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THE BANGCHAK PETROLEUM PUBLIC COMPANY LIMITED NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,1997 AND 1996 1. Summary of Significant Accounting Policies 1.1 The accounting transactions of the Company have been recorded on the accrual basis. 1.2 Allowance for Doubtful Accounts The allowance for doubtful accounts is set-up based on debts deemed uncollectable from debtors as judged from the current status of each account receivable. 1.3 Inventories Finished petroleum products are stated at the lower of cost or market, whichever is lower. The unit cost is determined by the weighted average of monthly production costs and the volume of each oil product and ex-refinery selling prices. Product inventories are priced on a first-in, first-out method. Crude oil is stated at the lower of cost or market, whichever is lower. The unit cost is determined by the weighted average cost and the volume of monthly purchased crude oil. Crude inventories are priced on a first-in, first-out method. 1.4 Materials and Supplies Materials and supplies are stated at cost determined by the moving average method. 1.5 Long-Term Investment 1.5.1 The investment equal to or over 20 % of the paid-up share capital is recorded on the equity method. 1.5.2 The investment less than 20 % of the paid-up share capital is recorded on the cost method. 1.6 Property, Plant and Equipment and Depreciation Property, plant, equipment and depreciation are carried at cost. Interest expenses and the foreign exchange gains or losses on loans, which are related to fixed assets, are booked to the cost of assets. Depreciation is computed by the straight-line method at rates varying from 5% to 20% per annum based upon the estimated useful life of the assets. The company revises the value of its fixed assets should serious fluctuation in the economy occur which has direct effect on the assets.The surplus value from the revaluation is recorded under account +Surplus on fixed assets revaluation" in Shareholders+ Equity, which is not available for dividend distribution. Depreciation on the increased value of the assets is deducted from the +Surplus on fixed assets revaluation". 1.7 Turn-Around Expenses Refinery turn-around expenses are amortized over the period of 18 months. 1.8 Deferred Charges Deferred charges related to the exchange of buildings between the company and Defence Energy Department,of the Ministry of Defence is amortized over a contracted term of 20 years. The prepaid land lease for service stations are amortized over the term of the land lease contract. Other deferred charges are amortized within five years. 1.9 Deferred Revenue Deferred revenue, the advance lease income of equipments and others, are amortized over the term of the lease contract. 1.10 Foreign Currencies 1.10.1 Foreign currency transactions are converted into Baht at the exchange rate on the date the transactions incurred . The outstanding balance as of the ending period is translated into Baht using the exchange rate as announced by the Bank of Thailand. Differences from foreign exchange translations are adjusted based on the following methods - Book the total amount as income or expense except for foreign exchange losses prior to year 1996, which are booked as deferred expense and amortized over the period of the loan . - On July 2,1997 the government announced the change in the foreign exchange system from the + Basket of Currencies " to + Managed Float ". The total foreign exchange losses resulting from this currency float was recorded in full by the company as +Extraordinary Items" in the Statement of Income. 1.10.2 Foreign exchange gains or losses translation and revaluation on long-term loan agreement which are related to construction projects are recorded as follows :- - In case of work in progress , gains or losses are booked as construction cost. - In case of completed project ,gains or losses are booked as income or expense. 1.10.3 Gains or losses resulting from the repayment of loans during the year are recorded as income or expense. 1.11 Pension Fund The Company has set up a pension fund reserve for employees who have completed five years service in the Company. Employees who are retiring in the current period and those due to retire in the next five years are fully reserved. A five percent reserve is made for those employees who do not fall under the mentioned categories at each year end. 1.12 Deferred Income Tax The company records the difference in the corporate income tax numbers, calculated on the basis of the company+s financial statement and that of the Revenue Code, as +Deferred Income Tax" in the Balance Sheet. Amortization of this account is made as the income or expense booked is realized or used for tax credit when permitted under the Revenue Code. 1.13 Interest Expense Interest on long term loans which is related to the construction of fixed assets are booked to the cost of work in progress until projects are completed. Interest costs incurring after the project is completed , are booked to expense. 1.14 Public Offering Expenses Public offering expenses which include registered capital fee, underwriting fee and all other expenses incurred in connection with the public offering, are treated as an adjustment against the premium on share capital. 1.15 Earnings Per Share Earnings per share is calculated from the net profit divided by the weighted average of issued and paid-up share capital. 