Societatea Energetica Electrica S.A Annual Report 2018

Plain-text annual report

A N N U A L R E P O R T 2 0 1 8 | 1 ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 3 CONTENTS KEy figURES 4 MESSAgE fROM THE CHAiRMAN 8-9 MESSAgE fROM THE CEO 10-11 DiRECTORS’ REPORT 12-140 for the year 2018 CONSOLiDATED fiNANCiAL STATEMENTS 141-213 as at and for the year ended 31 december 2018 iNDEPEDENT AUDiTOR REPORT 214-219 consolidated financial statements SEPARATE fiNANCiAL STATEMENTS 220-277 as at and for the year ended 31 december 2018 iNDEPEDENT AUDiTOR REPORT 278-283 individual financial statements DECLARATiON Of THE MANAgEMENT 284 ELECTRICA SA4 | A N N U A L R E P O R T 2 0 1 8 KEy figURES gROUP KEy figURES ELECTRiCA gROUP Operational results 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) THE STRUCTURE Of ELECTRiCA gROUP 2016 17.5 3.67 10.6 3.60 9,685 2016 5,518 960 586 357 718 569 1.05 2017 17.8 3.70 9.2 3.57 8,792 2017 5,603 601 197 128 389 742 0.38 2018 17.7 3.78 8.6 3.54 7,995 2018 5,613 681 261 230 696 913 0.68 99.99% Electrica Furnizare 3.54 mn. consumers1 Market share4 17.02% Revenues: RON 3,995 mn. EBITDA: RON 137 mn. 99.99% Societatea de Distributie a Energiei Electrice Transilvania Nord S.A 1.28 mn. users1 Market share2 11.9% Revenues: RON 896 mn. EBITDA: RON 211 mn. Electrica SA 99.99% Societatea de Distributie a Energiei Electrice Transilvania Sud S.A 1.17 mn. users1 Market share2 13.8% Revenues: RON 918 mn. EBITDA: RON 186 mn. 99.99% Societatea de Distributie a Energiei Electrice Muntenia Nord S.A 1.33 mn. users1 Market share2 14.6% Revenues: RON 893 mn. EBITDA: RON 109 mn. Supply business: 88.6 TWh on the retail market in 2018 Distribution business (2018): 3.78 mn. users / area of 97,196 km2 covered / distributed quantity 17.66 TWh RON 5.3 bn. (EUR 1.1 bn3) Regulated Asset Base (RAB) / concession ending in 2054 (+24.5 years possibility of extension) 100% Electrica Serv 100% External services: SE Muntenia Revenues: RON 161 mn. EBITDA: RON 27 mn. Source: Company data – Consolidated financial statements - segment reporting, ANRE. 1. Consumer = Any natural person or legal entity that enters a contract to purchase electricity. User = Any producer, transmission system operator, distribution system operator, supplier, eligible consumer or captive consumer connected to the network; 2. As of 31 December 2017 Market share is based on volumes (ANRE Report); 3. As of 31 December 2018 as per the financial section converted from RON to EUR using 31 December 2018 exchange rate of 4.6639 for balance sheet data and average rate of 4.6535 for income statement data; 4. As of 30 November 2018 Market share is based on volumes Additional shareholder in distribution and supply subsidiaries The existence of additional shareholder was imposed by the observance of the provisions of Art. 10, paragraph (3) of the Law no. 31/1990 regarding the companies. As a result: SDTS holds 10 shares in SDMN, SDMN holds 10 shares in SDTN, SDTN holds 10 shares in SDTS and Electrica Serv holds 10 shares in EF. Source: Datele companiei – Situatii financiare consolidate - raportarea pe segmente, ANRE. ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 5 KEy gROUP iNfORMATiON Summary Consolidated Financials Revenues (RON mn) Adjusted EBITDA Growth and Margin Performance EBITDA (RON mn) and EBITDA Margin (%) Net Profit (RON mn) Net Cash Position Net Debt1/(Net Cash) (RON mn) Earnings and gross dividends per share (RON) Source: Company data 1 Net debt/ ( net Cash) is calculated as bank borrowings + bank overdrafts + financial leases + Financing of PP&E - Cash and cash equivalents - bank deposits - T-bills and government bonds. ELECTRICA SAÎncepând cu data de 1 noiembrie, Consiliul de Administrație a desemnat-o pe Corina Popescu ca Director general provizoriu al Grupului Electrica, pentru o perioadă de un an sau până la numirea unui nou Director, după ce Cătălin Stancu și-a încetat colaborarea cu Grupul. noștri”, spune Corina Popescu. După ce în 2017 a realizat un re- cord în privința investițiilor în rețelele de distribuție - 736 milioane de lei, în acest an, Electrica și-a propus din nou cel mai ambițios plan de investiții din industrie, în valoare de 900 mili- oane de lei. Toate aceste investiții vor avea ca efect principal îmbunătățirea Corina Popescu preia conducerea in vedere asigurarea unor rezultate fi- calității serviciului. “O provocare im- Electrica, după ce a făcut parte din nanciare sustenabile pentru acționarii portantă pentru ceea ce urmează este Consiliul de Administrație și a condus noștri. În privința furnizării, avem în dată de reducerea semnificativă a ca- Societatea de Distribuție a Energiei vedere trecerea de la poziția de vân- drului de reglementare, care, cel puțin Electrice Muntenia Nord, parte a Gru- zător de energie la aceea de furnizor într-o primă etapa, va încetini ritmul pului Electrica. Cunoaște foarte bine integrat de servicii, iar primii pași în investițiilor în infrastructură. Și asta Electrica, pe care o consideră „com- această direcție au fost deja făcuți, reprezintă o mare provocare, în con- pania sa de suflet”. „M-am format sub prin obținerea licenței de furnizare a dițiile în care infrastructura de energie umbrela Electrica. Profesioniștii care gazelor naturale. Este o zonă pe care are nevoie de continuarea investițiilor au lucrat în această companie sunt vrem să o dezvoltăm, pentru a veni masive”, consideră noul Director Ge- cei care m-au îndrumat în primii ani în întâmpinarea așteptărilor clienților neral al Electrica. ai carierei mele. Să mă întorc la Elec- trica, pe această poziție, este o onoare, dar și o mare provocare pentru mine”. Procesele de optimizare a activi- tăților rămân prioritate, atât pe seg- mentul de distribuție, cât și pe aria de furnizare, la fel și modernizarea infrastructurii de distribuție. Strategia Electrica este de a oferi stabilitate și predictibilitate celor peste 3,7 milioa- ne de clienți ai noștri, dar și servicii cu valoare adăugată. “Modernizarea rețelelor la nivelul celor trei operatori de distribuție din cadrul Grupului Electrica va continua să fie o prioritate pentru companie, ținând însă cont, evident, de noile reglementari din domeniu și având Corina Popescu este un executiv de top cu o experiență impresionan- tă în domeniul energiei electrice și al gazelor naturale. De la data de 1 iunie 2018, doamna Popescu ocupă poziția de Director General al Societății de Distribuție a Energiei Electrice Muntenia Nord, parte a Grupului Electrica. Absolventă a Facultății de Energetică din cadrul Universității Poli- tehnica București, specializarea Electroenergetică, Georgeta Corina Popescu și-a început cariera profesională în cadrul Sucursalei de Dis- tribuție și Furnizare a Energiei Electrice București. Începând cu anul 2007, Georgeta Corina Popescu a trecut în sectorul privat, unde a ocupat funcții importante în cadrul Grupului E.ON Ro- mânia și al Grupului OMV. În perioada decembrie 2015 - februarie 2017, Corina Popescu a ocu- pat poziția de Secretar de stat în Ministerul Energiei. În martie 2017, a fost numită în Directoratul Transelectrica, iar începând cu 1 iunie 2017 Președinte al Directoratului Transelectrica. 6 | A N N U A L R E P O R T 2 0 1 8 DiSTRiBUTiON Distributed Volumes (TWh) The structure of Electrica Group’s investments in 2018 3 Capital expenditures 2016 – 2018 (RON mil) SUPPLy MARKET Volumes of electricity supplied on retail market (TWh) ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 7 E L E C T R I C A S A Overall Market Share 12M 2018 Share of Competitive Market 12M 2018 Share of Regulated Market 12M 2018 Source: ANRE Report December 2018 1. ENEL refers to ENEL Energie Muntenia and ENEL Energie 8 | A N N U A L R E P O R T 2 0 1 8 MESSAgE fROM THE CHAiRMAN Of THE BOARD Of DiRECTORS for the electrica Group, the year 2018 represented a natural continuation of the path started in 2014, when the privatization started with listings on both the bucharest stock exchange and the london stock exchange. the complex reconfiguration process of the company and the achievement of record investments for the industry remained our top priorities, given the significant changes in the energy market. during the last years, electrica has made major progresses as regards the operational efficiency and the improvement of service quality, especially concerning the optimization of the processes at Group level. the efforts were focused on the sustainable development of the business, so that our activity generates added value to all interested parties: shareholders, investors, clients and business partners, as well as to the communities where we operate. last years were marked by significant the transformations of the energy industry, and the board of directors and the management team of electrica had to find the balance between the long-term strategic objectives and the challenges of the current activity. it has been, and will still be, necessary to adapt to the permanent changes on the energy market, which, at the same time, come with challenges that are difficult to anticipate at times. besides these, there is also the technological progress with which we must keep up, starting with digitalization, smart metering or electrical mobility. customers' expectations have diversified, and the role of distribution and supply companies will gradually change. it is fundamental to continue to focus on the assurance of the human resources needed for the key areas of the business, the electrica Group aiming to invest in professional training centers and in dual education. in 2018 as well, the board of directors has continued to closely collaborate with the executive management of the company in order to ensure the acceleration of the transformation process initiated in 2017, in distribution companies. the finalization and operational implementation of a new organizational model represented an important objective, given the very ambitious targets in terms of operational efficiency and quality of the distribution service, established by the methodology for the new regulation period. as regards the supply segment, we focused on the increase of the profitability of the client portfolio, through measures to improve customer satisfaction, portfolio restructuring and competitive and dynamic procurement strategies, in the context of a volatile and unpredictable market. the measures undertaken in 2018 establish a solid ground for the Group’s ambition to be the market leader and to ensure, in a sustainable manner, profitability and satisfaction for all the interested parties. moreover, at the end of 2018, the board of directors of the company has approved the new strategic directions of the Group for the next five years. even though 2018 was a year with fluctuating evolutions, the financial results were solid. We concluded the year with an individual net profit with 24% over the budgeted level and with a consolidated net profit with 34.3% higher than in 2017. thus, we proposed to the shareholders of the company the distribution of dividends with an attractive return, representing 87.4% of the net profit. on behalf of the board of directors, i ensure you that the electrica Group granted particular interest in the increase of the transparency degree and the enhancement of communication with all interested parties, through their active involvement and through the reports on actions related to the sustainable development, environment and social responsibility actions, in line with the objectives of the company to integrate sustainability elements in all its activities. the year 2019 represents an important year for us. beyond the major challenges ahead, we are celebrating 5 years since the listing of the company, and i will take this opportunity to pass on the consideration of the board of directors for the efforts of all the employees of the Group during this challenging period. VALENTiN RADU CHAiRMAN Of THE BOARD Of DiRECTORS Of ELECTRiCA SA ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 9 ELECTRICA SA10 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 11 MESSAgE fROM THE CEO 2018 was a year filled with challenges, as well as with numerous accomplishments for electrica, one of the most important being the implementation of the most ambitious investment plan in the industry. Almost 900 million RON were allocated for the refurbishment and upgrade of the distribution infrastructure, resulting in an enhanced operational efficiency and an improvement of the electrical energy distribution service. moreover, in response to the energy market changes, we continued the program for the transformation and optimization of the distribution and service activities. the program’s main objective consists of the implementation of a new model for the organization of the distribution segment, which is translated into efficiency improvement, by means of the functional coordination of all activities within the company. We follow the same course of action in the supply area, where, in 2018 as well, we searched for balance between profitability and market share. it is obvious that the transfer from our energy provider position to that of an integrated service provider should be achieved with expediency, and we are glad we can say that we have taken the first steps towards creating a multi-utility-type company, as electrica furnizare already has the license for natural gas supply, an area which we intend to develop, in order to meet our clients’ expectations. increase thus, together we have managed to the Group companies’ capacity to streamline its operations, to make investments, to improve access to the network and, very important, to attain better coordination of field activities. the transformation process is very important indeed, it will also continue this year and it will, naturally, pursue the interest of our customers, as well as that of our shareholders. also in 2018, due to the streamlining measures and to the joint effort at Group level, we managed to obtain solid financial results. We ended the year with total operational revenues of 5.778 million ron, an individual net profit 24% above the budgeted level, and a net consolidated profit of 230 million ron, 34.3% higher than in the previous year. thus, we managed to provide an attractive dividend yield to the company’s shareholders, of 7%, calculated at the price valid end of day, 5 march 2019. at the same time, we also enhanced our social responsibility projects, and we carried out the third edition of the Grant Program “electrica puts romania in a different light”, which enjoys increasing notoriety and appreciation from the communities we activate in. in 2018, electrica ranked 9th among the 50 most valuable romanian brands, going up one place as compared to 2017. at the same time, electrica ranked among romania’s most appreciated companies in terms of transparency, as a result of launching the sustainability report. 2019 marks the beginning of a new regulatory period, which incurs important changes to the industry. consequently, this year’s tagline should be flexibility - the availability to find the best solutions, to adjust to a continuously changing world. in 2019, the electrica Group’s main objectives consist of improving the offer of products and services, as well as of meeting the customer’s needs and demands, by developing new solutions and services, and also by steady investments into networks and technology. to this end, we aim to supplement the activities which are already being performed, for the optimization of the distribution companies, by means of concrete actions in the supply and services area, as well as by streamlining measures for the supporting functions. also, out of the desire to develop sustainable partnerships, in addition to the traditional products, we also aim to support the development of the gas segment, as well as other solutions which bring added value to the customers and to the shareholders. gEORgETA CORiNA POPESCU CEO ELECTRiCA S.A. ELECTRICA SA12 | A N N U A L R E P O R T 2 0 1 8 DiRECTORS’ REPORT fOR THE yEAR 2018 (based on the individual financial statements prepared in accordance with the Order of the Ministry of Public finance no. 2844/2016 for the approval of the Accounting Regulations in accordance with international financial Reporting Standards, respectively on the consolidated financial statements prepared in accordance with international financial Reporting Standards as adopted by the European Union) REgARDiNg THE ECONOMiC AND fiNANCiAL ACTiViTy Of SOCiETATEA ENERgETiCA ELECTRiCA S.A. and ELECTRiCA gROUP in compliance with art. 67 of the Law no. 24/2017 on issuers of financial instruments and market operations and with annex no. 15 to ASf Regulation no. 5/2018 and the Bucharest Stock Exchange Code for the 12 month period ended 31 December 2018 Free translation from Romanian, which is the official and binding version, and will prevail, in the event of any discrepancies with the English version ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 13 TAblE of ConTEnTS Organizational structure Mission, vision, values Key elements of the 2015 – 2018 Strategic Plan Outlook Key factors, directions and significant market trends affecting the operational results of Electrica group Key financial data 2018 Key events in 2018 and up to the report’s publication date Post balance sheet events date Identification details of Electrica 1 Electrica 2018 Overview 1.1. 1.2. 1.3. 2 Electrica Group 2.1. 2.2. 2.3. 2.4. 2.5. 3 Electrica on the capital markets Ownership structure 3.1. Shares evolution on BSE and global depository receipts (gDRs) evolution on LSE 3.2. investor relations (iR) 3.3. Legal acts reported 3.4. Dividends policy 3.5. Dividend distribution 3.6. 3.7. Own shares 4 Corporate Governance in ELSA Corporate governance Code 4.1. general Meeting of ELSA’s Shareholders 4.2. Shareholders’ rights 4.3. ELSA’s Board of Directors 4.4. The activity of ELSA’s Board of Directors and of its Consultative Committees in 2018 4.5. ELSA’s Executive management 4.6. Remuneration of the Directors and of the Executive Managers 4.7. Corporate governance in ELSA’s Subsidiaries 4.8. Statement regarding the corporate governance “Comply or Explain” 4.9. implementing action plans undertaken by signing the framework agreement with EBRD 4.10. 4.11. internal audit report for 2018 5 Operating activity 5.1. 5.2. 5.3. 5.4. 5.5. 5.6. 5.7. 5.8. 6 Electrica financial reporting 2018 6.1. 6.2. 6.3. 6.4. 6.5. 6.6. 6.7. Consolidated statement of the financial position Consolidated statement of profit and loss Consolidated cash flow statement individual statement of the financial position individual statement of profit or loss individual cash flow statement Risk management Operating segments fixed assets Procurement Sales activity Reorganization and disposal of assets Personnel Environmental considerations Research and development activities 6.8. Description of the main features of internal control and risk management systems in relation to the financial reporting process 15 16 17 20 25 26 27 29 29 30 32 34 35 38 43 44 44 45 45 46 47 47 48 50 55 60 63 65 68 76 79 80 81 83 86 86 89 89 91 91 92 93 96 103 105 108 111 112 116 Appendix 1 – Litigations Appendix 2 – Details of the main investments accomplished in 2018 by the Electrica Group 119 136 ELECTRICA SA14 | A N N U A L R E P O R T 2 0 1 8 gLOSSARy ANRE Romanian Energy Regulatory Authority BPS BoD BRP BSE Basis points Board of Directors Balance Responsible Party Bucharest Stock Exchange CAPEX Capital Expenditure CgC CMC CMUS CNTEE CSR DAM DSO DMS EBiT EBiTDA EDN ELSA EgMS EU EUR fCA gC gDP gDR gEO gMS HV iAS ifRiC ifRS iMS iPO iR iSiN KPi kV LR Corporate governance Code Competitive Market Component Centralized Market for Universal Service The National Transmission System Operator Corporate Social Responsibility Day Ahead Market Distribution System Operator Distribution Management System Earnings before interest and tax Earnings before interest, tax, depreciation and amortization Electrical Distribution Network Electrica S.A. Extraordinary general Meeting of Shareholders European Union The monetary unit of several member states of the European Union financial Conduct Authority – United Kingdom green Certificates gross Domestic Product global Depositary Receipts government Emergency Ordinance general Meeting of Shareholders High Voltage international Accounting Standard international financial Reporting interpretations Committee international financial Reporting Standard integrated Management System initial Public Offering investor Relations international Securities identification Number Key Performance indicators KiloVolt Last Resort LSH LV MV MVA MWh MKP NAfA NES NL NRC OMPf OgMS OHS OHSAS Labour safety and health Low Voltage Medium Voltage Mega Volt Ampere MegaWatt hour Management Key Position National Agency for fiscal Administration National Electricity System Network Losses Nomination and Remuneration Committee Order of Ministry of Public finances Ordinary general Meeting of Shareholders Occupational Health and Safety Occupational Health and Safety Assessment Series OPCOM Romanian gas and Electricity market operator PBS PCB RAB RM RON RRR SAD SCADA SDEE SDMN SDTN SDTS SED SEM SEO SoLR TWh TSO UM US USD VAT Percentage basis points Polychlorinated Biphenylsor Regulated Asset Base Retail Market Romanian monetary unit Regulated Rate of Return Distribution Automation System Supervisory Control And Data Acquisition Societatea de Distributie a Energiei Electrice Societatea de Distributie a Energiei Electrice Muntenia Nord Societatea de Distributie a Energiei Electrice Transilvania Nord Societatea de Distributie a Energiei Electrice Transilvania Sud Servicii Energetice Dobrogea SA Servicii Energetice Muntenia SA Servicii Energetice Oltenia SA Supplier of last resort TeraWatt hour Transmission and system operator Unit of Measurement Universal Service United States Dollar Value Added Tax ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 15 identification details of Electrica Report date: 5 March 2019 Name of the Issuer: Societatea Energetica Electrica S.A. Headquarter: no. 9 grigore Alexandrescu Street, 1st District, Bucharest, Romania Telephone/fax number: +4021.208.5999; +4021.208.5998 Fiscal code: 13267221 Trade Registry No: J40/7425/2000 LEI Code (Legal Entity Identifier): 213800P4SUNUM5AUDX61 Subscribed and paid share capital: RON 3,459,399,290 Main characteristics of issued shares: 345,939,929 ordinary shares of 10 RON nominal value, out of which 6,890,593 are treasury shares and 339,049,336 are shares issued in dematerialized form and freely transferable, nominative, tradable and fully paid. Regulated market where the issued securities are traded: the Company’s shares are listed on the Bucharest Stock Exchange (ticker: EL), and the global Depositary Receipts (ticker: ELSA) are listed on the London Stock Exchange Applicable accounting standards: Order of the Ministry of Public finance no. 2844/2016 for the approval of the Accounting Regulations in accordance with international financial Reporting Standards and the international financial Reporting Standards as approved by the European Union Reporting period: year 2018 (period 1 January - 31 December 2018) Audit: The individual and consolidated financial statements as at and for the period ended 31 December 2018 are audited by an independent financial auditor ISIN Bloomberg Symbol Currency Nominal Value Ordinary Shares ROELECACNOR5 0QVZ RON RON 10 GDR US83367y2072 ELSA:Li USD RON 40 Stock Market Bursa de Valori Bucuresti REgS London Stock Exchange MAiN MARKET Ticker Source: Electrica EL ELSA ELECTRICA SA16 | A N N U A L R E P O R T 2 0 1 8 1 ELECTRiCA 2018 OVERViEW ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 17 1.1. Key financial data 2018 in 2018, Electrica group net profit increased by 34.3% as compared to the previous year, mainly driven by the higher profitability of supply segment. The group revenues in 2018 and 2017 were of RON 5,613 mn and RON 5,603 mn respectively. RON mn Revenue Other operating income Operational costs Adjusted EBiTDA1 EBiT gross profit Net profit Source: Electrica 2018 5,613 165 2017 5,603 173 2016 5,518 243 (5,517) (5,580) (5,175) 656 261 263 230 614 197 207 172 998 586 589 469 in the charts As presented the adjusted EBiTDA below, margin went up by 73 bps in 2018 compared to 2017, while the net profit margin increased by 34.1%. On 31 December 2018, the group has a Net Debt/(Cash) position2 of minus RON 350.4 mn. Figure 1: Consolidated revenue of Electrica Group (RON mn) Figure 2: Adjusted EBITDA (RON mn) and adjusted EBITDA margin (%) Figure 3: Net profit (RON mn) Figure 4: Net debt/(Cash) (RON mn) ELECTRiCA 2018 OVERViEW Source: Electrica 1 The Company defines the consolidated adjusted EBITDA as consolidated EBITDA adjusted for non-recurring events, i.e. impairment/ reversal of impairment of trade and other receivables, net at consolidated level 2 Net debt/(Cash) is defined as bank borrowings + bank overdrafts + financial leases + funding for concession agreements - cash and cash equivalents - bank deposits and treasury bills and government bonds. ELECTRICA SA18 | A N N U A L R E P O R T 2 0 1 8 DiSTRiBUTiON SEgMENT Essential information: Electricity distribution in Romania is fulfilled currently mainly by eight electricity distribution system operators, regulated by ANRE. Each company is responsible for the exclusive distribution of electricity in the region for which it is authorized, under a concession agreement concluded with the Romanian state. Electrica and Enel each own three distribution companies, while CEZ through Distributie Oltenia and E.ON through Delgaz grid own the remaining two. Electrica group is a key player in the electricity distribution sector, both in terms of areas covered and in number of users served. The Regulated Assets Base (RAB) estimated value at the end of 2018 was RON 5,256 mn. 197,946 km of electric lines - 7,595 km for High Voltage (“HV”), 45,755 km for Medium Voltage (“MV”) and 144,596 km for Low Voltage (“LV”). Total area covered: 97,196 km2, 40.7% of Romania’s territory. 3.8 mn users (2018) for the distribution activity. 17.7 TWh of electricity distributed in 2018, a decrease of 0.9% as compared to 2017. 40.3% market share for the distribution of electricity to final users in 2017 (based on distributed quantities, according to ANRE report for 2017). Figure 5: Romanian electricity distribution map Figure 6: Evolution of the number of users (mn) Figure 7: Quantity distributed (TWh) Source: Electrica Source: ANRE Report – Performance Indicators 2017 Source: ANRE Report – Annual Report 2017 ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 19 Key financial indicators Revenues from the distribution segment increased by RON 62.8 mn, or 2.3%, to RON 2,738.6 mn as compared to RON 2,675.7 mn in 2017, as a result of both the increase of distributed quantities on medium and low voltages by 6.1% and 1.5% respectively, and of the increase of the investments made in the network, registered as intagible assets, according to ifRiC 12. The increase of costs with the energy purchased to cover network losses, the increase in costs with employee benefits, and other categories of expenses led to a decrease of RON 117.2 mn or 18% of EBiTDA on the distribution segment. The EBiTDA margin decreased by 19.8% in 2018, from 24.3% in 2017 to 19.5% in 2018. The net profit was additionally influenced by the increase in depreciation and amortization costs, driven by the investments made in the electricity distribution network. Figure 8: Revenues from distribution (RON mn) Figure 9: EBITDA – distribution segment (RON mn) Figure 10: Net Profit – distribution segment (RON mn) Figure 11: Net debt/(Cash) – distribution segment (RON mn) Source: Electrica Source: Electrica Source: Electrica Source: Electrica SUPPLy SEgMENT Essential market data (according to ANRE Report for November 2018) The supply market from competitive segment and from the regulated segment; is composed both The regulated segment comprises five suppliers of last resort. The competitive segment comprises 97 suppliers (including suppliers of last resort with activity in competitive segment from retail market), out of which 91 are relatively small (<4% market share). EfSA has a market share of 17.02%; is the market leader on regulated market with a share of 45.42%, on the competitive market having a market share of 9.34% (ANRE report from November 2018). By comparison, in 2017 EfSA had a regulated market share of 40.79% and a competitive market share of 11.58% (ANRE report from December 2017). Key financial indicators Revenues from supply activity have decreased by RON 229.2 mn or 5.4%, at RON 3,995.5 mn in 2018, from RON 4,224.7 mn in 2017. This decrease is the net effect of the energy supply activity, which had a positive influence, due to the 6.9% increase in sales price, covering the impact generated by the decrease of the quantity supplied by 3.4%, and of the decrease of the revenues from Balance Responsible Party (BRP), mainly as a ELECTRICA SA20 | A N N U A L R E P O R T 2 0 1 8 result of the accounting of BRP, beginning with 1 January 2018, in accordance with ifRS 15, which removes the revenues and the expenses related to BRP. The financial position of the supply segment is relatively stable compared to 2017, having a cash position of RON 243.7 mn. in terms of EBiTDA, EfSA recorded an increase of RON 127.3 mn in 2018 compared to 2017, mainly due to the decrease of cost of electricity purchased. Figure 12: Revenues for the supply segment (RON mn) Figure 13: EBITDA for the supply segment (RON mn) Figure 14: Net profit of the supply segment (RON mn) Figure 15: Net debt/(Cash) - the supply segment (RON mn) Source: Electrica Source: Electrica Source: Electrica Source: Electrica 1.2. Key events in 2018 and up to the report’s publication date During 2018 and 2019, until the issue date of this report, the following main events took place: Î ELSA’s General Meetings of Shareholders: During 2018, three Ordinary general Meetings of Shareholders (OgMS) took place in 9 february, 27 April and 18 September as well as an Extraordinary Meeting of Shareholders (EgMS) in 27 April. The main resolutions of the OgMS dated 9 february 2018 refer to: the approval of the remuneration policy of the members of the Board of Directors of the Company and its application from the date of the OgMS approval; the approval of the proposed Mandate Agreement for the members of the Board of Directors of the Company and of the remuneration limits of the Company’s executive managers. The main resolutions of the OgMS and EgMS dated 27 April 2018 refer to: the approval of 2017 audited financial individual and consolidated statements, at levels; ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 21 the approval of 2018 revenue and expenses budget, at individual and consolidated levels; the approval of the 2017 profit distribution (the total gross dividend value was of RON 245.37 mn, and the gross dividend per share of RON 0.7237); through the election of ELSA’s Board of Directors members the cumulative voting method: Ms. Elena Doina Dascalu, Mr. gicu iorga, Ms. Ramona Ungur, Mr. Valentin Radu, Ms. Arielle Malard De Rothschild, Mr. Bogdan george iliescu, Mr. Willem Jan Antoon Henri Schoeber and the setting of their mandate’s duration for a period of four years; the rejection of the appointment of Deloitte Audit as ELSA’s financial auditor; the rejection of setting the company’s working point in Bucharest, 4 - 8 Nicolae Titulescu Road, West Wing, 6th floor, district 1, Romania; in the OgMS dated 18 September 2018, the shareholders approved the appointment of Deloitte Audit as ELSA’s financial auditor for a three-year period, respectively for financial years 2018, 2019 and 2020. Î Changes in the structure of ELSA’s Board of Directors (BoD) and of the BoD’ Committees: On 12 October 2018, ELSA announced the decision of Ms. Arielle Malard de Rothschild to renounce her position as member of the BoD, due to additional core activity responsibilities; On 15 November 2018, ELSA announced that Ms. Doina Elena Doina Dascalu, the chair of the BoD since date of 14 May 2018, has resigned from the position as member of the BoD, following her nomination, by the Romanian Parliament, as first Vice President of the financial Supervisory Authority; following the resignation of Ms. Arielle Malard de Rothschild, the BoD appointed Mr. Dragos Andrei as interim member of the Board of Directors, starting with 1 December 2018 and until 30 June 2019 or until the OgMS having on the agenda the filling of the vacant director position, whichever would have occured first; On 18 December 2018, Mr. Willem Jan Antoon Henri Schoeber notified the Company about his decision to resign from his position in the Board of Directors of ELSA, 6 february 2019 being the last day Mr. Schoeber was a member of the Board of Directors; following the resignation of Ms. Elena Doina Dascalu from her position as member of the BoD, the BoD appointed Mr. Valentin Radu as Chair of the Board of Directors for a mandate of one year, starting 12 December 2018; The composition of the BoD’s committees and their chairs with 1-year mandate were decided in 2018 on 14 May as follows: The Strategy and Corporate governance committee: Mr. Willem Jan Antoon Henri Schoeber - chair, Ms. Arielle Malard de Rothschild - member, Mr. gicu iorga - member The Audit and Risk committee: Mr. Bogdan george iliescu - chair, Ms. Arielle Malard de Rothschild - member, Ms. Ramona Ungur - member; The Nomination and Remuneration committee: Mr. Valentin Radu - chair, Mr. Bogdan george iliescu - member, Mr. Elena Doina Dascalu - member. following the changes in the structure of the Board of Directors, on 12 December 2018, the BoD decided the composition of the committees and elected their chairs, as follows: The Strategy and Corporate governance committee: Mr. Willem Jan Antoon Henri Schoeber - chair, mr. Dragos Andrei - member, Mr. gicu iorga - member; The Audit and Risk committee: Mr. Bogdan george iliescu - chair, Ms. Ramona Ungur - Member, Mr. gicu iorga - Member; The Nomination and Remuneration committee: Mr. Bogdan george iliescu - chair, Mr. Valentin Radu - member, Ms. Ramona Ungur – member. On 7 february 2019, the OgMS of ELSA took place, during which ELSA’s shareholders elected, through the simple voting method, the members of the Company’s Board of Directors following the vacancy of the positions in the Board of Directors, after the renunciation to the mandate by Ms. Arielle Marie Malard de Rothschild, Mr. Willem Jan Antoon Henri Schoeber and by Ms. Elena Doina Dascalu. Thus, the three new members elected are Mr. Radu Mircea florescu, Mr. Dragos Andrei si Mr. Niculae Havrilet. Their mandate period is equal to the period remaining until the expiry of the mandate for the vacant positions, i.e. until 27 April 2022. Î Changes in ELSA’s executive management: On 25 July 2018, the Board of Directors decided the revocation of Mr. Dan Crisfalusi from the position of Chief iT&T Officer; On 17 September 2018, the BoD decided to revoke Ms. Dana Alexandra Dragan from the position of Chief Human Resources Officer, following the mandate’s termination; On 15 October 2018, the Board of Directors has reached a mutual agreement with Mr. Dan Catalin Stancu to terminate without cause the mandate agreement from the CEO position of ELSA, starting with 1 November 2018. in the same meeting, Ms. georgeta Corina Popescu was appointed as ELSA’s interim CEO, starting with 1 November 2018, for a 1-year period or until the nomination of a new CEO, whichever would have occurred first. By the time of the present report, on 23 January 2019, ELSA’s Board of Directors decided to appoint Ms. georgeta Corina Popescu as CEO and to appoint Ms. Bibiana Constantin as Chief Human Resources Officer, both mandates starting on 1 february 2019, for a period of four years. ELECTRICA SA22 | A N N U A L R E P O R T 2 0 1 8 Î Other relevant events: A) Litigations: On 8 June 2017, ELSA received a legal summoning formulated by SAPE against, former managers and directors, the Ministry of Economy and respectively the Ministry of Energy. The case is registered at Bucharest Court under no. 463565/3/2016, being in course of settlement; On 20 November 2017, ELSA received the notification issued by the Bucharest Court (Romanian: Tribunalul Bucuresti), referring to the file No. 42479/3/2017, by which Mr. Stanciu Razvan, as shareholder of the Company, filed a complaint to request the ascertainment of the "absolute nullity of the decision no. 2 of the OgMS of ELSA regarding the election of the BoD members by applying the cumulative vote and setting the mandate’s duration for the elected directors for a period of 4 years, pursuant of art. 132 of Law 31/1990, having as a direct consequence the cancellation of all legal acts concluded by the new Board of Directors of ELSA". On 6 June 2018, the court rejected the plaintiff’s action, the decision being final; in October 2018, ELSA attacked in administrative contentious the ANRE Orders no. 169/2018 regarding the Approval of the Tariff Setting Methodology for the Electricity Distribution Service and no. 168/2018 on the Regulatory Rate of Return, requesting the partial and, respectively, the total annulment of these orders. Thus, both preliminary complaints were sent to ANRE and actions in court were filed. Applications are filed under case no. 7591/2/2018 (cancellation of Order 168/2018) and no. 7614/2/2018 (partial cancellation of Order 169/2018), of the Bucharest Court of Appeal. At the same time, following the rejection by ANRE of the preliminary complaints in December 2018, the actions in administrative litigation were reintroduced, forming the files 8430/2/2018 (annulment of Order 168/2018) and 8436/2/2018 (partial annulment of Order 169/2018), also in the role of the Bucharest Court of Appeal, pending; in february 2018, ELSA has obtained a favourable Supreme Court ruling in one of the litigations with NAfA, which essentially maintains into force a prior Court of Appeal decision, which is favourable for the group. Based on this Court ruling and in conjunction with all other litigations with NAfA on the same historical amounts, for taxes including penalties and interest, as well as based on analysis with internal and external lawyers, the management best estimate as of 31 December 2017 was that ELSA shall be able to obtain favourable Court rulings with the end result of no future cash outflows. As a result, there is no provision recognized subsequent to 31 December 2017 related to NAfA litigations; On 12 December 2018, an amount of RON 44.7 mn was collected by ELSA from Oltchim SA, representing amounts distributed to creditors in the insolvency proceedings. B) Policies in place at ELSA level, in order to comply with best corporate governance practices (may be accessed on ELSA’s website, under investors > Corporate governance Section): The Policy of Transactions with Related Parties has been revised three times during 2018, the last 2018 approved version being published on ELSA website on 14 January 2019; The BoD approved the forecast Policy and the reviewed version of Dividend Policy, the two documents being published on the company’s website on 19 february 2018; following the resolutions of OgMS dated 9 february 2018, the Remuneration policy of ELSA’s directors and executive managers was published on the Company website on 7 May 2018. C) intra-group loans and other intra-group facilities: During 2018, ELSA concluded new agreements for intra-group loans to its distribution subsidiaries in total amount of RON 520 mn, for financing part of the 2018 CAPEX Plan, as follows: SDMN – RON 230 mn, SDTS –RON 130 mn and SDTN – RON 160 mn; On 29 May 2018, ELSA also granted an intra-group loan in favor of SEM, of RON 5.5 mn. D) Certifications During 24 – 25 September 2018, took place an external audit of ELSA’s integrated Management System Quality – Environment – Occupational Health and Safety, implemented according to iSO 9001:2015, iSO 14001:2015 and OHSAS 18001:2007 requirements. The audit was conducted by DEKRA Certification, one of the world’s leading accredited certification body, and ended without any noncompliance, ELSA obtaining the new certificates issued on 5 November 2018 valid until October 2019; Risk Management: Electrica group Risk Appetite was approved by the Board of Directors Decision no. 14 on 14 August 2018. ELSA Risk Management Policy was approved by the Board of Directors Decision no. 22 on 13 December 2018. DiSTRiBUTiON SEgMENT With regard to the Transformation Plan of the distribution area (EL SERV, SDMN, SDTN, SDTS), initiated on 10 August 2017, it was completed during the year 2018 and considered mainly the following: implementing a new target organizational model of the distribution segment, based on redesigned processes with focus on efficiency and quality of customer services; internalization in the distribution subsidiaries of certain activities of EL SERV, having as main ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 23 objective the consolidation of the investment execution capabilities, as well as the increase of the reaction capacity and the improvement of the performance in the operational activity; a new performance-based remuneration concept; a proper concept for a cost reduction and cost controlling program; developing and implementing a new business plan for EL SERV; following the completion of this organizational transformation program, the companies in question went through a period of stabilization and consolidation, a necessary step before the start of a new regulatory period. A new business plan has been approved for EL SERV, providing measures to streamline and optimize the operational processes, including: improving the services currently provided and extending them to companies outside Electrica group; developing new products and supporting activities for the companies within the group; streamlining of the real estate portfolio; reduction of the administrative and general costs. in January 2018, the Articles of Association of EL SERV was amended, so that the structure of the Board of Directors was reverted to five non- executive members. Between December 2016 and January 2018, the Board of Directors was composed of three non-executive members, being applicable the version of the Articles of Association approved in December 2016. Î Distribution activity: During 2018, ANRE issued basic documents for the regulatory framework of the 4th Regulatory Period: Order no. 168/2018 approving the regulated rate of return (RRR) begining with 1 January 2019; Order no. 169/2018 approving the Methodology for establishing distribution tariffs. Thus, in the period April – October, according to the evolution of the legislative framework, the strategic package for the 4th Regulatory Period, which represented the basis for the regulated revenues in the distribution area for the next five years, was prepared and subject to approval by ANRE; Specific tariffs for electricity distribution for the year 2019 were approved by ANRE through Orders no. 197, 198 and 199/2018, applicable until 28 february 2019, with average values equal to or slightly above those of 2018. On 25 february 2019 were approved by ANRE through Orders No. 24, 25 and 26/2019 the new distribution tariffs, applicable from 1 March 2019. The new tariffs represent an increase of approximately 2.3% compared to the tariffs applied in the first two months of 2019; for the implementation areas framework conditions On 10 October 2018, the Regulatory Authority approved the electricity smart metering system implementation timetable at national level, through Order no. from 15 October 2018. 177/2018, effective Based on the specific legislation, the distribution companies have developed the implementation plans of the electricity smart metering systems (low-voltage), based on on criteria of economic efficiency, security and ensuring the participation on the competitive market, the main objectives being: to provide benefits to the users, better asset management and quality indicators. These widespread deployment plans for smart metering systems were subject to ANRE approval in January 2019. Subsequent to approval, the portfolio of projects considered in the cost-benefit analyzes will be included in the annual investment plans to be developed and approved according to the specific legislation in force; in 2018, for the three distribution operators, investments amounting to approx. RON 836 mn were made and commissioned, being the highest post-iPO value, also higher by over 80% than the recorded average of other distribution operators nationwide in 2017 and higher by 14% than their own performance in 2017; in 2019, the distribution operators will continue to invest in the distribution infrastructure, the investments planned to be commisioned related to 2019 for the three distribution operators cumulating RON 612.5 mn (nominal terms 2019), but decreasing as compared to the previous years, considering the possibilities of sustainable funding, as well as the regulated rate of return level, under the new regulatory framework. The investment plans for 2019 have been prepared in accordance with the requirements set out by the Regulatory Authority in the specific legislation in force. SUPPLy SEgMENT Starting with 1 April 2018, the Balance Responsible Party (BRP) activity and its related assets were transferred, from ELSA to EfSA, the supply subsidiary of the group. The transaction price was of RON 19.8 mn and was established considering the transferred activity’s market value, based on a valuation report delivered by an ANEVAR authorized valuator; in 2018, the implementation of initiatives identified for the operational streamlining of EfSA activity was continued, as follows: the acquisition of an iT application for managing the electricity purchase activity; developing the OPEN BRP application; continuous improvement of mobile application MyElectrica and its alignment with the web interface; continuing the implementation of Customer Relationship Management (CRM) system; ELECTRICA SA24 | A N N U A L R E P O R T 2 0 1 8 modernizing the integrated risk management system; implementing a continuous monitoring system for customer satisfaction and identifying the measures to improve the quality of services; starting the implementation of a modern solution for the commercial call-center; implementation of a project for digitalization/ modernization of customer relations centers; continuing the process of optimizing the portfolio of products/services tailored to the needs of customers. Î Supply activity: in 2018, EfSA’s activity was influenced by a series of laws and ANRE orders with a significant impact in the purchase and sale of electricity to final customers, as follows: ANRE Order no. 75/2017, applicable in H1 2018 - Centralized Market for Universal Service (CMUS) was the bound market for the suppliers of last resort (SoLR) (at least 50% of the electricity required for US customers was purchased from CMUS, the rest can only be purchased from other Centralized Markets); following the completion of the schedule of regulated tariffs removal and the total electricity market liberalization as of 1 January 2018, ANRE approved the regulatory package for the supply activity of last resort/universal service, applicable starting with S2 2018: ANRE Order no. 27/2018 - CMUS was the voluntary market for SoLR; ANRE Order no. 26/2018 – the SoLR designation was achieved through a competitive process: bound SoLRs were appointed for a four-year period based on eligibility and capability criteria and optional SoLRs were appointed for one year on basis of eligibility, capability and availability criteria. Through ANRE Decision no. 657/2018, EfSA was appointed as bound SoLR for the period 1 July 2018 –30 June 2022 for network areas North Muntenia, North Transylvania and South Transylvania; ANRE Order no. 39/2018 – ANRE modified the pricing endorsement principles applied by SoLR and established for each network area and for each SoLR the maximum price for US based on three components: the purchase cost (depending on the actual purchase and the average prices in the centralized market), the supply cost of RON 5.4/ consumption point/month (which includes the recognized profit), the adjustment cost (previous corrections) and endorses the prices proposed by SoLR at most equal to the maximum prices for US considered justified by ANRE. Law no. 167/2018 regarding the amendment and completion of electricity and natural gas law no. 123/2012, introduced new obligations for suppliers: the supplier has the obligation to purchase electricity in order to ensure the coverage of its customers’ consumption, prioritizing the customers which are beneficiary of US from their own portfolio; the supplier does not have the right to unilaterally terminate the electricity supply contracts with the final customers. The ANRE Order no. 157/2018 approved the the mandatory Methodology of establishing annual quota for purchasing of green certificates and the ANRE Order no. 158/2018 established the mandatory estimated quota for purchasing of green certificates for the period August – December 2018 (0.425 gC/MWh), being higher by 22.8% than the quota set for the period January – July 2018 (0.346 gC/MWh); the establishment of measures government Emergency Ordinance no. 114/2018 regarding in areas as public investments and fiscal-budgetary, amendment and completion of some normative acts and the extension of deadlines, imposes to the eletricity market participants: new rules for trading the quantities required to cover the consumption of SoLR’s household customers; reintroduction of regulated tariffs for household customers; increasing the annual contribution to be paid by the license holders to ANRE from 0.1% to 2% of the turnover; restoring regulated prices to households for the period 1 March 2019 – 28 february 2022; the differences in suppliers’ purchasing costs from the years 2018 to 2019, unrecovered through the prices charged, will be recovered until 30 May 2022, according to ANRE regulations. The ANRE Order no. 11/2019 for the approval of the methodology for setting the regulated tariffs and the prices applied by the last resort suppliers to the final customers, applicable from 1 March 2019, establishes: the calculation method of the regulated tariffs applied to the household customers, the terms of the price approval for the universal service and the price for inactive customers applied by the last resort suppliers (fUi), the ultimate pricing principles applied by the fUi. The year 2018, the first year of complete deregulation of customers’ consumption that are beneficiary of US, was a year of legislative instability, especially for the universal service customers. The main events that the electricity market faced are the following: After a beginning of year characterized by moderate temperatures, rising hydraulicity and DAM prices lower than those of the forward markets, once the ANRE Order no. 39/2018 that aims to modify the Pricing Methodology applied by the SoLRs for the ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 25 universal service customers entered into force, the OPCOM forward trading prices have been steadily increasing. According to this order, the price applied by the SoLRs to the customers benefiting of the US is established for the first endorsement period (1 July 2019 – 30 June 2019) taking into account the weighted average price of the SoLRs transactions in the period 21 March 2018 – 30 April 2018, adjusted with a profiling coefficient of 5% or 8%, depending on the purchases coverage degree of the consumption forecast for this category of customers. This regulation led to a sudden increase in demand on the forward markets and, as a result, of the trading price and given the very short deadline for the electricity purchase, did not allow the trading of sufficient volumes in order to secure the price of US for the whole endorsed period; The increase in the trading prices, both on the spot and on the forward markets, was correlated with: a decrease in the production from hydro sources, both in Romania and in the region, as well as the increase in consumption; an accelerated growth in the price of CO2 emissions certificate. Thus, during 2018, the CO2 emission certificate price has tripled, exceeding EUR 20 on 23 August 2018 and reaching a maximum of EUR 24.85 on 10 September 2018; a regulatory change regarding the bid prices in the balancing market, brought by ANRE Order no. 31/2018; as a result of which, starting with 1 September 2018, the deficit price increased significantly compared to the first 8 months of the year. Î Corporate image: As a result of the PR and Communication activities, ELSA has ranked 9th in TOP 50 of the most valuable Romanian brands, made by Brand finance – advancing a position compared to 2017. At the same time, ELSA entered the top of the most appreciated companies in Romania, in terms of transparency, following the launch of the Sustainability Report. Î Ethics and Compliance Reviewing the Policy on transactions with related parties and adopting the updated version at group level, in order to align its provisions to the legislative changes, trends and best practices, as well as to cover better particular aspects and specificities of Electrica group companies; Assessing the 2017 transactions of the company and of its subsidiaries with the related parties, regarding the possibility of conflicts of interest occurence; Launching the analysis regarding the assimilation of new steps in the development of Ethics and Compliance’ activity; Report regarding the potential conflicts of interest in Electrica group in 2018; Report regarding the assessment of the company’s and its subsidiaries related parties’ transactions, from the perspective of generating/consuming conflicts of interest in H1 2018. 