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TANESCO Tariff Application Jan2008-Aug 07 Ver 0

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									   Tanzania Electric Supply Company Ltd




 TANESCO Tariff Application January 2008




AUGUST 2007                     Version 0
TANESCO Tariff Application




CONTENTS
1       EXECUTIVE SUMMARY.......................................................................................i
2       Description of the Proposed Approach.................................................................1
    2.1     The current situation in the power sector in Tanzania ............................................. 1
    2.2     The “steady state” tariff system................................................................................ 4
    2.3     Description of the Proposed Approach .................................................................... 9
    2.4 Guidance Sought from EWURA.................................................................................... 12
3       Tariff History .......................................................................................................13
4       Current and Proposed tariffs ..............................................................................15
5       Customer Benefits..............................................................................................16
6       TANESCO Corporate Business Plan .................................................................18
    6.1 The Plan ........................................................................................................................ 18
    6.2 Key Assumptions........................................................................................................... 18
    6.3 Strategies and Plans ..................................................................................................... 19
    6.4 Past and Projected Corporate Performance ................................................................. 20
7  Audited Financial Statements.............................................................................22
8  Demand and Energy Forecast ...........................................................................23
9  5 Year Operating Information Forecast ..............................................................24
10      Cost of Service Analysis.............................................................................28
11      Return on Investment .................................................................................29
12      Revenue Requirements Forecast...............................................................30
13      Tariff Application.........................................................................................31
ANNEXURE A: 2007 – 2011 Corporate Business Plan .............................................32
        Strategies and Plans....................................................................................................... 33
ANNEXURE B: KPA’s/KPI’s.......................................................................................39
ANNEXURE C: SHORT TERM GENERATION PLAN...............................................46
ANNEXURE D: Cost of Service Analysis...................................................................51
ANNEXURE E: Audited Financial Statements ...........................................................52



TABLES
Table 1: CURRENT TAriff structure .......................................................................................... 1
Table 2: current tariff and historic evolution ............................................................................ 13
Table 3: current and proposed tariffs....................................................................................... 15
Table 4: customers and energy forecast ................................................................................. 23
Table 5: income statement ...................................................................................................... 25
Table 6: balance sheet ............................................................................................................ 26
Table 7: cash flow statement................................................................................................... 27



FIGURES
FIGURE 1: ELECTRICITY TARIFF COMPARISON, 2006 ....................................................... 2
FIGURE 2: AVERAGE SELLING PRICE ................................................................................ 14
FIGURE 3: IPP GENERATION VS TOTAL GENERATION - 2006......................................... 20
FIGURE 4: IPP COST VS TOTAL REVENUE - 2006 ............................................................. 20
TANESCO Tariff Application



1 EXECUTIVE SUMMARY

TANESCO initially applied for a tariff increase of 6% that was approved by
EWURA effective from 1st February 2007. That tariff increase was to cover
inflation. TANESCO now wishes to apply for tariff adjustment for the transitory
period 2008-2009 as the first stage of a phased process aimed at setting steady-
state tariffs based on costs reflecting efficient sustainable provision of services
under its responsibility.
Among EWURA’s requirements are those which are readily accessible in the
company’s records like previous audited financial statements, previous tariffs and
other operating information. However, other information requiring detailed cost of
supply for respective tariff categories and the effects of cross subsidy among the
tariffs may not be immediately available as the studies were made three years ago
and therefore need to be updated.
The main requirements for such application as per EWURA’s guidelines are as
follows:
− A comprehensive tariff schedule supported by a detailed explanation on how
  each tariff was calculated and how the data was obtained for both current
  and the proposed tariff.
− Effective date of the tariff accompanied by a trend of adjustments for the
  past three years
− A statement explaining how the proposed tariff adjustment will benefit the
  applicant’s current customers.
− Applicant’s strategic plan for the next five years indicating programmes
  intended to improve the quality and quantity of service.
− Audited financial statements for the past three years
− Comprehensive operating information, how the information was obtained
  and how this information can be verified by an independent verifier.
− Demand forecast for the next five years
− A projection of operating information for the next five years
− Cost of service analysis
− The proposed rate of return on invested capital supported by a cost of capital
  analysis.
− A schedule based on above analyses that projects revenue requirements for
  a twelve-month period from date tariff adjustment is proposed to be effective
− Any other material
The company proposes to carry out an updated tariff study focusing on tariff
balancing and full recovery of costs reflecting efficient and sustainable
performance, calculated based on the guidelines to be issued by EWURA, for
submission later on.
TANESCO has prepared this tariff application based on the best available
information required for this purpose and requests EWURA to apply the proposed
tariffs during a transition period comprising years 2008 and 2009.



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During this transition period, TANESCO will carry out the tariff study mentioned
above, upon definition by EWURA of the regulatory framework and related
methodologies and operational procedures to determine costs reflecting efficient
and sustainable performance of the company.

TANESCO noted that the study can not be completed in less than six months
and the procurement process is quite lengthy. TANESCO so far has managed
to secure funding for the first part of the assignment i.e. for the expert to support
TANESCO in preparing this tariff application. The second part funding that
involves the cost of service and tariff study is not financed so far but TANESCO
is working diligently to secure funds. In addition, important input to the study will
come from the Power System Master Plan Study, which will certainly not be
ready before August 2007 and is currently planned to be completed in January
2008.

The action plan for TANESCO to conduct the above study is to look for funds to
cover costs of its implementation. The study is expected to start early 2008.
Therefore the application for tariff adjustment is based on TANESCO’s revenue
requirements.




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2 Description of the Proposed Approach

2.1 The current situation in the power sector in Tanzania
2.1.1 Tariff Structure, average tariff level and subsidisation
The current tariff structure distinguishes between the following customer groups:
Domestic Low Usage Tariff (D1) for low consumption users
General Usage for general use of electricity including residential, small commercial
and light industrial use, public lighting and billboards (T1)
Low Voltage Maximum Demand Usage for general use at 400 V and average
consumption is more than 75000 kWh per meter reading period (T2)
High Voltage Maximum Demand Usage Tariff for general use where power is
metered at 11, 33,132 and 220 kV (T3).
Individual tariffs for large customers like Zanzibar and the mines


The following table shows the tariff components of each tariff:


TABLE 1: CURRENT TARIFF STRUCTURE

 TARIFF          TARIFF COMPONENTS
 NAME
                 FIXED CHARGE           ENERGY         TIME-OF-USE       DEMAND
                                        CHARGE         ENERGY            CHARGE
                 (Shs/CUSTOME
                                                       CHARGE
                 RPER MONTH)            (Shs/kWh)                        (Shs/kVA)
                                                       (Shs/kWh)
 D1                                               √

 T1                        √                      √

 T2                        √                      √                          √

 T3                        √                      √                          √

 Other large               √                      √                          √
 customers


Allocation of sales among tariff categories evidences the existence of a very
significant “Pareto effect”. Customers in tariff categories T2, T3 and other large
consumers represent only 0.4% of total number, but more than 55% of
TANESCO’s sales in physical units (as per 2006 figures).




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The current cost of supply to final consumers for TANESCO is Tshs 164/kWh,
and the average tariff charged is around Tshs 96. This means that TANESCO
loses, on average, about Tshs 68 on every kWh sold. As a consequence, the
company is operating deeply “in the red.”
As per Annexure D, between 2004 and 2005 the financial haemorrhaging was at
the level of Tshs. 112 billion per calendar year. In 2006, the losses increased to
approximately Tshs. 189 billion due to heavy use of higher cost thermoelectric
generation caused by the drought. During the first six months of 2007 the loss
amounts to Tshs. 36,358 million (or Tshs. 6,060 per month).


The shortfall between our revenues and our costs has historically been covered by
direct and indirect subsidies from the Government’s budget, but from financial year
2007/8 the Government will not subsidize TANESCO from its budget, except Tshs
18,000 million for part payment of IPTL Capacity Charges.


It is instructive to note that TANESCO’s tariffs are low when compared to those of
neighbouring countries, In 2006, Tanzania’s electricity tariffs in Tanzania were
lower than in most other African countries, including neighbouring Kenya, Uganda
and Rwanda (see figure 1 below).


FIGURE 1: ELECTRICITY TARIFF COMPARISON, 2006

                     25.0


                                                                                                  20.0
                     20.0
  US Cents per kWh




                     15.0

                                                                                          11.8

                                                                             9.8
                     10.0                                           8.4
                                                          7.4


                      5.0             4.0       4.2
                             3.1



                      0.0
                            South    Malawi   Namibia   Tanzania   Kenya   Tanzania   Uganda     Rwanda
                            Africa                       Current             Prop.




The principal motivation for this tariff application is to gradually move our average
tariff levels up to commercially realistic levels that will allow TANESCO to cover its


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cost of operations. Without such a tariff increase, TANESCO will be unable to
provide the quality of service that our customers deserve and which TANESCO
seeks to provide. The inescapable reality is that no enterprise, whether it is an
electricity company or a small grocery store, can provide the service that its
customers seek if it loses money on every unit of output that it sells.
The shortfall between our revenues and our costs has historically been covered by
direct and indirect subsidies from the Government’s budget. Since the revenues for
the Government’s budget ultimately come from the all of the nation’s citizens, this
means that all citizens, whether connected to our grid or not, pay as taxpayers for
the electricity that TANESCO produces through the subsidies that TANESCO
receives from the Government.
2.1.2 TANESCO historic and current operational performance
TANESCO fully recognizes that its performance in the recent years has not been
acceptable. In 2006, there were widespread and painful blackouts throughout the
TANESCO grid. These blackouts were strongly influenced by the severe drought
suffered by the country and our lack of funds to maintain and make even minimal
improvements in our distribution facilities. Similarly, our inability to connect new
customers for lack of adequate equipment, even though many of these potential
consumers had already made the necessary deposits, is simply not acceptable.


It is tempting to get into the “blame game” in explaining these failings in our recent
performance. We think that most objective observers would agree that there are
both internal and external causes that explain TANESCO’s poor performance. The
existence of inefficiencies in management and operations is a fact. But several
relevant external causes can also be identified. These include low tariffs that do not
cover costs, no regulatory mechanisms for adjusting for changes in inflation and
changes in costs beyond the control of TANESCO, poor hydrology in 2006, a
legacy of high capacity payments for IPP power purchases in two PPA’s and the
occasional failure of the Government to provide promised and timely financial
support1.


The company is designing an ambitious Business Plan for the coming years,
aimed at eliminating its inefficiencies as fast as possible and achieving a
sustainable improvement in quality of electricity supply and customer service.
However, it will be impossible to achieve improved outcomes unless we receive a
tariff increase that will allow us to finance improvements. Our customers have
reason to be sceptical about such a Business Plan. What they want is concrete
improvements in performance and not just public promises. TANESCO is equally
committed to genuine improvements in performance. Therefore, in return for

1
  For example, the capacity and energy charges that we pay to IPPs use up to
90% of our collected revenues. In most other countries, total generation costs,
whether through self-generation or purchases, rarely constitute more than 65% of
collected revenues.




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accepting our request for a tariff increase, we are requesting that EWURA
establish a monitoring system that publicly reports on our operational, technical
and commercial performance.


2.1.3 Proposed Approach
Among EWURA’s requirements are those which are readily accessible in the
company’s records like previous audited financial statements, previous tariffs and
other operating information. However, other information requiring detailed cost of
supply for respective tariff categories and the effects of cross subsidy among the
tariffs may not be immediately available as the studies were made three years ago
and therefore need to be updated. The main requirements from EWURA are as
stated in the execute summary of this application.
TANESCO wishes to apply for tariff adjustment for the transitory period January
2008 to December 2009 as the first stage of a phased process aimed at setting
steady-state tariffs based on costs reflecting efficient sustainable provision of
services under its responsibility.
The company proposes to carry out an updated tariff study focusing on tariff
balancing and full recovery of costs reflecting efficient and sustainable
performance, calculated based on the guidelines to be issued by EWURA in future,
for submission later on.
TANESCO has prepared this tariff application based on the best available
information required for this purpose and requests EWURA to apply the proposed
tariffs during a transition period from January 2008 to December 2009.
During this transition period, TANESCO will carry out the tariff study mentioned
above, upon definition by EWURA of the regulatory framework and related
methodologies and operational procedures to determine costs reflecting efficient
and sustainable performance of the company.

TANESCO noted that the study can not be completed in less than six months
and the procurement process is quite lengthy. TANESCO so far has managed to
secure funding for the first part of the assignment i.e. for the expert to support
TANESCO in preparing this tariff application. The second part funding that
involves the cost of service and tariff study is not financed so far but TANESCO
is working diligently to secure funds. In addition, important input to the study will
come from the Power System Master Plan Study that will certainly not be ready
before August 2007 and is currently planned to be completed in January 2008.
The action plan for TANESCO to conduct the above study is to look for funds to
cover costs of such a study. The study is expected to start early 2008.
Therefore the application for tariff adjustment is based on TANESCO’s revenue
requirements.


2.2 The “steady state” tariff system
After the transition period, we believe that it is important that EWURA use its legal
authority as the electricity sector regulator to establish a “steady state” tariff setting



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system that protects TANESCO’s consumers from paying for inefficient costs while
providing TANESCO with regulatory certainty that will allow us to rationally plan our
operations and investments. In this section, we provide background information on
our recommendations to EWURA on the key elements of a steady state tariff
system. These recommendations are based on our understanding of the principal
“cost drivers” that affect the costs of generating and supplying supply electricity to
our customers.


2.2.1 Physical and Commercials Function Performed by TANESCO
In the current institutional and organizational structure of power sector in Tanzania,
the principal production and commercial activities are carried out as follows:
Electricity generation: TANESCO owns and operates both hydropower plants
and thermal stations running on oil products. In addition, the company has signed
power purchase agreements (PPA’s) with Independent Power Producers (IPP’s)
and Emergency Power Producers (EPP’s) involving both capacity and energy
charges to be paid for electricity produced by thermal plants running on natural gas
and oil products. At this time, our two principal IPP suppliers are IPTL and
Songas.
Transmission services (ownership and operation of the national 220 kV, 132 kV
and 66 kV transmission system interconnecting power plants with consumption
areas) provided by TANESCO.
Distribution and retail services to final consumers nation-wide (ownership and
operation of 33 kV, 11 kV and low voltage (400/240V) networks) provided by
TANESCO.

Therefore, total costs incurred by TANESCO to provide electricity services to final
consumers can be expressed as:


TANESCO Total Costs = Power Generation and Purchase Costs + Transmission
Costs + Distribution & Retail Costs


2.2.2 Key Considerations in the Design of the “Steady State” Tariff System
In order to ensure sustainability of electricity supply to final consumers, TANESCO
should be allowed to collect revenues (the “Allowed Revenues (AR)”), through
tariffs charged to its customers and/or other sources (funds provided by
Government, donors, etc.) to cover:
Operational costs, capital costs and taxes corresponding to efficient operation of
activities directly performed by TANESCO to supply electricity to its customers
(hydro and thermal generation, electricity transmission and distribution, retail
supply), including allowed total losses (Costs of own operation).
Total costs incurred by TANESCO to purchase capacity and energy under existing
PPA’s with IPP’s and EPP’s (Costs of power purchases from external suppliers).




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In addition, each component of the AR should be periodically adjusted to reflect
changes in the values of its main cost drivers that are beyond the control of
TANESCO. The procedures for adjustment (specification of the adjustment
formulas and the frequency of their application) should be defined in advance and
applied automatically. These tariff adjustment mechanisms should apply to
activities performed by the company (generation, transmission, distribution and
retail supply), as well as to power purchases. The use of automatic adjustment
mechanisms to adjust tariffs for changes in cost that are beyond the control of the
regulated company is a standard regulatory approach that is used by electricity
regulators in both developing and developed countries2.
In the following sections, we present a discussion of some of the specific tariff
setting considerations in the major areas of operation.


2.2.2.1 Generation costs
It is clear that operational costs (OPEX) of hydropower plants and non-fuel OPEX
of thermal plants owned and operated by TANESCO are largely “manageable
costs”. Therefore, the values of these parameters that should be included in the
AR should be based on a determination of the costs that would result from efficient
execution of these processes and activities. Similarly, capital costs (CAPEX) of
TANESCO’s power plants to be included in the AR should be determined based on
replacement cost and economic life of assets and a reasonable rate of return for
the generation activity. Both components of the AR should be adjusted annually
based on changes in external cost drivers (such as local inflation and the rate of
exchange).
Fuel costs of thermal plants operated by TANESCO are largely “non-manageable”
costs. The company must operate those plants to meet the design value of thermal
efficiency (known as heat rate) of each of its generating units, but fuel prices are
completely outside of its control3.
Fuel and capacity charges paid by TANESCO to IPP’s under existing PPA’s are
“non-manageable” costs because these contracts were negotiated by government
officials and then handed over to TANESCO for implementation. Therefore,

2   (See World Bank, “Pass-through of Power Purchases: Regulatory Challenges and International
     Practices,” Energy and Mining Sector Board Discussion Paper No. 10, February 2004, p.11-12,
     available at www.worldbank.org/energy).


3   Overall fuel costs are determined by both the prices paid for the fuel and the quantity of fuel used.
    The prices paid are largely determined by international fuel markets (especially in the case of
    petroleum) or the subsidized prices determined by the Government of Tanzania. Consequently,
    these prices are largely beyond TANESCO’s control. Therefore, the effect of changes in fuel
    prices should be periodically adjusted in the allowed revenue requirements. In addition, since
    international oil markets are characterized by high volatility, the adjustments should be made
    relatively frequently at 6 months interval. The quantity of fuel used is determined by the overall
    demand of our customers (largely beyond our control) and our ability to transmit and distribute
    electricity to our final customer while minimizing technical and commercial losses (which is
    substantially under our control).




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TANESCO believes that it is appropriate for the AR to include mechanisms that
allow for the periodic pass-through of these charges in the tariffs paid that are paid
final consumers. TANESCO requests that EWURA consider establishing periodic
adjustments in the AR based on changes in foreign exchange values and
fluctuations in oil product prices.


2.2.2.2Transmission and distribution costs
Transmission and distribution are natural monopolies (the “grid” services).
Allowed remuneration for these services can be respectively expressed through
a “transmission margin (TM)” and a Distribution margin (DM). Those margins
represent TANESCO’s costs in providing electricity transmission and distribution
services efficiently, meeting the standards in service quality defined by EWURA.

TM and DM comprise both operating (OPEX) and capital (CAPEX) costs.

CAPEX, in turn, is broken down into:

    a) Return or amortisation of investments, which is recovered through a
       depreciation allowance, and

    b) Costs of financing this investment, recovered through an allowed return
       on assets.

Therefore, TM and DM can be written as:


TM = OPEX + Depreciation + Allowed Return


DM = OPEX + Depreciation + Allowed Return


Where:
Depreciation (“return of investment”) = Asset Base / Average asset life
Allowed Return (“return on investment”) = Asset Base * cost of capital + taxes


It is suggested that the regulatory approach to be defined by EWURA to calculate
values of TM and DM to be included in the AR in the “steady state tariffs” should
comprise methodologies and procedures for setting values of the parameters in the
formulae above (both for transmission and distribution services):
        −   OPEX
        −   Asset Base
        −   Average asset life
        −   Cost of capital




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It is also suggested that it is very important to outline that determination of OPEX
and the “Asset Base” by taking into consideration the standards on quality of
supply and service to be previously defined by EWURA.
In addition, procedures (formulae and frequency for application) for periodic
adjustment of Transmission and Distribution Margin (TDM) based on changes in its
cost drivers must, it is suggested, be defined by EWURA.


2.2.3 Need Of A Phased Approach To Reach “Steady State”: The Transitory
Period 2008-2009
Analysis developed in the previous paragraphs of this section shows that it is for
EWURA to define the regulatory approaches, methods and procedures to
determine the parameters comprised in the calculation of the AR that TANESCO is
allowed to collect (from tariffs paid by its customers and other sources).
TANESCO understands that doing so for a “steady state” condition of the power
sector in Tanzania is a long and time-consuming process, comprising several
stages such as definition of methodologies and procedures, collection of relevant
data, effective application in an open and transparent process involving EWURA,
TANESCO, consumers and other sector’s stakeholders.
Based on those elements, as well as in the current situation of the power sector
and values of tariffs charged to electricity consumers, TANESCO proposes for
EWURA’s consideration a phased approach consisting of two stages:


Stage 1: Transitory Phase for the Period 2008-2009. Tariffs to be allowed
during this period should base the allowed revenues that will permit the recovery
of TANESCO’s current operating costs for all activities (generation,
transmission, distribution, power purchases), plus a targeted allowance for
capital expenditures that are especially crucial to achieving acceptable levels of
reliability, quality of supply and commercial service. These capital expenditures
should have a relatively short payback period (such as investments in
automated meter reading for reduction of commercial losses). During this period,
mechanisms for the automatic adjustment of costs beyond TANESCO’s control
will be put into place.

During this transition period, TANESCO commits to obtaining the best possible
financing for its investment program, through an efficient combination of long-
term loans, short-term financing and grants from multilateral agencies and
donors and other government subsidies. The investment plan will be focused on
achieving sustainable improvement in quality of electricity supply and customer
service, as well as specific targets in reduction of technical and commercial
losses to be approved by EWURA

Stage 2: The Steady-State Phase Tariff Setting Period. As described in
section 2..2.2, TANESCO requests that EWURA provide guidance on
establishing a steady state tariff setting system that will allow TANESCO to
recover both operating and capital costs based on efficient operations. This



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means that TANESCO will not be allowed to automatically recover incurred or
projected costs. Allowed costs will be keyed to efficient costs. As with the
transition period, the automatic adjustment mechanisms should be applied from
the beginning of the period.


2.3 Description of the Proposed Approach
In this section we describe the approach proposed for calculation of values of each
of the components of TANESCO costs specified in the formula presented in
Section 2.2 to be included in the Allowed Revenues (AR) for the transitory period
2008-2009:


TANESCO Total Costs = Power Generation and Purchase Costs + Transmission
Costs + Distribution & Retail Costs
As stated in section 1.2.3, the proposed approach for determining AR for the
period 2008-2009 aims at achieving full recovery of the operating costs incurred
by TANESCO from the beginning of the transitory period, as well as to periodically
adjusting these costs, based on changes in values of their main drivers. It is the
first step of the proposed phased approach aimed at moving from the current
situation to the “steady state” tariff system. It has been elaborated following the
guidelines defined by EWURA.

In return for EWURA approval of this tariff application, TANESCO commits to
achieve systematic improvements in quality of electricity supply and customer
service, as well as in reduction of commercial losses as stipulated in EWURA’s
Order No.07-001 of January 2007. The Business Plan prepared by the
company for this transitory period is strongly focused on the execution of repairs,
maintenance and commercial activities that allow to start recovering from a long
period of underinvestment and inefficient management.


2.3.1 Power Generation and Purchase Costs
2.3.1.1 Optimized generation mix
Generation requirements for the period 2007-2009 were defined starting from
the best available forecast of electricity sales for the period 2007-2009. An
allowance on total losses for the same period, based on current values and
plans designed by TANESCO to gradually reduce them during that period was
added. It is important to outline that funds available for investments aimed at
reducing technical and commercial losses during that period will be very limited.

A “base generation plan” was prepared using the planning and modelling
computational tools available at TANESCO (operated by System Control
Department) and the set of available historic hydrologic data. This base plan is
characterized by assuming average hydrology (arithmetic mean of all the historic
data available) for 2008 and 2009 and actual hydrology in 2007. Annual
production (in physical units, MWh) of TANESCO’s own generating facilities and



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of power plants owned by IPP’s and EPP’s for the transitory period were
determined by optimizing economic dispatch through the models, taking into
consideration representative fuel prices, thermal efficiencies, relevant
transmission and fuel supply constraints. Detailed assumptions and obtained
results are described in detail in Annexure C, Attachments 1 to 3.


2.3.1.2 Generation charges to be included in the AR
TANESCO proposes to adopt outcomes of that “base generation plan” to calculate
the AR related to power generation and purchase costs for the transitory period
2008-2009, considering the following additional assumptions:


        − Apply current values of operational costs (OPEX) of hydropower
          plants and non-fuel OPEX of thermal plants owned and operated by
          TANESCO.

        − Consider fuel costs actually paid by the company for operation of its
          own thermal plants.

        − Consider full “pass-through” into AR of capacity and energy charges to
          be paid by TANESCO to IPP’s under existing PPA’s.

        − In order to minimize the impact on average tariff level, do not include
          capital costs (CAPEX) of TANESCO’s power plants in the AR for the
          transitory period. This reflects that no allowance for depreciation and
          return will be contemplated during that period. In the meantime,
          TANESCO will define a plan for renovation of electromechanical
          equipment (generating units and auxiliary equipment) of its
          hydropower plants at the end of their economic lives, including time
          schedule and optimized scheme for financing (based in principle on
          external resources available for environmentally friend projects). All
          the relevant information on this issue will be submitted to EWURA, in
          order to allow the Regulator to determine the value of CAPEX to be
          included in the AR for the tariffs to be applied at the end of the
          transitory period.


The impact of the generation component of AR on tariffs paid by final consumers
will be determined by taking into consideration potential Government support (e.g.
capacity payments under the PPA’s or others).


2.3.1.3 Periodic adjustment of generation costs

Taking into consideration the crucial impact of generation costs on AR and the
high volatility of its main cost drivers (fuel prices, currency exchange rate),



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TANESCO proposes to define and implement a mechanism for periodic “ex-
post” adjustment of the generation costs considered in the calculation of the AR,
by comparing them with generation costs actually incurred in the previous 6
months. Comparison between forecasted and real values will be performed
considering actual sales plus allowed losses, as well as amounts effectively paid
by TANESCO to IPP’s and EPP’s and for fuel purchased for own generation
(non manageable parameters). Differences between real and forecasted values
of AR due to the generation costs components, with their sign, will be reflected
in the AR for the following period.


2.3.2 Transmission and Distribution Services Provided by TANESCO
2.3.2.1Transmission and distribution costs to be considered in the AR
TANESCO proposes that values of TM and DM to be considered for the
calculation of AR during the transitory period are determined as follows:


        − Recognition of OPEX required to provide transmission and distribution
          services with current TANESCO’s efficiency levels.

        − Allowance for capital expenditures that are actually crucial to achieve
          acceptable levels in reliability quality of electricity supply and customer
          connections and/or have a very short payback period (such as
          investments in automated meter reading for reduction of commercial
          losses).

        − No allowance for depreciation will be considered during this transitory
          period. TANESCO will do its best efforts to obtain adequate financing
          for its investment plan and, at the same time, a preliminary calculation
          of the Asset Base, following the methodology defined by EWURA, will
          be carried out.

        − Provision for non-collectable revenues will be limited to 3% of sales
          revenues from the beginning of the transitory period, as a way of
          showing TANESCO’s commitment to improve its operational
          performance for the benefit of good customers. No provision for old
          bad debts will be considered.



2.3.2.2 Periodic Adjustment of Transmission and Distribution Costs
TANESCO proposes to define and implement a mechanism for annual adjustment
of the transmission and distribution margins considered in the calculation of the
AR, based on changes in cost drivers determined by EWURA (local inflation, rate
of exchange, etc.)




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2.3.3 Allocation of AR among the Different Tariff Categories
As stated at the beginning of this section, in return for EWURA approval of this
tariff application, TANESCO commits to implement a Business Plan for the
transitory period strongly focused on the execution of repairs, maintenance and
commercial activities that allow to achieve significant improvement in quality of
electricity supply and customer service. It is clear that willingness of TANESCO’s
customers to pay for higher electricity tariffs will not exist if they do not perceive
that, in return, they are getting a service of better quality.


2.4 Guidance Sought from EWURA

TANESCO wishes to cooperate with EWURA in developing a credible and
effective regulatory system that will produce concrete benefits for TANESCO’s
customers. To achieve this outcome TANESCO seeks guidance from EWURA
for the following seven components of the electricity regulatory framework:-
The regulatory methodologies and processes that TANESCO should apply in
creating a “steady state” tariff setting system (including guidance on the
continuation of intra and inter-class cross subsidies and regional cross subsidies)
The standards on quality of supply and service for different customer classes that
EWURA wishes TANESCO to achieve in the near and mid-term
Procedures for allocating allowed revenue (AR) among voltage levels and between
tariff categories within each voltage level.
The type of monitoring system for TANESCO’s financial, operational and
commercial performance that EWURA requires to perform its regulatory functions
EWURA’s receptiveness to the establishment of one or more incentive systems
tied to measurable gains in TANESCO’s performance.
Principles to encourage competition in the procurement of new sources of
generation supply and for the development of model PPA’s.
Principles for the purchase of power from small power producers that are
connected to the TANESCO grid.




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3 Tariff History

During 2003 TANESCO (through NetGroup Solutions) carried out a
comprehensive tariff study, based on the principles of NRS 058. The tariff study
proposed cost reflective tariffs and having tariffs aligned according to customer
groupings with the same consumption requirements. This included the allocation of
costs to match the TANESCO cost structure.
Not all of the recommendations in that study could be met to date. The tariff
balancing plan could not be implemented. The new proposed tariff structure was
implemented. The current tariff structure was developed as part of this study, and
implemented as such.


TABLE 2: CURRENT TARIFF AND HISTORIC EVOLUTION

      TARIFF                           COMPONENT       1 MAY        1 JUNE           1 FEBRUARY
                                                       2005         2006             2007
      APPROVING AUTHORITY                              BOD          BOD              EWURA
                                       UNIT COST       (SHS)        (SHS)            (SHS)
 D1   Domestic Low Usage               Basic Charge             0                0                 0
                                       Energy Charge           38            38                   40
      High cost units:                 Start at:       50 kWh          50 kWh                50 kWh
      Penalty - high usage:            Energy Charge      115               121                 128
 T1   General Use                      Basic Charge      1,700             1,785              1,892
                                       Energy                  95           100                 106
 T2   Low Voltage Supply               Basic             6,300             6,615              7,012
                                       Energy                  63            66                   70
                                       Demand (kVA)      6,900             7,245              7,680
 T3   High Voltage Supply              Basic             6,300             6,615              7,012
                                       Energy             58.5               61                   65
                                       Demand (kVA)      6,400             6,720              7,123
 T5   Zanzibar Supply                  Basic             6,300             6,615              7,012
                                       Energy             24.3               26                   28
                                       Demand (kVA)      3,510             3,686              3,907




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The following figure depicts the average selling price since 2004. The tariff
increases shown in figure 2 were not more than 6% designed to cover inflation
and to accommodate the powers of the Board of Directors. Please refer to
annexure B of this application.


FIGURE 2: AVERAGE SELLING PRICE


             120

             100

              80
   Tsh/kWh




              60

              40

              20

               0
                                     May-04




                                                                                           May-05




                                                                                                                                                 May-06
                            Mar-04




                                                                                  Mar-05




                                                                                                                                        Mar-06
                   Jan-04




                                              Jul-04
                                                       Sep-04


                                                                         Jan-05




                                                                                                    Jul-05
                                                                                                             Sep-05


                                                                                                                               Jan-06




                                                                                                                                                          Jul-06
                                                                                                                                                                   Sep-06
                                                                Nov-04




                                                                                                                      Nov-05




                                                                                                                                                                            Nov-06

Note: Billing amount in the month of November 2006 was exceptionally high
compared to other months.




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4     Current and Proposed tariffs

EWURA’s Board of Directors issued an order to increase the TANESCO’s tariff by
6% effective February 1st 2007. This increase was mainly to cover inflation.
TANESCO now wishes to apply for tariff adjustment for the transitory period 2008-
2009 as the first stage of a phased process aimed at setting steady-state tariffs
based on costs reflecting efficient sustainable provision of services under its
responsibility. The proposed tariff increase is on average 40% during the transitory
period. A comparison between present tariff and proposed tariff is as shown in the
table below.


TABLE 3: CURRENT AND PROPOSED TARIFFS

         TARIFF                           COMPONENT       CURRENT 1st        PROPOSED
                                                          FEB                1st JAN
                                                          2006               2008

                                          UNIT COST       (SHS)              (SHS)

 D1      Domestic Low Usage               Basic Charge                   0                0

                                          Energy Charge               40                 56

         High cost units:                 Start at:               50 kWh             50 kWh

         Penalty - high usage:            Energy Charge              128                179

 T1      General Use                      Basic Charge             1,892              2,649

                                          Energy                     106                148

 T2      Low Voltage Supply               Basic                    7,012              9,817

                                          Energy                      70                 98

                                          Demand (kVA)             7,680             10,752

 T3      High Voltage Supply              Basic                    7,012              9,817

                                          Energy                      65                 91

                                          Demand (kVA)             7,123              9,972

 T5      Zanzibar Supply                  Basic                    7,012              9,817

                                          Energy                      28                 39

                                          Demand (kVA)             3,907              5,470




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5       Customer Benefits
The company has designed an ambitious Business Plan for the coming years,
aimed at eliminating its inefficiencies as fast as possible and achieving a
sustainable improvement in quality of electricity supply and customer service. Our
customers want concrete improvements in performance and TANESCO is equally
committed to achieve them. Therefore, in return for the tariff increase, we commit
to provide our customers with benefits in the following areas:

    − Customer Service Charter (improvement of customer connections,
      Introduction Metering services, notification of interruptions, recognition of
      customers rights and obligations, prompt attention to customer’s
      complaints, inquiries and requests, provision of essential telephone
      services etc)
    − Establishment of a Call Centre to improve customer services
    − Reduction of operational costs through efficient procurement procedures
      and optimize utilisation of generation resources
    − Significant reduction in power rationing by increasing generation to cope up
      with the increasing demand.
    − Improved system reliability and quality of supply by reducing outages
      through upgrading and rehabilitation of the transmission and distribution
      lines.
    − Improved customer services installation of Automated Meter Reading
      (AMR) for medium and large customers and by LUKU roll-over to other
      areas. This will mean installation of more LUKU meters to phase out the
      conventional ones and increase the LUKU vending stations.
    − Reduction in losses. Technical and commercial losses will be minimised by
      improving the transmission and distribution lines coupled with remote
      metering and frequent energy audits to the customers.
    − Increased maintenance to ensure effective utilisation of the networks and
      reduction in outages.
    − Maintain and improve service levels by capacity building in TANESCO’s
      workforce/personnel coupled with improvement of tools and equipments.
    − Access to electricity to larger portion of the community will be realised out of
      the savings from improved services and efficiency acquired.
    − Introduction of new payment services such as:
              • Scratch cards and SMS for LUKU.
              • Payment for credit meters through Banks and ATM Machines.

