THE UNITED REPUBLIC OF TANZANIA NATIONAL AUDIT OFFICE wd& REPORT OF THE CONTROLLER AND AUDITOR GENERAL ON THE CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS OF TANZANIA ELECTRIC SUPPLY COMPANY LIMITED FOR THE YEAR ENDED 30TH JUNE 2016 The Controller and Auditor General National Audit Office, Tanzania KPMG Samora Avenue/Ohio Street 2nd Floor, The Luminary P.O. Box 9080 Plot No. 574 Haile Selassie Road Dar Es Salaam P. O Box 1160 ON Tel: 255 (022) 2115157/8 Dar es Salaam, Tanzania Fax: 255 (022) 2117527 Tel: +255 22 2600330/90 E-mail: ocaanao.qo.tz Website: www.nao.go.tz CONTENTS PAGE NAO Vision and Mission Statements n Abbreviations ii Report of Directors 1 - 27 Statement of Directors' Responsibilities 28 Declaration of Head of Finance 29 Report of the Controller and Auditor General 30 - 32 Consolidated and Separate Financial Statement: Consolidated and Separate Statements of Profit or Loss and Other 33 Comprehensive Income Consolidated and Separate Statements of Financial Position 34 - 35 Consolidated and Separate Statements of Changes in Equity 36 - 39 Consolidated and Separate Statements of Cash Flows 40 Notes to the Consolidated and Separate Financial Statements 41 - 116 Office of the Controller and Auditor General, National Audit Office, The United Republic of Tanzania (Established under Article 143 of the Constitution of the URT) The statutory duties and responsibilities of the Controller and Auditor General are given under Article 143 of the Constitution of the United Republic of Tanzania and amplified in the Public Audit Act of 2008. Vision To be a centre of excellence in public sector auditing. Mission To provide efficient audit services to enhance accountability and value for money in the collection and use of public resources. In providing quality services, NAO is guided by the following Core Values: v Objectivity: We are an impartial organization, offering services to our clients in an objective, and unbiased manner; V Excellence: We are professionals providing high quality audit services based on best practices; / Integrity: We observe and maintain high standards of ethical behavior and the rule of law; V People focus: We focus on stakeholders' needs by building a culture of good customer care and having competent and motivated work force; 1 Innovation: We are a creative organization that constantly promotes a culture of developing and accepting new ideas from inside and outside the organization; and V Best resource utilisation: We are an organisation that values and uses public resources entrusted to it in efficient, economic and effective manner. We do this by:- * Contributing to better stewardship of public funds by ensuring that our clients are accountable for the resources entrusted to them; * Helping to improve the quality of public services by supporting innovation on the use of public resources; * Providing technical advice to our clients on operational gaps in their operating systems; * Systematically involve our clients in the audit process and audit cycles; and * Providing audit staff with adequate working tools and facilities that promote independence. ABBREVIATIONS ACGC Audit Corporate & Governance Committee KtW Kreditanstalt (Or Wiederaufbau AfDB African Development Bank Km Kilometers ADF African Development Fund KV Kilo Volts ARC Audit and Risk Committee AFD Agence Francaise de Developpement LPF Local Authority Pension Fund AMR Automatic Meter Reader LPUs Large Power Users BTIP Backbone Transmission Investment Project LOTO Lock Out and Tag Out CAG Controller and Auditor General LV Low Voltage CCTV Closed Circuit Television MW Mega Wat CG Corporate Governance MVA Mega Volt Amp CGC Corporate and Governance Committee MV Medium Voltage MV Motor Vehicle CMS Corporate Management System NBAA National Board of Accountants and Auditors CPR Cardiopulmonary Resuscitation CWIP Capital Work in Progress NCI Non-Controlling Interest NEMC National Environmental Management Council DROC Disaster Recovery Data Centre DPRP Disaster Preparedness and Response Plan NSSF National Social Security Fund EDCF Economic Development Cooperation Fund NOK Norwegian Kroner 0MG One Minute Goal EIB European Investment Bank PABX Private Automatic Branch Exchange EMS Environmental Management Systerm EPPs Emergency Power Producers PPEs Property, Plant and Equipment PPF Parastatals Pension Fund ESIA Environmental and Social Impact Assessment ESMP Environmental and Social Management Plan PMU Procurement Management Unit. Eol Expression of Interest PAPs Project affected persons ERP Enterprise Resource Planning PSMP Power System Master Plan PSPF Public Service Pensions Fund 3E Eclipse Enterprise Edition. RAP Resettlement Action Plan GEPF Government Employees Pensions Fund GIS Geographical Information System REA Rural Energy Agency HRRC Human Resources and Remuneration Committee REF Rural Energy Fund RPU Revenue Protection Units [AS International Accounting Standards ICT Information and Communication Technology RoW Right of way FC International Finance Company SCADA Supervisory Control and Data Acquisition SCBHK Standard Chartered Bank H-ong Kong IFRIC International Financial Reporting Interpretations Committee SDR Special Drawing Rights IFRS International Financial Reporting Standards SEA Strategic Environmental Assessment ISMS Integrated Security Management System SEPC Shanghai Electric Power Company Limited IPOC Investment, Planning and Operations Committee SPGC Shanglan Power Generation Company Limited IPPS Independent Power Producers TEDAP Tanzania Energy Development and Access JPTL Independent Power Tanzania Limited Expansion Project IPMPLS Internet Protocol Mti-Prolocol Label Switch TGDC Tanzania Geothermal Development Company Limited TL Transmission line JICA Japan International Development Agency ZTK Zambia - Tanzania - Kenya power interconnector KAWEU Kampeni Kamata Wezi wa Umeme project III TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS The Directors submit their report together with the consolidated and separate financial statements for the year ended 30th June 2016, which disclose the state of affairs of Tanzania Electric Supply Company Limited (the "Company" or "TANESCO") and its subsidiary - Tanzania Geothermal Development Company Limited( together, the "Group" as at that date). 1. INCORPORATION The Company is incorporated in Tanzania under the Companies Act, 2002 as a limited liability Company. Having all its shares held by the Government of the United Republic of Tanzania, it is a public corporation governed by the Public Corporations Act, revised edition 2002. The subsidiary company was incorporated on 19th November 2013 as a limited liability company. The subsidiary is 100% owned by TANESCO. 2. CHANGE OF REPORTING PERIOD In 2015, the Company changed the reporting period to 30th June from 31St December in order to align its financial year to the Government's fiscal year as per Treasury circular number 11 of financial year 2014/2015. As a result, the comparative period is 18 months to 301h June 2015 while the current period which ended on 30th June 2016 covers 12 months. Therefore, the amounts presented in the financial statements are not entirely comparable. 3. VISION STATEMENT To be an efficient and commercially focused utility supporting the development of Tanzania, and to be a power house of East Africa. 4. MISSION STATEMENT To generate, purchase, transmit, supply and sell electricity in the most effective, competitive and sustainable manner possible. 5. PRINCIPAL ACTIVITIES The Company's principal activities are generation, purchasing, transmission, distribution and selling of electricity to the Mainland Tanzania as well as bulk supply to Zanzibar and neighboring countries. Electricity is generated at seven (7) hydro power plants (namely Kidatu, Mtera, Kihansi, New Pangani, Hale, Nyumba ya Mungu and Uwemba) and twenty four (24) thermal power plants (namely Kinyerezi 1, Ubungo 1 Gas Plant, Tegeta Gas Plant, Ubungo 2 Gas Plant, Nyakato 60MW power plant at Mwanza, Zuzu at Dodoma, Biharamulo, Bukoba Urban, Kasulu, Kibondo, Kigoma Urban, Liwale, Loliondo, Ludewa, Mafia, Mbinga, Mpanda, Mtwara, Namtumbo, Ngara, Somanga, Songea, Sumbawanga and Tunduru). All hydro power plants and six (6) thermal power plants are connected to the National grid. The Company imports power from Uganda, Kenya and Zambia and, in turn, exports power to Kenya. The Company has long term power purchase agreements with Independent Power Producers (IPPs), namely Independent Power Tanzania Limited (IPTL), Songas Limited, Tanganyika Waftle Company Limited (TANWAT), TPC Limited, Andoya Mwenga, Tulila, lyovi and Ngombeni. 