Societatea Energetica Electrica S.A Annual Report 2014

Plain-text annual report

1 2014 annual report 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report20142 SUMMAry 003 Key figures electrica group 005 message from Victor cionga, chairman of the Board of directors electrica sa 006 message from ioan rosca, general manager electrica sa 007 2014 DIRECTOR’S REPORT (COnSOlID aTED) 074 consolidated financial s tatements for the year ended 31 decemBer 2014 138 independent auditors’ report for consolidated financial s tatements for the year ended 31 decemBer 2014 141 2014 DIRECTOR’S REPORT (InDIVIDUal) 157 indiVidual financial s tatements for the year ended 31 decemBer 2014 204 independent auditors’ report for indiVidual financial s tatements for the year ended 31 decemBer 2014 206 ”comply or explain” statement proVided By the corporate go Vernance c ode of Bucharest stocK exchange 27 april 2015 211 declaration of the management annual report20143 key figures Key figures electrica group Operational results Distributed energy (Twh) Number of users (mil.) Supplied energy (Twh) Number of customers (mil.) 2012 16.26 3.6 10.7 3.5 2013 16.07 3.6 9.0 3.6 2014 16.30 3.6 9.7 3.6 Number of employees at period end 13,217 12,780 11,740 financial results revenues (th. rON) EBITDA (th. rON) EBIT (th. rON) Profit for the year attributable to the owners of the company (th. rON) Profit for the year attributable to the owners of the company excluding the equity accounted investments (th. rON) Net cash from operating activities (th. RON) Investitii (mii RON) EPS (rON) 5,252,948 5,382,818 5,043,728 645,074 243,229 353,533 671,138 345,450 244,412 855,453 496,941 287,837 106,755 181,453 287,837 996,040 405,527 1.73 511,258 366,845 1.18 981,309 465,232 1.03 net cash from operating actiVities (mIl. ROn) EaRnIngS PER ShaRE (ROn) 1.73 996 2012 511 2013 nET PROfIT (mIl. ROn ) 414 60 354 2012 316 71 244 2013 981 2014 401 114 288 2014 Profit attributable to non-controlling interests Profit attributable to owners of the Company 1.18 1.03 2012 2013 2014 distriBution networK area Others 59% edmn 12% edts 14% edtn 15% annual report2014 4 key figures distriBution segment Distributed energy (TWh) 16 16 16 capital expenditures Capex 2012 – 2014 (mil RON) 406 367 465 2012 2013 2014 2012 2013 2014 supply segment Supplied energy (TWh) Supply market share 10.70 9.00 9.70 23% 22% 21% 2012 2013 2014 2012 2013 2014 Supplied energy on the regulated market (TWh) Share of regulated supply market 38% 36% 38% 7.50 6.20 6.00 2012 2013 2014 2012 2013 2014 Supplied energy on the competitive market (TWh) Share of competitive supply market 3.20 2.80 3.70 12% 11% 12% 2012 2013 2014 2012 2013 2014 annual report20145 VICToR CIonGA Chairman of the Board of Directors of Electrica SA Dear ladies and gentlemen, A s the global economy gradually recovers from the adverse effects of the financial crisis which begun in 2008, the Romanian economy con- tinued to show clear signs of growth. Howev- er, despite the rather noticeable favorable outlook and the expected positive impact it will trigger on the me- dium and long term both on the Romanian industrial sector and energy market, the road to full recovery and sustainable growth will most likely last at least over the medium term. We are aware that, in order to ensure Electrica Group’s sustainable growth on the long term, the strategy we will adopt, needs to be adapted to the future challenges raised by the technological development, regulato- ry framework and customers’ demands. We believe that, to be able to respond to the sector’s trends and perspectives, all energy market players, including Electrica Group, will focus their efforts on endeavors aimed at optimization and internal reorganization of their core business. Such measures will ensure effec- tive cost control and capitalization of local market growth potential, especially on specific niches. To be in a position to implement certain projects, Electrica is keen to benefit, by setting mutually advantageous partnerships, from the expertise of similar companies carrying their business especially in Western Europe, as the outlook and trends of the respective markets are more distinct in that region. 2014 has been an important year and a turning point to Electrica’s business and perspectives. The successful listing of its shares on the Bucharest and London stock exchanges, and more importantly, Electrica Group’s ability to evolve in line with Romanian and foreign institutional investors’ expectations, will be a solid ar- gument in attracting new investors to the Romanian capital and energy markets. With the listing, Electrica has initiated an extensive and complex transformation process, which mainly aims at improving performance and aligning to the highest standards and best practices in the Romanian electricity distribution and supply sector. We strongly believe in the medium and long term benefits of this process. An initial specific step towards enhancing transparency and promoting an integrity and ethical based organi- zational structure is the recent launching of the Code of Ethics and Professional Conduct implementation. This milestone followed the commitments under- taken during the public offering and the Framework Agreement concluded with the European Bank for Reconstruction and Development. We are confident that the directions and actions we propose as well as the targets we intend to reach on the medium term, reflect Electrica’s vision, “to expand its leading position in the electricity distribution and sup- ply market segments, both nationally and regionally”. We consider it our mission to spare no efforts in or- der “to deliver long term value to our shareholders by distributing and supplying electricity and providing ex- ceptional services to our customers in a safe, reliable, affordable and sustainable manner”. We strongly believe in the transformation and optimi- zation of the Group’s current business as a key driver of achieving the targets set. We acknowledge the sig- nificant efforts required to implement the directions and measures we envisage going forward. However, we firmly consider this to be the path to proceed so as to meet our strategic goals, namely to achieve excel- lence in conducting our business and to align Electrica Group to the current performance of its Romanian market peers. In order to carry out the concrete steps of this continu- ous process, we will reach out to both internal resources as well as those available outside the Group and we will have a pragmatic cooperation with all stakeholders. The Board of Directors has recently approved the new or- ganizational chart of Electrica S.A. which is designed to establish the proper setting for the transforming the company’s operations. Given the regulated nature of our business, specific to the Group’s most significant part of operations, which has an important effect on the predictability of our ac- tivities as well as the sustainability of the Group’s per- formance and results, we intend to dedicate our efforts towards capitalizing on the benefits generally afforded to regulated business sectors. Electrica is a success story of the Romanian capi- tal market, a potential public-to-private partnership model and an instrument to attracting foreign invest- ment to Romania, to ensuring the national energy sec- tor modernization and to supporting the capital mar- ket. Electrica’s course of evolution is important not only to the company itself but also to the credibility of Romania overall. As part of its development, Electrica needs the joint input of its employees, management and shareholders. ... Electrica has initiated an extensive and complex transformation process, which mainly aims at improving performance and aligning to the highest standards and best practices ... annual report20146 IoAn RoSCA General Manager of Electrica SA 2 014 was a landmark year for Electrica since our company managed, in addition to its now historical public listing, to record outstanding performances. Despite the economic and regu- latory context, and the new market challenges, Electrica obtained very good financial results, the high net profit level being a sign of the effectiveness of our strategy which was presented in the offering prospectus, a strategy through which we maintained a leading position in the distribution and supply of electricity in Romania. Beyond the outstanding financial performance recorded in 2014, we made and we continue to make very important steps in developing an organizational culture based on performance and professionalism. Adherence to ethical values and principles is an already accomplished essen- tial prerequisite for growth of trust capital on the part of our company‘s stakeholders. We are determined to continue in the direction of the strategy presented in the offering prospectus, to implement the best practices in corporate governance within the Electrica Group, to continue the application of efficiency measures in all the business segments and to implement ambitious invest- ment programs in our own network. All these generate added value in the long term for all stakeholders and enable us to adapt and evolve in a market where compe- tition is becoming increasingly fierce. Last year we went through a complex process suc- cessfully completed through the dual listing of the company on the Bucharest and on the London Stock Exchanges. This is the starting moment of transforma- tion for our company, which must become a reference project for Romania. our journey, very good through- out 2014, gives us the energy and the confidence to continue, confident that we chose the right path. Looking ahead, we rely on the professionalism, passion and enthusiasm of our people in sustaining the irre- versible process of implementing the changes that are so much more needed for a publicly traded company, as well as for maintaining the leadership position in the field. ... our journey, very good throughout 2014, gives us the energy and the confidence to continue ... annual report20147 directors’ report electrica s.a. for the year 2014 (based on audited consolidated financial statements for the year 2014) 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report20148 TABlE Of C ONTENTS Identification details on report and issuer ___________________________________________________ 11 1 Electrica group results in 2014 __________________________________________________________ 12 1.1 Key consolidated financials _________________________________________________________ 12 1.2 Key events 2014 _________________________________________________________________ 14 1.3 Key financials by segments _________________________________________________________ 15 2 group overview ______________________________________________________________________ 18 2.1 General overview ________________________________________________________________ 18 2.2 Mission, Vision, Values ____________________________________________________________ 20 2.3 Strategic Objectives _______________________________________________________________ 21 2.4 Outlook ________________________________________________________________________ 21 3 Business overview ____________________________________________________________________ 22 3.1 Operating segments ______________________________________________________________ 22 3.2 Procurement ____________________________________________________________________ 25 3.3 Sales activity ____________________________________________________________________ 25 3.4 Reorganization and spin-off of assets _________________________________________________ 28 3.5 Personnel ______________________________________________________________________ 28 3.6 Environmental considerations _______________________________________________________ 30 3.7 Research and development activities _________________________________________________ 31 3.8 risk management ________________________________________________________________ 31 4 fixed assets _________________________________________________________________________ 36 5 Securities market _____________________________________________________________________ 40 6 management of the group _____________________________________________________________ 42 6.1 Board of Directors of Electrica S.A. ___________________________________________________ 42 6.2 Activity of the Board of Directors of Electrica S.A. and of its consultative committees ______________________________________________________ 43 6.3 Board of Directors of Electrica S.A. subsidiaries _________________________________________ 45 6.4 Executive Management____________________________________________________________ 46 7 Corporate governance ________________________________________________________________ 48 7.1 General Meeting of Shareholders ____________________________________________________ 48 7.2 Corporate Governance Code _______________________________________________________ 48 7.3 Implementing action plans undertook by signing the framework Agreement with EBrD ___________________________________________________ 49 7.4 The Corporate Governance Action Plan _______________________________________________ 49 7.5 The Environment and Social Action Plan ______________________________________________ 51 8 financial overview of the company ______________________________________________________ 52 8.1 Consolidated Balance Sheet ________________________________________________________ 52 8.2 Profit and Loss ___________________________________________________________________ 59 8.2.1 Consolidated figures ___________________________________________________________ 59 8.2.2 Segment reporting - Distribution _________________________________________________ 61 8.2.3 Segment reporting - Supply ______________________________________________________ 62 8.3 Cash flow _______________________________________________________________________ 64 annex 1 – litigations ___________________________________________________________________ 66 annex 2 – Details of realized investments in 2014 by Electrica group ____________________________ 70 annex 3 – Internal audit report ___________________________________________________________ 73 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report20149 GlOSSAry anre Bps cagr capex cee cpt dso eBit eBitda eBrd ec ee eem edd edB edm edmn edtn edts eiu eu eur gaap gdp gWh hV kV lV mV mWh opcom opex ppa raB roa roe ron saidi saifi scada tso TWh Vat romanian Energy regulatory Authority Basis points Compound Annual Growth rate Capital expenditure Central-Eastern Europe Own Technological Consumption Distribution System Operator Earnings before interest and tax Earnings before interest, tax, depreciation and amortization European Bank for Reconstruction and Development European Commission Enel Energie Enel Energie Muntenia Enel Distributie Dobrogea Enel Distributie Banat Enel Distributie Muntenia Electrica Distributie Muntenia Nord Electrica Distributie Transilvania Nord Electrica Distributie Transilvania Sud Economist Intelligence Unit European Union European monetary unit Generally accepted accounting principles Gross Domestic Product GigaWatt hour High voltage kilovolt low voltage Medium voltage MegaWatt hour romanian Gas and Electricity market operator Operational expenditure Power Purchase Agreement regulated Asset Base return on assets return on equity Monetary unit of romania System Average Interruption Duration Index System Average Interruption Frequency Index Supervisory Control And Data Acquisition Transmission System Operator TeraWatts hour Value added tax 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201410 figure 1 Consolidated revenues of Electrica Group (rON mil) ____________________________________ 12 figure 2 Adjusted EBITDA (rON mil) and Adjusted EBITDA Margin (%) _____________________________ 12 figure 3 Net Income (rON mil) ____________________________________________________________ 13 figure 4 Net Debt/(Cash) (rON mil) ________________________________________________________ 13 figure 5 Romanian Electricity Distribution Map _______________________________________________ 15 figure 6 Number of Users (thousand) _______________________________________________________ 16 figure 7 Distributed Volume (TWh) ________________________________________________________ 16 figure 8 Distribution Revenues (RON mil) ____________________________________________________ 16 figure 9 EBITDA (rON mil) _______________________________________________________________ 16 figure 10 Net Income (rON mil) ___________________________________________________________ 16 figure 11 Net Debt/( Cash) (rON mil) _______________________________________________________ 16 figure 12 Supply revenues (rON mil) _______________________________________________________ 17 figure 13 EBITDA (rON mil) ______________________________________________________________ 17 figure 14 Net Income (rON mil) ___________________________________________________________ 17 figure 15 Net Debt / (Cash) (rON mil) ______________________________________________________ 17 figure 16 Group entities as of 31 December 2014 _____________________________________________ 18 figure 17 Electrica Group Corporate Values __________________________________________________ 20 figure 18 The coverage of companies in the Electrica Group _____________________________________ 24 figure 19 Market share distribution segment _________________________________________________ 25 figure 20 regulated Market, 2013 _________________________________________________________ 26 figure 21 Competitive Market, 2013 _______________________________________________________ 26 figure 22 Volume of electricity supplied on retail market (TWh) __________________________________ 26 figure 23 Growing number of consumers (‘000’s) _____________________________________________ 26 figure 24 Consumers by volume, 2014 ______________________________________________________ 27 figure 25 Consumers by revenues, 2014 ____________________________________________________ 27 figure 26 Investment program pre and post IPO ______________________________________________ 38 figure 27 Electrica investment structure in 2014 ______________________________________________ 39 figure 28 Share price on BVB and lSE ______________________________________________________ 40 figure 29 Performance of Electrica in comparison to BET index (%) _______________________________ 40 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201411 identification details on report and issuer Report date: March 26, 2015 name of the Issuer: SC DfEE ElECTrICA SA headquarter: no. 9 Grigore Alexandrescu Street, 1st District, Bucharest, romania Telephone/fax number: +4021.208.5002; +4021.208.5004 fiscal Code: rO13267221 Trade Registry no: J40/7425/2000 Share capital: rON 3,459,399,290 subscribed and paid (see Note 1) Main caracteristic of issued shares: 345,939,929 ordinary shares of 10 rON nominal value, issued in dematerialized form and freely transferable, nominative, tradable and fully paid. Regulated market where the issued securities are traded: As at December 31, 2014 the Company shares are listed on the Bucharest Stock Exchange and Global Depositary receipts are listed on the london Stock Exchange. (see Note 2) note 1 Pursuant to the registration certificate no. 2340001 and the resolution no. 78473/ 02.07.2014 issued by the National Trade Registry Office, the share capital was increased by 1,771,887,440 RON, following the successful completion of the process of underwriting new shares issued by the Company in the initial public offering. As at the date of the current report the subscribed and paid up capital of SC Electrica SA is 3,459,399,290 rON. note 2 Following the completion of initial public offering, the Company’s securities were admitted to trading on the Bucharest Stock Exchange (BSE) under the trading symbol El and on the london Stock Exchange (lSE) under the trading symbol ElSA on July 3, 2014. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201412 1 Electrica Group results in 2014 1.1 Key consolidated financials In 2014 Electrica Group financial results presented a consistent improvement compared to 2013, driven by an exceptional result in supply segment and by the improvement of the distribution segment profitability. Electrica’s revenue in 2014 and 2013 amounted to rON 5,044 million and RON 5,383 million, respectively. The decrease of revenue by rON 339 million, or 6.30% in the 2014 as compared to 2013 resulted mainly from the decrease in revenues from supply activity that were partially offset by the increase in distribution revenues. (rON mil) revenues Other income Operating expenses adjusted EBITDa3 eBit Profit before tax net profit Source: Electrica S.A. 20121 5,253 124 (4,765) 613 246 468 416 20132 5,383 128 (4,862) 649 345 397 316 2014 5,044 177 (4,350) 870 497 510 401 As it can be observed in the following graph, EBITDA margin sharply increased in 2014 as compared to 2013, presenting a strong margin growth, namely from 12% to 17% for EBITDa margin and from 5% to 8% in terms of net income margin (eexcluding net income related to equity accounted investments). As of 31 December 2014, the Company has a capital structure driven by a negative Net Debt/(Cash) position of RON 2,551 million based on the proceeds from the IPO. fIgURE 1: consolidated reVenues of electrica gROUP (ROn mil) fIgURE 2: aDjUSTED EBITDa (ROn mil) anD aDjUSTED EBITDa maR gIn (%) 5,253 302 5,383 414 5,044 273 4.951 4.969 4.771 17% 870 12% 613 12% 649 2012 2013 2014 Revenues (ex-green Certificates) Revenues from green Certificates 2012 eBitda 2013 2014 EBITDa margin Source: Electrica S.A Source: Electrica S.A 1 No restatement has been performed for the year 2012, as a result of the application of IFRIC 12 starting with 1 January 2014 2 Restated as a result of application of IFRIC 12 and new standards with a date of initial application of 1 January 2014 under IFRS-EU. 3 The Company defines Group adjusted EBITDA as Group EBITDA adjusted for non-recurring events (i) consolidatedimpairment / reversal of impairment of trade and other receivables, net and (ii) consolidated write down / reversal of write down of inventories, net. 4 Net debt/(Cash) is calculated as bank borrowings + bank overdrafts + financial leases + Financing of PP&E less cash and cash equivalents. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report2014 13 fIgURE 3: nET InCOmE (ROn mil) fIgURE 4: nET DEBT/(CaSh) (ROn mil) 3% 247 169 2012 (128) (298) 5% 63 253 8% 402 2013 2014 2012 2013 (2.551) 2014 nI Related to Equity accounted Investments Datoria neta (cash) nI group nI margin Source: Electrica S.A Source: Electrica S.A liquidity Cash and cash equivalents comprise cash balances and call deposits and deposits with maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments. (rON mil) Bank current accounts Call deposits Cash in hand Treasury bills and government bonds with original maturity of less than 3 months Total cash and cash equivalents in the consolidated statement of financial position Overdrafts used for cash management purposes Total cash and cash equivalents in the consolidated statement of cash flows Deposits, treasury bills and government bonds Source: Electrica S.A. 31 December 2014 31 December 2013 77 1,352 0,3 199 1,629 (48) 1,581 1,221 109 542 0,4 - 651 (80) 571 - Cash and cash equivalents include treasury bonds denominated in RON with an amortized cost of RON 199 million with original maturity of 3M or less and an interest rate of 1.7% p.a. Deposits, treasury bills and government bonds include treasury bills and government bonds of rON 901 million denominated in rON with original maturity of more than three months with an average interest rate of 1.6% and deposits with maturity of more than three months of rON 319 million. The treasury bills and government bonds were classified as investments held to maturity. use of ipo proceeds The Company’s strategy was to place the IPO money through the Underwriter banks, member of the Syndicate, in risk-free titles and deposits, on short-term. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201414 Source: Electrica S.A 1.2 Key eVents 2014 Main events in the year 2014 related to the core business: n An IPO organised between 11 and 27 June 2014, referring to an offering by the Company of 177,188,744 ordinary shares in the form of shares and in the form of GDRs, each GDR representing four shares. The allocation of shares and GDRs and the offering prices were concluded on 27 June 2014. The transfer of ownership rights on new shares and the collection of cash by the Company took place on 2 July 2014; n Starting 4 July 2014 the Company’s shares are listed on Bucharest Stock Exchange, and the GDrs are listed on london Stock Exchange; n following the IPO, Electrica has made major steps towards alinigng to best practices of publicly listed companies by putting in place a corporate governance action plan, defining clear lines of responsibility and accountability, implementing a code of ethicsand professional conduct, evaluating management through an external party and implementing a whistleblowing policy; n Electrica continued the strict monitoring and reduction of costs, in order to achieve the targets imposed by the regulator for the regulated activity, as well as to increase the efficiency in the competitive area; n Multiple meetings and discussions with ANRE regarding the change in the methodology for establishing the electricity distribution tariffs; modified methodology was published on 29 October 2014 (ANrE Order 112/2014); n RRR was modified from 8.52% to 7.7% through ANRE Order no.146 published on 12 December 2014; n Distribution tariffs applicable starting 1 January 2015 were published during 18-21 December 2014 while the supporting documentation detailing the tariff elements were made available by ANrE on 9 January 2015; n Preparation of the updated investment plans for the 3 distribution operators in accordance with the IPO prospectus, with the efficiency gains requested by the regulator and amended following the changes of the regulatory framework at the end of 2014; thetotal value of the investment plans accepted by ANrE is 3.1 billion rON (in nominal terms, adjustable with inflation); n Electrica and its subsidiaries have filed against ANRE, as claimant, legal actions for the annulment of the Order No. 146/2014 and for repealing Article 122 of the Methodology for establishing the tariffs for electric energy distribution services; Electrica has also requested by the same legal proceeding, as a direct consequence of the annulment of Order 146/2014, the annulment of the orders setting the tariffs for the DSOs; the Group has also initiated legal proceedings against ANRE for the annulment of the tariff decisions applicable starting 1 Januarey 2015; n Since 1 September Cfr is no longer a client of Electrica furnizare; n At the beginning of July, a Government Decision for the exemption from payment of green certificates for energy intensive consumers was published, which entered into force on 1 December 2014; n Electrica Furnizare concluded significant contracts with several large consumers, among which Metrorex and Daewoo-Mangalia Heavy Industries; 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201415 n The price liberalisation calendar continued. Since n SE Dobrogea – entered bankruptcy in January 2015, all July 1st Ef has purchased 30% of the electricity for regulated retail customers from the competitive whole sale market. personnel being dismissed; tenders have been organised by the liquidator for valorification of the assets; n SE Banat entered bankruptcy procedure in August Regarding distressed subsidiaries, the process of reducing their activity was thoroughly continued: n SE Moldova – voluntary liquidation procedure, all personnel being dismissed; tenders have been organised by the liquidator for valorification of the assets; 2014; n SE Oltenia – insolvency with reorganization since May 2014; the judicial administrator prepared a reorganization plan (Feb 2015); 246 employees as at end of 2014; n SE Muntenia – insolvency with reorganization since November 2014; 505 employees as at end of 2014. 1.3 Key financials By segments distriBution segment Key Facts n Electricity distribution in Romania is currently controlled by eight licensed electricity distribution companies; n Each company is responsible for the exclusive distribution of electricity within its licensed region, based on a concession agreement with the Romanian State acting through the Ministry of Energy, Small and Medium Enterprises and Business Environments; n Electrica is a leading player in the distribution sector, both in terms of area and users covered; n 2014 regulated asset base (rAB) of rON 4,169mil; n 189,376 km of voltage lines (8,410 km HV; 45,775 km MV; 135,191 km lV) (H1 2014); n Area of operation: 97,996 km2, 40.7% of Romania’s territory; n 3.56 million users (2014) for distribution activity; n 16.3 TWh of electricity distributed in 2014, stable compared to 2013; n Electrica and Enel own three distribution companies n 39% market share for distribution of electricity to each, while CEZ and E.ON own the other two; end users in 2014. fIgURE 5: romanian electricity distriBution map edtn emd edB edts ceZ edmn edm edd Source: Electrica S.A. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201416 The three electricity distribution companies part of Electrica Group have served in 2014 an estimated 3.56 million customers (equivalent of a volume of about 16 TWh). As such, Electrica’s DSOs have distributed approximately 39% of total electricity distributed nationwide in 2014, maintaining an average of market share of approximately 39% during the period 2012- 2014 and estimated to remain at this level for the following period. fIgURE 6: nUmBER Of USERS (thousand) 8,969 8,900 8,850 5,367 5,410 5,450 3,483 2010 Electrica Source: Electrica S.A. 3,490 2011 Rest of market 3,591 2012 fIgURE 7: DISTRIBUTED VOlUmE (TWh) 42 26 16 2010 Electrica Source: Electrica S.A. 41 25 16 2011 Rest of market 41 25 16 2012 Key financial metrics Distribution segment Revenue from the distribution segment increased by rON 193million, or 8%, to rON 2,475 million in 2014 from rON 2,282million in 2013. This increase was mainly attributable to the increase of the average regulated distribution tariff. Electrica Serv slightly improved the external revenues (services rendered to companies outside the group) from rON 11 million in 2013 to rON 22 million in 2014. The increase in revenues together with the decrease in network losses costs as well as the improvement in employees costs and other operational expenses led to a rON 85 million or14% increase in the segment’s EBITDA. The EBITDA margin gained 140 bps in 2014, from 26.4% in 2013 up to 27.8% in 2014, mainly driven by the EDTN’s performance (a 400 bps improvement y-o-y). fIgURE 8: DISTRIBUTIOn REVEnUES (ROn mil) fIgURE 9: EBITDa (ROn mil) 688 2,282 2,475 1,944 623 603 2012 2013 Source: Electrica S.A. fIgURE 10: nET InCOmE (ROn mil) 2014 306 2012 2013 2014 Source: Electrica S.A. fIgURE 11: DnET DEBT/( CaSh) (ROn mil) 30 226 176 2012 Source: Electrica S.A. 2013 2014 2012 Source: Electrica S.A. (139) 2013 (28) 2014 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201417 Supply market Overview Key facts n Supply market consists of regulated and competitive segments; n The regulated segment comprises 5 companies, integrated within the same group as the corresponding distribution operators; n The competitive segment comprises 62 players, 54 of which are relatively small (<4% market share); Electrica furnizare is the market leader also on the regulated and competitive market with a market share of 36% and 11% respectively in 2013. In 2014, the total electricity supplied by Electrica increased by approximately 7.7% as compared to 2013. In the same period, the Company experienced also a slight increase in the number, especially on the competitive market due to the 100% liberalization of the market for non- household consumers starting with 1st of January 2014. From a financial point of view, Electrica Furnizare had a strong increase at EBITDA level and a significant improvement of its cash level in 2014.The increase in Electrica Furnizare profitability was mainly due to some non-recurring circumstances, namely the electricity acquisition at reduced prices during the year. Net revenue from the supply segment decreased by rON 505 million or 13%, to rON 3,861 million in 2014 from rON 4,366 million in 2013. This decrease was mainly attributable to the decrease in energy prices that offset the 8% increase in quantity supplied as well as to a 5% decrease in the average supply tariff. An improved cost structure implementation programme and better sales strategyled to a RON 116 million or 99% increase in the supply segment EBITDA, that combined with the decrease in revenues led to a 320 bps improvement in EBITDA margin, from 2.4% in 2013 up to 5.6% in 2014. The supply segment presents a strong financial position, namely a negative cash position of RON 403 million, mainly influenced by the very strong 2014 financial results. fIgURE 12: SUPPly REVEnUES (ROn mil) fIgURE 13: EBITDa (ROn mil) 4,801 302 4,499 4,780 414 4,366 4,133 272 3,861 5.6% 233 2.4% 116 2.4% 117 2012 2013 2014 net Revenues Source: Electrica S.A. green Certificates 2012 eBitda Source: Electrica S.A. 2013 EBITDa margin 2014 fIgURE 14: nET InCOmE (ROn mil) fIgURE 15: nET DEBT / (CaSh) (ROn mil) 4.5% 180 1.6% 79 1.9% 90 (33) (50) (403) 2012 net Income Source: Electrica S.A. 2013 margin profit net 2014 2012 net Debt / (Cash) Source: Electrica S.A. 2013 2014 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201418 2 Group overview 2.1 general oVerView Electrica S.A. (“The Company”) is the majority shareholder of SC Electrica Distributie Transilvania Nord S.A. (“EDTN”), SC Electrica Distributie Transilvania Sud S.A. (“EDTS”), SC Electrica Distributie Muntenia Nord S.A. (“EDMN”), SC Electrica furnizare S.A. (“Electrica furnizare”), SC fISE Electrica Serv S.A. (“Electrica Serv”), SC Servicii Energetice Moldova S.A. (“SE Moldova”), SC Servicii Energetice Oltenia S.A. (“SE Oltenia”), SC Servicii Energetice Muntenia S.A. (“SE Muntenia”), Servicii Energetice Doborgea (“SE Dobrogea”), together “the Group” or “Electrica Group”.The Company holds all sharesofSC Servicii Energetice Banat (“SE Banat”), but starting November 2014, it has lost control over SE Banat, as a result of SE Banat entering bankruptcy proceedings in August 2014 and, consequently, SE Banat was not consolidated in the financial statements. The registered office of the Company is 9 Grigore Alexandrescu Street, Sector 1, Bucharest, romania. The Company has unique registration number 13267221 and Trade Register registration number J40/7425/2000. According to Decision no. 627 of July 13th 2000, romanian Government approved the setting up of Societatea Comerciala de Distributie si Furnizare a Energiei Electrice “Electrica” - S.A. As at 31 December 2014 the major shareholder of Electrica SA is the romanian State, represented by the Ministry of Energy, Small and Medium-sized Enterprises and Business Environment (48.78%), after the ownership dilution following an initial public offer. The second shareholder based on the share of ownership is EBrD with 8.66%. fIgURE 16: group entities as of 31 decemBer 2014 Distribution activity Supply activity Energy services activity 78% edmn 22% fp 78% edts 22% fp 78% edtn 22% fp 100% Electrica Serv Source: Electrica S.A. 78% Electrica furnizare 100% SE muntenia 22% fp 100% SE Oltenia 100% SE moldova 100% SE Dobrogea 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201419 presentation of group suBsidiaries Subsidiary activity Registration code headquarters % stake as of 31 December2014 Electrica Distributie Muntenia Nord S.A. Electrica Distributie Transilvania Nord S.A. Electrica Distributie Transilvania Sud S.A. Electricity distribution in North Muntenia geographical area Electricity distribution in Northern Transylvania geographical area Electricity distribution in Southern Transylvania geographical area 14506181 Ploiesti 78.0000021% 14476722 Cluj-Napoca 77.99999% 14493260 Brasov 78.0000019% Electrica furnizare S.A. Trading of electrical energy 28909028 Bucharest 77.99997% Electrica Serv S.A. Servicii Energetice Muntenia S.A. Servicii Energetice Moldova S.A. Servicii Energetice Oltenia S.A. Servicii Energetice Dobrogea S.A. Servicii Energetice Banat SA* (in bankruptcy) Services in the energy sector (maintenance, repair, construction) Services in the energy sector (maintenance, repair, construction) Services in the energy sector (maintenance, repair, construction) Services in the energy sector (maintenance, repair, construction) Services in the energy sector (maintenance, repair, construction) Services in the energy sector (maintenance, repair, construction) 17329505 Bucharest 100% 29384120 Bucharest 100% 29386768 Bacau 29389861 Craiova 100% 100% 29388378 Constanta 100% 29388211 Timisoara 100% Source: Electrica S.A. *) Electrica S.A. has lost control over Servicii Energetice Banat SA in November 2014 The main activities of the Group include operation and development of electricity distribution networks and activities related to electricity supply to final consumers. The Group is the electricity distribution operator and the main electricity supplier in Muntenia Nord area (Prahova, Buzau, Dambovita, Braila, Galati and Vrancea counties), Transilvania Nord area (Cluj, Maramures, Satu Mare, Salaj, Bihor and Bistrita- Nasaud counties) and Transilvania Sud area (Brasov, Alba, Sibiu, Mures, Harghita and Covasna counties), operating with transformation stations and 0.4 kV and 110 kV power lines. The Company’s distribution subsidiaries (Electrica Distributie Muntenia Nord, Electrica Distributie Transilvania Nord and Electrica Distributie Transilvania Sud) invoice the electricity distribution service to electricity suppliers (mainly to Electrica furnizare SA subsidiary, the main electricity supplier in Muntenia Nord, Transilvania Nord and Transilvania Sud areas), which further invoice the electricity consumption to final consumers. Electrica furnizare SA is the supplier of last resort (defined as supplier designated by the regulatory authority to deliver the universal service of electricity supply under specific regulated conditions) in Muntenia Nord, Transilvania Nord and Transilvania Sud areas. According to the regulations issued by the National Authority for Energy Regulation (“ANRE”), the suppliers of last resort have the obligation to ensure the electricity supply to the final customers which have not exercised their eligibility right – this is the right to choose their electricity supplier (hereinafter named captive consumers). The electricity supply to captive consumers is made based on regulated contracts, with prices that are regulated by ANrE. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201420 2.2 mission, Vision, Values To continue succeeding over the next ten years, the Group has set its Vision, Mission and Values which will serve as a foundation for formulating and implementing its corporate goals, objectives and strategy and for communicating them to internal and external stakeholders. 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 mission of the Group is to deliver long term value to our shareholders by distributing and supplying electricity and providing exceptional services to our customers in a safe, reliable, affordable and sustainable manner. Values The values exercised across all structures of the Group are presented in the figure below. fIgURE 17: electrica group c orporate Values Robust growth while demonstrating environmental and corporate social responsibility Commitment and focus towards customers corporate Values Professional and proficient approach Commitment towards labour safety Transparency and integrity Dynamism and flexibility Team spirit Source: Electrica S.A. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201421 2.3 strategic oBjectiVes The Group’s overriding goalis tocreate sustainable long term return on investment for our shareholders. for reaching this overriding goal, the Group has set the following strategic goals: n To achieve sustainable growth n To maintain financial stability n To improve operational efficiency n To actively manage the portfolio of businesses and build synergies n To ensure the availability of a committed and qualified workforce n To adopt high standards of corporate governance n To enhance sustainability profile 2.4 outlooK The regulatory framework has experienced major changes in the past decade, including market liberalization, unbundling, and support scheme for renewable energy. Other legislative changes that have recently occurred in romania refer to the remuneration of the Romanian DSOs - according to the ANRE Order no. 146/2014, starting with 2015 the distribution operators’ WACC will be reduced to 7.7% from 8.52%. ANRE’s changes of the distribution tariff setting methodology, including the change in remuneration (ie. the rrr) all these during the regulatory period, indicate a lack of predictability and stability of regulatory environment and a negative impact on the Groups’ distribution operators’ operational and financial performance. Although these changes had the overall aim of converging the Romanian legislation towards EU legislation, the process has not been completed, and major changes are expected to occur in the following years in all EU countries in order to progress towards completing the Internal Energy Market. Amongst these changes, we could mention: the implementation of a harmonized set of rules across member countries, increase in regional cooperation and a more active role for consumers. TaBlE 1: Key driVers for change within the electricity marKet Key driver Description GDP evolution and industry structure Changes in Regulation Economic growth is a key determinant of electricity demand. Although there is not a one-to-one relationship between GDP growth rates and electricity demand growth rates, 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 influenced by energy efficiency policies. The regulatory framework has experienced major changes aiming to align the Romanian legislation with EU legislation. Although important steps have been accomplished, major changes are expected to occur in the next decade influencing the electricity price, the demand and the supply patterns. Impact on Electricity consumption Electricity prices Increase in environmental awareness Technological development Source: Electrica S.A. Romania has adapted the EU 20-20-20 targets, aiming to reduce greenhouse gas emissions, improve energy efficiency and rising the share of renewable energy. According to the latest discussions about EU framework for climate and energy policy projected, these targets will further be increased. Electricity prices and consumption, regulatory framework Smart grids and smart meters will create benefits for end- consumers, distributors and suppliers in terms of energy efficiency and smarter use of energy, through a more efficient utilization of information. Electricity prices and consumption 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201422 3 Business overview 3.1 operating segments distriBution segment Distribution segment contributes with the highest share to the operational profitability of Electrica. Electricity distribution is a regulated activity in Romania and specific tariffs applicable to distribution services must be approved by ANRE as a “tariff basket price cap’’ mechanism as established by Order no. 31/2004 (applicable in the first regulatory period 2005-2007), no. 39/2007 (applicable in the second regulatory period 2008-2012), no. 51/2012 (applicable in the transition year 2013) and no. 72/2013 (applicable in the third regulatory period 2014-2018). The methodology “tariff basket price cap” plans to reduce income fluctuations and avoid significant fluctuations in the electricity prices charged to consumers. 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. ANrE sets regulated annual income levels required for each year during the regulatory period, which is based on projections submitted by the distribution operators, in line with the methodology requirements. Details regarding the tariff setting methodology are available in Annex 3. Starting 1 January 2015, electricity distribution tariffs approved by ANrE are as follows (rON/MWh). TaBlE 2: electricity distriBution tariffs as of j anuary 1, 2015 Tariff (ROn/mWh) anRE Order no. high voltage medium voltage low voltage Transilvania Nord 155/15 December 2014 Transilvania Sud 156/15 December 2014 Muntenia Nord 154/15 December 2014 21.10 23.41 18.47 47.34 46.85 42.84 112.15 122.39 138.61 Source: ANRE Order supply segment Electricity market is divided into regulated market and competitive market. On both markets, electricity can be sold or purchased wholesale or retail. Regulated market After the implementation of the Second Energy Package of EU, the liberalization of the electricity market in romania started on 1 January 2007. The tariffs of electricity supply to industrial consumers have been fully liberalized and only the tariffs for the electricity supply to households are still subject of approval by ANrE. Households are free to change their electricity supplier, but still have access to regulated tariffs for electricity supply until this market will be fully liberalized in 2018. Starting 1 January 2014, the tariffs of electricity supply to industrial consumers are determined by the market and freely negotiated. It is possible that increasing competition on this market segment that does not any longer work under regulated tariffs will lead to the switch of electricity suppliers by consumers and may result in an increased consumer migration to the competitors of the Group. Electricity supply market in romania could also record migration within the segment of householder consumers segment and the equivalent thereof, as the liberalization process will advance. However, as a result of small or no savings that could be obtained by changing household electricity supplier, the Management expects that the effect of liberalization in the segment of households to be relatively small. Currently, Electrica is “the Provider of last resort” for approximately 3.56 million consumers. A Provider of last resort is under Energy law, a supplier designated by the regulatory authority to provide universal service for electricity supply under specific regulated conditions. Until 2018, when liberalization of households segment is planned to be completed, tariffs on households must be approved each year by ANrE based on relative cost categories as well as on regulated profit margin. Tariffs are calculated in order to cover the cost of electricity (including transport costs, network services, distribution costs and a profit margin regulated). ANrE’s previous methodology provided a maximum profit of 2.5% applied to the cost of electricity purchased for supply to households until 1 December 2013. The new methodology (ANrE Order no. 82/2013) provides a maximum profit per unit of electricity sold to consumers tariff setting and CPC tariffs of 4 RON/MWh and operating cost supply of 4.5 RON/client/month, following that, until the application of competitive criteria for selecting suppliers of last 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201423 resort, the value of profit per unit of electricity sold to consumers to be established by ANrE. furthermore, Electrica records supply costs including closing costs of contracts, billing, bill collection, database management and costs of IT and telecommunications infrastructure. Starting 1 September 2012 and with the implementation of Order no. 82/2013 to the ultimately providers is allowed to determine for final consumers who have not used the entitlement to switch suppliers, a new tariff that consists of a mix of regulated tariff component and a “component of the competitive market” (CPC) approved by ANRE. Purchase prices paid to producers controlled by the state for the purchased electricity to provide to consumers on the regulated market are established by ANRE. CPC component of the tariff is based on average acquisition price of the electricity which the relevant supplier purchase on the centralized electricity market to be supplied to industrial consumers and may not exceed a legal amount with this price multiplied by 1.1. Any difference between estimated and realized tariff components made by suppliers of electricity in the last month of a given period of liberalization in the regulated tariff elimination schedule will be adjusted in the next period of liberalization. Cost categories of ultimately provider recognized in the prices of final consumers, but only up to the level considered to be justified by ANRE are the following: n Acquisition costs of electricity and CPC, depending on the allocation level of the necessary electricity by ANrE through the regulated contracts; n Cost for electricity transmission service; n Costs related to system technological and functional services; n Costs related to services provided by the operator of the centralized electricity market to the participants on the centralized electricity market; n Costs related to service charges for electricity distribution; n Costs related to electricity supply activity of electricity for final consumers who have not used the entitlement; n Occasional costs incurred by force majeure (if applicable). According to law no. 134/2012, since September 2012, the cost of Green Certificates which are billed to final consumers separately from tariffs for electricity. Electricity providers have a legal obligation to purchase Green Certificates every year based on annual targets or quotas calculated by ANrE based on gross production from renewable sources and the final net consumption of electricity in Romania. Although the cost of Green Certificates has been shown separately in electricity bill, for reasons of transparency, since September 2012, ANrE did not properly reduced the regulated tariff by the supply. This has led to incurring of double cost with the Green Certificates to consumers (through the inclusion of these costs in the regulated tariff and the separate invoicing of the cost of Green Certificates) for the period September 2012 - July 2013. Competitive market Trading on competitive wholesale market is transparent, public, centralized and non- discriminatory. Prices may be freely negotiated by the parties on the competitive retail market. Participants on wholesale Market can trade electricity on the basis of bilateral agreements concluded on the dedicated centralized market. Since 19 July 2012 Energy law does not allow contracts of sale on the wholesale electricity market outside centralized markets, unless for import/export energy contracts. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201424 In the following figure are shown the areas covered by the subsidiaries of the Group and the number of clients they serve: fIgURE 18: the coVerage of companies in the electrica group electrica distriButie transilVania nORD (EDTn) 1.2 mil clients electrica distriButie transilVania SUD (EDTS) 1.2 mil clients Source: Electrica S.A. edtn edts electrica distriButie muntenia nORD (EDmn) 1.3 mil clients edmn electrica fURnIzaRE (Ef) 3.5 mil clients Electrica’s distribution segment operates through its subsidiaries: EDMN, EDTN, EDTS and Electrica Serv, the latter mainly through maintenance and repair services of distribution networks, and the activity is limited geographically and through the services provided, being the operator of electricity distribution in North Muntenia region (counties Prahova, Buzau, Dambovita, Braila, Galati and Vrancea), Northern Transylvania (counties Cluj, Maramures, Satu Mare, Salaj, Bihor, Bistrita-Nasaud) and Southern Transylvania (counties Brasov, Alba Sibiu, Mures, Harghita and Covasna), operating transformer stations and transmission lines with voltages of 0.4 kV and 110 kV. The Group holds exclusive distribution licenses for these regions which will still be valid 13 years with the possibility of extension. In the distribution business, Electrica provides equipment maintenance services, repair and other services for its network and with a lesser extent, to third parties. Electricity supply segment operates through its subsidiary, Electrica furnizare and delivers electricity to consumers in both the regulated electricity market (in geographic regions in which the Group operates its distribution segment), and in the competitive market throughout romania. The Group holds two licenses covering the entire supply on the territory of Romania, with a remaining period of validity of 7 and 8 years respectively, and extendable. The Group’s portfolio also includes the energy services segment (equipment maintenance, repair and other additional services related to the network), performed almost entirely by the distribution subsidiaries. Energy services segment consists of Servicii Energetice Dobrogea S.A., Servicii Energetice Moldova S.A., Servicii Energetice Oltenia S.A. and Servicii Energetice Muntenia S.A. Servicii Energetice Dobrogea S.A. and Servicii Energetice Moldova S.A. are in the process of liquidation, which is expected to conclude by the end of 2015; also Servicii Energetice Oltenia S.A. and Servicii Energetice Muntenia S.A. are in the process of reorganization. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201425 3.2 procurement Electrica S.A. will continue to centralize its acquisition process within the Group, by means of which centralized acquisition will be delegated to Electrica S.A. The aim is to reduce costs, optimize acquisition and ensure a unified policy within the Group. The centralization process will enable a standardized acquisition process and at the same time will lead to an increased level of integrity. 3.3 sales actiVity The following summary describes the operations of each reportable segment. Reportable segments Operations Electricity supply Buying and supplying electricity to final consumers (includes Electrica Furnizare SA and the supply activity of Electrica SA) Electricity distribution Electricity distribution service (includes Electrica Distributie Muntenia Nord SA, Electrica Distributie Transilvania Nord SA, Electrica Distributie Transilvania Sud SA, Electrica Serv SA and the investments in the distribution activity done by Electrica SA) External electricity network maintenance repairs, maintenance and other services for electricity networks owned by other distributors (includes Servicii Energetice Banat SA, Servicii Energetice Dobrogea SA, Servicii Energetice Moldova SA, Servicii Energetice Oltenia SA and Servicii Energetice Muntenia SA) Headquarter Source: Electrica S.A. Includes corporate services at parent level The main drivers of Electrica revenues is represented by the distribution and supply segment. In 2014, the contribution of the electricity distribution segment and electricity supply segment to the revenues of Electrica are expected to be 37% and 62% respectively. In comparison, in 2013 the contribution of the electricity distribution segment and electricity supply segment in total revenues of Electrica was 34.58% and 61.08% respectively. The Group’s distribution operators are natural monopolies in their respective markets and as such, they enjoy a dominant position. Also, the Group’s distribution operators have a legal monopoly in their relevant regions and hence, other entities cannot set up a competing electricity distribution business. The following figure shows the national market shares held by Group subsidiaries in the segment of distribution of electricity. fIgURE 19: marKet share distriBution segment Electrica 39% Other 61% Source: Electrica S.A. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201426 In addition, the Group’s supply operations enjoy a dominant position on the electricity supply market, due to it being a supplier of last resort. On the hand, Electrica faces a growing competition on the supply competitive market. Supply market consists of Regulated and Competitive segments: n The regulated segment comprises 5 companies, integrated within the same group as the corresponding distribution operators n The competitive segment comprises 62 players, 54 of which are relatively small (<4% market share) The following figure presents the market share of Electrica supply business: fIgURE 20: regulated marKet, 2013 fIgURE 21: competitiVe marKet, 2013 e.on Energie Romania 13% ceZ Vanzare 13% Electrica furnizare 36% Source: ANRE E.On Energie Romania 5% Complexul Energetic Oltenia 4% Enel Energie - Total 38% arcelormittal galati 5% altii 40% EfT Romania 5% Repower furnizare Romania 5% OmV Petrom 5% Tinmar Ind 8% Electrica furnizare 11% Source: ANRE alro 12% Total number of consumers was 3.59 mil in 2014, with 176 sale points. fIgURE 22: Volume of electricity supplied On RETaIl maRKET (TWh) fIgURE 23: growing numBer of consumers (‘000’S) 15.0 mil. ROn 10.0 5.0 - 11 3.2 7.5 2012 9 2.8 6.2 2013 10 3.7 6.0 2014 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 - 3,549 17 3,556 34 3,591 74 3,532 3,532 3,517 2012 2013 2014 Regulated Competitive Regulated Competitive Source: Electrica S.A. Source: Electrica S.A. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201427 fIgURE 24: consumers By Volume, 2014 fIgURE 25: consumers By reVenues, 2014 Regulated household 47% Competitive Eligible 36% Regulated household 50% Competitive Eligible 32% Regulated - non household 17% Regulated - non household 18% Source: Electrica S.A. Source: Electrica S.A. major client exposure Electrica does not have a significantexposure to a certain client or group of clients that could influence drastically its activity. However, under romanian law, certain electricity consumers, such as hospitals, rescue stations, schools, retirement homes, or air, naval and railroad traffic services are deemed of special importance, and cannot be disconnected by an electricity supplier. As a result, electricity must be provided to them by Electrica furnizare even if they are in payment default. 3.4 REORganIzaTIOn anD SPIn-Off Of aSSETS On 18 December 2013, an EGMS of the Company proposed thetransfer of the Company’s interests in: ENEL EnergieMuntenia S.A., ENEL Distributie Muntenia S.A., ENEL Distributie Banat S.A., ENEL, Distributie Dobrogea S.A.,ENEl Energie S.A., E.ON Moldova Distributie S.A., E.ON Energie Romania S.A., Electrica Soluziona S.A., Bursa romana De Marfuri S.A. and Hidro Tarnita S.A. to a newly formed entity Societatea de Administrare a Participatiilor in Energie (“SAPE”) through the Spin-off. As part of the Spin-off, which was approved by thecourt in April 2014 and registered with the Trade registry in May 2014, Electrica reduced its capital by approximately rON 431 million through the cancellation of 43,123,780 Shares. In 2013 the Company approved the liquidation of 3 subsidiaries: Servicii Energetice Banat, Servicii Energetice Dobrogea and Servicii Energetice Moldova. In January 2014 the Board of Directors of Servicii Energetice Oltenia and in October 2014 the Board of Directors of Servicii Energetice Muntenia decided the commencement of the insolvency process with a view to reorganization.Servicii Energetice Banat entered in bankruptcy in November 2014 and consequently the Company discontinued consolidation at that date as it no longer has control over it. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201428 3.5 personnel As of 31 December 2014, the Group employed 11,740 people. The table below provides an overview of employment in the Group, by business segment, as follow: factor Electricity distribution EDMN EDTN EDTS Electrica Serv Supply Electrica furnizare Services related to other distribution networks SE headquarter Electrica Total Source: Electrica S.A. 2012 9,450 2,111 2,025 1,859 3,455 2,332 2,332 1,236 1,236 199 199 as at 31 December 2013 9,347 2,092 2,007 1,874 3,374 2,059 2,059 1,225 1,225 149 149 2014 9,386 2,156 2,011 1,874 3,345 988 988 1,217 1,217 149 149 13,217 12,780 11,740 The reduction in number of employees of the Group during the year 2014 is the result of liquidation or reorganization procedures of energy services subsidiaries. As of 31 December 2014 approximately 58% of the Group’s employees are directly productive and 42% indirectly productive, which includes technical, economic, social and administrative personnel. The table below presents the Group’s employment, broken down by age as follows: Below 18 years of age 18-30 31-40 41-50 51-60 above 60 years of age Total Source: Electrica S.A. 31 December 2013 31 December 2014 0% 6.76% 21.39% 38.42% 28.85% 4.58% 100% 0% 6.16% 20.37% 38.90% 29.90% 4.67% 100% 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201429 As of 31 December 2014, approximately 98% of the Group’s employees are members of labour unions and their employment conditions are governed by a collective bargaining agreement that is renegotiated at least every two years and filed with the relevant labour authorities in Romania. None of Electrica and its subsidiaries has experienced any strike or other form of labour disturbances that have interfered with its operations, and management considers its relationship with employees of the Group to be appropriate. Electrica SA and its subsidiaries have in place internal regulations that generally relate to general employment provisions, non-discrimination, labour safety and health, rights and obligations of the employer and of the employees, employee complaint procedures, rules on labour discipline, disciplinary sanctions and disciplinary infringements, rules regarding disciplinary procedure, the criteria and procedure for the professional evaluation of employees and final provisions. Electrica’s training programmes aim to upgrade the skills of the Group’s employees so they can adapt to broader tasks to better utilise its existing resources. Management believes that its emphasis on training and development helps its employees meet business challenges effectively. safety and health at worK Achieving safety and health at work at Electrica SA level represents an integrated part of designing, organizing and conducting work processes and includes the measures and actions assembly which results in preventing accidents and professional disease and improvement of work environment. The surveillance audit of quality, environment, health and work safety integrated management system took place in 2014, resulting that the activity of work safety and health being carried out in compliance with standard OHSAS 18001/2009. Electrica SA is focused on training the employeers, in compliance with the legislation in force, and also focusing on danger awareness trainings, with the purpose of eliminating the accidents and professional disease identified by assessing the risk level in all the workplaces. The labour Health and Security Comitee coordinated by at Electrica SA coordinating level, meets periodicaly to analyize and solvethe problems identified in a common and unitary manner, for all hierarchic levels. In 2014, was conducted the analysis of work health and security for 2013 and also the analysis of individual protection ecquipments, proposed for centralized acquisition for employees, mainly the electricians. Preventive actions in the field of work safety and health Mentoring and controlling actions regarding the compliance with the legal requirements for work health and security, including defense against fire, were conducted in compliance with the framework approved by Electrica SA and respectively byeach subsidiary level. Some impaiments were operational eliminated during the control and for the others are set corrective/ preventive measures with specific deadlines. The measures established are followed and reported upon maturity by the designated project managertowords the protection and prevention service of each subsidiary, finally being forwarded to Electrica SA for the agregattedanalysis of Labour Health and Security Comitee. Impementing the measurements programme To ensure the safety and health status for 2014, the prevention and procection plan at each subsidiary level set measures that require funds allocation. At Electrica SA level it was approved a expense budget of 18 thd RON for implementing the program, mainly representing production funds. For conducting operational activity in maximum security conditions, namely for preventing work accidents and professional deseases, each subsidiary individualy acquired protection ecquipment (EIP) in2014, through out approved budget for work health and security. The status of Electrica S.a. group`s work accidents In 2014, Electrica SA group had no mortally working accident. There were eight accidents with temporary unavailability of working (ITM) with 9 injured workers, namely: n 3 accidents at FDEE Electrica Distributie Transilvania Sud, in branches SDEE Alba, SDEE Sibiu, SDEE Harghita; n 4 accidents at fISE Electrica Serv, at SISE Transilvania Sud – AISE Brasov and SSE Sf.Gheorghe (with 2 injured workers) and at SISE Transilvania Nord – AISE Oradea (2 accidents); n 1 accident at Servicii Energetice Muntenia. Because of the 2014 accidents, a total amount of 494 days of unavailability of working was recorded. The causes and favouring factors for each accident were separately analysed by committee set up for this exact purpose, and the investigating files were approved by the Territorial labour Inspectorate. It is worth mentioning that there was just one labour accident caused by electric risk, the rest of the accidents were caused by mechanical risks (fall, failure in respecting the technological specifications, other causes). The statistical analysis revealed no factors that might lead to imposing general measures, but only specific measures for each case. Most of the accidents are recorded for the 40 and 49 years age group (6 out of 9 injured workers), 4 injured workers with more than 25 years seniority, and in terms 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201430 of qualification the injured workers were: electrician, electrician-driver, mechanical locksmith and driver. As in previous years, the labour accidents are caused by complementary causes, mainly of human nature factor (distraction, lack of technological discipline, lack of control/supervision). In Electrica SA electrical instalations there were reported 8 externalinjuries, out of wich 6 died being electrocuted. The accidents are mainly caused by unauthorized intervention to the electrical instalations, in order to substract metallic components. Status of Electrica Sa employees` health in 2014 Surveilance of the employees` health is conducted by doctors employeed by fISE, based on a services agreement and also outsourcingcontracts. The control of health of all Electrica`s employees and diagnosis of professional diseases, respectively the work related diseases, is conducted by the labour medicine specialized doctor, by interpreting a series of statistical indexes included in the framework operational procedure, received from each subsidiary. The main health indicators are given by the degree of impacting the ability to work, respectively medical/ psyhological chronic diseases that limits the ability to work, physical efforts, working in heights, work under voltage, and the total number of days of temporary incapacity to work (medical leaves caused by chronic and/or acute medical conditions). Thus, in 2014, the conditional aptitude indicator is estimated at 9% out of total number of employees, out of which one third is represented by cardiovascular issues, rest of the issuesbeing of ophtalmological/ psychological nature. In 2014, the main causes for temporary inability to work that lead to medical leaves, are caused by injuries occuered outside of workplace (spains, fractures, contusions), cardiovascular conditions (hypertension, ischemic heart disease, chronic venouse insufficiency), malignant tumors, musculoskeletal disorders (discopathy, arthrosis), respiratory diseases, pregnancy and confinement, digestive disorders, psychiatric disorders. Prevention is achieved through medical consultsby occupational doctors, other than the mandatory ones, medical laboratory analyzes, anti-influenza vaccination, occupational medicine and first aid training and checks of hygienic conditions. 