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Power Generation & Distribution: S.G POWER LIMITED - Year Ended June 30, 2006

25 January, 2007

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OVERVIEW: For a captive power producer like S.G. Power Limited (S.G. Power), it is surprising that it's share with par at Rs 10/- is quoted these days on the Stock Exchange round Rs 4.00 against break up value at Rs 17.76 as on June 30, 2006.

The sponsors might already be looking into it. Perhaps the investors are shy of companies operating captive power plants and supplying entire electricity generated as well as steam to the associated companies.

SG Power is a public limited company, incorporated on February 10, 1994 under the Companies Ordinance, 1984 and is listed on Islamabad and Karachi Stock Exchange. The business of SG Power is generation and supply of electric power to S.G. Fibre Limited, as associated company.

On June 30, 2006 SG Power had 1,730 shareholders, of which 1,714 individuals representing general public held 3.065 million shares (17%) of the total capital of Rs 178.333 million. Shareholding by the new sponsors is: Three foreign shareholders together owned 3.569 million shares (20%). The Directors, CEO, their spouses and minor children own over 10 million shares (over 58%). The rest of the shares are distributed among a small number of corporate entities including banks and DFIs.

The company's power plant is built on land rented out by S.G. Fibre Limited, located in S.I.T.E., Karachi. There are nine generators and the entire output (electricity as well as steam) is sold to S.G. Fibre Limited. Lower generation in 2006, according to the Directors' Report, was mainly due to seven generators were in use out of nine generators and resultantly net sales were lower this year than the last year. Annual capacity and actual generation for the years 2005 and 2006 are given below:

The statutory auditors, while expressing their opinion, have taken exception for the effect of such adjustments, if any, that might have been determined to be necessary in view of the matter referred in paragraph 1 of their Report to the Members. The said paragraph 1 reads as under: "As explained in note 12.1 to the financial statements, the Company has transferred Rs 111.422 million from debtors to long term receivables on that the Company has neither accrued any interest as directed by the Securities and Exchange Commission of Pakistan nor worked out its amount".

Note 12.1 to the financial statements reads as under: "During the year, the SECP has given directive under section 473 of the Ordinance pursuant to order made in the matter of show cause notice issued to the directors of the Company under section 208 read with section 476 of the Ordinance to recover the old outstanding balance from an associated company in quarterly installments of Rs 10 million each beginning from quarter April-June 2006. Further SECP has directed to recover interest that should not be less than the borrowing cost of the Company, as return on its previous year's credits. Consequently, the balance of previous year's credits as at June 30, 2006 has been transferred to long term receivables".

The above matter has been briefly discussed in the Directors' Report. The last sentence reads: "In connection with showcause notice issued under section 208, SECP imposed penalty on each of the Directors of the Company against which Directors has preferred an appeal".

Total assets as on June 30, 2006 saw 19% decrease to Rs 343 million compared to Rs 422 million as on June 30, 2005. This was due largely to sale of a generator, loss for the year under review and the payment of liabilities to an associated company. The receivables from the associated company however remained high. There are no long term loans and the company has comfortable financial position.

Total sales for the year ended June 30, 2006 saw 6% decrease to Rs 174 million compared to Rs 185 million for the previous year. This was due to lower electricity and steam produced for 100% sale to S.G. Fibre Limited. From the data provided in the annual report, it appears that the loss for the year under review mainly was due to the reason that the selling price of electricity did not fully recover from the customer the increase in fuel cost. The average price of electricity (which also includes supply of steam) works out to Rs 3.01 per unit for the year 2006 compared to Rs 2.92 per unit for the year 2005. The cost of fuel works out to Rs 2.57 per unit of electricity for the year 2006 compared to Rs 2.22 per unit for 2005. The increase in selling price per unit of electricity for 2006 is only 3% as compared to increase in cost of fuel per unit of electricity at 16%. The company suffered a big loss during 2006 compared to small profit in the previous year. Performance statistics are given below.

On performance, the Chairman in his Review states even after all its efforts, S.G. Power could not give positive results by way of profit. There were some major problems during the year like continuous low pressure of gas supply throughout the year generally and during last quarter specifically resulting in shutdown of generators at frequent intervals. Like previous year there were also some major breakdowns in the year under review. As a result to maintain the supply of our only consumer M/s S.G. Fibre Limited we had to pay Rs 16.145 M on account of rent of a generator and in addition increase in gas rate by 15.5% played vital role to bring 11.63% Gross Loss which finally reached to net loss by 15.75%.

COMPANY INFORMATION: Chairman: S.M. Ahmed; Chief Executive: Asim Ahmed; Director: Sohail Ahmed; Company Secretary: Syed Haris Kazmi; Auditors: M/s M. Yousuf Adil Saleem & Co, Chartered Accountants; Registered Office & Plant: B-40, S.I.T.E., Karachi; Web Address:

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