Consistently, efforts to improve effectiveness and efficiency in technical and
financial performance of TANESCO will be focused in the following critical areas:

    •    Achieve and sustain standards reflecting good quality in electricity supply
         and customer service.
    •    Achieve and sustain acceptable levels in total losses



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   •   Improve system reliability
   •   Optimise utilisation of generation resources
   •   Execute critical investments to reinforce the backbone of the power system
       and enhance critical business processes
   •   Promote ongoing skills transfer
   •   Accelerate electrification

Strategic thinking, interaction with key stakeholders and workshops resulted in the
identification of Power Systems improvement programs, which will take care of the
priority areas. The formalisation of each program will be part of the activities to be
implemented in the Corporate Business Plan as fully explained in annexure A.. The
objective of these projects is to address critical areas in order to improve
TANESCO's financial and operational performance. Successful implementation of
these projects will increase the value of TANESCO significantly to prospective
investors. These projects are all important to managing the business processes
that determine the income stream of the company. At present these projects can
not be implemented for lack of funds.




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6 TANESCO Corporate Business Plan

6.1 The Plan
The Corporate Business Plan focuses on the actions needed to effect the changes
required in the short term as well as financial predictions for the coming 5 years
starting in year 2007.
The Vision and Mission statements of the Company also guide the Business Plan.
The Vision of the company is: “To be an efficient and commercially focused utility
supporting the development of Tanzania, and be a regional player.”
The Mission of the Company is: “To generate/purchase, transmit and supply
electricity in the most effective, competitive and sustainable manner possible.”
Along with the above envisaged Corporate Vision and Mission, TANESCO has at
heart the following values:
                        − Ethical business conduct
                        − Integrity
                        − Honesty
                        − Service excellence
                        − Receptivenes to stakeholders opinions
                        − Environmentally responsibility


To realise the vision and mission, TANESCO business imperatives are:
                        − Ensure financial viability
                        − Attain customer satisfaction
                        − Attain employee satisfaction
                        − Support the National policies


6.2 Key Assumptions.
The key assumptions used in preparing the 2007 Corporate Business Plan are:
                TANESCO will provide all funds for essential capex investments
                for 2008 and 2009 through tariffs.
                A 40% tariff increase from January 2008, thereafter a stedy state
                tariff will be applied after two years.
                The annual inflation will be 7% per annum
                To procure a short/medium term loan to off set Tsh 250 bn
                operational shortfall and repay the loan over a six year period (with
                a grace period of 18 months) at commercial rates.




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                Government will strengthen hydrology resource management
                which has started. GoT intervention to restore this resource will
                have a huge positive effect on future investment costs.
                The Songas debt restructuring to reduce the capacity charges
                levied by the IPP on a monthly basis. Agreement has been
                reached in principle.
                IPTL conversion beginning January 2009        and completed July
                2009.
                Increased generation projects to meet demand will take place as
                planned.


6.3 Strategies and Plans
TANESCO has set out the following strategic focus areas:
                Ensure company´s financial viability
                Improve quality of supply
                Improve customer service
                Raise level of management skills
                Make electricity available to as many people as possible
                Prepare ring fenced business units for autonomy.
                Improve company´s image
Action plans and budgets have been drawn up to align with these focus areas. In
order to monitor progress and focus the attention of all staff, various targets have
been set in certain Key Performance Areas (KPA’s) and management will monitor
Key Performance Indicators (KPI’s) against such targets.
Below is a list of the Key Performance Areas.
                Revenue improvement
                Loss reduction
                Customer care
                Cost effectiveness
                Reliability of supply
                Safety
                Business efficiency


The implementation of this plan is demanding, given the challenges ahead. To
meet these challenges, Management will put in place effective monitoring
mechanisms to ensure that the strategies are achieving the desired results and the
action plans are being executed as planned. In this regard, Business Units will be




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required to report on quarterly basis their performance for evaluation and
monitoring.


6.4 Past and Projected Corporate Performance
The Past Performance of TANESCO over the last 4 years is shown in the graphs
in Annexure B. The losses have not been reduced as planned, due to a lack of
investment. The generation costs have been increasing drastically. The increase is
due to high capacity charges of the two IPP’s (IPTL since 2002 and Songas since
2004) and the rising of fuel price world wide. The cost of IPP’s is a heavy burden to
the Company as shown in the following charts(Chart 1 & 2) whereby the cost of the
IPP’s as a percentage of TANESCO’s Revenue is not proportional to the
percentage contribution of IPP’s to the total generation.


FIGURE 3: IPP GENERATION VS TOTAL GENERATION -
2006


        IPP GENERATION vs TOTAL GENERATION - 2006



          43%



                                                               57%




                  IPP’s Generation (GWh)          Own Generation




FIGURE 4: IPP COST VS TOTAL REVENUE - 2006




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                       IPP COST vs TOTAL REVENUE - 2006


                          10%




                                                  90%


                 IPP Cost (mil Tshs)        Balance for other use



6.5 The Corporate Business Plan
The Corporate Business Plan intends to overlay TANESCO’s strategic road map
for the next five years. It entails the objectives of the Company at corporate level. It
details milestones, resource requirement, as well as key issues towards achieving
its objectives.     The plan makes reference to Tanzania Development Vision
referred to as ‘’Vision 2025” and various other national policies which impacts the
company in one way or another. The plan also makes reference to various
regional documents such as the East Africa Power Master Plan (EAPMP) and
Southern Africa Power Pool (SAPP). The Corporate Business Plan is aligned with
the national policies as well as takes advantages of the power policies as spelled
out in the regional co-operative documents.
In the final analysis the plan articulates the vision of the Company and provides
yardstick for measurement of corporate performance in that respect. The
Corporate Business Plan contains the budget 2007 as depicted in the income
statement in Table 6 of section 9 being its first year plan.




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7 Audited Financial Statements

Audited financial accounts are available for years 2004 and 2005. At the time of
submitting the application final audited accounts for 2006 were still being
finalized however, draft accounts are provided. TANESCO shall endeavour to
finalise the accounts and submit as soon as they are certified by the external
auditors.
These are attached in Annexure E.




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8 Demand and Energy Forecast
The following table shows the customer and energy forecast for the planning
period:


TABLE 4: CUSTOMERS AND ENERGY FORECAST


                Five year Projection                    Budget Transitory Period Transitory Period   Forecast     Forecast
Customer Numbers and Classes                         2007            2008              2009           2010         2011
D1 -Domestic Low Usage                                289,572          332,732           375,890        419,050      462,208
T1 -General Use                                       379,699          436,291           492,882        549,475      606,065
T2 -Low Voltage Supply                                   1,467            1,686             1,905         2,123        2,342
T3 -High Voltage Supply                                    258              299               338           377          417
T5 -Zanzibar State Fuel & Power Corp.                        1                1                 1             1            1
Resolute Gold Mine                                           1                1                 1             1            1
Kahama Gold Mine                                             1                1                 1             1            1
Total                                                 670,999          771,011           871,018        971,028    1,071,035
Year on Year Customer Growth                              8.0%            14.9%             13.0%         11.5%        10.3%

Employees                                                4,697            4,838            4,983         5,133        5,287
Customer per employee                                      143              159               175           189          203
Units per employee                                     671,280          701,259           752,618       800,317      833,475

Total Electricity Sales by Customer Class (kWh)            2007          2008          2009          2010          2011
D1 -Domestic Low Usage                              445,223,185   479,060,147   515,468,719   554,644,341   596,797,311
T1 -General Use                                     895,001,083   963,021,166 1,036,210,774 1,114,962,793 1,199,699,965
T2 -Low Voltage Supply                              453,193,933   487,636,672   524,697,059   564,574,035   607,481,662
T3 -High Voltage Supply                             945,102,925 1,016,930,748 1,094,217,484 1,177,378,013 1,266,858,742
T5 -Zanzibar State Fuel & Power Corp.               232,290,358   249,944,425   268,940,201   289,379,656   311,372,510
Resolute Gold Mine                                   54,656,555    58,810,453    63,280,047    68,089,331    73,264,120
Kahama Gold Mine                                    127,531,961   137,224,390   147,653,444   158,875,105   170,949,613
Total                                             3,153,000,000 3,392,628,000 3,750,331,728 4,107,658,275 4,406,178,924
Year on Year Total Sales Growth                           13.9%          7.6%         10.5%          9.5%          7.3%



The growth rates for sales over the years have to vary due to increase in new
customers as well as changes in specific consumption. For example in 2007 when
the load recovers from suppressed demand condition in the previous year due to
drought, load growth is high (14%)




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9 5 Year Operating Information Forecast

The following three tables show the operating forecast for the planning period used
in the analysis.




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TABLE 5: INCOME STATEMENT

Income Statement                                                                     Five Year Projection
(TSH m, Years ended 31 December)                                         Assuming Tariff set such that year end cash balances for 2008 - 9
                                                                                                    equal zero

                                                                                     Transitory Transitory
                                                                         Budget        Period     Period           Forecast      Forecast
                                                                              2007          2008          2009          2010          2011

Sales (GWh)                                                                 3,153         3,393         3,750         4,108         4,406
Sales Growth (%)                                                            13.9%          7.6%         10.5%          9.5%          7.3%

Operating Revenue
 Electricity Sales                                                       291,239       438,722       529,045       578,417       627,049
 Other                                                                       -             -             -             -             -
Total Gross Operating Revenue                                            291,239       438,722       529,045       578,417       627,049

Other Operating Income
 Grants and subsidies                                                     74,153       109,039        41,696          3,367         2,480
 Non Electricity Sales Related Customer Payments                          12,995        16,038        18,998         19,068        17,779
 Other Income                                                             34,830           -             -              -             -
 Sub-total                                                               121,977       125,076        60,694         22,435        20,259

Total Revenue                                                            413,215       563,798       589,739       600,852       647,308

Expenses
   Own generation and transmission                                        48,859        50,501        55,117        60,155        65,653
   Purchased electricity                                                 239,275       268,871       255,988       247,422       267,917
   Distribution expenses                                                     -             -             -             -             -
   Provision for doubtful debts                                           66,201        17,549        21,162        23,137        25,082
   Loss on revaluation of assets                                             -             -             -             -             -
 Cost of Sales                                                           354,335       336,921       332,267       330,713       358,652
   Provision for impairment of trade receivables                             -             -             -             -             -
   Relief project                                                            -             -             -             -             -
   Management Support Services and Monitoring Consultant (SIDA funded)       -             -             -             -             -
   Staff costs                                                            59,008        68,343        73,127        78,246        83,723
   Provision for doubtful debts – Morogoro Training Centre                   -             -             -             -             -
   Provision for obsolete and slow moving inventories                        -             -             -             -             -
   Repairs and maintenance                                                56,447        65,808        79,357        86,762        94,057
   Transport and travel                                                    6,329         9,181         9,823        10,511        11,247
   Other administration expenses                                          14,952        23,670        31,510        37,083        42,158
   Retrenchment costs                                                        500           -             -             -             -
   NetGroup Solutions Pty success fee                                        -             -             -             -             -
   Loss on revaluation of land and buildings                                 -             -             -             -             -
   Allocations to capital work-in-progress                                   -             -             -             -             -
 Other Operating expenses                                                137,236       167,001       193,816       212,602       231,185
Total Expenses                                                           491,572       503,922       526,084       543,315       589,837

EBITDA                                                                    (78,356)      59,876        63,656         57,536        57,471

less Depreciation                                                         28,406        32,881        54,093         52,429        56,878

EBIT                                                                     (106,762)      26,995          9,562         5,107            593

Net foreign exchange gain/(loss)                                              -            -             -              -             -
Interest expense                                                          (25,679)     (42,394)      (40,286)       (33,351)      (26,267)
Interest income                                                               -            -             -              -             -
Reversal of 2004 finance charges on loans converted into equity               -            -             -              -             -
Unwinding of fair value adjustment                                            -            -             -              -             -
Net finance Income/Expense                                                (25,679)     (42,394)      (40,286)       (33,351)      (26,267)

Profit/Loss before tax (With Depreciation Recovery)                      (132,441)     (15,398)      (30,724)       (28,244)      (25,675)

Exclude Depreciation from Tariff Determination                            28,406        32,881        54,093         52,429        56,878

Profit/Loss before tax (Without Depreciation Recovery)                   (104,035)      17,482       (21,162)       (23,137)      (25,082)

Exclude Depreciation and Doubtful Debts from Tariff Determination         66,201        17,549        21,162         23,137        25,082

Profit/Loss before tax (Without Depreciation & Doubtful Debt Recovery)    (37,834)      35,031               (0)           (0)               0

Analysis:

Average Gross Operating Revenue per Unit (TSH/kWh)                         92.37        129.32        141.07         140.81        142.31
Average Cost of Sales per Unit (Excluding Depreciation) (TSH/kWh)         112.38         99.31         88.60          80.51         81.40
Gross Income/ (Loss) per Unit (TSH/ kWh)                                  (20.01)        30.01         52.47          60.30         60.91

Year on Year Tariff Increase (Actual and Projected*)                         7.6%         40.0%           9.1%         -0.2%          1.1%
* Excluding Capital Cost Recovery




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TABLE 6: BALANCE SHEET

Balance Sheet                                                        Five Year Projection
(TSH m, Years ended 31 December)                    Assuming Tariff set such that year end cash balances for 2008 - 9 equal zero


                                                                   Transitory      Transitory
                                                     Budget          Period          Period          Forecast        Forecast
                                                          2007            2008             2009            2010             2011
Current Assets
Inventories                                           58,552              -                -                -               -
Trade and other receivables                          136,634         184,118          195,848          185,505         170,076
Current income tax                                        -               -                -                -               -
Cash at bank and in hand                              25,134          72,569           56,039           54,112          72,251
Other                                                     -               -                -                -               -
                                                      220,320         256,688          251,886          239,617         242,327
Investments
  Investments - current                                   -                -               -                -               -
  Investments - noncurrent                              1,055            1,055           1,055            1,055           1,055
                                                        1,055            1,055           1,055            1,055           1,055
Fixed & Intangible Assets
  Property, plant and equipment                     1,089,265      1,254,722        1,453,515       1,536,448        1,576,183
  Capital work in progress                                -              -                -               -                -
  AFUDC – Prepayment                                    8,218          7,690            7,162           6,634            6,106
  Deferred income tax asset                               -              -                -               -                -
  Total Fixed Assets                                1,097,483      1,262,412        1,460,677       1,543,082        1,582,289

Total Assets                                        1,318,858      1,520,155        1,713,618       1,783,754        1,825,671

Current Liabilities
 Overdraft                                               -               -                -                -               -
 Trade and other payables                            133,615         136,972          142,996          147,680         160,325
 Tax payable                                             -               -                -                -               -
 Loans repayable within one year                         -               -                -                -               -
 Total Current Liabilities                           133,615         136,972          142,996          147,680         160,325

Term Liabilities
 Loans Repayable Between 1-2 Yrs (as at 31.12.06)        -                  -               -                -               -
 Loans Repayable Between 2-5 Yrs (as at 31.12.06)        -                  -               -                -               -
 Loans Repayable After 5 Yrs (as at 31.12.06)            -                 (0)              -                -               -
 Stanbic Syndicated Loan                             235,000               (0)              (0)              (0)             (0)
 Loan 5                                                  -           250,000          215,278          173,611         131,944
 Loan 6                                                  -               -                -                -               -
 New Debt                                                -               -                -                -               -
 Total Term Loans                                    235,000         250,000          215,278          173,611         131,944
 Consumer deposits                                       -               -                -                -               -
 Deferred tax liabilities                                -               -                -                -               -
Total Term Liabilities                               235,000         250,000          215,278          173,611         131,944
Sub Total                                            368,615         386,972          358,274          321,291         292,269

Capital and Reserves
Share capital                                         293,912   293,912               293,912         293,912          293,912
Advance towards share capital                         693,193   693,193               693,193         693,193          693,193
Accumulated losses                                   (701,967) (717,365)             (748,089)       (776,333)        (802,008)
Revaluation reserve                                   501,286   501,286               501,286         501,286          501,286
Grants                                                163,819   362,157               615,043         750,405          847,018
Total equity                                          950,243 1,133,183             1,355,345       1,462,463        1,533,401

Total Liabilities                                   1,318,858      1,520,155        1,713,618       1,783,754        1,825,671




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TABLE 7: CASH FLOW STATEMENT

Cash Flow Statement                                                                     Five Year Projection
(TSH m, Years ended 31 December)                                          Assuming Tariff set such that year end cash balances for 2008 - 9 equal
                                                                                                           zero

                                                                                        Transitory       Transitory
                                                                           Budget         Period           Period       Forecast       Forecast
                                                                                2007           2008            2009           2010          2011
Operating activities

Profit/(loss) before tax                                                  (132,441)        (15,398)        (30,724)       (28,244)      (25,675)

Adjustments for:
Depreciation                                                                28,406          32,881          54,093         52,429       56,878
Interest income                                                                -               -               -              -            -
Unrealised exchange loss/(gain)                                                -               -               -              -            -
Amortisation AFUDC prepayment                                                  528             528             528            528          528
Reversal of 2004 finance charges                                               -               -               -              -            -
Provision for Morogoro Training Centre                                         -               -               -              -            -
Profit on disposal of property, plant and equipment                            -               -               -              -            -
Write-off of property, plant and equipment                                     -               -               -              -            -
Impairment adjustment                                                          -               -               -              -            -
Amortisation                                                                   -               -               -              -            -

Total Adjustments                                                         (103,507)         18,010          23,897         24,714       31,731

Changes in working capital:
- inventories                                                                  -            58,552             -              -            -
- trade and other receivables                                              (13,375)        (47,484)        (11,729)        10,343       15,429
- trade and other payables and consumer deposit                             25,187           3,357           6,024          4,684       12,645
- Current Income Taxes                                                       6,269             -               -              -            -
Cash generated from/ utilised by operations                                (85,426)         32,435          18,192         39,740       59,805
Interest received                                                              -               -               -              -            -
Tax paid                                                                       -               -               -              -            -

Net cash utilised in operating activities                                  (85,426)         32,435          18,192         39,740       59,805

Investing activities
Capital Work in Progress - Beginning of the Year                            58,508             -               -             -              -
Capital Work in Progress - Transferred to property, plant and equipment        -          (198,338)       (252,886)     (135,362)       (96,613)
Capital Work in Progress - End of the Year                                     -               -               -             -              -
Capital Work in Progress - Net Additions                                    58,508        (198,338)       (252,886)     (135,362)       (96,613)
Proceeds from disposals of property, plant and equipment
Acquisition of investments
Net cash utilised in investing activities                                   58,508        (198,338)       (252,886)     (135,362)       (96,613)

Financing activities
Proceeds from borrowings                                                   235,000         15,000             -              -              -
Repayment of loans                                                        (232,908)             0         (34,722)       (41,667)       (41,667)
Proceeds from grants                                                           -          198,338         252,886        135,362         96,613
Net cash utilised in financing activities                                    2,092        213,338         218,164         93,696         54,946

Decrease in cash and cash equivalents                                      (24,826)         47,435         (16,531)        (1,926)      18,139

Movement in cash and cash equivalents
At the beginning of the year                                                49,960          25,134          72,569         56,039       54,112
Decrease during the year                                                   (24,826)         47,435         (16,531)        (1,926)      18,139
At the end of the year                                                      25,134          72,569          56,039         54,112       72,251




TANESCO Tariff Application Jan2008-Aug 07 Ver 0                                                     27
TANESCO Tariff Application


10 Cost of Service Analysis

The cost of service from Audited Management Accounts of 2004 to 2006 has been
varying, ranging between 42% and 71% above actual revenue. As TANESCO
could not raise enough money to meet its true cost of service over the period some
important services to improve power reliability and general efficiency could not be
carried out. Therefore, the true cost of service is somehow higher than these
figures. Details are indicated in Annex D.




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TANESCO Tariff Application


11     Return on Investment
As described in Section 1, the tariff application has been prepared on the basis of
recovery of direct operating costs incurred by TANESCO during the transition
period. Therefore, depreciation and return on assets are not included in the
amount of the revenues requested for that period.
However, it is clear that steady-state tariffs to be set by EWURA must contemplate
total costs reflecting efficient sustainable performance of the company. This implies
to recognize efficient operating costs, investments actually needed to meet the
standards on quality of electricity supply and customer service and a reasonable
return on invested capital.




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TANESCO Tariff Application


12     Revenue Requirements Forecast

Table 5 in section 9 includes revenue requirements for a twelve-month period
(2008) from date which the tariff adjustment is proposed to be effective with
additional projections to year 2011.




TANESCO Tariff Application Jan2008-Aug 07 Ver 0             30
TANESCO Tariff Application


13 Tariff Application
As noted above TANESCO’s cost of service in 2006 was in excess of 40% above
its revenue if Government and donor community contributions are considered.
Even with such contributions TANESCO has not been able to finance some
important programs to deliver reliable power and to improve efficiency in general.
It is recommended that EWURA approves a 40% tariff increase effective from 1st
January, 2008. This tariff increase for the transitory period should generate
revenues that will permit the recovery of TANESCO’s current operating costs for all
activities (generation, transmission, distribution, power purchases), plus a targeted
allowance for capital expenditures that are especially crucial to achieving
acceptable levels of reliability, quality of supply and commercial service. These
capital expenditures should have a relatively short payback period (such as
investments in automated meter reading for reduction of commercial losses).
During this period, mechanisms for the automatic adjustment of costs beyond
TANESCO’s control will be put into place.
In summary TANESCO requests the following:
EWURA approve 40% tariff increase for the period from January 2008 to cover
TANESCO’s current operating costs plus allowance for essential capital
expenditure;
EWURA put in place during this period a mechanism for automatic adjustment of
costs beyond TANESCO’s control (exchange rate fluctuations, inflation and power
purchase costs).




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  TANESCO Tariff Application


ANNEXURE A: 2007 – 2011 Corporate Business Plan

  Executive Summary
      Introduction

      The Corporate Business Plan of TANESCO is a strategic road map for the
      next five years (2007-2011). This Corporate Business Plan is prepared with
      two main objectives namely:
      (I)     To make efficient use of company’s scare resources of human
              resources, finance, materials and infrastructures.
      (II)    To position the company such that it meets its objectives and main
              challenges. The main challenges facing TANESCO are:
                     Inability to meet the national demand
                     Heavy dependency on hydro generation
                     Inability to supply new customers quick enough
                     Inadequate business systems and processes to support
                     business plan
                     Skills needs for growing business

      The plan takes into consideration the fact that the company now is de-listed
      and is no longer under the Presidential Public Sector Reform Commission
      (PSRC). The way forward is depicted in the diagram below



                 TANESCO route after delisting

                                                    Stabilisation &             Autonomy &
                         Privitisation              Consolidation                 Financial
                                                                                Independency




                          Prior 2007                  January                     Post 2008
                                                       2008




              The strategic objective
                                                                      •maximise
                    of Tanesco                                         shareholder value
                                                                      •delivery
              should now be different




      The effects of de-listing are that TANESCO:

                  a. will remain a vertically integrated utility company
                  b. will remain a monopoly company for electricity distribution
                  c. will be initially be operating in ‘a single buyer model’ system
                     purchasing electricity from the Independent Power Producers


  TANESCO Tariff Application Jan2008-Aug 07 Ver 0                                 32
TANESCO Tariff Application


                    (IPP’s), but later on electricity market to be liberalized with
                    change of legislation

    The Plan makes reference to Tanzania Development Vision referred to as
    ‘’Vision 2025” which is the Country’s long term Plan as well as the National
    Energy Policy.      The ‘’Vision 2025” targets 8% economy growth and
    TANESCO electricity supply will grow by 15% annually in the next 5 years to
    support the intended growth of the economy.

    The plan also makes reference to various regional documents such as the
    East Africa Power Master Plan (EAPMP) and Southern Africa Power Pool
    (SAPP). In this regard TANESCO will:

                a. Increase revenue by supplying power to additional mines
                   starting from 2009
                b. Export power to Kenya by year 2010 which will boost the
                   company’s revenue.
                c. Allow energy trading with the SAPP within five years when the
                   Zambia – Tanzania interconnection line is expected to be
                   completed.


    Guiding Principles of the Corporate Plan

     This Corporate Business Plan is guided by the Vision and Mission
    statements, The Vision: “To be an efficient, commercially feasible customer
    oriented utility supporting the development of Tanzania, and to be a power
    house of East Africa.”

    The Mission: “To generate/purchase, transmit and supply electricity in the
    most effective, competitive and sustainable manner possible.”

    Strategies and Plans

    The company is planning to embark on two major strategies namely the
    generation strategy and the financial recovery strategy.

    The generation strategy targets to achieve the following:
          Increase power generation capacity by 60 MW every year to meet the
          growing demand.
          Move away from hydro-generation dependence presently at 60%
          hydro generation to predominantly thermal (70%) thermal.




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TANESCO Tariff Application



                        TANESCO GENERATION CONTRIBUTION

         100%
           90%
           80%
           70%
           60%                                                         hydro
                                                                       Coal
           50%
                                                                       Thermal Fuel
           40%                                                         Thermal Gas
           30%
           20%
           10%
            0%
                     2007        2008        2009   2010   2011


    The financial recovery strategy to be employed will ensure that:
           Growth in revenue to meet both operational and investments
           requirements by year 2010.
           Connection of mining loads in the Lake Zone.
           Export of power to Kenya by 2010.

Way Ahead

The Outcome of implementing the strategies are summarized in the chart below




TANESCO Tariff Application Jan2008-Aug 07 Ver 0                   34
TANESCO Tariff Application




Tanesco 2007              Tanesco 2012                                       Tanesco Beyond
                                                                                  2012




                                                                                     >25%
 10%                              25%                                                access
access                           access




670,000 cust
623 MW                                                                          >1 600 000 cust
3153 GWh sales                 1 210 000 cust
                               950 MW                                           1600 MW
4654 employees                                                                  >8000 GWh
$1bn equity                    6100 GWh sales
                               4600 employees                                   4700 employees
                               $2,5bn equity                                    >$3bn equity
                               Energy Trading                                   Energy Trading




  Immediate                     Medium                            Medium
                                                                                                Long term
  Short term                    Short term                       Long term

 Purpose:                      Support:                         Max GoT’s value:              Market liberalisation:
 Stabilisation &               GoT econ growth &                Fin returns                   Fiscal revenue streams
 Consolidation Phase           Delivery phase
                                                                Focus areas                    Focus areas
 Focus areas                   Focus areas                      • Gen Capacity continue        • Separate entities under Tan
 • Generation emergency        • Gen capacity expansions        • Electrificat continue          Holdings
    Capacity
                Reform and transformation
 • Cash flow recovery
 • Long term transform
                                 &gas utilization
                               • Financial independence
                                                                • Value chains
                                                                  as per Business plan
                                                                • Returns to shareholder
                                                                                               • GoT fiscal revenue streams
                                                                                               • Continue delivery & growth
                                                                                               • Electrification cont
                               • Electrification
   as per Business plan

 Deliverables
                          Map  • Business systems/processes
                               • HR developm & training
                               Deliverables
                                                                • Competition in generation • Generation competition
                                                                • Customer choice
                                                                • Power House East. Africa
                                                                                               • Financial autonomy

 • Gen short term lease &      • Interconnectors                • Autonomous entity            Deliverables
   long term acceleration      • Invest plan                    Deliverables                   • Legal unbundling G,D ,T
 • Execution of Fin Rec Plan   • Gen cap ~ 1100 MW              • Electricity market &         • Expand Energy market
 • Tariff Application          • Electrification~ 100000/an     • Tanesco Bonds                • Add IPP’s & own gen
 • Collection continue         • Org struct to match business   • pool operator                • Electrification cont> 50%
 • IPP’s & Own generation        plan deliverables              • IPP’s & Own generation
 Institutional                 • IPP’s & Own generation         • Electrification cont ~40-50% Institutional
 Arrangements                  • KPI -Balance scorecard         • Interconnectors              GoT considers:
 • Tanesco corporatised        Institutional                    Institutional                  • Separate companies owned
 • 100% owned by GoT           Arrangements                     Arrangements                   • Semi/full privitization
 • Delisted                    • Restruct to support GoT        • 100% owned by GoT            • PPP
 • Not fully ring fenced         growth                         • Separate business comp       • Status Quo
                               • Commercialisation                under Tanesco Holdings       • Others
                               • Ring fence for new business    • Shared services

         2007                           2008 - 2010                         2010-2012                Beyond 2012




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TANESCO Tariff Application




Corporate Performance

 The Company has set for itself some strategic key performance areas it wants
 to concentrate on. The technical and financial key performance indicators and
 their timings are summarized in the company journey which follows.




TANESCO Tariff Application Jan2008-Aug 07 Ver 0               36
                     Company Journey
         TANESCO Tariff Application
•New connections         • New connections      •New connection              •New connections           •New connections
89,000                   100,000                100,000                      100,000                    100,000

•Customer service        •Improved customer
improvement              service
                                                •Losses reduced to           •Losses reduced to         •Losses reduced 15%
•Losses reduced to       •Losses reduced to
                                                19%                          17%
24%                      22%
                                                                                                                                   A world class electricity
Collections at 96%                                                                                                                          utility
                                                •Collections at              •Collections at            • Profit growth
                         •Collections at 96%                                                                                      • Our service levels are the best in
                                                96%                          96%                        sustained
•Leased 140MW                                                                                                                       the Region
projects completed       •Improved quality of                                                                                     • We continuously meet our service
                                                                             •Nairobi- Arusha           Collections at              level performance standard
                         supply                                                                                                   • Lowest cost per service provided
                                                                             330 kV link.               96%
•Quality of supply                                                                                                                • Safety record is the best in the
                                                -KIWIRA phase 1
improvement
                                                & 11
                                                                             •Reinforcement of
•100MW Perrmanent
                                                                             Iringa-Dodoma-
gas based generators                                                                                    Zambia –Tanzania
                                                                             Shinyanga line
installed                                                                                               Interconnector
                         •Tegeta 45MW on                                                                commission. Trading
•Customer service        line                                                                           in SAPP
improvement

•Net income              •Net income            •Net income (40)                                        •Net income (26)bn
                                                                             •Net income
(22) bn.Tshs             (42) bn. Tshs          bnTshs                                                  Tshs
                                                                             (33) bn. Tshs
•Operating
Efficiency Ratio
(OER) 136%
                         •OER 128%              •OER 95%                                                •OER 81%
                                                                             •OER 88%
•Client Charter
issued




                   Dec 2007
                                          Dec 2008                Dec 2009                     Dec 2010                      Dec 2011                  Long-term


         TANESCO Tariff Application Jan2008-Aug 07 Ver 0                                       xxxvii
TANESCO Tariff Application


Capital Investment Plan

It is projected that between 2008 and 2011 TANESCO shall have a Capital
Investment Programme amounting to TSH 699.9 billion, of which TSH 683.2
billion shall comprise investment in new assets and TSH 16.7 billion shall be
to fund associated technical assistance. It is assumed that the World Bank will
provide a grant amounting to the equivalent of TSH 93.15 billion to the MOF
under the proposed TEDAP Facility that shall be injected by the MOF into
TANESCO as equity to finance specified capital investments. It is further
assumed that MCC shall provide a facility amounting to TSH 154.51 billion to
finance certain capital investments and also injected by the MOF as equity.
This leaves a funding requirement of TSH 444.05 billion that is assumed to be
funded by equity and loans.

