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Board of Directors

Annual Report 2005 x1

P.O. Box 1229, Postal Code 131, Hamriya

Sultanate of Oman

Tel.: 24573400, Fax: 24573440

1

His Majesty Sultan Qaboos Bin Said

1. Chairman’s Message 8

2. The Electricity Industry New Market Structure 10

3. The Company Profile 12

• Incorporation and Ownership

• Duties and Responsibilities

• Description of the Logo

• Highlights

4. Organization and Human Resources 16

• The Organization Structure

• Human Resources

• Training

5. Business overview 17

• Summer and winter Demand and Energy

• Customers Services

• Tariff Categories

• New Connections

6. Distribution System 24

• Electric Lines

• 33/11 kV Primary Sub Stations

• Distribution Sub Stations

• Operation and Maintenance

7. Power Quality Indicators 27

8. Projects Highlights 28

9. Health, Safety and Environment 29

10. Market Regulation and Financial Highlights 30

11. Future Outlook 32

12. Corporate Governance 33

13. Financial Statements and

Notes to the Statements 37

Contents

3Annual Report 2005

4 Annual Report 2005

SN. Figure Description Page

1. The Successor Companies and Associated Activities 10

2. Mazoon Franchised Areas 11

3. The Organization Structure 15

4. Employment and Omanization 16

5. Summer and Winter Demand 17

6. Hourly Summer and Winter Demand 18

7. Energy Profile May- December 19

8. Regional Customer Categorization 19

9. Actual Income and Revenue 21

10. Revenue By customes Category 21

11. Customers Categories Energy Distribution 21

12. Growth of Regulated Customers Accounts 22

13. Regional Trend of New Connections 22

14. (33/11 & 0.433) Distribution Lines 24

15. (33/11KV) Transformers 25

16. (11/0.433Kv) Substations 25

17. 33/0.433 KV Transformers 26

18. SAIFI Indicator of The Three Regions 27

19. SAIDI Indicator of The Three Regions 27

20. CAIDI Indicator of The Three Regions 27

21. Projects In Progress 28

List of Figures

5Annual Report 2005

Tables

SN. Table Description Page

1. Highlights 14

2. The Company & Contractors Human Resources 16

3. Training Courses And Staff Participation 16

4. Energy Profile May- December 18

5. Monthly Regulated Customer Accounts By Tariff Type 20

6. Customers Categories Revenue 20

7. Villages Electrification and New Lines Added 23

8. Statistics and Network Major Assets At 31 December 2005 24

9. Distribution Business Outsourced Activities 26

10. The Power Quality Indicators 27

11. Load and Non Load Related CAPEX 28

12. MZEC Price Control 30

13. Maximum Allowed Revenues 31

14. Actual Regulated Revenue 31


Board of Directors

Eng. Hamed Bin Mohammed Al Mahruqy

Chairman

Eng. Mubarak Bin Juma Al Araimi

Deputy Chairman

Dr. Zaid Bin Khamis Al Siyabi

Member

Mr. Khalifa Bin Ali Al Hosni

Member

Mr. Haitham Bin Yousif Al Zidjali

Member

7Annual Report 2005

Management Team

Eng. Abdullah Bin Said Al BadriGeneral Manager

Eng. Majid Bin Nasser Al BusaidiPlanning & Projects Manager

Eng. Mohammed Bin Abdullah Al HajriDakhiliah Distribution Manager

Eng. Mohammed Bin Rashid Al QurriSharqiya Distribution Manager

Mr. Salim Bin Yasser Al SulaimaniAdministration & Finance Manager

Eng. Mohammed Bin Hamed Al BusaidiCustomers Services Manager

Eng. Naser Bin Khalid Al RashaidiSouth Batinah Distribution Manager


Chairman’s Message

I have the honor to present the first annual report of the Company for the year ended 31st

December 2005. This year was remarkable as the company start official business on 1st May

2005, following the implementation of the transfer from the Ministry of Housing, Electricity and

Water to the successor government owned companies and applying the provisions of Royal

Decree. No. 78/2004 concerning the regulation and privatization of electricity and related water

sector.

According to the transfer scheme and the company distribution and supply license granted by the

Authority for Electricity Regulation, Oman the responsibilities, liabilities and revenues for the

distribution and supply of electricity in the South al Batinah, Dakhilyah and Sharqiyah were

transferred to the company.

In accordance with the regulatory framework of the new industry of electricity in Oman, the

company entered into several sector agreements for wholesale of electricity supply with Oman

Power and Water Procurement Company, connection and use of system agreements with Oman

Electricity Transmission Company, connection agreements with Majan Electricity Company and

Muscat Electricity Distribution Company and accounting services agreement with the Electricity

Holding Company.

In the context of building the company institutional infrastructure the Board of Directors and

Executive management were appointed and exercised their official functions. The company

prepared various policies and procedures as per the license requirements and obtained necessary

licenses from different government bodies. During the year, Five additional regional offices were

opened added to the existing thirteen offices to provide electricity services to 25 Willayat of the

Sultanate.

9Annual Report 2005

Chairman’s MessageIn its first financial year as at 31st December 2005 (8 months) operations, the company achieved total

revenue of RO.52.36Million, out of which RO.25.56 Million (49.20%) from sales of electricity and other

operating income, and RO.26.6 Million (50.80%) from subsidy. The company ended the financial year

with a net profit of RO. 3.668 Million, a basic earning per share R.O 7.336

The company has faced in its first year of operation many challenges, perhaps most notably the adoption

and compliance to the requirements of the new regulatory framework, management of the transional

phase and the working environment in the private sector with the limited human resources. In this context,

I wish to convey my sincere thanks to the Authority for Electricity Regulation, Oman, Electricity Holding

Company and sisters companies in the industry for their support and understanding of the nature of that

stage.

Also, I would like to thank the Board of Directors, the executive management and staff of the company on

the sincere efforts made over the past year valuing their contributions in the preparation of the company’s

transfer scheme and the management of the transition, and wish everyone success in the next year to

achieve the goals of the company and government objectives from the restructuring and privatization of

the electricity sector in Oman under the wise leadership of His Majesty Sultan Qaboos Bin Said.

