EXECUTIVE SUMMARY

A. Introduction

National Power Corporation (NPC)

1. The NPC was created under Commonwealth Act No. 120 on November 3, 1936 as
a non-stock corporation to undertake the development of hydraulic power and
production of power, subject to existing rights, from Philippine water resources
reserved for its use and all other sources in the Philippines, and was converted in
1960 into a stock corporation wholly owned by the government. In 1971, its charter
was revised under Republic Act 6395 with its activities and functions decentralized
and carried out by its regional centers in Luzon, Visayas and Mindanao. NPC
took over the electricity generation assets of rural electric cooperatives in 1988.
This paved the way for the creation of the Small Power Utilities and Barge
Management Group in 1992, which later became the Small Power Utilities Group
(SPUG).

2. In 1993, NPC was reorganized pursuant to Republic Act 7648, also known as the
Electric Power Crisis Act of 1993, which provides private capital infusion to power
generation, increase in return on rate base and upgrading of compensation of NPC
personnel were provided.

3. In June 2001, the EPIRA (Republic Act No. 9136, otherwise known as the “Electric
Power Industry Reform Act of 2001”) mandated NPC (a) to perform the missionary
electrification functions, i.e. provision of power generation and its associated power
delivery systems in areas that are not connected to the transmission system
through its Small Power Utilities Group (SPUG), (b) to manage the watersheds and
(c) to operate and maintain the generation assets transferred to PSALM pending
their disposal under an Operation and Maintenance Agreement (OMA).

4. NPC is attached to the Department of Energy by virtue of Section 13 of Republic

Act 7638 or the Department of Energy Act of 1992.

The NPC Board of Directors is composed of nine members chaired by the

Secretary of the Department of Finance. NPC is headed by its President and
Executive Officer.

Scope and Objectives of Audit

5. The audit covered the transactions, accounts and operations of NPC for CY 2013.
The audit was conducted on a test basis to determine the (a) level of assurance
that may be placed on the management’s assertions on the financial statements;
(b) the propriety of transactions as well as compliance with existing rules and
regulation as well as management’s policies; and (c) the extent of the
implementation of prior years’ audit recommendations.

6. The audit involved performing procedures to obtain audit evidence to determine

the fairness of presentation of the financial statements and the propriety of the

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 financial transactions, in accordance with the Philippine Standards of Auditing,
applicable laws, rules and regulations

B. Financial Highlights

Financial Position

Increase
2014 2013 (Decrease)
Assets 43,198,662,105 39,633,533,159 3,565,128,946
Liabilities 17,882,979,463 17,018,430,912 864,548,551
Equity 25,315,682,642 22,615,102,247 2,700,580,395

Results of Operation

Increase
2014 2013 (Decrease)
Revenues 10,794,813,138 9,547,006,706 1,247,806,432
Expenses 7,544,874,198 7,127,852,833 417,021,365
Income(Loss) 3,249,938,940 2,419,153,873 830,785,067
Other Income 1,099,096,642 1,521,585,885 (422,489,243)
Other Charges 2,812,761,116 2,447,902,702 364,858,414
Net Income (Loss) 1,536,274,466 1,492,837,056 43,437,410

Budget Utilization

Approved Budget Obligations Balance

PS 1,282,546,176 1,282,546,176 0
MOOE 39,495,726,369 28,667,271,111 10,828,455,258
CO 5,465,203,915 2,855,367,957 2,609,835,958
Total 46,243,476,460 32,805,185,244 13,438,291,216

C. Auditor’s Opinion

The Auditor rendered a qualified opinion on the fairness of the presentation of the 2013
financial statements because:

1. The existence, validity and accuracy of “Operations and Management

Agreement (OMA) Trust” account with year-end balance of P8.066 billion
consisting of Utility Plants, Cash and Cash Equivalents, Other Receivables,
Advances, Materials & Supplies for Operation and Other Assets, were not
ascertained due to:
a. Unreconciled variance of P2.637 billion between OMA Trust account
and the reciprocal account, “Assets Held in Trust with NPC”
maintained by PSALM for fund transfers for the operation and

