Directors' Report for the Year 2018 -Electrica Group
Chairman of the Board of Directors
Valentin RADU
Directors’ Report for the year 2018 -Electrica Group-
ELECTRICA SA – 2018 DIRECTORS’ REPORT
DIRECTORS’ REPORT FOR THE YEAR 2018
(based on the individual financial statements prepared in accordance with the Order of the Ministry of Public Finance no. 2844/2016 for the approval of the Accounting Regulations in accordance with International Financial Reporting Standards, respectively on the consolidated financial statements prepared in accordance with International Financial Reporting Standards as adopted by the European Union)
REGARDING THE ECONOMIC AND FINANCIAL ACTIVITY OF SOCIETATEA ENERGETICA ELECTRICA S.A. and ELECTRICA GROUP
in compliance with art. 67 of the Law no. 24/2017 on issuers of financial instruments and market operations and with annex no. 15 to ASF Regulation no. 5/2018 and the Bucharest Stock Exchange Code
for the 12 month period ended 31 December 2018
Free translation from Romanian, which is the official and binding version, and will prevail, in the event of any discrepancies with the English version
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
Table of Contents
Identification details of Electrica ...... 8 1 Electrica 2018 Overview ...... 9 1.1. Key financial data 2018 ...... 9 1.2. Key events in 2018 and up to the report’s publication date ...... 15 1.3. Post balance sheet events date ...... 22 2 Electrica Group ...... 24 2.1. Organizational structure ...... 24 2.2. Mission, vision, values ...... 26 2.3. Key elements of the 2015 – 2018 Strategic Plan ...... 27 2.4. Outlook ...... 28 2.5. Key factors, directions and significant market trends affecting the operational results of Electrica Group ...... 31 3 Electrica on the capital markets ...... 33 3.1. Ownership structure ...... 33 3.2. Shares evolution on BSE and Global depository receipts (GDRs) evolution on LSE ...... 35 3.3. Investor relations (IR) ...... 41 3.4. Legal acts reported ...... 42 3.5. Dividends policy ...... 43 3.6. Dividend distribution ...... 43 3.7. Own shares ...... 44 4 Corporate Governance in ELSA ...... 45 4.1. Corporate Governance Code ...... 45 4.2. General Meeting of ELSA’s Shareholders ...... 46 4.3. Shareholders’ rights ...... 48 4.4. ELSA’s Board of Directors ...... 50 4.5. The activity of ELSA’s Board of Directors and of its Consultative Committees in 2018 .56 4.6. ELSA’s Executive management ...... 64 4.7. Remuneration of the Directors and of the Executive Managers ...... 67 4.8. Corporate Governance in ELSA’s Subsidiaries...... 70
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
4.9. Statement regarding the corporate governance “Comply or Explain” ...... 73 4.10. Implementing action plans undertaken by signing the framework agreement with EBRD 83 4.11. Internal audit report for 2018 ...... 88 5 Operating activity ...... 90 5.1. Operating segments ...... 90 5.2. Fixed assets ...... 93 5.3. Procurement ...... 98 5.4. Sales activity ...... 98 5.5. Reorganization and disposal of assets ...... 101 5.6. Personnel ...... 102 5.7. Environmental considerations ...... 104 5.8. Research and development activities ...... 105 6 Electrica financial reporting 2018 ...... 106 6.1. Consolidated statement of the financial position ...... 106 6.2. Consolidated statement of profit and loss ...... 111 6.3. Consolidated cash flow statement ...... 119 6.4. Individual statement of the financial position ...... 121 6.5. Individual statement of profit or loss ...... 127 6.6. Individual cash flow statement ...... 130 6.7. Risk management ...... 132 6.8. Description of the main features of internal control and risk management systems in relation to the financial reporting process ...... 137 Appendix 1 – Litigations ...... 140 Appendix 2 – Details of the main investments accomplished in 2018 by the Electrica Group .. 159
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
Glossary ANRE Romanian Energy Regulatory Authority BPS Basis points BoD Board of Directors BRP Balance Responsible Party BSE Bucharest Stock Exchange CAPEX Capital Expenditure CGC Corporate Governance Code CMC Competitive Market Component CMUS Centralized Market for Universal Service
CNTEE The National Transmission System Operator CSR Corporate Social Responsibility DAM Day Ahead Market DSO Distribution System Operator DMS Distribution Management System EBIT Earnings before interest and tax EBITDA Earnings before interest, tax, depreciation and amortization EDN Electrical Distribution Network ELSA Electrica S.A. EGMS Extraordinary General Meeting of Shareholders EU European Union EUR The monetary unit of several member states of the European Union FCA Financial Conduct Authority – United Kingdom GC Green Certificates GDP Gross Domestic Product GDR Global Depositary Receipts GEO Government Emergency Ordinance
GMS General Meeting of Shareholders HV High Voltage IAS International Accounting Standard IFRIC International Financial Reporting Interpretations Committee IFRS International Financial Reporting Standard
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
IMS Integrated Management System IPO Initial Public Offering IR Investor Relations ISIN International Securities Identification Number KPI Key Performance Indicators kV KiloVolt LR Last Resort LSH Labour safety and health LV Low Voltage
MV Medium Voltage MVA Mega Volt Ampere MWh MegaWatt hour MKP Management Key Position NAFA National Agency for Fiscal Administration NES National Electricity System NL Network Losses NRC Nomination and Remuneration Committee OMPF Order of Ministry of Public Finances
OGMS Ordinary General Meeting of Shareholders OHS Occupational Health and Safety OHSAS Occupational Health and Safety Assessment Series OPCOM Romanian Gas and Electricity market operator PBS Percentage basis points PCB Polychlorinated Biphenylsor RAB Regulated Asset Base RM Retail Market RON Romanian monetary unit RRR Regulated Rate of Return SAD Distribution Automation System SCADA Supervisory Control And Data Acquisition SDEE Societatea de Distributie a Energiei Electrice SDMN Societatea de Distributie a Energiei Electrice Muntenia Nord
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
SDTN Societatea de Distributie a Energiei Electrice Transilvania Nord SDTS Societatea de Distributie a Energiei Electrice Transilvania Sud SED Servicii Energetice Dobrogea SA SEM Servicii Energetice Muntenia SA SEO Servicii Energetice Oltenia SA SoLR Supplier of last resort TWh TeraWatt hour TSO Transmission and system operator UM Unit of Measurement
US Universal Service USD United States Dollar VAT Value Added Tax
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
Identification details of Electrica
Report date: 5 March 2019
Name of the Issuer: Societatea Energetica Electrica S.A.
Headquarter: no. 9 Grigore Alexandrescu Street, 1st District, Bucharest, Romania
Telephone/fax number: +4021.208.5999; +4021.208.5998
Fiscal code: 13267221
Trade Registry No: J40/7425/2000
LEI Code (Legal Entity Identifier): 213800P4SUNUM5AUDX61
Subscribed and paid share capital: RON 3,459,399,290
Main characteristics of issued shares: 345,939,929 ordinary shares of 10 RON nominal value, out of which 6,890,593 are treasury shares and 339,049,336 are shares issued in dematerialized form and freely transferable, nominative, tradable and fully paid.
Regulated market where the issued securities are traded: the Company’s shares are listed on the Bucharest Stock Exchange (ticker: EL), and the Global Depositary Receipts (ticker: ELSA) are listed on the London Stock Exchange
Applicable accounting standards: Order of the Ministry of Public Finance no. 2844/2016 for the approval of the Accounting Regulations in accordance with International Financial Reporting Standards and the International Financial Reporting Standards as approved by the European Union
Reporting period: Year 2018 (period 1 January - 31 December 2018)
Audit: The individual and consolidated financial statements as at and for the period ended 31 December 2018 are audited by an independent financial auditor
Ordinary Shares GDR ISIN ROELECACNOR5 US83367Y2072 Bloomberg Symbol 0QVZ ELSA:LI Currency RON USD Nominal Value RON 10 RON 40 London Stock Exchange MAIN Stock Market Bursa de Valori Bucuresti REGS MARKET Ticker EL ELSA Source: Electrica
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
1 Electrica 2018 Overview
1.1. Key financial data 2018
In 2018, Electrica Group net profit increased by 34.3% as compared to the previous year, mainly driven by the higher profitability of supply segment.
The Group revenues in 2018 and 2017 were of RON 5,613 mn and RON 5,603 mn respectively.
RON mn 2018 2017 2016 Revenue 5,613 5,603 5,518 Other operating income 165 173 243 Operational costs (5,517) (5,580) (5,175) Adjusted EBITDA1 656 614 998 EBIT 261 197 586 Gross profit 263 207 589 Net profit 230 172 469 Source: Electrica
As presented in the charts below, the adjusted EBITDA margin went up by 73 bps in 2018 compared to 2017, while the net profit margin increased by 34.1%.
On 31 December 2018, the Group has a Net Debt/(Cash) position2 of minus RON 350.4 mn.
1 The Company defines the consolidated adjusted EBITDA as consolidated EBITDA adjusted for non-recurring events, i.e. impairment/ reversal of impairment of trade and other receivables, net at consolidated level 2 Net debt/(Cash) is defined as bank borrowings + bank overdrafts + financial leases + funding for concession agreements - cash and cash equivalents - bank deposits and treasury bills and government bonds.
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
Figure 1: Consolidated revenue of Electrica Group Figure 2: Adjusted EBITDA (RON mn) and adjusted (RON mn) EBITDA margin (%)
5.518 5.603 5.613 20% 18% 1.400 18% 401 373 378 16% 1.200 14% 12% 1.000 12% 11% 800 10% 8% 600 5.117 5.230 5.235 998 6% 400 4% 614 656 200 2% 0% - 2016 2017 2018
2016 2017 2018 EBITDA EBITDA Margin
Revenues from Green Certificates Revenues (ex-Green Certificates)
Source: Electrica Source: Electrica Figure 3: Net profit (RON mn) Figure 4: Net debt/(Cash) (RON mn)
9% 8% 1.000 (350) 8% 900 (698)
7% 800 700 6% 600 (2.366) 5% 4% 500 4% 3% 400 3% 300 469 2% 200 1% 230 172 100 0% - 2016 2017 2018 2016 2017 2018
Net profit Net profit margin Net debt/(cash)
Source: Electrica Source: Electrica
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
DISTRIBUTION SEGMENT
Essential information:
Electricity distribution in Romania is fulfilled currently mainly by eight electricity distribution system operators, regulated by ANRE. Each company is responsible for the exclusive distribution of electricity in the region for which it is authorized, under a concession agreement concluded with the Romanian state. Electrica and Enel each own three distribution companies, while CEZ through Distributie Oltenia and E.ON through Delgaz Grid own the remaining two. Electrica Group is a key player in the electricity distribution sector, both in terms of areas covered and in number of users served. The Regulated Assets Base (RAB) estimated value at the end of 2018 was RON 5,256 mn. 197,946 km of electric lines - 7,595 km for High Voltage (“HV”), 45,755 km for Medium Voltage (“MV”) and 144,596 km for Low Voltage (“LV”). Total area covered: 97,196 km2, 40.7% of Romania’s territory. 3.8 mn users (2018) for the distribution activity. 17.7 TWh of electricity distributed in 2018, a decrease of 0.9% as compared to 2017. 40.3% market share for the distribution of electricity to final users in 2017 (based on distributed quantities, according to ANRE report for 2017).
Figure 5: Romanian electricity distribution map
Source: Electrica
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
Figure 6: Evolution of the number of users (mn) Figure 7: Quantity distributed (TWh)
9,2 9.2 9.4 43,3 44,3 42,4
5,6 5,6 5,7 25,3 25,8 26,5
3,6 3,6 3,7 17,1 17,5 17,8
2015 2016 2017 2015 2016 2017
Electrica Others Electrica Others
Source: ANRE Report – Performance Indicators 2017 Source: ANRE Report – Annual Report 2017
Key financial indicators
Revenues from the distribution segment increased by RON 62.8 mn, or 2.3%, to RON 2,738.6 mn as compared to RON 2,675.7 mn in 2017, as a result of both the increase of distributed quantities on medium and low voltages by 6.1% and 1.5% respectively, and of the increase of the investments made in the network, registered as intagible assets, according to IFRIC 12.
The increase of costs with the energy purchased to cover network losses, the increase in costs with employee benefits, and other categories of expenses led to a decrease of RON 113.7 mn or 17.5% of EBITDA on the distribution segment.
The EBITDA margin decreased by 19.4% in 2018, from 24.3% in 2017 to 19.6% in 2018.
The net profit was additionally influenced by the increase in depreciation and amortization costs, driven by the investments made in the electricity distribution network.
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
Figure 8: Revenues from distribution (RON Figure 9: EBITDA – distribution segment (RON mn) mn)
760 2.676 2.739 2.498 650 537
2016 2017 2018 2016 2017 2018
Source: Electrica Source: Electrica
Figure 10: Net Profit – distribution segment Figure 11: Net debt/(Cash) – distribution segment (RON mn) (RON mn)
312 403
205 175 168 91
2016 2017 2018 2016 2017 2018 Source: Electrica Source: Electrica
SUPPLY SEGMENT
Essential market data (according to ANRE Report for November 2018)
The supply market is composed both from competitive segment and from the regulated segment; The regulated segment comprises five suppliers of last resort. The competitive segment comprises 97 suppliers (including suppliers of last resort with activity in competitive segment from retail market), out of which 91 are relatively small (<4% market share).
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
EFSA has a market share of 17.02%; is the market leader on regulated market with a share of 45.42%, on the competitive market having a market share of 9.34% (ANRE report from November 2018). By comparison, in 2017 EFSA had a regulated market share of 40.79% and a competitive market share of 11.58% (ANRE report from December 2017).
Key financial indicators
Revenues from supply activity have decreased by RON 229.2 mn or 5.4%, at RON 3,995.5 mn in 2018, from RON 4.224.7 mn in 2017. This decrease is the net effect of the energy supply activity, which had a positive influence, due to the 6.9% increase in sales price, covering the impact generated by the decrease of the quantity supplied by 3.4%, and of the decrease of the revenues from Balance Responsible Party (BRP), mainly as a result of the accounting of BRP, beginning with 1 January 2018, in accordance with IFRS 15, which removes the revenues and the expenses related to BRP.
In terms of EBITDA, EFSA recorded an increase of RON 127.3 mn in 2018 compared to 2017, mainly due to the decrease of cost of electricity purchased.
The financial position of the supply segment is relatively stable compared to 2017, having a cash position of RON 243.7 mn.
Figure 12: Revenues for the supply segment Figure 13: EBITDA for the supply segment (RON mn) (RON mn)
4,2% 4.432 250 4.225 401 3.995 4,0% 373 3.4% 378 200 3,5% 3,0% 150 2,5% 2,0% 4.031 3.852 3.617 100 185 1,5% 137 1,0% 50 0,2% 0,5% 0 10 0,0% 2016 2017 2018 2016 2017 2018 Revenues from Green Certificates EBITDA EBITDA Margin Revenues (ex-Green Certificates)
Source: Electrica Source: Electricsa
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
Figure 14: Net profit of the supply segment Figure 15: Net debt/(Cash) - the supply segment (RON mn) (RON mn)
250 4,00%
200 3.1% 3,50% (219) 2,7% 3,00% (244) 150 2,50% 2,00% (465) 100 1,50% 139 108 1,00% 50 0,03% 0,50% 1 0 0,00% 2016 2017 2018 2016 2017 2018 Net Profit Net Profit Margin Net debt/(Cash)
Source: Electrica Source: Electrica
1.2. Key events in 2018 and up to the report’s publication date
During 2018 and 2019, until the issue date of this report, the following main events took place:
ELSA’s General Meetings of Shareholders: During 2018, three Ordinary General Meetings of Shareholders (OGMS) took place in 9 February, 27 April and 18 September as well as an Extraordinary Meeting of Shareholders (EGMS) in 27 April. The main resolutions of the OGMS dated 9 February 2018 refer to: - the approval of the remuneration policy of the members of the Board of Directors of the Company and its application from the date of the OGMS approval; - the approval of the proposed Mandate Agreement for the members of the Board of Directors of the Company and of the remuneration limits of the Company's executive managers.
The main resolutions of the OGMS and EGMS dated 27 April 2018 refer to: - the approval of 2017 audited financial statements, at individual and consolidated levels; - the approval of 2018 revenue and expenses budget, at individual and consolidated levels; - the approval of the 2017 profit distribution (the total gross dividend value was of RON 245.37 mn, and the gross dividend per share of RON 0.7237); - the election of ELSA’s Board of Directors members through the cumulative voting method: Ms. Elena Doina Dascalu, Mr. Gicu Iorga, Ms. Ramona Ungur, Mr. Valentin Radu, Ms. Arielle Malard De Rothschild, Mr. Bogdan George Iliescu, Mr. Willem Jan Antoon Henri Schoeber and the setting of their mandate’s duration for a period of four years; - the rejection of the appointment of Deloitte Audit as ELSA’s financial auditor; - the rejection of setting the company's working point in Bucharest, 4 - 8 Nicolae Titulescu Road, West Wing, 6th floor, district 1, Romania; In the OGMS dated 18 September 2018, the shareholders approved the appointment of Deloitte Audit as ELSA’s financial auditor for a three-year period, respectively for financial years 2018, 2019 and 2020.
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
Changes in the structure of ELSA’s Board of Directors (BoD) and of the BoD’ Committees:
On 12 October 2018, ELSA announced the decision of Ms. Arielle Malard de Rothschild to renounce her position as member of the BoD, due to additional core activity responsibilities; On 15 November 2018, ELSA announced that Ms. Doina Elena Doina Dascalu, the chair of the BoD since date of 14 May 2018, has resigned from the position as member of the BoD, following her nomination, by the Romanian Parliament, as First Vice President of the Financial Supervisory Authority; Following the resignation of Ms. Arielle Malard de Rothschild, the BoD appointed Mr. Dragos Andrei as interim member of the Board of Directors, starting with 1 December 2018 and until 30 June 2019 or until the OGMS having on the agenda the filling of the vacant director position, whichever would have occured first; On 18 December 2018, Mr. Willem Jan Antoon Henri Schoeber notified the Company about his decision to resign from his position in the Board of Directors of ELSA, 6 February 2019 being the last day Mr. Schoeber was a member of the Board of Directors; Following the resignation of Ms. Elena Doina Dascalu from her position as member of the BoD, the BoD appointed Mr. Valentin Radu as Chair of the Board of Directors for a mandate of one year, starting 12 December 2018; The composition of the BoD’s committees and their chairs with 1-year mandate were decided in 2018 on 14 May as follows:
- The Strategy and Corporate Governance committee: Mr. Willem Jan Antoon Henri Schoeber - chair, Ms. Arielle Malard de Rothschild - member, Mr. Gicu Iorga - member - The Audit and Risk committee: Mr. Bogdan George Iliescu - chair, Ms. Arielle Malard de Rothschild - member, Ms. Ramona Ungur - member; - The Nomination and Remuneration committee: Mr. Valentin Radu - chair, Mr. Bogdan George Iliescu - member, Mr. Elena Doina Dascalu - member.
Following the changes in the structure of the Board of Directors, on 12 December 2018, the BoD decided the composition of the committees and elected their chairs, as follows: - The Strategy and Corporate Governance committee: Mr. Willem Jan Antoon Henri Schoeber - chair, mr. Dragos Andrei - member, Mr. Gicu Iorga - member; - The Audit and Risk committee: Mr. Bogdan George Iliescu - chair, Ms. Ramona Ungur - Member, Mr. Gicu Iorga - Member; - The Nomination and Remuneration committee: Mr. Bogdan George Iliescu - chair, Mr. Valentin Radu - member, Ms. Ramona Ungur – member.
On 7 February 2019, the OGMS of ELSA took place, during which ELSA’s shareholders elected, through the simple voting method, the members of the Company’s Board of Directors following the vacancy of the positions in the Board of Directors, after the renunciation to the mandate by Ms. Arielle Marie Malard de Rothschild, Mr. Willem Jan Antoon Henri Schoeber and by Ms. Elena Doina Dascalu. Thus, the three new members elected are Mr. Radu Mircea Florescu, Mr. Dragos Andrei si Mr. Niculae Havrilet. Their mandate period is equal to the period remaining until the expiry of the mandate for the vacant positions, i.e. until 27 April 2022. Changes in ELSA’s executive management:
On 25 July 2018, the Board of Directors decided the revocation of Mr. Dan Crisfalusi from the position of Chief IT&T Officer; On 17 September 2018, the BoD decided to revoke Ms. Dana Alexandra Dragan from the position of
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
Chief Human Resources Officer, following the mandate’s termination; On 15 October 2018, the Board of Directors has reached a mutual agreement with Mr. Dan Catalin Stancu to terminate without cause the mandate agreement from the CEO position of ELSA, starting with 1 November 2018. In the same meeting, Ms. Georgeta Corina Popescu was appointed as ELSA’s interim CEO, starting with 1 November 2018, for a 1-year period or until the nomination of a new CEO, whichever would have occurred first. By the time of the present report, on 23 January 2019, ELSA’s Board of Directors decided to appoint Ms. Georgeta Corina Popescu as CEO and to appoint Ms. Bibiana Constantin as Chief Human Resources Officer, both mandates starting on 1 February 2019, for a period of four years.
Other relevant events: a) Litigations:
On 8 June 2017, ELSA received a legal summoning formulated by SAPE against, former managers and directors, the Ministry of Economy and respectively the Ministry of Energy. The case is registered at Bucharest Court under no. 463565/3/2016, being in course of settlement; On 20 November 2017, ELSA received the notification issued by the Bucharest Court (Romanian: Tribunalul Bucuresti), referring to the File No. 42479/3/2017, by which Mr. Stanciu Razvan, as shareholder of the Company, filed a complaint to request the ascertainment of the "absolute nullity of the decision no. 2 of the OGMS of ELSA regarding the election of the BoD members by applying the cumulative vote and setting the mandate’s duration for the elected directors for a period of 4 years, pursuant of art. 132 of Law 31/1990, having as a direct consequence the cancellation of all legal acts concluded by the new Board of Directors of ELSA ". On 6 June 2018, the court rejected the plaintiff’s action, the decision being final; In October 2018, ELSA attacked in administrative contentious the ANRE Orders no. 169/2018 regarding the Approval of the Tariff Setting Methodology for the Electricity Distribution Service and no. 168/2018 on the Regulatory Rate of Return, requesting the partial and, respectively, the total annulment of these orders. Thus, both preliminary complaints were sent to ANRE and actions in court were filed. Applications are filed under case no. 7591/2/2018 (cancellation of Order 168/2018) and no. 7614/2/2018 (partial cancellation of Order 169/2018), of the Bucharest Court of Appeal. At the same time, following the rejection by ANRE of the preliminary complaints in December 2018, the actions in administrative litigation were reintroduced, forming the files 8430/2/2018 (annulment of Order 168/2018) and 8436/2/2018 (partial annulment of Order 169/2018), also in the role of the Bucharest Court of Appeal, pending; In February 2018, ELSA has obtained a favourable Supreme Court ruling in one of the litigations with NAFA, which essentially maintains into force a prior Court of Appeal decision, which is favourable for the Group. Based on this Court ruling and in conjunction with all other litigations with NAFA on the same historical amounts, for taxes including penalties and interest, as well as based on analysis with internal and external lawyers, the management best estimate as of 31 December 2017 was that ELSA shall be able to obtain favourable Court rulings with the end result of no future cash outflows. As a result, there is no provision recognized subsequent to 31 December 2017 related to NAFA litigations; On 12 December 2018, an amount of RON 44.7 mn was collected by ELSA from Oltchim SA, representing amounts distributed to creditors in the insolvency proceedings.
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
b) Policies in place at ELSA level, in order to comply with best corporate governance practices (may be accessed on ELSA’s website, under Investors > Corporate Governance Section):
The Policy of Transactions with Related Parties has been revised three times during 2018, the last 2018 approved version being published on ELSA website on 14 January 2019; The BoD approved the Forecast Policy and the reviewed version of Dividend Policy, the two documents being published on the company’s website on 19 February 2018; Following the resolutions of OGMS dated 9 February 2018, the Remuneration policy of ELSA’s directors and executive managers was published on the Company website on 7 May 2018. c) Intra-group loans and other intra-group facilities:
During 2018, ELSA concluded new agreements for intra-group loans to its distribution subsidiaries in total amount of RON 520 mn, for financing part of the 2018 CAPEX Plan, as follows: SDMN – RON 230 mn, SDTS –RON 130 mn and SDTN – RON 160 mn; On 29 May 2018, ELSA also granted an intra-group loan in favor of SEM, of RON 5.5 mn. d) Certifications
During 24 – 25 September 2018, took place an external audit of ELSA’s Integrated Management System Quality – Environment – Occupational Health and Safety, implemented according to ISO 9001:2015, ISO 14001:2015 and OHSAS 18001:2007 requirements. The audit was conducted by DEKRA Certification, one of the world’s leading accredited certification body, and ended without any noncompliance, ELSA obtaining the new certificates issued on 5 November 2018 valid until October 2019; Risk Management: Electrica Group Risk Appetite was approved by the Board of Directors Decision no. 14 on 14 August 2018. ELSA Risk Management Policy was approved by the Board of Directors Decision no. 22 on 13 December 2018.
Distribution segment With regard to the Transformation Plan of the distribution area (EL SERV, SDMN, SDTN, SDTS), initiated on 10 August 2017, it was completed during the year 2018 and considered mainly the following:
- implementing a new target organizational model of the distribution segment, based on redesigned processes with focus on efficiency and quality of customer services; - internalization in the distribution subsidiaries of certain activities of EL SERV, having as main objective the consolidation of the investment execution capabilities, as well as the increase of the reaction capacity and the improvement of the performance in the operational activity; - a new performance-based remuneration concept; - a proper concept for a cost reduction and cost controlling program; - developing and implementing a new business plan for EL SERV; - following the completion of this organizational transformation program, the companies in question went through a period of stabilization and consolidation, a necessary step before the start of a new regulatory period.
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
A new business plan has been approved for EL SERV, providing measures to streamline and optimize the operational processes, including:
- improving the services currently provided and extending them to companies outside Electrica Group; - developing new products and supporting activities for the companies within the Group; - streamlining of the real estate portfolio; - reduction of the administrative and general costs.
In January 2018, the Articles of Association of EL SERV was amended, so that the structure of the Board of Directors was reverted to five non-executive members. Between December 2016 and January 2018, the Board of Directors was composed of three non-executive members, being applicable the version of the Articles of Association approved in December 2016.
Distribution activity:
During 2018, ANRE issued basic documents for the regulatory framework of the 4th Regulatory Period: - Order no. 168/2018 approving the regulated rate of return (RRR) begining with 1 January 2019; - Order no. 169/2018 approving the Methodology for establishing distribution tariffs. Thus, in the period April – October, according to the evolution of the legislative framework, the strategic package for the 4th Regulatory Period, which represented the basis for the regulated revenues in the distribution area for the next five years, was prepared and subject to approval by ANRE; Specific tariffs for electricity distribution for the year 2019 were approved by ANRE through Orders no. 197, 198 and 199/2018, applicable until 28 February 2019, with average values equal to or slightly above those of 2018. On 25 February 2019 were approved by ANRE through Orders No. 24, 25 and 26/2019 the new distribution tariffs, applicable from 1 March 2019. The new tariffs represent an increase of approximately 2.3% compared to the tariffs applied in the first two months of 2019; On 10 October 2018, the Regulatory Authority approved the framework conditions for the electricity smart metering system implementation timetable at national level, through Order no. 177/2018, effective from 15 October 2018. Based on the specific legislation, the distribution companies have developed the implementation plans of the electricity smart metering systems on implementation areas (low-voltage), based on criteria of economic efficiency, security and ensuring the participation on the competitive market, the main objectives being: to provide benefits to the users, better asset management and quality indicators. These widespread deployment plans for smart metering systems were subject to ANRE approval in January 2019. Subsequent to approval, the portfolio of projects considered in the cost-benefit analyzes will be included in the annual investment plans to be developed and approved according to the specific legislation in force; In 2018, for the three distribution operators, investments amounting to approx. RON 836 mn were made and commissioned, being the highest post-IPO value, also higher by over 80% than the recorded average of other distribution operators nationwide in 2017 and higher by 14% than their own performance in 2017; In 2019, the distribution operators will continue to invest in the distribution infrastructure, the investments planned to be commisioned related to 2019 for the three distribution operators cumulating RON 612.5 mn (nominal terms 2019), but decreasing as compared to the previous years, considering the possibilities of sustainable funding, as well as the regulated rate of return level, under the new regulatory framework. The investment plans for 2019 have been prepared in accordance with the requirements set out by the Regulatory Authority in the specific legislation in force.
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
Supply segment Starting with 1 April 2018, the Balance Responsible Party (BRP) activity and its related assets were transferred, from ELSA to EFSA, the supply subsidiary of the Group. The transaction price was of RON 19.8 mn and was established considering the transferred activity’s market value, based on a valuation report delivered by an ANEVAR authorized valuator; In 2018, the implementation of initiatives identified for the operational streamlining of EFSA activity was continued, as follows:
- the acquisition of an IT application for managing the electricity purchase activity; - developing the OPEN BRP application; - Continuous improvement of mobile application MyElectrica and its alignment with the web interface; - continuing the implementation of Customer Relationship Management (CRM) system; - modernizing the integrated risk management system; - implementing a continuous monitoring system for customer satisfaction and identifying the measures to improve the quality of services; - starting the implementation of a modern solution for the commercial call-center; - implementation of a project for digitalization/modernization of customer relations centers; - continuing the process of optimizing the portfolio of products/services tailored to the needs of customers.
Supply activity: In 2018, EFSA’s activity was influenced by a series of laws and ANRE orders with a significant impact in the purchase and sale of electricity to final customers, as follows: • ANRE Order no. 75/2017, applicable in H1 2018 - Centralized Market for Universal Service (CMUS) was the bound market for the suppliers of last resort (SoLR) (at least 50% of the electricity required for US customers was purchased from CMUS, the rest can only be purchased from other Centralized Markets); • Following the completion of the schedule of regulated tariffs removal and the total electricity market liberalization as of 1 January 2018, ANRE approved the regulatory package for the supply activity of last resort/universal service, applicable starting with S2 2018: - ANRE Order no. 27/2018 - CMUS was the voluntary market for SoLR; - ANRE Order no. 26/2018 – the SoLR designation was achieved through a competitive process: bound SoLRs were appointed for a four-year period based on eligibility and capability criteria and optional SoLRs were appointed for one year on basis of eligibility, capability and availability criteria. Through ANRE Decision no. 657/2018, EFSA was appointed as bound SoLR for the period 1 July 2018 –30 June 2022 for network areas North Muntenia, North Transylvania and South Transylvania; - ANRE Order no. 39/2018 – ANRE modified the pricing endorsement principles applied by SoLR and established for each network area and for each SoLR the maximum price for US based on three components: the purchase cost (depending on the actual purchase and the average prices in the centralized market), the supply cost of RON 5.4/consumption point/month (which includes the recognized profit), the adjustment cost (previous corrections) and endorses the prices proposed by SoLR at most equal to the maximum prices for US considered justified by ANRE.
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Law no. 167/2018 regarding the amendment and completion of electricity and natural gas law no. 123/2012, introduced new obligations for suppliers: - the supplier has the obligation to purchase electricity in order to ensure the coverage of its customers’ consumption, prioritizing the customers which are beneficiary of US from their own portfolio; - the supplier does not have the right to unilaterally terminate the electricity supply contracts with the final customers. The ANRE Order no. 157/2018 approved the Methodology of establishing the mandatory annual quota for purchasing of green certificates and the ANRE Order no. 158/2018 established the mandatory estimated quota for purchasing of green certificates for the period August – December 2018 (0.425 GC/MWh), being higher by 22.8% than the quota set for the period January – July 2018 (0.346 GC/MWh); Government Emergency Ordinance no. 114/2018 regarding the establishment of measures in areas as public investments and fiscal-budgetary, amendment and completion of some normative acts and the extension of deadlines, imposes to the eletricity market participants: - new rules for trading the quantities required to cover the consumption of SoLR’s household customers; - reintroduction of regulated tariffs for household customers; - increasing the annual contribution to be paid by the license holders to ANRE from 0.1% to 2% of the turnover; - restoring regulated prices to households for the period 1 March 2019 – 28 February 2022; - the differences in suppliers’ purchasing costs from the years 2018 to 2019, unrecovered through the prices charged, will be recovered until 30 May 2022, according to ANRE regulations. • The ANRE Order no. 11/2019 for the approval of the methodology for setting the regulated tariffs and the prices applied by the last resort suppliers to the final customers, applicable from 1 March 2019, establishes: the calculation method of the regulated tariffs applied to the household customers, the terms of the price approval for the universal service and the price for inactive customers applied by the last resort suppliers (FUI), the ultimate pricing principles applied by the FUI.
The year 2018, the first year of complete deregulation of customers’ consumption that are beneficiary of US, was a year of legislative instability, especially for the universal service customers. The main events that the electricity market faced are the following: After a beginning of year characterized by moderate temperatures, rising hydraulicity and DAM prices lower than those of the forward markets, once the ANRE Order no. 39/2018 that aims to modify the Pricing Methodology applied by the SoLRs for the universal service customers entered into force, the OPCOM forward trading prices have been steadily increasing. According to this order, the price applied by the SoLRs to the customers benefiting of the US is established for the first endorsement period (1st July 2019 – 30 June 2019) taking into account the weighted average price of the SoLRs transactions in the period 21 March 2018 – 30 April 2018, adjusted with a profiling coefficient of 5% or 8%, depending on the purchases coverage degree of the consumption forecast for this category of customers. This regulation led to a sudden increase in demand on the forward markets and, as a result, of the trading price and given the very short deadline for the electricity purchase, did not allow the trading of sufficient volumes in order to secure the price of US for the whole endorsed period; The increase in the trading prices, both on the spot and on the forward markets, was correlated with: - a decrease in the production from hydro sources, both in Romania and in the region, as well as the increase in consumption;
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- an accelerated growth in the price of CO2 emissions certificate. Thus, during 2018, the CO2 emission certificate price has tripled, exceeding EUR 20 on 23 August 2018 and reaching a maximum of EUR 24.85 on 10 September 2018; - a regulatory change regarding the bid prices in the balancing market, brought by ANRE Order no. 31/2018; as a result of which, starting with 1 September 2018, the deficit price increased significantly compared to the first 8 months of the year.
Corporate image: As a result of the PR and Communication activities, ELSA has ranked 9th in TOP 50 of the most valuable Romanian brands, made by Brand Finance – advancing a position compared to 2017. At the same time, ELSA entered the top of the most appreciated companies in Romania, in terms of transparency, following the launch of the Sustainability Report.
Ethics and Compliance
Reviewing the Policy on transactions with related parties and adopting the updated version at Group level, in order to align its provisions to the legislative changes, trends and best practices, as well as to cover better particular aspects and specificities of Electrica Group companies; Assessing the 2017 transactions of the company and of its subsidiaries with the related parties, regarding the possibility of conflicts of interest occurence; Launching the analysis regarding the assimilation of new steps in the development of Ethics and Compliance’ activity; Report regarding the potential conflicts of interest in Electrica Group in 2018; Report regarding the assessment of the company's and its subsidiaries related parties’ transactions, from the perspective of generating/consuming conflicts of interest in H1 2018.
1.3. Post balance sheet events date
During the period between the 2018 financial year closing and the date of the present report, the following relevant events took place at the group level: On 16 January 2019, the Company informed its shareholders and investors about the conclusion in the first semester of 2019 of a legal act with a value greater than EUR 50,000 with SDTS, affiliate, where ELSA is the main shareholder; On 5 February 2019, the external financial auditor report on factual findings according to art. 82 of Law no. 24/2017 regarding the transactions reported in the second semester of 2017 was published; In January 2019, ELSA, together with its distribution subsidiaries, have filed in court requests for cancellation of ANRE orders for the setting of regulated tariffs for the distribution of electricity, being constituted on the role of the court the following files: - File no. 434/2/2019 - cancellation of ANRE Order no. 197/2018 regarding the approval of the specific tariffs for the electricity distribution service and the price for the reactive electricity for SDMN; - File no. 435/2/2019 - cancellation of ANRE Order no. 199/2018 regarding the approval of the specific tariffs for the electricity distribution service and the price for the reactive electricity for SDTS; - File no. 436/2/2019 - cancellation of ANRE Order no. 198/2018 regarding the approval of the specific tariffs for the electricity distribution service and the price for the reactive electricity for
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SDTN. At the same time, in each file, it was requested from ANRE the recognition of the amounts that were not included in the 2019 tariffs and also, to include these amounts in the computation of the tariffs for the year following litigation’s final decision. The files are pending at the Bucharest Court of Appeal, in preliminary procedure. The Company has published current reports to the market to inform the investors and all stakeholders about these events. In addition, during the period between the 2018 financial year closing and the date of the present report, SDMN’s share capital was increased from RON 354,364,670 to RON 355,906,870 through contribution in kind by ELSA shareholder with the value of four plots of land in a total area of 19,672 sqm. in the amount of RON 1,542,200 (according to SDMN EGMS Decision of 14 February 2019).
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2 Electrica Group
General overview
ELSA is the parent company for the Group, which comprises four subsidiaries in the distribution segment: SDTN, SDTS, SDMN, EL SERV, whereas the supply segment comprises one subsidiary, EFSA. The Company also owns all shares of SEO and SEM. In January 2014, the Board of Directors of SEO and in October 2014, the Board of Directors of SEM decided the commencement of the insolvency procedure with a view to reorganization. The insolvency procedures were initiated in 2014. On 31 October 2018, the court decided the bankruptcy of SEO, at the request of the judicial administrator, and cancelled its right of management. At the date of this report, SEM completed the reorganization plan, the payables included in the payment schedule being fully paid, thus the legal procedures for exiting the insolvency procedures can be completed in the following period.
2.1. Organizational structure
As of 31 December 2018, the biggest shareholder of ELSA is the Romanian State, represented by the Ministry of Energy (48.78%), after its ownership was diluted following the initial public offering in 2014.
Figure 16: The Group’s subsidiaries at 31 December 2018
Source: Electrica
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The Group’s subsidiaries that were included in the consolidated financial statements for the year are presented below: % shareholdings as Registration Subsidiary Activity Headquarters of 31 December code 2018 Societatea de Distributie a Electricity distribution in Energiei Electrice Muntenia North Muntenia 14506181 Ploiesti 99,9999696922382% Nord SA (SDMN) geographical area Societatea de Distributie a Electricity distribution in Energiei Electrice Northern Transylvania 14476722 Cluj-Napoca 99,9999829770757% Transilvania Nord SA geographical area (SDTN) Societatea de Distributie a Electricity distribution in Energiei Electrice Southern Transylvania 14493260 Brasov 99,999976413243% Transilvania Sud SA geographical area (SDTS) Electrica Furnizare SA Supply and trading of 28909028 Bucharest 99,9998390431663% (EFSA) electricity Services in the energy Electrica Serv SA (EL SERV) sector (maintenance, 17329505 Bucharest 100% repair, construction) Servicii Energetice Services in the energy Muntenia SA (SEM) - in sector (maintenance, 29384120 Bucharest 100% insolvency repair, construction) Services in the energy Servicii Energetice Oltenia sector (maintenance, 29389861 Craiova n/a* S.A.* repair, construction) Source: Electrica *Societatea Energetica Electrica SA lost the control of Servicii Energetice Oltenia starting November 2018 when the bankruptcy proceedings of the subsidiary began. As of this date, the Group ceased to consolidate this company.
The main activities of the Group are the regulated distribution of electricity (through operation and development of electricity distribution networks) and the electricity supply to end consumers. The Group is the electricity distribution operator and the main electricity supplier in North Transylvania (Cluj, Maramures, Satu Mare, Salaj, Bihor and Bistrita-Nasaud counties), South Transylvania (Brasov, Alba, Sibiu, Mures, Harghita and Covasna counties) and North Muntenia (Prahova, Buzau, Dambovita, Braila, Galati and Vrancea counties), ensuring the service of the network users by operating installations that function at voltages ranging from 0,4 kV to 110 kV (power lines, substations and electrical transformer stations).
The Company’s distribution subsidiaries (SDTN, SDTS and SDMN) invoice the electricity distribution service to electricity suppliers (mainly to EFSA subsidiary, the main electricity supplier in North Muntenia, North Transylvania and South Transylvania), which further invoice the electricity consumption to end consumers.
EFSA is an electricity supplier in the competitive market and a supplier of last resort defined as bound supplier for the network regions: North Muntenia, North Transylvania and South Transylvania.
According to the regulations issued by ANRE, the bound suppliers of last resort ensure the electricity supply to the end consumers, which benefit, under the law, from universal service, to non-household customers who have not exercised their eligibility right and to non-household customers taken over because they have not secured the supply of electricity from any other source.
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In the regulated market, the electricity supply was done based on competitive market component (CMC) and last resort (LR) tariffs endorsed by ANRE for H1 2018, respectively on final prices for universal service, final prices for inactive customers (Pi) and final prices for last resort customers (LR) in S2 2018. In the competitive market, the electricity supply was done based on contracts and on negociated prices.
2.2. Mission, vision, values
To ensure a high level of performance, Electrica Group has defined its Vision, Mission and Set of Values. These identity elements represent the foundation for formulating and implementing the strategic goals of the Group.
Vision
The Group’s vision is to expand its leading position in the electricity distribution and supply market segments, both nationally and regionally.
Mission
The Group’s mission is to deliver long-term value to the shareholders by distributing and supplying electricity and providing high quality services to the customers, in a safe, reliable, affordable and sustainable manner.
Values
The values cultivated across all Group structures are especially those related to professionalism and responsibility for a real orientation towards customers, in an increasingly challenging market context, including from the regulatory framework perspective. These represent the base for a viable and sustainable performance, in order to match the strategic objectives with the legal requirements, industry trends, and market context. It also reflects the Group’s commitment to create an internal environment where integrity and ethics are the corporate culture’s fundamentals and are based on an open and transparent communication.
Figure 17: Electrica Group Corporate Values
Commitment and focus towards customers
Robust growth while Professional demonstrating environmental approach and corporate social responsibility
Corporate values Commitment Transparency towards labour and integrity safety
Dynamism and Team spirit flexibility
Source: Electrica
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
2.3. Key elements of the 2015 – 2018 Strategic Plan
The Strategic Plan for the period 2015-2018, which reflects the Board of Directors’ vision of the management of activities in the stakeholders’ best interest, both on a medium term and a long-term horizon, has been formulated following an analysis of the following areas:
the external environment, to determine the main environmental factors affecting the electricity market and the key drivers that can significantly influence the evolution of the electricity market in the future; industry analysis, in order to identify trends in the energy market, assess the market attractiveness and determine the critical success factors for competing and surviving in this market; internal analysis of the Group, to assess its past and current performance (relative to other market players). Based on the above analysis, the Board of Directors has formulated the corporate and business strategies of ELSA with respect to the Group, has set out the strategic objectives and the action plan with measures to implement.
