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PENINSULA GASOLINE CORPORATION

Background of the Study

Joan Sobrevinas, Chairman and President of Peninsula Gasoline Corporate, called for a meeting
with Josie Capul, Vic Neri, and Alma Borlongan, VPs for Finance, Operations, and Human Resources,
respectively. He is concerned about the payment of maturing bonds to PGC’s bondholders and its tax
liability at P10M as ordered by the court of Appeals. He would also need new ideas to improve the
service quality of PGC to determine its competitiveness, particularly with the influx of new oil players in
the industry.

Peninsula Gasoline Corporation was registered in 1975 for the purpose of operating gas stations
along the South Super Highway situated between the boundaries of Muntinlupa City and San Pedro
Laguna. In 1980, the company was chosen by Caltron Philippines as the gas dealer of its oil products.
PGC started with one gas station and opened 10 more stations in 1981. Then, it acquired 20 units of
tanker trucks and engaged in the wholesale of petroleum products in different areas in Cavite and
nearby provinces.

The Oil Deregulation Act which was enacted in 1996 paved the way for PCG’s expansion. To
finance 30 more outlets in Luzon in 1997, the company issued 15-year indenture bonds for P900 million
at 95% (5%discount). Several creditors participated in the purchase of the said bonds.

During the first ten months after deregulation, PGC incurred losses amounting to about
P150,00.00 per day because of its inability to recover costs amid rising crude oil prices and peso
depreciation. The company’s rate of return in 1997 dropped to a negative 7.25%, way below the 12%
return limit set by the government.

During the meeting, Josie reported that the PGC’s capitalization relied heavily on its creditors.
Thus, she proposed PGC’s restructuring by splitting the company into two entities: Host Peninsula
Gasoline Corporation, which would manage the affairs, assets and liabilities; and Peninsula Pilipinas Inc.,
which would own most of the non-performing assets.

In addition, he suggested that the expansion plan would raise P1 B from stock offering and
generate employment. However, the timing and execution of the initial public offering will not be
feasible because of the news that the Philippine equities market officially entered a “bear market”.

He presented the significant financial data and audio findings. The net income of P975 million in
2007 was the highest over the last 3 years of operation; however, such improvement was reduced by
the sharp increase in income tax expense. Also, there was tax liability issue arose from alleged deficiency
taxes because of law regulation. The reduction of cost of goods sold was brought by lower duty paid
landed cost per liter of crude into cost; however, the refinery transportation expense increased because
of the higher cost being charged by the leading competitor. Aside from that, company has low net
income compared to competitors.

He found out that the rising cost of spare part has a tremendous effect on the pricing strategy of
th company. There was also over/under supply of spare parts due to unpredicted number of vehicles for
repairs. The repair and service boys are also sneaking extra fluids and lube oil to have a bigger tip. Lastly,
ten rooms and reception areas needed some repairs and renovation; and five service machines are
already worn-out.

In Neri’s report, he reported that there was a raised in fuel prices due to higher cost of crude oil
in the international market. Relatively, some sectors in the Philippines claim that the Oil Deregulation
Law and E-VAT law are also major factors for the steep local prices.

He added that there was a very strong demand from other big countries and thus, affects our
demands. However in some, there was a tight supplies which have been aggravated by the political
instability, resource mismanagement and weather and thus, affects our supply.

According to reports, future global demand for natural gas on the year 2030 will increase by 64%
or even more.

Lastly, Alma reported that the rank-and-file union has been pressing for salary increase due to
increasing of prices of basic needs. The inflation rose to 12.4% and thus, eroding peso’s purchasing
power. The union threatened to conduct strikes if their demand could not be address. She added that
the company’s biggest share in the budget share is salaries and wages at 50%. Followed by interest
expense at 30%. She came up with the idea of using Bata-bata system. Aside from that, she also tackled
about tax exemption and corporate governance.

1.0 TIME CONTEXT

2007

2.0 PERSPECTIVE/VIEWPOINT

Joan Sobrevinas

Chairman and President of Peninsula Gasoline Corporation

3.0 STATEMENT OF THE PROBLEM

Management inefficiency in handling the assets and liabilities on the operating results of the
business

4.0 STATEMENT OF OBJECTIVES


 To pay the Peninsula Gasoline Corporation maturity bonds and to settle the tax liabilities
for at least 30% within 3 days.
 To maximize the other revenue in order to generate additional income
 To minimize the expenses for at least 10 percent

5.0 AREAS OF CONSIDERATION

Strengths:
 The company was chosen by Caltron Philippines as the gas dealer.
 PCG started with one gas station and opened to more stations.
 It acquired 20 units of tanker trucks and engaged in the wholesale of petroleum
products in different areas in Cavite and nearby provinces.
 75% of the respondents are very much satisfied with the service provided by the
front liners.

Weaknesses:

 PGC incurred losses amounting to about P150,000 per day.


 The company’s rate of return in 1997 dropped to a negative 7.25%, way below the
12% return limit set by the government.
 PGC’s capitalization relied heavily on its creditors.
 The highest net income of P975 million in 2007 over the last three (3) years,
significantly reduced by the sharp increase in income tax expense.
 Customs officials ordered PGC to pay P10 million in deficiency taxes.
 The refinery transportation expense increase because of higher cost being charged
by the leading competitor.
 The comparative top 5 key performance indicators show that PGC has low net
income and high debt compare to its competitors.
 The rising cost of spare parts has tremendous effect on the pricing strategy.
 Due to peak season (June to July), the gas patrons have to wait for about 30 minutes
before they could attend to.
 The repair and service boys are sneaking extra fluids and lube oil to their favorite
customers, presumably to gain bigger tips.
 Ten repair rooms were found to have leaks while the reception areas needed some
repairs and renovation. Five service machines are already worn-out.
 Rank-and-file union has been pressing for salary increase. Company’s biggest share
in the budget is salaries and wages at 50%.