1.3. Post balance sheet events date During the period between the 2018 financial year closing and the date of the present report, the following relevant events took place at the group level: On 16 January 2019, the Company informed its shareholders and investors about the conclusion in the first semester of 2019 of a legal act with a value greater than EUR 50,000 with SDTS, affiliate, where ELSA is the main shareholder; On 5 february 2019, the external financial auditor report on factual findings according to art. 82 of Law no. 24/2017 regarding the transactions reported in the second semester of 2017 was published; in January 2019, ELSA, together with its distribution subsidiaries, have filed for cancellation of ANRE orders for the setting of regulated tariffs for the distribution of electricity, being constituted on the role of the court the following files: in court requests file no. 434/2/2019 - cancellation of ANRE Order no. 197/2018 regarding the approval of the specific tariffs for the electricity distribution service and the price for the reactive electricity for SDMN; file no. 435/2/2019 - cancellation of ANRE Order no. 199/2018 regarding the approval of the specific tariffs for the electricity distribution service and the price for the reactive electricity for SDTS; file no. 436/2/2019 - cancellation of ANRE Order no. 198/2018 regarding the approval of the specific tariffs for the electricity distribution service and the price for the reactive electricity for SDTN. At the same time, in each file, it was requested from ANRE the recognition of the amounts that were not included in the 2019 tariffs and also, to include these amounts in the computation of the tariffs for the year following litigation’s final decision. The files are pending at the Bucharest Court of Appeal, in preliminary procedure. The Company has published current reports to the market to inform the investors and all stakeholders about these events. in addition, during the period between the 2018 financial year closing and the date of the present report, SDMN’s share capital was increased from RON 354,364,670 to RON 355,906,870 through contribution in kind by ELSA shareholder with the value of four plots of land in a total area of 19,672 sqm. in the amount of RON 1,542,200 (according to SDMN EgMS Decision of 14 february 2019). ELECTRICA SA26 | A N N U A L R E P O R T 2 0 1 8 2 ELECTRiCA gROUP ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 27 On 31 October 2018, the court decided the bankruptcy of SEO, at the request of the judicial administrator, and cancelled its right of management. At the date of this report, SEM completed the reorganization plan, the payables included in the payment schedule being fully paid, thus the legal procedures for exiting the insolvency procedures can be completed in the following period. General overview ELSA is the parent company for the group, which comprises four subsidiaries in the distribution segment: SDTN, SDTS, SDMN, EL SERV, whereas the supply segment comprises one subsidiary, EfSA. The Company also owns all shares of SEO and SEM. in January 2014, the Board of Directors of SEO and in October 2014, the Board of Directors of SEM decided the commencement of the insolvency procedure with a view to reorganization. The insolvency procedures were initiated in 2014. 2.1. organizational structure As of 31 December 2018, the biggest shareholder of ELSA is the Romanian State, represented by the Ministry of Energy (48.78%), after its ownership was diluted following the initial public offering in 2014. Figure 16: The Group’s subsidiaries at 31 December 2018 99.99% Electrica Furnizare (EFSA) 99.99% Societatea de Distributie a Energiei Electrice Transilvania Nord S.A (SDTN) Electrica SA 99.99% Societatea de Distributie a Energiei Electrice Transilvania Sud S.A (SDTS) 99.99% Societatea de Distributie a Energiei Electrice Muntenia Nord S.A (SDMN) 100% Electrica Serv (EL SERV) 100% Servicii Energetice Muntenia S.A. (SEM) Additional shareholder in distribution and supply subsidiaries The existence of additional shareholder was imposed by the observance of the provisions of Art. 10, paragraph (3) of the Law no. 31/1990 regarding the companies. As a result: SDTS holds 10 shares in SDMN; SDMN holds 10 shares in SDTN; SDTN holds 10 shares in SDTS; Electrica Serv holds 10 shares in Ef. Source: Electrica ELECTRiCA gROUP ELECTRICA SA28 | A N N U A L R E P O R T 2 0 1 8 The group’s subsidiaries that were included in the consolidated financial statements for the year are presented below: Subsidiary Activity Registration code Headquarters % shareholdings as of 31 December 2018 Societatea de Distributie a Energiei Electrice Muntenia Nord SA (SDMN) Electricity distribution in North Muntenia geographical area Societatea de Distributie a Energiei Electrice Transilvania Nord SA (SDTN) Electricity distribution in Northern Transylvania geographical area Societatea de Distributie a Energiei Electrice Transilvania Sud SA (SDTS) Electricity distribution in Southern Transylvania geographical area Electrica furnizare SA (EfSA) Electrica Serv SA (EL SERV) Servicii Energetice Muntenia SA (SEM) - in insolvency Servicii Energetice Oltenia S.A.* Supply and trading of electricity 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 99.9999696922382% 14476722 Cluj-Napoca 99.9999829770757% 14493260 Brasov 99.999976413243% 28909028 Bucharest 99.9998390431663% 17329505 Bucharest 100% 29384120 Bucharest 100% 29389861 Craiova n/a* Source: Electrica *Societatea Energetica Electrica SA lost the control of Servicii Energetice Oltenia starting November 2018 when the bankruptcy proceedings of the subsidiary began. As of this date, the Group ceased to consolidate this company. The main activities of the group are the regulated (through operation and distribution of electricity development of electricity distribution networks) and the electricity supply to end consumers. The group is the electricity distribution operator and the main electricity supplier in North Transylvania (Cluj, Maramures, Satu Mare, Salaj, Bihor and Bistrita-Nasaud counties), South Transylvania (Brasov, Alba, Sibiu, Mures, Harghita and Covasna counties) and North Muntenia (Prahova, Buzau, Dambovita, Braila, galati and Vrancea counties), ensuring the service of the network users by operating installations that function at voltages ranging from 0.4 kV to 110 kV (power lines, substations and electrical transformer stations). The Company’s distribution subsidiaries (SDTN, SDTS and SDMN) invoice the electricity distribution service to electricity suppliers (mainly to EfSA subsidiary, the main electricity supplier in North Muntenia, North Transylvania and South Transylvania), which invoice the electricity consumption to end consumers. further EfSA is an electricity supplier in the competitive market and a supplier of last resort defined as bound supplier for the network regions: North Muntenia, North Transylvania and South Transylvania. According to the regulations issued by ANRE, the bound suppliers of last resort ensure the electricity supply to the end consumers, which benefit, under the law, from universal service, to non-household customers who have not exercised their eligibility right and to non-household customers taken over because they have not secured the supply of electricity from any other source. in the regulated market, the electricity supply was done based on competitive market component (CMC) and last resort (LR) tariffs endorsed by ANRE for H1 2018, respectively on final prices for universal service, final prices for inactive customers (Pi) and final prices for last resort customers (LR) in H2 2018. in the competitive market, the electricity supply was done based on contracts and on negociated prices. ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 29 2.2. mission, vision, values To ensure a high level of performance, Electrica group has defined its Vision, Mission and Set of Values. These identity elements represent the foundation for formulating and implementing the strategic goals of the group. Vision Mission Values The group’s vision is to expand its in the electricity leading position supply market distribution and segments, both nationally and regionally. The group’s mission is to deliver long- term value to the shareholders by distributing and supplying electricity and providing high quality services to the customers, in a safe, reliable, affordable and sustainable manner. Figure 17: Electrica Group Corporate Values represent structures The values cultivated across all are especially group those related to professionalism and responsibility for a real orientation towards customers, in an increasingly challenging market context, including framework from regulatory the perspective. These the base for a viable and sustainable performance, to match the strategic objectives with the legal requirements, industry trends, and market context. it also reflects the group’s commitment to create an internal environment where integrity and ethics are the corporate culture’s are fundamentals based on an open and transparent communication. in order and 2.3. Key elements of the 2015 – 2018 strategic Plan The Strategic Plan for the period 2015-2018, which reflects the Board of Directors’ vision of the management of activities in the stakeholders’ best interest, both on a medium term and a long-term horizon, has been formulated following an analysis of the following areas: objectives and the action plan with measures to implement. ELSA’s corporate strategic directions with respect to the group are the following: Preserve and enlarge the activities of the distribution the external environment, to determine the main environmental factors affecting the electricity market and the key drivers that can significantly influence the evolution of the electricity market in the future; industry analysis, in order to identify trends in the energy market, assess the market attractiveness and determine the critical success factors for competing and surviving in this market; internal analysis of the group, to assess its past and current performance (relative to other market players). Based on the above analysis, the Board of Directors has formulated the corporate and business strategies of ELSA with respect to the group, has set out the strategic and supply segments in Romania. Explore potential opportunities to expand the distribution and supply segments in the region. Enlarge the business portfolio, by developing “value-added services” related to distribution and supply activities, which can be offered to customers. Divest the unprofitable business segments and activities. Electrica group`s business strategy addresses three key success factors in its implementation: operational excellence for efficiency and quality; ensuring a committed and qualified workforce; the highest standards in corporate governance. ELECTRICA SA30 | A N N U A L R E P O R T 2 0 1 8 The strategic action plans defined by ELSA Board: 1. Overall financial performance for the group 2. Excellence in financial processes management 3. Overall operational performance for the group 4. Quality of services provided 5. Employees’ productivity and support for their development 6. implementation by distribution segment of the investment program subsidiaries of the the 7. Corporate governance and enhancement of our sustainability profile. in 2018, Electrica group took actions to improve the financial performance in the context of a challenging energy market, and to ensure the sustainable growth of its activities. The group priorities have been to increase performance, improve services, diversify and expand the activities and business portfolio. Moreover, beside these, for the next period, will be continued the efforts of operational streamlining and orientation towards customers. The year 2018 meant for the distribution companies the finalization of the transformation process initiated in 2017 and the finalization and operational implementation of the new organizational model in five key functional areas: Asset Management, Network Development, Network Operations, Energy Management and Common Services. The achievement of the ambitious investment program focused on the financing of the rehabilitation works and on the network modernization, in order to improve the quality of the service, on the improvement of the energy efficiency and on the losses reduction represented the 2.4. outlook Considering energy policies developed at both EU and national level, as well as the international context of the energy markets, the following trends are expected to characterize on medium and long term the local electricity market increased competition among the players on the national electricity supply market, especially in terms of diversifying the portfolio of products offered to customers (offers for natural gas, insurance, household products etc.) and digital services offered (mobile applications, invoices and online payments, expansion of customer service with chat solutions); The customers who, according to the legal provisions, have the right to benefit from the universal service and do not wish to migrate to the eligible segment, shall be provided with the supply of electricity under regulated conditions; The new secondary legislation under discussion3 which regulated reintroduces provisions on contracts and changes the tariffs methodology for the household customers, will also influence the greatest challenge in 2018, in the context of the transition in 2019 to a new regulatory period. The new regulatory period focuses on the operational efficiency and the distribution service quality, and a significant attention is paid to the comparative analysis of the relevant indicators among the national DSOs by the ANRE. In the supply segment, the company focused in 2018 on increasing the profitability of its customer portfolio by developing specific measures to increase customer satisfaction, through portfolio restructuring and through competitive and dynamic acquisition strategies, in the context of a volatile and unpredictable energy market. in addition, the traditional offer of electricity supply was completed with combined electricity and gas packages. The measures taken during the year 2018 represent a stable foundation for the group’s ambition to be a market leader and to ensure, in a sustained way, the profitability and satisfaction for customers and partners. Negotiations with the social partners (representatives of fNSE Univers, ELSA Union) took place in 2018, in order to implement a new concept of performance- based remuneration within the group. As a result, since 1 October 2018 the new concept has been implemented within SDMN subsidiary and since 1 January 2019 is to be applied in the other distribution subsidiaries and the supply subsidiary, as well as in ELSA. Electrica group continued also this year to provide a major interest in increasing the degree of transparency and enhance the communication with all stakeholders by actively engaging them and by reporting on subject such as sustainable development, environment and social responsibility, in line with the group’s objectives to integrate sustainability in all activities. electricity market and the future strategies of the SoLRs in respect to portfolio management; A regulatory trend in electricity distribution area is the principle of remuneration of the distribution operator considering both the quality of the service, as well as the operational costs and efficiency based on comparative analyzes between DSO; Electricity distributed generation technologies will determine the distribution operators to adapt their processes and strategies regarding the upgrade and development of the network and to offer solutions to independent producers, considering the appearance of prosumers, which are active participants in the energy market; in this context, significant investments are necessary in order to improve both the transmission and the distribution infrastructure; the full electric vehicles, light commercial vehicles and electrification of railways are expected to increase the consumption of electricity in the transportation sector. 3 As of the date of the report – March 2019; through the implementation of the ANRE regulations in accordance with GEO no. 114/2018 ELECTRICA SA future development of technologies will support energy efficiency policies such as: Development of transmission and distribution including smart grid and smart networks, metering; End-use energy efficiency (thermal integrity of buildings, lighting, electric appliances, motor drives, heat pumps etc.); The implementation of smart metering will offer complex tarrifs options to the consumers, detailed information regarding the consumption profile, which might lead to increased flexibility and peak demand reduction. Thus, the consumers shall be better in decision- making process, as active particiants. The smart informed and involved A N N U A L R E P O R T 2 0 1 8 | 31 metering implementation pace depends on the implementation timetable to be adopted at national level; The significat reduction in the cost of photovoltaic technologies is an opportunity for the development of small-scale generation projects, especially in the domestic area; The development of the and infrastructure transmission and distribution long-distance interconnection will become a necessity. The electricity market target model, which implies the development of Europe’s internal electricity market, will continue to evolve and be in line with future trends and challenges in the energy industry. The key drivers of changes in the electricity market are presented in the following table: Key driver Description gDP evolution and industry structure The economic growth is a key determinant of electricity demand. Although there is not a one-to-one relationship between gDP growth rate and electricity demand growth rate, there is a positive correlation, mainly between the industrial demand for electricity and economic growth. in the future, household and industrial electricity demand will also be influenced by energy efficiency policies. intensification of electricity consumption is a major trend in Romania. Over 2010 - 2018, there was a significant increase in consumption, as opposed to a decrease of the gas consumption over the same period, mainly due to the curtailment of heavy industry production. Despite the demographic decline recorded at EU and Romanian level, the electricity consumption is impacted by the changes in the consumer behaviour and the increase in urbanization. for example, smart devices are expected to generate a massive increase in connected devices and implicitly in the electricity consumption and revenue growth across multiple industries. The regulatory framework has undergone major changes with the aim of aligning the Romanian legislation with the EU legislation. Although important steps have been taken, other major changes are expected to occur in the next decade, particularly following the new framework Strategy for a European Energy Union, which highlights the need for integration and cooperation amongst member states. from 2019, the 4th Regulatory Period will start and ANRE approved significant changes in the methodology for all tariff elements (Regulated Rate of Return, Regulated Assets Base, Network losses, Operating Expenses, TOU distribution tariffs starting from 2020). Also for the supply segment important changes are forecasted in the acquisition strategies and the sales to final customers, considering the impact of the methodologies under discussion regarding the reintroduction of regulated contracts with the producers for the household customers. The change in the amount of the contribution to be paid to ANRE from 0.1% to 2% of the turnover generated by licensed activities has the potential to lead to restructuring the activities of the players in the electricity market. Smart networks and smart meters will create benefits for the end consumers, distributors and suppliers in terms of energy efficiency, resource optimization and network operation, implementation of demand response etc. it is necessary to prepare the networks and to integrate the distributed resources (storage solutions, micro-grids, local production, electric machines, etc.), considering also the management of their impact. Romania has adopted the EU 20-20-20 targets, aiming to reduce greenhouse gas 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. Demographic evolution and technology development Changes in regulations Technological development increase in environmental awareness Source: Electrica Impact on Electricity consumption Electricity consumption Electricity prices Electricity prices and consumption Electricity prices and consumption, regulatory framework ELECTRICA SA32 | A N N U A L R E P O R T 2 0 1 8 The regulatory framework perspective and the impact on the energy market The energy regulatory framework has experienced major changes in the past decade, including market liberalization, unbundling and support scheme implementation for renewable energy, and the changes brought by gEO no. 114/2018 will most likely lead to new market rules and possible reorganization in the activities of energy market players. For the distribution area, the most significant changes in the Romanian legislation refer to the following: The change in 2018 of the regulatory framework for the 4th Regulatory Period – 2019 – 2023, according to the Methodology for establishing the distribution tariffs, approved through ANRE Order no. 169/2018 and of the remuneration of the distribution operators – according to the ANRE order no. 168/2018, starting with 2019, the regulated rate of return (RRR) approved for the DSOs decreased from 7.70% to 5.66% for the existing RAB and 6.66% for the investments put into operation during the period 2019-2023; The changes brought by the new tariff setting methodology and by the new RRR will have a negative impact on the operational and financial performance of the DSOs, as a result of the ANRE approval of operating and maintenance costs and of costs with the purchase of electricity to cover network losses lower than the necessary costs demanded by the DSOs, as well as ANRE’s implementation of corrections for the annual costs and planned investments. ANRE approved the framework conditions for the achievement of the timetable for the implementation of electricity smar t metering systems at national level through Order no. 177/2018. Based on the cost-benefit analyzes, the DSOs have sent to ANRE for approval the proposals regarding the implementation of electricity smart metering plans for the period 2019- 2028, on an annual basis; On 29 December 2019, the gEO no. 114/2018 entered into force, regarding the setting of several measures in the field of public investments and of some fiscal-budgetary measures, the change and completion of some normative acts and the prorogation of certain terms that have a negative impact on the results of the distribution operators due to the non-recognition in the distribution tariffs of the cost of the monopoly tax. The changes to the Romanian legislation with relevant impact for the supply segment are the following: The amendments to the Electricity and Natural gas Law no. 123/2012 introduce the obligation of the electricity suppliers to purchase electricity to ensure the coverage of their customers’ consumption, with priority for the customers of the US in their own portfolio. The provision affects the electricity purchase strategy of the SoLRs, with impact on the functioning of the entire market in the short and medium term. in addition, the supplier does not have the right to unilaterally terminate the electricity supply contracts with the final customers; gEO no. 114/2018 influences the supply area also, through the increase of the amount of annual contributions related to the organization and functioning of ANRE and introduction of new provisions related to the regulated household segment; The new secondary legislation, submitted by ANRE for public consultation at the beginning of 2019, reintroduces the regulated contracts with producers and changes the tariff methodology for the regulated segment of customers. These changes have the potential to bring significant changes in market participant’s strategies for the next period; in 2018 were published the normative acts regarding a new category of market participants, the prosumers, defining the guide rules for the commercializing of the eelctricity produced by them. Prosumers who own electricity-generating units with renewable power of up to 27 kW installed power per consumption place can sell the electricity produced and delivered into the grid to the electricity suppliers with whom they have supply agreements concluded, according to ANRE regulation. Considering legislative and regulatory changes, Electrica group is reviewing its medium and long-term strategy in order to manage responsibly and sustainably their impact on the company’s activities, in the context of a regulatory framework that has undergone numerous successive and profound changes in the last months of 2018 and early 2019. 2.5 Key factors, directions and significant market trends affecting the operational results of electrica Group The company analyzes the strategic options and aims to implement streamlining measures, through restructuring programs and transformation of group’s divisions, training and staff development programs, redesigning business models, or entering new business segments, in order to improve both the quality of the services offered and the financial performance. The most important assumptions considered for the strategy review are the following: The Romanian energy mix landscape is changing significantly, being heavily disrupted by the advent of renewables, together with the emergence of the prosumers in the following years; ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 33 on customer orientation and maximizing their satisfaction. The aim is to increase the natural gas supply side, to provide value added solutions (products and services) and to digitalize specific operations and processes; Ensure the necessary human resources (internally or through specific recruitment) for key business areas and train the employees and capitalize on their potential, expertise and aptitudes, in order to increase productivity and individual performance. in the context of a labour market expected to be tense also in the next years for the qualifed labor force segment, the group aims to invest in vocational training centers and dual education, which are so important in order to provide qualified personnel needed to ensure optimal conditions and services to the grid; Optimise the support functions and implement iT tools to support business lines and create synergies that bring value added. Processes’ digitalization and integration into iT platforms are to be provided to both business lines, in the context of the changes brought by smart grids, prosumers and the trend in streamlining the customers’ consumption, so the iT department becomes a strategic partner in the years to come; Continue to improve the corporate governance framework, closely the Corporate governance Action Plan established with EBRD beginning with 2014. following Please note that other factors unavailable (eg. legislation and regulatory provisions under disscusions or final versions not available at the date of the report – march 2019 etc.), or not presented above, or not considered by the Group may occur and may have a significant impact on the implementation and evolution of the Group’s strategy. Romanian gDP will have a stable evolution in the future; Different trends in electricity (increasing trend on a medium term, but stagnation/reduction on the long term); consumption in Romania will maintain its commitment towards the accomplishment of the 20-20-20 strategy regarding the climate changes and the implementation of the new framework for the period 2020-2030; for the next regulatory period, the remuneration mechanism, the tariffs and methodology for applying corrections to the tariff are subject to changes, these key factors being considered in the strategic planification; The supply sector will experience a short to medium term repositioning following the reintroduction of the regulated contracts and the changes in the tariff calculation methodology for SoLR; The impact coming from the recent change in the legislative framework, as well as its lack of predictability in the medium and short term; No major geopolitical turbulences have been taken into account, which might significantly affect the Romanian electricity market; financial markets will allow access to profitable financing sources to support companies’ investment programs. in December 2018, the Board of Directors of the Company approved the new strategic directions for the electricity distribution and supply business lines for the next five years, and, in the next period, the strategy and the implementation plan for the period 2019-2023 will be defined according to these new directions. For this period, Electrica Group targets the following lines of action: in the distribution segment, the focus is on operational efficiency, by reducing technical and commercial losses, by optimizing internal processes, ensuring optimal use of resources, on customer orientation and ensuring their satisfaction, by improving network access and quality of service, on the development of smart grid technologies and on cost recovery. increasing operational performance will lead to a positive impact on the lives of our customers, from continuity in the electricity supply, to the quality of the service and of the interaction with our staff. At the same time, exploiting the significant potential for optimization and reducing losses by streamlining the distribution operators’ activities are key factors for optimal allocation of resources, an important requirement during this regulatory period; The supply segment will focus on diversifying the business through offers and services tailored to customers’ needs, on operational efficiency through optimized sales and purchasing processes and ELECTRICA SA34 | A N N U A L R E P O R T 2 0 1 8 3 ELECTRiCA ON THE CAPiTAL MARKETS ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 35 3.1 ownership structure Until July 2014, the Romanian state, through the Ministry of Energy, was the sole shareholder of ELSA. As of 4 July 2014, after the initial Public Offering, the Company’s shares are listed on the Bucharest Stock Exchange (BSE – ticker EL), and the global Depository Receipts are listed on the London Stock Exchange (LSE – ticker ELSA). following the stabilization process after the June 2014 iPO, ELSA owns 6,890,593 of its shares, representing 1.99% of the total share capital, which does not entitle ELSA the right neither to vote, nor to receive dividends. The ownership structure according to the records of Central Depository (Romanian: Depozitarul Central) as of 31 December 2018 is presented in the following table: Shareholder Number of shares Stake held (% of the share capital) The Romanian state, through the Ministry of Energy, Bucharest, Romania The European Bank for Reconstruction and Development, London, UK Electrica SA BNy MELLON DRS, New york, USA Other legal entities* individuals TOTAL Source: Central Depository, Electrica * Dedeman SRL owns between 5 and 10% of the total number of shares Figure 18: Ownership structure on 31 December 2018 168,751,185 23,955,272 6,890,593 5,931,364 121,776,730 18,634,785 345,939,929 48.7805% 6.9247% 1.9918% 1.7146% 35.2017% 5.3867% 100.0000% ELECTRiCA ON THE CAPiTAL MARKETS Source: Central Depository, Electrica ELECTRICA SA 36 | A N N U A L R E P O R T 2 0 1 8 At 31 December 2018, 81.96% of the total number of shares were held by Romanian investors, while 18.04% were owned by shareholders with European (other than Romanian) and North American residence. Figure 19: The structure of the Romanian shareholders at 31 December 2018 Source: Central Depository, Electrica As of 31 December 2018, out of the total shares owned by Romanian shareholders, 59.52% where held by the Romanian state through the Ministry of Energy, 6.39% were shares belonging to individual shareholders and 31.66% were owned by legal shareholders. The remaining 2.43% represented Electrica’s shares, bought back for price stabilization purposes in July 2014. Of the remaining 18.04% of the share capital held by foreign shareholders, the European shareholders (other than Romanian ones) held 81.17% as of 31 December 2018 (out of which EBRD 38.39%), while the American shareholders held 18.19%, this category including the gDRs holders. More details on these holdings are shown in the following figure. The shares that appear to be held by the Bank of New york Mellon are the global deposit receipts (gDRs) owned by ELSA shareholders that are traded on the London Stock Exchange (LSE). A global deposit receipt represents four shares. Bank of New york Mellon is the depository bank for these securities. ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 37 Source: Central Depository, Electrica Figure 20: Geographical distribution of shareholders outside Romania as of 31 December 2018 ELECTRICA SA38 | A N N U A L R E P O R T 2 0 1 8 3.2 shares evolution on bse and Global depository receipts (Gdrs) evolution on lse BSE: ELSA’s shares are included in several BSE indices, including the BET index (the reference index for the Romanian capital market reflecting the performance of the most traded companies on the BSE’s regulated market), as well as in the BET-Ng index (the sectoral index that reflects the evolution of the companies listed on BSE’s regulated market having as main activity energy and related utilities). Between 4 July 2014 - 31 December 2018, ELSA’s shares recorded a minimum price of RON 9.10 (13 July 2018) and a maximum price of RON 14.96 (12 May 2017), therefore the weighted average price was RON 12.13. Compared to the iPO price (RON 11), ELSA closed the year 2018 at a price of RON 9.7, down by 11.8%, while the BET index increased by 5.3% and the BET-Ng index dropped by 14.5%. The gross dividends per share granted by ELSA in this period reached a cumulative value of RON 3.0469, with a return of 27.7% as reported to the closing price of the last day of 2018. At the same time, all the companies included in BET index granted dividends with a cumulative yield of 36.7% (calculated at the closed prices of the last day of 2018). Thus, the aggregate yield generated by ELSA’s shares (along with dividends) from the iPO and by the end of 2018 was 15.9%. from the iPO dated 4 July 2014 until the end of 2018, ELSA shares attracted a RON 2.73 bn liquidity on BSE, with a daily average of RON 2.43 mn. During this period of about 4 years and a half, 225.2 mn ELSA shares had been traded, representing 65% of the share capital and 174.4% of the free float (computed without the shares held by the Romanian State through the Ministry of Energy, the European Bank for Reconstruction and Development (EBRD) and ELSA’s own shares). Thus, the average daily turnover during this period on BSE was 200,522 shares. Strictly analyzing the year 2018, the maximum closing price was RON 12.18 RON (29 January) and the minimum closing price was RON 9.10, so the weighted average was RON 10.99. During the year, ELSA’s share price fell by 14.2%, while the BET index decreased by 4.8% and the BET-Ng index depreciated by 7.4%. The gross dividend per share granted by Electrica in 2018 (for 2017) was RON 0.7237, slightly below the 2017 level (by 2.4%), with a yield of 6.4% (computed at the last price in 2018). At the same time, the shares from BET composition granted dividends with an average yield of 9.1%. Thus, the aggregate yield generated by ELSA’s shares (together with dividends) in 2018 was -7.8%. During 2018, ELSA shares attracted a liquidity of RON 468.4 mn on BSE, with a daily average of RON 1.88 mn, down by 27% compared to 2017, the sixth in the market. The volume of shares traded was 42.63 mn, down by 12% from 2017, so the daily average volume was of 171,201 shares. The total volume of shares traded in 2018 accounted for 12.3% of the share capital and 36.2% of the free float. Since the holdings larger than 5% are removed from the free float (according to the BVB index methodology), the previous calculation eliminates from the share capital the holdings of the Romanian state through the Ministry of Energy, EBRD, ELSA and Dedeman. During the period from the beginning of 2019 until 15 february 2019, ELSA’s share price had an ascending trend, with an advance of 10.10%, reaching a closing price of RON 10.68. This evolution was recorded on a traded volume of 4.55 mn shares, with an average daily turnover of 146,943 shares. in the same period, the BET index grew by 3.7% and the BET-Ng index went up by 11.2%. LSE: The GDRs’ weight in ELSA’s total share capital diminished following the initial Public Offering, reaching a level of 1.71% at the end of 2018 compared to 10.17% at 4 July 2014. The maximum price reached by the gDRs was USD 15.3, in September 2014. Subsequently, the gDRs’ price followed a ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 39 fluctuating but declining trend, to a price of USD 9.6 at 31 December 2018. The gDRs recorded a minimum price of USD 8.9 on 27 December 2018. Without taking into consideration the dividends granted, the gDRs price dropped by 29.7% from the iPO price (USD 13.66) at the end of 2018 (18.3% drop in 2018 and 3.7% in 2017). gDRs liquidity was USD 159.3 mn from the iPO until the end of 2018. in 2018, the liquidity recorded was of USD 1.75 mn, compared to USD 4.78 mn in 2017. in this period, 12.42 mn gDRs had been traded. Refering only to year 2018, the total traded volume was 151,962 gDRs, with over 50% lower than compared to the 2017 volume. A summary of the above mentioned aspects is found next: 4 Jul 2014 - 31 Dec 2018 2018 2017 Variation 2018 vs 2017 Indicator Bucharest Stock Exchange Total liquidity (RON) Average daily liquidity (RON) Turnover (no. shares) Average daily turnover (no. shares) 2,730,696,104 468,419,456 644,878,005 2,431,608 225,185,693 200,522 1,881,203 42,628,976 171,201 2,600,315 48,467,600 195,434 Market cap. - end of period (RON) 3,355,617,311 3,355,617,311 3,909,121,198 Minimum price (RON) Maximum price (RON) Average price (RON) ELSA Share price performance (%) BET performance (%) BET-Ng performance (%) Dividend(s) ELSA’s Dividend(s) yield (%) BET-TR Dividend(s) yield 4 (%) ELSA’s Adjusted price performance (%) 5 BET-TR performance (%) London Stock Exchange ELSA’s gDRs liquidity (USD) ELSA’s gDRs turnover (no. of gDRs) gDRs price performance (%) 9.1 14.96 12.13 -11.80% 5.30% -14.50% 3.0469 27.70% 36.70% 15.90% 41.90% 9.1 12.18 10.99 10.78 14.96 13.31 -14.20% -14.10% -4.80% -7.40% 0.7237 6.40% 9.10% -7.80% 4.30% 9.40% 10.80% 0.7415 5.60% 9.70% -8.50% 19.10% 159,324,372 12,419,189 -29.7% 1,753,268 4,778,489 151,962 -18.3% 358,614 -3.7% 4 Computed at the periods’ last day close price (for comparability) 5 Computed together with dividend(s) granted during the analyzed period -27.4% -27.7% -12.0% -12.4% -14.2% -15.6% 18.6% -17.4% 0.2% - - -2.4% 13.7% -6.0% -8.8% -77.5% -63.4% -57.6% - ELECTRICA SA40 | A N N U A L R E P O R T 2 0 1 8 No Date Event description 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 5-Jan-18 Competition Council Ruling - fine amounting to RON 10.8 mn 16-Jan-18 Rejection suspension of the OgMS dated 26 October 2017 resolution 18-Mar-18 Action in annulment of the OgMS dated 26 October 2017 resolution 29-Mar-18 9-feb-18 ELSA announced the achieved value of the investments in distribution infrastructure of RON 727 mn in 2017 and assumed an investment plan of RON 900 mn for 2018 OgMS approved a new Mandate Agreement and a new Remuneration policy for the members of the ELSA's BoD as well as new remuneration limits for executive managers of ELSA 15-feb-18 ELSA published the preliminary separate financial statements for 2017 (unaudited) 7-Mar-18 ELSA published the convening of the OgMS and EgMS on 27 April 2018 and the related documents: financial statements, director's report, auditor report for 2017, 2018 budget and the dividend proposal for 2017 16-Mar-18 fy 2017 Results Presentation for analysts and investors (teleconference) 27-Mar-18 29-Mar-18 5-Apr-18 19-Apr-18 27-Apr-18 ELSA published the supplemented convening notice of the gMS dated 27 April 2018 with the election of the BoD through cumulative voting method by the request of the Ministry of Energy ELSA announced the transfer, starting 1 April, of the BRP (Balance Responsible Party) activity to EfSA ELSA announced the conclusion of three legal acts (intra-group loans), each with a greater value than EUR 50,000, with its distribution subsidiaries Competition Council denounces a cartel during 2008-2015 between distribution operators and some meter suppliers ELSA gMS approved the 2017 financial statements and 2018 Budget at standalone and consolidated level, the 2017 dividend, elected the new BoD members through cumulative voting method and rejected the appointed proposed financial auditor and the establishing of a new working point in “America House’. ANRE published a document regarding the substantiation of the 2019 distribution tariffs with a proposal to reduce the RRR level from 7.7% to 5.07%. 14-May-18 Appointment of the BoD chair and of the BoD's committees 15-May-18 ELSA published the Q1 2018 financial statements and a current report regarding the appeal to the Competition Council's decision. Figure 21: Share price evolution on BSE and the most important events occurred from the beginning of 2018 until 15 February 2019 (RON) Source: BSE, Electrica ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 41 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 16-May-18 Q1 2018 results Presentation for analysts and investors (teleconference) 7-Jun-18 25-Jul-18 Ex-date for 2017 dividend. The price decreased by 1.2% - less than the gross value of dividend per share ELSA published the convening of the gMS on 18 September 2018. Revocation of the Chief iT&T Officer 14-Aug-18 ELSA published the H1 2018 financial statements and held a webconference for H1 2018 Results Presentation for analysts and investors 17-Sep-18 Revocation of the HR Manager following the mandate termination 18-Sep-18 12-Oct-18 16-Oct-18 23-Oct-18 15-Nov-18 OgMS approved the appointment of Deloitte Audit SRL as ELSA's financial auditor for the financial years 2018, 2019 and 2020 ELSA's BoD announces the renouncement to the position as member of BoD of Ms Arielle Malard de Rothschild ELSA's BoD announces the termination of the mandate of CEO Mr Catalin Stancu, by mutual agreement, and the nomination as interim CEO of Ms Corina georgeta Popescu starting 1 November 2018 ELSA announces the application for annulment of the ANRE Orders no. 168 and 169 from 2018 regarding the methodology and the distribution tariffs ELSA published the Q3 financial 2018 results, BoD appointed Mr. Dragos Andrei as interim member of the BoD after the resignation of Ms. Arielle Malard de Rothschild. Ms. Doina Dascalu resigned from her position as Chair of the BoD, considering the Parliament nominated her as first Vice President of ASf 13-Dec-18 ELSA published the Convening notice for OgMS for the election of the BoD members for filling in the vacant position 18-Dec-18 Mr. Willem Schoeber announced his decision to resign from his position in the BoD. The Ministry of finance announced an Emergency government Ordinance introducing new taxes mainly for banks and energy companies. The stock exchange collapses by 17% in 3 days and ELSA loses 15% 20-Dec-18 25-Jan-19 7-feb-19 ELSA published the tariffs approved by ANRE for its three distribution subsidiaries for 2019 The BoD appinted Ms. georgeta Corina Popescu as CEO and Ms. Bibiana Constantin as HR Manager, with a four-year mandate ELSA OgMS elected Mr. Radu Mircea florescu, Mr. Dragos Andrei and Mr. Niculae Havrilet as new BoD members, with mandate until April 2022 Figure 22: Global depositary receipts’ price history on LSE, together with the most important events occurred from the beginning of 2018 until 15 February 2019 (USD) Source: LSE, Electrica ELECTRICA SA42 | A N N U A L R E P O R T 2 0 1 8 Figure 23: Monthly trading volume and weighted average monthly closing price of shares on BSE (in RON) and GDRs on LSE (in USD) (until 15 February 2019) Source: BSE, LSE, Electrica Figure 24: Evolution of the adjusted closing price6 of ELSA’s shares vs BET-TR index Source: BSE, Electrica 6 Adjusted at each ex-date with the annual value of the dividend/share Electrica adjusted price with dividends ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 43 3.3 investor relations (ir) Throughout 2018, ELSA’s management team was involved in numerous activities for investors and analysts, whether it was national or international conferences, individual meetings with Romanian or foreign investors and analysts, or conference calls with them. Like in every year, four teleconferences were organized to present the annual, quarterly and half-yearly financial results of the group. The events have been streamed live through webcasts; both the supporting documents and the webconference recordings can be accessed on the company’s website, under investors section > Results and Reports. Among the conferences that took place during 2018, we mention the attendance at: The Central & Eastern European forum 2018 in Vienna (16 – 17 January 2018); Romania investor Days in London (28 february – 1 March 2018); Concorde Securities’ annual “face to face” conference in Budapest (3-4 April 2018); BCR investor Conference in Bucharest (8 May 2018); CEE investor Days Conference in New york (23-24 May 2018); frontier investor Days in Bucharest (6-7 September 2018); Romania investor Day in Warsaw (13 September 2018); Romania investor Day in Zagreb (20 September 2018); CEE investors Conference in Stegersbach (9-10 October 2018); Romania investor Days Nordics in Stockholm (18 October 2018); 7th Annual WOOD’s Winter Wonderland in Prague (5 - 7 December 2018) in the first part of 2018, the first ”Meet the Company, Meet the CEO” event, dedicated to individual (retail) investors at the company level was organized, in collaboration with investors Club. Approximately 20 persons interested to meet the company’s management attended the meeting at ELSA’s headquarters. Thus, investors had the opportunity to get in touch with the company’s representatives, to ask questions of interest to them and to deepen relevant information about the group. ELSA aims at achieving the best-in-class investor program, constantly developing the equity story. As a novelty, in the second half of 2018, ELSA conducted a study on the perception of local and international investors and analysts. The way that the company is perceived at individual level, compared to the industry and to similar market-cap peers was determined. The company’s goal was to better understand investors and their needs in order to avoid inappropriate communication, to minimize information misinterpretation and to improve the quality of communication with existing and potential investors and analysts. Refering to fairly, continuously and transparently informing investor Relations Department has stakeholders, the disseminated over 45 current reports and communications on the platforms of the Bucharest Stock Exchange (BSE), the London Stock Exchange (LSE), the financial Supervisory Authority (ASf and fCA), as well as on ELSA’s website. All these documents can be accessed on the company’s website, under investors section > Results and Reports. ELECTRICA SA44 | A N N U A L R E P O R T 2 0 1 8 3.4 legal acts reported The legal acts reported in 2017 according to Art. 82 of Law No. 24/2017 are the following: EL SERV – Subsequent Agreement no. 344/29 December 2017 – valid until 30 June 2018 - Auto transportation services for ELSA for the period 1 January 2018 – 30 June 2018 – value: RON 447 th; EfSA – Business Transfer Agreement no. 42/28 March 2018 - Business Transfer of Balance Responsible Party activities and assets – amount: RON 19,762 th (the transaction’s price was established considering the transferred activity’s market value, based on a valuation report delivered by an ANEVAR authorized valuator); SDTS – Loan Agreement no. 73/05 April 2018 - granting of a loan in amount of up to RON 130 mn – expiry date 4 April 2025; SDMN – Loan Agreement no. 74/05 April 2018 - granting of a loan in amount of up to RON 230 mn – expiry date 4 April 2025; 3.5 dividend policy SDTN – Loan Agreement no. 75/05 April 2018 - granting of a loan in amount of up to RON 160 mn – expiry date 4 April 2025; SDMN – Services agreement no. 153/27 April 2018 – Rendering services in the AMR system until 30 September 2018; amount: RON 5,496 th; subsequently, the services agreement no. 219/24 October 2018 was signed, having the same scope, with expiry date 28 february 2019, agreement in total amount of RON 4,580 th; SDTS – Services agreement no. 154/27 April 2018 – Rendering ser vices in the AMR system until 31 December 2018; amount: RON 7,354 th; SDTN – Services agreement no. 155/27 April 2018 – Rendering ser vices in the AMR system until 27 April 2019; amount: RON 8,943 th; SEM – Loan Agreement no. 167/29 May 2018 - granting of a loan in amount of up to RON 5.5 mn – expiry date 29 May 2020. ELSA’s dividend policy was updated in february 2018, and the document can be accessed on the company’s website under investors section > Corporate governance > Corporate Policies. ELSA’s dividends are distributed from the annual net distributable profit based on the annual individual audited financial statements after their approval by ELSA’s Ordinary general Shareholders’ Meeting (OgMS) and the approval of the dividend proposal by the OgMS. The shareholders receive dividends proportionally to their share in the company’s paid-up capital. The company has 345,939,929 ordinary shares issued, all shares conferring equal rights on the net assets of the company. Out of the total number of shares issued, 339,049,336 shares offer the right to dividends and the right to one vote per share in the shareholders’ meetings of the company. The remaining 6,890,593 shares were bought back by the company in July 2014 in order to stabilize the price and do not confer any right to dividends or any voting right. Regarding the global deposit receipts that are traded on the London Stock Exchange, ELSA pays dividends to the gDRs issuer proportionally to its holdings. Holders of gDRs will then receive dividends from the gDR issuer, proportionally to their holdings. According to the policy in force, the dividend distribution that the Board of Directors will consider in formulating the proposal to ELSA’s OgMS will be between 65% and 100% of its distributable net profit. in case there are deviations outside this range, they will be substantiated and explained to shareholders in the periods in which they occur. The company will pay all dividends in RON. The dividend payout ratio from the distributable profit of the group subsidiaries shall be consistent with ELSA’s ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 45 present dividend policy. The dividends paid by the group’s subsidiaries to ELSA in year N (related to year N-1 results) are recorded as finance income in ELSA’s individual financial statements in year N and incorporated into dividends paid by ELSA to its shareholders in year N+1 (related to the result of year N). 