Societatea Energetica Electrica S.A
Annual Report 2016

Plain-text annual report

E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 1 ANNUAL REPORT 2016 Key Figures -Electrica Group 2016 p. 5 Message from CEO Electrica S.A. p. 10 Consolidated Directors’ Report for the year 2016 p. 12 Consolidated Financial Statements for the year ended - 31 December 2016 p. 115 Separate Financial Statements for the year ended - 31 December 2016 p. 223 Independent Auditors’ Report (Consolidated) p. 116 Independent Auditors’ Report (Individual) p. 260 Directors’ Report for 2016 - Societatea Energetica Electrica S.A. p. 185 Declaration of the Management p. 267 4 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 5 LUMINA SCRIE POVESTEA VICTORIEI ANNUAL REPORT 2016 ELECTRICA GROUP GROUP KEy FIGURES 6 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 7 Key Figures Electrica Group DISTRIBUTION ACTIVITY Operational results 2014 2015 2016 Distributed energy (Twh) Number of users (mil.) Supplied energy on retail (Twh) Number of customers (mil.) Number of employees at period end Financial results Revenues (mil. RON) EBITDA (mil.RON) EBIT (mil.RON) Profit for the year attributable to the owners of the company (mil. RON) Net cash from operating activities (mil. RON) Capital expenditures (mil. RON) EPS (RON) 16.3 3.62 9.2 3.59 11,740 17.1 3.65 10.1 3.61 10,539 5.044 869 511 297 981 465 1.07 5.503 922 569 363 743 551 1.07 17.5 3.67 10.6 3.6 9,685 5.518 960 586 357 718 569 1.05 Electrica Significant Subsidiaries and Key Figures Societatea de Distributie a Energiei Electrice Transilvania Nord S.A 1.25 mil users Market share 11.6% Revenues: RON 857 mil EBITDA: RON 269 mil Distributed volume: 5.1 TWh Societatea de Distributie a Energiei Electrice Transilvania Sud S.A 1.12 mil users Market share 13.3% Revenues: RON 790 mil EBITDA: RON 256 mil Distributed Volume: 5.8 TWh Societatea de Distributie a Energiei Electrice Muntenia Nord S.A 1.30 mil users Market share 15.4% Revenues: RON 801 mil EBITDA: RON 227 mil Distributed Volume: 6.6 TWh SUPPLY ACTIVITY ENERGY SERVICES ACTIVITY Electrica Furnizare (EF) 3.60 mil consumers Market share 22.6% Revenues: RON 4,432 mil EBITDA: RON 185 mil Supplied volume on retail market: 10.6 TWh Electrica Serv (ES) Revenues: RON 365 mil EBITDA: RON 17 mil Summary Consolidated Financials Consolidated Revenues (RON mil) Adjusted EBITDA (RON mil) and Adjusted EBITDA Margin (%) Net Profit (RON mil) Revenues from Green Certificates Revenues (ex-Green Certificates) EBITDA EBITDA Margin Group Net Profit Net Profit Margin Net Debt (Net Cash) Capital Structure: Net Debt / (Net Cash) Position (RON mil) 8 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 9 Earnings and gross dividends per share (RON) Distributed Volumes (TWh) Supply market share (22.55% overall) – September 2016 Regulated market Competitive market Capital expenditures 2014 – 2016 (RON mil) The structure of Electrica Group’s investments in 2016 Other 20,1 Studies 13,4 Quality of Energy 38.1 Independent Equipment 34 Energy Efficiency/CPT 145.1 Continuity of supply 247.7 Operational Efficiency 54.6 Volumes of electricity supplied on retail market (TWh) Regulated market Competitive market 10 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 11 2016 was a challenging year for the entire energy market in Romania and elsewhere. Now, we can conclude that Electrica reacted very well to these challenges, the results recorded at Group level being noteworthy in this context, on certain segments, such as, for example, improvement of operational performance. Investments made in our distribution networks, in improving the services provided, and intensification of cost optimization programs have allowed us, on the one hand, to meet our commitments to all stakeholders, and on the other to maintain a sound financial position. Keeping these strategic lines, I am convinced that Electrica has great chances to perform as well in the coming years, being advantaged by the fact that it has a very important tradition in a vital business area for what the modern world means. Moreover, Electrica has at least one other important asset, an outstanding investment availability. This is a great advantage and we will try to use these resources as well as possible. We know that expectations are high from shareholders, customers, employees, probably also from authorities, and therefore we have very ambitious plans. First, as we have committed in the company’s listing prospectus, we plan to finance our own investment projects and we have a plan providing for approximately EUR 55-60 mln each year, at least in the following two years, for each distribution company of the Group. It means around EUR 170-180 mln per year, an extremely ambitious target, which in turn comes with a number of challenges. For example, we are in full implementation of a project for the reorganization of the investment process, to be able to basically double investments from one year to the next. At the same time, I assure you that we are carefully analyzing the opportunities we have in the market because, naturally, we are trying to get a better use of the existing resources. All these options should be prioritized according to long-term added value they can bring, while respecting a certain financial discipline. The terrible challenges in late 2016 and early 2017, in the energy market, meant lessons learned by both us, companies activating in this business area, and also authorities and even customers. It is clear for everyone that, in the supply segment, competition has reached an unprecedented level. On the other hand, it is clear that this competition cannot go on forever solely on prices. We must expand our horizons. That’s also because people want more, and we want to be able to provide customers with integrated solutions, clearly at a competitive price. This means developing a new business, investments in technology, by which to offer integrated services, not only electricity. Another aspect that concerns us with priority is the operational and staff safety and, in this regard, we have taken measures to ensure the highest standards in health and safety at work, both for employees and for contractors. Although I am convinced that 2017 will not be an easy year, we maintain our commitments to take all the necessary measures to bring added value, continuing to focus on what sustainable performance means. Catalin Stancu CEO Electrica SA 12 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 13 ELECTRICA GROUP CONSOLIDATED DIRECTORS’ REPORT FOR ThE yEAR 2016 SUMMARy Glossary Identification details of the issuer 1 Results of Electrica Group in 2016 1.1 Key financial data 1.2 Key events in 2016 1.3 Key data by business 2 Electrica Group overview 2.1 General overview 2.2 Mission, vision, values 2.3 Key elements of the 2015 – 2018 Strategic Plan 2.4 Outlook 3 Operating activity 3.1 Operating segments 3.2 Procurement 3.3 Sales activity 3.4 Reorganization and disposal of assets 3.5 Personnel 3.6 Environmental considerations 3.7 Research and development activities 3.8 Risk management 4 Fixed assets 5 Capital market 6 Management of the Group 6.1 The Board of Directors of Electrica S.A. 6.2 The activity of the Board of Directors of Electrica S.A. and of its Consultative Committees 6.3 Boards of Directors of Electrica subsidiaries 6.4 Executive management of Electrica S.A. 6.5 Executive management of Electrica S.A. subsidiaries 6.6 Number of shares owned by the managers of the Electrica Group 7 Corporate governance 7.1 General Meeting of Shareholders 7.2 Corporate Governance Code 7.3 Implementing action plans undertaken by signing the framework agreement with EBRD 7.4 The action plan on corporate governance 7.5 The environmental and social responsibility plan 8 Financial overview 8.1 Consolidated statement of the financial position 8.2 Consolidated statement of profit and loss 8.3 Consolidated cash flow statement 9 Post balance sheet event Appendix 1 – Litigations 14 15 16 16 18 23 26 26 28 29 30 32 32 35 35 40 40 43 44 45 50 54 58 58 62 69 71 71 73 74 74 75 75 76 78 81 81 86 92 94 95 Appendix 2 – Details of main investments in 2016 by the Electrica Group Appendix 3 – Internal audit report for 2016 111 114 14 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 15 GLOSSARy ACER ANRE BPS BoD BRP BSE CAPEX CCM CEE CGC CIRED Agency for the Cooperation of Energy Regulators Romanian Energy Regulatory Authority Basis points Board of Directors Balancing Responsible Party Bucharest Stock Exchange Capital Expenditure Component of the Competitive Market Central-Eastern Europe Corporate Governance Code International Conference on Electricity Distribution Chief Information Security Officer Centralised Market for Universal Service The National Transmission System Operator Chief Operating Officer Corporate Social Responsibility Own Technological Consumption Distribution System Operator Earnings before interest and tax CISO CMUS CNTEE COO CSR OTC DSO EBIT EBITDA Earnings before interest, tax, depreciation and amortization Enel Distributie Banat Enel Distributie Dobrogea Enel Distributie Muntenia Societatea de Distributie Muntenia Nord Societatea de Distributie Transilvania Nord Societatea de Distributie Transilvania Sud Electrica S.A. Extraordinary General Meeting of Shareholders European Union European monetary unit The distribution subsidiaries in the Electrica Group Green Certificates Gross Domestic Product Global Depositary Receipts General Meeting of Shareholders Giga Watt hour Government Decision high Voltage International Accounting Standards International Financial Reporting Interpretations Committee International Financial Reporting Standards Integrated Management System EDB EDD EDM SDMN SDTN SDTS ELSA EGMS EU EUR FDEE GC GDP GDR GMS GWh G.D. HV IAS IFRIC IFRS IMS Initial Public Offering Investor Relations Key Performance Indicators KiloVolt Labour safety and health Low Voltage Medium Voltage MegaWatt hour National Agency for Fiscal Administration Non-controlling Interests National Electricity Network Non-Governmental Organization Nomination and Remuneration Committee Ordinary General Meeting of Shareholders IPO IR KPI kV LSH LV MV MWh NAFA NCI NEN NGO NRC OGMS OPCOM Romanian Gas and Electricity market operator OTC PCB RAB REMIT Own Technological Consumption Polychlorinated Biphenylsor Regulated Asset Base Regulation on Wholesale Energy Market Integrity and Transparency Return on Assets Romanian monetary unit Regulated Return Rate ROA RON RRR SCADA Supervisory Control And Data Acquisition SDFEE Societatea de Distributie si Furnizare a Energiei Electrice Shared Service Center Tehnical, Economic and Socio-Administrative TeraWatt hour Unit of Measurement United States Dollar Value Added Tax SSC TESA TWh UM USD VAT Identification details of the issuer Report date: March 9th, 2017 Name of the Issuer: Societatea Energetica Electrica S.A. Headquarter: no. 9, Grigore Alexandrescu Street, 1st District, Bucharest, Romania Telephone/fax number: +4021.208.5999; +4021.208.5998 Fiscal code: RO13267221 Trade Registry No: J40/7425/2000 Share capital: 3,459,399,290 RON subscribed and paid Main characteristics 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 issues securities are traded: As at December 31st, 2016 the Company shares are listed on the Bucharest Stock Exchange and Global Depositary Receipts are listed on the London Stock Exchange ISIN Bloomberg Symbol Currency Nominal Value Stock Market Ticker Source: Electrica Ordinary Shares ROELECACNOR5 0QVZ RON 10 RON GDR US83367y2072 ELSA:LI USD 40 RON Bursa de Valori Bucuresti REGS London Stock Exchange MAINMARKET EL ELSA Free translation, the Romanian version of the document will prevail in the event of discrepancies with the English version 16 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 17 1 RESULTS OF ELECTRICA GROUP IN 2016 1.1 Key financial data In 2016, the financial results of Electrica recorded a slight decrease compared to the previous year, mainly driven by lower profitability of distribution segment which was partially offset by a positive result of the supply segment and of the services segment relating to external distribution networks. The Group’s income in 2016 and 2015 amounted to RON 5,518 million and, respectively, RON 5,503 million. The increase in income by RON 15 million or 0.3% in 2016 as compared to 2015 resulted from gains after the deconsolidation of SE Moldova: (RON mil.) Income Other income Operational costs Adjusted EBITDA2 EBIT Profit before taxes Net profit Source: Electrica 2016 5,518 243 (5,175) 998 586 589 469 2015 5,503 211 (5,145) 925 569 589 482 20141 5,044 177 (4,710) 884 511 524 413 As presented in the charts below, the adjusted EBITDA margin went up by 128 ppb in 2016 compared to 2015, while the net profit margin decreased with 3,0%. On December 31st, 2016, the Company’s equity structure presented a Net debt/(Cash) position3 of minus RON 2,366 million, mainly influenced by the funds obtained from the Company’s IPO on July 4th, 2014. Figure 4 Net debt/ (Cash) (RON mil.) Figure 1 Consolidated income of Electrica Group (RON mil.) Revenues from Green Certificates Revenues (ex-Green Certificates) Figure 2 Adjusted EBITDA (RON mil.) and adjusted EBITDA margin (%) EBITDA EBITDA Margin Figure 3 Net profit (RON mil.) Group Net Profit Net Profit Margin Source: Electrica Net Debt (Net Cash) LIqUIDITY Cash and cash equivalents include cash balances, demand deposits and deposits with maturity up to three months from the acquisition date, which have an insignificant exposure to the risk of change in fair value and are used by the Group for the management of short-term commitments. December 31st 2016 2015 (RON mil.) Bank current accounts Call deposits Cash in hand Treasury bills and government bonds with original maturity 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 148 740 0.2 - 889 (143) 746 1,875 123 679 0.3 91 893 (66) 828 1,988 Deposits, treasury bills and government bonds include treasury bills and government bonds amounting to RON 1,758 mil, denominated in RON, with original maturity of more than three months and average interest rate of 0.63% (2015: 0.93%), as well as deposits with a maturity of more than three months, amounting to RON 117 mil within the following banks: Citibank Europe PLC Dublin, Raiffeisen Bank, BRD-GSG, Marfin Bank, ING Bank. The decrease in value of deposits, treasury certificates and government bonds by 6% compared to 2015 is mainly determined by setting a collateral deposit of RON 134 million to guarantee loans contracted by distribution subsidiaries. • Deposit, treasury bills and government bonds have been presented as investments held until maturity. The Company strategy was to place IPO proceeds in risk-free securities and short-term deposits. • 1 3 Retreated due to the application of IFRIC 21 starting with 1 January 2015 2 The Company defines Group adjusted EBITDA as Group EBITDA adjusted for non-recurring events (i) consolidated impairment/ reversal of impairment of trade and other receivables, net and (ii) consolidated write down/reversal of write down of inventories, net. Net debt/(Cash) is defined as bank borrowings + bank overdrafts + financial leases + funding for concession agreements less cash and cash equivalents, bank deposits and treasury bills and government bonds. 18 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 19 1.2 Key events in 2016 THE MAIN EVENTS IN 2016: CORPORATE GOVERNANCE RELATED: f Starting July 4th, 2014 the Company’s shares are listed on Bucharest Stock Exchange, and the GDRs are listed on London Stock Exchange. Following the admission to trading on the regulated markets in Bucharest and London, towards Electrica has made major steps aligning to the 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 ethics and professional conduct, evaluating management through an external party and implementing a whistleblowing policy. f The most important decisions of the General Meetings of Electrica’s Shareholders in 2016 (31st March 2016, 27th April 2016, 21st October 2016) refer to: • Approval of the budgets for Electrica and its subsidiaries and of the consolidated investment plan at the level of the Electrica group (CAPEX plan) for the financial year 2016; Approval of the financial statements and profit distribution for Electrica and its subsidiaries for 2015; Approval of the remuneration policy of the members of the Board of Directors of Electrica, valid for the entire period of their mandates; Approval of the framework management agreement to be concluded by Electrica with the BoD members; Amendment of the Company name from “Societatea de Distributie si Furnizare a • • • • • • • • • Energiei Electrice – “Electrica” S.A.” to “Societatea Energetica Electrica S.A.“; Re-appointment of KPMG Audit SRL as auditor for 2016 and 2017 financial years; Rejection of the sale of the automatic meter reading system (AMR System) by Electrica SA to its distribution subsidiaries; Appointment of Mr. Willem Jan Antoon henri Schoeber as an independent member of the Board of Directors following the vacancy of a position in the Board of Directors of Electrica, with mandate valid until December 14th, 2019; Approval of the consolidated annual investment plan at Electrica group level (CAPEX plan) corresponding to the 2016 financial exercise supplemented up to RON 844,619 thousands; Approval of the proposals for amendment of the Articles of Association of Societatea Energetica Electrica S.A. ELECTRICA’S NON-EXECUTIVE AND EXECUTIVE MANAGEMENT RELATED: f On January 13th, 2016 Electrica’s Board appointed Mr. Cristian Busu as Chairman with a one-year mandate and established three consultative committees: Audit and Risk Committee, Nomination and Remuneration Committee and Strategy and Corporate Governance Committee. f On February 10th 2016 Mr. Michael Boersma renounced to his position of member of the Board of Directors starting with May 1st 2016. Following Mr. Michael Boersma resignation, on April 26th 2016 the Board appointed Mr. Willem Schoeber as temporary member of the Board of Directors, starting with May 1st 2016. he was confirmed as an independent member of the Board of Directors by the General Meeting of Shareholders held on October 21st, 2016. f On February 26th, 2016 the Board of Directors and Mr. Ioan Rosca reached a mutual agreement to terminate his mandate as CEO of Electrica no later than June 2016. On March 11th, 2016 the Board of Directors revoked Mr. Ioan Rosca from the CEO position and appointed Ms. Iuliana Andronache, current CFO, as interim CEO of Electrica SA. f On September 19th, 2016, the Board of Directors of Electrica SA appointed Mr. Dan Catalin Stancu as CEO of Electrica SA for a mandate of four years starting with October 24th 2016. f On October 4th, 2016 the Board revoked Ms. Gabriela Marin from the position of executive manager coordinating the Human Resources Division of Electrica starting as of October 5th, 2016. AMENDMENT OF ARTICLES OF ASSOCIATION: si in Electrica Energetica f Changing the name of the Company from “Societatea Furnizare de Distributie a Energiei Electrice – “Electrica S.A.” to S.A.”, “Societatea mentioned the Trade Registry under no. 198016 from 28 April 2016. The name changing was achieved following the request ANRE to remove from the name “Distribution and Supply Energy Company Electrica SA” the words “distribution and supply” do not create any confusion between the activity of Electrica SA subsidiaries distribution on their separate identities and the operator that provides service delivery. f Regarding the subsidiaries of Electrica Group, on December 2016 were held the Extraordinary General Meetings of Shareholders, which amended the Articles of Association of these Companies; moreover, were held Ordinary General Meeting of Shareholders, which amended the structure of BoD. For the supply and distribution subsidiaries, the minority shareholder challenged in court the above mentioned resolutions decided in the General Meeting of Shareholders. for the purpose of regulatory authority, compliance with the regulations in force (Law No. 123/2012, the ANRE’s order No. 5/2015, Directive 2009/72/EC). In this context, there were adopted new visual identity elements by the distribution companies within the Group and were made arrangements for their registration at OSIM. f Changing the names of distribution subsidiaries within follows: the Electrica Group as “Societatea de Distributie a Energiei Electrice Muntenia Nord”, “Societatea de Distributie a Energiei Electrice Transilvania Nord” and “Societatea de Distributie a Energiei Electrice Transilvania Sud”. f Specific tariffs for electricity distribution for the year 2017 were approved by ANRE Orders No. 112, 113 and 114/14.12.2016, smaller ones than those from the year 2016. Lowering the average tariff for distribution in 2016 and 2017 it is 3.44% to SDEE Transilvania Sud, 5.63% to SDEE Transilvania Nord and 7.54% to SDEE Muntenia Nord. f The regulatory authority has issued orders that request from the distribution operators further efforts with a view to compliance with the new requirements: Order No. 8/23.03.2016 “procedure for elaboration and approval of investment programs of economic operators of the concessionaire electricity distribution”, Order No. “Performance 11/30.03.2016 Standard for electricity distribution”, Order No. 26/22.06.2016 “Rule for determining the energy consumption technique proper technological networks of public interest”. f There have been prepared investment plans for 2017 for the three distribution operators, according to the Prospectus Offer and with the new requirements stipulated by the regulatory authority in the ANRE Order No. 8/2016 “procedure for elaboration and approval of investment programs of economic operators of the concessionaire electricity distribution”). The total value of investment plans accepted by the National Regulatory Authority in the field of energy (“ANRE”) for the current period (2014-2018) is 3.2 billion lei (in nominal terms, amount adjustable with inflation). ETHICS AND qUALITY: DISTRIBUTION ACTIVITY: f In the second half of the year 2016, the Group developed the process of rebranding of the distribution operators within the group, according to the timetable agreed with the f Adopting policies regarding zero tolerance of corruption, fraud and money laundering and combating and avoidance of conflicts of interest, gifts, protocol expenses and prohibition of facilitation payments, transparency and stakeholder engagement, in accordance with 20 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 21 the Code of Ethics and Professional Conduct in force at the Electrica level and its subsidiaries, during 2016, as follows: • Electrica S.A., Serv Electrica S.A, Societatea de Distributie a Energiei Electrice Transilvania Sud S.A. in January, Electrica Furnizare S.A., Societatea de Distributie a Energiei Electrice Muntenia Nord S.A. Societatea de Distributie a Energiei Electrice Transilvania Nord S.A. in February, by decisions of the BoD; Societatea Servicii Energetice Oltenia S.A. in November, respectively Societatea in Servicii Energetice Muntenia S.A. December, administrator decision. special by • THE C OMPLIANCE WITH STANDARDS IN THE FIELD OF qUALITY- ENVIRONMENTAL-HEALTH AND OCCUPATIONAL SAFETY: (IMS) f In September 2016 at SE Electrica SA occurred the certification of Integrated Management System for Quality-Environmental- health and Occupational Safety according international standards to requirements of “Quality management ISO 9001:2015 – systems. Requirements.” ISO 14001:2015 – “Environmental management systems - Requirements with guidance for use” and OhSAS 18001:2007 – “Occupational health and safety management systems. Requirements” respectively; the certification was made certification organization DEKRA the by CERTIFICATION, top global provider for audit and certification services. subsidiaries implemented f The their own (IMS) System Integrated Management for Quality-Environmental-health and Occupational Safety requirements according to international standards ISO 9001:2008 – “Quality management systems. Requirements”, ISO 14001:2004 – “Environmental management systems - Requirements with guidance for use” and OhSAS 18001:2007 – “Occupational systems. health and Requirements”. The certification was made by SC SRAC CERT SRL, considering the core activity of each subsidiary (distribution of electric energy, electric energy supply and energy maintenance services). • safety management Continued operation and continuous improvement of Integrated Management System effectiveness of SE Electrica SA and subsidiaries was one of the main objectives of the year 2016. In this regard, elaborated/updated every subsidiary • to records core operational documents (manuals, operational system procedures, system procedures as well as work instructions) Integrated and specific Management System, according to its own organizational structure. The management, by Policy Statement in the fields of Quality, Environmental, health and Occupational Safety, considers that the Integrated Management System is a top priority and a key factor for maintaining SE Electrica SA and its subsidiaries as leaders in their respective sustainable domains of development and in establishing policies, strategies, programs and practices for the management of processes and activities for quality, in a manner of respect environment, health and occupational safety. activity, in SUPPLY A CTIVITY: f During 2016 Electrica Furnizare the streamline started, and partially completed, a range of projects to internal processes in order to increase the company competitiveness, for the energy market that will be completely liberalized. therefore preparing systems and f The price liberalization calendar continued in 2016, the percentages of electricity purchased on for domestic customers who have not used eligibility, were as follows: 60% from 1st of January, 2016 and 70% from July 1st, 2016. the competitive market f On 1st of March 2016 came into force the single model of electricity bill, approved by ANRE Order no. 88/2015, which applies only to the domestic and non-domestic customers of the Suppliers of Last Resort. f On 7th of April 2016 entered into force the 2nd phase of data collection of wholesale energy market transactions by Agency for the Cooperation of Energy Regulators (ACER), according to the timetable for implementing (EU) No 1227/2011 on the Regulation wholesale energy market and transparency (REMIT). integrity f In the second half of 2016, electricity regulated tariffs applied by Suppliers of last Resort to domestic customers that have not exercised their eligibility, were maintained at the values in the first half of 2016, while the competitive market component tariffs (CPC), decreased on average by 2.5% compared to period April to June 2016, as approved by ANRE Notice 25/22.06.2016. CORPORATE IMAGE: f During 15th September - 4th November, 2016, Electrica carried out the first integrated image campaign in the history of the company - “The story of light”, with very good results, in line with Management expectations, it were being involved: TV, online, national and local press, outdoor, transit, subway and PR. f Electrica launched a new corporate website, with a fresh design and a user- friendly structure and also diversified and developed the social media channels. LUMINA SCRIE POVESTEA SPECTACOLULUI 22 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 23 f Transmission and system service tariffs were reduced on average by 10.8% and 6.3% respectively, compared to the first semester of 2016, the ANRE Order 27/2016. high efficiency for cogeneration, was reduced by 12.7% compared to the first semester of 2016, the ANRE order 24/2016. contribution f The f On December 17th, 2014, European Commission adopted the Regulation (EU) no. 1348/2014 regarding data reporting for the enforcement of article 8th, paragraphs (2) and (6) of the Regulation (EU) no. 1227/2011 of the European Parliament and Council regarding the integrity and transparency of energy wholesale market. The regulation implies additional obligations for the market players, among which the obligation to report the details on wholesale energy products sold on regulated markets, including standard contracts and trading orders, correlated and uncorrelated by ACER. The obligation to report the trading data admitted on specialized platforms of regulated markets came into force starting October 7th, 2015, while the obligation to report non- standardized contracts on wholesale energy market will come into force starting with April 7th, 2016. in secondary f Changes in primary legislation (adjustments to Law no. 220/2008 through Law no. 122/2015) legislation (ANRE Order and no. 101/2015) regarding the promotion of electricity production from renewable energy sources and the state aid scheme regarding the exemption of some categories of final consumers from the application of Law no. 220/2008. f Retail sales of Electrica Furnizare decreased in 2016 by 2.2% compared to 2015. f Electrica’s market share on the retail market for January - September 2016 was 22.55%, compared to 21.40% during the same period of 2015. f The launch of the Centralized Market for Universal Service (“CMUS”): starting with 1st of April 2015, the electricity volumes necessary for final clients eligible for universal service were acquired based on the contracts following simultaneous auctions concluded with decreasing bid on the Centralized Market for Universal Service. f B.R.P. Electrica client portfolio increase with 18% compared with the average number of clients of 2015 as well as portfolio diversification with suppliers, producers and distributors. EXPANDING BUSINESS PORTFOLIO: f In October 2016, the first stop for fast loading into operation, electric vehicles was put mounted in a fuel distribution plant from Romania (Bucharest - OMV Aerogarii), part of a pilot project in the field of electro-mobility initiated by Electrica and OMV Petrom, on the basis of a Memorandum. In November it was requested a funding from the Environmental Fund Administration regarding the carry out of the project “Infrastructure growing demands” which involves installing the 6 fastchargers outside of Bucharest. 1.3 Key data by business DISTRIBUTION SEGMENT Essential information • • • • it Electricity distribution in Romania is controlled currently by eight authorized electricity distribution system operators (“DSOs”). responsible is Each company for the exclusive distribution of electricity in the region for which is authorized, under a concession agreement with the Romanian state through the Ministry of Energy. Electrica and Enel each own three distribution companies, while CEZ and Delgaz Grid (former E.ON) own the remaining two. Electrica is a key player in the • • 17.5 TWh of electricity distributed in 2016, an increase of 2.6% as compared to 2015. 40.3% market share for the to distribution of electricity final users in 2015 (based on distributed quantities according to ANRE annual report of 2015). electricity distribution sector, both in terms of areas covered and number of users served. The Regulated Assets Base (RAB) in 2016 was RON 4,524 million. 195,760 km of electric lines - 7,574 km for high Voltage (“hV”), 45,061 km for Medium Voltage (“MV”) and 143,126 km for Low Voltage (“LV”). Total area covered: 97,196 km2, 40.7% of Romania’s territory. 3.67 million users in 2016 for the distribution activity. • • • • Figure 5: Romanian electricity distribution map three The electricity distribution companies, part of Electrica Group, delivered electricity in 2016 to about (or 3.67 million customers a volume of more than 17 TWh). Electrica’s DSOs distributed about 40.3% of the total electricity distributed on a national level in 2015, maintaining an average market share of 39.5% during 2012- 2015, market share which is expected to remain constant in the following period. Figure 6: Evolution in number of customers (thousands) Source: Electrica 1925 1947 1953 Source: Electrica 24 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 25 Figure 7: Quantity distributed (TWh) Source: Electrica KEY FINANCIAL INDICATORS the from distribution Revenues segment decreased by RON 115 million, or 4.4%, to RON 2,498 million in 2016, compared to RON 2,613 million in 2015. This was a direct increase consequence of decrease of the regulated distribution tariffs, in terms in the distributed of an quantity with 2.6%. The reduction of revenues and the increase of costs of energy acquired to cover network losses, have all led to a decrease of RON 49 million or 6.1% of EBITDA for the distribution segment. The EBITDA margin decreased by 54 bps in 2016, from 30.96% in 2015 to 30.42% in 2016. Figure 8: Revenues from distribution (RON mil.) Figure 9: EBITDA – distribution segment (RON mil.) Figure 10: Net Profit – distribution segment (RON mil.) Source: Electrica Figure 11: Net debt/(Cash) – distribution segment (RON mil.) SUPPLY SEGMENT Essential market data (ANRE Report - September 2016) • • • The supply market is composed of the regulated market and the competitive market. There are five last resort suppliers on the regulated market. The competitive market includes 108 the last resort suppliers active on the competitive segment of the retail market) of which 101 are relatively (<4% market share). (including suppliers small (ANRE in 2016 the market is Electrica Furnizare leader in both the regulated and competitive market, with a market share of 38.87% and, respectively, 15.89% report, September 2016). As a comparison, in 2015, Electrica Furnizare had a regulated market share of 38.09% and competitive market share of 14.72% (ANRE report in December 2015). In 2016, the total electricity supplied by Electrica increased by approximately 5.4% compared to 2015. The company experienced a 13.4% increase in the quantity of electricity sold on the competitive market, as an effect of attracting new customers through advantageous price offers and in line with market conditions regarding customers switching from the regulated to the competitive market. The net revenues (excluding revenues from Green Certificates) from the supply activity decreased by RON 110 million or 2.7% to 4,031 million RON in 2016, from RON 4,141 million in 2015. This was caused by a deacrease of 4.7% in the supply tariffs for 2016 due to increased competition on the electricity supply market, given that the supplied quantity went up by 5.7%. From a financial point of view, Electrica presented an EBITA increase of 12.1% and a growth in cash of RON 127 milion in 2016 compared to 2015. This evolution is explained by an increased profitability, resulting mainly from the acquisition of electricity at a lower price during the year (decrease of 3% in average acquisition price of 2016 compared to 2015). The supply segment has a strong financial position, namely a cash position of RON 465 million, influenced by strong financial results in 2016. Figure 12 Revenues for the supply segment (mil. RON) Revenues Revenues from Green Certificates Source: Electrica Figure 15 Net debt/ (Cash) for the supply segment (mil. RON) Figure 13 EBITDA for the supply segment (mil. RON) Figure 14 Net profit of the supply segment (mil. RON) EBITDA EBITDA Margin Group Net Profit Net Profit Margin Net Debt (Net Cash) Source: Electrica 26 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 27 2 ELECTRICA GROUP OVERVIEW 2.1 General overview shareholder the majority Transilvania Nord Societatea Energetica Electrica S.A. (“Electrica S.A.” or “The Company”) in is Societatea de Distributie a Energiei Electrice S.A. (“SDTN”), Societatea de Distributie a Energiei Electrice Transilvania Sud S.A. (“SDTS”), Societatea de Distributie a Energiei Electrice Muntenia Nord S.A. (“SDMN”), Electrica Furnizare S.A. (“Electrica Furnizare”), Electrica Serv S.A. (“Electrica Serv”), Servicii Energetice Oltenia S.A. (“SE Oltenia”), Servicii Energetice Muntenia S.A. (“SE Muntenia”), representing together “the Group” or “Electrica Group”. On December 31st, 2015, the Company held all the shares in Servicii Energetice Moldova (“SE Moldova”), but starting with January 2016 it has lost the control over SE Moldova, as a result of the company entering bankruptcy proceedings and consequently, the company was not consolidated in the financial statements. The registered office of the Company is 9 Grigore Alexandrescu Street, District 1, Bucharest, Romania. The Company has the unique registration number 13267221 and the Trade Register registration number J40/7425/2000. In accordance with the Order no. 627/2000, the Romanian Government of approved Societatea Energetica Electrica S.A. establishment the As at December 31st, 2016, the biggest shareholder of Electrica S.A. is the Romanian State, represented by the Ministry of Energy (48.78%), after its ownership was diluted following the initial public offer in 2014. The second shareholder, based on the share of ownership, is EBRD with 8.66%. Figure 16: The Group’s subsidiaries at 31st December, 2016 SDTN SDTS Electrica Serv Electrica Furnizare Source: Electrica SE Oltenia SUPPLy ACTIVITy DISTRIBUTION ACTIVITy ENERGy SERVICES ACTIVITy SDMN SE Muntenia The Group’s subsidiaries are presented below: Subsidiary Activity Registration code Headquarters % stake as of December 31st, 2016 Societatea de Distributie a Energiei Electrice Muntenia Nord S.A. Electricity distribution in North Muntenia geographical area Societatea de Distributie a Energiei Electrice Transilvania Nord S.A. Societatea de Distributie a Energiei Electrice Transilvania Sud S.A. Electricity distribution in Northern Transylvania geographical area Electricity distribution in Southern Transylvania geographical area Electrica Furnizare S.A. Electricity supply Electrica Serv S.A. Servicii Energetice Muntenia S.A. (in restructuring) Servicii Energetice Oltenia S.A. (in restructuring) Servicii Energetice Moldova S.A. (in bankruptcy) Servicii Energetice Dobrogea S.A.* (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) 14506181 Ploiesti 78.0000021% 14476722 Cluj-Napoca 77.999999% 14493260 Brasov 78.0000019% 28909028 17329505 Bucharest Bucharest 77.9999700% 100% 29384120 Bucharest 100% 29389861 Craiova 100% 29386768 Bacau 29388378 Constanta n/a n/a *) Electrica S.A. has lost control over Servicii Energetice Dobrogea S.A. starting with January 2015, and over Servicii Energetice Moldova S.A. starting with January 2016, due to the commencement of bankruptcy proceedings of the subsidiaries. Source: Electrica 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 North Transylvania (Cluj, Maramures, Satu Mare, Salaj, Bihor and Bistrita- Nasaud counties), South Transylvania (Brasov, Alba, Sibiu, Mures, harghita and Covasna counties) and North Muntenia (Prahova, Buzau, Dambovita, Braila, Galati and Vrancea counties), operating with transformation stations and power lines ranging from 0.4 kV to 110 kV. invoice the electricity distribution service to electricity suppliers (mainly to Electrica Furnizare subsidiary, the in North main electricity supplier Muntenia, North Transylvania and South Transylvania), which further invoice the electricity consumption to final consumers. last resort is the supplier Electrica Furnizare of (“FUI” defined as supplier designated by the regulatory authority to deliver the universal service of electricity supply under specific regulated conditions) in North Muntenia, North Transylvania and South Transylvania areas. the obligation to ensure the electricity supply to the final customers which have not exercised their eligibility right (the right to choose their electricity supplier). The electricity supply for universal service and last resort customers is done based on regulated contracts, with ANRE regulated prices, based on regulated tariff for the last resort customers and a “component of (CCM) the substantiated by resort suppliers and endorsed by ANRE. competitive market” last the The distribution subsidiaries (SDTN, SDTS and SDMN) Company’s According to the regulations issued by ANRE, suppliers of last resort have 28 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 29 2.2 Mission, vision, values 2.3 Key elements of the 2015 – 2018 Strategic Plan To continue succeeding over the long-term horizon, the Group has set its Vision, Mission and Values, which represent the foundation for formulating and implementing its corporate goals, objectives and business strategy. leading position VISION The Group’s vision is to expand the its electricity and supply market segments, both nationally and regionally. distribution in MISSION The mission of the Group is to deliver long term value to our shareholders by distributing and electricity exceptional and services to our customers, in a safe, reliable, affordable and sustainable manner. supplying providing VALUES The values exercised across all structures of the Group are presented in the figure below. The Group established these values as guiding lines in achieving its strategic objectives and communicating them to both internal and external interested parties. They reflect the Group’s commitment to create an internal environment integrity and ethics where corporate represent culture’s and are based on an open and transparent communication approach. fundamentals the Figure 17: Electrica Group Corporate Values The Strategic Plan for the period 2015-2018, reflecting the Board’s vision concerning managing the activities in the stakeholders’ best interest at the time, both on a long-term and a short-term basis, had been formulated following an analysis of the following areas: • The external environment, to determine the main environmental factors affecting this industry and the key drivers that can shape the future of the electricity market; Industry analysis, in order to identify future trends in the energy market, assess the market attractiveness and determine the critical success factors for competing and surviving in this market; Internal analysis of the Group, its past and current to assess performance to other market players). (relative • • • • committed a Ensuring qualified workforce. The highest corporate governance. standards and in The strategic action plans defined by the Electrica Board: • Overall financial performance of • the Group. Excellence in financial processes management. • Overall operational performance of the Group. • Quality of services provided. • by and productivity Employees’ support of their development. Implementation the subsidiaries of the distribution segment investment programme. Corporate and enhancement of our sustainability profile. Governance • • Based on the above analysis, the Board has formulated the corporate and business strategies of Electrica with respect to the Group, and has set out the strategic objectives and the action plan with measures that the Board intends to undertake. Electrica’s strategic corporate directions with respect to the Group are the following: • and enlarge Preserve the distribution and supply segments in Romania. Explore potential opportunities to expand the distribution and supply segments in the region. Enlarge the business, by developing “value- to added distribution and supply activities, which to be customers. the portfolio of services” offered related can • • Source: Electrica efficiency and quality. • Divest the unprofitable business segments and activities. Electrica Group`s business strategy addresses three key success factors in its implementation: • Operational excellence for Under the action plan, Electrica strives to: • by and a n d and all transparency with Restructure its activities in all Group companies with a view to address all seven strategic objectives e n s u r e S u p p o r t the implementation subsidiaries of the distribution investment plan. Increase communication stakeholders. implement Identify measures aimed reduce to headcount to achieve peers’ performance. Train and capitalise on their potential, expertise and capabilities to increase labor productivity Reinforce Group’s capablities management by and training, selective recruitment of new managers, also from outside the Group. Continue the implementation of the Corporate Governance Action Plan agreed with EBRD. personnel coaching the the • • • • • • 30 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 31 • • • • • 2.4 Outlook The energy 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’ RRR was reduced to 7.7% from 8.52%. Also, ANRE Order no. 165/2015 has modified art. 105 para. 1 from the Methodology of establishing the electricity distribution tariffs, eliminating the cap regarding the maximum percentages by which the distribution tariffs could be lowered, keeping however the limits concerning the maximum percentage increase in these tariffs. including ANRE’s changes of the distribution tariff setting methodology, the change in remuneration (i.e., the RRR) 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. Other significant Romanian legislation changes, relevant for the supply activity, refer to: Although these changes had the overall aim of converging the Romanian legislation towards EU legislation, the process has not been yet 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. The Framework Strategy for a European Energy Union, adopted on 25 February 2015 will highly influence the energy markets in all countries. The Energy Union long- is based on the three established objectives of EU energy policy and focuses on five mutually supportive dimensions: energy security, solidarity and trust; a fully integrated internal energy market; energy efficiency as a contribution to the moderation of energy demand; decarburization of the economy; innovation and competitiveness. research, Considering the EU energy policies which have been developed, the following trends are expected to characterize the Romanian electricity market: the universal • Organising a centralized market service – for according to ANRE Order no. 65/2014, which, beginning with the second quarter of 2015 aimed to implement a transparent and competitive mechanism for electricity acquisition by the suppliers of last resort for covering invoiced using the consumption the CPC tariff in the case of the universal service beneficiaries. Approval of the methodology for establishing the tariffs applied by the last resort suppliers to final customers – ANRE Order no. 92/2015, which, starting with the second semester of 2015, set out the calculation stages and principles of these tariffs. • • • • increase completion the liberalisation of Through timetable, the competition will at national level amongst electricity suppliers. Regulated electricity tariffs will continue to be relevant for households until January 2018 in Romania when they will be eliminated completely and the Universal Service will be available for vulnerable consumers. A trend in electricity distribution is remuneration of the activity into operator which also takes of quality the consideration their service, together with the operational costs and efficiencies. the green energy To sustain the objectives production and due to be met after 2020, further investments for upgrading necessary the networks are development (transmission distribution and networks) for integrating the green energy production. Future of technologies will support energy efficiency policies such as: • Development of transmission and distribution networks, including smart grid and smart metering. efficiency energy End-use (thermal integrity of buildings, lighting, electric appliances, motor drives, heat pumps, etc.). • distribution light Full electric vehicles, and vehicles commercial electrification railways of are expected to increase the consumption of electricity in the transport sector. Development of the transmission and infrastructure and long-distance interconnection will become a necessity. The Electricity Market Target Model, which implies the development of Europe’s internal electricity market, will continue to evolve and be in line with future trends and challenges in the energy industry. Distributed generation technologies will force the distribution operators to adapt their practices and to offer solutions independent producers, considering the new prosumers, which active participants in the energy market. Future development of smart meters will expose consumers to time-of-use pricing, which will lead to greater flexibility and reduce peak demand. Therefore, citizens will be more informed and engaged in the decision-making process as active participants. are to The following table presents key drivers of changes in the electricity market: Key driver Description GDP evolution and industry structure Changes in regulations Technological development Increase in environmental awareness Source: Electrica 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 Romanian legislation that of the EU. Although important steps have been taken, other major changes are expected to occur in the next decade, particularly following the new Framework Strategy for a European Energy Union which highlights the need for integration and cooperation amongst member states. Also, changes of the methodology during the regulatory period, indicate a lack of predictability and stability of regulatory environment, with a negative impact on the distribution operators’ operational and financial performance. 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 more efficient use of information. Romania has adopted the EU 20-20-20 targets, aiming to reduce greenhouse gas emissions, improve energy efficiency and raise the share of renewable energy. Moreover, the 2030 Framework increases these targets and therefore more efforts are needed from governments and market players to achieve them. Impact on Electricity consumption Electricity prices Electricity prices and consumption Electricity prices and consumption, regulatory framework industry is Moreover, the energy currently analyzing ways in which distributors will accomodate changes in their business model as a result of the advent of the prosumer, namely distribution connected customers to the grid that also own small descentralized electricity production capacities. The negative impact of the prosumer on distribution operators returns, as revenues of the prosumer will partially (or even entirely) grid costs invoiced by distributors, will have to be mitigated by appropriate regulatory measures, such as fixed grid access fees. the energy For elaborating its Strategic Plan for 2015 – 2018, Electrica considered the above mentioned factors when formulating goals, objectives and strategy. The most important assumptions which Electrica considered are as follows: corporate its • • • • • the timetable Romanian GDP will have a positive trend in the future and electricity consequently consumption will increase at a moderate pace. The legal framework will not change the significantly and will liberalization continue to be implemented in its current form. Romania will maintain its commitment towards achieving the 20-20-20 strategy for climate change and implement the new Framework for the period 2020- 2030. The remuneration mechanism for distribution companies will not change significantly. However, the tariff type and regulated rate of return could be subject to changes. There will geopolitical no major turbulences which be • the significantly will affect Romanian electricity market. remain Financial markets will stable and the availability of finance support sources will companies’ investment programs. Please note that other factors not presented above and not considered by the Group may occur and may impact on the have a significant implementation and evolution of the Group’s strategy. If these assumptions change, Electrica S.A. may update its strategy to reflect these changes. 32 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 33 3 OPERATING ACTIVITy 3.1 Operating segments The operations of each reportable segment are summarized below. Segments Electricity supply Operations Purchasing electricity and supplying electricity to final consumers (includes Electrica Furnizare and the trading and representation activity on the Balancing Market as Balance Responsible Party – BRP Electrica) Electricity distribution Electricity distribution service (includes SDTN, SDTS, SDMN, Electrica Serv and the investments in the distribution activity done by Electrica) External electricity network services Repairs, maintenance and other services for electricity networks owned by other distributors (includes SE Oltenia and SE Muntenia) headquarters Includes corporate services at parent level Source: Electrica The figure below shows the areas covered by the Group subsidiaries and the number of clients they serve. Figure 18: The geographical coverage of the companies in the Electrica Group Societatea de Distributie a Energiei Electrice Transilvania Nord 1.25 mil. users Societatea de Distributie a Energiei Electrice Transilvania Sud 1.12 mil. users Societatea de Distributie a Energiei Electrice Muntenia Nord 1.3 mil. users DISTRIBUTION SEGMENT distribution segment Electrica’s operates through its subsidiaries SDMN, SDTN, SDTS and Electrica Serv, the latter aimed at maintenance and repair of distribution networks. segment distribution is The limited geographically and by the services provided. Thus, Electrica the operator of electricity is in Transilvania Nord distribution (Cluj, Maramures, Satu Mare, Salaj, Bihor, Bistrita-Nasaud counties), Transilvania (Brasov, Alba Sibiu, Mures, harghita and Covasna and Muntenia Nord counties) region (Prahova, Buzau, Dambovita, Braila, Galati and Vrancea counties), operating transformer stations and transmission lines with voltages of 0.4 kV and 110 kV. Sud The Group has exclusive distribution licenses for these regions valid for the next 11 years with extension its distribution clause. Within business, provides Electrica equipment maintenance services, repair and other services for its network and to a smaller extent for third parties. Distribution segment contributes with the operational profitability of Electrica. the highest share to Electricity distribution is a regulated in Romania and specific activity tariffs applicable to distribution services must be approved by ANRE based on a “tariff basket ceiling’’ 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), amended and completed by ANRE Order no. 146/2014, Order no.112/2014 and Order no.165/2015. “tariff basket The ceiling ” methodology 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) recorded of by the distribution operator, the Distributor’s main source of profit being the rate of return on capital invested in the distribution activity. controllable costs of the volumes technological cost The tariffs are annually adjusted considering operating performance reached, including the distributed electricity, amounts and acquisition price of electricity to cover the (“OTC”), own uncontrollable costs, change of revenues reactive energy compared to the forecasted ones, depreciation and forecasted capital expenses, change of forecasted gross profit from other activities, as well as the difference between the return on assets determined by RRR cut down from 8.52% to 7.7%, with effect since January 1st, 2015. from A N R E O r d e r n o . 1 6 5 / 2 0 1 5 the modified Art.105 para.1 of Methodology of tariffs set up for electricity service, in the sense of eliminating the distribution maximum percentages by which the distribution tariffs could have keeping been the percentage in case of distribution tariffs increase. reduced, while limits the Group The current regulatory period (“the regulatory period”) within third is operating which has started on January 1st, 2014 and will end on December 31st, 2018. Both the current regulatory framework, and the rules related to RAB determination and to distribution tariffs are expected to remain unchanged, at least until the end of 2018. ANRE sets up the annual level of distribution tariffs in RON per MWh for each distribution company and for each voltage level (high, medium and low). The tariffs invoiced to clients are cumulated depending on their related voltage level (i.e. the tariff for medium voltage also includes the tariff for high voltage, and the tariff for low voltage also includes the tariff for high and medium voltages). ANRE sets up the annual regulated income levels required for each year during the regulatory period, based on projections submitted by the distribution operators, in line with the methodology requirements, at the beginning of the regulated period. Electrica Furnizare (EF) 3.6 mil. clients Note: The diagram relates to the number of company’s clients on December 31st, 2016. Source: Electrica Starting January 1st, 2017, electricity distribution tariffs approved by ANRE are as follows (RON/MWh): Tariff (RON/MWh) SDTN SDTS SDMN Source: ANRE ANRE Order no. 113/December 14th, 2016 114/December 14th, 2016 112/December 14th, 2016 High voltage Medium voltage Low voltage 19.05 20.63 14.79 41.93 41.01 33.67 96.73 103.73 109.35 34 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 35 SUPPLY SEGMENT the The electricity supply segment operates through Electrica Furnizare subsidiary, both on regulated electricity market (in geographical regions where the Group distribution segment is operating), and on the competitive market at national level. The Group has two supply licenses covering the whole of Romania’s territory valid until 2021 and 2022, respectively, and extendable afterwards. The electricity market is divided in regulated market and competitive market. On both markets, electricity and/or purchased can be wholesale or retail. sold Regulated market The liberalization of the electricity market in Romania started on January 1st, 2007, after the implementation of the Second Energy Package of the EU. The tariffs of electricity supply to non-households consumers have been fully liberalized and only the tariffs of electricity supply to households are still partially regulated by ANRE. The households are free to change their electricity supplier, still having access to regulated tariffs of electricity supply until this market will be fully liberalized in 2018. Starting January 1st, 2014, the tariffs of electricity supply to non- households consumers are determined by the market and freely negotiated. It is possible that increasing competition on this market segment which is no longer under regulated tariffs will determine consumers to switch their electricity suppliers and may result in an increased consumer’s migration to the Group’s competitors. as the supply market The electricity in Romania could also record migration within the segment of household liberalization consumers, is progressing. however, process considering the insignificant savings that could be obtained by household consumers their electricity supplier, the Management expects a relatively small liberalization effect over the household segment. When the households segment will be changing from completely liberalized, Electrica should be able to offer packages of tariffs and competitive and innovating services to household consumers. resort” “supplier of Electrica last Furnizare Currently, is for approximately 3.6 million consumers. A supplier of is, under Energy Law, a supplier designated by the regulatory authority to provide the universal service of electricity supply under specific regulated conditions. last resort Until 2018, when the liberalization of the household segment is planned to be completed, tariffs for households must be approved each year by ANRE based on the reported cost categories as well as on regulated profit margin. Tariffs are calculated in order to cover the cost of electricity (including transmision costs, network services, distribution costs and a regulated profit margin). records Electrica Furnizare supply costs including costs of contracting, database billing, management and costs of IT and telecommunications infrastructure. collection, bill The methodology (ANRE Order no. 92/2015) provides for a percentage of the profit from supply worth 1.5% of the total cost of electricity supply includes acquisition, activity (which transmission, system distribution, services, and market operation and supply costs) and an operation supply in amount of 4.7 RON/client/ cost month in 2016. According to the new methodology, ANRE can increase the supply activity cost by the quota of the occasional costs recorded by Electrica Furnizare as a result of special circumstances (such as re-contracting based on ANRE Order no. 88/2015, adjustment of IT systems to comply with the latest regulations, losses from receivables, etc.). In 2016, the households were billed, according to the calendar of regulated tariffs elimination, at a tariff that consists of a mix of regulated tariff component and a “component of the competitive market” (CCM). Non- household clients, beneficiaries of the Universal Service, were invoiced at CCM tariffs, while those which did not benefit from the Universal Service were invoiced at tariffs of last resort for 100% of their achieved consumption. The electricity supplied at regulated tariffs is acquired by means of regulated contracts, with amounts and prices set up by ANRE. The electricity supplied at CCM tariffs is acquired by means of bilateral result contracts concluded as a tenders conducted on CMUS of (centralized market for universal services), respectively, by means of bilateral contracts concluded on the competitive market for electricity supply at last resort tariffs. Any difference between the achieved revenues and the costs plus profit from the supply at regulated/CCM/ LR tariffs for the periods before the regulated tariffs elimination will be corrected during the next period of tariffs substantiation applied to the clients on regulated market. The cost categories of the supplier of last resort, which contribute to the tariffs applied to the final clients up to the level regarded as admissible by ANRE, are: • • • • • • to and to electricity the system functional Acquisition costs of electricity. Costs associated transmission service. Costs related technological services. Costs related to services provided by the operator of the centralized electricity market. Costs to distribution services. Costs related to electricity supply to final consumers who have not used their eligibility right. electricity related • Occasional costs incurred by force majeure (if applicable). Competitive market on the competitive Trading is transparent, wholesale market public, non- discriminatory. Prices may be centralized and on the freely negotiated by the parties on the competitive market. Market participants can trade electricity on the basis of bilateral agreements concluded dedicated centralized market. Starting with 19th of July 2012, the Energy Law does not allow the conclusion of electricity contracts outside centralized markets, except of contracts for import / export of energy. BRP Electrica - Balancing Responsible Party Representation activity in the Balancing Market as Balance Responsible Party (“BRP Electrica”) was performed by Electrica S.A. since 2005, and is based on electricity supply license no. 1091/2012. This activity is compliant with market mechanisms detailed in the Commercial Energy Wholesale Code. type of activity and in terms of size, it provides balance for over 28% of the total consumption in NES. Balancing Market, a component of is the wholesale energy market, mandatory and each license holder must delegate its responsibility for balancing to a BRP. By delegating the responsibility to a Balance Responsible Party there is an advantage of the aggregation of the imbalances, in order to reduce costs on Balancing Market compared to when the producer / supplier / distributor would be in its own name as Balance Responsible Party. SDMN, SDTS, SDTN and Electrica Furnizare delegated their balancing responsibility to BRP Electrica, thus establishing strategic partnerships within the Group. Electrica is group binder helping to establish beneficial partnerships and brand promotion of Electrica in the electricity market. ENERGY SERVICES SEGMENT The Group’s portfolio also includes the energy services segment (equipment other repair maintenance, additional services related to the network), performed almost entirely to distribution subsidiaries outside the Group. and In 2016, the energy services segment consists of SE Oltenia, SE Muntenia, and until the end of January it also included SE Moldova which went bankrupt. In Electrica Group, Electrica S.A. is the only company that carries this relationships with By establishing over 150 in all areas of the wholesale market, BRP license holders 3.2 Procurement Electrica S.A. will continue its process of centralizing procurement within the Group, a process which will delegate the centralized procurement to Electrica S.A. The objective is to reduce costs, optimize procurement and ensure a uniform policy within the Group. This process of centralizing procurement will enable standardization of assets procurement and, equally, will increase the integrity level. 3.3 Sales activity The main factors influencing Electrica’s revenues are represented by the distribution and supply segments. In 2016, the contribution, on one hand, of SDMN, SDTS, SDTN and Electrica Serv, and, on the other hand, of Electrica Furnizare to Electrica’s total revenues were 38% and 56%, respectively. In comparison, in 2015, the contribution of the electricity distribution segment and electricity supply segment to total revenues was 40% and 55%, respectively. The Group’s distribution operators are natural monopolies in their respective markets and as such, they hold 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 share (based on the amounts of distributed electricity) held by the Group’s subsidiaries in the electricity distribution segment, according to the most recent ANRE report available. Figure 19: Market share of distribution segment in 2015 Source: ANRE 36 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 37 REGULATED MARKET 2016 COMPETITIVE MARKET 2016 Although it holds a strong position on the electricity supply market, Electrica Furnizare is facing growing competition on its market. • The competitive segment comprises 108 suppliers (including the last resort ones operating on the competitive segment of retail market), of which 101 are relatively small (<4% market share). The supply market consists of the regulated and competitive segments: • The regulated segment comprises five supply companies, each being part of a group comprising also the corresponding distribution operators. The figure below shows the market shares of Electrica’s supply business on September 30th, 2016 (based on the supplied quantities): Figure 20: Regulated Market, 2016 Figure 21: Competitive Market, 2016 Source: ANRE report, September 2016 Source: ANRE report, September 2016 38 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 39 The total number of consumers supplied by Electrica Furnizare was 3.60 million in 2016, with 149 points of sale. Figure 22: Volume of electricity supplied on retail market (TWh) Figure 23: Evolution in number of consumers (thousand) Major client exposure BRP Electrica - Balancing Responsible Party Electrica Furnizare does not have a significant exposure to a certain client or group of clients that could significantly influence its activity. In 2016, 108 Balance Responsible Parties were set up with Transelectrica S.A., with a total of 1100 licensed participants. legislation, However, under Romanian certain electricity consumers, such as hospitals, ambulance stations, schools, nursing homes, air or naval traffic services are deemed of special importance, and cannot be disconnected by the electricity supplier. Moreover, the clients subject to the insolvency law, can benefit from protection against creditors and, perhaps, against electricity suppliers. Thus, the electricity must be supplied by Electrica Furnizare, even if they are in payment default. At the end of 2016, 150 licensed participants (19 suppliers, 124 producers and 7 distributors) delegated their responsibility to BRP Electrica, as compared to 2015, when 145 licensed participants were registered with BRP Electrica. Figure 26: Number of BRP Electrica members Regulated Market Competitive Market Competitive Market Regulated Market Source: Electrica Source: Electrica Regulated non-households Competitive eligible Regulated households The number of members increased as a result of promoting BRP Electrica high quality services, aimed at attracting new clients (producers and distributors) and clients from the portfolios of competing BRPs (suppliers and producers). Figure 27: BRP Electrica share with regards to electricity consumption in 2016 Source: BRP Electrica Figure 24 Consumers by volume of electricity supplied, 2016 Source: Electrica Figure 25 Consumers by revenues, 2016 Competition BRPs BRP Electrica Source: BRP Electrica 40 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 41 3.4 Reorganization and disposal of assets Regarding distressed subsidiaries, the process of reducing their activity was continued. and In 2013, the Company approved the liquidation procedure for three subsidiaries: SE Banat, SE Dobrogea and SE Moldova. • consequently, SE Moldova – entered bankruptcy in January Company 2016, the has derecognized this subsidiary from the consolidation, given that it no longer had control over it, and tenders have been organised by the liquidator to capitalize the assets; SE Dobrogea – entered bankruptcy in January 2015 and during 2016 there have been organised • • • • tenders by the liquidator to capitalize the assets; SE Banat - entered bankruptcy in August 2014 and during 2016 there have been organised tenders by the liquidator to capitalize the assets; SE Oltenia – insolvency with reorganization since May 2014. The reorganization plan was approved by the Creditors’ Assembly in May 2015, confirmed by the court in June 2015 and extended by one year in December 2016 by the Creditor’s Assembly; SE Oltenia had 215 employees at the end of 2016; SE Muntenia – insolvency with reorganization since November 2014. The reorganization plan in was approved by the Creditors’ Meeting November 2015, and confirmed by the court in November 2015; SE Muntenia had 309 employees at the end of 2016. 3.5 Personnel On December 31st, 2016, the Group counted 9,685 employees. The table below provides an overview of employment in the Group, by business segments, on the specified dates. Electricity distribution SDMN SDTN SDTS Electrica Serv Supply segment Electrica Furnizare Services related to other DSOs SE Headquarters Electrica Total Source: Electrica 2014 9,386 2,156 2,011 1,874 3,345 1,217 1,217 988 988 149 149 2015 8,767 1,949 1,880 1,795 3,143 1,110 1,110 526 526 136 136 11,740 10,539 2016 7,978 1,872 1,817 1,720 2,569 1,041 1,041 524 524 142 142 9,685 The reduction in the number of Group employees leave during 2016 was due to the voluntary program, plus retirements at age limit, disability and termination of individual labour agreements due to other causes (resignation, mutual agreement), as well as reduction in the number of employees of insolvency and deconsolidation of subsidiaries former subsidiaries went bankrupt. in On December 31st, 2016, about 55% of the Group’s employees were directly productive personnel and 45% were indirectly productive personnel, including technical, economic, social and administrative personnel. The table below presents the Group’s employment by age, as follows: December 31st, 2015 December 31st, 2016 Below 18 years old 18-30 31-40 41-50 51-60 over 60 years old Total Source: Electrica 0% 5.96% 19.47% 40.98% 29.49% 4.10% 100% 0% 5.96% 19.34% 42.90% 29.26% 2.54% 100% On December 31st, 2016, about 98% of the Group’s employees were members of trade unions and their employment conditions were governed by a Collective Labor Agreement, which was extended for a period of maximum 12 months starting 1st of January 2017 and submitted to the relevant labor authorities in Romania. The Electrica Group did not face strikes or other forms of labor conflicts that might have interfered with the Group’s business. In 2016, the mutual voluntary leave program with compensatory payments has been continued at Group level and it is valid until the end of 2017. its subsidiaries prepared The Company and to: employment, related internal regulations 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 employees’ professional appraisal and final provisions. training programmes conducted at Electrica’s Electrica into account the constant professional upgrading and skills improvement for the Group’s employees. level took the principle of The management supports training and trough continuous development actively takes part in involving the employees within these programs and supporting them to efficiently approach professional challenges. HEALTH AND SAFETY AT WORK health and safety at work within the Electrica Group is considered part of the organization and conduct of work processes and includes all actions and measures aimed to accidents prevention, occupational illness and improving work conditions. legislation and aware of dangers, A particular focus in achieving this safety status is training of workers according to the requirements in order of to eliminate the risk of injury or occupational disease, identified by assessing the level of risk in all workplaces. A total of 408,422 hours were allocated in 2016 to training employees in health and safety at work, fire emergency exercises (including additional training, special courses and first aid training). Professional training performing in safe conditions is added. The analysis and unitary development of the Regulation of endowment and key technical specifications for individual protection equipment in relation to the risks identified was a priority in 2016. This resulted in the call for procurement in order to equip electricians with individual protection devices. health and safety at work, in the Electrica Group, is developed under the OHSAS 18001/2009 standard of the integrated management system for quality, environment, occupational health and safety, which was externally audited in 2016, without resulting in nonconformities. This provides a unified compliance with legislation requirements through procedures implemented at the level of the companies, and also a continuous improvement of the integrated management system. Work accidents across the Electrica Group implemented. Nevertheless, At the level of the Group, following last year’s event a policy of “zero tolerance to accidents” in the course was of 2016 there were seven accidents, two on the route accidents, of which one ended with an unfortunate death, and five injuries due to involuntary causes causing temporary disability (aggression, car crash and careless walking or fall to the same level). Compared with 2015 both the number of accidents ended with death and those causing temporary disability decreased. Also, the 42 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 43 indicator for 2016 Thus, conditional aptitude amounts to 11.45% of the total number of employees. Calendar days of sick leave for common diseases totalled less than 2.8% of working time in the year 2016, i.e. less than 7 days (6.2 days) of leave per employee, representing the national average. The main causes of temporary incapacity in granting medical leave in 2016 were injuries outside the workplace (sprains, fractures, and contusions), cardiovascular disorders (hypertension, ischemic heart disease, and chronic venous insufficiency) malignancies, muscle (arthrosis), respiratory diseases, pregnancy and confinement, digestive disorders, psychiatric disorders. disease health at work prevention was done through medical examinations by doctors of occupational medicine; psychological examinations; laboratory tests; flu jab; training employees in occupational first aid; checking and health problems and maintaining hygienic conditions. 