Eng. Hamed Bin Mohammed Al Mahruqy

Chairman of The Board of Directors.


The Electricity Industry New Market StructureEstablishment of the Company

In December 1999 the Council of Ministers approved a process of restructuring the electricity and related watersector (the Sector) to facilitate further private sector participation in the generation, transmission, distribution andsupply of electricity in the Sultanate.

The policy required the implementation of a new market structure and regulatory framework for the Sector andfurther required that these be implemented through comprehensive sector specific legislation.

The new regulatory framework was implemented and a timetable was set for the implementation of the new marketstructure through the Law for the Regulation and Privatisation of the Electricity and Related Water Sector (the SectorLaw) promulgated by Royal Decree 78/2004. The Sector Law came into effect on 1 August 2004 and the deadlinefor implementing the new market structure was set as 1 May 2005.

As required by the Sector Law, a Transfer Scheme was implemented by a Decision of the Minister of NationalEconomy on 1 May 2005. The Transfer Scheme transferred the operational assets and liabilities of the Governmentand in respect of the generation, transmission, distribution and supply of electricity (and related water) to a holdingcompany and nine subsidiaries.

Coincidentally, the responsibilities of the Government for undertaking the activities of generation, transmission,distribution and supply of electricity previously undertaken by the Ministry of Housing Electricity and Water wereallocated to the subsidiary companies under the supervision of new regulatory legislation embodied in the SectorLaw and administered by the Authority for Electricity Regulation, Oman.

The nine subsidiary companies have, from 1 May 2005, undertaken specific regulated activities in a new marketstructure alongside and on the same terms as existing private sector companies. The Successor Companies andassociated regulated activities are shown in figure (1) below:

Figure (1): The Successor Companies and Associated Activities

11Annual Report 2005

The Electricity Industry New Market StructureThe Electricity Holding Company is 100 per cent owned by the Ministry of Finance and each of the subsidiarycompanies is 0.01 per cent owned by the Ministry of Finance and 99.99 per cent by the Electricity HoldingCompany.

Of the nine subsidiary companies, all but two (Oman Power and Water Procurement Company and Rural AreasElectricity Company) will be privatized in the near future.

The company undertakes the regulated activity of distribution and supply of electricity in South Al Batinah, AlDakhilyah and Al Sharqiyah as illustrated in figure (2) under a license granted to it by the Authority for ElectricityRegulation, Oman

Figure (2): Mazoon Franchised Areas


The Company ProfileIncorporation and Ownership

The company was incorporated by articles of incorporation on Feb 2nd, 2003 under the Commercial CompaniesLaw No. 4/74, and amendments thereto, of Oman. MZEC is a wholly owned subsidiary of the Electricity HoldingCompany (“EHC”) that in turn is 100% owned by the Government of the Sultanate of Oman.

The company is effectively a monopoly with the exclusive right to own and operate distribution and supply systemof electricity to the customers in its franchise areas.

The company authorized, issued and paid-up capital consists of 500,000 shares of RO 1 each. The ElectricityHolding Company owns 99.99% of the company’s shares (499,950 shares) and the Ministry of Finance owns0.01% of total shares (50 shares). The company started its operations on 1st May 2005 following theimplementation of “the Transfer Scheme” issued pursuant to Royal Decree 78/2004” Sector Law”.

Duties and Responsibilities

The company duties and responsibilities as identified in articles (90 and 91) of the sector law are:

• Article (90)

(a) Undertake to finance, operate, maintain, develop and expand the owned Distribution System in a safemanner and in accordance with the relevant performance Security Standards, and shall offer terms forConnection with the Distribution System and use of the System on a non-discriminatory basis and equalopportunity;

(b) To charge the Permitted Tariff or Cost-Reflective Tariff for Connection to its Distribution System, and shallhave the right to disconnect services from the Customers who do not pay amounts due to it or to a LicensedSupplier;

(c) To become a party to the Grid Code, and to implement, publish, develop and amend a Distribution Code;

(d) To charge a Cost-Reflective Tariff to Persons Licensed to Supply from his System;

(e) Not to Connect an RAEC System without the approval of the Authority;

(f) To acquire any Distribution assets from the Rural Areas Electricity Company in accordance with the mannerspecified by the Authority pursuant to Article (88) of this Law;

(g) Undertake not to discriminate without legal justification in favor or against any Person when undertaking itsregulated activities;

(h) Undertake to design, construct, develop, own, operate and maintain International Interconnections inaccordance with Article (115) of this Law;

(i) To purchase all goods and services and manage them on the basis of Economic Purchase.

All being in the manner specified in the License according to the provisions of this Law.

• Article (91)

(a) To meet all reasonable demand for the Supply of electricity to Premises located within its Authorized Area,which are Connected to a Distribution or Transmission System on a non-discriminatory basis, and he shallpublish the Permitted Tariff and Cost-Reflective Tariff;

(b) To arrange for the meter reading and to submit bills to Customers and to collect amounts due to it inaccordance with the conditions of its License;

(c) To pay a Licensed Transmission System Operator or a Licensed Distribution System Operator, inconsideration for the use of the System, as the case may be;


The Company Profile(d) Not to acquire electricity other than from the Oman Power and Water Procurement Company and shall act

as the agent of the Oman Power and Water Procurement Company in relation to the purchase of the Outputof Autogenerators;

(e) Undertake not to discriminate without legal justification in favor or against any Person when undertaking hisregulated activities;

(f) To purchase and manage all goods and services on an Economic Purchase basis;

(g) To charge Permitted Tariffs and Cost-Reflective Tariffs in consideration of all Supplies made by it accordingto the License granted to him; and shall have the right to take all prescribed procedures in this Law in caseof Customers who default on payment, including the termination of Supply;

(h) To acquire Supply business from the Rural Areas Electricity Company in the manner specified by theAuthority.

All being in the manner specified in the Licence according to the provisions of this Law.

