INTERNAL AUDIT REPORT RE: CERNAVODA COMPLIANCE AUDIT - ENVIRONMENTAL REVIEW DIRECTIVE AUTHORIZED FOR ISSUANCE BY: Carman

Lapointe-Young, VP, Internal Audit and Evaluation PREPARED FOR: I. Gillespie, President & Chief Executive Officer; G. Ross, SVP Corporate Secretariat and Legal Services; E. Siegel, SVP MLTFS; A. Lawford, Compliance Officer ISSUANCE DATE: June 11, 2004 CONCLUSION: In IAE's opinion, in executing the Cernavoda transaction, EDC satisfactorily complied with all relevant policy sections of the Environmental Review Directive (ERD) that were identified by the complainant.

Table of Contents SECTION ONE: BACKGROUND SECTION TWO: PROJECT SCOPE AND METHODOLOGY SECTION THREE: ISSUES/FINDINGS/CONCLUSIONS SECTION FOUR: VICE PRESIDENT INTERNAL AUDIT SIGNATURE

SECTION ONE: BACKGROUND In a letter of complaint received by EDC's Compliance Officer dated July 28, 2003, the Halifax Initiative, a coalition of 19 non-governmental organizations (NGO's), alleged that in supporting the Cernavoda 2 Nuclear Power Plant (NPP), EDC failed to adhere to the following three internal policies: 1. Environmental Review Directive 2. Disclosure Policy 3. Code of Business Ethics In response to these allegations, pursuant to EDC's compliance program, in October of 2003, EDC's Compliance Officer recommended a compliance audit be conducted into the application of these three policies to the Cernavoda 2 NPP transaction. In March, 2004, Internal Audit and Evaluation (IAE) was asked by EDC Executive Management to provide them with independent and objective assurance as to whether or not the Corporation complied with the ERD in executing the Cernavoda transaction. Previous to this audit, IAE had provided assurance to Management that EDC satisfactorily complied with the Disclosure Policy and Code of Business Ethics pursuant to the allegations in the Halifax Initiative letter. In conducting this engagement, IAE adhered to appropriate professional standards prescribed by the Institute of Internal Auditors (IIA). Work consisted of inquiry, analysis, and discussion related to information and documentation supplied.

SECTION TWO: PROJECT SCOPE AND METHODOLOGY The scope of this compliance audit was defined by the written allegations against EDC with respect to the Cernavoda transaction documented in the July 28, 2003 letter from the Halifax Initiative. The specific sections of the ERD cited in the letter are Sections 16, 21, and 22. These sections define the scope of this compliance audit. Excluded from the scope of this audit is assurance that EDC has complied with the Disclosure Policy and the Code of Business Ethics as these have been addressed in a separate IAE compliance audit. In conducting this audit, IAE: 1. Developed assessment criteria 2. Interviewed EDC personnel involved with the Cernavoda transaction 3. Reviewed file documentation Based on the allegations in the Halifax Initiative letter, questions related to the following aspects of the ERD were posed and responses analyzed against established criteria which are outlined at the beginning of each section. SECTION THREE: ISSUES/FINDINGS/ CONCLUSIONS Allegation #1: Omission of key information in all three Environmental Impact Assessments (EIAs) EDC's ERD Section 16 states "Where EDC determines that it is unable to obtain sufficient environmental assessment information to conduct its environmental review of a project, EDC will decline to enter into a transaction related to such a project".

The complainant has alleged that based on the EIA information they reviewed (i.e. the information that was publicly available), EDC did not have sufficient environmental assessment information to make a determination under the ERD to enter into this transaction related to a project. Criteria EDC must have sufficient environmental assessment information to conduct its review or decline the transaction. What was the purpose of each of the EIAs completed for this project? What EIA(s) did EDC rely upon to make its determination under the ERD? The following questions pertain to the EIA(s) upon which EDC relied to make its determination: o Did the EIA contain all elements of the ERD? o Was information received incorporated into the analysis? o Was all relevant EIA information obtained prior to EDC making a determination under the ERD? Findings Three separate and distinct EIAs were produced for this project by three different entities for different parties. Each had different requirements and elements. The three EIAs produced were: 1) The Aquatest EIA dated May 2001, prepared for EURATOM (European Union). 2) The Atomic Energy of Canada (AECL) EIA Summary dated December 2001 and the

full EIA dated January 2002, prepared for EDC. 3) The National Institute of Research and Development for Environmental Protection ICIM EIA, dated October 2002, prepared to meet the requirements of the Romanian regulatory authorities. EDC relied upon the AECL EIA to make its determination under the ERD. This EIA was prepared by AECL based on the requirements of EDC's ERD. This EIA conformed to the requirements of the ERD. EDC was aware of and reviewed all three EIAs. There is evidence that all three EIAs along with other project related information were used throughout the project review process to increase EDC's knowledge and to inform the decision to finance. During this compliance audit, IAE noted that EDC worked to continuously enhance the project.