3.6 Environmental considerations The Group promotes environmentally friendly policies part of its activity and implementation of business strategy. SE Electrica SA and its subsidiaries have implemented an Integrated Quality, Environmental, Occupational Health&Safety Management System, which effectively manages environmental aspects associated with its processes, to prevent pollution and increase environmental performance. Management commitment, guidelines and general objectives of environmental protection are undertaken in the Statement on Integrated Quality, Environmental, Occupational Health & Safety Management System Policy. Annual capex budgets of the Group’s subsidiaries include environmental expenditure. In 2016 the environmental expenditure at Group level amounted to RON 5.195 thousand, 7% up from 2015. In 2016 main environmental concerns were: • Minimization of environmental impact by modernization of equipment and adoption of smart grid; energy equipment with polychlorinated biphenyl impregnated dielectric represent the main environmental aspect; according to legal requirements, plans have been prepared for their elimination and 148 equipments were withdrawn from service; Improvement of waste management by responsible and safe disposal of generated waste including hazardous ones; waste management indicator increasing from 93.5 % in 2015 to 97.3% in 2016; Conservation of biodiversity and resources. • • In accordance with specific legal requirements, Electrica Serv has all necessary environmental permits, respectively 26; for electricity distribution and supply there are no environmental permits required. No pollution incidents complaints exceeding the allowed specific limits were reported. No environmental grievances were reported. period of recovery from injury dropped to a total of 99 days of inability to work, plus a period of 103 days for recovery for an accident recorded in 2015. Prevention actions in the field of health and safety at work Following accidents produced in 2015, the top required an objective analysis management materialized in an audit of health and safety at work by an independent consultant for the entire Electrica Group. The main goal was to define actions needed to improve health and safety at work management system on short and medium term, based on the results of the risk analysis performed on a sample of causes of accidents within the last 10 years and compliance with the specific legislation on health and safety. The audit was performed in the three distribution companies and the energy services subsidiary. Additionally, an internal analysis was performed to identify key risk factors and key specific indicators compared to the national level, European and other companies in the energy sector, focusing on accidents in the past 6 years. The conclusions of these analyses have identified the need to develop a strategic plan for the medium and long term on the awareness of employees about the risks and dangers, with the participation of authorized experts in the field of safety and health at work, with the role of counselling and in stages of management personnel and the entire staff. Causes and favouring factors were analysed for each accident recorded by the legally established commissions, and the files were overviewed by the Labour Inspection. It is worth mentioning that the electrical risk was not the leading cause of accidents at the workplace, but there have been events in which contracted staff died and this signalized a direction of prevention for the safety at work policy so that in the future such unfortunate events would be eliminated. Accidents at work happen because of a conjunction of causes to which subjective aspects specific to each individual are added, such as attitude towards risk, reduced attention and omissions in supervision of workers. As in previous years, more unfortunate events occurred in own electrical installations, due to unauthorized acces without awareness of the electrical risk and exposure to accidents, despite the risk being properly marked with warning and prohibition notices. Throughout the year, internal controls were conducted on compliance with legal inspections and requirements and internal regulations with regards to safety and health at work, fire protection. All these materialized by offering assistance and identifying deficiencies that required immediate implementation of measures but also preventive/ corrective measures requiring long-term action. A total of 3,382 inspections of safety and health at work were carried out in 2016. for information and awareness Other action included organizing a presentation on work equipment and hight safety systems; briefings on legislative changes in order to ensure compliance; additional information and materials for training employees; participation the program. in presenting Prevention actions in the area of fire safety of fire inspection companies intervention and evacuation The prevention program in the area of defence against fire and emergencies situations, in 2016, included: control by own authorized staff of compliance with specific rules; periodic training for all staff in accordance with the approved annual periodic programs; conducting exercises in emergency for and maintenance by situations; authorized protection installations, respectively the firefighting devices at each location; keeping clear all way of access and evacuation; hot and cold season specific measures for fire prevention. All events of fire in electrical reported and installations were technically analysed in order to prevent similar events. For 6 incidents (5 EDTS and 1 EDTN) the Inspectorate for Emergency Situations intervened with firefighting teams, and in other cases the group’s employees in accordance with the training and competence, to eliminate outbreaks of fire. intervened Analysis regarding the health on employees in 2016 the Electrica Group there were no Within occupational illnesses registered. Nevertheless, there are some work-related diseases identified in employee health surveillance carried out both by Electriva Serv physicians, and by foreign medical services employed by the group as well. In analyzing the health of employees, key indicators are represented by the conditiionalities for work, i.e. medical and psychological chronic conditions that limited work capacity (physical effort, working at hight, working under voltage), and total days of temporary incapacity of work (sick leave due to acute and / or chronic medical conditions). 44 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 45 3.7 Research and development activities In accordance with the “Elements of the S.E. Electrica’s Board Strategic Plan for the period 2015-2018 Electrica Group currently carries Pilot Project “Green Highway”. In March 2016 S.E. Electrica signed with OMV Petrom a Memorandum of Understanding to initiate a partnership in electromobility domain (MoU) for placement in four public filling stations of high commercial interest (OMV Aerogarii, OMV Maniu, OMV Titan Grigorescu, OMV Coposu), of fast charging stations, one at the headquarters of Petrom City and one at S.E. Electrica headquarter. At the end of 2016, the first fast charger standard type of 50kW was put into operation in fuel station OMV Aerogarii, and in January 12, 2017 S.E. Electrica and OMV Petrom inaugurated it. By participating to these research, development and innovation projects with financing / co-financing the grants, Electrica has the following benefits: • • Making access to cutting-edge technologies in the field of optimizing the operating modes of the electricity distribution network (EDN) in terms of network connection of renewable electricity production (distributed or concentrated); Improving the safety and reliability of isolated electrical systems, power quality provided through the provision of rapid, low-cost reserves through flexible task; The possibility of identifying criteria in working to promote smart grids - smart grids and smart metering solutions in terms of new measuring code requirements on data protection and encryption methods; • • Use the opportunities to develop self-financing business portfolio of Electrica; • Developing new skills through transfer of know-how; • Compliance with the best practices of similar companies in Europe by winning image; Creating new opportunities for future participation of S.E. ELECTRICA S.A. projects funded by the European Commission • Another important endeavour of S.E. Electrica S.A. in promoting technological innovation is to disseminate the solutions for updating its electric grid using a smart grids concept in the international conferences/symposia that S.E.Electrica S.A. holds every year in November and which propose as an alternative topic the smart grids and smart metering solutions. We mention that S.E. Electrica S.A. has supervised the organization of the international symposium called “Smart Grids 2016”. We emphasize the participation in the WEC conferences with presentations concerning technological innovation and promotion of new technologies that improve operational efficiency. Thus, in June 2016, Electrica SA participated with three papers accepted to FOREN 2016. LUMINA SCRIE POVESTEA TEhNICII 3.8 Risk management To implement the risk management system as well as an internal control/management system at group level, the following provisions were considered: • Order of the Ministry of Public Finance no. 946/2005 regarding the development of an internal control/management system, with subsequent amendments and completions. • Government Order no. 119/1999 regarding internal control and preventive financial control, with subsequent amendments and completions. Internal procedures adopted with this purpose. International Standards on Risk Management Systems. Best practices and methodologies applied in listed and non-listed companies. • • • A major concern for the management is building awareness of employees regarding the importance of managing risks inside the organization and the necessity of direct involvement in the risk management process, as well as of alignment to the best practices at national and international level by following legislation in place, standards and the related norms. In 2016, both within Electrica S.A. and its subsidiaries, was conducted the risks identification process. Thus, after identifying risks, were proposed adequate control measures, aiming to avoid or mitigate such risks in the future. For 2017, the Company considers the development of risk management system according to the provisions of the international standard SR ISO 31000:2010 “Risk Management – Principles and Guidelines” and its integration within Electrica S.A. and its subsidiaries. The risks related to the activity and the sector in which Electrica operates in, for the year 2016, can be presented as follows: • Group’s supply segment may be exposed to the market increasing competition due liberalization and it could lose the last resort supplier status; The Supply Segment may face increased volatility of markets in which it operates, both in terms of volume and in terms of market price; to • • Group’s financial performance may be negatively influenced by changing tariffs on the regulated market and by the energy acquisition prices. • Group’s supply segment might lose its status of supplier of last resort; • Group’s financial performance may be negatively • • influenced by changing prices for energy; Romania’s electricity demand is linked to various factors beyond control of the Group, such as economic, political and climate-changing factors; The Group has regulatory requirements and has to keep in place regulated to comply with • • • • • • approvals, being exposed to significant liabilities in case of non-compliance; Components of the Group’s distribution network are subject to deterioration over time; The Group’s assets and/or business could be damaged by natural and man-made acts or disasters; The Group’s IT systems are outdated and are not integrated; The migration of the Group to a new integrated ERP system may encounter difficulties and delays; The Group may face risks associated with restitution claims with regard to certain real estate properties; from Electrica Furnizare may be prohibited suspending or interrupting the supply of electricity to certain of the Group’s customers, even if such customers are in payment default; The Group’s position in electricity distribution and supply markets may expose it to claims relating to abuse of dominant position; A strike or other labour disruption could adversely affect the Group’s business; Failure to execute management’s business strategy may lead to cost savings and revenue forecasts being lower than predicted for the Group; The Group’s reputation, future prospects or results of operations may be materially adversely affected by claims or litigation; • Not conforming to legislation regarding public purchases by members of the Group could lead to fines and annulment of contracts; • • • • • • • • • • Ownership title over certain real estate properties owned by members of the Group may be deemed uncertain; The Company may face additional claims from tax authorities for budgetary debts due for previous periods; The Romanian taxation system is subject to change and may issue inconsistent interpretations of tax legislation; After the Offering, the State will continue to have significant influence over the Company; After the Offering, the State will continue to have significant influence over the Company; Components of the Group’s distribution network are subject to deterioration over time. The distribution subsidiaries’ activity may be negative impacted by natural disasters or unauthorized human interventions; The existence of companies in the electricity distribution and network construction in the area where the Group’s distribution subsidiaries performed their activity; Regulation risk generated by frequently changes and without appropriate consulting sessions with the electricity distribution operators negatively influence the budget planning capabilities; The risk generated by the regulations in the field of PRE activity. involved • • • • 46 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 47 FINANCIAL RISK MANAGEMENT The Group is exposed to the following risks resulting from the use of financial instruments: • • • Market risk Credit risk Liquidity risk Credit risk The 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 mainly 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 with financial institutions, which are regarded as having a high creditworthiness. The accounting value of financial assets represents the maximum exposure to the credit risk. Trade receivables The Group’s credit risk related to receivables is concentrated on the state-controlled companies. The Group registers a depreciation allowance which is the best estimation of losses recorded as related to trade receivables. The ageing statement of trade receivables was as follows: December 31st, 2016 December 31st, 2015 RON thousand Gross value Not past due 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 603,467 209,205 16,616 14,087 30,872 21,618 1,010,228 1,906,093 Bad debt allowance - (46,494) (11,673) (11,514) (26,577) (21,618) (1,010,228) (1,128,104) Gross value 654,679 189,243 12,525 9,864 33,561 19,388 1,043,639 1,962,899 Bad debt allowance - (15,916) (3,605) (9,008) (33,561) (19,388) (1,043,639) (1,125,117) Net trade receivables December 31st,2016 December 31st,2015 603,467 162,711 4,943 2,573 4,295 777,989 654,679 173,327 8,920 856 - 837,782 RON thousand Not past due Past due 1-90 days Past due 90-180 days Past due 180-360 days Past due 1-2 years Total Source: Electrica 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. Also, stariting with 2016, some subsidiaries have closed long-term loan agreements in order to improve the financial position. Exposure to liquidity risk The following table shows the remaining contractual maturities of financial liabilities on the reporting date. The gross amounts are undiscounted, and include estimated interest costs. (RON thousand) Contractual cash flows Financial liabilities Book value Total less than 1 year 1-2 years 2-5 years more than 5 years December 31st, 2016 Bank overdrafts Financing for network construction related to concession agreements Long term bank borrowings Trade payables Total December 31st, 2015 Bank overdrafts Financing for network construction related to concession agreements Finance lease Trade payables Total Source: Electrica 142,626 127,130 142,626 130,452 142,626 86,636 - 39,720 - 4,096 - - 127,733 722,830 140,508 722,830 1,120,319 1,136,416 2,555 722,830 954,647 2,555 - 2,555 132,843 - - 42,275 6,651 132,843 65,963 221,641 65,963 228,332 65,963 100,248 - - 97,002 31,082 59,821 656,410 59,821 656,410 1,003,835 1,010,526 59,821 656,410 882,442 - - - - 97,002 31,082 - - - - - 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, USD). 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. 48 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 49 Exposure to currency risk Interest rate risk The summary of quantitative data about the Group’s exposure to currency risk is as follows: The Group does not have significant long-term bank loans. The loans contracted in 2016 by the DSOs have been entirely guaranteed with cash collateral by the holding company. Interest rate risk on the newly contracted loans is minimal as the interest on these loans is fixed. In thousand RON December 31st, 2016 EUR December 31st, 2016 USD December 31st, 2015 EUR Exposure to interest rate risk Cash and cash equivalents Deposits (deposits, treasury bills and government bonds) Financing for network construction related to concession agreements Net exposure of financial position statement Source: Electrica 2,533 - (127,130) 4,699 - - (124,597) 4,699 10,241 139,581 (221,641) (71,819) The following significant exchange rates have been applied during the year: Average rate Year-end spot rate 2016 4.4908 4.0569 2015 4.4450 4.0057 2016 4.5411 4.3033 2015 4.5245 4,1477 EUR/ RON USD/ RON Source: Electrica 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 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. A reasonably possible strengthening/ weakening of the USD against RON at 31 December would have affected the measurement of financial instruments denominated in a foreign currency and profit before tax, and affected equity, respectively, by the amounts shown below. The analysis assumes that all other variables, in particular interest rates, remain constant and ignore any impact of forecasted sales and purchases. Thousand RON Effect December 31st, 2016 EUR (change by 5%) USD (change by 5%) December 31st, 2015 EUR (change by 5%) USD (change by 5%) Source: Electrica Profit before tax Appreciation Depreciation (6,230) 233 (3,591) - 6,230 (233) 3,591 - The interest rate profile of the Group’s interest-bearing financial instruments is as follows: Thousand RON 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 Total Variable-rate instruments Financial liabilities (thousand RON) Short-term borrowings Overdrafts Total Source: Electrica December 31st, 2016 December 31st, 2015 740,487 - 1,875,054 (127.130) (127,130) (127,733) 2,360,678 - (142,626) (142,626) 678,612 90,865 1,987,881 (221.641) (221,641) - 2,535,717 (59,821) (65,963) (125,784) Fair value sensitivity analysis for fixed-rate instruments The Group does not account for any fixed-rate financial assets or financial liabilities at fair value through profit or loss. Therefore, a change in interest rates at the reporting date would not affect profit or loss. Cash flow sensitivity analysis for variable-rate instruments A reasonably possible change of 50 basis points in interest rates at the reporting date would have increased (decreased) profit before tax by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency exchange rates, remain constant. Thousand RON December 31st, 2016 Variable-rate instruments December 31st, 2015 Variable-rate instruments Source: Electrica Profit before tax 50 bps increase 50 bps decrease (713) (629) 713 629 50 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 51 4 FIXED ASSETS The number of users and volume of installations at December 31st, 2016 at the level of the three distribution subsidiaries (SDTN, SDTS and SDMN) and at Electrica’s overall level are quantified as follows: Geographical coverage Number of users, of which: 110 kV medium voltage (MV) low voltage (LV) Overhead power lines length, of which: 110 kV medium voltage (MV) low voltage (LV) Of which connections Underground power lines length, of which: 110 kV medium voltage (MV) low voltage (LV) Of which connections Cumulative power of transformers/ power AT in power stations (110 kV/MT + MT/MT) in power stations 110 kV/MT in power stations MT/MT Switching stations/Transformer stations No. of substations, of which: power stations 110 kV/MT power stations MT/MT Number of switching stations and transformer stations Source: Electrica UM km² - - - - km km km km km km km km km km MVA MVA MVA MVA pcs pcs - - TN MN TS Total 34,162 28,962 34,072 97,196 1,245,989 1,305,139 1,123,012 3,674,140 34 4,042 39 3,453 42 2,905 115 10,400 1,241,913 1,301,647 1,120,065 3,663,625 52,432 2,179 11,759 38,495 18,033 15,761 27 3,658 12,076 6,959 6,008 3,660 3,617 43 2,348 121 92 29 58,712 2,146 12,527 44,040 23,845 11,780 15 3,345 8,420 2,138 8,554 5,544 5,191 353 3,009 212 124 88 45,567 3,166 10,411 31,990 17,260 11,507 41 3,361 8,105 2,512 6,683 4,145 4,135 10 2,538 106 101 5 156,711 7,491 34,697 114,525 59,137 39,048 83 10,364 28,601 11,608 21,245 13,349 12,943 406 7,895 439 317 122 pcs 8,736 10,188 8,867 27,791 The vast majority of the distribution equipment currently in the patrimony of electricity distribution subsidiaries within Electrica were built in the last 60 years, following the successive development phases of the National Electricity System. This led to a great variety of equipment currently in use. The vast majority of installations were produced by the Romanian industry during 1960-1990, in which case a high rate of wear and tear is noticed. A relatively small group, accounting for approx. 20% of total equipment, is represented by new installations, put into force after 1990 and which meet current requirements. Depending on voltage level, categories of installations, year of commissioning and specific operating conditions, wear of installations can be assessed as follows: high voltage power lines (110 kV) Underground power lines Overhead power lines Medium voltage power lines Underground power lines Overhead power lines Low voltage power lines Underground power lines Overhead power lines Substations Transformers Source: Electrica INVESTMENTS Pole - Amount Concrete enclosure Pad-Mount Underground SDTN 25% 75% 48% 60% 52% 58% 75% 45% 51% 69% 16% SDMN 45% 80% 80% 75% 75% 75% 75% 70% 75% 85% 95% SDTS 50% 75% 65% 60% 75% 68% 60% 50% 75% 20% 85% Investments at Electrica Group level were promoted considering especially the wear of assets of Distribution Companies, in order to increase the improvement of the distribution efficiency, the service quality and of the operating safety. The Group will continue to modernize and to develop the distribution network into a concept of smart network by installing smart network infrastructure systems, such as SCADA, SAD, energy measurement improve operational systems, etc., the network, to efficiency, improvement of network flexibility, distribution service quality, stability and reliability of the network. in order to reduce losses in the the implementation of investment Within program, Electrica ensures the compliance with the Group’s Strategy and especially, with the following criteria: • Inclusion in RAB of regulated investments; • Non-regulated investments of the Group should provide an IRR higher than weighted average cost of capital. The investment program will follow the Group financial strategy to maintain a solid capital structure. • Based on these criteria and in the context of Electrica improve the operational Group’s commitment to performance and quality of the electricity distribution service, as stated in the Prospectus, the proceeds from IPO obtained by Electrica Group will be used to improve the existing grid infrastructure, to develop the network for connecting new users and for investments in smart grid and smart metering. According to the Strategy of Investment in Electrica’s Power Grids, it is aimed to promote those categories of capital expenditure contributing to the development of a profitable distribution activity and to the creation of conditions of access to the electricity distribution network to energy consumers and producers, in line with market requirements, especially based on: • Automation of distribution by integrating the installation in SCADA, SAD etc. the equipment stations and in the medium voltage network. Introducing equipment with reduced own losses, with higher operating efficiencies, environmentally-friendly. The expending of modern energy measurement systems, transmission of power consumption • Modernizing low voltage distribution network • Modernizing transformer in • • and connections. At the same time, the Group plans important investments in the improvement and modernization of the IT infrastructure, IT systems, as well as investments in cyber-security and business continuity, aiming the improving data protection and implicitly the quality of provided services. The following table presents the investment program approved by ANRE on Distribution Subsidiaries within Electrica Group: 52 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 53 Other 20,1 Studies 13,4 Commissioning program approved by ANRE for the period 2014 - 2018 (RON mil.) 2014 117.00 126.00 113.81 356,81 2015 180.00 184.00 171.33 535,33 2016 219.60 223.20 205.04 647,84 2017 250.00 259.20 252.41 761,61 2018 287.50 288.00 287.09 862,59 Total 1,054.10 1,080.40 1,029.68 3.164,18 SDTS SDTN SDMN Total Source: ANRE Figure 28: The structure of CAPEX achievements for distribution operators within the Group, in 2016 increase the volume of Based on IPO proceeds, Electrica Group has decided to in the distribution network in the third regulatory period compared to the volume approved by ANRE at the end of 2013. investments The consolidated investment plan, at Group level, for 2016, was RON 844.619 RON mil. In 2016, the companies within Electrica Group made the following investments compared to those approved by the General Meeting of Shareholders in March 2016: Subsidiary Electrica Group (RON mil.) Planned 2016 Achieved SDTN SDTS SDMN Electrica Furnizare Electrica Serv Electrica S.A. Total Source: Electrica 269.0 265.0 253.0 17.153 14.509 25.957 844.619 230.899 161.774 160.369 11.706 1.512 3.167 569.427 At the Electrica Group level, the plan was achieved at a rate of 67.4%, with the mention that for distribution subsidiaries a rate of 70.3% was recorded, compared to the plan approved by the EGM. The synthetic structure of the investments achieved by distribution subsidiaries in 2016 is presented in the table below (for details of the most important investments see Appendix 2). Category of works (RON mil.) Efficiency of which: Energy efficiency/CPT Operational efficiency quality of service of which: Continuity of supply Quality of energy Other categories Independent equipment Studies and projects for the coming years Total Source: Electrica Total 199.7 145.1 54.6 285.8 247.7 38.1 20.1 34 13.4 553 The main investments of Electrica Group were focused in 2016 on increasing the quality and efficiency of the distribution service. Quality of Energy 38.1 Independent Equipment 34 Energy Efficiency/CPT 145.1 CAPEX 2016 [MIL. RON] Continuity of Supply 247.7 Operational Efficiency 54.6 Source: Electrica The commissioning plan for 2016, approved by ANRE, was achieved at a rate of 82.5%. Electrica Group (RON mil. in nominal terms) Planned Achieved % SDTN SDTS SDMN Total Source: Electrica 234,084 236,826 101.2 230,309 165,166 215,037 158,419 71.2 73.7 679,430 560,411 82.5 As a result of investments made during 2013-2016, the structure of the Regulatory Assets Base of the three distribution operators in the portfolio of Electrica Group is presented in the table below: RAB (RON mil.) SDTN SDTS SDMN Total Source: Electrica 2013 1,292 1,332 1,434 4,058 2014 1,335 1,352 1,490 4,177 2015 1,423 1,391 1,561 4,375 2016*) 1,528 1,413 1,583 4,524 *) The values in 2016 may suffer corrections following ANRE's analysis process. During 2013 - 2016 RAB evolution has been increasing for all the three distribution companies in the Group’s portfolio, which is reflected in increased profitability across the Group. 54 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 55 5 CAPITAL MARKET Starting with July 4th, 2014, the Company’s shares are listed on Bucharest Stock Exchange (BSE) under the ticker symbol EL, while the GDRs (Global Depositary Receipts) are listed on London Stock Exchange (LSE) under the ticker symbol ELSA. No. 1 2 3 4 5 6 7 8 Date Event description 4-January-16 External storm erased 12.2% from BET cap in the first two weeks of 2016, while Electrica’s shares fell by 5.5% 13-January-16 Chairman of Board of Directors appointment and consultative committees establishment 18-January-16 Legal actions for annulment/suspension of certain ANRE orders Tariffs for 2016 approved through ANRE orders for the distribution operators in Electrica Group 10-February-16 Decision of Mr. Michael A M Boersma to resign, starting with May 1st, 2016 from his position of member of the Board of Directors of Electrica SA 15-February-16 Publication of preliminary standalone 2015 results 26-February-16 Mutual agreement on Mr. Ioan Rosca’s mandate termination as CEO of Electrica SA (until June 2016) 28-March-16 Electrica and FP didn't reach a price agreement for a potential acquisition of minority stakes owned by FP in the three distribution subsidiaries of Electrica SA and in the supply subsidiary 31-March-16 GMS approved the Income and Expenses Budgets for 2016 for Electrica (consolidated and individual) and its subsidiaries and the Remuneration Policy for BOD' members 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27-April-16 GMS approved Financial Statements and profit distribution (dividends) for the Group, Electrica SA and its subsidiaries. The Board named Willem Schoeber as interim director and chairman of the SRGC Committee 16-May-2016 Electrica published the Consolidated Financial Statements for Q1 2016 24-June-16 First day after Brexit vote 7-July-2016 Two days before ex-date (share price: RON 13.40) 8-July-2016 One day before ex-date (share price: RON 13.22) 16-August-16 Electrica published the Consolidated Financial Statements and Director's Report for h1 2016 2-September-16 Electrica convenes GMS on 21 Oct 2016 for appointing a new independent member of the Board of Directors and approval 2016 CAPEX Plan supplemented up to RON 844.6 mn 7-September-16 highest closing price on BSE since IPO - RON 13.90 – no major event 20-September-16 Electrica announced the new CEO 4-October-16 Electrica announced the revocation of the HR Manager by the BoD 19-October-16 Electrica signed with BRD three block account pledge agreements related to the credits granted to its distribution subsidiaries 21-October-16 GMS approved the appointing of Mr. Willem Schoeber as a member of the BoD, the amendment of the Articles of Association and a new CAPEX level supplemented up the value of RON 844.6 mn 15-November-16 Electrica published the Consolidated Financial Statements and a financial report for Q3 2016 (followed by results presentation webcast on 21 November 2016) 11-December-16 Parliamentary elections results 30-December-16 President Iohannis accepted the proposal for prime-minister 4-January-17 Appointment of the Grindeanu Cabinet 31-January-17 Re-appointment of the Chairman of the BoD and of the members of the BoD's Committees, revocation of the Sales Manager, appointment of the Chief Distribution Officer 24-February-17 highest closing price on BSE since IPO - RON 14.24 – no major event Source: BSE, LSE, Electrica Figure 29: Share price history on BSE, together with the most important events occurred from the beginning of 2016 until February 28th, 2017 (RON) Figure 30: Global depositary receipts’ price history on LSE, together with the most important events occurred from the beginning of 2016 until February 28th, 2017 (USD) Source: LSE, Electrica 56 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 57 Figure 31: Comparative performance of Electrica’s share price and BSE indices: BET, BETNG and BETFI (%, as compared with the last day of trading in 2015) 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 for the statutory results obtained in the financial years 2012–2015 were as follows: (RON mil.) Dividends distributed Dividends/share (RON) Source: Electrica Dividend policy 2012 13.2 0.064 2013 22.5 0.108 2014 245 0.7217 2015 291.6 0.8600 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. The Company will pay any dividends in RON. The Company will distribute dividends on the basis its annual financial statements which starting with 2014 are prepared in accordance with IFRS-EU. Repurchase of treasury shares In July 2014 the Company bought back for price stabilization purposes, 5,206,593 ordinary shares and 421,000 Global Depositary Receipts, equivalent of 1,684,000 shares. The total amount paid for acquiring the shares and Global Depositary Receipts was RON 75,372 thousand. There were no changes in the value of the treasury shares in 2015 and 2016. Source: BSE, Electrica Figure 32: Monthly trading volume and average monthly closing price of shares on BSE (in RON) and GDRs on LSE (in USD) Source: BSE, LSE, Electrica 58 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 59 6 MANAGEMENT OF ThE GROUP 6.1 The Board of Directors of Electrica S.A. During 2016, the Board of Directors has undergone some changes. At the beginning of the year, the Board of Directors consisted of 7 non-executive members, appointed by the Ordinary General Meeting of Shareholders on December 14th, 2015. Their term of office, registered based on the decision of the General Meeting of Shareholders, is four years. Four of the seven directors fulfilled the independence criteria provided by the Articles of Association, according to statements presented on the occasion of their nomination. The Board of Directors is responsible for taking all the necessary measures to carry out the activity of the Company as well as to supervise its activity. Its structure, organization, duties and responsibilities are established under the Articles of Association and the Regulation of the Board of Directors. During December 14th, 2015 – May 1st, 2016, the Board of Directors had the following members: • Mr. Cristian Busu – non-executive director, elected as Chairman of the Board of Directors until January 2017 • Ms. Arielle Malard de Rothschild - non- executive independent director • Mr. Michael Boersma – non-executive independent director • Mr. Pedro Mielgo Alvarez – non-executive independent director • Mr. Bogdan George Iliescu – non-executive independent director • Ms. Corina Georgeta Popescu - non-executive director • Ms. Ioana Alina Dragan - non-executive director. Following Mr. Boersma’s renunciation to his position of member of the Board of Directors of Electrica SA starting with 1st of May 2016, on April 26th, 2016 the Board of Directors appointed Mr. Willem Jan Antoon henri Schoeber as interim member of the Board of Directors, until the next Ordinary General Meeting of Shareholders of the Company (i.e. October 21st, 2016). On October 21st, 2016, the General Meeting of Shareholders elected Mr. Willem Jan Antoon henri Schoeber as non-executive independent director with a mandate period equal with the remaining period until the expiration of the vacant mandate, respectively until 14 December 2019. Four of the seven directors fulfill the independence criteria provided by the Articles of Association, according to statements presented on the occasion of their nomination. We present below the most relevant aspects regarding the professional experience of the members of the Board of Directors at the time of their appointment: Cristian Busu Mandate 4 years Arielle Malard de Rothschild Mandate 4 years Michael Adriaan Boersma Mandate 4 years Pedro Mielgo Alvarez Mandate 4 years Bogdan George Iliescu Mandate 4 years Corina Georgeta Popescu Mandate 4 years Ioana Alina Dragan Mandate 4 years Willem Jan Antoon Henri Schoeber Mandate 4 years 60 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 61 Ioana Alina Dragan Mandate 4 years Professional experience • Expert, Department of Administration of State Ownership in Energy, Ministry of Energy. • Member of Shareholders General Assembly, OPCOM – Romanian Gas and electricity market operator. • Member of Board of Directors, Bogdan George Iliescu Mandate 4 years Corina Georgeta Popescu Mandate 4 years Cristian Busu Mandate 4 years Arielle Malard de Rothschild Mandate 4 years Professional experience • State Secretary, Ministry of Energy (December 2015 – January 2017). • Member of the Board of Directors and of the Audit Committee at SIF OLTENIA. • Manager at the Central branch of Marfin Bank in Bucharest. • During 2009 – 2013, Financial • • Manager of Fondul Proprietatea and member of the Representatives Committee. Economic Adviser for the Economic Department of the Romanian Government. Lecturer at the Bucharest Academy of Economic Studies, in which capacity he conducted various teaching and research activities. Professional experience • has an extensive experience in investment banking, spending over 25 years in companies such as Lazard Frères & Cie and Rothschild. She is the founder of the Emerging Markets Division at the Rothschild & Cie investment bank, part of the Rothschild group. Before joining Rothschild & CIE in 1999, she spent 10 years as an investment banker at Lazard Frères & Cie, as part of the Sovereign Advisory team. • • her experience includes major privatization projects in Romania, Poland, Russia, hungary and Morocco, coordinating the privatization of companies such as MOL, Nafta Polska, ZIL, BCR or Dacia. • Has experience in M&A projects, working in over 40 such projects in Eastern Europe and Africa. • Member of the Board of Directors of Imerys S.A. (SBF120) and of Rothschild & Co, both listed on the Paris Stock Exchange and of Groupe Lucien Barrière. Michael Adriaan Boersma Mandate 4 years • Professional experience • Professor of corporate governance at the TIAS School for Business and Society, University of Tilburg in the Netherlands Senior adviser for First State European Diversified Infrastructure Fund, London, UK. • Non-executive independent director of Nynas AB, Stockholm, Sweden, a company owned by PDVE and Neste Oil Oyj, specializing in the production and trade of oils and bitumen. Chairman of the Board of Directors of Prometheus Energy, based in houston (Texas, U.S.A.). Chairman of the Supervisory Board of TMG, a Dutch listed company, Amsterdam. • • • • • Member of the Supervisory Board of PostNl, a Dutch listed company, The hague, the Netherlands. Chairman of the Supervisory Board of the VieCuri Medical Center for Noord-Limburg in Venlo, the Netherlands. Chairman/member of foundations/ institutions/advisory bodies (e.g. Energy Fund Limburg, Jheronimus Bosch 500, Protective preference shares FUGRO). From 2003 until the end of 2009 - CEO and Chairman of the Executive Board of Directors of Essent, the largest Dutch utility. • Pedro Mielgo Alvarez Mandate 4 years Professional experience • Non-executive Chairman, Madrilena • Red de Gas, Madrid Spain. Chairman and Managing Partner of the Fund GP, Nereo GreenCapital, Luxembourg. • Non-executive Chairman, Ingenio • • • • • • • 3000, Madrid, Spain. Independent Director, Landis & Gyr SAU, Sevilla, Spain. From 2008 until 2011 - non- executive Chairman, Centimetri, Milan, Italy. From 2008 until 2011 - Independent Director, Landis & Gyr AG, Zug, Switzerland. From 1999 until 2004 - Director, Redesur, Lima, Peru. From 1997 until 2004 – Chairman & CEO, Red Electrica de Espana, Madrid, Spain. From 1995 until 1997 – General Manager, Iniexport, Madrid, Spain. From 1991 until 1997 – Director, Marketing & Sales, Intec, Madrid, Spain. Professional experience • Board member, Nominalization and Remuneration Committee member, Rating and Audit Committee member, Strategy committee member, SNTGN Transgaz SA, Medias. From May 2014 until May 2016 - Executive Manager, Corporate Finance Department, BRD – Group Societe Generale. From 2007 – 2014 – General Manager, BRD Corporate Finance. From 2005 until 2009 – Board member, SAI INVESTICA ASSET MANAGEMENT SA, Bucharest. From 2001 – 2007 – Project Manager, BRD/SG Corporate Finance. From 1997 – 2001 – Analyst, BRD – Group Societe Generale. • • • • • Professional experience • State Secretary, Ministry of Energy. • head of Power Assets Department, • • • • • • • OMV Petrom SA. From 2011 until 2015 – Bucharest Branch Manager, OMV Trading Gmbh Viena, Austria. From 2008 until 2011 – Manager of Energy Market Regulation and Supervision, E-ON Romania. From 2007 until 2008, Head of Power Acquisition Department, E-ON Moldova Furnizare. From 2001 until 2006 – Head of Distribution Service, Electrica SA From 1998 until 2001 – Head of Operation Service, Electrica SA – Distribution & Supply Bucharest Branch From 1996 until 1998 – Chief Deputy Division, North Network Division, CONEL - Distribution & Supply Bucharest Branch. From 1991 until 1996 - North Network Division, RENEL - Distribution & Supply Bucharest Branch Willem Jan Antoon Henri Schoeber Mandate 4 years • • • • • • National Company of Uranium SA; From 2013 until 2014, Member of Board of Directors, SN Nuclearelectrica SA. 2014, Adviser of Minister, Ministry of Energy. From 2012 – 2013, Country Financial Specialist, Responsible for Siemens Financial Services Department, Siemens Romania. From 2008 until 2012, Bonne GAMME Relationship Manager, BRD – Group Societe Generale – Beller Agency. From 2007 until 2008, Grand Public Relationship Manager, BRD – Group Societe Generale – Beller Agency. From 2005 until 2007, Front Desk Operator, BRD – Group Societe Generale – ASE Agency. Professional experience • Independent business consultant (since 2013). • • • Member of the board of directors of Neste Oyj (helsinki, Finland), of the supervisory board of Gasunie NV (Groningen, the Netherlands) and member of the audit committees of these boards (since 2013). From 2010-2015: Chair of the Boards of Directors of EWE Turkey Holding AŞ (Istanbul, Turkey), Bursagaz (Bursa, Turkey), Kayserigaz (Kayseri, Turkey) From 2010-2013: Member of the executive board of EWE AG (Oldenburg, Germany), responsible for power generation and for the EWE utility businesses in Turkey and Poland From 2007-2011: Chair of the executive board of swb AG (Bremen, Germany) From 1977-2007: Various positions in the Royal Dutch Shell group in the Netherlands, France, Germany and the USA, with senior management positions in refining, i.a. refinery manager in Reichstett (France) and Cologne (Germany) • • Source: Electrica 62 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 63 At the date of this report, the members of the Board of Directors are as follows: No. Name 1. Cristian Busu 2. 3. 4. 5. Arielle Malard de Rothschild Ioana Dragan Corina Popescu Bogdan Iliescu Pedro Mielgo Alvarez 6. 7. Willem Jan Antoon henri Schoeber *starting with December 14th, 2015 Source: Electrica Term of office* Status 4 years 4 years 4 years 4 years 4 years 4 years 4 years non-executive director, President of BoD non-executive, independent director non-executive director non-executive director Date of first election September 22nd, 2014 September 22nd, 2014 December 14th, 2015 December 14th, 2015 non-executive, independent director December 14th, 2015 non-executive, independent director December 14th, 2015 non-executive, independent director April 26th, 2016 Consultative committees’ members are elected for a period of one year. The organization, duties and responsibilities of each committee are set under the Articles of Association of Electrica S.A., respectively in the committee charters - an integral part of the Corporate Governance Code of the Company. In its meeting held in January 2017, the Board decided to maintain the same composition of the committees, for another year. According to the information held, there is no agreement, understanding or family relation between the directors of the Company and another person who may have contributed to their appointment as directors. At 1st March 2017, no member of the Board of Directors held any Electrica S.A. shares. to information, the available the Board According members were not involved in litigations or administrative proceedings regarding their activity within the Company in the last five years or regarding their capacity to fulfill their duties within the Company. More details on the Board members’ biographies can be found on the company’s website. Mr. Cristian Busu was elected Chairman of the Board of Directors during the new Board’s first meeting, which took place on January 13th, 2016, for a term of one year, and reelected in January 2017 for another year. In the its first meeting, held on January 13th, 2016, the new Board of Directors decided the composition of committees, as follows: a) b) c) The Nomination and Remuneration Committee • Mr. Bogdan Iliescu - Chair of the committee • Ms. Arielle Malard de Rothschild • Ms. Corina Popescu The Audit Committee • Mr. Pedro Mielgo Alvarez - Chair of the committee • Ms. Arielle Malard de Rothschild • Mr. Bogdan Iliescu The Strategy and Corporate Governance Committee • Mr. Michael Boersma - Chair of the committee (until his resignation as of May 1st, 2016, when his place was taken by Mr. Willem Schoeber) • Ms. Ioana Dragan • Mr. Cristian Busu. 6.2 The activity of the Board of Directors of Electrica S.A. and of its Consultative Committees In 2016, the Board of Directors met 30 times. Out of the 30 meetings that took place in 2016, 16 meetings were organized with physical presence of the members and 14 were held electronically, in accordance with the provisions of art. 17 paragraph 22 (respectively art. 18 alin. 23 after October 21st, 2016) of the Articles of Association of the Company. We present below the situation of Board members’ presence in the meetings of the Board of Directors and its committees in 2016: Name The Board of Directors The Audit and Risk Committee (no. of meetings - 30) (no. of meetings - 10) The Nomination and Remuneration Committee (no. of meetings - 15) The Strategy and Corporate Governance Committee (no. of meetings - 11) Cristian Busu Arielle Malard de Rothschild* Corina Popescu Ioana Dragan Bogdan Iliescu Pedro Mielgo Alvarez Willem Schoeber* Michael Boersma* 30 29 30 30 30 29 19 8 - 9 - - 10 10 - - - 14 15 - 15 - - - 10 - - 11 - - 8 3 *Note: in one meeting of the Board of Directors, Ms. Arielle Malard de Rothschild was represented by Mr. Cristian Busu, based on the mandate given. The same, Mr. Willem Schoeber was represented in one meeting by Mr. Pedro Mielgo Alvarez, and Mr. Michael Boersma was represented in two meetings of the Board of Directors by Ms. Arielle Malard de Rothschild, based on the mandates given. Source: Electrica The main areas of interest and decisions adopted by the Board of Directors in 2016 refer to: • Election of the Chairman of the Board of Directors and establishment of the consultative committees and election of their chairman; Continuing the project started in 2015 aiming to review and align the Articles of Association of Electrica and of its subsidiaries, considering more clearly the scope of activity and the level of management, responsibilities by controlled delegation of competence and implementation of a new corporate governance at group level, based on the new Corporate Governance Code issued by the Bucharest Stock Exchange (BSE Code) and the key points underlined by the Board’s evaluation process. The EGMS approved the proposed revised Articles of Association on October 21st, 2016. Revision and endorsement of ELSA subsidiaries Articles of Association. The update of the charter of the Board of Directors and of the charters of the committees set up by the Board. Electrica Revision endorsement SA’s financial statements at individual and consolidated levels for the financial year of 2015. Revision and endorsement of financial statements of Company’s subsidiaries for the financial year of 2015. Revision and endorsement of Electrica SA’s income and expenses budget at standalone and consolidated levels for the financial year of 2016. Revision and endorsement of income and expenses budgets of company’s subsidiaries for the financial year of 2016. Revision and endorsement of the consolidated investment plan for the 2016 financial year. Analysis, of approval different proposals submitted by the executive and management coordination acquisitions regarding and and of • • • • • • • • • to implement investment opportunities (e.g.: supervising the negotiations with Fondul Proprietatea regarding the acquisition of the minority stakes within distribution and supply operators). Preparing and submitting for the GMS approval the new Remuneration Policy and mandate contracts, including revised KPIs for the members of the Board of Directors. reshaping Group’s Reviewing proposals on improved aiming activity, processes flows and an increased efficiency for core business, but also to create the basis for better operational and financial results, at individual and consolidated level. Setting the annual calendar of the Board meetings and the key documents and reports to be presented by the executive management. Reviewing the BoD composition in subsidiaries, to assure a consistent approach and to support subsidiaries development and market the positioning, as well the governance across the group. Approval of the Market Abuse Regulation. Approval of the Treasury Policy. Approval of the Delegation of Authority Policy. Approval of the Internal Audit Charter and of the Code of Ethics for the internal auditor. Approval of the audit plan for 2017. Approval of the Code of ethics of the internal auditor. Approval of the Manual of Procedures. Approval of the CSR Plan and Policies for 2016, aligned to the PR, Communication and CSR Strategy. The appointment of a new CEO starting with October 24th, 2016. Approval of the new organizational chart, to enter into force starting with January 1st, 2017, having as objective to streamline the Internal Audit Policies and for strengthening • • • • • • • • • • • • • • 64 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 65 responsibilities reporting lines in Electrica and at the Group level and to use and combine the necessary competencies and in more efficient way. Revision and approval of the executive management KPIs achievement for 2015 and the new ones for 2016 – at Electrica and Group level. • In 2017, until the date of the Report, the Board of Directors met seven times (out of which two meetings were held electronically and one was telephonic) and adopted important decisions for both its organization and the development and operational orientation of the Company. • • the consultative The main decisions adopted by the Board of Directors during meetings held 2017 refer to: • Election of the Chairman of the Board of Directors. Reviewing committees’ composition and election of their chairpersons. Analysis and endorsement of Electrica SA’s budget, of the budgets of its subsidiaries and of the consolidated budget at Group level for 2017. • Decisions regarding the mandate agreements subsidiaries for the General Managers of of (termination/ prolongation/ confirmation specific period of time). The termination of the mandate agreement of the executive manager of the Sales Coordination Division of Electrica SA. The appointment of the Chief Distribution Officer of Electrica SA. The approval of Electrica Dividends Policy. The approval of Policy on ethical career management. Electrica Revision endorsement individual and SA’s financial statements at consolidated levels for the financial year of 2016. Revision and endorsement of financial statements of Company’s subsidiaries for the financial year of 2016. Revision and approval of the individual and consolidated investment plan for the 2016 financial year. • • • • • • • and of Based on the main conclusions and objectives set following the evaluation process carried out in 2015, the Board of Directors has undergone several important projects during 2016 and until the date of the Report: f Improving the corporate governance framework at Group level, having 3 main pillars: • The revision of the Articles of Association of Electrica and of its subsidiaries - project started in late 2015, aiming to review and align the corporate governance rules within the Group, considering more clearly the scope of activity and the responsibilities by level of management, controlled delegation of competence and the implementation of a new corporate governance at group level. The EGMS finally approved the new Electrica Articles of Association on 21 October 2016; Consequently, the charters of the Board and of the committees were approached, as the most important tools to address the main areas of partial or non-compliance with the new Bucharest Stock Exchange Code provisions and the action plan related to the improvement of the Board’s activity. The new charters of Electrica were discussed and finally approved during the meetings of November and December; The next step is to further roll out these principles within subsidiaries and to define and apply appropriate governance policies at group level; • • f Overseeing the activity at Group level: • • receiving and analysing more Asking, information on the activity of subsidiaries; Improving the communication with the executive management and creating a relevant tool for the periodic reporting of Electrica and Group activity; • Discussing during several meetings and analysing the materials and proposals regarding the Strategy on natural gas supply, Business Plan for gas supply and the Marketing Strategy; f Consolidating the executive management team: • • • • • Following the mutual agreement on the termination of Mr. Ioan Rosca’s mandate as CEO of Electrica, in March the Board nominated Ms. Iuliana Andronache as interim CEO and in October appointed Mr. Catalin Stancu as CEO of Electrica; in the executive Implementing changes management team (hR manager, Sales Coordination Division manager, Chief Distribution Officer) and redefining the roles and competencies and reviewing the split of responsibilities among the executive management team members. Approving a new organizational chart and introducing positions of performance managers middle level (MKP – Management Key Positions); Approving the 2017 KPIs structure for Electrica SA’s managers and the way of cascading from the general manager level to managers and from ELSA to its subsidiaries; Approving new remuneration (structure and level) and KPIs for subsidiaries. BOARD OF DIRECTORS EVALUATION The Board of Directors, whose term started on December 14, 2015, has carried out an evaluation of its activity – at the end of 2015 with the support of an external advisor, a well-established international comprehensive company, with experience in corporate governance. The results of this analysis have been presented in the annual report for 2015. An internal evaluation of the Board activities was carried out in December 2016, based on a questionnaire defined and thoroughly discussed by the Board members. The questionnaire served to establish a self- assessment of the 2016 achievements of the Board in the following areas: • The main objectives defined by the General Meeting of Shareholders for the Board: Group strategy, Corporate Governance, Placing of Investment investments and achievement in the distribution companies Impact of the Board on the functioning of the company financial • • Quality of functioning of the Board and its internal processes, including Board culture Individual aspects of the Board work for each Board member Role and functioning of the Chair. • • the that fact, The results of the questionnaire were discussed among the Board members in their meeting of February 10th, 2017. The main conclusions and observations were the following: f The overall progress in the functioning of the company was not at the desired level, the Board hampered by decided in March 2016 not to extend the mandate of the existing CEO and to start the recruitment of a new CEO with the support of an professional executive search agency. The new CEO could only be contracted in September 2016 and started his activities on October 24th, 2016. The CEO selection has been a top priority in the Board agenda 2016. The same holds for further reinforcements of the Company’s top management, that remain a priority for the Board in 2017. f The achievements on the Board’s own KPIs, investments realised most notably on the and commissioned during 2016 the distribution companies, that influence future profitability, have been below the Board’s ambitions and expectations. The Board has taken organisational measures to improve this in the future and requested Management to proceed with restructuring and business in process redesign, in particular (but not only) in this area. f The process for a profitable deployment of the funds available to the company has continuous attention in the Board. During 2016 several external growth projects were thoroughly analyzed and negotiations in this respect were carried out and are still underway. f The governance and management of the company have been reinforced by taking the areas of management measures in composition of boards of composition, revised board charters. subsidiaries and In doing so, the Board is striving for a consistent execution of company strategies and operational excellence both in parent company and subsidiaries. The board focuses on reaching a high standard of corporate governance in the company. f The identification of risks and their mitigation has intensively been discussed in the Board at several occasions, in particular in the wider area of energy trading. Proprietary trading in Electrica has been stopped in this context. Further work is needed in the organisation to bring the company to an international standard of risk management. its time over f The Board has identified the need to improve the distribution of formal requirements and activities coming from the organisation on the one hand and its own agenda and key priorities on the other. It has established an annual rolling agenda where strategic items will get more attention and it has reinforced the follow-up of its own action items – also in reaction to previous year’s evaluation. Attention remains needed to follow this through. f The Board’s own meeting quality and culture are evaluated regularly with a feedback session planned after every meeting. All board members participate actively and the Board culture is stimulating for deviating opinions, that are taken for consideration by other members. No conflicts of interests for Board members have been observed in their Board work. f The Chair received positive feedback and has been re-elected unanimously by the other Board members. THE NOMINATION AND REMUNERATION COMMITTEE The Nomination and Remuneration Committee consists of three non-executive Board of Directors members, the majority of them being independent members, while the chair 66 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 67 The Committee has the following duties in the field of remuneration: • Making recommendations to the Board in relation to the remuneration, incentive and severance compensation policies of the Company; Advising the Board on the structure of the for Board members; remuneration framework • • • of the committee is an independent director. The role of the Committee is to propose candidates for the Board of Directors, to develop and propose to the Board the selection procedure of candidates for the positions of managers and other management positions, to recommend to the Board candidates for the positions listed, to formulate proposals on the remuneration of directors and other management positions. The Committee has the following responsibilities concerning nomination matters: • recommendations Recommending to the Board a nomination policy, including a target Board profile, process and principles for shareholders to consider when proposing candidates for director positions at the Company, and the Board making regarding interim directors in accordance with the policy; Reviewing the nomination policy, preparing a report to the Board on its implementation, and presenting a summary of this report in the Directors’ Report; the appointment of implementation of the to • the • Advising the Board on the appointment and dismissal of the General Manager, making recommendations on appointment and dismissal of the Company’s executive management team after considering the views of the General Manager, and making proposals on the appointment and dismissal of subsidiary board members in accordance with the Group Governance Policy; Recommending to the Board policies in the human resources field, including those termination, covering talent management and development, and succession planning across the Company and its subsidiaries (the Group); recruitment and • • Overseeing for the process the annual evaluation of the effectiveness of the Board and its consultative committees; Periodically assessing the size, composition and committee structure of the Board and making recommendations to the Board with regard to any changes; • • Making recommendations to the Board on continuous skill development programmes for Board members and executive management. • Overseeing the nomination process of the general managers and executive managers in the subsidiaries according to the nomination and remuneration Policy • Making to recommendations the Board in relation to the remuneration of the General Manager and other executive managers, including the main remuneration components, performance objectives and appraisal methodology; • Making recommendations the Board on the remuneration of subsidiary board limits of the members remuneration for subsidiary management; general and to • Monitoring compensation trends within industries relevant to the Group; • Overseeing the remuneration process of the general managers and executive managers in the subsidiaries according to the Nomination and Remuneration Policy. The Nomination and Remuneration Committee met 19 times during January 1st, 2016 – March 9th, 2017. During these meetings, the following topics were discussed and referred to the Board of Directors for approval: • the the organizational Recommendations on remuneration of Board members and their framework – management agreement. Recommendations on the structure and remuneration of the subsidiaries Board members. Recommendations on the appointment of executive directors and performance criteria. Recommendations on structure of the Electrica SA. Recommendation on the appointment of the new CEO of Electrica SA. Recommendation on the appointment of the new CEO of Electrica Serv. Recommendation as regards the mandate agreements of the General Managers of subsidiaries prolongation/ (termination/ confirmation for specific period of time). Recommendation on the appointment of the Chief Distribution Officer of Electrica SA. Reviewing the BoD composition in subsidiaries for strengthening the governance across the group. Revision of the executive management KPIs achievement for 2015 and the new ones for 2016 – at Electrica and Group level. Recommendation on implementing new • • • • • • • • • • for the contracts executive in Electrica and for other key mandate management positions subsidiaries, as well as positions. Recommendation on the 2017 KPIs structure for Electrica SA’s managers and the way of cascading from the general manager level to managers and from ELSA to its subsidiaries; Recommendation on the new remuneration (structure and level) and KPIs for subsidiaries THE AUDIT AND RISK COMMITTEE independent directors, them is a non-executive The Committee is made up of three members, the most of chairman independent director. This structure provided the necessary finance and risk management, expertise according to legal requirements. in The main role of the Committee is to support the Board in fulfilling its duties of verifying the efficiency of Company’s financial reporting, internal control and risk management. While fulfilling this role, the Committee advises the Board regarding the assessment of the Annual Report Statements, whether the documents are accurate, balanced and comprehensive and provide all the necessary information for the shareholders’ evaluation of the financial performance. and Annual Financial • • • The Committee has the following duties in terms of financial reporting: • the integrity of annual and examining interim financial statements or disclosures for Electrica and its subsidiaries (the Group) at standalone and consolidated levels; regularly reviewing the adequacy of the Group’s accounting policies; reviewing and recommending the Company’s financial forecast policy to the Board for approval; advising the content of the annual report, taken as a whole, represents a fair, balanced and for shareholders understandable account information and provides them with the necessary Company’s the performance the Board on whether assess to Regarding the auditing and internal control matters, the Committee has the following responsibilities: • approving a Group-wide, annual risk-based audit plan as well as any material changes to the plan, and receiving regular reports on activities, key findings, and follow up regarding internal audit reports; • advising the Board on the appointment, removal and remuneration of the head of Internal Audit; • • relevant • monitoring the adequacy, effectiveness and independence of the internal audit function; • making recommendations to the Board on the appointment, rotation or dismissal of the Company’s external auditor; reviewing the plan, work and findings of the external auditor; assessing the independence and objectivity of the external auditor and monitoring and compliance with the professional requirements on the rotation of audit partners regularly and reviewing implementation of control policies, including policies for detecting fraud and the prevention of bribery; reviewing related party transactions in line with a policy developed by the Committee and approved by the Board; reviewing annually a report by the head of Internal Audit assessing the effectiveness of the system of internal control across the Group ethical including the key guidance, adequacy internal • • • The Committee has the following responsibilities concerning risk management matters: • reviewing regularly the main risks facing the Company and Group, recommending to the Board relevant policies for their identification, mapping, management and mitigation of risk; reviewing annually a report from management assessing the effectiveness of the system of risk management across the Group; advising the Board on equity and debt financing, including proposals for contracting any type of loans and securities associated with these loans; advising the Board on its recommendations regarding major economic transactions within the authority of the General Meeting of Shareholders, assessing any associated risks regarding such transactions. • • • The Audit and Risk Committee met 12 times during January 1st, 2016 – March 9th, 2017. During these meetings, the following were discussed and referred to the Board of Directors for debate and, when applicable, approval/endorsement: • • • The Audit Committee Charter. The audit plan for 2016. The internal audit policies and procedures manual. The internal audit charter. The internal Auditor’s Ethical Code. The financial statements of Electrica S.A. at standalone and consolidated levels for the • • • 68 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 69 financial year of 2015 and 2016, as well as financial statements of Company’s subsidiaries for the financial year of 2015 and 2016. The income and expenses of Electrica S.A. at standalone and consolidated levels for the financial years of 2016 and the revenue and expenditure budgets of Company’s subsidiaries for the financial years of 2016. Various reports submitted by the internal auditor on missions carried out within Electrica SA and its subsidiaries. Annual report on the internal audit activity for 2016. Annual report on integrity warnings for 2016. 2016 Individual preliminary unaudited results of Electrica SA. Annual report on risk management activity for 2016. Report on the internal control effectiveness. • • • • • • • The internal audit activity is carried out by a from a structural point of separate division view Internal Audit Department), within (the the Company. In order to ensure the fulfilment of its main functions, it reports to the Board of Directors through the Audit and Risk Committee and administratively - to the CEO. THE STRATEGY AND CORPORATE GOVERNANCE COMMITTEE The Committee was made up of three non- executive directors, the chairman being a non- executive independent director. The Committee has the following duties in terms of strategy: • making proposals the Board on to recommendations on the development of the medium-term strategic plan, making the strategic direction, priorities and long term objectives of Electrica and its subsidiaries (the Group); reviewing management proposals on the Group’s consolidated annual budget, subsidiary annual budgets, and CAPEX plans for the Group, and making relevant recommendations to the Board; supporting the Board in monitoring and assessing the Group’s performance in light of the approved strategic plan, budgets, industry trends, local and regional market trends, competiveness and advances in technology; periodically reviewing the overall strategic planning process, including the process for developing a medium-term strategic plan; advising the Board on proposed acquisitions, joint- divestments, projects, ventures, cooperation investment projects, and • • • • • particularly assessing their alignment with the Group’s strategy; performing or responsibilities on strategy matters as may be delegated to the Committee, from time to time, by the Board. activities other any Regarding the tasks of the Committee on restructuring, they mainly related to: • reviewing and making recommendations to the Board with respect to, the development and implementation of the Group’s overall restructuring plans and objectives, including any determination regarding the disposition or rationalization of core businesses; regularly organisational structure and chart of the Company, and making recommendations to the Board; performing or activities responsibilities on restructuring matters as may be delegated to the Committee, from time to time, by the Board. reviewing other any the • • At the same time, the Committee has duties in terms of corporate governance: • to the reviewing recommendations overseeing and monitoring the Company’s compliance with legal and contractual obligations on corporate governance, as well as other applicable corporate governance principles, and making recommendations to the Board ; regularly Company’s Corporate Governance Code, Board Charter and the Company’s Articles of Association, the and making Board on relevant amendments to the Company’s corporate governance policy and documentation; recommending the Group Governance Policy to the Board for approval and regularly reviewing it thereafter; reviewing the chart of authorities for the Company in order to ensure that the delegation of authorities for effective and efficient decision-making process, and making recommendations to the Board; reviewing the Company’s policy for corporate social stakeholder engagement, and making recommendations to the Board; to management allows responsibility and • • • • • making recommendations to the Board on improving the quality of information flows to the Board including the adequacy of reports to the Board, key performance indicators presented to the Board, and guidelines for Board papers and presentations; preparing other reports or materials on corporate governance as may be requested by the Board. • • • • • • The income and expenses of Electrica S.A. at standalone and consolidated levels for 2017 financial year and the revenue and expenditure budgets of Company’s subsidiaries for 2017 financial year. Recommendation on different opportunities on the market. Recommendation on Regulation. Recommendation on Authority Policy. reviews recommendations Several regarding the Capex and Commissioning plans for 2016 and 2017 – quantitative and qualitative analysis. the Market Abuse the Delegation of investment and On June 30th, 2016, the Committee changed his name from The Strategy, Restructuring and Corporate Governance Committee to the Strategy and Corporate Governance Committee). During January 1st, 2016 – March 9th, 2017, the Committee met 15 times and discussed and referred to the Board of Directors for approval/ endorsement: • Revision of the Articles of Association of Electrica and of its subsidiaries, as well as of Electrica’s Board and its committees’ charters – this project required several iterations (overall 9 meetings of the Committee); Electrica Furnizare Strategy on the natural gas supply activity and the completion of the Electrica Furnizare object of activity; Electrica Furnizare Business Plan for gas supply. CSR Policies. ELSA Foundation. The rebranding of the subsidiaries. Risk Policy and Acquisition and Sales Strategy for gas and energy at Group level. Process for the improvement of the Board (BoD) functioning. • • • • • • 6.3 Boards of Directors of Electrica subsidiaries During 2016 the Board of Directors of Electrica’ subsidiaries were composed from non-executive directors. Regarding the distribution subsidiaries, they suffered composing changes in March and October, respectively structure changes in the middle of December, 2016, when the number of BoD members was diminished from five to three according with the provisions of the new Articles of Association and they have been appointed for 4 years mandate, starting with December, 13th 2016 until December 12th 2020. The Resolutions of the General Meeting of Shareholders in distribution subsidiaries which appointed the new three directors, as well as the Resolutions changing the Articles of Association were contested in court by the minority shareholder. Structure of the Board of Directors of Electrica’s Distribution and Services Subsidiaries between January 1st and December 12th 2016 Subsidiary SDMN SDTS SDTN Source: Electrica January 1st – March 17th 2016 March 18th – October 5th 2016 November – December 12th 20116 Ioan Rosca-chairman Aurel Gubandru Oana Truta Costin Mihai Paun Alexandra Borislavschi Iuliana Andronache-chairman Gabriela Marin Oana Truta Costin Mihai Paun Alexandra Borislavschi Marian Geanta-chairman Simona Fatu Carmen Pirnea Mihai Lazar Alexandra Borislavschi Iuliana Andronache-chairman Simona Fatu Gabriela Marin Mihai Lazar Alexandra Borislavschi Ioan Dumbrava-chairman Costica Vlad Ciprian Gheorghe Diaconu Oana Truta Ioan Rosca Iuliana Andronache-chairman Gabriela Marin Ciprian Gheorghe Diaconu Oana Truta Alexandra Borislavschi Iuliana Andronache-chairman Dan Catalin Stancu, starting with November 3rd 2016 Oana Truta Costin Mihai Paun Alexandra Borislavschi Iuliana Andronache-chairman Simona Fatu Dan Catalin Stancu, starting with November 10th 2016 Mihai Lazar Alexandra Borislavschi Iuliana Andronache- chairman Dan Catalin Stancu, starting with 11th November 2016 Ciprian Gheorghe Diaconu Oana Truta Alexandra Borislavschi 70 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 71 Regarding the services subsidiary, the Board of Directors suffered composing changes in March and in July, respectively structure changes in the middle of December, when the number of BoD members was diminished from five to three according with the provisions of the new Articles of Association and they have been appointed for 4 years mandate, starting with December, 13th 2016 until December 12th 2020 Structure of the Board of Directors of Electrica’s Services Subsidiary between January 1st and December 12th 2016 Subsidiary March 18th – June 30th 2016 July 1st – December 12th 2016 December 13th – 21st December 2016 January 1st – March 17th 2016 ES Marin Adrian Gheorghe chairman Ramiro Angelescu chairman Ramiro Angelescu chairman Iuliana Andronache chairman Catalin Leonte Gabriela Sandu Gabriela Marin Razvan Badan Catalin Leonte Mirela Dimbean Creta Marin Adrian Gheorghe Raluca Bulumacu Catalin Leonte Mirela Dimbean Creta Marin Adrian Gheorghe Madalina Rusu Ramiro Angelescu Vlad Gheorghe Source: Electrica Structure of the Board of Directors of Electrica’s Distribution and Services Subsidiaries as of December 31st, 2016 SDMN Dan Catalin Stancu chairman ES Iuliana Andronache chairman SDTN Dan Catalin Stancu chairman SDTS Dan Catalin Stancu chairman Alexandra Borislavschi Oana Truta Alexandra Borislavschi Oana Truta Alexandra Borislavschi Simona Fatu Vlad Gheorghe Bogdan Popa Source: Electrica Regarding the situation of Electrica Furnizare’s Board of Directors, during 2016 the following directors were in force, the reduction from five to three members of the Board being implemented at the beginning of 2017 when the directors had been appointed for four years mandate, starting with January 12th 2017 until January 11th 2021. Structure of the Board of Directors of Electrica’ Supply Subsidiary during 2016 Subsidiary January 1st –March 17th 2016 March 18th–June 30th 2016 July 1st – July 31st 2016 August 1st – October 24th 2016 EF Oana Truta Ioan Rosca-chairman Marcel Ionescu Victoria Lupu Ramiro Angelescu Ramiro Angelescu- chairman Oana Truta Alina Calugareanu Marcel Ionescu Victoria Lupu Vlad Gheorghe- chairman Oana Truta Raluca Bulumacu Marcel Ionescu Victoria Lupu Vlad Gheorghe-chairman Dan Gheorghe Raluca Bulumacu Marcel Ionescu Victoria Lupu Source: Electrica Structure of the Board of Directors of Electrica’ Supply Subsidiary as of December 31st, 2016 EF Source: Electrica Dan Gheorghe Marcel Ionescu Vlad Gheorghe Dragos Magui-chairman Mirela Dimbean Creta the General Meeting The Resolutions of of Shareholders in supply subsidiary which appointed the new three directors, as well as the Resolution changing the Articles of Association were contested in court by the minority shareholder. 