CAPITAL INVESTMENT PLAN

                                         2008 TSH 2009 TSH 2010 TSH 2011 TSH
             Name of Project                m        m        m        m          TOTAL

Tedap Projects                              16,728    16,728    16,728   16,728    66,913
CIP Projects                                   175       325       -        -         500
Hydro Generation                            16,903    17,053    16,728   16,728    67,413
CIP Projects                                64,902    82,693     2,547      -     150,143
Thermal Generation                          64,902    82,693     2,547      -     150,143
MCC Projects                                19,228    16,023    16,023   12,819    64,093
Tedap Projects                               5,780     5,780     5,780    5,780    23,120
CIP Projects                                36,415    91,250    57,651   26,357   211,673
Transmission Systems                        61,423   113,054    79,455   44,955   298,887
MCC Projects                                 7,995     6,663     6,663    5,330    26,650
Tedap Projects                              16,118    16,118    16,118   16,118    64,473
CIP Projects                                13,098     3,704       250      -      17,052
Distribution Systems                        37,211    26,485    23,031   21,448   108,175
CIP Projects                                   149       -         -        -         149
Land and Buildings                             149       -         -        -         149
CIP Projects                                13,000    13,000    13,000   13,000    52,000
Motor Vehicles                              13,000    13,000    13,000   13,000    52,000
MCC Projects                                   722       601       601      481     2,405
CIP Projects                                 4,028       -         -        -       4,028
Office Equipment                             4,749       601       601      481     6,433
Total Capital Expenditure                  198,338   252,886   135,362   96,613   683,199
                                                                                      -
CIP Related Operating Expenditure            4,666     6,183     3,367    2,480    16,696
                                                                                      -
Total Capital Investment Programme         203,004   259,069   138,730   99,093   699,895



TANESCO Tariff Application Jan2008-Aug 07 Ver 0                           38
 TANESCO Tariff Application



ANNEXURE B: KPA’s/KPI’s
                                                                                                    TANESCO
                                                                                               Revenue Management
                                                                                                     Graph 1



                   30,000

                   25,000

                   20,000
     Tsh '000000




                   15,000

                   10,000

                    5,000

                        -
                                                 May-04




                                                                                                                                     May-05




                                                                                                                                                                                                                       May-06
                                     Mar-04




                                                                                   Nov-04




                                                                                                                       Mar-05




                                                                                                                                                                     Nov-05




                                                                                                                                                                                                     Mar-06




                                                                                                                                                                                                                                                         Nov-06
                            Jan-04




                                                          Jul-04




                                                                                                     Jan-05




                                                                                                                                                Jul-05




                                                                                                                                                                                   Jan-06




                                                                                                                                                                                                                                     Jul-06
                                                                      Sep-04




                                                                                                                                                          Sep-05




                                                                                                                                                                                                                                                Sep-06
                                                                            Billing                             Collections




                                                                                                     TANESCO
                                                                                                Revenue Management
                                                                                                  Collection Level
                                                                                                      Graph 2




                       115.00%
                       110.00%
                       105.00%
                       100.00%
                        95.00%
                        90.00%
                        85.00%
                        80.00%
                        75.00%
                        70.00%
                                                          May-04




                                                                                                                                       May-05




                                                                                                                                                                                                              May-06
                                                                                            Nov-04




                                                                                                                                                                   Nov-05




                                                                                                                                                                                                                                                Nov-06
                                                 Mar-04




                                                                                                                            Mar-05




                                                                                                                                                                                            Mar-06
                                        Jan-04




                                                                   Jul-04




                                                                                                              Jan-05




                                                                                                                                                Jul-05




                                                                                                                                                                              Jan-06




                                                                                                                                                                                                                            Jul-06
                                                                               Sep-04




                                                                                                                                                         Sep-05




                                                                                                                                                                                                                                       Sep-06




                                                                                        Actual                                  Target




 TANESCO Tariff Application Jan2008-Aug 07 Ver 0                                                                                                                                                                                              39
TANESCO Tariff Application


                                                                                                  TANESCO
                                                                                                 Losses (kWh)
                                                                                                   Graph 3


           40.00%
           35.00%
           30.00%
           25.00%
           20.00%
           15.00%
           10.00%
            5.00%
            0.00%
                         Jan-04

                                    Mar-04

                                              May-04

                                                       Jul-04



                                                                          Nov-04

                                                                                      Jan-05

                                                                                                  Mar-05

                                                                                                              May-05

                                                                                                                           Jul-05



                                                                                                                                                           Nov-05

                                                                                                                                                                             Jan-06

                                                                                                                                                                                               Mar-06

                                                                                                                                                                                                                 May-06

                                                                                                                                                                                                                                   Jul-06



                                                                                                                                                                                                                                                              Nov-06
                                                                Sep-04




                                                                                                                                         Sep-05




                                                                                                                                                                                                                                                 Sep-06
            Actual                 Target                       Base year                                  Moving Average




                                                                                     TANESCO
                                                                              Units Generated vs Billed
                                                                                      Graph 4


         350000000


         300000000


         250000000


         200000000


         150000000


         100000000


          50000000


                 0
                                             May-04




                                                                                                                  May-05




                                                                                                                                                                                                                          May-06
                                  Mar-04




                                                                           Nov-04




                                                                                                     Mar-05




                                                                                                                                                                    Nov-05




                                                                                                                                                                                                        Mar-06




                                                                                                                                                                                                                                                                       Nov-06
                     Jan-04




                                                       Jul-04

                                                                 Sep-04




                                                                                        Jan-05




                                                                                                                                Jul-05

                                                                                                                                                  Sep-05




                                                                                                                                                                                      Jan-06




                                                                                                                                                                                                                                            Jul-06


                                                                                                                                                                                                                                                           Sep-06




                                                                                    Available                          Billed




TANESCO Tariff Application Jan2008-Aug 07 Ver 0                                                                                                                                                                                                           40
TANESCO Tariff Application




                                                                                                                                                         TANESCO
                                                                                                                                                 Distribution Maintenance
                                                                                                                                                  Planned Interruptions
                                                                                                                                                          Graph 5


                          1400                                                                                                                                                                                                                                                                                                              10000

                                                                                                                                                                                                                                                                                                                                            9000
                          1200
                                                                                                                                                                                                                                                                                                                                            8000

                          1000                                                                                                                                                                                                                                                                                                              7000

                                                                                                                                                                                                                                                                                                                                            6000
  Nr of Outages




                           800




                                                                                                                                                                                                                                                                                                                                                         Duration
                                                                                                                                                                                                                                                                                                                                            5000

                           600
                                                                                                                                                                                                                                                                                                                                            4000


                           400                                                                                                                                                                                                                                                                                                              3000

                                                                                                                                                                                                                                                                                                                                            2000
                           200
                                                                                                                                                                                                                                                                                                                                            1000

                             0                                                                                                                                                                                                                                                                                                              0
                                                                  May-04




                                                                                                                                                                      May-05




                                                                                                                                                                                                                                                                          May-06
                                                Mar-04




                                                                                                                   Nov-04




                                                                                                                                                    Mar-05




                                                                                                                                                                                                                       Nov-05




                                                                                                                                                                                                                                                        Mar-06




                                                                                                                                                                                                                                                                                                                          Nov-06
                                 Jan-04




                                                                                  Jul-04


                                                                                                    Sep-04




                                                                                                                                     Jan-05




                                                                                                                                                                                     Jul-05


                                                                                                                                                                                                       Sep-05




                                                                                                                                                                                                                                         Jan-06




                                                                                                                                                                                                                                                                                         Jul-06


                                                                                                                                                                                                                                                                                                           Sep-06
                                                                                                                         Number of Outages                                                                      Total Duration




                                                                                                                                                TANESCO
                                                                                                                                     Distribution Forced Interruptions
                                                                                                                                                  Graph 6

                          2500                                                                                                                                                                                                                                                                                                              4000



                                                                                                                                                                                                                                                                                                                                            3500

                          2000
                                                                                                                                                                                                                                                                                                                                            3000



                                                                                                                                                                                                                                                                                                                                            2500
                          1500
          Nr Of Outages




                                                                                                                                                                                                                                                                                                                                                    Duration




                                                                                                                                                                                                                                                                                                                                            2000


                          1000
                                                                                                                                                                                                                                                                                                                                            1500



                                                                                                                                                                                                                                                                                                                                            1000
                           500

                                                                                                                                                                                                                                                                                                                                            500



                             0                                                                                                                                                                                                                                                                                                              0
                                   Jan-04

                                            Feb-04

                                                         Mar-04



                                                                              May-04

                                                                                           Jun-04

                                                                                                       Jul-04




                                                                                                                                        Oct-04

                                                                                                                                                 Nov-04

                                                                                                                                                             Dec-04

                                                                                                                                                                         Jan-05

                                                                                                                                                                                  Feb-05

                                                                                                                                                                                              Mar-05



                                                                                                                                                                                                                    May-05

                                                                                                                                                                                                                                Jun-05

                                                                                                                                                                                                                                             Jul-05




                                                                                                                                                                                                                                                                              Oct-05

                                                                                                                                                                                                                                                                                       Nov-05

                                                                                                                                                                                                                                                                                                  Dec-05

                                                                                                                                                                                                                                                                                                               Jan-06

                                                                                                                                                                                                                                                                                                                        Feb-06

                                                                                                                                                                                                                                                                                                                                   Mar-06
                                                                                                                            Sep-04




                                                                                                                                                                                                                                                                 Sep-05
                                                                     Apr-04




                                                                                                                Aug-04




                                                                                                                                                                                                           Apr-05




                                                                                                                                                                                                                                                      Aug-05




                                                                                                    Number 2004 onwards                                                                                Duration 2004 onwards




TANESCO Tariff Application Jan2008-Aug 07 Ver 0                                                                                                                                                                                                                                                            41
                                                                                                                                                         0.00%
                                                                                                                                                                 10.00%
                                                                                                                                                                          20.00%
                                                                                                                                                                                   30.00%
                                                                                                                                                                                            40.00%
                                                                                                                                                                                                     50.00%
                                                                                                                                                                                                              60.00%
                                                                                                                                                                                                                       70.00%
                                                                                                                                                                                                                                80.00%
                                                                                                                                                                                                                                         90.00%
                                                                                                                                                Jan-04
                                                                                                                                                Feb-04




                                                                                     0
                                                                                     5
                                                                                    10
                                                                                         15
                                                                                         20
                                                                                         25
                                                                                         30
                                                                                              35
                                                                                              40
                                                                                              45
                                                                          Jan-04                                                                Mar-04
                                                                                                                                                Apr-04
                                                                          Mar-04                                                                May-04




                                                  Grid failures
                                                                                                                                                Jun-04
                                                                          May-04
                                                                                                                                                Jul-04
                                                                           Jul-04                                                               Aug-04
                                                                                                                                                                                                                                                               TANESCO Tariff Application




                                                                                                                                                Sep-04
                                                                          Sep-04




                                                                                                                             Hydro
                                                                                                                                                Oct-04
                                                                                                                                                Nov-04
                                                                          Nov-04
                                                                                                                                                Dec-04
                                                                          Jan-05                                                                Jan-05
                                                                                                                                                Feb-05




                                                  Partial grid Failures
                                                                          Mar-05




                                                                                                                             Imports
                                                                                                                                                Mar-05

                                                                          May-05
                                                                                                                                                Apr-05
                                                                                                                                                May-05




TANESCO Tariff Application Jan2008-Aug 07 Ver 0
                                                                           Jul-05                                                               Jun-05
                                                                                                                                                                                                                                                   Graph 7




                                                                                                          Graph 8
                                                                                                                                                Jul-05
                                                                                                                                                                                                                                                  TANESCO
                                                                                                                                                                                                                                                  Generation




                                                                                                        TANESCO
                                                                          Sep-05




                                                                                                       Nr Of Failures
                                                                                                                                                Aug-05

                                                                          Nov-05                                                                Sep-05




                                                                                                   Transmission Reliabilty
                                                                                                                                                Oct-05
                                                                          Jan-06                                                                Nov-05

                                                                          Mar-06
                                                                                                                             Isolated Thermal   Dec-05
                                                                                                                                                Jan-06

                                                                          May-06                                                                Feb-06
                                                                                                                                                Mar-06
                                                                           Jul-06
                                                                                                                                                Apr-06
                                                                                                                                                May-06
                                                                          Sep-06
                                                                                                                                                Jun-06
                                                                                                                             Grid Thermals




                                                                          Nov-06                                                                Jul-06




42
                                                                                                                                                Aug-06
                                                                                                                                                Sep-06
                                                                                                                                                Oct-06
                                                                                                                                                Nov-06
                                                                                                                                                Dec-06
                                                                                                                                                                                                                                    Tshs (x1000)




                                                                                          0.00%
                                                                                                  20.00%
                                                                                                           40.00%
                                                                                                                    60.00%
                                                                                                                             80.00%
                                                                                                                                      100.00%
                                                                                                                                                120.00%
                                                                                                                                                                                                                                                               -
                                                                                Jan-04




                                                                                                                                                                                                        -200,000
                                                                                                                                                                                                                   -150,000
                                                                                                                                                                                                                              -100,000
                                                                                                                                                                                                                                               -50,000
                                                                                                                                                                                                                                                                   50,000
                                                                                Feb-04

                                                                                Mar-04                                                                                                                                                                   Jan-04
                                                                                Apr-04

                                                                                May-04                                                                                                                                                                   Mar-04
                                                                                Jun-04

                                                                                 Jul-04                                                                                                                                                                  May-04
                                                                                Aug-04
                                                                                                                                                                                                                                                          Jul-04
                                                                                                                                                                                                                                                                                         TANESCO Tariff Application




                                                                                Sep-04

                                                                                Oct-04
                                                                                Nov-04                                                                                                                                                                   Sep-04
                                                                                Dec-04
                                                                                Jan-05                                                                                                                                                                   Nov-04
                                                                                Feb-05
                                                                                Mar-05                                                                                                                                                                   Jan-05




                                                  Isolated Thermal Generation
                                                                                Apr-05
                                                                                May-05                                                                                                                                                                   Mar-05




                                                                                                                                                                                    Liquidity




TANESCO Tariff Application Jan2008-Aug 07 Ver 0
                                                                                Jun-05
                                                                                                                                                                                                                                                         May-05




                                                                                                                                                                Graph 10
                                                                                 Jul-05




                                                                                                                                                               TANESCO
                                                                                                                                                                                                                                                                             Graph 9
                                                                                                                                                                                                                                                                             Liquidity
                                                                                                                                                                                                                                                                            TANESCO




                                                                                Aug-05

                                                                                Sep-05
                                                                                                                                                                                                                                                          Jul-05




                                                                                                                                                          Generation Availability
                                                                                Oct-05

                                                                                Nov-05
                                                                                                                                                                                                                                                         Sep-05

                                                                                Dec-05
                                                                                                                                                                                                                                                         Nov-05




                                                  Grid Thermal Generation
                                                                                Jan-06
                                                                                Feb-06

                                                                                Mar-06
                                                                                                                                                                                                                                                         Jan-06
                                                                                                                                                                                    Cash Book Balance

                                                                                Apr-06
                                                                                                                                                                                                                                                         Mar-06
                                                                                May-06
                                                                                Jun-06
                                                                                                                                                                                                                                                         May-06
                                                                                 Jul-06
                                                                                Aug-06




43
                                                  Hidro Generation
                                                                                                                                                                                                                                                          Jul-06
                                                                                Sep-06
                                                                                Oct-06
                                                                                                                                                                                                                                                         Sep-06
                                                                                Nov-06

                                                                                Dec-06
                                                                                                                                                                                                                                                         Nov-06
TANESCO Tariff Application




                                                                                                                TANESCO
                                                                                                          Dem and and Loadfactor
                                                                                                                Graph 11
                         650                                                                                                                                                                                                      1
                                                                                                                                                                                                                                  0.9
                         600                                                                                                                                                                                                      0.8
          Demand in MW




                                                                                                                                                                                                                                  0.7




                                                                                                                                                                                                                                        Loadfactor
                         550                                                                                                                                                                                                      0.6
                                                                                                                                                                                                                                  0.5
                         500                                                                                                                                                                                                      0.4
                                                                                                                                                                                                                                  0.3
                         450                                                                                                                                                                                                      0.2
                                                                                                                                                                                                                                  0.1
                         400                                                                                                                                                                                                      0
                                Jan-04




                                                                 Jul-04




                                                                                                  Jan-05




                                                                                                                                  Jul-05




                                                                                                                                                                   Jan-06




                                                                                                                                                                                                  Jul-06
                                                  Apr-04




                                                                                   Oct-04




                                                                                                                    Apr-05




                                                                                                                                                    Oct-05




                                                                                                                                                                                     Apr-06




                                                                                                                                                                                                                    Oct-06
                                                               Maximum Demand                                        Load Factor                                 Log. (Maximum Demand)




                                                                                                        TANESCO
                                                                                                Human Resoureces Productivity
                                                                                                         Graph 12


                 140.0                                                                                                                                                                                                            80000.0

                 120.0                                                                                                                                                                                                            70000.0

                                                                                                                                                                                                                                  60000.0
                 100.0
                                                                                                                                                                                                                                  50000.0
                                                                                                                                                                                                                                                     Units/Empl
   Csut/Empl




                         80.0
                                                                                                                                                                                                                                  40000.0
                         60.0
                                                                                                                                                                                                                                  30000.0
                         40.0
                                                                                                                                                                                                                                  20000.0
                         20.0                                                                                                                                                                                                     10000.0

                          0.0                                                                                                                                                                                                     0.0
                                                      May-04




                                                                                                                        May-05




                                                                                                                                                                                        May-06
                                Jan-04




                                                                                                 Jan-05




                                                                                                                                                                  Jan-06
                                         Mar-04




                                                                                       Nov-04


                                                                                                           Mar-05




                                                                                                                                                        Nov-05


                                                                                                                                                                            Mar-06




                                                                                                                                                                                                                       Nov-06
                                                                Jul-04




                                                                                                                                 Jul-05




                                                                                                                                                                                                 Jul-06
                                                                          Sep-04




                                                                                                                                           Sep-05




                                                                                                                                                                                                           Sep-06




                                                                                                Customers/Empl                                       Units/Empl




TANESCO Tariff Application Jan2008-Aug 07 Ver 0                                                                                                                                                                              44
TANESCO Tariff Application




                                                                                  TANESCO
                                                                             Salary per employee
                                                                                   Graph 13




  900000
  800000
  700000
  600000
  500000
  400000
  300000
  200000
  100000
              0
                                             Jul-04




                                                                                                   Jul-05




                                                                                                                                                         Jul-06
                  Jan-04




                                                                        Jan-05




                                                                                                                              Jan-06
                                                      Sep-04




                                                                                                            Sep-05




                                                                                                                                                                  Sep-06
                                    May-04




                                                                                          May-05




                                                                                                                                                May-06
                           Mar-04




                                                               Nov-04


                                                                                 Mar-05




                                                                                                                     Nov-05


                                                                                                                                       Mar-06




                                                                                                                                                                           Nov-06
                                                                              TANESCO
                                                                         Average selling Price
                                                                              Graph 14


            120

            100

             80
  Tsh/kWh




             60

             40

             20

              0
                                             Jul-04




                                                                                                   Jul-05




                                                                                                                                                         Jul-06
                  Jan-04
                           Mar-04
                                    May-04


                                                      Sep-04
                                                               Nov-04
                                                                        Jan-05
                                                                                 Mar-05
                                                                                          May-05


                                                                                                            Sep-05
                                                                                                                     Nov-05
                                                                                                                              Jan-06
                                                                                                                                       Mar-06
                                                                                                                                                May-06


                                                                                                                                                                  Sep-06
                                                                                                                                                                           Nov-06




See note in Section 3, Figure 2.




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 TANESCO Tariff Application




ANNEXURE C: SHORT TERM GENERATION PLAN




 TANESCO Tariff Application Jan2008-Aug 07 Ver 0   46
TANESCO Tariff Application




BASIC ASSUMPTIONS.                                                                                       Attachment 1


SONGAS Equity Refinancing      it is assumed that the equity refinancing occurs on 1/7/2008 and this reduces the capacity charge by 20
                               per cent.
Government Capacity Payment Su it is assumed that the GoT provides operating grants to TANESCO to cover 40 per cent of the IPTL
                               capacity payments (until any buyout occurs) and 100 per cent of the EPP capacity payments.
Sales Growth                   It is assumed that sales will grow in 2007 by 13.87 per cent, followed by 7.6 per cent growth in 2008,
                               10.54 per cent in 2009, 9.53 per cent in 2010 and 7.27 per cent in 2011. This assumes average
                               background billed energy growth of 8.9 per cent plus additional mining loads.
Network Losses                 it is assumed that losses are 24 per cent in 2007, 23 per cent in 2008, 20 per cent in 2009, 17 per cent in
                               2010 and 15 per cent in 2011.
Generation Hydrology           it is assumed that the hydrology in 2007 is Good, in 2008 it is Average, 2009 is Average, 2010 is Average
                               and hydrology is Average in 2011.
Financing                      it is assumed that a syndicated loan amounting to TSH 250 billion reaches financial close on 1/9/2007. Of
                               this amount, it is assumed that TSH 235 billion is drawn in 2007 to refinance existing debt and to repay
                               trade creditors. The balance of TSH 15 billion is assumed to be drawn in 2008 to finance capital
                               expenditure.
Macroeconomy                   between 2007 and 2011, it is assumed that on average the currency will depreciate against the US Dollar
                               by -4.5 per cent a year. Regarding inflation, it is assumed that average inflation between 2007 and 2011
                               will be 7 per cent.




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                                                                                                                                                                                                                                                                                                      ATTACHMENT 2:

TANESCO - Generation Assumptions                                               Back to Contents


Principal Generation Data

          1 Duration of simulation:                                                   Jan-2007 to Dec-2007                                                                                   Jan-08 to Dec -09
                                                                            Mtera                                698.47 m.a.s.l.                                                            Mtera                          694.50
                                                         Actual on 1st Jan-                                                                                             Estimated for 1st
          2 Levels                                                          Kidatu                               449.34 m.a.s.l.                                                            Kidatu                         449.00
                                                         2007                                                                                                           Jan 2008
                                                                            NYM                                  688.54 m.a.s.l.                                                            NYM                            687.00
          3 Generation plants:
                                                           Installed cap.
            HYDRO:
                                                               (MW)           Availability factor
            Kidatu                                              204                    1
            Kihansi                                             180                    1
            Mtera                                                80                    1
            NPF                                                  68                    1
            Hale                                                 21                   0.5            One unit faulty.




                                                                                                                                                                                                                                                                                                                                    Thermal Economic
            NYM                                                   8                            0.5 PBWO-Limitation                                                                                                                                                                           Variable O&M




                                                                                                                                                                                                                                                                                                                                     Dispatch Order
                                                                                                                                                                                                                                                         Fixed O&M
                                                                                                                                                                                                                                                            Data                                            Non Fuel
                                                                                                                                                                                                                                                                                  Fuel VOM                   VOM     Total VOM
                                             Ownership      Online From         Offline From            Installed cap.      Availability factor   Availability factor          Fuel          Assumed Energy      Special Event      Special Event Date                             USD/
            GRID THERMAL:                                                                                   (MW)                  From                   %                                   price US$/kWh*                                              $/kW/Mth     Heat Rate                USc/kWh      USc/kWh      USc/kWh
                                                                                                                                                                                                                                                                                  mmBTU§
                                                                                                                                                                                                                                     Date       Other
            SONGAS U1 - 6                      IPP             Jan-07                                             178.1          Jan-07                 90%              92.7% Protected          0.0108         Refinancing        Jul-08      80%          28.03      9601          0.93         0.89         0.67         1.56                      1
                                                                                                                                                                          Gas, Balance
                                                                                                                                                                          Additional Gas
            IPTL Oil                            IPP            Jan-07                Jul-09                       103.4          Jan-07                 90%                     Oil               0.0903            Buyout          Jul-12       0%          27.80      8900         10.15         9.03          -           9.03                 11
            Grid Diesel                        OWN             Jan-07                                              10.0          Jan-07                  0%                     Oil                                  N/A                                                9620         10.15         9.76          -           9.76                 12
            AGGREKO                            EPP             Jan-07              Jan-09                          40.0          Jan-07                 95%               Additional Gas          0.0219             N/A                                     35.93      9445          2.17         2.05          -           2.05                  4
            Kiwira-Old                          IPP            Jan-07              Jul-08                           1.4          Jan-07                 100%                   Coal                                  N/A                                                9500          5.60         5.32          -           5.32                 10
            DOWANS                             EPP             Feb-07              Jun-09                         100.0          Feb-07                 15%               Additional Gas          0.0219           Capacity         Aug-07                   34.61     11000            2.5        2.75              -       2.75                  7
                                                                                                                                 May-07                 60%                                                       Payments
                                                                                                                                 Oct-07                 95%                                                       Commence
            ALSTHOM-MWZ                        EPP             Mar-07              Feb-08                          40.0          Mar-07                 100%                    Oil               0.1353             N/A                                     43.80      9620         10.15         9.76         3.77        13.53                 13
            WARTSILA-UB                        OWN             Oct-07                                             100.0          Jan-07                 20%               Additional Gas          0.0271             N/A                                                7900            2.5        1.98         0.53         2.50                  5
                                                                                                                                 Jan-08                 91%
            ORETI - TEGETA                     OWN             Jan-08                                              45.0          Jan-08                 91%               Additional Gas         0.0271              N/A                                      6.64       7900             2.50       1.98  0.54         2.52                           6
            IPTL Gas U1&2                       IPP            Jan-09                                              50.0          Jan-09                  91%              Additional Gas         0.0307              N/A            Jul-12       0%          27.80       8900             2.50       2.23  0.53         2.75                           8
            IPTL Gas U3&4                       IPP            Jul-09                                              50.0          Mar-09                  91%              Additional Gas         0.0307                             Jul-12       0%          27.80       8900             2.50       2.23  0.53         2.75                           9
            Kiwira Phase 1                      IPP            Mar-09                                              50.0          Mar-09                  96%                   Coal              0.0560              N/A                                     23.00       9620             2.08       2.00   -           2.00                           2
            Kiwira Phases 2 and 3               IPP            Jun-09                                             150.0          Jun-09                  96%                   Coal              0.0560                                                       8.00       9620             2.08       2.00   -           2.00                           3
                                                                                                                                                                                      *See Variable O&M Data                                                         § TANESCO Assumed Energy price and separate heat rate/
          3 Load demand               Year                     2007                           2008                   2009                                                                                                                                             fuel cost data does not agree.
                                      GWh                     4,251.6              4,655.5                 5,097.8
                                      MW                       660.3                723.1                   791.8

          4 Hydrological series:                         1940 to 1999

          5 RESTRICTION:                                 Mtera is planned to be used from February 2007.
                                                         By the end of December 2007 the level should not be below 694.50 m.a.s.l.
                                                         And throughout the period considered the level not to drop below 691.50 m.a.s.l

          6 SIMULATION RESULTS:                          Results are extracted for the period of three years




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TANESCO Tariff Application



ATTACHMENT 3:
 Generation Information                                                           Five Year Projection
 (TSH m, Years ended 31 December)




                                                                                  Transitory Transitory
                                                                        Budget      Period     Period Forecast Forecast
 Generation, Sales and Losses (GWh)                                        2007         2008       2009   2010     2011
 Sales                                                                    3,153       3,393      3,750   4,108    4,406
 Generation from Grid Based Stations                                      4,055       4,304      4,581   4,841    5,073
 Generation from Isolated Stations                                           86         107        109     111      113
 Imported Electricity                                                         8          -          -      -        -
 Total Generation                                                         4,149       4,411      4,690   4,952    5,187
 Losses                                                                     996       1,015        938     842      778
 Losses as % Total Generation                                               24%         23%        20%     17%      15%


 Generation by Provider Type (GWh)                                         2007       2008      2009          2010     2011
 Own Generation                                                           2,718      2,389     2,391         2,393    2,395
 IPP Generation                                                           1,140      1,747     2,289         2,559    2,791
 EPP Generation                                                             283        275         9           -        -
 Electricity Imports                                                          8        -         -             -        -
 Total                                                                    4,149      4,411     4,690         4,952    5,187


 Generation by Generation Type (excluding cross border imports) (GWh)      2007        2008      2009      2010         2011
 Hydological Year Type                                                     Good     Average   Average   Average      Average
 Hydro                                                                    2,632      2,282     2,282     2,282        2,282
 Thermal                                                                  1,509      2,129     2,408     2,670        2,905
 Total                                                                    4,141      4,411     4,690     4,952        5,187
 Hydro/Themal Mix Ratio                                                   64/36      52/48     49/51     46/54        44/56


 Energy Cost Summary (TSH m)                                               2007       2008       2009      2010         2011
 Own generation and transmission                                         48,859     50,501     55,117    60,155       65,653
 Purchased electricity                                                  239,275    268,871    255,988   247,422      267,917
 Total Energy Cost                                                      288,135    319,372    311,105   307,577      333,570
 Cost per unit sold (TSH/kWh)                                             91.38      94.14      82.95     74.88        75.71
 Year on Year % change                                                    -9.5%       3.0%     -11.9%     -9.7%         1.1%




TANESCO Tariff Application Jan2008-Aug 07 Ver 0                                                         49
TANESCO Tariff Application



 Projected Dispatch (GWh)                         2007     2008    2009     2010       2011
 Grid Hydro
 Mtera                                              344      297     297      297        297
 Kidatu                                             907      691     691      691        691
 P/System                                           454      414     414      414        414
 Kihansi                                            927      880     880      880        880
 Sub Total                                        2,632    2,282   2,282    2,282      2,282

 Grid Thermal
 SONGAS U1 - 6                                    1,064    1,389   1,404    1,404      1,404
 IPTL Oil                                             32     -       -        -          -
 Grid Diesel                                           0     -       -        -          -
 AGGREKO                                            223      275     -        -          -
 Kiwira-Old                                            0     -       -        -          -
 Dowans                                              60      -          9     -          -
 ALSTHOM-MWZ                                        -        -       -        -          -
 WARTSILA-UB                                         44      357     142      -           28
 ORETI - TEGETA                                     -        -         48     -          -
 IPTL Gas U1&2                                      -        -       -        -          -
 IPTL Gas U3&4                                      -        -       -        -          -
 Kiwira Phase 1                                     -        -       309      418        420
 Kiwira Phases 2 and 3                              -        -       385      737        939
 Sub Total                                        1,423    2,022   2,299    2,559      2,791

 Isolated Thermal                                    86      107     109         111     113

 Total                                            4,141    4,411   4,690     4,952     5,187




TANESCO Tariff Application Jan2008-Aug 07 Ver 0                             50
 TANESCO Tariff Application



ANNEXURE D: Cost of Service Analysis

                          COST OF SERVICE ANALYSIS TABLE

 FROM ANNUAL AUDITED REPORTS                                           2004      2005     2006*

 Sales (million kWh)                                                   2,466      2,628     2,769

 Operating Revenue (million Tshs)
 Sales Revenue                                                       188,475 221,658      232,146
 Other operating income                                               39,416 37,537        33,330
 Total                                                               227,891 259,195      265,476

                              Average Revenue per unit (Tshs/kWh)          92       99         96

 Operating costs (million Tshs)
 Cost of sales
 Own generation & Transmission                                        44,047 32,039        61,949
 Purchased electricity                                               124,657 176,117      241,717
 Distribution expenses                                                29,951 41,277        41,708
 Depreciation                                                         26,323 26,788        30,332
 Provision for doubtful debts                                         41,262 13,586        50,796
 Loss on revaluation of Hydro assets                                       0       0          -
 Operating expenses
 Sida MSS & Monitoring Consultant                                         533        0    -
 Staff costs                                                           16,801 20,038   27,939
 Depreciation                                                           3,430    3,381  3,531
 Provision for doubtful debts - Morogoro Training Centre                3,414        0    -
 Provision for obselete & Slow moving inventory                         (369)        0    -
 Repairs and Maintenance                                                1,784      760    680
 Transport and Travel                                                   1,809    2,275  1,695
 Other administration expenses                                         15,621    7,620 11,512
 Retrenchment costs                                                       675       12      7
 Relief Projects                                                          734        0    -
 Efficiency Improvement                                                     0        0    -
 Loss on revaluation of land and buildings                                  0        0    -
 NetGroup Solutions Pty success fee                                     1,361    1,391    -
 Net finance expenses                                                  77,969 73,646 (17,523)
 Taxation                                                            (53,152) (24,590)    -
 Total                                                               336,850 374,340 454,343

                                  Average Cost per unit (Tshs/kWh)         137     142        164

                      Percentage Cost Under(Over) Recovered             48%        44%       71%
 * Provisional Statement




 TANESCO Tariff Application Jan2008-Aug 07 Ver 0                      51
  TANESCO Tariff Application



ANNEXURE E: Audited Financial Statements


  Following are audited financial statements for 2004 and 2005 including draft
  financial statement for 2006;




  TANESCO Tariff Application Jan2008-Aug 07 Ver 0             52
TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

REPORT AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2004
TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

REPORT AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2004




TABLE OF CONTENTS                           Page

Report of the directors                    1 – 10

Report of the auditors                     11 –12

Income statement                               13

Balance sheet                                  14

Statement of changes in equity                 15

Cash flow statement                            16

Notes to the financial statements          17 - 35
        TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

        REPORT OF THE DIRECTORS
        FOR THE YEAR ENDED 31 DECEMBER 2004

        The directors submit their report together with the audited financial statements for the year
        ended 31 December 2004 which disclose the state of affairs of Tanzania Electric Supply
        Company Limited (Tanesco Limited).

1       STATEMENT OF DIRECTORS’ RESPONSIBILITIES

        The directors are required under the Companies Ordinance to prepare financial statements for
        each financial period that give a true and fair view of the state of affairs of the Company as at
        the end of the financial period and of its profit or loss for that period.

        The directors confirm that suitable accounting policies have been used and applied consistently,
        and reasonable and prudent judgment and estimates have been made in the preparation of the
        financial statements for the year ended 31 December 2004. The directors also confirm that
        Tanzania Financial Accounting Standards have been followed and that the financial statements
        have been prepared on the going concern basis.

        The directors are responsible for keeping proper accounting records which disclose with
        reasonable accuracy at any time the financial position of the Company and which enable them
        to ensure that the financial statements comply with the Companies Ordinance, Cap 212. They
        are also responsible for safeguarding the assets of the Company and hence for taking
        reasonable steps for the prevention and detection of fraud, errors and other irregularities.

    2   DIRECTORS

        The directors of the Company at the date of this report, all of whom have served since 1
        January 2004, unless otherwise stated are:

        Name                          Position                       Remarks
        Amb. F.M.Kazaura              Chairman                       Appointed on 28 September 2004
        Mr. A. Mapunda                Vice Chairman
        Hon. P. A. Magani (MP)        Member
        Mr A. Mwakapugi               Member                         Appointed on 28 September 2004
        Mr. B. J. Mrindoko            Member
        Mr. A. Kilewo                 Member
        Mr. S. Salula                 Member                         Appointed on 28 September 2004
        Mrs. A. E. Bukuku             Member                         Appointed on 28 September 2004
        Mr. S.A.Juma                  Member                         Appointed on 28 September 2004
        Mr. N. N. Kitomari            Former Chairman                Retired on 28 September 2004
        Hon. M. N. Mbega              Member                         Retired on 28 September 2004
        Mr. P. M. Lyimo               Member                         Retired on 28 September 2004
        Dr. E. S. Bukuku              Member                         Retired on 28 September 2004
        Mr. R.H. Haji                 Member                         Retired on 28 September 2004

        The non-executive Directors received sitting allowances for their attendance at Board meetings.
        For the year ended 31 December 2004, these allowances amounted to Shs 150 million (2003:
        Shs 171 million).



                                                                                                        (1)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    REPORT OF THE DIRECTORS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2004

2   DIRECTORS (Continued)

    None of the directors hold any interest in the share capital of the Company.

    All the directors of the Company are Tanzanians.

    In accordance with the Company's Articles of Association, the Directors are not required to
    retire by rotation.

3   ACTIVITIES

    The Company's principal activities are generation, transmission and distribution of electricity.
    Electricity is generated at seven Hydro-Power Plants and 21 Thermal Power Plants. All Hydro
    Power Plants and nine Thermal Power Plants are connected to the National grid. The company
    also imports power from Uganda, Zambia and purchases power from four Independent Power
    Plants, namely Independent Power Tanzania Limited (IPTL), Tanganyika Wattle Company
    Limited, Kiwira Coal Mine and Songas Limited

    The year 2004 witnessed a dry spell throughout the country. As a result the company’s water
    reservoirs could not be filled adequately to support the planned generation mix of the Company.
    The Mtera Dam (the main water reservoir) reached the lowest level ever and at times had to be
    closed. Whereas the planned generation mix was a ratio of 87% hydro to 13% thermal
    production, the situation required 47% of power to be supplied by thermal sources.
    Consequently, the company had to resort to extensive use of IPTL. The company’s thermal
    plants located within the grid had also to be run. Towards the end of year, gas turbine
    generation had to be resorted to, in a bid to avoid load shedding which was imminent. This was
    done under an agreement whereby the turbines were managed by Songas Limited.

    Despite the expensive nature of thermal generation and its effect on the financial performance
    of the company, the company utilized all its financial resources to avoid power rationing. This
    increased cost led to the poor financial performance of the company, with it not being able to
    recover even its direct costs of generation. Direct costs of generation amounted to Shs 266,240
    million while electricity sales amounted to only Shs 188,475 million.

    During the year 2004, the company made an operating profit of Shs 15,214 million, against a
    loss of Shs 65,265 million in the previous year. The profit is attributable to the increase in other
    operating income especially the Governments contribution towards IPTL and Songas and on
    interest on overdue electricity bills.

    Revenue of the company increased from Shs 165,014 million in 2003 to Shs 188,475 million (an
    increase of 14%) in 2004 due to amongst other factors the impact of ongoing rural expansion
    programmes.