ELSA’s corporate strategic directions with respect to the Group are the following:
Preserve and enlarge the activities of the distribution and supply segments in Romania. Explore potential opportunities to expand the distribution and supply segments in the region. Enlarge the business portfolio, by developing “value-added services” related to distribution and supply activities, which can be offered to customers. Divest the unprofitable business segments and activities. Electrica Group`s business strategy addresses three key success factors in its implementation:
operational excellence for efficiency and quality; ensuring a committed and qualified workforce; the highest standards in corporate governance. The strategic action plans defined by ELSA Board:
1. Overall financial performance for the Group 2. Excellence in financial processes management 3. Overall operational performance for the Group 4. Quality of services provided 5. Employees’ productivity and support for their development 6. Implementation by the subsidiaries of the distribution segment of the investment program 7. Corporate Governance and enhancement of our sustainability profile. In 2018, Electrica Group took actions to improve the financial performance in the context of a challenging energy market, and to ensure the sustainable growth of its activities. The Group priorities have been to increase performance, improve services, diversify and expand the activities and business portfolio. Moreover, beside these, for the next period, will be continued the efforts of operational streamlining and orientation towards customers.
The year 2018 meant for the distribution companies the finalization of the transformation process initiated in 2017 and the finalization and operational implementation of the new organizational model in five key functional areas: Asset Management, Network Development, Network Operations, Energy
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Management and Common Services. The achievement of the ambitious investment program focused on the financing of the rehabilitation works and on the network modernization, in order to improve the quality of the service, on the improvement of the energy efficiency and on the losses reduction represented the greatest challenge in 2018, in the context of the transition in 2019 to a new regulatory period. The new regulatory period focuses on the operational efficiency and the distribution service quality, and a significant attention is paid to the comparative analysis of the relevant indicators among the national DSOs by the ANRE. In the supply segment, the company focused in 2018 on increasing the profitability of its customer portfolio by developing specific measures to increase customer satisfaction, through portfolio restructuring and through competitive and dynamic acquisition strategies, in the context of a volatile and unpredictable energy market. In addition, the traditional offer of electricity supply was completed with combined electricity and gas packages. The measures taken during the year 2018 represent a stable foundation for the Group's ambition to be a market leader and to ensure, in a sustained way, the profitability and satisfaction for customers and partners. Negotiations with the social partners (representatives of FNSE Univers, ELSA Union) took place in 2018, in order to implement a new concept of performance-based remuneration within the Group. As a result, since 1 October 2018 the new concept has been implemented within SDMN subsidiary and since 1 January 2019 is to be applied in the other distribution subsidiaries and the supply subsidiary, as well as in ELSA.
Electrica Group continued also this year to provide a major interest in increasing the degree of transparency and enhance the communication with all stakeholders by actively engaging them and by reporting on subject such as sustainable development, environment and social responsibility, in line with the Group's objectives to integrate sustainability in all activities.
2.4. Outlook
Considering energy policies developed at both EU and national level, as well as the international context of the energy markets, the following trends are expected to characterize on medium and long term the local electricity market:
Increased competition among the players on the national electricity supply market, especially in terms of diversifying the portfolio of products offered to customers (offers for natural gas, insurance, household products etc.) and digital services offered (mobile applications, invoices and online payments, expansion of customer service with chat solutions); The customers who, according to the legal provisions, have the right to benefit from the universal service and do not wish to migrate to the eligible segment, shall be provided with the supply of electricity under regulated conditions; The new secondary legislation under discussion3, which reintroduces provisions on regulated contracts and changes the tariffs methodology for the household customers, will also influence the electricity market and the future strategies of the SoLRs in respect to portfolio management; A regulatory trend in electricity distribution area is the principle of remuneration of the distribution operator considering both the quality of the service, as well as the operational costs and efficiency based on comparative analyzes between DSO;
3 As of the date of the report – March 2019; through the implementation of the ANRE regulations in accordance with GEO no. 114/2018
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Electricity distributed generation technologies will determine the distribution operators to adapt their processes and strategies regarding the upgrade and development of the network and to offer solutions to the independent producers, considering the appearance of prosumers, which are active participants in the energy market; in this context, significant investments are necessary in order to improve both the transmission and the distribution infrastructure; Full electric vehicles, light commercial vehicles and electrification of railways are expected to increase the consumption of electricity in the transportation sector. Future development of technologies will support energy efficiency policies such as:
- Development of transmission and distribution networks, including smart grid and smart metering; - End-use energy efficiency (thermal integrity of buildings, lighting, electric appliances, motor drives, heat pumps etc.); The implementation of smart metering will offer complex tarrifs options to the consumers, detailed information regarding the consumption profile, which might lead to increased flexibility and peak demand reduction. Thus, the consumers shall be better informed and involved in decision-making process, as active particiants. The smart metering implementation pace depends on the implementation timetable to be adopted at national level; The significat reduction in the cost of photovoltaic technologies is an opportunity for the development of small-scale generation projects, especially in the domestic area; The development of the transmission and distribution infrastructure and long-distance interconnection will become a necessity. The electricity market target model, which implies the development of Europe’s internal electricity market, will continue to evolve and be in line with future trends and challenges in the energy industry.
The key drivers of changes in the electricity market are presented in the following table:
Key driver Description Impact on
The economic growth is a key determinant of electricity demand. Although there is not a one-to-one relationship between GDP growth rate and electricity demand growth rate, there is a positive correlation, mainly between the industrial demand for electricity and economic growth. In the future, household and industrial electricity demand will also be GDP evolution and Electricity influenced by energy efficiency policies. industry structure consumption Intensification of electricity consumption is a major trend in Romania. Over 2010 - 2018, there was a significant increase in consumption, as opposed to a decrease of the gas consumption over the same period, mainly due to the curtailment of heavy industry production. Despite the demographic decline recorded at EU and Romanian level, the electricity Demographic consumption is impacted by the changes in the consumer behaviour and the increase in evolution and Electricity urbanization. For example, smart devices are expected to generate a massive increase technology consumption in connected devices and implicitly in the electricity consumption and revenue growth development across multiple industries. The regulatory framework has undergone major changes with the aim of aligning the Romanian legislation with the EU legislation. Although important steps have been taken, other major changes are expected to occur in the next decade, particularly following the Changes in new Framework Strategy for a European Energy Union, which highlights the need for Electricity prices regulations integration and cooperation amongst member states. From 2019, the 4th Regulatory Period will start and ANRE approved significant changes in the methodology for all tariff elements (Regulated Rate of Return, Regulated Assets Base, Network losses, Operating Expenses, TOU distribution tariffs starting from 2020). Also for the supply segment
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Key driver Description Impact on
important changes are forecasted in the acquisition strategies and the sales to final customers, considering the impact of the methodologies under discussion regarding the reintroduction of regulated contracts with the producers for the household customers. The change in the amount of the contribution to be paid to ANRE from 0.1% to 2% of the turnover generated by licensed activities has the potential to lead to restructuring the activities of the players in the electricity market. Smart networks and smart meters will create benefits for the end consumers, distributors and suppliers in terms of energy efficiency, resource optimization and network operation, Technological Electricity prices implementation of demand response etc. It is necessary to prepare the networks and to development and consumption integrate the distributed resources (storage solutions, micro-grids, local production, electric machines, etc.), considering also the management of their impact.
Romania has adopted the EU 20-20-20 targets, aiming to reduce greenhouse gas Electricity prices Increase in emissions, improve energy efficiency and raise the share of renewable energy. Moreover, and consumption, environmental the 2030 Framework increases these targets and therefore more efforts are needed from regulatory awareness governments and market players to achieve them. framework
Source: Electrica
The regulatory framework perspective and the impact on the energy market The energy regulatory framework has experienced major changes in the past decade, including market liberalization, unbundling and support scheme implementation for renewable energy, and the changes brought by GEO no. 114/2018 will most likely lead to new market rules and possible reorganization in the activities of energy market players.
For the distribution area, the most significant changes in the Romanian legislation refer to the following: The change in 2018 of the regulatory framework for the 4th Regulatory Period – 2019 – 2023, according to the Methodology for establishing the distribution tariffs, approved through ANRE Order no. 169/2018 and of the remuneration of the distribution operators – according to the ANRE order no. 168/2018, starting with 2019, the regulated rate of return (RRR) approved for the DSOs decreased from 7.70% to 5.66% for the existing RAB and 6.66% for the investments put into operation during the period 2019-2023; The changes brought by the new tariff setting methodology and by the new RRR will have a negative impact on the operational and financial performance of the DSOs, as a result of the ANRE approval of operating and maintenance costs and of costs with the purchase of electricity to cover network losses lower than the necessary costs demanded by the DSOs, as well as ANRE's implementation of corrections for the annual costs and planned investments. ANRE approved the framework conditions for the achievement of the timetable for the implementation of electricity smart metering systems at national level through Order no. 177/2018. Based on the cost- benefit analyzes, the DSOs have sent to ANRE for approval the proposals regarding the implementation of electricity smart metering plans for the period 2019-2028, on an annual basis; On 29 December 2019, the GEO no. 114/2018 entered into force, regarding the setting of several measures in the field of public investments and of some fiscal-budgetary measures, the change and completion of some normative acts and the prorogation of certain terms that have a negative impact on the results of the distribution operators due to the non-recognition in the distribution tariffs of the cost of the monopoly tax.
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The changes to the Romanian legislation with relevant impact for the supply segment are the following:
The amendments to the Electricity and Natural Gas Law no. 123/2012 introduce the obligation of the electricity suppliers to purchase electricity to ensure the coverage of their customers' consumption, with priority for the customers of the US in their own portfolio. The provision affects the electricity purchase strategy of the SoLRs, with impact on the functioning of the entire market in the short and medium term. In addition, the supplier does not have the right to unilaterally terminate the electricity supply contracts with the final customers; GEO no. 114/2018 influences the supply area also, through the increase of the amount of annual contributions related to the organization and functioning of ANRE and introduction of new provisions related to the regulated household segment; The new secondary legislation, submitted by ANRE for public consultation at the beginning of 2019, reintroduces the regulated contracts with producers and changes the tariff methodology for the regulated segment of customers. These changes have the potential to bring significant changes in market participant’s strategies for the next period; In 2018 were published the normative acts regarding a new category of market participants, the prosumers, defining the guide rules for the commercializing of the eelctricity produced by them. Prosumers who own electricity-generating units with renewable power of up to 27 kW installed power per consumption place can sell the electricity produced and delivered into the grid to the electricity suppliers with whom they have supply agreements concluded, according to ANRE regulation. Considering legislative and regulatory changes, Electrica Group is reviewing its medium and long-term strategy in order to manage responsibly and sustainably their impact on the company's activities, in the context of a regulatory framework that has undergone numerous successive and profound changes in the last months of 2018 and early 2019.
2.5. Key factors, directions and significant market trends affecting the operational results of Electrica Group
The company analyzes the strategic options and aims to implement streamlining measures, through restructuring programs and transformation of group’s divisions, training and staff development programs, redesigning business models, or entering new business segments, in order to improve both the quality of the services offered and the financial performance.
The most important assumptions considered for the strategy review are the following:
The Romanian energy mix landscape is changing significantly, being heavily disrupted by the advent of renewables, together with the emergence of the prosumers in the following years; Romanian GDP will have a stable evolution in the future; Different trends in electricity consumption (increasing trend on a medium term, but in stagnation/reduction on the long term); Romania will maintain its commitment towards the accomplishment of the 20-20-20 strategy regarding the climate changes and the implementation of the new Framework for the period 2020-2030; For the next regulatory period, the remuneration mechanism, the tariffs and methodology for applying corrections to the tariff are subject to changes, these key factors being considered in the strategic planification; The supply sector will experience a short to medium term repositioning following the reintroduction of the regulated contracts and the changes in the tariff calculation methodology for SoLR;
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The impact coming from the recent change in the legislative framework, as well as its lack of predictability in the medium and short term; No major geopolitical turbulences have been taken into account, which might significantly affect the Romanian electricity market; Financial markets will allow access to profitable financing sources to support companies’ investment programs. In December 2018, the Board of Directors of the Company approved the new strategic directions for the electricity distribution and supply business lines for the next five years, and, in the next period, the strategy and the implementation plan for the period 2019-2023 will be defined according to these new directions.
For this period, Electrica Group targets the following lines of action:
In the distribution segment, the focus is on operational efficiency, by reducing technical and commercial losses, by optimizing internal processes, ensuring optimal use of resources, on customer orientation and ensuring their satisfaction, by improving network access and quality of service, on the development of smart grid technologies and on cost recovery. Increasing operational performance will lead to a positive impact on the lives of our customers, from continuity in the electricity supply, to the quality of the service and of the interaction with our staff. At the same time, exploiting the significant potential for optimization and reducing losses by streamlining the distribution operators’ activities are key factors for optimal allocation of resources, an important requirement during this regulatory period; The supply segment will focus on diversifying the business through offers and services tailored to customers’ needs, on operational efficiency through optimized sales and purchasing processes and on customer orientation and maximizing their satisfaction. The aim is to increase the natural gas supply side, to provide value added solutions (products and services) and to digitalize specific operations and processes; Ensure the necessary human resources (internally or through specific recruitment) for key business areas and train the employees and capitalize on their potential, expertise and aptitudes, in order to increase productivity and individual performance. In the context of a labour market expected to be tense also in the next years for the qualifed labor force segment, the Group aims to invest in vocational training centers and dual education, which are so important in order to provide qualified personnel needed to ensure optimal conditions and services to the grid; Optimise the support functions and implement IT tools to support business lines and create synergies that bring value added. Processes’ digitalization and integration into IT platforms are to be provided to both business lines, in the context of the changes brought by smart grids, prosumers and the trend in streamlining the customers’ consumption, so the IT department becomes a strategic partner in the years to come; Continue to improve the corporate governance framework, closely following the Corporate Governance Action Plan established with EBRD beginning with 2014. Please note that other factors unavailable (eg. legislation and regulatory provisions under disscusions or final versions not available at the date of the report – March 2019 etc.), or not presented above, or not considered by the Group may occur and may have a significant impact on the implementation and evolution of the Group’s strategy.
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3 Electrica on the capital markets
3.1. Ownership structure
Until July 2014, the Romanian state, through the Ministry of Energy, was the sole shareholder of ELSA. As of 4 July 2014, after the Initial Public Offering, the Company's shares are listed on the Bucharest Stock Exchange (BSE – ticker EL), and the Global Depository Receipts are listed on the London Stock Exchange (LSE – ticker ELSA). Following the stabilization process after the June 2014 IPO, ELSA owns 6,890,593 of its shares, representing 1.99% of the total share capital, which does not entitle ELSA the right neither to vote, nor to receive dividends. The ownership structure according to the records of Central Depository (Romanian: Depozitarul Central) as of 31 December 2018 is presented in the following table: Stake held Shareholder Number of shares (% of the share capital) The Romanian state, through the Ministry of Energy, 168,751,185 48.7805% Bucharest, Romania The European Bank for Reconstruction and 23,955,272 6.9247% Development, London, UK Electrica SA 6,890,593 1.9918% BNY MELLON DRS, New York, USA 5,931,364 1.7146% Other legal entities* 121,776,730 35.2017% Individuals 18,634,785 5.3867% TOTAL 345,939,929 100.0000% Source: Central Depository, Electrica * Dedeman SRL owns between 5 and 10% of the total number of shares
Figure 18: Ownership structure on 31 December 2018
Total shares: 345,939,929
5,39%
The Romanian state through the Ministry of Energy EBRD, UK
35,20% Electrica SA
Bank of New York Mellon (DRS - LSE)
Other legal entities
48,78% Individuals 1,71% 1,99% 6,92%
Source: Central Depository, Electrica
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
At 31 December 2018, 81.96% of the total number of shares were held by Romanian investors, while 18.04% were owned by shareholders with European (other than Romanian) and North American residence.
Figure 19: the structure of the Romanian shareholders at 31 December 2018
Total shares: 283,543,138
Source: Central Depository, Electrica
As of 31 December 2018, out of the total shares owned by Romanian shareholders, 59.52% where held by the Romanian state through the Ministry of Energy, 6.39% were shares belonging to individual shareholders and 31.66% were owned by legal shareholders. The remaining 2.43% represented Electrica’s shares, bought back for price stabilization purposes in July 2014.
Of the remaining 18.04% of the share capital held by foreign shareholders, the European shareholders (other than Romanian ones) held 81.17% as of 31 December 2018 (out of which EBRD 38.39%), while the American shareholders held 18.19%, this category including the GDRs holders. More details on these holdings are shown in the following figure.
The shares that appear to be held by the Bank of New York Mellon are the global deposit receipts (GDRs) owned by ELSA shareholders that are traded on the London Stock Exchange (LSE). A global deposit receipt represents four shares. Bank of New York Mellon is the depository bank for these securities.
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
Figure 20: Geographical distribution of shareholders outside Romania as of 31 December 2018
Source: Central Depository, Electrica
3.2. Shares evolution on BSE and Global depository receipts (GDRs) evolution on LSE
BSE: ELSA's shares are included in several BSE indices, including the BET index (the reference index for the Romanian capital market reflecting the performance of the most traded companies on the BSE’s regulated market), as well as in the BET-NG index (the sectoral index that reflects the evolution of the companies listed on BSE’s regulated market having as main activity energy and related utilities). Between 4 July 2014 - 31 December 2018, ELSA’s shares recorded a minimum price of RON 9.10 (13 July 2018) and a maximum price of RON 14.96 (12 May 2017), therefore the weighted average price was RON 12.13. Compared to the IPO price (RON 11), ELSA closed the year 2018 at a price of RON 9.7, down by 11.8%, while the BET index increased by 5.3% and the BET-NG index dropped by 14.5%.
The gross dividends per share granted by ELSA in this period reached a cumulative value of RON 3.0469, with a return of 27.7% as reported to the closing price of the last day of 2018. At the same time, all the companies included in BET index granted dividends with a cumulative yield of 36.7% (calculated at the closed prices of the last day of 2018). Thus, the aggregate yield generated by ELSA’s shares (along with dividends) from the IPO and by the end of 2018 was 15.9%.
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
From the IPO dated 4 July 2014 until the end of 2018, ELSA shares attracted a RON 2.73 bn. liquidity on BSE, with a daily average of RON 2.43 mn. During this period of about 4 years and a half, 225.2 mn ELSA shares had been traded, representing 65% of the share capital and 174.4% of the free float (computed without the shares held by the Romanian State through the Ministry of Energy, the European Bank for Reconstruction and Development (EBRD) and ELSA’s own shares). Thus, the average daily turnover during this period on BSE was 200,522 shares.
Strictly analyzing the year 2018, the maximum closing price was RON 12.18 RON (29 January) and the minimum closing price was RON 9.10, so the weighted average was RON 10.99. During the year, ELSA’s share price fell by 14.2%, while the BET index decreased by 4.8% and the BET-NG index depreciated by 7.4%.
The gross dividend per share granted by Electrica in 2018 (for 2017) was RON 0.7237, slightly below the 2017 level (by 2.4%), with a yield of 6.4% (computed at the last price in 2018). At the same time, the shares from BET composition granted dividends with an average yield of 9.1%. Thus, the aggregate yield generated by ELSA’s shares (together with dividends) in 2018 was -7.8%.
During 2018, ELSA shares attracted a liquidity of RON 468.4 mn on BSE, with a daily average of RON 1.88 mn, down by 27% compared to 2017, the sixth in the market. The volume of shares traded was 42.63 mn, down by 12% from 2017, so the daily average volume was of 171,201 shares. The total volume of shares traded in 2018 accounted for 12.3% of the share capital and 36.2% of the free float. Since the holdings larger than 5% are removed from the free float (according to the BVB index methodology), the previous calculation eliminates from the share capital the holdings of the Romanian state through the Ministry of Energy, EBRD, ELSA and Dedeman.
During the period from the beginning of 2019 until 15 February 2019, ELSA’s share price had an ascending trend, with an advance of 10.10%, reaching a closing price of RON 10.68. This evolution was recorded on a traded volume of 4.55 mn shares, with an average daily turnover of 146,943 shares. In the same period, the BET index grew by 3.7% and the BET-NG index went up by 11.2%.
LSE:
The GDRs’ weight in ELSA's total share capital diminished following the Initial Public Offering, reaching a level of 1.71% at the end of 2018 compared to 10.17% at 4 July 2014.
The maximum price reached by the GDRs was USD 15.3, in September 2014. Subsequently, the GDRs’ price followed a fluctuating but declining trend, to a price of USD 9.6 at 31 December 2018. The GDRs recorded a minimum price of USD 8.9 on 27 December 2018.
GDRs liquidity was USD 159.3 mn from the IPO until the end of 2018. In 2018, the liquidity recorded was of USD 1.75 mn, compared to USD 4.78 mn in 2017. In this period, 12.42 mn GDRs had been traded. Refering only to year 2018, the total traded volume was 151,962 GDRs, with over 50% lower than compared to the 2017 volume.
Without taking into consideration the dividends granted, the GDRs price dropped by 29.7% from the IPO price (USD 13.66) at the end of 2018 (18.3% drop in 2018 and 3.7% in 2017).
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
A summary of the above mentioned aspects is found next.
4 Jul 2014 - Variation Indicator 2018 2017 31 Dec 2018 2018 vs 2017 Bucharest Stock Exchange Total liquidity (RON) 2,730,696,104 468,419,456 644,878,005 -27.4% Average daily liquidity (RON) 2,431,608 1,881,203 2,600,315 -27.7% Turnover (no. shares) 225,185,693 42,628,976 48,467,600 -12.0% Average daily turnover (no. shares) 200,522 171,201 195,434 -12.4% Market cap. - end of period (RON) 3,355,617,311 3,355,617,311 3,909,121,198 -14.2% Minimum price (RON) 9.1 9.1 10.78 -15.6% Maximum price (RON) 14.96 12.18 14.96 18.6% Average price (RON) 12.13 10.99 13.31 -17.4% ELSA Share price performance (%) -11.80% -14.20% -14.10% 0.2% BET performance (%) 5.30% -4.80% 9.40% - BET-NG performance (%) -14.50% -7.40% 10.80% - Dividend(s) 3.0469 0.7237 0.7415 -2.4% ELSA’s Dividend(s) yield4 (%) 27.70% 6.40% 5.60% 13.7% BET-TR Dividend(s) yield 4 (%) 36.70% 9.10% 9.70% -6.0% ELSA’s Adjusted price performance (%)5 15.90% -7.80% -8.50% -8.8% BET-TR performance (%) 41.90% 4.30% 19.10% -77.5% London Stock Exchange ELSA’s GDRs liquidity (USD) 159,324,372 1,753,268 4,778,489 -63.4% ELSA’s GDRs turnover (no. of GDRs) 12,419,189 151,962 358,614 -57.6% GDRs price performance (%) -29.7% -18.3% -3.7% -
4 Computed at the periods’ last day close price (for comparability) 5 Computed together with dividend(s) granted during the analyzed period
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
Figure 21: Share price evolution on BSE and the most important events occurred from the beginning of 2018 until 15 February 2019 (RON)
13,0 12,5 8 12,0 4 7 3 6 11,5 2 5 9 11 1 10 12 26 11,0 14 24 25 10,5 15 23 27 16 21 22 10,0 13 19 20 17 30 9,5 28 29 9,0 18 8,5 8,0
Source: BSE, Electrica
Figure 22: Global depositary receipts’ price history on LSE, together with the most important events occurred from the beginning of 2018 until 15 February 2019 (USD)
13,0
10 3 4 7 8 9 2 12 12,0 1 56 11
15 11,0 14 13 16 26 20 23 25 10,0 21 24 27 22 19 17 28 29 9,0 18 30
8,0
Source: LSE, Electrica
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
No Date Event description
1 5-Jan-18 Competition Council Ruling - fine amounting to RON 10.8 mn 2 16-Jan-18 Rejection suspension of the OGMS dated 26 October 2017 resolution 3 18-Mar-18 Action in annulment of the OGMS dated 26 October 2017 resolution ELSA announced the achieved value of the investments in distribution infrastructure of RON 4 29-Mar-18 727 mn in 2017 and assumed an investment plan of RON 900 mn for 2018 OGMS approved a new Mandate Agreement and a new Remuneration policy for the members 5 9-Feb-18 of the ELSA's BoD as well as new remuneration limits for executive managers of ELSA 6 15-Feb-18 ELSA published the preliminary separate financial statements for 2017 (unaudited) ELSA published the convening of the OGMS and EGMS on 27 April 2018 and the related 7 7-Mar-18 documents: financial statements, director's report, auditor report for 2017, 2018 budget and the dividend proposal for 2017 8 16-Mar-18 FY 2017 Results Presentation for analysts and investors (teleconference) ELSA published the supplemented convening notice of the GMS dated 27 April 2018 with the 9 27-Mar-18 election of the BoD through cumulative voting method by the request of the Ministry of Energy ELSA announced the transfer, starting 1 April, of the BRP (Balance Responsible Party) activity 10 29-Mar-18 to EFSA ELSA announced the conclusion of three legal acts (intra-group loans), each with a greater 11 5-Apr-18 value than EUR 50,000, with its distribution subsidiaries Competition Council denounces a cartel during 2008-2015 between distribution operators and 12 19-Apr-18 some meter suppliers ELSA GMS approved the 2017 financial statements and 2018 Budget at standalone and consolidated level, the 2017 dividend, elected the new BoD members through cumulative voting method and rejected the appointed proposed financial auditor and the establishing of a 13 27-Apr-18 new working point in “America House’. ANRE published a document regarding the substantiation of the 2019 distribution tariffs with a proposal to reduce the RRR level from 7.7% to 5.07%. 14 14-May-18 Appointment of the BoD chair and of the BoD's committees ELSA published the Q1 2018 financial statements and a current report regarding the appeal to 15 15-May-18 the Competition Council's decision. 16 16-May-18 Q1 2018 esults Presentation for analysts and investors (teleconference) Ex-date for 2017 dividend. The price decreased by 1.2% - less than the gross value of dividend 17 7-Jun-18 per share ELSA published the convening of the GMS on 18 September 2018. 18 25-Jul-18 Revocation of the Chief IT&T Officer ELSA published the H1 2018 financial statements and held a webconference for H1 2018 19 14-Aug-18 Results Presentation for analysts and investors 20 17-Sep-18 Revocation of the HR Manager following the mandate termination OGMS approved the appointment of Deloitte Audit SRL as ELSA's financial auditor for the 21 18-Sep-18 financial years 2018, 2019 and 2020 ELSA's BoD announces the renouncement to the position as member of BoD of Ms Arielle 22 12-Oct-18 Malard de Rothschild ELSA's BoD announces the termination of the mandate of CEO Mr Catalin Stancu, by mutual 23 16-Oct-18 agreement, and the nomination as interim CEO of Ms Corina Georgeta Popescu starting 1 November 2018 ELSA announces the application for annulment of the ANRE Orders no. 168 and 169 from 2018 24 23-Oct-18 regarding the methodology and the distribution tariffs ELSA published the Q3 financial 2018 results, BoD appointed Mr. Dragos Andrei as interim member of the BoD after the resignation of Ms. Arielle Malard de Rothschild. Ms. Doina Dascalu 25 15-Nov-18 resigned from her position as Chair of the BoD, considering the Parliament nominated her as First Vice President of ASF ELSA published the Convening notice for OGMS for the election of the BoD members for filling 26 13-Dec-18 in the vacant position
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
No Date Event description Mr. Willem Schoeber announced his decision to resign from his position in the BoD. The Ministry of Finance announced an Emergency Government Ordinance introducing new 27 18-Dec-18 taxes mainly for banks and energy companies. The stock exchange collapses by 17% in 3 days and ELSA loses 15% 28 20-Dec-18 ELSA published the tariffs approved by ANRE for its three distribution subsidiaries for 2019 The BoD appinted Ms. Georgeta Corina Popescu as CEO and Ms. Bibiana Constantin as HR 29 25-Jan-19 Manager, with a four-year mandate ELSA OGMS elected Mr. Radu Mircea Florescu, Mr. Dragos Andrei and Mr. Niculae Havrilet as 30 7-Feb-19 new BoD members, with mandate until April 2022 Source: BSE, LSE, Electrica
Figure 23: Monthly trading volume and weighted average monthly closing price of shares on BSE (in RON) and GDRs on LSE (in USD) (until 15 February 2019) 9.000.000 13,00
8.000.000 12,50
7.000.000 12,00 11,50 6.000.000 11,00 5.000.000 10,50 4.000.000 10,00 3.000.000 9,50 2.000.000 9,00 1.000.000 8,50 - 8,00 ian.18 feb.18 mar.18 apr.18 mai.18 iun.18 iul.18 aug.18 sept.18 oct.18 nov.18 dec.18 ian.19 feb.19
BSE - Shares - Monthly volume LSE - GDRs - Monthly volume BSE - Shares - Average monthly closing price (RON) LSE - GDRs - Average monthly closing price (USD)
Source: BSE, LSE, Electrica
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
Figure 24: Evolution of the adjusted closing price6 of ELSA’s shares vs BET-TR index
60,00
50,00
40,00 Electrica: 24.8% 30,00 BET-TR: 46.5% 20,00
10,00
0,00
-10,00
-20,00
BET-TR Electrica adjusted price with dividends
Source: BSE, Electrica
3.3. Investor relations (IR)
Throughout 2018, ELSA's management team was involved in numerous activities for investors and analysts, whether it was national or international conferences, individual meetings with Romanian or foreign investors and analysts, or conference calls with them.
Like in every year, four teleconferences were organized to present the annual, quarterly and half-yearly financial results of the Group. The events have been streamed live through webcasts; both the supporting documents and the webconference recordings can be accessed on the company's website, under Investors section > Results and Reports.
Among the conferences that took place during 2018, we mention the attendance at:
The Central & Eastern European Forum 2018 in Vienna (16 – 17 January 2018); Romania Investor Days in London (28 February – 1 March 2018); Concorde Securities' annual “Face to Face” conference in Budapest (3-4 April 2018); BCR Investor Conference in Bucharest (8 May 2018); CEE Investor Days Conference in New York (23-24 May 2018); Frontier Investor Days in Bucharest (6-7 September 2018); Romania Investor Day in Warsaw (13 September 2018); Romania Investor Day in Zagreb (20 September 2018); CEE Investors Conference in Stegersbach (9-10 October 2018); Romania Investor Days Nordics in Stockholm (18 October 2018); 7th Annual WOOD's Winter Wonderland in Prague (5 - 7 December 2018)
6 Adjusted at each ex-date with the annual value of the dividend/share
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
In the first part of 2018, the first „Meet the Company, Meet the CEO” event, dedicated to individual (retail) investors at the company level was organized, in collaboration with Investors Club. Approximately 20 persons interested to meet the company's management attended the meeting at ELSA’s headquarters. Thus, investors had the opportunity to get in touch with the company's representatives, to ask questions of interest to them and to deepen relevant information about the group.
ELSA aims at achieving the best-in-class investor program, constantly developing the equity story. As a novelty, in the second half of 2018, ELSA conducted a study on the perception of local and international investors and analysts. The way that the company is perceived at individual level, compared to the industry and to similar market-cap peers was determined.
The company's goal was to better understand investors and their needs in order to avoid inappropriate communication, to minimize information misinterpretation and to improve the quality of communication with existing and potential investors and analysts.
Refering to fairly, continuously and transparently informing stakeholders, the Investor Relations Department has disseminated over 45 current reports and communications on the platforms of the Bucharest Stock Exchange (BSE), the London Stock Exchange (LSE), the Financial Supervisory Authority (ASF and FCA), as well as on ELSA’s website. All these documents can be accessed on the company’s website, under Investors section > Results and Reports.
3.4. Legal acts reported
The legal acts reported in 2017 according to Art. 82 of Law No. 24/2017 are the following:
• EL SERV – Subsequent Agreement no. 344/29 December 2017 – valid until 30 June 2018 - Auto transportation services for ELSA for the period 1 January 2018 – 30 June 2018 – value: RON 447 th; • EFSA – Business Transfer Agreement no. 42/28 March 2018 - Business Transfer of Balance Responsible Party activities and assets – amount: RON 19,762 th (the transaction’s price was established considering the transferred activity’s market value, based on a valuation report delivered by an ANEVAR authorized valuator); • SDTS – Loan Agreement no. 73/05 April 2018 - Granting of a loan in amount of up to RON 130 mn – expiry date 4 April 2025; • SDMN – Loan Agreement no. 74/05 April 2018 - Granting of a loan in amount of up to RON 230 mn – expiry date 4 April 2025; • SDTN – Loan Agreement no. 75/05 April 2018 - Granting of a loan in amount of up to RON 160 mn – expiry date 4 April 2025; • SDMN – Services agreement no. 153/27 April 2018 – Rendering services in the AMR system until 30 September 2018; amount: RON 5,496 th; subsequently, the services agreement no. 219/24 October 2018 was signed, having the same scope, with expiry date 28 February 2019, agreement in total amount of RON 4,580 th; • SDTS – Services agreement no. 154/27 April 2018 – Rendering services in the AMR system until 31 December 2018; amount: RON 7,354 th; • SDTN – Services agreement no. 155/27 April 2018 – Rendering services in the AMR system until 27 April 2019; amount: RON 8,943 th; • SEM – Loan Agreement no. 167/29 May 2018 - Granting of a loan in amount of up to RON 5.5 mn – expiry date 29 May 2020.
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
3.5. Dividends policy
ELSA’s dividend policy was updated in February 2018, and the document can be accessed on the company's website under Investors section > Corporate Governance > Corporate Policies.
ELSA's dividends are distributed from the annual net distributable profit based on the annual individual audited financial statements after their approval by ELSA's Ordinary General Shareholders' Meeting (OGMS) and the approval of the dividend proposal by the OGMS. The shareholders receive dividends proportionally to their share in the company’s paid-up capital. The company has 345,939,929 ordinary shares issued, all shares conferring equal rights on the net assets of the company. Out of the total number of shares issued, 339,049,336 shares offer the right to dividends and the right to one vote per share in the shareholders' meetings of the company. The remaining 6,890,593 shares were bought back by the company in July 2014 in order to stabilize the price and do not confer any right to dividends or any voting right.
Regarding the global deposit receipts that are traded on the London Stock Exchange, ELSA pays dividends to the GDRs issuer proportionally to its holdings. Holders of GDRs will then receive dividends from the GDR issuer, proportionally to their holdings.
According to the policy in force, the dividend distribution that the Board of Directors will consider in formulating the proposal to ELSA’s OGMS will be between 65% and 100% of its distributable net profit. In case there are deviations outside this range, they will be substantiated and explained to shareholders in the periods in which they occur. The company will pay all dividends in RON.
The dividend payout ratio from the distributable profit of the Group subsidiaries shall be consistent with ELSA’s present dividend policy. The dividends paid by the Group's subsidiaries to ELSA in year N (related to year N-1 results) are recorded as finance income in ELSA's individual financial statements in year N and incorporated into dividends paid by ELSA to its shareholders in year N+1 (related to the result of year N).
3.6. Dividend distribution
Figure 25: Gross dividends distributed (2014-2017) - RON mn
291,6
251,4 244,7 245,4 The dividends distributed by ELSA fluctuated in the period 2014 - 2017, between RON 244.7 mn and RON 291.6 mn, but the dividend payout ratio7 was 100% each year, except for 2014, when it reached a level of 96%. In 2015, the net dividend distributions included the amount of RON 5.7 mn representing the retained earnings from 2014.
2014 2015 2016 2017
7 Dividend payout ratio is calculated as Gross Dividends/ Net profit distributable to dividend, whereas Net profit distributable to dividend is Net profit according to individual financial statements of ELSA less the required distributions to legal to legal reserves
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
Figure 26: Gross dividend per share (RON) and dividend yield (%)
6,9% 7,3% 6,1% 5,2% The yield of the dividend paid in 2018 (for the 2017 0,8600 results), recorded the highest level in the 2014-
0,7217 0,7415 0,7237 2017 period, reaching a level of 7.3%. The gross dividend per share paid in 2018 was 0.7237 RON. The dividend yield (%) is calculated as Gross dividend per share/Closing share price on BSE at ex- date.
2014 2015 2016 2017
3.7. Own shares In July 2014, ELSA bought back for price stabilization purposes, 5,206,593 ordinary shares and 421,000 Global Depositary Receipts, equivalent of 1,684,000 shares. The total amount paid for acquiring the shares and Global Depositary Receipts was RON 75,372 th. There were no changes in the number of the treasury shares until the date of the report.
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
4 Corporate Governance in ELSA
ELSA confers a great importance to the principles of good corporate governance, considering corporate governance a key element for sustainable growth of the business and for enhancement of long-term value for shareholders.
ELSA constantly develops and adapts its corporate governance practices and model, both at standalone, as well as at Group level, so that it can align with the increasingly rigorous capital market requirements and with the best practices in corporate governance at European level, as well as for creating opportunities and increasing competitivity.
Corporate governance represents the principles at the basis of the governance framework through which the company is administered and controlled. Transposed in the internal regulations, these principles determine the efficiency and effectiveness of the control mechanisms adopted with the purpose of protecting and harmonizing the interests of all the stakeholders – shareholders, directors, executive managers, managers of different structures of the company, employees and the organizations that represent their interests, customers and business partners, suppliers, central and local authorities, regulators and operators of the capital markets, etc.
ELSA’s Code of Corporate Governance presents primarily the main work methods, attributions and responsibilities of the management and supervisory structures of the company, as well as those of the committees constituted to support these structures to fulfil their responsibilities.
ELSA undertook from the IPO and admission to trading from July 2014 the implementation of a corporate governance action plan, as part of the framework agreement with the European Bank for Reconstruction and Development. The standards and measures provisioned in this plan have been implemented and continuously monitored. For more details about this action plan, please see chapter 4.10.
4.1. Corporate Governance Code
ELSA adhered to and has been applying the provisions of the Corporate Governance Code issued by the Bucharest Stock Exchange (BSE CGC). This code, entered into force starting with 4 January 2016, can be accessed on the BSE’s website at the address: http://m.bvb.ro/Regulations/LegalFramework/BvbRegulations.
ELSA’s compliance with BSE’s code is being thoroughly assessed and periodically reported to the market as new developments are observed.
ELSA had officially adopted and applies the Corporate Governance Code (ELSA CGC) starting with 2014 financial year. Formally, ELSA adopted the Code of Corporate Governance (ELSA CGC) starting with February 2015 and made it available to all the interested parties on ELSA’s website, in the section Investors > Corporate Governance > Corporate Governance Code.
ELSA CGC embeds ELSA’s general principles and conduct rules that set forth the corporate values, the responsibilities, obligations and business conduct of the company.
ELSA CGC comprises also ELSA’s Articles of Association, the charters of the BoD and those of its committees, and all these documents together contain the terms of reference and responsibilities of the administrative and executive management of the company.
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
The most recent update of ELSA CGC took place in April 2017, following the update of the Articles of Association of the Company that was approved by the GMS on 27 April 2017.
The “Comply or Explain” Statement from chapter 4.9 presents the company’s compliance level with the provisions of BSE’s CGC code. ELSA is in compliance with all of these provisions.
The CGC is also a guide for ELSA’s management and employees and for other stakeholders regarding the business conduct and governance matters and provides information about aspects of the Company’s principles and policies. It also incorporates the Code of Ethics and Professional Conduct, Appendix 7 of the CGC.
In compliance with Company’s policies and with the procedures of the Code of Ethics and Professional Conduct, the Audit and Risk Committee ensures that the Company`s activity is carried on with honesty and integrity, including the implementation of the whistle-blower policy.
ELSA has implemented a procedure for reporting ethical deviations, frauds and any other aspects of non- compliance that otherwise could cause image and/or commercial prejudice or even involve legal sanctions, thus damaging the prestige and profitability of the Company.
The whistleblowing reporting tools, which functions according to this procedure, as well the procedure itself, are available on ELSA’s website, in the Whistleblowing section.
Whereas the shares of the Company are allowed for trading both on the regulated market administered by Bucharest Stock Exchange (BSE), and through GDRs on the market managed by the London Stock Exchange (LSE), ELSA is subject to the rules imposed by the national and European laws on market abuse regarding market abuse prevention and the arrangements applicable to inside information. Thus, ELSA CGC includes instructions on the use of insider information and market manipulation. ELSA has implemented a procedure to comply with the national and European regulations regarding market abuse prevention. 4.2. General Meeting of ELSA’s Shareholders
The General Meeting of Shareholders (“GMS”) is the main corporate governance body of ELSA, deciding on the items as outlined in the Articles of Association. The convening, functioning, voting as well as other provisions regarding the GMS are detailed in ELSA’s Articles of Association, which is available in electronic format on ELSA’s website, in the section Group > About.
The ordinary general meeting of the shareholders has the following main duties:
to appoint and revoke the members of the Board of directors and establish the level of their remuneration and other rights according to the legal provisions; to establish the revenues and expenses budget, to set out the activity schedule of the Company; to establish the revenues and expenses budget consolidated at the group level; to discuss, approve or amend the annual financial statements according to the reports submitted by the Board and the financial auditor; to approve the profit distribution according to the law and to establish the dividend; to decide on the management activity of the directors and on the discharge of their liability, in accordance with the law; to decide to file legal actions against the directors, managers as well as financial auditor for damages they caused to the Company by breaching their obligations towards the Company; to decide on mortgaging, renting or closing of one or more units of the Company;
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
to appoint and revoke the financial auditor and to set the minimum term of the financial audit contract; to carry out any other duties set out by the law. The extraordinary general meeting of the shareholders shall decide on the following:
withdrawal of the preference right of shareholders upon subscription of new shares issued by the Company; contracting any type of loans, debts or obligations representing a loan, as well as creating real or personal liens related to these loans, in each case in accordance with the competence limits provided in Annex 1 to Articles of Association; operations regarding the acquisition, sale, exchange or creation of encumbrances over fixed assets of the Company whose value exceeds, individually or cumulated, during any financial year, 20% of the total fixed assets, less receivables, and leases of tangible assets for periods longer than one year, whose individual or cumulated value towards the same co-contractor or involved persons or with whom it acts in concert exceeds 20% of the fixed assets value, less receivables at the time of entering in the relevant operation, as well as joint ventures in excess of the same value and with a duration of over one year; approving investment projects in which the Company will be involved in accordance with the competence limits provided in Annex 1 to these Articles of Association, other than the ones provided in the annual investment plan of the Company; approving the issuance and admission to trading on a regulated market or on an alternative trading system of shares, depositary certificates, allotment rights or other similar financial instruments; approving the competencies delegated to the Board; changing the legal form; relocation of the registered office; changing the main or secondary business objects; increasing the share capital, as well as decreasing or the replenishment of the share capital by issuing new shares, according to the law; the merger and the spin-off; the dissolution of the Company; carrying out any bond issuance, as per the provisions of art. 10 of the Articles of Association, or conversion of a category of bonds in a different category or in shares; approving the conversion of preferential and nominative shares from one category to another, according to the law; any other amendment to the Articles of Association; the establishment or dissolution of secondary offices: branches, agencies, representative offices, working points or other similar units without legal status, according to the legal provisions; participation in the establishment of new legal persons; approval of the eligibility and independence criteria with respect to the Board members; approval of the corporate governance strategy of the Company, including the corporate governance action plan; donations within the limits of the competence provided in Appendix 1 to these Articles of Association; and approves granting of intragroup loans with a value of more than EUR 50 mn per operation; any other decision that requires the approval of the extraordinary general meeting of the shareholders.
