Anila Khwaja(0836136) - Japan Power

[2010]

Submitted By

Anila Khwaja [0836136]

Submitted To

Sir Faisal Abdullah

Financial Analysis Report

TABLE OF CONTENT1 Introduction...............................................................................................................3

2 Environment Analysis.................................................................................................4

2.1 Industry Analysis..................................................................................................4

2.1.1 History of Energy Sector...............................................................................4

2.1.2 Energy Overview..........................................................................................5

2.1.3 Sector Organization......................................................................................6

2.1.4 Privatization.................................................................................................6

2.1.5 Electricity......................................................................................................7

2.2 Market Analysis...................................................................................................7

3 Company Analysis......................................................................................................8

3.1 Principal Activities...............................................................................................8

3.2 Major Strategic Issues:........................................................................................9

3.3 Plant Performance.............................................................................................10

3.4 Financial Performance.......................................................................................10

4 Ratio Analysis...........................................................................................................11

5 Vertical Analysis of Balance Sheet............................................................................14

6 Horizontal Analysis of Balance Sheet.......................................................................18

7 Vertical Analysis of Income Statement.....................................................................20

8 Horizontal Analysis of Income Statement................................................................22

9 Interpretation of Notes............................................................................................24

10 Conclusion................................................................................................................29

[Financial Analysis of Japan Power Generation Limited] – SZABIST – Anila Khwaja

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1 Introduction

Japan Power Generation Limited is a public limited company incorporated on September 29, 1994. The principal business of the company is to generate and supply electric power to WAPDA. The company obtained the Letter of Interest from the Government of Pakistan (GOP) on March 14, 1994 in which, GOP showed its interest to attract more independent power stations in order to meet the future energy needs.

Continuing to this, the company gained Letter of Support on July 27, 1994 allowing the Company to operate anywhere in the country under the conditions of Implementation Agreement and admitting to provide full support where legally it is possible. It obtained the Certificate of Commencement of Business on February 14, 1995. At this time, it was required legally to achieve Financial Close within 24 months. The company achieved the Financial Close on January 24, 1996. The ground breaking ceremony was held on Sept. 26, 1995 and the company commenced its commercial operations on March 14, 2000.

Power plant is located at Jia Bagga Railway Station, Raiwind Road, District Lahore-Pakistan, has an installed capacity of 135 MW, comprise of 24 diesel power generator sets of 5.65 MW each and are designed for operation using heavy furnace oil (HFO) while startup and shutdown operations are on high speed diesel oil (HSD).


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2 Environment Analysis

2.1 Industry Analysis

2.1.1 History of Energy Sector

Pakistan's economy has recovered from years of sluggishness, caused primarily to droughts, with growth experienced in the agriculture, industry and service sectors. In fiscal year (FY) 2004/2005 (ending in June), Pakistan achieved gross domestic product (GDP) growth of 8.4 percent and in 2005/2006 the country had GDP growth of 6.6 percent. High inflation (9.1 percent) in 2004/2005 was attributed to escalating oil prices,


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higher housing rents and food item shortages. In an effort to decrease inflation, the central bank of Pakistan announced that it would raise interest rates.

The strategy worked, with inflation decreasing to 7.6 percent by the end of FY 2005/2006. The International Monetary Fund (IMF), and the World Bank, both major donor organizations to Pakistan, have acknowledged the favorable performance and progress in Pakistan’s structural reforms, but have stressed even greater reform in the public institutions and the public energy sector where progress has been slow. In 2004, the IMF approved a fresh loan of nearly $250 million as part of its overall $1.5 billion aid package to Pakistan. In 2005, the United States began the first installments of a $3 billion aid package, which will continue through 2010. In 2006, the World Bank approved loans of $185 million for various reform and infrastructure projects, in addition to the nearly $850 million loaned to the country in 2005.

2.1.2 Energy Overview

In recent years, the combination of rising oil consumption and flat oil production in Pakistan has led to rising oil imports from Middle East exporters. In addition, the lack of refining capacity leaves Pakistan heavily dependent on petroleum product imports. Natural gas accounts for the largest share of Pakistan’s energy use, amounting to about 50 percent of total energy consumption.