    The company recorded a loss before tax of Shs 62,755 million, mainly as a result of exchange
    losses (Shs 40,773 million) and interest accrued (Shs 37,533 million) on long term loans.




                                                                                                    (2)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    REPORT OF THE DIRECTORS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2004

3   ACTIVITIES (continued)

    The Company performed well in revenue collections. During the year 2004, the company
    collected a total of Shs 203,501 million against Shs 196,603 in year 2003 (an increase of 3.5%).
    This level of collections, coupled with a government and World Bank contributions amounting to
    Shs 98,823 million, resulted in the company sustaining its business operations.

    The Company’s capital investment for the year totaled Shs 24,100 million. Capital expenditure
    included rehabilitation of distribution network as well as ongoing rural electrification in Moshi,
    Arusha, Tanga and Manyara regions. Electrification of Ngara and Biharamulo is ongoing as are
    donor funded electrification projects in Ukerewe, Urambo and Serengeti districts.

    During the year under review the following projects were undertaken:

    •     A 2 MW-Generator was installed in Songea.
    •     Tariff analysis and financial modeling were completed and adopted by the Company.
    •     Transmission network improvement was extensively carried out.
    •     The distribution rehabilitation study for Dar es Salaam, Arusha and Moshi are at an
          advanced stage.
    •     The project to improve the Information and Management Information Systems is ongoing.
    •     Meter audits and other revenue protection projects were undertaken.

    The operational performance of the company can be summarized as follows:

                                                          5 year                         Percentage
                                                           target                       change from
                                                          (2009)       2004      2003      prior year
        Service lines completed during the year          133,100     31,492    27,708          +14%
        Number of pending service line applications       11,000     16,673    17,796            -6%
        kWh sold during the year (million)                  4,068     2,369     2,326            +2%
        Additional 33kV and 11kV lines during the
        year (km)                                          1,741       412        425            -3%
        Total length of 33kV and 11kV distribution
        lines by the end of the year (km)                 19,237     13,047    12,635           +3%
        Total length of low voltage lines by the end
        of the year (km)                                  49,033     19,649    14,488          +36%
        Distribution transformers installed during
        the year                                           1,175       278        443           -37%
        Total distribution transformers by the end of
        the year                                          10,933      6,756     6,478           +4%
        Total number of consumers by the end of
        the year                                        1,024,000   550,863   513,703           +7%
        Total number of staff of the Company                4,515     4,857     4,996           -3%
        Consumer/staff ratio                                  227       113       103          +10%




                                                                                                 (3)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    REPORT OF THE DIRECTORS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2004

3   ACTIVITIES (Continued)

    The Company has been experiencing a number of operational challenges in serving its
    customers, as follows:

    (a)    The transmission network still requires major maintenance and rehabilitation. Given the
           financial condition of the company it is unlikely that it can generate adequate funding to
           carry out the rehabilitation. Long term financing is required either in the form of a loan or
           cash injection from the shareholder. Quality of supply also needs to be improved.
           Considering the fact that the company is in the process of being unbundled the
           Shareholders need to intervene to ensure that funds are availed for this. Currently the
           company is carrying out maintenance on a sporadic basis by use of its own funds and
           support by KFW, the German donor agency, in the energy efficiency improvement
           program.

    (b)    There is rampant theft of transformer oil resulting in a lot of distribution transformers
           being damaged. However the company has embarked on sensitizing the public in
           reporting and participating in ensuring that the transformers are not tampered with. A
           reward system has been put in place to ensure that this problem is reduced.

    (c)    The Company is yet to implement the Government debt swap certificate issued in the
           year 2000 because it contained errors which need to be corrected before its
           implementation.

           A technical team comprising officials from Ministry of Energy and Minerals Ministry of
           Finance, Attorney General, PSRC and Tanesco has been formed to review the Debt
           Swap Certificate .The correct position has been agreed and the team has prepared and
           presented the report to the Government for deliberation. The Government is still working
           on it and is expected to issue an addendum to the certificate as proposed by the
           technical team. Upon receipt of the addendum the company will offset the swap amount
           against Company loans payable to the Government.

    (d)    High dependency on hydro generation and the recent dry spell experienced has greatly
           affected the company’s ability to produce and sell electricity. Investment in alternative
           sources of energy away from the current dependence on hydro-electric generation is
           seen as the only feasible solution to this problem.




                                                                                                    (4)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    REPORT OF THE DIRECTORS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2004

4   FUTURE DEVELOPMENTS

    Following the recent drought in the country the company has looked at various short-term and
    medium-term options to mitigate the energy deficit caused by the drought and to reduce its
    dependency on hydro-power as source of generation.

    Medium-term plans include:

    •   The installation of two additional gas turbines at Ubungo with a capacity 36 MW each, which
        are expected to be in commercial operation by the 2nd quarter of 2005.

    •   Conversion of the IPTL plant from using the expensive Heavy Fuel Oil (HFO) into using
        natural gas subject to government approval. Commercial operations will commence by 1st
        quarter of 2006.

    •   The Power System Master Plan includes another gas based power plant using the Songo
        Songo gas development. The actual location and size of this plant will be determined later.
        There is a drive to make the plant financed by private investors as an independent power
        producer or as a joint venture with private participation.

    •   The company has plans to install a 40MW plant at Tegeta to run on natural gas by 1st
        quarter of 2006.

    •   For a considerable time, distribution and transmission network rehabilitation and expansion
        have been lacking funds. However a US$ 60 million transmission and distribution
        rehabilitation project, to be funded by the World Bank are in advanced stages of
        negotiations. The project is expected to kick off towards the end of 2005. The project will be
        implemented over an 18 month period.

    •   Accelerated electrification that intends to connect a total of 100,000 customers per year is
        under initial stages of implementation.




                                                                                                  (5)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    REPORT OF THE DIRECTORS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2004

4   FUTURE DEVELOPMENTS (Continued)

    Power System Expansion Planning

    •   Phase II of the Electricity IV project has been approved. In the year 2004, implementation of
        various projects financed by various financial institutions were ongoing, namely:

           o   Electrification of Urambo and Serengeti, financed by SIDA;
           o   Power supply to Ukerewe under Spanish funding;
           o   Makambako substation network expansion in Njombe District;
           o   Makambako-Songea 132kv line feasibility study;
           o   Energizing Rural Transformation (ERT) Programme – a project to be financed by the
               World Bank (expected number of customers to be 200,000 in the year 2006-2010).
               Seven regions have been identified for grid extension to the areas in Arusha,
               Manyara, Dodoma, Iringa, Kilimanjaro, Mwanza, Singida and Tabora.
           o   Three Rural Projects Feasibility study for Ukerewe Rural network expansion in
               Simanjaro, Bukombe, Kagera rural, Ruaha National park and Idodi Division

    A new Power System Master Plan (PSMP) is required. The new study commenced during the
    second half of 2004 and will take between 12 and 18 months. In the interim Tanesco is using
    its internal resources to update the existing PSMP as required.

    Both actions will include addressing important items such as the Mchuchuma Coal to Electricity
    Project, the Zambian and Kenyan interconnectors, system upgrading and possible future hydro
    generation projects.

5   TANESCO DIVESTITURE

    In order to attain the objectives of the Government of restructuring the company, it was decided
    that the operations of TANESCO should be unbundled into three areas namely, Generation,
    Transmission and Distribution and subsequently several companies should be formed
    especially in Generation and Distribution Services prior to its Privatization. It was as well
    anticipated that the Units would be self-accounting thus inviting investors to accomplish the
    absolute private participation as envisaged in the policy document. As a step toward this prime
    objective the following activities have been undertaken to date:

        1. The Government decided to establish a regulatory mechanism for the players in the
           power sector by establishing the Act to provide for the Regulatory framework for Energy
           and Water. The establishment of the Energy and Water Regulatory Authority is at an
           advanced stage.

           The Government decided to prepare a new Electricity Bill, which would suit the market
           for the new Power Sector. However, the Government also decided to enhance
           TANESCO to be run commercially and profitably, while transferring the role for rural
           electrification to the Ministry of Energy and Minerals.



                                                                                                 (6)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    REPORT OF THE DIRECTORS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2004

5   TANESCO DIVESTITURE (continued)

       2. The Government and NetGroup also concluded an extension contract of the
          Management Support Services for the next 29 months with effect from August 2004 to
          allow more time for completion. The execution of the contract was initially estimated to
          be completed within two years.

       3. Under the renewed Terms of Reference for the NetGroup Solutions in this second phase
          the target is to have good quality of electricity, power system reinforcement and
          improvement especially in transmission and distribution networks throughout the
          country. In addition it is targeted to expedite electrification to new customers to
          safeguard the achievements of financial turnaround and preparing TANESCO for
          privatisation in collaboration with all stakeholders internally and externally..

       4. Power Sector Restructuring is a continuous and sometimes a reversible process. After
          consultations with stakeholders and reviewing the potential of TANESCO turning private
          given the prevailing circumstances, the Government invoked the other option suggested
          by consultants for corporate restructuring, Messrs Stone & Webster. This option requires
          the Government to effect the Ring-Fencing of the Company, after which the established
          business units will in the long run turn private.

       5. Preparations for internal ring-fencing exercise have started and they are anticipated to
          be in place by mid 2005. TANESCO will continue to be run under the same roof until
          prospective and potential investors show up to invest in those business units, the
          presence of the Management Contractor notwithstanding.

6   RESULTS

    These are set out on page 13 of these financial statements.




                                                                                                (7)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    REPORT OF THE DIRECTORS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2004

7   SOLVENCY

    The Company's state of affairs at 31 December 2004 is set out on page 14 of these financial
    statements. In the opinion of the directors, the Company is solvent and is able to continue
    trading as a going concern, provided it continues to obtain the necessary financial support that it
    requires from the Government of Tanzania in the foreseeable future. Additional information
    pertinent to the solvency of the Company is given below:

    (a)    Long-term loans were received through Government facilitation and are repayable to the
           Government of Tanzania which is also the sole shareholder of the Company.
           Negotiations are currently underway with the Government to offset some of the loans
           with the Government debtor balances and restructure the remainder by way of
           converting them into the paid up share capital. The directors believe that it is unlikely
           that the Government will take forced recovery measures in respect of the loans for which
           repayment is due.

    (b)    The restructuring of the Company in preparation for its divestiture, as explained in note 5
           of the report of the directors, is expected to result in increased electricity generation
           capacity, improved services to customers and more efficient operations.

    (c)    The Government of Tanzania has been partly financing rural electrification projects and
           is expected to continue to provide funds for these projects for the foreseeable future. In
           addition, the Government has continued to solicit grants from external donors to finance
           electrification and rehabilitation projects.

8   STATUTORY PAYROLL REMITTANCES

    The directors confirm that they are aware of, and have taken full responsibility for, the accuracy
    and consequences of the disclosures made in Notes 10 and 11 to the financial statements in
    respect of remittances for social security fund contributions and other statutory payroll
    deductions, respectively.

    In February 2005, the company received an assessment from the Tanzania Revenue Authority
    in respect of outstanding corporation taxes and penalties amounting to Shs 24,910 million for
    the periods 1997 and 1998. The company has objected to the assessment and the directors
    anticipate that no material liabilities will arise above those that have been provided for. Further
    details are disclosed in note 26 to these financial statements.




                                                                                                   (8)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     REPORT OF THE DIRECTORS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2004

9    EMPLOYEES’ WELFARE

     (i)     Industrial Safety

             The Company continued to satisfy the standards of industrial safety established by the
             Chief Inspector of Factories.

     (ii)    Training Facilities

             A training programme is drawn up every year to cater for all grades of staff. Particular
             emphasis is made on management, technical, information technology and business
             training.

     (iii)   Medical Facilities

             Medical allowances have been consolidated in staff salaries.

     (iv)    Employee Motivation

             The Company has plans to introduce a new productivity motivation programme in the
             near feature.

     (v)     Trade Union

             A healthy relationship continues to exist between management, personnel and the Trade
             Union.

10   DISABLED PERSONS

     It remains the Company's policy to accept disabled persons for employment for those vacancies
     that they are able to fill.

11   RELATED PARTY TRANSACTIONS

     Details of transactions and balances with related parties are included in note 30 to the financial
     statements.

12   POLITICAL AND CHARITABLE DONATIONS

     There were no political donations made during the year. Charitable donations amounting to Shs
     1.4 million were made to various charities during the year, (2003: Nil).

13   OWNERSHIP

     The Government of Tanzania is the sole owner of the Company.




                                                                                                   (9)
(10)
REPORT OF THE AUDITORS

TO THE MEMBERS OF TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

We have audited the financial statements of Tanzania Electric Supply Company Limited on
pages 13 to 35 for the year ended 31 December 2004. The financial statements are in
agreement with the accounting records and we obtained the information and explanations we
required.

Respective responsibilities of directors and auditors

As described on page 1, the Company’s directors are responsible for the preparation of the
financial statements. Our responsibility is to form an independent opinion, based on our audit,
on those financial statements and to report our opinion to you.

Basis of opinion

We conducted our audit in accordance with International Standards on Auditing. Those
Standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.

Opinion

In our opinion, the financial statements give a true and fair view of the state of affairs of the
Company as at 31 December 2004 and the results of its operations and its cash flows for the
year then ended in accordance with Tanzania Financial Accounting Standards and comply with
the Companies Ordinance, CAP 212.

Emphasis of matter

Without qualifying our audit opinion, we draw your attention to the following significant matters:

(a)    As explained in note 1 to the financial statements the Company is dependent on the
       continued support of the Government of Tanzania in order to continue to operate as a
       going concern.

(b)    As stated in note 18 to the financial statements, the Company continues to negotiate
       with the Government of Tanzania to offset Government debtor balances with some of
       the long-term loans payable to it. Negotiations are also ongoing for the conversion of
       the remaining amount of loans into paid up share capital.




                                                                                             (11)
(12)
TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2004

                                                    Notes            2004          2003
                                                                    Shs'm         Shs'm

Sales                                                 3           188,475       165,014

Cost of sales                                         4          (266,240)     (189,968)

Gross loss                                                        (77,765)      (24,954)

Other operating income                                5           138,772        37,957

Operating expenses                                    6           (45,793)      (78,268)

Operating profit/(loss)                                             15,214      (65,265)

Net finance expense                                   7           (77,969)     (157,089)

Loss before tax                                                   (62,755)     (222,354)

Taxation                                              8             53,152       45,556

Loss after tax                                                     (9,603)     (176,798)




    The notes on pages 17 to 35 form an integral part of these financial statements.




                                                                                       (13)
(14)
TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2004


                                           Advance
                                           towards     Accumu-
                                  Share       share       lated    Revaluatio
                                 capital     capital    Losses      n reserve   Grants         Total
                                 Shs'm       Shs'm       Shs'm         Shs'm    Shs'm         Shs'm

Balance as at
1 January 2003                   293,912        388    (289,659)     501,231     69,914      575,786

Grants received during the
year                                   -           -           -            -    44,833       44,833

Loss for the year                      -           -   (176,798)            -         -   (176,798)

Release of revaluation
reserve                                -           -      1,013       (1,013)         -            -

Deferred tax on release of
revaluation reserve                    -           -           -         304          -         304

Revaluation surplus                    -           -           -        7,990         -        7,990

Deferred tax on
revaluation surplus                    -           -           -      (2,397)         -      (2,397)

Balance as at
31 December 2003                 293,912        388    (465,444)     506,115    114,747      449,718

Balance at
1 January 2004                   293,912        388    (465,444)     506,115    114,747      449,718

Grants received during the
year                                   -           -           -            -    11,900       11,900

Loss for the year                      -           -     (9,603)            -         -      (9,603)

Release of revaluation reserve
on disposal/adjustments                -           -      5,451       (5,770)         -        (319)

Deferred tax on release of
revaluation reserve                    -           -           -        1,692         -        1,692

Balance at
31 December 2004                 293,912        388    (469,596)     502,037    126,647      453,388


       The notes on pages 17 to 35 form an integral part of these financial statements.




                                                                                      (15)
TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2004

                                                       Notes          2004              2003
                                                                     Shs’m             Shs’m
Operating activities
Cash generated from/(utilised by) operations             29           9,948          (28,375)
Interest received                                                       337               518
Tax paid                                                                (12)          (2,259)

Net cash generated from/(used in) operating
activities                                                           10,273          (30,116)

Investing activities
Additions to capital work in progress                    14         (24,100)         (28,435)
Proceeds from disposals of property, plant and
equipment                                                            46,413                 162
Acquisition of investment                                            (1,055)                  -

Net cash generated from/(used in) investing
activities                                                           21,258          (28,273)

Financing activities
Proceeds from short term loan                            21                -          10,000
Proceeds from long-term loans                            21            2,851            3,315
Payments of short-term loan                              21          (6,993)          (3,007)
Payments of long-term loans                              21         (41,876)          (5,194)
Proceeds from grants                                     25           11,900          44,833

Net cash (used in)/generated from financing
activities                                                          (34,118)          49,947

Decrease in cash and cash equivalents                                (2,587)          (8,442)

Movement in cash and cash equivalents
At the beginning of the year                             19          11,605           20,047
Decrease during the year                                             (2,587)          (8,442)

At the end of the year                                   19           9,018           11,605




  The notes on pages 17 to 35 form an integral part of these financial statements.




                                                                                     (16)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    NOTES TO THE FINANCIAL STATEMENTS
    FOR THE YEAR ENDING 31 DECEMBER 2004

1   BASIS OF PREPARATION


    These financial statements have been prepared in accordance with Tanzania Financial
    Accounting Standards under the historical cost convention, except as modified by the
    revaluation of certain property, plant and equipment.

    The financial statements have been prepared on the assumption that the Company will
    continue to operate as a going concern. This assumption is based on the anticipation
    that the Government of Tanzania, which is the sole owner of the Company, will offset
    part of the loans advanced to the Company against amounts due from the Government,
    and that it will continue to provide the financial support required by the Company in the
    foreseeable future. Negotiations to offset Government loans with amounts due from the
    Government are currently ongoing. It is further envisaged that the balance of loans and
    interest remaining after the offset will be converted into equity.

    This assumption has also been based on the current status of the divestiture timetable.
    Although a date has been set for the unbundling of company assets and liabilities into
    various successor companies, neither the structure of these companies nor the post
    unbundling structure of Tanzania Electric Supply Company Limited have been decided
    upon. The directors therefore anticipate that the Company will operate as a going
    concern for the foreseeable future. If the company were not to continue as a going
    concern, then these financial statements would have to be prepared on a break-up
    value or liquidation basis. Long term assets and liabilities would be reclassified as
    current assets and liabilities and assets would be restated to a forced sale value basis.
    In addition, provisions would be necessary for closure costs and losses to the date of
    termination, including redundancies and penalties for early termination of contracts.

2   PRINCIPAL ACCOUNTING POLICIES

    The principal accounting policies adopted in the preparation of these financial
    statements are set out below.

    (a)   Revenue recognition

          Revenue from sale of electricity excludes value added tax.

          Revenue is recognized when earned. Revenue is earned on a billed account
          when a customer has consumed the electricity and the units consumed have been
          billed. Billings for units of energy sold and rentals are made on a monthly basis
          throughout the year. Revenue is earned on a prepaid account when units of
          electricity are purchased. An adjustment is made at the year-end to reverse the
          estimated portion of unused units.




                                                                                         (17)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2004

2   PRINCIPAL ACCOUNTING POLICIES (continued)

    (b) Property, plant and equipment

    The company revalued all property, plant and equipment (with the exception of motor vehicles
    and office equipment) as at 31 December 2003.

     Increases in the carrying amounts arising on the revaluation of property, plant and equipment
    are credited to the revaluation reserve in shareholders’ equity. Decreases that offset previous
    increases of the same asset are charged against that reserve; all other decreases are charged
    to the income statement.

     Depreciation is calculated on the straight line method to write off the cost of each asset, or its
    revalued amount, to its residual value over its estimated useful life as follows:

    Estimated useful lives of property, plant and equipment are as follows:-

     Hydro-generation equipment                                                   20 – 60 years
     Thermal-generation equipment                                                 15 – 50 years
     Transmission systems                                                         10 – 60 years
     Distribution systems                                                         10 – 60 years
     Buildings                                                                    30 – 54 years
     Motor vehicles                                                                 4 – 6 years
     Office equipment                                                                   8 years

    Gains and losses on disposal of property, plant and equipment are determined by comparing
    proceeds with the carrying amount and are included in the operating results. On disposal of
    revalued assets, the related revaluation surplus is transferred to accumulated losses/retained
    earnings.

    Property, plant and equipment are reviewed for impairment losses whenever events or
    changes in circumstances indicate that the carrying amount may not be recoverable. An
    impairment loss is recognized for the amount by which the carrying amount of the asset
    exceeds its recoverable amount which is the higher of an asset’s net selling price and value
    in use.

    (c) Investments

    Investments are stated at cost. However, they are written down to their net realizable value
    whenever there is a permanent diminution in value. Provision for diminution in value is
    computed by reference to each individual investment. Income from investments is taken to the
    income statement when received.




                                                                                                   (18)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2004

2   PRINCIPAL ACCOUNTING POLICIES (continued)

    (d)   Inventories

    Inventories are stated at the lower of cost or net realizable value. Cost is determined by the
    weighted average method.

    Provision is made for the full value of obsolete inventories and stocks which are surplus to
    requirements. Obsolete items are materials or spares which have no further use due to
    obsolescence, technological changes or other factors.

    (e)   Trade receivables

    Trade receivables are carried at original invoiced amounts less an estimate made for doubtful
    receivables based on a review of all outstanding amounts at the year-end. All non-
    government balances outstanding for more than 120 days are provided for in full. In addition,
    a 5% provision has been made against all other outstanding trade debtors. At the year-end, a
    full provision is made against amounts receivable from Zanzibar State Power and Fuel
    Corporation.

    (f)   Deferred income taxes

     Deferred income tax is provided in full, using the liability method, on temporary differences
     arising between the tax bases of assets and liabilities and their carrying amounts in the
     financial statements. The principal temporary differences arise from depreciation on property,
     plant and equipment, revaluations of property, plant and equipment, provisions for inventories
     and debtors and tax losses carried forward.

     Tax rates enacted or substantively enacted by the balance sheet date are used to determine
     deferred income tax.

    (g)   Translation of foreign currencies

    Transactions in foreign currencies during the year are converted into Tanzania Shillings at
    rates ruling at the transaction dates. Monetary assets and liabilities at the balance sheet date
    which are denominated in foreign currencies are translated into Tanzania Shillings at rates
    ruling at that date. The resulting differences from conversion and translation are dealt with in
    the profit and loss account in the year in which they arise.

    (h) Cash and cash equivalents

    Cash and cash equivalents are carried in the balance sheet at cost. For the purposes of the
    cash flow statement, cash and cash equivalents comprise cash on hand, deposits held at call
    with banks, other short-term highly liquid investments, and bank overdrafts. In the balance
    sheet, bank overdrafts are included in trade and other payables.




                                                                                                (19)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2004

2    PRINCIPAL ACCOUNTING POLICIES (continued)

    (i) Grants

    The grants were procured by the Government from various sources in order to fund part of the
    Company’s capital expenditure programme.

    Grants are accounted for under the capital method and are considered as part of the
    shareholders’ funds due to the government’s intention to convert these to equity.

    (j) Comparative figures

    Where necessary, comparative figures have been adjusted to conform to changes in
    presentation in the current year.

3    SALES

                                            Tariff       2004       2003        2004        2003
                                           number      kWh’m       kWh’m       Shs’m       Shs’m

     Domestic low usage                       D1           212          -      18,743           -
     General use                               1           873      1,061      69,126      74,499
     Low voltage supply                        2           378        337      32,770      28,745
     High voltage supply                      3            684        641      50,624      46,909
     Zanzibar State Fuel & Power Corp.         5           161        145       4,910       4,256
     Resolute Gold Mine                        6            44         43       2,929       2,861
     Kahama Gold Mine                          7           114         99       9,373       7,744

                                                         2,466      2,326    188,475     165,014

4    COST OF SALES
                                                                               2004         2003
                                                                             Shs’m         Shs’m
      Own generation and transmission                                        44,047       32,235
      Purchased electricity                                                 124,657       70,667
      Distribution expenses                                                  29,951       34,124
      Depreciation                                                           26,323       42,374
      Provision for doubtful debts                                           41,262       10,341
      Loss on revaluation of hydro generation plant                               -          227

                                                                            266,240      189,968




                                                                                            (20)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2004

5   OTHER OPERATING INCOME                                                       2004      2003
                                                                                Shs’m     Shs’m

    Government contribution                                                     65,168    20,300
    World bank contribution                                                     33,655         -
    Capital and chargeable works orders                                          6,696     3,835
    Interest on overdue electricity bills                                       28,243    10,761
    SIDA Management Support Services and Monitoring grant                          533     1,126
    Reconnection fees                                                              423       433
    Rental income                                                                  216       338
    Profit on disposal of property, plant and equipment                          1,779       139
    Other                                                                        2,059     1,025

                                                                               138,772    37,957

6   OPERATING EXPENSES

    Relief project                                                         734             1,626
    Management Support Services and Monitoring Consultant (SIDA funded)    533             1,126
    Staff costs (Note 9)                                                16,801            10,367
    Depreciation                                                         3,430             4,673
    Provision for doubtful debts – Morogoro Training Centre              3,414                 -
    Provision for obsolete and slow moving inventories                   (369)             4,437
    Repairs and maintenance                                              1,784             1,604
    Transport and travel                                                 1,809             1,674
    Other administration expenses                                       15,621            23,225
    Retrenchment costs                                                     675            21,456
    NetGroup Solutions Pty success fee                                   1,361             4,614
    Loss on revaluation of land and building                                 -             3,466

                                                                                45,793    78,268

    The following items have been charged in arriving at the operating profit/(loss):

    Depreciation on property, plant and equipment (note 13)                    29,753    47,046
    Directors’ emoluments                                                         150       171
    Auditors’ remuneration                                                        111        97

7   NET FINANCE EXPENSE

    Net foreign exchange losses                                                 40,773   120,623
    Interest expense                                                            37,533    36,984
    Interest income                                                              (337)     (518)

                                                                                77,969   157,089




                                                                                          (21)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2004

8    TAXATION                                                                   2004          2003
                                                                               Shs’m         Shs’m

     Current tax in respect of current year                                         -             -
     Current tax in respect of prior years                                          -         2,259
     Deferred tax in respect of current year                                 (47,445)      (66,115)
     Deferred tax in respect of prior years                                   (5,707)        18,300

                                                                             (53,152)      (45,556)

     The tax on the Company’s result before tax differs from the theoretical amount that would
     arise using the basic tax rate as follows:

                                                                                2004          2003
                                                                               Shs’m         Shs’m

     Loss before tax                                                         (62,755)    (222,354)

     Tax calculated at a tax rate of 30 % (2003: 30 %)                       (18,827)      (66,706)

     Non taxable income                                                      (29,647)              -
     Tax on rental income not provided                                            (32)          (51)
     Expenditure permanently disallowed                                        13,875         2,293
     Investment deduction                                                     (1,003)       (1,651)
     Prior year deferred tax adjustment                                       (5,707)       18,300
     Current tax in respect of prior year                                            -        2,259
     Qualifying exchange loss for which no deferred tax asset was
     recognised                                                              (11,811)               -

                                                                             (53,152)      (45,556)

     Further information about deferred tax is presented in note 22.

9    STAFF COSTS

     The following items are included within staff costs:
     Social security costs – employer’s contribution (Note 10)                  3,754        3,004
     Skills and Development Levy                                                1,410        1,915

                                                                                5,154        4,919

10   SOCIAL SECURITY COSTS

     All the company’s employees are either members of the National Social Security Fund
     (“NSSF”) or the Parastatal Pension Fund (“PPF”). The company contributes 10% and 15%
     and the employees contribute 10% and 5% of the employees’ gross salaries to the schemes,
     respectively on a monthly basis. The employer’s contribution is charged to the income
     statement when payable.




                                                                                             (22)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2004

10   SOCIAL SECURITY COSTS (continued)

     The amount charged to the income statement in the year in respect of the company’s
     contribution is:
                                                                       2004       2003
                                                                      Shs’m      Shs’m

     Company’s contribution to PPF                                               3,711        2,998
     Company’s contribution to NSSF                                                 43            6

     The contribution by employees (deducted from their salary payments) was Shs 1,280 million
     (2003:Shs 1,004 million).
     At year-end the following amounts were payable to NSSF and PPF. They relate to the
     December 2004 contributions and have subsequently been paid.

                                                                                 2004         2003
                                                                                Shs’m        Shs’m

     Company’s contribution - NSSF                                                   -              1
     Employee’s contribution - NSSF                                                  -              1
     Company’s contribution – PPF                                                  302            248
     Employee’s contribution – PPF                                                 100             82

                                                                                   402            332

     All remittances have been made in time in accordance with NSSF and PPF regulations.

     Employees can obtain details of their contributions and contributions made on their behalf
     by requesting statements from the NSSF and PPF.




                                                                                              (23)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2004

11   OTHER STATUTORY PAYROLL REMITTANCES

     Other statutory payroll remittances include Pay As You Earn (PAYE) and Skills and
     Development Levy which are payable to Tanzania Revenue Authority (TRA).

     The amount charged to the income statement in respect of Skills and Development Levy,
     and the amount deducted from the employees’ salaries and wages in respect of PAYE are:

                                                                                2004    2003
                                                                               Shs’m   Shs’m

     PAYE                                                                      4,928   4,784
     Skills and Development Levy                                               1,738   1,915

     At year-end the following amounts, which relate to the December 2004 remittances, were
     payable to relevant authorities. These remittances have been subsequently paid.

                                                                                2004    2003
                                                                               Shs’m   Shs’m

     PAYE                                                                          -     378
     Skills and Development Levy                                                   -     184

12   DIVIDENDS

     No dividends have been declared as there are no distributable reserves.




                                                                                       (24)
   TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

   NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
   FOR THE YEAR ENDED 31 DECEMBER 2004

13 PROPERTY, PLANT AND EQUIPMENT


                                    Hydro    Thermo Transmission Distribution     Land &    Motor      Office
                                generation generation    systems    systems     buildings vehicles equipment      Total
                                    Shs’m      Shs’m       Shs’m       Shs’m       Shs’m    Shs’m      Shs’m     Shs’m
  Cost/valuation as at

  At 1 January 2004               403,120     52,104      363,869     327,428     56,448    15,981     47,031 1,265,981
  Capitalised during the year         550        877        1,318      17,381         581       37        798     21,542
  Disposals                             -   (41,220)            -           -     (3,470)    (700)          -   (45,390)

  At 31 December 2004             403,670     11,761      365,187     344,809     53,559    15,318     47,829 1,242,133

  Comprising:
  - Cost                              550        877        1,318      17,381        581    15,318     47,829    83,854
  - Valuation                     403,120     10,884      363,869     327,428     52,978         -          - 1,158,279
                                  403,670     11,761      365,187     344,809     53,559    15,318     47,829 1,242,133

  Depreciation as at

  At 1 January 2004                     -         -             -           -          -    13,537     44,679    58,216
  Charge for the year               9,441       467         7,220       9,194      1,763       890        778    29,753
  Disposals                             -         -             -           -          -     (700)          -     (700)

  31 December 2004                  9,441       467         7,220       9,194      1,763    13,727     45,457    87,269

  Net book value as at

  31 December 2004                394,229     11,294      357,967     335,615     51,796     1,591      2,372 1,154,864

  31 December 2003                403,120     52,104      363,869     327,428     56,448    2,444,      2,352 1,207,765




                                                                                                                   (25)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2004

13   PROPERTY, PLANT AND EQUIPMENT (continued)

     Property, plant and equipment, except for motor vehicles and office equipment, were valued
     as at 31 December 2003 by two teams of professional valuers:

     • Property Bureau (T) Ltd, in joint venture with EM Consultants and PB Power valued hydro
     generation, thermal generation, transmission and distribution assets.

     • Land Masters Combine Limited, in joint venture with Capital Shelterworks Limited and
     Trace Associates Limited, valued land and buildings.

     Hydro generation, thermal generation, transmission and distribution assets were valued on a
     depreciated replacement cost basis. Land and buildings were valued on open market value
     basis, except for specialized assets and those in locations where there was no open market,
     where a depreciated replacement cost basis was used.

     The revaluation surplus net of applicable deferred income taxes was credited to revaluation
     reserve in shareholders’ equity.

     The Company does not currently have title deeds for a number of its properties but is
     following up the processing of deeds with the relevant authorities.

14   CAPITAL WORK IN PROGRESS                                                   2004            2003
                                                                               Shs’m           Shs’m

     At the beginning of the year                                                5,652          9,025
     Expenditure during the year                                                24,100         28,435
     Transferred to property, plant and equipment                             (21,542)       (31,808)

     At the end of the year                                                     8,210          5,652

15   INVESTMENTS

     Tanzania Daesung Cables Limited                                    (a)         1               1
     ABB Tanelec Company Limited                                        (b)        12              12
     Songas Limited                                                     (c)     1,055               -

                                                                                1,068              13
     Less: Provision for diminution in value                                      (13)           (13)

                                                                                1,055                 -

     As at 31 December 2004, the Company had the following investments:

     (a)    3,180,000 shares of Shs 10 each in Tanzania Cables Limited representing 10% of
            total issued share capital in the company.




                                                                                               (26)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2004
15   INVESTMENTS (continued)

     (b)    39,242 shares of Shs 10,000 each in ABB Tanelec Limited representing 16.35% of
            total issued share capital of the company.

            Both the Tanzania Daesung Cables Limited and ABB Tanelec Company Limited
            have not paid dividends for a number of years. The directors have decided to provide
            for the diminution in value of these investments.

     (c)    As at 31 December 2004, the Company held 2 shares of US$ 100 each in Songas
            Limited. During the year, it agreed to transfer the Ubungo complex in consideration
            for 9,998 shares. The shares will be issued when the legal transfer is completed.
            TANESCO has recognized its investment in Songas Limited of Shs 1,055 million as
            all conditions for the transfer had been met as at year end.
16   AFUDC PREPAYMENT

     In 2003, TANESCO, as allowed under the “Amended and Restated Shareholders’
     Agreement” relating to the Songo Songo Gas-to-Electricity Project, paid to Songas Limited
     an amount of US$ 10 million as a prepayment of the amount of Allowance for equity Funds
     Used During Construction (AFUDC). This is being amortised over a period of 20 years from
     31 July 2004.