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ELECTRICA SA – 2018 DIRECTORS’ REPORT
4.3. Shareholders’ rights
Rights of the Company’s shareholders, including the minority ones, are protected according to the relevant legislation. Shareholders have, amongst others rights provided under the Company’s Articles of Association and the laws and regulations in force, the right to obtain information about the operations and results of ELSA, regarding the exercise of voting rights and the voting results in the GMS.
Shareholders have also the right to participate and vote in the GMS, as well as to receive dividends. Except for the shares owned by ELSA following the stabilization after the IPO in 2014, there are no preference shares without voting rights. There are no shares conferring the right to more than one vote.
Moreover, shareholders have the right to challenge the decisions of GMS or to withdraw from the Company and to request the Company to acquire their shares, in certain conditions mentioned by the law. Likewise, one or more shareholders holding, individually or jointly, at least 5% of the share capital, may request the calling of a GMS. Such shareholders have also the right to add new items to the agenda of a GMS, provided such proposals are accompanied by a justification or a draft resolution proposed for approval and copies of the identification documents of the shareholders who make the proposals.
In the following paragraphs are presented aspects regarding the shareholders’ rights, extracted from ELSA’s Articles of Association.
Rights and obligations deriving from the shares
Each share subscribed and fully paid in by the shareholders, in accordance with the law, grants the shareholders (i) the right to one vote in the general meeting of the shareholders, (ii) the right to elect the management bodies, (iii) the right to participate to the profit distribution, as well as (iv) other rights provided by these Articles of Association and by the legal provisions. The acquisition of the property right over a share by a person, directly or indirectly, has as effect the obtainment of the capacity of shareholder of the Company together with all rights and obligations deriving from this capacity, in accordance with the law and these Articles of Association. The rights and obligations deriving from the shares are transferred to the new acquirers together with the shares. When a nominative share is owned by several persons, the transfer shall be registered only if they appoint a sole representative for exercising the rights derived from the shares. The obligations of the Company are secured by its social patrimony, and the liability of the shareholders is limited to the subscribed share capital. The shareholder that has, in a certain operation, either personally or as representative of another person, an interest contrary to the interest of the Company, must refrain from deliberations regarding the respective operation. The exercise of the rights by the holders of the depositary certificates8:
The rights and obligations related to the underlying shares based on which the depositary certificates were issued are exercised by the holders of the depositary certificates, proportionally to their holdings of depositary certificates and taking into account the conversion rate between underlying shares and the depositary certificates. The issuer of the depositary certificates in the name of whom the underlying shares are registered,
8 According to ELSA’s Articles of Association; the provisions are according to CNVM Regulation 6/2009 and will be updated in accordance with Law no. 24/2017 on issuers of financial instruments and market operations.
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is the shareholder within the meaning and for the application of the Regulation no. 6/2009 regarding the exercise of certain rights of the shareholders in the general meetings of the companies. In this sense, the issuer of the depositary certificates is fully responsible for informing the holders of the depositary certificates in a correct, complete and timely manner, observing the provisions of the issuance documents of the depositary certificates, about the documents and the informative materials related to a general meeting of shareholders, as made available by the Company to the shareholders. In order to exercise its rights and obligations related to a general meeting of shareholders, a holder of depositary certificates will send to the entity where it has opened its account for depositary certificates the voting instructions for the topics on the agenda of the general meeting of the shareholders, so that the respective information is sent to the issuer of the depositary certificates. The issuer of the depositary certificates votes in the general meeting of the shareholders of the Company in accordance with and within the limits of the instructions of the holders of the depositary certificate which have this quality at the reference date. The issuer of the depositary certificates may cast different votes for certain underlying shares in the general meeting of the shareholders than those expressed for other underlying shares. The issuer of the depositary certificates is fully responsible for taking all necessary measures, so that the entity which keeps the records of the holders of the depositary certificates, the intermediaries involved in the custody services for holders of the depositary certificates on the market where the depositary certificates are traded and/or any other entities involved in recording the holders of the depositary certificates, to send the voting instructions of the holders of the depositary certificates related to the topics on the agenda of the general meeting of the shareholders. Any reference date for the identification of the shareholders which have the right to take part and to vote in the general meeting of the shareholders of the Company and any registration date for the identification of the shareholders which have rights deriving from their shares, as well as any other similar date set by the Company related to any corporate events of the Company will be established in accordance with the applicable legal provisions and with a prior notice sent with at least 15 free calendar days (in Romanian, zile calendaristice libere) to the issuer of the depositary certificates, in the name of which the underlying shares are registered based on which the depositary certificates mentioned above are issued. The reference date will be prior with at least 15 working days to the deadline for submitting the power of attorney related to the vote. Transfer of shares
The shares are indivisible. The Company shall recognize a sole owner per each share, subject to the provisions of article 11 paragraph (4) from Articles of Association.
The partial or total transfer of shares between the shareholders or to third parties shall be carried out according to the terms and procedure provided by the applicable legal provisions, including the capital markets legislation.
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4.4. ELSA’s Board of Directors
ELSA adopted a one-tier (unitary) corporate governance system, consistent with the principles of good corporate governance, transparency and accountability towards its shareholders and other categories of stakeholders, aiming to support and drive the business development and efficient exchange of relevant corporate information. The Board of Directors (BoD) is responsible for taking all the necessary measures to carry out as well as to supervise the activity of the Company. Its structure, organization, duties and responsibilities are established under the Articles of Association and the Charter of the BoD. According to the provisions of the company’s Articles of Association, starting with 14 December 2015, the BoD is composed of seven non-executive directors, elected by the Ordinary General Meeting of Shareholders for a four years mandate, four of whom must meet the criteria of independence provided by the Articles of Association. During 2018, the composition of the BoD has undergone several changes, as follows:
At the beginning of the year, the BoD consisted of the following members: Mr. Cristian Busu, Ms. Arielle Malard de Rothschild, Ms. Elena Doina Dascalu, Mr. Bogdan Iliescu, Mr. Gicu Iorga, Mr. Pedro Mielgo Alvarez and Mr. Willem Schoeber; On 27 April 2018, according to shareholders’ request, the General Meeting of Shareholders elected a new BoD through the cumulative vote method, for a four-year mandate, as it follows: Ms. Elena Doina Dascalu, Mr. Gicu Iorga, Ms. Ramona Ungur, Mr. Valentin Radu, Ms. Arielle Malard de Rothschild, Mr. Bogdan Iliescu, and Mr. Willem Schoeber. Five out of the seven directors fulfilled the independence criteria provided by the Articles of Association, according to their statements, namely: Ms. Ramona Ungur, Mr. Valentin Radu, Ms. Arielle Malard de Rothschild, Mr. Bogdan Iliescu, and Mr. Willem Schoeber; On 11 October 2018, Ms. Arielle Malard de Rothschild renounced her position as a member of the BoD, her mandate ceasing on 11 November 2018. In this context, the BoD decided to appoint Mr. Dragos Andrei as interim member of the BoD, starting with 1 December 2018; On 15 November 2018, Ms. Elena Doina Dascalu renounced her position as a member of the BoD, following her nomination as First-Vice-president of the Financial Supervisory Authority (ASF), starting 14 November 2018; In order to fill in the vacant positions, on 13 December 2018, the BoD decided to convene the General Meeting of Shareholders on 7 February 2019. On 18 December 2018, Mr. Willem Schoeber informed the BoD about his resignation, and about the ceasing of his mandate on 6 February 2019.
At the end of 2018, the members of the BoD were the following:
Term of office (starting Starting date of the No Name Status with 27 April 2018) first mandate
non-executive director, 1. Mr. Valentin Radu 4 years 27 April 2018 independent non-executive director, 2. Ms. Ramona Ungur 4 years 27 April 2018 independent
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Term of office (starting Starting date of the No Name Status with 27 April 2018) first mandate
3. Mr. Gicu Iorga 4 years non-executive director 1 May 2017
non-executive director, 4. Mr. Bogdan Iliescu 4 years 14 December 2015 independent non-executive director, 5. Mr. Willem Schoeber 4 years 1 May 2016 independent
6. Mr. Dragos Andrei Interim* non-executive director 1 December 2018
Source: Electrica *Note: Following Ms. Arielle Malard de Rothschild renunciation of her mandate as member of the Board of Directors, on 13 November 2018, the Board of Directors appointed Mr. Dragos Andrei as interim member, starting with 1 December 2018, and until 30 June 2019 or until the General Meeting of Shareholders having on the agenda the filling of the vacant position, whichever comes first.
At the date of this report, the members of the BoD were the following:
Term of office Starting date of the No Name Status (until 27 April 2022) first mandate
non-executive director, 1. Mr. Valentin Radu 4 years 27 April 2018 independent non-executive director, 2. Ms. Ramona Ungur 4 years 27 April 2018 independent
3. Mr. Gicu Iorga 4 years non-executive director 1 May 2017
non-executive director, 4. Mr. Bogdan Iliescu 4 years 14 December 2015 independent
5. Mr. Dragos Andrei ~ 3 years, 5 months non-executive director 1 December 2018
6. Mr. Niculae Havrilet ~ 3 years, 3 months non-executive director 7 February 2019
non-executive director, 7. Mr. Radu Florescu ~ 3 years, 3 months 7 February 2019 independent
More details on the Board members’ biographies can be found on the Group’s website in the section Investors > Corporate Governance > Board of Directors .
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We present below the most relevant aspects regarding the professional experience of the members of the BoD:
Mandate Name Professional experience duration Currently – Founding member and Managing Partner at Platinum Capital From August 2005 until August 2007 – General Manager, Chair of the Board of Directors Valentin – TiriacAuto, Autorom – General Supplier DaimlerChrysler 4 years Radu During March 2003 – August 2007 – CEO within TiriacHoldings From April 1995 – March 2003 – Senior Project Manager – Roland Berger Strategy Consultants Currently – Member of the Board of Directors of Oil Terminal SA, and Romgaz SA During January 2013 – April 2018 – Head of department/Supervisor – SME Reorganization Department/Office – Banca Comerciala Romana From May 2010 until January 2013 – Coordinator of Recovery Department - Banca Comerciala Romana. From December 2008 until December 2009 – Head of Risk and Credits Division - Ramona Eximbank Romania 4 years Ungur During April 2003 – December 2008 – Head of Credit Management Department and Deputy Manager/Control Officer – Internal Control Department - Credite Europe Bank, Bucharest From 1998 until 2003 - Banking Supervision Inspector –National Bank of Romania, Tg. Mures During August 1991 – August 1992 – Compensation Referent, Banca Agricola SA (Raiffeisen Bank), Bacau Currently - Board member, Nomination and Remuneration Committee member, Rating and Audit Committee member, Strategy committee member, SNTGN Transgaz SA, Medias; Between 2014 - 2016 - Executive Director, Corporate Finance Department, BRD – Group Bogdan Societee Generale; George 4 years Between 2007 - 2014 - Managing Director, BRD Corporate Finance; Iliescu From 2005 until 2009 – Board member, SAI INVESTICA ASSET MANAGEMENT SA, Bucharest; Between 2001 - 2007 - Project Manager, BRD/SG Corporate Finance; Between 1997 - 2001 - Analyst, BRD – Group Societe Generale. Currently - Secretary General in the Ministry of Energy; Between 2014 - 2017 - Senior Advisor A.N.A.F. - D.G.V. (General customs direction) Bucharest; Between 2012 - 2014 - Head of customs office - D.G.V. (General customs direction) Bucharest/Ploiesti; Gicu Iorga 4 years Between 2011 - 2012 - Head of municipal tax information office/Deputy executive manager – economic - D.G.F.P.M. Bucharest (General Direction of Public Finance of Bucharest Municipality); Between 2010 - 2011 - Chief of administration - Administration of the consolidated state budget D.G.F.P.M. Bucharest, A.F.P – 5th district; 30 years’ experience in economics, finance-fiscal and public administration. ~2 years, Independent business consultant (since 2013); Willem Jan 9 months, Antoon Member of the board of directors of Neste Oyj (Helsinki, Finland) and of the supervisory until Henri board of Gasunie NV (Groningen, the Netherlands) since 2013 and member of the audit 6 February Schoeber committees of these boards; 2019
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Mandate Name Professional experience duration Chair of the Board of Directors of EWE Turkey Holding AS (Istanbul, Turkey), Bursagaz (Bursa, Turkey), Kayserigaz (Kayseri, Turkey) (2010 - 2015); Member of the executive board of EWE AG (Oldenburg, Germany), responsible for power generation and the utility businesses in Turkey and Poland (2010 - 2013); Chairman of the executive board of swb AG (formerly "Stadtwerke Bremen AG", the integrated utility company of the city of Bremen, Germany) (2007 - 2011); Various positions in the Royal Dutch Shell group in the Netherlands, France, Germany and the USA, with senior management positions in refining, i.a. refinery manager in Reichstett (France) and Cologne (Germany) (1977 - 2007). Currently – Member of the Board of Directors, Alternate Executive Director of the Board Turkey/Romania/Azerbaijan/Moldova/Kirghistan - EBRD, London During January 2013 – March 2015 –State Counsellor, Chancellery of the Prime Minister, Romanian Government During September 2011 - January 2013, February 2005 – August 2007 and March 1999 – April 2003 – President of Valsa Consulting SA From August 2007 until August 2011 – Minister Counsellor at the Permanent Representation of Romania to the European Union, Brussels; From April 2003 until January 2005 a had several positions within the Romanian Government, as follows: April 2004 - January 2005 – Secretary of State within the Ministry of Public Finance; September 2003 –April 2004 – Advisor of the Minister of Internal Affairs and Administration; April – September 2003 – Secretary of State, Dragos ~3 year, Administration Ministry; Andrei 5 months During April 1998 – February 1999 – First Vice-president, Banca Romana de Comert Exterior, BANCOREX SA From September 1995 until March 1998 – Vice-president of the Board of Directors and Deputy General Manager, ABN AMRO Bank Romania During June 1992 – August 1995, Chief Operations Officer and General Manager, Banque Franco RouMayne SA From December 1990 until May 1992 – Chief of Service “Foreign exchange reserves”, National Bank of Romania During September 1988 – November 1990 – International money market research analyst, Institute of World Economy, Bucharest From September 1995 until August 1988, Analyst within the Ministry of Oil, ICE Rompetrol, Bucharest With over 35 years of experience in the field of electricity and natural gas, out of which he spent 20 years in managerial positions, Niculae Havrilet holds, since February 2018, the position of counsellor to the Minister of Energy. A graduate of the Technical University of Cluj-Napoca, the Faculty of Mechanical Engineering, Niculae Havrilet has gathered significant experience in the field of central public administration. Between June 2012 and October 2017, he held the position of President of the Romania’s National Energy Regulation Agency (ANRE), a time when he Niculae ~3 year, was also a member of the Council of Regulator Authorities within the Agency for the Havrilet 3 months Cooperation of Energy Regulators (ACER), as well as a member of the General Assembly of the Council of European Energy Regulators (CEER). Between 2002 and 2012, he served as General Secretary of the National Professional Association of Natural Gas, and from 2001 to 2012 he was General Manager of Gascop Company. In 2000, Niculae Havrilet was decorated with the Order of the “Star of Romania”, in the rank of Knight. Niculae Havrilet has been appointed member of the BoD of ELSA since February 2019.
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Mandate Name Professional experience duration Radu Florescu is currently CEO of Centrade│Cheil, for the South East Europe, the regional communications center for Cheil Worldwide, coordinating 11 markets in the Adriatic and Balkan countries. For more than 25 years, Radu Florescu has worked with top multinational companies to be found in Fortune 500, working in emerging countries, including within EU funded programs. A graduate in Marketing and Finance at Boston College, Radu Florescu began his Merrill Lynch commodity trading career at NYMEX, focusing his activity on WTI, fuel oil and gasoline. In 1989, he co-founded Centrade USA and brought pioneering communication services to the Romanian market through the launch of Saatchi & Saatchi, the establishment of Cable Direct and the foundation of Zenith Media. Among the positions he held the following are to be mentioned: Founding member of IAA Romania, co-founder of the Union of Advertising Agencies of Romania (UAPR), Radu ~3 year, member of the EACA European Council representing Romania and Eastern Europe in Florescu 3 months Brussels (2012-2015, 2017 up to present), member of the Council and vice-president of the American Chamber of Commerce in Romania (2013-2015 and 2016 up to present), member of the TAROM Board of Directors (March 2015-June 2017), coordinator and member of Coalition Coordination Group for Romania’s Development – the “umbrella” type leading association representing the business community and trade sections of the embassies in Bucharest. Radu Florescu is also active in the field of social responsibility, having a long history of contribution brought to the local community. Currently, Radu is a member of the AIESEC Romania Board, member of the JA (Junior Achievement) Council, member of the OvidiuRo Council, member of the Supervisory Board of the Principesa Margareta Foundation, president of the MBA ASEBUSS Program Board, member of Top Business School in Romania and member of the Hospice Casa Sperantei Board. He was also a member of the United Way Romania Council for 12 years and president of the Council. Radu Florescu holds the position of member of the ELSA BoD since February 2019. Source: Electrica
During January – April 2018, Mr. Cristian Busu performed the duties of Chair of the BoD, according to the decision made by the Board in its meeting on 13 November 2017. On 14 May 2018, the BoD decided to appoint Ms. Doina Dascalu as Chair for a mandate of one year. Following her resignation, on 12 December 2018, Mr. Valentin Radu was elected Chair of the BoD, with a mandate of one year. On 7 February 2019, the Ordinary General Meeting of Shareholders, convened in order to fill in the vacant positions of the BoD, decided to appoint as directors the following members: Mr. Radu Florescu, Mr. Dragos Andrei and Mr. Niculae Havrilet, the duration of the term of office of the elected administrators being equal to the period remaining until the expiry of the term of office for the vacant positions, respectively until 27 April 2022. Three committees support the activity of the BoD, respectively the Nomination and Remuneration Committee, the Audit and Risk Committee and the Strategy and Corporate Governance Committee, each of them composed of three Directors and chaired by an independent Director. The majority members of the Nomination and Remuneration Committee and of the Audit and Risk Committee are independent Directors. The consultative committees’ members are elected for a period of one year. The organization, duties and
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responsibilities of each committee are set under the Articles of Association of ELSA, respectively in the committee Charters - an integrant part of the Corporate Governance Code of the Company. According to the changes registered in the BoD composition, the composition of the committees changed during 2018, as it follows:
1 January – 27 April 2018 Nomination and Remuneration Committee Mr. Pedro Mielgo Alvarez – Chair of the committee Mr. Bogdan Iliescu Mr. Gicu Iorga Audit and Risk Committee Mr. Bogdan Iliescu - Chair of the committee Ms. Arielle Malard de Rothschild Ms. Doina Dascalu Strategy and Corporate Governance Committee Mr. Willem Schoeber - Chair of the committee Ms. Arielle Malard de Rothschild Mr. Cristian Busu 14 May – 11 December 2018 Nomination and Remuneration Committee Mr. Valentin Radu – Chair of the committee Mr. Bogdan Iliescu Ms. Doina Dascalu9 Audit and Risk Committee Mr. Bogdan Iliescu - Chair of the committee Ms. Arielle Malard de Rothschild10 Ms. Ramona Ungur Strategy and Corporate Governance Committee Mr. Willem Schoeber - Chair of the committee Ms. Arielle Malard de Rothschild9 Mr. Gicu Iorga 12 – 31 December 2018 Nomination and Remuneration Committee Mr. Bogdan Iliescu – Chair of the committee Mr. Valentin Radu Ms. Ramona Ungur Audit and Risk Committee Mr. Bogdan Iliescu - Chair of the committee Ms. Ramona Ungur Mr. Gicu Iorga
9 Note: renounced her mandate on 15 November 2018 10 Note: renounced her mandate on 11 October 2018
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Strategy and Corporate Governance Committee Mr. Willem Schoeber - Chair of the committee Mr. Dragos Andrei Mr. Gicu Iorga
On 18 February 2019, the new Board of Directors revised the committees’ composition, valid until 31 December 2019, as follows: The Strategy and Corporate Governance committee Mr. Valentin Radu – Chair Mr. Dragos Andrei – Member Mr. Niculae Havrilet – Member
The Audit and Risk committee Ms. Ramona Ungur – Chair Mr. Bogdan George Iliescu – Member Mr. Radu Florescu – Member
The Nomination and Remuneration committee Mr. Bogdan George Iliescu – Chair Mr. Gicu Iorga – Member Mr. Valentin Radu – Member
According to the available information, there is no agreement, understanding or family relation between the directors of the Company and another person who may have contributed to their appointment as directors.
As of 31 December 2018, the members of the BoD did not hold ELSA shares. At 15 February 2019, out of the members of the BoD, only Mr. Niculae Havrilet held ELSA shares (199 shares).
According to the available information, the Board members were not involved in litigations or administrative proceedings regarding their activity within the Company or regarding their capacity to fulfil their duties within the Company in the past five years.
4.5. The activity of ELSA’s Board of Directors and of its Consultative Committees in 2018
In 2018, the Board of Directors met 22 times. Out of the 22 meetings that took place in 2018, 18 meetings were organized with physical presence of the members, 3 were held by conference call, in accordance with Art. 18 para. 20 of the Company’s Articles of Association and one was held electronically, in accordance with the provisions of Art. 18 para. 23 of the Articles of Association of the Company11.
The Board members' attendance (in person, by conference call or by email) in the meetings of the Board of Directors and its committees in 2018 is presented below:
11 When the Board members were unable to attend the meetings organized by the three methods specified by the Company's Articles of Association (physical presence, by telephone conference call and electronic), they were represented based on the mandates given to another Board member.
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The Nomination The Strategy and The Board of The Audit and and Corporate Directors Risk Committee Remuneration Governance Name (no. of meetings (no. of meetings - Committee Committee - 22) 13) (no. of meetings (no. of meetings - - 11) 11) Cristian Busu12 6 - - 3 Pedro Mielgo 6 - 4 - Alvarez12 Arielle Malard de 14 10 - 7 Rothschild13 Doina Dascalu14 18 4 6 - Bogdan Iliescu 22 13 11 - Gicu Iorga 21 1 4 8 Willem Schoeber 20 - - 11 Valentin Radu15 16 - 7 - Ramona Ungur15 16 9 1 - Dragos Andrei16 1 - - - Source: Electrica
In accordance with the provisions of the Collective Labor Agreement, when appropriate, invitations to attend the BoD meetings were sent to Trade Union representatives. The key decisions taken by the BoD during 2018 refer to:
Election of the Chairman of the BoD and establishing the composition of the consultative committees and election of their chairpersons ( after the GMS has established the new structure); Revision and endorsement of ELSA revenue and expenses budgets at standalone and consolidated levels, as well as of the revenue and expenses budgets of company's subsidiaries for the financial year of 2018; Analysis and endorsement of ELSA financial statements at individual and consolidated levels, as well as of the financial statements of the Company's subsidiaries for the financial year of 2017; the quarterly analysis of the financial results, including their analysis as compared to the budget; Revision of Company’s Delegation of Authority; Revision of the Policy on Transactions with Related Parties.
Regarding the structuring and development of Group’s business portfolio:
Redefining the strategic directions of Group’s development, of the vision, mission and values, taking into consideration the market and the company’s already initiated transformation process, as well as the European and national perspectives; Revision and approval of ELSA and of the consolidated investment plan for the financial year of 2018, as well as the monthly analysis of its achievement;
12 His mandate ceased according to the OGMS decision no 2/ 27 April 2018 13 On 11 October 2018, Ms. Arielle Malard de Rothschild renounced her position as a member of the Board of Directors 14 On 15 November 2018, Ms. Elena Doina Dascalu renounced her position as a member of the Board of Directors 15 Nominated through the OGMS decision no 2/ 27 April 2018 16 Following Ms. Arielle Malard de Rothschild’s renunciation of her position as member of the Board, on 13 November 2018, the Board of Directors decided to appoint Mr. Dragos Andrei as interim member of the Board of Directors, starting with 1 December 2018
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Analysis, coordination and approval of several proposals submitted by the executive management regarding investment opportunities on renewable energy, given the context of the energy market, the impact on the supply activity and the competitive advantages of the competitors; The transfer of Balance Responsible Party (BRP) from ELSA to EFSA, along with the approval of the Market Risk Management Strategy, including the strategic provisions regarding the energy procurement by EFSA; Monitoring the implementation and the performance of the transformation program for the distribution segment; A new business plan was approved for EL SERV, plan that provides efficiency and optimization measures, such as: - Improvement of the services currently provided and their development for companies outside Electrica Group; - Development of new products and ancillary services for the companies within the Group; - Streamline the real estate portfolio; - Reduction of administrative and general costs. Approval of the efficiency project of ELSA, concentrated on personnel reduction at holding level, starting the employees’ evaluation process, and implementing an optimal organizational structure aimed to streamline the activity. Regarding the human resources and the managerial competences:
Along with the overseeing of the recruitment process of the general managers for ELSA’s subsidiaries, a new system of key performance indicators and a new assessment methodology for the performance of executive management, providing general, specific and individual indicators for each executive manager of ELSA were set in place, followed by their cascading within the subsidiaries. In terms of audit and financials:
Approval of the Group’s financing strategy, under ELSA’s coordination, as well as the Treasury Strategy, including the optimization of financial placements strategy; Overseeing the implementation of the internal audit plan for 2018 and the approval of the 2019 audit plan; Monitoring the risk management at group level, based on the reports presented by the executive management, the corrective measures regarding the high risk identified noncompliance and the recommendations made by the Audit and Risk Committee and approving the Risk Management Policy, in order to be implemented on 2019 within the entire Group; Running the selection process and submission for GMS approval the appointment of the new financial auditor of the Company.
Evaluation of the Board of Directors: According to the established mechanism, namely to carry out the evaluation of its activity either with the support of a consultant or by self-evaluation, alternatively, an internal evaluation of the Board activities was carried out at the beginning of 2019, based on a questionnaire defined and thoroughly discussed and agreed by the Board members.
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The questionnaire, using a scale of 1 to 5, served to perform an assessment of the Board’s activities in the following areas: Specific KPIs as provided in the mandate agreements (the main objectives defined by the General Meeting of Shareholders: Group strategy, Corporate Governance, Placement of financial investments and Investments achievement in the distribution companies) Board Efficiency and Ways of Working of the Board Board interactions and activities’ dynamics Self-Assessment of each Board member Functioning of the Board Chair Board’s interactions with CEO/Management Board’s interactions with stakeholders.
After analysing the results of the questionnaire, the following conclusions were drawn: Most respondents assessed the overall work of the Board in 2018 as being generally good; Regarding the achievements of the Board’s own KPIs, it was noted that the investments made and commissioned during 2018 in the distribution companies reached the expected level, creating the prerequisites for the development and improvement of the results recorded by the distribution subsidiaries in the future. Thus, there is an improvement compared to the previous years, both quantitative (in terms of value of investments) and in terms of effort’s efficiency (a higher degree of achievement); As in previous years, the Board’s ability to predict evolutions in the business environment in which the Company operates and potential opportunities or threats, has been impacted mainly by the unpredictability of the regulatory framework, even in identifying business opportunities (e.g. renewable energy); The relationships with important shareholders, as well as public communication have been improved compared to previous years.
In this context, for the next year, the Board has set the following priority directions: The Board will pay more attention to the compliance with the corporate governance framework at Group level, to ensure an efficient functioning, an increased collaboration and a quick functional reporting within the group, all with strict compliance with the unbundling rules; The Board considers that progress has been made in establishing the company’s mission, vision and strategic directions, but it is necessary to continue and materialize the efforts to achieve the medium- term objectives, taking into consideration market opportunities and challenges; The Board identified a considerable improvement in the company’s activity on the correct identification of the main risks and on the implementation of efficient mechanisms for their mitigation. However, it is necessary to permanently monitor the potential risks and refine the management mechanisms by continuously adapting them to the new market and regulatory conditions.
The Nomination and Remuneration Committee
The Nomination and Remuneration Committee consists of three non-executive BoD members, two of them being independent members, while the chair of the Committee is an independent director.
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The role of the Committee is to propose candidates for the BoD, to develop and propose to the Board the selection procedure of candidates for the executive managers’ positions and other management positions, to recommend to the Board candidates for the positions listed, to formulate proposals on the managers’ remuneration and other management positions.
The Committee has the following responsibilities concerning nomination matters:
Recommending the Board a nomination policy, including a target Board profile, process and principles for shareholders to consider when proposing candidates for director positions at the Company, and advising the Board regarding the appointment of interim directors in accordance with the policy; Reviewing the implementation of the nomination policy, preparing a report to the Board on its implementation, and presenting a summary of this report in the Directors' Report; Advising the Board on the appointment and dismissal of the CEO, making recommendations on the appointment and dismissal of the Company’s executive management team after considering the views of the CEO, and making proposals on the appointment and dismissal of subsidiary board members in accordance with the Group Governance Policy; Recommending the Board policies in the human resources field, including those covering recruitment and dismissal, talent management and development, and succession planning across the Company and its subsidiaries (the Group); Overseeing the process for the annual evaluation of the effectiveness of the Board and its consultative committees; Periodically assessing the size, composition and Committee’s structure and making recommendations to the Board with regard to any changes; Advising the Board on continuous skill development programmes for Board members and executive management; Overseeing the nomination process of the CEOs and executive managers in the subsidiaries according to the nomination and remuneration Policy.
The Committee has the following duties regarding remuneration:
Advising the Board in relation to the remuneration, incentive and severance compensation policies of the Company; Advising the Board on the structure of the remuneration policy for Board members; Advising the Board in relation to the remuneration of the CEO and other executive managers, including the main remuneration components, performance objectives and appraisal methodology; Making recommendations to the Board on the remuneration of subsidiary board members and the general limits of remuneration for subsidiary management; Monitoring compensation trends within areas relevant to the Group; Overseeing the remuneration process of the CEOs and executive managers in the subsidiaries according to the Nomination and Remuneration Policy.
The Nomination and Remuneration Committee met 11 times during 2018. The main topics addressed and referred to the BoD for approval/endorsement, additionally to the recurrent activities, were the following:
Analysis of the executive managers KPIs achievement for 2017 and implementing a new improved system for 2018 - at ELSA and Group level; Drafting, in order to be approved by the BoD, of the Recruitment and Nomination Policy of candidates for the executive positions of the companies within Electrica Group, as well as
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overseeing the recruitment processes of the general managers of ELSA’s subsidiaries, followed by recommendations; Analysis of the remuneration system applied within the Group, at different levels of administration and management, compared to the market and its trends; setting the guidelines for further updates in the next period; Analyze the activity of the executive managers, revising the executive management team and prospect the market in order to select the new CEO and the Human Resources Manager.
The Audit and Risk Committee: The Committee is composed of three non-executive BoD members, two of them being independent members, while the chair of the committee is an independent director. The Committee’s composition provided the necessary expertise in finance and risk management, according to legal requirements. The main role of the Committee is to support the Board in fulfilling its duties of verifying the efficiency of Company's financial reporting, internal control and risk management. While fulfilling this role, the Committee advises the Board regarding the assessment of the Annual Report and Annual Financial Statements, whether the documents are accurate, balanced and comprehensive and provide all the necessary information for the shareholders’ evaluation of the financial performance. The Committee has the following duties in terms of financial reporting:
Examining the integrity of annual and interim financial statements or disclosures for ELSA and its subsidiaries (the Group) at standalone and consolidated levels; Regularly reviewing the adequacy of the Group’s accounting policies; Reviewing and recommending the Company’s financial forecast policy to the Board for approval; Advising the Board on whether the content of the annual report, taken as a whole, represents a fair, balanced and understandable account for shareholders and provides them with the information necessary to assess the Company’s performance. Regarding the auditing and internal control matters, the Committee has the following responsibilities:
Approving a Group-wide, annual plan as well as any material changes to the plan, and receiving regular reports on activities, key findings, and follow up regarding internal audit reports;
Making recommendations to the Board on the appointment, removal and remuneration of the Head of Internal Audit; Monitoring the adequacy, effectiveness and independence of the internal audit function; Making recommendations to the Board on the appointment, rotation or dismissal of the Company’s external auditor; Reviewing the plan, work and findings of the external auditor; Assessing the independence and objectivity of the external auditor and monitoring compliance with relevant ethical and professional guidance, including the requirements on the rotation of audit partners; Regularly reviewing the adequacy and implementation of key internal control policies, including policies for detecting fraud and the prevention of bribery; Reviewing related party transactions in line with a policy developed by the Committee and approved by the Board; Reviewing annually the report prepared by the Head of Internal Audit assessing the effectiveness of the system of internal control across the Group.
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The Committee has the following responsibilities concerning risk management matters:
Reviewing regularly the main risks facing the Company and Group, recommending to the Board adequate policies for risks identification, mapping, management and mitigation; Reviewing annually a report from management assessing the effectiveness of the risk management system across the Group; Making recommendations to the Board on equity and debt financing, including proposals for contracting any type of loans and securities associated with these loans; Making recommendations to the Board regarding major economic transactions within the authority of the General Meeting of Shareholders, assessing the associated risks regarding such transactions. The Audit and Risk Committee met 13 times during 2018. The main issues that the work of the Committee focused on, in addition to recurring activities, were the following:
The financial statements of ELSA at standalone and consolidated levels for the financial year of 2017, as well as financial statements of Company's subsidiaries for the financial year of 2017; The financial auditor report and recommendations, issued during the auditing process; ELSA’s budget execution, the consolidated budget execution and the quarterly financial results registered;
The internal audit plan for 2018 and the analysis of its achievement, as well as the reports submitted by the Internal Audit Department, with the formulation of recommendations;
Running the selection process and submitting for GMS approval the prosposal for the appointment of the new financial auditor of the Company; Approval of the Financing Strategy of the group, regarding cash pooling and the general financing framework of the investment activity, and the Treasury Strategy, including the Strategy for optimizing the placement of financial investments; Risk Management policy; analyze the risks management at Group level, based on the reports submitted by the management, and of the status of implementation of the corrective measures pertaining to non-compliances of higher risk identified and on the recommendations of the Audit & Risk Committee; Selecting the new Head of the Internal Audit Department. The internal audit activity is carried out by a separate division from a structural point of view (the Internal Audit Department), within the Company. In order to ensure the fulfilment of its main functions, it reports functionally to the BoD through the Audit and Risk Committee and administratively to the CEO.
The Strategy and Corporate Governance Committee The Committee was composed of three non-executive directors, the chair being a non-executive independent director. The Committee has the following duties in terms of strategy:
Making proposals to the Board on the development of the medium-term strategic plan, making recommendations on the strategic direction, priorities and long term objectives of ELSA and its subsidiaries (the Group); Reviewing management proposals on the Group’s consolidated annual budget, subsidiary annual budgets, CAPEX plans for the Group and making relevant recommendations to the Board; Supporting the Board in monitoring and assessing the Group’s performance in light of the approved strategic plan, budgets, industry trends, local and regional market trends, company’s competiveness and advances in technology;
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Periodically reviewing the overall strategic planning process, including the process for developing a medium-term strategic plan; Making recommendations to the the Board regarding proposed acquisitions, divestments, investment projects, joint-ventures, and cooperation projects, particularly assessing their alignment with the Group’s strategy; Performing any other activities or assuming responsibilities regarding strategic matters which may be delegated from time to time to the Committee by the Board. Regarding the tasks of the Committee on restructuring, they mainly relate to:
Reviewing and making recommendations to the Board with respect to the development and implementation of the Group's overall restructuring plans and objectives, including any decision regarding the conducting or rationalization of core businesses; Regularly reviewing the organisational structure and chart of the Company, and making recommendations to the Board in this regard; Performing any other activities or responsibilities on restructuring matters as may be delegated to the Committee, from time to time, by the Board. At the same time, the Committee has duties in terms of corporate governance: Overseeing and monitoring the Company’s compliance with legal and contractual obligations on corporate governance, as well as other applicable corporate governance principles, and making recommendations to the Board; Regularly reviewing the Company’s Corporate Governance Code, Board Charter and the Company’s Articles of Association, and making recommendations to the Board on relevant amendments to the Company’s corporate governance policy and documentation; Recommending the Group Governance Policy to the Board for approval and regularly reviewing it thereafter; Reviewing the delegations of authorities charrt for the Company in order to ensure that the delegation of authorities to management allows for effective and efficient decision-making process, and making recommendations to the Board; Reviewing the Company’s policy for corporate social responsibility and stakeholder engagement, and making recommendations to the Board in this regard; Making recommendations to the Board on improving the quality of information flows to the Board including the adequacy of reports to the Board, key performance indicators presented to the Board, and guidelines for prepairing Board papers and presentations. During 2018, the Committee met 11 times, and the main topics of the Committee’s work, in addition to recurring activities, were the following:
Developing and substantion of decisions regarding the strategy of the different areas of activity of the Group, within a cycle of analyzes and debates initiated in the "Strategy Day", finalized by redefining the strategic directions of Group development, vision, mission and values, subject to approval of the BoD; Analysis of the opportunity and efficiency of the investment in different renewable production capacities, followed by recommendations regarding the conditions for the implementation of such an approach; Monitoring the implementation and performance of the transformation program for the distribution area, aimed to achieve the ambitious investment plan for 2018, as well as to increase the reaction capacity and to improve the performance in the operational activity, by internalizing the design,
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procurement and logistics, maintenance, investment execution, technical service activities and the dedicated staff from EL SERV, within the distribution companies; Reviewing the Hedging Strategy and Market Risk Management and Credit Policy for EFSA; Development of a Communication Strategy with Investors, adapted to the Company's strategic objectives; Delegation of Authority (DoA) Revision, analyzed in several stages.
4.6. ELSA’s Executive management
In accordance with art. 19 letter A, item 1, paragraphs (f) and (k) of ELSA’s Articles of Association (approved by the GMS on 27 April 2017), the BoD appoints and revokes the CEO, as well as the other executives with mandates and also approves their empowerments.
The duties of Company’s executive managers (including those of the CEO) are determinated by the mandate contracts on which the managers operate within the Company, an internal regulation for the organization and functioning of the Company and applicable legal provisions.
Until 1 November 2018, Mr. Dan Catalin Stancu held the position of CEO of ELSA. He had been appointed starting with 24 October 2016, with a mandate of four years. In 15 October 2018, the BoD of ELSA and Mr. Dan Catalin Stancu have reached a mutual agreement regarding the termination without cause of the CEO mandate agreement.
On the same date, the BoD decided the appointment of Ms. Georgeta Corina Popescu as Interim CEO, starting 1 November 2018, for a 1-year period or until the appointment of a new CEO – whichever occurs first.
During 2018, the BoD decided the revocation of the Chief IT & Telecom Officer, Mr. Dan Crisfalusi (decision taken on 25 July 2018), and of the Executive Manager of Human Resources Division, Ms. Dana Alexandra Dragan (decision taken on 18 September 2018).
On 23 January 2019, the BoD appointed Ms. Georgeta Corina Popescu as CEO, starting 1 February 2019, for a four years period.
On 23 January 2019, the BoD appointed Ms. Bibiana Constantin as Human Resources Director, starting 1 February 2019, for a period of four years.
Following this changes, at the end of the year 2018 and at the date of this report, ELSA’s executive managers, each appointed for a period of four years were:
Starting date of the Executive Name Function Manager’s mandate Georgeta Corina Popescu Chief Executive Officer 1 February 201917 Mihai Darie Chief Financial Officer 3 January 2018 Alexandra Romana Augusta Chief Corporate Governance & M&A 4 August 2015 Popescu Borislavschi Officer Livioara Sujdea Chief Distribution Officer 1 February 2017 Chief Strategy & Performance Anamaria Dana Acristini-Georgescu 1 May 2017 Management Officer
17 Ms. Popescu was appointed as interim CEO starting with 1 November 2018
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Starting date of the Executive Name Function Manager’s mandate Catalina Popa Chief Sales Executive Officer 12 December 2017 Bibiana Constantin Human Resources Director 1 February 2019
More details on the executive managers’ biographies can be found on ELSA’s website in the section Investors > Corporate Governance > Executive Management.. We present below the most relevant aspects regarding the professional experience of ELSA’s executive managers:
Name Professional experience Ms. Georgeta Corina Popescu is a top executive with an impressive experience in the field of electricity and natural gas. Appointed General Manager of SDMN, part of Electrica Group, on 1 June 2018, Corina Popescu also took over from 1 November 2018, the position of interim CEO of ELSA. Graduate of the Faculty of Power Engineering at the Polytechnic University of Bucharest, Power Engineering Systems department, Georgeta Corina Popescu started her professional Georgeta Corina career in Sucursala de Distributie si Furnizare a Energiei Electrice Bucuresti. Popescu - Chief
Executive Officer Since 2007, Georgeta Corina Popescu has worked in the private sector, holding important
positions in E.ON Romania Group and OMV Group. Between December 2015 and February 2017, Corina Popescu held the position of State Secretary within the Ministry of Energy, during which time she was also a member of the BoD of ELSA. Starting with 1 May 2017, she was appointed in Transelectrica’s Directorate, and during the period of June 2017 – April 2018 she was Transelectrica’s Directorate Chairperson. Mr. Mihai Darie has 19 years of professional experience in finance, acquired in various fields such as energy, infrastructure, financial advisory, banking, investment funds in executive as well as management positions accumulated in companies such as Nuclearelectrica SA, Fondul Mihai Darie - Chief Proprietatea SA, Raiffeisen Bank and BDO Romania. Financial Officer Mihai Darie has a Bachelor Degree in Finance and Banking from the Academy of Economic
Studies Bucharest, he is an expert accountant member of CECCAR, he is a graduate of Asebuss Bucharest EMBA program and he is an ACCA UK member as well as a CFA charter holder. Ms. Alexandra Borislavschi was appointed as Executive Manager of Corporate Governance & M&A Division starting with 1 May 2017. From August 2015, Alexandra Borislavschi coordinated the Strategy and Corporate Governance Division, as Executive Manager. Ms. Borislavschi joined ELSA’s team in June 2013, as Deputy Manager of the Economic and Corporate Business Division, and was Alexandra Borislavschi - promoted Manager of the Corporate Finance and Governance Division in February 2014. Chief Corporate The most important project managed by her was the initial public offering of 105% of the Governance & M&A share capital, between October 2013 – July 2014, which was successfully completed through Officer the double listing of Electrica on the Bucharest Stock Exchange and the London Stock Exchange, being the largest public offering in Romania until now. Prior to joining our company, Alexandra Borislavschi had been working for BRD-Groupe Societe Generale, between 2003 and 2013. She was Retail Manager within BRD’s Victoria Agency and continued as Credit Analyst for Large Corporate Clients. Starting 2007, she joined the Investment Banking team of BRD-Groupe Societe Generale through BRD Corporate Finance department, as Project Coordinator.
