petroenergy-sec-17-q-2nd-quarter-2018-

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SECURITIES AND EXCHANGE COMMISSION SECBuilding, EDSA,Greenhills, MandaluyongCity, MetroManila, philippines Tef :(632) 726-0931 to 39 Fax:(632)725-S293Emait: mis@sec.gov.ph

Barcode Page The following document has been received:

Receiving Officer/Encoder : Donna Encarnado - COS

Receiving Branch : SEC Head Office Receipt Date and Time : August 13, 2018 01:31:00 pM Received From : Head Office

Company Representative

Doc Source Company Information SEC Registration No.

AS94008880

Company Name

PETROENERGY RESOURCES CORP.

Industry Classification Company Type

Stock Corporation

Document lnformation Document lD

108132018002101

Document Type

17-Q (FORM 11-Q:QUARTERLY REPORT/FS)

Document Code Period Covered

June 30, 2018

No. of Days Late

0

Department

CFD

Remarks

17-Q

COVER SHEET

A S O 9 4 - 0 8 8 8 0 SEC Registration Number

P E T R O E N E R G Y A N D

R E S O U R C E S

C O R P O R A T I O N

S U B S I D I A R I E S

(Company’s Full Name)

7 T H

F L O O R

A D B

A V E N U E

P A S I G

J M T

B U I L D I N G

O R T I G A S

C E N T E R

C I T Y (Business Address: No. Street City/Town/Province)

Carlota R. Viray

637-2917

(Contact Person)

(Company Telephone Number)

Second Quarter

1 2

3 1

Month

Day

1

7

-

Q

0 7

2 6

Month

(Fiscal Year)

Day

(Annual Meeting)

(Secondary License Type, If Applicable)

Dept. Requiring this Doc.

Amended Articles Number/Section Total Amount of Borrowings

Total No. of Stockholders

Domestic

Foreign

To be accomplished by SEC Personnel concerned

File Number

LCU

Document ID

Cashier

STAMPS Remarks: Please use BLACK ink for scanning purposes.

-2SECURITIES AND EXCHANGE COMMISSION SEC FORM 17-Q QUARTERLY REPORT PURSUANT TO SECTION 11 OF THE SECURITIES REGULATION CODE (SRC) AND SRC RULE 17(a)-1(b) (2) THEREUNDER 1.

30 June 2018 For the quarterly period ended

2.

SEC Identification Number ASO94-08880

4.

PetroEnergy Resources Corporation Exact name of registrant as specified in its charter

5.

Manila, Philippines Province, country or other jurisdiction of incorporation

7.

7th Floor JMT Condominium, ADB Avenue, Pasig City Address of principal office

8.

(632) 637-2917 Registrant’s telephone number, including area code

9.

Not Applicable Former name, former address and former fiscal year, if changed since last report

10.

Securities registered pursuant to Sections 8 and 12 of the Code, or Section 4 and 8 of the RSA Title of Each Class

3. BIR Tax Identification No. 004-471-419-000

6. (SEC Use Only) Industry Classification Code:

1605 Postal Code

Number of Shares of Common Stock Outstanding

Common (par value of P1.00/share)

568,711,842

Amount of Debt Outstanding = $121.034 Million 11.

12.

Are any or all of the securities listed on the Philippine Stock Exchange?

All issued and outstanding common shares are listed in the Philippine Stock Exchange.

Indicate by check mark whether the registrant: a.

has filed all reports required to be filed by Section 11 of the Securities Regulation Code(SRC) and SRC Rule 11(a)-1 thereunder and Sections 26 and 141 of the Corporation Code of the Philippines, during the preceding 12 months (or for such shorter period the registrant was required to file such reports) Yes [ /]

b.

has been subject to such filing requirements for the past 90 days Yes [/ ]

-3TABLE OF CONTENTS Page no.

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements 1. Consolidated Statements of Financial Position As of June 30, 2018, June 30, 2017 and December 31, 2017 2. Consolidated Statements of Income For the quarter and six months ended June 30, 2018 and June 30, 2017 3. Consolidated Statements of Comprehensive Income For the quarter ended June 30, 2018 and June 30, 2017 4. Consolidated Statement of Changes in Equity As of June 30, 2018, June 30, 2017 and December 31, 2017 5. Consolidated Statement of Cash flows As of June 30, 2018, June 30, 2017 and December 31, 2017 6. Notes to Financial Statements

4 5 6 7 8 9 - 57

Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations 1. Financial Condition – June 30, 2018 and June 30, 2017 2. Results of Operations – For the quarter ended June 30, 2018 and June 30, 2017 3. Financial Condition – June 30, 2018 and June 30, 2017 4. Results of Operations – For the six months ended June 30, 2018 and June 30, 2017 5. Key performance indicators 6. Discussion of Indicators of the Company’s Level of Performance 7. Disclosure in view of the current global financial crisis.

8. Operations review and business outlook

PART II OTHER INFORMATION Supplementary Information and disclosures required on SRC Rule 68 Schedule of Financial Soundness Indicators Reconciliation of Retained Earnings Available for Dividend Declaration Report on Stock Rights Offering Map of relationships of companies within the group

SIGNATURES

55 - 57 58 - 59 60 – 62 62 – 64 64 65 66 67 - 69

70 - 71 72 73 75

76

-4PETROENERGY RESOURCES CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (In U.S. Dollars)

ASSETS Current Assets Cash and cash equivalents Financial assets at fair value through profit and loss (FVPL) Receivables Advances, prepaid expenses and other current assets Total Current Assets Noncurrent Assets Property and equipment-net Deferred oil exploration cost Investment in Associate Deferred tax assets-net Investment properties-net Other non-current assets Total Noncurrent Assets

LIABILITIES AND EQUITY Current Liabilities Accounts payable and accrued expenses Loans payable - Current Income tax payable Deposit for future stock subscription Total Current Liabilities Noncurrent Liabilities Loans payable - Non Current Asset retirement obligation Deferred tax liability-net Other Non-Current Liability Total Noncurrent Liabilities Total Liabilities Equity Attributable to equity holders of the Parent Company Capital stock Additional paid- in capital Retained earnings Appropriated Unappropriated Equity reserve Remeasurement loss on define benefit obligation Cumulative translation adjustment Noncontrolling interest - BS Total Equity

Unaudited

Unaudited

Audited

30-Jun-18

30-Jun-17

31-Dec-17

$ 15,080,573 149,825 8,326,526 19,432,547 42,989,471

$ 12,952,412 176,981 8,301,079 8,192,803 29,623,275

$ 20,110,581 181,215 7,789,463 5,332,588 33,413,847

151,661,953 4,099,116 27,048,864 242,208 31,417 10,381,491 193,465,049 $ 236,454,520

156,007,327 3,943,491 27,824,957 308,164 31,417 13,031,843 201,147,199 $ 230,770,474

162,806,394 3,982,542 28,196,245 242,686 31,417 10,815,279 206,074,563 $ 239,488,410

$ 5,741,503 15,211,730 127,816 21,081,049

$ 6,284,231 22,168,391 75,051 4,251,257 32,778,930

$ 5,698,427 21,867,859 56,952 27,623,238

97,666,634 1,653,777 632,950 99,953,361 121,034,410

99,744,161 1,388,801 1,522,277 222,901 102,878,140 135,657,070

108,504,253 1,642,504 572,638 110,719,395 138,342,633

12,500,454 47,435,328

9,391,311 35,620,588

9,391,311 35,620,588

3,149,555 24,556,837 1,859,173 (17,136) (5,969,690) 68,590,638 26,522,766 95,113,404 $ 230,770,474

3,149,555 24,466,415 1,859,173 (194,480) (5,291,774) 69,000,788 32,144,989 101,145,777 $ 239,488,410

3,149,555 27,414,359 1,859,173 (189,982) (8,991,456) 83,177,431 32,242,679 115,420,110 $ 236,454,520

-5PETROENERGY RESOURCES CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (In U.S. Dollars)

Unaudited 30-Jun-18 For the 2nd To date Quarter REVENUES Electricity sales Oil revenues

30-Jun-17 For the 2nd To date Quarter

$ 7,932,335 2,004,538 9,936,873

$ 15,328,579 3,750,994 19,079,573

$ 7,529,396 1,568,372 9,097,768

$ 15,112,117 3,287,961 18,400,078

3,395,112 1,100,660 362,957 4,858,729

6,216,178 2,120,334 747,945 9,084,457

3,018,907 911,646 518,830 4,449,383

5,850,234 1,765,364 960,369 8,575,967

5,078,144

9,995,116

4,648,385

9,824,111

706,494

1,766,189

597,276

1,178,917

167,234 (107,465) (22,174)

292,994 (90,523) (19,136)

126,052 (713) 2,679

133,447 46,443 14,187

(1,818,629) (18,087) 49,125 38,765 (1,711,231)

(3,458,176) (40,351) 751,598 76,140 (2,487,454)

(1,785,762) (13,075) 46,716 (99,030) (1,723,133)

(3,427,308) (26,145) 1,237,580 91,553 (1,930,243)

INCOME BEFORE INCOME TAX PROVISION FOR INCOME TAX NET INCOME

2,660,419 80,063 2,580,356

5,741,473 171,614 5,569,859

2,327,976 80,823 2,247,153

6,714,951 162,214 6,552,737

NET INCOME ATTRIBUTATBLE TO: Equity Holders of the Parent Company Noncontrolling interest - IS NET INCOME

1,374,411 1,205,945 2,580,356

2,947,944 2,621,915 5,569,859

1,026,111 1,221,042 2,247,153

3,884,123 2,668,614 6,552,737

0.0024

0.00518

0.00250

0.00946

COST OF SALES Cost of sales - Electricity Oil production operating expenses Depletion

GROSS INCOME GENERAL AND ADMINISTRATIVE EXPENSES OTHER INCOME (CHARGES) Interest income Net unrealized foreign exchange gain (loss) Net unrealized gain on fair value changes on financial assets at FVPL Interest expense Accretion expense Share in net income of an Associate Miscellaneous income (charges)

EARNINGS PER SHARE FOR NET INCOME ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT COMPANY- BASIC AND DILUTED

-6PETROENERGY RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In U.S. Dollars) Unaudited 30-Jun-18 For the 2nd To date Quarter NET INCOME

$2,580,356

$5,569,859

(2,644,946)

30-Jun-17 For the 2nd To date Quarter $2,247,153

$6,552,737

(6,453,087)

(96,477)

(570,382)

2,614 ($61,976)

4,498 ($878,730)

$2,150,676

$5,982,355

9,184 (71,160) ($61,976)

(747,239) (131,491) ($878,730)

$947,229 $1,203,447 $2,150,676

$3,461,666 $2,520,689 $5,982,355

OTHER COMPREHENSIVE INCOME (LOSS) Cumulative translation adjustment Item not to be reclassified to profit or loss in subsequent periods Remeasurement gains(losses) on net accrued retirement liability - net of tax TOTAL COMPREHENSIVE INCOME COMPREHENSIVE INCOME ATTRIBUTABLE TO: Equity holders of the Parent Company Noncontrolling interest

-7PETROENERGY RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (In U.S. Dollars)

Unaudited 30-Jun-18 CAPITAL STOCK Authorized capital Increase in capital on June 2015 Total authorized capital Issued and outstanding Balance beginning of year Issuance during the period Total issued and outstanding

Unaudited 30-Jun-17

Audited 31-Dec-17

330,000,000 370,000,000 700,000,000 410,736,330 157,975,512 568,711,842

$9,391,311 3,109,143

$9,391,311 -

$9,391,311 -

12,500,454

$9,391,311

$9,391,311

Balance beginning of year

35,620,588

35,620,588

35,620,588

Additions during the period

11,814,740

ADDITIONAL PAID-IN CAPITAL -

-

47,435,328

35,620,588

35,620,588

3,149,555

3,149,555

3,149,555

24,466,415 2,947,944

20,672,714 3,884,123

20,672,714 3,793,701

27,414,359

24,556,837

24,466,415

(194,480) 4,498

(17,136) -

(17,136) (177,344)

(189,982)

(17,136)

(194,480)

(5,291,774) (3,699,682)

(5,399,308) (570,382)

(5,399,308) 107,534

(8,991,456)

(5,969,690)

(5,291,774)

1,859,173

1,859,173

1,859,173

TOTAL EQUITY ATTRIBUTED TO EQUITY HOLDERS OF PARENT

83,177,431

68,590,638

69,000,788

NONCONTROLLING INTEREST Balance at beginning of year Net income Increase in non-controlling interests - stock issuances Movement in cumulative translation adjustment Remeasurement loss on defined benefit obligation Cash dividends

32,144,989 2,621,915 229,180 (2,753,405) -

24,002,078 2,668,614 (147,926) -

24,002,078 4,669,372 4,542,322 (303,809) (63,993) (700,981)

32,242,679

26,522,766

32,144,989

$115,420,110

$95,113,404

$101,145,777

APPROPRIATED RETAINED EARNINGS UNAPPROPRIATED RETAINED EARNINGS Balance at beginning of year Net Income

REMEASUREMENT OF NET ACCRUED RETIREMENT LIABILITY Balance at beginning of year Remeasurement gain (loss) on accrued retirement liability CUMULATIVE TRANSLATION ADJUSTMENT Balance at beginning of year Movement of cumulative translation adjustment

PARENT'S OTHER EQUITY RESERVES

TOTAL EQUITY

-8PETROENERGY RESOURCES CORPORATION CONSOLIDATED STATEMENTS OF CASHFLOWS (In U.S Dollars) Unaudited 30-Jun-2018 For the 2nd To date Quarter

Unaudited 30-Jun-2017 For the 2nd To date Quarter

31-Dec-17

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax Adjustments for:

2,498,397

5,741,474

2,327,976

6,714,951

7,330,855

-

Interest expense

1,818,629

3,458,176

1,785,762

3,427,308

7,159,803

Depletion, depreciation and amortization

2,034,928

3,825,081

1,838,861

3,699,236

7,566,135

99,030

(1,237,580)

(1,496,888)

Impairment loss on Gabon assets

-

-

Share in net income (loss) of joint venture

(49,125)

(751,598)

Net unrealized foreign exchange loss (gain)

1,945,425

269,488

90,523

713

(46,443)

47,340

Accretion expense

18,087

40,351

13,075

26,145

66,530

Dividend income

(1,210)

(1,210)

(1,273)

(1,273)

(1,629)

19,136

(325) (2,679)

(716) (14,187)

(7,405)

(292,994)

(126,052)

(133,447)

Gain on sale of property, plant and equipment Net loss (gain) on fair value changes on financial assets at fair value through profit or loss Interest income Movement in accrued retirement liability Operating income before working capital changes

22,174 (167,234) -

-

(61)

6,444,134

12,128,939

5,935,027

(81,018)

(514,229)

(435,838)

(515) 12,433,479

(18,343) (371,815) 51,362 22,271,370

Decrease (increase) in: Receivables Crude oil inventory Prepaid expenses and other current assets Input VAT

3,721,270 -

(14,099,959)

(433,984) -

1,292,417

-

(1,426,353) -

80,294 (486,164) (1,839,125)

Increase (decrease) in: Accounts payable and accrued expenses Cash generated from (used in) operations

599,285

132,718

617,541

1,149,090

931,328

10,683,671

(2,352,531)

7,409,147

11,722,232

20,957,703

117,847

126,791

Interest received

192,625

270,160

Income taxes paid

(82,250)

(100,750)

10,794,046

(2,183,121)

7,526,994

11,849,023

21,028,237

(1,358,466)

(2,332,363)

(4,428,300)

(15,537,522)

(20,424,903)

Net cash provided by (used in) operating activities

-

-

395,555 (325,021)

CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of property, plant and equipment Proceeds from disposals of property, plant and equipment Dividends received Increase in Other noncurrent assets Contribution to escrow fund Increase in deferred oil exploration costs Increase in deferred development costs Net cash used in investing activities

-

-

-

1,412 1,273

1,210

1,210

1,273

197,225

433,788

(1,249,480)

(2,629,344)

(61,230)

(337,176)

(58,830) -

(116,574)

-

-

-

7,475 1,629 (69,019) (172,838) (253,948) (2,081,735)

(1,218,861)

(2,013,939)

(5,737,737)

(18,501,357)

(22,993,339)

1,460,706 -

3,531,258 -

8,056,775 (5,086)

14,536,041 2,469,617

33,736,094 2,742,139

-

CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from: Availments of long term debt Deposits for future stock subscriptions to non-controlling interest Issuance of stocks

14,923,883

-

(7,684)

229,180

-

Loans

(5,454,742)

(12,490,785)

(7,035,065)

(7,035,065)

(18,855,178)

Interest

(3,414,055)

(3,547,818)

(2,635,293)

(2,845,390)

(7,815,144)

Issuance of stocks to NCI

26,037

Payments of:

Dividends to Non-Controlling Interest

-

-

-

(700,981)

Dividends

-

-

-

(113)

Increase in other noncurrent liabilities

11,238

19,316

20,511

40,268

(1,598,158)

7,165,471

-

Net cash provided by financing activities

(7,404,537)

2,665,034

EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

(1,798,860)

(3,497,982)

(124,210)

371,788

(5,030,008)

66,889

37,824

7,195,993

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT END OF YEAR

(475,313)

9,132,854 28,241

14,708,785

20,110,581

12,885,523

12,914,588

12,914,588

15,080,573

15,080,573

12,952,412

12,952,412

20,110,581

-9-

PETROENERGY RESOURCES CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Corporate Information a. Organization PetroEnergy Resources Corporation (“PERC” or “PetroEnergy” or the Parent Company) is a publicly-listed domestic corporation. Its registered office and principal place of business is 7th Floor, JMT Building, ADB Avenue, Ortigas Center, Pasig City.

PERC was organized on September 29, 1994 as Petrotech Consultants, Inc. to provide specialized technical services to its then parent company, Petrofields Corporation, and to companies exploring for oil in the Philippines.

In 1997, PERC simultaneously adopted its present name and changed its primary purpose to oil exploration and development and mining activities. Subsequently in 1999, PERC assumed Petrofields’ oil exploration contracts in the Philippines and the Production Sharing Contract covering the Etame discovery block in Gabon, West Africa.

On August 11, 2004, PERC’s shares of stock were listed at the Philippine Stock Exchange (PSE) by way of introduction.

In 2009, following the enactment of Republic Act No. 9513, otherwise known as the “Renewable Energy Act of 2008”, PERC amended its articles of incorporation to include among its purposes the business of generating power from renewable sources such as, but not limited to, biomass, hydro, solar, wind, geothermal, ocean and such other renewable sources of power.

On March 31, 2010, PERC incorporated PetroGreen Energy Corporation (PetroGreen or PGEC), 90%-owned subsidiary, to act as its renewable energy arm and holding company.

PGEC ventured into renewable energy development and power generation through its subsidiaries and affiliate: (a) Maibarara Geothermal, Inc. (MGI, 65%-owned) - owner and Renewable Energy (RE) developer of the 20 MW Maibarara Geothermal Power Project (MGPP-1) in Santo Tomas, Batangas and its expansion, the 12 MW MGPP-2; (b) PetroSolar Corporation (PetroSolar, 56%-owned) - owner and RE developer of the 50MW Tarlac Solar Power Project (TSPP-1) in Tarlac City and ; and (c) PetroWind Energy, Inc. (“PetroWind”, 40%-owned) – owner and developer of the 36 MW Nabas Wind Power Project (NWPP-1) in Nabas and Malay, Aklan.

As of June 30, 2018 and December 31, 2017, MGI and PetroSolar are effectively indirect subsidiaries of PetroEnergy through PetroGreen. PetroGreen owns majority of the voting power of MGI and PetroSolar. PetroEnergy, PetroGreen, MGI and PetroSolar are collectively referred to as the “Group” and were incorporated in the Philippines. b. Nature of Operations The Group’s four (4) main energy businesses are petroleum, geothermal, solar and wind, through the group’s affiliate, PetroWind.