                                                                           2004           2003
                                                                          Shs’m          Shs’m
17   INVENTORIES
     General stores and meter stocks                                      29,009         24,359
     Engine and vehicle parts                                              8,587          8,296
     Combustibles                                                          3,818          2,230
     Stocks in transit                                                     4,359          2,823
     Others                                                                  300            214
                                                                          46,073         37,922

     Provision for obsolete and slow moving inventories                  (10,064)      (10,433)

                                                                          36,009         27,489




                                                                                            (27)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2004

18   TRADE AND OTHER RECEIVABLES                                           2004            2003
                                                                          Shs’m           Shs’m

     General trade debtors                                               184,514        143,423
     Prior year adjustments                                                    -         (8,930)

     Adjusted general trade debtors                                      184,514        134,493
     Government debtors (see note below)                                  35,234         36,184
     Zanzibar State Fuel and Power Corporation                            19,761         19,710
     Other balance due from the Government                                16,833         16,833
     Chargeable works orders                                                 167            333
     Prepayments and deposits                                             10,881          9,415
     Staff debtors                                                           155            136
     Sundry debtors                                                        2,686          3,464
                                                                         270,231        220,568

     Provision for doubtful debts                                      (171,434)      (139,102)
     Prior year adjustment                                                     -          8,930
     Adjusted provision for doubtful debts                             (171,434)      (130,172)
     Cash defalcations                                                     (285)          (285)

                                                                          98,512         90,111

     The company is continuing negotiations with the Government of Tanzania to offset the
     Government debtor balances with some of the long-term loans payable to it. After the offset,
     it is envisaged that the remaining loan amount will be converted into equity.

19   CASH AND CASH EQUIVALENTS

     For the purposes of the cash flow statement, the year-end cash and cash equivalents
     comprise the following:
                                                                            2004          2003
                                                                          Shs’m          Shs’m

     Bank and cash balances                                                  9,018        14,796
     Bank overdraft                                                              -        (3,191)

                                                                             9,018        11,605

20   TRADE AND OTHER PAYABLES

     Accrued interest                                                     271,633        223,949
     Advances against works orders                                          2,801          2,273
     Trade creditors and accruals                                          44,583         62,346
     Bank overdraft                                                             -          3,191
     Customers with credit balances                                         4,432          5,344
     Due to related parties (Note 30)                                         782            696

                                                                          324,231        297,799

                                                                                             (28)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2004
20   TRADE AND OTHER PAYABLES (continued)

     The bank overdraft facility with National Bank of Commerce has a limit of Shs 6.5 billion.
     The average interest charge during the year was 10%. The overdraft is secured over
     certain non-industrial book debts.

21   LONG TERM LOANS
                                                                              2004            2003
                                                                             Shs’m           Shs’m

     Total borrowings                                                       564,012        579,932
     Less: current portion                                                (232,213)      (206,826)

     Non-current portion                                                   331,799         373,106

     The long-term loans are from various overseas lenders through the Government of
     Tanzania. The Company has entered into loan agreements with the Government, to whom
     these loans are payable. The loans are unsecured and are analysed as follows:

                                    Balance at          Local            Rate of      Repayment
      Currency                        the year       currency       interest per          period
                                          end          Shs’m             annum

      Special Drawing Rights       188,764,706        307,776      0.75% - 11%        1986 - 2033
      United States Dollars         31,443,499         33,172       6.5% - 8.5%       1986 - 2003
      Norwegian Kroner             401,059,702         70,547    7.43% – 7.73%        1995 - 2020
      Units of Account              37,073,110         60,447          1% - 4%        1992 - 2033
      Swedish Kroner               294,558,440         47,316        4% - 7.43%       1997 - 2016
      European Currency Units       22,592,358         32,497                5%       2001 - 2015
      Kuwaiti Dinar                  3,422,570         12,231          9%-11%         1995 - 2014
      Tanzanian Shillings           25,822,240             26         8% - 8.5%       1982 - 2003

                                                      564,012

     Following a High Court ruling in which the Company was ordered to pay a foreign lender an
     amount which had previously been offset with Government electricity debts, the directors
     have decided to include the amount due to the foreign lender in the current portion of long-
     term loans. The directors also believe that the amount is recoverable from the Government
     and have therefore included the balance of Shs 16,833 million in trade and other
     receivables.

     The Government of Tanzania and the Company are currently involved in negotiations to
     offset a portion of the above loans with amounts due from Government. Discussions are
     also in progress to agree on converting the remainder of the on-lent loan into paid up share
     capital with the view of restructuring the balance sheet of the company.




21   LONG TERM LOANS (continued)

                                                                                                  (29)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2004

     Maturities of non-current borrowings                                           2004         2003
                                                                                   Shs’m        Shs’m

     Repayable between one and two years                                        39,406         44,292
     Repayable between two and five years                                       97,122        109,166
     Repayable after more than five years                                      195,271        219,648

                                                                               331,799        373,106

22   DEFERRED TAX

     Deferred tax is calculated on all timing differences under the liability method using a
     principal tax rate of 30% (2002: 30%). The movement on the deferred tax account is as
     follows:

                                                                                    2004         2003
                                                                                   Shs’m        Shs’m

     At the beginning of the year                                                30,254         94,276
     Release to profit and loss                                                (53,152)       (66,115)
     (Release)/charge to equity                                                 (1,692)          2,093

     At the end of the year                                                    (24,590)        30,254

     In addition, the net deferred tax (asset)/liability is analysed as follows:

                                                            Release to
                                                             profit and     Release to
                                                  2003              loss        equity           2004
                                                 Shs’m          Shs’m           Shs’m           Shs’m
     Deferred tax liabilities

     Accelerated tax depreciation                81,839        (32,865)                  -     48,974
     Property, plant & equipment
     revaluation                               216,868                 -           (1,692)    215,176

                                               298,707         (32,865)            (1,692)    264,150
     Deferred tax assets
     Tax loss carried forward                 (147,912)        (86,160)                  -   (234,072)
     Other deductible temporary
     differences                              (120,541)          65,873                  -    (54,668)

                                              (268,453)        (20,287)                  -   (288,740)

     Net deferred tax liability/(asset)          30,254        (53,152)            (1,692)    (24,590)



23   SHARE CAPITAL                                                                  2004        2003
                                                                                   Shs’m       Shs’m
                                                                                                  (30)
      TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

      NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
      FOR THE YEAR ENDED 31 DECEMBER 2004
      Authorised:
      35,000,000,000 ordinary shares of Shs 20 each                          700,000        700,000

      Issued and fully paid:
      14,695,607,473 ordinary shares of Shs 20 each                          293,912        293,912

      All the issued and fully paid shares are owned by the Government of Tanzania.

 24   ADVANCE TOWARDS SHARE CAPITAL

      At the beginning and end of the year                                        388           388

      The advance towards share capital represents amounts advanced by the Government of
      Tanzania for rural electrification projects. The outstanding amounts advanced will be
      converted into share capital at a later date. No date has been fixed for the conversion of the
      advanced amounts as at 31 December 2004 into share capital

 25   GRANTS
                                                                               2004            2003
      Donor                         Project                                   Shs’m           Shs’m

      Agence Francaise De
      Development                   Sub-station rehabilitation                 2,960           2,960
      African Development Bank      Rural Electrification Master Plan
                                    Study                                        896              -
      DANIDA                        220 KV TL Singida - Arusha                22,253         22,253
      French Government             Rehabilitation of Diesel Engines           5,099          5,099
      Italian Government            See (i) below                             10,825         10,825
      Japanese Government           Dar es Salaam rehabilitation               8,077          8,077
      KFW                           See (ii) below                            24,405         22,792
      ODA                           Mufindi electrification                    1,902          1,902
      NORAD                         See (iii) below                           17,622         16,973
      SIDA/NORAD/FINNIDA            Pangani Falls                              2,011          2,011
      SIDA                          See (iv) below                            13,369         10,479
      Spanish Government            See (v) below                             12,925          7,842
      Treasury                      See (vi) below                             4,300          3,531
      Yugoslavia                    Purchase of motor vehicles                     3              3

                                                                             126,647        114,747




25    GRANTS (continued)
                                                                               2004            2003
          Project funded by                                                   Shs’m           Shs’m
                                                                                                (31)
TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2004

(i) Italian Government
    132 KV Masaka/Bukoba                           4,407    4,407
    Mufindi/Mbeya                                  6,418    6,418

                                                  10,825   10,825
(ii) KFW
     96-66-108 Kihansi                            13,411   12,834
     96-66-640 Grid Control Centre                   802      802
     Energy efficiency improvement                 6,742    5,706
     Mtera Power Plant                             3,450    3,450

                                                  24,405   22,792
(iii) NORAD
      Rehabilitation Nyumba ya Mungu and Hale        589      589
      Chang'ombe sub-station                       1,244    1,244
      132 KV Mbala - Sumbawanga                    7,351    6,702
      Bahari Beach Sub-station                     1,184    1,184
      NPRP                                         6,450    6,450
      SADCC Mbozi/Tunduma                            804      804

                                                  17,622   16,973
(iv) SIDA
     Kilimanjaro rural electrification Phase II        3        3
     Ubungo power station rehabilitation           6,041    5,986
     KIDATU Power Plant Rehabilitation             3,258    3,258
     Ubungo Gas Turbine                            1,082    1,082
     Electrification of Urambo                     1,236       80
     Electrification of Serengeti                  1,749       70

                                                  13,369   10,479
(v) Spanish Government
    POWER Supply AGRO Based                        6,481    6,481
    Electrification of Ukerewe                     6,444    1,361

                                                  12,925    7,842




                                                             (32)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2004

25   GRANTS (continued)                                                       2004            2003
                                                                             Shs’m           Shs’m
     (vi) Treasury
          Kilimanjaro rural electrification Phase II                             20             20
          Biharamlo rural electrification                                       920            720
          Ruangwa rural electrification                                         164            163
          Meatu rural electrification                                           266            266
          Nassa rural electrification                                           131            131
          Ngara rural electrification                                         1,014            875
          Tandahimba rural electrification                                      129            129
          Sumbawanga rural electrification                                      130            130
          Rufiji rural electrification                                          108            104
          Geita rural electrification                                           175            175
          Serengeti & Urambo rural electrification                            1,018            718
          Electrification of Ukerewe                                            200            100
          Rural Electrification Master Plan Study                                25              -

                                                                              4,300          3,531

26   CONTINGENT LIABILITIES

     The Company is a defendant in various legal actions. In the opinion of the directors, after
     taking appropriate legal advice, the outcome of such actions will not give rise to any
     significant loss. The directors are not aware of any other material contingencies as at the
     balance sheet date.

     The Company has been accruing for and remitting VAT on sales on a receipts basis rather
     than on an invoice basis. The Tanzania Revenue Authority (TRA) has agreed to this
     treatment for the year 2000 but not for 2001 to 2004. Consequently, there are uncertainties
     as to possible penalties which may be assessed due to late remittance of VAT. However,
     the directors and management believe that the receipt basis will be formally agreed by the
     TRA for 2001 to 2004. It is not practicable to quantify the potential penalties, if any.

     In February 2005, the company received a Tax demand notice from the Tanzania Revenue
     Authority in respect of outstanding corporation taxes and penalties amounting to Shs 24,910
     million for the period 1997 and 1998. This follows the dismissal of the Company’s appeals at
     the Tax Revenue Appeals Board. However the company submitted an appeal at the
     Tanzania Revenue Appeals Tribunal against the aforementioned Tax Revenue Appeals
     Boards’ decision. The Tanzania Revenue Appeals Tribunal ruled against the dismissal and
     ordered the Tax Revenue Appeals Board to hear the case. This has now been listed for
     hearing between 23 and 30 June 2005 at the Tax Revenue Appeals Board.




                                                                                               (33)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2004

27   CAPITAL COMMITMENTS

     The board of directors has approved capital commitments of Shs 73,698 million (2003: Shs
     85,480 million). These commitments will be funded by Company’s internal resources, grants
     and long-term loans.

28   OTHER COMMITMENTS

     Independent Power Tanzania Limited (IPTL)

     There is a commitment of Shs 36,215 million in respect of capacity charge arising from
     power purchase for the year to 31 December 2005. The Power Purchase agreement
     between the company and IPTL is for 20 years and it commenced in 2002.

     Songas Limited

     The company has entered into agreement with Songas Limited for the supply of electricity.
     The agreement commenced in July 2004. There is a commitment of Shs 52,800 million in
     respect of capacity charge arising from power purchase from Songas Limited for the year to
     31 December 2005.


29   CASH GENERATED FROM OPERATIONS

     Reconciliation of loss before tax to cash generated from/(utilized by) operations.

                                                                            2004              2003
                                                                           Shs’m             Shs’m

      Loss before tax                                                     (62,755)        (222,354)
      Adjustments for:
      Depreciation (note 13)                                               29,753           47,046
      Tax paid                                                                   -           2,259
      Interest income                                                        (337)           (518)
      Unrealised exchange loss                                             29,807           52,165
      Provision for Morogoro Training Centre                                 3,414               -
      Profit on disposal of property, plant and equipment                  (1,723)           (139)
      Impairment adjustment                                                  (263)               -
      Effects of adjustments in asset register                                   -           1,433

                                                                           (2,104)        (120,108)
      Changes in working capital:
      - inventories                                                        (8,520)            4,918
      - trade and other receivables                                        (7,642)          (4,401)
      - trade and other payables and consumer deposit                      28,214           91,216

      Cash generated from/(utilised by) operations                          9,948          (28,375)




                                                                                               (34)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2004

30   RELATED PARTY TRANSACTIONS

     The following transactions were carried out with related parties:
                                                                                    2004       2003
                                                                                   Shs’m      Shs’m
     (i) Purchase of goods and services

     NetGroup Solutions (Pty) - success fees                                       1,361      4,614
     NetGroup Solutions (Pty) - relief projects                                      734      1,626

     Purchases from related parties were made at terms and conditions similar to those available
     elsewhere on an arm’s length basis.

     (ii) Outstanding balances arising from purchase of goods and services

                                                                                    2004       2003
                                                                                   Shs’m      Shs’m

     NetGroup Solutions (Pty) success fees                                           782           696

     iii) Loans to directors

     Loans to the directors of the Company (and their families)                        -             -

31   POST BALANCE SHEET EVENTS

     There are no material post balance sheet events which can have an impact on the financial
     statements.

32 COUNTRY OF INCORPORATION AND REGISTERED OFFICE

     The Company is incorporated in the United Republic of Tanzania under the Companies
     Ordinance and domiciled in Tanzania. The address of its registered office is:

     Tanzania Electric Supply Company Limited
     Umeme Park
     Ubungo
     Dar es Salaam

33 ULTIMATE OWNER OF THE COMPANY

     The Government of United Republic of Tanzania is the ultimate owner of the Company.

34 CURRENCY

     These financial statements are presented in millions of Tanzania Shillings.




                                                                                            (35)
TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

REPORT AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005
TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

REPORT AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2005




TABLE OF CONTENTS                           Page

Report of the directors                      1-9

Report of the auditors                     10 - 12

Financial statements

Income statement                               13

Balance sheet                                  14

Statement of changes in equity                 15

Cash flow statement                            16

Notes to the financial statements          17 - 38
        TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

        REPORT OF THE DIRECTORS
        FOR THE YEAR ENDED 31 DECEMBER 2005

        The directors submit their report together with the audited financial statements for the year
        ended 31 December 2005 which disclose the state of affairs of Tanzania Electric Supply
        Company (TANESCO) Limited (“the Company”).

1       STATEMENT OF DIRECTORS’ RESPONSIBILITIES

        The directors are required under the Companies Act 2002 to prepare financial statements
        for each financial period that give a true and fair view of the state of affairs of the
        Company as at the end of the financial period and of its profit or loss for that period.

        The directors confirm that suitable accounting policies have been used and applied
        consistently, and reasonable and prudent judgment and estimates have been made in the
        preparation of the financial statements for the year ended 31 December 2005. The
        directors also confirm that International Financial Reporting Standards have been followed
        and that the financial statements have been prepared on the going concern basis.

        The directors are responsible for keeping proper accounting records which disclose with
        reasonable accuracy at any time the financial position of the Company and which enable
        them to ensure that the financial statements comply with the Companies Act 2002. They
        are also responsible for safeguarding the assets of the Company and hence for taking
        reasonable steps for the prevention and detection of fraud, errors and other irregularities.

    2   DIRECTORS

        The directors of the Company at the date of this report, all of whom have served since
        1 January 2005, unless as otherwise stated are:

        Name
        Amb. F.M.Kazaura              Chairman
        Mr. A. Mapunda                Vice Chairman
        Hon. P. A. Magani (MP)
        Mr A. Mwakapugi
        Mr. B. J. Mrindoko
        Mr. A. Kilewo
        Mr. S. Salula
        Mrs. A. E. Bukuku
        Mr. S.A. Juma

        The non-executive Directors received sitting allowances for their attendance at Board
        meetings. For the year ended 31 December 2005, these allowances amounted to Shs
        245 million (2004: Shs 150 million).

        None of the directors hold any interest in the share capital of the Company.

        All the directors of the Company are Tanzanians.

        In accordance with the Company's Articles of Association, the Directors are not required to
        retire by rotation.



                                                                                                 (1)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    REPORT OF THE DIRECTORS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2005

3   ACTIVITIES

    The Company's principal activities are generation, transmission and distribution of electricity.
    Electricity is generated at six Hydro-Power Plants and 18 Thermal Power Plants. All Hydro
    Power Plants and four Thermal Power Plants are connected to the National grid. The
    Company also imports power from Uganda and Zambia and purchases power from five
    Independent Power Plants, namely Independent Power Tanzania Limited (IPTL),
    Tanganyika Wattle Company Limited, Kiwira Coal Mine, Songas Limited and local industries
    (TPC and Kilombero Sugar Company).

    For the whole year of 2005 there was a dry spell throughout the country. As a result the
    Company’s water reservoirs could not be filled adequately to support the planned generation
    mix of the Company. The Mtera Dam (the main water reservoir) reached the lowest level
    ever and at times had to be closed. Whereas the planned generation mix was a ratio of 67%
    hydro to 33% thermal production, the situation required 47% of power to be supplied by
    thermal sources. Consequently, the Company had to resort to extensive use of IPTL and
    Songas. The Company’s thermal plants located within the grid were run throughout the year.

    Despite the expensive nature of thermal generation and its effect on the financial
    performance of the Company, the Company utilized all its financial resources to avoid power
    rationing. The increased cost led to the poor financial performance of the company, as a
    consequence of not being able to recover direct costs of generation at the current tariffs.
    Direct costs of generation amounted to Shs 276,221 million while electricity sales amounted
    to only Shs 221,658 million.

    During the year 2005, the Company made an operating loss of Shs 25,014 million, against
    an operating loss of Shs 35,454 in the previous year. The loss is attributed to the increase in
    operating expenses especially energy purchase costs from IPTL and Songas.

    Revenue of the company increased from Shs 188,475 million in 2004 to Shs 221,658 million
    (an increase of 18%) in 2005 due to amongst other factors the impact of ongoing rural
    expansion programmes and tariff increase of an average of 4.8%.

    The Company performed well in revenue collections. During the year 2005, the Company
    collected a total of Shs 255,581 million against Shs 203,501 in year 2004 (an increase of
    25.59%). This level of collections, coupled with a government contributions amounting to
    Shs 41,075 million, resulted in the Company sustaining its business operations.

    The Company’s capital investment for the year totalled only Shs 39.9 billion (note 14).
    Capital expenditure included rehabilitation of distribution network as well as ongoing rural
    electrification.




                                                                                               (2)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    REPORT OF THE DIRECTORS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2005

3   ACTIVITIES (Continued)

    During the year under review the following projects were undertaken:

    •    Two reconditioned Wartsila engines totaling 1280 Kwh were installed and
         commissioned at Kigoma.
    •    Ludewa and Mbinga districts electrification projects are financed by the government and
         preparations for procurement and installation of new diesel generating plants is in
         progress.
    •    During the year preparatory work for Kinyerezi Greenfield continued. The project
        involves installation of 200 MW plant scheduled to be operational by the year 2009.
    •    Preparation were made to improve North-West Transmission grid network in order to
         reduce system outages.
    •    The distribution rehabilitation study for Dar es Salaam, Arusha and Moshi were
         completed and the report was out in January 2005.
    •    The projects to improve the Information and Management Information Systems were
         undertaken as follows. Upgrading of Scala to iScala version 2.2 release 2,
         implementation of materials management system using iScala, LAN AND WAN, to
         facilitate smooth data communication from regions to Head Office and installation of
         prepayment system using Eclipse software.
    •    Meter audits and other revenue protection projects were undertaken. This includes
         installation of outdoor pole mounted metering equipment to tariff three and tariff two
         customers.

    The operational performance of the company can be Summarized as follows:
                                                      5 year                    Percentage
                                                       target                   change from
                                                      (2009)    2005       2004  prior year
     Service lines completed during the year         133,100  24,281     31,492    -23%
     Number of pending service line applications      11,000  18,805     16,673     13%
     kWh sold during the year (million)                 4,068  2,657      2,369    +12%
     Additional 33kV and 11kV lines during the
     year (km)                                          1,741    713        412    +73%
     Total length of 33kV and 11kV distribution
     lines by the end of the year (km)                19,237  13,760     13,047     +5%
     Total length of low voltage lines by the end
     of the year (km)                                 49,033  22,822     19,649    +16%
     Distribution transformers installed during
     the year                                           1,175    260        278     -6%
     Total distribution transformers by the end of
     the year                                         10,933   7,016      6,756     +4%
     Total number of consumers by the end of
     the year                                      1,024,000 585,773 550,863        +6%
     Total number of staff of the Company               4,515  4,783      4,857    -1.5%
     Consumer/staff ratio                                 227  97.35        113    -14%




                                                                                           (3)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    REPORT OF THE DIRECTORS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2005

3   ACTIVITIES (Continued)

    The Company has been experiencing a number of operational challenges in serving its
    customers, as follows:

    (a)    The transmission network still requires major maintenance and rehabilitation. Given
           the financial condition of the Company it is unlikely that it can generate adequate
           funding to carry out the rehabilitation. Long term financing is required either in the
           form of a loan or cash injection from the shareholder. Quality of supply also needs to
           be improved. Currently the Company is carrying out maintenance on a sporadic
           basis by use of its own funds and support by KFW, the German donor agency, in the
           energy efficiency improvement program.

    (b)    Rampart transformer oil theft continued up to September 2006 and the following
           have been done in this regard;

           •      The National task force involving Police Headquarters and Tanesco Head
                  Office has been formed. Its major functions are to formulate follow up
                  strategies and management teams for transformer oil theft prevention
           •      The Regional and District task forces involving Regional Police Commanders,
                  District Police Commanders, Tanesco Regional Managers and Tanesco
                  District Managers have been formed to run the operation.
           •      The Regional and District Commissioners are involved in curbing this
                  problem and they are at the front line to inform the general public (Wananchi)
                  on the advantages of preventing transformer oil theft.

    (c)    The Company has implemented the Government debt swap certificate issued in the
          year 2003 and has been reflected in the year 2005 balance sheet.

    (d) Bad hydrological conditions experienced in the past few years have greatly affected
        hydro power generation. In order to reduce dependency on hydro generation other
        sources such as coal are being developed as alternative source of energy.

    (e) The Company’s liquidity position has worsened to alarming levels. A Financial
        Recovery Plan has been prepared to address the Company’s situation and Directors
        are of the view that if the Shareholders adopt the recovery plan, the Company will be
        able to bounce back to normality by 2009.




                                                                                            (4)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    REPORT OF THE DIRECTORS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2005

4   FUTURE DEVELOPMENTS

    Following the recent drought in the country the company has looked at various short-term
    and medium-term options to mitigate the energy deficit caused by the drought and to reduce
    its dependency on hydro-power as source of generation.

    Medium-term plans include:

    •   The installation of two additional gas turbines at Ubungo with a capacity 36 MW each
        has been completed and the units were in commercial operations since June 2005.

    •   Conversion of the IPTL plant from using the expensive Heavy Fuel Oil (HFO) into using
        natural gas subject to government approval. Commercial operations using natural gas is
        expected to commence by 1st quarter of 2007.

    •   The Power System Master Plan includes another gas based power plant using the
        Songo Songo gas development as follows:-

        1. The Government has negotiated with the M/S Richmond LLC to install 100 MW of
           gas fired plant on rental basis to TANESCO.
        2. The Government has negotiated with M/S Aggreko to install 40 MW gas fired rental
           plant at Ubungo, which will be commissioned by last quarter of 2006.

    •   The Company has plans under ORET funds to install a 45MW plant at Tegeta to run on
        natural gas by 3rd quarter of 2007.

    •   For a considerable time, distribution and transmission network rehabilitation and
        expansion have been lacking funds. However US$ 60 million transmission and
        distribution rehabilitation project to be funded by the World Bank are in advanced stages
        of negotiations. The project is expected to kick off towards the end of 2006. The project
        will be implemented over an 18 month period.

    •   Accelerated electrification that intends to connect a total of 100,000 customers per year
        is under initial stages of implementation. Funds are being awaited for the execution of
        the project.




                                                                                            (5)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    REPORT OF THE DIRECTORS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2005

4   FUTURE DEVELOPMENTS (Continued)

    Power System Expansion Planning

    •   Phase II of the Electricity IV project has been approved. In the year 2005,
        implementation of various projects financed by various financial institutions were
        undertaken:
           o Electrification of Urambo and Serengeti, financed by SIDA was completed;
           o Power supply to Ukerewe under Spanish funding was completed;
           o Makambako substation network expansion in Njombe District;
           o Makambako-Songea 132kv line feasibility study;
           o Preparations of feasibility studies and business plans for Energizing Rural
               Transformation (ERT) Programme – a project to be financed by the World Bank
               (expected number of customers to be 200,000 in the year 2006-2010) are at final
               stage.
           o Three Rural Projects: Feasibility study for Ukerewe Rural network and expansion
               in Simanjaro, Bukombe, Kagera rural, Ruaha National park and Idodi Division
           o Way leave village electrification and community development scheme (WVS)-A
               component of the Songo Songo main project

    A new Power System Master Plan (PSMP) study will be carried out in second half of 2006
    and will take about 18 months to complete.

    The study will address alternative sources of power generation including Zambia, Tanzania
    and Kenya interconnector and upgrading requirement of the transmission system.

5   TANESCO DIVESTITURE

    In year 2005 two major Government decisions were made in respect of the company.
    These were de-specifying the company and restructuring some of its debts.

    TANESCO was specified under the Public Corporation Act of 1992 (Cap 257) on 22nd
    August 1997 through Government Notice number 547 with the aim of bringing Private sector
    Participation (PSP) in the electricity industry. The Company was de-specified on November
    18, 2005 through Government Notice number 373.

    Under de-specification the Company is now no longer earmarked for privatization. However,
    the Government has the prerogative of deciding otherwise in future. This means the
    company has at this moment more autonomy in decision-making.

    With some of its debts restructured the Company now qualifies for long term loans from
    local and foreign financial institutions.

    The overall strategic direction for TANESCO is to operate commercially and improve
    reliability and quality of the power supply. The Company is set to improve performance in
    revenue collection, power loss reduction, customer care, cost effectiveness, safety
    improvement, business efficiency and staff development.



                                                                                         (6)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    REPORT OF THE DIRECTORS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2005

6   RESULTS

    These are set out on page 13 of these financial statements.

7   SOLVENCY

    The Company's state of affairs at 31 December 2005 is set out on page 14 of these financial
    statements. In the opinion of the directors, the Company is solvent and is able to continue
    trading as a going concern, provided it continues to obtain the necessary financial support
    that it requires from the Government of Tanzania in the foreseeable future. Additional
    information pertinent to the solvency of the Company is given below:

    (a)    The Government of Tanzania has already offset some of the loans with the
           Government debtor balances and restructured the remainder by way of converting
           them into the paid up share capital.

    (b)    The Government of Tanzania has been partly financing rural electrification projects
           and is expected to continue to provide funds for these projects for the foreseeable
           future. In addition, the Government has continued to solicit grants from external
           donors to finance electrification and rehabilitation projects.

    (c)    The Government has been providing subvention funds to offset cash deficits to
           assist the Company in meeting its energy charges.

8   STATUTORY PAYROLL REMITTANCES

    In February 2005, the Company received an assessment from the Tanzania Revenue
    Authority in respect of outstanding corporation taxes and penalties amounting to Shs 24,910
    million for the periods 1997 and 1998. The Company has objected to the assessment. The
    issue was taken to the Tax Appeals Board that has given the judgment. TRA has shown
    intention to appeal on some of the issues from the judgment; however the directors
    anticipate that no material liabilities will arise above those that have been provided for.
    Further details are disclosed in note 27 to these financial statements.

9   EMPLOYEES’ WELFARE

    (i)    Industrial Safety

           The Company continued to satisfy the standards of industrial safety established by
           the Chief Inspector of Factories.

    (ii)   Training Facilities

           A training programme is drawn up every year to cater for all grades of staff.
           Particular emphasis is made on management, technical, information technology and
           business training.




                                                                                          (7)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     REPORT OF THE DIRECTORS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2005

9    EMPLOYEES’ WELFARE (continued)

     (iii)   Medical Facilities

             The Company intends to treat employees through medical insurance. Meanwhile the
             company policy on medical costs is as follows:

             •   Treatment covers the cost of employees involved in accidents while at
                 workplace.
             •   Treatment of opportunistic infections for AIDS infected employees.
             •   Nutritional supplements to boost immunity for TANESCO AIDS patients.

     (iv)    Employee Motivation

             The Company has plans to introduce a new productivity motivation programme in the
             near feature.

     (v)     Trade Union

             A healthy relationship continues to exist between management, personnel and the
             Trade Union.

10   DISABLED PERSONS

     It remains the Company's policy to accept disabled persons for employment for those
     vacancies that they are able to fill.

11   RELATED PARTY TRANSACTIONS

     Details of transactions and balances with related parties are included in note 31 to the
     financial statements.

12   POLITICAL AND CHARITABLE DONATIONS

     There were no political donations made during the year. Charitable donations amounting to
     Shs 2.6 million (2004: 48.2 million) were made to various charities during the year.

13   OWNERSHIP

     The Government of Tanzania is the sole owner of the Company.




                                                                                         (8)
(9)
REPORT OF THE AUDITORS

TO THE SHAREHOLDERS OF TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

We were engaged to audit the accompanying financial statements of Tanzania Electric
Supply Company Limited, which comprise the balance sheet as at 31 December 2005 and
the income statement, statement of changes in equity and cash flow statement for the year
then ended, and a summary of significant accounting policies and other explanatory notes.

This report has been prepared for, and only for, the Company’s shareholder in accordance
with the Companies Act 2002 and for no other purposes.

Respective responsibilities of directors and auditors

As described in the Report of the Directors, the Company’s directors are responsible for the
preparation of financial statements in accordance with applicable law and International
Financial Reporting Standards.

Our responsibility is to audit the financial statements in accordance with relevant legal and
regulatory requirements and International Standards on Auditing.

Basis of disclaimer of opinion

We were engaged to conduct our audit in accordance with International Standards on
Auditing. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial
statement presentation.

Inventories

The Company experienced problems in updating its inventory records due to the
introduction of new accounting software. Inventory transactions in respect of the year 2005
were recorded during the year 2006 and the resulting quantity balances as at 31 December
2005 could not be agreed to physical quantities of stock at that date. In addition, not all the
transactions related to the year 2005 were recorded and significant errors were
subsequently discovered in some of the recorded transactions. Although these errors were
corrected, they cast doubt on the effectiveness of controls over the recording of inventory
transactions.

As an additional consequence of the above problems, the company was not able to carry
out a review of inventories to determine the required provision for obsolete and slow moving
items.

Due to the forgoing we were not able to determine the extent to which inventories stated in
the balance sheet at Shs 51.9 billion are misstated. Adjustments to inventories would result
in similar adjustments to property plant and equipment and/or loss for the year.




                                                                                         (10)
   REPORT OF THE AUDITORS

   TO THE SHAREHOLDERS OF TANZANIA ELECTRIC SUPPLY COMPANY LIMITED
   (CONTINUED)

   Property plant and equipment

   The company’s controls over capital work in progress did not operate as intended. As a
   result significant amounts were transferred from capital work in progress to completed items
   of property plant and equipment without appropriate senior management approval.
   Consequently, we were not able to confirm that amounts transferred represent items of
   property, plant and equipment in use and whether the depreciation charge in respect of
   these amounts had been correctly determined.

   Unsupported credit balances

   Creditors stated in the balance sheet at Shs 87.4 billion, include an amount of Shs 2.8
   billion, said to comprise payments by customers in advance of receipt of electricity. We were
   not provided with supporting documents to enable us to confirm that payments of the said
   amount were indeed made to the Company. We are therefore uncertain whether the amount
   represents a valid liability of the Company.

   Fair value of liability

   As explained in note 25 to the financial statements, trade and other payables include an
   amount of Shs 17.8 billion in respect of which the payment terms have yet to be agreed with
   the Government. As required by IAS 39 the amount should been measured at fair value on
   initial recognition, which can only be determined when the repayment period is known. We
   were therefore not able to satisfy ourselves whether the liability is fairly stated in accordance
   with IFRS.

Accounting for Government grants

   Government grants have been considered as part of equity funds by the Company. This is
   not in accordance with IAS 20, which requires Government grants to be presented in the
   balance sheet as deferred income and amortised over the useful lives of the related assets
   or to be deducted from the carrying amount of the related assets. We were unable to
   quantify the effect of non-compliance due to the fact that the Company was not able to
   match the grant to specific items of property, plant and equipment.

   Trade and other receivables

   Trade and other receivables include an amount of Shs 16.8 billion said to be due from the
   Government. The Company expected the amount to be settled as part of the debt swap
   arrangement with Government. In view of the fact that the amount was excluded from the
   debt swap arrangement and there is no acknowledgement of the debt by the Government, in
   our opinion, it should have been provided for in full. Trade and other receivables are
   therefore overstated and the loss for the year understated by this amount.