1 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 5. PRINCIPAL ACTIVITIES (CONTINUED) Revenue of the Company decreased from Shs. 1,957,756 million in the 18-month period ended 30th June 2015 to Shs. 1,379,740 million, which represents an annualised increase of 6%. i) Projects implemented/ continued to be implemented during the year: a) In collaboration with Rural Energy Agency (REA), electrification projects in all regions of Mainland Tanzania that will reach 2,500 villages in 133 districts as well as electrifying un-electrified district headquarters. Under this project, construction of 15,457.11 kilometers of Medium Voltage (MV) power distribution lines; 9,520.98 kilometers of Low Voltage (LV) lines; installation of 3,580 distribution transformers and connection of 250,000 initial customers will be undertaken. The total cost for this project funded by the Government through Rural Energy Fund (REF) is estimated to be Shs 881 billion. Up to June 2016, the project was completed by 95% and all district headquarters for Chemba, Nyasa, Kyerwa, Kalambo, MIele, Buhigwe, Uvinza, Kakonko, Malinyi, Itilima and Mkalama were electrified. All districts in Katavi region have been electrified except Tanganyika district. Construction of 14,235.85km out of 15,457.11km MV line, 8,319km out of 9,520.98km LV line, installation of 3,145 out of 3,580 distribution transformers were already completed by end of June 2016. Also 99,155 out of 249,884 earmarked customers were connected with power. b) The implementation of the ongoing Backbone Transmission Investment Project (BTIP); mainly, the construction of 400kV transmission line and its substations from Iringa to Shinyanga. It also includes Rural Village Electrification initiative component along the backbone project. The Project is financed by the Government and other multilateral donor agencies. The project is completed. c) Installation and upgrading of 11/33kV substations at Kigoma (5 MVA), Kasulu (3 MVA), Kibondo (3 MVA), Ngara (3 MVA), Mbinga (3 MVA) and Tunduru (3 MVA) was completed by end of the year. d) The ongoing Tanzania Energy Development and Access Expansion Project (TEDAP). The objective of the project is to improve the quality and efficiency of the provision of electricity service in the country and to establish a sustainable base for energy access expansion. The project is financed by IDA Credit of SDR 67,700,000 (sixty-seven million seven hundred thousand Special Drawing Rights), of which SDR 49,800,000 has been allocated to TANESCO as a grant for implementing some components of the project. e) Electricity V - Package III Construction and Rehabilitation of substation works in Dar es Salaam and Arusha regions and extension of Distribution Networks in Mwanza and Shinyanga regions. Contract price for substation works was USD 8 Million while contract price for Distribution works was USD 18 million. Distribution component scope of work involved construction of 480km of 33kV medium voltage lines, 231km of 0.4kV low voltage lines; installation of 102 pieces of 33/0.4kV distribution transformers and street lights at distribution transformers and connection of about 8,421 customers. The works were completed on 31st May 2016. 2 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 5. PRINCIPAL ACTIVITIES (CONTINUED) i) Projects implementedl continued to be implemented during the year (Continued): f In the substation component works involved installation of 2 x 50MVA, 132/33kV Power Transformers at Njiro substation in Arusha Region and 1 x 15 MVA, 33/11 kV transformer at Sokoine and Ilala substations in Dar es Salaam. The works were completed on 31s December 2015. g) Supply of Wood Pole, Distribution Materials and Diggers Derricks for Electricity V Project in Mwanza and Shinyanga Regions - Lot 1, 2 and 3 component respectively. Lot 1, 2 & 3 were all delivered during the year and the project was completed in June 2016. h) Distribution component additional scope consists of construction of 30km of 33kV, 100km of 0.4kV distribution lines, installation of 95 distribution Transformers, connection of 15,000 customers in Mwanza and Shinyanga Regions. i) Construction of a 150MW gas-fired power plant to be installed at Kinyerezi 1. This project was completed in March, 2016. j) Construction of a 240MW combined cycle gas-fired power plant to be installed at Kinyerezi II. Construction of the project started November 2016 and expected to be completed in 2018. k) Construction of 185MW Kinyerezi I extension gas fired power plant at Kinyerezi. The project started November 2016 and expected to be completed in 2018. I) The construction of Bulyanhulu - Geita - Nyakanazi 220 kV Transmission Line. This project comprises of construction of Bulyanhulu to Geita 100km Transmission line (including electrification of villages along the line corridor), which is on re-evaluation stage (PMU). m) The construction of 132kV underground cable in Dar es Salaam from Ilala - City Centre - Makumbusho, installation of 2x50 MVA transformers and construction of 132/33kV substation at Dar es Salaam City Centre, construction of Supervisory Control and Data Acquisition (SCADA) Distribution Control Centre at Mikocheni for Monitoring the 28 distribution substations in Dar es Salaam and construction of 33kV network from City Centre to Sokoine Drive and Railways Head Quarters 33/11 kV substations. The project is financed by the Government of Finland in collaboration with the Government of Tanzania. The project is completed. n) Construction of the second 132kV Transmission line (70km long) from Kilimanjaro to Arusha and the rehabilitation of Kiyungi Substation. The project is financed by Economic Development Cooperation Fund (EDCF) from the Republic of South Korea and was completed in December, 2015. 3 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 5. PRINCIPAL ACTIVITIES (CONTINUED) i) Projects implementedl continued to be implemented during the year (Continued): o) The review of transmission line from 220kV to 400kV, negotiation for the project conducted in July 2017. ESIA certificate for Mbeya- Sumbawanga portion was obtained and that of Mpanda - Kigoma - Nyakanazi portion is under process. TANESCO received compensation schedule for new Mbeya substation plot. Payment is underway. Solicitation of financing from Development Partners is ongoing. p) Electrification of Rural Tanzania through ORIO project which involve construction and Installation of 2.5MW generating sets, construction of distribution network at Biharamulo, Mpanda and Ngara. The project total cost is Euro 32.8 million which involves development phase, implementation phase, Operation and maintenance phase. Biharamulo and Ngara were completed in October 2016. For Mpanda installation of generator is completed and construction of lines continues and will be completed in 2017. q) Construction of 400kV Singida - Arusha - Nairobi Interconnector line. Government has concluded Financing Agreements with Lenders (African Development Bank (AfDB) and Japan International Development Agency (JICA) for the Project. Demarcation of right of way (RoW) boundaries and valuation of properties for compensation to project affected persons (PAPs) from Singida to Namanga has been completed. Procurement of consultancy services and EPC contracts for the works (Lot 1-3) has been initiated. The project is expected to be completed in June, 2019. r) Rehabilitation of protection and control system at Singida expected to be completed in December 2017. s) Installation of 45MVA, 220/33kV transformer at Kidatu was completed in July 2017, also, rehabilitation and upgrade of Musoma, Nyakato, Sabasaba 33/11 kV substations is expected to be completed in December 2017. t) Capacity building and Emergency repair of six hydro power plants in Tanzania namely Kidatu, Kihansi, Mtera, Pangani, Hale and Nyumba ya Mungu. The Total Project cost was 67.5 million Norwegian Kroners financed by Government of Norway but the actual project cost for repair works exceeded the grant facility by Euro 1.5 million and thus TANESCO has to pay the difference. The project is expected to be completed in December, 2017. u) Level B-Maintenance and upgrade of three Gas Turbines at Ubungo -II Gas Plant from 35MW to 43MW. The Total project cost is SEK 216,375,164. The maintenance and upgrade for unit no.2 and unit no.3 was completed in April, 2016 and Unit no. 1 was completed in December 2016. v) Upgrade of Ubungo - Kipawa 132kV transmission line by stringing the second circuit on existing towers. Installation and commissioning of busbar protection at Kidatu is completed by 95%, installation and Commissioning of 45MVA transformer at Tanga and Chato 33kV switching station are expected to be completed in 2018. 4 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 5. PRINCIPAL ACTIVITIES (CONTINUED) i) Projects implemented( continued to be implemented during the year (Continued): w) Rehabilitation of ten (10) substations under AFD financing and optical fiber network extension phase 2 is on tendering for consultant stage and it is expected to be completed in June 2019. The project total cost is estimated to be Euro 53 million. ii) Other projects implemented during the year include: a) Construction of 132kV Mtwara - Lindi transmission line and associated substations was completed in July 2017. b) Reinforcement of power distribution in Dar es Salaam operational regions including installation of two 60MVA 132/33kV transformers at Ilala substation, stringing of the second transmission line on 132kV from Ubungo to lIala; expansion of Msasani substation through installation of one 15MVA 33/11kV transformer and construction of three new substations of 15MVA 33/11kV at Jangwani beach, Muhimbili and Mwananyamala. The project is completed. c) Rolling out of Geographical Information System (GIS) database in four regions of liala, Kinondoni North, Coast and Temeke. The database will enhance network planning, network analysis, network operations, optimization of the network as well as asset management. The project was completed in June 2016 for Kinondoni North and Ilala regions. Temeke and Coast regions have been completed in 2017. d) Installation and commissioning of busbar protection at Kidatu was completed in June 2017. The cost of the project was USD 445,168. e) Installation and Commissioning of 45MVA transformer at Tanga is expected to be completed in December 2017. f) Upgrade of Ubungo - Kipawa 132kV transmission line; stringing the second circuit on existing towers. Lot 1 is on progress while lot 2 is on shipment. It is expected to be completed in 2018. g) Upgrade of Optical Fiber network software and hardware to IPMPLS expected to be completed in 2017. The cost of the project is estimated to be USD 1.6 million. h) Supply, installation and commissioning of PABX for Head office and Branches and it is on implementation stage and is expected to be completed in December 2017. The cost of the project is Shs. 2.5 billion. 