69257 Chişinău Heat and Electricity Supply Institutional and Financial Restructuring Study Phase 2 Final Report October 2011 Submitted to the World Bank by: Economic Consulting Associates Jointly Financed by: Economic Consulting Associates Limited 41 Lonsdale Road, London NW6 6RA, UK tel: +44 20 7604 4545, fax: +44 20 7604 4547 email: peter.robinson@eca-uk.com Contents Acknowledgement The report was produced by a team of experts consisting of consultants from Economic Consulting Associates. The World Bank team consisted of Shinya Nishimura (Task Team Leader), Gary Stuggins, Pekka Kalevi Salminen, Claudia Ines Vasquez Suarez, Alexander Sharabaroff, Sandu Ghidirim (ECSS2), and Pedzisayi Makumbe (ECSSD). Valuable comments on the first phase draft report were received from Messrs. Maria Vagliasindi (Lead Economist, SEGEN), Alexander Berg (Program Manager, GCMCG) and Victor Loksha(Consultant, SEGES). The project team is grateful to the staff of the Ministry of Economy of Moldova and all other Moldovan counterparts for their cooperation. The study is jointly financed by the Energy Sector Management Assistance Program (ESMAP) and Public-Private Infrastructure Advisory Facility (PPIAF). ESMAP is a global knowledge and technical assistance partnership administered by the World Bank and sponsored by official bilateral donors - assists low- and middle-income countries, to provide modern energy services for poverty reduction and environmentally sustainable economic development. ESMAP is governed and funded by a Consultative Group (CG) comprised of official bilateral donors and multilateral institutions, representing Australia, Austria, Denmark, Finland, France, Germany, Iceland, the Netherlands, Norway, Sweden, the United Kingdom, and the World Bank Group. PPIAF is a multi-donor technical assistance facility aimed at helping developing countries improve the quality of their infrastructure through private sector involvement. For more information on the facility see the Web site: www. PPIAF.org. Disclaimer The findings, interpretations, and conclusions expressed in this report are entirely those of the authors and should not be attributed in any manner to the World Bank, or its affiliated organizations, or to members of its board of executive directors for the countries they represent, or to ESMAP and PPIAF. The World Bank and ESMAP/PPIAF do not guarantee the accuracy of the data included in this publication and accept no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement of acceptance of such boundaries. Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 i Contents Contents Acronyms and abbreviations iv  Executive summary v  1  Vertical integration of Chişinău’s DH system 1  1.1  Government order on district heating system restructuring 1  1.2  Objectives for the sector and expected benefits 2  1.3  Legislative and regulatory framework 3  1.4  State acting as owner 4  1.5  Ownership structure 7  1.5.1  Municipal ownership 7  1.5.2  Conclusion on the termination of municipal ownership 8  1.5.3  Government ownership options 9  1.5.4  Subsidiary of CET-2 9  1.5.5  Holding company 10  1.5.6  Transfer of assets 11  1.5.7  Preferred option 11  1.6  Composition and responsibilities of the Board 12  1.7  Financial and accounting perspective 14  1.7.1  Profit and loss 15  1.7.2  Balance sheet 15  1.7.3  Securing a sustainable financial position 18  2  Case studies 19  2.1  Case study of the vertical integration of DH in Bălţi 19  2.1.1  History and basic information about CET-Nord 19  2.1.2  Legislative changes required for integration 19  2.1.3  Corporate governance of the vertically integrated company 19  2.1.4  Performance since vertical integration 20  Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 i Contents 2.1.5  Revenue collection and disconnections 23  2.1.6  Conclusions for Chişinău 23  2.2  International experience on disconnections 23  2.2.1  Competition in district heating 23  2.2.2  Disconnections from the district heating network 24  2.2.3  Command and control measures 25  2.2.4  Economic incentives 25  2.2.5  Customer-focussed performance 26  2.2.6  Conclusions for Chişinău 27  A1  Pro-forma consolidated accounts   A2  Pro-forma combined accounts   Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 ii Contents Tables Table 1: Pro Forma Consolidated Profit and Loss Statement 15 Table 2: Pro Forma Consolidated Balance Sheet 16 Table 3: Impairable value 17 Table 4: 2010 Consolidated Trade Payables 17 Table 5 CET-Nord key performance indicators 2001-2010 22 Figures Figure 1: Separation of ownership and policy functions 7 Figure 2: Government ownership structure options 9 Exchange rate Early 2011 exchange rate approximately 12 MDL/$ Rate used by ANRE in May 2010 tariff round: 12.5 MDL/$ Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 iii Acronyms and abbreviations Acronyms and abbreviations AC alternating current ANRE National Energy Regulatory Agency CET Moldovan for CHP – the firms in Chişinău are CET-1 and CET-2 CHP combined heat and power (cogeneration plant) DC direct current DH district heat DHCAN District Heat in Candidate Countries EC Energy Community (Vienna, Austria) ERRA Energy Regulators Regional Association (Budapest, Hungary) EU European Union GoM Government of Moldova HOB heat only boiler IMF International Monetary Fund kWh kilowatt hour, basic unit of energy used in the electricity sector. Mega-, giga- and tera-watthours for thousands, millions and billions of kWh respectively. MDL Moldovan Lei MoU Memorandum of Understanding OECD Organisation for Economic Cooperation and Development SIDA Swedish International Development Cooperation Agency SoE state owned enterprise TOR terms of reference US United States - $ throughout is US dollar, c refers to US cents. Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 iv Executive summary Executive summary Vertical integration of Chişinău’s DH system The earlier Phase 1 report provided a detailed analytic assessment of the options available for debt and corporate restructuring of the District Heating system in the Municipality of Chişinău and identified the need for strategic longer-term investments to reduce the underlying cost structure in the sector and lay the basis for an efficient and sustainable district heat system in Moldova’s capital. At the workshop organised by the World Bank to discuss the issues raised in the report, a preference was indicated for the immediate vertical integration of Termocom and the CETs. Following the workshop, the Deputy Prime Minister issued an order establishing a Working Group which is required to elaborate and submit the Concept and Action Plan on corporate and financial restructuring, with a draft Government Decision to follow shortly afterwards (in 45 and 60 days respectively). This Phase 2 report is a contribution to the materials on which the working group will draw in order to complete its mandate. The first part of this Phase 2 report calls for clarity in the objectives to be pursued and the identification of the framework for the restructuring, which should orient the resulting state owned enterprise (SoE) to operate as a commercial business. Guided by the OECD Guidelines on Corporate Governance of State Owned Enterprises, we recommend that Government’s roles of owner and policy maker in the district heating sector should be clearly separated: The energy and economic policy making function should be implemented through policy directions being provided to ANRE, which over time should develop an incentive-based regulatory regime for the sector. The ownership function should be implemented through strategic objectives being provided to a three person Stakeholder Executive Committee, constituted by the Ministry of Economy, and which draws on skills in the Corporate Governance Department and the Agency for Public Property. This committee would inter alia would be empowered to make board appointments, monitor performance and hold the Board of Directors to account. Professionalism and competence are to be the determining factors in the composition of the Board of Directors. The Board is to give direction to the internal management of the newly integrated company, including the relentless pursuance of the commercial objectives for the longer term benefit of the district heat customers and the wider Moldovan economy. Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 v Executive summary Noting previous governance failures and the lack of financial capacity of the Municipality, the report definitely rejects the continued ownership of Termocom by the Municipality of Chişinău. At a later stage, there may be private ownership but at this juncture, ownership should be transferred to Government, because it is only the Government which has the financial capacity and the unambiguous interest in the long term financial sustainability of Termocom to secure the governance, while also taking the other essential step of resolving the legacy debt issue. The report then considers various options for the structure of the district heating sector under Government ownership to best achieve the objectives of the vertical integration (subsidiary of CET-2, holding company and transfer of assets to a new corporate entity). The transfer of assets approach may have the largest short-term costs, but is the option reportedly preferred by key stakeholders, including the major creditor and potential private sector investors. Financial and accounting perspective Based on company accounts to 31 December 2010, pro-forma consolidated accounts have been produced for the amalgamation of Termocom and CET-2. The consolidated profit and loss account shows a small positive balance, as expected from the tariff-setting by ANRE. The report highlights the need for asset impairments to be taken into account in the consolidated balance sheet, and highlights the rapid growth in trade receivables from the population struggling to pay the higher tariffs which were applied in 2010 (from MDL 513.1 million to MDL 693.2 million). The Phase 1 report recommended that a working capital credit facility be set up, but in the continuing absence of this, the increase is being funded by a rise in trade payables. In other words, suppliers are continuing to fund Termocom’s cash flow requirements, a situation which cannot be sustained. Integration of Termocom and CET-2 will not, by itself, secure any of the reforms and improvements necessary to put the Chişinău district heat system onto a sustainable footing. A government-funded resolution of the historical debt issue remains the first priority in this regard, accompanied by the regulatory reforms identified in the Phase 1 report and the corporate governance reforms highlighted in this report. Case study of the vertical integration of the DH system of Bălţi The district heating (DH) system of Bălţi was vertically integrated in the year 2000 in response to a Government directive. The Law on Joint Stock Companies allows for the kind of restructuring of companies which took place, so no specific legal amendments were needed to make possible the vertical integration of the district heating system in Bălţi. The biggest issue at the time was that the amalgamation involved approximately 280 job losses. The legal framework does not preclude the inclusion of representatives of the business community of civil society on the Board of Directors of CET-Nord, but it would appear this has never been considered. The present Board is composed of three representatives of the Ministry of Economy and one each from the Ministry of Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 vi Executive summary Finance and the State Property Agency. Board members are appointed for one year at a time and attend regular meetings, usually monthly but at least quarterly. Board members from the Ministry of Economy report that they spend on average 1-2 hours per week on CET-Nord matters. Over the post-integration period for which data is available (2001-2010), electricity production and revenues increased significantly while heat revenue growth was driven by tariff increases rather than heat delivered, which grew at an average of only 1% per year. Heat losses were reduced, and impressive revenue collection ratios were achieved, but it was only when heat tariffs were hiked significantly (by 40%) in 2007 that CET-Nord’s financial position moved from losses to a small positive level of profits. Efficiency improvements have been swamped in the tariffs by the dominance of gas procurement costs (70% in 2011). Disconnections are said to be CET-Nord’s biggest problem, but it seems that this refers to the disconnection of large industrial consumers, rather than domestic disconnections or connections overall. Households accounted for 75% of heat consumed in both 2001 and 2010. Total numbers of connections have been static at around 33,000, 98% of which are domestic connections. The overall increase in heat consumption over the period (from 153 th Gcal in 2001 to 178 th Gcal in 2010) is attributed to higher consumption by some categories of consumer, such as schools and hospitals. The conclusions from this case study for Chişinău are that the restructuring of the district heat system in the capital needs to be done purposefully, with full involvement and understanding of key players. The governance recommendations made above need to be followed to properly direct the integration process and ensure thereafter that there is a strong customer focus by the consolidated DH company. International experience of disconnections from DH systems Disconnections from a district heating network have the potential to become a vicious downward cycle which undermines the social benefits of shared system that should benefit from significant economies of scale. Low income domestic consumers would be particularly hard hit because they cannot afford the investments required for autonomous heating and are faced with the rising costs of the DH systems as more affluent customers disconnect. Governments, municipalities and DH companies have responded to disconnections in three main ways: Command and control measures, such as zoning laws which require all potential customers in designated areas to connect to the DH network. Economic incentives, such as two-part tariffs biased towards energy charges even if cost reflectivity points to a different balance, or financial penalties for disconnecting. Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 vii Executive summary Enhanced customer-focussed performance, which encourages customers to remain connected or new customers to join. The third strategy is clearly the most sustainable in the long run, and is also a good complement to the others, for example strong performance by the DH company would blunt any consumer resistance there may be to command and control measures. In the report, examples of the different approaches are cited, these being drawn mainly from Eastern European countries. Noting that it would be inconsistent with Moldova’s commitments under the Energy Community Treaty to resort to severe command and control measures and heavy economic penalties to stop disconnections, it is recommended for Chişinău that the approach to the growing trend towards disconnections should be to work on improving the fundamentals and adopting a much more customer-oriented focus, in line with recommendations already made in this report. That said, the improvements that are needed in these areas will take time to achieve and in the short-run it may be necessary to tighten the provisions available to Termocom to discourage disconnections. This would be a temporary action, pending achieving the level of improvements which will make the bulk of disconnection applicants willing to remain Termocom customers. Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 viii Vertical integration of Chişinău’s DH system 1 Vertical integration of Chişinău’s DH system 1.1 Government order on district heating system restructuring The Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study was divided in two phases. Phase 1 provided a detailed analytic assessment of the options available for debt and corporate restructuring and identified the need for strategic longer-term investments to reduce the underlying cost structure in the sector and lay the basis for an efficient and sustainable district heat system in Moldova’s capital. The Phase 1 report was presented at the Stakeholder Meeting organised by the World Bank on May 23, 2011. In respect of immediate restructuring options, the meeting was broadly in favour of the integration of Termocom with at least one of the cogeneration companies to create a vertically integrated district heat system in Chişinău. On June 1, 2011, Order no 108 was issued by the Deputy Prime Minister on elaboration of the Concept and Action Plan for the corporate and financial restructuring of the District Heating system in the Municipality of Chisinau. The order establishes a Working Group which is required to elaborate and submit, within 45 days, the Concept on corporate and financial restructuring of the District Heating system in the Municipality of Chisinau and the Action Plan for its implementation. A draft Government Decision is to be ready within 60 days. This Phase 2 report is a contribution to the materials on which the working group will draw in order to complete its mandate. The issues explored are areas which were identified during the workshop as requiring further research. This first section deals with different aspects of the proposed vertical integration of the district heating sector, while Section 2 provides a case study of vertical integration of the DH system of Bălţi and a summary of international experience of different strategies to counter disconnections from district heat systems. This first section should be read in the context of the Phase 1 report which highlighted three key recommendations for the future sustainability of the district heat sector: A government-sponsored resolution of Termocom’s acute long-term debt issues. Substantial improvements in the sector’s efficiency to address affordability issues that could further threaten its sustainability; improvements may in particular require investment in new, modern, efficient cogeneration plant. Reform of Termocom’s governance. The justification for these recommendations is given in detail in the Phase 1 report. It is noted there that the integration of Termocom with one or both of the existing cogeneration companies would not by itself resolve the debt issues and would not Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 1 Vertical integration of Chişinău’s DH system be a necessary step for efficiency improvements, although the report identified that integration may help improve dispatch efficiency. The report also noted that governance reforms might be achieved with or without integration and argued that a decision about integration would depend mainly on the policy emphasis of the government. In the light of the discussion during the Stakeholder Meeting, it is recognised that the process of integration would impose change at the ownership and board level and thereby help reduce the risk of governance reforms being undermined by any institutional resistance to change. An important benefit of integration, therefore, is that it maximises the opportunity for governance reform directed towards the necessary efficiency improvements. This section sets out analysis of various aspects of integration which may be helpful for the Working Group. 