3.6 dividend distribution Figure 25: Gross dividends distributed (2014-2017) - RON mn Figure 26: Gross dividend per share (RON) and dividend yield (%) The dividends distributed by ELSA fluctuated in the period 2014 - 2017, between RON 244.7 mn and RON 291.6 mn, but the dividend payout ratio7 was 100% each year, except for 2014, when it reached a level of 96%. in 2015, the net dividend distributions included the amount of RON 5.7 mn representing the retained earnings from 2014. 3.7 own shares in July 2014, ELSA bought back for price stabilization purposes, 5,206,593 ordinary shares and 421,000 global Depositary Receipts, equivalent of 1,684,000 shares. The total amount paid for acquiring the shares and global The yield of the dividend paid in 2018 (for the 2017 results), recorded the highest level in the 2014-2017 period, reaching a level of 7.3%. The gross dividend per share paid in 2018 was 0.7237 RON. The dividend yield (%) is calculated as gross dividend per share/Closing share price on BSE at ex-date. Depositary Receipts was RON 75,372 th. There were no changes in the number of the treasury shares until the date of the report. 7 Dividend payout ratio is calculated as Gross Dividends/ Net profit distributable to dividend, whereas Net profit distributable to dividend is Net profit according to individual financial statements of ELSA less the required distributions to legal to legal reserves ELECTRICA SA46 | A N N U A L R E P O R T 2 0 1 8 4 CORPORATE gOVERNANCE iN ELSA ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 47 ELSA confers a great importance to the principles of good corporate governance, considering corporate governance a key element for sustainable growth of the business and for enhancement of long-term value for shareholders. ELSA constantly develops and adapts its corporate governance practices and model, both at standalone, as well as at group level, so that it can align with the increasingly rigorous capital market requirements and with the best practices in corporate governance at European level, as well as for creating opportunities and increasing competitivity. Corporate governance represents the principles at the basis of the governance framework through which the company is administered and controlled. Transposed in the internal regulations, these principles determine the efficiency and effectiveness of the control mechanisms adopted with the purpose of protecting and harmonizing the interests of all the stakeholders – shareholders, directors, executive managers, managers of different structures of the company, employees and the organizations that represent their interests, customers and business partners, suppliers, central and local authorities, regulators and operators of the capital markets, etc. ELSA’s Code of Corporate governance presents primarily the main work methods, attributions and responsibilities of the management and supervisory structures of the company, as well as those of the committees constituted to support these structures to fulfil their responsibilities. ELSA undertook from the iPO and admission to trading from July 2014 the implementation of a corporate governance action plan, as part of the framework agreement with the European Bank for Reconstruction and Development. The standards and measures provisioned in this plan have been implemented and continuously monitored. for more details about this action plan, please see chapter 4.10. 4.1 corporate Governance code ELSA adhered to and has been applying the provisions of the Corporate governance Code issued by the Bucharest Stock Exchange (BSE CgC). This code, entered into force starting with 4 January 2016, can be accessed on the BSE’s website at the address: http://m.bvb.ro/Regulations/Legalframework/ BvbRegulations. The CgC is also a guide for ELSA’s management and employees and for other stakeholders regarding the business conduct and governance matters and provides information about aspects of the Company’s principles and policies. it also incorporates the Code of Ethics and Professional Conduct, Appendix 7 of the CgC. ELSA’s compliance with BSE’s code is being thoroughly assessed and periodically reported to the market as new developments are observed. ELSA had officially adopted and applies the Corporate governance Code (ELSA CgC) starting with 2014 financial year. formally, ELSA adopted the Code of Corporate governance (ELSA CgC) starting with february 2015 and made it available to all the interested parties on ELSA’s website, in the section investors > Corporate governance > Corporate governance Code. ELSA CgC embeds ELSA’s general principles and conduct rules that set forth the corporate values, the responsibilities, obligations and business conduct of the company. ELSA CgC comprises also ELSA’s Articles of Association, the charters of the BoD and those of its committees, and all these documents together contain the terms of reference and responsibilities of the administrative and executive management of the company. The most recent update of ELSA CgC took place in April 2017, following the update of the Articles of Association of the Company that was approved by the gMS on 27 April 2017. The “Comply or Explain” Statement from chapter 4.9 presents the company’s compliance level with the provisions of BSE’s CgC code. ELSA is in compliance with all of these provisions. in compliance with Company’s policies and with the procedures of the Code of Ethics and Professional Conduct, the Audit and Risk Committee ensures that the Company`s activity is carried on with honesty and integrity, including the implementation of the whistle-blower policy. ELSA has implemented a procedure for reporting ethical deviations, frauds and any other aspects of non-compliance that otherwise could cause image and/or commercial prejudice or even involve legal sanctions, thus damaging the prestige and profitability of the Company. functions The whistleblowing according to this procedure, as well the procedure itself, are available on ELSA’s website, in the Whistleblowing section. tools, which reporting Whereas the shares of the Company are allowed for trading both on the regulated market administered by Bucharest Stock Exchange (BSE), and through gDRs on the market managed by the London Stock Exchange (LSE), ELSA is subject to the rules imposed by the national and European laws on market abuse regarding market abuse prevention and the arrangements applicable to inside information. Thus, ELSA CgC includes instructions on the use of insider information and market manipulation. ELSA has implemented a procedure to comply with the national and European regulations regarding market abuse prevention. 4.2 General meeting of elsa’s shareholders The general Meeting of Shareholders (“gMS”) is the main corporate governance body of ELSA, deciding on the items as outlined in the Articles of Association. The convening, functioning, voting as well as other provisions regarding the gMS are detailed in ELSA’s Articles of Association, which is available in electronic format on ELSA’s website, in the section group > About. ELECTRICA SA48 | A N N U A L R E P O R T 2 0 1 8 The ordinary general meeting of the shareholders has the following main duties: as joint ventures in excess of the same value and with a duration of over one year; to appoint and revoke the members of the Board of directors and establish the level of their remuneration and other rights according to the legal provisions; to establish the revenues and expenses budget, to set out the activity schedule of the Company; to establish the revenues and expenses budget consolidated at the group level; to discuss, approve or amend the annual financial statements according to the reports submitted by the Board and the financial auditor; to approve the profit distribution according to the law and to establish the dividend; to decide on the management activity of the directors and on the discharge of their liability, in accordance with the law; to decide to file legal actions against the directors, managers as well as financial auditor for damages they caused to the Company by breaching their obligations towards the Company; to decide on mortgaging, renting or closing of one or more units of the Company; to appoint and revoke the financial auditor and to set the minimum term of the financial audit contract; to carry out any other duties set out by the law. The extraordinary general meeting of the shareholders shall decide on the following: withdrawal of the preference right of shareholders upon subscription of new shares issued by the Company; contracting any type of loans, debts or obligations representing a loan, as well as creating real or personal liens related to these loans, in each case in accordance with the competence limits provided in Annex 1 to Articles of Association; regarding operations the acquisition, sale, exchange or creation of encumbrances over fixed assets of the Company whose value exceeds, individually or cumulated, during any financial year, 20% of the total fixed assets, less receivables, and leases of tangible assets for periods longer than one year, whose individual or cumulated value towards the same co-contractor or involved persons or with whom it acts in concert exceeds 20% of the fixed assets value, less receivables at the time of entering in the relevant operation, as well approving investment projects in which the Company will be involved in accordance with the competence limits provided in Annex 1 to these Articles of Association, other than the ones provided in the annual investment plan of the Company; approving the issuance and admission to trading on a regulated market or on an alternative trading system of shares, depositary certificates, allotment rights or other similar financial instruments; approving the competencies delegated to the Board; changing the legal form; relocation of the registered office; changing the main or secondary business objects; increasing the share capital, as well as decreasing or the replenishment of the share capital by issuing new shares, according to the law; the merger and the spin-off; the dissolution of the Company; carrying out any bond issuance, as per the provisions of art. 10 of the Articles of Association, or conversion of a category of bonds in a different category or in shares; approving the conversion of preferential and nominative shares from one category to another, according to the law; any other amendment the Articles of to Association; the establishment or dissolution of secondary offices: branches, agencies, representative offices, working points or other similar units without legal status, according to the legal provisions; participation in the establishment of new legal persons; approval of the eligibility and independence criteria with respect to the Board members; approval of the corporate governance strategy of the Company, including the corporate governance action plan; donations within the limits of the competence provided in Appendix 1 to these Articles of Association; and approves granting of intragroup loans with a value of more than EUR 50 mn per operation; any other decision that requires the approval of the extraordinary general meeting of the shareholders. 4.3 shareholders’ rights Rights of the Company’s shareholders, including the minority ones, are protected according to the relevant legislation. Shareholders have, amongst others rights provided under the Company’s Articles of Association and the laws and regulations in force, the right to obtain information about the operations and results of ELSA, regarding the exercise of voting rights and the voting results in the gMS. Shareholders have also the right to participate and vote in the gMS, as well as to receive dividends. Except for the shares owned by ELSA following the stabilization after the iPO in 2014, there are no preference shares without voting rights. There are no shares conferring the right to more than one vote. Moreover, shareholders have the right to challenge the decisions of gMS or to withdraw from the Company and to request the Company to acquire their shares, in certain conditions mentioned by the law. Likewise, one or more shareholders holding, individually or jointly, at least 5% of the share capital, may request the calling of a gMS. Such shareholders have also the right to add new items to the agenda of a gMS, provided such proposals are accompanied by a justification or a draft resolution proposed for approval and copies of the identification ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 49 to a general meeting of shareholders, a holder of depositary certificates will send to the entity where it has opened its account for depositary certificates the voting instructions for the topics on the agenda of the general meeting of the shareholders, so that the respective information is sent to the issuer of the depositary certificates. The issuer of the depositary certificates votes in the general meeting of the shareholders of the Company in accordance with and within the limits of the instructions of the holders of the depositary certificate which have this quality at the reference date. The issuer of the depositary certificates may cast different votes for certain underlying shares in the general meeting of the shareholders than those expressed for other underlying shares. The issuer of the depositary certificates is fully responsible for taking all necessary measures, so that the entity which keeps the records of the holders of the depositary certificates, the intermediaries involved in the custody services for holders of the depositary certificates on the market where the depositary certificates are traded and/ or any other entities involved in recording the holders of the depositary certificates, to send the voting instructions of the holders of the depositary certificates related to the topics on the agenda of the general meeting of the shareholders. Any reference date for the identification of the shareholders which have the right to take part and to vote in the general meeting of the shareholders of the Company and any registration date for the identification of the shareholders which have rights deriving from their shares, as well as any other similar date set by the Company related to any corporate events of the Company will be established in accordance with the applicable legal provisions and with a prior notice sent with at least 15 free calendar days (in Romanian, zile calendaristice libere) to the issuer of the depositary certificates, in the name of which the underlying shares are registered based on which the depositary certificates mentioned above are issued. The reference date will be prior with at least 15 working days to the deadline for submitting the power of attorney related to the vote. Transfer of shares The shares are indivisible. The Company shall recognize a sole owner per each share, subject to the provisions of article 11 paragraph (4) from Articles of Association. The partial or total transfer of shares between the shareholders or to third parties shall be carried out according to the terms and procedure provided by the applicable legal provisions, including the capital markets legislation. documents of the shareholders who make the proposals. in the following paragraphs are presented aspects regarding the shareholders’ rights, extracted from ELSA’s Articles of Association. Rights and obligations deriving from the shares: Each share subscribed and fully paid in by the shareholders, in accordance with the law, grants the shareholders (i) the right to one vote in the general meeting of the shareholders, (ii) the right to elect the management bodies, (iii) the right to participate to the profit distribution, as well as (iv) other rights provided by these Articles of Association and by the legal provisions. The acquisition of the property right over a share by a person, directly or indirectly, has as effect the obtainment of the capacity of shareholder of the Company together with all rights and obligations deriving from this capacity, in accordance with the law and these Articles of Association. The rights and obligations deriving from the shares are transferred to the new acquirers together with the shares. When a nominative share is owned by several persons, the transfer shall be registered only if they appoint a sole representative for exercising the rights derived from the shares. The obligations of the Company are secured by its social patrimony, and the liability of the shareholders is limited to the subscribed share capital. The shareholder that has, in a certain operation, either personally or as representative of another person, an interest contrary to the interest of the Company, must refrain from deliberations regarding the respective operation. The exercise of the rights by the holders of the depositary certificates8: The rights and obligations related to the underlying shares based on which the depositary certificates were issued are exercised by the holders of the depositary certificates, proportionally to their holdings of depositary certificates and taking into account the conversion rate between underlying shares and the depositary certificates. The issuer of the depositary certificates in the name of whom the underlying shares are registered, 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 the documents and the 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 8 According to ELSA’s Articles of Association; the provisions are according to CNVM Regulation 6/2009 and will be updated in accordance with Law no. 24/2017 on issuers of financial instruments and market operations. ELECTRICA SA50 | A N N U A L R E P O R T 2 0 1 8 4.4 elsa’s board of directors ELSA adopted a one-tier (unitary) corporate governance system, consistent with the principles of good corporate governance, transparency and accountability towards its shareholders and other categories of stakeholders, aiming to support and drive the business development and efficient exchange of relevant corporate information. The Board of Directors (BoD) is responsible for taking all the necessary measures to carry out as well as to supervise the activity of the Company. its structure, organization, duties and responsibilities are established under the Articles of Association and the Charter of the BoD. According to the provisions of the company’s Articles of Association, starting with 14 December 2015, the BoD is composed of seven non-executive directors, elected by the Ordinary general Meeting of Shareholders for a four years mandate, four of whom must meet the criteria of independence provided by the Articles of Association. During 2018, the composition of the BoD has undergone several changes, as follows: At the beginning of the year, the BoD consisted of the following members: Mr. Cristian Busu, Ms. Arielle Malard de Rothschild, Ms. Elena Doina Dascalu, Mr. Bogdan iliescu, Mr. gicu iorga, Mr. Pedro Mielgo Alvarez and Mr. Willem Schoeber; On 27 April 2018, according to shareholders’ request, the general Meeting of Shareholders elected a new BoD through the cumulative vote method, for a four-year mandate, as it follows: Ms. Elena Doina Dascalu, Mr. gicu iorga, Ms. Ramona Ungur, Mr. Valentin Radu, Ms. Arielle Malard de Rothschild, Mr. Bogdan iliescu, and Mr. Willem Schoeber. five out of the seven directors fulfilled the independence criteria provided by the Articles of Association, according to their statements, namely: Ms. Ramona Ungur, Mr. Valentin Radu, Ms. Arielle Malard de Rothschild, Mr. Bogdan iliescu, and Mr. Willem Schoeber; On 11 October 2018, Ms. Arielle Malard de Rothschild renounced her position as a member of the BoD, her mandate ceasing on 11 November 2018. in this context, the BoD decided to appoint Mr. Dragos Andrei as interim member of the BoD, starting with 1 December 2018; On 15 November 2018, Ms. Elena Doina Dascalu renounced her position as a member of the BoD, following her nomination as first-Vice-president of the financial Supervisory Authority (ASf), starting 14 November 2018; in order to fill in the vacant positions, on 13 December 2018, the BoD decided to convene the general Meeting of Shareholders on 7 february 2019. On 18 December 2018, Mr. Willem Schoeber informed the BoD about his resignation, and about the ceasing of his mandate on 6 february 2019.     ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 51 At the end of 2018, the members of the BoD were the following: No Name 1. 2. 3. 4. 5. Mr. Valentin Radu Ms. Ramona Ungur Mr. gicu iorga Mr. Bogdan iliescu Mr. Willem Schoeber Term of office (starting with 27 April 2018) 4 years 4 years 4 years 4 years 4 years Status non-executive director, independent non-executive director, independent non-executive director non-executive director, independent non-executive director, independent non-executive director Starting date of the first mandate 27 April 2018 27 April 2018 1 May 2017 14 December 2015 1 May 2016 Mr. Dragos Andrei 6. Source: Electrica *Note: Following Ms. Arielle Malard de Rothschild renunciation of her mandate as member of the Board of Directors, on 13 November 2018, the Board of Directors appointed Mr. Dragos Andrei as interim member, starting with 1 December 2018, and until 30 June 2019 or until the General Meeting of Shareholders having on the agenda the filling of the vacant position, whichever comes first. 1 December 2018 interim* At the date of this report, the members of the BoD were the following: No Name Term of office (until 27 April 2022) Status non-executive director, independent non-executive director, independent Starting date of the first mandate 27 April 2018 27 April 2018 non-executive director 1 May 2017 non-executive director, independent 14 December 2015 Mr. Valentin Radu Ms. Ramona Ungur Mr. gicu iorga Mr. Bogdan iliescu 4 years 4 years 4 years 4 years 1. 2. 3. 4. 5. 6. 7 Mr. Dragos Andrei ~ 3 years, 5 months non-executive director 1 December 2018 Mr. Niculae Havrilet ~ 3 years, 3 months non-executive director 7 february 2019 Mr. Radu florescu ~ 3 years, 3 months non-executive director, independent 7 february 2019 More details on the Board members’ biographies can be found on the group’s website in the section investors > Corporate governance > Board of Directors.    ELECTRICA SA52 | A N N U A L R E P O R T 2 0 1 8 We present below the most relevant aspects regarding the professional experience of the members of the BoD: Name Valentin Radu Mandate duration 4 years Ramona Ungur 4 years 4 years Bogdan George Iliescu Gicu Iorga 4 years Willem Jan Antoon Henri Schoeber ~2 years, 9 months, until 6 february 2019 Dragos Andrei ~3 year, 5 months Professional experience Currently – founding member and Managing Partner at Platinum Capital from August 2005 until August 2007 – general Manager, Chair of the Board of Directors – TiriacAuto, Autorom – general Supplier DaimlerChrysler During March 2003 – August 2007 – CEO within TiriacHoldings from April 1995 – March 2003 – Senior Project Manager – Roland Berger Strategy Consultants Currently – Member of the Board of Directors of Oil Terminal SA, and Romgaz SA During January 2013 – April 2018 – Head of department/Supervisor – SME Reorganization Department/Office – Banca Comerciala Romana from May 2010 until January 2013 – Coordinator of Recovery Department - Banca Comerciala Romana. from December 2008 until December 2009 – Head of Risk and Credits Division - Eximbank Romania During April 2003 – December 2008 – Head of Credit Management Department and Deputy Manager/Control Officer – internal Control Department - Credite Europe Bank, Bucharest from 1998 until 2003 - Banking Supervision inspector –National Bank of Romania, Tg. Mures During August 1991 – August 1992 – Compensation Referent, Banca Agricola SA (Raiffeisen Bank), Bacau Currently - Board member, Nomination and Remuneration Committee member, Rating and Audit Committee member, Strategy committee member, SNTgN Transgaz SA, Medias; Between 2014 - 2016 - Executive Director, Corporate finance Department, BRD – group Societee generale; Between 2007 - 2014 - Managing Director, BRD Corporate finance; from 2005 until 2009 – Board member, SAi iNVESTiCA ASSET MANAgEMENT SA, Bucharest; Between 2001 - 2007 - Project Manager, BRD/Sg Corporate finance; Between 1997 - 2001 - Analyst, BRD – group Societe generale. Currently - general Secretary in the Ministry of Energy; Between 2014 - 2017 - Senior Advisor A.N.A.f. - D.g.V. (general customs direction) Bucharest; Between 2012 - 2014 - Head of customs office - D.g.V. (general customs direction) Bucharest/ Ploiesti; Between 2011 - 2012 - Head of municipal tax information office/Deputy executive manager – economic - D.g.f.P.M. Bucharest (general Direction of Public finance of Bucharest Municipality); Between 2010 - 2011 - Chief of administration - Administration of the consolidated state budget D.g.f.P.M. Bucharest, A.f.P – 5th district; 30 years’ experience in economics, finance-fiscal and public administration. independent business consultant (since 2013); Member of the board of directors of Neste Oyj (Helsinki, finland) and of the supervisory board of gasunie NV (groningen, the Netherlands) since 2013 and member of the audit committees of these boards; Chair of the Board of Directors of EWE Turkey Holding AS (istanbul, Turkey), Bursagaz (Bursa, Turkey), Kayserigaz (Kayseri, Turkey) (2010 - 2015); Member of the executive board of EWE Ag (Oldenburg, germany), responsible for power generation and the utility businesses in Turkey and Poland (2010 - 2013); Chairman of the executive board of swb Ag (formerly „Stadtwerke Bremen Ag”, the integrated utility company of the city of Bremen, germany) (2007 - 2011); Various positions in the Royal Dutch Shell group in the Netherlands, france, germany and the USA, with senior management positions in refining, i.a. refinery manager in Reichstett (france) and Cologne (germany) (1977 - 2007). Currently – Member of the Board of Directors, Alternate Executive Director of the Board Turkey/ Romania/Azerbaijan/Moldova/Kirghistan - EBRD, London During January 2013 – March 2015 –State Counsellor, Chancellery of the Prime Minister, Romanian government During September 2011 - January 2013, february 2005 – August 2007 and March 1999 – April 2003 – President of Valsa Consulting SA ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 53 Name Mandate duration Professional experience from August 2007 until August 2011 – Minister Counsellor at the Permanent Representation of Romania to the European Union, Brussels; from April 2003 until January 2005 had several positions within the Romanian government, as follows: April 2004 - January 2005 – Secretary of State within the Ministry of Public finance; September 2003 –April 2004 – Advisor of the Minister of internal Affairs and Administration; April – September 2003 – Secretary of State, Administration Ministry; During April 1998 – february 1999 – first Vice-president, Banca Romana de Comert Exterior, BANCOREX SA from September 1995 until March 1998 – Vice-president of the Board of Directors and Deputy general Manager, ABN AMRO Bank Romania During June 1992 – August 1995, Chief Operations Officer and general Manager, Banque franco RouMayne SA from December 1990 until May 1992 – Chief of Service “foreign exchange reserves”, National Bank of Romania During September 1988 – November 1990 – international money market research analyst, institute of World Economy, Bucharest from September 1995 until August 1988, Analyst within the Ministry of Oil, iCE Rompetrol, Bucharest With over 35 years of experience in the field of electricity and natural gas, out of which he spent 20 years in managerial positions, Niculae Havrilet holds, since february 2018, the position of counsellor to the Minister of Energy. A graduate of the Technical University of Cluj-Napoca, the faculty of Mechanical Engineering, Niculae Havrilet has gathered significant experience in the field of central public administration. Between June 2012 and October 2017, he held the position of President of the Romania’s National Energy Regulation Agency (ANRE), a time when he was also a member of the Council of Regulator Authorities within the Agency for the Cooperation of Energy Regulators (ACER), as well as a member of the general Assembly of the Council of European Energy Regulators (CEER). Between 2002 and 2012, he served as general Secretary of the National Professional Association of Natural gas, and from 2001 to 2012 he was general Manager of gascop Company. in 2000, Niculae Havrilet was decorated with the Order of the “Star of Romania”, in the rank of Knight. Niculae Havrilet has been appointed member of the BoD of ELSA since february 2019. Radu florescu is currently CEO of Centrade-Cheil, for the South East Europe, the regional communications center for Cheil Worldwide, coordinating 11 markets in the Adriatic and Balkan countries. for more than 25 years, Radu florescu has worked with top multinational companies to be found in fortune 500, working in emerging countries, including within EU funded programs. A graduate in Marketing and finance at Boston College, Radu florescu began his Merrill Lynch commodity trading career at NyMEX, focusing his activity on WTi, fuel oil and gasoline. in 1989, he co-founded Centrade USA and brought pioneering communication services to the Romanian market through the launch of Saatchi & Saatchi, the establishment of Cable Direct and the foundation of Zenith Media. Among the positions he held the following are to be mentioned: founding member of iAA Romania, co-founder of the Union of Advertising Agencies of Romania (UAPR), member of the EACA European Council representing Romania and Eastern Europe in Brussels (2012-2015, 2017 up to present), member of the Council and vice-president of the American Chamber of Commerce in Romania (2013-2015 and 2016 up to present), member of the TAROM Board of Directors (March 2015-June 2017), coordinator and member of Coalition Coordination group for Romania’s Development – the “umbrella” type leading association representing the business community and trade sections of the embassies in Bucharest. Radu florescu is also active in the field of social responsibility, having a long history of contribution brought to the local community. Currently, Radu is a member of the AiESEC Romania Board, member of the JA (Junior Achievement) Council, member of the OvidiuRo Council, member of the Supervisory Board of the Principesa Margareta foundation, president of the MBA ASEBUSS Program Board, member of Top Business School in Romania and member of the Hospice Casa Sperantei Board. He was also a member of the United Way Romania Council for 12 years and president of the Council. Radu florescu holds the position of member of the ELSA BoD since february 2019. Niculae Havrilet ~3 year, 3 months Radu Florescu ~3 year, 3 months Source: Electrica ELECTRICA SA54 | A N N U A L R E P O R T 2 0 1 8 During January – April 2018, Mr. Cristian Busu performed the duties of Chair of the BoD, according to the decision made by the Board in its meeting on 13 November 2017. On 14 May 2018, the BoD decided to appoint Ms. Doina Dascalu as Chair for a mandate of one year. following her resignation, on 12 December 2018, Mr. Valentin Radu was elected Chair of the BoD, with a mandate of one year. On 7 february 2019, the Ordinary general Meeting of Shareholders, convened in order to fill in the vacant positions of the BoD, decided to appoint as directors the following members: Mr. Radu florescu, Mr. Dragos Andrei and Mr. Niculae Havrilet, the duration of the term of office of the elected administrators being equal to the period remaining until the expiry of the term of office for the vacant positions, respectively until 27 April 2022. and the Nomination Three committees support the activity of the BoD, Remuneration respectively Committee, the Audit and Risk Committee and the Strategy and Corporate governance Committee, each of them composed of three Directors and chaired by an independent Director. The majority members of the Nomination and Remuneration Committee and of the Audit and Risk Committee are independent Directors. The consultative committees’ members are elected for a period of one year. The organization, duties and responsibilities of each committee are set under the Articles of Association of ELSA, respectively in the committee Charters - an integrant part of the Corporate governance Code of the Company. According to the changes registered in the BoD composition, the composition of the committees changed during 2018, as it follows: Î 1 January – 27 April 2018 Nomination and Remuneration Committee Mr. Pedro Mielgo Alvarez – Chair of the committee Mr. Bogdan iliescu Mr. gicu iorga Audit and Risk Committee Mr. Bogdan iliescu - Chair of the committee Ms. Arielle Malard de Rothschild Ms. Doina Dascalu Strategy and Corporate Governance Committee Mr. Willem Schoeber - Chair of the committee Ms. Arielle Malard de Rothschild Mr. Cristian Busu Î 14 May – 11 December 2018 Nomination and Remuneration Committee Mr. Valentin Radu – Chair of the committee Mr. Bogdan iliescu Ms. Doina Dascalu 9 9 renounced her mandate on 15 November 2018 10 renounced her mandate on 11 October 2018 Audit and Risk Committee Mr. Bogdan iliescu - Chair of the committee Ms. Arielle Malard de Rothschild10 Ms. Ramona Ungur Strategy and Corporate Governance Committee Mr. Willem Schoeber - Chair of the committee Ms. Arielle Malard de Rothschild9 Mr. gicu iorga Î 12 – 31 December 2018 Nomination and Remuneration Committee Mr. Bogdan iliescu – Chair of the committee Mr. Valentin Radu Ms. Ramona Ungur Audit and Risk Committee Mr. Bogdan iliescu - Chair of the committee Ms. Ramona Ungur Mr. gicu iorga Strategy and Corporate Governance Committee Mr. Willem Schoeber - Chair of the committee Mr. Dragos Andrei Mr. gicu iorga Î On 18 February 2019, the new Board of Directors revised the committees’ composition, valid until 31 December 2019, as follows: The Strategy and Corporate Governance committee Mr. Valentin Radu – Chair Mr. Dragos Andrei – Member Mr. Niculae Havrilet – Member The Audit and Risk committee Ms. Ramona Ungur – Chair Mr. Bogdan george iliescu – Member Mr. Radu florescu – Member The Nomination and Remuneration committee Mr. Bogdan george iliescu – Chair Mr. gicu iorga – Member Mr. Valentin Radu – Member According to the available 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. information, there As of 31 December 2018, the members of the BoD did not hold ELSA shares. At 15 february 2019, out of the members of the BoD, only Mr. Niculae Havrilet held ELSA shares (199 shares). ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 55 According to the available information, the Board members were not involved in litigations or administrative proceedings regarding their activity within the Company or regarding their capacity to fulfil their duties within the Company in the past five years. 4.5 the activity of elsa’s board of directors and of its consultative committees in 2018 in 2018, the Board of Directors met 22 times. Out of the 22 meetings that took place in 2018, 18 meetings were organized with physical presence of the members, 3 were held by conference call, in accordance with Art. 18 para. 20 of the Company’s Articles of Association and one was held electronically, in accordance with the provisions of Art. 18 para. 23 of the Articles of Association of the Company . The Board members’ attendance (in person, by conference call or by email) in the meetings of the Board of Directors is presented below: in 2018 and its committees The Board of Directors (no. of meetings - 22) The Audit and Risk Committee (no. of meetings - 13) The Nomination and Remuneration Committee (no. of meetings - 11) The Strategy and Corporate Governance Committee (no. of meetings - 11) 6 6 14 18 22 21 20 16 16 1 - - 10 4 13 1 - - 9 - - 4 - 6 11 4 - 7 1 - 3 - 7 - - 8 11 - - - Nume Cristian Busu12 Pedro Mielgo Alvarez12 Arielle Malard de Rothschild13 Doina Dascalu14 Bogdan iliescu gicu iorga Willem Schoeber Valentin Radu15 Ramona Ungur15 Dragos Andrei16 Source: Electrica in accordance with the provisions of the Collective Labor Agreement, when appropriate, invitations to attend the BoD meetings were sent to Trade Union representatives. The key decisions taken by the BoD during 2018 refer to: Election of the Chairman of the BoD and establishing the composition of the consultative committees and election of their chairpersons ( after the gMS has established the new structure); Revision and endorsement of ELSA revenue and expenses budgets at standalone and consolidated levels, as well as of the revenue and expenses budgets of company’s subsidiaries for the financial year of 2018; Analysis and endorsement of ELSA financial statements at individual and consolidated levels, as well as of the financial statements of the Company’s subsidiaries for the financial year of 2017; the quarterly analysis of the financial results, including their analysis as compared to the budget; Revision of Company’s Delegation of Authority; Revision of the Policy on Transactions with Related Parties. Regarding the structuring and development of Group’s business portfolio: Redefining the strategic directions of group’s development, of the vision, mission and values, taking into consideration the market and the company’s already initiated transformation process, as well as the European and national perspectives; 11 When the Board members were unable to attend the meetings organized by the three methods specified by the Company’s Articles of Association (physical presence, by telephone conference call and electronic), they were represented based on the mandates given to another Board member. 12 His mandate ceased according to the OGMS decision no 2/ 27 April 2018 13 On 11 October 2018, Ms. Arielle Malard de Rothschild renounced her position as a member of the Board of Directors 14 On 15 November 2018, Ms. Elena Doina Dascalu renounced her position as a member of the Board of Directors 15 Nominated through the OGMS decision no 2/ 27 April 2018 16 Following Ms. Arielle Malard de Rothschild’s renunciation of her position as member of the Board, on 13 November 2018, the Board of Directors decided to appoint Mr. Dragos Andrei as interim member of the Board of Directors, starting with 1 December 2018 ELECTRICA SA56 | A N N U A L R E P O R T 2 0 1 8 Revision and approval of ELSA and of the consolidated investment plan for the financial year of 2018, as well as the monthly analysis of its achievement; Analysis, coordination and approval of several proposals submitted by the executive management regarding investment opportunities on renewable energy, given the context of the energy market, the impact on the supply activity and the competitive advantages of the competitors; The transfer of Balance Responsible Party (BRP) from ELSA to EfSA, along with the approval of the Market Risk Management Strategy, including the strategic provisions regarding the energy procurement by EfSA; Policy, in order to be implemented on 2019 within the entire group; Running the selection process and submission for gMS approval the appointment of the new financial auditor of the Company. Evaluation of the Board of Directors: According to the established mechanism, namely to carry out the evaluation of its activity either with the support of a consultant or by self-evaluation, alternatively, an internal evaluation of the Board activities was carried out at the beginning of 2019, based on a questionnaire defined and thoroughly discussed and agreed by the Board members. Monitoring the implementation and the performance of the transformation program for the distribution segment; The questionnaire, using a scale of 1 to 5, served to perform an assessment of the Board’s activities in the following areas: A new business plan was approved for EL SERV, plan that provides efficiency and optimization measures, such as: improvement of the services currently provided and their development for companies outside Electrica group; Development of new products and ancillary services for the companies within the group; Streamline the real estate portfolio; Reduction of administrative and general costs. Approval of the efficiency project of ELSA, concentrated on personnel reduction at holding level, starting the employees’ evaluation process, and implementing an optimal organizational structure aimed to streamline the activity. Regarding the human resources and the managerial competences: Along with the overseeing of the recruitment process of the general managers for ELSA’s subsidiaries, a new system of key performance indicators and a new assessment methodology for the performance of executive management, providing general, specific and individual indicators for each executive manager of ELSA were set in place, followed by their cascading within the subsidiaries. In terms of audit and financials: Approval of the group’s financing strategy, under ELSA’s coordination, as well as the Treasury Strategy, including the optimization of financial placements strategy; Overseeing the implementation of the internal audit plan for 2018 and the approval of the 2019 audit plan; Monitoring the risk management at group level, based on the reports presented by the executive management, the corrective measures regarding the high risk identified noncompliance and the recommendations made by the Audit and Risk Committee and approving the Risk Management Specific KPis as provided in the mandate agreements (the main objectives defined by the general Meeting of Shareholders: group strategy, Corporate governance, Placement of financial investments and investments achievement in the distribution companies) Board Efficiency and Ways of Working of the Board Board interactions and activities’ dynamics Self-Assessment of each Board member functioning of the Board Chair Board’s interactions with CEO/Management Board’s interactions with stakeholders. After analysing the results of the questionnaire, the following conclusions were drawn: Most respondents assessed the overall work of the Board in 2018 as being generally good; in Regarding the achievements of the Board’s own KPis, it was noted that the investments made and commissioned during 2018 the distribution companies reached the expected level, creating the prerequisites for the development and improvement of the results recorded by the distribution subsidiaries in the future. Thus, there is an improvement compared to the previous years, both quantitative (in terms of value of investments) and in terms of effort’s efficiency (a higher degree of achievement); As in previous years, the Board’s ability to predict evolutions in the business environment in which the Company operates and potential opportunities impacted mainly by the or threats, has been unpredictability of the regulatory framework, even in identifying business opportunities (e.g. renewable energy); The relationships with important shareholders, as well as public communication have been improved compared to previous years. ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 57 In this context, for the next year, the Board has set the following priority directions: The Board will pay more attention to the compliance with the corporate governance framework at group level, to ensure an efficient functioning, an increased collaboration and a quick reporting within the group, all with strict compliance with the unbundling rules; functional The Board considers that progress has been made in establishing the company’s mission, vision and strategic directions, but it is necessary to continue and materialize the efforts to achieve the medium- term objectives, taking into consideration market opportunities and challenges; The Board identified a considerable improvement in the company’s activity on the correct identification of the main risks and on the implementation of efficient mechanisms for their mitigation. However, it is necessary to permanently monitor the potential risks and refine the management mechanisms by continuously adapting them to the new market and regulatory conditions. The Nomination and Remuneration Committee The Nomination and Remuneration Committee consists of three non-executive BoD members, two of them being independent members, while the chair of the Committee is an independent director. The role of the Committee is to propose candidates for the BoD, to develop and propose to the Board the selection procedure of candidates for the executive managers’ positions and other management positions, to recommend to the Board candidates for the positions listed, to formulate proposals on the managers’ remuneration and other management positions. The Committee has the concerning nomination matters: following responsibilities Recommending the Board a nomination policy, including a target Board profile, process and principles for shareholders to consider when proposing candidates for director positions at the Company, and advising the Board regarding the appointment of interim directors in accordance with the policy; Reviewing the implementation of the nomination policy, preparing a report to the Board on its implementation, and presenting a summary of this report in the Directors’ Report; Advising the Board on the appointment and dismissal of the CEO, making recommendations on the appointment and dismissal of the Company’s executive management team after considering the views of the CEO, and making proposals on the appointment and dismissal of subsidiary board members in accordance with the group governance Policy; Recommending the Board policies in the human resources field, including those covering recruitment and dismissal, talent management and development, and succession planning across the Company and its subsidiaries (the group); Overseeing the process for the annual evaluation of the effectiveness of the Board and its consultative committees; Periodically assessing the size, composition and Committee’s structure and making recommendations to the Board with regard to any changes; Advising the Board on continuous skill development for Board members and executive programmes management; Overseeing the nomination process of the CEOs and executive managers in the subsidiaries according to the nomination and remuneration Policy. The Committee has the following duties regarding remuneration: Advising the Board in relation to the remuneration, incentive and severance compensation policies of the Company; Advising the Board on the structure of the remuneration policy for Board members; Advising the Board in relation to the remuneration of the CEO and other executive managers, including the main remuneration components, performance objectives and appraisal methodology; Making recommendations to the Board on the remuneration of subsidiary board members and the general limits of remuneration for subsidiary management; Monitoring compensation trends within areas relevant to the group; Overseeing the remuneration process of the CEOs and executive managers in the subsidiaries according to the Nomination and Remuneration Policy. The Nomination and Remuneration Committee met 11 times during 2018. The main topics addressed and referred to the BoD for approval/endorsement, additionally to the recurrent activities, were the following: Analysis of the executive managers KPis achievement for 2017 and implementing a new improved system for 2018 - at ELSA and group level; Drafting, in order to be approved by the BoD, of the Recruitment and Nomination Policy of candidates for the executive positions of the companies within Electrica group, as well as overseeing the recruitment processes of the general managers of ELSA’s subsidiaries, followed by recommendations; Analysis of the remuneration system applied within the group, at different levels of administration and management, compared to the market and its trends; setting the guidelines for further updates in the next period; Analyze the activity of the executive managers, revising the executive management team and prospect the market in order to select the new CEO and the Human Resources Manager. ELECTRICA SA 58 | A N N U A L R E P O R T 2 0 1 8 The Audit and Risk Committee: The Committee is composed of three non-executive BoD members, two of them being independent members, while the chair of the committee is an independent director. The Committee’s composition provided the necessary expertise in finance and risk management, according to legal requirements. The main role of the Committee is to support the Board in fulfilling its duties of verifying the efficiency of Company’s financial reporting, internal control and risk management. While fulfilling this role, the Committee advises the Board regarding the assessment of the Annual Report and Annual financial Statements, whether the documents are accurate, balanced and comprehensive and provide all the necessary information for the shareholders’ evaluation of the financial performance. The Committee has the following duties in terms of financial reporting: including policies for detecting fraud and the prevention of bribery; Reviewing related party transactions in line with a policy developed by the Committee and approved by the Board; Reviewing annually the report prepared by the Head of internal Audit assessing the effectiveness of the system of internal control across the group. The Committee has the following responsibilities concerning risk management matters: Reviewing regularly the main risks facing the Company and group, recommending to the Board adequate policies for risks identification, mapping, management and mitigation; Reviewing annually a report from management assessing the effectiveness of the risk management system across the group; Examining the integrity of annual and interim financial statements or disclosures for ELSA and its subsidiaries (the group) at standalone and consolidated levels; Regularly reviewing the adequacy of the group’s accounting policies; Reviewing and recommending the Company’s financial forecast policy to the Board for approval; Advising the Board on whether the content of the annual report, taken as a whole, represents a fair, balanced and understandable account for shareholders and provides them with the information necessary to assess the Company’s performance. Regarding the auditing and internal control matters, the Committee has the following responsibilities: Approving a group-wide, annual plan as well as any material changes to the plan, and receiving regular reports on activities, key findings, and follow up regarding internal audit reports; Making recommendations to the Board on the appointment, removal and remuneration of the Head of internal Audit; Monitoring the adequacy, effectiveness and independence of the internal audit function; Making recommendations to the Board on the appointment, rotation or dismissal of the Company’s external auditor; Reviewing the plan, work and findings of the external auditor; Assessing the independence and objectivity of the external auditor and monitoring compliance with relevant ethical and professional guidance, including the requirements on the rotation of audit partners; Regularly and implementation of key internal control policies, reviewing adequacy the Making recommendations the Board on equity and debt financing, including proposals for contracting any type of loans and securities associated with these loans; to Making recommendations to the Board regarding major economic transactions within the authority of the general Meeting of Shareholders, assessing the associated risks regarding such transactions. The Audit and Risk Committee met 13 times during 2018. The main issues that the work of the Committee focused on, in addition to recurring activities, were the following: The financial statements of ELSA at standalone and consolidated levels for the financial year of 2017, as well as financial statements of Company’s subsidiaries for the financial year of 2017; The financial auditor report and recommendations, issued during the auditing process; ELSA’s budget execution, the consolidated budget execution and the quarterly financial results registered; The internal audit plan for 2018 and the analysis of its achievement, as well as the reports submitted by the internal Audit Department, with the formulation of recommendations; Running the selection process and submitting for gMS approval the prosposal for the appointment of the new financial auditor of the Company; Approval of the financing Strategy of the group, regarding cash pooling and the general financing framework of the investment activity, and the Treasury Strategy, including the Strategy for optimizing the placement of financial investments; Risk Management policy; analyze the risks management at group level, based on the reports submitted by the management, and of the status of implementation of the corrective measures pertaining to non-compliances of higher risk identified and on the recommendations of the Audit & Risk Committee; ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 59 Selecting the new Head of the internal Audit Department. At the same time, the Committee has duties in terms of corporate governance: The internal audit activity is carried out by a separate division from a structural point of view (the internal Audit Department), within the Company. in order to ensure the fulfilment of its main functions, it reports functionally to the BoD through the Audit and Risk Committee and administratively to the CEO. The Strategy and Corporate Governance Committee: The Committee was composed of three non-executive directors, the chair being a non-executive independent director. The Committee has the following duties in terms of strategy: Making proposals to the Board on the development the medium-term strategic plan, making of the strategic direction, recommendations on priorities and long term objectives of ELSA and its subsidiaries (the group); Reviewing management proposals on the group’s consolidated annual budget, subsidiary annual budgets, CAPEX plans for the group and making relevant recommendations to the Board; Supporting the Board in monitoring and assessing the group’s performance in light of the approved strategic plan, budgets, industry trends, local and regional market trends, company’s competiveness and advances in technology; Periodically reviewing the overall strategic planning process, including the process for developing a medium-term strategic plan; Making to the recommendations the Board regarding proposed acquisitions, divestments, investment projects, joint-ventures, and cooperation projects, particularly assessing their alignment with the group’s strategy; Performing any other activities or assuming responsibilities regarding strategic matters which may be delegated from time to time to the Committee by the Board. Regarding the tasks of the Committee on restructuring, they mainly relate to: Reviewing and making recommendations to the Board with respect to the development and implementation of the group’s overall restructuring plans and objectives, including any decision regarding the conducting or rationalization of core businesses; Regularly reviewing the organisational structure the Company, and making and chart of recommendations to the Board in this regard; Performing any other activities or responsibilities on restructuring matters as may be delegated to the Committee, from time to time, by the Board. Overseeing and monitoring the Company’s compliance with legal and contractual obligations on corporate governance, as well as other applicable corporate governance principles, and making recommendations to the Board; Regularly reviewing the Company’s Corporate governance Code, Board Charter and the Company’s Articles of Association, and making recommendations to the Board on relevant amendments to the Company’s corporate governance policy and documentation; Recommending the group governance Policy to the Board for approval and regularly reviewing it thereafter; Reviewing the delegations of authorities charrt for the Company in order to ensure that the delegation of authorities to management allows for effective and efficient decision-making process, and making recommendations to the Board; Reviewing the Company’s policy for corporate social responsibility and stakeholder engagement, and making recommendations to the Board in this regard; Making recommendations to the Board on improving the quality of information flows to the Board including the adequacy of reports to the Board, key performance indicators presented to the Board, and guidelines for prepairing Board papers and presentations. During 2018, the Committee met 11 times, and the main topics of the Committee’s work, in addition to recurring activities, were the following: Developing and substantion of decisions regarding the strategy of the different areas of activity of the group, within a cycle of analyzes and debates initiated in the „Strategy Day”, finalized by redefining the strategic directions of group development, vision, mission and values, subject to approval of the BoD; Analysis of the opportunity and efficiency of the investment in different renewable production capacities, followed by recommendations regarding the conditions for the implementation of such an approach; Monitoring the implementation and performance of the transformation program for the distribution area, aimed to achieve the ambitious investment plan for 2018, as well as to increase the reaction capacity and to improve the performance in the operational activity, by internalizing the design, procurement and logistics, maintenance, investment execution, technical service activities and the dedicated staff from EL SERV, within the distribution companies; Reviewing the Hedging Strategy and Market Risk Management and Credit Policy for EfSA; Development of a Communication Strategy with investors, adapted to the Company’s strategic objectives; Delegation of Authority (DoA) Revision, analyzed in several stages. ELECTRICA SA60 | A N N U A L R E P O R T 2 0 1 8 4.6 elsa’s executive management in accordance with art. 19 letter A, item 1, paragraphs (f ) and (k) of ELSA’s Articles of Association (approved by the gMS on 27 April 2017), the BoD appoints and revokes the CEO, as well as the other executives with mandates and also approves their empowerments. The duties of Company’s executive managers (including those of the CEO) are determinated by the mandate contracts on which the managers operate within the Company, an internal regulation for the organization and functioning of the Company and applicable legal provisions. Until 1 November 2018, Mr. Dan Catalin Stancu held the position of CEO of ELSA. He had been appointed starting with 24 October 2016, with a mandate of four years. in 15 October 2018, the BoD of ELSA and Mr. Dan Catalin Stancu have reached a mutual agreement regarding the termination without cause of the CEO mandate agreement. On the same date, the BoD decided the appointment of Ms. georgeta Corina Popescu as interim CEO, starting 1 November 2018, for a 1-year period or until the appointment of a new CEO – whichever occurs first. During 2018, the BoD decided the revocation of the Chief iT & Telecom Officer, Mr. Dan Crisfalusi (decision taken on 25 July 2018), and of the Executive Manager of Human Resources Division, Ms. Dana Alexandra Dragan (decision taken on 18 September 2018). On 23 January 2019, the BoD appointed Ms. georgeta Corina Popescu as CEO, starting 1 february 2019, for a four years period. On 23 Januar y 2019, the BoD appointed Ms. Bibiana Constantin as Human Resources Director, star ting 1 february 2019, for a period of four years.    ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 61 Following this changes, at the end of the year 2018 and at the date of this report, ELSA’s executive managers, each appointed for a period of four years were: No. Name Function Starting date of the Executive Manager’s mandate 1. 2. 3. 4. 5. 6. 7 georgeta Corina Popescu Mihai Darie Chief Executive Officer Chief financial Officer Alexandra Romana Augusta Popescu Borislavschi Chief Corporate governance & M&A Officer Livioara Sujdea Anamaria Dana Acristini-georgescu Chief Distribution Officer Chief Strategy & Performance Management Officer 1 february 2019 17 3 January 2018 4 August 2015 1 february 2017 1 May 2017 Catalina Popa Bibiana Constantin Chief Sales Executive Officer 12 December 2017 Human Resources Director 1 february 2019 More details on the executive managers’ biographies can be found on ELSA’s website in the section investors > Corporate governance > Executive Management.. 17 Ms. Popescu was appointed as interim CEO starting with 1 November 2018     ELECTRICA SA62 | A N N U A L R E P O R T 2 0 1 8 We present below the most relevant aspects regarding the professional experience of ELSA’s executive managers: Name Professional experience georgeta Corina Popescu - Chief Executive Officer Ms. georgeta Corina Popescu is a top executive with an impressive experience in the field of electricity and natural gas. Appointed general Manager of SDMN, part of Electrica group, on 1 June 2018, Corina Popescu also took over from 1 November 2018, the position of interim CEO of ELSA. Mihai Darie - Chief financial Officer Alexandra Borislavschi - Chief Corporate governance & M&A Officer Livioara Şujdea - Chief Distribution Officer graduate of the faculty of Power Engineering at the Polytechnic University of Bucharest, Power Engineering Systems department, georgeta Corina Popescu started her professional career in Sucursala de Distributie si furnizare a Energiei Electrice Bucuresti. Since 2007, georgeta Corina Popescu has worked in the private sector, holding important positions in E.ON Romania group and OMV group. Between December 2015 and february 2017, Corina Popescu held the position of State Secretary within the Ministry of Energy, during which time she was also a member of the BoD of ELSA. Starting with 1 May 2017, she was appointed in Transelectrica’s Directorate, and during the period of June 2017 – April 2018 she was Transelectrica’s Directorate Chairperson. Mr. Mihai Darie has 19 years of professional experience in finance, acquired in various fields such as energy, infrastructure, financial advisory, banking, investment funds in executive as well as management positions accumulated in companies such as Nuclearelectrica SA, fondul Proprietatea SA, Raiffeisen Bank and BDO Romania. Mihai Darie has a Bachelor Degree in finance and Banking from the Academy of Economic Studies Bucharest, he is an expert accountant member of CECCAR, he is a graduate of Asebuss Bucharest EMBA program and he is an ACCA UK member as well as a CfA charter holder. Ms. Alexandra Borislavschi was appointed as Executive Manager of Corporate governance & M&A Division starting with 1 May 2017. from August 2015, Alexandra Borislavschi coordinated the Strategy and Corporate governance Division, as Executive Manager. Ms. Borislavschi joined ELSA’s team in June 2013, as Deputy Manager of the Economic and Corporate Business Division, and was promoted Manager of the Corporate finance and governance Division in february 2014. The most important project managed by her was the initial public offering of 105% of the share capital, between October 2013 – July 2014, which was successfully completed through the double listing of Electrica on the Bucharest Stock Exchange and the London Stock Exchange, being the largest public offering in Romania until now. Prior to joining our company, Alexandra Borislavschi had been working for BRD-groupe Societe generale, between 2003 and 2013. She was Retail Manager within BRD’s Victoria Agency and continued as Credit Analyst for Large Corporate Clients. Starting 2007, she joined the investment Banking team of BRD-groupe Societe generale through BRD Corporate finance department, as Project Coordinator. Alexandra Borislavschi holds a Master’s degree in finance and Management Control from institut d’Administration des Entreprise, Universite d’Orleans since 2003. With over 20 years of experience in energy field, Livioara Şujdea started her activity as a Design Engineer at ELSA, subsequently occupying various top management positions, including Deputy general Manager and member of the BoD at E.ON Moldova Distribuție, E.ON gas Distribuție, E.ON Distribuție România, Director of Operation and Maintenance at Delgaz grid and Deputy general Manager and member of the BoD at E.ON Energie. Livioara Şujdea graduated the Technical University “gheorghe Asachi” of iaşi – faculty of Electrical Engineering and Energy, where she also obtained a master’s degree in Business Management and Commercial Engineering, and she also has an Executive MBA with specialization in general Management at the University of Sheffield U.K. and a Strategic Management and Leadership Degree from the Chartered Management institute London, U.K. Anamaria Acristini - Chief Strategy & Performance Management Officer Anamaria Acristini has an experience of over 10 years in the field of energy, in particular from the strategic and financial perspectives; the last position held was that of Strategy Director within E.ON Romania. Previously, she has held important positions in leading companies, such as Ernst&young, Mazars and KPMg. Anamaria Acristini is a graduate of the Bucharest Academy of Economic Studies, has a master’s degree in international Project Management and holds an Executive MBA from Sheffield University (U.K.). Moreover, she is a scheme member of the ACCA U.K.. ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 63 Name Professional experience Catalina Popa - Chief Sales Executive Officer With an experience of more than 28 years in the field of electrical power and natural gases, Catalina Popa has started her activity as an engineer within ELSA. Subsequently, she occupied several top management positions within E.ON, among which Sales Management Executive Director, Director of Operations, financial Director and Director of the Management of the performance of power networks. Catalina Popa is a graduate of the faculty of Power Engineering of the University Politehnica of Bucharest, holding as well a diploma in Management & Business Administration from Codecs-Open University, great Britain. Bibiana Constantin – Human Resources Director graduate of the faculty of Psychology and Sociology – West University of Timisoara and of a Master in Human Resources Management and Communication, as well as of a Master in Psychology, Bibiana Constantin has experience in consultancy and HR management for various industries, including the energy field. With more than 10 years of experience in managing company restructuring and executive search projects, at national and international level, but also with a solid knowledge of the human resources market, Bibiana has provided, in the recent years, specialized consultancy and occupied positions in the top management of large companies in the industry. According to information held by ELSA, there is no contract, understanding or family relationship between the executive managers of the Company and another person who may have contributed to their appointment as executive managers. managers mentioned in this chapter have not been involved, in the last five years, in any litigations or administrative proceedings related to their activity within the company and neither to their capacity to fulfil their work-related duties in the group. According to available information, ELSA’s executive 4.7 remuneration of the directors and of the executive managers The Remuneration Policy for Directors and Executive Managers was prepared based on the best practice used at international and national level by companies comparable to ELSA, as approached after the iPO, and updated taking into consideration the impact of the fiscal changes introduced within the Romanian legislation. The Policy was approved by the general Shareholders Meeting – as regards the Directors’ remuneration and the remuneration limits for the executive managers, respectively by the Board of Directors – as regards the setting of the remuneration and benefits for each executive position, according to the Nomination and Remuneration Committee’s recommendation. According to the Corporate governance Code of ELSA, the Nomination and Remuneration Committee (NRC) established within the BoD has the following responsibilities as regards remuneration: making recommendations to the Board in relation to the remuneration, incentive and severance compensation policies of the Company; making recommendations to the Board on the remuneration framework for Board members; making recommendations to the Board in relation to the remuneration of the general Manager and other executive managers, including the main remuneration components, performance objectives and appraisal methodology; making recommendations the remuneration of subsidiaries board members and the general limits of remuneration for subsidiaries management; the Board on 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. in this context, in 2018, based on the NRC recommendations, the Board endorsed and submitted for the gMS approval two proposals on updating the Remuneration Policy of the members of the BoD, and respectively on revising the remuneration limits of executive managers, in order to counterbalance the fiscal changes impact. The Remuneration Policy for Directors and Executive Managers is subject to annual review of NRC and describes the main pillars of remuneration, as well as the terms, conditions and non-financial benefits approved by the corporate bodies of ELSA. The Directors and the Executive Managers are remunerated for the work performed with a fixed monthly remuneration and a variable component. The variable component is either paid according to their involvement in supporting the Board activity (in case of the Directors) or according to achievement of the objectives and key performance indicators set in the mandate agreements of the Executive Managers. The Remuneration Policy has the following objectives: To establish clear guidelines and thresholds on remuneration matters; To establish the remuneration structure; To set the correlation matrix between remuneration levels within the Company. ELECTRICA SA64 | A N N U A L R E P O R T 2 0 1 8 The principles governing this policy are: A. Board of Directors 1. 2. The remuneration structure is defined separately for the Board of Directors and the executive management. The remuneration structure and thresholds were set considering national and international best practices and benchmarks, respectively: 2.1. the remuneration system includes a fixed and a variable component based on performance, in line with market practice; additionally, include non-financial benefits; it also 2.2. the benchmarks were established based on compensation data several international companies of comparable size in the energy sector, in Romania, but, also, compared to other industries (e.g. Oil & gas industry) and other countries in SEE; from 2.3. most companies’ practice to choose the range between the median and upper quartile in order to be attractive on the competitive market, that is, however, not positioned to the upper limit; 3. The variable component is composed of: 3.1. a short term variable remuneration (variable salary), attributed for the collective and individual contribution of the executive managers to the company’s objectives, determined yearly based on performance criteria; 3.2. a long term variable compensation – a package of options of virtual shares – considered as compensation for executives managers with the aim of promoting added value and contribution over medium to long term; tool 3.3. for the Board members – both the international norm and the fact that ELSA is a listed company on both Bucharest Stock Exchange and London Stock Exchange, for Board provide an attendance members participating to the BoD and its committees’ meetings; fee 4. 5. 6. The importance of the Company on the energy market – ELSA is a strategic company in the energy sector, with potential of becoming a regional player; The need to attract and retain in the BoD specialists and senior managers with broad experience in a wide range of activities, not only in the energy sector, nationally and internationally; The 2017 amendments to the fiscal Romanian legislation on both staff taxation and social security contributions and those that entered into force as of 1 January 2018 have had a significant negative impact on the net income. The BoD members’ remuneration has as main pillars a monthly fixed remuneration and an attendance fee for participating at meetings, and it is completed by facilities (benefits) necessary for the mandate fulfilment, as follows:: The fixed monthly remuneration is differentiated between the Chair and the Board members, respectively EUR 3,630 gross for the BoD members and EUR 4,985 gross for the Chair. The attendance fee to the Board and its committees’ meetings is differentiated as well between the members and the committees’ Chairs, respectively EUR 1,200 gross for the Board/committees’ members and EUR 1,445 gross for the committees’ chairs. The annual number of meetings to be remunerated is limited to 12 for BoD and to 6 of each committee. However, if the BoD composition changes, either as effect of registering a vacancy of one or more Director positions, or as effect of applying the cumulative voting method, the Director appointed as such will be entitled to receive the remuneration fee for the Board/committees meetings attended. Reimbursement of reasonable expenses related to the execution of the mandate. A “directors & officers’ insurance policy, supported by the company, according to market terms. liability” Same medical services and/or medical insurance package contracted by the Company for the employees (if any). Other legal expenses sustained by the Director in defending against a third party claim made against the Director in relation to the performance of its duties according to his mandate agreement, the Articles of Association, the Board Charter or the Legal framework shall be borne by the Company, to the extent that they are not already covered by the directors & officers liability insurance policy in force at the time. A compensation in case of unjustified revocation. B. The Executive Management B.1. General remuneration limits for ELSA CEO The remuneration of ELSA CEO is comprised of: (a) a fixed monthly remuneration, (b) a variable yearly remuneration or remuneration element or variable compensation depending on the achievement of the performance indicators and (c) a package of options of virtual shares (hereinafter referred to as “OAVT”), as follows: a. b. The fixed monthly remuneration is between EUR 9,000 and EUR 13,050 gross. This remuneration is established by the BoD within the limits approved by the gMS. The variable yearly compensation is between 30% and 50% of the fixed yearly remuneration. The percentage is established by the BoD within the limits approved by the gMS. The payment of the variable yearly compensation (partially or in full) depends on ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 65 Each executive manager (unless mandated on interim or on a short-term basis) will receive at the beginning of the term an OAVT package. The value of the OAVT package will be between 60% and 160% of the fixed yearly remuneration. The executive manager is entitled to cash in the value of the OAVT package only at the end of the term, according to the mandate agreement. At the beginning of the mandate of the Executive Manager (including the CEO), the BoD will set up the long-term KPis (for the duration of the mandate). At the end of the term, the Board will review the achievement of the long-term KPis and will adjust the final value of the OAVT package paid out to the executive manager, including the CEO. in order to perform more efficiently his/her duties and obligations, in a proper and safe manner, the mandate agreements of the executive managers (including the CEO), approved by the BoD, stipulate the specific equipments that the company makes available (e.g.: company car, mobile phone, laptop), the rules to use it, as well as other kind of related benefits (e.g.: reimbursement of reasonable expenses related to the execution of the mandate, a “directors & officers’ liability” insurance policy). the achievement of the KPis set for the respective year. c. c. The value of the OAVT package will be set between 150% and 200% of the fixed yearly remuneration and cashed only at the end of the term, according to the mandate agreement B.2 General remuneration limits for the Executive Managers (mandated by the BoD) The remuneration of the executive managers is comprised of: (a) a fixed monthly remuneration, (b) a variable yearly compensation depending on the achievement of KPis and (c) a package of options of virtual shares (hereinafter referred to as “OAVT”), as follows: a. b. The fixed monthly remuneration will be between EUR 6,980 and EUR 11,700 gross. This remuneration is established by the BoD within the limits approved by the gMS. The variable yearly compensation of an executive manager is between 15% and 40% of the fixed yearly remuneration. The percentage is established by the BoD within the limits approved by the gMS. The payment of the variable yearly compensation (partially or in full) depends on the achievement of the KPis set for the respective year. 4.8 corporate Governance in elsa’s subsidiaries The Board of Directors of ELSA’s subsidiaries During 2018 all the Boards of Directors of ELSA’s subsidiaries were composed of non executive directors. During the year, the Boards of Directors of ELSA’s subsidiaries were as follows: Members of the Boards of Directors of distribution companies, respectively SDTN, SDTS and SDMN, between 1 January and 31 December 2018 1 January – 31 October 2018 Dan Catalin Stancu – chairman Livioara Sujdea 20 November– 14 December 2018 georgeta Corina Popescu18 Livioara Sujdea Anamaria Acristini Ana Maria Nistor Madalina Rusu Anamaria Acristini Ana Maria Nistor Madalina Rusu 15 December – 31 December 2018 georgeta Corina Popescu Livioara Sujdea Ana Maria Nistor Members of the Board of Directors of Electrica Furnizare SA between 1 January 2018 and 31 December 2018 1 January 2018 – 26 July 2018 30 July 2018 – 31 December 2018 Catalina Popa - chairman Dan Crisfalusi Mihai ioanitescu Diana Moldovan Alexandra Borislavschi Catalina Popa - chairman Mihai Darie Mihai ioanitescu Diana Moldovan Alexandra Borislavschi 18 Ms. Georgeta Corina Popescu was appointed by the BoD as temporary director starting from 20 November 2018. ELECTRICA SA66 | A N N U A L R E P O R T 2 0 1 8 in the case of energy services company EL SERV, the Extraordinary general Meeting of Shareholders approved in January the amendment of the Articles of Associations, provisioning that the Board of Directors is comprises five non-executive members. Hence, during the year 2018 the composition of the Boards of Directors of EL SERV was as follows: Members of the Board of Directors of Electrica Serv SA between 1 January – 31 December 2018 1 – 8 January 2018 iuliana Andronache - chairman 9 – 28 January 2018 Alexandra Borislavschi 29 January – 1 December 2018 Alexandra Borislavschi - chairman 2 – 13 December 2018 Alexandra Borislavschi - chairman 14 – 18 December 2018 Alexandra Borislavschi - chairman Mirela Dimbean Creta Mirela Dimbean Creta Mirela Dimbean Creta Mirela Dimbean Creta Mirela Dimbean Creta Dragos george Serban Dragos george Serban Dragos george Serban Mihai Darie Mihai Darie 19 - 31 December 2018 Diana Moldovan - chairman Alexandra Borislavschi Mirela Dimbean Creta Mihai Darie Mihai ioanitescu Mihai ioanitescu Mihai Darie Mihai ioanitescu Diana Moldovan Mihai ioanitescu Between 31 December 2018 and until the date of this report, the members of the ELSA subsidiaries boards changed as follows: Mr. Stefan-Alexandru frangulea was appointed starting from 23 January 2019 as temporary director of SDMN’ s BoD. Ms. georgeta Corina Popescu was appointed as director of the three distribution subsidiaries (SDMN, SDTS, SDTN) starting from 14 february 2019. Executive management of ELSA’s subsidiaries The table below shows the subsidiaries’ executive managers with delegated management duties by ELSA Board of Directors in 2018, as well as until the date of this report: Name Position Subsidiary Valentin Branescu 1 Jan – 31 May 2018 Georgeta Corina Popescu 1 May – 31 Oct 2018 Valentin Branescu 1 Nov 2018 – date of the report Valentin Branescu 1 Jun – 31 Oct 2018 Constantin Coman 1 Jan – 31 Aug 2018 Vasile Claudiu Tudose 1 Sep 2018 – date of the report Gabriel Gheorghe 1 Jan – 31 Aug 2018 Ilie Marin 1 Sep 2018 – date of the report Marius Raduta Petrescu 1 Jan 2018 – date of the report Gabriela Dobrescu 24 Sep 2018 – date of the report Marian Stegarita 22 feb – 31 Aug 2018 Ioana Tabara 1 Sep – 31 Oct 2018 Raluca Florentina Dumitriu 5 Nov 2018 – date of the report general Manager Deputy general Manager Energy Management Division Manager Network Development Division Manager SDMN Network Operations Division Manager Asset Management Division Manager Shared Services Division Manager ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 67 Name Position Subsidiary Emil Merdan 1 Jul 2017 – date of the report Sorin Viorel Muresan 1 feb 2019 – date of the report Dora Fataceanu 1 Oct 2017 – date of the report Constantin Buda 1 Oct 2017 – date of the report Sorin Viorel Muresan 1 Oct 2017 – 31 ian 2019 Vasile Farcas 1 Oct 2017 – date of the report Gabriel – Adrian Margin 1 Oct 2017 – date of the report Nicu Constandache 6 feb 2017 – 30 Jun 2018 Eduard Staicu 1 Jul– 27 Aug 2018 Sinan Mustafa 28 Aug 2018 – date of the report Eduard Staicu 1 Jul 2018 – date of the report Dorel Mircea Stanescu 1 Apr – 14 Oct 2018 Raul Toma 15 Oct 2018 – date of the report Alexandru Iulian Gyorgy 1 Apr – 31 Jul 2018 Attila Lajos Simon 1 Aug 2018 – date of the report Catalin Grama 1 Oct 2017 – 31 Jan 2018 Attila Lajos Simon 1 feb – 29 Jun 2018 Nicu Constandache 1 Jul – 31 Jul 2018 Dragos Eduard Staicu 1 Aug 2018 – date of the report Florinel Boboc 28 Sep 2017 – date of the report Monica Radulescu 28 Sep 2017 – date of the report Mircea Patrascoiu 1 Jan 2018 – date of the report Darius Mesca 1 feb – 30 Apr 2019 Cristina Pana 1 feb – 30 Apr 2019 Mihai Beu 1 feb – 30 Apr 2019 general Manager Deputy general Manager Shared Services Division Manager Asset Management Division Manager SDTN Energy Management Division Manager Network Operations Division Manager Network Development Division Manager general Manager Deputy general Manager Energy Management Division Manager Network Operations Division Manager SDTS Asset Management Division Manager Network Development Division Manager Shared Services Division Manager general Manager Deputy general Manager financial Manager Portfolio Management Manager EFSA ELECTRICA SA68 | A N N U A L R E P O R T 2 0 1 8 Name Position Subsidiary Sinan Mustafa 1 Jan – 26 Aug 2018 Gheorghe Batir 27 Aug 2018 – 6 Jan 2019 Ovidiu-Aurelian Andrei Starting from 7 Jan 2019 Marius Viorel Stanciu 1 Jan 2018 – date of the report Daniel Marin 1 Jan 2018 – date of the report Vasile Ionel Bujorel Oprean 1 Jan 2018 – date of the report Gheorghe Batir 1 Jun 2018 – date of the report Source Electrica general Manager Deputy general Manager financial Manager Property Management and Product Development Manager Technical Manager EL SERV Number of shares owned by the managers of Electrica Group The table below shows the status as of 31 December 2018 of shares holdings in ELSA (EL) held by the executive managers of ELSA and by the executive managers of ELSA subsidiaries, to whom ELSA BoD delegated management duties in 2018: Item no. Name Number of shares Share in the share capital (%) 1 2 Emil Merdan Dora fataceanu Source: Central Depository, Electrica 7,277 1,000 0.0021% 0.0003% According to information held by ELSA, there is no contract, understanding or family relationship between the executive managers of the company and another person who may have contributed to their appointment as executive managers. According to available information, the members of the BoD and the executive managers of the group companies mentioned in this chapter have not been involved, in the last five years, in any litigations or administrative procedures related to their activity within the group and to their capacity to fulfil their work-related duties within the group. 4.9 statement regarding the corporate governance “comply or explain” The present Statement reflects the status of compliance with the new BSE Corporate governance Code as of 5 March 2019. Note: considering the fact that there are no mentions for ”Reason for non-compliance”, the corresponding column has been removed from the table below. No. Provisions of the BSE Corporate Governance Code Compliance YES/NO/ PARTIALLY Other remarks Section A - Responsibilities A.1. All companies should have an internal regulation of the Board which includes terms of reference/ responsibilities for the Board and the key management functions of the company, applying, among others, the general Principles of this Section. yES ELSA’s CgC was adopted in february 2015 and published on ELSA’s website (includes the Articles of Association of ELSA, the Charter of the BoD and of its committees). All the above mentioned documents include the terms of reference/the BoD’s responsibilities, as well as those of the key management functions of the company. in 2016, the Board conducted an extensive project to review the Articles of Association and the above mentioned Charters in order to detail the responsibilities of the Board, of its committees and of the management team, taking into consideration the recommendations ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 69 No. Provisions of the BSE Corporate Governance Code Compliance YES/NO/ PARTIALLY Other remarks made in the Board activity evaluation report of the previous year. The last version of ELSA’s CgC was published on ELSA’s website on 27 April 2017, together with the amendment of ELSA’s Articles of Association (AoA). Such provisions are mentioned in ELSA’s CgC, in the Articles of Association, in the Code of Ethics and Professional Conduct, as well as in the revised BoD Charter ELSA’s BoD comprises seven members since 14 December 2015. All the members of ELSA’s BoD are non- executive. According to the AoA, at least four from the seven members must be independent. The independence criteria provided by the AoA are similar and even more restrictive than the ones provided by BSE Corporate governance Code. four out of seven are independent members. All the independent members submitted a declaration of independence, at the time they were elected by the OgMS. A.2. A.3. A.4. yES yES yES Provisions for the management of conflict of interest should be included in the Board regulation. The Board of Directors should have at least five members. The majority of the members of the Board of Directors should be non-executive. in the case of Premium Tier Companies not less than two non-executive members of the Board of Directors or Supervisory Board should be independent. Each independent member of the Board of Directors 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 and according to the following criteria: A.4.1. he/she is not the CEO/executive officer of the company or of a company controlled by it and has not been in such position for the previous 5 years; A.4.2. he/she is not an employee of the company or of a company controlled by it and has not been in such position for the previous five (5) years; A.4.3. he/she does not and did not receive additional remuneration or other advantages from the company or from a company controlled by it, apart from those corresponding to the position of a non-executive director; A.4.4. he/she is nor or has not been an employee of, or has not or had not a contractual relationship, during the previous year, with a significant shareholder of the company, controlling more than 10% of voting rights or with a company controlled by it; A.4.5. he/she has not and did not have during the previous year a business or professional relationship with the company or with a company controlled by it, either directly or as a customer, partner, shareholder, member of the Board/Director, CEO/executive officer or employee of a company if, by its substantial character, this relationship could affect his/her objectivity; A.4.6. he/she is not and has not been in the last three years the external or internal auditor or a partner or salaried associate of the current external financial or internal auditor of the company or of a company controlled by it; ELECTRICA SA70 | A N N U A L R E P O R T 2 0 1 8 No. Provisions of the BSE Corporate Governance Code Compliance YES/NO/ PARTIALLY Other remarks A.4.7. he/she is not a CEO/executive officer in another company where another CEO/ executive officer of the company is a non- executive director; A.4.8. he/she has not been a non-executive director of the company for more than twelve years; A.4.9. he/she does not have family ties with a person in the cases referred to at points A.4.1. and A.4.4. Other relatively permanent professional commitments and engagements of a Board member, including executive and non-executive Board positions in companies and not-for-profit institutions, should be disclosed to shareholders and 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 chair or the nomination committee and, if it has, to 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. The corporate governance statement should contain information on the number of meetings of the Board and committees during the past year, the attendance by the directors (in person and in absentia) and a report of the Board and committees on their activities. yES yES yES yES yES A.5. A.6. A.7. A.8. A.9. A.10. The corporate governance statement should contain information on the precise number of the independent members of the Board of Directors. yES The professional background of the proposed candidates, as well as of the current Board members are published on ELSA’s website in the investors > gMS section. Their biographies contain all the relevant information requested by this provision of the Code. 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 briefly informed the entire Board. The company has established the general Secretariat Department, which functionally reports to the BoD. The A.8 provision was applied starting from 2015 - the Board has carried out an annual review process of its activity with the support of an external consultant (in 2015 and 2017), or by using a self-assessment questionnaire (in 2016 and 2018). More details are provided in the Annual Report for 2015-2017 - chapters 6.1 and 6.2 and for 2018 in this report at chapters 4.4 and 4.5. Details regarding the compliance with this provision are presented in the Annual Report, in the Corporate governance chapter. for 2018, please see chapter 4.5. four out of seven members of the BoD are independent and this is specified in the Annual Report. More details are provided in the Annual Report for 2015-2017 - chapters 6.1 and 6.2 and for 2018 in this report at chapters 4.4 and 4.5. On ELSA’s website, in the investors > Corporate governance > Board of Directors section, it is mentioned which members are independent. ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 71 Compliance YES/NO/ PARTIALLY yES No. Provisions of the BSE Corporate Governance Code A.11. The Board of Premium Tier companies should set up a nomination committee consisting of non-executive members to lead the nomination of new members to the Board and make recommendations to the Board on the appointment and dismissal of the Chief Executive Officer and the management team. The majority of the members of the nomination committee should be independent. Section B - Risk management and internal control system B.1. yES 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 qualification relevant to the functions and responsibilities of the committee. At least one 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. B.2. The audit committee should be chaired by an independent non-executive member. yES B.3. Among its responsibilities, the audit committee should undertake an annual assessment of the internal control system. yES Other remarks The Articles of Association and ELSA’s CgC highlight the existence of this committee (Nomination and Remuneration Committee - NRC), its structure and responsibilities. The NRC composition is reviewed annually, according to NRC Charter and at the beginning of each new mandate of the BoD. in 2018, as well as in february 2019, its composition was reviewed according to the changes occurred within the board composition. Details regarding the NRC members are presented in chapter 4.4. Two members are independent. The Articles of Association and ELSA’s CgC highlight the existence of this committee (Audit and Risk Committee - ARC), its structure and responsibilities. The ARC composition is reviewed annually, according to ARC Charter and at the beginning of each new mandate of the BoD. in 2018, as well as in february 2019, its composition was reviewed according to the changes occurred within the board composition. Details regarding the ARC composition are presented in the chapter 4.4. Two members are independent. During 2018, the Chair of the Audit and Risk Committee was Mr. Bogdan iliescu, independent non-executive board member. Starting from 18 february 2019, the Chair of the Audit and Risk Committee is Ms. Ramona Ungur, independent non-executive board member. According to the revised Charter, the Audit and Risk Committee (ARC) has the following responsabilities with regards to internal control matters: (i) regularly reviewing the adequacy and implementation of key internal control policies, including policies for detecting fraud and the prevention of bribery; (ii) reviewing related party transactions in line with a policy developed by the Committee and approved by the Board; (iii) reviewing annually a report by the Head of internal Audit department assessing the effectiveness of the internal control system across the group. ELECTRICA SA72 | A N N U A L R E P O R T 2 0 1 8 No. B.4. B.5. B.6. Compliance YES/NO/ PARTIALLY yES Provisions of the BSE Corporate Governance Code The assessment should consider the effectiveness and scope of the internal audit function, the adequacy of risk management and internal control reports submitted to the audit committee of the Board, management’s responsiveness and effectiveness in dealing with identified internal control deficiencies or weaknesses following the internal control and the submission of relevant reports to the Board. 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 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. B.9. Whenever the Code mentions reports or analysis initiated by the Audit Committee, these should be followed by periodic (at least annual) or ad-hoc reports to be submitted to the Board afterwards. 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. yES yES Other remarks The evaluation report for 2018 provided by the CgC was prepared and discussed by ARC in its meeting of 4 March 2019. The evaluation report for 2018 provided by the CgC was prepared and discussed by ARC in its meeting of 4 March 2019. The ARC has at least the following responsibilities with regards to risk management matters: (i) reviewing regularly the main risks to which the company and group, are exposed, recommending to the Board relevant policies for their identification, mapping, management and mitigation; (ii) reviewing annually a report from management assessing the effectiveness of the risk management system within the group. Based on the new provisions introduced in the ARC Charter, the evaluation report for the 2018 year was prepared and discussed by ARC in its meeting of 4 March 2019. Details regarding the ARC activity are presented in the Annual Report 2018 - chapter 4.5.. The ARC has the following responsibilities with regards to internal audit 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, dismissal and remuneration of the Head of internal Audit department; (iii) monitoring the adequacy, effectiveness and independence of the internal audit function. Details regarding the ARC activity are presented in chapter 4.5. Provisions on this matter are included in ELSA’s CgC and in the Policy on Transactions with Affiliated Parties. ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 73 Compliance YES/NO/ PARTIALLY yES Other remarks The Audit and Risk Committee and the Board reviewed the Policy on Transactions with Related Parties in their meetings of february, September and December 2018. yES yES yES 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. The remuneration limits for the general Manger and other mandate managers were approved by the general Meeting of Shareholders (gMS) on 9 July 2015. in March 2016 the gMS approved the new Directors Remuneration Policy. Taking into account the tax changes introduced during 2017, the Board has analyzed their impact and submitted for the gMS approval proposals regarding the revision of the Remuneration Policy for the BoD members and of the remuneration limits for the executive managers. On 9 february 2018 the gMS approved the Remuneration Policy of the members of the BoD of the company and the remuneration limits for the executive managers, both revised. The Remuneration Policy for directors and the executive management is available on ELSA’s website. No. Provisions of the BSE Corporate Governance Code B.10. B.11. B.12. 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 a mandatory opinion of the Board’s audit committee and fairly disclosed to shareholders and potential investors, to the extent that these transactions fall within the category of events subject to reporting requirements. The internal audits should be carried out by a separate structural division (internal audit department) within the company or by hiring an independent third-party entity. To ensure the fulfillment of the core functions of the internal audit department, 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. Section C - Fair rewards and motivation C.1. 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. The remuneration policy should be drafted in such a way that allows shareholders 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 manager’s contract and their notice period and the eventual compensation for revocation without cause. The remuneration report should present the implementation of the remuneration policy for the persons identified in the remuneration policy during the annual period under review. Any essential change of the remuneration policy should be published on the company’s website in a timely manner. ELECTRICA SA74 | A N N U A L R E P O R T 2 0 1 8 No. Provisions of the BSE Corporate Governance Code Compliance YES/NO/ PARTIALLY Section D - Building value through investors’ relations Other remarks yES The company has both an investor Relations department and a dedicated investor Relation section on its website (both in Romanian and English). in the investors section on ELSA’s website are published all relevant information for investors. yES yES The BoD reviewed the Dividends Policy in its meeting of 14 february 2018. it is published also on ELSA’s website, under investors section > Corporate governance > Corporate Policies. The BoD reviewed the forecasts Policy in its meeting of 14 february 2018. it is published also on ELSA’s website, under investors section > Corporate governance > Corporate Policies. D.1. D.2. D.3. The company should have an investor Relations function - indicating the person (s) responsible or the organizational unit, to the general public. in addition to information required by legal provisions, the company should include on its corporate website a dedicated investor Relations section, both in Romanian and English, with all relevant information of interest for investors, including: D.1.1. Principal corporate regulations: the articles of association, general shareholders’ meeting procedures. D.1.2. Professional CVs of the members of its governing bodies, other professional engagements of the BoD members, including executive and non-executive board of directors positions in companies or non-profit institutions D.1.3. Current reports and periodic reports (quarterly, semi-annual and annual reports); D.1.4. information related to general meetings of shareholders; D.1.5. information on corporate events; D.1.6. The name and contact data of a person who should be able to provide relevant information upon request; D.1.7. Corporate presentations (e.g. iR presentations, quarterly results presentations, etc.), financial statements (quarterly, semi- annual, annual), audit reports and annual reports. A company should have a policy on the annual distribution of dividends or other benefits to shareholders, proposed by the CEO or the Management Board and adopted by the Board, in the form of a set of guidelines that the company intends to follow regarding the distribution of net profit. The principles of annual distribution policy to shareholders will be published on the company’s website. A company should have adopted a policy with respect to forecasts, whether they are published 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 upon a high level of uncertainty, with results sometimes significantly different from forecasts initially presented. The policy regarding forecasts should provide the frequency, envisaged timeframe and content of forecasts. forecasts, if published, may only be part of annual, semi-annual or quarterly reports. The forecast policy should be published on the company’s website.. ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 75 No. D.4. D.5. D.6. D.7. D.8. D.9. D.10. Provisions of the BSE Corporate Governance Code 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 the decision of the general meeting. Any professional, consultant, expert or financial analyst may participate in the shareholders’ meeting upon prior invitation from 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. Compliance YES/NO/ PARTIALLY yES yES yES yES yES yES yES Other remarks The rules of general meetings of shareholders are included within each convening notice, published in accordance with the legal requirements, approximately 45 days prior to the meeting. External auditors attend each OgMS for approving the annual reports. The annual directors’ report, presented to the annual general meeting of shareholders, togethe with the financial statements includes 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. in this respect, shareholders’ agreement present to the general Meetings was requested each time it was needed. Electrica holds quarterly teleconferences with analysts and investors, publishes the presentations and the audio recording of the webcasts on ELSA’s website, under investors section > Results and Reports > Analyst Presentations. in 2017, 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 ELSA’s website. Annually, based on the Corporate Social Responsibility Policy, the CSR Plan is approved. Electrica’s Sustainability Report for 2017, published in 2018, includes informations regarding all the projects and activities sustained during the reporting year. ELECTRICA SA 76 | A N N U A L R E P O R T 2 0 1 8 4.10 implementing action plans undertaken by signing the framework agreement with ebrd The company’s initial Public Offer and dual listing preparation process the signing of a involved framework Agreement with the European Bank for Reconstruction and Development (EBRD) which includes extensive action plans with implications for developing a culture of integrity at Electrica group level, for adopting best practices with regard to corporate governance and incorporating the sustainability principles into the group’s development strategy. As for the development of a culture of integrity at Electrica group level in line with the EBRD standards, in 2018 the company implemented the ethics compliance framework, defined by The Code of Ethics and Professional Conduct and subsequent policies, based on a compliance program with three main priorities: updating and developing the compliance framework; maintaining functional dedicated organizational structures for ethics and compliance; monitoring the compliance. With mainly a preventive role with respect to the risks the organization is exposed to, compliance adds value to each business, but in order to be efficient, the compliance framework has to adapt to the realities of the organization and to align permanently with legislative changes, external environment trends, business ethics best practice and organizational transformations of the companies and the group. Knowing these aspects, ELSA embraced a proactive attitude updating and developing the compliance framework in order to better suit to practical aspects and specificities of the group companies activities. in this regard, in 2018, the Policy regarding transactions with Related Parties was reviewed and updated in line with legal and organizational framework evolution. After adopting the reviewed policies, ELSA initiated personnel awareness programs and compliance their provisions, regarding monitoring plans implemented by organizational the structures dedicated to ethics and compliance at group’ companies level. existent for capacity of the operational the Regarding organizational entities dedicated to ethics and compliance, after a uniform structure was set in 2017 the electricity distribution companies within the group by defining ethics and compliance departments directly subordinated to the company’s Chief Executive Officer, the structures were populated in two of the companies. The existent dedicated organizational structures, existing since 2015, were maintained during 2018 at EfSA and EL Serv level, but for two energy services companies within the group the appointed ethics and compliance officers left the companies during 2018 following the insolvency procedures. Within ELSA, in the fourth quarter of 2018, in the context of streamlining the activity, the organizational structure was modified by removing the subordinate department to the Chief Executive Officer and setting up a position of ethics and compliance officer directly subordinated to the BoD. The efforts to professionally train the dedicated staff, but also to increase its cohesion and encourage the exchange of ideas and solutions, materialized in an in-house workshop during the second half of 2018 and individual counseling sessions. implementing ethical and compliance standards and compliance monitoring process continued during 2018 in all Electrica group companies. The action plan regarding corporate governance The action plan on corporate governance assumed as part of the framework Agreement with the European Bank for Reconstruction and Development was taken into consideration ever since the iPO and the listing of the company. The standards and measures it envisaged have been implemented and monitored continuously. Selecting independent directors in the articles of included EBRD guidelines were association of electrica adopted on 4 July 2014, and were in force until the Extraordinary general Meeting of Shareholders dated 10 November 2015, whose decision changed the number of members of the BoD of the company, from five to seven directors, out of which four independent ones. for details about ELSA’s Board of Directors, its members and the selection of its members, please see chapter 4.4. Nomination and Remuneration Policies for details regarding the remuneration of the Board members and of the executive management of ELSA, please see chapter 4.7. ELSA developed the nomination and remuneration policies with the support of a reputable international consultant in human resources. These have been endorsed by the BoD and were approved by decision of the general Meeting of Shareholders, on 31 March 2016. Advisory Committees of the Board of Directors There are three advisory committees at the level of ELSA’s BoD. for details, please see chapter 4.5. ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 77 Internal Control Framework The BoD approved the internal audit procedure and related documents updated versions since the beginning of 2015 and on 15 November 2016, the code of ethical conduct of the internal auditor was approved, meant to set universal ethic standards, applicable to all its own or contracted auditors at group level. internal Audit in Electrica group is governed by The Audit Charter and Audit Manual of Electrica group, the last update of these documents have been approved by the BoD in December 2018. These are available on ELSA’s website in the section The group > internal Audit. The annual internal audit plan and any updates are prepared by the specialized department, reviewed by the Audit and Risk Committee, approved by BoD decision based on the committee recommendation and implemented in the approved version. for more details about the internal control and internal audit, please see chapter 4.11. to policies was started, in order to align them to reflect the new organizational structures, implement the principles updated in ELSA’s policy and to more accurately reflect their specific activity. The updating process didn’t finalize in 2018 and will be completed in 2019, when an update of the delegation of authority policy is envisaged for the rest of the group companies (EL SERV and SEM). Code of Conduct EBRD requirements are covered by the code of ethics and Professional conduct developed with the support of Transparency international and the Whistleblowing Policy as part of the Corporate governance Code. The documents were approved on 2 february 2015 and published on ELSA’s website in the section The group > Ethics, Sustainability and Conformity. in 2018, the Code’s implementation and compliance monitoring activities were carried on at group level. included ELSA’s Articles of Association EBRD guidelines were in the Articles of Association of ELSA adopted on 4 July 2014. During 2017, the company’s Articles of Association have been updated by the resolution of the Extraordinary general Meeting of Shareholders dated 27 April. As a result, the competences for the approval of the subsidiaries’ global strategy (including but not limited to their development and restructuring), as well as the competence for the company’s mandate to vote in the subsidiaries gMS regarding mergers and spin- off, is ELSA’ BoD responsibility. The changes were aimed to transform the approval process, with respect to the subsidiaries, into a more flexible and efficient mechanism. in the same time, the changes aimed to reduce the complexity and the number of the gMSs, as well as the related costs, both from the company and shareholders’ perspective. All the versions of the Articles of Association adopted since the listing of ELSA are available on the company website in the section The group > About > Articles of Association. Clear lines of competence and responsibility in order to establish duties and competencies, as well as to clearly define a reporting system within the company, ELSA performed the mapping of its processes, benefiting from external advice in this regard. The first of these projects was completed by defining the procedures in the company, audited to be certified applied according to iSO 14001/2015 standards. following the external audit conducted by Dekra Romania, Electrica received the certification for its integrated management system quality - environment - HSS. iSO 9001/2015 and During 2018, the policy for the delegation of authority was updated at ELSA and EfSA level. At the level of the distribution subsidiaries, similar policies have been approved by their boards in 2017, but in 2018 a procedure for updating the delegation of authority Compliance with BSE Governance Code On 4 January 2016 the New Code of Corporate governance of the Bucharest Stock Exchange entered into force and, on this occasion, ELSA published on 8 January 2016 the „Corporate governance Code Apply or Explain” statement according to the new provision. ELSA publishes the updated statement yearly and reports promptly any update to the capital market. for details, please see chapter 4.9. Between June - September 2016, ELSA developed the Market Abuse Procedure, in compliance with the national and European provisions in this field. it was adopted in September 2016 and is being implemented across the entire group. The environmental and social responsibility plan The implementation of the Social and Environmental Action Plan, annex to the framework Agreement signed by ELSA with the European Bank for Reconstruction and Development started by the end of 2014, continuing during the next years and aiming a high degree of compliance with the bank standards. 1.1. following the organizational changes that took place between 2016 and 2018, Electrica group companies have redefined their integrated quality-environment- OHS management systems by reviewing the processes and the applicable procedural framework. All companies successfully completed the recertification and supervision external audits performed by the accredited certification bodies, maintaining certifications in accordance with iSO 9001: 2015 and iSO 14001: 2015, OHSAS 18001: 2007 Currently, a process of alignment of the integrated quality - environment - OHS management systems documentation at distribution operators and ELSA level is ongoing, aiming to simplify and streamline processes at the group level, ELECTRICA SA78 | A N N U A L R E P O R T 2 0 1 8 focusing on the distribution activity and especially on its development (investment) component. implementing the energy management international standard iSO 50001:2011 is considered after the Electrica group organizational transformation project finishes. 1.2. for ensuring contractors compliance with the group OHS standards and procedures, ELSA developed certain provisions integrated in dedicated conventions concluded for group companies agreements with works and services providers and infrastructure users (for example, telecommunications companies). 1.3. During 2018 the practice of introducing chapters dedicated to the environmental aspects, occupational health and safety, according to the requirements, in the new investment projects, continued at group level. Main measures were envisaged for the grid crossing the protected areas and the Natura 2000 sites, according to the developed digital maps highlighting the priority areas for risk mitigation. 1.4. As far as Corporate Social Responsibility is concerned, in 2018 ELSA revised and approved grant policies, donations and sponsorships, the new form of policies being available on its website. As in previous years, during 2018 the company carried the Corporate Social Responsibility Program, out materialized by financial support of social causes through prestigious non-governmental organizations in Romania, as well as the third edition of the grant Program „Electrica puts Romania in a different light”, through which projects with long-term positive social impact across the country were financed. All information on donations, sponsorships and grants awarded by ELSA are available on its website under the CSR section. At the end of the first half of 2018, ELSA has posted on its website the group’s Second Sustainability Report, for 2017, developed according to the requirements of the global Reporting initiative (gRi) standards. involves level and 1.5. Complaints’ management within Electrica group in force at is based on conventional procedures each company internal Audit department and Legal & Control department/division for investigations and analysis, as well as experts from other departments, if the situation requires. for 2019, the development and implementation of an iT tool for process management, with the subsequent review and alignment of the companies’ procedures, is considered. Since April 2015, at Electrica group level is available and functional a reporting system for ethical misconduct, irregularities or any violations of the law by professional alert devices (whistleblowing system). it includes a hotline, postal addresses (physical and electronic) and an online platform for taking over reports, accessible on the websites of all companies within the group. The integrity alerts takeover and anonymization services have been outsourced since the launch of the system, including during 2018. 1.6. identify and assess environmental and social risks by an independent consultant was part of the Project for improving and developing the risk management system inside ELSA according to iSO 31000:2010, launched in November 2017. The Consultant has defined a dedicated methodology, analyzing all vulnerabilities in relation to the environment, communities, occupational health and safety and to business ethics and has conducted interviews and evaluation sessions across all of the group’s companies. At the end of the first half of 2018, the vulnerability analysis was finalized and in September 2018, the Project Steering Committee approved the external consultant’s report on Electrica group environmental and social risks. 1.7. With regard to the development of a corporate policy regarding the reorganization/restructuring actions carried out at the group level, in the context of the implemented organizational dedicated programs were developed. ELSA defined a medium - term strategy for training and development of employees, the necessary budget for its implementation being already anticipated by the Human Resources Department. transformation projects, 2.1. RENAR accredited laboratory of iCEMENERg National Research and Development institute conducted recently a study on the level of electromagnetic fields in installations belonging to SDTS (transformer stations and 110 kV aerial power lines). The study showed no parameters exceeds the standards admitted in accordance with the legal provisions in force, in any of the locations for which the evaluation was conducted. The external consultant involved in the environmental and social risk assessment at the group level also found that the aspect has no significant impact. 2.2. Electrica group companies selectively collect and temporary deposit generated waste according to legal requirements in force, submitting all reports requested by the environmental authorities, based on own implemented waste management procedure. ELSA developed a framework procedure for implementing an integrated waste management system at group level, which will become effective after the organizational transformation process. 2.3. Electrica group companies have a program to eliminate asbestos and PCB from their installations, according to specific national and European legislation in force, developed on the basis of a risk assessment of the use of these materials in their own activity. The program is monitored semi-annually and annually through reports, the objective being followed in all the investment projects initiated. ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 79 4.1. 2018 meant, for management of the emergency and fire protection within ELSA, a series of preventive measures implemented at the level of all companies, including: control of compliance with specific rules by its own authorized personnel; periodic training for all categories of staff, according to the approved training programs and themes; performing intervention and evacuation exercises in emergency situations; verification and maintenance of fire protection facilities and of fire-fighting equipment and devices for each location, with authorized companies; free access to evacuation routes; measures for prevention of fires in the hot and the cold seasons. 2.4. Accidental leakage of insulating oil from transformers from the stations of distribution subsidiaries within Electrica group are monitored and recorded in Registers of faults. for a number of locations (repair shops, warehouses) of EL SERV, soil and water analysis were conducted, according to the requirements imposed by environmental permits. During 2018, there were no significant impact environment incident and no decontamination of soil and groundwater was required. 3.1. Reducing noise pollution in residential areas and associated health risks is accomplished by including specific provisions in contracts for works and services, where applicable. for 2018 no significant impact on noise pollution and no complaints or notices related to noise pollution have been reported. 4.11 internal audit report for 2018 The Annual Audit plan prepared for 2018, endorsed by the Audit & Risk Committee and approved by the Board of Director, included assurance missions - the type of audit being a regulatory audit, but also ad-hoc missions, at the request of the Audit & Risk Committee. During the year a number of seven missions were performed on the following audit areas: acquisitions, patrimony, SMi & HSS, financial - accounting, technical, legal. This plan was taken from 2016-2018 strategic plan, drafted based on a detailed risk analysis. The audit team consisted of five internal auditors on 1 January 2018 and reached three internal auditors on 31 December 2018, of which one person with management function. The internal audit missions carried out in 2018 had the following specific subjects: 5. The assessment of receivables collection activity within EfSA, followed by the elaboration of a single internal audit report which included a number of four recommendations with high impact; 6. The assessment of measurement, recording and purchase of electrical energy for network losses - NL for Distribution Companies within the group (SDMN, SDTN, SDTS), with three internal audit reports which included a number of 24 recommendations with a high impact; 7. The assessment of legal department activity at ELSA and EfSA level, with two internal audit reports that included a number of one recommendation with high impact. The internal audit reports, that were based on the mission mandate approved by the chairman of the Audit and Risk Committee, were endorsed by the management of the audited entities, endorsed by the Audit Committee of ELSA, and the implementation of the recommendations has been and is continuously monitored through their tracking sheets. following the completion of the audit missions and the acceptance of the recommendations by those concerned, the audited structures prepare their own action plans in order to comply with the recommendations. 1. The assessment of the direct purchases over EUR 3,000 made at the level of the companies in the Electrica group (SDMN, SDTN, SDTS, EL SERV, EfSA), a single audit report was issued for this mission without recommendations with high impact; 2. The assessment of the activity regarding the inventory of the assets of the companies belonging to the Electrica group (ELSA, EfSA, EL SERV SDMN, SDTN, SDTS), with six internal audit reports, which included a number of six recommendations with a high impact at group level; 3. The assessment of the SMi & HSS activity for the distribution companies within the group (SDMN, SDTN, SDTS), with three internal audit reports, which included a number of three recommendations with a high impact at group level; 4. The assessment of the activity regarding the forecasting, elaboration and execution of revenues and expenses budget within ELSA, with only one internal audit report, without high impact recommendations; ELECTRICA SA80 | A N N U A L R E P O R T 2 0 1 8 5 OPERATiNg ACTiViT y ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 81 5.1 operating segments The operations of each reportable segment are summarized below. Segments Electricity and gas supply Operations Purchasing and supplying electricity and gas to end consumers (EfSA, including the trading and representation activity on the Balancing Market as Balance Responsible Party – BRP) Electricity distribution Electricity distribution service (includes SDTN, SDTS, SDMN, EL SERV) External electricity network services Repairs, maintenance and other services for electricity networks owned by Headquarters Source: Electrica other distributors (include SEO and SEM) includes corporate services at parent level The figure below shows the areas covered by the group subsidiaries and the number of customers/users they serve Figure 27: The geographical coverage of the companies in the Electrica Group Societatea de Distributie a Energiei Electrice Transilvania Nord (SDTN) 1.28 mn users Societatea de Distributie a Energiei Electrice Muntenia Nord (SDMN) 1.17 mn users Societatea de Distributie a Energiei Electrice Transilvania Sud (SDTS) 1.33 mn users Electrica Furnizare (EF) 3.5 mn customers Source: Electrica Note: The figure relates to the number of company’s customers/users on 31 December 2018. DISTRIBUTION SEGMENT Electrica group’s distribution segment refers to the activity of its subsidiaries SDMN, SDTN, SDTS and EL SERV. The electricity distribution segment is a regulated area of activity in which operations are conducted in a geographically limited area in accordance with the concession agreement, the nature of the services provided and the specific obligations are stipulated in the license conditions of the concessionary operators. Thus, Electrica group, through its subsidiaries, is the electricity distribution operator in Transilvania Nord (Cluj, Maramures, Satu Mare, Salaj, Bihor, Bistrita-Nasaud counties), Transilvania Sud (Brasov, Alba Sibiu, Mures, Harghita and Covasna counties) and Muntenia Nord regions (Prahova, Buzau, Dambovita, Braila, galati and Vrancea counties), operating electrical installation with voltages between 0.4 kV and 110 kV. activity, EL SERV provides maintenance, repair and various services to group companies (car rental, rental of buildings, etc.) as well as repairs and other related services to third parties. The specific tariffs applicable to distribution services are approved by ANRE based on a “tariff basket ceiling’’ mechanism as established by ANRE Orders no.168/2018 and no.169/2018 (applicable in the 4th regulatory period 2019-2023), amended and completed by ANRE Order no. 193/2018. The “tariff basket ceiling” methodology plans to reduce income fluctuations and avoid significant fluctuations for the electricity tariffs charged to consumers for the distribution of electricity. The tariff model is based on the principle of remuneration (through tariffs) of controllable costs recorded by the distribution operator, the distributor’s main source of profit being the rate of return on capital invested in the distribution activity. The group has exclusive electricity distribution licenses for these regions valid for a nine years period with an extension clause for another 25 years. Within its service for distribution The tariffs are adjusted on an annual basis considering the achieved operating performance, the volumes of distributed electricity, the quantities and the acquisition price of electricity ELECTRICA SA82 | A N N U A L R E P O R T 2 0 1 8 to cover the network losses (“NL”), the uncontrollable costs, the change of revenues from reactive energy compared to the forecasted ones, depreciation and forecasted capital expenses, change of forecasted gross profit from other activities, as well as corrections from previous periods made in accordance with the methodology. The current regulatory period (“the 4th regulatory period”) within which the group operates has started on 1 January 2019 and will end on 31 December 2023. Both the current regulatory framework, and the rules related to RAB determination and to distribution tariffs are expected to remain unchanged, at least until the end of 2023. ANRE sets up the annual level of distribution tariffs in RON per MWh for each distribution company and for each voltage level (high, medium and low). The tariffs invoiced to users are cumulated depending on their corresponding voltage level (i.e. the tariff for medium voltage also includes the tariff for high voltage, and the tariff for low voltage includes also the tariff for high and medium voltages). ANRE sets up the annual regulated income levels required for each year of the regulatory period, based on projections submitted by the distribution operators, in line with the methodology requirements, at the beginning of the regulatory period. Starting 1 January 2019, the electricity distribution tariffs approved by ANRE are as follows (RON/MWh): Tariff (RON/ MWh) SDMN SDTN SDTS ANRE Order no. High voltage Medium voltage Low voltage Applicable between 1 January -28 February 2019 114.18 197/14.12.2018 98.67 198/14.12.2018 100.21 199/14.12.2018 33.08 41.84 39.83 15.21 18.16 20.27 High voltage Medium voltage ANRE Order no. Low voltage Applicable between 1 March – 31 December 2019 116.80 24/25.02.2019 100.98 25/25.02.2019 102.56 26/25.02.2019 33.84 42.82 40.77 15.56 18.58 20.75 Source: ANRE SUPPLY SEGMENT The Electrica group operates on the supply segment through its EfSA subsidiary, both on the regulated electricity market (supplier of last resort in geographical regions where the group distribution segment operates) as well as on the competitive market at national level. The group has an electricity supply license covering Romania’s territory valid until 2021, with the possibility of extension. Starting with 10 May 2018, the group’s second license for electricity supply, ELSA’s, ceased according to the ANRE Decision no. 728/2018 – at the request of the operator. in addition, EfSA holds a license to carry out its gas supply activity, valid until 2022. The electricity market is divided into the regulated market (electricity supplied as last resort supplier) and competitive market. On both markets, electricity may be sold and/or purchased wholesale or retail. Regulated market Liberalization of the electricity market was completed starting with 1 January 2018. The competition between traditional suppliers and other new suppliers to the electricity market has increased in the sense of massive bids to household customers from the regulated market. in 2018 there was an increase in the number of products offered by suppliers to end customers and an increase in customers’ choice for bids that combine electricity, gas and/or telecom services. Currently, EfSA is obligated “Supplier of Last Resort” for approximately 3.3 mn customers. Until 28 february 2019, EfSA has been obligated SoLR only for the areas covered by the Electrica group distribution operators. Starting with 1 March 2019, EfSA is optional SoLR for the other areas of Romania. EfSA incurs supply costs that include mainly costs related to conclusion of contracts, invoicing, collection and costs iT&C related to database management, infrastructure. ANRE may supplement the cost of supply with the share of occasional costs incurred by EfSA as a result of special situations (for example: re-contracting, modification of information systems to comply with new regulations, losses from receivables, etc.). in the first semester of 2018, household and non-household customers which benefit from the universal service were subject to CMC tariffs endorsed by ANRE on the basis of the justified purchase and supply costs and of on the regulated profit share. Non-household customers who do not benefit from the universal service have been invoiced at last resort tariffs for 100% of their consumption. Any difference between revenues and costs plus justified profit realized from the supply activity at CMC tariffs/last resort tariffs from previous periods is corrected if it is justified in the next stage of setting the prices applied to last resort customers. in the second semester of 2018, household and non- household customers which benefits from the universal service were subject to universal service tariffs. Non- household customers who do not benefit of universal service were invoiced at tariffs for inactive customers, respectively non-household customers taken over due to the fact that they had no electricity supply ensured from any source at last resort tariffs. Competitive market Trading on the wholesale competitive electricity market is carried out in a transparent, public, centralized and non- discriminatory manner on market platforms managed by OPCOM. The prices may be freely negotiated by the parties on the retail competitive market. The wholesale market participants can trade electricity based on bilateral contracts concluded on the markets managed by OPCOM or on spot markets managed by OPCOM. Starting 19 July ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 83 The balancing market, a component of the wholesale energy market, is mandatory and each license holder must either assume or delegate its responsibility for balancing to a BRP. By transferring the responsibility to a Balance Responsible Party there is an advantage for the aggregation of the imbalances, in order to reduce costs on the Balancing Market compared to when the producer/supplier/distributor would act on its behalf as a Balance Responsible Party. . ENERGY SERVICES SEGMENT The group’s portfolio also includes the energy services segment (equipment maintenance, repairs and other additional services related to the network), performed almost entirely for the distribution companies outside the group. in 2018, the energy services segment consists of SEO and SEM. 2012, the Energy Law does not allow the conclusion of sale and purchase contracts on the wholesale electricity market outside of the centralized markets. BRP Electrica - Balance Responsible Party The representation activity in the Balancing Market as Balance Responsible Party (”BRP Electrica”) was performed by ELSA from 2005 until March 2018 based on electricity supply license no. 1091/2012. This activity is compliant with market mechanisms detailed in the Romanian Commercial Energy Wholesale Code. Starting with 1 April 2018, the transfer of the representation activity in the balancing market as Balance Responsible Party was made from ELSA towards EfSA. The customer portfolio is diversified, consisting in producers (hydro, thermal, wind, photovoltaic, biogas, biomass), suppliers and distributors, providing balancing services for over 24% of the total consumption in NES. The distribution companies within the Electrica group have delegated their responsibilities to BRP EfSA. 5.2 fixed assets The number of users and volume of installations at 31 December 2018 at the level of the three distribution subsidiaries (SDTN, SDTS and SDMN) and at group’s overall level are quantified as follows: Geographical coverage Number of users, of which: high voltage (HV) medium voltage (MV) low voltage (LV) Overhead power lines length, out of which: high voltage (HV) medium voltage (MV) low voltage (LV) out of which connections Underground power lines length, out of which: 110 kV medium voltage (MV) low voltage (LV) out of which connections Cumulative power of transformers/ power AT in power stations(HV/MV + MV/MV) in HV/MV power stations in MV/MV power stations Switching stations/Transformer stations No. of substations, out of which: HV/MT power stations MT/MT power stations 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 - - pcs SDTN 34,162 1,275,460 33 4,115 1,271,312 SDMN 28,962 1,328,070 39 4,050 1,323,981 SDTS 34,072 1,172,893 44 2,955 1,169,894 Total 97,196 3,776,423 116 11,120 3,765,187 52,882 59,040 45,622 157,544 2,197 11,863 38,822 18,149 2,146 12,561 44,332 24,080 3,166 10,471 31,985 17,259 7,509 34,896 115,139 59,488 16,504 11,919 11,979 40,402 30 3,935 12,539 7,312 6,161 3,739 3,690 49 2,422 113 92 21 15 3,423 8,481 2,167 41 3,501 8,437 2,675 86 10,859 29,457 12,154 8,710 6,746 21,617 5,716 5,364 352 2,994 212 124 88 4,146 4,068 78 2,682 105 101 4 13,601 13,122 479 8,098 430 317 113 8,971 10,396 9,198 28,565 ELECTRICA SA 84 | A N N U A L R E P O R T 2 0 1 8 The vast majority of the distribution equipment currently in the assets of the electricity distribution subsidiaries within the Electrica group, approximately 70% of the total volume, were built during 1960-1990, following the successive development phases of the National Electricity System. This led to a great variety of equipment currently in use. The vast majority of installations were produced by the romanian industry during 1960-1990, in which case a high rate of wear and tear is noticed. A relatively small category accounting for approx. 30% of the total equipment is represented by new installations, commissioned after 1990, meeting current requirements. it is notable that the installations commissioned between 1980 and 1990 (approx. 10%) are gradually exceeding their normal lifetime. Considering the voltage level, categories of installations, the year of commissioning and the specific operating conditions, the installations’ degree of wear and tear can be assessed as follows: High voltage power lines (110 kV) Medium voltage power lines Low voltage power lines Substations Transformers Underground power lines Overhead power lines Underground power lines Overhead power lines Underground power lines Overhead power lines Pole - mounted Concrete enclosure Pad - mounted Underground Concrete base SDTN 25% 74% 48% 59% 52% 57% 70% 44% 50% 69% 15% 10% SDMN 45% 65% 65% 60% 70% 65% 75% 50% 65% 75% 95% 9% SDTS 50% 75% 65% 60% 75% 68% 60% 50% 75% 20% 85% 12% Source: Electrica Investments The investments at the Electrica group level have been prioritised considering especially the degree of wear of the assets of the distribution companies, with a particular focus on the improvement of the quality of the distribution service, the safety in operations as well as the increase in efficiency. installing The group will continue to modernize and to develop intelligent the smart distribution network by network infrastructure systems, such as SCADA, SAD, energy measurement systems, etc., in order to improve the operational efficiency and the energetic efficiency, to reduce the network losses, to improve the network flexibility, the distribution service quality, the continuity and reliability of the network. The implementation of the investment program is compliant with the group’s Strategy considering the following criteria: Tracking the inclusion of regulated investments in the RAB; Non-regulated investments of the group must provide an iRR higher than weighted average cost of capital; The proposed investment program must follow the group’s financial strategy of maintaining a solid capital structure. Thus, a priority are those categories of capital expenditure contributing to the development of a profitable and sustainable distribution activity and to the creation of access conditions to the electricity distribution network for energy consumers and producers, in line with market requirements, especially based on: Automation of the distribution by integrating of the installation in SCADA, SAD, DMS etc.; Modernizing the equipment in transformer stations and in the medium voltage network; introducing equipment with reduced technological and operating efficiencies losses, higher environmentally friendly; Modernizing the medium and low voltage distribution network and connections; Expanding the modern energy measurement and transmission of power consumption systems. At the same time, the group is considering investments in the upgrade of iT infrastructure and information technology systems, taking into account both the legal requirements regarding data protection and the positive effect on the quality of the provided services.. The following table presents the investment program approved by ANRE for the distribution subsidiaries within Electrica group (in real terms 2013): Commissioning program approved by ANRE for the period 2014 - 2018 (RON mn) 2014 117.0 126.0 113.8 356.8 2015 180.0 184.0 171.3 535.3 2016 219.6 223.2 205.0 647.8 2017 250.0 259.2 252.4 761.6 2018 287.5 288.0 287.1 862.6 Total 1,054.1 1,080.4 1,029.6 3,164.1 SDTS SDTN SDMN Total Source: ANRE ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 85 Based on iPO proceeds, Electrica group has decided to increase the volume of investments in the distribution network in the third regulatory period compared to the volume approved by ANRE at the end of 2013. The consolidated investment plan at group level in 2018 was RON 1,010 mn (CAPEX), out of which RON 970 mn represent the investments planned by the distribution operators. in 2018, the companies of the Electrica group made the following investments compared to the planned investments: Subsidiary Electrica Group (RON mn) SDTN SDTS SDMN EfSA EL SERV ELSA Total Source: ANRE Planned 2018 Achieved 320 335 315 34 2 4 1,010 283 284 311 32 2 1 913 At Electrica group level, in 2018, the CAPEX plan was achieved at a rate of 90.4%; the achievement rate of investment for the distribution subsidiaries alone was 90.5% compared to the total plan approved by ELSA’s Board of Directors. The structure of investments realized (CAPEX) by the distribution subsidiaries in 2018 is presented in the table below (for details of the most important investments see Appendix 2). Category of works (RON mn) Efficiency out of which: Energy efficiency/NL Operational efficiency Quality of distribution service Other categories features for independent equipment Studies and projects for the coming years Total Source: Electrica Total 310 239 71 500 16 34 18 878 The main investments of the Electrica group were focused in 2018 on improving the quality of the distribution service, as well as on increasing the energy and operational efficiency. Figure 28: The structure of CAPEX achievements for distribution operators within the group, in 2018 (mn RON) Source: Electrica Of the total investments planned to be commissioned in 2018 value of RON 904.7 mn (nominal terms 2018) by the distribution operators, the investments made and commissioned sum up to RON 836 mn. Thus, the executed and commissioned investment programs approved by ANRE ex-ante for the distribution operators were achieved in an average percentage of 92.4%. Electrica Group (RON mn in nominal terms) SDTN SDTS SDMN Total Source: Electrica Planned Achieved % 300.3 299.8 304.6 296.1 246.3 293.6 98.6 82.2 96.4 904.7 836.0 92.4 ELECTRICA SA86 | A N N U A L R E P O R T 2 0 1 8 As a result of investments made during 2013-2018, the value of the Regulatory Assets Base of the group’s distribution operators has progressively changed and is as follows: RAB (RON mn) SDTN SDTS SDMN Total Source: Electrica 2013 1,292 1,332 1,434 4,058 2014 19 1,331 1,333 1,486 4,150 2015 1,420 1,377 1,543 4,340 2016 1,519 1,388 1,581 4,488 2017 1,624 1,475 1,679 4,779 201820 1,785 1,625 1,845 5,255 During 2013 – 2018, RAB had an increasing evolution for all the three distribution companies in the group’s portfolio. 5.3 Procurement The procurement activity is carried out in accordance with the legal provisions in force, as well as in accordance with own procedures and regulations, as appropriate, aiming to cover the needs of goods, services and works, in order to carry out in good conditions the group’s activities. in some 5.4 sales activity Electrica group’s revenues are influenced mainly by the distribution and supply segments. The contribution of the distribution segment to the total revenues was of 28.6% in 2018 (2017: 25.7%), while the contribution of the supply segment was of 70.7% in 2018 (2017: 73.6%). The group’s distribution operators are natural monopolies in their respective markets and as such, they hold a dominant position. in addition, the group’s distribution operators have a legal monopoly in their relevant regions; hence, other entities cannot set up a competing electricity distribution business. The following figure shows the national market share (based on the quantities of distributed electricity) held by the group’s subsidiaries in the electricity distribution segment, according to the most recent ANRE report available. Regarding the supply segment, although it holds a strong position on the electricity supply market, EfSA is facing growing competition on its market. The next figure shows Electrica market shares for the supply activity as at 31 December 2018 (based on the quantities supplied): cases, purchases are carried out centralized, by delegating the purchase’ coordination to a group company, with the primary goal of reducing costs, optimizing the procurement and ensuring a unified policy within the group. Figure 29: Market share of distribution segment in 2017 Figura 30: Regulated Market, 2018 Source: ANRE Source: ANRE report (December 2018) 19 In 2018, ANRE communicated the final value of the investments recognised for 2014, due to this reason starting with 2014 the RAB values have been modified 20 The values estimated as of 31 December 2018 may suffer corrections following ANRE’s analysis process. ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 87 Figure 31: Competitive Market, 2018 The number of consumption locations was 3.54 mn at 31 December 2018, served through a number of 151 sales points and customer relationship offices. . Source: ANRE report, November 2018 Figure 32: Volume of electricity supplied on the retail market (TWh) Figure 33: Evolution in number of costumers (th.) Source: Electrica Source: Electrica ELECTRICA SA 88 | A N N U A L R E P O R T 2 0 1 8 Figure 34: Customers by electricity supplied volume, 2018 Figure 35: Customers by revenues, 2018 Source: Electrica Source: Electrica were registered with CNTEE Transelectrica, out of which 66 are active. Between January and March 2018, approximately 96 licensed participants delegated their responsibility to BRP ELSA, as compared with the first quarter of 2017, when approximately 164 licensed participants were enrolled in BRP ELSA. Between April and December 2018, 98 licensed participants (seven suppliers, six distribution operators and 85 producers) transferred their responsibility to BRP EfSA. Thus, the customer portfolio increased by 3% compared to the first quarter of 2018, respectively increased by 12 customers and a number of approximately 252 bilateral agreements, i.e. exchanges with OPCOM. Major customers exposure EfSA does not have a significant exposure to a certain customer or group of customers that could significantly influence its activity. However, certain electricity customers, such as hospitals, ambulance stations, schools, nursing homes, air or naval traffic services are deemed of special importance and cannot be disconnected by the electricity supplier. Moreover, the customers subject to the insolvency law, can benefit from protection against creditors and, possibly, against electricity suppliers. Thus, the electricity must be supplied by EfSA, even if they are in payment default. BRP Electrica - Balance Responsible Party Between January – August 2018, 120 Balance Responsible Parties were registered with Transelectrica S.A., having a total of 1,030 licensed participants. Starting with September 2018, according to ANRE Order no. 31/31 Jan 2018 - the regulation on the functioning and settlement of the balancing market and the regulation for calculation and settlement of imbalances of the parties responsible for balancing, as well as for the modification, completion and approval of certain provisions in the electricity sector, each license holder assumes responsibility for balancing with the TSO (Transport and System Operator). Thus, by the end of 2018, 360 Responsible Balance Parties ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 89 5.5 reorganization and disposal of assets Regarding financially distressed subsidiaries, the process of reducing their activity was continued. in 2013, the Company approved the insolvency procedure starting for three subsidiaries: SE Banat, SE Dobrogea and SE Moldova; SE Moldova, SE Dobrogea and SE Banat entered bankruptcy procedures in January 2016, January 2015 and August 2014 respectively; During 2018, the liquidator of each company has organized several tenders with the objective of selling the company’s assets under the bankruptcy procedure; SEO – During the reorganization period (May 2014 – June 2018), the company failed to pay the amounts due according to the Reorganization Plan, and as a result in October 2018 the court ordered the opening of the bankruptcy procedure for SEO; currently, the assets’ stock count from the company’s patrimony is carried out and, following the stock count’s completion, the procedure for the valuation of all the company’s assets to be continued and, as 5.6 Personnel a last step, the assets’ valorification following the creditors’ approval of the sales regulation and of the assets valorification method; judicial SEM – under reorganization since November 2014, with a reorganization plan approved by the Creditors’ Assembly in November 2015 and confirmed by the Court in November 2015. The deadline for the implementation of the reorganization plan was November 2018, when the company fulfilled its payment schedule. The appeal in court of a creditor to the amount registered in the SEM receivables table is the reason why the SEM reorganization procedure has not yet been closed. Until 31 December 2018, the following values were recorded from the sale of the assets of the subsidiaries that are bankrupt as of 31 December 2018: SE Moldova – RON 19,452 th., SEO – RON 8,084 th., SE Dobrogea – RON 3,428 th., SE Banat – RON 8,115 th. Also, the value of the receivables recovered by the subsidiaries that are bankrupt as of 31 December 2018 is: SE Moldova – RON 42 th., SEO – RON 2,171 th., SE Dobrogea – RON 849 th., SE Banat – RON 810 th.. On 31 December 2018, the group had 7,995 employees. The table below provides an overview of the employment in the group, by business segments, at the end of the specified years. including technical, economic, social and administrative personnel. The table below presents the Group’s employment by age, as follows: Electricity distribution SDMN SDTN SDTS EL SERV Supply segment EfSA Services related to other DSOs SE Headquarter ELSA Total Source: Electrica 2018 2017 2016 6,697 2,166 2,160 2,024 347 872 872 303 303 123 123 7,995 7,144 7,978 1,872 2,263 1,817 2,241 1,720 2,122 518 2,569 945 1,041 1,041 945 524 548 548 155 155 524 142 142 8,792 9,685 The reduction in the number of group employees during 2018 was mainly due to the voluntary leave program, plus retirements at the age limit, disability and termination of individual labour agreements due to other causes (resignation, mutual agreement etc). Age 18-30 31-40 41-50 51-60 over 60 years old Total Source: Electrica 31 December 2018 31 December 2017 4.41% 18.72% 42.21% 32.99% 1.66% 100% 5.51% 19.49% 44.66% 28.81% 1.53% 100% On 31 December 2018, about 98% of the group’s employees were members of trade unions and their employment conditions are governed by the Collective Labour Agreement, which will expire on 2 April 2020 for ELSA and on 31 December 2019 for the group’s subsidiaries. The Electrica group faced four unionised picketing actions (one per each distribution company and one held at ELSA HQ) but these did not significantly interfere with the group’s day to day activity. On 31 December 2018, about 55% of the group’s employees represented directly productive personnel and 45% represented indirectly productive personnel, the voluntary in 2018, leave program with compensatory payments has been continued at group level, program valid until the end of the year. ELECTRICA SA90 | A N N U A L R E P O R T 2 0 1 8 ELSA and its subsidiaries prepared internal regulations related to: employment, non-discrimination, labour safety and health, rights and obligations of the employer and of the employees, employee complaint labour discipline, disciplinary procedures, rules on procedure, sanctions and disciplinary infringements, the criteria and procedures for employees professional evaluation and termination of employment procedure. level have taken The training programs carried out at the Electrica group into account both the constant evolution and the improvement of the group employees’ skills. The company’s management supports the principle of development through continuous training and takes an active part in involving employees in these programs, thus supporting them to effectively address their professional challenges. HEALTH AND SAFETY AT WORK The companies within Electrica group use in their daily activity a set of internal norms and regulations elaborated in accordance with the legal provisions and OHSAS 18001 requirements, as part of the integrated Management System Quality – Environment integrated – Occupational Health and Safety. Management System implemented by each of the companies are certified and supervised by prestigious accredited the certification bodies: SRAC distribution operators, EfSA and EL SERV) and Dekra certification for ELSA. During 2018 all the companies went through external audits performed by the certification bodies and maintained their certifications. These integrated management systems certified and supervised by external audits ensure services are provided in safety conditions, for customers and users and for the organization’s own staff. (for The status of work accident at Electrica Group level During 2018 there were no fatalities in the Electrica group companies, but six employees of this companies suffered unfortunately injures as a result of labor accidents: three occurred at SDTS, two at SDTN and one at SEO. causes complex of complementary The and contributing factors that led to the occurrence of these accidents were analyzed at the level of legal committees for each case and the research files were submitted to the Territorial Labor inspectorates to receive the visa, including for the measures to prevent some similar situations. Only in one of the six registered work accidents, the electric risk had consequences, the rest being the result of mechanical risks (knocking, falling from the same level or falling from a height), independent in three of the cases of the professional activities carried out by the employees. Overall, in 2018, at Electrica group level, there was a 60% decrease in the number of work accidents, as a result of the executive management efforts to develop a safety culture under the motto „zero accidents”, under the close supervision of the Board of Directors. These efforts will continue in 2019, with an awareness program on the risks to the health and safety of employees for the entire Electrica group being defined. An achievement in 2018 was also the implementation of the OHS Phone application, for communicating faster all OHS events across the group companies, facilitating the increase of the organization’s speed reaction in the event of an accident at work. Actions to improve health and safety at work for the employees As a result of the transfer of activity among the companies within the group, by the end of 2018 the level of risk was re-evaluated for all the workplaces within the electricity distribution companies and within EL SERV. These re-evaluations were the basis for redefining the OHS training topics, the control procedure and the level of endowment with protection equipment. Thus, 2018 marked the beginning of the digitization of OHS control activity for Electrica group, a Pilot Project for implementing a dedicated iT tool being launched in SDMN. its success has demonstrated the opportunity to extend its implementation to all the distribution operators and subsequently to the service companies within the group. in 2018, 3,167 OHS controls were carried out by own OHS control staff, to identify non-compliances and deficiencies that could increase the level of risk for employees’ health and safety and to implement immediate mitigation measures. During the same period, 12 inspections of the Territorial Labor inspectorates, External Auditors and Emergency inspectorates took place. These have resulted in guidance and in actions to identify deficiencies that require immediate measures or preventive/corrective medium term measures. The implementation of the resulting action plans is done in accordance with the set deadlines. As for employees training, in 2018, over 360,000 hours of training in health and safety at work, fire protection and emergency situations were provided within Electrica group companies, including compulsory training, additional training following accidents at work as well as following the organizational changes and the training courses of the OHS professionals. The training topics set up by the Electrica group companies were based on the national legislation and own internal instructions, focusing on personnel awareness on the dangers involved by the professional activity. A special initiative for 2018 was to introduce the Direct Productive Employeees Training for first Aid in Case of injury Module, developed by Electrica group collaboration with the National Emergency Situations Department, as part of the group OHS Risks and Aspects Awareness Raising Program, at SDTS level. ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 91 at group Level by the OHS Coordination Committee, established in August 2018, bringing together members of representative trade union organizations within the group companies and the group companies executive management. companies in 2018, either for recertification of the iMS or for its supervision. in 2018, the main concerns for the environment were as follows: Reducing the impact on the environment by upgrading installations and promoting smart grids; Withdrawal of PCB-impregnated dielectric equipment in accordance with legal requirements; Responsible waste management by safe disposal of generated waste, including hazardous waste; Conservation of biodiversity and resources. for 2018, no accidental pollution occurred and no exceedance of the limits allowed by the regulations in force for emissions were recorded. There have been no complaints or notices regarding environmental issues. Other Health & Safety at Work aspects during 2018 There were no occupational illnesses within Electrica group. Prevention and health at work was done by doctors specialized in occupational medicine through dedicated service agreements and was monitored 5.7 environmental considerations in carrying out its its activities and business strategy, the Electrica group promotes practices harmonized with the environmental protection norms. implementing Electricity distribution and supply activities do not require environmental authorizations, and EL SERV holds all the necessary environmental authorizations, according to the legislation in force. ELSA and its subsidiaries have implemented integrated Quality-Environment and Safety Management Systems, which aim to improve environmental performance through pollution prevention and responsible waste management. - Occupational Health The assessment of all real and potential, positive and negative environmental aspects associated with normal and abnormal or emergency situations at the level of all group companies in 2018 has made it possible to identify aspects with significant impact and to develop and implement measures programs in order to reduce it. The efficiency and effectiveness of the environmental management systems implemented by Electrica group companies has been assessed during the external audits performed by accredited certification bodies within the 5.8 research and development activities Electrica group is promoting technological innovation by participating in research and development financed/ co-financed by European funds, having the possibility to test new technologies to manage and optimize energy efficiency. Also, the operational electrical networks distribution integrate a high level of distributed generation sources. By participating in these research, development and innovation projects with financing/co-financing grants, Electrica group has the following benefits: making access to cutting-edge technologies in the field of optimizing the operating modes of the electricity distribution network (EDN) in terms of network connection of renewable electricity production (distributed or concentrated); improving the safety and reliability of isolated electrical systems, power quality provided through the provision of rapid, low-cost reserves through flexible task; of the requirements of the new data protection measurement code and encryption modalities; use the opportunities to develop self-financing business portfolio of group Companies; developing new skills through transfer of know- how; compliance with the best practices of similar companies in Europe; creating new opportunities for future of financing of group Companies’ projects through EU funds. Another important endeavour of the Electrica group in promoting technological innovation is to disseminate the solutions for updating its electric grid using a smart grid concept. Communications take place at international conferences/symposiums where group participates or organizes internally to align development plans with available new technologies. Electrica the possibility of identifying criteria to promote smart grids and smart metering solutions in terms . ELECTRICA SA92 | A N N U A L R E P O R T 2 0 1 8 6 ELECTRiCA fiNANCiAL REPORTiNg 2018 The overview of the company’s consolidated financials is in accordance with the consolidated financial statements that have been prepared in accordance with the international financial Reporting Standards (“ifRS”) adopted by the European Union („ifRS-EU”). These Consolidated financial statements are presented in RON, which is the functional currency of all companies within the group. ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 93 6.1 consolidated statement of the financial position The following table presents the consolidated statement of the financial position (amounts in RON mn): 31 December 2018 31 December 2017 (*restated) Variation 2018/2017 ASSETS Non-current assets intangible assets related to concession agreements Other intangible assets Tangible assets, net 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 Assets held for sale Total current assets Total assets 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 Total equity Liabilities for network construction Non-current liabilities financing agreements Deferred tax liabilities Employee benefits Other liabilities Long-term bank borrowings Total non-current liabilities related to concession 4,810.3 13.9 601.2 320.0 28.9 1.9 5,776.2 806.3 38.5 665.7 136.5 63.6 2.7 - 16.4 23.2 1,752.9 4,330.9 14.1 701.5 320.0 41.1 1.3 5,408.9 804.4 55.5 562.5 747.0 21.6 3.7 12.6 1.1 - 2,208.4 11.1% -1.1% -14.3% - -29.7% 41.1% 6.8% 0.2% -30.7% 18.4% -81.7% 194.1% -27.8% -100.0% 1,353.4% - -20.6% 7,529.1 7,617.3 -1.2% 3,459.4 103.0 (75.4) 5.1 108.7 352.1 1,675.5 5,628.4 5,628.4 1.0 183.4 186.9 41.2 320.0 732.5 3,459.4 103.0 (75.4) 5.1 123.8 326.8 1,712.9 5,655.6 5,655.6 - - - - -12.2% 7.7% -2.2% -0.5% -0.5% 11.1 -91.2% 200.5 165.4 40.4 320.0 737.4 -8.5% 12.9% 2.0% - -0.7% ELECTRICA SA94 | A N N U A L R E P O R T 2 0 1 8 Current liabilities financing for network construction related to concession agreements 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 The non-current assets increased by RON 367.3 mn in 2018, to RON 5,776.2 mn from RON 5,408.9 mn as of 31 December 2017, mainly due to the net effect of the network investments made by the distribution subsidiaries (the most relevant values of the investments and assets commissioned are presented in Annex 2) and several assets’ disposals that generate a decrease in the tangible assets. Current assets in 2018, the current assets decreased by RON 455.5 mn as compared to 2017, from RON 2,208.5 mn to RON 1,752.9 mn, this (mil. RON) Bank current accounts Call deposits Cash in hand 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 Source: Electrica Deposits, treasury bills and government bonds The deposits with initial maturity of more than three months and have an average interest rate (yield) of 2.9%. The significant variation of these elements from RON 747 mn 31 December 2018 31 December 2017 (*restated) Variation 2018/2017 32.7 -63.8% 11.9 119.0 742.2 181.1 5.0 78.0 29.1 1.9 247.9 689.4 134.2 7.4 78.9 29.9 3.9 1,168.2 1,224.3 1,900.7 7,529.1 1,961.7 7,617.3 -52.0% 7.7% 34.9% -31.6% -1.2% -2.6% -50.8% -4.6% -3.1% -1.2% evolution being the net effect of the decrease in deposits, treasury certificates and government bonds’ value and the increase in the cash and cash equivalents. The evolution of the current assets that generate most of the variation is presented below. Cash and cash equivalents Cash and cash equivalents include cash balances, call deposits and deposits with maturities of up to three months that have an insignificant exposure to the fair value change risk, being used by the group for short- term commitments’ management. Their value increased by RON 103.2 mn in 2018 to RON 665.7 mn, from RON 562.5 mn in 2017. 31 December 2018 354.5 311.0 0.2 31 December 2017 330.6 231.8 0.1 665.7 (119.0) 546.8 562.5 (247.9) 314.6 to RON 136.5 mn is the result of using internal financing for investments. As at 31 December 2018 the group no longer holds treasury bills and government bonds. ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 95 Share capital and share premium The subscribed share capital in nominal terms consists of 345,939,929 ordinary shares as of 31 December 2018 (345,939,929 ordinary shares on 31 December 2017) with a nominal value of RON 10/share. All the shares give equal rights to the net assets of the Company. Holders of ordinary shares are entitled to dividends and have the right to one vote per share in the general Meetings of Shareholders of the Company and (excepting the 6,890,593 shares repurchased by the Company in July 2014 with the purpose to stabilize the share price). Number of ordinary shares 2018 345,939,929 2017 345,939,929 - - 345,939,929 345,939,929 Number of shares at 1 January Shares issued during the year Number of shares at 31 December Source: Electrica The company recognizes the changes in its share capital only after their approval in the general Meeting of Shareholders and their registration with the Trade Register. Contributions made by the shareholder, which are not registered with the Trade Register at the end of the year are recognized as “Pre- paid capital contributions in kind from shareholders”. Until 31 December 2003, the statutory share capital in nominal terms was restated according to iAS 29 “financial Reporting in Hyperinflationary Economies” with a corresponding adjustment to retained earnings in amount of RON 354.8 mn. in 2015, the amount was used to cover the cumulated accounting losses according to the general Meeting of Shareholders decision from 27 April 2015. in 2018, the Company reclassified the amount of RON 354.8 mn in the statement of financial position, from Share capital to Retained earnings, by restating each affected element of the prior periods statement of financial position, the reclassification having no impact within the Equity line. Own Shares Revaluation reserves The reconciliation between the opening balance and the closing balance of the revaluation reserve is presented below (amounts in RON mn): Balance at 1 January Reserve from the revaluation of property, plant and equipment, attributable to the owners Related tax Release of revaluation reserve to retained earnings corresponding to depreciation and disposals of property, plant and equipment Other effects Balance at 31 December Source: Electrica 2018 2017 123.7 104.7 55.9 - - (8.8) (8.9) (27.9) (6.2) - 108.7 123.8 Other reserves The other reserves include: Legal reserves are established as 5% of the profit before tax according to the individual statutory financial statements of companies within the group, until the total legal reserves reach 20% of the paid-up share capital of each company, according to legal provisions. These reserves are deductible for income tax purposes and are not distributable. Other reserves set up in compliance with the legislation in force. RON mn Balance at 1 January 2016 Set-up of legal reserves Balance at 31 December 2016 Set-up of legal reserves Balance at 31 December 2017 Set-up of legal reserves Balance at 31 December 2018 Source: Electrica Legal reserves 273.9 28.3 302.2 24.5 326.8 25.3 352.0 in July 2014, the Company bought back 5,206,593 shares and 421,000 gDRs, representing the equivalent of 1,684,000 shares. The total amount paid for these shares and gDRs was RON 75.4 mn and the value is unchanged since then. Non-current liabilities The non-current liabilities recorded an insignificant decrease, of RON 4.9 mn, to RON 732.5 mn in 2018, from RON 737.4 mn in 2017. Dividends Dividends for the financial year 2017, with a total gross value of RON 245.4 mn. were declared based on the individual annual audited statutory financial statements prepared in accordance with OMPf no. 2844/2016 for the approval of the accounting regulations in accordance with ifRS as adopted by the EU. Dividends for 2017 were approved by the Ordinary general Meeting of Shareholders dated 27 April 2018 and were paid starting with 22 June 2018. The gross dividend per share approved by the OgMS was of RON 0.7237. Current liabilities in 2018, the current liabilities decreased by RON 56,1 mn, to RON 1,168.2 mn, from RON 1,224.3 mn at the end of 2017, as a result of the changes in the categories listed below (representing approx. 92% of the total current liabilities). Overdrafts The overdrafts decreased significantly in 2018, by RON 128.9 mn, or 52%, reaching RON 119 mn, from RON 247.9 mn in 2017; this evolution is correlated with the group’s working capital financing needs. ELECTRICA SA 96 | A N N U A L R E P O R T 2 0 1 8 Trade payables The trade payables increased by 7.7% in 2018, to RON 742.2 mn, from RON 689.4 mn at the end of 2017. The main trade payables are to electricity suppliers, suppliers of non-current assets and other suppliers (suppliers of services, materials and consumables etc.). Other current liabilities Other current payables, detailed in the table below, increased by 34.9% in 2018, compared to 2017. RON mn 31 December 2018 31 December 2017 VAT payable Other liabilities to the State Other liabilities Total Source: Electrica 85.3 8.5 87.3 181.1 85.8 21 27.4 134.2 Other liabilities refer mainly to guarantees, various creditors, connection fee, habitat fee and contribution for cogeneration; other non-current liabilities refer to guarantees cashed from customers related to electricity supply. Provisions As of 31 December 2018, the provisions refer mainly to:: potential tax charges of the group (including interest and penalties), of RON 14 mn; benefits upon the termination of executive managers’ contracts in the form of the non- compete clause, of RON 4.9 mn; work litigations, RON 0.7 mn; various claims and litigations involving the group companies, of RON 9.5 mn. RON mn Balance at 1 January 2018 Provisions recognized Provisions used Provisions reversed Effect of loss of control over subsidiaries Balance on 31 December 2018 Source: Electrica Provisions 29.9 23.9 (20.4) (4.0) (0.3) 29.1 6.2 consolidated statement of profit and loss The following table presents the consolidated statement of profit or loss of Electrica group, for 2018 and 2017 (amounts in RON mn): 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 impairment loss on assets held for sale 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 Basic and diluted earnings per share (RON) Source: Electrica 2018 2017 5,612.8 164.9 (2,718.3) (378.3) (841.5) (671.5) (86.9) (423.3) 3.6 25.2 (0.1) 0.5 (426.1) 261 14 (12.3) 1.8 262.7 (32.3) 230.4 230.4 - 230.4 5,603.2 173.5 (2,972.8) (372.9) (745.3) (642.4) (61.7) (395.6) (8.8) (12.9) - 32.5 (399.8) 197 20.1 (10.4) 9.7 206.8 (35.2) 171.6 127.7 43.8 171.6 Variation 2018/2017 0.2% -5% -8.6% 1.4% 12.9% 4.5% 40.7% 7% - - - -98.4% 6.6% 32.5% -30.3% 18.3% -82% 27.1% -8.1% 34.3% 80.4% - 34.3% 0.68 0.38 80.4% ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 97 KEY FINANCIAL INDICATORS FOR 2018 Î Revenues: RON 5.6 bn, a 0.2% y-o-y increase; Î EBiTDA: RON 680.7 mn, a RON 79.3 mn (13.2%) increase compared to the last year; Î EBiT: RON 261 mn, a RON 64 mn (32.5%) increase compared to 2017; Î EBT: RON 262.7 mn, a RON 55.9 mn (27.1%) increase compared to the last year; Î Net Profit: RON 230.4 mn, a RON 58.8 mn (34.3%) y-o-y increase. Revenues and other income in 2018, Electrica recorded total revenues (including other income) of RON 5,777.7 mn, with a slight increase of RON 1 mn, from RON 5,776.7 mn in 2017. Revenues Figure 36: Revenue for 2018 and comparative information (RON mil.) As of 1 January 2018, the group applied ifRS 15 “Revenue from contracts with customers”, so that that the revenue and expenses from Balance Responsible Party activity (“BRP”) have been eliminated, without affecting the margin of this activity. if this financial reporting standard would not have been implemented, the Revenues and respectively Electricity purchased lines from the consolidated statement of profit or loss for 2018 would have been higher by RON 120.9 mn, without any impact on the margin. The first part of 2017 has been significantly affected by the balancing market evolution, when there have been recorded significant values of imbalances due to the energy market crisis. The consolidated revenues presented for 2017 include Balance Responsible Party activity revenues of approx. RON 297.8 mn, since the group decided to apply ifRS 15 using the modified retrospective method, without restating the figures of the comparative period. The revenues increased by RON 9.5 mn, or 0.2%, as a net effect of the following main factors: external evolution the (outside electricity sales towards third parties have increased by RON 185.1 mn, generating a favorable impact on the consolidated revenue; the group): RON 62.8 mn increase of the distribution segment revenues; decrease by RON 229.2 mn of the supply segment revenues. Other income in 2018, the other income decreased by RON 8.6 mn, or 5%, to RON 164.9 mn, from RON 173.5 mn realized in 2017. The decrease is generated by the fact that in the previous year, revenues from litigations won regarding old receivables and, also, revenues from compensations obtained from contracts termination on the supply segment were recognized. Source: Electrica ELECTRICA SA98 | A N N U A L R E P O R T 2 0 1 8 Electricity purchased in 2018, the expense for electricity purchased at group level decreased by RON 254.5 mn, or 8.6%, to RON 2,718.3 mn, from RON 2,972.8 mn in the comparative period. This decrease was mainly because the first part of 2017 was affected by the unfavorable events from the energy market, which generated significantly higher electricity prices as compared to 2018. The table below presents the structure of the electricity purchased expenses for the indicated periods: RON mn Electricity purchased to cover network losses Electricity purchased for supply and balancing Transmission and system services related to supply and balancing activities 2018 605.3 2017 581.4 1,883 2,139.1 230 252.3 Total electricity purchased 2,718.3 2,972.8 Source: Electrica Green certificates Electricity suppliers have a legal obligation to acquire/ supply green certificates based on the annual quotas set by law according to the weight of gross production from renewable sources. The expenses with green certificates is a pass-through cost. Construction costs in 2018, the network construction costs related to concession agreements increased by RON 96.1 mn or 12.9%, to RON 841.5 mn, from RON 745.3 mn recorded in 2017. This increase is attributable to the realized investments related to the Regulated Asset Base. Employee benefits Expenses with employee benefits increased in 2018 by RON 29.1 mn, or 4.5%, reaching an amount of RON 671.5 mn, from RON 642.4 mn in 2017, mainly due to the changes in the structure of employee benefits. Repairs, maintenance and materials in 2018, the repairs, maintenance and materials expenses recorded an increase of RON 25.1 mn, or 40.7%, to RON 86.9 mn, from RON 61.7 mn in the comparative period, considering the group’s reorganization process of maintenance, investments and design activities, to support the investments plan. Impairment of trade and other receivables The main factor generating the positive variance of the impairment adjustments for receivables, in amount of RON 38.1 mn, is the recognition of the partial cash collection from Oltchim (RON 44.7 mn) by ELSA; the positive effect was partially reduced by the recognition of other provisions for customers and sundry debtors. Change in provisions, net The provisions recorded a negative variation in 2018 as compared with the prior year, of RON 32 mn. in 2018, the net change in provisions generates an income of RON 0.5 mn, the most significant movement being related to the provision recorded for potential tax impact of the changes in the accounting policy in the statutory financial statements, in amount of RON 11.4 mn, and to the provision used, related to the fine from the Competition Council, in amount of RON 10.8 mn. in 2017, the net change in provisions generated an income of RON 32.5 mn, the main income being the reversal of the provision in amount of RON 20.7 mn related to the Court of Accounts inspection at SDTS, following the closing of the fiscal inspection Report in 2017. Other operating expenses The other operating expenses recorded an increase of RON 26.3 mn, or 6.6%, from RON 399.8 mn in 2017 to RON 426.1 mn in 2018, mainly as a result of the reorganization process of the maintenance, investment and design activities mentioned above. EBITDA and EBITDA margin Figure 37: EBITDA and EBITDA margin for 2018 and comparative information (RON mn and %) Source: Electrica ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 99 Operating profit Net finance income The group EBiT increased by approx. RON 64 mn y-o-y, impact of the adding to the EBiTDA evolution the increase depreciation and amortization expenses, an of RON 27.7 mn, or 7%, mainly due to a higher level of investments’ commissioning, and the impact of the impairment adjustments of property, plant and equipment (variation of RON 12.4 mn). Figure 38: EBIT and EBIT margin for 2018 and comparative information (RON mn and %) The net financial result at group level decreased by 82% in 2018 compared to 2017, due to lower finance income, while the finance costs remained around the same level. Profit before tax The profit before tax increased in 2018 by RON 55.9 mn, to RON 262.7 mn, from RON 206.8 mn in 2017. Income tax expense The income tax decreased by RON 2.9 mn, or 8.1%, to RON 32.3 mn in 2018 from RON 35.2 mn in 2017. Net profit for the period As a result of the above described factors, in 2018, the net profit increased by RON 58.8 mn, to RON 230.4 mn, from RON 171.6 mn in 2017.. Source: Electrica SEGMENT REPORTING - DISTRIBUTION Key indicators - The distribution segment Figure 39: Distribution segment revenues w/o conso adjustments (RON mn) Figure 40: Distribution segment EBITDA w/o conso adjustments (RON mn) Source: Electrica Source: Electrica ELECTRICA SA100 | A N N U A L R E P O R T 2 0 1 8 Source: Electrica Figure 41: Distribution segment net profit (RON mn) Figure 42: Distribution segment net debt/(cash) (RON mn) Source: Electrica The following table presents elements from the reporting of the statement of profit or loss of the group’s distribution segment, for the period 2018 - 2017 (amounts in RON mn). External revenues 2018 2017 1,602.8 1,437.6 inter-segment revenue 1,135.8 1,238.1 Segment revenue 2,738.6 2,675.7 Segment profit (loss) before tax 103.6 243.2 Net finance (cost)/income (27.0) (8.5) Depreciation, amortization and impairment, net EBiTDA Net profit/(loss) of the segment Source: Electrica (402.6) (392.1) 533.2 650.4 90.6 205.2 Revenues in 2018, the revenue from the electricity distribution segment increased by aprox. RON 62.9 mn, or 2.4%, to RON 2,738.6 mn, from RON 2,675.7 mn in 2017, as a result of the following factors: the total distributed quantity slightly decreased as a result of the high voltage distributed quantity drop by 22%, partially compensated by the increases recorded on medium and low voltage by 6.1% and 1.5%, respectively, where the distribution tariffs are higher, thus generating a positive effect on the total distribution revenues; positive increase; impact from reactive energy revenue the recognition of investments into the network under concession agreements in accordance with ifRiC 12, which increased in 2018, influenced, also, favourable the revenues from the distribution segment. ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 101 consolidation adjustments between Electrica Serv and the distribution subsidiaries. This decrease was caused especially by the diminished level of expenses with network maintenance, as a result of the investments made by the distribution subsidiaries, and by the capitalization of certain maintenance and repair expenses. EBITDA The increase in electricity acquisition costs to cover network losses as well as other unfavorable elements, led to a decrease of RON 117.2 mn or 18% of EBiTDA on the distribution segment. Net profit of the segment The net profit followed a similar trend with EBiTDA, decreasing by RON 114.6 mn, or 55.9%. The net profit margin decreased to 3.3% in 2018 from 7.7% in 2017. Electricity purchased The cost of electricity purchased to cover network losses increased by RON 23.9 mn, or 4.1%, reaching RON 605.3 mn in 2018, from RON 581.4 mn in 2017. This evolution is the net effect of the rise in the average electricity purchase prices (negative effect of RON 32.8 mn) and of the decrease in the level of quantity of electricity used to cover the network losses (positive effect of RON 8.9 mn). Employee benefits The expenses with employee benefits increased by RON 11.5 mn or 2.2%, to RON 533.6 mn in 2018, from RON 522.1 mn in 2017, mainly due to the changes in the structure of the benefits granted to employees. Repairs, maintenance and materials Repairs, maintenance and materials significantly decreased, by RON 118.5 mn, or 59.1%, to RON 82.1 mn in 2018 from RON 200.5 mn in 2017, values that do not include the SEGMENT REPORTING – SUPPLY Key indicators - the supply segment Figure 43: Revenues - supply segment (RON mn) Figure 44: EBITDA - supply segment (RON mn) Source: Electrica Source: Electrica Figure 45: Net profit - the supply segment (RON mn) Figure 46: Net debt/(Cash) - supply segment (RON mn) Source: Electrica Source: Electrica ELECTRICA SA102 | A N N U A L R E P O R T 2 0 1 8 The following table presents the elements from the reporting of the statement of profit or loss of the group`s supply segment for 2018 and 2017 (amounts in RON mn): 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 2018 2017 3,966.7 28.7 3,995.5 127.1 4.3 (14.4) 137.2 107.7 4,125.7 99 4,224.7 (1.6) 1.1 (12.7) 9.9 1.2 Revenues The increase was mainly generated by: in 2018, cumulated with the 1% increase in the average price, from an average price of RON 132.71/gC in 2017 to RON 133.99/ gC in average regulated quota of gC imposed by ANRE to electricity suppliers at 0.346 gC/MWh supplied from 0.320 gC/MWh supplied in 2017 (RON 47 mn negative variance); increase 5% lower supplied volumes for which there is an obligation to purchase gC (RON 20 mn positive variance); the regularization impact – positive variance of RON 22 mn, reflected in both revenue and expenses, therefore with no impact on the margin (the regularization for 2017 of RON 36 mn with impact in 2018 compared to the RON 14 mn regularization for 2016 with impact in 2017). Employee benefits Employee benefits increased by RON 6.1 mn, or 7.8%, from RON 78.6 mn in 2017, to RON 84.7 mn in 2018. EBITDA The above presented factors generated an increase in EBiTDA of RON 127.3 mn, respectively an increase of the EBiTDA margin from 0.2% in 2017, up to 3.4% in 2018. Segment net profit The net profit followed a trend similar to EBiTDA, increasing by RON 106.6 mn as compared to 2017. The revenue from the supply activity decreased by RON 229.2 mn or 5.4% to RON 3,995.5 mn in 2018, from RON 4,224.7 mn in 2017. The variation of the supply segment is generated by two elements: the electricity supply activity, with a positive impact on the segment revenue, mainly due to the sale price increase by 6.9%, which covers the impact of the quantity decrease of 3.4%; the Balance Responsible Party activity revenues, whose variation had a negative influence mainly due to the accounting for BRP activity starting 1 January 2018 in accordance with ifRS 15, by eliminating the BRP revenues and the corresponding expense. The value of the green Certificates included in the invoice to the final consumer, set by ANRE, increased from an average price of RON 45.93/MWh in 2017 to an average price of RON 50.84/MWh in 2018. Electricity purchased including the The cost of the electricity purchased for supply and balancing, the amount intercompany transactions, decreased by RON 530.6 mn, or 14%, to RON 3,270.6 mn in 2018, from RON 3,801.2 mn recorded in 2017. The main factor is the reduction in the volatility of electricity purchase prices; out of this variance, RON 120.9 mn decrease is attributable to the change in the financial reporting standards. Green certificates green certificates’ (gC) cost is recognized in the statement of profit and loss based on the quantitative quota set by the regulatory authority and is influenced by the quantity of the gC that the group has to purchase for the current year and the purchase price of gC on the centralized market. The cost with the acquisition of green certificates is a pass through cost. in 2018, the cost of gC increased by RON 5.4 mn, or 1.4%, to RON 378.3 mn, from RON 372.9 mn in the same period of the prior year. ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 103 6.3 consolidated cash flow statement The following table presents the consolidated statement of cash flows of Electrica group, for 2018 and 2017 (amounts in RON mn).: Cash flows from operating activities Profit for the year Adjustments for: Depreciation Amortization (Reversal of impairment)/impairment of property, plant and equipment, net Loss on disposal of property, plant and equipment (Reversal of impairment)/impairment of trade and other receivables, net impairment of assets held for sale Change in provisions, net Net finance income gain on loss of control over subsidiaries in financial distress income tax expense Total Adjustments: Changes in : Trade receivables Other receivables Prepayments green Certificates inventories Trade payables Other payables Employee benefits Deferred revenue Cash generated from operating activities interest paid income tax paid 2018 2017 (restated) Variation 2018/2017 230.4 171.6 34.3% 38.3 385 (3.6) 13.1 (25.2) 0.1 (0.5) (1.8) (0.3) 32.2 667.9 (27.8) 13.4 1 12.6 (42) 39.4 59.2 27 (2.3) 748.5 (3.1) (49) 32.0 363.6 8.8 4.6 12.9 - (32.5) (9.7) - 35.2 586.4 (196.1) (28.5) 1.9 (12.6) 1.1 120.7 (16.3) (14.7) 2.9 444.9 (2.2) (53.2) 19.7% 5.9% - 184.8% - - -98.5% -81.4% - -8.2% 13.9% -85.8% - -47.4% - - -67.4% - - - 68.2% 40.9% -7.9% Net cash from operating activities 696.4 389.4 78.8% Cash flows from investing activities Payments for purchases of tangible assets Payments for network construction related to concession agreements Payments for purchases of other intangible assets Proceeds from sale of property, plant and equipment Restricted cash Payments for purchases of treasury bills and government bonds Proceeds from maturity of treasury bills and government bonds Payments for deposits with maturity of 3 months or longer Proceeds from deposits with maturity of 3 months or longer interest received Net cash effect due to loss of control over subsidiaries Consideration paid to acquire non-controlling interests (3.2) (803.1) (9.9) 15.6 - (95.3) 550.1 (654) 802.2 11.7 (1.2) - (52.9) (726.7) (2.4) 2.6 (185.5) (543.1) 1,838.2 (995.6) 820.3 20.0 - (752.0) -94% 10.5% 312.5% 500% - -82.4% -70.1% -34.3% -2.2% -41.5% - - ELECTRICA SA 104 | A N N U A L R E P O R T 2 0 1 8 Net cash used in investing activities Cash flows from financing activities Proceeds from long term bank loans Dividends paid Repayment of financing for network construction related to concession agreements 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 31 December Source: Electrica 2018 2017 (restated) Variation 2018/2017 (187.1) (577.2) -67.6% - (244.7) (32.4) 192.3 (349.4) (86.8) -30% -62.7% (277.1) (243.9) 13.6% 232.2 314.6 546.8 (431.6) 746.2 314.6 - -57.8% 73.8% Cash flow in 2018, the net cash from operating activities was of RON 696.4 mn. The net profit for the analyzed period was RON 230.4 mn. The main adjustments were: i) ii) adding the depreciation and amortization of RON 423.3 mn, the impact of the impairment adjustments and of the result of disposal of tangible assets worth RON 9.5 mn, the net change in the impairment of trade and other receivables and assets held for sale of RON 25.1 mn, deducting a net finance result of RON 1.8 mn, net change in provisions value of RON 0.5 mn, the impact of loss of control over subsidiaries in financial distress of RON 0.3 mn, and adding the income tax of RON 32.2 mn; a variation of trade receivables, other receivables and prepayments worth RON 13.4 mn, of inventories value of RON 42 mn, variation of trade payables and other payables worth RON 98.6 mn, gC variation of RON 12.6 mn, employee benefits adjustment of RON 27 mn and the deferred revenue impact, in value of RON 2.3 mn. The income tax and interest paid totaled RON 52.1 mn. in 2018. in 2017, the net cash from operating activities amounted to RON 389.4 mn. The profit before tax for the period was RON 171.6 mn. The main adjustments were: i) ii) adding the depreciation and amortization of RON 395.6 mn, the impact of the impairment adjustments and of the result of disposal of tangible assets worth RON 13.4 mn, the net change in the impairment of trade and other receivables of RON 12.9 mn, deducting a net finance result of RON 9.7 mn, net change in provisions of RON 32.5 mn, and adding the income tax of RON 35.2 mn; the variation of trade receivables, other receivables and prepayments worth RON 222.7 mn, of the inventories of RON 1.1 mn, trade payables and other payables worth RON 104.5 mn; gC variation of RON 12.6 mn, employee benefits adjustment of RON 14.7 mn, and the deferred revenue impact, value of RON 2.9 mn. The income tax and interest paid totaled RON 55.4 mn in 2017. ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 105 6.4 individual statement of the financial position financial information selected from company’s separate statement of financial position (amounts in RON mn): 31 December 2018 31 December 2017 Variation (%) ASSETS Non-current assets Property, plant and equipment intangible assets investments in subsidiaries Restricted cash Loans granted to subsidiaries Total non-current assets Current assets Cash and cash equivalents Deposits, treasury bills and government bonds Trade receivables Other receivables inventories Prepayments Loans granted to subsidiaries – short term Total current assets Total assets EQUITY AND LIABILITIES Equity Share capital Share premium Treasury shares Pre-paid capital contributions in kind from shareholders Revaluation reserves Legal reserves Retained earnings Total equity 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 225.9 0.6 2,180.2 320 968.1 3,694.8 170 101.5 9 17 0.1 - 5.2 302.8 3,997.6 3,459.4 103.1 (75.4) 5.1 11.8 184.2 288.6 3,976.8 1.9 1.9 4 4 0.6 6.6 3.7 18.9 20.8 270.7 0.6 2,183.9 320 246.5 3,021.7 126 747 79.3 54.9 0.2 0.1 - 1,007.5 4,029.2 3,459.4 103.1 (75.4) 5.1 16.3 169.3 246.4 3,924.2 -16.5% 1.4% -0.2% 0% 292.6% 22.3% 34.9% -86.4% -88.6% -69% -56.1% - - -69.9% -0.8% 0% 0% 0% 0% -27.4% 8.8% 17.1% 1.3% 1.6 1.6 19.5% 19.5% 72.4 12.9 0.8 5.0 12.3 103.4 105 -94.5% -69% -23% 32% -69.8% -81.8% -80.2% 3,997.6 4,029.2 -0.8% ELECTRICA SA106 | A N N U A L R E P O R T 2 0 1 8 Non-current assets On 31 December 2018, as compared to 31 December 2017, fixed assets increased by RON 673 mn or 22.3%, to RON 3,694.8 mn from RON 3,021.7 mn. Equipment and tangible assets in progress mainly include the costs related to the implementation of the AMR system (Automatic Meter Reading) for electricity measuring and dispatch activity of Electrica group. On 31 December 2018, the net capitalized amount regarding the AMR system is RON 135.1 mn (2017: RON 155.2 mn), out of which a part is recognized as tangible asset in progress amounting to RON 21.9 mn as at 31 December 2018 (2017: RON 21.9 mn). During the year 2017, an evaluation of the entire AMR system was performed by an independent evaluator in order that the distribution subsidiaries of the group to take over the AMR system. As a result of the ANRE’s refusal to approve the transfer of AMR system from ELSA to distribution subsidiaries, with the subsequent recognition into RAB, the transfer was not implemented. in connection with the AMR system, the company had concluded service agreements with its distribution subsidiaries. The main services provided are obtaining data from the real-time measurement groups with accuracy and increased frequency by the distribution companies within the Electrica group, using remote reading systems at the electricity metering points, owned by the company, located at consumption points, respectively in Electrica group distribution subsidiaries’ grid. As at 31 December 2018, the company recognized a partial impairment loss for the AMR system equipment that are proposed to be written off, in the amount of RON 6.8 mn. At the end of the year 2018, the buildings and land include ELSA’s administrative headquarters and related land, as well as land for which it has obtained ownership titles and is intended to contribute to the share capital of its subsidiaries. At 31 December 2018, the building of the administrative headquarters has a net book value of RON 20.6 mn (2017: RON 20.9 mn) and the related land has a net book value of RON 13.1 mn (2017: RON 13.1 mn). land and the building were revalued by an The independent valuer on 31 December 2017, the results representing a net increase in the revaluation reserve of RON 18.6 mn and a net impact of RON 1.9 mn in the statement of profit or loss. During 2018, ELSA in increased subsidiaries, ELSA and EL SERV, by contributing in kind to their share capital with the following land: investments its in March 2018, the share capital of the subsidiary EL SERV was increased by the contribution in nature with four land with a total surface area of 31,668.92 sqm. The accounting value of the four land at the time of the transfer was of RON 16 mn, while the value of the contribution is of RON 15 mn, according to the evaluation reports drawn up by the appointed evaluator expert; in December 2018, the share capital of the subsidiary EL SERV was increased by the contribution in nature of two plots with a total surface of 678.9 sqm. The contribution value is RON 0.8 mn, according to the evaluation reports prepared by the evaluator expert, equal to the carrying amount of the two land at the time of the transfer. Trade receivables As of 31 December 2018, the receivables of the company decreased by RON 70.3 mn or 88.6%, to RON 9 mn, from RON 79.3 mn on 31 December 2017, as a result of the adjustments recorded for the impairment of receivables at the amount of expected credit losses (calculated based on historical loss rates). impairment adjustments mainly refer to trade receivables from Oltchim amounting to RON 614.1 mn (31 December 2017: RON 658.8 mn), from Transenergo Com S.A. in the amount of RON 35.7 mn (31 December 2017: RON 35.9 mn) and from fidelis Energy in the amount of RON 11.2 mn (31 December 2017: RON 11.2 mn). On 12 December 2018, the company received the amount of RON 44.7 mn from Oltchim, representing amounts distributed to creditors in the insolvency proceedings. The adjustment of RON 44.7 mn was reversed as a result of the receivable collection. Cash, restricted cash and short-term investments As of 31 December 2018, the category of cash and cash equivalents increased by RON 44 mn or 34.9% to RON 170 mn from RON 126 mn at 31 December 2017 31 December 2018 31 December 2017 Bank current accounts 2.4 3.5 Call deposits Total cash and cash equivalents in the separate statement of financial position and in the separate statement of cash flow 167.6 122.5 170 126 On 31 December 2018, ELSA has collateral deposits with BRD – groupe Societe generale as collateral for long- term loans received from BRD by SDTS, SDTN and SDMN. The value of collateral deposits as 31 December 2018 is RON 320 mn, without any change from the balance at 31 December 2017. These collateral deposits are presented in the separate statement of the financial position as long-term restricted cash. ELECTRICA SADeposits, treasury bills and government bonds (amounts in mn RON) Deposits with an initial maturity over three months have an average interest rate of 2.9% compared to 1.3% average yield in 2017. As at 31 December 2018 the company no longer holds treasury bills and government bonds. 31 December 2018 31 December 2017 101.5 - 284.2 462.7 101.5 746.9 Deposits with maturity of more than three months Treasury bills and government bonds denominated in RON with original maturity of more than three months Total deposits, treasury bills and government bonds Source: Electrica Loans granted to subsidiaries (RON mn) Subsidiaries SDTN (long term loan granted) SDMN (long term loan granted) SDTS (long term loan granted) EL SERV (long term loan granted) SEM (short term loan granted) Total loans granted to subsidiaries Source: Electrica 31 December 2018 31 December 2017 359.6 366.6 241.9 - 5.2 94.4 94 49.3 8.9 - 973.3 246.5 The closing balance of the loans with subsidiaries are related to intragroup loans granted in 2017 and 2018; of these, in 2018, the company has entered into loan agreements as lender with the group’s distribution subsidiaries, as follows: intragroup loan agreement concluded with SDMN in April 2018. The main provisions are: maximum loan amount of the loan: RON 230 mn; purpose of the loan: financing the investment program of 2018; interest rate: 2.79% per annum; maturity: 84 months; period allowed for disbursements: 12 months; full in repayment at maturity; reimbursement advance allowed, but not earlier than the 12 months of the period of use. As of 31 December 2018, loan balance is RON 216.6 mn; intragroup loan agreement concluded with SDTN in April 2018. The main provisions are: maximum loan amount of the loan: RON 160 mn; purpose of the loan: financing the investment program of 2018; interest rate: 2.79% per annum; maturity: 84 months; period allowed for disbursements: 12 months; full repayment at maturity; reimbursement in advance allowed, but not earlier than the 12 A N N U A L R E P O R T 2 0 1 8 | 107 months of the period of use. As of 31 December 2018, loan balance is RON 159.6 mn; intragroup loan agreement concluded with SDTS in April 2018. The main provisions are: loan: RON loan amount of the maximum 130 mn; purpose of the loan: financing the investment program of 2018; interest rate: 2.79% per annum; maturity: 84 months; period allowed for disbursements: 12 months; full repayment at maturity; reimbursement in advance allowed, but not earlier than the 12 months of the period of use. As of 31 December 2018, loan balance is RON 81.9 mn; in May 2018, the company concluded a loan agreement with SEM. The main provisions are: maximum amount of the loan: RON 5.5 mn, granted in two installments; purpose of the loan: first installment in the amount of RON 1.5 mn for financing the payment of the last installment due to the creditors enrolled at the creditors’ table, second installment in the amount of RON 4 mn for the financing of the working capital needs; interest rate: 4.5% per annum; withdrawal period: 1 to 12 months from the date of granting, 2 to 24 months from the date of granting; reimbursement: first installment – within maximum 12 months from the date of granting; second installment – at any time during the term of the loan, but not later than the final maturity of the entire installment, i.e. 2 years from the date of signing the loan agreement. At 31 December 2018, the balance of the granted loan is of RON 5.2 mn. in December 2018, following the drawing up of the transfer price file for 2018 and in accordance with the provisions of the OMfP no. 442/2016 regarding the amount of the transactions, the deadlines for drawing up, the content and the conditions for requesting the transfer price file and the procedure for adjusting/estimating the transfer prices, the interest rates for the loans granted to the distribution subsidiaries, respectively the interest collected during the year 2018, were adjusted according to the transfer pricing legislation mentioned above as follows: interest rate on loans granted in 2017 have been updated to 2.79%; interest rate on loans granted in 2018 have been updated to 4.70%. Provisions (RON mn) Balance at 1 January 2018 Provisions made Provisions used Provisions reversed Balance at 31 December 2018 Source: Electrica Litigations and other risks 12.3 3.7 (12.3) - 3.7 ELECTRICA SA108 | A N N U A L R E P O R T 2 0 1 8 Competition Council During 2018 there were no changes in the share capital. On 31 December 2017, the company recognized a provision of RON 10.8 mn for the fine from the Competition Council. As the fine received in October 2018 was executed by NAfA, ELSA has reversed the provision amounting to RON 10.8 mn and acknowledged the fine as expenses with damages, fines and penalties. Provisions Provisions in the amount of RON 3.7 mn recognized during the financial year ended at 31 December 2018 refer mainly to the benefits granted upon the termination of the executive managers’ contracts as non-compete clauses. Share Capital The subscribed share capital in nominal terms consists of 345,939,929 ordinary shares on 31 December 2018 (345,939,929 ordinary shares on 31 December 2017), with a nominal value of RON 10/share. Ordinary shares are entitled to dividends and the right to one vote per share in the general Meetings of Shareholders of the company, except for the 6,890,593 shares repurchased by the company in July 2014 with the scope to stabilize the share price. All shares confer equal rights on the net assets of the company, except for the 6,890,593 shares repurchased by the company in July 2014 in order to stabilize the share price. The Company recognizes the changes in share capital only after the approval in the general Meeting of Shareholders and the registration with the Trade Register. Dividends The Company can distribute dividends from the statutory profit according to the individual audited statutory financial statements prepared in accordance with Romanian accounting regulations. The dividends distributed by the company in the years 2018 and 2017 (from previous year’s statutory profits) were in RON mn): as 2017 251.4 (amounts presented 2018 245.4 follows Distributed dividends Source: Electrica On 27 April 2018, the general Meetings of Shareholders of the company approved the distribution of dividends of RON 245.4 mn. The amount of dividends per share distributed to the company’s shareholders was RON 0.7237 per share (2017: RON 0.7415 per share). in the calculation of dividends per share, own shares redeemed by the company (6,890,593 shares) are not considered as shares in circulation and are deducted from the total number of ordinary shares issued. Of the distributed dividends for the year 2017 in the amount of RON 245.4 mn, RON 244.7 mn was paid, the difference representing dividends unclaimed by shareholders from the Depositary. 