7.01 The appraisal report of February 1982 examined the main features of EGPrc's prevailing financial situation and the finances of the Abu Qir gas Field, treating it as a financial entity. EGPC's financial situation has continued to remain satisfactory, largely a result of earnings from export of petroleum. Due to implementation delays of about 15 months, the Bank financed Phase II development project had an impact on the revenues from FY87 only, partially in that year and more fully from FY88. In a latter paragraph, the financial viability of the Abu Qir field is
considered. But it may be mentioned here that the expectation at appraisal that "in effect, Abu Qir would be operated as an autonomous enterprise for accounting purposes within EGPC's accounting system" has not materialized.
WEPCO compiles accounting data on investments and operating costs only.
Gas is delivered free at WEPCO's battery limits to Petroleum Pipeline Company, a subsidiary of EGPC, which transports the gas through its
pipeline net work in lower Egypt, mixing the gas from all sources. The gas is then marketed to consumers by Petrogas, another subsidiary of EGPC, including marketing within the proximate areas of Abu Qir where Abu Qir gas is presumed to go. In the absence of a cos,ing system to collect detailed costs and apportion them by sources of gas, by products where more than one product is handled and such other allocations, the best that can be done is
to develop a proforma income statement based on estimates and
approximations. EGPC should develop a good costing system for which it has the necessary expertise as well as consultant studies completed under the Gulf of Suez project (Loan 1732-EGT).
EGPC's Financial Position
7.02 EGPC's unconsolidated income statements for 1983-1987 are summarized below. Details are shown in Annex 5.
EGPC's Unconsolidated Income Statement (in LE million)
1983 1984 1985 1986 1987
Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jul-Jun
Export Revenue 1,255 1,318 1,427 827 843
Local Revenue 1,565 1,914 1,852 1,834 1,993
Total Sales Revenue 2,820 3,232 3,279 2,660 2,836 Other non-operating Revenue 200 '49 253 188 378
Total Revenues 3,020 3,j81 3,532 2,848 3,214
Operating Expenses & Taxes 1,813 2,190 2,264 1,896 2,120
Net Profit 1,207 1,391 1,268 952 1,094
Net profit to sales
revenues (2) 43 43 39 36 39
EGPC uses the exchange rate of 1 LE = $1.44.
7.03 The close correspcndence betweer: the export revenue and net profit is noteworthy. In 1986 and the first half of CY 1987, the decline in
export earnings was an aberration brought by the constrained export market and low international prices for petroleum. It seems unlikely that the export prices would get to be lower then what they had dipped to in 1986.
7.04 The unconsolidated balance sheets of EGPG are shown in Annex 6. A summary for FY85 - FY87 is given below.
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EGPC's Balance Sheet (in LE million)
FY85 FY86 FY87
Assets
Fixed Assets (Net) 275 540 577
Projects in progress 510 357 354
Investments 2,057 2,416 2,632
Working Capital 167 205 290
Total Assets 3,009 3,518 3,853
Equity and Liabilities
Equity 300 300 300
Reserves 2,442 2,895 3,164
Long term firanicing 267 325 389
Total Equity and Liabilities 3,009 3,518 3,853
Current ratio 1.2 1.1 1.1
Debt Equity ration 10:90 9:91 9:91
7.05 It will seem ftom the financial statements that EGPC is conservatively capitalized with a low debt equity ratio and its net
profits, as a percentage of sales revenue is high. Sufficient information on EGPC's assets, directly owned and through 'investments' is not available
to review profits as a proportion of assets. However, on the basis of available information it can be concluded that the fina.n_al situation of EGPC remains satisfactory and with upward domestic price revisions for which there is much scope and urgent need the position would remain good.
7.06 The following statement shows how about 852 of financing for EGPC's projects in the period 1984-1986 could be covered by internally
generated funds.
EGPC's Investments (LE million)
1984 1985 1986
Internal source: 437 404 360
External source (net)
Local lcans 4 16 7
Foreign loans 35 58 50
Investment in projects 476 478 417
Abu Qir Field Present Finances
7.07 An income statement in respect of Abu Qir gas operations (Phases I and II) for the years 1981-1988 has been prepared, making use of investment and production cost data available !#ftn WKPCO anci estimating revenues from consumer tariffs and net backs to WEPCO on a notional basis (statement is at Annex 7). Operations of Phase II were reflected in the income from FY86, but the full effect was realized in FY88. A summary of the financial results for FY86 and FY87 together with estimates for FY88 is given below.