                                                                                             (11)
(12)
TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2005

                                      Notes         2005       2004
                                                            Restated
                                                  Shs'm       Shs'm

Sales                                      5     221,658     188,475

Cost of sales                              6    (276,221)   (224,978)

Gross loss                                       (54,563)    (36,503)

Other income                               7      78,612      88,104

Operating expenses                         8     (49,063)    (87,055)

Operating loss                                   (25,014)    (35,454)

Net finance income/(expense)               9      73,646     (77,969)

Profit/(loss) before tax                          48,632    (113,423)

Income tax (charge)/credit                 10    (24,590)     53,152

Profit/(loss) after tax                           24,042     (60,271)




                                                              (13)
(14)
TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2005

                                    Advance
                                    towards     Accumu-
                           Share       share        lated   Revaluation
                          capital     capital     losses       reserve    Grants          Total
                          Shs'm       Shs'm        Shs'm         Shs'm    Shs'm          Shs'm

Balance as at
1 January 2004            293,912        388    (465,444)       506,115   114,747      449,718
Grants received during
the year                        -           -           -             -    11,900        11,900
Loss for the year               -           -    (60,271)             -         -      (60,271)
Release of revaluation
reserve                         -           -      5,451        (5,770)           -       (319)
Deferred tax on
release of revaluation
reserve                         -           -           -         1,692           -       1,692
Balance as at
31 December 2004          293,912        388    (520,264)      502,037    126,647      402,720

Balance at
31 December 2004
- As previously
reported                  293,912        388    (469,596)       502,037   126,647      453,388
- Prior year adjustment
(Note 26)                       -           -    (50,668)                              (50,668)
Restated at
31 December 2004          293,912        388    (520,264)       502,037   126,647      402,720
Adoption of IAS 32 &
39 (Note 23)                    -           -     29,351              -           -     29,351
Balance at
1 January 2005            293,912        388    (490,913)       502,037   126,647      432,071
Grants received during
the year                        -           -          -              -    27,921       27,921
Profit for the year             -           -     24,042              -         -       24,042
Conversion of debt to
equity                          -    692,805            -             -           -    692,805
Release of revaluation
reserve                         -           -        751          (751)           -           -
Balance at 31
December 2005             293,912    693,193    (466,120)      501,286    154,568     1,176,839




                                                                           (15)
TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

CASHFLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2005

                                                           Notes     2005             2004
                                                                    Shs’m            Shs’m
Operating activities
Cash generated utilised in operations                       30        7047     (40,720)
Interest received                                                       32          337
Tax paid                                                                 -         (12)

Net cash utilised in operating activities
                                                                      7079     (40,395)

Investing activities
Additions to capital work in progress                       14     (39,994)    (24,100)
Proceeds from disposals of property, plant and equipment                  -      46,413
Acquisition of investment                                                 -     (1,055)

Net cash (used in)/generated from investing activities             (39,994)      21,258

Financing activities
Proceeds from borrowings                                               611       53,519
Repayment of long term loans                                             -     (48,869)
Proceeds from grants                                                18,005       11,900

Net cash generated from/(used in) financing activities              18,616       16,550

Decrease in cash and cash equivalents                              (14,299)      (2,587)

Movement in cash and cash equivalents
At the beginning of the year                                20        9,018      11,605
Decrease during the year                                           (14,299)      (2,587)

At the end of the year                                      20      (5,281)          9,018




                                                                              (16)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    FINANCIAL STATEMENTS
    FOR THE YEAR ENDED 31 DECEMBER 2005

1   GOING CONCERN

    The Company reported an operating loss of Shs 25.0 billion for the year ended 31
    December 2005 and was unable to generate sufficient cash for its working capital and
    capital expenditure needs. The financial statements have been prepared on the assumption
    that the Company will continue to operate as a going concern based on the actions that
    have been taken by the Company. The directors believe that these actions will enable the
    Company to operate profitably on a sustainable basis. The actions taken include:

    (i)         Request for financial support from the Government to finance the anticipated
                shortfall in cashflow required to meet working capital needs;

    (ii)        A financial recovery plan aimed at improving the Company’s performance and
                returning it to profitability has been approved by the Government; and

    (iii)       Request to the Government to approve a biannual tariff increase effective 2007.

    If the Company were not able to continue as a going concern, these financial statements
    would have to be prepared on a break-up value or liquidation basis. Long term assets and
    liabilities would be reclassified as current assets and liabilities and assets would be restated
    to a forced sale value basis. In addition, provisions would be necessary for closure costs
    and losses to the date of termination, including redundancies and penalties for early
    termination of contracts.
2   PRINCIPAL ACCOUNTING POLICIES

    The principal accounting policies adopted in the preparation of these financial statements
    are set out below.
    (a) Basis of preparation

            The financial statements are prepared in compliance with International Financial
            Reporting Standards (IFRS). The financial statements are presented in the functional
            currency, Tanzania Shilling (Shs), rounded to the nearest million, and prepared under the
            historical cost convention, as modified by the revaluation of certain property, plant and
            equipment.

            The transition to IFRS in Tanzania is mandatory for financial periods beginning on or after
            1 July 2004. Financial statements of the Company until 31 December 2004 had been
            prepared in accordance with Tanzania Financial Accounting Standards (TFAS). The
            main impact of the change to IFRS has been an increase in financial disclosures. Apart
            from accounting for Government grants and financial instruments, there are no changes in
            accounting policy that have been necessary in order to comply with IFRS. The Company
            has made use of the exemptions available under IFRS 1 to only apply IAS 32 and 39
            from 1 January 2005.

            The preparation of financial statements in conformity with IFRS requires the use of
            estimates and assumptions. It also requires management to exercise its judgement in the
            process of applying the Company’s accounting policies. The areas involving a higher
            degree of judgement or complexity, or where assumptions and estimates are significant to
            the financial statements, are disclosed in Note 4.


                                                                                               (17)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    FINANCIAL STATEMENTS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2005

2   PRINCIPAL ACCOUNTING POLICIES (continued)

    (b) Revenue recognition

        Revenue from sale of electricity excludes value added tax.

        Revenue is recognized in the period electricity is consumed by customers. Revenue is
       recognized on a prepaid account when units of electricity are purchased. An
       adjustment is made at the year-end to reverse the estimated portion of unused units.

    (c) Property, plant and equipment

       All categories of property, plant and equipment are initially recorded at cost. Property,
       plant and equipment other than motor vehicles and office equipment are subsequently
       shown at fair value, based on valuations by external independent valuers, less subsequent
       depreciation. All other property, plant and equipment is stated at historical cost less
       depreciation.

       Increases in the carrying amounts arising on the revaluation of property, plant and
       equipment are credited to the revaluation reserve in shareholders’ equity. Decreases that
       offset previous increases of the same asset are charged against that reserve; all other
       decreases are charged to the income statement.

       Depreciation is calculated on the straight line method to write off the cost or valuation of
       each asset, or its revalued amount, to its residual value over its estimated useful life as
       follows:

       Estimated useful lives of property, plant and equipment are as follows:-

        Hydro-generation equipment                                            20 – 60 years
        Thermal-generation equipment                                          15 – 50 years
        Transmission systems                                                  10 – 60 years
        Distribution systems                                                  10 – 60 years
        Buildings                                                             30 – 54 years
        Motor vehicles                                                          4 – 6 years
        Office equipment                                                            8 years

       Gains and losses on disposal of property, plant and equipment are determined by
       comparing proceeds with the carrying amount and are included in the operating results.
       On disposal of revalued assets, the related revaluation surplus is transferred to
       accumulated losses/retained earnings.

       Property, plant and equipment are periodically reviewed for impairment. When the
       carrying amount of an asset is greater than its estimated recoverable amount, it is
       written down immediately to its recoverable amount.




                                                                                           (18)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    FINANCIAL STATEMENTS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2005

2   PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

    (d) Investments

    The Company’s investments are classified as available-for-sale financial assets. They are
    presented as non-current assets unless management intends to dispose of the investment
    within 12 months of the balance sheet date. Investments are initially recognized at fair value
    plus transaction costs. Investments are derecognized when the right to receive cashflows from
    investments has expired.

    Investments are subsequently valued at fair value. Income from investments is taken to the
    income statement when the right to receive payment is established.

    (e)   Inventories

    Inventories are stated at the lower of cost or net realizable value. Cost is determined by the
    weighted average method.

    Provision is made for the full value of obsolete inventories and stocks which are surplus to
    requirements. Obsolete items are materials or spares which have no further use due to
    obsolescence, technological changes or other factors.

    (f)   Trade receivables

    Trade receivables are recognised initially at fair value and subsequently measured at
    amortised cost using the effective interest method, less provision for impairment. A provision
    for impairment of trade receivables is established when there is objective evidence that the
    Company will not be able to collect all amounts due according to the original terms of
    receivables. The amount of the provision is the difference between the asset’s carrying
    amount and the present value of estimated future cashflows, discounted at the effective
    interest rate. The amount of the provision is recognised in the income statement.

    (g)    Deferred income taxes

     Deferred income tax is provided in full, using the liability method, on temporary differences
     arising between the tax bases of assets and liabilities and their carrying amounts in the
     financial statements.

     Deferred income tax is determined using tax rates that have been enacted or substantively
     enacted by the balance sheet date and are expected to apply when the related income tax
     asset is realised or the deferred income tax liability is settled. Deferred income tax assets are
     recognized to the extent that it is probable that future taxable profit will be available against
     which the temporary differences can be utilized.




                                                                                               (19)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    FINANCIAL STATEMENTS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2005

2   PRINCIPAL ACCOUNTING POLICIES (continued)

    (h)   Translation of foreign currencies

    Foreign currency transactions are translated into the functional currency, Tanzania Shilling,
    using the exchange rates prevailing at the dates of the transactions. Foreign exchange
    gains and losses resulting from the settlement of such transactions and from the translation
    at year-end exchange rates of monetary assets and liabilities denominated in foreign
    currencies are recognised in the income statements.

    (i) Cash and cash equivalents

    For the purposes of the cash flow statement, cash and cash equivalents comprise cash on
    hand, deposits held at call with banks, other short-term highly liquid investments, and bank
    overdrafts. In the balance sheet, bank overdrafts are included in trade and other payables.

    (j) Provisions

    Provisions are recognised when the Company has a present legal or constructive obligation
    as a result of past events, and when it is probable that an outflow of resources will be
    required to settle the obligation, and a reliable estimate of the amount can be made. Where
    the Company expects a provision to be reimbursed, for example under an insurance
    contract, the reimbursement is recognised as a separate asset but only when the
    reimbursement is virtually certain.

    (k) Grants

    The grants were procured by the Government from various sources in order to fund part of the
    Company’s capital expenditure programme.

    Grants are accounted for under equity as it is expected that the government will agree to their
    conversion into share capital. This is because it is not practical to match the grants to related
    items of property, plant and equipment.

    (l)   Retirement benefits obligation

    The Company operates a defined contribution plan. A defined contribution plan is a plan
    under which the Company pays fixed contributions into a separate entity. The Company has
    no further liability once the contributions have been paid. The Company’s contributions to
    the defined contribution scheme are charged to the profit and loss account in the year to
    which they relate.

    (m) Comparative figures

    Where necessary, comparative figures have been adjusted to conform to changes in
    presentation in the current year.




                                                                                             (20)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    FINANCIAL STATEMENTS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2005

3   FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

    The Company’s activities expose it to a variety of financial risks, including credit risk,
    liquidity risk and the effects of changes in foreign currency exchange rates and interest
    rates. The Company’s overall risk management programme focuses on the unpredictability
    of financial markets and seeks to minimise potential adverse effects on its financial
    performance, but the company does not hedge any risks.

    (a)    Foreign exchange risk

           The Company is exposed to foreign exchange risk arising from various currency
           exposures, primarily with respect to the US dollar. Foreign exchange risk arises from
           commercial transactions as the Company incurs a significant portion of its expenses in
           the US dollar while its earnings are based in the Tanzanian Shillings.

    (b)    Credit risk

           The Company minimises credit risk by prompt disconnection of customers with
           overdue balances.

    (c)    Liquidity risk

           Prudent liquidity risk management implies maintaining sufficient cash and the
           availability of funding through an adequate amount of committed credit facilities.
           The Company has overdraft facilities with National Bank of Commerce and CRDB
           Bank Limited. Further details are disclosed on Note 25.

    (d)    Interest rate risk

           The company’s borrows principally from the Government, which enables it to
           minimize the amount of interest paid.

4   Critical accounting estimates and judgements

    Estimates and judgements are continually evaluated and are based on historical experience
    and other factors, including experience of future events that are believed to be reasonable
    under the circumstances.

    (i) Critical accounting estimates and assumptions

    Property, plant and equipment

    Critical estimates are made by the directors in determining depreciation rates for property,
    plant and equipment. The rates used are set out in Note 2(c) above.

    (ii) Critical judgements in applying the entity’s accounting policies

    In the process of applying the company’s accounting policies, management has made
    judgements in determining whether assets are impaired.



                                                                                          (21)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    FINANCIAL STATEMENTS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2005

5   SALES

                                         Tariff      2005    2004     2005       2004
                                        number     kWh’m    kWh’m    Shs’m      Shs’m

    Domestic low usage                    D1          374     212    32,606     18,743
    General use                            1          771     873    72,881     69,126
    Low voltage supply                     2          392     378    36,654     32,770
    High voltage supply                   3           750     684    61,029     50,624
    Zanzibar State Fuel & Power Corp.      5          186     161     6,038      4,910
    Resolute Gold Mine                     6           45      44     2,978      2,929
    Kahama Gold Mine                       7          110     114     9,472      9,373

                                                    2,628   2,466   221,658    188,475

6   COST OF SALES


    Own generation and transmission                                  32,039     44,047
    Purchased electricity                                           176,117    124,657
    Distribution expenses                                            41,277     29,951
    Depreciation                                                     26,788     26,323

                                                                    276,221    224,978

7   OTHER OPERATING INCOME

    Government contribution                                          41,075     14,500
    World bank contribution                                               -     33,655
    Capital and chargeable works orders                               7,911      6,696
    Interest on overdue electricity bills                            27,309     28,243
    SIDA Management Support Services and Monitoring grant                 -        533
    Reconnection fees                                                   473        423
    Rental income                                                       101        216
    Profit on disposal of property, plant and equipment                   -      1,779
    Other                                                             1,743      2,059

                                                                     78,612     88,104




                                                                              (22)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2005

                                                                                 2005      2004
                                                                                Shs’m     Shs’m

8    OPERATING EXPENSES

     Provision for impairment of trade receivables                              13,5866    41,2622
     Relief project                                                                   -      734
     Management Support Services and Monitoring Consultant
     (SIDA funded)                                                                   -        533
     Staff costs (Note 11)                                                      20,038     16,801
     Depreciation                                                                3,381      3,430
     Provision for doubtful debts – Morogoro Training Centre                         -      3,414
     Provision for obsolete and slow moving inventories                              -      (369)
     Repairs and maintenance                                                       760      1,784
     Transport and travel                                                        2,275      1,809
     Other administration expenses                                               7,620     15,621
     Retrenchment costs                                                             12        675
     NetGroup Solutions Pty success fee                                          1,391      1,361

                                                                                49,063     87,055

     The following items have been charged in arriving at the operating loss:

     Depreciation on property, plant and equipment (note 13)                    30,168     29,753
     Directors’ emoluments                                                         245        150
     Auditors’ remuneration                                                        141        111

9    NET FINANCE INCOME/(EXPENSE)

     Net foreign exchange gain/(loss)                                               474   (40,773)
     Interest expense                                                             (487)   (37,533)
     Interest income                                                                 32        337
     Reversal of 2004 finance charges on loans converted into equity            77,782           -
     Unwinding of fair value adjustment (Note 23)                               (4,155)          -

                                                                                73,646    (77,969)

10   INCOME TAX

     Deferred income tax (charge)/credit in respect of current year         (16,935)       47,445
     Write off of deferred tax asset (see note 17)                           (6,512)            -
     Deferred income tax in respect of prior years                           (1,143)        5,707

                                                                            (24,590)       53,152

     The tax on the Company’s result before tax differs from the theoretical amount that would
     arise using the basic tax rate as follows:




                                                                                          (23)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2005


10   TAXATION (CONTINUED)

                                                                                 2005         2004
                                                                                Shs’m        Shs’m

     Profit/(loss) before tax                                                   52,787    (113,423)

     Tax calculated at a tax rate of 30 %                                       15,836     (34,027)

     Non taxable income                                                               -    (14,447)
     Tax on rental income not provided                                                -         (32)
     Expenditure permanently disallowed                                           1180       13,875
     Property, plant and equipment expensed                                        (81)            -
     Investment deduction                                                             -     (1,003)
     Prior year deferred tax adjustment                                          1,143      (5,707)
     Current tax in respect of prior year                                             -            -
     Qualifying exchange loss for which no deferred tax asset was
     recognized                                                                       -    (11,811)
                                                                                                  -
     Deferred tax asset written off                                              6,512            -

                                                                               (24,590)    (53,152)

     Further information about deferred tax is presented in note 17.

11   STAFF COSTS

     Staff costs comprise:
     Salaries and benefits                                                      41,014      30,679
     Social security costs (defined contribution scheme)                         3,935       3,754
     Skills and development Levy                                                 2,175       1,410

                                                                                47,124      35,843

12   DIVIDENDS

     No dividends have been declared as there are no distributable reserves.




                                                                                          (24)
   TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

   FINANCIAL STATEMENTS (CONTINUED)
   FOR THE YEAR ENDED 31 DECEMBER 2005

13 PROPERTY, PLANT AND EQUIPMENT

                                  Hydro    Thermo Transmission Distribution Land &    Motor      Office
                              generation generation    systems    systems buildings vehicles equipment           Total
                                  Shs’m      Shs’m       Shs’m       Shs’m   Shs’m    Shs’m      Shs’m          Shs’m

   At 1 January 2004
   Cost/valuation                403,120     52,104     363,869    327,428    56,448      15,981     47,031 1,265,981
   Accumulated depreciation            -          -           -          -         -    (13,537)   (44,679)   (58,216)

   Net book value                403,120     52,104     363,869    327,428    56,448      2,444      2,352 1,207,765

   Year ended 31 December 2004
   Opening net book value        403,120      52,104    363,869    327,428    56,448      2,444      2,352 1,207,765
   Capitalised during the year        550        877       1,318    17,381        581        37        798     21,542
   Disposals                            -   (41,220)           -          -   (3,470)         -          -   (44,690)
   Depreciation charge            (9,441)      (467)     (7,220)    (9,194)   (1,763)     (890)      (778)   (29,753)

   Closing net book value        394,229     11,294     357,967    335,615    51,796      1,591      2,372 1,154,864

   At 31 December 2004
   Cost/valuation                403,670     11,761     365,187    344,809    53,559      15,318     47,829 1,242,133
   Accumulated Depreciation       (9,441)     (467)      (7,220)    (9,194)   (1,763)   (13,727)   (45,457)   (87,269)

   Net book value                394,229     11,294     357,967    335,615    51,796      1,591      2,372 1,154,864




                                                                                                         (25)
   TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

   FINANCIAL STATEMENTS (CONTINUED)
   FOR THE YEAR ENDED 31 DECEMBER 2005

13 PROPERTY, PLANT AND EQUIPMENT (Continued)

                                      Hydro    Thermo Transmission Distribution Land &    Motor      Office
                                  generation generation    systems    systems buildings vehicles equipment           Total
                                      Shs’m      Shs’m       Shs’m       Shs’m   Shs’m    Shs’m      Shs’m          Shs’m
    Year ended 31 December
    2005
    Opening net book value          394,229     11,294      357,967    335,615    51,796      1,591      2,372 1,154,864
    Capitalised during the year          784     1,181         1,388    15,302        125     1,519      2,010     22,309
    Write-off                              -         -             -    (2,115)         -         -          -    (2,115)
    Depreciation charge              (9,467)     (513)       (7,248)    (9,559)   (1,766)     (808)      (807)   (30,168)

    Closing net book value          385,546     11,962      352,107    339,243    50,155      2,302      3,575 1,138,890

    At 31 December 2005
    Cost/valuation                  404,454     12,942      366,575    357,996    53,684      16,837     49,839 1,262,327
    Accumulated depreciation        (18,908)     (980)      (14,468)   (18,753)   (3,529)   (14,535)   (46,264) (117,437)

    Net book value                  385,546     11,962      352,107    339,243    50,155      2,302      3,575 1,144,890




                                                                                                             (26)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2005

13   PROPERTY, PLANT AND EQUIPMENT (continued)

     Property, plant and equipment with the exception of motor vehicles and office equipment,
     were revalued as at 31 December 2003 by two teams of professional valuers:

     • Property Bureau (T) Ltd, in joint venture with EM Consultants and PB Power valued hydro
     generation, thermal generation, transmission and distribution assets.

     • Land Masters Combine Limited, in joint venture with Capital Shelterworks Limited and
     Trace Associates Limited, valued land and buildings.

     Hydro generation, thermal generation, transmission and distribution assets were valued on a
     depreciated replacement cost basis. Land and buildings were valued on open market value
     basis, except for specialized assets and those in locations where there was no open market,
     where a depreciated replacement cost basis was used.
     The revaluation surplus net of applicable deferred income taxes was credited to revaluation
     reserve in shareholders’ equity.

     The Company does not currently have title deeds for a number of its properties but is following
     up the processing of deeds with the relevant authorities.

     Property, plant and equipment on historical cost basis

     The company does not have a complete record of the historical cost of property, plant and
     equipment. Therefore their carrying value on historical cost basis has not been disclosed.

14   CAPITAL WORK IN PROGRESS                                                   2005          2004
                                                                               Shs’m         Shs’m

     At the beginning of the year                                                8,210        5,652
     Expenditure during the year                                                39,994       24,100
     Transferred to property, plant and equipment                             (22,309)     (21,542)

     At the end of the year                                                    25,895         8,210

15   INVESTMENTS

     Tanzania Daesung Cables Limited                                    (a)         1             1
     ABB Tanelec Company Limited                                        (b)        12            12
     Songas Limited                                                     (c)     1,055         1,055

                                                                                1,068         1,068
     Less: Impairment loss                                                        (13)          (13)

                                                                                1,055         1,055

     As at 31 December 2005, the Company had the following investments:

     (a)    3,180,000 shares of Shs 10 each in Tanzania Cables Limited representing 10% of
            total issued share capital in the company.

                                                                                          (27)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2005

15   INVESTMENTS (CONTINUED)

     (b)    39,242 shares of Shs 10,000 each in ABB Tanelec Limited representing 16.35% of
            total issued share capital of the company.

            Both the Tanzania Daesung Cables Limited and ABB Tanelec Company Limited
            have not paid dividends for a number of years. The directors have decided to provide
            for the diminution in value of these investments.

     (c)    As at 31 December 2005, the Company held 10,000 shares of US$ 100 each in
            Songas Limited.

     The investments in Songas was acquired in 2004 and is carried at its acquisition cost which
     the Company considers to be a reasonable approximation of its fair value. The directors
     believe that the fair value has not changed significantly since acquisition.
16   AFUDC PREPAYMENT

     In 2003, TANESCO, as allowed under the “Amended and Restated Shareholders’
     Agreement” relating to the Songo Songo Gas-to-Electricity Project, paid to Songas Limited
     an amount of US$ 10 million as a prepayment of the amount of Allowance for equity Funds
     Used During Construction (AFUDC). This is being amortised over a period of 20 years from
     31 July 2004. The effect of the prepayment is to reduce the rate at which the Company is
     charged for purchase of electricity from Songas Limited.

17   DEFERRED INCOME TAX ASSET

     Deferred tax is calculated on all temporary differences under the liability method using a
     principal tax rate of 30% (2004: 30%). The movement on the deferred tax account is as
     follows:


                                                                           2005           2004
                                                                          Shs’m          Shs’m

     At the beginning of the year                                        (24,590)        30,254
     Charge/(release) to income statement (see note below)                 24,590      (53,152)
     (Release)/charge to equity                                                 -       (1,692)

     At the end of the year                                                     -      (24,590)




                                                                                        (28)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2005

17   DEFERRED INCOME TAX ASSET (CONTINUED)

                                                                              Movement
                                                                Restated      during the
                                                                   2004             year             2005
                                                                  Shs’m           Shs’m             Shs’m
     Deferred tax liabilities

     Property, plant & equipment                                 264,150       (264,150)                 -

     Deferred tax assets
     Tax loss carried forward                                  (234,072)        234,072                  -
     Other deductible temporary differences                     (54,668)         54,668                  -

                                                               (288,740)        288,740                  -

     Net deferred tax liability/(asset)                          (24,590)         24,590                 -

     In addition to the asset utilised during the year, the company has written off the balance of the
     deferred tax asset of shs 6,512 million as at 31 December 2005, due to the fact that the
     directors are uncertain whether sufficient taxable profits will be generated in future against
     which the asset can be utilised.
                                                                                     2005            2004
                                                                                   Shs’m            Shs’m
18   INVENTORIES
     General stores and meter stocks                                               28,847         29,009
     Engine and vehicle parts                                                       8,512           8,587
     Combustibles                                                                   3,155           3,818
     Stocks in transit                                                             21,217           4,359
     Others                                                                            326            300

                                                                                  62,057            46,073

     Provision for obsolete and slow moving inventories                         (10,064)        (10,064)

                                                                                  51,993            36,009




                                                                                             (29)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2005

19   TRADE AND OTHER RECEIVABLES                                         2005           2004
                                                                        Shs’m          Shs’m

     General trade receivables                                         174,515        184,514
     Government debtors                                                 15,217         35,234
     Zanzibar State Fuel and Power Corporation                               -         19,761
     Other balance due from the Government (see note below)             16,833         16,833
     Chargeable works orders                                               128            167
     Prepayments and deposits                                            2,890         10,881
     Staff debtors                                                         454            155
     Sundry debtors                                                     11,886          2,686

                                                                       221,923        270,231

     Provision for doubtful debts                                     (142,313)     (171,434)
     Cash defalcations                                                    (285)         (285)

                                                                        79,325         98,512

     Following a High Court ruling the Company was ordered to pay a loan amount which had
     previously been offset with Government electricity debts. The directors believe that the
     amount is recoverable from the Government and have therefore included the balance of Shs
     16,833 million in trade and other receivables.

20   CASH AT BANK AND IN HAND
                                                                           2005             2004
                                                                          Shs’m            Shs’m

     Bank and cash balances                                               17,130           9,018

     For the purposes of the cash flow statement, the year-end cash and cash equivalents
     comprise the following:

     Bank and cash balances                                               17,130           9,018
     Bank overdraft                                                     (22,411)               -

                                                                         (5,281)           9,018

     Cash and cash equivalent balance includes Shs 5,201 million, the amount set aside by the
     company to the Trust deed fund to cater for the employee retrenchment costs.




                                                                                       (30)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2005

21   SHARE CAPITAL                                                         2005          2004
                                                                          Shs’m         Shs’m
     Authorised:
     35,000,000,000 ordinary shares of Shs 20 each                       700,000       700,000

     Issued and fully paid:
     14,695,607,473 ordinary shares of Shs 20 each                       293,912       293,912

     All the issued and fully paid shares are owned by the Government of Tanzania.

22   ADVANCE TOWARDS SHARE CAPITAL

     At the beginning of the year                                            388           388
     Converted during the year(*)                                        692,805             -

     As the end of the year                                              693,193           388

     (*)The advance towards share capital represents Shs 388 million amounts advanced by the
     Government of Tanzania for rural electrification projects and Shs 692,805 million of loans
     and interest converted to equity.

23   BORROWINGS                                                            2005           2004
                                                                          Shs’m          Shs’m

     Loans (a)                                                            65,669       614,680
     Overdraft (b)                                                        22,411             -

                                                                          88,080        614,680
     Less: Current portion                                              (22,411)      (232,213)

     Non-current portion                                                  65,669       382,467
     Fair value adjustment                                              (29,351)             -
     Unwinding of fair value adjustment (Note 9)                           4,155             -

                                                                          40,473       382,467
     Current portion comprises:
     Loans                                                                     -       232,213
     Overdraft                                                            22,411             -

                                                                          22,411       232,213

     Maturities of non-current borrowings before fair value
     adjustment

     Repayable between one and two years                                       -        90,074
     Repayable between two and five years                                 13,134        97,122
     Repayable after more than five years                                 52,535       195,271

     Balance at 31 December 2005                                          65,669       382,467


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     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2005

23   BORROWINGS (CONTINUED)

     a)    All borrowings are from the Government of Tanzania and unsecured. The
     Government has agreed to convert an amount of Shs. 692,805 million out of loans and
     accrued interest owed by the Company as at 1 January 2004 into equity. This amount has
     been accounted for as Advance towards share capital during 2005, as no share certificates
     have been issued as yet (Note 22). The amount due to the Government of Tanzania as at
     31 December 2005 is expected to be paid after years commencing 1 March 2008. The
     amount has been fair value on initial recognition.

     The position at 31 December 2005 was as follows:

                                                                        Effective interest rate
                                                           Shs’m
      Loan outstanding                                     65,669                        3.4%

      Fair value of loan                                   40,473                Discounted at
                                                                              borrowing rate of
                                                                                        11.4%

     b)     The Company has overdraft facilities with the following:-

            (i) National Bank of Commerce with a limit of Shs 8.5 billion. The effective interest
            rate during the year was 12%. The overdraft is secured over certain non industrial
            book debts.

            (ii) CRDB Bank with a limit of Shs 20 billion. The effective interest rate during the
            year was 13%. The overdraft is secured by a guarantee by the Government of the
            United Republic of Tanzania.

24   GRANTS                                                                      2005       2004
                                                                                Shs’m      Shs’m
     Donor                        Project
     Agence Francaise De
     Development                  Sub-station rehabilitation                     2,960      2,960
     African Development Bank     Rural Electrification Master Plan Study        2,171        896
     DANIDA                       220 KV TL Singida - Arusha                    22,253     22,253
     French Government            Rehabilitation of Diesel Engines               5,099      5,099
     Italian Government           See (i) below                                 10,825     10,825
     Japanese Government          Dar es Salaam rehabilitation                   8,114      8,077
     KFW                          See (ii) below                                24,511     24,405
     ODA                          Mufindi electrification                        1,902      1,902
     NORAD                        See (iii) below                               17,622     17,622
     SIDA/NORAD/FINNIDA           Pangani Falls                                  2,011      2,011
     SIDA                         See (iv) below                                20,851     13,369
     Spanish Government           See (v) below                                 15,188     12,925
     Treasury                     See (vi) below                                21,058      4,300
     Yugoslavia                   Purchase of motor vehicles                         3          3

                                                                               154,568    126,647
                                                                                           (32)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2005

     Grant funds received during the year amounted to shs 18,005 million (2004: 11,900 million).

24   GRANTS (CONTINUED)

            Project funded by                                               2005           2004
                                                                           Shs’m          Shs’m
     (i)    Italian Government
            132 KV Masaka/Bukoba                                            4,407          4,407
            Mufindi/Mbeya                                                   6,418          6,418

                                                                           10,825        10,825

     (ii)   KFW
            96-66-108 Kihansi                                              13,411        13,411
            96-66-640 Grid Control Centre                                     802           802
            Energy efficiency improvement                                   6,847         6,742
            Mtera Power Plant                                               3,450         3,450

                                                                           24,510        24,405


     (iii) NORAD
           Rehabilitation Nyumba ya Mungu and Hale                            589            589
           Chang'ombe sub-station                                           1,244          1,244
           132 KV Mbala – Sumbawanga                                        7,351          7,351
           Bahari Beach Sub-station                                         1,184          1,184
           NPRP                                                             6,450          6,450
           SADCC Mbozi/Tunduma                                                804            804

                                                                           17,622        17,622

     (iv) SIDA
          Kilimanjaro rural electrification Phase II                            3              3
          Ubungo power station rehabilitation                               6,058          6,041
          KIDATU Power Plant Rehabilitation                                 3,258          3,258
          Ubungo Gas Turbine                                                1,082          1,082
          Electrification of Urambo                                         3,307          1,236
          Electrification of Makambako                                      2,946              -
          Electrification of Serengeti                                      4,197          1,749

                                                                           20,851        13,369

     (v)    Spanish Government
            POWER Supply Agrobased                                          6,481          6,481
            Electrification of Ukerewe                                      8,707          6,444

                                                                           15,188        12,925

                                                                                         (33)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2005


24   GRANTS (CONTINUED)                                                      2005             2004
                                                                            Shs’m            Shs’m
     (vi) Treasury
          Kilimanjaro rural electrification Phase II                            20              20
          Biharamlo rural electrification                                    1,220             920
          Ruangwa rural electrification                                        164             164
          Meatu rural electrification                                          266             266
          Nassa rural electrification                                          131             131
          Ngara rural electrification                                        1,314           1,014
          Tandahimba rural electrification                                     129             129
          Sumbawanga rural electrification                                     130             130
          Rufiji rural electrification                                         108             108
          Geita rural electrification                                          175             175
          Serengeti & Urambo rural electrification                           1,623           1,018
          Bukoba rural electrification                                         100               -
          Sumitomo nets project – Arusha                                       948               -
          Electrification of Makambako                                         100               -
          Electrification of Ukerewe                                           500             200
          Rural Electrification Master Plan Study                               25              25
          Rural electrification                                              9,916               -
          Ilala Transmission                                                 3,400               -
          Mini Hydro Study                                                     789               -

                                                                            21,059          14,216

25   TRADE AND OTHER PAYABLES

     Interest accrued                                                             -        271,633
     Trade payables and accruals                                             79,912         44,583
     Advances against works orders                                            3,270          2,801
     Customers with credit balances                                           2,826          4,432
     Due to related parties (Note 31)                                         1,390            782

                                                                             87,398        324,231

     Included in trade payables and accruals above, is an amount of Shs 17.8 billion arising from
     capacity charges by Songas. The Company has negotiated deferred payment terms with the
     Government and Songas and made proposals which have yet to be approved. It is expected
     that no interest will be charged on the amount. The fair value of the liability will be
     determined once the payment and interest terms have been agreed.

     Included in Trade payables and accruals are embedded derivates in relation to contracts
     with IPTL and Songas Limited, which have not been fair valued as at 31 December 2005. In
     the opinion of the directors, the fair value adjustment is not require because its deemed that
     the United States dollar is a functional currency in the economy in which the entity operates.




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     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2005

26   PRIOR YEAR ADJUSTMENTS

     Prior year adjustment is in respect of a loan from government received in 2004, which was
     wrongly accounted for as a grant.

27   CONTINGENT LIABILITIES

     The Company is a defendant in various legal actions. In the opinion of the directors, after
     taking appropriate legal advice, the outcome of such actions will not give rise to any
     significant loss. The directors are not aware of any other material contingencies as at the
     balance sheet date.

     The Company has been accruing for and remitting VAT on sales on a receipts basis rather
     than on an invoice basis. The Tanzania Revenue Authority (TRA) has agreed to this
     treatment for the year 2000 but not for 2001 to 2005. Consequently, there are uncertainties
     as to possible penalties which may be assessed due to late remittance of VAT. However,
     the directors and management believe that the receipt basis will be formally agreed by the
     TRA for 2001 to 2005. It is not practicable to quantify the potential penalties, if any.