6.5 individual statement of profit or loss financial information selected from the company’s separate statement of profit or loss (RON mn): Indicator Revenues Other income Electricity purchased Employee benefits Depreciation and amortization Reversal of impairment/(impairment) of trade and other receivables, net Reversal of impairment/(impairment) of property, plant and equipment impairment of equity interests in subsidiaries Change in provisions, net Other operating expenses Operating loss finance income finance expenses Net finance income Profit before tax income tax – benefit/(expense) Profit for the year Earnings per share Basic and diluted earnings per share (RON) Source: Electrica 31 December 2018 31 December 2017 Var. (%) 16.8 20.3 - (36.8) (21.8) 41.2 5.7 (19.5) 8.6 (45.9) (31.4) 329.4 - 329.4 298 0 298 0.88 481.9 5.5 (469.7) (25.9) (23.5) (15.1) (1.9) - (12.3) (48.1) (109.1) 364.8 (0.5) 364.3 255.2 3 258.2 -96.5% 272.5% - 42.5% -7.6% - - - - -4.7% -71.2% -9.7% - -9.6% 16.8% - 15.4% 0.76 15.4% ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 109 Revenues During the year 2018, ELSA recorded revenues of RON 16.8 mn compared to RON 481.9 mn in 2017. The variation is mainly determined by the adoption of the new reporting standard regarding revenues and the transfer of the BRP activity to EfSA starting 1 April 2018. Starting 1 January 2018, the company adopted the new standard ifRS 15 ” Revenue from Customer Contracts,” thus eliminating the impact of revenues from balancing market and related costs without affecting the margin resulted from the Balance Responsible Par ty (“BRP”) activity. if this standard had not been implemented, the “Revenue” and “Electricity purchased” positions in the separate statement of profit or loss for 2018 would have been higher by RON 40 mn, without impact on the margin. in 2018, the main revenues earned by the company are represented by revenues from service contracts related to the AMR system concluded with its distribution subsidiaries that include data telemetry services, communications and monitoring of the quality parameters of electricity. The breakdown structure of the revenues is as follows (amounts in RON mn): Revenues from services contracts related to the Automatic Meter Reading System income from the Balance Responsible Party activity (fixed and variable rate) Revenue from supply of electricity on the Balancing Market Total Source: Electrica 2018 14.7 2.1 - % 87.5% 12.5% - 2017 1.3 10.6 470 16.8 100% 481.9 % 0.3% 2.2% 97.5% 100% Other income During the financial year ended 31 December 2018, ”Other income” includes mainly the income of RON 19.8 mn obtained from the transfer of the BRP activity to EfSA, representing the transfer of the BRP department employees, the existing customer agreements, as well as the related software, the market value being determined by an external evaluator. During the financial year ended 31 December 2017, „Other operating income” includes mainly rental income and penalties for deferred payment from customers. Electricity purchased During the financial year ended 31 December 2017, the purchased electricity includes the cost of electricity purchased for balancing market settlements in the amount of RON 469.7 mn. During the year 2018, ifRS 15 standard has been applied, which led to the elimination of balancing market revenues impact, as well as related costs, without affecting the margin of Balance Responsible Party (“BRP”) activity. Depreciation and amortization of tangible and intangible assets The depreciation and amortization expense is of RON 21.8 mn in 2018, compared to RON 23.5 mn in 2017, decrease as a result of the termination of certain AMR system equipment depreciation and the lower value of investments made in 2018. Employee benefits in 2018, employee benefits increased by RON 10.9 mn to RON 36.8 mn from RON 25.9 mn in 2017. The increase comes from the compensatory payments provided through the voluntary leave program, as well as from non- recurring events, such as the remuneration of executive management in the event of termination of mandate contracts. Impairment of trade receivables and other receivables Starting 1 April 2018, ELSA transferred the BRP activity to EfSA, therefore as at 31 December 2018 there is no trade receivable recorded from the supply of electricity on the balancing market. impairment adjustments for other receivables recognized in 2018 amount to RON 3.4 mn in respect of interest receivable from EL SERV subsidiary (RON 1.8 mn) for loans repaid after maturity and from SDTN (RON 1.6 mn) related to dividends paid after maturity. On 12 December 2018, ELSA received the amount of RON 44.7 mn from Oltchim SA, representing amounts distributed to creditors as part of in the insolvency proceedings, therefore the adjustment was reversed as a result of the collection of the claim. Due to the uncertainties regarding the recoverability of the amounts owed by this customer, ELSA has recognized in prior years depreciation adjustments for the total amount of receivables. The procedure is ongoing, the company being enrolled at the creditors’ table. Starting 1 January 2018, ELSA applied for the first time the new standard ifRS 9 ”financial instruments”, which results in early recognition of impairment adjustments of receivables up to the amount of forecasted credit losses calculated based on historical loss rates. ELSA adopted ifRS 9 as of 1 January 2018 using the modified retrospective method with cumulative adjustments in the initial application recognized on 1 January 2018 in equity, without altering the figures for prior periods. for the company’s trade receivables, there are no significant differences between the initial measurement method according to iAS 39 and the new valuation categories under ifRS 9. ELECTRICA SA110 | A N N U A L R E P O R T 2 0 1 8 Other operating expenses On 31 December 2018, ELSA recorded expenses of RON 45.9 mn from other operating activities compared to RON 48.1 mn at 31 December 2017. in December 2018, ELSA derecognized the ongoing investments of RON 12.5 mn related to the investment projects for the construction of two wind farms in frumusita and Chirnogeni areas, the costs of the two projects being recognized as expense with the ceded assets, while adjustment for impairment of tangible fixed assets with the same value was reversed. ELSA was penalized on 4 January 2018 by the Competition Council by a fine of RON 10.8 mn and in October 2018 the fine received was executed by NAfA; the company reversed the provision of RON 10.8 mn and recognized the amount as “Expenses with fines and penalties”. in 2017, the court ordered ELSA to pay the amount of RON 25 mn and late payment penalties amounting to RON 0.8 mn for invoices related to the period 1 April 2007 - 31 March 2008 owed to Termoelectrica S.A. Operating loss As a result of the above mentioned factors, ELSA recorded a loss resulting from the operating activity in amount of RON 31.4 mn, lower as compared with RON 109.2 mn in 2017. Finance income ELSA’s main financial income is provided by the dividends distributed by its subsidiaries. During the financial year ended 31 December 2018, ELSA registered dividend income amounting to RON 301.5 mn representing dividend income from its subsidiaries (2017: RON 347.3 mn), structured as follows SDMN SDTS SDTN EfSA TOTAL Source: Electrica 2018 2017 38.1 96.7 80.1 86.6 301.5 68.6 77 78.4 123.4 347.3 Another category of financial its subsidiaries is represented by interest income, which increased to RON 23.2 mn in 2018 compared to RON 0.2 mn in 2017, according to the detail: income related to SDMN SDTN SDTS EL SERV SEM(insolvency proceedings) TOTAL Source: Electrica 2018 7.7 9.2 4.3 1.8 0.1 23.2 2017 0.1 0.1 0 - - 0.2 The average interest rate for treasury bills, government bonds and deposits with an original maturity of more than three months increased from 0.78% in 2017 to 1.91% in 2018. Profit before tax in 2018, profit before tax increased by RON 42.8 mn or 16.8% to RON 298 mn from RON 255.2 mn in 2017. Income tax expense in 2017, ELSA recorded a deferred tax asset of RON 3 mn, that has been utilized in 2018. Net Profit for the year As a result of the factors presented above, the net profit realized in 2018 recorded an increase of 15.4% compared to 2017, to RON 298 mn from RON 258.2 mn. . ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 111 6.6 individual cash flow statement financial information selected from the cash flow statement of the company (RON mn): Indicator 31 December 2018 31 December 2017 Var. (%) Cash flows from operating activities Profit for the year Adjustments for: Depreciation Amortization (Reversal of impairment)/impairment of property, plant and equipment impairment of equity interests in subsidiaries Loss from the disposal of tangible assets (Reversal of impairment)/impairment of trade and other receivables, net Net finance income Changes in provisions, net income tax - (benefit) Changes in: Trade receivables Other receivables Trade payables Other payables Employee benefits Cash generated from/(used in) operating activities Cash flows from investing activities Payments for purchases of property, plant and equipment Payments for purchase of intangible assets Payments for purchase of additional shares in subsidiaries Proceeds from the sale of intangible assets Restricted cash Payments for purchase of treasury bills and government bonds Proceeds from maturity of treasury bills and government bonds Payments for deposits with maturity of 3 months or longer Proceeds from deposits with maturity of 3 months or longer Proceeds relating to loans granted to subsidiaries interest received Dividends received Loans granted to related parties Net cash from investing activities Cash flows from financing activities Dividends paid Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December Source: Electrica 298 21.4 0.3 (5.7) 19.5 12.6 (41.2) (329.4) (8.6) (0) (33) 108 10.2 (64.9) (9.8) 1.8 12.4 (0.2) (0.3) - 0.9 - (95.3) 550.1 (619) 802.2 9.5 18.2 346.5 (736.2) 276.3 258.2 15.4% 22 1.5 1.9 - - 15.1 (364.3) 12.3 (3) (56.3) (53.3) (3.9) 27.8 0.2 2 (83.6) (1) (0.2) (752) - (185.5) (543.1) 1,838.6 (995.6) 820.3 - 17 302.3 (237.7) 263.1 -2.8% -78.7% -398.8% - - - -9.6% - -99.9% -41.5% - - - - -9.9% -114.8% -74.9% 59.1% -100% - -100% -82.4% -70.1% -37.8% -2.2% - 6.9% 14.6% 209.8% 5% (244.7) (244.7) (251.2) (251.2) -2.64% -2.64% 44 126 170 (71.7) 197.6 126 - -36.3% 34.9% ELECTRICA SA112 | A N N U A L R E P O R T 2 0 1 8 Cash flow In 2018, the net cash generated from operating activity amounted to RON 12.9 mn. The net profit for the analyzed period was RON 298 mn, the main adjustments being: (i) the amortization and depreciation of tangible and intangible assets in the amount of RON 21.7 mn; impairment adjustments for tangible assets and the impact of tangible assets disposal in net amount of RON 6.9 mn; impairment of trade receivables and other receivables of RON 41.2 mn; adjustment of the investments in subsidiaries amounting to RON 19.5 mn; deduction of a net financial result of RON 329.4 mn, the adjustment of provisions in value of RON 8.6 mn; (ii) the deduction of a variation of trade receivables and other receivables of RON 118.2 mn, of trade and other payable of RON 74.7 mn and a change in employee benefits of RON 1.8 mn. The cash flow statement for the investment activity during the year 2018 increased by 5% compared to 2017, reaching RON 276.3 mn. The main adjustments are those related to the net receipts on maturity of treasury certificates and government bonds amounting to RON 454.8 mn, to net receipts from deposits with an initial maturity of more than 3 months worth RON 183.2 mn, the dividends received from its subsidiaries of RON 346.5 mn and the loans granted to them, amounting to RON 736.2 mn. Dividends paid during the year 2018 amounted to RON 244.7 mn. During the year 2017, the net cash used in operating activity amounted to RON 83.6 mn. 6.7 risk management To implement the risk management system, as well as an internal control/management system at group level, the following were taken into consideration, as appropriate: international Standards on Risk Management Systems (iSO 31000 family); Best practices and methodologies applied by listed and non-listed companies; internal policies and procedures adopted for this purpose. in 2018, ELSA continued the process of redesigning and improving the risk management system according to the international standard iSO 31000: 2010 ”Risk Management - Principles and guidelines” provisions, launched during the 4th quarter of 2017, in order to adapt to the new market conditions and to integrate it across the group. in 2018, the operational risk management Thus, framework model was defined at the Electrica group level, the process was redesigned and the risk management policy and procedure were redefined. At the each level of company within Electrica group, The net profit for the analyzed period was RON 258.2 mn, the main adjustments being: (i) the amortization and depreciation of tangible and intangible assets in the amount of RON 23.5 mn; impairment adjustments for tangible assets and the impact of tangible assets disposal in net amount of RON 1.9 mn; adjustments for impairment of trade receivables and other receivables, RON 15.1 mn; the deduction of a net financial result of RON 364.3 mn, the adjustment of provisions in value of RON 12.3 mn; (ii) the deduction of a variation of trade receivables and other receivables amounting to RON 57.2 mn, of trade and other payables of RON 28 mn and a change in employee benefits of RON 2 mn. The cash flow of the investment activity during the year 2017 shows a value of RON 263.1 mn. The main adjustments are those related to payments for purchase of additional shares in its subsidiaries, amounting to RON 752 mn, restricted cash of RON 185.5 mn, net receipts on maturity of treasury certificates and government bonds amounting to RON 1,295.5 mn, the net variation between the payments and the receipts value related to deposits with an initial maturity of more than 3 months worth RON 175.3 mn, the dividends received from its subsidiaries in the amount of RON 302.3 mn and the loans granted to them, amounting to RON 237.7 mn. Dividends paid during 2017 amounted to RON 251.2 mn. workshops were organized, during which the main risks associated with their specific operational areas were identified, analyzed and estimated and appropriate control measures were set up to avoid, reduce or control the identified risks. Among the identified risk categories at Electrica group companies the level, we can mention: strategic risks operational risks market risks compliance risks financial risks social, environmental, health and safety risks. identifying, analyzing and estimating During the first half of the year, a methodology for social, environmental and OHS risks was defined and applied, starting with the assessment of all the organization’s vulnerabilities in relation to the environment, the communities in which it operates, its own staff and business ethics. ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 113 The Board of Directors of ELSA set the Risk Appetite for Electrica group in September 2018 and the Policy in the field in December 2018. By the end of the year, the executive management adopted the Risk Management Procedure to be implemented during 2019 by all the group companies, in line with the development strategy of the group cash equivalents, bank deposits and treasury bills and government bonds. Cash, bank deposits, treasury bills and government bonds are placed in financial institutions, which are considered to have low risk of default. The carrying amount of financial assets represents the maximum credit exposure. FINANCIAL RISK MANAGEMENT Trade receivables The group is exposed to the following risks resulting from the use of financial instruments: credit risk, liquidity risk and market risk. Î Credit risk Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the group’s receivables from customers, cash and in The group’s credit risk in respect of receivables was concentrated state-controlled the past around companies and in the recent years refers to clients that are facing financial difficulties in their industries due to specific changes in circumstances in their industry sector. The group establishes an allowance for impairment that represents the amount of expected credit losses, calculated based on the expected loss rates. The following table provides information on the credit risk exposure and expected loss rates on trade receivables at 31 December 2018: Gross value 31 December 2018 Bad debt allowance Net trade receivables Credit impaired Weighted average rate of losses 1% 3% 9% 29% 100% 641.9 Neither past due nor impaired 141.5 Past due 1-30 days 28.8 Past due 31-60 days 6.2 Past due 61-90 days 1,013.7 Past due more than 90 days Total 1,832 Source: Consolidated financial statements of Electrica Group as of 31 December 2018 (4.3) (4.3) (2.5) (1.8) (1,012.8) (1,025.7) 637.5 137.2 26.3 4.4 0.9 806.3 No No No No yes Comparative information in accordance with IAS 39 An analysis of the trade receivables from the credit risk perspective, and the maturity of the trade receivables as of 31 December 2017, is as follows: Gross value Bad debt allowance 31 December 2017 Neither past due nor impaired Past due 1-90 days Past due 90-180 days Past due 180-360 days Past due 1-2 years Past due 2-3 years Past due more than 3 years Total Source: Consolidated financial statements of Electrica Group as of 31 December 2018 530.4 274.5 25.3 60.5 34.8 92.6 845.8 1,863.9 Î 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. (7.5) (5.9) (22.3) (56.4) (28.9) (92.6) (845.8) (1,059.5) Net trade receivables 522.9 268.6 3.0 4.1 5.9 - - 804.4 The group aims to maintain the level of its cash and cash equivalents at an amount in excess of expected cash outflows on financial liabilities. The group also monitors the level of expected cash inflows on trade receivables together with expected cash outflows on trade and other payables. in addition, the group maintains overdraft facilities. Also, starting with 2016, some subsidiaries have signed improve their financial position. loan agreements to long-term ELECTRICA SA114 | A N N U A L R E P O R T 2 0 1 8 Exposure to liquidity risk The following are the remaining contractual maturities of financial liabilities at the reporting date. The amounts are presented in RON mn, gross and undiscounted, and include estimated interest accrued. (RON mn) Financial liabilities 31 December 2018 Bank overdrafts financing for network construction related to concession agreements Long term bank borrowings Trade payables Total (RON mn) Financial liabilities 31 December 2017 Bank overdrafts financing for network construction related to concession agreements Long term bank borrowings Trade payables Total Carrying amount 119.0 12.8 Total 119.0 12.9 320.0 742.2 1,194.0 330.2 742.2 1,204.3 Carrying amount 247.9 43.8 Total 247.9 50.6 Contractual cash flows less than 1 year 1-2 years 2-5 years more than 5 years 119.0 11.9 - 742.2 873.1 - 1.0 330.2 - 331.2 - - - - - - - - - - Contractual cash flows less than 1 year 1-2 years 2-5 years more than 5 years 247.9 33.9 2.6 689.4 973.8 - 15.3 2.6 - 17.8 - 1.4 327.7 - 329.1 - - - - - 332.8 689.4 1,320.7 Source: Consolidated financial statements of Electrica Group as of 31 December 2018 320.0 689.4 1,301.1 Î Market risk Market risk is the risk that changes in market prices – such as foreign exchange rates, interest rates– will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return. Currency risk The group is exposed to currency risk to the extent that there is a mismatch between the currencies in which sales, purchases and borrowings are denominated and the functional currency of the Company. The functional currency of the Company is the Romanian Leu (RON). The currency in which these transactions are primarily denominated is RON. Certain liabilities are denominated in foreign currency (EUR). The Company also has deposits and bank accounts denominated in foreign currency (EUR and USD). The group’s policy is to use the local currency in its transactions as far as practically possible. The Company does not use derivative or hedging instruments. Exposure to currency risk The summary quantitative data about the group’s exposure to currency risk is as follows: (RON mn) 31 December 2018 EUR 31 December 2018 USD 31 December 2017 EUR 31 December 2017 USD 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: Consolidated financial statements of Electrica Group as of 31 December 2018 0.8 - (12.8) (12.0) 0.1 - - 0.1 0.1 1.2 (43.8) (42.4) - 0.1 - 0.1 ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 115 The following significant exchange rates have been applied during the year: EUR/RON USD/RON Average rate Year-end spot rate 2018 4.6535 3.9416 2017 4.5681 4.0525 2018 4.6639 4.0736 2017 4.6597 3.8915 Source: Consolidated financial statements of Electrica Group as of 31 December 2018 Sensitivity analysis A reasonably possible aprreciation (depreciation) of the EUR against RON at 31 December would have affected the measurement of financial instruments denominated in a foreign currency and profit before tax by the amounts shown below. The analysis assumes that all other variables, in particular interest rates, remain constant and ignores any impact of forecast sales and purchases. Amounts in thousands RON. A reasonably possible appreciation/depreciation of the USD against RON at 31 December would have affected the measurement of financial instruments denominated in a foreign currency and profit before tax, and affected equity, respectively, by the amounts shown below. The analysis assumes that all other variables, in particular interest rates, remain constant and ignore any impact of forecasted sales and purchases. Interest rate risk (RON mn) Profit before tax Appreciation Depreciation 31 December 2018 EUR (change by 5%) USD (change by 5%) 31 December 2017 EUR (change by 5%) USD (change by 5%) (0.6) 0.005 (2.1) 0.003 0.6 (0.005) 2.1 (0.003) Source: Consolidated financial statements of Electrica Group as of 31 December 2018 Until 2016 the group’s policy was to mainly use supplier credit for financing its capital investments. Starting 2016 the group started to use also medium term bank loans. Exposure to interest rate risk The interest rate profile of the group’s interest-bearing financial instruments is as follows: (RON mn) Fixed-rate instruments Financial assets Call deposits Deposits, treasury bills and government bonds Financial liabilities financing for network construction related to concession agreements finance lease Total Variable-rate instruments Financial liabilities Overdrafts Total Source: Consolidated financial statements of Electrica Group as of 31 December 2018 31 December 2018 31 December 2017 311.0 136.5 (12.8) (320.0) 114.7 231.8 747.0 (43.8) (320.0) 614.9 (119.0) (119.0) (247.9) (247.9) ELECTRICA SA 116 | A N N U A L R E P O R T 2 0 1 8 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. (RON mn) 31 December 2018 Variable-rate instruments 31 December 2017 Variable-rate instruments Profit before tax 50 bps increase 50 bps decrease (0.6) (1.2) 0.6 1.2 Source: Consolidated financial statements of Electrica Group as of 31 December 2018 6.8 description of the main features of internal control and risk management systems in relation to the financial reporting process the employees, The internal control represents all measures, procedures and policies adopted by ELSA management and their the implementation by organizational structure, applied procedures, methods, techniques and the purpose of implementation of company strategy and objectives. The internal control includes all control forms performed at company level such as preventive financial control, internal and managerial control, compliance. instruments, regarding for The internal control and the risk management systems have the following main goals: protecting organizational resources against losses due to waste, negligence, abuses, fraud etc.; compliance with the applicable legislation and the internal regulations; the reliability of financial reporting (accuracy, completeness and correctness of the information ); ensuring an environment based on identifying, understanding and controlling risks, environment which will the organizational goals; contribute achieving to efficient and effective business operations and use of resources; applying the BoD and executive management resolutions and follow-up. The achievement of these goals is performed as follows: recruitment of personnel with an adequate level of competency, in accordance with the company’s needs, accompanied by training and development of personnel skills and knowledge, supplemented with any external consultants, whenever necessary; clear definition and split of responsibilities of each person involved in the organizational process; segregation of duties regarding the carrying out of operations among the personnel, so that the approval, control and registration duties are adequately assigned to different persons (as per the Company’s organizational chart); elaboration and implementation of regulations, policies, procedures, forms etc.; the existence of a guide for Accounting Policies, elaborated in accordance with the requirements of the legislation in force, approved by the Board of Directors; the existence of a schedule and a well-defined process regarding the elaboration of accounting and financial information in accordance with the reporting requirements (financial reports, including financial statements, annual and interim reports, budget etc) and their appropriate verification and approval by the Board of Directors, for the purpose of endorsing and release for publication. The framework of ELSA’s internal control system consists of the following elements: Control environment – The existence of a control environment represents the basis of an efficient internal control system. it consists of the commitment towards integrity and ethical values (for this purpose, a series of policies on zero tolerance towards corruption, anti-fraud and anti-money-laundering, avoidance and fighting against conflicts of interest, policy for gifts and protocol expenses as well as forbidding facilitating payments, transparency and the involvement of stakeholders), as well as organizational measures (policies on the delegation of authority and responsibilities); Evaluation of risks – generally, all processes are within the scope of the internal control system. An identification process is carried out regarding major or critical risks, related to particular activities for stimulating internal control methods; ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 117 Control activities meant to reduce the risks – Control activities have different forms (managerial control, general control, preventive financial control, etc.) and they are implemented and carried out with the purpose of reducing significant operational and compliance risks; Information and communication – information helps all other components of the internal control system by means of communication to employees their responsibilities regarding the control and the provision of information in an adequate and timely manner, so that all employees may carry out their duties. is performed by means of disseminating information to all levels, while the external one implies the dissemination of information to external parties, in accordance with the requirements and expectations; internal communication Monitoring activities – the Audit and Risk Committee and the internal Audit Department assess the efficiency and the effective implementation of the internal control system. The management monitors the functioning of internal controls by means of periodical analyzes; for instance, the execution of the budget, the monitoring of security incidents, internal and external audit reports and internal control reports. Deficiencies in the implementation or functioning of internal controls are noted in the internal control and internal audit reports and are presented to the management, with the purpose of issuing the corrective actions. The internal audit missions evaluate the internal control system, the risks and the implemented control strategies, and present initiatives, proposals, solutions and recommendations for mitigating the risks of fraud and for improving control strategies. The internal audit includes, but is not limited to, the examination and evaluation of the adequate nature and the efficiency of the organization’s corporate governance, of risk management, as well as of internal controls and of quality performance in carrying out the assigned responsibilities, in order to achieve the assumed strategy and objectives of the organization. The guide for Accounting Policies is consistently applied in all companies within the group, for the purpose of ensuring an accounting treatment consistently applied for the same business situations, for the preparation of annual and interim financial statements of the group on a standalone and consolidated basis. This guide is subject to review based on the changes made to the international financial Reporting Standards as adopted by EU. The group has appropriate systems in place for the collection, storage, protection and processing of data in order to generate financial and managerial reports for both internal and external use, as well as proper systems and procedures for meeting the statutory, stock exchange or other legal requirements concerning financial reports in a timely manner and subject to control review.. ELECTRICA SA118 | A N N U A L R E P O R T 2 0 1 8 APPENDiX ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 119 APPENDiX 1 litigations Electrica group litigations in 2018 – status as of 27 february 2019: 1. Disputes with ANRE Crt. no. Parties/Case file number 1 Plaintiff: ELSA Defendant: ANRE 192/2/2015 2 Plaintiff: ELSA; Enel Distributie Muntenia S.A. Defendant: ANRE 7968/2/2015 3 Plaintiff: ELSA; Defendant: ANRE; 361/2/2015 4 Plaintiff: ELSA; Defendant: ANRE; 360/2/2015 5 Plaintiff: ELSA; Defendant: ANRE; 134/2/2016 Subject matter Court Case status Cancellation of the Order of the president of ANRE no. 146/2014 regarding the establishment of the regulated rate of return considered to the approval of the tariffs for the electricity distribution service provided by concessionary DSOs starting with 1 January 2015 and the abrogation of Art. 122 of the Tariff Pricing Methodology for Electricity Distribution Service, approved by the ANRE Order no. 72/2013. Cancellation of ANRE President’s Order no. 165/2015 regarding the modification of the Tariff Setting Methodology for the Electricity Distribution Service, approved by the ANRE Order no. 72/2013. Cancellation of ANRE President’s Order no. 155/2014 regarding the approval of the specific tariffs for the electricity distribution service and the price for the reactive energy for SDTN. Cancellation of ANRE President’s Order no. 156/2014 regarding the approval of the specific tariffs for the electricity distribution service and the price for the reactive energy for SDTS. Action to suspend the administrative act – Order no. 165/2015 of ANRE regarding the modification of the Tariff Setting Methodology for the Electricity Distribution Service, approved by the ANRE Order no. 72/2013. High Court of Cassation and Justice Appeal – in course of settlement. High Court of Cassation and Justice Appeal – under pre-filtering proceedings. High Court of Cassation and Justice Suspended until the settlement of the case file no. 192/2/2015. High Court of Cassation and Justice Suspended until the settlement of the case file no. 192/2/2015. High Court of Cassation and Justice The Court has definitely rejected Electrica’s appeal. 6 Plaintiff: ELSA; Defendant: ANRE; Action for partial annulment (regarding the special tariffs) of the administrative act – ANRE Order 171/2015. High Court of Cassation and Justice 340/2/2016 7 Plaintiff: ELSA; 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 – in course of settlement. The suspension of the case was claimed until the settlement of the case file 192/2/2015. Appeal – in course of settlement. The suspension of the case was claimed until the settlement of the case file 192/2/2015. APPENDiX ELECTRICA SA 120 | A N N U A L R E P O R T 2 0 1 8 Crt. no. Parties/Case file number Subject matter Court Case status 8 9 Plaintiff: ELSA; SDTN; SDTS; SDMN; Defendant: ANRE; Action for partial annulment of ANRE Order no. 169/2018 regarding the approval of the Tariff Setting Methodology for the Electricity Distribution Service. 7614/2/2018 Plaintiff: ELSA; SDTN; SDTS; SDMN; Defendant: ANRE Action for the annulment of the ANRE Order no. 168/2018 regarding the regulatory rate of return and obliging ANRE to issue a new order. 7591/2/2018 10 Plaintiff: ELSA; SDTN; SDTS; SDMN; Defendant: ANRE 8436/2/2018 Action for partial annulment of ANRE Order no. 169/2018 regarding the approval of the establishment Methodology for the energy distribution tariffs. Bucharest Court of Appeal in course of settlement. Bucharest Court of Appeal in the regularization procedure. Bucharest Court of Appeal in the regularization procedure. 11 Plaintiff: ELSA; SDTN; SDTS; SDMN; Defendant: ANRE Action for the annulment of the ANRE Order no. 168/2018 regarding the regulated rate of return and obliging ANRE to issue a new order. Bucharest Court of Appeal in course of settlement. 12 13 14 8430/2/2018 Plaintiff: ELSA, SDMN Defendant: ANRE 434/2/2019 Plaintiff: ELSA, SDTS Defendant: ANRE 435/2/2019 Plaintiff: ELSA, SDTN Defendant: ANRE 436/2/2019 15 Plaintiff: SDMN Defendant: ANRE 184/2/2015 Action for annulment of ANRE Order 197/2018 regarding the approval of the specific tariffs for the electricity distribution service and the price for the reactive electric energy for SDMN. Action for annulment of ANRE Order 199/2018 regarding the approval of the specific tariffs for the electricity distribution service and the price for the reactive electric energy for SDTS. Action for annulment of ANRE Order 198/2018 regarding the approval of the specific tariffs for the electricity distribution service and the price for the reactive electric energy for SDTN. Contentious administrative litigation – Cancellation of ANRE President’s Order No. 146/2014 regarding the setting of the regulated rate of return applied at the approval of the tariffs for the electricity distribution service provided by the DSOs from 1 January 2015 and the abrogation of Art. 122 of the Tariff Setting Methodology for the Electricity Distribution Service, approved by the ANRE Order no. 72/2013. Bucharest Court of Appeal in the regularization procedure. Bucharest Court of Appeal in the regularization procedure. Bucharest Court of Appeal in the regularization procedure. High Court of Cassation and Justice Suspended case file until the final settlement of the case 7341/2/2014. The Plaintiff quit the judgement of the appeal against the suspension decision. The Court rejects the appeal filed by fondul Proprietatea SA against the Decision of the Bucharest Court of Appeal of 25 June 2015 – the Section Viii Administrative and fiscal Litigation, as unfounded. The case file no. 7341/2/2014 is in course of settlement. ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 121 Subject matter Court Case status Cancellation of Order no. 165/2014, of the President of ANRE regarding the modification of the Tariff Pricing Methodology for Electricity Distribution Service, approved by the ANRE Order no. 72/2013. High Court of Cassation and Justice The case file no 1574/2/2016 has been linked to this case file. The court of first instance rejected the application as unreasonable. SDMN filed an appeal, in course of settlement. Through the Decision no. 1086/1 April 2016, the Bucharest Court of Appeals rejected the claim on suspension of as ungrounded. An appeal was stated, which was definitively rejected as unfounded. By Decision no.689/1 March 2017, the Court of Appeal dismissed the action as unreasonable. SDMN has filed an appeal, which is in course of settlement. Through the Decision no. 1272/2016 of the Bucharest Court of Appeals, the claim for suspension of was rejected as unfounded. An appeal was stated, definitively rejected as unfounded. High Court of Cassation and Justice High Court of Cassation and Justice High Court of Cassation and Justice Bucharest Court of Appeal The file is in the regularization procedure. High Court of Cassation and Justice The Court of first instance upheld the plea of inadmissibility of all three heads of claim, dismissing them as inadmissible. An appeal was filed – in course of settlement. High Court of Cassation and Justice Appeal – in course of settlement. High Court of Cassation and Justice The court has definitively rejected the action of SDTN. Suspension of the enforcement of the ANRE President Order no. 165/2015 regarding the modification of the Tariff Pricing Methodology for Electricity Distribution Service, by the ANRE Order no. 72/2013. Cancellation of ANRE President’s Order No. 172/2015 regarding the approval of the specific tariffs for the electricity distribution service and the price for the reactive energy, for SDMN. Suspension of the enforcement of the ANRE President Order no. 172/2015 regarding the approval of the specific tariffs for the electricity distribution service and the price for the reactive energy, for SDMN. Action in administrative litigation to oblige ANRE to issue an address of response to the request of DSOs from Electrica group to issue a decision stating whether or not they have exclusive or special rights in accordance with the provisions of Law 99/2016. Annulment of administrative act for the refusal to issue a favourable opinion regarding the transfer of the AMR system and requiring the issue of favourable administrative documents for the cession of the AMR system from ELSA to DSOs, also obliging ANRE to make adjustments of the distribution tariffs of DSOs. Cancellation of ANRE President’s Order no. 146/2014 regarding the establishment of the regulated rate of return applied to the approval of the tariffs for the electricity distribution service provided by the DSOs from 1 January 2015 and the abrogation of Art. 122 of the Tariff Pricing Methodology for Electricity Distribution Service, approved by the ANRE Order no. 72/2013. Cancellation of the ANRE President’s Order No. 155/2014 regarding the approval of the specific tariffs for the electricity distribution service and the price for the reactive energy for SDTN. Crt. no. Parties/Case file number 16 Plaintiff: SDMN Defendant: ANRE 164/2/2016 17 Plaintiff: SDMN Defendant: ANRE 165/2/2016 18 Plaintiff: SDMN Defendant: ANRE 41/42/2016 19 Plaintiff: SDMN Defendant: ANRE 42/42/2016 20 Plaintiff: SDMN; SDTS Defendant: ANRE 8901/2/2018 21 Plaintiff: ELSA; SDMN; SDTN; SDTS; Defendant: ANRE 8019/2/2017 22 Plaintiff: SDTN Defendant: ANRE 213/2/2015 23 Plaintiff: SDTN Defendant: ANRE 353/2/2015 ELECTRICA SA122 | A N N U A L R E P O R T 2 0 1 8 Crt. no. Parties/Case file number 24 Plaintiff: SDTN Defendant: ANRE 18/33/2016 25 Plaintiff: SDTN Defendant: ANRE 17/33/2016 26 Plaintiff: SDTS Defendant: ANRE 87/64/2016 27 Plaintiff: SDTS Defendant: ANRE 18/64/2016 28 Plaintiff: SDTS Defendant: ANRE 88/64/2016 29 Plaintiff: SDTS Defendant: ANRE 41/64/2016 30 Plaintiff: SDTS Defendant: ANRE 371/2/2015 31 Plaintiff: SDTS Defendant: ANRE 208/2/2015 Subject matter Court Case status High Court of Cassation and Justice Appeal – in course of settlement. High Court of Cassation and Justice The court has definitively rejected the action of SDTN. Bucharest Court of Appeals Suspended until the settlement of 18/64/2016. High Court of Cassation and Justice Appeal – in course of settlement. High Court of Cassation and Justice Appeal – in course of settlement. High Court of Cassation and Justice Appeal – in course of settlement. High Court of Cassation and Justice Suspended until the final settlement of the case no. 208/2/2015. High Court of Cassation and Justice Suspended. Waiver of the trial at the appeal regarding the suspension decision. Action for annulment of the administrative act – Order no. 165/2015 of ANRE regarding the modification of the Tariff Pricing Methodology for Electricity Distribution Service, approved by the ANRE Order no. 72/2013. Action for annulment of the administrative act – Order no. 165/2015 of ANRE regarding the modification of the Tariff Pricing Methodology for Electricity Distribution Service, approved by the ANRE Order no. 72/2013. Contentious administrative litigation (request for suspension of administrative act) – ANRE President’s Order no. 165/2015 regarding the modification of the Tariff Pricing Methodology for Electricity Distribution Service, approved by the ANRE Order no. 72/2013. Cancellation of Order no. 165/2015 of the ANRE President regarding the modification of the Tariff Pricing Methodology for Electricity Distribution Service, approved by the ANRE Order no. 72/2013. Cancellation of the ANRE President’s Order no. 171/2015 regarding the approval of the specific tariffs for the electricity distribution service and the price for the reactive energy, for SDTS. Cancellation of the ANRE Order no. 171/2015. Cancellation of the ANRE President’s Order no. 156/2014 regarding the approval of the specific tariffs for the electricity distribution service and the price for the reactive energy, for SDTS. Cancellation of the ANRE President’s Order no. 146/2014 regarding the establishment of the regulated rate of return applied to the approval of the tariffs for the electricity distribution service provided by DSOs from 1 January 2015 and the abrogation of Art. 122 of the Tariff Pricing Methodology for Electricity Distribution Service, approved by the ANRE Order no. 72/2013. ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 123 Crt. no. Parties/Case file number 32 Plaintiff: SDTS Defendant: ANRE 73/197/2019 33 Plaintiff: EfSA Defendant: ANRE 26210/3/2013 34 Plaintiff: EfSA Defendant: ANRE 8201/2/2015 Subject matter Court Case status Complaint against the contravention report no. 97341/18 December 2018. Brasov Court in regulatory procedures. Judicial action having as object the recognition of the right provided in art. 79 para. (6) of the Law no. 123/2012, the obligation of the defendant to modify the regulated tariff by ANRE Order no. 40/2013, order the defendant to pay the amount of the prejudice that cannot be covered by the change of the mentioned regulated tariff. Judicial action having as object to oblige the defendant to resolve a dispute related to the change of supplier procedure. High Court of Cassation and Justice Appeal – in course of settlemet. High Court of Cassation and Justice Bucharest Court of Appeals has admitted the judicial action stated by EfSA, obliging ANRE to solve the dispute. ANRE stated an appeal, admitted by the Court. The High Court dismisses EfSA’s case as remained without object. 2. Fiscal matter disputes Crt. no. Parties/Case file number 1 Plaintiff: ELSA Defendant: NAfA 7614/2/2013 Subject matter Court Case status High Court of Cassation and Justice Appeal of the Decision no.147/22 May 2013, amounting to RON 2,387,992 (action for annulment of the Decision no. 147/22 May 2013, issued by NAfA within the proceedings for solving the administrative appeals against the debt securities by which they were established accessories for delayed payment of the current budgetary duties, by the Decision no. 214/2012 in the amount of RON 2,387,992). On 6 March 2015, the court: - partially upheld the claim and partially cancelled the Decisions no. 147/22 May 2013 and no. 214/30 October 2012, issued by the defendant for the amount of RON 2,383,070, representing ancillary tax obligations; - maintained the claimed fiscal- administrative acts for the amount of RON 4,922; - ordered the plaintiff to pay to the applicant the amount of RON 30,961, as court charges. NAfA has stated Appeal – definitively rejected by court. ELECTRICA SA124 | A N N U A L R E P O R T 2 0 1 8 Crt. no. Parties/Case file number Subject matter Court Case status 2 3 4 5 6 Plaintiff: ELSA Defendant: NAfA 5433/2/2013 Tax appeal of the administrative annulment of the Decision no. 24/31 January 2013, payment obligations amounting to RON 9,805,319. High Court of Cassation and Justice On the merits, the court has partially admitted the action stated by the plaintiff ELSA and: - cancels Decision no. 24/2013, issued by NAfA-DgSC; - partially cancels the decisions regarding the ancillary payment obligations no. 1270/2012 (in the amount of RON 5,705,115) and no. 1271/2012 (in the amount of RON 3,747,331), issued by NAfA, as well as the tax decisions issued by NAfA notices of assessment no. 2143501.5/2012, 2143501.6/2012, 2143501.7/2012, 2143501.11/2012 (regarding the amount of RON 352,873). Rejects the action as for the rest. forces NAfA to pay RON 20,500 as court charges to the plaintiff. NAfA and ELSA have stated an appeal. The High Court dismissed the appeals as unfounded. District 1 Court Suspended until the final settlement of case no. 9131/2/2017. Plaintiff: ELSA Defendant: NAfA 17237/299/2017 1. Suspension of forced execution initiated by NAfA-DgAMC in the enforcement file no. 13267221 under the enforceable order no. 13725/3 May 2017 and of the no. 13739/03 May 2017; 2. Cancellation of the enforcement order no. 13725/3 May 2017, of the no. 61/90/1/2017/263129 (which also bears the No. 13739/3 May 2017) issued by NAfA- DgAMC for the amount of RON 39,248,818 and all subsequent execution orders issued in connection with the forced execution of the amount of RON 39,248,818 in the execution file no. 13267221. Plaintiff: ELSA Defendant: NAfA 9131/2/2017 Plaintiff: ELSA Defendant: NAfA 3430/2/2017 Plaintiff: ELSA Defendant: NAfA 6043/2/2018 Annulment of the tax decisions issued by NAfA and communicated to the company by adress no. 665/17 March 2017, new accessories amounting to RON 39,000,000. Bucharest Court of Appeal in course of settlement. Appeal to execution, cancellation foreclosure for RON 39,083,190 - Decision no. 665/17/03/2017 High Court of Cassation and Justice The first court dismissed the file as unfounded. ELSA filed an appeal, definitively rejected by court. Bucharest Court of Appeal in course of settlement. 1. Oblige NAfA to correct the evidence of tax receivables, so that it reflects the judgments in the litigation between parties through judgments that have entered into the power of the trial. 2. in particular, in order to adjust the fiscal statement in the sense indicated in paragraph 1, the NAfA shall be obliged to draw up those corrective administrative acts or operations which: a) to reflect in the fiscal file the extinguishing by prescription of the amount of RON 16,915,950 representing the profit tax registered in Decision no. 3/2008 (the “Main Claim”) and the removal from its tax records, ‘ b) to reflect in the fiscal file the corresponding extinction of all the accessories calculated by NAfA in the Main Claim (expired by prescription) and the removal from their tax records (including the amount of RON 30,777,354 included in the Decision no. 357/2008). ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 125 Crt. no. Parties/Case file number Subject matter Court Case status 7 8 9 Plaintiff: ELSA Defendant: NAfA - DgAMC 25091/299/2018 Plaintiff: ELSA Defendant: NAfA 7949/2/2018 Plaintiff: SDMN Defendant: Public Service for local finances Ploiesti 309/42/2015 10 Plaintiff: SDMN Defendant: NAfA 1018/2/2016 11 Plaintiff: EL SERV Defendant: NAfA 5786/2/2018 Appeal to execution and suspension of forced execution - cancellation of the enforcement order no. 13566/22 June 2018 and the notice 13567/22 June 2018, issued in the execution file no. 13267221/61/90/1/2018/278530, amounting to RON 10,024,825 (representing the partial fine from the Competition Council). Cancellation of administrative act: Decision no. 231/09/05/2018 issued by NAfA- DgS in the procedure for solving the fiscal administrative appeal against the following tax decisions (communicated to the company through the address no. 665/17 March 2017): 1. Decision no. 607/ EV2/15 March 2017 - interest and penalties calculated on the profit tax amounting to RON 38,687,726; 2. Taxation decisions on obligations established as a result of tax adjustments correcting Decision no. 607/EV2/15 March 2017, by setting differences in minus, in the amount of RON 2,125,229; 3. Taxation decisions on obligations established as a result of tax adjustments correcting Decision no. 607/EV2/15 March 2017, by establishing additional differences, in the amount of RON 2,447,528; 4. Decision no. 620/ EV2/15 March 2017 regarding the related tax liabilities representing interests and penalties for delayed payment in the amount of RON 21,548. Cancellation of administrative act – taxation decision no. 124814/28 November 2014. The amount under litigation: RON 11,963,955, representing additional differences from the fiscal inspection report, out of which RON 8,528,896 additional tax on buildings for the period January 2009 - September 2014 and RON 3,439,085 as accessory fiscal obligations calculated until the date of 11 November 2014. Cancellation of administrative act – Decision no. 462/23 November 2015, litigation amount of RON 7,731,693 (RON 4,689,686 income tax + RON 3,042,007 VAT) and for the amount of RON 6,154,799 (RON 3,991,503 interests/penalties and late fees related to income tax + RON 2,163,296 interests/penalties and delay fees related to the VAT). Cancellation of administrative act NAfA Rif 2017 and decision no. 305/30 May 2017, value of RON 46,260,952, the amount with which the fiscal loss of the Company was diminished; RON 7,563,561 as Additional VAT set up by VAT refusal to deduct + related accessories. District 1 Court Suspended until the settlement of case no. 3889/2/2018. Bucharest Court of Appeal in course of settlement. High Court of Cassation and Justice By Decision no. 32/10 february 2016, Ploiesti Court of Appeal dismissed the action as unfounded. SDMN filed an appeal, which was rejected by the court; the company filed an appeal for annulment (case no. 209/1/2019). Bucharest Court of Appeal The first court dismissed the request as unfounded. The plaintiff filed an appeal, in course of settlement. Bucharest Court of Appeal in course of settlement. ELECTRICA SA 126 | A N N U A L R E P O R T 2 0 1 8 Crt. no. Parties/Case file number 12 13 14 Plaintiff: EL SERV Defendant: NAfA 31945/3/2018 Plaintiff: SDTN Defendant: MfP- NAfA – DgRfP Cluj – AJfP Maramures 371/33/2017 Plaintiff: EfSA Defendant: NAfA – DgAMC 8709/2/2018 Subject matter Court Case status Cancellation of administrative decision no. 221/19 July 2017 - cancellation of penalties related to the decision no. 305/2017 from above, RON 118,215. Bucharest Court Suspended until the final settlement of the case no. 5786/2/2018. Taxation contestation no. f-MM-180/2016 on tax and additional VAT, as well as interest/late payment and delay penalties. Preliminary administrative procedures were conducted in 2017, prior to the case filing. Amount: RON 32,295,033. Cancellation of: DgSC Decision no. 325/26 June 2018 Decision f-MC 678/28 December 2017 Report f-MC 385/28 December 2017 Decision no. 511/24 October 2018 Decision no. 21095/24 July 2018 Value: RON 11,483,652 Cluj Court of Appeal Ongoing procedure Bucharest Court of Appeal in course of settlement. 3. Other significant litigations (whose value is more than EUR 500 th.) Crt. no. Parties/Case file number 1 Plaintiff: SPEEH Hidroelectrica S.A. Defendant: ELSA 13268/3/2015 Subject matter Court Case status High Court of Cassation and Justice The court of first instance rejects the exception of the prescription of the material right to action as unreasonable and the action as unfounded. Both parties have appealed, rejected as unfounded. Both parties filed an appeal in the filter procedure. Obligation of Electrica to pay to SPEEH Hidroelectrica SA the sum of RON 5,444,761 (the loss suffered by selling energy at an average price per MWH under the production cost of 1 MWH); partially oblige to pay the unrealized benefit of Hidroelectrica by selling the total amount of 398,300 MWh, calculated according to the ANRE regulations (RON 9,646,826, according to the written instructions dated 5 May 2015/RON 5,444,761 according to the applicant’s conclusions mentioned in the Conclusion of 15 March 2017) obliging the defendant to pay the legal interest from the date of delivery of the decision until the effective payment, court costs. 