Corresponding appraisal report data are juxtaposed.
7.08 The financial results have been poore. than projected, firstly due to a 15 month delay in implementation and secondly due to sale prices
having been lower than expected. At appraisal, 't was assumed that the price of gas (notional to WEPCO) would be increased from LE 0.17/MCF in
198, to LE 0.85/MCF in 1987. In fact, the price was maintained at LE 0.17/0.18/MCF until FY85. The average realization thereafter increased to LE 0.35/MCF in FY87, following a major price adjustment in May, 1987.
Although the gas price increases were lower than appraisal expectation, due to the annual inflation being lower than assumed in the appraisal
estimates, the operating expenses have been lower. As a result, the net income in FY88, the first year of full production, is expected to be close to the SAR anticipation.
Financial viability of Abu Qir Gas Operation
7.09 It is necessary to test this against one main criterion adopted at appraisal. There was to be a return of not less than 10Z on net revalued
fixed assets in the first three years of operations of the Abu Qir project and 15% thereafter. This criterion was premised on GOE having agreed to
increase gas prices to a level which would be above the marginal cost of
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-production of the field. In addition, as the subsequent widening gap between the official exchange rate accordeo to EGPC and the market exchange rate was not anticipated a mechanism for revaluing assets and calculating production costs on the basis of the market rate was not stipulated. The exchange rate used in the SAR (February 1982) is US$l= LE 0.70 which was the Central Bank pool rate for handling exports of petroleum, raw cotton and rice; pipeline
revenues; imports of essential fo d stuffs, insecticidesand fertilizers, etc.
On the basis of the existing natural gas prices and official exchange rate of US$1=0.70, Abu Qir gas operations are expected to show a positive net income and yield a rate of return of 18Z on net revalued assets as shown below.
Rate 1$ - 0.7 LE (in LE million) Sales revenue expected in FY88
5L
6 ExpensesOperating costs (50% foreign cost) 11.5
Royalty 5.5
Depreciation 11.6
28. 6
Operating income 28.0
Less Administrative overheads O 8
Net profit (before interest charges) 27.2 Value of revalued assets (75% foreign 152.0
costs)
Return on net revalued assets (%) 18
@ (Calculated on revalu.ed assets and a 20 year life).
This compares favorably with the 15% for FY88 assured by EGPC during loan negotiations. However, given the magnitude of the divergence between official exchange rate accorded to EGPC and the market rate of exchange if the assets were to be revalued at the prevailing market exchange rate of 1US$=2.2 LE an increase in natural gas prices of 5Z in real terms or about 30Z nominal would now be necessary to achieve the stipulated financial rate of return.
Subsequent increases may be necessary depending upon exchange rate and inflation rate movements.
7.10 The different covenants stipulated are summarized in the following and extent of compliance is discussed.
(i) Review of computer needs of EGPC aud implementation of consultants recommendations on financial management and accounting practices as were made under a provision in Bank .oan to EGPC (1732-EGT)i
EGPC has implemented some of the recommendations of the consultants but much remains to be done.
Progress made towards review of computer needs is little, pending full implementation of the
recommendations on financial management and accounting practices.
(ii) Maintenance by EGPC of debt service coverage of not less than 1.5 times:
This is being done.
(iii) Maintenance of separate accounts for the project:
This was done for costs incurred by WEPCO and not for revenues generated by Abu Qir sales.
(iv) Revaluation of Abu Qir fixed assets according to a method acceptable to the Bank for the purpose of computlng rates of return on revalued assets:
Since EGPC had no interest in preparing a profoma income account for Abu Qir field, this and other assurances bearing on Abu Qir field as such did not engage its attention. However from FY88, the Abu Qir field is seen to generate the kind of return expected but based on the premises of the appraisal report concerning exchange rates.
(v) Tariff structure for Abu Qir to yield stated rate of return and other requirements.
Complied with on the basis of the exchange rate of
$1 - LE 0.7 permitted for EGPC by GOE.
(vi) Non-incurrance of debts related to Abu Qir field unless the project debt service coverage for the field is at least 1.5 for any year.
In the absence of the Abu Qir field becoming an independent financial entitv, the condition bec e impractical.
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