[2010]

Financial Analysis Report

Submitted By
Anila Khwaja [0836136]

Submitted To
Sir Faisal Abdullah
TABLE OF CONTENT
1 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.....................................................16

6 Horizontal Analysis of Balance Sheet.................................................21

7 Vertical Analysis of Income Statement..............................................23

8 Horizontal Analysis of Income Statement..........................................26

9 Interpretation of Notes......................................................................28

10 Conclusion.......................................................................................34

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

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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

2.1Industry 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, higher housing rents and food item shortages. In an effort to
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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

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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.

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,

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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.

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.

2.2Market Analysis
High 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

Off Raiwind Road, Near Jia Bagga Railway

Location
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 & Siemens Pakistan Engineering Co. Ltd.

Maintenance

Power Purchaser WAPDA

Life of the Complex 30 Years

3.1Principal Activities
The 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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3.2Major 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.

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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 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.

3.3Plant Performance
During 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.

3.4Financial Performance
The 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 520,298.0 1,130,351 1,247,371 1,577,505 1,112,711

0 .00 .00 .00 .00

CL 666,542.0 1,100,470 1,248,390 1,624,257 1,905,488

0 .00 .00 .00 .00

F.A 5,713,498 6,007,310 5,749,999 5,538,638 5,316,919

.00 .00 .00 .00 .00

T.A 6,233,796 7,137,661 6,997,370 7,116,143 6,429,630

.00 .00 .00 .00 .00

C.E 337,080.0 212,690.0 16,789.00 (40,958.0 (612,732.

0 0 0) 00)

Long Term 5,230,174 5,281,584 5,210,009 5,031,396 4,656,121

Debt .00 .00 .00 .00 .00

Sales 2,194,817 3,176,384 3,614,898 4,499,144 3,505,758

.00 .00 .00 .00 .00

G.P 376,035.0 361,479.0 278,413.0 285,075.0 224,583.0

0 0 0 0 0

N.P (Loss) (89,244.0 (268,578. (216,635. (162,670. (592,509.

0) 00) 00) 00) 00)

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

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EBIT (89,866.0 (268,252. (216,444. (162,114. (592,065.
0) 00) 00) 00) 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

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

Profitability Ratios

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

- -
- 397.16
ROE 126.28 1290.34 96.70%
26.48% %
% %

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

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 2.29%

Current Assets to Total 22.17

8.35% 15.84% 17.83% 17.31%
Assets %

Fixed Assets to Total 77.83

91.65% 84.16% 82.17% 82.69%
Assets %

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5 Vertical Analysis of Balance Sheet

Particulars 2008 2009

5,538,63 5,316,91
Fixed Assets 8.00 9.00

41,41 37,63
Stores and Spares 9.00 3.00

162,31 4,311
Stock In Trade 6.00 .00

865,22 680,99
Trade Debts 6.00 4.00

Advances, Deposits, Prepayments and other 446,81 194,26

Receivables 4.00 2.00

71,45 69,49
Tax Refund due from government 2.00 2.00

20,89 24,84
Cash and Bank Balances 8.00 6.00

1,577,50 1,112,71
Current Assets 5.00 1.00

7,116,14 6,429,63
Total Asset 3.00 0.00

Particulars 2008 2009

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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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Particulars 2008 2009

1,476,188. 1,560,376.
Issues Subscribed and paid up capital 00 00

84,188.
Share Deposit Money 00 -

40,958. 612,732.
Shares holder Equity 00 00

501,448. 480,713.
Surplus on revaluation of PPE 00 00

5,027,950. 4,650,516.
Long Term Finance 00 00

3,446. 5,645.
Defered Liability 00 00

5,031,396. 4,656,161.
Total Long Term Liability 00 00

235,344. 221,400.
Short Term Borrowing 00 00

94,358. 471,792.
Current Portion of Long Term Finance 00 00

1,185,141. 666,890.
Trade and Other Payables 00 00

109,414. 545,406.
Accrude Markup 00 00

1,624,257. 1,905,488.
Total Current Liability 00 00

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Particulars 2008 2009

Issues Subscribed and paid up capital 20.74% 24.27%

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

Percentage
Particulars 2008 2009 Change

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

41,419.
Stores and Spares 00 37,633.00 (9.14)

162,316.
Stock In Trade 00 4,311.00 (97.34)

865,226.
Trade Debts 00 680,994.00 (21.29)

Advances, Deposits,
Prepayments and other 446,814.
Receivables 00 194,262.00 (56.52)

Tax Refund due from 71,452.

government 00 69,492.00 (2.74)

20,898.
Cash and Bank Balances 00 24,846.00 18.89

1,577,505.
Current Assets 00 1,112,711.00 (29.46)

7,116,143.
Total Asset 00 6,429,630.00 (9.65)

Issues Subscribed and 1,476,188.

paid up capital 00 1,560,376.00 5.70

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 84,188.
Share Deposit Money 00 0 (100.00)

40,958.
Shares holder Equity 00 612,732.00 1,396.00

Surplus on revaluation of 501,448.

PPE 00 480,713.00 (4.14)

5,027,950.
Long Term Finance 00 4,650,516.00 (7.51)

3,446.0
Defered Liability 0 5,645.00 63.81

5,031,396.
Total Long Term Liability 00 4,656,161.00 (7.46)

235,344.
Short Term Borrowing 00 221,400.00 (5.92)

Current Portion of Long 94,358.

Term Finance 00 471,792.00 400.00

1,185,141.
Trade and Other Payables 00 666,890.00 (43.73)

109,414.
Accrude Markup 00 545,406.00 398.48

1,624,257.
Total Current Liability 00 1,905,488.00 17.31

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7 Vertical Analysis of Income Statement

Particulars 2008 2009

4,499,145. 3,505,758.
Sales 00 00

4,214,069. 3,281,175.
Cost of Sales 00 00

285,076. 224,583.
Gross Profit 00 00

(41,783. 70,961.
Operating Expense 00) 00

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 243,293. 153,622.
Operating Profit 00 00

14,550. 545,406.
Other Income 00 00

(523,976. (760,237.
Finance Cost 00) 00)

(162,113. (592,065.
Net Loss before taxation 00) 00)

(557. (444.
Provision for taxation 00) 00)

(592,509. (162,670.
Net loss after taxation 00) 00)

Particulars 2008 2009

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%

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Net loss after taxation -13.17% -4.64%

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8 Horizontal Analysis of Income
Statement

Particulars 2008 2009 Percentage Change

4,499,145. 3,505,758.
Sales 00 00 (22.08)

4,214,069. 3,281,175.
Cost of Sales 00 00 (22.14)

285,076. 224,583.
Gross Profit 00 00 (21.22)

(41,783. 70,961. (
Operating Expense 00) 00 269.83)

243,293. 153,622.
Operating Profit 00 00 (36.86)

14,550. 545,406. 3,
Other Income 00 00 648.49

(523,976. (760,237.
Finance Cost 00) 00) 45.09

Net Loss before (162,113. (592,065.

taxation 00) 00) 265.22

(557. (444.
Provision for taxation 00) 00) (20.29)

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Net loss after (592,509. (162,670.
taxation 00) 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

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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
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

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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

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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 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.

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32 | P a g e
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.

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.

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

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