6.4 Executive management of Electrica S.A. In accordance with the Articles of Association of the Company (approved by GMS on 21 October 2016), the Board of Directors appoints and revokes the CEO, as well as the other executives with mandates and also approves their empowerments. The CEO carries out the activity according to the provisions of the mandate contract concluded with the Company. On 26 February 2016, the Board of Directors and Mr. Ioan Rosca, CEO at that time, announced that they had reached a mutual agreement on terminating his mandate as CEO of Electrica S.A. no later than June 2016. On 11 March 2016, the Board of Directors revoked Mr. Rosca from the CEO position and appointed Ms. Iuliana Andronache, current CFO, as interim CEO. During the meeting held on 19 September 2016, the Board of Directors appointed Mr. Dan Catalin Stancu as CEO for a mandate of four years starting with October 24 2016. During the meeting held on 4 October 2016, the Board of Directors revoked Ms. Gabriela Marin from the position of executive manager coordinating the Human Resources Division starting as of 5 October 2016. At the end of 2016, the executive managers are: • Mr. Dan Catalin Stancu – CEO with a mandate of four years starting with 24 October 2016; • Ms. Iuliana Andronache – CFO, with a mandate of four years starting with 27 October 2015; • Ms. Alexandra Romana Augusta Popescu Borislavschi – Executive Manager of Strategy and Corporate Governance Division, with a mandate of four years starting with 4 August 2015; • Mr. Ramiro-Robert-Eduard Angelescu – Executive Manager of Sales Coordination Division with a mandate of four years starting with 4 August 2015. regarding international markets, According to the best practices applied by companies the listed on implementation of a succession plan for key- positions, the Nomination and Remuneration Committee coordinates the process of selection suitable applicants for the vacant Director positions of Electrica SA. The Nomination and Remuneration Committee is supported in this approach by an international consulting firm specialized in recruiting top management, in order to complete the selection process as soon as possible. According to information held by the Company, there is no contract, understanding or family relationship the Company and between another person who may have contributed to their appointment as directors. the directors of information the persons According to available mentioned in sections 6.33 – 6.4 have not been involved administrative proceedings related to their activity within the Company in the last five years and to their capacity to fulfil their work-related. litigations or any in 6.5 Executive management of Electrica S.A. subsidiaries The table below shows the company’s managers who have delegated powers from the Board of Directors: Name Darius Dumitru Mesca Ion Dobre Emil Merdan Mircea Patrascoiu Eugen Davidoiu, until April 26th 2016 Viorel Vasiu, until July 5th 2016 Vasile Ionel Bujorel Oprean Source: Electrica Position Subsidiary General Manager SDMN General Manager General Manager SDTS SDTN General Manager Electrica Furnizare General Manager Electrica Serv General Manager Electrica Serv General Manager Electrica Serv 72 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 73 The table below shows the company’s managers who do not have delegated powers from the Board of Directors: 6.6 Number of shares owned by the managers of the Electrica Group The table below shows the number of Electrica SA’s shares held by the Group’s managers as of February 15th, 2017: Nr. Crt 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Nume Number of shares Share in the share capital (%) Dan Catalin Stancu Ioan Rosca4 Iuliana Andronache Alexandra Borislavschi Livioara Sujdea5 Ramiro Robert Eduard Angelescu6 Gabriela Marin7 Oana Pirvulete Ion Dobre Emil Merdan Eugen Davidoiu8 Radu holom Dora Fataceanu Vasile Filip - - - - - 1,000 - 1,208 1,660 7,277 2,478 1,000 1,000 8,745 - - - - - 0.0003% - 0.0003% 0.0005% 0.0021% 0.0007% 0.0003% 0.0003% 0.0025% Source: Electrica Name SDMN Gabriela Blagoi Constantin Coman Valentin Branescu Gabriel Gheorghe Ion Preda SDTS Monica Radulescu Radu holom Position Manager Manager Manager Manager Manager Manager Manager Ioan Toma, pana in 31.08.2016 Deputy Manager Nicu Constandache Catalin Grama Ioan Dumbrava SDTN Dora Fataceanu Vasile Filip Constantin Buda Ladislau Reider Electrica Furnizare Cristina Pana Mihai Beu Oana Pirvulete Petre Marin Roxana Gheorghe Electrica Serv Ana Iuliana Dinu Cristian Andruhovici Alexandru Ivan Manager Manager Deputy Manager Manager Manager Manager Manager Manager Manager Manager Manager Manager Manager Manager Manager Division Finance Distribution Technical 110 kV Development Control, Regulation and Communication Finance Distribution Distribution Technical 110 kV Development Development Finance Distribution Technical 110 kV Development Finance Commercial Legal Development Commercial Operations Finance Human Resources and Administration Commercial Monica Felicia Dumitrascu Deputy Manager Human Resources and Administration Viorel Vasiu Gheorghe Batir Viorel Beleuzu Sursa: Electrica Manager Deputy Manager Manager Production Production Legal and Assets 4 5 6 7 8 CEO Electrica SA until 11 March 2016 Chief Distribution Officer Electrica SA from 1 February 2017 Executive Sales Manager Electrica SA until 27 January 2017 HR Executive Manager Electrica SA until 5 October 2016 General Manager Electrica Serv until 26 April 2016 74 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 75 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 July 4th, 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 Central Depository on February 15th, 2017 and is presented in the table below: Shareholder Ministry of Energy, 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 Shares Percent of share capital 168,751,185 29,944,090 16,610,424 113,679,866 16,954,364 345,939,929 48.7805% 8.6559% 4.8015% 32.8612% 4.9010% 100% Figure 33: Shareholders’ structure at February 15th, 2017 7.2 Corporate Governance Code Electrica S.A. adhered to the Corporate Governance Code issued by Bucharest Stock Exchange and has been willfully applying its provisions since the fiscal year 2014. Electrica had officially adopted the Corporate Governance in February Code 2015 and made it available on the Company’s website for all interested parties’ benefit. (“CGC ELSA”) This Corporate Governance Code 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 ELSA CGC comprises also ELSA’s Articles of Association, the charters of the Board of Directors and those these of documents the terms of reference and responsibilities of the administrative and executive management of the company. its committees, and all together contain has S.A. in order continuously Electrica developed and updated its corporate governance principles to meet the capital market requirements and to apply the best practices in corporate governance as well as to develop opportunities and increase competitiveness. Therefore, in October 2016 company’s Articles of following Association was updated, the approval of the General Meeting of Shareholders held on October 21st, the that In compliance with Company’s policies and with the Code of Ethics and professional conduct, the Audit and Risk Committee ensures the Company`s activity is carried on with honesty and including the integrity, approval of the whistleblower policy. The main purpose of the whistleblower policy is to protect the Company from ethical deviations, frauds and any other aspects of non-compliance that would otherwise harm Electrica’s image or even legal sanctions, thus damaging the prestige and profitability of the Company. This procedure can be found on Electrica’s website. involve Whereas the shares of the Company are allowed for trading both on the regulated market administered by Bucharest Stock Exchange, and on the market managed by the London Stock Exchange (LSE), Electrica SA is subject to the imperative rules imposed by the national and European laws on market the arrangements abuse inside applicable information to insider dealing and Therefore, the market manipulation guidelines are presented in Schedule 6 of the CGC. regarding 2016. Later, in January 2017, the charter of the Board of Directors and the charters of the committees had also been updated. In September 2015 the BSE issued a new Corporate Governance Code (“the BSE Code”), which entered into force as of January 4th, 2016. The provisions of the new Code are being carefully examined and Company’s compliance therewith is being thoroughly assessed. The “Comply or Explain” Statement presents the compliance level of the Company with the new provisions of BSE’s CGC code. Electrica S.A. it is and has been in full compliance with most of these requirements. Regarding the aspects in which the company is not in full compliance, we mention that concrete actions will be taken in order to improve the degree of compliance in the shortest time. Further consideration will be applied with regards to these provisions and any subsequent progress made by the Company in achieving compliance will be reported to the capital market. the conduct business The CGC is also a guide for the management and the employees of Electrica S.A. and other stakeholders on 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). 7.3 Implementing action plans undertaken by signing the framework agreement with EBRD Source: Central Depository, Electrica The preparation of the Initial Public Offering and dual listing of Electrica involved the signing of a Framework Agreement with the European Bank for Reconstruction and Development, which provides action plans agreed with the overall objective to adopt to ensure new values, essential sustainable development. for the implementation of action organizational necessary change in the context of the status as a listed dual company: developing a culture of integrity of the entire group, adoption of best practices in corporate governance and subsuming the the development strategy of principles of sustainability. Following the stabilization process after the June 2014 IPO, Electrica S.A. owns 6,890,593 of its treasury shares, representing 1.99% of the total share capital. These shares entitle Electrica neither to voting rights nor to dividends. Under this bilateral document, there important directions of are three ACTIONS TO PREVENT FRAUD AND CORRUPTION In order to develop a culture of integrity at Electrica group, accordingly to the standards of the bank, first action was the adoption in 2015 of a new code of ethics and professional the entire conduct applicable Electrica Group, which integrates EBRD guidelines. After its adoption, Electrica has developed a system of to 76 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 77 for managing relevant processes ethics and compliance framework and defining the operational procedure in the field. The third dimension involved in 2016, carrying out sweeps, preparing and providing the information necessary to the staff and management in making decisions, updating information of the management and personnel through dedicated messages accordingly specific activities or with external the developments environment, analysis of reported cases of violation of the Code and / or policies, risk identification and analysis, monitoring compliance with the dedicated staff of the subsidiaries. their of two ethics and compliance management, structured on fundamental elements: dedicated organizational structures and mechanisms / tools needed in ethics and compliance management. In the first quarter of 2016 the two basic elements of the system became operational by clearly defining the powers of departments / ethics counselors in the Rules of organization and functioning of each subsidiary and by adopting policies aiming for zero tolerance of corruption, fraud and money laundering, avoidance and combating conflicts of interest, gifts, protocol expenses and prohibition of facilitation payments, transparency stakeholder engagement, as and required by the Code of ethics and professional conduct at art. 3.7 across all Group companies. the implementation program Based on this, Electrica defined implementation and started program of the system of ethics compliance management. and The is structured in three dimensions: f A dimension that aims to inform the the staff, disseminating values and principles of the Code and subsequent policies, their awareness throughout the organization; f A dimension that aims to develop dedicated organizational professional structures and training dedicated staff who ranks the positions the of counselor or within departments and Ethics Compliance; the for of f A dimension aimed at providing advice to the management and personnel to generate compliant behaviors compliance and monitoring. of first The the dimension implementation program materialized in 2016 through information to all staff about the Code and policies consequential as a whole, but also specific provisions, developed at Group level and through an awareness program to middle-management on values, principles and provisions of the Code and policies by organizing dedicated workshops quarterly, at group level. A second dimension of the program implementation during 2016 aimed both at increasing cohesion at the dedicated staff and encourage the exchange of ideas and solutions through a program of quarterly workshops and training by participating in a training program with external trainer. Also the mapping of the 7.4 The action plan on corporate governance The action plan on corporate governance assumed as part of the Framework Agreement with the European Bank for Reconstruction and Development was considered running ever since IPO and listing of the company on the stock exchange. Standards and measures it envisaged have been implemented and monitored continuously. 1. SELECTING INDEPENDENT DIRECTORS force until EBRD guidelines were taken in the Articles of Association of Electrica adopted on July 4th, 2014 Electrica the Extraordinary in General Meeting of Shareholders dated November 10th, 2015 whose decision the members of the Board of Directors of the company, from 5 to 7 directors, from which 4 are independent. increasing changed it Cristian Rusu as president of the BoD, having a mandate of one year. the The current composition of Board is available here http://www. electrica.ro/grupul/despre/consiliul- de-administratie/. On December 14th, 2015 Ordinary General Meeting of Shareholders has appointed new directors of Electrica. Following the cancellation of Mr. Michael Adriaan Maria Boersma as director of the company with effect from May 1st, 2016, the Board independent non- appointed as executive temporary director Mr. Jan Willem Antoon henri Schoeber and this is confirmed by the General Meeting of Shareholders dated October 21st, 2016. Also, the Board of Directors decided on January 27th to reelect Mr. 2. NOMINATION AND REMUNERATION POLICIES Electrica developed the Nomination and Remuneration policies with the support of a reputable international consultant in human resources and it received a positive opinion of the BoD and was approved by decision of the General Meeting of Shareholders, on March 31st, 2016. But it is necessary to implement these policies at Group level. 3. ADVISORY COMMITTEES OF THE BOARD OF DIRECTORS At the Electrica’s Board of Directors level operates three advisory committees: • (Bogdan Audit and Risk Committee (Pedro Mielgo Alvarez - President, Arielle Malard de Rothschild - member, Bogdan George Iliescu - member); Nomination and Remuneration George Committee Iliescu - President, Arielle Malard de Rothschild – Member, Corina Popescu Georgeta - Member); Strategy and Corporate Governance Schoeber (Willem Committee - President, Dragan Alina Ioana - Member, Cristian Busu - Member). • • Rules of organization and functioning of these advisory committees have been updated with the Rules of organization and functioning of the Board, by decision of the Board on December 16th, 2016. The Board of Directors scheduled the January 2017 establishing for composition of the three advisory committees for 2017. 4. THE FRAMEWORK FOR INTERNAL CONTROL its Internal audit procedure and associated documents were updated in a version approved by the Board of Directors since the beginning of 2015. In October 2016 was developed Code Internal of Ethical Conduct of the Auditor to set standards of ethics unit applicable to all auditors own or contracted, at group level, Code, adopted by the Decision of the Board of Directors on 15 November 2016: http:// www.electrica.ro/grupul/audit-intern/ codul-etic-al-auditorului-intern/. internal audit plan for 2016, The prepared by specialized department was also approved, by decision of the Board of Directors and implemented as approved. 5. ARTICLES OF ASSOCIATION OF ELECTRICA the EBRD guidelines were taken in the Articles of Association of Electrica adopted on July 04th, 2014. During 2016 company’s Articles of Association has been updated by decisions of the Extraordinary General Meeting of Shareholders dated April 27th, and October 21st, focusing mainly on changes alignment with ANRE regulations. All variants of the Articles of Association adopted at the time of listing Electrica are available on its website: http://www.electrica.ro/ grupul/despre/act-constitutiv/. 6. CLEAR LINES OF RESPONSIBILITY AND COMPETENCE from external advice In order to establish tasks and powers, as well as clearly defining the reporting system in the company, Electrica has developed projects to map processes, benefiting in this regard. The first of these projects the completed by defining was procedures applied in the company audited for certification according to ISO 9001/2015 and ISO 14001/2015 standards. Following the external audit conducted by Dekra Romania, Electrica has certified its integrated management system quality - environment - hSS. A new organizational structure and delegation of authority regarding policy were approved by the Board of Directors for Electrica in the meeting on December 2016, implementation being accomplished in early 2017. By the end of 2017 the project will be expanded at the level of the Group by aligning organizational structures of all subsidiaries to the extent that specific activity subject allows. 7. CODE OF CONDUCT EBRD requirements are partly covered by the Code of Ethics and Professional Conduct and the other part by the Code of Corporate Governance. Code of Ethics and Professional Conduct has been developed with the support of Transparency International, and the Code of Corporate Governance and Policy of the integrity warnings included in cooperation with external legal consultant of the company. The two codes have been aligned during January 2015 approved on February 2nd, 2015 and published on the website Electrica http://www.electrica. ro/grupul/etica-sustenabilitate-si- conformitate/valori-si-principii/. During 2016 there were steps for implementing the provisions of both codes, along with monitoring and ensuring in relation to them compliance functions 8. COMPLIANCE WITH THE CODE OF CORPORATE GOVERNANCE OF BSE On January 4th, 2016 came into force the new Code of Corporate Governance of the Bucharest Stock Exchange, while Electrica published on this occasion the statement “Apply or Explain” according to the new provisions, on January 8th, 2016. In the latest statement “Apply or Explain” which appears in the Annex and presented the Company’s compliance with the new provisions of the Code of Corporate Governance of the Bucharest Stock Exchange. On areas where the company is not fully compliant, clear actions are taken into account so that the degree of compliance to be in the shortest time. improved Given the changing BSE Code of Electrica Governance, Corporate has made the changes necessary in their Corporate Governance Code, in cooperation with its external legal 78 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 79 was aproved by GSM on October 21st, 2016. In the period June to September 2016, Electrica developed the Market Abuse Regulation, in compliance with national and European provisions in this field. It was adopted in September 2016 and is being implemented across the whole Group. consultant, the update is available on the company website: http://www. electrica.ro/investitori/guvernanta- corporativa/codul-de-guvernanta- corporativa/. Last updated Code of Corporate Governance was published on the website on January 19th 2017. Regarding the Company’s subsidiaries, it was done revising and updating the Articles of Association and governance principles for the whole Group. The new Articles of Association were approved by the Extraordinary General Meeting of each Electrica subsidiary, during December 2016, being aligned with the principles from the Article of Association of Electrica S.A., which 7.5 The environmental and social responsibility plan Implementation of the Social and Environmental Action Plan, Annex of the Framework Agreement signed by Electrica S.A. with the European Bank for Reconstruction and Development started at the end of 2014, continuing in 2015 and 2016 and covering the following actions to complain the requirements of the bank. In the period May - August 2016 level was carried at the company out a comprehensive project for of and mapping identification processes at Electrica, which benefit from external advice in this regard. It was completed by redefining the procedural framework applicable to the company and certification of integrated management system quality - environment - hSS, in accordance ISO with the 14001:2015, OhSAS 18001:2007 following the external audit conducted by Dekra Romania. ISO 9001:2015 and In November 2016 Electrica started a program to streamline the promotion and monitoring of investment projects at group level and it will be fully implemented in the first quarter of 2017. The program seeks to establish integrated procedural a group-wide framework conduct to Electrica investment activity. This will include the settings of operational procedures in force concerning and provisions environmental impact assessment of investment projects of the Group and stakeholder consultation on projects with significant impact and targeting contractors on the requirements of environmental issues. At the same time, in 2016 Electrica has followed the necessary steps to change the statutory documents of its subsidiaries, providing the necessary conditions for the integration of quality - environment - hSS management systems at the group level, the new Articles of Association being approved by the Extraordinary General Meeting of subsidiaries during December 2016. Implementation of the international standard energy management ISO 50001:2011 was scheduled after the completion of the process of the the redefining Electrica group. structure of Management of complaints are made at group level based on conventional procedures in force at the level of each company, involving departments Communication and Public Relations for collection and for verification and analysis, the departments of audit and control, as well as experts from other departments, if the situation requires. Since April 2015 Electrica is functional at group level the reporting ethical misconduct, system of violations or irregularities any law by professional alert of the devices (whistleblowing). It includes hotline, postal address (physical and electronic) and an online platform for taking whistle blows, accessible on the websites of all companies in the group. Receiving and anonymization services of whistleblows alerts are outsourced and the provider for these for 2016 is Transparency International Romania. LUMINA SCRIE POVESTEA CUNOASTERII staff, their 2016 Corporate Regarding Social Responsibility Program of Electrica, during approved Electrica and implemented both stakeholder engagement policy, available here http://www.electrica.ro/wp-content/ uploads/2016/01/Politica-privind- implicarea-partilor-interesate.pdf, also involvement and social responsibility strategy including community actions involving providing sponsorships and donations to non- profit organizations and social causes, along with initiating a grant program called “Electrica put Romania in a different funding light” aimed at projects with long-term impact on the communities in which the company develops. In general, the strategy was addressed by the company to identify and causes, actions or relevant projects, sustainable, positive long-term impact, all presented here: http://www.electrica.ro/wp-content/ uploads/2017/01/brosura-net.pdf. support At the same time, Electrica managed to make in important developing an organizational culture oriented towards business ethics and compliance. strides Identify and assess environmental and social risks by an independent consultant was not done in isolation, but as a part of the project to improve and develop the system of risk management to be implemented in Electrica group during 2017. The documentation for this project was completed in the first quarter of 2016 but regarding subsequent organizational require revision of this one. Regarding of corporate policies on actions of restructuring reorganization / the level, undertaken at Group Collective Labour Agreement signed with the social partners and applicable during 2016 provides clear principles in this regard and establishes measures development changes the group in accordance with to reduce the social impact of these actions, labor legislation. In parallel, the companies of developed, Electrica approved and implemented Annual Training Programs. These programs target both professional development and retraining and are used to avoid, where possible, staff reductions. if all group companies have Even implemented procedures for waste management, Electrica developed at the end of 2015 a procedural framework for the implementation of a unified system at Group level, the implementation of which shall be made after completion of the process of redefining the structure of the group Electrica. Waste management in 2016 was conducted independently by each company in the group, through the selective collection of waste generated to recovery or disposal, according to legal requirements and compiling all reports required by the environmental authorities. For 2016, spills of insulating oil from transformers from the stations of distribution subsidiaries within the group Electrica were monitored and recorded in the registers of faults. locations (repair For a number of shops, warehouses) of Electrica Serv agencies were conducted soil analysis and water, as is required by environmental permits. Practically all incidents were treated by operative intervention measures, having a significant environmental impact and did not require decontamination of soil and groundwater. group Electrica companies have developed a program to eliminate asbestos in facilities owned, pursuing the goal in all investment projects initiated. Reducing noise pollution in residential areas and associated health risks is achieved by the inclusion of specific provisions in contracts for works and 80 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 81 services, where applicable. To provide but a unified approach at group level, Electrica initiated the development of a framework procedure applicable across on and environmental health and safety to be respected by the providers of works, also including noise pollution issues. requirements subsidiaries its all in this Electrica has conducted studies on influence of electromagnetic the installations and has fields of its regard, all measurements falling within the accepted standards, according to legal provisions in force. For all the modernization work and intended future measurements of electromagnetic fields during commissioning of facilities and the provision of relevant data as required by law, measurements made by the contractors. investments are involved In 2016, Electrica was responsibility social in numerous activities and in financing projects with positive impact on the community. The documents necessary for the proper development of the CSR activity implemented, were completed and including the “Policy on Sponsorships and Donations” and the “Policy on Grant awarding”. Moreover, Electrica adhered to the 10 principles of the Global Compact of the United Nations and to the local program, through Global Compact Network Romania, largest corporate sustainability the initiative in the world. results. Within The company became a partner of famous NGOs, which managed to develop sustainable projects, with the social visible responsibility the company, over 200 employees were involved volunteering various activities. initiatives of in f health projects: • services Counseling Save The Children Romania - and educational for 100 support children with mental health disorders integrated in school; • Help Autism (the program “Parent for Parent”) - Support for families of 50 children diagnosed with in the following areas: financing education, social and health services, environment, and culture. Over 180 projects entered the competition, six of which were selected for a total funding of EUR 50,000. All the projects mentioned were included in the first CSR brochure of the company: “The story of light - A vision on Electrica’s social involvement in the community”. autism spectrum disorder, who cannot afford to pay the therapy needed for their recovery; • hOSPICE Casa Sperantei (hospices of hope) - Electrica supported and participated along with its employees to a charity marathon. The amount raised covered the costs of operation for 52 days of the dedicated palliative care unit for stationary patients cared for by the NGO; • hOSPICE Casa Sperantei (hospices of Hope) - Supporting one of the mobile team of the organization. The donation covered 100 home visits, 78 days of hospitalization in units with beds and 200 participations in day care centers. f Environmental projects: • Let`s Do It, Romania! (“National Cleaning Day”) - Support with both financial resources and involvement of employees in the cleaning action organized on 24 September, one of the biggest social movement in Romania (over 1.1 million volunteers in six years of activity). f Social/education projects: • • • It, Romania! Save The Children Romania (the program “School after school”) - Provision of complementary services, both educational and social, to children and families who come from disadvantaged communities; Let`s Do („Let`s Do It, Corporate!”) – With help from Electrica volunteers, a contribution was brought to the renovation, rehabilitation and rearrangement of the Placement Centre in Plopeni, which hosts 60 children and young people with special educational requirements; SERA Romania – To celebrate 20 years of activity, the foundation organized a charity concert at the Romanian Athenaeum, where Electrica was the main partner. The funds collected were directed to activities and programs aiming child protection. Also, in 2016, the company launched the first edition of the grant program “Electrica puts Romania in a different it offered light”, during which 8 FINANCIAL OVERVIEW The financial overview of the company is based on the consolidated financial statements that have been prepared in accordance with the International Financial Reporting Standards (“IFRS”) adopted by the European Union (“IFRS-EU”). These Consolidated financial statements are presented in RON, which is the functional currency of all companies within the Group. 8.1 Consolidated statement of the financial position The following table presents the consolidated statement of the financial position: RON mil. ASSETS Non-current assets Intangible assets related to concession agreements Other intangible assets Tangible assets Restricted cash 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 gov. bonds Inventories Prepayments Green Certificates Income tax receivables Total current assets Total assets Total active circulante Total active EqUITY AND LIABILITIES Equity Share capital Share premium Treasury share reserves Pre-paid capital contributions in kind from shareholders Revaluation reserve Other reserves Retained earnings Total equity attributable to shareholders of the Company Non-controlling interests Total equity December 31st, 2016 December 31st, 2015 Variation 2016/2015 3,910 17 702 134 40 2 4,805 778 20 889 1,875 23 6 0 2 3,593 8,398 3.593 8.398 3,814 103 (75) 5 105 302 1,430 5,684 837 6,520 3,700 14 779 - 51 4 4,548 838 37 893 1,988 23 9 31 23 3,843 8,148 3.843 8.391 3,814 103 (75) 3 140 274 1,355 5,614 829 6,443 5.7% 20.4% -9.9% - -21.6% -54.2% 5.7% -7.1% -45.6% -0.5% -5.7% -2.2% -40.4% - -89.7% -6.5% 0.1% -6,5% 0,1% 0.0% 0.0% 0.0% 79.7% -25.4% 10.3% 5.6% 1.3% 0.9% 1.2% 82 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 83 RON mil. Liabilities Non-current liabilities Long-term bank borrowings Financing for network construction related to concession agreements Deferred tax liabilities Employee benefits Other payables Total non-current liabilities Current liabilities Financing for network construction related to concession agreements Short-term bank borrowings Bank overdrafts Trade payables Other payables Deferred revenue Employee benefits Provisions Current income tax liability Total current liabilities Total liabilities Total equity and liabilities Source: Electrica NON-CURRENT ASSETS December 31st, 2016 December 31st, 2015 Variation 2016/2015 128 42 196 193 45 603 86 - 143 723 161 4 84 62 12 1,275 1,878 8,398 - 122 181 194 43 540 100 60 66 656 249 4 135 128 11 1,408 1,949 8,391 - -65.9% 8.0% -0.5% 4.3% 11.6% -14.1% - 116.2% 10.1% -35.5% 4.3% -37.6% -51.1% 11.5% -9.5% -3.6% 0.1% The application model of IFRIC 12, being to a large extent correlated to the recognition and depreciation of the asset components of RAB, reflects the principle of generating revenues. Non-current assets increased by 5.7% in 2016 compared to 2015, from RON 4,548 mil. to RON 4,805 mil., primarily as a result of an increase in the assets related to concession agreements (investments made in the network, for the most important ones please refer to Appendix 2). CURRENT ASSETS Current assets decreased by 6.5% in 2016 as compared to 2015, from RON 3,843 mil. to RON 3,593 mil., mainly driven by the decrease in the value of deposits, treasury bills and government bonds, as well as by decrease of receivables and green certificates. TRADE RECEIVABLES Trade receivables decreased by RON 60 mil, representing 7.1%, from RON 838 mil. in 2015 to RON 778 mil. in 2016. This variation was mainly caused by the decrease in amounts receivable by Electrica Furnizare in line with revenue reduction. CASH AND CASH EqUIVALENTS Cash and cash equivalents decreased by 0,5% in 2016 compared to 2015, from RON 893 mil.to RON 889 mil. DEPOSITS, TREASURY BILLS AND GOVERNMENT BONDS Deposits, treasury bills and government bonds decreased by RON 113 mil. compared to 2015, as a result of setting a collateral deposit to guarantee loans contracted by distribution subsidiaries. SHARE CAPITAL AND SHARE PREMIUM The subscribed share capital in nominal terms consists of 345,939,929 ordinary shares on December 31st, 2016 (345,939,929 ordinary shares on December 31st, 2015) with a face value of RON 10 per share. All shares rank equally with regard to the Company’s residual assets. Holders of ordinary shares are entitled to dividends and have the right to one vote per share in the general meetings of shareholders of the Company, except for 6,890,593 shares repurchased by the Company in July 2014 for stabilization. Number of shares at 1 January Shares issued during the year Number of shares at December 31st Source: Electrica Number of ordinary shares 2016 345,939,929 - 345,939,929 2015 345,939,929 - 345,939,929 The company recognizes the changes in its share capital only after their approval in the General Meeting of Shareholders and their registration with the Trade Register. Contributions made by the shareholder which are not registered yet with the Trade Register at the end of the year are recognized as “Pre-paid capital contributions in kind from shareholders”. In 2014 there were several changes to the share capital: a share capital increase of 188,264 ordinary shares in February and an increase of 3,846,797 ordinary shares in May, the shares being issued in respect of land contributed by the shareholder in the previous periods; the partial division of Electrica S.A. by separation of a part of the patrimony (investments held by Electrica S.A. in other entities) and its transfer to the newly established company - Societatea de Administrare a Participatiilor in Energie S.A.) which lead to a share capital decrease of 43,123,780 ordinary shares; the share capital increase on July 2nd, 2014 of 177,188,744 ordinary shares, as a result of organizing an IPO, which referred to an offering of 142,007,744 shares and 8,795,250 GDRs, each GDR representing the equivalent of four shares. The underwritings amounted to RON 1,556,095 thousand and USD 120,143,115. Consequently, the Group recognized an increase of share capital amounting to 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. In 2016 there were no changes to the share capital. Until December 31st, 2003, the statutory share capital in nominal terms was restated according to IAS 29 “Financial Reporting in Hyperinflationary Economies”, with the corresponding adjustments being reflected in the retained earnings. TREASURY SHARES In July 2014 the Company bought-back 5,206,593 shares and 421,000 GDRs, representing the equivalent of 1,684,000 shares. The total amount paid for these shares and GDRs was RON 75,372 thousand. DIVIDENDS Dividends for 2015, worth RON 292 mil., were declared on the basis of individual annual statutory financial statements prepared in accordance with the Romanian accounting regulations. Dividends for 2015 were approved by the Ordinary General Meeting of Shareholders of April 27th, 2015 and were paid first on July 18th, 2016. REVALUATION RESERVES The reconciliation between opening and closing revaluation reserve is as follows: RON mil. Balance at 1 January Revaluation of tangible assets attributable to shareholders of the Company Release of revaluation reserve to retained earnings due to depreciation and disposals of tangible assets Spin-off effect Loss of control over subsidiaries Balance at December 31st Source: Electrica 2016 140 - (29) - (6) 105 2015 156 - (14) - (2) 140 84 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 85 OTHER RESERVES NON-CURRENT LIABILITIES Other reserves include: f Legal reserves – established as 5% of the profit before tax according to the individual statutory financial statements of companies within the Group, until the total legal reserves reach 20% of the paid-up nominal share capital of each company, according to legal provisions. These reserves are deductible for income tax purposes and are not distributable. f Other reserves established in compliance with the legislation in force. RON mil. Balance on 1 January 2014 Set-up of legal reserves Effect of division Balance on December 31st, 2014 Set-up of legal reserves Balance on December 31st, 2015 Set-up of legal reserves Balance on December 31st, 2016 Source: Electrica Legal reserves 246 30 (39) 237 37 274 28 302 Other reserves 369 - (369) - - - - - Total other reserves 615 30 (408) 237 37 274 28 302 NON-CONTROLLING INTERESTS (“NCI”) The following tables summarise the information related to each of the Group’s subsidiaries that has material non- controlling interest, before any intra-group elimination. December 31st, 2015 (RON mil.) EDMN EDTN EDTS EF Intra-group adjustments Total 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 investment activities Cash flows from financing activities* Net increase/(decrease) in cash and cash equivalents** Dividends paid to NCI during the year 22% 1,354 279 (139) (174) 1,319 290 801 107 1 109 24 0.3 214 (56) (154) 4 22% 1,333 154 (176) (270) 1,041 229 857 116 1 117 25 0.3 219 (213) (95) (89) 22% 1,224 195 (123) (268) 1,028 226 790 115 3 117 25 0.6 238 (150) (135) (47) 22% 131 1,066 (71) (720) 406 89 4,141 173 (1) 172 38 (0.1) 258 (20) (111) 127 27 28 26 25 - - - - - 2 - - - - - - - - - - - - - - - - 837 - - - - 112 1 - - - - 106 *Cash flows from financing activities include dividends paid to NCI. **The amounts presented represent the cash flows of subsidiaries Source: Electrica S.A. Non-current liabilities increased by 11.6% in 2016 compared to 2015, from RON 540 mil. to RON 603 mil, as a result of contracted bank loans by the distribution subsidiaries. CURRENT LIABILITIES Current liabilities decreased by 9.5% in 2016 compared to 2015, to RON 1,275 mil from RON 1,408 mil., as a result of changes in the following categories (representing 81% of total current liabilities): Trade payables Trade payables increased by 10.1% in 2016 compared to 2015, to RON 723 mil. from RON 656 mil. The main categories included in trade payables are: payables to electricity suppliers, fixed assets suppliers and other suppliers (suppliers of services, materials and consumables etc.). Provisions RON mil. Balance on 1 January 2015 Provisions recognized Provisions used Provisions reversed Balance on December 31st, 2015 Source: Electrica Provisions 128 44 (70) (39) 62 As of December 31st, 2016, provisions refer mainly to: • • • RON 35.5 mil. for group potential fiscal obligations (including interest and penalties); RON 12.7 mil. for restructuring provision recorded by Electrica Serv; RON 3 mil. for customer claim which requests the reimbursement of connection fee Short-term employee benefits Short-term employee benefits have decreased by 37.6% in 2016 as compared to 2015. RON mil. Personnel payables Current portion of defined benefit liability and other long-term employee benefits Social security charges Tax on salaries Termination benefits Total Source: Electrica December 31st, 2016 37 10 December 31st,2015 32 12 28 9 0 84 52 15 22 135 In Romania, all employers and employees, as well as other persons, are contributors to the state social security system. The social insurance system covers pensions, allocations for children, temporary inability to work, risks of works and occupational diseases and other social assistance services, unemployment benefits and incentives for employers creating new jobs. At December 31st, 2015, termination benefits in amount of 22.5 mil. RON refers to benefits for voluntary leaves of employees related to 2015, while in 2016 short-term employee benefits in amount of RON 53 mil. where deconsolidated, as a result of deconsolidation of Servicii Energetice Moldova. 86 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 87 Other current liabilities Other payables decreased by 35.5% in 2016 compared to 2015. RON mil. VAT payable Other liabilities to the State Liabilities related to radio and TV tax Other liabilities Liabilities related to Green Certificates Total Source: Electrica December 31st, 2016 85 30 10 22 14 161 December 31st, 2015 119 91 13 25 - 249 The decreased debt towards state budget is mainly a result of deconsolidation of Servicii Energetice Moldova. In accordance with Law 533/2003, which amended Law no. 41/1994 on the organization and functioning of the Romanian Radio Broadcasting Company and of the Romanian Television Company, radio and TV taxes are collected by Electrica Furnizare on behalf of these companies. The payable of the Group to the above mentioned institutions is represented by the radio and TV tax collected and not paid by year end. Other liabilities refer mainly to guarantees, various creditors, connection fee, habitat fee and contribution for cogeneration. Other non-current liabilities refer to guarantees from customers related to electricity supply. 8.2 Consolidated statement of profit and loss The following table presents the Consolidated Income Statement of Electrica Group, for years 2016 and 2015. THE CONSOLIDATED FINANCIAL STATEMENT Electrica’s revenues in 2016 and 2015 amounted to RON 5,518 mil. and RON 5,503 mil, respectively. The increase in revenues by RON 15 mil., or 0.3%, in 2016 as compared to 2015, resulted from the deconsolidation of Servicii Energetice Moldova. Electricity purchased The expense for electricity purchased by the Group increased by RON 37 mil. or 1.4%, reaching RON 2,756 mil. in 2015, from RON 2,719 mil. in 2015. This is mainly a consequence of an increase in quantities supplied. As percentage of the revenue, the cost of electricity purchased was the main cost element of the Group, accounting for 49.9% in 2016 and 49.4% in 2015. Green certificates Electricity suppliers have a legal obligation to purchase/supply a certain share of the electricity produced from renewable sources, through the acquisition of green certificates, based on annual targets or quotas set by law, regarding the share of gross production from renewable sources. The cost with the acquisition of Green Certificates is a pass through cost. As a percentage of revenues, the cost with the acquisition of Green Certificates represented, at Group level, 7.3% in 2016 compared to 6.3% in 2015. Construction costs In 2016, the costs related to the construction of power grids increased by RON 38 mil. or 7.8%, to RON 528 mil in 2016 from RON 490 mil. in 2015. This increase is mainly due to RAB increase in 2016, resulting from undertaken investments. Employee benefits RON mil. Revenues Other operating income Electricity purchased Green Certificates Construction costs related to concession agreements Employee benefits Repair, maintenance and equipment Depreciation and amortisation Impairment of property, plant and equipment, net Impairment of trade and other receivables, net Other operating expenses Change in provisions, net Operating profit Financial income Financial costs Net finance (income)/cost Profit before tax Income tax expense Profit for the year Source: Electrica 2016 5,518 243 (2,756) (401) (528) (654) (44) (373) (1) (41) (442) 65 586 20 (17) 3 589 (120) 469 2015 5,503 211 (2,719) (347) (490) (663) (59) (351) (2) (4) (455) (55) 569 38 (17) 20 589 (107) 482 Variation 2016/2015 0.3% 15.3% Expenses for salaries and employee benefits decreased by RON 9 mil. or 1.3%, to RON 654 mil. in 2016 from RON 663 mil. in 2015. This decrease was attributable to lower benefits for employees of SDMN and SEM. As percentage in revenues, the expense for salaries and employee benefits accounted for 11.9% in 2016 compared to 12% in 2015. 1.4% 15.8% 7.8% -1.3% -25.3% 6.4% -70.7% 823.0% -2.9% -218.6% 3.0% -47.1% -2.9% -84.5% -0.0% 12.3% -2.8% Repair, maintenance and equipment Repair, maintenance and equipment expenses decreased by RON 15 mil. or 25.3%, to RON 44 mil. in 2016 from RON 59 mil. in 2015. This was mainly attributable to a decrease in expenses with maintenance and repair of the distribution companies. Expenses with repairs, maintenance and equipment accounted for 0.8% of revenues recorded in 2016, respectively 1.1% of revenues recorded in 2015. Other operating expenses Other operating expenses remained decreased by RON 13 mil. or 2.9%, %, from RON 455 mil. in 2015 to RON 442 mil. in 2016, as a result of exclusion of SEMO expenses. Other operating expenses accounted for 8% of revenues in 2016, respectively 8.3% of revenues in 2015. Change in provisions, net This expense category recorded a favorable evolution at the Group level, with a variation of RON 120 mil in 2016 compared to 2015, from a negative position of RON 55 mil to a positive one of RON 65 mil RON, generated by the reversal of a provision from ELSA related to late payment penalties claimed by NAFA and a restructuring provision recorded by Electrica Serv, as achieving the reduction of staff. Operating profit As a result of the cumulative impact of the above mentioned factors, the operating profit increased by RON 17 mil, or 3%, to RON 586 mil. in 2016 from RON 569 mil. in 2015, driven by improved efficiency in the energy services segment. 88 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 89 Net finance income/cost The Group recorded a positive financial result in 2016, decreasing by RON 17 mil., as compared to 2015, from RON 20 mil. in 2015 to RON 3 mil. in 2016, due to lower investments made in 2016 and due to unfavorable evolution on the local capital market. Profit before tax The profit before tax remained at the same level as in 2015 to RON 589 mil. Income tax expense The income tax increased by RON 13 mil, or 12.3%, to RON 120 mil. in 2016 from RON 107 mil. in 2015. Net profit for the period Taking into account the above mentioned, the net profit for 2016 decreased by RON 13 mil, or 2.8%, to RON 469 mil. in 2016 from RON 482 mil. in 2015. SEGMENT REPORTING - DISTRIBUTION Key indicators - The distribution segment Figure 34: Distribution segment revenues w/o conso adjustments (mil. RON) Figure 35: Distribution segment EBITDA w/o conso adjustments (mil. RON) Source: Electrica Source: Electrica The following table presents the Income Statement of the Group’s distribution segment, for the period 2014 –2015. 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) of the segment Source: Electrica Revenues December 31st, 2016 December 31st, 2015 1,142 1,356 2,498 398 (12) (350) 760 312 1,103 1,509 2,613 464 (10) (335) 809 377 Revenues from the distribution segment decreased by RON 115 mil., or 4.4%, to RON 2,498 mil. in 2016, compared to RON 2,613 mil. in 2015. This was mainly attributable to a decrease in regulated distribution tariffs, in the context of 2.6% increase in distributed electricity. Electricity purchased The cost of electricity purchased to cover the network losses increased by RON 10 mil., or 2%, to RON 501 mil. in 2016 from RON 491 mil. in 2015. The increase was mainly caused by the upward trend in the volumes of electricity needed to cover network losses and of energy acquisition price. Employee benefits Employee benefits decreased by RON 4 mil, or 1%, to RON 531 mil. in 2016 from RON 535 mil. in 2015, driven mainly by the undertaken reorganization and efficiency improvement measures, with SDMN recording the most significant decrease. Repair, maintenance and equipment Repairs, maintenance and equipment expenses decreased by RON 44 mil., or 16%, to RON 259 mil. in 2016 from RON 303 mil. in 2015. These amounts do not include the consolidation adjustments between Electrica Serv and distribution subsidiaries. This decrease was caused especially by the diminished level of expenses with network maintenance, as a consequence of investments made by the distribution subsidiaries, and also by the capitalization, starting with 2014, of certain maintenance and repair expenses. EBITDA Figure 37: Distribution segment net debt/ (cash) (mil. RON) The decrease in revenues together with the increase in costs of purchased electricity to cover network losses, led to a decrease of RON 49 mil., or 6.1%, in EBITDA of the distribution segment. The EBITDA margin decreased by 54 bps in 2016, from 30.97% in 2015 to 30.43% in 2016 Net profit of the segment The net profit followed a similar trend with EBITDA, decreasing by RON 65 mil., or 17.4%. The net profit margin decreased to 12.48% in 2016 from 14.43% in 2015. Source: Electrica Figure 36: Distribution segment net profit (mil. RON) Source: Electrica 90 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 91 SEGMENT REPORTING – SUPPLY Key indicators - the supply segment Figure 38: Revenues for the supply segment (mil. RON) Revenues (ex-Green Certificates) Revenues from Green Certificates Source: Electrica The following table presents the Income Statement of the Group`s supply segment for 2015 and 2016. RON mil. External revenues Inter-segment revenues Segment revenue Segment profit (loss) before tax Net finance (cost)/income Depreciation, amortization and impairment, net EBITDA Net Profit (loss) of the segment Source: Electrica Revenues December 31st, 2016 December 31st, 2015 4,347 85 4,432 174 (1) (10) 185 139 4,375 114 4,488 160 3 (7) 165 136 Net revenues (excluding revenues from Green Certificates) from the supply segment decreased by RON 110 mil. or 2.7%, to RON 4,031 mil. in 2016 from RON 4,141 mil. in 2015. This can be explained by the net result coming from a 4.7% decrease in supply tariff for 2016, correlated with an increase in competition on the electricity supply market, and an 5.4% increase in supplied quantities. Electricity purchased The expense with electricity purchased decreased by RON 148 mil., or 3.8%, to RON 3,742 mil. in 2016 from RON 3,891 mil. in 2015. This decrease was mainly attributable by the decrease of 2.7% of average electricity acquisition price compensated by the increase with 5% in purchased quantity. EBITDA EBITDA Margin Group Net Profit Net Profit Margin Figure 39: EBITDA for the supply segment (mil. RON) Figura 40: Net profit of the supply segment (mil. RON) Source: Electrica Source: Electrica Figure 41: Net debt/ (Cash) for the supply segment (mil. RON) Green certificates The 17% increase in the value of Green Certificates included in the invoice to final consumers from RON 35.90/ MWh in 2015 to RON 41.90/MWh in 2016, in accordance with ANRE regulations, generated an increase in revenues from green certificates, without affecting the profitability, taking into account that Green Certificates are re-invoiced to consumers at their cost. The cost with acquisition of Green Certificates increased by RON 54 mil., or 16%, to RON 401 mil. in 2016 from RON 347 mil. in 2015. This was mainly due to an increase in the regulated quota of Green Certificates imposed to electricity suppliers by ANRE, from 0.278 Green Certificates for 1 MWh supplied in 2015 to 0.317 Green Certificates for 1 MWh supplied in 2016. Salaries and employee benefits In 2016, salaries and employee benefits remained constant as compared to 2015, amounting to RON 82 mil (RON 1 mil. decrease as compared with 2015). EBITDA Decreased expense with energy acquisition by RON 148 mil. in 2016 as compared to 2015 resulted in an increase in EBITDA by RON 20 mil., or 12%, which, correlated with a decrease in revenues, led to an increase of 51 bps in EBITDA margin, from 3.7% in 2015 to 4.2% in 2016. Segment net profit The net profit increased by RON 3 mil., or 2.4%, as a result of a decrease in expenses with electricity acquisition at a higher rate than the selling price decrease. Net Debt (Net Cash) Source: Electrica 92 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 93 8.3 Consolidated cash flow statement RON mil. RON mil. Cash flows from the operating activities Profit Adjustments for: Depreciation Amortisation Impairment of tangible assets, net Loss on disposal of tangible assets Impairment loss on trade and other receivables, net Change in provisions, net Net finance cost Gain on loss of control over subsidiaries in financial distress Income tax expense Total adjustments Changes in: Trade receivables Other receivables Deposits, treasury bills and government bonds Restricted cash Prepayments Green Certificates Inventories Trade payables Other payables Employee benefits Cash generated from operating activities Interest paid Income tax paid 2016 2015 Variation 2016/2015 468.9 482.2 -2.8% 40.9 332.2 0.7 (8.0) 40.6 (65.2) (3.2) (73.7) 120.1 853.3 (88.3) 34.0 (4.9) (134.5) 3.8 31.3 0.5 150.7 (34.9) 5.3 816.3 (4.6) (93.7) 44.1 306.7 2.4 4.7 4.4 55.0 (20.5) (38.5) 107.0 947.4 (126.4) (5.9) (2.6) - (0.8) 22.4 1.0 81.8 (62.1) (2.3) 852.5 (8.0) (101.3) -7.3% 8.3% -70.7% - 823.0% - -84.5% 91.4% 12.3% -9.9% -30.1% - 89.8% - - 39.7% -51.5% 84.2% -43.9% - -4.2% -43.0% -7.4% Net cash from operating activities 718.0 743.2 -3.4% Cash flows from the investment activity Payments for purchases of tangible assets Payments for network construction related to concession agreements Payments for purchases of other intangible assets Proceeds from the sale of tangible assets Payments for purchases of treasury bills and government bonds Proceeds from maturity of treasury bills and government bonds Increase in deposits with maturity of 3 months or longer Proceeds from deposits with maturity of 3 months or longer Interest received Effect on loss on control over subsidiaries on cash Net cash used in investing activities (32.1) (500.3) (7.5) 27.8 (2,437.5) 2,436.4 (300.9) 419.8 18.4 (1.6) - (377.6) (31.8) (353.3) (8.8) 14.8 (4,094.0) 3,240.5 (350.2) 439.0 41.3 (2.9) - (1,105.4) 1.2% 41.6% -14.0% 88.4% -40.5% -24.8% -14.1% -4.4% -55.5% -43.8% -65.8% Cash flows from financing activities Proceeds from long term bank loans Proceeds from short term bank loans Repayment of long term bank loans Repayment of short-term bank loans Dividends paid Repayment of financing for network construction related to concession agreements Payment of finance lease liabilities Net cash from/(used in) financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at December 31st Source: Electrica Cash flow In 2016, net cash from operating activities amounted to RON 718 mil. 2016 2015 Variation 2016/2015 127.7 - (9.9) (50.0) (396.9) (92.7) - (421.7) (81.3) 827.5 746.2 18.0 51.8 (8.1) (1.9) (341.3) (109.9) (0.3) (391.7) (753.8) 1,581.4 827.5 609.6% - 22.2% 2521.9% 16.3% -15.7% - 7.7% -89.2% -47.7% -9.8% The profit before tax for the period was RON 589 mil. The main adjustments were: (i) adding the depreciation and amortization amounting to RON 373 mil., a change in impairment and loss on disposal of tangible assets worth RON 7 mil., a net change in trade and other receivables of RON 40.6 million (mainly as a result of Transenergo receivables impairment in amount of MRON 32), deducting a net finance cost of RON 3.2 mil., a gain from losing control over subsidiaries of RON 73.7 mil., a change in provisions, net in amount of MRON 60 mainly due to reversal of tax provisions made in previous years (ii) a variation of trade receivables and other receivables worth RON 54.3 mil., of trade payables and other accounts payable worth RON 116 mil. and a variation regarding Green Certificates of RON 31 mil. The income tax and interest paid totaled RON 98 mil. in 2016. In 2015, net cash from operating activities amounted to RON 743 mil. The profit before tax for the period was RON 589 mil. The main adjustments were: (i) adding the depreciation and amortization amounting to RON 351 mil., a change in impairment and loss on disposal of tangible assets worth RON 7 mil., a net change in trade and other receivables of RON 4.4 million (mainly as a result of a decrease in trade receivables collected in 2015 compared to 2014), deducting a net finance cost of RON 20.5 mil., a gain from losing control over subsidiaries of RON 38.5 mil., adjusting employee benefits and provisions worth RON 52.6 mil., (ii) a variation of trade receivables and other receivables worth RON 132 mil., of trade payables and other accounts payable worth RON 36 mil., of inventories worth RON 1 mil. and a variation regarding Green Certificates of RON 22.4 mil. The income tax and interest paid totaled RON 109 mil. in 2015. 94 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 95 9 POST BALANCE ShEET EVENT During the period between the 2016 financial year closing and the date of the present report, the following relevant events took place at Electrica S.A. level: f On January 4th, 2017, the Company informed its shareholders and investors about the conclusion in the second semester of 2016 of a legal act with a value greater than EUR 50,000 with Filiala de Intretinere si Servicii Energetice „Electrica Serv” S.A., affiliate, where Electrica is the sole shareholder. The auditor report of factual findings according to art. 225 of Law no. 297/2004 regarding the transactions reported in the second semester of 2016 was published on January 31st, 2017. f On January 27th, 2017, the Board of Directors took note of the cases disputed by Electrica S.A. in contradiction with ANRE and approved the following: • withdrawal of legal actions in cases on the suspension of applicability of ANRE orders by which the • distribution tariffs were determined for 2015 and 2016; formulating motions of judgement suspension in cases on the annulment of ANRE orders by which the distribution tariffs were determined for 2015 and 2016, until the settlement of the case on the annulment of ANRE Order no. 146/2014, by which the regulatory rate (RRR) was changed. f On January 27th, 2017, the Board of Directors decided to reappoint Mr. Cristian Busu as BoD chair for a mandate of one year. Also, the Board of Directors decided the same composition of the BoD’s committees and re-elected their chairs for one year mandate. Detailed information is provided under chapter 6.1 and 6.2 of the present report. f Also, during the same meeting, the Board of Directors decided: • • To revoke Mr. Ramiro Robert Eduard Angelescu from the position of Executive Manager of the Sales Coordination Division of SE Electrica S.A., starting as of January 27th, 2017. To appoint Ms. Livioara Sujdea, as Executive Manager - Chief Distribution Officer, starting with February 1st, 2017. f On January 30th, 2017, the shareholders and the investors were informed that as of January 27th, 2017, in its Balancing Responsible Party business line, Electrica S.A. had a RON 36.3 million exposure on one of its clients, Transenergo. As the client filed for its insolvency, with ELSA and another market player also filing separate insolvency requests, management expects low recoverability of the total exposure. The Company has sent current reports to the market to inform the investors and all the other stakeholders on the events presented above. Regarding the supply subsidiary, on January 2017 was held the Ordinary General Meeting of Shareholders which implemented the provisions of the new Articles of Association approved in December 2016 namely, the number of BoD members was diminished from five to three. The Resolutions of the General Meeting of Shareholders through which were adopted the decisions mentioned were contested in court by the minority shareholder. APPENDIX 1 – LITIGATIONS Electrica Group litigations in 2016 year – status as of January 31st 2017 1. LITIGATION WITH FONDUL PROPRIETATEA Crt. no. 1 2 3 4 5 6 7 Parties/Case file number Subject matter Court Case status Plaintiff: Fondul Proprietatea Defendant: Electrica Distributie Nord Transilvania 532/1285/2014 Plaintiff: Fondul Proprietatea Defendant: SDEE Transilvania Sud S.A. 6208/62/2016 Plaintiff: Fondul Proprietatea Defendant: SDEE Transilvania Sud S.A. 6207/62/2016 Plaintiff: Electrica Furnizare Intervener: Fondul Proprietatea Electrica S.A. 46356/3/2016 Plaintiff: Electrica Furnizare Intervener: Fondul Proprietatea 46358/3/2016 Plaintiff: Fondul Proprietatea Defendant: Electrica Furnizare 47011/3/2016 Plaintiff: Fondul Proprietatea Defendant: Electrica Furnizare Intervener: Electrica SA 47014/3/2016 Cancellation of the AGA decision through which the Corporate Governance Strategy was approved Presidential Ordinance for suspending the effects of the EGM Decision 9/2016 and OGM Decision 10/2016 Cancellation of the EGM Decision 9/2016 regarding the ammendament of the AoA and of the OGM Decision nr. 10/2016 regardind the members of the BoD. Claims based on EGD 116/2009 intervention claim -ORC-*TB- Regarding the non- registration to the CRO of the AGA decision Claims based on EGD 116/2009 intervention claim -ORC-*TB Regarding the non-registration to the CRO of the AGA decision no. 5 on 15.12.2016 Action for the anullament of the EGM Decision no 5/15.12.2016 regargding the increase of the share capital and of the Decision 6/15.12.2016 regarding the ammendament of the AoA (process on merits) Presiding judge’s order for suspension of the effects of AGEA Decision no. 5 and no. 6/2016 Cluj Commercial Court The court admits to a civil lawsuit. The decision is final. Brasov Court In course of settlement. Brasov Court Settled on 02.02.2017 Bucharest Court In course of settlement. Bucharest Court In course of settlement. Bucharest Court In course of settlement. Bucharest Court In course of settlement. 96 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 97 Rejection of the decision for AGEA registration claim no. 9/ December 13, 2016 Cluj Specialized Court In course of settlement. 2. DISPUTES WITH ANRE C r t . no. Parties/Case file number Subject matter Court Case status 8 9 10 11 Intervener: Fondul Proprietatea Defendant: Electrica Distributie Nord Transilvania 1148/1285/2016 Intervener: Fondul Proprietatea Defendant: Electrica Distributie Nord Transilvania 1149/1285/2016 Plaintiff: Fondul Proprietatea Defendant: Electrica Distributie Nord Transilvania 1160/1285/2016 Plaintiff: Fondul Proprietatea Defendant: Electrica Distributie Nord Transilvania 1159/1285/2016 Rejection of the decision for AGOA registration claim no. 10/ December 13, 2016 Cluj Specialized Court In course of settlement. Claim for annulment of the AGEA decision no. 9/ December 13, 2016 Cluj Specialized Court Case file in the filtering proceedings Cluj Specialized Court Issuing presiding judge’s order for suspension of the enforcement of the AGEA decision no. 9/ December 13, 2016 and of AGA Decision no. 10/ December 13, 2016. Reject the exception of the prematurity claim, exception raised by the defendant. Accepts the application for issuing of a presiding judge’s order claimed by the Plaintiff FONDUL PROPRIETATEA S.A. in contradiction with the defendant ELECTRICA DISTRIBUTIE NORD TRANSILVANIA and consequently: Order the suspension of the enforcement of the Decision of the Ordinary General Meeting of the Shareholders no. 10, dated on December 13, 2016 and of the Decision of the Extraordinary General Meeting of the Shareholders no. 9, on December 13, 2016, issued by the defendant company, until the final solution of the Cluj Specialized Court on the case file no. 1160/1285/2016. Enforceable. EDTN appealed. 12 Plaintiff: Fondul Proprietatea Defendant: Electrica Distributie Muntenia Nord Intervener: Electrica SA 7622/105/2016 Rejection of the decision for AGOA registration claim on December 13, 2016 Prahova Court In course of settlement. 1 2 3 4 5 6 7 Plaintiff: Electrica S.A. Defendant: ANRE 192/2/2015 Plaintiff: Electrica S.A.; Enel Distributie Muntenia S.A. Defendant: ANRE 7968/2/2015 Plaintiff: Electrica S.A Defendant: ANRE 361/2/2015 Cancellation of the Order of the president of the Regulation National Authority in the Energy Field (ANRE) no. 146/2014 Cancellation of the Order of the ANRE president no. 165/2015 high Court of Cassation and Justice Appeal – under pre-filtering proceedings. high Court of Cassation and Justice Appeal – under pre-filtering proceedings. Cancellation of the Order of the ANRE president no. 155/2014 high Court of Cassation and Justice Plaintiff: Electrica S.A. Defendant: ANRE 360/2/2015 Cancellation of the Order of the ANRE president no. 156/2014 high Court of Cassation and Justice Plaintiff: Electrica S.A. Defendant: ANRE 134/2/2016 Action for suspension of the administrative act – ANRE Order no. – 165/2015 high Court of Cassation and Justice Plaintiff: Electrica S.A. Defendant: ANRE 340/2/2016 Action for partial annulment (regarding the special tariffs) of the administrative act – ANRE Order 171/2015 high Court of Cassation and Justice Plaintiff: Electrica S.A. Defendant: ANRE 342/2/2016 Action for partial annulment (regarding the special tariffs) of the administrative act – ANRE Order. no. 172/2015 high Court of Cassation and Justice Appeal. On the term on December 6, 2016, the court admits in principle, the Appeal, establishing the term for the lawsuit trial of the Appeal. According to the decision of the Company Management Board, on the lawsuit, the suspension of the case trial will be claimed until the settlement of the case file no. 192/2/2015. Appeal – under preliminary filtering proceedings. According to the decision of the Company Management Board, in the case lawsuit, the suspension of the case trial will be claimed until the settlement of the case file no. 192/2/2015. Appeal – under preliminary filtering proceedings. According to the decision of the Company Management Board, in the case lawsuit, the cancellation of the case trial will be claimed. Appeal – under preliminary filtering proceedings. According to the decision of the Company Management Board, in the case lawsuit, the suspension of the case trial will be claimed until the settlement of the case file 192/2/2015. Appeal – under the preliminary filtering proceedings According to the decision of the Company Management Board, on the case the suspension of the case judgment will be claimed until settlement of the case file 192/2/2015. 98 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 99 8 9 Plaintiff: Electrica S.A. Defendant: ANRE 343/2/2016 Action for partial annulment (regarding the special tariffs) of the administrative act – ANRE Order. no. 171/2015 high Court of Cassation and Justice Plaintiff: Electrica S.A. Defendant: ANRE 345/2/2016 Action for partial annulment (regarding the special tariffs) of the administrative act – ANRE Order. no. 172/2015 high Court of Cassation and Justice 10 Plaintiff: FDEE Electrica Muntenia Nord S.A. Defendant: ANRE 184/2/2015 Contentious administrative matters – Cancellation of the ANRE President Order No. 146/2014 high Court of Cassation and Justice 11 12 13 Plaintiff: FDEE Electrica Muntenia Nord S.A. Defendant: ANRE 164/2/2016 Cancellation of Order no. 165/2014, of the President of National Authority for Regulation in the Energy Field (ANRE) Bucharest Court of Appeals Plaintiff: FDEE Electrica Muntenia Nord S.A. Defendant: ANRE 165/2/2016 Suspension of the enforcement of the ANRE President Order no. 165/2015 high Court of Cassation and Justice Plaintiff: FDEE Electrica Muntenia Nord S.A. Defendant: ANRE 41/42/2016 Cancellation of the ANRE President Order No. 172/2015 Bucharest Court of Appeals Appeal – under the preliminary filtering proceedings According to the decision of the Company Management Board, on the case the cancelation of the case judgment will be claimed. Appeal – under the preliminary filtering proceedings According to the decision of the Company Management Board, on the case the cancelation of the case judgment will be claimed. Suspended case file until the final settlement of the case file 7341/2/2014 by the Bucharest Court of Appeals, against the suspension of an affidavit Appeal was stated. Through the Affidavit on May 18, 2016, the communication to the parties of the report on the admissibility of the Appeal is ordered. The case file no. 7341/2/2014 is in course of settlement. The case file no 1574/July 17, 2016 was interlinked to this case file. Through the Decision no. 2409/July 17, 2016 the claims were rejected as ungrounded. An appeal is going to be filed. Through the Decision no. 1086/April 01, 2016, the Bucharest Court of Appeals rejected the claim on suspension of as ungrounded. Appeal was stated, which is in the regulating proceedings in the High Court of Cassation and Justice (ICCJ). In course of settlement. 14 15 16 17 18 19 20 21 22 23 Plaintiff: FDEE Electrica Muntenia Nord S.A. Defendant: ANRE 42/42/2016 Suspension of the enforcement of the ANRE President Order no. 172/2015 high Court of Cassation and Justice Plaintiff: Electrica Distribuţie Transilvania Nord (EDTN) Defendant: ANRE 213/2/2015 Cancellation of Order no. of the President of National Authority for Regulation in the Energy Field (ANRE) 146/2014 high Court of Cassation and Justice Through the Decision no. 1272/2016 of the Bucharest Court of Appeals, the claim for suspension of was rejected, as ungrounded. Appeal was stated - regulating proceedings. Appeal – under the preliminary filtering proceedings Plaintiff: Electrica Distribuţie Transilvania Nord (EDTN) Defendant: ANRE 353/2/2015 Plaintiff: FDEE Electrica Distribuţie Transilvania Nord Defendant: ANRE 18/33/2016 Plaintiff: FDEE Electrica Distribuţie Transilvania Nord Defendant: ANRE 17/33/2016 Plaintiff: SDEE Electrica Distribuţie Transilvania Sud S.A. Defendant: ANRE 87/64/2016 Plaintiff: SDEE Electrica Distribuţie Transilvania Sud S.A. Defendant: ANRE 18/64/2016 Plaintiff: SDEE Electrica Distribuţie Transilvania Sud S.A. Defendant: ANRE 88/64/2016 Plaintiff: SDEE Electrica Distribuţie Transilvania Sud S.A. Defendant: ANRE 41/64/2016 Plaintiff: SDEE Electrica Distribuţie Transilvania Sud S.A. Defendant: ANRE 371/2/2015 Cancellation of the ANRE President Order No. 155/2014 high Court of Cassation and Justice Appeal – under the preliminary filtering proceedings Action for annulment of administrative act – ANRE Order no. 165/2015 high Court of Cassation and Justice Appeal – under the preliminary filtering proceedings Action for suspension of the administrative act– ANRE Order no. 165/2015 high Court of Cassation and Justice Appeal in course of settlement. Contentious administrative matters – Claim for suspension of administrative act – The ANRE President Order no. 165/2015 Cancellation of the Order no. 165/2015 of the President of National Authority for Regulation in the Energy Field (ANRE) Cancellation of the Order no. 171/2015 of the President of National Authority for Regulation in the Energy Field (ANRE) Cancellation of the Order no. 171/2015 of the President of National Authority for Regulation in the Energy Field (ANRE) Cancellation of the ANRE President Order no. 156/2014 Bucharest Court of Appeals Suspended until the settlement of 18/64/2016 high Court of Cassation and Justice Appeal – under the preliminary filtering proceedings high Court of Cassation and Justice Appeal – under the preliminary filtering proceedings high Court of Cassation and Justice Appeal – under the preliminary filtering proceedings high Court of Cassation and Justice Appeal – under the preliminary filtering proceedings 100 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 101 Cancellation of the ANRE President Order no. 146/2014 high Court of Cassation and Justice Appeal – under the preliminary filtering proceedings 2 Plaintiff: Electrica S.A. Defendant: ANAF 5433/2/2013 Claim on the fiscal administrative act, cancelling the Decision 24/ January 31, 2013, on the ancillary payment obligations. Value of lei 9,805,319. high Court of Cassation and Justice 24 25 26 27 Plaintiff: SDEE Electrica Distribuţie Transilvania Sud S.A. Defendant: ANRE 208/2/2015 Plaintiff: SDEE Electrica Distribuţie Transilvania Sud S.A. Defendant: ANRE 17/64/2016 Plaintiff: SDEE Electrica Distribuţie Transilvania Sud S.A. Defendant: ANRE 40/64/2016 Plaintiff: Electrica Furnizare S.A. Defendant: ANRE 26210/3/2013 28 Plaintiff: Electrica Furnizare S.A. Defendant: ANRE 8201/2/2015 Claim for suspension of administrative act – The ANRE President Order no. 165/2015 Claim for suspension of administrative act – The ANRE President Order no. 171/2015 Judicial action having as object the right recognition provided in art. 79 para. (6) in the Law no. 123/2012, the order for the defendant to change the tariff regulated by the ANRE Order no. 40/2013, the order for the defendant to pay the counter value of the prejudice that can not be covered by changing the regulated tariff mentioned above. Judicial action having as object an order for the defendant to solve a dispute related to the procedure for changing the supplier. Bucharest Court of Appeals Rejects the claim. Decision no. 1388/April 22, 2016, remained final. Bucharest Court of Appeals Rejects the claim. Decision no. 1048/March 20, 2016, remained final. high Court of Cassation and Justice Appeal – under the preliminary filtering proceedings high Court of Cassation and Justice Bucharest Court of Appeals has admitted the judicial action stated by Electrica Furnizare S.A., coercing ANRE to solve the dispute. ANRE stated an appeal that is under the preliminary filtering proceedings. 