NATIONAL ELECTRIFICATION ADMINISTRATION

ANNUAL AUDIT REPORT FOR CY 2012

EXECUTIVE SUMMARY

Introduction

The National Electrification Administration (NEA) was originally created as a national

government agency by virtue of Republic Act (RA) Nos. 2717 and 6038 dated June 19, 1960
and August 4, 1969, respectively. It existed as such for a period of more than ten (10)
years. On August 6, 1973, Presidential Decree (PD) No. 269 was issued converting NEA
into a government-owned and controlled corporation with an authorized capital stock of P1
billion; declaring a national policy objective for the total electrification of the Philippines on
an area coverage basis and the organization, promotion and development of viable rural
electric cooperatives (ECs) to attain the said objective. Moreover, NEA is geared towards
the uplifting of the standard of living in the rural areas by the service of electricity.
Presidential Decree No. 1370 issued on May 2, 1978 increased NEAs capital stock to PhP2
Billion.

On October 8, 1979, PD No. 1645 amended certain provisions of PD Nos. 269 and
1370 and raised NEAs authorized capital stock to PhP5 Billion and expanded its functions
to include the development of mini-hydro and dendro thermal projects.

On June 8, 2001, RA No. 9136, better known as the Electric Power Industry Reform
Act (EPIRA) of 2001, was enacted. Section 58 of the said law gave NEA an additional
mandate as follows:

a. To prepare the electric cooperatives in operating and competing under the

deregulated electricity market within five (5) years from the effectivity of this act;

b. To strengthen the technical capability and financial viability of rural electric

cooperatives; and

c. To review and upgrade regulatory policies with a view to enhancing the viability of
the electric cooperatives, as electric utilities.

d. Furthermore, the EPIRA had increased NEAs authorized capital from PhP5 Billion to
PhP15 Billion. However, as of December 31, 2012, no additional subscription was
made by the National Government.

Administrative Order (AO) No. 112 dated December 7, 2004 directed the NEA to take
full and sole authority and responsibility in the conversion of electric cooperatives into stock
cooperatives. Pursuant to the AO, the NEA Board of Administrators promulgated the
Guidelines in the Conduct of ECs Referendum (GCECR) to convert into either stock
cooperative under the Cooperative Development Authority or stock corporation under the
Securities and Exchange Commission.

Scope of Audit

The audit covered the examination of accounts and operations of the Agency for
calendar year 2012. It also included the verification of the Agencys compliance with
existing laws, rules and regulations and review of financial statements and reports to
ascertain the fairness and reliability of the Agencys financial position and its financial
performance.
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 The audit also covered the review and examination of the records and documents
pertaining to the utilization of subsidy fund releases amounting to P983,917,385.21,
composed of Regular Subsidy of P257,472,108.71; Priority Development Assistance
Fund (PDAF) P37,712,143.64; Calamity Assistance Rehabilitation Effort (CARE)
P82,515,455.57; Barangay/Sitio Electrification Project (BLEP/SEP) P104,714,475.06;
Pantawid Kuryente Katas ng Vat (PKKV) P480,918,500.00 and Expanded Rural
Electrification Program (EREP) P20,584,702.23 to selected Electric Cooperatives (ECs)
and to determine whether the government funds were utilized in accordance with the
Memorandum of Agreement signed between the Agency and the ECs. The audit was
also done to ascertain whether the subsidies were utilized with due regard to economy,
efficiency and established policy and the effectiveness of the electrification projects was
in line with the attainment of the Agencys objectives.

Financial Profile (In Thousand Pesos)

Shown below are the comparative financial position and financial performance of
NEA for CY 2012 and CY 2011.

Comparative Financial Position

Increase
Particulars 2012 2011
(Decrease)
Assets 19,770.13 16,056.64 3,713.49
Liabilities 18,692.15 14,814.37 3,877.77
Equity 1,077.99 1,242.27 (164.28)

Comparative Financial Performance

Increase
Particulars 2012 2011
(Decrease)
Gross Income 762,187.93 605,335.64 156,852.29
Other Income 102,640.14 62,776.34 39,863.80
Total Income 864,828.07 668,111.98 196,716.09
Operating Expenses 322,294.32 317,356.78 4,937.54
Financial Expenses 90,027.25 143,307.16 (53,279.91)
Net Profit before Income Tax 452,506.50 207,448.04 245,058.46
Income Tax Expense 111,928.58 51,721.22 60,207.36
Net Profit 340,577.92 155,726.82 184,851.10

Budget Utilization

General Appropriations Act of 2012 (R.A. No. 10155) appropriated

P8,655,514,000 for the NEA, broken down as follows:

Expenditures
COB Balance
Disbursement
PS 207,664,000 204,671,301 2,992,699
MOOE 3,701,328,000 117,623,023 3,583,704,977
CO 4,746,522,000 12,503,419 4,734,018,581
TOTAL 8,655,514,000 334,797,743 8,320,716,257
COA Audit Team Composition
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 The NEA was audited by 2 Teams under CGS Cluster 3- Public Utilities, Audit
Group E headed by Ms. Marlyn V. Balazon, State Auditor IV and OIC-Supervising
Auditor. The Audit Team was composed of the following.