Description of the Logo

• Star represents in the distribution system star connections

• Outer triangle symbolizes the Delta connection in the distribution system

• Triangulation reflect the three areas of the company’s license Al Dakhilyah, Al Sharqiyah andSouth Al Batinah

• The three colors red, yellow and blue colors are commonly used in coding electricity faces.

• Red and yellow representing flare and electric power.


Highlights Table (1): Highlights

SL# Description Units 2005

1 General Data

1.01 Service Area Sq KM 74,669

1.02 Customers(Output) Number 194,118

1.03 Total (Output) MWh 1,944,385

1.04 Energy Loss % 16.90%

1.05 Maximum Demand(Output) MW 793.6

1.06 Distribution Stations(Input) Number 233

1.07 Distribution Stations (Input) MVA 1958

1.08 Sub-Stations (Input) Number 8,897

1.09 Sub-Stations(Input) MVA 2594.5

1.10 Distribution Network 33KV Ckt KM 2630.8

1.11 Distribution Network 11KV Ckt KM 8118.8

1.12 Distribution Network 0.433 KV Ckt KM 8829.7

2 Ratios

2.01 Total MWh/Total Connection MWh/ Connection 10.017

2.02 Total revenue/ MWh Supplied RO/MWh 13.045

2.03 Staff Costs/ MWh Supplied RO/MWh 0.808

2.04 Staff Cost/System Peak MW RO/MW 1980.847

2.05 CAPEX/MWh Sold RO/MWh 25.191

2.06 MWh Supplied/ Total Employees MWh/Employee 11,036.467

2.07 OPEX/MWh Sold RO 24.728

2.08 Average Staff Cost RO 909.722

2.09 Profit Before Tax /Share RO 8.832

2.10 Profit Before Tax /Employee RO 20,830.189

2.11 Profit Before Tax /MWh Sold RO 2.271

Company at a Glance

74,669 Km2 of Service Areas194,118 Customers

Annual Units Sold 1,944,385 MWHMaximum Demand 793.6MW233 33/11 KV substations

8,849 11/0.433 KV Substations52.3 Million Revenue


Organization and Human Resources The Organization Structure:

The company structure is designed to fulfill and reflects the statutory obligations of the company. Several factors havecontributed with various degrees in shaping the company organization structure such as franchised areas geography,new market structure obligations, new role of distribution department in managing 33 KV systems, continuation ofoutsourced services, concentration on core business with emphasis on specialization by separating distributionsystem management from the customers services.

Figure (3) below shows the company organization structure and departments key responsibilities and deliverablesare then explained.

Figure (3): The Organization Structure.

Board of Directors

Regulatory Compliance General Manager Technical Office

Admin & Planning & Customers Distribution Distribution DistributionControl Centre

Finance Projects services Al Dakhiliyah South Al Batinah Al Sharqiyah

• General Manager Office: This unit includes the company corporate level services such as regulatorycompliance expertise, HSE, legal and corporate technical support.

• Administration and Finance: This department manages the ‘Settlement Process” with clients, the financialservice agreement with the Electricity Holding Company, human resources development, stores managementand other support deliverables.

• Customers Services: The key deliverables of this department include the administration of the Bulk SupplyAgreement with Oman Power and Water Procurement company (PWP), management of the meter reading,billing and collection contract, and carries out energy sales projections by customer category and regional. It isalso where direct interface takes place with the customer. The department has 18 districts offices serving 25willayats.

• Planning and Projects: This department prepares the company’s distribution capability statement with itsannual updates, management for the tendering and projects. It introduces the geographical information systemto the company to enhance the assets and resources efficiencies. The department also manages the differenttypes of drawing (design drawings, approved drawings, As built drawings, etc.). It also maintains the database,documentations and provides IT support.

• Regional Distribution- Three distribution departments are established in the South Batinah, Al Dakhilyah andAl Sharqiyah regions. The three departments oversee the distribution system in their respective regions byoperating and maintaining (33, 11 and 0.433) KV system. The department manages the outsourced activities tocontractors and network extensions for customers onnections.

• Control Center : This unit controls the distribution system operations, liaises with the Load Dispatch Center(LDC) and other distribution companies control centers and also provides reports on system performance.


Organization and Human Resources Human Resources

The company started in 1st May 2005 with 195 employees transferred from the Ministry of Housing, Electricity andWater. This number increased to 212 by the end of 2005, as the company provided 19 job opportunities during theyear. The company Outsourcing some activities to local Omani agents for meter reading billing and collection,emergency and maintenance services and live lines washing for distribution systems as well as some other non corebusiness activities. Contractors’ workforce was 1047 employees. Table (2) and figure (4) illustrates the companyand contractors, Omani and expatriate employees.

Table (2): The Company and Contractors Human Resources

Employees Omani Expatriate Total % Omanization

M F M F

Direct Employees 203 6 3 0 212 98.58%

Contractors Employees 654 28 365 0 1047 65.14%

Total 857 34 368 0 1259 70%

Figure (4): Employment and Omanization

Training

Human resources development is the pillar of Mazoon’s growth. To underpin the development of the company’sstaff, 641 participants- day of training provided in 2005 both locally and abroad as illustrated in Table (3) below.Among total of 212 employees working for the company, 110 employees participated in training.

Table (3): Training Courses and Staff Participation

Course Type Number of Participants-day

HSE Courses 582

Other Courses 59

Total participants-day Training 641


Business OverviewSummer and Winter Demand and Energy

Due to weather characteristics in Oman, demand for electricity varies between the summer period (May-August) andthe winter period. The demand increases to its full extent during summer and decreases significantly during nonsummer. Figure (5) shows the monthly demand profile of the distribution system and figure (6) shows hourlysummer and winter profile. The significant increase is electricity demand and therefore in energy consumed duringsummer period is influenced by the need for operating air conditioners in order to overcome the high degree oftemperatures, which reaches +45Cº.

