Audit Highlights Memorandum for the Year Ended 31

Audit Highlights Memorandum for the Year Ended 31 December 2012 Volta River Authority August 2013 AUDIT

Key Findings Presentation to Stakeholders Meeting Area Summary observations Analysis Quality of earnings Financial statement analysis Compared to the previous year, the company’s financial results and performance showed a significant downturn. This finding was reached based on our analysis of the following: ■ Statement of financial position ■ Statement of comprehensive income ■ Ratio Analysis ■ Financial statement analysis Page 4 Page 7 Page 9 Page 10 - 16 Other information Disclosures Subsidiaries Page 19 - 21 Governance Audit Issues and Control observations Controls tested were generally found to be operating satisfactorily and we noted a positive approach to addressing issues previously reported Disclosures Other risk assessment © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. Page 23 Page 26 - 27 1

Quality of Earnings Our perspective on the underlying performance of the Authority and the key accounting judgments made

Quality of Earnings Underlying Performance Quality of Earnings Key developments during the year • Average inflation rates increased from 8. 7% in January 2012 to 9. 3% by the end of December 2012. • The cedi also depreciated by 18% against the US Dollar during the year. • Bank of Ghana increased the monetary policy rate from 12. 5% in January 2012 to 15% by the end of December 2012. • Crude oil prices decreased from USD 122 per barrel in January 2012 to USD 111 per barrel by the end of December 2012. © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 3

Quality of Earnings Underlying Performance Quality of Earnings STATEMENTS OF COMPREHENSIVE INCOME (GROUP) FOR THE YEAR ENDED 31 DECEMBER 2012 GH¢'000 2011 % Change 1, 749, 385 (1, 656, 583) 92, 802 1, 110, 560 (806, 679) 303, 881 58% 105% 63, 777 (238, 796) (82, 217) 48, 537 (211, 970) 140, 448 31% 13% Financial Income Financial Expenses Exchange Gain/(Loss) Exchange Fluctuation Gain/(Loss) on Foreign Debts 35, 617 (50, 389) 21, 231 (14, 388) 2, 371 (37, 745) (7, 747) (14, 677) 1402% 33% -374% -2% Profit/(loss) for the year after taxation Taxation Profit/(loss) for the year after taxation (90, 146) 82, 650 (8) 82, 642 -209% 389, 500 49, 342 258, 550 714, 590 42, 938 757, 528 -45% 15% Revenue Cost of Sales Other Operating Income Administrative Expenses -209% Other comprehensive Income: Capital surplus Revaluation of Investment © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 4

Quality of Earnings Underlying Performance Quality of Earnings Revenue Growth GH¢ thousand Revenue 2, 000 1, 800, 000 1, 600, 000 1, 400, 000 1, 200, 000 1, 000 800, 000 600, 000 400, 000 200, 000 - Revenue 2011 Increase in volume Tariff adjustment (Mines) Government subsidy 2012 Revenue Gross revenue for the group increased by 58% (i. e. 2012: GHC 1, 749 m vs. 2011: GHC 1, 110 m). The increase was mainly the result of increase in volume of electricity sold of 12% and an upward adjustment in tariff of the deregulated mining companies from US cents 13/k. Wh in 2011 to US cents 15. 8/k. Wh in 2012. Also, there was government subsidy of GHC 360 m in the current year. © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 5

Quality of Earnings Underlying Performance Quality of Earnings Power Sales 700, 000 600, 000 GH¢ thousand 500, 000 591, 511 493, 464 397, 706 400, 000 265, 275 300, 000 2012 150, 771 123, 978 101, 140 200, 000 147, 473 145, 049 2011 82, 794 ECG Mines Northern Electricity Dept (NED) Communauté Electrique Du Benin Others Revenue Breakdown Power sales to Electricity Company of Ghana increased by 19% over the period from GHC 493 m in 2011 to GHC 591 m in 2012 as a result of the 12% increase in the volume of electricity sold. Also power sales to the mining companies increased by 49% from GHC 265. 2 m in 2011 to GHC 397. 7 m in 2012 as a result of the upward tariff adjustment in 2012 and a 19% depreciation of the Ghana cedi against the US dollars in 2012. © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 6