Petroleum Petroleum production is on-going in the Etame (Gabon) concession, while the other petroleum concessions in the Philippines (Northwest Palawan, Offshore Mindoro, Eastern Visayas) are still in the advanced exploration stages or pre-development stages.

- 10 Geothermal Energy The geothermal projects are the 20-MW Maibarara Geothermal Power Project (MGPP) in Sto. Tomas, Batangas and its 12MW expansion, which started its commercial operations on April 30, 2018.

Solar Energy The Solar power project is the 50MW Tarlac Solar Power Plant (TSPP) in Tarlac City, Tarlac.

Wind Energy The wind energy project is the 36-megawatt (MW) NWPP in Nabas, Aklan, where PetroWind has a wind farm.

c.

Approval of Consolidated Financial Statements The accompanying unaudited interim financial statements were approved and authorized for issue by the BOD on July 26, 2018.

2. Basis of Preparation The accompanying consolidated financial statements have been prepared under the historical cost convention method, except for financial assets carried at fair value through profit or loss (FVPL) and crude oil inventory that have been measured at fair value. Figures are presented in United States (US) Dollar ($), the Parent Company’s functional and presentation currency. All amounts are rounded to the nearest dollar unless otherwise indicated.

Statement of Compliance The accompanying consolidated financial statements have been prepared in compliance with Philippine Financial Reporting Standards (PFRS).

3. Changes in Accounting Policies The accounting policies adopted are consistent with those of the previous calendar year, except that the Group has adopted the following new accounting pronouncements starting January 1, 2018. Adoption of these pronouncements did not have any significant impact on the Group’s financial position or performance unless otherwise indicated. 

PFRS 9, Financial Instruments PFRS 9 reflects all phases of the financial instruments project and replaces PAS 39, Financial Instruments: Recognition and Measurement, and all previous versions of PFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. Retrospective application is required but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions.

The adoption of PFRS 9 will have an effect on the classification, measurement and impairment methodology of the Group’s financial assets, but will have no impact on the classification and measurement of the Group’s financial liabilities.

The Group plans to adopt the new standard on the mandatory effective date and will not restate comparative information.



- 11 PFRS 15, Revenue from Contracts with Customers PFRS 15 establishes a new five-step model that will apply to revenue arising from contracts with customers. Under PFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in PFRS 15 provide a more structured approach to measuring and recognizing revenue.

The new revenue standard is applicable to all entities and will supersede all current revenue recognition requirements under PFRSs. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after January 1, 2018.

The Group is currently assessing the impact of PFRS 15 and plans to adopt the new standard on the required effective date.



Amendments to PAS 28, Measuring an Associate or Joint Venture at Fair Value (Part of Annual Improvements to PFRSs 2014 - 2016 Cycle) The amendments clarify that an entity that is a venture capital organization, or other qualifying entity, may elect, at initial recognition on an investment-by-investment basis, to measure its investments in associates and joint ventures at fair value through profit or loss. They also clarify that if an entity that is not itself an investment entity has an interest in an associate or joint venture that is an investment entity, the entity may, when applying the equity method, elect to retain the fair value measurement applied by that investment entity associate or joint venture to the investment entity associate’s or joint venture’s interests in subsidiaries. This election is made separately for each investment entity associate or joint venture, at the later of the date on which (a) the investment entity associate or joint venture is initially recognized; (b) the associate or joint venture becomes an investment entity; and (c) the investment entity associate or joint venture first becomes a parent.

The amendments should be applied retrospectively, with earlier application permitted.

4. Summary of Significant Accounting Policies Basis of Consolidation The consolidated financial statements comprise the financial statements of the Group as at June 30, 2018, December 31, 2017 and June 30, 2017. The financial statements of the subsidiaries are prepared in the same reporting year as the Group, using consistent accounting policies.

Below are the Group’s subsidiaries, which are all incorporated in the Philippines, with its respective percentage ownership as of June 30, 2018 and December 31, 2017: PetroGreen Percentage share of PetroGreen in its subsidiaries: MGI PetroSolar Navy Road Development Corporation (NRDC)

90% 65% 56% 100%

Subsidiaries are entities controlled by PERC. PERC controls an investee if and only if the PERC has: a) Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee); b) Exposure, or rights, to variable returns from its involvement with the investee; and

- 12 c) The ability to use its power over the investee the amount of the investor’s returns.

When PERC has less than a majority of the voting or similar rights of an investee, PERC considers all relevant facts and circumstances in assessing whether it has power over an investee, including: a) The contractual arrangement with the other vote holders of the investee; b) Rights arising from other contractual arrangements; and c) The Group’s voting rights and potential voting rights. d) PERC re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidations of a subsidiary begins when PERC obtains control over the subsidiary and ceases when the PERC loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the date PERC gains control until the date PERC ceases to control the subsidiary.

The consolidated financial statements are prepared using uniform accounting policies for like transactions and other events in similar circumstances. Adjustments where necessary are made to ensure consistency with the policies adopted by the Group. All intra-group balances and transactions, intra-group profits and expenses and gains and losses are eliminated during consolidation. All intra-group balances, transactions, income and expenses and profit and losses are eliminated in full.

A change in the ownership interest of a subsidiary, without loss of control, is accounted for as an equity transaction, as transactions with the owners in their capacity as owners. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

If the Group loses control over a subsidiary, it:   

Derecognizes the assets (including goodwill) and liabilities of the subsidiary, the carrying amount of any non-controlling interest and the cumulative translation differences recorded in equity.

Recognizes the fair value of the consideration received, the fair value of any investment retained and any surplus or deficit in the consolidated statement of comprehensive income.

Reclassifies the parent’s share of components previously recognized in other comprehensive income (OCI) to the consolidated statement of comprehensive income or retained earnings, as appropriate.

Non-controlling interests are presented separately from the Parent Company’s equity. The portion of profit or loss and net assets in subsidiaries not wholly owned are presented separately in the consolidated statement of comprehensive income and consolidated statement of changes in equity, and within equity in the consolidated statement of financial position.

Cash and Cash Equivalents Cash includes cash on hand and in banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three (3) months or less from the dates of acquisition and that are subject to an insignificant risk of change in value.

- 13 Fair Value Measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:  

In the principal market for the asset or liability, or In the absence of a principal market, in the most advantageous market for the asset or liability

The principal or the most advantageous market must be accessible to by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:   

Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable

For assets and liabilities that are recognized in the financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

Financial Instruments Date of recognition The Group recognizes a financial asset or a financial liability in the consolidated statement of financial position when it becomes a party to the contractual provisions of the instrument.

Purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace are recognized on the settlement date.

Initial recognition and measurement All financial assets and financial liabilities are recognized initially at fair value. Transaction costs are included in the initial measurement of all financial assets and financial liabilities, except for financial assets and financial liabilities measured at fair value through profit or loss (FVPL).

Financial assets are classified into the following categories: financial assets at FVPL, loans and receivables, held-to-maturity (HTM) financial assets, or available-for-sale (AFS) financial assets.

Financial liabilities are classified as either financial liabilities at FVPL or other financial liabilities.

The classification depends on the purpose for which the financial assets were acquired or financial liabilities were incurred and whether they are quoted in an active market. Management determines the classification of its financial assets and financial liabilities at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date.

Financial assets and financial liabilities are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Financial assets and financial liabilities are offset when there is a legally enforceable right to offset and intention to settle either on a net basis or to realize

- 14 the asset and settle the liability simultaneously.

As of June 30, 2018 and December 31, 2017, the Group’s financial assets and financial liabilities include financial assets at FVPL, loans and receivables and other financial liabilities.

Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Company provides money, goods or services directly to a debtor with no intention of trading the receivables. Loans and receivables are recognized initially at fair value, which normally pertains to the billable amount. After initial measurement, loans and receivables are carried at amortized cost in the statement of financial position. Amortization is determined using the effective interest rate (EIR) method, less allowance for probable losses, if any.

Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the EIR. The amortization, if any, is included in the interest income in the profit or loss.

Gains and losses are recognized in profit or loss when loans and receivables are derecognized or impaired, as well as through the amortization process.

As of June 30, 2018 and December 31, 2017, the loans and receivables of the Group consist of cash and cash equivalents, receivables and restricted cash.

Financial assets at FVPL Financial assets at FVPL include financial assets held for trading purposes, derivative instruments, or those designated by management upon initial recognition as at FVPL, subject to any of the following criteria:   

the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis; or the assets and liabilities are part of a group of financial assets, financial liabilities or both which are managed and their performance are evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.

Financial assets at FVPL are recorded in the consolidated statement of financial position at fair value. Changes in fair value are reflected in the consolidated statement of comprehensive income.

Interest earned or incurred is recorded in interest income or expense, respectively.

As of June 30, 2018 and December 31, 2017, the Group’s financial assets at FVPL include marketable equity securities held for trading purposes and investment in golf club shares.

Derivative financial instruments Derivative financial instruments (including bifurcated embedded derivatives), if any, are initially recognized at fair value on the date at which the derivative contract is entered into and is subsequently re-measured at fair value. Any gains or losses arising from changes in fair value of the derivative (except those accounted for as accounting hedges) is taken directly to the consolidated statement of comprehensive income under “Other income”. The derivative is carried as asset when the fair value is positive and as liability when the fair value is negative.

- 15 Other Financial Liabilities All financial liabilities are initially recognized at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, other financial liabilities are subsequently measured at amortized cost using the EIR method. Gains and losses are recognized in the consolidated statement of comprehensive income when the liabilities are derecognized or impaired, as well as through the amortization process.

As of June 30, 2018 and December 31, 2017, the Group’s other financial liabilities include accounts payable and accrued expenses (excluding withholding taxes payable) and loans payable.

Impairment of Financial Assets The Group assesses at each reporting date whether a financial or group of financial assets is impaired.

A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where observable data indicate that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Financial assets carried at amortized cost The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant or collectively for financial assets that are not individually significant. If there is an objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not been incurred) discounted at the financial asset’s original EIR (i.e., the EIR computed at initial recognition).

If it is determined that no objective evidence of impairment exists for an individually assessed financial asset loan or receivable, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

The carrying amount of the asset is reduced through the use of an allowance for impairment loss account. The amount of the loss shall be recognized in the consolidated statement of comprehensive income.

If, in a subsequent period, the amount of the impairment loss decreases, and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in the consolidated statement of comprehensive income, to the extent that the carrying value of the asset does not exceed what would have been the amortized cost at the reversal date had there been no impairment recognized.

Derecognition of Financial Assets and Liabilities A financial asset (or where applicable, a part of a group of financial assets) is derecognized when:

 

- 16 the rights to receive cash flows from the assets have expired; or the Group has transferred substantially all the risks and rewards of the asset, or has assumed an obligation to pay them in full without material delay to a third-party under a “pass-through” arrangement and neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Group has transferred the rights to receive cash flows from an asset or has entered into a pass-through arrangement and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Financial liabilities are derecognized when the obligation under the liability is discharged, cancelled or has expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated statement of comprehensive income.

Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously.

Prepaid Expenses and Other Current Assets Prepayments are expenses paid in advance and recorded as asset before these are utilized. This account comprises prepaid expenses and advances to contractors. The prepaid expenses are apportioned over the period covered by the payment and charged to the appropriate accounts in profit or loss when incurred and the advances to contractors are reclassified to the proper asset or expense account and deducted from the contractor’s billings as specified in the provisions of the contract. Prepayments that are expected to be realized for a period of no more than 12 months after the financial reporting period are classified as current assets, otherwise, these are classified as noncurrent assets.

Restricted Cash Restricted cash is recognized when the Company reserves a portion of its cash to pay loan interest charges and loan principal amortization expected to be settled within one year.

Crude Oil Inventory Crude oil inventory is stated at fair market value.

Property, Plant and Equipment Property, plant and equipment, except for land, are stated at cost less accumulated depletion, depreciation and amortization and any accumulated impairment losses. Land is stated at cost less any accumulated impairment losses. The initial cost of the property, plant and equipment consists of its purchase price, including any import duties, taxes and any directly attributable costs of bringing the assets to its working condition and location for its intended use and abandonment costs.

Expenditures incurred after the fixed assets have been put into operation, such as repairs and maintenance, are normally charged to the consolidated statement of comprehensive income in the period in which the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property, plant and equipment beyond its originally assessed standard of

- 17 performance, the expenditures are capitalized as an additional cost of property, plant and equipment.

Depreciation of an item of property, plant and equipment begins when it becomes available for use, i.e., when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation ceases at the earlier of the date that the item is classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with PFRS 5, Non-current Assets Held for Sale and Discontinued Operations, and the date the asset is derecognized.

Wells, platforms and other facilities related to oil operations are depleted using the units-ofproduction method computed based on estimates of proved reserves. The depletion base includes the exploration and development cost of the producing oilfields.

Power plant, fuel collection and reinjection system (FCRS) and production wells are depreciated using the straight-line method over twenty five (25) years or the remaining life of the service contract, whichever is shorter.

Land improvements consist of betterments, site preparation and site improvements that ready land for its intended use. These include excavation, non-infrastructure utility installation, driveways, sidewalks, parking lots, and fences.

Other property, plant and equipment are depreciated and amortized using the straight-line method over the estimated useful lives of the assets as follows:

Power plant, FCRS and production wells Office condominium units Land improvements Transportation equipment Office improvements Office furniture and other equipment

Number of Years 25 15 5 4 3 2 to 3

The useful lives and depletion, depreciation and amortization methods are reviewed periodically to ensure that the period and method of depletion, depreciation and amortization are consistent with the expected pattern of economic benefits from items of property, plant and equipment.

Construction in progress represents property, plant and equipment under construction and is stated at cost. This includes the cost of construction to include materials, labor, professional fees, borrowing costs and other directly attributable costs. Construction in progress is not depreciated until such time the construction is completed.

When the assets are retired or otherwise disposed of, the cost and the related accumulated depletion, depreciation and amortization and any accumulated impairment losses are removed from the accounts and any resulting gain or loss is recognized in profit or loss.

Borrowing Costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalized as part of the cost of the asset. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds.

Deferred Oil Exploration Costs PERC follows the full cost method of accounting for exploration costs determined on the basis of each SC area. Under this method, all exploration costs relating to each SC are tentatively deferred

- 18 pending determination of whether the area contains oil reserves in commercial quantities.

Deferred oil and gas exploration costs are assessed at each reporting period for possible indications of impairment. This is to confirm the continued intent to develop or otherwise extract value from the discovery. When this is no longer the case or is considered as areas permanently abandoned, the costs are written off through the consolidated statement of comprehensive income. Exploration areas are considered permanently abandoned if the related permits of the exploration have expired and/or there are no definite plans for further exploration and/or development.

The exploration costs relating to the SC where oil in commercial quantities are discovered are subsequently reclassified to “Wells, platforms and other facilities” shown under “Property and equipment” account in the consolidated statements of financial position upon substantial completion of the development stage. On the other hand, all costs relating to an abandoned SC are written off in the year the area is permanently abandoned. SCs are considered permanently abandoned if the SCs have expired and/or there are no definite plans for further exploration and/or development.

Deferred Development Costs - Geothermal included in Other Noncurrent Assets All costs incurred in the geological and geophysical activities such as costs of topographical, geological and geophysical studies, rights of access to properties to conduct those studies, salaries and other expenses of geologists, geophysical crews, or others conducting those studies are charged to profit or loss in the year such costs are incurred.

If the results of initial geological and geophysical activities reveal the presence of geothermal resource that will require further exploration and drilling, subsequent exploration and drilling costs are accumulated and deferred under the “Other noncurrent assets” account in the consolidated statement of financial position.

These costs include the following:   

Costs associated with the construction of temporary facilities; Costs of drilling exploratory and exploratory type stratigraphic test wells, pending determination of whether the wells can produce proved reserves; and Costs of local administration, finance, general and security services, surface facilities and other local costs in preparing for and supporting the drill activities, etc. incurred during the drilling of exploratory wells.

If tests conducted on the drilled exploratory wells reveal that these wells cannot produce proved reserves, the capitalized costs are charged to expense except when management decides to use the unproductive wells for recycling or waste disposal.

Once the project’s technical feasibility and commercial viability to produce proved reserves are established, the exploration and evaluation assets shall be reclassified to property, plant and equipment and depreciated accordingly.

Deferred Development Costs - Solar Power Project included in Other Noncurrent Assets These are costs incurred in the development of the solar plant expansion project. Costs are capitalized if the technological and economic feasibility is confirmed, usually when a project development has reached a defined milestone according to an established project management model. These costs include the following  

Costs incurred for the expansion of the solar plant project Costs of administration, finance, general and security services and other costs attributed to the expansion of the project.

- 19 Deferred development costs of the Solar Power Project is recognized under “Other noncurrent assets” in the statement of financial position. Once the project’s technical feasibility and commercial viability has been established, development costs shall be reclassified to property, plant and equipment.

Investment in a Joint Venture (JV) A JV is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. Investment in a JV is accounted for under the equity method of accounting.

Under the equity method, the investment in a JV is initially recognized at cost. The carrying amount of the investment is adjusted to recognize changes in the Group’s share of net assets of the JV since the acquisition date.

The consolidated statement of comprehensive income reflects the Group’s share of the financial performance of the joint venture. Any change in OCI of those investees is presented as part of the Group’s OCI. In addition, when there has been a change recognized directly in the equity of the JV, the Group recognizes its share of any changes, when applicable, in the consolidated statement of changes in equity. Unrealized gains and losses from transactions between the Group and the JV are eliminated to the extent of the interest of the JV. The aggregate of the Group’s share in profit or loss of a JV is shown under “Other income (charges)” in the consolidated statement of comprehensive income and represents profit or loss after tax and non-controlling interests in the subsidiaries of the JV. The financial statements of the JV are prepared in the same reporting period of the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group.

After application of the equity method for the investment in a JV, the Group determines whether it is necessary to recognize an impairment loss on its investment in a JV. At each reporting date, the Group determines whether there is objective evidence that the investment in JV is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the JV and its carrying value, then recognizes the loss in the consolidated statement of comprehensive income.

Upon loss of joint control over the JV, the Group measures and recognizes any retained investment at its fair value. Any difference between the carrying amount of the joint venture upon loss of joint control and the fair value of the retained investment and proceeds from disposal is recognized in the consolidated statement of comprehensive income.

Intangible Assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired is their fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less accumulated amortization and accumulated impairment losses, if any.

Intangible assets with finite lives are amortized over their useful economic lives and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and are treated as changes in

- 20 accounting estimates.

The amortization expense on intangible assets with finite lives is recognized in the statement of comprehensive income in the expense category consistent with the function of the intangible assets.

Software related to windows application is amortized using the straight-line method over one (1) to two (2) years. Land rights is amortized using the straight-line method over 25 years.

Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the consolidated statement of comprehensive income when the asset is derecognized.

Investment Properties Investment properties consist of land held for capital appreciation. Land is stated at cost less any impairment in value.

The initial cost of the investment properties comprises of purchase price and any directly attributable costs of bringing the asset to its working condition. Expenditures incurred after the investment properties have been put into operation, such as repairs and maintenance, are normally charged to expense in the year when costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of investment properties beyond its originally assessed standard of performance, the expenditures are capitalized as an additional cost of investment properties.

Investment property is derecognized when either it has been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of investment properties are recognized in the consolidated statement of comprehensive income in the year of retirement or disposal.

Transfers are made to investment properties when, and only when, there is a change in use, evidenced by the end of owner-occupation, commencement of an operating lease to another party or by the end of construction or development. Transfers are made from investment properties when, and only when, there is a change in use, evidenced by commencement of owner-occupation or commencement of development with a view to sell.

Interest in Joint Operations A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement.

