EXECUTIVE SUMMARY

A. Introduction

National Transmission Corporation (TRANSCO)

1. TRANSCO is a government-owned and controlled corporation created in June

2001 by virtue of Section 8 of Republic Act No. 9136, otherwise known as the
Electric Power Industry Reform Act (EPIRA). TRANSCO started operations as
a functional unit of the National Power Corporation (NPC). TRANSCO is wholly
owned by the Power Sector Assets and Liabilities Management Corporation
(PSALM).

2. On March 1, 2003 Transco started independent operations and took over the
electrical transmission function of the NPC. Following the mandate of the
EPIRA, the transmission business of TRANSCO was privatized through a
concession contract. PSALM and TRANSCO entered into a Concession
Agreement (CA) with National Grid Corporation of the Philippines (NGCP) on
February 28, 2008, granting the latter the right to take over and operate the
whole of TRANSCO’s regulated transmission business. Ownership of all
transmission assets and real property remains with TRANSCO.

3. Congressional franchise to operate the transmission network was granted to

NGCP on December 01, 2008, thru Republic Act (RA) 9511, “An Act Granting the
NGCP a franchise to Engage in the Business of Conveying or Transmitting
Electricity through High Voltage Back-bone System of Interconnected
Transmission Lines, Substations and Related Facilities, and for other Purposes.”
TRANSCO officially turned over the management and operation of its nationwide
power transmission system to NGCP on January 15, 2009, the commencement
date of the Concession Agreement. The concession period is for 25 years and
renewable for another 25 years. The concession contract amounts to US$3.95
billion, 25 per cent of which, equivalent to US$987.50 million, was paid to PSALM
on commencement date, and the balance in semi-annual installments for 20
years

4. The Department of Budget and Management approved on April 20, 2009, the
new structure of TRANSCO consequent to the privatization of its transmission
business. TRANSCO implemented the new table of organization on July 16,
2009, with its primary functions as follows:

a. To ensure the concessionaire’s (NGCP) compliance with the terms and

conditions of the CA and the policies and guidelines of the Department of
Energy (DOE);

b. To handle all existing cases including right of way claims which accrued
prior to the Commencement Date of the CA;

c. To divest remaining sub-transmission assets to qualified distribution

utilities; and

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 d. To undertake operation and maintenance, management and consultancy
and other technical services for the power distribution systems of the
Philippine Economic Zone Authority (PEZA).

Scope and Objectives of Audit

5. The audit covered the accounts and operations of the TRANSCO for CY 2014. It
was conducted in accordance with Philippine Standards on Auditing using
sampling methodology, 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. .

B. Financial Highlights

Comparative Financial Condition

Increase/
2014 2013 (Decrease)
Assets 349,102,113,607 358,671,122,719 (9,569,009,112)
Liabilities 140,745,059,668 145,055,227,134 (4,310,167,466)
Equity 208,357,053,939 213,615,895,585 (5,258,841,646)

Results of Operations

Increase/
2014 2013 (Decrease
Income 11,065,606,632 13,819,009,412 (2,753,402,780)
Expenses 5,850,214,865 5,791,731,915 58,482,950
Net Income 5,215,391,767 8,027,277,497 (2,811,885,730)

Budget Utilization

Approved Budget Obligations Balance

PS 156,081,000 138,264,637 17,816,363
MOOE 5,300,705,000 5,239,367,211 61,337,789
CO 2,968,897,000 569,523,048 2,399,373,952
Total 8,425,683,000 5,947,154,896 2,478,528,104

C. Auditor’s Opinion

1. The Auditor rendered a qualified opinion on the fairness of the presentation of the
2014 financial statements due to the following:

a. P1.794 billion overstatement of the Construction Work-in-Progress account

with year-end balance of P6.406 billion due to inclusion of cost of
completed and energized projects amounting to P1.561 billion, non-moving

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 accounts for the last six years amounting to P246.820 million, as well as
items with abnormal or credit balances of P14.286 millionl;

b. Doubtful validity and collectability of Power Receivables account with year-

end balance of P803.392 million due to the following: a) the accounts
have been outstanding for more than five years; b) the amount of
P179.167 million had no details as to specific debtors; and b) 38 power
customers with outstanding accounts of P283.915 million confirmed that
they did not have outstanding accounts with TRANSCO;.