Pakistan currently consumes all of its domestic natural gas production, but without higher production Pakistan will need to become a natural gas importer. As a result, Pakistan is exploring several pipeline and LNG import options to meet the expected growth in natural gas demand. Pakistan’s electricity demand is rising rapidly. According to Pakistani government estimates, generating capacity needs to grow by 50 percent by 2010 in order to meet expected demand.


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2.1.3 Sector Organization

Pakistan’s Ministry of Petroleum and Natural Resources regulates the country’s oil sector. The Ministry grants oil concessions by open tender and by private negotiation. To encourage oil sector investment, the Ministry has offered various tax and royalty payment incentives to oil companies. Pakistan’s three largest national oil companies (NOCs), include the Oil and Gas Development Corporation Limited (OGDCL), Pakistan Petroleum Limited (PPL) and Pakistan State Oil (PSO). All three operate under joint ventures and partnerships with various international oil companies (IOCs) and other domestic firms. Major IOCs operating in Pakistan include BP (UK), Eni (Italy), OMV (Austria), Orient Petroleum Inc. (OPI, Canada), Petronas (Malaysia) and Tullow (Ireland).

2.1.4 Privatization

In response to conditions laid down by lenders, such as the IMF and the World Bank, Pakistan continues to strive for privatization of its state-owned companies. For instance, the government has on offer a 51 percent stake in PPL, as well as a 54 percent stake in PSO. PPL owns the Sui fields in Balochistan, as well as exploration interests in 22 blocks, while PSO holds a majority share in the domestic diesel fuel market with more than 3,800 retail outlets. In November 2006, Pakistan plans to have a share issue from OGDCL for the equivalent of 15 percent of the NOCs capitalization. Five percent of the company was previously divested in November 2003 in an initial public offering (IPO). Pakistan hopes to reap significant revenues from these privatizations over the next several years.


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2.1.5 Electricity

Pakistan had 20.4 gigawatts (GW) of installed electric generating capacity in 2004. Conventional thermal plants using oil, natural gas, and coal account for about 66 percent of Pakistan’s capacity, with hydroelectricity making up 32 percent and nuclear 2 percent. The Pakistani government estimates that by 2010, Pakistan will have to increase its generating capacity by more than 50 percent to meet increasing demand. In 2004, Pakistan generated 80.2 billion kilowatthours (Bkwh) of electricity while consuming 74.6 Bkwh. Pakistan's total power generating capacity has increased rapidly in recent years, due largely to foreign investment, leading to a partial alleviation of the power shortages Pakistan often faces in peak seasons. However, much of Pakistan’s rural areas do not have access to electric power and about half the population is not connected to the national grid. Rotating blackouts ("load shedding") are also necessary in some areas. In addition, transmission losses are about 30 percent, due to poor quality infrastructure and a significant amount of power theft.

Pakistan could see more increase in power shortages by 2nd Quarter 2010 unless actions are taken to increase electricity generation and reduce transmission losses.

2.2 Market AnalysisHigh levels of toxic emissions and a lack of energy efficiency standards are two of the environmental issues facing Pakistan. In Pakistani cities, widespread consumption of low-quality fuel, combined with a dramatic expansion in the number of vehicles on the roads, has led to significant air pollution problems. Lead and carbon emissions are major air pollutants in urban centers such as Karachi, Lahore, and Islamabad. A lack of energy efficiency standards has contributed to Pakistan’s high carbon dioxide intensity. One hopeful trend is that Pakistan has increasingly been using compressed natural gas (CNG) to fuel vehicles. Currently, government vehicles and taxis that have been using liquefied petroleum gas (LPG) are being converted to CNG.


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3 Company Analysis

Briefly company’s features are as follows:

Company Japan Power Generation Limited

Installed Capacity 135.6 MW

Dependable Capacity 107 MW

Location Off Raiwind Road, Near Jia Bagga Railway Station

Fuel Heavy Furnace Oil (HFO)

Technology Diesel Engines

Plant Configuration 24 Oil Fired Units of 5.65 MW Each

Plant Manufacture Mitsubishi Heavy Industries (Japan)

Plant Operation & Maintenance Siemens Pakistan Engineering Co. Ltd.

Power Purchaser WAPDA

Life of the Complex 30 Years

3.1 Principal ActivitiesThe principal activity of the Company is to own, operate and maintain an oil-fired power station with a net contracted capacity of 120.5 MW (gross capacity of 135 MW).