1.2 Objectives for the sector and expected benefits The process of restructuring and reform should be guided by clearly articulated policy objectives. Taking account of the DH objectives laid out in the Energy Strategy of Moldova, and the analysis in Phase 1, the objectives of the reforms may be stated as being to achieve: a financially sustainable district heating sector in Chişinău providing heat, co-generated electricity and heat-related services efficiently at attractive prices; a sector that is responsive to customer needs; a sector that attracts private sector capital in the form of both debt and equity to support major investments and reinforce financial discipline. The third objective suggests that a premium is to be placed on the views of investors in deciding between alternative options. The expected benefits from pursuing the objectives are first and foremost for the district heating customers. They deserve to be able to buy heat at the lowest price commensurate with efficient provision of the service, to have reliable supplies on a sustainable basis and a company that is responsive to their needs and interests (for example responsive to requests for start and end dates of DH in each heating season). Sustained pursuit of the objectives should deliver these benefits, if not immediately then over the medium term. Benefits will also accrue to electricity consumers when the cross-subsidy from electricity to heat consumers is reduced through new investment and greater efficiency in the system. The private sector objective takes account of government’s constrained investment resources: the benefit of private sector investment in DH would be to release resources for investment elsewhere in the economy as well as Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 2 Vertical integration of Chişinău’s DH system reinforcing financial discipline in the sector, curtailing the possibility of large-scale debts being accumulated in future. 1.3 Legislative and regulatory framework The Phase 1 report considered the broader legislative framework for the sector and noted that there is a lack of a framework Heat Law, although a new Heat Law cannot be regarded as an urgent necessity at present. Since the shares of Termocom are currently owned by the municipality, the transfer of ownership will require either an agreement between the government and the municipality for the transfer of shares or the issue of new shares. The Phase 1 report outlined a possible mechanism involving the transfer of government assets to Termocom (which would fund or form the means of repayment of long—term debt) in consideration of new and existing shares in the company. The precedent of the vertical integration of the district heat system of Bălţi, suggests that no legislative change will be necessary to facilitate or procure the share transactions (see Section 2.1.2 below). Although a full review of the legislative framework for state owned enterprises has not been carried out, as this was outside the terms of reference for this study, it would appear that the framework is adequate for the restructured heat sector to operate effectively. Whether any refinements are needed should be considered in relation to factors determining the ability of the resulting state-owned enterprise (SoE) to be governed and to operate as a commercial business: the rights and duties of directors of the SoE; annual financial reporting; access to commercial finance; clarity in the relationships with state owned banks and other financial institutions; separation of the roles of government as shareholder, as policy maker and as economic and market regulator; clarity in obligations and responsibilities in terms of public services beyond generally accepted commercial norms (public service obligations); non-exemption to laws and regulations generally applicable to commercial enterprises, including competition law and the rights of creditors. Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 3 Vertical integration of Chişinău’s DH system 1.4 State acting as owner Of central importance to governance reform will be clarity in the Government’s participation in corporate governance as owner. Government’s role as policy maker needs to be distinguished from its role as owner. The essential principle here is that the policy and ownership functions of government with respect to state owned enterprises (SOEs) are to be kept separate. The policy functions of government apply both to state owned and private enterprises; in a regulated sector such as district heating, the policy is set by the responsible Ministry and is implemented by the regulatory agency. The ownership function for an SOE is simply the counterpart of the governance arrangements in a private corporate setting – owners appoint a Board of Directors and hold this Board accountable for the performance of the company. In a state owned enterprise setting, the Government in its ownership capacity similarly appoints a Board of Directors and holds it accountable for financial and commercial performance. The required functions are to: Establish and participate in well structured and transparent board nomination processes. Ensure that remuneration schemes for board members foster the long term interest of the company and can attract and motivate qualified professionals. Establish clear financial and commercial objectives for the business and a framework to monitor performance against those objectives. Monitor financial and commercial performance on quarterly or annual basis as appropriate, ensuring the board is providing meaningful and high quality performance information. Maintain continuous dialogue with auditors and relevant state control organs. Operate on a transparent basis so that the government and interested parties more generally can see that the business is being governed in a professional and objective manner. The individuals appointed by Government to carry out these tasks should have a balance of skills and experience in managing and setting strategic aims for large and complex businesses, monitoring business performance, selecting candidates for senior positions and working with government, regulators and other state bodies. For the district heating sector, corporate governance should facilitate professional and effective management of the SoE, focused on clear commercial and customer- oriented objectives within an economic framework overseen by the economic regulator, ANRE. This has implications for: Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 4 Vertical integration of Chişinău’s DH system the required skills and experience of the directors of the SoE; the process for selection and appointment of directors; the scope for the board of directors to have full operational autonomy to make commercial decisions in pursuit of defined commercial objectives; the accountability of the board of directors for the decisions it makes; the process and the grounds for removal of directors; the scope and transparency of any intervention in the sector by the government to further its policy objectives. The discussion below is informed by the ‘OECD Guidelines on Corporate Governance of State-Owned Enterprises’, in particular the principle that: “There should be a clear separation between the state’s ownership function and other state functions that may influence the conditions for state owned enterprises, particularly with regard to market regulation� To give effect to this principle, international best practice would be to establish a body, a ‘Shareholder Executive Committee’, made up of professional and experienced individuals to exercise its ownership rights and participate in corporate governance in furtherance of the defined commercial objectives of the SoE. In the context of the urgent issues in the district heating sector of Chişinău and the relatively small size of the country and hence the pool of people on which to draw, it would be most appropriate for the Shareholder Executive Committee to be simply a committee formed within the Ministry of Economy, with no separate institutional structure, but with the roles and orientation laid out in the OECD Guidelines. The group could be very small, composed of perhaps three individuals chosen for their experience in the governance of large and complex businesses. The committee is to be constituted by and meet within the Ministry, drawing on the expertise in existing relevant departments such as the Corporate Governance Department and the Agency for Private Property. Other than payment for the participation of any outside members chosen for their special expertise, there would not be any budgetary implications. As previously outlined, and reiterated here in more detail, the principles to guide the separation of policy and ownership roles of government are as follows: The Shareholder Executive is responsible for the normal ownership role activities in the realm of corporate governance, including making board appointments. The government interventions in the sector in pursuit of wider policy objectives are made in the form of transparent directions addressed to ANRE, not to the SoE itself, for ANRE to effect through its economic regulatory framework for the SoE. Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 5 Vertical integration of Chişinău’s DH system ANRE should be encouraged to develop an incentive-based regulatory regime, recognising the role of financial performance, reputational incentives and management incentives for SoEs, to create alignment between customer interests and, where appropriate, policy directions from Government, and the commercial objectives of the SoE, the reporting of its performance and its management incentive arrangements The Board of Directors, appointed by the Ministry of Economy, will be responsible for company resolutions, monitoring performance, appointing senior managers and holding them to account, determining remuneration and management incentive arrangements, maintaining a statement of defined commercial objectives for the SoE and making recommendations to the government on any matters relevant to the commercial objectives of the SoE. Where appropriate, the government may require specified classes of actions by the Shareholder Executive Committee or the Board of Directors to be recommended for approval by ministers, but on the basis that ministers shall give reasons for any departure from the recommendations. Mirroring reporting requirements of ANRE, the Shareholder Executive Committee should be required to publish annual reports on its activities. The following diagram illustrates how a clear separation between the state’s ownership and policy functions would be maintained through the separate regimes of the economic regulator, ANRE, and the Shareholder Executive Committee. Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 6 Vertical integration of Chişinău’s DH system Figure 1: Separation of ownership and policy functions Government Energy and economic Ownership policy function function Shareholder  ANRE Executive Incentive�based Performance�based regulatory regime governance regime State�owned enterprise The composition and responsibilities of the Board of Directors is the next element of governance to be described. This is done in Section 1.6 below, but first we consider different options for the ownership structure of the DH enterprise. 1.5 Ownership structure 1.5.1 Municipal ownership The ownership of Termocom was transferred from the Government to the Municipality in October 1999. With the benefit of hindsight, this was a counter- productive move. Under the ownership of the Municipality of Chişinău, the main governance failure that arose was that heat tariffs were persistently set at levels well below those necessary for cost recovery, with the result that Termocom and upstream entities built up levels of debt large enough to be of national concern. The fact that the scale of the accumulated debts of the company has become too great for a resolution at a local level highlights an inherent accountability issue: Termocom is too big an enterprise for the Municipality to be realistically held accountable for its financial sustainability. The prospect of a State-backed resolution to the current debt crisis underlines the economic hazard. The Government should not be put in a position where it is forced to take on large liabilities due to governance weakness. An obvious immediate solution to this is for Government itself to be the owner and hence to ensure a governance framework that emphasizes Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 7 Vertical integration of Chişinău’s DH system financial sustainability. A competent private owner, committed to financial profitability, would be another option. The immediate symptom of this governance failure has been addressed by giving ANRE responsibility for tariff setting. However, that does not solve the underlying governance issue. Other tensions between local policy objectives, for example relating to employment or enforcement of consumer debt, may in future displace financial management as a primary objective for the owners. This leads us to the conclusion that an important condition for longer term financial sustainability of Termocom will be an owner with the financial capacity to underwrite the company’s governance, thereby ensuring the owner has an unambiguous interest in the company’s long term financial management. The current debt crisis can be attributed to the fact that Termocom has not had that owner. One of the consequences of the debt crisis has been to undermine longer term governance of the whole sector. The debt issue has certainly dominated analysis of the sector, the relationships between the parties and the context for longer term planning and investment. Critically, however, the governance weakness is primarily sourced in Termocom, the principal customer for heat in the sector and the party with the relationship with consumers. It would be natural for Termocom to play a central role in the strategic development of the sector, as it is best placed to focus on the implications for tariff levels and service levels for its own customers. A governance weakness in Termocom is therefore liable to translate to a governance weakness in the entire sector and vice versa. 1.5.2 Conclusion on the termination of municipal ownership The strong conclusion to be drawn from the above is that remedying the governance weakness in Termocom will require the transfer of Termocom to a more suitable owner. In the first instance, this will have to be the Government of Moldova – at a later stage the aim should be to bring in private sector participation. At this juncture, it is only the Government which has the financial capacity and the unambiguous interest in the long term financial sustainability of Termocom to secure the governance, while also taking the other essential step of resolving the legacy debt issue. It is recognised that the ownership transfer may not be the preferred route of the Municipality of Chişinău, but it is necessary for all parties to come to terms with the ‘facts of life’ however unpalatable these may be. Termocom’s net asset position is substantially negative. The only entity that can settle the very large legacy debts is the Government, and in current fiscal circumstances the only feasible route is an equity injection (in the form of tangible assets) which is used by the Government to acquire the ownership of the shares of the Termocom. The Municipality was abdicating its responsibilities as owner when it suppressed tariffs for a protracted period, and in so doing it in effect forfeited the ownership of the district heat network Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 8 Vertical integration of Chişinău’s DH system 1.5.3 Government ownership options There are many possible mechanisms for the transfer of ownership of Termocom to the government or a government-owned body. These would include the acquisition of existing shares or subscription to a sufficient number of new shares to acquire control1. In the case of an acquisition of existing shares, the valuation of those shares would be practically zero, given the substantial negative net asset position of the company. In the case of subscribing to new shares, consideration could take the form of a reduction in the level of debt payable to CET-2 or in the form of a transfer of assets. Such a transfer of assets could form part of the mechanism for the government-sponsored resolution of the outstanding long term debts to external parties. Some of these options were discussed in the Phase 1 report. There are also a number of possible ownership arrangements. The diagram below summarises four possible ones. Figure 2: Government ownership structure options ` Co�owned Subsidiary of CET�2 Holding company Transfer of assets Government Government Government Government Shareholder  Shareholder  Shareholder  Shareholder  Executive Executive Executive Executive Termo Newco CET�2 CET�2 Newco com Termo CET�2 com Termo Termo CET�2 com com The first option, a co-owned arrangement, was one of the options discussed in the Phase 1 report but attendees at the Stakeholder Meeting on May 23 2011 favoured the creation of a vertically integrated district heat system in Chişinău. The other arrangements in the diagram represent the three main corporate options for this integration. 1.5.4 Subsidiary of CET-2 This option would involve the transfer of Termocom’s shares or acquisition of new shares in Termocom by CET-2, possibly paid for through a reduction in the amounts payable to CET-2 by Termocom. The board of CET-2 would exercise board-level control of the vertically integrated group. 