3.6 enVironmental considerations In developing the activites and implementing its business strategy, the Group promotes environmentally friendly policies and procedures. for example, the implementation of smart grid networks and the expected reduction in network losses, in order to improve energy efficiency and a reduction in CO2 emissions. The Group’s Management systems in relation to environmental and health and operational safety matters are implemented and operated on a standalone basis by each of the Group’s subsidiaries. The annual capital investment budgets of each of the Group’s subsidiaries include expenditure for environmental matters. The Group’s activities impact the environment, principally as a result of emissions of noise by equipment and transformer posts from the transformers’ stations, and secondly, because the Group uses equipment containing insulating oil with polychlorinated biphenylsor ‘‘PCBs’’, sulphuric acid and other polluting substances, whose operation is subject to regulation, being subject to specific environmental laws and regulations, including the provisions of the EGO no. 195/2005 relating to environmental protection (the ‘‘Environmental Protection Law’’). The Groups functions based on environmental authorisations and environmental authorities monitor the compliance with granted authorisations and endorsements, which may be suspended for compliance failures. In addition to compliance with the Environmental Protection Law, the Group is also subject to: n EGO no. 68/2007 on the environmental liability with respect to the prevention and remedying of environmental damage to land water and air in the case of pollution event; n law no. 104/2011 regarding air quality published in the Official Gazette on 28 June 2011, which relates to restrictions on atmospheric pollutants and the elaboration of air quality plans; n law no. 211/2011 on waste management, published in the Official Gazette on 25 November 2011, which relates to ensuring a high level of environmental protection and the safety of the public’s health through management of waste and prevention or reduction of the adverse impact of waste generation; and n other specific restrictions relating to package and packaging waste, disposal of waste oils, batteries, tyres, PCBs and other materials used in the distribution segment’s business; n the privatisation legislation regarding the notification of National Agency for Environmental Protection and obtaining the confirmation that is not necessary to set environmental obligations in the privatisation process, except for EDMN in respect of compliance with the 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201431 regulation of the special regime on management and control of PCBs and AISE Buzau, AISE Galati, AISE Ploiesti, AISE Targoviste, AISE Focsani, AISE Brasov, AISE Miercurea Ciuc, AISE Sibiu, AISE Bistrita, AISE Baia Mare, AISE Satu Mare, AISE Cluj, AISE Braila. As at the date of this report, the Group holds all 193 material permits required for it to conduct its business, and the Group’s business is conducted in compliance with all specific environmental regulations. Integrated Quality, Environment, Occupational Health and Safety management systems certified in accordance with ISO 9001:2008, ISO 14001:2014 and EN OHSAS 18001:2007 have been implemented in each of the Group’s subsidiaries. 3.7 research and deVelopment actiVities With respect to Electrica’s concern for promoting technological innovation by participating in research and development projects cofinanced through European funds, namely for testing new technologies, simulating and managing behaviours which can be integrated in the distribution electricity networks, Electrica stress out the involvement in accessing funds by participating in calls for VSYNC, SiNGULAR and Horizon 2020, among: n ”VSynC”, a fP6 cofinancing project, wasdesignated to test a virtual sincron generator in a network node where generation sources could have a bigger share compared to the energetic system. Various functioning regimes where simulated and emphasis was made on the role of an electricity storage system in a low voltage network, where the voltage level is highly influenced by consumption evolution from turstic areas. Systems for measuring and distance control through GSM confirmed the premises of the project through the demonstrations performed; n ”SingUlaR ”, an ongoing research project, cofinanced through fP7, has the purpose to test software programs aimed at forecasting loads in network nodes and the production generated by wind power plants and photovoltaic plants, based upon measures from counters read from the distance. Managing of forecasted consumption/ production in a network island area might ensure allocation of electricity losses and an improved monitoring aimed at mitigating losses. Moreover, testing software applications on a real network for optimizing power flows followed by demos constitutes a way to develop methodologies in determining electricity losses in networks with renewable sources, in order to obtain energy and operational efficiencies for network with an increased degree of penetration of renewable sources; An additional important endeavour in promoting technological innovation constitutes the dissemination of improvement solutions for electricity networks related to smart grid concepts. As such, Electrica is organizing every year in November conferences with international attendance which have as an alternative theme smart grid solutions in one year and smart metering solutions in the next year. Best practices in the field for each investment category are presented. Moreover, we can emphazise the participation at international conferences organized by the World Energy Council, CIGRE and CIRED international conferences which aim at tackling technological innovation and promoting new technologies which improve operational efficiency. 3.8 risK management risK management and internal c ontrol Underlying legislation for implementing a risk management system as well as a system for internal control/management has been: n Order of the Ministry of Public finance no. 946/2005 regarding development of a internal control/management system with all subsequent ammendments; n Government Order n. 119/1999 regarding internal control and preventive financial control with all susbsequent ammendments. In addition, the risk management together with the internal control and management system at Electrica SA level takes place in accordance with internal procedures agreed. A major concern for the management is building awareness of employees regarding the importance of managing risk inside the organization and the necessity of direct involvement in unfolding the risk management process, as well as aligning best practices on national and international level by following legislation in place, standards and related norms. Subsidiaries of Electrica Group have their own legal personality and have implemented at their level risk management and internal control/management systems, in accordance with legislative provisions as mentioned before. In June last year Executive management of Electrica SA started with classifying the risks for the Company in 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201432 terms of probability of occurrence and impact on the Company. Five impact levels and five probability levels were identified, ranging from risks that are tolerable and risks that have zero tolerance and risks that have low probability and risks with high probability. One risk, which has to do with loss of intellectual capital, was quantified in the highest category, which means that urgent managerial control measures are needed. A further five risks were classified in the area of low tolerance, for which short term managerial control measures are required.Corrective actions have been taken for these six risk areas. During 2015 the risk management system will be further detailed, improved and discussed with the board. Risks related to the activity and sector of Electrica in 2014 can be presented as follows: n Group’s supply segment may be exposed to increasing competition due to the market liberalization n Group’s financial performance may be negatively influenced by changing tariffs on the regulated market; n Group’s supply segment might loose its status of supplier of last resort; n Group’s financial performance may be negatively influenced by changing prices for energy; n romania’s electricity demand is linked to various factors beyond control of the Group, such as economical, political and climate-changing instances; n The Group has to comply with regulatory requirements and has to keep in place regulated approvals, being exposed to significant liabilities in case of non-compliance; n Components of the Group’s distribution network are subject to deterioration over time; n The Group’s assets and/or business could be damaged by natural and man-made acts or disasters; n The Group’s IT systems are outdated and are not integrated; n The migration of the Group to a new integrated ERP system may encounter difficulties and delays; n The Group may face risks associated with restitution claims with regard to certain real estate properties; n Electrica furnizare may be prohibited from suspending or interrupting the supply of electricity to certain of the Group’s customers, even if such customers are in payment default; n Failure to observe public procurement legislation by members of the Group may lead to fines and voided contracts; n The Group’s position in electricity distribution and supply markets may expose it to claims relating to abuse of dominant position; n A strike or other labour disruption could adversely affect the Group’s business; n failure to execute management’s business strategy may lead to cost savings and revenue forecasts being lower than predicted for the Group; n The Group’s reputation, future prospects or results of operations may be materially adversely affected by claims or litigation. Risk exposure The Group has exposure to the following risks arising from financial instruments: n credit risk n liquidity risk n market risk. (i) Credit risk Credit risk is the risk of financial loss to the Group 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 minimal 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 is concentrated around state-controlled companies. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade receivables. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201433 Impairment The ageing of trade receivables was as follows: factor ROn thousand Neither past due nor impaired Past due 1-90 days Past due 90-180 days Past due 180-360 days Past due 1-2 years Past due 2-3 years Past due more than 3 years Total Source: Electrica S.A. factor ROn thousand Neither past due nor impaired Past due 1-90 days Past due 90-180 days Past due 180-360 days Past due 1-2 years Total Source: Electrica S.A. 31 December 2014 31 December 2013 gross value Bad debt allowance gross value Bad debt allowance 501,052 240,421 23,542 29,463 52,801 105,710 975,487 1,928,476 - - - (13,657) (52,801) (105,710) (975,487) (1,147,655) 686,315 201,939 64,846 121,536 180,802 244,905 752,726 2,253,069 - - (1,947) (33,543) (132,403) (244,905) (752,726) (1,165,524) net trade receivables 31 December 2014 31 December 2013 501,052 240,421 23,542 15,806 - 780,821 686,315 201,939 62,899 87,993 48,399 1,087,545 (ii) 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 overdrafts (refer to Note 21 of the Consolidated financial Statements). Exposure to liquidity risk The following are the remaining contractual maturities of financial liabilities at the reporting date. The amounts are gross and undiscounted, and include estimated interest payments. ROn thousand financial liabilities 31 December 2014 Contractual cash flows Carrying amount Total less than 1 year 1-2 years 2-5 years more than 5 years Bank overdrafts 48,132 48,132 48,132 - - Financing for network construction related to concession agreements 250,550 262,332 101,633 87,114 73,484 finance lease Trade payables Total Sursa: Electrica S.A. 294 555,256 854,232 294 555,256 866,014 294 555,256 705,315 - - 87,114 - 73,484 - 101 - - 101 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201434 ROn thousand financial liabilities 31 December 2013 Contractual cash flows Carrying amount Total less than 1 year 1-2 years 2-5 years more than 5 years Bank overdraft 79,684 79,684 79,684 - - Financing for network construction related to concession agreements 272,411 288,693 144,623 93,755 50,315 finance lease Trade payables Total Source: Electrica S.A. 788 581,522 934,405 788 581,522 950,687 498 581,522 806,327 290 - 94,045 - - 50,315 - - - - - (iii) Market risk Market risk is the risk that changes in market prices – such as foreign exchange rates, interest rates– will affect the Group’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 optimising 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 Group. The functional currency of the Group is the romanian leu (rON). The currencies in which these transactions are primarily denominated are rON and EUr. Certain liabilities are denominated in foreign currency (EUR). The Group also has bank accounts denominated in foreign currency (EUr). The Group’s policy is to use the local currency in its transactions as much as possible. The Group 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: factor in thousands of ROn Cash and cash equivalents Deposits (deposits, treasury bills and government bonds) Financing for network construction related to concession agreements finance lease net statement of financial position exposure Source: Electrica S.A. 31 December 2014 31 December 2013 eur eur 10,138 136,704 (250,550) (294) (104,002) 136,173 - (272,411) (788) (137,026) The following significant exchange rates have been applied during the year: factor rON/EUr 1 average rate year-end spot rate 2014 4.4446 2013 4.4190 2014 4.4821 2013 4.4847 Sensitivity analysis A reasonably possible strengthening (weakening) 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. The analysis assumes that all other variables, in particular interest rates, remain constant and ignores any impact of forecast sales and purchases. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201435 ROn thousand Effect 31 December 2014 EUr (5% movement) 31 December 2013 EUr (5% movement) Source: Electrica S.A. Profit before tax Strengthening Weakening (5,200) (6,851) 5,200 6,851 Interest rate risk The Group’s policy is to use mainly supplier credit for financing its investments. The Group does not have significant long-term bank loans. Exposure to interest rate risk The interest rate profile of the Group’s interest-bearing financial instruments is as follows: ROn thousand fixed-rate instruments Financial assets Bank deposits (cash and cash equivalent) Deposits, treasury bills and government bond (cash and cash equivalent) Deposits, treasury bills and government bond Financial liabilities Financing for network construction related to concession agreements finance lease Variable-rate instruments Financial liabilities Overdrafts Source: Electrica S.A. 31 December 2014 31 December 2013 1,352,487 199,500 1,220,521 (250,550) (294) 2,521,664 541,891 - - (272,411) (788) 268,692 (48,132) (48,132) (79,684) (79,684) 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 and equity by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency exchange rates, remain constant. factor ROn thousand 31 December 2014 Variable-rate instruments 31 December 2013 Variable-rate instruments Source: Electrica S.A. Profit before tax 50bp increase 50bp decrease (240) (399) 240 399 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report2014 36 4 fixed assets The following table presents the number of customers and the volume of equipment of Electrica Group distribution companies (FDEE Electrica Distributie Transilvania Nord – TN, FDEE Electrica Distributie Transilvania Sud – TS and FDEE Electrica Distributie Muntenia Nord – MN) as at 31 December 2014: TaBlE 3: ElECTRICa gROUP DISTRIBUTIOn SECTOR EqUIPmEnT OVERVIEW: geographical coverage no.of customers, of which 110 kV medium voltage (MV) low voltage (lV) Overhead power lines length, of which 110 kV medium voltage (MV) low voltage (lV) whereof connections Underground power lines length, of which 110 kV medium voltage (MV) low voltage (lV) whereof connections Cumulative transformers' power: Electricity stations (110 kV/MV + MV/MV) Electricity stations 110 kV/MV Electricity stations 110 MV/MV Switching stations/Transformer stations no. of substations, of which: 100 kV/MT substations 100 MT/MT substations number of switching stations and transformer stations Source: Electrica S.A. um Km2 tn ts 34,162 34,072 mn 28,962 Total 97,196 # # # # km km km km km km km km km km mVa MVA MVA MVA # # # # # 1,218,831 1,102,885 1,302,330 3,624,046 30 3,637 62 2,745 34 3,448 126 9,830 1,215,164 52,045 1,100,078 43,576 1,298,848 62,439 3,614,090 158,060 2,180 11,684 38,181 17,885 15,100 26 3,432 11,642 6,635 6,081 3,774 3,668 106 2,307 119 90 29 2,257 10,217 31,102 16,460 10,719 28 3,274 7,417 1,765 6,543 4,018 3,854 164 2,525 103 98 5 2,148 12,587 47,704 23,720 12,005 15 3,622 8,368 2,112 8,527 5,429 5,074 355 3,098 216 124 92 6,585 34,488 116,987 58,065 37,824 69 10,328 27,427 10,512 21,151 13,221 12,596 625 7,930 438 312 126 8,438 8,556 10,035 27,029 The vast majority of distribution companies’ equipment were constructed in the last 60 years, following the successive development phases of the National Electricity System. A relatively low proportion of western standards equipment (approximately 20%) was constructed after 1990. On the other hand, the vast majority of equipment were put into function between 1960 –1990. Hence, most of it presents a relatively high wear rate. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report2014 37 The following table presents the structure of equipment wear rates divided by voltage level: TaBlE 4: wear rates Wear rates (%) High voltage power lines (110 kV) Medium voltage power lines low voltage power lines Substations Transformers Source: Electrica S.A. edmn edtn Underground Overhead Underground Overhead Underground Overhead Pole - Amount Concrete enclosure Pad-Mount Underground 40% 75% 75% 70% 70% 70% 70% 65% 70% 80% 90% 25% 75% 70% 75% 70% 70% 75% 70% 75% 85% 90% edts 50% 75% 65% 60% 75% 70% 60% 65% 75% 15% 85% inVestment program Electrica intends to modernise and develop the distribution network based on the smart grid concept through installation of smart meters and infrastructure development for system such as SCADA, SAD etc. The main objectives of Electrica investment program is to increase the operating efficiency, to reduce network losses, to raise network flexibility, to increase the quality, stability and safeness of the grid. The investment program was developed taking into account te wear rate of the equipments. criteria for implementing the inVestment PROgRam: Through the implementation process of the investment program, Electrica follows a set of rules mainly consisting of the following: n aligning to Group’s strategy; n inclusion in rAB of regulated investments; n non-regulated investments should provide an IRR higher than Group’s WACC; n investment program will follow the Group financial strategy to maintain a solidcapital structure. Based on above criteria and in the context of Electrica Group`s engagement stated in the Prospectus, the IPO proceeds will be used to improve the existing grid infrastructure, to develop new ones for connecting new customers and for investments in smart grid and smart metering. According to the Electrica’s strategy, the main objective of the investment programme is to increase Group profitability as well as to raise the accessiblity of custormers and electricity producers to the grid. The main cathegories of investments are: n grid automatisation through SCADA, SAD integration; n extension of the modern smart metering equipment, n modernization of the transformer station and of the medium voltage network; n introduction of equipment with low network losses, higher efficiency rate and which comply with environmental requirements; n modernization of the connections. At the same time, the Group takes into consideration important investments related to development and upgrade of IT infrastructure, as well as investments related to cyber security and business continuity. All these investments are based on the findings of the IT audit and have the aim to improve the data privacy and implicitly the quality of services provided. The following table presents the volume of investments approved by ANRE, as follows: TaBlE 5: inVestment programs appro Ved By anre for distriBution operators of the group for ThE PERIOD 2014 - 2018 Investment programs approved by anRE for distribution operators of the group for the period 2014-2018 (ROn mil) EDTS EDTN EDMN Source: ANRE 2014 117.00 126.00 113.81 2015 180.00 184.00 171.33 2016 219.60 223.20 205.04 2017 250.00 259.20 252.41 2018 287.50 288.00 287.09 Total 1,054.10 1,080.40 1,029.68 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report2014 38 Based on the IPO proceeds, Electrica decided to increase the investment program for the third regulatory period as compared with the initial level approved by ANrE in December 2013. Based on the following graph, Electrica’s IPO positively influenced the level of investment programs, which will positively impact the quality of the electricity distribution process. fIgURE 26: inVestment program pre and post ipo 1, 000 ROn mil. 963 762 648 535 369 375 384 384 post IPO investments pre IPO investments 2015 2016 2017 2018 800 600 400 357 200 357 357 - 2014 Source: Electrica S.A. The investment programs approved for the third regulatory period (2014 – 2018) may be supplemented with investments, which even if not remunerated through RAB, provide efficiency and cost reduction, the benefit being at the level or superior to the RRR. In 2014, the companies of Electrica Group realised the following investments as compared to the ones budgeted at the beginning of the year: Electrica Sa subsidiary (ROn mil) Budgeted Realised SC Transilvania Nord SA SC Transilvania Sud SA SC Muntenia Nord SA Electrica furnizare fISE Electrica SA total Source: Electrica S.A. 140 127 122 16 4 47 457 140 132 139 15 3 35,7 465 In 2014, the Group investment program was accomplished in a proportion of 102%. For the distribution segment an increase from RON 389 million budgeted at the beginning of the year to RON 411 million actually realized, representing a 6% overrun. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201439 The synthetic structure of the investments realized in 2014, is presented in the following table (for a more detailed presentation please see Annex 2): Investment cathegory (ROn mil) Efficiency CPT reduction Operating efficiency Quality improvement Distribution process continuity process Electricity quality improvement Other Independent equipment Studies total Source: Electrica S.A. total 164 147 18 181 181 - 14 39 14 411 The main investments in 2014 focused predominantly on the improvement quality and efficacy of the distribution service. fIgURE 27: electrica inVestment structure in 2014 Independent equipment 10% Other 4% Electricity quality 0% Studies 3% Energy Efficiency (CPT reduction) 36% Distribution process continuity 43% Source: Electrica S.A. EOperating efficiency 4% Based on the implementation of the 2011 – 2014 investment programme, Electrica’s distribution companies RAB is presented in the following table: TaBlE 6: 2011 – 2014 RaB EVOlUTIOn RaB (ROn mil) EDTS EDTN EDMN Source: Electrica S.A. 2011 1,213 1,166 1,312 2012 1,321 1,261 1,408 2013 1,332 1,292 1,434 2014 1,343 1,335 1,490 During 2011 – 2014, RAB had an upward trend for all the Group distribution companies, being directly reflected in a Group profitability increase. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201440 5 Securities market initial puBlic offering The Government Decision no. 85/2013, amended and completed by Government Decision no. 477/2014 approved the privatization strategy of Electrica SA by initial public offer (“IPO”). The privatization strategy included the offer for sale of a 51% stake by issuance of new shares representing 105% of the existing share capital as at the date of the IPO. The shares were offered to both individual and institutional investors on the Romanian market, as well as to qualified institutional investors on the US market and outside USA, and Global Depository receipts (“GDrs”) on the UK market. The IPO was organised in June 2014 and referred to an offering by the Company of 177,188,744 ordinary shares in the form of shares and in the form of GDrs, each GDR representing four shares. Following the IPO, the Company sold 142,007,744 shares and 8,795,250 GDRs, at the offer prices of RON 11 per share and 13.66 USD per GDR. The allocation of shares and GDRs and the offering prices were concluded on 27 June 2014. The transfer of ownership rights on new shares and the collection of cash by the Company took place on 2 July 2014. At the same date the increase in share capital was recorded in the Trade register. Starting 4 July 2014 the Company’s shares are listed on Bucharest Stock Exchange, and the GDrs are listed on london Stock Exchange. share price eVolution since ipo fIgURE 28: share price on BVB and lse 14 13.5 13 12.5 12 11.5 11 10.5 10 7/4/2014 8/4/2014 9/4/2014 10/4/2014 11/4/2014 12/4/2014 ElSa gDR (USD/share) Electrica Sa (ROn/share) Source: BVB. LSE 1/4/2015 2/4/2015 3/4/2015 fIgURE 29: PERf ORmanCE Of ElECTRICa In COmPaRISOn TO BET InDEx (%) 120 115 110 105 100 95 90 85 80 7/4/2014 8/4/2014 9/4/2014 10/4/2014 11/4/2014 12/4/2014 1/4/2015 2/4/2015 elsa gdr romania Bet Electrica Sa 3/4/2015 Source: Electrica S.A. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201441 diVidend distriBution romanian companies may distribute dividends from statutory earnings only, as per separate financial statements prepared in accordance with romanian accounting regulations. The dividends distributed by the Company in 2014, 2013 and 2012 (from the statutory profits of preceding years) were as follows: (ROn mil) Dividends distributed Dividends/share (rON) 2012 6.0 0.029 2013 13.2 0.064 2014 22.5 0.108 The dividends per share paid to the owners of the Company were: 2014: RON 0.108, 2013: RON 0.064 and 2012: rON 0.029 per share. diVidend policy Dividends, if and when declared, are distributed to shareholders on a pro-rata basis proportionately to their participation in the paid-up share capital of the Company. Each fully paid Share gives its owner the right to receive dividends. The Company will pay any dividends in RON. Prior to the Offering, the Company was subject to Government Ordinance no. 64/2001 on distribution of profits of national companies and State owned companies (the ‘‘Dividend Ordinance’’). Management will distribute dividends on the basis of the Company’s annual financial statements which starting with 2014 will be prepared in accordance with IFRS-EU. Management’s intention is to distribute dividends, based on a guidance of approximately 85% of consolidated profit attributable to shareholders of Electrica SA. For the financial years ending 31 December 2011 and 2012, State-owned companies were obliged to distribute 85% share of their distributable profit as dividends. According to the Companies law, in case of assignment of shares, the assignee shall be entitled to the right to dividends due for the period after the assignment is complete. Thus, the investors shall be entitlted to dividends according to this rule. repurchase of treasury shares In July 2014 the Company purchased 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 thousand. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201442 6 Management of the Group 6.1 Board of directors of electrica s.a. The board of directors consists of five non-executive directors appointed by the general meeting of shareholders. One of the Directors was appointed on the proposal of the romanian state, represented by the Ministry of Energy, Small and Medium Enterprises and Business Environment, three were appointed on the proposal of the private shareholders and one was named both on the proposal of the romanian state and private shareholders. Four of the five directors meet the criteria for independence provided by the Article of Association of Electrica. The Board is entrusted with fulfilling all the necessary and useful acts for performing the Company’s business object and for supervising the management’s activity, save for the ones assigned to the General Meeting of Shareholders. The composition, organisation, duties and responsibilities of the Board of Directors are set out in the Articles of Associationand in the Charter of the Board of Directors. The current members of the Board of Directors were elected for four years, through the cumulative voting method, by the General Meeting of Shareholders, during the first meeting after the IPO, on 22 September 2014. The composition of the Board of Directors is the following: n Mr. Victor Cionga – non-executive administrator, elected as Chairman of the Board of Directors until January 2016 n Ms. Arielle Malard de Rothschild – non-executive administrator n Mr. Michael Boersma – non-executive administrator n Mr. Cristian Busu – non-executive administrator n Mr. Victor Vlad Grigorescu – non-executive administrator During the first Board of Directors meeting on 14 October 2014, the Board has established three consultative committees, with the following composition: a) The nomination and Remuneration Committee n Ms. Arielle Malard de Rothschild – Chair of the committee n Mr. Michael Boersma n Mr. Cristian Busu b) The audit Committee n Mr. Cristian Busu – Chair of the committee n Mr. Victor Vlad Grigorescu n Ms. Arielle Malard de rothschild c) The Strategy, Restructuring and Corporate governance Committee n Mr. Michael Boersma – Chair of the committee n Mr. Victor Vlad Grigorescu n Mr. Victor Cionga The members of the committees are elected for a one- year term. The organisation, duties and responsibilities of each committee are laid down in Electrica’s Articles of Association, respectively in the charters of each committee. The Board of Directors delegates Electrica’s management to one or more managers, appointing one of them as general manager. The duties and responsibilities of the general manager are set out in Electrica’s Articles of Association. According to our information, there is no agreement, understanding or family relationship between the Company’s directors and another person that contributed to their appointment as managers. Details regarding the bios of the members of the Board of Directors can be accessed on the company’s website. The table below comprises the number of Electrica S.A. shares held by the Company’s directors as of March 2015: no. name number of shares Stake held(as % of the share capital) 1. Mr. Victor Cionga 5.000 0.00144534% 2. Ms. Arielle Malard de rothschild 3. Mr. Cristian Busu 4. Mr. Michael Boersma 5. Mr. Victor Vlad Grigorescu - - - - - - - - 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201443 According to our information, the persons mentioned in section 6.1., have not been involved in litigations or administrative proceedings related to their activity in the Company in the last 5 years, nor in proceedings related to their capacity of fulfilling the duties in the Company. Until September 22, 2014 the Board of Directors members were: n Mr. Marius Eugen Untescu – non-executive director, president of the board of directors n Mr. Niculae Plesa – non-executive director n Mr. Constantin Dinescu – non-executive director n Mr. Rares Ion Popescu – non-executive director n Mr. Ioan Rosca – executive director, general manager 6.2 actiVity of the Board of directors of electrica s.a. and of its consultatiVe committees During 2014, the Board of Directors nominated on September 22nd 2014 met 6 times. Out of the 6 meetings, one was an electronic board meeting, convened in accordance with art. 17 (22) in the Articles of Incorporation. The main decisions of the Board of Directors during the 6 meetings refer to: n Establishing three consultative committees; n Drafting the charter of the board and of the of a treasury department and a major projects department n Endorsement of the 2014 income and expenses budgets for Electrica SA - standalone and consolidated; n Endorsement of the 2014 income and expenses budgets for Electrica’s subsidiaries; n Endorsement of the 2014 consolidated investment plan; consultative committees; n Discussionof acquisition opportunities for Electrica n Proposals regarding the organizational structure and redefining the internal processes, which will reflect the current context of the Company. Competencies evaluation for the key personnel in the Company and proposals for a remuneration system for the members of the Board, director, managers and key personnel; n Negociations with the Unions on the CLA n Changes to the organizational chart – creation SA; n Discussionof the investment opportunities, respectively the strategy of implementing smart- metering in the Group, dispatch centralization, GIS etc.; n Endorsement of the external auditor for Electrica SA and subsidiaries and approval of the external auditor for the subsidiaries. During 2015, until March 26th 2015, the Board of Directors met 9 times. Out of the 9 meetings, 6 were electronic board meetings, convened in accordance with art. 17 (22) in the Articles of Incorporation. The main decisions of the Board of Directors during the 9 meetings refer to: n Approval of the charters of the board and of its n Endorsement of the 2014 financial statements Electrica SA – standalone and consolidated; n Endorsement of the 2014 statutory financial statements for Electrica’s subsidiaries; n Endorsement of the 2015 income and expenses budgets for Electrica SA - standalone and consolidated; consultative committees; n Endorsement of the 2015 income and expenses n Approval of the Code of Ethics and Professional budgets for for Electrica’s subsidiaries; Conduct; n Approval of the Corporate Governance Code; n Approval of the whistleblower policy; n Approval of the Chart of internal auditor; n Approval of the Code of Ethics for the internal auditor; n Approval of the audit plan for 2015; n Approval of the internal audit operational procedure; n Applying in the subsidiaries the same corporate governance model as in Electrica SA, namely replacing the executive directors with non-executive ones; n Endorsement of the draft management agreement of the Board members, taking into account EBrD’s request to modify the management agreement, approved by the GMS on September 22nd 2014, and present to the GMS a new proposal drafted by a reputable legal consultant, in accordance with best practices and standards. n Approval of the change in accounting policies (application of IFRIC 12); n Discussions about ITC security at group level n Discussion of Electrica’s strategy 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201444 nomination and remunerations c ommittee During the period September 22nd, 2014 - March 26th, 2015 thiscommittee hasmet 5 times. During these meetings the following subjects were discussed and submitted to the Board for discussions and, when the case, for the approval of the Board: n Recommendations regarding the Company’s remuneration and compensation policies; n Endorsement of the charter of the committee; n The organizational structure of the Company, updated to reflect the current status of the Company; audit committee During the period September 22nd, 2014 - March 26th, 2015 this committee has met 3 times. During these meetings the following subjects were discussed and submitted to the Board for discussions and, when the case, for the approval of the Board: n Endorsement of the chater of the committee; n Endorsement of the Code of ethics and professional conduct; n Endorsement of the whistleblower policy; n Endorsement of the internal auditor’s charter; n Endorsement of the Code of ethics for the internal auditor; n Endorsement of the audit plan for 2015; n Endorsement of the internal audit operational procedure; n Evaluation of the competencies of key personnel in the company and proposal for a remuneration and compensation system for the board, managers and key personnel; n Applying in the subsidiaries the same corporate governance model as in Electrica SA, namely replacing the executive directors with non-executive ones; n Interviewing the candidates proposed to be nominated in the board of Directors of the subsidiaries. n Endorsement of the 2014 financial statements Electrica SA – standalone and consolidated; n Endorsement of the 2014 statutory financial statements for Electrica’s subsidiaries; n Endorsement of the 2015 income and expenses budgets for Electrica SA - standalone and consolidated; n Endorsement of the 2015 income and expenses budgets for for Electrica’s subsidiaries; n Endorsement of the change in accounting policies (application of IFRIC 12); n Endorsement of the manual of accounting policies n Ordering two spotcheck audit missions. strategy, restructuring and c orporate go Vernance c ommittee During the period September 22nd, 2014 - March 26th, 2015 this committee has met 6 times. During these meetings the following subjects were discussed and submitted to the Board for discussions and, when the case, for the approval of the Board: n Endorsement of the charter of the board; n Endorsement of the charter of the committee; n Endorsement of the Code of ethics and professional investment plan; conduct; n The potential acquisition of Enel shareholdings in romania; n Discussions regarding the potential acquisition of the shareholdings of fondul Proprietatea in Electrica’s subsidiaries; n Redefinition of the processes, to reflect the current status of the Company; n Analysis of acquisition opportunities for Electrica SA; n Anaysis of the investment opportunities, respectively the strategy of implementing smart- metering in the Group, dispatch centralization, GIS etc.; n Endorsement of the Corporate Governance Code; n Endorsement of the 2014 and 2015 consolidated n Endorsement of the draft management agreement of the Board members, taking into account EBrD’s request to modify the management agreement, approved by the GMS on September 22nd 2014, and present to the GMS a new proposal drafted by a reputable legal consultant, in accordance with best practices and standards. n The Group’s development strategy; n Occupational safety and health at group level; n The possibility of accessing European funds; n Endorsement of the whistleblower policy; n The organizational structure of the Company, updated to reflect the current status of the Company; n Applying in the subsidiaries the same corporate governance model as in Electrica SA, namely replacing the executive directors with non-executive ones. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201445 6.3 Board of directors of electrica s .a. suBsidiaries edts edtn edmn ef es Structure of the Board of Directors in Electrica’s Subsidiaries Geanta Marian - non-executive director, chairman of the board Coman Claudiu - non-executive director Carmen Mihaela Pirnea - non-executive director Simona Fatu - non-executive director Ion Dobre - executive director (general manager) (general manager) Dumbrava Ioan - non-executive director, chairman of the board Ciprian Gheorghe Diaconu - non-executive director Vlad Costica - non-executive director Oana Valentina Truta - non-executive director Merdan Emil - executive director (general manager) Rosca Ioan - non-executive director, chairman of the board Oana Valentina Truta - non-executive director Paun Costin - Mihai - non-executive director Gubandru Aurel - non-executive director Mesca Darius Dumitru - executive director (general manager) Rosca Ioan - non-executive director, chairman of the board Oana Valentina Truta - non-executive director Ionescu Valentin - non-executive director Lupu Victoria - non-executive director Patrascoiu Mircea - executive director (general manager) Marin Adrian Gheorghe - non-executive director, chairman of the board Badan Gabriel Razvan - non-executive director Leonte Catalin - non-executive director Sandu Gabriela - non-executive director Davidoiu Eugen - executive director (general manager) 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201446 6.4 executiVe management Ioan ROSCa – General Manager (CEO) Pursuant to the decision of the Board of Directors no. 24 dated 5th July 2013, the Board of Directors has appointed Mr. Ioan Rosca to the position of general manager of the Company and delegated him responsibilities and duties related to internal management and representation. His mandate is until July 8th, 2017. The table below shows the company’s managers who have delegated powers from the Board of Directors: name Mesca Darius Dumitru Dobre Ion Merdan Emil Patrascoiu Mircea Davidoiu Eugen Position General Manager General Manager General Manager General Manager General Manager Subsidiary EDMN EDTS EDTN Electrica furnizare Electrica Serv The table below shows the company’s managers who do not have delegated powers from the Board of Directors: Position Department name Electrica headquarters Angelescu ramiro robert Eduard Dumbrava Ioan Petre Marin Geanta Marian Marin Emilia - Elena Popescu Borislavschi Alexandra romana Augusta Stan Corneliu Crisan Mariana Deputy General Manager Manager Deputy Manager Deputy Manager Manager Manager Deputy Manager Manager Pindichi Valentin Cosmin Deputy Manager edmn Blagoi Gabriela Coman Constantin Branescu Valentin Gheorghe Gabriel Preda Ion EDTS Subsidiary radulescu Monica radu Holom Constandache Nicu Grama Catalin EDTn Subsidiary fataceanu Dora filip Vasile Buda Constantin ladislau reider Muresan Cristian Marius Electrica furnizare Subsidiary Pana Cristina Beu Mihai Pirvulete Oana Gheorghe roxana Electrica Serv Subsidiary Hateganu Constantin Nicolae Andruhovici Cristian Ivan Alexandru Vasiu Viorel Beleuzu Viorel Manager Manager Manager Manager Manager Manager Manager Manager Manager Manager Manager Manager Manager Deputy Manager Manager Manager Manager Manager Manager Manager Manager Manager Manager Operations Operations Operations Economic Corporate finance and Governance Corporate finance and Governance Human resources, Control and Communication Human resources, Control and Communication Economic Distribution 110 kV Development Control, Regulation and Communication Economic Distribution 110 kV Development Economic Distribution 110 kV Development Development Economic Commercial legal Commercial Operations Economic Human resources Procurement and International Relations Production legal and Assets 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201447 According to the Articles of Incorporation, the Board of Directors appoints and revokes the General Manager and the other managers with mandate agreements –art.18, letter A, paragraph (f) and (k).The General Manager performs his activity according to the provisions of the mandate agreement concluded with the Company. The Managers with managing functions are employees of the company, having an individual labor agreement and they are appointed and revoked by the General Manager. According to our information, there is no agreement, understanding or family relationship between the Company’s managers and another person that contributed to their appointment as managers. The table below shows the number of shares held by the Company’s managers as of March, 2015: no. name number of shares Share in the share capital (%) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Ioan rosca Angelescu ramiro robert Eduard Geanta Marian Dobre Ion Merdan Emil Patrascoiu Mircea Davidoiu Eugen radulescu Monica radu Holom fataceanu Dora filip Vasile Beu Mihai Pirvulete Oana Beleuzu Viorel 25,000 1,000 1,000 1,800 7,277 1,000 2,478 1,800 1,000 1,000 8,745 1,000 6,836 1,000 0.00722669% 0.00028907% 0.00028907% 0.00052032% 0.00210354% 0.00028907% 0.00071631% 0.00052032% 0.00028907% 0.00028907% 0.00252790% 0.00028907% 0.00197607% 0.00028907% According to information at hand the persons mentioned in section 6.3 have not been involved in any litigations or administrative proceedings related to their activity within the Company in the last 5 years and their capacity to fulfil their work-related attributes. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201448 7 Corporate Governance 7.1 general meeting of shareholders The General Meeting of Shareholders (GMS) is the main corporate governance body of Electrica, 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 Electrica’s Articles of Association Until July 2014, the Romanian State, acting through the Ministry of Energy, Small and Medium Enterprises and Business Environment, was the sole shareholder of Electrica. Starting 4 July 2014 the Company’s shares are listed on Bucharest Stock Exchange, and the GDrs are listed on london Stock Exchange. The latest available information regarding the shareholder structure has been provided by Depozitarul Central on 21 November 2014 and is presented in the table below: Shareholder Shares Percent of share capital Ministry of Energy, Small and Medium Enterprises and Business Environment, Bucharest, romania EUrOPEAN BANK fOr rECONSTrUCTION AND DEVElOPMENT, lONDON, UK BNy MEllON DrS, NEW yOrK, USA legal persons Individual persons total Source: Central Depository, Electrica S.A. 168,751,185 29,944,090 27,442,180 100,506,060 19,296,414 345,939,929 48.7805 % 8.6559 % 7.9326 % 29.0530 % 5.5780 % 100 % Following the stabilization process after the IPO, Electrica SA owns 6,890,593 of its own shares, representing 1.9918% of the total share capital. These shares do not entitle Electrica to voting rights, nor dividends. 7.2 corporate goVernance c ode The Board of Directors of Electrica S.A. has approved on 2 february 2015 the Corporate Governance Code (CGC), which can be accessed on the company’s website. Starting with 4 July 2014, the shares issued by Electrica are traded on the Bucharest Stock Exchange (the BSE) and the global depositary receipts (GDrs) issued by The Bank of New york Mellon (BNyM) having Electrica’s shares as underlying security, are traded on the london Stock Exchange (the lSE). Electrica adheres to and applies wilfully the provisions of the Corporate Governance Code issued by the BSE as may be amended or replaced from time to time. This CGC embeds Electrica’s general principles and conduct rules which set forth and regulate the corporate values, the responsibilities, obligations and business conduct of the company. The CGC is also a guide for the management and the employees of Electrica and other stakeholders on 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 (Schedule 7 of the CGC). In compliance with Companie`s policies and with the Code of Ethics and professional conduct, the Audit Committee ensures that the Companie`s activity is developed with honesty and integrity, including the approvalof the integrity warning procedure. The scope of integrity warning procedure is to protect the Company from ethical deviations, frauds and any other aspects of non-compliance that would harm the image, prestige and profitability of the Company. This procedure can be accesed on Electrica SA website. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201449 7.3 implementing action plans undertooK By signing the frameworK agreement with eBrd As a result of EBrD and SDfEE Electrica S.A. signing the framework Agreement, the Company undertook to implement the “EBRD Anti – Corruption Guidelines”, the “Corporate Governance Action Plan” and the “Environmental and Social Action Plan” and to report on their implementation progress. The first step was to adhere to “EBRD anti – Corruption guidelines” and to integrate those guidelines into the Company’s Code of Ethics in force. Electrica initiated the “Socrates” project for elaborating and disseminating the new code of conduct and best practices for preventing fraud and corruption, with the support of Transparency International Romania (a prestigious international NGO with expertise in integrity/ethics best practice contracted for support). The Code of Ethics and Professional Conduct was finalized in December 2014 and submitted to the Board of Directors, following the completion of Socrates Project phases mentioned below: stage ii action: analyzing the processes, the internal and external interactions and diagnosing the corporate culture. Result: identifying risks and sensitive areas or activities, related to both the intragroup and external interactions from moral/ethical/deontological standpoint; identifying shared values inside the group, describing practices specific to Electrica corporate culture; identifying the values that need and may be adopted by the Company. Deliverables: analysis report on Company’s processes from an ethical perspective and corporate culture diagnose. stage iii action: developing an integrated code of ethics applicable by the Company. Result: setting the values and principles that need to be adopted and respected by the Company. Deliverables: Electrica’s Code of Ethics and Professional Conduct. stage i action: analyzing the organization’s socioeconomic environment and also the relevant legislation, regulations and governance principles. Result: defining the regulatory framework, the standards and best practices and also the values and principles. Deliverables: analysis report of the external environment from an ethical and integrity standards perspective. The next step consisted of the reconciliation of the Code of Ethics and Professional Conduct with the Corporate Governance Code (documents drafted in parallel) and the final form of the Code of Ethics and Professional Conduct has been approved by the Board of Directors on 02.02.2015 through HCA 3/02.02.2015. Pursuant to its approval, the Company has drafted the project for the second phase of Project Socrate, which consists of a 12 months implementation process aimed at changing the organizational culture. 7.4 the corporate goVernance action plan 1. independent directors’ selection After its IPO and being listed on the stock exchange, Electrica’s convened its General Shareholders Meeting on 22.09.2014 for the appointmentof its newBoard of Directors. For selecting the candidates for independent non-executive director positions Electrica contracted an international reputable executive search agency in August 2014. The international reputable executive search agency delivered a long list of 10 potential independent non-executive directors 2. nomination and remuneration policies In order to assistthe Company in preparing its Nomination and Remuneration Policies, an international specialized consultant was contracted to assist. In December 2014 a Nomination and Remuneration Policy Proposal was submitted to the Board of Directors by the and a short list of 4 potential independent non-executive directors that was made public. On 22.09.2014 the General Shareholder Meeting nominated the 5 new directors of the company, in compliance with the independence principlefor 3 of the directors. Electrica’s Board of Directors designated members are: Arielle Malard de Rothschild, Victor Cionga, Michael Adriaan Maria Boersma, Victor Vlad Grigorescu and Cristian Busu. Nomination and Remuneration Committee. The policy was endorsed by the Board of Directors and was included for approval on the agenda of the first GSM in 2015 (programed for 27 -28 of April 2015). 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201450 3. Board committees Three consultation committees were set during the first Board of Directors meeting: the Audit Committee, the Nomination and Remuneration Committee and the Strategy, restructuring and Corporate Governance Committee, according to Board of Directors decision 44/14.10.2014. The committees’ charts were prepared by the Company’s legal consultant and submitted to the 4. internal control frameworK Electrica’s Internal Control Framework was defined in accordance with international best practice and International Standards for the Professional Practice of Internal Auditing, as requested. The Internal Audit Department in Electrica updated the Internal Auditing Procedure and the related documents in accordance with international best practices and standards, submitting them to the Audit Committee of the Board of Directors for endorsement in November 2014. The Internal Audit Charter, The Procedure and The Auditor Code of Conduct were developed according to the International Standards for the Professional Practice of Internal Auditing that were totally assimilated by The romanian financial 5. company’s articles of incorporation Electrica reviewed and updated its Articles of Incorporation according to EBRD guidelines with respect to the laws in force, the new version of the Company’s Articles of Incorporation being approved by the Extraordinary General Shareholders Meeting Board of Directors committees for endorsement and to Board of Directors for approval in November 2014 (for Nomination and Remuneration and Audit Committee) and in December 2014 (for Strategy, restructuring and Corporate Governance Committee). Committees’ charts were approved by Board of Directors Decision 03/02.02.2015. Auditors Chamber through Decision No.35/30.11.2004 and the reviewed Government Emergency Ordinance No. 75/1999 regarding financial audit. In June 2014, the romanian financial Auditors Chamber adopted the International Mandatory Regulation issued by Global Internal Auditors Institute through Decision No.48/26.06.2004. This international mandatory regulations were also used for amending Electrica’s internal auditing documents which were endorsed by the Audit Committee of the Board of Directors on 23.12.2014 and approved by Board of Directors Decision 3/02.02.2015. Decision 9/10.06.2014. Through the General Meeting of Shareholders’ Resultion on December 18th 2014, the Articles of Incorporation were updated (the term “comerciala” as removed from the name of the company). 6. clear lines of responsiBility and accountaBility At group level, Electrica prepared with its legal advisor a framework document on reporting and accountability corporate policy (the status quo and the options). Electrica’s and its subsidiaries’ lines of responsibility and Accountability were defined until now by the Integrated Quality Environment Health and Safety Management Systems with respect to ISO 9001:2008, ISO 14001:2004 and OHSAS 18001:2007, certified by an internationally accredited certification entity (SRAC CERT). Each subsidiary of Electrica group has its own SRAC certified Integrated Quality Environment Health and Safety Management System. The implementation of the standards followed a consistent approach, based on a unique set of guidelines, but differences in management systems appeared in time as a result of core activity differences. At Company level, the consultant engaged elaborated a proposal regarding Electrica’s new organizational chart and defined the key functions. The proposal was submitted to the Nomination and Remuneration Committee of the Board for study and endorsement and after, to the Board of Directors approval. 7. code of conduct The code of conduct requirements are covered partly by the code of ethics developed as part of the “Socrates” Project and partially by Electrica’s Governance Code. The Company and its external legal advisor elaborated Electrica’s Corporate Governance Code and submitted it to the Strategy, restructuring and Corporate Governance Committee on 17.12.2014. The reconciliation of the code of ethics with the corporate governance code and with the policy regarding integrity was finalized on 27.01.2015 and the final form of the Corporate Governance Code was approved by the Board of Directors by decision 3/02.02.2015. For details regarding the Code of Conduct visit http:// www.electrica.ro/cod-de-etica-si-conduita-profesionala/ 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201451 8. compliance with the Bse corporate go Vernance c ode regarding the compliance with the BSE Corporate Governance Code, Electrica included all its provisions in the Company’s Corporate Governance Code elaborated with the help of its external legal advisor. 7.5 the enVironment and social a ction plan Some of the actions included have extended implementation deadlines (one to two years), but the measures with short deadlines were implemented by the end of 2014: n regarding Environmental health and Safety management, Electrica reviewed its procedure on investment projects endorsement in order to ensure publicity on the Company’s web site and public consultation on investment project with significant environmental impact. The updated internal procedure was approved on 19.12.2014, getting into force on 20.12.2014 (the term according to EBrD being 31.12.2014). n regarding Corporate Social Responsibility, Electrica developed an organizational structure aimed at elaborating and managing the implementation of the Company’s major projects/programs, one of these being on Corporate Social Responsibility (CSR). The new organizational chart was approved by the Board of Directors on the 18.12.2014, thus meeting the 31.12.2014 deadline agreed with EBRD. The Project/Program Manager and its team should develop the Corporate responsibility Program including the Stakeholder Engagement Plan 2015 and submit them to the Board of Directors for approval in early 2015. n regarding the restructuring policy, Electrica requested the deadline to be rescheduled, considering that the new Collective Labor Contract signed with the trade unions requires the elaboration and negotiation of such a policy as part of the contract within 6 month from the contract signing (27.11.2014). Along with this policy, Electrica also needs to develop and implement a National Integrated Training Program aimed at using professional reconversion in order to avoid future staff reductions. The framework procedure regarding restructuring related actions management at group level, including terms for reporting and informing stakeholders was elaborated and approved by the General Manager on 22.12.2014 and entered into force the following day, while the term agreed with EBrD was 31.12.2014. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201452 8 financial overview of the company The consolidated financial statements have been prepared in accordance with International Reporting Standards (“IFRS”) as endorsed by the European Union (“IFRS-EU”). These consolidated financial statements are presented in Lei (RON), which is the functional currency of all group companies. 