Conclusion In IAE's opinion there is sufficient evidence to support the conclusion that the AECL EIA, which EDC relied on to make its determination, met the requirements of the ERD, specifically those outlined in Annex 3 of the ERD. As such there is evidence that EDC complied with Section 16 of the ERD.

Allegation #2a: Public Consultations did not meet National Environmental Legal Requirements (AECL's EIA) EDC's ERD section 22 states "In addition, the environmental assessment information provided will demonstrate to EDC's satisfaction that the project in respect of which EDC is conducting a review has been designed to comply with host country environmental requirements such as any applicable provisions for local consultation, licenses, permits and other regulatory approvals." T h e complainant alleged t h a t the public consultation process carried out i n Romania by AECL did not meet Romanian environmental legal requirements. Criteria The environmental assessment information provided to EDC must demonstrate to EDC's satisfaction that the project has been designed to comply with host country environmental requirements. Did the AECL EIA identify host country requirements for public consultation? How did the public consultations meet Section 9 of EDC's ERD? Did EDC note any concerns with or have to take action with respect to the information provided about the local consultations that were held? Findings The requirements for public consultation in Romania are outlined in the Permitting Procedure for Economic and Social Activities having an Environmental Impact according to the Environmental Protection Law No.137/1995. That document identifies that the permitting process in Romania requires public consultation. Actual permit granting does not occur until the commissioning stage of a project. Societatea Nationala Nuclearellectricia (SNN) required public consultation as a part of the ICIM EIA which was developed for the permitting process. The public consultation held as part of the AECL EIA was completed to satisfy the EIA elements identified in Annex 3

of the ERD, not the Romanian legal requirements because these were to be fulfilled by the ICIM EIA. In EDC's opinion the project itself was designed to comply with any and all host country environmental requirements, such as local consultations, licenses, permits and other regulatory approvals since, as with many projects, approval comes in stages. The legal question of local public consultations and their compliance with Romanian law is for the Romanian regulatory authorities to determine. EDC required, as per its normal operating procedures, that the project sponsor comply with all Romanian laws and regulations, which would include that SNN obtain such permits, approvals, consents and agreements as are required by environmental laws, rules, regulations and orders of any relevant governmental authority.

Conclusion In IAE's opinion there is sufficient evidence to support the conclusion that the AECL EIA, which EDC relied upon to make its determination, met the requirements of Section 9 of the ERD, specifically that "EDC expects that for each Category A project public consultations with affected parties, if any, will be held in the host country and that the results of these consultations will have been taken into account in the environmental assessment of the project." As such, there is evidence that EDC complied with Section 22 of the ERD namely that the project has been "...designed to comply with host country environmental requirements such as any applicable provisions for local consultation, licenses, permits and other regulatory approvals." Allegation #2b: Public Consultations did not meet National Environmental Legal Requirements (ICIM EIA) EDC's ERD section 22 states "In addition, the environmental assessment information provided will demonstrate to EDC's satisfaction that the project in respect of which EDC is conducting a review has been designed to comply with host country environmental requirements such as any applicable provisions for local consultation, licenses, permits and other regulatory approvals". The complainant has alleged that the public consultation process carried out in Romania for the ICIM EIA process did not meet Romanian environmental legal requirements. Criteria The environmental assessment information provided to EDC must demonstrate to EDC's satisfaction that the project has been designed to comply with host country environmental requirements. What was the purpose of the ICIM EIA? How was the ICIM EIA incorporated into EDC's analysis of the Cernavoda transaction? How were the local consultations which were described in the ICIM EIA incorporated into EDC's analysis? What concerns and what actions, if any, did EDC note with respect to the information provided about the local consultations that were held? Findings EDC relied upon the AECL EIA to make its determination under the ERD. The ICIM EIA was completed for the Romanian Ministerial Authority for their permitting

process. It was provided to EDC in October 2002, in Romanian and in January 2003 in English. The receipt of this EIA demonstrated to EDC that SNN was following the Romanian regulatory process required to obtain its permit. EDC reviewed the public consultation aspect of the ICIM EIA to ensure that public consultation had occurred and had been incorporated into the ICIM analysis. No concerns arose out of this review. The ICIM EIA was not a requirement of meeting the ERD. It demonstrated that SNN was satisfying the Romanian laws and regulations. As noted above, EDC requires as per its normal operating procedures, that project sponsors comply with all host country laws and regulations, including specifically that they obtain such permits, approvals, consents and agreements as are required by environmental laws, rules, regulations and orders of any relevant governmental authority. The requirement for local public consultation satisfying the ERD and the requirement for the sponsor, SNN, to meet Romanian legal requirements, are separate issues, both of which were addressed in a reasonable manner in EDC's opinion.