5 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 5. PRINCIPAL ACTIVITIES (CONTINUED) ii) Other projects implemented during the year include (Continued): i) LUKU upgrade to 3E, hardware, software and staff training: The system was upgraded from Eclipse Manager to Eclipse Enterprise Edition in order to have no limitation of number of customers. Initially the system was only able to handle not more than 900,000 customers. The cost of the project was Euro 1,694,740.73 and was completed in April 2016. The operational performance of the Company can be summarized as follows: Plan Actual Actual Percentage 12 12 18 change months to months to months to from prior 30e June 30h June 30th June Period 2016 2016 2015 Service lines completed during the 250,000 278,062 309,250 -10% year/period Number of pending service line - 26,667 55,196 -52% applications Units sold during the year/period (million) 6,142 5,549 7,727 -27% Additional 33kV and 11kV lines during 12,003 11,036 1,148 861% the year/period (km) Total length of 33Kv and 11kV distribution lines completed during the 31,939 30,972 20,852 49% year/period (km) Total length of low voltage lines by the 34,560 97,956 40,822 140% end of the year/period (km) Distribution transformers installed during 2,300 2,039 1,214 68% the year/period Total number of distribution transformers 14,640 14,379 12,340 17% by the end of the year/period Total number of consumers by the end of 1,751,162 1,743,820 1,473,217 18% the year/period Total number of staff 7,488 5,990 6,328 -5% Ponsumer/staff ratio 206 194 241 -20% 6 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 5. PRINCIPAL ACTIVITIES (CONTINUED) The Company has been experiencing a number of operational challenges in serving its customers. These challenges together with strategies used to address them are outlined below; (a) Reliability and quality of power The rehabilitation and maintenance of generation, transmission and distribution networks continued to be carried out during the period in order to improve quality and reliability of power. During the year ended 30th June 2016 Shs 54,442.67 million was used in the rehabilitation and maintenance of assets. (b) Power loss through meter tampering and stopped meters. The progress on the project to install the Automatic Meter Reader (AMR) meters for Large Power Users (LPUs) (Tariff 2 and Tariff 3) as well as Medium Power Users (Tariff 1 customers using three - phase meters), as at 30h June 2016 was as follows:- (i) Tariff 3: The cumulative number of customers installed with AMR meters as of 30th June 2016 is 602 (By 30th June 2015 it was 536 meters), (ii) Tariff 2: The cumulative number of customers installed with AMR meters as of 30th June 2016 is 2,665 (By 30th June 2015 it was 2509 meters), (iii) Tariff 1: The cumulative number of customers installed with AMR meters as of 30th June 2016 is 17,672 (By 301h June 2015 it was 19,688 meters). The number went down as some of the customers were transferred to LUKU meters. During the year from 1st July 2015 to 30th June 2016 the AMR meters realized the following benefits; 1. Decrease in number of cases of energy thefts by large power users in comparison with when 'conventional' electromechanicallelectronic meters were in use. For instance, no incidence of AMR meter tampering was reported by the revenue protection team for T3 customers from 1st July 2015 to 30th June 2016. 2. Increase of average monthly revenue collection due to increased number of Tariff 1 customers with AMR Meters. These can be disconnected remotely whereby 4,036 TI AMR-metered customers were remotely disconnected with debt amounting to Shs. 3,287,853,457 and 2,824 AMR Meters were remotely reconnected after payment, in which a total of Shs. 1,448,006,874 was collected. 3. Accuracy of meter reading has extremely improved. 4. Giving clear and actual meter readings in different measurement levels (Primary Substations, feeders, boundaries, secondary substations and generation plants. 7 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 5. PRINCIPAL ACTIVITIES (CONTINUED) Management of energy losses Energy losses reflect the difference between the quantity of energy sent out from the power stations and the quantity sold to various customers at the end of the value chain. The losses are categorised as technical or non-technical in nature. Total losses were: Target Actual Actual 12 months 12 months 18 months to 30e to 30th to 30m Energy losses June 2016 June 2016 June 2015 Distribution loss (%) 11.9% 11.2% 12.1% Transmission loss (%) 6.1% 6.2% 6.1% Total loss% 18.0% 17.4% 18.2% Meter audit through Revenue Protection Units (RPUs) During the year Company's Revenue Protection Units (RPUs) continued to carry out the operational campaigns against energy theft, known as 'Kampeni Kamata Wezi wa Umeme (KAWEU)" in all regions. Out of the 154,056 customers inspected during the period 2,577 customers equivalent to 1.67% of all customers inspected had metering discrepancies. A total of Shs 8,360 million was established as revenue loss. The Company billed the amounts and the same is being collected. (a) Vandalism of infrastructures including theft of distribution lines cables and transformer oil The Company continued to strengthen the national task force by improving collaboration with the communities including providing incentives to citizens who provide information on vandalism and power theft. During the year the Company continued to pursue the following activities in the front: (i) Public sensitization and education on effects of vandalism to infrastructure; Education on public awareness was conducted to 418 villages in 18 regions of Coast, Mbeya, Singida, Tabora, Kilimanjaro, Lindi, Mtwara, Katavi, Mara, Arusha, Dodoma, Kagera, Tanga, Geita, Simiyu, Shinyanga, Njombe and Kigoma. The same was done to 35,406 students of 19 primary schools, 16 secondary schools and 6 colleges; (ii) Frequent patrol and inspection by TANESCO and the Police Force on various transmission and distribution lines; (iii) Installation of dry transformers especially in areas where transformer oil theft was rampant; and (iv) Enhance the Village Guarding Contracts along transmission lines. 8 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 6, COMPOSITION OF THE BOARD OF DIRECTORS The directors of the Company at the date of this report, and whom have served since 1St July 2015 are: Name Position Qualificationsl Nationality Appointed/ Date Disciplines resigned appointedl resigned Dr. Alexander. Chairman Ph.D. (Electrical Tanzanian Appointed 30th May 2016 L. Kyaruzi Engineering) Consulting Engineer Amb. Dr. James Member Ph.D. (Economic Tanzanian Appointed 4th Aug 2016 Mwasi Nzagi Science and Economic Management) Mr. David E. Member CPA(NBAA) Tanzanian Appointed 30th May 2016 Alal MBA (Finance) M/s Anna B. Member LLM Oil and Gas Law Tanzanian Appointed 9th Jan 2017 Ngowi Eng. Gilay C. Member MSc. (Engineering Tanzanian Appointed 9th Jan 2017 Shamika Management) Dr. Lugano Member Ph.D. (Energy Tanzanian Appointed 301h May 2016 Wilson Engineering), Ph. Licentiate (Engineering) Dr. Mighanda J. Chairman Ph.D. (EMC/ Tanzanian Resigned 7h Mar 2016 Manyahi Electrical Transients and Discharges and Senior Lecturer UDSM Dr. Haji Deputy Ph.D. (Energy Tanzanian Resigned 71h Mar 2016 Semboja Chairman Economics) Senior Economist - Research Policy Dr. Nyamajeje Member Ph.D. (Economics) and Tanzanian Resigned 7th Mar 2016 C. Weggoro Presidential Advisor Dr. Mutesingwa Member Ph.D. (Electrical Tanzanian Resigned 7th Mar 2016 Maingu Engineer) and CEO - Alpha Crown Electrics Limited Eng. Juma F. Member MSc. (Engineering Tanzanian Resigned 71h Mar 2016 Mkobya Management) Ministry of Energy and Minerals Mr. Shaaban Member MSc. (Sustainable Tanzanian Resigned 71h Mar 2016 Kayungilo Energy and Management) Marketing Manager - ENGEN Petroleum (T) Limited 9 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 6. COMPOSITION OF BOARD OF DIRECTORS (CONTINUED) Name Position Qualificationl Nationality Appointed/ Date appointedl Discipline resigned resigned Ms Kissa Member MBA and Director of Tanzanian Resigned 71h Mar 2016 Kilindu Employment Services - Tanzania Employment Services Agency (TaESA) Mr. Felix G. Member LL.M and Advocate of Tanzanian Resigned 7th Mar 2016 Kibodya High Court of Tanzania Eng. Member MSc. (Engineering) and Tanzanian Resigned 7th Mar 2016 Boniface C. Registered Consulting Muhegi Engineer Eng. Member MSc. (Mechanical Tanzanian Resigned 9th Jan 2017 Stephen P. Engineering) Mabada Eng. Leonard Member MSc. (Hydropower Tanzanian Resigned 9h Jan 2017 R.Masanja Development) Dr. Samuel Member Ph.D. (Vehicle Tanzanian Resigned 4th Aug 2016 Nyantahe Dynamics) 7. CORPORATE GOVERNANCE The current Board of Directors consists of six (6) directors, all of whom are non-executive. The Board takes overall responsibility for the Company, including responsibility for identifying key risk areas, considering and monitoring investment decisions, considering significant financial matters, and reviewing the performance of Company business plans and budgets. The Board is also responsible for ensuring that a comprehensive system of internal control policies and procedures is operative, and that the Company complies with sound corporate governance principles. The Board is required to meet at least four (4) times a year. The Board delegates the day to day management of the business to the Managing Director assisted by senior management. Members of senior management are, from time to time, invited to attend board meetings in order to facilitate the effective control of Company's operational activities, as they act as a medium of communication and coordination with the various business units. During the year ended 301h June 2016, the CGC, HRC and the ARC were formed out of the former ACGC and HRRC. The purpose was to comply with the new Corporate Governance philosophy that requires audit and risk matters to be transacted independent of any other business. The Company is committed to the principles of effective corporate governance The directors also recognize the importance of integrity, transparency and accountability. During the year ended 301h June 2016, the Board of Directors had the following board sub-committees to ensure a high standard of corporate governance in running the Company. 