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Name Professional experience Alexandra Borislavschi holds a Master’s degree in Finance and Management Control from Institut d’Administration des Entreprise, Universite d’Orleans since 2003.
With over 20 years of experience in energy field, Livioara Şujdea started her activity as a Design Engineer at ELSA, subsequently occupying various top management positions, including Deputy General Manager and member of the BoD at E.ON Moldova Distribuție, E.ON Gas Distribuție, E.ON Distribuție România, Director of Operation and Maintenance at Livioara Şujdea - Chief Delgaz Grid and Deputy General Manager and member of the BoD at E.ON Energie. Distribution Officer Livioara Şujdea graduated the Technical University “Gheorghe Asachi” of Iaşi – Faculty of
Electrical Engineering and Energy, where she also obtained a master’s degree in Business Management and Commercial Engineering, and she also has an Executive MBA with specialization in General Management at the University of Sheffield U.K. and a Strategic Management and Leadership Degree from the Chartered Management Institute London, U.K. Anamaria Acristini has an experience of over 10 years in the field of energy, in particular Anamaria Acristini - from the strategic and financial perspectives; the last position held was that of Strategy Chief Strategy & Director within E.ON Romania. Previously, she has held important positions in leading Performance companies, such as Ernst&Young, Mazars and KPMG. Management Officer Anamaria Acristini is a graduate of the Bucharest Academy of Economic Studies, has a master’s degree in International Project Management and holds an Executive MBA from Sheffield University (U.K.). Moreover, she is a scheme member of the ACCA U.K.. With an experience of more than 28 years in the field of electrical power and natural gases, Catalina Popa has started her activity as an engineer within ELSA. Subsequently, she occupied several top management positions within E.ON, among which Sales Management Executive Catalina Popa - Chief Director, Director of Operations, Financial Director and Director of the Management of the Sales Executive Officer performance of power networks.
Catalina Popa is a graduate of the Faculty of Power Engineering of the University Politehnica of Bucharest, holding as well a diploma in Management & Business Administration from Codecs-Open University, Great Britain. Graduate of the Faculty of Psychology and Sociology – West University of Timisoara and of a Master in Human Resources Management and Communication, as well as of a Master in Psychology, Bibiana Constantin has experience in consultancy and HR management for Bibiana Constantin – various industries, including the energy field. Human Resources With more than 10 years of experience in managing company restructuring and executive Director search projects, at national and international level, but also with a solid knowledge of the human resources market, Bibiana has provided, in the recent years, specialized consultancy and occupied positions in the top management of large companies in the industry.
According to information held by ELSA, there is no contract, understanding or family relationship between the executive managers of the Company and another person who may have contributed to their appointment as executive managers.
According to available information, ELSA’s executive managers mentioned in this chapter have not been involved, in the last five years, in any litigations or administrative proceedings related to their activity within the company and neither to their capacity to fulfil their work-related duties in the Group.
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4.7. Remuneration of the Directors and of the Executive Managers
The Remuneration Policy for Directors and Executive Managers was prepared based on the best practice used at international and national level by companies comparable to ELSA, as approached after the IPO, and updated taking into consideration the impact of the fiscal changes introduced within the Romanian legislation. The Policy was approved by the General Shareholders Meeting – as regards the Directors’ remuneration and the remuneration limits for the executive managers, respectively by the Board of Directors – as regards the setting of the remuneration and benefits for each executive position, according to the Nomination and Remuneration Committee’s recommendation.
According to the Corporate Governance Code of ELSA, the Nomination and Remuneration Committee (NRC) established within the BoD has the following responsibilities as regards remuneration: making recommendations to the Board in relation to the remuneration, incentive and severance compensation policies of the Company; making recommendations to the Board on the remuneration framework for Board members; making recommendations to the Board in relation to the remuneration of the General Manager and other executive managers, including the main remuneration components, performance objectives and appraisal methodology; making recommendations to the Board on the remuneration of subsidiaries board members and the general limits of remuneration for subsidiaries management; monitoring compensation trends within industries relevant to the Group; overseeing the remuneration process of the general managers and executive managers in the subsidiaries according to the Nomination and Remuneration Policy.
In this context, in 2018, based on the NRC recommendations, the Board endorsed and submitted for the GMS approval two proposals on updating the Remuneration Policy of the members of the BoD, and respectively on revising the remuneration limits of executive managers, in order to counterbalance the fiscal changes impact. The Remuneration Policy for Directors and Executive Managers is subject to annual review of NRC and describes the main pillars of remuneration, as well as the terms, conditions and non-financial benefits approved by the corporate bodies of ELSA. The Directors and the Executive Managers are remunerated for the work performed with a fixed monthly remuneration and a variable component. The variable component is either paid according to their involvement in supporting the Board activity (in case of the Directors) or according to achievement of the objectives and key performance indicators set in the mandate agreements of the Executive Managers. The Remuneration Policy has the following objectives: To establish clear guidelines and thresholds on remuneration matters; To establish the remuneration structure; To set the correlation matrix between remuneration levels within the Company. The principles governing this policy are:
1. The remuneration structure is defined separately for the Board of Directors and the executive management. 2. The remuneration structure and thresholds were set considering national and international best practices and benchmarks, respectively: 2.1. the remuneration system includes a fixed and a variable component based on performance, in line
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with market practice; additionally, it also include non-financial benefits; 2.2. the benchmarks were established based on compensation data from several international companies of comparable size in the energy sector, in Romania, but, also, compared to other industries (e.g. Oil & Gas industry) and other countries in SEE; 2.3. most companies’ practice to choose the range between the median and upper quartile in order to be attractive on the competitive market, that is, however, not positioned to the upper limit; 3. The variable component is composed of: 3.1. a short term variable remuneration (variable salary), attributed for the collective and individual contribution of the executive managers to the company’s objectives, determined yearly based on performance criteria; 3.2. a long term variable compensation – a package of options of virtual shares – considered as compensation tool for executives managers with the aim of promoting added value and contribution over medium to long term; 3.3. for the Board members – both the international norm and the fact that ELSA is a listed company on both Bucharest Stock Exchange and London Stock Exchange, provide an attendance fee for Board members participating to the BoD and its committees’ meetings; 4. The importance of the Company on the energy market – ELSA is a strategic company in the energy sector, with potential of becoming a regional player; 5. The need to attract and retain in the BoD specialists and senior managers with broad experience in a wide range of activities, not only in the energy sector, nationally and internationally; 6. The 2017 amendments to the fiscal Romanian legislation on both staff taxation and social security contributions and those that entered into force as of 1 January 2018 have had a significant negative impact on the net income.
A. Board of Directors
The BoD members’ remuneration has as main pillars a monthly fixed remuneration and an attendance fee for participating at meetings, and it is completed by facilities (benefits) necessary for the mandate fulfilment, as follows: The fixed monthly remuneration is differentiated between the Chair and the Board members, respectively EUR 3,630 gross for the BoD members and EUR 4,985 gross for the Chair. The attendance fee to the Board and its committees’ meetings is differentiated as well between the members and the committees’ Chairs, respectively EUR 1,200 gross for the Board/committees’ members and EUR 1,445 gross for the committees’ chairs. The annual number of meetings to be remunerated is limited to 12 for BoD and to 6 of each committee. However, if the BoD composition changes, either as effect of registering a vacancy of one or more Director positions, or as effect of applying the cumulative voting method, the Director appointed as such will be entitled to receive the remuneration fee for the Board/committees meetings attended. Reimbursement of reasonable expenses related to the execution of the mandate. A “directors & officers’ liability” insurance policy, supported by the company, according to market terms. Same medical services and/or medical insurance package contracted by the Company for the employees (if any). Other legal expenses sustained by the Director in defending against a third party claim made against the Director in relation to the performance of its duties according to his mandate agreement, the Articles of Association, the Board Charter or the Legal Framework shall be borne
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by the Company, to the extent that they are not already covered by the directors & officers liability insurance policy in force at the time. A compensation in case of unjustified revocation.
B. The Executive Management B.1. General remuneration limits for ELSA CEO The remuneration of ELSA CEO is comprised of: (a) a fixed monthly remuneration, (b) a variable yearly remuneration or remuneration element or variable compensation depending on the achievement of the performance indicators and (c) a package of options of virtual shares (hereinafter referred to as “OAVT”), as follows: 4.7.1.1.1.1.1.1. The fixed monthly remuneration is between EUR 9,000 and EUR 13,050 gross. This remuneration is established by the BoD within the limits approved by the GMS. 4.7.1.1.1.1.1.2. The variable yearly compensation is between 30% and 50% of the fixed yearly remuneration. The percentage is established by the BoD within the limits approved by the GMS. The payment of the variable yearly compensation (partially or in full) depends on the achievement of the KPIs set for the respective year. 4.7.1.1.1.1.1.3. The value of the OAVT package will be set between 150% and 200% of the fixed yearly remuneration and cashed only at the end of the term, according to the mandate agreement.
B.2 General remuneration limits for the Executive Managers (mandated by the BoD) The remuneration of the executive managers is comprised of: (a) a fixed monthly remuneration, (b) a variable yearly compensation depending on the achievement of KPIs and (c) a package of options of virtual shares (hereinafter referred to as “OAVT”), as follows: a. The fixed monthly remuneration will be between EUR 6,980 and EUR 11,700 gross. This remuneration is established by the BoD within the limits approved by the GMS. b. The variable yearly compensation of an executive manager is between 15% and 40% of the fixed yearly remuneration. The percentage is established by the BoD within the limits approved by the GMS. The payment of the variable yearly compensation (partially or in full) depends on the achievement of the KPIs set for the respective year. c. Each executive manager (unless mandated on interim or on a short-term basis) will receive at the beginning of the term an OAVT package. The value of the OAVT package will be between 60% and 160% of the fixed yearly remuneration. The executive manager is entitled to cash in the value of the OAVT package only at the end of the term, according to the mandate agreement. At the beginning of the mandate of the Executive Manager (including the CEO), the BoD will set up the long-term KPIs (for the duration of the mandate). At the end of the term, the Board will review the achievement of the long-term KPIs and will adjust the final value of the OAVT package paid out to the executive manager, including the CEO. In order to perform more efficiently his/her duties and obligations, in a proper and safe manner, the mandate agreements of the executive managers (including the CEO), approved by the BoD, stipulate the specific equipments that the company makes available (e.g.: company car, mobile phone, laptop), the rules to use it, as well as other kind of related benefits (e.g.: reimbursement of reasonable expenses related to the execution of the mandate, a “directors & officers’ liability” insurance policy).
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4.8. Corporate Governance in ELSA’s Subsidiaries
The Board of Directors of ELSA’s subsidiaries
During 2018 all the Boards of Directors of ELSA’s subsidiaries were composed of non-executive directors. During the year, the Boards of Directors of ELSA’s subsidiaries were as follows:
Members of the Boards of Directors of distribution companies, respectively SDTN, SDTS and SDMN, between 1 January and 31 December 2018
15 December – 1 January – 31 October 2018 20 November– 14 December 2018 31 December 2018 Dan Catalin Stancu – chairman Georgeta Corina Popescu18 Georgeta Corina Popescu Livioara Sujdea Livioara Sujdea Livioara Sujdea Anamaria Acristini Anamaria Acristini Ana Maria Nistor Ana Maria Nistor Ana Maria Nistor Madalina Rusu Madalina Rusu
Members of the Board of Directors of Electrica Furnizare SA between 1 January 2018 and 31 December 2018
1 January 2018 – 26 July 2018 30 July 2018 – 31 December 2018 Catalina Popa - chairman Catalina Popa - chairman Dan Crisfalusi Mihai Darie Mihai Ioanitescu Mihai Ioanitescu Diana Moldovan Diana Moldovan Alexandra Borislavschi Alexandra Borislavschi
In the case of energy services company EL SERV, the Extraordinary General Meeting of Shareholders approved in January the amendment of the Articles of Associations, provisioning that the Board of Directors is comprises five non-executive members. Hence, during the year 2018 the composition of the Boards of Directors of EL SERV was as follows:
Members of the Board of Directors of Electrica Serv SA between 1 January – 31 December 2018 9 – 28 14 – 18 19 - 31 1 – 8 January 29 January – 1 2 – 13 January December December 2018 December 2018 December 2018 2018 2018 2018 Iuliana Alexandra Alexandra Alexandra Diana Alexandra Andronache - Borislavschi - Borislavschi - Borislavschi - Moldovan - Borislavschi chairman chairman chairman chairman chairman Mirela Dimbean Mirela Dimbean Mirela Mirela Mirela Alexandra Creta Creta Dimbean Creta Dimbean Creta Dimbean Creta Borislavschi Dragos George Dragos George Dragos George Mirela Dimbean Mihai Darie Mihai Darie Serban Serban Serban Creta Mihai Darie Mihai Ioanitescu Mihai Ioanitescu Mihai Darie
18 Ms. Georgeta Corina Popescu was appointed by the BoD as temporary director starting from 20 November 2018.
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Members of the Board of Directors of Electrica Serv SA between 1 January – 31 December 2018 9 – 28 14 – 18 19 - 31 1 – 8 January 29 January – 1 2 – 13 January December December 2018 December 2018 December 2018 2018 2018 2018 Mihai Mihai Ioanitescu Diana Moldovan Ioanitescu
Between 31 December 2018 and until the date of this report, the members of the ELSA subsidiaries boards changed as follows:
Mr. Stefan-Alexandru Frangulea was appointed starting from 23 January 2019 as temporary director of SDMN’ s BoD. Ms. Georgeta Corina Popescu was appointed as director of the three distribution subsidiaries (SDMN, SDTS, SDTN) starting from 14 February 2019.
Executive management of ELSA’s subsidiaries
The table below shows the subsidiaries’ executive managers with delegated management duties by ELSA Board of Directors in 2018, as well as until the date of this report:
Name Position Subsidiary Valentin Branescu 1 Jan – 31 May 2018 Georgeta Corina Popescu General Manager 1 Jun – 31 Oct 2018 Valentin Branescu 1 Nov 2018 – date of the report Valentin Branescu Deputy General Manager 1 Jun – 31 Oct 2018 Constantin Coman 1 Jan – 31 Aug 2018 Energy Management Division Manager Vasile Claudiu Tudose 1 Sep 2018 – date of the report Gabriel Gheorghe SDMN 1 Jan – 31 Aug 2018 Network Development Division Manager Ilie Marin 1 Sep 2018 – date of the report Marius Raduta Petrescu Network Operations Division Manager 1 Jan 2018 – date of the report Gabriela Dobrescu Asset Management Division Manager 24 Sep 2018 – date of the report Marian Stegarita 22 Feb – 31 Aug 2018 Ioana Tabara Shared Services Division Manager 1 Sep – 31 Oct 2018 Raluca Florentina Dumitriu 5 Nov 2018 – date of the report Emil Merdan General Manager 1 Jul 2017 – date of the report Sorin Viorel Muresan Deputy General Manager SDTN 1 Feb 2019 – date of the report Dora Fataceanu Shared Services Division Manager 1 Oct 2017 – date of the report
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Name Position Subsidiary Constantin Buda Asset Management Division Manager 1 Oct 2017 – date of the report Sorin Viorel Muresan Energy Management Division Manager 1 Oct 2017 – 31 Ian 2019 Vasile Farcas Network Operations Division Manager 1 Oct 2017 – date of the report Gabriel – Adrian Margin Network Development Division Manager 1 Oct 2017 – date of the report Nicu Constandache 6 Feb 2017 – 30 Jun 2018 Eduard Staicu General Manager 1 Jul– 27 Aug 2018 Sinan Mustafa 28 Aug 2018 – date of the report Eduard Staicu Deputy General Manager 1 Jul 2018 – date of the report Dorel Mircea Stanescu 1 Apr – 14 Oct 2018 Energy Management Division Manager Raul Toma 15 Oct 2018 – date of the report Alexandru Iulian Gyorgy 1 Apr – 31 Jul 2018 Network Operations Division Manager SDTS Attila Lajos Simon 1 Aug 2018 – date of the report Catalin Grama 1 Oct 2017 – 31 Jan 2018 Attila Lajos Simon 1 Feb – 29 Jun 2018 Asset Management Division Manager Nicu Constandache 1 Jul – 31 Jul 2018 Dragos Eduard Staicu 1 Aug 2018 – date of the report Florinel Boboc Network Development Division Manager 28 Sep 2017 – date of the report Monica Radulescu Shared Services Division Manager 28 Sep 2017 – date of the report Mircea Patrascoiu General Manager 1 Jan 2018 – date of the report Darius Mesca Deputy General Manager 1 Feb – 30 Apr 2019 EFSA Cristina Pana Financial Manager 1 Feb – 30 Apr 2019 Mihai Beu Portfolio Management Manager 1 Feb – 30 Apr 2019 Sinan Mustafa 1 Jan – 26 Aug 2018 Gheorghe Batir General Manager 27 Aug 2018 – 6 Jan 2019 Ovidiu-Aurelian Andrei EL SERV Starting from 7 Jan 2019 Marius Viorel Stanciu Deputy General Manager 1 Jan 2018 – date of the report Daniel Marin Financial Manager 1 Jan 2018 – date of the report
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Name Position Subsidiary Vasile Ionel Bujorel Oprean Property Management and Product 1 Jan 2018 – date of the report Development Manager Gheorghe Batir Technical Manager 1 Jun 2018 – date of the report Sursa: Electrica
Number of shares owned by the managers of Electrica Group
The table below shows the status as of 31 December 2018 of shares holdings in ELSA (EL) held by the executive managers of ELSA and by the executive managers of ELSA subsidiaries, to whom ELSA BoD delegated management duties in 2018:
Item Share in the share capital Name Number of shares no. (%) 1. Emil Merdan 7,277 0.0021% 2. Dora Fataceanu 1,000 0.0003% Source: Central Depository, Electrica
According to information held by ELSA, there is no contract, understanding or family relationship between the executive managers of the company and another person who may have contributed to their appointment as executive managers.
According to available information, the members of the BoD and the executive managers of the Group companies mentioned in this chapter have not been involved, in the last five years, in any litigations or administrative procedures related to their activity within the Group and to their capacity to fulfil their work- related duties within the Group.
4.9. Statement regarding the corporate governance “Comply or Explain”
The present Statement reflects the status of compliance with the new BSE Corporate Governance Code as of 5 March 2019.
Note: considering the fact that there are no mentions for ”Reason for non-compliance”, the corresponding column has been removed from the table below.
Provisions of the BSE Corporate Compliance No. Other remarks Governance Code YES/NO/PARTIALLY Section A Responsibilities A.1. All companies should have an internal YES ELSA’s CGC was adopted in regulation of the Board which includes February 2015 and published on terms of reference/responsibilities for ELSA’s website (includes the the Board and the key management Articles of Association of ELSA, the functions of the company, applying, Charter of the BoD and of its among others, the General Principles of committees). All the above this Section. mentioned documents include the terms of reference/the BoD's responsibilities, as well as those of the key management functions of
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Provisions of the BSE Corporate Compliance No. Other remarks Governance Code YES/NO/PARTIALLY the company. In 2016, the Board conducted an extensive project to review the Articles of Association and the above mentioned Charters in order to detail the responsibilities of the Board, of its committees and of the management team, taking into consideration the recommendations made in the Board activity evaluation report of the previous year. The last version of ELSA’s CGC was published on ELSA's website on 27 April 2017, together with the amendment of ELSA’s Articles of Association (AoA). A.2. Provisions for the management of YES Such provisions are mentioned in conflict of interest should be included ELSA's CGC, in the Articles of in the Board regulation. Association, in the Code of Ethics and Professional Conduct, as well as in the revised BoD Charter A.3. The Board of Directors should have at YES ELSA's BoD comprises seven least five members. members since 14 December 2015. A.4. The majority of the members of the YES All the members of ELSA's BoD are Board of Directors should be non- non-executive. According to the executive. In the case of Premium Tier AoA, at least four from the seven Companies not less than two non- members must be independent. executive members of the Board of The independence criteria provided Directors or Supervisory Board should by the AoA are similar and even be independent. Each independent more restrictive than the ones member of the Board of Directors provided by BSE Corporate should submit a declaration that he/she Governance Code. Four out of is independent at the moment of seven are independent members. his/her nomination for election or re- All the independent members election as well as when any change in submitted a declaration of his/her status arises, by demonstrating independence, at the time they the ground on which he/she is were elected by the OGMS. considered independent in character and judgement and according to the following criteria: A.4.1. he/she is not the CEO/executive officer of the company or of a company controlled by it and has not been in such position for the previous 5 years; A.4.2. he/she is not an employee of the company or of a company controlled by it and has not been in such position for the previous five (5) years; A.4.3. he/she does not
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Provisions of the BSE Corporate Compliance No. Other remarks Governance Code YES/NO/PARTIALLY and did not receive additional remuneration or other advantages from the company or from a company controlled by it, apart from those corresponding to the position of a non- executive director; A.4.4. he/she is nor or has not been an employee of, or has not or had not a contractual relationship, during the previous year, with a significant shareholder of the company, controlling more than 10% of voting rights or with a company controlled by it; A.4.5. he/she has not and did not have during the previous year a business or professional relationship with the company or with a company controlled by it, either directly or as a customer, partner, shareholder, member of the Board/Director, CEO/executive officer or employee of a company if, by its substantial character, this relationship could affect his/her objectivity; A.4.6. he/she is not and has not been in the last three years the external or internal auditor or a partner or salaried associate of the current external financial or internal auditor of the company or of a company controlled by it; A.4.7. he/she is not a CEO/executive officer in another company where another CEO/executive officer of the company is a non-executive director; A.4.8. he/she has not been a non- executive director of the company for more than twelve years; A.4.9. he/she does not have family ties with a person in the cases referred to at points A.4.1. and A.4.4. A.5. Other relatively permanent YES The professional background of the professional commitments and proposed candidates, as well as of engagements of a Board member, the current Board members are including executive and non-executive published on ELSA’s website in the Board positions in companies and not- Investors > GMS section. Their for-profit institutions, should be biographies contain all the relevant disclosed to shareholders and potential information requested by this investors before appointment and provision of the Code. during his/her mandate. A.6. Any member of the Board should YES When a member of the Board has
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Provisions of the BSE Corporate Compliance No. Other remarks Governance Code YES/NO/PARTIALLY submit to the Board information on any entered into a relation with a relationship with a shareholder who shareholder who directly or holds, directly or indirectly, shares indirectly holds shares representing representing more than 5% of all more than 5% of all voting rights, voting rights. he/she briefly informed the entire Board. A.7. The company should appoint a Board YES The company has established the secretary responsible for supporting General Secretariat Department, the work of the Board. which functionally reports to the BoD. A.8. The corporate governance statement YES The A.8 provision was applied should inform on whether an starting from 2015 - the Board has evaluation of the Board has taken place carried out an annual review under the leadership of the chair or the process of its activity with the nomination committee and, if it has, to support of an external consultant summarize key action points and (in 2015 and 2017), or by using a changes resulting from it. The self-assessment questionnaire (in company should have a 2016 and 2018). policy/guidance regarding the More details are provided in the evaluation of the Board containing the Annual Report for 2015-2017 - purpose, criteria and frequency of the chapters 6.1 and 6.2 and for 2018 evaluation process. in this report at chapters 4.4 and 4.5. A.9. The corporate governance statement YES Details regarding the compliance should contain information on the with this provision are presented in number of meetings of the Board and the Annual Report, in the Corporate committees during the past year, the governance chapter. For 2018, attendance by the directors (in person please see chapter 4.5. and in absentia) and a report of the Board and committees on their activities. A.10 The corporate governance statement YES Four out of seven members of the should contain information on the BoD are independent and this is precise number of the independent specified in the Annual Report. members of the Board of Directors. More details are provided in the Annual Report for 2015-2017 - chapters 6.1 and 6.2 and for 2018 in this report at chapters 4.4 and 4.5. On ELSA’s website, in the Investors > Corporate Governance > Board of Directors section, it is mentioned which members are independent. A.11. The Board of Premium Tier companies YES The Articles of Association and should set up a nomination committee ELSA's CGC highlight the existence consisting of non-executive members of this committee (Nomination and to lead the nomination of new Remuneration Committee - NRC), members to the Board and make its structure and responsibilities. recommendations to the Board on the The NRC composition is reviewed
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Provisions of the BSE Corporate Compliance No. Other remarks Governance Code YES/NO/PARTIALLY appointment and dismissal of the Chief annually, according to NRC Charter Executive Officer and the management and at the beginning of each new team. The majority of the members of mandate of the BoD. In 2018, as the nomination committee should be well as in February 2019, its independent. composition was reviewed according to the changes occurred within the board composition. Details regarding the NRC members are presented in chapter 4.4. Two members are independent.
Section B Risk management and internal control system B.1 The Board should set up an audit YES The Articles of Association and committee, and at least one member ELSA's CGC highlight the existence should be an independent non- of this committee (Audit and Risk executive. The majority of members, Committee - ARC), its structure including the chairman, should have and responsibilities. proven an adequate qualification The ARC composition is reviewed relevant to the functions and annually, according to ARC Charter responsibilities of the committee. At and at the beginning of each new least one member mandate of the BoD. of the audit committee should have In 2018, as well as in February proven and adequate auditing or 2019, its composition was reviewed accounting experience. In the case of according to the changes occurred Premium Tier companies, the audit within the board composition. committee should be composed of at Details regarding the ARC least three members and the majority composition are presented in the of the audit committee should be chapter 4.4. independent. Two members are independent. B.2 The audit committee should be chaired YES During 2018, the Chair of the Audit by an independent non-executive and Risk Committee was Mr. member. Bogdan Iliescu, independent non- executive board member. Starting from 18 February 2019, the Chair of the Audit and Risk Committee is Ms. Ramona Ungur, independent non- executive board member. B.3. Among its responsibilities, the audit YES According to the revised Charter, committee should undertake an annual the Audit and Risk Committee assessment of the internal control (ARC) has the following system. responsabilities with regards to internal control matters: (i) regularly reviewing the adequacy and implementation of key internal control policies, including policies for detecting fraud and the prevention of bribery; (ii) reviewing related party transactions in line with a policy
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Provisions of the BSE Corporate Compliance No. Other remarks Governance Code YES/NO/PARTIALLY developed by the Committee and approved by the Board; (iii) reviewing annually a report by the Head of Internal Audit department assessing the effectiveness of the internal control system across the Group. B.4. The assessment should consider the YES The evaluation report for 2018 effectiveness and scope of the internal provided by the CGC was prepared audit function, the adequacy of risk and discussed by ARC in its meeting management and internal control of 4 March 2019. reports submitted to the audit committee of the Board, management’s responsiveness and effectiveness in dealing with identified internal control deficiencies or weaknesses following the internal control and the submission of relevant reports to the Board. B.5. The audit committee should review YES The evaluation report for 2018 conflicts of interests in transactions of provided by the CGC was prepared the company and its subsidiaries with and discussed by ARC in its meeting related parties. of 4 March 2019. B.6. The audit committee should evaluate YES The ARC has at least the following the efficiency of the internal control responsibilities with regards to risk system and risk management system. management matters: (i) reviewing regularly the main risks to which the company and Group, are exposed, recommending to the Board relevant policies for their identification, mapping, management and mitigation; (ii) reviewing annually a report from management assessing the effectiveness of the risk management system within the Group. Based on the new provisions introduced in the ARC Charter, the evaluation report for the 2018 year was prepared and discussed by ARC in its meeting of 4 March 2019. Details regarding the ARC activity are presented in the Annual Report 2018 - chapter 4.5. B.7. The audit committee should monitor YES The ARC has the following the application of statutory and responsibilities with regards to generally accepted standards of internal audit matters: internal auditing. The audit committee (i) approving a Group-wide annual
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Provisions of the BSE Corporate Compliance No. Other remarks Governance Code YES/NO/PARTIALLY should receive and evaluate the reports risk-based audit plan as well as any of the internal audit team. material changes to the plan, and receiving regular reports on activities, key findings, and follow up regarding internal audit reports; (ii) advising the Board on the appointment, dismissal and remuneration of the Head of Internal Audit department; (iii) monitoring the adequacy, effectiveness and independence of the internal audit function. Details regarding the ARC activity are presented in chapter 4.5. B.8. Whenever the Code mentions reports YES or analysis initiated by the Audit Committee, these should be followed by periodic (at least annual) or ad-hoc reports to be submitted to the Board afterwards. B.9. No shareholder may be given undue YES Provisions on this matter are preference over other shareholders included in ELSA's CGC and in the with regard to transactions and Policy on Transactions with agreements made by the company with Affiliated Parties. shareholders and their related parties. B.10. The Board should adopt a policy YES The Audit and Risk Committee and ensuring that any transaction of the the Board reviewed the Policy on company with any of the companies Transactions with Related Parties in with which it has close relations, that is their meetings of February, equal to or more than 5% of the net September and December 2018. assets of the company (as stated in the latest financial report), should be approved by the Board following a mandatory opinion of the Board's audit committee and fairly disclosed to shareholders and potential investors, to the extent that these transactions fall within the category of events subject to reporting requirements. B.11. The internal audits should be carried YES The internal audit is conducted by out by a separate structural division the Internal Audit Department. (internal audit department) within the company or by hiring an independent third-party entity. B.12. To ensure the fulfillment of the core YES The Internal Audit Department functions of the internal audit reports functionally to the BoD department, it should report through the ARC, while functionally to the Board via the audit administratively reports to the CEO. committee. For administrative
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Provisions of the BSE Corporate Compliance No. Other remarks Governance Code YES/NO/PARTIALLY purposes and in the scope related to the obligations of the management to monitor and mitigate risks it should report directly to the chief executive officer. Section C Fair rewards and motivation C.1. The company should publish a YES The remuneration limits for the remuneration policy on its website and General Manger and other mandate include in its annual report a managers were approved by the remuneration statement on the General Meeting of Shareholders implementation of this policy during (GMS) on 9 July 2015. In March the annual period under review. 2016 the GMS approved the new Directors Remuneration Policy. The remuneration policy should be Taking into account the tax drafted in such a way that allows changes introduced during 2017, shareholders to understand the the Board has analyzed their impact principles and rationale behind the and submitted for the GMS approval remuneration of the members of the proposals regarding the revision of Board and the Remuneration Policy for the the CEO, as well as of the members of BoD members and of the the Management Board in two-tier remuneration limits for the board systems. It should describe the executive managers. remuneration governance and On 9 February 2018 the GMS decision-making process, detail the approved the Remuneration Policy components of executive remuneration of the members of the BoD of the (i.e. salaries, annual bonus, long term company and the remuneration stock-linked incentives, benefits in limits for the executive managers, kind, pensions, and others) and both revised. describe each component’s purpose, The Remuneration Policy for principles and assumptions (including directors and the executive the general performance criteria management is available on ELSA’s related to any form of variable website. remuneration). In addition, the remuneration policy should disclose the duration of the executive manager’s contract and their notice period and the eventual compensation for revocation without cause. The remuneration report should present the implementation of the remuneration policy for the persons identified in the remuneration policy during the annual period under review. Any essential change of the remuneration policy should be published on the company’s website in a timely manner.
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Provisions of the BSE Corporate Compliance No. Other remarks Governance Code YES/NO/PARTIALLY Section Building value through investors’ D relations D.1. The company should have an Investor YES The company has both an Investor Relations function - indicating the Relations department and a person (s) responsible or the dedicated Investor Relation section organizational unit, to the general on its website (both in Romanian public. In addition to information and English). In the Investors required by legal provisions, the section on ELSA's website are company should include on its published all relevant information corporate website a dedicated Investor for investors. Relations section, both in Romanian and English, with all relevant information of interest for investors, including: D.1.1. Principal corporate regulations: the articles of association, general shareholders’ meeting procedures. D.1.2. Professional CVs of the members of its governing bodies, other professional engagements of the BoD members, including executive and non- executive board of directors positions in companies or non-profit institutions D.1.3. Current reports and periodic reports (quarterly, semi-annual and annual reports); D.1.4. Information related to general meetings of shareholders; D.1.5. Information on corporate events; D.1.6. The name and contact data of a person who should be able to provide relevant information upon request; D.1.7. Corporate presentations (e.g. IR presentations, quarterly results presentations, etc.), financial statements (quarterly, semi- annual, annual), audit reports and annual reports. D.2. A company should have a policy on the YES The BoD reviewed the Dividends annual distribution of dividends or Policy in its meeting of 14 February other benefits to shareholders, 2018. It is published also on ELSA's proposed by the CEO or the website, under Investors section > Management Board and adopted by the Corporate Governance > Corporate Board, in the form of a set of guidelines Policies. that the company intends to follow regarding the distribution of net profit. The principles of annual distribution policy to shareholders will be published on the company's website.
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Provisions of the BSE Corporate Compliance No. Other remarks Governance Code YES/NO/PARTIALLY D.3. A company should have adopted a YES The BoD reviewed the Forecasts policy with respect to forecasts, Policy in its meeting of 14 February whether they are published or not. 2018. It is published also on ELSA's Forecasts means the quantified website, under Investors section > conclusions of studies aimed at Corporate Governance > Corporate determining the total impact of a list of Policies. factors related to a future period (so called assumptions): by nature such a task is based upon a high level of uncertainty, with results sometimes significantly different from forecasts initially presented. The policy regarding forecasts should provide the frequency, envisaged timeframe and content of forecasts. Forecasts, if published, may only be part of annual, semi-annual or quarterly reports. The forecast policy should be published on the company's website. D.4. The rules of general meetings of YES The rules of general meetings of shareholders should not restrict the shareholders are included within participation of shareholders in general each convening notice, published in meetings and the exercising of their accordance with the legal rights. Amendments of the rules should requirements, approximately 45 take effect, at the earliest, as of the days prior to the meeting. next general meeting of shareholders. D.5. The external auditors should attend the YES External auditors attend each shareholders’ meetings when their OGMS for approving the annual reports are presented there. reports. D.6. The Board should present to the annual YES The annual directors' report, general meeting of shareholders a brief presented to the annual general assessment of the internal controls and meeting of shareholders, togethe significant risk management system, as with the financial statements well as opinions on issues subject to includes the BoD's comments on the decision of the general meeting. the internal controls and significant risk management system. In practice, all the documents submitted for the approval of the GMS are endorsed by the BoD; this is clearly stated in the documents presented to the shareholders. D.7. Any professional, consultant, expert or YES In this respect, shareholders' financial analyst may participate in the agreement present to the General shareholders’ meeting upon prior Meetings was requested each time invitation from the Board. Accredited it was needed. journalists may also participate in the general meeting of shareholders, unless the Chairman of the Board decides otherwise.
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Provisions of the BSE Corporate Compliance No. Other remarks Governance Code YES/NO/PARTIALLY D.8. The quarterly and semi-annual YES financial reports should include information in both Romanian and English regarding the key drivers influencing the change in sales, operating profit, net profit and other relevant financial indicators, both on quarter-on- quarter and year-on-year terms. D.9. A company should organize at least two YES Electrica holds quarterly meetings/conference calls with teleconferences with analysts and analysts and investors each year. The investors, publishes the information presented on these presentations and the audio occasions should be published in the IR recording of the webcasts on ELSA's section of the company website at the website, under Investors section > time of the meetings/conference calls. Results and Reports > Analyst Presentations. D.10. If a company supports various forms of YES In 2017, the BoD analyzed and artistic and cultural expression, sport approved the Corporate Social activities, educational or scientific Responsibility Policy, including activities, and considers the resulting programs supporting the areas of impact on the innovativeness and activity/actions, grants and competitiveness of the company part of principles of granting its business mission and development sponsorships/donations. The most strategy, it should publish the policy relevant information was published guiding its activity in this area. on ELSA’s website. Annually, based on the Corporate Social Responsibility Policy, the CSR Plan is approved. Electrica's Sustainability Report for 2017, published in 2018, includes informations regarding all the projects and activities sustained during the reporting year.
4.10. Implementing action plans undertaken by signing the framework agreement with EBRD
The company’s Initial Public Offer and dual listing preparation process involved the signing of a Framework Agreement with the European Bank for Reconstruction and Development (EBRD) which includes extensive action plans with implications for developing a culture of integrity at Electrica Group level, for adopting best practices with regard to corporate governance and incorporating the sustainability principles into the Group’s development strategy.
As for the development of a culture of integrity at Electrica Group level in line with the EBRD standards, in 2018 the company implemented the ethics compliance framework, defined by The Code of Ethics and Professional Conduct and subsequent policies, based on a compliance program with three main priorities:
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updating and developing the compliance framework; maintaining functional dedicated organizational structures for ethics and compliance; monitoring the compliance. With mainly a preventive role with respect to the risks the organization is exposed to, compliance adds value to each business, but in order to be efficient, the compliance framework has to adapt to the realities of the organization and to align permanently with legislative changes, external environment trends, business ethics best practice and organizational transformations of the companies and the Group. Knowing these aspects, ELSA embraced a proactive attitude updating and developing the compliance framework in order to better suit to practical aspects and specificities of the Group companies activities.
In this regard, in 2018, The Policy regarding Transactions with Related Parties was reviewed and updated in line with legal and organizational framework evolution.
After adopting the reviewed policies, ELSA initiated personnel awareness programs and compliance monitoring plans regarding their provisions, implemented by the existent organizational structures dedicated to ethics and compliance at Group’ companies level.
Regarding the operational capacity of the organizational entities dedicated to ethics and compliance, after a uniform structure was set in 2017 for the electricity distribution companies within the group by defining ethics and compliance departments directly subordinated to the company's Chief Executive Officer, the structures were populated in two of the companies. The existent dedicated organizational structures, existing since 2015, were maintained during 2018 at EFSA and EL Serv level, but for two energy services companies within the Group the appointed ethics and compliance officers left the companies during 2018 following the insolvency procedures. Within ELSA, in the fourth quarter of 2018, in the context of streamlining the activity, the organizational structure was modified by removing the subordinate department to the Chief Executive Officer and setting up a position of ethics and compliance officer directly subordinated to the BoD.
The efforts to professionally train the dedicated staff, but also to increase its cohesion and encourage the exchange of ideas and solutions, materialized in an in-house workshop during the second half of 2018 and individual counseling sessions.
Implementing ethical and compliance standards and compliance monitoring process continued during 2018 in all Electrica Group companies.
The action plan regarding corporate governance
The action plan on corporate governance assumed as part of the Framework Agreement with the European Bank for Reconstruction and Development was taken into consideration ever since the IPO and the listing of the company. The standards and measures it envisaged have been implemented and monitored continuously.
Selecting independent directors
EBRD guidelines were included in the Articles of Association of Electrica adopted on 4 July 2014, and were in force until the Extraordinary General Meeting of Shareholders dated 10 November 2015, whose decision changed the number of members of the BoD of the company, from five to seven directors, out of which four independent ones.
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For details about ELSA’s Board of Directors, its members and the selection of its members, please see chapter 4.4.
Nomination and Remuneration Policies
For details regarding the remuneration of the Board members and of the executive management of ELSA, please see chapter 4.7.
ELSA developed the Nomination and Remuneration policies with the support of a reputable international consultant in human resources. These have been endorsed by the BoD and were approved by decision of the General Meeting of Shareholders, on 31 March 2016.
Advisory Committees of the Board of Directors
There are three advisory committees at the level of ELSA’s BoD. For details, please see chapter 4.5.
Internal Control Framework
The BoD approved the Internal audit procedure and related documents updated versions since the beginning of 2015 and on 15 November 2016, The Code of Ethical Conduct of the Internal Auditor was approved, meant to set universal ethic standards, applicable to all its own or contracted auditors at group level.
Internal Audit in Electrica Group is governed by The Audit Charter and Audit Manual of Electrica Group, the last update of these documents have been approved by the BoD in December 2018. These are available on ELSA’s website in the section The group > Internal Audit.
The annual internal audit plan and any updates are prepared by the specialized department, reviewed by the Audit and Risk Committee, approved by BoD decision based on the committee recommendation and implemented in the approved version.
For more details about the internal control and internal audit, please see chapter 4.11.
ELSA’s Articles of Association
EBRD guidelines were included in the Articles of Association of ELSA adopted on 4 July 2014. During 2017, the company's Articles of Association have been updated by the resolution of the Extraordinary General Meeting of Shareholders dated 27 April. As a result, the competences for the approval of the subsidiaries' global strategy (including but not limited to their development and restructuring), as well as the competence for the company’s mandate to vote in the subsidiaries GMS regarding mergers and spin-off, is ELSA’ BoD responsibility.
The changes were aimed to transform the approval process, with respect to the subsidiaries, into a more flexible and efficient mechanism. In the same time, the changes aimed to reduce the complexity and the number of the GMSs, as well as the related costs, both from the company and shareholders’ perspective. All the versions of the Articles of Association adopted since the listing of ELSA are available on the company website in the section The group > About > Articles of Association.
Clear lines of competence and responsibility
In order to establish duties and competencies, as well as to clearly define a reporting system within the company, ELSA performed the mapping of its processes, benefiting from external advice in this regard. The first of these projects was completed by defining the procedures applied in the company, audited to be
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certified according to ISO 9001/2015 and ISO 14001/2015 standards. Following the external audit conducted by Dekra Romania, Electrica received the certification for its integrated management system quality - environment - HSS.
During 2018, the policy for the delegation of authority was updated at ELSA and EFSA level. At the level of the distribution subsidiaries, similar policies have been approved by their boards in 2017, but in 2018 a procedure for updating the delegation of authority policies was started, in order to align them to reflect the new organizational structures, to implement the principles updated in ELSA’s policy and to more accurately reflect their specific activity. The updating process didn’t finalize in 2018 and will be completed in 2019, when an update of the delegation of authority policy is envisaged for the rest of the group companies (EL SERV and SEM).
Code of Conduct
EBRD requirements are covered by the Code of Ethics and Professional Conduct developed with the support of Transparency International and the Whistleblowing Policy as part of the Corporate Governance Code. The documents were approved on 2 February 2015 and published on ELSA’s website in the section The group > Ethics, Sustainability and Conformity.
In 2018, the Code’s implementation and compliance monitoring activities were carried on at Group level.
Compliance with BSE Governance Code
On 4 January 2016 the New Code of Corporate Governance of the Bucharest Stock Exchange entered into force and, on this occasion, ELSA published on 8 January 2016 the "Corporate Governance Code Apply or Explain" statement according to the new provision. ELSA publishes the updated statement yearly and reports promptly any update to the capital market.
For details, please see chapter 4.9.
Between June - September 2016, ELSA developed the Market Abuse Procedure, in compliance with the national and European provisions in this field. It was adopted in September 2016 and is being implemented across the entire Group.
The environmental and social responsibility plan
The implementation of the Social and Environmental Action Plan, annex to the Framework Agreement signed by ELSA with the European Bank for Reconstruction and Development started by the end of 2014, continuing during the next years and aiming a high degree of compliance with the bank standards.
