Audit Highlights Memorandum for the Year Ended 31 December 2012 August 2013 AUDIT Volta River Authority.

Audit Highlights Memorandum for the Year Ended 31 December 2012

August 2013

AUDIT

Volta River Authority

2© 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved.

Key FindingsPresentation to Stakeholders Meeting

Area Summary observations Analysis

Quality of earnings

Financial statement analysis

Compared to the previous year, the company’s financial results and performance showed a significant downturn. This finding was reached based on our analysis of the following:

■ Statement of financial position

■ Statement of comprehensive income

■ Ratio Analysis

■ Financial statement analysis

Page 4

Page 7

Page 9

Page 10 - 16

Other information

Disclosures Subsidiaries Page 19 - 21

Governance

Audit Issues and Control observations

Controls tested were generally found to be operating satisfactorily and we noted a positive approach to addressing issues previously reported

Page 23

Disclosures Other risk assessment Page 26 - 27

Quality of Earnings

Our perspective on the underlying performance of the Authority and the key accounting judgments made


Quality of EarningsUnderlying Performance

Key developments during the year

• Average inflation rates increased from 8.7% in January 2012 to 9.3% by the end of December 2012.

• The cedi also depreciated by 18% against the US Dollar during the year.

• Bank of Ghana increased the monetary policy rate from 12.5% in January 2012 to 15% by the end of December 2012.

• Crude oil prices decreased from USD 122 per barrel in January 2012 to USD 111 per barrel by the end of December 2012.

Quality of Earnings



Quality of Earnings

STATEMENTS OF COMPREHENSIVE INCOME (GROUP) FOR THE YEAR ENDED 31 DECEMBER 2012

GH¢'000 GH¢'000 % Change2012 2011

Revenue 1,749,385 1,110,560 58%Cost of Sales (1,656,583) (806,679) 105%

92,802 303,881

Other Operating Income 63,777 48,537 31%Administrative Expenses (238,796) (211,970) 13%

(82,217) 140,448

Financial Income 35,617 2,371 1402%Financial Expenses (50,389) (37,745) 33%Exchange Gain/(Loss) 21,231 (7,747) -374%Exchange Fluctuation Gain/(Loss) on Foreign Debts (14,388) (14,677) -2%

Profit/(loss) for the year after taxation (90,146) 82,650 -209%Taxation - (8)Profit/(loss) for the year after taxation (90,146) 82,642 -209%

Other comprehensive Income:

Capital surplus 389,500 714,590 -45%Revaluation of Investment 49,342 42,938 15%

258,550 757,528



Revenue

Gross revenue for the group increased by 58% (i.e. 2012: GHC1,749m vs. 2011: GHC1,110m).The increase was mainly the result of increase in volume of electricity sold of 12% and an upward adjustment in tariff of the deregulated mining companies from US cents 13/kWh in 2011 to US cents15.8/kWh in 2012. Also, there was government subsidy of GHC 360m in the current year.

Revenue Growth

Quality of Earnings

GH

¢ t

ho

usa

nd

2011

Incr

ease in

volu

me

Tariff a

djust

ment (

Min

es)

Gove

rnm

ent subsid

y2012

-

400,000

800,000

1,200,000

1,600,000

2,000,000

Revenue



Power Sales

Quality of Earnings

ECGM

ines

North

ern

Electri

city

Dept (

NED)

Comm

unau

té E

lectri

que

Du Ben

in

Other

s -

200,000

400,000

600,000 591,511

397,706

150,771 101,140 147,473

493,464

265,275 123,978

82,794 145,049

20122011

GH

¢ t

ho

usa

nd

Revenue BreakdownPower sales to Electricity Company of Ghana increased by 19% over the period from GHC 493m in 2011 to GHC 591m in 2012 as a result of the 12% increase in the volume of electricity sold.Also power sales to the mining companies increased by 49% from GHC 265.2m in 2011 to GHC 397.7m in 2012 as a result of the upward tariff adjustment in 2012 and a 19% depreciation of the Ghana cedi against the US dollars in 2012.


2011 Profit Crude Oil purchase

Power purchase

(Loss) 2012

-100000

-50000

0

50000

100000

150000

200000Operating Profit / (Loss)

Operating Profit / (Loss)


Statement of comprehensive income analysis

Quality of EarningsG

H¢

th

ou

san

d

140,448

90,146



Statement of comprehensive income analysis

Quality of Earnings

Operating Profit / (Loss)

Operating loss compared to prior year profit was mainly caused by a significant increase of 105% recorded in cost of sales from GHC 806.6m in 2011 to GHC 1,656m in 2012.