Opportunities:

 PCG’s restructuring by splitting the company into two entities: Host Peninsula
Gasoline Corporation (HPGC) and Peninsula Philippines Inc. (PPI)
 World’s demand for oil has increased sharply in recent years.
 In the light of uncontrollable oil price, the need to use the bio- fuel seems to be the
answer.
 25% commented that service could be improved if the company will adopt more
sophisticated electronic machines like computerized gasoline dispenser, change oil,
car wash, tune-up, alignment, and other related services.

Threats:

 The timing and execution of the initial public offering will not be feasible as of the
moment because of the news that the Philippine equities market officially entered
a “bear market”
 The situation is coupled with the continuing threat of destabilization of the PGMA
government.
 PGC was compelled to jack-up prices to P65 per liter starting August 15, 2008.
 Under the Deregulation Law, oil companies are mandated to adjust their monthly
prices.
 Tight supplies have been aggravated by political instability, resource
mismanagement and weather.
 The possibility of staging a nationwide transport strike.
 The inflation rose 12.4% in July.

6.0 ALTERNATIVE COURSE OF ACTION
 Use the asset reduction strategy to dispose the assets which are already worn-out.
 Consolidate with the partner firm to improve financial performance
 Use the asset reduction cum maximization-revenue boosting strategy to sell non-
performing asset and maximize the use of assets.

7.0 ANALYSIS OF ACA


Advantages Disadvantages
ACA 1: Asset  The Company will be able to  If they immediately
reduction strategy sell 5 machines which are sell the machine,
already worn-out. there’s a chance
 If the amount earned from that it can still
the sold machine, it will be repair and it will use
an additional amount for again.
PGC to pay their maturity
bonds and tax liabilities.

ACA 2:  The partner firm of PGC will  There is an


Consolidation help them to improve the imbalance in level
company’s financial of expertise
performance and provide investment or
economies of scale. assets brought into
the venture by the
different partners.
 Different cultures
and management
styles result in poor
integration and
cooperation.
ACA 3: Asset  They will able to sell their  The asset
Reduction cum non-performing assets. maximization will
Maximization-  They will able to maximize tend to take
Revenue Boosting the use of their assets. advantage by the
Strategy  The money earned from the maximum usage of
asset reduction and asset assets such as
equipment and
maximization, it will be an manpower of the
additional amount to pay company.
the maturity bonds and tax Therefore, this
liabilities of PGC. result to
 The asset maximization will malfunction or
make the company’s asset failure of company’s
more efficient and asset.
productive.

8.0 CONCLUSION

8.1 Decision Matrix

3- Very Satisfactory 2- Satisfactory 1- Less Satisfactory


Objective 1: To pay the Peninsula Gasoline Corporation maturity bonds and tax liabilities
for at least 30% within 3 days.

Criteria ACA 1 ACA 2 ACA 3


Availability of Funds 2 2 3
Increase Profit 2 2 3
Timeliness 3 3 3
Total 7 7 9

3- Very Satisfactory 2- Satisfactory 1- Less Satisfactory


Objective 2: To maximize the other revenue in order to generate additional income
Criteria ACA 1 ACA 2 ACA 3
Suitability 2 2 3
Convenience 2 1 2
Timeliness 3 3 3
Total 7 6 8

3- Very Satisfactory 2- Satisfactory 1- Less Satisfactory


Objective 3: To minimize the expenses for at least 10 percent

Criteria ACA 1 ACA 2 ACA 3


Cost-efficient 3 1 3
Sustainability 3 2 3
Timeliness 3 3 3
Total 9 6 9

Analysis

Criteria ACA 1 ACA 2 ACA 3


Criteria 1 7 7 9
Criteria 2 7 6 8
Criteria 3 9 6 9
Overall Total 23 19 26
8.2 ACA Selection

After a critical analyzation, we highly recommend the alternative course of action 3 which is the
asset reduction cum maximization is the best solution for this case. It can be a big help for the Peninsula
gasoline corporation to pay all their debts for consecutive years by selling their assets that can’t be of
use for their company and by using this strategy, it can help for the company to be more efficient and
effective on their day to day operation. This strategy will help the company to maximize the other
revenue by selling non-performing assets which will be recorded as an additional revenue of the
company. Also, maximization of the usage of assets can help the company to generate income. Lastly, it
can be a great help to minimize the expenses by dispatching the assets that could no longer of use which
usually added to the expenses.

9.0 ACTION PLAN

TIME FRAME ACTIVITIES PERSON/S RESPONSBLE Budget


1 day 1. Conduct a meeting to Joan Sobrevinas, BOD, VP
flat form and discuss the Finance and HR
chosen strategy
2 days 2. Know the approval of Joan Sobrevinas
the board of director and
Joan Sobrevinas itself
1 month 3. Check, analyze and VP Finance, VP Operation
segregate the non- and HR
performing assets of PGC
3 months 4. Look for potential Vic Neri
buyers of non-performing
assets 300, 000.00
2 weeks 5. Assessing of agreement Joan Sobrevinas
between the PGC and the
buyers of assets
1 week 6. Actual Selling Process Joan Sobrevinas
1 week 7. Planning on how to Joan Sobrevinas, VP
maximize assets Finance, VP Operation
and HR
6 months and 3 weeks 8. Leasing their VP Finance, VP Operation
equipment and buildings and HR
on weekends 24 hours
open of the PGC’s
Gasoline Station
2 days 9. Evaluation of the Joan Sobrevinas
outcome of the cost
profitability reduction and
asset maximization
2 days 10. Payment of their 10% Josie Capul
tax liabilities and maturity
bonds