• Summer Peak (2nd July 2005), Demand Profile Analysis:

1. The maximum demand on the Distribution Network was at 15:00 to the value of 793.6MW. The demand forelectricity reached 700s between 14:00 and 16:00 mostly because the additional Air Conditioners load arises atthis time and it reaches its peak at the time 15:00. Although private companies and commercial shops are closedduring this time but the A/C and refrigerators remain ON and due to the fact that load major contributors areresidential customers.

2. Between 17:00 and 20:00 Hrs, the demand decreased mainly due to switching off the A/Cs as a result of adecrease in the temperature which stays till evening time.

3. Again this trend of demand appears during 22:00and 01:00 Hrs due to the Air conditioning and lighting load.Most of commercial companies’ buildings, schools, houses and street lights remaining ON during night. Theselights are Fluorescent lamps, working at a low power factor.

4 After midnight the temperature falls and the A/C load decreases. The load reaching its minimum at 414.7 MW.

• Winter Minimum (31st December 2005), Demand Profile Analysis:

1. During winter less A/Cs are used due to the refreshment in the weather and moderate temperatures. Thedemand reached its minimum of about 145.9 MW at 04:00.

2. The demand trend shows an upward slope during the official working hours due to the functions of factories,hospitals, commercial and government institutions.

3. The demand keeps increasing after the sunset due to the increased use of lighting load and it reaches the peakof 300.3 MW at 18:00 then it falls until it reaches its minimum point of145.9 MW at 04:00 when the minimumtemperature is recorded.

Figure (5): Summer and winter Demand

710

610

510

410

310

210

110

323.8

793.6

307

145.9

May705.8256.8

June764.1329.8

July793.6302.5

August763.2317.2

September670.9302.5

October573.2258.2

November390.5179.3

December307

145.9


Business OverviewFigure (6): Hourly Summer and Winter Profile

Table (4) presents May to December 2005 outlining the flow of energy from the generation sources via OmanElectricity Transmission Company (OETC) Network to the bulk supply points and finally to the end use customer. Thedata in Table (4) is plotted in Figure (7). As obvious from the energy profiles of Figure (7) that there are considerablegaps between the three presented profiles which represent the losses in the system. The losses are divided into twoparts: losses at OETC network and losses at Mazoon network.

The losses at OETC network are equal to 5.73%. These are from the point where Mazoon purchases energy fromthe PWP (system entry) to the bulk supply points (entry of Mazoon network). The remaining losses are in Mazoondistribution and supply businesses and are classified as technical and non technical losses. This represents around16.9% of losses from energy delivered to the bulk supply points.

It is noticed from Figure (7) that the losses increased during the summer period and reduced with the decline ofenergy demand after summer. The major contributor to this is the high ambient temperature which affects theperformance of the network parts and therefore losses are increased. In addition to non-technical losses.

Table (4) Energy Profile May-December

Month Bought (from PWP) At (Bulk Supply Points) (Billed)

May 345952 327,400 217,970

Jun 397316 382,463 255,965

July 405446 387,833 307,381

Aug 409943 359,365 259,571

Sep 323605 309,321 297,355

Oct 261755 250,367 237,114

Nov 189145 179,553 207,595

Dec 148842 143,429 161,434

Total 2482004 2,339,731 1,944,385

Losses 5.73% 16.90%

MW

g ( ) y

870.0770.0670.0570.0470.0370.0270.0170.070.0

Summer Profile 2/7/2005 Winter Profile 31/12/2005

00:0001:00

02:0003:00

04:0005:00

06:0007:00

08:0009:00

10:0011:00

12:0013:00

14:0015:00

16:0017:00

18:0019:00

20:0021:00

22:0023:00


Business OverviewFigure (7) Energy Profile May-December

It is also noticed that in months November and December the billed MWh is higher than the energy bought fromthe PWP. This is because the PWP meters reading at certain instant in the month whereas the customers' meters areread during a period of 10 days, which then leads to variations in energy readings. However, as a total energy read,the billed MWh for the eight months period adjusts the errors appeared in the monthly readings as each monthcompensates previous months readings.

Customers Services

Mazoon has 18 district offices dedicated to customer service serving 25 willayh. Most of customer’s new connectionapplications and complaints are received there. Customers services in Al Sharqiyah Region are in Sur, Jaalan Bani BuAli, Jaalan Bani Bu Hassan, Mudhaibi, Bidiyah, Mudhairib and W. Tayeen. In Al Dakhilyah our customers servicesoffices are located in Nizwa, Bahla, Sumail, Adam, Izki and Bisya. South Al Batinah offices are located in Rustaq, Barka,Suwaiq, Musanah and Nakhal. Regional customers’ categorization is shown in figure (8) below.

Figure (8): Regional Customers Categorization

450000

400000

350000

300000

250000

200000

150000

100000

MW

h

May Jun

July

Aug Sep

Oct

Nov

Dec

Bought (from PWP) At (Bulk Supply Points) (Billed)


Business OverviewTariff Categories

The company depends on the Oman Power and Water Procurements Company for procurement of electricitysupplied to its customers. The company distributes electricity to 194,118 customers over 25 willayats. Domesticcustomers represent 79.5% of the customers, 15% Commercial; almost 5% Government and the rest aredistributed between tourism, Agricultural and Fisheries as illustrated in table (5) below.

Table (5): Monthly Regulated Customer Account by Tariff Type

Type of Customers May June July August September October November December

Domestic 151,356 151,792 152,238 152,622 153,142 153,488 154,102 154,361

Commercial 28,125 28,200 28,254 28,626 28,700 28,765 28,835 28,941

Others 10,854 10,922 10,949 10,670 10,709 10,754 10,789 10,816

Total 190,335 190,914 191,441 191,918 192,551 193,007 193,726 194,118

Table (6) below demonstrates revenues generated by customers categories with some indices.