     The last year for which agreed corporate tax assessments have been issued is 1996. The
     years 1997 to 1999 have been the subject of a tax appeal following a demand for tax and
     penalties of Shs 24,910 million. A ruling was given by the Tax Revenue Appeals Board on
     21 August 2006, whereby the Company won on some of the grounds of appeal while it lost
     on others. The item of most significance in triggering TRA’s tax demand was their argument
     that Shs 68,024m interest costs capitalised as share capital should be treated as paid and
     therefore deductible for tax in 1999 not 1997. On this particular ground the Appeals Board
     ruled in the Company’s favour. Both the Tanzania Revenue Authority and the Company
     have appealed to Tax Revenue Appeals Tribunal against those decisions of the Appeals
     Board that were unfavourable to them. Given the uncertainty over the tax position, the
     deferred tax numbers are based on tax returns as filed. If upheld, the effect of the Appeals
     Board ruling would be to reduce the company’s tax losses but would not result in a current
     tax liability.

28   CAPITAL COMMITMENTS

     The board of directors has approved capital commitments of Shs 72,405 million (2004: Shs
     73,698 million). These commitments will be funded by Company’s internal resources, grants
     and long-term loans.

29   OTHER COMMITMENTS

     Independent Power Tanzania Limited (IPTL)

     There is a commitment of USD 34.9 million in respect of capacity charge arising from power
     purchase commitments for the year to 31 December 2006. The Power Purchase agreement
     between the Company and IPTL is for 20 years and it commenced in 2002.




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     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2005
29
     OTHER COMMITMENTS (CONTINUED)

     Songas Limited

     The Company has entered into agreement with Songas Limited for the supply of electricity.
     The agreement commenced in July 2005. There is a commitment of USD 74.4 million in
     respect of capacity charge arising from power purchase from Songas Limited for the year to
     31 December 2006.

30   CASH GENERATED FROM OPERATIONS

     Reconciliation of loss before tax to cash generated from/(utilized by) operations.

                                                                                 2005         2004
                                                                               Shs’m         Shs’m
      Profit/(loss) before tax                                                 48,632     (113,423)

      Adjustments for:
      Depreciation (note 13)                                                    30,168      29,753
      Interest income                                                              (32)      (337)
      Unrealised exchange loss/(gain)                                                 -     29,807
      Amortisation AFUDC prepayment                                                528
      Reversal of 2004 finance charges (Note 9)                               (77,782)            -
      Provision for Morogoro Training Centre                                          -       3,414
      Profit) on disposal of property, plant and equipment                            -     (1,723)
      Write-off of property, plant and equipment                                 2,115            -
      Impairment adjustment                                                           -       (263)
      Amortisation (Note 9)                                                      4,155            -

                                                                                7,784      (52,772)

      Changes in working capital:
      - inventories                                                           (15,984)      (8,520)
      - trade and other receivables                                           (21,565)      (7,642)
      - trade and other payables and consumer deposit                           36,812      28,214

      Cash generated from/(utilised in) operations                               7047      (40,720)

31   RELATED PARTY TRANSACTIONS

     The Company is a owned by the Government of Tanzania and its
     management is contracted to NetGroup Solutions (Pty) Limited.
                                                                                2005          2004
                                                                               Shs’m         Shs’m
     The following transactions were carried out with related parties:

     (i) Purchase of goods and services

     NetGroup Solutions (Pty) - success fees                                    1,391        1,361
     NetGroup Solutions (Pty) – relief projects                                     -          734

                                                                                          (36)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2005

31   RELATED PARTY TRANSACTIONS (CONTINUED)

     (ii) Sales of goods and services

     Management is not able to accurately determine the amount of sales to Government
     departments and institutions for purposes of disclosure. These were made in the ordinary
     course of business on an arm’s length basis.

     (iii) Outstanding balances arising from purchase of goods and services

                                                                                2005         2004
                                                                               Shs’m        Shs’m
     Payables

     NetGroup Solutions (Pty) success fees                                      1,390           782

     Borrowings and grants from the Government are disclosed in notes 23
     and 24, respectively.

     Receivables
     Central Government                                                        32,050      30,821
     Zanzibar Government                                                            -         255

     (iv) Support received from parent


     Grants received                                                            6,843      10,685
     Government contribution to capacity charges                               41,075      14,500

                                                                               47,918      25,185

     v) Key management compensation

     During the year the Company’s key management personnel was provided by NetGroup
     Solutions (Pty). NetGroup Solutions earned a Success fee for provision of its management
     services (See (i) above).

32   POST BALANCE SHEET EVENTS

     There are no material post balance sheet events which can have an impact on the financial
     statements.




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     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2005

33   COUNTRY OF INCORPORATION AND REGISTERED OFFICE

     The Company is incorporated in the United Republic of Tanzania under the Companies Act,
     2002 and domiciled in Tanzania. The address of its registered office is:

     Tanzania Electric Supply Company Limited
     Umeme Park
     Ubungo
     Dar es Salaam


34   ULTIMATE OWNER OF THE COMPANY

     The Government of United Republic of Tanzania is the ultimate owner of the Company.




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TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

REPORT AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2006
TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

REPORT AND FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2006




TABLE OF CONTENTS                           Page

Report of the directors                     1 - 10

Report of the auditors                     11 – 13

Financial statements

Income statement                               14

Balance sheet                                  15

Statement of changes in equity                 16

Cash flow statement                            17

Notes to the financial statements          18 - 41
        TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

        REPORT OF THE DIRECTORS (CONTINUED)
        FOR THE YEAR ENDED 31 DECEMBER 2006

        The directors submit their report together with the audited financial statements for the year
        ended 31 December 2006 which disclose the state of affairs of Tanzania Electric Supply
        Company (TANESCO) Limited (“the Company”).

1       STATEMENT OF DIRECTORS’ RESPONSIBILITIES

        The directors are required under the Companies Act 2002 to prepare financial statements
        for each financial period that give a true and fair view of the state of affairs of the Company
        as at the end of the financial period and of its profit or loss for that period.

        The directors confirm that suitable accounting policies have been used and applied
        consistently, and reasonable and prudent judgment and estimates have been made in the
        preparation of the financial statements for the year ended 31 December 2006. The directors
        also confirm that International Financial Reporting Standards have been followed and that
        the financial statements have been prepared on the going concern basis.

        The directors are responsible for keeping proper accounting records which disclose with
        reasonable accuracy at any time the financial position of the Company and which enable
        them to ensure that the financial statements comply with the Companies Act 2002. They
        are also responsible for safeguarding the assets of the Company and hence for taking
        reasonable steps for the prevention and detection of fraud, errors and other irregularities.

    2   DIRECTORS

        The directors of the Company at the date of this report, all of whom have served since
        1 January 2005, unless as otherwise stated are:

        Name
        Name                                 Position               Remarks
        Amb. F.M.Kazaura                     Chairman
        Mr. A. Mapunda                       Vice Chairman
        Hon. P. A. Magani (MP)               Member
        Mr A. Mwakapugi                      Member                 Retired September 2006
        Mr. B. J. Mrindoko                   Member
        Mr Mr. A. Kilewo                     Member
        Mr. S. Salula                        Member
        Mrs. A. E. Bukuku                    Member
        Mr. S.A. Juma                        Member                 Retired September 2006
        Hon Abbas Mtemvu                     Member                 Appointed September, 2006
        Hon Manju Msambya                    Member                 Appointed September 2006
        Juma Isahak Bakari                   Member                 Appointed September 2006


        The non-executive Directors received sitting allowances for their attendance at Board
        meetings. For the year ended 31 December 2006, these allowances amounted to Shs 257
        million (2005: Shs 245 million).

        None of the directors hold any interest in the share capital of the Company.
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    REPORT OF THE DIRECTORS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2006

2   DIRECTORS (CONTINUED)

    All the directors of the Company are Tanzanians.

    In accordance with the Company's Articles of Association, the Directors are not required to
    retire by rotation.

3   ACTIVITIES

    The Company's principal activities are generation, transmission and distribution of electricity.
    Electricity is generated at six (6) Hydro-Power Plants and eighteen (18) Thermal Power
    Plants. All Hydro Power Plants and four (4) Thermal Power Plants are connected to the
    National grid. The Company also imports power from Uganda and Zambia and purchases
    power from five Independent Power Plants, namely Independent Power Tanzania Limited
    (IPTL), Tanganyika Wattle Company Limited, Kiwira Coal Mine, Songas Limited and local
    industries (TPC and Kilombero Sugar Company).

    For most of the year 2006 there was a dry spell throughout the country. As a result the
    Company’s water reservoirs could not be filled adequately to support the planned generation
    mix of the Company. The Mtera Dam (the main water reservoir) reached the lowest level
    ever and at times had to be closed. Whereas the planned generation mix was a ratio of 67%
    hydro to 33% thermal production, the situation required 47% of power to be supplied by
    thermal sources. Consequently, the Company had to resort to extensive use of IPTL and
    Songas. The Company’s thermal plants located within the grid were run throughout the year.

    Despite the expensive nature of thermal generation and its effect on the financial
    performance of the Company, the Company utilized all its financial resources to avoid power
    rationing. The increased cost led to the poor financial performance of the company as a
    consequence of not being able to recover direct costs of generation at the current tariffs.
    Direct costs of generation amounted to Shs 375,706 million while electricity sales amounted
    to only Shs 232,146 million.

    During the year 2006, the Company made an operating loss of Shs 151,258 million, against
    an operating loss of Shs 25,014 in the previous year. The loss is attributed to the increase in
    operating expenses especially energy purchase costs from IPTL and Songas.

    Revenue of the company increased from Shs 221,658 million in 2005 to Shs 237,672 million
    (an increase of 5%) in 2006 due to amongst other factors the impact of ongoing rural
    expansion programmes and tariff increase of an average of 4.8%.

    The Company performed well in revenue collections. During the year 2006, the Company
    collected a total of Shs 331,421 million against Shs 255,581 in year 2005 (an increase of
    29.67%). This level of collections, coupled with a government contributions amounting to
    Shs 56,682 million, resulted in the Company sustaining its business operations.

    The Company’s capital investment for the year totaled only Shs 32,760 billion (note 14).
    Capital expenditure included rehabilitation of distribution network as well as ongoing rural
    electrification.
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    REPORT OF THE DIRECTORS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2006

3   ACTIVITIES (Continued)

    During the year under review the following projects were undertaken:

    •   Construction and installation of 7MW gas based plant at Somanga under WVE project is
        underway.
    •   Ludewa and Mbinga districts electrification projects are financed by the government and
        preparations for procurement and installation of new diesel generating plants is in
        progress. Construction of Transmission and service lines continued.
    •   Project design and procurement of emergency plants of 40 MW and 100 MW gas based
        plant for Tegeta and Ubungo respectively.
    •   During the year preparatory work for Kinyerezi Greenfield continued. The project
        involves installation of 200 MW plant scheduled to be operational by the year 2010.
    •   Preparations were made to improve North-West Transmission grid network in order to
        reduce system outages.
    •   Integration of optical fibre into existing WAN to facilitate smooth data communication
        from regions to Head office. Projects are in progress for replacing Custima billing system
        with Hi Affinity, upgrading LUKU to online vending and selling and making payment for
        electricity banks, ATMs SMS and scratch Cards.
    •   Meter audits and other revenue protection projects were undertaken. This includes
        installation of outdoor pole mounted metering equipment to tariff three and tariff two
        customers.
    •   Preventive maintenance works for the grid sub-stations, distribution substations,
        transmission lines and power station were done. Rehabilitation of Mwanza –
        Musoma 132kV transmission line was carried out and completed
    •   Re-installation and commissioning of 45MVA, 132/33kV transformer at Kipawa
        sub-station.
    •   Installation and commissioning of 45/90MVA, 132kV transformer at Ilala sub-
        station
    •   Commissioning of 15MVA, 33/11kV transformer at Railway sub-station.
    •   Installation and commissioning of reactor at Babati, SVC at Iringa and Shinyanga
        sub-stations.
    •   Increased generation by installation of AGGREKO gas generators at Ubungo
        which started to generate on 16.10.2006 a total of 10MW. The generation
        incresed to 20MW on 26.10.2006. The total generation of AGGREKO will be
        40MW.
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    REPORT OF THE DIRECTORS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2006

3   ACTIVITIES (Continued)

    The operational performance of the company can be summarized as follows:

                                                         5 year                           Percentage
                                                          target                          change from
                                                         (2010)        2006       2005     prior year
     Service lines completed during the year            133,100      21,281     24,281      -12.4%
     Number of pending service line applications         11,000      20,784     18,805      +10.5%
     kWh sold during the year (million)                    4,068      2,769      2,628       5.4%
     Additional 33kV and 11kV lines during the
     year (km)                                             1,741      1,018         713      +42.8%
     Total length of 33kV and 11kV distribution
     lines by the end of the year (km)                   19,237      14,778     13,760       +7.4%
     Total length of low voltage lines by the end
     of the year (km)                                    49,033      21,370     22,822        -6.4%
     Distribution transformers installed during
     the year                                              1,175        775         260     +198.1%
     Total distribution transformers by the end of
     the year                                            10,933       7,791       7,016      +9.9%
     Total number of consumers by the end of
     the year                                         1,024,000     635,310    585,773       +8.5%
     Total number of staff of the Company                 4,515       3,646      4,783       -23.8%
     Consumer/staff ratio                                   227       174.2      97.35       +76.8%

    The Company has been experiencing a number of operational challenges in serving its
    customers, as follows:

    (a) The transmission network still requires major maintenance and rehabilitation. Given the
        financial condition of the Company it is unlikely that it can generate adequate funding to
        carry out the rehabilitation. Long term financing is required either in the form of a loan or
        cash injection from the shareholder. Quality of supply also needs to be improved.
        Currently the Company is carrying out maintenance on a sporadic basis by use of its
        own funds and support by KFW, the German donor agency, in the energy efficiency
        improvement program. Power quality (losses) has been remarkably improved by
        installing and commissioning loss compensating devices at Babati, Iringa and
        Shinyanga.”

    (b) Rampart transformer oil theft continued up to September 2006 and the following have
        been done in this regard;

       •   The National task force involving Police Headquarters and Tanesco Head Office has
           been formed. Its major functions are to formulate follow up strategies and
           management teams for transformer oil theft prevention
       •   The Regional and District task forces involving Regional Police Commanders,
           District Police Commanders, Tanesco Regional Managers and Tanesco District
           Managers have been formed to run the operation.
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    REPORT OF THE DIRECTORS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2006


3   ACTIVITIES (Continued)

        •    The Regional and District Commissioners are involved in curbing this problem and
             they are at the front line to inform the general public (“Wananchi”) on the advantages
             of preventing transformer oil theft.

    (c) Bad hydrological conditions experienced in the past few years have greatly affected
        hydro power generation. In order to reduce dependency on hydro generation other
        sources such as coal are being developed as alternative source of energy.

    (d) The Company’s liquidity position has worsened for the period under review due to bad
        hydrology that resulted into high cost of power purchase from IPPs. However a Financial
        Recovery Plan has been prepared to address the Company’s situation. The Government
        which is a sole shareholder has adopted the recovery plan and the company is working
        to achieve the Financial Recovery targets which gear to turn around the financial
        position to normal by year 2009.


4   FUTURE DEVELOPMENTS

    Following the recent drought in the country the company has looked at various short-term
    and medium-term options to mitigate the energy deficit caused by the drought and to reduce
    its dependency on hydro-power as source of generation.

    Medium-term plans include:

    •   Conversion of the IPTL plant from using expensive Heavy Fuel Oil (HFO) into using
        natural gas subject to government approval. Commercial operations using natural gas is
        expected to commence by 1st quarter of 2010.

    •   Continue with the Power System Master Plan development as follows:-

        1)   Power connections to Mines (Buzwagi, North Mara and Geita)
        2)   Continue with EPPs (Aggreko, Dowans,Wartsila 100 + 45)
        3)   Inter-connections (Zambia, Tanzania and Kenya)
        4)   Review of East African Power Master Plan Study
        5)   Development of Mchuchuma Coal Fired Power Plant (with NDC)
        6)   Continue research on other alternatives of power generation (wind, bagasse, etc)
        7)   Continue discussions with private investors for Ruhudji project
        8)   Development of Malagarasi scheme (MCC).
        9)   Transmission line strengthening Iringa-Shinyanga

    •   The Company has plans under ORET funds to install a 45MW plant at Tegeta to run on
        natural gas by 2nd quarter of 2008.
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    REPORT OF THE DIRECTORS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2006


4   FUTURE DEVELOPMENTS (CONTINUED)

    •   For a considerable time, distribution and transmission network rehabilitation and
        expansion have been lacking funds. However US$ 60 million transmission and
        distribution rehabilitation project to be funded by the World Bank are in advanced stages
        of negotiations. The project is expected to kick off towards the end of 2007. The project
        will be implemented over an 18 month period.

    •   Accelerated electrification that intends to connect a total of 100,000 customers per year
        is under initial stages of implementation. Funds are being awaited for the execution of
        the project.

    Power System Expansion Planning

    In the year 2006, implementation of various projects financed by various financial institutions
    were undertaken:
            o Electrification of Simanjiro & Ukerewe principal villages. The projects which are
                being financed by SIDA have just commenced.
            o Makambako substation network expansion in Njombe District, financed by SIDA
                is at the final stages
            o Makambako-Songea 132kv line feasibility study financed by SIDA has been
                completed.
            o Preparations of feasibility studies and business plans for Access Expansion
                Projects (AEP) Programme – a project to be financed by the World Bank
                (expected number of customers to be 200,000 in the year 2006-2010) are at final
                stage.
            o Three Rural Projects: Feasibility study for Ukerewe Rural network and expansion
                in Simanjaro, Bukombe, Kagera rural have been completed.
            o Way leave village electrification and community development scheme (WVS)-A
                component of the Songo Songo main project financed by World Bank is now on
                final stages

    A new Power System Master Plan (PSMP) study will be carried out in second half of 2007
    and will take about 18 months to complete.

    The study will address alternative sources of power generation including Zambia, Tanzania
    and Kenya interconnector and upgrading requirement of the transmission system.

5   RESULTS

    These are set out on page 15 of these financial statements.

6   SOLVENCY

    The Company's state of affairs at 31 December 2006 is set out on page 16 of these financial
    statements. In the opinion of the directors, the Company is solvent and is able to continue
    trading as a going concern, provided it continues to obtain the necessary financial support
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    REPORT OF THE DIRECTORS (CONTINUED)
    FOR THE YEAR ENDED 31 DECEMBER 2006


6   SOLVENCY
    that it requires from the Government of Tanzania in the foreseeable future. Additional
    information pertinent to the solvency of the Company is given below:

    (a)     The Company has processed to get a syndicated loan that will be used to liquidate
            existing bank overdrafts and bridge finance immediately after obtaining it. The
            remaining funds will be used to improve transmission and distribution systems.

    (b)     The Government of Tanzania has been partly financing rural electrification projects
            and is expected to continue to provide funds for these projects for the foreseeable
            future. In addition, the Government has continued to solicit grants from external
            donors to finance electrification and rehabilitation projects.

    (c)     The Government has been providing subvention funds to offset cash deficits to
            assist the Company in meeting its energy charges.

7   STATUTORY REMITTANCES

    The Directors confirm that, they have taken full responsibility in respect of statutory
    remittances for all payroll statutory remittances including social security fund contributions.

8   EMPLOYEES’ WELFARE

    (i)    Industrial Safety
           The Company continued to satisfy the standards of industrial safety established by the
           Chief Inspector of Factories.

    (ii)   Employment
           There has been a general freeze of employment since 1996. This has brought a big
           succession gap. In view of this, the Company plans to start recruiting new employees
           to fill the gap. About 792 new staff will be needed to fill the gap. The exercise is
           expected to start in January 2007.

    (iii) Training and Development
              Training programmes are designed and budgeted for each year.
              In our budgetary process the Training Plan provides direction and focus on what
              kind of learning and training activities will be implemented in the year.
              Our focus of training and learning is on improving management skills,
              communication, engineering & technology development and information systems.


8   EMPLOYEES’ WELFARE (CONTINUED)

    (iv) Employee Care Services and Products
           Industrial Relations
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     REPORT OF THE DIRECTORS (CONTINUED)
     FOR THE YEAR ENDED 31 DECEMBER 2006

             There were continued good relation between employees and management for
             2006. No industrial unrest has been reported apart from disciplinary cases. A
             healthy relationship continues to exist between management and the trade union.

             Performance Management and Productivity
             The Company has introduced a new Performance Management process for Senior
             Managers and Managers. The process takes off officially in January 2007. This
             will be followed by introduction of a productivity focused, remuneration and
             compensation strategy.

             Employees’ Welfare & Medical Care
             Medical Scheme to ensure medical care to all staff was implemented from
             September 2007. The Scheme is managed by MED-X.

             HIV Policy is being implemented and the following is being implemented:
                       Treatment of opportunistic infections for HIV and AIDS infected
                        employees.
                       Nutritional supplements are being fully provided to boost health of the
                        employees affected.

             Employee’s Care Services and Products
             There was continued assistance to employees in terms of providing funeral
             services and also general counselling.

9    DISABLED PERSONS

     It remains the Company's policy to accept disabled persons for employment for those
     vacancies that they are able to fill.

10   RELATED PARTY TRANSACTIONS

     Details of transactions and balances with related parties are included in note 30 to the
     financial statements.



11   POLITICAL AND CHARITABLE DONATIONS

     There were no political donations made during the year. Charitable donations amounting to
     Shs 2.6 million (2005: 2.6 million) were made to various charities during the year.

12   OWNERSHIP

     The Government of Tanzania is the sole owner of the Company.

13   AUDITORS
TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

REPORT OF THE DIRECTORS (CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER 2006

The appointment of the auditor is made as per directive of the Controller and Auditor
General that the Auditor shall be obtained according to the procurement Act and that the
results will be submitted to CAG for final recommendation. The current auditor for the
company is the Controller and Auditor General.

BY ORDER OF THE BOARD




Director:……………………..


Date:……………………….…
REPORT OF THE INDIPENDENT AUDITORS

TO THE SHAREHOLDERS OF TANZANIA ELECTRIC SUPPLY COMPANY LIMITED
(CONTINUED)

Report on the Financial Statements

We have audited the accompanying financial statements of Tanzania Supply Company
Limited, which comprise the balance sheet as at 31 December 2006, and the profit and loss
account, statement of changes in equity and cash flow statement for the year then ended,
and a summary of significant accounting policies and other explanatory notes.

Directors’ responsibility for the financial statements

As described in the Statement of Directors’ Responsibilities, the company’s directors are
responsible for the preparation and fair presentation of these financial statements in
accordance with International Financial Reporting Standards and with the requirements of
the Tanzanian Companies Act 2002. This responsibility includes: designing, implementing
and maintaining internal control relevant to the preparation and fair presentation of financial
statements that are free from material misstatement, whether due to fraud or error; selecting
and applying appropriate accounting policies; and making accounting estimates that are
reasonable in the circumstances.

Auditor’s responsibility

Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with International Standards on Auditing. Those
standards require that we comply with ethical requirements and plan and perform the audit
to obtain reasonable assurance whether the financial statements are free from material
misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity’s preparation and fair presentation of the
financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
entity’s internal control. An audit also includes evaluating the appropriatenss of accounting
policies used and the reasonableness of accounting estimates made by management, as
well as evaluating the overall presentation of the financial statements.

 We believe that the audit evidence we have obtained is sufficient and appropriate to provide
a basis of our audit opinion.

Basis of disclaimer of opinion

Inventories

The Company experienced problems in updating its inventory records due to the
introduction of new accounting software. Inventory transactions in respect of the year 2006
were recorded during the year 2007 and the resulting quantity balances as at 31 December
2006 could not be agreed to physical quantities of stock at that date.
REPORT OF THE INDIPENDENT AUDITORS

TO THE SHAREHOLDERS OF TANZANIA ELECTRIC SUPPLY COMPANY LIMITED
(CONTINUED)

Inventories (Continued)

Due to the forgoing we were not able to determine the extent to which inventories stated in
the balance sheet at Shs 23 billion are misstated. Adjustments to inventories would result in
similar adjustments to property plant and equipment and/or loss for the year.

Fair value of liability

As explained in note 23 to the financial statements, borrowings include an amount of Shs 56
billion in respect of which the payment terms have yet to be agreed with the Government. As
required by IAS 39 the amount should have been measured at fair value on initial
recognition, which can only be determined when the repayment period is known. We were
therefore not able to satisfy ourselves whether the liability is fairly stated in accordance with
IFRS.

Trade and other receivables

Trade and other receivables include an amount of Shs 16.8 billion said to be due from the
Government. The Company expected the amount to be settled as part of the debt swap
arrangement with Government. In view of the fact that the amount was excluded from the
debt swap arrangement and there is no acknowledgement of the debt by the Government, in
our opinion, it should have been provided for in full. Trade and other receivables are
therefore overstated and the loss for the year understated by this amount.


Capital works in progress closing balances

Capital work in progress includes Tanesco funded projects amounting to Shs 2,395 million.
Based on confirmation replies received from the regions heads we noted work orders shown
as outstanding in the ledger but stated as completed by the regional engineers. Due to the
low response rate from the regions we are unable to fully quantify the error and as such
unable to give assurance on the correctness of the on-going project amount.

Release of revaluation reserve

Decrease of the revaluation reserve that offsets previous increases of the same asset which
are to be charged to the income statement has not been computed in the current year.
Revaluation reserve has thus been overstated

Impairment of property, plant and equipment

The Company has been operating at a loss for a number of years. In addition the directors
are looking into alternative sources of energy. This is a likely indication that the amount at
which the Company’s property, plant and equipment related to the hydro-generation facilities
are stated in these financial statements may not be recovered from future profits of the
Company. Consequently, they should have been assessed by the company for impairment
as required by IAS 36. In the absence of an assessment, we were unable to satisfy
ourselves on the extent to which an impairment provision may be required.
REPORT OF THE INDIPENDENT AUDITORS

TO THE SHAREHOLDERS OF TANZANIA ELECTRIC SUPPLY COMPANY LIMITED
(CONTINUED)

Prior year adjustment

Included in the statement of changes in equity is an amount of 18,989 million which relates
to adjustments not passed in the prior year. Opening balances have this been misstated

Going concern

As stated in note 1 to the financial statements, the Company reported an operating loss of
Shs 152 billion before tax and was unable to generate sufficient cash to fund its operating
activities during the year. These conditions indicate the existence of a material uncertainty
which may cast significant doubt about the Company’s ability to continue as a going
concern.

Disclaimer of opinion

Because of the possible effect of the limitation in evidence available to us, we are unable to
form an opinion as to whether the financial statements give true and fair view of the state of
the Company’s affairs as at 31 December 2005 and of the results its operations and cash
flows for the year then ended in accordance with International Financial Reporting Standards,
and whether they have been properly prepared in accordance with the Tanzanian Companies
Act 2002.

In respect of the limitation on scope of our work on inventories, property plant and equipment
and creditors we were unable to determine whether proper books of account have been kept.

Report on Other Legal and Regulatory Requirements

This report, including the opinion, has been prepared for, and only for, the company’s
members as a body in accordance with the Tanzanian Companies Act 2002 and for no other
purposes.

As required by the the Tanzanian Companies Act 2002, we are also required to report to
you if, in our opinion, the Directors’ Report is not consistent with the financial statements, if
the company has not kept proper accounting records, if we have not received all the
information and explanations we require for our audit, or if information specified by law
regarding directors’ remuneration and transactions with the company is not disclosed.




Certified Public Accountants
DAR ES SALAAM                                                 Date: …………………………….
Signed by Leonard C Mususa
TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2006

                                      Notes         2006        2005

                                                  Shs'm        Shs'm

Sales                                      5     232,146     221,658

Cost of sales                              6    (375,706)   (276,221)

Gross loss                                      (143,560)    (54,563)

Other income                               7      88,462      78,612


Operating expenses                         8     (96,160)    (49,063)

Operating loss                                  (151,258)    (25,014)

Net finance income/(expense)               9     (17,523)     73,646

Profit/(loss) before tax                        (168,781)     48,632

Income tax (charge)/credit                 10           -    (24,590)

Profit/(loss) after tax                         (168,781)     24,042




                                                              (15)
TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

BALANCE SHEET
AS AT 31 DECEMBER 2006
                                                  Notes              2006               2005

                                                                   Shs’m               Shs’m
Non-current assets
Property, plant and equipment                       13         1,156,415         1,144,890
Capital work in progress                            14            15,774            25,895
Investments                                         15             1,055             1,055
AFUDC – Prepayment                                  16             8,746             9,274
Deferred income tax asset                           17                 -                 -

                                                               1,181,990         1,181,114
Current assets
Inventories                                         18            22,787              51,993
Trade and other receivables                         19            68,600              79,325
Current income tax                                                 6,269               6,269
Cash at bank and in hand                            20            43,192              17,130

                                                                 140,848             154,717

Total assets                                                   1,322,838         1,335,831
Capital and reserves
Share capital                                       21           293,912           293,912
Advance towards share capital                       22           837,846           693,193
Accumulated losses                                             (653,890)         (466,120)
Revaluation reserve                                              501,286           501,286
Grants                                              24            19,167           154,568

Total equity                                                     998,321         1,176,839
Non-current liabilities
Borrowings                                          23           152,573              40,473
Consumer deposits                                                 10,568               8,710

                                                                 163,141              49,183

Current liabilities
Trade and other payables                            25            97,610              87,398
Borrowings                                          23            63,766              22,411

Total liabilities                                                324,517             158,992

Total equity and liabilities                                   1,322,838         1,335,831

The financial statements on pages 13 to 40 were approved for issue by the board of
directors on ………………………… and signed on its behalf by:



…………………………………………                                          …………………………………
Chairman - Amb. Fulgence Kazaura                          Director - A. Mapunda


                                                                                       (16)
TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2006

                                    Advance
                                    towards
                           Share       share      Accumulated   Revaluation
                          capital     capital                                    Grants             Total
                                                       losses       reserve
                          Shs'm       Shs'm             Shs'm        Shs'm       Shs'm             Shs'm

Balance at
1 January 2005           293,912         388        (490,913)      502,037     126,647            432,071
Grants received during
the year                        -             -             -             -      27,921            27,921
Profit for the year             -             -        24,042             -           -            24,042
Conversion of debt to
equity                          -   692,805                 -             -            -          692,805
Release of revaluation
reserve                         -             -          751          (751)            -                -
Balance at 31 December
2005                     293,912    693,193         (466,120)      501,286     154,568        1,176,839


Balance at
1 January 2006           293,912    693,193         (466,120)      501,286     154,568        1,176,839
Grants received during
the year                        -             -             -             -       9,252           9,252
Prior year adjustment                                (18,989)                                  (18,989)
Conversion to equity                144,653                                   (144,653)               -
Loss for the year               -             -     (168,781)             -            -      (168,781)
Release of revaluation
reserve                                                     -             -
Balance at 31 December
2006                     293,912    837,846         (653,890)      501,286      19,167            998,321




                                                                                           (17)
TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

CASHFLOW STATEMENT
FOR THE YEAR ENDED 31 DECEMBER 2005

                                                           Notes    2006      2005
                                                                   Shs’m     Shs’m
Operating activities
Cash generated from/(utilised in) operations                29                7047
Interest received                                                               32
Tax paid                                                                         -

Net cash generated from/(utilised in) operating
activities                                                                    7079

Investing activities
Additions to capital work in progress                       14             (39,994)
Proceeds from disposals of property, plant and equipment                          -
Acquisition of investment                                                         -

Net cash (used in)/generated from investing activities                     (39,994)

Financing activities
Proceeds from borrowings                                                       611
Repayment of long term loans                                                     -
Proceeds from grants                                                        18,005

Net cash generated from/(used in) financing activities                      18,616

Decrease in cash and cash equivalents                                      (14,299)

Movement in cash and cash equivalents
At the beginning of the year                                20                9,018
Decrease during the year                                                   (14,299)

At the end of the year                                      20              (5,281)




                                                                            (18)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    FINANCIAL STATEMENTS
    FOR THE YEAR ENDED 31 DECEMBER 2006 - NOTES

1   GOING CONCERN

    The Company reported an operating loss of Shs 152 billion for the year ended 31
    December 2006 and was unable to generate sufficient cash for its working capital and
    capital expenditure needs. The financial statements have been prepared on the assumption
    that the Company will continue to operate as a going concern based on the actions that
    have been taken by the Company. The directors believe that these actions will enable the
    Company to operate profitably on a sustainable basis. The actions taken include:

    (i)         Request for financial support from the Government to finance the anticipated
                shortfall in cashflow required to meet working capital needs;

    (ii)        A financial recovery plan aimed at improving the Company’s performance and
                returning it to profitability has been approved by the Government; and

    (iii)       Request to the Government to approve a biannual tariff increase effective 2007.

    If the Company were not able to continue as a going concern, these financial statements
    would have to be prepared on a break-up value or liquidation basis. Long term assets and
    liabilities would be reclassified as current assets and liabilities and assets would be restated
    to a forced sale value basis. In addition, provisions would be necessary for closure costs
    and losses to the date of termination, including redundancies and penalties for early
    termination of contracts.
2   PRINCIPAL ACCOUNTING POLICIES

    The principal accounting policies adopted in the preparation of these financial statements
    are set out below.
    (a) Basis of preparation

            The financial statements are prepared in compliance with International Financial
            Reporting Standards (IFRS). The financial statements are presented in the functional
            currency, Tanzania Shilling (Shs), rounded to the nearest million, and prepared under the
            historical cost convention, as modified by the revaluation of certain property, plant and
            equipment.

            The preparation of financial statements in conformity with IFRS requires the use of
            estimates and assumptions. It also requires management to exercise its judgement in the
            process of applying the Company’s accounting policies. The areas involving a higher
            degree of judgement or complexity, or where assumptions and estimates are significant to
            the financial statements, are disclosed in Note 4.

    (b) Revenue recognition

             Revenue from sale of electricity excludes value added tax.

            Revenue is recognized in the period electricity is consumed by customers. Revenue
            on prepaid accounts is recognized when units of electricity are purchased. An
            adjustment is made at the year-end to reverse the estimated portion of unused units.


                                                                                                  (19)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    FINANCIAL STATEMENTS
    FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)

2   PRINCIPAL ACCOUNTING POLICIES (continued)

    (c) Property, plant and equipment

      All categories of property, plant and equipment are initially recorded at cost. Property,
      plant and equipment other than motor vehicles and office equipment are subsequently
      shown at fair value, based on valuations by external independent valuers, less subsequent
      depreciation. All other property, plant and equipment is stated at historical cost less
      depreciation.