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 maintenance of the generation and other assets under the OMA, with
reported balance of P5.429 billion in the books of PSALM, registering
a decrease of P484 million from P3.121 billion in CY 2013;
b. inclusion of Utility Plants owned by PSALM with a carrying value of
P1.668 billion;
c. Unreconciled variance of P322.276 million between book balance at
P2.545 billion, and the total amount per physical inventory report at
P2.223 billion for Material and Supplies for Operation; and
d. Non-recording in the books Stocks for disposal amounting to P21.243
million.
2. The Construction Work in Progress (CWIP) account continued to carry a
balance at P1.516 billion, whose validity and accuracy remained
unascertained due to the inclusion of:
a. cost of personnel services amounting to P317.719 million which
remained unallocated to the completed projects;
b. 18 work orders in the total amount of P162.430 million which remained
dormant for three years, of which P102.902 million worth of equipment
were already delivered in CY 2009;
c. cost of suspended work orders due to Right of Way (ROW) problems
amounting to P1.022 million;
d. cost of work orders amounting to P17.736 million that was not related
to the construction of Electric Plant in Service;
e. cost of completed projects amounting to P16.047 million, of which
P0.534 million pertained to SPUG-Mindanao; and
f. Charging of SPUG-Visayas drydocking expenses for Power Barge 113
amounting to P5.536 million to CWIP account instead of to
Maintenance-Diesel Plant.
3. The aggregate year-end balances of P2.584 billion for asset accounts and
P41.250 billion for liability accounts under PSALM-Retained and TRANSCO-
Retained accounts remained outstanding/dormant since CY 2009, and
remained undocumented, hence, the validity and accuracy of the accounts’
balances were doubtful.

D. Significant Audit Observations

In addition to the audit observations which we considered in the rendition of our

qualified opinion, presented below are other significant audit observations and
recommendations, which are discussed in detail in Part II of the Report.

1. Of the P4.639 billion balance of Accounts Payable and Accrued Expenses

accounts, the amount of P331.932 million pertained to:

a. SPUG-Luzon accounts amounting to P157.778 million which have

been outstanding for more than two years;

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 b. accounts of NPC-Head Office with abnormal or debit balances at
P156.987 million; and

c. accounts amounting to P18.167 million, consisting of P 1.772 million

for the NPC Head Office and P16.395 million for SPUG-Luzon, which
did not reflect the names of the creditors in the subsidiary ledgers.

Recommendations:

a. Review documents supporting the payables accounts to determine

their validity and completeness; then revert to the Corporate General
Fund all undocumented payables which have been outstanding for
more than two years;

b. Analyze accounts with negative or debit balances to determine errors

committed and make the necessary adjustment; and

c. Exert extra efforts in analyzing the payable accounts to determine

whether Subsidiary Ledgers without the corresponding creditors are
valid and make the necessary adjustment where appropriate.

2. Of the year-end balance of P4.311 billion of Power Receivables account, the

collectability of 53% of the account balance or P2.277 billion was doubtful
because the accounts have been outstanding for more than two to ten years,

Likewise, NPC continued to report poor collection efficiency as evidenced by

the fact that the long overdue accounts during the year amounting to P2.277
billion have increased by P462.420 million when compared with the CY 2013
balance of P1.815 billion

Further, the other deficiencies noted were: (a) Statement of Accounts of eight
power customers with outstanding accounts amounting to P57.437 million
were not available for verification; and b) seven power customers confirmed
amounts higher than the amounts per books by P1.052 million. (This is a
partial reiteration of the audit observations in CY 2013)

Recommendations:

a. Intensify its collection efforts by regularly sending demand letters; and if

necessary, resort to legal remedies;

b. Require the Power Receivables Accounting Division to submit to the

Auditor’s Office all Statement of Accounts issued to power customers;
and

c. Require all personnel involved in the maintenance of SLs for power

customers and the personnel in charge in the issuance of SOAs to
regularly reconcile their records and make the necessary adjustments
where appropriate.

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3. There were noted violations of provisions of law and regulations in the
disbursement/utilization of the 30% Maintenance and Other Operating
Expenses (MOOE) savings allotted for the improvement of working condition
as provided in DBM Circular No. 2013-4, as follows:

a. Payment of premiums for Group Hospitalization and Life Insurance Plan

for NPC employees amounting to P34.047 million was not in
accordance with Section 28 (b) of Commonwealth Act 186 as amended
by RA 4968 and COA Resolution No. 2005-001;

b. Personnel incentives, in the form of eyeglasses and hiking shoes, in the

amount of P8,000 per employee or a total of P15.753 million were
granted to employees over and above the authorized P25,000 each
employee, contrary to DBM Circular No. 2013 – 4; and

c. Funds amounting to P55.315 million transferred to the NPC-Power

Generation Employee’s Association were not supported with the
documentary requirements and were taken up in the books as outright
expenses instead of cash advances subject to liquidation, contrary to
COA Circular No. 2012-001.