Table (6): Customers Categories Revenue

Category # Customers Revenue RO MWh Supplied MWh / Revenue / Customer Customer

Domestic 154,361 14,011,947.00 1,332,074.18 8.630 90.774

Commercial 28,941 4,354,398.00 241,291.90 8.337 150.458

Industrial 43 431,309.00 23,694.00 551.023 10,030.442

Agri. & Fisheries 1,464 636,845.00 52,479.00 35.846 435.003

Hotels & Tourism 12 36,043.00 1,993.00 166.083 3,003.583

Gov 9,297 5,897,797.00 292,853.00 31.500 634.376

Total 194,118 25,368,339.00 1,944,385.08 10.017 130.685

The highest revenue is generated from residential customers and as the company earns RO 90.7 per customer thisaccounts for 55% of the total revenue, which is then followed by government customers. Highest Mega Watt houris supplied to industrial customers by 551 MWh per customer.


Business OverviewThe following charts represent actual income and revenue for categories of customers.

Figure (9): Actual Revenue & Income RO Figure (10) Revenue by customers’ category

Figure (11): Customers Categories Energy Distribution

Actual Income & Revenue (R.O.)

4,500,0004,000,0003,500,0003,000,0002,500,0002,000,0001,500,0001,000,000

500,0000

Rials

Oman

i

May June July August September October November December

g ( ) y g y

* Others26%

Industrial2%

Commercial17%

*Others: Agricultural and Fisharies, Hotels and Tourism, and Government

Domestic55%

*Others18%

Industrial1%

Commercial11%

Domestic70%

*Others: Agricultural and Fisharies, Hotels and Tourism, and Government


Business OverviewNew Connections

Total of 3783 new connections were executed during the period May-December 2005. These are primarily housesin new villages’ electrification or planned areas as well as farms and other usage connections. Figure (12) belowdemonstrates the growth in Regulated Customers Accounts.

Figure (12): Growth of Regulated Customer Accounts

The biggest project the company completed for villages electrification was tender No. 87/2004 in Al SharqiyahRegion (433V & 11KV) Power Supply to Aqeedah, Khazaina, Nimar, Sak Naghayel, Al Fara'ah Khuzamah & HeemAreas in Al Qabil. It consists of extension of 11KV O/H line by length of 40.5KM, construction of low tension line bylength of 9.6 Km and installation of 22 Nos. distribution transformers.

The largest villages’ electrification project transferred to 2006 is electrical distribution works (433V & 11KV networks)at Giza Area in Mudhibi at Sharqiyah Region and Al Ghaidranah in Adam. It consists of extension of 33 KV O/H lineby length of 71 Km, 3X2 MVA sub stations , construction of 11KV O/H for 150KM, installation of 78 distributiontransformers and construction of LT O/H line by length of 80Km. Figure (13) illustrates regional new connections,whereas table (7) details new villages electrification completed during the year.

Figure (13): Regional Trend of New Connection

May June July August September October November December

195,000

194,000

193,000

192,000

191,000

190,000

189,000

188,000


Business OverviewTable( 7): Villages Electrification and New Lines Added

Region Willlayah Villages Electrified in 2005 New Lines Added

11KV (km) 415V (km)

AL SUWAIQA'Samaa 1.6 0.16

Qulool 2 0.756

AL MUSANAH Muwailha 1.12 0.04

NAKHALQalqal 4 3.42

Gubrat Al Taw 2.5 0.72

AL AWABIMuhiniyah 0.4 0.04

Wadi Al Mahani 0.3 0.126

Wadi AlMaawilAlWasit 0.64 0

Hubra 1.6 0

SAMAILGa'ez, Nahdah 6 2

Al Barak 3.6 0.2

IZKI Qadhabat 19.6 2.8

ADAMAl Anqa 5 2

Wadi Halfain 10.5 4.3

Al Ruwaidah, Al Rafeeiah 7.5 1.3

AL MUDHABISagam 1.9 0.75

Saeed Salem Wald Azzaboon area 9 3.2

Wadi Al Melah 1.5 0.3

Abu Delma 7.8 2.6

IBRA Fijj, Hammail South Area 2.8 0.3

Nasaf 7 2

AL QABIL Alfara'ah Khuzamah & Heem 40.5 9.6

J.B.B ALIAllitaq 0.55 1

Abu Fushaighah 1.3 1.2

AL KamilAl Salil 0.43 1.64

Al Mazrah 2.6 1.2

J.B.B HASSAN Saihoon 0.9 3.4

Total 142.64 45.052

SOU

TH A

L B

ATIN

AH

AL

DA

KH

ILYA

HSH

AR

QIY

AH


Distribution SystemThe company owns, operates, maintains and develops a complex distribution network within its Authorized Area(South Batinah, Al Sharqiyah and Al Dakhilyah). This distribution network is composed mainly of electric lines, primarysubstations and distribution transformer stations. Table (8) shows statistics and network major assets on regional andaggregated levels.

Table (8): Statistics &Network Major Assets at 31st December 2005

Dakhilyah Sharqiyah South Al Batinah Total

Area (KM2) 31900 36400 6399 74,669

Population 1 267140 304469 345664 917273

Customers 59579 67708 66831 194118

Number of 33/11KV SS 42 54 41 137

Number of 11/0.433 KV SS 2862 2886 3101 8849

Number of 33/11 KV TX 74 85 74 233

Number of 33/0.433 KV TX 12 18 18 48

1. Source: MNE Report for 2003 Census

Distribution system major components are further explained below.

Electric Lines

The electric lines used in the distribution network are overhead lines and underground cables of different cross-sectional areas and different voltage levels (33, 11 & 0.433Kv). Figure (14) below shows the total lengths of theelectric lines in kilometers distributed according to the voltage levels. The figure demonstrates that the overhead linesdominate over underground cable due to the regional character of the Authorized Area, whereas the 0.433Kv LowTension (LT) overhead lines dominate over the other two voltage levels. The underground cables represent a lessercontribution in all the three voltage levels.