10 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 7. CORPORATE GOVERNANCE (CONTINUED) (i) Corporate and Governance Committee (CGC) The CGC deals with all finance and administration matters of the Company. The matters were being dealt with by the formally Audit Corporate & Governance Committee (ACGC). The following are the members of the committee: Name Position Qualification Nationality Appointed/ Date IDiscipline Resigned appointedl resigned Dr. Lugano Chairman Ph.D. (Energy Tanzanian Appointed 30h May 2016 Wilson Engineering), Ph. Licentiate (Engineering) Mr. David E. Member CPA (NBAA) Tanzanian Appointed 30th May 2016 Alal MBA (Finance) M/s Anna B. Member LLM Oil and Gas Law Tanzanian Appointed 91h Jan 2017 Ngowi Dr. Chairman Ph.D. (Economics) Tanzanian Resigned 71h Mar 2016 Nyamajeje Presidential Advisor C. Weggoro Mr. Member MSc. (Sustainable Tanzanian Resigned 7h Mar 2016 Shaaban Energy and Kayungilo Management) Marketing Manager - ENGEN Petroleum (T) Limited Ms. Kissa V. Member MBA and Director of Tanzanian Resigned 7th Mar 2016 Kilindu Employment Services - Tanzania Employment Services Agency (TaESA) Mr. Felix Member LL.M and Advocate of Tanzanian Resigned 7th Mar 2016 G.Kibodya High Court of Tanzania Eng. Member MSc. (Mechanical Tanzanian Resigned 91h Jan 2017 Stephen P. Engineering) Mabada Dr. Samuel Member Ph.D. (Vehicle Tanzanian Resigned 4th Aug 2016 Nyantahe Dynamics) Eng. Member MSc. (Hydropower Tanzanian Resigned 9th Jan 2017 Leonard Development) R.Masanja CGC reports to the Board of Directors of the Company. The CGC conducted six (6) ordinary meetings during the year ended 30th June 2016. 11 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 7. CORPORATE GOVERNANCE (CONTINUED) (ii) Investment, Planning and Operations Committee (IPOC) IPOC deals with technical matters especially investment planning. The following are the members of the IPOC: Name Position Qualification Nationality Appointed/ Date IDiscipline Resigned appointed! resigned Amb. Dr. Chairman Ph.D. (Economic Tanzanian Appointed 4h Aug 2016 James Mwasi Science and Nzagi Economic) Dr. Alexander Member Ph.D. (Electrical Tanzanian Appointed 30th May 2016 L. Kyaruzi Engineering) Eng. Gilay C. Member MSc. (Engineering Tanzanian Appointed 91h Jan 2017 Shamika Management) Dr. Haji H. Chairman Ph.D. (Energy Tanzanian Resigned 71h Mar 2016 Semboja Economics) and Senior Research Policy and Economist Dr. Member Ph.D. (Electrical Tanzanian Resigned 71h Mar 2016 Mutesingwa Engineer) and CEO - Maingu Alpha Crown Electrics Limited Eng. Juma F. Member MSc. (Engineering Tanzanian Resigned 7th Mar 2016 Mkobya Management) Ministry of Energy and Minerals Eng. Boniface Member MSc. (Engineering) Tanzanian Resigned 7h Mar 2016 C. Muhegi and Registered Consulting Engineer Dr. Samuel Member Ph.D. (Vehicle Tanzanian Resigned 4th Aug 2016 Nyantahe Dynamics) Eng. Leonard Member MSc. (Hydropower Tanzanian Resigned 9th Jan 2017 R.Masanja Development) Eng. Stephen Member MSc. (Mechanical Tanzanian Resigned 9th Jan 2017 P. Mabada Engineering) The IPOC reports to the Board of Directors of the Company. IPOC conducted five (5) ordinary meetings during the year ended 301h June 2016. 12 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 7. CORPORATE GOVERNANCE (CONTINUED) (iii) Audit and Risk Committee (ARC) The ARC deals with Audit and Risk. The following are the members of the ARC committee. Name Position Qualification Nationality Appointedl Date IDiscipline Resigned appointed/ resigned Mr. David E. Chairman CPA (NBAA) Tanzanian Appointed 30th May 2016 Alal MBA (Finance) Dr. Lugano Member Ph. D (Energy Tanzanian Appointed 30th May 2016 Wilson Engineering), Ph. Licentiate (Engineering) Eng. Gilay C. Member MSc. (Engineering Tanzanian Appointed 9th Jan 2017 Shamika Management) The ARC reports to the Board of Directors of the Company. The ARC is a new committee and it did not conduct any meeting during the year ended 30th June 2016. (iv) Human Resources and Remuneration Committee (HRRC) The HRRC deals with staff welfares. The following are the members of the ARC committee Name Position Qualification Nationality Appointedl Date IDiscipline Resigned appointedl resigned Dr. Alexander Member Ph. D (Electrical Tanzanian Appointed 30th May 2016 L. Kyaruzi Engineering) Consulting Engineer Amb. Dr. Member Ph.D. (Economic Tanzanian Appointed 41h Aug 2016 James Mwasi Science and Economic Nzagi M/s Anna B. Member LLM Oil and Gas Law Tanzanian Appointed 9th Jan 2017 Ngowi The HRRC is a new committee that reports to the Board of Directors of the Company and did not conduct any meeting during the year ended 301h June 2016. 13 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 7. CORPORATE GOVERNANCE (CONTINUED) During the year ended 301h June 2016, the Board of Directors had twenty two (22) meetings and fifteen (15) committee meetings as tabulated in the table below: SIN Meeting Board of Corporate Investment, Audit Risk Human Directors and Planning and Committee Resources and (BoD) Governance Operations (ARC) Remuneration Committee (IPOC) Committee (CGC) (HRRC) 1. Ordinary 3 6 5 - meetings 2. Special 9 3 1 - Meetings 3. Performance Evaluation - - Committee of meeting 4. Select 8 - - - Committee of the Board of Directors 22 9 6 - 14 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 8. CAPITAL STRUCTURE The Company capital structure for the year is as shown below. SHARE CAPITAL 2016 2015 Shs 'm Shs 'm Authorised: Ordinary Shares 120,000,000,000 ordinary shares of Shs 20 each 2,400,000 2,400,000 Issued and fully paid: 49,335,830,882 ordinary shares of Shs 20 each 986,717 986,717 All the issued and fully paid shares are owned by the Government of Tanzania. ADVANCE TOWARDS SHARE CAPITAL 12 months 18 months to 301 to 30e June 2016 June 2015 Shs'm Shs'm At start of year/period 494,316 359,909 Received during the year/period 112,435 134,407 At end of yearlperiod 606,751 494,316 Advances toward share capital represent capital contributions received from the Government, and the reserves from the fair value of interest free loans. 9. SHAREHOLDERS OF THE COMPANY The Company is 100% owned by the Government. The shares of the Company are held as follows: 2016 2015 Shares in million Shares in million Shareholder Ordinary Preference Ordinary Preference Government of Tanzania 49,336 - 49,336 10. MANAGEMENT The Management of the Company is under the Managing Director who reports to the Board of Directors. The operations are split in the following business units: Generation, Transmission, Distribution and Customer Services, Investment, Finance, Information Communications Technology, Human Resource, Procurement, Legal Counsel and Company Secretariat. There is also an independent unit of Internal Audit which administratively reports to Managing Director and functionally to the ARC. 15 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 11. FUTURE DEVELOPMENTS The Company continues to improve its performance by implementing various projects categorized as short and medium term plans/projects. These short and medium term plans/projects include: Implementing Power System Master Plan (PSMP) lastly updated in 2016 which provides load forecast, generation, distribution and transmission expansion plans which are categorized into short, medium and long terms. i) Implementations of projects identified in PSMP are as follows: a) Construction of another 300MW gas-fired power plant to be installed at Kinyerezi Ill. This project is expected to be completed in 2020. The estimated cost of the project is USD 341 million. b) Construction of a 300MW gas-fired power plant to be installed at Kinyerezi IV phase one. This project is expected to be completed in 2021. The estimated cost of the project is USD 336 million. c) Construction of an 80MW hydro power plant at Rusumo and 220kV transmission line from Rusumo - Nyakanazi. The project is financed by the World Bank and African Development Bank (AfDB) in collaboration with the Government of Tanzania. It is expected to be completed in December 2019. d) Construction of 44.8MW Malagarasi hydropower project at an estimated cost of USD 150.2 million. Request has been sent to the Development Partners for soliciting financing. We are currently working on procurement process of consultants for Provision of Consultancy Services for Detailed Design, Construction Management, Supervision, Testing and Commissioning. The project is expected to be completed in June 2020. e) Construction of 87MW Kakono Hydropower Project at an estimated cost of USD 379.4 million. Request has been sent to the Development Partners for soliciting financing USD 379.4 million. We are currently working on procurement process of consultants for Provision of Consultancy Services for Detailed Design, Construction Management, Supervision, Testing and Commission. The project is expected to be completed in June 2020. 