Conclusion In concluding on this allegation it is important to differentiate between the purpose of the ICIM EIA and the AECL EIA. As stated in the previous section, in IAE's opinion there is sufficient evidence to support the conclusion that the AECL EIA, which EDC relied on to make its determination under the ERD, met the requirements of Sections 9 and 22 of the ERD. The ICIM EIA was not used by EDC as a basis for making its determination under the ERD, but it did meet the requirements of EDC's normal operating procedures, namely that sponsors comply with host country laws.

Allegation #3a: Failure of EIAs to abide by international standards most applicable to the process EDC's ERD Section 21 states that "In conducting its environmental review, EDC will use, as benchmarks, the international standards which are most appropriate to the particular project and require any adverse gaps EDC identifies between the standards to which the project has been designed and the international standards selected by EDC to be explained to EDC's satisfaction." The complainant has alleged that the EIAs used by EDC to review the Cernavoda transaction failed to abide by international standards set by European law, the Helsinki Convention and the Espoo Convention which they identify as the international standards most appropriate to the project. Criteria EDC must select and use, as benchmarks, international standards which are most appropriate to the particular project. What international standards did EDC use as benchmarks and why? Are these the internationally accepted standards for this industry? How are wastewater impacts addressed by these standards? Were there any adverse gaps between the standards to which the project was designed and the standards applied by EDC? If yes, were these gaps explained to EDC's satisfaction?

Findings There is evidence to substantiate the fact that EDC used the most appropriate standards for this review. The rationale for the selection of the standards was documented in the files. The standards selected addressed both nuclear and nonnuclear aspects of the project. In addition there is evidence to substantiate the fact that where EDC identified a gap between the standard and the project design -that gap was addressed. Conclusion In IAE's opinion there is sufficient evidence to support the conclusion that the international standards which were used in the AECL EIA and by EDC were the most appropriate and met the requirements of Section 21 of the ERD, specifically that "In conducting its environmental review, EDC will use, as benchmarks, the international standards which are most appropriate to the particular project." In addition there is evidence to substantiate that where EDC identified a gap between the standard and the project design that gap was addressed. This also meets the requirements of Section 21 of the ERD specifically "... and require any adverse gaps EDC identifies between the standards to which the project has been designed and the international standards selected by EDC to be explained to EDC's satisfaction."

Allegation #3b: International Standards - Environmental Impact Assessment on Transboundary Context EDC's ERD Section 21 states that "In conducting its environmental review, EDC will use, as benchmarks, the international standards which are most appropriate to the particular project and require any adverse gaps EDC identifies between the standards to which the project has been designed and the international standards selected by EDC to be explained to EDC's satisfaction." The Complainant alleged that Romania violated the Espoo Convention which states that regarding an activity "that is likely to cause a significant adverse trans-boundary impact, the Pary of origin shall, for the purposes of ensuring adequate and effective consultations under Article 5, notify any Party which it considers may be an affected Party as early as possible." The Complainant alleged that the Bulgarian government was not notified appropriately by the Romanian government about its intention to go ahead with the project. Criteria EDC must select and use, as benchmarks, international standards which are most appropriate to the project. Were transboundary impacts considered? Were notification requirements met? Findings EDC reviewed this issue and found that if the neighboring countries were signatories to the Espoo Convention then they would have at their disposal the means to contest the Romanian assessment of this Project should they wish to do so. Conclusion In IAE's opinion there is evidence to support the conclusion that Romania did not breach the

Espoo Convention in undertaking this transaction. There is also sufficient evidence to support the conclusion that the international standards which were used in the AECL EIA were the most appropriate and met the requirements of Section 21 of the ERD, specifically that "In conducting its environmental review, EDC will use, as benchmarks, the international standards which are most appropriate to the particular project."

SECTION FOUR: VICE PRESIDENT INTERNAL AUDIT SIGNATURE

Carman Lapointe-Young Vice President, Internal Audit & Evaluation

June 11, 2004 Date