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3.2 Major Strategic Issues:Company is in extreme financial distress due to the ongoing dispute with WAPDA, whereby WAPDA has completely stopped payments from January 2009 onwards. This is a departure from WAPDA's obligations under the PPA. Since the country is in dire need of electricity, the management has started numerous initiatives with WAPDA to re-start operations of the plant. In this connection, the WAPDA / PEPCO / Financial Institutions along with the Company are working on various proposals and plans to resume the operations of Company.

According to the last year's annual report, the Company was contingently liable for the liquidated damages claimed by WAPDA for the period from July 1, 2001 to June 30, 2009, to the tune of Rs. 1,598.215 million (including 505.654 million billed during the year under report), out of which WAPDA has already arbitrarily deducted an amount of Rs. 458.255 million from Company's capacity invoices. The Company disputed the liquidated damages and arbitrary deduction by WAPDA from the Company's capacity invoices.

WAPDA had disputed payments amounting to Rs. 384.032 million, relating to indexation of nonescalable components of capacity purchase price (CPP) already paid to the Company from March 14, 2004 to March 13, 2006 and disputed further amount of Rs. 506.290 million against the Company's CPP invoices for the period from March 14, 2006 to June 30, 2009. The total amount disputed by WAPDA comes to Rs. 890.322 million, against which WAPDA has arbitrarily withheld a total amount of Rs. 542.109 million from the Company's CPP invoices up-till June 30, 2009.

These disputes were referred to a mutually agreed Expert, as per the dispute resolution mechanism provided in the Power Purchase Agreement (the “PPA”), who gave his recommendations that fully support the Company's position. Both Parties initialed a settlement based on the Expert's recommendations but with certain concessions given to WAPDA. WAPDA, however, failed to sign the said settlement. Therefore, neither the recommendations of the Expert are implemented nor the settlement was implemented by WAPDA. WAPDA is, therefore, in breach of the terms of the PPA. Under the circumstances, the Company is not able to continue its operations and hence has shut down its plant in last week of December 2008.

In January 2009, the Company has referred the matter to the International Court of Arbitration under the International Chamber of Commerce's (the “ICC”) Rules as per the provisions of the PPA for the implementation of the Expert's recommendations. The claimed amount as per recommendations of the Expert is Rs. 3.6 billion (approximately). After adjusting the Company's liabilities to WAPDA, net expected cash inflow could be


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Rs. 2.5 billion (approximately). The management of the Company is optimistic about the outcome of the arbitration. The arbitration process is expected to be completed in another year's time.

3.3 Plant PerformanceDuring the current financial year, the plant usage decreased to 256,870MWh as compared to 506,924MWh in the previous year, as the plant remained shutdown from last week of December 2008 due to default of WAPDA as per the provisions of the PPA.

3.4 Financial PerformanceThe sales revenue for the current year decreased to Rs. 3.51 billion as compared to Rs. 4.50 billion last year due to shutdown of plant from last week of December 2008. However, the gross profit margin has slightly increased as compared to last year due to the reason that operational losses of fuel consumption reduced as the plant remained shutdown in last six months of the current year. The operating Expenses increased as compared to last year because of the payments to lawyers and International Chamber of Commerce's (the “ICC”) fee for arbitration proceedings. The increase in financial charges as compared to last year is mainly due to increase in applicable KIBOR rates. Further, last year's other income included non-recurring adjustments. For the above mentioned reasons, the net loss after taxation increased to Rs. 592.51 million as compared to Rs. 162.67 million in the last year


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4 Ratio Analysis

Ratio analysis of Japan power is as follows:

2005 2006 2007 2008 2009

CA 520,298.00 1,130,351.00

1,247,371.00

1,577,505.00

1,112,711.00

CL 666,542.00 1,100,470.00

1,248,390.00

1,624,257.00

1,905,488.00

F.A 5,713,498.00

6,007,310.00

5,749,999.00

5,538,638.00

5,316,919.00

T.A 6,233,796.00

7,137,661.00

6,997,370.00

7,116,143.00

6,429,630.00

C.E 337,080.00 212,690.00 16,789.00 (40,958.00) (612,732.00)