8.1 consolidated Balance sheet The table below presents a summary of the statement of individual financial position: ROn mil assets non-current assets Intangible assets related to concession agreements Property, plant and equipment Other Intangible assets Equity-accounted investees Other investments Deferred tax assets Other non-current assets Total non-current assets Current assets Trade receivables Other receivables Green Certificates Cash and cash equivalents Deposits, treasury bills and government bonds Inventories Prepayments Income tax receivable Assets held for distribution Total current assets Total assets equity and liaBilities Equity Share capital Share premium Pre-paid capital contribution in kind from shareholders Revaluation reserves Treasury share reserve Other reserves retained earnings Total equity attributable to the owners of the Company Non-controlling interests total equity December 31st 20135 2014 20125 Variation 2014/2013 3,501 805 9 - - 60 8 4,382 781 25 54 1,630 1,221 24 9 23 - 3,765 8,148 3,814 103 3 156 (75) 237 1,269 5,507 811 6,317 3,340 876 5 - - 85 1 4,307 1,088 57 - 651 - 34 6 37 2,243 4,116 8,423 2,509 - 48 573 - 615 1,937 5,681 764 6,446 3,318 848 8 1,042 1,138 106 6 6,467 1,011 95 - 642 - 35 40 17 - 1,840 8,307 2,493 - 55 589 - 602 1,700 5,439 718 6,157 4.82% (8.10%) 79.40% - - (30.15%) 612.88% 1.75% (28.20%) (56.98%) - 150.37% - (28.11%) 35.53% (36.63%) (100.00%) (8.52%) (3.27%) 52.00% - (93.13%) (72.76%) - (61.52%) (34.48%) (3.08%) 6.05% (1.99%) 5 Restated as a result of application of IFRIC 12 and new standards with a date of initial application of 1 January 2014 under IFRS-EU 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201453 ROn mil liabilities non-current liabilities Long-term bank liabilities finance lease Trade payables Financing for network construction related to concession agreements Deferred revenue Deferred tax liabilities EMplOyEE bENEFiTS Other payables TOTal nOn-CURREnT lIaBIlITIES Current liabilities Short term bank borrowings Bank overdrafts finance lease Financing for network construction related to concession agreementsagreements Trade payables Other payables Current income tax liability Deferred revenue Employee benefits Provisions Total current liabilities Total liabilities Total equity and liabilities Source: Electrica S.A. December 31st 20135 2014 20125 Variation 2014/2013 - - - 151 - 189 220 53 614 - 48 0 99 555 277 14 3 147 73 1,216 1,831 8,148 - 0 - 130 - 201 213 66 611 - 80 0 143 582 307 15 3 152 85 1,366 1,977 8,423 - 1 - 196 1 202 217 77 693 9 167 27 114 681 247 11 2 120 80 1,457 2,150 8,307 - (100.00%) - 16.68% - (5.98%) 3.37% (19.88%) 0.54% - (39.60%) (40.96%) (30.52%) (4.52%) (9.93%) (6.01%) 14.88% (3.60%) (14.28%) (10.99%) (7.43%) (3.27%) nOn-CURREnT aSSETS Until 2014, the Company considered the concession services agreements related to the distribution of electricity concluded by the Subsidiaries to be public-public, and thus considered that the model IAS 16 regarding accounting treatement of assets subject to concession agreements as more adequate, taking into account that the Company was State owned. Following the initial public offering,Electrica’s management considers that it may not be concluded that the romanian State holds the de facto control through its shareholding of 48.78% and reassessed the accounting treatment used for concession agreements and as a result adopted IfrIC 12 for concession services arrangements, applicable to public-private arrangements. Applying IFRIC 12 has the following effects on the financial statements: a. the assets of the distribution subsidiaries will no longer be classified as tangible fixed assets and will be classified as intangible fixed assets, representing the consideration to be received (the right to charge distribution tariffs based on the consumption of electricity) by the concessionaire for the rendered service, consisting of the construction, modernisation, rehabilitation of electric networks; b. the tangible fixed assets acquired from contributions paid by clients (the connection fee), as well as the tangible fixed assets funded from subventions or other subvention-like operations are derecognized, simultaneously with the related deferred revenues; c. the reduction of debts related to the deferred tax as a result of reducing the IFRS accounting basis of the tangible and intangible fixed assets; d. the concessionaires act as services supplier (it builds, modernizes and rehabilitates the distribution network) and will have to enter into the accounting records the revenues related to the construction or improvement of infrastructure as per IAS 11. This results in additional revenues and expenditures being recognized in the profit and loss account (related to the construction and modernization of infrastructure), as well as of a margin resulting from rendering the construction services (the used profit margin was estimated at 3%, relying on the experience of the subsidiary Electrica Serv for 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201454 construction-installation services); e. the depreciation of the intangible fixed assets will created according to the repairs and investment plans. be based on the BAr value recovery model; f. the contributions paid by clients will no longer be recognized as revenues as per IfrIC 18 “Transfer of assets from customers”; g. the Company estimates that provisions are not required for the obligations related to maintenance or capital expenditures, since they are annually The application of the interpretation that an amendment to the accounting policy entails restatingthe comparative numbers related to the financial positionas of31 December 2013 and 31 December 2012, and the profit or loss and other elements of the global result and the cash flows for the year ended on 31 December 2013. The summary of the estimated effects of applying the interpretation at the level of the consolidated financial statements is as follows: TaBlE 7: ifric 12 impact ROn mil Gross profit increase Operating revenues increase Operating expenses increase 2012 Net assets reduction as at 31 December 216 Source: Electrica S.A. 2013 8 222 214 214 2014 8 360 352 212 The application model of IFRIC 12, being to a large extent correlated to the recognition and depreciation of the asset components of BAR, reflects the principle of generating revenues. At 31 December 2014 the Group performed the revaluation of land and buildings with a net effect of rON (42) million. Non-current assets have increased by 1.75% in 2014 as compared to 2013, from rON 4,307 million to rON 4,382 million, mainly due to the increase in intangible assets related to concession agreements (investments made in the network).The increase in non-current assets is driven mainly by investments in the distribution network (see Annex 2). current assets Current assets have decreased by 8.52% in 2014 as compared to 2013, from rON 4,116 million to rON 3,765 million, due to the decrease in assets held for distribution related to the transfer of the shares held by the Company in 10 entities (Enel Distributie Muntenia, Enel Energie Muntenia, Enel Distributie Banat, Enel Distributie Dobrogea, Enel Energie, E.On Moldova Distributie, E.On Energie, Electrica Soluziona, Hidro Tarnita and BRM), following the spin-off of the Company’s shareholdings to a new company - „Societatea de Administrare a Participatiilor in Energie SA” - wholly owned by the Company’s major shareholder and on other hand the increase in cash and cash equivalents following the capital increase through the IPO. trade receiVaBles Trade receivables decreased by rON 306.6 million, equivalent to 28%, to rON 781 million in 2014 from rON 1,088 million as of 31 December 2013. This decrease was mainly attributable to the collection by Electrica furnizare SA subsidiary of the overdue receivables from the National Railway Company - Compania Nationala Caile Ferate Romane CFR SA (“CFR”) (a state-owned company). On 13 May 2014 the Group collected the value of electricity invoiced as of31 December 2013 of rON 221 million. cash and cash equiValents Cash and cash equivalents have increased by 150.37% in 2014 as compared to 2013, from rON 651 million to rON 1,630 million, as a result of the funds received from IPO. deposits, treasury Bills and go Vernment Bonds Deposits, treasury bills and government bonds have increased with rON 1,221 million in 2014 as compared to 2013, as a consequence of the IPO process. assets held for distriBution Based on the Extraordinary General Shareholders decision dated 20 March 2014 and the resolution of the Bucharest Court dated 10 April 2014, the Group recognised the spin-off of the Company’s shareholdings to a new company - „Societatea de Administrare a Participatiilor in Energie SA” - wholly owned by the Company’s main shareholder (Ministry of Energy, Small and Medium Enterprises and Business Environment). 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report2014 55 The investments included equity accounted investees and other investments and were classified as assets held for distribution as of31 December 2013, as follows: assets held for distribution (ROn mil) Carrying amount at 31 December 2013 Percentage Ownership interest Enel Distributie Muntenia Enel Energie Muntenia Enel Distributie Banat Enel Distributie Dobrogea Enel Energie E.On Distributie E.On Energie Electrica Soluziona Hidro Tarnita BrM Total assets held for distribution Source: Electrica S.A. 823.18 91.05 552.15 394.30 158.67 213.00 11.00 0.05 0.06 0.04 2,243 23.57% 23.57% 24.87% 24.90% 36.99% 27.00% 3,78% 49.00% 50.00% share capital and share premium The issued share capital in nominal terms consists of 345,939,929 ordinary shares at 31 December 2014 (2013: 207,839,904) with a nominal value of RON 10 per share. All shares rank equally with regard to the Company’s residual assets. The holders of ordinary shares are entitled to receive dividends as declared, and are entitled to one vote per share at General Shareholders Meetingsof the Company. Number of shares at 1 January Shared issued during the year Decrease of the number of shares by spin-off number of shares at 31 December Source: Electrica S.A. Ordinary shares 2014 207,839,904 181,223,805 (43,123,780) 345,939,929 2013 206,229,044 1,610,860 - 207,839,904 The Company recognizes the changes in share capital only after their approval in the General Shareholders Meeting and their registration by the Trade Register. The contributions made by the shareholder which are not yet registered with the Trade register at year end are recognized as “pre-paid capital contributions in kind from shareholders”. On 25 february 2014 an increase of share capital of 188,264 ordinary shares was registered in the Trade registry. The shares were issued in respect of land contributed by the shareholder in previous periods. On 10 April 2014 Bucharest Court approved the spin-off by Electrica SA through transfer of part of its assets (investments held by Electrica SA in other entities – see Note 24 of the Consolidated financial Statements) to a new company „Societatea de Administrare a Participatiilor in Energie SA”, owned by the Romanian State, represented by the Ministry of Energy, Small and Medium Enterprises and Business Environment. Following this transaction, the share capital decreased by 43,123,780 ordinary shares. On 16 May 2014 an increase of share capital of 3,846,797 ordinary shares was registered in the Trade registry. The shares were issued in respect of land contributed by the shareholder in previous periods for shares. Between 11 and 27 June 2014 the Company organised an IPO, which referred to an offering of 142,007,744 shares and 8,795,250 GDRs, each GDR representing four shares (see Note 1 of the Consolidated financial Statements). The underwritings amounted to RON 1,556,095 thousand and USD 120,143,115. On 2 July 2014 the increase of share capital by 177,188,744 ordinary shares was recorded in the Trade register. Consequently, the Group recognised an increase of share capital of rON 1,771,887 thousand and a share premium of RON 171,128 thousand. The transaction costs of rON 68,079 thousand were deducted from the share premium. 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. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report2014 56 treasury shares In July 2014 the Company purchased 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 thousand. diVidends Dividends for the year ended 31 December 2013, in amount of rON 22.48million, were declared on the basis of individual annual statutory financial statements. The dividends in respect of the year ended 31 December 2013 were approved by OGMS of the Company no. 29 on 28 May 2014 and were paid on 28 July 2014. reValuation reserVes The reconciliation between opening and closing revaluation reserve is as follows: ROn mil. Balance at 1 january Revaluation of property, plant and equipment attributable to the owners of the company Share of changes in revaluation reserve of equity accounted investees Release of revaluation reserve to retained earnings due to depreciation and disposals of property, plant and equipment Spin-off effect loss of control over subsidiaries Balance as at 31 December Source: Electrica S.A. 2014 573 (1) - (15) (388) (13) 156 2013 restated 589 - (2) (15) - - 573 other reserVes Other reserves include: n legal reserves – set up as 5% of the gross profit for the year in the statutory individual financial statements of the companies within the Group, until the total legal reserves reach 20% of the paid-up nominal share capital of each company, according to the legislation. These reserves are deductible for income tax purposes and are not distributable; n other reserves set up in compliance with legislation in force. ROn mil Balance at 1 january 2013 Set-up of legal reserves Balance at 31 December 2013 Set-up of legal reserves Spin-off effect Balance at 31 December 2014 Source: Electrica S.A. legal reserves Other reserves Total other reserves 233 13 246 30 (39) 237 369 - 369 - (369) - 602 13 615 30 (408) 237 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201457 nOn-COnTROllIng InTERESTS The following table summarises the information related to each of the Group’s subsidiaries that has material NCI, before any intra-group elimination. 31 December 14 ROn mil nCI percentage Non-current assets Current assets Non-current liabilities Current liabilities net assets Carrying amount of nCI revenues Profit Other comprehensive income Total comprehensive income Profit allocated to NCI Other comprehensive income allocated to NCI Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities** net increase in cash and cash equivalents* Dividends paid to NCI during the year Source: Electrica S.A. edmn edtn edts ef Intra-group eliminations Total 22.00% 22.00% 22.00% 22.00% 1,232 1,110 1,160 130 449 (205) (163) 1,313 289 876 133 (2) 131 29 (0) 181 (276) (135) (230) 23 156 (92) (183) 990 218 751 128 1 129 28 0 163 (134) (82) (53) 12 178 1,065 (133) (225) 980 216 (71) (729) 394 87 2 811 816 3,995 74 (2) 72 16 (0) 182 (80) (142) (40) 13 181 3 184 40 1 444 (1) (89) 354 20 114 (0) 67 *Amounts presented represent cash flows of the subsidiaries **Cash flows from financing activities include dividends paid to subsidiaries nOn-CURREnT lIaBIlITIES Non-current liabilities have slightly increased by 0.54% in 2014 compared to 2013. current liaBilities Current liabilities have decreased by 10.99% in 2014 compared to 2013, from rON 1,366 million to rON 1,216 million, as a result of the following categories (that represent 87% of total current liabilities): proVisions In 2013 several companies from the Group had control from the Court of Accounts that were concluded with several findings and recommendations, some of them with fiscal impact. The Group set-up provisions for the amount it estimated that will probably result in an outflow of economic resources in the future. The Group considered as contingent liabilities the possible amounts related to uncertain aspects. trade payaBles Trade payables have decreased by 4.52% in 2014 compared to 2013. The main categories included in trade payables are: electricity suppliers (state-owned power generators and other participants on the electricity market), CAPEX suppliers and other suppliers (suppliers of services, materials, consumables, etc.). As of 31 December 2014, provisions for litigation and other risks refer mainly to: n RON 34.2 million representing potential fiscal obligations of the Group (including interest and penalties); n RON 17.9 million representing claims of individuals in respect of land owned by the Group. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report2014 58 employee Benefits Employee benefits have decreased by 3.6% in 2014 compared to 2013. ROn mil. 31 Dec 14 31 Dec 13 Personnel payables Current portion of defined benefit liability and other long-term employee benefits Social security charges Tax on salaries Termination benefits Other employee benefits Total Source: Electrica S.A. 39 13 64 16 0 16 147 30 11 80 15 16 - 152 In romania, all employers and employees, as well as other persons, are contributors to the state social security system. The social security system covers pensions, allocations for children, temporary inability to work, risks of works and professional diseases and other social assistance services, unemployment benefits and incentives for employers creating new workplaces. The Group has overdue social security and other salary taxes of rON 39,541 thousand at 31 December 2014 (2013: RON 58,476 thousand) which relate to the four subsidiaries with financial difficulties (SC Servicii Energetice Moldova SA, SC Servicii Energetice Dobrogea SA, SC Servicii Energetice Muntenia and SC Servicii Energetice Oltenia SA). other current payaBles Other payables have decreased by 9.93% in 2014 compared to 2013. ROn mil. VAT payable Late payment penalties to the State budget Liabilities related to radio and TV tax Liabilities related to Green Certificates Other liabilities Total Source: Electrica S.A. 31 December 2014 31 December 2013 137 71 12 42 15 277 167 69 12 46 13 307 Part of the late payment penalties to the State are rescheduled for payment based on a plan issued by ANAf to Electrica Serv for a period of 48 months starting August 2012. In relation to this ANAF instituted a pledge on certain property, plant and equipment of Electrica Serv (see Note 35 c) of the Consolidated financial Statements). The late payment penalties refer to services subsidiaries, including those in financial distress. In accordance with law no. 533/2003, whichamended Law no. 41/1994 regarding the organization and functioning of Romanian Radio Company and romanian Television Company, radio and TV taxes are collected by Electrica furnizare SA on behalf of these companies. The payable of the Group to the above mentioned institutions represents radio and TV tax collected and not paid by the year-end. Other liabilities include mainly guarantees and sundry creditors. Other non-current liabilities refer to guarantees from customers related to electricity supply. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201459 8.2 profit and l oss In the following table is presented the Consolidated Income Statement of Electrica Group, for the period 2012 – 2014. ROn mil revenues Other income Electricity purchased Green certificates Construction costs Employee benefits repairs, maintenance and materials Depreciation and amortisation Impairment of property, plant and equipment, net reversal of impairment / (impairment) of trade and other receivables, net Other operating expenses Operating profit finance income finance costs net finance (income) /cost 2014 5,044 177 20136 5,383 128 (2,349) (2,845) (272) (440) (739) (85) (326) (33) (5) (475) 497 36 (23) 13 (414) (290) (766) (111) (313) (12) 21 (434) 345 24 (35) (12) 20127 Variation 2014/2013 5,253 124 (3,089) (302) - (755) (179) (398) (4) 53 (460) 243 22 (46) (24) (6.30%) 37.56% (17.43%) (34.21%) 51.63% (3.57%) (23,56%) 3.98% 163.33% (122.30%) 9.32% 43.85% 54.81% (33.99%) (214.73%) Share of profit or loss of equity-accounted investees, net of tax - 63 247 (100.00%) Profit before tax Income tax expense Profit for the year Source: Electrica S.A. 510 (109) 401 397 (81) 316 466 (53) 413 28.56% 33.96% 27.17% 8.2.1 consolidated figures Electrica’s revenue in 2014 and 2013 amounted to RON 5,044 million and RON 5,383 million, respectively. The decrease of revenue by rON 339 million, or 6.3% in 2014 as compared to 2013 resulted mainly from the decrease in revenues from supply activity that were partially offset by the increase in distribution revenues. electricity purchased The expense for electricity purchased by the group decreased by rON 496 million, or 17%, to rON 2,349 million in 2014 from rON 2,845 million in 2013, this decrease being mainly attributable to the decrease in the average electricity acquisition price as well as to a decrease in quantities supplied. 6 Restated as a result of application of IFRIC 12 and new standards with a date of initial application of 1 January 2014 under IFRS-EU 7 No restatement has been performed for the year 2012, as a result of the application of IFRIC 12 starting with 1 January 2014 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report2014 60 The table below presents the structure of the electricity purchased for the periods indicated. ROn mil Electricity acquired to cover network losses Transmission and system services Electricity purchased for supply and trading Total electricity purchased Source: Electrica S.A. As a percentage of revenue, the cost of electricity purchased was the main cost element of the Group, representing 46.6% in 2014 and 52.9% in 2013. green certificates Green Certificates are accrued in the profit and loss based on the quantitative quota determined by the regulator representing the amount of the Green Certificates that the Group has to purchase for the year and based on the price of Green Certificates on the centralised market. The cost with the acquisition of Green Certificates is a pass through cost. As a percentage of revenue, the cost with the acquisition of Green Certificates represented 5.4% in 2014 and 7.7% in 2013. construction costs In 2014, the costs of construction contracts increased by rON 150 million, or 51.6%, to rON 440 million from rON 290 million in 2013. This increase is mainly due to the increase of RAB in 2014, resulting from investments undertaken in 2014. employee Benefits Expense for salaries and employee benefits decreased by rON 27.3 million, or 4%, to rON 739 million in 2014 from rON 766 million in 2013. This decrease was attributable to the decrease in employee benefits from both distribution and supply segments, which was partially offset by an increase related to dismissed employees that enforced their claims against the assets of SE Moldova, in voluntary liquidation. As a percentage of revenue, the expense for salaries and employee benefits represented 15.6% in 2014 and 14.8% in 2013. repairs, maintenance and materials repairs, maintenance and materials expenses decreased by rON 26.1 million, or 23.6%, to rON 85million in 2014 from rON 111 million in 2013. This decrease was primarily attributable to a decrease of activity of the services companies of the Group performing external electricity network maintenance, 2014 426 324 1,599 2,349 2013 521 304 2,020 2,845 as well as to the decrease in expenses with network maintenance of the distribution companies. As a percentage of revenue, the expense for repairs, maintenance and materials represented 1.7% 2014 and 2.1% 2013. other operating expenses Other operating expenses remained relatively constant in 2014 and in 2013, the increase by rON 40.5 million due to the special construction tax introduced in 2014 being partially offset by efficiency measures. As a percentage of revenues, other expenses represented 9.4% 2014 and 8.1% in 2013. operating profit As a result of the factors described above, the operating profit increased by RON 151 million, or 44% to rON 497 million in 2014 from rON 345 million in 2013, driven by an exceptional result in supply segment and by the improvement of the distribution segment rentability. nET fInanCE InCOmE /COST The group’s financial result turned positive in 2014 due to the interest received related to both IPO proceeds and the Cfr receivables cash in. profit Before tax The profit before tax increased by RON 113 million, or 28.6 % to rON 510 million in 2014 from rON 397 in 2013. income tax The income tax increased by rON 27.6 million, or 34%, to rON 109 million in 2014 from rON 81 million in 2013. This increase was primarily attributable to the tax paid in connection to the sale of shares held in in E.On Moldova Distributie and E.On Energie romania. net profit for the period For the reasons discussed above, net profit for the year increased by rON 85.8 million, or 27.2%, to rON 401 million in 2014 from rON 316 million in 2013. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201461 8.2.2 SEgmEnT REPORTIng - DISTRIBUTIOn KEy fa CTS – DISTRIBUTIOn SE gmEnT (ROn mil) distriBution segment reVenues distriBution segment eBitda 3,000 ROn mil 2,500 2,000 1,500 1,000 500 0 2,313 403 700 574 636 2012 2,657 396 805 714 742 2013 2,838 395 876 751 816 2014 800 700 600 500 400 300 200 100 0 ROn mil 623 22 203 202 197 2012 603 20 206 184 193 2013 688 20 232 225 211 2014 edts edtn edmn Electrica Serv edts edtn edmn Electrica Serv Source: Electrica S.A. Source: Electrica S.A. distriBution segment net income DISTRIBUTIOn SEgmEnT nET DEBT/(nET CaSh) 350 300 250 200 150 100 50 0 -50 ROn mil 176 82 53 46 5 2012 226 12 106 55 53 306 5 127 104 70 2013 2014 edts edtn edmn Electrica Serv 300 200 100 0 (100) (200) (300) ROn mil 30 19 57 162 (208) 2012 edts -139 23 93 (246) (9) 2013 -28 52 105 (168) (17) 2014 edtn edmn Electrica Serv Source: Electrica S.A. Source: Electrica S.A. The following table presents the Segment reporting Income Statement of the group`s distribution segment, for the period 2013 –2014. ROn mil External revenues Inter-segment revenue Segment revenue Segment profit (loss) before tax Net finance (cost)/income Depreciation, amortization and impairment, net eBitda net profit / (loss) Source: Electrica S.A. 31 Dec 14 31 Dec 13 955 1,519 2,475 370 (7) (311) 688 306 712 1,570 2,282 286 (15) (302) 603 226 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201462 reVenues Revenue from the distribution segment increased by rON 243.5 million, or 34.2%, to rON 955 million 2014 from rON 712 million in 2013. This increase was mainly attributable the increase of the average regulated distribution tariff. Electrica Serv slightly improved the external revenues (services rendered to companies outside the group) from rON 11 million in 2013 to rON 22 million in 2014. electricity purchased The table below presents the structure of the electricity purchased for the periods indicated. ROn mil Electricity acquired to cover network losses Transmission and system services 2014 426 324 2013 521 304 The cost of electricity purchased to cover network losses decreased by rON 95 million, or 18.2%, to rON 426 million in 2014 from rON 521 million in 2013. The decrease was mainly attributable to the decrease in the electricity acquisition price. employee Benefits Employee benefits decreased by RON 28.5 million, or 5%, to rON 545.2 million in 2014 from rON 573.7 million in 2013, driven mainly by efficiency measures. repairs, maintenance and materials repairs, maintenance and materials expenses decreased by rON 49.4 million, or 19%, to rON 209 million in 2014 from rON 259 million in 2013. This decrease was attributable to to the decrease in expenses with network maintenance that were capitalized starting 2014. eBitda The increase in revenues together with the decrease in network losses costs as well as the improvement in employee costs and other operational expenses led to a rON 85 million and 14% increase in the segment’s EBITDA, The EBITDA margin gained 160 bps in 2014, from 26.4% in 2013 up to 28% in 2014, mainly driven by the EDTN’s performance (a 400 bps improvement y-o-y). segment net profit The net profit followed the main trend as the EBITDA, sustained also by the reductionof the segments financial loss. The net profit margin improved from 9.9% in 2013 up to 12.4% in 2014. 8.2.3 SEgmEnT REPORTIng - SUPPly KEy fa CTS – SUPPly SEgmEnT supply segment reVenues supply segment eBitda 6,000 ROn mil ROn mil 4,801 302 4,780 414 4,499 4,366 4,133 272 3,861 2,4% 2,4% 116 117 5,000 4,000 3,000 2,000 1,000 - 2012 2013 2014 net Revenues green Certificates Source: Electrica S.A. 2012 eBitda 2013 2014 marja EBITDa 5,6% 233 8% 6% 4% 2% 0% -2% -4% -6% -8% 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201463 supply segment net income SUPPly SEgmEnT nET DEBT/(nET CaSh) 400 350 300 250 200 150 100 50 - ROn mil 1.6% 1.9% 79 90 4.5% 180 2012 net Income Source: Electrica S.A. 2013 2014 net Income margin 6% 4% 2% 0% -2% -4% -6% -8% (50) (100) (150) (200) (250) (300) (350) (400) (450) (33) ROn mil (50) (403) 2012 2013 2014 net Debt/(net Cash) Source: Electrica S.A. The following table is presented the Segment reporting Income Statement of the group`s distribution segment, for the period 2013 –2014. ROn mil External revenues Inter-segment revenue Segment revenue Segment profit (loss) before tax Net finance (cost)/income Depreciation, amortization and impairment, net eBitda net profit / (loss) Source: Electrica S.A. reVenues Net revenue (excluding revenues from green certificates) from the supply segment decreased by rON 505 million or 12%, to rON 3,861 million in 2014 from rON 4,366 million in 2013. This decrease was mainly attributable to the decrease in energy prices which offset an 8% increase in quantity supplied and a 5% decrease in the average supply tariff. electricity purchased The expense for electricity purchased decreased by rON 320 million, or 22%, to rON 1,134 million in 2014 from rON 1,454 million in 2013. This decrease was primarily attributable to the decrease in the cost of electricity purchased for supply and trading by rON 297 million, or 25%, to rON 885 million in 2014 from rON 1,182 million in 2013. The decrease was mainly attributable to the decrease in the average electricity acquisition price. green certificates The 34% decrease in the value of Green Certificates included in the invoice to the final consumer from 51.29 rON/MWh in 2013 to 32.84 rON/MWh in 2014, in accordance with ANRE regulations, generated a RON 142 million decrease in the revenues from green certificates, without an impact on the profitability as Green Certificates are reinvoiced to the customers at cost. The cost with the acquisition of the Green Certificates 31 Dec 14 31 Dec 13 4,030 103 4,133 230 4 (7) 233 180 4,570 210 4,780 110 (0) (7) 117 90 decreased by rON 142 million, or 34%, to rON 272 million in 2014 from rON 414 million in 2013. This decrease was mainly attributable to the 39% reduction in the price of Green Certificates from RON 229 per Green Certificate in 2013 to RON 138.6 per Green Certificate in 2014. In 2014, the regulatory Green Certificates quota imposed to the electricity suppliers by ANrE decreased from 0.224 Green Certificates per MWh supplied in 2013 to 0.218 Green Certificates per MWh supplied in 2014. salaries and employee Benefits Employee benefits decreased by RON 1.4 million, or 4%, to rON 83.1 million in 2014 from rON 84.5 million in 2013, driven mainly byefficiency measures. eBitda The above mentioned factors led to a 94%/RON 110 million increase in the supply segment EBITDA, that combined with the decrease in revenues led to a 330 bps improvement in EBITDA margin, from 2.4% in 2013 up to 5.7% in 2014. segment net profit The net profit increased by RON 91 million/101.1%, driven also by the improvements of the financial profit, following the cash in of the Cfr receivables. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201464 8.3 cash flow ROn mil Cash flows from operating activities Profit adjustments for: Depreciation Amortisation Impairment of property, plant and equipment loss on disposal of property, plant and equipment Impairment loss on trade and other receivables, net Write-down of inventories, net Change in provisions release of deferred income Net finance cost Share of profit or loss of equity-accounted investees, net of tax Gain on loss of control over subsidiaries Income tax expense Changes in : Trade receivables Other receivables Green Certificates Deposits, treasury bills and government bonds Prepayments Inventories Trade payables Other payables Provisions and employee benefits Deferred revenue Cash generated from operating activities Interest paid Income tax paid 2014 2013 2012 Variation 2014/2013 401 316 416 27.17% 33 292 33 5 5 10 - - (13) - (32) 109 229 27 (54) (3) (2) (1) 49 (40) 21 0 1,068 (11) (76) 31 283 12 4 (21) (1) - - 12 (63) - 81 381 16 4 6 (53) 18 - (68) 24 (247) - 53 (118) 103 21 - - 34 2 (74) 25 36 - 579 (21) (47) 7 - - (4) (19) 62 123 65 181 1,070 (29) (45) 9.07% 3.43% 163.33% 26.27% (122.30%) (1080.81%) - - (214.73%) (100.00%) - 33.96% (293.99%) 25.49% - - (106.68%) (138.83%) (166.22%) (260.00%) (43.08%) - 70.19% (47.62%) 61.70% net cash from operating activities 981 511 996 91.98% Cash flows from investing activities Payments for network construction and rehabilitation Payments for purchases of property, plant and equipment** Payments for purchases of property, plant and equipment from customers contribution Payments for purchases of other intangible assets Proceeds from sale of property, plant and equipment Proceeds from sale of investments Payments for purchase of treasury bills and government bonds Proceeds from maturity of treasury bills and government bonds Payments in deposits with maturity of 3 months or longer Interest received net cash used in investing activities (318) (39) - (8) 0 141 (1,194) 296 (319) 36 (1,406) (178) (72) - (2) 1 - - - - - (378) (181) (15) 1 - - - - 78.65% (45.78%) - 217.68% (74.76%) - - - - 21 (231) 23 (549) 70.36% 328.32% 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report2014 65 ROn mil Cash flows from financing activities Proceeds from issue of shares, net of transaction cost repurchase of treasury shares Repayment of financing for network construction related to concession agreements repayment of bank borrowings Dividends paid Payment of finance lease liabilities Cash transferred at spin-off net cash from financing activities net increase in cash and cash equivalents Cash and cash equivalents at 1 January Effect of loss of control over subsidiaries on cash Effect of movements in exchange rates on cash held Cash and cash equivalents at 31 December Source: Electrica S.A. 2014 20138 20128 Variation 2014/2013 1,875 (75) (143) - (90) (2) (130) 1,435 1,011 571 - - 1,581 - - (130) (10) (39) (6) - (185) 95 474 - 2 571 - - (151) (30) (8) (6) - (194) 252 218 - 4 474 - - 9.41% (100.00%) 131.97% (66.26%) - (876.08%) 962.53% 20.41% - (100.00%) 176.88% cash flow In 2014, net cash from operating activities amounted to RON 981 million. The profit before tax for the period was rON 510 million. The key adjustments were: (i) adding depreciation, amortisationof RON 325 million, a change inimpairment and loss on disposal of PP&E in amount of RON 38 million, a net change in trade and other receivables of rON 4.6 million (mainly due to a decrease in the trade receivables collection period in 2014 compared to 2013), a change in trade and other payables of rON 149 million and a change in employee benefits and provisions of RON 21million, a change in inventories of RON 10 million (ii) deducting a net finance cost of RON 13 million, a loss from control over subsidiaries of rON 32 million, a cost withgreen certificates of RON 54 million and other adjustments in effect of RON 5 million. Income tax and interest paid amounted to a total of rON 87 million. In 2013, net cash from operating activities amounted to RON 511 million. The profit before tax for the period was rON 397 million. The key adjustments were: (i) adding depreciation, amortisation of RON 313 million, a change in impairment and loss on PP&E in amount of rON 16 million, a change in trade and other payables of rON 81 million (mainly due to an increase in the VAT payable), a change in provisions and employee benefits of RON 36 million, a net finance gain of RON 12million, prepayments of RON 34 million, a change in inventories of rON 1 million and (ii) deducting a net change in trade and other receivables of rON 118 million (mainly due to an increase in receivables from CFR),the share of profit of equity-accounted investees in amount of RON 63 million related to the minority stakes held by Electrica in the privatised electricity distribution and supply companies Enel Distributie Banat, Enel Distributie Dobrogea and Enel Energie). Income tax and interest paid amounted to a total of rON 68 million. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report2014 66 2014 DireCTOrs’ rePOrT (CONsOLiDATeD) annex 1 litigations Electrica S.A. and its subsidiaries are part of a series of litigations, out of which we present additional details pertaining to the most material ones: 1. fiscal litigations no. Parties/ Case no. Object Court Case status 2014 annual report 1 2 3 4 5 Plaintiff: Electrica S.A. Defendant: ANAF No. 24402/302/2013 Appeal against enforcement regarding the writ of execution no. 335/4.11.2013 Court of District 5, Bucharest Electrica’s appeal was accepted on 06/17/2014. The decision is not final, ANAF may lay an appeal. We mention that the term for lodging an appeal runs from the date of communication of the court decision, and the decision was communicated to Electrica SA on 03/20/2015. Plaintiff: Electrica S.A. Defendant: ANAF No. 7614/2/2013 Plaintiff: Electrica S.A. Defendant: ANAF No. 55166/299/2010 Appellant - Challenger: Electrica S.A. Respondent: ANAF No. 4841/299/2013 Appellant - Challenger: ElECTrICA S.A. Respondent: ANAF No. 39910/299/2012 Contestation of Decision no. 147/22.05.2013 for the value of 2,387,992 lei (action for annulment against Decision no. 147/22.05.2013, issued by ANAf within the procedure for solving administrative contestations formulated against the debentures which established ancillary payment obligations for the delayed payment of the current state budget payment obligations, by Decision no. 214/2012 for the amount of 2,387,992 lei). Appeal against enforcement and stay of execution regarding the writ of execution no. 3166/09.11.2010 - adjournment of the forced execution initiated in the fiscal case no. 13267221; - annulment of the writ of execution No. 3166/2010 for the amount of 31,250,651 lei tax on revenue; - annulment of the demand for payment no. 61/90/1/2010/13875 for the amount of 31,250,651 lei tax on revenue. Bucharest Court of Appeal On 06.03.2015 the court admitted the contestation in part and partly cancelled the Decisions no. 147/22.05.2013 and no. 214/30.10.2012, issued by the defendant for the amount of 2,383,070 lei, which represent ancillary tax payment obligations. The court maintained the challenged administrative- fiscal deeds for the amount of 4,922 lei. The court summoned ANAf to pay to Electrica the amount of 30,961.35 lei as court fees. ANAf may lay an appeal. We mention that the term for the appeal runs from the date of communication of the court decision, and until the present, the decision was not communicated. Tribunalul Bucuresti Instanta de fond a admis contestatia la executare, astfel cum a fost precizata si a dispus anularea titlului executoriu nr. 3166/09.11.2010 emis de ANAF pentru suma de 31.250.651 RON, reprezentând impozit pe profit; a anulat somatia nr. 61/90/2010/13875 din data de 09.11.2010 emisa de ANAf in dosarul de executare nr. 13267221 pentru suma de 31.250.651 rON si a tuturor actelor de executare subsecvente emise in dosarul de executare nr. 13267221. A dispus intoarcerea executarii silite si a obligat ANAf sa achite Electrica suma de 31.250.651 rON. ANAf a atacat hotararea cu recurs, dosarul avand termen de judecata la 30.03.2015. Contestation of the writ of execution no. 61/08.01.2013 for the amount of 2,391,528.00 lei Court of District 5, Bucharest Electrica’sappeal was acceptedon06/17/2014. The decisionis not final, ANAF may lay an appeal.We mentionthat the termfor lodging an appealruns from thedate of communication ofthe court decision, and the decision wascommunicatedtoElectricaSAon03/20/2015. Contestation for annulment of the writ of execution no. 983/2012 issued by ANAF, demand for payment no. 61/09.08.2012 for the amount of 13,592,890.00 lei (this amount represents current obligations for the tax on revenue, paid in due time by our company). Bucharest Court of Justice The court irrevocably dismissed the contestation formulated by Electrica. 67 2014 DireCTOrs’ rePOrT (CONsOLiDATeD) 2. litigations against the c ourt of accounts no. Parties/ Case no. Object Court Case status 2014 annual report Appellant - Plaintiff: Electrica S.A. – exonerated, Societatea de Administrare a Participatiilor in Energie brought in the proceedings - defendant No. 5699/2/2013 Appellant - Plaintiff: Electrica S.A. – exonerated, Societatea de Administrare a Participatiilor in Energie brought in the proceedings romanian Court of Accounts – Respondent - Defendant No. 8335/2/2012 Plaintiff - Electrica Serv; Defendant - The Romanian Court of Accounts. No. 368/2/2014 Plaintiff - Electrica Furnizare; Defendant - The Romanian Court of Accounts. No. 5755/2/2013 Plaintiff - Electrica Transilvania Nord Defendant - The Romanian Court of Accounts No. 1499/117/2014 Plaintiff - Electrica Transilvania Sud Defendant - The Romanian Court of Accounts No. 2251/62/2014 1 2 3 4 5 6 Arrest of measures Annulment of administrative deed and adjournment. S Electrica SA requested the partial adjournment of the measures ordered by C.C. through decision no. X/40147/2013 and annulment of the final statement no. 25/2013. Bucharest Court of Appeal Societatea de Administrare a Participatiilor in Energie, established by the division of Electrica S.A., was brought in the proceedings to replace Electrica SA. Adjournment and annulment of administrative and fiscal deed. Litigations with the Court of Accounts Law no. 94/1992. THE HIGH COUrT Of CASSATION AND JUSTICE Societatea de Administrare a Participatiilor in Energie, established by the division of Electrica S.A., was brought in the proceedings to replace Electrica SA. Litigations with the Court of Accounts Law no. 94/1992. THE HIGH COUrT Of CASSATION AND JUSTICE Appeal. The case undergoes the screening procedure. The first judgment term is to be established by the court at a later date. Litigations with the Court of Accounts (Law no. 94/1992) final statement no. 82/01.08.2013 THE HIGH COUrT Of CASSATION AND JUSTICE The court of first instance admitted the action in part. The court cancelled in part the final Statement no. 82/2013 and Decision no. 20/2013, regarding measure no. II 6 of the Decision. The Court dismissed the remainder of the action as unfounded. Electrica furnizare brought an appeal. Adjournment of administrative deed Cluj Court of Appeal The court admitted the plea of lack of object and dismissed the action for being left without object. Adjournment of administrative deed Brasov Court of Appeal The court dismissed the contestation formulated by the plaintiff S.C FILIALA DE DISTRIBUŢIE A ENERGIEI ELECTRICE „ELECTRICA DISTRIBUŢIE TrANSIlVANIA SUD” S.A as opposed to the defendants CUrTEA DE CONTUrI A rOMÂNIEI (romanian Court of Accounts) and CAMErA DE CONTUrI A JUDEŢULUI BRAŞOV (the Chamber of Accounts of Brasov County) against the final Statement no. 30/28.03.2014, the Decision no. 75/23.12.2013 and the Control Report no. 700/23618/04.12.2013. It dismissed the plaintiff’s request to suspend the execution of Decision no. 75/23.12.2013 until the final settlement of the case. The solution is irrevocable. 68 2014 DireCTOrs’ rePOrT (CONsOLiDATeD) 3. other significant litigations 2014 annual report no. Parties/ Case no. Object Court Case status 1 2 3 4 SC Termoelectrica SA –Appellant - Plaintiff Electrica SA – Respondent - Defendant No. 5651/2/2014 (in the first instance the case had no. 15350/3/2010) Plaintiff– Terradox Solutions Defendant – Electrica S.A. No. 4875/2/2014 Plaintiff: .S.C.Orange Media SRL; S.C.Electrica S.A. No. 47304/3/2012* Plaintiff: Toma Sevasta et. al.; Defendant: Electrica Muntenia Nord S.A. et. al. No. 31617/281/2011* Claims: the amount of 25,047,353.32 lei which represents penalties of delay for electricity bills between 1.04.2007-31.03.2008. Bucharest Court of Appeal The court of first instance dismissed the action as it was specified as unfounded. Nullity of legal deed Bucharest Court of Justice The court admitted the plea of the lack of capacity to sue and dismissed the action as being brought by a person who lacked capacity. The solution is irrevocable. Declaratory action and action for claims for the amount of 17,008,850.15 lei (the amount consists of: -971,042.22 lei registered expenses; -16,037,807.93 lei stands for loss of profit as a consequence of the termination of the subsequent Service Contract no. 138/2011 and the framework agreement for services no. 132/2011). Bucharest Court of Appeal The court of first instance dismissed the request formulated by Orange Media Srl as unfounded. SC Orange Media Srl brought an appeal. real estate claim Ploiesti Court of Appeal The court of first instance dismissed the the action as unfounded. Toma Sevasta and the other plaintiffs appealed the court’s decision. 4. litigations with “fondul proprietatea” no. Parties/ Case no. Object Court Case status 1 2 3 4 Plaintiff: Fondul Proprietatea Defendant: ELECTRICA DISTRIBUTIE MUNTENIA NOrD No. 3537/105/2014 Plaintiff: Fondul Proprietatea Defendant: Electrica Distributie Transilvania Sud No. 2362/62/2014 Plaintiff: Fondul Proprietatea Defendant: Electrica Distributie Transilvania Nord No. 532/1285/2014 Plaintiff: Fondul Proprietatea Defendant: Electrica Furnizare No. 14173/3/2014 Annulment of GAM Decision approving the corporate governance strategy Prahova Court Annulment of AGM Decision approving the corporate governance strategy Brasov Court of Appeal Annulment of AGM Decision approving the corporate governance strategy Cluj Commercial Court Annulment of AGM Decision approving the corporate governance strategy Bucharest Court of Justice The court admitted the request formulated by Fondul Proprietatea. The decision may be challenged by an appeal. We mentionthat the termfor lodging an appealruns from thedate of communication of the court decision, anduntilthe present, the decision was not communicated. In the first instance the court admitted the request formulated by Fondul Proprietatea. The decision was challenged by appeal by both parties in litigation. The first judgment term in appeal is to be established by the court at a later date. The court admitted the request formulated by Fondul Proprietatea. The decision was challenged by appeal by Electrica Distributie Transilvania Nord. The first judgment term in appeal is to be established by the court at a later date. The court dismissed the request formulated by fondul Proprietatea. The decision may be challenged by an appeal. We mentionthat the termfor lodging an appealruns from thedate of communication of the court decision, anduntilthe present, the decision was not communicated. 69 2014 DireCTOrs’ rePOrT (CONsOLiDATeD) 2014 annual report 5. litigations with anre no. 1 Parties/ Case no. Plaintiff: Electrica S.A. Defendant: ANRE No. 192/2/2015 2 3 4 5 6 7 8 9 Plaintiff: Filiala de Distribuţie a Energiei Electrice Electrica Distribuţie Muntenia Nord (EDMN Electricity Distribution Subsidiary) Defendant: ANRE No. 184/2/2015 Plaintiff: Filiala de Distribuţie a Energiei Electrice Electrica Distribuţie Transilvania Nord (EDTN) Defendant: ANRE No. 213/2/2015 Plaintiff: Filiala de Distribuţie a Energiei Electrice Electrica Distribuţie Transilvania Sud (EDTS Electricity Distribution Subsidiary) Defendant: ANRE No. 208/2/2015 Plaintiff: Electrica S.A. Defendant: ANRE No. 317/2/2015 Plaintiff: Filiala de Distribuţie a Energiei Electrice Electrica Distribuţie Muntenia Nord (EDMN) Defendant: ANRE No. 318/2/2015 Plaintiff: Electrica S.A. Defendant: ANRE No. 361/2/2015 Plaintiff: Filiala de Distribuţie a Energiei Electrice Electrica Distribuţie Transilvania Nord (EDTN) Defendant: ANRE No. 353/2/2015 Plaintiff: Electrica S.A. Defendant: ANRE No. 361/2/2015 10 Plaintiff: Filiala de Distribuţie a Energiei Electrice Electrica Distribuţie Transilvania Sud (EDTS) Defendant: ANRE No. 371/2/2015 Object Court Case status Annulment of the Order of the President of ANrE (the National Regulatory Authority for Energy) no. 146/2014 Annulment of the Order of the President of ANrE (the National Regulatory Authority for Energy) no. 146/2014 Annulment of the Order of the President of ANrE (the National Regulatory Authority for Energy) no. 146/2014 Annulment of the Order of the President of ANrE (the National Regulatory Authority for Energy) no. 146/2014 Bucharest Court of Appeal The first hearingwas seton04/27/2015 Bucharest Court of Appeal The first hearingwas seton04/23/2015 Bucharest Court of Appeal The first hearingwas seton05/13/2015 Bucharest Court of Appeal The first judgment term in appeal is to be established by the court at a later date. Annulment of the Order of ANrE President no. 154/2014 Bucharest Court of Appeal The first judgment term in appeal is to be established by the court at a later date. Annulment of the Order of ANrE President no. 154/2014 Bucharest Court of Appeal The first hearingwas seton05/12/2015 Annulment of the Order of ANrE President no. 155/2014 Bucharest Court of Appeal The first hearingwas seton04/17/2015 Annulment of the Order of ANrE President no. 155/2014 Bucharest Court of Appeal The first hearingwas seton04/06/2015 Annulment of the Order of ANrE President no. 156/2014 Bucharest Court of Appeal The first judgment term in appeal is to be established by the court at a later date. Annulment of the Order of ANrE President no. 156/2014 Bucharest Court of Appeal The first hearingwas seton05/15/2015 70 annex 2 details of realiZed inVestments in 2014 By electrica group Description Value (ROn mil) Implementation of the SAD-R rural system throughout the branches of the Muntenia Nord distribution subsidiary, Step IV vol. 1 Capitalization of repair works according to OMF 1898/2013 Implementation of the SAD-R rural system throughout the branches of the Muntenia Nord distribution subsidiary, Step IV vol. 2 Equipments Electricity meters Modernisations and integration of existing network into SCADA ST110/20KV Liesti, Galati county Expenses for development of pre-feasibility studies, feasibility studies and other studies related to the investment objectives Systematisation of the Sinaia MV grid Improvement of the technical conditions for the distribution of electricity for consumers (ICTAEE) in Insuratei, Braila county Modernisation of the connections and expansion of the tele-management blocks (FDCP), Targoviste, Micro VI Upgrading and expansion of the AMR tele-management system in Sfantu Gheorghe, Covasna county Integration of existing network into SCADA DMS LEA 110 kV Ghimbav - Cristian and Bartolomeu, Brasov county Substation110/20 kV 2x25 MVA Sanpaul, Mures county Modernisations through repairs – electricity meters replacement INT areas PTA1, PTA2, Ghidfalau, Covasna county Modernisation of the 35/20 kV substation in Feldioara, Brasov county Modernisation of the 110 kV Beius substation Smart-metering pilot project SDEE Zalau Smart-metering SDEE Oradea Modernisation of the 110/20/6 KV Carei 1 substation Modernisation of the Baia Mare 5 substation Smart-metering pilot project SDEE Cluj Construction of 20kV Baia Mare 2 bar Rehabilitation of the Uzina Veche Baia Mare building (former thermal plant) Distribution automation system SAD 2014-2015 Satu Mare Increasing security for the supply of electricity for consumers in Turt, Vama, Binesti Modernisation of the 110 kV switchgears from transformation stations - Step 2 Modernisation of the substation 110/20kV Aghires – secondary wiring Distribution automation system SAD 2014 - 2015 Bistrita Distribution automation system SAD 2014 - 2015 Baia Mare 34.0 20.5 16.7 13.2 10.3 6.9 6.0 3.4 1.8 1.6 16.2 12.2 4.0 2.6 1.7 1.5 1.0 5.2 4.5 2.9 2.2 2.0 2.0 1.7 1.6 1.5 1.2 1.2 1.1 1.1 1.0 Total 183 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201471 During 2014, the main cathegories of the transfered tangible assets in progress to tangible assets, are the following: Description Implementation of the SAD-R rural system Equipments Capitalization of repair works according to OMF 1898/2013 Electricity meters replacement Solutions on increasing efficiency by reducing losses in the network Modernisation through repairs DD Modernisation of the measurement groups at the distribution subsidiaries Modernisation of the 110/20/6 kV Blaj substation, Alba county 110/20KV Biharia substation Upgrading and expansion of the Avrig tele-management system, Sibiu county Smart-metering pilot project at SD Modernisation of the 110 kV switchgears from transformation stations – step II Modernisation of the metering system in Iernut city, Mures county 20 kV Distributor between Hipodrom substation and Port substation, Braila municipality Improvement of the substation 110/20 kV Prejmer, Brasov county Upgrading and expansion of the AMR tele-management system in Sfantu Gheorghe, Covasna county 16 MVA,110/20kV and 25 MVA,110/20kV transformers Increasing security for the supply of electricity for consumers in Salonta - Tinca Systematisation of the Sinaia MV grid Modernisation of the substation 110/20kV Valea Calugaresca Migration of the MV grid to 20 kV in Satu Mare municipality, Step 1 - old town area Modernisation of the 110/20kV Valeni substation Modernisation of the trafo 25 MVA, 110/6kV si 110/22kV Modernisation of the low voltage lines – Cluj Napoca – step 1 – modernisation of the electrical network, Calea Turzii street Modernisation of the low voltage in Stejeris, Modernisation of the connections in Copaceni, modernisation of LEA 0,4kV Lujerdiu, modernisation LEA 0,4kV Aghires PTZ Moara Modernisation of the distribution network through assembly of measurement and protection blocks for public lighting (BMPIP) Increasing the security and continuity in supply for consumers from the municipality Marghita Switching to 20kV Stei Improvement of the technical conditions for the supply of electricity for consumers in Insuratei, Braila county Modernisation of the LEA 04 kV in Huta (Principala street), Remetea (PT 4203 area), Stana, Lelei, Scarisoara Ferneziu substation- modernisation of the 20Kv bar for increasing the distribution capacity to 20kV Automatic tele-measurement of electric energy for consumers at LEA 20kV Scurtesti – step 1 Optimisation and integration of existing network into SCADA Modernisation of the connections and expansion of the telemanagement blocks Targoviste, Micro VI Value (ROn mil) 44.3 23.9 19.7 19.4 18.6 18.0 17.0 10.1 9.9 9.1 6.6 5.9 4.5 4.3 4.2 4.1 3.8 3.6 3.6 3.3 3.2 3.2 3.1 2.7 2.6 2.6 2.4 2.4 2.4 2.2 2.0 1.9 1.9 1.7 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201472 Description Improvement of voltage levels in Barsana (Stramtura), Chechis, Ungureni (and modernization of LEA 0,4kV PTA 1 and PTA 2 zones), Mara (and modernization LEA 0,4 kV Mara (Baia Sprie)), Desesti, Maramures county RED expansion in Plaiul Foii, Zarnesti, Brasov county areas Switching to 20kV Velenta Oradea Step 1 Improvement of the technical conditions for the supply of electricity for consumers in central area of the municipality Braila, Braila county Modernisation of the Lukoil distributor in Nufarul substation Portable terminal for manual readings (PDA) with car charger Modernisations and integration of existing network into SCADA ST110/20KV Liesti, Galati county Modernisation of the low voltage L.E.A. in: Rodna zona PT Graniceri, Calea Moldovei area, Ilva Mica PT2 zone, Sângeorz Băi, Persa and Stejarului streets Increasing security for the supply of electricity for consumers in rodna and Valea Ilvelor areas Increasing security for the supply of electricity for consumers in Tusa rural area Switching to 20kV of PA 5 Baia Mare- step 2 Increasing security for the supply of electricity for consumers in Ulmeni INT lEA j.t. lisnau, areas PTA1,PTA2, comm. Ozun, Covasna county Module for SAP-ISU for interface + modernisation of the manual reading equipment Fueling of the LEA 20 kV Budesti rezerve from Cavnic substation Improvement of voltage levels and modernization of LEA 0.4 kV zona PTa1 Sacele, Brasov county Value (ROn mil) 1.6 1.6 1.5 1.4 1.3 1.3 1.3 1.3 1.2 1.1 1.1 1.1 1.1 1.0 1.0 1.0 Total 288 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201473 annex 3 internal audit report report regarding the internal audit actiVity of electrica s .a. during the year 2014 During 2014, internal audit activity at Company level has been conducted on the basis of the annual internal audit plan, registered with no. 9900/27250/26.11.2013, signed-off by the General Manager of Electrica S.A. and approved by the Board of Directors. As a result of closing the audit engagements and acceptance of proposed recommendations, the audited entities are defining their own action plan in order to align and fulfil the recommendations. Within the company there were six audit engagements planned for the year 2014. The six internal audit engagements took place in the distribution and supply subsidiaries, followed by an ad-hoc audit solicited by the Board of Directors for Electrica S.A. The engagements were carried out by teams of two internal auditors. All seven engagements were carried out and completed within the defined schedule. The audit reports written as a result were acknowledged by the management of the subsidiaries, signed-off by the General Managaer of the Company and the implementation of recommendations has been consistently monitored through follow-up registers. The internal audit engagements have confirmed the positive impact of an internal audit on the activities carried out within the Company and its subsidiaries. Since the initial public offering on BVB (Bucharest Stock Exchange) and lSE (london Stock Exchange) and year end, an update has been performed for the Operational Procedure of Internal Audit, Handbook of Internal Audit and Code of Ethics of the internal auditor, taking into account the national legislation and international standards for professional practice of an internal auditor. All of these procedures have been signed-off by the Audit Comitee and approved by the Board of Directors. 2014 DIRECTORS’ REPORT (CONSOLIDATED)annual report201474 CONsOLiDATeD fiNANCiAL sTATeMeNTs As AT AND fOr THe yeAr eNDeD 31 DeCeMBer 2014 PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS AS ENDORSED BY THE EUROPEAN UNION consolidated financial s tatements for the year ended 31 December 2014 annual report201475 siTuATii fiNANCiAre CONsOLiDATe LA DATA De si PeNTru ANuL iNCHeiAT LA 31 DeCeMBrie 2014 INTOCMITE IN CONFORMITATE CU STANDARDELE INTERNATIONALE DE RAPORTARE FINANCIARA ADOPTATE DE UNIUNEA EUROPEANA Contents Consolidated statement of financial position __________________________________________________ 77 Consolidated income statement _____________________________________________________________ 79 Consolidated statement of profit or loss and other comprehensive income __________________________ 80 Consolidated statement of changes in equity ___________________________________________________ 81 Consolidated statement of cash flows ________________________________________________________ 83 notes to the consolidated financial statements Basis of preparation 1 Reporting entity and general information _____________________________________________________ 85 2 Basis of accounting _______________________________________________________________________ 89 3 Functional and presentation currency ________________________________________________________ 89 4 Use of judgments and estimates ____________________________________________________________ 89 accounting policies 5 Basis of measurement ____________________________________________________________________ 90 6 Significant accounting policies ______________________________________________________________ 90 7 Changes in accounting policies and changes in classification and presentation ________________________ 98 8 New standards and interpretations not yet adopted ___________________________________________ 100 Performance for the year 9 Operating Segments _____________________________________________________________________ 101 10 revenue _____________________________________________________________________________ 107 11 Income and expenses ___________________________________________________________________ 107 12 Net finance cost _______________________________________________________________________ 108 13 Earnings per share _____________________________________________________________________ 108 Employee benefits 14 Short-term employee benefits ___________________________________________________________ 109 15 Post-employment and other long-term employee benefits _____________________________________ 109 16 Employee benefit expenses ______________________________________________________________ 112 Income taxes 17 Income taxes _________________________________________________________________________ 112 assets 18 Trade receivables ______________________________________________________________________ 115 19 Deposits, treasury bills and government bonds ______________________________________________ 115 20 Other receivables ______________________________________________________________________ 116 21 Cash and cash equivalents _______________________________________________________________ 116 22 Property, plant and equipment ___________________________________________________________ 117 23 Intangible assets ______________________________________________________________________ 120 24 Spin off ______________________________________________________________________________ 121 annual report201476 siTuATii fiNANCiAre CONsOLiDATe LA DATA De si PeNTru ANuL iNCHeiAT LA 31 DeCeMBrie 2014 INTOCMITE IN CONFORMITATE CU STANDARDELE INTERNATIONALE DE RAPORTARE FINANCIARA ADOPTATE DE UNIUNEA EUROPEANA Equity and liabilities 25 Capital and reserves ____________________________________________________________________ 122 26 Non-controlling interests ________________________________________________________________ 124 27 Financing for network construction related to concession agreements ____________________________ 126 28 Trade payables ________________________________________________________________________ 126 29 Other payables ________________________________________________________________________ 126 30 Provisions ____________________________________________________________________________ 127 financial instruments 31 Financial instruments - Fair values and risk management _______________________________________ 127 Other information 32 Related parties ________________________________________________________________________ 132 33 Subsidiaries in financial distress __________________________________________________________ 135 34 Contingencies ________________________________________________________________________ 136 35 Commitments ________________________________________________________________________ 137 annual report201477 CONsOLiDATeD sTATeMeNT Of fiNANCiAL POsiTiON As AT 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) note 31 December 2014 31 December 2013 restated* 1 january 2013 restated* assets non-current assets Intangible assets related to concession arrangements Other intangible assets Property, plant and equipment Equity-accounted investees Other investments Deferred tax assets Other non-current assets Total non-current assets Current assets Trade receivables Other receivables Cash and cash equivalents Deposits, treasury bills and government bonds Inventories Prepayments Green certificates Income tax receivable Assets held for distribution Total current assets Total assets equity and liaBilities Equity Share capital Share premium Treasury shares reserve Pre-paid capital contributions in kind from shareholders Revaluation reserve Other reserves retained earnings Total equity attributable to the owners of the Company Non-controlling interests Total equity (continued on page 78) *See Note 7 23 23 22 24 24 17 18 20 21 19 24 25 25 25 25 25 26 3,501,184 3,340,103 3,318,332 8,812 804,823 4,912 875,715 - - - - 59,625 7,970 4,382,414 85,361 1,118 4,307,209 7,781 848,440 1,042,153 1,138,326 106,105 5,804 6,466,941 780,821 24,611 1,629,508 1,220,521 24,305 8,644 53,708 23,135 - 3,765,253 1,087,545 1,010,909 57,210 650,835 - 33,809 6,378 - 36,510 2,243,494 4,115,781 94,824 641,811 - 34,999 40,306 - 17,420 - 1,840,269 8,147,667 8,422,990 8,307,210 3,814,242 2,509,413 2,493,305 103,049 (75,372) - - - - 3,273 47,657 54,645 156,018 236,597 572,825 614,906 588,951 601,642 1,268,811 1,936,547 1,700,277 5,506,618 5,681,348 5,438,820 810,520 6,317,138 764,270 6,445,618 717,941 6,156,761 annual report2014 78 CONsOLiDATeD sTATeMeNT Of fiNANCiAL POsiTiON As AT 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) note 31 December 2014 31 December 2013 restated* 1 january 2013 restated* liabilities non-current liabilities finance lease Financing for network construction related to concession agreements Deferred tax liabilities Employee benefits Other payables Total non-current liabilities Current liabilities Short term bank borrowings Bank overdrafts finance lease Financing for network construction related to concession agreements Trade payables Other payables Current income tax liability Deferred revenue Employee benefits Provisions Total current liabilities Total liabilities 27 17 15 29 21 27 28 29 14,15 30 - 290 788 151,486 129,827 195,508 189,168 220,382 53,181 614,217 - 48,132 294 99,064 555,256 276,961 14,270 2,987 146,714 72,634 201,208 213,187 66,376 610,888 - 79,684 498 201,963 217,147 77,112 692,518 9,292 167,467 26,677 142,584 113,700 581,522 307,487 15,183 2,600 152,191 84,735 681,069 247,131 10,628 2,362 119,654 79,951 1,216,312 1,830,529 1,366,484 1,977,372 1,457,931 2,150,449 Total equity and liabilities 8,147,667 8,422,990 8,307,210 The accompanying notes are an integral part of these consolidated financial statements. *See Note 7 general Director Ioan rosca Economic Director Emilia Elena Marin annual report2014 79 CONsOLiDATeD iNCOMe sTATeMeNT FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, except per share data) note 2014 2013 restated* Revenues Other income Electricity purchased Green certificates Construction costs Employee benefits repairs, maintenance and materials 10 11 11 23 16 11 Depreciation and amortization 22,23 Impairment of property, plant and equipment, net 22,23 reversal of impairment/ (Impairment) of trade and other receivables, net 18,20 Other operating expenses Operating profit finance income finance costs net finance income/(cost) Share of profit or loss of equity-accounted investees, net of tax Profit before tax Income tax expense Profit for the year Profit for the year attributable to: - owners of the Company - non-controlling interests Profit for the year Earnings per share 11 12 12 24 17 26 5,043,728 176,509 (2,349,200) (272,265) (440,337) (738,606) (84,866) (325,698) (32,814) (4,632) (474,878) 496,941 36,404 (23,149) 13,255 5,382,818 128,317 (2,845,179) (413,847) (290,405) (765,932) (111,029) (313,227) (12,461) 20,770 (434,375) 345,450 23,515 (35,068) (11,553) - 62,959 510,196 (108,791) 401,405 287,837 113,568 401,405 396,856 (81,209) 315,647 244,412 71,235 315,647 Basic and diluted earnings per share (rON) 13 1.03 1.18 The accompanying notes are an integral part of these consolidated financial statements. *See Note 7 general Director Ioan rosca Economic Director Emilia Elena Marin annual report2014 80 CONsOLiDATeD sTATeMeNT Of PrOfiT Or LOss AND OTHer COMPreHeNsiVe iNCOMe FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) Profit for the year 401,405 315,647 nota 2014 2013 retratat* Other comprehensive income Items that will never be reclassified to profit or loss Remeasurements of the defined benefit liability Tax related to remeasurements of the defined benefit liability Revaluation of property, plant and equipment 15 17 22 Other comprehensive income, net of tax (3,922) 628 59 (3,235) 3,297 (528) - 2,769 Total comprehensive income 398,170 318,416 Total comprehensive income attributable to: - owners of the Company - non-controlling interests Total comprehensive income The accompanying notes are an integral part of these consolidated financial statements. *See Note 7 284,670 113,500 398,170 246,619 71,797 318,416 general Director Ioan rosca Director Economic Emilia Elena Marin annual report2014 81 CONsOLiDATeD sTATeMeNT Of CHANges iN eQuiTy FOR THE YEAR ENDED 31 DECEMBER 2014 (All AmOUNTS ARe iN THOUSAND RON, if NOT OTHeRwiSe STATeD) 2014 annual report note Share capital Share premium Treasury shares Pre-paid capital contributions in kind from shareholders Revaluation reserve Other reserves Retained earnings Total non- controlling interests Total equity attributable to the owners of the Company Balance at 31 December 2013 (restated) 2,509,413 - - 47,657 572,825 614,906 1,936,547 5,681,348 764,270 6,445,618 Comprehensive income Profit Other comprehensive income Total comprehensive income Transactions with owners of the Company Contributions and distributions Underwritings from the IPO, net Treasury shares acquired Issue of ordinary shares in respect of land contributed by the shareholders Dividends Spin-off effect Total transactions with owners of the Company - - - - - - - - - 25 25 25 25 24 1,771,887 103,049 - 40,371 - (507,429) - - - - - (75,372) - - - - - - - - (44,384) - (835) (835) - - - - - - - - - - - - 287,837 (2,332) 285,505 287,837 (3,167) 284,670 113,568 (68) 113,500 401,405 (3,235) 398,170 - - - 1,874,936 (75,372) (4,013) (22,475) (22,475) - - - - - - 1,874,936 (75,372) (4,013) (22,475) (2,232,476) (459,400) 1,304,829 103,049 (75,372) (44,384) (388,018) (408,195) (951,309) (459,400) - (388,018) (408,195) (928,834) (2,232,476) Other changes in equity Dividends to non-controlling interests 25 Set up of legal reserves Release of revaluation reserve to retained earnings due to depreciation and disposals of property, plant and equipment loss of control over subsidiaries in financial distress 33 - - - - - - - - - - - - - - - - - - (15,202) (12,752) - - - - 29,886 (29,886) 15,202 12,752 - - - - (67,250) (67,250) - - - - - Balance at 31 December 2014 3,814,242 103,049 (75,372) 3,273 156,018 236,597 1,268,811 5,506,618 810,520 6,317,138 (continued on page 82) 82 CONsOLiDATeD sTATeMeNT Of CHANges iN eQuiTy FOR THE YEAR ENDED 31 DECEMBER 2014 (All AmOUNTS ARe iN THOUSAND RON, if NOT OTHeRwiSe STATeD) attributable to the owners of the Company 2014 annual report 8 2 note Share capital Share premium Treasury shares Pre-paid capital contributions in kind from shareholders Revaluation reserve Other reserves Retained earnings Total non- controlling interests Total equity Balance at 1 January 2013, as previously reported Impact of change in accounting policy Balance at 1 january 2013 (restated) 7 7 2,493,305 - 2,493,305 Comprehensive income Profit Other comprehensive income Total comprehensive income (restated) Transactions with owners of the Company Contributions and distributions Issue of ordinary shares in respect of land contributed by the shareholders land for which ownership rights were obtained Dividends Total transactions with owners of the Company 25 25 25 Other changes in equity Dividends to non-controlling interests 25 Set up of legal reserves Release of revaluation reserve to retained earnings due to depreciation and disposals of property, plant and equipment - - - 16,108 - - 16,108 - - - Balance at 31 December 2013 (restated) 2,509,413 The accompanying notes are an integral part of these consolidated financial statements. - - - - - - - - - - - - - - - - - - - - - - - - - - - - 54,645 1,132,815 599,226 1,326,572 5,606,563 765,253 6,371,816 - 54,645 (543,864) 588,951 2,416 373,705 601,642 1,700,277 (167,743) 5,438,820 (47,312) 717,941 (215,055) 6,156,761 244,412 3,765 248,177 244,412 2,207 246,619 71,235 562 71,797 315,647 2,769 318,416 - - - 9,120 (13,211) (13,211) (13,211) (4,091) - - - - - 9,120 (13,211) (4,091) - - - - (1,558) (1,558) (16,108) 9,120 - (6,988) - - - - - - - - - - - - - - - - - - 13,264 (13,264) (14,568) - 14,568 - - - (25,468) (25,468) - - - - 47,657 572,825 614,906 1,936,547 5,681,348 764,270 6,445,618 83 CONsOLiDATeD sTATeMeNT Of CAsH fLOWs FOR THE YEAR ENDED 31 DECEMBER 2014 (All AmOUNTS ARe iN THOUSAND RON, if NOT OTHeRwiSe STATeD) note 2014 2013 restated* Cash flows from operating activities Profit for the year Adjustments for: Depreciation Amortisation Impairment loss on property, plant and equipment loss on disposal of property, plant and equipment 22 23 22 Impairment loss on trade and other receivables, net 18,20 12 24 11 17 24 19 19 Write-down of inventories, net Net finance cost/(income) Share of profit or loss of equity-accounted investees, net of tax Gain on loss of control over subsidiaries Income tax expense Changes in: Trade receivables Other receivables Deposits, treasury bills and government bonds Prepayments Green certificates Inventories Trade payables Other payables Employee benefits and provisions Cash generated from operating activities Interest paid Income tax paid net cash from operating activities Cash flows from investing activities Payments for purchases of property, plant and equipment Payments for network construction related to concessionagreements Payments for purchase of other intangible assets Proceeds from sale of property, plant and equipment Proceeds from sale of other investments Payments for purchase of treasury bills and government bonds Proceeds frommaturity oftreasury bills and government bonds Payments in deposits with maturity of 3 months or longer Interest received net cash used in investing activities (Continued on page 84) *See Note 7 401,405 315,647 33,284 292,414 32,814 4,542 4,632 10,377 (13,255) - (32,349) 108,791 842,655 228,893 26,592 (2,764) (2,266) (53,708) (873) 49,095 (39,871) 20,567 1,068,320 (11,290) (75,721) 981,309 30,516 282,711 12,461 3,597 (20,770) (1,058) 11,553 (62,959) - 81,209 652,907 (117,991) 21,191 - 33,928 - 2,248 (74,401) 25,390 36,131 579,403 (20,932) (47,213) 511,258 (39,152) (72,206) (318,237) (178,362) (7,653) 237 140,920 (1,194,251) 295,598 (319,104) 35,502 (1,406,140) (2,409) 939 - - - - 20,839 (231,199) annual report2014 84 CONsOLiDATeD sTATeMeNT Of CAsH fLOWs FOR THE YEAR ENDED 31 DECEMBER 2014 (All AmOUNTS ARe iN THOUSAND RON, if NOT OTHeRwiSe STATeD) note 2014 2013 restated* Cash flows from financing activities Proceeds from issue of shares, net of transaction costs Re-purchase of treasury shares Repayment of financing for network construction related to concession agreements repayment of bank borrowings Dividends paid Payment of finance lease liabilities Cash transferred at spin off net cash from /(used in) financing activities net increase in cash and cash equivalents Cash and cash equivalents at 1 January Effect of loss of control over subsidiaries on cash Effect of movements in exchange rates on cash held Cash and cash equivalents at 31 December 25 25 27 25 24 21 21 1,874,936 (75,372) (142,680) - (89,725) (1,889) (129,902) 1,435,368 1,010,537 571,151 (312) - 1,581,376 - - (130,404) (10,271) (38,679) (5,598) - (184,952) 95,107 474,344 - 1,700 571,151 The accompanying notes are an integral part of these consolidated financial statements. *See Note 7 general Director Ioan rosca Economic Director Emilia Elena Marin annual report2014 85 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) 1 reporting entity and general information (a) gEnERal InfORmaTIOn aBOUT ThE gROUP These financial statements are the consolidated financial statements of Societatea de Distributie si furnizarea Energiei Electrice Electrica S.A. (“the Company” or “Electrica SA”) and its subsidiaries (together “the Group”). The registered office of the Company is 9 Grigore Alexandrescu Street, Sector 1, Bucharest, romania. The Company has unique registration number 13267221 and Trade Register registration number J40/7425/2000. As at 31 December 2014 the major shareholder of Electrica SA is the romanian State, represented by the Ministry of Energy, Small and Medium-sized Enterprises and Business Environment (48.78%), after the ownership dilution following an initial public offer. The second shareholder based on the share of ownership is EBrD with 8.66%. The Company’s subsidiaries are the following: Subsidiary activity Tax code head Office % shareholding as at 31 Dec 2014 % shareholding as at 31 Dec 2013 Electrica Distributie Muntenia Nord SA Electrica Distributie Transilvania Nord SA Electrica Distributie Transilvania Sud SA Electricity distribution in geographical area of Muntenia Nord Electricity distribution in geographical area of Transilvania Nord Electricity distribution in geographical area of TransilvaniaSud 14506181 Ploiesti 78.0000021% 78.0000021% 14476722 Cluj-Napoca 77.99999% 77.99999% 14493260 Brasov 78.0000019% 78.0000019% Electrica furnizare SA Electricity supply 28909028 Bucuresti 77.99997% 77.99997% ElectricaServ SA Servicii Energetice Muntenia SA Servicii Energetice Moldova SA Servicii Energetice Banat SA* Servicii Energetice Dobrogea SA Servicii Energetice Oltenia SA Services in the energy sector (maintenance, repairs, construction) Services in the energy sector (maintenance, repairs, construction) Services in the energy sector (maintenance, repairs, construction) Services in the energy sector (maintenance, repairs, construction) Services in the energy sector (maintenance, repairs, construction) Services in the energy sector (maintenance, repairs, construction) 17329505 Bucuresti 29384120 Bucuresti 29386768 Bacau 29388211 Timisoara 29388378 Constanta 29389861 Craiova * Electrica SA lost the control of Servicii Energetice Banat starting with November 2014 (see Note 33). 