3. FISCAL MATTER DISPUTES Crt. no. 1 Plaintiff: Electrica S.A. Defendant: ANAF 7614/2/2013 Object Court Case status high Court of Cassation and Justice Complaint related to the Decision no.147/May 22, 2013. Value of lei 2,387,992 (action for cancel against the Decision no. 147/May 22, 2013, issued by ANAF within the proceedings for administrative claims’ settlement stated against the promissory note throughout the ancillary payment obligations for delayed payments of the current budgetary duties were established, by the decision no. 214/2012 in amount of lei 2,387,992). On the date of March 06, 2015, the court has admitted the claim in part and partially cancelled the Decisions no. 147/May 22, 2013 and no. 214/October 30, 2012, issued by the defendant for the amount of lei 2,383,070, representing fiscal ancillary obligations. It keeps the claimed fiscal-administrative acts for the amount of lei 4,922 lei. It coerces the Defendant to the payment of the amount of lei 30,961.35 lei, to the Plaintiff, as court charges. ANAF has stated Appeal – under the preliminary filtering proceedings On the merits, the court has admitted in part the action stated by the Plaintiff SC Electrica SA and: -cancels the decision no. 24/2013, issued by ANAF-DGSC; - cancels in part the decisions on the ancillary payment obligations no. 1270/2012 (on the amount of lei 5,705,115) and no. 1271/2012 (on the amount of lei 3,747,331), issued by ANAF, and also of ANAF notices of assessment no, 2143501.5/2012, 2143501.6/2012, 2143501.7/2012, 2143501.11/2012(on regard to the amount of lei 352,873). Rejects the action as for the rest. Coerces ANAF to pay lei 20,500 court charges to the Plaintiff. ANAF has stated Appeal – preliminary filtering proceedings. The court on the merits rejected the claim. Electrica has stated appeal, rejected as ungrounded. Sector 1 Court Bucharest Court The Court rejects irrevocably the appeal for annulment as ungrounded. Sector 1 Court Sector 1 Court high Court of Cassation and Justice Admits the exception of remaining without object of the claim regarding the suspension of the enforcement until the settlement of the appeal against the enforcements. The file is under regulation proceedings. Through the Decision no. 32/ February 10, 2016, Ploiesti Court of Appeals Ploiesti has rejected the claim, as ungrounded. FDEE has stated Appeal – within the regulating proceedings. 3 4 5 6 7 Plaintiff: Electrica S.A. Defendant: ANAF 103614/299/2015 Plaintiff: Electrica S.A. Defendant: ANAF 6480/3/2016 Plaintiff: Electrica S.A. Defendant: ANAF 29213/299/2016 Plaintiff: Electrica S.A. Defendant: ANAF 51817/299/2016* Plaintiff: FDEE North Muntenia S.A. Defendant: Ploiesti Public Service for local Finances 309/42/2015 Challenge on enforcement of the enforceable title no. 28/June 23, 2015 for the amount of lei 16,915,950 stated in the Decision no. 3/2008. Enforcement files 13267221/61/90/2015/179599. Challenge on annulment against the decision no. 1029 within the file no. 55166/299/2010 on the merits of the BC, in the file no. 55166/299/2010 of BC TB S5, for the amount of lei 31,250,651 lei – accessories regarding the income tax. Disputes with professionals- suspension of enforcement of the art. 484; 507; 512; 700; 718 NCPC on the enforceable title no. 28/June 255, 2015 for the amount of lei 16,915,950. Challenge on enforcement, cancellation of the foreclosure for the amount of lei 41,209,736 – title 151/2016. Cancellation of administrative act – Notice of assessment no. 124814/November 28, 2014. The amount under litigation: lei 11,963,955, representing additional differences resulting from the report on the fiscal audit, out of which lei 8,528,896 additional tax on the buildings for the period of January 2009- September 2014 and lei 3,439,085 lei accessory fiscal obligations calculated until the date of November 11, 2014 102 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 103 Cancelation administrative act – Decision no. 462/November 23, 2015 –amount of lei 7,731,693 (lei 4,689,686 lei income tax + lei 3,042,007 VAT) and for the amount of lei 6,154,799 (lei 3,991,503 interests/increases and late fees related to the income tax + lei 2,163,296 interests/penalties and delay fees related to the VAT) Cancellation of administrative act Decision no. 375/October 01, 2014 – amount of lei 2,351,034 8 9 Plaintiff: FDEE Nord S.A. Defendant: ANAF 1018/2/2016 Plaintiff: FISE Electrica Serv S.A. Defendant: Ploiesti Public Service for local Finances 6358/2/2014 Bucharest Court of Appeals In course of settlement. high Court of Cassation and Justice In course of settlement. 4. OTHER SIGNIFICANT DISPUTES (WHOSE VALUE IS MORE THAN EURO 500 THOUSANDS) Crt. no. Parties/Case file number 1 Plaintiff: Termoelectrica S.A. Defendant: Electrica S.A. 5651/2/2014 (on merits the case file had the no. 15350/3/2010) Object Court Case status Claims: amount of lei 25,047,353.32 representing delay fees of the invoices for electric power in the period of April 1, 2007 – March 31, 2008 high Court of Cassation and Justice Admits the appeal declared by the Plaintiff SC TERMOELECTRICA SA ThROUGh ThE JUDICIAL LIQUIDATOR CONSORTIUM MUSAT & ASOCIAŢII RESTRUCTURING & INSOLVENCy SPRL AND MUSAT & ASOCIAŢII SPARL in opposition to the Respondent-defendant SOCIETATEA ENERGETICA ELECTRICA SA, against the Civil Sentence no. 6576/November 13, 2013 delivered by the Bucharest Court – Section VIth Civil, within the case file no. 15350/3/2010. Cancels the appealed sentence and re-judging: Rejects the exception of prescription of the rights to actions, as ungrounded. Admits the claim stated by the Plaintiff SC TERMOELECTRICA SA in opposition to the defendant SOCIETATEA ENERGETICA ELECTRICA SA (former SC ELECTRICA SA). Coerces the defendant to the payment of the amount of lei 25,047,458.32, representing contractual penalties related to the main debt amounting lei 68,453,678.47 lei, related to the interval April 01, 2007-March 31. Coerces the Respondent-defendant SOCIETATEA ENERGETICA ELECTRICA SA to the payment of the court charges amounting lei 761,576.79 lei. The decision is enforceable. Electrica has stated Appeal. Bucharest Court In course of settlement. Coerces Electrica to the payment to SPEEh hidroelectrica SA of the amount of lei 5,444,761 (loss due to the electric power sale to an average prices per MWH under the production cost for 1 MWH); coerces to partial payment of the benefit not obtained by Hidroelectrica through the sale of the total amount of MWh 398.300, calculated, according to the ANRE regulations; coercion of the defendant to the payment of the legal interest from the date of the decision delivery and until the effective payment, court charges. Declaratory action (discharge of by right of the obligation of CEZ Distributie to Electrica of an amount of lei 4,425,068.55, of Electrica to Termoelectrica of the same amount and of Termoelectrica to the Risk Fund for internal and foreign loans guaranteed by the state of the same amount of lei 4,425,068.55). 2 Plaintiff: SPEEH hidroelectrica S.A. Defendant: Electrica S.A. 13268/3/2015 3 Appellant – Defendant: Electrica S.A. Respondent – Plaintiff: Cez Distributie S.A. Respondent– Defendants: Termoelectrica S.A., Ministry of Public Finance, Romanian State 35866/3/2014 high Court of Cassation and Justice Exchange the sentence in the whole, in the way that admits the claim and considers discharged, by right, the obligations of Cez Distributie to Electrica in amount of lei 4,425,068.55 lei, of Electrica to Termoelectrica in the same amount and of Termoelectrica to the Risk Fund for internal and foreign loans guaranteed by the state of the same amount of lei 4,425,068.55. Coerces the Defendants to the joint payment of the amount of lei 48,361 stamp fee and judicial fee in the first procedural cycle and in the first instance in the second procedural cycle and also of the amount of lei 33,459 lawyer fees. Coerces the summoned parties, to jointly pay the amount of lei 24,281 stamp fee and judicial stamp in appeal and of lei 9605 lei as lawyer fees. Electrica has stated Appeal. In Appeal: Admits the appeals stated by the appellants-defendants SOCIETATEA ENERGETICA ELECTRICA SA, S.C. TERMOELECTRICA S.A. through judicial liquidator MUŞAT & ASOCIAŢII RESTRUCTURING & INSOLVENCY SPRL and MINISTRy OF PUBLIC FINANCE against the civil decision no. 801 A on May 14, 2015 of the Bucharest Court of Appeals – Section VIth Civil. Changes the contested decision, in the way that rejects the stated appeal by the Plaintiff SC CEZ DISTRIBUŢIE SA against the civil sentence no. 6135 on December 8 , 2014 of the Bucharest Court – Section VIth Civil. Coerces the Respondent-Plaintiff SC CEZ DISTRIBUŢIE SA to the payment of the amount of lei 24,181 to the appellant- defendant SOCIETATEA ENERGETICA ELECTRICA SA representing court charges. Admits the action. Cez Distributie has stated appeal, but rejected by the court. With Appeal. 4 Plaintiff: Electrica Claim action in value of lei 4,425,068.55 Craiova Court of Appeals S.A. Defendant: Cez Distributie S.A. 11601/63/2009 5 Creditor: Electrica S.A. Debtor: Petprod S.A. 47478/3/2012*/a1 Insolvency proceedings Enter a claim to the statement of affairs for the amount of lei 2,591,163.01 Bucharest Court Ongoing proceedings. 104 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 105 6 Creditor: Electrica S.A. Debtor: CET Braila S.A. 2712/113/2013 7 Creditor: Electrica S.A., AAAS, BCR SA and others Debtor: Oltchim S.A. 887/90/2013 8 Creditor: Electrica S.A. Debtor: Romenergy Industry SRL 2088/107/2016 9 Plaintiff: Electrica S.A. Defendant: Authority for the Management of the State Assets (AAAS former AVAS) 8260/3/2013 10 Appellant: Electrica S.A. Respondent: AAAS 38859/299/2015 11 Appellant: Electrica Respondent: AAAS 39803/299/2015 Insolvency proceedings. Enter a claim to the statement of affairs for the amount of lei 3,826,034.8. Braila Court Ongoing proceedings. 12 Appellant: AAAS Respondent: Electrica S.A. 78584/299/2015 Insolvency proceedings. Enter a claim to the statement of affairs in amount of lei 658,535,805.38. lei. Valcea Court Ongoing proceedings. Insolvency proceedings. Enter a claim to the statement of affairs in amount of lei 2,917,265.89. Alba Court Ongoing proceedings. Bucharest Court Challenge on enforcement – AAAS stated Challenge on enforcement against the foreclosure acts performed by BEJA Dorina Gont, Lucian Gont, Marian Panait, consisting in: -summons (foreclosure file) no. 1914/ June 16, 2015, through which AAAS is demanded to pay within 15 days, the total amount of lei 11,426,867.65 lei (debt and foreclosure fees); -Affidavit on June 15, 2015 regarding the writ of execution; -Affidavit on June 16, 2015 regarding the settlement of the foreclosure fees. (The Civil Sentence no. 6440/2013 in the file no. 8260/3/2013 is the enforceable title.) Action in claims for the amount of lei 11.173.143. high Court of Cassation and Justice Sector 1 Court The Instance on the merits has admitted the claim, coercing AAAS to pay to the Plaintiff the amount of lei 11,173,143. Coerces the defendant to pay to the Plaintiff the amount of lei 105,847.43, as court charges title. AAAS has stated appeal, rejected as ungrounded. The instance admits the claim for suspension of the foreclosure stated by the Plaintiff Electrica; Suspension of the foreclosure performed based on the foreclosure file no .8/2015 of BEJ Oprescu Mihai until the settlement of the challenge of enforcements; Based on art. 413 alin. 1 item 1 CPC suspended the judgment of the case regarding the Plaintiff Electrica, until the final settlement of the file no. 2155/2/2015 of CAB (currently this file is under the Appeal phase to ICCJ, in the filtering procedure). Sector 1 Court Admits the claim for provisory suspension of the foreclosure. Provisory suspension of the foreclosure that is executed in the foreclosure file no. 8/2015 on the merits of BEJ Oprescu Mihai until the settlement of the suspension of claim stated within challenge of enforcements. Electrica SA has stated Challenge on enforcement against the foreclosure of the Administrative Decision no. P/14/27055/ December 16, 2014 16.12.2014 and of all the subsequent foreclosure acts. (administrative decision issued by the Respondent AAAS against the subscribed for the amount of lei 7,505,637.00, as recovery title for the illegal state aid that would have been granted to S Electrica SA, in the context of privatization of S Electrica Banat SA and of S CSR Resita SA)-claim cancelling of this act. -Canceling demand for payment issued by the BEJ-Oprescu Mihai in the foreclosure file no. 8/2015 (where it is stated that “the interest is added, that is going to be calculated beginning with the date of providing the amount to the beneficiary disposal and until the effective date of the debt plus lei 99,687.50 lei counter-value of foreclosure and of all the subsequent acts.”); -cancelling of all the foreclosure acts issued in the file no. 8/2015; -suspension of the foreclosure begun by the Respondent until the irrevocable settlement of the current litigation; -provisory suspension of until the settlement of the claim for suspension of requested by the present sue petition. provisory suspension of the administrative decision invested with foreclosure title and of all the subsequent foreclosure acts – the suspension being necessary to clarify the foreclosure character of the title enforced by Respondent that is not a judicial decision but is issued by AAAS 13 Appellant: AAAS Respondent: Electrica S.A. Garnishee: IOR S.A. 96099/299/2015 14 Appellant: AAAS Respondent: Electrica S.A. 86175/299/2015 Claim to foreclosure – AAAS has stated a claim to foreclosure against the foreclosure acts performed by the BEJA Dorina Gont, Lucian Gont, Marian Panait, consisting of: - garnishment (setting up) notice on the date of August 25, 2015, developed in accordance with art. 783 NCPC until the completion of the amount of lei 10,342,891.72 (rest of debt and court charges) -Affidavit on June 15, 2015 regarding the writ of execution; -Affidavit on June 16, 2015 regarding the settlement of the foreclosure fees. (The Civil sentence no. 6440/2013 is the Enforceable title.) Claim to foreclosure Suspension of the Foreclosure file 1914/2015 (throughout AAAS is ordered to pay, within 15 day, the total amount of lei 11,426,867.65 - debt and collection fees) Sector 1 Court Sector 1 Court 15 Appellant: AAAS Respondent: Electrica S.A. 27873/299/2016 Claim to foreclosure. Referring to the foreclosure case file no. 1914/2015 in the Office of the Associated Legal Executors Dorina Gont, Lucian Panait and Marian Panait Sector 1 Court The instance on the merits admitted, in part, the challenge on enforcement. It cancels, in part, the Affidavit for stating the foreclosure expenses on the date of June 16, 2015 developed in the foreclosure file no. 1914/2015 constituted to B.E.J.A. Dorina Gonţ, Lucian Gonţ and Marian Panait, regarding the keeping of the amount of lei 1,445.74 as title for expenses needed to accomplish the foreclosure. Cancels in part, the foreclosure performed in the foreclosure file 1914/2015 constituted to B.E.J.A. Dorina Gonţ, Lucian Gonţ and Marian Panait for the amount of lei 1.445,74 lei, representing foreclosure charges establish illegally. Rejects the claim for suspension of the foreclosure, as it remains without object. Rejects the claim for return the foreclosure, as ungrounded. Coerce the Plaintiff to pay to B.E.J.A. Dorina Gonţ, Lucian Gonţ and Marian Panait the amount of lei 161.20, representing expenses incurred by photocopying of the foreclosure file. Both AAAS, and Electrica have stated appeal. The appeal instance admits the stated appeal by AAAS. Changes in part the appealed sentence in the way that regarding the executor fee it will be reduced to the amount of lei 59365 plus VAT. Keeps the rest of dispositions. Rejects the appeal stated by Electrica as ungrounded. The instance accepts the exception of the authority of the judged matter; rejects the challenge on enforcement under all the claim heads for the authority of the judged matter. With appeal. Admits in part the exception of authority of the judged matter. Rejects the head of claim having as object the cancellation of the affidavit on the date of June 16, 2015 regarding the collection fees as inacceptable. Rejects the other heads of the claim as ungrounded. Reject the suspension of claim of the foreclosure as being without object. With appeal rights. In course of settlement. 106 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 107 Insolvency proceedings. Debt with calculated penalties until January 25, 2017. Lei 36,797,429.55 lei. Bucharest Court Insolvency proceedings. Main debt: lei 4,941,420.03. Bucharest Court Claims: debt lei 8,306,493.06 – tariff for distribution Sector 5 Court On the date of February 1, 2017, the opening of the insolvency proceedings was ordered. Electrica is going to develop the statement of claims. Until the moment of opening the proceedings, the foreclosure against the debtor was initiated. Against the debtor, a claim for opening the insolvency proceeding was stated, that will have the term on February 24, 2017. In the situation of opening of the proceedings, we are going to subscribe to the statement of affairs. Presently we are under foreclosure proceedings. Regulation proceedings. The insolvency proceedings of the Debtor were ordered. Bankruptcy - debt: lei 5,439,537.09 lei Alba Court Ongoing proceedings. Bankruptcy - debt: lei 3,987,508.14 lei Alba Court Ongoing proceedings. Writ of payment - debt: lei 2,806,317.75 Brasov Court Suspended case file until the settlement of the case file regarding the bankruptcy of Romenergy Industry S.A. Claims – EUR 1,177,221.50 EUR, equivalent of lei 5,298,203,.8 lei, calculated on the exchange rate respectively of 4.5006 lei/euro on January 30 Bucharest Court Suspended according to the insolvency Law no. 85/2006 Insolvency – amount to be recovered: lei 3,938,810.56 Bucharest Court Ongoing proceedings. Insolvency – amount to be recovered: lei 53,023,201.08 Bucharest Court Ongoing proceedings. 16 Creditor: Electrica S.A. Debtor: Transenergo Com S.A. 1372/3/2017 17 Creditor: Electrica S.A. Debtor: Electra Management & Suppy SRL 41095/3/2016 18 Plaintiff: FDEE Electrica Muntenia Nord S.A. Defendant: Transenergo Com S.A. 47088/3/2016 19 Plaintiff: FDEE Transilvania Nord SA Defendant: Romenergy Industry S.A. 2088/107/2016 20 Plaintiff: SDEE Transilvania Sud SA Defendant: Romenergy Industry S.A. 2088/107/2016 21 Plaintiff: SDEE Transilvania Sud SA Defendant: Romenergy Industry S.A. 3086/62/2016 22 Plaintiff: FISE Electrica Serv S.A. Defendant: National Leasing IFN SA 39542/3/2009 23 Plaintiff: FISE Electrica Serv S.A. Defendant: Best Recuperare Creante SRL 2253/3/2011 (former 58348/3/2010) 24 Plaintiff: FISE Electrica Serv S.A. Defendant: National Leasing IFN S.A. 18711/3/2010 Summons for payment – lei 3,938,810.56 lei Bucharest Court Suspended according to the insolvency Law no. 85/2006 Corruption criminal offence – lei 4,128,969.65 (according to the sentence on the merits court) Cluj Court of Appeals In course of settlement. 25 Plaintiff: FISE Electrica Serv S.A. Defendant: Best Recuperare Creante SRL 54060/3/2011 26 Plaintiff: FISE Electrica Serv S.A. (civil party) Defendant: Ruga Gabriel, Stoica Ioan Constantin, s.a. 1436/33/2015 (former 4228/117/2009) 27 Plaintiff: FISE Banckrupt - debt lei 73,453,299.30 Timis Court Ongoing proceedings. Electrica Serv S.A. Defendant: Servicii Energetice Banat S.A. 8776/30/2013 (joint with cu 2982/30/2014) 28 Plaintiff: FISE Electrica Serv S.A. Defendant: Servicii Energetice Oltenia SA 2570/63/2014 29 Plaintiff: FISE Electrica Serv S.A. Defendant: Servicii Energetice Muntenia S.A. 40081/3/2014 30 laintiff: FISE Electrica Serv S.A. Defendant: Servicii Energetice Dobrogea S.A. 8785/118/2014 31 Plaintiff: FISE Electrica Serv S.A. Defendant: CNAS, CASMB 43602/3/2015 32 Plaintiff: FISE Electrica Serv S.A. Defendant: Servicii Energetice Moldova 4435/110/2015 33 Plaintiff: FISE Electrica Serv S.A. Defendant: New Koppel Romania 20376/3/2016 Insolvency - debt lei 26,448,133.90 Dolj Court Ongoing proceedings. Insolvency - debt lei 15,343,942.68 Bucharest Court Ongoing proceedings. Insolvency proceedings - banckruptcy - debt lei 18,168,842.73 lei Constanta Court Rejected on 17.02.2016. Recovery amounts of social insurance – FNUASS – lei 1,384,652 + interest Bucharest Court Admits the action in part. Insolvency proceedings - banckruptcy – debt: lei 73,708,082.90 Bacau Court Ongoing proceedings. Claims – Euro 655,164.44 – equivalent lei of 2,948,239.98 Bucharest Court Ongoing proceedings. 108 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 109 Insolvency proceedings Enter a claim to the statement of affairs for the amount of lei 21,634,926.27. Galati Court Ongoing proceedings. 5. DISPUTES AGAINST THE ROMANIAN COURT OF ACCOUNTS Object Court Case status Crt. no. 1 Parties/Case file number Plaintiff: Electrica S.A. Defendant: Romanian Court of Auditors; 2268/2/2014 high Court of Cassation and Justice Suspension of and cancelling the administrative act on those ordered by the Decision no.3/January 14, 2014 and the Resolution no.23/March 17, 2014. 34 Creditor: Electrica Furnizare S.A. Debtor: Metal S.A. Galati 2181/121/2013 35 Creditor: Electrica Furnizare S.A. Debtor: Apaterm S.A. Galati 4783/121/2011 36 Creditor: Electrica Furnizare S.A. Debtor: Vegetal Trading SRL Braila 1653/113/2014 37 Plaintiff: Carpatcement holding S.A. Defendant: Ministry of Economy, Romanian Government, Electrica Furnizare S.A. 1665/2/2014 38 Creditor: Electrica Furnizare S.A. Debtor: Balan S.A. 2139/96/2007 39 Creditor: Electrica Furnizare S.A. Debtor: Ariesmin S.A. Branch 7375/107/2008 40 Creditor: Electrica Furnizare S.A. Debtor: Zlatmin S.A. Branch 6/107/2003 41 Creditor: Electrica Furnizare S.A. Debtor: hidromecanica S.A. 3836/62/2009 42 Creditor: Electrica Furnizare S.A. Debtor: Nitrarmonia S.A. 261/F/2004 43 Creditor: Electrica Furnizare S.A. Debtor: European Drinks S.A. 4058/111/2016 44 Creditor: Electrica Furnizare S.A. Debtor: Remin S.A. 32/100/2009 45 Creditor: Electrica Furnizare S.A. Debtor: Oltchim S.A. 887/90/2013 Insolvency proceedings Enter a claim to the statement of affairs for the amount of lei 2,742,115.08. Galati Court Ongoing proceedings. Insolvency proceedings Enter a claim to the statement of affairs for the amount of lei 2,252,570.18. Braila Court Ongoing proceedings. Compliance obligation Canceling penalties in amount of lei 2,440,785 – Based EGD 57/2002. high Court of Cassation and Justice On the merits, the Plaintiff action was rejected, the Plaintiff stating Appeal. Insolvency proceedings Enter a claim to the statement of affairs for the amount of lei 48,856,788.69. harghita Court Ongoing proceedings. Insolvency proceedings Enter a claim to the statement of affairs for the amount of lei 20,711,587.76. Alba Court Ongoing proceedings. Insolvency proceedings Enter a claim to the statement of affairs for the amount of lei lei 9,314,175.96. Alba Court Ongoing proceedings. Insolvency proceedings Enter a claim to the statement of affairs for the amount of lei 4,792,025.80. Brasov Court Ongoing proceedings. Insolvency proceedings Enter a claim to the statement of affairs for the amount of lei 2,285,997.22. Brasov Court Ongoing proceedings. Writ of payment. Debt: lei 5,535,461.37. Bihor Court Settled by transaction. Insolvency proceedings Enter a claim to the statement of affairs for the amount of lei 71,443,401.67. Timisoara Court Ongoing proceedings. Insolvency proceedings Enter a claim to the statement of affairs for the amount of lei 56,533,826.02. Valcea Court Ongoing proceedings. Court on the merits: Admits in part the claim. Cancels partially the Resolution no. 23 on March 17, 2014 regarding the items 1 and 5 and the Decision no. 3/January 14, 2014 regarding the items 4 and 8. Rejects, as ungrounded the claim regarding items 2, 3 and 4 in the Resolution no. 23/March 17, 2014, 17.03.2014 and items 5, 6 and 7 in the Decision no 3/January 14, 2014. Rejects the claim for suspension of the enforcement of the Decision no. 3/January 14, 2014, as ungrounded. With Appeal in term of 15 day from the notice regarding the solution on the merits and 5 days from the notice regarding the suspension of. Admits in part the claim stated by S Electrica SA. Cancels in part the Resolution no. 23 on March 17, 2014 regarding items 1 and 5 and the Decision no. 3/ January 14 regarding the items 4 and 8. Rejects, as ungrounded the claim regarding the items 2, 3 and 4 in the Resolution no. 23/March 17, 2014 and the items 5, 6 and 7 in the Decision no. 3/January 1, 2014. Rejects the claim for suspension of the enforcement of the Decision no. 3/January 14, 2014, as ungrounded. With Appeal in term of 15 day from the notice regarding the solution on the merits and 5 days from the notice regarding the suspension of. Electrica and CCR have stated Appeal. Currently, the case file is to ICCJ, in filtering proceedings. The Company of Administration of the shares in Energy, founded by division of Electrica, was approach in the case file, and Electrica claimed to be EXTRACTED FROM ThE CASE. The Supreme Court of Cassation and Justice has ascertained, on the term of January 21, 2016, that Electrica S.A. is not standing to bring active proceedings in the case. Reject the Appeal stated by the Plaintiff S.C. Filiala de Întreţinere şi Servicii Energetice Serv S.A. against the civil decision no. 1306 on April 24, 2014 of the Bucharest Court of Appeal – Section VIIIrd Contentious administrative and fiscal matters, as ungrounded. Admits the Appeal stated by the defendant Romania Court of Accounts against the same decision. Quash in part the decision under appeal in that it dismisses the action stated by the Plaintiff S.C. Filiala de Întreţinere şi Servicii Energetice Serv S.A. and on the measure ordered in item 12 in the Decision no. 32/2013 of the Court of Accounts. Keep the other decisions of the sentence under appeal. Final. Appeal- In course of settlement. 2 3 4 Plaintiff: Electrica S.A. Defendant: Romanian Court of Auditors; 8335/2/2012 Suspension of and cancelling the administrative and fiscal act Litigations Court of Accounts Law no. 94/1992. high Court of Cassation and Justice Disputes Law no. 94/1992 high Court of Cassation and Justice Plaintiff: FISE Electrica Serv S.A. Defendant: Romanian Court of Auditors 368/2/2014 Plaintiff: Electrica Furnizare S.A. Defendant: Romanian Court of Auditors; 5755/2/2013 Disputes Court of Accounts (Law no. 94/1992), action on cancellation of the Audit Report no. 2835/2013, of the Decisions no. 20/2013 and of the Affidavit no. 82/2013. high Court of Cassation and Justice 110 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 111 6. OTHER DISPUTES WITH POSSIBLE SIGNIFICANT IMPACT Parti/Nr. dosar Object Court Case status Crt. no. 1 2 3 4 5 6 7 Plaintiff: Niculescu Vladimir Defendant: FDEE Electrica Muntenia Nord S.A., City hall Valenii de Munte town 1580/105/2008 Plaintiff: FDEE Transilvania Nord SA Defendant: Local Council of Oradea City Intervener: RCS&RDS 2527/111/2015 Plaintiff: FDEE Transilvania Nord SA Defendant: Local Council of Oradea City Intervener: RCS&RDS 2526/111/2015 Plaintiff: FDEE Transilvania Nord SA Defendant: Local Council of Oradea City, RCS&RDS 3340/111/2015 Claim based on the Law no. 10/2001 – for a land of 1558 sqm and built area of 202 sqm, located in Valenii de Munte, str. N. Iorga, no. 129 and being used by the Exploitation Center Valeni. Cancellation of the Oradea LCD no /April, 28 2015 regarding the association between Oradea City, SC RDS&RCS SA and SC Delalina SRL in order to develop an electric power distribution network. Cancellation of the Oradea LCD no 284/April 28, 2015 on the Regulation regarding the settlement of the conditions for exercising the right to access on the public or private property of the Oradea City, in order to install electronic communication networks. Cancellation of the Oradea LCD no 108/February 02, 2014 on the public bidding for concession of the land of 100,000 sqm area, in order to develop an underground channel for installing the electronic and electric communication networks. Prahova Court Presently, the case is on the merits of Prahova Court Prahova. Oradea Court of Appeals The court on the merits rejects the EDTN action as premature. The ETDN Appeal was admitted and the case was sent to be re- trialed to Bihor Court. In course of settlement. Oradea Court of Appeals On the merits the claim was rejected. Appeal was settled, the case file being in course of regulating procedures. Bihor Court On the claim of the Defendant RCS-RDS the suspension of the case was ordered until the settlement of the case file 2414/2/2016 with Delalina SRL, case file on the lawsuit of the Bucharest Appeal Court. RCS-RDS settled a claim for reexamination of the stamp duty; therefore, the case file 3340/111/2015/a1 was developed, within the application to challenge the constitutionality of the provisions of art. 39 par. 1 and par. 3 in the EGD 80/2013 was invoked. The application to challenge the constitutionality was admitted in principle, and the case was suspended until the settling by the Constitutionality Court. The case file was suspended until the settlement of the case file no. 2414/2/2016 with Delalina SRL, case file on the lawsuit of the Bucharest Court of Appeals. In course of settlement. The obligation to issue technical permit for connection in the favor of SC Delalina SRL Bihor Court Cancellation of administrative acts (Order 73/2014, Concession agreements) Bucharest Court of Appeals Plaintiff: Delalina S.R.L. Defendant: FDEE Transilvania Nord SA 910/111/2016 Plaintiff: Delalina S.R.L., Foto Distributie S.R.L. Defendant: FDEE Transilvania Nord SA, ANRE, Romanian Government, Ministry of Economy, Commerce and Relationships with the Business Environment, Ministry of Energy, Banat Enel Distribution, Muntenia Enel Distribution, Dobrogea Enel Distribution 2414/2/2016 Plaintiff: Delalina S.R.L., Foto Distributie S.R.L. Defendant: ANRE Intervener: FDEE Transilvania North SA 4013/2/2016 The case file has as object the cancellation of the ANRE decision on refusal to give licenses for electric power distribution. Court of Appeals Bucharest In course of settlement. APPENDIX 2 – DETAILS OF MAIN INVESTMENTS IN 2016 By ThE ELECTRICA GROUP In 2016, the most significant investments made by the Group are the following: DESCRIPTION value (mln RON) MUNTENIA NORD Modernization and SCADA integration of transformer station 110 kV Cuza Voda, Braila County Modernization of FDCP-AMR with GSM Stage V/C Micro XIV Buzau Neighborhood Modernization of 110/20 kV transformer station Maraşeşti Modernization and SCADA integration of transformer station 110kV Adjud, Vrancea County Modernization of OHL 110 kV Tecuci - Cudalbi and 110 kV cell in the Station 110/20 kV Cudalbi, Galati County Modernization and SCADA integration of transformer station 110kV Laminorul, Galati County Modernization and SCADA integration of transformer station 110kV Pastarnacu, Prahova County Modernization 110kV Columbia station (replacement transformer 2*25 MVA with 2*40MVA) Modernization and amplification groups neutral treatment with BSRC in 110/MT Station Doftana, Campina, Busteni, Sinaia, Southern District Ploiesti, Urlati, Northern District Ploiesti, Prahova County Providing the technical conditions of operation of the 110 kV equipments of the transformer station 110/20kv Romanu, Braila County Providing the technical conditions of operation of the 110 kV equipments of the transformer station 110/20kv Dudesti, Braila County Modernization of OHL 110 kV Schela Tudor Vladimirescu (panel 94 - 104; 104 - 113; 113 - 123), Galati County Acquisition and installation of meters Modernization and SCADA integration transformer stations VOL I Ploiesti Vest, Ploiesti Sud, Doftana, Pleasa, Urlati Improvement of technical operating conditions of failure signaling system in UPL 20 kV and introduction in DAS Dambovita, the city of Targoviste Integration in SCADA system of transformer stations EDMN VOL I TRANSILVANIA NORD Modernization of 110/20kV Dej (Cuzdrioara) station Replacement of wire guard with OPGW on: OhL 110 kV Lapus-Tocila; OhL 110 kV Viseu -Pietrosul; OhL 110 kV Pietrosul - Baia Borsa; OHL 110 kV BM3 - Nistru; OHL 110 kV Nistru - Negresti Increasing the distribution capacity to 20 kV of the Station 110/20/10 kV CAMPULUI Modernization of grud 20 kV Station 110/20/10 kV Cluj Sud Switch to 20 kV distribution in transformation Station 110/6 kV Turda SCADA stage III - SCADA integration of 15 stations SCADA stage IV - preparation works for SCADA integration of 14 stations SCADA stage IV - SCADA integration of 14 stations Optimization of central points Cluj and Oradea, implementation and installation EMS application with DMS Cluj update and DMS Oradea implementation Automation of distribution - all Distribution Subsidiaries Switch to 20 kV distribution Velenta station Automation of distribution - modernization TP Modernization and systematization transformer station 110/20 kV CET 2 - stage I Replacement of 110/MT power transformers with low losses FDEE EDTN Reconstruction/Retrofitting OHL 110 kV Cluj Sud - Iernut, DC with OHL 110 kV Iernut - Campia Turzii, in the panel stretching between poles 5-16, near the village of Cuci, Mures County Reconstruction/Retrofitting OHL 110 kV Iernut - CFR Calarasi, DC with OHL 110 kV Iernut - Ludus, in the panel stretching between poles 8-23, near the village of Cuci, Mures County Switch to 20 kV distribution CET 1 station Automation of distribution - modernization TP - SCADA integration Switch to 20 kV distribution Iosia, Oradea 3.9 3.9 2.8 3.1 6.9 2.2 2.5 4.2 2.3 2.1 2.2 2.3 8.4 2.2 5.6 2.6 2.5 3.7 3.1 2.4 2.2 2.8 3.3 2.5 5.3 7.4 3.0 4.8 2.7 2.4 3.0 3.7 2.5 4.2 2.1 112 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 113 TRANSILVANIA SUD Modernization of 110/20/6 kV Predeal station and switch to 20 kV RED Predeal, Braşov County - Objective 1 and Objective 3, Braşov County Integration of transformer stations belonging to CEM 110 kV Braşov in SCADA DMS system of S.C. FDEE Electrica Distributie Transilvania Sud S.A. Modernization and improving safety Station 110/20/10 kV Baraj, Mures County Modernization of 110/20/6 kV Predeal station and switch to 20 kV RED Predeal, Braşov County - Objective 2: Switch to 20 kV EDN Predeal, Braşov County Improvement voltage level OhL j.t. Barcani, Covasna County Improvement voltage level OhL j.t. Bretcu, Covasna County Modernization of electricity supply installations in blocks of flats within SDEE Harghita Modernization of electricity supply installations in blocks of flats within SDEE Mures Improvement voltage level and modernization OHL j.t. Târgu Mureș area str. Viile Dealului Mic, Viile 1 Mai, Piata Republicii, Eden, Mures County Modernization of electricity supply installations in the city of Medias (Gura Campului neighborhood), Sibiu County Improvement voltage level area PTa 1, PTa 2, Valea Crisului, Covasna County Switch to 20 kV of the Distributor Vinalcool area PA 9, Mures County Improvement voltage level OhL j.t. Sita Buzaului, area PTa 2, Covasna County 5.6 2.2 2.4 2.8 4.5 2.2 6.1 4.9 3.5 6.7 3.3 3.7 2.3 In 2016, the largest transfers of tangible assets in progress to tangible assets are represented mainly by the commissioning of the investment objectives, as follows: DESCRIPTION value (mln RON) MUNTENIA NORD Modernization and SCADA integration of transformer station 100kV Cuza Voda, Braila County Modernization and SCADA implementation Sahateni Station Modernization of FDCP-AMR with GSM Stage V/C Micro XIV Buzau Neighborhood Modernization of 110/20 kV transformer station Maraşeşti Modernization and SCADA integration of transformer station 110 kV Adjud, Vrancea County Modernization of OHL 110 kV Tecuci - Cudalbi and 110 kV cell in the Station 110/20 kV Cudalbi, Galati Modernization 110kV Columbia station (replacement transformer 2*25 MVA with 2*40MVA) Modernization and amplification groups neutral treatment with BSRC in 110/MT Station Doftana, Campina, Busteni, Sinaia, Southern District Ploiesti, Urlati, Northern District Ploiesti, Prahova County Acquisition and installation of meters Improvement of technical operating conditions of failure signaling system in UPL 20 kV and introduction in DAS Dambovita, the city of Targoviste Integration in SCADA system of transformer stations EDMN VOL I Providing the technical conditions of operation of the 110 kV equipments of the transformer station 110/20kv Romanu, Braila County Providing the technical conditions of operation of the 110 kV equipments of the transformer station 110/20kv Dudesti, Braila County Modernization and SCADA integration of transformer stations 110kV Ploiesti Vest, Ploiesti Sud,Doftana, Pleasa, Urlati TRANSILVANIA SUD Modernization of 110/20/6 kV Predeal station and switch to 20 kV RED Predeal, Braşov County - Objective 1 and Objective 3, Braşov County Integration of transformer stations belonging to CEM 110 kV Braşov in SCADA DMS system of S.C. FDEE Electrica Distributie Transilvania Sud S.A. Modernization of electricity supply installations in Medias (Gura Campului neighborhood) Sibiu County Modernization of electricity supply installations in blocks of flats within SDEE Harghita Modernization of electricity supply installations in blocks of flats within SDEE Mures Switch to 20 kV of the Distributor Vinalcool area PA 9, Mures County Improvement voltage level OhL j.t. Valea Crisului, Covasna County 4.1 2.8 3.9 4.1 2.8 7.1 4.6 5.0 12.7 5.7 2.6 2.2 2.1 2.2 4.6 11.4 6.2 5.0 4.9 3,7 3.3 Modernization and improving safety in supply installation switching to underground supply cable 20 kV, Tg Mures-Cristesti, Mures County Improvement voltage level OhL j.t. Sita Buzaului, PTA 2_ Ciumenic, Covasna County Improvement voltage level OhL j.t. Bretcu, Covasna County Modernization of 110/20/6 kV Predeal station and switch to 20 kV RED Predeal, Braşov County - Objective 2: Switch to 20 kV EDN Predeal, Braşov County Improvement voltage level OhL j.t. Barcani, Covasna County Improvement voltage level and modernization OHL j.t. Târgu Mureș area str. Viile Dealului Mic, Viile 1 Mai, Piata Republicii, Eden, Mures County TRANSILVANIA NORD Creation of grud 20 kV Station 110/20/6 kV Clujana Increasing safety in supply to consumers in Valea lui Mihai Modernization of 110/20/10KV Baia Mare 5 station Modernization of 110/20/6 KV Carei 1 transformer station Modernization of 110/20 kV Dej - Cuzdrioara station Modernization of busbar 20 kV Station 110/20/10 kV Cluj Sud Modernization of Crisul Oradea Station Modernization of 110/20/6 KV Satu Mare 1 station Modernization of 110/20 kV Negresti station Reconstruction of OHL 110 kV Cluj Sud - Iernut Reconstruction of OHL 110 kV Iernut - CFR Calarasi Retrofitting of MT equipment in 110 Palota Station Modernization of power transformers 110 kV/MT (3 works) SCADA stage III - preparation works for SCADA integration - 15 stations SCADA stage IV - preparation works for SCADA integration of 14 stations Aghires, Sacuieni, Voievozi, Suplac, Tileagd, Baia Borsa, Tocila, Pietrosul, Tasnad, Lechinta, Rodna, Prundu Bargaului, Sarmasag, Cehu Silvaniei SCADA stage III + IV - SCADA integration in 29 stations Modernization of metering points (all SD) Optimization of central points Cluj and Oradea, implementation and installation EMS application with DMS Cluj update and DMS Oradea implementation Automation of distribution - modernization TP and SCADA integration SD Zalau Automation of distribution - modernization TP at SD Bistrita Replacement of existing MT/JT transformers with transformers with low losses Replacement of wire guard with OPGW on: OhL 110 kV Lapus-Tocila; OhL 110 kV Viseu -Pietrosul; OhL 110 kV Pietrosul - Baia Borsa; OHL 110 kV BM3 - Nistru; OHL 110 kV Nistru - Negresti Distribution automation system for 2015-2016 DAS Baia Mare- automatic reclosers 20 kV and remote controlled separators Distribution automation system for 2015-2016 DAS Bistrita- automatic reclosers 20 kV and remote controlled separators Distribution automation system for 2015-2016 DAS Cluj- automatic reclosers 20 kV and remote controlled separators Distribution automation system for 2015-2016 DAS Satu Mare- automatic reclosers 20 kV and remote controlled separators Distribution automation system for 2015-2016 DAS Zalau- automatic reclosers 20 kV and remote controlled separators Modernization of electricity supply installations in Oradea - zona PTZ Ortopedie, PTZ Decebal 2; PTZ Moara; PTS Decebal 1; PTZ Centrocoop; PTZ Engels; PTZ Centrul de Calcul Switch to 20 kV distribution Velenta station - Oradea 2.7 2.3 2.2 2.2 4.7 3.5 2.0 3.6 6.4 4.6 6.7 2.5 2.6 4.7 3.8 3.3 3.9 2.8 2.2 3.2 4.8 2.1 3.7 5.6 4.5 3.5 3.6 7.6 2.5 2.4 5.1 3.1 4.5 4.3 3.6 114 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 115 APPENDIX 3 INTERNAL AUDIT REPORT FOR 2016 The Annual Audit Plan for 2016, endorsed by the Audit Committee and approved by the Board of Directors by the Decision no.39/08.12.2015, provided for seven missions planned for 2016 in the following auditable areas: human resources, technical, procurement, transportation, risk management, BRP activity (Balance Responsible Part). This plan was drawn up in view of identifying the efficiency of internal controls within ELSA. On the date of audit missions planning, the Audit & Compliance Office team was made of two internal auditors, but after April the internal audit missions were conducted by five internal auditors. In 2016, upon the request of the Board of Directors, were conducted two ad-hoc missions on human resources and procurement auditable areas. During the first half year 2016, 5 audit missions were conducted in the company, 3 from Annual Internal Audit Plan and 2 ad-hoc missions. Seven audit reports were developed, containing 36 recommendations of witch 20 with high risk impact in case of non-implementing. The missions developed in first half of year: • • • Human resources activity - ad-hoc mission; Transportation activity – planned mission; • EDN access ( Electric Distribution Network) - planned mission. • Procurement of services – ad-hoc mission; Enterprise risk management – planned mission; In the second half of 2016 were conducted 3 audit missions, planned and were developed 11 internal audit reports, containing 45 recommendations of which 18 with high risk impact in case of non-implementing. The missions developed in second half of year : • • • Administrative activity; BRP activity; Procurement evaluation. These missions were performed by teams made of two internal auditors supervised by the chief of internal audit department. The internal audit report concluded as a result of the missions were acknowledged by the management of audited entities, endorsed by the Audit Committee and the implementation of their recommendations is consistently monitored by their follow up sheets. As a result of the audit missions and the acceptance of their recommendations by the audited entities and persons, the audited structures make up their own plans of measure to meet the recommendations. During 2016 have been uptated Charta of internal audit and Code of ethic behaviour for internal auditors. Were developed Manual of politicies and procedures for internal audit, based on CAFR (Chamber of financial auditors) model, organization which appropriated entirely International Standards for the Professional Practice of Internal Auditor. All these procedures were endorsed by Audit Committee and approved by Board of Directors. SOCIETATEA ENERGETICA ELECTRICA S.A. CONSOLIDATED FINANCIAL STATEMENTS FOR ThE yEAR ENDED 31 DECEMBER 2016 116 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 117 CONTENTS Consolidated statement of financial position Consolidated statement of profit or loss Consolidated statement of comprehensive income Consolidated statement of changes in equity Consolidated statement of cash flows Basis of measurement Significant accounting policies New standards and interpretations not yet adopted Reporting entity and general information Basis of accounting Functional and presentation currency Use of judgments and estimates Notes to the consolidated financial statements Basis of preparation 1 2 3 4 Accounting policies 5 6 7 Performance for the year 8 9 10 11 12 Employee benefits 13 14 15 Income taxes 16 Operating Segments Revenue Income and expenses Net finance income Earnings per share Income taxes Short-term employee benefits Post-employment and other long-term employee benefits Employee benefit expenses Trade receivables Deposits, treasury bills and government bonds Other receivables Cash and cash equivalents Property, plant and equipment Intangible assets Capital and reserves Non-controlling interests Financing for network construction related to concession agreements Trade payables Other payables Provisions Long-term bank borrowings Financial instruments - Fair values and risk management Assets 17 18 19 20 21 22 Equity and liabilities 23 24 25 26 27 28 29 Financial instruments 30 Other information 31 32 33 34 Related parties Subsidiaries in financial distress Contingencies Commitments 118 120 121 122 124 126 130 130 130 132 132 141 142 147 147 148 148 149 149 152 152 154 155 156 156 158 160 161 162 163 164 164 164 165 166 171 173 174 175 118 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 119 SOCIETATEA ENERGETICA ELECTRICA S.A. CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2016 (All amounts are in ThOUSAND RON, if not otherwise stated) Note 31 December 2016 31 December 2015 Note 31 December 2016 31 December 2015 3,910,388 3,700,211 Financing for network construction related to concession agreements Liabilities Non-current liabilities ASSETS Non-current assets Intangible assets related to concession arrangements Other intangible assets Property, plant and equipment Restricted cash 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 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 Legal reserves Retained earnings Total equity attributable to the owners of the Company Non-controlling interests Total equity 22 22 21 20 16 17 19 20 18 16 23 23 23 23 24 17,218 701,962 134,492 39,668 1,741 14,295 779,264 - 50,597 3,802 4,805,469 4,548,169 777,989 20,030 888,841 837,782 36,804 893,492 1,875,054 1,987,881 22,750 5,635 - 2,385 23,258 9,460 31,304 23,135 3,592,684 3,843,116 8,398,153 8,391,285 3,814,242 3,814,242 103,049 (75,372) 5,144 104,681 302,236 1,429,908 5,683,888 836,599 6,520,487 103,049 (75,372) 2,862 140,358 273,899 1,354,595 5,613,633 828,957 6,442,590 Deferred tax liabilities Employee benefits Other payables Long-term bank borrowings Total non-current liabilities Current liabilities Financing for network construction related to concession agreements Short term bank borrowings Bank overdrafts Trade payables Other payables Deferred revenue Employee benefits Provisions Current income tax liability Total current liabilities Total liabilities Total equity and liabilities The accompanying notes are an integral part of these consolidated financial statements. 25 16 14 27 29 25 30 20 26 27 13,14 28 41,617 195,689 192,965 44,921 127,733 602,925 85,513 - 142,626 722,830 160,890 4,415 83,972 62,407 12,088 122,065 181,253 193,915 43,068 - 540,301 99,576 59,821 65,963 656,410 249,306 4,235 134,625 127,613 10,845 1,274,741 1,877,666 1,408,394 1,948,695 8,398,153 8,391,285 General Manager Dan Catalin Stancu Finance Manager Iuliana Andronache 120 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 121 SOCIETATEA ENERGETICA ELECTRICA S.A. CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR ThE yEAR ENDED 31 DECEMBER 2016 (All amounts are in ThOUSAND RON, except per share data) SOCIETATEA ENERGETICA ELECTRICA SA CONSOLIDATED STATEMENT OF COMPREhENSIVE INCOME FOR ThE yEAR ENDED 31 DECEMBER 2016 (All amounts are in ThOUSAND RON, if not otherwise stated) Note 2016 2015 Note 2016 2015 Profit for the year 468,897 482,160 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 14 16 4,792 (768) 16,707 (2,674) Other comprehensive income, net of tax 4,024 14,033 Total comprehensive income 472,921 496,193 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. 359,555 113,366 472,921 374,294 121,899 496,193 General Manager Dan Catalin Stancu Finance Manager Iuliana Andronache Revenues Other income Electricity purchased Green certificates Construction costs related to concession agreements Employee benefits Repairs, maintenance and materials Depreciation and amortization Impairment of property, plant and equipment, net Impairment of trade and other receivables, net Change in provisions, net Other operating expenses Operating profit Finance income Finance costs Net finance income 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 9 10 22 15 21,22 21,22 17,19 28 10 11 11 16 24 5,517,802 5,502,795 243,454 211,161 (2,756,032) (2,718,682) (401,382) (528,372) (654,383) (44,077) (373,096) (695) (40,614) 65,206 (441,959) 585,852 20,037 (16,856) 3,181 589,033 (120,136) 468,897 (346,754) (490,023) (662,963) (59,015) (350,813) (2,368) (4,400) (54,979) (455,319) 568,640 37,851 (17,368) 20,483 589,123 (106,963) 482,160 356,566 112,331 468,897 362,675 119,485 482,160 Basic and diluted earnings per share (RON) 12 1.05 1.07 The accompanying notes are an integral part of these consolidated financial statements. Director General Dan Catalin Stancu Finance Manager Iuliana Andronache 122 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 123 SOCIETATEA ENERGETICA ELECTRICA S.A. CONSOLIDATED STATEMENT OF ChANGES IN EQUITy FOR ThE yEAR ENDED 31 DECEMBER 2016 (All amounts are in ThOUSAND RON, if not otherwise stated) Balance at 1 January 2016 Comprehensive income Profit for the year Other comprehensive income Total comprehensive income Transactions with owners of the Company Contributions and distributions Land for which ownership rights were obtained Dividends to the owners of the Company Total transactions with owners of the Company Other changes in equity Dividends to non-controlling interests Set up of legal reserves Transfer of revaluation reserve to retained earnings due to depreciation and disposals of property, plant and equipment Loss of control over subsidiaries in financial distress Balance at 31 December 2016 Balance at 1 January 2015 Comprehensive income Profit for the year Other comprehensive income Total comprehensive income Transactions with owners of the Company Contributions and distributions Land for which ownership rights were obtained Dividends to the owners of the Company Total transactions with owners of the Company Other changes in equity Dividends to non-controlling interests Set up of legal reserves Transfer of revaluation reserve to retained earnings due to depreciation and disposals of property, plant and equipment Loss of control over subsidiaries in financial distress Balance at 31 December 2015 The accompanying notes are an integral part of these consolidated financial statements. Attributable to the owners of the Company Note Share capital Share premium Treasury shares Pre-paid capital con- tributions in kind from sharehold- ers Revaluation reserve Legal reserves Retained earnings Total Non- controlling interests Total equity 3,814,242 103,049 (75,372) 2,862 140,358 273,899 1,354,595 5,613,633 828,957 6,442,590 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2,282 - 2,282 - - - - - - - - - - - - (29,251) (6,426) 356,566 356,566 112,331 468,897 2,989 2,989 1,035 4,024 359,555 359,555 113,366 472,921 - 2,282 (291,582) (291,582) (291,582) (289,300) - - - 2,282 (291,582) (289,300) 28,337 (28,337) - - 29,251 6,426 - - - - (105,724) (105,724) - - - - - - 3,814,242 103,049 (75,372) 5,144 104,681 302,236 1,429,908 5,683,888 836,599 6,520,487 3,814,242 103,049 (75,372) 3,273 156,018 236,597 1,246,635 5,484,442 804,266 6,288,708 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (411) - (411) - - - - - - - - - - - - (14,217) (1,443) 362,675 362,675 119,485 482,160 11,619 11,619 2,414 14,033 374,294 374,294 121,899 496,193 - (411) (244,692) (244,692) (244,692) (245,103) - - - (411) (244,692) (245,103) 37,302 (37,302) - - 14,217 1,443 - - - - (97,208) (97,208) - - - - - - 3,814,242 103,049 (75,372) 2,862 140,358 273,899 1,354,595 5,613,633 828,957 6,442,590 - - - - - - - - - - - - - - - - 23 23 23 23 32 23 23 23 23 32 124 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 125 SOCIETATEA ENERGETICA ELECTRICA S.A. CONSOLIDATED STATEMENT OF CASh FLOWS FOR ThE yEAR ENDED 31 DECEMBER 2016 (All amounts are in ThOUSAND RON, if not otherwise stated) Cash flows from operating activities Cash flows from investing activities Note 2016 2015 Profit for the year Adjustments for: Depreciation Amortisation Impairment loss of property, plant and equipment, net Loss/(Gain) on disposal of property, plant and equipment Impairment of trade and other receivables, net Change in provisions, net Net finance income Gain on loss of control over subsidiaries in financial distress Income tax expense Changes in : Trade receivables Other receivables Deposits, treasury bills and government bonds Prepayments Green certificates Restricted cash Inventories Trade payables Other payables Employee benefits Cash generated from operating activities Interest paid Income tax paid Net cash from operating activities 468,897 482,160 Payments for purchases of property, plant and equipment 21 22 21 17,19 28 11 10,32 16 40,886 332,210 695 (8,015) 40,614 (65,206) (3,181) (73,693) 120,136 853,343 44,084 306,729 2,368 4,676 4,400 54,979 (20,483) (38,501) 106,963 947,375 (88,336) (126,401) 33,954 (4,943) 3,825 31,304 (134,492) 508 150,682 (34,854) 5,323 816,314 (5,855) (2,605) (816) 22,404 - 1,047 81,784 (45,171) (2,309) 869,453 (4,575) (8,030) (93,722) (118,177) 718,017 743,246 Payments for network construction related to concession agreements Payments for purchase of other intangible assets Proceeds from sale of property, plant and equipment Payments for purchase of treasury bills and government bonds Proceeds from maturity of treasury bills and government bonds Increase in deposits with maturity of 3 months or longer Proceeds from deposits with maturity of 3 months or longer Interest received Effect on loss on control over subsidiaries on cash Net cash used in investing activities Cash flows from financing activities Proceeds from long term bank loans Proceeds from short term bank loans Repayment of long term bank loans Repayment of short term bank loans Dividends paid Repayment of financing for network construction related to concession agreements Payment of finance lease liabilities Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December The accompanying notes are an integral part of these consolidated financial statements The non-cash transactions are disclosed in Note 20. Note 2016 2015 18 18 (32,140) (31,759) (500,262) (353,302) (7,530) 27,829 (8,755) 14,771 (2,437,538) (4,093,998) 2,436,404 3,240,481 (300,895) (350,228) 419,799 438,990 18,358 (1,609) 41,286 (2,863) (377,584) (1,105,377) 127,733 - (9,900) (50,000) 18,000 51,753 (8,100) (1,907) 23 25 (396,922) (341,293) (92,658) (109,875) - (294) (421,747) (391,716) (81,314) (753,847) 827,529 1,581,376 746,215 827,529 20 20 General Manager Dan Catalin Stancu Finance Manager Iuliana Andronache 126 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 127 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO ThE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR ThE yEAR ENDED 31 DECEMBER 2016 (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 Energetica Electrica S.A. (“the Company” or “Electrica SA”) and its subsidiaries (together “the Group”). During 2016 the Company changed its name from Societatea de Distributie si Furnizare a Energiei Electrice Electrica S.A. to Societatea Energetica Electrica S.A. 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 2016 and 2015 the major shareholder of Societatea Energetica Electrica SA is the Romanian State, represented by the Ministry of Energy (48.78%), after the ownership dilution following an initial public offer. The second largest 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 2016 % shareholding as at 31 Dec 2015 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 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 (Societatea de Distributie a Energiei Electrice Transilvania Sud, Societatea de Distributie a Energiei Electrice Muntenia Nord and Societatea de Distributie a Energiei Electrice Transilvania Nord) 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 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 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 32. 14506181 Ploiesti 78.0000021% 78.0000021% Initial public offering Electrica Furnizare SA Electricity Supply 28909028 Bucuresti 77.99997% 77.99997% Societatea de Distributie a Energiei Electrice Muntenia Nord SA Electricity distribution in geographical area of Muntenia Nord Societatea de Distributie a Energiei Electrice Transilvania Nord SA Electricity distribution in geographical area of Transilvania Nord Societatea de Distributie a Energiei Electrice Transilvania Sud SA Electricity distribution in geographical area of Transilvania Sud Electrica Serv SA Servicii Energetice Muntenia SA (in reorganization) Servicii Energetice Oltenia SA (in reorganization) Servicii Energetice Moldova SA* Servicii Energetice Dobrogea 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) 14476722 Cluj-Napoca 77.99999% 77.99999% 14493260 Brasov 78.0000019% 78.0000019% 17329505 Bucuresti 100% 100% 29384120 Bucuresti 100% 100% 29389861 Craiova 100% 100% 29386768 Bacau n/a* 100% 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) REGULATIONS REGARDING THE ENERGY SECTOR 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. * Societatea Energetica Electrica SA lost the control of Servicii Energetice Dobrogea starting January 2015 and of Servicii Energetice Moldova starting January 2016 when the bankruptcy proceedings of the subsidiaries began (see Note 32). As of these dates the Group ceased to consolidate these companies. 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. 72/2013, no. 112/2014 no. 146/2014 and no. 165/2015. The specific distribution tariffs applicable for the years 2016 and 2015 for the three voltage levels (high, medium and 29388378 Constanta n/a* n/a* Electricity distribution 128 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 129 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) low) by regions were approved by ANRE orders as follows (RON/MWh, presented cumulatively for medium and low voltage): Order 171, 172, 173/14.12.2015 Order 155, 156, 154/15.12.2014 1 January-31 December 2016 1 January-31 December 2015 High voltage Medium voltage 19.93 21.22 15.93 64.20 63.58 52.60 Low voltage 167.74 172.02 171.38 High voltage Medium voltage Low voltage 21.10 23.41 18.47 68.44 70.26 61.31 180.59 192.65 199.92 Transilvania Nord Transilvania Sud Muntenia Nord 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”); working capital requirements and revenues from reactive energy. 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 generated by the use of distribution networks of other operators; extraordinary costs produced by force majeure; costs generated by the impossibility of shutting down the electricity supply for certain consumers, according to the legislation; damages paid by the main distribution operator to third parties for maintenance works established in court. The regulated rate of return on the RAB starting with 2015 is 7.7%, in accordance with the ANRE Order no. 146/2014. The distribution tariffs applicable for 2017 for the three voltage levels (high, medium and low) by regions were approved by ANRE orders as follows (RON/MWh), presented cumulatively for medium and low voltage: Order 113, 114, 112/14.12.2016 1 January-31 December 2017 High voltage Medium voltage Low voltage Transilvania Nord Transilvania Sud Muntenia Nord 19.05 20.63 14.79 60.98 61.64 48.46 157.71 165.37 157.81 Regulatory asset base (RAB) In accordance with ANRE Orders no. 72/2013, 112/2014, 146/2014 and 165/2015, the determination of the distribution tariffs is based on, inter alia, the regulated asset base (“RAB”). The RAB calculation is based on 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 methodology, in the reference year of the regulatory period, the distribution operator may request the regulator the recognition of the revaluation of asset commissioned after 1 January 2005, based on the revaluations studies 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 value of the assets commissioned after 1 January 2005 updated using the cumulative inflation rate over that period. Starting with the fourth regulatory period, the value of RAB at 31 December of the reference year of a regulatory period is no longer updated with the inflation rate. Tariff adjustments Annually, ANRE makes revenue corrections 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; changes in revenues from reactive energy compared to the forecast; under-/overruns of the approved investments programme; and revenues generated from other operations made by the distribution operator. The differences in revenue arising in relation to the above mentioned stipulations are used to modify the regulated tariffs for the subsequent year. 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 2016 the Group is in an over-recovery position of approximately RON 332 million (2015: RON 322 million), which will be deducted from the tariffs for subsequent periods. Tariffs increase limitations Starting with the third regulatory period (2014-2018) the distribution tariffs shall not increase year on year by more than 7% for the weighted average tariff and 10% for each specific distribution tariff. According to ANRE Order no. 165/2015, starting 2015 the tariff variation limitation applies only to tariff increases, and not to tariff decreases. 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 Regulated market 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 and amended by Order no. 92/2015 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, costs related to technical and operational services, 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. Until 2018 when the market for the household consumers will be competitive, the tariffs applicable to the households consumers shall be annual approved by ANRE based on the reported costs and regulated profit margin. The tariffs are 130 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 131 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) established in order to cover the costs of electricity (including transports costs, network services, distribution costs and the regulated profit margin). The previous ANRE 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 current methodology (ANRE Order 92/2015) establish the regulated profit as a percentage of 1.5% of the total supply costs (that includes energy acquisition, transport and distribution costs, costs related to the system services and costs related market operations and supply) and the operating supply costs of 4.5 RON/client/month in 2015 and 4.7 RON/client/month in 2016. recognised in the consolidated financial statements is included below. Service Concession Arrangements The distribution subsidiaries (as operators) concluded concession contracts with the Ministry of Economy (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 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. IFRIC 12 “Service Concession Arrangements” deals with public-to-private service concession arrangements. The tariffs for electricity supplied under regulated regime in 2016 and 2015 are those established by ANRE Orders no. 115/2016, no. 176/2015, no.157/2014 and no. 57/2014. 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, and the quantities acquired are established by ANRE. IFRIC 12 applies to public-to-private service concession arrangements if: (a) the grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them, and at what price; and (b) the grantor controls—through ownership, beneficial entitlement or otherwise—any significant residual interest in the infrastructure at the end of the term of the arrangement. Competitive market Transactions on the competitive en-gross market are transparent, public, centralised and non-discriminatory. Participants on the en-gross market can trade electricity based on the bilateral contracts concluded on the related centralised market. 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. ANRE establishes by order, until 1 March of each year, the compulsory annual quota for the acquisition of green certificates related to the previous year, based on the quantities of electricity from renewable sources and the final consumption of electricity of the previous year. 2 Basis of accounting These consolidated financial statements have been prepared in accordance with International Reporting Standards (“IFRS”) as adopted by the European Union (“IFRS-EU”). They were authorized for issue by the Board of Directors on 9 March 2017. The financial statements will be submitted for shareholders’ approval in the meeting scheduled on 27 April 2017. 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. The control or regulation referred to in condition (a) could be by contract or otherwise (such as through a regulator). The activities of the electricity distribution operators, including distribution tariffs, are regulated by ANRE. 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 operators 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 operators 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 of 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. Within the arrangements, the Group incurs significant expenditure in relation to the development and maintenance of the infrastructure. The construction works are either outsourced by the Group to sub-contractors, or performed internally. Significant management judgment is involved in accounting for the concession arrangements under IFRIC 12, including those in respect of the recognition of revenue based on the stage of completion of the services and separation of construction or upgrade services from operation services. 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. Details of the Group’s accounting policies are included in Note 6. The Group has consistently applied the accounting policies to all periods presented in these consolidated financial statements. (B) ASSUMPTIONS AND ESTIMATION UNCERTAINTIES 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 assumptions and estimation uncertainties that may result in a material adjustment in the subsequent twelve month period is included in the following notes: • Note 6 k), l) – assumptions regarding the useful life of the intangible assets related to concession arrangements and other intangible assets; • Notes 17 and 30 – assumptions and estimates about the recoverability of trade receivables; • Note 6 j) – estimates regarding the useful lives of property, plant and equipment; • Note 21 - assumptions regarding the revalued amount of property, plant and equipment; • Note 32 – assumptions and estimates regarding the measurement of assets of the subsidiaries under financial distress; • Note 16 – recognition of deferred tax assets: availability of future taxable profit against which tax loss carried forward can be used; • Notes 28 and 33 – recognition and measurement of provisions and contingencies; • 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. Information about judgements made in applying accounting policies that have the most significant effects on the amounts When measuring the fair value of an asset or a liability, the Group uses market observable data as far as possible. Fair 132 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 133 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows. • • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; 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); 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. equity-accounted investees, from the date that significant influence commences until the date that significant influence ceases. Transactions eliminated on consolidation (v) 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 Further information about the assumptions made in measuring fair values is included in the following notes: • Note 30 – financial instruments; • Note 21 – property, plant and equipment. 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. 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 subsidiaries in financial distress are not recognised on a going concern basis but on an alternate basis, as disclosed in Note 32. 6 Significant accounting policies Supply and distribution of electricity The revenue from supply and distribution of electricity to consumers is recognized when electricity is delivered to consumers (consumed by 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 Group has consistently applied the following accounting policies to all periods presented in these consolidated financial statements. 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)). (A) BASIS OF CONSOLIDATION Subsidiaries (i) 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. Loss of control (ii) 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. Non-controlling interests (iii) 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. Investments in equity-accounted investees (iv) 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 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 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. 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. 134 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 135 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) (D) FINANCE INCOME AND FINANCE COSTS (G) INCOME TAX The Group’s finance income and finance costs include: • • • • Interest income or expense is recognised using the effective interest method. interest income; interest expense; the foreign currency gain or loss on financial assets and financial liabilities; impairment losses recognised on financial assets (other than trade receivables). (E) FOREIGN CURRENCY TRANSACTIONS 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. • • 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. Current tax (i) 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. Deferred tax (ii) 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: • 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; 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 differences and it is probable that they will not reverse in the foreseeable future; and taxable temporary differences arising on the initial recognition of goodwill. (F) EMPLOYEE BENEFITS Short-term employee benefits (i) 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. Defined contribution plans (ii) 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. Defined benefit plans (iii) 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. Re-measurements 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. Other long-term employee benefits (iv) 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. Re-measurements 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 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. 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 CERTIFICATES 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. The obligation for covering the annual acquisition quota is accrued in profit or loss. (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 Recognition and measurement (i) 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. 136 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 137 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) 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 other items of property, plant and equipment are measures at cost less any accumulated depreciation and any accumulated impairment losses. (L) OTHER INTANGIBLE ASSETS (i) Recognition and measurement 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. 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. 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. Subsequent expenditure (ii) Subsequent expenditure is capitalised only if it is probable that the future economic benefits associated with the expenditure will flow to the Group. Depreciation (iii) 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 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 Useful lives Buildings Equipment Motor vehicles Office equipment 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 Recognition and measurement (i) 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. Amortisation (ii) 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 assets related to the concession arrangements is 10 years at 31 December 2016 (useful life 25 years). Subsequent expenditure (ii) 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. Amortisation (iii) 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 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 re- measurement are recognised in profit or loss. Once classified as held-for-distribution, equity-accounted investee is no longer equity accounted. (N) FINANCIAL INSTRUMENTS The Group classifies non-derivative financial assets into the following categories: loans and receivables and held to maturity investments. The Group classifies non-derivative financial liabilities into the other financial liabilities category. Non-derivative financial assets and financial liabilities – recognition and derecognition (i) 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. 138 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 139 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) 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 agreements and 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 Non-derivative financial assets (i) 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: • • • • • • default or delinquency by a debtor; restructuring of an amount due to the Group on terms that the Group would not consider otherwise; indications that a debtor or issuer will enter bankruptcy; adverse changes in the payment status of borrowers or issuers; the disappearance of an active market for a security; or 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. Non-financial assets (ii) 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 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. (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. 140 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 141 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) (S) PROVISIONS (V) SEGMENT REPORTING 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) CONTINGENT ASSETS AND LIABILITIES A contingent liability is: a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group; or i. b) a present obligation that arises from past events but is not recognized because: it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or ii. the amount of the obligation cannot be measured with sufficient reliability. Contingent liabilities are not recognized in the Group’s financial statements, but disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Group. A contingent asset is not recognized in the Group’s financial statements but disclosed when an inflow of economic benefits is probable. (U) LEASES Determining whether an arrangement contains a lease (i) 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. Leased assets (ii) 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. Lease payments (iii) 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. Rental income (iv) 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. 