Long Term Debt

5,230,174.00

5,281,584.00

5,210,009.00

5,031,396.00

4,656,121.00

Sales 2,194,817.00

3,176,384.00

3,614,898.00

4,499,144.00

3,505,758.00

G.P 376,035.00 361,479.00 278,413.00 285,075.00 224,583.00

N.P (Loss) (89,244.00) (268,578.00) (216,635.00)

(162,670.00)

(592,509.00)

EPS (0.67) (2.02) (1.57) (1.10) (3.86)


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EBIT (89,866.00) (268,252.00)

(216,444.00)

(162,114.00)

(592,065.00)


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2005 2006 2007 2008 2009

Liquidity Ratios

Current Ratio 0.78 1.03 1.00 0.97 0.58

Asset Management Ratios

Fixed Asset Turnover 0.38 0.53 0.63 0.81 0.66

Total Asset Turnover 0.35 0.45 0.52 0.63 0.55

Debt Management Ratios

Debt Ratio 94.59% 89.41% 92.30% 93.53% 102.05%

Profitability Ratios

Net Profit Margin -4.07% -8.46% -5.99% -3.62% -16.90%

ROE -26.48% -126.28%

-1290.34%

397.16%

96.70%

ROA -1.56% -3.76% -3.10% -2.29% -9.22%


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Current Assets to Total Assets

8.35% 15.84% 17.83% 22.17% 17.31%

Fixed Assets to Total Assets 91.65% 84.16% 82.17% 77.83% 82.69%


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5 Vertical Analysis of Balance Sheet

Particulars 2008 2009

Fixed Assets 5,538,638.00

5,316,919.00

Stores and Spares 41,419.00

37,633.00

Stock In Trade 162,316.00 4,311.00

Trade Debts 865,226.00

680,994.00

Advances, Deposits, Prepayments and other Receivables

446,814.00

194,262.00

Tax Refund due from government 71,452.00

69,492.00

Cash and Bank Balances 20,898.00

24,846.00

Current Assets 1,577,505.00

1,112,711.00

Total Asset 7,116,143.00

6,429,630.00



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Fixed Assets 77.83% 82.69%

Stores and Spares 0.58% 0.59%

Stock In Trade 2.28% 0.07%

Trade Debts 12.16% 10.59%

Advances, Deposits, Prepayments and other Receivables 6.28% 3.02%

Tax Refund due from government 1.00% 1.08%

Cash and Bank Balances 0.29% 0.39%

Current Assets 22.17% 17.31%


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Issues Subscribed and paid up capital 1,476,188.00 1,560,376.00

Share Deposit Money 84,188.00 -

Shares holder Equity 40,958.00 612,732.00

Surplus on revaluation of PPE 501,448.00 480,713.00

Long Term Finance 5,027,950.00 4,650,516.00

Defered Liability 3,446.00 5,645.00

Total Long Term Liability 5,031,396.00 4,656,161.00

Short Term Borrowing 235,344.00 221,400.00

Current Portion of Long Term Finance 94,358.00 471,792.00

Trade and Other Payables 1,185,141.00 666,890.00

Accrude Markup 109,414.00 545,406.00

Total Current Liability 1,624,257.00 1,905,488.00


Issues Subscribed and paid up capital 20.74% 24.27%


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Share Deposit Money 1.18% 0.00%

Shares holder Equity 0.58% 9.53%

Surplus on revaluation of PPE 7.05% 7.48%

Long Term Finance 70.66% 72.33%

Defered Liability 0.05% 0.09%

Total Long Term Liability 70.70% 72.42%

Short Term Borrowing 3.31% 3.44%

Current Portion of Long Term Finance 1.33% 7.34%

Trade and Other Payables 16.65% 10.37%

Accrude Markup 1.54% 8.48%

Total Current Liability 22.82% 29.64%


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6 Horizontal Analysis of Balance Sheet

Particulars 2008 2009Percentage Change

Fixed Assets 5 ,538,638.00 5,316,919.00 (4.00)

Stores and Spares 41,419.00 37,633.00 (9.14)

Stock In Trade 162,316.00 4,311.00 (97.34)

Trade Debts 865,226.00 680,994.00 (21.29)

Advances, Deposits, Prepayments and other Receivables 446,814.00 194,262.00 (56.52)

Tax Refund due from government 71,452.00 69,492.00 (2.74)