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% group’s main activities The main activities of the Group include operation and construction of electricity distribution networks and activities related to electricity supply to final consumers. The Group is the electricity distribution operator and the main electricity supplier in Muntenia Nord area (Prahova, Buzau, Dambovita, Braila, Galati and Vrancea counties), Transilvania Nord area (Cluj, Maramures, Satu Mare, Salaj, Bihor andBistrita- Nasaud counties) and Transilvania Sud area (Brasov, Alba, Sibiu, Mures, Harghita and Covasna counties), operating with transformation stations and 0.4 kV and 110 kV power lines. The Company’s distribution subsidiaries (Electrica Distributie Muntenia Nord, Electrica Distributie Transilvania Nord and Electrica Distributie TransilvaniaSud) invoice the electricity distribution service to electricity suppliers (mainly to Electrica furnizare SA subsidiary, the main electricity supplier in Muntenia Nord, Transilvania Nord and Transilvania Sud areas), which further invoice the electricity consumption to final consumers. Electrica furnizare SA is the supplier of last resort annual report201486 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) (defined as supplier designated by the regulatory authority to deliver the universal service of electricity supply under specific regulated conditions) in Muntenia Nord, Transilvania Nord and Transilvania Sud areas. According to the regulations issued by the National Authority for Energy Regulation (“ANRE”), the suppliers of last resort have the obligation to ensure electricity supply to final customers which have not exercised their eligibility right – this is the right to choose their electricity supplier (hereinafter named captive consumers). The electricity supply to captive consumers is made based on regulated contracts, with prices that are regulated by ANrE. In 2013 the Company approved the liquidation of 3 subsidiaries: Servicii Energetice Banat, Servicii Energetice Dobrogea and Servicii Energetice Moldova. In January 2014 the Board of Directors of Servicii Energetice Oltenia and in October 2014 the Board of Directors of Servicii Energetice Muntenia decided the commencement of the insolvency process with a view to reorganization. For further information on the financial position of these subsidiaries refer to Note 33. Initial public offering The Government Decision no. 85/2013, amended and completed by Government Decision no. 477/2014 approved the privatization strategy of Electrica SA by initial public offer (“IPO”). The privatization strategy included the offer for sale of a 51% stake by issuance of new shares representing 105% of the existing share capital as at the date of the IPO. The shares were offered to both individual and institutional investors on the Romanian market, as well as to qualified investors on the US market and outside USA, and Global Depository receipts (“GDrs”) on the UK market. The IPO was organised between 11 and 27 June 2014 and entailed to an offering by the Company of 177,188,744 ordinary shares in the form of shares and in the form of GDRs, each GDR representing four shares. following the IPO, the Company sold 142,007,744 shares and 8,795,250 GDRs, at the offer prices of rON 11 per share and 13.66 USD per GDr. The allocation of shares and GDRs and the offering prices were concluded on 27 June 2014. The transfer of ownership rights to new shares and the collection of cash by the Company took place on 2 July 2014. At the same date the increase in share capital was recorded in the Trade register. Starting 4 July 2014 the Company’s shares are listed on the Bucharest Stock Exchange, and the GDrs are listed on the london Stock Exchange. (B) reglementari in sectorul energetic Regulatory environment The activity in the energy sector is regulated by National Authority for Energy Regulation (“ANRE”). Some of the main responsibilities of ANRE are to approve prices and tariffs and to prepare computation methodologies used to establish regulated prices and tariffs. Electricity distribution Electricity distribution is a monopoly activity. Distribution tariffs are established by a „tariff basket- price cap” mechanism.The tariff setting methodology is approved by ANrE Orders no. 39/2007 and no. 72/2013. The specific distribution tariffs applicable for the years 2014 and 2013for the three voltage levels (high, medium and low) by regionswere approved by ANRE orders as follows (RON/MWh, presented cumulatively for medium and low voltage): Order 104, 105, 98/18.12.2013 1 january-31 December 2014 Order 51/19.12.2012 1 january-31 December 2013 High voltage Medium voltage low voltage High voltage Medium voltage low voltage Transilvania Nord Transilvania Sud Muntenia Nord 20.65 23.46 18.90 67.28 70.45 63.13 178.75 194.74 206.05 22.07 22.07 18.92 66.21 66.19 63.06 172.80 195.75 209.15 annual report201487 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) The following items are considered by ANrE when setting the target revenue for one year of one regulatory period: controllable and non-controllable operating and maintenance costs; costs of electricity purchased for own technological consumption (distribution network losses); regulated depreciation charge;the return on the regulated assets base (“rAB”); and working capital requirements. The controllable operating and maintenance costs include, without limitation, the following: raw materials and consumables; utilities; maintenance and repairs; rental; insurance; studies and research; other services; employee benefits (salaries, per diem, bonuses); damages paid by the main distribution operator to third parties for maintenance works agreed between parties. The uncontrollable operating and maintenance costs include: costs resulting from payment of taxes, royalties, duties and similar payments; regulated costs related to special expenditure; contributions to the health fund, special funds and other similar funds related to the salary fund; regulated distribution costs generatedby the use of distribution networks of other operators; extraordinary costs produced by force majeure; termination benefits; costs generated by the impossibility of shutting down the electricity supply for certain consumers, according to the legislation; loss on receivables from electricity distribution; damages paid by the main distribution operator to third parties for maintenance works established in court. The regulated rate of return on the rAB is 8.52% for the years 2013and 2014. Starting with 2015, the regulated rate of return on the rAB decreased to 7.7%, in accordance with the ANrE Order no. 51/2014. Regulatory asset base (RaB) In accordance with the ANrE Orders no. 31/2004, 39/2007,and 72/2013, the determination of the distribution tariffs is based on, inter alia, the regulated asset base (“RAB”). The RAB calculation is based on statutory amounts of capital expenditure. The regulatory asset base at the beginning of the first regulatory period (1 January 2005) (initial RAB) includes the net book value of the property, plant and equipment and intangible assets as approved by ANrE and used only for regulated electricity distribution. The RAB subsequently calculated includes the net value of the initial RAB and the net value of property, plant and equipment and intangible assets subsequently acquired through investments approved by ANrE. rAB does not include the property, plant and equipment financed through donations, or other irredeemable funds, including the connection fee from the new users of the electricity distribution network (property and equipment obtained through contributions of cash by customers to establish a connection to the network). According to the tariff setting legislation, the distribution operator may request the regulator to recognise in the tariff the revaluation of property, plant and equipment commissioned after 1 January 2005, based on the revaluations performed according to the legislation in force. However, the maximum amount of the revaluation that would be accepted by the regulator may not exceed the cumulative inflation applied to the value of the assets commissioned after 1 January 2005. Tariff adjustments Annually, ANRE makes revenue adjustments due to: change in the quantities of electricity distributed compared to the forecast;change in quantities and acquisition price for the regulated own technological consumption (electricity network losses) compared to the forecast;annual change in uncontrollable operating and maintenance costs compared to the forecast; under-/overrunsof the approved investments programme; and revenues generated from other operations made by the distribution operator. The differences in revenuearising in relation to the above mentioned stipulations are used to modify the regulated tariffsfor the subsequentyears. The annual corrections are adjusted by the interest rate on one year treasury bills, in real terms. The annual regulated revenue in nominal terms is obtained by applying the adjusted inflation rate for the year of revenue adjustments. In regulated activities, the regulator establishes through the tariff adjustment mechanism (as presented above), the criteria to recognise over or under recoveries of one period in future periods. The Group does not recognise regulatory assets and liabilities in respect of these under or over recoveries, as these differences are recovered or returned through the tariffs charged in subsequent periods. As at 31 December 2014 the Group is in an over-recovery position of approximately RON 164 million (2013: RON 142 million), which will be deducted from the tariffs for the next regulatory period (2015 – 2018). annual report201488 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) Tariffs increase limitations During the third regulatory period (2014-2018) the distribution tariffs shall not increase year on year by more than 7% in real terms for the weighted average tariff and 10% for each specific distribution tariff. Where the increase in tariffs is limited and does not allow distribution operators to obtain the approved regulated revenues in full, the difference shall be recovered in the following year(s)limited to the cap set for tariff increases. Such difference is adjusted with the interest rate on one year treasury bills, in nominal terms. Electricity supply According to Electricity law and the European Directive 54/2003 the electricity market is fully open starting from 1 July 2007 and all consumers were declared eligible. The eligible consumers are free to choose their electricity supplier from which they purchase electricity at negotiated prices. For the other consumers (including those that did not use their eligibility right), the tariffs are regulated by ANrE orders. Starting from 1 September 2012, the methodology for setting tariffs to consumers that do not use the eligibility right is established by ANrE Order no. 30/2012 that includes a proposed timetable for gradual elimination of the regulated tariffs between 2012 and 2017 (“the timetable”) that sets the share of electricity purchased on the competitive market, in three-month period stages, for sale to consumers that do not use the eligibility right (household and non-household consumers). The categories of justified costs of the last resort supplier, recognized by ANRE in the tariffs applied to the consumers that did not use the eligibility right, according to the methodology, are: electricity acquisition costs, transmission and system services costs, services provided by the centralized electricity market operator to the participants in the centralized electricity markets, electricity distribution cost, electricity supply costs related to consumers that did not use the eligibility right (including cost for concluding contracts, invoicing, call-centre, mass- media, salaries and other personnel related costs, rental, taxes, borrowing costs, interest, loss on receivables, debt recovery, financing of cash flow deficits and investments, legal expenses, costs related to the implementation of legislative changes). Starting from 1 September 2012, in correlation with the proposed timetable for eliminating the regulated tariffs, the last resort suppliers apply a new electricity tariff called “the competitive market component” (“CPC”) in the invoice to customers that did not use the eligibility right. The CPC is based on costs for the electricity acquisition on the competitive market estimated by the last resort suppliers, plus costs for transmission and system services, services rendered by the centralized market operator, distribution and supply costs, profit margin, and adjustments for the difference between estimated and actual costs for the previous stage of the timetable. The last resort suppliers submit the CPC pricing proposals to ANrE for approval and the related calculations for the 3 distinct voltage levels. ANrE’s previous methodology provided a maximum profit of 2.5% applied to the cost of electricity purchased for supply to households until 1 December 2013. The new methodology (ANrE Order no. 82/2013) provides a maximum profit per unit of electricity sold to consumers tariff setting and CPC tariffs of 4 RON/MWh and operating cost supply of 4.5 RON/client/month, following that, until the application of competitive criteria for selecting suppliers of last resort, the value of profit per unit of electricity sold to consumers to be established by ANrE. furthermore, Electrica records supply costs including closing costs of contracts, billing, bill collection, database management and costs of IT and telecommunications infrastructure. The tariffs for electricity supplied under regulated regime in 2014 and 2013are those established by ANrE Orders no. 57/2014 and no. 40/2013. The acquisition prices paid to producers for electricity purchased based on regulated contracts for delivery under the regulated regime to captive consumers / consumers that did not use the eligibility right are established by ANrE. green certificates Electricity suppliers have a legal obligation to purchase green certificates from producers of electricity from renewable sources, based on annual targets or quotas set by law, which are applied to the quantity of electricity purchased and supplied to end consumers. Cost of green certificates is billed to end consumers separately from the tariffs for electricity. Starting March 2014 the electricity suppliers have the obligation to purchase green certificates before they bill the related costs to end consumers. annual report201489 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) 2 Basis of accounting These consolidated financial statements have been prepared in accordance with International Reporting Standards (“IFRS”) as endorsed by the European Union (“IFRS-EU”). They were authorized for issue by the Board of Directors on 26March 2015. The financial statements will be submitted for shareholders’ approval in the meeting scheduled on 27 April 2015. The Company also issues an original version of consolidated financial statements prepared in accordance with IFRS-EU in Romanian language that will be used for filing with Romanian authorities. Details of the Group’s accounting policiesare included in Note 6. The Group has consistently applied the accounting policies to all periods presented in these consolidated financial statements, except for the changes described in Note 7. 3 functional and presentation currency These consolidated financial statements are presented in Lei (RON), which is the functional currency of all group companies. All amounts have been rounded to the nearest thousand, unless otherwise indicated. 4 use of judgements and estimates In preparing these consolidated financial statements, management has made judgements, estimates and assumptions that affect the application of the Group’s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively. (a) jUDgEmEnTS Information about judgements made inapplying accounting policies that have the most significant effects on the amounts recognised in the consolidated financial statements is included below. Service Concession arrangements IFRIC 12 deals with public-to-private service concession arrangements. Until 4 July 2014,the Group was controlled by the romanian State, therefore the concession arrangements(see Note 23) were considered a form of public-to-public service arrangements and therefore not directly within the scope of IfrIC 12.The management determined that IAS 16 model of accounting for the assets that are subject to the service concessions was more appropriate in those circumstances. following the IPO (see Note 1), the act of incorporation of Electrica changed.Significant decisions in the General Shareholders Meeting are taken with a super majority of 55% of the total voting rights as a protective right of the minority shareholders.The Board of Directors has 3 out of 5 members who are independent and non-executive, appointed by private shareholders.The Board of Directors also has increased powers. Given these major changes in the circumstances, the management reassessed the applicability of IfrIC 12. Since de facto control bythe State,with its 48.78% shareholding,cannot be proved and given that it is expected that the Group will be operated as a “private” entity, the Group changed its accounting policy with respect to the accounting for the service concession arrangements (see Note 7). Commissions Group assesses its revenue arrangements against specific criteria to determine if it is acting as principal or agent. The Group has concluded that it is acting as a principal in all of its revenue arrangements except for collection of radio and TV taxes. If the Group acts in the capacity of an agent rather than as the principal in a transaction, then the income recognised is the net amount of commission earned by the Group. (B) aSSUmPTIOnS anD ESTImaTIOn uncertainties Information about assumptions and estimation uncertainties that may result in a material adjustment in the subsequent twelve month period is included in the following notes: n Note 6 k), l) – assumptions regarding the useful life of the intangible assets related to concession arrangements and other intangible assets; n Notes 18and 31– assumptions and estimates about the recoverability of trade receivables; n Note6 j) – estimates regarding the useful lives of property, plant and equipment; n Note 22 - assumptions regarding the revalued amount of property, plant and equipment; n Note 33 – assumptions and estimates regarding the measurement of assets of the subsidiaries under financial distress; annual report201490 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) n Note 17 – recognition of deferred tax assets: availability of future taxable profit against which tax losscarried forward can be used; n Notes 30 and 34 – recognition and measurement of provisions and contingencies; n Note 15 – measurement of defined benefit obligations and other long-term employee benefits: key actuarial assumptions. measurement of fair values A number of the Group’s accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities. When measuring the fair value of an asset or a liability, the Group uses market observable data as far as possible. fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows. n Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; n Level 2: inputs other than quoted prices included 5 Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the land and buildings which are measured based on revaluation model. The assets and liabilities of the in level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); n Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred. Further information about the assumptions made in measuring fair values is included in the following notes: n Note 31 – financial instruments; n Note 22 – property, plant and equipment. subsidiaries in financial distressare not recognised on a going concern basis but on an alternate basis, as disclosed in Note 33. 6 significant accounting policies Except as disclosed in Note 7, the Group has consistently applied the following accounting policies to all periods presented in these consolidated financial statements. (a) BaSIS Of COnSOlID aTIOn (i) Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date on which control ceases. (ii) loss of control On the loss of control, the Group derecognizes the assets and liabilities of the subsidiary, any non- controlling interests and the other components of equity related to the subsidiary. Any surplus or deficit arising on the loss of control is recognized in profit or loss. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that control is lost. Subsequently that retained interest is accounted for as an equity- accounted investee or as an available-for-sale financial asset depending on the level of influence retained. (iii) non-controlling interests The Group measures any non-controlling interests in the subsidiary at their proportionate share of the subsidiary’s identifiable net assets. Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. Adjustments to non-controlling interests are based on a proportionate amount of the net assets of the subsidiary. (iv) Investments in equity-accounted investees Equity-accounted investees (or associates) are those entities in which the Group has significant influence, but not control or joint control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 percent and 50 percent of the voting power of another entity. Investments in associates are accounted for under the equity method and are recognized initially at annual report201491 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) cost. The cost of the investment includes transaction costs. The consolidated financial statements include the Group’s share of the profit or loss and other comprehensive income of equity-accounted investees, from the date that significant influence commences until the date that significant influence ceases. (v) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealized income and expenses arising from intra- group transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. (B) REVEnUE revenue is recognized when it is probable that the economic benefits associated with the transaction will flow to the Group, and the amount of the revenue can be measured reliably. revenue is recognized at the fair value of the services rendered or goods delivered, net of VAT, excises or other taxes related to the sale. Supply and distribution of electricity The revenue from supply and distribution of electricity to consumers is recognized when electricity is delivered to consumers, based on meter readings and based on estimates for electricity delivered and for which no reading was performed yet. The invoicing of electricity sales is performed on a monthly basis. Monthly electricity invoices are based on meter readings or on estimated consumptions based on the historical data of each consumer. Electricity supplied to consumers which is not yet billed as at the reporting date is accrued on the basis of recent average consumption or based on subsequent meter readings. Differences between estimated and actual amounts are recorded in subsequent periods. The revenues from supply and distribution of electricity also includes the cost of green certificates recharged by the Group to final consumers (see paragraph (h)). of when paid or received, in accordance with the accrual basis. Sales of goods revenue from sale of goods is recognized when the goods are delivered and significant risks and rewards of ownership of the goods have passed to the buyer. Service concession arrangement revenue related to construction or upgrade services under service concession arrangement is recognised based on the stage of completion of the work performed, consistent with the accounting policy on recognising revenue on construction contracts, as follows: Contract revenue includes the initial amount agreed plus any variation in contract work, claims and incentive payments, to the extent that it is probable that they will result in revenue and can be measured reliably. If the outcome of a construction contract can be estimated reliably, then contract revenue is recognised in profit or loss in proportion to the stage of completion of the contract. The stage of completion is assessed with reference to surveys of work performed. Otherwise, contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable. Contract expenses are recognized as incurred unless they create an asset related to future contract activity. An expected loss on a contract is recognised immediately in profit or loss. (C) COmmISSIOnS Group assesses its revenue arrangements against specific criteria to determine if it is acting as principal or agent. The Group has concluded that it is acting as a principal in all of its revenue arrangements except for collection of radio and TV taxes. If the Group acts in the capacity of an agent rather than as the principal in a transaction, then the income recognised is the net amount of commission earned by the Group. (D) fInanCE InCOmE anD fInanCE COSTS The Group’s finance income and finance costs include: n interest income; n interest expense; n the foreign currency gain or loss on financial assets and financial liabilities; Rendering of services revenues related to services rendered are recognised in the period in which the services were rendered based on statements of work performed, regardless n impairment losses recognised on financial assets (other than trade receivables). Interest income or expense is recognised using the effective interest method. annual report2014 92 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) (E) fOREIgn CURREnCy TRanS aCTIOnS Transactions in foreign currencies are translated to the functional currency at the exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the exchange rate at the reporting date, as communicated by the National Bank of Romania. Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated to the functional currency at the exchange rate when the fair value was determined. foreign currency differences are recognised in profit or loss. Non-monetary items that are measured based on historical cost in a foreign currency are not translated. (f) EmPl OyEE BEnEfITS (i) Short-term employee benefits Short-term employee benefits are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. (ii) Defined contribution plans Obligations for contributions to defined contribution plans are expensed as the related service is provided. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. (iii) Defined benefit plans The Group’s net obligation in respect of defined benefit plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount. The calculation of defined benefit obligations is performed annually by a qualified actuary using the projected unit credit method. remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, are recognised immediately in other comprehensive income. The Group determines the net interest expense (income) on the net defined benefit liability for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability, taking into account any changes in the net defined benefit liability during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognised in profit or loss. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognised immediately in profit or loss. The Group recognises gains and losses on the settlement of a defined benefit plan when the settlement occurs. (iv) Other long-term employee benefits The Group’s net obligation in respect of long- term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value. remeasurements are recognised in profit or loss in the period in which they arise. (v) Termination benefits Termination benefits are expensed at the earlier of when the Group can no longer withdraw the offer of those benefits and when the Group recognises costs for a restructuring. If benefits are not expected to be settled wholly within 12 months of the end of the reporting period, then they are discounted. (g) InCOmE Tax Income tax expense comprises current and deferred tax. It is recognised in profit or loss except to the extent that it relates to a business combination or items recognised directly in equity or in other comprehensive income. (i) Current tax Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to tax payable or receivable in respect of previous years. It is measured using tax rates enacted or substantively enacted at the reporting date. Current tax also includes any tax arising from dividends. (ii) Deferred tax Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for: n temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; n temporary differences related to investments in subsidiaries, associates and joint arrangements to the extent that the Group is able to control the timing of the reversal of the temporary annual report201493 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) differences and it is probable that they will not reverse in the foreseeable future; and n taxable temporary differences arising on the initial recognition of goodwill. Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. The measurement of deferred tax reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset only if certain criteria are met. Unrecognized deferred tax assets are reassessed at each reporting date and recognized to the extent that it has become probable that the future taxable profits will be available against which they can be used. (h) gREEn CERTIfICa TES The cost of green certificates is accrued in the profit or loss based on the quantitative quota determined by the regulator representing the amount of the green certificates that the Group has to purchase for the year and based on the price of green certificates acquired on the centralized market. Staring 2014, the Group implemented a procedure in order to allocate the green certificates acquired either for future recharges to customers (see note 1 for the changes in the regulations regarding green certificates) or to cover the annual green certificates acquisition obligation. The green certificates acquired for future recharges to customers are recognised in the statement of financial position until the moment their cost is recharged to final consumer. The obligation for covering the annual acquisition quota is accrued in profit or loss and other non-financial liabilities. (I) InVEnTORIES Inventories consist mainly of consumables, goods for resale and other inventories. Inventories are measured at the lower of cost and net realizable value. The cost of inventories is based on the weighted average cost method. The cost of inventories includes all the acquisition costs and other expenses related to bringing the inventories to their current place and condition. Consumables used for the repairs and maintenance of the electricity network are included in profit and loss when consumed and presented in “repairs, maintenance and materials”. (j) PROPERTy, PlanT anD EqUIPmEnT (i) Recognition and measurement Property, plant and equipment are stated initially at cost, which includes purchase price and other costs directly attributable to acquisition and bringing the asset to the location and condition necessary for their intended use. After initial recognition, land and buildings are measured at revalued amountsless any accumulated depreciation and any accumulated impairment losses since the most recent valuation. The other items of property, plant and equipment are measures at cost less any accumulated depreciation and any accumulated impairment losses. Until 31 December 2003 the Group has restated the cost of property, plant and equipment according to IAS 29 “financial reporting in Hyperinflationary Economies”, with its effect being recognized in retained earnings. revaluations of land and buildings are made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using the fair value at the end of the reporting period. When a building is revalued, the accumulated depreciation is eliminated against the gross carrying amount of that item, and the net amount is restated to the revalued amount of the asset. If significant parts of an item of property, plant and equipment have different useful lives, then they are accounted for as separate items (major components) of property, plant and equipment. Spare parts, stand-by and servicing equipment are classified as property, plant and equipment if they are expected to be used during more than one period or can be used only in connection with an item of property, plant and equipment. Any gain or loss on disposal of an item of property, plant and equipment is recognised in profit or loss. (ii) Subsequent expenditure Subsequent expenditure is capitalised only if it is probable that the future economic benefits associated with the expenditure will flow to the Group. (iii) Depreciation Depreciation is calculated to write off the cost of items of property, plant and equipment less their estimated residual values using the straight-line annual report201494 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) method over their estimated useful lives, and is recognised in profit or loss. leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. land and construction in progress are not depreciated. The estimated useful lives of property, plant and equipment are as follows: Category Buildings Equipment Motor vehicles Office equipment Useful lives 60-70 (average 67 years) 4-12 (average 7 years) 4-10 (average 7 years) 5-10 (average 7 years) Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. (K) InTangIBlE aSSET In a SERVICE concession arrangement (i) recognition and measurement The Group recognises an intangible asset arising from a service concession arrangement when it has a right to charge for use of the concession infrastructure. An intangible asset received as consideration for providing construction or upgrade services in a service concession arrangement is measured at fair value on initial recognition with reference to the fair value of the services provided. Subsequent to initial recognition, the intangible asset is measured at cost, less accumulated amortisation and accumulated impairment losses. (ii) amortisation The amortization method used is selected on the basis of the expected pattern of consumption of the expected future economic benefits embodied in the asset, and is applied consistently from period to period, unless there is a change in the expected pattern of consumption of those future economic benefits. The Group determined that the amortisation method that reflects appropriately the expected pattern of consumption of the expected future economic benefits is correlated with the amortisation of the regulated asset base “rAB” (refer to Note 1). The remaining useful life of the intangible assetsrelated to the concession arrangementsis 12 years at 31 December 2014 (useful life 25 years). (ii) Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss as incurred. (iii) amortisation Amortisation is calculated to write off the cost of intangible assets less their estimated residual values using the straight-line method over their estimated useful lives, and is generally recognised in profit or loss. The estimated useful lives of software and licenses are 3-5 years. Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. (m) aSSETS hElD fORDISTRIBUTIOn Non-current assets, or disposal groups comprising assets and liabilities, are classified as held-for- distribution if it is highly probable that they will be recovered primarily through distribution rather than through continuing use. Such assets, or disposal groups, are measured at the lower of their carrying amount and fair value less costs of distribution. Impairment losses on initial classification as held-for-distribution and subsequent gains and losses on remeasurement are recognised in profit or loss. Once classified as held-for-distribution, equity- accounted investee is no longer equity accounted. (l) OThER InTangIBlE aSSETS (i) Recognition and measurement Other intangible assets that are acquired by the Group and have finite useful lives are measured at cost less accumulated amortisation and any accumulated impairment losses. (n) fInanCIal InSTRUmEnTS The Group classifies non-derivative financial assets into the following categories: loans and receivablesand held to maturity investments. The Group classifies non-derivative financial liabilities into the other financial liabilities category. annual report201495 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) (i) non-derivative financial assets and financial liabilities – recognition and derecognition The Group initially recognises loans and receivables on the date when they are originated. financial liabilities are initially recognised on the trade date, which is the date the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred, or it neither transfers nor retains substantially all of the risks and rewards of ownership and does not retain control over the transferred asset. Any interest in such derecognised financial assets that is created or retained by the Group is recognised as a separate asset or liability. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire. financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously. (ii) non-derivative financial assets – measurement loans and receivables These assets are initially recognised at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortised cost using the effective interest method. loans and receivables comprise trade receivables, cash and cash equivalents and deposits, treasury bills and government bond. Trade receivables Trade receivables include mainly unsettled invoices issued until reporting date for supply and distribution of electricity and services, late payment penalties and accrued revenue for electricity delivered and services rendered until the end of the year, but invoiced after the end of the year. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits and deposits with maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Group in the management of its short-term commitments. held-to-maturity investments Held-to-maturity financial assets are initially recognized at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortized cost using the effective interest method. (iii) non-derivative financial liabilities – measurement Non-derivative financial liabilities are initially recognised at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these liabilities are measured at amortised cost using the effective interest method. Other financial liabilities include bank borrowings, bank overdrafts, financing for network construction related to concession agreementsand trade payables. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents in the statement of cash flows. (iv) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares, net of any tax effects, are recognised as a deduction from equity. Repurchase and reissue of ordinary shares (treasury shares) When shares recognised as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from equity. repurchased shares are classified as treasury shares and are presented in the treasury share reserve. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity and the resulting surplus or deficit on the transaction is presented within share premium. (O) ImPaIRmEnT (i) non-derivative financial assets financial assets are assessed at each reporting date to determine whether there is objective evidence of impairment. Objective evidence that financial assets are impaired includes: n default or delinquency by a debtor; n restructuring of an amount due to the Group on terms that the Group would not consider otherwise; n indications that a debtor or issuer will enter bankruptcy; annual report201496 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) n adverse changes in the payment status of borrowers or issuers; n the disappearance of an active market for a security; or n observable data indicating that there is measurable decrease in expected cash flows from a group of financial assets. financial assets measured at amortised cost The Group considers evidence of impairment for these assets at both an individual asset and a collective level. All individually significant assets are individually assessed for impairment. Those found not to be impaired are then collectively assessed for any impairment that has been incurred but not yet individually identified. Assets that are not individually significant are collectively assessed for impairment. Collective assessment is carried out by grouping together assets with similar risk characteristics. In assessing collective impairment, the Group uses historical information on the timing of recoveries and the amount of loss incurred, and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater or lesser than suggested by historical trends. An impairment loss is calculated as the difference between an asset’s carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. losses are recognised in profit or loss and are reflected in an allowance account. for household customers the receivables are written off when the Group considers that there are no realistic prospects of recovery of the asset. for customers other than households, the amounts are written off after the legal proceedings regarding the bankruptcy or liquidation of the customer are completed. If the amount of impairment loss subsequently decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, then the previously recognised impairment loss is reversed through profit or loss. Equity-accounted investees An impairment loss in respect of an equity- accounted investee is measured by comparing the recoverable amount of the investment with its carrying amount. An impairment loss is recognised in profit or loss, and is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. (ii) non-financial assets At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than inventories and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. for impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or cash generating units (“CGUs”). The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount. Impairment losses are recognised in profit or loss, except for the property, plant and equipment measured at the revalued amount, in which case the impairment loss is recognised in other comprehensive income and decreases the revaluation reserve within equity to the extent that it reverses a previous revaluation surplus related to the same asset. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. A reversal of an impairment loss other than on revalued assets is recognised in profit or loss. A reversal of an impairment loss on a revalued asset is recognised in profit or loss to the extent that it reverses an impairment loss on the same asset that was previously recognised as an expense in profit or loss. Any additional increase in the carrying amount of the asset is treated as a revaluation increase. (P) REValUaTIOn RESERVE The difference between the revalued amount and the net carrying amount of property, plant and equipment is recognised as revaluation reserve included in equity. If an asset’s carrying amount is increased as a result of a revaluation, the increase is recognised and accumulated in equity under the heading of revaluation reserve. However, the increase is recognised in profit and loss to the extent that it reverses a revaluation decrease of the same amount of the asset previously recognised in profit and loss. If an asset’s carrying amount is decreased as a annual report201497 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) result of a revaluation, the decrease is recognised in profit or loss. However, the decrease is recognized in equity in revaluation reserves if there is any credit balance existing in the revaluation reserve in respect of that asset. The revaluation reserve is transferred to retained earnings inan amount corresponding to the use of the asset(as the asset is depreciated) and upon disposal of the asset. (q) DIVIDEnDS Dividends are recognized as a deduction from equity in the period in which their distribution is approved and recognised as a liability to the extent it is unpaid at the reporting date. Dividends are disclosed in the notes to financial statements when their distribution is proposed after the reporting date and before the date of the issuance of the financial statements. (R) PRE-PaID CaPITal COnTRIBUTIOnS In KInD from shareholders These contributions from a shareholder (the Romanian State) represent pre-paid contributions of land for which the Company obtained title deeds in respect of future issuance of shares. The amounts recorded are based on the fair value of the land. (S) PROVISIOnS A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost. A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. future operating losses are not provided for. (T) lE aSES (i) Determining whether an arrangement contains a lease At inception of an arrangement, the Group determines whether the arrangement is or contains a lease. At inception or on reassessment of an arrangement that contains a lease, the Group separates payments and other consideration required by the arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Group concludes that, for a finance lease, it is impracticable to separate the payments reliably, then an asset and a liability are recognised at an amount equal to the fair value of the underlying asset; subsequently, the liability is reduced as payments are made and an imputed finance cost on the liability is recognised using the Group’s incremental borrowing rate. (ii) leased assets Assets held by the Group under leases that transfer to the Group substantially all of the risks and rewards of ownership are classified as finance leases. The leased assets and finance lease liability are measured initially at an amount equal to the lower of their fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the assets are accounted for in accordance with the accounting policy applicable to that asset. Assets held under other leases are classified as operating leases and are not recognised in the Group’s consolidated statement of financial position. (iii) lease payments Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. (iv) Rental income rental income from property other than investment property is recognised as other income. rental income is recognised on a straight-line basis over the term of the lease. (U) SE gmEnT REPORTIng Segment results that are reported to the Company’s Board of Directors (the chief operating decision maker) include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly deferred taxes. (V) SUBSEqUEnT EVEnTS Events occurring after the reporting date 31 December 2014, which provide additional information about conditions prevailing at those reporting dates (adjusting events) are reflected annual report201498 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) in the consolidated financial statements. Events occurring after the reporting date that provide information on events that occurred after the reporting dates (non-adjusting events), when material, are disclosed in the notes to the consolidated financial statements. When the going concern assumption is no longer appropriate at or after the reporting period, the financial statements are not prepared on a going concern basis. 7 changes in accounting policies and changes in classification and presentation Except for the change below, the Group has consistently applied the accounting policies set out in Note 6to all periods presented in these consolidated financial statements: a. Application of IfrIC 12 as a result of changes in circumstances (see Note 4) B. New standards with a date of initial application of 1 January 2014 under IFRS-EU c. Changes in classification and presentation. a. application of ifric 12 “ser Vice concession arrangements” Due to the initial public offering, the management reassessed the accounting treatment used for concession agreements and as a result adopted IfrIC 12 (see Note 4). Consequently, the Group ceased the application of IfrIC 18 “Transfers of assets from customers”. The Group has applied the change in accounting policy retrospectively and restated the comparative periods. The following tables summarise the impact on the Group’s consolidated financial statements. Consolidated statement of financial position 1 january 2013 as previously reported adjustment as restated Impact of changes in accounting policies Property, plant and equipment 5,717,592 (4,869,152) Intangible assets related to concession arrangements Other intangible assets Others Total assets Deferred revenue Deferred tax liabilities Others Total liabilities retained earnings Revaluation reserve Non-controlling interests Others Total equity 848,440 3,318,332 7,781 4,132,657 8,307,210 (2,362) (201,963) (1,946,124) (2,150,449) - 3,318,332 (34,362) - (1,585,182) 1,309,336 60,791 - 1,370,127 42,143 4,132,657 9,892,392 (1,311,698) (262,754) (1,946,124) (3,520,576) (1,326,572) (1,132,815) (765,253) (3,147,176) (6,371,816) (373,705) (1,700,277) 543,864 47,312 (2,416) 215,055 (588,951) (717,941) (3,149,592) (6,156,761) annual report201499 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) 31 December 2013 as previously reported adjustment as restated Impact of changes in accounting policies Property, plant and equipment 5,932,771 (5,057,056) Intangible asset related to concession arrangements Other intangible assets Others Total assets Deferred revenue Deferred tax liabilities Others Total liabilities retained earnings Revaluation reserve Non-controlling interests Others Total equity 875,715 3,340,103 4,912 4,202,260 8,422,990 (2,600) (201,208) (1,773,564) (1,977,372) - 3,340,103 (54,001) (5,777) (1,776,731) 1,508,219 54,760 - 1,562,979 58,913 4,208,037 10,199,721 (1,510,819) (255,968) (1,773,564) (3,540,351) (1,597,810) (1,080,704) (811,296) (3,169,560) (6,659,370) (338,737) (1,936,547) 507,879 47,026 (2,416) 213,752 (572,825) (764,270) (3,171,976) (6,445,618) Consolidated statement of profit and loss and other comprehensive income for the year ended 31 December 2013 revenues Other income Impact of changes in accounting policies as previously reported 5,156,633 132,929 adjustment as restated 226,185 (4,612) 5,382,818 128,317 Depreciation and amortization (397,540) 84,313 (313,227) Impairment of property, plant and equipment, net repairs, maintenance and materials Construction costs Income tax expense Others Profit Total comprehensive income (13,222) (102,121) - (75,178) (4,387,157) 314,344 317,113 761 (12,461) (8,908) (290,405) (6,031) - 1,303 1,303 (111,029) (290,405) (81,209) (4,387,157) 315,647 318,416 There is no material impact on the Group’s basic or diluted earnings per share for the year ended 31 December 2013. consequential amendments to other standards, with a date of initial application of 1 January 2014 under IFRS-EU: B. new standards with a date of initial application of 1 january 2014 UnDER IfRS-EU The Group has adopted the following new standards and amendments to standards, including any IfRS 10 Consolidated financial Statements, IfRS 12 Disclosure of Interests in Other Entities (2011) As a result of IfrS 10 (2011), the Group has changed its accounting policy for determining whether it has control over and consequently whether it consolidates annual report2014100 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) its investees. IfrS 10 (2011) introduces a new control model that is applicable to all investees, by focusing on whether the Group has power over an investee, exposure or rights to variable returns from its involvement with the investee and ability to use its power to affect those returns. In particular, IFRS 10 (2011) requires the Group to consolidate investees that it controls on the basis of de facto circumstances. The Group reassessed the control conclusion for its investees at 1 January 2014. The Group has not changed its control conclusion in respect of any of its investments in subsidiaries. IfrS 12 brings together into a single standard all the disclosure requirements about an entity’s interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. These disclosures relate to an entity’s interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures were added, but there was no impact on the Group’s financial position or performance. Offsetting financial assets and financial liabilities - amendments to IaS 32 These amendments clarify the meaning of ’currently has a legally enforceable right to set-off’ and the criteria for non-simultaneous settlement mechanisms of clearing houses to qualify for offsetting. These amendments have no impact on the Group for 2014 and 2013. Recoverable amount Disclosures for non-financial assets – amendments to IaS 36 These amendments remove the unintended consequences of IfrS 13 fair Value Measurement on the disclosures required under IAS 36 Impairment of Assets. In addition, these amendments require disclosure of the recoverable amounts for the assets or cash-generating units (CGUs) for which an impairment loss has been recognized or reversed during the period. c. changes in classification and presentation (i) Change in classification The Group’s liabilities in respect of the obligations related to acquisition of green certificates were recorded in prior years as trade payables in the consolidated statement of financial position. Starting with 2014, the Group changed the classification of these liabilities to other payables in the consolidated statement of financial position. Management believes that the classification of these liabilities as other payables reflects better the non- financial nature of these liabilities. for the purpose of comparability, rON 46,097 thousands as at 31 December 2013 and rON 64,869 thousands as at 31 December 2012 previously classified as trade payables have been reclassified to other payables with no impact on total current liabilities. This reclassification had no impact on the Group financial position as at 31 December 2013 and 31 December 2012, respectively. (ii) Change in presentation In 2014 the Group changed the disclosure of management compensation and included compensation granted to the general directors of the Group companies. In prior period management compensation included the compensation also directors of departments. The management of the Company considers that the new presentation reflects more accurately the persons having authority and responsibility for planning, directing and controlling the activities of the entity. 8 new standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2014, and have not been applied in preparing these consolidated financial statements. Those which may be relevant to the Group are set out below. The Group does not plan to adopt these standards early. IfRIC 21 levies (effective for annual periods beginning on or after 17 june 2014 under IfRS-EU) IfrIC 21 was endorsed by EfrAG on 13 June 2014 and published in the Official Journal in 14 June 2014. Regulations legally come into force 3 days after publication in the Official Journal. Each company shall therefore apply IfrIC 21, at the latest, as from the commencement date of its first financial year starting on or after 17 June 2014. Therefore the Group must apply IfrIC 21 from 1 January 2015. The Group has decided not to early adopt this standard. IFRIC 21 is applied retrospectively. It is applicable to all levies imposed by governments under legislation, other than outflows that are within the scope of other standards (e.g., IAS 12 Income Taxes) and fines or other penalties for breaches of legislation. The interpretation clarifies that an entity recognizes a liability for a levy no earlier than when the activity that triggers payment, as identified by the relevant legislation, occurs. It also clarifies that a levy liability is accrued progressively only if the activity that triggers payment occurs over a period of time, in accordance with the relevant legislation. For a levy that is triggered upon reaching a minimum threshold, no liability is recognized before the specified minimum threshold is reached. The interpretation requires the same principles to be applied in interim annual report2014101 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) financial statements. The Group estimates that IFRIC 21 will have an impact in respect with the timing of recognition of taxes on special constructions.IFRIC 21 should be applied retrospectively from the year ended 31 December 2013. The following new or amended standards are not expected to have a significant impact of the Group’s consolidated financial statements: n Annual improvements to IfrSs 2011 – 2013 Cycle; n Annual improvements to IfrSs 2010 – 2012 Cycle; n Amendments to IAS 19 (Defined Benefit Plans, Employee Contributions). 