REVIEW OF THE KEY ELEMENTS OF THE BUDGET FOR THE YEAR 2015

Transcription

1 REVIEW OF THE KEY ELEMENTS OF THE BUDGET FOR THE YEAR 2015 ELECTRICA Distributie Transilvania Sud SA 1

2 1. GENERAL PRESENTATION Electrica Distributie Transilvania Sud SA ( EDTS ), Subsidiary of Electrica SA is presented below : Subsidiary Electrica Distributie Transilvania Sud SA Activity Electricity distribution in Southern Transylvania geographical area Unique Rgistration Code Headquater % stake as of 31 December Brasov 78, % In the following figure below are shown the areas covered by EDTS and the number of clients it serves: Figure 1: The coverage of EDTS EDTS : 1.1 million clients EDTS fulfils the role of distribution operator in the the Southern Transylvania region (counties Brasov, Alba, Sibiu, Mures, Harghita and Covasna), operating transformer stations and transmission lines with voltages of 0.4 kv and 110 kv. The company is the statutory undertaker of the concession agreement for the period of 49 years (since 2005), for a period equal to maximum half of this period (24.5 years) and holds exclusive distribution license no. 465 for this region wich will still be valid 13 years with the possibility of extension. In the distribution business, EDTS provides equipment maintenance services, repair and other services for its network. 2

3 2. SHAREHOLDING STRUCTURE At 31 December 2014 and at 31 December 2013, share capital of FDEE Electrica Transilvania Sud SA was of 423,967,400 RON representing 42,396,740 shares, each with a nominal value of 10 RON, and was held as followes: - Electrica S.A. holds 33,069,458 shares representing 78, % of the share capital; - Fondul Proprietatea S.A. holds 9,327,282 shares representing 21, % of the share capital. 3. Presentation of the methodology for defining the consolidated Budget Income and Expenses Budget represents for the Electrica the main planning tool for budgeting revenues and expenses related to the activities performed on the electricity market, aiming to ensure internal financial balance for the whole activity in terms of profitability. Currently, EDTS pays great attention to the efficient management of resources, and use for this purpose, the Budget Report - as an instrument of financial management at company s level and at the level of main types of activities of the company. The budgeted income represent the financial forecast of services rendered, while the budgeted expenses represent the financial forecast of resource utilization necessary to achieve the company s objectives. EDTS prepares a set of accounting estimates based on the applicable rules, respectively the Order of the Ministry of Finance no. 1802/2014. The budget is an effective tool to control the activity of the company, setting goals, allowing for better control of expenditures, providing a realistic view of the future and ensuring business continuity on short-term, medium as well as on long term. Underlying assumptions of the proposed budget for 2015 was realized based on "prudence" and "continuity of activity" in terms of economic efficiency for defining financial resources necessary for all activities. According to the company's status, the consolidated budget is approved by the General Meeting of Shareholders, following its approval by the Board of Directors. 3

4 4. Strategic Objectives for EDTS General information According to the Energy Law, tariffs approved by ANRE are intended to cover the real costs of the company s activities related to the distribution of electricity on the regulated market plus a justifiable rate of return of capital involved in this activity. Tariffs are established with the objective to be nondiscriminatory using objective criteria and determined in a transparent manner according to the target rates of return approved by ANRE. Distribution activity Electricity distribution is a regulated activity in Romania and specific tariffs applicable to distribution services must be approved by ANRE as an allowed revenue methodology as established by Order no. 31/2004 (applicable in the first regulatory period ), no. 39/2007 (applicable in the second regulatory period ), no. 51/2012 (applicable in the transition year 2013) and no. 72/2013 (applicable in the third regulatory period ). The allowed revenue methodology plans to reduce income fluctuations and avoid significant fluctuations in the electricity prices charged to consumers. The tariff model is based on the principle of remuneration through tariffs of controllable costs recorded by the distribution operator, the Distributor s main source of profit being the rate of return on capital invested in the distribution activity. ANRE sets regulated annual income levels required for each year during the regulatory period, which is based on projections submitted by the distribution operators, in line with the methodology requirements. With the purpose of ANRE to establish the distribution tariff for electricity, distribution operators must submit an investment program to be included in the RAB (Regulated Asset Base) at the beginning of each regulatory period over a span of five years. Once approval by ANRE, the investment program is included in the RAB and is remunerated in accordance with the methodology stipulated in ANRE s Order no. 72/2013. Tariffs are adjusted annually based on operational performance, including the amount of electricity distributed, non-controllable costs, depreciation and anticipated capital expenditures. Annual income is determined by considering the cost of distribution and the rate of return on the regulated asset base (or RAB ). In determining the regulated revenue, following costs are excluded: Costs covered by distribution affiliates; Costs for connecting new users, which are incurred by third parties through connection tariffs; Costs incurred in connection with the unregulated activities carried out by the distribution operator which use the distribution network and/or employees involved in the execution of distribution services; Costs resulting from payment of damages to users due to non-compliance of performance standards or for damages incurred to electrical receivers due to the distribution operator; Costs resulting from fines and penalties imposed to the distribution operator; Costs resulting from claims paid to natural or legal persons for injuries or damages caused by the distribution operator and ordered by court. 4