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. (W) SUBSEqUENT EVENTS Events occurring after the reporting date 31 December 2016, which provide additional information about conditions prevailing at those reporting dates (adjusting events) are reflected 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. New standards and interpretations not yet adopted or adopted by the EU 7 and not yet effective A number of standards were adopted by the EU but are not yet mandatorily effective for the year ending 31 December 2016 and have not been applied in preparing these consolidated financial statements: • IFRS 9 “Financial Instruments”. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted. The Group currently plans to apply IFRS 9 initially on 1 January 2018. The actual impact of adopting IFRS 9 on the Group’s consolidated financial statements in 2018 is not known and cannot be reliably estimated because it will be dependent on the financial instruments that the Group holds and economic conditions at that time as well as accounting elections and judgements that it will make in the future. The Group has performed a preliminary assessment of the potential impact of adoption of IFRS 9 based on its position at 31 December 2016 and does not believe that the new requirements, if applied at 31 December 2016, would have had a material impact on its financial statements. IFRS 15 “Revenue from Contracts with Customers”. IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognized. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. IFRS 15 is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted. The Group has performed an initial assessment of the potential impact of the adoption of IFRS 15 on its consolidated financial statements. • Rendering of services The Group does not expect significant differences in the timing of revenue recognition or the net impact on the result for the financial period. Transition The Group plans to adopt IFRS 15 in its consolidated financial statements for the year ending 31 December 2018, using the retrospective approach. As a result, the Group will apply all of the requirements of IFRS 15 to each comparative period presented and adjust its consolidated financial statements. The Group is currently performing a detailed assessment of the impact resulting from the application of IFRS 15. A number of standards were not yet adopted by the EU: • IFRS 16 “Leases”. IFRS 16 is effective for annual periods beginning on or after 1 January 2019. IFRS 16 supersedes IAS 17 Leases and related interpretations. The Standard eliminates the current dual accounting model for lessees and instead requires companies to bring most leases on-balance sheet under a single model, eliminating the distinction between operating and finance leases. Under IFRS 16, a contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. For such contracts, the new model requires a lessee to recognise a right-of-use asset and a lease liability. The right-of-use asset is depreciated and the liability accrues interest. This will result in a front-loaded pattern of expense for most leases, even when the lessee pays constant annual rentals. Lessor accounting shall remain largely unaffected by the introduction of the new Standard and the distinction between operating and finance leases will be retained. The Group has significant operating leases. For future lease payment please refer to Note 34b). The Group is currently performing the detailed assessment of the impact resulting from the application of IFRS 16. 142 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 143 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) 8 Operating segments (A) BASIS FOR SEGMENTATION The following summary describes the operations of each reportable segment. Reportable segments Electricity supply Electricity distribution External electricity network maintenance Operations Buying and supplying electricity to final consumers (includes Electrica Furnizare SA and the supply activity of Electrica SA) Electricity distribution service (includes Societatea de Distributie a Energiei Electrice Transilvania Sud SA, Societatea de Distributie a Energiei Electrice Transilvania Nord SA, Societatea de Distributie a Energiei Electrice Muntenia Nord SA, Electrica Serv SA and the investments in distribution activity done by Societatea Energetica Electrica SA) Repairs, maintenance and other services for electricity networks owned by other distributors (includes Servicii Energetice Oltenia SA and Servicii Energetice Muntenia SA). For the year ended 31 December 2015 the segment included also the operations of Servicii Energetice Moldova, which was deconsolidated starting with January 2016, as a result of loss of control. headquarter Includes corporate services at parent level The Board of Directors of the Company reviews management reports of each segment. Segment earnings before interest, tax, depreciation and amortisation (EBITDA) is used to measure performance because management believes that such information is the most relevant in evaluating the results of the segments. (B) INFORMATION ABOUT REPORTABLE SEGMENTS Year ended 31 December 2016 Electricity supply Electricity distribution External revenues 4,346,816 1,141,823 Inter-segment revenue 84,922 1,355,800 Segment revenue 4,431,738 2,497,623 173,781 397,660 External electricity network maintenance Headquar- ter Total for reportable segments Consolidation eliminations and adjust- ments Con- solidated total 29,163 13,079 42,242 70,491 - - - 5,517,802 - 5,517,802 1,453,801 (1,453,801) - 6,971,603 (1,453,801) 5,517,802 318,439 960,371 (371,338) 589,033 (1,346) (12,093) 14 387,944 374,519 (371,338) 3,181 (10,197) (350,352) (7,622) (5,620) (373,791) - - 73,693 - 73,693 185,324 139,174 760,105 311,612 (63,885) 318,439 959,643 840,236 - - - (371,339) (373,791) 73,693 959,643 468,897 78,099 71,011 (22,634) 154,704 24,080 Employee benefits (81,864) (529,382) Segment assets 1,225,799 5,128,477 669,372 544,644 (20,503) (654,383) - (654,383) 2,224,487 8,733,467 (335,314) 8,398,153 - 1,238,096 (440,077) 798,019 464,551 214,105 13,142 197,043 888,841 - - - 7,939 - - 134,492 134,492 1,867,115 1,875,054 - - - 888,841 134,492 1,875,054 802,107 455,444 80,578 13,821 1,351,950 (349,597) 1,002,353 Segment profit before tax Net finance (cost)/ income Depreciation, amortization and impairment, net Gain on control loss over subsidiaries EBITDA* Segment net profit (loss) Trade and other receivables Cash and cash equivalents Restricted cash 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 bank borrowings - - 142,626 254,863 - - - - - - 142,626 254,863 556,623 - - - 142,626 254,863 556,623 Capital expenditure 10,143 546,480 * 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. 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. 144 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 145 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) The breakdown of the Electricity distribution reportable segment is as follows: Year ended 31 December 2016 Distribution Muntenia Nord Distribution Transilvania Nord Distribution Transilvania Sud Electricity network mainte- nance Eliminations Total Electricity distribu- tion External revenues 339,275 423,131 350,164 29,253 - 1,141,823 Inter-segment revenue 461,592 434,348 439,666 335,657 (315,463) 1,355,800 Segment revenue 800,867 857,479 789,830 364,910 (315,463) 2,497,623 Segment profit / (loss) before tax Net finance (cost)/ income Depreciation, amortization and impairment, net EBITDA* Net profit 118,606 144,913 130,208 3,933 (6,110) (896) (4,739) (348) - - 397,660 (12,093) (102,308) (123,030) (121,510) (13,179) 9,675 (350,352) 227,024 268,839 97,538 108,609 256,457 107,728 17,460 (2,263) (9,675) 760,105 - 311,612 Year ended 31 December 2015 Electricity supply Electricity distribution External revenues 4,374,524 1,103,356 Inter-segment revenue 113,939 1,509,144 Segment revenue 4,488,463 2,612,500 Segment profit (loss) before tax 160,169 464,202 External electricity network maintenance Head- quarter Total for reportable segments Con- solidated total Consolida- tion elimi- nations and adjust- ments 24,915 14,590 39,505 12,006 - - - 5,502,795 - 5,502,795 1,637,673 (1,637,673) - 7,140,468 (1,637,673) 5,502,795 297,394 933,771 (344,648) 589,123 Net finance (cost)/income 2,759 (10,381) 16 372,737 365,131 (344,648) 20,483 Depreciation, amortization and impairment, net Gain on control loss over subsidiaries (7,437) (334,574) (6,695) (4,475) (353,181) - - 38,501 - 38,501 EBITDA* 164,847 809,157 Segment net profit (loss) 135,870 377,114 18,685 16,430 (70,868) 297,394 921,821 826,808 - - - (353,181) 38,501 921,821 (344,648) 482,160 Employee benefits (82,899) (535,443) (27,984) (16,637) (662,963) - (662,963) Employee benefits (124,314) (123,078) (118,655) (168,535) 5,200 (529,382) Segment assets 1,179,588 5,137,881 193,747 2,244,312 8,755,528 (364,243) 8,391,285 Segment assets 1,687,859 1,543,364 1,493,920 484,109 (80,775) 5,128,477 Trade and other receivables Cash and cash equivalents Deposits, treasury bills and government bonds Trade and other payables, and short term employee benefits 136,248 134,422 138,631 216,118 (80,775) 544,644 127,658 16,691 56,454 13,302 7,939 - - - - - 214,105 7,939 133,472 154,223 148,129 100,395 (80,775) 455,444 Bank overdrafts - 100,474 50,611 107,364 Financing for network construction related to concession agreements and bank borrowings 42,152 96,888 - - Capital expenditure 162,395 234,244 148,104 1,737 - - - 142,626 254,863 546,480 Trade and other receivables 719,529 611,531 25,084 - 1,356,144 (481,558) 874,586 Cash and cash equivalents 337,912 268,262 4,253 283,065 893,492 - 87,486 - 1,900,395 1,987,881 - - 893,492 1,987,881 787,518 477,295 260,019 9,692 1,534,524 (463,312) 1,071,212 - - 65,963 281,462 - - - - - - 65,963 281,462 555,171 - - - 65,963 281,462 555,171 Capital expenditure 19,187 535,984 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 bank borrowings * 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. 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. 146 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 147 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) The breakdown of the Electricity distribution reportable segment is as follows: (C) RECONCILIATION OF INFORMATION ON REPORTABLE SEGMENTS TO IFRS MEASURES Year ended 31 December 2015 Distribution Muntenia Nord Distribution Transilvania Nord Distribution Transilvania Sud Electricity network maintenance Eliminations Total Electricity distribution External revenues 338,764 381,813 Inter-segment revenue 532,897 475,776 349,941 490,301 32,838 - 1,103,356 362,661 (352,491) 1,509,144 Segment revenue 871,661 857,589 840,242 395,499 (352,491) 2,612,500 Segment profit (loss) before tax Net finance (cost)/ income Depreciation, amortization and impairment, net EBITDA* Net profit 168,886 160,089 158,407 (23,180) (1,908) (3,558) (2,388) (2,527) (91,895) (112,003) (115,482) (15,194) 262,689 275,650 276,277 (5,459) 134,646 136,621 132,189 (26,342) Employee benefits (131,147) (122,030) (117,700) (164,566) - - - - - - 464,202 (10,381) (334,574) 809,157 377,114 (535,443) Segment assets 1,746,442 1,440,592 1,526,887 537,146 (113,186) 5,137,881 183,566 140,218 153,593 247,340 (113,186) 611,531 123,985 18,551 104,132 21,594 87,486 - - - - - 268,262 87,486 134,883 165,742 174,050 115,806 (113,186) 477,295 - 90,680 12,836 70,038 43,127 110,844 10,000 9,900 - - - 65,963 281,462 535,984 Capital expenditure 152,345 223,102 157,204 3,333 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 bank borrowings * 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. 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. 31 December 2016 31 December 2015 Total assets Total assets for reportable segments Elimination of inter-segment assets 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 9 Revenue Electricity distribution and supply Construction revenue related to concession agreements (Note 22) Repairs and maintenance and other services rendered Re-connection fees Sales of merchandise Total 10 Income and expenses (A) OTHER INCOME Rent income Late payment penalties from customers Commissions for the collection of radio and TV taxes (Note 27) Gain on loss of control over subsidiaries (Note 32) Other Total 8,733,467 (373,733) 38,419 8,398,153 1,238,096 (438,828) (1,249) 798,019 8,755,528 (413,016) 48,773 8,391,285 1,356,144 (479,734) (1,824) 874,586 1,351,950 1,534,524 (348,348) (461,488) (1,249) 1,002,353 (1,824) 1,071,212 2016 4,892,158 537,872 69,544 9,454 8,774 2015 4,915,539 502,641 61,082 9,083 14,450 5,517,802 5,502,795 2016 87,985 24,443 14,312 73,693 43,021 2015 83,586 54,900 13,956 38,501 20,218 243,454 211,161 148 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 149 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) (B) OTHER OPERATING EXPENSES Rent Meter readings Printing and distribution of invoices Cash collection services IT services Postage and telecommunication Utilities Security Call centre Penalties for late payment and other payments to the State Other taxes and duties Legal and consultancy fees Cost of merchandise sold Bank commissions Other Total 2016 67,332 34,855 33,041 30,964 32,258 18,984 27,115 9,921 7,747 63,140 48,262 3,819 4,791 2,271 57,459 441,959 2015 60,866 37,172 31,407 25,951 44,181 18,280 28,541 8,767 7,512 3,177 91,774 8,093 10,830 3,309 75,459 455,319 In 2015, following an adverse court decision, the Group made a provision of RON 31,252 thousand representing penalties disputed by Electrica SA with Agentia Nationala de Administrare Fiscala („ANAF”). Also, during 2016 the Group made additional provisions of RON 23,648 thousand, following the solution of the court to reject the appeal from execution. In December 2016, the Group made payments of RON 41,211 thousand as a result of the enforcement received in connection with these litigations and reversed the provisions (refer to Note 28) and the tax assets previously recorded in relation with these matters. All these amounts (RON 58,126 thousand) are included in the line “Penalties for late payment and other payments to the State” in the table above. Weighted-average number of ordinary shares (in number of shares) 2016 2015 Issued ordinary shares at 1 January (Note 23) 339,049,336 339,049,336 Weighted-average number of ordinary shares at 31 December 339,049,336 339,049,336 For the calculation of basic and diluted earnings per share, treasury share (6,890,593 shares) were not treated as outstanding ordinary shares and were deducted from the number of issued ordinary shares Earnings per share Basic and diluted earnings per share (RON) 2016 1.05 2015 1.07 13 Short-term employee benefits Personnel payables Current portion of defined benefit liability and other long-term employee benefits Social security charges Tax on salaries Termination benefits payable Total 31 December 2016 31 December 2015 36,743 10,260 27,859 9,059 51 83,972 32,465 12,197 52,278 15,187 22,498 134,625 For details of the related employee benefit expenses, see Note 15. 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. As a result of these litigations and enforcements the tax record of Electrica SA is in the process of settlement with ANAF. The management of the Group estimates that there will be no additional significant amounts. As at 31 December 2015 the termination benefit of RON 22,498 thousand referred to compensation indemnities for the employees, based on the voluntary redundancies during 2015. 11 Net finance income Interest income Other finance income Total finance income Interest expense Interest cost for employee benefits (Note 14) Foreign exchange losses Other finance costs Total finance costs Net finance income 12 Earnings per share 2016 17,935 2,102 20,037 (4,439) (10,728) (1,689) - (16,856) 3,181 2015 34,513 3,338 37,851 (8,166) (8,050) (857) (295) (17,368) 20,483 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 2016 356,566 356,566 2015 362,675 362,675 In January 2016 the Group ceased the consolidation of Servicii Energetice Moldova (refer to Note 32). As a result, short- term employee benefits of RON 52,902 thousand were deconsolidated. 14 Post-employment 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 retirement. In 2016 and 2015, 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 13 31 December 2016 31 December 2015 124,445 78,780 203,225 10,260 192,965 126,322 79,790 206,112 12,197 193,915 150 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 151 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) Movement in the defined benefit liability and other long-term employee benefits (i) 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 Other long-term employee benefits Balance at 1 January Included in profit or loss Current service cost Actuarial gain Interest cost Benefits paid Balance at 31 December 2016 126,322 2,383 8,003 2015 141,988 2,697 5,636 (4,792) (16,707) (7,471) 124,445 2016 79,790 2,331 (3,432) 2,725 (2,634) 78,780 (7,292) 126,322 2015 91,184 2,067 (12,037) 2,414 (3,838) 79,790 Actuarial assumptions (ii) The following were the main actuarial assumptions at each reporting date: (a) Macroeconomic assumptions: • inflation. The actuaries used the Consumer Price Index (CPI) published by the Economist Intelligence Unit: Year 2016 2017 2018 2019 2020+ Valuation date 31 December 2016 Valuation date 31 December 2015 - 2.3% 2.3% 2.2% 2% 1.8% 2.5% 2.3% 2.2% 2.2% • • • • (b) • • • the discount rate used was the yield for Romanian government bonds maturing in 10 years at the reporting date of 3.63% for the year 2016 (2015: 4.75%); the electricity price per KWh used is 0.4576 RON at 31 December 2016 (2015: 0.4847 RON/ KWh); the mortality rate published by the National Institute of Statistics was adjusted to allow for an anticipated decrease in mortality rates; taxes and social charges are those in force as at the reporting date. Group specific assumptions: salaries increase mainly in line with the estimated inflation rates in the future periods; employees’ turnover: turnover rates are based on statistical information regarding employees’ mobility during 2003- 2015. Considering historical retirement data, it is assumed that the personnel turnover rate decreases with the employees’ age; jubilee and retirement bonuses based on seniority according to the collective labour contract, as follows: Jubilee bonus based on years of service No of gross monthly base salaries Seniority 20 years 30 years 35 years 40 years 45 years 31 December 2016 31 December 2015 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 No of gross monthly base salaries Seniority Between 8 and 10 years Between 10 and 25 years More than 25 years 31 December 2016 31 December 2015 1 2 3 1 2 3 The Group also offers 1,200 kWh of free electricity per year to retired employees based on years of seniority. Termination benefits Termination benefits for individual lay-off at the Group’s initiative (a) In accordance with the Collective labour contract concluded between the Group and the Unions, when individual labour contracts are terminated at the Group’s initiative, the Group pays 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 Termination benefits for collective lay-offs at the Group’s initiative (b) For collective lay-offs, according to the Collective labour contract, the Group pays termination benefits to the employees depending on their period of service, as follows: Period of service No of gross monthly base salaries 1 - 3 years 3 - 5 years 5 - 10 years 10 - 20 years More than 20 years 4 6 7 15 20 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. Termination benefits for voluntary redundancies (c) In accordance with the Agreement dated 13 August 2015 signed between the Group and the Unions and the Addendums to Collective Labour Contract, in case the individual labour contracts are terminated as voluntary redundancy from the employee, the Group pays termination benefits depending on the period to reach the standard retirement age, the period of service in the Group and the seniority. The number of gross monthly base salaries paid as termination benefits vary between 4 and 18. 152 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 153 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) 15 Employee benefit expenses Average number of employees Number of employees at 31 December Wages and salaries* Social security contributions Meal tickets Termination benefits Total employees benefits for the year Capitalised employee benefit expenses Total employees benefits in the statement of profit or loss 2016 10,000 9,685 481,867 118,865 19,433 39,418 659,583 (5,200) 654,383 2015 11,029 10,539 498,286 115,711 20,878 28,088 662,963 - 662,963 *Wages and salaries includes also current service cost, defined benefits and other long-term employee benefits The overall decrease of wages and salaries is due mainly to: • • deconsolidation in January 2016 of Servicii Energetice Moldova; decrease in the number of employees. Termination benefits for the year 2016 refer to compensations for voluntary redundancies in each of the companies. Out of the total amount for 2016, RON 24,762 thousand are related to the implementation of the restructuring programme of Electrica Serv approved in December 2015 (also refer to note 28). Management remuneration is disclosed in Note 31 b). 16 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 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. (i) Amounts recognised in profit or loss Current tax expense Deferred tax expense Adjustments for prior years’ current tax Total income tax expense (ii) Amounts recognised in other comprehensive income 2016 85,473 26,117 8,546 2015 95,726 3,998 7,239 120,136 106,963 Before tax 2016 Tax (expense) benefit Net of tax Before tax 2015 Tax (expense) benefit Net of tax Remeasurement of defined benefit liability 4,792 (768) 4,024 16,707 (2,674) 14,033 Total 4,792 (768) 4,024 16,707 (2,674) 14,033 (iii) Reconciliation 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 Adjustment for prior years Current-year tax losses for which no deferred tax asset is recognised Deferred tax asset derecognized Change in recognised temporary differences Income tax (iv) Movement in deferred tax balances 16% 1% -1% -1% -2% 1% 1% 1% 3% 20% Net balance at 1 January 2016 Recognised in profit or loss Recognised in other comprehen- sive income 2016 Property, plant and equipment 60,438 Intangible assets related to concession agreements 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) 154,608 (14,916) (48,360) (14,001) (7,113) 130,656 (2,004) 4,538 1,347 4,236 11,457 6,543 26,117 Net balance at 1 January 2015 Recognised in profit or loss Recognised in other comprehen- sive income 2015 Property, plant and equipment 61,991 Intangible assets related to concession agreements 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) 155,881 (18,107) (55,906) (18,765) (966) 124,128 (1,409) (1,273) 517 7,546 4,764 (6,147) 3,998 - - 768 - - - - - 2,674 - - - 2016 589,033 2015 589,123 94,245 3,892 (7,397) (3,285) (9,226) 8,546 8,614 7,089 17,658 120,136 Effect of loss of control over subsidiary (1,520) - - - - - 16% 2% -1% -1% -1% 1% 1% 0% 1% 18% 94,260 12,044 (6,475) (4,481) (8,337) 7,239 8,230 290 4,193 106,963 Balance at 31 December 2016 Net Deferred tax assets Deferred tax liabilities 56,914 159,146 - - 56,914 159,146 (12,801) (12,801) (44,124) (44,124) (2,544) (2,544) (570) (570) - - - - 20,371 (20,371) (39,668) 195,689 Balance at 31 December 2015 Net Deferred tax assets Deferred tax liabilities 60,438 154,608 - - 60,438 154,608 (14,916) (14,916) (48,360) (48,360) (14,001) (14,001) (7,113) (7,113) - - - - Effect of loss of control over subsidiary (144) - - - - - 2,674 (144) 130,656 (84,390) 215,046 33,793 (33,793) (50,597) 181,253 768 (1,520) 156,021 (60,039) 216,060 154 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 155 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) (v) Unrecognised deferred tax assets The movement in the bad debt allowance for trade receivables is as follows: Deferred tax assets have not been recognised in respect of the certain tax losses generated by several Companies within the Group, 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 2016 2015 349,362 345,411 Tax losses for which no deferred tax assets were recognised expire as follows: Year when the tax loss was generated: 2016 (expiring in 2023) 2015 (expiring in 2022) 2014 (expiring in 2021) 2013 (expiring in 2020) 2012 (expiring in 2019) 2011 (expiring in 2018) 2010 (expiring in 2017) Total (vi) Income tax receivable Tax losses 2016 53,838 51,439 84,206 62,179 70,175 10,896 16,629 2015 - 51,439 84,206 62,179 70,175 10,896 66,516 349,362 345,411 As at 31 December 2015, the income tax receivable include RON 16,916 thousand which were under litigation with Autoritatea Nationala de Administrare Fiscala (“ANAF”). During 2016, the Group derecognized the income tax receivable, due to the fact that the solution was not favourable (please see Note 10). 17 Trade receivables Trade receivables, gross Bad debt allowance Total trade receivables, net 31 December 2016 31 December 2015 1,906,093 1,962,899 (1,128,104) (1,125,117) 777,989 837,782 Trade receivables from related parties are presented in Note 31. Trade receivables gross comprise: 31 December 2016 31 December 2015 Electricity distribution and supply Late payment penalties receivable Electricity receivables and late payment penalties from clients in litigation, insolvency and bankruptcy Repairs, maintenance and other services Other 755,151 113,781 926,148 26,936 84,077 786,609 142,681 945,482 24,249 63,878 Total trade receivables, gross 1,906,093 1,962,899 Bad debt allowance 2016 2015 Balance as at 1 January 1,125,117 1,147,655 Impairment recognized Impairment reversed Amounts written off 74,145 16,880 (28,918) (12,565) (42,240) (22,320) Effect of loss of control over subsidiaries - (4,533) Balance as at 31 December 1,128,104 1,125,117 For the ageing of trade receivables refer to Note 30. A significant part of the bad debt allowances refers to clients in litigation, insolvency or bankruptcy procedures, many of them being older than four years. The Group will derecognize these receivables together with the related allowances after the finalization of the bankruptcy process. Amounts written off refer mainly to RON 35,483 thousand from Tractorul UTB Brasov, client of Electrica Furnizare, for which the bankruptcy procedure was closed. Impairment recognized during the year refers mainly to doubtful receivables from Transenergo Com S.A., a trader of electricity whose financial situation deteriorated given the recent adverse changes in prices on the electricity spot market. The Group has initiated foreclosure proceedings against this client due to non-payment of invoices starting September 2016. On 1 February 2017 Transenergo Com S.A. entered into the insolvency procedure. The gross outstanding amount receivable from Transenergo Com S.A as at 31 December 2016 is RON 44,426 thousand, out of which Electrica SA benefits from an insurance policy for RON 4,000 thousand. The management estimates that the recoverability of the uninsured amount is reduced and therefore recorded an impairment loss of RON 40,426 thousand. 18 Deposits, treasury bills and government bonds 31 December 2016 31 December 2015 Treasury bills and government bonds denominated in RON with original maturity of more than three months 1,757,746 1,756,339 Deposits with maturity of more than three months 117,308 231,542 Total deposits, treasury bills and government bonds 1,875,054 1,987,881 Treasury bills and government bonds with original maturity of more than three months have an average interest rate (yield) of 0.63% (2015: 0.93%) at the following banks: Citibank Europe PLC Dublin, Raiffeisen Bank, BRD, Marfin Bank, ING Bank. Treasury bills and government bonds were classified as held to maturity investments. 156 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 157 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) 31 December 2016 31 December 2015 The Group has overdrafts from ING and BCR, as follows: 19 Other receivables Good performance guarantees VAT receivable Interest receivable Structural funds Other receivables Bad debt allowance Total other receivables, net 7,127 2,301 43 72 39,152 (28,665) 20,030 7,454 5,095 443 1,509 58,165 (35,862) 36,804 2015 37,127 1,051 - (966) (1,350) 35,862 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 Impairment reversed Effect of loss of control over subsidiaries Balance as at 31 December 20 Cash and cash equivalents 2016 35,862 - (2,584) (4,613) - 28,665 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 31 December 2016 31 December 2015 148,111 740,487 243 - 123,713 678,612 302 90,865 888,841 893,492 (142,626) 746,215 (65,963) 827,529 As at 31 December 2015 cash and cash equivalents include treasury bills and government bonds denominated in RON of RON 90,865 thousands with original maturities of 3 months or less at the following banks Citibank Europe PLC Dublin, Raiffeisen Bank, BRD-CSG, Marfin Bank, ING Bank. These bear an average interest rate (yield) of 0.56% p.a. (2014: 1.7% p.a). Bank BCR ING Bank N.V. and BRD Groupe Societe Generale Total Bank ING Bank N.V. and BRD Groupe Societe Generale Contract date 28-Jan-16 8-Dec-16 Contract date 8-Dec-14 Facility type Maturity overdraft facility for financing current activity until 31 March 2017 working capital financing and issuance of potential commitments 1 year for overdraft, 2 years for potential commitments Overdraft limit (th RON) Balance at 31 December 2016 150,000 100,474 80,000 42,152 230,000 142,626 Facility type Maturity working capital financing and issuance of potential commitments until February 2016 for overdraft, 2 years for potential commitments Overdraft limit (th RON) Balance at 31 December 2015 70,000 12,836 OTP Bank Romania 7-Sep-15 working capital financing 1 year ING Bank N.V. and BRD Groupe Societe Generale 9-Dec-15 working capital financing and issuance of potential commitments 1 year for overdraft, 2 years for potential commitments 20,000 10,000 60,000 43,127 Total 150,000 65,963 The security for these overdrafts is presented in Note 34 d). As at 31 December 2016, Electrica SA has guarantees in the form of collateral deposits at BRD - Groupe Societe Generale on the withdrawals account made by Societatea de Distributie a Energiei Electrice Transilvania Sud and Societatea de Distributie a Energiei Electrice Transilvania Nord. The amount of the collateral deposits is RON 134,492 thousands. Refer also to Note 29. The following information is relevant in the context of the consolidated statement of cash flows: Non-cash activity includes: • • set-off between trade receivables and trade payables of RON 101 million in 2016 (2015: RON 64 million); effect of loss of control over subsidiaries under financial distress (see Note 32). During 2016, the Group made payments related to property, plant and equipment acquired in the prior years, in amount of RON 200 million. 158 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 159 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) 21 Property, plant and equipment The movements in property, plant and equipment in 2016 and 2015 were as follows: Land and land improve- ments 314,544 18 - (14,498) (394) 299,670 2,283 - (7,695) (16,158) Gross carrying amount Balance at 1 January 2015 Additions Transfer from construction in progress Disposals Effect of loss of control over subsidiaries (Note 32) Balance at 31 December 2015 Additions Transfer from construction in progress Disposals Effect of loss of control over subsidiaries (Note 32) Buildings Equipment Total Construc- tion in progress Vehicles, furniture and office equip- ment 263,132 2,926 6,508 (5,701) (5,170) 261,695 - 2,164 (16,038) (22,436) 152,428 5,350 114,060 (1,074) (1,445) 269,319 5,515 12,096 (867) - 102,740 684 157,738 34,797 73 (120,641) 990,582 43,775 - (22,371) (11,085) - - 71,894 3,196 1,000,901 11,221 - (14,260) (1,078) (5,653) - - - (25,948) (44,247) (1,098) (4,076) 98,323 227 Balance at 31 December 2016 277,830 225,385 286,063 91,189 60,830 941,927 Accumulated depreciation and impairment losses Balance at 1 January 2015 Depreciation Accumulated depreciation of disposals Impairment loss Reversal of impairment loss Effect of loss of control over subsidiaries (Note 32) Balance at 31 December 2015 Depreciation Accumulated depreciation of disposals Impairment loss Effect of loss of control over subsidiaries (Note 32) - - - 2,500 - - 2,500 - - - 24,944 13,845 (1,424) - - (2,857) 34,508 8,010 (4,189) 695 (2,500) (8,966) 53,616 23,558 (674) - (132) (717) 75,651 27,957 (867) - - 77,949 6,681 (826) - - (4,076) 79,728 4,919 (1,078) - (5,653) 29,250 - - - - - 29,250 - - - - 185,759 44,084 (2,924) 2,500 (132) (7,650) 221,637 40,886 (6,134) 695 (17,119) Balance at 31 December 2016 (2,500) 30,058 102,741 77,916 29,250 239,965 Net carrying amounts At 1 January 2015 At 31 December 2015 At 31 December 2016 314,544 297,170 277,830 238,188 227,187 195,327 98,812 193,668 183,322 24,791 18,595 13,903 128,488 42,644 31,580 804,823 779,264 701,962 Equipment and construction in progress include mainly costs for the implementation of the AMR system (Automatic Meter Reading). The restrictions on property, plant and equipment are presented in Note 34 d). 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 2016, as well as the significant unobservable inputs used. Category Valuation technique Significant unobservable inputs Inter-relationship between key unobservable inputs and fair value measurement Land Market approach f Adjustment for liquidity, location, size The estimated fair value would increase (decrease) if: f Adjustment for liquidity, location, size was lower (higher) f Occupancy rates (70- 90%) f Discount rates (10% on average) f Costs not paid by The estimated fair value would increase (decrease) if: f Occupancy rates were higher (lower) tenants (average 10%) f Discount rates were lower f Annual rent per sqm f Rental growth f Adjustment for liquidity, (higher) f Costs not paid were lower (higher) location, size f Annual rent per sqm was higher (lower) f Rental growth was higher (lower) f Adjustment for liquidity, location, size was lower (higher) 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. 160 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 161 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) 22 Intangible assets 23 Capital and reserves 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: Gross book value Balance at 1 January 2015 Additions Transfers from intangibles in progress Disposals Effect of loss on control on subsidiaries Balance at 31 December 2015 Additions Disposals Intangible assets related to concession agreements Software and licenses Intangible assets in progress Total 5,484,026 502,641 - - - 5,986,667 537,872 - 163,114 6,267 1,701 (1,305) (373) 169,404 7,530 (359) 817 2,488 (1,701) - - 5,647,957 511,396 - (1,305) (373) 1,604 6,157,675 - - 545,402 (359) Balance at 31 December 2016 6,524,539 176,575 1,604 6,702,718 Accumulated amortisation and impairment losses Balance at 1 January 2015 Amortisation Accumulated amortisation of disposals Effect of loss on control on subsidiaries Balance at 31 December 2015 Amortisation Accumulated amortisation of disposals Balance at 31 December 2016 At 1 January 2015 At 31 December 2015 At 31 December 2016 1,982,842 303,614 - - 2,286,456 327,695 - 2,614,151 3,501,184 3,700,211 3,910,388 155,119 3,115 (1,148) (373) 156,713 4,515 (267) 160,961 7,995 12,691 15,614 - - - - - - - - 817 1,604 1,604 2,137,961 306,729 (1,148) (373) 2,443,169 332,210 (267) 2,775,112 3,509,996 3,714,506 3,927,606 The distribution subsidiaries (as operators) concluded concession contracts with the Ministry of Economy concerning 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. The Group applies IFRIC 12 for the accounting of the transactions under these concession contracts. (See further details in Notes 4 (a), 6(b) and 6(k)). For the year ended 31 December 2016, the Group has recognized construction revenue related to the concession agreements of RON 537,872 thousand (2015: RON 502,641 thousand) and construction costs of RON 528,372 thousand (2015: RON 490,023 thousand). Intangible assets in progress as at 31 December 2016 and 2015 include the cost of implementation for IT applications that imply a certain implementation period. (A) SHARE CAPITAL AND SHARE PREMIUM The issued share capital in nominal terms consists of 345,939,929 ordinary shares at 31 December 2016 (2015: 345,939,929) with a nominal value of RON 10 per share. 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, except for the 6,890,593 treasury shares purchased by the Group in July 2014, for the prices stabilization. All shares rank equally with regard to the Company’s residual assets, except for treasury shares. 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. The share premium resulted at IPO was RON 103,049 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 (totalling 6,890,593 shares). The total amount paid for acquiring the shares and Global Depositary Receipts was RON 75,372 thousand. (C) REVALUATION RESERVE The reconciliation between opening and closing revaluation reserve is as follows: Balance at 1 January Release of revaluation reserve to retained earnings corresponding to depreciation and disposals of property, plant and equipment Loss of control over subsidiaries Balance as at 31 December 2016 140,358 (29,251) 2015 156,018 (14,217) (6,426) (1,443) 104,681 140,358 (D) LEGAL RESERVES Legal reserves are 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; Balance at 1 January 2015 Set-up of legal reserves Balance at 31 December 2015 Set-up of legal reserves Balance at 31 December 2016 Legal reserves 236,597 37,302 273,899 28,337 302,236 (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 declared by the Company in 2016 and 2015 (from the statutory profits of preceding years) were as follows: To the owners of the Company To non-controlling interests Total Distribution of dividends 2016 291,582 105,724 397,306 2015 244,692 97,208 341,900 162 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 163 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) The dividends per share were: 2016: RON 0.8600, 2015: RON 0.7217, per share. 31 December 2015 For the calculation of dividends shares to be paid to the owners of the Company, treasury share (6,890,593 shares) were not treated as outstanding ordinary shares and were deducted from the number of issued ordinary shares. Out of the dividends declared by the Company of RON 291,582 thousands, the dividends paid were RON 291,198 thousands, the remaining differences represents dividends unclaimed by the shareholders from the Depository. 24 Non-controlling interests The following tables summarises the information related to each of the Group’s subsidiaries that has material non- controlling interest (“NCI”), before any intra-group elimination. 31 December 2016 Electrica Distributie Muntenia Nord Electrica Distributie Transilvania Nord Electrica Distributie Transilvania Sud Electrica Furnizare Intra- group elimina- tions Total NCI percentage 22% 22% 22% 22% Non-current assets Current assets Non-current liabilities Current liabilities Net assets 1,353,880 1,333,005 1,224,097 131,081 278,756 (139,224) (174,077) 154,189 (175,814) (269,906) 195,248 1,066,256 (123,059) (71,462) (267,963) (719,819) 1,319,335 1,041,474 1,028,323 406,056 Carrying amount of NCI 290,254 229,124 226,231 89,332 1,658 836,599 Revenues Net profit Other comprehensive income Total comprehensive income Profit allocated to NCI Other comprehensive income allocated to NCI Cash flows from operating activities Cash flows used in investing activities Cash flows used in financing activities** Net increase/(decrease) in cash and cash equivalents* Dividends paid to NCI during the year 800,867 107,122 1,445 108,567 23,587 318 857,479 115,760 1,287 117,047 25,476 283 789,830 114,885 2,597 117,482 25,295 571 4,140,730 172,520 (626) 171,894 37,973 (137) 112,331 1,035 213,603 (55,516) 218,964 (213,423) 237,674 257,786 (149,812) (19,667) (154,414) (95,039) (134,565) (111,480) 3,673 (89,498) (46,703) 126,639 26,896 27,960 26,345 24,523 105,724 *Amounts presented represent cash flows of the subsidiaries **Cash flows from financing activities include dividends paid to NCI Electrica Distributie Muntenia Nord Electrica Distributie Transilvania Nord Electrica Distributie Transilvania Sud Electrica Furnizare Intra- group elimina- tions Total NCI percentage 22% 22% 22% 22% Non-current assets Current assets Non-current liabilities Current liabilities Net assets 1,288,375 1,217,033 1,195,298 133,944 399,710 (164,332) (190,731) 161,166 (80,112) 262,649 1,005,095 (136,294) (67,293) (246,573) (291,064) (726,104) 1,333,022 1,051,514 1,030,589 345,642 Carrying amount of NCI 293,265 231,332 226,730 76,041 1,589 828,957 Revenues Net profit Other comprehensive income Total comprehensive income Profit allocated to NCI Other comprehensive income allocated to NCI Cash flows from operating activities Cash flows used in investing activities Cash flows used in financing activities** Net increase/(decrease) in cash and cash equivalents* Dividends paid to NCI during the year 871,661 140,085 2,575 142,660 30,819 567 857,589 143,033 3,171 146,204 31,467 698 840,242 137,335 2,273 4,159,740 122,665 2,953 139,608 125,618 30,214 26,985 500 649 119,485 2,414 179,668 (14,980) 242,102 (160,123) 270,443 (78,064) 124,725 (16,275) (135,242) (54,673) (137,947) (174,024) 29,446 27,306 54,432 (65,574) 24,653 16,702 17,568 38,285 97,208 *Amounts presented represent cash flows of the subsidiaries **Cash flows from financing activities include dividends paid to NCI 25 Financing for network construction related to concession agreements Financing for network construction related to concession agreements is 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 1.93% in 2016 (2015: 2.64%). The amounts are due as follows: Less than 1 year Between 1 and 5 years Total 31 December 2016 85,513 41,617 127,130 31 December 2015 99,576 122,065 221,641 164 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 165 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) 26 Trade payables Electricity suppliers Capital expenditure suppliers Other suppliers Total 31 December 2016 31 December 2015 308,056 214,749 200,025 722,830 302,267 181,945 172,198 656,410 Electricity suppliers are mainly state-owned power generators, as detailed in Note 31, but also other participants on the electricity market. Other suppliers include suppliers of services, materials, consumables, etc. 27 Other payables VAT payable Liabilities to the State Payables related to radio and TV tax Liabilities related to green certificates acquisition obligation Other liabilities Total 31 December 2016 31 December 2015 Current Non-current 85,346 29,837 9,981 13,980 21,746 160,890 - - - - 44,921 44,921 Current 119,262 91,269 13,428 - 25,347 249,306 Non-current - - - - 43,068 43,068 The decrease in liabilities to the State is mainly due to the deconsolidation of Servicii Energetice Moldova. In accordance with Law no. 533/2003, that amended 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 that should be paid according to the contract in the month following the reporting month. Other liabilities include mainly guarantees and sundry creditors. Other non-current liabilities refer to guarantees from customers related to electricity supply. 28 Provisions Balance at 1 January 2016 Provisions made Provisions used Provisions reversed Balance at 31 December 2016 Fiscal risks Restructuring 80,106 27,697 (44,706) (27,564) 35,533 28,989 8,488 (24,762) - 12,715 Other 18,518 7,657 (417) (11,599) 14,159 Total 127,613 43,842 (69,885) (39,163) 62,407 As at 31 December 2016, provisions refer mainly to: • • • RON 35,533 thousand representing potential tax charges of the Group (including interest and penalties); RON 12,715 thousand representing restructuring provision in respect of Electrica Serv; RON 3,043 thousand representing claims with a customer who claims reimbursement of connection fees. The provisions made in 2016 refer mainly to: • provision for restructuring of RON 8,488 thousand as a result of an additional restructuring plan approved by the Board of Directors of Electrica Serv in December 2016, representing the lay-off of an additional number of 234 employees. • • provision of RON 27,697 thousand representing additional potential taxes and penalties out of which RON 23,648 thousand refer to Electrica SA (see Note 10 for further details); Provision of RON 3,043 thousand for a litigation with a customer who claims reimbursement of connection fees. The provisions used in 2016 refer mainly to: • payment of compensatory indemnities of RON 24,762 thousand in respect of the restructuring plan of Electrica Serv approved in December 2015, for the lay-off of 500 employees of Electrica Serv; payment of RON 3,496 thousand by Distributie Muntenia Nord to tax authorities. Payment of RON 41,210 thousand representing amounts disputed with ANAF in court, paid by Electrica SA in December 2016 based on an enforcement title received from ANAF (see Note 10 for further details). Provisions reversed in 2016 refer mainly to: • reassessment of potential tax charges of Distributie Muntenia Nord by RON 6,940 thousand following an ANAF decision; reassessment of potential tax charges of Electrica SA by RON 13,691 thousand following the enforcement title received from ANAF mentioned above; reassessment of potential tax charges of Distributie Transilvania Sud by RON 6,933 thousand; the reversal of the provision representing claims of individuals in respect of land of the Group of RON 2,388 as a result of a favourable court decision. • • • • • As at 31 December 2015, provisions refer mainly to: • • • RON 80,106 thousand representing potential tax charges of the Group (including interest and penalties); RON 28,989 thousand representing restructuring provision in respect of Electrica Serv; RON 2,388 thousand representing claims of individuals in respect of land of the Group. 29 Long-term bank borrowings Long-term bank borrowings Total 127,733 127,733 - - 31 December 2016 31 December 2015 On 17 October 2016 the Company’s distribution subsidiaries (Societatea de Distribuție a Energiei Electrice Transilvania Sud, Societatea de Distribuție a Energiei Electrice Muntenia Nord and Societatea de Distribuție a Energiei Electrice Transilvania Nord) concluded loan contracts with BRD – Groupe Societe Generale, in which Electrica SA has the quality of guarantor. The Group has long-term bank borrowings from BRD as follows: Beneficiary Facility type Maturity Societatea de Distributie a Energiei Electrice Muntenia Nord Societatea de Distributie a Energiei Electrice Transilvania Nord Societatea de Distributie a Energiei Electrice Transilvania Sud Total term loan, non-revolving facility, financing the treasury deficit generated by the investment activity term loan, non-revolving facility, financing the treasury deficit generated by the investment activity term loan, non-revolving facility, financing the treasury deficit generated by the investment activity Loan amount (th RON) Balance at 31 December 2016 80,000 - until 16 October 2021 until 16 October 2021 114,000 95,502 until 16 October 2021 126,000 32,231 320,000 127,733 166 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 167 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) 30 Financial instruments - fair values and risk management (B) MEASUREMENT OF FAIR VALUES (A) ACCOUNTING CLASSIFICATIONS AND FAIR VALUES The following table shows the valuation techniques used in measuring Level 2 fair values, as well as the significant unobservable inputs used. 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. Financial instruments not measured at fair value Note Loans and re- ceivables Carrying amount Held to maturity financial assets Other financial liabilities Fair value justa Total Level Total 1 2 3 31 December 2016 Financial assets not measured at fair value Trade receivables 17 777,989 Deposits, treasury bills and government bonds 1,875,054 Cash and cash equivalents 20 888,841 Restricted cash Total 134,492 1,801,322 1,875,054 777,989 1,875,054 888,841 134,492 3,676,376 Financial liabilities not measured at fair value Bank overdrafts Financing for network construction related to concession agreements Long-term bank borrowings Trade payables Total 20 25 26 31 December 2015 Financial assets not measured at fair value 142,626 142,626 127,130 127,130 129,383 129,383 127,733 127,733 722,830 722,830 1,120,319 1,120,319 Trade receivables 17 837,782 Deposits, treasury bills and government bonds 1,987,881 Cash and cash equivalents 20 893,492 Total 1,731,274 1,987,881 837,782 1,987,881 893,492 3,719,155 Financial liabilities not measured at fair value Bank overdrafts Financing for network construction related to concession agreements Short-term bank borrowings Trade payables Total 20 25 26 65,963 65,963 221,641 221,641 224,124 224,124 59,821 59,821 656,410 656,410 1,003,835 1,003,835 Type Valuation technique Significant unobservable inputs Other financial liabilities Discounted cash flows (DCF) method Not applicable The discount rates used are the average 12 M ROBID-ROBOR interest rates of 0.98% as at 31 December 2016 (2015: 1.43%). (C) FINANCIAL RISK MANAGEMENT The Group has exposure to the following risks arising from financial instruments: credit risk • • liquidity risk • 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, restricted cash, 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 was concentrated in the past around state-controlled companies and in the recent years refers to clients that are facing financial difficulties in their industries due to specific changes in circumstances in their industry sector. The Group is in process of setting up a policy regarding insurance of the trade receivables. Also the electricity supply contracts include termination clauses in certain circumstances. 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: 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 2016 31 December 2015 Gross value 603,467 209,205 16,616 14,087 30,872 21,618 1,010,228 1,906,093 Bad debt allowance - (46,494) (11,673) (11,514) (26,577) (21,618) (1,010,228) (1,128,104) Gross value Bad debt allowance 654,679 189,243 12,525 9,864 33,561 19,388 1,043,639 1,962,899 - (15,916) (3,605) (9,008) (33,561) (19,388) (1,043,639) (1,125,117) 168 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 169 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) Net trade receivables As at 31 December 2015 the Group has loan contracts from OTP and BCR as follows: 31 December 2016 31 December 2015 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 603,467 162,711 4,943 2,573 4,295 777,989 654,679 173,327 8,920 856 - 837,782 Details of the main movements in the allowances for doubtful debts are disclosed in Note 17. (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 20). Also starting 2016, certain subsidiaries contracted also long-term loans in order to improve their liquidity position. 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 2016 Bank overdrafts Financing for network construction related to concession agreements Long term bank borrowings Trade payables Total 31 December 2015 Bank overdrafts Financing for network construction related to concession agreements Trade payables Total Carrying amount Contractual cash flows Total less than 1 year 1-2 years 2-5 years More than 5 years 142,626 127,130 142,626 130,452 142,626 - - 86,636 39,720 4,096 127,733 722,830 140,508 722,830 2,555 2,555 135,398 722,830 - - 1,120,319 1,136,416 954,647 42,275 139,494 65,963 65,963 65,963 - - 221,641 228,332 100,248 97,002 31,082 656,410 656,410 656,410 1,003,835 1,010,526 882,442 97,002 31,082 - - - - - - - - - - - - - - Short-term bank borrowings 59,821 59,821 59,821 Bank Contract date Facility type Maturity Credit limit (thousand RON) Balance at 31 December 2015 OTP Bank Romania 13-Mar-15 financing of liabilities to Fiscal Authorities until November 2017 18,000 9,900 BCR 7-Sep-15 4 months working capital financing and refinancing of other loans Total 50,000 49,921 68,000 59,821 In March 2015 Electrica Serv contracted a loan from OTP Bank Romania of RON 18,000 thousand in order to finance the subsidiary’s payables to tax authorities. The loan bears an interest rate of ROBOR 3M plus a margin of 3.25% p.a. The loan is payable in equal monthly tranches until 11 November 2016. The loan is secured by pledges over part of the subsidiary’s assets (bank accounts, trade receivables from the contracts concluded with related parties and buildings). In September 2015 Electrica Distributie Transilvania Nord contracted a revolving credit facility from Banca Comerciala Romana in order to finance the operational activity and to refinance credit facilities contracted by the subsidiary from other banks. The credit has a maximum limit of RON 50,000 thousand. These loans were paid in full during 2016. (iii) Market risk Market risk is the risk that changes in market prices – such as foreign exchange rates and 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 and USD). 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 is 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 31 December 2016 31 December 2016 31 December 2015 EUR 2,533 - (127,130) USD 4,669 - - EUR 10,241 139,581 (221,641) Net statement of financial position exposure (124,597) 4,669 (71,819) The following significant exchange rates have been applied during the year: RON EUR 1 USD 1 Average rate Year-end spot rate 2016 4.4900 4.0569 2015 4.4450 4.0057 2016 4.5411 4.3033 2015 4.4821 4.1477 170 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 171 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (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 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. Effect 31 December 2016 EUR (5% movement) 31 December 2015 EUR (5% movement) Profit before tax Strengthening Weakening (6,230) 6,230 (3,591) 3,591 A reasonably possible strengthening (weakening) of the USD against RON at 31 December would have affected the measurement of financial instruments denominated in a foreign currency and profit before tax 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 2016 USD (5% movement) 31 December 2015 USD (5% movement) Profit before tax Strengthening 233 Weakening (233) - - Interest rate risk Until 2016 the Group’s policy was to mainly use supplier credit for financing its capital investments. Starting 2016 the Group started to use medium term bank loans (please see Note 20). Exposure to interest rate risk The interest rate profile of the Group’s interest-bearing financial instruments is as follows: 31 December 2016 31 December 2015 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 740,487 - 1,875,054 678,612 90,865 1,987,881 Financial liabilities Financing for network construction related to concession agreements (127,130) (221,641) Long-term bank borrowings Variable-rate instruments Financial liabilities Short term bank borrowings Overdrafts (127,733) 2,360,678 - (142,626) (142,626) - 2,535,717 (59,821) (65,963) (125,784) Fair value sensitivity analysis for fixed-rate instruments The Group does not account for any fixed-rate financial assets or financial liabilities at fair value through profit or loss. Therefore, a change in interest rates at the reporting date would not affect profit or loss. Cash flow sensitivity analysis for variable-rate instruments A reasonably possible change of 50 basis points in interest rates at the reporting date would have increased (decreased) profit before tax by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency exchange rates, remain constant. Profit before tax 50 bp increase 50 bp decrease (713) (629) 713 629 31 December 2016 Variable-rate instruments 31 December 2015 Variable-rate instruments 31 Related parties (A) MAIN SHAREHOLDERS As at 31 December 2016, the main shareholder of Electrica SA is the Romanian State, represented by the Ministry of Energy (48.78%), after the ownership dilution following an initial public offer. The second largest shareholder is the European Bank for Reconstruction and Development with 8.66%. (B) MANAGEMENT AND ADMINISTRATORS’ COMPENSATION Executive Management compensation 2016 4,573 2015 5,540 Executive management compensation refers to the managers with mandate contract, which are the General Managers of each subsidiary and the managers of Electrica SA. The changes in 2016 refers to the following: at the beginning of 2016, Electrica SA management included five managers remunerated based on mandate contract. A mandate contract ceased in March 2016 and another one in October, while in October 2016 one new manager was hired based on the same type of contract. As at 31 December 2016 Electrica SA has four managers with mandate contracts. Compensations granted to the members of the Board of Directors were as follows: Members of Board of Directors 2016 3,322 2015 5,362 Until 14 December 2015 the Board of Directors of Electrica SA comprised 5 members and afterwards 7 members. The amount of fixed monthly remuneration was also increased and an attendance fee was established for the Board of Directors and its committees’ meetings. The annual number of meetings to be remunerated is limited to 12 for the Board of Directors and to 6 for each committee, according to the remuneration policy approved by the General Meeting of Shareholders on 31 March 2016. In 2016 the composition of the Board of Directors of the subsidiaries was modified by the increase in the number of administrators from Electrica SA, who are not remunerated for this activity; therefore there was a significant decrease in the administrators’ remuneration at subsidiaries level. Also in December 2016 the number of the members of the Board of Directors of distribution subsidiaries and of Electrica Serv was changed from 5 to 3. No loans were granted to directors or administrators in 2016 and 2015. 172 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 173 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) (C) TRANSACTIONS 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 influence in 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: Furnizor Purchases (without VAT) Balance (including VAT) 2016 2015 31 December 2016 31 December 2015 Nuclearelectrica Transelectrica Complexul Energetic Oltenia hidroelectrica OPCOM Electrocentrale Bucuresti SNGN ROMGAZ Societatea Comerciala "Cupru Min" CN Posta Romana SA E-Distributie Muntenia E-Distributie Banat E-Distributie Dobrogea Others Total 305,597 614,439 57,166 550,038 302,239 24,998 56,331 1,887 348 25,460 9,286 7,473 12,453 304,412 30,893 651,045 141,474 242,181 8,395 482,448 52,297 326,655 3,889 32,487 - - - - 1,887 5,654 6 32,190 4,230 9,517 1,731 11,664 19,558 2,041 2,544 249,387 1,967,715 2,117,811 19,682 119,065 39,622 34,889 3,604 - - - 437 6,908 2,106 1,469 5,802 233,584 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: Sales (without VAT) Balance, gross (including VAT) Allowance (including VAT) Balance, net Client CFR Telecomunicatii Electrificare CFR SNGN ROMGAZ OPCOM Societatea Comerciala "Cupru Min" Transelectrica CN Romarm CN Remin SA C.N.C.A.F. MINVEST S.A. Oltchim Baita SA E-Distributie Muntenia Others Total 2016 44,861 10,839 14,151 28,285 26,627 14,734 9,635 343 - - 1,541 18,034 32,723 201,773 31 December 2016 (53) - - - - - - (71,148) (78,735) (715,259) (4,334) - (6,713) (876,242) 4,474 1,203 1,256 2,590 - 1,361 62 71,180 78,735 715,259 5,002 9,101 10,103 900,326 4,421 1,203 1,256 2,590 - 1,361 62 32 - - 668 9,101 3,390 24,084 Sales (without VAT) Balance, gross (including VAT) Allowance (including VAT) Balance, net Client CFR Telecomunicatii Electrificare CFR SNGN ROMGAZ OPCOM Societatea Comerciala "Cupru Min"- S.A. Abrud Transelectrica CN Romarm CN Remin SA C.N.C.A.F. MINVEST S.A. Oltchim Baita SA E-Distributie Muntenia Others Total 2015 52,332 12,660 20,145 28,316 31,295 5,536 8,592 314 - - 1,845 15,576 56,784 233.395 32 Subsidiaries in financial distress 31 December 2015 - - - - (10,122) - - (71,173) (78,735) (715,277) (4,770) - (6,790) (886.867) 7,040 1,139 1,497 3,537 10,122 1,403 33 71,173 78,735 715,277 5,349 4,933 15,253 915.491 7,040 1,139 1,497 3,537 - 1,403 33 - - - 579 4,933 8,463 28.624 The Company’s subsidiaries Servicii Energetice Moldova and Servicii Energetice Dobrogea entered in bankruptcy in January 2016 and in January 2015, respectively, and consequently the Company discontinued their consolidation as of these dates as it no longer has control over these entities. The individual assets and liabilities of Servicii Energetice Moldova and Servicii Energetice Dobrogea at the date the Company ceased their consolidation (31 January 2016 and 31 January 2015, respectively) were as follows: Property, plant and equipment Trade receivables Cash and cash equivalents Total assets Trade payables Other payables Employee benefits Deferred tax liabilities Total liabilities Gain on loss of control (Note 10) Carrying amount Carrying amount Servicii Energetice Moldova as of 31 January 2016 Servicii Energetice Dobrogea as of 31 January 2015 21,709 2,027 1,609 25,345 2,685 41,931 52,902 1,520 99,038 73,693 3,435 1,367 2,863 7,665 1,802 22,006 22,214 144 46,166 38,501 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 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 measured the carrying amounts of the assets and liabilities of these subsidiaries on a liquidation basis starting the commencement of their insolvency procedures. 174 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 175 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in THOUSAND RON, if not otherwise stated) As at 31 December 2016 and at 31 December 2015, the carrying amount of the assets and liabilities of these companies included in the consolidated financial information are as follows: B) FISCAL ENVIRONMENT Servicii Energetice Muntenia Servicii Energetice Oltenia 93,894 8,251 10,154 112,299 (21,615) (183) (434) (24,412) 23,588 8,406 2,988 34,982 (4,232) (8,859) (5,916) (12,572) Total 117,482 16,657 13,142 147,281 (25,847) (9,042) (6,350) (36,984) 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. As disclosed in Notes 10 (b) and 28, the Group incurred significant expense related to previous years’ tax adjustments as a result of controls and litigations with tax authorities. The management of the Group believes that adequate provisions were recorded in the consolidated financial statements for all significant tax obligations; however a risk persists that the tax authorities might have different positions. 34 Commitments (46,644) (31,579) (78,223) (A) CONTRACTUAL COMMITMENTS 31 December 2016 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 Total liabilities 31 December 2015 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 Total liabilities Servicii Energetice Moldova Servicii Energetice Muntenia Servicii Energetice Oltenia 21,709 2,027 1,609 25,345 (2,854) (41,931) (34,610) (19,412) 106,389 7,878 2,252 116,519 (26,144) (333) (447) (24,752) 32,312 6,780 392 39,484 (3,059) (8,715) (7,798) (14,329) Total 160,410 16,685 4,253 181,348 (32,057) (50,979) (42,855) (58,493) (98,807) (51,676) (33,901) (184,384) The Group has not classified the assets and liabilities of these subsidiaries as held for sale as at 31 December 2016, as 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 2016. The reorganization programs for Servicii Energetice Muntenia and Servicii Energetice Oltenia, which are due to finalize in 2018 and in 2019 respectively, will result either in their liquidation or in the continuation of their activities. 33 Contingencies A) LITIGATION AND CLAIMS The Group is involved in many litigations and claims (ie. with Property Fund – holder of minority interests in the Company’s subsidiaries, ANRE, ANAF, Court of Accounts, claims for damages, claims over land titles, labour related litigations etc.). As summarised in Note 28, the Group set-up provisions for the litigations or claims for which the management assessed as probable the outflow of resources embodying economic benefits due to low chances of favourable outcomes of those litigations or disputes. The Group does not present information in the financial statements and did not set-up provisions for items for which the management assessed as remote the possibility of outflow of economic benefits. The Group discloses below information on the most significant items of litigations or claims for which the Group did not set- up provisions as they relate to possible obligations that arise from past events whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future events not wholly within the control of the Group (ie. litigations for which different inconsistent sentences were issued by the Courts, or litigations which are in early stages and no preliminary ruling were issued so far): • In 2010 Electrica SA was sued by Termoelectrica S.A., which claimed the payment of RON 25,047 thousand representing penalties related to certain electricity invoices, for the period 1 April 2007 – 31 March 2008. The first sentence in this case was favourable to Electrica SA. In November 2016, the Court of Appeal admitted Termoelectrica S.A.’s appeal, cancelled the first court ruling and pronounced a decision in favour of Termoelectrica S.A. In 2017 Electrica SA made an appeal against the civil decision execution. In 2015 Electrica SA was sued by hidroelectrica S.A., which claimed the payment of RON 5,445 thousand and other damages, representing claims related to acquisition of electricity by the Company from Hidroelectrica S.A. at a price alleged to be unfair. There was no preliminary ruling in this case as of the date of these financial statements. • The Group has the following contractual commitments as at 31 December 2016: Amount 1,223,717 410,208 1,633,925 Purchase of electricity Purchase of property, plant and equipment and intangible assets (B) OPERATING LEASES The main operating leases refer to vehicles and equipment leased by Electrica Serv, as follows: Supplier Operational Autoleasing SRL Electrical Business Center SRL RCI Finantare Romania Energopetroleum Top Service SRL Center TEA & Co SRL Total Contractual amount 60,241 77,467 1,327 7,578 12,179 158,791 The future lease payments related to the operating lease contracts mentioned above are as follows: Less than 1 year Between 1 and 5 year Total 31 December 2016 25,544 33,163 58,707 31 December 2015 24,438 57,383 81,821 (C) INVESTMENT PROGRAM The investment program approved for the year 2017 is as follows: Distribution activity Supply activity Maintenance activity Other/ shared Total 2016 874,000 12,775 12,237 5,000 904,012 The amounts actually incurred may differ from the ones planned. (D) GUARANTEES AND PLEDGES At 31 December 2016 and 2015, the Group has guarantees on its bank accounts opened at ING, BRD and BCR for the overdrafts contracted (please see Note 20). At 31 December 2016 the Group has outstanding bank letters of guarantee of RON 459,421 thousand (2015: RON 188,084 thousand) issued in favour of its suppliers. 176 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 177 KPMG Audit SRL Victoria Business Park DN1, Soseaua Bucuresti-Ploiesti nr. 69-71 Sector 1 P.O. Box 18-191 Bucharest 013685 Romania Tel: Fax: +40 (21) 201 22 22 +40 (372) 377 800 +40 (21) 201 22 11 +40 (372) 377 700 www.kpmg.ro Independent Auditors’ Report (free translation1) TO THE SHAREHOLDERS OF SOCIETATEA ENERGETICA ELECTRICA S.A. Opinion We have audited the consolidated financial statements of Societatea Energetica Electrica S.A. (“the Company”) and its subsidiaries (together “the Group”), which comprise the consolidated statement of financial position as at 31 December 2016, the consolidated statements of profit or loss, comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information. In our opinion, the accompanying consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2016, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (“ISAs”). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Romania, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. ©2017 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 1TRANSLATOR’S EXPLANATORY NOTE: The above translation of the auditors’ report is provided as a free translation from Romanian, which is the official and binding version. SOCIETATEA ENERGETICA ELECTRICA S.A. INDEPENDENT AUDITORS’ REPORT 178 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 179 Revenue recognition – electricity distribution and supply Capitalized expenditure related to the concession agreements Revenue - Electricity distribution and supply (RON 4,892,158 thousand – Note 9) Refer to Notes 6(b) (accounting policy) and 9 (financial disclosures) to the consolidated financial statements. Key audit matter How the matter was addressed in our audit Electricity distribution and supply is the Group’s main revenue stream. This revenue is recognised when electricity is consumed by the customers, as described in Note 6(b) to the consolidated financial statements. Our audit procedures included, among others: • using our own IT specialists, testing of general and IT application controls over accounting and billing systems related to capturing and recording of revenue transactions; Revenue recognition is a key matter in our audit due to the following factors: • • • • • in a locations large number The Group operates of throughout Romania, and the process of capturing, processing and transferring to the accounting system of the data relevant for revenue recognition is not centralized; In the reporting period, significant changes were made to the accounting system used by the Group’s supply subsidiary, including changes the the accounting and the billing system; interface between to A significant amount of revenue refers to the accrual for electricity delivered and not yet billed by the year end. The computation of this amount is based on historical data and assumptions regarding consumption patterns; are significant transactions, There revenue-related intra- intra-group including group services, sales of goods, capital expenditure and agent transactions. These transactions are reconciled and eliminated on consolidation, a process which involves significant manual input, and therefore more prone to misstatement. • • • • • the testing of controls over manual reconciliations between the billing and the accounting system of the data relevant for revenue recognition; developing an independent expectation of the electricity revenue for the year based on our industry and entity knowledge; obtaining external confirmation for a sample of trade receivables and performing procedures on other revenue related accounts, such as obtaining external confirmations for bank accounts; the reasonableness of assessing the methodology used to compute unbilled revenue balances at year end, and of the related assumptions, such as, primarily, the estimated pattern of electricity consumption; testing the accuracy of unbilled revenue reports by comparing a sample of items with the level of subsequent amounts invoiced; testing the consolidation adjustments in respect of intra-group revenue transactions. Intangible assets related to concession agreements (RON 3,910,388 thousand – Note 22) Construction revenue related to concession agreements (RON 537,872 thousand – Note 9) Construction costs related to concession agreements (RON 528,372 thousand – Consolidated Statement of Profit or Loss) Amortization of intangible assets related to concession agreements (RON 327,695 thousand – Note 22) Deferred tax liability from temporary differences related to Intangible assets related to concession agreements (RON 159,146 thousand – Note 16(iv)) Refer to Notes 4 (judgments), 6(b), 6(k) (accounting policy), 9, 16(iv) and 22 (financial disclosures) to the consolidated financial statements. Key audit matter How the matter was addressed in our audit Our audit procedures included, among others: • • • assessing the Group’s model used for the service concession accounting for compliance with relevant financial reporting standards; understanding and assessing the separation of construction or upgrade services from operation services; for obtaining supporting documentation items capitalised, assessing a sample of whether for capitalization, and assessing their accuracy by tracing to supporting documents (i.e. contracts, invoices, work statements); they meet criteria the • assessing the adequacy of related disclosures in the consolidated financial statements. The electricity distribution is a regulated activity. The Group’s distribution subsidiaries, as operators, have in place service concession agreements with the Ministry of Economy, as grantor, to provide the electricity distribution service. According to these agreements, the Group builds the electricity distribution infrastructure which is used to provide the power distribution service, which shall ultimately be transferred to the grantor or a third party appointed by the grantor at the end of the concession period. incurs significant expenditure The Group in relation to the development and maintenance infrastructure. The construction and of the maintenance works are either performed internally, or outsourced to sub-contractors. We considered this area a key audit matter due to the magnitude of the amounts involved, as well as due to the complexities of the application of relevant financial reporting standards and of the management judgment, including those in respect of recognition of revenue based on the stage of completion of the services and separation of construction or upgrade services from operation services. 180 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 181 Taxation Penalties to the State and other payments to the State budget (RON 63,140 thousand – Note 10(b)) Income tax expense (RON 120,136 thousand – Note 16) Provisions for tax risks (RON 35,533 thousand – Note 28) Change in provisions for tax risks during the year, net (RON 44,573 thousand – Note 28) Refer to Notes 6(g), 6(s), 6(t) (accounting policy), 10(b), 16 and 28 (financial disclosures) to the consolidated financial statements. Key audit matter How the matter was addressed in our audit The Group has been to various adjustments related to corporate income tax and value added tax imposed by tax authorities as a result of their tax audits from prior periods. subject Certain Group entities are in litigation or disputes with tax authorities regarding findings of tax audits from prior years. Our audit procedures included, among others: • using our own tax specialists, assessing the Group’s interpretation and application of relevant tax law, and evaluating the appropriateness of key assumptions used and the reasonableness of estimates in relation to uncertain tax positions and the level of tax liabilities or provisions; Key judgments are made by management in estimating tax exposures and quantifying related liabilities, provisions and/or contingent liabilities. • obtaining and evaluating responses to our audit inquiry letters from the Group’s in- house and external lawyers in relation to existing or potential tax proceedings and assessing the Group’s position in relation to specific matters disputed; • • inspecting the Group’s correspondence with tax authorities during the reporting period and subsequently, until the date of our report; the adequacy of disclosures assessing related to taxation in the consolidated financial statements, with particular focus on uncertain tax positions and tax-related contingencies. Litigations and claims - provisions and contingent liabilities Refer to Notes 6(s), 6(t) (accounting policy), 28 and 33 (financial disclosures) to the consolidated financial statements. Key audit matter How the matter was addressed in our audit In the normal course of the Group’s business, potential exposures arise from administrative or court proceedings. As disclosed in Notes 28 and 33 to the consolidated financial statements, the Group entities are involved in litigations with different authorities, business partners or other parties. Whether a liability is recognized or disclosed as a contingent liability in the financial statements judgmental and dependent on is inherently a number of significant assumptions and assessments. Our audit procedures included, among others: • • inspecting minutes of the shareholders’ and board of directors’ meetings; obtaining and evaluating lawyers’ responses to our audit inquiry letters and discussing the nature and status of the litigations and potential legal exposures with the Group’s management and in-house legal counsels, with particular focus on the open litigation with Termoelectrica S.A. (RON 25,047 thousand); The amounts involved are potentially significant and determining the amount, if any, to be recognised or disclosed in the financial statements, is inherently subjective. • critically assessing the Group’s assumptions and estimates in respect of litigations and claims, including the liabilities or provisions recognized or contingent liabilities disclosed in the consolidated financial statements. This involved assessing the probability of an unfavourable outcome of a given proceeding and the reliability of estimates of related amount; • assessing whether the disclosures detailing legal proceedings adequately significant disclose the Group’s potential liabilities. 