9 operating segments (a) BaSIS fOR SEgmEnTaTIOn The following summary describes the operations of each reportable segment. Reportable segments Operations Electricity supply Buying and supplying electricity to final consumers (includes Electrica Furnizare SA and the supply activity of Electrica SA) Electricity distribution External electricity network maintenance Electricity distribution service (includes Electrica Distributie Muntenia Nord SA, Electrica Distributie Transilvania Nord SA, Electrica Distributie Transilvania Sud SA, Electrica Serv SA and the investments in distribution activity done by Electrica SA) repairs, maintenance and other services for electricity networks owned by other distributors (includes Servicii Energetice Banat SA, Servicii Energetice Dobrogea SA, Servicii Energetice Moldova SA, Servicii Energetice Oltenia SA and Servicii Energetice Muntenia SA) Headquarter Includes corporate services at parent level The Board of Directorsof the Company reviews mana- gement reports of each segment. Segment earnings before interest, tax, depreciation and amorti sation (EBITDA) is used to measure performance because mana gement believes that such information is the most relevant in evaluating the results of the segments. annual report2014102 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) (B) InfORmaTIOn aBOUT REPORTaBlE SEgmEnTS 2014 annual report Electricity supply Electricity distribution External electricity network maintenance headquarter Total for reportable segments Consolidation eliminations and adjustments Consolidated total year ended 31 December 2014 External revenues Inter-segment revenue Segment revenue Segment profit (loss) before tax Net finance (cost)/income Depreciation, amortization and impairment, net EBITDa** Segment net profit (loss) Employee benefits Segment assets Trade and other receivables Cash and cash equivalents Deposits, treasury bills and government bonds Trade and other payables, and short term employee benefits Bank overdrafts Financing for network construction related to concession agreements and finance lease 4,029,654 103,438 4,133,092 229,531 3,553 (6,706) 232,684 179,782 (83,183) 1,286,522 724,938 403,486 826,140 - - - Capital expenditure 15,073 955,470 1,519,452 2,474,922 369,738 (7,001) (311,401) 688,140 305,722 (545,172) 4,980,388 661,105 144,481 182,100 371,151 48,132 250,844 508,821 58,604 58,604 (101,836) 39 (36,113) (65,762) (96,862) (92,472) 222,100 23,841 6,220 309,771 - - - - - - - - - - - 5,043,728 1,622,890 6,666,618 748,628 251,687 (358,512) 855,453 639,837 (738,606) 8,691,603 1,409,884 1,629,508 1,220,521 251,195 255,096 (4,292) 391 251,195 (17,779) 2,202,593 - 1,075,321 1,038,421 7,274 1,514,336 48,132 250,844 523,894 - (1,622,890) (1,622,890) (238,432) (238,432) (238,432) - (543,936) (604,452) - - - - - - (495,014) 1,019,322 48,132 250,844 519,881 (4,013) 5,043,728 - 5,043,728 510,196 13,255 (358,512) 855,453 401,405 (738,606) 8,147,667 805,432 1,629,508 1,220,521 103 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) The breakdown of the Electricity distribution reportable segment is as follows: 2014 annual report year ended 31 December 2014 External revenues Inter-segment revenue Segment revenue Segment profit /(loss) before tax Net finance (cost)/income Depreciation, amortization and impairment, net EBITDa** Net profit Employee benefits Segment assets Trade and other receivables Cash and cash equivalents Deposits, treasury bills and government bonds Trade and other payables, and short term employee benefits Bank overdrafts Financing for network construction related to concession agreements and finance lease Capital expenditure Distribution muntenia nord Distribution Transilvania nord Distribution Transilvania Sud Electricity network maintenance Eliminations Total Electricity distribution 327,560 548,922 876,482 152,280 4,970 (85,001) 232,311 127,337 (133,790) 1,739,503 171,169 94,539 182,100 109,695 - 108,291 165,469 281,189 469,480 750,669 121,441 (4,010) (99,319) 224,770 103,943 (120,984) 1,326,879 137,526 17,370 - - 119,911 38,948 30,538 158,869 324,733 491,090 815,823 91,830 (5,899) (113,433) 211,162 69,883 (116,511) 1,422,739 159,785 15,744 120,044 9,184 111,721 161,561 21,988 372,929 394,917 4,187 (2,062) (13,648) 19,897 4,559 (173,887) 583,871 285,229 16,828 114,235 294 22,922 - - (362,969) (362,969) (92,604) (92,604) (92,734) - - - - - - - - - - - - 955,470 1,519,452 2,474,922 369,738 (7,001) (311,401) 688,140 305,722 (545,172) 4,980,388 661,105 144,481 182,100 371,151 48,132 250,844 508,821 104 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) 2014 annual report year ended 31 December 2013 (restated*) External revenues Inter-segment revenue Segment revenue Segment profit /(loss) before tax Net finance (cost)/income Depreciation, amortization and impairment, net EBITDa** Segment net profit (loss) Employee benefits Share of profit (loss) of equity accounted investees Segment assets Trade and other receivables Cash and cash equivalents Assets held for distribution Trade and other payables, and short term employee benefits Bank overdrafts Financing for network construction related to concession agreements and finance lease Capital expenditure *See Note 7 Electricity supply Electricity distribution External electricity network maintenance headquarter Total for reportable segments Consolidation eliminations and adjustments Consolidated total 4,570,091 209,936 4,780,027 109,742 (176) (7,183) 117,101 89,676 (84,570) - 1,409,768 1,213,788 92,146 880,349 42,218 4,986 - - 711,999 1,570,404 2,282,403 285,900 (15,448) (301,629) 602,977 226,283 (573,735) - 4,868,773 644,150 412,580 417,795 467 273,199 361,706 - - - - - 100,728 100,728 (45,102) 327 (3,382) (42,047) (46,628) (84,922) - 372,062 44,004 1,983 382,700 683 - - - - - 73,648 94,035 (13,494) (6,893) 73,648 (22,705) 62,959 214,854 - 144,126 2,243,494 3,307 36,999 5,382,818 1,780,340 7,163,158 424,188 78,738 (325,688) 671,138 342,979 (765,932) 62,959 6,865,457 1,901,942 650,835 2,243,494 1,684,151 79,684 273,199 367,375 - (1,780,340) (1,780,340) (27,332) (90,291) - - - - - - - - (27,332) 1,557,533 (757,187) (588,007) 9,120 5,382,818 - 5,382,818 396,856 (11,553) (325,688) 671,138 315,647 (765,932) 62,959 8,422,990 1,144,755 650,835 2,243,494 1,096,144 79,684 273,199 376,495 105 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) The breakdown of the Electricity distribution reportable segment is as follows: 2014 annual report year ended 31 December 2013 (restated*) External revenues Inter-segment revenue Segment revenue Segment profit (loss) before tax Net finance (cost)/income Depreciation, amortization and impairment, net EBITDa** Net profit Employee benefits Segment assets Trade and other receivables Cash and cash equivalents Trade and other payables, and short term employee benefits Bank overdrafts Financing for network construction related to concession agreements and finance lease Distribution muntenia nord Distribution Transilvania nord Distribution Transilvania Sud Electricity network maintenance Eliminations Total Electricity distribution 225,020 579,871 804,891 133,905 6,546 (79,037) 206,396 106,431 (145,203) 1,706,178 158,157 324,565 133,435 - 78,722 245,258 468,568 713,826 80,167 (7,104) (96,661) 183,932 55,242 (131,675) 1,283,917 134,001 31,621 138,852 467 53,891 230,783 511,430 742,213 70,507 (12,395) (110,180) 193,082 52,735 (121,692) 1,405,514 156,058 47,062 134,802 - 139,798 10,938 385,119 396,057 1,321 (2,495) (15,751) 19,567 11,875 (175,165) 600,505 323,275 9,332 138,047 - 788 - (374,584) (374,584) - - - - - - (127,341) (127,341) - (127,341) - - 711,999 1,570,404 2,282,403 285,900 (15,448) (301,629) 602,977 226,283 (573,735) 4,868,773 644,150 412,580 417,795 467 273,199 Capital expenditure *See Note 7 ** EBITDA (Earnings before interest, tax, depreciation and amortisation) for operating segments is defined and calculated as segment profit (loss) before tax of a given operating segment adjusted for i) depreciation, amortization and impairment/ reversal of impairment of property, plant and equipment and intangible assets in the operating segment, ii) net finance (cost)/income in the operating segment, iii) share of profit (loss) of equity-accounted investees in the operating segment (as disclosed in the income statements). EBITDA is not an IFRS measure and should not be treated as an alternative to IFRS measures. Moreover, EBITDA is not uniformly defined. The method used to calculate EBITDA by other companies may differ significantly from that used by the Group. As a consequence, the EBITDA presented in this note cannot, as such, be relied upon for the purpose of comparison to EBITDA of other companies. 100,594 112,596 146,446 2,070 - 361,706 106 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) (C) RECOnCIlIa TIOn Of InfORmaTIOn On REPORTaBlE SEgmEnTS TO IfRS mE aSURES 2014 2013 restated* Revenues Total revenue for reportable segments Elimination of inter-segment revenue Consolidated revenue Profit before tax Total profit before tax for reportable segments Elimination of inter-segment profit/(loss) before tax Share of profit of equity accounting investees Consolidated profit before tax net finance (cost)/income Total net finance (cost)/income Elimination of inter-segment net finance (cost)/ income Consolidated total net finance (cost)/income net profit Total net profit for reportable segments Elimination of inter-segment net profit/(loss) Share of profit of equity accounting investees Consolidated net profit Total assets Total assets for reportable segments Elimination of inter-segment assets Assets held for distribution Unallocated amounts Consolidated total assets Trade and other receivables Trade and other receivables for reportable segments Elimination of inter-segment trade and other receivables Unallocated amounts Consolidated trade and other receivables Trade and other payables and short term employee benefits Trade and other payables and short term employee benefits for reportable segments Elimination of inter-segment trade and other payables and short term employee benefits Unallocated amounts Consolidated trade and other payables and short term employee benefits *See Note 7 6,666,618 (1,622,890) 5,043,728 7,163,158 (1,780,340) 5,382,818 748,628 (238,432) - 510,196 251,687 (238,432) 13,255 639,837 (238,432) - 401,405 8,691,603 (601,805) - 57,869 8,147,667 1,409,884 (602,696) (1,756) 805,432 1,514,336 (493,258) (1,756) 1,019,322 424,188 (90,291) 62,959 396,856 78,738 (90,291) (11,553) 342,979 (90,291) 62,959 315,647 6,865,457 (768,396) 2,243,494 82,435 8,422,990 1,901,942 (754,261) (2,926) 1,144,755 1,684,151 (585,081) (2,926) 1,096,144 annual report2014107 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) 10 reVenue Supply and distribution of electricity Construction revenue related to concession agreements (Note 23) repairs and maintenance and other services rendered Re-connection fees Sales of merchandise Total *See Note 7 11 income and expenses (a) OThER InCOmE rent income Late payment penalties from customers Commissions for the collection of radio and TV taxes (Note 29) Gain on loss of control over subsidiaries (Note 33) Other Total *See Note 7 2014 2013 restated* 4,492,096 449,742 68,138 8,961 24,791 5,043,728 4,939,831 298,496 121,056 12,608 10,827 5,382,818 2014 2013 restated* 77,802 38,681 13,889 32,349 13,788 176,509 73,504 26,556 13,486 - 14,771 128,317 (B) ElECTRICITy PURChaSED Electricity purchased include the cost of electricity purchased for the purpose of supply to final consumers or to other electricity suppliers, the cost of transmission and system services (2014: RON 323,929 thousand; 2013: RON 303,632 thousand), and the electricity acquired to cover the network losses (2014: RON 425,814 thousand; 2013: RON 521,374 thousand).The Group purchases the electricity and transmission and system services mainly from state controlled companies – refer to Note 32. (C) REPaIRS, maInTEnanCE anD maTERIalS repairs, maintenance and materials include materials used for works performed by the service subsidiaries of the Group for third party electricity distribution infrastructure in amount of rON 18,478 thousand in 2014 (2013: RON 19,439 thousand). annual report2014108 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) (D) OThER OPERaTIng ExPEnSES rent Meter readings Printing and distribution of invoices Cash collection services IT services Postage and telecommunication Utilities Security Call centre Penalties to the State for late payment of taxes Contractual penalties Other taxes and duties Movement in provisions, net (Note 30) legal and consultancy fees Cost of merchandise sold Bank commissions Other Total 2014 2013 59,429 38,123 32,777 24,282 49,988 27,527 29,242 7,613 7,405 8,162 368 89,333 (413) 5,161 23,980 9,979 61,922 48,593 37,724 34,712 25,584 38,441 27,526 29,141 6,637 6,564 12,967 23,703 45,794 4,784 10,329 9,687 10,218 61,971 474,878 434,375 With effect from 1 January 2014, a tax on special construction payable to the State Budget was introduced, computed as 1.5% of the gross book value of qualifying constructions as at 31 December of the previous year. The expense recorded in 2014 in respect of this tax was rON 47,535 thousand,recorded in “Other taxes and duties” in the table above. Contractual penalties refer to penalties paid mainly to electricity producers for advance termination of electricity acquisition contracts. 12 net finance cost Interest income Other finance income Total finance income Interest expense Interest cost for employee benefits (Note 15) foreign exchange losses Other finance costs Total finance costs net finance income / (cost) 2014 2013 32,806 3,598 36,404 (11,250) (9,576) (1,797) (526) (23,149) 13,255 23,140 375 23,515 (20,168) (11,916) (2,061) (923) (35,068) (11,553) annual report2014109 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) 13 earnings per share The calculation of basic and diluted earnings per share has been based on the following profit attributable to ordinary shareholders and weighted-average number of ordinary shares outstanding: Profit attributable to ordinary shareholders Profit for the year attributable to the owners of the Company Profit attributable to ordinary shareholders *See Note 7 2014 2013 restated* 287,837 287,837 244,412 244,412 Weighted-average number of ordinary shares (in number of shares) 2014 2013 Issued ordinary shares at 1 january (note 25) Effect of shares issued in February Effect of spin-off in April Effect of shares issued in May Effect of shares issued in June Effect of underwritings from the IPO in June Effect of shares re-purchased in July Effect of shares issued in August Effect of shares issued in October 207,839,904 172,575 (32,342,835) 2,564,531 - 103,360,101 (3,445,297) - - 206,229,044 142,963 - - 13,630 - - 402,463 36,708 Weighted-average number of ordinary shares at 31 December 278,148,979 206,824,808 Earnings per share Basic and diluted earnings per share (rON) 1.03 1.18 14 ShORT-TERm EmPl OyEE BEnEfITS 31 December 2014 31 December 2013 Personnel payables Current portion of defined benefit liability and other long-term employee benefits Social security charges Tax on salaries Other employees benefits Termination benefits Total 38,632 12,790 64,172 15,567 - 15,553 146,714 30,073 11,432 80,215 14,618 15,853 - 152,191 For details of the related employee benefit expenses, see Note 16. In romania, all employers and employees, as well as other persons, are contributors to the state social security system. The social security system covers pensions, allocations for children, temporary inability to work, risks of works and professional diseases and other social assistance services, unemployment benefits and incentives for employers creating new workplaces. Termination benefits refer to lay-off indemnities for the employees of ServiciiEnergetice Moldova. Other employee benefits at 31 December 2013 include mainly employee bonuses granted in accordance with Order no. 144/2005. The Group has overdue social security and other salary taxes of rON 39,541 thousand at 31 December 2014 (2013: RON 58,476 thousand) whichrelatemainly to the four subsidiaries with financial difficulties described in Note 33. annual report2014110 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) 15 POST-EmPl OymEnT anD OThER lOng-TERm employee Benefits In accordance with Government Decisions no. 1041/2003 and no. 1461/2003, the Group provides benefits in kind in the form of free electricity to retired employees of the Group. The Group also provides cash benefits to employees depending on seniority and years of service at Defined benefit liability Other long-term employee benefits Total - Current portion* - Non-current portion *included in Personnel payables in Note 14 retirement. In 2014 and 2013, employee benefit obligations were computed by independent actuaries using the projected unit credit method with benefits calculated proportionally to period of service. 31 December 2014 31 December 2013 141,988 91,184 233,172 12,790 220,382 143,911 80,708 224,619 11,432 213,187 (I) mOVEmEnT In ThE DEfInED BEnEfIT lIaBIlITy anD OThER lOng-TERm EmPl OyEE BEnEfITS The following tables shows a reconciliation from the opening balances to the closing balances for the defined benefit liability and other long-term employee benefits and its components. There are no plan assets. Defined benefit liability Balance at 1 january Included in profit or loss Current service cost Interest (income) / cost Included in other comprehensive income Remeasurements loss (gain) - Actuarial loss /(gain) Other Benefits paid Balance at 31 December 2014 2013 143,911 3,694 (1,946) 3,922 (7,593) 141,988 Other long-term employee benefits 2014 2013 Balance at 1 january Included in profit or loss Current service cost Actuarial gain Interest cost Benefits paid Balance at 31 December 80,708 3,242 (565) 11,522 (3,723) 91,184 142,241 3,255 7,955 (3,297) (6,243) 143,911 88,030 3,255 (11,129) 3,961 (3,409) 80,708 annual report2014111 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) (II) aCTUaRIal aSSUmPTIOnS The following were the principal actuarial assumptions at the respective reporting date: (a) Macroeconomic assumptions: n inflation. The actuaries used the Consumer Price Index (CPI) published by the Economist Intelligence Unit: year 2014 2015 2016 2017 2018+ Valuation date 31 December 2014 Valuation date 31 December 2013 - 2.1% 3.2% 2.7% 2.5% 2.3% 3.3% 3.2% 2.9% 2.7% n the discount rate used was the yield for Romanian government bonds maturing in 10 years at the reporting date of 4.5% for the year 2014 (2013: 5.2%); n the electricity price per KWh used is 0.464 RON at 31 December 2014 (2013: 0.499RON/ KWh); n the mortality rate published by the National Institute of Statistics was adjusted to allow for an anticipated decrease in mortality rates; n taxes and social charges are those in force as at the reporting date. (b) Group specific assumptions: n salaries increase in line with the estimated inflation rates in the future periods; n employees’ turnover: turnover rates are based on statistical information regarding employees’ mobility during 2007-2014. Consideringhistorical retirement data, it is assumed that the personnel turnover rate decreases with the employees’ age; n jubilee and retirement bonuses based on seniority according to the collective labour contract, as follows: Jubilee bonus based on years of service Seniority 20 years 30 years 35 years 40 years 45 years no of gross monthly base salaries 31 December 2014 31 December 2013 0.8 1.6 2.4 3.2 4 0.8 1.6 2.4 3.2 4 Retirement bonus based on years of service in the Group Seniority Between 8 and 10 years Between 10 and 25 years More than 25 years no of gross monthly base salaries 31 December 2014 31 December 2013 1 2 3 1 2 3 The Group also offers 1,200 kWh of free electricity per year to retired employees for certain years of seniorirty. Termination benefits In accordance with the Collective labour contract concluded between the Group and the Unions, when individual labour contract are terminated at the Group’s initiative, the Group will pay termination benefits to the employees depending on their period of service, as follows: Period of service 1 - 5 years 5 - 10 years 10 - 20 years More than 20 years no of gross monthly base salaries 4 6 7 10 annual report2014112 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) For collective lay-offs, according to the Collective labour contract, the Group will pay termination benefits to the employees depending on their period of service, as follows: Period of service 1 - 3 years 3 - 5 years 5 - 10 years 10 - 20 years More than 20 years no of gross monthly base salaries 4 6 7 15 20 Collective lay-offs and termination benefits are only applicable subject to approval of a rectification of the budget, such that the approved salary fund for the year will not be affectedby such measures. The above mentioned stipulations do not apply to employees with individual labour contract concluded for a determined period. The above stipulations do not apply to employees that obtained other higher cumulative salary compensation rights, provided by legal regulations regarding the Group’s reorganization and restructuring. Employees who are re-employed within the Group after lay-off are not entitled to the above mentioned benefits. 16 employee Benefit expenses Average number of employees Number of employees at 31 December 12,308 11,740 2014 2013 2014 2013 Wages and salaries Social security contributions Meal tickets Termination benefits Other employee benefits Total 548,336 150,505 24,212 15,553 - 738,606 12,773 12,780 563,224 164,867 21,016 3,595 13,230 765,932 Termination benefits for the year 2014 refer to lay-off indemnities for the employees of ServiciiEnergetice Moldova (2013: for Electrica SA). Other employee benefits for the year 2013 include mainly employee bonuses granted in accordance with Order no. 144/2005. 17 income taxes In determining the amount of current and deferred tax, the Group takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. The Group considers that the accounting records for taxes due are adequate for all open tax years, based on assessment (I) amOUnTS RECOgnISED In PROfIT OR lOSS Current tax expense Deferred tax expense Total income tax *See Note 7 made by management taking into account various factors, including the interpretation of tax legislation and previous experience. New information may become available that causes the Group to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made. 2014 2013 restated* 88,836 19,955 108,791 61,748 19,461 81,209 annual report2014113 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) (II) amOUnTS RECOgnISED In OThER COmPREhEnSIVE InCOmE Before tax 59 (3,922) (3,863) Revaluation of property, plant and equipment remeasurement of defined benefit liability Total *See Note 7 2014 Tax (expense) benefit net of tax Before tax 2013 restated* Tax (expense) benefit net of tax - 628 628 59 (3,294) (3,235) - 3,297 3,297 - (528) (528) - 2,769 2,769 (III) RECOnCIlIa TIOn Of EffECTIVE Tax RaTE Profit before tax Tax using Company’s domestic tax rate Non-deductible expenses Non-taxable income Deduction of legal reserves Other tax effects Effect of share of profit of equity-accounted investees Recognition of tax effect of previously unrecognised tax losses Current-year tax losses for which no deferred tax asset is recognised Change in recognised temporary differences Income tax *See Note 7 (IV) mOVEmEnT In DEfERRED Tax BalanCES 2014 2013 restated* 510,196 81,631 37,991 (8,961) (4,782) (3,413) - - 13,473 (7,148) 108,791 16% 7% -2% -1% -1% 0% 0% 3% -1% 21% 396,856 63,497 18,581 (15,006) (2,122) 8,167 (10,073) (10,736) 10,576 18,325 81,209 16% 5% -5% -1% 2% -3% -3% 3% 5% 20% net balance at 1 january 2014 Recognised in profit or loss Recognised in other comprehensive income Effect of loss of control over subsidiary net Deferred tax assets Deferred tax liabilities Balance at 31 December 2014 229,625 (6,122) - (5,631) 217,872 - 217,872 (17,490) 11 (628) (74,466) 18,562 (26,269) 4,447 7,504 - 115,847 19,955 - - - - - - (18,107) (18,107) (55,904) (55,904) (18,765) 4,447 (18,765) - 4,447 - - - (5,631) 129,543 (92,776) 222,319 - - (5,631) 129,543 33,151 (59,625) (33,151) 189,168 - - - (628) - (628) 2014 Property, plant and equipment and intangible assets Employee benefits Impairment of trade receivables Tax loss carried forward Other items Tax liabilities (assets) before set-off Set off of tax net tax liabilities (assets) 115,847 19,955 annual report2014114 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) net balance at 1 january 2013 Recognised in profit or loss Recognised in other comprehensive income net Deferred tax assets Deferred tax liabilities Balance at 31 December 2013 2013 restated* Property, plant and equipment and intangible assets Employee benefits Impairment of trade receivables Tax loss carried forward Other items Tax liabilities (assets) before set-off 219,103 10,522 (17,089) (84,371) (26,232) 4,447 (929) 9,905 (37) - 95,858 19,461 Set off of tax - - net tax liabilities (assets) 95,858 19,461 *See Note 7 - 528 - - - 528 - 528 229,625 (17,490) (74,466) (26,269) 4,447 - 229,625 (17,490) (74,466) (26,269) - - - - 4,447 115,847 (118,225) 234,072 - 32,864 115,847 (85,361) (32,864) 201,208 (V) UnRECOgnISED DEfERRED Tax aSSETS Deferred tax assets have not been recognised in respect of the following items, because it is not probable that future taxable profit will be available against which the entity generating it can use the benefits therefrom. Tax losses 2014 2013 293,972 262,721 Tax losses for which no deferred tax assets were recognised expire as follows: year when the tax loss was generated: 2014 2013 Tax losses 2014 (expiring in 2021) 2013 (expiring in 2020) 2012 (expiring in 2019) 2011 (expiring in 2018) 2010 (expiring in 2016-2017) 2009 (expired in 2014) Total 84,206 62,179 70,175 10,896 66,516 - 293,972 - 66,095 70,175 - 66,516 59,935 262,721 The Group has not recognized deferred tax assets for tax losses related to the subsidiaries with financial difficulties. The Group also has not recognized deferred tax assets for tax losses generated before 2011 (this was generated by one company within the Group), as it is considered unlikely that future taxable profit would be sufficient to recover such assets. annual report2014115 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) 31 December 2014 31 December 2013 1,928,476 (1,147,655) 780,821 2,253,069 (1,165,524) 1,087,545 31 December 2014 31 December 2013 18 trade receiVaBles Trade receivables, gross Bad debt allowance Total trade receivables, net Receivables from related parties are presented inNote 32. Trade receivables gross comprise: Electricity distribution and supply Late payment penalties receivable Electricity receivables from clients in litigation, insolvency and bankruptcy Late payment penalties from clients in litigation, insolvency and bankruptcy repairs, maintenance and other services Other Total trade receivables, gross 737,960 120,026 865,223 113,794 20,774 70,699 1,928,476 The movement in the bad debt allowance for trade receivables is as follows: Bad debt allowance Balance as at 1 january Impairment recognized Impairment reversed Amounts written off Balance as at 31 December 2014 2013 1,165,524 8,460 (9,449) (16,880) 1,147,655 for the ageing of trade receivables refer to Note 31. A significant part of the bad debt allowances refers to clients in litigation, insolvency or bankruptcy procedures, many of them being older than three years. The Group will derecognize these receivables together with the related allowances after the finalization of the bankruptcy process. On 25 April 2014 Electricafurnizare SA subsidiary concluded an agreement with the National Railway Company - CompaniaNationala de CaiFerate “CFR” SA (“CFR”) (a state-owned company) on the settlement of Cfr debts towards Electricafurnizare SA. On this basis, on 13 May 2014 the Group collected rON 221,183 thousand. 19 deposits, treasury Bills and goVernment Bonds Deposits, treasury bills and government bonds include treasury bills and government bonds of rON 901,417 thousands denominated in rON with original maturity of more than three months with an average interest rate (yield) of 1.6% and deposits with maturity of more than three months of rON 319,104 thousands. The treasury bills and government bonds were classified as investments held to maturity. 1,033,920 152,089 839,407 130,495 38,076 59,082 2,253,069 1,188,904 53,751 (75,456) (1,675) 1,165,524 annual report2014116 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) 20 other receiVaBles 31 December 2014 31 December 2013 Good performance guarantees VAT receivable Interest receivable Structural funds Other receivables Bad debt allowance Total other receivables, net 8,553 3,850 4,212 7,234 37,889 (37,127) 24,611 The movement in the bad debt allowance for other receivables is as follows: Bad debt allowance Balance as at 1 january Impairment recognized Amounts written off Balance as at 31 December 2014 2013 35,177 5,621 (3,671) 37,127 12,485 14,797 4,609 16,023 44,473 (35,177) 57,210 39,087 935 (4,845) 35,177 21 cash and cash equiValents 31 December 2014 31 December 2013 Bank current accounts Call deposits Cash in hand Treasury bills and government bonds with original maturities of less than 3 months Total cash and cash equivalents in the consolidated statement of financial position Overdrafts used for cash management purposes Total cash and cash equivalents in the consolidated statement of cash flows 77,225 1,352,487 296 199,500 1,629,508 (48,132) 1,581,376 108,543 541,891 401 - 650,835 (79,684) 571,151 Cash and cash equivalents include treasury bills and government bonds denominated in rON of rON 199,500 thousands with original maturities of 3 months or less. These bear anaverage interest rate (yield) of 1.7% p.a. The Group has overdrafts from ING and BRD, as follows: Bank Contract date facility type maturity annual interest Overdraft limit (th ROn) Balance at 31 December 2014 ING Bank N.V. and BrD Groupe Societe Generale ING Bank N.V. and BrD Groupe Societe Generale Total 9-Dec-14 8-Dec-14 working capital financing and issuance of potential commitments working capital financing and issuance of potential commitments 1 year for overdraft, 2 years for potential commitments 1 year for overdraft, 2 years for potential commitments 1M ROBOR - 1.3% 40,000 9,171 1M rOBOr + 0.49% 70,000 38,961 110,000 48,132 annual report2014 117 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) Bank Contract date facility type maturity annual interest Overdraft limit (th ROn) Balance at 31 December 2013 ING ING Total 9-Oct-13 27-Sep-13 working capital financing and issuance of potential commitments working capital financing (80,000) and issuance of potential commitments (120,000) 1 year for overdraft, 2 years for potential commitments 1 year for overdraft, 2 years for potential commitments 1M ROBOR - 2.5% 190,000 37,466 1M ROBOR - 2.5% 80,000 42,218 270,000 79,684 The security for these overdrafts is presented in Note 35 c). The following information is relevant in the context of the consolidated statement of cashflows: Non-cash activity includes: n purchases on suppliers’ credit related to property, plant and equipment and concessionsof rON 96 million in 2014 (2013: RON 53 million); n land contributed by the majority shareholder (2014: nil; 2013: RON 9.1 million); n set-off between trade receivables and trade payables of RON 73 million in 2014 (2013: RON 54 million); n effectof loss of control over subsidiaries under financial distressin amount of RON 0.3 million in 2014 (see Note 33). 22 property, plant and equipment The movements in property, plant and equipment in 2014 and 2013 were as follows: land and land improvements Buildings Equipment Vehicles, furniture and office equipment Construction in progress Total 389,361 284,558 91,440 110,852 128,548 1,004,759 gross carrying amount Balance at 1 january 2013 restated* Additions Transfers from construction in progress Disposals Balance at 31 December 2013 restated* Additions Transfer from construction in progress Disposals Revaluation recognized in other comprehensive income, net Revaluation recognized in profit or loss, net Gross book value netted off against the accumulated depreciation at revaluation Valuation of land contribution from the shareholders, net Effect of loss of control over subsidiaries Balance at 31 December 2014 10,162 - (1,550) 397,973 6,224 - (7,167) (7,847) 270 3,382 (1,906) 286,304 5,664 2,681 7,906 (36,655) (5,296) - (11,299) (10,315) - 1,493 61,593 (593) 1,210 4,940 (366) 61,653 (69,915) (1,195) 74,788 - (5,610) 153,933 116,636 119,091 1,073,937 2,474 1,077 3,679 1,235 44,275 (4,993) (2,889) (3,481) (10,391) 62,316 - (23,928) 59 (41,951) (11,299) (10,315) - - - - - - - - - - - - - (27,669) (19,939) (1,575) (8,419) (635) (58,237) 314,544 263,132 152,428 102,740 157,738 990,582 annual report2014 118 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) land and land improvements Buildings Equipment Vehicles, furniture and office equipment Construction in progress Total accumulated depreciation and impairment losses Balance at 1 january 2013 restated* Depreciation Disposals Impairment loss reversal of impairment loss Balance at 31 December 2013 restated* Depreciation Disposals Impairment loss reversal of impairment loss Accumulated depreciation netted off against gross book value at revaluation Effect of loss of control over subsidiaries Balance at 31 December 2014 net carrying amounts at 1 january 2013 restated* at 31 December 2013 restated* at 31 December 2014 *See Note 7 - - - - - - - - - - - - - 18,321 13,212 (194) - (5) 31,334 11,557 (1,572) - (1,550) (11,299) 36,439 11,608 (593) - - 47,454 14,958 (2,338) - (4,930) - 5,696 (287) - - 90,353 6,769 (8,072) 20 (2,846) - 84,944 16,615 156,319 - - 12,466 - 29,081 - - 169 - - - 30,516 (1,074) 12,466 (5) 198,222 33,284 (11,982) 189 (9,326) (11,299) (13,329) (3,526) (1,528) (8,275) 24,944 53,616 77,949 29,250 185,759 389,361 266,237 55,001 25,908 111,933 848,440 397,973 314,544 254,970 238,188 106,479 98,812 26,283 24,791 90,010 128,488 875,715 804,823 Property, plant and equipment includes mainly land and buildings. At 31 December 2014, the Group performed a revaluation of land and buildings, except for the land and buildings of subsidiaries in financial distress, which are recognised on an alternate basis due to going concern issues (see Note 33). The restrictions on property, plant and equipment are presented in Note 35c). annual report2014119 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) measurement of fair value The following table shows the valuation techniques used in measuring fair values (Level 3) for the revaluation of land and buildings as of 31 December 2014, as well as the significant unobservable inputs used. Category Valuation technique Significant unobservable inputs land Market approach n Adjustment for liquidity, location, Buildings size n Occupancy rates (70-90%) n Discount rates (10%on average) n Costs not paid by tenants (average 10%) n Annual rent per sqm n rental growth n Adjustment for liquidity, location, size The fair value is estimated based on selling price per square meter of land of similar characteristics (i.e. ownership, legal limitations, location, physical properties, and best use). The market price is mainly based on recent transactions. Market approach and discounted cash-flows (DCF) method The market approach is based on the selling price per square meter for buildings of similar characteristics, adjusted for liquidity, location, size etc. The valuation model based on the DCF method estimates the present value of net cash flows to be generated by a building taking into account occupancy rate and costs not paid by tenants. The discount rate estimation considers, inter alia, the quality of a building and its location. Inter-relationship between key unobservable inputs and fair value measurement The estimated fair value would increase (decrease) if: n Adjustment for liquidity, location, size was lower (higher) The estimated fair value would increase (decrease) if: n Occupancy rates were higher (lower) n Discount rates were lower (higher) n Costs not paid were lower (higher) n Annual rent per sqm was higher (lower) n rental growth was higher (lower) n Adjustment for liquidity, location, size was lower (higher) annual report2014120 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) 23 intangiBle assets Intangible assets include mainly intangible assets related to distribution service concession agreements recorded in accordance with IFRIC 12 “Service Concession Arrangements”, licenses and costs of implementation of SAP ERP, customer management and billing system, and automation software, as follows: Intangible assets related to concession agreements Software and licenses Intangible assets in progress Total gross book value Balance at 1 january 2013 restated* Additions Transfers from intangibles in progress Disposals Balance at 31 December 2013 restated* Additions Transfers from intangibles in progress Disposals 4,734,986 299,298 - - 5,034,284 449,742 - - Balance at 31 December 2014 5,484,026 accumulated amortisation and impairment losses Balance at 1 january 2013 restated* Amortisation Disposals Balance at 31 December 2013 restated* Amortisation Disposals Balance at 31 December 2014 Carrying amounts at 1 january 2013 restated* at 31 December 2013 restated* at 31 December 2014 *See Note 7 1,416,654 277,527 - 1,694,181 288,661 - 1,982,842 3,318,332 3,340,103 3,501,184 156,798 931 1,620 (1,411) 157,938 6,832 833 (2,489) 163,114 149,818 5,184 (1,317) 153,685 3,753 (2,319) 155,119 6,980 4,253 7,995 801 1,478 (1,620) - 659 991 (833) - 817 - - - - - - - 801 659 817 4,892,585 301,707 - (1,411) 5,192,881 457,565 - (2,489) 5,647,957 1,566,472 282,711 (1,317) 1,847,866 292,414 (2,319) 2,137,961 3,326,113 3,345,015 3,509,996 The European Union adopted IfrIC 12 “Service Concession Arrangements” effective for financial years starting on or after 1 April 2009. The distribution subsidiaries (as operators) concluded concession contracts with the Ministry of Economy and Commerce (as grantor) in 2005, updated in 2009 by addenda. These contracts concern the operation of electricity distribution service in the established territory (Transilvania Nord, Transilvania Sud, Muntenia Nord), on the risk and responsibility of the operators and taking into account the technical regulations applicable to the operation, modernization, rehabilitation and development of energy distribution networks specified in the Electricity Law, the terms and conditions of the licenses for electricity distribution and the regulations issued by ANRE. Before entering into these service concessions, the distribution infrastructure was held by the operators and accounted as property, plant and equipment. The concession contracts are concluded for a period of 49 years and may be extended for a period equal to no more than half of that period. As a price for the concession, the companies pay an annual royalty fee recognized in the distribution tariff of 1/1000 of the revenues from electricity distribution. According to the concession contracts, the companies use the assets representing the distribution network owned by them located in the above-mentioned territory for electricity distribution. According to the concession contracts, the grantor will buy at the end of the term of concession contract the ownership right on the “relevant assets”, that are mainly the electricity distribution networks, at a price equal to the value of the regulated assets base at the end of the concession. annual report2014121 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) for the year ended 31 December 2014, the Group has recognized construction revenue related to the concession agreements of RON 449,742 thousand (2013: RON 298,496 thousand) and construction costs of RON 440,337 thousand (2013: RON 290,405 thousand). concession agreements for impairment. The recoverable amount was estimated based on value in use and is higher than its carrying amount, therefore no impairment was necessary. The key assumptions used in the estimation of the recoverable amount are set out below: Intangible assets in progress as at 31 December 2014 and 2013 include the cost of implementation for IT applications that imply a certain implementation period. The Group tested the intangible assets related to n Discount rate: 9% n Inflation rate: 2% n EBITDA: amortization of the intangible assets related to concession agreementsplus the regulated return on RAB of 7.7% (see Note 1) 24 spin off Based on the Extraordinary General Shareholders decision dated 20 March 2014 and the resolution of the Bucharest Court dated 10 April 2014, the Group recognised the spin-off of the Company’s shareholdings to a new company - „Societatea de Administrare a Participatiilor in Energie SA” - wholly owned by the Ministry of Energy, Small and Medium- sized Enterprises and Business Environment. The spin-off referred to the transfer of the shares held by assets held for Distribution Enel Distributie Muntenia Enel Energie Muntenia Enel Distributie Banat Enel Distributie Dobrogea Enel Energie E.On Distributie E.On Energie Electrica Soluziona Hidro Tarnita BrM Total assets held for distribution The spin-off was recorded as follows: Assets held for distribution Share capital Revaluation reserve related to equity accounted investees Other reserves (legal reserves) retained earnings Total the Company in 10 entities (Enel Distributie Muntenia, Enel Energie Muntenia, Enel Distributie Banat, Enel Distributie Dobrogea, Enel Energie, E.On Moldova Distributie, E.On Energie, Electrica Soluziona, Hidro Tarnita and BrM). The investments included equity accounted investees and other investments and were classified as assets held for distribution as at 31 December 2013, as follows: Carrying amount at 31 December 2013 Percentage ownership interest 823,183 91,054 552,147 394,297 158,667 213,000 11,000 49 57 40 2,243,494 Carrying amount 23.57% 23.57% 24.87% 24.90% 36.99% 27.00% 3,78% 49.00% 50% 2,232,476 507,429 388,018 408,195 928,834 2,232,476 On 17 february 2014 the Company sold part of the shares held in E.On Moldova Distributie and E.OnEnergie romania to E.On following the exercise of call options by E.On. E.On paid the exercise price of rON 140,920 thousandto the Company.Cash received from transaction with E.ON less the directly attributable costs were transferred to Societatea de Administrare a Participatiilor in Energie SA (RON 129,902 thousand). annual report2014 122 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) The Group’s share of the profit or loss and other comprehensive income for 2013of its equity-accounted investees wasas follows: Enel Distributie Banat Enel Distributie Dobrogea Enel Energie Total 2013 Share of profit or loss Share of other comprehensive income 45,751 31,825 (14,617) 62,959 - - - - In order to record its share of the associates’ profit or loss and changes in other comprehensive income, the Group used information from the statutory financial statements of its associates, as financial statements prepared in accordance with IFRS/ IFRS-EU were not available. 25 capital and reserVes (a) ShaRE CaPITal anD ShaRE PREmIUm The issued share capital in nominal terms consists of 345,939,929ordinary shares at 31 December 2014 (2013: 207,839,904) with a nominal value of rON 10 per share. Number of shares at 1 January Shared issued during the year Decrease in the number of shares due spin-off number of shares at 31 December The Company recognizes changes in share capital only after their approval in the General Shareholders Meeting and their registration by the Trade Register. The contributions made by the shareholders which are not yet registered with the Trade register at year end are recognized as pre-paid capital contributions from shareholders. On 25 february 2014 an increase of share capital of 188,264 ordinary shares was registered in the Trade registry. The shares were issued in respect of land contributed by the shareholder in previous periods. On 10 April 2014 Bucharest Court approved the spin-off by Electrica SA through transfer of part of its assets (investments held by Electrica SA in other entities – see Note 24) to a new company „Societatea de Administrare a Participatiilor in Energie SA”, owned by the romanian State, represented by the Ministry of Economy – Department for Energy. As a consequence of this transaction, share capital was decreased by 43,123,780 ordinary shares. On 16 May 2014 an increase of share capital of 3,846,797 ordinary shares was registered in the Trade registry. The shares were issued in respect of land contributed by the shareholder in previous periods for shares. All shares rank equally with regard to the Company’s residual assets. The holders of ordinary shares are entitled to receive dividends as declared, and are entitled to one vote per share at meetings of the Company. Ordinary shares 2014 2013 207,839,904 181,223,805 (43,123,780) 345,939,929 206,229,044 1,610,860 - 207,839,904 Between 11 and 27 June 2014 the Company organised an IPO, which entailed to an offering of 142,007,744 shares and 8,795,250 GDrs, each GDr representing four shares (see also Note 1). The subscriptions amounted to RON 1,556,095 thousand and USD 120,143,115. On 2 July 2014 the increase of share capital by 177,188,744 ordinary shares was recorded in the Trade register. Consequently, the Group recognised an increase of share capital of rON 1,771,887 thousand and a share premium of RON 171,128 thousand. The transaction costs of rON 68,079 thousand were deducted from the share premium. 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. (B) TREaSURy ShaRES In July 2014 the Company purchased 5,206,593 ordinary shares and 421,000 Global Depositary receipts, equivalent to 1,684,000 shares. The total amount paid for acquiring the shares and Global Depositary receipts was rON 75,372 thousand. annual report2014123 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) (C) REzERVa DIn REEValUaRE The reconciliation between opening and closing revaluation reserve is as follows: 2014 2013 restated* Balance at 1 january Revaluation of property, plant and equipment attributable to the owners of the Company Share of changes in revaluation reserve of equity accounted investees Release of revaluation reserve to retained earnings corresponding to depreciation and disposals of property, plant and equipment Spin-off effect loss of control over subsidiaries Balance as at 31 December *See Note 7 (D) OThER RESERVES Other reserves include: n legal reserves – set up as 5% of the gross profit for the year in the statutory individual financial statements of the companies within the Group, until the total legal reserves reach 20% of the paid-up nominal share capital of each company, Balance at 1 january 2013 Set-up of legal reserves Balance at 31 December 2013 Set-up of legal reserves Spin-off effect Balance at 31 December 2014 572,825 (835) - (15,202) (388,018) (12,752) 156,018 588,951 - (1,558) (14,568) - - 572,825 according to the legislation. These reserves are deductible for income tax purposes and are not distributable; n other reserves set up in compliance with legislation in force. legal reserves Other reserves Total other reserves 232,606 13,264 245,870 29,886 (39,159) 236,597 369,036 - 369,036 - (369,036) - 601,642 13,264 614,906 29,886 (408,195) 236,597 (E) DIVIDEnDS romanian companies may distribute dividends from statutory earnings only, as per separate financial statements prepared in accordance with romanian accounting regulations. The dividends distributed by the Company in 2014 and 2013 (from the statutory profits of preceding years) were as follows: To the owners of the Company To non-controlling interests Total Distribution of dividends 2014 2013 22,475 67,250 89,725 13,211 25,468 38,679 The dividends per share paid to the owners of the Company were: 2014: RON 0.108, 2013: RON 0.064 per share. annual report2014124 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) 26 nOn-COnTROllIng InTERESTS The following tables summarises the information related to each of the Group’s subsidiaries that has material NCI, before any intra-group elimination. 31 December 2014 Electrica Distributie muntenia nord Electrica Distributie Transilvania nord Electrica Distributie Transilvania Sud Electrica furnizare Intra-group eliminations Total nCI percentage 22% 22% 22% 22% Non-current assets Current assets Non-current liabilities Current liabilities net assets Carrying amount of nCI revenues Profit Other comprehensive income Total comprehensive income Profit allocated to NCI Other comprehensive income allocated to NCI Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities** net increase/(decrease) in cash and cash equivalents* Dividends paid to NCI during the year 1,232,023 448,692 (205,044) (163,163) 1,312,508 288,752 876,482 133,197 (2,082) 1,109,674 155,693 (92,368) (182,825) 990,174 217,838 750,669 127,948 625 131,115 128,573 29,303 (458) 28,149 138 1,160,070 178,432 (133,449) (225,139) 979,914 215,581 815,823 74,292 (1,925) 72,367 16,344 (424) 129,534 1,064,741 (71,220) (729,007) 394,048 86,691 3,994,524 180,786 3,070 183,856 39,772 676 181,225 162,827 181,781 443,936 (276,110) (133,883) (80,000) (1,116) (135,141) (81,689) (142,270) (89,262) (230,026) (52,745) (40,489) 353,558 1,658 810,520 113,568 (68) 23,212 11,666 12,734 19,638 67,250 *Amounts presented represent cash flows of the subsidiaries **Cash flows from financing activities include dividends paid to NCI annual report2014125 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) 31 December 2013 nCI percentage Non-current assets Current assets Non-current liabilities Current liabilities net assets Carrying amount of nCI revenues Profit Other comprehensive income Total comprehensive income Profit allocated to NCI Other comprehensive income allocated to NCI Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities** net increase in cash and cash equivalents* Dividends paid to NCI during the year Electrica Distributie muntenia nord Electrica Distributie Transilvania nord Electrica Distributie Transilvania Sud Electrica furnizare Intra-group eliminations Total 22% 22% 22% 22% 1,163,400 487,055 (160,211) (203,388) 1,286,856 283,108 804,891 119,969 25 119,994 26,393 6 1,058,720 166,371 (128,205) (182,258) 914,628 201,218 713,826 60,805 (1,446) 59,359 13,377 (318) 1,120,981 203,496 (131,481) (227,567) 965,429 212,394 742,213 58,132 637 58,769 12,789 140 134,762 1,077,618 (62,957) (849,970) 299,453 65,880 4,692,686 84,890 3,335 88,225 18,676 734 174,345 152,104 155,652 61,031 (55,006) (83,981) (24,075) (2,109) (95,977) (42,373) (75,991) (42,094) 23,362 25,750 55,586 16,828 1,670 764,270 71,235 562 16,206 - - 9,262 25,468 *Amounts presented represent cash flows of the subsidiaries **Cash flows from financing activities include dividends paid to NCI annual report2014126 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) 27 financing for networK construction related to concession agreements Financing for network construction related to concession agreementsis based on suppliers’ credit. The amounts are denominated in EUr and are backed by promissory notes issued by the Group to its suppliers. Part of these promissory notes are discounted by the suppliers at banks for early settlement. Such financing is measured at amortized cost, by using an average effective interest rate of 4.1%in 2014(2013: 5%). The amounts are due as follows: less than 1 year Between 1 and 5 years Total 28 trade payaBles Electricity suppliers Capital expenditure suppliers Other suppliers Total 31 December 2014 31 December 2013 99,064 151,486 250,550 142,584 129,827 272,411 31 December 2014 31 December 2013 318,549 93,283 143,424 555,256 345,597 73,357 162,568 581,522 Electricity suppliers are mainly state-owned power generators, as detailed in Note 32, but also other participants on the electricity market. Other suppliers include suppliers of services, materials, consumables, etc. 29 other payaBles VAT payable Late payment penalties to the State budget Liabilities related to radio and TV tax Liabilities related to green certificates acquisition obligation Other liabilities Total 31 December 2014 31 December 2013 Current non-current Current non-current 136,831 70,720 12,424 42,396 14,590 276,961 - 167,114 11,238 - - 41,943 53,181 69,300 11,563 46,097 13,413 307,487 - 22,423 - - 43,953 66,376 Part of the late payment penalties to the State are rescheduledfor payment based on a plan issued by ANAf to Electrica Serv for a period of 48 months starting August 2012. In relation to this ANAF instituted a pledge on certain property, plant and equipment of Electrica Serv (see Note 35c)).The late payment penalties refer to services subsidiaries, including those in financial distress presented in Note 33. In accordance with law no. 533/2003, that amended Law no. 41/1994 regardingthe organization and functioning of Romanian Radio Company and romanian Television Company, radio and TV taxes are collected by Electricafurnizare SA on behalf of these companies. The payable of the Group to the above mentioned institutions represents radio and TV tax collected and not paid by the year-end. Other liabilities include mainly guarantees and sundry creditors. Other non-current liabilities refer to guarantees from customers related to electricity supply. annual report2014127 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) 30 proVisions Balance at 1 january 2014 Provisions raised Provisions used Provisions reversed Effect of loss of control over subsidiaries under financial distress Balance at 31 December 2014 Provisions 84,735 40,491 (8,904) (40,904) (2,784) 72,634 As at 31 December 2014, provisions refer mainly to: n RON 34,175 thousand representing potential fiscal obligations of the Group (including interest and penalties); n RON 21,497 thousand representing claims of individuals in respect of land of the Group. The provisions raised in 2014 refer mainly to potential fiscal obligations of the Group following several controls by the Court of Accounts concluded with certain findings and recommendations, some with fiscal impact. The Group raised provisions for the amount of the probable outflow of economic resources. reversals during 2014 mainly relate to a provision for litigation with ANAF for a claim of RON 30,777 thousand, following aintermediaryfavorable court decision for the Company. 31 fInanCIal InSTRUmEnTS - faIR ValUES anD RISK management (a) aCCOUnTIng ClaSSIfICa TIOnS anD faIR Values The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value. loans and receivables Carrying amount held to maturity financial assets Other financial liabilities fair value Total level 1 level 2 level 3 Total 31 December 2014 Note financial assets not measured at fair value Trade receivables 18 780,821 - Deposits, treasury bills and government bonds - 1,220,521 Cash and cash equivalents 21 1,629,508 - Total 2,410,329 1,220,521 - - - - 780,821 1,220,521 1,629,508 3,630,850 financial liabilities not measured at fair value Bank overdrafts financing for network construction related to concession agreements finance lease Trade payables Total 21 27 28 - - - - - - - - - - 48,132 48,132 250,550 250,550 256,130 256,130 294 555,256 854,232 294 555,256 854,232 256,130 256,130 annual report2014 128 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) Carrying amount fair value 31 December 2013 Note loans and receivables Other financial liabilities Total level 1 level 2 level 3 Total financial liabilities not measured at fair value Trade receivables Cash and cash equivalents Total financial liabilities not measured at fair value Bank overdrafts financing for network construction related to concession agreements finance lease Trade payables Total 18 21 21 27 28 1,087,545 650,835 1,738,380 - - - 1,087,545 650,835 1,738,380 - - - - - 79,684 79,684 272,411 272,411 288,475 288,475 788 581,522 934,405 788 581,522 934,405 288,475 288,475 (B) mEaSUREmEnT Of faIR ValUES The following table shows the valuation techniques used in measuring Level 2 fair values, as well as the significant unobservable inputs used. Financial instruments not measured at fair value Type Valuation technique Other financial liabilities Discounted cash flows (DCF) method Significant unobservable inputs Not applicable The discount rates used are the average 12 M ROBID-ROBOR interest rates of 1.67% as at 31 December 2014 (2013: 2.78%). (C) fInanCIal RISK managEmEnT The Group has exposure to the following risks arising from financial instruments: n credit risk n liquidity risk n market risk. and treasury bills and government bonds. Cash, bank deposits, treasury bills and government bonds are placed in financial institutions, which are considered to have minimal risk of default. The carrying amount of financial assets represents the maximum credit exposure. (i) Credit risk Credit risk is the risk of financial loss to the Group 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 Trade receivables The Group’s credit risk in respect of receivables is concentrated around state-controlled companies. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade receivables.. annual report2014129 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) Impairment The ageing of trade receivables was as follows: Neither past due nor impaired Past due 1-90 days Past due 90-180 days Past due 180-360 days Past due 1-2 years Past due 2-3 years Past due more than 3 years Total Neither past due nor impaired Past due 1-90 days Past due 90-180 days Past due 180-360 days Past due 1-2 years Total 31 December 2014 31 December 2013 gross value Bad debt allowance gross value Bad debt allowance 501,052 240,421 23,542 29,463 52,801 - - - (13,657) (52,801) 105,710 (105,710) 686,315 201,939 64,846 121,536 180,802 244,905 - - (1,947) (33,543) (132,403) (244,905) 975,487 1,928,476 (975,487) (1,147,655) 752,726 2,253,069 (752,726) (1,165,524) net trade receivables 31 December 2014 31 December 2013 501,052 240,421 23,542 15,806 - 780,821 686,315 201,939 62,899 87,993 48,399 1,087,545 (ii) 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 overdrafts(refer to Note 21). annual report2014130 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) Exposure to liquidity risk The following are the remaining contractual maturities of financial liabilities at the reporting date. The amounts are gross and undiscounted, and include estimated interest payments. financial liabilities 31 December 2014 Bank overdrafts financing for network construction related to concession agreements finance lease Trade payables Total 31 December 2013 Bank overdraft financing for network construction related to concession agreements finance lease Trade payables Total Carrying amount Total less than 1 year 1-2 years 2-5 years more than 5 years Contractual cash flows 48,132 48,132 48,132 250,550 262,332 101,633 294 555,256 854,232 294 555,256 866,014 294 555,256 705,315 79,684 79,684 79,684 272,411 288,693 144,623 788 581,522 934,405 788 581,522 950,687 498 581,522 806,327 - 87,114 - - 87,114 - 93,755 290 - 94,045 - 73,484 - 73,484 - 50,315 - - 50,315 - 101 - - 101 - - - - - (iii) market risk Market risk is the risk that changes in market prices – such as foreign exchange rates, interest rates– will affect the Group’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 optimising 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 Group. The functional currency of all entities belonging to the Group is the romanian leu (rON). The currencies in which these transactions are primarily denominated are rON and EUr. Certain liabilities are denominated in foreign currency (EUR). The Group also has deposits and bank accounts denominated in foreign currency (EUr). The Group’s policy is to use the local currency in its transactions as far as practically possible. The Group does not use derivative or hedging instruments. Exposure to currency risk The summary quantitative data about the Group’s exposure to currency risk as follows: in thousands of RON Cash and cash equivalents Deposits (deposits, treasury bills and government bonds) Financing for network construction related to concession agreements finance lease net statement of financial position exposure 31 December 2014 31 December 2013 eur eur 10,138 136,704 (250,550) (294) (104,002) 136,173 - (272,411) (788) (137,026) The following significant exchange rates have been applied during the year: rON 1 EUr average rate year-end spot rate 2014 4.4446 2013 4.4190 2014 4.4821 2013 4.4847 annual report2014131 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) Sensitivity analysis A reasonably possible strengthening (weakening) of the EUr against rON at 31 December would have affected the measurement of financial instruments denominated in a foreign currency and profit before Effect 31 December 2014 EUr (5% movement) 31 December 2013 EUr (5% movement) 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. Profit before tax Strengthening Weakening (5,200) (6,851) 5,200 6,851 Interest rate risk The Group’s policy is tomainly use supplier credit for financing its capital investments. The Group does not have significant long-term bank loans. Exposure to interest rate risk The interest rate profile of the Group’s interest-bearing financial instruments is as follows: 31 December 2014 31 December 2013 fixed-rate instruments Financial assets Bank accounts (cash and cash equivalent) Treasury bills and government bonds (cash and cash equivalent) Deposits, treasury bills and government bonds Financial liabilities Financing for network construction related to concession agreements finance lease Variable-rate instruments financial liabilities Overdrafts 1,352,487 199,500 1,220,521 (250,550) (294) 2,521,664 (48,132) (48,132) 541,891 - - (272,411) (788) 268,692 (79,684) (79,684) fair value sensitivity analysis for fixed-rate instruments Cash flow sensitivity analysis for variable-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. 