Figure (14): (33, 11&0.433KV) Distribution Lines

2391.9

7637 8088.7

238.9 481.8 741

O.H Cables33 KV Line

O.H Cables11 KV Line

O.H Cables0.433 KV Line


Distribution System33/11Kv Primary Sub Stations

Primary substations step down the 33Kv voltage to11Kv voltage to feed the distribution transformer stations through11Kv overhead lines or underground cable feeders. Figure (15) below shows the total number of 33/11Kvtransformers. The figure illustrates the distribution of the transformers according to their MVA rating. The 6 MVA ratingis the dominant, whereas the 16 and the 5 MVA ratings have much less contribution to the total number of the33/11Kv transformers.

Figure (15): 33/11 KV Transformers

Distribution Sub Stations

a) 11/0.433Kv Distribution Sub Station

For the purpose of transporting electricity to most premises, distribution transformers are used to step down the 11Kvvoltage to the desired 433V voltage level. Chart in figure (16) shows the distribution of these 11/0.433Kvtransformers according to KVA rating which ranges form 1000 KVA to 50 KVA. The dominant rating is the 100 KVAand its contribution is 35% as seen from the figure.

Figure (16): 11/0.433 KV Sub Stations

140

120100

8060

40

20

0

42

2 224 34

8

121

20 MVA 16 MVA 10 MVA 6 MVA 5 MVA 3 MVA 1 MVA


Distribution Systemb) 33/0.433Kv Distribution Sub Station

In very rare occasions and where 11Kv networks are not available, 33/0.433Kv distribution transformers are used tosupply some special loads such as street lighting and PDO special loads. Illustrated below, in figure (17) thedistribution of these transformers according to the KVA rating. The 100 KVA rating is the dominant over the otherratings.

Figure (17): 33/0.433KV Transformers

This type of transformers contribution to the total number of Mazoon’s distribution transformers is less than 0.6%and is decreasing as the 11Kv network expands and covers new areas.

Operation and Maintenance

As explained in previous sections, some distribution business activities are outsourced to the private sector. Theseservices contracts and monthly costs are given in table (9) below

Table (9): Distribution Business Outsourced Activities

SN Contract Type Monthly Cost RO

1 Emergency and Maintenance of 11 KV & LT Networks 103,747.00

2 Maintenance of 33 KV Networks 13616.9

3 Live Line washing for 33 & 11KV networks 21470.6

4 AC maintenance system at indoor s/s 475.00

5 Cleaning for 33/11 KV S/S 862.00

6 Total 140,171.50

The company spent during the year:

• RO. 829,976 for Emergency and Maintenance of 11 KV & LT Networks

• RO. 108,935.200 for Maintenance of 33 KV Networks.

• RO. 171,764.800 for Live Line washing for 33 & 11KV net works

• RO. 3,800 for AC maintenance system at indoor s/s.

• RO. 6,896 Cleaning for 33/11 KV S/S.

Others2

4%

315 KVA4

8%

200 KVA11

22%

100 KVA32

66%


Power Quality IndicatorsThe internationally accepted power quality indicators are system Average Interruption Frequency Index (SAIFI),System Average Interruptions Duration Index(SAIDI), Customer Average Interruption Duration Index (CAIDI),Interruption per 100 Km of Lines and Minutes Lost per Km of lines.

The company power quality indicators for the year are shown in Table (10) and illustrated in Figures 18, 19 and 20

Table (10): The Power Quality Indicators

South Batinah Dakhiliyah Sharqiyah Mazoon

SAIFI/1000 Customer 4.34 4.93 6.75 5.36

SAIDI/1000 Customer 361 Minutes 343 Minutes 548 Minutes 421 Minutes

CAIDI 83 Minutes 69 Minutes 81 Minutes 78 Minutes

Interruption / 100Km 48 25 38 37

Minutes lost / km 8 Min. 7Min. 11 Min. 9 Min.

Figure (18): Figure (19): Figure (20):SAIFI Indicators of three regions SAIDI Indicators of three regions CAIDI Indicators of three regions

1 The representative outages are for 11 & 33 KV only (January- December 2005).

South Batinah27%

Dakhiliah31%

Sharqiyah42%

SAIFI

South Batinah29%

Dakhiliah27%

Sharqiyah44%

SAIDI

South Batinah35%

Dakhiliah30%

Sharqiyah35%

CAIDI


Projects Highlights41 projects were completed during the period of May to December 2005. These related to extension of villageelectrification and distribution system reinforcement with total amount of R.O 2,654,345. Moreover, 696 projects ofcustomers’ contribution extension with total amount of R.O. 1,120,484.7. The period of January to April 2005 (PriorTo The transfer) has not been taken into consideration. Most of these projects have either transferred from Ministryof Housing, Electricity and Water as part of the transfer scheme or tendered by the company.

Projects progress faced with some challenges particularly shortage of poles, limitation of contractors, shortage of laboror drawing and plots approval. Following Table shows load related and non load related CAPEX. Load related CAPEXare any project related to distribution network, such as new extensions, villages’ electrification, reinforcement, etc.Non load related CAPEX are not directly related to the distribution system such as IT projects, GIS, vehicles and otherassets.

Table (11): Load and Non-Load Related CAPEX

Completed in 2005 PROJECTS IN PROGRESS

Load Related CAPEX 3,774,829 6,002,688

Non-Load Related CAPEX 700,630.80 -

A total of 61 projects have been transferred to 2006 with total cost of R.O. 6,002,688.400. Out of these projects,40% are mainly extensions to non-electrified villages and roughly 54% were reinforcement in 33, 11 and 0.433 KVnetwork. Figure 21 below shows these projects distribution in the regions.

Figure (21): Projects in Progress

South Al Batinah

6

9

2

2015

53

1

Villages Electrification Reinforcements Extension - Planned Areas

Sharqiyah Dakhilyah


Health, Safety and Environment HSEAs per the company distribution and Supply license conditions 7 and 17, the company drafts health, Safety andEnvironment (HSE) Policy to reflects the license obligations.

The company is committed to continuously improve its Operations while protecting people and the Environment.Emphasis shall be placed on ensuring human Health, Operational Safety, Environment protection and communitygoodwill. MZEC aims to keep this commitment in the best interests of its Employees, Customers, Contractors andthose might be affected by its activities. MZEC is committed to comply with all relevant Environmental Standardsprevailing in the Sultanate of Oman. Management believes that all accidents are preventable.