5 Revenues from reactive energy collected from users with regulated tariff is deducted from the regulated annual income. Tariffs are approved in a specific manner for a period of one year. ANRE defines the regulatory periods, which currently covers five years, for which a model for calculating operational costs is used and principles for defining a reasonable level of network losses. The current regulatory period ('the third regulatory period') in which the Group operates began on January 1 st, 2014 and will end on December 31 st, It is expected that both the current regulatory framework, as well as the rules to determine the RAB and distribution tariffs will remain unchanged at least until the end of ANRE sets the annual distribution tariffs in RON per MWh for each distribution company and for each voltage level (high, medium and low). Tariffs invoiced to consumers are cumulated according to the corresponding voltage level (i.e. the medium voltage tariff includes the tariff for high voltage, while the tariff for low voltage includes the tariff for high and medium voltage). ANRE obligations for setting tariffs ANRE checks the following information provided by a distribution operator in order to establish or revise tariffs: Forecasted quantity of energy to be distributed, given the economic growth index by the National Forecast Commission for the period in question; Performance standards and other requirements imposed by the distribution operator; Stability of tariffs; Own network losses for each voltage level in accordance with the reduction plan approved by ANRE; Optimal development of distribution network; Regulated rate of return applied RAB; Fees set by the state authorities related to distribution services; and Financial viability of the distribution operator. Obligations of distribution operator in relation to costs allocation Distribution operator will allocate the common costs of the distribution regulated and / or unregulated activities according to the following principles: Economic causality - assigning costs of those activities that have determined the costs; Objectivity - cost allocation based on objective basis; Transparency - allocation based on defined rules; and Continuity allocation based on rules that are preserved in time; with changes only in necessary and justified situations. Therefore the distribution operators must comply with the methodology approved by ANRE, referring to the distribution segment, their purpose being to reach or even exceed the targets set by ANRE. 5

6 The strategic objectives at the level of EDTS The main objectives considered by EDTS in 2015 mainly refer to: Obtaining a profit for the regulated activity, at least at the level of regulated return Achieving and exceeding target indicators imposed by ANRE Starting with 2015 the implementation of a program of technical and economic efficiency efficiency increase that will lead efficiency indicators to the level of other companies in the sector. Investment program of EDTS The main investments of EDTS include the following: Upgrading existing network infrastructure; Development of the network for connection of new consumers; Investments in networks and smart metering system; Automation of distribution system and implementing SCADA for substations The following table summarizes the investment program of EDTS: Table1: Investment program aproved by ANRE for EDTS Investment programs aproved by ANRE for EDTS EDTS (mn. RON) Based on the investment program, EDTS forecasts a decrease in cost of CPT, as follows: Table 2: CPT Decreasing Program EDTS Program EDTS CPT HV 1.11% 1.08% MV 4.14% 4.07% LV 17.30% 16.90% Total 11.68% 11.40% 6

7 In order to substantiate this budget, EDTS have considered the following quantities of energy distributed: Table 3: Distributed quantities (MWh) EDTS EDTS HV 870, ,000 MV 2,130,634 2,141,287 LV 2,347,473 2,370,948 Total 5,348,107 5,382,235 Source: ANRE Letters 1341/ Starting 1 January 2015, electricity distribution tariffs approved by ANRE are as follows (RON/MWh). Tabel 4: Distribution Tariffs, January 1, 2015 DSO ANRE Order no. High Voltage Medium Voltage Low Voltage Transilvania Sud 156/15 December Source: ANRE Letters 1341/ OPERATING RESULTS Selected financial information of the individual profit and loss account Indicator 2014 Preliminary Budget 2015 Revenue from energy Other operating revenue Variable costs ( ) ( ) Operating and maintenance costs Total, of which: ( ) ( ) Controllable Operating and maintenance costs ( ) ( ) Non-Controllable Operating and maintenance costs (48.833) (51.353) Expenses with personnel layoffs (4.227) Expenses with contibutions supported by the employer for the personnel layoffs (973) Total operating revenue Total operating expenses ( ) ( ) Operating result (IX-X) Financial result (150) Total revenue Total expenses ( ) ( ) Gross profit Income taxes (19.533) (31.703) Net profit