The Group recognized in relation to its interest in a joint operation its:  assets, including its share of any assets held jointly  liabilities, including its share of any liabilities incurred jointly  revenue from the sale of its share of the output arising from the joint operation  share of the revenue from the sale of the output by the joint operation  expenses, including its share of any expenses incurred jointly The Group accounts for the assets it controls and the liabilities it incurs, the expenses it incurs and the share of income that it earns from the sale of crude oil by the joint operations.

As of June 30, 2018 and December 31, 2017, the Group’s participating interest in the Etame block in Gabon, West Africa and participating interests in Philippine service contracts are classified as joint operations.

- 21 Impairment of Nonfinancial Assets The Group assesses at each reporting date whether there is an indication that an asset (e.g., property, plant and equipment, investment properties, deferred costs, and intangible assets) may be impaired.

If any such indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or group of assets.

Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.

An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Group makes an estimate of recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depletion, depreciation and amortization had no impairment loss been recognized for the asset in prior years.

Such reversal is recognized in the consolidated statement of comprehensive income unless the asset is carried at revalued amount, in which case the reversal is treated as a revaluation increase.

Capital Stock and Additional Paid-in Capital The Group records common stock at par value and additional paid-in capital in excess of the total contributions received over the aggregate par values of the equity shares. When the Group issues more than one class of stock, a separate account is maintained for each class of stock and the number of shares issued. Incremental costs incurred directly attributable to the issuance of new shares are shown in equity as a deduction from proceeds, net of tax. When any member of the Group purchases the Group’s capital stock (treasury shares), the consideration paid, including any attributable incremental costs, is deducted from equity attributable to the Group’s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any consideration received, net of any directly attributable incremental transaction costs and the related tax effects, is included in equity.

Deposits for Future Stock Subscriptions Deposits for future stock subscriptions is recorded based on the redeemable amounts received and is presented under liabilities unless the following items were met for classification as part of equity: a. The unissued authorized capital stock of the entity is insufficient to cover the amount of shares indicated in the contract; b. There is BOD approval on the proposed increase in authorized capital stock (for which a deposit was received by the Group); c. There is stockholders’ approval of said proposed increase; and d. The application for the approval of the proposed increase has been filed with the Securities and Exchange Commission (SEC).

Deposits represent subscription payments received from prospective investors for the Group’s common shares which are yet to be issued upon approval by the SEC of the application for increase

- 22 in the authorized capital stock. This will be reclassified to ‘Capital stock’ upon issuance of the subscribed shares.

Retained Earnings Retained earnings represent the cumulative balance of consolidated net income, effects of changes in accounting policy and other capital adjustments, net of dividend declaration.

Unappropriated retained earnings represent the portion which can be declared as dividends to stockholders after considering the undistributed accumulated equity in a subsidiary, funds appropriated for corporate expansion projects or programs, restrictions under loan agreements and funds retained under special circumstances for probable contingencies.

Appropriated retained earnings represent the portion which has been restricted and therefore is not available for any dividend declaration.

Cumulative Translation Adjustment Cumulative translation adjustment represents the resulting exchange differences in the remeasurement of accounts due to change in functional currency.

Equity Reserve Equity reserve is made up of equity transactions other than equity contributions such as gain or loss resulting from increase or decrease of ownership without loss of control.

Dividend Distribution Cash dividends on capital stock are recognized as a liability and deducted from equity when approved by the BOD. Revenue Recognition Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured regardless of when the payment is being made.

Revenue is measured at the fair value of the considerations received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. The Group assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent. The Group has concluded that it is acting as principal in all of its revenue arrangements since it is the primary obligor in all the revenue arrangements, has pricing latitude and is also exposed to inventory and credit risks.

Electricity sales Sale of electricity using renewable energy is consummated whenever the electricity generated by the Group is transmitted through the transmission line designated by the buyer, for a consideration.

Oil revenues Revenue from oil wells is recognized as income at the time of production. Revenue is measured at the fair value of the consideration received.

Interest income Interest income is recognized as the interest accrues taking into account the effective yield on the asset.

Share in net income of a joint venture Share in net income of a joint venture represents the Group’s share in profit or loss of its affiliate, PWEI. Dividend income Dividend income is recognized according to the terms of the contract, or when the right of the

- 23 payment has been established.

Miscellaneous income Miscellaneous income is recognized when the Group’s right to receive the payment is established.

Costs and Expenses Cost of electricity sales Costs of electricity sales pertain to direct costs in generating electricity power which includes operating and maintenance costs (O&M) for power plant and fluid collection and reinjection system (FCRS), depreciation and other costs directly attributed to producing electricity.

Oil production Oil production are costs incurred to produce and deliver crude oil inventory, including transportation, storage and loading, among others.

General and administrative expenses General and administrative expenses constitute costs of administering the business.

Costs and expenses are recognized as incurred.

Other Comprehensive Income (Loss) Other comprehensive income (loss) comprises items of income and expense (including items previously presented under the consolidated statement of changes in equity) that are not recognized in the consolidated statement of income for the year in accordance with PFRSs. Income Taxes Current Tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amounts are those that are enacted or substantively enacted at the reporting date.

Deferred Tax Deferred tax is provided using the balance sheet liability method on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred tax liabilities are recognized for all taxable temporary differences except to the extent that the deferred tax liabilities arise from the: a) initial recognition of goodwill; or b) the initial recognition of an asset or liability in a transaction which is not: i) a business combination; and ii) at the time of the transaction, affects neither accounting profit nor taxable profit or loss.

Deferred tax assets are recognized for all deductible temporary differences with certain exceptions, and carryforward benefits of unused tax credits from excess minimum corporate income tax (MCIT) over RCIT and unused net operating loss carryover (NOLCO), to the extent that it is probable that sufficient taxable income will be available against which the deductible temporary differences and carryforward benefits of unused tax credits from excess MCIT and unused NOLCO can be utilized.

Deferred tax assets, however, are not recognized when it arises from the: a) initial recognition of an asset or liability in a transaction that is not a business combination; and b) at the time of transaction, affects neither the accounting income nor taxable profit or loss.

The carrying amounts of deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable income will be available to allow all or part of the deferred tax assets to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date, and are recognized to the extent that it has become probable that future taxable

- 24 income will allow the deferred tax assets to be recovered. The Group does not recognize deferred tax assets and deferred tax liabilities that will reverse during the income tax holiday.

Deferred tax assets and liabilities are measured at the tax rates that are applicable to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted as of the reporting date.

Deferred tax relating to items recognized outside profit or loss is recognized outside profit or loss.

Deferred tax items are recognized in correlation to the underlying transaction either in profit or loss or other comprehensive income.

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.

Value-Added Tax (VAT) Revenues, expenses and assets are recognized net of the amount of VAT, if applicable.

When VAT from sales of goods or services (output VAT) exceeds VAT passed on from purchases of goods or services (input VAT), the excess is recognized as payable in the consolidated statement of financial position. When VAT passed on from purchases of goods or services (input VAT) exceeds VAT from sales of goods and/or services (output VAT), the excess is recognized as an asset in the consolidated statement of financial position as part of “Other noncurrent assets” to the extent of the recoverable amount.

Accrued Retirement Liability The net defined benefit liability or asset is the aggregate of the present value of the defined benefit obligation at the end of the reporting period reduced by the fair value of plan assets (if any), adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The asset ceiling is the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

The cost of providing benefits under the defined benefit plans is actuarially determined using the projected unit credit method.

Defined benefit costs comprise the following:  Service cost  Net interest on the net defined benefit liability or asset  Remeasurements of net defined benefit liability or asset Service costs which include current service costs, past service costs and gains or losses on nonroutine settlements are recognized as expense in the consolidated statement of comprehensive income. Past service costs are recognized when plan amendment or curtailment occurs. These amounts are calculated periodically by independent qualified actuaries.

Net interest on the net defined benefit liability or asset is the change during the period in the net defined benefit liability or asset that arises from the passage of time which is determined by applying the discount rate based on government bonds to the net defined benefit liability or asset.

Net interest on the net defined benefit liability or asset is recognized as expense or income in the consolidated statement of comprehensive income.

Remeasurements comprising actuarial gains and losses, return on plan assets and any change in the effect of the asset ceiling (excluding net interest on defined benefit liability) are recognized immediately in OCI in the period in which they arise. Remeasurements are not reclassified to consolidated statement of comprehensive income in subsequent periods.

- 25 Plan assets are assets that are held by a long-term employee benefit fund. Plan assets are not available to the creditors of the Group nor can they be paid directly to the Group. Fair value of plan assets is based on market price information. When no market price is available, the fair value of plan assets is estimated by discounting expected future cash flows using a discount rate that reflects both the risk associated with the plan assets and the maturity or expected disposal date of those assets (or, if they have no maturity, the expected period until the settlement of the related obligations). If the fair value of the plan assets is higher than the present value of the defined benefit obligation, the measurement of the resulting defined benefit asset is limited to the present value of economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

The Group’s right to be reimbursed of some or all of the expenditure required to settle a defined benefit obligation is recognized as a separate asset at fair value when and only when reimbursement is virtually certain.

Asset Retirement Obligation (ARO) The Group records present value of estimated costs of legal and constructive obligations required to restore the oilfields and plant sites upon termination of its operations. The nature of these restoration activities includes dismantling and removing structures, rehabilitating settling ponds, dismantling operating facilities, closure of plant and waste sites, and restoration, reclamation and re-vegetation of affected areas. The obligation generally arises when the asset is constructed or the ground or environment at the sites are disturbed. When the liability is initially recognized, the present value of the estimated cost is capitalized as part of the carrying amount of the ARO assets (included under “Property, plant and equipment”) and ARO liability.

Liability and capitalized costs included in oil properties is equal to the present value of the Group’s proportionate share in the total decommissioning costs of the consortium on initial recognition.

Additional costs or changes in decommissioning costs are recognized as additions or charges to the corresponding assets and ARO when they occur.

For closed sites or areas, changes to estimated costs are recognized immediately in the consolidated statement of comprehensive income. If the decrease in liability exceeds the carrying amount of the asset, the excess shall be recognized immediately in profit or loss.

For the oil operation, the Group depreciates ARO assets based on unit of production method.

For the renewable energy, the Group depreciates ARO assets on a straight-line basis over the estimated useful life of the related asset or the service contract term, whichever is shorter, or written off as a results of impairment of the related asset.

The Group amortizes ARO liability using the EIR method and recognizes accretion expense in profit or loss over the service contract term.

The Group regularly assesses the provision for ARO and adjusts the related liability and asset.

Operating Lease Group as a lessee Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the profit and loss on a straight-line basis over the lease term. Minimum lease payments are recognized on a straight-line basis.

- 26 Foreign Currency-denominated Transactions and Translation The consolidated financial statements are presented in US Dollars, which is the Parent Company’s functional and presentation currency. Transactions in foreign currencies are initially recorded in the functional currency using the exchange rate at date of transaction. Monetary assets and liabilities denominated in foreign currencies are reinstated to the functional currency using the closing exchange rate at reporting date.

All exchange differences are taken to the consolidated statement of comprehensive income with the exception of differences on foreign currency borrowings that provide, if any, a hedge against a net investment in a foreign entity. These are taken directly to equity until disposal of the net investment, at which time they are recognized in the consolidated statement of comprehensive income. Nonmonetary items that are measured in terms of historical cost in foreign currency are translated using the exchange rates as at the dates of initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

The functional currency of the Group’s immediate subsidiary, PetroGreen and its subsidiaries, namely MGI and PetroSolar, is the Philippine Peso. As at reporting date, the assets and liabilities of these subsidiaries are translated into the presentation currency of the Group (the US Dollars) at the exchange rate at the reporting date and the consolidated statement of comprehensive income accounts are translated at weighted average exchange rates for the year. The exchange differences arising on the translation are taken directly to “Cumulative translation adjustment” account in the equity section of the consolidated statement of financial position. Upon disposal of a subsidiary, the deferred cumulative translation adjustment amount recognized in equity relating to that particular subsidiary is recognized in the consolidated statement of comprehensive income.

Earnings Per Share Basic earnings per share is computed on the basis of the weighted average number of shares outstanding during the year after giving retroactive effect to any stock split or stock dividends declared and stock rights exercised during the current year, if any.

Diluted earnings per share is computed on the basis of the weighted average number of shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.

PERC does not have potentially dilutive common stock.

Segment Reporting The Group’s operating businesses are organized and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and services and serves different markets. Financial information on business segments is presented in Note 21 to the consolidated financial statements.

Provisions and Contingencies Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

Where discounting is used, the increase in the provision due to the passage of time is recognized as an interest expense. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate.

- 27 Contingent liabilities are not recognized in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the financial statements but are disclosed when an inflow of economic benefits is probable. Contingent assets are assessed continually to ensure that developments are appropriately reflected in the financial statements. If it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognized in the consolidated financial statements.

Events After the Reporting Period Post year-end events that provide additional information about the Group’s situation at the reporting date (adjusting events) are reflected in the financial statements, if any. Post year-end events that are not adjusting events are disclosed in the notes to consolidated financial statements when material.

5. Significant Accounting Judgments, Estimates and Assumptions The preparation of the consolidated financial statements in compliance with PFRS requires the Group to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses and disclosure of contingent assets and contingent liabilities.

Future events may occur which will cause the assumptions used in arriving at the estimates to change. The effects of any change in judgments, estimates and assumptions are reflected in the consolidated financial statements, as they become reasonably determinable.

Judgments, estimates and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Judgments In the process of applying the Group’s accounting policies, management has made the following judgments, apart from those involving estimations, which has the most significant effect on the amounts recognized in the consolidated financial statements: Determination of Functional Currency The entities within the Group determine the functional currency based on economic substance of underlying circumstances relevant to each entity within the Group. The Parent Company’s functional currency is the US Dollar ($). The functional currency of PetroGreen, MGI and PetroSolar is the Philippine Peso (P =).

As of June 30, 2018 and December 31, 2017, the Group’s cumulative translation adjustment amounted to $8.99 million and $5.29 million, respectively.

- 28 Capitalization of Deferred Oil Exploration Costs and Deferred Development Costs Initial capitalization of costs is based on management’s judgment that technological and economic feasibility is confirmed, usually when a product development project has reached a defined milestone according to an established project management model. If the accounting policy on capitalization of development costs are not met, such costs are expensed.

As of June 30, 2018 and December 31, 2017, the carrying value of deferred oil explorations costs amounted to $4.10 million and $3.98 million, respectively, and the Group’s deferred development costs amounted to $0.37 million and $0.22 million as of June 30, 2018 and December 31, 2017, respectively.

Classification of Joint Arrangements Judgment is required to determine when the Group has joint control over an arrangement, which requires an assessment of the relevant activities and when the decisions in relation to those activities require unanimous consent. The Group assesses their rights and obligations arising from the arrangement and specifically considers:  The structure of the joint arrangement - whether it is structured through a separate vehicle  When the arrangement is structured through a separate vehicle, the Group also considers the rights and obligations arising from:  The legal form of the separate vehicle  The terms of the contractual arrangement  Other facts and circumstances, considered on a case by case basis This assessment often requires significant judgment. A different conclusion about both joint control and whether the arrangement is a joint operation or a joint venture, may materially impact the accounting of the investment.

The Group’s investment in PetroWind Energy Inc. (PetroWind or PWEI) is structured in a separate incorporated entity. The Group and the parties to the agreement only have the right to the net assets of the joint venture through the terms of the contractual arrangement. Accordingly, the joint arrangement is classified as a joint venture. As of June 30, 2018 and December 31, 2017, the Group’s investment in a joint venture amounted to $27.05 million and $28.20 million, respectively.

The Group and the parties to the agreement in investment in Gabon, West Africa have joint control over its rights to the assets and obligations for the liabilities, relating to the arrangement.

Accordingly, the joint arrangement is classified as a joint operation.

Derecognition of Derivative Liability The Group reviews its liabilities to assess if the possibility of outflow of economic resources to settle the obligation is remote. In particular, judgment by management is required in determining if its obligations are extinguished.

Estimates and Assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed in the next page.

Estimation of Geothermal Field Reserves MGI performed volumetric reserve estimation and numerical modeling to determine the reserves of the Maibarara geothermal field. As a requirement for project financing, MGI engaged at its own cost the New Zealand firm Sinclair Knight Merz (SKM) in 2011 to undertake a comprehensive third-party technical review of the Maibarara geothermal field. This review included analysis of the resource assessment performed in-house by MGI as well as a separate SKM reserve estimation and numerical modeling of the Maibarara reserves.

- 29 As the economic assumptions used may change and as additional geological information is obtained during the operation of a field, estimates of recoverable reserves may change. Such changes may impact the Group’s reported financial position and results, which include:  The carrying value of exploration and evaluation asset; and property, plant and equipment;  Provisions for decommissioning may change - where changes to the reserve estimates affect expectations about when such activities will occur and the associated cost of these activities; and  The recognition and carrying value of deferred tax assets may change due to changes in the judgments regarding the existence of such assets and in estimates of the likely recovery of such assets.

As of June 30, 2018 and December 31, 2017, there has been no significant change in the estimated reserves that would affect the useful lives and carrying value of MGI’s property, plant and equipment.

Estimation of Proved Oil Reserves The Group assesses its estimate of proved oil reserves on an annual basis. The estimate is based on the technical assumptions and is calculated in accordance with accepted volumetric methods, specifically the probabilistic method of estimation. Probabilistic method uses known geological, engineering and economic data to generate a range of estimates and their associated probabilities.

As of June 30, 2018 and December 31, 2017, there has been no significant change in the estimated recoverable reserves for the Gabon assets. The same estimated remaining recoverable reserve was used to compute the depletion rate used.

As of June 30, 2018 and December 31, 2017, the carrying value of “Wells, Platforms and other Facilities” under “Property, Plant and Equipment” amounted to $15.08 million and $15.83 million, respectively.

Estimation of Useful Lives of Property, Plant and Equipment The Group reviews on an annual basis the estimated useful lives of property, plant and equipment based on expected asset utilization as anchored on business plans and strategies that also consider expected future technological developments and market behavior.

It is possible that future results of operations could be materially affected by changes in these estimates brought about by changes in the factors mentioned. A reduction in the estimated useful lives of property, plant and equipment would increase the recorded depletion, depreciation and amortization expense and decrease noncurrent assets.

There is no change in the estimated useful lives of property, plant and equipment as of June 30, 2018 and December 31, 2017. As of June 30, 2018 and December 31, 2017, the Group’s depreciable property, plant and equipment amounted to $150.62 million and $129.63 million, respectively.

Impairment of Nonfinancial Assets The Group assesses at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or cash-generating unit’s (CGU) fair value less cost of disposal and its value in use.

The recoverable amount is the higher of an asset’s or cash-generating unit’s (CGU) fair value less cost of disposal and its value in use. The fair value less cost of disposal is the amount obtainable from the sale of an asset in an arm’s length transaction while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset or CGU and from its disposal at the end of its useful life.

- 30 In determining the present value of estimated future cash flows expected to be generated from the continued use of an asset or CGU, the Group is required to make estimates and assumptions that can materially affect the consolidated financial statements.

Facts and circumstances that would require an impairment assessment as set forth in PFRS 6, Exploration for and Evaluation of Mineral Resources, are as follows:  The period for which the Group has the right to explore in the specific area has expired or will expire in the near future, and is not expected to be renewed;  Substantive expenditure on further exploration for and evaluation of mineral resources in the specific area is neither budgeted nor planned;  Exploration for and evaluation of mineral resources in the specific area have not led to the discovery of commercially viable quantities of mineral resources and the entity has decided to discontinue such activities in the specific area; and  Sufficient data exist to indicate that, although a development in the specific area is likely to proceed, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale.

There are no indicators of impairment that would trigger impairment review in June 30, 2018 and 2017 other than those mentioned below.