Quality of Earnings Underlying Performance Quality of Earnings Statement of comprehensive income analysis Operating Profit / (Loss) 200000 150000 140, 448 GH¢ thousand 100000 50000 Operating Profit / (Loss) 0 2011 Profit Crude Oil purchase Power purchase (Loss) 2012 -50000 90, 146 -100000 © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 7

Quality of Earnings Underlying Performance Quality of Earnings Statement of comprehensive income analysis Operating Profit / (Loss) Operating loss compared to prior year profit was mainly caused by a significant increase of 105% recorded in cost of sales from GHC 806. 6 m in 2011 to GHC 1, 656 m in 2012. Analysing by budget centre, the increase of 130% and 132% in cost of thermal power and purchase of electricity respectively accounted for the significant increase in cost of sales. The cost of generating power from thermal increased due to increase in the use of crude which is relatively expensive to gas. Following the challenges with the West African Gas Pipeline in July 2012, the crude used by VRA to power its thermal plants shot up from 1. 6 m barrels in 2011 to 5. 2 m barrels in 2012 resulting in the significant overall increase in thermal power generating cost despite the marginal decrease in crude prices in 2012. There was a similar increase in the purchase of electricity from GHC 273 m in 2011 to GHC 634 m in 2012 representing an increase of 132%. The increase in the power purchase is as a result of increase in crude component of power purchase bills from Takoradi International Company. © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 8

Quality of Earnings Underlying Performance Quality of Earnings Ratio Analysis Ratios Solvency Profitability 2012 Current ratio (Current assets/ Current liabilities) 1. 92 2011 Commentary 2. 52 Current ratio deteriorated over the prior year’ s due to the significant increase in short term borrowings and trade payable and decrease in inventory in 2012. Gross Profit Margin (Gross profit/ Revenue) 5% 27% Net Profit Margin (Net profit/ Revenue) -5% 7% Return on Assets (Profit before Tax / Total assets) -6% 8% The gross profit margin decreased as a result of a significant increase in cost of sales in 2012. The increase in cost of sales and administrative expenses resulted in a net loss for the period. Operational losses and increasing assets caused the deterioration in this ratio © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 9

Quality of Earnings Underlying Performance Quality of Earnings STATEMENTS OF FINANCIAL POSITION (GROUP) AT 31 DECEMBER 2012 © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 10

Quality of Earnings Underlying Performance Quality of Earnings Statement of financial position analysis 15% 4, 000 3, 000 -43% 82% 4% 31% 3, 386, 105 2, 956, 818 2, 500, 000 2, 000 1, 221, 604 1, 000 500, 000 671, 614 136, 312 239, 309 26, 333 Trade and other Receivables Inventory Long Term Investments - © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 25, 313 Short Term Investments 371, 467279, 276 210, 891 160, 997 2012 2011 Cash and Bank Balances 1, 500, 000 Property, Plant and Equipment GH¢ Thousand 3, 500, 000 33% 11

Quality of Earnings Underlying Performance Quality of Earnings Statement of financial position analysis Total Assets: Total assets increased by 24% in 2012 compared to 2011 and comprised : Asset Category % of total asset s 2012 % of total assets 2011 Property, plant and equipment 63 68 Long term investments 6 6 Inventory 3 6 Trade and other receivables 23 15 Short term investments 1 1 Cash and bank balances 4 4 © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 12

Quality of Earnings Underlying Performance Quality of Earnings Statement of financial position analysis Total Assets Total assets increased by 22% from GHC 4, 155. 7 million in 2011 to GHC 5, 089 million in 2012 Property, plant and equipment(PPE) which makes up 63% of total assets increased by GHC 429. 2 m in 2012. The increase was mainly due to the revaluation surplus amounting to GHC 389. 5 m of the Authority’s assets and additions of GHC 178. 1 m to PPE during the year under review. Major additions in 2012 included GHC 4. 6 m for motor vehicles, generation assets of GHC 43. 5 m and power distribution assets of GHC 114 m. The long term investments increased by 33% over the period as a result of the increase in the debt contingency fund investment in 2012 by GHC 5. 6 m, interest on investment from West African Gas Pipeline through TAPCO of GHC 35 m and a revaluation surplus of GHC 49 m. © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 13