16 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 11. FUTURE DEVELOPMENTS (CONTINUED) ii) Implementations of projects identified in PSMP are as follows (Continued): f) Kikonge Multipurpose Dam, Hydropower (300MW) and Irrigation Project AfDB has approved a grant to finance this project with a cost of Euro 1,986,198 from Africa Water Facility, Euro 263,200 from CRIDIF and Euro 213,000 from Government of Tanzania (GoT) in kind contribution. We are currently working on procurement process of consultants for feasibility studies. The project is on initial stage. g) Construction of Nyakanazi-Kigoma-Tunduma-Mbeya 400kV power transmission line project will be implemented in 3 phases: phase one being from Mbeya to Sumbawanga 340km, to be completed in 35 months. Phase two from Nyakanazi-Kigoma-Mpanda 568km to be completed in 42 months after commencement, and phase three from Mpanda to Sumbawanga 240km to be completed in 26 months from commencement. Consultant is at the final stage of completing the review of transmission line feasibility study from 220kV to 400kV. The final report was submitted in September 2016. ESIA certificate for Mbeya- Sumbawanga portion was obtained and that of Mpanda - Kigoma - Nyakanazi portion is under process. TANESCO received compensation schedule for new Mbeya substation plot. Payment is underway. Solicitation of financing from Development Partners is ongoing. h) Construction of 220 kV transmission line from Mwanza to Masaka will be implemented jointly by the two countries. The Governments of Uganda and Tanzania will solicit funds for implementation of the project. KfW has agreed to finance Consultancy Service for review and update of feasibility study. Evaluation of the Expression of Interest (Eol) documents and short listing of five (5) highest ranked Consulting firms for bid submittal was done. Submission of the Final pre-Qualification report to TANESCO Tender Board was done for approval and later seeking no objection from KfW in order to invite the qualified bidders to submit technical and financial proposal. i) Construction of Dar es Salaam-Chalinze-Tanga Arusha 400kV Transmission Line. This project is expected to be completed in 30 months after commencement. j) Construction of 300MW gas fired power plant at Mtwara and transmission line from Mtwara to Somanga. Request has been sent to JICA for development of the project. k) Construction of wind power plants in Singida by Geo Wind with initial capacity of 50MW and Wind East Africa with capacity of 100MW. 17 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 11. FUTURE DEVELOPMENTS (CONTINUED) ii) Other projects include: a) The Disaster Recovery Data Centre, which will ensure business continuity of ICT operations on the occurrence of a disaster at the primary site. The systems under this project are Email System, LUKU, iScala (Financial System) and HiAffinity (Billing System) also termed as Business Critical Systems. The project is completed. b) Supply, Installation, Commissioning and Configuration of equipment for Corporate Data Centre: Phase 1 of the project was completed in February 2016 and the cost was Shs 1.4 billion. This project aims at providing reliable infrastructure for business systems. Phase 11 is upcoming and estimated to cost Shs 400 million this will include network infrastructure and other accessories, c) The Corporate Management System (CMS) project is an enterprise wide project to implement the state of art Enterprise Resource Planning (ERP). The project will be implemented in phases under supervision of the consulting firm Deloitte Consulting Ltd. Implementation time is 18 months after sourcing the contractor. The basic module on financials will be the first to be implemented within one year of the project implementation period. The estimated costs covering capex and operating expenses in five years is estimated at Shs 86 billion. d) The Integrated Security Management System project that will encompass three (3) modern security systems including, access Control, Intruder Alarm Fence and Closed Circuit Television (CCTV). The installation will cover Head Office, National Grid Control Centre, Kurasini Central Stores and 33kV Substation at Ubungo. The project is expected to cost USD 1,491,814.50. The project is at advertisement stage. 12. TRANSMISSION SYSTEM REHABILITATION AND UPGRADES Completed Projects include the following: During the year ended 30th June 2016 transmission network rehabilitation projects have been completed and other projects still in progress, these include; * Upgrade of 132/33kV Ubungo substation by installing two 90 MVA, 132/33kV and two 15 MVA, 33/11kV Transformers, * Installation and commissioning of busbar protection at Kihansi, * Installation and commissioning of busbar protection at Kidatu, * Construction of new 45MVA, 220/132/33kV Mabuki substation, * Major overhaul of ABB circuit breakers for the Ubungo, Tegeta,,Chalinze, Hale, Pangani, Tanga (Majani Mapana), Babati, Mbulu, Karatu, Kondoa and Mtera substations. Total cost for the project is Shs 2.4 billion. 18 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 12. TRANSMISSION SYSTEM REHABILITATION AND UPGRADES (CONTINUED) Completed Projects include the following (Continued); * Installation of 60MVA, 220/33kV Transformer at Mwakibete Substation in Mbeya still under defects liability period up to May 2018, * Installation of 45MVA, 132/33kV Transformer at Chalinze substation. This is one component of the project for installation of transformers at Mwanza, Shinyanga, Tanga and Chalinze. Total cost for the project was USD 8.9 million and Shs 2.1 billion, * Rehabilitation of 220kV Ubungo - Morogoro transmission line by replacing insulators and improving grounding, and * Construction of Chato 33kV switching station. New Construction Projects in Pipeline; * Extension of Kurasini - Kigamboni 132kV Transmission line and construction of Kigamboni 132/33kV substation, * Termination and construction of 220/33kV substation at Luguruni, Dar es Salaam, * Construction of Zuzu - Mbande 132kV transmission line, * Installation of 300MVA - 220/132/33kV, 35MVA -220/33/11kV and 15MVA - 66/33/11kV transformers at Ubungo, Mufindi and Sumbawanga substations respectively, * Supply, installation and commission of 65MVA, 132/33kV transformer at Kunduchi, * Major rehabilitation of 2 X 150MVA, 220/132/33kV transformers at Ubungo substation, * Supply, installation and commissioning of Advanced Power Quality Analyzers and PQ Monitoring System, * Replacement of aged insulators on 220k32V Shinyanga - Bulyanhulu transmission line and, * Rehabilitation and upgrade of Musoma, Nyakato - Mwanza and Sabasaba - Mwanza, 33/11 kV substations. 13. RESULTS AND DIVIDEND During the year ended 30th June 2016, the Group incurred a net loss of Shs 349,555 million (18 month to 301t June 2015: Loss Shs 126,066 million). Since there is still significant accumulated losses, the directors do not recommend the payment of dividend (30h June 2015: Nil). 19 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 14. RISK MANAGEMENT AND INTERNAL CONTROL In a good Corporate Governance, the key function of the Board of Directors of the Company envisioning to examine the internal control and risk management. The board accepts final responsibility for the risk management and internal control systems of the Company. It is the task of management to ensure that adequate internal financial and operational control systems are developed and maintained on an on-going basis in order to provide reasonable assurance regarding; i. The effectiveness and efficiency of operations; ii, The safeguarding of the Company's assets; iii. Compliance with applicable laws and regulations; iv. The reliability of accounting records; v. Business sustainability in normal and adverse conditions; and vi. Responsible behaviors towards all stakeholders. The efficiency of any internal control system is dependent on the strict observance of prescribed measures. There is always a risk of non-compliance of such measures by staff. Whilst no system of internal control can provide absolute assurance against misstatement or losses, the Company system is designed to provide the board with reasonable assurance that the procedures in place are operating effectively. The Board assessed the internal control systems throughout the financial year ended 301h June 2016 and is of the opinion that they met accepted criteria. Company risk management is a process affected by the Board of Directors, management and other personnel, applied in strategy setting and across the Company, designed to identify potential events that may affect the company and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of company objectives. The Company's risk management philosophy encompasses a set of shared beliefs and attitudes which set out how TANESCO considers risk in everything it does from strategy setting to day-to-day operational activities. It influences culture and operating style including how risks are identified, the kind of risks accepted and how they are managed. The Company's risk management philosophy is continually captured in policy statements, oral and written communications to stakeholders, staff and in every decision making. The Board of Directors carries risk and internal control assessment through Audit and Risk Committee (ARC). 20 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 15. SOLVENCY The Board of Directors confirms that applicable financial reporting standard have been followed and that the financial statements have been prepared on a going-concern basis. The Board has reasonable expectation that TANESCO has adequate resources to continue in operational existence for the foreseeable future. Additional information pertinent to the solvency of the Company is given below: The Company requires financial support from the Government of United Republic of Tanzania to pay for capacity and energy charges in order to continue operating in the foreseeable future. The Government has been consistently showing commitment in assisting the Company. The directors are of the opinion that the Government acknowledges the Company's financial difficulties and it will not recall its loan that the Company has defaulted paying. The Government has continued funding the Company despite the default. Additionally, the Government of Tanzania has confirmed its commitment of providing financial support to TANESCO in order to continue operating on a going concern basis. The Government has been partly financing rural electrification projects through its agency, the Rural Energy Agency (REA), through capital grants 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 projects and rehabilitation of distribution and transmission networks. 