1.1. Following the organizational changes that took place between 2016 and 2018, Electrica Group companies have redefined their integrated quality-environment-OHS management systems by reviewing the processes and the applicable procedural framework. All companies successfully completed the recertification and supervision external audits performed by the accredited certification bodies, maintaining certifications in accordance with ISO 9001: 2015 and ISO 14001: 2015, OHSAS 18001: 2007
Currently, a process of alignment of the integrated quality - environment - OHS management systems documentation at distribution operators and ELSA level is ongoing, aiming to simplify and streamline processes at the group level, focusing on the distribution activity and especially on its development (investment) component.
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Implementing the energy management international standard ISO 50001:2011 is considered after the Electrica Group organizational transformation project finishes.
1.2. For ensuring contractors compliance with the Group OHS standards and procedures, ELSA developed certain provisions integrated in dedicated conventions concluded for Group companies agreements with works and services providers and infrastructure users (for example, telecommunications companies).
1.3. During 2018 the practice of introducing chapters dedicated to the environmental aspects, occupational health and safety, according to the requirements, in the new investment projects, continued at Group level. Main measures were envisaged for the grid crossing the protected areas and the Natura 2000 sites, according to the developed digital maps highlighting the priority areas for risk mitigation.
1.4. As far as Corporate Social Responsibility is concerned, in 2018 ELSA revised and approved grant policies, donations and sponsorships, the new form of policies being available on its website.
As in previous years, during 2018 the company carried out the Corporate Social Responsibility Program, materialized by financial support of social causes through prestigious non-governmental organizations in Romania, as well as the third edition of the Grant Program "Electrica puts Romania in a different light", through which projects with long-term positive social impact across the country were financed. All information on donations, sponsorships and grants awarded by ELSA are available on its website under the CSR section.
At the end of the first half of 2018, ELSA has posted on its website the Group's Second Sustainability Report, for 2017, developed according to the requirements of the Global Reporting Initiative (GRI) standards.
1.5. Complaints’ management within Electrica Group is based on conventional procedures in force at each company level and involves Internal Audit department and Legal & Control department/division for investigations and analysis, as well as experts from other departments, if the situation requires. For 2019, the development and implementation of an IT tool for process management, with the subsequent review and alignment of the companies’ procedures, is considered.
Since April 2015, at Electrica Group level is available and functional a reporting system for ethical misconduct, irregularities or any violations of the law by professional alert devices (whistleblowing system). It includes a hotline, postal addresses (physical and electronic) and an online platform for taking over reports, accessible on the websites of all companies within the group. The integrity alerts takeover and anonymization services have been outsourced since the launch of the system, including during 2018.
1.6. Identify and assess environmental and social risks by an independent consultant was part of the Project for improving and developing the risk management system inside ELSA according to ISO 31000:2010, launched in November 2017. The Consultant has defined a dedicated methodology, analyzing all vulnerabilities in relation to the environment, communities, occupational health and safety and to business ethics and has conducted interviews and evaluation sessions across all of the group's companies. At the end of the first half of 2018, the vulnerability analysis was finalized and in September 2018, the Project Steering Committee approved the external consultant's report on Electrica Group environmental and social risks.
1.7. With regard to the development of a corporate policy regarding the reorganization/restructuring actions carried out at the Group level, in the context of the implemented organizational transformation projects, dedicated programs were developed. ELSA defined a medium - term strategy for training and development
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of employees, the necessary budget for its implementation being already anticipated by the Human Resources Department.
2.1. RENAR accredited laboratory of ICEMENERG National Research and Development Institute conducted recently a study on the level of electromagnetic fields in installations belonging to SDTS (transformer stations and 110 kV aerial power lines). The study showed no parameters exceeds the standards admitted in accordance with the legal provisions in force, in any of the locations for which the evaluation was conducted. The external consultant involved in the environmental and social risk assessment at the group level also found that the aspect has no significant impact.
2.2. Electrica group companies selectively collect and temporary deposit generated waste according to legal requirements in force, submitting all reports requested by the environmental authorities, based on own implemented waste management procedure. ELSA developed a framework procedure for implementing an integrated waste management system at Group level, which will become effective after the organizational transformation process.
2.3. Electrica group companies have a program to eliminate asbestos and PCB from their installations, according to specific national and European legislation in force, developed on the basis of a risk assessment of the use of these materials in their own activity. The program is monitored semi-annually and annually through reports, the objective being followed in all the investment projects initiated.
2.4. Accidental leakage of insulating oil from transformers from the stations of distribution subsidiaries within Electrica Group are monitored and recorded in Registers of faults. For a number of locations (repair shops, warehouses) of EL SERV, soil and water analysis were conducted, according to the requirements imposed by environmental permits. During 2018, there were no significant impact environment incident and no decontamination of soil and groundwater was required.
3.1. Reducing noise pollution in residential areas and associated health risks is accomplished by including specific provisions in contracts for works and services, where applicable. For 2018 no significant impact on noise pollution and no complaints or notices related to noise pollution have been reported.
4.1. 2018 meant, for management of the emergency and fire protection within ELSA, a series of preventive measures implemented at the level of all companies, including: control of compliance with specific rules by its own authorized personnel; periodic training for all categories of staff, according to the approved training programs and themes; performing intervention and evacuation exercises in emergency situations; verification and maintenance of fire protection facilities and of fire-fighting equipment and devices for each location, with authorized companies; free access to evacuation routes; measures for prevention of fires in the hot and the cold seasons.
4.11. Internal audit report for 2018
The Annual Audit plan prepared for 2018, endorsed by the Audit & Risk Committee and approved by the Board of Director, included assurance missions - the type of audit being a regulatory audit, but also ad-hoc missions, at the request of the Audit & Risk Committee. During the year a number of seven missions were performed on the following audit areas: acquisitions, patrimony, SMI & HSS, financial - accounting, technical, legal. This plan was taken from 2016-2018 strategic plan, drafted based on a detailed risk analysis. The audit team consisted of five internal auditors on 1 January 2018 and reached three internal auditors on 31 December 2018, of which one person with management function.
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The internal audit missions carried out in 2018 had the following specific subjects:
1. The assessment of the direct purchases over EUR 3000 made at the level of the companies in the Electrica Group (SDMN, SDTN, SDTS, EL SERV, EFSA), a single audit report was issued for this mission without recommendations with high impact; 2. The assessment of the activity regarding the inventory of the assets of the companies belonging to the Electrica group (ELSA, EFSA, EL SERV SDMN, SDTN, SDTS), with six internal audit reports, which included a number of six recommendations with a high impact at group level; 3. The assessment of the SMI & HSS activity for the distribution companies within the Group (SDMN, SDTN, SDTS), with three internal audit reports, which included a number of three recommendations with a high impact at group level; 4. The assessment of the activity regarding the forecasting, elaboration and execution of revenues and expenses budget within ELSA, with only one internal audit report, without high impact recommendations; 5. The assessment of receivables collection activity within EFSA, followed by the elaboration of a single internal audit report which included a number of four recommendations with high impact; 6. The assessment of measurement, recording and purchase of electrical energy for network losses - NL for Distribution Companies within the Group (SDMN, SDTN, SDTS), with three internal audit reports which included a number of 24 recommendations with a high impact; 7. The assessment of legal department activity at ELSA and EFSA level, with two internal audit reports that included a number of one recommendation with high impact.
The internal audit reports, that were based on the mission mandate approved by the chairman of the Audit and Risk Committee, were endorsed by the management of the audited entities, endorsed by the Audit Committee of ELSA, and the implementation of the recommendations has been and is continuously monitored through their tracking sheets. Following the completion of the audit missions and the acceptance of the recommendations by those concerned, the audited structures prepare their own action plans in order to comply with the recommendations.
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5 Operating activity
5.1. Operating segments
The operations of each reportable segment are summarized below.
Segments Operations Purchasing and supplying electricity and gas to end consumers (EFSA, including Electricity and gas supply the trading and representation activity on the Balancing Market as Balance Responsible Party – BRP) Electricity distribution Electricity distribution service (includes SDTN, SDTS, SDMN, EL SERV) External electricity network Repairs, maintenance and other services for electricity networks owned by other services distributors (include SEO and SEM) Headquarters Includes corporate services at parent level Source: Electrica
The figure below shows the areas covered by the Group subsidiaries and the number of customers/users they serve.
Figure 27: The geographical coverage of the companies in the Electrica Group
Societatea de Distributie a Energiei Electrice Transilvania Nord 1.28 mn users Societatea de Distributie a Energiei Electrice Muntenia Nord 1.33 mn users
Societatea de Distributie a Energiei Electrice Transilvania Sud Electrica Furnizare (EF) 1.17 mn users 3.5 mn customers
Source: Electrica Note: The figure relates to the number of company’s customers/users on 31 December 2018.
DISTRIBUTION SEGMENT
Electrica Group’s distribution segment refers to the activity of its subsidiaries SDMN, SDTN, SDTS and EL SERV.
The electricity distribution segment is a regulated area of activity in which operations are conducted in a geographically limited area in accordance with the concession agreement, the nature of the services provided and the specific obligations are stipulated in the license conditions of the concessionary operators. Thus, Electrica Group, through its subsidiaries, is the electricity distribution operator in Transilvania Nord (Cluj, Maramures, Satu Mare, Salaj, Bihor, Bistrita-Nasaud counties), Transilvania Sud (Brasov, Alba Sibiu, Mures, Harghita and Covasna counties) and Muntenia Nord regions (Prahova, Buzau, Dambovita, Braila, Galati and Vrancea counties), operating electrical installation with voltages between 0.4 kV and 110 kV.
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The Group has exclusive electricity distribution licenses for these regions valid for a nine years period with an extension clause for another 25 years. Within its service for distribution activity, EL SERV provides maintenance, repair and various services to group companies (car rental, rental of buildings, etc.) as well as repairs and other related services to third parties.
The specific tariffs applicable to distribution services are approved by ANRE based on a “tariff basket ceiling'' mechanism as established by ANRE Orders no.168/2018 and no.169/2018 (applicable in the 4th regulatory period 2019-2023), amended and completed by ANRE Order no. 193/2018.
The “tariff basket ceiling” methodology plans to reduce income fluctuations and avoid significant fluctuations for the electricity tariffs charged to consumers for the distribution of electricity. The tariff model is based on the principle of remuneration (through tariffs) of controllable costs recorded by the distribution operator, the distributor’s main source of profit being the rate of return on capital invested in the distribution activity.
The tariffs are adjusted on an annual basis considering the achieved operating performance, the volumes of distributed electricity, the quantities and the acquisition price of electricity to cover the network losses (“NL”), the uncontrollable costs, the change of revenues from reactive energy compared to the forecasted ones, depreciation and forecasted capital expenses, change of forecasted gross profit from other activities, as well as corrections from previous periods made in accordance with the methodology.
The current regulatory period (“the 4th regulatory period”) within which the Group operates has started on 1 January 2019 and will end on 31 December 2023. Both the current regulatory framework, and the rules related to RAB determination and to distribution tariffs are expected to remain unchanged, at least until the end of 2023. ANRE sets up the annual level of distribution tariffs in RON per MWh for each distribution company and for each voltage level (high, medium and low). The tariffs invoiced to users are cumulated depending on their corresponding voltage level (i.e. the tariff for medium voltage also includes the tariff for high voltage, and the tariff for low voltage includes also the tariff for high and medium voltages).
ANRE sets up the annual regulated income levels required for each year of the regulatory period, based on projections submitted by the distribution operators, in line with the methodology requirements, at the beginning of the regulatory period.
Starting 1 January 2019, the electricity distribution tariffs approved by ANRE are as follows (RON/MWh):
High Medium Low ANRE Order High Medium Low ANRE Order no. Tariff voltage voltage voltage no. voltage voltage voltage (RON/MWh) Applicable between 1 January -28 February Applicable between 1 March – 31 December 2019 2019 SDMN 197/14.12.2018 15.21 33.08 114.18 24/25.02.2019 15.56 33.84 116.80 SDTN 198/14.12.2018 18.16 41.84 98.67 25/25.02.2019 18.58 42.82 100.98 SDTS 199/14.12.2018 20.27 39.83 100.21 26/25.02.2019 20.75 40.77 102.56 Source: ANRE
SUPPLY SEGMENT
The Electrica Group operates on the supply segment through its EFSA subsidiary, both on the regulated electricity market (supplier of last resort in geographical regions where the Group distribution segment operates) as well as on the competitive market at national level. The Group has an electricity supply license covering Romania’s territory valid until 2021, with the possibility of extension. Starting with 10 May 2018, the group’s second license for electricity supply, ELSA’s, ceased according to the ANRE Decision no.
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728/2018 – at the request of the operator. In addition, EFSA holds a license to carry out its gas supply activity, valid until 2022.
The electricity market is divided into the regulated market (electricity supplied as last resort supplier) and competitive market. On both markets, electricity may be sold and/or purchased wholesale or retail.
Regulated market
Liberalization of the electricity market was completed starting with 1 January 2018. The competition between traditional suppliers and other new suppliers to the electricity market has increased in the sense of massive bids to household customers from the regulated market. In 2018 there was an increase in the number of products offered by suppliers to end customers and an increase in customers' choice for bids that combine electricity, gas and/or telecom services.
Currently, EFSA is obligated “Supplier of Last Resort” for approximately 3.3 mn customers. Until 28 February 2019, EFSA has been obligated SoLR only for the areas covered by the Electrica Group distribution operators. Starting with 1 March 2019, EFSA is optional SoLR for the other areas of Romania.
EFSA incurs supply costs that include mainly costs related to conclusion of contracts, invoicing, collection and costs related to database management, IT&C infrastructure. ANRE may supplement the cost of supply with the share of occasional costs incurred by EFSA as a result of special situations (for example: re- contracting, modification of information systems to comply with new regulations, losses from receivables, etc.).
In the first semester of 2018, household and non-household customers which benefit from the universal service were subject to CMC tariffs endorsed by ANRE on the basis of the justified purchase and supply costs and of on the regulated profit share. Non-household customers who do not benefit from the universal service have been invoiced at last resort tariffs for 100% of their consumption.
Any difference between revenues and costs plus justified profit realized from the supply activity at CMC tariffs/last resort tariffs from previous periods is corrected if it is justified in the next stage of setting the prices applied to last resort customers.
In the second semester of 2018, household and non-household customers which benefits from the universal service were subject to universal service tariffs. Non-household customers who do not benefit of universal service were invoiced at tariffs for inactive customers, respectively non-household customers taken over due to the fact that they had no electricity supply ensured from any source at last resort tariffs.
Competitive market
Trading on the wholesale competitive electricity market is carried out in a transparent, public, centralized and non-discriminatory manner on market platforms managed by OPCOM. The prices may be freely negotiated by the parties on the retail competitive market. The wholesale market participants can trade electricity based on bilateral contracts concluded on the markets managed by OPCOM or on spot markets managed by OPCOM. Starting 19 July 2012, the Energy Law does not allow the conclusion of sale and purchase contracts on the wholesale electricity market outside of the centralized markets.
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BRP Electrica - Balance Responsible Party
The representation activity in the Balancing Market as Balance Responsible Party ("BRP Electrica") was performed by ELSA from 2005 until March 2018 based on electricity supply license no. 1091/2012. This activity is compliant with market mechanisms detailed in the Romanian Commercial Energy Wholesale Code.
Starting with 1 April 2018, the transfer of the representation activity in the balancing market as Balance Responsible Party was made from ELSA towards EFSA. The customer portfolio is diversified, consisting in producers (hydro, thermal, wind, photovoltaic, biogas, biomass), suppliers and distributors, providing balancing services for over 24% of the total consumption in NES.
The distribution companies within the Electrica Group have delegated their responsibilities to BRP EFSA.
The balancing market, a component of the wholesale energy market, is mandatory and each license holder must either assume or delegate its responsibility for balancing to a BRP. By transferring the responsibility to a Balance Responsible Party there is an advantage for the aggregation of the imbalances, in order to reduce costs on the Balancing Market compared to when the producer/supplier/distributor would act on its behalf as a Balance Responsible Party.
ENERGY SERVICES SEGMENT
The Group's portfolio also includes the energy services segment (equipment maintenance, repairs and other additional services related to the network), performed almost entirely for the distribution companies outside the Group.
In 2018, the energy services segment consists of SEO and SEM. 5.2. Fixed assets
The number of users and volume of installations at 31 December 2018 at the level of the three distribution subsidiaries (SDTN, SDTS and SDMN) and at Group's overall level are quantified as follows:
UM SDTN SDMN SDTS Total
Geographical coverage km² 34,162 28,962 34,072 97,196 Number of users, of which: - 1,275,460 1,328,070 1,172,893 3,776,423 high voltage (HV) - 33 39 44 116 medium voltage (MV) - 4,115 4,050 2,955 11,120 low voltage (LV) - 1,271,312 1,323,981 1,169,894 3,765,187 Overhead power lines length, out of which: km 52,882 59,040 45,622 157,544 high voltage (HV) km 2,197 2,146 3,166 7,509 medium voltage (MV) km 11,863 12,561 10,471 34,896 low voltage (LV) km 38,822 44,332 31,985 115,139 out of which connections km 18,149 24,080 17,259 59,488 Underground power lines length, out of which: km 16,504 11,919 11,979 40,402 110 kV km 30 15 41 86 medium voltage (MV) km 3,935 3,423 3,501 10,859 low voltage (LV) km 12,539 8,481 8,437 29,457 out of which connections km 7,312 2,167 2,675 12,154
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UM SDTN SDMN SDTS Total
Cumulative power of transformers/power AT MVA 6,161 8,710 6,746 21,617 in power stations MVA 3,739 5,716 4,146 13,601 (HV/MV + MV/MV) in HV/MV power stations MVA 3,690 5,364 4,068 13,122 in MV/MV power stations MVA 49 352 78 479 Switching stations/Transformer stations pcs 2,422 2,994 2,682 8,098 No. of substations, out of which: pcs 113 212 105 430 HV/MT power stations - 92 124 101 317 MT/MT power stations - 21 88 4 113 Number of switching stations and transformer pcs 8,971 10,396 9,198 28,565 stations Source: Electrica
The vast majority of the distribution equipment currently in the assets of the electricity distribution subsidiaries within the Electrica Group, approximately 70% of the total volume, were built during 1960- 1990, following the successive development phases of the National Electricity System. This led to a great variety of equipment currently in use. The vast majority of installations were produced by the romanian industry during 1960-1990, in which case a high rate of wear and tear is noticed.
A relatively small category accounting for approx. 30% of the total equipment is represented by new installations, commissioned after 1990, meeting current requirements. It is notable that the installations commissioned between 1980 and 1990 (approx. 10%) are gradually exceeding their normal lifetime.
Considering the voltage level, categories of installations, the year of commissioning and the specific operating conditions, the installations’ degree of wear and tear can be assessed as follows:
SDTN SDMN SDTS High voltage power lines (110 kV) Underground power lines 25% 45% 50% Overhead power lines 74% 65% 75% Medium voltage power lines Underground power lines 48% 65% 65% Overhead power lines 59% 60% 60% Low voltage power lines Underground power lines 52% 70% 75% Overhead power lines 57% 65% 68% Substations 70% 75% 60% Transformers Pole - mounted 44% 50% 50% Concrete enclosure 50% 65% 75% Pad - mounted 69% 75% 20% Underground 15% 95% 85% Concrete base 10% 9% 12% Source: Electrica
Investments
The investments at the Electrica Group level have been prioritised considering especially the degree of wear of the assets of the distribution companies, with a particular focus on the improvement of the quality of the distribution service, the safety in operations as well as the increase in efficiency.
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The Group will continue to modernize and to develop the smart distribution network by installing intelligent network infrastructure systems, such as SCADA, SAD, energy measurement systems, etc., in order to improve the operational efficiency and the energetic efficiency, to reduce the network losses, to improve the network flexibility, the distribution service quality, the continuity and reliability of the network.
The implementation of the investment program is compliant with the Group's Strategy considering the following criteria:
Tracking the inclusion of regulated investments in the RAB; Non-regulated investments of the Group must provide an IRR higher than weighted average cost of capital; The proposed investment program must follow the Group’s financial strategy of maintaining a solid capital structure.
Thus, a priority are those categories of capital expenditure contributing to the development of a profitable and sustainable distribution activity and to the creation of access conditions to the electricity distribution network for energy consumers and producers, in line with market requirements, especially based on:
Automation of the distribution by integrating of the installation in SCADA, SAD, DMS etc.; Modernizing the equipment in transformer stations and in the medium voltage network; Introducing equipment with reduced technological losses, higher operating efficiencies and environmentally friendly; Modernizing the medium and low voltage distribution network and connections; Expanding the modern energy measurement and transmission of power consumption systems. At the same time, the Group is considering investments in the upgrade of IT infrastructure and information technology systems, taking into account both the legal requirements regarding data protection and the positive effect on the quality of the provided services.
The following table presents the investment program approved by ANRE for the distribution subsidiaries within Electrica Group (in real terms 2013):
Commissioning program approved by ANRE for the period 2014 - 2018 (RON mn)
2014 2015 2016 2017 2018 Total SDTS 117.0 180.0 219.6 250.0 287.5 1,054.1 SDTN 126.0 184.0 223.2 259.2 288.0 1,080.4 SDMN 113.8 171.3 205.0 252.4 287.1 1,029.6 Total 356.8 535.3 647.8 761.6 862.6 3,164.1 Source: ANRE
Based on IPO proceeds, Electrica Group has decided to increase the volume of investments in the distribution network in the third regulatory period compared to the volume approved by ANRE at the end of 2013.
The consolidated investment plan at Group level in 2018 was RON 1,010 mn (CAPEX), out of which RON 970 mn. represent the investments planned by the distribution operators.
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In 2018, the companies of the Electrica Group made the following investments compared to the planned investments:
Subsidiary Electrica Group (RON mn) Planned 2018 Achieved SDTN 320 283 SDTS 335 284 SDMN 315 311 EFSA 34 32 EL SERV 2 2 ELSA 4 1 Total 1,010 913 Source: Electrica
At Electrica Group level, in 2018, the CAPEX plan was achieved at a rate of 90.4%; the achievement rate of investment for the distribution subsidiaries alone was 90.5% compared to the total plan approved by ELSA’s Board of Directors.
The structure of investments realized (CAPEX) by the distribution subsidiaries in 2018 is presented in the table below (for details of the most important investments see Appendix 2)
Category of works (RON mn) Total Efficiency out of which: 310 Energy efficiency/NL 239 Operational efficiency 71 Quality of distribution service 500 Other categories 16 Features for independent equipment 34 Studies and projects for the coming years 18 Total 878 Source: Electrica
The main investments of the Electrica Group were focused in 2018 on improving the quality of the distribution service, as well as on increasing the energy and operational efficiency.
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Figure 28: The structure of CAPEX achievements for distribution operators within the group, in 2018 (mn RON)
Studies and projects for the coming Independent equipment years 34 18 4% 2%
Energy efficiency/NL Others categories 239 16 27% 2%
Operational Quality of service efficiency, 500 71 57% 8%
Source: Electrica
Of the total investments planned to be commissioned in 2018 value of RON 904.7 mn (nominal terms 2018) by the distribution operators, the investments made and commissioned sum up to RON 836 mn. Thus, the executed and commissioned investment programs approved by ANRE ex-ante for the distribution operators were achieved in an average percentage of 92.4%.
Electrica Group (RON mn in nominal terms) Planned Achieved %
SDTN 300.3 296.1 98.6 SDTS 299.8 246.3 82.2 SDMN 304.6 293.6 96.4 Total 904.7 836.0 92.4 Source: Electrica
As a result of investments made during 2013-2018, the value of the Regulatory Assets Base of the Group’s distribution operators has progressively changed and is as follows:
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20 RAB (RON mn) 2013 201419 2015 2016 2017 2018 SDTN 1,292 1,331 1,420 1,519 1,624 1,785 SDTS 1,332 1,333 1,377 1,388 1,475 1,625 SDMN 1,434 1,486 1,543 1,581 1,679 1,845 Total 4,058 4,150 4,340 4,488 4,779 5,255 Source: Electrica
During 2013 – 2018, RAB had an increasing evolution for all the three distribution companies in the Group's portfolio.
5.3. Procurement
The procurement activity is carried out in accordance with the legal provisions in force, as well as in accordance with own procedures and regulations, as appropriate, aiming to cover the needs of goods, services and works, in order to carry out in good conditions the Group's activities. In some cases, purchases are carried out centralized, by delegating the purchase’ coordination to a Group company, with the primary goal of reducing costs, optimizing the procurement and ensuring a unified policy within the Group.
5.4. Sales activity
Electrica Group’s revenues are influenced mainly by the distribution and supply segments. The contribution of the distribution segment to the total revenues was of 28.6% in 2018 (2017: 25.7%), while the contribution of the supply segment was of 70.7% in 2018 (2017: 73.6%).
The Group’s distribution operators are natural monopolies in their respective markets and as such, they hold a dominant position. In addition, the Group’s distribution operators have a legal monopoly in their relevant regions; hence, other entities cannot set up a competing electricity distribution business.
The following figure shows the national market share (based on the quantities of distributed electricity) held by the Group’s subsidiaries in the electricity distribution segment, according to the most recent ANRE report available.
19 In 2018, ANRE communicated the final value of the investments recognised for 2014, due to this reason starting with 2014 the RAB values have been modified 20 The values estimated as of 31 December 2018 may suffer corrections following ANRE's analysis process.
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Figure 29: Market share of distribution segment in 2017
Electrica 40% Others 60%
Source: ANRE
Regarding the supply segment, although it holds a strong position on the electricity supply market, EFSA is facing growing competition on its market.
The figure below shows Electrica market shares for the supply activity as at 30 November 2018 (based on the quantities supplied):
Figure 30: Regulated Market, 2018 Figure 31: Competitive Market, 2018
CEZ Vanzare, ENEL Energie E.ON Energie Romania Alro, 5.45% 4.96% Muntenia 13.78% RWE Energie, 4.73% E.ON Energie 15.95% Romania, OMV Petrom, 4.67% 8.87% MET Romania CEZ Vanzare, Energy, 13.48% 4.51% Electrica Furnizare, Getica 95 9.34% COM, 4.45%
Tinmar Energy, 4.04%
ENEL Energie, Enel Energie 11.37% Total, Electrica 18.95% Furnizare, 45.42% Others, 30.03%
Source: ANRE report (November 2018) Source: ANRE report, November 2018 Note: ʺOthersʺ category includes suppliers whose individual market shares are below 4%
The number of consumption locations was 3.54 mn at 31 December 2018, served through a number of 151 sales points and customer relationship offices.
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Figure 32: Volume of electricity supplied on the Figure 33: Evolution in number of costumers (th.) retail market (TWh)
15,0 4.000 3,591 3.610 3,601 3.577 3.541 74 90 131 3.500 215 253 10.1 10.6 3.000 9.2 9.2 8.5 10,0 2.500
3,4 4,7 5.4 2.000 4,2 5,4 3.517 3.520 3.470 3.362 3.288 1.500 5,0 1.000 5,8 5,4 5,2 5,1 4,9 500 0,0 0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018
Regulated Market Competitive Market Regulated Market Competitive Market
Source: Electrica Source: Electrica
Figure 34: Customers by electricity supplied Figure 35: Customers by revenues, 2018 volume, 2018
Non-household customers, Non-household regulated market customers, regulated 7% market 6%
Eligible, Eligible, competitive market competitive Household 35% market customers, Household 43% regulated customers, market regulated 51% market 58%
Source: Electrica Source: Electrica
Major customers exposure
EFSA does not have a significant exposure to a certain customer or group of customers that could significantly influence its activity.
However, certain electricity customers, such as hospitals, ambulance stations, schools, nursing homes, air or naval traffic services are deemed of special importance and cannot be disconnected by the electricity supplier. Moreover, the customers subject to the insolvency law, can benefit from protection against creditors and, possibly, against electricity suppliers. Thus, the electricity must be supplied by EFSA, even if they are in payment default.
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BRP Electrica - Balance Responsible Party
Between January – August 2018, 120 Balance Responsible Parties were registered with Transelectrica S.A., having a total of 1,030 licensed participants.
Starting with September 2018, according to ANRE Order no. 31/31 Jan 2018 - The Regulation on the functioning and settlement of the balancing market and the Regulation for calculation and settlement of imbalances of the parties responsible for balancing, as well as for the modification, completion and approval of certain provisions in the electricity sector, each license holder assumes responsibility for balancing with the TSO (Transport and System Operator). Thus, by the end of 2018, 360 Responsible Balance Parties were registered with CNTEE Transelectrica, out of which 66 are active.
Between January and March 2018, approximately 96 licensed participants delegated their responsibility to BRP ELSA, as compared with the first quarter of 2017, when approximately 164 licensed participants were enrolled in BRP ELSA.
Between April and December 2018, 98 licensed participants (seven suppliers, six distribution operators and 85 producers) transferred their responsibility to BRP EFSA. Thus, the customer portfolio increased by 3% compared to the first quarter of 2018, respectively increased by 12 customers and a number of approximately 252 bilateral agreements, i.e. exchanges with OPCOM.
5.5. Reorganization and disposal of assets
Regarding financially distressed subsidiaries, the process of reducing their activity was continued.
In 2013, the Company approved the insolvency procedure starting for three subsidiaries: SE Banat, SE Dobrogea and SE Moldova; SE Moldova, SE Dobrogea and SE Banat entered bankruptcy procedures in January 2016, January 2015 and August 2014 respectively; During 2018, the liquidator of each company has organized several tenders with the objective of selling the company’s assets under the bankruptcy procedure; SEO – During the reorganization period (May 2014 – June 2018), the company failed to pay the amounts due according to the Reorganization Plan, and as a result in October 2018 the court ordered the opening of the bankruptcy procedure for SEO; currently, the assets' stock count from the company's patrimony is carried out and, following the stock count's completion, the procedure for the valuation of all the company’s assets to be continued and, as a last step, the assets' valorification following the creditors’ approval of the sales regulation and of the assets valorification method; SEM – under judicial reorganization since November 2014, with a reorganization plan approved by the Creditors’ Assembly in November 2015 and confirmed by the Court in November 2015. The deadline for the implementation of the reorganization plan was November 2018, when the company fulfilled its payment schedule. The appeal in court of a creditor to the amount registered in the SEM receivables table is the reason why the SEM reorganization procedure has not yet been closed. Until 31 December 2018, the following values were recorded from the sale of the assets of the subsidiaries that are bankrupt as of 31 December 2018: SE Moldova – RON 19,452 th., SEO – RON 8,084 th., SE Dobrogea – RON 3,428 th., SE Banat – RON 8,115 th. Also, the value of the receivables recovered by the subsidiaries that are bankrupt as of 31 December 2018 is: SE Moldova – RON 42 th., SEO – RON 2,171 th., SE Dobrogea – RON 849 th., SE Banat – RON 810 th.
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5.6. Personnel
On 31 December 2018, the Group had 7,995 employees. The table below provides an overview of the employment in the Group, by business segments, at the end of the specified years.
2018 2017 2016 Electricity distribution 6,697 7,144 7,978 SDMN 2,166 2,263 1,872 SDTN 2,160 2,241 1,817 SDTS 2,024 2,122 1,720 EL SERV 347 518 2,569 Supply segment 872 945 1,041 EFSA 872 945 1,041 Services related to other DSOs 303 548 524 SE 303 548 524 Headquarter 123 155 142 ELSA 123 155 142 Total 7,995 8,792 9,685 Source: Electrica
The reduction in the number of Group employees during 2018 was mainly due to the voluntary leave program, plus retirements at the age limit, disability and termination of individual labour agreements due to other causes (resignation, mutual agreement etc).
On 31 December 2018, about 55% of the Group’s employees represented directly productive personnel and 45% represented indirectly productive personnel, including technical, economic, social and administrative personnel.
The table below presents the Group’s employment by age, as follows:
31 December 2018 31 December 2017 18-30 4.41% 5.51% 31-40 18.72% 19.49% 41-50 42.21% 44.66% 51-60 32.99% 28.81% over 60 years old 1.66% 1.53% Total 100% 100% Source: Electrica
On 31 December 2018, about 98% of the Group’s employees were members of trade unions and their employment conditions are governed by the Collective Labour Agreement, which will expire on 2 April 2020 for ELSA and on 31 December 2019 for the Group’s subsidiaries. The Electrica Group faced four unionised picketing actions (one per each distribution company and one held at ELSA HQ) but these did not significantly interfere with the Group’s day to day activity.
In 2018, the voluntary leave program with compensatory payments has been continued at Group level, program valid until the end of the year.
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ELSA and its subsidiaries prepared internal regulations related to: employment, non-discrimination, labour safety and health, rights and obligations of the employer and of the employees, employee complaint procedures, rules on labour discipline, disciplinary procedure, sanctions and disciplinary infringements, the criteria and procedures for employees professional evaluation and termination of employment procedure.
The training programs carried out at the Electrica Group level have taken into account both the constant evolution and the improvement of the Group employees' skills.
The company's management supports the principle of development through continuous training and takes an active part in involving employees in these programs, thus supporting them to effectively address their professional challenges.
HEALTH AND SAFETY AT WORK
The companies within Electrica Group use in their daily activity a set of internal norms and regulations elaborated in accordance with the legal provisions and OHSAS 18001 requirements, as part of the Integrated Management System Quality – Environment – Occupational Health and Safety. Integrated Management System implemented by each of the companies are certified and supervised by prestigious accredited certification bodies: SRAC (for the distribution operators, EFSA and EL SERV) and Dekra certification for ELSA. During 2018 all the companies went through external audits performed by the certification bodies and maintained their certifications. These integrated management systems certified and supervised by external audits ensure services are provided in safety conditions, for customers and users and for the organization's own staff.
The status of work accident at Electrica Group level
During 2018 there were no fatalities in the Electrica Group companies, but six employees of this companies suffered unfortunately injures as a result of labor accidents: three occurred at SDTS, two at SDTN and one at SEO.
The complex of complementary causes and contributing factors that led to the occurrence of these accidents were analyzed at the level of legal committees for each case and the research files were submitted to the Territorial Labor Inspectorates to receive the visa, including for the measures to prevent some similar situations. Only in one of the six registered work accidents, the electric risk had consequences, the rest being the result of mechanical risks (knocking, falling from the same level or falling from a height), independent in three of the cases of the professional activities carried out by the employees.
Overall, in 2018, at Electrica Group level, there was a 60% decrease in the number of work accidents, as a result of the executive management efforts to develop a safety culture under the motto "zero accidents", under the close supervision of the Board of Directors. These efforts will continue in 2019, with an awareness program on the risks to the health and safety of employees for the entire Electrica Group being defined.
An achievement in 2018 was also the implementation of the OHS Phone application, for communicating faster all OHS events across the Group companies, facilitating the increase of the organization's speed reaction in the event of an accident at work.
Actions to improve health and safety at work for the employees
As a result of the transfer of activity among the companies within the group, by the end of 2018 the level of risk was re-evaluated for all the workplaces within the electricity distribution companies and within EL SERV. These re-evaluations were the basis for redefining the OHS training topics, the control procedure
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and the level of endowment with protection equipment.
Thus, 2018 marked the beginning of the digitization of OHS control activity for Electrica Group, a Pilot Project for implementing a dedicated IT tool being launched in SDMN. Its success has demonstrated the opportunity to extend its implementation to all the distribution operators and subsequently to the service companies within the Group.
In 2018, 3,167 OHS controls were carried out by own OHS control staff, to identify non-compliances and deficiencies that could increase the level of risk for employees' health and safety and to implement immediate mitigation measures. During the same period, 12 inspections of the Territorial Labor Inspectorates, External Auditors and Emergency Inspectorates took place. These have resulted in guidance and in actions to identify deficiencies that require immediate measures or preventive/corrective medium term measures. The implementation of the resulting action plans is done in accordance with the set deadlines.
As for employees training, in 2018, over 360,000 hours of training in health and safety at work, fire protection and emergency situations were provided within Electrica Group companies, including compulsory training, additional training following accidents at work as well as following the organizational changes and the training courses of the OHS professionals. The training topics set up by the Electrica Group companies were based on the national legislation and own internal instructions, focusing on personnel awareness on the dangers involved by the professional activity. A special initiative for 2018 was to introduce the Direct Productive Employeees Training for First Aid in Case of Injury Module, developed by Electrica Group collaboration with the National Emergency Situations Department, as part of the group OHS Risks and Aspects Awareness Raising Program, at SDTS level.
Other Health & Safety at Work aspects during 2018
There were no occupational illnesses within Electrica Group. Prevention and health at work was done by doctors specialized in occupational medicine through dedicated service agreements and was monitored at Group Level by the OHS Coordination Committee, established in August 2018, bringing together members of representative trade union organizations within the group companies and the group companies executive management.
5.7. Environmental considerations
In carrying out its activities and implementing its business strategy, the Electrica Group promotes practices harmonized with the environmental protection norms.
Electricity distribution and supply activities do not require environmental authorizations, and EL SERV holds all the necessary environmental authorizations, according to the legislation in force.
ELSA and its subsidiaries have implemented Integrated Quality-Environment- Occupational Health and Safety Management Systems, which aim to improve environmental performance through pollution prevention and responsible waste management.
The assessment of all real and potential, positive and negative environmental aspects associated with normal and abnormal or emergency situations at the level of all group companies in 2018 has made it possible to identify aspects with significant impact and to develop and implement measures programs in order to reduce it.
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The efficiency and effectiveness of the environmental management systems implemented by Electrica Group companies has been assessed during the external audits performed by accredited certification bodies within the companies in 2018, either for recertification of the IMS or for its supervision.
In 2018, the main concerns for the environment were as follows:
- Reducing the impact on the environment by upgrading installations and promoting smart grids; - Withdrawal of PCB-impregnated dielectric equipment in accordance with legal requirements; - Responsible waste management by safe disposal of generated waste, including hazardous waste; - Conservation of biodiversity and resources.
For 2018, no accidental pollution occurred and no exceedance of the limits allowed by the regulations in force for emissions were recorded. There have been no complaints or notices regarding environmental issues.
5.8. Research and development activities
Electrica Group is promoting technological innovation by participating in research and development financed/co-financed by European funds, having the possibility to test new technologies to manage and optimize energy efficiency. Also, the operational electrical networks distribution integrate a high level of distributed generation sources.
By participating in these research, development and innovation projects with financing/co-financing grants, Electrica Group has the following benefits:
making access to cutting-edge technologies in the field of optimizing the operating modes of the electricity distribution network (EDN) in terms of network connection of renewable electricity production (distributed or concentrated); improving the safety and reliability of isolated electrical systems, power quality provided through the provision of rapid, low-cost reserves through flexible task; the possibility of identifying criteria to promote smart grids and smart metering solutions in terms of the requirements of the new data protection measurement code and encryption modalities; use the opportunities to develop self-financing business portfolio of Group Companies; developing new skills through transfer of know-how; compliance with the best practices of similar companies in Europe; creating new opportunities for future of financing of Group Companies’ projects through EU funds. Another important endeavour of the Electrica Group in promoting technological innovation is to disseminate the solutions for updating its electric grid using a smart grid concept. Communications take place at international conferences/symposiums where Electrica Group participates or organizes internally to align development plans with available new technologies.
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6 Electrica financial reporting 2018
The overview of the company’s consolidated financials is in accordance with the consolidated financial statements that have been prepared in accordance with the International Financial Reporting Standards (“IFRS”) adopted by the European Union ("IFRS-EU"). These Consolidated financial statements are presented in RON, which is the functional currency of all companies within the Group.
6.1. Consolidated statement of the financial position
The following table presents the consolidated statement of the financial position (amounts in RON mn):
31 December 2017 Variation 31 December 2018 (*restated) 2018/2017 ASSETS
Non-current assets Intangible assets related to concession 4,810.3 4,330.9 11.1% agreements Other intangible assets 13.9 14.1 -1.1% Tangible assets, net 601.2 701.5 -14.3% Restricted cash 320.0 320.0 - Deferred tax assets 28.9 41.1 -29.7% Other non-current assets 1.9 1.3 41.1% Total non-current assets 5,776.2 5,408.9 6.8%
Current assets Trade receivables 806.3 804.4 0.2% Other receivables 38.5 55.5 -30.7% Cash and cash equivalents 665.7 562.5 18.4% Deposits, treasury bills and gov. bonds 136.5 747.0 -81.7% Inventories 63.6 21.6 194.1% Prepayments 2.7 3.7 -27.8% Green Certificates - 12.6 -100.0% Income tax receivables 16.4 1.1 1,353.4% Assets held for sale 23.2 - - Total current assets 1,752.9 2,208.4 -20.6%
Total assets 7,529.1 7,617.3 -1.2%
EQUITY AND LIABILITIES
Equity Share capital 3,459.4 3,459.4 - Share premium 103.0 103.0 - Treasury share reserves (75.4) (75.4) - Pre-paid capital contributions in kind 5.1 5.1 - from shareholders Revaluation reserve 108.7 123.8 -12.2% Other reserves 352.1 326.8 7.7%
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31 December 2017 Variation 31 December 2018 (*restated) 2018/2017 Retained earnings 1,675.5 1,712.9 -2.2% Total equity attributable to 5,628.4 5,655.6 -0.5% shareholders of the Company Total equity 5,628.4 5,655.6 -0.5%
Liabilities
Non-current liabilities Financing for network construction 1.0 11.1 -91.2% related to concession agreements Deferred tax liabilities 183.4 200.5 -8.5% Employee benefits 186.9 165.4 12.9% Other liabilities 41.2 40.4 2.0% Long-term bank borrowings 320.0 320.0 - Total non-current liabilities 732.5 737.4 -0.7%
Current liabilities Financing for network construction 11.9 32.7 -63.8% related to concession agreements Bank overdrafts 119.0 247.9 -52.0% Trade payables 742.2 689.4 7.7% Other payables 181.1 134.2 34.9% Deferred revenue 5.0 7.4 -31.6% Employee benefits 78.0 78.9 -1.2% Provisions 29.1 29.9 -2.6% Current income tax liability 1.9 3.9 -50.8% Total current liabilities 1,168.2 1,224.3 -4.6%
Total liabilities 1,900.7 1,961.7 -3.1%
Total equity and liabilities 7,529.1 7,617.3 -1.2%
Source: Electrica
Non-current assets The non-current assets increased by RON 367.3 mn in 2018, to RON 5,776.2 mn from RON 5,408.9 mn as of 31 December 2017, mainly due to the net effect of the network investments made by the distribution subsidiaries (the most relevant values of the investments and assets commissioned are presented in Annex 2) and several assets’ disposals that generate a decrease in the tangible assets.
Current assets In 2018, the current assets decreased by RON 455.5 mn as compared to 2017, from RON 2,208.5 mn to RON 1,752.9 mn, this evolution being the net effect of the decrease in deposits, treasury certificates and government bonds’ value and the increase in the cash and cash equivalents. The evolution of the current assets that generate most of the variation is presented below.
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Cash and cash equivalents Cash and cash equivalents include cash balances, call deposits and deposits with maturities of up to three months that have an insignificant exposure to the fair value change risk, being used by the Group for short- term commitments’ management. Their value increased by RON 103.2 mn in 2018 to RON 665.7 mn, from RON 562.5 mn in 2017.