Quality of Earnings Underlying Performance Quality of Earnings Statement of financial position analysis Trade and other receivables increased significantly by 82% in 2012 compared to 2011. This increase was due to a significant increase in power sales receivables from GHC 471. 4 m in 2011 to GHC 918 m in 2012 representing a percentage increase of 94%. Significant balances owed were that of the Electricity Company of Ghana and Ministries, Departments and Agencies of the Government of Ghana amounting to GHC 277. 6 m and GHC 163. 5 m respectively. Also, other receivables from Tema Oil Refinery(TOR) increased from GHC 27 m in 2011 to GHC 123 m in 2012 as a result of TOR’s usage of VRA’s crude. Inventory reduced by 43% in 2012 compared to 2011 due to reduction in crude stock held at the year end from GHC 216. 8 m in 2011 to GHC 125. 3 m in 2012. Also, spares and consumable inventory reduced from GHC 21. 7 m in 2011 to GHC 10. 5 m in 2012 due mainly to a write off of unsupported inventory in 2012. Cash and bank balances increased by 31%in 2012 compared to 2011. © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 14

Quality of Earnings Underlying Performance Quality of Earnings Statement of financial position analysis 23% 368% GH¢ thousand 600, 000 500, 000 448, 205 86% 455, 239 484, 303 358, 455 259, 936 300, 000 2012 2011 200, 000 98, 289 100, 000 Long term borrowings Short term borrowings Trade and other payables - © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 15

Quality of Earnings Underlying Performance Quality of Earnings Statement of financial position analysis Total Liabilities: Total liabilities increased by 94% in 2012 compared to 2011 and comprised: Asset Category % of total liabilities 2012 % of total liabilities 2011 Trade and other payables 32 50 Short term borrowings 33 14 Long term borrowings 35 36 © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 16

Quality of Earnings Underlying Performance Quality of Earnings Total Liabilities Total liabilities increased by 94% The 94% increase in liabilities was mainly driven by an increase in short term borrowings of 363% from GHC 98 m in 2011 to GHC 454 m in 2012. The high operating cost coupled with increasing receivables meant that the Authority had to rely on short term loans from its bankers and suppliers (Standard Chartered Bank, Ecobank, Unibank, Merchant Bank and Sahara Energy) for funds to finance its crude imports. Long term loans also increased by 86% due to a GHC 188. 5 m three year loan obtained from Ecobank Ghana Limited in 2012 and drawdown on other long term facilities used to finance capital projects during the period amounting to GHC 38. 6 m. Trade and other payables increased by 25% over the period due to outstanding invoices on crude imports at the end of the year. © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 17

Northern Electricity Distribution Company Limited is incorporated as a subsidiary of VRA. Currently, it has been treated as a department whose results are combined with the mainstream. However, NEDCo though a limited liability company has not prepared separate financial statements from its inception as a company(1997) to date. NED serves as a distribution unit of the authority serving the Northern part of the country. During the year NED made a total revenue of GHC 151. 8 m (2011: GHC 124. 8 m) as against operational and general expenses of GHC 214. 3 m (2011: GHC 170 m) resulting in operating loss of GHC 62. 5 m (2011: GHC 45. 2 m). As at 31 December 2012, the total assets of the company amounted to GHC 705. 4 m (2011: GHC 585. 5 m) with total liabilities of GHC 248. 4 m (2011: GHC 182 m). © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 18

Subsidiaries VRA has four subsidiaries, i. e. TAPCo, VLTC, Akosombo Hotels Limited and Kpong farms. These companies are wholly owned by the Authority. These Subsidiaries have been consolidated except Kpong farms which is a dormant company. Two of these subsidiaries were audited by other auditors. TAPCo was, however, audited by KPMG. Below are highlights of the financials of the subsidiaries: Income statement VLTC caption Revenue Operating cost Operating (loss)/profit Other Income/expense Tax expenses/income AHL TAPCO 2012 GHS’ 000 2011 GHS’ 000 9, 861 9, 122 3, 729 3, 418 - - (14, 201) (6, 279) (3, 429) (3, 306) (12) (10) (4, 340) 2, 843 300 112 (12) (10) (31) (51) - - 86, 604 43, 676 - - (8) - - © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 19