16. EMPLOYEES' WELFARE Management and Employee's Relationship (i) Industrial Relationship There was a continued positive relation between employees/Labour Union and Management during the year ended 301h June 2016. No industrial unrest was reported apart from disciplinary cases to employees engaged in unethical behaviour. Management and the trade union have continued to work together in pertinent issues for the betterment of the employee's welfare and the Company. The trade union has fully participated under the electricity sub sector reforms both internally and at National level under the supervision of the Ministry of Energy and Minerals. (ii) Employment The Company is an equal opportunity employer. It gives equal access to employment opportunities to both males and females and free from discrimination of any kind and without regard to factors like gender, marital status, tribes, religion and disability which does not impair ability to discharge duties. 21 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 16. EMPLOYEES' WELFARE (CONTINUED) Management and Employee's Relationship (Continued) During the year ended 30th June 2016, the Company recruited 667 new employees to fill the gaps of employees who retired, passed away, terminated and those from approved establishment in respective years. Below table illustrate employment category and gender. Period No. of staff Technical Non-Technical Gender Employed Male Female Jul 2015 - Jun 2016 667 488 179 569 98 Jan 2014 - Jun 2015 739 376 363 595 144 During the same year, a total of 251 employees (18-month period ended 30th June 2015: 419) ceased to be employees of the Company due to retirement, death, termination on disciplinary grounds and resignation. (iii) Capacity Building. During the year ended 301h June 2016 the Company utilized Shs 3.9 billion (18-month period ended 30t June 2015: Shs 6.5 billion) for staff training at Corporate level in order to improve employee's technical skills and productivity. The Company trained 903 employees (18-month period ended 30h June 2015: 4,385) in various capacity building programs. The 806 staff were trained locally and 97 staff were trained abroad through funding from international agencies i.e. Government of India, World Bank, European Union, JICA, AfDB and others. TANESCO Training Schools (TTS) conducted 35 training programs (18-month period ended 301h June 2015: 34) with 105 training sessions (18-month period ended 30t" June 2015: 95) to improve employee's skills and productivity at the company. A total of 2,245 (18-month period ended 30th June 2015: 2,239) employees were trained at TTS out of which 816 employees (18-month period ended 30th June 2015: 1,156) were trained under the TANESCO-JICA Project for Capacity Development of Efficient Distribution and Transmission systems program (The Project was completed and handed over to TANESCO on 31st March 2016 after 6.5 years of implementation). The programs delivered at the Schools were divided into two categories i.e. Technical (1,423 employees participated) and Non-technical (822 employees participated). During this year a total of Shs 4.01 billion was utilized as the training costs at TTS (18-month period ended 30th June 2015: Shs 3.5 billion). Performance Management and Productivity During the year ended 30th June 2016 the two categories which are; Performance Contract for Principal Officers, Managers, Senior Managers and Deputy Managing Directors. 22 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 16. EMPLOYEES' WELFARE (CONTINUED) Performance Management and Productivity Also One Minute Goal individual appraisal model for the rest of the employees by evaluating various targets set for each employee, One Minute Goal (OMG) is administered on a monthly basis while performance contracts are evaluated on a quarterly basis. During the year ended 30th June 2016 the Company continued with review of performance management process and policy with the aim of strengthening control and improving productivity in line with its strategic aims, The proposed performance management policy and process are set for implementation in the financial year 2016/2017. Medical Assistance During the year ended 301h June 2016 the Company continued to implement its Medical Scheme to all employees and dependents as stipulated under the policy. The Scheme is fully covered country wide up to the district level. AAR Health insurance assist the Company to administer the scheme from the control perspective (Verification of bills). The reviewed HIV/AIDs Policy came into effect in year 2014 after approval of the Board. Implementation of HIV and AIDS Programs has continued by providing Nutritional Food Supplements to infected employees, Conducting Voluntary Counseling and Testing and Training Peer Educators in all our regional, district and power generation plant offices. The Company is soon launching Smart Card and Biometric System for the Medical Scheme where employees and dependents will be using Smart Cards/Biometric system. The system is intended to improve control of the Scheme. Health and Safety The Company has made efforts to ensure that Occupational Health and Safety is maintained and adhered to by all employees. Accident prevention has been the core and foremost goal where all major accidents are investigated and mitigation measures implemented. To raise level of awareness to employees of different discipline, the Company has conducted various trainings among others includes Disaster Preparedness and Response Plan (DPRP) and CPR, MV/LV certification course, re-categorized linesmen safety training and Lock Out and Tag Out (LOTO). Also the Company conducted public safety awareness campaign to primary and secondary schools students, college students as well as public meetings on safety to villagers especially on newly electrified villages as well as through media on "TANESCO NA MAENDELEO" TV program. Employees Benefit Plans During the year ended 30' June 2016 the Company paid Shs 32,784 million (18-month period ended 30th June 2015: Shs 35,074 million) as contributions to publicly administered Pension plans (i.e. Parastatals Pension Fund (PPF), National Social Security Fund (NSSF), Public Service Pensions Fund (PSPF), Local Authority Pension Fund (LAPF) and Government Employees Pensions Fund (GEPF). 23 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 16. EMPLOYEES' WELFARE (CONTINUED) Persons with Disabilities it is the Company's policy to accept disabled persons for employment for those vacancies that they are able to fill. In the event of members of staff becoming disabled, every effort is made to ensure that their employment with the Company continues and appropriate training is arranged. It is the Company's policy that training, career development and promotion of disabled persons are identical to that of other employees. 17. GENDER PARITY During the year ended 30th June 2016, the Company had 6,812 employees (18-month period ended 30th June 2015: 6,328 employees), out of which 1,360 were female and 5,452 were male. (18-month period ended 30th June 2015: Female 1,288 and Male 5,040). 18. RELATED PARTY TRANSACTIONS Details of transactions and balances with related parties are included in note 37 to the financial statements. 19. POLITICAL AND CHARITABLE DONATIONS The Company did not make any political donations during the year ended 30th June 2016 (18-month period ended 30th June 2015: Nil), the company donated only to charitable organizations. The total donations made during the year amounted to Shs 50 million (18-month period ended 30th June 2015: Shs 88 million). 20. ENVIRONMENTAL CONTROL PROGRAMME The Company continues to manage environmental and social management measures in compliance with national laws and regulations and national and international environmental standards. For all new projects the company undertake Environmental and Social Impact Assessment (ESIA) and Environmental Auditing (EA) of existing power infrastructures. It also implementing Environmental and Social Mitigation and monitoring measures for all ongoing to comply with Environment Impact Assessment (EIA) certificates and lenders requirements. The Company has been in compliance with the Environmental Management Act Cap 191 and Environmental Impact Assessment and Audit Regulations of 2005. In working with development partners the Company has observed different policies such as World Bank OP 4.01 Environmental Assessment; OP.4.04 - Natural Habitats; OP 4.12 - Involuntary Resettlement; Japan Bank for International Cooperation Guidelines for confirmation of Environmental and Social Considerations and African Bank Safeguard policies. In order to improve Company environmental performance, the Company established its unit headed by Manager to spearhead the environmental and social management measures. 