(mil. RON) 31 December 2018 31 December 2017 Bank current accounts 354.5 330.6 Call deposits 311.0 231.8 Cash in hand 0.2 0.1 Total cash and cash equivalents in the consolidated 665.7 562.5 statement of financial position Overdrafts used for cash management purposes (119.0) (247.9) Total cash and cash equivalents in the consolidated 546.8 314.6 statement of cash flows
Deposits, treasury bills and government bonds The deposits with initial maturity of more than three months and have an average interest rate (yield) of 2.9%. The significant variation of these elements from RON 747 mn to RON 136.5 mn is the result of using internal financing for investments. As at 31 December 2018 the Group no longer holds treasury bills and government bonds.
Share capital and share premium The subscribed share capital in nominal terms consists of 345,939,929 ordinary shares as of 31 December 2018 (345,939,929 ordinary shares on 31 December 2017) with a nominal value of RON 10/share. All the shares give equal rights to the net assets of the Company. Holders of ordinary shares are entitled to dividends and have the right to one vote per share in the General Meetings of Shareholders of the Company and (excepting the 6,890,593 shares repurchased by the Company in July 2014 with the purpose to stabilize the share price). Number of ordinary shares 2018 2017 Number of shares at 1 January 345,939,929 345,939,929 Shares issued during the year - - Number of shares at 31 December 345,939,929 345,939,929 Source: Electrica
The company recognizes the changes in its share capital only after their approval in the General Meeting of Shareholders and their registration with the Trade Register. Contributions made by the shareholder, which are not registered with the Trade Register at the end of the year are recognized as “Pre-paid capital contributions in kind from shareholders”.
Until 31 December 2003, the statutory share capital in nominal terms was restated according to IAS 29 “Financial Reporting in Hyperinflationary Economies” with a corresponding adjustment to retained earnings in amount of RON 354.8 mn. In 2015, the amount was used to cover the cumulated accounting losses according to the General Meeting of Shareholders decision from 27 April 2015.
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In 2018, the Company reclassified the amount of RON 354.8 mn in the statement of financial position, from Share capital to Retained earnings, by restating each affected element of the prior periods statement of financial position, the reclassification having no impact within the Equity line.
Own Shares In July 2014, the Company bought back 5,206,593 shares and 421,000 GDRs, representing the equivalent of 1,684,000 shares. The total amount paid for these shares and GDRs was RON 75.4 mn and the value is unchanged since then.
Dividends Dividends for the financial year 2017, with a total gross value of RON 245.4 mn. were declared based on the individual annual audited statutory financial statements prepared in accordance with OMPF no. 2844/2016 for the approval of the accounting regulations in accordance with IFRS as adopted by the EU. Dividends for 2017 were approved by the Ordinary General Meeting of Shareholders dated 27 April 2018 and were paid starting with 22 June 2018. The gross dividend per share approved by the OGMS was of RON 0.7237.
Revaluation reserves The reconciliation between the opening balance and the closing balance of the revaluation reserve is presented below (amounts in RON mn): 2018 2017 Balance at 1 January 123.7 104.7 Reserve from the revaluation of property, plant and equipment, attributable - 55.9 to the owners Related tax - (8.9) Release of revaluation reserve to retained earnings corresponding to (8.8) (27.9) depreciation and disposals of property, plant and equipment Other effects (6.2) - Balance at 31 December 108.7 123.8 Source: Electrica
Other reserves The other reserves include: Legal reserves are established as 5% of the profit before tax according to the individual statutory financial statements of companies within the Group, until the total legal reserves reach 20% of the paid-up share capital of each company, according to legal provisions. These reserves are deductible for income tax purposes and are not distributable. Other reserves set up in compliance with the legislation in force.
RON mn Legal reserves Balance at 1 January 2016 273.9 Set-up of legal reserves 28.3 Balance at 31 December 2016 302.2 Set-up of legal reserves 24.5 Balance at 31 December 2017 326.8 Set-up of legal reserves 25.3 Balance at 31 December 2018 352.0 Source: Electrica
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Non-current liabilities The non-current liabilities recorded an insignificant decrease, of RON 4.9 mn, to RON 732.5 mn in 2018, from RON 737.4 mn in 2017.
Current liabilities In 2018, the current liabilities decreased by RON 56,1 mn, to RON 1,168.2 mn, from RON 1,224.3 mn at the end of 2017, as a result of the changes in the categories listed below (representing approx. 92% of the total current liabilities).
Overdrafts The overdrafts decreased significantly in 2018, by RON 128.9 mn, or 52%, reaching RON 119 mn, from RON 247.9 mn in 2017; this evolution is correlated with the Group's working capital financing needs.
Trade payables The trade payables increased by 7.7% in 2018, to RON 742.2 mn, from RON 689.4 mn at the end of 2017. The main trade payables are to electricity suppliers, suppliers of non-current assets and other suppliers (suppliers of services, materials and consumables etc.).
Other current liabilities Other current payables, detailed in the table below, increased by 34.9% in 2018, compared to 2017.
RON mn 31 December 2018 31 December 2017 VAT payable 85.3 85.8 Other liabilities to the State 8.5 21 Other liabilities 87.3 27.4 Total 181.1 134.2 Source: Electrica
Other liabilities refer mainly to guarantees, various creditors, connection fee, habitat fee and contribution for cogeneration; other non-current liabilities refer to guarantees cashed from customers related to electricity supply.
Provisions As of 31 December 2018, the provisions refer mainly to: potential tax charges of the Group (including interest and penalties), of RON 14 mn; benefits upon the termination of executive managers' contracts in the form of the non-compete clause, of RON 4.9 mn; work litigations, RON 0.7 mn; various claims and litigations involving the Group companies, of RON 9.5 mn. RON mn Provisions Balance at 1 January 2018 29.9 Provisions recognized 23.9 Provisions used (20.4) Provisions reversed (4.0) Effect of loss of control over subsidiaries (0.3) Balance on 31 December 2018 29.1 Source: Electrica
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6.2. Consolidated statement of profit and loss
The following table presents the consolidated statement of profit or loss of Electrica Group, for 2018 and 2017 (amounts in RON mn).
Variation 2018 2017 2018/2017
Revenues 5,612.8 5,603.2 0.2% Other income 164.9 173.5 -5% Electricity purchased (2,718.3) (2,972.8) -8.6% Green certificates (378.3) (372.9) 1.4% Construction costs related to concession agreements (841.5) (745.3) 12.9% Employee benefits (671.5) (642.4) 4.5% Repairs, maintenance and materials (86.9) (61.7) 40.7% Depreciation and amortization (423.3) (395.6) 7% Impairment of property, plant and equipment, net 3.6 (8.8) - Impairment of trade and other receivables, net 25.2 (12.9) - Impairment loss on assets held for sale (0.1) - - Change in provisions, net 0.5 32.5 -98.4% Other operating expenses (426.1) (399.8) 6.6% Operating profit 261 197 32.5%
Finance income 14 20.1 -30.3% Finance costs (12.3) (10.4) 18.3% Net finance income 1.8 9.7 -82%
Profit before tax 262.7 206.8 27.1% Income tax expense (32.3) (35.2) -8.1% Profit for the year 230.4 171.6 34.3%
Profit for the year attributable to: owners of the Company 230.4 127.7 80.4% non-controlling interests - 43.8 - Profit for the year 230.4 171.6 34.3%
Earnings per share Basic and diluted earnings per share (RON) 0.68 0.38 80.4% Source: Electrica
Key financial indicators for 2018: Revenues: RON 5.6 bn, a 0.2% y-o-y increase; EBITDA: RON 680.7 mn, a RON 79.3 mn (13.2%) increase compared to the last year; EBIT: RON 261 mn, a RON 64 mn (32.5%) increase compared to 2017; EBT: RON 262.7 mn, a RON 55.9 mn (27.1%) increase compared to the last year; Net Profit: RON 230.4 mn, a RON 58.8 mn (34.3%) y-o-y increase.
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Revenues and other income In 2018, Electrica recorded total revenues (including other income) of RON 5,777.7 mn, with a slight increase of RON 1 mn, from RON 5,776.7 mn in 2017.
Revenues Figure 36: Revenue for 2018 and comparative information (RON mil.) 5.518 5.603 5.613
401 373 378
5.117 5.230 5.235
2016 2017 2018 Revenues from Green Certificates Revenues (ex-Green Certificates)
As of 1 January 2018, the Group applied IFRS 15 “Revenue from contracts with customers”, so that that the revenue and expenses from Balance Responsible Party activity (“BRP”) have been eliminated, without affecting the margin of this activity. If this financial reporting standard would not have been implemented, the Revenues and respectively Electricity purchased lines from the consolidated statement of profit or loss for 2018 would have been higher by RON 120.9 mn, without any impact on the margin.
The first part of 2017 has been significantly affected by the balancing market evolution, when there have been recorded significant values of imbalances due to the energy market crisis. The consolidated revenues presented for 2017 include Balance Responsible Party activity revenues of approx. RON 297.8 mn, since the Group decided to apply IFRS 15 using the modified retrospective method, without restating the figures of the comparative period.
The revenues increased by RON 9.5 mn, or 0.2%, as a net effect of the following main factors: . external evolution (outside the Group): the electricity sales towards third parties have increased by RON 185.1 mn, generating a favorable impact on the consolidated revenue; . RON 62.8 mn increase of the distribution segment revenues; . decrease by RON 229.2 mn of the supply segment revenues.
Other income In 2018, the other income decreased by RON 8.6 mn, or 5%, to RON 164.9 mn, from RON 173.5 mn realized in 2017. The decrease is generated by the fact that in the previous year, revenues from litigations won regarding old receivables and, also, revenues from compensations obtained from contracts termination on the supply segment were recognized.
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Electricity purchased In 2018, the expense for electricity purchased at Group level decreased by RON 254.5 mn, or 8.6%, to RON 2,718.3 mn, from RON 2,972.8 mn in the comparative period. This decrease was mainly because the first part of 2017 was affected by the unfavorable events from the energy market, which generated significantly higher electricity prices as compared to 2018.
The table below presents the structure of the electricity purchased expenses for the indicated periods: RON mn 2018 2017 Electricity purchased to cover network losses 605.3 581.4 Electricity purchased for supply and balancing 1,883 2,139.1 Transmission and system services related to supply and balancing activities 230 252.3 Total electricity purchased 2,718.3 2,972.8 Source: Electrica
Green certificates Electricity suppliers have a legal obligation to acquire/supply green certificates based on the annual quotas set by law according to the weight of gross production from renewable sources. The expenses with green certificates is a pass-through cost.
Construction costs In 2018, the network construction costs related to concession agreements increased by RON 96.1 mn or 12.9%, to RON 841.5 mn, from RON 745.3 mn recorded in 2017. This increase is attributable to the realized investments related to the Regulated Asset Base.
Employee benefits Expenses with employee benefits increased in 2018 by RON 29.1 mn, or 4.5%, reaching an amount of RON 671.5 mn, from RON 642.4 mn in 2017, mainly due to the changes in the structure of employee benefits.
Repairs, maintenance and materials In 2018, the repairs, maintenance and materials expenses recorded an increase of RON 25.1 mn, or 40.7%, to RON 86.9 mn, from RON 61.7 mn in the comparative period, considering the Group’s reorganization process of maintenance, investments and design activities, to support the investments plan.
Impairment of trade and other receivables The main factor generating the positive variance of the impairment adjustments for receivables, in amount of RON 38.1 mn, is the recognition of the partial cash collection from Oltchim (RON 44.7 mn) by ELSA; the positive effect was partially reduced by the recognition of other provisions for customers and sundry debtors.
Change in provisions, net The provisions recorded a negative variation in 2018 as compared with the prior year, of RON 32 mn. In 2018, the net change in provisions generates an income of RON 0.5 mn, the most significant movement being related to the provision recorded for potential tax impact of the changes in the accounting policy in the statutory financial statements, in amount of RON 11.4 mn, and to the provision used, related to the fine from the Competition Council, in amount of RON 10.8 mn. In 2017, the net change in provisions generated an income of RON 32.5 mn, the main income being the
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reversal of the provision in amount of RON 20.7 mn related to the Court of Accounts inspection at SDTS, following the closing of the Fiscal Inspection Report in 2017.
Other operating expenses The other operating expenses recorded an increase of RON 26.3 mn, or 6.6%, from RON 399.8 mn in 2017 to RON 426.1 mn in 2018, mainly as a result of the reorganization process of the maintenance, investment and design activities mentioned above.
EBITDA and EBITDA margin Figure 37: EBITDA and EBITDA margin for 2018 and comparative information (RON mn and %) 17%
12% 11%
960 601 681
2016 2017 2018
Source: Electrica
Operating profit The Group EBIT increased by approx. RON 64 mn y-o-y, adding to the EBITDA evolution the impact of the depreciation and amortization expenses, an increase of RON 27.7 mn, or 7%, mainly due to a higher level of investments’ commissioning, and the impact of the impairment adjustments of property, plant and equipment (variation of RON 12.4 mn).
Figure 38: EBIT and EBIT margin for 2018 and comparative information (RON mn and %) 11%
5% 586 4%
261 197
2016 2017 2018
Source: Electrica
Net finance income The net financial result at group level decreased by 82% in 2018 compared to 2017, due to lower finance income, while the finance costs remained around the same level.
Profit before tax The profit before tax increased in 2018 by RON 55.9 mn, to RON 262.7 mn, from RON 206.8 mn in 2017.
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Income tax expense The income tax decreased by RON 2.9 mn, or 8.1%, to RON 32.3 mn in 2018 from RON 35.2 mn in 2017.
Net profit for the period As a result of the above described factors, in 2018, the net profit increased by RON 58.8 mn, to RON 230.4 mn, from RON 171.6 mn in 2017.
SEGMENT REPORTING - DISTRIBUTION
Key indicators - The distribution segme
Figure 39: Distribution segment revenues w/o Figure 40: Distribution segment EBITDA w/o conso adjustments (RON mn) conso adjustments (RON mn)
769 2.813 2.948 2,868 17 359 161 650 365 227 25 533 863 893 801 155 27 109 269 215 853 896 857 211
256 255 790 873 918 186
2016 2017 2018 2016 2017 2018 Electrica Serv SDMN SDTN SDTS Electrica Serv SDMN SDTN SDTS
Source: Electrica Source: Electrica
Figure 41: Distribution segment net profit Figure 42: Distribution segment net debt/(cash) (RON mn) (RON mn) 403 313 24
176 168 98 205 226 14 120 191 27 109 64 88 182 153 16 83 42 (29) (43) 108 101 (85) 44 (13) (62) (2) (13) 2016 2017 2018 2016 2017 2018 Electrica Serv SDMN SDTN SDTS Electrica Serv SDMN SDTN SDTS
Source: Electrica Source: Electrica
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The following table presents elements from the reporting of the statement of profit or loss of the Group’s distribution segment, for the period 2018 - 2017 (amounts in RON mn).
2018 2017 External revenues 1,602.8 1,437.6 Inter-segment revenue 1,135.8 1,238.1 Segment revenue 2,738.6 2,675.7 Segment profit (loss) before tax 103.6 243.2 Net finance (cost)/income (27.0) (8.5) Depreciation, amortization and impairment, net (402.6) (392.1) EBITDA 533.2 650.4 Net profit/(loss) of the segment 90.6 205.2 Source: Electrica
Revenues In 2018, the revenue from the electricity distribution segment increased by aprox. RON 62.9 mn, or 2.4%, to RON 2,738.6 mn, from RON 2,675.7 mn in 2017, as a result of the following factors: - the total distributed quantity slightly decreased as a result of the high voltage distributed quantity drop by 22%, partially compensated by the increases recorded on medium and low voltage by 6.1% and 1.5%, respectively, where the distribution tariffs are higher, thus generating a positive effect on the total distribution revenues; - positive impact from reactive energy revenue increase; - the recognition of investments into the network under concession agreements in accordance with IFRIC 12, which increased in 2018, influenced, also, favourable the revenues from the distribution segment.
Electricity purchased The cost of electricity purchased to cover network losses increased by RON 23.9 mn, or 4.1%, reaching RON 605.3 mn in 2018, from RON 581.4 mn in 2017. This evolution is the net effect of the rise in the average electricity purchase prices (negative effect of RON 32.8 mn) and of the decrease in the level of quantity of electricity used to cover the network losses (positive effect of RON 8.9 mn).
Employee benefits The expenses with employee benefits increased by RON 11.5 mn or 2.2%, to RON 533.6 mn in 2018, from RON 522.1 mn in 2017, mainly due to the changes in the structure of the benefits granted to employees.
Repairs, maintenance and materials Repairs, maintenance and materials significantly decreased, by RON 118.5 mn, or 59.1%, to RON 82.1 mn in 2018 from RON 200.5 mn in 2017, values that do not include the consolidation adjustments between Electrica Serv and the distribution subsidiaries. This decrease was caused especially by the diminished level of expenses with network maintenance, as a result of the investments made by the distribution subsidiaries, and by the capitalization of certain maintenance and repair expenses.
EBITDA The increase in electricity acquisition costs to cover network losses as well as other unfavorable elements, led to a decrease of RON 117.2 mn or 18% of EBITDA on the distribution segment.
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Net profit of the segment The net profit followed a similar trend with EBITDA, decreasing by RON 114.6 mn, or 55.9%. The net profit margin decreased to 3.3% in 2018 from 7.7% in 2017.
SEGMENT REPORTING – SUPPLY
Key indicators - the supply segment
Figure 43: Revenues - supply segment (RON mn) Figure 44: EBITDA - supply segment (RON mn)
250 4,2% 4,0% 4.432 3,4% 4.225 3,5% 401 3.995 200 373 378 3,0%
150 2,5% 137 2,0% 100 4.031 185 3.852 3.617 1,5% 1,0% 50 0,2% 0,5% 10 0 0,0% 2016 2017 2018 2016 2017 2018 Revenues from Green Certificates Revenues (ex-Green Certificates) EBITDA EBITDA Margin
Source: Electrica Source: Electrica
Figure 45: Net profit - the supply segment Figure 46: Net debt/(Cash) - supply segment (RON mn) (RON mn)
250 4,00%
200 3.1% 3,50% (219) (244) 2,7% 3,00% 150 2,50% (465) 2,00% 100 1,50% 139 108 1,00% 50 0,03% 0,50% 1 0 0,00% 2016 2017 2018 2016 2017 2018
Net Profit Net Profit Margin Net debt/(Cash)
Source: Electrica Source: Electrica
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The following table presents the elements from the reporting of the statement of profit or loss of the Group`s supply segment for 2018 and 2017 (amounts in RON mn):
2018 2017 External revenues 3,966.7 4,125.7 Inter-segment revenues 28.7 99 Segment revenue 3,995.5 4,224.7 Segment profit (loss) before tax 127.1 (1.6) Net finance (cost)/income 4.3 1.1 Depreciation, amortization and impairment, net (14.4) (12.7) EBITDA 137.2 9.9 Net Profit (loss) of the segment 107.7 1.2 Source: Electrica
Revenues The revenue from the supply activity decreased by RON 229.2 mn or 5.4% to RON 3,995.5 mn in 2018, from RON 4,224.7 mn in 2017. The variation of the supply segment is generated by two elements: - the electricity supply activity, with a positive impact on the segment revenue, mainly due to the sale price increase by 6.9%, which covers the impact of the quantity decrease of 3.4%; - the Balance Responsible Party activity revenues, whose variation had a negative influence mainly due to the accounting for BRP activity starting 1 January 2018 in accordance with IFRS 15, by eliminating the BRP revenues and the corresponding expense. The value of the Green Certificates included in the invoice to the final consumer, set by ANRE, increased from an average price of RON 45.93/MWh in 2017 to an average price of RON 50.84/MWh in 2018.
Electricity purchased The cost of the electricity purchased for supply and balancing, the amount including the intercompany transactions, decreased by RON 530.6 mn, or 14%, to RON 3,270.6 mn in 2018, from RON 3,801.2 mn recorded in 2017. The main factor is the reduction in the volatility of electricity purchase prices; out of this variance, RON 120.9 mn decrease is attributable to the change in the financial reporting standards.
Green certificates Green certificates’ (GC) cost is recognized in the statement of profit and loss based on the quantitative quota set by the regulatory authority and is influenced by the quantity of the GC that the Group has to purchase for the current year and the purchase price of GC on the centralized market. The cost with the acquisition of green certificates is a pass through cost. In 2018, the cost of GC increased by RON 5.4 mn, or 1.4%, to RON 378.3 mn, from RON 372.9 mn in the same period of the prior year. The increase was mainly generated by: . 1% increase in the average price, from an average price of RON 132.71/GC in 2017 to RON 133.99/GC in 2018, cumulated with the increase in average regulated quota of GC imposed by ANRE to electricity suppliers at 0.346 GC/MWh supplied from 0.320 GC/MWh supplied in 2017 (RON 47 mn negative variance); . 5% lower supplied volumes for which there is an obligation to purchase GC (RON 20 mn positive variance);
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. the regularization impact – positive variance of RON 22 mn, reflected in both revenue and expenses, therefore with no impact on the margin (the regularization for 2017 of RON 36 mn with impact in 2018 compared to the RON 14 mn regularization for 2016 with impact in 2017).
Employee benefits Employee benefits increased by RON 6.1 mn, or 7.8%, from RON 78.6 mn in 2017, to RON 84.7 mn in 2018.
EBITDA The above presented factors generated an increase in EBITDA of RON 127.3 mn, respectively an increase of the EBITDA margin from 0.2% in 2017, up to 3.4% in 2018.
Segment net profit The net profit followed a trend similar to EBITDA, increasing by RON 106.6 mn as compared to 2017.
6.3. Consolidated cash flow statement
The following table presents the consolidated statement of cash flows of Electrica Group, for 2018 and 2017 (amounts in RON mn).
2017 Variation 2018 (restated) 2018/2017 Cash flows from operating activities Profit for the year 230.4 171.6 34.3% Adjustments for: Depreciation 38.3 32.0 19.7% Amortization 385 363.6 5.9% (Reversal of impairment)/Impairment of property, plant and (3.6) 8.8 - equipment, net Loss on disposal of property, plant and equipment 13.1 4.6 184.8% (Reversal of impairment)/Impairment of trade and other (25.2) 12.9 - receivables, net Impairment of assets held for sale 0.1 - - Change in provisions, net (0.5) (32.5) -98.5% Net finance income (1.8) (9.7) -81.4% Gain on loss of control over subsidiaries in financial distress (0.3) - - Income tax expense 32.2 35.2 -8.2% Total Adjustments: 667.9 586.4 13.9%
Changes in : Trade receivables (27.8) (196.1) -85.8% Other receivables 13.4 (28.5) - Prepayments 1 1.9 -47.4% Green Certificates 12.6 (12.6) - Inventories (42) 1.1 - Trade payables 39.4 120.7 -67.4% Other payables 59.2 (16.3) - Employee benefits 27 (14.7) - Deferred revenue (2.3) 2.9 -
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2017 Variation 2018 (restated) 2018/2017 Cash generated from operating activities 748.5 444.9 68.2%
Interest paid (3.1) (2.2) 40.9% Income tax paid (49) (53.2) -7.9%
Net cash from operating activities 696.4 389.4 78.8%
Cash flows from investing activities Payments for purchases of tangible assets (3.2) (52.9) -94% Payments for network construction related to concession (803.1) (726.7) 10.5% agreements Payments for purchases of other intangible assets (9.9) (2.4) 312.5% Proceeds from sale of property, plant and equipment 15.6 2.6 500% Restricted cash - (185.5) - Payments for purchases of treasury bills and government (95.3) (543.1) -82.4% bonds Proceeds from maturity of treasury bills and government 550.1 1,838.2 -70.1% bonds Payments for deposits with maturity of 3 months or longer (654) (995.6) -34.3% Proceeds from deposits with maturity of 3 months or longer 802.2 820.3 -2.2% Interest received 11.7 20.0 -41.5% Net cash effect due to loss of control over subsidiaries (1.2) - - Consideration paid to acquire non-controlling interests - (752.0) -
Net cash used in investing activities (187.1) (577.2) -67.6%
Cash flows from financing activities Proceeds from long term bank loans - 192.3 Dividends paid (244.7) (349.4) -30% Repayment of financing for network construction related to (32.4) (86.8) -62.7% concession agreements Net cash from/(used in) financing activities (277.1) (243.9) 13.6%
Net (decrease)/increase in cash and cash 232.2 (431.6) - equivalents Cash and cash equivalents at 1 January 314.6 746.2 -57.8% Cash and cash equivalents at 31 December 546.8 314.6 73.8% Source: Electrica
Cash flow
In 2018, the net cash from operating activities was of RON 696.4 mn. The net profit for the analyzed period was RON 230.4 mn. The main adjustments were: i) adding the depreciation and amortization of RON 423.3 mn, the impact of the impairment adjustments and of the result of disposal of tangible assets worth RON 9.5 mn, the net change in the impairment of trade and other receivables and assets held for sale of RON 25.1 mn, deducting a net finance result of RON 1.8 mn, net change in provisions value of RON 0.5 mn, the impact of loss of control over subsidiaries in financial distress of RON 0.3 mn, and adding the income tax of RON 32.2 mn;
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ii) a variation of trade receivables, other receivables and prepayments worth RON 13,4 mn, of inventories value of RON 42 mn, variation of trade payables and other payables worth RON 98.6 mn, GC variation of RON 12.6 mn, employee benefits adjustment of RON 27 mn and the deferred revenue impact, in value of RON 2.3 mn. The income tax and interest paid totaled RON 52.1 mn. in 2018.
In 2017, the net cash from operating activities amounted to RON 389.4 mn. The profit before tax for the period was RON 171,6 mn. The main adjustments were: i) adding the depreciation and amortization of RON 395.6 mn, the impact of the impairment adjustments and of the result of disposal of tangible assets worth RON 13.4 mn, the net change in the impairment of trade and other receivables of RON 12.9 mn, deducting a net finance result of RON 9.7 mn, net change in provisions of RON 32.5 mn, and adding the income tax of RON 35,2 mn; ii) the variation of trade receivables, other receivables and prepayments worth RON 222.7 mn, of the inventories of RON 1.1 mn, trade payables and other payables worth RON 104.5 mn; GC variation of RON 12.6 mn, employee benefits adjustment of RON 14.7 mn, and the deferred revenue impact, value of RON 2.9 mn. The income tax and interest paid totaled RON 55.4 mn in 2017.
6.4. Individual statement of the financial position
Financial information selected from company's separate statement of financial position (amounts in RON mn):
31 December 31 December Variation 2018 2017 (%) ASSETS
Non-current assets Property, plant and equipment 225.9 270.7 -16.5% Intangible assets 0.6 0.6 1.4% Investments in subsidiaries 2,180.2 2,183.9 -0.2% Restricted cash 320 320 0% Loans granted to subsidiaries 968.1 246.5 292.6% Total non-current assets 3,694.8 3,021.7 22.3%
Current assets Cash and cash equivalents 170 126 34.9% Deposits, treasury bills and government bonds 101.5 747 -86.4% Trade receivables 9 79.3 -88.6% Other receivables 17 54.9 -69% Inventories 0.1 0.2 -56.1% Prepayments - 0.1 - Loans granted to subsidiaries – short term 5.2 - - Total current assets 302.8 1,007.5 -69.9%
Total assets 3,997.6 4,029.2 -0.8%
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31 December 31 December Variation 2018 2017 (%) EQUITY AND LIABILITIES
Equity Share capital 3,459.4 3,459.4 0% Share premium 103.1 103.1 0% Treasury shares (75.4) (75.4) 0% Pre-paid capital contributions in kind from 5.1 5.1 0% shareholders Revaluation reserves 11.8 16.3 -27.4% Legal reserves 184.2 169.3 8.8% Retained earnings 288.6 246.4 17.1% Total equity 3,976.8 3,924.2 1.3%
Non-current liabilities Employee benefits 1.9 1.6 19.5% Total non-current liabilities 1.9 1.6 19.5%
Current liabilities Trade payables 4 72.4 -94.5% Other payables 4 12.9 -69% Deferred revenue 0.6 0.8 -23% Employee benefits 6.6 5.0 32% Provisions 3.7 12.3 -69.8% Total current liabilities 18.9 103.4 -81.8%
Total liabilities 20.8 105 -80.2%
Total equity and liabilities 3,997.6 4,029.2 -0.8% Source: Electrica
Non-current assets On 31 December 2018, as compared to 31 December 2017, fixed assets increased by RON 673 mn or 22.3%, to RON 3,694.8 mn from RON 3,021.7 mn. Equipment and tangible assets in progress mainly include the costs related to the implementation of the AMR system (Automatic Meter Reading) for electricity measuring and dispatch activity of Electrica Group. On 31 December 2018, the net capitalized amount regarding the AMR system is RON 135.1 mn (2017: RON 155.2 mn), out of which a part is recognized as tangible asset in progress amounting to RON 21.9 mn as at 31 December 2018 (2017: RON 21.9 mn). During the year 2017, an evaluation of the entire AMR system was performed by an independent evaluator in order that the distribution subsidiaries of the Group to take over the AMR system. As a result of the ANRE’s refusal to approve the transfer of AMR system from ELSA to distribution subsidiaries, with the subsequent recognition into RAB, the transfer was not implemented. In connection with the AMR system, the company had concluded service agreements with its distribution subsidiaries. The main services provided are obtaining data from the real-time measurement groups with accuracy and increased frequency by the distribution companies within the Electrica Group, using remote reading systems at the electricity metering points, owned by the company, located at consumption points, respectively in Electrica Group distribution subsidiaries’ grid.
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As at 31 December 2018, the company recognized a partial impairment loss for the AMR system equipment that are proposed to be written off, in the amount of RON 6.8 mn. At the end of the year 2018, the buildings and land include ELSA’s administrative headquarters and related land, as well as land for which it has obtained ownership titles and is intended to contribute to the share capital of its subsidiaries. At 31 December 2018, the building of the administrative headquarters has a net book value of RON 20.6 mn (2017: RON 20.9 mn) and the related land has a net book value of RON 13.1 mn (2017: RON 13.1 mn). The land and the building were revalued by an independent valuer on 31 December 2017, the results representing a net increase in the revaluation reserve of RON 18.6 mn and a net impact of RON 1.9 mn in the statement of profit or loss. During 2018, ELSA increased its investments in subsidiaries, ELSA and EL SERV, by contributing in kind to their share capital with the following land:
In March 2018, the share capital of the subsidiary EL SERV was increased by the contribution in nature with four land with a total surface area of 31,668.92 sqm. The accounting value of the four land at the time of the transfer was of RON 16 mn, while the value of the contribution is of RON 15 mn, according to the evaluation reports drawn up by the appointed evaluator expert; In December 2018, the share capital of the subsidiary EL SERV was increased by the contribution in nature of two plots with a total surface of 678.9 sqm. The contribution value is RON 0.8 mn, according to the evaluation reports prepared by the evaluator expert, equal to the carrying amount of the two land at the time of the transfer.
Trade receivables As of 31 December 2018, the receivables of the company decreased by RON 70.3 mn or 88.6%, to RON 9 mn, from RON 79.3 mn on 31 December 2017, as a result of the adjustments recorded for the impairment of receivables at the amount of expected credit losses (calculated based on historical loss rates). Impairment adjustments mainly refer to trade receivables from Oltchim amounting to RON 614.1 mn (31 December 2017: RON 658.8 mn), from Transenergo Com S.A. in the amount of RON 35.7 mn (31 December 2017: RON 35.9 mn) and from Fidelis Energy in the amount of RON 11.2 mn (31 December 2017: RON 11.2 mn). On 12 December 2018, the company received the amount of RON 44.7 mn from Oltchim, representing amounts distributed to creditors in the insolvency proceedings. The adjustment of RON 44.7 mn was reversed as a result of the receivable collection.
Cash, restricted cash and short-term investments As of 31 December 2018, the category of cash and cash equivalents increased by RON 44 mn or 34.9% to RON 170 mn from RON 126 mn at 31 December 2017. 31 December 31 December 2018 2017 Bank current accounts 2.4 3.5 Call deposits 167.6 122.5 Total cash and cash equivalents in the separate statement of financial position and in the separate 170 126 statement of cash flow
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On 31 December 2018, ELSA has collateral deposits with BRD – Groupe Societe Generale as collateral for long-term loans received from BRD by SDTS, SDTN and SDMN. The value of collateral deposits as 31 December 2018 is RON 320 mn, without any change from the balance at 31 December 2017. These collateral deposits are presented in the separate statement of the financial position as long-term restricted cash. Deposits, treasury bills and government bonds (amounts in mn RON) Deposits with an initial maturity over three months have an average interest rate of 2.9% compared to 1.3% average yield in 2017. As at 31 December 2018 the company no longer holds treasury bills and government bonds.
31 December 2018 31 December 2017
Deposits with maturity of more than three months 101.5 284.2 Treasury bills and government bonds denominated in RON - 462.7 with original maturity of more than three months Total deposits, treasury bills and government bonds 101.5 746.9 Source: Electrica
Loans granted to subsidiaries (RON mn)
Subsidiaries 31 December 2018 31 December 2017 SDTN (long term loan granted) 359.6 94.4 SDMN (long term loan granted) 366.6 94 SDTS (long term loan granted) 241.9 49.3 EL SERV (long term loan granted) - 8.9 SEM (short term loan granted) 5.2 - Total loans granted to subsidiaries 973.3 246.5 Source: Electrica
The closing balance of the loans with subsidiaries are related to intragroup loans granted in 2017 and 2018; of these, in 2018, the company has entered into loan agreements as lender with the Group’s distribution subsidiaries, as follows: Intragroup loan agreement concluded with SDMN in April 2018. The main provisions are: maximum loan amount of the loan: RON 230 mn; purpose of the loan: financing the investment program of 2018; interest rate: 2.79% per annum; maturity: 84 months; period allowed for disbursements: 12 months; full repayment at maturity; reimbursement in advance allowed, but not earlier than the 12 months of the period of use. As of 31 December 2018, loan balance is RON 216.6 mn; Intragroup loan agreement concluded with SDTN in April 2018. The main provisions are: maximum loan amount of the loan: RON 160 mn; purpose of the loan: financing the investment program of 2018; interest rate: 2.79% per annum; maturity: 84 months; period allowed for disbursements: 12 months; full repayment at maturity; reimbursement in advance allowed, but not earlier than the 12 months of the period of use. As of 31 December 2018, loan balance is RON 159.6 mn; Intragroup loan agreement concluded with SDTS in April 2018. The main provisions are: maximum loan amount of the loan: RON 130 mn; purpose of the loan: financing the investment program of 2018; interest rate: 2.79% per annum; maturity: 84 months; period allowed for disbursements: 12 months; full repayment at maturity; reimbursement in advance allowed, but not earlier than the 12 months of the period of use. As of 31 December 2018, loan balance is RON 81.9 mn;
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In May 2018, the company concluded a loan agreement with SEM. The main provisions are: maximum amount of the loan: RON 5.5 mn, granted in two installments; purpose of the loan: first installment in the amount of RON 1.5 mn for financing the payment of the last installment due to the to the creditors enrolled at the creditors’ table, second installment in the amount of RON 4 mn for the financing of the working capital needs; interest rate: 4.5% per annum; withdrawal period: 1 to 12 months from the date of granting, 2 to 24 months from the date of granting; reimbursement: first installment – within maximum 12 months from the date of granting; second installment – at any time during the term of the loan, but not later than the final maturity of the entire installment, i.e. 2 years from the date of signing the loan agreement. At 31 December 2018, the balance of the granted loan is of RON 5.2 mn. In December 2018, following the drawing up of the transfer price file for 2018 and in accordance with the provisions of the OMFP no. 442/2016 regarding the amount of the transactions, the deadlines for drawing up, the content and the conditions for requesting the transfer price file and the procedure for adjusting/estimating the transfer prices, the interest rates for the loans granted to the distribution subsidiaries, respectively the interest collected during the year 2018, were adjusted according to the transfer pricing legislation mentioned above as follows: - interest rate on loans granted in 2017 have been updated to 2.79%; - interest rate on loans granted in 2018 have been updated to 4.70%.
Provisions (RON mn)
Litigations and other risks Balance at 1 January 2018 12.3 Provisions made 3.7 Provisions used (12.3) Provisions reversed - Balance at 31 December 2018 3.7 Source: Electrica
Competition Council On 31 December 2017, the company recognized a provision of RON 10.8 mn for the fine from the Competition Council. As the fine received in October 2018 was executed by NAFA, ELSA has reversed the provision amounting to RON 10.8 mn and acknowledged the fine as expenses with damages, fines and penalties. Provisions Provisions in the amount of RON 3,7 mn recognized during the financial year ended at 31 December 2018 refer mainly to the benefits granted upon the termination of the executive managers’ contracts as non- compete clauses. Share Capital
The subscribed share capital in nominal terms consists of 345,939,929 ordinary shares on 31 December 2018 (345,939,929 ordinary shares on 31 December 2017), with a nominal value of RON 10/share. Ordinary shares are entitled to dividends and the right to one vote per share in the General Meetings of Shareholders of the company, except for the 6,890,593 shares repurchased by the company in July 2014 with the scope to stabilize the share price. All shares confer equal rights on the net assets of the company, except for the 6,890,593 shares repurchased by the company in July 2014 in order to stabilize the share price.
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The Company recognizes the changes in share capital only after the approval in the General Meeting of Shareholders and the registration with the Trade Register.
During 2018 there were no changes in the share capital. Dividends The Company can distribute dividends from the statutory profit according to the individual audited statutory financial statements prepared in accordance with Romanian accounting regulations. The dividends distributed by the company in the years 2018 and 2017 (from previous year’s statutory profits) were as follows (amounts presented in RON mn):
RON 2018 2017 Distributed dividends 245.4 251.4 Source: Electrica
On 27 April 2018, the General Meetings of Shareholders of the company approved the distribution of dividends of RON 245.4 mn. The amount of dividends per share distributed to the company’s shareholders was RON 0.7237 per share (2017: RON 0.7415 per share). In the calculation of dividends per share, own shares redeemed by the company (6,890,593 shares) are not considered as shares in circulation and are deducted from the total number of ordinary shares issued. Of the distributed dividends for the year 2017 in the amount of RON 245.4 mn, RON 244.7 mn was paid, the difference representing dividends unclaimed by shareholders from the Depositary.
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6.5. Individual statement of profit or loss
Financial information selected from the company’s separate statement of profit or loss (RON mn):
31 December 31 December Var.(%) 2018 2017 Revenues 16.8 481.9 -96.5% Other income 20.3 5.5 272.5% Electricity purchased - (469.7) - Employee benefits (36.8) (25.9) 42.5% Depreciation and amortization (21.8) (23.5) -7.6% Reversal of impairment/(Impairment) of trade and other 41.2 (15.1) - receivables, net Reversal of impairment/(Impairment) of property, plant 5.7 (1.9) - and equipment Impairment of equity interests in subsidiaries (19.5) - - Change in provisions, net 8.6 (12.3) - Other operating expenses (45.9) (48.1) -4.7% Operating loss (31.4) (109.1) -71.2%
Finance income 329.4 364.8 -9.7% Finance expenses - (0.5) - Net finance income 329.4 364.3 -9.6%
Profit before tax 298 255.2 16.8% Income tax – benefit/(expense) 0 3 - Profit for the year 298 258.2 15.4%
Earnings per share Basic and diluted earnings per share (RON) 0.88 0.76 15.4% Source: Electrica
Revenues During the year 2018, ELSA recorded revenues of RON 16.8 mn compared to RON 481.9 mn in 2017. The variation is mainly determined by the adoption of the new reporting standard regarding revenues and the transfer of the BRP activity to EFSA starting 1 April 2018. Starting 1 January 2018, the company adopted the new standard IFRS 15 "Revenue from Customer Contracts," thus eliminating the impact of revenues from balancing market and related costs without affecting the margin resulted from the Balance Responsible Party (“BRP”) activity. If this standard had not been implemented, the “Revenue” and “Electricity purchased” positions in the separate statement of profit or loss for 2018 would have been higher by RON 40 mn, without impact on the margin.
In 2018, the main revenues earned by the company are represented by revenues from service contracts related to the AMR system concluded with its distribution subsidiaries that include data telemetry services, communications and monitoring of the quality parameters of electricity.
The breakdown structure of the revenues is as follows (amounts in RON mn):
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2018 % 2017 % Revenues from services contracts related to the Automatic Meter Reading 14.7 87.5% 1.3 0.3% System Income from the Balance Responsible Party activity (fixed and variable rate) 2.1 12.5% 10.6 2.2% Revenue from supply of electricity on the Balancing Market - - 470 97.5% Total 16.8 100% 481.9 100% Source: Electrica
Other income During the financial year ended 31 December 2018, "Other income" includes mainly the income of RON 19.8 mn obtained from the transfer of the BRP activity to EFSA, representing the transfer of the BRP department employees, the existing customer agreements, as well as the related software, the market value being determined by an external evaluator. During the financial year ended 31 December 2017, "Other operating income" includes mainly rental income and penalties for deferred payment from customers.
Electricity purchased During the financial year ended 31 December 2017, the purchased electricity includes the cost of electricity purchased for balancing market settlements in the amount of RON 469.7 mn. During the year 2018, IFRS 15 standard has been applied, which led to the elimination of balancing market revenues impact, as well as related costs, without affecting the margin of Balance Responsible Party (“BRP”) activity.
Depreciation and amortization of tangible and intangible assets The depreciation and amortization expense is of RON 21.8 mn in 2018, compared to RON 23.5 mn in 2017, decrease as a result of the termination of certain AMR system equipment depreciation and the lower value of investments made in 2018.
Employee benefits In 2018, employee benefits increased by RON 10.9 mn to RON 36.8 mn from RON 25.9 mn in 2017. The increase comes from the compensatory payments provided through the voluntary leave program, as well as from non-recurring events, such as the remuneration of executive management in the event of termination of mandate contracts.
Impairment of trade receivables and other receivables Starting 1 April 2018, ELSA transferred the BRP activity to EFSA, therefore as at 31 December 2018 there is no trade receivable recorded from the supply of electricity on the balancing market. Impairment adjustments for other receivables recognized in 2018 amount to RON 3.4 mn in respect of interest receivable from EL SERV subsidiary (RON 1.8 mn) for loans repaid after maturity and from SDTN (RON 1.6 mn) related to dividends paid after maturity.
On 12 December 2018, ELSA received the amount of RON 44.7 mn from Oltchim SA, representing amounts distributed to creditors as part of in the insolvency proceedings, therefore the adjustment was reversed as a result of the collection of the claim. Due to the uncertainties regarding the recoverability of the amounts owed by this customer, ELSA has recognized in prior years depreciation adjustments for the total amount of receivables. The procedure is ongoing, the company being enrolled at the creditors’ table.
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Starting 1 January 2018, ELSA applied for the first time the new standard IFRS 9 "Financial Instruments", which results in early recognition of impairment adjustments of receivables up to the amount of forecasted credit losses calculated based on historical loss rates. ELSA adopted IFRS 9 as of 1 January 2018 using the modified retrospective method with cumulative adjustments in the initial application recognized on 1 January 2018 in equity, without altering the figures for prior periods. For the company's trade receivables, there are no significant differences between the initial measurement method according to IAS 39 and the new valuation categories under IFRS 9.