1 Other possible mechanisms would include the liquidation of the Termocom company and the transfer of its assets and business as a going concern to a new company. Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 9 Vertical integration of Chişinău’s DH system The advantages and disadvantages of this option are: Advantages Could be relatively simple to effect because there would be no need for a new organisation to be established The Board of CET-2 would be able to combine activities where it sees scope for greater efficiency or effectiveness, and keep activities separate where the costs of combining them do not exceed the benefits Disadvantages Governance reforms may be more difficult to implement through a board that already exists With two separate companies, accounting will involve allocation of shared costs where activities are combined 1.5.5 Holding company This option would involve the transfer of Termocom’s shares or acquisition of new shares in Termocom to a new company (Newco), possibly paid for through a transfer of assets by the Government. In addition, the Government would need to transfer its existing shares in CET-2 to the new company. The board of Newco would exercise board-level control of the vertically integrated group. The advantages and disadvantages of this option are: Advantages Newco could be established in accordance with modern standards of corporate governance, along the lines envisaged in this report, reducing the risk of resistance from an existing board New composition of the controlling Board would represent a ‘shake-up’ By managing the combined entities on a group basis, the Board of Newco would be able to combine activities where it sees scope for greater efficiency or effectiveness, and keep activities separate where the costs of combining them do not exceed the benefits Disadvantages It would require the administrative effort involved in establishing a new company With two separate operating companies, accounting will involve allocation of shared costs where activities are combined Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 10 Vertical integration of Chişinău’s DH system 1.5.6 Transfer of assets This option would involve the transfer of Termocom’s business, its assets and (some of) its liabilities to Newco, by agreement, legislation or by a liquidator of the existing Termocom company. Simultaneously, there would be a transfer of the business, assets and liabilities of CET-2 to Newco. The board of Newco would exercise board- level control of the vertically integrated company. The advantages and disadvantages of this option are: Advantages As with the holding company option, Newco could be established in accordance with modern standards of corporate governance, along the lines envisaged in this report, reducing the risk of resistance from an existing board New composition of the controlling Board would represent a ‘shake-up’ Avoids the need for accounting for cost allocations of shared costs at the company level (but see below) The board of Newco would be able to combine activities where it sees scope for greater efficiency or effectiveness, and keep activities separate in separate operating divisions of the company where the costs of combining them do not exceed the benefits. We understand that a transfer of assets is the structure preferred by potential private investors who have been sounded out about possible interest in the district heating system of Chişinău. It is also the preferred option of the major creditor. Disadvantages This would be the most complex option to put into effect, both legally and in accounting terms There may be a need to maintain separate accounting of generation and heat distribution activities for disclosure and regulatory tariff setting purposes The loss of full accounting separation may complicate possible future options, for example the acquisition of the heat distribution business by a CET-3 1.5.7 Preferred option It is understood that the immediate transfer of assets is the structure preferred by potential private investors who have been sounded out about possible interest in the district heating system of Chişinău. Similarly, it is understood that the transfer of assets model is also the preferred option of the major creditor and other Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 11 Vertical integration of Chişinău’s DH system stakeholders who believe that there will be merit in the medium term from a major shake-up in the district heating sector. The challenges are firstly to carry out the closure of CET-1. The plant at CET-1 should have been closed a long time ago. It is fit only for scrap or perhaps an industrial museum, but its closure will nonetheless require careful and sensitive planning as it must inevitably involve some loss of employment. The CET-1 site is very valuable, because it already has connections to all the networks (gas, water, electricity, district heat) that a future investor in district heat generation would require. The dismantling of CET-1 should therefore be done with an eye to the intention to attract a private investor to the site at some point in the future. The second challenge is to transfer the assets of CET-2 and Termocom so as to maximise those benefits while minimising the short-term direct and indirect disruption costs. Accounting is one of the functions to be considered for merger across the two companies, but it would be difficult to over-emphasize the importance of ensuring that accounting separation of the heat generation and heat distribution businesses is maintained in the vertically integrated enterprise. This is important both for effective management and for proper regulation of heat tariffs by ANRE. The necessary governance reforms are most likely to be implemented effectively with the creation of a new company and the appointment of a completely new Board. It is strongly recommended that the new company be established and the new Board appointed prior to any transfer of shares or assets. 1.6 Composition and responsibilities of the Board The two pivots in corporate governance are the Board of Directors and the body exercising the ownership function and holding the board to account, in this case a Shareholder Executive Committee. Adopting the transfer of assets option in the previous section, the relevant board would be the Board of Directors of the new company, Newco. The ‘OECD Guidelines on Corporate Governance of State-Owned Enterprises’ states that: “The boards of state-owned enterprises should have the necessary authority, competencies and objectivity to carry out their function of strategic guidance and monitoring of management. They should act with integrity and be held accountable for their actions.� The Shareholder Executive Committee would be responsible for board nominations, monitoring performance and maintaining appropriate remuneration and incentives for the board members. The OECD guidelines indicate that the Shareholder Executive Committee would: Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 12 Vertical integration of Chişinău’s DH system establish well structured and transparent board nomination processes; actively participate in the nomination of board members; set up reporting systems for regular monitoring and assessment of performance; maintain continuous dialogue with auditors and relevant state control organs; ensure that remuneration schemes for board members foster the long term interest of the company and can attract and motivate qualified professionals. The OECD guidelines for SoEs, which reflect generally accepted best practice for corporate governance more widely, have profound implications for the membership of both the Shareholder Executive Committee and the board of directors. They imply an emphasis on competence and experience to ensure that the members of both bodies are able to exercise their functions professionally. This will mean drawing at least some members from the small population of people who have proven experience and necessary track records in the management of commercial enterprises – in Moldova and outside Moldova Separation of the ownership and policy making functions in the government’s dealings with the SoE, as we strongly recommend in Section 1.4 above, means that the Shareholder Executive and the Board of Directors can both be focused on professional management and commercial objectives. In turn, this means that corporate governance can be safely modelled on what works for successful commercial enterprises anywhere in the world. Professionalism and competence are the guiding characteristics. The membership of the board of directors should be constructed to provide a balance of skills, experience and strength of characters who will: operate as an effective team, well-led, focused on the government’s commercial objectives for the enterprise; reform and direct the internal management of the constituent businesses within the group towards those objectives; work positively and effectively with the enterprise’s stakeholders, including employees, ANRE, customers, suppliers, other participants in the energy sector, the municipality, the Shareholder Executive and the government more widely; welcome the invigorating effect and reputation-building potential of transparent performance reporting, demanding disclosure requirements, monitoring by the Shareholder Executive and scrutiny by the media and other interests in Moldova and outside the country; Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 13 Vertical integration of Chişinău’s DH system pursue the enterprise’s commercial objectives relentlessly for the longer term benefit of its customers and the wider Moldovan economy. In line with best practice, an appropriate composition of the Board of Directors is likely to include the following: A non-executive chairman, experienced in senior corporate positions, effective at coordinating and guiding the board members and the work of the board, encouraging the active involvement of individual board members in the strategic guidance of the enterprise and ensuring that the board is able to operate independently from and as a balance to the executive management of the enterprise. Non-executive directors able to bring deep experience of business management in Moldova and outside Moldova to the benefit of the enterprise’s management. The Chief Executive and other key members of the Executive Management Board. Besides having some overlapping membership, the Executive Management Board falls under the main Board of Directors and would include: A chief executive, an effective leader of the executive management of the enterprise, accountable to the Board as a whole and responsive to the strategic guidance of the Board. A chief financial officer, an executive position responsible for the integrity of the enterprise’s internal and external financial and performance reporting and for securing and aligning the group’s financial resources towards its strategic aims. A chief operating officer, or possibly two, one each for cogeneration and heat distribution activities. 1.7 Financial and accounting perspective Since carrying out the field work for our Phase 1 report, the companies in the district heating sector have issued financial statements for the year ended 31 December 2010. We have taken the opportunity to prepare proforma accounts for the proposed integrated enterprise by consolidating the financial statements of the two operating companies, Termocom and CET-2. The following statements are summaries of our full consolidation, which we set out in detail in Annex A1. Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 14 Vertical integration of Chişinău’s DH system 1.7.1 Profit and loss The following table sets out a summarised pro forma consolidated profit and loss account for the proposed district heating group comprising Termocom and CET-2 (under a holding company). Table 1: Pro Forma Consolidated Profit and Loss Statement 2010 2009 MDL million MDL million Sales 1,757.2 1,457.3 Cost of sales (1,696.9) (1,602.3) Gross profit (loss) 60.4 (145.1) Other operating income 47.5 28.6 Business expenses (8.4) (8.7) General and administrative expenses (36.9) (39.5) Other operating expenses (53.6) (42.5) Operating profit (loss) 8.9 (207.2) Investing, financing and tax (0.8) (0.8) Net profit (loss) 8.2 (208.0) The profit for the year in 2010 and the turnaround since 2009 reflects the transfer of tariff setting responsibility to ANRE for 2010 and the application of its methodology. The results are not markedly different to those projected by ANRE in the tariff calculations described and commented on in the Phase 1 report. It appears that Termocom has not made material provision for further doubtful debts, an issue highlighted in the Phase 1 report. The more interesting issues are in the balance sheets. 1.7.2 Balance sheet The following table summarises the consolidated pro forma balance sheet. Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 15 Vertical integration of Chişinău’s DH system Table 2: Pro Forma Consolidated Balance Sheet 2010 2009 MDL million MDL million Tangible and other long-term assets 1,790.6 1,823.6 Stocks of goods and materials 99.0 90.7 Customer receivables: population 692.6 513.1 Customers in litigation 67.2 65.6 Adjustments for doubtful debts (55.7) (55.7) Other trade receivables 223.8 279.7 Other short-term receivables 63.1 47.0 Cash 40.4 22.8 Total current assets 1,130.4 963.1 Total assets 2,921.1 2,786.8 Total equity 275.6 275.1 Long-term trade payables 1,793.2 1,719.9 Other long-term liabilities 24.6 27.8 Long term liabilities 1,817.8 1,747.7 Short-term financial liabilities 24.7 0.8 Short-term trade payables 774.4 727.6 Other short-term liabilities 28.5 35.5 Total short-term liabilities 827.7 764.0 Total assets 2,921.1 2,786.8 The balance sheet shows a relatively small level of positive equity under the accounting basis used by the companies . However, we identified in the Phase 1 report two issues where there is evidence of material impairment: long term assets, where ANRE’s tariff setting methodology ascribes no return to assets acquired before 2003, rendering them substantially worthless in financial terms for the companies, and amounts receivable from the population, where the questions of affordability we raised in the Phase 1 report suggest there should be significant doubt over recoverability. As the table below shows, the potential impairable amount is very large in relation to the reported level of equity in the two companies. Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 16 Vertical integration of Chişinău’s DH system Table 3: Impairable value Termocom CET-2 Total Zero-return assets 398.6 1,204.7 1,603.3 Net from population 704.1 704.1 Impairable value 1,102.7 1,204.7 2,307.4 At present, Termocom is economically and in practical terms insolvent, while CET-2 generates relatively small profits. Combining two companies cannot by itself resolve the inherent insolvency problem in Termocom – the combined group will remain economically and in practical terms insolvent. The positive equity shown in the pro forma balance sheet very materially misstates the actual financial position of the group. The central problem the group will face is the accumulated trade payables, payable mainly to Moldovagaz and other companies in the Gazprom group (amounts payable to CET-1 in the table below are mirrored by amounts it in turn owes those same companies). Table 4: 2010 Consolidated Trade Payables Long-term Short-term Total CET 1 148.7 380.1 528.8 Moldovagaz 1,235.6 113.9 1,349.4 Chisinau gaz 9.5 249.9 259.4 MoU parties 1,393.7 743.9 2,137.6 Other creditors 399.5 30.5 430.0 Trade payables 1,793.2 774.4 2,567.6 Our Phase 1 report highlighted our conclusion that debt problem cannot be resolved within the district heating sector and that the only credible routes to resolve the legacy debt problem will require funding by the Government of Moldova. The 2010 accounts show that the outstanding amounts receivable from the population in Termocom have increased markedly, from MDL 513.1 million to MDL 693.2 million. We remarked in the Phase 1 report that these amounts were liable to increase with the increase in tariffs, and will need to be funded. This is because tariffs are set at levels that broadly cover costs, but do not cover the cost of funding working capital. The accounts show that the increase in receivables was funded by increases in trade payables. In Termocom’s own accounts, the increase in receivables was closely matched by increases in payables to CET-2 and CET-1. Suppliers are continuing to fund Termocom’s cash flow requirements, a situation that cannot be sustained. Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 17 Vertical integration of Chişinău’s DH system 1.7.3 Securing a sustainable financial position As already stressed, the debts are of a scale where Government has to intervene, and a debt-asset swap is the most feasible route to pursue. Once a transaction is agreed with the ultimate creditor, the reciprocal clearing of debts in the district heating chain would have to be effected. As well as the necessity of a government-funded resolution of the historical debt issue, we highlighted in our Phase 1 report a number of reforms in regulation and improvements in management that would be required to ensure that the district heating sector will be placed on a sustainable footing. We cannot overstate the fact that integration of Termocom and CET-2 will not, by itself, secure any of these reforms and improvements. They will only be secured by a combination of the regulatory reforms indentified in the Phase 1 report and the corporate governance reforms highlighted in this report. Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 18 Case studies 2 Case studies 2.1 Case study of the vertical integration of DH in Bălţi 2.1.1 History and basic information about CET-Nord At the behest of the Government of Moldova (GoM), the cogeneration plant CET- Nord was amalgamated with the district heat network company of the city of Bălţi in the year 2000. From that time, CET-Nord has been a vertically integrated district heating company, owned by GoM. The initial amalgamation involved some job losses. CET-Nord had 380 employees before integration, while the network company had around 500, making 880 in all. Approximately 280 jobs were lost during the integration, with the present number of employees of CET-Nord being around 580. Only some of the posts are full-time as there are a significant proportion of the jobs are part time or seasonal. This is because the plant only operates during the winter months. Unlike Termocom, CET- Nord does not supply hot water to its customers during the summer. The company has installed thermal capacity of 342 GCal/hr and electrical generation capacity of 24 MW. The fuel is natural gas, with oil as a back-up. The total population of Bălţi is around 150,000 people, the majority of whom have access to the district heat network. 