182 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 183 Other information - Consolidated Administrators’ Report Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements The other information comprises the consolidated Administrators’ Report. The Administrators are responsible for the preparation and presentation of the consolidated Administrators’ Report in accordance with Order of Minister of Public Finance no. 2844/2016, articles 26-27 of the accounting regulations in accordance with International Financial Reporting Standards, and for such internal control as Administrators determine is necessary to enable the preparation and presentation of consolidated Administrators’ Report that is free from material misstatement, whether due to fraud or error. The consolidated Administrators’ Report presented from page 1 to 142 is not part of the consolidated financial statements. Our opinion on the consolidated financial statements does not cover the consolidated Administrators’ Report. In connection with our audit of the consolidated financial statements as at and for the year ended 31 December 2016, our responsibility is to read the consolidated Administrators’ Report and, in doing so, consider whether there is a material inconsistency between the Administrators’ Report and the financial statements, whether the Administrators’ Report includes, in all material respects, the information required by Order of Minister of Public Finance no. 2844/2016, articles 26-27 of the accounting regulations in accordance with International Financial Reporting Standards, and whether, based on our knowledge and understanding of the entity and its environment obtained during our audit of the consolidated financial statements, the information included in the consolidated Administrators’ Report is materially misstated. We are required to report in respect of these matters. Based on the work performed we report that: a) b) in the consolidated Administrators’ Report we have not identified information which is not in accordance, in all material respects, with the information presented in the accompanying consolidated financial statements; the consolidated Administrators’ Report identified above includes, in all material respects, the information required by Order of Minister of Public Finance no. 2844/2016, articles 26-27 of the accounting regulations in accordance with International Financial Reporting Standards. In addition, based on our knowledge and understanding of the entity and its environment acquired during our audit of the consolidated financial statements as at and for the year ended 31 December 2016, we have not identified information included in the consolidated Administrators’ Report that is materially misstated. Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements Management is responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted 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. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit 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. • • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.   184 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 185 From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Other matter 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 this report, or for the opinion we have formed. The engagement partner on the audit resulting in this independent auditors’ report is Razvan Mihai. REFER TO THE ORIGINAL SIGNED ROMANIAN VERSION For and on behalf of KPMG Audit S.R.L.: Razvan Mihai KPMG AUDIT S.R.L. registered with the Chamber of Financial Auditors of Romania under no. 2561/2008 registered with the Chamber of Financial Auditors of Romania under no. 9/2001 Bucharest 9 March 2017 ChAIRMAN OF ThE BOARD OF DIRECTORS, CRISTIAN BUSU SOCIETATEA ENERGETICA ELECTRICA S.A. DIRECTORS’ REPORT FOR 2016 GENERAL MANAGER DAN CATALIN STANCU ChIEF FINANCIAL OFFICER IULIANA ANDRONAChE 186 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 187 SUMMARy Identification details of the report and issuer 1 Highlights 2 Organisational structure 3 Key events in 2016 4 Declaration on Corporate Governance 4.1 Ownership Structure 4.2 Electrica S.A General Meeting of Shareholders 4.3 Electrica S.A. Board of Directors 4.4 The activity of the Board of Directors of Electrica S.A. and of its Consultative Committees 4.5 Executive Management 4.6 The Corporate Governance Code 4.7 The remuneration of Managers and Directors with mandate agreements 4.8 Description of the main features of internal control and risk management systems in relation to the financial reporting process 5 Financial Reporting 5.1 Balance Sheet Items 5.2 Operational Results 6 Other information 6.1 Personnel 6.2 The predictable development of the Company 6.3 Main risk and uncertainties 6.4 Financial Risk Management 6.5 Environmental aspects 6.6 Research and development activity 6.7 Legal documents reported 6.8 Subsequent events 6.9 Key factors, important market directions and trends influencing Electrica’s operational results Appendix 1 Current report - status of compliance with the new Bucharest Stock Exchange Corporate Governance Code as of 9 March 2017 Appendix 2 – Internal audit report for 2016 187 188 188 189 190 190 191 193 197 204 204 205 205 206 207 209 211 211 211 211 212 215 215 216 216 216 217 222 Identification details of the report and issuer Report date: 9 March 2017 Issuer name: Societatea Energetica Electrica S.A. Registered Office: no. 9 Grigore Alexandrescu Street, 1st District, Bucharest, Romania Telephone/fax: +4021.208.5999; +4021.208.5998 Fiscal code: RO13267221 Registered with the Trade Register under no.: J40/7425/2000 Share Capital: RON 3,459,399,290 subscribed and paid up The main characteristics 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 securities issued are traded: As at December 31st, 2016, the company’s shares are listed on the Bucharest Stock Exchange and Global Depository Receipts are listed on the London Stock Exchange. ISIN Bloomberg Symbol Currency Face value Ordinary Shares ROELECACNOR5 0QVZ RON RON 10 Trading market Bursa de Valori Bucuresti REGS Market symbol EL GDRs US83367y2072 ELSA: LI USD RON 40 London Stock Exchange MAINMARKET ELSA 188 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 189 1 hIGhLIGhTS 3 KEy EVENTS IN 2016 Societatea Energetica Electrica S.A., herein after refer to as “Electrica SA” or ”the Company”, registered with the National Trade Registry Office under no. J40/7425/2000, with unique registration code 13267221 and having as main activity “Consulting activities and business management” - NACE Code 7022, aims at the coordination and efficient control of investments in subsidiaries carrying out electricity distribution and supply activities, as well as energy services. Also, the Company carries out services in the electricity balancing market, import-export and trading. A summary of the key indicators is presented below: • In the period ended December 31, 2016, revenues collected by the Company from dividends distributed by its subsidiaries increased by RON 30 million compared to 2015; In the period ended December 31, 2016, the net profit amounted to RON 265 million, increasing by RON 36 million or 12% as compared to 2015. • 2 ORGANISATIONAL STRUCTURE • The Company’s subsidiaries as at December 31st 2016 are the following: Subsidiary Activity Societatea de Distributie a Energiei Electrice Muntenia Nord S.A. Electricity distribution in North Muntenia geographical area Societatea de Distributie a Energiei Electrice Transilvania Nord S.A. Electricity distribution in Northern Transylvania geographical area Societatea de Distributie a Energiei Electrice Transilvania Sud S.A. Electricity distribution in Southern Transylvania geographical area Registration code Headquar- ters % stake as of December 31st, 2015 14506181 Ploiesti 78.0000021% 14476722 Cluj-Napoca 77.999999% 14493260 Brasov 78.0000019% Electrica Furnizare S.A. Electricity supply 28909028 Bucharest 77.9999700% Electrica Serv S.A. Servicii Energetice Muntenia S.A. (in reorganization) Servicii Energetice Oltenia S.A. (in reorganization) Servicii Energetice Moldova S.A.* (in bankruptcy) Servicii Energetice Dobrogea S.A.* (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) 17329505 Bucharest 100% 29384120 Bucharest 100% 29389861 Craiova 100% 29386768 Bacau n/a 29388378 Constanta n/a *) Electrica S.A. lost control over Servicii Energetice Banat S.A. in November 2014 and over Servicii Energetice Dobrogea S.A. in January 2015. Also Electrica S.A. lost control of Moldova Energy Services since January 2016 due to the commencement of bankruptcy proceedings of subsidiary Source: Electrica Electrica’s subsidiaries do not hold any shares issued by the parent company. • • • • • • • Electrica, valid for the entire period of their mandates; Approval of the framework management agreement to be concluded by Electrica with the BoD members; Amendment of the Company name from “Societatea de Distributie si Furnizare a Energiei Electrice – “Electrica” SA” to “Societatea Energetică Electrica S.A.“; Re-appointment of KPMG Audit SRL as auditor for 2016 and 2017 financial years Rejection of the sale of the automatic meter reading system (AMR System) by Electrica SA to its distribution subsidiaries; Appointment of Mr. Willem Jan Antoon henri Schoeber as an independent member of the Board of Directors following the vacancy of a position in the Board of Directors of Electrica, with mandate valid until December 14th, 2019; Approval of consolidated annual the investment plan at Electrica group level (CAPEX plan) corresponding to the 2016 financial exercise supplemented up to RON 844,619 th.; Approval of the proposals for amendment of the Articles of Association of Societatea Energetică Electrica S.A. the Board of Directors revoked Mr. Ioan Rosca from the CEO position and appointed Ms. Iuliana Andronache, current CFO, as interim CEO of Electrica SA; • On September 19th, 2016, the Board of Directors of Electrica SA appointed Mr. Dan Catalin Stancu as CEO of Electrica SA for a mandate of four years starting with October 24th 2016; • On October 4th, 2016 the Board revoked Ms. Gabriela Marin from the position of executive manager coordinating the Human Resources Division of Electrica starting as of October 5th, 2016. THE MAIN EVENTS OF 2016: f Regarding corporate governance • Starting with July 4, 2014, the Company’s shares were listed on the Bucharest Stock Exchange, and Global Depository Receipts were listed on London Stock Exchange. After admission to trading on regulated markets in Bucharest and London, Electrica has taken major steps to align to the best practices of listed companies, by defining and introducing an action plan regarding corporate governance, defining clear lines of responsibility and accountability, implementing a code of conduct, assessing the management by a third party consultant, implementing a whistle- blower policy and drawing up the insider dealing and market manipulation guidelines. The most important decisions of the General Meeting of Electrica’s Shareholders in 2016 (31 March 2016, 27 April 2016, 21 October 2016) refer to: • Approval of the budgets for Electrica and its subsidiaries and of the consolidated investment plan at the level of the Electrica group (CAPEX plan) for the financial year 2016; Approval of the financial statements and profit distribution its subsidiaries for 2015 ; Approval of the remuneration policy of the members of the Board of Directors of for Electrica and • • f Regarding the non-executive and executive management • On January 13th, 2016 Electrica’s Board appointed Mr. Cristian Busu as Chairman with a one-year mandate and established three consultative committees: Audit and Risk Committee, Nomination and Remuneration Committee and Strategy and Corporate Governance Committee; • On February 10th 2016 Mr. Michael Boersma renounced to his position of member of the Board of Directors starting with May 1st 2016. Following Mr. Michael Boersma resignation, on April 26th 2016 the Board appointed Mr. Willem Jan Antoon henri Schoeber as temporary member of the Board of Directors, starting with May 1st 2016; He was confirmed as an independent member of the Board of Directors by the General Meeting of Shareholders held on October 21st 2016 ; • On February 26th, 2016 the Board of Directors and Mr. Ioan Rosca reached a mutual agreement to terminate his mandate as CEO of Electrica no later than June 2016. On March 11th, 2016 190 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 191 f Other relevant events: • On January 8th, 2016 Electrica issued a report on its status of compliance with the new Bucharest Stock Exchange Corporate Governance Code; In h1 2016, Electrica set-up a project team dedicated to develop a network of fast chargers, in collaboration with OMV Petrom; • • • Ongoing internal procedures streamlining, with a focus on Lean Six Sigma implementation at HQ level. Further to the implementation at HQ level, the LSS project will be gradually rolled-out at subsidiaries level; tolerance regarding zero Adopting policies of corruption, fraud and money laundering and combating and avoidance of conflicts of interest, gifts, protocol expenses and prohibition transparency and of stakeholder engagement, in accordance with the Code of Ethics and Professional Conduct in force at the Electrica level and its subsidiaries, during 2016; The group-wide voluntary leave plan deployed is on track; facilitation payments, • • Ongoing projects to the supply related segment: development of key IT and marketing infrastructure ongoing. Major projects started during h1 with some already implemented and the remaining being in the roll-out phase; FP negotiations: discussions ongoing throughout Q1, finalized with no-go decision due to material • Figure 1: Ownership structure on 15 February 2017 difference between buyer-seller price. Results of the negotiation process were made public on March 28th 2016; • Media Campaign: kick-off of the first brand • campaign in Electrica’s history; Loans: Electrica signed three blocked account pledge agreements, with a total value of RON 320 million, related to the credits granted to its distribution subsidiaries to finance the cash shortage; international standards • During the month of september 2016 occurred the certification of Integrated Management System for Quality-Environmental-health and (IMS) Occupational Safety according to requirements of ISO 9001:2015 – “Quality management systems. Requirements.”, ISO 14001:2015 – “ Environmental management systems - Requirements with guidance for use” and OHSAS 18001:2007 – “Occupational health and safety management systems. Requirements”; Certification was realized by the certification organization DEKRA CERTIFICATION, top global provider for audit and certification services; In the second semester of 2016, together with the external consultant ENVISO, the mapping of all processes associated to current organisational structure was realized. • • 4 DECLARATION ON CORPORATE GOVERNANCE 4.1 Ownership Structure The General Meeting of Shareholders (“GMS”) is the main corporate forum of Electrica S.A., with responsibilities of decision regarding matters mentioned in the Articles of Association. Convening, operating, voting process and other provisions regarding GMS are detailed in the Articles of Association of Electrica S.A. Until July 2014, the Romanian state, through the Ministry of Energy, was the sole shareholder of Electrica S.A. As of July 4, 2014, the Company’s shares are listed on the Bucharest Stock Exchange, and Global Depository Receipts are listed on London Stock Exchange. The latest information on ownership structure was made available by the Central Depository on 15 February 2017 and is presented in the following table: Shareholder The Ministry of Energy, Bucharest, Romania The European Bank for Reconstruction and Development, London, UK BNy MELLON DRS, New york, USA Legal entities Individuals TOTAL Source: Central Depository, Electrica S.A. Number of shares 168,751,185 29,944,090 16,610,424 113,679,866 16,954,364 345,939,929 Stake held (% of the share capital) 48.7805% 8.6559% 4.8015% 32.8612% 4.9010% 100% Electrica S.A General Meeting 4.2 of Shareholders According to the Articles of Association updated on 21 October 2016: DUTIES OF THE GENERAL MEETING OF SHAREHOLDERS 1. The general meeting of the shareholders is the governing body of the Company. The general meetings of the shareholders are ordinary and extraordinary. The ordinary the shareholders shall have the following main duties: general meeting of to appoint and revoke the members of the Board and establish the level of their remuneration and other rights according to the legal provisions; to establish the income and expenses budget, to set out the activity schedule; to establish the income and expenses budget consolidated at the group level; to discuss, approve or amend the annual financial statements according to the reports submitted by the Board and the financial auditors; to approve the profit distribution according to 2. 3. • • • • • Following the stabilization process after the June 2014 IPO, Electrica S.A. owns 6,890,593 of its treasury shares, representing 1.99% of the total share capital. These shares entitle Electrica neither to voting rights nor to dividends. Source: Central Depository, Electrica • • • • • 4. the law and to establish the dividend; to decide on the management activity of the directors and on the discharge of liability, in accordance with the law; to decide to file legal actions against the directors, managers as well as financial auditors for damages they caused to the Company by breaching their obligations towards the Company; to decide on mortgaging or leasing or closing of one or more units of the company; to appoint and revokes the financial auditor and to set the minimum term of the financial audit contract; to carry out any other duties set out by the law. The extraordinary general meeting of the shareholders shall decide on the following: • withdrawal of the preference right of shareholders upon subscription of new shares issued by the Company; contracting any type of loans, debts or obligations representing a loan, as well as creating real or personal security related to these loans, in each case in accordance with the competence limits provided in Annex 1 to Articles of Association; operations regarding the acquisition, alienation, exchange or creation of encumbrances over fixed assets of the Company whose value • • 192 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 193 approving investment projects the main or secondary business exceeds, individually or cumulated, during any financial year, 20% of the total fixed assets, less receivables, and leases of tangible assets for periods longer than one year, whose individual or cumulated value towards the same co- contractor or involved persons or with whom it acts in concert exceeds 20% of the fixed assets value, less receivables at the time of entering in the relevant operation, as well as joint ventures in excess of the same value and with a duration of over one year; approving in which the Company will be involved in accordance with the competence limits provided in Annex 1 to these Articles of Association, other than the ones provided in the annual investment plan of the Company; approving the issuance and admission to trading on a regulated market or on an alternative trading system of shares, depositary certificates, rights or other similar financial allotment competencies the instruments; delegated to the Board; changing the legal form; relocation of the registered office; changing objects; increasing the share capital, as well as decreasing or the replenishment of the share capital by issuing new shares, according to the law; the merger and the spin-off; the dissolution of the Company; carrying out any bond issuance, as per the provisions of art. 10 of the Articles of Association, or conversion of a category of bonds in a different category or in shares; approving the conversion of preferential and nominative shares from one category to another, according to the law; any other amendment Association; the establishment or dissolution of secondary representative offices: branches, offices, working points or other similar units without legal provisions; participation in the establishment of new legal persons; approval of the eligibility and criteria with respect to the Board members; approval of the corporate governance strategy of the corporate the Company, governance action plan; donations within the limits of the competence provided in Appendix 1 to these Articles of Association; and approves granting of intragroup loans with a value of more than EUR 50 million per operation; any other decision that requires the approval of the extraordinary general meeting of the shareholders. legal status, according to the the Articles of independence agencies, including to • • • • • • • • • • • • • • • • • • RIGHTS AND OBLIGATIONS DERIVING FROM THE SHARES 1. 2. 3. Each share subscribed and fully paid in by the shareholders, in accordance with the law, grants the shareholders (i) the right to one vote in the general meeting of the shareholders, (ii) the right to elect the management bodies, (iii) the right to participate to the profit distribution, as well as (iv) other rights provided by these Articles of Association and by the legal provisions. The acquisition of the property right over a share by a person, directly or indirectly, has as effect the obtainment of the capacity of shareholder of the Company together with all rights and obligations deriving from this capacity, in accordance with the law and these Articles of Association. The rights and obligations deriving from the shares are transferred to the new acquirers together with the shares. 5. 4. When a nominative share is owned by several persons, the transfer shall be registered only if they appoint a sole representative for exercising the rights derived from the shares. The obligations of the Company are secured by its social patrimony, and the liability of the shareholders is limited to the subscribed share capital. The shareholder that has, in a certain operation, either personally or as representative of another person, an interest contrary to the interest of the Company, must refrain from deliberations regarding the respective operation. 6. THE EXERCISE OF THE RIGHTS BY THE HOLDERS OF THE DEPOSITARY CERTIFICATES 1. 2. 3. The rights and obligations related to the underlying shares based on which the depositary certificates were issued are exercised by the holders of the depositary certificates, proportionally to their holdings of depositary certificates and taking into account the conversion rate between underlying shares and the depositary certificates. The issuer of the depositary certificates in the name of whom the underlying shares are registered, is the shareholder within the meaning and for the application of the Regulation no. 6/2009 regarding the exercise of certain rights of the shareholders in the general meetings of the companies. In this sense, the issuer of the depositary certificates is fully responsible for informing the holders of the depositary certificates in a correct, complete and timely manner, observing the provisions of the issuance documents of the depositary certificates, informative about materials related to a general meeting of shareholders, as made available by the Company to the shareholders. In order to exercise its rights and obligations related to a general meeting of shareholders, the documents and the a holder of depositary certificates will send to the entity where it has opened its account for depositary certificates the voting instructions for the topics on the agenda of the general meeting of the shareholders, so that the respective information is sent to the issuer of the depositary certificates. The issuer of the depositary certificates votes in the general meeting of the shareholders of the Company in accordance with and within the limits of the instructions of the holders of the depositary certificate which have this quality at the reference date. The issuer of the depositary certificates may cast different votes for certain underlying shares in the general meeting of the shareholders than those expressed for other underlying shares. The issuer of the depositary certificates is fully responsible for taking all necessary measures, so that the entity which keeps the records of the holders of the depositary certificates, the intermediaries involved in the custody services for holders of the depositary certificates on the market where the depositary certificates are traded and/ or any other entities involved in recording the holders of the depositary certificates, to send the voting instructions of the holders of the depositary certificates related to the topics on the agenda of the general meeting of the shareholders. Any reference date for the identification of the shareholders which have the right to take part and to vote in the general meeting of the 4. 5. 6. 7. shareholders of the Company and any registration date for the identification of the shareholders which have rights deriving from its shares, as well as any other similar date set by the Company related to any corporate events of the Company will be established in accordance with the applicable legal provisions and with a prior notice sent with at least 15 free calendar days (in Romanian, zile calendaristice libere), to the issuer of the depositary certificates, in the name of which the underlying shares are registered based on which the depositary certificates mentioned above are issued. The reference date will be prior with at least 15 working days to the deadline for submitting the power of attorney related to the vote. TRANSFER OF SHARES 1. 2. The shares are indivisible. The Company shall recognize a sole owner per each share, subject to the provisions of article 11 paragraph (4) from Articles of Association. The partial or total transfer of shares between the shareholders or to third parties shall be carried out according to the terms and procedure provided by the applicable legal provisions, including the capital markets legislation. Useful updated information is available for shareholders at the following website address: http://www.electrica. ro/en/investors/. 4.3 Electrica S.A. Board of Directors During 2016, the Board of Directors has undergone some changes. At the beginning of the year, the Board of Directors consisted of seven non-executive members, appointed by the Ordinary General Meeting of Shareholders on December 14th, 2015. Their term of office, registered based on the decision of the General Meeting of Shareholders, is four years. Four of the seven directors fulfilled the independence criteria provided by the Articles of Association, according to statements presented on the occasion of their nomination. The Board of Directors is responsible for taking all the necessary measures to carry out the activity of the Company as well as to supervise its activity. Its structure, organization, duties and responsibilities are established under the Articles of Association and the Regulation of the Board of Directors. During December 14th, 2015 – May 1st, 2016, the Board of Directors had the following members: • Mr. Cristian Busu – non-executive director, elected as Chairman of the Board of Directors until January 2017; • Ms. Arielle Malard de Rothschild - non-executive independent director; • Mr. Michael Boersma – non-executive independent director; • Mr. Pedro Mielgo Alvarez – non-executive independent director; • Mr. Bogdan Iliescu – non-executive independent director; • Ms. Corina Georgeta Popescu - non-executive director; • Ms. Ioana Alina Dragan - non-executive director. Following Mr. Boersma’s renunciation to his position of member of the Board of Directors of Electrica SA starting with 1st of May 2016, on April 26th, 2016 the Board of Directors appointed Mr. Willem Jan Antoon Henri Schoeber as interim member of the Board of Directors, until the next Ordinary General Meeting of Shareholders of the Company (i.e. October 21st, 2016). 194 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 195 On October 21st, 2016, the General Meeting of Shareholders elected Mr. Willem Jan Antoon Henri Schoeber as non-executive independent director with a mandate period equal with the remaining period until the expiration of the vacant mandate, respectively until 14 December 2019. Four of the seven directors fulfill the independence criteria provided by the Articles of Association, according to statements presented on the occasion of their nomination. We present below the most relevant aspects regarding the professional experience of the members of the Board of Directors at the time of their appointment: Name Cristian Busu Mandate 4 years Professional experience • State Secretary, Ministry of Energy (December 2015 – January 2017). • Member of the Board of Directors and of the Audit Committee at SIF Arielle Malard de Rothschild 4 years Michael Adriaan Boersma 4 years OLTENIA. • Manager at the Central branch of Marfin Bank in Bucharest. • During 2009 – 2013, Financial Manager of Fondul Proprietatea and • • member of the Representatives Committee. Economic Adviser for the Economic Department of the Romanian Government. Lecturer at the Bucharest Academy of Economic Studies, in which capacity he conducted various teaching and research activities. • has an extensive experience in investment banking, spending over 25 years in companies such as Lazard Frères & Cie and Rothschild. She is the founder of the Emerging Markets Division at the Rothschild & Cie investment bank, part of the Rothschild group. Before joining Rothschild & CIE in 1999, she spent 10 years as an investment banker at Lazard Frères & Cie, as part of the Sovereign Advisory team. • • Her experience includes major privatization projects in Romania, Poland, Russia, Hungary and Morocco, coordinating the privatization of companies such as MOL, Nafta Polska, ZIL, BCR or Dacia. • Has experience in M&A projects, working in over 40 such projects in Eastern Europe and Africa. • Member of the Board of Directors of Imerys S.A. (SBF120) and of Rothschild & Co, both listed on the Paris Stock Exchange and of Groupe Lucien Barrière. • • Professor of corporate governance at the TIAS School for Business and Society, University of Tilburg in the Netherlands Senior adviser for First State European Diversified Infrastructure Fund, London, UK. • Non-executive independent director of Nynas AB, Stockholm, Sweden, a company owned by PDVE and Neste Oil Oyj, specializing in the production and trade of oils and bitumen. Chairman of the Board of Directors of Prometheus Energy, based in houston (Texas, U.S.A.). Chairman of the Supervisory Board of TMG, a Dutch listed company, Amsterdam. • • • Member of the Supervisory Board of PostNl, a Dutch listed company, The • • • hague, the Netherlands. Chairman of the Supervisory Board of the VieCuri Medical Center for Noord-Limburg in Venlo, the Netherlands. Chairman/member of foundations/institutions/advisory bodies (e.g. Energy Fund Limburg, Jheronimus Bosch 500, Protective preference shares FUGRO). From 2003 until the end of 2009 - CEO and Chairman of the Executive Board of Directors of Essent, the largest Dutch utility. Pedro Mielgo Alvarez 4 years • Non-executive Chairman, Madrilena Red de Gas, Madrid Spain. • Chairman and Managing Partner of the Fund GP, Nereo GreenCapital, Luxembourg. • Non-executive Chairman, Ingenio 3000, Madrid, Spain. Independent Director, Landis & Gyr SAU, Sevilla, Spain. • From 2008 until 2011 - non-executive Chairman, Centimetri, Milan, Italy. • From 2008 until 2011 - Independent Director, Landis & Gyr AG, Zug, • Switzerland. From 1999 until 2004 - Director, Redesur, Lima, Peru. From 1997 until 2004 – Chairman & CEO, Red Electrica de Espana, Madrid, Spain. From 1995 until 1997 – General Manager, Iniexport, Madrid, Spain. From 1991 until 1997 – Director, Marketing & Sales, Intec, Madrid, Spain. • • • • Bogdan George Iliescu 4 years • • • • • • Board member, Nominalization and Remuneration Committee member, Rating and Audit Committee member, Strategy committee member, SNTGN Transgaz SA, Medias. Executive Manager, Corporate Finance Department, BRD – Group Societe Generale. From 2007 – 2014 – General Manager, BRD Corporate Finance. From 2005 until 2009 – Board member, SAI INVESTICA ASSET MANAGEMENT SA, Bucharest. From 2001 – 2007 – Project Manager, BRD/SG Corporate Finance. From 1997 – 2001 – Analyst, BRD – Group Societe Generale. Corina Georgeta Popescu 4 years State Secretary, Ministry of Energy. • • head of Power Assets Department, OMV Petrom SA. • From 2011 until 2015 – Bucharest Branch Manager, OMV Trading GmbH Viena, Austria. From 2008 until 2011 – Manager of Energy Market Regulation and Supervision, E-ON Romania. From 2007 until 2008, Head of Power Acquisition Department, E-ON Moldova Furnizare. From 2001 until 2006 – Head of Distribution Service, Electrica SA From 1998 until 2001 – Head of Operation Service, Electrica SA – Distribution & Supply Bucharest Branch From 1996 until 1998 – Chief Deputy Division, North Network Division, CONEL - Distribution & Supply Bucharest Branch. From 1991 until 1996 - North Network Division, RENEL - Distribution & Supply Bucharest Branch • • • • • • Ioana Alina Dragan 4 years • Expert, Department of Administration of State Ownership in Energy, Ministry of Energy. • Member of Shareholders General Assembly, OPCOM – Romanian Gas and electricity market operator. • Member of Board of Directors, National Company of Uranium SA; • From 2013 until 2014, Member of Board of Directors, SN Nuclearelectrica SA. 2014, Adviser of Minister, Ministry of Energy. From 2012 – 2013, Country Financial Specialist, Responsible for Siemens Financial Services Department, Siemens Romania. From 2008 until 2012, Bonne GAMME Relationship Manager, BRD – Group Societe Generale – Beller Agency. From 2007 until 2008, Grand Public Relationship Manager, BRD – Group Societe Generale – Beller Agency. From 2005 until 2007, Front Desk Operator, BRD – Group Societe Generale – ASE Agency. • • • • • 196 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 197 Willem Jan Antoon Henri Schoeber 4 years Independent business consultant (since 2013). • • Member of the board of directors of Neste Oyj (helsinki, Finland), of • • • • the supervisory board of Gasunie NV (Groningen, the Netherlands) and member of the audit committees of these boards (since 2013). From 2010-2015: Chair of the Boards of Directors of EWE Turkey holding AŞ (Istanbul, Turkey), Bursagaz (Bursa, Turkey), Kayserigaz (Kayseri, Turkey) From 2010-2013: Member of the executive board of EWE AG (Oldenburg, Germany), responsible for power generation and for the EWE utility businesses in Turkey and Poland From 2007-2011: Chair of the executive board of swb AG (Bremen, Germany) From 1977-2007: Various positions in the Royal Dutch Shell group in the Netherlands, France, Germany and the USA, with senior management positions in refining, i.a. refinery manager in Reichstett (France) and Cologne (Germany) Source: Electrica At the date of this report, the members of the Board of Directors are as follows: No. Name Status Date of first election Term of office (starting with December 14th, 2015) 4 years 1. 2. 3. 4. 5. 6. 7. Cristian Busu Arielle Malard de Rothschild Ioana Dragan non-executive director, chairman 4 years 4 years non-executive, independent director non-executive director Corina Popescu 4 years non-executive director Bogdan Iliescu Pedro Mielgo Alvarez Willem Jan Antoon henri Schoeber 4 years 4 years 4 years non-executive, independent director non-executive, independent director non-executive, independent director September 22nd, 2014 September 22nd, 2014 December 14th, 2015 December 14th, 2015 December 14th, 2015 December 14th, 2015 April 26th, 2016 Source: Electrica More details on the Board members’ biographies can be found on the company’s website. Mr. Cristian Busu was elected Chairman of the Board of Directors during the new Board’s first meeting, which took place on January 13th, 2016, for a term of one year, and reelected in January 2017 for another year. In its first meeting, held on January 13th, 2016, the new Board of Directors decided the composition of committees, as follows: a) The Nomination and Remuneration Committee Mr. Bogdan Iliescu - Chair of the committee Ms. Arielle Malard de Rothschild Ms. Corina Popescu • • • b) The Audit Committee • • • Mr. Pedro Mielgo Alvarez - Chair of the committee Ms. Arielle Malard de Rothschild Mr. Bogdan Iliescu c) The Strategy and Corporate Governance Committee • • • Mr. Michael Boersma - Chair of the committee (until his resignation as of May 1st, 2016, when his place was taken by Mr. Willem Schoeber) Ms. Ioana Dragan Mr. Cristian Busu. Consultative committees’ members are elected for a period of one year. The organization, duties and responsibilities of each committee are set under the Articles of Association of Electrica S.A., respectively in the committee charters - an integral part of the Corporate Governance Code of the Company. In its meeting held in January 2017, the Board decided to maintain the same composition of the committees, for another year. According to the information held, there is no agreement, understanding or family relation between the directors of the Company and another person who may have contributed to their appointment as directors. At 1st March 2017, no member of the Board of Directors held any Electrica S.A. shares. According to the available information, the Board members were not involved in litigations or administrative proceedings regarding their activity within the Company in the last five years or regarding their capacity to fulfill their duties within the Company. The activity of the Board of Directors of Electrica S.A. and of its 4.4 Consultative Committees In 2016, the Board of Directors met 30 times. Out of the 30 meetings that took place in 2016, 16 meetings were organized with physical presence of the members and 14 were held electronically, in accordance with the provisions of art. 17 paragraph 22 (respectively art. 18 alin. 23 after October 21st, 2016) of the Articles of Association of the Company. We present below the situation of Board members’ presence in the meetings of the Board of Directors and its committees in 2016: Name The Board of Directors The Audit and Risk Committee The Nomination and Remuneration Committee (no. of meetings - 30) (no. of meetings - 10) (no. of meetings - 15) The Strategy and Corporate Governance Committee (no. of meetings - 11) Cristian Busu Arielle Malard de Rothschild* Corina Popescu Ioana Dragan Bogdan Iliescu Pedro Mielgo Alvarez Willem Schoeber* Michael Boersma* 30 29 30 30 30 29 19 8 - 9 - - 10 10 - - - 14 15 - 15 - - - 10 - - 11 - - 8 3 *Note: in one meeting of the Board of Directors, Ms. Arielle Malard de Rothschild was represented by Mr. Cristian Busu, based on the mandate given. The same, Mr. Willem Schoeber was represented in one meeting by Mr. Pedro Mielgo Alvarez, and Mr. Michael Boersma was represented in two meetings of the Board of Directors by Ms. Arielle Malard de Rothschild, based on the mandates given. Source: Electrica 198 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 199 The main areas of interest and decisions adopted by the Board of Directors in 2016 refer to: • of of and and Election of the Chairman of the Board of Directors and establishment of the consultative committees and election of their chairman; Continuing the project started in 2015 aiming to review and align the Articles of Association of Electrica and of its subsidiaries, considering more clearly the scope of activity and the level of management, responsibilities by controlled delegation of competence and implementation of a new corporate governance at group level, based on the new Corporate issued by the Bucharest Governance Code Stock Exchange (BSE Code) and the key points underlined by the Board’s evaluation process. The EGMS approved the proposed revised Articles of Association on October 21st, 2016. Revision and endorsement of ELSA subsidiaries Articles of Association; The update of the charter of the Board of Directors and of the charters of the committees set up by the Board; Electrica Revision endorsement SA’s financial statements at individual and consolidated levels for the financial year of 2015; Revision financial endorsement statements of Company’s subsidiaries for the financial year of 2015; Revision and endorsement of Electrica SA’s income and expenses budget at standalone and consolidated levels for the financial year of 2016; Revision and endorsement of income and expenses budgets of company’s subsidiaries for the financial year of 2016; Revision and endorsement of the consolidated investment plan for the 2016 financial year; Analysis, of approval different proposals submitted by the executive and management investment opportunities (e.g.: supervising the negotiations with Fondul Proprietatea regarding the acquisition of the minority stakes within distribution and supply operators); Preparing and submitting for the GMS approval the new Remuneration Policy and mandate contracts, the including members of the Board of Directors. Reviewing proposals on reshaping Group’s improved activity, aiming processes flows and an increased efficiency for core business, but also to create the basis for better operational and financial results, at individual and consolidated level. Setting the annual calendar of the Board meetings and the key documents and reports to be presented by the executive management; revised KPIs coordination acquisitions implement regarding and for to • • • • • • • • • • • • • • • • • • • • • • • • for strengthening Reviewing the BoD composition in subsidiaries, to assure a consistent approach and to support subsidiaries development and market the positioning, as well the governance across the group; Approval of the Market Abuse Regulation. Approval of the Treasury Policy; Approval of the Delegation of Authority Policy; Approval of the Internal Audit Charter and of the Code of Ethics for the internal auditor. Approval of the audit plan for 2017; Approval of the Code of ethics of the internal auditor; Approval of the Internal Audit Policies and Manual of Procedures; Approval of the CSR Plan and Policies for 2016, aligned to the PR, Communication and CSR Strategy; The appointment of a new CEO starting with October 24th, 2016; Approval of the new organisational chart, to enter into force starting with January 1st, 2017, having as objective to streamline the reporting lines in Electrica and at the Group level and to use and combine the necessary competencies and responsibilities in more efficient way; Revision and approval of the executive management KPIs achievement for 2015 and the new ones for 2016 – at Electrica and Group level. In 2017, until the date of the Report, the Board of Directors met seven times (out of which two meetings were held electronically) and adopted important decisions for both its organization and the development and operational orientation of the Company. The main decisions adopted by the Board of Directors during meetings held in 2017 refer to: • consultative Election of the Chairman of the Board of Directors. Reviewing committees’ composition and election of their chairpersons. Analysis and endorsement of Electrica SA’s budget, of the budgets of its subsidiaries and of the consolidated budget at Group level for 2017. • • the • Decisions regarding the mandate agreements the General Managers of subsidiaries for of (termination/ prolongation/ confirmation specific period of time). The termination of the mandate agreement of the executive manager of the Sales Coordination Division of Electrica SA. The appointment of the Chief Distribution Officer of Electrica SA. The approval of Electrica Dividends Policy. The approval of Policy on ethical career • • • • • • • of and management. Electrica Revision endorsement SA’s financial statements at individual and consolidated levels for the financial year of 2016. financial endorsement Revision statements of Company’s subsidiaries for the financial year of 2016. Revision and approval of the individual and investment plan for the 2016 consolidated financial year. and of Based on the main conclusions and objectives set following the evaluation process carried out in 2015, the Board of Directors has undergone several important projects during 2016 and until the date of the Report: f Improving the corporate governance framework at Group level, having 2 main pillars: 1. The revision of the Articles of Association of Electrica and of its subsidiaries - project started in late 2015, aiming to review and align the corporate governance rules within the Group, considering more clearly the scope of activity and the responsibilities by level of management, controlled delegation of competence and the implementation of a new corporate governance at group level. The EGMS finally approved the new Electrica Articles of Association on 21 October 2016; 2. Consequently, the charters of the Board and of the committees were approached, as the most important tools to address the main areas of partial or non-compliance with the new Bucharest Stock Exchange Code provisions and the action plan related to the improvement of the Board’s activity. The new charters of Electrica were discussed an finally approved during the meetings of November and December; 3. The next step is to implement these principles within subsidiaries and to define and apply appropriate governance policies at group level; f Overseeing the activity at Group level: 1. Asking, receiving and analysing more information 2. on the activity of subsidiaries; Improving the communication with the executive management and creating a relevant tool for the periodic reporting of Electrica and Group activity; 3. Discussing during several meetings and analysing the materials and proposals regarding the Strategy on natural gas supply, Business Plan for gas supply and the Marketing Strategy; f Consolidating the executive management team: the 1. Following termination of Mr. Ioan Rosca’s mandate as the mutual agreement on 2. in the (hR manager, changes team Division CEO of Electrica, in March the Board nominated Ms. Iuliana Andronache as interim CEO and in October appointed Mr. Catalin Stancu as CEO of Electrica; executive Implementing Sales management Chief Coordination Distribution Officer) the roles and competencies and reviewing the split of responsibilities among the executive management team members. In this context, a process of recruiting executive managers for the positions of director of operations, IT and human resources and for defined key positions people was carried out; redefining manager, and 3. Approving the new organizational chart and introducing positions of performance managers middle level (MKP – Management Key Positions); 4. Approving the 2017 KPIs structure for Electrica SA’s managers and the way of cascading from the general manager level to managers and from ELSA to its subsidiaries; 5. Approving new remuneration (structure and level) and KPIs for subsidiaries. BOARD OF DIRECTORS EVALUATION The Board of Directors, whose term started on December 14, 2015, has carried out an evaluation of its activity – at the end of 2015 with the support of an external advisor, a well-established international company, with in corporate governance. The results of this analysis have been reported in the annual report for 2015. comprehensive experience An internal evaluation of the Board activities was carried out in December 2016, based on a questionnaire defined and thoroughly discussed by the Board members. The questionnaire served to establish a self- assessment of the 2016 achievements of the Board in the following areas: • The main objectives defined by the General Meeting of Shareholders for the Board: Group Placing Corporate Governance, strategy, Investment investments and of financial achievement in the distribution companies Impact of the Board on the functioning of the company • • Quality of functioning of the Board and its internal processes, including Board culture Individual aspects of the Board work for each Board member Role and functioning of the Chair. • • 200 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 201 The results of the questionnaire were discussed among the Board members in their meeting of February 10th, 2017. The main conclusions and observations were the following: 1. The overall progress in the functioning of the company was not at the desired level, hampered by the fact, that the Board decided in March 2016 not to extend the mandate of the existing CEO and to start the recruitment of a new CEO with the support of an professional executive search agency. The new CEO could only be contracted in September 2016 and started his activities on October 24th, 2016. The CEO selection has been a top priority in the Board agenda 2016. The same holds for further reinforcements of the Company’s top management that remain a priority for the Board in 2017. 2. The achievements on the Board’s own KPIs, most notably on the investments realised and commissioned during 2016 in the distribution companies, that influence future profitability, have been below the Board’s ambitions and expectations. The Board has taken organisational measures to improve this in the future and requested Management to proceed with restructuring and business process redesign, in particular (but not only) in this area. 3. The process for a profitable deployment of the funds available to the company has continuous in the Board. During 2016 several attention external growth projects were thoroughly analysed and negotiations in this respect were carried out and are still under way. 4. The governance and management of the company have been reinforced by taking measures in the areas of management composition, composition of boards of subsidiaries and revised board charters. In doing so, the Board is striving for a consistent execution of company strategies and operational excellence both in parent company and subsidiaries. The board focuses on reaching a high standard of corporate governance in the company. 5. The identification of risks and their mitigation has intensively been discussed in the Board at several occasions, in particular in the wider area of energy trading. Proprietary trading in Electrica has been stopped in this context. Further work is needed in the organisation to bring the company to an international standard of risk management. 6. The Board has identified the need to improve the distribution of its time over formal requirements and activities coming from the organisation on the one hand and its own agenda and key priorities on the other. It has established an annual rolling agenda where strategic items will get more attention and it has reinforced the follow-up of its own action items – also in reaction to previous year’s evaluation. Attention remains needed to follow this through. 7. The Board’s own meeting quality and culture are evaluated regularly with a feedback session planned after every meeting. All board members participate actively and the Board culture is stimulating for deviating opinions that are taken for consideration by other members. No conflicts of interests for Board members have been observed in their Board work. 8. The Chair received positive feedback and has been re-elected unanimously by the other Board members. THE NOMINATION AND REMUNERATION COMMITTEE The Nomination and Remuneration Committee consists of three non-executive Board of Directors members, the majority of them being independent members, while the chairman of the committee is an independent director. The role of the Committee is to propose candidates for the Board of Directors, to develop and propose to the Board the selection procedure of candidates for the positions of managers and other management positions, to recommend to the Board candidates for the positions listed, to formulate proposals on the remuneration of directors and other management positions. The Committee has the following responsibilities concerning nomination matters: • recommending to the Board a nomination policy, including a target Board profile, process and principles for shareholders to consider when proposing candidates for director positions at the Company, and making recommendations to the Board regarding the appointment of interim directors in accordance with the policy; reviewing the implementation of the nomination policy, preparing a report to the Board on its implementation, and presenting a summary of this report in the Directors’ Report; advising the Board on the appointment and the General Manager, making dismissal of on recommendations appointment the Company’s executive and dismissal of management team after considering the views of the General Manager, and making proposals on the appointment and dismissal of subsidiary board members in accordance with the Group Governance Policy; recommending to the Board policies in the human resources field, including those covering recruitment and termination, talent management and development, and succession planning across the Company and its subsidiaries (the Group); overseeing the process for the annual evaluation of the effectiveness of the Board and its consultative committees; the • • • • • periodically assessing the size, composition and committee structure of the Board and making recommendations to the Board with regard to any changes; • making recommendations to the Board on continuous skill development programmes for Board members and executive management; overseeing the the nomination process of general managers and executive managers in the subsidiaries according to the nomination and remuneration Policy. • • The Committee has the following duties in the field of remuneration: • making recommendations to the Board in relation incentive and severance to the remuneration, compensation policies of the Company; advising the Board on the structure of the remuneration framework for Board members; • making recommendations to the Board in relation to the remuneration of the General Manager and including the main other executive managers, remuneration components, performance objectives and appraisal methodology; • making recommendations to the Board on the remuneration of subsidiary board members and the general limits of remuneration for subsidiary management; • monitoring compensation trends within industries • relevant to the Group; overseeing the remuneration process of the general managers and executive managers in the subsidiaries according to the Nomination and Remuneration Policy. • • • • strengthening the governance across the group. Revision of the executive management KPIs achievement for 2015 and the new ones for 2016 – at Electrica and Group level. Recommendation on implementing new mandate contracts for the executive management positions in Electrica and subsidiaries, as well as for other key positions. Recommendation on the 2017 KPIs structure for Electrica SA’s managers and the way of cascading from the general manager level to managers and from ELSA to its subsidiaries; Recommendation on (structure and level) and KPIs for subsidiaries. remuneration the new THE AUDIT AND RISK COMMITTEE The Committee is made up of three members, most of them independent directors, the chairman is a non-executive independent director. This structure provided the necessary expertise in finance and risk management, according to legal requirements. The main role of the Committee is to support the Board in fulfilling its duties of verifying the efficiency of Company’s financial reporting, internal control and risk management. While fulfilling this role, the Committee advises the Board regarding the assessment of the Annual Report and Annual Financial Statements, whether the documents are accurate, balanced and comprehensive and provide all the necessary information for the shareholders’ evaluation of the financial performance. The Nomination and Remuneration Committee met 19 during January 1st, 2016 – March 9th, 2017. During these meetings, the following topics were discussed and referred to the Board of Directors for approval: • on the structure Recommendations on the remuneration of Board members and their framework – management agreement. Recommendations and remuneration of the subsidiaries Board members. Recommendations on the appointment of executive directors and performance criteria. Recommendations on the organizational structure of the Electrica SA. Recommendation on the appointment of the new CEO of Electrica SA. Recommendation on the appointment of the new CEO of Electrica Serv. Recommendation as the mandate agreements of the General Managers of subsidiaries (termination/ prolongation/ for specific period of time). Recommendation on the appointment of the Chief Distribution Officer of Electrica SA. Reviewing the BoD composition in subsidiaries for confirmation regards • • • • • • • • The Committee has the following duties in terms of financial reporting: • examining the integrity of annual and interim financial statements or disclosures for Electrica and its subsidiaries (the Group) at standalone and consolidated levels; regularly reviewing the adequacy of the Group’s accounting policies; reviewing and recommending the Company’s financial forecast policy to the Board for approval; advising the Board on whether the content of the annual report, taken as a whole, represents a fair, balanced and understandable account for shareholders and provides them with the information necessary to assess the Company’s performance. • • • Regarding the auditing and internal control matters, the Committee has the following responsibilities: • approving a Group-wide, annual risk-based audit plan as well as any material changes to the plan, and receiving regular reports on activities, key findings, and follow up regarding internal audit reports; 202 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 203 • the Board on the appointment, advising removal and remuneration of the Head of Internal Audit; • • • monitoring the adequacy, effectiveness and independence of the internal audit function; • making recommendations to the Board on the appointment, rotation or dismissal of the Company’s external auditor; reviewing the plan, work and findings of the external auditor; assessing the independence and objectivity of the external auditor and monitoring compliance with relevant ethical and professional guidance, including the requirements on the rotation of audit partners regularly and implementation of key internal control policies, including policies for detecting fraud and the prevention of bribery; reviewing related party transactions line with a policy developed by the Committee and approved by the Board; reviewing annually a report by the head of Internal Audit assessing the effectiveness of the system of internal control across the Group. reviewing adequacy the in • • • The Committee has the following responsibilities concerning risk management matters: • reviewing regularly the main risks facing the Company and Group, recommending to the Board relevant policies for their identification, mapping, management and mitigation of risk; reviewing annually a report from management assessing the effectiveness of the system of risk management across the Group; advising the Board on equity and debt financing, including proposals for contracting any type of loans and securities associated with these loans; advising the Board on its recommendations regarding major economic transactions within the authority of the General Meeting of Shareholders, assessing any associated risks regarding such transactions. • • • The Audit and Risk Committee met 13 times during January 1st, 2016 – March 9th, 2017. During these meetings, the following were discussed and referred to the Board of Directors for debate and, when applicable, approval/endorsement: • • • The Audit Committee Charter. The audit plan for 2016. The manual. The internal audit charter. The financial statements of Electrica S.A. at standalone and consolidated levels for the financial year of 2015 and 2016, as well as financial statements of Company’s subsidiaries internal audit policies and procedures • • for the financial year of 2015 and 2016. The income and expenses of Electrica S.A. at standalone and consolidated levels for the financial years of 2016 and the revenue and expenditure budgets of Company’s subsidiaries for the financial years of 2016. Various reports submitted by the internal auditor on missions carried out within Electrica SA and its subsidiaries and as whistle blower reports. Annual report on the internal audit activity for 2016. Annual report on integrity warnings for 2016. 2016 Individual preliminary unaudited results of Electrica SA. Annual report on risk management activity for 2016. Report on the internal control effectiveness. • • • • • • • The internal audit activity is carried out by a separate division from a structural point of view (the Internal Audit Department), within the Company. In order to ensure the fulfilment of its main functions, it reports to the Board of Directors through the Audit and Risk Committee and administratively - to the CEO. THE STRATEGY AND CORPORATE GOVERNANCE COMMITTEE The Committee was made up of three non-executive directors, the chairman being a non-executive independent director. The Committee has the following duties in terms of strategy: • making proposals to the Board the Board on the development of the medium-term strategic plan, making recommendations on the strategic direction, priorities and long term objectives of Electrica and its subsidiaries (the Group); reviewing management proposals on the Group’s consolidated annual budget, subsidiary annual budgets, and CAPEX plans for the Group, and making relevant recommendations to the Board; in monitoring and supporting assessing the Group’s performance in light of the approved strategic plan, budgets, industry trends, local and regional market trends, competiveness and advances in technology; periodically reviewing the overall strategic planning process, including the process for developing a medium-term strategic plan; advising the Board on proposed acquisitions, joint- divestments, ventures, and cooperation projects, particularly assessing their alignment with the Group’s strategy; investment projects, • • • • • performing any other activities or responsibilities on strategy matters as may be delegated to the Committee, from time to time, by the Board. the Regarding restructuring, they mainly relate to: • tasks of the Committee on reviewing and making recommendations to the Board with respect to, the development and implementation of the Group’s overall including restructuring plans and objectives, any determination regarding the disposition or rationalization of core businesses; regularly reviewing the organisational structure the Company, and making and chart of recommendations to the Board; performing any other activities or responsibilities on restructuring matters as may be delegated to the Committee, from time to time, by the Board. At the same time, the Committee has duties in terms of corporate governance: • to and overseeing and monitoring the Company’s compliance with contractual legal obligations on corporate governance, as well as other applicable corporate governance principles, and making recommendations to the Board; regularly reviewing the Company’s Corporate Governance Code, Board Charter and the Company’s Articles of Association, and making recommendations to the Board on relevant amendments the Company’s corporate governance policy and documentation; recommending the Group Governance Policy to the Board for approval and regularly reviewing it thereafter; reviewing the chart of authorities for the Company in order to ensure that the delegation of authorities for effective and efficient decision-making process, and making recommendations to the Board; reviewing the Company’s policy for corporate social stakeholder engagement, and making recommendations to the Board; to management allows responsibility and • • • • • • • making recommendations to the Board on improving the quality of information flows to the Board including the adequacy of reports to the Board, key performance indicators presented to the Board, and guidelines for Board papers and presentations; preparing other reports or materials on corporate governance as may be requested by the Board. • On June 30th, 2016, the Committee changed his name from The Strategy, Restructuring and Corporate Governance Committee to the Strategy and Corporate Governance Committee). During January 1st, 2016 – March 9th, 2017, the Committee met 16 times and discussed and referred to the Board of Directors for approval/endorsement: • Revision of the Articles of Association of Electrica and of its subsidiaries, as well as of Electrica’s Board and its committees’ charters – this project required several iterations (overall 9 meetings of the Committee); Electrica Furnizare Strategy on the natural gas supply activity and the completion of the Electrica Furnizare object of activity; Electrica Furnizare Business Plan for gas supply. CSR Policies. ELSA Foundation. The rebranding of the subsidiaries. Risk Policy and Acquisition and Sales Strategy for gas and energy at Group level. Process for the (BoD) functioning. The income and expenses budget of Electrica levels S.A. at standalone and consolidated for 2017 financial year and the revenue and expenditure budgets of Company’s subsidiaries for 2017 financial year. Recommendation on different opportunities on the market. Recommendation on Regulation. Recommendation on the Delegation of Authority Policy. Several reviews and recommendations regarding the Capex and Commissioning plans for 2016 and 2017 – quantitative and qualitative analysis. improvement of the Board the Market Abuse investment • • • • • • • • • • • 4.5 Executive Management In accordance with provisions of the Articles of Association of the Company (approved by GMS on 21 October 2016), the Board of Directors appoints and revokes the CEO, as well as the other executives with mandates and also approves their empowerments. The CEO carries out the activity according to the provisions of the mandate contract concluded with the Company. On 26 February 2016, the Board of Directors and Mr. Ioan Rosca, CEO at that time, announced that they had reached a mutual agreement on terminating his mandate as CEO of Electrica S.A. no later than June 2016. On 11 March 2016, the Board of Directors revoked Mr. Rosca from the CEO position and appointed Ms. Iuliana Andronache, current CFO, as interim CEO of Electrica SA. During the meeting held on 19 September 2016, the Board of Directors appointed Mr. Dan Catalin Stancu as CEO of Electrica SA for a mandate of four years starting with October 24, 2016. 204 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 205 During the meeting held on 4 October 2016, the Board revoked Ms. Gabriela Marin from the position of executive manager coordinating the Human Resources Division of Electrica starting as of October 5th, 2016. At the end of 2016, the executive managers are: • Mr. Dan Catalin Stancu – CEO with a mandate of four years starting with 24 October 2016; • Ms. Iuliana Andronache – CFO, with a mandate of four years starting with 27 October 2015; • Ms. Alexandra Romana Augusta Popescu Borislavschi – Executive Manager of Strategy and Corporate Governance Division, with a mandate of four years starting with 4 August 2015; to • Mr. Ramiro-Robert-Eduard Angelescu – Executive Manager of Sales Coordination Division with a mandate of four years starting with 4 August 2015 According the best practices applied by companies listed on international markets, regarding the implementation of a succession plan for key- positions, the Nomination and Remuneration Committee coordinates the process of selection suitable applicants for the vacant Director positions of Electrica SA. The Nomination and Remuneration Committee is supported in this approach by an international consulting firm specialized in recruiting top management, in order to complete the selection process as soon as possible. According to information held by the Company, family is no contract, understanding or there relationship between the directors of the Company and another person who may have contributed to their appointment as directors. The Corporate Governance 4.6 Code executive management of the company. its corporate governance principles Electrica S.A. has continuously developed and updated in order to meet the capital market requirements and to apply the best practices in corporate governance as well as to develop opportunities and increase competitiveness. Therefore, in October 2016 the company’s Articles of Association was updated, following the approval of the General Meeting of Shareholders held on October 21st, 2016. Later, in January 2017, the charter of the Board of Directors and the charters of the committees had also been updated. In September 2015 the BSE issued a new Corporate Governance Code (“the BSE’s Code” or “BSE’s CGC), which entered into force as of January 4th, 2016. The provisions of the new Code are being carefully examined and Company’s compliance therewith is being thoroughly assessed. The “Comply or Explain” Statement presents the compliance level of the Company with the new provisions of BSE’s CGC code. Electrica S.A. has been in full compliance with most of these requirements. Regarding the aspects in which the company is not in full compliance, we mention that concrete actions will be taken in order to improve the degree of compliance in the shortest time (more details can be found in Appendix 1). Further consideration will be applied to Code’s provisions and any subsequent progress made by the Company in achieving compliance will be reported to the capital market. The CGC is also a guide for the management and the employees of Electrica S.A. and other stakeholders regarding the business conduct and governance matters and provides information about aspects of the Company’s principles and policies. It also incorporates the Code of Ethics and Professional Conduct, Appendix 7 of the CGC. Electrica adhered to and has been willfully applying the provisions of the Corporate Governance Code since the fiscal year 2014. Electrica had officially adopted the Corporate Governance Code (“CGC ELSA”) since February 2015 and made it available on the Company’s website for all interested parties’ benefit. This Corporate Governance Code embeds Electrica’s general principles and conduct rules which set forth the corporate values, the responsibilities, obligations and business conduct of the Company. The ELSA CGC comprises also Electrica’s Articles of Association, the charters of the Board of Directors and those of its committees, and all these documents together contain the terms of reference the administrative and and responsibilities of In compliance with Company’s policies and with the procedures of the Code of Ethics and Professional Conduct, the Audit and Risk Committee ensures that the Company`s activity is carried on with honesty and integrity, including the approval of the whistleblower policy. The main purpose of the whistleblower policy is to protect the Company from ethical deviations, frauds and any other aspects of non-compliance that would otherwise could cause image and/or commercial prejudice or even involve legal sanctions, thus damaging the prestige and profitability of the Company. This procedure can be found on Electrica’s website. Whereas the shares of the Company are allowed for trading both on the regulated market administered by Bucharest Stock Exchange (BSE), and on the market managed by the London Stock Exchange (LSE), Electrica SA is subject to the imperative rules imposed by the national and European laws on market abuse regarding the arrangements applicable to inside information. Therefore, the inside trading and market manipulation guidelines are presented in Appendix 6 of the CGC. The internal control represents all measures ordered by the ELSA management and their implementation by all personnel members regarding the organizational structure, procedures, methods, the applied instruments, for the purpose of techniques and achieving the organizational goals, including all control forms performed at company level. The remuneration of 4.7 Managers and Directors with mandate agreements 2016 1,039,030 2015 1,483,880 Management remuneration Source: Electrica At the beginning of 2016, Electrica SA`s management consisted in five managers remunerated based on mandate agreement. For two out of the five managers, the mandate agreements ended in March 2016, respectively in October 2016, and in October 2016 a new manager was designated based on same mandate agreement type. As of December 31st 2016 the Company had four managers with mandate agreement. The remuneration granted to the Board of Directors members and in General to Shareholders Meeting were, as follows: representatives Board of Directors members Total Source: Electrica 2016 2,136,888 2015 863,361 2,136,888 863,361 Until 14 December 2015, the Board of Directors was composed of five members and of seven members after this date. Also, the fixed monthly remuneration increased and remunerations were established for participations to the meetings of the Board of Directors and its committees. According to the remuneration policy approved by the General Shareholders Meeting from 31 March 2016, the maximum annual paid meetings is capped at 12 for Board of Directors and at six for each of the committees. During 2016 and 2015 there were no loans granted to managers and directors. The internal control and the risk management systems have the following main goals: • protecting organizational resources against waste, negligence, abuses, fraud etc.; compliance with the legislation and with the internal regulations; the reliability of financial reporting (accuracy, completeness and correct presentation); ensuring an environment based on identifying, understanding and controlling risks, environment which will the organizational goals; efficient and effective business operations. contribute achieving to • • • • The achievement of these goals is supported by means of: • recruitment of personnel with an adequate level of competency, in accordance with the company’s needs, and the existence of a plan of continuous training which would allow for an updating of specific knowledge or a supplementation of internal resources with external consultants, whenever necessary; clear definition of responsibilities of each person involved in the organizational process; segregation of duties regarding the carrying out of operations among the personnel, so that the approval, control and registration duties are adequately assigned to different persons (as per the Company’s organizational chart); elaboration and implementation of regulations, policies, procedures, forms etc.; the existence of a Guide for Accounting Policies, elaborated in accordance with the requirements of the legislation in force, approved by the Board of Directors; the existence of a schedule and a well-defined process regarding the elaboration of accounting and financial information in accordance with the reporting requirements (financial and accounting, of the capital market) and their appropriate verification and approval by the Board of Directors, for the purpose of publishing them. • • • • 4.8 Description of the main features of internal control and risk management systems in relation to the financial reporting process The framework of ELSA’s internal control system consists of the following elements: • Control environment – The existence of a control environment represents the basis of an efficient internal control system. It consists of the commitment towards integrity and ethical values (for this purpose, a series of policies on 206 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 207 The internal audit missions evaluate the internal control system, the risks and the implemented control strategies, and present initiatives, proposals, solutions and recommendations for mitigating the risks of fraud and for improving control strategies (refer to Appendix 2 attached to this report). The internal audit includes, but is not limited to, the examination and evaluation of the adequate nature and the efficiency of the organization’s corporate governance, of risk management, as well as of internal controls and of quality performance in carrying out the assigned responsibilities, in order to achieve the declared purposes and goals of the organization. The Guide for Accounting Policies is consistently applied in all companies within the Group, for the purpose of ensuring an accounting treatment equally applied for the same business situations. This guide is revised based on the changes made to the International Financial Reporting Standards. • • • to reduce zero tolerance towards corruption, fraud and money-laundering, avoiding and fighting against conflicts of interest, gifts, protocol expenses, and forbidding facilitating payments, transparency and the involvement of stakeholders), as well as organizational measures (policies on the delegation of powers and responsibilities); Evaluation of risks – Generally, all processes are found within the scope of the internal control system. An identification is carried our regarding major or critical risks, related to particular activities for stimulating internal control methods; Control activities meant the risks – Control activities have different forms (managerial control, general control, preventive financial control, etc.) and they are implemented and carried out for the purpose of reducing significant operational and compliance risks; Information and communication – Information helps all other components of the internal control system by means of communication to employees their responsibilities regarding the control and the provision of information in an adequate and timely form, so that all employees may carry out their duties. Internal is performed by means of communication disseminating information to all levels (high, low and same levels), while the external one implies the dissemination of information to external parties, in accordance with the requirements and expectations; • Monitoring activities – the Audit and Risk Committee and the Internal Audit Department assess effective implementation of the internal control system. efficiency and the the The management monitors the functioning of internal controls by means of periodical analyses; for instance, the execution of the budget, the monitoring of security incidents, internal and external audit reports and internal control reports. Deficiencies in the implementation or functioning of internal controls are noted in the internal control and internal audit reports and are presented to the operational management, for the purpose of issuing of corrective actions. 