8 According to the budget for 2015, EDTS estimates revenues in amount of RON 779 million, as compared to revenues in 2014, amounting to RON 739 million, representing an increase by 5.41%. It is estimated that in 2015, revenues from electricity distribution will decrease by RON 5 million, or 1%, Se estimeaza ca in anul 2015, veniturile din segmentul de distributie de energie electrica vor scadea cu 5 milioane RON, sau cu 1 %, as compared with the period ending 31 December This decrease is mainly due to decrese of the distribution tariffs. Purchased energy In 2015, the expenses for electricity purchased for covered CPT is projected to increase by RON 4 million, or 2%, to RON 167 million from RON 163 million in the period ending 31 December This variation is mainly due to forcasted rising purchased prices of electricity. The cost with purchased energy represents 21% of revenues in 2015 and 22% of revenues in Operating and maintenance expenses As compared with 2014, the maintenance expenses are forecasted to be reduced by RON 2.6 million. Controllable operating and maintenance costs are forcasted to be reduced by 2.3% as compared with 2014, the main categories of expenses being as follows: Salaries costs and other employee benefits The costs with salaries and other employee benefits will decrease by RON 2 million, or 2%, to RON 117 million from RON 120 million in Through a process of labour productivity increase, based on natural turnover of personnel, business reorganization and/or restructuring, the number of employees in the company will be reduced by 4%, leading to a cost reduction of salaries and other employee benefits. Moreover, the reduction of this category of expenses is driven by a decrease of charges with Social Insurance Contribution by 5 percentage points (covered by the employer). The current employee structure and the planned structure scheduled for end of Table 5: The trend of personnel numbers, 2015 EDTS Personnel at the beginning of the year ,893 Personnel to be reduced in Personnel at the end of the year ,818 As a percentage of revenues, salary costs and other employee benefits planned to be 15% in 2015, as compared to 16% in Repairs, maintenance and materials In 2015, costs with repairs, maintenance and materials will decrease by RON 2 million, or 3%, to a value of RON 61 million from RON 63 million in This decrease is mainly due to the reduction of maintenance costs according to investment program. 8

9 Other operating expenses Other operating expenses show a decreasing trend in 2015, representing RON 99 million as compared to RON 146 million in As a percentage of revenues, other operating expenses represent 13% in 2015, as compared to 20% in Operating profit As a result of the above mentioned, in 2015, operating profit will increase by RON 21 million, or 17%, to RON 142 million from RON 122 million in At the same time, operating profit margin projected for 2015 is 2%. Profit before tax Profit before tax will increase by RON 19 million, or 15%, to RON 142 million from RON 123 million in Income tax In 2015, income tax of EDTS is estimated to increase by RON 12 million, or 62%, to RON 32 million from RON 20 million in the period ending 31 December Net profit for the period As a result of the above mentioned, in 2015, Net profit is estimated to increase by RON 7 million, or 7%, to RON 110 million from RON 103 million in the period ending 31 December Net profit margin will increase slightly in 2015 to 17% compared to 16% in the previous year. 9

10 Key factors, directions and significant market trends influencing the operating results of Electrica Distributie Transilvania Sud The Board of Directors makes a distinction between the key factors, significant market trends and directions that they cannot control and those they can control (although often only to a limited extent). Key factors, directions and significant market trends that the Board of Directors cannot control include: (i) (ii) (iii) (iv) (v) General regulatory and legal framework in which the company operates, including policies of ANRE; Distribution and supply tariffs regulated by ANRE; Cost of purchased electricity; Macroeconomic trends in the Romanian economy and Demand for electricity. Key factors and directions that the Board of Directors can control at least partially, include the capital investments and operating expenses of EDTS. An important part of business strategy of the company s Management includes the implementation of an Investment Plan, mainly in the distribution segment. EDTS s operations require significant capital investments, mainly in connection with Electrica power distribution segment. EDTS s assets require periodic refurbishments and upgrades to improve its operating efficiency. Any delays in the implementation of the Investment Plan, amendments thereof, or any increase of the budget may have a costly impact on future investments of EDTS and EDTS s operations, financial situation and development prospects. The capital investments will have the expected positive impact on results from operations to the extent that they are recognized in the RAB by ANRE and considering the rate of return approved by the regulatory authority. Mention The income and expenses budget for the year 2015 was endorsed by EDTS Board of Directors through Decision no. 5/ and Electrica SA s Board of Directors through decision no. 8/