2.1.2 Legislative changes required for integration The main instruments defining the legal framework for cogeneration and district heating are the Energy Law, the Electricity Law, the Law on Joint Stock Companies and the Resolution of the Government on the National Energy Regulatory Agency. The Law on Joint Stock Companies allows for the kind of restructuring of companies which took place in 2000, so no specific legal amendments were needed to make possible the vertical integration of the district heating system in Bălţi. In such cases, a general meeting of shareholders is required by law, but with both companies being 100% state owned, a Government decision determines the outcome. In this case, the decision was recorded in Government of the Republic of Moldova decree no. 415 dated May 2, 2000, after which the companies were merged. 2.1.3 Corporate governance of the vertically integrated company From a governance standpoint, CET-Nord falls under the Ministry of Economy. The Board of Directors of CET-Nord is composed of five people, three from the Ministry of Economy, one from the Ministry of Finance and one from the State Property Agency. The board members have always been drawn exclusively from government structures. The legal framework does not mandate that all the board members should be from government and does not preclude the inclusion of representatives of the business community or civil society. It would appear that the idea of Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 19 Case studies appointing someone from outside of government to be a board member has simply never been considered. Since the state is the sole owner of the company, in the appointment of Board members there is no need of a special general meeting of the shareholders. Board members are appointed by the Ministry of Economy for a period of one year at a time, during which no delegation is allowed. If no significant decisions have to be adopted at a meeting, it can take place provided that 3 members of the 5 are present at the meeting. However, if there is a serious decision to be taken at the meeting and someone is not able to attend, then the meeting will be postponed for everyone to be present. Board meetings take place normally every month, but not less than once in a quarter. The meetings are normally held in Chişinău. At these meetings various issues related to the company are discussed, particularly investments and preparation for the cold season. Written reports are not prepared for the Board, except for the standard financial reports on a quarterly and annual basis. Board members from the Ministry of Economy report that they spend on average 1-2 hours per week on CET-Nord matters. 2.1.4 Performance since vertical integration Table 5 gives time series of a number of key performance indicators over the first full nine years of the vertical integration period. The table shows a number of important trends and achievements: electricity supplied to the network grew significantly over the period by an annual average of 5.8%; this was made possible by a higher load factor being achieved (this rose from less than 50% to over 70% over the period, measuring the load factor over the winter months only); with electricity tariffs increasing by 14.6% per year, electricity revenue grew by 24% per year, increasing its share in total revenues from 23% to 30%; by contrast, heat supplied grew by only 1% per year, but with tariffs rising by 14.2%, billable heat revenues grew by nearly 16% per year; collection of heat tariff revenues improved markedly from 68% to over 100% (ie collection of arrears as well as current revenues) over the period 2004-2006, and has been in the range of 84%-96% since then; heat losses were reduced from 26% to as low as 20% but increased again to 22% in 2010; despite the achievements of collection rates above 100% and reduced heat losses in the network, it was only in 2007, when tariffs were Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 20 Case studies increased in one year by a massive 40%, that the financial position of CET-Nord moved from overall losses to small positive profitability. The last point needs further elaboration. During the period up to 2005, Moldova was importing gas at sub-economic prices. When the import price was raised significantly over the years from 2006 onwards, it became imperative to increase electricity and heat tariffs to keep pace. In 2008, ANRE was given responsibility for tariff-setting for CET-Nord and since then tariffs in Bălţi have moved towards full cost recovery levels. The management of CET-Nord feel that they have made some significant improvements in efficiency over the last decade, but that these fail to be noticeable for the consumer because of the dominance of the gas price in determining the overall cost-recovery tariff. Gas procurement costs constituted 66% of total costs in 2010 and 70% in 2011. Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 21 Case studies Table 5 CET-Nord key performance indicators 2001-2010 Units 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 AAG Electricity production GWh 44.4 40.6 52.5 57.7 67.8 74.7 67.7 67.4 66.5 70.0 5.8% Own consumption GWh 12.9 13.0 13.7 12.6 12.2 12.8 12.3 12.2 13.0 12.9 -0.4% Supply of electricity to the network GWh 31.5 27.6 38.8 45.1 55.5 61.8 55.4 55.2 53.5 57.1 7.8% Heat production th Gcal 217.4 210.1 255.3 238.7 247.5 242.8 208.2 211.3 221.3 239.9 -0.1% Own consumption th Gcal 11.3 11.6 9.3 9.2 14.0 19.3 13.9 11.4 14.7 11.5 2.7% Supply of heat to network th Gcal 206.1 198.5 246.0 229.5 233.4 223.5 194.2 199.8 206.5 228.4 -0.2% Losses of heat � absolute th Gcal 53.2 59.0 60.9 59.0 48.9 45.5 38.5 39.5 39.2 50.4 -4.1% Losses of heat � proportional % 25.8% 29.7% 24.8% 25.7% 20.9% 20.4% 19.8% 19.8% 19.0% 22.1% Heat delivered to customes th Gcal 152.9 139.5 185.1 170.5 184.6 178.0 155.8 160.3 167.3 178.0 1.0% Prime cost of 1 kilowatt hour bani/kWh 38.3 44.4 41.8 42.3 37.6 49.3 65.6 89.0 101.1 98.4 12.6% Prime cost of 1 Gkal MDL/GCal 302.2 376.8 329.5 338.7 314.6 367.8 486.4 667.7 798.7 852.3 12.5% Proceeds from the sale of electricity th MDL 12,129 10,659 14,944 17,392 21,835 24,964 38,435 52,537 56,998 64,009 24.0% Proceeds from the sale of heat th MDL 41,489 40,078 52,921 49,571 55,189 53,228 71,639 107,441 131,511 148,257 15.9% Total proceeds from sales th MDL 53,618 50,737 67,864 66,963 77,024 78,192 110,074 159,979 188,508 212,266 18.0% Tariff 1 kilowatt hour bani/kWh 38.6 38.6 38.6 38.6 39.5 40.4 61.3 92.8 106.6 111.1 14.6% Tariff 1 Gkal MDL/GCal 292.5 286.0 286.0 292.5 299.0 299.0 419.5 653.3 786.0 848.5 14.2% (Losses) profit th MDL -4,792 -14,762 -7,903 -7,781 -1,586 -15,391 1,003 4,145 7,805 4,279 Collections of heat revenues th MDL 28,317 38,147 50,303 53,619 59,881 58,951 59,946 96,345 110,590 142,858 16.8% % collections 68.2% 95.0% 96.0% 107.0% 108.5% 110.8% 83.5% 89.7% 84.1% 96.4% Units 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 AAG Note: AAG = average annual growth (calcuated with a regression formula) Phase 2 Final Report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 22 Case studies 2.1.5 Revenue collection and disconnections Despite average incomes being lower than in Chişinău and the heat tariffs being higher (848.5 MDL/GCal in Bălţi vs 727.2 MDL/GCal in Chişinău in 2010), CET- Nord has been able to achieve high revenue collection rates, over 96% in 2010. These collection rates apply to the connected customers, of course. Some of those disconnecting may be doing so because of inability to pay heat bills, which are considerably higher now in real terms than they were a decade ago. Disconnections are said to be CET-Nord’s biggest problem, but it seems that this refers to the disconnection of large industrial consumers, rather than domestic disconnections or connections overall. Households accounted for 75% of heat consumed in both 2001 and 2010, but within the remaining 25% there was a change in composition with large industry being substituted by commercial consumers and small industries, including households registering as enterprises. In terms of total numbers of connections, there were 33,190 in 2001 and 33,615 in 2010, of which 32,785 and 33,241respectively were domestic consumers. With numbers of connections almost static over the nine year period, the overall increase in heat consumption from 153 th Gcal in 2001 to 178 th Gcal in 2010 (see Table 5) is attributed to higher consumption by some categories of consumer, such as schools and hospitals. 2.1.6 Conclusions for Chişinău The restructuring of the district heat system in Chişinău needs to be done purposefully, with full involvement and understanding of key players. Clear objectives need to be spelt out by Government as the owner as well as the policy maker. A properly constituted Board needs to be appointed at an early stage to direct the integration process. Particular attention is to be paid to the needs of any staff who may be made redundant by corporate consolidation. To reduce the risk of further customer disconnections from the Termocom network, customer focus needs to be made central in everything the newly integrated company does going forward. 2.2 International experience on disconnections2 2.2.1 Competition in district heating As noted in the Phase 1 report (Section 4.2.3), under the influence of the competition-oriented energy policies of the European Union, many countries with 2 This section draws on a number of sources including International Energy Agency (2004): Coming in from the Cold – Improving DH Policy in Transitional Economies; OECD, DHCAN Project – District Heating in Candidate Countries (2003): Towards a Modern Customer-Driven District Heating System in Debrecen BRE and Euroheat and Power, Watford, U.K. and Brussels and other DHCAN reports; Oxera Consulting Ltd (2011): Assessment of DH market regimes in 8 countries, Fortum; Pilot Co-Project of ERRA and Fortum (2011) Benchmarking District Heating in Hungary, Poland, Lithuania, Estonia and Finland Executive Summary Report Phase II report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 23 Case studies district heating are moving towards competition in the generation of heat. The idea is to provide a framework that encourages producers to compete to supply heat to the company or companies operating the network and distributing heat to final customers. A much more widespread, indeed all but universal, form of competition relates to the choice consumers have over the source they will use to obtain the heat they require. They can choose between obtaining heat from the shared district heating system or can opt out, and obtain heat from other sources. Consumers pursuing the ‘autonomous heating’ route typically have to make significant investments in equipment, such as, in a domestic setting, a gas-fired boiler and the associated pipework for a self-contained central heating system within their apartment or house. The size of such investments is such that when a consumer who is presently obtaining heat from the DH network decides to disconnect and install an autonomous heating system, the decision is one which is not readily reversed and thus has long-term consequences. From a social benefit-cost viewpoint, the socially optimum situation is one in which all consumers within an economic distance of the DH network are supplied from the shared system. This is because there are significant economies of scale in the production, transmission and distribution of heat. On the production side, unit costs of heat tend to be lower from a large heat source, particularly a cogeneration plant where the heat is produced as a by-product of electricity generation and would otherwise be wasted. On the transmission and distribution side, the per unit capital, operating and maintenance costs are much lower if the number of customers being served by each part of the network is maximised. In particularly, to minimise the burden on individual consumers, the costs of the losses in the network need to be shared amongst as many customers as possible. 2.2.2 Disconnections from the district heating network If customers are free to choose between heat sources and a significant number of them choose to disconnect at some point in time, the DH company can easily get into a vicious downward cycle. When customers start disconnecting, a precedent is created and further momentum will be given to the disconnection trend when service declines due to declining revenues and/or the heat tariff is increased to try to cover the costs which can no longer be spread over the original customer base. The social benefit of a shared DH network will thereby be undermined and ultimately may disappear altogether. Low income domestic consumers are particularly hard hit because they cannot afford the investments required for autonomous heating and are faced with the rising costs of the DH system as more affluent customers disconnect. To prevent this happening, governments, municipalities and district heating companies have adopted a number of strategies, which for analytical purposes can be grouped into three main categories: Command and control measures Economic incentives Phase II report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 24 Case studies Enhanced customer-focussed performance These approaches apply equally to strategies to increase the number of new connections. Discussion of each of these approaches is presented in the sections which follow. 2.2.3 Command and control measures In a range of different countries, laws require customers to remain connected to the district heat network, or at least require that disconnection applications be scrutinised by the DH company, which is given the power to refuse the application. Zoning requirements, that is geographically specified areas within which all buildings are required to be connected to the district heating system are very common. Countries as diverse as Denmark, Estonia, Latvia, Lithuania, Norway and Switzerland have established the legal basis for DH zoning. There are clearly major advantages to command and control approaches. Debrecen in Hungary provides a good example. Designated district heated zones were fixed by the local municipality law in 1999. The law covered both new customers, who were not allowed to choose an alternative heating method, and existing customers, who were not allowed to disconnect. It is reported that the zoning law not only improved the economic stability of the district heating company, but also reduced air pollution in the city. 2.2.4 Economic incentives When customers wish to disconnect in apartment blocks with vertical pipe systems, the disconnected customer will continue to receive some heat from the DH system. To avoid this ‘free rider’ heat imposing a cost on other consumers, a charge is often levied. In principle, this could be set at a level which is well above what is justified by the amount of heat that will continue to be delivered in order to provide a disincentive to disconnection. In the case of Termocom, the increase in the charge to disconnected customers still benefiting from vertical pipes is considered by many in Chişinău as a deliberate disconnection disincentive, whereas the increase from the pervious level of 5% of the heat bill for those disconnected is actually based on studies by the Academy of Science of Moldova3. Where consumer-level control of heat is possible within a DH system, two-part tariffs are common and can be structured to discourage disconnections. Two-part tariffs which are set to recover capital costs may have a high fixed charge and a relatively small energy charge. This structure gives consumers very little flexibility and control over their heating bill and this may encourage some to opt for autonomous heating. On the other hand, if the major part of the DH bill is based on the energy charge and not the capital charge, consumers can reduce their bill by saving energy, and in this situation the consumer will not be motivated to disconnect. 3For example, if the air temperature is 5 degrees, the Academy estimates that those disconnecting should pay 10.3% of their previous level of payment. Phase II report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 25 Case studies Fötáv is the DH company in Budapest. Its two-part tariff has a 70% fixed charge and a 30% variable charge. This leads to a situation where customers who need little heat or use an apartment only occasionally would want to disconnect. However, in Budapest, such consumers are obliged to remain connected because disconnection can take place only if the whole block votes for it. By contrast, two part tariffs in Poland have a relatively low capacity charge and have greater reliance on the energy charge to generate the revenue needed within the DH sector. This is the outcome of an amendment made in 2000 to the 1997 Energy Law which stipulated that the fixed production, transmission and distribution costs in district heating systems may constitute no more than 30% of total heat charges, even if the actual fixed costs constitute a higher share of required revenues. 