
100.0%
Use of Proceeds
Percentage
90.0%
Estimated
Timing
Within two
years
Within two
years
Note:
1
This does not include the IPO tax. The Company has filed an application with the BIR for a confirmation of the Company’s
opinion that the 4% IPO tax is not applicable.
If the expected gross proceeds are not realized, the Company will use its internally generated funds from
operations and existing cash, existing credit lines, and other potential borrowings to finance the expected uses.
The proposed use of proceeds described above represents best estimates of the use of net proceeds of the
Primary Offer based on the Company’s current plans and expenditures. Other than as described above, no part
of the net proceeds from the Primary Offer shall be used to acquire assets or finance the acquisition of other
businesses, or to reimburse any officer, director, employee or shareholder of the Company for services rendered,
assets previously transferred, money loaned or advanced, or otherwise. The Company’s plans may change based
on, and the actual amount and timing of disbursement of the net proceeds from the Primary Offer for the uses
stated above will depend on, various factors which include, among others, changing market conditions or new
information regarding the cost or feasibility of the Company’s plans. Cost estimates may change as the
Company develops its plans, and actual costs may be different from budgeted costs. For these reasons, the
Company may find it necessary or advisable to reallocate the net proceeds within the categories described
above, or to alter plans.
To the extent that the net proceeds from the Primary Offer are not immediately applied to the above purposes,
the Company may invest the net proceeds in interest-bearing short term demand deposits and/or money market
instruments. In the event of any deviation, adjustment or reallocation in the planned use of proceeds, the
Company will secure the approval of its Board for such deviation, adjustment or reallocation and promptly make
the appropriate disclosure to the Philippine SEC and the PSE, provided that the actual disbursement or
implementation of such reallocation must be disclosed by the Company at least 30 days prior to such actual
disbursement or implementation. The Company will regularly disclose to the PSE, through the PSE Electronic
Disclosure Generation Technology (PSE EDGE), any disbursements from the proceeds generated from the
Offer. In addition, the Company will likewise submit via the PSE EDGE the following required disclosures to
ensure transparency in the use of proceeds from the Offer:
(i) any disbursements made in connection with the planned use of proceeds from the Offer;
(ii) quarterly progress report on the application of the proceeds from the Offer within 15 days following the
end of the quarter following the Offer certified by the Company’s Chief Financial Officer or Treasurer
and external auditor;
43
(iii) annual summary of the application of the proceeds on or before January 31 of the year following the
Offer certified by the Company’s Chief Financial Officer or Treasurer and external auditor; and
(iv) approval by the Board of any reallocation on the planned use of proceeds. The actual disbursement or
implementation of such reallocation must be disclosed by the Company at least 30 days prior to the
said actual disbursement or implementation.
The quarterly and annual reports required in items (ii) and (iii) above must include a detailed explanation for
any material variances between the actual disbursements and the planned use of proceeds in the Prospectus, if
any. The detailed explanation must state the approval of the Board as required in item (iv) above. The Company
will submit an external auditor’s certification of the accuracy of the information reported by the Company to the
PSE in its quarterly and annual reports.
Expenses
Based on an Offer Price of ₱[90.0] per Offer Share, the Company estimates that the total proceeds from the
Primary Offer, total expenses for the Primary Offer and the net proceeds from the Primary Offer will be
(excluding any additional expenses that may be incurred in relation to the Over-allotment Option):
Estimated total proceeds from the Primary Offer........................................................
Estimated expenses
Underwriting and selling fees for Primary Offer Shares ...................................................
PSE listing and processing fee ...........................................................................................
Philippine SEC registration, filing and research fees ........................................................
Estimated professional fees ...............................................................................................
₱[2,700.0] million
Estimated other expenses...................................................................................................
₱[52.7] million
₱[89.9] million
₱[8.4] million
₱[175.0] million
₱[200.0] million
Total expenses ..................................................................................................................
₱[525.9] million
Estimated net proceeds from the Primary Offer ..........................................................
₱[2,174.1] million
Based on an Offer Price of ₱[90.0] per Offer Share, the Company estimates that the total proceeds from the
Secondary Offer, total expenses for the Secondary Offer and the net proceeds from the Secondary Offer will be:
If Over-allotment
Option is not fully
exercised
Assuming full
exercise of Overallotment Option
₱[24,300.0] million
₱[27,000.0] million
Underwriting and selling fees for Secondary Offer Shares ......
₱473.9 million
₱521.1 million
Estimated other expenses..........................................................
–
–
Total expenses .........................................................................
₱[473.9] million
₱[521.1] million
Net proceeds from the Secondary Offer ...............................
₱[23,826.1] million
₱[26,478.9] million
Estimated total proceeds from the Secondary Offer ...........
Estimated expenses
The Company will not receive any of the proceeds from the Secondary Offer. The actual underwriting and
selling fees and other Offer-related expenses may vary from the estimated amounts indicated above.
44
EXCHANGE RATES
Fluctuations in the exchange rates between the Peso and the US dollar and other foreign currencies will affect
the equivalent in US dollars and such other foreign currencies of the Peso price of the Offer Shares on the PSE,
of dividends distributed in Pesos by the Company, if any, and of the Peso proceeds received by investors on a
sale of the Offer Shares on the PSE, if any. Fluctuations in such exchange rates will also affect the Peso value of
the Company’s assets and liabilities which are denominated in currencies other than Pesos, if any.
The Philippine Dealing System (PDS), a computer network supervised by the BSP, through which the members
of the Bankers Association of the Philippines effect spot and forward currency exchange transactions, was
introduced in 1992. The PDS was adopted by the BSP as a means to monitor foreign exchange rates. The BSP
Rate is the average rate for the purchase of US dollars with Pesos which is quoted by the PDS and published in
BSP’s Reference Exchange Rate Bulletin and the major Philippine financial press on the following business
day. On December 29, 2015, the BSP Rate was ₱47.166 = US$1.00.
The following table sets out certain information concerning the BSP Rate between the Peso and the US dollar
for the periods and dates indicated, expressed in Pesos per US$1.00:
Peso/US dollar exchange rate
Year
Period end
Average1
High2
Low3
2013 .........................................................................................
44.414
42.416
44.660
40.569
2014 .........................................................................................
44.617
44.393
45.406
43.280
2015 .........................................................................................
47.166
45.488
47.435
44.053
2016
January .............................................................................
47.823
47.511
47.987
46.950
February ...........................................................................
47.560
47.636
47.882
47.431
March ...............................................................................
46.108
46.724
47.568
46.108
April .................................................................................
46.773
46.285
46.844
45.983
May ..................................................................................
46.775
46.802
47.247
46.385
June ..................................................................................
46.960
46.464
47.073
46.062
Source: Reference Exchange Rate Bulletin, Treasury Department of the BSP.
______________________
1
Weighted average rate under the PDS.
2
Highest daily closing exchange rate for the period.
3
Lowest daily closing exchange rate for the period.
45
DIVIDENDS AND DIVIDEND POLICY
The Board is authorized to declare dividends only from the Company’s unrestricted retained earnings,
representing the net accumulated earnings of the Company with its unimpaired capital, which are not
appropriated for any other purpose. The Board may not declare dividends which will impair the Company’s
capital. Dividends may be payable in either cash, shares or property, or a combination thereof, as the Board
determines. A cash dividend declaration does not require any further approval from the Company’s
shareholders. Each holder of Shares will be entitled to such dividends as may be declared by the Board,
provided that any declaration of stock dividends requires the further approval of shareholders holding at least
two-thirds of the Company’s total outstanding capital stock. The Philippine Corporation Code has defined
“outstanding capital stock” as the total shares of stock issued, whether paid in full or not, except treasury shares.
In relation to foreign shareholders, dividends payable may not be remitted using foreign exchange sourced from
the Philippine banking system unless the investment was first registered with the BSP. See “Philippine Foreign
Exchange Controls”.
The Company is allowed under Philippine laws to declare cash, property and stock dividends, subject to certain
requirements. See “Description of the Shares — Rights Relating to Shares — Dividend Rights”.
Record Date
Pursuant to existing Philippine SEC rules, cash dividends declared by the Company must have a record date not
less than ten days and more than 30 days from the date the cash dividends are declared.
With respect to stock dividends, the record date is to be not less than ten days and more than 30 days from the
date of shareholder approval, provided however, that the set record date is not to be less than ten trading days
from receipt by the PSE of the notice of declaration of stock dividend. If no record date is set, under Philippine
SEC rules, the record date will be deemed fixed at 15 days from the date of the stock dividend declaration. In
the event that a stock dividend is declared in connection with an increase in authorized capital stock, the
corresponding record date is to be fixed by the Philippine SEC.
Dividends
In 2013, the Company declared a cash dividend of P0.689 per share from unrestricted retained earnings to
stockholders of record as of April 16, 2013 and the total dividend paid out was P0.48 million.
The Company intends to pay annual dividends in the amount of not less than 75% of its audited net income after
tax of the previous year subject to compliance with the requirements of applicable laws and regulations and
subject to investment plans and financial condition. The amount of dividends will be reviewed periodically by
the Board in light of the Company's earnings, financial condition, cash flows, capital requirements and other
considerations while maintaining a level of capitalization that is commercially sound and sufficient to ensure
that the Company can operate on a standalone basis.
Dividends shall be declared and paid out of the Company’s unrestricted retained earnings which shall be
payable in cash, property or stock to all shareholders on the basis of outstanding stock held by them. Unless
otherwise required by law, the Board, at its sole discretion, shall determine the amount, type and date of
payment of the dividends to the shareholders, taking into account various factors, including:

the level of the Company’s earnings, cash flow, return on equity and retained earnings;

its results for and its financial condition at the end of the year in respect of which the dividend is to be
paid and its expected financial performance;
46

the projected levels of capital expenditures and other investment programs;

restrictions on payments of dividends that may be imposed on it by any of its financing arrangements
and current or prospective debt service requirements; and

such other factors as the Board deems appropriate.
The Company’s retained earnings includes the retained earnings of the amount of P1.1 billion representing the
retained earnings of Shell Philippines Petroleum Corporation as at June 30, 1999 upon its merger with the
Company. The said amount is available only for stock dividends.
The Company cannot provide any assurance that it will pay any dividends in the future.
47
DETERMINATION OF THE OFFER PRICE
The final Offer Price will be set through a book-building process and discussions among the Company and the
Bookrunner, and the maximum Offer Price will be ₱[90.0] per Offer Share. Since the Offer Shares have not
been listed on any stock exchange, there has been no market price for Shares derived from day-to-day trading.
The factors considered in determining the Offer Price were, among others, the Company’s ability to generate
earnings and cash flow, the Company’s short and long term prospects, the level of demand from institutional
investors, overall market conditions at the time of launch of the Offer and the market price of listed comparable
refining and marketing companies particularly in the Asia Pacific region, with reference to the relevant
country’s stock market index. The Offer Price does not have any correlation to the book value of the Offer
Shares.
48
CAPITALIZATION
The following table sets out the Company’s long-term debt, equity and capitalization as of December 31, 2015
and as adjusted to reflect the sale of the Offer Shares based on an Offer Price of ₱[90.0] per Offer Share,
assuming no exercise of the Over-allotment Option, and the use of proceeds as described in this Prospectus.
The table should be read in conjunction with the Company’s financial statements and the notes thereto included
in this Prospectus beginning on page F-1, and is based on the assumption that the Offer Price is ₱[90.0] per
Offer Share. There has been no material change in the Company’s capitalization since December 31, 2015.
As adjusted after giving effect
Actual as of December 31, 2015
to the Offer
(US$
(US$
(₱ million)
million)(1)
(₱ million)
million)(1)
Short-term borrowing ......................................................................
2,717.0
57.6
[]
Current portion of loans payable .....................................................
0.0
–
[]
[]
[]
Total long-term debt(2) .....................................................................
16,000.0
339.2
[]
[]
Equity:
Share capital ....................................................................................
1,653.6
35.1
[]
[]
Share premium ................................................................................
24,396.0
517.2
[]
[]
Treasury shares ................................................................................
(507.1)
(10.8)
Retained earnings (deficit) ..............................................................
181.5
3.8
[]
[]
Other reserves ..................................................................................
371.2
7.9
[]
[]
Total equity......................................................................................
26,095.1
553.3
[]
[]
Total equity and long-term debt ......................................................
42,095.1
892.5
[]
[]
___________________________
1
Based on the BSP Rate of ₱47.166 = US$1.00 on December 29, 2015.
2
Comprised of loans payable, net of current portion.
49
DILUTION
As of December 31, 2015, the Company’s net tangible book value per Share was ₱16.5. Net tangible book value
per Share represents total assets minus total liabilities and goodwill, divided by the total number of Shares
outstanding. After giving effect to the sale of the Primary Offer Shares (at an Offer Price of ₱[90.0] per Primary
Offer Share), and deducting estimated discounts, commissions, estimated fees and expenses of the Offer, the net
tangible book value per Share would increase to ₱[] per Offer Share. At the Offer Price of ₱[90.0], the Shares
will be purchased at a premium of ₱[] to net tangible book value per Share.
The following table illustrates dilution on a per Share basis based on an Offer Price of ₱[90.0] per Primary Offer
Share assuming full exercise of the Over-allotment Option:
Offer Price per Primary Offer Share ...............................................................................................
Net tangible book value per Share as of December 31, 2015...............................................................
Difference between Offer Price per Primary Offer Share and net tangible book value per Offer
Share as of December 31, 2015 ...........................................................................................................
Pro forma net tangible book value per share after the Offer and increased capital ..............................
Dilution to investors in the Offer1 ........................................................................................................
₱[90.0]
₱16.5
₱[73.5]
₱[]
₱[]
The exercise of the Over-allotment Option will not result in any dilution on a per Share basis, as all Optional
Shares are being offered by the Selling Shareholders.
The following table sets out the shareholdings, and percentage of Shares outstanding, of existing and new
shareholders of the Company immediately after completion of the Offer, assuming full exercise of the Overallotment Option:
Number of Shares
%
Existing shareholders ............................................................................................
[]
[]
New investors .......................................................................................................
[]
[]
Total .....................................................................................................................
[]
100.0
See also “Risk Factors — Risks Relating to the Offer Shares — Future sales of Shares in the public market
could adversely affect the prevailing market price of the Shares and shareholders may experience dilution in
their holdings”.
___________________________
1
Calculated as Offer Price of ₱[90.0] per Offer Share less pro forma net tangible book value per Share after the
Offer.
50
SELECTED FINANCIAL AND OPERATING INFORMATION
The following tables present selected financial information of the Company. This selected data should be read in
conjunction with the independent auditors’ report and with the financial statements of the Company and notes
thereto contained in this Prospectus and the section entitled “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”. The Company’s selected financial data as of and for the years
ended December 31, 2013, 2014 and 2015 were derived in each case from the audited financial statements of the
Company included elsewhere in this Prospectus. The Company’s financial information below should not be
considered indicative of the results of future operations. Furthermore, the translation of Peso amounts into US
dollars as of and for the year ended December 31, 2015 is provided for convenience only and is unaudited. For
readers’ convenience only, amounts in Pesos were converted to US dollars using the BSP Rate as of December
29, 2015 of ₱47.166 = US$1.00.
STATEMENTS OF INCOME
2014
2015
2015
(audited)
(unaudited)
(₱ million)
(US$ million)
2013
Gross sales ..........................................................................................
211,333.3
238,238.5
168,853.8
Sales discounts and rebates ................................................................
(12,484.4)
(14,153.6)
(11,876.2)
Net sales .............................................................................................
198,848.9
224,084.8
156,977.7
3,328.2
Cost of sales........................................................................................
(187,218.8)
(225,394.2)
(139,709.6)
(2,962.1)
Gross profit (loss) .............................................................................
11,630.1
(1,309.3)
17,268.1
366.1
Selling expenses .................................................................................
(6,624.2)
(7,736.0)
(8,155.9)
(172.9)
General and administrative expenses .................................................
(2,376.1)
(2,049.2)
(2,406.4)
(51.0)
Other operating income, net ...............................................................
209.3
Income (Loss) from operations .......................................................
2,839.1
Finance income ..................................................................................
31.8
147.2
(10,947.4)
239.5
Finance expense .................................................................................
(2,431.5)
(1,660.0)
Other non-operating income (expense), net .......................................
(1,170.4)
(17.7)
3,580.0
(251.8)
212.2
4.5
6,918.0
146.7
69.1
(1,781.3)
1.5
(37.8)
17.1
0.4
Income (Loss) before income tax ....................................................
(731.0)
(12,385.5)
5,223.0
110.7
Benefit from (Provision for) income tax............................................
(181.1)
3,897.0
(1,669.8)
(35.4)
Profit (Loss) for the year .................................................................
(912.1)
(8,488.6)
3,553.2
75.3
BALANCE SHEETS
2013
As of December 31,
2014
2015
(audited)
(₱ million)
2015
(unaudited)
(US$ million)
Current assets
Cash ..............................................................................................
6,161.2
4,721.6
3,576.8
75.8
Receivables, net ............................................................................
15,664.0
14,004.6
10,387.0
220.2
Inventories, net .............................................................................
28,514.2
16,336.3
11,348.5
240.6
Prepayments and other current assets .........................................
9,531.9
12,160.2
11,328.2
240.2
Total current assets ....................................................................
59,871.3
47,222.8
36,640.6
776.8
Non-current assets
Long-term receivables, rentals and investments, net ...................
1,409.4
1,389.8
885.3
18.8
Property and equipment, net ........................................................
14,777.2
18,630.7
22,309.1
473.0
Deferred income tax assets, net....................................................
1,488.7
5,293.9
3,712.3
78.7
Other assets, net............................................................................
1,186.8
965.5
2,671.8
56.6
Total non-current assets ............................................................
18,862.1
26,279.9
29,578.4
627.1
Total assets ..................................................................................
78,733.4
73,502.7
66,219.0
1,404.0
Current liabilities
51
Accounts payable and accrued expenses .....................................
14,291.8
19,892.9
16,159.5
Dividends payable ........................................................................
10.1
9.7
9.7
0.2
Short-term borrowings .................................................................
35,537.0
21,550.0
2,717.0
57.6
Current portion of loans payable ..................................................
-
11,000.0
-
342.6
-
49,838.9
52,452.6
18,886.2
400.4
Loans payable, net of current portion ..........................................
11,000.0
12,000.0
16,000.0
339.2
Provisions and other liabilities .....................................................
5,333.8
5,219.5
5,237.7
111.0
Total non-current liabilities ......................................................
16,333.8
17,219.5
21,237.7
450.3
Total liabilities ............................................................................
66,172.7
69,672.1
40,123.9
850.7
Share capital .................................................................................
758.9
758.9
1,653.6
35.1
Share premium .............................................................................
7,437.8
7,437.8
24,396.0
517.2
Treasury shares .............................................................................
(507.1)
(507.1)
(507.1)
(10.8)
Retained earnings (deficit) ...........................................................
4,524.4
(4,184.8)
181.5
3.8
Other reserves ...............................................................................
346.7
325.8
371.2
7.9
Total equity .................................................................................
12,560.7
3,830.6
26,095.1
553.3
Total liabilities and equity .........................................................
78,733.4
73,502.7
66,219.0
1,404.0
Total current liabilities ..............................................................
Non-current liabilities
Equity
STATEMENTS OF CASH FLOWS For the year ended December 31,
2014
2015
(audited)
2013
(₱ million)
2015
(unaudited)
(US$ million)
Cash flows from operating activities
Income (Loss) before income tax.................................................
(731.0)
(12,385.5)
5,223.0
110.7
Adjustments:
Depreciation and amortization .................................................
1,883.1
2,299.3
1,637.9
34.7
Interest and finance charges .....................................................
1,175.9
1,250.8
1,035.7
22.0
Pension expense ........................................................................
175.5
167.4
379.5
8.0
Accretion expense.....................................................................
113.6
221.7
196.3
4.2
Share-based compensation .......................................................
79.0
73.8
109.3
2.3
Unrealized mark-to-market loss, net ........................................
11.3
59.5
61.4
1.3
Loss on disposal of property and equipment............................
78.8
16.6
52.5
1.1
Provision for legal case, net......................................................
56.2
56,.2
37.5
0.8
Interest income .........................................................................
(31.8)
(19.7)
(26.3)
(0.6)
Unrealized foreign exchange loss (gain), net ...........................
76.5
179.3
(42.9)
(0.9)
Provision for (reversal of) impairment of receivables .............
(0.5)
114.0
(82.7)
(1.8)
Write-off of accounts receivable ..............................................
29.6
12.3
34.0
0.7
Cost of claim settlement ...........................................................
1,283.4
-
-
Provision (Reversal) for inventory losses, net .........................
29.8
2,825.7
(1,796.2)
(38.1)
Operating income (loss) before working capital changes............
4,229.4
(5,128.5)
6,819.1
144.6
Decrease (increase) in current assets other than cash ..................
(4,146.7)
7,688.4
11,092.6
235.2
Increase (decrease) in liabilities other than provisions, dividends
payable, short-term borrowings and loans payable .....................
(4,748.4)
5,213.3
(3,630.8)
(77.0)
7,773.2
14,280.9
302.8
Cash generated from (used in) operations ...................................
(4,665.6)
Pension contributions paid ...........................................................
(442.3)
Net cash from (used in) operating activities ................................
(5,107.9)
7,360.3
Decrease (increase) in other assets...............................................
(297.6)
431.3
Interest received ...........................................................................
(0.4)
19.7
26.3
0.6
Decrease in long-term receivables, rentals and investments, net
32.6
19.7
531.9
11.3
Proceeds from sale of property and equipment ...........................
175.1
4.3
28.6
0.6
31.9
(95.5)
(379.7)
(8.1)
(412.9)
(122.4)
(2.6)
14,158.5
300.2
(1,196.6)
(25.4)
Cash flows from investing activities
Additions/Reversal/Charges from provisions for ARO,
remediation and demolition costs ................................................
52
Additions to program and software, property, plant and
equipment .....................................................................................
(1,860.0)
Settlement of claims by local company .......................................
(1,283.4)
Net cash used in investing activities ............................................
(3,201.8)
(5,645.6)
(6,244.5)
(132.4)
9,220.8
(13,987.0)
(29,833.0)
(632.5)
12,000.0
4,000.0
84.8
17,852.8
378.5
(6,025.1)
-
(5,255.0)
-
(111.4)
-
Cash flows from financing activities
Net proceeds from (settlements of) short-term borrowings.........
Proceeds from long-term loans payable.......................................
-
Proceeds from issuance of shares.................................................
-
-
Cash dividends paid .....................................................................
(474.9)
(0.4)
Interest and finance charges paid .................................................
(1,189.7)
(1,170.3)
(1,104.2)
(23.4)
Net cash flow from (used in) financing activities ........................
7,556.3
(3,157.7)
(9,084.3)
(192.6)
(1,443.0)
(1,170.3)
(24.8)
6,161.2
4,721.6
100.1
3.5
25.5
0.5
4,721.6
3,576.8
75.8
(753.5)
Net decrease in cash for the year ..............................................
Cash at the beginning of the year .................................................
6,924.6
Effect of exchange rate changes on cash .....................................
(10.0)
Cash at the end of the year
6,161.2
53
-
-
OTHER FINANCIAL DATA
Reconciliation from statutory profit for the year to EBIT and EBITDA
2013
EBIT1 ..........................................................................................
EBITDA1 ....................................................................................
527
2,234
2014
2015
(unaudited)
(₱ million)
(10,933)
6,429
(8,768)
8,062
2015
(unaudited)
(US$ million)
136.3
170.9
___________________________
1
EBIT indicates profit for the year excluding interest income, interest and finance charges (and accretion) expense and benefit
from (provision for) income tax. EBITDA indicates profit for the year excluding interest income, interest and finance charges
(and accretion) expense, benefit from (provision for) income tax and depreciation and amortization. EBIT and EBITDA are not
measurements of financial performance under IFRS or PFRS and investors should not consider them in isolation or as an
alternative to profit or loss for the year, income or loss from operations, an indicator of the Company’s operating performance,
cash flow from operating, investing and financing activities, or as a measure of liquidity or any other measures of performance
under PFRS. Because there are various EBIT and EBITDA calculation methods, the Company’s presentation of this measure
may not be comparable to similarly titled measures used by other companies. Set forth below is a reconciliation of the
Company’s profit for the year to its EBITDA and EBIT.
2013
Profit (Loss) for the year ...........................................................
Add:
(Benefit from) Provision for income tax ...............................
Finance expense .....................................................................
Less:
Finance income ......................................................................
EBITDA ....................................................................................
Less:
EBIT .........................................................................................
(912)
2014
2015
(₱ million)
(8,489)
3,553
2015
(US$ million)
75.3
181
1,290
1,707
(3,897)
1,472
2,165
1,670
1,232
1,634
35.4
26.1
34.6
32
2,234
20
(8,768)
26
8,062
0.6
170.9
1,707
527
2,165
(10,933)
1,634
6,429
34.6
136.3
KEY FINANCIAL RATIOS AND OPERATING DATA Key financial ratios
2013
2014
1.2013
3.3057
51.3%
(1.2%)
(7.3%)
1.0%
Current ratio1 ................................................................................
Debt to equity ratio2 .....................................................................
Debt ratio3 .....................................................................................
Return on assets4 ..........................................................................
Return on equity5........................................................... ..............
Return on average capital employed5...........................................
(audited)
0.9003
11.3639
54.2%
(11.6%)
(221.6%)
(20.3%)
2015
1.9401
0.5886
22.9%
5.4%
13.6%
13.8%
___________________________
1
2
Current ratio is computed by dividing current assets over current liabilities.
Debt to equity ratio is computed by dividing net debt (short-term and long-term borrowings and loans payable less cash) by
stockholder’s equity (exclusive of other reserves).
3
Debt ratio is computed as net debt divided by total assets.
4
Return on assets is computed as profit (loss) for the period divided by total assets.
5
Return on equity is computed as profit (loss) for the period divided by total equity.
54
6
Return on average capital employed is defined as EBIT as a percentage of the average capital employed for the period. Capital
employed consists of total equity, short-term and long-term borrowings and loans payable. Average capital is calculated as the
mean of the opening and closing balances of capital employed for that period.
Key operating data
2013
2014
2015
(unaudited)
Nameplate capacity (thousand barrels per day (bpd))1 ................
Refinery utilization rate (%)2 ........................................................
Retail fuel volumes sold (million liters)3 ......................................
Commercial fuel volumes sold (million liters)4 ............................
Retail lubricants volumes sold (million liters)5 ............................
Commercial lubricants volumes sold (million liters)6 ..................
110
70.3%
2,450
2,116
11
47
110
60.5%
2,714
2,421
10
46
110
62.9%
2,926
2,401
11
45
___________________________________
Note:
1
110,000 bpd is nameplate capacity on a calendar basis.
2
Refinery utilization rate is calculated as the ratio of total product output to the calendar day nameplate capacity.
3
Retail fuel volumes sold indicates the total volume of fuel sold through the retail business for the period.
4
Commercial fuel volumes sold indicates the total volume of wholesale commercial fuel and jet fuel sold for the period.
5
Retail lubricants volumes sold indicates the total volume of lubricants sold through the retail business for the period.
6
Commercial lubricants volumes sold indicates the total volume of lubricants sold through the wholesale and marine businesses
for the period.
55
INDUSTRY OVERVIEW
The information set out in this section has been extracted from a report commissioned by the Company and
prepared by Nexant relating to the Philippine downstream oil industry. Although the Company has taken
reasonable care in extracting and reproducing such information from the report prepared by Nexant, the
information below has not been independently verified by any of the Company, the Global Coordinator and
International Bookrunner or the Domestic Lead Underwriter and Domestic Bookrunner, or any of their
respective directors, officers, representatives, affiliates or advisors, and no representation is given as to its
accuracy. The information provided by Nexant has been derived in part from publicly available government
sources, market data providers and other independent third party sources. While the report prepared by Nexant
provides that the views, opinions, forecasts and information contained in it are based on information reasonably
believed by Nexant in good faith to be reliable, Nexant makes no representation as to the accuracy of the
information prepared by it set forth in this Prospectus and the information should not be relied upon in making,
or refraining from making, any investment decision.
Nexant was responsible in its capacity as an expert in the Philippine downstream oil industry for preparing a
report relating to the same, extracts of which comprise the information in this section. The information provided
by Nexant has been derived in part from publicly available government sources, market data providers and
other independent third party sources. While the report prepared by Nexant provides that the views, opinions,
forecasts and information contained in it are based on information reasonably believed by Nexant in good faith
to be reliable, Nexant makes no representation as to the accuracy of the information prepared by it set forth in
this Prospectus and the information should not be relied upon in making, or refraining from making, any
investment decision. Nexant has given, and has not withdrawn, its consent to the issue of the Philippine
Prospectus with the inclusion of Nexant’s name and such section in the form and context in which they are
included.
PHILIPPINE MACROECONOMIC ENVIRONMENT
The Philippines is one of the fastest growing economies in Southeast Asia
The Philippines continues to be a growing and emerging market in the Southeast Asia region, driven by strong
and robust underlying economic fundamentals and a competitive workforce that is recognized globally. During
the period 2010 to 2015, real GDP grew at a compounded annual growth rate (CAGR) of 6%. Nexant expects
that real GDP growth will continue to average around 6% per year during the next five year period.
Southeast Asia Real GDP Growth
Source: IMF, Nexant
Economic outlook is anticipated to be healthy underpinned by the government fully utilizing its budget and
accelerating planned reforms. The country has earned investment grade credit ratings from major credit rating
agencies as a result of sound macroeconomic fundamentals characterized by sustained growth, low and stable
56
inflation as well as sound fiscal management. Improved economic growth is forecast to be driven by robust
private consumption, low inflation and continued levels of remittances. In addition, the business process
outsourcing industry is expected to remain as a key component for growth in the services sector whereas fiscal
incentives offered under the Comprehensive Automotive Resurgence Strategy program are likely to boost car
assembly and other related industries, which can support the recovery of manufacturing sector.
Oil plays a critical role in fulfilling the Philippines’ energy demand, driven mainly by an underpenetrated
motor vehicle market, offering further potential for growth
The Philippines has a relatively low energy consumption per capita compared against other more developed
nations in the world. Primary energy sources are mainly oil and coal and to a much lesser extent gas,
hydropower and renewables. The country produces substantial geothermal energy which is used to generate
electricity.
Primary energy demand has increased strongly in the past decade, with a CAGR in the past five years averaging
just below 6% per year, including growth of almost 10% in 2015, due to lower energy prices. Oil continues to
play a critical role in fulfilling the Philippines’ needs for primary energy, accounting for just under half of total
primary energy demand.
Philippine Primary Energy Consumption
MTOE
Source: BP Statistical Review 2016; Note: million tons of oil equivalent (“MTOE”)
Motor vehicles are a key driver of oil demand. Registered motor vehicles have grown at a CAGR of more than
5% in recent years, according to data from the Land Transportation Office. Strong vehicles registration growth
is seen particularly in the motorcycles and three wheelers categories. However, vehicles per capita still remain at
very low levels compared to other regional countries, offering further potential for growth.
57
Philippine Motor Vehicles
Southeast Asia Vehicles per Capita
Source: Philippines Land Transportation Office
Source: Nexant
Note: Singapore 1.0 million vehicles
The retail sector is underpenetrated and offers significant growth potential
Retail developments in the Philippines typically lag those of many other Southeast Asian countries, with
customers having significantly less access to convenience stores on a per capita basis, offering the potential for
strong growth as highlighted in independent studies. The sustained growth in retail spending as well as
availability of largely untapped market has provided the impetus for convenience store operators to expand their
reach and capture a larger fraction of the population.
Retail sales per capita (US$), 2016 [pending EIU consent]
Source: EIU
Convenience Stores Sales in the Philippines to Enjoy Double Digit Growth in the Coming Years
58
Source: Conlumino
REFINED PETROLEUM PRODUCT MARKET
Overview of the Petroleum Industry Supply Chain
The major aspects of the petroleum supply chain cover the following activities:

Exploration and production to find and extract crude oil

Transport and refine crude oil into various refined petroleum products

Distribution and marketing, which focus on moving these refined products to end consumers
These activities occur within a global marketplace, supported by an extensive physical infrastructure that
includes drilling rigs, pipelines, ports, tankers, barges, trucks, crude oil storage facilities, refineries, product
terminals and retail service stations. This infrastructure links an international network comprising numerous
producers, refiners, marketers, traders and consumers buying as well as selling physical volumes of crude oil
and petroleum products throughout this value chain. An overview of the supply chain is illustrated in the figure
below.
Petroleum Industry Supply Chain Overview
Source: Nexant
Oil refineries manufacture petroleum products that power virtually all motor vehicles, aircraft, and marine
vessels around the world
An oil refinery is the key link in the oil industry that connects the industry’s upstream crude oil production
activities with the marketing and distribution of crude oil-derived refined products and finished petroleum
products to consumers. The production of refined products and finished petroleum products is a complex
process as oil refineries manufacture a range of various products using a number of different process units.
Refined products include transportation fuels such as gasoline and diesel, along with liquefied petroleum gas
(LPG), naphtha, jet fuel, kerosene, gasoil and residual fuel oil. Finished petroleum products can also be
manufactured by refining crude oil, such as lubricants and asphalt which is used in paving roads. These products
power virtually all motor vehicles, aircraft, marine vessels and trains around the globe.
59
Overview of Product Slate from Crude Oil
LPG
Naphtha
Gasoline
Crude
Oil
Refinery
Jet Fuel
Diesel / Gas Oil
Residual Fuel Oil
Others
Source: Nexant
Considering the vast number of products that are derived from crude oil, refinery profitability is thus strongly
influenced by the yield of refined products and finished petroleum products, which in turn is determined by the
feedstock quality, refinery configuration and process technology. The simplest refinery configurations process
crude oil to the least extent and yield a high proportion of low value, heavy refined products, offering low
margins. Modern complex refineries incorporate numerous flexible upgrading processes, allowing the refinery
to maximise yield of higher products to increase margins.
The refining industry is highly capital intensive which provides significant barriers to entry. Hence, the industry
tends to be dominated by well-established international companies integrated across the oil supply chain or
national oil companies, which may also have access to significant oil reserves. The industry is relatively mature
with net annual grass roots capacity additions or expansions accounting for 7% of existing global capacity on an
annual average basis over the past five years.
Refined products and finished petroleum products are usually marketed via retail outlets, wholesalers, or sold
directly to end customers
Refined products and finished petroleum products are usually marketed via retail outlets or sold directly to end
customers. An overview of the typical retail and marketing value chain for the petroleum industry is illustrated
in the following figure.
Retail & Marketing Value Chain
Refiners /
Importers
Wholesalers
Independent
Retailers
Commercial Customers
COCO / CODO /
DODO
Retailers
Retail Customers
Source: Nexant
60
Note: COCO – Company Owned Company Operated, CODO – Company Owned Dealer Operated, DODO –
Dealer Owned Dealer Operated
Products from refineries can either be sold to wholesalers or directly to end-users via retail outlets. Wholesalers
in turn market products to domestic retailers and export market through their own storage as well as
transportation networks. In some cases, refiners face competition from importers within the domestic market.
Similar to refiners, importers are able to market their products to wholesalers as well as retailers, which are
brought in via import terminals.
There are several forms of retailing structures in the petroleum industry but the most common arrangements
include the COCO, CODO and DODO structures.

COCO refers to retail outlets that are owned by the oil company and operates under its own brand name

The CODO structure has the same ownership arrangement as COCO but operational activities for the retail
outlet are contracted to an external party

Lastly, the DODO outlets refer to retail sites that are owned and operated by an individual or a group
which is not part of an oil company. These dealers source products from the oil company and use the brand
name of the supplier on their retail outlets

There are also independent retailers that source their own refined products and finished petroleum products
and market them under their own brand name. However, independent retailers usually make up a small
proportion
Besides selling refined products and finished petroleum products, retail outlets may also provide additional
offerings that boost sales and profitability such as convenience stores, restaurants, loyalty cards, car wash and
services etc. as part of an overall marketing strategy to attract more consumers.
Retail businesses are by their nature, domestically focused. Most markets may have three to five major players,
usually international oil companies and/or a national oil company, with some markets also having a number of
small, local independent players. Key success factors for a retail and marketing business include network size
and geographic coverage, convenience in terms of site location, site throughputs, logistics, brand awareness,
service quality and value added offerings.
Unitary margins are typically low and hence, economies of scale are important to offset fixed costs of running
the business. Over the last few years, non-fuel sales, in particular sales from convenience store offerings are
becoming increasingly important as a form of contribution towards retail profitability.
Wholesale/commercial sales cover direct sales from refinery or product terminal to customers, e.g. business to
business sales without the use of retail assets. This may cover sales into industrial segments such as diesel, fuel
oil or bitumen as well as aviation sales to airports.
Key factors which determine the relative attractiveness of a Retail & Marketing distribution chain include:

Network size – allowing economies of scale to be captured

Site throughputs – maximising income from existing assets

Logistics – minimising supply and distribution costs

Product portfolio – product quality as well as including non-fuels offerings to increase site revenues and
profitability for retail stations

Brand awareness – customer perception of quality is an important factor for retail customers.
Wholesale/commercial customers focus on reliability of supply and strength of customer relationships
61
ASIAN INDUSTRY OVERVIEW
Asia accounts for approximately one-third of the world’s refining capacity and growth is mainly driven by
growth in population and consumer wealth, increased vehicle ownership, and industrial activity
Asia contains close to 60 percent of the world’s population and remains the major region of economic growth in
the world. The region also shows the most significant growth in refined product demand since oil demand
growth is typically linked closely to economic activity. Asia currently accounts for approximately one-third of
the world’s refining capacity with a total of over 1.6 billion tons (32.5 million barrels per day) in 2015.
Asian demand for major refined products grew at a CAGR of 2.5% from 2005 to 2015, led by strong growth in
China, given its size, amongst other countries. Asian major refined products demand is approximately 1.2 billion
tons in 2015, with gasoline, diesel and jet/kerosene accounting for around two thirds of this total.
Growth has been mainly driven by China, India and Southeast Asia due to growth in population and consumer
wealth, increased vehicle ownership, and industrial activity including new petrochemicals capacity. Developing
economies such as Vietnam and the Philippines have also experienced strong growth in demand, whilst
developed countries such as Japan, South Korea and Taiwan have seen lower demand growth. Refined products
consumption per capita in the Philippines remains at very low levels compared to other Southeast Asia
countries, offering further potential for growth.
Asia Refined Products Demand vs Population
Source: National Sources, Nexant
Southeast Asia Refined Products Consumption
Source: Nexant
62
PHILIPPINE INDUSTRY OVERVIEW
Demand for Petroleum products is expected to continue to grow
Demand for refined products in the Philippines grew at a CAGR of 2.8% from 2005 to 2015 reaching 390 kbpd
(18 million tons per year). Demand has grown steadily since 2011, despite higher energy prices, but lower oil
prices in 2015 supported growth of 15% compared to 2014 based on data provided by the DOE. Refined
products demand growth is primarily driven by consumption in gasoline, diesel and jet fuel. These three
products are expected to drive the country’s refined products growth in the forecast period, with a CAGR of 4%
forecast between 2015 to 2025, assuming stable economic growth and energy prices.
Philippine Refined Petroleum Product Demand
Source: Philippines DOE, Nexant
Gasoline demand grew by more than 6% on a CAGR basis between 2010 to 2015, due to growth in motor
vehicles sales, especially higher demand of small vehicles, motorcycles and three wheelers. Consumption was
also further boosted by the recent drop in oil prices, resulting in lower retail prices at the pump. Demand is
expected to grow at a 4.5% CAGR from 2015 to 2025 as consumer wealth improves, resulting in higher motor
vehicles ownership and use.
Diesel use in the industrial sector has grown more than 9% on a CAGR basis in the past five years. Diesel is
mainly used in large trucks, trailers and jeepneys. As industrial activity and export is expected to grow, diesel
consumption is expected to grow slightly more than 4% CAGR throughout the forecast period.
Jet fuel demand has grown more than 6% on a CAGR basis in the past five years, fuelled by growth in the
domestic low cost airline sector. According to the Civil Aeronautics Board, domestic air passenger traffic grew
from 7 million in 2005 to 20 million by 2014. Jet fuel demand is expected to grow more than 4% on a CAGR
basis throughout the forecast period driven by an increase in air travel, especially in the low cost domestic
sector.
The Philippines is affected by ongoing smuggling and illegal trading of refined products. These products are
supplied illegally from locations with cheaper fuel prices such as Malaysia and Indonesia. The Philippines is
planning and discussing a fuel-marking scheme to detect smuggled products. Existing industry players could
benefit as smuggled products may be replaced by domestic supply or legally imported products.
63
The Philippines has two refineries, however, domestic production of refined products is unable to meet
demand, hence it has to rely on imports
The Philippines has two refineries, both located in Luzon island. Petron has a 180 kbpd refinery while PSPC has
a 110 kbpd refinery. Crude oil is imported into these refineries from various locations including the Middle East,
Russia and other parts of Asia. There is no significant oil production in the Philippines.
Philippine Major Oil Facilities and Infrastructure
Source: Nexant
Petron’s refinery was inaugurated in 1961 with a capacity of 25 kbpd and has since expanded to 180 kbpd. The
refinery is located in Limay, Bataan about 150 km southwest of Manila. Refinery operating rates were
historically limited by a lack of upgrading facilities, resulting in relatively weak margins. However, Petron
completed a major Refinery Upgrading Project (RMP-2) in 2014 which significantly improves the refinery’s
upgrading capability by adding new Fluidized Catalytic Cracking and Delayed Coking units, plus other related
facilities, to allow upgrading of low value fractions of crude oil into high value products. The upgrade allows
Petron to source a wider range of feedstock and meet higher quality fuel specifications such as Euro IV/V (PH).
The Project became fully operational in mid-2015. With the completion of this upgrade, it is expected Petron
will operate the refinery much closer to its design capacity than historically.
PSPC’s refinery commenced operations in 1962 with a capacity of 30 kbpd and was expanded to 110 kbpd in
1995. It is located in Tabangao, Batangas about 121 km south of Manila. The refinery has a configuration
comprising crude distillation, naphtha and middle distillate hydrotreating, platforming with a thermal cracking
unit to upgrade atmospheric residue. The refinery has historically run below its nameplate crude distillation
capacity to balance capacity of its downstream processing units. PSPC completed an upgrade to its refinery in
December 2015 to produce products compliant with the Euro IV (PH) fuel standards as required by the
government by January 2016.
64
Domestic refined products supply in 2015 increased significantly due to Petron commissioning its upgrading
project. Further supply increases are assumed in 2016 due to full year operation of Petron’s upgrading project
and an improvement in PSPC’s utilization after completion of its 2015 upgrade. For the remainder of the
forecast period, Nexant expects no major new refining capacity additions.
Philippine Refined Products Demand and Supply
The Philippines is a significant net importer of refined products due to limited refining capacity and growing
domestic demand. In 2015, the Philippines imported 77 million barrels (just over 10 million tons per year) of
refined products, approximately 54% of total domestic demand. Refined product imports into the Philippines are
usually supplied from various Asian locations such as Singapore, China, Korea and India. The net deficit in all
products is projected to increase over the forecast period as no new refining capacity addition is assumed.
Highest net deficits are expected for gasoline and diesel, projected to be as high as 10 million tons by 2025.
The Philippines is one of the key refined products deficit markets in Southeast Asia, alongside Indonesia and
Vietnam. The deficit nature of the Philippines market provides a strong competitive advantage for local industry
participants which have domestic refining capacity as well as extensive supply and distribution facilities, which
in combination provide increased product flexibility and supply reliability as well as lower supply costs.
Philippine Refined Petroleum Product Net Trade
65
The Philippines has a deregulated retail pricing market with a relatively stable retail margin
Currently, the country’s downstream oil sector is a fully deregulated market pursuant to the Republic Act “An
Act Deregulating the Downstream Oil Industry and for Other Purposes”. This act was established to promote a
competitive market by achieving fair prices as well as adequate supply of high quality and environmentally
compliant petroleum products.
Pricing of refined products in the Philippines are closely monitored by DOE and are updated on a weekly basis.
This reporting practice was adopted since 2009 upon consultation by the DOE with industry players and
consumers, including the transport as well as industrial sectors, in order to provide up to date information for the
relevant parties. Computation of landed cost for refined products within the country is summarized in the
following table.
Computation Formula for Landed Cost of Refined Products
Parameters
CNF Cost
Excise Duty
Ocean Loss, Insurance & Port Charges
Landed Cost (excl VAT)
VAT
Landed Cost (incl VAT)
Components
MOPS + Freight
Based on published rates by Internal Revenue Board
CNF * 0.5 percent
CNF + Excise Duty + Ocean Loss
12 percent
(CNF + Excise Duty + Ocean Loss)*1.12
Source: Philippines DOE
CNF refers to cost and freight calculation, which is defined as free on board (FOB) price of the product based on
weekly average of the Mean of Platts Singapore (MOPS) pricing plus associated freight cost. Excise duties are
as published by the Internal Revenue Board and are indicated in the following table. The Philippines has a
prevailing Value Added Tax (VAT) at 12 percent. There is no excise duty for diesel, LPG and naphtha used as
petrochemical feedstock. Ocean Loss, Insurance & Port Charges component include charges such as custom
stamping, import processing fees and brokerage fees, amongst others.
Excise Duties for Selected Petroleum Products
Products
Naphtha
Gasoline
Unleaded Premium Gasoline
Leaded Premium Gasoline
Aviation Jet Fuel
Kerosene (used as Aviation Fuel)
Lube Oil and Grease
Diesel Fuel Oil
LPG
Naphtha (Petrochemical Feedstock)
Duty (Peso per liter)
4.35
4.35
4.35
5.35
3.67
3.67
4.50
-
Source: Philippines Internal Revenue Board
66
Retail Pricing Structure for Gasoline and Diesel
Products
Landed Cost (Incl VAT)
Biofuel Blending Cost
Margin
VAT
Retail Price
Components
(CNF + Excise Duty + Ocean Loss)*1.12
Benchmark Pricing*Blending Ratio
Includes retail and wholesale margins
12%
(Landed Cost (incl VAT) + Biofuel Blending Cost + Storage and Transportation
Cost + Margin)*1.12
Source: Nexant
The following points related to retail pricing structure for gasoline and diesel:

There is a Biofuels blending ratio mandated for gasoline at 10 percent Ethanol and 2% Coconut Methyl
Ester (CME) for diesel

Benchmark price for Ethanol is based on prices of sugar and molasses as well as relevant processing and
transportation cost

Benchmark price for CME is dependent on market prices for coconut oil

Retail and wholesale margins include costs associated with supply, distribution and marketing of fuels
including transportation costs associated with moving products around the country

VAT for retail sales of gasoline and diesel is charged at a flat rate of 12%
A breakdown of the retail pricing build-up for gasoline and diesel is indicated in the following figures.
Retail Price Build-Up for Gasoline
US$/liter
Retail Price Build-Up for Diesel
US$/liter
67
Southeast Asia Fuel Retail Pricing
Source: Nexant
Note: The prices above are effective July 2016. Prices reflect most widely consumed fuel. For gasoline, it is RON 95
except for Indonesia where RON 88 is widely consumed
The deregulated environment of the downstream oil industry in the Philippines means retail fuel prices are
susceptible to fluctuation in global crude oil prices. Changes in retail pricing reflect the movement of crude oil
prices in the international market. A comparison of crude oil prices against retail prices for retail gasoline and
diesel in the Philippines demonstrates that the retail sector is typically able to pass through changes in
international pricing to its customers swiftly, based on the pricing structure established by the Government.
Hence, retail margins are typically not impacted by oil price volatility.
Comparison of Crude Oil Prices Against Retail Gasoline and Diesel Prices
Philippine fuel retail margins are higher than in other countries in Southeast Asia
The main difference in retail fuels pricing is government policies on taxation which are a major component of
fuels pricing across the region, albeit to a lesser extent in Indonesia and Malaysia.
The Philippines continues to experience some of the region’s highest average fuel retail margins. The margins
for micro-sites and locations in more rural locales are much lower than the average due to low throughputs and
higher transportation costs. This may be compensated by higher end-user pricing to some degree, whilst major
suppliers typically benefit from sales being focused in urban areas with higher population densities and site
throughputs, resulting in higher unit margins.
Nexant notes the following comparisons with Malaysia and Thailand which represent two key Southeast Asian
markets which have a competitive fuels retail business environment:
68

In Malaysia, the dealers’ margin is set at 12.19 sen (US¢ 3.02) per liter for Gasoline (RON 95) and 7 sen
(US¢ 1.74) per liter for diesel

In Thailand, the dealers’ margin is set at 4.03 baht (US¢ 12.02) per liter for Gasoline (RON 95) and 1.78
baht (US¢ 5.39) per liter for diesel
The Philippines began implementing sales of Euro IV (PH) specification gasoline and diesel since January
2016
Fuel specifications in the Philippines are governed by the Clean Air Act of 1999, which outlines the
government’s measures to reduce air pollution and incorporate environmental protection into the country’s
development plans. The country began implementing sales of Euro IV (PH) specification gasoline and diesel
fuel since 1st January 2016, replacing Euro II (PH) products that have been marketed since 2008 as the new
Philippine National Standard (PNS). Euro IV (PH) is a globally accepted European emission standard for
vehicles that requires fuel with significantly lower concentrations of sulphur and benzene.
Nexant highlights the following aspects relating to the potential for future changes in fuels specifications in the
Philippines:

The most stringent fuels specifications for gasoline and diesel applied globally are typically Euro V, which
has been implemented in Western Europe for several years, and requires further reduction in sulphur
content of gasoline and diesel from 50ppm (Euro IV) to 10ppm. Most Southeast Asian countries have not
implemented Euro V and many countries have not yet implemented Euro IV, with some continuing to
apply Euro II. Governments typically announce the intention to implement more stringent fuels standards
several years in advance, in order to allow the refining industry time to make necessary investments to
comply with the requirements. The Philippines Government has currently not made any firm indication of
whether it plans to require future compliance with Euro V requirements

The International Maritime Organization (IMO) plans to lower sulfur content of bunker fuel oil used for
shipping on a global basis from the current level of 3.5 percent. Ships trading in certain designated
emission control areas are already operating under a limit of 0.1 percent effective 1 January 2015. The
designated emission control areas cover Baltic Sea, North Sea, coastal areas off United States and Canada,
and United States Caribbean Sea area. The reduction in sulphur content on a global basis would be a
significant change for the refining industry and require extensive investments to improve fuel oil quality or
upgrade it into other products. At this time, the exact timing of a global reduction in fuel oil sulphur
content and the nature of its enforcement remains unclear, but is proposed that timing would be finalised
by 2018 following a further IMO review and would be implemented between 2020 to 2025
Philippine retail gasoline and diesel, and commercial fuel sales have exhibited healthy growth over the last
five years
Equipped with a competitive workforce and reasonable economic fundamentals, the country has emerged as one
of the fastest growing economies in Southeast Asia. Increased expenditure in household consumption and
private vehicle ownership are the main demand drivers for the sustained increase in demand for retail fuels
which is expected to continue, assuming a stable economic environment. Also, fiscal incentives offered under
the Comprehensive Automotive Resurgence Strategy program to attract new investments, stimulate demand and
effectively implement industry regulations that aims to develop the country as a regional automotive
manufacturing hub, are likely to boost car assembly and other related industries, which can in turn support
economic growth.
69
Philippine Historical Retail Fuel Demand
Philippine commercial fuel demand is estimated at approximately 74 million barrels in 2015. Commercial fuel
demand constitutes slightly more than half of Philippine total refined products demand. A large proportion of
commercial fuels demand comes from diesel, whilst virtually all fuel oil and jet fuel is sold on a non-retail basis.
Some LPG (other than cylinder retail sales) and others constitutes the remainder of commercial fuel sales.
Diesel has experienced the highest demand growth from 2005 to 2015, with a CAGR exceeding 8%. Strong
growth is also seen in jet fuel and LPG, but fuel oil sales have been decreasing due to declining domestic
demand.
Philippine Commercial Fuel Demand
Non-fuel Retail
The objectives behind non-fuels offerings are to improve profitability by increasing site throughputs, customer
preference and loyalty.
The non-fuel business at retail stations generally includes convenience stores, as well as allied services such as
restaurants, cafes, carwash, car maintenance, ATM, etc. including co-location. Co-location is the act of placing
multiple (sometimes-related) entities within a single location. Co-locators typically rent a space within the retail
station and incur their own capital costs to build and operate the business within the leased space. Co-locators
include major retail corporations such as McDonalds, KFC, Starbucks, Jollibee, etc. and are typically located in
higher throughput locations, found in urban areas or along major roads or highways.
70
Convenience stores in retail stations may charge higher prices than conventional grocery stores or supermarkets
due to smaller inventories. They typically have longer opening hours, more locations, and can offer customers
greater convenience. In the Philippines, major retailers have their own brand of convenient stores: Petron
operates Treats store, PSPC runs Shell Select store and Caltex runs Star Mart on their respective retail stations.
In 2009, 7-Eleven convenience stores began replacing Star Mart in Caltex service stations. Other smaller
independent, domestic retailers have typically been more focused on fuel sales and expanding retail network
rather than expanding their non-fuel business.
In general, within the Philippines, non-fuels retailing remains under-developed compared to more developed
economies, offering potential growth opportunities to fuels retailers as they modernise, upgrade and expand
their retail sites to improve the overall customer experience.
Retail Sales through Convenience Stores in the Philippines
Source: Conlumino
Based on current demographics and retail fuels offerings in the Philippines, Nexant anticipates there is good
potential growth opportunity in the non-fuels retail segment which is underpinned by:

Retail sales is growing in the Philippines with convenience stores a key sales channel for retail offerings

Retail stations, especially in the urban area or along main highways, will continue to offer potential for
significant non fuel retail business, especially as non-fuels offerings are enhanced
COMPETITIVE LANDSCAPE
The Philippines fuel market has three major players
Philippine oil industry is dominated by three major companies: Petron, PSPC and Chevron (Caltex). As the
market is deregulated, there are more than 80 other smaller players in the industry, which have gradually
increased their share following market deregulation. The three major companies collectively account for
approximately 66 percent of refined products sale. Other players in the market include Total, PTT, Seaoil,
Phoenix Petroleum, Unioil, and Flying V.
71
Philippine Refined Products Market Share by Volume – 2015
Comparison between Major Philippine Industry Players
Estimated domestic
refined products
market share
Refinery
35%
24%
7%
Complex refinery
Semi- complex refinery
Capacity: 180 kbpd
Capacity: 110 kbpd
Historical refinery utilisation has
been low, but its expansion
project (RMP-2) began operation
in mid-2015 and has resulted in a
significant increase in utilisation
Typically run at lower capacity to
ensure optimal utilisation of
conversion capacity
Supply and
Distribution
Has the most extensive supply
and distribution network covering
all demand centres across the
country with more than 30 fuel
terminals.
Has access to 34 supply and
distribution facilities across the
country, including 22 fuel
terminals including Tabangao,
where its refinery is located and
the North Mindanao Import
Facility (NMIF), 10 lubricant
warehouses, and 2 bitumen import
facilities
Has 20 fuel supply terminals
across the country with an import
terminal in San Pascual, Batangas.
Retail Fuel
Stations: ~ 2 200
Stations: ~ 1 000
Stations: ~ 700
Market Share by Station Count:
35%
15%
11%
Market Share by Retail Volume:
32%
29%
15%
Network Efficiency*: 0.9
Average Annual Throughput
(ML/site/year): 1.5
(ML/site/year): 3.1
(ML/site/year): 2.1
Source: Nexant
72
Used to own and operate a 72
kbpd refinery in Batangas, which
was closed and converted to an
import terminal in 2003.
PSPC’s Tabangao refinery is a semi-complex refinery
Based on its configuration, PSPC’s refinery is a semi-complex refinery. The following figure provides a
comparison of refinery yield versus typical Singapore benchmarks using Dubai crude oil. The simple
configuration represents crude oil distillation and conversion to light products and atmospheric residue, with no
further upgrading. The complex configuration represents an average of fluidised catalytic cracking and
hydrocracking configurations which upgrades the vacuum gas oil portion of atmospheric residue to higher value
products, and blends the remaining residue into fuel oil. The thermal cracking configuration employed by
Tabangao refinery results in a refinery yield which more strongly favours middle distillates comprising
jet/kerosene and diesel versus gasoline, which is aligned with the structure of the domestic market.
Relative Refinery Yield
Source: Company, Nexant
Nexant notes the following:

Tabangao refining margins benefit from a structural uplift compared to Singapore given that Philippine
refined product pricing reflects import parity, which is typically around US$10 per ton (US$1.5 per barrel)
above FOB Singapore pricing

Other key factors which will drive differences in performance include:
o
Differences in feedstock quality and hence cost with Tabangao feedstock slate typically being higher
cost than a Dubai reference complex configuration.
o
Differences in gasoline and diesel pricing, given Tabangao refinery’s relatively high yield of middle
distillates, particularly diesel, derived from its configuration
o
Product quality differentials in the Philippines for e.g. production of higher grades of gasoline, less
stringent diesel specifications which allows a slightly higher proportion of heavy material to be
upgraded to diesel, and a higher fuel oil viscosity which requires less gas oil blending into fuel oil
73
Tabangao Typical Refining Margin
Source: Nexant
Gross Refining Margins – defined as product revenues minus feedstock costs based on Dubai crude oil.
Supply and distribution infrastructure provides a key competitive advantage
Due to the geographical nature of the Philippines, products are mainly transported via vessels and barges, and
inland transportation is usually by road, with very limited pipeline infrastructure.
PSPC has access to 22 fuel terminals including Tabangao, where its refinery is located, and the North Mindanao
Import Facility (NMIF). NMIF commenced operations in July 2016 and will take refined products imported
directly from outside the Philippines, hence enhancing PSPC’s supply cost competitiveness in southern
Philippines. The Company also has 10 lubricant warehouses and 2 bitumen import facilities spread throughout
the Philippine archipelago. PSPC’s network is integrated and supply points are strategically located such that it
allows PSPC to optimize the distribution and delivery of refined products and finished petroleum products and
serve commercial and retail customers efficiently. The newly upgraded Tabangao refinery is built to better
withstand harsh climatic conditions. PSPC also has long-term crude oil and refined product supply arrangements
with the Shell Group ensure consistent procurement and better predictability of supply. PSPC’s geographical
positions of fuel terminals, including the Tabangao Refinery and the NMIF, and scale of operations allow
accommodation of larger vessels such as VLCCs or marine risers and reduce transportation costs.
Petron, from its refinery in Bataan, moves its refined products mainly by sea via barges and vessels to more than
30 depots, plants and terminals located across the country. Its supply network comprises eight depots and
terminals in Luzon, ten in Visayas and seven in Mindanao. Form their storage facilities, products are transported
by land via tank trucks and delivered to the commercial customers and retail stations nationwide. The company
also supplies jet fuel to international and domestic carriers at key airports in the Philippines.
All other oil industry players have a smaller supply and distribution network compared to Petron and PSPC.

Given its historical presence, Caltex has 20 supply facilities across the country with an import terminal in
San Pascual, Batangas. It used to own and operate a 72 kbpd refinery in Batangas, which was closed and
converted to an import terminal in 2003

Seaoil operates around 10 depots across the country with the largest in Davao. It also has depots in
Batangas, Bacolod, Cebu, Davao, Dipolog, Pasacao, and Subic

Phoenix Petroleum has depot and storage terminals in Batangas, Davao, Cagayan de Oro, Subic,
Zamboanga, Cebu, Bacolod, Aklan and Calapan

PTT operates and maintains the PTT Cebu Mactan Oil Depot and Terminal and has depots in Subic and
Clark on Luzon Island
74