31 December 2014 Variable-rate instruments 31 December 2013 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 50 bp increase 50 bp decrease (240) (399) 240 399 annual report2014 132 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) 32 related parties (a) maIn ShaREhOlDERS As at 31 December 2014, the main shareholder of Electrica SA is the romanian State, represented by the Ministry of Energy, Small and Medium-sized Enterprises and Business Environment(48.78%), after the ownership dilution following an initial public offer. The next large shareholder is the European Bank for Reconstruction and Development with 8.66%. (B) managEmEnT anD aDmInISTRa TORS’ COmPEnS aTIOn management compensation 4,030 3,556 Compensations granted to the members of the Board of Directors and representatives in the General Meeting of Shareholders were as follows: 2014 2013 Members of Board of Directors Representatives in the General Meeting of Shareholders Total 2014 2013 3,093 115 3,208 2,861 116 2,977 No loans were granted to managers or administrators in 2014 and 2013. (C) TRanS aCTIOnS WITh aSSOCIaTES (i) Balances receivables and payables from/ to associates as at 31 December 2013 Receivables from associates are as follows: 31 December 2013 Enel Distributie Muntenia Enel Energie Muntenia Enel Distributie Banat Enel Distributie Dobrogea Enel Energie E.On Moldova Distributie Total Trade receivables Bad debt allowance Total receivables 17,631 496 821 773 912 5,537 26,170 - - - - - (3,959) (3,959) 17,631 496 821 773 912 1,578 22,211 Trade receivables from associates refer mainly to maintenance, repairs and other services rendered. Payables to associates are as follows: Enel Distributie Muntenia Enel Energie Muntenia Enel Distributie Banat Enel Distributie Dobrogea Enel Energie E.On Moldova Distributie Electrica Soluziona Total 31 December 2013 1,928 51 3,075 1,012 451 2,809 964 10,290 annual report2014133 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) (ii) Transactions with associates for 2013 Sales to: Enel Distributie Muntenia Enel Energie Muntenia Enel Distributie Banat Enel Distributie Dobrogea Enel Energie E.On Moldova Distributie Total Purchases from: Enel Distributie Muntenia Enel Energie Muntenia Enel Distributie Banat Enel Distributie Dobrogea Enel Energie E.On Moldova Distributie Electrica Soluziona Total Sales of electricity and electricity distribution services maintenance and repairs and other services 2013 2013 48,302 - 5,243 3,600 6 10,136 67,287 2013 - 2,741 2 - 3,299 4 6,046 8,388 655 6,351 5,126 847 9,411 4,116 34,894 Purchases from associates refer mainly to electricity distribution services. Purchases from Electrica Soluziona represent maintenance of the customer management system. (D) TRanS aCTIOnS WITh COmPanIES In WhICh ThE STaTE haS COnTROl OR SIgnIfICanT influence The Group has transactions with companies in which the state has control or significant influencein the ordinary course of its business, related mainly to the acquisition of electricity, transmission and system services and sale of electricity. Significant purchases and balances are mainly with energy suppliers, as follows: Supplier Nuclearelectrica Transelectrica Complexul Energetic Oltenia Hidroelectrica OPCOM Electrocentrale Bucuresti Complexul Energetic Hunedoara SNGN rOMGAZ CN Posta romana SA CET Govora Electrocentrale Oradea Electrocentrale Galati Altii Total Purchases (without VaT) Balance (including VaT) 2014 2013 31 December 2014 31 December 2013 391,517 504,776 2,892 553,509 391,742 4,565 - 19,296 7,442 - 618 2,495 30,676 563,884 444,903 388,039 379,811 315,146 143,657 95,677 126,872 30,960 24,849 15,923 5,351 8,835 1,909,528 2,543,907 35,619 156,759 6,000 55,065 2,449 1 - - 324 - - - 5,540 261,757 18,608 182,354 27,050 10,381 140 - 3,283 - 5,511 - 85 426 - 247,838 annual report2014134 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) The Group also makes sales to companies in which the state has control or significant influence representing electricity supplied, of which the most important transactions are the following: Client Cfr Electrificare CFR SNGN rOMGAZ OPCOM Societatea Comerciala "Cupru Min"- S.A. Abrud Transelectrica CN romarm Electrocentrale Oradea CN remin SA C.N.C.A.f. MINVEST S.A. Oltchim SNTGN Transgaz Medias Hidroelectrica Baita SA Enel Distributie Muntenia Altii Total Client Oltchim Cfr SNGN rOMGAZ OPCOM Societatea Comerciala "Cupru Min"- S.A. Abrud Transelectrica Electrocentrale Oradea CN romarm Societatea Nationala a Sarii CN remin SA C.N.C.A.f. MINVEST S.A. Altii Total Sales (without VaT) Balance, gross (including VaT) allowance (including VaT) Balance, net 2014 126,868 4,328 23,032 13,722 31,399 17,167 9,412 1,991 349 - - 2,668 3,996 2,143 33,918 13,359 31 December 2014 1,367 27,681 1,544 2,374 24,122 2,080 366 341 71,192 78,735 - (19,711) - - (24,122) - - - (71,192) (78,735) 715,277 (715,277) 110 306 6,366 14,814 4,737 - - - - (75) 284,352 951,412 (909,112) 1,367 7,970 1,544 2,374 - 2,080 366 341 - - - 110 306 6,366 14,814 4,662 42,300 Sales (without VaT) Balance, gross (including VaT) allowance (including VaT) Balance, net 2013 467 162,963 78,785 54,223 33,100 18,264 5,208 7,899 5,582 - - 12,008 31 December 2013 715,277 240,632 6,795 142 (715,277) - - - 36,122 (36,122) 2,281 1,180 485 - 71,151 78,735 10,455 - - - - (71,151) (78,735) (7,742) 378,499 1,163,255 (909,027) - 240,632 6,795 142 - 2,281 1,180 485 - - - 2,713 254,228 annual report2014135 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) 33 suBsidiaries in financial distress In 2013 the Company approved the liquidation of ServiciiEnergetice Moldova, ServiciiEnergetice Banat and Servicii Energetice Dobrogea. Servicii Energetice Banat entered in bankruptcy in November 2014 and consequently the Company discontinued consolidation at that date as it no longer has control over it.The individual assets and liabilities at that datewere as follows: Carrying amount Property, plant and equipment Trade receivables Cash and cash equivalents Total assets Trade payables Other payables Employee benefits Provisions Deferred tax liabilities Total liabilities gain on loss of control 44,908 484 312 45,704 9,654 28,524 31,460 2,784 5,631 78,053 32,349 In January 2014 the Board of Directors of ServiciiEnergeticeOltenia and in October 2014, the Board of Directors of Servicii Energetice Muntenia decided the commencement of the insolvency procedure with a view to reorganization. The insolvency processes were initiated in 2014. Due to the above conditions that indicated the existence of significant uncertainties that cast significant doubt on the ability of these subsidiaries to continue to operate as going concerns, the Group has recognised the carrying amounts of the assets and liabilities of these subsidiaries on an alternate basis as at 31 December 2013 (for Servicii Energetice Moldova SA, Servicii Energetice Dobrogea SA, Servicii Energetice Banat and Servicii Energetice Oltenia SA) and 31 December 2014 (for Servicii Energetice Moldova SA, Servicii Energetice Dobrogea SA, Servicii Energetice Oltenia SA, and Servicii Energetice Muntenia). As at 31 December 2013 and 31 December 2014 the carrying amount of the assets and liabilities of these companies, included in the consolidated financial statements are as follows: 31 December 2014 Property, plant and equipment Trade receivables Cash and cash equivalents Total assets Trade payables Payables to the State budget Social security and other salary taxes Provisions, employee benefits and deferred taxes Servicii Energetice moldova Servicii Energetice Dobrogea Servicii Energetice muntenia Servicii Energetice Oltenia Total 40,418 811 1,971 43,200 (2,900) (47,735) (38,192) (26,387) 3,435 1,313 2,863 7,611 (2,098) (22,006) (17,130) (5,228) 109,180 16,894 291 126,365 (5,976) (1,887) (2,471) (27,762) (38,096) 35,006 3,729 1,095 39,830 (2,865) (4,297) (6,120) (13,914) 188.039 22.747 6.220 217.006 (13.839) (75.925) (63.913) (73.291) (27,196) (226.968) Total liabilities (115,214) (46,462) annual report2014136 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) 31 December 2013 Property, plant and equipment Trade receivables Cash and cash equivalents Total assets Trade payables Payables to the State budget Social security and other salary taxes Provisions, employee benefits and deferred taxes Servicii Energetice moldova Servicii Energetice Dobrogea Servicii Energetice Banat Servicii Energetice Oltenia Total 40,492 1,991 195 42,678 (4,361) (38,161) (24,960) (9,512) 15,764 3,151 226 19,141 (1,682) (20,691) (14,560) (4,191) 54,795 2,535 198 57,528 (7,358) (27,257) (23,864) 36,633 4,795 299 41,727 (2,452) (2,541) (3,035) (9,536) (13,366) 147,684 12,472 918 161,074 (15,853) (88,650) (66,419) (36,605) Total liabilities (76,994) (41,124) (68,015) (21,394) (207,527) The Group has not classified the assets and liabilities of these subsidiaries as held for sale as at 31 December 2014, as the assets are not available for immediate sale in their present condition, the assets or disposal groups were not actively marketed for sale, the Group is not committed to a plan to sell the assets or disposal groups, and it has not initiated an active programme to locate a buyer and complete the disposal plan. Consequently, the Group has not presented these subsidiaries as discontinued operations in the income statement for the year ended 31 December 2014. Assumptions used for adjusting the carrying amount of assets and liabilities of subsidiaries under financial distress. The carrying amount of assets and liabilities were recognised on a liquidation basis as at the reporting date when significant doubt on the ability of each 34 commitments (a) lITIgaTIOn anD ClaImS The Group is involved in various litigations; the most significant are the followings: n In 2012, the Group was sued by Orange Media, claiming the payment of rON 18,819 thousand representing damages requested by the claimant as a result of the cancelation of a public acquisition contract by the Group. By sentence no. 4890/13.06.2013 issued by Bucharest Court, Orange Media’s claim was dismissed. By sentence no. 573/24.02.2014 the Bucharest Court of Appeal upheld the appeal, voided the sentence and referred the case back to Bucharest Court. By sentence no. 5200/30.10.2014 issued by Bucharest Court, the claim was dismissed again. An appeal against this sentence was made by Orange Media. The next term is set forMarch 2015. The Group expects a favourable outcome for this case. subsidiary to continue as going concern existed. Property, plant and equipment (PP&E). land and buildings were valued under a forced sale assumption, where the Group recognized impairment adjustments to carrying amounts based on market experience for forced sale transactions. The impairment losses recognized in 2014 were rON 60 million, of which rON 26 million decreased the revaluation reserve and RON 34 million was recognised in profit or loss. Provisions, employee benefits and payables to the State budget. The Group recognised provisions or liabilities for the obligations as at 31 December 2014 and 2013. In addition, all non-current liabilities, if any, were reclassified as current liabilities. n The Group was sued by Termoelectrica, claiming the payment of rON 25,047 thousand representing penalties related to certain invoices,for the period 1 April 2007 – 31 March 2008. In the first sentence the claim was dismissed. following the appeal this decision was overruled. The Group expects a favourable outcome for this case. n During 2014, one company from the Group was subject to controls performed by ANAf. As at the date of the financial statements, ANAF report was not finalised, but the subsidiary received only minutes for its branches whereby the amount of possible additional tax liabilities claimed by ANAf are approx. rON 5.8 million (late payment and interest were not calculated). The subsidiary will contest these findings and considers likely a favourable result. annual report2014137 NOTes TO THe CONsOLiDATeD fiNANCiAL sTATeMeNTs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in THOUSAND RON, if not otherwise stated) (B) fISCal EnVIROnmEnT Tax audits are frequent in Romania, consisting of detailed verifications of the accounting records of tax payers. Such audits sometimes take place after months, even years, from the date liabilities are established. Consequently, companies may be found liable for significant taxes and fines. Moreover, tax legislation is subject to frequent changes and the authorities demonstrate inconsistency in interpretation of the law. Income tax returns may be subject to revision and corrections by tax authorities, generally for a five year period after they are completed. The management of the Group believes that adequate provisions were recorded for all significant tax obligations. 35 commitments (a) COnTRa CTUal COmmITmEnTS The Group has the following contractual commitments as at 31 December 2014: Purchase of electricity Purchase of property, plant and equipment and intangible assets amount 781,588 214,885 996,473 (B) OPERaTIng lE aSES The main operating leases refer to vehicles and equipment leased by ElectricaServ, as follows: Supplier Operational Autoleasing SRL rCI finantare romania SA Electrical Business Center Srl Energopetroleum Top Service Srl Total Contractual amount 60,241 1,569 12,862 6,244 80,916 The future minimum lease payments related to the operating lease contracts mentioned above are as follows: 31 December 2014 31 December 2013 less than 1 year Between 1 and 5 year Total 18,094 52,484 70,578 (C) InVESTmEnT PROgRam The investment program approved for the year 2015is as follows: Distribution activity Supply activity Maintenance activity Other/ shared Total 8,577 23,257 31,834 595,000 19,731 14,949 44,433 674,113 2015 The amounts actually incurred may differ from the ones planned. (D) gUaRanTEES anD PlEDgES At 31 December 2014 and 2013, the Group has guarantees on its bank accounts opened at ING and BrD for the overdrafts contracted (please see Note 21). At 31 December 2014 the Group has outstanding bank letters of guarantee of RON 180,127 thousand (2013: rON 90,078 thousand) issued in favour of its suppliers. In 2012, ANAF instituted pledges on land and buildings of ElectricaServin relation with outstanding taxes and contributions. As at 31 December 2014 the pledges amount to RON 73 million (2013: RON 77 million). annual report2014138 iNDePeNDeNT AuDiTOrs’ rePOrT fOr CONsOLiDATeD fiNANCiAL sTATeMeNTs fOr THe yeAr eNDeD 31 DeCeMBer 2014 ABCD KPMG Audit SRL Victoria Business Park DN1, Soseaua Bucuresti-Ploiesti nr. 69-71 Sector 1 Tel: Fax: +40 (21) 201 22 22 +40 (372) 377 800 +40 (21) 201 22 11 +40 (372) 377 700 www.kpmg.ro P.O. Box 18-191 Bucharest 013685 Romania Independent Auditors’ Report (free translation1) To the shareholders of Electrica S.A. Report on the Consolidated Financial Statements 1 We have audited the accompanying consolidated financial statements of Electrica S.A. (“the Company”) and its subsidiaries (together “the Group”), which comprise the consolidated statement of financial position as at 31 December 2014, the consolidated statements of income, profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements 2 Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as endorsed by the European Union, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility 3 Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the standards on auditing as adopted by the Romanian Chamber of Financial Auditors. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. 4 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Group’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 1 TRANSLATOR’S EXPLANATORY NOTE: This translation of the auditors’ report is provided as a free translation from Romanian which is the official and binding version. © 2015 KPMG Audit SRL, a Romanian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. PDC no. 15632 Fiscal registration code RO12997279 Trade Registry no.J40/4439/2000 Share Capital 2,000 RON annual report2014 139 iNDePeNDeNT AuDiTOrs’ rePOrT fOr CONsOLiDATeD fiNANCiAL sTATeMeNTs fOr THe yeAr eNDeD 31 DeCeMBer 2014 ABCD 5 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion. Basis for Qualified Opinion 6 Our audit opinion on the consolidated financial statements as at and for the year ended 31 December 2013 was modified because we did not obtain sufficient and appropriate audit evidence in relation with the accounting treatment of the Company’s investments in other entities classified as assets held for distribution as at that date, as described in Note 24 to the accompanying consolidated financial statements. The Company disposed of these assets in 2014. Our opinion on the current year’s consolidated financial statements is also modified because of the possible effects of this matter on the corresponding figures for assets held for distribution, retained earnings and reserves as at 31 December 2013, share of profit or loss of equity-accounted investees, profit or loss and other comprehensive income for the year ended 31 December 2013. Qualified Opinion 7 In our opinion, except for the possible effects on the corresponding figures as at and for the year ended 31 December 2013 of the matter described in paragraph 6, the consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2014, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as endorsed by the European Union. Emphasis of matter 8 Without further qualifying our opinion, we draw attention to Notes 4 and 7 to the accompanying consolidated financial statements, which describe the fact that the Group elected to change its accounting policy for the service concession agreements and made retrospective adjustments to the comparative information in the consolidated accompanying financial statements. Consequently, the comparative information in the accompanying consolidated financial statements has been restated. Other Matter 9 This independent auditors’ report is made solely to the Company’s shareholders, as a body. Our audit work has been undertaken so that we might state to the Company’s shareholders those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s shareholders, as a body, for our audit work, for the report on the consolidated financial statements and the report on conformity, or for the opinion we have formed. annual report2014140 iNDePeNDeNT AuDiTOrs’ rePOrT fOr CONsOLiDATeD fiNANCiAL sTATeMeNTs fOr THe yeAr eNDeD 31 DeCeMBer 2014 ABCD Report on conformity of the consolidated Administrators’ Report with the consolidated financial statements ABCD In accordance with the Order of the Minister of Public Finance no. 1286/2012 and related amendments, article no. 30 of accounting regulations in accordance with International Financial Reporting Standards ABCD applicable to companies whose securities are traded on a regulated market, we have read the consolidated Administrators’ Report attached to the consolidated financial statements. The consolidated Raport asupra conformitatii raportului consolidat al administratorilor cu situatiile financiare Administrators’ Report is not a part of the consolidated financial statements. In the consolidated consolidate Administrators’ Report we have not identified any financial information which is not in accordance, in Raport asupra conformitatii raportului consolidat al administratorilor cu situatiile financiare all material respects, with the information presented in the accompanying consolidated financial consolidate In concordanta cu Ordinul Ministrului Finantelor Publice nr. 1286/2012 cu modificarile ulterioare, statements. articolul 30 din Reglementarile contabile conforme cu Standardele Internationale de Raportare In concordanta cu Ordinul Ministrului Finantelor Publice nr. 1286/2012 cu modificarile ulterioare, Financiara aplicabile societatilor comerciale ale caror valori mobiliare sunt admise la tranzactionare pe articolul 30 din Reglementarile contabile conforme cu Standardele Internationale de Raportare o piata reglementata, noi am citit raportul consolidat al administratorilor anexat situatiilor financiare Financiara aplicabile societatilor comerciale ale caror valori mobiliare sunt admise la tranzactionare pe consolidate. Raportul consolidat al administratorilor nu face parte din situatiile financiare consolidate. o piata reglementata, noi am citit raportul consolidat al administratorilor anexat situatiilor financiare In raportul consolidat al administratorilor noi nu am identificat informatii financiare care sa fie in mod consolidate. Raportul consolidat al administratorilor nu face parte din situatiile financiare consolidate. semnificativ neconcordante cu informatiile prezentate in situatiile financiare consolidate anexate. For and on behalf of KPMG Audit SRL: In raportul consolidat al administratorilor noi nu am identificat informatii financiare care sa fie in mod semnificativ neconcordante cu informatiile prezentate in situatiile financiare consolidate anexate. Mikael Olsson Pentru si in numele KPMG Audit SRL: Refer to the original signed Romanian version KPMG Audit SRL registered with the Chamber of Financial Pentru si in numele KPMG Audit SRL: Auditors of Romania under no 662/2001 Mikael Olsson registered with the Chamber of Financial Auditors of Romania under no 9/2001 KPMG Audit SRL Bucharest, 26 March 2015 Mikael Olsson KPMG Audit SRL inregistrat la Camera Auditorilor Financiari din Romania cu numarul 662/2001 inregistrat la Camera Auditorilor Financiari Bucuresti, 26 martie 2015 din Romania cu numarul 662/2001 inregistrat la Camera Auditorilor Financiari din Romania cu numarul 9/2001 inregistrat la Camera Auditorilor Financiari din Romania cu numarul 9/2001 Bucuresti, 26 martie 2015 annual report2014141 2014 director’s REPORT (InDIVIDUal) (based on the audited individual financial statements prepared in accordance with IfRS) REgaRDIng ThE ECOnOmIC-fInanCIal aCTIVITy Of SDfEE ElECTRICa Sa according to art. 227 from law 297/2004 and to annex no. 32 to CnVm Reg. no. 1/2006, for the year ended December 31, 2014 2014 DIRECTOR’S REPORT (INDIVIDUAL)annual report2014142 identification details on report and issuer Report date: March 20, 2015 name of the Issuer: SDfEE ElECTrICA SA headquarter: no. 9 Grigore Alexandrescu Street, 1st District, Bucharest, romania Telephone/fax number: +4021.208.5002; +4021.208.5004 fiscal Code: rO13267221 Trade Registry no: J40/7425/2000 Share capital: rON 3,459,399,290 subscribed and paid (see Note 1) main caracteristic of issued shares: 345,939,929 ordinary shares of 10 rON nominal value, issued in dematerialized form and freely transferable, nominative, tradable and fully paid. Regulated market where the issued securities are traded: As at December 31, 2014 the Company shares are listed on the Bucharest Stock Exchange and Global Depositary receipts are listed on the london Stock Exchange. (see Note 2) note 1 Pursuant to the registration certificate no. 2340001 and the resolution no. 78473/ 02.07.2014 issued by the National Trade Registry Office, the share capital was increased by 1,771,887,440 RON, following the successful completion of the process of underwriting new shares issued by the Company in the initial public offering. As at the date of the current report the subscribed and paid up capital of SC Electrica SA is 3,459,399,290 rON. note 2 Following the completion of initial public offering, the Company’s securities were admitted to trading on the Bucharest Stock Exchange (BSE) under the trading symbol El and on the london Stock Exchange (lSE) under the trading symbol ElSA on July 3, 2014. 2014 DIRECTOR’S REPORT (INDIVIDUAL)annual report2014143 highlights SDFEE Electrica SA has the unique registration number 13267221, registered at the Trade registry under no. J40/7425/2000, with core business “Consulting and business management activities “ - CAEN code 7022, has as it’s main goal coordinating and effective control of stakes in subsidiaries that perform distribution and supply of electricity as well as energy services activities. A summary of the main indicators is described below: n In the period ended 31 December 2014 the revenues from dividends received from its subsidiaries increased by rON 148.1 million as compared to 2013; n The financial result increased in 2014 to RON 286.9, by 192.9 million as compared to 2013, mainly from the sale of shares held in in E.On Moldova Distributie and E.On Energie Romania to E.On following the exercise of call options by E.On n In the period ended 31 December 2014 the net profit reached RON 269 million, an 632% increase or rON 233 million as compared to 2013. organiZational structure The Company is a holding company for the Group, which comprises in its distribution segment three subsidiaries for electricity distribution: Electrica Distributie Muntenia Nord, Electrica Distributie Transilvania Nord, Electrica Distributie Transilvania Sud, and one for maintenance and repairs, Electrica Serv, and one subsidiary, Electrica furnizare, in its supply segment. The Group also includes four service entities owned by Electrica, i.e. Servicii Energetice Muntenia, Servicii The Company’s subsidiaries are the following: Energetice Dobrogea, Servicii Energetice Moldova and Servicii Energetice Oltenia, and until November 2014 included Servicii Energetice Banat also. Out of these Servicii Energetice Oltenia and Servicii Energetice Muntenia are under insolvency proceedings, Servicii Energetice Dobrogea and Servicii Energetice Moldova are currently subject to dissolution and liquidation and Servicii Energetice Banat is in bankruptcy. filiala activitatea Electrica Distributie Muntenia Nord SA Electricity distribution in geographical area of Muntenia Nord Electrica Distributie Transilvania Nord SA Electrica Distributie Transilvania Sud SA Electricity distribution in geographical area of Transilvania Nord Electricity distribution in geographical area of Transilvania Sud Cod unic de inregistrare Sediu social % participatie la 31 decembrie 2014 % participatie la 31 decembrie 2013 14506181 Ploiesti 78.0000021% 78.0000021% 14476722 Cluj-Napoca 77.99999% 77.99999% 14493260 Brasov 78.0000019% 78.0000019% Electrica furnizare SA Electrica Serv SA Servicii Energetice Muntenia SA Servicii Energetice Moldova SA Servicii Energetice Banat SA* Electricity Supply 28909028 Bucuresti 77.99997% 77.99997% Services in the energy sector (maintenance, repairs, construction) Services in the energy sector (maintenance, repairs, construction) Services in the energy sector (maintenance, repairs, construction) Services in the energy sector (maintenance, repairs, construction) 17329505 Bucuresti 100% 100% 29384120 Bucuresti 100% 100% 29386768 Bacau 100% 100% 29388211 Timisoara 100% 100% Servicii Energetice Dobrogea SA Services in the energy sector (maintenance, repairs, construction) 29388378 Constanta 100% 100% Servicii Energetice Oltenia SA Services in the energy sector (maintenance, repairs, construction) 29389861 Craiova 100% 100% * Electrica SA lost the control of Servicii Energetice Banat starting with November 2014 2014 DIRECTOR’S REPORT (INDIVIDUAL)annual report2014144 shareholder structure The General Meeting of Shareholders (GMS) is the main corporate governance body of Electrica, 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 Electrica’s Articles of Association Until July 2014, the Romanian State, acting through the Ministry of Energy, Small and Medium Enterprises and Business Environment, was the sole shareholder of Electrica. Starting 4 July 2014 the Company’s shares are listed on Bucharest Stock Exchange, and the GDrs are listed on london Stock Exchange. The latest available information regarding the shareholder structure has been provided by Depozitarul Central on 21 November 2014 and is presented in the table below: Shareholder Shares Percent of share capital Ministry of Energy, Small and Medium Enterprises and Business Environment, Bucharest, romania EUrOPEAN BANK fOr rECONSTrUCTION AND DEVElOPMENT, lONDON, UK BNy MEllON DrS, NEW yOrK, USA legal persons Individual persons total Source: Central Depository, Electrica S.A. 168,751,185 29,944,090 27,442,180 100,506,060 19,296,414 345,939,929 48.7805 % 8.6559 % 7.9326 % 29.0530 % 5.5780 % 100 % Following the stabilization process after the IPO, Electrica SA owns 6,890,593 of its own shares, representing 1.9918% of the total share capital. These shares do not entitle Electrica to voting rights, nor dividends. Board of directors structure The board of directors consists of five non-executive directors appointed by the general meeting of shareholders. One of the Directors was appointed on the proposal of the romanian state, represented by the Ministry of Energy, Small and Medium Enterprises and Business Environment, three were appointed on the proposal of the private shareholders and one was named both on the proposal of the romanian state and private shareholders. Four of the five directors meet the criteria for independence provided by the Article of Association of Electrica. The Board is entrusted with fulfilling all the necessary and useful acts for performing the Company’s business object and for supervising the management’s activity, save for the ones assigned to the General Meeting of Shareholders. The composition, organisation, duties and responsibilities of the Board of Directors are set out in the Articles of Association and in the Charter of the Board of Directors. The current members of the Board of Directors were elected for four years, through the cumulative voting method, by the General Meeting of Shareholders, during the first meeting after the IPO, on 22 September 2014. The composition of the Board of Directors is the following: n Mr. Victor Cionga – non-executive director, elected as Chairman of the Board of Directors until January 2016 n Ms. Arielle Malard de Rothschild – non-executive director n Mr. Michael Boersma – non-executive director n Mr. Cristian Busu – non-executive director n Mr. Victor Vlad Grigorescu – non-executive director During the first Board of Directors meeting on 14 October 2014, the Board has established three consultative committees, with the following composition: a) The nomination and Remuneration Committee n Ms. Arielle Malard de Rothschild – Chair of the committee n Mr. Michael Boersma n Mr. Cristian Busu b) The audit Committee n Mr. Cristian Busu – Chair of the committee n Mr. Victor Vlad Grigorescu n Ms. Arielle Malard de rothschild 2014 DIRECTOR’S REPORT (INDIVIDUAL)annual report2014145 c) The Strategy, Restructuring and Corporate governance Committee n Mr. Michael Boersma – Chair of the committee n Mr. Victor Vlad Grigorescu n Mr. Victor Cionga The members of the committees are elected for a one- year term. The organisation, duties and responsibilities of each committee are laid down in Electrica’s Articles of Association, respectively in the charters of each committee. The Board of Directors delegates Electrica’s management to one or more managers, appointing one of them as general manager. The duties and responsibilities of the general manager are set out in Electrica’s Articles of Association. According to our information, there is no agreement, understanding or family relationship between the Company’s directors and another person that contributed to their appointment as managers. Details regarding the bios of the Board of Directors members can be accessed on the company’s website. The table below comprises the number of Electrica S.A. shares held by the Company’s directors as of March 2015: no. name 1. Mr. Victor Cionga 2. Ms. Arielle Malard de rothschild 3. Mr. Cristian Busu 4. Mr. Michael Boersma 5. Mr. Victor Vlad Grigorescu number of shares Stake held (as % of the share capital) 5.000 0.00144534% - - - - - - - - According to our information, the persons mentioned aboved, have not been involved in litigations or administrative proceedings related to their activity in the Company in the last 5 years, nor in proceedings related to their capacity of fulfilling the duties in the Company. Until September 22, 2014 the Board of Directors members were: n Dl. Marius Eugen Untescu – non-executive administrator, president of the board of directors n Dl. Niculae Plesa – non-executive administrator n Dl. Constantin Dinescu – non-executive administrator n Dl. Rares Ion Popescu – non-executive administrator n Dl. Ioan Rosca – non-executive administrator, general manager executiVe management IOan ROSCa – gEnERal managER (CEO) Pursuant to the decision of the Board of Directors no. 24 dated 5th July 2013, the Board of Directors has appointed Mr. Ioan Rosca to the position of general manager of the Company and delegated him responsibilities and duties related to internal management and representation. The table below shows the company’s managers who do not have delegated powers from the Board of Directors: name Electrica headquarters Position Department Angelescu ramiro robert Eduard Deputy General Manager Dumbrava Ioan Petre Marin Geanta Marian Marin Emilia - Elena Manager Deputy Manager Deputy Manager Manager Operations Operations Operations Economic Popescu Borislavschi Alexandra romana Augusta Manager Stan Corneliu Crisan Mariana Deputy Manager Manager Pindichi Valentin Cosmin Deputy Manager Corporate finance and Governance Corporate finance and Governance Human resources, Control and Communication Human resources, Control and Communication 2014 DIRECTOR’S REPORT (INDIVIDUAL)annual report2014146 According to the Articles of Incorporation, the Board of Directors appoints and revokes the General Manager and the other managers with mandate agreements –art.18, letter A, paragraph (f) and (k). The General Manager performs his activity according to the provisions of the mandate agreement concluded with the Company. The Managers with managing functions are employees of the company, having an individual labor agreement and they are appointed and revoked by the General Manager. According to our information, there is no agreement, understanding or family relationship between the Company’s managers and another person that contributed to their appointment as managers. The table below shows the number of shares held by the Company’s managers as of March, 2015: Item no. name 1. 2. 3. Ioan rosca Angelescu ramiro robert Eduard Geanta Marian number of shares 25,000 1,000 1,000 Share in the share capital (%) 0.00722669% 0.00028907% 0.00028907% According to information at hand the persons mentioned above have not been involved in any litigations or administrative proceedings related to their activity within the Company in the last 5 years and their capacity to fulfil their work-related attributes. financial reporting The financial statements for the year ended 31 December 2014 represent the first set of individual financial statements prepared in accordance with International Financial Reporting Standards, a mandatory provision according to the Minister of finance no. 881/2012 applicable to companies whose securities are admitted to trading on a regulated market. Balance sheet highlights SElECTED fInanCIal InfORmaTIOn fROm ThE COmPany BalanCE ShEET (ThOUS anDS ROn) assets non-current assets Property, plant and equipment Intangible assets Investments in subsidiaries Deferred tax assets Total non-current assets Current assets Trade receivables Other receivables Cash and cash equivalents Deposits, treasury bills and government bonds Inventories Prepayments Income tax receivable Assets held for distribution Total current assets 31-Dec-14 31-Dec-13 Var. 291,259 678 1,427,361 7,206 1,726,502 302,373 798 1,405,190 13,932 1,722,293 87,696 15,391 1,075,620 1,038,420 166 337 23,134 - 2,240,763 95,660 32,500 144,126 - 135 328 22,795 507,266 802,810 -4% -15% 2% -48% 0% -8% -53% 646% - 23% 3% 1% - 179% Total assets 3,967,265 2,525,104 -57% 2014 DIRECTOR’S REPORT (INDIVIDUAL)annual report2014147 equity and liaBilities Equity Share capital out of which: Subscribed and paid in share capital Inflation adjustment to share capital Share premium Treasury shares reserve Pre-paid capital contributions in kind from shareholders Revaluation reserve legal reserves retained earnings Total equity liabilities non-current liabilities Employee benefits Other payables Total non-current liabilities Current liabilities Bank overdrafts Trade payables Other payables Deferred revenue Employee benefits Provisions Total current liabilities Total liabilities 31-Dec-14 31-Dec-13 Var. 3,814,242 3,459,399 354,843 103,049 (75,372) 3,277 829 127,897 (104,364) 2,509,306 2,078,399 430,907 - - 47,493 - 114,093 (317,249) 3,869,557 2,353,644 31-Dec-14 31-Dec-13 2,991 - 2,991 - 83,400 8,663 384 2,270 - 94,718 97,709 2,759 5,498 8,256 36,999 86,799 4,190 410 4,027 30,777 163,204 171,460 -52% 66% -18% - - -93% - 12% -67% 64% Var. 8% - -64% - -4% 107% -6% -44% - -42% -43% Total equity and liabilities 3,967,266 2,525,104 57% nOn-CURREnT aSSETS Electrica’s non-current assets increased by RON 4 million in the year ended 31 December, 2014 compared with the year ended 31 December, 2013 to rON 1,726 million from RON 1,722 million, respectively. Increase in non-current assets was generated by the shares conversion of the loan granted to Electrica trade receiVaBles Trade receivables decreased by rON 8 million at the end of 2014 as compared to yE 2013, to rON 88 million from RON 96 million, due to termination of cash and equiValents As at 31 December 2014 compared to 31 December 2013 cash and cash equivalents and deposits, treasury bills and government bonds increased by rON 1,970 million, to rON 2,114 million from rON 144 million Serv, to contribution in kind (land) to the Electrica Serv share capital, adjustments for the participations held by Electrica SA in Electrica Serv based on the revaluation report made by an independent valuator in view of estimating the recoverable amount of shares held in Electrica Serv. services and representation contracts concluded with its subsidiaries. at 31 December 2013 due to cashing related to the transfer of the ownership of the new shares isued by the company in July 2014. 2014 DIRECTOR’S REPORT (INDIVIDUAL)annual report2014 148 assets held for distriBution Based on the Extraordinary General Shareholders decision dated 20 March 2014 and the resolution of the Bucharest Court dated 10 April 2014, the Group recognised the spin-off of the Company’s shareholdings to a new company - „Societatea de Administrare a Participatiilor in Energie SA” - wholly owned by the Ministry of Energy, Small and Medium-sized Enterprises and Business Environment. The spin-off referred to share capital The issued share capital in nominal terms consists of 345,939,929 ordinary shares at 31 December 2014, with a nominal value of rON 10 per share. All shares rank equally with regard to the Company’s residual assets. The holders of ordinary shares are entitled to receive dividends as declared, and are entitled to one vote per share at meetings of the Company. On 25 february 2014 an increase of share capital of 188,264 ordinary shares was registered in the Trade registry. The shares were issued in respect of land contributed by the shareholder in previous periods. On 10 April 2014 Bucharest Court approved the spin-off by Electrica SA through transfer of part of its assets (investments held by Electrica SA in other entities) to a new company „Societatea de Administrare a Participatiilor in Energie SA”, owned by the Romanian State, represented by the Ministry of Economy – Department for Energy. Following this transaction, the share capital decreased by 43,123,780 ordinary shares. On 16 May 2014 an increase of share capital of diVidends Dividends for the year ended 31 December 2013, in amount of 22,475,225 rON, were declared on the basis of individual annual statutory financial statements. the transfer of the shares held by the Company in 10 entities (Enel Distributie Muntenia, Enel Energie Muntenia, Enel Distributie Banat, Enel Distributie Dobrogea, Enel Energie, E.On Moldova Distributie, E.On Energie, Electrica Soluziona, Hidro Tarnita and BrM). The investments included equity accounted investees and other investments and were classified as assets held for distribution as at 31 December 2013. 3,846,797 ordinary shares was registered in the Trade registry. The shares were issued in respect of land contributed by the shareholder in previous periods. In June 2014 the Company organised an IPO, which entailed to an offering of 142,007,744 shares and 8,795,250 GDRs, each GDR representing four shares. The subscriptions amounted to RON 1,556,095 thousand and USD 120,143,115. On 2 July 2014 the increase of share capital by 177,188,744 ordinary shares was recorded in the Trade register. Consequently, the Group recognised an increase of share capital of rON 1,771,887,440 and a share premium of RON 171,128,062. The transaction costs of rON 68,079,885 were deducted from the share premium. In July 2014 the Company purchased 5,206,593 ordinary shares and 421,000 Global Depositary receipts, equivalent to 1,684,000 shares. The total amount paid for acquiring the shares and Global Depositary receipts was rON 75,372,435. The dividends in respect of the year ended 31 December 2013 were approved by OGMS of the Company no. 29 on 28 May 2014 and were paid on 28 July 2014. 2014 DIRECTOR’S REPORT (INDIVIDUAL)annual report2014149 results of operations SElECTED fInanCIal InfORmaTIOn fROm ThE COmPany InCOmE STaTEmEnT (ThOUS anDS ROn) Indicator Revenues Other income Electricity purchased Employee benefits Depreciation and amortization Impairment of property, plant and equipment, net Impairment of investments in subsidiaries, net reversal of impairment / (Impairment) of trade and other receivables, net Other operating expenses, net of variation in provisions Operating loss Finance income: Dividends income Interest income finance costs Gain from disposals of shares held in other entities 2014 244,517 4,462 2013 282,988 15,357 (224,176) (227,939) (16,699) (13,252) - (4,675) (2,469) 1,460 (10,832) 257,583 238,432 19,151 (2,486) 31,809 (22,737) (9,378) (12,466) (48,398) 16,594 (49,962) (55,940) 95,987 90,291 5,696 (2,044) - Var. -14% -71% -2% -27% 41% - -90% - - -81% 168% 164% 236% 22% - net finance cost 286,907 93,942 205% Profit before tax Income tax expense Profit for the year 276,075 (6,586) 269,490 38,002 (1,182) 36,819 626% 457% 632% In 2014, Electrica posted revenues of rON 244 million as compared to rON 283 million in 2013. The rON 39 million decrease in 2014 as compared to 2013 is mainly due to termination of services and representation contracts concluded with its subsidiaries. The income structure is as follows: Th. ROn 2014 2013 Supply of electricity on the balancing market and day ahead market 230,731 232,817 Management and advisory services Revenue from service contracts in relation to Automatic Meter Reading System Total 9,051 4,735 45,436 4,735 244,517 282,988 other income Other income mainly include rental income and late payment penalties from customers. electricity purchased Electricity purchased include the cost of electricity purchased for settlements on the balancing market and the day ahead market. 2014 DIRECTOR’S REPORT (INDIVIDUAL)annual report2014150 Salaries and other employee benefits decreased by rON 6 million, to rON 17 million from rON 23 million in 2013, due to layoffs in the company’s reorganization and restructuring program. operational profit In 2014, the company recorded a operating loss decrease compared to 2013, from 56 million to 11 million, due to lower operating expenses. reVenues from the diVidend distriButed B y suBsidiaries The main part of Electrica’s income comes from dividends distributed by its subsidiaries. Income from dividends from subsidiaries in 2014 amount to rON 238 million compared to rON 90 million in 2013, their structure is as follows: fDEE Electrica muntenia nord Sa fDEE Electrica Transilvania nord Sa fDEE Electrica Transilvania Sud Sa ffEE Electrica furnizare Sa total mil. ROn 2014 82 41 45 70 238 2013 57 - - 33 90 interest reVenues In 2014, the company recorded an increase in interest revenue to rON 19 million from rON 6 million in 2013. The Company’s strategy was to place the IPO money through the Underwriter banks, member of the Syndicate, in risk-free titles and deposits, on short-term. The increasing of financial performance is due to interest income: RON 4,739,363 relating to investments in deposits and rON 9,866,661 related investments in treasury bills and government bonds, cash earned by the company in July 2014 following the transfer of property rights on new shares. The Company obtained so far in 2015, interest income related to investments in treasury bills and government bonds of rON 5,421,770 and rON 825.236 from deposits. 2014 DIRECTOR’S REPORT (INDIVIDUAL)annual report2014151 profit Before tax In 2014 the profit before tax increased by RON 238 million, to rON 276 million from rON 38 million in 2013, due to increasing of dividend revenues from its subsidiaries and operating expenses reduction. The profit before tax was impacted by an one-off transaction, respectively on 17 February 2014 the Company sold part of the shares held in E.On Moldova Distributie and E.On Energie Romania to E.On following the exercise of call options by E.On. E.On paid the exercise price of rON 140,920 thousand to the Company. Cash received from transaction with E.ON less the directly attributable costs were transferred to Societatea de Administrare a Participatiilor in Energie SA (rON 129 mill). income tax In 2014, income tax expense increased by rON 5.4 million to rON 6.6 million from rON 1.2 million in 2013. The increase is mainly generated by its deferred tax component related to Oltchim following restatements. net profit for the period As a result of the factors discussed above, net profit in 2014 recorded a significant increase compared to 2013, to rON 269 million from rON 37 million. The company’s main objective is to maximize Electrica’s individual net profit, coordination and effective control of participations in subsidiaries, so as to ensure the possibility of fulfilling the intention of management, declared in the Prospectus, to distribute dividends in the amount representing 85% of consolidated net profit. cash flow In 2014 the profit before tax was RON 276 million compared to rON 38 million in 2013. The key adjustments in 2014 were: (i) adding depreciation and amortisation in the amount of RON 13 million, (ii) a net change in trade and other receivables of RON 31 million, (iii) deducting a change in trade and other payables of rON 14 million. The key adjustments in 2013 were: (i) adding depreciation and amortisation in the amount of rON 9 million, (ii) change in adjustments related to non-current assets depreciation, participations in its subsidiaries, trade and other receivables in amount of RON 44 million, (iii) deducting a change in trade and other payables of rON 53 million. Income tax and interest paid amounted to a total of rON 2.6 million. personnel The average number of employees decreased in 2014 as compared to 2013 by 49 employees, to 139 employees from 188 employees, as a result of the lay-offs in the company’s reorganization and restructuring program, while the actual staff number is constant 149. At 31 December 2014, approximately 93% of the Group’s employees are members of labour unions and their employment conditions are governed by a collective bargaining agreement that is renegotiated at least every two years and filed with the relevant labour authorities in romania. Electrica has not experienced any strike or other form of labour disturbances that have interfered with its operations, and management considers its relationship with employees to be good. In compliance with law No. 319/2006 on labour safety and health and its methodological norms the company has established a committee for labour safety and health. Electrica’s training programmes aim to upgrade the skills of the employees so they can adapt to broader tasks to better utilise its existing resources. Management believes that its emphasis on training and development helps its employees meet business challenges effectively. The Company has in place internal regulations that generally relate to general employment provisions, non-discrimination, labour safety and health, rights and obligations of the employer and of the employees, employee complaint procedures, rules on labour discipline, disciplinary sanctions and disciplinary infringements, rules regarding disciplinary procedure, the criteria and procedure for the professional evaluation of employees and final provisions. 2014 DIRECTOR’S REPORT (INDIVIDUAL)annual report2014152 risK management and internal c ontrol risk management and Internal Control Underlying legislation for implementing a risk management system as well as a system for internal control/management has been: n Order of the Ministry of Public finance no. 946/2005 regarding development of a internal control/management system with all subsequent ammendments; n Government Order no. 119/1999 regarding internal control and preventive financial control with all susbsequent ammendments. In addition, the risk management together with the internal control and management system at Electrica SA level takes place in accordance with internal procedures agreed. A major concern for the management is building awareness of employees regarding the importance of managing risk inside the organization and the necessity of direct involvement in unfolding the risk management process, as well as aligning best practices on national and international level by following legislation in place, standards and related norms. In June last year Executive management of Electrica SA started with classifying the risks for the Company in terms of probability of occurrence and impact on the Company. Five impact levels and five probability levels were identified, ranging from risks that are tolerable and risks that have zero tolerance and risks that have low probability and risks with high probability. One risk, which has to do with loss of intellectual capital, was quantified in the highest category, which means that urgent managerial control measures are needed. A further five risks were classified in the area of low tolerance, for which short term managerial control measures are required. Corrective actions have been taken for these six risk areas. During 2015 the risk management system will be further detailed, improved and discussed with the board. financial risK management The Company has exposure to the following risks arising from financial instruments: n credit risk n liquidity risk n market risk. (i) 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 Company’s receivables from customers, cash and cash equivalents, bank deposits and treasury bills and government bonds. The company has a high credit risk mainly with the state-owned companies. Until 2012, the Company had a credit risk concentration with Oltchim SA, which became insolvent. Currently, the Company considers that the credit risk exposure significantly decreased. Cash, bank deposits, treasury bills and government bonds are placed in financial institutions, which are considered to have minimal risk of default. The carrying amount of financial assets represents the maximum credit exposure. Trade receivables The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade receivables. Impairment The ageing of trade receivables was as follows: In RON Neither past due nor impaired Past due 1-90 days Past due 90-180 days Past due 180-360 days Past due 1-2 years Past due 2-3 years Past due more than 3 years Total 31 December 2014 31 December 2013 gross value Bad debt allowance gross value Bad debt allowance 83,382,090 743,587 498,036 3,072,053 - - - - 92,780,614 77,738 773,759 2,028,375 3,804,652 (3,804,652) 32,264,483 (32,264,483) 34,542,103 (34,542,103) 229,020,902 (229,020,902) 632,051,499 758,094,020 (632,051,499) (670,398,254) 406,643,388 763,589,259 (406,643,388) (667,928,773) 2014 DIRECTOR’S REPORT (INDIVIDUAL)annual report2014153 The allowance for impairment refers mainly to customer Oltchim SA. In RON Neither past due nor impaired Past due 1-90 days Past due 90-180 days Past due 180-360 days Total net trade receivables 31 December 2014 31 December 2013 83,382,090 92,780,614 743,587 498,036 3,072,053 87,695,766 77,738 773,759 2,028,375 95,660,486 (ii) liquidity risk liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company’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 Company aims to maintain the level of its cash and cash equivalents at an amount in excess of expected cash outflows on financial liabilities. The Company also monitors the level of expected cash inflows on trade receivables together with expected cash outflows on trade and other payables. Exposure to liquidity risk The following are the remaining contractual maturities of financial liabilities at the reporting date. The amounts are gross and undiscounted, and include estimated interest payments. In RON financial liabilities 31 December 2014 Trade payables Total Contractual cash flows Carrying amount Total less than 1 year 83,400,334 83,400,334 83,400,334 83,400,334 83,400,334 83,400,334 (iii) 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 Currency risk The Company 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 all entities belonging to the Company is the romanian leu (rON). market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. The currencies in which these transactions are primarily denominated are rON and EUr. The Company also has deposits and bank accounts denominated in foreign currency (EUr). The Company’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 Company’s exposure to currency risk is as follows: in thousands of RON Cash and cash equivalents Deposits (deposits, treasury bills and government bonds) Expunere neta la nivelul situatiei pozitiei financiare 31 December 2014 31 December 2013 eur 10,137,641 136,704,050 146,841,691 eur 136,172,767 - 136,172,767 2014 DIRECTOR’S REPORT (INDIVIDUAL)annual report2014154 The following significant exchange rates have been applied during the year: average rate year-end spot rate rON EUr 1 2014 4.4446 2013 4.4190 2014 4.4821 2013 4.4847 2011 4,4287 Sensitivity analysis A reasonably possible strengthening (weakening) 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, and respectively the equity 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. Effect 31 December 2014 EUr (5% movement) 31 December 2013 EUr (5% movement) Profit before tax Strengthening Weakening 7,342,085 (7,342,085) 6,808,638 (6,808,638) Interest rate risk The company does not have long-term bank loans. Exposure to interest rate risk The interest rate profile of the Company’s interest-bearing financial instruments is as follows: fixed-rate instruments Financial assets bank accounts (cash and cash equivalent) Deposits, treasury bills and government bonds Variable-rate instruments Financial liabilities Overdrafts Short-term bank loans 31 December 2014 31 December 2013 874,243,283 1,038,419,841 1,912,663,124 140,619,441 - 140,619,441 - - - (36,999,437) - (36,999,437) Fair value sensitivity analysis for fixed-rate instruments The Company 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. 2014 DIRECTOR’S REPORT (INDIVIDUAL)annual report2014 155 31 December 2014 Variable-rate instruments 31 December 2013 Variable-rate instruments Profit before tax 50 bp increase 50 bp decrease - - (184,997) 184,997 enVironmental aspects The company has implemented management system in relation to environmental and health and operational safety matters. The annual capital investment budget include expenditure for environmental matters. As at the date of this report, the company holds all material permits required for it to conduct its business, and the company’s business is conducted in compliance with all specific environmental regulations. Integrated Quality, Environment, Occupational Health and Safety management systems certified in accordance with ISO 9001:2008, ISO 14001:2014 and EN OHSAS 18001:2007 have been implemented by the company. r&d actiVity An important endeavour in promoting technological innovation constitutes the dissemination of improvement solutions for electricity networks related to smart grid concepts. As such, Electrica is organizing every year in November conferences with international attendance which have as an alternative theme smart grid solutions in one year and smart metering solutions in the next year. Best practices in the field for each investment category are presented. Moreover, we can emphazise the participation at international conferences organized by the World Energy Council, CIGRE and CIRED international conferences which aim at tackling technological innovation and promoting new technologies which improve operational efficiency. concluded contracts Contracts concluded during 2014 reported according to art. 225 of Law 297/2004: n SC Filiala de Intretinere si Servicii Energetice „Electrica Serv” SA – C54/28-02-2014 - Auto transport services - value: 2,996 th RON SA – C60/28-02-2014 – Management and advisory services - value: 953 th. RON n SC FDEE Electrica Distributie Transilvania Nord n SC FDEE Electrica Distributie Muntenia Nord S A – C59/28-02-2014 – Management and advisory services – value: 953 th. RON n SC FDEE Electrica Distributie Transilvania Sud SA – C61/28-02-2014 – Management and advisory services - value: 953 th. RON suBsequent eVents From 1 January 2015 until the date of this report, the company did not record subsequent events with significant impact on the financial situation such as new significant commitments or contingent liabilities (e.g. issuing significant guarantees or getting significant loans, etc), capital increases, significant Company’s shares transactions, controls from various state institutions, major acquisitions or disposals of assets, etc. 2014 DIRECTOR’S REPORT (INDIVIDUAL)annual report2014 156 Key factors, driVers and significant marKet trends affecting the results of electrica’s operations Directors distinguishes between key factors, drivers and significant market trends it cannot control and those that it can (albeit often only to a limited degree) control. Key factors, drivers and significant market trends that Directors cannot control include: (i) the cost of electricity purchased; (ii) macroeconomic trends in the romanian economy; (iii) demand for electricity; (iv) the general regulatory and legal framework under which the company operates, including ANrE’s policies; Key factors and drivers that Directors can at least partially control include the company’s capital expenditures and operating expenses. Key factors and directions that you can control Board of Directors at least partially, include the company’s capital investment and operating expenses. Directors believe that in the mid- to long-term the continued growth of Romania’s real GDP, and of the romanian economy generally, will have some positive impact on electricity consumption in Romania, which, in turn, will have a positive effect on Electrica’s business) and its results of its operations. In particular, Directors believe that as long as romanian economic growth continues to outpace that of the EU, per capita electricity consumption in romania is likely to continue to rise. Conversely, a significant slowdown in the growth of romania’s GDP and of the romanian economy in general could have some negative effect on energy consumption in romania and, in turn, on Electrica’s business and its results of operations. statements During the year ended 31 December 2014, DfEE ELECTRICA SA complied with all its financial obligation. Also, there are no factors of uncertainty that could affect the company’s liquidity. Attached hereto are the individual audited financial statements for the year ended on 31 December, 2014, prepared in accordance with the International Financial Reporting Standards, approved through the Board of Directors Decision no. 9 on 26 March 2015 Chairman of the Board of Directors, Victor CIOnga 2014 DIRECTOR’S REPORT (INDIVIDUAL)annual report2014157 iNDiViDuAL fiNANCiAL sTATeMeNTs As AT AND fOr THe yeAr eNDeD 31 DeCeMBer 2014 PREPARED IN ACCORDANCE WITH THE ORDER OF THE MINISTRY OF FINANCE NO.1286/2012, AS FURTHER AMENDED indiVidual financial statements for the year ended 31 December 2014 annual report2014158 iNDiViDuAL fiNANCiAL sTATeMeNTs As AT AND fOr THe yeAr eNDeD 31 DeCeMBer 2014 PREPARED IN ACCORDANCE WITH THE ORDER OF THE MINISTRY OF FINANCE NO.1286/2012, AS FURTHER AMENDED CONTENTS Individual statement of financial position ____________________________________________________ 160 Individual income statement ______________________________________________________________ 162 Individual statement of profit or loss and other comprehensive income ___________________________ 163 Individual statement of changes in equity ____________________________________________________ 164 Individual statement of cash-flows __________________________________________________________ 166 notes to the individual financial statements Basis of preparation 1 Reporting entity and general information ____________________________________________________ 168 2 Basis of accounting ______________________________________________________________________ 169 3 Functional and presentation currency ______________________________________________________ 1169 4 Use of judgements and estimates __________________________________________________________ 170 accounting policies 5 Basis of measurement ___________________________________________________________________ 170 6 Significant accounting policies _____________________________________________________________ 171 7 New standards and interpretations not yet addopted ___________________________________________ 177 Performace for the year 8 revenue ______________________________________________________________________________ 177 9 Other operating revenue and expenses ______________________________________________________ 177 10 Net finance income ____________________________________________________________________ 178 11 Earning per share ______________________________________________________________________ 178 Employee benefits 12 Short-term employee benefits ____________________________________________________________ 179 13 Post-employment and other long-term employee benefits ______________________________________ 179 14 Employee benefits expenses _____________________________________________________________ 181 Income taxes 15 Income taxes _________________________________________________________________________ 181 active 16 Trade receivables ______________________________________________________________________ 183 17 Deposits, treasury bills and government bonds _______________________________________________ 183 18 Other receivables ______________________________________________________________________ 183 19 Cash and cash equivalents _______________________________________________________________ 184 20 Property, plant and equipment ___________________________________________________________ 184 21 Intangible assets _______________________________________________________________________ 186 22 Investments in subsidiaries ______________________________________________________________ 187 23 Spin-Off______________________________________________________________________________ 188 Equity and liabilities 24 Capital and reserves ____________________________________________________________________ 189 25 Trade payables ________________________________________________________________________ 190 26 Other payables ________________________________________________________________________ 190 27 Provisions ____________________________________________________________________________ 190 financial instruments 28 Financial instruments - fair values and risk management ________________________________________ 191 annual report2014 159 iNDiViDuAL fiNANCiAL sTATeMeNTs As AT AND fOr THe yeAr eNDeD 31 DeCeMBer 2014 PREPARED IN ACCORDANCE WITH THE ORDER OF THE MINISTRY OF FINANCE NO.1286/2012, AS FURTHER AMENDED Other information 29 Related parties ________________________________________________________________________ 195 30 Conditionalities________________________________________________________________________ 197 31 Commitments _________________________________________________________________________ 198 32 Foundation of accounting restatements ____________________________________________________ 198 annual report2014160 iNDiViDuAL sTATeMeNT Of fiNANCiAL POsiTiON AS AT 31 DECEMBER 2014 (All amounts are in RON) assets non-current assets Property, plant and equipment Intangible assets Investments in subsidiaries Investments in associated entities Deferred tax assets Total non-current assets Current assets Cash and cash equivalents Deposits, treasury bills and government bonds Trade receivables Other receivables Inventories Prepayments Income tax receivable Assets held for distribution Total current assets Total assets equity and liaBilities Equity Share capital out of which: Subscribed share capital Inflation adjustment to share capital Share premium Treasury shares reserve Pre-paid capital contributions in kind from shareholders Revaluation reserve legal reserves retained earnings Total equity (Continued on next page) note 31 December 2014 31 December 2013 1 january 2013 20 21 22 23 15 19 17 16 18 23 24 24 30 24 24 24 24 291.258.568 302.373.419 257.387.192 677.666 797.803 318.000 1.427.360.547 1.405.189.737 1.453.587.987 - - 507.266.152 7.205.689 1.726.502.470 13.932.473 1.722.293.432 15.156.826 2.233.716.157 1.075.619.774 144.125.683 185.208.969 1.038.419.841 - - 87.695.766 95.660.486 86.841.490 15.390.676 32.500.435 38.665.771 166.347 336.573 134.502 328.120 217.965 443.126 23.134.100 22.794.808 5.878.858 - 507.266.152 - 2.240.763.077 802.810.186 317.256.179 3.967.265.547 2.525.103.618 2.550.972.336 3.814.242.000 2.509.306.102 2.493.197.502 3.459.399.290 2.078.399.040 2.062.290.440 354.842.710 430.907.062 430.907.062 103.049.177 (75.372.435) - - - - 3.277.268 47.492.961 54.481.291 828.548 - - 127.896.823 114.093.070 114.093.070 (104.364.433) (317.248.563) (341.076.784) 3.869.556.948 2.353.643.570 2.320.695.079 annual report2014 161 iNDiViDuAL sTATeMeNT Of fiNANCiAL POsiTiON AS AT 31 DECEMBER 2014 (All amounts are in RON) liabilities non-current liabilities Employee benefits Other payables Total non-current liabilities Current liabilities Bank loans Bank overdrafts Trade payables Other payables Deferred revenue Employee benefits Provisions Total current liabilities Total liabilities note 31 December 2014 31 December 2013 1 january 2013 13 26 28 19 25 26 12,13 27 2.990.743 - 2.990.743 2.758.753 5.497.560 8.256.313 2.828.309 10.625.446 13.453.755 - - - 10.333.911 36.999.437 55.732.038 83.400.334 86.798.928 94.529.169 8.663.437 4.190.377 34.541.668 384.428 410.264 361.339 2.269.657 4.027.375 3.825.288 - 94.717.856 30.777.354 163.203.735 17.500.089 216.823.502 97.708.599 171.460.048 230.277.257 Total equity and liabilities 3.967.265.547 2.525.103.618 2.550.972.336 general manager Ioan rosca Economic manager Emilia Elena Marin annual report2014 162 iNDiViDuAL iNCOMe sTATeMeNT FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in RON) revenues Other income Electricity purchased Employee benefits Depreciation and amortization note 2014 2013 8 9 9 14 20,21 244.517.469 4.462.492 (224.176.045) (16.699.072) (13.252.249) 282.988.139 15.356.685 (227.938.870) (22.737.116) (9.377.572) Impairment of property, plant and equipment, net 20 - (12.465.531) Impairment of investments in subsidiaries, net (4.674.871) (48.398.250) reversal of impairment / (Impairment) of trade and other receivables, net Other operating expenses, net of variation in provisions Operating loss finance income finance costs Gain from disposals of shares held in other entities net finance cost Profit before tax Income tax expense Profit for the year Earnings per share Basic and diluted earnings per share general manager Ioan rosca 16,18 (2.469.481) 16.594.284 9 10 10 10 15 11 1.459.641 (49.962.140) (10.832.116) (55.940.371) 257.583.262 (2.485.569) 31.809.478 286.907.171 276.075.055 (6.585.537) 269.489.518 95.986.764 (2.044.364) - 93.942.400 38.002.029 (1.182.446) 36.819.583 0,97 0,18 Economic manager Emilia Elena Marin annual report2014 163 iNDiViDuAL sTATeMeNT Of PrOfiT Or LOss AND OTHer COMPreHeNsiVe iNCOMe FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in RON) Profit for the year 269.489.518 36.819.583 note 2014 2013 Other comprehensive income Items that will never be reclassified to profit or loss Revaluation of property, plant and equipment Tax related to revaluation of property, plant and equipment Remeasurements of the defined benefit liability Tax related to remeasurements of the defined benefit liability 20 15 13 15 986.367 (157.819) (103.574) 16.572 - - 261.921 (41.907) Other comprehensive income, net of tax 741.546 220.014 Total comprehensive