Other operating expenses On 31 December 2018, ELSA recorded expenses of RON 45.9 mn from other operating activities compared to RON 48.1 mn at 31 December 2017. In December 2018, ELSA derecognized the ongoing investments of RON 12.5 mn related to the investment projects for the construction of two wind farms in Frumusita and Chirnogeni areas, the costs of the two projects being recognized as expense with the ceded assets, while adjustment for impairment of tangible fixed assets with the same value was reversed. ELSA was penalized on 4 January 2018 by the Competition Council by a fine of RON 10.8 mn and in October 2018 the fine received was executed by NAFA; the company reversed the provision of RON 10.8 mn and recognized the amount as “Expenses with fines and penalties”. In 2017, the court ordered ELSA to pay the amount of RON 25 mn and late payment penalties amounting to RON 0.8 mn for invoices related to the period 1 April 2007 - 31 March 2008 owed to Termoelectrica S.A. Operating loss As a result of the above mentioned factors, ELSA recorded a loss resulting from the operating activity in amount of RON 31.4 mn, lower as compared with RON 109.2 mn in 2017. Finance income
ELSA’s main financial income is provided by the dividends distributed by its subsidiaries. During the financial year ended 31 December 2018, ELSA registered dividend income amounting to RON 301.5 mn representing dividend income from its subsidiaries (2017: RON 347.3 mn), structured as follows:
2018 2017 SDMN 38.1 68.6 SDTN 96.7 77 SDTS 80.1 78.4 EFSA 86.6 123.4 TOTAL 301.5 347.3 Source: Electrica
Another category of financial income related to its subsidiaries is represented by interest income, which increased to RON 23.2 mn in 2018 compared to RON 0.2 mn in 2017, according to the detail: 2018 2017 SDMN 7.7 0.1 SDTN 9.2 0.1 SDTS 4.3 0 EL SERV 1.8 - SEM (insolvency proceedings) 0.1 - TOTAL 23.2 0.2 Source: Electrica
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The average interest rate for treasury bills, government bonds and deposits with an original maturity of more than three months increased from 0.78% in 2017 to 1.91% in 2018.
Profit before tax In 2018, profit before tax increased by RON 42.8 mn or 16.8% to RON 298 mn from RON 255.2 mn in 2017.
Income tax expense In 2017, ELSA recorded a deferred tax asset of RON 3 mn, that has been utilized in 2018.
Net Profit for the year As a result of the factors presented above, the net profit realized in 2018 recorded an increase of 15.4% compared to 2017, to RON 298 mn from RON 258.2 mn.
6.6. Individual cash flow statement
Financial information selected from the cash flow statement of the company (RON mn):
31 December 31 December Indicator Var. (%) 2018 2017 Cash flows from operating activities Profit for the year 298 258.2 15.4% Adjustments for: Depreciation 21.4 22 -2.8% Amortization 0.3 1.5 -78.7% (Reversal of impairment)/Impairment of property, (5.7) 1.9 -398.8% plant and equipment Impairment of equity interests in subsidiaries 19.5 - - Loss from the disposal of tangible assets 12.6 - - (Reversal of impairment)/Impairment of trade and (41.2) 15.1 - other receivables, net Net finance income (329.4) (364.3) -9.6% Changes in provisions, net (8.6) 12.3 - Income tax - (benefit) (0) (3) -99.9% (33) (56.3) -41.5% Changes in: Trade receivables 108 (53.3) - Other receivables 10.2 (3.9) - Trade payables (64.9) 27.8 - Other payables (9.8) 0.2 - Employee benefits 1.8 2 -9.9% Cash generated from/(used in) operating 12.4 (83.6) -114.8% activities
Cash flows from investing activities Payments for purchases of property, plant and (0.2) (1) -74.9% equipment
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31 December 31 December Indicator Var. (%) 2018 2017 Payments for purchase of intangible assets (0.3) (0.2) 59.1% Payments for purchase of additional shares in - (752) -100% subsidiaries Proceeds from the sale of intangible assets 0.9 - - Restricted cash - (185.5) -100% Payments for purchase of treasury bills and (95.3) (543.1) -82.4% government bonds Proceeds from maturity of treasury bills and 550.1 1,838.6 -70.1% government bonds Payments for deposits with maturity of 3 months or (619) (995.6) -37.8% longer Proceeds from deposits with maturity of 3 months or 802.2 820.3 -2.2% longer Proceeds relating to loans granted to subsidiaries 9.5 - - Interest received 18.2 17 6.9% Dividends received 346.5 302.3 14.6% Loans granted to related parties (736.2) (237.7) 209.8% Net cash from investing activities 276.3 263.1 5%
Cash flows from financing activities Dividends paid (244.7) (251.2) -2.64% Net cash used in financing activities (244.7) (251.2) -2.64%
Net increase/(decrease) in cash and cash 44 (71.7) - equivalents Cash and cash equivalents at 1 January 126 197.6 -36.3% Cash and cash equivalents at 31 December 170 126 34.9% Source: Electrica
Cash flow
In 2018, the net cash generated from operating activity amounted to RON 12.9 mn.
The net profit for the analyzed period was RON 298 mn, the main adjustments being:
(i) the amortization and depreciation of tangible and intangible assets in the amount of RON 21.7 mn; impairment adjustments for tangible assets and the impact of tangible assets disposal in net amount of RON 6.9 mn; impairment of trade receivables and other receivables of RON 41.2 mn; adjustment of the investments in subsidiaries amounting to RON 19.5 mn; deduction of a net financial result of RON 329.4 mn, the adjustment of provisions in value of RON 8.6 mn; (ii) the deduction of a variation of trade receivables and other receivables of RON 118.2 mn, of trade and other payable of RON 74.7 mn and a change in employee benefits of RON 1.8 mn.
The cash flow statement for the investment activity during the year 2018 increased by 5% compared to 2017, reaching RON 276.3 mn. The main adjustments are those related to the net receipts on maturity of treasury certificates and government bonds amounting to RON 454.8 mn, to net receipts from deposits with an initial maturity of more than 3 months worth RON 183.2 mn, the dividends received from its subsidiaries of RON 346.5 mn and the loans granted to them, amounting to RON 736.2 mn. Dividends paid during the year 2018 amounted to RON 244.7 mn.
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During the year 2017, the net cash used in operating activity amounted to RON 83.6 mn.
The net profit for the analyzed period was RON 258.2 mn, the main adjustments being:
(i) the amortization and depreciation of tangible and intangible assets in the amount of RON 23.5 mn; impairment adjustments for tangible assets and the impact of tangible assets disposal in net amount of RON 1.9 mn; adjustments for impairment of trade receivables and other receivables, RON 15.1 mn; the deduction of a net financial result of RON 364.3 mn, the adjustment of provisions in value of RON 12.3 mn;, (ii) the deduction of a variation of trade receivables and other receivables amounting to RON 57.2 mn, of trade and other payables of RON 28 mn and a change in employee benefits of RON 2 mn.
The cash flow of the investment activity during the year 2017 shows a value of RON 263.1 mn. The main adjustments are those related to payments for purchase of additional shares in its subsidiaries, amounting to RON 752 mn, restricted cash of RON 185.5 mn, net receipts on maturity of treasury certificates and government bonds amounting to RON 1,295.5 mn, the net variation between the payments and the receipts value related to deposits with an initial maturity of more than 3 months worth RON 175.3 mn, the dividends received from its subsidiaries in the amount of RON 302.3 mn and the loans granted to them, amounting to RON 237.7 mn. Dividends paid during 2017 amounted to RON 251.2 mn.
6.7. Risk management
To implement the risk management system, as well as an internal control/management system at Group level, the following were taken into consideration, as appropriate: International Standards on Risk Management Systems (ISO 31000 family); Best practices and methodologies applied by listed and non-listed companies; Internal policies and procedures adopted for this purpose.
In 2018, ELSA continued the process of redesigning and improving the risk management system according to the international standard ISO 31000: 2010 "Risk Management - Principles and Guidelines" provisions, launched during the 4th quarter of 2017, in order to adapt to the new market conditions and to integrate it across the Group.
Thus, in 2018, the operational risk management framework model was defined at the Electrica Group level, the process was redesigned and the risk management policy and procedure were redefined. At the each level of company within Electrica group, workshops were organized, during which the main risks associated with their specific operational areas were identified, analyzed and estimated and appropriate control measures were set up to avoid, reduce or control the identified risks.
Among the identified risk categories at Electrica Group companies the level, we can mention:
- strategic risks - operational risks - market risks - compliance risks - financial risks - social, environmental, health and safety risks.
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During the first half of the year, a methodology for identifying, analyzing and estimating social, environmental and OHS risks was defined and applied, starting with the assessment of all the organization's vulnerabilities in relation to the environment, the communities in which it operates, its own staff and business ethics.
The Board of Directors of ELSA set the Risk Appetite for Electrica Group in September 2018 and the Policy in the field in December 2018. By the end of the year, the executive management adopted the Risk Management Procedure to be implemented during 2019 by all the Group companies, in line with the development strategy of the Group.
FINANCIAL RISK MANAGEMENT
The Group is exposed to the following risks resulting from the use of financial instruments: credit risk, liquidity risk and market risk.
Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers, cash and cash equivalents, bank deposits and treasury bills and government bonds.
Cash, bank deposits, treasury bills and government bonds are placed in financial institutions, which are considered to have low risk of default. The carrying amount of financial assets represents the maximum credit exposure.
Trade receivables
The Group’s credit risk in respect of receivables was concentrated in the past around state-controlled companies and in the recent years refers to clients that are facing financial difficulties in their industries due to specific changes in circumstances in their industry sector. The Group establishes an allowance for impairment that represents the amount of expected credit losses, calculated based on the expected loss rates. The following table provides information on the credit risk exposure and expected loss rates on trade receivables at 31 December 2018: 31 December 2018 Weighted Bad debt Net trade Credit average rate of Gross value allowance receivables impaired losses Neither past due nor impaired 1% 641.9 (4.3) 637.5 No Past due 1-30 days 3% 141.5 (4.3) 137.2 No Past due 31-60 days 9% 28.8 (2.5) 26.3 No Past due 61-90 days 29% 6.2 (1.8) 4.4 No Past due more than 90 days 100% 1,013.7 (1,012.8) 0.9 Yes Total 1,832 (1,025.7) 806.3 Source: Consolidated financial statements of Electrica Group as of 31 December 2018
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Comparative information in accordance with IAS 39 An analysis of the trade receivables from the credit risk perspective, and the maturity of the trade receivables as of 31 December 2017, is as follows:
31 December 2017
Gross value Bad debt allowance Net trade receivables Neither past due nor impaired 530.4 (7.5) 522.9 Past due 1-90 days 274.5 (5.9) 268.6 Past due 90-180 days 25.3 (22.3) 3.0 Past due 180-360 days 60.5 (56.4) 4.1 Past due 1-2 years 34.8 (28.9) 5.9 Past due 2-3 years 92.6 (92.6) - Past due more than 3 years 845.8 (845.8) - Total 1,863.9 (1,059.5) 804.4 Source: Consolidated financial statements of Electrica Group as of 31 December 2018
Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses.
The Group aims to maintain the level of its cash and cash equivalents at an amount in excess of expected cash outflows on financial liabilities. The Group also monitors the level of expected cash inflows on trade receivables together with expected cash outflows on trade and other payables. In addition, the Group maintains overdraft facilities. Also, starting with 2016, some subsidiaries have signed long-term loan agreements to improve their financial position.
Exposure to liquidity risk
The following are the remaining contractual maturities of financial liabilities at the reporting date. The amounts are presented in RON mn, gross and undiscounted, and include estimated interest accrued.
Contractual cash flows more Carrying less than 1-2 Financial liabilities Total 2-5 years than 5 amount 1 year years years 31 December 2018 Bank overdrafts 119.0 119.0 119.0 - - - Financing for network construction related to 12.8 12.9 11.9 1.0 - - concession agreements Long term bank 320.0 330.2 - 330.2 - - borrowings Trade payables 742.2 742.2 742.2 - - - Total 1,194.0 1,204.3 873.1 331.2 - -
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Contractual cash flows more Carrying less than 1-2 Financial liabilities Total 2-5 years than 5 amount 1 year years years 31 December 2017 Bank overdrafts 247.9 247.9 247.9 - - - Financing for network construction related to 43.8 50.6 33.9 15.3 1.4 - concession agreements Long term bank 320.0 332.8 2.6 2.6 327.7 - borrowings Trade payables 689.4 689.4 689.4 - - - Total 1,301.1 1,320.7 973.8 17.8 329.1 - Source: Consolidated financial statements of Electrica Group as of 31 December 2018
Market risk Market risk is the risk that changes in market prices – such as foreign exchange rates, interest rates– will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return.
Currency risk The Group is exposed to currency risk to the extent that there is a mismatch between the currencies in which sales, purchases and borrowings are denominated and the functional currency of the Company. The functional currency of the Company is the Romanian Leu (RON).
The currency in which these transactions are primarily denominated is RON. Certain liabilities are denominated in foreign currency (EUR). The Company also has deposits and bank accounts denominated in foreign currency (EUR and USD). The Group’s policy is to use the local currency in its transactions as far as practically possible. The Company does not use derivative or hedging instruments.
Exposure to currency risk
The summary quantitative data about the Group’s exposure to currency risk is as follows:
31 December 31 December 31 December 31 December (RON mn) 2018 2018 2017 2017 EUR USD EUR USD Cash and cash equivalents 0.8 0.1 0.1 - Deposits (deposits, treasury bills - - 1.2 0.1 and government bonds) Financing for network construction (12.8) - (43.8) - related to concession agreements Net exposure of financial (12.0) 0.1 (42.4) 0.1 position statement Source: Consolidated financial statements of Electrica Group as of 31 December 2018
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The following significant exchange rates have been applied during the year:
Average rate Year-end spot rate 2018 2017 2018 2017 EUR/RON 4.6535 4.5681 4.6639 4.6597 USD/RON 3.9416 4.0525 4.0736 3.8915 Source: Consolidated financial statements of Electrica Group as of 31 December 2018
Sensitivity analysis
A reasonably possible aprreciation (depreciation) of the EUR against RON at 31 December would have affected the measurement of financial instruments denominated in a foreign currency and profit before tax by the amounts shown below. The analysis assumes that all other variables, in particular interest rates, remain constant and ignores any impact of forecast sales and purchases. Amounts in thousands RON.
A reasonably possible appreciation/depreciation of the USD against RON at 31 December would have affected the measurement of financial instruments denominated in a foreign currency and profit before tax, and affected equity, respectively, by the amounts shown below. The analysis assumes that all other variables, in particular interest rates, remain constant and ignore any impact of forecasted sales and purchases.
Profit before tax (RON mn) Appreciation Depreciation 31 December 2018 EUR (change by 5%) (0.6) 0.6 USD (change by 5%) 0.005 (0.005) 31 December 2017 EUR (change by 5%) (2.1) 2.1 USD (change by 5%) 0.003 (0.003) Source: Consolidated financial statements of Electrica Group as of 31 December 2018
Interest rate risk
Until 2016 the Group’s policy was to mainly use supplier credit for financing its capital investments. Starting 2016 the Group started to use also medium term bank loans.
Exposure to interest rate risk
The interest rate profile of the Group’s interest-bearing financial instruments is as follows:
(RON mn) 31 December 2018 31 December 2017
Fixed-rate instruments Financial assets Call deposits 311.0 231.8 Deposits, treasury bills and government bonds 136.5 747.0 Financial liabilities Financing for network construction (12.8) (43.8) related to concession agreements Finance lease (320.0) (320.0)
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(RON mn) 31 December 2018 31 December 2017
Total 114.7 614.9
Variable-rate instruments Financial liabilities Overdrafts (119.0) (247.9) Total (119.0) (247.9) Source: Consolidated financial statements of Electrica Group as of 31 December 2018
Fair value sensitivity analysis for fixed-rate instruments
The Group does not account for any fixed-rate financial assets or financial liabilities at fair value through profit or loss. Therefore, a change in interest rates at the reporting date would not affect profit or loss.
Cash flow sensitivity analysis for variable-rate instruments
A reasonably possible change of 50 basis points in interest rates at the reporting date would have increased (decreased) profit before tax by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency exchange rates, remain constant.
Profit before tax (RON mn) 50 bps increase 50 bps decrease 31 December 2018 Variable-rate instruments (0.6) 0.6 31 December 2017 Variable-rate instruments (1.2) 1.2 Source: Consolidated financial statements of Electrica Group as of 31 December 2018
6.8. Description of the main features of internal control and risk management systems in relation to the financial reporting process
The internal control represents all measures, procedures and policies adopted by ELSA management and their implementation by the employees, regarding the organizational structure, applied procedures, methods, techniques and instruments, for the purpose of implementation of company strategy and objectives. The internal control includes all control forms performed at company level such as preventive financial control, internal and managerial control, compliance. The internal control and the risk management systems have the following main goals:
protecting organizational resources against losses due to waste, negligence, abuses, fraud etc.; compliance with the applicable legislation and the internal regulations; the reliability of financial reporting (accuracy, completeness and correctness of the information ); ensuring an environment based on identifying, understanding and controlling risks, environment which will contribute to achieving the organizational goals; efficient and effective business operations and use of resources;
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applying the BoD and executive management resolutions and follow-up.
The achievement of these goals is performed as follows: recruitment of personnel with an adequate level of competency, in accordance with the company’s needs, accompanied by training and development of personnel skills and knowledge, supplemented with any external consultants, whenever necessary; clear definition and split of responsibilities of each person involved in the organizational process; segregation of duties regarding the carrying out of operations among the personnel, so that the approval, control and registration duties are adequately assigned to different persons (as per the Company’s organizational chart); elaboration and implementation of regulations, policies, procedures, forms etc.; the existence of a Guide for Accounting Policies, elaborated in accordance with the requirements of the legislation in force, approved by the Board of Directors; the existence of a schedule and a well-defined process regarding the elaboration of accounting and financial information in accordance with the reporting requirements (financial reports, including financial statements, annual and interim reports, budget etc) and their appropriate verification and approval by the Board of Directors, for the purpose of endorsing and release for publication.
The framework of ELSA’s internal control system consists of the following elements:
Control environment – The existence of a control environment represents the basis of an efficient internal control system. It consists of the commitment towards integrity and ethical values (for this purpose, a series of policies on zero tolerance towards corruption, anti-fraud and anti-money-laundering, avoidance and fighting against conflicts of interest, policy for gifts and protocol expenses as well as forbidding facilitating payments, transparency and the involvement of stakeholders), as well as organizational measures (policies on the delegation of authority and responsibilities); Evaluation of risks – Generally, all processes are within the scope of the internal control system. An identification process is carried out regarding major or critical risks, related to particular activities for stimulating internal control methods; Control activities meant to reduce the risks – Control activities have different forms (managerial control, general control, preventive financial control, etc.) and they are implemented and carried out with the purpose of reducing significant operational and compliance risks; Information and communication – Information helps all other components of the internal control system by means of communication to employees their responsibilities regarding the control and the provision of information in an adequate and timely manner, so that all employees may carry out their duties. Internal communication is performed by means of disseminating information to all levels, while the external one implies the dissemination of information to external parties, in accordance with the requirements and expectations; Monitoring activities – the Audit and Risk Committee and the Internal Audit Department assess the efficiency and the effective implementation of the internal control system. The management monitors the functioning of internal controls by means of periodical analyzes; for instance, the execution of the budget, the monitoring of security incidents, internal and external audit reports and internal control reports.
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Deficiencies in the implementation or functioning of internal controls are noted in the internal control and internal audit reports and are presented to the management, with the purpose of issuing the corrective actions. The internal audit missions evaluate the internal control system, the risks and the implemented control strategies, and present initiatives, proposals, solutions and recommendations for mitigating the risks of fraud and for improving control strategies. The internal audit includes, but is not limited to, the examination and evaluation of the adequate nature and the efficiency of the organization’s corporate governance, of risk management, as well as of internal controls and of quality performance in carrying out the assigned responsibilities, in order to achieve the assumed strategy and objectives of the organization. The Guide for Accounting Policies is consistently applied in all companies within the Group, for the purpose of ensuring an accounting treatment consistently applied for the same business situations, for the preparation of annual and interim financial statements of the Group on a standalone and consolidated basis. This guide is subject to review based on the changes made to the International Financial Reporting Standards as adopted by EU. The Group has appropriate systems in place for the collection, storage, protection and processing of data in order to generate financial and managerial reports for both internal and external use, as well as proper systems and procedures for meeting the statutory, stock exchange or other legal requirements concerning financial reports in a timely manner and subject to control review.
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Appendix 1 – Litigations
Electrica Group litigations in 2018 – status as of 27 February 2019
1. Disputes with ANRE
Crt. Parties/Case Subject matter Court Case status no. file number Cancellation of the Order of the president of ANRE no. 146/2014 regarding the establishment of the regulated rate of return considered to Plaintiff: ELSA the approval of the tariffs for the High Court Defendant: ANRE electricity distribution service provided of Appeal – in course of 1 by concessionary DSOs starting with 1 Cassation settlement. 192/2/2015 January 2015 and the abrogation of and Justice Art. 122 of the Tariff Pricing Methodology for Electricity Distribution Service, approved by the ANRE Order no. 72/2013. Plaintiff: ELSA; Cancellation of ANRE President’s Order Enel Distributie no. 165/2015 regarding the High Court Muntenia S.A. modification of the Tariff Setting of Appeal – under pre-filtering 2 Defendant: ANRE Methodology for the Electricity Cassation proceedings. Distribution Service, approved by the and Justice 7968/2/2015 ANRE Order no. 72/2013. Cancellation of ANRE President’s Order Plaintiff: ELSA; High Court no. 155/2014 regarding the approval of Suspended until the settlement Defendant: ANRE; of 3 the specific tariffs for the electricity of the case file no. Cassation distribution service and the price for the 192/2/2015. 361/2/2015 and Justice reactive energy for SDTN. Cancellation of ANRE President’s Order Plaintiff: ELSA; High Court no. 156/2014 regarding the approval of Suspended until the settlement Defendant: ANRE; of 4 the specific tariffs for the electricity of the case file no. Cassation distribution service and the price for the 192/2/2015. 360/2/2015 and Justice reactive energy for SDTS. Action to suspend the administrative Plaintiff: ELSA; act – Order no. 165/2015 of ANRE High Court Defendant: ANRE; regarding the modification of the Tariff of The Court has definitely 5 Setting Methodology for the Electricity Cassation rejected Electrica’s appeal. 134/2/2016 Distribution Service, approved by the and Justice ANRE Order no. 72/2013. Appeal – in course of Plaintiff: ELSA; High Court Action for partial annulment (regarding settlement. The suspension of Defendant: ANRE; of 6 the special tariffs) of the administrative the case was claimed until the Cassation act – ANRE Order 171/2015. settlement of the case file 340/2/2016 and Justice 192/2/2015. Appeal – in course of Plaintiff: ELSA; High Court Action for partial annulment (regarding settlement. The suspension of Defendant: ANRE; of 7 the special tariffs) of the administrative the case was claimed until the Cassation act – ANRE Order. No. 172/2015. settlement of the case file 342/2/2016 and Justice 192/2/2015. Plaintiff: ELSA; Action for partial annulment of ANRE Bucharest 8 In course of settlement. SDTN; SDTS; Order no. 169/2018 regarding the Court of
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Crt. Parties/Case Subject matter Court Case status no. file number SDMN; approval of the Tariff Setting Appeal Defendant: ANRE; Methodology for the Electricity Distribution Service. 7614/2/2018 Plaintiff: ELSA; SDTN; SDTS; Action for the annulment of the ANRE Bucharest SDMN; Order no. 168/2018 regarding the In the regularization 9 Court of Defendant: ANRE regulatory rate of return and obliging procedure. Appeal ANRE to issue a new order. 7591/2/2018 Plaintiff: ELSA; Action for partial annulment of ANRE SDTN; SDTS; Order no. 169/2018 regarding the Bucharest SDMN; In the regularization 10 approval of the establishment Court of Defendant: ANRE procedure. Methodology for the energy distribution Appeal 8436/2/2018 tariffs. Plaintiff: ELSA; SDTN; SDTS; Action for the annulment of the ANRE Bucharest SDMN; Order no. 168/2018 regarding the 11 Court of In course of settlement. Defendant: ANRE regulated rate of return and obliging Appeal ANRE to issue a new order. 8430/2/2018
Plaintiff: ELSA, Action for annulment of ANRE Order SDMN 197/2018 regarding the approval of the Bucharest In the regularization 12 specific tariffs for the electricity Court of procedure. Defendant: ANRE distribution service and the price for the Appeal reactive electric energy for SDMN. 434/2/2019
Plaintiff: ELSA, Action for annulment of ANRE Order SDTS 199/2018 regarding the approval of the Bucharest In the regularization 13 specific tariffs for the electricity Court of procedure. Defendant: ANRE distribution service and the price for the Appeal reactive electric energy for SDTS. 435/2/2019
Plaintiff: ELSA, Action for annulment of ANRE Order SDTN 198/2018 regarding the approval of the Bucharest In the regularization 14 specific tariffs for the electricity Court of procedure. Defendant: ANRE distribution service and the price for the Appeal reactive electric energy for SDTN. 436/2/2019 Contentious administrative litigation – Suspended case file until the Cancellation of ANRE President’s Order final settlement of the case No. 146/2014 regarding the setting of 7341/2/2014. Plaintiff: SDMN the regulated rate of return applied at High Court The Plaintiff quit the Defendant: ANRE the approval of the tariffs for the of judgement of the appeal 15 electricity distribution service provided Cassation against the suspension 184/2/2015 by the DSOs from 1 January 2015 and and Justice decision. The Court rejects the the abrogation of Art. 122 of the Tariff appeal filed by Fondul Setting Methodology for the Electricity Proprietatea SA against the Distribution Service, approved by the Decision of the Bucharest
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Crt. Parties/Case Subject matter Court Case status no. file number ANRE Order no. 72/2013. Court of Appeal of 25 June 2015 – the Section VIII Administrative and Fiscal Litigation, as unfounded. The case file no. 7341/2/2014 is in course of settlement. The case file no 1574/2/2016 Cancellation of Order no. 165/2014, of has been linked to this case Plaintiff: SDMN the President of ANRE regarding the High Court file. The court of first instance Defendant: ANRE modification of the Tariff Pricing of 16 rejected the application as Methodology for Electricity Distribution Cassation unreasonable. SDMN filed an 164/2/2016 Service, approved by the ANRE Order and Justice appeal, in course of no. 72/2013. settlement. Through the Decision no. Suspension of the enforcement of the 1086/1 April 2016, the Plaintiff: SDMN ANRE President Order no. 165/2015 High Court Bucharest Court of Appeals Defendant: ANRE regarding the modification of the Tariff of rejected the claim on 17 Pricing Methodology for Electricity Cassation suspension of as ungrounded. 165/2/2016 Distribution Service, by the ANRE Order and Justice An appeal was stated, which no. 72/2013. was definitively rejected as unfounded. By Decision no.689/1 March Cancellation of ANRE President’s Order Plaintiff: SDMN High Court 2017, the Court of Appeal No. 172/2015 regarding the approval of Defendant: ANRE of dismissed the action as 18 the specific tariffs for the electricity Cassation unreasonable. SDMN has filed distribution service and the price for the 41/42/2016 and Justice an appeal, which is in course of reactive energy, for SDMN. settlement. Through the Decision no. Suspension of the enforcement of the 1272/2016 of the Bucharest Plaintiff: SDMN ANRE President Order no. 172/2015 High Court Court of Appeals, the claim for Defendant: ANRE regarding the approval of the specific of 19 suspension of was rejected as tariffs for the electricity distribution Cassation unfounded. An appeal was 42/42/2016 service and the price for the reactive and Justice stated, definitively rejected as energy, for SDMN. unfounded. Action in administrative litigation to oblige ANRE to issue an address of Plaintiff: SDMN; response to the request of DSOs from SDTS Bucharest Electrica Group to issue a decision The file is in the regularization 20 Defendant: ANRE Court of stating whether or not they have procedure. Appeal exclusive or special rights in 8901/2/2018 accordance with the provisions of Law 99/2016. Annulment of administrative act for the refusal to issue a favourable opinion The Court of First Instance Plaintiff: ELSA; regarding the transfer of the AMR upheld the plea of SDMN; SDTN; High Court system and requiring the issue of inadmissibility of all three SDTS; of 21 favourable administrative documents heads of claim, dismissing Defendant: ANRE Cassation for the cession of the AMR system from them as inadmissible. An and Justice ELSA to DSOs, also obliging ANRE to appeal was filed – in course of 8019/2/2017 make adjustments of the distribution settlement. tariffs of DSOs.
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Crt. Parties/Case Subject matter Court Case status no. file number Cancellation of ANRE President’s Order no. 146/2014 regarding the establishment of the regulated rate of return applied to the approval of the Plaintiff: SDTN High Court tariffs for the electricity distribution Defendant: ANRE of Appeal – in course of 22 service provided by the DSOs from 1 Cassation settlement. January 2015 and the abrogation of 213/2/2015 and Justice Art. 122 of the Tariff Pricing Methodology for Electricity Distribution Service, approved by the ANRE Order no. 72/2013.
Cancellation of the ANRE President’s Plaintiff: SDTN High Court Order No. 155/2014 regarding the Defendant: ANRE of The court has definitively 23 approval of the specific tariffs for the Cassation rejected the action of SDTN. electricity distribution service and the 353/2/2015 and Justice price for the reactive energy for SDTN.
Action for annulment of the administrative act – Order no. Plaintiff: SDTN High Court 165/2015 of ANRE regarding the Defendant: ANRE of Appeal – in course of 24 modification of the Tariff Pricing Cassation settlement. Methodology for Electricity Distribution 18/33/2016 and Justice Service, approved by the ANRE Order no. 72/2013. Action for annulment of the administrative act – Order no. Plaintiff: SDTN High Court 165/2015 of ANRE regarding the Defendant: ANRE of The court has definitively 25 modification of the Tariff Pricing Cassation rejected the action of SDTN. Methodology for Electricity Distribution 17/33/2016 and Justice Service, approved by the ANRE Order no. 72/2013. Contentious administrative litigation (request for suspension of Plaintiff: SDTS administrative act) – ANRE President’s Bucharest Defendant: ANRE Order no. 165/2015 regarding the Suspended until the settlement 26 Court of modification of the Tariff Pricing of 18/64/2016. Appeals 87/64/2016 Methodology for Electricity Distribution Service, approved by the ANRE Order no. 72/2013. Cancellation of Order no. 165/2015 of Plaintiff: SDTS the ANRE President regarding the High Court Defendant: ANRE modification of the Tariff Pricing of Appeal – in course of 27 Methodology for Electricity Distribution Cassation settlement. 18/64/2016 Service, approved by the ANRE Order and Justice no. 72/2013. Cancellation of the ANRE President’s Plaintiff: SDTS High Court Order no. 171/2015 regarding the Defendant: ANRE of Appeal – in course of 28 approval of the specific tariffs for the Cassation settlement. electricity distribution service and the 88/64/2016 and Justice price for the reactive energy, for SDTS.
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Crt. Parties/Case Subject matter Court Case status no. file number
Plaintiff: SDTS High Court Defendant: ANRE Cancellation of the ANRE Order no. of Appeal – in course of 29 171/2015. Cassation settlement. 41/64/2016 and Justice
Cancellation of the ANRE President’s Plaintiff: SDTS High Court Order no. 156/2014 regarding the Suspended until the final Defendant: ANRE of 30 approval of the specific tariffs for the settlement of the case no. Cassation electricity distribution service and the 208/2/2015. 371/2/2015 and Justice price for the reactive energy, for SDTS. Cancellation of the ANRE President’s Order no. 146/2014 regarding the establishment of the regulated rate of return applied to the approval of the Plaintiff: SDTS High Court tariffs for the electricity distribution Suspended. Waiver of the trial Defendant: ANRE of 31 service provided by DSOs from 1 at the appeal regarding the Cassation January 2015 and the abrogation of suspension decision. 208/2/2015 and Justice Art. 122 of the Tariff Pricing Methodology for Electricity Distribution Service, approved by the ANRE Order no. 72/2013. Plaintiff: SDTS Defendant: ANRE Complaint against the contravention Brasov 32 In regulatory procedures. report no. 97341/18 December 2018. Court 73/197/2019 Judicial action having as object the recognition of the right provided in art. 79 para. (6) of the Law no. 123/2012, Plaintiff: EFSA the obligation of the defendant to High Court Defendant: ANRE modify the regulated tariff by ANRE of Appeal – in course of 33 Order no. 40/2013, order the Cassation settlemet. 26210/3/2013 defendant to pay the amount of the and Justice prejudice that cannot be covered by the change of the mentioned regulated tariff. Bucharest Court of Appeals has admitted the judicial action Plaintiff: EFSA Judicial action having as object to High Court stated by EFSA, obliging ANRE Defendant: ANRE oblige the defendant to resolve a of to solve the dispute. ANRE 34 dispute related to the change of Cassation stated an appeal, admitted by 8201/2/2015 supplier procedure. and Justice the Court. The High Court dismisses EFSA’s case as remained without object.
2. Fiscal matter disputes
Crt. Parties/Case file Object Court Case status no. number Appeal of the Decision no.147/22 May On 6 March 2015, the court: Plaintiff: ELSA High Court 2013, amounting to RON 2,387,992 - partially upheld the claim and Defendant: NAFA of 1 (action for annulment of the Decision partially cancelled the Cassation no. 147/22 May 2013, issued by NAFA Decisions no. 147/22 May 2013 7614/2/2013 and Justice within the proceedings for solving the and no. 214/30 October 2012,
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Crt. Parties/Case file Object Court Case status no. number administrative appeals against the issued by the defendant for the debt securities by which they were amount of RON 2,383,070, established accessories for delayed representing ancillary tax payment of the current budgetary obligations; duties, by the Decision no. 214/2012 - maintained the claimed fiscal- in the amount of RON 2,387,992). administrative acts for the amount of RON 4,922; - ordered the plaintiff to pay to the applicant the amount of RON 30,961, as court charges. NAFA has stated Appeal – definitively rejected by court. On the merits, the court has partially admitted the action stated by the plaintiff ELSA and: - cancels Decision no. 24/2013, issued by NAFA-DGSC; - partially cancels the decisions regarding the ancillary payment obligations no. 1270/2012 (in the amount of RON 5,705,115) and no. 1271/2012 (in the amount of Plaintiff: ELSA Tax appeal of the administrative High Court RON 3,747,331), issued by Defendant: NAFA annulment of the Decision no. 24/31 of NAFA, as well as the tax 2 January 2013, payment obligations Cassation decisions issued by NAFA 5433/2/2013 amounting to RON 9,805,319. and Justice notices of assessment no. 2143501.5/2012, 2143501.6/2012, 2143501.7/2012, 2143501.11/2012 (regarding the amount of RON 352,873). Rejects the action as for the rest. Forces NAFA to pay RON 20,500 as court charges to the plaintiff. NAFA and ELSA have stated an appeal. The High Court dismissed the appeals as unfounded. 1. Suspension of forced execution initiated by NAFA-DGAMC in the enforcement file no. 13267221 under the enforceable order no. 13725/3 May 2017 and of the no. 13739/03 May 2017; Plaintiff: ELSA 2. Cancellation of the enforcement Suspended until the final Defendant: NAFA order no. 13725/3 May 2017, of the District 1 3 settlement of case no. no. 61/90/1/2017/263129 (which also Court 9131/2/2017. 17237/299/2017 bears the No. 13739/3 May 2017) issued by NAFA-DGAMC for the amount of RON 39,248,818 and all subsequent execution orders issued in connection with the forced execution of the amount of RON 39,248,818 in the execution file no. 13267221. 4 Plaintiff: ELSA Annulment of the tax decisions issued Bucharest In course of settlement.
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Crt. Parties/Case file Object Court Case status no. number Defendant: NAFA by NAFA and communicated to the Court of company by adress no. 665/17 March Appeal 9131/2/2017 2017, new accessories amounting to RON 39,000,000. Plaintiff: ELSA High Court The first court dismissed the Appeal to execution, cancellation Defendant: NAFA of file as unfounded. ELSA filed an 5 foreclosure for RON 39,083,190 - Cassation appeal, definitively rejected by Decision no. 665/17/03/2017 3430/2/2017 and Justice court. 1. Oblige NAFA to correct the evidence of tax receivables, so that it reflects the judgments in the litigation between parties through judgments that have entered into the power of the trial. 2. In particular, in order to adjust the fiscal statement in the sense indicated in paragraph 1, the NAFA shall be obliged to draw up those corrective administrative acts or operations which: Plaintiff: ELSA a) to reflect in the fiscal file the Bucharest Defendant: NAFA extinguishing by prescription of the 6 Court of In course of settlement. amount of RON 16,915,950 Appeal 6043/2/2018 representing the profit tax registered in Decision no. 3/2008 (the "Main Claim") and the removal from its tax records, ‘ b) to reflect in the fiscal file the corresponding extinction of all the accessories calculated by NAFA in the Main Claim (expired by prescription) and the removal from their tax records (including the amount of RON 30,777,354 included in the Decision no. 357/2008). Appeal to execution and suspension of forced execution - cancellation of Plaintiff: ELSA the enforcement order no. 13566/22 Defendant: NAFA - June 2018 and the notice 13567/22 June 2018, issued in the execution file District 1 Suspended until the settlement 7 DGAMC no. Court of case no. 3889/2/2018.
13267221/61/90/1/2018/278530, 25091/299/2018 amounting to RON 10,024,825 (representing the partial fine from the Competition Council). Cancellation of administrative act: Decision no. 231/09/05/2018 issued by NAFA-DGS in the procedure for solving the fiscal administrative Plaintiff: ELSA appeal against the following tax decisions (communicated to the Bucharest Defendant: NAFA 8 company through the address no. Court of In course of settlement.
665/17 March 2017): 1. Decision no. Appeal 7949/2/2018 607/EV2/15 March 2017 - interest and penalties calculated on the profit tax amounting to RON 38,687,726; 2. Taxation decisions on obligations established as a result of tax
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Crt. Parties/Case file Object Court Case status no. number adjustments correcting Decision no. 607/EV2/15 March 2017, by setting differences in minus, in the amount of RON 2,125,229; 3. Taxation decisions on obligations established as a result of tax adjustments correcting Decision no. 607/EV2/15 March 2017, by establishing additional differences, in the amount of RON 2,447,528; 4. Decision no. 620/EV2/15 March 2017 regarding the related tax liabilities representing interests and penalties for delayed payment in the amount of RON 21,548. Cancellation of administrative act – taxation decision no. 124814/28 November 2014. The amount under By Decision no. 32/10 February Plaintiff: SDMN litigation: RON 11,963,955, 2016, Ploiesti Court of Appeal Defendant: Public representing additional differences High Court dismissed the action as Service for local from the fiscal inspection report, out of unfounded. SDMN filed an 9 Finances Ploiesti of which RON 8,528,896 additional Cassation appeal, which was rejected by tax on buildings for the period and Justice the court; the company filed an 309/42/2015 January 2009 - September 2014 and appeal for annulment (case no. RON 3,439,085 as accessory fiscal 209/1/2019). obligations calculated until the date of 11 November 2014. Cancellation of administrative act – Decision no. 462/23 November 2015, litigation amount of RON 7,731,693 The first court dismissed the Plaintiff: SDMN (RON 4,689,686 income tax + RON Bucharest request as unfounded. The Defendant: NAFA 3,042,007 VAT) and for the amount of 10 Court of plaintiff filed an appeal, in RON 6,154,799 (RON 3,991,503 Appeal course of settlement. 1018/2/2016 interests/penalties and late fees
related to income tax + RON 2,163,296 interests/penalties and delay fees related to the VAT). Cancellation of administrative act NAFA RIF 2017 and decision no. Plaintiff: EL SERV 305/30 May 2017, value of RON Bucharest Defendant: NAFA 46,260,952, the amount with which 11 Court of In course of settlement. the fiscal loss of the Company was Appeal 5786/2/2018 diminished; RON 7,563,561 as Additional VAT set up by VAT refusal to deduct + related accessories. Cancellation of administrative Plaintiff: EL SERV decision no. 221/19 July 2017 - Suspended until the final Defendant: NAFA cancellation of penalties related to the Bucharest 12 settlement of the case no. decision no. 305/2017 from above, Court 5786/2/2018. 31945/3/2018 RON 118,215.
Taxation contestation no. F-MM- Plaintiff: SDTN 180/2016 on tax and additional VAT, Defendant: MFP- as well as interest/late payment and NAFA – DGRFP Cluj Cluj Court 13 delay penalties. Preliminary Ongoing procedure – AJFP Maramures of Appeal administrative procedures were
conducted in 2017, prior to the case 371/33/2017 filing.