The related balances of the Group’s nonfinancial assets as of June 30, 2018 and December 31, 2017 follow:

Property, plant and equipment Deferred oil exploration costs Intangible assets Deferred development costs Investment properties

Unaudited 30-Jun-18 $151,661,953 4,099,116 2,650,419 400,068 31,417 $158,842,973

Audited 31-Dec-17 $162,806,394 3,982,542 2,878,262 224,026 31,417 $169,922,641

Gabon, West Africa In assessing whether impairment is required, the carrying value of the asset is compared with its recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and value in use. Given the nature of the Group’s activities, information on the fair value of an asset is usually difficult to obtain unless negotiations with potential purchasers or similar transactions are taking place. Consequently, unless indicated otherwise, the recoverable amount used in assessing the impairment loss is value in use. The Group generally estimates value in use using a discounted cash flow model. The Group believes that the low crude oil prices in the market, political risks in Gabon, discount rates and changes in other assumptions such as change in production profile which is based on continued production until the term of the existing PSC are indicators that the assets might be impaired and thus prompted the Group to perform impairment testing of the assets.

The value in use as of December 31, 2017 amounted to $9.17 million at a discount rate of 10.10%.

In 2017, the Group recorded an impairment loss amounting to $1.95 million, pertaining to the assets in Gabon, Africa used for oil production.

- 31 The Group recognized an impairment loss for the Gabon Assets in December 31, 2017 (nil as of June 30, 2018):

Wells, platforms and other facilities Deferred oil exploration costs

Audited 31-Dec-17 $1,945,425 ‒ $1,945,425

As of June 30, 2018 and December 31, 2017, the net carrying value of wells, platforms and other facilities related to Gabon amounted to $8.43 million and $9.17 million, respectively.

SC 14-C2 - West Linapacan, Northwest Palawan Production activities in the West Linapacan Oilfield (WLO) remained on suspension mode for the last twenty (20) years. The investment in WLO included in “Wells, platforms and other facilities” account under “Property and equipment” amounted to $6.66 million as of June 30, 2018 and December 31, 2017. Management assessed that the said investment is fully recoverable as SC 14C is not yet expired, with the 15-year extension of the SC as approved by the DOE, from December 18, 2010 to December 18, 2025 and the existing redevelopment activities led by Pitkin Petroleum Ltd. (Pitkin) of the United States of America. Based on oil prices existing at June 30, 2018 and December 31, 2017, the prices have not gone below the breakeven level for the Group in so far as its WLO investment is concerned. Thus, no impairment was recognized for as of June 30, 2018 and December 31, 2017. As of June 30, 2018 and December 31, 2017, the carrying value of wells, platforms and other facilities amounted to $6.66 million.

Estimation of Asset Retirement Obligations The Group has various legal obligation to decommission or dismantle its assets related to the oil production, geothermal energy project and solar power project at the end of each respective service contract. In determining the amount of provisions for restoration costs, assumptions and estimates are required in relation to the expected costs to restore sites and infrastructure when such obligation exists. The Group recognizes the present value of the obligation to dismantle and capitalizes the present value of this cost as part of the balance of the related property, plant and equipment, which are being depreciated and amortized on a straight-line basis over the useful life of the related assets (for the renewable energy) and based on unit-of-production method based on estimates of proved reserves (for the oil operations).

Cost estimates expressed at current price levels at the date of the estimate are discounted using a rate ranging from 4.61% to 5.70% in 2017 to take into account the timing of payments. Each year, the provision is increased to reflect the accretion of discount and to accrue an estimate for the effects of inflation, with charges being recognized as accretion expense.

Changes in the asset retirement obligation that result from a change in the current best estimate of cash flow required to settle the obligation or a change in the discount rate are added to (or deducted from) the amount recognized as the related asset and the periodic unwinding of the discount on the liability is recognized in profit or loss as it occurs.

While the Group has made its best estimate in establishing the asset retirement obligation, because of potential changes in technology as well as safety and environmental requirements, plus the actual time scale to complete decommissioning activities, the ultimate provision requirements could either increase or decrease significantly from the Group’s current estimates. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances.

- 32 Asset retirement obligation as of June 30, 2018 and December 31, 2017 follows:

PetroEnergy - Oil production MGI - Geothermal energy project PetroSolar - Solar power project

Unaudited 30-Jun-18 $1,240,025 294,805 118,947 $1,653,777

Audited 31-Dec-17 $1,210,697 307,838 123,969 $1,642,504

Recognition of deferred income tax assets The Group reviews the carrying amounts of deferred tax assets at each reporting date and reduces them to the extent that it is no longer probable that sufficient future taxable profit will be available to allow all or part of the deferred tax assets to be utilized.

As of June 30, 2018 and December 31, 2017, the Group did not recognize deferred tax assets on certain NOLCO and MCIT as the Group believes that it may not be probable that sufficient taxable income will be available in the near foreseeable future against which the tax benefits can be realized prior to their expiration.

6. Cash and Cash Equivalents

Cash on hand Cash in banks Cash equivalents

Unaudited 30-Jun-2018 $5,529 5,208,943 9,866,101 $15,080,573

Audited 31-Dec 2017 $4,324 7,117,335 12,988,922 $20,110,581

Cash in banks earn interest at the prevailing bank deposit rates. Cash equivalents are made for varying periods of up to three months depending on the immediate cash requirements of the Group, and earn interest at the prevailing short-term deposit rates.

The Group has no short-term investments with periods of more than three months but less than one year as of June 30, 2018 and December 31, 2017.

Interest income earned on cash in banks and short-term investments amounted to $0.20 million, $0.18 million, and $0.15 million as of June 30, 2018, December 31, 2017 and December 31, 2016, respectively.

7. Financial Assets at Fair Value Through Profit or Loss

Marketable equity securities Investment in golf club shares

Unaudited 30-Jun-2018 $135,438 14,387 $149,825

Audited 31-Dec 2017 $165,793 15,422 $181,215

Net gain (loss) on fair value changes on financial assets at FVPL included in the consolidated statements of comprehensive income amounted to ($19,136), $18,343, and $16,404 as of June 30, 2018, December 31, 2017 and December 31, 2016, respectively.

- 33 Dividend income received from equity securities amounted to $1,210, $1,629, and $2,131 as of June 30, 2018, December 31, 2017 and December 31, 2016, respectively.

8. Receivables

Accounts receivable from: TransCo – FiT Allowance PHINMA – Electricity sales Consortium operator WESM – Electricity sales Affiliate Others Interest receivable Less allowance for impairment losses

Unaudited 30-Jun-2017

Audited 31-Dec-2017

$5,088,516 2,330,189 796,225 6,779 6,203 113,053 35,680 8,376,645 50,119 $8,326,526

$5,830,139 1,667,011 320,914 7,396 – 4,881 12,846 7,843,187 53,724 $7,789,463

The Group’s receivables are mainly due from FiT sales to TransCo, sale of electricity to PHINMA and consortium operator. These are generally on 30 days credit terms except for receivables from consortium operator which is due within one (1) year. Interest income earned from the delayed payment of FiT differential amounted to $0.09 million, $0.19 million and $0.13 million as of June 30, 2018, December 31, 2017 and December 31, 2016, respectively.

The table below shows the disclosure of reconciliation of allowance for impairment losses on receivables from a consortium operator:

Balance at beginning of year Effect of foreign currency translation Balance at end of year

Unaudited 30-Jun-2018 $53,724 (3,605) $50,119

The following table below shows the aging of receivables as of June 30, 2018:

Audited 31-Dec-2017 $53,950 (226) $53,724

- 34 -

9. Prepaid Expenses and Other Current Assets

Restricted cash Supplies inventory Prepaid expenses Crude oil inventory Prepaid taxes Advances to contractors Others

Unaudited 30-Jun-2018 $15,714,696 1,142,786 1,807,770 317,946 240,220 134,419 74,710 $19,432,547

Audited 31-Dec-2017 $2,613,333 790,958 728,628 632,794 273,548 233,138 60,189 $5,332,588

Restricted cash pertains to the remaining proceeds from Stock Rights Offering (SRO) placed under escrow account. This will be withdrawn or disbursed in accordance with the usage disclosed in the prospectus. This also includes fund that the Group is required to maintain in the Debt Service Payment Account and Debt Service Reserve Account pursuant to the Omnibus Loan and Security Agreement (OLSA) of MGI and PetroSolar, respectively.

Supplies inventory refers to purchases of supplies that are intended to be used for operations and maintenance.

Prepaid expenses include various prepaid insurances, services and prepaid rent. The prepaid rents pertain to the current portion of the advance rental payment paid for the Land Lease Agreement (LLA) with the National Power Corporation (NPC) and the Power Sector Assets and Liabilities Management Corporation (PSALM) over MGPP’s steamfield lot in Sto. Tomas, Batangas (see Note 14) and unamortized prepayment of land lease with Luisita Industrial Park Corporation.

Prepaid taxes pertains to creditable withholding taxes and prior year’s income tax credit.

Advances to contractors pertain to downpayments to various contractors for the purchase of materials and equipment.

Others pertain to advances, supplies and deferred financing costs on undrawn credit line.

- 35 10. Property, Plant and Equipment

Cost Balances at beginning of year Additions Reclassification Disposal Balances at end of year Accumulated depletion and depreciation Balances at beginning of year Depletion and depreciation Disposals Balances at end of year Accumulated impairment losses Balances at beginning of year Impairment losses Balances at end of year Cumulative translation adjustments Net book values

30-Jun-2018 (Unaudited) Office condominium units and Transportation improvements equipment

Power plants

FCRS and production wells geothermal

Wells, platforms and other facilities

Land and land improvements

$105,381,579 8,698 24,928,354 ‒ 130,318,631

$24,541,043 255,603 6,883,535 ‒ 31,680,181

$41,590,762 ‒ ‒ ‒ 41,590,762

$1,970,279 41,750 10,824 ‒ 2,022,853

$797,853 ‒ ‒ ‒ 797,853

$975,147 30,582 ‒ ‒ 1,005,729

$2,243,322 175,803 22,944 ‒ 2,442,069

11,615,229 2,256,969 ‒ 13,872,198

2,787,740 500,073 ‒ 3,287,813

21,187,144 747,945 ‒ 21,935,089

322,370 54,280 ‒ 376,650

793,644 ‒ ‒ 793,644

471,676 91,260 ‒ 562,936

1,427,013 174,554 ‒ 1,601,567

(4,572,136)

‒ ‒ ‒ (185,660) $1,460,543

‒ ‒ ‒ ‒ $4,209

‒ ‒ ‒ (28,014) $414,779

‒ ‒ ‒ (68,251) $772,251

‒ ‒ ‒ (8,605,528) $107,840,905

‒ ‒ ‒ (2,410,630) $25,981,738

(4,572,136) ‒ $15,083,537

Office furniture and other equipment

Construction in progress $35,418,869 1,819,927 (31,845,657) ‒ 5,393,139 ‒ ‒ ‒ ‒ ‒ ‒ ‒ (5,289,148) $103,991

Total $212,918,854 2,332,363 ‒ ‒ 215,251,217 38,604,816 3,825,081 ‒ 42,429,897 (4,572,136) ‒ (4,572,136) (16,587,231) $151,661,953

- 36 -

Cost Balances at beginning of year Additions Change in ARO estimate (Note 18) Transfers from deferred oil exploration costs (Note 11) Transfers from deferred development cost (Note 14) Reclassification/adjustments Disposal Balances at end of year Accumulated depletion and depreciation Balances at beginning of year Depletion and depreciation Disposals Balances at end of year Accumulated impairment losses Balances at beginning of year Impairment losses Balances at end of year Cumulative translation adjustments Net book values

31-Dec-2017 (Audited) Office condominium units and Transportation improvements equipment

Power plants

FCRS and production wells geothermal

Wells, platforms and other facilities

Land and land improvements

$105,078,680 62,995 (23,507) ‒ ‒ 263,411 ‒ 105,381,579

$22,475,381 2,047,449 ‒ ‒ ‒ 18,213 ‒ 24,541,043

$41,206,101 ‒ 183,999 200,662 ‒ ‒ ‒ 41,590,762

$1,768,461 201,818 ‒ ‒ ‒ ‒ ‒ 1,970,279

$797,183 670 ‒ ‒ ‒ ‒ ‒ 797,853

$1,006,693 163,087 ‒ ‒ ‒ ‒ (194,633) 975,147

$1,793,339 448,616 ‒ ‒ ‒ 9,844 (8,477) 2,243,322

2,040,345 747,395 ‒ 2,787,740

19,200,604 1,986,540 ‒ 21,187,144

213,065 109,305 ‒ 322,370

793,134 510 ‒ 793,644

513,744 152,565 (194,633) 471,676

1,087,065 347,615 (7,667) 1,427,013

(2,626,711) (1,945,425) (4,572,136) ‒ $15,831,482

‒ ‒ ‒ (83,856) $1,564,053

‒ ‒ ‒ ‒ $4,209

‒ ‒ ‒ (12,108) $491,363

‒ ‒ ‒ (27,874) $788,435

7,534,860 4,080,369 ‒ 11,615,229 ‒ ‒ ‒ (2,507,607) $91,258,743

‒ ‒ ‒ (1,050,345) $20,702,958

Office furniture and other equipment

Construction in progress $11,314,639 20,934,983 50,391 ‒ 3,410,324 (291,468) ‒ 35,418,869 ‒ ‒ ‒ ‒ ‒ ‒ ‒ (3,253,718) $32,165,151

Total $185,440,477 23,859,618 210,883 200,662 3,410,324 ‒ (203,110) 212,918,854 31,382,817 7,424,299 (202,300) 38,604,816 (2,626,711) (1,945,425) (4,572,136) (6,935,508) $162,806,394

- 37 Power plants represent MGI’s geothermal power plant and PetroSolar’s photovoltaic plant.

The Group’s construction in progress account includes steam assets and other on-going construction projects related to Maibarara 2 Expansion Geothermal Project (M2) and civil works in the solar plant. Steam assets are mainly composed of in-progress production wells and FCRS, while other construction projects include on-going rehabilitation activities in the plants, work-over activities and other constructions. M2 started its commercial operations on April 30, 2018.

Change in ARO estimate and transfers from advances to contractors, deferred oil exploration costs and development costs are considered as noncash investing activities.

Depletion of wells, platforms and other facilities is presented under cost of sales in the consolidated statements of comprehensive income.

As of June 30, 2018 and December 31, 2017, the participating interest of PERC in various service contracts areas are as follows: Gabonese Oil Concessions West Linapacan - SC 14C2

2.525% 4.137%

11. Deferred Oil Exploration Costs

Balances at beginning of year Additions Transferred to wells and platforms Balances at end of year Accumulated impairment losses

Unaudited 30-Jun-18 $10,187,520 116,574 – 10,304,094 (6,204,978) $4,099,116

Audited 31-Dec-17 $10,134,234 253,948 (200,662) 10,187,520 (6,204,978) $3,982,542

Unaudited 30-Jun-18 $6,315,401 3,023,655 546,680 379,991 38,367 10,304,094 (6,204,978) $4,099,116

Audited 31-Dec-17 $6,204,978 3,018,042 546,680 379,991 37,829 10,187,520 (6,204,978) $3,982,542

Details of deferred oil exploration costs follow:

Gabonese Oil Concessions Octon Malajon Block - SC 6A NW Palawan -SC 75 East Visayas - SC 51 West Linapacan - SC 14C2 Total Accumulated impairment losses

Philippine Operations Under the SCs entered into with the DOE covering certain petroleum contract areas in various locations in the Philippines, the participating oil companies (collectively known as Contractors) are obliged to provide, at their sole risk, the services, technology and financing necessary in the performance of their obligations under these contracts. The Contractors are also obliged to spend specified amounts indicated in the contract in direct proportion to their work obligations.

- 38 However, if the Contractors fail to comply with their work obligations, they shall pay to the government the amount they should have spent but did not in direct proportion to their work obligations. The participating companies have Operating Agreements among themselves which govern their rights and obligations under these contracts.

The full recovery of these deferred costs is dependent upon the discovery of oil in commercial quantities from any of the petroleum concessions and the success of future development thereof.

As of June 30, 2018 and December 31, 2017, the participating interest of the Group in various Petroleum SC areas are as follows: Octon Malajon Block - SC 6A East Visayas - SC 51 NW Palawan -SC 75

16.667% 20.050% 15.000%

12. Investment in a Joint Venture The investment in a joint venture represents PetroGreen’s 40% interest in PetroWind, a company incorporated in the Philippines. The primary purpose of PWEI is to carry on the general business of generating, transmitting and/or distributing power derived from renewable energy sources.

The movements in the carrying value as of June 30, 2018 and December 31, 2017 follows:

Balance at beginning of year Share in net income of a joint venture Translation adjustment Balance at end of year

Unaudited 30-Jun-18 $28,196,245 751,598 (1,898,979) $27,048,864

Audited 31-Dec-17 $26,843,396 1,496,888 (144,039) $28,196,245

The carrying value of the investment in PetroWind is equivalent to the Group’s 40% share in PetroWind’s equity, plus the fair value adjustment of P =764.49 million (or $15.31 million) was recognized when the Group lost control over PetroWind in 2014.

Selected financial information of PetroWind follows:

Current assets Noncurrent assets Current liabilities Noncurrent liabilities Equity

Unaudited 30-Jun-18 $13,624,627 71,563,126 (9,940,142) (44,544,289) $30,703,322

Audited 31-Dec-17 $15,604,146 78,114,075 (12,710,316) (50,092,098) $30,915,807

- 39 Summary of statements of comprehensive income of PetroWind for the 2nd quarter ended June 30, 2018 and year ended December 31, 2017 follows:

Revenue (electricity sales and other income) Cost and expenses Income before tax Tax benefit Net income Group’s share of the net income

Unaudited 30-Jun-18 $ 7,208,298 (5,329,302) 1,878,996 $1,878,996 $ 751,598

Audited 31-Dec-17 $14,774,581 (11,033,640) 3,740,941 1,280 $3,742,221 $1,496,888

13. Investment Properties As of June 30, 2018 and December 31, 2017, this account consists of land and parking lot space in Tektite Tower located in Pasig City with total carrying value of $31,417.

The fair value of the investment properties of the Group amounted to $40,278 as of June 30, 2018 and December 31, 2017. The Group determined the fair values of the Group’s investment properties on the basis of recent sales of similar properties in the same areas as the investment properties and taking into account the economic conditions prevailing at the time the valuations were made.

As of June 30, 2018 and December 31, 2017 and 2016, the fair value of the investment properties is classified under the Level 2 category.

Except for insignificant amounts of real property taxes on the investment properties, no other expenses were incurred, and no income was earned in relation to the investment properties as of June 30, 2018 and December 31, 2017.

14. Other Noncurrent Assets

Input VAT Intangible assets Prepaid rent - noncurrent portion Restricted cash Deferred development costs Others

Unaudited 30-Jun-18 $4,624,085 2,650,419 1,456,114 875,924 400,068 374,881 $10,381,491

Audited 31-Dec-17 $4,876,950 2,878,262 1,560,867 875,924 224,026 399,250 $10,815,279

Input VAT Input VAT represents VAT due or paid on purchases of goods and services that can be claimed against any future liability to the Bureau of Internal Revenue (BIR) for output VAT from sale of goods and services.

Input VAT also includes outstanding input VAT claims of MGI that were applied for refund with the BIR and Court of Tax Appeals (CTA). As of June 30, 2018 and December 31, 2017, the

- 40 outstanding input VAT claims which are still pending with the BIR and CTA amounted to P =127 million (or $2.37 million) and P =126.96 million (or $2.54 million), respectively.

Intangible assets Intangible assets pertain to land rights, which refers to grant of easement of right of way entered by PetroSolar to construct, operate, maintain, repair, replace and remove poles, wire, cables, apparatus, and equipment and such other apparatus and structures needed for the transmission line.