Cash and Bank Balances 20,898.00 24,846.00 18.89

Current Assets 1,577,505.00 1,112,711.00 (29.46)

Total Asset 7,116,143.00 6,429,630.00 (9.65)

Issues Subscribed and paid up capital 1,476,188.00 1,560,376.00 5.70

Share Deposit Money 84,188.00 0 (100.00)

Shares holder Equity 40,958.00 612,732.00 1,396.00

Surplus on revaluation of PPE 501,448.00 480,713.00 (4.14)


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Long Term Finance 5,027,950.00 4,650,516.00 (7.51)

Defered Liability 3,446.00 5,645.00 63.81

Total Long Term Liability 5,031,396.00 4,656,161.00 (7.46)

Short Term Borrowing 235,344.00 221,400.00 (5.92)

Current Portion of Long Term Finance 94,358.00 471,792.00 400.00

Trade and Other Payables 1,185,141.00 666,890.00 (43.73)

Accrude Markup 109,414.00 545,406.00 398.48

Total Current Liability 1,624,257.00 1,905,488.00 17.31


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7 Vertical Analysis of Income Statement


Sales 4,499,145.00 3,505,758.00

Cost of Sales 4,214,069.00 3,281,175.00

Gross Profit 285,076.00 224,583.00

Operating Expense (41,783.00) 70,961.00

Operating Profit 243,293.00 153,622.00

Other Income 14,550.00 545,406.00


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Finance Cost (523,976.00)

(760,237.00)

Net Loss before taxation (162,113.00)

(592,065.00)

Provision for taxation (557.00) (444.00)

Net loss after taxation (592,509.00)

(162,670.00)


Cost of Sales 93.66% 93.59%

Gross Profit 6.34% 6.41%

Operating Expense -0.93% 2.02%

Operating Profit 5.41% 4.38%

Other Income 0.32% 15.56%

Finance Cost -11.65% -21.69%

Net Loss before taxation -3.60% -16.89%

Provision for taxation -0.01% -0.01%

Net loss after taxation -13.17% -4.64%


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8 Horizontal Analysis of Income Statement

Particulars 2008 2009 Percentage Change

Sales 4,499,145.00 3,505,758.00 (22.08)

Cost of Sales 4,214,069.00 3,281,175.00 (22.14)

Gross Profit 285,076.00 224,583.00 (21.22)

Operating Expense (41,783.00) 70,961.00

(269.83)

Operating Profit 243,293.00 153,622.00 (36.86)

Other Income 14,550.00 545,406.00 3,648.49

Finance Cost (523,976.00)

(760,237.00) 45.09

Net Loss before taxation (162,113.00)

(592,065.00) 265.22

Provision for taxation (557.00) (444.00) (20.29)

Net loss after taxation (592,509.00)

(162,670.00)

(72.55)


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9 Interpretation of Notes

1. Legal status and nature of business

Japan Power Generation Limited was incorporated in Pakistan on September 29, 1994 as public limited company under the Companies Ordinance, 1984 and its shares are quoted on Lahore and Karachi Stock Exchanges.

The major loss contributing factor has been shortfall in reimbursement from WAPDA of actual fuel cost incurred vis-à-vis Power Purchase Agreement (PPA's) standard formula. This issue has been addressed materially through amendment to the PPA. The effect of this amendment together with proposed modification in engines would eliminate fuel loss and would contribute to the profitability of the company.

2. Basis of measurement

Financial statements have been prepared under the historical cost convention except for staff retirement benefits that are measured at present value and capitalization of exchange differences on foreign currency loans. Except for cash flow statement, all the transactions have been accounted for on accrual basis.

3. Taxation

The company’s profit and gains from power generation are exempt from tax under clause 132 of the Second Schedule - Part I of the Income Tax Ordinance, 2001. The company is also exempt from minimum tax on turnover under clause 15 of Part – IV of the Second Schedule to the Income Tax Ordinance, 2001. Tax on income from sources not covered under the above clauses is determined in accordance with the normal provisions of the Income Tax Ordinance, 2001.

4. Operating Assets

Operating fixed assets except land are stated at cost / revalued amount less accumulated depreciation and accumulated impairment losses, if any. Free hold land is stated at revalued amount. Cost of certain fixed assets is comprised of historical cost and exchange differences.