2 Creditor: ELSA Debtor: Petprod S.A. 47478/3/2012*/a1 3 Creditor: ELSA Debtor: CET Braila S.A. 2712/113/2013 insolvency proceedings, enter a claim to the statement of affairs for the amount of RON 2,591,163 Bucharest Court Ongoing procedure insolvency proceedings, enter a claim to the statement of affairs for the amount of RON 3,826,035 Braila Court Ongoing procedure 4 Creditor: ELSA, AAAS, BCR SA and others insolvency proceeding, enter a claim to the statement of affairs in amount of RON 658,535,805 Valcea Court Ongoing procedure Debtor: Oltchim S.A. 887/90/2013 ELECTRICA SACrt. no. Parties/Case file number 5 Creditor: ELSA Debtor: Romenergy industry SRL 2088/107/2016 6 Appellant: ELSA Defendant: AAAS 38859/299/2015 7 Appellant: ELSA Defendant: AAAS 2155/2/2015 A N N U A L R E P O R T 2 0 1 8 | 127 Subject matter Court Case status insolvency proceedings, enter a claim to the statement of affairs in amount of RON 2,917,266 Alba Court Ongoing procedure Electrica SA filed an appeal to enforcement against foreclosure Administrative Decision no. P/14/27055/16 December 2014 and of all the subsequent enforcement acts (administrative decision issued by the respondent AAAS against the subscription for the amount of RON 7,505,637 as recovery of unlawful state aid granted to ELSA, in the context of privatization of Electrica Banat SA and of CSR Resita SA) - claim for cancelling of this act. - The cancellation of the payment order issued by BEJ Oprescu Mihai in the execution file no. 8/2015 (where it is stated that “the interest is to be added starting from the date of placing the funds at the disposal of the beneficiary and up to the effective date of the flow plus RON 99,688 c/v of execution costs and all subsequent execution acts.”); - Cancel all execution acts issued in the file no. 8/2015; - Suspension of the forced execution started by the intimate until the irrevocable settlement of the current litigation; - Provisional suspension until the settlement of the claim for suspension requested by the present petition. - Annulment of the Administrative Decision no. P/14/27055/16 December 2014, of Order no. 883/16 December 2014 (restitution by ELSA of the amount of RON 7,505,637 and interests calculated from 27 March 2006 until the effective date of payment) and notification no. 883/16 December 2014, issued by AAAS; - Suspension of the execution of the contested administrative acts until the final settlement of the case; - Order the Defendant to pay the judicial costs. Disctrict 1 Court High Court of Cassation and Justice The court admits the claim for suspension of the forced execution formulated by the Plaintiff ELSA; suspends of the forced execution performed based on the foreclosure file no. 8/2015 of BEJ Oprescu Mihai until the contestation of the execution. Based on art. 413 para. 1 point 1, CPC suspends the case regarding the Plaintiff ELSA, until the final settlement of the file no. 2155/2/2015 of Bucharest Court of Appeal. The court partially upheld the contestation of execution and canceled the notice from 26 March 2015 and all the execution documents issued in enforcement file no. 8/2015 of BEJ Oprescu Mihai. The court dismisses as inadmissible the application for annulment of Administrative Decision no. P/14/27055/16 December 2014 issued by AAAS. Returns to the contestant the amount of RON 1,000 representing the court expenses related to the appeal to the execution, after the final decision has expired, with right of appeal within 10 days of communication, definitely by non-appealing. On the background of the case, the court ordered the annulment of the administrative decision no. P/14/27055/16 December 2014, of the Order no. 883/16 December 2014 and of the Notification no. 883/16 December 2014 issued by the defendant. The Defendant filed an appeal, rejected as unfounded. ELECTRICA SA128 | A N N U A L R E P O R T 2 0 1 8 Subject matter Court Case status Bucharest Court Appeal at execution regarding the execution file no. 1914/2015 of the Bureau of the Associated Legal Executors Dorina gont, Lucian Panait and Marian Panait - execution of the decision no. 6440/01 January 2013 - case no. 8260/3/2013 - the nominal value of the shares resulting from the conversion of ELSA, claimed to Combinatul Siderurgic Resita S.A. and the amount resulting from their capitalization – RON 10,342,892. Bucharest Court Appeal against enforcement initiated by BEJ Spiridonescu ileana Cornelia in the execution file no. 30/B/2017, as well as the subsequent execution acts, for the amount of RON 26,122,589. in the alternative, annulment in part as regards the pursuit of the amount of RON 1,561,105, representing the receivable lost by offsetting, with the consequence of the return of the execution for this amount, the partial annulment of the execution and the subsequent acts regarding the pursuit of the amount of RON 782,067, representing the receivable extinguished by offsetting, with the consequence of the return for this amount. The court of first instance partially admits the contestation of the enforcement formulated by the contestants; orders the cancellation of the measure of attachment established in the execution file no. 1914/2015 by BEJA Dorina gonț, Lucian gonț and Marian Panait regarding third parties; rejects the request for the return of the execution as unfounded. Dismisses the application for suspension of execution as being without object; with appeal within 10 days of communication. Both parties filed an appeal, rejected by court as unfounded. The merit court partially admits the appeal, in the sense that it reduces the execution costs to RON 135,000. Disputes the return of forced execution in respect of the amount of RON 178,554, in respect of undue enforcement costs. Otherwise, the contestation of the execution is dismissed as unreasonable. ELSA has filed an appeal definitively rejected as unfounded. insolvency proceedings – debt RON 9,542,337. Bucharest Court Ongoing procedure; the receivable assigned to ELSA from EL SERV, which was fully recovered. insolvency proceedings. Debt RON 37,088,830. Bucharest Court Ongoing procedure Crt. no. Parties/Case file number 8 Appellant: AAAS Defendant: ELSA 27873/299/2016* 9 Appellant: ELSA Defendant: Termoelectrica S.A. 16159/299/2017** 10 Creditor: ELSA Debtor: SEM 40081/3/2014 11 Creditor: ELSA Debtor: Transenergo Com S.A. 1372/3/2017 12 Creditor: ELSA Bankruptcy. Debt: RON 6,027,537. Bucharest Court Ongoing procedure Debtor: Electra Management & Suppy SRL 41095/3/2016 13 Creditor: ELSA Debtor: fidelis Energy SRL 3052/99/2017 14 Plaintiff: SAPE Defendant: ELSA and others 46365/3/2016 insolvency proceedings. Debt: RON 11,354,912. iasi Court Ongoing procedure Action for damages – RON 3,629,529,920. Bucharest Court in course of settlement. ELECTRICA SACrt. no. Parties/Case file number 15 Plaintiff: SEM Defendant: ELSA 5930/3/2016 16 Plaintiff: ELSA Defendant: Competition Council 3889/2/2018 A N N U A L R E P O R T 2 0 1 8 | 129 Subject matter Court Case status High Court of Cassation and Justice The court of first instance accepted the exception of the prescription of the material right to action, dismissing the action as prescribed, but the court of appeal annulled the sentence, sending the case for re- judgment. ELSA filed an appeal - in the filter procedure. Bucharest Court of Appeal The court dismissed ELSA’s action as unfounded, appealable in 15 days from it’s communication. Obligation to increase the share capital of SEM, with the value of the land located in Dobroiesti, str. Zorilor no. 71, ilfov County (“Terrain warehouses and fundeni thermal power station”), with an area of 6,479.62 sqm, CADP M03 no. 10982/2008, respectively from Bucharest, Timisoara Boulevard no. 104, sector 6 (“Workshop for repairing energy equipment”), with an area of 8,745.31 sqm, CADP M03 no. 12917/2014 – amounting to RON 7,344,390. Action in administrative litigation - annulment of Competition Council Decision no. 77/20 December 2017, imposing on ELSA a fine in the amount of RON 10,800,984 and, in the alternative, the reduction of the fine set up to the legal minimum of 0.5% of ELSA’s turnover, by re-individualizing the alleged anticompetitive facts, retaining and fully capitalizing on all the attenuating circumstances applicable to ELSA. High Court of Cassation and Justice The court of first instance rejected the request. ELSA has filed an appeal, in course of settlement. Bucharest Court Bucharest Court Bucharest Court in course of settlement. in regulatory procedures. in course of settlement. Prahova Court in course of settlement. 17 18 19 20 21 Plaintiff: ELSA Defendant: Competition Council 3883/2/2018 Application for suspension of the enforcement of the Competition Council Decision no. 77/20 December 2017, establishing a fine in the amount of RON 10,800,984 to ELSA. Plaintiff: ELSA Defendant: EL SERV 39968/3/2018 Action for damages - request payment of penalty interest in the amount of RON 4,671,287, corresponding to the amount of RON 10,327,442. Plaintiff: ELSA Defendant: Elite insurance Company 44380/3/2018 Claims - request for equivalent insurance policy issued to guarantee the obligations of Transenergo Com S.A., in the amount of RON 4,000,000. Plaintiff: EfSA Defendant: ELSA 2869/2/2019 Plaintiff: ViR Company international S.R.L. Defendant: SDMN 7507/105/2017 Claims: request of payment of invocies paid without justificative documents, as it has been stated by the Court of Account, in amount of RON 17,274,162. Claims - the amount requested by ViR Company international SRL consists of: - EUR 5,000,000, damage caused by delayed issuance of the connection certificate for the photovoltaic plant located in Valea Calugareasca village, Darvari; - EUR 155,000, equivalent of the amount of electricity produced by the plant during the technological evidence period; - EUR 145,000, green certificates related to the amount of energy produced by the photovoltaic plant during the technological evidence period. in addition, it requires to SDMN to pay the penalty interest of 5.75%/year for all the amounts of money claimed and court costs. ELECTRICA SA130 | A N N U A L R E P O R T 2 0 1 8 Subject matter Court Case status insolvency proceedings. Debt: RON 8,418,833. Bucharest Court Ongoing proceedings. Crt. no. Parties/Case file number 22 Creditor: SDMN Debtor: Transenergo Com S.A. 1372/3/2017 23 Plaintiff: SDTN Bankruptcy - debt: RON 5,439,537. Alba Court Ongoing proceedings. 24 Defendant: Romenergy industry S.A. 2088/107/2016 Plaintiff: Asirom Vienna insurance group S.A. Defendant: SDTN 439/111/2017 Recourse claims – for the amount of RON 2,842,347, representing the indemnity paid by the plaintiff to the insured company SC Ciocorom SRL following a fire that took place on 07 March 2013. SDTN is responsible for the over- voltage after a power outage. Bihor Court in course of settlement. 25 Plaintiff: SDTN Claims of RON 2,677,707. Alba Court Suspended based on the Law no. 85/2014. Claims of RON 2,387,357. in course of settlement. Cluj Commercial Court 27 Plaintiff: SDTS Bankruptcy - debt: RON 3,987,508. Alba Court Ongoing proceedings. Payment ordinance - debt: RON 2,806,318. Brasov Court Suspended case file until the Claims: RON 3,009,514. Alba Court of Appeal settlement of the case file regarding the bankruptcy of Romenergy industry S.A. (file no. 2088/107/2016). The court of first instance partially upheld the application, forcing the defendant to pay to the applicant the sum of RON 2,117,046. SDTS filed an appeal, rejected by the court, with the possibility of appeal within 30 days of communication. The appeal has been dropped, due to lack of motivation, by a note approved according to the proceedings. 30 Plaintiff: EL SERV Defendant: National Leasing ifN SA Claims – EUR 1,177,222, equivalent of RON 5,298,203, calculated on the exchange rate respectively of 4.5006 RON/EUR on 30 January 2017. Bucharest Court Suspended according to the insolvency Law no. 85/2006. 39542/3/2009 Defendant: Romenergy industry S.A. 2157/111/2016 Plaintiff: Energo Proiect SRL Defendant: SDTN 374/1285/2018 26 Defendant: Romenergy industry S.A. 2088/107/2016 28 Plaintiff: SDTS Defendant: Romenergy industry S.A. 3086/62/2016 29 Plaintiff: Project Service RO SA Defendant: SDTS 3433/85/2015 ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 131 Subject matter Court Case status insolvency – amount to be recovered: RON 3,938,811. Bucharest Court Ongoing proceedings. insolvency – amount to be recovered remained: RON 12,204,221. Bucharest Court Ongoing proceedings. Summons for payment – RON 3,938,811. Bucharest Court Suspended according to the insolvency Law no. 85/2006. Crt. no. Parties/Case file number 31 Plaintiff: EL SERV Defendant: Best Recuperare Creante SRL 2253/3/2011 (former 58348/3/2010) 32 Plaintiff: EL SERV Defendant: National Leasing ifN S.A. 18711/3/2010 33 Plaintiff: EL SERV Defendant: Best Recuperare Creante SRL 54060/3/2011 34 Plaintiff: EL SERV Bankruptcy - debt RON 73,453,299. Timis Court Ongoing proceedings. Defendant: Servicii Energetice Banat S.A. 8776/30/2013 (joint with cu 2982/30/2014) 35 Plaintiff: EL SERV insolvency - debt RON 26,448,134. Dolj Court Ongoing proceedings. Defendant: SEO 2570/63/2014 36 Plaintiff: EL SERV Bankruptcy - debt RON 12.297.491. Constanta Court Ongoing proceedings. Defendant: SED 8785/118/2014 37 Plaintiff: EL SERV Defendant: CNAS, CASMB 43602/3/2015 Recovery amounts of social insurance – fNUASS – RON 1,384,652, plus interest. Bucharest Court of Appeal The court rejects the appeal made by EL SERV as unfounded. Admits the appeal filed by Casa de Asigurari de Sanatate a Municipiului Bucuresti. it partially amends the civil appeal in the sense that: forces the plaintiff to pay to the applicant the amount of RON 161,657, representing amounts to be recovered from fNUASS, for the period January 2013 - March 2013 and January 2014, as well as to pay the interest legal costs, calculated from the due date of each amount to the day of the payment. it still retains the rest of the decision, final appeal. 38 Plaintiff: EL SERV Bankruptcy – debt: RON 73,708,083. Bacau Court Ongoing proceedings. Defendant: SEM 4435/110/2015 39 Plaintiff: EL SERV Defendant: New Koppel Romania 20376/3/2016 Claims – EUR 655,164, equivalent of RON 2,948,240. Bucharest Court Ongoing proceedings. ELECTRICA SA132 | A N N U A L R E P O R T 2 0 1 8 Crt. no. Parties/Case file number 40 Plaintiff: integrator S.A. Defendant: EL SERV, SAP Romania 34479/3/2016** 41 Plaintiff: EL SERV Defendant: SED 8785/118/2014/a1 42 Creditor: EfSA Debtor: Apaterm S.A. galati 4783/121/2011* 43 Creditor: EfSA 44 Debtor: Vegetal Trading SRL Braila 1653/113/2014 Plaintiff: Carpatcement Holding S.A. Defendant: Ministry of Economy, Romanian government, EfSA 1665/2/2014 45 Creditor: EfSA Debtor: Ariesmin S.A. Branch 7375/107/2008 Subject matter Court Case status Claims – RON 17,677,309 Bucharest Court of Appeal The merit court rejects the claim. The plaintiff filed an appeal, being in course of settlement. Bankruptcy – opposition to the preliminary table - debt RON 3,025,622. Constanta Court Suspended. Bankruptcy - enter a claim to the statement of affairs for the amount of RON 2,742,115. galati Court Ongoing proceedings. insolvency proceedings - enter a claim to the statement of affairs for the amount of RON 2,252,570. Braila Court Ongoing proceedings. Compliance obligation - cancelling penalties in amount of RON 2,440,785 – based on gEO 57/2002. High Court of Cassation and Justice On the merits, the Plaintiff action was rejected, the Plaintiff stating an appeal. The appeal was definitively rejected. Bankruptcy - enter a claim to the statement of affairs for the amount of RON 20,711,588. Alba Court Ongoing proceedings. 46 Creditor: EfSA Debtor: Zlatmin S.A. Branch Bankruptcy - enter a claim to the statement of affairs for the amount of RON 9,314,176. Alba Court Ongoing proceedings. 6/107/2003 47 Creditor: EfSA Debtor: Hidromecanica S.A. 3836/62/2009 48 Creditor: EfSA Debtor: Nitrarmonia S.A. 261/f/2004 49 Creditor: EfSA Debtor: Remin S.A. 32/100/2009 50 Creditor: EfSA Debtor: Oltchim S.A. 887/90/2013 Bankruptcy - enter a claim to the statement of affairs for the amount of RON 4,792,026. Brasov Court Ongoing proceedings. Bankruptcy - enter a claim to the statement of affairs for the amount of RON 2,285,997. Brasov Court Ongoing proceedings. insolvency proceedings - enter a claim to the statement of affairs for the amount of RON 71,443,402. Timisoara Court Ongoing proceedings. insolvency proceedings - enter a claim to the statement of affairs for the amount of RON 56,533,826. Valcea Court Ongoing proceedings. ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 133 Crt. no. Parties/Case file number 51 Creditor: EfSA Debtor: Energon Power and gas S.R.L. 53/1285/2017 52 Creditor: EfSA Debtor : CUg S.A. 2145/1285/2005 Subject matter Court Case status insolvency proceedings - enter a claim to the statement of affairs for the amount of RON 2,392,985. Cluj Specialised Court Ongoing proceedings. Bankruptcy - enter a claim to the statement of affairs for the amount of RON 7,880,857. Cluj Specialised Court Ongoing proceedings. 4. Litigations against the Romanian Court of Accounts Crt. no. Parties/Case file number Subject matter Court Case status Court on the merits: Admits in part the claim. Cancels partially the Resolution no. 23 on 17 March 2014 regarding the items 1 and 5 and the Decision no. 3/14 January 2014 regarding the items 4 and 8. Rejects, as ungrounded the claim regarding items 2, 3 and 4 in the Resolution no. 23/17 March 2014 and items 5, 6 and 7 in the Decision no 3/14 January 2014. Rejects the claim for suspension of the enforcement of the Decision no. 3/14 January 2014, as ungrounded. Electrica and CCR have stated Appeal. The court admits in part ELSA’s request and sent the case for rejudgement to the first instance, regarding the annulament of item 5 of the Decision no. 23/17 March 2014, coresponding to item 8 of the Decision no. 3/14 January 2014. Currently the case is in rejudgement phase. in course of settlement. 1 Plaintiff: ELSA Defendant: Romanian Court of Accounts Suspension and cancelling of the administrative act (Decision no.3/14 January 2014 and the Resolution no. 23/17 March 2014). Bucharest Court of Appeal 2268/2/2014* Bucharest Court of Appeal 2 Plaintiff: ELSA Defendant: Romanian Court of Accounts 2229/2/2017 Partial annulment of Decision no. 12/27 December 2016, issued by the director of the 2nd Direction from the iVth Department of the Court of Accounts, regarding the faults from point 1 to 8, with the consequence of dismissing the actions from point 1, 3 to 9 inclusive, imposed to ELSA by the disputed Decision; the partial annulment of the conclusion no. 12/27 february 2017 of the Court of Accounts, rejecting the objection raised by ELSA against Decision no. 12, regarding the faults and orders mentioned above. in the alternative, the extension of the deadlines for carrying out all the measures ordered by ELSA through Decision no. 12/27 December 2016 with at least 12 months; the suspension of the enforceability of Decision no. 12 until final settlement of the present dispute. ELECTRICA SA134 | A N N U A L R E P O R T 2 0 1 8 Crt. no. Parties/Case file number Subject matter Court Case status 3 4 5 6 7 8 Plaintiff: ELSA Defendant: Romanian Court of Accounts 7780/2/2018 Plaintiff: EfSA Defendant: Romanian Court of Accounts 2213/2/2017 Plaintiff: EL SERV Defendant: Romanian Court of Accounts 2098/2/2017 Plaintiff: EL SERV Defendant: Romanian Court of Accounts 1677/105/2017 Plaintiff: SDTS Defendant: Romanian Court of Accounts 2763/62/2017 Action in administrative litigation for annulment of Decision no. 38/09 October 2018, the annulment of the decision concluding the appeal imposed by the Decision no. 12/1 of 27 December 2016, the revocation of the Decision no. 12/1 and the cessation of any CCR control act. Disputes with the Court of Accounts (Law no. 94/1992), action for the annulment of the Decision no. 11/2016, of the Decision no. 23/2017 and of the Control Report no. 5799/2016. Disputes with the Court of Accounts Administrative act – Decision no. 11/27 february 2017, for the amount of RON 2,351,034. Disputes with the Court of Accounts – Annulment of Decision and of the control report Bucharest Court of Appeal in course of settlement. High Court of Cassation and Justice The first instance rejected the request filed by EfSA as unfounded. EfSA filed an appeal, in course of settlement. Bucharest Court of Appeal in course of settlement. Prahova Court in course of settlement. Dispute litigation on Law 94/1992; annulment of the Decision no. 73/12 January 2017 and of the Decision no. 24/11 April 2017. Brasov Court of Appeal On merits, SDTS’s case was dismissed, SDTS filed an appeal, admitted. Plaintiff: SDMN Defendant: Romanian Court of Accounts 1677/105/2017 Suspension and annulment of the Control Report of the Prahova Chamber of Accounts no. 6618/11 November 2016 and of the Decision no. 45/2016. Prahova Court in course of settlement. 5. Other litigations with significant impact Crt. no. Parties/Case file number Subject matter Court Case status 1 2 Plaintiff: Niculescu Vladimir Defendant: SDMN, City Hall Valenii de Munte 1580/105/2008* Plaintiff: SDTN Defendant: Local Council of Oradea City, RCS&RDS 3340/111/2015 Claim under Law no. 10/2001 – for a land of 1,558 sqm and built area of 202 sqm, located in Valenii de Munte, N. iorga str. No.129 and being used by the Exploitation Center Valeni. Cancellation of Oradea LCD no. 108/2 february 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. Ploiesti Court of Appeal Bihor Court On the merits of the case, the plaintiff’s action was admitted in part, with the right to repairs by equivalent for the land of 1,402 sqm located in Valenii de Munte, Bvd. Nicolae iorga no. 129 (currently no.131), Prahova County. The Plaintiff and Valenii de Munte Town Hall filed an appeal - in course of settlement. At the request of RCS-RDS, the case was suspended until the case file 2414/2/2016 was settled with Delalina SRL, a case file by the Bucharest Court of Appeal. RCS-RDS filed a request for re-examination of the stamp duty, so the case file 3340/111/2015/a1 was formed, within the application to challenge the constitutionality of the provisions of art. 39 par. 1 and par. 3 of gEO 80/2013 was invoked. ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 135 Crt. no. Parties/Case file number Subject matter Court Case status Plaintiff: Delalina S.R.L. Defendant: SDTN 910/111/2016 The obligation to issue technical permit for connection in the favour of SC Delalina SRL. Bihor Court The exception was admitted in principle and the case was suspended pending its settlement by the Constitutional Court. At the deadline of 31 January 2018, the court rejects the request filed by the petitioner RCS & RDS SA for the re-examination of the judicial tax in case no. 3340/111/2015, as inadmissible. The case file was suspended until the settlement of the case file no. 2414/2/2016 with Delalina SRL, case file on the lawsuit of the Bucharest Court of Appeals. Plaintiff: Delalina S.R.L., foto Distributie S.R.L. Defendant: SDTN, 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: SDTN 4013/2/2016 Plaintiff: Stanciu Razvan Defendant: ELSA 42479/3/2017 Plaintiff: Dumitrascu gabriel Defendant: ELSA 44217/3/2017 Plaintiff: ELSA Defendant: E – Distributie Banat S.A. 30399/325/2018 Plaintiff: ELSA Defendant: Baile Herculane City 4572/208/2018 Cancellation of administrative acts (Order 73/2014, Concession agreements). High Court of Cassation and Justice in merits, the court has rejected the exceptions and the action filed by the plaintiffs, which have initiated an appeal; in course of settlement. Court of Appeals Bucharest The file was suspended until the settlement of case file no. 2414/2/2016. Bucharest Court The court rejected the request. The decision is final by non-appealing. Bucharest Court The plaintiff dropped the trial application. Timisoara Court in regularization procedures. Caransebes Court in course of settlement. The case file has as object the cancellation of the ANRE decision on refusal to give licenses for electricity distribution Action for the annulment of the OgMS Decision no. 2/26 October 2017, regarding the election of the members of the BoD by cumulative vote. Action for the annulment of the OgMS Decision no. 2/26 October 2017 regarding item 1 – the election of the members of the BoD. Obligation to do - Mainly obliging the defendant to hand over the documentation for the land in Bocsa. in the alternative, the obligation to draw up the CADP documentation and damages. Claim for land Lot 1-NC 32024 (area of 259 sqm) and lot 2 NC 31944 (with a surface of 1,394 sqm), both located in Baile Herculane, Uzinei str. 1 and fC rectification. 3 4 5 6 7 8 9 ELECTRICA SA136 | A N N U A L R E P O R T 2 0 1 8 APPENDiX 2 details of the main investments accomplished in 2018 by the electrica Group During 2018, the most significant investments accomplish by the group are the following: CAPEX 2018 DESCRIPTION MUNTENIA NORD Modernization of LV connections belonging to transformer stations powered from 20kV OHL Vadu Soresti, Buzau county Modernization of transformer stations powered from 20kV Eternitatii underground line, in municipality of Targoviste, Dambovita county DAS (Distribution Automation System) URBAN, municipality of focsani, Vrancea county Modernization of electricity distribution installations belonging to Targoviste branch, for flats housing in Pucioasa locality Modernization of 110 kV OHL focsani Vest – Tataranu, pillars 1-125 Modernization and SCADA system integration of Măgura Substation Modernization and SCADA system integration of Comarnic 110/20 kV Substation Modernization and SCADA system integration of Breaza 110/20 kV Substation Modernization of Scaieni 110/20 kV Substation Modernization and SCADA system integration of 110/20 kV iCM Tecuci Substation, galati county Mounting the second 110/20 kV power transformer in Vidra, Jugureanu, Bujoru, Cudalbi, galati Centru 110/20 kV Substations – Vol. 2 Jugureanu 110/20 kV Substation Modernization of 110/MT substations within SDMN - Replacement of 110/MT power transformers increasing energy efficiency of distribution network and improving technical conditions for power supply of the consumers by switching to 20 kV transformer stations from the Hipodrom, Obor, Victoriei neighbourhoods of Braila municipality Modernization and SCADA system integration of Baraganu 110/20 kV Substation increasing the energetic efficiency of distribution installations and improving technical conditions for electricity supply to household customers from 0.4 kV OHL in locality of ianca, Braila county Modernization of LV electrical connections at flats housing of neighbourhoods Viziru i, Obor, Hipodrom and of streets Calea galati, Eremia grigorescu from Braila municipality Modernization and SCADA system integration 110kV/20kV insuratei Substation, Braila county Modernization of LV OHL and LV electrical connections in locality of Lanurile, Braila county Modernization of LV OHL and LV electrical connections in locality of Chiscani, Braila county Modernization and SCADA system integration of Patarlagele 110/20 kV Substation Switching of MV networks from 6 kV to 20 kV, voltage level improvement of area Sos. Spatarului, Aleea industriei, Sos. Brailei Modernization - voltage level improvement at consumers of Village Sibiciu de Jos, Panatau commune, Buzau county Modernization of transformer stations of galati municipality, Tiglina 1 area, galati municipality improving technical conditions for power supply of the consumers in Cheia village, Maneciu commune – 20/6 kV transformer station Modernization and SCADA system integration of Azuga 110/20/6 kV Substation Upgrading protections of 110 kV cell and 6 kV cells, installation of the second neutral treatment group by resistor at 20 kV and SCADA system integration in 110/27,5/20/6 kV Ploiesti Nord Substation VALUE (RON mn) 10.43 4.48 8.05 3.96 13.36 3.75 6.64 5.93 5.38 4.41 4.54 22.22 2.06 3.53 4.34 2.14 2.82 2.31 3.47 3.34 2.39 2.36 2.42 2.90 3.20 3.09 ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 137 DESCRIPTION VALUE (RON mn) Modernization of LV electrical connections in CE Valeni – locality of Varbilau Modernization and SCADA system integration of gaesti 110/20 kV Substation Traction checks, conductors stretching, insulation replacement, protective conductor replacement, foundation restoration of OHL 110 kV fieni – Moroeni, circuit 1+2, between pillars 1-84 Modernization and SCADA system integration of iUP Targoviste 110/20/6 kV Substation Modernization of LV OHL and LV electrical connections in glodeni Deal – gusoiu area and central area Modernization of LV OHL, MV OHL and LV electrical connections in Tetcoiu area, Matarsaru commune Modernization of 110 kV switches in substations within SDMN Replacement of primary switching equipment at 110kV cells in the substations managed by SDMN (Bordei Verde, Coltea, km221, Lacu Rezi, Lebada, Lunca, Port Braila, Spiru Haret, Urleasca, Zatna, faurei, Buzau Est, Ceil focsani, inetof, Moreni, Lespezi) Automated distribution system for M.T. air power lines in the Distribution Branches within SDMN, STAgE V- vol. 3 TRANSILVANIA NORD Modernization of Nadas 110/20 KV Substation Optimization of central point’s Cluj and Oradea, implementation and installation of EMS application with update of DMS Cluj and DMS implementation in Oradea - stage 3, DMS Baia Mare, Bistrita, Satu Mare, Zalau Modernization of LV connections in the localities: Salard, Santandrei, fughiu, Nojorid Modernization of Vascau 110/20 kV Substation Modernization of Zalau 110/20 kV Substation Mounting remote-controlled switches and reclosers within SD Zalau and SD Cluj, stage 2018 Modernization of Mihai Viteazu 110/20 kV Substation Modernization of gherla 110/20 kV Substation Switching to 20 kV of transformer stations within Baia Mare branch – stage 1 2017 Switching to 20 kV of networks within Satu Mare branch - Distributor: SM1-PA 1003 BUJOR-PA1021 MARA-SM1 Switching of MV networks from 6 kV to 20 kV in the municipality of Carei Modernization of Unirea 110/20 kV Substation Switching to 20 kV of distributors L5, L6, L17 and L2SMA from Turda Substation, Turda municipality, Cluj county 2.60 3.26 3.50 2.42 2.14 2.73 3.17 4.75 3.42 2.00 2.80 5.00 3.80 4.90 3.70 3.20 3.10 4.30 4.00 6.00 4.70 4.30 Replacing of 110/MV power transformers with low-loss transformers SDTN stage 1 and 2 17.10 TRANSILVANIA SUD Modernization of LV electricity distribution network in Avrig city, Str. gheorghe Lazar area, Sibiu county Modernization of LV OHL and LV electrical connections in work point Covasna and intorsura Buzaului, Covasna county Replacing of LV OHL conductors and modernization of electrical connection in CE Tg. Secuiesc, Covasna county Replacing of LV OHL conductors and modernization of electrical connection in CE Sf. gheorghe, Covasna county Modernization of electricity supply installations for flats housing within SDTS Harghita Conductor replacements, systematization and securing of LV OHL electrical connections ileni, reconfiguration of 20 kV OHL Sebes, Brasov county Voltage level improvements of LV OHL Ojdula, Covasna county Voltage level improvements and modernization of 0.4 kV OHL Tarlungeni, in locality of Tarlungeni, Brasov county Voltage level improvements in Pauleni – Ciuc commune, villages Pauleni-Ciuc, Soimeni and Delnita, Harghita county Voltage level improvements of PTa 1, PTa 2, PTa 3 Micfalau area, Covasna county 2.80 3.90 6.10 7.80 3.30 3.36 3.00 2.30 2.80 2.40 ELECTRICA SA138 | A N N U A L R E P O R T 2 0 1 8 DESCRIPTION Modernization of transformer stations (MV cell replacement, indoor network distribution board of Astra neighbourhood, Tractorul, Triaj, Craiter, garii area, Uzina 2, Racadau, etc), in locality of Brasov, Brasov county Modernization of transformer stations and LV connections in locality of Sighisoara ( PTz 75, PTz 70, PTz 5, PTz 72, PTz 37, PTz 62, PTz 82, PTz 81, PTz 11, PTz 1, PTz 78, PTz 44, PTz 8, PTz 12, PTz 4, PTz 23, PTz 38 ), Mures county Switching to 20 kV of MT networks PA 3 Astra neighbourhood, in locality of Brasov, Brasov county Switching to 20 kV of the MT networks operating at the 6 kV in Tg. Mures locality, Mures county – ob. MV Works Modernization of 20 kV OHL Ludus - Cipau, Mures county Modernization and route modifying of 110 kV underground cable lines Brasov - iUS and Zizin – iUS, Brasov county Modernization of 110 kV OHL Zizin - iABv - Metrom and 110 kV OHL Darste - iABv - Racadau by partial passage in 110 kV underground cable line increasing supply reliability for the users connected to 110/20/6 kV Ocna Mures substation, Alba county Retrofitting of Medias 110/20 kV substation, Sibiu county integration of substations belonging to CEM 110 kV Mures into the SCADA DMS system of SDTS integration of substations belonging to CEM 110 kV Sibiu into the SCADA DMS system of SDTS Replacing of MV/LV power transformers with low-loss transformers Modernization (conductor replacements, systematization and securing of LV OHL electrical connections) of urban networks in Brasov, Brasov county – Str. Lacurilor, Stejarului, Brazilor - Noua neighbourhood VALUE (RON mn) 15.10 2.50 3.50 3.90 3.60 4.80 2.80 6.90 4.60 3.40 2.80 13.2 2.12 During 2018, the largest transfers from ongoing tangible fixed assets to tangible fixed assets are mainly represented by the commissioning of investment objectives, as follows: Commissioning 2018 DESCRIPTION MUNTENIA NORD Modernization of LV connections related to aerial transformation points powered from 20 kV OHL Vadu Soresti, Buzau county Modernization of transformer stations powered from 20kV Eternitatii underground line, in municipality of Targoviste, Dambovita county DAS (Distribution Automation System) URBAN, municipality of focsani, Vrancea county implementation of DAS (Distribution Automation System) RURAL in branches of SDMN stage 2016, VOL3 – Targoviste branch + Braila branch Modernization of electricity distribution installations belonging to Targoviste branch, for flats housing in Pucioasa locality Modernization of 110 kV OHL focsani Vest – Tataranu, pillars 1-125 Modernization and SCADA system integration of Comarnic 110/20 kV Substation Modernization and SCADA system integration of Breaza 110/20 kV Substation Modernization of Scaieni 110/20 kV Substation Modernization and SCADA system integration of iCM Tecuci 110/20 kV Substation, galati county Modernization and SCADA system integration of gaesti 110/20 kV Substation Mounting the second 110/20 kV power transformer in Vidra, Jugureanu, Bujoru, Cudalbi, galati Centru 110/20 kV Substations – Vol. 2 Jugureanu 110/20 kV Substation Modernization of 110/MV substations within SDMN - Replacement of 110/MV power transformers - group i + grup ii Modernization of 110 kV switches in substations within SDMN increasing energy efficiency of distribution network and improving technical conditions for power supply of the consumers by switching to 20 kV transformer stations from the Hipodrom, Obor, Victoriei neighbourhoods of Braila municipality VALUE (RON mn) 9.56 4.72 8.11 4.76 4.18 13.64 4.01 6.57 4.29 5.53 4.60 4.16 21.59 3.87 2.06 ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 139 DESCRIPTION VALUE (RON mn) Traction checks, conductors stretching, insulation replacement, protective conductor replacement, foundation restoration of OHL 110 kV fieni – Moroeni, circuit 1+2, between pillars 1-84 Ensuring the technical conditions for operation of the 110 kV installations at the Maxineni 110/20 kV Substation, Braila County Modernization and SCADA system integration of Baraganu 110/20 kV Substation increasing the energetic efficiency of distribution installations and improving technical conditions for electricity supply to household customers from 0.4 kV OHL in locality of ianca, Braila county Modernization of LV electrical connections at flats housing of neighbourhoods Viziru i, Obor, Hipodrom and of streets Calea galati, Eremia grigorescu from Braila municipality Modernization of LV OHL and LV electrical connections in locality of Lanurile, Braila county Modernization of LV OHL and LV electrical connections in locality of Chiscani, Braila county Modernization and SCADA system integration of Vernesti 110/20 kV Substation Modernization and SCADA system integration of Patarlagele 110/20 kV Substation Switching of MV networks from 6 kV to 20 kV, voltage level improvement of area Sos. Spatarului, Aleea industriei, Sos. Brailei Modernization - voltage level improvement at consumers of Village Sibiciu de Jos, Panatau commune, Buzau county Modernization and SCADA system integration of Magura Substation improving technical conditions for power supply of the consumers in Cheia village, Maneciu commune – 20/6 kV transformer station Modernization of LV connections in CE Valeni- locality of Predeal-Sarari, Teisani Modernization and SCADA system integration of Azuga 110/20/6 kV Substation Protections upgrading of 110 kV cell and 6 kV cells, installation of the second neutral treatment group by resistor at 20 kV and SCADA system integration in 110/27,5/20/6 kV Ploiesti Nord Substation Modernization of LV electrical connections in CE Valeni – locality of Varbilau Modernization and SCADA system integration of Aninoasa 110/20 kV substation Modernization of transformer stations powered from 20kV Bratianu underground line, municipality of Targoviste, Dambovita county Modernization of LV OHL and LV electrical connections in glodeni Deal – gusoiu area and central area Modernization of MV OHL, LV OHL and LV electrical connections in Tetcoiu area, Matasaru commune Replacement of primary switching equipment to 110kV cells in the substations of SDMN (Bordei Verde, Coltea, km221, Lacu Rezi, Lebada, Lunca, Port Braila, Spiru Haret, Urleasca, Zatna, faurei, Buzau Est, Ceil focsani, inetof, Moreni, Lespezi) TRANSILVANIA NORD Replacement of protective conductor with OPgW on: 110 kV OHL Vascau-Beius, 110 kV OHL Vascau-Stei, 110kV OHL Vascau-Baita, Connection 110kV Suncuius, 110kV OHL M.Viteazu-Turda; 110kV OHL Vetis- Carpati-SM1 Replacing of 110/MV power transformers with low-loss SDTN – stage 1 and 2 Optimization of central point’s Cluj and Oradea, implementation and installation of EMS application with update of DMS Cluj and DMS implementation in Oradea - stage 3, DMS Baia Mare, Bistrita, Satu Mare, Zalau Modernization of Mihai Viteazu 110/20 kV Substation Modernization of gherla 110/20 kV Substation Modernization of Poiana 110/6 KV Substation and create 20kV bar – modernization of transformer cells Distribution Automation System (DAS) - Mounting remote-controlled switches and Sf6 reclosers in MV networks within SDTN – branches Cluj – Napoca, Satu Mare and Oradea Switching to 20 kV of distributors L5, L6, L17 and L2SMA from Turda Substation, Turda municipality, Cluj county Modernization of 110 kV OHL Oradea Vest - Voivozi Modernization of Vascau 110/20 kV Substation Modernization of Stei 110/20/6 kV Substation - External 110kV cells Modernization of Tileagd 110/20 kV Substation - External 110kV cells Modernization of transformer stations powered from Oradea Nord 110/20kV Substation, SC2, SC2, from iosia 110/20kV Substation, from Palota 110/20kV Substation, Crisul, Biharea, CET ii, Velenta, and from Oradea Centru 110/20kV Substation and Oradea Sud, Oradea locality, Bihor county 3.60 2.03 3.04 4.85 2.37 2.32 3.51 2.37 2.59 2.17 2.47 3.12 2.67 2.09 2.21 2.16 2.70 2.33 2.01 2.44 2.11 4.23 2.40 16.80 2.30 4.40 3.40 3.80 10.30 4.60 6.10 2.00 4.40 2.80 10.10 ELECTRICA SA140 | A N N U A L R E P O R T 2 0 1 8 DESCRIPTION VALUE (RON mn) Construction of MT Underground cable in order to increase the power supply reliability in area Baile felix, Bihor county Modernization of LV connections in localities Salard, Santandrei, fughiu, Nojorid – 2528 connections increasing safety and power supply reliability in area Sintandrei, Santandrei locality, area Calea Santandreiului, Palota, Porcine, fibralex increasing power supply reliability for users connected to Somcuta 110/MV Substation Modernization of Baia Mare 1 - 110/35/20/10/6kV Substation Switching to 20 kV of Sasar neighbourhood, Baia Mare - stage 3 and 4 Switching to 20 kV of transformer stations within Baia Mare branch – stage 1 Ensuring continuity in power supply of consumers from Carei area - Realization of connection 110kV underground cable Vetis-Carei Switching to 20 kV of networks within Satu Mare branch - Distributor: SM1-PA 1003 BUJOR-PA1021 MARA-SM1 Switching of MV networks from 6 kV to 20 kV in the municipality of Carei increasing power supply reliability for users connected to 110/MV Beclean Substation Modernization of Unirea 110/20 kV Substation Modernization of Zalau 110/20 kV Substation TRANSILVANIA SUD Modernization of low voltage electricity distribution network in Avrig city, Str. gheorghe Lazar area, Sibiu county Modernization of LV OHL and LV electrical connections in work point Covasna and intorsura Buzaului, Covasna county Replacing of LV OHL conductors and modernization of electrical connection in CE Tg. Secuiesc, Covasna county Replacing of LV OHL conductors and modernization of electrical connection in CE Sf. gheorghe, Covasna county Modernization of electricity supply installations for flats housing within SDTN - Harghita Conductor replacements, systematization and securing of LV OHL electrical connections ileni, reconfiguration of 20 kV OHL Sebes, Brasov county Voltage level improvements and modernization of 0.4 kV OHL Tarlungeni, in locality of Tarlungeni, Brasov county Voltage level improvements of LV OHL Ladauti, Covasna county Voltage level improvements of PTa 1, PTa 2, PTa 3 Micfalau area, Covasna county Modernization of transformer stations (MV cell replacement, indoor network distribution board of Astra neighbourhood, Tractorul, Triaj, Craiter, garii area, Uzina 2, Racadau, etc),in locality of Brasov, Brasov county Switching to 20 kV of MT networks PA 3 Astra neighbourhood, in locality of Brasov, Brasov county Modernization of 20 kV OHL Ludus - Cipau, Mures, county Modernization (conductor replacements, systematization and securing of LV OHL electrical connections) of urban networks in Brasov, Brasov county – Str. Lacurilor, Stejarului, Brazilor - Noua neighbourhood Modernization of LV networks in the municipality of Brasov, Brasov county - Str. Mircea cel Batran, Barbu St. Delavrancea, Decebal, Baba Novac, ioan Ratiu, Dealul Cetatii - Old City neighbourhood Switching of Zarnesti overhead lines (OHL) from 6 kV to 20 kV and increase the power supply reliability in the Magura area, Pestera, Brasov county - Object 1 Modernization of primary and secondary equipment of Turnatorie 110/6 kV Substation, Alba county increasing supply reliability for the users connected to 110/20/6 kV Ocna Mures substation, Alba county Modernization of 110 kV cells in substations Retrofitting of Medias 110/20 kV substation, Sibiu county 3.70 5.80 2.30 2.20 4.50 3.40 2.00 2.30 3.40 6.70 4.30 4.80 2.60 2.58 4.10 5.4 7.68 4.30 3.26 2.40 2.03 2.5 15.3 2.7 3.26 2.14 2.3 2.34 3.28 6.77 3.05 4.15 ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 141 fiNANCiAL STATEMENTS prepared in accordance with international financial reporting standards as adopted by the european union ELECTRICA SA142 | A N N U A L R E P O R T 2 0 1 8 CONSOLiDATED fiNANCiAL STATEMENTS as at and for the year ended 31 december 2018 prepared in accordance with International Financial Reporting Standards as adopted by the European Union ELECTRICA SAA N N U A L R E P O R T 2 0 1 8 | 143 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 income taxes income and expenses 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 Restatements 5. Basis of measurement 6. Significant accounting policies 7. New standards and interpretations not yet adopted 8. Performance for the year 9. Operating Segments 10. Revenue 11. Electricity Purchased 12. 13. Net finance income 14. Earnings per share Employee benefits 15. Short-term employee benefits 16. Post-employment and other long-term employee benefits 17. Employee benefit expenses Income taxes 18. Assets 19. Trade receivables 20. Deposits, treasury bills and government bonds 21. Other receivables 22. Cash and cash equivalents 23. Assets held for sale 24. Property, plant and equipment 25. intangible assets Equity and liabilities 26. Capital and reserves 27. Non-controlling interests 28. financing for network construction related to concession agreements 29. Trade payables 30. Other payables 31. Provisions 32. Long-term bank borrowings Financial instruments 33. financial instruments - fair values and risk management Other information 34. Related parties 35. Subsidiaries in financial distress 36. Contingencies 37. Commitments 38. Subsequent events 1 3 4 5 7 9 16 16 16 18 20 20 35 38 43 44 44 45 45 46 46 49 50 52 53 53 54 55 56 58 59 61 62 62 63 63 64 65 71 73 74 75 76 ELECTRICA SA144 | A N N U A L R E P O R T 2 0 1 8 (continued next page) ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 145 ELECTRICA SA 146 | A N N U A L R E P O R T 2 0 1 8 - - ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 147 - - ELECTRICA SA 148 | A N N U A L R E P O R T 2 0 1 8 ) e g a p t x e n d e u n i t n o c ( ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 149 ELECTRICA SA 150 | A N N U A L R E P O R T 2 0 1 8 (continued next page) ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 151 ELECTRICA SA 152 | A N N U A L R E P O R T 2 0 1 8 1 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 153 ELECTRICA SA 154 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 155 ELECTRICA SA 156 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 157 - - - ELECTRICA SA 158 | A N N U A L R E P O R T 2 0 1 8 2 3 4 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 159 • • • • • • • • • • • ELECTRICA SA 160 | A N N U A L R E P O R T 2 0 1 8 • • 5 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 161 6 7 ELECTRICA SA 162 | A N N U A L R E P O R T 2 0 1 8 • ‑ ‑ ‑ ‑ ‑ ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 163 ELECTRICA SA 164 | A N N U A L R E P O R T 2 0 1 8 • • • ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 165 • • • • ELECTRICA SA 166 | A N N U A L R E P O R T 2 0 1 8 • • • ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 167 ELECTRICA SA 168 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 169 • • • • ‑ ‑ ‑ ELECTRICA SA 170 | A N N U A L R E P O R T 2 0 1 8 ‑ • • ELECTRICA SA ‑ ‑ • • • • • • A N N U A L R E P O R T 2 0 1 8 | 171 ‑ ‑ ELECTRICA SA 172 | A N N U A L R E P O R T 2 0 1 8 ‑ ‑ ‑ ‑ ‑ ‑ ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 173 ‑ ELECTRICA SA 174 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 175 8 • • • • • • • • • • • ELECTRICA SA 176 | A N N U A L R E P O R T 2 0 1 8 • • • • • • • • • ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 177 9 ELECTRICA SA 178 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 179 ELECTRICA SA 180 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 181 ELECTRICA SA 182 | A N N U A L R E P O R T 2 0 1 8 10 11 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 183 12 ELECTRICA SA 184 | A N N U A L R E P O R T 2 0 1 8 13 14 15 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 185 16 (ii) ELECTRICA SA 186 | A N N U A L R E P O R T 2 0 1 8 • • • • • • • • ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 187 (iii) • • • • 17 ELECTRICA SA 188 | A N N U A L R E P O R T 2 0 1 8 18 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 189 ELECTRICA SA 190 | A N N U A L R E P O R T 2 0 1 8 19 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 191 20 21 22 ELECTRICA SA 192 | A N N U A L R E P O R T 2 0 1 8 • • 23 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 193 • • • • • • • • • • ELECTRICA SA 194 | A N N U A L R E P O R T 2 0 1 8 24 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 195 • • • • • • • • • • ELECTRICA SA 196 | A N N U A L R E P O R T 2 0 1 8 • • • • 25 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 197 26 ELECTRICA SA 198 | A N N U A L R E P O R T 2 0 1 8 27 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 199 ELECTRICA SA 200 | A N N U A L R E P O R T 2 0 1 8 28 29 30 31 - - - - ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 201 - - - - - - - - - 32 ELECTRICA SA 202 | A N N U A L R E P O R T 2 0 1 8 33 • ‑ ‑ ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 203 • • • • • • ELECTRICA SA 204 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 205 ELECTRICA SA 206 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 207 34 ELECTRICA SA 208 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 209 35 ELECTRICA SA 210 | A N N U A L R E P O R T 2 0 1 8 36 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 211 • • ELECTRICA SA 212 | A N N U A L R E P O R T 2 0 1 8 37 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 213 ELECTRICA SA iNDEPENDENT AUDiTOR'S REPORT SEPARATE fiNANCiAL STATEMENTS as at and for the year ended 31 december 2018 prepared in accordance with Ministry of Public Finance Order no. 2844/2016 for the approval of the Accounting Regulations in accordance with International Financial Reporting Standards Free translation from Romanian, which is the official and binding version A N N U A L R E P O R T 2 0 1 8 | 221 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 and general information 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 income 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 tax 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. intangible assets 22. investments in subsidiaries and loans granted to 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 31. Subsequent events 1 3 4 5 7 9 11 11 11 12 12 25 27 28 29 30 30 31 34 35 37 38 38 38 39 42 43 47 48 48 48 49 54 57 59 60 Free translation from Romanian, which is the official and binding version ELECTRICA SA222 | A N N U A L R E P O R T 2 0 1 8 (continued on next page) ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 223 ELECTRICA SA 224 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 225 ELECTRICA SA 226 | A N N U A L R E P O R T 2 0 1 8 ) e g a p t x e n n o d e u n i t n o c ( ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 227 ELECTRICA SA 228 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 229 ELECTRICA SA 230 | A N N U A L R E P O R T 2 0 1 8 1 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 231 2 ELECTRICA SA 232 | A N N U A L R E P O R T 2 0 1 8 3 4 • • • • • • • • • • ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 233 • • • 5 6 ELECTRICA SA 234 | A N N U A L R E P O R T 2 0 1 8 • ‑ ‑ ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 235 ‑ ‑ ‑ • • • • • ELECTRICA SA 236 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 237 • • ELECTRICA SA 238 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 239 ‑ ‑ ‑ • • • • ‑ • • ELECTRICA SA 240 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SA ‑ ‑ • • • • • • A N N U A L R E P O R T 2 0 1 8 | 241 ‑ ‑ ELECTRICA SA 242 | A N N U A L R E P O R T 2 0 1 8 ‑ ‑ ‑ ‑ ‑ ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 243 ‑ ‑ ELECTRICA SA 244 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 245 7 • • • • • • • • ELECTRICA SA 246 | A N N U A L R E P O R T 2 0 1 8 • • • ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 247 • • • • • • • • • 8 ELECTRICA SA 248 | A N N U A L R E P O R T 2 0 1 8 9 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 249 10 In 2018, the Company collected the entire amount of the total income of RON 301,491,712 as dividends from its subsidiaries (2017: RON 302,341,425). The average interest rate for deposits, treasury bills and government bonds with original maturity of three months increased from 0.78% in 2017 to 1.91% in 2018. ELECTRICA SA 250 | A N N U A L R E P O R T 2 0 1 8 11 12 13 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 251 ELECTRICA SA 252 | A N N U A L R E P O R T 2 0 1 8 • • • • • • • • ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 253 • • • • ELECTRICA SA 254 | A N N U A L R E P O R T 2 0 1 8 14 15 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 255 ELECTRICA SA 256 | A N N U A L R E P O R T 2 0 1 8 16 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 257 17 18 ELECTRICA SA 258 | A N N U A L R E P O R T 2 0 1 8 19 • 20 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 259 ELECTRICA SA 260 | A N N U A L R E P O R T 2 0 1 8 • • • • • • • • • • ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 261 21 22 ELECTRICA SA 262 | A N N U A L R E P O R T 2 0 1 8 • • • • • ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 263 • - - - • - - - ELECTRICA SA 264 | A N N U A L R E P O R T 2 0 1 8 23 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 265 ELECTRICA SA 266 | A N N U A L R E P O R T 2 0 1 8 24 25 26 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 267 27 • ‑ ‑ ELECTRICA SA 268 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 269 ELECTRICA SA 270 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 271 28 ELECTRICA SA 272 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 273 ELECTRICA SA 274 | A N N U A L R E P O R T 2 0 1 8 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 275 29 • • ELECTRICA SA 276 | A N N U A L R E P O R T 2 0 1 8 30 ELECTRICA SA A N N U A L R E P O R T 2 0 1 8 | 277 31 ELECTRICA SA iNDEPENDENT AUDiTOR'S REPORT 284 | A N N U A L R E P O R T 2 0 1 8 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, 2018, 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. Valentin Radu non-executive director, Chairman of the Board of Directors Ramona Ungur non-executive director gicu iorga non-executive director Bogdan iliescu non-executive director Dragos Andrei non-executive director Niculae Havrilet non-executive director Radu florescu non-executive director georgeta Corina Popescu general Manager ELECTRICA SA

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