24 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 20. ENVIRONMENTAL CONTROL PROGRAMME (CONTINUED) The company is in the process of establishing its Company Environmental Management System (EMS) that will include environmental policy, objectives, performance targets, and mode of communicating environmental performance and feedback and identification of areas of improvement. In 2016/17, as the first step, it will start to establish Company Environmental Policy. The Company must receive ESIA clearance certificates from the National Environmental Management Council (NEMC) before implementing any project. Therefore, during the year 2015/16 the Company has undertaken a number of Environmental and Social Impact Assessments and Environmental Audit studies for various projects using internal capacity and some in collaboration with external consultants. While some impact assessments and audits have been completed, the ESIA and EA process for some projects will continue to be implemented in year 2016/17. The projects include; 1. Environmental and Social Impact Assessment (ESIA) and Resettlement Action Plan (RAP) Studies:- a) ESIA and RAP for Mtwara - Lindi 132kV Transmission Line. b) ESIA and RAP for Somanga 250MW CCG. c) ESIA for Mbeya - Tunduma 400kV Transmission Line (under Zambia - Tanzania - Kenya power interconnector project). d) ESIA for Lake Ngozi exploration drilling for geothermal power. e) ESIA and RAP for Geita - Nyakanazi 220kV Transmission Line. f) RAP study for Rusumo - Nyakanazi 220kV Transmission line. g) ESIA for Electrification of Rural Areas of Katavi and Rukwa regions h) North - West Grid Extension phase II and Ill (Nyakanazi (Kabale) - Kigoma - Mpanda 400kV Transmission line) and Mpanda - Sumbawanga 400kV transmission line. i) RAP for Bulyanhulu - Geita 220kV Transmission line updates. j) ESIA for Upgrade and extension of telecommunication infrastructure and enhancement of SCADA System for 10 substations and 5 existing 220kV (Mufindi - Mbeya and Singida - Mwanza), 132kV (Mwanza - Musoma and Shinyanga - Tabora) and 66kV (Kondoa - Babati - Mbulu - Karatu) transmission lines under AfDB funding. k) Strategic Environmental Assessment for the Power System Master Plan update I) Environmental and Social Impact Assessment (ESIA) for construction of TANESCO office buildings (Somanga Residential Complex in Kilwa District, Mtwara, and Kibaha training school). m) ESIA for Hale Hydropower Plant Rehabilitation project. 25 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 20. ENVIRONMENTAL CONTROL PROGRAMME (CONTINUED) II. Environmental Audit and Monitoring for the:- a) Environmental audit for Tunduru thermal power station b) Environmental and social monitoring for Kihansi catchment management for the hydropower station c) Monitoring of implementation of Environmental and Social Management Plan (ESMP) for Backbone Transmission Investment Project (BTIP) 400kV TL d) Monitoring of implementation of ESMP for Singida - Namanga (ZTK) 400kV TL e) Environmental audit for Kigoma Power Station f) Environmental monitoring for Ubungo I Power station g) Environmental monitoring and ESMP implementation for Kinyerezi I and II gas power plants h) Environmental audit for Pangani Hydro system Also during the year ended 301h June 2016, the Company has continued to acquire land for the implementation of the project using existing laws particularly the Land Act No. 4 of 1999, the Land Acquisition Act of 1967, the Land Regulations of 2001 and other amendments that has followed since 2001. As some projects are being financed by other development partners, the land acquisition process has gone further to fulfil both the requirement of the country and that of development partners' policies such as World Bank, African Development Bank, International Finance Company, and JICA. The main challenge is shortage of funds that has caused delay in payment of compensation money, increase of land value, multiple projects at the same time and lack of appropriate tools and equipment. Shortage of funds has caused some of the environmental mitigation and management plans not to be implemented on time causing grievances from project affected people. However, using its little resources, the Company has continued to receive and resolve complaints from dissatisfied project affected people (PAPs). In spite of all the challenges, EIA certificates have been obtained, contractors have been handed over site as required and the projects have been constructed almost on schedule 26 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE DIRECTORS (CONTINUED) 21. CORPORATE SOCIAL RESPONSIBILITY The Company has continued with commitment towards sustainable energy supply without undue compromise to human and environmental development in line with business strategies towards building strong social value with the community. Reliable service delivery, ethical behavior, responsive and accountable to customers' needs and interests through various business re- engineering processes focusing on improving corporate image are some of the measures that have been taken to abide with corporate social responsibility. The Board of Directors has approved the Corporate Social Responsibility Policy, which guides all donation and contributions made by TANESCO to the society. The social responsibilities are in health, social welfare, education and environmental categories and the company sets aside budget every year to cater for all Corporate Social Responsibility activities. During the year ended 301h June 2016, apart from other donations and contributions (see item no. 19, political and charitable donations), the Company continued to provide medical and transport services to citizens who live nearby the Hydro power stations. Such services are provided at Kidatu, Hale Pangani, Mtera and Kihansi Hydro Power Stations. The Company also provides financial assistance on the occasional basis to the nursery and primary schools at Kidatu and Mtera. 22. AUDITORS The Controller and Auditor General (CAG) is the statutory auditor of the Company by virtue of Article 143 of the Constitution of the United Republic of Tanzania of 1977 as amplified under section 10 (1) of the Public Audit Act No. 11 of 2008. However, in accordance with Section 33 of the same Act, KPMG was authorized to carry out the Audit of Tanzania Electric Supply Company Limited for the year ended 30th June 2016 on behalf of the Controller and Auditor General to assist the CAG in forming the audit opinion. BY ORDER OF THE BOARD Chairman: Dr. Alexander L. Kyaruzi Date .. -EK45L 1_____ 611bJ0[7 Director: Mr. David E. Alal Date 27 TANZANIA ELECTRIC SUPPLY COMPANY LIMITED STATEMENT OF DIRECTORS' RESPONSIBILITIES FOR THE YEAR ENDED 30th JUNE 2016 The Directors are responsible for the preparation of the consolidated and separate financial statements that give a true and fair view of the Tanzania Electric Supply Company Limited and its subsidiary comprising the consolidated and separate statements of financial position as at 30th June 2016, and the consolidated and separate statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and the notes to the financial statements, which include a summary of significant accounting policies and other explanatory notes, in accordance with International Financial Reporting Standards and in the manner required by the Companies Act, 2002. The directors are also responsible for such internal control as the directors determine is necessary to enable the preparation of the consolidated and separate financial statements that are free from material misstatement, whether due to fraud or error, and for maintaining adequate accounting records and an effective system of risk management. The directors have made an assessment of the ability of the Company and its subsidiary to continue as going concern and have no reason to believe that the business will not be a going concern in the year ahead. The auditor is responsible for reporting on whether the consolidated and separate financial statements give a true and fair view in accordance with the applicable financial reporting framework. Approval of financial statements The consolidated and separate financial statements of Tanzania Electric Supply Company Limited apd,its subsidiary, as identified in the first paragraph, were approved by the Board of Directors on . O 25j. ). and signed by: Chairman: Dr. Alexander L. Kyaruzi Date Director: Mr. David E. Alal Date (28) TANZANIA ELECTRIC SUPPLY COMPANY LIMITED DECLARATION OF HEAD OF FINANCE The National Board of Accountants and Auditors (NBAA) according to the power conferred under the Auditors and Accountants (Registration) Act. No. 33 of 1972, as amended by Act No. 2 of 1995, requires financial statements to be accompanied with a Statement of Declaration issued by the Head of Finance responsible for the preparation of financial statements of the entity concerned. It is the duty of a professional accountant to assist the Board of Directors to discharge the responsibility of preparing financial statements of an entity showing true and fair view position of the entity in accordance with international accounting standards and statutory reporting requirements. Full legal responsibility for financial statements rests with the Board of Directors as under Directors Responsibility statement on an earlier page. I Renata C. Ndege being the Head of Finance of Tanzania Electric Supply Company Limited hereby acknowledge my responsibility of ensuring that financial statements for the year ended 301h June 2016 have been prepared in compliance with applicable accounting standards and statutory requirements. I thus confirm that the financial statements comply with applicable accounting standards and statutory requirements as on that date and that they have been prepared based on properly maintained financial records. Signed by: . .......... Position: .... . . NBAA Membership No. :.. Date: ...... G ....... . ...2017 (29) TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE CONTROLLER AND AUDITOR GENERAL Chairman, Board of Directors, Tanzania Electric Supply Company Limited P.O. Box 9024 DAR ES SALAAM Introduction I have audited the accompanying consolidated and separate financial statements of Tanzania Electric Supply Company Limited, which comprise the consolidated and separate statements of financial position as at 301h June 2016, and the consolidated and separate statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and