Depreciation on operating fixed assets is charged to profit on straight line method so as to write off the historical cost of an asset over its estimated useful life at the annual rates. The net exchange differences relating to an asset at the end of each year is amortized in equal installments over its remaining useful life. Depreciation is charged on


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the basis of period of use i.e. full month's depreciation is charged in the month of purchase while no depreciation is charged in the month of disposal. Subsequent expenditure relating to an item of property, plant and equipment that has already been recognized is added to the carrying amount of the asset, when it is probable that future economic benefits in excess of the originally assessed standard of performance of the existing asset will flow to the company. Every other subsequent expenditure is recognized as an expense in the period in which it is incurred. Gains and losses on deleted assets are included in the profit and loss account.

5. Capital Work in Progress

Capital work-in-progress represents expenditure on property, plant and equipment in the course of construction and installation. Transfers are made to relevant category of property, plant and equipment as and when assets are available for use. Capital work in progress is stated at cost, less any identified impairment loss.

6. Surplus on revaluation of property, plant and equipment

The incremental depreciation of surplus on revaluation of building & civil works and plant & machinery is transferred to revaluation reserves. The same amount of incremental depreciation has been transferred to accumulated loss through statement of changes in equity.

7. Stores, spares and stock in trade

These are valued at lower of cost and net realizable value. The net realizable value is the estimated selling price in the ordinary course of business less estimated cost necessary to make the sale.

8. Trade debts and other receivables

These are carried at original invoice amount less an estimate made for doubtful receivables based on review of outstanding amount at the year end. Other receivables are recognized at nominal amount which is the fair value of the consideration to be received in future. Bad debts are written off when identified.

9. Cash and cash equivalents

Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of cash flow statement, cash equivalents are short term highly liquid instruments that are readily convertible to known amounts of cash which are subject to insignificant changes.


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10. Trade and other payables

Liabilities in respect of trade and other payables are carried at cost, which is the fair value of the consideration to be paid in future for goods and services received.

11. Foreign currency translation

Foreign currency transactions are converted into Pak Rupees at the rates prevailing on the date of transaction. Monetary assets and liabilities in foreign currencies at the year-end are translated into Pak Rupees at the rates of exchange prevailing at the balance sheet date. Exchange gains and losses on translation of foreign currency loans utilized for the acquisition of fixed assets are capitalized and incorporated in the cost of such assets. All other exchange differences are charged to income currently.

12. Contingencies and commitments

As reported in the last year’s annual report, the Company was contingently liable for the liquidated damages claimed by WAPDA for the period from July 1, 2001 to June 30, 2009 to the tune of Rs. 1,598.215 million (including Rs. 505.654 million charged during the year), out of which WAPDA has already arbitrarily deducted an amount of Rs. 458.255 million from Company’s capacity invoices. The Company disputed the liquidated damages and arbitrary deduction by WAPDA from the Company’s capacity invoices.

WAPDA had disputed payments amounting to Rs. 384.032 million, relating to indexation of non scalable components of capacity purchase price (CPP) already paid to the company from March 14, 2004 to March 13, 2006 and disputed further amount of Rs. 506.290 million against the Company's CPP invoices for the period from March 14, 2006 to June 30, 2009. The total amount disputed by WAPDA comes to Rs. 890.322 million, against which WAPDA has arbitrarily withheld a total amount of Rs. 542.109 million from the Company's CPP invoices uptil June 30, 2009.

These disputes were referred to a mutually agreed Expert, as per the dispute resolution mechanism provided in the Power Purchase Agreement (the “PPA”), who gave his recommendations on September 1, 2007 that fully supported the Company’s position. Both Parties initialed a settlement based on the Expert’s recommendations but with certain concessions given to WAPDA. WAPDA has failed to sign the said settlement. Therefore, neither the recommendations of the Expert are implemented nor the settlement was followed by WAPDA. WAPDA is, therefore, in breach of the terms of the PPA. Under the circumstances, the Company is not able to continue its operations and hence had shutdown its plant in last week of December 2008.