income 270.231.064 37.039.597 general manager Ioan rosca Economic manager Emilia Elena Marin annual report2014 164 iNDiViDuAL sTATeMeNT Of CHANges iN eQuiTy FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in RON) note Subscribed share capital Inflation adjustment to share capital Share premium Treasury shares Balance at 31 December 2013 2.078.399.040 430.907.062 Comprehensive income Profit Other comprehensive income Total comprehensive income Transactions with owners of the Company Contributions and distributions Underwritings from the IPO, net Treasury shares acquired Issue of ordinary shares in respect of land contributed by the shareholders Dividends Spin-off effect Total transactions with owners of the Company 24 24 24 24 23 Other changes in equity Set up of legal reserves - - - - - (75.372.435) Pre-paid capital contributions in kind from shareholders 47.492.961 - - - - - - - - (44.215.693) - - - - - - 103.049.177 - - - - - - - 1.771.887.440 - 40.350.610 - - - - - - - - (431.237.800) (76.064.352) 1.381.000.250 (76.064.352) 103.049.177 (75.372.435) (44.215.693) - - - - 2014 annual report Revaluation reserve Revaluation reserve Retained earnings Total - - 828.548 828.548 - - - - - - - 114.093.070 (317.248.563) 2.353.643.570 - - - - - - - - - 269.489.518 269.489.518 (87.002) 741.546 269.402.516 270.231.064 - - - 1.874.936.617 (75.372.435) (3.865.083) (22.475.225) (22.475.225) (20.239.408) (527.541.560) (42.714.633) 1.245.682.314 13.803.753 (13.803.753) - Balance at 31 December 2014 3.459.399.290 354.842.710 103.049.177 (75.372.435) 3.277.268 828.548 127.896.823 (104.364.433) 3.869.556.948 (Continued on next page) 165 iNDiViDuAL sTATeMeNT Of CHANges iN eQuiTy FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in RON) note Subscribed share capital Inflation adjustment to share capital 2.062.290.440 430.907.062 Balance at 1 january 2013 Comprehensive income Profit Other comprehensive income Total comprehensive income Transactions with owners of the Company Contributions and distributions Issue of ordinary shares in respect of land contributed by the shareholders land for which ownership rights were obtained Dividends Total transactions with owners of the Company 24 24 24 - - - 16.108.600 - - 16.108.600 - - - - - - - Balance at 31 December 2013 2.078.399.040 430.907.062 The accompanying notes are an integral part of these individual financial statements. Share premium Treasury shares - - - - - - - - - - - - - - - - - - Pre-paid capital contributions in kind from shareholders 54.481.291 - - - (16.108.600) 9.120.270 - (6.988.330) 47.492.961 2014 annual report Revaluation reserve Revaluation reserve Retained earnings Total 1 6 5 - - - - - - - - - 114.093.070 (341.076.784) 2.320.695.079 - - - - - - - 36.819.583 220.014 37.039.597 36.819.583 220.014 37.039.597 - - - 9.120.270 (13.211.376) (13.211.376) (13.211.376) (4.091.106) 114.093.070 (317.248.563) 2.353.643.570 166 iNDiViDuAL sTATeMeNT Of CAsH fLOWs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in RON) note 2014 2013 20 21 20 22 18,20 10 15 Cash flows from operating activities Profit for the year Adjustments for: Depreciation Amortisation Impairment loss on property, plant and equipment, net Impairment of investments in subsidiaries, net Impairment / (reversal of impairment) of trade and other receivables, net Net finance income Income tax expense Changes in : Trade receivables Other receivables Trade payables Other payables Employee benefits and provisions Cash used in operating activities 269.489.518 36.819.583 12.806.965 445.284 9.291.239 86.333 - 12.465.531 4.674.871 48.398.250 2.469.481 (16.594.284) (286.907.171) 6.585.537 9.564.485 (48.019.061) 17.040.412 52.585.186 (38.536.239) (1.629.302) (8.994.519) (93.942.400) 1.182.446 (2.293.302) (91.696.728) (6.730.352) 73.669.223 (20.720.113) 394.452 (47.376.820) Interest paid (34.807) (2.615.320) net cash used in operating activities (9.029.326) (49.992.140) (Continued on next page) annual report2014 167 iNDiViDuAL sTATeMeNT Of CAsH fLOWs FOR THE YEAR ENDED 31 DECEMBER 2014 (All amounts are in RON) note 2014 2013 Cash flows from investing activities Payments for purchases of property, plant and equipment Payments for purchase of intangible assets Proceeds from sale of other investments 23 Payments for purchase of treasury bills and government bonds Proceeds from maturity of treasury bills and government bonds Payments in deposits with maturity of 3 months or longer Proceeds from borrowings granted to subsidiaries Payments for share acquisition in associates Interest received Dividends received net cash from / (used in) investing activities Cash flows from financing activities Proceeds from issue of shares, net of transaction costs Re-purchase of treasury shares Dividends paid repayment of bank borrowings Cash transferred at spin off net cash from / (used in) financing activities net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at 1 January Effect of movements in exchange rates on cash held Cash and cash equivalents at 31 December 22 24 24 24 23 19 19 (31.416.511) (57.622.727) (325.147) 140.920.000 (1.194.250.628) 295.598.291 (137.004.050) - - 17.866.153 238.431.719 (670.180.173) 1.874.936.617 (75.372.435) (22.475.225) - (129.385.930) 1.647.703.027 (566.136) - - - - 10.271.379 (57.500) 7.390.381 90.293.077 49.708.474 - - (13.211.376) (10.333.911) - (23.545.287) 968.493.528 (23.828.953) 107.126.246 129.476.931 - 1.478.268 1.075.619.774 107.126.246 The accompanying notes are an integral part of these individual financial statements. general manager Ioan rosca Economic manager Emilia Elena Marin annual report2014 168 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) 1 reporting entity These financial statements are the individual financial statements of Societatea de Distributie si Furnizare a Energiei Electrice Electrica S.A. (“the Company”). Electrica was originally incorporated as a company in 1998 by Government Decision no. 365/1998, following the restructuring of the former National Electricity Kings (rENEl). On 1 August 2000, following the restructuring of the former National Electricity Company (Electrical Company) under the Government Decision no. 627/2000, the Company was allocated a new tax registration number, without changing the object of activity (distribution and supply of electricity in Romania). The registered office of the Company is 9 Grigore Alexandrescu Street, Sector 1, Bucharest, Romania. The Company has unique registration number 13267221 and Trade Register registration number J40/7425/2000. As at 31 December 2014 the major shareholder of Electrica SA is the romanian State, represented by the Ministry of Energy, Small and Medium-sized Enterprises and Business Environment (48.78%), after the ownership dilution following an initial public offer. The second shareholder based on the share of ownership is EBrD with 8.66%. As at 31 December 2014 and 2013, the Company has the following shareholdings: Subsidiary activity Tax code head Office % shareholding as at 31 Dec 2014 % shareholding as at 31 Dec 2013 Electrica Distributie Muntenia Nord SA Electrica Distributie Transilvania Nord SA Electrica Distributie Transilvania Sud SA Electricity distribution in geographical area of Muntenia Nord Electricity distribution in geographical area of Transilvania Nord Electricity distribution in geographical area of Transilvania Sud Electrica furnizare SA Electricity Supply Electrica Serv SA Servicii Energetice Muntenia SA (societate in reorganizare) Servicii Energetice Moldova SA (societate in insolventa) Servicii Energetice Banat SA* (societate in faliment) Servicii Energetice Dobrogea SA (societate in insolventa) Servicii Energetice Oltenia SA (societate in reorganizare) Services in the energy sector (maintenance, repairs, construction) Services in the energy sector (maintenance, repairs, construction) Services in the energy sector (maintenance, repairs, construction) Services in the energy sector (maintenance, repairs, construction) Services in the energy sector (maintenance, repairs, construction) Services in the energy sector (maintenance, repairs, construction) 14506181 Ploiesti 78.0000021% 78.0000021% 14476722 Cluj-Napoca 77.99999% 77.99999% 14493260 Brasov 78.0000019% 78.0000019% 28909028 Bucuresti 77.99997% 77.99997% 17329505 Bucuresti 29384120 Bucuresti 29386768 Bacau 29388211 Timisoara 29388378 Constanta 29389861 Craiova 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% * Electrica SA lost the control of Servicii Energetice Banat starting with November 2014 (see Note 22). the main actiVities of the c ompany Currently, the core business of the Company, according to the Statute, annex to Government Decision no. 627/2000, consolidated, amended and supplemented, is the “Activities of business and management consulting.” The Company also covers services on the balancing electricity market, trading and import-export. According to the Commercial Code of the wholesale electricity market, balancing market was introduced and began operating in Romania in July 2005. The purpose of this market is to allow the balance of the production and consumption of power in real time, using resources provided in a competitive system. Each participant at the wholesale market (producer, supplier, operator, eligible consumer) has the obligation to register at the Operator of the balancing market of CN Transelectrica SA as a Balance responsible Party (“BrP”) or to transfer his balancing responsibility to another licence holder registered as BrP. The Company operates as Balance responsible Party for 110 license holders. annual report2014169 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) initial puBlic offering The Government Decision no. 85/2013, amended and completed by Government Decision no. 477/2014 approved the privatization strategy of Electrica SA by initial public offer (“IPO”). The privatization strategy included the offer for sale of a 51% stake by issuance of new shares representing 105% of the existing share capital as at the date of the IPO. The shares were offered to both individual and institutional investors on the Romanian market, as well as to qualified investors on the US market and outside USA, and Global Depository receipts (“GDrs”) on the UK market. The IPO was organised between 11 and 27 June 2014 and entailed to an offering by the Company of 177,188,744 ordinary shares in the form of shares 2 Basis of accounting These individual financial statements have been prepared in accordance with the Minister of Public finance Order no. 1286/2012 for approving the Accounting Regulations in accordance with International Financial Reporting Standards (“IFRS”), applicable to companies whose securities are admitted to trading on a regulated market, and related amendments (“OMPf 1286/2012”). In acceptance of OMPF 1286/2012, International Financial Reporting Standards are standards adopted under the procedure provided by the European Commission Regulation no. 1606/2002 of the European Parliament and of the Council of 19 July 2002 regarding the application of the international accounting standards. These financial statements are the first set of individual financial statements prepared in accordance with OMPF 1286/2012 and IFRS 1 “First-time Adoption of the International Financial Reporting Standards” (“IfrS 1”) was applied. According to the Minister of Public Finance Order no. 881/2012, starting with financial year 2014, the company has the obligation to apply the International Financial Reporting Standards for the annual individual financial statements. Explanations on how the transition to IFRS has affected the reported financial position and financial performance of the Company are presented in note and in the form of GDRs, each GDR representing four shares. following the IPO, the Company sold 142,007,744 shares and 8,795,250 GDRs, at the offer prices of rON 11 per share and 13.66 USD per GDr. The allocation of shares and GDRs and the offering prices were concluded on 27 June 2014. The transfer of ownership rights to new shares and the collection of cash by the Company took place on 2 July 2014. At the same date the increase in share capital was recorded in the Trade register. Starting 4 July 2014 the Company’s shares are listed on the Bucharest Stock Exchange, and the GDrs are listed on the london Stock Exchange. 30. Date of transition to the International Financial Reporting Standards was 1 January 2013. Starting with financial year 2012, companies whose securities are admitted to trading on a regulated market are required to apply IfrS for the annual individual financial statements. The individual financial statements for the year 2014 compliant with the OMPf 1286/2012 have been prepared by restating the accounting information organized under the accounting regulations compliant with Directive IV of the European Economic Community, approved by the Minister of Public finance Order no. 3055/2009 approving the accounting regulations compliant with European Directives, and related amendments (“OMPF 3055/2009”). The most significant changes brought to financial statements prepared in accordance with accounting regulations compliant with Directive IV of the European Economic Community to align them with International Financial Reporting Standards requirements (“IfrS”) are presented in Note 32. The individual financial statements were authorized for issue by the Board of Directors on 25 March 2015. The financial statements will be submitted for shareholders’ approval in the meeting scheduled on 27 April 2015. 3 functional and presentation currency These individual financial statements are presented in Lei (RON), which is the functional currency of the Company. All amounts are presented in rON, unless otherwise indicated. annual report2014170 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) 4 use of judgements and estimates In preparing these individual financial statements, management has made judgements, estimates and assumptions that affect the application of the Company’s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively. (a) jUDgEmEnTS Information about judgements made in applying accounting policies that have the most significant effects on the amounts recognised in the individual financial statements is included below: Commissions Company assesses its revenue arrangements against specific criteria to determine if it is acting as principal or agent. The Company has concluded that it is acting as a principal in all of its revenue arrangements. If the Company acts in the capacity of an agent rather than as the principal in a transaction, then the income recognised is the net amount of commission earned by the Company. (B) aSSUmPTIOnS anD ESTImaTIOn uncertainties Information about assumptions and estimation uncertainties that may result in a material adjustment in the subsequent twelve month period is included in the following notes: n Note 6 h) and i) – assumptions regarding the useful life of the tangible and intangible assets; n Notes 16 and 28 – assumptions and estimates about the recoverability of trade receivables; n Note 20 - assumptions regarding the revalued amount of the intangible assets; n Note 22 – assumptions and estimates regarding the evaluation of shares in subsidiaries; 5 Basis of measurement n Note 15 – recognition of deferred tax assets: availability of future taxable profit against which tax loss carried forward can be used; n Notes 27 and 30 – recognition and measurement of provisions and contingencies; n Note 13 – measurement of defined benefit obligations and other long-term employee benefits: key actuarial assumptions; n Note 20 – determining whether a contract contains a lease. measurement of fair values A number of the Company’s accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities. When measuring the fair value of an asset or a liability, the Company uses market observable data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows. n Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; n Level 2: inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); n Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Company recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred. Further information about the assumptions made in measuring fair values is included in Note 20 - Intangible assets. The individual financial statements have been prepared on the historical cost basis except for the intangible assets which are measured based on revaluation model. annual report2014171 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) 6 significant accounting policies The Company has consistently applied the following accounting policies to all periods presented in these individual financial statements: (a) REVEnUE revenue is recognized when it is probable that the economic benefits associated with the transaction will flow to the Company, and the amount of the revenue can be measured reliably. revenue is recognized at the fair value of the services rendered or goods delivered, net of VAT, excises or other taxes related to the sale. Rendering of services revenues related to services rendered are recognised in the period in which the services were rendered based on statements of work performed, regardless of when paid or received, in accordance with the accrual basis. Sales of goods revenue from sale of goods is recognized when the goods are delivered and significant risks and rewards of ownership of the goods have passed to the buyer. (B) COmmISSIOnS Company assesses its revenue arrangements against specific criteria to determine if it is acting as principal or agent. The Company has concluded that it is acting as a principal in all of its revenue arrangements except for collection of radio and TV taxes. If the Company acts in the capacity of an agent rather than as the principal in a transaction, then the income recognised is the net amount of commission earned by the Company. (C) fInanCE InCOmE anD fInanCE COSTS The Company’s finance income and finance costs include: n interest income; n interest expense; n the foreign currency gain or loss on financial assets and financial liabilities; n impairment losses recognised on financial assets (other than trade receivables). Interest income or expense is recognised using the effective interest method. (D) fOREIgn CURREnCy TRanS aCTIOnS Transactions in foreign currencies are translated to the functional currency at the exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the exchange rate at the reporting date, as communicated by the National Bank of Romania. Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated to the functional currency at the exchange rate when the fair value was determined. Foreign currency differences are recognised in profit or loss. Non-monetary items that are measured based on historical cost in a foreign currency are not translated. (E) EmPlOyEE BEnEfITS (i) Short-term employee benefits Short-term employee benefits are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. (ii) Defined contribution plans Obligations for contributions to defined contribution plans are expensed as the related service is provided. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. (iii) Defined benefit plans The Company’s net obligation in respect of defined benefit plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount. The calculation of defined benefit obligations is performed annually by a qualified actuary using the projected unit credit method. Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, are recognised immediately in other comprehensive income. The Company determines the net interest expense (income) on the net defined benefit liability for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability, taking into account any changes in the net defined benefit liability during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognised in profit or loss. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognised immediately in profit or loss. The Company recognises gains and losses on the settlement of a defined benefit plan when the settlement occurs. (iv) Other long-term employee benefits The Company’s net obligation in respect of long- annual report2014172 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value. Remeasurements are recognised in profit or loss in the period in which they arise. Termination benefits (v) Termination benefits are expensed at the earlier of when the Company can no longer withdraw the offer of those benefits and when the Company recognises costs for a restructuring. If benefits are not expected to be settled wholly within 12 months of the end of the reporting period, then they are discounted. (f) InCOmE Tax Income tax expense comprises current and deferred tax. It is recognised in profit or loss except to the extent that it relates to a business combination or items recognised directly in equity or in other comprehensive income. (i) Current tax Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to tax payable or receivable in respect of previous years. It is measured using tax rates enacted or substantively enacted at the reporting date. Current tax also includes any tax arising from dividends. (ii) Deferred tax Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for: n temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; n temporary differences related to investments in subsidiaries, associates and joint arrangements to the extent that the Company is able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future. Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. The measurement of deferred tax reflects the tax consequences that would follow from the manner in which the Company expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset only if certain criteria are met. Unrecognized deferred tax assets are reassessed at each reporting date and recognized to the extent that it has become probable that the future taxable profits will be available against which they can be used. (g) InVEnTORIES Inventories consist mainly of consumables, goods for resale and other inventories. Inventories are measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of the business, minus the estimated costs of completion and the estimated costs necessary to make the sale. The cost of inventories is based on the weighted average cost method. The cost of inventories includes all the acquisition costs and other expenses related to bringing the inventories to their current place and condition. (h) PROPERTy, PlanT anD EqUIPmEnT (i) Recognition and measurement Property, plant and equipment are stated initially at cost, which includes purchase price and other costs directly attributable to acquisition and bringing the asset to the location and condition necessary for their intended use. After initial recognition, land and buildings are measured at revalued amounts less any accumulated depreciation and any accumulated impairment losses since the most recent valuation. The Company used the fair value as deemed cost for the tangible assets for the opening of the financial position. Revaluations are made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using the fair value at the end of the reporting period. When a building is revalued, the accumulated depreciation is eliminated against the gross carrying amount of that item, and the net amount is restated to the revalued amount of the asset. If significant parts of an item of property, plant and equipment have different useful lives, then they are accounted for as separate items (major components) of property, plant and equipment. Spare parts, stand-by and servicing equipment are classified as property, plant and equipment if they are expected to be used during more than one period annual report2014173 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) or can be used only in connection with an item of property, plant and equipment. Any gain or loss on disposal of an item of property, plant and equipment is recognised in profit or loss. (ii) Subsequent expenditure Subsequent expenditure is capitalised only if it is probable that the future economic benefits associated with the expenditure will flow to the Company. (iii) Depreciation Depreciation is calculated to write off the cost of items of property, plant and equipment less their estimated residual values using the straight-line method over their estimated useful lives, and is recognised in profit or loss. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Company will obtain ownership by the end of the lease term. land and construction in progress are not depreciated. The estimated useful lives of property, plant and equipment are as follows: Category Buildings Equipment Office equipment Useful lives 60-70 (average 67 years) 4-12 (average 7 years) 3-10 (average 7 years) Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. (I) InTangIBlE aSSETS (i) Recognition and measurement Other intangible assets that are acquired by the Company and have finite useful lives are measured at cost less accumulated amortisation and any accumulated impairment losses. (ii) Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss as incurred. (iii) amortisation Amortisation is calculated to write off the cost of intangible assets less their estimated residual values using the straight-line method over their estimated useful lives, and is generally recognised in profit or loss. The estimated useful lives of software and licenses are 3-5 years. Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. (j) aSSETS hElD fOR DISTRIBUTIOn Non-current assets, or disposal groups comprising assets and liabilities, are classified as held-for- distribution if it is highly probable that they will be recovered primarily through distribution rather than through continuing use. Such assets, or disposal groups, are measured at the lower of their carrying amount and fair value less costs of distribution. Impairment losses on initial classification as held-for-distribution and subsequent gains and losses on remeasurement are recognised in profit or loss. (K) fInanCIal InSTRUmEnTS The Company classifies non-derivative financial assets into the following categories: loans and receivables, held to maturity investments and financial assets available for sale. The Company classifies non-derivative financial liabilities into the other financial liabilities category. (i) non-derivative financial assets and financial liabilities – recognition and derecognition The Company initially recognises loans and receivables on the date when they are originated. financial liabilities are initially recognised on the trade date, which is the date the Company becomes a party to the contractual provisions of the instrument. The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred, or it neither transfers nor retains substantially all of the risks and rewards of ownership and does not retain control over the transferred asset. Any interest in such derecognised financial assets that is created or retained by the Company is recognised as a separate asset or liability. The Company derecognises a financial liability when its contractual obligations are discharged or cancelled, or expire. Financial assets and financial liabilities are offset and the net amount presented in the statement of annual report2014174 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) financial position when, and only when, the Company has a legal right to offset the amounts and intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously. (ii) non-derivative financial assets – measurement loans and receivables These assets are initially recognised at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortised cost using the effective interest method. loans and receivables comprise trade receivables, cash and cash equivalents and deposits, treasury bills and government bond. Trade receivables Trade receivables include mainly unsettled invoices issued until reporting date for settlements on the balancing market, late payment penalties and accrued revenue for settlements on the balancing market until the end of the year, but invoiced after the end of the year. Also trade receivables include issued invoices or issued by the subsidiaries for their rendered services. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits and deposits with maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value, and are used by the Company in the management of its short-term commitments. Held-to-maturity investments Held-to-maturity financial assets are initially recognized at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortized cost using the effective interest method. Financial assets available for sale Available for sale financial assets are non-derivative financial assets that are designated as available for sale. Financial assets available for sale are initially recognized at fair value plus any directly attributable transaction costs. After the initial recognition, they are measured at cost minus any impairment losses. financial assets available for sale for which there isn’t an active market and it is not possible to reliably determine the fair value, are measured at cost and periodically tested for impairment. financial assets available for sale include investments in subsidiaries and investments in associates. (iii) non-derivative financial liabilities – measurement Non-derivative financial liabilities are initially recognised at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these liabilities are measured at amortised cost using the effective interest method. Other financial liabilities include bank borrowings, bank overdrafts, and trade payables. Bank overdrafts that are repayable on demand and form an integral part of the Company’s cash management are included as a component of cash and cash equivalents in the statement of cash flows. (iv) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares, net of any tax effects, are recognised as a deduction from equity. Repurchase and reissue of ordinary shares (treasury shares) When shares recognised as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury share reserve. When shares are sold or reissued subsequently, the amount received is recognised as an increase in equity and the resulting surplus or deficit on the transaction is presented within share premium. (l) ImPaIRmEnT (i) non-derivative financial assets Financial assets are assessed at each reporting date to determine whether there is objective evidence of impairment. Objective evidence that financial assets are impaired includes: n default or delinquency by a debtor; n restructuring of an amount due to the Company on terms that the Company would not consider otherwise; n indications that a debtor or issuer will enter bankruptcy; n adverse changes in the payment status of borrowers or issuers; n the disappearance of an active market for a security; or n observable data indicating that there is measurable decrease in expected cash flows from a group of financial assets. Financial assets measured at amortised cost The Company considers evidence of impairment for these assets at both an individual asset and a collective level. All individually significant assets are individually assessed for impairment. Those found annual report2014 175 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) not to be impaired are then collectively assessed for any impairment that has been incurred but not yet individually identified. Assets that are not individually significant are collectively assessed for impairment. Collective assessment is carried out by grouping together assets with similar risk characteristics. In assessing collective impairment, the Company uses historical information on the timing of recoveries and the amount of loss incurred, and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater or lesser than suggested by historical trends. An impairment loss is calculated as the difference between an asset’s carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognised in profit or loss and are reflected in an allowance account. If the amount of impairment loss subsequently decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, then the previously recognised impairment loss is reversed through profit or loss. (ii) non-financial assets At each reporting date, the Company reviews the carrying amounts of its non-financial assets (other than inventories and deferred tax assets) to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or cash generating units (“CGUs”). The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. An impairment loss is recognised if the carrying amount of an asset or CGU exceeds its recoverable amount. Impairment losses are recognised in profit or loss, except for the property, plant and equipment measured at the revalued amount, in which case the impairment loss is recognised in other comprehensive income and decreases the revaluation reserve within equity to the extent that it reverses a previous revaluation surplus related to the same asset. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. A reversal of an impairment loss other than on revalued assets is recognised in profit or loss. A reversal of an impairment loss on a revalued asset is recognised in profit or loss to the extent that it reverses an impairment loss on the same asset that was previously recognised as an expense in profit or loss. Any additional increase in the carrying amount of the asset is treated as a revaluation increase. (m) REValUaTIOn RESERVE The difference between the revalued amount and the net carrying amount of property, plant and equipment is recognised as revaluation reserve included in equity. If an asset’s carrying amount is increased as a result of a revaluation, the increase is recognised and accumulated in equity under the heading of revaluation reserve. However, the increase is recognised in profit and loss to the extent that it reverses a revaluation decrease of the same amount of the asset previously recognised in profit and loss. If an asset’s carrying amount is decreased as a result of a revaluation, the decrease is recognised in profit or loss. However, the decrease is recognized in equity in revaluation reserves if there is any credit balance existing in the revaluation reserve in respect of that asset. The revaluation reserve is transferred to retained earnings in an amount corresponding to the use of the asset (as the asset is depreciated) and upon disposal of the asset. (n) DIVIDEnDS Dividends are recognized as a deduction from equity in the period in which their distribution is approved and recognised as a liability to the extent it is unpaid at the reporting date. Dividends are disclosed in the notes to the financial statements when their distribution is proposed after the reporting date and before the date of the issuance of the financial statements. (O) PRE-PaID CaPITal COnTRIBUTIOnS In KInD from shareholders These contributions from a shareholder (the Romanian State) represent pre-paid contributions of land for which the Company obtained title deeds in respect of future issuance of shares. The amounts recorded are based on the fair value of the land. (P) PROVISIOnS A provision is recognised if, as a result of a past event, the Company has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will annual report2014 176 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost. A provision for restructuring is recognised when the Company has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. future operating losses are not provided for. (q) lEaSES (i) Determining whether an arrangement contains a lease At inception of an arrangement, the Company determines whether the arrangement is or contains a lease. At inception or on reassessment of an arrangement that contains a lease, the Company separates payments and other consideration required by the arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Company concludes that, for a finance lease, it is impracticable to separate the payments reliably, then an asset and a liability are recognised at an amount equal to the fair value of the underlying asset; subsequently, the liability is reduced as payments are made and an imputed finance cost on the liability is recognised using the Company’s incremental borrowing rate. (ii) leased assets Assets held by the Company under leases that transfer to the Company substantially all of the risks and rewards of ownership are classified as finance leases. The leased assets and finance lease liability are measured initially at an amount equal to the lower of their fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the assets are accounted for in accordance with the accounting policy applicable to that asset. Assets held under other leases are classified as operating leases and are not recognised in the Company’s individual statement of financial position. (iii) lease payments Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. (iv) Rental income rental income from property other than investment property is recognised as other income. rental income is recognised on a straight-line basis over the term of the lease. (R) SUBSEqUEnT EVEnTS Events occurring after the reporting date 31 December 2014, which provide additional information about conditions prevailing at those reporting dates (adjusting events) are reflected in the individual financial statements. Events occurring after the reporting date that provide information on events that occurred after the reporting dates (non-adjusting events) are disclosed in the notes to the individual financial statements when they are significant. When the going concern assumption is no longer appropriate at or after the reporting period, the financial statements are not prepared on a going concern basis. 7 new standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2014, and have not been applied in preparing these consolidated financial statements. Any of new standards are not expected to have a significant impact of the Company’s individual financial statements. annual report2014177 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) 8 reVenue Supply energy in balancing market and a-day- ahead-market Management and consultancy services Revenues from services contracts on Automatic Meter reading System (Note 20) Total 2014 2013 230.730.695 232.816.597 9.051.202 4.735.572 45.435.970 4.735.572 244.517.469 282.988.139 9 other operating reVenue and expenses (a) OThER OPERaTIng InCOmE Other income mainly include rent income and late payment penalties from customers. (B) ElECTRICITy PURChaSED Electricity purchased include the cost of electricity purchased for settlements on balancing market and a-day-ahead-market. (C) OThER OPERaTIng ExPEnSES rent repairs and maintenance expenses IT Services Postage and telecommunication Penalties to the State for late payment of taxes Other taxes and duties Movement in provisions (Note 27) legal and consultancy fees Bank commissions Others Total 2014 2013 65.564 1.770.137 1.009.657 5.761.386 669.980 1.590.988 (30.777.354) 5.155.146 1.932.248 11.362.607 (1.459.641) 48.364 655.589 914.760 4.038.840 17.414 6.947.942 13.277.265 10.328.226 1.774.384 11.959.356 49.962.140 annual report2014178 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) 10 net finance income Interest income Dividends Other finance income Total finance income Interest expense Interest cost for employee benefits (Note 15) foreign exchange loss Other finance costs Total finance costs Gain from disposals of shares held in other entities net finance income net finance Income 2013 19.090.471 238.431.719 61.072 257.583.262 (34.807) (147.286) (1.801.036) (502.440) (2.485.569) 31.809.478 286.907.171 5.661.232 90.293.077 32.455 95.986.764 (2.411.652) (193.563) 1.445.813 (884.962) (2.044.364) - 93.942.400 On 17 February 2014 the Company sold part of the shares held in E.On Moldova Distributie and E.On Energie Romania to E.On following the exercise of call options by E.On. (see Note 23). The Company recognize this transaction as follows: Sale price of share held in other entities Carrying amount of share held in other entities Gain from disposals of shares held in other entities Carrying amount 140,920,000 (109,110,522) 31,809,478 11 earnings per share The calculation of basic and diluted earnings per share has been based on the following profit attributable to ordinary shareholders and weighted-average number of ordinary shares outstanding: Profit attributable to ordinary shareholders Profit for the year attributable to the owners of the Company Profit attributable to ordinary shareholders 2014 2013 269.489.518 269.489.518 36.819.583 36.819.583 Weighted-average number of ordinary shares (in number of shares) 2014 2013 Issued ordinary shares at 1 january Effect of shares issued in February Effect of spin-off in April Effect of shares issued in May Effect of shares issued in June Effect of underwritings from the IPO in June Effect of shares re-purchased in July Effect of shares issued in August Effect of shares issued in October Weighted-average number of ordinary shares at 31 December Earnings per share 207.839.904 172.575 (32.342.835) 2.564.531 - 103.360.101 (3.445.297) - - 206.229.044 142.963 - - 13.630 - - 402.463 36.708 278.148.979 206.824.808 Basic and diluted earnings per share (rON) 0,97 0,18 annual report2014179 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) 12 ShORT-TERm EmPl OyEE BEnEfITS Personnel payables 1.164.359 1.869.401 2.319.447 31 December 2014 31 December 2013 1 january 2013 Current portion of defined benefit liability and other long-term employee benefits Social security charges Tax on salaries Total 252.613 169.156 429.432 663.931 188.754 2.269.657 1.288.539 700.279 4.027.375 760.022 316.387 3.825.288 For details of the related employee benefits expenses, see Note 14. In romania, all employers and employees, as well as other persons, are contributors to the state social security system. The social security system covers pensions, allocations for children, temporary inability to work, risks of works and professional diseases and other social assistance services, unemployment benefits and incentives for employers creating new workplaces. 13 POST-EmPl OymEnT anD OThER lOng-TERm employee Benefits In accordance with Government Decisions no. 1041/2003 and no. 1461/2003, the Company provides benefits in kind in the form of free electricity to retired employees of the Company. The Company also provides cash benefits to employees depending on seniority and years of service at retirement. In 2014 and 2013, employee benefit obligations were computed by independent actuaries using the projected unit credit method with benefits calculated proportionally to period of service. Defined benefit liability Other long-term employee benefits Total - Current portion* - Non-current portion * included in Personnel payables in Note 12 31 December 2014 31 December 2013 1 january 2013 1.731.636 1.511.720 3.243.356 252.613 2.990.743 1.512.070 1.415.839 2.927.909 169.156 2.758.753 1.551.022 1.706.719 3.257.741 429.432 2.828.309 (I) mOVEmEnT In ThE DEfInED BEnEfIT lIaBIlITy anD OThER lOng-TERm EmPl OyEE BEnEfITS The following tables shows a reconciliation from the opening balances to the closing balances for the defined benefit liability and other long-term employee benefits and its components. There are no plan assets. Defined benefit liability Balance at 1 january Included in profit or loss Current service cost Interest (income) / cost Included in other comprehensive income Remeasurements loss (gain) - Actuarial loss /(gain) Other Benefits paid Balance at 31 December 2014 2013 1.512.070 1.667.720 70.506 76.064 146.570 75.435 99.222 174.657 103.574 (261.921) (30.578) 1.731.636 (68.386) 1.512.070 annual report2014180 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) Other long-term employee benefits 2014 2013 Balance at 1 january Included in profit or loss Current service cost Actuarial gain/(loss) Interest cost Benefits paid Balance at 31 December 1.415.839 1.590.021 64.922 18.684 71.222 (58.947) 1.511.720 72.963 (273.127) 94.341 (68.359) 1.415.839 (II) aCTUaRIal aSSUmPTIOnS The following were the principal actuarial assumptions at the respective reporting date: (a) Macroeconomic assumptions: n Inflation. The actuaries used the Consumer Price Index (CPI) published by the Economist Intelligence Unit: year 2014 2015 2016 2017 2018+ Valuation date 31 December 2014 Valuation date 31 December 2013 - 2,1% 3,2% 2,7% 2,5% 2,3% 3,3% 3,2% 2,9% 2,7% n the discount rate used was the yield for romanian government bonds maturing in 10 years at the reporting date of 4.5% for the year 2014 (2013: 5.2%); n the electricity price per KWh used is 0.464 rON at 31 n the mortality rate published by the National Institute of Statistics was adjusted to allow for an anticipated decrease in mortality rates; n taxes and social charges are those in force as at the December 2014 (2013: 0.499 RON/ KWh); reporting date. (b) Company specific assumptions: n salaries increase in line with the estimated inflation rates in the future periods; n employees’ turnover: turnover rates are based on statistical information regarding employees’ mobility during 2006-2013. Considering historical retirement data, it is assumed that the personnel turnover rate decreases with the employees’ age; n jubilee and retirement bonuses based on seniority according to the collective labour contract, as follows: jubilee bonus based on years of service Seniority 20 ani 30 ani 35 ani 40 ani 45 ani no of gross monthly base salaries 31 December 2014 31 December 2013 0,8 1,6 2,4 3,2 4 0,8 1,6 2,4 3,2 4 Retirement bonus based on years of service in the Company Seniority Between 8 and 10 years Between 10 and 25 years More than 25 years no of gross monthly base salaries 31 December 2014 31 December 2013 1 2 3 1 2 3 annual report2014181 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) The Company also offers 1,200 kWh of free electricity per year to retired employees for certain years of seniority. In the event of pensioner’s death, husband/wife is entitled to receive the same benefit until he/she will marries again. Termination benefits In accordance with the Collective labour contract concluded between the Company and the Unions, when individual labour contract are terminated at the Company’s initiative, the Company will pay termination benefits to the employees depending on their period of service, as follows: Period of service 1 - 5 years 5 - 10 years 10 - 20 years More than 20 years no of gross monthly base salaries 4 6 7 10 For collective lay-offs, according to the Collective labour contract, the Company will pay termination benefits to the employees depending on their period of service, as follows: Period of service 1 - 3 years 3 - 5 years 5 - 10 years 10 - 20 years More than 20 years no of gross monthly base salaries 4 6 7 15 20 Collective lay-offs and termination benefits are only applicable subject to approval of a rectification of the budget, such that the approved salary fund for the year will not be affected by such measures. The above mentioned stipulations do not apply to employees with individual labour contract concluded for a determined period. The above stipulations do not apply to employees that obtained other higher cumulative salary compensation rights, provided by legal regulations regarding the Group’s reorganization and restructuring. Employees who are re-employed within the Group after lay-off are not entitled to the above mentioned benefits. The financial statements do not include any provision for liabilities relating to compensation payments because there isn’t a present obligation in this regard. 14 employee Benefits expenses Average number of employees Number of employees at 31 December Wages and salaries Social security contributions Meal tickets Total 2014 2014 139 149 13.288.226 3.140.154 270.692 16.699.072 2013 2013 188 149 18.074.979 4.326.566 335.571 22.737.116 15 income taxes In determining the amount of current and deferred tax, the Company takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. The Company considers that the accounting records for taxes due are adequate for all open tax years, based on assessment made by management taking into account various factors, including the interpretation of tax legislation and previous experience. New information may become available that causes the Company to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made. annual report2014182 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) (I) amOUnTS RECOgnISED In PROfIT OR lOSS Deferred tax expense Total income tax 2014 2013 6.585.537 6.585.537 1.182.446 1.182.446 (II) amOUnTS RECOgnISED In OThER COmPREhEnSIVE InCOmE Before tax 2014 Tax (expense) benefit net of tax Before tax 2013 Tax (expense) benefit net of tax 986.367 (157.819) 828.548 - - - (103.574) 16.572 (87.002) 261.921 (41.907) 220.014 Revaluation of property, plant and equipment remeasurement of defined benefit liability Total 882.793 (141.247) 741.546 261.921 (41.907) 220.014 (III) RECOnCIlIa TIOn Of EffECTIVE Tax RaTE Profit before tax Tax using Company’s domestic tax rate Non-deductible expenses Non-taxable income Deduction of legal reserves Other tax effects Income tax 2014 2013 276.075.055 38.002.029 16% 44.172.009 1% 2.783.994 16% 25% 6.080.325 9.566.690 -14% (38.149.075) -38% (14.446.892) -1% 0% 2% (2.208.600) (12.791) 6.585.537 0% 0% 3% - (17.677) 1.182.446 Non-taxable income represents dividend income in the amount of RON 238,431,719 (2013: RON 90,293,077). (IV) mOVEmEnT In DEfERRED Tax BalanCES 2014 Intangible assets Employee benefits net balance at 1 january 2014 Recognised in profit or loss Recognised in other comprehensive income Deferred tax assets, net 2.812.489 (359.163) (17.218) (10.773) 157.819 (16.572) 2.953.090 (386.508) Balance at 31 December 2014 Deferred Tax assets Deferred tax liabilities - 2.953.090 (386.508) Tax loss carried forward (16.385.799) 6.613.528 - (9.772.271) (9.772.271) Tax liabilities (assets) before set-off (13.932.473) 6.585.537 141.247 (7.205.689) (10.158.779) 2.953.090 net balance at 1 january 2013 Recognised in profit or loss Recognised in other comprehensive income Deferred tax assets, net Deferred Tax assets Deferred tax liabilities Balance at 31 December 2013 2.829.707 (408.476) (17.218) 7.406 - 41.907 2.812.489 (359.163) (359.163) - 2.812.489 2013 Intangible assets Employee benefits Tax loss carried forward (17.578.057) 1.192.258 - (16.385.799) (16.385.799) Tax liabilities (assets) before set-off (15.156.826) 1.182.446 41.907 (13.932.473) (16.744.962) 2.812.489 - - - - annual report2014183 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) 16 trade receiV aBles Trade receivables, gross Bad debt allowance Total trade receivables, net 31 December 2014 31 December 2013 1 january 2013 758.094.020 763.589.259 754.448.597 (670.398.254) 87.695.766 (667.928.773) 95.660.486 (667.607.107) 86.841.490 Receivables from related parties are presented in Note 29. Trade receivables gross comprise: 31 December 2014 31 December 2013 1 january 2013 Electricity distribution and supply 94.359.475 100.083.722 92.298.877 Electricity receivables from clients in litigation, insolvency and bankruptcy (Oltchim SA) Late payment penalties from clients in litigation, insolvency and bankruptcy (Oltchim SA) Other Total trade receivables, gross 569.811.232 569.811.231 569.811.232 88.968.313 88.968.313 88.968.313 4.955.000 758.094.020 4.725.993 763.589.259 3.370.175 754.448.597 A significant customer of the Company, until January 2012, was Oltchim SA (a state-controlled company), when the Company has transferred the contract with Oltchim to Electrica furnizare SA. In January 2013 Oltchim became insolvent. Due to uncertainties regarding the recoverability of amounts owed by this customer, the Company recognized bad debt allowances to the total amount of receivables. The movement in the bad debt allowance for trade receivables is as follows: Bad debt allowance Balance as at 1 January Impairment recognized Impairment reversed Sold la 31 December 2014 2013 667.928.773 2.546.823 (77.342) 670.398.254 667.607.107 336.600 (14.934) 667.928.773 for the ageing of trade receivables refer to Note 28. 17 deposits, treasury Bills and goVernment Bonds Deposits, treasury bills and government bonds include treasury bills and government bonds of rON 901,415,791, denominated in rON with original maturity of more than three months with an average interest rate (yield) of 1.6% and deposits with maturity of more than three months of rON 137,004,050. The treasury bills and government bonds were classified as investments held to maturity. 18 other receiVaBles VAT receivable Interest receivable Other receivables Bad debt allowance Total other receivables, net 31 December 2014 31 December 2013 1 january 2013 - 3.175.177 26.676.226 17.763.510 1.950.918 27.246.734 8.445.598 3.680.067 57.916.783 (14.460.727) (14.460.727) (31.376.677) 15.390.676 32.500.435 38.665.771 Other receivables, net include loans granted by the Company to Electrica Serv (see Note 29). annual report2014184 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) The movement in the bad debt allowance for other receivables is as follows: Bad debt allowance Balance as at 1 january Impairment recognized Balance as at 31 December 2014 2013 14.460.727 - 14.460.727 31.376.677 (16.915.950) 14.460.727 19 cash and cash equiV alents 31 December 2014 31 December 2013 1 january 2013 Bank current accounts 1.544.632 3.473.158 22.885.283 Deposits with original maturities of less than 3 months 874.243.283 140.619.441 162.318.391 Cash in hand Treasury bills and government bonds with original maturities of less than 3 months Total cash and cash equivalents in the individual statement of financial position 19.508 33.084 199.812.351 - 5.295 - 1.075.619.774 144.125.683 185.208.969 Overdrafts used for cash management purposes - (36.999.437) (55.732.038) Total cash and cash equivalents in the individual statement of cash flows 1.075.619.774 107.126.246 129.476.931 Cash and cash equivalents include treasury bills and government bonds denominated in rON of rON 199,812,351 and an average interest rate (yield) of 1.7% p.a. The following information is relevant in the context of the statement of cash flows: Non-cash activity includes: n land contributed by the shareholder of rON 0 IN 2014 (2013: RON 9,120,270); n set-off between trade receivables and trade payables of RON 55,983,780 in 2014 (2013: RON 82,877,732); 20 property, plant and equipment The movements in property, plant and equipment in 2014 and 2013 were as follows: land and land improvements Buildings Equipment Vehicles, furniture and office equipment Construction in progress Total gross carrying amount Balance at 1 January 2013 104.249.525 16.884.919 61.920.038 753.032 91.076.704 274.884.218 Additions 8.063.400 - - 1.056.870 - - - - 59.816 60.352.193 - - 57.562.911 65.686.127 (60.352.193) - (12.263) (1.351) - - - - (13.614) 1.056.870 113.369.795 16.884.919 122.319.784 751.681 88.287.422 341.613.601 9.265.658 (33.638.211) - - 449.420 536.947 - (663.294) (10.314.815) - 396.256 - 34.996.860 44.658.774 - - - - (8.127) - - - - - - - (33.646.338) 986.367 (663.294) (10.314.815) 79.131.847 16.758.572 122.716.040 743.554 123.284.282 342.634.295 Transfers from construction in progress Disposals Revaluation of land contribution from the shareholders, net Balance at 31 December 2013 Additions Disposals Revaluation recognized in other comprehensive income, net Gross book value netted off against the accumulated depreciation at revaluation Revaluation of land contribution from the shareholders, net Balance at 31 December 2014 annual report2014185 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) land and land improvements Buildings Equipment Vehicles, furniture and office equipment Construction in progress Total accumulated depreciation and impairment losses Balance at 1 January 2013 Depreciation Disposals reversal of impairment loss Balance at 31 December 2013 Depreciation Disposals Accumulated depreciation netted off against gross book value at revaluation Balance at 31 December 2014 net carrying amounts at 1 january 2013 at 31 December 2013 at 31 December 2014 - - - - - - - - - 236.158 222.854 - - 16.623.018 9.030.032 (12.263) - 637.850 38.353 (1.351) - - - 17.497.026 9.291.239 (13.614) - 12.465.531 12.465.531 459.012 25.640.787 674.852 12.465.531 39.240.182 222.854 12.554.869 (663.294) - - 29.242 (8.126) - - - - 12.806.965 (8.126) (663.294) 18.572 38.195.658 695.967 12.465.531 51.375.727 104.249.525 113.369.795 79.131.847 16.648.761 16.425.907 16.740.000 45.297.020 96.678.997 84.520.382 115.182 91.076.704 257.387.192 76.829 47.587 75.821.891 302.373.419 110.818.751 291.258.568 On 31 December 2014, the buildings and lands include the administrative offices of the Company over which the Company has obtained title deeds and to be contributed to the share capital of the subsidiaries. The building is the administrative headquarters is of rON 16,603,977 of net book value and related land is worth rON 13,410,443 of net book. On 31 December 2014, the buildings and land were revalued by an independent authorized. The results of revaluation were recognized in other comprehensive income. The Company has signed four contracts for the implementation and extension of AMR system (Automatic Meter Reading) for measurement and consumption dispatch activities at the Group level. In 2013 the Company put into operation a part of this investment, amounting to RON 59,920,097. Another part of the investment, amounting to rON 110,133,543, is in the current assets as at 31 December 2014, from which the amount of rON 34,768,016 was conducted during the year. related to the AMr system the Company has concluded services agreements with the distribution subsidiaries. The main services provided relates to the direct data acquisition of subsidiaries by the personnel of the distribution subsidiaries using remote reading systems from electricity metering points, owned by the Company. The Company assessed whether the arrangement contains a lease and determined that does not contain a lease as distribution subsidiaries have no right to use specific assets. During 2013, adjustments for impairment losses of the tangible assets in progress were recorded in the amount of RON 12,456,531, representing ongoing investments in two wind farms, whose activity were interrupted. annual report2014186 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) measurement of fair value The following table shows the valuation techniques used in measuring fair values (Level 3) for the revaluation of land and buildings, as well as the significant unobservable inputs used. Category Valuation technique Significant unobservable inputs land Market approach n Adjustment for liquidity, location, size The fair value is estimated based on selling price per square meter of land of similar characteristics (i.e. ownership, legal limitations, location, physical properties, and best use). The market price is mainly based on recent transactions. Buildings Market approach and discounted cash-flows (DCF) method The market approach is based on the selling price per square meter for buildings of similar characteristics, adjusted for liquidity, location, size etc. The valuation model based on the DCF method estimates the present value of net cash flows to be generated by a building taking into account occupancy rate and costs not paid by tenants. The discount rate estimation considers, inter alia, the quality of a building and its location. n Occupancy rates (80-90%) n Discount rates (9,5% on average) n Costs not paid by tenants (average 10%) n Annual rent per sqm n rental growth n Adjustment for liquidity, location, size Inter-relationship between key unobservable inputs and fair value measurement The estimated fair value would increase (decrease) if: n Adjustment for liquidity, location, size was lower (higher) The estimated fair value would increase (decrease) if: n Occupancy rates were higher (lower) n Discount rates were lower (higher) n Costs not paid were lower (higher) n Annual rent per sqm was higher (lower) n rental growth was higher (lower) n Adjustment for liquidity, location, size was lower (higher) 21 intangiBle assets Intangible assets include mainly intangible assets related licenses and costs of implementation of SAP ERP, as follows: Software and licenses Intangible assets in progress Total gross book value Balance at 1 January 2013 Additions Transfers from intangibles in progress Balance at 31 December 2013 Disposals Transfers from intangibles in progress Balance at 31 December 2014 accumulated amortisation and impairment losses Balance at 1 January 2013 Amortisation Balance at 31 December 2013 Amortisation Balance at 31 December 2014 Carrying amounts At 1 January 2013 at 31 December 2013 at 31 December 2014 2.240.058 - 299.700 2.539.758 - 282.600 2.822.358 1.981.058 86.333 2.067.391 445.284 2.512.675 259.000 472.367 309.683 59.000 566.136 (299.700) 325.436 325.147 (282.600) 367.983 - - - - - 59.000 325.436 367.983 2.299.058 566.136 - 2.865.194 325.147 - 3.190.341 1.981.058 86.333 2.067.391 445.284 2.512.675 318.000 797.803 677.666 annual report2014187 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) 22 inVestments in suBsidiaries The situation regarding the investments in subsidiaries is presented as follows: 31 December 2014 31 December 2013 1 january 2013 gross value Bad debt allowance gross value Bad debt allowance gross value Bad debt allowance Electrica Distributie Muntenia Nord SA Electrica Distributie Transilvania Nord SA Electrica Distributie Transilvania Sud SA 322.729.680 336.460.800 383.398.860 Electrica furnizare SA 57.695.820 - - - - 322.729.680 336.460.800 383.398.860 57.695.820 - - - - 322.729.680 336.460.800 383.398.860 57.695.820 - - - - Electrica Serv SA 442.284.000 (144.849.043) 415.437.909 (140.173.762) 415.437.909 (173.808.732) Servicii Energetice Banat SA 43.761.094 (43.761.094) 43.761.094 (43.761.094) 43.761.094 (43.761.094) Servicii Energetice Dobrogea SA Servicii Energetice Muntenia SA Servicii Energetice Moldova SA Servicii Energetice Oltenia SA Total Electrica Distributie Muntenia Nord SA Electrica Distributie Transilvania Nord SA Electrica Distributie Transilvania Sud SA Electrica furnizare SA Electrica Serv SA Servicii Energetice Muntenia SA Servicii Energetice Oltenia SA Total investments in subsidiaries 23.822.124 (23.822.124) 23.822.124 (23.822.124) 23.822.124 (23.822.124) 29.640.430 - 29.640.430 - 29.640.430 - 106.162.492 (106.162.492) 106.162.492 (106.162.492) 106.162.492 (106.162.492) 82.033.220 (82.033.220) 82.033.220 (82.033.220) 82.033.220 - 1.827.988.520 (400.627.973) 1.801.142.429 (395.952.692) 1.801.142.429 (347.554.442) Investments in subsidiaries, net value 31 December 2014 31 December 2013 1 january 2013 322.729.680 336.460.800 383.398.860 57.695.820 297.434.957 29.640.430 - 322.729.680 336.460.800 383.398.860 57.695.820 275.264.147 29.640.430 - 322.729.680 336.460.800 383.398.860 57.695.820 241.629.177 29.640.430 82.033.220 1.427.360.547 1.405.189.737 1.453.587.987 Based on the GD nr. 760/21.07.2010, at the beginning of year 2012 Electrica Serv subsidiary war reorganized through a partial spin-off, in order to separate the unprofitable branches, being established five new companies, held 100% by Electrica SA: SC Servicii Energetice Banat SA, SC Servicii Energetice Dobrogea SA, SC Servicii Energetice Moldova SA, SC Servicii Energetice Oltenia SA and SC Servicii Energetice Muntenia SA. In year 2013 the Company approved the liquidation of Servicii Energetice Moldova, Servicii Energetice Banat and Servicii Energetice Dobrogea. For Servicii Energetice Banat, Timis Court has decided the opening of the simplified insolvency procedure. The bankruptcy of Servicii Energetice Banat was declared and the Company concluded that, starting with the beginning of November 2014, the conditions for establishing the control over the subsidiary were no longer fulfilled. Therefore, the Company has derecognized the investments in Servicii Energetice Banat. On January the 22nd 2015, Constanţa Court decided the opening of the simplified insolvency procedure for Servicii Energetice Dobrogea. The Board of Administration of Servicii Energetice Oltenia annual report2014188 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) (in January 2014) and the Board of Administration of Servicii Energetice Muntenia have decided both the opening of the insolvency procedure for the reorganizing purpose. Having in view the above-mentioned, during year 2012 the Company recognized Impairment of investments (amount to RON 173,745,710) representing the investments value in the following subsidiaries Servicii Energetice Moldova, Servicii Energetice Banat and Servicii Energetice Dobrogea. During year 2013 the Company increased the Impairment of investments with RON 82,033,220, representing the value of investments in Servicii Energetice Oltenia. The Company did not adjusted the carrying amount of the investments in Servicii Energetice Muntenia as long this amount is deemed to be recoverable, taking into account the significant asset base of this company and the fact that its net assets have positive value. As regarding Electrica Serv, the Company recognized Impairments, based on the valuation report prepared by an independent valuator and having as purpose the assessment of the recoverable value of the shares in Electrica Serv SA. The valuator used the discounted cash flows (DCF) method. The model envisages both the asset exploitation potential, based on the current activity and the assets outside exploitation. 