This also includes software licenses of the Group.

Prepaid rent - noncurrent portion On April 23, 2012, MGI entered into a LLA with the NPC and PSALM over MGI’s steamfield lot in Sto. Tomas, Batangas.

Under the LLA, MGI will lease the steamfield lot for a period of 25 years, extendable for another 25 years upon mutual agreement of the parties. Prepaid rent pertains to the advance rental paid for the lease agreement.

Restricted cash Restricted cash pertains to the Parent Company’s share in the escrow fund for the abandonment of the Gabon assets. This also includes escrow to secure payment and discharge of the Group’s obligations and liabilities under the Floating Production Storage and Offloading (FPSO) contract.

The amount for the share in escrow of the Parent Company’s obligation for the FPSO was deducted from the share on lifting proceeds during the first lifting made by Etame in November 2002 and will be paid back to the Group at the end of the contract which is in 2020.

In 2017, the Parent Company contributed its share in the abandonment of the Etame Marine Permit to the escrow fund amounting to $0.17. Contributions for 2018 is expected in the last quarter.

Deferred development costs These pertains to costs incurred in the exploration, development, production and expansion of renewable energy projects.

Others Other noncurrent assets pertain to noncurrent portion of prepaid insurance and security deposit.

15. Accounts Payable and Accrued Expenses

Accounts payable Accrued expenses: Interest Sick/vacation leaves Professional fees Utilities Government share Others Withholding taxes and VAT payable Dividends payable Due to related party Others

Unaudited 30-Jun-18 $ 3,664,475

Audited 31-Dec-17 $3,312,295

1,115,664 196,884 74,213 129,390 92,121 185,203 46,958 194,189 42,406 $5,741,503

1,205,306 235,572 25,860 37,124 12,942 172,668 315,255 208,159 5,625 167,621 $5,698,427

- 41 Accounts payable consists of payable to suppliers and contractors that are currently involved in the development, construction and operations of energy projects. The Group’s accounts payable and accrued expenses are due within one year.

Dividends payable pertain to unclaimed checks as of June 30, 2018 and December 31, 2017.

Other payables mainly pertain to accrued security services, utilities and condominium dues.

16. Loans Payable The Group’s loans payable as of June 30, 2018 and December 31, 2017 follow:

Principal, balance at beginning of year Add availments during the year Less principal payments during the year Foreign currency translation adjustments Cumulative translation adjustment Principal, balance at end of year Less unamortized deferred financing cost Less current portion - net of unamortized deferred financing cost Noncurrent portion

Unaudited 30-Jun-18 $132,394,443 3,531,258 (12,490,785) (1,034,311) (7,851,023) 114,549,582 (1,671,218) 112,878,364

Audited 31-Dec-17 $117,252,692 34,558,382 (18,855,178) (14,381) (463,028) 132,478,487 (2,106,375) 130,372,112

(15,211,730) $97,666,634

(21,867,859) $108,504,253

PetroEnergy’s short-term and long-term loans payable PetroEnergy entered into unsecured loan agreements specifically to finance its Etame Expansion Project and investments in Renewable Energy Projects.

On April 27, 2015, PetroEnergy entered into an Omnibus Credit Line Agreement (OCLA) with the Development Bank of the Philippines (DBP) which provides a credit facility in the principal amount not exceeding P =420.00 million (or $9.30 million). On June 29, 2016 the credit facility was increased to P =500.00 million (or $10.01 million) Loans payable as of June 30, 2018 and December 31, 2017 pertains to:  loans from DBP amounting to $9.34 million and $10.01 million as of June 30, 2018 and December 31, 2017, respectively with interest rate ranging from 5.05% to 6.41% with maturity on January 2018 ($2.43 million), October 1, 2018 ($3.74 million) and October 30, 2018 ($3.18 million).  loans from various lenders amounting to $5.40 million as of December 31, 2017 with an interest rate of 3.7% - 5% and maturity on November 2019 ($1.57 million), February 2018 ($3.43 million) and January 2018 ($0.4 million); and  short-term loan from various lenders amounting to $1.51 million as of June 30, 2018 at interest rate of 4.5% due on August 2018.

PetroGreen’s short-term and long-term loans payable In November 2015, PetroGreen entered into a 5-year credit line facility with Chinabank amounting to P =500.00 million (or $10.62 million) with an annual interest rate of 5.24% subject to repricing payable every May and November. P =400.00 million (or $8.01 million) out of the total loan facility were granted to PetroGreen.

- 42 In November 2016, PetroGreen availed additional P =30.00 million (or $0.60 million) loan from Chinabank with a term of 4 years and annual interest of 5.33%.

PGEC’s short-term loans payable amounting to P =46.00 million (or $0.92 million) as of December 31, 2017 (nil as of June 30, 2018) pertains to loans from various lenders with interest rate of 3.5% and maturity in January 2018.

MGI’s long-term loans payable Omnibus Loan and Security Agreement with RCBC and Bank of the Philippine Islands (BPI) On September 26, 2011, MGI, together with PNOC RC and Trans-Asia (presently PHINMA), entered into a P =2,400.00 million (or $54.00 million) Omnibus Loan and Security Agreement (OLSA) with RCBC and BPI specifically to finance the design, development, procurement, construction, operation and maintenance of its 20 MW geothermal power plant project.

As of December 31, 2016, the outstanding balance of the loan amounted to P =0.1 million (or $0.002 million) (nil as of December 31, 2017). Thereafter, on September 5, 2016, MGI consolidated the outstanding principal of the above loan, incidental costs, general corporate expenditures and working capital requirement by executing a new Project Loan Facility Agreement now with RCBC only.

Bridge Financing Loan with RCBC Capital Corporation On January 15, 2016, MGI entered into a Bridge Financing Loan with RCBC Capital Corporation specifically to finance the operation and maintenance of its 20 MW geothermal power plant project.

Total principal amount and interest amounting to P =150.00 million (or $3.02 million) and =7.06 million (or $0.15 million), respectively. These were fully paid as of November 25, 2016.

P Project Loan Facility Agreements with RCBC On May 19, 2016, MGI, together with PHINMA and PNOC RC executed the Project Loan Facility Agreement with RCBC for a P =1,400.00 million (or $28.40 million) project loan to finance the design, development and construction of MGPP-2. The first loan drawdown was made on June 2, 2016.

On September 5, 2016, the MGI, together with PHINMA and PNOC RC executed another Project Loan Facility Agreement with RCBC for a P =2,100.00 million (or $42.06 million) project loan to consolidate the outstanding principal of the term loan under the 2011 OLSA with RCBC and BPI. The drawdown of the total loan amount was made on October 10, 2016. As of June 30, 2018 and December 31, 2017, MGI has outstanding drawdowns of P =3,140.60 million (or $58.68 million).

MGPP-1 or M1 new Loan The new M1 Loan amounting to P =2,100.00 million (or $42.06 million) has a term of ten (10) years from the Drawdown Date of October 10, 2016. Interest and principal are payable semi-annually.

Interest payment started on October 12, 2016, while the twenty (20) semi-annual principal payments started on April 12, 2017.

Interest rate is fixed for the first five (5) years from Drawdown Date, based on the sum of the prevailing 5-Year Fixed Benchmark Rate on the Pricing date and the margin of 1.75% (the “Initial Interest Rate”). On the Repricing Date, the interest for the remaining five (5)-year term of the Loan will be the higher of (i) the sum of then prevailing 5-Year Fixed Benchmark Rate plus the margin of 1.75%, or (ii) the Initial Interest Rate. As of June 30, 2018 and December 31, 2017, the outstanding balance related to this loan amounted to P =1,905.60 million (or $35.60 million).

MGPP-2 or M2 Expansion Loan The M2 Expansion Loan amounting to P =1,400.00 million (or $28.40 million) has a term of twelve (12) years including thirty-six (36) months grace period from Initial Drawdown Date of June 2,

- 43 2016. Interest and principal are payable semi-annually. Interest payment started on October 12, 2016, while the eighteen (18) semi-annual principal payments will start on October 12, 2019.

Interest rate is fixed for the first seven (7) years from the Initial Drawdown Date based on the sum of the prevailing 7-Year Fixed Benchmark Rate on the Pricing Date and the applicable margin of (1) 1.25% per annum prior to Commercial Operations Date, or (ii) 1.75% per annum from and after the Commercial Operations Date (the “Initial Interest Rate”). For subsequent Drawdowns, interest rate will be the three (3)–day simple average interpolated rate based on the remaining tenor and computed using the straight-line method. On the Repricing Date, the interest for the remaining five (5)-year term of the Loan will be the higher of (i) the sum of the then prevailing 5-Year Fixed Benchmark Rate plus the applicable margin, or (ii) the weighted average interest rate during the first seven (7) years of the Loan.

Deferred financing costs are incidental costs incurred in obtaining the loan, which include documentary stamp tax, transfer tax, chattel mortgage, real estate mortgage, professional fees, arranger’s fees and other out-of-pocket expenses.

As of June 30, 2018 and December 31, 2017, the outstanding balance of these loans amounted to P1,235 million (or $23.07 million) and P =1,215.06 million (or $24.34 million), respectively.

The loan covenants covering the outstanding debt of MGI include, among others the following conditions: maintenance at all times of Debt-to-Equity (DE) Ratio of not greater than 70:30, Default Debt Service Coverage Ratio (DSCR) of at least 1.10x both until full payment of the Loans, and Dividend DSCR of at least 1.20x. MGI is also required to transfer in the DSPA equivalent to onesixth (1/6) of the amount sufficient to pay for the forthcoming debt service scheduled in April and October of every year until the loan is fully paid off. As of June 30, 2018 and December 31, 2017, MGI has been compliant with the above conditions.

PetroSolar’s long-term loans payable On November 12, 2015, the PetroSolar, together with PGEC and EEIPC, as third party mortgagors and pledgors, entered into a P =2.6 billion (or $55.25 million) OLSA with PNB and DBP specifically to partially finance the design, development, procurement, construction, operation and maintenance of its TSPP. The PetroSolar shall fully pay the loan for the pro-rata account of each lender within twelve (12) years from and after the date of the initial drawdown. Interest and principal are payable semiannually. Interest payment started on May 27, 2016, while the twenty-two (22) semi-annual principal payments started on November 27, 2016.

The rate of the interest applicable to the facility or the relevant part thereof for each interest period shall be fixed for the first seven periods (7) from the initial drawdown date (the Initial Interest Rate).

Prior to the FIT entitlement and collection of FIT revenues of the borrower, the rate shall be the higher of: (i) the aggregate of the seven (7) year PDST-R2 and the initial credit spread, or (ii) the minimum interest rate. Upon FIT entitlement of at least 40MW and collection of FIT revenues by the borrower equivalent to an aggregate of at least four hundred seventy three million pesos (P = 473,000,000) within a period not exceeding twelve (12) consecutive months, the rate shall be the higher of (i) the weighted average interest rate in previous drawdowns less the step down credit spread, or (ii) minimum interest rate, and which interest rate shall be applied beginning the following month immediately succeeding the month wherein the aforesaid FIT entitlement and FIT revenue collection thresholds were satisfied.

Deferred financing costs are incidental costs incurred in obtaining the loan, which include documentary stamp tax, transfer tax, chattel mortgage, real estate mortgage, professional fees, arranger’s fee and other out-of-pocket expenses.

- 44 PetroSolar mortgaged all of its property and equipment as collateral in connection with the loan.

The loan covenants covering the outstanding debt of PetroSolar include, among others, maintenance of debt-to-equity ratio of 75:25 and establishment of DSPA required balance. As of June 30, 2018 and December 31, 2017, PetroSolar is in compliance with the said loan covenants.

Deferred financing costs Deferred financing costs are incidental costs incurred in obtaining the loan which includes documentary stamp tax, transfer tax, chattel mortgage, real estate mortgage, professional fees, arranger’s fee and other costs directly attributable in obtaining the loan. The portion pertaining to the drawn amount of the loan is presented as deduction from the loans payable account and is amortized over the life of the loan using the effective interest rate method. Amortization of deferred costs will be capitalized until all activities necessary to prepare the power plant for its intended use are substantially complete.

17. Asset Retirement Obligation The Group has recognized its share in the abandonment costs associated with the Etame, Avouma and Ebouri oilfields located in Gabon, West Africa, geothermal field located in Sto. Tomas Batangas, and photovoltaic (PV) solar power facility in Tarlac.

Movements in this account follow:

Balance at beginning of year Additions or change in estimates (Note 10) Accretion expense Translation adjustment Balance at end of year

Unaudited 30-Jun-18 $1,642,504 40,351 (29,078) $1,653,777

Audited 31-Dec-17 $1,366,511 210,883 66,530 (1,420) $1,642,504

18. Equity Under the existing laws of the Republic of the Philippines, at least 60% of the Parent Company’s issued capital stock should be owned by citizens of the Philippines for the Parent Company to own and hold any mining, petroleum or renewable energy contract area. As of June 30, 2018, the total issued and subscribed capital stock of the Parent Company is 99.66% Filipino and 0.34% nonFilipino as compared to 99.67% Filipino and 0.33% non-Filipino as of December 31, 2017.

As of June 30, 2018 and December 31, 2017, paid-up capital consists of: Unaudited 30-Jun-18 Capital stock - Shares Authorized – 700,000,000 shares Issued and outstanding shares Capital stock – in USD Additional paid in capital – in USD

568,711,842 $12,500,454 47,435,328 $59,935,782

Audited 31-Dec-17

410,736,330 $9,391,311 35,620,588 $45,011,899

- 45 -

The Group’s track record of capital stock follows:

Listing by way of introduction -August 11, 2004 Add (deduct): 25% stock dividend 30% stock dividend 1:1 stock rights offering December 31, 2010 Deduct: Movement December 31, 2011 Deduct: Movement December 31, 2012 Deduct: Movement December 31, 2013 Deduct: Movement December 31, 2014 Add (Deduct): 2:1 stock rights offering December 31, 2015 Deduct: Movement December 31, 2016 Deduct: Movement December 31, 2017 Add: 2.6 : 1 stock rights offering Deduct: Movement June 30, 2018

Number of shares registered

Issue/offer price

Date of SEC approval

84,253,606

=3/share P

August 4, 2004

21,063,402 31,595,102 136,912,110 273,824,220 − 273,824,220 − 273,824,220 − 273,824,220

Number of holders as of year-end

P1/share September 6, 2005 = =1/share September 8, 2006 P =5/share P May 26, 2010 2,149 (26) 2,123 (10) 2,113 (41) 2,072 (29) 2,043

273,824,220 136,912,110 410,736,330 − 410,736,330 − 410,736,330

=4.38/share P

June 3, 2015

(15) 2,028 (1) 2,027 (15) 2,012

157,975,512 568,711,841

(6) 2,006

Dividends There were no declaration of cash dividends as of June 30, 2018 and December 31, 2017.

Appropriated Retained Earnings On January 15, 2008, the BOD approved the appropriation of $0.49 million for the development of the Ebouri oilfield in Gabon, West Africa in addition to the $0.56 million originally appropriated amount.

On July 24, 2008, the BOD approved additional appropriation of retained earnings amounting to $1.0 million for the development of the Ebouri oil field in Gabon, West Africa.

On February 19, 2013, the BOD approved additional appropriated retained earnings amounting to $1.10 million to cover for the Group’s share in the cost of the committed wells in the Etame oilfield in Gabon, West Africa.

On July 12, 2018, the BOD approved the reversal of the appropriation amounting to $3.150 million to unappropriated retained earnings.

Equity Reserve On June 9, 2015, PetroEnergy sold its 10% interest in PetroGreen to EEIPC, bringing its ownership

- 46 in PetroGreen from 100% to 90%. The transaction was accounted as an equity transaction since there was no change in control.

The effect of change in the ownership interest in PetroGreen on the equity attributable to owners of PetroEnergy is summarized as follows: Consideration received from non-controlling interest Carrying amount of non-controlling interest sold, net of related cost Excess of consideration received recognized in equity

$4,669,613 (2,810,440) $1,859,173

Capital Management The primary objective of the Group’s capital management is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximize shareholders’ value.

The Group manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may increase its debt from creditors, adjust the dividend payment to shareholders or issue new shares.

As of June 30, 2018 and December 31, 2017, the Group monitors capital using a debt-to-equity ratio, which is total liabilities divided by total equity.

The Group’s sources of capital are as follows:

Loans payable Capital stock Additional paid-in capital Retained earnings Equity reserve

Unaudited 30-Jun-18 $112,878,364 12,500,454 47,435,328 30,563,914 1,859,173 $205,237,233

Audited 31-Dec-17 $130,372,112 9,391,311 35,620,588 27,615,970 1,859,173 $204,859,154

The table below demonstrates the debt-to-equity ratio of the Group:

Total liabilities Total equity Debt-to-equity ratio

Unaudited 30-Jun-18 $121,034,410 115,420,110 1.05:1

Audited 31-Dec-17 $138,342,633 101,145,777 1.37:1

Based on the Group’s assessment, the capital management objectives were met as of June 30, 2018 and December 31, 2017.

19. Related Party Transactions Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party in making financial and operating decisions or the parties are subject to common control or common significant influence (referred to as ‘Affiliates’). Related parties may be individuals or corporate entities.

- 47 Significant transactions with related parties are as follows:

Transactions for the Period Unaudited Audited Related Party/Nature 30-Jun-18 31-Dec-17 Stockholder HI Internal audit services ($13,333) ($6,334) Joint Venture PetroWind Rental income 17,006 8,078 Management income 159,809 18,850 Advances 108,191 -

Outstanding Balance Receivables (Payables) Unaudited Audited 30-Jun-18 31-Dec-2017

Terms and Conditions

$-

($5,625)

Note a

− − − $-

− − − ($5,625)

Note b Note c Note d

a. PetroEnergy has engaged HI to perform internal audit services on PetroEnergy. HI charges retainer fee of P =672,000 ($13,333), inclusive of VAT per annum. b. Management income refers to timewriting charges, management fees for accounting, legal, management and other support services rendered by PetroEnergy to PetroWind. c. Advances represents minimal reimbursement of costs and expenses.

Terms and conditions of transactions with related parties Outstanding balances at year-end are unsecured, interest-free and settlement occurs in cash.

There have been no guarantees provided or received for any related party receivables or payables.

The Group has not recognized any impairment on amounts due from affiliated companies for the first half 2018 and for year ended December 31, 2017. This assessment is undertaken each financial year through a review of the financial position of the related party and the market in which the related party operates.

Compensation of Key Management Personnel The Group has a profit-sharing plan for directors, officers, managers and employees as indicated in its by-laws. The amount, the manner and occasion of distribution is at the discretion of the BOD, provided that profit share shall not exceed 5% of the audited income before income tax and profit share.

- 48 20. Financial Instruments The Group’s principal financial instruments include cash and cash equivalents, trading and investment securities (financial assets at FVPL), receivables, restricted cash, loans payable, accounts payable, accrued expenses and dividends payable. The main purpose of these financial instruments is to fund the Group’s working capital requirements.

Categories and Fair Values of Financial Instruments As of June 30, 2018 and December 31, 2017, the carrying amounts of the Group’s financial assets and financial liabilities approximate their fair values except for loans payable. The fair value of the loans payable as of June 30, 2018 and December 31, 2017 amounted to $112.88 million and $130.37 million compared to their carrying value of $112.88 million and $130.37 million, respectively.

The methods and assumptions used by the Group in estimating the fair value of financial instruments are: Cash and cash equivalents, Restricted cash, Receivables and Accounts payable and accrued expenses

Due to the short-term nature of the instruments, carrying amounts approximate fair values as of the reporting date.

Equity securities

Fair values are based on published quoted prices.

Golf club shares

Fair values are based on quoted market prices as at reporting date.

Loans payable

Estimated fair value of long term loans is based on the discounted value of future cash flows using the prevailing PDST-R2 at the reporting period adjusted for credit spread.