The Purpose of this Policy is to build up MZEC Commitments to:

• Ensure that efforts of each employee are directed to contribute for achieving excellence in Safety, Health, WorkEnvironment, Quality & Productivity.

• Routinely evaluate the practices, procedures and implement the necessary actions to maintain and improveSafety and Health of Employees, Customers and Contractors.

• Provide an adequate training to all staff, to reduce the risk and hazards to Health and Safety.

• Promote Safety Culture.

• Ensure that every employee & Contractor whose work may create an HSE impacts shall be trained & heldaccountable for complying with this Policy & related HSE Legislation in the Sultanate of Oman.

• Ensure that Safety Rules are followed by all who use (customers), or are responsible for, Electrical equipmentsinstallations, operations and maintenance.

• Ensure that the environment is protected against Pollution during all MZEC practices.

• Ensure Incident reporting of all injuries, Incidents and Occupational illness and investigation are of fundamentalimportance in their prevention.

• Ensure that Employees and Contractors when perform work at premises are fully aware of hazards and Safe workpractices.

• Motivate near misses and HSE violations reporting so that everyone can contribute to the Safety of theCommunity.

• Set objectives, Targets, Measures, Appraisal and Publicly Report HSE Performance.

Various implementation initiatives were commenced during the year with emphasis on staff training and educationin HSE. Safety audits were implemented as well.

1 The HSE policy and management arrangements for implementation drafted in 2005 and approved in 2006


Market Regulation and Financial HighlightsThe new formation of the electricity market in the Sultanate necessitates Market regulations and financial funding andtransactions. This section highlights on the major issues of the Market regulation.

The Price Control incorporates a range of assumptions made by the Authority for Electricity Regulation, Omanregarding the outputs and cost of Mazoon as a Distribution and Supply Licensee. The principal assumptions aresummarized in the table below. The 2005 values are for the period of operation 1st May to 31st December 2005.

Table (12): Mazoon Price Control

2005 2006 2007

Regulated Units Distributed (RUDTt) GWh 1,811 2,374 2,516

Annual % Increase 5.4% 6%

Customer Accounts (CATt) 201,394 2111,464 222,037

Annual % Increase 5% 5%

Price control costs were stated in 2005 prices

Source: ARE, Oman 2005 Annual Report ( Table C1 Page 67)

Market Regulation: The calculation of subsidy required by Mazoon starts with the preparation of forecasts ofelectricity demands over the period for which subsidy is required. The Authority then estimates the economic costof meeting forecast electricity demands and derives the subsidy requirement of Mazoon by subtracting forecastPermitted Tariff (and other) revenue from the total economic cost of supply. Mazoon operates under Price Controlsthat sets maximum limits on its revenue entitlement in each year (Permitted Tariff (and other) revenue and subsidy).The Maximum Allowed Revenue (MAR) is determined for each year by the formula given below.

MARt = PCt + C&UofSt + MANCSRt + LFt - Kt

where: PCt is the cost of purchasing bulk supplies of electricity from the PWP in year t

C&UofSt are amounts paid to OETC for connection and use of the licensedtransmission system in year t

MANCSRt is the maximum allowed network and customer service revenue of RPI-Xtype controls that remunerate the costs of operating the licenseddistribution systems and undertaking supply activities in year t

LFt is the License Fee paid to the Authority in year t,

Kt is a correction factor calculated in accordance with the following formula:

Kt = (ARRt-1 —MARt-1) x (1 + (i/100))

where: ARRt-1 is the Actual Regulated Revenue in the previous year (when calculating2006 subsidy, the previous year is 2005)

MARt-1 is the actual Maximum Allowed Revenue in the previous year (whencalculating 2006 subsidy, the previous year is 2005)

i is a Specified Rate of interest added to over or under recovered revenue,and defined in the distribution and supply licence as the weighted averageinterest rate on deposits in the previous year as published by the CentralBank of Oman

Source: schedule charge restriction condition of the distribution and supply license


Market Regulation and Financial HighlightsWhy Subsidy: Mazoon is one of four subsidiary licensed to undertake supply business activities in the new marketstructure in Oman which supply electricity on Regulated Permitted Tariffs. The present level and structure ofPermitted Tariffs does not provide sufficient revenue to remunerate the full economic cost of electricity supply.

Article (18) of the Sector Law implements a mechanism through which the Ministry of Finance provides electricitysubsidy calculated by the Authority to licensed suppliers on annual basis. The Authority defines subsidy as thedifference between the economic costs of electricity supply (including financing costs) and Permitted Tariff (andother) revenue. Subsidy is therefore required to sustain the electricity sector’s operations. The Maximum AllowedRevenue (MAR) and Actual Regulated Revenue (ARR) are given in tables 13 & 14.

Table (13): Maximum Allowed Revenues

Maximum Allowed Revenue (RO) Mazoon

PC1 30,202,882

C&UofSt 7,668,657

MANCSRt 14,215,725

LFt 112,087

Kt 0

MAR2005 52,199,351

Source: ARE, Oman 2005 Annual Report (Figure 25 Page 33)

Table (14): Actual Regulated Revenue

Actual Regulated Revenues (2005 outturn) Mazoon

Subsidy estimate 26,600,000

Customer revenue 25,751,459

ARR 2005 52,351,459

ARR2005 - MAR2005 152,109

Interest at specified rate (1.25%) 1,901

K2006 154,010

Source: ARE, Oman 2005 Annual Report ( Figure 25 Page 33)


Future OutlookThe year 2006 has very challenging work programs which cover the following major areas:

Continuation in building the company organizational capabilities by:

• Updating the business plan to reflect the company obligations under the ESI market structure regulations.

• Drafting the company values, vision and mission statements.

• Recruitment of talented staff.

• Training and development of the employees.

• Preparation for the various Statements, Policies and Codes of Practice.

• Building the company information system infrastructure.

• Development of the data basis and GIS.

• Building the stores and Meter workshop.

• Building the Control Centre at Sumail.