23 SPIn-Off Based on the Extraordinary General Shareholders decision dated 20 March 2014 and the resolution of the Bucharest Court dated 10 April 2014, the Company recognized the spin-off of the Company’s shareholdings to a new company - „Societatea de Administrare a Participatiilor in Energie SA” - wholly owned by the Ministry of Energy, Small and Medium- sized Enterprises and Business Environment. The spin-off referred to the transfer of the shares held by assets held for Distribution Enel Distributie Muntenia Enel Energie Muntenia Enel Distributie Banat Enel Distributie Dobrogea Enel Energie E.On Distributie E.On Energie Electrica Soluziona Hidro Tarnita BrM Total assets held for distribution The asset transferred through spin-off was recorded as follows: Assets held for distribution Cash and cash equivalents Total Share capital retained earnings Total the Company in 10 entities (Enel Distributie Muntenia, Enel Energie Muntenia, Enel Distributie Banat, Enel Distributie Dobrogea, Enel Energie, E.On Moldova Distributie, E.On Energie, Electrica Soluziona, Hidro Tarnita and BrM). The investments included equity accounted investees and other investments and were classified as assets held for distribution as at 31 December 2013, as follows: Carrying amount at 31 December 2013 Percentage ownership interest 77.139.794 10.519.062 100.527.111 85.763.375 58.498.737 166.080.960 8.590.613 49.000 57.500 40.000 507.266.152 23,57% 23,57% 24,87% 24,90% 36,99% 27,00% 3,78% 49,00% 50% Carrying amount 398.155.630 129.385.930 527.541.560 507.302.152 20.239.408 527.541.560 On 17 february 2014 the Company sold part of the shares held in E.On Moldova Distributie and E.On Energie romania to E.On following the exercise of call options by E.On. E.On paid the exercise price of RON 140,920,000 to the Company. Cash received from transaction with E.ON less the directly attributable costs were transferred to Societatea de Administrare a Participatiilor in Energie SA (rON 129,385,930). annual report2014 189 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) 24 capital and reserVes (a) ShaRE CaPITal anD ShaRE PREmIUm The issued share capital in nominal terms consists of 345,939,929 ordinary shares at 31 December 2014 (2013: 207,839,904) with a nominal value of RON 10 per share. All shares rank equally with regard to the Number of shares at 1 January Shared issued during the year Decrease in the number of shares due spin-off number of shares at 31 December The Company recognizes changes in share capital only after their approval in the General Shareholders Meeting and their registration by the Trade Register. The contributions made by the shareholders which are not yet registered with the Trade register at year end are recognized as pre-paid capital contributions from shareholders. On 25 february 2014 an increase of share capital of 188,264 ordinary shares was registered in the Trade registry. The shares were issued in respect of land contributed by the shareholder in previous periods. On 10 April 2014 Bucharest Court approved the spin-off by Electrica SA through transfer of part of its assets to a new company „Societatea de Administrare a Participatiilor in Energie SA” (see Note 23). As a consequence of this transaction, share capital was decreased by 43,123,780 ordinary shares. On 16 May 2014 an increase of share capital of 3,846,797 ordinary shares was registered in the Trade registry. The shares were issued in respect of land contributed by the shareholder in previous periods for shares. Between 11 and 27 June 2014 the Company organized an IPO, which entailed to an offering of 142,007,744 shares and 8,795,250 GDRs, each GDR representing Balance at 1 January Revaluation of property, plant and equipment Tax related to the defined benefit Balance as at 31 December Company’s residual assets. The holders of ordinary shares are entitled to receive dividends as declared, and are entitled to one vote per share at shareholder meetings of the Company. 2014 2013 207.839.904 181.223.805 (43.123.780) 345.939.929 206.229.044 1.610.860 - 207.839.904 four shares (see Note 1). The subscriptions amounted to rON 1,556,094,600 and USD 120,143,115. On 2 July 2014 the increase of share capital by 177,188,744 ordinary shares was recorded in the Trade register. Consequently, the Company recognized an increase of share capital of rON 1,771,887,440 and a share premium of RON 171,128,062. The transaction costs of rON 68,078,885 were deducted from the share premium. 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. (B) TREaSURy ShaRES In July 2014 the Company purchased 5,206,593 ordinary shares and 421,000 Global Depositary receipts, equivalent to 1,684,000 shares. The total amount paid for acquiring the shares and Global Depositary receipts was rON 75,372,435. (C) REValUaTIOn RESERVE The reconciliation between opening and closing revaluation reserve is as follows: 2014 - 986.367 (157.819) 828.548 Starting with the date of IFRS implementation, the Company has choose to apply the presumed cost exception, according to IFRS 1, therefore the difference resulting from the revaluations recorded prior to January 1st 2013 was transferred to retained earnings (see Note 30). (D) lEgal RESERVES The Legal reserves are set up as 5% of the gross profit, until the total legal reserves reach 20% of the paid-up nominal share capital of the Company, according to the legislation. These reserves are deductible for income tax purposes and are not distributable. annual report2014190 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) (E) DIVIDEnDS The dividends distributed by the Company in 2014 and 2013 (from the statutory profits of preceding years) were as follows: 2014 2013 Distributed dividends 22.475.225 13.211.376 The dividends per share paid to the owners of the Company were: 2014: RON 0.108, 2013: RON 0.064 per share. 25 trade payaBles Electricity suppliers Capital expenditure suppliers Other suppliers Total 31 December 2014 31 December 2013 1 january 2013 73,665,026 3,547,546 6,187,762 83,400,334 76,709,422 1,953,737 8,135,769 86,798,928 77,844,660 9,025,568 7,658,941 94,529,169 Electricity suppliers are mainly state-owned power generators, as detailed in Note 29. Other suppliers include suppliers of services, materials, consumables, etc. 26 other payaBles 31 December 2014 31 December 2013 1 january 2013 Current non-current Current non-current Current non-current Payables to the State budget Other liabilities Total 8,386,846 276,591 8,663,437 - - - 5,577 4,184,800 4,190,377 - 13,283,732 - 5,497,560 5,497,560 21,257,936 34,541,668 10,625,446 10,625,446 Other liabilities include mainly guarantees and sundry creditors. Other non-current liabilities refer mainly to an instalment transaction for a liability representing late payment of the invoices for electricity supply. 27 proVisions Balance at 1 january 2013 Provisions raised Balance at 31 December 2013 Provisions reversed Balance at 31 December 2014 litigations and other risks 17,500,089 13,277,265 30,777,354 (30,777,354) - As at 31 December 2013, provisions refer mainly to litigations with the National Agency for Fiscal Administration (ANAF), referring to late payment penalties claimed by ANAF. Following the partial favourable solution for the Company, these provisions were reversed during year 2014. annual report2014191 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) 28 fInanCIal InSTRUmEnTS - faIR ValUES anD RISK management (a) aCCOUnTIng ClaSSIfICa TIOnS anD faIR ValUES The following table shows the carrying amounts and it does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value. 31 December 2014 Note loans and receivables held to maturity financial assets Other financial liabilities Total Carrying amount financial assets not measured at fair value Trade receivables Other receivables Deposits, treasury bills and government bonds 16 18 17 87,695,766 12,209,901 - - - 1,038,419,841 Cash and cash equivalents 19 1,075,619,774 - Total 1,175,525,441 1,038,419,841 financial liabilities not measured at fair value - - - - - 87,695,766 12,209,901 1,038,419,841 1,075,619,774 2,213,945,282 Trade payables Total 25 - - - - 83,400,334 83,400,334 83,400,334 83,400,334 31 December 2013 Note loans and receivables Carrying amount Other financial liabilities Total financial assets not measured at fair value Trade receivables Other receivables Cash and cash equivalents Total financial liabilities not measured at fair value Bank overdrafts Trade payables Total 16 18 19 25 95,660,486 11,995,000 144,125,683 251,781,169 - - - - 95,660,486 11,995,000 144,125,683 251,781,169 - - - 36,999,437 86,798,928 123,798,365 36,999,437 86,798,928 123,798,365 annual report2014 192 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) 1 january 2013 Note loans and receivables Carrying amount Other financial liabilities Total financial assets not measured at fair value Trade receivables Other receivables Cash and cash equivalents Total financial liabilities not measured at fair value Bank loans Bank overdrafts Trade payables Total 16 18 19 26 (B) fInanCIal RISK managEmEnT The Company has exposure to the following risks arising from financial instruments: n credit risk n liquidity risk n market risk. (i) 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 Company’s receivables from customers, cash and cash equivalents, bank deposits and treasury bills and government bonds. The Company has a high credit risk mainly from State- Impairment The ageing of trade receivables was as follows: 86,841,490 23,702,977 185,208,969 295,753,436 - - - - 86,841,490 23,702,977 185,208,969 295,753,436 - - - - 10,333,911 55,732,038 94,529,169 160,595,118 10,333,911 55,732,038 94,529,169 160,595,118 owned companies. Until 2012, the Company had a concentration of credit risk with Oltchim SA, company that became insolvent (see Note 16). Currently, the Company consider that credit risk exposure has significantly diminished. Cash, bank deposits, treasury bills and government bonds are placed in financial institutions, which are considered to have minimal risk of default. The carrying amount of financial assets represents the maximum credit exposure.. Trade receivable The Company establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade receivables. 31 December 2014 31 December 2013 1 january 2013 gross Value Bad debt allowance gross Value Bad debt allowance gross Value Bad debt allowance Neither past due nor impaired Past due 1-90 days Past due 90-180 days Past due 180-360 days Past due 1-2 years Past due 2-3 years 83,382,090 743,587 498,036 3,072,053 3,804,652 - - - - 92,780,614 77,738 773,759 2,028,375 65,782,210 8,002,656 - 37,655,377 (24,598,753) (3,804,652) 32,264,483 (32,264,483) 245,781,874 (245,781,874) 34,542,103 (34,542,103) 229,020,902 (229,020,902) 254,096,454 (254,096,454) Past due more than 3 years 632,051,499 (632,051,499) 406,643,388 (406,643,388) 143,130,026 (143,130,026) Total 758,094,020 (670,398,254) 763,589,259 (667,928,773) 754,448,597 (667,607,107) Bad debt allowance related to Oltchim SA. annual report2014193 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) net trade receivable 31 December 2014 31 December 2013 1 january 2013 Neither past due nor impaired 83,382,090 92,780,614 Past due 1-90 days Past due 90-180 days Past due 180-360 days Total 743,587 498,036 3,072,053 87,695,766 77,738 773,759 2,028,375 95,660,486 65,782,210 8,002,656 - 13,056,624 86,841,490 (ii) liquidity risk liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company’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 Company aims to maintain the level of its cash and cash equivalents at an amount in excess of expected cash outflows on financial liabilities. The Company also monitors the level of expected cash inflows on trade receivables together with expected cash outflows on trade and other payables. Exposure to liquidity risk The following are the remaining contractual maturities of financial liabilities at the reporting date. The amounts are gross and undiscounted, and include estimated interest payments. financial liabilities 31 December 2014 Trade payables Total 31 December 2013 Bank overdraft Trade payables Total 1 january 2013 Bank loans Bank overdraft Trade payables Total The bank loan existing in balance at 1 January 2013 represents a long-term loan from BCR (Banca Comerciala romana – romanian Commercial Bank), contracted in 15 October 2004, for investments on the basis of GD 702/2003. The interest rate was rOBOr 6M + 1%. repayment of bank loan was made in 15 equal semestrial tranches, in the period 15 November 2006 – 15 November 2013. (iii) market risk Market risk is the risk that changes in market prices – such as foreign exchange rates, interest rates– will affect the Company’s profit 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 optimising the return. Carrying amount Contractual cash flows Total less than 1 year 83,400,334 83,400,334 83,400,334 83,400,334 83,400,334 83,400,334 36,999,437 86,798,928 123,798,365 36,999,437 86,798,928 123,798,365 36,999,437 86,798,928 123,798,365 10,333,911 55,732,038 94,529,169 160,595,118 10,333,911 55,732,038 94,529,169 160,595,118 10,333,911 55,732,038 94,529,169 160,595,118 Current risk The Company 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 currencies in which these transactions are primarily denominated are rON and EUr. Certain liabilities are denominated in foreign currency (EUr). The Company also has deposits and bank accounts denominated in foreign currency (EUr). The Company’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. annual report2014 194 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) Exposure to currency risk The summary quantitative data about the Company’s exposure to currency risk is as follows: In ROn 31 December 2014 31 December 2013 1 january 2013 eur eur eur Cash and cash equivalents 10,137,641 136,172,767 162,037,151 Deposits (deposits, treasury bills and government bonds) 136,704,050 - - net statement of financial position exposure 146,841,691 136,172,767 162,037,151 The following significant exchange rates have been applied during the year: ron 1 EUr average rate year-end spot rate 2014 4.4446 2013 4.4190 2013 4.4821 2012 4.4847 2011 4.4287 Sensitivity analysis A reasonably possible strengthening (weakening) 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 and, respectively, equity 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. Effect 31 December 2014 EUr (5% movement) 31 December 2013 EUr (5% movement) 1 january 2013 EUr (5% movement) Profit before tax Strengthening Weakening 7,342,085 (7,342,085) 6,808,638 (6,808,638) 8,101,858 (8,101,858) Interest rate risk The Company does not have significant long-term bank loans. Exposure to interest rate risk The interest rate profile of the Company’s interest-bearing financial instruments is as follows: fixed-rate instruments Financial assets 31 December 2014 31 December 2013 1 january 2013 Bank accounts (cash and cash equivalent) 874.243.283 140.619.441 162.318.391 Deposits, treasury bills and government bonds 1.038.419.841 - - 1.912.663.124 140.619.441 162.318.391 Variable-rate instruments Financial liabilities Overdrafts Short term bank borrowings - - - (36,999,437) (55,732,038) - (36,999,437) (10,333,911) (66,065,949) annual report2014 195 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) fair value sensitivity analysis for fixed-rate instruments The Company 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. 31 December 2014 Variable-rate instruments 31 December 2013 Variable-rate instruments 31 December 2012 Variable-rate instruments 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 50 bp increase 50 bp increase - - (184,997) 184,997 (330,330) 330,330 29 related parties (a) maIn ShaREhOlDERS As at 31 December 2014, Romanian State, represented by the Ministry of Energy, Small and Medium-sized Enterprises and Business Environment holds 48.78% of the Company’s share capital. The next large shareholder is the European Bank for Reconstruction and Development with 8.66%. (B) managEmEnT anD aDmInISTRa TORS’ COmPEnS aTIOn management compensation 2014 821,012 2013 188,431 Compensations granted to the members of the Board of Directors and representatives in the General Meeting of Shareholders were as follows: Members of Board of Directors Representatives in the General Meeting of Shareholders Total 915,885 8,389 924,274 273,705 14,620 288,325 No loans were granted to managers or administrators in 2014 and 2013. 2014 2013 annual report2014 196 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) (C) TRanS aCTIOnS WITh aSSOCIaTES (i) Balances receivables and payables from/ to associates: Receivables balance Payables Balance 31 December 2014 31 December 2013 1 january 2013 31 December 2014 31 December 2013 1 january 2013 Electrica furnizare 14,177,389 52,286,762 27,520,714 1,624,698 1,885,180 1,696,840 Electrica Muntenia Nord Distributie 13,807,379 4,144,291 5,377,628 Electrica Transilvania Nord Distributie 7,428,076 8,038,921 8,305,074 Electrica Transilvania Sud Distributie 6,860,197 4,084,511 7,785,697 201,646 940,609 200,318 55,917 - - 26,177 19,334 22,153 Electrica Serv Servicii Energetice Muntenia Servicii Energetice Moldova Servicii Energetice Banat Servicii Energetice Dobrogea Servicii Energetice Oltenia Electrica Soluziona* Total 10,962,160 12,827,683 14,571,768 1,307,532 301,589 396,040 214,006 147,305 105,426 - 214,006 147,305 105,426 - 320,026 320,026 215,655 153,984 107,030 6,685 322,453 - - - - - - - - - - - - - - - n/a 54,021,962 - 82,168,931 - 64,366,688 n/a 4,274,803 371.628 2,614,314 326.339 2,486,883 *Transferred at (d) Transactions with other companies in which the State holds control or significant influence as a result of the disposal of this investment. Receivables and payables from/to electricity distribution and supply companies mainly include, receivables/ payables from electricity supply, mainly from disbursements on balancing market. receivables from Electrica Serv are mainly represented by loans granted by the company to Electrica Serv, being at maturity and which were not received. The Company estimates that in the following period this amounts will be received, taking into account the improvement of Electrica Serv financial position. (ii) Transactions with other affiliates Sales in 2014 Sales in 2013 Purchases in 2014 Purchases in 2013 Electrica furnizare 71,166,230 132,577,209 21,029,810 17,346,013 Electrica Muntenia Nord Distributie Electrica Transilvania Nord Distributie Electrica Transilvania Sud Distributie Electrica Serv Electrica Soluziona* 28,736,574 15,335,807 1,916,777 953,547 20,380,439 15,011,090 1,062,056 15,177,388 15,058,599 3,928,571 n/a 6,428 - 1,738,183 2,970,456 n/a 10,200 5,400 2,365,754 299,700 Total *Transferred at (d) Transactions with other companies in which the State holds control or significant influence as a result of the disposal of this investment. 177,989,133 139,389,203 28,717,283 20,980,614 annual report2014197 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) (D) TRanS aCTIOnS WITh COmPanIES In WhICh ThE STaTE haS COnTROl OR SIgnIfICanT InflUEnCE In 2014 the Company had sale and purchase transactions mainly with the following companies: net Receivables balance at 31 December 2014 Payables balance at 31 December 2014 Sales 2014 Purchase 2014 Transelectrica OPCOM Complexul Energetic Oltenia Electrocentrale Oradea CET Govora total 669,015 18.900.021 12.530.551 162.058.079 - - - 12.524 5.802.674 117.127 - - 552.615 30.650 - 617.797 382,917 1,051.932 28.742 24.743.961 911.047 14.111.340 1.006.441 163.712.967 In 2013 the Company had sale and purchase transactions mainly with the following companies controlled by state: net Receivables balance at 31 December 2013 Payables balance at 31 December 2013 Sales 2013 Purchase 2013 Transelectrica OPCOM Complexul Energetic Oltenia Electrocentrale Oradea CET Govora total 2,038,175 59,863,273 17,120,958 141,270,942 2,356 - 681,872 - 4,748,531 40,369,180 11,300,234 - 85,156 1,121,436 - 184,351 - 708,896 496,576 2,722,403 71,248,663 23,175,276 182,845,594 At 1 January 2013, the main balances with the companies in which the state has control or significant influence are as the following: Transelectrica OPCOM Complexul Energetic Oltenia Electrocentrale Oradea CET Govora total net Receivables balance at 1 january 2013 Payables balance at 1 january 2013 1,039,126 - - 1,305,617 774,113 3,118,856 49,311,741 1,194,930 17,915,272 135,302 502,866 69,060,111 Transactions refer mainly to purchase and sales on the balancing market as well as on the Day Ahead Market. 30 conditionalities (a) lITIgaTIOn anD ClaImS The Company is involved in various litigations; the most significant are the followings: n The Group was sued by Orange Media, claiming the payment of RON 17,008,850 RON representing late payment penalties requested by the claimant as a result of the cancelation of a public acquisition contract by the Company. By sentence no. 4890/13.06.2013 issued by Bucharest Court, Orange Media’s claim was dismissed. By sentence no. 573/24.02.2014 the Bucharest Court of Appeal upheld the appeal, voided the sentence and referred the case back to Bucharest Court. By sentence no. 5200/30.10.2014 issued by Bucharest Court, the claim was dismissed. An appeal against this sentence can be made. The Company expects a favourable outcome for this case and in consequence, no provisions were registered. n The Company was sued by Termoelectrica, claiming the payment of RON 25,047,353 representing penalties related to certain invoices, for the period 1 April 2007 – 31 March 2008. In the first sentence the claim was dismissed. The Company expects a favourable outcome for this case and in consequence, no provisions were registered. n The activity of the company was subject to many controls performed by ANAf. As at the date of the financial statements, the company is in litigation with ANAF for late payment penalties claimed by ANAF in amount of 30,777,354 rON. annual report2014198 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) (B) fISCal EnVIROnmEnT Tax audits are frequent in Romania, consisting of detailed verifications of the accounting records of tax payers. Such audits sometimes take place after months, even years, from the date liabilities are established. Consequently, companies may be found liable for significant taxes and fines. Moreover, tax legislation is subject to frequent changes and the authorities demonstrate inconsistency in interpretation of the law. Income tax returns may be subject to revision and corrections by tax authorities, generally for a five year period after they are completed. The management of the company believes that adequate provisions were recorded for all significant tax obligations. 31 commitments (C) TRanSfER PRICES According to the fiscal legislation, the fiscal assessment for a transaction with affiliates is based on the market price concept for that transaction. Based on this concept, the transfer prices must be adjusted in order to reflect the market prices established between the entities having no affiliation relation and which act independently, based on “normal market conditions”. Likely, verifications of the transfer prices may be done in the future by the fiscal authorities, in order to establish if these prices are respecting the principle of the “normal market conditions” and that the tax base for romanian taxpayer is not distorted. guarantees and pledges At 31 December 2014 the company has an outstanding bank letter of guarantee as it follows: Bank ING B.V. Beneficiary amount Currency Issue Date Expiry Date Transelectrica 20,000,000 rON 10.10.2013 09.10.2015 contractual commitments The Group has the following contractual commitments as at 31 December 2014: Purchase of property, plant and equipment and intangible assets amount 8,034,000 32 foundation of accounting restatements Base of preparation These financial statements have been prepared in accordance with OMFP 1268/2012 as it is mentioned in note 2. The accounting policies presented in note 6 were applied for the preparation of the financial statements for the year ended at 31 December 2014, for the comparative information presented in these financial statements for the financial year ended at 31 December 2013 and for the preparation of the opening of the For the preparation of the opening IFRS statement of financial position, the company adjusted the previous reported amounts from the financial statements prepared according to OMfP 3055/2009. An explanation of the IFRS restatement method, as well as accounting errors corrections affected the financial position of the company and the financial performance is presented in the following tables and the corresponding notes. annual report2014199 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) (i) Reconciliation of financial position of the Company 2014 annual report note omfp 3055/2009 – 1 january 2013 The adjustments impact for the transition to IfRS – 1 january 2013 The impact of accounting errors related to prior periods -1 january 2013 IfRS – 1 january 2013 omfp 3055/2009 – 31 December 2013 The adjustments impact for the transition to IfRS -31 December 2013 The impact of accounting errors related to prior periods – 31 December 2013 IfRS -31 December 2013 assets non-current assets Property, plant and equipment 265,509,512 (858,365) (7,263,955) 257,387,192 322,961,270 (858,365) (19,729,486) 302,373,419 Intangible assets Investments in subsidiaries Investments in associates Deferred tax assets Total non-current assets Current assets Cash and cash equivalents Trade receivables Other receivables Inventories Prepayments Income tax receivable Assets held for distribution Total current assets b,f b d e b 318,000 - - 318,000 797,803 - - 797,803 1,527,855,544 209,895,099 (284,162,656) 1,453,587,987 1,494,219,179 231,740,044 (320,769,486) 1,405,189,737 431,410,493 - 75,855,659 15,156,826 - - 507,266,152 431,410,493 (431,410,493) 15,156,826 - 13,932,473 - - - 13,932,473 2,225,093,549 300,049,219 (291,426,611) 2,233,716,157 2,249,388,745 (186,596,341) (340,498,972) 1,722,293,432 185,208,969 - - 185,208,969 144,125,683 - - 144,125,683 483,838,569 (3,612,794) (393,384,285) 86,841,490 417,949,814 (3,612,794) (318,676,534) 74,682,812 (36,017,041) 217,965 443,126 5,878,858 - - - - - - - - - - 38,665,771 94,017,710 (61,517,275) 217,965 443,126 134,502 328,120 5,878,858 22,794,808 - - - - - 507,266,152 - - - - - 95,660,486 32,500,435 134,502 328,120 22,794,808 507,266,152 750,270,299 (39,629,835) (393,384,285) 317,256,179 679,350,637 442,136,083 (318,676,534) 802,810,186 Total assets 2,975,363,848 260,419,384 (684,810,896) 2,550,972,336 2,928,739,382 255,539,742 (659,175,506) 2,525,103,618 200 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) 2014 annual report equity and liaBilities Equity Share capital, of which: Subscribed share capital Inflation adjustment of share capital Contributions of shareholders in nature Revaluation reserve legal reserves retained earnings Total equity liabilities Total non-current liabilities Employee benefits Other payables Total non-current liabilities Current liabilities Short term bank borrowings Bank overdrafts Trade payables Other payables Income in advance Employee benefits Provisions Total current liabilities Total liabilities note omfp 3055/2009 – 1 january 2013 The adjustments impact for the transition to IfRS – 1 january 2013 The impact of accounting errors related to prior periods -1 january 2013 IfRS – 1 january 2013 omfp 3055/2009 – 31 December 2013 The adjustments impact for the transition to IfRS -31 December 2013 The impact of accounting errors related to prior periods – 31 December 2013 IfRS -31 December 2013 a a c a,b,c, d,e.f 2,062,290,440 430,907,062 2,062,290,440 - - 430,907,062 54,481,291 - 27,100,218 (27,100,218) 114,093,070 - - - - - - - 2,493,197,502 2,078,399,040 430,907,062 2,062,290,440 2,078,399,040 - 430,907,062 - 430,907,062 54,481,291 47,492,961 - - 27,046,818 (27,046,818) 114,093,070 114,093,070 - - - - - - - 2,509,306,102 2,078,399,040 430,907,062 47,492,961 - 114,093,070 478,577,149 (134,843,037) (684,810,896) (341,076,784) 483,508,335 (141,581,392) (659,175,506) (317,248,563) 2,736,542,168 268,963,807 (684,810,896) 2,320,695,079 2,750,540,224 262,278,852 (659,175,506) 2,353,643,570 3,257,741 13,500,000 16,757,741 (429,432) (2,874,554) (3,303,986) 10,333,911 55,732,038 93,239,343 41,862,702 - 2,295,856 18,600,089 222,063,939 - - 1,289,826 (7,321,034) 361,339 1,529,432 (1,100,000) (5,240,437) 238,821,680 (8,544,423) - - - - - - - - - - - - 2,828,309 10,625,446 13,453,755 2,927,909 6,000,000 8,927,909 (169,156) (502,440) (671,596) 10,333,911 55,732,038 94,529,169 34,541,668 361,339 3,825,288 - 36,999,437 86,996,438 10,229,537 410,264 2,643,336 17,500,089 31,992,237 216,823,502 169,271,249 - - (197,510) (6,039,160) - 1,384,039 (1,214,883) (6,067,514) 230,277,257 178,199,158 (6,739,110) - - - - - - - - - - - - 2,758,753 5,497,560 8,256,313 - 36,999,437 86,798,928 4,190,377 410,264 4,027,375 30,777,354 163,203,735 171,460,048 Total equity and liabilities 2,975,363,848 260,419,384 (684,810,896) 2,550,972,336 2,928,739,382 255,539,742 (659,175,506) 2,525,103,618 201 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) ii) Reconciliation of profit or loss account note omfp 3055/2009 –2013 The adjustments impact for the transition to IfRS -2013 The impact of accounting errors related to prior periods - 2013 revenues Other income Electricity purchased Employee benefits Depreciation and amortization Impairment of property, plant and equipment, net Value adjustments on investments in subsidiaries Resumption of impairment of trade and other receivables, net Other operating expenses , net movement in provisions Profit / (loss) from operating f e 283,256,214 15,088,609 (227,938,870) (21,925,367) (9,377,572) - - (75,029,417) (33,732,081) (69,658,484) (268,075) 268,076 - (811,749) - - (11,791,420) - 685,891 (11,917,277) - - - - - (12,465,531) (36,606,830) 91,623,701 (16,915,950) 25,635,390 finance income finance costs Income / (Expenses) net financial Profit before tax Income tax expense Profit for the year 104,936,477 (9,915,552) 95,020,925 (8,949,713) 7,871,188 (1,078,525) - - - 25,362,441 (12,995,802) - 25,362,441 (1,182,446) (14,178,248) 25,635,390 - 25,635,390 IfRS - 2013 282,988,139 15,356,685 (227,938,870) (22,737,116) (9,377,572) (12,465,531) (48,398,250) 16,594,284 (49,962,140) (55,940,371) 95,986,764 (2,044,364) 93,942,400 38,002,029 (1,182,446) 36,819,583 a) Restatement of share capital under IaS 29 Romanian economy was a hyperinflationary economy until December 31, 2003, According to IAS 29 “Financial Reporting in Hyperinflationary Economies”, components of equity, except retained earnings and revaluation reserves are restated by applying a general price index of the dates the components were contributed, Thus the Company’s share capital was adjusted with the effects of hyperinflation period up to 31,12,2003 The modification impact resulting from the application of IAS 29 is summarized as follows: Statement of financial position Adjustments of share capital The effect on retained earnings due to the adoption of IAS 29 for the first time (loss) 1 january 2013 31 December 2013 430,907,062 430,907,062 (430,907,062) (430,907,062) b) Restatement of investments in subsidiaries and associates under IaS 29 Investments in associates and classification of assets held for distribution in accordance with IfRS 5 Investments in subsidiaries and other companies have been restated with the inflation effect until 31 December 2003 (the date of which the romanian economy stop to be hyperinflationary), the differences in restatement is recorded in retained earnings. The impact of the changes resulting from the application of IAS 29 is summarized as follows: Statement of financial position Investments in subsidiaries Investments in associates entities The effect on retained earnings due to the adoption of IAS 29 for the first time (profit / credit) 1 january 2013 31 December 2013 184,440,554 75,855,659 260,296,213 172,649,135 75,855,659 258,761,358 annual report2014202 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) On 31 December 2013, the Company has reclassified investments in associates division of the project approved in March 20, 2014 (see Note 23) and presented them as assets held for distribution in accordance with IFRS 5. c) application of deemed cost exception The Company applies the revaluation tangible model, the Company chose the date of transition to IFRS to apply the exception of deemed cost under IFRS 1 as the difference revaluation registered until January 1, 2013 was transferred to retained earnings, After the transition date of revaluation reserves arising from revaluation are recognized as such in the financial statements, The impact of the exception deemed cost is summarized as follows: Statement of financial position Revaluation reserve retained earnings (credit) 1 December 2013 31 December 2013 (27,100,218) 27,100,218 (27,046,818) 27,046,818 d) Deferred tax Deferred tax concept is not adopted as OMPf 3055/2009, As a result of applying IAS 12 “Income Taxes”, the Company recorded deferred tax for taxable and deductible temporary differences in the levels of its assets and liabilities during the translation subject to IfrS. Impact of deferred tax application is summarized as follows: Statement of financial position Deferred tax assets retained earnings (credit) Deferred income tax liability recognized in equity Profit and loss account Income tax income 1 january 2013 31 December 2013 15,156,826 15,156,826 83,154 13,932,473 13,932,473 41,907 2013 1,182,446 e) Value adjustments related to customer Oltchim receivables from Oltchim insolvent company were evaluated in OMPF 3055/2009 financial statements net of 318, 676, 535 rON to 31 December 2013 (393, 384, 285 rON to 31 December 2012), In January 30, 2013 was granted the application filed by the debtor Oltchim general opening insolvency proceedings, The Company recorded impairment adjustments in the IFRS financial statements for the entire debt of Oltchim, as error correction for the year 2012. Accordingly, the Company cancelled subsequent adjustments made in profit or loss on the value of the receivables Oltchim. Impact correction value adjustments for Oltchim is summarized as follows: Statement of financial position Trade receivables retained earnings (loss) Profit and loss account Impairment of trade receivables and other receivables, net 1 january 2013 31 December 2013 (393,384,285) (393,384,285) (318,676,534) (318,676,534) 2013 (74,707,751) annual report2014203 NOTes TO THe iNDiViDuAL fiNANCiAL sTATeMeNTs AS AT 31 DECEMBER 2014 (All amounts are in RON, unless otherwise indicated) f) Value adjustments relating to investments in subsidiaries Adjustment relates to the carrying amount of the shares held by Electrica SA in Servicii Energetice Banat, Servicii Energetice Dobrogea, Servicii Energetice Moldova, Servicii Energetice Oltenia and Electrica Serv, adjusted retrospectively as indicators of impairment value existed since the end of 2012: the energy services companies entered in 2013 into liquidation / insolvency and adjusted net assets or net assets of these companies are negative, regarding Electrica Serv, its net assets, corrected flow results in relation with the Servicii Energetice Banat, Servicii Energetice Dobrogea, Servicii Energetice Moldova and Servicii Energetice Oltenia whose recoverability is unlikely, is significantly lower than the carrying value of shares held by Electrica in Electrica Serv. In the OMPF 3055/2009 financial statements were not recorded value adjustments relating to the recoverability of investments in these subsidiaries, In IFRS Electrica financial statements retrospectively adjusted entirely investments in Servicii Energetice Banat, Servicii Energetice Dobrogea, Servicii Energetice Moldova (since 2012) and Servicii Energetice Oltenia (in 2013), and hired an independent assessor to perform valuation of investments in Electrica Serv to 31 December 2014, 2013 and 2012, These results were recorded in the IFRS financial statements as correction of errors related to previous years. Impact correction value adjustments to investments in subsidiaries is summarized as follows: Statement of financial position Investments in subsidiaries retained earnings (loss) Profit and loss account Value adjustments on the equity interests in subsidiaries 1 january 2013 31 December 2013 (284,162,656) (284,162,656) (320,769,486) (320,769,486) 2013 36,606,830 annual report2014204 iNDePeNDeNT AuDiTOrs’ rePOrT fOr iNDiViDuAL fiNANCiAL sTATeMeNTs fOr THe yeAr eNDeD 31 DeCeMBer 2014 ABCD KPMG Audit SRL Victoria Business Park DN1, Soseaua Bucuresti-Ploiesti nr. 69-71 Sector 1 Tel: Fax: +40 (21) 201 22 22 +40 (372) 377 800 +40 (21) 201 22 11 +40 (372) 377 700 www.kpmg.ro P.O. Box 18-191 Bucharest 013685 Romania Independent Auditors’ Report (free translation1) To the shareholders of Electrica S.A. Report on the Individual Financial Statements 1 We have audited the accompanying individual financial statements of Electrica S.A. (“the Company”), which comprise the individual statement of financial position as at 31 December 2014, the individual statements of profit or loss, other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management’s Responsibility for the Individual Financial Statements 2 Management is responsible for the preparation and fair presentation of these individual financial statements in accordance with the Order of the Minister of Public Finance no. 1286/2012 and related amendments for the approval of accounting regulations conforming to International Financial Reporting Standards applicable to companies whose securities are traded on a regulated market, and for such internal control as management determines is necessary to enable the preparation of individual financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility 3 Our responsibility is to express an opinion on these individual financial statements based on our audit. We conducted our audit in accordance with the standards on auditing as adopted by the Romanian Chamber of Financial Auditors. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the individual financial statements are free from material misstatement. 4 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the individual financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the individual financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the individual financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the individual financial statements. 1 TRANSLATOR’S EXPLANATORY NOTE: This translation of the auditors’ report is provided as a free translation from Romanian which is the official and binding version. © 2015 KPMG Audit SRL, a Romanian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. PDC no. 15632 Fiscal registration code RO12997279 Trade Registry no.J40/4439/2000 Share Capital 2,000 RON annual report2014 205 iNDePeNDeNT AuDiTOrs’ rePOrT fOr iNDiViDuAL fiNANCiAL sTATeMeNTs fOr THe yeAr eNDeD 31 DeCeMBer 2014 ABCD 5 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion ABCD Opinia 6 6 Opinia 6 ABCD In our opinion, the individual financial statements give a true and fair view of the individual financial position of the Company as at 31 December 2014, and of its individual financial performance and its individual cash flows for the year then ended in accordance with the Order of the Minister of Public Finance no. 1286/2012 and related amendments for the approval of accounting regulations conforming to International Financial Reporting Standards applicable to companies whose securities are traded on a regulated market. In opinia noastra, situatiile financiare individuale ofera o imagine fidela a pozitiei financiare individuale a Societatii la data de 31 decembrie 2014, precum si a rezultatului individual al operatiunilor sale si a fluxurilor de numerar individuale pentru exercitiul financiar incheiat la aceasta data, in conformitate cu Ordinul Ministrului Finantelor Publice nr. 1286/2012 pentru 7 This independent auditors’ report is made solely to the Company's shareholders, as a body. Our aprobarea Reglementarilor contabile conforme cu Standardele Internationale de Raportare audit work has been undertaken so that we might state to the Company's shareholders those matters Financiara aplicabile societatilor comerciale ale caror valori mobiliare sunt admise la we are required to state to them in an auditor's report and for no other purpose. To the fullest extent tranzactionare pe o piata reglementata, cu modificarile ulterioare. permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's shareholders as a body, for our audit work, for the report on the individual financial statements and the report on conformity, or for the opinion we have formed. In opinia noastra, situatiile financiare individuale ofera o imagine fidela a pozitiei financiare individuale a Societatii la data de 31 decembrie 2014, precum si a rezultatului individual al operatiunilor sale si a fluxurilor de numerar individuale pentru exercitiul financiar incheiat la aceasta data, in conformitate cu Ordinul Ministrului Finantelor Publice nr. 1286/2012 pentru aprobarea Reglementarilor contabile conforme cu Standardele Internationale de Raportare Financiara aplicabile societatilor comerciale ale caror valori mobiliare sunt admise la tranzactionare pe o piata reglementata, cu modificarile ulterioare. Other Matters Alte aspecte Alte aspecte 7 Acest raport al auditorului independent este adresat exclusiv actionarilor Societatii, in 7 Acest raport al auditorului independent este adresat exclusiv actionarilor Societatii, in 8 As disclosed in Note 2 to the accompanying individual financial statements, in accordance with the ansamblu. Auditul nostru a fost efectuat pentru a putea raporta actionarilor Societatii acele ansamblu. Auditul nostru a fost efectuat pentru a putea raporta actionarilor Societatii acele Order of Minister of Public Finance no. 881/2012, starting with 2014 the Company has the aspecte pe care trebuie sa le raportam intr-un raport de audit financiar, si nu in alte scopuri. In aspecte pe care trebuie sa le raportam intr-un raport de audit financiar, si nu in alte scopuri. In obligation to apply International Financial Reporting Standards in the preparation of the individual masura permisa de lege, nu acceptam si nu ne asumam responsabilitatea decat fata de Societate masura permisa de lege, nu acceptam si nu ne asumam responsabilitatea decat fata de Societate financial statements. Therefore, this is the first set of individual financial statements prepared in si de actionarii acesteia, in ansamblu, pentru auditul nostru, pentru raportul asupra situatiilor si de actionarii acesteia, in ansamblu, pentru auditul nostru, pentru raportul asupra situatiilor accordance with the Order of the Minister of Public Finance no. 1286/2012 and related amendments financiare individuale si raportul asupra conformitatii sau pentru opinia formata. financiare individuale si raportul asupra conformitatii sau pentru opinia formata. for the approval of accounting regulations conforming to International Financial Reporting Standards applicable to companies whose securities are traded on a regulated market, and we have 8 Dupa cum este prezentat in Nota 2 la situatiile financiare individuale anexate, in conformitate 8 Dupa cum este prezentat in Nota 2 la situatiile financiare individuale anexate, in conformitate not expressed an opinion or issued a separate audit report on the individual statements of financial cu Ordinul Ministrului Finantelor Publice nr. 881/2012, incepand cu exercitiul financiar al cu Ordinul Ministrului Finantelor Publice nr. 881/2012, incepand cu exercitiul financiar al position as of 31 December 2013 and 1 January 2013, and on the individual statements of profit or anului 2014 Societatea are obligatia de a aplica Standardele Internationale de Raportare anului 2014 Societatea are obligatia de a aplica Standardele Internationale de Raportare loss, other comprehensive income, changes in equity and cash flows for the year ended Financiara la intocmirea situatiilor financiare anuale individuale. In consecinta, acesta este Financiara la intocmirea situatiilor financiare anuale individuale. In consecinta, acesta este 31 December 2013, or any of the related notes included in the accompanying individual financial primul set de situatii financiare individuale intocmite in conformitate cu Ordinul Ministrului primul set de situatii financiare individuale intocmite in conformitate cu Ordinul Ministrului statements. Finantelor Publice nr. 1286/2012 pentru aprobarea Reglementarilor contabile conforme cu Finantelor Publice nr. 1286/2012 pentru aprobarea Reglementarilor contabile conforme cu Standardele Internationale de Raportare Financiara aplicabile societatilor comerciale ale caror Standardele Internationale de Raportare Financiara aplicabile societatilor comerciale ale caror Report on conformity of the Administrators’ Report with the individual financial statements valori mobiliare sunt admise la tranzactionare pe o piata reglementata, cu modificarile valori mobiliare sunt admise la tranzactionare pe o piata reglementata, cu modificarile ulterioare, si noi nu am exprimat o opinie si nu am emis un raport de audit separat asupra ulterioare, si noi nu am exprimat o opinie si nu am emis un raport de audit separat asupra In accordance with the Order of the Minister of Public Finance no. 1286/2012 and related amendments, situatiilor individuale ale pozitiei financiare la 31 decembrie 2013 si 1 ianuarie 2013, ale situatiilor individuale ale pozitiei financiare la 31 decembrie 2013 si 1 ianuarie 2013, ale article no. 16 point 1 of accounting regulations in accordance with International Financial Reporting profitului sau pierderii, altor elemente ale rezultatului global, modificarilor capitalurilor proprii profitului sau pierderii, altor elemente ale rezultatului global, modificarilor capitalurilor proprii Standards applicable to companies whose securities are traded on a regulated market, we have read the si fluxurilor de numerar pentru exercitiul financiar incheiat la 31 decembrie 2013, si notelor si fluxurilor de numerar pentru exercitiul financiar incheiat la 31 decembrie 2013, si notelor Administrators’ Report attached to the individual financial statements. The Administrators’ Report is aferente acestora incluse in situatiile financiare individuale anexate. aferente acestora incluse in situatiile financiare individuale anexate. not a part of the individual financial statements. In the Administrators’ Report we have not identified any financial information which is not in accordance, in all material respects, with the information Raport asupra conformitatii raportului administratorilor cu situatiile financiare individuale presented in the accompanying individual financial statements. Raport asupra conformitatii raportului administratorilor cu situatiile financiare individuale Refer to the original signed Romanian version In concordanta cu Ordinul Ministrului Finantelor Publice nr. 1286/2012 cu modificarile ulterioare, In concordanta cu Ordinul Ministrului Finantelor Publice nr. 1286/2012 cu modificarile ulterioare, articolul 16, punctul 1 din Reglementarile contabile conforme cu Standardele Internationale de articolul 16, punctul 1 din Reglementarile contabile conforme cu Standardele Internationale de Raportare Financiara aplicabile societatilor comerciale ale caror valori mobiliare sunt admise la Raportare Financiara aplicabile societatilor comerciale ale caror valori mobiliare sunt admise la tranzactionare pe o piata reglementata, noi am citit raportul administratorilor anexat situatiilor tranzactionare pe o piata reglementata, noi am citit raportul administratorilor anexat situatiilor For and on behalf of KPMG Audit SRL: financiare individuale. Raportul administratorilor nu face parte din situatiile financiare individuale. financiare individuale. Raportul administratorilor nu face parte din situatiile financiare individuale. In raportul administratorilor noi nu am identificat informatii financiare care sa fie in mod In raportul administratorilor noi nu am identificat informatii financiare care sa fie in mod semnificativ neconcordante cu informatiile prezentate in situatiile financiare individuale anexate. semnificativ neconcordante cu informatiile prezentate in situatiile financiare individuale anexate. Mikael Olsson KPMG Audit SRL registered with the Chamber of Financial Pentru si in numele KPMG Audit SRL: Pentru si in numele KPMG Audit SRL: Auditors of Romania under no 662/2001 registered with the Chamber of Financial Auditors of Romania under no 9/2001 Mikael Olsson Bucharest, 26 March 2015 Mikael Olsson KPMG Audit SRL KPMG Audit SRL inregistrat la Camera Auditorilor Financiari din Romania cu numarul 662/2001 inregistrat la Camera Auditorilor Financiari din Romania cu numarul 662/2001 inregistrat la Camera Auditorilor Financiari din Romania cu numarul 9/2001 inregistrat la Camera Auditorilor Financiari din Romania cu numarul 9/2001 Bucuresti, 26 martie 2015 Bucuresti, 26 martie 2015 annual report2014206 ”COMPLy Or exPLAiN” sTATeMeNT PrOViDeD By THe COrPOrATe gOVerNANCe CODe Of BuCHAresT sTOCk exCHANge 27 APriL 2015 2014 annual report Principle/ Recommendation question yes no If nOT, please explain P19 P1 r1 r2 r3 Is the Company managed under a dualist system? Has the Company drawn up the By-laws/Corporate Governance Rules to describe the main aspects of corporate governance? The By-laws/Corporate Governance Rules are posted on the Company’s website, indicating the date of the last update? Are there in the By-laws/Corporate Governance Rules definitions of corporate governance structures, positions, competencies and responsibilities of the Board of Directors and of the executive management? Does the Company’s Annual report provide for a chapter on corporate governance describing all relevant events related to corporate governance recorded during the previous financial year? Does the Company post on its own website the information regarding the following aspects on its corporate governance policy: a) description of its corporate governance structures? b) the updated articles of incorporation? c) internal functioning rules/its essential aspects for each speciality commission/committee? d) “Comply or Explain” statement? e) list with the members of Board of Directors mentioning the independent and/or non-executive members, the members of the executive management and the members of the speciality commissions/committees? f) a brief description of the CV for each member of the Board of Directors and each member of the executive management? P2 Does the Company abide by the rights of financial instruments holders, providing them with equal treatment and submitting to approval any modification of the rights in the special meetings of such holders? X X X X X X X X X X X According to the Articles of Incorporation, the Company is managed under a one-tier system. http://www.electrica.ro/en/wp-content/uploads/2015/03/ELSA_EN_Corporate_ Governance_Code_feb2015.pdf On 2 february 2015 the Board of Directors of the Company has approved the Corporate Governance Code, which has not undergone any changes. Functiile si competentele Consiliului de Administratie sunt prevazute in Actul Constitutiv (postat pe website-ul Societatii) si in regulamentul Consiliului de Administratie, ambele fiind anexate Codului de guvernanta corporativa al Societatii (http://www.electrica.ro/ wp-content/uploads/2015/03/ELSA_RO_Corporate_Governance_Code_Feb2015.pdf) http://www.electrica.ro/en/wp-content/uploads/2015/03/ELSA_EN_Corporate_ Governance_Code_feb2015.pdf http://www.electrica.ro/en/wp-content/uploads/2014/07/EN_Electrica-Articles-of- Incorporation-updated-18-December-2014.pdf http://www.electrica.ro/en/wp-content/uploads/2015/03/ELSA_EN_Corporate_ Governance_Code_feb2015.pdf http://www.electrica.ro/en/electrica-s-a-administration/ X The information relating to the biographies of the Board members and of the executive management may be accessed in the documents presented to the General Meeting of Shareholders dated 22 September 2014. Nevertheless, there is no section dedicated to this requirement yet. The Company’s website is constantly being updated, and the Company will endeavour to fulfil this requirement. The Company has not issued several classes of shares nor bonds. 207 ”COMPLy Or exPLAiN” sTATeMeNT PrOViDeD By THe COrPOrATe gOVerNANCe CODe Of BuCHAresT sTOCk exCHANge 27 APriL 2015 2014 annual report Principle/ Recommendation question yes no If nOT, please explain P3 r4 Does the Company publish on the website details of the General Meeting of Shareholders: a) the General Meeting of Shareholders convening notice? b) materials/documents related to the agenda, as well as any information on the agenda? c) special power of attorney forms? Has the Company prepared and proposed to the General Meeting of Shareholders procedures for a proper and efficient performance of the General Meeting of Shareholders meetings without any damage to the right of any shareholder to express its free opinion on the debated topics? r6 r8 Does the Company publish on its website details of the shareholders’ rights as well as rules and procedures for attendance at the General Meeting of Shareholders? Does the Company inform in due time (immediately after the General Meeting of Shareholders meetings) all shareholders by means of the special section of its own website: a) on the resolutions made within the General Meeting of Shareholders? b) on the detailed result of the vote? Does the Company publish in a special section of its own website, that is easy identifiable and accessible: a) current reports/announcements? b) the financial calendar, annual reports, half year and quarter reports? r9 Is there within the Company a special department/person dedicated to investor relations? X X X X X X X X http://www.electrica.ro/en/investor-relations/general-meeting-of-shareholders/ http://www.electrica.ro/en/investor-relations/general-meeting-of-shareholders/ http://www.electrica.ro/en/investor-relations/general-meeting-of-shareholders/ X X Although the Company has yet to prepare procedures for the proper and efficient performance of the General Meeting of Shareholders meetings, they are performed in accordance with the applicable laws, the Articles of Incorporation and the provisions of the convening notice, granting to any shareholder the right to express its free opinion on the debated topics. The shareholders’ rights are provided both by the law and by the Articles of Incorporation published on the Company’s website separately and attached to the Corporate Governance Code. Nevertheless, the Company’s website does not have a separate section dedicated to the shareholders’ rights. Although the Company has yet to prepare procedures and rules for attendance at the General Meeting of Shareholders, the shareholders’ attendance is made in accordance with the applicable legal provisions, the Articles of Incorporation and the provisions of the convening notice, observing the shareholders’ rights. http://www.electrica.ro/en/investor-relations/press-releases/ http://www.electrica.ro/en/investor-relations/press-releases/ http://www.electrica.ro/en/investor-relations/financial-calendar/ http://www.electrica.ro/en/investor-relations/investor-relations-contact/ 208 ”COMPLy Or exPLAiN” sTATeMeNT PrOViDeD By THe COrPOrATe gOVerNANCe CODe Of BuCHAresT sTOCk exCHANge 27 APriL 2015 Principle/ Recommendation question P4, P5 r10 Does the Board of Directors meet at least once every quarter in order to monitor the Company’s activity? r12 Does the Company have a set of rules referring to the reporting conduct and obligations of transactions with shares or other financial instruments issued by the company (“company’s securities”) made on own account by directors or by related parties? If a member of the Board of Directors or a member of the executive management or any other related party carries out on its own a transaction with the Company’s shares, is such transaction shared on its website, according to the applicable rules? Does the organization of the Company’s Board of Directors provide a balance between executive and non-executive members (and especially non-executive independent directors) so that no person or group of persons may generally dominate the decision-making process of the Board of Directors? Does the organization of the Board of Directors provide a sufficient number of independent members? In its activity, does the Board of Directors have the support of the advisory commissions/committees for analysing and providing advice on specific subjects chosen by the Board of Directors? Do the advisory commissions/committees forward activity reports to the Board of Directors on their specific subjects? Does the Board of Directors use the evaluation criteria listed in Recommendation 16 for the independence assessment of its non-executive members? Do the members of the Board of Directors permanently improve their knowledge through training/formation in corporate governance? Are the members of the Board of Directors selected subject to a transparent procedure (objective criteria regarding the personal/professional qualification etc.)? Does the Company have a Nomination Committee? P6 P7 P8 r15 r16 r17 P9 P10 X X X X X X X X X 2014 annual report yes no If nOT, please explain As per the Articles of Incorporation the Board of Directors meets at “Electrica’s” headquarters once a month or whenever required, upon being convened by the president of the board of directors, by at least two members of the Board of Directors or by the General Manager. The Company’s Corporate Governance Code contains a set of general rules referring to the obligations to report transactions and also referring to the restrictions relating the regime of privileged information. The Company will take the necessary measures to implement a set of specific rules for this type of transactions. The Company’s website is constantly being updated, and the Company will endeavour to fulfil this requirement. X X All members of the Board of Directors are non-executive. As per Article 17(1) of the Articles of Incorporation: “Electrica” is managed by a board of directors having 5 directors elected by the General Meeting of Shareholders of the Company out of which at least 3 directors need to be independent and non-executive. […] http://www.electrica.ro/en/wp-content/uploads/2015/03/ELSA_EN_Corporate_ Governance_Code_feb2015.pdf As per the Charter of each committee. Members of the Board of Directors have been appointed as per the independence requirements provided by the Articles of Incorporation transposing Recommendation 16 of the Corporate Governance Code of the BSE. As per Article 3 of the Charter of the Board of Directors. Members of the Board of Directors have been appointed in accordance with the requirements of the Articles of Incorporation which imposes a transparent procedure and eligibility criteria. 209 ”COMPLy Or exPLAiN” sTATeMeNT PrOViDeD By THe COrPOrATe gOVerNANCe CODe Of BuCHAresT sTOCk exCHANge 27 APriL 2015 2014 annual report Principle/ Recommendation question yes no If nOT, please explain P11 r21 Does the Board of Directors review at least once a year the need to set up a Remuneration/Remuneration Policy Committee for the directors and for the members of the executive management? Is the remuneration policy approved by the General Meeting of Shareholders? r22 r24 Does the Remuneration Committee consist exclusively of non-executive directors? Is the company remuneration policy provided in the By-laws /Corporate Governance rules? P12, P13 r25 Does the Company supply information, in the English language, which are provided by the reporting requirements as: a) periodic information (periodical information supply)? b) continuous information (continuous information supply)? Does the Company prepare and provide financial reporting according to IfrS as well? Does the Company facilitate, at least once a year, meetings with financial analysts, brokers, rating agents and other market specialists, with the view of presenting financial elements that are relevant for making investment decisions? Is there an Audit Committee within the Company? Does the Board of Directors or the Audit Committee, as the case may be, investigate on a regular basis the efficiency of the financial reporting, internal control and risk management system as adopted by the Company? Does the Audit Committee comprise strictly non-executive directors and is there a sufficient number of independent directors? Does the Audit Committee meet at least twice a year; are these meetings dedicated to drafting and providing to the shareholders and to the public the half-year and annual results? Does the Audit Committee make recommendations on the selection, appointment, re-appointment and replacement of the financial auditor, as well as on its remuneration terms and conditions? r26 r27 r28 r29 r30 r32 X X X X X X X X X X X X X There already exists a Nomination and Remuneration Committee incorporated under the Company’s Articles of Incorporation (Article 18 item C of the Articles of Incorporation). The nomination and remuneration policies are approved by the Board of Directors at the suggestion of the Nomination and Remuneration Committee however the remuneration of the Board of Directors is established by the General Meeting of Shareholders. Electrica is currently preparing the nomination and remuneration policy and this policy will be included in the Corporate Governance Code immediately after being completed. The Company organizes quarterly presentations for financial analysts, brokers, rating agencies and other market specialists, with the view of presenting the financial elements relevant for making investment decisions. All directors of the Company are non-executive and the majority of the members of the Board of Directors are independent. It was not the case so far but these meetings will to take place in 2015. It was not the case so far; external financial auditor was appointed by the Board of Directors for a period of two years in the first meeting of the Board of Directors of 14 October 2014 in which it was established the Audit Committee as well. 210 ”COMPLy Or exPLAiN” sTATeMeNT PrOViDeD By THe COrPOrATe gOVerNANCe CODe Of BuCHAresT sTOCk exCHANge 27 APriL 2015 2014 annual report Principle/ Recommendation question yes no If nOT, please explain P14 P15 r33 P16 r34/ r35 P17 r36 Has the Board of Directors adopted a procedure with the view of identifying and proper settlement of the conflicts of interest? Do the directors inform the Board of Directors on the conflicts of interest as they occur and do they refrain from the debates and the vote on those matters, according to the relevant legal provisions? Has the Board of Directors adopted the specific procedures in order to secure fair procedures (criteria for identifying material transactions, transparency criteria, objectivity criteria, non-competition criteria etc.) for the scope of identifying related parties transactions? Has the Board of Directors adopted a procedure on the internal flow and disclosure to third parties of information related to the Company, with emphasis on information that can influence the market price of the securities issued by it? P18 r37/ r38 Does the Company perform activities related to Social and Environment responsibility? X X X X http://www.electrica.ro/en/code-of-ethics-and-professional-conduct/ http://www.electrica.ro/en/code-of-ethics-and-professional-conduct/ X At the level of the Company there are general principles with respect to approving certain transactions, however at the present time no such specific set of procedures has been prepared. The Company will take the required measures in order to implement a set of specific procedures in view of the above. There are two sets of guidelines referring to the flow of information and documents (one set is concerned with the regime of privileged information and abuse on the market and the procedure regarding integrity) both attached to the Corporate Governance Code (http://www.electrica.ro/en/wp-content/uploads/2015/03/ELSA_EN_ Corporate_Governance_Code_feb2015.pdf). Since the Company’s website is constantly being updated, some of the links listed above may become inoperable in the near future. Also the Company does not assume any obligation to update this statement following the changes to the website. 211 declaration of the management We confirm to the best of our knowledge that the consolidated financial statements, prepared in accordance with the applicable accounting standards, give a true and fair view of the financial position of the Group, its financial performance and cash flows for the year ended December 31, 2014, and that the Directors‘ report gives a true and fair view of the development and performance of the business of the Group, together with a description of the main risks and uncertainties associated with the expected development of the Group. Victor cionga non-executive director, Chairman of the Board of Directors michael Boersma non-executive director arielle malard de r othschild non-executive director cristian Busu non-executive director Victor Vlad grigorescu non-executive director ioan r osca General Manager annual report2014

Continue reading text version or see original annual report in PDF format above