The tables in the next page show financial instruments recognized at fair value as of June 30, 2018 and December 31, 2017. The fair value is based on the source of valuation as outlined below:   

quoted prices in active markets for identical assets or liabilities (Level 1); those involving inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly (Level 2); and those with inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).

Level 1 Financial assets at FVPL Marketable equity securities Investment in golf club shares

30-Jun-18 (Unaudited) Level 2 Level 3

$135,438 14,762 $149,825

$− − $−

Fair Value

$− − $−

$135,438 14,762 $149,825

- 49 -

Level 1 Financial assets at FVPL Marketable equity securities Investment in golf club shares

31-Dec-17 (Audited) Level 2 Level 3

$165,793 15,422 $181,215

$− − $−

Fair Value

$− − $−

$165,793 15,422 $181,215

As of June 30, 2018 and December 31, 2017, there were no transfers of financial instruments among all levels.

Financial Risk Management Objectives and Policies The Group manages and maintains its own portfolio of financial instruments in order to fund its own operations and capital expenditures. Inherent in using these financial instruments are the following risks on liquidity, market and credit.

Financial Risks The main financial risks arising from the Group’s financial instruments are liquidity risk, market risk and credit risk.

Liquidity Risk Liquidity risk is the risk that the Group is unable to meet its financial obligations when due. The Group monitors its cash flow position and overall liquidity position in assessing its exposure to liquidity risk. The Group maintains a level of cash and cash equivalents deemed sufficient to finance its operations and to mitigate the effects of fluctuation in cash flows. To cover its short-term and long-term funding requirements, the Group intends to use internally generated funds as well as to obtain loan from financial institutions.

The tables below summarize the maturity profile of the Group’s financial assets and financial liabilities as of June 30, 2018 and December 31, 2017 based on contractual payments:

On demand Financial Assets Financial assets at FVPL Loans and receivables: Cash and cash equivalents Accounts receivable Interest receivable Restricted cash Financial Liabilities Loans payable Accounts payable and accrued expenses* Net financial assets (liabilities)

Financial Assets Financial assets at FVPL Loans and receivables: Cash and cash equivalents Accounts receivable Interest receivable Restricted cash

30-Jun-18 (Unaudited) Less than 6 months to More than 6 months 12 months 12 months

Total

$149,825

$−

$−

$−

$149,825

5,214,472 746,106 − − 6,110,403

9,866,101 5,667,489 35,680 − 17,446,521

− 1,877,251 − 15,714,696 15,714,696

− − − 875,924 875,924

15,080,573 8,290,846 35,680 16,590,620 40,147,544

−

8,426,441

6,785,289

97,666,634

112,878,364

− − $6,110,403

5,694,545 14,120,986 $3,325,535

− 6,785,289 $8,929,407

− 97,666,634 ($96,790,710)

5,694,545 118,572,909 ($78,425,365)

On demand

Less than 6 months

$181,215

$−

7,121,659 271,030 1,785 − 7,575,689

12,988,922 7,505,587 11,061 − 20,505,570

31-Dec-17 (Audited) 6 months to 12 months

More than 12 months

Total

$−

$−

$181,215

− − − 2,613,333 2,613,333

− − − 875,924 875,924

20,110,581 7,776,617 12,846 3,489,257 31,570,516

- 50 -

Financial Liabilities Loans payable** Accounts payable and accrued expenses* Net financial assets (liabilities)

31-Dec-17 (Audited) 6 months to 12 months

On demand

Less than 6 months

−

28,646,451 4,201,586 32,848,037 ($12,342,467)

542,968 542,968 $7,032,721

More than 12 months

Total

1,691,258

123,710,807

154,048,516

− 1,691,258 $922,705

− 123,710,807 ($122,834,883)

4,744,554 158,793,070 ($127,222,554)

*Excluding statutory payables **Includes future interest payments

b. Market Risk Market risk is the risk of loss on future earnings, on fair values or on future cash flows that may result from changes in market prices. The value of a financial instrument may change as a result of changes in equity prices, foreign currency exchanges rates, interest rates and other market changes.

Foreign Exchange Risk Foreign currency risk is the risk that the value of the Group’s financial instruments denominated other than the Group’s functional currency diminishes due to unfavorable changes in foreign exchange rates. The Group’s transactional currency exposures arise from cash and cash equivalents, financial assets at FVPL, receivables, restricted cash, loans payable and accounts payable and accrued expenses. Currency risk is monitored and analyzed systematically and is managed by the Group.

There is no other impact on the Group’s equity other than those already affecting income before income tax.

Interest Rate Risk The Group’s exposure to market risk for changes in interest rates relates primarily to the Group’s loans payable. Interest rate of loans payable is fixed for the first five (5) years or first seven (7) years and will be repriced thereafter.

There is no other impact on the Group’s equity other than those already affecting income before income tax. c. Credit Risk There are significant concentrations of credit risk within the Group since most of its financial assets are with consortium operator, although credit risk is minimal. The gross maximum exposure of the Group’s credit risk is equal to the carrying amounts of the financial assets.

The Group has a well-defined credit policy and established credit procedures. In addition, receivable balances are being monitored on a regular basis to ensure timely execution of necessary intervention efforts.

The Group determines the credit quality by class for loan-related consolidated statements of financial position lines based on the following: Cash in banks and short-term investments - based on the nature of the counterparties and the reputation of the financial institution.

Receivables - based on the payment behavior of the counterparty. High grade pertains to receivables from consortium operator and interest receivable from short-term investments and standard grade pertains to other receivables.

- 51 The tables below show the credit quality by class of asset for loan-related consolidated statements of financial position lines, based on the Group’s credit rating system as of June 30, 2018 and December 31, 2017: 30-Jun-18 (Unaudited) Neither past due nor impaired Past due High grade Standard grade and impaired Cash and cash equivalents* Accounts receivable Interest receivable Restricted cash

Cash and cash equivalents* Accounts receivable Interest receivable Restricted cash

$15,075,044 8,290,846 35,680 16,590,620 $39,992,190

$− 50,119 − − $50,119

$15,075,044 8,340,965 35,680 16,590,620 $40,042,309

31-Dec-17 (Audited) Neither past due nor impaired Past due High grade Standard grade and impaired

Total

$20,106,257 7,776,617 12,846 3,489,257 $31,384,977

$− − − − $−

Total

$− − − − $−

$− 53,724 − − $53,724

$20,106,257 7,830,341 12,846 3,489,257 $31,438,701

*excluding cash on hand

21. Segment Information For management purposes, the Group is organized into business units based on their products and has four reportable segments as follows:    

The oil production segment is engaged in the oil and mineral exploration, development and production.

The geothermal energy segment develops and operates geothermal steamfields and power plants.

The solar energy segment carries out solar energy operations of the Group.

Other activities pertain to research and investment activities.

No operating segments have been aggregated to form the above reportable operating segments.

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss and is measured consistently with operating profit or loss in the consolidated financial statements.

- 52 -

Segment revenue Net income (loss) Other comprehensive loss Other information: Segment assets except deferred tax assets Deferred tax assets - net Segment liabilities except deferred tax liabilities Deferred tax liabilities - net Provision for (benefit from) income tax Capital expenditures Deferred oil exploration costs Depletion, depreciation and amortization

Segment revenue Net income (loss) Other comprehensive loss Other information: Segment assets except deferred tax assets Deferred tax assets - net Segment liabilities except deferred tax liabilities Deferred tax liabilities - net Cash flows from (used in): Operating activities Investing activities Financing activities Provision for (benefit from) income tax Capital expenditures Deferred oil exploration costs Depletion, depreciation and amortization

Oil Production $3,750,994 (497,481) (6,448,589)

Geothermal Energy $8,977,454 3,064,704 –

30-Jun-18 (Unaudited) Other Solar Energy Activities $6,351,125 $– 2,649,911 238,977 – –

Elimination $113,748 –

Consolidated $19,079,573 5,569,859 (6,448,589)

$73,059,673 $107,211,629 $206,739 $22,699

$62,105,242 $12,770

$39,134,304 $–

($88,288,007) $–

$193,222,841 $242,208

$12,159,088 $–

$38,351,226 $–

$7,966,514 $–

($683,774) $–

$121,034,410 $–

$63,241,356 $–

$25,242 $106,066 $4,099,116

$1,293 $2,186,500 $–

$142,701 $45,568 $–

$2,378 $13,319 $–

$– ($19,090) $–

$171,614 $2,332,363 $4,099,116

$797,897

$1,787,311

$1,293,689

$12,412

($248)

$3,891,061

Oil Production $6,510,755 (3,483,469) (87,138)

Geothermal Energy $16,508,677 5,716,165 (154,199)

31-Dec-17 (Audited) Other Solar Energy Activities $12,342,104 $– 4,227,402 1,803,527 – –

Elimination $– 199,448 –

Consolidated $35,361,536 8,463,073 (241,337)

$63,840,627 $111,948,713 $206,739 $24,332

$67,041,789 $11,615

$44,204,260 $–

($47,789,666) $–

$239,245,723 $242,686

$17,366,443 $–

$43,190,528 $–

$9,537,075 $–

($723,949) $–

$138,342,633 $–

$68,972,536 $–

$2,013,715 (4,354,105) 5,778,711 $137,310 $118,258 $3,982,542

$10,470,771 (21,887,133) 13,376,338 $3,227 $23,355,388 $–

$8,508,056 (280,897) (7,914,758) $239,106 $320,551 $–

$2,083,736

$2,917,493

$2,543,365

$139,204 (3,060,608) 4,503,349 $4,895 $84,510 $– $21,789

($103,509) 6,589,404 (6,610,787) ($1,516,756) ($19,089) $– ($248)

InterGroup investments, revenues and expenses are eliminated during consolidation.

$21,028,237 (22,993,339) 9,132,853 ($1,132,218) $23,859,618 $3,982,542 $7,566,135

- 53 22. Basic/Diluted Earnings Per Share The computation of the Group’s earnings per share follows: Unaudited 30-Jun-18 Net income attributable to equity holders of the Parent Company Weighted average number of shares Basic/diluted earnings per share

Audited 31-Dec-17

Audited 31-Dec-16

$2,947,944

$3,793,701

$1,772,841

568,711,842 $0.0052

410,736,330 $0.0092

410,736,330 $0.0043

Earnings per share are calculated using the net income attributable to equity holders of the Parent Company divided by the weighted average number of shares. On June 3, 2015, the SEC approved the increase in the authorized capital from 330,000,000 shares to 700,000,000 shares at P =1 par value per share. Total issued and outstanding shares as of June 30, 2018 and December 31, 2017 amounts to 568,711,842 shares and 410,736,330 shares, respectively.

23. Noncontrolling Interests As of June 30, 2018 and December 31, 2017, noncontrolling interests (NCI) pertain to the 10% shareholdings of EEI-PC in PetroGreen, 35% shareholdings of PHINMA and PNOC in MGI and 44% shareholdings of EEI-PC in PetroSolar.

As of June 30, 2018 and December 31, 2017, the accumulated balances of and net loss attributable to noncontrolling interests are as follows: Unaudited 30-Jun-18 Accumulated balances of non-controlling interests: MGI PetroSolar PetroGreen Net income attributable to non-controlling interests: MGI PetroSolar PetroGreen

Audited 31-Dec-17

$15,397,540 10,457,386 6,387,753 $32,242,679

$15,115,270 10,499,665 6,530,054 $32,144,989

$1,072,646 1,165,961 383,308 $2,621,915

$2,000,658 1,860,057 808,657 $4,669,372

- 54 24. Others a. The Interim Financial Report (June 30, 2018) is in compliance with generally accepted accounting principles. b. The same policies and methods of computation were followed in the preparation of the interim financial report compared to the December 31, 2017 Consolidated Audited Financial Statements. c. No unusual item or items affected the assets, liabilities, equity and cash flows of the June 30, 2018 Financial Statements. d. Earnings per share is presented in the face of the unaudited statements of income for the period ended June 30, 2018 and December 31, 2017. e. No significant events happened during the quarter that will affect the June 30, 2018 Unaudited Financial Statements. f.

There are no seasonal aspects that had a material effect on the financial condition or results of operation of the Company.

g. There is no foreseeable event that will trigger direct or contingent financial obligation that is material to the Company, including any default of accelerated obligation. h. There are no material off-balance sheet transactions, arrangements, obligations and other relationships of the Company with other entities or persons that were created during the period. i.

There are no changes in estimates of amounts reported in prior periods of the current financial year or changes in estimates of amounts reported in prior financial years that could have material effect in the current period.

j.

Our Company has no contingent liabilities or assets during the period.

- 55 Item 2. MANAGEMENT DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS 1.

Consolidated Financial Condition (June 30, 2018 and June 30, 2017) As of June 30 (Unaudited) 2018

ASSETS Cash and cash equivalents Financial assets at fair value through profit or loss (FVPL) Receivables Prepaid expenses and other current assets Property,plant and equipment Deferred oil exploration costs Investment in a joint venture Deferred tax assets-net Investment properties Other noncurrent assets TOTAl ASSETS LIABILITIES AND EQUITY Accounts payable and accrued expenses Current portion of loans payable Income tax payable Deposit for future stock subscription Loans payable - net of current portion Asset retirement obligation Deferred tax liabilities Other noncurrent liability TOTAL LIABILITIES EQUITY Attributable to equity holders of the Parent Company Non-controlling interest TOTAL EQUITY TOTAL LIABILITIES AND EQUITY

$15,080,573

2017 $12,952,412

% Change

% to Total Assets

16.43%

6.38%

-15.34% 0.31% 137.19% -2.80% 3.95% -2.79% -21.40% 0.00% -20.12%

0.06% 3.52% 8.22% 64.13% 1.73% 11.44% 0.10% 0.01% 4.40%

149,825 8,326,526 19,432,547 151,633,508 4,099,116 27,048,864 242,208 31,417 10,409,936

176,981 8,301,079 8,192,803 156,007,327 3,943,491 27,824,957 308,164 31,417 13,031,843

$236,454,520

$230,770,474

2.46%

100.00%

5,741,503 15,211,730 127,816 97,666,734 1,653,777 632,950 121,034,510

6,284,231 22,168,391 75,051 4,251,257 99,744,161 1,388,801 1,522,277 222,901 135,657,070

-8.64% -31.38% 70.31% -100.00% -2.08% 19.08% -100.00% 183.96% -10.78%

2.43% 6.43% 0.05% 0.00% 41.30% 0.70% 0.00% 0.27% 51.19%

83,177,431 32,242,679

68,590,638 26,522,766

21.27% 21.57%

35.18% 13.64%

$115,420,110 $236,454,620

$95,113,404 $230,770,474

21.35% 2.46%

48.81% 100.00%

Note: Differences in amounts are due to rounding off.

Total assets amounted to US$236.455 million and US$230.770 million as of June 30, 2018 and June 30, 2017, respectively.

Cash and cash equivalents consist of cash on hand, cash in banks and money market placements with original maturities of not more than three months. The 16.43% net increase is mainly due to the proceeds from sale of electricity sales, crude oil and proceeds from additional loan of MGI for MGPP Phase 2.

This is offset by the capital and operating expenses incurred during the period.

Financial assets at fair value through profit and loss (FVPL) declined by 15.34% due to the downtrend movement of market prices of investments in stocks traded in the Philippe Stock Exchange (PSE).

The Receivables account mainly consists of receivables from electricity sales and lifting/sales of crude oil revenue. This account slightly changed by 0.31% due to higher outstanding receivable from oil liftings and electricity sales.

- 56 Prepaid expenses and other current assets consist of escrow fund, advances to contractor, deferred financing costs, prepaid insurance, supplies inventory, crude oil inventory, refundable deposits, restricted cash and other prepayments. The 137.19% net increase is mainly due to the remaining net proceeds of the Stock Rights Offering amounting to $13.377 (or PhP 715.969 million) put under escrow.

Property, plant and equipment (PPE) decreased by 2.80% mainly due to the continuous depletion and depreciation (of the oil wells and platforms and existing power plants and equipment) and impact of translation of the Peso denominated PPE to USD. This is net of the additional PPE for the development of the MGPP2.

Deferred oil exploration increased by 3.95% decrease is due to the continuous studies and development of the Etame Marine Permit to increase or maintain production.

Investment in a joint venture refers to the remaining 40.00% shareholdings in PWEI. The 2.79% net decrease mainly pertains to the effect of translation adjustments of the translation of investment from Peso to USD. This is net of the Group’s share in net income generated during the period.

Investment properties remained unchanged as of June 30, 2018.

Deferred tax assets – net occurs due to timing differences in recognizing temporary deductible expenses and temporary taxable revenues such as accrued profit share, accretion expenses, accrued retirement liability, provision for probable losses, unrealized gains or losses and change in crude oil inventory. As of June 30, 2018 and June 30, 2017, this amounted to US$0.242 million and US$0.308 million. The decline pertains to the changes in the recorded parameters.

The group also recorded a US$1.522 million deferred tax liability as of June 30, 2017 relative to PetroGreen’s unrealized gain on re-measurement of investment. However, in December 31, 2017, this amount was reversed because the Group, as a joint venturer, assessed that it can control the timing of the distribution of its share in profits in the joint arrangement and its share in profits will not be distributed in the foreseeable future. Therefore, deferred tax liability is not recognized starting December 31, 2017.

Other non-current assets mainly consists of input vat carry-over, non-current portion of advance rent, and restricted cash. The 20.12% net decrease is mainly due to the transfer of deferred development costs of the MGPP2 to PPE account upon its commercial operation in April 30, 2018.

Accounts payable and accrued expenses declined by 8.64% mainly from settlement of progress billings from suppliers/contractors for the development of MGPP - 2.

Majority of the current portion of loans payable refers to loans with maturity of not more than one (1) year; and the reclassification of non-current loans payable that are due within 1 year to current portion.

The 31.38% net decrease mainly pertains to payment of short-term loans during the period.

The group’s income tax payable as of June 30, 2018 and 2017 mainly refers to the PetroSolar’s tax payable during the quarter (under PEZA rules).

The 2.08% decrease loans payable – noncurrent mainly pertains to payment of principal loans due during the period and impact of the forex translation adjustment in translating the Peso loans to US$.

The deposit for future stock subscription as of June 30, 2017 pertains to total consideration received from non-controlling interests in excess of the authorized capital of entities within the Group, with the purpose of applying the same payment for future issuance of shares. Since the increase in capitalization was already approved by the SEC, this amount was reclassified to equity.

- 57 Asset retirement obligation increased by 19.08% resulting from the additional amortization of the net present value of abandonment costs estimate during the period.

Other non-current liabilities pertain to accrued rent payable arising from the application of straight line amortization of operating lease and accrued retirement liability. This account increased by 183.96% due to the initial set-up of retirement funding of MGI and rent levelization of PSC’s land lease.

Equity attributable to equity holders of the Parent Company amounted increased from US$68.591 million as of June 30, 2017 as compared to US$83.177 million as of June 30, 2017. The increase is mainly due to:  Stock Rights Offering during the 1st quarter of 2018,which added P758.282 million or US$14.924 million in Capital Stock and Additional Paid In Capital; and  Income generated during the period.

Non-controlling interest (NCI) pertains to the following:  10% share of EEI-PC in PetroGreen;  25% share of Trans-Asia, the 10% share of PNOC-RC, and 10% of the 65% share of EEI-PC (indirect) in MGI;  44% share of EEI-PC (direct) and 10% of 56% share (indirect) in PSC; Non-controlling interest increased by 21.57% from US$26.523 million as of June 30, 2017 to US$32.243 million as of June 30, 2018. The increase is due to net income and additional equity infusion for the MGPP2.

- 58 2.