c. 95% of P131.75 million balance of Preliminary Surveys and Investigation

(PSI) account being inactive/non-moving for the last six years and could
not be determined whether or not the projects to which they pertained
would still be implemented;

d. Very low collectability and doubtful validity of Receivables from Officers

and Employees and Accounts Receivable-Others amounting to P2.421
million and P106.871 million, respectively, because receivables from
officers and employees amounting to P2.294 million or 95% of the total
amount and receivables - others amounting to P57.043 million or 53% of
the total amount were dormant for more than three years; and

e. Non-presentation at net realizable value of the Stocks for Disposal and

Electric Plant for Disposal net of depreciation amounting to P159.961
million and P48.947 million, respectively, due to non provision of allowance
for obsolescence and allowance for depreciation, respectively, since CY
2010.

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D. Significant Audit Observations

In addition to the audit observations which we considered in the formulation 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. No disposal for Stocks and Electric Plants was undertaken/initiated four years
after their reclassification to Stocks for Disposal and Electric Plant for Disposal
due to the absence of inventory and appraisal reports as required under Section
of VI.A of COA Circular No. 89-296.

Likewise, Property Custodians for the above-cited stocks and electric plants for
disposals were allowed to retire and/or cleared from property accountabilities
even without the proper accounting thereof.

We recommended that Management implement the following measure:

a. Coordinate with NGCP to determine the whereabouts of the Stocks

and Electric Plant for disposal stored in the former TRANSCO
Regional Offices, which are now being used by them;

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 b. Conduct physical inventory and prepare the corresponding report
specifying the following information about the assets to be disposed
of:
 Description, quantity and specification
 Date of purchase;
 Acquisition cost; and
 Physical condition;

c. Reconcile physical inventory balance with the balance per books and
make the necessary adjustment where appropriate;

d. Require the Corporation’s Disposal Committee to prepare a Program

of Disposal for the subject assets; and

e. Send out demand letters to the separated Property Custodians and

require them to account for their accountabilities, if necessary resort
to legal action.

2. The subsidy of P1.5 billion released to Transco under Special Allotment Release
Order No. F-13-01333 and Notice of Cash Allocation No. NCA-BMB-F-13-
0024890 on December 27, 2013 for the rehabilitation and restoration of
transmission lines damaged caused by typhoon Yolanda remained unobligated
and undisbursed as of December 31, 2014, one year after receipt, thus,
defeating the purpose for which it was given.

We recommended that Management revert to the Bureau of Treasury the

subsidy received amounting to P1.5 billion including all interest earned
thereon.

3. OGCC lawyers were paid allowances amounting to P1.151 million even if they
were not assigned/designated to perform additional or special tasks in
TRANSCO contrary to Section 6 of Executive Order (EO) No. 878.

We recommended and Management agreed to strictly adhere to the

provisions of Section 6 of EO 878 and stop the granting of fixed monthly
allowances to OGCC lawyers.

Also, we recommended that the OGCC lawyers be required to refund the

amount received.

4. Payment of Length of Service Award amounting to P2.970 million was not in

accordance with Section 14.0 of the Amended TRANSCO Program on Awards
and Incentives for Service Excellence (PRAISE) as approved by the Civil
Service Commission on January 9, 2012 and Section 3.6 of TRANSCO Circular
No. 2014-007 re: Implementing Guidelines for CY 2014 PRAISE.

We recommended that Management to:

a. Strictly adhere to the provisions of CSC approved TRANSCO PRAISE;

and

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 b. Require all persons concerned to refund the unauthorized Length of
Service Award received.

E. Summary of total 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 disallowances amounted to P269.848
million, with details shown in Part II of the Report.

F. Implementation of Prior Year’s Audit Recommendations.

Of the 27 prior year’s audit recommendations, 12 were fully implemented and 15

were on-going/partially implemented. Audit recommendations on-going/partially
implemented were reiterated in Part II of this Report. Details are found in Part III of
the Report.