Analysing by budget centre, the increase of 130% and 132% in cost of thermal power and purchase of electricity respectively accounted for the significant increase in cost of sales. The cost of generating power from thermal increased due to increase in the use of crude which is relatively expensive to gas. Following the challenges with the West African Gas Pipeline in July 2012, the crude used by VRA to power its thermal plants shot up from 1.6 m barrels in 2011 to 5.2m barrels in 2012 resulting in the significant overall increase in thermal power generating cost despite the marginal decrease in crude prices in 2012.

There was a similar increase in the purchase of electricity from GHC 273m in 2011 to GHC 634m in 2012 representing an increase of 132%. The increase in the power purchase is as a result of increase in crude component of power purchase bills from Takoradi International Company.



Ratios 2012 2011 Commentary

SolvencyCurrent ratio (Current assets/ Current liabilities)

1.92 2.52Current ratio deteriorated over the prior year’ s due to the significant increase in short term borrowings and trade payable and decrease in inventory in 2012.

Profitability

Gross Profit Margin (Gross profit/ Revenue)

5% 27%The gross profit margin decreased as a result of a significant increase in cost of sales in 2012.

Net Profit Margin (Net profit/ Revenue)

-5% 7%The increase in cost of sales and administrative expenses resulted in a net loss for the period.

Return on Assets (Profit before Tax / Total assets)

-6% 8%Operational losses and increasing assets caused the deterioration in this ratio

Ratio Analysis

Quality of Earnings



Quality of Earnings

STATEMENTS OF FINANCIAL POSITION (GROUP) AT 31 DECEMBER 2012

GH¢'000 GH¢'000 % Change2012 2011

Non Current Assets

Property, Plant and Equipment 3,386,105 2,956,818 15%Long Term Investments 371,467 279,276 33%Trade and other Receivables 14,874 10,195 46%

3,772,446 3,246,289

Current Assets

Inventory 136,312 239,309 -43%Trade and other Receivables 1,206,730 661,419 82%Taxation 357 -

Short Term Investments 26,333 25,313 4%Cash and Bank Balances 210,891 160,997 31%

1,580,623 1,087,038

Current Liabilities

Trade and other Payables 366,394 333,442 10%Taxation - 21

Borrowings 455,239 98,289 363%821,633 431,752

Net Current Assets 758,990.00 655,286 16%Total Assets less Current liabilities 4,531,436.00 3,901,575 16%Non-Current Liabilities

Other Payables 81,811 25,013 227%Long term Borrowings 484,303 259,936 86%

566,114 284,949

Net Assets 3,965,322 3,616,626 10%

Financed by:

Investment by Republic of Ghana 495,449 495,449 0%Retained Earnings Account 459,629 389,121 18%Capital Surplus 2,975,893 2,703,284 10%Debt Contingency Fund Reserve 34,351 28,772 19%

3,965,322 3,616,626



Statement of financial position analysis

Quality of Earnings

Pro

pe

rty,

Pla

n...

Lo

ng

Te

rm In

v...

Inve

nto

ry

Tra

de

an

d o

the

...

Sh

ort

Te

rm In

...

Ca

sh a

nd

Ba

n...

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

3,386,105

371,467 136,312

1,221,604

26,333 210,891

2,956,818

279,276 239,309

671,614

25,313 160,997

2012

2011

33%

-43%

15%

31%

4%

82%

GH

¢

Th

ou

san

d



Total Assets:Total assets increased by 24% in 2012 compared to 2011 and comprised :


Quality of Earnings

Asset Category % of total asset s 2012 % of total assets 2011

Property, plant and equipment

63 68

Long term investments 6 6

Inventory 3 6

Trade and other receivables

23 15

Short term investments 1 1

Cash and bank balances 4 4




Quality of Earnings

Total Assets

Total assets increased by 22% from GHC4,155.7 million in 2011 to GHC5,089

million in 2012

Property, plant and equipment(PPE) which makes up 63% of total assets increased

by GHC 429.2m in 2012. The increase was mainly due to the revaluation surplus

amounting to GHC 389.5m of the Authority’s assets and additions of GHC178.1m

to PPE during the year under review. Major additions in 2012 included GHC 4.6m

for motor vehicles, generation assets of GHC 43.5m and power distribution assets

of GHC 114m.

