STATEMENT BY PRIME MINISTER BOYKO BORISSOV SOUTH STREAM - ANALYSIS OF DOCUMENTS Dear Madam President, Ladies and Gentlemen Members of Parliament, The Bulgarian government has not changed its position regarding South Stream - we support the project’s implementation, but only if European rules are complied with. Last Monday, President Putin announced the suspension of the project and we were notified of this by the media. So far, we do not have the official position of the Russian side. In the government’s program declaration, we clearly stated that a necessary condition for the future of strategic infrastructure projects in the energy sector is the clarification of their economic parameters. After I ordered the collection of all documents and correspondence on the project, today I will inform you, MPs, of the results of the inspection. Much has been said in recent days about what our country would lose if the South Stream gas pipeline is not realized or if its route is changed. Experts informed that there is no long term gas transportation contract and that such has not been signed. At present, there is no complete financial model of the project. Both documents are directly related to clarifying the benefits for our country from building the gas pipeline on Bulgarian territory. By Decision of the Council of Ministers taken on Protocol 42 of June 11 2012, the Minister of Economy, Energy and Tourism is authorized to allow BEH to adopt a final investment decision. At the General Meeting of South Stream Bulgaria AD on November 15 2012, a protocol was signed with which shareholders BEH and OAO Gazprom adopt a positive final investment decision on the following technical and economic parameters: Technical capacity - a total of 63 bn. cu. m. of gas per year; length of pipeline approximately 540 km. The target payback period of the investment should be no longer than 15 years from the start of commercial operation of the pipeline on Bulgarian territory. This is the period within which all capital costs on the project should be recovered. The internal rate of return is 8% of shareholders’ own funds invested in the project. The base period to reach the required level of internal rate of return on own funds is 25 years, from the date of the operation permit. Subsequently, the Russian company OOO Gazprom Export has developed and proposed to BEH a draft a long-term gas transportation agreement (GTA), which has not been signed. I will read the text given to me by experts, verbatim: “The project presented by Gazprom Export does not meet the requirements of the European Union established by Directive 2009/73 / EC. The significant discrepancies relate to the requirements for third party access, tariff and operator of the pipeline. In this sense, the relevant clauses can be considered by BEH only if an exemption is made to Directive 2009/73 / EC. Furthermore, the draft contains significantly biased clauses, placing the project company (in its capacity as operator of the pipeline) in a significant disadvantage to the other party. The long-term gas transportation contract also contains clauses, which are extremely unfavorable for BEH as a shareholder in the project company: • intermediate internal rate of return of 4.25% (at an internal rate of return set at 8% under a Protocol of August 27, 2012); • a tariff profile with an excessively low tariff during the first 15 years (the period when BEH needs incoming funds to pay the loan to Gazprom). The low tariff rate in the first years of operation of the pipeline would lead to a small dividend, which in turn would render BEH unable to make large installments to repay the loan to Gazprom EP International B.V. In this sense, the repayment period would be extended substantially, which will generate significant interest for BEH; • provides for a zero profit after the 25th year of operation of the pipeline. It is envisaged that, once the investment is paid off, South Stream Bulgaria generates an income in the amount of operating costs + 2%, which would not only deprive the project company of profit (and BEH of dividends, respectively), but would create the possibility for the project company to operate at a loss after this period (for instance, unforeseen expenses that exceed the 2% threshold of operating costs). The draft long-term gas transportation agreement, proposed by OOO Gazprom Export, actually provides a structure, according to which the project company will generate profits only for the purpose of the investment and its payment period, after which the profit (and the dividend for BEH, respectively) will be zero”. With regard to the financial model, experts informed that there is currently no complete final financial model of the project, as the current version should be updated. The data in the current version of the Financial Model is as follows: A. Assumptions (according to the draft GTA): 1. Internal rate of return on equity - 8% 2. Internal rate of return on equity for the first 15 years - 4.25% 3. 100% capacity for Gazprom Export (subject to an exception made for third party access in Directive 2009/73 /EC) 4. Reduction of tariff after 2040 to cover only the costs of the project company 5. The tariff shall be considered in proportion to the capacity reserved by Gazprom Results: 1. Average size of the annual dividend, received by BEH EAD for the period 2023- 2040 – EUR 65 million per year (total of EUR 1.252 billion) Until 2023 BEH will not receive dividends. 2. Average amount of annual tax profit for the period 2016 - 2040 - EUR 31 million (a total of EUR 831 million). B. Assumptions (at 50% capacity of the entire gas pipeline): 1. Internal rate of return on equity - 8% 2. Internal rate of return on equity for the first 15 years - 4.25% 3. 50% capacity for Gazprom 4. Reduction of tariff after 2040 to cover only the costs of the project company Results: These parameters render it practically impossible to find external financing due to: 1. Inability to repay the debt in the first years of the project 2. Inability to distribute dividends during the life of the project I think these facts speak for themselves and are enough to stop speculations about the so-called “profits” of the project, which our country has lost. I will clearly say once again that since there is an open procedure by the European Commission of June 2, 2014 in connection with the selection of a contractor on the project, the Bulgarian government cannot take any action for the realization of the South Stream project on Bulgarian territory. In a letter, the European Commission warned Bulgarian authorities back on August 14, 2013, that there could be discrepancies between the Intergovernmental Agreement between Bulgaria and Russia of 2008 on the building of a pipeline for transit of natural gas and EU legislation governing the internal energy market. I am confident that the data I presented provides a clear answer to questions relating to profits for the country from the South Stream project. Thank you