Subsidiaries – cont’d Financial Position Caption VLTC 2012 GHS’ 000 Property, plant and equipment Investments (short/long term) Inventory Accounts receivable AHL 2011 GHS’ 000 2012 GHS’ 000 TAPCO 2011 GHS’ 000 2012 GHS’ 000 2011 GHS’ 000 77, 477 81, 236 6, 286 3, 488 - - 955 239 337, 116 250, 113 842 564 189 194 - - 3, 080 2, 003 291 244 12, 198 12, 402 10, 76 Cash and Cash equivalent 904 196 831 758 6 9, 049 Taxation 402 235 104 93 (345) Accounts payable (7, 476) (4, 335) (3, 557) (2, 694) 6, 136 4, 222 Borrowings (1, 241) (1, 200) - (80) - - Stated capital (1, 123) (542) (1) 1, 618 1, 598 (74, 78, 765) 1, 265 1, 594 (184, 453) (97, 861) (5, 821) (3, 295) - - Retained earnings Capital surplus 317) © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 20

Subsidiaries – cont’d TAPCO The following outstanding issues raised during the prior year audit of TAPCO had still not been resolved. • Shares : We require the number of issued shares for incorporation into the financial statements. This is a requirement of the Companies Act, 1963 (Act 179) • Explanation for tax provision of GHC 0. 4 m on dividend income • Taxation on revenue and other income : No tax provision has been made on revenue and other income • Supporting documentation for the increase in investment in the West African Gas Pipeline Company Limited were not obtained. © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 21

Governance Audit Issues and Controls findings including a summary of our management letter points

Systems and Controls Analysis of Current and Prior Year Control Deficiencies Definitions of control deficiencies 18 16 14 12 10 8 6 4 2 0 2011 No action Key taken 2011 Resolved fic an Si t 2 gn 01 ifi 1 ca nt 20 12 O th er 20 11 O th er 20 12 gn i Si M at er ia l 2 01 1 2012 New Issues ria l 2 at e A significant deficiency is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a misstatement that is more than inconsequential would not be prevented or detected. M A material weakness is a control deficiency that results in more than a remote likelihood that a material misstatement would not be prevented or detected in the financial statements. No. of Issues A control deficiency exists when the design or operation of a control does not prevent or detect misstatements on a timely basis. Governance Type of deficiency © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 23

Other Information from the Audit Areas relating to the general conduct of the audit

Summary of Audit Status of the Audit Significant risks: • Fraudulent revenue recognition Audit work at a glance Main Risk areas § Fraudulent revenue recognition • Unrecorded liabilities • Incorrect capitalisation of capital work in progress Other Information § Unrecorded liabilities § Incorrect capitalisation of capital work in progress Our deliverables § Audit opinion on statutory financial statements § Management report § Report to audit committee Adding value Status of the audit § Highlighting areas for § Audit complete. improvement in the management § Clean audit opinion issued. letter © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 25

Other risk assessment Disclosures • The company generally complied with relevant laws and regulations relating to financial reporting. Other information Going concern No events or conditions were highlighted that cast doubt on the company’s ability to continue operations as a going concern. However, the current year’s financial performance is an issue of concern. Fraud findings As part of our responsibilities as auditors, we are required to make inquiries of those charged with governance, as to their knowledge of known or suspected incidence of fraud. We held various discussions with management with respect to fraud. No fraud related issues were identified. Laws and regulations The Authority generally complied with relevant laws and regulations relating to financial reporting. © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 26

Reliance on the Work of Others Other Information Internal Audit We considered work done by the Authority’s internal audit unit to determine the extent to which we could place reliance on their work in the conduct of our audit. Our interaction included reviewing results of their work and interpreting the extent to which that mitigated our overall audit risk. Due to differences in objectives and the scope of work of the unit, which focused mainly on compliance with operating procedures and policies, limited reliance was placed on their work in our audit of the financial statements. Information technology (IT) § We used ITA specialists to ascertain the operating effectiveness of IT controls. Broad areas covered under these tests included the following: - Access to programmes and data - Programme changes - Programme development - Computer operations (including data back ups and business continuity planning). © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 27

Appreciation We wish to place on record our appreciation of the courtesies and co-operation extended to our representatives by Management, Staff and the Board of the Authority during the course of the audit. Thank you. © 2013 KPMG, a partnership established under Ghanaian law and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved. 28

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