      Increases in the carrying amounts arising on the revaluation of property, plant and
      equipment are credited to the revaluation reserve in shareholders’ equity. Decreases that
      offset previous increases of the same asset are charged against that reserve; all other
      decreases are charged to the income statement.

      Depreciation is calculated on the straight line method to write off the cost or valuation of
      each asset, or its revalued amount, to its residual value over its estimated useful life as
      follows:

      Estimated useful lives of property, plant and equipment are as follows:-

       Hydro-generation equipment                                            20 – 60 years
       Thermal-generation equipment                                          15 – 50 years
       Transmission systems                                                  10 – 60 years
       Distribution systems                                                  10 – 60 years
       Buildings                                                             30 – 54 years
       Motor vehicles                                                          4 – 6 years
       Office equipment                                                            8 years

      Gains and losses on disposal of property, plant and equipment are determined by
      comparing proceeds with the carrying amount and are included in the operating results.
      On disposal of revalued assets, the related revaluation surplus is transferred to
      accumulated losses/retained earnings.

      Property, plant and equipment are periodically reviewed for impairment. When the
      carrying amount of an asset is greater than its estimated recoverable amount, it is
      written down immediately to its recoverable amount.




                                                                                             (20)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    FINANCIAL STATEMENTS
    FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)

2   PRINCIPAL ACCOUNTING POLICIES (CONTINUED)

    (d) Investments

    The Company’s investments are classified as available-for-sale financial assets. They are
    presented as non-current assets unless management intends to dispose of the investment
    within 12 months of the balance sheet date. Investments are initially recognized at fair value
    plus transaction costs. Investments are derecognized when the right to receive cashflows from
    investments has expired.

    Investments are subsequently valued at fair value. Income from investments is taken to the
    income statement when the right to receive payment is established.

    (e)   Inventories

    Inventories are stated at the lower of cost or net realizable value. Cost is determined by the
    weighted average method.

    Provision is made for the full value of obsolete inventories and stocks which are surplus to
    requirements. Obsolete items are materials or spares which have no further use due to
    obsolescence, technological changes or other factors.

    Provision is made for items that have not moved for a period of two years.

    (f)   Trade receivables

    Trade receivables are recognised initially at fair value and subsequently measured at
    amortised cost using the effective interest method, less provision for impairment. A provision
    for impairment of trade receivables is established when there is objective evidence that the
    Company will not be able to collect all amounts due according to the original terms of
    receivables. The amount of the provision is the difference between the asset’s carrying
    amount and the present value of estimated future cashflows, discounted at the effective
    interest rate. The amount of the provision is recognised in the income statement.

    (g)    Deferred income taxes

     Deferred income tax is provided in full, using the liability method, on temporary differences
     arising between the tax bases of assets and liabilities and their carrying amounts in the
     financial statements.

     Deferred income tax is determined using tax rates that have been enacted or substantively
     enacted by the balance sheet date and are expected to apply when the related income tax
     asset is realised or the deferred income tax liability is settled. Deferred income tax assets are
     recognized to the extent that it is probable that future taxable profit will be available against
     which the temporary differences can be utilized.




                                                                                                  (21)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    FINANCIAL STATEMENTS
    FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)

2   PRINCIPAL ACCOUNTING POLICIES (continued)

    (h)   Translation of foreign currencies

    Foreign currency transactions are translated into the functional currency, Tanzania Shilling,
    using the exchange rates prevailing at the dates of the transactions. Foreign exchange
    gains and losses resulting from the settlement of such transactions and from the translation
    at year-end exchange rates of monetary assets and liabilities denominated in foreign
    currencies are recognised in the income statements.

    (i) Cash and cash equivalents

    For the purposes of the cash flow statement, cash and cash equivalents comprise cash on
    hand, deposits held at call with banks, other short-term highly liquid investments, and bank
    overdrafts.

    (j) Provisions

    Provisions are recognised when the Company has a present legal or constructive obligation
    as a result of past events, and when it is probable that an outflow of resources will be
    required to settle the obligation, and a reliable estimate of the amount can be made. Where
    the Company expects a provision to be reimbursed, for example under an insurance
    contract, the reimbursement is recognised as a separate asset but only when the
    reimbursement is virtually certain.

    (k) Grants

    The grants were procured by the Government from various sources in order to fund part of the
    Company’s capital expenditure programme.

    Grants are accounted for under equity as it is expected that the government will agree to their
    conversion into share capital. This is because it is not practical to match the grants to related
    items of property, plant and equipment.

    (l)   Retirement benefit obligation

    The Company operates a defined contribution plan. A defined contribution plan is a plan
    under which the Company pays fixed contributions into a separate entity. The Company has
    no further liability once the contributions have been paid. The Company’s contributions to
    the defined contribution scheme are charged to the profit and loss account in the year to
    which they relate.

    (m) Comparative figures

    Where necessary, comparative figures have been adjusted to conform to changes in
    presentation in the current year.




                                                                                                (22)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    FINANCIAL STATEMENTS
    FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)

3   FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

    The Company’s activities expose it to a variety of financial risks, including credit risk,
    liquidity risk and the effects of changes in foreign currency exchange rates and interest
    rates. The Company’s overall risk management programme focuses on the unpredictability
    of financial markets and seeks to minimise potential adverse effects on its financial
    performance, but the company does not hedge any risks.

    (a)    Foreign exchange risk

           The Company is exposed to foreign exchange risk arising from various currency
           exposures, primarily with respect to the US dollar. Foreign exchange risk arises from
           commercial transactions as the Company incurs a significant portion of its expenses in
           US dollar while its earnings are based in the Tanzanian Shillings.

    (b)    Credit risk

           The Company minimises credit risk by prompt disconnection of customers with
           overdue balances.

    (c)    Liquidity risk

           Prudent liquidity risk management implies maintaining sufficient cash and the
           availability of funding through an adequate amount of committed credit facilities.
           The Company has overdraft facilities with National Bank of Commerce and CRDB
           Bank Limited. Further details are disclosed on Note 25.

    (d)    Interest rate risk

           The company’s borrows principally from the Government, which enables it to
           minimize the amount of interest paid.

4   Critical accounting estimates and judgments

    Estimates and judgments are continually evaluated and are based on historical experience
    and other factors, including experience of future events that are believed to be reasonable
    under the circumstances.

    (i) Critical accounting estimates and assumptions

    Property, plant and equipment

    Critical estimates are made by the directors in determining depreciation rates for property,
    plant and equipment. The rates used are set out in Note 2(c) above.

    (ii) Critical judgements in applying the entity’s accounting policies

    In the process of applying the company’s accounting policies, management has made
    judgements in determining whether assets are impaired.


                                                                                              (23)
    TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

    FINANCIAL STATEMENTS
    FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)

5   SALES

                                         Tariff      2006    2005     2006      2005
                                        number     kWh’m    kWh’m    Shs’m     Shs’m

    Domestic low usage                    D1         391      374    35,258    32,606
    General use                            1         786      771    70,237    72,881
    Low voltage supply                     2         398      392    39,927    36,654
    High voltage supply                   3          830      750    65,648    61,029
    Zanzibar State Fuel & Power Corp.      5         204      186     6,799     6,038
    Resolute Gold Mine                     6          48       45     3,228     2,978
    Kahama Gold Mine                       7         112      110    11,049     9,472

                                                    2,769   2,628   232,146   221,658

6   COST OF SALES


    Own generation and transmission                                  61,949    32,039
    Purchased electricity                                           241,717   176,117
    Distribution expenses                                            41,708    41,277
    Depreciation                                                     30,332    26,788

                                                                    375,706   276,221

7   OTHER OPERATING INCOME

    Government contribution                                          55,132    41,075
    World bank contribution                                               -         -
    Capital and chargeable works orders                               3,433     7,911
    Interest on overdue electricity bills                            26,872    27,309
    SIDA Management Support Services and Monitoring grant                 -         -
    Reconnection fees                                                   335       473
    Rental income                                                       127       101
    Profit on disposal of property, plant and equipment                   -         -
    Other                                                             2,563     1,743

                                                                     88,462    78,612




                                                                               (24)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS
     FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)

                                                                                2006         2005
                                                                               Shs’m        Shs’m

8    OPERATING EXPENSES

     Provision for impairment of trade receivables                             50,796       13,5866
     Relief project                                                                 -             -
     Management Support Services and Monitoring Consultant                          -
     (SIDA funded)                                                                               -
     Staff costs (Note 11)                                                     27,939       20,038
     Depreciation                                                               3,531        3,381
     Provision for doubtful debts – Morogoro Training Centre                        -            -
     Provision for obsolete and slow moving inventories                             -            -
     Repairs and maintenance                                                      680          760
     Transport and travel                                                       1,695        2,275
     Other administration expenses                                             11,512        7,620
     Retrenchment costs                                                             7           12
     NetGroup Solutions Pty success fee                                             -        1,391

                                                                               96,160       49,063


9    NET FINANCE INCOME/ (EXPENSE)

     Net foreign exchange gain/(loss)                                          (5,824)         474
     Interest expense                                                          (7,168)       (487)
     Interest income                                                                99          32
     Reversal of 2004 finance charges on loans converted into equity                 -     77,782
     Unwinding of fair value adjustment (Note 23)                              (4,630)     (4,155)

                                                                             (17,523)       73,646

10   INCOME TAX

     Deferred income tax (charge)/credit in respect of current year                  -    (16,935)
     Write off of deferred tax asset (see note 17)                                   -     (6,512)
     Deferred income tax in respect of prior years                                   -     (1,143)

                                                                                     -    (24,590)

     The tax on the Company’s result before tax differs from the theoretical amount that would
     arise using the basic tax rate as follows:




                                                                                             (25)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS
     FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)

10   TAXATION (CONTINUED)

                                                                                2006       2005
                                                                               Shs’m      Shs’m

     Profit/(loss) before tax                                                       -    52,787

     Tax calculated at a tax rate of 30 %                                           -    15,836

     Non taxable income                                                             -          -
     Tax on rental income not provided                                              -          -
     Expenditure permanently disallowed                                             -     1,180
     Property, plant and equipment expensed                                         -       (81)
     Investment deduction                                                           -          -
     Prior year deferred tax adjustment                                             -     1,143
     Current tax in respect of prior year                                           -          -
     Qualifying exchange loss for which no deferred tax asset was
     recognized                                                                     -            -

     Deferred tax asset written off                                                 -     6,512

                                                                                    -   (24,590)

     Further information about deferred tax is presented in note 17.

11   STAFF COSTS

     Staff costs comprise:
     Salaries and benefits                                                     45,977    41,014
     Social security costs (defined contribution scheme)                        5,429     3,935
     Skills and development Levy                                                2,519     2,175

                                                                               53,925    47,124

12   DIVIDENDS

     No dividends have been declared as there are no distributable reserves.




                                                                                          (26)
   TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

   FINANCIAL STATEMENTS
   FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)

13 PROPERTY, PLANT AND EQUIPMENT

                                  Hydro    Thermo Transmission Distribution Land &    Motor      Office
                              generation generation    systems    systems buildings vehicles equipment           Total
                                  Shs’m      Shs’m       Shs’m       Shs’m   Shs’m    Shs’m      Shs’m          Shs’m

   At 1 January 2005
   Cost/valuation                404,454    12,942      366,575    357,996    53,684      16,837     49,839 1,262,327
   Accumulated depreciation      (18,908)    (980)      (14,468)   (18,753)   (3,529)   (14,535)   (46,264) (117,437)

   Net book value                385,546    11,962      352,107    339,243    50,155      2,302      3,575 1,144,890

   Year ended 31 December 2005
   Opening net book value        394,229    11,294      357,967    335,615    51,796      1,591      2,372 1,154,864
   Capitalised during the year        784    1,181         1,388    15,302        125     1,519      2,010     22,309
   Disposals/ write-offs                -        -             -    (2,115)         -         -          -    (2,115)
   Depreciation charge            (9,467)    (513)       (7,248)    (9,559)   (1,766)     (808)      (807)   (30,168)

   Closing net book value        385,546    11,962      352,107    339,243    50,155      2,302      3,575 1,144,890

   At 31 December 2005
   Cost/valuation                404,454    12,942      366,575    357,996    53,684      16,837     49,839 1,262,327
   Accumulated Depreciation      (18,908)    (980)      (14,468)   (18,753)   (3,529)   (14,535)   (46,264) (117,437)

   Net book value                385,546    11,962      352,107    339,243    50,155      2,302      3,575 1,144,890




                                                                                                         (27)
   TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

   FINANCIAL STATEMENTS
   FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)

13 PROPERTY, PLANT AND EQUIPMENT (Continued)


                                      Hydro    Thermo Transmission Distribution Land &    Motor      Office
                                  generation generation    systems    systems buildings vehicles equipment              Total
                                      Shs’m      Shs’m       Shs’m       Shs’m   Shs’m    Shs’m      Shs’m             Shs’m
    Year ended 31 December
    2006
    Opening net book value
                                    404,453     12,941      366,576    357,930      53,684     16,784     49,839 1,262,207
    Capitalised during the year         315        126       19,150     21,365          41        150      1,689    42,836
    Write-off/                            -          -            -          -           -          -          -         -

    Cost valuation                  404,768     13,067      385,726    379,296      53,725     16,933      51528 1,305,043
    Depreciation charge for the
    year                             (9,476)     (522)       (7,641)   (10,142)     (1,759)     (925)      (845)      (31,311)

    Depreciation as 01/01/ 2006     (18,908)     (980)      (14,468)   (18,688)     (3,529)   (14,481)   (46,264)   (117,318)

    Accumulated depreciation        (28,385)    (1,502)     (22,109)   (28,830)     (5,288)   (15,407)   (47,108)   (148,629)

    Net book value 31.12.2006       376,383     11,565      363,617    350,466    48,437       1,527       4,420    1,156,415

    Net book value 31.12.2005       385,544     11,961      352,107    339,243      50,155      2,302      3,576 1,144,890




                                                                                                               (28)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS
     FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)

13   PROPERTY, PLANT AND EQUIPMENT (continued)

     Property, plant and equipment with the exception of motor vehicles and office equipment,
     were revalued as at 31 December 2003 by two teams of professional valuers:

     • Property Bureau (T) Ltd, in joint venture with EM Consultants and PB Power valued hydro
     generation, thermal generation, transmission and distribution assets.

     • Land Masters Combine Limited, in joint venture with Capital Shelterworks Limited and
     Trace Associates Limited, valued land and buildings.

     Hydro generation, thermal generation, transmission and distribution assets were valued on a
     depreciated replacement cost basis. Land and buildings were valued on open market value
     basis, except for specialized assets and those in locations where there was no open market,
     where a depreciated replacement cost basis was used.
     The revaluation surplus net of applicable deferred income taxes was credited to revaluation
     reserve in shareholders’ equity.

     The Company does not currently have title deeds for a number of its properties but is following
     up the processing of deeds with the relevant authorities.

     Property, plant and equipment on historical cost basis

     The company does not have a complete record of the historical cost of property, plant and
     equipment. Therefore their carrying value on historical cost basis has not been disclosed.

14   CAPITAL WORK IN PROGRESS                                                  2006           2005
                                                                              Shs’m          Shs’m

     At the beginning of the year                                             25,895          8,210
     Expenditure during the year                                              32,760         39,994
     Adjustment                                                                  (45)             -
     Transferred to property, plant and equipment                           (42,836)       (22,309)

     At the end of the year                                                   15,774         25,895

15   INVESTMENTS

     East African Cables (formerly Tanzania Daesung Cables Limited) (a)            1              1
     ABB Tanelec Company Limited                                    (b)           12             12
     Songas Limited                                                 (c)        1,055          1,055

                                                                               1,068          1,068
     Less: Impairment loss                                                       (13)           (13)

                                                                               1,055          1,055




                                                                                              (29)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS
     FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)

15   INVESTMENTS (CONTINUED)

     As at 31 December 2005, the Company had the following investments:

     (a)    3,180,000 shares of Shs 10 each in Tanzania Cables Limited representing 10% of
            total issued share capital in the company.

     (b)    39,242 shares of Shs 10,000 each in ABB Tanelec Limited representing 16.35% of
            total issued share capital of the company.

            Both the Tanzania Daesung Cables Limited and ABB Tanelec Company Limited
            have not paid dividends for a number of years. The directors have decided to provide
            for the diminution in value of these investments.

     (c)    As at 31 December 2005, the Company held 10,000 shares of US$ 100 each in
            Songas Limited representing 9.56% of total issued share capital of the company.

     The investments in Songas was acquired in 2004 and is carried at its acquisition cost which
     the Company considers to be a reasonable approximation of its fair value. The directors
     believe that the fair value has not changed significantly since acquisition.
16   AFUDC PREPAYMENT

     In 2003, TANESCO, as allowed under the “Amended and Restated Shareholders’
     Agreement” relating to the Songo Songo Gas-to-Electricity Project, paid to Songas Limited
     an amount of US$ 10 million as a prepayment of the amount of Allowance for equity Funds
     Used During Construction (AFUDC). This is being amortised over a period of 20 years from
     31 July 2004. The effect of the prepayment is to reduce the rate at which the Company is
     charged for purchase of electricity from Songas Limited.

17   DEFERRED INCOME TAX ASSET

     Deferred tax is calculated on all temporary differences under the liability method using a
     principal tax rate of 30% (2004: 30%). The movement on the deferred tax account is as
     follows:


                                                                           2006           2005
                                                                          Shs’m          Shs’m

     At the beginning of the year                                               -      (24,590)
     Charge/(release) to income statement (see note below)                               24,590
     (Release)/charge to equity                                                 -             -

     At the end of the year                                                     -              -




                                                                                            (30)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS
     FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)

17   DEFERRED INCOME TAX ASSET (CONTINUED)

                                                                              Movement
                                                                              during the
                                                                    2005            year           2006
                                                                   Shs’m          Shs’m           Shs’m
     Deferred tax liabilities

     Property, plant & equipment                                                                        -

     Deferred tax assets
     Tax loss carried forward                                                                           -
     Other deductible temporary differences                                                             -

                                                                                                        -

     Net deferred tax liability/(asset)                                                                 -

     In addition to the asset utilised during the year, the company has written off the balance of the
     deferred tax asset of shs 6,512 million as at 31 December 2005, due to the fact that the
     directors are uncertain whether sufficient taxable profits will be generated in future against
     which the asset can be utilised.
                                                                                     2006            2005
                                                                                   Shs’m            Shs’m
18   INVENTORIES
     General stores and meter stocks                                               19,828         28,847
     Engine and vehicle parts                                                       7,990           8,512
     Combustibles                                                                   2,396           3,155
     Stocks in transit                                                              3,624         21,217
     Others                                                                            350            326

                                                                                  34,188         62,057

     Provision for obsolete and slow moving inventories                         (11,401)        (10,064)

                                                                                  22,787         51,993




                                                                                                 (31)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS
     FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)

19   TRADE AND OTHER RECEIVABLES                                         2005           2004
                                                                        Shs’m          Shs’m

     General trade receivables                                         202,443       174,515
     Government debtors                                                 10,978        15,217
     Zanzibar State Fuel and Power Corporation                               -             -
     Rural electrification refund (government Swap)                      7,538             -
     Other balance due from the Government (see note below)             16,833        16,833
     Chargeable works orders                                               352           128
     Prepayments and deposits                                            1,266         2,890
     Staff debtors                                                         260           454
     VAT                                                                16,368         8,196
     Sundry debtors                                                      5,937         3,717

                                                                       252,723       221,923

     Provision for doubtful debts                                     (193,090)     (142,313)
     Cash defalcations                                                    (285)         (285)

                                                                        68,600         79,325

     Following a High Court ruling the Company was ordered to pay a loan amount which had
     previously been offset with Government electricity debts. The directors believe that the
     amount is recoverable from the Government and have therefore included the balance of Shs
     16,833 million in trade and other receivables.

20   CASH AT BANK AND IN HAND
                                                                           2006             2005
                                                                          Shs’m            Shs’m

     Bank and cash balances                                              15,577            17,130
     Escrow account - restricted                                         27,615                 -

     Bank and cash balances                                              43,192            17,130

     For the purposes of the cash flow statement, the year-end cash and cash equivalents
     comprise the following:

     Bank and cash balances                                               43,192        17,130
     Bank overdraft                                                     (63,766)      (22,411)

                                                                        (20,574)           (5,281)




                                                                                              (32)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS
     FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)

21   SHARE CAPITAL                                                         2006          2005
                                                                          Shs’m         Shs’m
     Authorised:
     35,000,000,000 ordinary shares of Shs 20 each                       700,000       700,000

     Issued and fully paid:
     14,695,607,473 ordinary shares of Shs 20 each                       293,912       293,912

     All the issued and fully paid shares are owned by the Government of Tanzania.

22   ADVANCE TOWARDS SHARE CAPITAL                                         2006           2005
                                                                          Shs’m          Shs’m

     At the beginning of the year                                        693,193           388
     Converted during the year(*)                                        144,653       692,805

     As the end of the year                                              837,846       693,193

     (*)The advance towards share capital represents Shs 145,215 million advanced by the
     Government of Tanzania for rural electrification projects and Shs 692,805 million of loans
     and interest converted to equity.

23   BORROWINGS

     Loans (a)                                                           147,943        65,669
     Overdraft (b)                                                        63,766        22,411

                                                                        211,709          88,080
     Less: Current portion                                              (63,766)       (22,411)

     Non-current portion                                                 147,943         65,669
     Fair value adjustment                                                     -       (29,351)
     Unwinding of fair value adjustment (Note 9)                           4,630          4,155

                                                                         152,573        40,473
     Current portion comprises:
     Loans                                                                     -             -
     Overdraft                                                            63,766        22,411

                                                                          63,766        22,411

     Maturities of non-current borrowings before fair value
     adjustment

     Repayable between one and two years                                  40,646        90,074
     Repayable between two and five years                                 61,157        97,122
     Repayable after more than five years                                 46,140       195,271

     Balance at 31 December                                              147,943       382,467

                                                                                           (33)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS
     FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)

23   BORROWINGS (CONTINUED)

     a) All borrowings from the Government of Tanzania and unsecured. The Government has
     agreed to convert an amount of Shs. 692,805 million out of loans and accrued interest owed
     by the Company as at 1 January 2004 into equity. This amount has been accounted for as
     Advance towards share capital during 2005, as no share certificates have been issued as
     yet (Note 22). The amount due to the Government of Tanzania as at 31 December 2005 is
     expected to be paid after years commencing 1 March 2008. The amount has been fair
     value on initial recognition.

     The position at 31 December 2005 was as follows:

                                                                         Effective interest rate
                                                            Shs’m
      Loan outstanding                                      65,669                         3.4%

      Fair value of loan                                    45,104      Discounted at borrowing
                                                                                  rate of 11.4%

     b) Included in trade payables and accruals above, is an amount of Shs 56 billion arising from
     capacity charges by Songas. The Company has negotiated deferred payment terms with the
     Government and Songas and made proposals which have yet to be approved. It is expected
     that no interest will be charged on the amount. The fair value of the liability will be
     determined once the payment and interest terms have been agreed.

     c) The Company has overdraft facilities with the following:-

            (i) National Bank of Commerce with a limit of Shs 8.5 billion. The effective interest
            rate during the year was 12%. The overdraft is secured over certain non industrial
            book debts.

            (ii) CRDB Bank with a limit of Shs 65 billion. The effective interest rate during the
            year was 13%. The overdraft is secured by a guarantee by the Government of the
            United Republic of Tanzania.




                                                                                              (34)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS
     FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)


24   GRANTS

      Donor                    Project             Opening Additions Converted Closing
                                                   Balance            to equity balance
                                                    Shs 'm  Shs 'm     Shs 'm   Shs 'm
     Agence Francaise De Sub-station
     Development         rehabilitation                2,960                   (2,960)              -
     African Development Rural
     Bank                Electrification
                         Master Plan Study             2,171                   (2,171)              -
     DANIDA              220 KV TL Singida
                         – Arusha                     22,253                  (22,253)              -
     French Government   Rehabilitation of
                         Diesel Engines                5,099                   (5,099)              -
     Italian Government  See (i) below                10,825                  (10,825)              -
     Japanese Government Dar es Salaam
                         rehabilitation                8,114                   (8,114)              -
     KFW                 See (ii) below               24,511                  (24,511)              -
     ODA                 Mufindi
                         electrification               1,902                   (1,902)          -
     NORAD               See (iii) below              17,622                  (17,622)          -
     SIDA/NORAD/FINNIDA Pangani Falls                  2,011                   (2,011)          -
     SIDA                See (iv) below               20,851       7,551      (20,851)      7,551
     Spanish Government  See (v) below                15,188                  (15,188)          -
     Treasury            See (vi) below               21,058       1,701      (11,143)     11,616
     Yugoslavia          Purchase of motor
                         vehicles                          3                         (3)            -

                                                    154,568        9,252     (144,653)     19,167

     Grant funds received during the year amounted to Shs 9,252 million (2005: 18,005 million).

           Project funded by                                                2006            2005
                                                                           Shs’m           Shs’m
     (i)   Italian Government
           132 KV Masaka/Bukoba                                                  -          4,407
           Mufindi/Mbeya                                                         -          6,418

                                                                                 -         10,825




                                                                                             (35)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS
     FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)


24   GRANTS (CONTINUED)                                   2006      2005
                                                         Shs’m     Shs’m
     (ii)   KFW
            96-66-108 Kihansi                                  -   13,411
            96-66-640 Grid Control Centre                      -      802
            Energy efficiency improvement                      -    6,742
            Mtera Power Plant                                  -    3,450

                                                               -   24,405


     (iii) NORAD
           Rehabilitation Nyumba ya Mungu and Hale             -      589
           Chang'ombe sub-station                              -    1,244
           132 KV Mbala – Sumbawanga                           -    7,351
           Bahari Beach Sub-station                            -    1,184
           NPRP                                                -    6,450
           SADCC Mbozi/Tunduma                                 -      804

                                                               -   17,622

     (iv) SIDA
          Kilimanjaro rural electrification Phase II          -         3
          Ubungo power station rehabilitation                 -     6,058
          KIDATU Power Plant Rehabilitation                   -     3,258
          Ubungo Gas Turbine                                  -     1,082
          Electrification of Urambo                         721     3,307
          Electrification of Makambako                    5,427     2,946
          Electrification of Serengeti                      987     4,197
          132 kV TL Makambako/Songea                        416         -

                                                          7,551    20,851


     (v)    Spanish Government
            POWER Supply Agrobased                             -    6,481
            Electrification of Ukerewe                         -    8,707

                                                               -   15,188




                                                                     (36)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS
     FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)

24   GRANTS (CONTINUED)                                   2006     2005
                                                         Shs’m    Shs’m

     (vi) Treasury
          Kilimanjaro rural electrification Phase II          -       20
          Biharamlo rural electrification                     -    1,220
          Ruangwa rural electrification                       -      164
          Meatu rural electrification                         -      266
          Nassa rural electrification                         -      131
          Ngara rural electrification                         -    1,314
          Tandahimba rural electrification                    -      129
          Sumbawanga rural electrification                    -      130
          Rufiji rural electrification                        -      108
          Geita rural electrification                         -      175
          Serengeti & Urambo rural electrification            -    1,623
          Bukoba rural electrification                        -      100
          Sumitomo nets project – Arusha                      -      948
          Electrification of Makambako                        -      100
          Electrification of Ukerewe                          -      500
          Rural Electrification Master Plan Study             -       25
          Rural electrification                           9,916    9,916
          Ilala Transmission                                  -    3,400
          Mini Hydro Study                                    -      789
          Electrification Mbinga                            500        -
          Electrification of Msonga                         124        -
          Electrification of Magindu                        124        -
          Electrification of Mgwashi                        100        -
          Electrification of Malya/Sumve                    100        -
          Electrification of Mbewe                          100        -
          Electrification of Bukombe & Kagera Village      100         -
          Electrification of kilolo                         100        -
          Electrification of Kilindi                        100        -
          Electrification of Simanjiro                     100         -
          Electrification of Mchinga A&B                   102         -

                                                         11,616   21,059




                                                                    (37)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS
     FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)

25   TRADE AND OTHER PAYABLES                                                 2006            2005
                                                                             Shs’m           Shs’m

     Trade payables and accruals                                             84,531         79,912
     Advances against works orders                                            9,367          3,270
     Customers with credit balances                                           2,322          2,826
     Due to related parties (Note 30)                                         1,390          1,390

                                                                             97,610         87,398

     Included in Trade payables and accruals are embedded derivates in relation to contracts
     with IPTL and Songas Limited, which have not been fair valued as at 31 December 2006. In
     the opinion of the directors, the fair value adjustment is not require because its deemed that
     the United States dollar is a functional currency in the economy in which the entity operates.

27   CONTINGENT LIABILITIES

     The Company is a defendant in various legal actions. In the opinion of the directors, after
     taking appropriate legal advice, the outcome of such actions will not give rise to any
     significant loss. The directors are not aware of any other material contingencies as at the
     balance sheet date.

     In February 2005, the Company received an assessment from the Tanzania Revenue
     Authority in respect of outstanding corporation taxes and penalties amounting to Shs 24,910
     million for the periods 1997 and 1998.The Company objected to the assessment. The issue
     was taken to the Tax Appeals Board that has given the judgment. TRA shown intention to
     appeal on some of the issues from the judgment; however settlement agreement between
     TANESCO and TRA was finally filed with Tax Revenue Board. Ms Mkono & Advocates have
     submitted claim amounting to TShs 4,640,955,200 as legal fee in connection to litigation of
     this issue. Tanesco is disputing the claim.

     Net Group solution who had a Management Support Service Contract (MSSC) from year
     2002 to year 2006 has also submitted claims of total amount of Shs 5,494,685,430 for
     phase 1 and phase 2 of MSSC contract relating to retention fee, bonus and success fee.
     Tanesco obtained legal opinion on the matter and it is contesting that Netgroup Solutions is
     not entitled to any retention fee, bonus and success fee. i.e. Tanesco is disputing all the
     claims.

28   CAPITAL COMMITMENTS

     The board of directors has approved capital commitments of Shs 441,030 million (2005: Shs
     72,405 million). These commitments will be funded by Company’s internal resources, grants
     and long-term loans.

     OTHER COMMITMENTS
     Independent Power Tanzania Limited (IPTL)

     There is a commitment of Shs 48.6 million in respect of capacity charge arising from power
     purchase commitments for the year to 31 December 2007. The Power Purchase agreement
     between the Company and IPTL is for 20 years and it commenced in 2002.
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     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS
     FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)
28   CAPITAL COMMITMENTS (CONTINUED)

     OTHER COMMITMENTS (CONTINUED)

     Songas Limited

     The Company has entered into agreement with Songas Limited for the supply of electricity.
     The agreement commenced in July 2005. There is a commitment of Shs 71.9 million in
     respect of capacity charge arising from power purchase from Songas Limited for the year to
     31 December 2007.

     IAS 39 states that contracts such as the above that are denominated in a foreign currency
     contain an embedded foreign currency derivative. However, in the opinion of the directors,
     the United States dollar is a commonly used currency in Tanzania in contracts to purchase
     or sell goods and services and, as such, there is no need to separate and account for the
     derivative.

29   CASH GENERATED FROM OPERATIONS

     Reconciliation of loss before tax to cash generated from/(utilized by) operations.

                                                                                2006        2005
                                                                               Shs’m       Shs’m
      Profit/(loss) before tax                                                             48,632

      Adjustments for:
      Depreciation (note 13)                                                                30,168
      Interest income                                                                          (32)
      Unrealised exchange loss/(gain)                                                             -
      Amortisation AFUDC prepayment                                                            528
      Reversal of 2004 finance charges (Note 9)                                           (77,782)
      Provision for Morogoro Training Centre                                                      -
      Profit) on disposal of property, plant and equipment                                        -
      Write-off of property, plant and equipment                                             2,115
      Impairment adjustment                                                                       -
      Amortisation (Note 9)                                                                  4,155

                                                                                            7,784

      Changes in working capital:
      - inventories                                                                       (15,984)
      - trade and other receivables                                                       (21,565)
      - trade and other payables and consumer deposit                                       36,812

      Cash generated from/(utilised in) operations                                          7,047




                                                                                            (39)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS
     FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)

30   RELATED PARTY TRANSACTIONS

     The Company is a owned by the Government of Tanzania and its
     management is contracted to NetGroup Solutions (Pty) Limited.
                                                                              2006           2005
                                                                             Shs’m          Shs’m
     The following transactions were carried out with related parties:

     (i) Purchase of goods and services

     NetGroup Solutions (Pty) - retainer fees                                      -            -
     NetGroup Solutions (Pty) - success fees                                       -        1,390
     NetGroup Solutions (Pty) – relief projects                                    -            -

     (ii) Sales of goods and services

     Management is not able to accurately determine the amount of sales to Government
     departments and institutions for purposes of disclosure. These were made in the ordinary
     course of business on an arm’s length basis.

     (iii) Outstanding balances arising from purchase of goods and services

                                                                                2006         2005
                                                                               Shs’m        Shs’m
     Payables

     NetGroup Solutions (Pty) retainer fees                                         -           -
     NetGroup Solutions (Pty) success fees                                      1,390       1,390




     Borrowings and grants from the Government are disclosed in notes 23
     and 24, respectively.

     Receivables
     Central Government                                                        17,746      32,050
     Zanzibar Government                                                          770           -

                                                                               18,516      32,050

     (iv) Support received from parent


     Grants received                                                            1,701       6,843
     Government contribution to capacity charges                               55,132      41,075

                                                                               56,833      47,918


                                                                                            (40)
     TANZANIA ELECTRIC SUPPLY COMPANY LIMITED

     FINANCIAL STATEMENTS
     FOR THE YEAR ENDED 31 DECEMBER 2006 – NOTES (CONTINUED)

30   RELATED PARTY TRANSACTIONS (CONTINUED)

     v) Key management compensation

     During the year the Company’s key management personnel was provided by NetGroup
     Solutions (Pty). NetGroup Solutions earned a Success fee for provision of its management
     services (See (i) above).

31   POST BALANCE SHEET EVENTS

     There are no material post balance sheet events which can have an impact on the financial
     statements.

32   COUNTRY OF INCORPORATION AND REGISTERED OFFICE

     The Company is incorporated in the United Republic of Tanzania under the Companies Act,
     2002 and domiciled in Tanzania. The address of its registered office is:

     Tanzania Electric Supply Company Limited
     Umeme Park
     Ubungo
     Dar es Salaam


33   ULTIMATE OWNER OF THE COMPANY

     The Government of United Republic of Tanzania is the ultimate owner of the Company.




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