5 FINANCIAL REPORTING These individual financial statements have been prepared in accordance with the Minister of Public Finance Order no. 2844/2016 for approving the Accounting Regulations in accordance with International Financial Reporting Standards (“IFRS”). In acception of OMPF 2844/2016, 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. 5.1 Balance Sheet Items Financial information selected from Company’s balance sheet (thousands RON) 31 decembrie 2016 31 decembrie 2015 Var. ASSETS Non-current assets Property, plant and equipment Intangible assets Investments in subsidiaries Restricted cash 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 receivables Total current assets 275,008 1,837 1,430,819 134,492 - 1,842,156 197,644 1,867,115 64,075 12,598 161 49 2,384 2,144,027 293,375 1,499 1,430,819 - 7,250 1,732,943 283,366 1,900,395 77,531 13,056 117 56 23,134 2,297,656 Total assets 3,986,183 4,030,599 EqUITY AND LIABILITIES Equity Share capital out of which: Subscribed and paid in share capital Inflation adjustment to share capital Share premium Treasury shares Pre-paid capital contributions in kind from shareholders Revaluation reserves Legal reserves Retained earnings Total equity Liabilities Non-current liabilities Employee benefits Total non-current liabilities Current liabilities Trade payables Other payables Deferred revenue Employee benefits Provisions Total current liabilities Total liabilities Total equity and liabilities Source: Electrica 3,459,399 3,459,399 - 103,049 -75,372 5,144 710 156,545 252,240 3,901,715 1,581 1,581 67,591 11,717 541 3,038 - 82,887 84,467 3,459,399 3,459,399 - 103,049 -75,372 2,862 769 142,932 292,266 3,925,905 1,796 1,796 60,634 7,632 497 2,885 31,251 102,898 104,694 3,986,183 4,030,599 -6% 23% 0% 100% -100% 6% -30% -2% -17% -4% 38% -13% -90% -7% -1% 0% 0% - 0% 0% 80% -8% 10% -14% -1% -12% -12% 11% 54% 9% 5% -100% -19% -19% -1% 208 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 209 NON-CURRENT ASSETS On December 31, 2016 compared to December 31st, 2015, fixed assets increased by RON 109,213 thousand or 6.3%, to RON 1,842,156 thousands from RON 1,732,943 thousands. Group, using remote reading systems, property of the Company located in the consumption points, respectively in distribution subsidiaries grid within Electrica Group. The Company assessed whether the arrangement contains a lease and concluded that it does not contain any lease due to the fact that the distribution subsidiaries do not have the right of usage of the assets. in progress tangible assets Equipment and include mainly the costs of implementation of the AMR system (Automatic Meter Reading), for measuring activities and consumption dispatcher at Electrica Group level. The capitalized net book value related to this system is in amount of RON 176,159,847 as of December 31st, 2016 (2015: RON 197,238,723), out of which a part in amount of RON 21,942,902 as of December 31st, 2016 are assets in progress (2015: RON 21,524,137). During 2017, an evaluation of the entire AMR system will be made by a third party independent evaluator in order for the distribution subsidiaries to take over the AMR system. Starting with this sale, the company estimates that it will commission during 2017 the assets in progress related to the AMR system implementation costs. TRADE RECEIVABLES On December 31st, 2016, the Company’s receivables dropped by RON 13,456 thousands or 17.36%, to RON 64,075 thousands, from RON 77,531 thousands on December 31st, 2015. As regards the corporate tax receivable, due to the fact the company was the subject of enforcement procedure in December 2016, it dropped by RON 2,384 following the unfavourable Court decision no. 1029/17.04.2015. RESTRICTED INVESTMENTS CASH AND SHORT-TERM In connection with the AMR system, the Company concluded service agreements with the distribution subsidiaries. The main services provided refers to obtaining in real time from measuring groups by the distribution subsidiaries of accurate data with increased frequency within Electrica On December 31st, 2016, the category including cash and cash equivalents, restricted cash and deposits, treasury bills and government bonds increased by RON 15,490 thousands or 0,71%, to RON 2,199,251 thousands, from RON 2,183,761 thousands on December 31st, 2015. Deposits, treasury bills and government bonds Deposits, treasury bills and RON government bonds with a maturity greater than three months Deposits with a maturity greater than three months Restricted cash Total deposits, treasury bills and government bonds Source: Electrica 31 December 2016 1,757,746 31 December 2015 1,756,339 109,369 134,492 2,001,607 144,056 - 1,900,395 Deposits, treasury bills and government bonds with an initial maturity over three months have an average interest rate (average yield) of 0.63% from the following financial institutions: Citibank Europe PLC Dublin, Raiffeisen Bank, BRD-CSG, Marfin Bank, ING Bank. Treasury bills and government bonds are presented as investments hold until maturity. PROVISIONS During the year 2015, the Company has recognized a provision for the amount of RON 31,250,650 for disputes with National Agency for Fiscal Administration “NAFA” having as object, penalties for delay in the payment claimed by the NAFA following the unfavorable decision 1029/17.04.2015. Also, during the year 2016 the Company has created additional provisions in the amount of 23,648,000 RON as a result of the court decision to reject the appeal made to the enforcement procedure. In December 2016, the Company made payments in the amount of RON 41,210,654 RON as a result of the forced execution received in connection with these litigations and reversed the provisions constituted. SHARE CAPITAL The subscribed share capital in nominal terms consists of 345,939,929 ordinary shares on December 31st, 2016 (345,939,929 ordinary shares on December 31st, 2015) with a nominal value of RON 10/share. Holders of ordinary shares are entitled to dividends and have the right to one vote per share in the General Meetings of Shareholders of the Company, with the exception of the 6,890,593 shares repurchased by the Company in July 2014 with the scope to stabilize the price. All shares give equal rights to the net assets of the Company, with the exception of the 6,890,593 shares repurchased by the Company in July 2014 with the scope to stabilize the price. The Company recognizes the changes in share capital only after their approval in the General Meeting of Shareholders and their registration with the Trade Register. During 2016 there were no changes in the share capital. At December 31st, 2016 the Company meet the requirements of share capital as per the legislation in force. DIVIDENDS The Company can distribute dividends from the statutory individual statutory financial profit, according to the statements prepared in accordance with the Romanian accounting regulation. Dividends distributed by the Company in past 3 years (from previous year’s statutory profits) were as follows: 2016 RON Distributed 291,582,429 dividends Source: Electrica 2015 244,691,906 2014 22,475,225 Dividends related to the year ended 31 December 2015, amounting to RON 291,582,429, were declared based on the standalone annual statutory financial statements of the Company. • The distribution of dividends was approved in the gross amount of RON 0.86 RON/share, related to 2015 financial 5.2 Operational Results year, under the Decision of the Ordinary General Meeting of Shareholders of April 27, 2016 and their payment started on July 18, 2016. At 31 December 2016 the Company recorded dividends liabilities amounting to RON 992 thousands representing the dividends uncollected by the shareholders from the Depository, thus: • the dividends uncollected for the year 2014 in the amount of RON 364 thousands; the dividends uncollected for the year 2015 in the amount of RON 646 thousands; • DESCRIPTION OF PURCHASE AND/OR LENDING OF ASSETS The main purchases of assets done by the Company during 2016 are the following: • Tangible assets in progress amounting to RON 1,314 thousands for the implementation of the AMR (Automatic Meter Reading) system, building rehabilitation and pilot project e-mobility (6 fast-charger stations); Treasury bills and government bonds purchase - please see “Cash and short term investments” for further details. Financial data selected from the profit and loss account of the Company (th. RON) 31 December 2016 31 December 2015 Var. Revenues Other income Electricity purchased Employee benefits Depreciation and amortization Impairment of trade and other receivables, net Other operating expenses Movement in provisions, net Operating profit Finance revenues Finance expenses Net finance income Profit before tax Income tax expense Profit for the year Earnings per share Basic and diluted earnings per share Profit for the year 362,388 1,710 (347,593) (20,504) (23,507) (38,392) (81,037) 31,251 (115,684) 389,683 (1,739) 387,944 272,260 (7,234) 265,026 0,78 265,026 383,708 1,533 (368,684) (16,637) (20,242) 2,832 (23,289) (31,251) (72,029) 373,026 (289) 372,737 300,708 157 300,864 -6% 11% -6% 23% 16% -1456% 248% -200% 61% 4% 502% 4% -9,46% -4.708% -12% 0,89 300,864 -12% -12% 210 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 211 Other comprehensive income Items that will never be reclassified to profit or loss Re-measurements of the defined benefit liability Tax related to re-measurements of the defined benefit liability Other comprehensive income, net of tax Total comprehensive income Source: Electrica INCOME 31 December 2016 31 December 2015 Var. 100 (16) 84 265,110 704 (113) 591 301,456 -86% -86% -86% -12% In the year 2016, Electrica reported revenues of RON 362 million against RON 384 million reported in the year 2015. The variation is mainly caused by the unfavourable evolution of the activity carried out by Electrica SA as being balancing responsible party on the energy market, reporting a decrease of RON 22 million, respectively 5.82%. The breakdown structure of the income is as follows: Th. RON Energy supply on balancing energy market and day ahead market Management and consultancy services Electricity sale - Trading Revenue from services related to AMR system Total Source: Electrica Absolute values 2016 356,982 Revenue structure 2016 98.50% Absolute values 2015 379,039 Revenue structure 2015 98.78% Absolute values 2014 230,731 Revenue structure 2014 94.36% - 723 4,683 362,388 - 0.20% 1.30% 100% - - 4,669 383,708 - - 1.22% 100% 9,051 - 4,735 244,517 3.7% - 1.94% 100% Other income Other income mainly include income from rent and penalties applied to clients for delayed payments. Electricity purchased The purchased electricity includes the cost of the electricity purchased for the settlements on the balancing market and the Day-Ahead Market, and it reached RON 347,593 thousands in 2016 dropped by RON 21,091 thousands in 2015. Amortisation of tangible and intangible assets The amortisation expense increased by RON 3,265 thousands, reaching the amount of RON 23,507 thousands in 2016, from RON 20,242 thousands in 2015, due to the commissioning made in previous period. Salaries and other benefits of the employees In the year 2016, the expenses related to salaries and other benefits of the employees increased by RON 3.867 thousands, reaching RON 20,504 thousands from RON 16,637 thousands in 2015. Adjustments on impairment of trade receivables and other receivables In the year 2016, due to the fact that some clients (Romenergy Industries, Elektra Management and Transenergo Com) were subject to insolvency procedures, the Company accounted adjustments on impairment of trade receivable and other receivables in the amount of RON 38.392 thousands. Change in provisions, net value During the year 2015, the Company has recognized a provision for the amount of RON 31,250,650 for disputes with National Agency for Fiscal Administration “NAFA” having as object the penalties for delay in the payment claimed by the NAFA following the unfavourable decision 1029/17.04.2015. Also, during the year 2016 the Company has created additional provisions in the amount of 23,648,000 RON as a result of the court decision to reject the appeal made to the enforcement procedure. In December 2016, the Company made payments in the amount of RON 41,210,654 RON as a result of the forced execution received in connection with these litigations and reversed the provisions constituted. Operational Profit As a result of the above mentioned factors for the year 2016, the Company reported a loss resulting from the operating activity in amount of RON 115,684 thousands increased compared with RON 72,029 thousands in 2015. Financial revenues The major financial revenues of Electrica SA consist of the dividends distributed by its subsidiaries. The income from the dividends distributed by subsidiaries in the year 2016 are in amount of RON 374,838 thousands compared to RON 344,648 thousands in the year 2015, its structure being as follows: RON Societatea de Distributie a Energiei Electrice Muntenia Nord SA Societatea de Distributie a Energiei Electrice Transilvania Nord SA Societatea de Distributie a Energiei Electrice Transilvania Sud SA Societatea de furnizare a energiei electrice Electrica Furnizare SA TOTAL Source: Electrica 2016 95,357,840 99,130,118 93,404,755 86,945,796 374,838,509 2015 87,406,431 59,214,482 62,288,316 135,738,720 344,647,949 Another category of financial revenues is represented by interests, which decreased to RON 14,784 thousands in 2016 compared to the amount of RON 26,380 thousands in 2015. The Company’s strategy was focused on placing the funds from IPO through the banks that have subscribed, as part of the Consortium, in risk-free bonds and short-term deposits. Profit before tax In 2016, the profit before tax decreased by RON 28,448 thousands or 9.46%, to RON 272,260 thousands, from RON 300,708 thousands in 2015, due to an increase of operating expenses following the enforcement procedures conducted by fiscal authority. Income tax expense In the year 2016, the Company reversed the deferred tax expense in the amount of RON 7,230 thousands because in the future it is not expected to obtain a taxable profit to offset this tax. Net Profit for the year Due to the above mentioned factors, the net profit for the year 2016 decreased by 12% against the year 2015, to RON 265,026 thousands from RON 300,864 thousands. The main objective of the Company is to maximize the net individual profit of Electrica SA, by efficient control and coordination of the investments in subsidiaries. 6 OThER INFORMATION 6.1 Personnel The average number of employees decreased in 2016 as compared to 2015 by eight employees, to 130 employees from 138 employees, as a result of the lay-offs made under the Company’s reorganization and restructuring program, while the effective number of employees was 142 in 2016, respectively 136 in 2015. On 31 December 2016, approximately 95% of the Company’s employees were Union members, and their employment conditions are governed by the Collective Labor Contract, which was extended for a period of maximum 12 months starting with 1st of January 2017 and submitted to the Territorial Labor Inspectorate of Bucharest. Electrica did not faced strikes or other forms of labour disturbances that might have interfered with the Company’s activity, and the Company’s Management trusts that the relations with the employees are good. n 2016 the program of mutual voluntary leave with compensatory payments has been continued. The Company issued internal regulations that mainly accommodate the provisions related to the general dispositions on employment, non-discrimination, complaint handling procedure, safety and health at work, rights and obligations of the employer and employees, rules concerning the discipline at work, disciplinary sanctions and disciplinary misconduct, rules concerning the disciplinary procedure, criteria and procedures concerning the professional evaluation of the employees and finale dispositions. The Company focuses on training programs in order to continuously employees’ improvement as well as specialization whenever applicable, ensuring employees providing professional development and processes optimization through optimal use of the existing resources. The Company’s Management believes that this approach on training and development helps the employees in efficiently cope with the professional challenges. The predictable development of 6.2 the Company The Company estimates that for 2017 the income from dividends received from the subsidiaries will be higher than in 2016. The Company expects that the 2017 profit will be slightly higher than in 2016. The company estimates a reduction of revenues and expenses from the electricity transactions on the balancing market, although with a higher margin than in 2016. 6.3 Main risk and uncertainties • • • Fondul Proprietatea, as a minoritary shareholder of the distribution and supply subsidiaries of the Group, may try to block the decision making process; Romania’s electricity demand is linked to various factors beyond control of the subsidiaries, such as economic, political and climate-changing instances; The supply segment may be exposed to increasing competition due to the liberalization of the market; • Group’s supply segment might lose its status of supplier of last resort; The regulation in place regarding the electricity supply envisages the liberalization calendar and the fact that costumers can chose the supplier. By eliminating the regulated prices according to the liberalization calendar new opportunities rise for the number of households’ customers exercising their eligibility right to increase. Thus, supplier switching experienced by the households customers can influence the supply’s subsidiaries client base in a negative way. 212 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 213 6.4 Financial Risk Management To implement the risk management system as well as an internal control/management system at group level, the following provisions were considered: • Order of the Ministry of Public Finance no. 946/2005 regarding the development of an internal control/ management system, with subsequent amendments and completions; • • experience difficulties and delays; The Group may face risks associated with restitution claims with regard to certain real estate properties; Electrica Furnizare may be prohibited by the legislation in place from suspending or interrupting the supply of electricity to certain customers, even if such customers are in payment default; • Group position on supply and distribution markets could expose to actions related to dominant position abuse; • Work strikes or other forms of activity interruption could • Government Order no. 119/1999 regarding internal control and preventive financial control, with subsequent amendments and completions; Internal procedures adopted with this purpose; International Standards on Risk Management Systems; Best practices and methodologies applied in listed and non-listed companies. • • • A major concern for the management is building awareness of employees regarding the importance of managing risks inside the organization and the necessity of direct involvement in the risk management process, as well as of alignment to the best practices at national and international level by following legislation in place, standards and the related norms. In 2016, within Electrica Group, it was carried out the identification of risks and it has been proposed and adopted appropriate control measures, aiming to avoid or reduce such risks in the future. For 2017, the Company considers the development of risk management system according to the provisions of the international standard SR ISO 31000:2010 “Risk Management – Principles and Guidelines” and its integration within Electrica Group. From the risks regarding the activity and the section of Electrica Group identified in 2016 it could be named: • Supply activity can confront with the risk of increased competition due to electricity market liberalization and could lose the title of supplier of last resort; Supply segment can confront with increased market volatility, from quantities and prices point of view; The financial performance may be negatively influenced by changing tariffs on the regulated market and by the electricity prices; Romania’s electricity demand is linked to various factors beyond control of the subsidiaries, such as economic, political and climate-changing instances; The group has to comply with regulatory requirements and to maintain active the regulatory approvals, being exposed to significant liabilities in case of non-compliance; Components of the distribution subsidiaries’ network are subject to deterioration over time; The assets or group activity may be negative impacted by natural disasters or unauthorized human interventions; The groups’ IT systems are outdated and are not integrated; The implementation of a new integrated ERP system may • • • • • • • • • • • • • • • • • • • have a negative effect on the Group activity; Failure to execute management’s goals from the business strategy may lead to cost savings and revenue forecasts being lower than predicted; Reputation, future prospects or results of operations may be materially adversely affected by claims or litigation; Failure to execute public procurement legislation by the Group member s may lead to fines and voided contracts; Property rights related to certain real estate owned by the Group members could be considered uncertain; The Company may face additional claims from tax authorities for budgetary debts due for previous periods; The Romanian taxation system is subject to change and may issue inconsistent interpretations of tax legislation; After the Offering, the State will continue to have significant influence over the Company; Fondul Proprietatea, as a minoritary shareholder of the distribution and supply subsidiaries of the Group, may try to block the decision making process; The existence of companies involved in the electricity distribution and network construction in the area where the Group’s distribution subsidiaries performed their activity; Regulation risk generated by frequently changes and without appropriate consulting sessions with the electricity distribution operators negatively influence the budget planning capabilities; The risk generated by regulation responsible with stability on energy market. in area of part FINANCIAL RISK MANAGEMENT The Company has exposure to the following risks arising from financial instruments: • • • market risk. credit risk; liquidity 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- owned companies. Until 2012, the Company had a concentration of credit risk with Oltchim SA, company that became insolvent. The Company is in progress of implementation of a policy regarding the insurance of receivables. 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. Cash, bank deposits, treasury bills and government Impairment The ageing of trade receivables was as follows: 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 December 31, 2016 December 31, 2015 Gross value 50,863,472 42,817,162 1,940,414 507,346 7,623,813 299,311 Bad debt allowance Gross value Bad debt allowance - 41,487,637 (32,097,026) 27,556,241 (1,543,044) 8,088,743 - - - (507,346) (5,530,018) (299,311) 399,034 474,206 104,441 (194) (474,206) (104,441) Past due more than 3 years 670,503,816 (670,503,816) 667,158,074 (667,158,074) Total Source: Electrica 774,555,334 (710,480,561) 745,268,376 (667,736,915) Bad debt allowance related to Oltchim SA (RON 667,735,915) and to Transenergo (RON 31,561,656). RON December 31, 2016 December 31, 2016 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 (II) LIqUIDITY RISK 50,863,472 10,720,136 397,370 - 2,093,795 64,074,773 41,487,637 27,556,241 8,088,743 398,840 - 77,531,461 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. 214 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 215 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, thousands RON Financial liabilities December 31, 2016 Trade payables Total December 31, 2015 Trade payables Total Source: Electrica (III) MARKET RISK Carrying value Contractual cash flows 67,591 67,591 60,634 60,634 Total 67,591 67,591 60,634 60,634 less than 1 year 67,591 67,591 60,634 60,634 Market risk is the risk that changes in market prices – such as foreign exchange rates, interest rates– will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return. Currency risk The 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, EUR and USD. The Company also has deposits and bank accounts denominated in foreign currency (EUR and USD). 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: thousands RON Cash and cash equivalents Deposits (deposits, treasury bills and government bonds) Net statement of financial position exposure Source: Electrica 31 decembrie 2016 USD 4,669 - 31 decembrie 2016 EUR 2,533 - 31 decembrie 2015 EUR 10,241 139,581 4,669 2,533 149,822 The following significant exchange rates have been applied during the year: Average rate 2016 4.4908 4.0569 2015 4.4450 4.0057 RON 1 EUR 1 USD Source: Electrica RON 1 EUR 1 USD Year-end spot rate 2016 4.5411 4.3033 2015 4.5245 4.1477 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 affected equity, Profit before tax Effect (Ron) December 31, 2016 EUR (5% movement) USD (5% movement) 126,650 233.454 Strengthening respectively, 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, December 31, 2015 EUR (5% movement) USD (5% movement) Source: Electrica 7,491,092 - Impairment (126,650) (233.454) (7,491,092) - A reasonably possible strengthening (weakening) of the USD against RON at 31 December would have affected the measurement of financial instruments denominated in a foreign currency and profit before tax, and affected equity, respectively, by the amounts shown below. The analysis assumes that all other variables, in particular interest rates, remain constant and ignores any impact of forecast sales and purchases. 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: thousands RON Fixed-rate instruments Financial assets Bank deposits (cash and cash equivalent) Deposits, treasury bills and government bonds Restricted cash Total Source: Electrica 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. 6.5 Environmental aspects The company has Integrated Quality, implemented an Environmental, Occupational Health & Safety Management System which aims to improve the performances of environmental pollution, prevention and responsible waste management. In 2016 have been identified and evaluated all environmental aspects associated processes developed in normal and emergency conditions that have an environmental impact. For efficient management of their own procedures have been elaborated in accordance with the specific legislation and requirements of the reference standard ISO 14001. Periodic evaluation of compliance was achieved by: audits, periodic environmental reports. 6.6 Research and development activity In accordance with the “Elements of the S.E. Electrica’s Board Strategic Plan for the period 2015-2018 Electrica Group currently carries Pilot Project “Green highway” by introducing in investment program for 2016 of a pilot project with 6 stations standardized -fast chargers for electric vehicles - investment approved by the Board of Administration decision no.3 in February 10, 2016 and approved by the General Meeting of Shareholders decision no.1 from March 31, 2016 and no 3 from October 21, 2016. In 2016 S.E. Electrica signed with OMV Petrom a Memorandum of Understanding to initiate a partnership in electromobility domain (MoU) for placement in public filling stations with commercial high interest of fast charging stations [fast chargers type tristandard]. 31 decembrie 2016 31 decembrie 2015 193,788 1,867,115 134,492 2,195,395 181,248 1,900,395 - 2,081,643 Strategic Plan for the period 2015-2018 Electrica” fulfilling the requirements as benefits, promoting the pilot project “Green Highway” has a strong innovative character and enables the development of new business for S.E.Electrica , management of fast chargers impact on electricity networks. Electrica is promoting technological innovation by participating in research and development co-financed / financed by European funds, having the possibility to test new technologies to manage and optimize energy efficiency and operational electrical networks distribution electricity are integrated a high level of distributed generation sources. • By participating in these research, development and innovation projects with financing / co-financing the grants Electrica has the following benefits: • making access to cutting-edge technologies in the field of optimizing the operating modes of the electricity distribution network (EDN) in terms of network connection of renewable electricity production (distributed or concentrated) improving the safety and reliability of isolated electrical systems, power quality provided through the provision of rapid, low-cost reserves through flexible task; the possibility of identifying criteria in working to promote smart grids - smart grids and smart metering solutions; use the opportunities to develop self-financing business portfolio of Electrica; developing new skills through transfer of know-how; compliance with the best practices of similar companies in Europe by winning image; creating new opportunities for future participation of S.E. ELECTRICA S.A. projects funded by the European Commission. • • • • • in the important endeavour of S.E. Electrica S.A. in Another promoting technological innovation is to disseminate the solutions for updating its electric grid using a smart grids concept international conferences/symposia that S.E.Electrica S.A. holds every year in November and which propose as an alternative topic the smart grids and smart metering solutions. We mention that S.E. Electrica S.A. has supervised the organization of the international symposium called “Smart Grids 2016”. In addition to integration with the “Elements of the Board We emphasize the participation in the WEC conferences 216 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 217 with presentations concerning technological innovation and promotion of new technologies that improve operational efficiency. Thus, in June 2016, Electrica SA participated with three papers accepted to FOREN2016. 6.7 Legal documents reported Legal documents reported in 2016, according to art. 225 of Law 297/ 2004: f Filiala de Intretinere si Servicii Energetice „Electrica Serv” SA – C241/28.12.2016 - valid until 30.06.2017 - Complex road transport services- value: RON 780 thousand. The Company has sent current reports to the market to inform the investors and all the other stakeholders on the events presented above. Regarding energy supply subsidiary, in January 2017 took place Ordinary General Shareholders Meeting through which were implemented the stipulations of the new Article of Association approved in December 2016 namely the reduction of Board of Directors members from 5 members to 3 members. The Shareholders meeting decisions through which were adopted the mentioned decisions were appealed in court by the minority shareholder. Key factors, 6.9 important market directions and trends influencing Electrica’s operational results The Board of Directors acknowledges between key factors, important market directions and trends that it cannot control and those that it can control (although frequently to a limited extent). The key factors, important market directions and trends that the Board of Directors cannot control are: • the cost of electricity purchased, • the macroeconomic trends of Romania the demand of electricity • • the domestic general regulatory and legal framework in which the Company operates, including ANRE policies. The key factors and the directions that the Board of Directors can control, at least partially, include the Company’s capital investments and the operational costs. The Board of Directors considers that on the medium and long term the growth of Romania’s real GDP and the overall economy will have to a certain extend a positive impact on the electricity consumption in Romania, which will positively affect Electrica’s activity. In particular, the Board of Directors considers that, as long as Romania’s economic growth will continue to exceed EU one, electricity consumption per capita in Romania is expected to continue to grow. On the other hand, a significant slowdown in the growth of GDP and that of the Romanian economy in general could have some negative effect on electricity consumption in Romania and, respectively, on Electrica activity. 6.8 Subsequent events During the period between the 2016 financial year closing and the date of the present report, the following relevant events took place at Electrica SA level: f On January 4th, 2017, the Company informed its shareholders and investors about the conclusion in the second semester of 2016 of a legal act with a value greater than EUR 50,000 with Filiala de Intretinere si Servicii Energetice „Electrica Serv” SA, affiliate, where Electrica is the sole shareholder. The auditor report of factual findings according to art. 225 of Law no. 297/2004 regarding the transactions reported in the second semester of 2016 was published on January 31st, 2017; f On January 27th, 2017, the Board of Directors took note of the cases disputed by Electrica SA in contradiction with ANRE and approved the following: • legal actions • Withdrawal of in cases on the suspension of applicability of ANRE orders by which the distribution tariffs were determined for 2015 and 2016; Formulating motions of judgement suspension in cases on the annulment of ANRE orders by which the distribution tariffs were determined for 2015 and 2016, until the settlement of the case on the annulment of ANRE Order no. 146/2014, by which the regulatory rate (RRR) was changed. f On January 27th, 2017, the Board of Directors decided to reappoint Mr. Cristian Busu as BoD chair for a mandate of one year. Also, the Board of Directors decided the same composition of the BoD’s committees and re-elected their chairs for one year mandate. Detailed information is provided under chapter 4.4 of the present report; f Also, during the same meeting, the Board of Directors decided: • • To revoke Mr. Ramiro Robert Eduard Angelescu from the position of Executive Manager of the Sales Coordination Division of SE Electrica SA, starting as of January 27th 2017. To appoint Ms. Livioara Sujdea, as Executive Manager - Chief Distribution Officer, starting with February 1st 2017. f On January 30th, 2017, the shareholders and the investors were informed that as of January 27th, 2017, in its Balancing Responsible Party business line, Electrica SA had a 36.3 MRON exposure on one of its clients, Transenergo. As the client filed for its insolvency, with ELSA and another market player also filing separate insolvency requests, management expects low recoverability of the total exposure. ANNEX 1 Current report - status of compliance with the new Bucharest Stock Exchange Corporate Governance Code as of 9 March 2017 Nr. Provisions of BSE Corporate Governance Code Section A A.1. Responsibilities All companies should have internal regulation of the Board which includes terms of reference/ responsibilities for Board and key management functions of the company, applying, among others, the General Principles of this Section. Y L L A I T R A P / O N / S E Y - n o n r o f n o s a e R e c n a i l p m o C yES e c n a i l p m o c Additional information the terms of ELSA CGC, adopted in February 2015 and published on the company’s website, includes the Articles of Association of ELSA, the Charter of the BoD and of its committees. All the above mentioned documents encompass reference/the BoD’s responsibilities, as well as those of the company’s key management. In 2016, the Board conducted an extensive project to review the Articles of Association and the above mentioned Charters in order to detail the responsibilities of the Board, of its committees and of the management team, taking into consideration the recomendations retained in the Board activity evaluation report of the prevoius year. The last version of ELSA CGC was published on company’s website on 19th of January 2017. Such provisions are mentioned in ELSA’s CGC, in the Articles of Association, in the Code of Ethics, as well as in the revised BoD Charter ELSA’s BoD comprises 7 members since 14 December 2015. All the members of ELSA’s BoD are non-executive. Four out of seven are independent members.All the independent members submitted a declaration of independence, when they were nominated as candidates by the shareholders. The declaration was made in accordance with the criteria included in the company’s Articles of Association, which are similar with those detailed by the Code. A.2. A.3. A.4. Provisions for the management of conflict of interest should be included in Board regulation. yES yES yES The Board of Directors should have at least five members. The majority of the members of the Board of Directors should be non-executive. At least one member of the Board of Directors or Supervisory Board should be independent, in the case of Standard Tier companies. Not less than two non-executive members of the Board of Directors or Supervisory Board should be independent, in the case of Premium Tier Companies. Each member of the Board of Directors or Supervisory Board, as the case may be, should submit a declaration that he/she is independent at the moment of his/her nomination for election or re-election as well as when any change in his/her status arises, by demonstrating the ground on which he/she is considered independent in character and judgement in practice and according to the following criteria:A.4.1. Not to be the CEO/executive officer of the company or of a company controlled by it and not have been in such position for the previous 5 years;A.4.2. Not to be an employee of the company or of a company controlled by it and not have been in such position for the previous five (5) years;A.4.3. Not to receive and not have received additional remuneration or other advantages from the company or from a company controlled by it, apart from those corresponding to the quality of non-executive director;A.4.4. Is not or has not been an employee of, or has not or had not any contractual relationship, during the previous year, with a significant shareholder of the company, controlling more than 10% of voting rights or with a company controlled by it;A.4.5. Not to have and not have had during the previous year a business or professional relationship with the company or with a company controlled byit, either directly or as a customer, partner, shareholder, member of the Board/ Director, CEO/ executive officer or employee of a company having such a relationship if, by its substantial character, this relationship could affect his/her objectivity;A.4.6. Not to be and not have been in the last three years the external or internal auditor or a partner or salaried associate of the current external financial or internal auditor of the company or a company controlled by it;A.4.7. Not to be a CEO/executive officer in another company where another CEO/executive officer of the company is a non-executive director;A.4.8. Not to have been a non-executive director of the company for more than twelve years;A.4.9. Not to have family ties with a person in the situations referred to at points A.4.1. and A.4.4. 218 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 219 The professional biography of each Board member is published on ELSA’s website in the IR section>2015 AGA >GMS from 14th of December 2015. B.3. its responsibilities, the audit committee Among should undertake an annual assessment of the system of internal control. yES A.5. A.6. A.7. A.8. and commitments A Board member’s other relatively permanent professional engagements, including executive and non- executive Board positions in companies and not-for-profit institutions, should be disclosed to shareholders and to potential investors before appointment and during his/her mandate. Any member of the Board should submit to the Board, information on any relationship with a shareholder who holds directly or indirectly, shares representing more than 5% of all voting rights. The company should appoint a Board secretary responsible for supporting the work of the Board. The corporate governance statement should inform on whether an evaluation of the Board has taken place under the leadership of the chairman or the nomination committee and, if it has, summarize key action points and changes resulting from it. The company should have a policy/guidance regarding the evaluation of the Board containing the purpose, criteria and frequency of the evaluation process. A.9. The corporate governance statement should contain information on the number of meetings of the Board and the committees during the past year, attendance by directors (in person and in absentia) and a report of the Board and committees on their activities. A.10. The corporate governance should contain information on the precise number of the independent members of the Board of Directors or of the Supervisory Board. statement A.11. The Board of Premium Tier companies should set up a nomination committee formed of non-executives, which will lead the process for Board appointments and make recommendations to the Board. The majority of the nomination committee should be independent. the members of yES yES yES yES yES yES yES Section B B.1. Risk management and internal control system the relevant The Board should set up an audit committee, and at least one member should be an independent non-executive. The majority of members, including the chairman, should have proven an adequate functions and qualification to least one responsibilities of the committee. At member of the audit committee should have proven and adequate auditing or accounting experience. In the case of Premium Tier companies, the audit committee should be composed of at least three members and the majority of the audit committee should be independent. The audit committee should be chaired by an independent non-executive member. yES yES B.2. When a member of the Board has entered into a relation with a shareholder who directly or indirectly holds shares representing more than 5% of all voting rights, he/she informed operatively the entire Board. The company has a General Secretariat, which functionally reports to the BoD. The A.8 provision was observed both in 2015 and in 2016 - the Board has carried out an annual review process of its activity - with the support of an external consultant in 2015, respectively by using a self-assessment questionnaire in 2016 (alternate). Additionally, the Board has decided to conduct that at the end of each meeting a brief analysis based on key aspects of its activity and to track the evolution of the recorded results. More details are provided in the Annual Reports 2015 and 2016 - cap 6.1 and 6.2. Details regarding the observance of this provision are presented in the Annual Reports 2015 and 2016- cap 6.1 and 6.2. Four out of seven members of the BoD are independent. followed during The A.11 provision was the previous BoD’s mandate. Additionally, the Articles of Association and ELSA’s CGC highlight the existence of this committee (Nomination and Remuneration its structure and responsibilities.The Committee), committee and in its structure were established the first meeting of the new BoD (elected on 14 December 2015), meeting which took place on 13 January 2016 and revised in 2017 according to the provisions of the Charter. The committee composition is: Mr. Bogdan Iliescu (chair), Ms. Arielle Malard de Rothschild, Ms. Corina Popescu. Two members are independent. The B.1 provision was followed during the previous BoD’s mandate. Additionally, the Articles of Association and ELSA’s CGC highlight the existence of this committee (Audit and Risk Committee) , its structure and responsibilities. The committee and its structure were established in the first meeting of the new BoD (elected on 14 December 2015), meeting which took place on 13 January 2016and revised in 2017 according to the provisions of the Charter. The committee composition is: Mr. Pedro Mielgo Alvarez (chair), Ms. Arielle Malard de Rothschild and Mr. Bogdan Iliescu. All members are independent. In 2016, the BoD has elected Mr. Pedro Mielgo Alvarez as chairman of the Audit Committee, independent non-executive board member, re-elected in 2017. the regularly adequacy reviewing for detecting and internal control policies, fraud and the According to the revised Charter, the Audit and Risk Committee (ARC) has the following responsabilities with regards to internal control matters: (i) implementation of key including policies prevention of bribery; (ii) reviewing related party transactions in line with a policy developed by the Committee and approved by the Board; (iii) reviewing annually a report by the head of Internal Audit assessing the effectiveness of the system of internal control across the Group. The evaluation report for 2016 provided by the CGC was prepared and discussed by ARC in its meeting of 8 March 2017. The evaluation report for 2016 provided by the CGC was prepared and discussed by ARC in its meeting of 8 March 2017. The ARC has at least the following responsibilities with regards to risk management matters: (i) reviewing regularly the main risks facing the Company and Group, recommending to the Board relevant policies for their identification, mapping, management and mitigation of risk; (ii) reviewing annually a report from management assessing the effectiveness of the system of risk management across the Group; Based on the new provisions introduced in the ARC Charter, the evaluation report for year 2016 was prepared and discussed by ARC in its meeting of 8 March 2017. The ARC has the following responsibilities with regards to auditing matters: (i) approving a Group-wide, annual risk-based audit plan as well as any material changes to the plan, and receiving regular reports on activities, key findings, and follow up regarding internal audit reports; (ii) advising the Board on the appointment, removal and remuneration of the Head of Internal Audit; (iii) monitoring the adequacy, effectiveness and independence of the internal audit function; B.4. B.5. B.6. The assessment should consider the effectiveness and scope of the internal audit function, the adequacy of risk management and internal control reports to the audit committee of the Board, management’s responsiveness and effectiveness in dealing with identified internal control failings or weaknesses and their submission of relevant reports to the Board. The audit committee should review conflicts of interests in transactions of the company and its subsidiaries with related parties. The audit committee should evaluate the efficiency of the internal control system and risk management system. yES yES yES B.7. The audit committee should monitor the application of statutory and generally accepted standards of internal auditing. The audit committee should receive and evaluate the reports of the internal audit team. yES B.8. Whenever the Code mentions reviews or analysis to be exercised by the Audit Committee, these should be followed by cyclical (at least annual), or ad-hoc reports to be submitted to the Board afterwards. yES B.9. No shareholder may be given undue preference over other shareholders with regard to transactions and agreements made by the company with shareholders and their related parties. B.10. The Board should adopt a policy ensuring that any transaction of the company with any of the companies with which it has close relations, that is equal to or more than 5% of the net assets of the company (as stated in the latest financial report), should be approved by the Board following an obligatory opinion of the audit committee. B.11. The separate internal audits should be carried out by (internal audit a department) within the company or by retaining an independent third-party entity. structural division internal audit department, B.12. To ensure the fulfillment of the core functions of the it should report functionally to the Board via the audit committee. For administrative purposes and in the scope related to the obligations of the management to monitor and mitigate risks, it should report directly to the chief executive officer. yES Provisions on this matter are included in ELSA’s CGC. yES yES yES Within the revised ARC Charter, it was included the committee responsability regading the review of related party transactions, according with a policy developed by the Committee and approved by the Board.The Board has initiated several discussions and analysis on the matter and set as objective to fynalize the policy by the end of the current year. The internal audit is conducted by the Internal Audit Department. The Internal Audit Department reports functionally to the BoD through the ARC, while administratively reports to the CEO. 220 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 221 The remuneration limits of the General Manger and of the other mandate managers were approved by the General Meeting of Shareholders (GMS) on July 9th 2015. In March 2016 te GMS approved the new Directors Remuneration Policy. the During remuneration structure of the mandate managers within the company and the group. The remuneration Policy was discussed and approved by the Board in its meeting of 9 March 2017. the year 2016, the BoD revised Section C C.1. Fair rewards and motivation The company should publish a remuneration policy on its website and include in its annual report a remuneration statement on the implementation of this policy during the annual period under review yES that allows stakeholders The remuneration policy should be formulated in such a way to understand the principles and rationale behind the remuneration of the members of the Board and the CEO, as well as of the members of the Management Board in two-tier board systems. It should describe the remuneration governance and decision-making process, detail the components of executive remuneration (i.e. salaries, annual bonus, long term stock-linked incentives, benefits in kind, pensions, and others) and describe each component’s purpose, principles and assumptions (including the general performance criteria related to any form of variable remuneration). In addition, the remuneration policy should disclose the duration of the executive’s contract and their notice period and eventual compensation for revocation without cause. remuneration The the implementation of the remuneration policy vis-à-vis the persons identified in the remuneration policy during the annual period under review. report should present Any essential change of the remuneration policy should be published on the corporate website in a timely fashion. yES The company has both an Investor Relations function and a dedicated Investor Relation section on its website (both in Romanian and English). In the Investors section on Electrica’s website are published all the relevant information for investors. Section D D.1. Building value through investors’ relations Investor Relations section, both The company should have an Investor Relations function - indicated, by person (s) responsible or an organizational unit, to the general public. In addition to information required by legal provisions, the company should include on its corporate website a dedicated in Romanian and English, with all relevant information of interest for investors, including: D.1.1. Principal corporate regulations: the articles shareholders’ meeting of association, general procedures. D.1.2. Professional CVs of the members of its governing bodies, a Board member’s other professional commitments, including executive and non-executive Board positions in companies and not-for-profit institutions; D.1.3. Current reports and periodic reports (quarterly, semi-annual and annual reports); D.1.4. Information related to general meetings of shareholders; D.1.5. Information on corporate events; D.1.6. The name and contact data of a person who should be able to provide knowledgeable information on request; D.1.7. Corporate presentations (e.g. IR presentations, results presentations, etc.), financial quarterly statements (quarterly, semi- annual, annual), auditor reports and annual reports. D.2. A company should have an annual cash distribution or dividend policy, proposed by the CEO or the Management Board and adopted by the Board, as a set of directions the company intends to follow regarding the distribution of net profit. The annual cash distribution or dividend policy principles should be published on the corporate website. yES The BoD approved the Dividends Policy in its meeting of 27 January 2017. D.3. D.4. D.5. D.6. D.7. D.8. D.9. D.10. from A company should have adopted a policy with respect to forecasts, whether they are distributed or not. Forecasts means the quantified conclusions of studies aimed at determining the total impact of a list of factors related to a future period (so called assumptions): by nature such a task is based level of uncertainty, with results upon a high sometimes significantly differing forecasts initially presented. The policy should provide for the frequency, period envisaged, and content of forecasts. Forecasts, if published, may only be part of annual, semi-annual or quarterly reports. The forecast policy should be published on the corporate website. The rules of general meetings of shareholders should not restrict the participation of shareholders in general meetings and the exercising of their rights. Amendments of the rules should take effect, at the earliest, as of the next general meeting of shareholders. The external auditors should attend the shareholders’ meetings when their reports are presented there. The Board should present to the annual general meeting of shareholders a brief assessment of the internal controls and significant risk management system, as well as opinions on issues subject to resolution at the general meeting. Any professional, consultant, expert or financial analyst may participate in the shareholders’ meeting upon prior invitation from the Chairman of the Board. Accredited journalists may also participate in the general meeting of shareholders, unless the Chairman of the Board decides otherwise. The quarterly and semi-annual financial reports should include information in both Romanian and English regarding the key drivers influencing the change in sales, operating profit, net profit and other relevant financial indicators, both on quarter- on- quarter and year-on-year terms. A company should organize at least two meetings/ conference calls with analysts and investors each year. The information presented on these occasions should be published in the IR section of the company website at the time of the meetings/conference calls. If a company supports various forms of artistic and cultural expression, sport activities, educational or scientific activities, and considers the resulting impact on the innovativeness and competitiveness of the company part of its business mission and development strategy, it should publish the policy guiding its activity in this area. NO initiated several discussions and The Board has analysis on the matter and set as objective to fynalize the policy by the end of the current year. yES yES yES yES yES yES yES The rules of general meetings of shareholders are included within each convening notice, published in requirements, the approximately 45 days prior to the meeting. accordance with legal The annual directors’ report, presented to the annual general meeting of shareholders, contains the BoD’s comments on the internal controls and significant risk management system. In practice, all the documents submitted for the approval of the GMS are endorsed by the BoD; this is clearly stated in the documents presented to the shareholders. On this aspect, shareholders’ agreement present to the General Meetings was requested each time it was needed. Electrica holds quarterly teleconferences with analysts and investors. In 2016, the BoD analyzed and approved the Corporate Social Responsibility Policy, including programs supporting the areas of activity / actions, grants and principles of granting sponsorships / donations. The most relevant information was published on the company website. 222 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 223 ANNEX 2 – INTERNAL AUDIT REPORT FOR 2016 The Annual Audit Plan for 2016, endorsed by the Audit Committee and approved by the Board of Directors by the Decision no.39/08.12.2015, provided for seven missions planned for 2016 in the following auditable areas: human resources, technical, acquisitions, transportation, risk management, BRP activity (Balance Responsible Part). This plan was drawn up in view of identifying the efficiency of internal controls within ELSA. On the date of audit missions planning, the Audit & Compliance Office team was made of two internal auditors, but after April the internal audit missions were conducted by five internal auditors. In 2016, upon the request of the Board of Directors, were conducted two ad-hoc missions on human resources and acquisitions auditable areas. During the first half year 2016, 5 audit missions were conducted in the company, 3 from Annual Internal Audit Plan and 2 ad-hoc missions. Seven audit reports were developed, containing 36 recommendations of witch 20 with high risk impact in case of non-implementing. The missions developed in first half of year: • • • Human resources activity - ad-hoc mission; • • Transportation activity – planned mission; EDN access (Electric Distribution Network) - planned mission. Acquisitions of services – ad-hoc mission; Enterprise risk management – planned mission; In the second half of 2016 were conducted 3 audit missions, planned and were developed 11 internal audit reports, containing 45 recommendations of which 18 with high risk impact in case of non-implementing. The missions developed in second half of year: • • • Administrative activity; BRP activity; Acquisitions evaluation. These missions were performed by teams made of two internal auditors supervised by the chief of internal audit department. The internal audit report concluded as a result of the missions were acknowledged by the management of audited entities, endorsed by the Audit Committee and the implementation of their recommendations is consistently monitored by their follow up sheets. As a result of the audit missions and the acceptance of their recommendations by the audited entities and persons, the audited structures make up their own plans of measure to meet the recommendations. During 2016 have been uptated Charta of internal audit and Code of ethic behaviour for internal auditors. Were developed Manual of politicies and procedures for internal audit, based on CAFR (Chamber of financial auditors) model, organization which appropriated entirely International Standards for the Professional Practice of Internal Auditor. All these procedures were endorsed by Audit Committee and approved by Board of Directors. SOCIETATEA ENERGETICA ELECTRICA S.A. SEPARATE FINANCIAL STATEMENTS FOR ThE yEAR ENDED 31 DECEMBER 2016 Free translation from Romanian, which is the official and binding version 224 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 225 CONTENTS Separate statement of financial position Separate statement of profit or loss Separate statement of comprehensive income Separate statement of changes in equity Separate statement of cash flows Notes to the separate financial statements Basis of preparation 1. Reporting entity 2. Basis of preparation 3. Functional and presentation currency 4. Use of judgments and estimates Accounting policies 5. Basis of measurement 6. Significant accounting policies 7. New standards and interpretations not yet adopted Performance for the year 8. Revenue 9. Other operating revenue and expenses 10. Net finance cost 11. Earnings per share Employee benefits 12. Short-term employee benefits 13. Post-employment and other long-term employee benefits 14. Employee benefit expenses Income tax 15. Income taxes Assets 16. Trade receivables 17. Deposits, treasury bills and government bonds 18. Other receivables 19. Cash and cash equivalents 20. Property, plant and equipment 21. 22. Intangible assets Investments in subsidiaries Equity and liabilities 23. Capital and reserves 24. Trade payables 25. Other payables 26. Provisions Financial instruments 27. Financial instruments - fair values and risk management Other information 28. Related parties 29. Contingencies 30. Commitments 226 227 227 228 229 230 231 231 231 232 232 240 240 240 241 241 242 242 245 245 247 247 248 248 249 250 251 251 252 253 253 253 257 258 259   226 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A SOCIETATEA ENERGETICA ELECTRICA SA SEPARATE STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2016 (All amounts are in RON) Note 31 December 2016 31 December 2015 SOCIETATEA ENERGETICA ELECTRICA SA SEPARATE STATEMENT OF PROFIT OR LOSS FOR ThE yEAR ENDED 31 DECEMBER 2016 (All amounts are in RON) E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 227 ASSETS Non-current assets Property, plant and equipment Other intangible assets Investments in subsidiaries Restricted cash 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 Total current assets Total assets EqUITY AND LIABILITIES Equity Share capital out of which: Subscribed and paid in share capital Inflation adjustment to share capital Share premium Treasury shares Pre-paid capital contributions in kind from shareholders Revaluation reserves Legal reserves Retained earnings Total equity Liabilities Non-current liabilities Employee benefits Total non-current liabilities Current liabilities Trade payables Other payables Deferred revenue Employee benefits Provisions Total current liabilities Total liabilities 20 21 22 19 15 19 17 16 18 15 23 23 23 23 23 23 23 13 24 25 12,13 26 275,008,415 1,836,710 1,430,819,457 134,491,752 - 1,842,156,334 197,644,018 1,867,115,360 64,074,773 12,597,869 161,205 48,926 2,384,366 2,144,026,517 293,375,460 1,498,663 1,430,819,457 - 7,249,634 1,732,943,214 283,366,031 1,900,395,387 77,531,461 13,056,225 116,597 56,033 23,134,100 2,297,655,834 Revenues Other income Electricity purchased Employee benefits Depreciation and amortization Impairment of trade and other receivables, net Change in provisions, net Other operating expenses Operating profit Finance income Finance costs Net finance income Profit before tax Income tax expense Profit for the year 3,986,182,851 4,030,599,048 Earnings per share Basic and diluted earnings per share (RON) Note 8 9 9 14 20,21 16,18 26 9 10 10 15 11 2016 2015 362,388,192 1,709,529 (347,592,754) (20,503,839) (23,506,827) (38,391,976) 31,250,650 (81,037,171) (115,684,196) 383,708,120 1,533,233 (368,683,747) (16,636,893) (20,241,737) 2,832,061 (31,250,650) (23,289,218) (72,028,831) 389,682,646 (1,738,725) 387,943,921 373,026,201 (289,466) 372,736,735 272,259,725 (7,233,616) 265,026,109 300,707,904 156,580 300,864,484 0,78 0,89 3,459,399,290 3,459,399,290 - 103,049,177 (75,372,435) 5,144,025 709,974 156,545,204 252,240,158 3,901,715,393 1,580,589 1,580,589 67,591,033 11,716,925 540,944 3,037,967 - 82,886,869 84,467,458 3,459,399,290 3,459,399,290 - 103,049,177 (75,372,435) 2,861,525 769,261 142,932,218 292,266,081 3,925,905,117 1,795,588 1,795,588 60,633,718 7,632,190 497,084 2,884,701 31,250,650 102,898,343 104,693,931 The accompanying notes are an integral part of these separate financial statements. General Manager Dan Catalin Stancu Finance Manager Iuliana Andronache SOCIETATEA ENERGETICA ELECTRICA SA SEPARATE STATEMENT OF COMPREhENSIVE INCOME FOR ThE yEAR ENDED 31 DECEMBER 2016 (All amounts are in RON, if not otherwise stated) Note 2016 2015 Profit for the year 265,026,109 300,864,484 Other comprehensive income Items that will never be reclassified to profit or loss Re-measurements of the defined benefit liability Tax related to re-measurements of the defined benefit liability 13 15 100,114 (16,018) 703,969 (112,635) Other comprehensive income, net of tax 84,096 591,334 Total comprehensive income 265,110,205 301,455,818 The accompanying notes are an integral part of these separate financial statements. General Manager Dan Catalin Stancu Finance Manager Iuliana Andronache Total equity and liabilities 3,986,182,851 4,030,599,048 The accompanying notes are an integral part of these separate financial statements. General Manager Dan Catalin Stancu Finance Manager Iuliana Andronache 228 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 229 7 1 1 . 5 0 9 . 5 2 9 . 3 7 1 1 , 5 0 9 , 5 2 9 , 3 1 8 0 , 6 6 2 , 2 9 2 8 1 2 , 2 3 9 , 2 4 1 1 6 2 , 9 6 7 5 2 5 , 1 6 8 , 2 ) 5 3 4 , 2 7 3 , 5 7 ( 7 7 1 , 9 4 0 , 3 0 1 0 9 2 , 9 9 3 , 9 5 4 , 3 y t i u q e l a t o T i d e n a t e R i s g n n r a e s e v r e s e r l a g e L n o ti a u a v e R l l a t i p a C s e v r e s e r s n o ti u b i r t n o c m o r f d n i k n i l s r e d o h e r a h s y r u s a e r T s e r a h s e r a h S i m u m e r p n o ti a fl n I o t t n e m t s u d a j l a t i p a c e r a h s d e b i r c s b u S n i i d a p d n a l a t i p a c e r a h s e t o N . 9 0 1 6 2 0 5 6 2 . , 9 0 1 6 2 0 5 6 2 , , 9 0 1 6 2 0 5 6 2 , . 0 0 5 2 8 2 2 . , 0 0 5 2 8 2 2 , - 6 9 0 4 8 . 6 9 0 4 8 , 6 9 0 4 8 , 5 0 2 . 0 1 1 . 5 6 2 5 0 2 , 0 1 1 , 5 6 2 5 0 2 , 0 1 1 , 5 6 2 . ) 9 2 4 2 8 5 1 9 2 ( . , ) 9 2 4 2 8 5 1 9 2 ( , , ) 9 2 4 2 8 5 1 9 2 ( , ) 9 2 9 . 9 9 2 . 9 8 2 ( ) 9 2 9 , 9 9 2 , 9 8 2 ( ) 9 2 4 , 2 8 5 , 1 9 2 ( - - - - - - , 6 8 9 2 1 6 3 1 , - - - - - - - - - - - , ) 6 8 9 2 1 6 3 1 ( , 7 8 2 9 5 , - ) 7 8 2 9 5 ( , - - - , 0 0 5 2 8 2 2 , - - - 0 0 5 , 2 8 2 , 2 - - - - - - - - - - - - - - - - - - - - - - - - 3 9 3 . 5 1 7 . 1 0 9 . 3 3 9 3 , 5 1 7 , 1 0 9 , 3 8 5 1 , 0 4 2 , 2 5 2 4 0 2 , 5 4 5 , 6 5 1 4 7 9 , 9 0 7 5 2 0 , 4 4 1 , 5 ) 5 3 4 , 2 7 3 , 5 7 ( 7 7 1 , 9 4 0 , 3 0 1 0 9 2 , 9 9 3 , 9 5 4 , 3 ) 3 4 7 5 1 4 ( , - 4 8 4 , 4 6 8 , 0 0 3 4 8 4 , 4 6 8 , 0 0 3 4 3 3 1 9 5 , 4 3 3 1 9 5 , 8 1 8 , 5 5 4 , 1 0 3 8 1 8 , 5 5 4 , 1 0 3 , ) 6 0 9 1 9 6 4 4 2 ( , , ) 6 0 9 1 9 6 4 4 2 ( , ) 9 4 6 . 7 0 1 . 5 4 2 ( ) 6 0 9 , 1 9 6 , 4 4 2 ( - - - , ) 5 9 3 5 3 0 5 1 ( , 7 8 2 9 5 , , 0 1 7 2 4 8 4 5 3 , - - - - - , 5 9 3 5 3 0 5 1 , - - - - - - - - ) 7 8 2 9 5 ( , - - - ) 3 4 7 5 1 4 ( , - ) 3 4 7 , 5 1 4 ( - - - - - - - - - - - - - - - - - - - - - 7 1 1 , 5 0 9 , 5 2 9 , 3 1 8 0 , 6 6 2 , 2 9 2 8 1 2 , 2 3 9 , 2 4 1 1 6 2 , 9 6 7 5 2 5 , 1 6 8 , 2 ) 5 3 4 , 2 7 3 , 5 7 ( 7 7 1 , 9 4 0 , 3 0 1 - - - - - - - - - , ) 0 1 7 2 4 8 4 5 3 ( , - - - - - - - - - 0 9 2 , 9 9 3 , 9 5 4 , 3 3 2 3 2 y n a p m o C e h t f o s r e n w o h t i w s n o ti c a s n a r T e r e w s t h g i r i p h s r e n w o h c i h w r o f d n a L s n o ti u b i r t s i d d n a s n o ti u b i r t n o C y n a p m o C e h t f o s r e n w o e h t o t s d n e d i v i D e h t f o s r e n w o h t i w s n o ti c a s n a r t l a t o T y n a p m o C i d e n a t b o f o s l a s o p s i d d n a n o ti a i c e r p e d o t e u d i s g n n r a e i d e n a t e r o t e v r e s e r n o ti a u a v e r l f o r e f s n a r T t n e m p u q e i d n a t n a p l , y t r e p o r p 6 1 0 2 r e b m e c e D 1 3 t a e c n a a B l y t i u q e n i s e g n a h c r e h t O s e v r e s e r l a g e l f o p u t e S 3 2 3 2 y n a p m o C e h t f o s r e n w o h t i w s n o ti c a s n a r T e r e w s t h g i r i p h s r e n w o h c i h w r o f s d n a L s n o ti u b i r t s i d d n a s n o ti u b i r t n o C y n a p m o C e h t f o s r e n w o e h t o t s d n e d i v i D e h t f o s r e n w o h t i w s n o ti c a s n a r t l a t o T i d e n a t b o f o s l a s o p s i d d n a n o ti a i c e r p e d o t e u d i s g n n r a e i d e n a t e r o t e v r e s e r n o ti a u a v e r l f o r e f s n a r T s r a e y s u o i v e r p m o r f s e s s o l e h t g n i r e v o C t n e m p u q e i d n a t n a p l , y t r e p o r p 5 1 0 2 r e b m e c e D 1 3 t a e c n a a B l y t i u q e n i s e g n a h c r e h t O s e v r e s e r l a g e l f o p u t e S y n a p m o C 5 1 0 2 y r a u n a J 1 t a e c n a a B l e m o c n i e v i s n e h e r p m o C r a e y e h t r o f t fi o r P e m o c n i e v i s n e h e r p m o c r e h t O e m o c n i e v i s n e h e r p m o c l a t o T 6 1 0 2 y r a u n a J 1 t a e c n a a B l e m o c n i e v i s n e h e r p m o C r a e y e h t r o f t fi o r P e m o c n i e v i s n e h e r p m o c r e h t O e m o c n i e v i s n e h e r p m o c l a t o T SOCIETATEA ENERGETICA ELECTRICA SA SEPARATE STATEMENT OF CASh FLOWS FOR ThE yEAR ENDED 31 DECEMBER 2016 (All amounts are in RON) Cash flows from operating activities Profit for the year Adjustments for: Depreciation Amortisation Impairment of trade and other receivables, net Net finance income Changes in provisions, net Income tax expense Changes in: Trade receivables Other receivables Restricted cash Trade payables Other payables Employee benefits Note 2016 2015 265,026,109 300,864,484 20 21 16,18 10 26 15 23,087,773 419,054 38,391,976 (387,943,921) (31,250,650) 7,233,616 20,028,254 213,483 (2,832,061) (372,736,735) 31,250,650 (156,580) (85,036,043) (23,368,505) (57,437,525) 18,856,898 (134,491,752) 49,579,305 3,745,961 22,363 (23,028,726) (631,077) - 10,426,415 (1,369,714) 123,858 Cash generated from operating activities (204,760,793) (37,847,749) Interest paid (1,677) (38) Net cash from operating activities (204,762,470) (37,847,787) Cash flows from investing activities Payments for purchases of property, plant and equipment Payments for purchase of other intangible assets Payments for purchase of treasury bills and government bonds Proceeds from maturity of treasury bills and government bonds Increase in deposits with maturity of 3 months or longer Proceeds from deposits with maturity of 3 months or longer Interest received Dividends received Net cash used in investing activities Cash flows from financing activities Dividends paid Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December The accompanying notes are an integral part of these separate financial statements Non-monetary transactions are presented in Note 19. General Manager Dan Catalin Stancu Finance Manager Iuliana Andronache (16,909,651) (757,101) (2,437,538,086) 2,436,403,791 (109,087,392) 148,443,585 14,844,919 374,838,510 (22,560,889) (1,034,480) (4,093,998,000) 3,240,481,000 (144,056,000) 136,704,000 29,494,629 344,647,949 410,238,575 (510,321,791) 10 23 (291,198,118) (244,084,165) (291,198,118) (244,084,165) 19 19 (85,722,013) 283,366,031 197,644,018 (792,253,743) 1,075,619,774 283,366,031 . s t n e m e t a t s l a i c n a n fi e t a r a p e s e s e h t f o t r a p l a r g e t n i n a e r a s e t o n g n i y n a p m o c c a e h T 6 1 0 2 R E B M E C E D 1 3 D E D N E R A E y E h T R O F y T I U Q E N I S E G N A h C F O T N E M E T A T S E T A R A P E S A S I A C R T C E L E A C I T E G R E N E A E T A T E C O S I ) N O R n i e r a s t n u o m a l l A ( 230 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A SOCIETATEA ENERGETICA ELECTRICA SA NOTES TO ThE SEPARATE FINANCIAL STATEMENTS FOR ThE yEAR ENDED 31 DECEMBER 2016 (All amounts are in RON, if not otherwise stated) 1 Reporting entity These financial statements are the separate financial statements of Societatea Energetica Electrica S.A. (“Company” or “Electrica SA”). During 2016 the Company changed its name from Societatea de Distributie si Furnizare a Energiei Electrice Electrica S.A. to Societatea Energetica Electrica S.A. Electrica was originally incorporated as a company in 1998 by Government Decision no. 365/1998, following the restructuring of the former National Electricity Company (RENEL). On 1 August 2000, following the restructuring of the former National Electricity Company (CONEL) 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, District 1, Bucharest, Romania. The Company has unique registration number 13267221 and Trade Register number J40/7425/2000. As at 31 December 2016 the major shareholder of Electrica SA is the Romanian State, represented by the Ministry of Energy (48.78%), after the ownership dilution following an initial public offer. The next largest shareholder is the European Bank for Reconstruction and Development with 8.66%. As at 31 December 2016 and 2015, Electrica SA has the following investments in subsidiaries: Subsidiary Activity Tax code Societatea de Distributie a Energiei Electrice Muntenia Nord SA Societatea de Distributie a Energiei Electrice Transilvania Nord SA Societatea de Distributie a Energiei Electrice Transilvania Sud SA Electrica Furnizare SA Electrica Serv SA Servicii Energetice Muntenia (In reorganization) Servicii Energetice Oltenia SA (In reorganization) Servicii Energetice Moldova SA (In bankruptcy)* Servicii Energetice Dobrogea SA (In bankruptcy)* Electricity distribution in geographical area of Muntenia Nord Electricity distribution in geographical area of Transilvania Nord Electricity distribution in geographical area of Transilvania Sud Electricity Supply 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) Head Office % shareholding as at 31 Dec 2016 78.0000021% Ploiesti % shareholding as at 31 Dec 2015 78.0000021% 14506181 14476722 Cluj-Napoca 77.99999% 77.99999% 14493260 Brasov 78.0000019% 78.0000019% 28909028 17329505 Bucuresti Bucuresti 77.99997% 100% 77.99997% 100% 29384120 Bucuresti 100% 100% 29389861 Craiova 100% 100% 29386768 Bacau 100% 100% 29388378 Constanta 100% 100% *Electrica SA lost control over Servicii Energetice Dobrogea in January 2015 and over Servicii Energetice Moldova in January 2016 as a consequence of starting the subsidiary’s bankruptcy procedure (see Note 22). THE COMPANY’S MAIN ACTIVITIES Currently, the core business of the Company, per the Statute, annex to Government Decision no, 627/2000, consolidated, amended and supplemented, is “Activities of business and management consulting”. The Company also covers services on the balancing electricity market and trading. According to the Commercial Code of the wholesale electricity market, the 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 E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 231 market (producer, supplier, operator, eligible consumer) has the obligation to register at the Operator of the balancing market part 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. 