The long term investments increased by 33% over the period as a result of the

increase in the debt contingency fund investment in 2012 by GHC 5.6m, interest on

investment from West African Gas Pipeline through TAPCO of GHC 35m and a

revaluation surplus of GHC 49m.




Quality of Earnings

Trade and other receivables increased significantly by 82% in 2012 compared to

2011. This increase was due to a significant increase in power sales receivables

from GHC 471.4m in 2011 to GHC 918m in 2012 representing a percentage

increase of 94%. Significant balances owed were that of the Electricity Company of

Ghana and Ministries, Departments and Agencies of the Government of Ghana

amounting to GHC 277.6m and GHC 163.5m respectively.

Also, other receivables from Tema Oil Refinery(TOR) increased from GHC 27m in

2011 to GHC 123m in 2012 as a result of TOR’s usage of VRA’s crude.

Inventory reduced by 43% in 2012 compared to 2011 due to reduction in crude

stock held at the year end from GHC 216.8m in 2011 to GHC 125.3m in 2012. Also,

spares and consumable inventory reduced from GHC 21.7m in 2011 to GHC 10.5m

in 2012 due mainly to a write off of unsupported inventory in 2012.

Cash and bank balances increased by 31%in 2012 compared to 2011.




Quality of Earnings

Tra

de

an

d o

th...

Sh

ort

term

bo

r...

Lo

ng

term

bo

r...

-

100,000

200,000

300,000

400,000

500,000

600,000

448,205 455,239 484,303

358,455

98,289

259,936

2012

2011

86% 368%

23%

GH

¢ t

ho

usa

nd



Total Liabilities:

Total liabilities increased by 94% in 2012 compared to 2011 and comprised:


Quality of Earnings

Asset Category % of total liabilities 2012 % of total liabilities 2011

Trade and other payables 32 50

Short term borrowings 33 14

Long term borrowings 35 36



Quality of Earnings

Total Liabilities

Total liabilities increased by 94%

The 94% increase in liabilities was mainly driven by an increase in short term borrowings of 363% from GHC 98m in 2011 to GHC 454m in 2012. The high operating cost coupled with increasing receivables meant that the Authority had to rely on short term loans from its bankers and suppliers (Standard Chartered Bank, Ecobank, Unibank, Merchant Bank and Sahara Energy) for funds to finance its crude imports.

Long term loans also increased by 86% due to a GHC 188.5m three year loan obtained from Ecobank Ghana Limited in 2012 and drawdown on other long term facilities used to finance capital projects during the period amounting to GHC 38.6m.

Trade and other payables increased by 25% over the period due to outstanding invoices on crude imports at the end of the year.


Northern Electricity Distribution Company Limited

Northern Electricity Distribution Company Limited is incorporated as a subsidiary of VRA. Currently, it has been treated as a department whose results are combined with the mainstream. However, NEDCo though a limited liability company has not prepared separate financial statements from its inception as a company(1997) to date.

NED serves as a distribution unit of the authority serving the Northern part of the country.

During the year NED made a total revenue of GHC151.8m (2011: GHC124.8m) as against operational and general expenses of GHC214.3m (2011:GHC170m) resulting in operating loss of GHC62.5m (2011: GHC45.2m).

As at 31 December 2012, the total assets of the company amounted to GHC705.4m (2011: GHC585.5m) with total liabilities of GHC248.4m (2011: GHC182m).


Subsidiaries

VRA has four subsidiaries, i.e. TAPCo, VLTC, Akosombo Hotels Limited and Kpong farms. These companies are wholly owned by the Authority. These Subsidiaries have been consolidated except Kpong farms which is a dormant company.

Two of these subsidiaries were audited by other auditors. TAPCo was, however, audited by KPMG.