Consolidated Results of Operations (For the quarter June 30, 2018 and June 30, 2017)

% Change

% to Total Revenues

Unaudited 30-Jun-18 OIL REVENUES Electricity Sales Oil Revenues

30-Jun-17

$7,932,335 2,004,538 9,936,873

$7,529,396 1,568,372 9,097,768

5.35% 27.81% 9.22%

78.83% 19.92% 98.75%

3,395,112 1,100,660 362,957 4,858,729 5,078,144

3,018,907 911,646 518,830 4,449,383 4,648,385

12.46% 20.73% -30.04% 9.20% 9.25%

33.74% 10.94% 3.61% 48.29% 50.47%

706,494

597,276

18.29%

7.02%

167,234 (107,465)

126,052 (713)

32.67% 14972.23%

1.66% -1.07%

(22,174) (1,818,629) (18,087) 38,765 49,125 (1,711,231)

2,679 (1,785,762) (13,075) 46,716 (99,030) (1,723,133)

-927.70% 1.84% 38.33% -17.02% -149.61% -0.69%

-0.22% -18.07% -0.18% 0.39% 0.49% -17.01%

2,660,419

2,327,976

14.28%

26.44%

80,063

80,823

-0.94%

0.80%

NET INCOME

$2,580,356

$2,247,153

14.83%

25.64%

NET INCOME (LOSS) ATTRIBUTABLE TO: Equity Holders of the Parent Company Noncontrolling interest

$1,374,411 1,205,945

$1,026,111 1,221,042

33.94% -1.24%

13.66% 11.98%

NET INCOME

$2,580,356

$2,247,153

14.83%

25.64%

$0.0025

-3.26%

COST OF SALES Costs of Electricity Sales Oil production operating expenses Depletion GROSS INCOME GENERAL AND ADMINISTRATIVE EXPENSES OTHER INCOME (CHARGES) Interest income Net unrealized foreign exchange gain (loss) Net unrealized gain (loss) on fair value changes on financial assets at FVPL Interest expense Accretion expense Miscellaneous income Share in net income of an Associate

INCOME BEFORE INCOME TAX PROVISION FOR INCOME TAX

EARNINGS PER SHARE(EPS) FOR NET INCOME ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT COMPANY- BASIC AND DILUTED

$0.0024

Note: Differences in amounts are due to rounding off.

The Group generated a consolidated net income amounting to US2.580 million and US$2.247 million for the period June 30, 2018 and June 30, 2017, respectively. Net income attributable to equity holders of the Parent Company amounts to US$1.374 million or $0.0024 earnings per share and US$1.026 million or 0.0025 earnings per share for the 2nd quarter ended June 30, 2018 and June 30, 2017, respectively.

- 59 Revenues: Electricity sales refer to the electricity power generated by MGPP and PetroSolar. The 5.35% increase is mainly due to the commissioning of the Maibarara Geothermal Power Project - Phase 2 (MGPP2), an additional 12MW power plant on April 30, 2018.

Oil revenues increased by 27.81% mainly due to the recovery of the average crude oil price from an average of $49.72/ barrel to $74.34/barrel, despite of the 18% decline in production due to shut-in wells.

Costs and Expenses: Costs of electricity sales pertain to the direct costs of generating electricity power including operating and maintenance costs (O&M) of power plant and fluid collection and reinjection system (FCRS), depreciation, and other costs directly attributed to producing electricity. The 12.46% increase mainly pertains to the operating expenses for the MGPP2.

Oil production expenses (OPEX) increased by 20.73% because of higher royalty (Gabon) expenses brought about by the recovery in average crude oil price and additional costs for workover of wells to maintain and increase production.

The 30.04% decrease in depletion is due to lower depletable costs as a result of the impairment of Gabon Assets in December 2017.

General and administrative expenses (G&A) increased by 18.29% mainly due to additional expenses for the MGPP2.

Other income (charges) amounted to US$ (1.711) million and US$ (1.723) million for the 2nd quarter June 30, 2018 and 2017, respectively. Below presents the itemized discussion of the changes in other income (charges) – net account.       

32.67% increase in interest income due to additional funds placed in short-term investments; Increase in unrealized forex loss due to further weakening of the Peso, where it reached a closing rate of P53.458:1USD (as compared to P49.93:1US$ closing rate in December 31, 2017); turnaround of the market value changes of investment in stocks traded at the PSE, form an unrealized gain to unrealized loss due downtrend movements of the market value of the investments; Interest expense increased in connection with the new OLSA of the MGPP2 which is funded thru 70:30 Debt and Equity.

38.33% increase in accretion expense mainly due to change in assumption and estimates; Miscellaneous income mainly pertains to the monthly time-writing charges and rental income. The 17.02% decrease is due to revised fees starting January 2018; and Turnaround of share in the results of operations of PWEI from a loss to income this quarter. The turnaround is a result of higher electricity generation.

Provision for income tax mainly pertains to PSC’s 5.00% provision for income tax under the PEZA rules. The other projects such as Oil Operations and MGPP subject to MCIT and Income Tax Holiday, respectively.

Non-controlling interest (NCI) pertains to the following:  10% share of EEI-PC in PetroGreen;  25% share of Trans-Asia, the 10% share of PNOC-RC, and 10% of the 65% share of EEI-PC (indirect) in Maibarara;  44% share of EEI-PC (direct) and 10% of 56% share (indirect) in to PetroSolar;

- 60 3. Financial Condition (June 30, 2018 and December 31, 2017) Unaudited

Audited

30-Jun-18

31-Dec-17

$15,080,573

% Change

% to Total Assets

$20,110,581

-25.01%

6.38%

149,825 8,326,526

181,215 7,789,463

-17.32% 6.89%

0.06% 3.52%

19,432,547 151,633,508 4,099,116 27,048,864 31,417 242,208 10,409,936

5,332,588 162,806,394 3,982,542 28,196,245 31,417 242,686 10,815,279

264.41% -6.86% 2.93% -4.07% 0.00% -0.20% -3.75%

8.22% 64.13% 1.73% 11.44% 0.01% 0.10% 4.40%

$236,454,520

$239,488,410

-1.27%

100.00%

Accounts payable and accrued expenses Current portion of loans payable Income tax payable Loans payable - net of current portion Asset retirement obligation Other noncurrent liabilities TOTAL LIABILITIES

5,741,503 15,211,730 127,816 97,666,734 1,653,777 632,950 121,034,510

5,698,427 21,867,859 56,952 108,504,253 1,642,504 572,638 $138,342,633

0.76% -30.44% 124.43% -9.99% 0.69% 10.53% -12.51%

2.43% 6.43% 0.05% 41.30% 0.70% 0.27% 51.19%

EQUITY Attributable to equity holders of the Parent Company Non-controlling interest

83,177,431 32,242,679

69,000,788 32,144,989

20.55% 0.30%

35.18% 13.64%

$115,420,110 $236,454,620

$101,145,777 $239,488,410

14.11% -1.27%

48.81% 100.00%

ASSETS Cash and cash equivalents Financial assets at fair value through profit or loss (FVPL) Receivables Prepaid expenses and other current assets Property,plant and equipment Deferred oil exploration costs Investment in a joint venture Investment properties Deferred tax assets-net Other noncurrent assets TOTAl ASSETS LIABILITIES AND EQUITY

TOTAL EQUITY TOTAL LIABILITIES AND EQUITY

Note: Difference in amounts is due to rounding off.

Total assets amounted to $236.455 million and $239.488 million as of June 30, 2018 and December 31, 2017, respectively.

Cash and cash equivalents consist of cash on hand, cash in banks and money market placements with original maturities of not more than three months. The 26.01% net decrease is mainly due to the capital and operating expenses incurred during the period, including payment of short-term and current portion of loans payable. This is offset by the proceeds from sale of crude oil and electricity sales.

Financial assets at fair value through profit and loss (FVPL) decreased by 17.32% mainly due to the downtrend movement of market values of investments in stocks traded in the PSE. The Receivables account mainly consists of receivables from electricity sales and lifting/sales of crude oil revenue. This account increased by 6.89% due to higher outstanding receivable from oil revenues and electricity sales resulting from the entry of the MGPP2 in April 30, 2018.

Prepaid expenses and other current assets consist of advances to contractor, deferred financing costs, prepaid insurance, supplies inventory, crude oil inventory, refundable deposits, restricted cash and other prepayments. The 264.41% net increase is mainly due to the remaining net proceeds of the Stock Rights Offering amounting to $13.377 (or PhP 715.969 million) put under escrow.

- 61 Property, plant and equipment (PPE) decreased by 6.86% mainly due to the continuous the continuous depletion and depreciation (of the oil wells and platforms and existing power plants and equipment) and impact of translation of the Peso denominated PPE to USD. This is net of the additional costs incurred for the development of the MGPP2.

Deferred oil exploration increased by 2.93% decrease is due to the continuous studies and development of the Etame Marine Permit to increase or maintain production.

Investment in a joint venture refers to the remaining 40.00% shareholdings in PWEI. The 2.79% net decrease mainly pertains to the effect of translation adjustments of the translation of investment from Peso to USD. This is net of the Group’s share in net income generated during the period.

Investment properties remained unchanged as of June 30, 2018.

Deferred tax assets (liability) (DTA/L) occurs due to timing differences in recognizing temporary deductible expenses and temporary taxable revenues such as accrued profit share, accretion expenses, accrued retirement liability, provision for probable losses, unrealized gains or losses and change in crude oil inventory. There is only minimal change of 0.20% in this account as compared to December 31, 2017.

Other non-current assets mainly consists of input vat carry-overs, non-current portion of advance rent, and restricted cash. The 20.12% net decrease is mainly due impact of translation of the Peso denominated assets to USD and additional amortization of the land lease (PSC) for the period.

Accounts payable and accrued expenses increased minimally by 0.76% mainly from additional setup of accrued interest expense from loan for the MGPP2 and set-up of payable to other contractors and suppliers during the period.

Current portion of loan payable declined by 30.44% decrease is mainly due to settlement of shortterm loans during the period and impact of the translation of the Peso loans to USD. Income tax payable as of June 30, 2018 pertains to PetroSolar’s 5% provision for income tax under the PEZA rules. The increase during the period pertains to the additional set-up of provision for the 2nd quarter 2018.

The 9.99% decrease loans payable – noncurrent mainly pertains to payment of principal loans due during the period and impact of the forex translation adjustment in translating the Peso loans to US$.

Asset Retirement Obligation minimal increase of 0.69% pertains to the accretion of the net present value of abandonment costs estimate.

Other non-current liabilities pertain to accrued rent payable arising from the application of straightline amortization of operating lease and accrued retirement liability. The 10.53% net increase mainly pertains to additions during the period.

Equity attributable to equity holders of the Parent Company amounted increased from US$69.001 million as of December 31, 2017 as compared to US$83.177 million as of June 30, 2017. The increase is mainly due to:  Stock Rights Offering during the 1st quarter of 2018,which added P758.282 million or US$14.924 million in Capital Stock and Additional Paid In Capital; and  Income generated during the period.

Non-controlling interest (NCI) pertains to the following:  10% share of EEI-PC in PetroGreen;

- 62  

25% share of Trans-Asia, the 10% share of PNOC-RC, and 10% of the 65% share of EEI-PC (indirect) in MGI; 44% share of EEI-PC (direct) and 10% of 56% share (indirect) in PSC;

Non-controlling interest increased by 0.30% due to net income during the period.

4.

Consolidated Results of Operations (For the six months ending June 30, 2018 and June 30, 2017)

% Change

% to Total Revenues

Unaudited 30-Jun-18 OIL REVENUES Electricity Sales Oil Revenues

30-Jun-17

$15,328,579 3,750,994 19,079,573

$15,112,117 3,287,961 18,400,078

1.43% 14.08% 3.69%

76.30% 18.67% 94.97%

6,216,178 2,120,334 747,945 9,084,457

5,850,234 1,765,364 960,369 8,575,967

6.26% 20.11% -22.12% 5.93%

30.94% 10.55% 3.72% 45.22%

GROSS INCOME

9,995,116

9,824,111

1.74%

49.75%

GENERAL AND ADMINISTRATIVE

1,766,189

1,178,917

49.81%

8.79%

133,447 46,443

119.56% -294.91%

1.46% -0.45%

COST OF SALES Costs of Electricity Sales Oil production operating expenses Depletion

OTHER INCOME (CHARGES) Interest income Net unrealized foreign exchange gain (loss) Net unrealized gain (loss) on fair value changes on financial assets at FVPL Interest expense Accretion expense Miscellaneous income Share in net income of an Associate

292,994 (90,523) (19,136) (3,458,176) (40,351) 76,140 751,598 (2,487,454)

14,187 (3,427,308) (26,145) 91,553 1,237,580 (1,930,243)

-234.88% 0.90% 54.34% -16.84% -39.27% 28.87%

-0.10% -17.21% -0.20% 0.38% 3.74% -12.38%

5,741,473

6,714,951

-14.50%

28.58%

171,614

162,214

5.79%

0.85%

NET INCOME

$5,569,859

$6,552,737

-15.00%

27.72%

NET INCOME (LOSS) ATTRIBUTABLE TO: Equity Holders of the Parent Company Noncontrolling interest

$2,947,944 2,621,915

$3,884,123 2,668,614

-24.10% -1.75%

14.67% 13.05%

NET INCOME

$5,569,859

$6,552,737

-15.00%

27.72%

$0.0095

-45.19%

INCOME BEFORE INCOME TAX PROVISION FOR INCOME TAX

EARNINGS PER SHARE(EPS) FOR NET INCOME ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT COMPANY- BASIC AND DILUTED

Note: Differences in amounts are due to rounding off.

$0.0052

- 63 The Group generated a consolidated net income amounting to US$5.570 million and US$6.553 million for the period June 30, 2018 and June 30, 2017, respectively. Net income attributable to equity holders of the Parent Company amounts to US$2.948 million or $0.0052 earnings per share and US$3.884 million or 0.0095 earnings per share as of June 30, 2018 and June 30, 2017, respectively.

Revenues: Electricity sales refer to the electricity power generated by MGPP and PetroSolar. The 1.43% increase is mainly due to the Commercial Operations of the MGPP2 on April 30, 2018, which contributed additional 12MW capacity to the Group’s Renewable Energy Portfolio.

Oil revenues increased by 14.08% mainly driven by the recovery of the crude oil prices from an average of $50.38/bbl. as of June 30, 2017 to $70.21/bbl. for the same period 2018.

Costs and Expenses: Costs of electricity sales pertain to the direct costs of generating electricity power including operating and maintenance costs (O&M) of power plant and fluid collection and reinjection system (FCRS), depreciation, and other costs directly attributed to producing electricity. The 6.26% increase mainly pertains to the operating expenses for the MGPP2.

Oil production expenses (OPEX) increased by 20.11% because of higher royalty (Gabon) expenses brought about by the recovery in average crude oil price and additional costs for workover of wells to maintain and increase production.

The 22.12% decrease in depletion is due to lower depletable costs as a result of the impairment of Gabon Assets in December 2017 and lower production barrels from 3.009MMbls as of June 30, 2017 to 2.398MMbls for the same period 2018.

General and administrative expenses (G&A) increased by 49.81% mainly due to additional expenses for the MGPP2 and the conduct of the SRO in the 1st quarter of 2018.

Other income (charges) amounted to US$ (2.847) million and US$ (1.930) million as of June 30, 2018 and 2017, respectively. Below presents the itemized discussion of the changes in other income (charges) – net account.       

119.56% increase in interest income due to additional funds placed in short-term investments; Turnaround of the unrealized forex from unrealized gain to loss due to further weakening of the Peso, where it reached a closing rate of P53.458:1USD (as compared to P49.93:1US$ closing rate in December 31, 2017); turnaround of the market value changes of investment in stocks traded at the PSE, form an unrealized gain to unrealized loss due downtrend movements of the market value of the investments; Interest expense increased in connection with the new OLSA of the MGPP2 which is funded thru 70:30 Debt and Equity.

54.34% increase in accretion expense mainly due to change in assumption and estimates; Miscellaneous income mainly pertains to the monthly time-writing charges and rental income. The 16.84% decrease is due to revised fees staring January 2018; and 39.27% lower share in the results of operations of PWEI due to lower electricity generation for the period.

Provision for income tax mainly pertains to PSC’s 5.00% provision for income tax under the PEZA rules. The other projects such as Oil Operations and MGPP subject to MCIT and Income Tax Holiday, respectively.

- 64 Non-controlling interest (NCI) as of June 30, 2018 and 2017 pertains to the following:  10% share of EEI-PC in PetroGreen;  25% share of Trans-Asia, the 10% share of PNOC-RC, and 10% of the 65% share of EEI-PC (indirect) in Maibarara;  44% share of EEI-PC (direct) and 10% of 56% share (indirect) in to PetroSolar;

The Philippines is still affected by the economic crises resulting in fluctuating foreign exchange rates and increased stock market uncertainties. Uncertainties remain as to whether the country will continue to be affected by regional trends in the coming months. The financial statements do not include any adjustments that might result from these uncertainties. Related effects will be reported in the financial statements, as they become known and estimable.

Material Commitments PetroEnergy has conducted a Stock Rights Offer in the 1st quarter 2018, where it raised P758.282 million or US$14.924 million. These funds are put under escrow and will be disbursed in accordance with the plans set out in the prospectus.

4.

KEY PERFORMANCE INDICATORS

The following liquidity and profitability ratios indicate acceptable levels of financial condition and performance of the company: Unaudited Audited Unaudited 30-Jun-18 31-Dec-17 30-Jun-17 Current ratio Debt-to-equity ratio Asset-to-equity ratio Operating profit margin Asset turnover

2.04:1 1.05:1 2.05:1 52.39% 8.07%

1.21:1 1.37:1 2.37:1 49.16% 15.63%

0.9:1 1.43:1 2.43:1 53.39% 8.63%

Formula Total Current Assets/Total Current Liabilities Liabilities/Total Stockholders’ Equity Total Assets/ Total Stockholders' Equity Operating profit/Operating Revenue Total Revenue/Total Assets

There is an increase in the group’s current ratio as of June 30, 2018 compared to December 31, 2017 due to the proceeds from the SRO. There is a decline in the group’s debt-to-equity ratio as of June 30, 2018 compared to December 31, 2017 mainly due to increase in equity resulting from the increase in equity from the SRO and income during the period.

The asset-to-equity ratio indicates the group’s leverage. This decreased due to the SRO for the expansion of the Group’s projects.

The group has almost maintained the operating profit margin for the current year as compared to the same period last year.

Lower asset turn-over within the quarter is mainly due to the increase in assets resulting from the SRO which will be invested in accordance with the disclosure in the Prospectus.

- 65 5.

Discussion of indicators of the Company’s level of performance.

Productivity Program For the electricity sales, the expansion of the Maibarara Geothermal Power Project have increased the power generation from 20 MW to 32 MW. For oil revenue, the operator of said project, VAALCO Gabon (Etame), Inc., and the members of the Consortium have defined some wells to be drilled to increase production. VAALCO has the necessary skills to manage the resources and complete the work on time and within budget.

Receivable Management The group’s receivables are mainly due from sale of electricity to PHINMA and Transco and crude oil in Etame Gabon, through the consortium operator. These are being recorded once sale is made. Payment is received every 30-45 days following each sale.

For electricity sales form TSPP and NWPP, the payment for the Actual FIT Revenue is sourced from the FIT-All Fund, specifically the Actual FIT Differential (FD) and the Actual Cost Recovery Revenue (ACRR). The FD is the difference between the Actual FIT Revenue and the ACRR and is collected from on-grid consumers as a uniform charge and applied to all billed kilowatt-hours. For FIT-Eligible RE Plants connected to the Wholesale Electricity Spot Market (“WESM”), the ACRR refers to the WESM proceeds remitted by the Philippine Electricity Market Cooperation (“PEMC”) to the FIT-All Fund. PWEI and PSC regularly receive the ACRR component on time. On the other hand, the FD will normally reach PWEI and PSC after seven months from billing date and on a staggard basis, in two or three installments.