Recommendations:

a. Comply strictly with the provisions of Section 28 (b) of Commonwealth

Act No. 186, as amended by RA 4968 and COA Resolution No. 2005-
001;

b. Comply strictly with DBM Circular No. 2013-4 in the implementation of

the 30% MOOE savings allotted for the improvement of working
conditions and other programs;

c. Require all persons concerned to submit to the Auditor’s Office the

documentary requirements for the disbursements of the CNA
incentives as enumerated under COA Circular No. 2012-001; and

d. Require the Accounting Department to record all fund transfers to

PGEA as debits to Advances to PGEA and as credits to the account
upon submission of PGEA Report of Disbursements supported by
documents necessary depending on the nature of disbursement.

4. Despite the audit observation in CY 2013, cash advances for Working Fund-
Miscellaneous amounting to P2.167 million were continuously used to pay
cash advances for travelling expenses, contrary to Section 4.1.6 of COA
Circular No. 97-002.

Likewise, cash advances for salaries were not equal to the payees’ net
payments for a pay period and excess cash advances amounting to P2.352
million were not refunded within the prescribed period

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 Recommendations:

a. Instruct the concerned Accountable Officers to refrain from using their

Cash Advance for Working Fund- Miscellaneous in paying cash advances
for travelling expenses and/or transferring their cash accountability to other
accountable officers pursuant to Section 4.1.6 of COA Circular No. 97-002.

b. Instruct all concerned accountable officers to see to it that cash advances

granted for salaries are supported by payrolls or a list of payees and the
amount of cash advance should be equal to the payees’ total net
payments pursuant to Section 4.2.1 of the same COA Circular;

c. Require the concerned Accountable Officers to liquidate their cash

advances for salaries within five days after each 15 days/end of the month
pay period pursuant to Section 5.1.1 of the same COA Circular; and

d. Coordinate with the NPC’s authorized depository bank so that payment of

employees’ salaries and other benefits may be made thru the bank.

5. Cash Advances for local and foreign travels in the total amount of P2.227
million and P353,117, respectively, were not liquidated within 30 days after the
concerned employees return to their official stations or within 60 days after
their return to the Philippines in violation of COA Circular No. 96-004.

Likewise, cash advances for special purposes amounting to P1.211 million,

consisting of P454,456 for NPC Head Office and P0.767 million for SPUG-
Luzon, were not immediately liquidated when the purpose for which it was
granted has been served contrary to Section 4.1.3 of COA Circular No. 97-
002.

Recommendation:

Strictly adhere to the provisions of COA Circular Nos. 96-004 and 97-002 in
the granting, utilization and liquidation of cash advances and impose the
sanctions specified therein.

6. Copies of 11 contracts were not submitted within the prescribed period of five
days after its execution contrary to Section 3.1.1 of COA Circular 2009-001;
and

Contracts and their supporting documents submitted to this Office for CY 2014
were found deficient due to:

a. 66 contracts were not supported by all the documentary requirements

as specified under Section 3.1.2 COA Circular 2009-001;

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 b. Ten procurement projects were not awarded within the three-month
period from the opening of bids as prescribed under Section 38.1 of the
IRR of RA 9184;

c. 20 procurement activities, from posting of Invitation to Bid to the

Issuance of Notice to Proceed, were not acted upon within the
maximum and earliest allowable time for action contrary to Section 38.2
of the IRR of RA 9184; and

d. Nine procurement projects were not awarded within the bid validity
period of 120 days contrary to Section 37.1.5 of the Revised IRR of R.A.
9184.

Recommendation:

Strictly adhere to the pertinent provisions of the IRR of RA 9184 as regards

the actions to be taken for procurement activities; and Sections 3.1.1 and
3.1.2 of COA Circular 2009-001 as regards the submission of copies of
contracts together with the supporting documents to Auditor’s Office.

7. Management had not imposed the P4.584 million prescribed penalty charges
for late deliveries of procured items pursuant to Section of 68 of the IRR of RA
9184.

Recommendation:
Adhere strictly to the provisions of Section 68 of the IRR of RA 9184 and to
bill all the suppliers with unpaid liquidated damages.

E. Summary of suspensions, disallowances and charges as of year-end.

Per Statement of Audit Suspension, Disallowances and Charges (SASDC) issued as of

December 31, 2014, the unsettled audit suspension and disallowance amounted to
P42,562.76 and P778.096 million, respectively. Details are shown in Part II of the
Report.

F. Status of Implementation of Prior Year’s Audit Recommendations

Of the 30 prior year’s audit recommendations, 13 were fully implemented and 17 were
partially implemented and thus reiterated in Part II of this Report. Details are found in
Part III of the Report.

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