2.2.5 Customer-focussed performance The third approach to obviating disconnections is for the district heating company to continuous work at delivering a cost effective, customer-oriented shared district heating service that out-performs autonomous heating systems. In principle, this is clearly a superior strategy as it does not depend on measures to be taken to force customers to behave in a certain way, but in practice the approaches are not mutually exclusive. The use of zoning or other measures which have some degree of coercion will not be socially acceptable unless these are accompanied by satisfactory performance from the DH company. In this regard, it is significant that in the first example from Hungary given above in Section 2.2.3, the municipal zoning law was introduced in Debrecen at a time when a range of other measures were being taken, which over a few years resulted in significantly improved efficiency and lowered costs. Other examples of customer focussed performance by DH companies leading to low disconnection rates are: Estonian cities, where it is estimated that district heating has price competitiveness of between 20% and 40% as compared with available alternatives (individual gas or pellet boilers or electrical heating) and the market share of district heating is over 80%. Vilnius in Lithuania, where the improved performance brought about through the 2002 concession agreement with the French operator Dalkia resulted in disconnections ceasing and new connections increasing at 2% per year. Sofia and Pernik in Bulgaria improved service provision under a $34m World Bank project and over a 5 year period increased connection rates from 85% to 96% and 63% to 85% respectively (exceeding the planned targets by a wide margin). In Budapest, Hungary, the strategy used by the district heating company to keep buildings/institutions maintained by local authorities as DH customers is to sign agreements with the boroughs to carry out Phase II report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 26 Case studies energy saving analyses for the buildings supplied with district heating. These studies provide good solutions for reducing the operational costs of investments financed by the boroughs, and at the same time ensure these buildings remain within the district heating system for the long- term. 2.2.6 Conclusions for Chişinău Compounding a growing trend in Chişinău in recent years, the present situation is one in which there would appear to be many heat consumers who would like to disconnect from the Termocom network and opt for autonomous, gas-based autonomous heating. This would have adverse consequences for the company and for the remaining customers, a large proportion of whom are low income households unable to access alterative sources of heat. It would be inconsistent with Moldova’s commitments under the Energy Community Treaty to resort to severe command and control measures and heavy economic penalties to stop disconnections. The approach should rather be to work on improving the fundamentals and adopting a much more customer-oriented focus, in line with the orientation discussed in Section 1 of this report. That said, the improvements that are needed in these areas will take time to achieve and in the short-run it may be necessary to tighten the provisions available to Termocom to discourage disconnections, pending achieving the level of improvements which will make the bulk of disconnection applicants willing to remain Termocom customers. In this regard, it is important to note that autonomous heating is universally regarded as being more expensive than Termocom supplied heat, so there is already an incentive, or at least a perceived incentive, for Termocom customers to remain connected. The prime motivations for disconnection are dissatisfaction with the quality of service received from Termocom and a desire to have direct control over heat received. These are both areas which Termocom can address: improving efficiency and customer focus should be key short-run goals during the period in which the vertical integration is taking place. Consumer level control over their own heating will take longer as it requires investment, but the Maria Drăgan pilot project has shown what can be achieved. Phase II report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 27 Pro-forma consolidated accounts A1 Pro-forma consolidated accounts Annex contents: Company accounts for the year to 31 December 2010 – from Annex I/1 Consolidated adjustments for the year to 31 December 2010 – from Annex I/9 Pro-forma Consolidated DH Group accounts for the year to 31 December 2010 – from Annex I/15 It should be noted that our working assumption, and recommendation, is that the vertical integration would involve TERMOCOM and CET-2 only: CET-1 would remain a separate company. The new combined group would still have amounts payable to CET-1 (MDL 528.9m as shown in Note 2 on Annex I/19). Broadly, this amount is similar is scale to other amounts payable in turn by CET-1 to Moldovagaz and Chişinău Gaz, although, from the more detailed returns in respect of 2009, the amounts payable to Moldovagaz and Chişinău Gas appear to be slightly smaller. There would appear to be no reason why the adjustments, by themselves, would have any substantive implications for CET-1 or why its legal position should in any way be affected. Phase II report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 Annex I: Pro Forma Consolidated Accounts Termocom Moldova Lei Accounts for the year to 31 December 2010 Note 2010 2009 LONG TERM ASSETS Intangible assets Intangible assets 010 5,545,312 4,065,092 Amortization of intangible assets 020 (2,906,424) (1,468,662) Total 030 2,638,888 2,596,430 Long-term tangible assets Active materials in progress 040 33,839,625 35,556,804 Land 050 Fixed assets 060 1,345,145,030 1,278,802,234 Natural Resources 070 Depreciation and depletion of long-term tangible assets 080 (832,506,748) (767,700,000) Total 090 546,477,907 546,659,038 Long term financial assets Long-term investments unrelated parties 100 72,010 72,010 Long-term investments in related parties 110 Change the value of long-term investments 120 Long-term trade receivables 130 Deferred income tax assets 140 Advances 150 Total 160 72,010 72,010 Other long term assets 170 TOTAL LONG TERM ASSETS 180 549,188,805 549,327,478 CURRENT ASSETS Stocks of goods and materials Materials 190 24,043,539 21,921,409 Growth and fattening animals 200 Items of small value and short duration 210 282,301 315,248 Production in progress 220 Products 230 Commodities 240 25,352,534 25,342,578 Total 250 49,678,374 47,579,235 Short-term receivables Short-term trade receivables 1 260 859,646,708 731,080,338 35% incr. in due from population Adjustments on doubtful receivables 270 (55,683,060) (55,683,060) No change Short-term receivables related parties 280 Short-term advances 290 11,949,311 6,204,423 Short-term receivables on settlements with the budget 300 5,056,216 2,532,515 Claims accrued 310 16,920,869 9,853,361 Short-term receivables of staff 320 52,183 77,762 Short-term receivables calculated on income 330 624,045 532,888 Other short-term debt 340 24,148,190 25,986,545 Total 350 862,714,462 720,584,772 Short-term investments Short-term investments in unrelated parties 360 Short-term investments in related parties 370 Decline in value of short-term investments 380 Total 390 Cash House 400 43,198 6,398 Current accounts in local currency 410 25,989,492 17,784,829 Current accounts in foreign currency 420 8 418 Other funds 430 23,253 41,722 Total 440 26,055,951 17,833,367 Other current assets 450 1,058,140 847,182 TOTAL CURRENT ASSETS 460 939,506,927 786,844,556 TOTAL ASSETS 470 1,488,695,732 1,336,172,034 Annex I/1 Annex I: Pro Forma Consolidated Accounts Termocom Moldova Lei Accounts for the year to 31 December 2010 Note 2010 2009 EQUITY Share capital Share capital 480 32,449,897 32,449,897 Supplementary capital 490 235,227,935 12,120,960 Reclassification as per IFRS Capital paid 500 Capital withdrawn 510 (35,875) (35,875) Total 520 267,641,957 44,534,982 Reserves Reserves established by legislation 530 6,929,630 6,929,630 Reserves provided for by statute 540 78 78 Other reserves 550 130,682,201 130,682,201 Total 560 137,611,909 137,611,909 Retained earnings (uncovered loss) The correction results in previous periods 570 (5,637,062) Retained earnings (uncovered loss) of previous years 580 (1,671,738,611) (1,671,738,611) Net profit (net loss) of period 590 23,648 Profit used for the reporting year 600 Total 610 (1,677,352,025) (1,671,738,611) Secondary Capital Differences from revaluation of long term assets 620 72,393,594 72,630,091 Grants 630 Total 640 72,393,594 72,630,091 TOTAL EQUITY 650 (1,199,704,565) (1,416,961,629) LONG-TERM DEBT Long term financial liabilities Long term bank loans 660 5,701,531 Long term borrowings 670 Other long-term financial liabilities 680 Total 690 5,701,531 Calculated long-term debt Long-term lease liabilities 700 Anticipated revenue long term 710 Grants and Revenues 720 13,749,570 9,452,491 Advances received 730 Deferred income tax liabilities 740 Long-term trade payables 2 750 1,001,236,307 1,001,236,307 Total 760 1,014,985,877 1,010,688,798 TOTAL LONG TERM DEBT 770 1,014,985,877 1,016,390,329 SHORT TERM LIABILITIES Short-term financial liabilities Short term bank loans 780 Short-term borrowings 790 Current share of long-term debt 800 Other short-term financial liabilities 810 712,688 805,615 Total 820 712,688 805,615 Short-term commercial debt Short-term trade payables 3 830 1,654,821,026 1,489,125,139 Amounts owed to related parties 840 Advances received 850 4,611,428 3,477,186 Total 860 1,659,432,454 1,492,602,325 Calculated short-term debt Wages owed to 870 5,381,507 4,155,921 On personal debt to other operations 880 20,072 3,654 Insurance liabilities 890 2,745,355 2,064,062 Debt settlement with the budget 900 838,593 10,902,813 Preliminary Debt 910 Extra payments owed to 920 Amounts owed by the founders and other participants 930 223,106,975 Preliminary expenses and payments related provisions 940 Other short-term debt 950 4,283,751 3,101,969 Total 960 13,269,278 243,335,394 TOTAL SHORT TERM LIABILITIES 970 1,673,414,420 1,736,743,334 TOTAL LIABILITIES 980 1,488,695,732 1,336,172,034 Annex I/2 Annex I: Pro Forma Consolidated Accounts Termocom Moldova Lei Accounts for the year to 31 December 2010 2010 2009 PROFIT AND LOSS STATEMENT Revenue from sales 010 1,060,430,832 795,432,029 33% increase Cost of sales 020 (1,038,628,767) (1,010,431,663) Gross profit (total loss) 030 21,802,065 (214,999,634) Other operating income 040 30,158,379 22,998,730 Business expenses 050 (7,932,223) (7,913,947) General and administrative expenses 060 (12,465,787) (15,989,027) Other operating expenses 070 (31,682,773) (30,547,695) Result from operating activities: Profit (loss) 080 (120,339) (246,451,573) Result from investing activities: Profit (loss) 090 767,188 (150,171) Result from financing activities: Profit (loss) 100 (623,201) 740,604 Result from financial and economic activities: Profit (loss) 110 23,648 (245,861,140) Exceptional result: profit (loss) 120 Profit (loss) before taxation reporting period 130 23,648 (245,861,140) Expenditure (savings) income tax 140 Net profit (net loss) 150 23,648 (245,861,140) 1 January 2010 Profits Other 31 December 2010 MOVEMENTS IN CAPITAL Share Capital and additional Share Capital 010 32,449,897 32,449,897 Supplementary Capital 020 12,120,960 223,106,975 235,227,935 Capital paid 030 Capital withdrawn 040 (35,875) (35,875) Total 050 44,534,982 223,106,975 267,641,957 Reserves Reserves established by legislation 060 6,929,630 6,929,630 Reserves provided for by statute 070 78 78 Other reserves 080 130,682,201 130,682,201 Total 090 137,611,909 137,611,909 Retained earnings (uncovered loss) Correction of results in previous periods 100 (5,637,062) (5,637,062) Retained earnings (uncovered loss) of previous periods 110 (1,671,738,611) (1,671,738,611) Net profit (loss) for period 120 23,648 23,648 Profit utilised in period 130 Total 140 (1,671,738,611) 23,648 (5,637,062) (1,677,352,025) Secondary Capital Differences from revaluation of long term assets 150 72,630,091 (236,497) 72,393,594 Grants 160 Total 170 72,630,091 (236,497) 72,393,594 TOTAL 180 (1,416,961,629) 23,648 217,233,416 (1,199,704,565) Annex I/3 Annex I: Pro Forma Consolidated Accounts Termocom Moldova Lei Accounts for the year to 31 December 2010 2010 CASH FLOW STATEMENT Operating activities Proceeds from sales 010 969,637,615 Cash payments to suppliers 020 (858,664,384) Cash payments to and for employees 030 (86,034,200) Interest Payment 040 (289,617) Income tax 050 (4,093,302) Other cash receipts 060 3,917,426 Other cash payments 070 (10,259,874) Net cash from operating activities 080 14,213,664 Investing activities Proceeds from the output of long term assets 090 Paying money to purchase long term assets 100 Interest earned 110 Dividends received 120 including foreign 121 Other receipts (payments) of funds 130 Net cash from investing activities 140 Financing activities Proceeds from loans and borrowings 150 Payments of loans and borrowings 160 (5,738,148) Payment of dividends 170 including dividends paid to non-residents 171 Proceeds from the issue of own shares 180 Paying money to repurchase its own shares 190 Other receipts (payments) of funds 200 Net cash from financing activities 210 (5,738,148) Net cash flows before exceptional items 220 8,475,516 Exceptional receipts (payments) 230 Net total 240 8,475,516 Exchange differences favorable (unfavorable) 250 (252,932) Cash and cash equivalents at beginning of year 260 17,833,367 Cash and cash equivalents at end of year 270 26,055,951 Note 1 Population 692,602,850 513,089,000 35% increase Other 99,890,191 152,425,338 Customers in litigation 67,153,667 65,566,000 Trade receivables 859,646,708 731,080,338 Note 2 Retelele Electrice 45,960,397 45,960,397 Apa Canal 19,336,270 19,336,270 CET 1 148,700,376 148,700,376 CET 2 458,746,732 458,746,732 Moldovagaz 57,749,467 57,749,467 Chisinau gaz 9,064,338 9,064,338 Other creditors 261,678,726 261,678,726 Other long term liabilities 1,001,236,307 1,001,236,307 Note 3 Retelele Electrice 11,088,908 7,727,421 Apa Canal 334,981 66,426 CET 1 380,115,419 339,080,866 41,034,553 increase CET 2 1,093,559,268 957,966,259 135,593,009 increase Moldovagaz 113,870,874 125,015,870 Chisinau gaz 44,095,739 60,716,694 Other creditors 11,755,837 (1,448,397) Trade payables 1,654,821,026 1,489,125,139 165,695,887 increase Annex I/4 Annex I: Pro Forma Consolidated Accounts CET-2 Moldova Lei Accounts for the year to 31 December 2010 Note 2010 2009 LONG TERM ASSETS Intangible assets Intangible assets 010 752,014 Amortization of intangible assets 020 (298,001) Total 030 423,654 454,013 Long-term tangible assets Active materials in progress 040 82,533,886 84,721,077 Land 050 Fixed assets 060 1,588,942,368 Natural Resources 070 Depreciation and depletion of long-term tangible assets 080 (400,059,144) Total 090 1,240,739,024 1,273,604,301 Long term financial assets Long-term investments unrelated parties 100 260,000 260,000 Long-term investments in related parties 110 Change the value of long-term investments 120 Long-term trade receivables 1 130 1,232,703,244 1,166,587,689 Deferred income tax assets 140 Advances 150 Total 160 1,232,963,244 1,166,847,689 Other long term assets 170 TOTAL LONG TERM ASSETS 180 2,474,125,922 2,440,906,003 CURRENT ASSETS Stocks of goods and materials Materials 190 48,957,017 42,645,003 Growth and fattening animals 200 Items of small value and short duration 210 298,843 358,482 Production in progress 220 27,556 Products 230 1,241 239 Commodities 240 60,645 69,097 Total 250 49,317,746 43,100,377 Short-term receivables Short-term trade receivables 2 260 445,116,537 377,383,087 Adjustments on doubtful receivables 270 Short-term receivables related parties 280 Short-term advances 290 1,466,267 168,555 Short-term receivables on settlements with the budget 300 833,505 Claims accrued 310 Short-term receivables of staff 320 162,329 Short-term receivables calculated on income 330 14,687 80,603 Other short-term debt 340 586,429 554,910 Total 350 448,179,754 378,187,155 Short-term investments Short-term investments in unrelated parties 360 Short-term investments in related parties 370 Decline in value of short-term investments 380 Total 390 Cash House 400 60,146 80,213 Current accounts in local currency 410 14,303,583 4,883,299 Current accounts in foreign currency 420 54 55 Other funds 430 Total 440 14,363,783 4,963,567 Other current assets 450 276,018 176,078 TOTAL CURRENT ASSETS 460 512,137,301 426,427,177 TOTAL ASSETS 470 2,986,263,223 2,867,333,180 Annex I/5 Annex I: Pro Forma Consolidated Accounts CET-2 Moldova Lei Accounts for the year to 31 December 2010 Note 2010 2009 EQUITY Share capital Share capital 480 370,549,590 370,549,590 Supplementary capital 490 Capital paid 500 Capital withdrawn 510 Total 520 370,549,590 370,549,590 Reserves Reserves established by legislation 530 24,311,997 24,311,997 Reserves provided for by statute 540 645,161,028 607,488,372 Other reserves 550 Total 560 669,473,025 631,800,369 Retained earnings (uncovered loss) The correction results in previous periods 570 Retained earnings (uncovered loss) of previous years 580 423,753,612 423,749,153 Net profit (net loss) of period 590 8,143,379 37,881,002 Profit used for the reporting year 600 Total 610 431,896,991 461,630,155 Secondary Capital Differences from revaluation of long term assets 620 4,988,243 4,992,542 Grants 630 Total 640 4,988,243 4,992,542 TOTAL EQUITY 650 1,476,907,849 1,468,972,656 LONG-TERM DEBT Long term financial liabilities Long term bank loans 660 10,845,748 12,622,363 Long term borrowings 670 Other long-term financial liabilities 680 Total 690 10,845,748 12,622,363 Calculated long-term debt Long-term lease liabilities 700 Anticipated revenue long term 710 Grants and Revenues 720 Advances received 730 Deferred income tax liabilities 740 Long-term trade payables 3 750 1,250,713,772 1,177,441,343 Total 760 1,250,713,772 1,177,441,343 TOTAL LONG TERM DEBT 770 1,261,559,520 1,190,063,706 SHORT TERM LIABILITIES Short-term financial liabilities Short term bank loans 780 24,000,000 Short-term borrowings 790 Current share of long-term debt 800 Other short-term financial liabilities 810 Total 820 24,000,000 Short-term commercial debt Short-term trade payables 4 830 213,135,849 196,462,157 Amounts owed to related parties 840 Advances received 850 5,001,030 Total 860 218,136,879 196,462,157 Calculated short-term debt Wages owed to 870 2,705,703 1,276,040 On personal debt to other operations 880 Insurance liabilities 890 739,386 589,137 Debt settlement with the budget 900 1,766,918 9,521,259 Preliminary Debt 910 96,331 Extra payments owed to 920 Amounts owed by the founders and other participants 930 Preliminary expenses and payments related provisions 940 Other short-term debt 950 350,637 448,225 Total 960 5,658,975 11,834,661 TOTAL SHORT TERM LIABILITIES 970 247,795,854 208,296,818 TOTAL LIABILITIES 980 2,986,263,223 2,867,333,180 Annex I/6 Annex I: Pro Forma Consolidated Accounts CET-2 Moldova Lei Accounts for the year to 31 December 2010 2010 2009 PROFIT AND LOSS STATEMENT Revenue from sales 010 1,180,693,710 1,137,665,533 Cost of sales 020 (1,142,120,608) (1,067,749,061) Gross profit (total loss) 030 38,573,102 69,916,472 Other operating income 040 17,359,853 5,589,428 Business expenses 050 (482,531) (745,142) General and administrative expenses 060 (24,482,165) (23,496,816) Other operating expenses 070 (21,930,327) (11,972,089) Result from operating