• Redefine the contracting relationship with major agents’ services providers to be in line with the licenserequirements.

• Expansion for the distribution system to meet the annual increase in demand, and new customers’ connections.

• Continuation in villages electrification program.

• Review the business process to enhance performance of the different departments.

• Technical and non-technical losses management and reduction.


Corporate Governance Report Board of Directors

The Board of directors was appointed by the Council of Ministers pursuant to the decision in December 2004. Thedecision named Eng. Hamed Bin Mohammed Al- Mahruqy as a Board Chairman.

As the year 2005 was the first operational year for the company, the Board has held five meetings pre the transferdate and during the period April – December 2005. The Board has selected Eng. Mubarak Bin Juma Al Araimi asDeputy Chairman, and has formed the Internal Tender Committee and Internal Auditing Committee. The Board hasalso approved the Accounting Policies and Procedures, Financial Delegation of Authority, Interim Human ResourcesManual and the Organization Structure of the company. The board has also dealt with various policy issues.

The Board appointed Eng. Abdullah Bin Said Al Badri as the General Manager (act) and has also appointed thedepartments managers.

The following table details the composition of the Board of Directors, and the attendance at Board Meetings.

Name of Director Represents Category of Board meetings Board meetingsDirector held during the attended

period

Eng. Hamed Bin MohammedAL-Mahruqy EHC Chairman 5 5

Eng. Mubarak bin Juma AL-Araimi EHC Deputy- Chairman 5 5

Khalifah Bin Ali AL-Hosni EHC Director 5 5

Dr. Zaid Bin Khamis Al-Siyabi EHC Director 5 5

Haitham Bin Yousef Al-Zedjali MOF Director 5 5

The dates of these meetings were:

18th April 2005

25th April 2005

11th July 2005

1st November 2005

31st December 2005

Other Interest

Eng. Mubarak Al Araimi, Dr. Zaid Al Siabi and Mr. Haitham Al Zadjali are the Board Members of the Muscat ElectricityDistribution Company and Majan Electricity Company. However, conflict of interest does not arise as the threedistribution and supply companies are monopolist with no competition for market share as the three companies arelicensed companies in their franchised areas.


Corporate Governance Report Audit Committee

Brief Description of Terms of Reference:

The primary function of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilitiesby reviewing:

• The financial reports.

• The Company's systems of internal controls regarding finance, accounting, legal compliance and ethics.

• The Company's auditing, accounting and financial reporting processes generally.

Consistent with this function, the Audit Committee will encourage continuous improvement of, and will fosteradherence to, the Company's policies, procedures and practices at all levels.

The Audit Committee's primary duties and responsibilities are to:

• serve as an independent and objective party to monitor the Company's financial reporting process and internalcontrol system;

• review and appraise the audit efforts of the Company's statutory and internal auditors; and

• provide an open avenue of communication among the statutory and internal auditors, financial and seniormanagement and the Board of Directors.

The Audit Committee consists of three members of the Board. The members were slected at the second meetingof the Board held on 25th April 2005.

The following table details the composition of the Audit Committee and attendance record of Committee Members.

Name of Committee Member Position Meetings held Meetings attended during the period during the period

Khalifah Bin Ali AL-Hosni Chairman 2 2

Dr. Zaid Bin Khamis AL-Siyabi Member 2 2

Haitham Bin Yousef Al-Zedjali Member 2 2


29th May 2005

27th December 2005

The Internal Auditing Committee has agreed to appoint a full time Internal Auditors for the company.


Corporate Governance Report Internal Tender Committee

As per the government tender law, the board has established the Internal Tender Committee in its second meetingheld on 25th April 2005.

The primary functions of the Internal Tender Committee are:

• Tendering, analysis and award for tenders below R.O. 250,000.

• Issue variation orders for projects.

• Enforce penalties on agreements deviation, issue partial or full exemptions from penalties.

The Internal Tender Committee consists of four members and chaired by the Board Chairman or his deputy.

The following table details the composition of the Internal Tender Committee and attendance records of members.

Name of Committee Member Position Meetings held Meetings attendedduring the period during the period

Hamed Bin Mohammed AL-Mahruqy Chairman 12 11

Abdullah Bin Said AL-Badri Member 12 12

Salim bin Yaser AL-Sulimani Member 12 12

Mohamed Bin Hamed AL-Busaidi Member 12 12


14th May 2005 2nd August 2005 14th November 2005

5th June 2005 7th September 2005 23rd November 2005

10th July 2005 28th September 2005 30th November 2005

25th July 2005 8th October 2005 26th December2005

The large number of the committee meetings is attributed to the number of tenders transferred to the company fromMHEW at different stages of the tendering and contracting. It is also due to the large number of tenders issued bythe company during the eight month period.


Corporate Governance Report Remuneration

Directors – Remuneration / Attendance Fees

The total remuneration paid to the Directors, Audit Committee members and Internal Tender Committee Chairmanfor 2005 was R.O. 23,700.

Aggregate Remuneration to Management

The aggregate remuneration paid to the General Manager and Six departments Managers of the Company was R.O.85,357.

Non-Compliance and Penalties

No penalties or structures were imposed on the Company by Muscat Securities Market, Capital Market Authority orany other statutory authority on any matter related to capital markets during the last year.

Communications with the shareholders and Investors

Since MZEC is part of the new established electricity supply industry market structure pursuant to Royal Decree78/2004, the company maintaining close liaison with the Electricity Holding Company (EHC) as Major shareholderon various policy issues as well as transitional matters. The company annual report will be sent to the shareholders,EHC and Ministry of Finance (MOF).

Distribution of Shareholding

The Shareholder pattern as on 31st December 2005 was as follows:

Shareholders Total Shares % Share Capital

Electricity Holding Company SAOC 499,950 99.99%

Ministry of Finance 50 0.01%

Total 500,000 100%

The Statutory Auditors

Deloitte is the appointed Statutory Auditors of the Company and other electricity sector successor companies(ESSC’s) by the Electricity Holding Company SAOC.

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