Total owns and operates two oil terminals in Manila and Bataan
Oil terminals and storages are typically located at demand centres, east Luzon, Mindanao and Cebu. Some of the
smaller independent players are more concentrated on the south, away from Luzon which is dominated by the
major oil companies.
The fuel retail market in the Philippines is fragmented with Petron being the largest and PSPC being the
most efficient major players in the market
Despite underlying growth in the past five years, the retail fuels industry in the Philippines has become an
increasingly fragmented market with multiple companies establishing themselves in the retailing business. Prior
to the passing of the Downstream Oil Industry Deregulation Act, the fuels retail industry was dominated by
Petron, PSPC and Caltex. These three parties collectively made up close to 100 percent of the overall retail
business before deregulation. Since the deregulation of the downstream oil sector, the market shares of these
companies have been diluted by the establishment of independent players such as Seaoil, Unioil, Phoenix and
Flying V, amongst others, as well as entry of some other international competitors such as PTT. New retailers
have taken the opportunity to establish their presence in major cities and also expand into previously
underserved areas. Due to the geographical composition of the country with around 7,100 islands, independent
players have the opportunity to branch away from areas and cities that are dominated by the presence of the
major established players. As a result of aggressive expansion of their retail footprint by the independent
players, especially in the Visayas and Mindanao region, these players now garner around 38% of the overall
fuels retail market by station counts within the country. However, many of these players are subscale and
account for a lower percentage of volume of fuel sold.
Petron, PSPC and Caltex remain as the largest key players in the downstream oil industry, each of them with
strong retail presence throughout the country. Retail and depot network expansion, pricing, and various other
marketing programs are being employed by these key players to maintain their individual market position.
In 2015, the Company is ranked second in terms of market share by retail stations as well as total retail sales
volumes, behind Petron. Both Petron and Caltex remains as key competitors in the downstream oil retail
industry whereby Petron currently possesses around 2,200 retail outlets and Caltex has approximately 700 sites.
Philippine Retail Market Share by Retail Stations and Volume – 2015
By Volume
By Stations
Source: Nexant
Although PSPC owns less than half the amount of retail sites as compared to Petron, PSPC has a much higher
average annual throughput per retail site and network efficiency, defined as percentage of market share by retail
volume divided by percentage of market share by retail sites, when compared to its closest competitors. A
75
comparison of PSPC’s aforementioned performance against other industry players is indicated in the following
figures.
Network Efficiency and Average Throughput – 2015
Source: Nexant
Note: 1 Defined as market share by volume divided by market share by number of retail service stations
76
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Prospective investors should read the following discussion and analysis of the Company’s financial condition
and results of operations together with the financial statements of the Company and the notes thereto included
elsewhere in this Prospectus.
Overview
77
Typhoon Haiyan.
Key factors affecting results of operations
The Company’s financial condition and results of operations are affected by a variety of factors. Set out below
is a discussion of the most significant factors that have affected the Company’s results during the period under
review and that the Company expects will continue to do so in the future. Factors other than those set out below
could also have a significant impact on the Company’s financial condition and results of operations in the
future.
Crude oil and petroleum product prices
The Company’s revenues, cost of sales and profits are significantly impacted by global trends in crude oil and
petroleum product prices, which are subject to volatile movements caused by a number of factors beyond the
Company’s control. For example, crude oil prices, which are a primary factor affecting the Company’s costs,
are driven by global trends in supply and demand and other political and economic factors. Prices at which the
Company sells its petroleum products tend to be driven by regional supply and demand, as well as trends in
crude oil prices and economic and other factors.
With respect to revenues, because of the commodity nature of oil products, competition in the Philippine and
international markets for refined products and finished petroleum products is based primarily on price as
adjusted to account for differences in product specifications and transportation and distribution costs. During the
period under review, sales prices of the Company’s principal products have been correlated with international
crude oil prices, although fluctuations in crude prices are generally reflected in the sales prices of the
Company’s Refined Products only after an interval of time. Regarding costs, crude oil, feedstock and Finished
Petroleum Products (whose cost is in turn correlated with oil prices) account for a large portion of the
78
Company’s total cost of sales, equal to 89% of total cost of sales in 2015. Fluctuations in oil prices have a more
immediate effect on the cost of the Company’s purchases (compared to sales prices) of crude oil and feedstock
for its refinery and Finished Petroleum Products, as these purchases are priced with reference to current market
rates.
Sudden and significant declines in oil prices can have other adverse effects on gross profit, as a result of noncash inventory losses and write-downs. The Company typically holds approximately 40 to 50 days of crude oil
and refined products inventory in the Philippines. As the Company accounts for its inventory using the first-infirst-out method, a sharp decrease in crude oil prices may require the Company to sell its Refined Products
produced with higher-priced crude oil at lower prices thereby eroding margins, and also to incur inventory
write-downs to reflect net realization value. Furthermore, a sharp increase in oil prices would increase the
Company’s requirements for short-term financing for working capital and may result in higher financing costs
for the Company or pose difficulties in securing financing on favorable terms. Any difficulties in securing shortterm financing for working capital, or unfavorable pricing terms, may have a material adverse effect on the
Company’s financial condition and results of operations.
During the period under review, trends in global crude oil prices have had a significant impact on the
Company’s results and financial condition for the reasons discussed above, with substantial decreases in oil
prices in 2014 (particularly in the fourth quarter) resulting in a gross loss, as inventory losses and impairments
more than offset the higher sales volumes at relatively stable prices, as compared to 2013 results. Results
improved in 2015, as declines in oil prices were more gradual compared to 2014, and the Company was able to
achieve better margins due in part to the time interval needed for sales prices to adjust to oil prices.
Sales volumes
During the period under review, sales volumes have been significantly influenced by several factors, including
the expansion of the Company’s retail service station network and general macroeconomic factors discussed in
more detail below. Sales volumes increased from 5,309 million liters in 2013 to 5,627 million liters in 2014 and
5,812 million liters in 2015, reflecting the overall growth of the Philippines economy and increased demand
from retail and commercial customers, the success of various nation-wide promotional campaigns, and the
Company’s expanded retail service station network, which notwithstanding the reduction in the number of retail
service stations in 2015 compared to 2014, still contributed to higher volumes as a number of sites opened in
2014 reached their operational maturity in 2015.
Economic and political conditions and natural disasters in the Philippines
Economic conditions
The Company derives a substantial portion of its revenues and profits from sales of its products and services in
the Philippines. As a result, the Company’s product demand and results of operations have generally been
influenced to a significant degree by the general state of the Philippine economy. Although the Philippines
benefits from an investment grade rating by international credit rating agencies, historically, the Philippines has
experienced periods of slow or negative growth, high inflation, significant devaluation of the Peso, and the
imposition of exchange controls. Sales of the Company’s products are directly related to the strength of the
Philippine economy (including overall growth levels and interest rates) and tend to decline during economic
downturns. Any downturn in the Philippine economy may negatively affect consumer sentiment and general
business conditions in the Philippines, which may lead to a reduction in demand for the Company’s products.
The Philippine economy has experienced relatively steady growth in recent years, with nominal GDP and
nominal GDP per capita growth at a CAGR from 2010 to 2015 of 7.9% and 6.2%, respectively, according to the
Economist Intelligence Unit. This growth trend has positively impacted the Company’s results of operations in a
number of ways, driving increases in sales volumes of fuel products in each of the three years under review,
reflecting growing demand from retail customers as well as commercial customers such as those in the power,
79
transport and mining sectors, who purchased higher volumes of fuel oil and other refined products to supply
their increased levels of operations.
Political conditions
In the last few years, there has been political instability in the Philippines, including impeachment proceedings
against two former presidents and the chief justice of the Supreme Court of the Philippines, and public and
military protests arising from alleged misconduct by previous administrations. An unstable political
environment, whether due to the imposition of emergency executive rule, martial law or widespread popular
demonstrations or rioting, could also negatively affect the general economic conditions and operating
environment in the Philippines, which could have a material adverse effect on the Company’s business, financial
condition and results of operations.
Natural disasters
The country has experienced severe typhoons, which can adversely affect the Company in a number of ways,
including disruptions in operations and additional transportation and logistics costs, potential government
intervention to regulate prices in emergencies, and temporary reductions in overall demand for the Company’s
products. During the period under review, Typhoon Glenda, which struck in 2014, impacted the Company’s
results as it caused the Company to incur higher transportation expenses due to the destruction of a major bridge
around the site of the Tabangao Refinery. Refinery utilization was lower in 2014 (with a refinery utilization rate
of 60.5%) compared to both 2013 and 2015 (70.3% and 62.9%, respectively) in part as a result of unplanned
maintenance shutdowns due to Typhoon Glenda. However, lower utilization did not materially affect sales
volumes, as the Company was able to source adequate imports and domestic purchases of refined products to
offset the loss in production at the Tabangao Refinery.
Competition
The Company faces competition in the sale of its products in the Philippines, primarily from Petron as the only
other Philippines-based R&M company, as well as a number of competitors who import refined products from
abroad and distribute them within the Philippines. Although the Company differentiates its Refined Products
and Finished Petroleum Products from those of its competitors, for example through special fuel additives to
improve engine performance, the Company’s refined products and finished petroleum products are, by nature,
commodities. As a result, competition for Refined Products and Finished Petroleum products is based primarily
on price as adjusted to account for differences in product specifications and transportation and distribution costs.
The Company’s competitiveness therefore depends on its ability to manage costs, maintain efficiency at its
refinery and maximize utilization of its assets and operations. Competitors may, among other strategies, invest
in increasing their refining or distribution capacity in the Philippines and engage in aggressive product sale
promotions, which could impact the Company’s sales. During the period under review, the principal change in
the domestic competitive environment in terms of capacity has been Petron’s upgrade of its refinery in 2014,
which resulted in increased production capacity primarily for white products; however, the Company believes
that such investment has not materially affected the Company’s sales volumes or prices to date.
Illegal imports
The Company is subject to the adverse impacts of smuggling and illegal trading of petroleum products, which
have historically accounted for a significant portion of the total supply of such products in the Philippines.
During the period under review, the impacts of illegal imports were more pronounced in 2013 and 2014, as a
result of higher differentials between market prices for refined products in the Philippines and those in regional
markets where prices are regulated or subsidized such as Malaysia and Indonesia, resulting in greater incentives
for smuggling. In 2015, volumes of smuggled products in the Philippines are believed to be lower, due to lower
global oil prices and the resulting decrease in price differentials between the Philippines and other markets, as
well as stronger enforcement measures implemented by Philippines authorities, among other factors.
80
Foreign exchange rates
The Company’s revenues are primarily denominated in Peso, apart from a relatively small portion of sales of
certain products such as commercial jet fuel and other exceptions. The Company’s principal expenses,
comprising the purchase of crude oil, feedstock and Finished Petroleum Products, are denominated in US
dollars. The Company’s financial reporting currency is the Peso, and therefore depreciation of the Peso would
result in increases in the Company’s foreign currency denominated expenses as reflected in its Peso financial
statements, and could also result in foreign exchange losses resulting from the revaluation of foreign currency
denominated assets and liabilities, which primarily comprise US dollar-denominated trade payables relating to
the Company’s inventory purchases, thereby adversely affecting the Company’s results of operations and
financial condition.
The Peso has weakened against the US dollar in each year of the period under review, with average exchange
rates increasing from ₱42.416 per US dollar in 2013, to ₱44.393 in 2014 and ₱45.488 in 2015 (weighted
average rates under the Philippine Dealing System). The Company benefits to a certain extent from natural
hedges against Peso depreciation, in that increased costs (as reflected in Peso) of US dollar-denominated crude
oil and finished products can be passed on to a limited extent to customers through increased sales prices. The
Company does not consider it necessary to enter into derivative contracts to hedge currency exchange risk.
Critical accounting estimates and assumptions
The preparation of the Company’s financial statements in accordance with PFRS requires the Company’s
management to make estimates and assumptions that affect the amounts reported in the Company’s financial
statements and the related notes. Actual results may differ from those estimates and assumptions. For a
description of the Company’s critical accounting estimates and assumptions, see note 30 to the Company’s
audited financial statements as of and for the year ended December 31, 2015 included elsewhere in this
Prospectus.
Description of principal income statement line items
Gross sales
Gross sales primarily comprise revenue from the sale of the Company’s Refined Products and Finished
Petroleum Products.
Sales discounts and rebates
Sales discounts and rebates comprise retail fleet fuel card discounts, sales discounts for retail and commercial
customers and rebates.
Cost of sales
Cost of sales primarily comprises the cost of crude oil, feedstock and Finished Petroleum Products, and to a
lesser extent, various expenses such as duties, logistics costs, manufacturing expenses, freight costs and
wharfage costs.
Selling expenses
Selling expenses are those expenses incurred by the marketing, distribution and sales functions of the
Company’s retail and commercial business segments, and primarily relate to rental expenses relating to CODO
retail service stations and distribution sites, advertising and promotion expenses, repairs and maintenance
expenses, outside services such as transport and shared services provided by the Shell Group, compensation,
pension cost and employee benefit expenses relating to the Company’s sales, distribution and marketing
personnel, depreciation of CODO retail service stations and distribution sites and others.
81
General and administrative expenses
The Company’s general and administrative expenses comprise the same components as selling expenses, but are
allocated as general and administrative expenses to the extent they relate to operating expenses incurred by the
Company’s corporate functions apart from sales, distribution and marketing, relating primarily to general
corporate functions such as human resource, corporate finance, legal, external relations, chairman’s office and
informational technology personnel. The principal components of general and administrative expenses include
outside services relating to shared services provided by the Shell Group, compensation, pension cost and
employee benefits, communication and utilities, insurance and other expenses.
Other operating income and expenses
Other operating income primarily comprises retailer fees, rental income and franchise commissions relating to
the Company’s retail service stations, the main components of which are rental income from co-locators and
sales of convenience store items, royalties paid by DODO retail service station dealers in the form of partnership
fees for their use of certain of the Company’s support systems (such as point of sale systems) and inclusion in
the Company’s retail loyalty programs, and in 2015, a reversal of excess provisions for asset retirement
obligation for the Pandacan Oil Depot (as the actual demolition expenses were less than the Company’s
provisions made in that respect). Other operating expenses relate primarily to provisions for legal cases,
commissions paid for referrals of customers, and losses on disposals of property and equipment. Other
operating income and expenses include realized and unrealized mark-to-market gains and losses relating to
forward contracts in connection with jet fuel and fuel oil sales, which the Company enters into from time to
time.
Finance income
Finance income comprises interest income and realized and unrealized foreign exchange gains relating mainly
to revaluation of the Company’s foreign currency-denominated trade payables.
Finance expense
Finance expense primarily comprises interest expense and finance charges and realized and unrealized foreign
exchange losses.
Other non-operating income and expenses
Other non-operating income and expenses primarily comprise miscellaneous expenses not directly attributable
to the Company’s operations.
Results of operations for the year ended December 31, 2014 compared to the year ended December 31,
2015
Gross sales
Gross sales decreased by ₱69,384.6 million, or 29.1%, from ₱238,238.5 million for the year ended December
31, 2014 to ₱168,853.8 million for the year ended December 31, 2015, primarily as a result of significantly
lower product prices in 2015 compared to 2014 which was driven by the decrease in global oil prices. Lower
product prices were partially offset by higher sales volumes, which increased from 5,627 million liters in 2014
to 5,812 million liters in 2015, mainly due to higher retail and commercial volumes driven by overall growth in
the Philippine economy, and improved sales from the Company’s retail service station network, notwithstanding
the decrease in the number of stations, as a number of sites opened in 2014 reached mature performance levels.
Volumes in 2015 were also enhanced by successful retail marketing initiatives.
82
Sales discounts and rebates
Sales discounts and rebates decreased by ₱2,277.5 million, or 16.1%, from ₱14,153.6 million for the year ended
December 31, 2014 to ₱11,876.2 million for the year ended December 31, 2015, primarily as a result of lower
gross sales, as discounts are generally calculated as a percentage thereof.
Net sales (by operating segment)
The following table sets forth net sales by operating segment for the periods indicated.
2014
2015
(Audited)
(₱ million)
Retail...........................................................................................................................
Commercial ................................................................................................................
Manufacturing and supply..........................................................................................
Others .........................................................................................................................
Total ...........................................................................................................................
107,545.2
84,558.1
31,977.9
3.7
224,084.8
82,465.0
53,966.0
20,546.7
156,977.7
Net sales for each of the Company’s operating segments decreased in 2015 compared to 2014 primarily as a
result of significantly lower product prices driven by the decrease in global oil prices, which more than offset
the increase in retail sales volumes. Commercial sales volumes decreased slightly in 2015, while volumes for
the manufacturing and supply segment were relatively unchanged.
Cost of sales
Cost of sales decreased by ₱85,684.6 million, or 38.0%, from ₱225,394.2 million for the year ended December
31, 2014 to ₱139,709.6 million for the year ended December 31, 2015, primarily as a result of the decrease in
global oil prices and lower transport costs. Provisions for inventory write-downs were also significantly lower in
2015, notwithstanding lower oil prices, as global price declines were more gradual compared to 2014.
The following table sets forth the components of cost of sales for the periods indicated.
2015
2014
(Audited)
(₱ million)
Crude and product costs .............................................................................................
Duties and specific tax ...............................................................................................
Logistics and transhipment ........................................................................................
Manufacturing expenses.............................................................................................
Freight and wharfage..................................................................................................
Depreciation and amortization ...................................................................................
Salaries and other employee benefits .........................................................................
Total ...........................................................................................................................
208,027.9
6,593.2
5,604.6
2,621.3
994.3
830.1
722.8
225,394.2
124,936.0
6,878.0
4,633.3
972.3
948.7
549.0
792.3
139,709.6
Crude and product costs decreased by ₱83,091.9 million, or 39.9%, from ₱208,027.9 million for the year ended
global oil prices, and also lower provisions (₱2,820.9 million in 2014 compared to ₱1,029.3 million in 2015) for
inventory write-downs to reflect fair market value as global price declines were more gradual compared to 2014.
The Company records inventory losses at fiscal year end.
83
Duties and specific tax increased by ₱284.7 million, or 4.3%, from ₱6,593.2 million for the year ended
December 31, 2014 to ₱6,878.0 million for the year ended December 31, 2015, primarily as a result of higher
excise duties resulting from increased import volumes in 2015.
Logistics and transhipment decreased by ₱971.3 million, or 17.3%, from ₱5,604.6 million for the year ended
global oil prices which resulted in lower fuel costs relating to logistics services. Lower logistics costs in 2015
compared to 2014 also reflect the reduced effect of public infrastructure damage caused by Typhoon Glenda,
which required the Company to incur increased costs to avoid disruption in its supply and distribution
operations in 2014.
Manufacturing expenses decreased by ₱1,648.9 million, or 62.9%, from ₱2,621.3 million for the year ended
December 31, 2014 to ₱972.3 million for the year ended December 31, 2015, primarily as a result of greater
repairs and maintenance costs incurred in 2014 for the upgrade of the Tabangao Refinery as compared to 2015
as well as a reclassification in 2015 of certain manufacturing expenses in the amount of ₱791.6 million from
cost of sales mainly to repairs and maintenance related selling expenses and the rest to various components of
general and administrative expenses. This reclassification did not affect previously reported profit/loss for the
year or retained earnings.
Freight and wharfage costs decreased by ₱45.6 million, or 4.6%, from ₱994.3 million for the year ended
December 31, 2014 to ₱948.7 million for the year ended December 31, 2015, primarily as a result of lower
overall market freight costs, notwithstanding the higher sales volumes in 2015.
Depreciation and amortization decreased by ₱281.1 million, or 33.9%, from ₱830.1 million for the year ended
December 31, 2014 to ₱549.0 million for the year ended December 31, 2015, primarily as a result of the full
scheduled depreciation in 2015 of certain assets related to the previous upgrade of the Tabangao Refinery.
Salaries and other employee benefits increased by ₱69.4 million, or 9.6%, from ₱722.8 million for the year
ended December 31, 2014 to ₱792.3 million for the year ended December 31, 2015, primarily as a result of the
hiring of additional refinery employees and redundancy costs for early retirement of staff incurred in 2015.
Gross profit (loss)
The Company recorded a gross loss of ₱1,309.3 million for the year ended December 31, 2014, compared to a
gross profit of ₱17,268.1 million for the year ended December 31, 2015. In 2014, the gross loss was due mainly
to the sharp decline in global oil prices particularly in the fourth quarter, resulting in significant inventory losses
and write-downs (in the amount of ₱2,820.9 million). Gross profit in 2015 reflected lower cost of sales and the
pricing effects of a more gradual oil price decline, as sales prices for the Company’s finished products generally
react to declines in crude prices more slowly compared to the Company’s cost of sales.
Selling expenses
Selling expenses increased by ₱419.9 million, or 5.4%, from ₱7,736.0 million for the year ended December 31,
2014 to ₱8,155.9 million for the year ended December 31, 2015, primarily as a result of increased advertising
and promotions and a reclassification in 2015 of certain cost of sales to selling expenses.
The following table sets forth the components of selling expenses for the periods indicated.
2014
2015
(Audited)
(₱ million)
Repairs and maintenance............................................................................................
84
1,088.8
1,793.7
2014
2015
(Audited)
(₱ million)
Outside services..........................................................................................................
Rentals ........................................................................................................................
Compensation, pension cost and employee benefits .................................................
Advertising and promotions .......................................................................................
Communication and utilities ......................................................................................
Travel and transportation ...........................................................................................
Insurance ....................................................................................................................
Write-off/Impairment (Reversal) of receivables........................................................
Miscellaneous .............................................................................................................
Total ...........................................................................................................................
1,639.3
1,307.9
1,277.1
1,342.8
606.3
136.3
141.2
61.2
127.1
7.9
7,736.0
1,565.4
1,380.2
1,098.4
1,070.3
914.5
162.4
149.4
21.2
(50.5)
50.6
8,155.9
Repairs and maintenance increased by ₱704.9 million, or 64.7%, from ₱1,088.8 million for the year ended
December 31, 2014 to ₱1,793.7 million for the year ended December 31, 2015, primarily as a result of a
reclassification in 2015 of certain manufacturing expenses related cost of sales in the amount of ₱791.6 million
mainly to repairs and maintenance related selling expenses, which did not affect previously reported net income
and retained earnings.
Outside services decreased by ₱73.9 million, or 4.5%, from ₱1,639.3 million for the year ended December 31,
2014 to ₱1,565.4 million for the year ended December 31, 2015, primarily as a result of a decrease in costs
associated with the sales and marketing-related shared services provided by the Shell Group to the Company.
Rentals increased by ₱72.4 million, or 5.5%, from ₱1,307.9 million for the year ended December 31, 2014 to
₱1,380.2 million for the year ended December 31, 2015, primarily as a result of the higher cost of lease renewals
for CODO retail service stations in 2015 reflecting the general trend of increasing property prices.
Compensation, pension cost and employee benefits decreased by ₱178.7 million, or 14.0%, from ₱1,277.1
million for the year ended December 31, 2014 to ₱1,098.4 million for the year ended December 31, 2015,
primarily as a result of a reclassification in 2015 of pension cost, related selling expenses to pension cost and
related general and administrative expenses.
Depreciation and amortization decreased by ₱272.5 million, or 20.3%, from ₱1,342.8 million for the year ended
December 31, 2014 to ₱1,070.3 million for the year ended December 31, 2015, primarily as a result of the
accelerated depreciation recorded in 2014 relating to the closure of the Pandacan Oil Depot.
Advertising and promotions increased by ₱308.2 million, or 50.8%, from ₱606.3 million for the year ended
December 31, 2014 to ₱914.5 million for the year ended December 31, 2015, primarily as a result of increased
marketing campaigns in 2015 and related advertisement purchases.
Communication and utilities increased by ₱26.1 million, or 19.1%, from ₱136.3 million for the year ended
marketing campaigns in 2015 and related computer purchases for sales staff and telecommunications and
electricity usage.
Travel and transportation increased by ₱8.2 million, or 5.8%, from ₱141.2 million for the year ended December
31, 2014 to ₱149.4 million for the year ended December 31, 2015, primarily as a result of attendance by the
Company’s employees at the 2015 National Retail Convention.
Insurance decreased by ₱39.9 million, or 65.3%, from ₱61.2 million for the year ended December 31, 2014 to
₱21.2 million for the year ended December 31, 2015, primarily as a result of lower insurance premiums
85
negotiated by the Company in 2015 for its distribution and retail network and a rationalization of the Company’s
insurance coverage where non-critical assets with low replacement values were excluded from coverage.
Write-off/Impairment (Reversal) of receivables decreased by ₱177.6 million, or 139.7%, from ₱127.1 million
write-off/impairment of receivables for the year ended December 31, 2014 to ₱50.5 million reversal of
receivables for the year ended December 31, 2015, primarily as a result of a smaller amount impaired
receivables in 2015 as compared to 2014.
Miscellaneous increased by ₱42.7 million, or 542.8%, from ₱7.9 million for the year ended December 31, 2014
to ₱50.6 million for the year ended December 31, 2015, primarily as a result of a reclassification in 2015 of
expenses for office supplies and surveying services from outside services related selling expenses to
miscellaneous related selling expenses.
General and administrative expenses increased by ₱357.2 million, or 17.4%, from ₱2,049.2 million for the year
ended December 31, 2014 to ₱2,406.4 million for the year ended December 31, 2015, primarily as a result of
higher compensation, pension and employee benefits as a result of a reclassification in 2015 of certain
compensation, pension cost and employee benefits from selling expenses to general and administrative expenses
and increased costs relating to outside services due to an increase in costs associated with the corporate-related
shared services provided by the Shell Group to the Company.
The following table sets forth the components of general and administrative expenses for the periods indicated.
2014
2015
(Audited)
(₱ million)
Rentals ........................................................................................................................
Insurance ....................................................................................................................
Miscellaneous .............................................................................................................
Total ...........................................................................................................................
33.4
531.0
83.2
448.4
126.4
133.5
445.9
32.3
204.2
(0.7)
11.7
2,049.2
44.9
663.0
101.9
793.0
18.6
144.3
387.4
32.1
192.9
1.7
26.7
2,406.4
Repairs and maintenance increased by ₱11.5 million, or 34.5%, from ₱33.4 million for the year ended
December 31, 2014 to ₱44.9 million for the year ended December 31, 2015, primarily as a result of an increase
in repair costs for the Company’s corporate offices.
Outside services increased by ₱132.0 million, or 24.9%, from ₱531.0 million for the year ended December 31,
2014 to ₱663.0 million for the year ended December 31, 2015, primarily as a result of an increase in costs
associated with the corporate-related shared services (such as accounting, finance, HSSE and IT) provided by
the Shell Group to the Company.
Rentals increased by ₱18.7 million, or 22.5%, from ₱83.2 million for the year ended December 31, 2014 to
₱101.9 million for the year ended December 31, 2015, primarily as a result of the scheduled increase in annual
rent for the Company’s corporate offices.
86
Compensation, pension cost and employee benefits increased by ₱344.6 million, or 76.8%, from ₱448.4 million
for the year ended December 31, 2014 to ₱793.0 million for the year ended December 31, 2015, primarily as a
result of a reclassification in 2015 of certain compensation, pension cost and employee benefits related selling
expenses to compensation, pension cost and employee benefits related general and administrative expenses.
depreciation of certain furniture and fixtures of the Company’s corporate offices.
in corporate sponsorships of various corporate social responsibility programs and sporting events, including
hosting the Asian leg of the Shell Eco-marathon.
Communication and utilities decreased by ₱58.5 million, or 13.1%, from ₱445.9 million for the year ended
December 31, 2014 to ₱387.4 million for the year ended December 31, 2015, primarily as a result of savings
related to the rationalization of the Company’s corporate office telecommunication systems.
Travel and transportation decreased by ₱0.2 million, or 0.5%, from ₱32.3 million for the year ended December
31, 2014 to ₱32.1 million for the year ended December 31, 2015, primarily as a result of a reduction in the
Company’s corporate-related travel and use of transportation services.
negotiated by the Company in 2015 for certain of the Company’s assets.
The Company recorded a reversal of impairments of receivables of ₱0.7 million for the year ended December
31, 2014, compared to impairments of ₱1.7 million for the year ended December 31, 2015. These reversals
were caused by an improvement in the prospects of collection for certain of the Company’s receivables.
Miscellaneous increased by ₱15.0 million, or 127.8%, from ₱11.7 million for the year ended December 31,
2014 to ₱26.7 million for the year ended December 31, 2015, primarily as a result of certain penalties and fines
imposed by the Bureau of Internal Revenue resulting from its tax audit of the Company.
Other operating income, net
Other operating income, net increased by ₱65.1 million, or 44.2%, from ₱147.2 million for the year ended
December 31, 2014 to ₱212.2 million for the year ended December 31, 2015, primarily as a result of a reversal
of asset retirement obligation in 2015 for Pandacan Oil Depot (as the actual demolition expenses were less than
the Company’s provisions made in that respect).
The following table sets forth the components of other operating income, net for the periods indicated.
2015
2014
(Audited)
(₱ million)
Retailer fee, rental income and franchise commission ..............................................
Reversal of asset retirement obligation ......................................................................
Royalties .....................................................................................................................
Provision for legal cases, net ......................................................................................
Commissions ..............................................................................................................
Loss on disposal of property and equipment .............................................................
Unrealized mark-to-market loss, net ..........................................................................
87
330.1
68.8
(56.2)
(31.8)
(16.6)
(59.5)
298.9
240.1
75.1
(37.5)
(40.7)
(52.5)
(61.4)
Realized mark-to-market loss, net .............................................................................
Provision for remediation and demolition cost ..........................................................
Others, net ..................................................................................................................
Total...........................................................................................................................
(149.3)
61.7
(265.3)
55.5
147.2
212.2
Retailer fee, rental income and franchise commission decreased by ₱31.2 million, or 9.4%, from ₱330.1 million
result of delays in certain rental income billings for lubricant service bays in its CODO retail service stations,
which are expected to be billed in 2016.
Reversal of asset retirement obligation was ₱240.1 million for the year ended December 31, 2015, as the actual
demolition expenses for Pandacan Oil Depot were less than the Company’s provisions made in that respect.
Royalties increased by ₱6.3 million, or 9.2%, from ₱68.8 million for the year ended December 31, 2014 to
₱75.1 million for the year ended December 31, 2015, primarily as a result of higher partnership fees paid by the
Company’s DODO retail service station dealers.
Provision for legal cases, net decreased by ₱18.7 million, or 33.3%, from ₱56.2 million for the year ended
December 31, 2014 to ₱37.5 million for the year ended December 31, 2015, primarily as a result of a reduction
in provision for the case filed by the COC against the Company relating to the alleged abandonment of certain
crude oil imports.
Commissions increased by ₱8.9 million, or 27.9%, from ₱31.8 million for the year ended December 31, 2014 to
₱40.7 million for the year ended December 31, 2015, primarily as a result of an increase in commercial
customer referrals and resulting commercial sales.
Loss on disposal of property and equipment increased by ₱35.9 million, or 216.4%, from ₱16.6 million for the
year ended December 31, 2014 to ₱52.5 million for the year ended December 31, 2015, primarily as a result of
the closure of the Pandacan Oil Depot.
Unrealized mark-to-market loss, net increased by ₱1.9 million, or 3.2%, from ₱59.5 million for the year ended
December 31, 2014 to ₱61.4 million for the year ended December 31, 2015, primarily as a result of the
continued decrease in crude oil prices in 2015 and resulting increased unrealized losses incurred in relation to
forward contracts for commercial sales.
Realized mark-to-market loss, net increased by ₱116.0 million, or 77.7%, from ₱149.3 million for the year
continued decrease in crude oil prices in 2015 and resulting increased realized losses incurred in relation to
Others, net decreased by ₱6.2 million, or 10.0%, from ₱61.7 million for the year ended December 31, 2014 to
₱55.5 million for the year ended December 31, 2015, primarily as a result of the impairment of the Company’s
investment in PDSI due to the closure of the Pandacan Oil Depot.
Finance income
Finance income decreased by ₱170.4 million, or 71.1%, from ₱239.5 million for the year ended December 31,
2014 to ₱69.1 million for the year ended December 31, 2015, primarily as a result of realized foreign exchange
gains in 2014 that did not recur in 2015, arising mainly from gains from revaluation of certain of the Company’s
foreign currency denominated trade payables.
The following table sets forth the components of finance income for the periods indicated.
88
2014
2015
(Audited)
(₱ million)
Unrealized foreign exchange gain..............................................................................
Interest income ...........................................................................................................
Realized foreign exchange gain .................................................................................
19.7
219.8
239.5
Total ...........................................................................................................................
42.9
26.3
69.1
Unrealized foreign exchange gain was ₱42.9 million for the year ended December 31, 2015, relating primarily
to gains from revaluation of certain of the Company’s foreign currency denominated trade payables.
Interest income increased by ₱6.6 million, or 33.4%, from ₱19.7 million for the year ended December 31, 2014
to ₱26.3 million for the year ended December 31, 2015, primarily as a result of an increase in interest income
from loans made by the Company to certain affiliates.
Realized foreign exchange gain was ₱219.8 million for the year ended December 31, 2014, relating to gains
from revaluation of certain of the Company’s foreign currency denominated trade payables.
Finance expense
Finance expense increased by ₱121.3 million, or 7.3%, from ₱1,660.0 million for the year ended December 31,
2014 to ₱1,781.3 million for the year ended December 31, 2015, primarily as a result of realized foreign
exchange losses in 2015 resulting from losses from revaluation of certain of the Company’s foreign currency
denominated trade payables.
The following table sets forth the components of finance expense for the periods indicated.
2014
2015
(Audited)
(₱ million)
Interest and finance charges .......................................................................................
Realized foreign exchange loss ..................................................................................
Accretion expense ......................................................................................................
Bank charges ..............................................................................................................
Unrealized foreign exchange loss ..............................................................................
Total ...........................................................................................................................
(1,250.8)
(221.7)
(8.2)
(179.3)
(1,660.0)
(1,035.7)
(545.0)
(196.3)
(4.2)
(1,781.3)
Interest and finance charges decreased by ₱215.1 million, or 17.2%, from ₱1,250.8 million for the year ended
repayment of short-term borrowings in 2015.
Realized foreign exchange loss was ₱545.0 million for the year ended December 31, 2015, mainly relating to
losses from revaluation of certain of the Company’s foreign currency denominated trade payables.
Accretion expense decreased by ₱25.3 million, or 11.4%, from ₱221.7 million for the year ended December 31,
2014 to ₱196.3 million for the year ended December 31, 2015, primarily as a result of lower asset retirement
obligations in 2015 relating to the Company’s assets.
Bank charges decreased by ₱4.0 million, or 48.9%, from ₱8.2 million for the year ended December 31, 2014 to
₱4.2 million for the year ended December 31, 2015, primarily as a result of lower short-term borrowings in
2015.
89
Unrealized foreign exchange loss was ₱179.3 million for the year ended December 31, 2014, mainly relating to
Other non-operating income (expense), net
The Company recorded other non-operating expense of ₱17.7 million for the year ended December 31, 2014,
compared to non-operating income of ₱17.1 million for the year ended December 31, 2015, primarily due to the
gain on revaluation of available for sale securities, primarily private membership club shares owned by the
Company.
Benefit from (Provision for) income tax
The Company recorded an income tax benefit of ₱3,897.0 million for the year ended December 31, 2014
compared to an income tax provision of ₱1,669.8 million for the year ended December 31, 2015, primarily as a
result of income tax payable on the Company’s pre-tax income in 2015 compared to pre-tax losses recorded in
2014.
Profit (Loss) for the year
As a result of the reasons above, the Company recorded a loss of ₱8,488.6 million for the year ended December
31, 2014, and profit of ₱3,553.2 million for the year ended December 31, 2015.
Results of operations for the year ended December 31, 2013 compared to the year ended December 31,
2014
Gross sales
Gross sales increased by ₱26,905.2 million, or 12.7%, from ₱211,333.3 million for the year ended December
31, 2013 to ₱238,238.5 million for the year ended December 31, 2014, primarily as a result of higher sales
volumes which increased from 5,309 million liters in 2013 to 5,627 million liters in 2014, reflecting the overall
growth of the Philippines economy resulting in increased demand from retail and commercial customers, as well
as the Company’s expanded retail service station network and the success of various nation-wide promotional
campaigns. Average product prices remained relatively stable as between 2013 and 2014, notwithstanding the
sharp decline in oil prices in the fourth quarter of 2014, reflecting the time lag between declines in crude prices
and adjustments to the sales price for finished products.
Sales discount and rebates
Sales discount and rebates increased by ₱1,669.2 million, or 13.4%, from ₱12,484.4 million for the year ended
gross sales, as discounts are generally calculated as a percentage thereof.
Net sales (by operating segment)
The following table sets forth net sales by operating segment for the periods indicated.
2013
2014
(Audited)
(₱ million)
Retail...........................................................................................................................
Commercial ................................................................................................................
Manufacturing and supply..........................................................................................
Others .........................................................................................................................
90
99,175.9
76,085.5
23,585.1
2.3
107,545.2
84,558.1
31,977.9
3.7
2013
2014
(Audited)
(₱ million)
Total ...........................................................................................................................
198,848.9
224,084.8
Net sales for the Company’s retail and commercial operating segments increased in 2014 compared to 2013,
primarily as a result of higher sales volumes for the reasons discussed above. Net sales for the manufacturing
and supply segments increased in 2014 primarily as a result of spot sales of excess supply that occurred when
prices for refined products were high, partially offset by the decrease in manufacturing and supply volumes sold
in 2014 resulting from the unplanned shutdowns in the Tabangao Refinery.
Cost of sales
Cost of sales increased by ₱38,175.4 million, or 20.4%, from ₱187,218.8 million for the year ended December
31, 2013 to ₱225,394.2 million for the year ended December 31, 2014, primarily as a result of higher volumes
of crude oil and other products purchased reflecting higher sales volumes in 2014, and higher provisions for
inventory write-downs as a result of significant declines in global oil prices in the fourth quarter of 2014.
2013
2014
(Audited)
(₱ million)
Crude and product costs .............................................................................................
Duties and specific tax
Logistics and transhipment ........................................................................................
Manufacturing expenses.............................................................................................
Freight and wharfage..................................................................................................
Salaries and other employee benefits .........................................................................
Total ...........................................................................................................................
170,992.5
5,443.0
4,572.4
2,962.2
1,945.4
787.0
516.4
187,218.8
208,027.9
6,593.2
5,604.6
2,621.3
994.3
830.1
722.8
225,394.2
Crude and product costs increased by ₱37,035.4 million, or 21,7%, from ₱170,992.5 million for the year ended
volumes of crude oil and other products purchased reflecting higher sales volumes in 2014, and higher
provisions for inventory write-downs.
Duties and specific tax increased by ₱1,150.2 million, or 21.1%, from ₱5,443.0 million for the year ended
excise duties resulting from increased import volumes in 2014.
Logistics and transhipment increased by ₱1,032.2 million, or 22.6%, from ₱4,572.4 million for the year ended
public infrastructure damage caused by Typhoon Glenda and the associated increased transportation expenses
incurred by the Company.
Manufacturing expenses decreased by ₱340.9 million, or 11.5%, from ₱2,962.2 million for the year ended
December 31, 2013 to ₱2,621.3 million for the year ended December 31, 2014, primarily as a result of a
reduction in pre-project approval development costs relating to the upgrade of the Tabangao Refinery. After the
approval by the Company of the Tabangao Refinery upgrade in the second quarter of 2014, all costs for such
upgrade were subsequently capitalized.
Freight and wharfage costs decreased by ₱951.1 million, or 48.9%, from ₱1,945.4 million for the year ended
December 31, 2013 to ₱994.3 million for the year ended December 31, 2014, primarily as a result of the cost
savings of using trucks instead of barges for distribution purposes.
91
Depreciation and amortization increased by ₱43.1 million, or 5.5%, from ₱787.0 million for the year ended
December 31, 2013 to ₱830.1 million for the year ended December 31, 2014, primarily as a result of the
capitalization of certain capital expenditure projects that were completed in the fourth quarter of 2013.
Salaries and other employee benefits increased by ₱206.4 million, or 40.0%, from ₱516.4 million for the year
hiring of more employees in relation to the upgrade of the Tabangao Refinery, higher bonuses given to
Company’s employees and an increase in overtime costs relating to unplanned shutdowns in the Tabangao
Refinery.
Gross profit (loss)
The Company recorded a gross profit of ₱11,630.1 million for the year ended December 31, 2013, compared to
a gross loss of ₱1,309.3 million for the year ended December 31, 2014, primarily reflecting the sharp decrease
in oil prices in the fourth quarter of 2014 which resulted in significant inventory losses, and provisions for
inventory write-downs (in the amount of ₱2,820.9 million) and increased logistics and transhipment costs
resulting from the public infrastructure damage caused by Typhoon Glenda.
Selling expenses
Selling expenses increased by ₱1,111.8 million, or 16.8%, from ₱6,624.2 million for the year ended December
31, 2013 to ₱7,736.0 million for the year ended December 31, 2014, primarily as a result of higher repairs and
maintenance expenses as discussed in more detail below.
The following table sets forth the components of selling expenses for the periods indicated.
2013
2014
(Audited)
(₱ million)
Rentals ........................................................................................................................
Insurance ....................................................................................................................
Write-off/Impairment of receivables .........................................................................
Miscellaneous .............................................................................................................
Total ...........................................................................................................................
233.1
2,182.1
1,266.9
996.0
927.6
580.5
172.2
180.4
8.1
29.1
48.2
6,624.2
1,088.8
1,639.3
1,307.9
1,277.1
1,342.8
606.3
136.3
141.2
61.2
127.1
7.9
7,736.0
Repairs and maintenance increased by ₱855.7 million, or 367.1%, from ₱233.1 million for the year ended
December 31,2013 to ₱1,088.8 million for the year ended December 31, 2014, due mainly to the increased costs
for repair and maintenance of certain of the Company’s distribution facilities as a result of damage caused by
Typhoon Glenda in 2014.
Outside services decreased by ₱542.7 million, or 24.9%, from ₱2,182.1 million for the year ended December 31,
2013 to ₱1,639.3 million for the year ended December 31, 2014, primarily as a result of a decrease in costs
associated with the sales and marketing-related shared services provided by the Shell Group to the Company.
Rentals increased by ₱40.9 million, or 3.2%, from ₱1,266.9 million for the year ended December 31, 2013 to
₱1,307.9 million for the year ended December 31, 2014, primarily as a result of the higher cost of lease renewals
for CODO retail service stations in 2014 reflecting the general trend of increasing property prices.
92
Compensation, pension cost and employee benefits increased by ₱281.1 million, or 28.2%, from ₱996.0 million
for the year ended December 31, 2013 to ₱1,277.1 million for the year ended December 31, 2014, primarily as a
result of higher bonuses paid to the Company’s employees in 2014.
Depreciation and amortization increased by ₱415.2 million, or 44.8%, from ₱927.6 million for the year ended
December 31, 2013 to ₱1,342.8 million for the year ended December 31, 2014, primarily as a result of
accelerated depreciation recorded in 2014 relating to the closure of the Pandacan Oil Depot.
marketing campaigns in 2014, such as the launch of the SM Advantage Card program.
Communication and utilities decreased by ₱35.8 million, or 20.8%, from ₱172.2 million for the year ended
related to the decrease in the number of computer laptops issued to the Company’s employees and the
rationalization of the Company’s corporate office telecommunication systems.
Travel and transportation decreased by ₱39.2 million, or 21.7%, from ₱180.4 million for the year ended
related to decreased use of third party vehicle services.
Insurance increased by ₱53.1 million, or 656.9%, from ₱8.1 million for the year ended December 31, 2013 to
₱61.2 million for the year ended December 31, 2014, primarily as a result of the transition to third party
insurance providers for certain of the Company’s insurance coverage.
Write-off/Impairment of receivables increased by ₱98.0 million, or 336.7%, from ₱29.1 million for the year
ended December 31, 2013 to ₱127.1 million for the year ended December 31, 2014, primarily as a result of an
impairment of certain supply receivables.
Miscellaneous decreased by ₱40.3 million, or 83.6%, from ₱48.2 million for the year ended December 31, 2013
to ₱7.9 million for the year ended December 31, 2014, primarily as a result of a decrease in deficiency taxes,
related interest and surcharges imposed by the Bureau of Internal Revenue as compared to 2013.
General and administrative expenses decreased by ₱326.9 million, or 13.8%, from ₱2,376.1 million for the year
ended December 31, 2013 to ₱2,049.2 million for the year ended December 31, 2014, primarily as a result of
lower outside services and insurance expenses, as discussed in more detail below.
The following table sets forth the components of general and administrative expenses for the periods indicated.
2013
2014
(Audited)
(₱ million)
Rentals ........................................................................................................................
Insurance ....................................................................................................................
93
30.4
629.6
70.5
462.0
168.5
45.0
443.6
9.6
385.4
-
33.4
531.0
83.2
448.4
126.4
133.5
445.9
32.3
204.2
(0.7)
Miscellaneous .............................................................................................................
Total ...........................................................................................................................
131.6
2,376.1
11.7
2,049.2
Repairs and maintenance increased by ₱3.0 million, or 9.8%, from ₱30.4 million for the year ended December
31,2013 to ₱33.4 million for the year ended December 31, 2014, primarily as a result of an increase in repair
costs for the Company’s corporate offices.
Outside services decreased by ₱98.6 million, or 15.7%, from ₱629.6 million for the year ended December 31,
2013 to ₱531.0 million for the year ended December 31, 2014, primarily as a result of a decrease in costs
associated with the corporate-related shared services provided by the Shell Group to the Company.
Rentals increased by ₱12.7 million, or 18.1%, from ₱70.5 million for the year ended December 31, 2013 to
₱83.2 million for the year ended December 31, 2014, primarily as a result of the increase in annual rent for the
Company’s corporate offices.
Compensation, pension cost and employee benefits decreased by ₱13.6 million, or 2.9%, from ₱462.0 million
result of savings resulting from reduced catering services for internal events.
depreciation of certain of the Company’s staff vehicles.
sponsorships of corporate social responsibility programs engaged in typhoon relief activities.
Communication and utilities increased by ₱2.3 million, or 0.5%, from ₱443.6 million for the year ended
in computer purchases.
Travel and transportation increased by ₱22.7 million, or 236.9%, from ₱9.6 million for the year ended
corporate-related travel.
negotiated by the Company in 2014 and a rationalization of the Company’s insurance coverage where noncritical assets with low replacement values were excluded from coverage.
The Company recorded a reversal of impairments of receivables of ₱0.7 million for the year ended December
31, 2014 as a result of an improvement in the prospects of collection for certain of the Company’s receivables.
Miscellaneous decreased by ₱119.9 million, or 91.1%, from ₱131.6 million for the year ended December 31,
2013 to ₱11.7 million for the year ended December 31, 2014, primarily as a result of a decrease in charitable
donations for disaster relief in 2014 as a result of a decrease in natural disasters that struck the Philippines in
2014.
Other operating income, net
Other operating income, net decreased by ₱62.2 million, or 29.7%, from ₱209.3 million for the year ended
December 31, 2013 to ₱147.2 million for the year ended December 31, 2014, primarily as a result of realized
mark-to-market losses in 2014 relating to forward contracts for commercial sales.
94
The following table sets forth the components of other operating income, net for the periods indicated.
2014
2013
(Audited)
(₱ million)
Retailer fee, rental income and franchise commission ..............................................
Reversal of asset retirement obligation ......................................................................
Royalties .....................................................................................................................
Provision for legal cases, net ......................................................................................
Commissions ..............................................................................................................
Loss on disposal of property and equipment .............................................................
Unrealized mark-to-market loss, net ..........................................................................
Realized mark-to-market loss, net .............................................................................
Provision for remediation and demolition cost ..........................................................
Others, net ..................................................................................................................
Total ...........................................................................................................................
279.1
66.2
(56.2)
(15.7)
(78.8)
(11.3)
(59.8)
85.9
209.3
330.1
68.8
(56.2)
(31.8)
(16.6)
(59.5)
(149.3)
61.7
147.2
Retailer fee, rental income and franchise commission increased by ₱51.0 million, or 18.3%, from ₱279.1 million
result of an increase in convenience retailing and increased co-locator in CODO retail service stations.
Royalties increased by ₱2.6 million, or 3.9%, from ₱66.2 million for the year ended December 31, 2014 to
₱68.8 million for the year ended December 31, 2015, primarily as a result of higher partnership fees paid by the
Company’s DODO retail service station dealers.
Commissions increased by ₱16.1 million, or 102.3%, from ₱15.7 million for the year ended December 31, 2013
to ₱31.8 million for the year ended December 31, 2014, primarily as a result of an increase in commercial
customer referrals and resulting commercial sales.
Loss on disposal of property and equipment decreased by ₱62.2 million, or 79.0%, from ₱78.8 million for the
year ended December 31, 2013 to ₱16.6 million for the year ended December 31, 2014, primarily as a result of
the retirement of certain of the Company’s low value and unused assets resulting from the asset verification
exercise the Company undertook in 2014.
Unrealized mark-to-market loss, net increased by ₱48.2 million, or 424.8%, from ₱11.3 million for the year
continued drop of crude oil prices in 2014 and resulting increased unrealized losses incurred in relation to
Realized mark-to-market loss, net was ₱149.3 million for the year ended December 31, 2014, relating mainly to
the continued drop of crude oil prices in 2014 and resulting increased realized losses incurred in relation to
Provision for remediation and demolition cost was ₱59.8 million for the year ended December 31, 2013, relating
to mainly to the planned demolition of the Pandacan Oil Depot.
Others, net decreased by ₱24.2 million, or 28.2%, from ₱85.9 million for the year ended December 31, 2013 to
₱61.7 million for the year ended December 31, 2014, primarily as a result of a decrease in dividends from the
Company’s investment in BGC.
Finance income
Finance income increased by ₱207.7 million, or 653.3%, from ₱31.8 million for the year ended December 31,
2013 to ₱239.5 million for the year ended December 31, 2014, primarily as a result of realized foreign exchange
95
gain in 2014 relating to the revaluation resulting in gain of certain of the Company’s foreign currency
denominated trade payables.
The following table sets forth the components of finance income for the periods indicated.
2013
2014
(Audited)
(₱ million)
Unrealized foreign exchange gain..............................................................................
Interest income ...........................................................................................................
Realized foreign exchange gain .................................................................................
31.8
31.8
Total ...........................................................................................................................
19.7
219.8
239.5
Interest income decreased by ₱12.1 million, or 38.1%, from ₱31.8 million for the year ended December 31,
2013 to ₱19.7 million for the year ended December 31, 2014, primarily as a result of a decrease in interest
income from loans made by the Company to certain related parties.
Realized foreign exchange gain was ₱219.8 million for the year ended December 31, 2014, mainly relating to
the revaluation resulting in gain of certain of the Company’s foreign currency denominated trade payables.
Finance expense
Finance expense decreased by ₱771.5 million, or 31.7%, from ₱2,431.5 million for the year ended December
31, 2013 to ₱1,660.0 million for the year ended December 31, 2014, primarily as a result of realized foreign
exchange losses in 2013 relating to the revaluation resulting in loss of certain of the Company’s foreign
currency denominated trade payables.
The following table sets forth the components of finance expense for the periods indicated.
2013
2014
(Audited)
(₱ million)
Interest and finance charges .......................................................................................
Realized foreign exchange loss ..................................................................................
Accretion expense ......................................................................................................
Bank charges ..............................................................................................................
Unrealized foreign exchange loss ..............................................................................
Total ...........................................................................................................................
(1,175.9)
(1,060.0)
(113.6)
(5.5)
(76.5)
(2,431.5)
(1,250.8)
(221.7)
(8.2)
(179.3)
(1,660.0)
Interest and finance charges increased by ₱74.9 million, or 6.4%, from ₱1,175.9 million for the year ended
December 31, 2013 to ₱1,250.8 million for the year ended December 31, 2014, primarily as a result of an
increase in short-term borrowings in 2014.
Realized foreign exchange loss was ₱1,060.0 million for the year ended December 31, 2013, relating mainly to
Accretion expense increased by ₱108.1 million, or 95.2%, from ₱113.6 million for the year ended December 31,
2013 to ₱221.7 million for the year ended December 31, 2014, primarily as a result of higher asset retirement
obligations in 2014 relating to the closure of the Pandacan Oil Depot.
Bank charges increased by ₱2.8 million, or 50.4%, from ₱5.5 million for the year ended December 31, 2013 to
₱8.2 million for the year ended December 31, 2014, primarily as a result of increased short-term borrowings in
2014.
96
Unrealized foreign exchange loss increased by ₱102.8 million, or 134.5%, from ₱76.5 million for the year ended
December 31, 2013 to ₱179.3 million for the year ended December 31, 2014, primarily as a result of losses from
revaluation of certain of the Company’s foreign currency denominated trade payables.
Other non-operating expense
Other net non-operating expense decreased by ₱1,152.8 million, or 98.5%, from ₱1,170.4 million for the year
one-off settlement by the Company of claims brought by Isla Gas in connection with its acquisition of the
Company’s LPG business in 2013.
Benefit from (Provision for) income tax
The Company recorded an income tax provision of ₱181.1 million for the year ended December 31, 2013,
compared to an income tax benefit of ₱3,897.0 million for the year ended December 31, 2014, primarily as a
result of the higher pre-tax losses recorded in 2014.
Profit (Loss) for the year
As a result of the reasons discussed above, loss for the year increased by ₱7,576.5 million, from ₱912.1 million
for the year ended December 31, 2013 to ₱8,488.6 million for the year ended December 31, 2014.
Operating segments
The Company is organized into the following operating segments:
Retail: comprises the Company’s business of directly servicing end consumers (private and commercial
motorists) through the Company’s network of retail service stations, involving the sale of petroleum fuels and
lubricants.
Commercial: comprises the Company’s business with commercial accounts in various sectors such as industrial
power, manufacturing, wholesale, marine, mining, aviation, transport and others.
Manufacturing and supply: this segment generates revenue principally from sales of excess supplies of the
Company’s products to third parties only, such as other oil companies, pursuant to product purchase/sale
agreements.
The table below presents certain financial information relating to the Company’s results of operations and
financial condition as of the dates and for the periods indicated.
Retail
Commercial
Manufacturing and supply
Others
Total
(₱ million)
As of and for the year ended December 31, 2015
Segment revenue
Local
Export and International
Total
82,465.0
49,237.7
20,540.0
-
152,242.7
-
4,728.3
6.7
-
4,735.0
156,977.7
82,465.0
53,966.0
20,546.7
-
Segment assets
23,874.8
19,329.3
16,352.6
6,662.3
66,219.0
Segment liabilities
(7,246.5)
(4,868.3)
(8,721.6)
(19,287.5)
(40,123.9)
Property and equipment
6,485.3
7,201.2
8,546.5
76.1
22,309.1
Depreciation and amortization
(609.0)
(461.3)
(549.0)
(18.6)
(1,637.9)
107,545.2
77,083.3
27,369.4
3.7
212,001.5
Segment revenue
Local
97
Total
-
7,474.9
4,608.5
-
12,083.4
107,545.2
84,558.1
31,977.9
3.7
224,084.8
Segment assets
17,555.8
20,755.3
25,376.9
9,814.6
73,502.7
Segment liabilities
(3,980.6)
(46,399.4)
(15,425.1)
(3,867.0)
(69,672.1)
5,938.1
90.6
6,307.0
6,295.0
18,630.7
(657.4)
(682.8)
(811.2)
(147.9)
(2,299.3)
99,175.9
68,491.1
16,257.8
2.3
183,927.1
-
7,594.4
7,327.3
-
14,921.7
99,175.9
76,085.5
23,585.1
2.3
198,848.9
Segment assets
22,682.5
25,761.4
18,285.4
12,004.1
78,733.4
Segment liabilities
(66,172.7)
Segment revenue
Local
Total
(9,019.4)
(1,598.9)
(5,083.0)
(50,471.4)
5,994.7
4,767.9
3,937.8
76.9
14,777.2
(617.2)
(310.5)
(787.0)
(168.5)
(1,883.1)
Net sales for each of the Company’s operating segments decreased in 2015 compared to 2014 primarily as a
result of significantly lower product prices driven by the decrease in global oil prices, which more than offset
the increase in retail sales volumes. Commercial sales volumes decreased slightly in 2015, while volumes for
the manufacturing and supply segment were relatively unchanged.
Net sales for the Company’s retail and commercial operating segments increased in 2014 compared to 2013,
primarily as a result of higher sales volumes for the reasons discussed above. Net sales for the manufacturing
and supply segments increased in 2014 primarily as a result of spot sales of excess supply that occurred when
prices for refined products were high, partially offset by the decrease in manufacturing and supply volumes sold
in 2014 resulting from the unplanned shutdowns in the Tabangao Refinery.
Financial condition
The following is a discussion of the Company’s current and non-current assets and liabilities as of the dates
presented.
Current assets
The Company’s current assets decreased from ₱59,871.3 million as of December 31, 2013, to ₱47,222.8 million
and ₱36,640.6 million as of December 31, 2014 and 2015, respectively. The decreases in both 2014 and 2015
were primarily due to the decrease in net inventories, as a result of lower crude oil prices and corresponding
provisions for inventory write-downs.
Non-current assets
The Company’s non-current assets increased from ₱18,862.2 million as of December 31, 2013, to ₱26,279.9
million and ₱ 29,578.4 million as of December 31, 2014 and 2015, respectively. The increase in 2014 was
primarily due to the increase in property, plant and equipment relating mainly to the construction of the NMIF
and investments in the Euro-IV upgrade at the Tabangao Refinery, as well as higher deferred income tax assets
mainly due to the Company’s net loss recorded in 2014. The increase in 2015 was also due to the construction
of the NMIF and the Euro-IV upgrade, as well as increased pension-related assets corresponding to their
increase in fair value.
Current liabilities
The Company’s current liabilities increased from ₱49,838.9 million as of December 31, 2013 to ₱52,452.6
million as of December 31, 2014, and then decreased to ₱18,886.2 million as of December 31, 2015. The
increase in 2014 was primarily due to the reclassification of a portion of the Company’s borrowings maturing in
2015 as short-term, as well as repayment of other short-term borrowings.
98
The decrease in 2015 primarily resulted from repayments of short-term borrowings and the conversion of a
portion of the Company’s short-term loans into long-term loans, as well as repayment of the current portion of
the Company’s long-term loans.
Non-current liabilities
The Company’s non-current liabilities increased from ₱16,333.8 million as of December 31, 2013, to ₱17,219.5
million and ₱21,237.7 million as of December 31, 2014 and 2015, respectively, reflecting increases in the
Company’s long-term borrowings, including in 2015, the conversion of a short-term loan to a long-term loan.
Liquidity and capital resources
The Company’s principal sources of liquidity during the period under review have been cash generated from
operations, short and long-term borrowings and the proceeds from a share capital increase in 2015.
As of December 31, 2015, the Company had cash of ₱3,576.8 million. As of the same date, the Company had
total outstanding short-term and long-term borrowings outstanding of ₱18,717.0 million. Total amounts
available under the Company’s borrowings and other credit lines as of December 31, 2015 but not yet utilized
were ₱85,300.0 million. The Company’s short-term borrowings comprise a peso-denominated unsecured loan
for working capital requirements in the amount of P2,717.0 million. Its long-term borrowings comprise several
peso-denominated floating rate unsecured facilities. Details of the Company’s long-term borrowings as of the
year ended December 31, 2015 are set forth in the table below.
Outstanding Amount
(₱ million) as of
December 31, 2015
Interest
Terms
6,000.0
2.8129% as of December 31, 2015
effective until next re-pricing
Payable after 36 months reckoned from the drawdown date on March
2, 2015. Principal is payable in lump sum at maturity date. Interest is
re-priced every three months.
5,000.0
2.9445% as of December 31, 2015
Payable after 36 months reckoned from the drawdown date on March
2, 2015. Principal is payable in lump sum at maturity date. Interest is
re-priced every three months.
5,000.0
2.7632% as of December 31, 2015
Payable after 36 months reckoned from the drawdown date on
January 10, 2014. Interest is re-priced every three months.
Statements of cash flows
The following table sets forth the principal components of the Company’s statements of cash flows for the
periods indicated.
As of December 31,
2013
2014
2015
(Audited)
(₱ million)
Net cash from (used in) operating activities .................................................