activities: Profit (loss) 080 9,037,932 39,291,853 Result from investing activities: Profit (loss) 090 (901,621) 96,773 Result from financing activities: Profit (loss) 100 10,599 (1,438,838) Result from financial and economic activities: Profit (loss) 110 8,146,910 37,949,788 Exceptional result: profit (loss) 120 Profit (loss) before taxation reporting period 130 8,146,910 37,949,788 Expenditure (savings) income tax 140 (3,531) (68,786) Net profit (net loss) 150 8,143,379 37,881,002 1 January 2010 Profits Other 31 December 2010 MOVEMENTS IN CAPITAL Share Capital and additional Share Capital 010 370,549,590 370,549,590 Supplementary Capital 020 Capital paid 030 Capital withdrawn 040 Total 050 370,549,590 370,549,590 Reserves Reserves established by legislation 060 24,311,997 24,311,997 Reserves provided for by statute 070 607,488,372 37,672,656 645,161,028 Other reserves 080 Total 090 631,800,369 37,672,656 669,473,025 Retained earnings (uncovered loss) Correction of results in previous periods 100 Retained earnings (uncovered loss) of previous periods 110 423,749,153 4,459 423,753,612 Net profit (loss) for period 120 37,881,002 8,143,379 (37,881,002) 8,143,379 Profit utilised in period 130 Total 140 461,630,155 8,143,379 (37,876,543) 431,896,991 Secondary Capital Differences from revaluation of long term assets 150 4,992,542 (4,299) 4,988,243 Grants 160 Total 170 4,992,542 (4,299) 4,988,243 TOTAL 180 1,468,972,656 8,143,379 (208,186) 1,476,907,849 Annex I/7 Annex I: Pro Forma Consolidated Accounts CET-2 Moldova Lei Accounts for the year to 31 December 2010 2010 CASH FLOW STATEMENT Operating activities Proceeds from sales 010 1,140,317,752 Cash payments to suppliers 020 (1,065,870,698) Cash payments to and for employees 030 (40,840,443) Interest Payment 040 Income tax 050 (62,202) Other cash receipts 060 17,452,951 Other cash payments 070 (46,276,889) Net cash from operating activities 080 4,720,471 Investing activities Proceeds from the output of long term assets 090 Paying money to purchase long term assets 100 (14,286,702) Interest earned 110 Dividends received 120 including foreign 121 Other receipts (payments) of funds 130 Net cash from investing activities 140 (14,286,702) Financing activities Proceeds from loans and borrowings 150 70,000,000 Payments of loans and borrowings 160 51,056,496 Payment of dividends 170 including dividends paid to non-residents 171 Proceeds from the issue of own shares 180 Paying money to repurchase its own shares 190 Other receipts (payments) of funds 200 22,982 Net cash from financing activities 210 18,966,486 Net cash flows before exceptional items 220 9,400,255 Exceptional receipts (payments) 230 Net total 240 9,400,255 Exchange differences favorable (unfavorable) 250 (39) Cash and cash equivalents at beginning of year 260 4,963,567 Cash and cash equivalents at end of year 270 14,363,783 Note 1 Long term receivable from Termocom 1,232,669,144 Lease 34,100 Long term trade receivables 1,232,703,244 Note 2 CET-1 SA 1,230,436 Damalio SRL 171,237 RED Union Fenosa SA ICS 104,060,333 R & R SRL 209,397 RED Northwest SA 18,014,233 Red Star SC FT SRL 142,979 Termocom to him in the procedure plan 321,238,412 Other receivables 49,510 Short-term trade receivables 445,116,537 Note 3 Apa Canal Chisinau SA 23,021,681 Chisinau Gaz SRL 407,655 Material Reserves Agency 47,115,281 State Ecological Inspectorate 2,349,996 Moldova-Gaz SA 1,177,819,159 Other long term liabilities 1,250,713,772 Note 4 Water Canal Chisinau SA 1,661,174 Chisnau Gaz SRL 205,813,184 Energoreparatii 246,215 Energo Rotor SRL 374,259 Horus 3,712,845 Policontract SRL 105,057 Policontract SRL 105,058 TehEnergo-Grup SRL 528,035 Vec SRL 190,808 Other liabilities 300,011 Trade payables 213,036,646 Annex I/8 Annex I: Pro Forma Consolidated Accounts Consolidation adjustments Moldova Lei Accounts for the year to 31 December 2010 Termocom CET-2 Adjustments Consolidated LONG TERM ASSETS Intangible assets Intangible assets 010 5,545,312 Amortization of intangible assets 020 (2,906,424) Total 030 2,638,888 423,654 3,062,542 Long-term tangible assets Active materials in progress 040 33,839,625 82,533,886 116,373,511 Land 050 Fixed assets 060 1,345,145,030 Natural Resources 070 Depreciation and depletion of long-term tangible assets 080 (832,506,748) Total 090 546,477,907 1,240,739,024 1,787,216,931 Long term financial assets Long-term investments unrelated parties 100 72,010 260,000 332,010 Long-term investments in related parties 110 Change the value of long-term investments 120 Long-term trade receivables 130 1,232,703,244 (1,232,669,144) 34,100 Deferred income tax assets 140 Advances 150 Total 160 72,010 1,232,963,244 (1,232,669,144) 366,110 Other long term assets 170 TOTAL LONG TERM ASSETS 180 549,188,805 2,474,125,922 (1,232,669,144) 1,790,645,583 CURRENT ASSETS Stocks of goods and materials Materials 190 24,043,539 48,957,017 73,000,556 Growth and fattening animals 200 Items of small value and short duration 210 282,301 298,843 581,144 Production in progress 220 Products 230 1,241 1,241 Commodities 240 25,352,534 60,645 25,413,179 Total 250 49,678,374 49,317,746 98,996,120 Short-term receivables Short-term trade receivables 260 859,646,708 445,116,537 (321,238,412) 983,524,833 Adjustments on doubtful receivables 270 (55,683,060) (55,683,060) Short-term receivables related parties 280 Short-term advances 290 11,949,311 1,466,267 13,415,578 Short-term receivables on settlements with the budget 300 5,056,216 833,505 5,889,721 Claims accrued 310 16,920,869 16,920,869 Short-term receivables of staff 320 52,183 162,329 214,512 Short-term receivables calculated on income 330 624,045 14,687 638,732 Other short-term debt 340 24,148,190 586,429 24,734,619 Total 350 862,714,462 448,179,754 (321,238,412) 989,655,804 Short-term investments Short-term investments in unrelated parties 360 Short-term investments in related parties 370 Decline in value of short-term investments 380 Total 390 Cash House 400 43,198 60,146 103,344 Current accounts in local currency 410 25,989,492 14,303,583 40,293,075 Current accounts in foreign currency 420 8 54 62 Other funds 430 23,253 23,253 Total 440 26,055,951 14,363,783 40,419,734 Other current assets 450 1,058,140 276,018 1,334,158 TOTAL CURRENT ASSETS 460 939,506,927 512,137,301 (321,238,412) 1,130,405,816 TOTAL ASSETS 470 1,488,695,732 2,986,263,223 (1,553,907,556) 2,921,051,399 Annex I/9 Annex I: Pro Forma Consolidated Accounts Consolidation adjustments Moldova Lei Accounts for the year to 31 December 2010 Termocom CET-2 Adjustments Consolidated EQUITY Share capital Share capital 480 32,449,897 370,549,590 402,999,487 Supplementary capital 490 235,227,935 235,227,935 Capital paid 500 Capital withdrawn 510 (35,875) (35,875) Total 520 267,641,957 370,549,590 638,191,547 Reserves Reserves established by legislation 530 6,929,630 24,311,997 31,241,627 Reserves provided for by statute 540 78 645,161,028 645,161,106 Other reserves 550 130,682,201 (1,601,556) 129,080,645 Total 560 137,611,909 669,473,025 (1,601,556) 805,483,378 Retained earnings (uncovered loss) The correction results in previous periods 570 (5,637,062) (5,637,062) Retained earnings (uncovered loss) of previous years 580 (1,671,738,611) 423,753,612 (1,247,984,999) Net profit (net loss) of period 590 23,648 8,143,379 8,167,027 Profit used for the reporting year 600 Total 610 (1,677,352,025) 431,896,991 (1,245,455,034) Secondary Capital Differences from revaluation of long term assets 620 72,393,594 4,988,243 77,381,837 Grants 630 Total 640 72,393,594 4,988,243 77,381,837 TOTAL EQUITY 650 (1,199,704,565) 1,476,907,849 (1,601,556) 275,601,728 LONG-TERM DEBT Long term financial liabilities Long term bank loans 660 10,845,748 10,845,748 Long term borrowings 670 Other long-term financial liabilities 680 Total 690 10,845,748 10,845,748 Calculated long-term debt Long-term lease liabilities 700 Anticipated revenue long term 710 Grants and Revenues 720 13,749,570 13,749,570 Advances received 730 Deferred income tax liabilities 740 Long-term trade payables 750 1,001,236,307 1,250,713,772 (458,746,732) 1,793,203,347 Total 760 1,014,985,877 1,250,713,772 (458,746,732) 1,806,952,917 TOTAL LONG TERM DEBT 770 1,014,985,877 1,261,559,520 (458,746,732) 1,817,798,665 SHORT TERM LIABILITIES Short-term financial liabilities Short term bank loans 780 24,000,000 24,000,000 Short-term borrowings 790 Current share of long-term debt 800 Other short-term financial liabilities 810 712,688 712,688 Total 820 712,688 24,000,000 24,712,688 Short-term commercial debt Short-term trade payables 830 1,654,821,026 213,135,849 (1,093,559,268) 774,397,607 Amounts owed to related parties 840 Advances received 850 4,611,428 5,001,030 9,612,458 Total 860 1,659,432,454 218,136,879 (1,093,559,268) 784,010,065 Calculated short-term debt Wages owed to 870 5,381,507 2,705,703 8,087,210 On personal debt to other operations 880 20,072 20,072 Insurance liabilities 890 2,745,355 739,386 3,484,741 Debt settlement with the budget 900 838,593 1,766,918 2,605,511 Preliminary Debt 910 96,331 96,331 Extra payments owed to 920 Amounts owed by the founders and other participants 930 Preliminary expenses and payments related provisions 940 Other short-term debt 950 4,283,751 350,637 4,634,388 Total 960 13,269,278 5,658,975 18,928,253 TOTAL SHORT TERM LIABILITIES 970 1,673,414,420 247,795,854 (1,093,559,268) 827,651,006 TOTAL LIABILITIES 980 1,488,695,732 2,986,263,223 (1,553,907,556) 2,921,051,399 Annex I/10 Annex I: Pro Forma Consolidated Accounts Consolidation adjustments Moldova Lei Accounts for the year to 31 December 2010 Termocom CET-2 Adjustments Consolidated PROFIT AND LOSS STATEMENT Revenue from sales 010 1,060,430,832 1,180,693,710 (483,890,228) 1,757,234,314 Cost of sales 020 (1,038,628,767) (1,142,120,608) 483,890,228 (1,696,859,147) Gross profit (total loss) 030 21,802,065 38,573,102 60,375,167 Other operating income 040 30,158,379 17,359,853 47,518,232 Business expenses 050 (7,932,223) (482,531) (8,414,754) General and administrative expenses 060 (12,465,787) (24,482,165) (36,947,952) Other operating expenses 070 (31,682,773) (21,930,327) (53,613,100) Result from operating activities: Profit (loss) 080 (120,339) 9,037,932 8,917,593 Result from investing activities: Profit (loss) 090 767,188 (901,621) (134,433) Result from financing activities: Profit (loss) 100 (623,201) 10,599 (612,602) Result from financial and economic activities: Profit (loss) 110 23,648 8,146,910 8,170,558 Exceptional result: profit (loss) 120 Profit (loss) before taxation reporting period 130 23,648 8,146,910 8,170,558 Expenditure (savings) income tax 140 (3,531) (3,531) Net profit (net loss) 150 23,648 8,143,379 8,167,027 Annex I/11 Annex I: Pro Forma Consolidated Accounts Consolidation adjustments Moldova Lei Accounts for the year to 31 December 2010 Termocom CET-2 Adjustments Consolidated CASH FLOW STATEMENT Operating activities Proceeds from sales 010 969,637,615 1,140,317,752 (348,297,219) 1,761,658,148 Cash payments to suppliers 020 (858,664,384) (1,065,870,698) 348,297,219 (1,576,237,863) Cash payments to and for employees 030 (86,034,200) (40,840,443) (126,874,643) Interest Payment 040 (289,617) (289,617) Income tax 050 (4,093,302) (62,202) (4,155,504) Other cash receipts 060 3,917,426 17,452,951 21,370,377 Other cash payments 070 (10,259,874) (46,276,889) (56,536,763) Net cash from operating activities 080 14,213,664 4,720,471 18,934,135 Investing activities Proceeds from the output of long term assets 090 Paying money to purchase long term assets 100 (14,286,702) (14,286,702) Interest earned 110 Dividends received 120 including foreign 121 Other receipts (payments) of funds 130 Net cash from investing activities 140 (14,286,702) (14,286,702) Financing activities Proceeds from loans and borrowings 150 70,000,000 70,000,000 Payments of loans and borrowings 160 (5,738,148) 51,056,496 45,318,348 Payment of dividends 170 including dividends paid to non-residents 171 Proceeds from the issue of own shares 180 Paying money to repurchase its own shares 190 Other receipts (payments) of funds 200 22,982 22,982 Net cash from financing activities 210 (5,738,148) 121,079,478 115,341,330 Net cash flows before exceptional items 220 8,475,516 111,513,247 119,988,763 Exceptional receipts (payments) 230 Net total 240 8,475,516 111,513,247 119,988,763 Exchange differences favorable (unfavorable) 250 (252,932) (39) (252,971) Cash and cash equivalents at beginning of year 260 17,833,367 4,963,567 22,796,934 Cash and cash equivalents at end of year 270 26,055,951 116,476,775 142,532,726 Annex I/12 Annex I: Pro Forma Consolidated Accounts Consolidation adjustments Moldova Lei Accounts for the year to 31 December 2009 Termocom CET-2 Adjustments Consolidated LONG TERM ASSETS Intangible assets Intangible assets 010 4,065,092 752,014 4,817,106 Amortization of intangible assets 020 (1,468,662) (298,001) (1,766,663) Total 030 2,596,430 454,013 3,050,443 Long-term tangible assets Active materials in progress 040 35,556,804 84,721,077 120,277,881 Land 050 Fixed assets 060 1,278,802,234 1,588,942,368 2,867,744,602 Natural Resources 070 Depreciation and depletion of long-term tangible assets 080 (767,700,000) (400,059,144) (1,167,759,144) Total 090 546,659,038 1,273,604,301 1,820,263,339 Long term financial assets Long-term investments unrelated parties 100 72,010 260,000 332,010 Long-term investments in related parties 110 Change the value of long-term investments 120 Long-term trade receivables 130 1,166,587,689 (1,166,587,689) Deferred income tax assets 140 Advances 150 Total 160 72,010 1,166,847,689 (1,166,587,689) 332,010 Other long term assets 170 TOTAL LONG TERM ASSETS 180 549,327,478 2,440,906,003 (1,166,587,689) 1,823,645,792 CURRENT ASSETS Stocks of goods and materials Materials 190 21,921,409 42,645,003 64,566,412 Growth and fattening animals 200 Items of small value and short duration 210 315,248 358,482 673,730 Production in progress 220 27,556 27,556 Products 230 239 239 Commodities 240 25,342,578 69,097 25,411,675 Total 250 47,579,235 43,100,377 90,679,612 Short-term receivables Short-term trade receivables 260 731,080,338 377,383,087 (250,125,302) 858,338,123 Adjustments on doubtful receivables 270 (55,683,060) (55,683,060) Short-term receivables related parties 280 Short-term advances 290 6,204,423 168,555 6,372,978 Short-term receivables on settlements with the budget 300 2,532,515 2,532,515 Claims accrued 310 9,853,361 9,853,361 Short-term receivables of staff 320 77,762 77,762 Short-term receivables calculated on income 330 532,888 80,603 613,491 Other short-term debt 340 25,986,545 554,910 26,541,455 Total 350 720,584,772 378,187,155 (250,125,302) 848,646,625 Short-term investments Short-term investments in unrelated parties 360 Short-term investments in related parties 370 Decline in value of short-term investments 380 Total 390 Cash House 400 6,398 80,213 86,611 Current accounts in local currency 410 17,784,829 4,883,299 22,668,128 Current accounts in foreign currency 420 418 55 473 Other funds 430 41,722 41,722 Total 440 17,833,367 4,963,567 22,796,934 Other current assets 450 847,182 176,078 1,023,260 TOTAL CURRENT ASSETS 460 786,844,556 426,427,177 (250,125,302) 963,146,431 TOTAL ASSETS 470 1,336,172,034 2,867,333,180 (1,416,712,991) 2,786,792,223 Annex I/13 Annex I: Pro Forma Consolidated Accounts Consolidation adjustments Moldova Lei Accounts for the year to 31 December 2009 Termocom CET-2 Adjustments Consolidated EQUITY Share capital Share capital 480 32,449,897 370,549,590 402,999,487 Supplementary capital 490 12,120,960 223,106,975 235,227,935 Capital paid 500 Capital withdrawn 510 (35,875) (35,875) Total 520 44,534,982 370,549,590 223,106,975 638,191,547 Reserves Reserves established by legislation 530 6,929,630 24,311,997 31,241,627 Reserves provided for by statute 540 78 607,488,372 607,488,450 Other reserves 550 130,682,201 130,682,201 Total 560 137,611,909 631,800,369 769,412,278 Retained earnings (uncovered loss) The correction results in previous periods 570 Retained earnings (uncovered loss) of previous years 580 (1,671,738,611) 423,749,153 (1,247,989,458) Net profit (net loss) of period 590 37,881,002 37,881,002 Profit used for the reporting year 600 Total 610 (1,671,738,611) 461,630,155 (1,210,108,456) Secondary Capital Differences from revaluation of long term assets 620 72,630,091 4,992,542 77,622,633 Grants 630 Total 640 72,630,091 4,992,542 77,622,633 TOTAL EQUITY 650 (1,416,961,629) 1,468,972,656 223,106,975 275,118,002 LONG-TERM DEBT Long term financial liabilities Long term bank loans 660 5,701,531 12,622,363 18,323,894 Long term borrowings 670 Other long-term financial liabilities 680 Total 690 5,701,531 12,622,363 18,323,894 Calculated long-term debt Long-term lease liabilities 700 Anticipated revenue long term 710 Grants and Revenues 720 9,452,491 9,452,491 Advances received 730 Deferred income tax liabilities 740 Long-term trade payables 750 1,001,236,307 1,177,441,343 (458,746,732) 1,719,930,918 Total 760 1,010,688,798 1,177,441,343 (458,746,732) 1,729,383,409 TOTAL LONG TERM DEBT 770 1,016,390,329 1,190,063,706 (458,746,732) 1,747,707,303 SHORT TERM LIABILITIES Short-term financial liabilities Short term bank loans 780 Short-term borrowings 790 Current share of long-term debt 800 Other short-term financial liabilities 810 805,615 805,615 Total 820 805,615 805,615 Short-term commercial debt Short-term trade payables 830 1,489,125,139 196,462,157 (957,966,259) 727,621,037 Amounts owed to related parties 840 Advances received 850 3,477,186 3,477,186 Total 860 1,492,602,325 196,462,157 (957,966,259) 731,098,223 Calculated short-term debt Wages owed to 870 4,155,921 1,276,040 5,431,961 On personal debt to other operations 880 3,654 3,654 Insurance liabilities 890 2,064,062 589,137 2,653,199 Debt settlement with the budget 900 10,902,813 9,521,259 20,424,072 Preliminary Debt 910 Extra payments owed to 920 Amounts owed by the founders and other participants 930 223,106,975 (223,106,975) Preliminary expenses and payments related provisions 940 Other short-term debt 950 3,101,969 448,225 3,550,194 Total 960 243,335,394 11,834,661 (223,106,975) 32,063,080 TOTAL SHORT TERM LIABILITIES 970 1,736,743,334 208,296,818 (1,181,073,234) 763,966,918 TOTAL LIABILITIES 980 1,336,172,034 2,867,333,180 (1,416,712,991) 2,786,792,223 Annex I/14 Annex I: Pro Forma Consolidated Accounts Consolidation adjustments Moldova Lei Accounts for the year to 31 December 2009 2010 2010 2010 2010 PROFIT AND LOSS STATEMENT Revenue from sales 010 795,432,029 1,137,665,533 (475,837,584) 1,457,259,978 Cost of sales 020 (1,010,431,663) (1,067,749,061) 475,837,584 (1,602,343,140) Gross profit (total loss) 030 (214,999,634) 69,916,472 (145,083,162) Other operating income 040 22,998,730 5,589,428 28,588,158 Business expenses 050 (7,913,947) (745,142) (8,659,089) General and administrative expenses 060 (15,989,027) (23,496,816) (39,485,843) Other operating expenses 070 (30,547,695) (11,972,089) (42,519,784) Result from operating activities: Profit (loss) 080 (246,451,573) 39,291,853 (207,159,720) Result from investing activities: Profit (loss) 090 (150,171) 96,773 (53,398) Result from financing activities: Profit (loss) 100 740,604 (1,438,838) (698,234) Result from financial and economic activities: Profit (loss) 110 (245,861,140) 37,949,788 (207,911,352) Exceptional result: profit (loss) 120 Profit (loss) before taxation reporting period 130 (245,861,140) 37,949,788 (207,911,352) Expenditure (savings) income tax 140 (68,786) (68,786) Net profit (net loss) 150 (245,861,140) 37,881,002 (207,980,138) Annex I/15 Annex I: Pro Forma Consolidated Accounts Proforma Consolidated DH Group Moldova Lei Accounts for the year to 31 December 2010 Note 2010 2009 LONG TERM ASSETS Intangible assets Intangible assets 010 4,817,106 Amortization of intangible assets 020 (1,766,663) Total 030 3,062,542 3,050,443 Long-term tangible assets Active materials in progress 040 116,373,511 120,277,881 Land 050 Fixed assets 060 2,867,744,602 Natural Resources 070 Depreciation and depletion of long-term tangible assets 080 (1,167,759,144) Total 090 1,787,216,931 1,820,263,339 Long term financial assets Long-term investments unrelated parties 100 332,010 332,010 Long-term investments in related parties 110 Change the value of long-term investments 120 Long-term trade receivables 130 34,100 Deferred income tax assets 140 Advances 150 Total 160 366,110 332,010 Other long term assets 170 TOTAL LONG TERM ASSETS 180 1,790,645,583 1,823,645,792 CURRENT ASSETS Stocks of goods and materials Materials 190 73,000,556 64,566,412 Growth and fattening animals 200 Items of small value and short duration 210 581,144 673,730 Production in progress 220 27,556 Products 230 1,241 239 Commodities 240 25,413,179 25,411,675 Total 250 98,996,120 90,679,612 Short-term receivables Short-term trade receivables 1 260 983,524,833 858,338,123 Adjustments on doubtful receivables 270 (55,683,060) (55,683,060) Short-term receivables related parties 280 Short-term advances 290 13,415,578 6,372,978 Short-term receivables on settlements with the budget 300 5,889,721 2,532,515 Claims accrued 310 16,920,869 9,853,361 Short-term receivables of staff 320 214,512 77,762 Short-term receivables calculated on income 330 638,732 613,491 Other short-term debt 340 24,734,619 26,541,455 Total 350 989,655,804 848,646,625 Short-term investments Short-term investments in unrelated parties 360 Short-term investments in related parties 370 Decline in value of short-term investments 380 Total 390 Cash House 400 103,344 86,611 Current accounts in local currency 410 40,293,075 22,668,128 Current accounts in foreign currency 420 62 473 Other funds 430 23,253 41,722 Total 440 40,419,734 22,796,934 Other current assets 450 1,334,158 1,023,260 TOTAL CURRENT ASSETS 460 1,130,405,816 963,146,431 TOTAL ASSETS 470 2,921,051,399 2,786,792,223 Annex I/16 Annex I: Pro Forma Consolidated Accounts Proforma Consolidated DH Group Moldova Lei Accounts for the year to 31 December 2010 Note 2010 2009 EQUITY Share capital Share capital 480 189,811,948 189,811,948 Supplementary capital 490 Capital paid 500 Capital withdrawn 510 Total 520 189,811,948 189,811,948 Reserves Reserves established by legislation 530 Reserves provided for by statute 540 Other reserves 550 Total 560 Retained earnings (uncovered loss) The correction results in previous periods 570 7,683,421 Retained earnings (uncovered loss) of previous years 580 Net profit (net loss) of period 590 8,407,943 Profit used for the reporting year 600 Total 610 8,407,943 7,683,421 Secondary Capital Differences from revaluation of long term assets 620 77,381,837 77,622,633 Grants 630 Total 640 77,381,837 77,622,633 TOTAL EQUITY 650 275,601,728 275,118,002 LONG-TERM DEBT Long term financial liabilities Long term bank loans 660 10,845,748 18,323,894 Long term borrowings 670 Other long-term financial liabilities 680 Total 690 10,845,748 18,323,894 Calculated long-term debt Long-term lease liabilities 700 Anticipated revenue long term 710 Grants and Revenues 720 13,749,570 9,452,491 Advances received 730 Deferred income tax liabilities 740 Long-term trade payables 2 750 1,793,203,347 1,719,930,918 Total 760 1,806,952,917 1,729,383,409 TOTAL LONG TERM DEBT 770 1,817,798,665 1,747,707,303 SHORT TERM LIABILITIES Short-term financial liabilities Short term bank loans 780 24,000,000 Short-term borrowings 790 Current share of long-term debt 800 Other short-term financial liabilities 810 712,688 805,615 Total 820 24,712,688 805,615 Short-term commercial debt Short-term trade payables 2 830 774,397,607 727,621,037 Amounts owed to related parties 840 Advances received 850 9,612,458 3,477,186 Total 860 784,010,065 731,098,223 Calculated short-term debt Wages owed to 870 8,087,210 5,431,961 On personal debt to other operations 880 20,072 3,654 Insurance liabilities 890 3,484,741 2,653,199 Debt settlement with the budget 900 2,605,511 20,424,072 Preliminary Debt 910 96,331 Extra payments owed to 920 Amounts owed by the founders and other participants 930 Preliminary expenses and payments related provisions 940 Other short-term debt 950 4,634,388 3,550,194 Total 960 18,928,253 32,063,080 TOTAL SHORT TERM LIABILITIES 970 827,651,006 763,966,918 TOTAL LIABILITIES 980 2,921,051,399 2,786,792,223 Annex I/17 Annex I: Pro Forma Consolidated Accounts Proforma Consolidated DH Group Moldova Lei Accounts for the year to 31 December 2010 2009 2009 PROFIT AND LOSS STATEMENT Revenue from sales 010 1,757,234,314 1,457,259,978 Cost of sales 020 (1,696,859,147) (1,602,343,140) Gross profit (total loss) 030 60,375,167 (145,083,162) Other operating income 040 47,518,232 28,588,158 Business expenses 050 (8,414,754) (8,659,089) General and administrative expenses 060 (36,947,952) (39,485,843) Other operating expenses 070 (53,613,100) (42,519,784) Result from operating activities: Profit (loss) 080 8,917,593 (207,159,720) Result from investing activities: Profit (loss) 090 (134,433) (53,398) Result from financing activities: Profit (loss) 100 (612,602) (698,234) Result from financial and economic activities: Profit (loss) 110 8,170,558 (207,911,352) Exceptional result: profit (loss) 120 120 240 Profit (loss) before taxation reporting period 130 8,170,678 (207,911,112) Expenditure (savings) income tax 140 (3,531) (68,786) Net profit (net loss) 150 8,167,147 (207,979,898) 1 January 2010 Profits Other 31 December 2010 MOVEMENTS IN CAPITAL Share Capital and additional Share Capital 010 189,811,948 189,811,948 Supplementary Capital 020 Capital paid 030 Capital withdrawn 040 Total 050 189,811,948 189,811,948 Reserves Reserves established by legislation 060 Reserves provided for by statute 070 Other reserves 080 Total 090 Retained earnings (uncovered loss) Correction of results in previous periods 100 7,683,421 (7,683,421) Retained earnings (uncovered loss) of previous periods 110 Net profit (loss) for period 120 8,167,147 240,796 8,407,943 Profit utilised in period 130 Total 140 7,683,421 8,167,147 (7,442,625) 8,407,943 Secondary Capital Differences from revaluation of long term assets 150 77,622,633 (240,796) 77,381,837 Grants 160 Total 170 77,622,633 (240,796) 77,381,837 TOTAL 180 275,118,002 8,167,147 (7,683,421) 275,601,728 Annex I/18 Annex I: Pro Forma Consolidated Accounts Proforma Consolidated DH Group Moldova Lei Accounts for the year to 31 December 2010 2010 CASH FLOW STATEMENT Operating activities Proceeds from sales 010 1,761,658,148 Cash payments to suppliers 020 (1,576,237,863) Cash payments to and for employees 030 (126,874,643) Interest Payment 040 (289,617) Income tax 050 (4,155,504) Other cash receipts 060 21,370,377 Other cash payments 070 (56,536,763) Net cash from operating activities 080 18,934,135 Investing activities Proceeds from the output of long term assets 090 Paying money to purchase long term assets 100 (14,286,702) Interest earned 110 Dividends received 120 including foreign 121 Other receipts (payments) of funds 130 Net cash from investing activities 140 (14,286,702) Financing activities Proceeds from loans and borrowings 150 70,000,000 Payments of loans and borrowings 160 45,318,348 Payment of dividends 170 including dividends paid to non-residents 171 Proceeds from the issue of own shares 180 Paying money to repurchase its own shares 190 Other receipts (payments) of funds 200 22,982 Net cash from financing activities 210 115,341,330 Net cash flows before exceptional items 220 119,988,763 Exceptional receipts (payments) 230 Net total 240 119,988,763 Exchange differences favorable (unfavorable) 250 (252,971) Cash and cash equivalents at beginning of year 260 22,796,934 Cash and cash equivalents at end of year 270 142,532,726 Note 1 2010 Population 692,602,850 513,089,000 Customers in litigation 67,153,667 65,566,000 CET 1 1,230,436 Retelele Electrice 122,074,566 Other receivables 100,463,314 152,425,338 Short-term trade receivables 983,524,833 Note 2 2010 2010 2010 Long-term Short-term Total CET 1 148,700,376 380,115,419 528,815,795 Moldovagaz 1,235,568,626 113,870,874 1,349,439,500 Chisinau gaz 9,471,993 249,908,923 259,380,916 Payable to MoU parties 1,393,740,995 743,895,216 2,137,636,211 Retelele Electrice 45,960,397 11,088,908 57,049,305 Apa Canal 42,357,951 1,996,155 44,354,106 Material Reserves Agency 47,115,281 47,115,281 State Ecological Inspectorate 2,349,996 2,349,996 Other creditors 261,678,726 17,318,125 278,996,851 Trade payables 1,793,203,347 774,298,404 2,567,501,751 Annex I/19 Pro-forma combined accounts A2 Pro-forma combined accounts Annex contents: Company accounts for CET-1 the year to 31 December 2010 – from Annex II/1 Combination adjustments for the year to 31 December 2010 – from Annex II/4 Notional Combined accounts for DH Group + CET-1 for the year to 31 December 2010 – from Annex I/10 It should be noted that this annex is provided for information only and does not form an integral part of this report. It presents notional, proforma combined accounts for a combination of entities that does not form part of our recommendations. Phase II report: Chişinău Heat & Electricity Supply Institutional & Financial Restructuring Study Economic Consulting Associates, October 2011 Annex I: Pro Forma Consolidated Accounts CET-1 Moldova Lei Accounts for the year to 31 December 2010 Note 2010 2009 LONG TERM ASSETS Intangible assets Intangible assets 010 521,506 376,626 Amortization of intangible assets 020 (491,634) (339,441) Total 030 29,872 37,185 Long-term tangible assets Active materials in progress 040 8,204,011 8,118,933 Land 050 Fixed assets 060 688,111,372 682,244,328 Natural Resources 070 Depreciation and depletion of long-term tangible assets 080 (130,925,365) (112,494,439) Total 090 565,390,018 577,868,822 Long term financial assets Long-term investments unrelated parties 100 Long-term investments in related parties 110 Change the value of long-term investments 120 Long-term trade receivables 1 130 148,700,376 148,700,376 Deferred income tax assets 140 Advances 150 Total 160 148,700,376 148,700,376 Other long term assets 170 TOTAL LONG TERM ASSETS 180 714,120,266 726,606,383 CURRENT ASSETS Stocks of goods and materials Materials 190 12,800,852 10,240,112 Growth and fattening animals 200 Items of small value and short duration 210 266,384 209,599 Production in progress 220 Products 230 5,404 5,404 Commodities 240 88,751 59,683 Total 250 13,161,391 10,514,798 Short-term receivables Short-term trade receivables 2 260 407,710,107 367,261,742 Adjustments on doubtful receivables 270 Short-term receivables related parties 280 Short-term advances 290 492,511 542,526 Short-term receivables on settlements with the budget 300 158,683 153,030 Claims accrued 310 Short-term receivables of staff 320 122,449 100,167 Short-term receivables calculated on income 330 248,998 383,673 Other short-term debt 340 26,750 49,593 Total 350 408,759,498 368,490,731 Short-term investments Short-term investments in unrelated parties 360 Short-term investments in related parties 370 Decline in value of short-term investments 380 Total 390 Cash House 400 48,849 45,081 Current accounts in local currency 410 844,070 118,920 Current accounts in foreign currency 420 67 Other funds 430 Total 440 892,986 164,001 Other current assets 450 532,283 49,147 TOTAL CURRENT ASSETS 460 423,346,158 379,218,677 TOTAL ASSETS 470 1,137,466,424 1,105,825,060 Annex I/1 Annex I: Pro Forma Consolidated Accounts CET-1 Moldova Lei Accounts for the year to 31 December 2010 Note 2010 2009 EQUITY Share capital Share capital 480 77,370,160 77,370,160 Supplementary capital 490 Capital paid 500 Capital withdrawn 510 Total 520 77,370,160 77,370,160 Reserves Reserves established by legislation 530 13,085,618 11,533,000 Reserves provided for by statute 540 Other reserves 550 281,670,315 252,360,000 Total 560 294,755,933 263,893,000 Retained earnings (uncovered loss) The correction results in previous periods 570 (45,955) Retained earnings (uncovered loss) of previous years 580 258,945,312 289,997,664 Net profit (net loss) of period 590 8,384,045 Profit used for the reporting year 600 Total 610 267,283,402 289,997,664 Secondary Capital Differences from revaluation of long term assets 620 1,866,936 1,866,936 Grants 630 Total 640 1,866,936 1,866,936 TOTAL EQUITY 650 641,276,431 633,127,760 LONG-TERM DEBT Long term financial liabilities Long term bank loans 660 27,450,000 Long term borrowings 670 Other long-term financial liabilities 680 Total 690 27,450,000 Calculated long-term debt Long-term lease liabilities 700 Anticipated revenue long term 710 Grants and Revenues 720 Advances received 730 Deferred income tax liabilities 740 Long-term trade payables 3 750 36,011,444 36,011,444 Total 760 36,011,444 36,011,444 TOTAL LONG TERM DEBT 770 63,461,444 36,011,444 SHORT TERM LIABILITIES Short-term financial liabilities Short term bank loans 780 Short-term borrowings 790 Current share of long-term debt 800 Other short-term financial liabilities 810 Total 820 Short-term commercial debt Short-term trade payables 4 830 428,928,294 431,167,743 Amounts owed to related parties 840 Advances received 850 Total 860 428,928,294 431,167,743 Calculated short-term debt Wages owed to 870 2,108,491 1,745,250 On personal debt to other operations 880 1,554 1,089 Insurance liabilities 890 549,277 442,996 Debt settlement with the budget 900 493,227 2,729,806 Preliminary Debt 910 51,262 37,329 Extra payments owed to 920 32,605 32,605 Amounts owed by the founders and other participants 930 Preliminary expenses and payments related provisions 940 Other short-term debt 950 563,839 529,038 Total 960 3,800,255 5,518,113 TOTAL SHORT TERM LIABILITIES 970 432,728,549 436,685,856 TOTAL LIABILITIES 980 1,137,466,424 1,105,825,060 Annex I/2 Annex I: Pro Forma Consolidated Accounts CET-1 Moldova Lei Accounts for the year to 31 December 2010 2010 2009 PROFIT AND LOSS STATEMENT Revenue from sales 010 235,113,462 302,642,675 Cost of sales 020 (192,356,823) (269,405,710) Gross profit (total loss) 030 42,756,639 33,236,965 Other operating income 040 6,414,497 3,584,413 Business expenses 050 (63,435) General and administrative expenses 060 (9,416,908) (5,601,990) Other operating expenses 070 (31,240,327) (1,992,088) Result from operating activities: Profit (loss) 080 8,450,466 29,227,300 Result from investing activities: Profit (loss) 090 (63,245) 286,991 Result from financing activities: Profit (loss) 100 (3,176) 1,533,786 Result from financial and economic activities: Profit (loss) 110 8,384,045 31,048,077 Exceptional result: profit (loss) 120 4,276 Profit (loss) before taxation reporting period 130 8,384,045 31,052,353 Expenditure (savings) income tax 140 Net profit (net loss) 150 8,384,045 31,052,353 1 January 2010 Profits Other 31 December 2010 MOVEMENTS IN CAPITAL Share Capital and additional Share Capital 010 77,370,160 77,370,160 Supplementary Capital 020 Capital paid 030 Capital withdrawn 040 Total 050 77,370,160 77,370,160 Reserves Reserves established by legislation 060 11,533,000 1,552,618 13,085,618 Reserves provided for by statute 070 Other reserves 080 252,360,000 29,310,315 281,670,315 Total 090 263,893,000 30,862,933 294,755,933 Retained earnings (uncovered loss) Correction of results in previous periods 100 23 (45,978) (45,955) Retained earnings (uncovered loss) of previous periods 110 289,997,664 (31,052,352) 258,945,312 Net profit (loss) for period 120 8,384,045 8,384,045 Profit utilised in period 130 Total 140 289,997,664 8,384,068 (31,098,330) 267,283,402 Secondary Capital Differences from revaluation of long term assets 150 1,866,936 1,866,936 Grants 160 Total 170 1,866,936 1,866,936 TOTAL 180 633,127,760 39,247,001 (31,098,330) 641,276,431 Annex I/3 Annex II: Pro Forma Combined Accounts Combination adjustments Moldova Lei Accounts for the year to 31 December 2010 DH Group CET-1 Adjustments Combined LONG TERM ASSETS Intangible assets Intangible assets 010 521,506 Amortization of intangible assets 020 (491,634) Total 030 3,062,542 29,872 3,092,414 Long-term tangible assets Active materials in progress 040 116,373,511 8,204,011 124,577,522 Land 050 Fixed assets 060 688,111,372 Natural Resources 070 Depreciation and depletion of long-term tangible assets 080 (130,925,365) Total 090 1,787,216,931 565,390,018 2,352,606,949 Long term financial assets Long-term investments unrelated parties 100 332,010 332,010 Long-term investments in related parties 110 Change the value of long-term investments 120 Long-term trade receivables 130 34,100 148,700,376 (148,700,376) 34,100 Deferred income tax assets 140 Advances 150 Total 160 366,110 148,700,376 (148,700,376) 366,110 Other long term assets 170 TOTAL LONG TERM ASSETS 180 1,790,645,583 714,120,266 (148,700,376) 2,356,065,473 CURRENT ASSETS Stocks of goods and materials Materials 190 73,000,556 12,800,852 85,801,408 Growth and fattening animals 200 Items of small value and short duration 210 581,144 266,384 847,528 Production in progress 220 Products 230 1,241 5,404 6,645 Commodities 240 25,413,179 88,751 25,501,930 Total 250 98,996,120 13,161,391 112,157,511 Short-term receivables Short-term trade receivables 260 983,524,833 407,710,107 (380,115,419) 1,011,119,521 Adjustments on doubtful receivables 270 (55,683,060) (55,683,060) Short-term receivables related parties 280 Short-term advances 290 13,415,578 492,511 13,908,089 