the notes to the financial statements, which include a summary of significant accounting policies and other explanatory notes as set out on page 33 to 116. Directors' responsibility for the financial statements The Company's directors are responsible for the preparation of the consolidated and separate financial statements that give a true and fair view in accordance with International Financial Reporting Standards, and in the manner required by the Companies Act, 2002 and for such internal control as the directors determine is necessary to enable the preparation of consolidated and separate financial statements that are free from material misstatement, whether due to fraud or error. Auditor's responsibility My responsibility as auditor is to express an independent opinion on these consolidated and separate financial statements based on my audit. I conducted the audit in accordance with the International Standards on Auditing. Those standards require that I comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated and separate financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated and separate financial statements. The procedures selected depend on my judgment, including the assessment of the risks of material misstatement of the consolidated and separate financial statements, whether due to fraud or error. In making those risk assessments, I consider the internal control relevant to the entity's preparation of the consolidated and separate financial statements that give a true and fair view 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 appropriateness of accounting policies used and the reasonableness of accounting estimates made by Directors as well as evaluating the overall presentation of the consolidated and separate financial statements. (30) TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE CONTROLLER AND AUDITOR GENERAL (CONTINUED) According to Section 9 of the Public Audit Act, 2008, my specific responsibilities are to examine, enquire into, audit and report on the consolidated and separate financial statements of Tanzania Electric Supply Company Limited for the year ended 30th June 2016. In addition, Section 10 (2) of the Public Audit Act, 2008 requires me to satisfy myself that the consolidated and separate financial statements have been kept in accordance with generally accepted accounting principles; reasonable precautions have been taken to safeguard the collection of revenue, the receipt, custody, disposal, issue and proper use of public property, and that the law, directions and instructions applicable thereto have been duly observed, expenditures of public monies have been properly authorised; and to satisfy myself whether the funds generated by Tanzania Electric Supply Company Limited were used exclusively and judiciously to meet eligible expenditure with due regard to economy and efficiency. Further, Section 48 (3) of the Public Procurement Act, 2011 and 269 (1) of the Public Procurement (Good, Works, Non-consultancy Services and Disposal of Public Assets by Tender) Regulation of 2013 requires me to state in my annual audit report whether or not the auditee has generally complied with the provisions of the Law and its Regulations. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion. Opinion In my opinion, .the consolidated and separate financial statements give a true and fair view of the consolidated and separate financial position of the Group and Company as at 30" June 2016, and of its consolidated and separate financial performance and consolidated and separate cash flows for the year then ended in accordance with International Financial Reporting Standards, and in the manner required by the Companies Act, 2002. Emphasis of Matter I draw attention to note 35 to the consolidated and separate financial statements, which describes that the Company is a defendant in an arbitration case filed by Standard Chartered Bank Hong Kong (SCBHK) at the International Centre for Settlement of Investment Disputes (ICSID). Following the final ruling (final award) issued on 12th September 2016, the Company is required to pay SCBHK USD 148.4 million (approximately Shs 324.96 billion) together with monthly interest based on UBOR plus 4% starting from 30th September 2015. The Company has applied for annulment and has been granted stay of enforcement of the award by the High Court of Tanzania. The Directors are of the opinion that it is not probable that any liability will arise as the possibility of losing the application for annulment is unanticipated and that no material losses will arise in respect of the legal claim at the date of these financial statements and hence the Company has not made any provision against the claim in the consolidated and the separate financial statements. (31) TANZANIA ELECTRIC SUPPLY COMPANY LIMITED REPORT OF THE CONTROLLER AND AUDITOR GENERAL (CONTINUED) Report on Other Legal and Regulatory Requirements 1. Compliance with the Companies Act, 2002 As required by the Companies Act, 2002 we report that: * in my opinion, proper accounting records have been kept by the Company; * the individual accounts are in agreement with the accounting records of the Company; and * 1 obtained all the information and explanations which, to the best of my knowledge and belief, are necessary for the purposes of my audit. 2. Compliance with Public Procurement Act, 2011 In view of my responsibility on the procurement legislation, and taking into consideration the procurement transactions and processes I have reviewed as part of this audit, I state that Tanzania Electric Supply Company Limited has generally complied with the requirements of the Public Procurement Act, 2011 and its Regulations of 2013. CO Assa A ITOR ENERAL Office of Controller and Auditor General, National Audit Office, DAR ES SALAAM, Date: (32) TANZANIA ELECTRIC SUPPLY COMPANY LIMITED CONSOLIDATED AND SEPARATE STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30TH JUNE 2016 Consolidated Separate 12 Months 18 Months 12 Months 18 Months to to 301h June to 30th June to 30th June 30* June Note 2016 2015 2016 2015 Shs'm Shs'm Shs'm Shs'm Revenue 9 1,379,740 1,957,756 1,379,740 1,957,756 Cost of sales 10 (1,469,103) (1,746,674) (1,469,103) (1,746,674) Gross (loss)Iprofit (89,363) 211,082 (89,363) 211,082 Other operating income 11 163,331 349,728 163,230 349,767 Operating expenses 12 (274,133) (299,697) (271667) (298,338) Operating (loss)/profit (200,165) 261,113 (197,800) 262,511 Interest income on bank deposits 1,139 1,914 1,139 1,914 Finance cost 13 (158,669) (289,913) (158,669) (289,913) Net finance cost (157,530) (287,999) (157,530) (287,999) Share of loss in associate 21 (792) (208) Loss before tax (358,487) (27,094) (355,330) (25,488) Income tax creditl(charge) 14 8,932 (98,972) 8,932 (98,972) Loss for the year/period (349,555) (126,066) (346,398) (124,460) Other comprehensive income Items that will not be reclassified to profit or loss: Revaluation of property, plant and equipment 2,280,608 - 2,280,608 - Related tax (684,183) - 684,183) - Other comprehensive income, net of tax 1,596,425 - 1-425 Total comprehensive incomel(loss) for the yearlperiod 1,246,870 126,066 1,250,027 124,460 The notes and related statements on pages 41 to 116 are an integral part of these financial statements. (33) TANZANIA ELECTRIC SUPPLY COMPANY LIMITED CONSOLIDATED AND SEPARATE STATEMENTS OF FINANCIAL POSITION AS AT 30TH JUNE 2016 Consolidated Separate 2016 2015 2016 2015 Note Shs 'm Shs 'm Shs 'm Shs 'm Non-current assets Property, plant and equipment 16 6,136,938 2,741,150 6,135,889 2,740,869 Capital work in progress 17 1,367,031 1,737,992 1,367,031 1,737,992 Intangible asset 18 310 928 310 928 Investment property 19 272 453 272 453 Investment in subsidiary 20 - - 1,000 1,000 Investment in associate 21 352 1,145 1,353 1,353 Other investments 22 1,056 1,056 1,056 1,056 Capacity charges prepayment 23 36,202 40,681 36,202 40,681 Restricted deposits/funds 27(b) 60,382 54,551 60,382 54,551 7,602,543 4,577,956 7,603,495 4,578,883 Current assets Inventories 25 12,942 19,339 12,942 19,339 Asset held for sale - 561 - 561 Trade and other receivables 26 218,584 334,692 221,380 335,260 Prepayments 54,410 54,431 54,410 54,431 Withholding tax recoverable 2,010 3,536 2,010 3,536 Restricted deposits/funds 27(b) 12,340 10,724 12,340 10,724 Bank balances and cash 27(a) 129,509 163,686 129,170 163,684 429,795 586,969 432,252 587,535 Total assets 8,032,338 5,164,925 8,35747 5,166,418 Capital and reserves Share capital 28 (a) 986,717 986,717 986,717 986,717 Advance towards share capital 28 (b) 606,751 494,316 606,751 494,316 Accumulated losses (1,926,001) (1,576,446) (1,921,238) (1,574,840) Reserves 2,301,040 704,615 2,301,040 704,615 Total equity 1,968,507 609,202 1,973,270 610,808 Non-current liabilities Deferred tax liability 24 1,080,400 374,993 1,080,400 374,993 Grants 29 2,215,613 1,788,548 2,214,459 1,788,435 Borrowings 30 892,526 843,755 892,526 843,755 Consumer deposits and deferred income 33 21,272 21,165 21,272 21,165 Other employment benefits 31 24,252 24,119 24,252 24,119 4,234,063 3,052,580 4,232,909 3,052,467 (34) TANZANIA ELECTRIC SUPPLY COMPANY LIMITED CONSOLIDATED AND SEPARATE STATEMENTS OF FINANCIAL POSITION AS AT 30m JUNE 2016 (CONTINUED) Consolidated Separate 2016 2015 2016 2015 Note Shs 'm Shs 'm Shs 'm Shs 'm Current liabilities Trade and other payables 32 1,187,238 979,918 1,187,038 979,918 Borrowings 30 637,268 519,126 637,268 519,126 Income tax payable 5,262 4,099 5,262 4,099 1,829,768 1,503,143 1,829,568 1,503,143 Total liabilities 6,063831 4,555,723 6,062,477 4,5,610 Total equity and liabilities 8,032,338 5, 925 8,035,747 5,166,418 The financial statements on pages 33 to 116 were approved by the Board of Directors on C 1 .g 4..and signed on its behalf by: - A