Net cash used in investing activities .............................................................
Net cash from (used in) financing activities .................................................
Net decrease in cash for the year ...............................................................
Cash at the beginning of the year ..................................................................
Effect of the exchange rate changes on cash ................................................
Cash at the end of the year .........................................................................
(5,107.9)
(3,201.8)
7,556.3
(753.5)
7,360.3
(5,645.6)
(3,157.7)
(1,443.0)
14,158.5
(6,244.5)
(9,084.3)
(1,170.3)
6,924.6
(10.0)
6,161.2
6,161.2
3.5
4,721.6
4,721.6
25.5
3,576.8
Operating activities
Net cash from operating activities for the year ended December 31, 2015 was ₱14,158.5 million, compared to
₱7,360.3 million for the year ended December 31, 2014, and net cash used in operating activities of ₱5,107.9
99
million for the year ended December 31, 2013. In 2013, the Company’s high crude oil costs and relatively weak
margins resulted in greater amounts of net cash being used to fund refinery operations, whereas in 2014,
stronger refining margins resulted in net positive cash flows from operations. Increased cash from operations in
2015 primarily reflects the Company’s continued improved margins and profit.
Investing activities
Net cash used in investing activities for the year ended December 31, 2015 was ₱6,244.5 million, compared to
₱5,645.6 million for the year ended December 31, 2014 and ₱3,201.8 million for the year ended December 31,
2013. Cash used in investing activities in 2014 and 2015 primarily comprised the construction of the NMIF and
the Euro-IV upgrade at the Tabangao Refinery. Investing activities in 2013 mainly related to the Company’s
cash settlement of the claims of a local company for ₱1.3 billion, as well as opening new retail service stations
and maintenance expenditures
Financing activities
Net cash used in financing activities for the year ended December 31, 2015 was ₱9,084.3 million, compared to
₱3,157.7 million for the year ended December 31, 2014 and cash from financing activities of ₱7,556.3 million
for the year ended December 31, 2013, primarily reflecting net settlements of short-term borrowings in 2014
and 2015, compared to net proceeds from short-term borrowings in 2013.
Capital expenditures
In 2013, 2014 and 2015, the Company’s capital expenditures were ₱1,860.0 million, ₱6,025.1 million and
₱5,255.0 million, respectively. Capital expenditures in 2013 related primarily to maintenance capital
expenditure and expansion of the Company’s retail service station network, while in 2014 and 2015, capital
expenditures were primarily for the construction of the NMIF and the upgrade at the Tabangao Refinery to
produce Euro IV (PH) compliant fuel products.
The Company has historically funded its capital expenditures mainly with cash provided by operating activities.
The table below sets forth the Company’s anticipated capital expenditure for period 2016 through 2017.
2016
2017
2018
2019
2020
(₱ million)
Retail.......................................................................................................
924.5
1,504.6
962.1
952.7
606.8
Manufacturing and supply......................................................................
1,664.9
2,825.2
3,410.1
3,478.1
1,419.4
Commercial ............................................................................................
Total .......................................................................................................
282.9
334.8
-
-
-
2,872.4
4,664.6
4,372.2
4,430.8
2,025.4
Capital expenditures for retail principally relate to the planned establishment of new retail service stations.
Capital expenditures for manufacturing and supply principally relate to the planned turnaround and upgrade in
2017 of the Tabangao Refinery to enable production of bitumen, and revamp in 2018 and 2019 of the Tabangao
Refinery’s catalytic cracking reformer to a continuous reformer. As a result of these capital investments from
2017 to 2019, the Company will be moving from a four-year turnaround cycle to a six-year turnaround cycle.
Additional capital expenditures for manufacturing and supply also relate to the establishment of new supply and
distribution sites as well as improvement of existing supply and distribution sites.
100
The Company expects to fund the planned capital expenditures indicated above using cash generated from
operations, existing cash and the proceeds of the Offer.
The expected amounts and uses indicated above reflect the Company’s expectations and strategy as of the date
of this Prospectus; however, actual amounts, uses and sources of funds may change depending on future
circumstances such as the Company's future results of operations and financial condition, trends in prices,
supply and demand of crude oil and Finished Petroleum Products, developments in the competitive landscape,
among others. See “Business—Capital Expenditures Plan” for more information about the Company’s capital
expenditure projects.
Off-balance sheet arrangements
The Company does not have any material off-balance sheet arrangements with unconsolidated entities.
Contingent liabilities
As of December 31, 2015, the Company’s contingent liabilities for which provisions have been made primarily
related to certain pending legal proceedings including tax matters, asset retirement obligations and potential
remediation and demolition costs, as described in more detail in note 14 the Company’s audited financial
statements as of and for the year ended December 31, 2015. As of that date, the Company did not have any
other contingent liabilities in respect of which management believes that provisions should, but have not,
already been made.
Contractual obligations
The following table summarizes the Company’s contractual obligations and other cash commitments as of
December 31, 2015:
Payments due by period
Less than 1
year
Rental commitments........................................................................................
Transport contracts
Others
Total ................................................................................................................
1,334.9
1,798.0
3,132.9
Above 5
1-5 years
years
(₱ million)
4,349.0
1,863.3
6,212.3
4,761.2
4,761.2
Total
10,445.1
3,661.3
14,106.4
The Company’s rental commitments above relate to Tabangao Refinery, storage depots and lease payments for
Company-owned retail service station, and lease agreements with various lessors for office space. The
Company’s transport contract commitments include charters with ship owners for fuels distribution across the
country.
Quantitative and qualitative disclosures about financial risk
The Company's operations expose it to a variety of financial risks: market risk (including foreign currency
exchange risk, fair value interest risk and price risk), credit risk, liquidity risk and cash flow interest-rate risk.
Market risk
The value of the Company's assets, liabilities and expected future cash flows is subject to market risk, including
changes in currency exchange rates, interest rates, and the prices of crude oil and refined products.
Foreign exchange risk
101
The Company operates internationally and is exposed to foreign currency exchange risk arising from currency
fluctuations, primarily with respect to the importations of crude and finished products denominated in US dollar.
Foreign currency exchange risk may also arise from future commercial transactions and recognized assets and
liabilities denominated in a currency other than the Company's functional currency.
The Company does not enter into significant derivative contracts to manage foreign currency risks. Since
foreign currency exposure is significantly concentrated on purchase of crude, the Company manages foreign
currency risk by planning the timing of its importation settlements with related parties. Management considers
that there are no significant foreign exchange risks with respect to other currencies. For more information
regarding the Company’s foreign exchange risk, see note 29 to the Company’s audited financial statements as of
December 31, 2105 included elsewhere in this Prospectus.
Cashflow and fair value interest rate risk
The Company has no significant exposure to fair value interest rate risk as the Company has no significant
interest-earning assets and interest-bearing liabilities subject to fixed interest rates. The Company's interest rate
risk arises from its borrowings. Borrowings issued at variable rates expose the Company to cash flow interestrate risk. As of December 31, 2015, the Company's short-term and long-term borrowings carried floating rates
based on a certain index plus applicable premium. The Company does not enter into significant hedging
activities or derivative contracts to cover risk associated with borrowings. For more information regarding the
Company’s cashflow and fair value interest risk, see note 29 to the Company’s audited financial statements as of
Price risk
The Company is not significantly exposed to price risk on equity securities, forward contract and proprietary
club shares because investments held by the Company classified in the balance sheet as available-for-sale
financial assets are not considered material in the financial statements. The Company enters into hedging
activities from time to time in connection with sales of jet fuel to commercial customers. For more information
regarding the Company’s price risk, see note 29 to the Company’s audited financial statements as of December
31, 2015 included elsewhere in this Prospectus.
Credit risk
The Company’s exposure to credit risk primarily relates to its trade and non-trade receivables. The Company
maintains cash and certain other financial instruments with various major financial institutions. To minimize
this risk, the Company performs periodic evaluations of the relative credit standing of these financial institutions
and where appropriate, places limits on the amount of credit exposure with any one institution. The Company
has policies in place to ensure that sales of products are made to customers with acceptable creditworthiness.
Counterparty credit risk is managed within a framework of individual credit limits with utilization being
regularly reviewed. Credit checks are performed by a department independent of sales department, and are
undertaken before contractual commitment. Where appropriate, cash on delivery terms are used to manage the
specific credit risk. There was no concentration of credit risks as of December 31, 2015, as the Company deals
with a large number of trade customers. For more information regarding the Company’s credit risk exposure,
see note 29 to the Company’s audited financial statements as of December 31, 2105 included elsewhere in this
Prospectus.
Liquidity risk
The Company is exposed to the possibility that adverse changes in the business environment or its operations
could result in substantially higher working capital requirements and consequently, suitable sources of funding
for the Company's activities may be difficult to obtain or unavailable. The Company manages its liquidity risk
by monitoring rolling forecasts of the Company's liquidity reserve on the basis of expected cash flow.
Additionally, Shell Treasury Centre East centrally monitors bank borrowings, foreign exchange requirements
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and cash flow position. The Company has access to sufficient external debt funding sources to meet currently
foreseeable borrowing requirements. Furthermore, surplus cash is invested into a range of short-dated money
market instruments, time deposits and other assets, which seek to ensure the security and liquidity of
investments while optimizing yield. For more information regarding the Company’s liquidity reserve and
maturity of the Company’s financial liabilities, see note 29 to the Company’s audited financial statements as of
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BUSINESS
OVERVIEW
104
Typhoon Haiyan.
STRENGTHS
The Company believes that its principal competitive strengths include the following:
Leading fuel retail and commercial market position.
The Company had the second largest overall market share (by volume of fuel sold) of the domestic retail fuel
market, equal to approximately 29%, based on industry data provided by Nexant. In terms of brand reputation,
the “SHELL” brand enjoys the highest overall good reputation score among the domestic retail fuel brands. It is
ahead in ranking against other petroleum brands by the general public in the Philippines. A study by The
Nielsen Company showed that of the 1,061 respondents interviewed, 89% said that Shell has an overall good
reputation.
The Company also benefits from the second largest retail distribution network in the Philippines, with 966 retail
service stations spread throughout the Philippine archipelago as of June 30, 2016, 583 in Luzon, 160 in Visayas
and 223 in Mindanao. 46% of these retail service stations are CODO retail service stations, and 54% are DODO
retail service stations. This retail network is currently focused on key metropolitan areas with strategic
expansion planned in additional urban centers and surrounding suburbs, other emerging economic regions and
growing rural trade areas.
According to Nexant, the Company’s retail service stations have the highest network efficiency of 1.9 (against
an average of 1.1 for the other two other major oil company competitors) in 2015, where network efficiency is
defined as market share by volume divided by market share by number of retail service stations. It also featured
the highest average annual throughput of 3.1 million liters per retail service station (against an average of 1.8
million liters per year for the two other two major competitors in the Philippines) in 2015.
In the commercial segment, the Company has a nationwide footprint to supply wholesale commercial fuels, jet
fuel, lubricants and bitumen that are either sourced from the Tabangao Refinery or imported. Leveraging this
extensive supply and distribution network allowed the Company to enjoy a significant market share in the
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wholesale commercial fuels market in 2015. A key strength of the Company’s commercial segment is its strong
and long-standing relationships with a large number of major conglomerates in the Philippines built over years
of consistent product quality and value added services, such as technical consulting services and price risk
management arrangements.
Integrated, efficient and reliable manufacturing, supply and distribution chain.
The Company boasts an extensive supply chain which integrates procurement, refining, import, distribution and
marketing of Refined Products and Finished Petroleum Products. This integrated approach enables the Company
to drive value across the value chain maximize cost savings while delivering reliable fuel supply. The
Company’s upgraded Tabangao Refinery is complemented by an integrated network of 22 fuel terminals, ten
lubricants warehouses and two bitumen import facilities, including the newly commissioned NMIF, and 966
retail service stations across the country. This integrated network allows the Company to strategically optimize
the distribution and delivery of Refined Products and Finished Petroleum Products in a cost efficient manner.
The strength of this integration coupled by its combined throughput of 2,461 million liters of fuel in fuel
terminals as of June 30, 2016 as well as the Company’s ability to produce fuel oil locally allow it to also offer
commercial and retail customers volume consistency and reliability. The Company believes that the Tabangao
Refinery and the Company’s Supply and Distribution Facilities are built to the highest standard such that they
can withstand harsh climatic conditions.
terminals using a fleet of third-party vessels; and to retail service stations and commercial customers throughout
to commercial customers. Imported lubricants are landed onshore through container vessels and delivered from
the port to the lubricants warehouses by third party trucking services. Lubricants are delivered from lubricants
warehouses to commercial customers by outsourced trucking services. From the bitumen import facilities, bulk
and packed bitumen products are either delivered to commercial customers by outsourced bitumen trucks and
bitutainers or picked up by customers. The vessels, tank trucks, trucking services, bitumen trucks and bitutainers
are chartered mainly on term contracts from third-party owners. Using stringent selection and monitoring
standards, the Company believes that it contracts with vessel and truck operators that safeguard the security and
supply of its fuel. The Shell Group has established base standards that apply to all existing and new vehicles,
which require that all vehicles meet all presently enforced vehicle legislation and regulations applicable in the
country in which the Company operates. In addition, to meet Shell Group standards, all tanks are constructed
with either steel or aluminum, and fitted with roll over protection to provide sufficient loading capacity.
The Company’s manufacturing, supply and distribution network also benefits from its longstanding relationship
with the Shell Group. Procurement for crude oil, feedstocks and Finished Petroleum Products is around 99%
catered to by various entities within the Shell Group, a relationship that provides the Company with a reliable
supply of various types of crude oil and Finished Petroleum Products from various origins. Leveraging on the
Shell Group’s operational know-how, the Company also has a supply chain and inventory management system
built on sophisticated information technology. This is complemented by the experience and knowledge of the
Company’s employees of the unique geography of the Philippine archipelago.
A highly efficient and integrated logistics network is key to ensuring the Company’s ability to deliver reliable
fuel supply at attractive and competitive prices and optimize value across its entire business operations.
Well positioned to capitalize on the attractive growth in the Philippines.
The Philippines enjoys a resilient, consumption-driven economy that benefits from favorable demographics,
such as a growing working age population with increasing disposable income, according to Nexant. The country
has also seen a rise in industrialization at a rate of 4.7% in the period 2010 to 2015 and according to Nexant will
continue to grow at 4.8% over the next five years. The Philippines was one of the best performing economies in
Southeast Asia in 2015 in terms of GDP growth, according to the Nexant. Its nominal GDP and nominal GDP
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per capita grew at a CAGR from 2010-2015 of 7.9% and 6.2%, respectively, according to the Economist
Intelligence Unit. Based on Nexant’s estimates, real GDP is expected to grow at a CAGR of 6.1% from 20152020, maintaining its position as the fastest growing economy in Southeast Asia.
This favorable macro-economic growth, and the resulting increased purchasing power, has fueled growth in the
use and ownership of motorized vehicles. The number of motorized vehicles in the Philippines is estimated to
grow at a CAGR of 5% from 2015-2020, according to Nexant. Industrial output and manufacturing sectors have
also seen a rise due to favorable government policies, construction of new infrastructure and increased business
activity and trade. According to the World Bank, manufacturing output is expected to grow at a CAGR of 5%
between 2015 to 2020. These factors are expected to contribute to an increase in demand for Finished Petroleum
Products in the Philippines, which is expected to increase at a CAGR of 4% between 2015 to 2020, according to
Nexant.
The Philippines consumed 143.1 million barrels of finished petroleum products in 2015, according to the DOE.
The country is a net importer of finished petroleum products with 53.6% of demand or 76.8 million barrels
being imported in 2015. The Company believes it is well positioned to take advantage of this structurally short
market for both crude and finished petroleum products, caused by limited indigenous oil reserves and
insufficient domestic refining capacity. The Company has 110,000 bpd of nameplate capacity, strategically
located supply points including 22 fuel terminals, ten lubricants warehouses and two bitumen import facilities
and 966 retail service stations throughout Philippines as of June 30, 2016, giving the Company opportunities to
capitalize on the demand and supply dynamics in the country. Through its strong distribution network and
secure and reliable supply chain, the Company is able to navigate and serve the wide spread archipelago of the
Philippines. According to Nexant, the Company supplies 24% of Philippine demand for refined products,
including imported finished petroleum products such as lubricants and bitumen, through the Tabangao Refinery
and its Supply and Distribution Facilities.
Differentiated fuel related offering and superior customer service.
Because of the scale of its manufacturing operations, as well as its affiliation with the Shell Group and access to
its fuel technology, the Company is able to provide a differentiated and comprehensive end-to-end fuel related
product offering to both retail and commercial customers. These products include a selection of premium
products, such as Shell V-Power Nitro+ and Shell V-Power Nitro+ Racing for the retail segment and Shell
FuelOil Plus and Shell FuelSave Diesel for the commercial segment, which offer consumers higher engine
performance as measured by fuel savings, cleaner emissions and other metrics.
In addition, the Company has been able to maintain its large retail market share by providing excellent customer
experience, convenient and trusted service at its retail service stations for both fuel and non-fuel offerings. The
Company also offers attractive loyalty schemes and marketing programs, such as point accumulation in
exchange for rewards and rebates schemes. Furthermore, the Company has been able to maintain relationships
with almost all major Philippine conglomerates and corporations in various industries. In terms of brand
reputation, the “SHELL” brand enjoys the highest overall good reputation score among the domestic retail fuel
brands. It is ahead in ranking against other petroleum brands by the general public in the Philippines. A study by
The Nielsen Company showed that of the 1,061 respondents interviewed, 89% said that Shell has an overall
good reputation. As of December 31, 2015, the Company has a committed commercial customer base, 35% of
which have been in supply contract relationships with the Company for over ten years, 24% have been in supply
less than one year. As of December 31, 2015, the Company has supply contracts with engagement terms of six
years or longer with nearly 6% of its commercial customers, while 21% of its commercial customers have
supply contract lengths of three to five years, 73% have supply contract lengths of one to three years, and 0.1%
have supply contract lengths of less than one year.
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Significant non-fuel and lubricants related retail growth potential.
Convenience store retail sales grew in the Philippines at a CAGR of 8.6% from 2010-2015 and is expected to
comprise nearly 50% of total retail sales by 2020 according to a report published by Conlumino in 2016 (‘The
Future of Retailing in the Philippines to 2020’). The Company is well positioned to capture growth in this space
with its extensive retail network footprint. Through CODO retail service stations, the Company can sell not only
premium lubricant products and related services but also other non-fuel-related retail products such as food and
grocery items. Through its convenience brands, Shell Select and Deli2Go, that are licensed from the Shell
Group and are available exclusively to the Company for use in the Philippines, the Company is able to offer
fast-moving convenience store goods and in-store dining options. As of June 30, 2016, there are 48 Shell Select
only retail service stations, and ten retail service stations with both Shell Select and Deli2Go offerings.
Currently, DODO retail service stations have non-fuel offerings such as small convenience stores. The
Company does not get a share in the income of the DODO retail service stations from these non-fuel offerings.
The Company intends to extend and roll out the non-fuel offerings found at CODO retail service stations,
including Shell Select convenience retailing, to DODO retail service stations to increase the attractiveness of the
Shell Group-branded retail service stations and improve customer traffic at these stations for both fuel and nonfuel related offerings.
A significant number of the Company’s larger retail service stations sublease space to co-locators, including
leading brands such as Mini-Stop, Jollibee, McDonald’s, KFC, Pizza Hut and Starbucks. These tenants not only
provide a diversified income stream derived either from fixed lease payments or a share of such tenant’s sales
revenues and hence, optimize retail site profitability, but also increase retail traffic to which the Company can
also cross-sell its fuel and non-fuel-related products. The Company has strong and strategic alliances with these
well-established QSR chains and is well positioned to expand this footprint and value-added proposition into
more retail stations. This non-fuel customer offering is highly complementary to the Company’s core business
in fuel and serves to further enhance the Company’s network efficiency.
In addition, through its lubricants segment’s “Smaller, Bigger, Better” strategy implemented in late 2014, which
focused on having a smaller number but bigger and better distributors, the Company is able to develop its
distributorship strategy that supports its overall growth strategy. The rationalization of the number of
distributors increases the volume per distributor resulting in improved efficiency and decreased unit costs. This
strategy incentivizes the distributors to invest on fixed costs which set them up for increase in growth in the
future that would support the Company's lubricants growth vision.
Experienced management supported by Company investment in talent training, retention and continuity.
The Company benefits from being led by a management team that has significant local and international oil
industry experience. Members of the Company’s current management team have an average of 20 years’
relevant experience, an average of 23 years of which were spent in the Shell Group. They have successfully
managed the Company through various business cycles, with an extensive operating track record, as evidenced
by the overall growth, asset renewal, retail network footprint expansion and business operations of the Company
over the years. The Company has also actively invested in talent retention and continuity, with a deep reserve of
experienced and committed management team and a succession plan. Furthermore, the Company was the only
oil and energy company included in the top ten list of most desirable companies to work for in the Philippines,
based on the Top Companies Report 2015 by Jobstreet.com Philippines.
Moreover, the Company’s affiliation with the Shell Group provides members of the Company’s management
team opportunities to rotate through the management ranks of other companies of the Shell Group worldwide.
This facilitates knowledge transfer, allowing management to hone their skills and ensures consistency of the
Company’s managerial standards with the Shell Group’s upon their return. The Company’s management team is
also committed to operating the Company in a safe, environmentally-conscious and sustainable manner.
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Over the course of its operating history, the Company’s management has consistently taken an active stance to
build a strong organization and high performance culture to deliver shareholder value by employing an
innovative and results-oriented team with a commitment to excellence.
Long term commitment and support from the Shell Group and adoption of world-class standards.
The Shell Group has a strong heritage and a long history of operations in the Philippines. This heritage and
history, coupled with the Shell Group’s prominent international profile, gives the Company a high degree of
brand recognition, customer trust and preference in the Philippines.
Its affiliation with the Shell Group gives the Company access to the Shell Group’s industry leading fuel and
lubricant technology and rights to use “SHELL”, which is one of the world’s most valuable and trusted brands,
in the Philippine downstream oil industry. It also provides the Company long-term and secure access to crude
oil and Finished Petroleum Products supplied by the Shell Group. For the six months ended June 30, 2016, the
Company purchased 96.8% of its total crude oil and non-crude feedstock requirements through SIETCO using
term supply agreements. This enables the Company to benefit from the consistency and reliability, regardless of
source, provided by the Shell Group’s single market interface approach.
Apart from providing access to its product technology and branding, the Shell Group also provides the Company
world class institutional and operational knowledge, such as management and business support, retail
development expertise, research and development and shared expert and technical support services.
By, closely following in the footsteps of the Shell Group, the Company has adopted and implements world class
standards in corporate governance and HSSE matters. All corporate actions and decisions follow clear and
effective governance standards and structures. Stringent codes of conduct are in place to ensure that the
Company’s corporate conduct is in line with the Shell Group’s core business values – honesty, integrity, respect
for people, and commitment to ethics and compliance. These standards are applicable to all employees to ensure
operational and personnel safety and extends to include third party service providers (such as charter vessels and
trucks) who are required to adhere to them. Various entities within the Company’s operations have often been
recognized for their excellence in maintaining the highest standards of safety. The Tabangao Refinery received
the Gawad Kaligtasan at Kalusugan (GKK) award of DOLE for the Company’s programs on occupational
safety and health on a number of occasions and, most recently, in 2014.
Furthermore, in 2013, the Company is one of only seven companies in the Philippines and the only domestic oil
company that has been recognized by the Integrity Initiative of the European Chamber of Commerce for
upholding the highest standards in ethical business practices.
In addition, the Company immerses itself in the communities where it operates, consistent with its corporate
social responsibilities as well as with the aim of creating jobs and opportunities for members of those
communities. These activities, such as the Company’s Country Disaster Relief and Rehabilitation Plan, the Shell
National Students Art Companion, the Shell Youth Active Chess Competition, and various local recruiting
initiatives hosted by the Company, further enhance the Company’s brand equity, which in turn generates a
multiplier effect on a triple bottom line (financial, social and environmental impact). Moreover, in 2015, the
Company was the only oil and energy company included in the top ten most desirable companies to work for in
the Philippines, based on the Top Companies Report 2015 by Jobstreet.com Philippines.
Strong balance sheet and cash flow with an attractive financial profile.
The Company has a debt to equity ratio of 0.59 as of December 31, 2015 which the Company believes is one of
the lowest among oil retail and manufacturing companies in Asia Pacific. With the completion of the Tabangao
Refinery upgrade and construction of the NMIF, the Company has now addressed its short term capital
expenditure requirements and freed up significant future cash flows. As a result, the Company has enhanced its
ability to meet its short-term and long-term obligations. Due to its strong cash flow profile, which was further
supported by the stock rights offering in 2015, the Company has adequate funding for other value-creating
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activities such as the selective expansion of its retail service station network and improving its manufacturing
and supply network. The Company also has access to both the public and private debt markets to fund any
future growth and expansion.
The Company uses its financial resources effectively and uses third party or outsourced service contractors for
various parts of its operations. For example, the Company charters vessels and tank trucks for its primary
distribution and hires tank trucks, barges, trucking services, bitumen trucks and bitutainers for secondary
distribution. This provides the Company with flexibility with respect to its supply chain, without large capital
commitments. It maintains a mix of CODO retail service stations and DODO retail service stations to manage
its capital intensity and margin profile. Additionally, the Company enters into strategic partnerships and joint
ventures for its Supply and Distribution Facilities that allow it to minimize risks inherent within the supply
chain.
STRATEGIES
The Company’s principal strategies for achieving its growth objectives are set out below.
Selectively pursue profitable fuel opportunities in the growing Philippine market.
The Company is one of only two integrated R&M companies in the Philippines. Given its existing market
leading position, the Company is well-positioned to selectively pursue growth opportunities presented by a
Philippine market that features favorable demographics and consumption patterns.
The Company intends to do this by continuing to selectively expand its retail network in profitable urban centers
and surrounding suburbs and other emerging economic regions and growing rural trade areas. Significant
management time is spent on identifying strategic site locations given the Company’s focus on margin and
profitability. The Company expects to grow its retail network to approximately 1,220 retail service station sites
by 2020. The Company continually reviews and rationalizes its retail station network to eliminate inefficiencies
in order to ensure these objectives do not compromise its number one positions in network efficiency and
average annual throughput vis-à-vis its competitors.
It is also focused on increasing retail and commercial market penetration in key regions where the Company
possesses a cost competitive advantage, including in Visayas and Mindanao with the new NMIF. As the most
recent example of the Company’s site selection and development strategy, the NMIF was selectively chosen for
its strategic location close to southern islands of Philippines, where its addition to the already extensive portfolio
of 22 fuel terminals, ten lubricants warehouses and two bitumen import facilities allows for further optimization
in terms of lower transport costs and expected higher margins.
Furthermore, the Company targets to increase its market share by capitalizing on its leading brand preference
position, growing its base of customers and dealers through innovative loyalty programs, tactical promotions,
forging or strengthening relationships with its dealers. A differentiated fuel offering with a focus on premium
products provides an opportunity to increase the Company’s share of revenues coming from higher margin
products.
The success of the commercial business is heavily reliant on i) service reliability and product innovation or
brand, ii) long standing customer relationships, and iii) depth and talent of people. The Company expects to
grow its commercial business by reaching a broader customer universe by increasing penetration in the targeted
market segments through enhancing partnerships, increasing original equipment manufacturers (OEM)
relationships and capturing new market opportunities.
Optimize related product portfolio and offering to increase customer loyalty.
The Company offers both its retail and commercial customers a comprehensive set of premium and regular fuel
related products and services that are differentiated from competitive offerings on various aspects of
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performance. In terms of brand reputation, the “SHELL” brand enjoys the highest overall good reputation score
among the domestic retail fuel brands. It is ahead in ranking against other petroleum brands by the general
public in the Philippines. A study by The Nielsen Company showed that of the 1,061 respondents interviewed,
89% said that Shell has an overall good reputation.
The Company plans to further expand and develop its leading market position, improve margins and increase its
customer base by: (i) inducing more customers to shift to premium fuels through, among others, a sustained
education and marketing campaign for products; (ii) leveraging its access to the Shell Group’s technological
research and development edge to continue offering technologically innovative and superior fuel related
products, such as rolling out the Shell V-Power Nitro+ family fuels; (iii) continuing to upgrade its wholesale
commercial offering through technical consulting services and price risk management arrangements; (iv)
capitalizing on its position as the sole fuel oil producer in the Philippines; and (v) expanding its loyal customer
base by sustaining the growth of its loyalty programs, developing dedicated loyalty schemes and further
enhancing the customer experience through the “Welcome to Shell” initiative, focusing on motivated staff who
are dedicated to enhancement of customer experience and world class facilities at its retail service stations.
Maintain competitive advantage through a reliable and efficient manufacturing, supply and distribution
chain.
The Company seeks to maintain and improve its integrated, reliable and cost efficient structure by maximizing
cost savings in its refinery and supply and distribution network. Accordingly, it will ensure plans to leverage the
continuing benefits of its long-term crude oil and refined product supply arrangement with the Shell Group,
which is underpinned by the Shell Group’s single market interface approach to ensure predictability of supply
regardless of source. It plans to also do so by promoting operational excellence and reliability, such as by
implementing a bottom loading system for loading refined products, conducting causal learning investigations
to prevent recurrence of operational shutdown incidents, prolonging turnaround cycles, improving energy
efficiency and flexibility, implementing margin improvement projects and capitalizing on the Tabangao
Refinery’s production and crude oil processing flexibility, which enables the Company to manage refinery
utilization and output in response to shifting market demand for products and production costs. In addition, the
Company will continue to refine and optimize its supply network (which may include adding or disposing of
supply points) to ensure sufficient and growing capacity to support the marketing businesses in a cost efficient
manner.
The Company also intends to capture the market growth by maximizing the benefits and strategic geographical
positions of its fuel terminals, including the Tabangao Refinery and the NMIF, which can accommodate larger
vessels such as VLCCs or marine risers and reduce transportation costs.
Capture market growth opportunity in the lubricant and convenience retailing markets.
The Company’s lubricant and non-fuel related offerings continue to complement and augment its fuel related
business. Given its extensive retail network, it is well-positioned to capture greater market share in the lubricant
and non-fuel related sectors. This includes plans to expand and improve its differentiated and higher margin
products such as lubricants offering through Shell Helix Oil Change+ (Shell HOC+) outlets and leveraging
Helix, Rimula and Advance as anchor brands. The Company also plans to continue with the upgrading of the
total customer experience at existing Shell retail stations through the “Welcome to Shell” new service concept.
The aim of “Welcome to Shell” is to secure brand preference leadership, improve volumes, and enhance overall
customer experience through multiple initiatives aimed at improving facilities and staff motivation as well as
upgrade retail service stations with world class restroom facilities and staff quarter improvements. Fresh and hot
foods in its Deli2Go in-store dining option offer a premium margin and additionally complement the non-fuel
retail offering. Furthermore, the Company is exploring innovative opportunities to maximize its retail network.
Co-locator collaboration with major fast food chains and leading brands will also be increased to complement its
convenience store offerings and maximize the use of available commercial space and offset fixed costs. The
Company employs a variety of revenue models, depending on the type of co-locator, to improve profitability.
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These steps are also simultaneously aimed at increasing cross selling opportunities to offer the Company’s fuel
related retail products as a footfall to drive fuel sales and hence further enhance the Company’s network
efficiency.
Uphold the Shell Group’s high standards and maintain industry leading position for corporate
governance, HSSE matters and corporate social responsibility.
The Company aims to continue being a role model for world class corporate governance and conduct business in
an open and transparent manner, consistent with its existing corporate governance standards, which increases
brand equity for the Company.
The Company is committed to good corporate governance and overall business sustainability and success and to
that end has adopted its Manual of Corporate Governance, which requires regular review to provide an avenue
for its continuous improvement. The Company also adheres to best-in-class HSSE standards and intends to
maintain a relentless focus on its HSSE performance. Through the concept of Goal Zero (particularly, on three
focus areas of personal, process and transport safety), the Company aims to achieve “no harms and no leaks”
across all of its operations.
The Company is also focused on sustainability and environmental awareness through its HSSE and Social
Performance Policy and these standards apply to all aspects of the Company’s activities, from designing a
facility through to decommissioning a site.
The Shell Principles and HSSE standards apply not only to the Company’s employees but even to its
contractors, third party service providers and any joint ventures where it has operational accountability.
The Company will also seek to continue playing a positive role in society by contributing to sustainable
development efforts. It will continue to address community education and development efforts by funding
projects such as Project KALSADA (Kabataang Ligtas sa Sakuna at Disgrasya) and a road safety program in
partnership with various local communities for students of schools located along the roads in the vicinity of the
Tabangao Refinery and other regions.
Continuing to focus on world class talent development and retention to realize the full potential of its
people.
The Company is led by an experienced management team supported by a highly skilled and highly motivated
workforce that has been recruited through the Shell Group’s international recruitment process. International
experience enables the Company to leverage the Shell Group’s best practices in operational excellence and
performance in manufacturing, supply and distribution and marketing. The Company’s organizational structure
is based on a lean and fit-for-purpose design, which facilitates a high level of employee empowerment and
engagement between management and front-liners. The Company has been able to retain its talent, through its
commitment and focus on its people, as evidenced by its low talent attrition rate.
A key focus of the Company is to develop the Filipino workforce. The Company employed 698 people in the
Philippines as of June 30, 2016, almost all of whom are Filipino except for four employees. Further, in its effort
to develop the workforce in its dealer network, the Company runs a nationwide scholarship program, Gas Mo,
Bukas Ko (GMBK) (meaning “You fuel my future”), in partnership with Pilipinas Shell Foundation Inc.
(PSFI), aimed at upskilling service station attendants, thus enabling them to access more income opportunities.
CORPORATE HISTORY AND MILESTONES
The Company traces its roots to Asiatic Petroleum Company (Philippine Islands), Ltd. which opened for
business in the Philippines and began to import and sell motor gasoline and kerosene in 1914. Asiatic Petroleum
Company (Philippine Islands), Ltd. was renamed The Shell Company of the Philippine Islands, Ltd. in the
1940s.
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In 1959, the Company was incorporated under the name The Shell Refining Company (Philippines), Inc. in
compliance with the then required percentage of Filipino ownership (25%) in large industrial ventures. In 1970,
the Company was renamed Shell Philippines, Inc. and was later renamed Pilipinas Shell Petroleum Corporation
in 1973.
In 1976, Meralco Securities Corporation acquired a 25% stake in the Company resulting in the Company being
50% Filipino-owned.
In February 1987, the Filipino ownership in the Company decreased to 33.33% after a share buyback by the
Company of the stake held by Meralco Securities Corporation. In August 2015, the Filipino ownership in the
Company decreased to 31.82% following the issuance of additional shares pursuant to a stock rights offering.
Certain key dates and milestones for the Company’s business are set forth below.
1960
The Company began the construction of a crude oil refinery in Tabangao, Batangas.
1962
The Tabangao Refinery commenced commercial operations with a nameplate capacity of 30,000 bpd.
1982
The Company began to partner with the Pilipinas Shell Foundation, Inc. or the PSFI on programs
relating to (i) healthcare and services, sanitation, and safety, (ii) technical, vocational and agricultural
skills development, training and employment, (iii) livelihood and entrepreneurship development, (iv)
leadership enhancement and attitude development, and (v) environmental stewardship.
1993
The Company commenced the construction of a bigger and more modern Tabangao Refinery. The
primary purpose of the construction was to replace two crude distillers built in 1960.
1995
The nameplate capacity of the Tabangao Refinery increased to 110,000 bpd.
1999
The Shell Philippine Petroleum Corporation (SPPC), the Philippines’ only lube oil refinery, was
merged with and absorbed by the Company. SPPC was formerly the Philippine Petroleum
Corporation, the majority stake of which was acquired by the Shell Group in 1986.
2003
The Company opened a bitumen storage and distribution facility in Villanueva, Misamis Oriental.
2008
The Company inaugurated its Bitumen Solutions Center at the Tabangao Refinery.
2012
The Tabangao Refinery celebrated its 50th year.
The Company launched three new premium performance fuels, namely, Shell V-Power Nitro +
Gasoline, Shell V-Power Nitro + Racing and Shell V-Power Nitro + Diesel.
2014
The Company began the construction of the NMIF.
2015
The Company completed the upgrade of the Tabangao Refinery.
2016
The NMIF commenced commercial operations by sending out its first shipment.
OWNERSHIP, GROUP STRUCTURE AND JOINT VENTURES
The Company is a public company jointly owned by Shell B.V., The Insular Life Assurance Company, Ltd.,
Spathodea Campanulata, Inc. and other minority stockholders. The chart below sets forth the ownership
structure of the common shares of the Company as of June 30, 2016.
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Shell Overseas
Investments B.V.
68.18%
The Insular Life
Assurance
Company, Ltd.
Spathodea
Campanulata,
Inc.
19.55%
5.14%
>360 Minority
Shareholders
7.12%
Shell B.V. operates as an investment holding company and is based in the Netherlands. It is wholly owned by
Shell Petroleum N.V., a subsidiary of RDS. The Insular Life Assurance Company, Ltd. is a mutual life
insurance company primarily engaged in the life insurance business. It is the largest Filipino life insurance
company and has diversified into healthcare, lending and investment management through its subsidiaries and
affiliate. Spathodea Campanulata, Inc. is a Filipino holding company whose primary purpose is to deal in and
with bonds, debentures, promissory notes, shares of capital stocks or other securities. There are more than 360
minority stockholders, majority of whom are Filipino.
The table below sets forth the Company’s equity interest in its incorporated joint ventures as of the date of this
Prospectus, as well as their principal businesses and places of incorporation.
Place of
Incorporation
Name of Company
Pandacan
Inc.
Depots
Services,
Company’s Equity
Interest
Principal Business
Philippines
33.3% (Chevron and
Petron own the remaining
33.3% and 33.31%,
respectively.)
Management and
operation of storage,
handling and distribution
facilities
Bonifacio Gas Corporation
Philippines
43.63% (Fort Bonifacio
Development Corporation
owns the remaining
56.36%.)
Construction, maintenance
and operation of a
centralized gas distribution
system
Kamayan Realty Corporation
Philippines
40% (National
Development Company
owns the remaining 60%.)
Acquisition, development
and management of real
estate properties
As of the date of this Prospectus, the Company has no majority-owned subsidiaries.
OPERATIONS
The Company’s integrated downstream operations comprise all aspects of the downstream product supply chain
from importing and refining crude oil to importing, marketing and distributing Refined Products and Finished
Petroleum Products to its customers and businesses, as shown by the chart below.
114
Procurement
The main raw material used in the Tabangao Refinery’s production process is crude oil. The Company sources
crude oil for the Tabangao Refinery through SIETCO pursuant to the single market interface program of the
Shell Group. For the six months ended June 30, 2016, the Company purchased 96.8% of its total crude oil and
feedstock supply requirements for the Tabangao Refinery through SIETCO. Under the frame term contract the
Company entered into with SIETCO in February 2014 but with an effective date of January 1, 2014, the
Company purchases its entire crude oil and non-crude feedstock requirements for the Tabangao Refinery
exclusively from or through SIETCO, except where the parties have agreed that the Company may purchase
directly from a third party. Prices are negotiated on an arm’s length basis by using reference markers to the
Mean of Platts Singapore or other similar market indexes. The contract will be in force until terminated by either
party. Under the frame term contract the Company entered into with SIETCO in October 2001, the Company
may sell through SIETCO any petroleum products and components, natural gas liquids, condensates or
feedstocks which exceed the Tabangao Refinery’s production capacity (excluding base oil, crude oil, bitumen,
sulfur, natural gas and LPG).
In the last quarter of 2015, the Company closed its lube oil blending plant located in Pandacan as mandated by
the Supreme Court of the Philippines (the Supreme Court). The Company has since imported all its lubricants
and grease supply requirements from Shell Group companies in other countries. Prices are determined on an
arm’s length basis in adherence to the Lubes Global Master Supply Agreement for the Long-Term Supply of
Finished Lubricants and Greases.
The Company sources bitumen through SETL pursuant to the single market interface program of the Shell
Group. In 2015, the Company purchased all of its total bitumen supply requirements from SETL. Prices are
determined on an arm’s length basis based on Argus reports.
For the year ended December 31, 2015, the Middle East (including the United Arab Emirates and Qatar),
Russia, Malaysia/Brunei and the Philippines/Indonesia/Vietnam accounted for 60%, 20%, 18% and 2%,
respectively, of the Company’s crude oil intake of 26 million barrels. The Tabangao Refinery is able to take in
various types of crude oil from various origins, thereby allowing the Company to be flexible enough to
maximize crude margins.
Manufacturing, Supply and Distribution
The manufacturing, supply and distribution segment manages crude oil refining, crude oil, Finished Petroleum
Products importation, and domestic logistics requirements for the product transfers for all fuels from the
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Tabangao Refinery or the NMIF to the distribution sites. This segment manages primary distribution to the
Company’s Supply and Distribution Facilities as well as secondary distribution to retail service stations and
commercial customers, and, in addition, operates the Company’s Supply and Distribution Facilities all over the
Philippines.
Supply chain solutions for lubricants and specialty products, such as bitumen, are managed by specialists within
the commercial business segment due to the specialized handling required for such products.
Refining
The Company owns a petroleum refinery complex located in Tabangao, Batangas City, approximately 121
kilometers south of Manila. The Company leases the land on which the Tabangao Refinery is situated from
Ayala Securities Corporation under a long-term lease contract. This lease was later on assigned by Ayala
Securities Corporation to Ayala Corporation. The Tabangao Refinery has a crude oil distillation nameplate
capacity of 110,000 bpd. Its facilities include a gasoline blender, crude distiller, gas and liquid treatment plant,
sulfur recovery unit, naphtha hydro-treater, LPG plant, platformer, middle distillate hydro-desulfurizer, thermal
cracker, fuel oil blender, 55 product and component tanks, 11 crude tanks, five LPG spheres and four jetties, one
of which is capable of accommodating VLCCs of up to 320,000 tons (deadweight). The Tabangao Refinery is
powered by electricity from the national grid through the spot market and electricity generated within the
refinery from turbo generators powered by natural gas supplied by a consortium led by Shell Philippines
Exploration B.V. from the Malampaya Deep Water Gas-to-Power project (the Malampaya Project) in the West
Philippine Sea thus ensuring reliability of power supply.
The following flowchart illustrates the production process at the Tabangao Refinery, including the principal
feedstock inputs, the process units and the products produced.
Refining at the Tabangao Refinery comprises of two major phases: the separation processes and the conversion
processes. The first step of the separation process involves distillation. During distillation, crude oil, which is a
mixture of various types of hydrocarbons, is boiled and recondensed to separate the crude oil into components
based on ranges of boiling points. To meet environmental specifications or to assist in further processing, some
components then undergo a process known as hydro-processing. The objective of this process is to remove
sulfur from the component stream. In the conversion process, large hydrocarbon molecules are broken down
into smaller higher value molecules or changed to produce molecules with the desired qualities, using a
combination of heat and catalytic action. The Tabangao Refinery has some flexibility to adjust output to
differing market demands or product price variation. For example, the Tabangao Refinery can increase the
portion of gasoline in terms of output in case of a higher market demand or higher price for gasoline, thereby
resulting in a higher priced mix of output. The Tabangao Refinery also has a number of smaller secondary
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processes. These are mainly involved with further polishing of components and products to remove sulfur and
other impurities. The final stage of the refining process involves blending, where the various hydrocarbon
components are mixed together to make the Refined Products.
The Tabangao Refinery is capable of producing a broad range of petroleum products such as naphtha, gasoline,
jet fuel, kerosene, diesel, fuel oil, LPG and sulfur. In 2015, diesel, gasoline, fuel oil, and jet fuel accounted for
44%, 24%, 20% and 7%, respectively, of the Tabangao Refinery’s refined product slate. The main raw material
used in the Tabangao Refinery’s production process is crude oil. The principal utilities required for the
Company’s production process are water, electricity and steam as well as natural gas. Deep wells provide the
Tabangao Refinery’s water requirements. The Company has steam generators that supply steam to its process
units in the Tabangao Refinery. In 2015, the Company purchased 8.23% of the Tabangao Refinery’s electricity
requirements from the national grid. Since the upgrade and as of June 30, 2016, the Company purchased less
than 0.1% of the Tabangao Refinery’s electricity requirements from the national grid. The balance was
generated within the Tabangao Refinery from its turbo generators powered by natural gas from the Malampaya
Project. The Malampaya Project supplies natural gas to the Company for its refining production pursuant to a
contract which was negotiated on an arm’s length basis, with pricing determined by a specified formula. In
addition to natural gas, the Company has flexibility to use other alternative fuels, such as its own fuel gas and
LPG to minimize risk exposure in the event of a shortage of natural gas supply.
In December 2015, the Company completed the upgrade of the Tabangao Refinery. The key improvement to the
Tabangao Refinery was the installation of a new hydrodesulfurization reactor. With the upgrade, the Tabangao
Refinery is now fully compliant with the DOE Circular No. DC 2015-06-0004 which requires oil companies,
effective January 1, 2016, to sell, in bulk or retail, gasoline and diesel fuels that meet Euro IV (PH), as
prescribed in Philippine National Standard/DOE Quality Standard (PNS/DOE QS) 008:2012 and PNS/DOE QS
004:2012. Under Euro IV (PH), the DENR Administrative Order No. 2015-04 requires significantly low
amounts of sulfur (0.005%) in diesel and gasoline as well as benzene (maximum of 2% by volume) and
aromatics (maximum of 35% by volume) in gasoline. By the end of 2015, the Company successfully
transitioned the quality of all marketable petroleum products in its fuel terminals and retail service stations from
Euro II (PH) to Euro IV (PH).
In March 2016, the Tabangao Refinery was awarded the Global Manufacturing Reliability Award by Shell
Global Manufacturing for its operational performance in 2015.
The utilization of the Tabangao Refinery is determined by prevailing market conditions, demand profile, and
economic crude slate. The Tabangao Refinery operating plan is generated and reviewed periodically to ensure
that changes in the local and regional markets are captured and the Tabangao Refinery is utilized to the
economic optimum. For the years ended December 31, 2013, 2014, 2015, and as of June 30, 2016, the refinery
utilization rates and total volume outputs for the Tabangao Refinery were 70.3% (28.2 million barrels), 60.5%
(24.3 million barrels), 62.9% (25.3 million barrels), and 77.4% (31.1 million barrels) respectively. In addition,
the Company continuously develops and implements projects and activities that improve the Tabangao
Refinery’s margin generation, energy efficiency, and cost profile. Depending on the refining margin
environment, the Tabangao Refinery has the flexibility to run at full utilization, to slow down and reduce
utilization to optimal levels, to partially shut down a unit or to undergo an economic shutdown. For the years
ended December 31, 2013, 2014, 2015, and as of June 30, 2016, planned downtime at the Tabangao Refinery
accounted for 0.9%, 5.3%, 10.8%, and 0.2% of calendar days, respectively, while total unplanned downtime
accounted for 6%, 11.3%, 2.5%, and 4.2% of calendar days, respectively.
The Company benefits from the presence of the Tabangao Refinery in the Philippines as its geographic location
and refinery configuration allows it to offer better product prices to its customers than export refineries in hub
locations. The structural price improvement comes from import parity pricing basis on ancillary costs related to
freight and product quality, the ability of the Tabangao Refinery to adapt to the differences in the Philippine
product quality specification compared with tradable market product specification and the capability of the
Tabangao Refinery to produce premium or customer-specific products. This is in addition to the crude flexibility
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or the ability of the Tabangao Refinery to take in crude oil of various types and from various origins that
provides an uplift against industry marker margins.
The Tabangao Refinery is shut down periodically for scheduled turnaround maintenance, including statutory
inspection requirements. While Philippine standards require companies to conduct hydrostatic tests on boilers
every 12 months, the Company has been granted a variation order from the DOLE to conduct its tests every two
years based on the robustness of the Shell Risk-Based Inspection methodology used by the Shell Group
globally. The Company’s past inspections showed that since its equipment are designed to run continuously,
more frequent shutdowns and startups of boilers lead to reliability issues, such as steam leaks, refractory cracks
and corrosions under insulation. The Company typically schedules major turnaround maintenance every six
years and scheduled maintenance every two years for periods of 40 to 60 days and 30 to 40 days, respectively.
When possible, the Company seeks to schedule the timing of turnarounds to coincide with periods of relatively
lower demand for the products of the relevant units. In between major scheduled turnaround maintenance
events, the Company also plans minor scheduled maintenance periodically. The Company believes it has
sufficient facilities and infrastructure to ensure continuous product supply to all customers through product
importation and local supply agreements during major scheduled turnaround or minor scheduled maintenance
shutdown events, which has been demonstrated during previous turnaround and shutdown activities for the
Tabangao Refinery.
Supply and Distribution Network
Primary Distribution
The Company’s Refined Products are distributed from the Tabangao Refinery and the NMIF to the various
terminals using a fleet of third-party vessels and to retail service stations and commercial customers throughout
the Philippines using a fleet of third-party tank trucks. Imported lubricants are landed onshore through container
vessels and delivered directly from the port to the lubricants warehouses by third party trucking services. The
vessels, tank trucks and trucking services are chartered mainly on term contracts from third-party owners. The
vessels are chartered mainly on term contracts from third party owners. The Company has vessels with contract
periods of up to three years. The Company has long-standing relationships with these service providers based on
customary terms of business.
Ownership and Operation of Supply and Distribution Facilities
The Company distributes a wide range of fuels, lubricants, bitumen and other specialty oil-based products
through its 34 Supply and Distribution Facilities across the Philippines to almost a thousand retail service
stations nationwide. As of June 30, 2016, the Company had 22 fuel terminals, ten lubricants warehouses and two
bitumen import facilities. The network of fuel terminals comprises nine fuel terminals in Luzon, seven fuel
terminals in Visayas and six fuel terminals in Mindanao. The Company has three lubricants warehouses in
Luzon, four lubricants warehouses in Visayas and three lubricants warehouses in Mindanao. The Company has
one import facility in Luzon and one import facility in Mindanao. See “–– Operations –– Manufacturing, Supply
and Distribution –– Supply and Distribution Network”. The Company has a combined throughput of 2,461
million liters of fuel in the fuel terminals as of June 30, 2016. The Company owns six of these fuel terminals and
co-owns ten fuel terminals under joint operating agreements. The remaining six fuel terminals are owned by
third parties. Where applicable, fuel terminals have marine receiving and out-loading facilities and multiple
product storage tanks for fuels. Lubricants warehouses have bulk products storage and warehouses for packaged
products such as lubricants and greases. Bitumen import facilities have marine import facilities, gantry bulk
product loading and bitumen packing facilities.
The Company’s network also includes two airport installations at the Ninoy Aquino International Airport
(NAIA) located in Manila and Clark International Airport located in Pampanga. At the NAIA, the Company is a
co-owner of the unincorporated Joint Oil Companies Aviation Fuel Storage Plant (JOCASP) which leases the
land from the Manila International Airport Authority. JOCASP jointly owns a 25% stake in the aviation depot
which provides storage of jet fuel. The Company also provides into-plane refueling services for customers at the
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NAIA using the Company’s aircraft refueling trucks. At Clark International Airport, the Company has a contract
with a third-party for storage and into-plane refueling services. Imported lubricants are directly sent and stored
in ten strategic points, specifically, in a regional distribution center in Taguig City, in a bulk facility in the
province of Bulacan, in Company-operated lubricants warehouses in Zamboanga, Iloilo and Palawan and in
other smaller third party lubricants warehouses in Tipas, Sasa (Davao City), Mandaue City, Cagayan de Oro
City and Bacolod City.
Bitumen is imported through two facilities, one in Tabangao, Batangas City, adjacent to the Tabangao Refinery,
and another in Villanueva, Misamis Oriental. These bitumen import facilities receive bitumen through marine
jetties, store bitumen products and load out bulk and packed bitumen through bulk gantry and packed product
loading facilities.
The Tabangao Refinery has storage tanks and facilities which enable the Company to store its products before
delivery and to store feedstock before use. In July 2016, the NMIF started commercial operations by sending out
its first shipment. The Company began the construction of the NMIF, a fuel import facility capable of receiving
medium-range vessels in Cagayan de Oro City, in 2014 to provide additional storage capacity for Finished
Petroleum Products. It also serves as an additional source point for fuels that will be distributed to the
Company’s fuel terminals in Visayas and Mindanao. The facilities of the NMIF include a tank farm, an
import/export pipeline and a waterfront loading facility. The Company operates on various leased properties for
its Supply and Distribution Facilities and various retail service stations located throughout the Philippines.
The map below shows the manufacturing, supply and distribution coverage of the Company as of June 30, 2016,
which includes 22 fuel terminals, ten lubricants warehouses and two bitumen import facilities.
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The following table shows the location, capacity, owner and operator of the Company’s fuel terminals
(excluding retail service stations).
Location
Luzon
Throughput (million
liter)1
as of June 30, 2016
Fuel Terminal
Address
Ownership
Operator
Bataan
Pias, Limay, Bataan
Third Party
41.2
Third Party
North Harbor
Total Philippines
Manila Terminal,
Manila Harbor Center
Third Party
200.5
Third Party
120
Complex, North
Harbor
Visayas
Mindanao
Calapan
Lazareto, Calapan,
Mindoro Oriental
Shared
33.7
Company
Masbate
Pulang Lupa, Masbate,
Masbate
Shared
13.5
Company
Pasacao
Camangue, Pasacao,
Camarines Sur
Third Party
180.2
Company
Poro
Poro Point, San
Fernando, La Union
Company
115.8
Company
Puerto
Princesa
Corner Abueg and
Burgos Streets, Puerto
Princesa City
Company
20.9
Company
Tabangao
Tabangao, Batangas
City
Company
982.5
Company
Clark
Angeles City,
Pampanga
Third Party
54.5
Company
Amlan
Tandayag, Amlan,
Negros Oriental
Third Party
5.4
Third Party
Anibong
Rawis, Anibong,
Tacloban City
Shared
43.5
Company
Bacolod
Sto. Nino, Bacolod
City
Shared
87.1
Company
Culasi
Culasi, Roxas City
Third Party
8.6
Third Party
Lapus
La Paz, Lapus, Iloilo
City
Shared
92.9
Company
Mandaue
Petron Terminal,
Looc, Mandaue City
Shared
164.7
Third Party
Tagbilaran
Graham Avenue,
Tagbilaran City
Company
46.0
Company
Cabadbaran
Cabinet, Cabadbaran,
Agusan del Norte
Shared
56.6
Company
Cagayan
Corrales Extension,
Cagayan de Oro City
Company
50.3
Company
North
Mindanao
Import
Facility
121
Davao
Sasa, Catitipan, Davao
City
Shared
127.6
Third Party
Iligan
Tomas Cabili, Iligan
City
Shared
96.0
Company
Jimenez
Jimenez, Misamis
Occidental
Shared
15.7
Third Party
Third Party
24.3
Third Party
Zamboanga
Baliwasan,
Zamboanga City
___________________________
Note:
1
The Company has a combined throughput of 2,461 million liters of fuel in these fuel terminals as of
June 30, 2016.
The following table shows the location, capacity, owner and operator of the Company’s lubricants warehouses.
Location
Luzon
Visayas
Mindanao
Lubricants
Warehouse Address
Ownership
Throughput
(thousand liter)1
as of June 30, 2016
Operator
Elisco
Ibayom Tipas, Taguig
City
Third Party
17,980.0
Third Party
Tipas
Novaliches, Quezon
City
Third Party
150.0
Third Party
Bulacan
Balagtas, Bulacan
Company
2,100.0
Company
Mandaue
Petron Terminal,
Looc, Mandaue City
Third Party
1,900.0
Third Party
Bacolod
Sto. Nino, Bacolod
City
Third Party
550.0
Third Party
Lapus
La Paz, Lapus, Iloilo
City
Company
390.0
Company
Puerto
Princesa
Corner Abueg and
Burgos Streets, Puerto
Princesa City
Company
240.0
Company
Cagayan
Bulua, Cagayan de
Oro City
Third Party
1,940.0
Third Party
Sasa
Sasa, Catitipan, Davao
City
Third Party
1,940.0
Third Party
Zamboanga
Baliwasan,
Company
150.0
Company
122
Zamboanga City
___________________________
Note:
1
The Company has a combined throughput of 27,340 thousand liters of lubricants in these lubricants
warehouses as of June 30, 2016.
The following table shows the location, capacity, owner and operator of the Company’s bitumen import
facilities.
Location
Tabangao
Bitumen Import
Facility Address
Operator
Batangas
Company
7.0
Company
Barangay Katipunan,
Villanueva, Misamis
Oriental
___________________________
Company
5.4
Company
Luzon
Mindanao
Villanueva
Tabangao,
City
Ownership
Throughput (kilo
tons)1 as of June 30,
2016
Note:
1
The Company has a combined throughput of 12.4 kilo tons of bitumen in these bitumen import facilities
as of June 30, 2016.
The Company believes its integrated storage facilities network have adequate stocks to accommodate normal
operations and allow for contingencies, including foreseeable circumstances where the Company or one or more
of its customers or feedstock suppliers may experience an unplanned plant shutdown for a limited period of
time. The Company’s inventory of products may increase from time to time, reflecting unscheduled shutdowns
or other problems at its customers’ plants that prevent or delay their taking delivery, as well as the Company’s
inventory planning in advance of its scheduled shutdowns and its customers’ inventory planning for planned
production. To maximize operational flexibility and consistent with market practice, the Company entered into
product purchase/sale agreements with other industry participants. Under these agreements, the Company and its
counterparty agreed to sell to each other a certain quantity and grade (consistent with Philippine National
Specifications) of base fuels for blending at specified fuel terminals within the Philippines. The Company
entered into these arrangements to complement its supply capabilities and to meet the operational needs of its
business while reducing ancillary costs such as transportation costs. Pursuant to section 7 of Republic Act No.
8479 or the Downstream Oil Industry Deregulation Act of 1998 (the Oil Deregulation Law) and rule III,
section 9 of its implementing rules and regulations (the Oil Deregulation Law IRR), the DOE encourages this
type of hospitality agreement among industry participants that serve the public interest, is intended to achieve
efficiency and cost reduction, and ensures continuous supply of petroleum products. Pursuant to rule III, section
10 of the Oil Deregulation Law IRR, the DOE monitors the relationship between the oil companies (refiners and
importers) and their dealers, haulers, and LPG distributors to help ensure the observance of fair and equitable
practices and to ensure the enforcement of such existing contracts. See “Industry –– Competitive Landscape”.
Pursuant to DOE Circular No. DC 2011-03-0002, all oil companies, except refiners, operating in the Philippines
and bulk suppliers must maintain a minimum inventory equivalent to 15 days’ supply of petroleum products,
excluding LPG, which must be maintained at seven days’ supply and refiners shall maintain a minimum
inventory equivalent to 30 days’ supply consisting of petroleum crude oil and refined products. The Company
typically holds approximately 40 to 50 days of crude oil and refined products inventory, which is in excess of
the 30-day minimum inventory requirement of the DOE.
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Secondary Distribution
From the fuel terminals, bulk fuel products are hauled by tank trucks owned by third parties to retail service
stations and by tank trucks and barges owned by third parties to commercial customers. Lubricants are delivered
from lubricants warehouses to commercial customers by outsourced trucking services. From the bitumen import
facilities, bulk and packed bitumen products are either delivered to commercial customers by outsourced
bitumen trucks and bitutainers or picked up by customers. Generally, the duration of the Company’s contracts
with third party tank truck service providers and haulers ranges from three to five years. The Company has longstanding relationships with these service providers based on customary terms of business.
Products
The Company’s products include gasoline, diesel, jet fuel, fuel oil, lubricants and bitumen. Since January 1,
2016, the Company’s gasoline and diesel fuels meet the requirements of Euro IV (PH). These fuels have a lower
sulfur content of 0.005%, as compared to 0.05% in Euro II (PH)-compliant fuels, thus reducing vehicular
emissions. Lubricant products include automotive, industrial and marine lubricants.
The table below sets forth each of the Company’s branded products, as well as a description of each brand as of
June 30, 2016.
Brand
Description
Shell V-Power Nitro+ Gasoline has a unique double action
formulation – increased detergent and increased friction modifier
content – designed to actively clean away deposits and protect vital
engine parts to improve performance. This friction modification
technology has been tested through the Shell Group’s longstanding
technical partnership with Ferrari and is designed to instantly reduce
friction in critical engine areas to help the engine deliver more
power to the wheels.
Shell FuelSave Gasoline is the basic, cost-effective product
designed to be efficient for regular use. Shell FuelSave Diesel is