Short-term receivables on settlements with the budget 300 5,889,721 158,683 6,048,404 Claims accrued 310 16,920,869 16,920,869 Short-term receivables of staff 320 214,512 122,449 336,961 Short-term receivables calculated on income 330 638,732 248,998 887,730 Other short-term debt 340 24,734,619 26,750 24,761,369 Total 350 989,655,804 408,759,498 (380,115,419) 1,018,299,883 Short-term investments Short-term investments in unrelated parties 360 Short-term investments in related parties 370 Decline in value of short-term investments 380 Total 390 Cash House 400 103,344 48,849 152,193 Current accounts in local currency 410 40,293,075 844,070 41,137,145 Current accounts in foreign currency 420 62 67 129 Other funds 430 23,253 23,253 Total 440 40,419,734 892,986 41,312,720 Other current assets 450 1,334,158 532,283 1,866,441 TOTAL CURRENT ASSETS 460 1,130,405,816 423,346,158 (380,115,419) 1,173,636,555 TOTAL ASSETS 470 2,921,051,399 1,137,466,424 (528,815,795) 3,529,702,028 Annex II/4 Annex II: Pro Forma Combined Accounts Combination adjustments Moldova Lei Accounts for the year to 31 December 2010 DH Group CET-1 Adjustments Combined EQUITY Share capital Share capital 480 189,811,948 77,370,160 267,182,108 Supplementary capital 490 Capital paid 500 Capital withdrawn 510 Total 520 189,811,948 77,370,160 267,182,108 Reserves Reserves established by legislation 530 13,085,618 13,085,618 Reserves provided for by statute 540 Other reserves 550 281,670,315 281,670,315 Total 560 294,755,933 294,755,933 Retained earnings (uncovered loss) The correction results in previous periods 570 (45,955) (45,955) Retained earnings (uncovered loss) of previous years 580 258,945,312 258,945,312 Net profit (net loss) of period 590 8,407,943 8,384,045 16,791,988 Profit used for the reporting year 600 Total 610 8,407,943 267,283,402 275,691,345 Secondary Capital Differences from revaluation of long term assets 620 77,381,837 1,866,936 79,248,773 Grants 630 Total 640 77,381,837 1,866,936 79,248,773 TOTAL EQUITY 650 275,601,728 641,276,431 916,878,159 LONG-TERM DEBT Long term financial liabilities Long term bank loans 660 10,845,748 27,450,000 38,295,748 Long term borrowings 670 Other long-term financial liabilities 680 Total 690 10,845,748 27,450,000 38,295,748 Calculated long-term debt Long-term lease liabilities 700 Anticipated revenue long term 710 Grants and Revenues 720 13,749,570 13,749,570 Advances received 730 Deferred income tax liabilities 740 Long-term trade payables 750 1,793,203,347 36,011,444 (148,700,376) 1,680,514,415 Total 760 1,806,952,917 36,011,444 (148,700,376) 1,694,263,985 TOTAL LONG TERM DEBT 770 1,817,798,665 63,461,444 (148,700,376) 1,732,559,733 SHORT TERM LIABILITIES Short-term financial liabilities Short term bank loans 780 24,000,000 24,000,000 Short-term borrowings 790 Current share of long-term debt 800 Other short-term financial liabilities 810 712,688 712,688 Total 820 24,712,688 24,712,688 Short-term commercial debt Short-term trade payables 830 774,397,607 428,928,294 (380,115,419) 823,210,482 Amounts owed to related parties 840 Advances received 850 9,612,458 9,612,458 Total 860 784,010,065 428,928,294 (380,115,419) 832,822,940 Calculated short-term debt Wages owed to 870 8,087,210 2,108,491 10,195,701 On personal debt to other operations 880 20,072 1,554 21,626 Insurance liabilities 890 3,484,741 549,277 4,034,018 Debt settlement with the budget 900 2,605,511 493,227 3,098,738 Preliminary Debt 910 96,331 51,262 147,593 Extra payments owed to 920 32,605 32,605 Amounts owed by the founders and other participants 930 Preliminary expenses and payments related provisions 940 Other short-term debt 950 4,634,388 563,839 5,198,227 Total 960 18,928,253 3,800,255 22,728,508 TOTAL SHORT TERM LIABILITIES 970 827,651,006 432,728,549 (380,115,419) 880,264,136 TOTAL LIABILITIES 980 2,921,051,399 1,137,466,424 (528,815,795) 3,529,702,028 Annex II/5 Annex II: Pro Forma Combined Accounts Combination adjustments Moldova Lei Accounts for the year to 31 December 2010 DH Group CET-1 Adjustments Combined PROFIT AND LOSS STATEMENT Revenue from sales 010 1,757,234,314 235,113,462 (86,578,357) 1,905,769,419 Cost of sales 020 (1,696,859,147) (192,356,823) 86,578,357 (1,802,637,613) Gross profit (total loss) 030 60,375,167 42,756,639 103,131,806 Other operating income 040 47,518,232 6,414,497 53,932,729 Business expenses 050 (8,414,754) (63,435) (8,478,189) General and administrative expenses 060 (36,947,952) (9,416,908) (46,364,860) Other operating expenses 070 (53,613,100) (31,240,327) (84,853,427) Result from operating activities: Profit (loss) 080 8,917,593 8,450,466 17,368,059 Result from investing activities: Profit (loss) 090 (134,433) (63,245) (197,678) Result from financing activities: Profit (loss) 100 (612,602) (3,176) (615,778) Result from financial and economic activities: Profit (loss) 110 8,170,558 8,384,045 16,554,603 Exceptional result: profit (loss) 120 120 120 Profit (loss) before taxation reporting period 130 8,170,678 8,384,045 16,554,723 Expenditure (savings) income tax 140 (3,531) (3,531) Net profit (net loss) 150 8,167,147 8,384,045 16,551,192 Annex II/6 Annex II: Pro Forma Combined Accounts Combination adjustments Moldova Lei Accounts for the year to 31 December 2009 DH Group CET-1 Adjustments Combined LONG TERM ASSETS Intangible assets Intangible assets 010 4,817,106 376,626 5,193,732 Amortization of intangible assets 020 (1,766,663) (339,441) (2,106,104) Total 030 3,050,443 37,185 3,087,628 Long-term tangible assets Active materials in progress 040 120,277,881 8,118,933 128,396,814 Land 050 Fixed assets 060 2,867,744,602 682,244,328 3,549,988,930 Natural Resources 070 Depreciation and depletion of long-term tangible assets 080 (1,167,759,144) (112,494,439) (1,280,253,583) Total 090 1,820,263,339 577,868,822 2,398,132,161 Long term financial assets Long-term investments unrelated parties 100 332,010 332,010 Long-term investments in related parties 110 Change the value of long-term investments 120 Long-term trade receivables 130 148,700,376 (148,700,376) Deferred income tax assets 140 Advances 150 Total 160 332,010 148,700,376 (148,700,376) 332,010 Other long term assets 170 TOTAL LONG TERM ASSETS 180 1,823,645,792 726,606,383 (148,700,376) 2,401,551,799 CURRENT ASSETS Stocks of goods and materials Materials 190 64,566,412 10,240,112 74,806,524 Growth and fattening animals 200 Items of small value and short duration 210 673,730 209,599 883,329 Production in progress 220 27,556 27,556 Products 230 239 5,404 5,643 Commodities 240 25,411,675 59,683 25,471,358 Total 250 90,679,612 10,514,798 101,194,410 Short-term receivables Short-term trade receivables 260 858,338,123 367,261,742 (339,080,624) 886,519,241 Adjustments on doubtful receivables 270 (55,683,060) (55,683,060) Short-term receivables related parties 280 Short-term advances 290 6,372,978 542,526 6,915,504 Short-term receivables on settlements with the budget 300 2,532,515 153,030 2,685,545 Claims accrued 310 9,853,361 9,853,361 Short-term receivables of staff 320 77,762 100,167 177,929 Short-term receivables calculated on income 330 613,491 383,673 997,164 Other short-term debt 340 26,541,455 49,593 26,591,048 Total 350 848,646,625 368,490,731 (339,080,624) 878,056,732 Short-term investments Short-term investments in unrelated parties 360 Short-term investments in related parties 370 Decline in value of short-term investments 380 Total 390 Cash House 400 86,611 45,081 131,692 Current accounts in local currency 410 22,668,128 118,920 22,787,048 Current accounts in foreign currency 420 473 473 Other funds 430 41,722 41,722 Total 440 22,796,934 164,001 22,960,935 Other current assets 450 1,023,260 49,147 1,072,407 TOTAL CURRENT ASSETS 460 963,146,431 379,218,677 (339,080,624) 1,003,284,484 TOTAL ASSETS 470 2,786,792,223 1,105,825,060 (487,781,000) 3,404,836,283 Annex II/7 Annex II: Pro Forma Combined Accounts Combination adjustments Moldova Lei Accounts for the year to 31 December 2009 DH Group CET-1 Adjustments Combined EQUITY Share capital Share capital 480 189,811,948 77,370,160 267,182,108 Supplementary capital 490 Capital paid 500 Capital withdrawn 510 Total 520 189,811,948 77,370,160 267,182,108 Reserves Reserves established by legislation 530 11,533,000 11,533,000 Reserves provided for by statute 540 Other reserves 550 252,360,000 252,360,000 Total 560 263,893,000 263,893,000 Retained earnings (uncovered loss) The correction results in previous periods 570 7,683,421 7,683,421 Retained earnings (uncovered loss) of previous years 580 289,997,664 289,997,664 Net profit (net loss) of period 590 Profit used for the reporting year 600 Total 610 7,683,421 289,997,664 297,681,085 Secondary Capital Differences from revaluation of long term assets 620 77,622,633 1,866,936 79,489,569 Grants 630 Total 640 77,622,633 1,866,936 79,489,569 TOTAL EQUITY 650 275,118,002 633,127,760 908,245,762 LONG-TERM DEBT Long term financial liabilities Long term bank loans 660 18,323,894 18,323,894 Long term borrowings 670 Other long-term financial liabilities 680 Total 690 18,323,894 18,323,894 Calculated long-term debt Long-term lease liabilities 700 Anticipated revenue long term 710 Grants and Revenues 720 9,452,491 9,452,491 Advances received 730 Deferred income tax liabilities 740 Long-term trade payables 750 1,719,930,918 36,011,444 (148,700,376) 1,607,241,986 Total 760 1,729,383,409 36,011,444 (148,700,376) 1,616,694,477 TOTAL LONG TERM DEBT 770 1,747,707,303 36,011,444 (148,700,376) 1,635,018,371 SHORT TERM LIABILITIES Short-term financial liabilities Short term bank loans 780 Short-term borrowings 790 Current share of long-term debt 800 Other short-term financial liabilities 810 805,615 805,615 Total 820 805,615 805,615 Short-term commercial debt Short-term trade payables 830 727,621,037 431,167,743 (339,080,624) 819,708,156 Amounts owed to related parties 840 Advances received 850 3,477,186 3,477,186 Total 860 731,098,223 431,167,743 (339,080,624) 823,185,342 Calculated short-term debt Wages owed to 870 5,431,961 1,745,250 7,177,211 On personal debt to other operations 880 3,654 1,089 4,743 Insurance liabilities 890 2,653,199 442,996 3,096,195 Debt settlement with the budget 900 20,424,072 2,729,806 23,153,878 Preliminary Debt 910 37,329 37,329 Extra payments owed to 920 32,605 32,605 Amounts owed by the founders and other participants 930 Preliminary expenses and payments related provisions 940 Other short-term debt 950 3,550,194 529,038 4,079,232 Total 960 32,063,080 5,518,113 37,581,193 TOTAL SHORT TERM LIABILITIES 970 763,966,918 436,685,856 (339,080,624) 861,572,150 TOTAL LIABILITIES 980 2,786,792,223 1,105,825,060 (487,781,000) 3,404,836,283 Annex II/8 Annex II: Pro Forma Combined Accounts Combination adjustments Moldova Lei Accounts for the year to 31 December 2009 DH Group CET-1 Adjustments Combined PROFIT AND LOSS STATEMENT Revenue from sales 010 1,457,259,978 302,642,675 (126,582,686) 1,633,319,967 Cost of sales 020 (1,602,343,140) (269,405,710) 126,582,686 (1,745,166,164) Gross profit (total loss) 030 (145,083,162) 33,236,965 (111,846,197) Other operating income 040 28,588,158 3,584,413 32,172,571 Business expenses 050 (8,659,089) (8,659,089) General and administrative expenses 060 (39,485,843) (5,601,990) (45,087,833) Other operating expenses 070 (42,519,784) (1,992,088) (44,511,872) Result from operating activities: Profit (loss) 080 (207,159,720) 29,227,300 (177,932,420) Result from investing activities: Profit (loss) 090 (53,398) 286,991 233,593 Result from financing activities: Profit (loss) 100 (698,234) 1,533,786 835,552 Result from financial and economic activities: Profit (loss) 110 (207,911,352) 31,048,077 (176,863,275) Exceptional result: profit (loss) 120 240 4,276 4,276 8,792 Profit (loss) before taxation reporting period 130 (207,911,112) 31,052,353 4,276 (176,854,483) Expenditure (savings) income tax 140 (68,786) (68,786) Net profit (net loss) 150 (207,979,898) 31,052,353 4,276 (176,923,269) Annex II/9 Annex II: Pro Forma Combined Accounts Notional Combined DH Group + CET-1 Moldova Lei Accounts for the year to 31 December 2010 Note 2010 2009 LONG TERM ASSETS Intangible assets Intangible assets 010 5,193,732 Amortization of intangible assets 020 (2,106,104) Total 030 3,092,414 3,087,628 Long-term tangible assets Active materials in progress 040 124,577,522 128,396,814 Land 050 Fixed assets 060 3,549,988,930 Natural Resources 070 Depreciation and depletion of long-term tangible assets 080 (1,280,253,583) Total 090 2,352,606,949 2,398,132,161 Long term financial assets Long-term investments unrelated parties 100 332,010 332,010 Long-term investments in related parties 110 Change the value of long-term investments 120 Long-term trade receivables 130 34,100 Deferred income tax assets 140 Advances 150 Total 160 366,110 332,010 Other long term assets 170 TOTAL LONG TERM ASSETS 180 2,356,065,473 2,401,551,799 CURRENT ASSETS Stocks of goods and materials Materials 190 85,801,408 74,806,524 Growth and fattening animals 200 Items of small value and short duration 210 847,528 883,329 Production in progress 220 27,556 Products 230 6,645 5,643 Commodities 240 25,501,930 25,471,358 Total 250 112,157,511 101,194,410 Short-term receivables Short-term trade receivables 1 260 1,011,119,521 886,519,241 Adjustments on doubtful receivables 270 (55,683,060) (55,683,060) Short-term receivables related parties 280 Short-term advances 290 13,908,089 6,915,504 Short-term receivables on settlements with the budget 300 6,048,404 2,685,545 Claims accrued 310 16,920,869 9,853,361 Short-term receivables of staff 320 336,961 177,929 Short-term receivables calculated on income 330 887,730 997,164 Other short-term debt 340 24,761,369 26,591,048 Total 350 1,018,299,883 878,056,732 Short-term investments Short-term investments in unrelated parties 360 Short-term investments in related parties 370 Decline in value of short-term investments 380 Total 390 Cash House 400 152,193 131,692 Current accounts in local currency 410 41,137,145 22,787,048 Current accounts in foreign currency 420 129 473 Other funds 430 23,253 41,722 Total 440 41,312,720 22,960,935 Other current assets 450 1,866,441 1,072,407 TOTAL CURRENT ASSETS 460 1,173,636,555 1,003,284,484 TOTAL ASSETS 470 3,529,702,028 3,404,836,283 Annex II/10 Annex II: Pro Forma Combined Accounts Notional Combined DH Group + CET-1 Moldova Lei Accounts for the year to 31 December 2010 Note 2010 2009 EQUITY Share capital Share capital 480 820,837,398 820,837,398 Supplementary capital 490 Capital paid 500 Capital withdrawn 510 Total 520 820,837,398 820,837,398 Reserves Reserves established by legislation 530 Reserves provided for by statute 540 Other reserves 550 Total 560 Retained earnings (uncovered loss) The correction results in previous periods 570 7,918,795 Retained earnings (uncovered loss) of previous years 580 Net profit (net loss) of period 590 16,791,988 Profit used for the reporting year 600 Total 610 16,791,988 7,918,795 Secondary Capital Differences from revaluation of long term assets 620 79,248,773 79,489,569 Grants 630 Total 640 79,248,773 79,489,569 TOTAL EQUITY 650 916,878,159 908,245,762 LONG-TERM DEBT Long term financial liabilities Long term bank loans 660 38,295,748 18,323,894 Long term borrowings 670 Other long-term financial liabilities 680 Total 690 38,295,748 18,323,894 Calculated long-term debt Long-term lease liabilities 700 Anticipated revenue long term 710 Grants and Revenues 720 13,749,570 9,452,491 Advances received 730 Deferred income tax liabilities 740 Long-term trade payables 2 750 1,680,514,415 1,607,241,986 Total 760 1,694,263,985 1,616,694,477 TOTAL LONG TERM DEBT 770 1,732,559,733 1,635,018,371 SHORT TERM LIABILITIES Short-term financial liabilities Short term bank loans 780 24,000,000 Short-term borrowings 790 Current share of long-term debt 800 Other short-term financial liabilities 810 712,688 805,615 Total 820 24,712,688 805,615 Short-term commercial debt Short-term trade payables 2 830 823,210,482 819,708,156 Amounts owed to related parties 840 Advances received 850 9,612,458 3,477,186 Total 860 832,822,940 823,185,342 Calculated short-term debt Wages owed to 870 10,195,701 7,177,211 On personal debt to other operations 880 21,626 4,743 Insurance liabilities 890 4,034,018 3,096,195 Debt settlement with the budget 900 3,098,738 23,153,878 Preliminary Debt 910 147,593 37,329 Extra payments owed to 920 32,605 32,605 Amounts owed by the founders and other participants 930 Preliminary expenses and payments related provisions 940 Other short-term debt 950 5,198,227 4,079,232 Total 960 22,728,508 37,581,193 TOTAL SHORT TERM LIABILITIES 970 880,264,136 861,572,150 Annex II/11 Annex II: Pro Forma Combined Accounts Notional Combined DH Group + CET-1 Moldova Lei Accounts for the year to 31 December 2010 TOTAL LIABILITIES 980 3,529,702,028 3,404,836,283 2009 2009 PROFIT AND LOSS STATEMENT Revenue from sales 010 1,905,769,419 1,633,319,967 Cost of sales 020 (1,802,637,613) (1,745,166,164) Gross profit (total loss) 030 103,131,806 (111,846,197) Other operating income 040 53,932,729 32,172,571 Business expenses 050 (8,478,189) (8,659,089) General and administrative expenses 060 (46,364,860) (45,087,833) Other operating expenses 070 (84,853,427) (44,511,872) Result from operating activities: Profit (loss) 080 17,368,059 (177,932,420) Result from investing activities: Profit (loss) 090 (197,678) 233,593 Result from financing activities: Profit (loss) 100 (615,778) 835,552 Result from financial and economic activities: Profit (loss) 110 16,554,603 (176,863,275) Exceptional result: profit (loss) 120 120 240 Profit (loss) before taxation reporting period 130 16,554,723 (176,863,035) Expenditure (savings) income tax 140 (3,531) (68,786) Net profit (net loss) 150 16,551,192 (176,931,821) 1 January 2010 Profits Other 31 December 2010 MOVEMENTS IN CAPITAL Share Capital and additional Share Capital 010 820,837,398 820,837,398 Supplementary Capital 020 Capital paid 030 Capital withdrawn 040 Total 050 820,837,398 820,837,398 Reserves Reserves established by legislation 060 Reserves provided for by statute 070 Other reserves 080 Total 090 Retained earnings (uncovered loss) Correction of results in previous periods 100 7,918,795 (7,918,795) Retained earnings (uncovered loss) of previous periods 110 Net profit (loss) for period 120 16,551,192 240,796 16,791,988 Profit utilised in period 130 Total 140 7,918,795 16,551,192 (7,677,999) 16,791,988 Secondary Capital Differences from revaluation of long term assets 150 79,489,569 (240,796) 79,248,773 Grants 160 Total 170 79,489,569 (240,796) 79,248,773 TOTAL 180 908,245,762 16,551,192 (7,918,795) 916,878,159 Annex II/12