Below are highlights of the financials of the subsidiaries:

Income statement caption

VLTC AHL TAPCO

2012GHS’000

2011GHS’000

2012GHS’000

2011GHS’000

2012GHS’000

2011GHS’000

Revenue 9,861 9,122 3,729 3,418 - -

Operating cost (14,201) (6,279) (3,429) (3,306) (12) (10)

Operating (loss)/profit

(4,340) 2,843 300 112 (12) (10)

Other Income/expense

(31) (51) - - 86,604 43,676

Tax expenses/income

- - (8) (8) - -


Subsidiaries – cont’d

Financial Position Caption VLTC AHL TAPCO

2012GHS’000

2011GHS’000

2012GHS’000

2011GHS’000

2012GHS’000

2011GHS’000

Property, plant and equipment 77,477 81,236 6,286 3,488 - -

Investments (short/long term) - - 955 239 337,116 250,113

Inventory 842 564 189 194 - -

Accounts receivable 3,080 2,003 291 244 12,198 12,402

Cash and Cash equivalent 904 196 831 758

10,766 9,049

Taxation 402 235 104 93 (345) (345)

Accounts payable (7,476) (4,335) (3,557) (2,694) 6,136 4,222

Borrowings (1,241) (1,200) - (80) - -

Stated capital (1,123) (1,123) (542) (542)

(1) (1)

Retained earnings 1,618 1,598 1,265 1,594 (184,453) (97,861)

Capital surplus

(74,317) 78,765) (5,821) (3,295) - -


Subsidiaries – cont’d

TAPCO

The following outstanding issues raised during the prior year audit of TAPCO had still not been resolved.

• Shares : We require the number of issued shares for incorporation into the financial statements. This is a requirement of the Companies Act, 1963 (Act 179)

• Explanation for tax provision of GHC 0.4m on dividend income

• Taxation on revenue and other income : No tax provision has been made on revenue and other income

• Supporting documentation for the increase in investment in the West African Gas Pipeline Company Limited were not obtained.

Governance

Audit Issues and Controls findings including a summary of our management letter points


Systems and Controls Analysis of Current and Prior Year Control Deficiencies

Governance

Definitions of control deficiencies

A control deficiency exists when the design or operation of a control does not prevent or detect misstatements on a timely basis.

A material weakness is a control deficiency that results in more than a remote likelihood that a material misstatement would not be prevented or detected in the financial statements.

A significant deficiency is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a misstatement that is more than inconsequential would not be prevented or detected.

No.

of

Issu

es

Type of deficiency

Key

Mat

erial

201

1

Mat

erial

201

2

Signific

ant 2

011

Signific

ant 2

012

Oth

er 2

011

Oth

er 2

012

02468

1012141618

2011 No action taken2011 Resolved2012 New Issues

Other Information from the Audit

Areas relating to the general conduct of the audit


Summary of Audit Status of the Audit

Significant risks:

•Fraudulent revenue recognition

•Unrecorded liabilities

•Incorrect capitalisation of capital work in progress

Main Risk areas Our deliverables

Fraudulent revenue recognition Unrecorded liabilities Incorrect capitalisation of capital

work in progress

Audit opinion on statutory financial statements

Management report Report to audit committee

Adding value Status of the audit

Highlighting areas for improvement in the management letter

Audit complete. Clean audit opinion issued.

Audit work at a glance

Other Information


Other risk assessmentDisclosures

•The company generally complied with relevant laws and regulations relating to financial reporting.

Going concern

No events or conditions were highlighted that cast doubt on the company’s ability to continue operations as a going concern .However, the current year’s financial performance is an issue of concern.

Fraud findings

As part of our responsibilities as auditors, we are required to make inquiries of those charged with governance, as to their knowledge of known or suspected incidence of fraud.

We held various discussions with management with respect to fraud. No fraud related issues were identified.

Laws and regulationsThe Authority generally complied with relevant laws and regulations relating to financial reporting.

Other information


Reliance on the Work of Others

Internal Audit

We considered work done by the Authority’s internal audit unit to determine the extent to which we could place reliance on their work in the conduct of our audit. Our interaction included reviewing results of their work and interpreting the extent to which that mitigated our overall audit risk.Due to differences in objectives and the scope of work of the unit, which focused mainly on compliance with operating procedures and policies, limited reliance was placed on their work in our audit of the financial statements.

Information technology (IT)

We used ITA specialists to ascertain the operating effectiveness of IT controls. Broad areas covered under these tests included the following:

- Access to programmes and data

- Programme changes

- Programme development

- Computer operations (including data back ups and business continuity planning).

Other Information


Appreciation

We wish to place on record our appreciation of the courtesies and co-operation extended to our representatives by Management, Staff and the Board of the Authority during the course of the audit.

Thank you.

© 2013 KPMG a partnership registered under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name, logo and ‘cutting through complexity’ are registered trademarks or trademarks of KPMG International Cooperative.

Audit Highlights Memorandum for the Year Ended 31 December 2012 August 2013 AUDIT Volta River Authority.

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