2. Trade Accounts and Notes Receivable Million Baht 1997 1996 Trade Accounts and Notes Receivable 2,628.46 2,443.92 Less Allowance for Doubtful Account 53.62 - Trade Accounts and Notes Receivable - Net 2,574.84 2,443.92 3. Investments in Related Parties Total investments in related companies of Baht 197.83 million represents shares based on cost method of Baht 163.00 million and on equity method of Baht 34.83 million. Details of these shares, together with other investments of Baht 224.63 million, are provided hereunder :- 3.1 Investment in associated company and related parties Company Type of Business Relationship Paid-up Share Investment DIVIDEND capital Ratio Cost Method Equity Method (Million (%) Baht 1997 1996 1997 1996 1997 1996 Associated company The Bangchak Green Net Co.,Ltd. Retail Business and Service Share holding 1.00 49.00 - - 17.68 10.04 - - The Bangchak Green Line Co.,Ltd. Transportation and Service Share holding 0.10 49.00 - - 2.68 2.58 - - Mongkhol Chaipattana Co.,Ltd. Retail Business and Service Share holding 3.00 48.98 - - 1.58 1.47 - - The Bangchak Power Co.,Ltd. Power Generation and Share holding 40.00 39.99 - - 12.89 16.23 - - Steam Production Related party Fuel Pipeline Transportation Ltd. Transportation and Service Share holding 796.00 16.71 133.00 133.00 - - - - Auchan Chiang Mai Co.,Ltd. Wholesale, Retail Business Share holding 300.00 10.00 30.00 - - - - - Total 163.00 133.00 34.83 30.32 - - The Company realized earnings from The Bangchak Green Net ,The Bangchak Green Line, Mongkhol Chaipattana and The Bangchak Power in the amounts of Baht 7.64 million ,Baht 0.10 million , Baht 0.11 million and Baht (3.34) million ,respectively. These earnings are recorded under the equity method as stated above in note 1.5.1 3.2 Others Million Baht Million Baht 1997 1996 Tariff Prepayment : Fuel Pipeline Transportation Ltd. 223.63 223.63 Long Term Investment - Bond : The Petroleum Authority of Thailand 1.00 - 224.63 223.63 4. Property, Plant and Equipment - Net Million Baht Million Baht 1997 1996 Land 1,248.79 1,248.79 Buildings 441.17 408.58 Piers, Dykes, Fences 189.77 137.90 Machineries, equipments and refinery plants 18,283.70 9,981.35 Office equipments 788.84 556.42 Platinum Catalyst 204.49 127.70 Vehicles 364.71 207.79 Leasehold 938.05 900.92 Asset transferring fee 41.80 41.80 Construction Work in Progress 3,551.00 2,203.40 26,052.32 15,814.65 Less Accumulated Depreciation (7,254.97) ( 3,333.29) Total 18,797.35 12,481.36 The 1997 total depreciation is Baht 695.18 million, of which Baht 527.98 million is booked as cost of product and Baht 167.20 million as administrative expenses. A revaluation of the company +s refinery fixed assets was made due to the sharp decline in the economy. The assets, which covered boat piers, machineries and equipments were revalued by the Chem System Asia Limited using the Replacement Cost - Depreciated method. The reappraisal increased the total cost of the assets by Baht 8,394.14 million and, after deducting the accumulated depreciation of Baht 3,229.58 million, the net increase was Baht 5,164.56 million. This amount is presented in the Shareholders Equity as +Surplus on Fixed Assets Revaluation". 5. Bank overdrafts and loans from financial institutions Bank overdrafts and loans from financial institutions were Baht 5,206.74 million with interest rates varying from 6.09%- 16.32% per annum. Interest charges of Baht 103.09 million is recorded as cost of work in progress and Baht 934.45 million as expense. 6. Long - Term Loans Million Baht 1997 1996 Foreign loan International Bank for Reconstruction and Development 1,198.73 827.88 Syndicated Loan 4,862.60 3,079.20 Total Long term Loan 6,061.33 3,907.08 Less Current portion of long-term liabilities 5,266.83 218.11 Balance 794.50 3688.97 The loan interest rates vary from 6.29%- 6.65% per annum. The interest associated with the construction of fixed assets was Baht 73.11 million, of which Baht 7.89 million was recorded as cost of work in progress and Baht 65.22 million as expense. 7. Sales Million Baht 1997 1996 High-Speed Diesel 16,016.13 13,590.76 Fuel Oil 9,539.87 8,241.76 Regular Gasoline 2,724.77 2,423.80 Premium Gasoline 4,940.65 3,555.53 Other Products 5,162.61 4,066.42 Total 38,384.03 31,878.27 8. Losses from foreign exchange -Managed float As a result of the government+s July 2,1997 foreign exchange system change from the +Basket of Currencies" to +Managed Float ", the company incurred a total loss in foreign exchange of Baht 6,788.45 million .This amount was fully recorded as expense as stated in the Accounting Policy Item 1.10.1 9. Income tax credit The company recorded a net loss of Baht 3,784.50 million after taking into account the income tax credit for the year 1997, as in accordance with the provision of Section 65 Tris (12) of the Revenue Code . The income tax credit, which is presented with the Deferred Income Tax and Extraordinary Item" as per the Accounting Policy Items 1.12 ,caused the net loss for this accounting period to decrease by Baht 1,595.04 million and the net loss per share by Baht 3.05 . 10. Contingent Liabilities As of year-end 1997 the Company+s contingent liabilities consisted of : 10.1 Obligations Bank guarantees issued by the banks on behalf of the Company at the amount of Baht 192.39 million. 10.2 Allegation The Ministry of Finance(the first defendant) was alleged in a land right transgression case (The claim for damages,which was filed with the civil court, amounts to Baht 1,055 million). The land in question ,which is located at the pier of the Refinery,was leased from the Ministry of Finance. The Company,as the lessee of land owned by the Ministry of Finance,was alleged as the fifth defendant along with the Ministry of Finance. According to the Company+s Legal Office opinion,regardless as to the outcome of the case, the Company would not be liable for any losses associated with the above mentioned claim as it is protected under a lease agreement. The case is being appealed with the civil court. . 11. Reclassification of account Certain accounts in financial statement for the year ended December 31, 1997 and 1996 were reclassified under the Ministerial Regulation No. 7 (1996) pursuant to the Public Limited Company Act (1992) ,which is enforced for the financial statement commencing January 1,1997 onwards. The mentioned reclassification caused the net profit in 1996 ,reported on February 13,1997 ,to decrease by Baht 0.87 million.