In January 2009, the Company has referred the matter to the International Court of Arbitration under the International Chamber of Commerce’s (the “ICC”) Rules as per the


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provisions of the PPA for the implementation of the Expert's recommendations. The claimed amount as per recommendations of the Expert is Rs. 3.6 billion (approximately). After adjusting the Company's liabilities to WAPDA, net expected cash inflow could be Rs. 2.5 billion (approximately). Under ICC rules, an award can be granted in one year’s time from the date the case is filed before the Tribunal so appointed by the ICC, which is October 09, 2009. The management of the Company is optimistic about the outcome of the arbitration. Under the circumstances, although the Expert's recommendations were in favor of the Company, no adjustment has been made in these financial statements.

The company is also contingently liable for infrastructure fee/cess amounting to Rs. 4,396,000 imposed by the Sindh Government under the provision of Sindh Finance (Amendment) Ordinance, 2001. The company had filed appeal that was pending before the Honorable Division Bench of the Sindh High Court; and the Bench passed an order staying the recovery of the impugned on furnishing of a bank guarantee (non-en-cashable till the pendency of the suit) by the company to the satisfaction of the Excise department. The Division Bench of the Honorable Sindh High Court had decided the case in favour of the company on September 17, 2008, so far as the above said levy is concerned. However for the subsequent period the case has been decided against the company for which the company has no liability at the moment. So in order to avoid the future complication, the company has filed an appeal before the Supreme Court of Pakistan challenging the part of judgment that was against the company, while the Sindh Government has also filed an appeal against this judgment challanging the decision made against it. These cross appeals pending adjudication at the terminal date.

13. Credit risk and concentration of credit risk

The credit risk represents the accounting loss that would be recognized at the reporting date if counter parties failed to perform as contracted. The maximum exposure to credit risk is presented by the carrying amount of each financial asset. All the trade receivables are due from WAPDA and are secured by sovereign guarantee of the Government of Pakistan. Out of the total financial assets of Rs. 884.820 (2008: Rs 1,108.059) million, the financial assets which are subject to credit risk amounted to Rs. 884.492 (2008: Rs. 1,108.059) million.

14. Liquidity risk

Liquidity risk is the risk that the company will not be able to meet its financial obligations as they fall due. Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding to an adequate amount of committed obligations of the business. The company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the company’s reputation.


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15. Foreign exchange risk management

Foreign exchange risk arises mainly where receivables and payables exist due to transactions with foreign undertakings. However, there are no such receivables or payables in foreign currency at the terminal date (2008: Rs. 28.883 million).

16. Fair value sensitivity analysis for fixed rate instruments

The company does not account for any fixed rate financial assets and liabilities at fair value through profit or loss, and the company does not designate derivatives (interest rate swaps) as hedging instruments under a fair value hedge accounting model. Therefore a change in profit rates at the reporting date would not affect profit or loss thereof.

17. Capital management

The Board's policy is to maintain an efficient capital base so as to maintain investor, creditor and market confidence and to sustain the future development of the company's business. The Board of Directors monitor the return on capital employed, which the company defines as operating income divided by total capital employed.


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10 Conclusion

The company has been suffering losses since the year 2000, when it commenced commercial operation, resulting in an accumulated loss of Rs. 2.173 billion as at June 30, 2009, which exceeded the shareholders' equity and as of that date its total liabilities exceeded the total assets by Rs. 612.732 million, in addition to adverse current working capital ratio. The power project of the company is also not in operation since December 24, 2008.

Furthermore, the company has two major disputes involving significant amount of contingent liabilities of the company as fully explained in note 20.1 and 20.2 of these financial statements. Company claims that these disputes will be decided in its favor due to which a huge amount of cash flow will accrue to it, yet the outcome of these disputes cannot be determined with any degree of certainty at this stage. The company is in negotiation with WAPDA / PEPCO / Financial Institutions on various proposals /alternatives for immediate resumption of the operations.

The above stated factors indicate the existence of material uncertainty which may cast significant doubt about the company's ability to continue as a Going Concern; the going concern assumption used by the management of the company for the preparation of these financial statements may not be valid, until the above mentioned factors are not favorably resolved within a reasonable period of time.

Though the Company is in extreme financial distress at the moment, and they can come out of this situation if the disputes with WAPDA will get resolved in favor of the Company, as it will improve the company’s cash flows.

Apart of this company should improve its Plant, so that proper benefit can be achieved from the technology. Company has also got the bad image as it doesn’t meet its obligation towards lender.


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Anila Khwaja(0836136) - Japan Power