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Crt. Parties/Case file Object Court Case status no. number Amount: RON 32,295,033. Cancellation of: DGSC Decision no. 325/26 June 2018 Plaintiff: EFSA Decision F-MC 678/28 December Defendant: NAFA – 2017 Bucharest 14 DGAMC Report F-MC 385/28 December Court of In course of settlement. 2017 Appeal 8709/2/2018 Decision no. 511/24 October 2018 Decision no. 21095/24 July 2018 Value: RON 11,483,652
3. Other significant litigations (whose value is more than EUR 500 th.)
Crt. Parties/Case file Object Court Case status no. number Obligation of Electrica to pay to SPEEH Hidroelectrica SA the sum of RON 5,444,761 (the loss suffered by selling energy at an average price per MWH under the production cost of 1 MWH); partially oblige to pay the unrealized The court of first instance rejects benefit of Hidroelectrica by selling the the exception of the prescription Plaintiff: SPEEH total amount of 398,300 MWh, of the material right to action as Hidroelectrica S.A. calculated according to the ANRE High Court unreasonable and the action as 1 Defendant: ELSA regulations (RON 9,646,826, of Cassation unfounded. according to the written instructions and Justice Both parties have appealed, 13268/3/2015 dated 5 May 2015/RON 5,444,761 rejected as unfounded. Both according to the applicant’s parties filed an appeal in the conclusions mentioned in the filter procedure. Conclusion of 15 March 2017) obliging the defendant to pay the legal interest from the date of delivery of the decision until the effective payment, court costs. Creditor: ELSA Insolvency proceedings, enter a claim Bucharest 2 Debtor: Petprod S.A. to the statement of affairs for the Ongoing procedure Court 47478/3/2012*/a1 amount of RON 2,591,163 Creditor: ELSA Insolvency proceedings, enter a claim 3 Debtor: CET Braila S.A. to the statement of affairs for the Braila Court Ongoing procedure 2712/113/2013 amount of RON 3,826,035 Creditor: ELSA, AAAS, Insolvency proceeding, enter a claim BCR SA and others 4 to the statement of affairs in amount Valcea Court Ongoing procedure Debtor: Oltchim S.A. of RON 658,535,805 887/90/2013 Creditor: ELSA Insolvency proceedings, enter a claim Debtor: Romenergy 5 to the statement of affairs in amount Alba Court Ongoing procedure Industry SRL of RON 2,917,266 2088/107/2016 Appellant: ELSA Electrica SA filed an appeal to The court admits the claim for Defendant: AAAS enforcement against foreclosure Disctrict 1 suspension of the forced 6 Administrative Decision no. Court execution formulated by the 38859/299/2015 P/14/27055/16 December 2014 and Plaintiff ELSA; suspends of the
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Crt. Parties/Case file Object Court Case status no. number of all the subsequent enforcement forced execution performed acts (administrative decision issued by based on the foreclosure file no. the respondent AAAS against the 8/2015 of BEJ Oprescu Mihai subscription for the amount of RON until the contestation of the 7,505,637 as recovery of unlawful execution. Based on art. 413 state aid granted to ELSA, in the para. 1 point 1, CPC suspends context of privatization of Electrica the case regarding the Plaintiff Banat SA and of CSR Resita SA) - ELSA, until the final settlement claim for cancelling of this act. of the file no. 2155/2/2015 of - The cancellation of the payment Bucharest Court of Appeal. The order issued by BEJ Oprescu Mihai in court partially upheld the the execution file no. 8/2015 (where it contestation of execution and is stated that “the interest is to be canceled the notice from 26 added starting from the date of March 2015 and all the execution placing the funds at the disposal of the documents issued in beneficiary and up to the effective enforcement file no. 8/2015 of date of the flow plus RON 99,688 c/v BEJ Oprescu Mihai. The court of execution costs and all subsequent dismisses as inadmissible the execution acts.”); application for annulment of - Cancel all execution acts issued in Administrative Decision no. the file no. 8/2015; P/14/27055/16 December 2014 - Suspension of the forced execution issued by AAAS. Returns to the started by the intimate until the contestant the amount of RON irrevocable settlement of the current 1,000 representing the court litigation; expenses related to the appeal - Provisional suspension until the to the execution, after the final settlement of the claim for suspension decision has expired, with right requested by the present petition. of appeal within 10 days of communication, definitely by non-appealing. - Annulment of the Administrative Decision no. P/14/27055/16 On the background of the case, December 2014, of Order no. 883/16 the court ordered the annulment December 2014 (restitution by ELSA of the administrative decision no. of the amount of RON 7,505,637 and P/14/27055/16 December 2014, Appellant: ELSA interests calculated from 27 March High Court of the Order no. 883/16 Defendant: AAAS 2006 until the effective date of 7 of Cassation December 2014 and of the payment) and notification no. 883/16 and Justice Notification no. 883/16 2155/2/2015 December 2014, issued by AAAS; December 2014 issued by the - Suspension of the execution of the defendant. The Defendant filed contested administrative acts until the an appeal, rejected as final settlement of the case; unfounded. - Order the Defendant to pay the judicial costs. Appeal at execution regarding the The court of first instance execution file no. 1914/2015 of the partially admits the contestation Bureau of the Associated Legal of the enforcement formulated Appellant: AAAS Executors Dorina Gont, Lucian Panait by the contestants; orders the Defendant: ELSA Bucharest 8 and Marian Panait - execution of the cancellation of the measure of Court decision no. 6440/01 January 2013 - attachment established in the 27873/299/2016* case no. 8260/3/2013 - the nominal execution file no. 1914/2015 by value of the shares resulting from the BEJA Dorina Gonţ, Lucian Gonţ conversion of ELSA, claimed to and Marian Panait regarding
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Crt. Parties/Case file Object Court Case status no. number Combinatul Siderurgic Resita S.A. and third parties; rejects the request the amount resulting from their for the return of the execution as capitalization – RON 10,342,892. unfounded. Dismisses the application for suspension of execution as being without object; with appeal within 10 days of communication. Both parties filed an appeal, rejected by court as unfounded. Appeal against enforcement initiated by BEJ Spiridonescu Ileana Cornelia in the execution file no. 30/B/2017, as The merit court partially admits well as the subsequent execution acts, the appeal, in the sense that it for the amount of RON 26,122,589. In reduces the execution costs to the alternative, annulment in part as RON 135,000. Disputes the regards the pursuit of the amount of Appellant: ELSA return of forced execution in RON 1,561,105, representing the Defendant: respect of the amount of RON receivable lost by offsetting, with the Bucharest 9 Termoelectrica S.A. 178,554, in respect of undue consequence of the return of the Court enforcement costs. Otherwise, execution for this amount, the partial 16159/299/2017** the contestation of the execution annulment of the execution and the is dismissed as unreasonable. subsequent acts regarding the pursuit ELSA has filed an appeal of the amount of RON 782,067, definitively rejected as representing the receivable unfounded. extinguished by offsetting, with the consequence of the return for this amount. Ongoing procedure; the Creditor: ELSA Insolvency proceedings – debt RON Bucharest receivable assigned to ELSA 10 Debtor: SEM 9,542,337. Court from EL SERV, which was fully 40081/3/2014 recovered. Creditor: ELSA Debtor: Transenergo Insolvency proceedings. Debt RON Bucharest 11 Ongoing procedure Com S.A. 37,088,830. Court 1372/3/2017 Creditor: ELSA Debtor: Electra Bucharest 12 Management & Suppy Bankruptcy. Debt: RON 6,027,537. Ongoing procedure Court SRL 41095/3/2016 Creditor: ELSA Debtor: Fidelis Energy Insolvency proceedings. Debt: RON 13 Iasi Court Ongoing procedure SRL 11,354,912. 3052/99/2017 Plaintiff: SAPE Defendant: ELSA and Action for damages – RON Bucharest 14 In course of settlement. others 3,629,529,920. Court 46365/3/2016 Obligation to increase the share The court of first instance Plaintiff: SEM capital of SEM, with the value of the High Court accepted the exception of the 15 Defendant: ELSA land located in Dobroiesti, str. Zorilor of Cassation prescription of the material right 5930/3/2016 no. 71, Ilfov County ("Terrain and Justice to action, dismissing the action warehouses and Fundeni thermal as prescribed, but the court of
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Crt. Parties/Case file Object Court Case status no. number power station"), with an area of appeal annulled the sentence, 6,479.62 sqm, CADP M03 no. sending the case for re- 10982/2008, respectively from judgment. ELSA filed an appeal - Bucharest, Timisoara Boulevard no. in the filter procedure. 104, sector 6 ("Workshop for repairing energy equipment"), with an area of 8,745.31 sqm, CADP M03 no. 12917/2014 – amounting to RON 7,344,390. Action in administrative litigation - annulment of Competition Council Decision no. 77/20 December 2017, imposing on ELSA a fine in the amount of RON 10,800,984 and, in the Plaintiff: ELSA The court dismissed ELSA’s alternative, the reduction of the fine Bucharest Defendant: action as unfounded, appealable 16 set up to the legal minimum of 0.5% Court of Competition Council in 15 days from it’s of ELSA's turnover, by re- Appeal 3889/2/2018 communication. individualizing the alleged anticompetitive facts, retaining and fully capitalizing on all the attenuating circumstances applicable to ELSA.
Plaintiff: ELSA Application for suspension of the The court of first instance Defendant: enforcement of the Competition High Court rejected the request. ELSA has 17 Competition Council Council Decision no. 77/20 December of Cassation filed an appeal, in course of 2017, establishing a fine in the and Justice settlement. 3883/2/2018 amount of RON 10,800,984 to ELSA. Plaintiff: ELSA Action for damages - request payment Defendant: EL SERV of penalty interest in the amount of Bucharest 18 In course of settlement. RON 4,671,287, corresponding to the Court 39968/3/2018 amount of RON 10,327,442. Plaintiff: ELSA Claims - request for equivalent Defendant: Elite insurance policy issued to guarantee Bucharest 19 In regulatory procedures. Insurance Company the obligations of Transenergo Com Court 44380/3/2018 S.A., in the amount of RON 4,000,000. Claims: request of payment of Plaintiff: EFSA invocies paid without justificative Bucharest 20 Defendant: ELSA documents, as it has been stated by In course of settlement. Court 2869/2/2019 the Court of Account, in amount of RON 17,274,162. Claims - the amount requested by VIR Company International SRL consists of: - EUR 5,000,000, damage caused by Plaintiff: VIR Company delayed issuance of the connection International S.R.L. certificate for the photovoltaic plant Prahova 21 Defendant: SDMN located in Valea Calugareasca village, In course of settlement. Court Darvari; 7507/105/2017 - EUR 155,000, equivalent of the amount of electricity produced by the plant during the technological evidence period; - EUR 145,000, green certificates
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Crt. Parties/Case file Object Court Case status no. number related to the amount of energy produced by the photovoltaic plant during the technological evidence period. In addition, it requires to SDMN to pay the penalty interest of 5.75%/year for all the amounts of money claimed and court costs. Creditor: SDMN Debtor: Transenergo Insolvency proceedings. Debt: RON Bucharest 22 Ongoing proceedings. Com S.A. 8,418,833. Court 1372/3/2017 Plaintiff: SDTN Defendant: Romenergy 23 Bankruptcy - debt: RON 5,439,537. Alba Court Ongoing proceedings. Industry S.A. 2088/107/2016 Recourse claims – for the amount of RON 2,842,347, representing the Plaintiff: Asirom Vienna indemnity paid by the plaintiff to the Insurance Group S.A. insured company SC Ciocorom SRL 24 Defendant: SDTN Bihor Court In course of settlement. following a fire that took place on 07
March 2013. 439/111/2017 SDTN is responsible for the over- voltage after a power outage. Plaintiff: SDTN Defendant: Romenergy Suspended based on the Law no. 25 Claims of RON 2,677,707. Alba Court Industry S.A. 85/2014. 2157/111/2016 Plaintiff: Energo Proiect Cluj SRL 26 Claims of RON 2,387,357. Commercial In course of settlement. Defendant: SDTN Court 374/1285/2018 Plaintiff: SDTS Defendant: Romenergy 27 Bankruptcy - debt: RON 3,987,508. Alba Court Ongoing proceedings. Industry S.A. 2088/107/2016 Suspended case file until the Plaintiff: SDTS settlement of the case file Defendant: Romenergy Payment ordinance - debt: RON 28 Brasov Court regarding the bankruptcy of Industry S.A. 2,806,318. Romenergy Industry S.A. (file 3086/62/2016 no. 2088/107/2016). The court of first instance partially upheld the application, forcing the defendant to pay to the applicant the sum of RON Plaintiff: Project 2,117,046. SDTS filed an appeal, Service RO SA Alba Court of rejected by the court, with the 29 Defendant: SDTS Claims: RON 3,009,514. Appeal possibility of appeal within 30
days of communication. The 3433/85/2015 appeal has been dropped, due to lack of motivation, by a note approved according to the proceedings.
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Crt. Parties/Case file Object Court Case status no. number Plaintiff: EL SERV Claims – EUR 1,177,222, equivalent of Defendant: National RON 5,298,203, calculated on the Bucharest Suspended according to the 30 Leasing IFN SA exchange rate respectively of 4.5006 Court insolvency Law no. 85/2006.
RON/EUR on 30 January 2017. 39542/3/2009 Plaintiff: EL SERV Defendant: Best Recuperare Creante Insolvency – amount to be recovered: Bucharest 31 Ongoing proceedings. SRL RON 3,938,811. Court 2253/3/2011 (former 58348/3/2010) Plaintiff: EL SERV Defendant: National Insolvency – amount to be recovered Bucharest 32 Ongoing proceedings. Leasing IFN S.A. remained: RON 12,204,221. Court 18711/3/2010 Plaintiff: EL SERV Defendant: Best Summons for payment – RON Bucharest Suspended according to the 33 Recuperare Creante 3,938,811. Court insolvency Law no. 85/2006. SRL 54060/3/2011 Plaintiff: EL SERV Defendant: Servicii 34 Energetice Banat S.A. Bankruptcy - debt RON 73,453,299. Timis Court Ongoing proceedings. 8776/30/2013 (joint with cu 2982/30/2014) Plaintiff: EL SERV 35 Defendant: SEO Insolvency - debt RON 26,448,134. Dolj Court Ongoing proceedings. 2570/63/2014 Plaintiff: EL SERV Constanta 36 Defendant: SED Bankruptcy - debt RON 12.297.491. Ongoing proceedings. Court 8785/118/2014 The court rejects the appeal made by EL SERV as unfounded. Admits the appeal filed by Casa de Asigurari de Sanatate a Municipiului Bucuresti. It partially amends the civil appeal in the sense that: forces the Plaintiff: EL SERV plaintiff to pay to the applicant Defendant: CNAS, Recovery amounts of social insurance Bucharest the amount of RON 161,657, 37 CASMB – FNUASS – RON 1,384,652, plus Court of representing amounts to be interest. Appeal recovered from FNUASS, for the 43602/3/2015 period January 2013 - March 2013 and January 2014, as well as to pay the interest legal costs, calculated from the due date of each amount to the day of the payment. It still retains the rest of the decision, final appeal. Plaintiff: EL SERV 38 Defendant: SEM Bankruptcy – debt: RON 73,708,083. Bacau Court Ongoing proceedings. 4435/110/2015 39 Plaintiff: EL SERV Claims – EUR 655,164, equivalent of Bucharest Ongoing proceedings.
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Crt. Parties/Case file Object Court Case status no. number Defendant: New RON 2,948,240. Court Koppel Romania 20376/3/2016 Plaintiff: Integrator S.A. Bucharest The merit court rejects the claim. 40 Defendant: EL SERV, Claims – RON 17,677,309 Court of The plaintiff filed an appeal, SAP Romania Appeal being in course of settlement. 34479/3/2016** Plaintiff: EL SERV Bankruptcy – opposition to the Constanta 41 Defendant: SED preliminary table - debt RON Suspended. Court 8785/118/2014/a1 3,025,622. Creditor: EFSA Bankruptcy - enter a claim to the Debtor: Apaterm S.A. 42 statement of affairs for the amount of Galati Court Ongoing proceedings. Galati RON 2,742,115. 4783/121/2011* Creditor: EFSA Insolvency proceedings - enter a claim Debtor: Vegetal 43 to the statement of affairs for the Braila Court Ongoing proceedings. Trading SRL Braila amount of RON 2,252,570. 1653/113/2014 Plaintiff: Carpatcement Holding S.A. On the merits, the Plaintiff action Compliance obligation - cancelling High Court Defendant: Ministry of was rejected, the Plaintiff stating 44 penalties in amount of RON 2,440,785 of Cassation Economy, Romanian an appeal. The appeal was – based on GEO 57/2002. and Justice Government, EFSA definitively rejected. 1665/2/2014 Creditor: EFSA Bankruptcy - enter a claim to the Debtor: Ariesmin S.A. 45 statement of affairs for the amount of Alba Court Ongoing proceedings. Branch RON 20,711,588. 7375/107/2008 Creditor: EFSA Bankruptcy - enter a claim to the Debtor: Zlatmin S.A. 46 statement of affairs for the amount of Alba Court Ongoing proceedings. Branch RON 9,314,176. 6/107/2003 Creditor: EFSA Bankruptcy - enter a claim to the Debtor: Hidromecanica 47 statement of affairs for the amount of Brasov Court Ongoing proceedings. S.A. RON 4,792,026. 3836/62/2009 Creditor: EFSA Bankruptcy - enter a claim to the Debtor: Nitrarmonia 48 statement of affairs for the amount of Brasov Court Ongoing proceedings. S.A. RON 2,285,997. 261/F/2004 Creditor: EFSA Insolvency proceedings - enter a claim Debtor: Remin S.A. Timisoara 49 to the statement of affairs for the Ongoing proceedings. Court amount of RON 71,443,402. 32/100/2009 Creditor: EFSA Insolvency proceedings - enter a claim Debtor: Oltchim S.A. 50 to the statement of affairs for the Valcea Court Ongoing proceedings.
amount of RON 56,533,826. 887/90/2013 Creditor: EFSA Insolvency proceedings - enter a claim Cluj Debtor: Energon Power 51 to the statement of affairs for the Specialised Ongoing proceedings. and Gas S.R.L. amount of RON 2,392,985. Court 53/1285/2017
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Crt. Parties/Case file Object Court Case status no. number Creditor: EFSA Bankruptcy - enter a claim to the Cluj 52 Debtor : CUG S.A. statement of affairs for the amount of Specialised Ongoing proceedings. 2145/1285/2005 RON 7,880,857. Court
4. Litigations against the Romanian Court of Accounts
Crt. Parties/Case Object Court Case status no. file number Court on the merits: Admits in part the claim. Cancels partially the Resolution no. 23 on 17 March 2014 regarding the items 1 and 5 and the Decision no. 3/14 January 2014 regarding the items 4 and 8. Rejects, as ungrounded the claim regarding items 2, 3 and 4 in the Resolution no. 23/17 March 2014 and items 5, 6 and 7 Plaintiff: ELSA Suspension and cancelling of the in the Decision no 3/14 January Defendant: administrative act (Decision 2014. Rejects the claim for Romanian Court Bucharest Court of 1 no.3/14 January 2014 and the suspension of the enforcement of of Accounts Appeal Resolution no. 23/17 March the Decision no. 3/14 January
2014). 2014, as ungrounded. Electrica 2268/2/2014* and CCR have stated Appeal. The court admits in part ELSA’s request and sent the case for rejudgement to the first instance, regarding the annulament of item 5 of the Decision no. 23/17 March 2014, coresponding to item 8 of the Decision no. 3/14 January 2014. Currently the case is in rejudgement phase. Partial annulment of Decision no. 12/27 December 2016, issued by the director of the 2nd Direction from the IVth Department of the Court of Accounts, regarding the faults from point 1 to 8, with the consequence of dismissing the Plaintiff: ELSA actions from point 1, 3 to 9 Defendant: inclusive, imposed to ELSA by the Romanian Court disputed Decision; the partial Bucharest Court of 2 In course of settlement. of Accounts annulment of the conclusion no. Appeal 12/27 February 2017 of the Court 2229/2/2017 of Accounts, rejecting the objection raised by ELSA against Decision no. 12, regarding the faults and orders mentioned above. In the alternative, the extension of the deadlines for carrying out all the measures ordered by ELSA through Decision
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Crt. Parties/Case Object Court Case status no. file number no. 12/27 December 2016 with at least 12 months; the suspension of the enforceability of Decision no. 12 until final settlement of the present dispute. Action in administrative litigation for annulment of Decision no. Plaintiff: ELSA 38/09 October 2018, the Defendant: annulment of the decision Romanian Court Bucharest Court of 3 concluding the appeal imposed by In course of settlement. of Accounts Appeal the Decision no. 12/1 of 27
7780/2/2018 December 2016, the revocation of the Decision no. 12/1 and the cessation of any CCR control act. Plaintiff: EFSA Disputes with the Court of Defendant: Accounts (Law no. 94/1992), The first instance rejected the High Court of Romanian Court action for the annulment of the request filed by EFSA as 4 Cassation and of Accounts Decision no. 11/2016, of the unfounded. EFSA filed an appeal, Justice Decision no. 23/2017 and of the in course of settlement. 2213/2/2017 Control Report no. 5799/2016. Plaintiff: EL SERV Disputes with the Court of Defendant: Accounts Administrative act – Bucharest Court of 5 Romanian Court Decision no. 11/27 February In course of settlement. Appeal of Accounts 2017, for the amount of RON 2098/2/2017 2,351,034. Plaintiff: EL SERV Defendant: Disputes with the Court of 6 Romanian Court Accounts – Annulment of Decision Prahova Court In course of settlement. of Accounts and of the control report 1677/105/2017 Plaintiff: SDTS Dispute litigation on Law Defendant: 94/1992; annulment of the On merits, SDTS’s case was Brasov Court of 7 Romanian Court Decision no. 73/12 January 2017 dismissed, SDTS filed an appeal, Appeal of Accounts and of the Decision no. 24/11 admitted. 2763/62/2017 April 2017. Plaintiff: SDMN Suspension and annulment of the Defendant: Control Report of the Prahova 8 Romanian Court Chamber of Accounts no. 6618/11 Prahova Court In course of settlement. of Accounts November 2016 and of the 1677/105/2017 Decision no. 45/2016.
5. Other litigations with significant impact
Crt. Parties/Case file Object Court Case status no. number Claim under Law no. On the merits of the case, the Plaintiff: Niculescu 10/2001 – for a land of plaintiff's action was admitted in Vladimir 1,558 sqm and built area part, with the right to repairs by Ploiesti Defendant: SDMN, City of 202 sqm, located in equivalent for the land of 1,402 sqm 1 Court of Hall Valenii de Munte Valenii de Munte, N. located in Valenii de Munte, Bvd. Appeal Iorga str. No.129 and Nicolae Iorga no. 129 (currently 1580/105/2008* being used by the no.131), Prahova County. Exploitation Center The Plaintiff and Valenii de Munte
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Crt. Parties/Case file Object Court Case status no. number Valeni. Town Hall filed an appeal - in course of settlement. At the request of RCS-RDS, the case was suspended until the case file 2414/2/2016 was settled with Delalina SRL, a case file by the Bucharest Court of Appeal. RCS-RDS Cancellation of Oradea filed a request for re-examination of LCD no. 108/2 February the stamp duty, so the case file 2014 on the public 3340/111/2015/a1 was formed, Plaintiff: SDTN bidding for concession of within the application to challenge Defendant: Local Council the land of 100,000 sqm the constitutionality of the provisions 2 of Oradea City, RCS&RDS area, in order to develop Bihor Court of art. 39 par. 1 and par. 3 of GEO an underground channel 80/2013 was invoked. The exception 3340/111/2015 for installing the was admitted in principle and the electronic and electric case was suspended pending its communication settlement by the Constitutional networks. Court. At the deadline of 31 January 2018, the court rejects the request filed by the petitioner RCS & RDS SA for the re-examination of the judicial tax in case no. 3340/111/2015, as inadmissible. The case file was suspended until Plaintiff: Delalina S.R.L. The obligation to issue the settlement of the case file no. Defendant: SDTN technical permit for 3 Bihor Court 2414/2/2016 with Delalina SRL, case connection in the favour file on the lawsuit of the Bucharest 910/111/2016 of SC Delalina SRL. Court of Appeals. Plaintiff: Delalina S.R.L., Foto Distributie S.R.L. Defendant: SDTN, ANRE, Romanian Government, Ministry of Economy, Cancellation of In merits, the court has rejected the Commerce and High Court administrative acts exceptions and the action filed by 4 Relationships with the of Cassation (Order 73/2014, the plaintiffs, which have initiated an Business Environment, and Justice Concession agreements). appeal; in course of settlement. Ministry of Energy, Banat Enel Distribution, Muntenia Enel Distribution, Dobrogea Enel Distribution 2414/2/2016 Plaintiff: Delalina S.R.L., The case file has as Foto Distributie S.R.L. object the cancellation of Court of The file was suspended until the 5 Defendant: ANRE the ANRE decision on Appeals settlement of case file no. Intervener: SDTN refusal to give licenses Bucharest 2414/2/2016. 4013/2/2016 for electricity distribution Action for the annulment Plaintiff: Stanciu Razvan of the OGMS Decision no. Bucharest The court rejected the request. The Defendant: ELSA 2/26 October 2017, 6 decision is final by non-appealing. regarding the election of Court
42479/3/2017 the members of the BoD by cumulative vote. 7 Plaintiff: Dumitrascu Action for the annulment Bucharest The plaintiff dropped the trial
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Crt. Parties/Case file Object Court Case status no. number Gabriel of the OGMS Decision no. Court application. Defendant: ELSA 2/26 October 2017 regarding item 1 – the 44217/3/2017 election of the members of the BoD. Obligation to do - Mainly obliging the defendant to hand over the Plaintiff: ELSA documentation for the Defendant: E – Distributie Timisoara 8 land in Bocsa. In the In regularization procedures. Banat S.A. Court alternative, the obligation 30399/325/2018 to draw up the CADP documentation and damages. Claim for land Lot 1-NC 32024 (area of 259 sqm) Plaintiff: ELSA and lot 2 NC 31944 (with Defendant: Baile a surface of 1,394 sqm), Caransebes 9 In course of settlement. Herculane City both located in Baile Court 4572/208/2018 Herculane, Uzinei str. 1 and FC rectification.
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Appendix 2 – Details of the main investments accomplished in 2018 by the Electrica Group
During 2018, the most significant investments accomplish by the Group are the following: CAPEX 2018 DESCRIPTION VALUE (RON mn) MUNTENIA NORD Modernization of LV connections belonging to transformer stations powered from 20kV OHL 10.43 Vadu Soresti, Buzau county Modernization of transformer stations powered from 20kV Eternitatii underground line, in 4.48 municipality of Targoviste, Dambovita county DAS (Distribution Automation System) URBAN, municipality of Focsani, Vrancea county 8.05 Modernization of electricity distribution installations belonging to Targoviste branch, for flats 3.96 housing in Pucioasa locality Modernization of 110 kV OHL Focsani Vest – Tataranu, pillars 1-125 13.36 Modernization and SCADA system integration of Măgura Substation 3.75 Modernization and SCADA system integration of Comarnic 110/20 kV Substation 6.64 Modernization and SCADA system integration of Breaza 110/20 kV Substation 5.93 Modernization of Scaieni 110/20 kV Substation 5.38 Modernization and SCADA system integration of 110/20 kV ICM Tecuci Substation, Galati 4.41 county Mounting the second 110/20 kV power transformer in Vidra, Jugureanu, Bujoru, Cudalbi, 4.54 Galati Centru 110/20 kV Substations – Vol. 2 Jugureanu 110/20 kV Substation Modernization of 110/MT substations within SDMN - Replacement of 110/MT power 22.22 transformers Increasing energy efficiency of distribution network and improving technical conditions for power supply of the consumers by switching to 20 kV transformer stations from the Hipodrom, 2.06 Obor, Victoriei neighbourhoods of Braila municipality Modernization and SCADA system integration of Baraganu 110/20 kV Substation 3.53 Increasing the energetic efficiency of distribution installations and improving technical conditions for electricity supply to household customers from 0.4 kV OHL in locality of Ianca, 4.34 Braila county Modernization of LV electrical connections at flats housing of neighbourhoods Viziru I, Obor, 2.14 Hipodrom and of streets Calea Galati, Eremia Grigorescu from Braila municipality Modernization and SCADA system integration 110kV/20kV Insuratei Substation, Braila county 2.82 Modernization of LV OHL and LV electrical connections in locality of Lanurile, Braila county 2.31 Modernization of LV OHL and LV electrical connections in locality of Chiscani, Braila county 3.47 Modernization and SCADA system integration of Patarlagele 110/20 kV Substation 3.34 Switching of MV networks from 6 kV to 20 kV, voltage level improvement of area Sos. 2.39 Spatarului, Aleea Industriei, Sos. Brailei Modernization - voltage level improvement at consumers of Village Sibiciu de Jos, Panatau 2.36 commune, Buzau county Modernization of transformer stations of Galati municipality, Tiglina 1 area, Galati municipality 2.42 Improving technical conditions for power supply of the consumers in Cheia village, Maneciu 2.90 commune – 20/6 kV transformer station Modernization and SCADA system integration of Azuga 110/20/6 kV Substation 3.20 Upgrading protections of 110 kV cell and 6 kV cells, installation of the second neutral treatment group by resistor at 20 kV and SCADA system integration in 110/27,5/20/6 kV 3.09 Ploiesti Nord Substation Modernization of LV electrical connections in CE Valeni – locality of Varbilau 2.60 Modernization and SCADA system integration of Gaesti 110/20 kV Substation 3.26 Traction checks, conductors stretching, insulation replacement, protective conductor replacement, foundation restoration of OHL 110 kV Fieni – Moroeni, circuit 1+2, between 3.50 pillars 1-84
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DESCRIPTION VALUE (RON mn) Modernization and SCADA system integration of IUP Targoviste 110/20/6 kV Substation 2.42 Modernization of LV OHL and LV electrical connections in Glodeni Deal – Gusoiu area and 2.14 central area Modernization of LV OHL, MV OHL and LV electrical connections in Tetcoiu area, Matarsaru 2.73 commune Modernization of 110 kV switches in substations within SDMN 3.17 Replacement of primary switching equipment at 110kV cells in the substations managed by SDMN (Bordei Verde, Coltea, km221, Lacu Rezi, Lebada, Lunca, Port Braila, Spiru Haret, 4.75 Urleasca, Zatna, Faurei, Buzau Est, Ceil Focsani, Inetof, Moreni, Lespezi) Automated distribution system for M.T. air power lines in the Distribution Branches within 3.42 SDMN, STAGE V- vol. 3 TRANSILVANIA NORD Modernization of Nadas 110/20 KV Substation 2.00 Optimization of central point’s Cluj and Oradea, implementation and installation of EMS application with update of DMS Cluj and DMS implementation in Oradea - stage 3, DMS Baia 2.80 Mare, Bistrita, Satu Mare, Zalau Modernization of LV connections in the localities: Salard, Santandrei, Fughiu, Nojorid 5.00 Modernization of Vascau 110/20 kV Substation 3.80 Modernization of Zalau 110/20 kV Substation 4.90 Mounting remote-controlled switches and reclosers within SD Zalau and SD Cluj, stage 2018 3.70 Modernization of Mihai Viteazu 110/20 kV Substation 3.20 Modernization of Gherla 110/20 kV Substation 3.10 Switching to 20 kV of transformer stations within Baia Mare branch – stage 1 2017 4.30 Switching to 20 kV of networks within Satu Mare branch - Distributor: SM1-PA 1003 BUJOR- 4.00 PA1021 MARA-SM1 Switching of MV networks from 6 kV to 20 kV in the municipality of Carei 6.00 Modernization of Unirea 110/20 kV Substation 4.70 Switching to 20 kV of distributors L5, L6, L17 and L2SMA from Turda Substation, Turda 4.30 municipality, Cluj county Replacing of 110/MV power transformers with low-loss transformers SDTN stage 1 and 2 17.10 TRANSILVANIA SUD Modernization of LV electricity distribution network in Avrig city, Str. Gheorghe Lazar area, 2.80 Sibiu county Modernization of LV OHL and LV electrical connections in work point Covasna and Intorsura 3.90 Buzaului, Covasna county Replacing of LV OHL conductors and modernization of electrical connection in CE Tg. Secuiesc, 6.10 Covasna county Replacing of LV OHL conductors and modernization of electrical connection in CE Sf. 7.80 Gheorghe, Covasna county Modernization of electricity supply installations for flats housing within SDTS Harghita 3.30 Conductor replacements, systematization and securing of LV OHL electrical connections Ileni, 3.36 reconfiguration of 20 kV OHL Sebes, Brasov county Voltage level improvements of LV OHL Ojdula, Covasna county 3.00 Voltage level improvements and modernization of 0.4 kV OHL Tarlungeni, in locality of 2.30 Tarlungeni, Brasov county Voltage level improvements in Pauleni – Ciuc commune, villages Pauleni-Ciuc, Soimeni and 2.80 Delnita, Harghita county Voltage level improvements of PTa 1, PTa 2, PTa 3 Micfalau area, Covasna county 2.40 Modernization of transformer stations (MV cell replacement, indoor network distribution board of Astra neighbourhood, Tractorul, Triaj, Craiter, Garii area, Uzina 2, Racadau, etc), in locality 15.10 of Brasov, Brasov county Modernization of transformer stations and LV connections in locality of Sighisoara ( PTz 75, PTz 70, PTz 5, PTz 72, PTz 37, PTz 62, PTz 82, PTz 81, PTz 11, PTz 1, PTz 78, PTz 44, PTz 8, 2.50 PTz 12, PTz 4, PTz 23, PTz 38 ), Mures county Switching to 20 kV of MT networks PA 3 Astra neighbourhood, in locality of Brasov, Brasov 3.50 county
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DESCRIPTION VALUE (RON mn) Switching to 20 kV of the MT networks operating at the 6 kV in Tg. Mures locality, Mures 3.90 county – ob. MV Works Modernization of 20 kV OHL Ludus - Cipau, Mures county 3.60 Modernization and route modifying of 110 kV underground cable lines Brasov - IUS and Zizin 4.80 – IUS, Brasov county Modernization of 110 kV OHL Zizin - IABv - Metrom and 110 kV OHL Darste - IABv - Racadau 2.80 by partial passage in 110 kV underground cable line Increasing supply reliability for the users connected to 110/20/6 kV Ocna Mures substation, 6.90 Alba county Retrofitting of Medias 110/20 kV substation, Sibiu county 4.60 Integration of substations belonging to CEM 110 kV Mures into the SCADA DMS system of 3.40 SDTS Integration of substations belonging to CEM 110 kV Sibiu into the SCADA DMS system of SDTS 2.80 Replacing of MV/LV power transformers with low-loss transformers 13.2 Modernization (conductor replacements, systematization and securing of LV OHL electrical connections) of urban networks in Brasov, Brasov county – Str. Lacurilor, Stejarului, Brazilor 2.12 - Noua neighbourhood
During 2018, the largest transfers from ongoing tangible fixed assets to tangible fixed assets are mainly represented by the commissioning of investment objectives, as follows:
Commissioning 2018 DESCRIPTION VALUE (mil. RON) MUNTENIA NORD Modernization of LV connections related to aerial transformation points powered from 20 kV 9.56 OHL Vadu Soresti, Buzau county Modernization of transformer stations powered from 20kV Eternitatii underground line, in 4.72 municipality of Targoviste, Dambovita county DAS (Distribution Automation System) URBAN, municipality of Focsani, Vrancea county 8.11 Implementation of DAS (Distribution Automation System) RURAL in branches of SDMN stage 4.76 2016, VOL3 – Targoviste branch + Braila branch Modernization of electricity distribution installations belonging to Targoviste branch, for flats 4.18 housing in Pucioasa locality Modernization of 110 kV OHL Focsani Vest – Tataranu, pillars 1-125 13.64 Modernization and SCADA system integration of Comarnic 110/20 kV Substation 4.01 Modernization and SCADA system integration of Breaza 110/20 kV Substation 6.57 Modernization of Scaieni 110/20 kV Substation 4.29 Modernization and SCADA system integration of ICM Tecuci 110/20 kV Substation, Galati 5.53 county Modernization and SCADA system integration of Gaesti 110/20 kV Substation 4.60 Mounting the second 110/20 kV power transformer in Vidra, Jugureanu, Bujoru, Cudalbi, 4.16 Galati Centru 110/20 kV Substations – Vol. 2 Jugureanu 110/20 kV Substation Modernization of 110/MV substations within SDMN - Replacement of 110/MV power 21.59 transformers - Group I + Grup II Modernization of 110 kV switches in substations within SDMN 3.87 Increasing energy efficiency of distribution network and improving technical conditions for power supply of the consumers by switching to 20 kV transformer stations from the 2.06 Hipodrom, Obor, Victoriei neighbourhoods of Braila municipality Traction checks, conductors stretching, insulation replacement, protective conductor replacement, foundation restoration of OHL 110 kV Fieni – Moroeni, circuit 1+2, between 3.60 pillars 1-84 Ensuring the technical conditions for operation of the 110 kV installations at the Maxineni 2.03 110/20 kV Substation, Braila County Modernization and SCADA system integration of Baraganu 110/20 kV Substation 3.04 Increasing the energetic efficiency of distribution installations and improving technical 4.85
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DESCRIPTION VALUE (mil. RON) conditions for electricity supply to household customers from 0.4 kV OHL in locality of Ianca, Braila county Modernization of LV electrical connections at flats housing of neighbourhoods Viziru I, Obor, 2.37 Hipodrom and of streets Calea Galati, Eremia Grigorescu from Braila municipality Modernization of LV OHL and LV electrical connections in locality of Lanurile, Braila county 2.32 Modernization of LV OHL and LV electrical connections in locality of Chiscani, Braila county 3.51 Modernization and SCADA system integration of Vernesti 110/20 kV Substation 2.37 Modernization and SCADA system integration of Patarlagele 110/20 kV Substation 2.59 Switching of MV networks from 6 kV to 20 kV, voltage level improvement of area Sos. 2.17 Spatarului, Aleea Industriei, Sos. Brailei Modernization - voltage level improvement at consumers of Village Sibiciu de Jos, Panatau 2.47 commune, Buzau county Modernization and SCADA system integration of Magura Substation 3.12 Improving technical conditions for power supply of the consumers in Cheia village, Maneciu 2.67 commune – 20/6 kV transformer station Modernization of LV connections in CE Valeni- locality of Predeal-Sarari, Teisani 2.09 Modernization and SCADA system integration of Azuga 110/20/6 kV Substation 2.21 Protections upgrading of 110 kV cell and 6 kV cells, installation of the second neutral treatment group by resistor at 20 kV and SCADA system integration in 110/27,5/20/6 kV 2.16 Ploiesti Nord Substation Modernization of LV electrical connections in CE Valeni – locality of Varbilau 2.70 Modernization and SCADA system integration of Aninoasa 110/20 kV substation 2.33 Modernization of transformer stations powered from 20kV Bratianu underground line, 2.01 municipality of Targoviste, Dambovita county Modernization of LV OHL and LV electrical connections in Glodeni Deal – Gusoiu area and 2.44 central area Modernization of MV OHL, LV OHL and LV electrical connections in Tetcoiu area, Matasaru 2.11 commune Replacement of primary switching equipment to 110kV cells in the substations of SDMN (Bordei Verde, Coltea, km221, Lacu Rezi, Lebada, Lunca, Port Braila, Spiru Haret, Urleasca, 4.23 Zatna, Faurei, Buzau Est, Ceil Focsani, Inetof, Moreni, Lespezi) TRANSILVANIA NORD Replacement of protective conductor with OPGW on: 110 kV OHL Vascau-Beius, 110 kV OHL Vascau-Stei, 110kV OHL Vascau-Baita, Connection 110kV Suncuius, 110kV OHL M.Viteazu- 2.40 Turda; 110kV OHL Vetis-Carpati-SM1 Replacing of 110/MV power transformers with low-loss SDTN – stage 1 and 2 16.80 Optimization of central point’s Cluj and Oradea, implementation and installation of EMS application with update of DMS Cluj and DMS implementation in Oradea - stage 3, DMS Baia 2.30 Mare, Bistrita, Satu Mare, Zalau Modernization of Mihai Viteazu 110/20 kV Substation 4.40 Modernization of Gherla 110/20 kV Substation 3.40 Modernization of Poiana 110/6 KV Substation and create 20kV bar – modernization of 3.80 transformer cells Distribution Automation System (DAS) - Mounting remote-controlled switches and SF6 10.30 reclosers in MV networks within SDTN – branches Cluj – Napoca, Satu Mare and Oradea Switching to 20 kV of distributors L5, L6, L17 and L2SMA from Turda Substation, Turda 4.60 municipality, Cluj county Modernization of 110 kV OHL Oradea Vest - Voivozi 6.10 Modernization of Vascau 110/20 kV Substation 2.00 Modernization of Stei 110/20/6 kV Substation - External 110kV cells 4.40 Modernization of Tileagd 110/20 kV Substation - External 110kV cells 2.80 Modernization of transformer stations powered from Oradea Nord 110/20kV Substation, SC2, SC2, from Iosia 110/20kV Substation, from Palota 110/20kV Substation, Crisul, Biharea, CET 10.10 II, Velenta, and from Oradea Centru 110/20kV Substation and Oradea Sud, Oradea locality, Bihor county Construction of MT Underground cable in order to increase the power supply reliability 3.70
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DESCRIPTION VALUE (mil. RON) in area Baile Felix, Bihor county Modernization of LV connections in localities Salard, Santandrei, Fughiu, Nojorid – 2528 5.80 connections Increasing safety and power supply reliability in area Sintandrei, Santandrei locality, area 2.30 Calea Santandreiului, Palota, Porcine, Fibralex Increasing power supply reliability for users connected to Somcuta 110/MV Substation 2.20 Modernization of Baia Mare 1 - 110/35/20/10/6kV Substation 4.50 Switching to 20 kV of Sasar neighbourhood, Baia Mare - stage 3 and 4 3.40 Switching to 20 kV of transformer stations within Baia Mare branch – stage 1 2.00 Ensuring continuity in power supply of consumers from Carei area - Realization of connection 2.30 110kV underground cable Vetis-Carei Switching to 20 kV of networks within Satu Mare branch - Distributor: SM1-PA 1003 BUJOR- 3.40 PA1021 MARA-SM1 Switching of MV networks from 6 kV to 20 kV in the municipality of Carei 6.70 Increasing power supply reliability for users connected to 110/MV Beclean Substation 4.30 Modernization of Unirea 110/20 kV Substation 4.80 Modernization of Zalau 110/20 kV Substation 2.60 TRANSILVANIA SUD Modernization of low voltage electricity distribution network in Avrig city, Str. Gheorghe Lazar 2.58 area, Sibiu county Modernization of LV OHL and LV electrical connections in work point Covasna and Intorsura 4.10 Buzaului, Covasna county Replacing of LV OHL conductors and modernization of electrical connection in CE Tg. 5.4 Secuiesc, Covasna county Replacing of LV OHL conductors and modernization of electrical connection in CE Sf. 7.68 Gheorghe, Covasna county Modernization of electricity supply installations for flats housing within SDTN - Harghita 4.30 Conductor replacements, systematization and securing of LV OHL electrical connections Ileni, 3.26 reconfiguration of 20 kV OHL Sebes, Brasov county Voltage level improvements and modernization of 0.4 kV OHL Tarlungeni, in locality of 2.40 Tarlungeni, Brasov county Voltage level improvements of LV OHL Ladauti, Covasna county 2.03 Voltage level improvements of PTa 1, PTa 2, PTa 3 Micfalau area, Covasna county 2.5 Modernization of transformer stations (MV cell replacement, indoor network distribution board of Astra neighbourhood, Tractorul, Triaj, Craiter, Garii area, Uzina 2, Racadau, etc),in 15.3 locality of Brasov, Brasov county Switching to 20 kV of MT networks PA 3 Astra neighbourhood, in locality of Brasov, Brasov 2.7 county Modernization of 20 kV OHL Ludus - Cipau, Mures, county 3.26 Modernization (conductor replacements, systematization and securing of LV OHL electrical connections) of urban networks in Brasov, Brasov county – Str. Lacurilor, Stejarului, Brazilor 2.14 - Noua neighbourhood Modernization of LV networks in the municipality of Brasov, Brasov county - Str. Mircea cel Batran, Barbu St. Delavrancea, Decebal, Baba Novac, Ioan Ratiu, Dealul Cetatii - Old City 2.3 neighbourhood Switching of Zarnesti overhead lines (OHL) from 6 kV to 20 kV and increase the power supply 2.34 reliability in the Magura area, Pestera, Brasov county - Object 1 Modernization of primary and secondary equipment of Turnatorie 110/6 kV Substation, Alba 3.28 county Increasing supply reliability for the users connected to 110/20/6 kV Ocna Mures substation, 6.77 Alba county Modernization of 110 kV cells in substations 3.05 Retrofitting of Medias 110/20 kV substation, Sibiu county 4.15
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