PWEI and PSC manage this risk through proper and meticulous allocation of funds, proper timing of expenditures, employment of cost-cutting measures, and sourcing short-term funding requirements from local banks and investment houses or from affiliated companies.

For the sixteen (16) years since oil production inception, there was no event that the buyer failed to remit the proceeds of the sale. However, the group is willing to look for another buyer should there be some problem that may happen in the future.

Liquidity Management Management of liquidity requires a flow and stock perspective. Constraint such as political environment, taxation, foreign exchange, interest rates and other environmental factors can impose significant restrictions on firms in management of their financial liquidity.

The Group considers the above factors and pays special attention to its cash flow management. The Company identifies all its cash requirements for a certain period and invests unrestricted funds to money market placements to maximize interest earnings.

The Group does not anticipate any cash flow or liquidity problems within the next twelve (12) months.

The Group is not in default of any, note, loan, lease, or other indebtedness or financing arrangement requiring it to make payments.

Inventory Management The only inventory is the crude oil produced in Gabon. The buyer lifts certain volume and pays the same in 30 days. The operator sees to it that crude oil inventory does not reach 800,000 barrels at any one time to avoid overflow and to generate revenues to cover production costs.

Cost Reduction Efforts In order to reduce costs, the Group employs a total of one thirty six (136) employees with multi-task assignments.

- 66 The Company’s general and administrative expense is equivalent to 8.79% of the total revenue.

Rate of Return of Each Stockholder The Company has no existing dividend policy. However, the Company intends to declare dividends in the future in accordance with the Corporation Code of the Philippines. Please see Part II, Item 5, 3.

Dividends for the Dividend declared for two (2) most recent years.

On July 26, 2018, the Company declared 5% dividends as of record August 24, 2018, payable on September 20, 2018.

The Company declared cash/stock dividends to wit: Date of Declaration January 07, 2004 August 17, 2004 June 08, 2005 June 08, 2005 June 8, 2006 June 8, 2006 January 29, 2007 July 25, 2007 February 06, 2008 July 24, 2008 July 22, 2009 February 23, 2010 October 21, 2010 May 17, 2011 May 17, 2011 April 26, 2012 April 26, 2012 July 22, 2013

Dividends per Share Cash Stock 20% 20% 20% 25% 20% 30% 20% 20% 20% 30% 20% 20% 10% 10% 10% 10% 10% 5%

Record Date January 15, 2004 August 31, 2004 June 23, 2005 August 12, 2005 June 30, 2006 August 15, 2006 February 21, 2007 August 10, 2007 February 22, 2008 August 11, 2008 August 05, 2009 March 15, 2010 November 08, 2010 June 16, 2011 September 20, 2011 May 18, 2012 September 21, 2012 July 25, 2013

Payment Date February 16, 2004 September 24, 2004 July 18, 2005 September 06, 2005 July 26, 2006 September 8, 2006 March 16, 2007 September 05, 2007 March 17, 2008 August 29, 2008 August 31, 2009 April 05, 2010 December 2, 2010 July 13, 2011 October 14, 2011 June 14, 2012 October 17, 2012 August 20, 2013

6. Financial Disclosures in view of the current global financial condition: Assess the financial risks exposures of the Company and its subsidiaries particularly on currency, interest credit, and market and liquidity risks. If any change thereof would materially affect the financial condition and results of operation of the Company, provide a discussion in the report on quantitative impact or such risks and include a description of enhancement in the company’s risk management policies to address the same: The Group’s principal financial instruments include cash and cash equivalents, trading and investment securities (financial assets at FVPL) and receivables. The main purpose of these financial instruments is to fund the Company’s working capital requirements.

Financial Risk Management Objectives and Policies Please refer to Note 20.

- 67 7. Operations Review and Business Outlook A. OIL EXPLORATION Foreign Operations Gabon, West Africa The daily oil production of the four oil fields (Ebouri, Etame, North Tchibala and Avouma) as of June 2018 ranged from 9,880 – 17,020 barrels of oil per day (BOPD). The fluctuations in the daily production were due to 1) Shut-in of ETBNM-2H on April 12 for pressure build-up (PBU), 2) Temporary shutdown of Avouma Platform due to process alarms and program uploading, 3) FPSO Gas Lift compressor maintenance and temporary process shutdowns, 4) Shutdown of Etame and Ebouri Platforms due to Air Instrument System alarm, and 5) SEENT Platform emergency shutdown due to high export pipeline pressure.

To regain production in the Avouma Platform, the CUDD hydraulic workover unit (HWU) completed its work-over operations on ETBSM-1H-B on May 31, 2018, EAVOM-2H on June 15, 2018, and ETBSM-2H on June 27, 2018. To date, the three (3) wells are currently producing ~5,500 BOPD. Three (3) cargoes with volumes ranging from 359,000 – 421,000 bbls were lifted during 2Q 2018 under the new Crude Oil Sale Purchase and Services Agreement with Glencore. Total cargo lifted in 2Q 2018 amounted to 1.17 Million barrels.

Philippine Operations SC 51 – East Visayan Basin On June 01, 2018, after four (4) years since former Operator Otto Energy’s withdrawal, the DOE formally approved the transfer of interest from Otto to the SC 51 Filipino Consortium (PHINMA, Alcorn and PERC). This comes after current Operator PHINMA also formally withdrew from SC 51 on May 07, 2018.

Noting that attendant requested conditions that would allow full implementation of the proposed work program (Pore Pressure study and Gravity survey) were not covered in the said approval, Alcorn and PERC also subsequently submitted their joint withdrawal notice to the DOE on June 22, 2018.

The consortium has since agreed instead to file a joint relinquishment to the DOE. This relinquishment is still subject to a comprehensive technical/legal/financial justification to be submitted by PHINMA to the DOE by early-July 2018.

Summary of Petroleum Properties: Contract Expiry Production Sharing Contract (PSC) 93 – 2021 Gabon Service Contracts (SC) – Philippines SC 6A – Octon-Malajon Block 2024 SC 14C2 – West Linapacan 2025 SC 51 – East Visayan Basin 2019 SC 75 – Offshore Northwest Palawan 2020 Contract No.

Participating Interest % 2.525%

16.667% 4.137% 20.050% 15.000%

Location Gabon Offshore

Northwest Palawan Northwest Palawan East Visayan Sea Northwest Palawan

The Company derives its revenues from its Gabon Operations. All contractual obligations with the Gabonese Government are complied with. The Philippine contracts are in exploration stage and some contracts are being farmed out to reduce risk inherent to the business.

- 68 B. RENEWABLE ENERGY PROJECTS Maibarara Geothermal Power Project The 20-MW Maibarara-1 (MGPP-1) and 12-MW Maibarara-2 (MGPP-2) Geothermal Power Plants are now both on continuous operations. From April 01 – June 30, 2018, the combined net exported output is 52,996 MWh (38,018 MWh from MGPP-1 and 14,978 MWh from MGPP-2 starting April 30, 2018).

The MGPP-1 underwent a 3-day minor maintenance shutdown from April 28-30, 2018. As part of the power plant commissioning activities, the MGPP-2 unit was run at full load (12 MW) since March 29, 2018. Further, The Energy Regulatory Commission (ERC) formally notified MGI of the approval of MGPP-2’s Certificate of Compliance (COC) application on April 26, 2018. Subsequently, the MGPP-2 was accepted into the Wholesale Electricity Spot Market (WESM) on April 30, 2018 – pegging the MGPP-2’s start of Commercial Operations on the same date. This also started the effectivity of MGPP2’s Electricity Sales Agreement (ESA) with PHINMA Energy, whereby PHINMA Energy agreed to buy all of the MGPP2’s electricity generation.

Nabas Wind Power Project From April 01 – June 30, 2018, the total net energy exported to the grid is 19,423 MWh for the Project’s Phase 1.

Siemens-Gamesa Renewable Energy (SGRE) completed their 36-Month (36M) WTG maintenance works, which started last April 16, 2018. The annual preventive maintenance works for the 69-kV electrical facilities (Substation, Switching Station, and Control Building equipment) were also completed last April 21-22, 2018. Further, Vertical Difficult Access Solutions (Vertical DAS) is continuing with the overall cleaning requirements on the WTG exteriors.

PWEI engaged Cendaur Engineering for the relocation of Feeder Line 2 (FL 2) cable which was left exposed after Typhoon Urduja in December 2017. The actual relocation (isolation of FL 2) of the cable is pushed by one (1) month to mid-July 2018.

For the given period, the plant experienced minor instances of unscheduled grid downtimes, due to 1) system frequency failure caused by line/load tripping in Cebu, 2) overloading of the NGCP NegrosPanay submarine cable, grid faults, and low grid voltage when the Visayas grid switched to islanding operation, and 3) current overloading on the Medium Voltage Switchgear (MVSG) protection system.

On May 31, 2018, PWEI formally submitted to NGCP the revised final amount to be reimbursed by NGCP on the SCADA and telecommunications system components.

Tarlac Solar Power Project From April 01 – June 30, 2018, the total net energy exported to the grid is 19,137 MWh. Puerto Princesa Solar Power Project PetroGreen (PGEC) is continuing its pre-development work program for the PPSPP. To date, PGEC is firming up the project cost for the hybrid solar facility by integrating the acceptable connection scheme with the Palawan Electric Cooperative (PALECO) and the cost of right-of-way for the transmission line.

To date, PGEC is awaiting the official Terms of Reference (TOR) from PALECO for its power supply bid round. PGEC is also awaiting the approval of both 1) Project Registration with the Board of Investments (BOI), and 2) Interconnection Agreement with the National Power Corporation (NPC).

- 69 Plan of operations for the next 12 months: Gabon, West Africa Crude production will continue from the existing wells.

SC 6A – Octon, Northwest Palawan Operator Philodrill will continue with the aforementioned G&G works to define new leads to be further de-risked.

SC 14C2 - West Linapacan, Northwest Palawan Operator Philodrill will conduct the proposed WLA-1 EPT scoping study, oil spill trajectory modelling, and the PCSD permitting works to validate the feasibility of extracting the remaining recoverable volumes in West Linapacan.

SC 51 - East Visayan Basin The consortium is awaiting DOE’s formal approval of the joint relinquishment of SC 51.

SC 75 - Offshore Northwest Palawan The service contract is currently under Force Majeure. Once lifted, the Consortium will proceed to Subphase 2, with the conduct of a ~1,000 sq.km 3D seismic survey over the identified leads in SC 75.

Maibarara Geothermal Power Project Power generation from both Maibarara -1 and Maibarara-2 will continue.

Nabas Wind Power Project The plant will be in continuous operation from the 18 WTGs comprising the project's Phase 1.

Tarlac Solar Power Project The TSPP-1 will continue to supply electricity to the grid. Further, PetroSolar will continue to negotiate for the most feasible project offtake for TSPP-2.

Puerto Princesa Solar Power Project PGEC will continue with its pre-development activities for the PPSPP, a well as firming up the project costs in order to substantiate the project’s offtake options with PALECO. Part II - OTHER INFORMATION The Company has no other information that needs to be disclosed other than disclosures made under SEC Form 17-C (if any).

- 70 -

PETROENERGY RESOURCES CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INFORMATION AND DISCLOSURES REQUIRED ON SRC RULE 68 AS AMENDED JUNE 30, 2018

Philippine Securities and Exchange Commission (SEC) issued the amended Securities Regulation Code Rule SRC Rule 68 which consolidates the two separate rules and labeled in the amendment as “Part I” and “Part II”, respectively. It also prescribed the additional information and schedule requirements for issuers of securities to the public.

Below are the additional information and schedules required by SRC Rule 68, as Amended (2011) that are relevant to the Group. This information is presented for purposes of filing with the SEC and is not required part of the basic financial statements.

Schedule A. Financial Assets The Group is not required to disclose the financial assets in equity securities as the total financial assets at fair value through profit and loss securities amounting to $149,825 do not constitute 5% or more of the total current assets of the group as at June 30, 2018.

Schedule B. Amounts Receivable from Directors, Officers, Employees, Related Parties and Principal Stockholders (Other than Related Parties) As of June 30, 2018 there are no amounts receivable from directors, officers, employees, related parties and principal stockholders that aggregates each to more than P =100,000 or 1% of total assets which-ever is less.

Schedule C. Amounts Receivable from/Payable to Related Parties which are Eliminated during the Consolidation of Financial Statements The following is the schedule of receivables from related parties, which are eliminated in the consolidated financial statements as at June 30, 2018:

Name and Designation of debtor PetroGreen Energy Corporation Maibarara Geothermal, Inc. PetroSolar NRDC*

Balance at beginning of period $– 802,995 – (45,458) $757,537

Additions $19,293 48,751 26,207 – $94,251

Amounts collected $18,469 96,014 7,796 – $122,279

Amounts written off $– – – – $–

Balance at Not Current end of period $– $824 – 755,732 – 84 – (42,408) $– $714,232

*Difference is due to foreign exchange differences.

Transactions with other related parties outside the Group.

Please refer to Note 19 of the Unaudited Consolidated Financial Statements.

Schedule D. Intangible Asset The Group has an insignificant amount of intangible assets as of June 30, 2018 amounting to $2.65 million. Bulk of the intangible asset pertains to the land rights acquisition of PetroSolar.

Schedule E. Long-term Debt Please refer to the Consolidated Audited Financial Statement, Note 16 for details of the loans.

- 71 Schedule F. Indebtedness to Related Parties (Long Term Loans from Related Companies) The Group has no outstanding long-term indebtedness to related parties as of June 30, 2018.

Schedule G. Guarantees of Securities of Other Issuers The Group does not have guarantees of securities of other issuers as of June 30, 2018.

Schedule H. Capital Stock

Title of issue Common Shares

Number of shares authorized 700,000,000

Number of shares issued and outstanding as shown under related balance sheet caption 568,711,842

Number of Shares reserved for options, warrants, conversion and other rights –

Number of shares held by related parties 367,024,036

Directors, Officers and Employees 5,769,751

Others 195,918,055

- 72 PETROENERGY RESOURCES CORPORATION AND SUBSIDIARIES SCHEDULE OF FINANCIAL SOUNDNESS INDICATORS AS OF JUNE 30, 2018 AND DECEMBER 31, 2017 Financial Soundness Indicators Below are the financial ratios that are relevant to the Group for first quarter ended June 30, 2018 and year ended December 31, 2017: Financial ratios Current ratio

Formula Total current assets Total current liabilities

Solvency ratio

2.04:1

0.09:1

1.21:1

0.08:1

0.08:1

0.11:1

1.05:1

1.43:1

1.37:1

2.05:1

2.43:1

2.37:1

2.66:1

2.96:1

2.02:1

0.0052

0.0095

0.0092

15.01

14.97

13.15

27.60%

32.89%

22.61%

0.87:1

1.08:1

1.09:1

3.69

4.87

2.82

Total Assets Total Stockholder's equity

Interest rate coverage ratios

Audited 31-Dec-17

Total Liabilities Total Stockholder's equity

Asset-to-Equity Ratio

Unaudited 30-Jun-17

After tax net profit + depletion and depreciation Long-term + short-term liabilities

Debt-to-Equity Ratio

Unaudited 30-Jun-18

Earnings before interest and taxes (EBIT) Interest expense

Earnings per share

Net income Attributed to Parent Company Weighted average no. of shares

Price Earnings Ratio

Closing price Earnings per share

Return on revenue

Net income Total revenue

Long term debt-to-equity ratio

Long term debt Equity

EBITDA to total interest paid

EBITDA* Total interest paid

*Earnings before interest, taxes, depreciation and amortization (EBITDA)

- 73 PETROENERGY RESOURCES CORPORATION REPORT ON SRO PROCEEDS June 30, 2018 On July 26, 2017, at the BOD meeting, the Parent Company was authorized to raise approximately one billion pesos (P =1,000,000,000) in capital, by offering and issuing to all eligible stockholders as of record date, the rights to subscribe up to all of the existing unissued common shares of the Parent Company (“ Stock Rights Offer”).

On September 29, 2017, the Parent Company filed its application for the listing and trading of rights shares with the PSE. On December 13, 2017, the PSE approved the application to list the Rights Shares.

The rights offer entitled eligible stockholders as of record date of January 12, 2018 to subscribe to one rights share for every 2.6 shares held at an offer price of P =4.80 per share.

The rights offer was undertaken in January 22 to 26, 2018. Following the close of the offer period, the Parent Company successfully completed the stock rights offer for 157,975,512 common shares with gross proceeds of P =758.28 million and was subsequently listed on the PSE on February 2, 2018.

The proceeds from the stock rights offer will be used for the development and expansion plans of the Group’s renewable energy projects and general corporate requirements.

The table below shows the gross and net proceeds; each expenditure item where the proceeds were used.

Proceeds from the Stock Rights Offering Gross Proceeds Less: Listing and Registration Fees Net Proceeds

PhP758,282,458 5,539,387 PhP752,743,071 2018 1st Quarter 2nd Quarter

Less: Expenditures A. Development and expansion of Renewable Energy Projects B. General and Corporate requirements Total Expenses Allocated to Proceeds

-

-

Total

-

20,005,886

16,768,390

36,774,276

20,005,886

16,768,390

36,774,276

Remaining proceeds as of June 30, 2018

In PhP

Remaining proceeds as of June 30, 2018

In USD

PhP715,968,795 US$13,377,093

- 74 -

PETROENERGY RESOURCES CORPORATION RECONCILIATION OF RETAINED EARNINGS AVAILABLE FOR DIVIDEND DECLARATION JUNE 30, 2018

30-Jun-18 Unappropriated Retained Earnings, Beginning

$(1,376,258)

Prior year adjustments: Unrealized foreign exchange gain - net Unrealized actuarial gains Unrealized MTM gain on FVPL

Unappropriated Retained Earnings, as adjusted - January 1, 2018

Net loss based on the face of unaudited financial statements Less: Non-actual/unrealized income net of tax Equity in net income of an associate/JV Unrealized foreign exchange (gain)/loss - net (except those attributable to cash and cash equivalents) Unrealized actuarial gain Fair value adjustment (marked-to-market gains) Fair value adjustment of investment properties resulting to gain Adjustment due to deviation from PFRS/GAAP - gain Other unrealized gains or adjustments to the retained earnings as a result of certain transactions accounted for under PFRS Add: Non-actual/unrealized losses net of tax Depreciation on revaluation increment Adjustment due to deviation from PFRS/GAAP - loss Loss on fair value adjustment of investment properties Movement in deferred tax assets Net loss actual/realized

Retained Earnings (Deficit)

(452,932) (5,779) (110,245)

(1,945,214)

(497,481) 92,200 19,136

-

(386,145)

$(2,331,359)

On July 11, 2018, the Parent Company, PetroEnergy Resources Corporation has reversed the Appropriated Retained Earnings amounting to $3,149,555 to Unappropriated Retained Earnings.

PETROENERGY RESOURCES CORPORATION AND SUBSIDIARIES MAP OF RELATIONSHIPS OF THE COMPANIES WITHIN THE GROUP Group Structure Below is a map showing the relationship between and among the Group and its subsidiaries as of June 30, 2018: PETROENERGY RESOURCES CORPORATION GROUP STRUCTURE PetroEnergy Resources Corporation 90% PetroGreen Energy Corporation 65 % Maibarara Geothermal, Inc.

*investment in a joint venture

56% PetroSolar Corporation

40% PetroWind Energy, Inc.*

SIGNATI]RES

Pursuant to the requirements of &e Securities Regulation Code, the registrant has duly caused this report to be signed on behalf of the undersigned thereunto duly authorized.

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Signature and

Signature and

Date

PETROENERGY RESOURCES CORPORATION

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Title :

Title

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- President

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Carlota R. VUV

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Asst. Vice President for Finance

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