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 through 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 as Global Depository Receipts (“GDRs”) on the UK market. The IPO was organised between 11 and 27 June 2014 and referred to an offering by the Company of 177,188,744 ordinary shares in the form of shares and GDRs, each GDR representing four shares. Following the IPO, the Company sold 142,007,744 shares and 8,795,250 GDRs, at the offer price of RON 11 per share and USD 13.66 per GDR. The allocation of shares and GDRs was 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 at 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. 2 Basis of preparation These separate financial statements have been prepared in accordance with the Ministry of Public Finance Order no. 2844/2016 for approving the Accounting Regulations in accordance with International Financial Reporting Standards (“OMFP 2844/2016”). In acceptance of OMFP 2844/2016, 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 separate financial statements were authorized for issue by the Board of Directors on 9 March 2017. The financial statements will be submitted for shareholders’ approval in the meeting scheduled on 27 April 2017. 3 Functional and presentation currency These separate financial statements are presented in Lei (RON), which is the functional currency of the Company. All amounts are in RON, if not otherwise stated. 4 Use of judgements and estimates In preparing these separate 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, revenues and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are prospectively recognised. (a) Judgements Information about judgements made in applying accounting policies that have the most significant effects on the amounts recognised in the separate financial statements is included below: Commissions Company assesses its revenue arrangements based on 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 recognised revenue is the net amount of commission earned by the Company. 232 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 233 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in RON, if not otherwise stated) (b) Assumptions and estimation uncertainties (B) COMMISSIONS 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: • Note 6 h) and i) – estimates regarding the useful lives of property, plant and equipment and of intangible assets; • Notes 16 and 27 – assumptions and estimates about the recoverability of trade receivables; • Note 20 - assumptions regarding the revalued amount of property, plant and equipment; • Note 22 – assumptions and estimates regarding the valuation of shareholdings in the subsidiaries; • Note 15 – recognition of deferred tax assets: availability of future taxable profit against which tax loss carried forward can be used; • Notes 26 and 29 – recognition and measurement of provisions and contingencies; • Note 13 – measurement of defined benefit obligations and other long-term employee benefits: key actuarial assumptions; • Note 20 – determining whether an agreement 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 observable market data as far as possible. Fair values are categorised into different levels in the fair value hierarchy based on the inputs used in the valuation techniques as follows: • • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; 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); 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 are categorised into different levels of the fair value hierarchy, then the fair value measurement is entirety categorised on the level of 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 used in measuring fair values is included in Note 20: Property, plant and equipment. 5 Basis of measurement The separate financial statements have been prepared on the historical cost basis, except for the land and buildings which are measured based on revaluation model. 6 Significant accounting policies The Company has consistently applied the following accounting policies to all periods presented in these separate 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 reliably measured. 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 the statements of work performed, regardless of when paid or received, in accordance with the accrual accounting principle. Sales of goods Revenues from sale of goods are recognized when the significant risks and rewards of ownership of the goods have passed to the buyer. Company assesses its revenue arrangements based on specific criteria to determine if it is acting as principal or agent. If the Company acts in the capacity of an agent rather than as the principal in a transaction, then the recognised revenue 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: • • • • • interest income; interest expense; dividend income; the foreign currency gain or loss on financial assets and financial liabilities; impairment losses recognised on financial assets (other than trade receivables), Interest income or expense is recognised using the effective interest method. (D) FOREIGN CURRENCY TRANSACTIONS 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 to the functional currency. (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 services provided by the employee and the obligation can be reliably estimated. (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, updating that amount at the present value. The calculation of defined benefit obligations is performed annually by a qualified actuary using the projected unit credit method. Re-measurements 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, considering 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. 234 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 235 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in RON, if not otherwise stated) (iv) Other long-term employee benefits The Company’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. Re-measurements 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 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 for the items recognised directly in equity or in other comprehensive income, case in which it will be recognized 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: • temporary differences arising from the initial recognition of assets and liabilities resulting from transactions that are not business combinations and that affect neither accounting nor taxable profit or loss; temporary differences resulting from investments in subsidiaries, associates and jointly controlled entities, to the extent that the Company can exercise control over the reversal period of the temporary differences and it is probable that they will not be reversed in the foreseeable future. • Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences only to the extent that it is probable that future taxable profits will be available to be used for covering them. 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 based on the tax rates that are expected to be applicable to temporary differences when they are reversed, using tax rates enacted or substantively enacted at the reporting date. The measurement of the deferred tax reflects the tax consequences that would follow from the manner in which the Company expects to recover or settle the carrying amount of its assets and liabilities at the reporting date. 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 is probable that the future taxable profits will be available against which they can be used. (G) INVENTORIES Inventories consist mainly of consumables and other materials. 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 perform 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. 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 performed with sufficient regularity to ensure that the carrying amount does not materially differ from the one 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 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 other non-current assets in progress are not depreciated. The estimated useful lives of property, plant and equipment are as follows: Category Buildings Equipment Vehicles, furniture and office equipment Useful lives 60-70 (average 67 years) 4-12 (average 7 years) 3-10 (average 7 years) The depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. (I) INTANGIBLE ASSETS (i) Recognition and measurement 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 recognised in profit or loss. The estimated useful lives of software and licenses are 3-5 years. The amortisation method, the useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. (H) PROPERTY, PLANT AND EqUIPMENT (J) ASSETS HELD FOR DISTRIBUTION (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 Non-current assets, or groups to be disposed 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 groups to be disposed, are measured at the lower of their carrying amount and fair value less costs of distribution. Impairment losses and subsequent gains and losses on re-measurement are recognised in profit or loss in case they refer to an asset that is initially classified as held-for-distribution.   236 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 237 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in RON, if not otherwise stated) (K) FINANCIAL INSTRUMENTS (iii) Non-derivative financial liabilities – measurement The Company classifies non-derivative financial assets into the following categories: loans and receivables, held to maturity investments and available-for-sale financial assets. The Company classifies non-derivative financial liabilities into the other financial liabilities category. 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 loans, bank overdrafts and trade payables. (i) Non-derivative financial assets and financial liabilities – recognition and derecognition 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. 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. (iv) Share capital 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 expired. Financial assets and financial liabilities are offset and the net amount presented in the statement of 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 the reporting date for the balancing electricity market settlements, late payment penalties and accrued revenue for the balancing electricity market settlements until the end of the year, but invoiced after the end of the year. Trade receivables include also invoices issued or to be issued to the subsidiaries for the 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, that 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, held-to-maturity financial assets are measured at amortized cost using the effective interest method. Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are designated as available for sale. Available- for-sale financial assets 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. 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 and 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. (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: • • • • • • default or delinquency by a debtor; restructuring of an amount due to the Company on terms that the Company would not otherwise accept; indications that a debtor or issuer will enter bankruptcy; adverse changes in the payment status of borrowers or issuers; the disappearance of an active market for a security; or observable data indicating that there is a measurable decrease in expected cash flows for 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 the assets that are individually significant 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 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. 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 objectively related to an event occurring after the impairment was recognised, then the previously recognised impairment loss is reversed through profit or loss. Financial assets available-for-sale for which there is not an active market and it is not possible to reliably determine the fair value, are measured at cost and periodically tested for impairment. (ii) Non-financial assets Financial assets available-for-sale include investments in subsidiaries and investments in associates. 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. 238 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 239 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in RON, if not otherwise stated) 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 RESERVES 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 financial statements when their distribution is proposed after the reporting date and before the date of the issuance of the financial statements. (O) 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 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. No provisions are provided for future operating losses. (q) CONTINGENT ASSETS AND LIABILITIES A contingent liability is: (a) a potential obligation arising as a result of previous events and whose existence will be confirmed only by the occurrence or the non-occurrence of one or more uncertain future events, which are not fully controlled by the Company; or (b) a current obligation arising as a result of previous events, but which is not recognized because: i. it is unlikely that outputs of resources incorporating economic benefits to be required for the settlement of the obligation; or ii. the value of the obligation may not be evaluated credibly enough. Contingent liabilities are not recognized in the financial statements of the Company. They are presented in case the output of resources incorporating economic benefits is possible and not probable. A contingent asset is a potential asset that appears as a result of previous events and whose existence will be confirmed only by the occurrence or the non-occurrence of one or more uncertain future events, which are not fully controlled by the Company. A contingent asset is not recognized in the financial statements of the Company, but it is shown when an input of economic benefits is likely to arise. (R) 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 substantially all the risks and rewards of ownership to the Company are classified as finance leases. The leased assets and finance lease liability are initially measured 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) Rent income Rental income from property, plant and equipment other than property investment is recognised as other income. Rental income is recognised on a straight-line basis over the term of the lease. 240 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 241 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in RON, if not otherwise stated) (S) SUBSEqUENT EVENTS (c) Other operating expenses Events occurring after the reporting date which provide additional information about conditions prevailing at those reporting dates (adjusting events) are reflected in the separate financial statements. Events occurring after the reporting dates that provide information on events that occurred after the reporting dates (non-adjusting events), when material, are disclosed in the notes to the separate 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 New standards and interpretations not yet adopted The European Union has adopted a series of standards whose application is not yet mandatory for the year ended on 31 December 2016 and which have not been applied for the present individual financial situations: f IFRS 9 ”Financial Instruments”. IFRS 9 is applicable for annual periods that begin on or after 1 January 2018, early adoption being permitted. The company intends to apply IFRS 9 the first time on 1 January 2018. IFRS 9 implementation impact on the 2018 individual financial statements of the Company is not known and cannot be reasonably estimated, as it will depend on the financial instruments that will be held by the Company and of the economic situation at that date, as well as of the future chosen accounting treatments and judgements. The company has carried out a preliminary analysis of the impact of the application of IFRS 9 in view of the situation at 31 December 2016, and it does not consider that the new requirements would have had a significant impact on the financial statements, if applied at 31 December 2016. f IFRS 15 “Revenues from contracts with customers”. IFRS 15 introduces a common model for revenues’ recognition and measurement. The standard replaces the criteria for the recognition of revenues, replacing the standards IAS 18 Revenue, IAS 11 Building contracts and IFRIC 13 Loyalty programs for customers. IFRS 15 shall apply for the annual periods that start on or after 1 January 2018, early adoption being permitted. The company has carried out a preliminary analysis of the impact of the application of IFRS 15 on the financial statements. THE SERVICES RENDERING The Company does not anticipate significant differences on the moment of recognition of revenues or the net impact on the outcome of the financial year. TRANSITION The company intends to adopt IFRS 15 in the financial statements for the year ending on 31 December 2018 using the retrospective approach. Therefore, the Company will apply all the requirements of the IFRS 15 for each comparative period presented and will adjust the financial statements. The company has started a detailed analysis of the impact resulting from the application of IFRS 15. 8 Revenue Supply energy in balancing market and day- ahead-market Revenues from services contracts with the subsidiaries related to the Automatic Meter Reading System (Note 20) Total 2016 357,705,156 2015 379,038,959 4,683,036 4,669,161 362,388,192 383,708,120 9 Other operating revenues and expenses (a) Other operating revenues Other income mainly includes rent revenue and late payment penalties from customers. (b) Purchased electricity Purchased electricity includes the cost of electricity purchased for settlements on balancing market and day-ahead-market. Rent Repair and maintenance expenses IT services Postage and telecommunication Penalties for late payment and other payments to the State Other taxes and duties Legal and consultancy fees Bank commissions Other Total 2016 17,088 1,466,533 494,340 3,354,655 62,417,320 626,058 3,818,706 254,051 8,588,420 2015 76,424 2,305,640 1,409,652 3,105,028 299,467 495,698 8,104,919 501,554 6,990,836 81,037,171 23,289,218 During 2015, the Company has recognized a provision for the amount of RON 31,250,650 for disputes with National Agency for Fiscal Administration “NAFA” having as its object the penalties for delay in the payment claimed by the NAFA. Also, during 2016 the Company has created additional provisions in the amount of RON 23,648,000 as a result of the court of first instance’s decision of rejecting the appeal against enforcement. In December 2016, the company made payments in amount of RON 41,210,654 as a result of the forced execution received in connection with these litigations and reversed the provisions constituted (see Note 26) and the claims to the tax previously recognized. The above line: “Penalties for delay in the payment of taxes and fees and other payments to the State” includes the amount of RON 58,126,604 in connection with these disputes. 10 Net finance income Interest income Dividends income Foreign exchange gains Other finance income Total finance income Interest expense Interest cost for employee benefits (Note 13) Foreign exchange losses Other financial costs Total finance costs Net finance income 2016 14,784,494 374,838,510 - 59,642 389,682,646 (1,677) (56,739) (1,680,309) - (1,738,725) 387,943,921 2015 26,379,877 344,647,949 1,932,933 65,442 373,026,201 (38) (93,404) - (196,024) (289,466) 372,736,735 In 2016, the Company received a total amount of RON 374,838,510 as dividends from its subsidiaries (2015: RON 344,647,949). The average interest rate for deposits, treasury bills and government bonds with original maturity of three months increased from 0.93% in 2015 to 0.63% in 2016. 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 265,026,109 300,864,484 Profit attributable to ordinary shareholders 265,026,109 300,864,484 2016 2015 242 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 243 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in RON, if not otherwise stated) Weighted-average number of ordinary shares (in number of shares) Issued ordinary shares at 1 January 2016 2015 339,049,336 339,049,336 Weighted-average number of ordinary shares at 31 December 339,049,336 339,049,336 For the calculation of basic and diluted earnings per share, the own shares repurchased by the Company (6,890,593 shares) were not treated as outstanding shares and are deducted from the total number of issued ordinary shares. Earnings per share Basic and diluted earnings per share (RON) 2016 0.78 2015 0.89 12 Short-term employee benefits Personnel payables Current portion of defined benefit liability and other long-term employee benefits Social security charges Tax on salaries Termination benefits payable Total 31 December 2016 1,891,629 178,350 31 December 2015 1,509,846 344,582 680,514 287,474 - 3,037,967 629,642 285,750 114,881 2,884,701 Defined benefit liability Balance at 1 January Included in profit or loss Current service cost Interest (income) / cost Included in other comprehensive income Re-measurements loss (gain) - Actuarial loss / (gain) Other Benefits paid Balance at 31 December Other long-term employee benefits Balance at 1 January Included in profit or loss Current service cost Actuarial gain Interest cost Benefits paid Balance at 31 December (II) ACTUARIAL ASSUMPTIONS Details related to employee benefit expenses are presented in Note 13. The following are the main actuarial assumptions at the respective reporting date: 2016 2015 1,043,453 1,731,636 32,481 30,491 62,972 38,417 45,575 83,992 (100,114) (703,969) (29,549) 976,762 (68,206) 1,043,453 2016 1,096,717 2015 1,511,720 33,852 (279,897) 26,248 (94,743) 782,177 41,971 (414,894) 47,829 (89,909) 1,096,717 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, child benefit, temporary incapacity for work situations, risks of work accidents and professional diseases and other social assistance services, redundancy payments and incentives granted to employers to creating new jobs. 13 Post-employment 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 2016 and 2015, employee benefit obligations were computed by independent actuary using the projected unit credit method with benefits calculated proportionally to the 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 2016 31 December 2015 976,762 782,177 1,758,939 178,350 1,580,589 1,043,453 1,096,717 2,140,170 344,582 1,795,588 (I) MOVEMENT IN THE DEFINED BENEFIT LIABILITY AND OTHER LONG-TERM EMPLOYEE BENEFITS The following tables shows a reconciliation between the opening balances and the closing balances of the defined benefit liability and other long-term employee benefits and their components. There are no plan assets. (a) Macroeconomic assumptions: f Inflation. The actuary used the Consumer Price Index (CPI) published by the Economist Intelligence Unit: Year 2016 2017 2018 2019 2020+ Valuation date 31 December 2016 - 2.3% 2.3% 2.2% 2% Valuation date 31 December 2015 1.8% 2.5% 2.3% 2.2% 2.2% f the discount rate used was the yield for Romanian government bonds maturing in 10 years at the reporting date, 3.63% for the year 2016 (2015: 4.75%); f the electricity price per KWh used in the actuarial computation is 0.4576 RON at 31 December 2016 (2015: 0.4847 RON/ KWh); f the mortality rate published by the National Institute of Statistics was adjusted to allow for an anticipated decrease in mortality rates; f taxes and social charges are those in force as at the reporting date. (b) Company specific assumptions: f Salaries’ growth rate was correlated mainly with the estimated inflation rates in the future periods; f employees’ turnover: turnover rates are based on statistical information regarding employees’ mobility during 2003-2015. Considering historical leaving data, it is assumed that the personnel turnover rate decreases with the employees’ age; f jubilee and retirement bonuses granted based on seniority per the collective labour contract, as follows: 244 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 245 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in RON, if not otherwise stated) Jubilee bonuses based on years of service Retirement bonuses based on years of service in the Company No. of gross monthly base salaries Seniority 31 December 2016 31 December 2015 Seniority No. of gross monthly base salaries 31 December 2016 31 December 2015 20 years 30 years 35 years 40 years 45 years 0.8 1.6 2.4 3.2 4 0.8 1.6 2.4 3.2 4 Between 8 and 10 years Between 10 and 25 years More than 25 years 1 2 3 1 2 3 In case the conditions related to years of service are met, the Company offers as benefit free electricity in quantity of 1,200 kWh per year to retired employees of the Company. In the event of pensioner’s death, husband/wife is entitled to receive the same benefit until he/she will marry again. Termination benefits a. Termination benefits for individual lay-offs at the Company’s initiative 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: Seniority 1 - 5 years 5 - 10 years 10 - 20 years More than 20 years No. of gross monthly base salaries 4 6 7 10 b. Termination benefits for collective lay-offs at the Company’s initiative For collective lay-offs, per the Collective labour contract, the Company will pay termination benefits to the employees depending on their period of service, as follows: Seniority 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 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 Company’s reorganization and restructuring. Employees who are re- employed within the Company after layoff are not entitled to the above-mentioned benefits. The financial statements do not include any provision for liabilities relating to compensation payments because there does not exist a present obligation in this regard. c. Termination benefits for voluntary redundancies According to the Collective labour contract from 13 August 2015 and to the Addendum on 1 October 2015, signed by the Company and the Union, in case the individual labour contract is terminated as voluntary redundancy of the employee, the Company will make severance payment depending on the employee’s remaining period to reach the standard retirement age, his period of service in the Company and his seniority. The number of gross monthly base salaries paid as termination benefits vary between 4 and 18. 14 Employee benefit expenses Average number of employees Number of employees at 31 December Wages and salaries Social security contributions Meal tickets Termination benefits Total 2016 130 142 16,631,440 3,605,695 266,704 - 20,503,839 2015 138 136 12,819,916 2,598,117 269,909 948,951 16,636,893 The termination benefits represent compensation payments in case of employees’ voluntary departure (see Note 13 c). Management remuneration is presented within Note 28 – Related parties. 15 Income tax 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 fiscal 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 the income tax expense in the period that such a determination is made. (i) Amounts recognised in profit or loss Deferred tax expense / (gains) Total expense/ (gain) related to income tax 2016 7,233,616 7,233,616 2015 (156,580) (156,580) (ii) Amounts recognised in other comprehensive income Before tax 100,114 2016 Fiscal benefit (expense) (16,018) Net of tax Before tax 84,096 703,969 2015 Fiscal benefit (expense) (112,635) Net of tax 591,334 100,114 (16,018) 84,096 703,969 (112,635) 591,334 Re-measurement of defined benefit liability Total (iii) Reconciliation of effective tax rate Profit before tax Tax using Company’s domestic tax rate Non-deductible expenses Non-taxable income Current-year tax losses for which no deferred tax asset is recognised Deferred tax asset derecognised Other tax effects Income tax – expense/(income) 2016 2015 272,259,725 300,707,904 16% 43,561,556 8,639,798 3% 16% 2% 48,113,265 4,655,583 -20% (59,974,162) -18% (55,143,672) 3% 2% 0% 2% 7,718,132 7,229,222 59,070 7,233,616 1% 0% 0% 0% 2,232,507 - (14,263) (156,580) Non-taxable income represents dividend income in amount of RON 374,838,510 (2015: RON 344,647,949). 246 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 247 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in RON, if not otherwise stated) (iv) Movement in deferred tax balances Net balance at 1 January 2016 Recognised in profit or loss Recognised in other comprehensive income Deferred tax assets, net Deferred tax assets Deferred tax liabilities Balance at 31 December 2016 2,783,522 (40,288) - 2,743,234 - 2,743,234 2016 Property, plant and equipment Employee benefits (260,885) 44,682 16,018 (200,185) (200,185) - Tax loss carried forward (9,772,271) 7,229,222 - (2,543,049) (2,543,049) Tax liabilities (assets) before set-off Set off of tax Net tax liabilities (assets) (7,249,634) 7,233,616 16,018 - - - (7,249,634) 7,233,616 16,018 - - - (2,743,234) 2,743,234 2,743,234 (2,743,234) - - Net balance at 1 January 2015 Recognised in profit or loss 2,953,090 (169,568) Recognised in other comprehensive income - Balance at 31 December 2015 Deferred tax assets, net Deferred tax assets Deferred tax liabilities 2,783,522 - 2,783,522 2015 Property, plant and equipment Employee benefits (386,508) 12,988 112,635 (260,885) (260,885) - Tax loss carried forward (9,772,271) - - (9,772,271) (9,772,271) Tax liabilities (assets) before set-off Set off of tax Net tax liabilities (assets) (7,205,689) (156,580) 112,635 (7,249,634) 2,783,522 - - - - (10,033,156) 2,783,522 (2,783,522) (7,205,689) (156,580) 112,635 (7,249,634) (7,249,634) - (v) Unrecognised deferred tax assets The Company had not recognized deferred tax assets in respect of the 2016 and 2015 tax losses as it is not probable that future taxable profit will be available against which the Company can use the benefits therefrom. Tax losses for which no deferred tax assets were recognised expire as follows: Year when the tax loss was generated: 2016 (expiring in 2023) 2015 (expiring in 2022) Total (vi) Receivables regarding current income tax Tax losses 2016 48,238,325 - 48,238,325 2015 - 13,953,169 13,953,169 As at 31 December 2015, current income tax receivables include the amount of RON 16,915,950 which is under litigation with National Agency for Fiscal Administration (“NAFA”). During 2016, the Company has derecognized these receivables as the dispute resolution was not favourable (see also Note 9). 16 Trade receivables Trade receivables, gross Bad debt allowance Total trade receivables, net 31 Decembrer 2016 774,555,334 (710,480,561) 64,074,773 31 December 2015 745,268,376 (667,736,915) 77,531,461 Receivables from related parties are presented in Note 28. Trade receivables, gross, comprise: Electricity supply on the balancing market Electricity receivables from clients in litigation, insolvency and bankruptcy (mainly Oltchim SA, Transenergo) Late payment penalties from clients in litigation, insolvency and bankruptcy (Oltchim SA) Other Total trade receivables, gross 31 December 2016 80,757,358 31 December 2015 83,032,806 601,372,888 569,811,232 88,968,313 88,968,313 3,456,775 774,555,334 3,456,025 745,268,376 The reconciliation between the opening balances and the closing balances of the impairment for trade receivables is follows: as Bad debt allowance Balance as at 1 January 2016 667,736,915 2015 670,398,254 Impairment recognized Impairment reversed Balance as at 31 December 42,847,186 (103,540) 710,480,561 - (2,661,339) 667,736,915 The ageing of trade receivables is presented in Note 27. Oltchim SA (a state-controlled company) was a significant customer of the Company until January 2012, 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 impairment for trade receivables to the total amount of receivables. The procedure is ongoing, the Company being registered in the creditors’ body. The adjustments recognized during 2016 comprise the amount of RON 31,561,656 refering to receivables from Transenergo Com S.A., trader of energy whose financial situation has deteriorated as a result of the recent changes in prices on the spot market of electrical energy. Electrica SA has initiated the procedure of enforcement against Transenergo Com S.A. due to non-collection of bills starting from September. On 1 February 2017, the procedure of insolvency of Transenergo Com S.A. has been opened. The balance of the debt at the gross value from Transenergo Com S.A. at 31 December 2016 is RON 35,561,656. Electrica SA is the beneficiary of an insurance policy for an amount of RON 4,000,000. The management estimates that the degree of recovery of the uninsured debt is reduced and consequently impairments were recorded. 17 Deposits, treasury bills and government bonds Treasury bills and government bonds denominated in RON with original maturity of more than three months Deposits with maturity of more than three months Total deposits, treasury bills and government bonds 31 December 2016 1,757,746,279 31 December 2015 1,756,339,194 109,369,081 1,867,115,360 144,056,193 1,900,395,387 Deposits, treasury bills and government bonds with original maturity of more than three months have an average interest rate (yield) of 0.63% (2015: 0.93%) at the following banks: Citibank Europe PLC Dublin, Raiffeisen Bank, BRD- GSG, Marfin Bank, ING Bank. The treasury bills and government bonds are classified as investments held-to-maturity. 248 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 249 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in RON, if not otherwise stated) 18 Other receivables Interest receivable Other receivables Bad debt allowance Total other receivables, net 31 December 2016 - 22,536,204 (9,938,335) 12,597,869 31 December 2015 60,425 27,285,805 (14,290,005) 13,056,225 Other receivables, net, include loans granted by the Company to Electrica Serv (see Note 28). The reconciliation between the opening balances and the closing balances of the impairment for other receivables is as follows: Bad debt allowance 2016 2015 Balance as at 1 January Impairment recognized Impairment reversed Balance as at 31 December 14,290,005 14,460,727 - (4,351,670) 9,938,335 795,686 (966,408) 14,290,005 19 Cash and cash equivalents 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 individual statement of financial position and in the individual statement of cash flow 31 December 2016 31 December 2015 3,825,171 193,787,807 31,040 - 11,205,203 181,248,010 47,403 90,865,415 197,644,018 283,366,031 In 2015, cash and cash equivalents included treasury bills and government bonds denominated in RON of RON 90,865,415 and an average interest rate (yield) of 0.56% p.a., at the following banks: Citibank Europe PLC Dublin, Raiffeisen Bank, BRD-CSG, Marfin Bank, ING Bank. The following information is relevant in the context of the statement of cash-flows: Non-cash activity includes: • Compensations between trade receivables and trade payables, especially related to the Company’s subsidiaries of RON 33,193,031 in 2015 (2014: RON 55,983,780) Also, during 2016, the Company made payments for tangible assets in amount of RON 14,471,423 (2015: RON 0). On 17 October 2016, Societatea de Distributie a Energiei Electrice Muntenia Nord SA, Societatea de Distributie a Energiei Electrice Transilvania Nord SA and Societatea de Distributie a Energiei Electrice Transilvania Sud SA have concluded credit agreements with BRD – Groupe Societe Generale, in which the Company is guarantor. The contracts relate to facilities for non-revolving term loans, with maturity on 15 October 2021. The total amount of the loan is RON 320 million. On 31 December 2016, the Company has guarantees as collateral deposits at BRD – Groupe Societe Generale for the withdrawals made by the Societatea de Distributie a Energiei Electrice Transilvania Sud SA and Societatea de Distributie a Energiei Electrice Transilvania Nord SA. The amount of such collateral deposits at 31 December 2016 is RON 134,491,752. The company has classified these deposits as restricted cash. 20 Property, plant and equipment The movements in property, plant and equipment in 2016 and 2015 were as follows: Buildings Equipment Land and land im- provements Vehicles, furniture and office equipment Construction in progress Total 79,131,847 - - (3,874,652) 75,257,195 2,282,500 77,539,695 16,758,572 - - - 16,758,572 - 16,758,572 122,716,040 892,742 112,858,356 (15,680) 236,451,458 966,948 237,418,406 743,554 - - (10,877) 732,677 157,526 890,203 123,284,282 342,634,295 26,022,890 25,130,148 - (112,858,356) (3,901,209) - 364,755,976 35,556,074 4,720,728 1,313,754 369,476,704 36,869,828 - - - - - - 18,572 230,237 - 248,809 230,240 479,049 38,195,658 19,775,652 (12,589) 57,958,721 22,847,888 80,806,609 695,967 22,365 (10,876) 12,465,531 - - 707,456 9,645 717,101 12,465,531 - 12,465,531 51,375,727 20,028,254 (23,465) 71,380,516 23,087,773 94,468,289 79,131,847 75,257,195 77,539,695 16,740,000 16,509,763 16,279,523 84,520,382 178,492,737 156,611,797 47,587 25,221 173,102 110,818,751 291,258,568 293,375,460 23,090,543 275,008,415 24,404,297 Gross carrying amount Balance at 1 January 2015 Additions Transfers from assets in progress Disposals Balance at 31 December 2015 Additions Balance at 31 December 2016 Accumulated depreciation and impairment losses Balance at 1 January 2015 Depreciation Accumulated depreciation of disposals Balance at 31 December 2015 Depreciation Balance at 31 December 2016 Net carrying amounts At 1 January 2015 At 31 December 2015 At 31 December 2016 On 31 December 2016, the buildings and lands include the administrative office of the Company and the corresponding land and the lands over which the Company has obtained title deeds which will be used as capital injection for subsidiaries. The administrative headquarter has a net book value of RON 16,134,462 (2015: RON 16,360,119) while the related land is worth RON 13,410,443 of net book value at 31 December 2016 (2015: RON 13,410,443). Equipment and tangible assets in progress mainly include costs related to the implementation of the AMR system (Automatic Meter Reading) for electricity measuring and dispatch activity of the entire Group. On 31 December 2016, the net capitalized amount regarding the system is RON 176,159,847 (2015: RON 197,238,723), out of which a part is recognized as tangible asset in progress amounting to RON 21,942,902 as at 31 December 2016 (2015: RON 21,524,137). During 2017, there will be an evaluation by an independent evaluator of the entire AMR system in order to be taken order by the distribution operators from the Electrica Group. It is estimated that, during 2017, the company will commission the assets in progress related to the implementation costs of the AMR system. Related to the AMR system, the Company has concluded service agreements with the distribution subsidiaries. The main services provided relate to retrieve direct data from measurement group in real time with accuracy and increased frequency by the distribution subsidiaries, by using remote reading systems from electricity metering points from the measurement electricity points, property of the Company located at consumption points, respectively in the networks of the distribution operators from Electrica Group. 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 the specific assets, according to the contractual provisions. 250 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 251 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in 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 well as the significant unobservable inputs used. Category Valuation technique Land Market approach 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 the most 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 rented building taking into account occupancy rate and costs to be paid by the tenants. The discount rate estimation considers, inter alia, the quality of a building and its location Significant unobservable inputs • Adjustments for liquidity, location, size Inter-relationship between key unobservable inputs and fair value measurement The estimated fair value would increase (decrease) if: • Adjustments for liquidity, location, size were lower (higher) • Occupancy rates (80- 90%) • Discount rates (9.5% • • • • on average) Costs to be paid by tenants (average 10%) Annual rent per sqm Rental growth Adjustments for liquidity, location, size The estimated fair value would increase (decrease) if: • Occupancy rates were higher (lower) • Discount rates were lower • • • • (higher) Costs to be paid by tenants were lower (higher) Annual rent per sqm was higher (lower) Rental growth was higher (lower) Adjustments for liquidity, location, size were lower (higher) 21 Intangible assets Intangible assets include mainly licenses and costs of implementation of SAP ERP, as follows: Gross carrying amount Balance at 1 January 2015 Additions Transfers from intangibles in progress Balance at 31 December 2015 Additions Balance at 31 December 2016 Accumulated depreciation and impairment losses Balance at 1 January 2015 Amortisation Balance at 31 December 2015 Amortisation Balance at 31 December 2016 Net carrying amounts At 1 January 2015 At 31 December 2015 At 31 December 2016 Software and licenses Intangible assets in progress Total 2,822,358 112,004 1,290,459 4,224,821 757,101 4,981,922 2,512,675 213,483 2,726,158 419,054 3,145,212 309,683 1,498,663 1,836,710 367,983 922,476 (1,290,459) - - - - - - - - 367,983 - - 3,190,341 1,034,480 - 4,224,821 757,101 4,981,922 2,512,675 213,483 2,726,158 419,054 3,145,212 677,666 1,498,663 1,836,710 22 Investments in subsidiaries The situation regarding the investments in subsidiaries is presented as follows: Societatea de Distributie a Energiei Electrice Muntenia Nord Societatea de Distributie a Energiei Electrice Transilvania Nord Societatea de Distributie a Energiei Electrice Transilvania Sud Electrica Furnizare SA Electrica Serv SA 31 December 2016 31 December 2015 Gross value 322,729,680 336,460,800 383,398,860 57,695,820 Impairment Gross value Impairment - - - - 322,729,680 336,460,800 383,398,860 57,695,820 - - - - 445,743,000 (144,849,133) 445,743,000 (144,849,133) Servicii Energetice Muntenia SA 29,640,430 - 29,640,430 - Servicii Energetice Moldova SA 106,162,492 (106,162,492) 106,162,492 (106,162,492) Servicii Energetice Oltenia SA 82,033,220 (82,033,220) 82,033,220 (82,033,220) Total 1,763,864,302 (333,044,845) 1,763,864,302 (333,044,845) Electrica SA also holds shares in two companies that are in bankruptcy (Servicii Energetice Banat si Servicii Energetice Doborgea), the net value of these investments being zero. The Company has lost control over them in November 2014 and respectively in January 2015, when they have entered bankruptcy. Societatea de Distributie a Energiei Electrice Muntenia Nord Societatea de Distributie a Energiei Electrice Transilvania Nord Societatea de Distributie a Energiei Electrice Transilvania Sud Electrica Furnizare SA Electrica Serv SA Servicii Energetice Muntenia SA Total investments in subsidiaries Investments in the subsidiaries, net value 31 December 2016 31 December 2015 322,729,680 322,729,680 336,460,800 336,460,800 383,398,860 383,398,860 57,695,820 300,893,867 29,640,430 1,430,819,457 57,695,820 300,893,867 29,640,430 1,430,819,457 The Company fully accounted the impairment of investments in Servicii Energetice Oltenia SA, which is in reorganization process, because is deemed to be an unrecoverable investment. The Company did not adjusted the carrying amount of the investments in Servicii Energetice Muntenia as long as 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 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 2016 (345,939,929 ordinary shares at 31 December 2015) with a nominal value of RON 10 per share. All shares rank equally with regard to the Company’s net assets. Ordinary shares grant the right to dividends and one vote per share in the shareholders’ meetings of the Company, except for 6,890,593 shares repurchased by the Company in July 2014 in order to stabilize the price. All shares confer equal rights to the net assets of the Company, except for 6,890,593 shares repurchased by the Company in July 2014 in order to stabilize shares price. 252 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 253 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in RON, if not otherwise stated) The Company recognizes changes in share capital only after their approval in the General Shareholders Meeting and their registration by the Trade Register. After IPO privatization, 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 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. The General Meeting’s of Shareholders decision no. 1/27.04.2015 approved the use of the amount known as “Inflation adjustment to share capital” to cover the accounting loss reported according to OMVFP 1286/2012. (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 reserves The reconciliation between opening and closing revaluation reserve is as follows: Balance at 1 January Release of revaluation reserve to retained earnings corresponding to depreciation and disposals of property, plant and equipment Balance at 31 December 2016 769,261 (59,287) 709,974 (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 legal provisions. These reserves are deductible for income tax purposes and are not distributable. (e) Dividends The dividends distributed by the Company in 2015 and 2014 (from the statutory profits of preceding years) were as follows: Distributed dividends 2016 291,582,429 2015 244,691,906 In 2016, the dividends per share paid to the shareholders of the Company were: RON 0,86 per share (2015: RON 0,7217 per share). When calculating the dividend per share, the Company’s repurchased own shares (6,890,593 shares) were not treated as outstanding shares and are deducted from the total number of issued ordinary shares. Out of the dividends declared by the Company of RON 291,582,429 the dividends paid were RON 291,198,118, the remaining difference represents dividends unclaimed by the shareholders from the Depositary. 24 Trade payables Electricity suppliers Capital expenditure suppliers Other suppliers Total 31 December 2016 31 December 2015 62,675,233 1,629,999 3,285,801 67,591,033 35,737,272 18,995,707 5,900,739 60,633,718 Electricity suppliers are mainly related parties, as detailed in Note 28. Other suppliers include suppliers of services, materials, consumables, etc. 25 Other payables Payables to the State budget Other payables Total 31 December 2016 31 December 2015 Current 9,677,979 2,038,946 11,716,925 Non-current - - - Current 5,840,517 1,791,673 7,632,190 Non-current - - - Other liabilities include mainly guarantees and sundry creditors. 26 Provisions Balance at 1 January 2016 Provisions made Provisions used Provisions reversed Balance at 31 December 2016 Litigations and other risks 31,250,650 23,648,000 (41,210,654) (13,687,996) - During the year 2015, the Company has recognized a provision for the amount of 31,250,650 RON for disputes with National Agency for Fiscal Administration “NAFA” having as object the penalties for payment delay claimed by the NAFA due to unfavorable sentence no. 1029/17.04.2015. Also, during the year 2016 the Company has created additional provisions in the amount of 23,648,000 RON as a result of the court of first instance’s decision of rejecting the appeal against enforcement. In December 2016, the Company made payments in the amount of 41,210,654 RON as a result of the forced execution procedure started due to these litigations and reversed the constituted provisions. See also Note 9 (c). As a result of this litigation, disputes, forced executions, the Company’s fiscal file is still not definitively closed. Company’s management estimates that there won’t be significant additional amounts. 27 Financial instruments - fair values and risk management (A) ACCOUNTING CLASSIFICATIONS 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 December2016 Note Loans and receivables Carrying amount Held-to- maturity investments Other financial liabilities Total Financial assets not measured at fair value Trade receivables Other receivables Deposits, treasury bills and government bonds Cash and cash equivalents Restricted cash Total Financial liabilities not measured at fair value Trade payables Total 16 18 17 19 19 24 64,074,773 11,480,832 - - - 1,867,115,360 197,644,018 134,491,752 - - 407,691,375 1,867,115,360 64,074,773 11,480,832 1,867,115,360 197,644,018 134,491,752 2,140,314,983 67,591,033 67,591,033 67,591,033 67,591,033 254 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 255 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in RON, if not otherwise stated) 31 December 2015 Note Loans and receivables Carrying amount Held-to- maturity investments Other financial liabilities Total Financial assets not measured at fair value Trade receivables Other receivables Deposits, treasury bills and government bonds Cash and cash equivalents Total Financial liabilities not measured at fair value Trade payables Total 16 18 17 19 25 77,531,461 12,821,074 - - - 1,900,395,387 - 283,366,031 373,718,566 1,900,395,387 77,531,461 12,821,074 1,900,395,387 283,366,031 2,274,113,953 60,633,718 60,633,718 60,633,718 60,633,718 (B) FINANCIAL RISK MANAGEMENT The Company has exposure to the following risks arising from financial instruments: • • • market risk credit risk liquidity 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 mainly 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-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 is in process of implementing a procedure regarding trade receivables’ insurance. Cash, bank deposits, treasury bills and government bonds are placed in financial institutions, which are considered to have good creditworthiness. The carrying amount of financial assets represents the maximum credit exposure. Trade receivables The Company establishes an allowance for impairment that represents the best estimate of incurred losses in respect of trade receivables. Impairment The ageing of trade receivables is 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 31 December 2016 31 December 2015 Gross value 50,863,472 42,817,162 1,940,414 507,346 7,623,813 299,311 670,503,816 774,555,334 Bad debt allowance - (32,097,026) (1,543,044) (507,346) (5,530,018) (299,311) (670,503,816) (710,480,561) Gross value 41,487,637 27,556,241 8,088,743 399,034 474,206 104,441 667,158,074 745,268,376 Bad debt allowance - - - (194) (474,206) (104,441) (667,158,074) (667,736,915) Allowances for impairment are referring mainly to Oltchim SA (RON 667,735,915) and to Transenergo Com S.A. (RON 31,561,656). Please see Note 16. 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 Net trade receivables 31 December 2016 50,863,472 10,720,136 397,370 - 2,093,795 64,074,773 31 December 2015 41,487,637 27,556,241 8,088,743 398,840 - 77,531,461 (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 has significant cash and cash equivalents so that no liquidity risk is experienced. 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 table presents the contractual maturities of financial liabilities at the reporting date. The amounts are gross and undiscounted, and include estimated interest payments. Financial liabilities 31 December 2016 Trade payables Total 31 December 2015 Trade payables Total Carrying amount Contractual cash flows Total less than 1 year 67,591,033 67,591,033 67,591,033 67,591,033 67,591,033 67,591,033 60,633,718 60,633,718 60,633,718 60,633,718 60,633,718 60,633,718 (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 market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return. 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 the Company is the Romanian Leu (RON). The currencies in which these transactions are primarily denominated are RON, EUR and USD. The Company also has deposits and bank accounts denominated in foreign currency (EUR and USD). 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 of the quantitative data about the Company’s exposure to currency risk is as follows: In RON Cash and cash equivalents Deposits (deposits, treasury bills and government bonds) 31 December 2016 31 December 2016 31 December 2015 USD 4,669,081 - EUR 2,533,008 - EUR 10,241,023 139,580,825 Net statement of financial position exposure 4,669,081 2,533,008 149,821,848 256 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 257 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in RON, if not otherwise stated) The following significant exchange rates have been applied during the year: Average rate Year-end spot rate RON EUR 1 USD 1 Sensitivity analysis 2016 4.4908 4.0592 2015 4.4450 4.0057 2016 4.5411 4.3033 2015 4.5245 4.1477 A reasonable possible appreciation (depreciation) of the EUR against RON at 31 December would have affected the measurement of financial instruments denominated in a foreign currency, the profit before tax and the equity, respectively, by the amounts shown below. The analysis assumes that all other variables, in especially the interest rates, remain constant and ignores the impact of forecasted sales and purchases. Effect 31 December 2016 EUR (5% movement) 31 December 2015 EUR (5% movement) Profit before tax Appreciation Depreciation 126,650 (126,650) 7,491,092 (7,491,092) A reasonable possible appreciation (depreciation) of the USD against RON at 31 December would have affected the measurement of financial instruments denominated in foreign currency and profit before tax, the equity, respectively, by the amounts shown below. The analysis assumes that all other variables, especially the interest rates, remain constant and ignores the impact of forecasted sales and purchases. Effect 31 December 2016 USD (5% movement) 31 December 2015 USD (5% movement) Interest rate risk Profit before tax Strengthening Weakening 233.454 (233.454) - - 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 2016 31 December 2015 Bank accounts (cash and cash equivalent) 193,787,807 181,248,010 Deposits, treasury bills and government bonds 1,867,115,360 1,900,395,387 Restricted cash 134,491,752 - 2,195,394,919 2,081,643,397 Fair value sensitivity analysis for fixed-rate instruments 28 Related parties (a) Main shareholders At 31 December 2016, the 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 administrators’ compensation Management compensation 1,039,030 1,483,880 2016 2015 At the beginning of 2016, Electrica SA’s management included five managers remunerated based on mandate contract. Two managers resigned in March 2016 and October 2016, respectively, while in October 2016 a new manager concluded the same agreement type. As at 31 December 2016, the Company had four managers with mandate contracts. Compensations granted to the members of the Board of Directors were as follows: Members of Board of Directors 2,136,888 863,361 2016 2015 Electrica SA’s Board of Directors comprised 5 members until 14 December 2015 and 7 members afterwards. Also, the amount of fixed monthly remuneration was increased and remuneration for participation in meetings of the Board of Directors and of its Committees was established. According to the remuneration policy approved by the General Meeting of Shareholders that took place on 31 March 2016, the annual number of paid sessions is limited to twelve for Board of Directors meetings and to six for each of the committees. No loans were granted to managers and administrators in 2016 and 2015. (c) Transactions with the subsidiaries (i) Balance of receivables and payables from / to subsidiaries: Electrica Furnizare Societatea de Distributie a Energiei Electrice Muntenia Nord SA Societatea de Distributie a Energiei Electrice Transilvania Nord SA Societatea de Distributie a Energiei Electrice Transilvania Sud SA Electrica Serv Servicii Energetice Moldova Servicii Energetice Muntenia Servicii Energetice Oltenia Total Receivables balance from Payables balance to: 31 December 2016 31 December 2015 31 December 2016 31 December 2015 6,435,530 8,067,916 5,321,472 4,392,453 2,428,881 830,343 439,209 1,522,087 5,932,916 3,696,938 246,823 638,824 5,864,832 2,244,875 20,677 390,440 10,602,735 10,429,579 261,773 370,089 - - - 147,305 2,952 320,025 - - - - - - 36,903,929 26,513,720 3,397,363 3,751,784 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. Receivables and payables from/to electricity distribution and supply subsidiaries mainly include, receivables/payables from/to electricity supply, mainly from settlements on the balancing market. The receivables from Electrica Serv are mainly represented by loans granted by the company to Electrica Serv that reached maturity but are undrawn. The Company estimates that these amounts will be cashed in the next period.     258 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 259 SOCIETATEA ENERGETICA ELECTRICA S.A. - NOTES TO THE SEPARATE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2016 (All amounts are in RON, if not otherwise stated) (ii) Transactions with subsidiaries: Electrica Furnizare Societatea de Distributie a Energiei Electrice Muntenia Nord SA Societatea de Distributie a Energiei Electrice Transilvania Nord SA Societatea de Distributie a Energiei Electrice Transilvania Sud SA Electrica Serv Total Sales in 2016 43,903,009 37,824,810 Sales in 2015 59,726,555 42,850,446 Purchases in 2016 22,793,574 4,997,798 Purchases in 2015 13,513,298 16,176,868 16,124,831 25,151,596 2,713,149 10,415,814 16,380,289 16,497,151 3,116,268 9,379,110 - 114,232,939 807,297 145,033,045 1,337,065 34,957,854 1,796,940 51,282,030 (d) Transactions with companies in which the state has control or significant influence In 2016 the Company had sold and purchased transactions mainly with the following companies: Transelectrica OPCOM ANRE ANCOM ICPE Others TOTAL Net Receivables balance at 31 December 2016 Payables balance at 31 December 2016 Sales 2016 Purchases 2016 1,335,460 259 - - 19,386 544 1,355,649 47,481,338 - 1,683 126,647 - 423,175 48,032,843 14,445,437 888,780 - - 242,166 1,399,383 16,975,766 228,274,428 - 305,539 499,443 - 2,670,409 231,749,819 The transactions with Transelectrica represent electricity imbalances from the balancing market. In 2015 the Company had sold and purchased transactions mainly with the following companies: Transelectrica CET Braila Complexul Energetic Oltenia OPCOM CET Grivita ANRE ANCOM ICPE Altii TOTAL Net Receivables balance at 31 December 2015 Payables balance at 31 December 2015 Sales 2015 Purchases 2015 1,376,440 3,656,056 - - 2,161 - - 396,998 28,346 5,460,001 23,719,925 - - 31,496 22,176 - - 4,748 20,444 23,798,789 6,075,370 - - - 79,641 - - 386,225 217,622 6,758,858 317,210,185 - 197,326 56,692 194,727 188,235 131,402 79,648 223,042 318,281,257 The transactions refer mainly to purchase and sale on the balancing market. 29 Contingencies Litigation and claims (a) The Company is involved in various litigations (i.e Fondul Proprietatea – major stakeholder in the subsidiaries, ANRE, NAFA, Court of Accounts, damage compensation requests, labour litigations etc.). As summarized in Note 26, the Company set up provisions for litigation and disputes over which management has assessed that is likely to be necessary an outflow of resources embodying economic benefits due to low chances of solving them favorably. The Company does not present information in the financial statements and had not set up provisions for litigation and disputes over which the management has assessed that the possibility of an outflow of resources is reduced. f The Company presents below information on the most significant amounts disputed in litigation and for which the Company had not set up provisions because they relate to potential liabilities arising as a result of past events and whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future events, which are not fully controlled by the Company (i.e. disputes where different contradictory sentences were pronounced or litigations which are in early stages and no preliminary ruling had been issued): In 2010, the Company was sued by Termoelectrica S.A., claiming the payment of RON 25,047,353 representing penalties related to certain invoices, for the period 1 April 2007 – 31 March 2008. The first ruling in this case was favorable to Electrica SA. In November 2016, the Court of Appeal admitted the appeal of Termoelectrica S.A., cancelled the decision of the first instance court and admitted Termoelectrica S.A.’s request for penalties to be paid by the Company. In 2017, Electrica SA filed an appeal against the request of enforcement. f The Company was sued by hidroelectrica S.A., which required the payment of RON 5,444,761 and other damages, representing the damages claimed for the sale of electricity at a price estimated by the defendant as being unjust. Up to the date of the financial statements, no ruling in this dispute was issued. (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 sometimes demonstrate inconsistency in interpretation of the law. Income tax statements may be subject to revision and corrections made by tax authorities, generally for a five-year period after they are filled in. The company was the subject of fiscal inspections until 31 March 2013. As shown in Note 9 (c) and 26, the Company has incurred significant expenses related to tax adjustments related to previous years as a result of tax authorities inspections and disputes. The Company’s management considers that adequate reserves were established in the individual financial statements for all the significant fiscal obligations, however a risk that the tax authorities could take different positions still persists. (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 that would have been established between the entities having no affiliation relation and are acting 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. 30 Commitments Guarantees and pledges At 31 December 2016, the Company has outstanding bank letters of guarantee as follows: Bank Beneficiary Unicredit Transelectrica Value Currency Issue Date 25,000,000 05.09.2016 Expiry Date 20.08.2018 Unicredit Enel Distributie Muntenia SA 1,397,967 BCR OPCOM 600,000 20.12.2016 12.02.2017 – 12.05.2018 01.04.2016 31.03.2017 RON RON RON The company has a facility for bank letter of guarantee issuance in the amount of RON 60 million contracted from UniCredit, out of which the used amount is RON 26,397,967. The facility will become due on 22 August 2017. Contractual commitments The Company has the following contractual commitments as at 31 December 2016: Purchase of property, plant and equipment and intangible assets Amount 5,000,000 260 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 261 KPMG Audit SRL Victoria Business Park DN1, Soseaua Bucuresti-Ploiesti nr. 69-71 Sector 1 P.O. Box 18-191 Bucharest 013685 Romania Tel: Fax: +40 (21) 201 22 22 +40 (372) 377 800 +40 (21) 201 22 11 +40 (372) 377 700 www.kpmg.ro Independent Auditors’ Report (free translation1) TO THE SHAREHOLDERS OF SOCIETATEA ENERGETICA ELECTRICA S.A. Opinion We have audited the separate financial statements of Societatea Energetica Electrica S.A. (“the Company”), which comprise the separate statement of financial position as at 31 December 2016, the separate statements of profit or loss, comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information. In our opinion, the accompanying separate financial statements give a true and fair view of the separate financial position of the Company as at 31 December 2016, and of its separate financial performance and its separate cash flows for the year then ended in accordance with Order of Minister of Public Finance no. 2844/2016 for approval of accounting regulations in accordance with International Financial Reporting Standards (“OMPF no. 2844/2016”). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (“ISAs”). Our responsibilities under those standards are further described in the Auditors’ Responsibilities for the Audit of the Separate Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the separate financial statements in Romania, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the separate financial statements of the current period. These matters were addressed in the context of our audit of the separate financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. ©2017 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 1 TRANSLATOR’S EXPLANATORY NOTE: The above translation of the auditors’ report is provided as a free translation from Romanian, which is the official and binding version. SOCIETATEA ENERGETICA ELECTRICA S.A. INDEPENDENT AUDITORS’ REPORT 262 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 263 Taxation Litigations and claims Penalties to the State and other payments to the State budget (RON 62,417,320 – Note 9(c)) Change in provisions for tax risks during the year, net (RON 31,250,650 – Note 26) Refer to Notes 6(f), 6(p), 6(q) (accounting policy), 9(c) and 26 (financial disclosures) to the separate financial statements. Key audit matter How the matter was addressed in our audit The Company has been subject to various adjustments related to corporate income tax and value added tax imposed by tax authorities as a result of their tax audits from prior periods. The Company is involved in litigation or disputes with tax authorities regarding findings of tax audits from prior years. Our audit procedures included, among others: • using our own tax specialists, assessing the interpretation and application Company’s of relevant tax law, and evaluating the appropriateness of key assumptions used and the reasonableness of estimates in relation to uncertain tax positions and the level of related liabilities or provisions; Key judgments are made by management in estimating tax exposures and quantifying related liabilities, provisions and/or contingent liabilities. • • • obtaining and evaluating responses to our audit inquiry letters from the Company’s in-house and external lawyers in relation to existing or potential tax proceedings and assessing the Company’s position in relation to specific matters disputed; inspecting the Company’s correspondence with tax authorities during the reporting period and subsequently, until the date of our report; the adequacy of disclosures assessing related to taxation in the separate financial statements, with particular focus on uncertain tax positions and tax-related contingencies. Refer to Notes 6(p), 6(q) (accounting policy) and 29 (disclosures) to the separate financial statements. Key audit matter How the matter was addressed in our audit Our audit procedures included, among others: In the normal course of the Company’s business, potential exposures arise from administrative or court proceedings. As disclosed in Note 29 to the separate financial statements, the Company is involved in litigations with different authorities, business partners or other parties. • • Whether a liability is recognized or disclosed as a contingent liability in the financial statements judgmental and dependent on is inherently significant assumptions and a number of assessments. The amounts involved are potentially significant if any, to be and determining the amount, recognised or disclosed in the financial statements, is inherently subjective. • inspecting minutes of the shareholders’ and Board of Directors’ meetings; obtaining and evaluating lawyers’ responses to our audit inquiry letters and discussing the nature and status of the litigations and potential legal exposures with the Company’s management and legal counsel, with particular focus on the open litigations with Termoelectrica S.A. (RON 25,047,353) and hidroelectrica S.A. (RON 5,444,761); in-house critically assessing the Company’s assumptions and estimates in respect of litigations and claims, including the liabilities or provisions recognized or contingent liabilities disclosed in the separate financial statements. This involved assessing the probability of an unfavourable outcome of a given proceeding and the reliability of estimates of related amount; • assessing whether the disclosures detailing significant legal proceedings adequately disclose the Company’s potential liabilities. 264 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A E L E C T R I C A S A A N N U A L R E P O R T 2 0 1 6 | 265 Other information - Separate Administrators’ Report The other information comprises the separate Administrators’ Report. The Administrators are responsible for the preparation and presentation of the separate Administrators’ Report in accordance with OMPF no. 2844/2016, articles 15–19 of the accounting regulations in accordance with International Financial Reporting Standards, and for such internal control as Administrators determine is necessary to enable the preparation and presentation of separate Administrators’ Report that is free from material misstatement, whether due to fraud or error. The separate Administrators’ Report presented from page 1 to 63 is not part of the separate financial statements. Our opinion on the separate financial statements does not cover the separate Administrators’ Report. In connection with our audit of the separate financial statements as at and for the year ended 31 December 2016, our responsibility is to read the separate Administrators’ Report and, in doing so, consider whether there is a material inconsistency between the Administrators’ Report and the financial statements, whether the Administrators’ Report includes, in all material respects, the information required by OMPF no. 2844/2016, articles 15–19 of the accounting regulations in accordance with International Financial Reporting Standards, and whether, based on our knowledge and understanding of the entity and its environment obtained during our audit of the separate financial statements, the information included in the separate Administrators’ Report is materially misstated. We are required to report in respect of these matters. Based on the work performed we report that: a) b) in the separate Administrators’ Report we have not identified information which is not in accordance, in all material respects, with the information presented in the accompanying separate financial statements; the separate Administrators’ Report identified above includes, in all material respects, the information required by OMPF no. 2844/2016, articles 15–19 of the accounting regulations in accordance with International Financial Reporting Standards. In addition, based on our knowledge and understanding of the entity and its environment acquired during our audit of the separate financial statements as at and for the year ended 31 December 2016, we have not identified information included in the separate Administrators’ Report that is materially misstated. Responsibilities of Management and Those Charged with Governance for the Separate Financial Statements The management is responsible for the preparation of the separate financial statements that give a true and fair view, in accordance with OMPF no. 2844/2016, and for the internal control that the management determines is necessary to enable the preparation of separate financial statements that are free from material misstatement, whether due to fraud or error. In preparing the separate financial statements, the management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditors’ Responsibilities for the Audit of the Separate Financial Statements Our objectives are to obtain reasonable assurance about whether the separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these separate financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the separate financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • • • Obtain an understanding of internal control relevant to the audit 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 Company’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the separate financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the separate financial statements, including the disclosures, and whether the separate financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. 266 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the separate financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Other matter 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 this report, or for the opinion we have formed. The engagement partner on the audit resulting in this independent auditors’ report is Razvan Mihai. Refer to the original signed Romanian version For and on behalf of KPMG Audit S.R.L.: Razvan Mihai KPMG AUDIT S.R.L. registered with the Chamber of Financial Auditors of Romania under no. 2561/2008 registered with the Chamber of Financial Auditors of Romania under no. 9/2001 Bucharest 9 March 2017 DECLARATIA CONDUCERII Confirmam, bazandu-ne pe datele pe care le detinem, ca situatiile financiare consolidate, intocmite in conformitate cu standardele de contabilitate aplicabile, ofera o imagine corecta si conforma cu realitatea privind pozitia financiara a Grupului, performanta financiara si fluxurile de numerar pentru anul incheiat la 31 decembrie 2016 si ca raportul administratorilor ofera o imagine corecta si conforma cu realitatea privind dezvoltarea si performanta activitatii Grupului, precum si o descriere a principalelor riscuri si incertitudini aferente dezvoltarii asteptate a Grupului. Cristian Busu administrator neexecutiv, presedinte al Consiliului de Administratie Willem Schoeber administrator neexecutiv Arielle Malard de Rothschild administrator neexecutiv Pedro Mielgo Alvarez administrator neexecutiv Corina Popescu administrator neexecutiv Bogdan Iliescu administrator neexecutiv Ioana Dragan administrator neexecutiv Catalin Stancu Director General 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, 2016, 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. Cristian Busu non-executive director, Chairman of the Board of Directors Willem Schoeber non-executive director Arielle Malard de Rothschild non-executive director Pedro Mielgo Alvarez non-executive director Corina Popescu non-executive director Bogdan Iliescu non-executive director Ioana Dragan non-executive director Catalin Stancu General Manager 268 | A N N U A L R E P O R T 2 0 1 6 E L E C T R I C A S A 

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