enriched with Efficiency Improver designed to help improve fuel
economy by reducing energy loss. It helps prevent the build-up of
deposits in the engine and improve engine efficiency, helping
motorists fuel less quickly.
Shell V-Power Nitro+ Racing has all the advantages of Shell VPower Nitro+ Gasoline. In addition, it has the highest octane level
among the Company’s fuel products and is designed to deliver more
power and responsiveness.
Shell V-Power Nitro+ Diesel is designed to act instantly and
improve performance. It contains a new and more powerful
detergent technology for faster and more effective clean-up of diesel
fuel injection systems – including the latest generation of diesel
engines. It also restores and maintains engine power through active
engine protection and contains anti-corrosion agents to protect the
fuel system from corrosion.
124
Brand
Description
Shell FuelOil Plus is an advanced heavy fuel oil for use in boilers
and other equipment for generating heat and energy in
manufacturing operations and processes. Its unique formulation
helps improve fuel efficiency, reduce maintenance and increase
equipment reliability. It also helps lower carbon dioxide emissions,
particulate emissions and black smoke.
Shell Helix is a range of engine oils for privately-owned vehicles
designed to help keep the engine clean, minimize friction and
combat wear.
Shell Advance is a range of engine oils specifically formulated for
motorcycle and scooter engines designed to protect and enhance the
performance and durability of bikes.
Shell Rimula is a range of heavy-duty engine oils for commerciallyused vehicles designed to protect and prolong the life of the engine
and improve performance, thereby helping save on maintenance and
fuel costs.
Shell Argina is a range of engine oils designed for medium speed
diesel engines formulated to give longer oil and component life,
greater engine protection and reliability to lower operational costs.
Shell Tellus is a range of hydraulic oils designed to provide
outstanding wear protection and long life in all operating conditions.
Shell Alexia is a range of marine lubricants designed for low-speed
engines in all operating conditions. It is designed to protect against
corrosion and against oil stress, which helps to minimize feed rates
and contribute to reducing operating costs.
Shell Naturelle is a range of environmentally acceptable
biodegradable lubricants designed to minimize the environmental
impact in the event of leak or accidental spillway, particularly suited
for use in environmentally sensitive areas.
In 2015, the Company introduced five new Shell Advance lubricant products with PurePlus technology,
including motorcycle oils that were developed in response to the growing segment of motorcycles in the
Philippines. PurePlus technology converts natural gas into base oil with virtually none of the impurities found in
crude oil. The oil produced enhances viscosity, friction and performance, reduces oil consumption, and helps
maintain a cleaner engine.
Retail
According to Nexant, in 2015, the Company’s retail service stations have the highest network efficiency of 1.9
(against an average of 1.1 for the other two other major oil company competitors), where network efficiency is
defined as market share by volume divided by market share by number of stations. In 2015, the Company’s
retail service stations have the highest average annual throughput of 3.1 million liters per retail service station.
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In 2015, the Company had the second largest overall market share (29%) of the domestic retail fuel market in
terms of sales volume based on industry data from Nexant. As of June 30, 2016, the Company had 966 retail
service stations throughout the Philippines, representing 15% of the country’s total retail service station count.
Most of these retail service stations are located in urban centers such as Metro Manila in Luzon, where demand
is heaviest. In 2015, the Company sold 2,926 million liters of fuel.
The following map illustrates the Company’s retail network footprint across key regions in the Philippines.
158
Luzon
344
76
96
64
Visayas
5
79
Mindanao
71
36
37
As of June 30, 2016, there are 583 retail stations in Luzon, 160 in Visayas and 223 in Mindanao. There is a
higher number of retail stations in Luzon mainly due to the higher number of profitable urban centers and
surrounding suburbs. 344 out of the 966 retail stations in the Philippines are located in the greater Manila area.
Visayas and Mindanao are identified as emerging economic regions and growing rural trade areas. Thus, the
number of retail stations in these areas could potentially increase.
The Company employs two types of retail service station operating structures, namely: company-owned-dealeroperated retail service stations or CODO and dealer-owned-dealer-operated retail service stations or DODO. For
CODO retail service stations, the Company leases the land and owns the service station structures and
equipment, but third party dealers operate the retail service stations. Capital costs are also borne by the
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Company. For DODO retail service stations, third party dealers own or lease the land, build service station
structures according to Company specifications, own the service station equipment and operate the retail service
station, while bearing all capital costs. The process for selecting a dealer is conducted by the Company’s
Retailer Management Steering Group (RMSG). These stations are mostly situated in rural areas. Dealers are
selected based on case brief submissions and/or face-to-face interviews with the RMSG panel. The RMSG team
also visits and evaluates the sites of DODO retail service stations. All dealers are provided extensive on-site
training. The RMSG is further responsible for identifying gaps in all aspects of service, personnel, and site
performance, and ensuring dealer compliance with the Company’s retail business agreements, operations
manuals and HSSE standards. Furthermore, dealer performance is measured against the Company’s key
performance indicators and the extension of the dealership is subject to meeting the required standards. As of
June 30, 2016, of the Company’s 966 retail service stations, 45.8% were CODO retail service stations, and
54.2% were DODO retail service stations. For the years ended December 31, 2013, 2014 and 2015, there were
431, 444, and 443 CODO retail service stations, respectively, accounting for 1,551, 1,702, and 1,751 million
liters of total throughput volumes, respectively. For the same periods, there were 507, 529, and 518 DODO
retail service stations, respectively, accounting for 899, 1,013, and 1,081 million liters of total throughput
volumes, respectively. In 2015, CODO retail service stations accounted for 59% of fuel volumes sold, while
DODO retail service stations accounted for 38% of fuel volumes sold. CODO retail service stations report
higher average throughput per site as stations tend to be larger and are located in primary areas.
The Shell Select convenience stores introduced the concept of a retail service station-based 24-hour convenience
store. To complement fuel sales, improve traffic in the Company’s retail service stations and increase potential
revenues of the Company’s non-fuel business, the Company established Shell Select convenience stores. These
stores enable the Company to test new offers and services. In December 2015, the Company launched Deli2Go,
a dine-in section in Shell Select convenience stores that offers fresh meals and drinks, to transform the retail
service stations into a one-stop shop for motorists and enhance overall customer experience. As of June 30,
2015, there were 58 Shell Select convenience stores and ten Deli2Go stores in the Company’s retail service
station sites. Currently, DODO retail service stations have non-fuel offerings such as small convenience stores.
Dealers are free to decide on convenience retail offering subject to meeting a minimum core offering. The
Company does not get a share in the income of the DODO retail service stations from these non-fuel offerings
and margin adjustments allow dealers to recover capital costs. The Company intends to extend and roll out the
non-fuel offerings found at CODO retail service stations, including Shell Select convenience retailing, to DODO
retail service stations to increase the revenue pool of the Company.
The following table sets forth aggregated retail sales of convenience store items (including in-store dining items)
for the periods indicated.
2014
2013
2015
Convenience Store Retail
Revenues (P million) ..............................................................................................
Same store sales growth (%) .................................................................................
135.0
141.7
148.4
–
5.0
4.8
To further enhance the Company’s non-fuel offering and to optimize the retail service station site, the Company
leases space to leading brands such as Mini-Stop, Jollibee, McDonald’s, KFC, Pizza Hut and Starbucks and
other consumer service shops, including ATMs, in select retail service stations.
The Company also opened Shell Helix Service Centers and Shell HOC+ in select retail service stations to
improve customer experience through a one-stop lubrication and maintenance center. As of June 30, 2015, the
Company had a network of 113 Shell Helix Service Centers and 68 Shell HOC+ outlets. Shell HOC+ offers
quick and reliable oil change service as well as free preventive maintenance checks. Most Shell HOC+ outlets
can also cater to basic vehicle service needs such as tune-ups, transmission works, minor mechanical repairs,
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and brake system maintenance. Several Shell HOC+ outlets have lounge facilities that allow the customers to
wait in comfort while the vehicle is being serviced.
For the years ended December 31, 2013, 2014 and 2015, the Company sold eleven million liters, ten million
liters and eleven million liters, respectively.
The Company actively pursues initiatives to improve customer service, promote customer loyalty and support its
retail business. In 1996, the Company launched the Shell Pepeng Pasada Club or PPC, a loyalty program that
caters exclusively to public utility vehicle drivers, where active members with an average basket size of 200
liters of fuel per month for four wheel vehicles and 50 liters for tricycle and small boats, are eligible for various
scholarship, insurance and rewards benefits. The scholarship benefit offers capacity-building programs, free
basic skills and livelihood courses to its members and their dependents, thus enhancing their skills and
employability. The insurance benefit enables members to get free accident insurance which covers claims for
partial and permanent disability and death. The rewards benefit allows members to exchange their points for
various items and appliances. As of June 30, 2016, PPC had 205,778 members. In September 2013, the
Company partnered with Marketing Convergence, Inc. in a loyalty scheme under which motorists can earn
shopping points when they gas up at the Company’s retail service stations using their SM Advantage Card, SM
Prestige or Banco De Oro (BDO) Rewards Cards. In addition, motorists can earn points from purchases made at
Shell Select, the Company's retail service station-based 24-hour convenience store and by having their vehicles
serviced at Shell Helix Service Center or Shell HOC+. Accumulated points may be used at any SM retail stores
in the Philippines.
Commercial
The Company’s commercial sales are divided into four segments, namely, wholesale commercial fuels, jet fuel,
lubricants and bitumen, making it a one-stop shop for customers’ entire fuel and lubricant needs. The
Company’s strategic business relationships with SIETCO with respect to imported petroleum products supply,
Shell International Petroleum Company, Ltd. (SIPC) with respect to lubricants supply and SETL with respect to
bitumen supply, as well as its integrated supply chain and nationwide footprint allows it to supply fuels
lubricants and specialty products to a broad range of customers such as industry users, airlines (for both
domestic and international routes), manufacturing sector, automotive sector, franchised workshops, OEMs and
road contractors. As of June 30, 2016, the Company has a committed commercial customer base, 35% of which
have been in supply contract relationships with the Company for over ten years, 24% have been in supply
less than one year. As of June 30, 2016, the Company has supply contracts with engagement terms of six years
or longer with nearly 60% of its commercial customers, while 21% of its commercial customers have supply
contract lengths of three to five years, 73% have supply contract lengths of one to three years, and 0.1% have
supply contract lengths of less than one year. In 2015, wholesale commercial fuels, jet fuel, lubricants and
bitumen accounted for 85%, 11%, 2% and 1%, respectively, of the Company’s commercial sales volume. While
lubricants account for a small percentage of the Company’s total commercial sales volume, its margin
percentage is high as it can be sold at significantly higher prices than wholesale commercial fuels. In 2015,
wholesale commercial and jet fuel, lubricants, and other commercial products accounted for 68%, 28% and 4%,
respectively, of the commercial segment’s gross margins.
The Company manufactures and imports wholesale commercial fuel products. In 2015, these comprise of fuel
oil (52%), diesel (34%) and other fuel products such as kerosene (14%). The Company is the sole domestic
producer of fuel oil. The Company has a broad base of customers which includes manufacturing, marine,
mining, power and transport accounts. The Company is not dependent on one or a limited number of customers
and no one customer accounts for 10% or more of its revenues. In 2015, the Company sold 2,119 million liters
of wholesale commercial fuels.
The Company’s sole aviation fuel product is jet fuel, which it both manufactures and imports. Shell Aviation
Philippines, the Company’s aviation operations team, is located at the NAIA and its airline customers include
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Philippine Airlines, Singapore Airlines, and Lufthansa Airline, among many others. In addition, the Company
has an airport installation at Clark International Airport. In 2015, the Company sold 282 million liters of jet fuel.
The Company imports all of its lubricant products. In 2015, the Company sold 40 million liters of lubricant
products which consist of industrial oil (43%), heavy duty diesel engine oil (24%), motorcycle oil (18%),
passenger car motor oil (8%) and other lubricant products (7%). In addition, the Company sold four million
liters of marine lubricant products, including marine engine oils (74%) and other lubricant products (26%).
The Company imports and sells bitumen directly to road contractors and indirectly through bitumen resellers. In
2015, the Company sold 27 kilo tons of bitumen.
The following table sets out the Company’s commercial sales volumes by product for the years ended December
31, 2013, 2014 and 2015.
2014
2013
2015
Wholesale commercial fuels ......................................................
Fuel oil ....................................................................................
Diesel ......................................................................................
Others......................................................................................
Jet ................................................................................................
Bitumen1 .....................................................................................
Lubricants ...................................................................................
1,800
854
749
197
316
61
47
(million liters)
2,069
1,082
796
191
352
40
46
2,119
1,100
711
307
282
33
45
Total commercial ......................................................................
2,225
2,508
2,478
___________________________________
Note:
1
For the years ended December 31, 2013, 2014 and 2015, the Company sold 53, 33 and 27 kilo tons of bitumen, respectively.
Differentiated commercial service offers contribute to the Company’s commercial sales. The Company provides
technical consulting services to help customers optimize fuel and lubricants consumption and reduce costs
through solutions tailored to the customer’s business and needs. The Company provides technical expertise
relating to fuel and lubricants system quality assurance, product selection, troubleshooting fuel- and lubricantrelated applications issues and assisting with the implementation of premium fuel and lubricant products. The
service is delivered through teams of highly trained technical staff. In addition, the Company helps its
commercial customers manage price-related risks by offering price risk management arrangements.
CAPITAL EXPENDITURES PLAN
The Company has upgraded the Tabangao Refinery and expanded its retail service station network in the
Philippines over the past several years and intends to continue to increase investments in these areas in order to
optimize operational efficiency, reduce costs and increase market share. Specifically, the Company intends to
continue the expansion of its retail service station network and improve its manufacturing and supply facilities
and networks. The Company intends to finance these plans with cash generated from operations, existing cash
and the proceeds of the Offer.
The plans indicated above reflect the Company’s expectations and strategy as of the date of this Prospectus;
however, actual amounts, uses and sources of funds may change depending on future circumstances such as the
Company's future results of operations and financial condition, trends in prices, supply and demand of crude oil
and Finished Petroleum Products, developments in the competitive landscape, among others. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital
Expenditures”.
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EMPLOYEES
In 2015, the Company was the only oil and energy company included in the top ten list of most desirable
companies to work for in the Philippines, based on the Top Companies Report 2015 by Jobstreet.com
Philippines. As of June 30, 2016, the Company had 698 employees, all of whom are Filipino except for four
employees. The Company believes that it has a well-trained and experienced pool of employees. As of June 30,
2016, 23% of the Company’s employees had worked with it for over 20 years. The average tenure of the
Company’s employees is 12.10 years. The Company has access to a rich pipeline of internally grown talent as
well as through secondments from other entities of the Shell Group both from within the Philippines and
globally. The Company continues to implement programs for its employees’ professional and personal
development. The Company aims to support its core operating functions and grow the capability of its
employees through a variety of internal and external development and training programs and by sending its
employees on secondment to other entities of the Shell Group. The Company also provides financial assistance
to employees who wish to pursue post-graduate courses that, in the opinion of the Company, will enhance the
employee’s education and development to the advantage of both the individual and the Company.
The Company has collective bargaining agreements with Kapisanan Ng Mga Manggagawa sa Shell, the labor
union of 65 employees assigned to the Company’s Supply and Distribution Facilities and with Tabangao Shell
Refinery Employees Association, the labor union of 99 employees assigned to the Tabangao Refinery. As of
June 30, 2016, 23.5% of the Company’s employees were covered by collective bargaining agreements.
The Company has not experienced any strikes or work stoppages for more than ten years. The Company
considers its relationship with its employees to be highly positive.
INFORMATION TECHNOLOGY
The Company views information technology (IT) as an integral part of its operations. The Company believes
that its current IT systems streamline its operations and enhance its overall organizational efficiency. IT services
are provided to the Company by the Shell Group, by third parties under global contracts entered into by the
Shell Group and by third party service providers in the Philippines under contracts entered into by the Company.
The IT products and services provided by the Shell Group include infrastructure (such as network,
telecommunications, application hosting and back office services), applications, end user equipment and
software licenses. The core element of the Company’s IT infrastructure is Global SAP, the Shell Group’s global
enterprise resourcing system for managing procurement, orders, sales and distribution, customers, financials,
assets, materials and inventory, maintenance and projects. Global SAP is integrated with the Company’s other
applications, thus ensuring consistency and transparency in the management of the Company’s operations. The
Company also benefits from IT services provided by third parties such as AT&T, Hewlett Packard, Microsoft
and T-Systems under global contracts entered into by the Shell Group.
To minimize system downtime and to safeguard information in the event of a technical or operational failure,
the Company maintains an off-site IT back-up recovery center, which is updated in real time and is located at a
separate site from its head office. This back-up facility contains a substantially complete duplicate of all of the
Company’s core IT systems and can provide emergency back-up data if the Company’s primary electronic data
center fails. The Company conducts IT disaster recovery drills annually to enhance the effectiveness of its backup systems.
The Company believes that its IT systems are secure and adequate for its business and financial reporting.
CONTRACTING AND PROCUREMENT
The Company’s contracts and procurement (C&P) personnel across its various business groups are responsible
for the purchase of third party goods, equipment and services for the full scope of the Company’s activities in all
segments of its business. They work collaboratively, get involved early in the purchase process and develop
strong relationships and mutually beneficial partnerships to create a competitive advantage for the Company.
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The Company’s C&P personnel conduct a stringent counterparty diligence process to assure safety and quality
of third party goods, equipment and services. In addition, they manage external challenges such as cost pressure,
volatile economy, availability of quality supply, materials and markets volatility as well as scarcity of equipment
and engineering skills to enable the Company to achieve its desired outcomes and maximize potential cost
savings.
RESEARCH AND DEVELOPMENT
Research and development (R&D) activities are primarily carried out by a global network of ten R&D centers
operated by the Shell Group. The Company has access to advanced technological, operative and engineering
know-how through the Cost Contribution Agreement for Research and Development and Technical Support
Services with SIPC and the Oil Products Manufacturing Cost Sharing Agreement with Shell Global Solutions
International B.V. (SGSI). SIPC and SGSI provide technical services to refineries worldwide, and the Tabangao
Refinery is part of this extensive technical data bank. These agreements allow the Company to be constantly
updated regarding all technological, operational and engineering aspects of oil refining as well as crude oil and
product quality matters. Of particular value to the Company are SGSI’s process/engineering trouble shooting
and technical development training courses, technical publications, technical conferences, computer network
systems, engineering systems, and information on standards and developments on safety.
The Company’s in-house technological department is responsible for providing support to ensure new products
developed by the global R&D centers are launched successfully. Technical support includes product blending
validation, ensuring component availability and sustainability, providing quality checks and controls as well as
responding to technical inquiries from external parties. The Company’s in-house technological department also
plays a key role in ensuring the operational availability of the Tabangao Refinery and the Company’s Supply
and Distribution Facilities, achieving energy and margin optimizations at the Tabangao Refinery and the
Company’s Supply and Distribution Facilities as well as ensuring timely delivery of products to customers.
The Company believes that its continued success will be affected in part by its ability to be innovative and
attentive to consumer preferences and local market conditions. Thus, the Company’s in-house technological
department is committed to focusing on technical inputs to capture short and long-term opportunities in crude
and feedstock diversification, product slate value optimization, enhancement of the Tabangao Refinery’s
production unit capabilities and investments in the latest technology to develop high quality and innovative
products to meet the requirements of the market.
INTELLECTUAL PROPERTY
The Company’s intellectual property is material to its operations and the growth of its business. Specifically,
trademarks are important because brand name recognition is a key factor in the success of many of the branded
products the Company produces and distributes. The Company’s products are marketed under, among other
brands, “SHELL” brand licensed from Shell Brands International AG (Shell Brands) pursuant to a nonexclusive and non-transferrable trademark and manifestations license agreement. The Company pays an arm’s
length royalty fee pursuant to the agreement. The trademark license will continue in force unless either the
Company or Shell Brands elects to terminate the contract upon at least 360 days’ written notice. The Company
has not had any significant disputes with respect to any of the trademarks.
The Tabangao Refinery consists of various process units utilizing both Shell Group and third party proprietary
process technologies. Specifically, the platformer unit uses Honeywell UOP refining process technology and the
gas/liquid treating unit as well as the liquid treating unit uses Merrichem Company technology. For all other
units, use rights for technology under Shell Group patents and proprietary know-how are granted to the
Company under the Cost Contribution Agreement for Research and Development and Technical Support
Services between SIPC and the Company.
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PROPERTIES
The Company cannot own land and operates on various leased properties for the Tabangao Refinery, its Supply
and Distribution Facilities and various retail service stations located throughout the Philippines. According to
Article XII of the 1987 Constitution of the Philippines and Chapter 5 of Commonwealth Act No. 141, no private
land shall be transferred or conveyed except to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines at least 60% of whose capital is owned by such citizens. For its head
office, the Company leases an approximately 1,933 square meter parcel of land and the entire Shell House
Building situated on it from BDO. The duration of the lease for the Company’s head office is six years and will
expire in 2018, unless renewed by the parties’ mutual agreement.
The Tabangao Refinery is situated in Tabangao, Batangas, 121 kilometers south of Manila, and occupies
approximately 160 hectares of land. The Company leases the land on which the Tabangao Refinery is situated
from Ayala Securities Corporation under a long-term lease contract. This lease was later on assigned by Ayala
Securities Corporation to Ayala Corporation. The Company also has an extensive and integrated network of
Supply and Distribution Facilities and field sales office. See “— Operations — Manufacturing, Supply and
Distribution — Supply and Distribution Network”. These Supply and Distribution Facilities have a variety of
tanks, lorry trucks, machinery, building structures and equipment. The Company shares a joint storage facility,
JOCASP, at the NAIA with Chevron and Petron. In addition, the Company has a long-term lease with Batangas
Land Company, Inc. for a plot of land with an area of approximately 23,476 square meters. This is the site for
the NMIF. The Company also has a long-term lease with the PPA for the jetty area in front of the NIMF where a
pipeline passes through connecting to the Company’s terminals.
As of June 30, 2016, the Company had 966 retail service stations throughout the Philippines. See “Business —
Retail”. The Company intends to lease additional lots from third parties for the expansion of its retail network.
INSURANCE
The Company obtains and maintains responsible and reputable insurance coverage on its properties, assets and
operations in such amounts and covering such risks as the Company deems appropriate and as may be usually
carried by other companies engaged in the same or similar activities and owning similar properties in the various
geographical areas where the Company operates. The Company employs risk management for purposes of
analyzing the risks faced by its businesses in determining the appropriate insurance policies. The Company’s
insurance coverage includes aviation fuelling liability, marine cargo, property, directors and officers,
commercial general liability and business interruption. The Company believes its policies are in accordance with
customary industry practices, including deductibles and coverage amounts.
HEALTH, SAFETY, SECURITY AND ENVIRONMENTAL MATTERS
The Company is committed to sustainability and environmental awareness through its HSSE and Social
Performance Policy. These standards are in line with those of the Shell Group and apply to all aspects of the
Company’s activities, from designing a facility through to decommissioning a site. They apply also to its
employees, its contractors and any joint ventures where it has operational accountability.
The Company is subject to a number of employee health and safety regulations. For example, the Company is
subject to the occupational safety and health standards promulgated by the Department of Labor and
Employment. The Company’s HSSE personnel across its various business groups are responsible for
formulating, implementing and enforcing the Company’s employee health and safety policies, as well as
ensuring compliance with applicable laws and regulations.
The Company’s Goal Zero project aims for an accident-free workplace by focusing on three areas of safety
hazards where the Company has the highest risks for its types of activities: personal, process and transport
safety. Pursuant to this project, the Company has conducted training and skills development for employees,
contractors and other business partners. The training programs were designed to raise awareness and impart vital
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knowledge in connection with oil spill response, fire-fighting and basic safety. The Company’s fuel terminals
and lubricants warehouses have oil spill contingency plans, which can be executed whenever necessary.
Furthermore, the Company has additional controls in place to ensure shipping safety and to mitigate and manage
pollution risks.
In 2014, the Tabangao Refinery received the silver GKK award of DOLE for the Company’s programs on
occupational safety and health. The GKK is a biennial national award given by DOLE in recognition of the
outstanding achievements of establishments and individuals in terms of responding to the safety and health
needs of workers, workplaces and community. In 2015, the NMIF received an award for achieving one million
safe man-hours with no lost time accident by the Safety Organization of the Philippines, Inc. during its 47th
National Industrial Safety Convention. The annual convention recognizes companies that exemplify best
practices in occupational safety and health.
Project KALSADA (Kabataang Ligtas sa Sakuna at Disgrasya) is the Company’s road safety program for
kindergarten, elementary and high school students of schools located along the roads in the Tabangao to Libjo
area, as well Batangas City proper, which are traversed by lorry trucks to and from the Tabangao Refinery in
Tabangao, Batangas. The success of this road safety program has led to the reduction of road safety incidents in
the area and has also led the Company to replicate such program in other areas where it operates, including sites
in the Province of Palawan and in Bacolod City. In 2014, Project KALSADA received an Anvil Award of
Excellence in the Youth and Children’s Welfare category.
The Company is also subject to various environmental protection laws and regulations. For example, the
Company is subject to extensive regulation by the DENR. Among others, these DENR regulations require the
Company to designate and appoint a DENR-accredited pollution control officer for every installation, to engage
DENR-accredited transporters and treaters of hazardous waste, to secure environmental compliance certificates
for all environmentally critical projects, discharge permits, permits to operate air pollution sources and
hazardous waste generators, and to submit regular monitoring reports. The Company engages third party service
providers to carry out required activities relating to, among others, hazardous waste management, air emission
monitoring, effluent water testing and solid waste management. Furthermore, the Company avails of technical
assistance and consultancy services on areas of environmental management and engineering from the Shell
Group. The Company’s HSSE personnel, with assistance from external environmental instructors, regularly
conduct environmental awareness training for the Company’s employees, contractors and retail service station
dealers. The training module is accredited by the DENR’s Environmental Management Bureau.
In addition, the Company employs a three line of defense model to ensure compliance with applicable
environmental laws and regulations as well as with the Company’s internal policies. The first line consists of the
local team and the HSSE managers of each business to ensure policies are carried out on the frontlines through
initiatives such as ARROWS, Assessment of Risk and Reponses on the Worksites of Shell. The second line
consists of an oversight function by the regional and/or global representatives to ensure compliance with the
HSSE framework. The final line of defense is the audit process by Company’s internal audit department that
includes the review of the business frontlines and the oversight functions to ensure that HSSE requirements have
been implemented and are effective.
The Company also participates in various industry forums, such as the Federation of Philippine Industries and
Philippine Institute of Petroleum, to promote its HSSE policies and sustainable development.
As of the date of this Prospectus, the Company has not been cited or penalized for major violations of applicable
environmental laws.
CORPORATE SOCIAL RESPONSIBILITY
The Company is committed to making a difference in the Philippines and is focused on working with its host
communities, developing good relationships and mutual trust with local governments and implementing industry
best practices and environment-friendly technologies.
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The Company partners with PSFI, established in 1982, to make a positive impact in the areas of education,
employment, health, poverty alleviation, social services and disaster relief. The partnership between the
Company and PSFI spans more than 30 years and while initially focused in areas where the Company operates,
the programs of the Company and PSFI have now been successfully implemented nationwide. These include
programs on: (i) healthcare and services, sanitation, and safety, (ii) technical, vocational and agricultural skills
development, training and employment, (iii) livelihood and entrepreneurship development, (iv) leadership
enhancement and attitude development, and (v) environmental stewardship. Some of these programs are
described below.
To aid the Company’s efforts to recruit from local areas where it has business presence, it created the following
programs with PSFI: Sanayan sa Kakayahang Industriyal (SKIL), Sanayan ng Kakayahan sa Agrikultura
(SAKA) and Gas Mo Bukas Ko or GMBK (meaning “You fuel my future”). SKIL provides training to
deserving out-of-school youth in various technical courses such as welding, structural pipe fitting, and small
engine, refrigeration and air conditioning repair. Beginning in 2006, SKIL provided information and
communications technologies skills training. SAKA is an agricultural skills training program designed to
improve farm productivity and management of either lowland or upland farming. GMBK is a scholarship
program aimed at improving the lives of retail service station crew by enabling them to potentially pursue
alternative livelihood activities that could augment their current income. It offers technical vocational courses
such as automobile mechanic, basic computer, bookkeeping, cellular phone repair, computer servicing,
electronics, food and beverage servicing, refrigeration and air conditioning repair, and welding. Graduates of the
GMBK program eventually get promoted to more challenging roles in the retail service station.
The Company also hosts the Asian leg of the Shell Eco-marathon, a competition that challenges students to
design, build and drive the most energy-efficient car. This is in line with the Company’s advocacy for energy
efficiency to help reduce emissions and mitigate climate change.
In addition to Shell Eco-marathon, the Company has two long-running programs targeted at youth development
and education: (i) Shell National Students Art Competition, an annual nationwide search for young Filipino
artists in four categories (oil/acrylic, watercolor, sculpture and multi-media), and (ii) Shell National Youth
Active Chess Competition, an annual chess tournament open to Filipinos under 20 years old that aims to provide
a platform for fostering character formation, sportsmanship, and youth empowerment.
In 2014, the Company received the Big Tick Award from the United Kingdom Business in the Community
Responsible Business Awards for its relief and rehabilitation efforts following the devastation brought about by
Typhoon Haiyan. The Company, together with different Shell offices worldwide, provided funding for
immediate assistance and rehabilitation efforts, and launched the “Call for Help” campaign where Shell
worksites and retail service stations functioned as receiving centers for donations from Shell staff and the
general public. The Company also worked with the PPA and the International Container Terminal Services, Inc.
in facilitating smooth cargo handling of relief goods by providing free fuel and in continuing rehabilitation
efforts. The Company’s Country Disaster Relief and Rehabilitation Plan helped strengthen the host
communities’ resilience thus enabling the Company to resume safe business operations in the affected areas
within two to 13 days, minimizing impact on customer and supply operations.
COMPETITION
In the Philippines, the Company operates in a deregulated business environment, selling its products to
individual and commercial customers. The enactment of the Oil Deregulation Law in 1998 effectively removed
the rate-setting function of the Government through what was then known as the Energy Regulatory Board,
leaving price-setting to market forces. It also opened the oil industry to free competition. See “Regulatory and
Environmental Matters” for a more detailed discussion of the oil deregulation law.
The Philippine oil industry is dominated by three major Philippine oil companies: the Company, Petron and
Chevron, which, based on industry data from Nexant for 2015, together constitute 66% of the Philippine market
based on sales volume. Deregulation has seen the entry of more than 80 other industry market participants,
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according to Nexant, rendering the petroleum business more competitive. The Company and Petron operate the
only refineries in the country. The rest of the industry market participants are importers of finished petroleum
products or purchase finished petroleum products from other market participants in the local market. In the
Philippines, the Company competes with other industry market participants on the basis of price (which in turn
depends principally on the price and availability of crude oil and other feedstock and refinery efficiency),
product quality, customer service, operational efficiency and distribution network, with price being the most
important competitive factor. Providing total customer solutions has increased in importance as consumers
became more conscious of value.
The Company participates in the retail and commercial segments, through its network of retail service stations,
Supply and Distribution Facilities, dealers and distributors throughout the Philippines. For both segments, the
Company’s stable supply of feedstock as well as ready market and distribution channels place it at a competitive
advantage. In the retail segment, competition is most dynamic among the major firms, as seen through the
construction of retail service stations by Petron, Chevron, Total Philippines, Phoenix Petroleum, Seaoil and
other new participants in major thoroughfares. Participants in the retail sector continue to resort to aggressive
pricing and discounting in order to expand their market share. In the commercial sector, the major market
participants continue to invest heavily in order to increase their market share and tap new markets. Intense
competition among brands in the lubricant segment, including global brands such as Caltex, Castrol, Mobil and
Petron, continues. Brands compete for limited shelf space, which has led to the penetration of previously
unutilized markets, such as auto-dealerships in malls.
According to Nexant, in 2015, the Company has the second largest overall market share (by volume of fuel
sold) of the domestic retail fuel market, equal to 29%. According to Nexant, the Company’s retail service
stations have the highest network efficiency of 1.9 (against an average of 1.1 for the other two other major oil
company competitors) in 2015, where network efficiency is defined as market share by volume divided by
market share by number of retail service stations. It also featured the highest average annual throughput of 3.1
million liters per year per retail service station (against an average of 1.8 million liters per year for the other two
other major oil company competitors in the Philippines) in 2015. In the commercial segment, the Company’s
extensive supply and distribution network allows it to enjoy a significant market share in the wholesale
commercial fuels market in 2015.
Furthermore, the Philippines suffer from smuggling activities with fuel products being supplied illegally from
locations with cheaper fuel prices, such as Malaysia and Indonesia. According to Nexant, quantities of smuggled
fuel in the Philippines are difficult to substantiate, but may result in higher demand than is stated in published
statistics. Malaysia has expended more effort in tightening security off the coast of Sabah, a key location for
smuggling fuels across to Mindanao, Southern Philippines. In addition, reductions in fuel subsidies in markets,
such as Malaysia and Indonesia, combined with lower international oil prices have also reduced incentives. The
Government is planning and discussing a fuel-marking scheme to detect smuggled products. According to
Nexant, should efforts to curb or minimize smuggling gradually become effective, existing industry players
could benefit as markets served by smuggled products may be replaced by domestic supply or legal imported
products.
LEGAL PROCEEDINGS
As set forth below, 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.
Tax Related Cases
Excise Tax on Importations of Catalytic Cracked Gasoline (CCG) and Light Catalytic Cracked Gasoline
(LCCG)
From 2004 to 2009, the Company imported shipments of CCG and LCCG into the Philippines in accordance
with the BIR Authority to Release Imported Goods stating that the importation of CCG and LCCG is not subject
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to excise tax. Upon payment of VAT as assessed in the ATRIGs, the Bureau of Customs (BOC) allowed the
entry of the imported CCG and LCCG without payment of excise tax.
In 2009, the District Collector of the Port of Batangas issued a letter demanding from the Company payments of
deficiency excise tax, VAT and penalties covering importation entries for CCG and LCCG from 2006 to 2009.
The Company requested an appeal before the Commissioner of Customs (COC) for the cancellation of the
demand letter for lack of factual and legal basis, which was denied. The Company thereafter filed a petition for
review with the Court of Tax Appeals (CTA) to appeal the ruling of the COC and applied for a temporary
restraining order to immediately prevent the COC from seizing future shipments of the Company pursuant to
Section 1508 of the Tariff and Customs Code of the Philippines, which temporary restraining order was granted
upon the Company’s payment of a surety bond. On December 15, 2009, the BIR issued a ruling that CCG and
LCCG are subject to excise tax and reversing its earlier rulings to the contrary. The CTA’s Third Division, on
November 27, 2012, ruled for the Company and held that the BOC’s demand for payment of excise taxes on
imported CCG and LCCG was without merit. Both parties appealed to the CTA en banc. In its September 28,
2015 decision, the CTA en banc reversed the CTA Third Division, ruled in favor of the BOC and held that the
Company is liable to pay excise taxes and VAT on the importation of CCG and LCCG in the amount of for the
period from 2006 to 2009. The Company has filed a motion for reconsideration of that decision with the CTA en
banc. The Company continues to take appropriate legal action with respect to this case. For more information,
see Note 26 to the Company’s audited financial statements for the year ended December 31, 2015.
Excise Tax on Importations of Alkylate
Following the ruling of the BIR on December 15, 2009 authorizing the collection of excise taxes on CCG and
LCCG importations, the Company began importing alkylate as a blending component. In a ruling on June 29,
2012 (the Alkylate BIR Ruling), the BIR Commissioner held that alkylate is also subject of excise tax upon
importation. The Alkylate BIR Ruling further held that the Company is liable for the amount of P3 billion
representing the unpaid taxes on the importations of alkylate from 2010. The Company filed a petition for
review with the CTA. The Supreme Court also issued a temporary restraining order enjoining the CTA and the
tax-collecting agencies of the Government from imposing excise taxes on incoming alkylate importations of the
Company. The Company continues to take appropriate legal action with respect to this case.
Abandonment Case
In 1996, the COC filed a case against the Company alleging that the Company had failed to timely pay duties
and taxes on its crude imports. The lower court found in favor of the COC and the Company has since appealed
the decision on the grounds that the delay in payment was due to disputes regarding the computation of the
amounts. The case is on-going and as of December 31, 2015, the Company has made provisions in the amount
of P936,899,834 to cover its financial exposure if the final decision is not in the Company’s favor. Other Significant Pending Tax Cases
The Company is a defendant or respondent in cases involving tax credit certificates and assessments for local
taxes by Batangas City government. The total amount of cases pending (excluding interest and penalties) is
P653 million. There are also tax cases filed by the Company for its claims from the Government that are
pending as of December 31, 2013, 2014, and 2015.
Other Cases
Pandacan Terminal Operations
On November 28, 2001, the city government of Manila enacted Ordinance No. 8207 rezoning the Pandacan
depot from an Industrial II to a Commercial I classification. The ordinance required the Company, Petron, and
Chevron operating in Pandacan to cease and desist from operating within six months. On November 25, 2014,
the Supreme Court declared Ordinance No. 8187 of the Manila City government, which repealed Ordinance No.
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8207, unconstitutional and invalid with respect to the continuing stay of the Pandacan depots. As of November
24, 2015, the Company has complied with the latest decision of the Supreme Court and operation of its
petroleum product storage facilities has been transferred to another location.
West Tower Condominium Corporation
In May 2010, the FPIC pipeline, which delivered fuel for the Company and Chevron from Batangas to Manila,
closed down after oil from a portion of the pipeline was discovered to have leaked into the basement of the West
Tower Condominiums in Barangay Bangkal, Makati City. The 15 to 20 drums per day leakage caused the City
of Makati to order the shutdown of the pipeline to prevent discharge of contaminated water into the drainage
system of Barangay Bangkal, and residents were evacuated.
On March 24, 2011, an environmental case was filed against FPIC, First Gen Corporation, Chevron, and their
respective directors along with four directors (two of whom are also officers) of the Company, who are also
directors of FPIC, and the Company. On August 22, 2011, the regional trial court ruled that the case is an
ordinary civil case for damages and directed that the same be re-raffled to a regular court and that each of the
individual complainants file a separate action for damages, as the damage suffered by one is not necessarily the
same for all, and accordingly, pay the appropriate filing fees. The motion for reconsideration filed by the
complainants was denied by the regional trial court on March 29, 2012. West Tower appealed, but the Court of
Appeals affirmed the decision of the lower court. West Tower submitted a petition to the Supreme Court on
February 11, 2015 seeking a review of the decision of the Court of Appeals. The Company has filed its
comment with opposition on September 18, 2015 asking the Supreme Court to dismiss the petition.
In relation to the above-mentioned case and based on the alleged opinion of a group of experts commissioned by
the local government confirming the leak from the FPIC pipeline causing products to seep into the basement of
West Tower Condominium, West Tower applied for a Writ of Kalikasan (Writ of Nature/Environment) or an
environmental protection order. Since the filing of said case in 2010, the Supreme Court has ordered the
continued shutdown of the FPIC pipeline. On November 16, 2015, the directors nominated by Shell Petroleum
Co., Ltd. in FPIC filed their consolidated comment/opposition to the motion for partial reconsideration. They
argued, among others, that that the issuance of an environmental protection order is no longer necessary
considering that the Supreme Court had already ordered the relocation and dismantling of the Pandacan oil
depot, and that the DOE has already certified the safety of commercial operations of the FPIC pipeline.
Subsequent complaints have been filed against the respondents, including complaints for criminal negligence
against the eleven directors of the Company and two of its officers who were also directors of FPIC, all of
whom were holding such positions at the time of the filing of the complaints, which are currently pending
preliminary investigation before the Department of Justice. The foregoing cases are pending resolution.
Desalination Ordinance
In 2003, pursuant to Batangas City Ordinance No. 3 S. 2001 (the Desalination Ordinance), the Company and
First Gas Power Corporation commissioned a groundwater study of Batangas City to determine the effects of
industrial operations on the Batangas aquifer. The Desalination Ordinance requires all established heavy
industries established along the Batangas City portion of the Batangas Bay and in areas declared as Heavy
Industrial Zones to construct desalination plants. The ordinance also prohibits the use or exploitation of
underground fresh water for cooling system and industrial purposes. The Ordinance provided for a 5-year grace
period within which all existing industries must comply with the Ordinance. The results of the study show that
the present residential, commercial and industrial users of groundwater in Batangas do not adversely affect the
Batangas aquifer. Further studies of the Tabangao Watershed confirmed the initial finding that that there was no
legal basis for the requirement to install desalination plants. The Company sought and obtained an injunction
enjoining the City of Batangas from implementing the Ordinance. The Regional Trial Court of Batangas as well
as the Court of Appeals decided in favor of the Company. The case is currently pending in the Supreme Court.
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Davao City
In 1996, an action for damages was filed against several US corporations, including Shell Oil Company, alleged
to be manufacturers of pesticides containing chemicals used in plantations in Davao City.
In August 2009, a Davao City trial court issued a Notice of Garnishment of the Company's funds in a bank. The
Company sought and obtained protective relief from the Court of Appeals on the basis that it was not a party to
the case nor to the compromise agreement subject of the case. The Court of Appeals further ordered the judge
who issued the execution and garnishment against the Company's assets to recuse himself from further presiding
in the proceedings in the trial court. The Supreme Court has declared the dismissal of one of the two petitions
filed for failure of petitioners to sufficiently show that the Court of Appeals committed any reversible error in
the decision and resolution. The Supreme Court has not yet resolved the remaining petition.
Other Proceedings
The Company is also party to certain other proceedings or disputes arising out of the ordinary course of its
business, including legal proceedings with respect to tax, regulatory and other matters. While the results of
litigation cannot be predicted with certainty, the Company believes that a negative outcome of any one of these
other proceedings will not have a material adverse effect on its business, financial condition or results of
operations.
INVESTOR RELATIONS
Effective immediately upon issuance by the Philippine SEC of the Permit to Sell the Offer Shares, the Company
will form an Investor Relations Office to (a) create and implement an investor relations program that reaches out
to all shareholders and fully informs them of corporate activities, and (b) formulate a clear policy on
communicating and relating relevant information to Company shareholders and to the broader investor
community accurately, effectively and sufficiently. The Investor Relations Office shall report to the Chief
Financial Officer.
Agnez Yap-Abina will head the Company’s Investor Relations Office and serve as the Company’s designated
Investor Relations Officer (IRO). The IRO will ensure that the Company complies with, and files on a timely
basis, all required disclosures and continuing requirements of the Philippine SEC and the PSE. The IRO will
also be responsible for ensuring that the Company’s shareholders have timely and uniform access to official
announcements, disclosures and market-sensitive information relating to the Company. As the Company’s
officially designated spokesperson, the IRO will be responsible for receiving and responding to investor and
shareholder queries. In addition, the IRO will oversee most aspects of the Company’s shareholder meetings,
press conferences, investor briefings, management of the investor relations portion of the Company’s website
and the preparation of the Company’s annual reports. The IRO will also be responsible for conveying
information such as the Company’s policy on corporate governance and corporate social responsibility, as well
as other qualitative aspects of the Company’s operations and performance.
The Company’s Investor Relations Office will be located at Pilipinas Shell Petroleum Corporation Shell House
at 156 Valero Street, Salcedo Village, 1227 Makati City, Philippines. The phone number of the Investor
Relations Office is +632 499 4001, and the email address is [email protected]. The website
of the Company’s Investor Relations Office will be available at http://pilipinas.shell.com.ph.
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REGULATORY AND ENVIRONMENTAL MATTERS
The statements herein are based on the laws in force as of the date of this Prospectus and are subject to any
changes in law occurring after such date, which changes could be made on a retroactive basis. The following
summary does not purport to be a comprehensive description of all of the regulatory and environmental
considerations that may be relevant to the Company or the offering.
GENERAL
Downstream Oil Industry Deregulation Act of 1998
The Oil Deregulation Law provides the regulatory framework for the downstream oil industry in the Philippines.
Under the Oil Deregulation Law, any person may import or purchase any quantity of crude oil and petroleum
products from foreign and domestic sources, lease or own and operate refineries and other downstream oil
facilities, and market such crude oil and petroleum products either in a generic name or in its own trade name, or
use the same for its own requirement. The same law declared as policy of the state the liberalization and
deregulation of the downstream oil industry in order to ensure a truly competitive market under a regime of fair
prices, adequate and continuous supply of environmentally clean and high quality petroleum products.
Additionally, the law requires all entities engaged in the oil refinery business to make a public offering of at
least ten percent of its common stock through an exchange to broaden the base of ownership of private
enterprises in keeping with the economy and patrimony provisions espoused under the Philippine Constitution.
To ensure the attainment of these objectives, the DOE, in consultation with relevant government agencies,
promulgated the Implementing Rules and Regulations of the Oil Deregulation Law in March 1998 through
Department Circular No. 98-03-004, as amended.
The DOE is the lead government agency overseeing the oil sector. With the enactment of the Oil Deregulation
Law, the regulatory functions of the DOE were significantly reduced. 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 and violations under the law, which includes
prohibited acts such as cartelization and predatory pricing.
Other functions of the DOE under the Oil Deregulation Law include the following:
(a) monitoring and publishing the daily international crude oil prices, following the movements of domestic oil
prices, monitoring the quality of petroleum and stopping the operation of businesses involved in the sale of
petroleum products which do not comply with national standards of quality;
(b) monitoring the refining and manufacturing processes of local petroleum products to ensure clean and safe
technologies are applied;
(c) maintaining a periodic schedule of present and future total industry inventory of petroleum products to
determine the level of supply; and
(d) immediately acting upon any report from any person of an unreasonable rise in prices of petroleum
products.
Section 22 of the Oil Deregulation Law, as clarified by the Department of Justice Opinion No. 006 S. 2001,
likewise requires any person or entity engaged in the oil refinery business to make a public offering through the
stock exchange of at least ten percent of its common stock within a period of three years from the effective date
of the law or the commencement of its refinery operations; provided, that no single person or entity shall be
allowed to own more than five percent of such stock offering; provided, further, that any crude oil refining
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company and any stockholder holding a substantial interest shall not acquire, directly or indirectly, any share of
stock offered by any other crude oil refining company. “Substantial interest” refers to the ownership of shares of
stock of a domestic crude oil refining corporation or entity, held beneficially, on record, or through any
contractual arrangement, that would allow such shareholder to exercise voting power sufficient to elect at least
one member of the board of directors of such domestic crude oil refining corporation or entity, and/or the
occupation of any senior officer position in a domestic crude oil refining company, giving such person
significant decision-making power in that company.
ENVIRONMENTAL LAWS
Development projects that are classified by law as environmentally critical or projects within statutorily defined
environmentally critical areas are required to obtain an Environmental Compliance Certificate (the ECC) prior
to commencement. The DENR, through its regional offices or through the Environmental Management Bureau
(the EMB), determines whether a project is environmentally critical or located in an environmentally critical
area. As a requirement for the issuance of an ECC, an environmentally critical project must submit an
Environment Impact Statement (EIS) to the EMB while a project in an environmentally critical area is generally
required to submit an Initial Environmental Examination to the proper DENR regional office. In the case of an
environmentally critical project within an environmentally critical area, an EIS is required.
The EIS refers to both the document and the study of a project’s environmental impact, including a discussion of
the direct and indirect consequences to human welfare and the ecological as well as environmental integrity. The
Initial Environmental Examination refers to the document and the study describing the environmental impact,
including mitigation and enhancement measures, for projects in environmentally critical areas. Presidential
Proclamation No. 2146 classifies petroleum and petro-chemical industries, including oil and gas, as
environmentally critical projects.
While the terms and conditions of an EIS or an Initial Environmental Examination may vary from project to
project, as a minimum, it contains all relevant information regarding the project’s environmental effects. The
entire process of organization, administration and assessment of the effects of any project on the quality of the
physical, biological and socio-economic environment as well as the design of appropriate preventive, mitigating
and enhancement measures is known as the EIS System. The EIS System successfully culminates in the
issuance of an ECC. The issuance of an ECC is a Government certification that the proposed project or
undertaking will not cause a significant negative environmental impact; that the proponent has complied with all
the requirements of the EIS System; and that the proponent is committed to implementing its approved
Environmental Management Plan in the EIS or, if an Initial Environmental Examination was required, that it
shall comply with the mitigation measures provided therein.
Project proponents that prepare an EIS are required to establish an Environmental Guarantee Fund when the
ECC is issued for projects determined by the DENR to pose a significant public risk to life, health, property and
the environment or where the project requires rehabilitation or restoration. The Environmental Guarantee Fund
is intended to meet any damage caused by such a project as well as any rehabilitation and restoration measures.
Project proponents that prepare an EIS are required to include a commitment to establish an Environmental
Monitoring Fund when an ECC is eventually issued. In any case, the establishment of an Environmental
Monitoring Fund must not occur later than the initial construction phase of the project. The Environmental
Monitoring Fund must be used to support the activities of a multi-partite monitoring team, which will be
organized to monitor compliance with the ECC and applicable laws, rules and regulations.
The Biofuels Act of 2006
The Biofuels Act aims to reduce the dependence of the transport sector on imported fuel and, pursuant to such
law, regulations mandate that all premium gasoline fuel sold by every oil company in the Philippines should
contain 10% bioethanol starting August 6, 2011. For diesel engines, the mandated biodiesel blend in the country
was increased from 1% to 2% starting February 2009.
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In 2008, a Joint Administrative Order known as the Guidelines Governing the Biofuel Feedstock Production and
Biofuel Blends Production, Distribution and Sale (the Biofuel Guidelines) was issued by various government
agencies. The Biofuel Guidelines provide for responsibilities of oil companies in the sourcing and blending of
biodiesel and bioethanol with diesel and gasoline. The Biofuel Guidelines mandate that oil companies should
source biofuels only from biofuel producers accredited by the DOE or from biofuel distributors registered with
the DOE. Moreover, unless authorized by DOE to import in case of shortage of supply of locally-produced
bioethanol as provided for under the Biofuels Act, an oil company’s failure to source its biofuels from
accredited biofuels producers and/or registered biofuel distributors would constitute a prohibited act.
In 2011, the DOE issued Circular No. 2011-12-0013, entitled Guidelines on the Utilization of Locally-Produced
Bioethanol in the Production of E-Gasoline Consistent with the Biofuels Act of 2006” (the Bioethanol
Circular). The Bioethanol Circular requires oil companies operating in the Philippines to submit to the DOE’s
Oil Industry Management Bureau certain reports in order for the Oil Industry Management Bureau to monitor
the oil companies’ compliance with the Bioethanol Circular, including a quarterly certification on compliance
with local monthly allocations for the use of locally-sourced bioethanol during the previous quarter and the 10%
mandated blend of biofuel by volume into all gasoline fuel distributed and sold. However, in June 2015, the
DOE issued Circular 2015-06-0005, temporarily waiving the ethanol blend requirement for premium plus grade
gasoline products due to insufficient amounts of locally-produced bioethanol and to reduce the level of
bioethanol importation.
Renewable Energy Act of 2008
Republic Act No. 9513, also known as the Renewable Energy Act of 2008 aims to promote development and
commercialization of renewable and environment-friendly energy resources such as biomass, solar, and wind
through various tax incentives. Some of the tax incentives granted to renewable energy developers under the law
include (i) a seven-year income tax holiday; (ii) duty free importation of renewable energy machinery,
equipment, and materials; (iii) special realty tax rates on equipment and machinery; (iv) zero percent VAT rate
for power generated from these energy sources; (v) the imposition of a reduced corporate tax of 10% on its net
taxable income after the income tax holiday; (vi) tax exemption of carbon credits; and (vii) subject to prior
approval of the DOE, and under certain circumstances, tax credit on domestic capital equipment and services.
Philippine Clean Air Act of 1999
Republic Act No. 8749, otherwise known as the Philippine Clean Air Act of 1999 (the Clean Air Act), provides
more stringent fuel specifications over a period of time to reduce emission that pollutes the air. The Clean Air
Act specifies the allowable sulfur and benzene content for gasoline and automotive diesel. Under the law, oil
firms are mandated to lower the sulfur content of automotive diesel oils to 0.05% by January 1, 2004
nationwide. The law also regulates the use of any fuel or fuel additives. Furthermore, the Clean Air Act
prohibits a manufacturer, processor or trader of any fuel or additive to import, sell, offer for sale, or introduce
into commerce such fuel or additive unless these have been registered with the DOE. All the requirements of the
said law have been implemented, starting with the phase-out of leaded gasoline in Metro Manila in April 2000
and all over the country in December 2000.
The Technical Committee on Petroleum Products and Additives sets the standards for certain petroleum
products following strict time-bound and quality-specific targets under the mandate of the Clean Air Act and the
DOE initiative on alternative fuels.
Philippine Clean Water Act of 2004
In 2004, Republic Act No. 9275, or the Philippine Clean Water Act of 2004 (the Clean Water Act), was
enacted to streamline processes and procedures in the prevention, control, and abatement of pollution from landbased sources (industries and commercial establishments, agriculture and community/household activities) in
the country’s water resources. The EMB, in partnership with other government agencies and the respective local
government units, is tasked by the implementing rules of the Clean Water Act to identify existing sources of
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water pollutants and strictly monitor pollution sources which are not in compliance with the effluent standards
provided in the law.
All owners or operators of facilities that discharge wastewater are required to get a permit to discharge from the
DENR or the Laguna Lake Development Authority, and to report the quality of effluents on a regular basis.
Oil Pollution Compensation Act of 2007
Republic Act No. 9483, otherwise known as the Oil Pollution Compensation Act of 2007 (the Oil Pollution
Compensation Act), provides that any person who has received more than 150,000 tons of “contributing oil”
(as explained below) in a calendar year in all ports or terminal installations in the Philippines through carriage
by sea shall pay contributions to the International Oil Pollution Compensation Fund in accordance with the
provisions of the 1992 International Convention on the Establishment of an International Fund for
Compensation for Oil Pollution Damage (the 1992 Fund Convention). For this purpose, “oil” includes any
persistent hydrocarbon mineral oil such as crude oil, fuel oil, heavy diesel oil and lubricating oil, whether
carried on board a ship as cargo or in bunkers of such a ship.
A person shall be deemed to have received “contributing oil,” for purposes of determining required
contributions, if he received such oil from another country or from another port or terminal installation within
the Philippines, notwithstanding that this oil had already been previously received by him. Where the quantity of
contributing oil received by any person in the Philippines in a calendar year, when aggregated with the quantity
of contributing oil received in the Philippines in that year by such person’s subsidiaries or affiliates, exceeds
150,000 tons, such person, including its subsidiaries and affiliates, shall pay contributions in respect of the
actual quantity received by each, notwithstanding that the actual quantity received by each did not exceed
150,000 tons.
The Oil Pollution Compensation Act proposes to collect a fee of ten centavos per liter from owners and
operators of tankers and barges hauling oil and/or petroleum products in Philippine waterways and coast wise
shipping routes. This new fund, named the Oil Pollution Management Fund, will be on top of the requirement
under the 1992 Civil Liability Convention and 1992 Fund Convention and will be administered by the Maritime
Industry Authority (MARINA).
Other Regulations on Water Pollution
Philippine maritime laws and regulations are enforced by two government agencies: the MARINA and the
Philippine Coast Guard. Both are agencies under the Department of Transportation and Communications.
The MARINA is responsible for integrating the development, promotion, and regulation of the maritime
industry in the Philippines. It exercises jurisdiction over the development, promotion, and regulation of all
enterprises engaged in the business of designing, constructing, manufacturing, acquiring, operating, supplying,
repairing, and/or maintaining vessels, or component parts thereof, of managing and/or operating shipping lines,
shipyards, dry docks, marine railways, marine repair ships, shipping and freight forwarding agencies, and
similar enterprises.
To address issues on marine pollution and oil spillage, the MARINA mandated the use of double-hull vessels
beginning at the end of 2008 for transporting black products and by 2011 for white products in certain
circumstances.
The Philippine Coast Guard, in a 2005 memorandum circular, provided implementing guidelines based on the
International Convention for the Prevention of Pollution from Ships, MARPOL 73/78. The guidelines provide
that oil companies in major ports or terminals/depots are required to inform the Philippine Coast Guard through
its nearest station of all transfer operations of oil cargoes in their respective areas. Furthermore, oil companies
and tanker owners are required to conduct regular team trainings on managing oil spill operations including the
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handling and operations of MARPOL combating equipment. A dedicated oil spill response team is required to
be organized to react to land and ship-originated oil spills.
Moreover, both the Clean Water Act and the Philippine Coast Guard guidelines provide that the spiller or the
person who causes the pollution have the primary responsibility of conducting clean-up operations at its own
expense.
FOREIGN INVESTMENT LAWS AND RESTRICTIONS
Land Ownership
The Philippine Constitution and related statutes set forth restrictions on foreign ownership of owning land in the
Philippines. Article XII, Section 7 of the Philippine Constitution, in relation to Article XII, Section 2 of the
Philippine Constitution and Chapter 5 of Commonwealth Act No. 141, states that no private land shall be
transferred or conveyed except to citizens of the Philippines or to corporations or associations organized under
the laws of the Philippines at least 60% of whose capital is owned by such citizens.
The Company does not own any private land.
Retail Trade Liberalization Act
Republic Act No. 8762, otherwise known as the Retail Trade Liberalization Act of 2000 (the Trade
Liberalization Act), was enacted into law on March 7, 2000. The Trade Liberalization Act liberalized the retail
industry to encourage Filipino and foreign investors to forge an efficient and competitive retail trade sector in
the interest of empowering the Filipino consumer through lower prices, high quality goods, better services, and
wider choices. Prior to the passage of the Trade Liberalization Act, retail trade was limited to Filipino citizens or
corporations that are 100% Filipino-owned.
“Retail Trade” is defined by the Trade Liberalization Act to cover any act, occupation, or calling of habitually
selling direct to the general public any merchandise, commodities, or goods for consumption. The law provides
that foreign-owned partnerships, associations and corporations formed and organized under the laws of the
Philippines may, upon registration with the Philippine SEC and the DTI or in case of foreign-owned single
proprietorships, with the DTI, engage or invest in the retail trade business, in accordance with the following
categories:

Category A—Enterprises with paid-up capital of the equivalent in Peso of less than US$2.5 million shall
be reserved exclusively for Filipino citizens and corporations wholly-owned by Filipino citizens.

Category B—Enterprises with a minimum paid-up capital of the equivalent in Peso of US$2.5 million but
less than US$7.5 million may be wholly owned by foreigners except for the first two years after the
effectiveness of the Trade Liberalization Act wherein foreign participation shall be limited to not more
than 60% of total equity.

Category C—Enterprises with a paid-up capital of the equivalent in Peso of US$7.5 million or more may
be wholly owned by foreigners, provided, that in no case shall the investments for establishing a store in
Categories B and C be less than the equivalent in Peso of US$830,000(1); and

Category D—Enterprises specializing in high-end or luxury products with a paid up capital of the
equivalent in Peso of US$250,000 per store may be wholly-owned by foreigners.
___________________________
(1)
Category C ceased to be available as a permitted category with effect from March 25, 2002.
No foreign retailer is allowed to engage in retail trade in the Philippines unless all the following qualifications
are met:
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
A minimum of US$200 million net worth in its parent corporation for categories B and C, and
US$50 million net worth in its parent corporation for category D;

Five retail branches or franchises in operation anywhere around the world unless such retailer has at least
one store capitalized at a minimum of US$25 million;

Five-year track record in retail; and

Only nationals from, or judicial entities formed or incorporated in, countries which allow the entry of
Filipino retailers, shall be allowed to engage in retail trade in the Philippines.
The implementing rules of the Trade Liberalization Act define a foreign retailer as an individual who is not a
Filipino citizen, or a corporation, partnership, association, or entity that is not wholly-owned by Filipinos,
engaged in retail trade. The DTI is authorized to pre-qualify all foreign retailers, subject to the provisions of the
Trade Liberalization Act, before they are allowed to conduct business in the Philippines.
Foreign Investment Act of 1991
The Foreign Investment Act of 1991 (the FIA) liberalized the entry of foreign investment into the Philippines.
Under the FIA, in domestic market enterprises, foreigners can own as much as 100% equity except in areas
specified in the Foreign Investment Negative List (the Negative List). The Negative List enumerates industries
and activities which have foreign ownership limitations under the FIA and other existing laws. The oil refining
and distribution business is not found in the latest (10th) Negative List of the FIA.
In connection with the ownership of private land, however, the Philippine Constitution states that no private
land shall be transferred or conveyed except to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines at least 60% of whose capital is owned by such citizens.
For the purpose of complying with nationality laws, the term “Philippine National” is defined under the FIA as
any of the following:
(a) a citizen of the Philippines;
(b) a domestic partnership or association wholly-owned by citizens of the Philippines;
(c) a corporation organized under the laws of the Philippines of which at least 60% of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines;
(d) a corporation organized abroad and registered to do business in the Philippines under the Philippine
Corporation Code, of which 100% of the capital stock outstanding and entitled to vote is wholly owned by
Filipinos; or
(e) a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a
Philippine National and at least 60% of the fund will accrue to the benefit of Philippine Nationals.
For as long as the percentage of Filipino ownership of the capital stock of the corporation is at least 60% of the
total shares outstanding and voting, the corporation shall be considered as a 100% Filipino-owned corporation.
A corporation with more than 40% foreign equity may be allowed to lease private land for a period of 25 years,
renewable for another 25 years.
Local Government Code
The Local Government Code (“LGC”) establishes the system and powers of provincial, city, municipal, and
barangay governments in the country. The LGC general welfare clause states that every local government unit
144
(“LGU”) shall exercise the powers expressly granted, those necessarily implied, as well as powers necessary,
appropriate, or incidental for its efficient and effective governance, and those which are essential to the
promotion of the general welfare.
LGUs exercise police power through their respective legislative bodies. Specifically, the LGU, though its
legislative body, has the authority to enact such ordinances as it may deem necessary and proper for sanitation
and safety, the furtherance of the prosperity, and the promotion of the morality, peace, good order, comfort,
convenience, and general welfare of the locality and its inhabitants. Ordinances can reclassify land, order the
closure of business establishments, and require permits and licenses from businesses operating within the
territorial jurisdiction of the LGU.
An ordinance may be repealed by a subsequent ordinance expressly repealing or declaring it as invalid. An
ordinance may also be repealed by implication by a subsequent ordinance that is inconsistent or contrary, in
whole or in part, to the previous ordinance. Under the LGC, the Sangguniang Panlalawigan (provincial council)
has the power to review ordinances passed by a city or municipality council and can declare ordinances invalid,
in whole or in part, if it finds that the lower council exceeded its authority in enacting the ordinance.
OTHER REGULATORY REQUIREMENTS
Governmental approval of the Company’s products and services is generally not required. However, products
refined at the Tabangao Refinery are subject to PNS specifications. The DTI, through the Bureau of Products
Standards, ensures that all products comply with the specifications of the Philippine National Standards. The Oil
Deregulation Law also requires the registration with the DOE of any fuel additive prior to its use in a product.
The DOE, through its Department Circular No. DC 2003-11-010, otherwise known as the Retail Rules, requires
that all gasoline retail stations should at least have a minimum lot area of 100 square meters to ensure that all
vehicles being serviced should at all times be inside the business premises. Liquid petroleum products (as
defined in the circular) should only be transferred from underground tanks by means of fixed pumps designed
and equipped to allow the control of the flow and prevent leakage or accidental discharge. Liquid petroleum
products shall not be dispensed from above-ground tanks, portable tanks, tank vehicles, drums, barrels or similar
containers, e.g. bote-bote (as defined in the circular), into the fuel tanks of motor vehicles or containers.
On September 7, 2010, the DENR issued Department Order No. 2010-23 on the Revised Emission Standards for
Motor Vehicles Equipped with Compression Ignition and Spark Ignition Engines, mandating compliance of all
new passenger and light duty motor vehicles with Euro IV (PH) emission limits subject to fuel availability,
starting on January 1, 2016. Euro IV vehicle emission technology requires a more stringent fuel quality of
0.005% sulfur content for both diesel and gasoline.
Government regulations also 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 ECC 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; (f)
bunkering from freeports and special economic zones; and (g) importations of petroleum products and additives.
In addition, importations of restricted goods require clearances from the proper governmental authorities.
Other Relevant Tax-Related Regulations
Taxes and duties applicable to the oil industry have had periodic and unpredictable changes over the last several
years. The import duty on crude oil was increased on January 1, 2005 from 3% to 5%, but was later reduced
back to 3% effective as of November 1, 2005.
145
Under Executive Order No. 527 dated May 12, 2006, upon certification by the DOE that the trigger price levels
provided therein have been reached, the 3% import duty on crude oil shall be adjusted to 2%, 1% or 0%.
Subsequently, Executive Order No. 850, which took effect on January 1, 2010, modified the rates of duty on
certain imported articles in order to implement the Philippines’ commitment to eliminate the tariff rates on
certain products under the Common Effective Preferential Tariff Scheme for the ASEAN Free Trade Area
ASEAN Trade in Goods Agreement (ATIGA). Under the ATIGA, crude oil and finished petroleum products
imported from Association of Southeast Asian Nations (ASEAN) member states are levied zero rates. To
address the tariff distortion between ASEAN and non-ASEAN member states brought about by the
implementation of the zero duty under Executive Order No. 850 and to provide a level playing field for local
refiners to compete with importers, the President issued Executive Order No. 890, which also imposed zero duty
effective as of July 4, 2010 for imported crude oil and finished petroleum products, except certain types of
aviation gas, from non-ASEAN member states.
Republic Act No. 9337 (the Expanded VAT Law) imposed a VAT of 10% on certain goods and services,
including petroleum products and its raw materials, particularly the sale and importation thereof. The rate was
further increased to 12% effective February 1, 2006. The Expanded VAT Law also limited the input VAT tax
credit to only 70% of the output VAT. Subsequently, however, Republic Act No. 9361, which was approved on
November 21, 2006, removed the 70% ceiling on the credit of input VAT to output VAT. As of November 1,
2005, the implementation date of the Expanded VAT Law, excise taxes on diesel, bunker fuel and kerosene
were lifted and excise taxes for regular gasoline were lowered to P4.35 per liter of volume capacity. In February
2012, the BIR issued Revenue Regulation No. 2-2012 stating that VAT and excise taxes due on all petroleum
and petroleum products that are imported and/or brought from abroad to the Philippines, including from the
freeport and economic zones, shall be paid by the importer to the BOC.
Republic Act No. 9136, or the Electric Power Industry Reform Act of 2001, provides for parity tax treatment
among imported oil and indigenous fuels. Prior to the enactment of this law, indigenous fuels were imposed
with higher taxes largely due to royalties to the Government.
146
BOARD OF DIRECTORS AND SENIOR MANAGEMENT
The overall management and supervision of the Company is undertaken by the Board at the direction of the
shareholders. The Company’s executive officers and management team support the Board by preparing
appropriate information and documents concerning the Company’s business operations, financial condition and
results of operations for its review.
THE BOARD AND SENIOR MANAGEMENT
The Board consists of eleven seats, of which two are for independent directors. The following table sets out
certain information regarding the members of the Board.
Name
Age
Citizenship
Position
Edgar O. Chua .............................................
59
Filipino
Chairman, Executive Director
Jose Jerome Rivera Pascual III ...................
52
Filipino
Treasurer, Executive Director
Anthony Lawrence D. Yam ........................
51
Filipino
Executive Director
Cesar G. Romero .........................................
51
Filipino
Director
Sebastian Cortez Quiniones ........................
56
Filipino
Director
Mona Lisa Bautista de la Cruz ....................
59
Filipino
Director
Anabil Dutta ................................................
49
Indian
Director
Nina D. Aguas .............................................
63
Filipino
Director
Fernando Zobel de Ayala ............................
55
Filipino
Independent Director
Cesar A. Buenaventura................................
86
Filipino
Independent Director
The following table sets out certain information regarding the Company’s executive officers.
Name
Age
Citizenship
Position
Edgar Chua ..................................................
59
Filipino
President
Jose Jerome Rivera Pascual III ...................
52
Filipino
Vice President – Finance
Homer Gerrard L. Ortega ............................
49
Filipino
Vice President – Human Resources
Eduard Rudolf Geus ....................................
51
Dutch
Vice President - Manufacturing
Dennis G. Gamab ........................................
51
Filipino
Vice President – Trading and Supply
Anthony Lawrence D. Yam ........................
51
Filipino
Vice President - Retail
Ramon Del Rosario .....................................
57
Filipino
Vice President - Communications
Jannet C. Regalado ......................................
53
Filipino
Vice President - Legal
Erwin R. Orocio ..........................................
47
Filipino
Corporate Secretary
Charles Edward M. Cheng ..........................
34
Filipino
Assistant Corporate Secretary
The business experience of each of the Company’s directors and executive officers is set out below.
Edgar O. Chua, 59, is the Chairman and President of the Company. Mr. Chua has been a director of the
Company since 1998, and is also director and the President of various RDS entities in the Philippines.
Additionally, he serves as director of joint venture companies wherein the Company has investments, including
Kamayan Realty Corporation. He is also currently an independent director at Energy Development Corporation
(EDC) and Integrated Micro Electronics Inc. (IMI). Mr. Chua concurrently serves on the Advisory Board of
Coca-Cola FEMSA Philippines, Globe Telecom, Inc., and Mitsubishi Motors Philippines, Inc. He received a
Bachelor of Science degree in Chemical Engineering from the De La Salle University.
147
Jose Jerome Rivera Pascual III, 52, is the Vice President of Finance and Treasurer at the Company. Mr. Pascual
has been a director of the Company since June 13, 2016. He is also presently the Chairman of the Board of
Trustees of the Company Multi-Employer Retirement Plan, Chairman of the Board of Trustees of the Shell
Philippines Exploration BV Non-Contributory Retirement and Gratuity Fund, and a director of other Shellaffiliated companies in the Philippines. He has held positions with various RDS entities globally. He was,
among other roles held, Finance Director of Shell Philippines Exploration BV, Finance Director of Shell
Deepwater Borneo Ltd., Deputy Business Finance Manager (Caspian) of Shell Kazakhstan Development BV,
Kazakhstan Country Controller, and Head of Finance for STAR. He received a Bachelor of Science degree in
Industrial Engineering from the University of the Philippines where he was a member of the Phi Kappa Phi
honor society. He is certified as a Management Accountant by the Institute of Certified Management
Accountants (Australia) and certified as a Professional Industrial Engineer by the Philippines Industrial
Engineering Certification Board.
Anthony Lawrence D. Yam, 51, is the Vice President of Retail Business at the Company. Mr. Yam has been a
director of the Company since April 17, 2012. He joined RDS in 1986 as a retail sales representative and has
undertaken positions with various RDS entities throughout Asia. He was previously Southern Regional Sales
Manager for LPG in the Philippines, General Manager for LPG in Vietnam, Interim General Manager for LPG,
Retail District Manager for Metro Manila, Retail Pricing Manager, and Operational Excellence Manager for the
Customer Service Center in the Philippines. He received a Bachelor of Science degree in Industrial Management
Engineering, with a minor in Mechanical Engineering, from De La Salle University.
Cesar G. Romero, 51, is the Vice President of Global Retail Network at the Company. Mr. Romero was
appointed as a director of the Company on July 18, 2016. He has held positions with various RDS entities
globally. He was previously the Vice President of Retail Sales and Operations East, Vice President for Supply
East based in Singapore, and Vice President for Downstream Management Consultant in London, among others.
He is currently a member of the Shell Global Retail Leadership team, which sets policies, strategies, annual
business targets, capital allocation, and operations for Shell’s Downstream Retail Business. He holds a Bachelor
of Science degree in Mechanical Engineering (cum laude) from the University of the Philippines, and a Masters
in Business Administration (with High Distinction) from the University of Michigan. He has also attended a
variety of management development courses at the London Business School and the Wharton Business School.
Sebastian Cortez Quiniones, 56, has been the General Manager/Managing Director of Shell B.V. since 2009.
Mr. Quiniones has been a director of the Company since May 5, 2014. He previously served as Distribution
General Manager of the Philippines and North Pacific Islands, Director and Chairman of the Board of Pandacan
Depots Services, Inc., Vice President of Supply of the Company, Refinery Superintendent of the Pililla
Refinery, Site Focal for STAR BDEP at Shell Internationale Maatschapij BV in The Hague, Netherlands, and
Process Manager and Refinery Technologist of the Shell Tabangao Refinery. He received his Bachelor of
Science degree in Chemical Engineering at the University of the Philippines where he was a National Science
Development Board scholar.
Anabil Dutta, 49, has been the Regional Finance Manager, East Manufacturing of RDS since January 2014. Mr.
Dutta was elected to serve as a director of the Company this year. Mr. Dutta previously served as Regional
Finance Manager (East - Trading Supply and Distribution) at the Company, and as Finance Manager of Projects
and Technology and Business Opportunity Manager. Prior to joining the Company, he held senior positions at
Colgate Palmolive, including Country Head for Nepal. Mr. Anabil is a Chartered Accountant and holds a Master
of Business Administration (Finance) degree, as well as an Advanced Diploma in Computer Applications and
Database Management.
Mona Lisa Bautista de la Cruz, 59, is President and Chief Operating Officer of Insular Life Assurance
Company, Ltd. Ms. de la Cruz has been a director of the Company since May 12, 2015. She is also a director of
Insular Life Health Care, Inc., ILAC General Agency, Inc., Insular Investment and Trust Corporation, Home
Credit Mutual building and Loan Association, Insular Life Development and Management Corporation, Insular
Life Property Holdings, Mapfre Insular Insurance Corporation and Union Bank of the Philippines. She is a
Fellow of the Actuarial Society of the Philippines, an Associate of the Society of Actuaries, United States, and a
148
member of the Management Association of the Philippines, and the Makati Business Club. She received a
Bachelor of Science degree in Statistics from the University of the Philippines and her Master of Science in
Mathematics, Actuarial Science from University of Michigan.
Nina D. Aguas, 63, is the CEO of Insular Life Assurance Company, Ltd. Ms. Aguas was elected to serve as a
director of the Company this year. She was previously the President and CEO of the Philippine Bank of
Communications, the Managing Director for Private Banking, Asia-Pacific for the Australia and New Zealand
Group Ltd. with the geographic responsibility for North and North East Asia (Hong Kong, Taiwan, China) and
South and South East Asia (Singapore, Indonesia, India, Malaysia, Philippines and Thailand). She also served
25 years with Citigroup, Inc. in various senior management positions. Ms. Aguas is a Certified Public
Accountant and has practiced extensively in the Philippines. She received her Bachelor of Science degree in
Commerce and Accounting from the University of Santo Tomas.
Cesar A. Buenaventura, 86, is Chairman of Buenaventura Echauz and Partners Inc., Chairman of Mitsubishi
Hitachi Power System Philippines, Vice Chairman of DMCI Holdings, and a director of Concepcion Industrial
Corporation. Mr. Buenaventura has been with the Company since 1956, and was Chairman and CEO from 1975
to 1990. He has been a director of the Company since 1970 and an independent director since 2012. . He is the
founding Chairman of the PSPC Foundation Inc. and founding member of the Board of Trustees of the Makati
Business Club. He was recognized as the Management Man of the year in 1985, granted the award of Honorary
Officer of the Order of the British Empire by her Royal Majesty Queen Elizabeth II in 1990, and recognized as
one of the top 100 graduates of the University of the Philippines College of Engineering. He received a Bachelor
of Science degree in Civil Engineering from the University of the Philippines, and a Master of Science degree in
Civil Engineering from Lehigh University in Pennsylvania as a Fulbright Scholar.
Fernando Zobel de Ayala, 55, is the Vice Chairman, President, and Chief Operating Officer of Ayala
Corporation. Mr. Zobel has been an independent director of the Company since April 30, 1996. He also serves
as Chairman of Ayala Land, Inc., Manila Water Company, Inc., AC International Finance Ltd., Ayala
International Pte Ltd., Ayala DBS Holdings, Inc., Alabang Commercial Corporation, AC Energy Holdings, Inc.,
and Hero Foundation, Inc. He received a Bachelor of Arts degree in Liberal Arts from Harvard College and a
Certificate in International Management (CIM) Programme from INSEAD.
EXECUTIVE OFFICERS
Eduard Rudolf Geus, 51, has been the General Manager and Vice President of Manufacturing of the Company
since May 2014. Mr. Geus served as a director of the Company from May 5, 2014 to June 28, 2016. He joined
as a Base Oil Technologist at Shell Internationale Petroleum Maatschappij at The Hague, Netherlands in 1993
and has undertaken various positions with RDS entities globally. He previously served as Senior Advisor in
Refining at Statoil Refinery in Mongstad, Norway and General Manager of Global Operations at Shell
WindEnergy Inc. in Houston, United States. He also held multiple leadership positions at Shell Refinery Petit
Couronne in France, at Shell Global Solutions in Amsterdam, Netherlands, and at Norske Shell, Norway. He
received a Master of Science degree in Chemical Technology and a PhD degree in Technical Sciences from the
Technical University Delft in the Netherlands.
Homer Gerrard L. Ortega, 49, has been the Vice President of Human Resources (HR) since April 2007. Mr.
Ortega previously served as HR Change Manager and HR Capability Manager, supporting the Company’s
Retail businesses in Asia-Pacific and the Middle East. Previous positions he held at the Company include Retail
Operations Manager, member of the HR Transition Management Team, HR Recruitment and Training Adviser,
and Retail Territory Manager. Mr. Ortega is a Certified Public Accountant and received a Bachelor of Science
degree in Business Administration and Accountancy from the University of the Philippines.
Dennis G. Gamab, 51, has been Vice President of Trading and Supply since 2010. Mr. Gamab joined the
Company in 1987 and has served in many senior positions, including Vice President of Supply, Road Transport
Manager for the Philippines, Secondary Logistics Economist, Logistics Project Implementer, Poro Installation
Manager, Marine and Lubricants Distribution Head in Dubai, and Bataan Depot Manager. He also previously
149
served as Plant and Transport Assistant and held various distribution related positions. He received a Bachelor
of Science degree in Mathematics from the University of the Philippines.
Ramon Del Rosario, 57, has been the Vice President of External Relations since August 2014. He was
previously the Marketing and Sales Manager at Shell Company of Cambodia Ltd., the General Manager of Shell
Gas (LPG) Philippines Inc., and the CEO of Isla LPG Corporation. He received a Bachelor of Science degree in
Mechanical Engineering from the University of the Philippines and a Master degree in Business Administration
from the Ateneo de Manila Graduate School of Business.
Jannet C. Regalado, 53, has been the General Counsel since 2001. Ms. Regalado is the Vice President for Legal
of the Company and is concurrently RDS’s Managing Counsel for Global Litigation Asia Pacific, covering the
Philippines, China, New Zealand, Korea, Japan, Indonesia, Brunei and the Pacific Islands, Malaysia, Singapore,
Thailand, India, Pakistan, Vietnam, Laos, Cambodia, and Australia. She previously served the Company as
Corporate Secretary, Employment and Industrial Relations Manager, and Assistant Legal Counsel. She received
a Bachelor of Arts degree in Political Science and a Bachelor of Laws degree from the University of the
Philippines.
Erwin R. Orocio, 47, has been Corporate Secretary and the Managing Counsel for Downstream since 2015. Mr.
Orocio joined the Legal department as a Legal Counsel in November 1997 and serves as Corporate Secretary for
various RDS entities in the Philippines. Previously, he was managing partner at the Garcia Ines Villacarlos
Garcia Reciña & Orocio Law Office. He received a Bachelor of Arts degree in Economics and Bachelor of
Science degree in Accountancy from De La Salle University, and a Juris Doctor degree from Ateneo De Manila
School of Law.
Charles Edward M. Cheng, 35, serves as Legal Counsel for Downstream. Mr. Cheng joined the Legal
Department in September 2012 and serves as the Assistant Corporate Secretary for various RDS entities in the
Philippines. He was previously at Shell Global Solutions advising clients in the Asia Pacific region. Prior to
joining the Company, he was a Senior Associate in the Corporate and Special Projects Department of Villaraza
Cruz Marcelo & Angangco law firm. He received a Bachelor of Science degree in Management with a minor in
Finance from Ateneo de Manila University, and completed a L.L.B degree at the University of the Philippines
College of Law.
FAMILY RELATIONSHIPS
The Company has no director or officer related to any other director or officer up to the four degree of
consanguinity.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BPI Capital is a wholly-owned subsidiary of Bank of the Philippines Islands, which in turn is 49.7% owned by
the Ayala Corporation as of June 30, 2016. Mr. Fernando Zobel de Ayala is the Vice-Chairman, President and
Chief Operating Officer of Ayala Corporation.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS OF DIRECTORS AND EXECUTIVE
OFFICERS
To the best of the Company’s knowledge and belief and after due inquiry, none of the Directors, nominees for
election as director, or executive officers of the Company and affiliates have in the five year period prior to the
date of this Prospectus: (1) had any petition filed by or against any business of which such person was a general
partner or executive officer either at the time of the bankruptcy or within a two-year period of that time; (2)
convicted by final judgment in a criminal proceeding, domestic or foreign, or have been subjected to a pending
judicial proceeding of a criminal nature, domestic or foreign, excluding traffic violations and other minor
offenses, except in connection with the West Tower Condominium Corporation legal proceedings; (3) subjected
to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent
150
jurisdiction, domestic or foreign, permanently or temporarily enjoining, barring, suspending or otherwise
limiting their involvement in any type of business, securities, commodities or banking activities; or (4) found by
a domestic or foreign court of competent jurisdiction (in a civil action), the Philippine SEC or comparable
foreign body, or a domestic or foreign exchange or other organized trading market or self-regulatory
organization, to have violated a securities or commodities law or regulation and the judgment has not been
reversed, suspended, or vacated. On March 24, 2011, an environmental case was filed against FPIC, First Gen
Corporation, Chevron and their respective directors, along with four directors (two of whom are also officers) of
the Company, who are also directors of FPIC, and the Company. The Company has since asserted that it is not
liable for the alleged damages suffered by the complainants. Subsequent complaints have been filed for criminal
negligence against the eleven directors of the Company and two of its officers who were also directors of FPIC,
all of whom were holding such positions at the time of the filing of the complaints, which are currently pending
preliminary investigation before the Department of Justice. The foregoing cases are pending resolution. See
“Business — Legal Proceedings — West Tower Condominium Corporation”
CORPORATE GOVERNANCE
The Board approved the revisions to the Company’s Manual of Corporate Governance on June 13, 2016 to
monitor and assess the level of the Company’s compliance with leading practices on good corporate governance
as specified in the Philippine SEC circulars. In addition to establishing specialized committees to assist in
complying with principles of good corporate governance, the manual also outlines specific investors’ rights and
protections and enumerates particular duties expected from the members of the Board, officers and employees.
It also features a disclosure system which requires adherence to the principles of transparency, accountability
and fairness. A compliance officer is responsible for the formulation of specific measures to determine the level
of compliance with the manual by members of the Board, officers and employees. As of the date of this
Prospectus, the Company has not encountered any material deviations from the standards specified in the
manual.
COMMITTEES OF THE BOARD
Pursuant to the Company’s Manual of Corporate Governance, the Board has created each of the following
committees.
Audit Committee
The Company’s audit committee is responsible for assisting the Board in its fiduciary responsibilities by
providing an independent and objective assurance to its management and shareholders of the continuous
improvement of its risk management systems, business operations and the proper safeguarding and use of its
resources and assets. The audit committee provides a general evaluation of and assistance in the overall
improvement of its risk management, control and governance processes. The audit committee shall have
functions and powers prescribed by the Board and in accordance with applicable laws and regulations,
including, among others, assisting the Board in the performance of its oversight responsibility for the financial
reporting process, system of internal control, audit process and monitoring of compliance with laws, rules and
regulations, oversight over the external auditors, the nature, scope and expenses of the audit, and evaluation and
determination of any non-audit work and review of the non-audit fees paid to the external auditors. The audit
committee must comprise of at least three members, including at least one independent director, and one of
whom shall have audit experience. As of the date of this Prospectus, the members of the audit committee
include Cesar A. Buenaventura, serving as chairman of the audit committee, and Sebastian C. Quiniones. One
seat of the Audit Committee is currently vacant.
Compensation and Remuneration Committee
The Company’s compensation and remuneration committee is responsible for objectively recommending a
formal and transparent framework of remuneration and evaluation for the members of the Board and the
Company’s key executives to enable them to run the Company successfully. The compensation and
151
remuneration committee must comprise at least three members, including one independent director. As of the
date of this Prospectus, the chairman of the compensation and remuneration Committee is Fernando Zobel de
Ayala, and its voting members are Jose Jerome Rivera Pascual III and Homer Gerrard L. Ortega.
Nomination Committee
The Company’s nomination committee is responsible for providing the Company’s shareholders with an
independent and objective evaluation and assurance that the members of the Board are competent and will foster
long-term success and competitiveness. The nomination committee must comprise at least three voting
members, including one independent director, and one non-voting member who shall be the person in the
position of HR General Manager. As of the date of this Prospectus, the chairman of the nomination committee is
Cesar A. Buenaventura, and its voting members are Edgar O. Chua and Jannet C. Regalado, and its non-voting
member is current Vice Presidnet and General Manager for Human Resources, Homer Gerrard L. Ortega.
EXECUTIVE COMPENSATION TABLE
Compensation
The following table identifies and summarizes the aggregate compensation of the Company’s President and bylaw officers, as well as the aggregate compensation paid to all directors as a group, for the years ended
December 31, 2014 and 2015, and presents the estimates of such aggregate compensation for the current year:
Year
Salary
Other Variable Pay
(₱ million)
President and by-law officers, including the four most highly
compensated executive officers named above ..............................................
Aggregate compensation paid to all directors as a group (honorariums
and retainers) .................................................................................................
2014
71.0
28.5
2015
75.7
51.2
1
2016
82.5
63.2
2014
40.8
–
2015
43.0
–
1
49.1
–
2016
___________________________________
Note:
1
Estimated amounts.
Standard Arrangements
Other than payment of reasonable per diem and other fees as may be determined by the Board for attendance by
certain directors at its meetings, there are no standard arrangements pursuant to which the directors are
compensated directly or indirectly, for any services provided as a director.
WARRANTS AND OPTIONS OUTSTANDING
As of the date of this Prospectus, there are no outstanding warrants or options held by the Company’s Chairman
and President, the named executive officers, and all officers and directors as a group.
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PRINCIPAL AND SELLING SHAREHOLDERS
SHAREHOLDERS
Shell B.V. is the Company’s largest shareholder and directly owns and controls 68.18% of the Company as of
the date of this Prospectus. Shell B.V. operates as an investment holding company and is based in The Hague,
the Netherlands. It is wholly owned by Shell Petroleum N.V., a subsidiary of RDS.
SELLING SHAREHOLDERS
The table below sets forth, for the Selling Shareholders, the number of Shares held by such Selling Shareholders
before the Offer, the number of Shares to be sold in the Offer and the number of Shares to be owned by those
Selling Shareholders immediately after the Offer.
The Selling Shareholders comprise Shell Overseas Investments B.V., The Insular Life Assurance Company,
Ltd., Spathodea Campanulata, Inc. and certain other minority shareholders that have elected to participate in the
Offer (the Minority Selling Shareholders).
Selling Shareholders
Shell Overseas Investments
B.V.................................................
The Insular Life Assurance
Company,
Ltd.............................................
Spathodea Campanulata, Inc.
Minority Selling
Shareholders...................................
TOTAL..................................
Common
Shares to be
sold in the
Firm Offer
Common
Shares to be
sold
pursuant to
the Overallotment
Option
Common
Shares held
after the Offer
68.2%
[]
[]
[]
[]
[]
[]
310,078,999
81,551,154
19.6%
5.1%
[]
[]
[]
[]
[]
[]
[]
[]
[]
[]
[]
[]
112,949,548
1,585,944,20
2
7.1%
[]
[]
[]
[]
[]
[]
100%
[]
[]
[]
[]
[]
[]
Common
Shares held
before the
Offer
1,081,364,50
1
% of
Common
Shares
outstandi
ng before
the Offer
No exercise of Overallotment Option
%
Full exercise of Overallotment Option
Common
Shares held
after the Offer
%
The PSE rules require existing shareholders owning at least 10% of the outstanding shares of a company not to
sell, assign or in any manner dispose of their shares for a period of 180 days after the listing of the shares. The
following shareholders are covered by the aforesaid 180-day PSE lock-up requirement:
Name of Shareholders
Shell Overseas Investments B.V.
The Insular Life Assurance Company, Ltd.
Number of
Common Shares
Held before the
Offer
1,081,364,501
310,078,999
% Total of
Shareholding
before the Offer
68.18%
19.55%
% Total of
Shareholding after
the Firm Offer
[]%
[]%
% Total of
Shareholding
Assuming Full
Exercise of the
Over-allotment
Option
[]%
[]%
[In addition, if there is any issuance of shares or securities such as private placements, assets for shares swap or
a similar transaction or instruments which lead to issuance of shares or securities such as convertible bonds,
warrants or a similar instrument that are completed within 180 days prior to the start of the offer period, and the
transaction price is lower than the Offer Price in the initial public offering, all such shares or securities shall be
subject to a lock-up period of at least 365 days from full payment of such shares or securities.]
To implement the foregoing lock-up requirements, the PSE requires the applicant company to lodge the shares
with the PDTC through a Philippine Central Depository (PCD) participant for the electronic lock-up of the
shares or enter into an escrow agreement with the trust department or custodian unit of an independent and
reputable financial institution.
[In addition to the foregoing lock-ups, the Company and the Selling Shareholders have agreed with the Global
Coordinator and International Bookrunner and the Domestic Lead Underwriter and Domestic Bookrunner that,
153
except in connection with the Over-allotment Option, they will not, without the prior written consent of the
Bookrunner, issue, offer, pledge, sell, contract to sell, pledge or otherwise dispose of (or publicly announce any
such issuance, offer, sale or disposal of) any Shares or securities convertible or exchangeable into or exercisable
for any Shares or warrants or other rights to purchase Shares or any security or financial product whose value is
determined directly or indirectly by reference to the price of the underlying securities, including equity swaps,
forward sales and options for a period of 180 days after the listing of the Offer Shares.]
SECURITY OWNERSHIP OF CERTAIN RECORD AND BENEFICIAL OWNERS HOLDING MORE
THAN 5% OF THE COMPANY’S VOTING SECURITIES AS OF THE DATE OF THIS
PROSPECTUS.
Title of Class
Common
Common
Common
Name and address of record owners and
relationship with the Company
Shell Overseas Investments B.V.
Carel van Bylandtlaan 30, 2596
HR the Hague
The Netherlands
(Parent of the Company)
The Insular Life Assurance Company, Ltd.
The Insular Life Bldg., Ayala Avenue cor. Paseo
de Roxas, Makati City
(Shareholder)
Spathodea Campanulata Inc.
General Aviation Center
Domestic Airport Compound
Pasay City
(Shareholder)
Name of beneficial owner
and relationship with
record owner
Shell Overseas Investments
B.V. is both the Beneficial
and Record Owner
The
Insular
Life
AssuranceCompany, Ltd. is
both the Beneficial and
Record Owner
Spathodea Campanulata Inc.
is both the Beneficial and
Record Owner
% of total
outstanding
Shares
68.18%
Citizenship
Dutch
No. of
Shares held
1,081,364,50
1
Filipino
310,078,999
19.55%
Filipino
81,551,154
5.14%
SECURITY OWNERSHIP OF MANAGEMENT AS OF THE DATE OF THIS PROSPECTUS
Title of Class
Common
Name of beneficial owner
Position
Amount and Nature
of Beneficial
Ownership
Nationality
% of total
outstanding
Shares
Edgar O. Chua
Director / Chairman and President
52 (direct)
Filipino
0.0000032%
Common
Jose Jereme R. Pascual, III
Director / Treasurer and Vice
President – Finance
1 (direct)
Filipino
0.00000014%
Common
Fernando Zobel de Ayala
Director
1 (direct)
Filipino
0.00000014%
Common
Nina D. Aguas
Director
39 (direct)
Filipino
0.0000025%
Common
Anabil Dutta
Director
1 (direct)
Indian
0.00000014%
Common
Mona Lisa Bautista Dela Cruz
Director
7 (direct)
Filipino
0.00000043%
Common
Cesar A. Buenaventura
Director
1 (direct)
Filipino
0.00000014%
Common
Cesar Romero
Director
1 (direct)
Filipino
0.00000014%
Common
Anthony Lawrence D. Yam
Director / Vice President – Retail
1 (direct)
Common
Sebastian Cortez Quiniones, Jr.
Director
1 (direct)
Filipino
Filipino
0.00000014%
0.00000014%
Except as disclosed above, none of the Company’s other executive officers or department managers own shares
directly or indirectly in the Company. Ownership in the Company is limited to that indicated in the foregoing.
VOTING TRUST HOLDERS OF 5% OR MORE
There were no persons holding more than 5% of a class of Shares under a voting trust or similar agreement as of
the date of this Prospectus.
RECENT ISSUANCES OF SECURITIES CONSTITUTING EXEMPT TRANSACTIONS BY THE
COMPANY
Not applicable.
154
CHANGES IN CONTROL
There has been no change in the control of the Company since it was incorporated in 1959. As of the date of this
Prospectus, there are no arrangements that may result in a change in the control of the Company.
155
RELATED PARTY TRANSACTIONS
In the ordinary course of the Company’s business, the Company engages in a variety of transactions with related
parties. Related party transactions, by their very nature, involve conflict of interest situations between the
Company and the related parties with whom the Company enters into such transactions. The Company’s policy
with respect to related party transactions is to ensure purchases from and sales to related parties are
consummated at competitive market rates and arm’s length basis.
The following table sets out the Company’s principal ongoing related party transactions as of June 30, 2016:
Related Parties
SGSI ...................................................................
Nature of Transactions
Oil Products Manufacturing Cost Sharing Agreement
The Company obtains technical and consulting services, research results from SGSI
Research and Development Program, and technical staff on temporary basis from SGSI.
This agreement has been in effect since January 1, 2002 and has been renewed annually
by the Company upon assessment of the services required at the Tabangao Refinery. The
Company will pay for each year, either the minimum contribution amount or its cost
allocated share for the year, costs for optional services requested within the year, and its
share in any other cost.
SIETCO ..............................................................
Crude and Non-Crude Feedstocks Frame Supply Agreement
The Company purchases all of its crude oil and non-crude feedstocks requirements
exclusively through SIETCO. The Company relies on SIETCO as its single market
interface for the purchase of crude and non-crude feedstocks. Under this agreement, the
Company purchases certain amounts of crude and non-crude feedstocks at market price
from SIETCO within an agreed timeframe. All other terms are in accordance with Shell
General Terms and Conditions (GTCs).
Product Purchase and Sale Agreement
In addition to all of its crude oil and non-crude feedstocks requirements, the Company
purchases other imported products exclusively through SIETCO. The Company relies on
SIETCO as its single market interface for the purchase of its product requirements. Under
this agreement, purchase is free on board and prices are based on market, plus a premium.
Cost of gross purchases from SIETCO in 2015 amounted to ₱80.2 billion.
Chartering Service Agreement
The Company employs SIETCO chartering services for the transportation of its
international products, feedstocks, base oil, chemicals and other products. For fuels, the
Company pays SIETCO a service fee. The fee so payable shall equal industry standard
brokerage fee, currently 1.25% to 2.5% (depending on vessel size) of the gross
freight/dead freight and demurrage payable by SIETCO to the vessel owner under the
applicable charter party in respect of the voyage. SIETCO is a division of SETL.
Shell Philippines Exploration B.V. (SPEX)
Chevron Malampaya LLC (CMLLC)
PNOC Exploration Company (PNOC) .............
Agreement for the Sale and Purchase of Natural Gas
The Company purchases natural gas for its Tabangao Refinery from SPEX, CMLLC and
PNOC. The natural gas purchased is used to supplement gas produced by the refinery to
fuel its furnaces and gas turbines. Purchase price is MOPS FO180 based such that ₱ =
0.95MFO / 40.1.
Shell International Trading and Shipping
Company
Shell International Aviation Trading System
Shell Aviation Limited
The Company participates in this agreement as a Shell Group Operating Company
Shell Eastern Petroleum Limited .......................
(OpCo). This agreement provides that a contract with an airline within a country with
156
another Shell Group Operating Company can be fulfilled by another Shell Group
company in another country for that airline, and the Company accepts and discharges
responsibilities and obligations passed as required by the terms.
Shell Marine Products Limited (SMPL)
Shell Marine Products A/S (SMPN)
Marine Lubricants Purchase Contract
Shell Marine Products US Company (SMPU)
The Company obtains all its lubricant supplies and sales services from Shell Marine
Shell Marine Products (Singapore) (SMPS) .....
Products (SMP), which consists of SMPL, SMPN, SMPU, SMPS and its affiliates. Under
this agreement, SMP is to fulfill the Company’s sale of lubricants and related service
obligations to the Company’s customers. Payment for products is due upon seven days of
receipt, and delivered on a back-to-back basis from customers to SMP to the Company.
SETL...................................................................
Bitumen Supply Agreement
The Company purchases all its bitumen sales requirements from SETL, which sources
the bitumen requirements from the market. Payment terms are in accordance with Shell
GTCs.
Shell Treasury Centre East Ltd (STCE) ...........
Service Agreement
The Company obtains treasury services from STCE, which includes, but is not limited to,
advisory services on financial transactions, maintenance of bank mandates, assistance in
forecasting cash position and required borrowing needs, selecting counterparties for
external deposits and other financial investment trades, arranging payments to and
receipts from counterparties, execution and settlement of foreign exchange and money
market transactions. However, by giving sufficient notice, the Company can develop its
own treasury services. The Company pays based on services rendered for the year.
SIPC ....................................................................
Cost Contribution Agreement for Research and Development and Technical
Support Services
The Company obtains specialist research and development, and technical support
services from SIPC. Fees are calculated based on a cost allocation key. Additionally, the
Company pays a standard charge for specific technical services or if not available, a
calculated agreed amount for that specific service rendered.
Trade Marks and Manifestations License Agreement
The Company pays royalties and is licensed to reproduce, apply, use and display incountry: (1) each of the Shell Group trademarks relating to goods and services delivered
that meet the applicable Shell Group product standards, and (2) each of the Shell Group
manifestations relating to goods, services, and activities meeting the relevant Shell Group
standards.
Global Master Supply Agreement (Lubricants)
This is an agreement for the long-term supply of finished lubricants and greases between
the Shell Group companies that are engaged in the business of manufacturing, blending
and storage with those that are engaged in the business of marketing and selling of
lubricants and/or greases.
Aviation Technical Services Agreement
The Company obtains technical advice, services and assistance from the Shell Group in
connection with the marketing, sale, supply, storage, handling and delivery of aviation
products.
Shell Shared Service (Asia) B.V. Philippine
Branch Shell Shared Service Center in
Malaysia (SSSC – Manila)................................
Contracting and Procurement of Non-hydrocarbon
The Company receives support services for contracting and procurement of nonhydrocarbon requirements from SSSC-Manila. Fees include ongoing tariff or charges
based on agreed rates.
157
Finance Operations and Master Reference Data (MRD) Services
The Company obtains services for its finance operations and MRD activities, including
creation, modification, maintenance, deletion, and data quality assessment of semi-static
data and associated date strictures from SSSC-Manila. MRD is required by the Company
in various business disciplines including, but not limited to, Finance MRD, Materials and
Services MRD, Retail MRD, and Customer MRD. Fees include ongoing tariff or charges
based on agreed rates as well as start-up and migration fees.
Shell Shared Service Center in Malaysia
(SSSC – Kuala Lumpur)..................................
Financial Operations Services
The Company obtains services for its finance operations from SSSC - Kuala Lumpur.
Fees include ongoing tariff or charges based on agreed rates.
Shell Polska S.P.Z.P.O.O. Oddzial w
Zabierzowie (SBSC – Krakow) ........................
Financial Accounting and Data Processing
The Company obtains services for its finance accounting and data operations from SBSC
- Krakow. Fees include ongoing tariff or charges/rates as well as a migration fee. The
service order has been effective since 2011.
Tabangao Realty Inc. (TRI)...............................
Lease Agreements
The Company leases parcels of land from TRI for various business purposes, including,
but not limited to, storage, blending, manufacturing, transportation, sale and disposal of
petroleum products, and the operation of its retail service stations. As of June 30, 2016,
the Company has entered into lease agreements with TRI, on terms determined at arm’s
length and based on market conditions, for land in Negros Oriental, Tacloban, Makati
City. and Metro Manila, among others.
Raizen Asia Pte. Ltd. (Raizen) ..........................
Supply of Denatured Fuel Grade Anhydrous Ethyl Alcohol or Fuel Bioethanol
The Company purchases bioethanol from Raizen. Payment is due on the 15th calendar
day of the followingt month for all listings in the current month.
Specific details of these transactions are set out below:

Payables for the purchase of goods and services from related parties amounted to ₱7,273.5 million,
₱9,591.1 million and ₱5,953.4 million for the years ended December 31, 2013, 2014 and 2015; and

Payables in connection with the leasing of land for business purposes from related parties amounted to
₱27.2 million, ₱27.9 million and ₱4.8 million, for the years ended December 31, 2013, 2014 and 2015,
respectively; and

Receivables in connection with sales to related parties amounted to ₱1,142.2 million, ₱557.8 million and
₱115.7 million for the years ended December 31, 2013, 2014 and 2015, respectively; and

Royalty fees paid to related parties amounted to ₱66.2 million, ₱68.8 million and ₱66.2 million for the
years ended December 31, 2013, 2014 and 2015, respectively.

Provisions for impaired receivables mainly related to Batangas Bay Carriers Inc., which has been in a
difficult economic situation and are aged over a year amounted to ₱19.0 million, ₱183.0 million and
₱156.0 million for the years ended December 31, 2013, 2014 and 2015, respectively.

Administrative billing charges paid to related parties amounted to nil, ₱ 84.6 million and ₱ 322.7 million
for the years ended December 31, 2013, 2014 and 2015, respectively. Administrative billing charges
received from related parties amounted to nil, ₱ 54.8 million and ₱ 88.8 million for the years ended
December 31, 2013, 2014 and 2015, respectively.
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For more information, see Note 22 to the Company’s audited financial statements as of and for the years ended
December 31, 2013, 2014 and 2015.
159
DESCRIPTION OF THE SHARES
The Shares to be offered shall be up to [300,000,000] common shares of the Company, with a par value ₱1.0 per
Share, to be issued and offered by the Company and the Selling Shareholders by way of a Primary Offer and
Secondary Offer. A total of up to [1,615,944,202] Shares shall be outstanding after the Offer [assuming the
Over-allotment Option is fully exercised].
SHARE CAPITAL INFORMATION
As of the date of this Prospectus, the Company’s authorized capital stock is ₱2,500,000,000 divided into
2,500,000,000 common shares with a par value of ₱1.0 per share. As of the date of this Prospectus, the
Company’s issued and outstanding share capital consisted of 1,585,944,202 common shares. The Company is
authorized to issue only common shares, unless it amends its articles of incorporation.
OBJECTS AND PURPOSES
Pursuant to the Company’s articles of incorporation, its primary purpose is to construct, operate and maintain
petroleum refineries, works, plant machinery, equipment, dock and harbor facilities and auxiliary works and
other facilities of all kinds used in or in connection with the manufacture of products of all kinds which are
wholly or partially derived from crude oil. The Company’s secondary purposes are to carry on the business of
petroleum refining in all its branches; to purchase, acquire, import and store crude oil, blending stocks and other
supplies and raw materials, to manufacture therefrom petroleum, chemical and/or petro-chemical products of all
kinds, and to sell at wholesale export, exchange, transport and dispose of such products; to the extent permitted
by law, to buy, trade, exchange, and sell at wholesale, all kinds of goods, wares, merchandise, and other articles
of trade including, but not limited to, dry goods, foodstuffs, products, electrical supplies, office equipment,
rubber and synthetic products, hydrocarbon products, chemicals, and chemical products; to purchase, build,
acquire, charter, own and operate ships and vessels of all kinds, for the corporation’s own use; to the extent
permitted by law, to acquire by purchase, lease or otherwise and to hold all such property, whether real or
personal, as may be necessary for the purposes of said corporation, and to make such contracts and enter into
such agreements as may be incidental to the objects of the corporation; to the extent permitted by law, to acquire
any company or companies for the purpose of acquiring all or any property, rights or liabilities of the said
corporation or for any purpose which may seem directly or indirectly calculated to benefit the said corporation;
to the extent permitted by law, to invest and deal with the monies of the said corporation not immediately
required in such manner as the said corporation shall from time to time determine; to borrow, raise or secure the
payment of money in such manner as the said corporation shall from time to time think fit; and to generally do
all such things and transact all such business as may be directly or indirectly, incidental or conducive to the
attainment of the above objects or any of them.
Under Philippine law, a corporation may invest its funds in any other corporation or business or for any purpose
other than the primary purpose for which it was organized when approved by a majority of the board of directors
and ratified by the shareholders representing at least two-thirds of the outstanding capital stock, at a
shareholders’ meeting duly called for the purpose; provided, however, that where the investment by the
corporation is reasonably necessary to accomplish its primary purpose, the approval of the shareholders shall not
be necessary.
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 by-laws of the corporation.
Subject to the approval by the Philippine SEC, a corporation may increase or decrease its authorized capital
stock, provided that the increase or decrease is approved by a majority of the board of directors and by
shareholders representing at least two-thirds of the outstanding capital stock of the corporation voting at a
shareholders’ meeting duly called for the purpose.
160
The shares of stock of a corporation may either be with or without par value. All of the Company’s shares that
are currently issued or authorized to be issued are common shares and have a par value of ₱1 per share. If par
value shares are issued at a price above par, whether for cash or otherwise, the amount by which the subscription
price exceeds the par value is credited to an account designated as paid-in surplus.
A corporation is empowered to acquire its own shares for a legitimate corporate purpose, provided that the
corporation has unrestricted retained earnings or surplus profits sufficient to pay for the shares to be acquired.
Examples of circumstances where the corporation is allowed to purchase its own shares are: elimination of
fractional shares arising out of stock dividends, the purchase of shares of dissenting shareholders exercising
their appraisal right as referred to below and the collection or compromise of an indebtedness arising out of an
unpaid subscription in a delinquency sale or to purchase delinquent shares during such sale. When a corporation
repurchases its own shares, the shares become treasury shares, which may be resold at a reasonable price fixed
by the board of directors.
The Board is authorized to issue shares from the treasury from time to time. Treasury shares may be issued to
any person, corporation or association, whether or not a shareholder of the Company, including the Company’s
officers or employees for such consideration in money as the Board may determine.
LIMITATIONS ON FOREIGN OWNERSHIP
In the event that the Company acquires land as part of its expansion plans, the Company will be subject to
nationality restrictions stipulated under the Philippine Constitution and other laws, limiting ownership of
companies who own land to citizens of the Philippines, or Philippine Nationals who are corporations or
associations organized under the laws of the Philippines of which at least 60% of the capital stock outstanding is
owned and held by citizens of the Philippines.
RIGHTS RELATING TO SHARES
Voting Rights
The Company’s Shares have full voting rights. Each common share entitles the holder to one vote. Members of
the Board are elected by the shareholders at the annual shareholders’ meeting. Cumulative voting is allowed
whereby a shareholder may cumulate his votes by giving one candidate as many votes as the number of
directors to be elected multiplied by the number of his Shares. The Philippine Corporation Code provides that
voting rights cannot be exercised with respect to shares declared delinquent, treasury shares, or if the
shareholder has elected to exercise his right of appraisal referred to below.
Dividend Rights
The Shares shall have full dividend rights. Dividends on the Shares, if any, are paid in accordance with
Philippine law. Dividends are payable to all shareholders on the basis of outstanding Shares held by them, each
Share being entitled to the same unit of dividend as any other Share. Dividends are payable to shareholders
whose names are recorded in the stock and transfer book as of the record date fixed by the Board. The PDTC
has an established mechanism for distribution of dividends to beneficial owners of the Shares which are traded
through the PSE and lodged with the PDTC as required for scripless trading.
Under Philippine law, a corporation can only declare dividends to the extent that it has unrestricted retained
earnings that represent the undistributed earnings of the corporation which have not been allocated for any
managerial, contractual or legal purposes and which are free for distribution to the shareholders as dividends.
The Company may pay dividends in cash, property or by the issuance of shares. Dividends may be declared by
the board of directors except for stock dividends which may only be declared and paid with the approval of
shareholders representing at least two-thirds of the issued and outstanding capital stock of the corporation voting
at a shareholders’ meeting duly called for the purpose.
161
The Philippine Corporation Code generally requires a Philippine corporation with retained earnings in excess of
100% of its paid-in capital to declare and distribute as dividends the amount of such surplus. Notwithstanding
this general requirement, a Philippine corporation may retain all or any portion of such surplus in the following
cases: (i) when justified by definite expansion plans approved by the board of directors of the corporation; (ii)
when the required consent of any financing institution or creditor to such distribution has not been secured; (iii)
when retention is necessary under special circumstances, such as when there is a need for special reserves for
probable contingencies; or (iv) when the non-distribution of dividends is consistent with the policy or
requirement of a Government office.
Philippine corporations whose securities are listed on any stock exchange are required to maintain and distribute
an equitable balance of cash and stock dividends, consistent with the needs of shareholders and the demands for
growth or expansion of the business.
See “Dividends and Dividend Policy”.
Pre-emptive Rights
The Philippine Corporation Code confers pre-emptive rights on shareholders of a Philippine corporation
entitling such shareholders to subscribe for all issues or other dispositions of equity-related securities by the
corporation in proportion to their respective shareholdings, regardless of whether the equity-related securities
proposed to be issued or otherwise disposed of are identical to the shares held. A Philippine corporation may,
however, provide for the denial of these pre-emptive rights in its articles of incorporation. Likewise,
shareholders who are entitled to such pre-emptive rights may waive the same through a written instrument to
that effect. [The Company’s articles of incorporation currently contain such a denial of pre-emptive rights on all
classes of shares issued by the Company and therefore further issues of shares can be made without offering
such shares on a pre-emptive basis to the existing shareholders.]
Derivative Rights
Philippine law recognizes the right of a shareholder to institute 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.
Appraisal Rights
The Philippine 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 of extending or shortening the term of corporate existence;

the sale, lease, exchange, transfer, mortgage, pledge or other disposal of all or substantially all the
assets of the corporation;

a merger or consolidation; and

investment by the corporation of funds in any other corporation or business or for any purpose other
than the primary purpose for which it was organized.
In these circumstances, the dissenting shareholder may require the corporation to purchase its 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. Regional Trial Courts will, in
162
the event of a dispute, determine any question about whether a dissenting shareholder is entitled to this right of
appraisal. The remedy will only be available if the corporation has unrestricted retained earnings sufficient to
support the purchase of the shares of the dissenting shareholders. From the time the shareholder makes a
demand for payment until the corporation purchases such shares, all rights accruing on the shares, including
voting and dividend rights, shall be suspended, except the right of the shareholder to receive the fair value of the
share.
Right of Inspection
A shareholder has the right to inspect the records of all business transactions of the corporation and the minutes
of any meeting of the board of directors and shareholders at reasonable hours on business days and may demand
a copy of excerpts from such records or minutes at his or her expense. However, the corporation may refuse
such inspection if the shareholder demanding to examine or copy the corporation’s records has improperly used
any information secured through any prior examination, or was not acting in good faith or for a legitimate
purpose in making his demand.
Right to Financial Statements
A shareholder has a right to be furnished with the most recent financial statement of a Philippine corporation,
which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said
taxable year, showing in reasonable detail its assets and liabilities and the results of its operations. At the
meeting of shareholders, the board of directors is required to present to the shareholders a financial report of the
operations of the corporation for the preceding year, which shall include financial statements duly signed and
certificate by an independent certified public accountant.
BOARD OF DIRECTORS
Unless otherwise provided by law, the corporate powers of the Company are exercised, its business is
conducted, and its property is controlled, by the Board. The Company has eleven Directors, two of which are
independent directors within the meaning set out in Section 38 of the SRC. Each Director shall have a term of
one year. The Board shall be elected during each regular meeting of shareholders at which shareholders
representing at least a majority of the issued and outstanding capital stock are present, either in person or by
proxy.
Under Philippine law, representation of foreign ownership on the Board is limited to the proportion of the
foreign shareholding. Directors may only act collectively; individual directors have no power as such. Six
directors, which is a majority of the Board, constitute a quorum for the transaction of corporate business. Except
for certain corporate actions such as the election of officers, which shall require the vote of a majority of all the
members of the Board, every decision of a majority of the quorum duly assembled as a board is valid as a
corporate act.
Any vacancy created by the death, resignation or removal of a director prior to expiration of such director’s term
may be filled by a vote of at least a majority of the remaining members of the Board, if still constituting a
quorum; otherwise, the vacancy must be filled by the shareholders at a meeting duly called for the purpose. Any
director elected in this manner by the Board shall serve only for the unexpired term of the director whom such
director replaces and until his successor is duly elected and qualified.
SHAREHOLDERS’ MEETINGS
Annual or Regular Shareholders’ Meetings
The Philippine Corporation Code requires all Philippine corporations to hold an annual meeting of shareholders
for corporate purposes including the election of directors. [The Company’s by-laws provide for annual meetings
on the third Tuesday in May of each year at the Company’s principal office.] If the date of the annual meeting
163
falls on a legal holiday, the annual meeting shall be held on the next succeeding business day, which is not a
legal holiday, at such hour as may be specified in the notice of said meeting.
Special Shareholders’ Meeting
Special meetings of shareholders, for any purpose or purposes, may at any time be called by: (a) the Board of
Directors or (b) the President at his own instance, or at the written request of shareholders representing not less
than one-fifth of the outstanding capital stock.
Notice of Shareholders’ Meeting
Whenever shareholders are required or permitted to take any action at a meeting, a written notice of the meeting
shall be given which shall state the place, date, and time of the meeting, and purposes for which said meeting is
called. Under the Company’s by-laws, as amended, notice of a shareholder’s meeting must be sent to all
shareholders of record, at least 30 days prior to the date of the meeting. Notices of a shareholders meeting shall
be sent by the Corporate Secretary by personal delivery or by mailing the notice to each shareholder of record
entitled to vote at the address left by such shareholder with the Corporate Secretary or at his last known address
or by publication in a newspaper of general circulation. Notice of any meeting may be waived, expressly or
impliedly, by any shareholder, in person or by proxy, before or after the meeting.
The notice shall state the time and place of the meeting, and the purpose or purposes for which the meeting is
called. In case of special meetings, only matters stated in the notice can be the subject of motions or
deliberations at such meeting, except by consent of all the stockholders of the Company present and entitled to
vote. The shareholders of the Company entitled to vote may, by written consent, waive notice of the time, place
and purpose of any meeting of shareholders and any action taken at a meeting held pursuant to such waiver shall
be valid and binding.
[When the meeting of shareholders is adjourned to another time or place, it shall not be necessary to give any
notice of the adjourned meeting if the time and place to which the meeting is adjourned are announced at the
meeting at which the adjournment is taken. At the reconvened meeting, any business may be transacted that
might have been transacted on the original date of meeting.]
Quorum
Unless otherwise provided by an existing shareholders’ agreement or by law, in all regular or special meeting of
shareholders, shareholders who own or hold a majority of the outstanding capital shares must be present or
represented in order to constitute a quorum, except in those cases where the Philippine Corporation Code
provides a greater percentage vis-a-vis the total outstanding capital shares. Under the Company’s by-laws, if no
quorum is constituted, the shareholders present may adjourn the meeting to such other date as they may, by
resolution, determine. If on the day and hour of the resumption of the meeting less than a majority of the
subscribed capital stock is present, then in order that the interests of the Company may not be jeopardized and to
enable the shareholders to take action on the business for which they may been summoned, the shareholders
present shall constitute a quorum and a majority of those present shall decide any question at the meeting,
except in those cases in which the Philippine Corporation Code requires the affirmative vote of a greater
percentage.
Voting
At each meeting of the shareholders, every shareholder who has voting power upon the matter in question shall
be entitled to vote in person or by proxy executed in writing by the shareholder for each share held by such
shareholder.
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Fixing Record Dates
The Company’s by-laws provide that [for purposes of determining the shareholders entitled to notice of, or to
vote or be voted at any meeting of shareholders, or entitled to receive payment of any dividends, the Board of
Directors may provide that the stock and transfer books be closed for at least 20 days immediately preceding the
date of such meeting or set a record date for the purpose.]
Notwithstanding the provisions of the Company’s by-laws on the setting of the record dates, the Philippine SEC
may, from time to time, promulgate rules for listed companies such as the Company relating to the fixing of
such record dates. Under existing Philippine SEC rules, cash dividends declared by corporations whose shares
are listed on the PSE shall have a record date which shall not be less than ten and not more than 30 days from
the date of declaration of cash dividends. With respect to stock dividends, the record date shall not be less than
ten nor more than 30 days from the date of shareholder approval. In the event that a stock dividend is declared in
connection with an increase in authorized capital stock, the corresponding record date shall be fixed by the
Philippine SEC and shall be indicated in the Philippine SEC order which shall not be less than ten days nor
more than 30 days after all clearances and approvals by the Philippine SEC shall have been secured. Regardless
of the kind of dividends, the record date set shall not be less than ten trading days from receipt by the PSE of the
notice of declaration of the dividend.
PROXIES
Shareholders may vote at all meetings the number of shares registered in their respective names, either in person
or by proxy duly given in writing and duly presented to and received by the Corporate Secretary for inspection
and recording at or prior to the opening of the meeting. No proxy bearing the signature that is not legally
acknowledged, if unrecognized by the Corporate Secretary, shall be honored at the meetings. Unless otherwise
provided in the proxy, it shall be valid only for the meeting at which it has been presented to the Corporate
Secretary. No proxy shall be valid and effective for a period longer than five years at any one time.
No member of the PSE and no broker/dealer shall give any proxy, consent or authorization, in respect of any
securities carried for the account of a customer to a person other than the customer, without the express written
authorization of such customer. The proxy executed by the broker shall be accompanied by a certification under
oath stating that before the proxy was given to the broker, he had duly obtained the written consent of the
persons in whose account the shares are held.
There shall be a presumption of regularity in the execution of proxies and proxies shall be accepted if they have
the appearance of prima facie authenticity in the absence of a timely and valid challenge.
Proxies should comply with the relevant provisions of the Philippine Corporation Code, the SRC, the
Implementing Rules and Regulations of the SRC (as amended), and Philippine SEC Memorandum Circular No.
5 (series of 1996) issued by the Philippine SEC.
TRANSFER OF COMMON SHARES AND SHARE REGISTER
All transfers of shares on the PSE shall be effected by means of a book-entry system. Under the book-entry
system of trading and settlement, a registered shareholder shall transfer legal title over the shares to such
nominee, but retains beneficial ownership over the shares. The transfer of legal title is done by surrendering the
stock certificate representing the shares to participants of the PDTC System (i.e., brokers and custodian banks)
that, in turn, lodge the same with the PCD Nominee. A shareholder may request upliftment of the shares from
the PDTC, in which case a certificate of stock will be issued to the shareholder and the shares registered in the
shareholder’s name in the books of the company. See “The Philippine Stock Market”.
Philippine law does not require transfers of the Company’s Shares to be effected on the PSE, but any offexchange 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, if the disposal price is higher than the
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acquisition cost of the Company’s Shares. See “Philippine Taxation”. All transfers of Shares on the PSE must
be effected through a licensed stockbroker in the Philippines.
ISSUES OF SHARES
Subject to otherwise applicable limitations, the Company may issue additional Shares to any person for
consideration deemed fair by the Board, provided that such consideration shall not be less than the par value of
the issued Shares. No share certificates shall be issued to a subscriber until the full amount of the subscription
together with interest and expenses (in case of delinquent Shares) has been paid and proof of payment of the
applicable taxes shall have been submitted to the Company’s Corporate Secretary. Under the PSE Rules, only
fully-paid shares may be listed on the PSE.
SHARE CERTIFICATES
Certificates representing the Shares will be issued in such denominations as shareholders may request, except
that certificates will not be issued for fractional shares. Shareholders wishing to split their certificates may do so
upon application to the Company’s stock transfer agent. Shares may also be lodged and maintained under the
book-entry system of the PDTC. See “The Philippine Stock Market”.
MANDATORY TENDER OFFER
In general, under the SRC and its implementing rules and regulations, any person or group of persons acting in
concert and intending to acquire at least (i) 35% of any class of any equity security of a public or listed
corporation in a single transaction or (ii) 35% of such equity over a period of 12 months; or (iii) even if less than
35% of such equity, if such acquisition would result in ownership of over 50% of the total outstanding equity, is
required to make a tender offer to all the shareholders of the target corporation on the same terms. Generally, in
the event that the securities tendered pursuant to such an offer exceed that which the acquiring person or group
of persons is willing to take up, the securities shall be purchased from each tendering shareholder on a pro rata
basis, disregarding fractions, according to the number of securities tendered by each security holder. In the event
that the tender offer is oversubscribed, the aggregate amount of securities to be acquired at the close of such
tender offer shall be proportionately distributed to both the selling shareholders with whom the acquirer may
have been in private negotiations and other shareholders. Where a mandatory tender offer is required, the
acquirer is compelled to offer the highest price paid by him for such shares during the past six months. Where
the offer involves payment by transfer or allotment of securities, such securities must be valued on an equitable
basis. However, if any acquisition of even less than 35% would result in ownership of over 50% of the total
outstanding equity, the acquirer shall be required to make a tender offer for all the outstanding equity securities
to all remaining shareholders of the said corporation at a price supported by a fairness opinion provided by an
independent financial adviser or equivalent third party. The acquirer in such a tender offer shall be required to
accept any and all securities thus tendered.
No Mandatory Tender Offer is required in: (i) purchases of shares from unissued capital shares unless it will
result to a 50% or more ownership of shares by the purchaser; (ii) purchases from an increase in the authorized
capital shares of the target company; (iii) purchases in connection with a foreclosure proceedings involving a
pledge or security where the acquisition is made by the debtor or creditor; (iv) purchases in connection with a
privatization undertaken by the Government; (v) purchases in connection with corporate rehabilitation under
court supervision; (vi) purchases through an open market at the prevailing market price; or (vii) purchases
resulting from a merger or consolidation.
FUNDAMENTAL MATTERS
The Philippine Corporation Code provides that certain significant acts may only be implemented with
shareholders’ approval. The following require the approval of shareholders representing at least two-thirds of
the issued and outstanding capital stock of the corporation:
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
amendment of the articles of incorporation;

removal of directors;

sale, lease, exchange, mortgage, pledge or other disposition of all or a substantial part of the assets of
the corporation;

investment of corporate funds in any other corporation or business or for any purpose other than the
primary purpose for which the corporation was organized;

delegation to the board of directors of the power to amend or repeal by-laws or adopt new by-laws;

merger or consolidation;

an increase or decrease in capital stock;

dissolution

extension or shortening of the corporate term;

creation or increase of bonded indebtedness;

declaration of stock dividends;

management contracts with related parties; and

ratification of contracts between the corporation and a director or officer.
The approval of shareholders holding a majority of the outstanding capital shares of a Philippine corporation,
including non-voting preferred shares, is required for the adoption or amendment of the by-laws of such
corporation.
ACCOUNTING AND AUDITING REQUIREMENTS
Philippine stock corporations are required to file copies of their annual consolidated financial statements with
the Philippine SEC. Corporations whose shares are listed on the PSE are also required to file quarterly
consolidated financial statements (for the first three quarters) with the Philippine 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 Company for the preceding year. This report is required to include audited financial statements.
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THE PHILIPPINE STOCK MARKET
Information presented in this section has been extracted from publicly available documents which have not been
prepared or independently verified by the Company, the Global Coordinator and International Bookrunner, the
Domestic Lead Underwriter and Domestic Bookrunner or any of their respective subsidiaries, affiliates or
advisers in connection with the sale of the Offer Shares.
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-regulatory, 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 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 bids, and ask quotations from the bourses.
In June 1998, the Philippine SEC granted the PSE “Self-Regulatory Organization” status, allowing it to impose
rules as well as implement penalties on erring trading participants and listed companies. On August 8, 2001, the
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 ₱97.8
million, of which ₱61.2 million was subscribed and fully paid-up as of June 30, 2015. Each of the 184 memberbrokers was granted 50,000 shares of the new PSE at a par value of ₱1 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 Main Board or the Small, Medium and Emerging Board. Recently, the PSE issued
Rules on Exchange Traded Funds (ETF) which provides for the listing of ETFs on an ETF Board separate from
the PSE’s existing boards. Previously, the PSE allowed listing on the First Board, Second Board or the Small,
Medium and Enterprises Board. With the issuance by the PSE of Memorandum No. CN-No. 2013-0023 dated
June 6, 2013, revisions to the PSE Listing Rules were made, among which changes are the removal of the
Second Board listing and the requirement that lock-up rules be embodied in the articles of the incorporation of
the Issuer. 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 as of April 3, 2006 simultaneous with the migration to
the free float index and the renaming of the PHISIX to PSEi. The PSEi is composed of 30 selected stocks listed
on the PSE. In July 2010, the PSE’s new trading system, now known as PSE Trade, was launched.
With the increasing calls for good corporate governance, the PSE has adopted an online daily disclosure system
to improve the transparency of listed companies and to protect the investing public.
The PSE launched its Corporate Governance Guidebook in November 2010 as another initiative of the PSE to
promote good governance among listed companies. It is composed of ten guidelines embodying principles of
good business practice and based on internationally recognized corporate governance codes and best practices.
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The table below sets out movements in the composite index from 2005 to 2015 and shows the number of listed
companies, market capitalization, and value of shares traded for the same period:
Composite Index at
Closing
Year
Number of Listed
Companies
2005 ...........................................................
2,096.0
237
2006 ...........................................................
2,982.5
240
2007 ...........................................................
3,621.6
244
2008 ...........................................................
1,872.9
246
2009 ...........................................................
3,052.7
248
2010 ...........................................................
4,201.1
253
2011 ...........................................................
4,372.0
245
2012 ...........................................................
5,812.7
254
2013 ...........................................................
5,889.8
257
2014 ...........................................................
7,230.6
263
2015 ...........................................................
7,098.8
263
_______________
Source: PSE. Data in the table above is as of the last trading day of each year.
Aggregate Market
Capitalization
(₱ billions)
Combined Value of
Turnover
(₱ billions)
5,948.4
7,173.2
7,977.6
4,069.2
6,029.1
8,866.1
8,697.0
10,952.7
11,931.3
14,251.7
13,650.0
383.5
572.6
1,338.3
763.9
994.2
1,207.4
1,422.6
1,771.7
2,546.2
2,130.1
1,510.0
TRADING
The PSE is a double auction market. Buyers and sellers are each represented by stock brokers. To trade, bid 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. Transactions are generally invoiced through a confirmation slip sent to
customers on the trade date (or the following trading day). 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.
Equities trading on the PSE starts at 9:30 am and ends at 12:00 pm for the morning session, and resumes at 1:30
pm and ends at 3:30 pm for the afternoon session, with a ten-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 and special holidays.
Minimum trading lots range from 5 to 1,000,000 shares depending on the price range and nature of the security
traded. The minimum trading lot for the Company’s Shares is [100] shares. 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, whenever an order will result in a breach of the trading threshold of a security within a trading day,
the trading of that security will be frozen. Orders cannot be posted, modified or cancelled for a security that is
frozen. In cases where an order has been partially matched, only the portion of the order that will result in a
breach of the trading threshold will be frozen. Where the order results in a breach of the trading threshold, the
following procedures shall apply:

In case the static threshold is breached, the PSE will accept the order, provided the price is within the
allowable percentage price difference under the implementing guidelines of the revised trading rules
(i.e., 50% of the previous day’s reference or closing price, or the last adjusted closing price);
otherwise, such order will be rejected. In cases where the order is accepted, the PSE will adjust the
static threshold to 60%. All orders breaching the 60% static threshold will be rejected by the PSE.