Name/Position
Marlyn V. Balazon, SAIV
Editha L. Galvez, SA III
Herminio P. Peguerra, SA II
Cecilia M. Morales, Sa II
Maria Paulina P. Cordero, SA I
Elizabeth A. Martelino, SA IV
Cynthia L. Florida, SA III
Ricardo M. Jacobo, SA II
Angelica B. Gaerlan, SA II
Designation
Audit Team Leader, Team 1 Financial and Compliance
Audit Team Member Team 1 Financial and compliance
Audit Team Member Team 1 Financial and compliance
Audit Team Member Team 1 Financial and compliance
Audit Team Member Team 1 Financial and compliance
Audit Team Leader, Team 2 NEA Subsidy/APU
Audit Team Member, Team 2 NEA Subsidy/APU
Audit Team Member, Team 2 NEA Subsidy/APU
Audit Team Member, Team 2 NEA Subsidy/APU

Audit Opinion

We rendered an unqualified opinion on the fairness of presentation of the financial

statement on the Agencys financial position, financial performance and cash flows for the
past three (3) years.

Year Opinion Rendered

2010 Unqualified
2011 Unqualified
2012 Unqualified

Audit Observations and Recommendations

Below is a summary of significant audit observations and recommendations with

details discussed in the Comments and Observation of this Report:

1. Recurring cases of unexpended subsidy balances not immediately returned or

without immediate submission of requests for realignment by electric cooperatives to
NEA.

We recommend that NEA closely monitor the unexpended subsidy fund

balances, and either demand the return of the same immediately after the
completion of the project, or require immediate submission of request for
realignment of the amount for implementing electrification-related projects/
activities.

2. Delayed implementation of projects by electric cooperatives.

We recommended that NEA ensure that all the requirements for the smooth
implementation of subsidy-funded projects have been complied with or
secured by the electric cooperatives before releasing any subsidy fund.

We also recommend regular and close coordination with the local government
units to address all the anticipated problems in the project implementation.

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3. Repeated cases of project implementation by electric cooperatives prior to receipt of
subsidy fund from NEA.

We recommend that NEA revisit their criteria in selecting electric cooperatives

that may be given prioritization in the grant of subsidy fund.

4. Non-compliance of electric cooperatives with the required approval of NEA before

effecting any realignment of subsidy fund.

We recommended that Management conduct a review and evaluation of the

common reasons/justifications submitted by the electric cooperatives on the
realignment of funds and on the non-implementation of the original projects, in
order to minimize if not eliminate fund realignment in the future.

5. Increasing Cases of Delayed Energization/Non-Energization of Completed Projects

We recommended that Management coordinate with the LGUs concerned on

how their requirements relative to the energization of completed projects can
be relaxed and how the payment of fees, charges and taxes can be eased up to
help their constituents as part of the poverty alleviation program.

We also recommend that Management be guided by the lessons learned from

the previous energization of complete projects in approving future projects of
electric cooperatives so that subsidy funds are efficiently and effectively
utilized.

6. Noted deviation from the As Planned Staking Sheet of electric cooperatives

We recommended that Management require the electric cooperatives

concerned to return the amount of P66,400 to NEA in case of the failure to
follow the designs and specifications of the staking approved by NEA.

7. Project cost based on the As built staking sheet per liquidation report lower than
the evaluated cost of NEA.

We recommended that Management ensure that release of the 10% retention

fee to the ECs should not result in excess subsidy.

8. Deviation in the implementation of projects under Priority Development Assistance

Fund (PDAF).

We recommended that Management require EC to obtain prior approval of the

realignment from NEA and PDAF proponent before effecting any changes in
the utilization of PDAF.

For the subject projects, we recommend that Management require post facto
approval by the PDAF proponent of the changes in project implementation; and
require SORECO II to return the amount of P190,476 unless the ownership has
been transferred to its name.

9. Unavailed PKKV Subsidy Fund

We recommended that Management require ECs to return the amount P0.316

million

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 10. Some recipients of PKKV Subsidy not residential consumers

We recommended Management demand from the three electric cooperatives

concerned the return the amount of P223,000.

11. Procurement of Private Health Care Services for NEA Personnel for CY 2012 in
violation of COA Resolution No. 2005-001.

We recommended that Management seek post facto approval from the Office
of the President. Non-submission thereof will cause the issuance of the
necessary Notice of Disallowance which may be appealed pursuant to Rule IV,
Section 4 of the Revised 2009 Rules of Procedure of COA.

On the other hand, we will seek clarification from the DBM of the Health Care
Insurance which was claimed to have approved the same notwithstanding the
prohibition under COA Resolution No. 2005-001.

Suspensions, Disallowances and Charges

Agency Disallowances Charges Suspensions

NEA 25,850.27 - 2,241,878.50

Beginning Ending
Audit
Balance Issued Settled Balance
Action
Jan. 1, 2012 Dec.31, 2012
Suspensions - 2,241,878.50 2,234,508.50 7,370.00
Disallowances 59,604.71 25,850.27 29,752.47 55,702.51
Charges - - - -
TOTAL 59,604.71 2,267,728.77 2,264,260.97 63,072.51

Status of Actions Taken on Prior Years Audit Recommendations

Of the 15 audit recommendations embodied in the 2012 Annual Audit Report,

eight were implemented, seven were partially acted. Details were presented in the Status
of Implementation of Prior Years Audit Recommendations.

Partially Not
Agency Implemented Implemented Implemented Total
NEA 8 7 - 15