In case the dynamic threshold is breached, the PSE will accept the order if the price is within the
allowable percentage price difference under the existing regulations (i.e., 20.% for security cluster A
and newly-listed securities, 15% for security cluster B and 10% for security cluster C); otherwise,
such order will be rejected by the PSE.
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NON-RESIDENT TRANSACTIONS
When the purchase/sale of Philippine shares involves a non-resident, whether the transaction is effected in the
domestic or foreign market, it will be the responsibility of the securities dealer/broker to register the transaction
with the BSP. The local securities dealer/broker shall file with the BSP, within three business days from the
transaction date, an application in the prescribed registration form. After compliance with other required
undertakings, the BSP shall issue a Certificate of Registration. Under BSP rules, all registered foreign
investments in Philippine securities including profits and dividends, net of taxes and charges, may be
repatriated.
SETTLEMENT
The Securities Clearing Corporation of the Philippines (SCCP) is a wholly-owned subsidiary of the PSE, and
was organized primarily as a clearance and settlement agency for SCCP-eligible trades executed through the
facilities of the PSE. SCCP received its permanent license to operate on January 17, 2002. It is responsible for:
(1) synchronizing the settlement of funds and the transfer of securities through delivery versus payment , as well
as clearing and settlement of transactions of clearing members, who are also PSE Trading Participants; (2)
guaranteeing the settlement of trades in the event of a PSE Trading Participant’s default through the
implementation of its “Fails Management System” and administration of the Clearing and Trade Guaranty Fund,
and; (3) performance of risk management and monitoring to ensure final and irrevocable settlement.
SCCP settles PSE trades on a three-day rolling settlement environment, which means that settlement of trades
takes place three days after transaction date (T+3). The deadline for settlement of trades is 12:00 noon of T+3.
Securities sold should be in scripless form and lodged under the book entry system of the PDTC. Each PSE
Trading Participant maintains a Cash Settlement Account with one of the seven existing Settlement Banks of
SCCP which are Banco De Oro Unibank, Inc. (BDO Unibank), Rizal Commercial Banking Corporation
(RCBC), Metropolitan Bank & Trust Company (Metrobank), Deutsche Bank (DB), Union Bank of the
Philippines (Unionbank), The Hongkong and Shanghai Banking Corporation Limited (HSBC) and Maybank
Philippines, Inc. (Maybank). 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 Central Clearing and Central Settlement (CCCS) system in 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 PDTC, 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 nonPSE 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, BDO Unibank, RCBC, Metrobank, DB, Unionbank, HSBC and Maybank.
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
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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. “Immobilization” is the process by which the warrant or share certificates of lodging holders are
cancelled by the transfer agent and the corresponding transfer of beneficial ownership of the immobilized shares
to PCD Nominee will be recorded in the Issuer’s registry. 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 the trade through a
participant. The participant can execute PSE trades and non-PSE trades of lodged equity securities through the
PDTC system. All matched transactions in the PSE trading system will be fed through the SCCP and into the
PDTC system. Once it is determined on the settlement date (T+3) 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 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 shareholder 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 shareholder the legal title to the shares lodged.
The uplifting shareholder shall follow the Rules and Operating Procedure of the PDTC for the upliftment of
shares lodged under the name of PCD Nominee. The transfer agent shall prepare and send a Registry
Confirmation Advice to the PDTC covering the new number of shares lodged under PCD Nominee. The
expenses for upliftment are for the account of the uplifting shareholder.
The difference between the depository and the registry would be on the recording of the shares in the issuing
corporations’ books. In the depository set-up, shares are simply immobilized, wherein customers’ certificates
are cancelled and a confirmation advice 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 SRC. 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 Article III, Part A of the PSE’s Revised Listing Rules.
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For listing applications, the amended rule on lodgment of securities is applicable to:
(a) The offer shares/securities of the applicant company in the case of an initial public offering;
(b) The shares/securities that are lodged with the PDTC, or any other entity duly authorized by the Commission
in the case of a listing by way of introduction;
(c) New securities to be offered and applied for listing by an existing listed company; and
(d) Additional listing of securities of an existing listed company.
Pursuant to the said 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 of 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 a confirmation date.”
ISSUANCE OF STOCK CERTIFICATES FOR CERTIFICATED SHARES
On or after the listing of the shares on the PSE, any beneficial owner of the shares may apply with PDTC
through his broker or custodian-participant for withdrawal from the book-entry system and return to the
conventional paper-based settlement. If a shareholder wishes to withdraw his stockholdings from the PDTC
system, the PDTC has a procedure of upliftment under which the PCD Nominee will transfer back to the
shareholder the legal title to the shares lodged. The uplifting shareholder shall follow the Rules and Operating
Procedures of the PDTC for the uplifting of the shares lodged under the name of the PCD Nominee. The transfer
agent shall prepare and send a Registry Confirmation Advice to the PDTC covering the new number of shares
lodged under the PCD Nominee. The expenses for upliftment are on the account of the uplifting shareholder.
Upon the issuance of stock certificates for the shares in the name of the person applying for upliftment, such
shares shall be deemed to be withdrawn from the PDTC book-entry settlement system, and trading on such
shares will follow the normal process for settlement of certificated securities. The expenses for upliftment of the
shares into certificated securities will be charged to the person applying for upliftment. Pending completion of
the upliftment process, the beneficial interest in the shares covered by the application for upliftment is frozen
and no trading and book-entry settlement will be permitted until the relevant stock certificates in the name of the
person applying for upliftment shall have been issued by the relevant company’s transfer agent.
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PHILIPPINE FOREIGN EXCHANGE CONTROLS
Under current BSP regulations, an investment in Philippine securities (such as the Shares) must be registered
with the BSP if the foreign exchange needed to service the repatriation of capital and the remittance of
dividends, profits and earnings derived from such Shares is to be sourced from the Philippine banking system. If
the foreign exchange required to service capital repatriation or dividend remittance is sourced outside the
Philippine banking system, registration is not required. BSP Circular No. 471 (Series of 2005), however,
subjects foreign exchange dealers, money changers and remittance agents to Republic Act No. 9160 (the AntiMoney Laundering Act of 2001, as amended) and requires these non-bank sources of foreign exchange to
require foreign exchange buyers to submit, among others, a notarized application form in connection with their
application to purchase foreign exchange exceeding US$5,000 for purposes of capital repatriation and
remittance of dividends.
The application for registration may be done directly with the BSP or through a custodian bank duly designated
by the foreign investor. A custodian bank may be a universal bank, commercial bank or an offshore banking unit
registered with the BSP to act as such and appointed by the investor to register the investment, hold shares for
the investor, and represent the investor in all necessary actions in connection with his investments in the
Philippines. Applications for registration must be accompanied by: (1) purchase invoice, subscription agreement
and proof of listing on the PSE (either or both); (2) credit advice or bank certificate showing the amount of
foreign currency inwardly remitted and converted into Pesos; and (3) transfer instructions from the stockbroker
or dealer, as the case may be.
Upon registration of the investment, proceeds of divestments, or dividends of registered investments are
repatriable or remittable immediately and in full with foreign exchange sourced from the Philippine banking
system, net of applicable tax, without need of BSP approval. Remittance is permitted upon presentation of: (1)
the BSP registration document; (2) the cash dividends notice from the PSE and the PCD printout of cash
dividend payment or computation of interest earned; (3) copy of the corporate secretary’s sworn statement on
the board resolution covering the dividend declaration; and (4) detailed computation of the amount applied for
in the format prescribed by the BSP. Pending reinvestment or registration, divestment proceeds, as well as
dividends of registered investments, may be lodged temporarily in interest-bearing deposit accounts. Interest
earned thereon, net of taxes, may also be remitted in full. Remittance of divestment proceeds or dividends of
registered investments may be reinvested in the Philippines if the investments are registered with the BSP or the
investor’s custodian bank.
The foregoing is subject to the power of the BSP, through the Monetary Board and with the approval of the
President of the Philippines, to suspend temporarily or restrict the availability of foreign exchange, require
licensing of foreign exchange transactions or require delivery of foreign exchange to the BSP or its designee
when an exchange crisis is imminent, or in times of national emergency.
The registration with the BSP of all foreign investments in any Shares received in exchange for the Offer Shares
shall be the responsibility of the foreign investor.
173
PHILIPPINE TAXATION
The following is a discussion of the material Philippine tax consequences of the acquisition, ownership and
disposition of the Company’s Shares. This general description does not purport to be a comprehensive
description of the Philippine tax aspects of the Company’s Shares and no information is provided regarding the
tax aspects of acquiring, owning, holding or disposing of the Company’s 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 Company’s 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 applicable to a holder of the Company’s 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 holder of the Company’s Shares.
Prospective investors of the Company’s Shares are urged to consult their own tax advisors as to the particular
tax consequences of the ownership and disposition of the Company’s Shares, including the applicability and
effect of any local or foreign tax laws.
As used herein, the term “resident alien” refers to an individual whose residence is 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.” A 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 foreign corporation not engaged in trade or
business in the Philippines.
The term “non -resident holder” means a holder of the Company’s Shares:

who is an individual who is neither a citizen nor a resident of the Philippines or an entity which is a
non-resident foreign corporation; and

should a tax treaty be applicable, whose ownership of the Company’s Shares is not effectively
connected with a fixed base or a permanent establishment in the Philippines.
TAX ON DIVIDENDS
Cash and property dividends received from a domestic corporation by individual shareholders who are either
citizens or resident aliens of the Philippines are subject to a final withholding tax at the rate of 10%, which shall
be withheld by the Company. Cash and property dividends received by resident alien individuals engaged in
trade or business in the Philippines are subject to a 20% final withholding tax on the gross amount thereof, while
cash and property dividends received by a non-resident alien not engaged in trade or business in the Philippines
are subject to a final withholding tax on dividends derived from Philippine sources at the rate of 25% of the
gross amount subject to applicable preferential tax rates under tax treaties in force between the Philippines and
the country of residence or domicile of such non-resident alien.
Cash and property dividends received from a domestic corporation by another domestic corporation or by
resident foreign corporations are not subject to tax while those received by non-resident foreign corporations are
subject to final withholding tax at the rate of 30%. The 30% rate may be reduced to a special 15% rate if (i) the
country in which the non-resident foreign corporation is domiciled imposes no taxes on foreign sourced
dividends or (ii) the country of domicile of the non-resident foreign corporation allows a credit against the tax
due from the non-resident foreign corporation for taxes deemed to have been paid in the Philippines at a rate
equivalent to at least 15%.The 30% rate may be reduced to a special 15% rate if (i) the country in which the
non-resident foreign corporation is domiciled imposes no taxes on foreign sourced dividends or (ii) the country
174
in which the non - resident foreign corporation is domiciled allows a credit against the tax due from the nonresident foreign corporation for taxes deemed to have been paid in the Philippines equivalent to 15%.
The BIR has prescribed, through an administrative issuance, procedures for availment of tax treaty relief. A
corporation may withhold taxes at a reduced rate on dividends paid to a non -resident holder of the Company’s
Shares if such non-resident holder submits to the domestic corporation proof of the filing of the tax treaty relief
application with the BIR prior to the payment of dividends. The application for tax treaty relief to be filed with
the BIR operates to confirm the entitlement of the taxpayer to such relief. While the Supreme Court has ruled
that the failure to file an application for tax treaty relief shall not disqualify an otherwise eligible taxpayer, in
practice, some withholding agents strictly require the income earners (payees) to show an approved tax treaty
relief application before availing of lower treaty tax rates to avoid controversy.
The requirements for a tax treaty relief application in respect of dividends are set out in the applicable tax treaty
and BIR Form No. 0901-D. These include proof of tax residence in the country that is a party to the tax treaty.
Proof of residence consists of a consularized certification from the tax authority of the country of residence of
the non-resident holder of Shares which states that the non-resident holder is a tax resident of such country
under the applicable tax treaty. If the non-resident holder of Shares is a juridical entity, authenticated certified
true copies of its articles of incorporation or association issued by the proper government authority should also
be submitted to the BIR in addition to the certification of its residence from the tax authority of its country of
residence.
If the regular rate of tax is withheld by the Company instead of the reduced rates applicable under a treaty, the
non - resident holder of Shares may file a claim for a refund from the BIR as a remedy. 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.
Stock dividends distributed pro-rata to any shareholder are not subject to Philippine income tax. However, the
sale, exchange or disposition of shares received as stock dividends by the holder is subject to either capital gains
and documentary stamp tax (if not through the local stock exchange) or stock transaction tax.
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:
Canada ........................................................................
China...........................................................................
France .........................................................................
Germany .....................................................................
Japan ...........................................................................
Singapore ....................................................................
United Kingdom .........................................................
United States ...............................................................
______________
Dividends
(%)
Stock transaction tax on sale
or disposition effected
through the PSE(%)(12)
25(1)
15(2)
15(3)
15(4)
15(5)
25(6)
25(7)
25(8)
0.5
0.5
0.5
0.5
0.5
0.5
0.5
0.5
Capital gains tax due on
disposition of shares
outside the PSE (%)
May be exempt(9)
May be exempt(9)
May be exempt(9)
5/10(10)
May be exempt(9)
May be exempt(9)
Exempt(11)
May be exempt(9)
(1)
15% if the recipient company controls at least 10% of the voting power of the company paying the dividends.
(2)
10% if the beneficial owner is a company which holds directly at least 10% of the capital of the company paying
the dividends.
(3)
10% if the recipient company (excluding a partnership) holds directly at least 10% of the voting shares of the
company paying the dividends.
(4)
10% if the recipient company (excluding a partnership) owns directly at least 25% of the capital of the company
paying the dividends.
175
(5)
10% if the recipient company holds directly at least 10% of either the voting shares of the company paying the
dividends or of the total shares issued by that company during the period of six months immediately preceding the
date of payment of the dividends.
(6)
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 shares of the paying
company were owned by the recipient company.
(7)
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.
(8)
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 shares of the
paying corporation were owned by the recipient corporation. Notwithstanding the rates provided under the
Republic of the Philippines-United States Treaty, residents of the United States may avail of the 15% withholding
tax rate under the tax-sparing clause of the Philippine Tax Code provided certain conditions are met.
(9)
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.
(10)
Under the tax treaty between the Philippines and Germany, capital gains from the alienation of share s 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 ₱100,000
and 10% on the net capital gains realized during the taxable year in excess of ₱100,000.
(11)
Under the tax treaty between the Philippines and the United Kingdom, capital gains on the sale of the shares 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.
(12)
Exempt if the stock transaction tax is expressly covered by the applicable tax treaty or is deemed by the relevant
authorities as an identical or substantially similar tax to the Philippine income tax. In BIR Ruling No. ITAD 22-07
dated February 9, 2007, the BIR held that the stock transaction tax cannot be considered as an identical or
substantially similar tax on income, and, consequently, ruled that a Singapore resident is not exempt from the
stock transaction tax on the sale of its shares in a Philippine corporation through the PSE.
The requirements for a tax treaty relief application in respect of capital gains tax on the sale of shares are set out
in the applicable tax treaty and BIR Form No. 0901-C. These include proof of residence in the country that is a
party to the tax treaty. Proof of residence consists of a consularized certification from the tax authority of the
country of residence of the seller of shares which provides that the seller is a resident of such country under the
applicable tax treaty. If the seller is a juridical entity, authenticated certified true copies of its articles of
incorporation or association issued by the proper government authority should also be submitted to the BIR in
addition to the certification of its residence from the tax authority of its country of residence.
SALE, EXCHANGE OR DISPOSITION OF SHARES THROUGH AN INITIAL PUBLIC OFFERING
(IPO)
The sale, barter, exchange or other disposition through an IPO of shares in closely held corporations is subject to
an IPO tax at the rates below based on the gross selling price or gross value in money of the shares sold,
bartered, exchanged or otherwise disposed in accordance with the proportion of shares sold, bartered, exchanged
or otherwise disposed to the total outstanding shares after the listing in the local stock exchange:
Up to 25% ...........................................................................................
Over 25% but not over 33 1⁄3% ..........................................................
Over 33 1⁄3% .......................................................................................
4%
2%
1%
A “closely held corporation” means any corporation at least 50% in value of outstanding capital shares or at
least 50% of the total combined voting power of all classes of shares entitled to vote is owned directly or
indirectly by or for not more than 20 individuals.
The IPO tax, if applicable, shall be paid by the Company.
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SALE, EXCHANGE OR DISPOSITION OF THE COMPANY’S SHARES AFTER THE OFFER
Taxes on Transfer of Shares Listed and Traded at the PSE
Sales, exchanges or other dispositions of Shares which are effected through the facilities of the PSE by a
resident or non-resident holder, other than a dealer in securities, is subject to a stock transaction tax at the rate of
0.5% of the gross selling price or gross value in money of the shares of stock sold or otherwise disposed, unless
an applicable treaty exempts such sale from said tax. This tax is required to be collected by and paid to the BIR
by the selling stockbroker on behalf of his client. The stock transaction ta x is classified as a percentage tax in
lieu of a capital gains tax. Under certain tax treaties, the exemptions from capital gains tax discussed herein may
not be applicable to stock transaction tax.
In addition, a VAT of 12% is imposed on the commission earned by the PSE-registered broker, and is generally
passed on to the client.
Capital Gains Tax, if Sale was Made Outside the PSE
Net capital gains realized by a resident or non-resident other than a dealer in securities during each taxable year
from the sale, exchange or disposition of shares outside the facilities of the PSE, unless an applicable treaty
exempts such gains from tax or provides for preferential rates, are subject to tax as follows: 5% on gains not
exceed in g ₱100,000 and 10% on gains over ₱100,000. An application for tax treaty relief must be filed (and
approved) by the BIR to obtain an exemption under a tax treaty. Such application must be filed before the
deadline for the filing of the documentary stamp tax return. The transfer of shares shall not be recorded in the
Company’s books unless the BIR certifies that the capital gains and documentary stamp taxes relating to the sale
or transfer have been paid or, where applicable, tax treaty relief has been confirmed by the International Tax
Affairs Division of the BIR in respect of the capital gains tax or other conditions have been met.
When availing of capital gains tax exemption on the sale of shares of stock under a tax treaty, a tax treaty
exemption ruling shall be necessary in order to completely implement the transfer. For sale of shares made
outside the PSE, a CAR from the BIR is required before the transfer is registered in the stock and transfer book.
The BIR issues the CAR only after verifying that the applicable taxes have been paid. Thus, in lieu of proof of
payment of capital gains tax, the tax treaty relief ruling should be submitted to the BIR office processing the
CAR.
Documentary Stamp Tax
The Philippines imposes a documentary stamp tax, or DST, on the issuance by a corporation of shares at the rate
of ₱1 on each ₱200, or fraction thereof, of the par value of the shares. The DST on the issuance of the Offer
Shares shall be paid by the Company.
The Philippines also imposes a DST upon transfers of shares of stock issued by a Philippine corporation at a rate
of ₱0.75 on each ₱200, or fractional part thereof, of the par value of the shares.
The DST is imposed on the person making, signing, issuing, accepting or transferring the document and is thus
payable by the vendor or the purchaser of the shares.
However, the sale, barter or exchange of shares of stock listed and traded through the PSE are exempt from
DST.
In addition, the borrowing and lending of securities executed under the securities borrowing and lending
program of a registered exchange, or in accordance with regulations prescribed by the appropriate regulatory
authority, are likewise exempt from documentary stamp tax. However, the securities borrowing and lending
agreement should be duly covered by a master securities borrowing and lending agreement acceptable to the
appropriate regulatory authority, and should be duly registered and approved by the BIR.
177
Estate and Gift Taxes
The transfer of the Company’s 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 rate s ranging from 5% to 20% if the net estate is over ₱200,000. Individual
and corporate registered holders, whether or not citizens or residents of the Philippines, who transfer share s by
way of gift or donation will be liable for Philippine donor’s tax on such transfer s at progressive rates ranging
from 2% to 15% if the net gifts mad e during the year exceed ₱100,000. 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 transfer s, 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 (i) 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 (ii) 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 30% is imposed upon the taxable net income of a domestic corporation from all sources
(within and outside the Philippines) pursuant to the Philippine Tax Code.
Tax Laws Outside of the Philippines
The tax treatment of a non-resident shareholder in jurisdictions outside of the Philippines may vary depending
on the tax laws applicable to such non-resident shareholder in connection with its domicile, business activities or
unique circumstances. This Prospectus does not discuss possible tax considerations of non-resident shareholders
under foreign laws.
Prospective shareholders must consult with their tax advisers as to the particular tax implications of purchasing,
owning and disposing of the Shares, which consultation must include the applicability and effect of foreign
laws.
178
PLAN OF DISTRIBUTION
Up to [207,000,000] of the Firm Shares ([69%] of the Firm Shares) (the Institutional Offer Shares) are being
offered for subscription at the Offer Price (i) outside the United States by J.P. Morgan Securities Plc (J.P.
Morgan or the Global Coordinator and International Bookrunner), and (ii) to Domestic QBs in the
Philippines by BPI Capital Corporation (BPI Capital or the Domestic Lead Underwriter and Domestic
Bookrunner) (collectively the Institutional Offer). Up to [3,000,000] of the Firm Shares ([1%] of the Firm
Shares) (the Employee Tranche Offer Shares) are being offered by the Domestic Lead Underwriter and
Domestic Bookrunner to all the regular employees of the Company in the Philippines who are on its payroll as
of June 30, 2016 and continue to be regular employees during the Trading Participants and Retail Offer Period.
Up to [90,000,000] Firm Shares (the Trading Participants and Retail Offer Shares), or [30]% of the Firm
Shares, are being offered by the Domestic Lead Underwriter and Domestic Bookrunner at the Offer Price to all
of the PSE Trading Participants and local small investors (LSIs) in the Philippines (the Trading Participants
and Retail Offer). The allocation of the Firm Shares between the Trading Participants and Retail Offer, the
Institutional Offer and the Employee Tranche Offer is subject to adjustment as agreed between the Global
Coordinator and International Bookrunner and the Domestic Lead Underwriter and Domestic Bookrunner. The
Domestic Lead Underwriter and Domestic Bookrunner will underwrite, on a firm commitment basis, the
Trading Participants and Retail Offer Shares and the Employee Tranche Offer Shares, and the Global
Coordinator and International Bookrunner and Domestic Lead Underwriter and Domestic Bookrunner will
underwrite, on a firm commitment basis, the Institutional Offer Shares. There is no arrangement for the Global
Coordinator and International Bookrunner or the Domestic Lead Underwriter and Domestic Bookrunner to
return any of the Offer Shares relating to the Trading Participants and Retail Offer or the Employee Tranche
Offer or the Institutional Offer to the Company.
THE TRADING PARTICIPANTS AND RETAIL OFFER
The Trading Participants and Retail Offer Shares shall initially be offered by the Domestic Lead Underwriter
and Domestic Bookrunner to all of the PSE Trading Participants and LSIs in the Philippines. The PSE shall
allocate approximately [60,000,000] Trading Participants and Retail Offer Shares, or [20] % of the Firm Shares,
among the PSE Trading Participants. Each PSE Trading Participant shall initially be allocated approximately
[454,540] Firm Shares (computed by dividing the Trading Participants and Retail Offer Shares allocated to the
PSE Trading Participants between [132] PSE Trading Participants) and subject to reallocation as may be
determined by the Domestic Lead Underwriter and Domestic Bookrunner. The balance of [] Firm Shares shall
be allocated by the Domestic Lead Underwriter and Domestic Bookrunner to the PSE Trading Participants. In
addition, approximately up to [30,000,000] Firm Shares, or [10] % of the Firm Shares, shall be allocated to the
LSIs. Prior to the closing of the Trading Participants and Retail Offer, any allocation of Trading Participants and
Retail Offer Shares not taken up by the PSE Trading Participants and the LSIs may be subject to reallocation to
the Institutional Offer at the discretion of the Global Coordinator and International Bookrunner and the
Domestic Lead Underwriter and Domestic Bookrunner. Trading Participants and Retail Offer Shares not
reallocated to the Institutional Offer will be distributed by the Domestic Lead Underwriter and Domestic
Bookrunner to its clients or the general public in the Philippines or as otherwise agreed with the Global
Coordinator and International Bookrunner. Trading Participants and Retail Offer Shares not taken up by the PSE
Trading Participants or the LSIs and which are not reallocated to the Institutional Offer or taken up by the
clients of the Domestic Lead Underwriter and Domestic Bookrunner, or the general public in the Philippines,
shall be purchased by the Domestic Lead Underwriter and Domestic Bookrunner pursuant to the terms and
conditions of the Domestic Underwriting Agreement (as defined below).
To facilitate the Trading Participants and Retail Offer, the Company has appointed BPI Capital to act as the
Domestic Lead Underwriter and Domestic Bookrunner. The Company and the Domestic Lead Underwriter and
Domestic Bookrunner shall enter into a Domestic Underwriting Agreement to be dated on [October 19], 2016
(the Domestic Underwriting Agreement), whereby the Domestic Lead Underwriter and Domestic Bookrunner
agrees to underwrite, on a firm commitment basis, any Firm Shares allocated in the Trading Participants and
Retail Offer, subject to agreement between the Global Coordinator and International Bookrunner and the
179
Domestic Lead Underwriter and Domestic Bookrunner on any clawback, clawforward or other such mechanism,
on a firm commitment basis.
On or before [November 3], 2016, the PSE Trading Participants shall submit to the designated representative of
the Domestic Lead Underwriter and Domestic Bookrunner their respective firm orders and commitments to
purchase Trading Participants and Retail Offer Shares.
With respect to the LSIs, all applications to purchase or subscribe for the Trading Participants and Retail Offer
Shares must be evidenced by a duly accomplished and completed application form. An application to purchase
Trading Participants and Retail Offer Shares shall not be deemed as a duly accomplished and completed
application unless submitted with all required relevant information and applicable supporting documents to the
Domestic Lead Underwriter and Domestic Bookrunner or such other institutions that may be invited to manage
the LSI program. Payment for the Trading Participants and Retail Offer Shares must be made upon submission
of the duly completed application form.
The Domestic Lead Underwriter and Domestic Bookrunner shall receive from the Company a fee equivalent to
[●]% of the gross proceeds of the Trading Participants and Retail Offer, inclusive of the amounts to be paid to
the PSE Trading Participants. The underwriting fees shall be withheld by the Domestic Lead Underwriter and
Domestic Bookrunner from the proceeds of the Trading Participants and Retail Offer. PSE Trading Participants
who take up Trading Participants and Retail Offer Shares shall be entitled to a selling fee of 1% of the Trading
Participants and Retail Offer Shares taken up and purchased by the relevant PSE Trading Participant; any such
selling fees will be borne by the Company. The selling fee, less a withholding tax of 10%, will be paid by the
Domestic Lead Underwriter and Domestic Bookrunner to the PSE Trading Participants within ten banking days
of the Listing Date.
All of the Trading Participants and Retail Offer Shares are or shall be lodged with the PDTC and shall be issued
to the PSE Trading Participants and LSIs in scripless form. They may maintain the Trading Participants and
Retail Offer Shares in scripless form or opt to have the stock certificates issued to them by requesting an
upliftment of the relevant Trading Participants and Retail Offer Shares from the PDTC’s electronic system after
the Listing Date.
BPI Capital is a Philippine corporation organized in the Philippines as a wholly owned subsidiary of the Bank of
the Philippine Islands. It obtained its license to operate as an investment house in 1994 and is licensed by the
Philippine SEC to engage in underwriting and distribution of securities to the public. As of December 31, 2015,
its total assets amounted to ₱6.0 billion and its capital base amounted to ₱5.5 billion. It has an authorized capital
stock of ₱2.0 billion, of which approximately P506.0 million represents its paid-up capital. The Bank of the
Philippine Islands is [48.3] % owned by Ayala Corporation as of June 30, 2016. Mr. Fernando Zobel de Ayala,
who serves as an independent director of the Company, is the Vice-Chairman of Ayala Corporation.
The Domestic Lead Underwriter and Domestic Bookrunner and its affiliates have engaged in transactions with,
and have performed various investment banking, commercial banking and other services for the Company in the
past, and may do so for the Company, the Selling Shareholders and their respective subsidiaries and affiliates
from time to time in the future. However, all services provided by the Domestic Lead Underwriter and Domestic
Bookrunner, including in connection with the Offer, have been provided as an independent contractor and not as
a fiduciary to the Company or the Selling Shareholders. The Domestic Lead Underwriter and Domestic
Bookrunner do not have any right to designate or nominate a member of the Board. The Domestic Lead
Underwriter and Domestic Bookrunner has no direct relationship with the Company in terms of share ownership
and, other than as Domestic Lead Underwriter and Domestic Bookrunner for the Offer, does not have any
material relationship with the Company.
THE INSTITUTIONAL OFFER
The Institutional Offer Shares will be offered for subscription (i) outside the United States by the Global
Coordinator and International Bookrunner in offshore transactions in reliance on Regulation S under the U.S.
180
Securities Act, and (ii) to Domestic QBs in the Philippines by the Domestic Lead Underwriter and Domestic
Bookrunner.The allocation of the Firm Shares between the Trading Participants and Retail Offer, the
Institutional Offer and the Employee Tranche Offer is subject to further adjustment as may be agreed between
the Global Coordinator and International Bookrunner and the Domestic Lead Underwriter and Domestic
Bookrunner. In the event of an under-application in the Institutional Offer and the Employee Tranche Offer and
a corresponding over-application in the Trading Participants and Retail Offer, Firm Shares in the Institutional
Offer and the Employee Tranche Offer may be reallocated to the Trading Participants and Retail Offer. If there
is an under-application in the Trading Participants and Retail Offer and if there is a corresponding overapplication in the Institutional Offer and the Employee Tranche Offer, Firm Shares in the Trading Participants
and Retail Offer may be reallocated to the Institutional Offer and the Employee Tranche Offer. The reallocation
shall not apply in the event of over-application or under-application in both the Trading Participants and Retail
Offer, on the one hand, and the Institutional Offer and the Employee Tranche Offer, on the other hand.
The International Underwriting Agreement to be dated [October 19], 2016 and to be entered into among the
Company and the Global Coordinator and International Bookrunner, is subject to certain conditions and may be
subject to termination by the Global Coordinator and International Bookrunner if certain circumstances,
including force majeure, occur on or before the Offer Shares are listed on the PSE. Under the terms and
conditions of the International Underwriting Agreement, the Global Coordinator and International Bookrunner
has agreed, on a firm commitment basis, to procure purchasers for or failing which, to purchase [●] Institutional
Offer Shares.
[In addition, pursuant to the Domestic Underwriting Agreement, the Domestic Lead Underwriter and Domestic
Bookrunner agrees to underwrite, on a firm commitment basis, [●] Institutional Offer Shares subject to
agreement between the Global Coordinator and International Bookrunner and the Domestic Lead Underwriter
and Domestic Bookrunner on any clawback, clawforward or other such mechanism, on a firm commitment
basis.]
The immediately preceding two paragraphs do not reflect the exercise of the Over-allotment Option that may or
may not be exercised by [] or its relevant affiliate as Stabilizing Agent to purchase up to [30,000,000]
additional Shares from the Selling Shareholders.
The Global Coordinator and International Bookrunner and its respective affiliates have engaged in transactions
with, and have performed various investment banking, commercial banking and other services for, the Company
in the past, and may do so for the Company, the Selling Shareholders and their respective subsidiaries and
affiliates from time to time in the future. However, all services provided by the Global Coordinator and
International Bookrunner, including in connection with the Offer, have been provided as an independent
contractor and not as a fiduciary to the Company or the Selling Shareholders. The Global Coordinator and
International Bookrunner does not have any right to designate or nominate a member of the Board. The Global
Coordinator and International Bookrunner has no direct relationship with the Company in terms of share
ownership and, other than as Global Coordinator and International Bookrunner for the Offer, does not have any
material relationship with the Company.
The Domestic Lead Underwriter and Domestic Bookrunner and its respective affiliates have engaged in
transactions with, and have performed various investment banking, commercial banking and other services for,
the Company in the past, and may do so for the Company, the Selling Shareholders and their respective
subsidiaries and affiliates from time to time in the future. However, all services provided by the Domestic Lead
Underwriter and Domestic Bookrunner, including in connection with the Offer, have been provided as an
independent contractor and not as a fiduciary to the Company or the Selling Shareholders. The Domestic Lead
Underwriter and Domestic Bookrunner does not have any right to designate or nominate a member of the Board.
The Domestic Lead Underwriter and Domestic Bookrunner has no direct relationship with the Company in
terms of share ownership and, other than as Domestic Lead Underwriter and Domestic Bookrunner for the
Offer, does not have any material relationship with the Company.
181
Investors in the Institutional Offer (but not the Trading Participants and Retail Offer and the Employee Tranche
Offer) will be required to pay, in addition to the Offer Price, a brokerage fee of 1% of the Offer Price.
THE EMPLOYEE TRANCHE OFFER
The Employee Tranche Offer Shares will be offered to all the regular employees of the Company in the
Philippines who are on its payroll as of June 30, 2016 and continue to be regular employees during the Trading
Participants and Retail Offer Period. Each of such regular employee may subscribe to a minimum of 260
Employee Tranche Offer Shares up to a maximum of 4,290 Employee Tranche Offer Shares, subject to pro-rata
allocation.
[Cornerstone Investment Agreement
Concurrently with and as part of the Institutional Offer, each of the entities listed below (the Cornerstone
Investors) has entered into a cornerstone investment agreement with the Company, the Global Coordinator and
International Bookrunner and the Domestic Lead Underwriter and Domestic Bookrunner to purchase such
number of Offer Shares from the Company at the Offer Price (the Cornerstone Shares). [Subject to certain
conditions, the Cornerstone Investors may be required to purchase a certain number of Offer Shares through the
book building process for the Offer Shares in addition to the Cornerstone Shares (the Additional Investor
Shares).]
The Cornerstone Investors may also participate in the Offer by purchasing more Offer Shares through the book
building process in addition to the Cornerstone Shares [and the Additional Investor Shares]. The purchase of
Cornerstone Shares will not limit the number of Shares which the Cornerstone Investor may purchase as part of
the Offer. Any Additional Investor Shares and other Offer Shares purchased by the Cornerstone Investor
through the book building process will not be subject to the Lock-up Period.]
[The Cornerstone Investor
The following table sets out details of the Cornerstone Investor.
Investor
Description
[]
[]
[]
[]
[]
[]
THE OVER-ALLOTMENT OPTION
In connection with the Offer, subject to the approval of the Philippine SEC, [each of the Selling Shareholders]
has granted the Stabilizing Agent an Over-allotment Option, exercisable in whole or in part to purchase the
Optional Shares on the same terms and conditions as the Firm Shares, as set forth herein, from time to time for a
period which shall not exceed 30 calendar days from and including the Listing Date. In connection therewith,
[each of the Selling Shareholders] has entered into a greenshoe agreement with the Stabilizing Agent to utilize
up to an additional [30,000,000] Shares, among others, to cover over-allocations under the Institutional Offer.
Any Shares that may be delivered to the Stabilizing Agent under the greenshoe agreement will be re-delivered to
the Selling Shareholders either through the purchase of Shares in the open market by the Stabilizing Agent in
the conduct of stabilization activities or through the exercise of the Over-allotment Option by the Stabilizing
Agent. The Optional Shares may be over-allotted and the Stabilizing Agent may affect price stabilization
transactions for a period beginning on or after the Listing Date, but extending no later than 30 days from and
including the Listing Date. The Stabilizing Agent may purchase Shares in the open market only if the market
price of the Shares falls below the Offer Price. Such activities may stabilize, maintain or otherwise affect the
market price of the Shares, which may have the effect of preventing a decline in the market price of the Shares
and may also cause the price of the Shares to be higher than the price that otherwise would exist in the open
market in the absence of these transactions. If the Stabilizing Agent commences any of these transactions, it may
182
discontinue them at any time. Once the Over-allotment Option has been exercised by the Stabilizing Agent, it
will no longer be allowed to purchase Shares in the open market for the conduct of stabilization activities. The
Over-allotment Option, to the extent not fully exercised by the Stabilizing Agent, shall be deemed cancelled and
the relevant Optional Shares shall be re-delivered to the Selling Shareholders.
LOCK-UP
The PSE rules require existing shareholders owning at least 10% of the outstanding shares of a company not to
sell, assign or in any manner dispose of their shares for a period of 180 days after the listing of the shares. If the
Over-allotment Option is not exercised, [] Shares held by Shell Overseas Investments B.V. and [] Shares held
by The Insular Life Assurance Company, Ltd. are subject to such 180-day lock-up. If the Over-allotment Option
is fully exercised, [] Shares held by Shell Overseas Investments B.V. and [] Shares held by The Insular Life
Assurance Company, Ltd. are subject to such 180-day lock-up.
[In addition, if there is any issuance or transfer of Shares (i.e., private placements, asset for shares swap or a
similar transaction) or instruments which lead to issuance of Shares (i.e., convertible bonds, warrants or a
similar instrument) done and fully paid for within 180 days prior to the start of the Offer, and the transaction
price is lower than that of the Offer Price, all such Shares issued or transferred shall be subject to a lock-up
period of at least 365 days from full payment of such Shares. A total of [] Shares, held by [], will be subject to
such 365-day lock-up.]
[In addition, the Company and the Selling Shareholders have agreed with the Global Coordinator and
International Bookrunner and the Domestic Lead Underwriter and Domestic Bookrunner that, except in
connection with the Over-allotment Option, none of the Company, Shell Overseas Investments B.V., The
Insular Life Assurance Company, Ltd., Spathodea Campanulata, Inc. or [other entities subject to lock-up to be
described], nor any person acting on their behalf, will, without the prior written consent of the Global
Coordinator and International Bookrunner and the Domestic Lead Underwriter and Domestic Bookrunner, issue,
offer, pledge, sell, contract to sell, pledge or otherwise dispose of (or publicly announce any such issuance,
offer, sale or disposal of) any Shares owned by it as of the Listing Date or securities owned as of the Listing
Date convertible or exchangeable into or exercisable for any Shares or warrants or other rights to purchase
Shares or any security or financial product whose value is determined directly or indirectly by reference to the
price of the underlying securities, including equity swaps, forward sales and options, for a period of [180] days
after the First Closing Date.]
SELLING RESTRICTIONS
Philippines
No securities, except of a class exempt under Section 9 of the SRC or unless sold in any transaction exempt
under Section 10 thereof, shall be sold or distributed by any person within the Philippines, unless such securities
shall have been registered with the Philippine SEC on Form 12-1 and the registration statement has been
declared effective by the Philippine SEC.
Under the Oil Deregulation Law, any person or entity engaged in the oil refinery business to make a public
offering through the stock exchange of at least ten percent of its common stock within a period of three years
from the effective date of the law or the commencement of its refinery operations; provided, that no single
person or entity shall be allowed to own more than five percent of such stock offering; provided, further, that
any crude oil refining company and any stockholder holding a substantial interest thereof shall not acquire,
directly or indirectly, any share of stock offered by any other crude oil refining company. The Department of
Justice Opinion No. 006 S. 2001 defines “substantial interest” as ownership of shares of stock of a domestic
crude oil refining corporation or entity, held beneficially, on record, or through any contractual arrangement,
that would allow such shareholder to exercise voting power sufficient to elect at least one member of the board
of directors of such domestic crude oil refining corporation or entity, and/or the occupation of any senior officer
183
position in a domestic crude oil refining company, giving such person significant decision-making power in that
company.
184
LEGAL MATTERS
Certain legal matters as to Philippine law in connection with the Offer will be passed upon by Picazo Buyco Tan
Fider & Santos, legal counsel to the Global Coordinator and International Bookrunner and the Domestic Lead
Underwriter and Domestic Bookrunner, and Romulo Mabanta Buenaventura Sayoc & De Los Angeles, legal
counsel to the Company. Certain legal matters as to United States federal law and English law in connection
with the Offer will be passed upon by Milbank, Tweed, Hadley & McCloy LLP, international legal counsel to
the Global Coordinator and International Bookrunner and the Domestic Lead Underwriter and Domestic
Bookrunner, and Allen & Overy, international legal counsel to the Company. None of the above mentioned
advisers has any direct or indirect interest in the Company arising from the Offer.
185
INDUSTRY EXPERT
Nexant was responsible in its capacity as an expert in the Philippine downstream oil industry for preparing (i) a
report relating to the same, extracts of which comprise the information in the section “Industry Overview” in this
Prospectus, and (ii) certain other information attributed to Nexant in this Prospectus. The information provided
by Nexant has been derived in part from publicly available government sources, market data providers and other
independent third party sources. While the report prepared by Nexant provides that the views, opinions,
forecasts and information contained in it are based on information reasonably believed by Nexant in good faith
to be reliable, Nexant makes no representation as to the accuracy of the information prepared by it set forth in
this Prospectus and the information should not be relied upon in making, or refraining from making, any
investment decision. Nexant has given, and has not withdrawn, its consent to the issue of this Prospectus with
the inclusion of Nexant’s name and the section “Industry Overview”, and all other information attributed to
Nexant in this Prospectus, in the form and context in which they are included.
186
INDEPENDENT AUDITORS
SyCip Gorres Velayo & Co. (SGV), a member firm of Ernst & Young Global Limited (EY), has audited the
Company’s financial statements as of June 30, 2016 and for the six months ended June 30, 2015 and 2016. Isla
Lipana & Co., a member firm of PricewaterhouseCoopers International Limited (PwCIL), independent auditors,
has audited the Company’s financial statements as of and for the years ended December 31, 2013, 2014 and
2015.
As of January 1, 2016, SGV is the independent auditor of the Company. Isla Lipana & Co. was the independent
auditor of the Company for the previous fiscal years, where Roderick M. Danao, Assurance Partner, was the
Company’s audit partner. The Company has not had any material disagreements on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or procedure with the current or
previous independent auditors for the same periods or any subsequent interim period. Neither SGV nor Isla
Lipana & Co. has shareholdings in the Company or any right, whether legally enforceable or not, to nominate
persons or to subscribe for the securities in the Company. Neither SGV nor Isla Lipana & Co. will receive any
direct or indirect interest in the Company or in any securities thereof (including options, warrants or rights
thereto) pursuant to or in connection with the Offer. The foregoing is in accordance with the Code of Ethics for
Professional Accountants in the Philippines set by the Board of Accountancy and approved by the Professional
Regulation Commission.
The following table sets out the aggregate fees billed for each of the last two fiscal years for professional
services rendered by Isla Lipana & Co., excluding fees directly related to the Offer.
2015
2014
(₱ million)
Audit and audit-related fees
Audit services1 ..................................................................................................................
7.0
7.3
Other assurance and related services ...............................................................................
-
-
Tax fees ............................................................................................................................
-
-
All other fees ....................................................................................................................
-
-
Total .................................................................................................................................
7.0
7.3
_____________
Note:
1
This category includes the audit of annual financial statements, review of interim financial statements and services that are
normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for those
calendar years.
In relation to the audit and review of the Company’s annual financial statements, the Company’s Manual of
Corporate Governance provides that the Audit Committee shall, among other activities (i) evaluate significant
issues reported by the independent auditors in relation to the adequacy, efficiency and effectiveness of policies,
controls, processes and activities of the Company; (ii) ensure that other non-audit work provided by the
independent auditors is not in conflict with their functions as independent auditors; and (iii) ensure the
compliance of the Company with acceptable auditing and accounting standards and regulations.
187
INDEX TO FINANCIAL STATEMENTS
Independent Auditor’s Report ......................................................................................................................................... []
Financial Statements with Supplementary Schedules for the Securities and Exchange Commission as
of and for the year ended December 31, 2013 ................................................................................................................. []
Notes to Financial Statements ......................................................................................................................................... []
188
Shell House
156 Valero Street
Salcedo Village
Makati City 1227
Philippines
GLOBAL COORDINATOR AND INTERNATIONAL BOOKRUNNER
J.P. Morgan Securities Plc
25 Bank Street
Canary Wharf
London, E14 5JP
United Kingdom
DOMESTIC LEAD UNDERWRITER AND DOMESTIC BOOKRUNNER
BPI Capital Corporation
8F BPI Building
Ayala Ave. cor. Paseo de Roxas
Makati City 1226
Philippines
FINANCIAL ADVISER
N M Rothschild & Sons Ltd
New Court
St Swithin's Lane,
London, EC4N 8AL
United Kingdom
LEGAL COUNSEL TO PILIPINAS SHELL PETROLEUM CORPORATION
As to United States Federal law and English law
As to Philippine law
Allen & Overy
9/F Three Exchange Square
Central
Hong Kong
Romulo Mabanta Buenaventura Sayoc &
de los Angeles
21/F Philamlife Tower,
8767 Paseo de Roxas
Makati City 1226
Philippines
LEGAL COUNSEL TO THE GLOBAL COORDINATOR AND INTERNATIONAL BOOKRUNNER
AND DOMESTIC LEAD UNDERWRITER AND DOMESTIC BOOKRUNNER
As to United States Federal law and English law
As to Philippine law
Milbank Tweed Hadley & McCloy LLP
30/F Alexandra House
18 Chater Road
Central
Hong Kong
Picazo Buyco Tan Fider & Santos Law Office
Penthouse
Liberty Center
104 H.V. de la Costa St.
Salcedo Village
Makati City 1227
Philippines
INDEPENDENT AUDITORS
SyCip Gorres Velayo & Company
Isla Lipana & Co.
(a member firm of Ernst & Young Global Limited)
(a member firm of PricewaterhouseCoopers International Limited)
6760 Ayala Avenue
Makati City 1226
Philippines
29/F Philamlife Tower
8767 Paseo de Roxas
Makati City, 1226
Philippines
189
190

Pilipinas Shell Petroleum Corporation

Transcription

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