ELECTRICA S.A HALF-YEAR CONSOLIDATED REPORT

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2 2018 FIRST HALF-YEAR REPORT (H1 2018) (based on the condensed consolidated interim reviewed financial statements prepared in accordance with IAS 34) REGARDING THE ECONOMIC AND FINANCIAL ACTIVITY OF SOCIETATEA ENERGETICA ELECTRICA S.A. in compliance with art. 65 of the Law no. 24/2017 on issuers of financial instruments and market operations and with annex no. 14 to ASF Regulation no. 5/2018 and the Bucharest Stock Exchange Code for the six month period ended 30 June 2018 Free translation from the Romanian version of the report, which will prevail in the event of any discrepancies with the English version. 2

3 Table of content 1. Identification Details Of The Issuer Highlights Key Events in H Summary of financial indicators Organizational Structure Group Structure Key information by segments Shareholders Structure Operational Results Financial position Statement of cash flows Outlook Capital Expenditures Statements Annexes Contracts concluded reported according to art. 82 of Law 24/ List of major investments and commissioning works List of major litigations as of 30 June

4 1. Identification Details Of The Issuer Report date: 13 August 2018 Company name: Societatea Energetica Electrica S.A. Headquarters: 9 Grigore Alexandrescu Street, 1st District, Bucharest, Romania Phone/fax no: / Fiscal Code: RO Trade Registry registration number: J40/7425/2000 LEI Code (Legal Entity Identifier): P4SUNUM5AUDX61 Subscribed and paid in share capital: RON 3,459,399,290 Main characteristic of issued shares: 345,939,929 ordinary shares of 10 RON nominal value, issued in dematerialized form and freely transferable, nominative, tradable and fully paid Regulated market where the issues securities are traded: the Company s shares are listed on the Bucharest Stock Exchange (ticker: EL) and Global Depositary Receipts (ticker: ELSA) are listed on the London Stock Exchange Applicable accounting standards: International Financial Reporting Standards as approved by the European Union; interim financial statements based on the International Accounting Standard IAS 34 Interim Financial Reporting Reporting period: Half year of financial year 2018 (period 1 January - 30 June 2018) Audit/Review: The condensed consolidated interim financial statements as at and for the period ended 30 June 2018 are reviewed by an independent financial auditor Ordinary Shares GDR ISIN ROELECACNOR5 US83367Y2072 Bloomberg Symbol 0QVZ ELSA:LI Currency RON USD Nominal Value 10 RON 40 RON Stock Market Bursa de Valori Bucuresti REGS London Stock Exchange MAIN MARKET Ticker EL ELSA Source: Electrica 4

5 2. Highlights The Group is a leading distributor and supplier of electricity on the regulated Romanian market. The Group s core business segments are the distribution of electricity to users and the supply of electricity to household and nonhousehold consumers. Electrica s distribution segment comprises the following subsidiaries: Societatea de Distributie a Energiei Electrice Muntenia Nord ( SDMN ), Societatea de Distributie a Energiei Electrice Transilvania Nord ( SDTN ), Societatea de Distributie a Energiei Electrice Transilvania Sud ( SDTS ) and Electrica Serv ( ELSERV ), and it is geographically limited to Northern Muntenia, Northern Transylvania and Southern Transylvania in what concerns the distribution subsidiaries. The Group holds exclusive distribution licenses for these regions which have a remaining term of 9 years and may be extended for another 25 years. Electrica Serv provides repair and other ancillary services to third parties and various services to the companies within the group (vehicles rental, building rental etc.) The electricity supply segment operates through Electrica Furnizare subsidiary and the main activity is the supply of electricity to final customers, both as the supplier of last resort (in the geographic regions where the Group's distribution segment operates) and as a competitive supplier, all over Romania. The Group holds two supply licenses covering the entire territory of Romania, valid until 2021 and respectively 2022, with the possibility of extension Key Events in H During the first semester of 2018, the following significant events for the main activity segments of the Group took place: Events in the period January June 2018 Main resolutions of the Ordinary General Meetings of Shareholders (OGMS) dated 9 February 2018: - Approval of the remuneration policy of the members of the Board of Directors of the Company and its application from the date of its approval by the OGMS; - 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. Main resolutions of the General Meetings of Shareholders dated 27 April 2018: - Approval of Electrica s 2017 financial statements and 2018 income and expenses budget, both at individual and consolidated levels; - Approval of the 2017 net profit distribution; gross dividend value - MRON ; gross dividend per share - RON ; payment date - 22 June 2018; - Election of the members of the Board of Directors of Electrica SA through the cumulative voting method: Elena Doina Dascalu, Gicu Iorga, Ramona Ungur, Valentin Radu, Arielle Malard De Rothschild, Bogdan George Iliescu, Willem Jan Antoon Henri Schoeber and the setting of their mandate s duration for a period of four years; - Rejection of the appointment of Deloitte Audit as Electrica s financial auditor; - Rejection of the establishment of a company's working point in Bucharest, 4 8 Nicolae Titulescu Road, West Wing, 6 th floor, district 1, Romania. 5

6 Main Board of Directors decisions in H and up to date: Board of Directors: - The appointment of Ms. Elena Doina Dascalu as Board of Directors Chair for a one year mandate; the approval of the committees composition and the election of their chairs for one year mandate, starting with 14 May 2018; - Strategy and Corporate Governance Committee: Mr. Willem Jan Antoon Henri Schoeber Chair, Ms. Arielle Malard de Rothschild Member, Mr. Gicu Iorga Member; - Audit and Risk Committee: Mr. Bogdan George Iliescu Chair, Ms. Arielle Malard de Rothschild Member, Ms. Ramona Ungur Member; - Nomination and Remuneration Committee: Mr. Valentin Radu Chair, Mr. Bogdan George Iliescu Member, Ms. Doina Elena Dascalu - Member Corporate Governance - policies: - The approval of the updated version of the Policy of Transactions with Related Parties, of the updated version of the Dividend Policy and of the Forecast Policy for Electrica S.A., all published on the Company s website on 19 February Intra-group loans and other intra-group facilities granted by Electrica SA: - Intercompany loans in favor of the DSOs, up to a total amount of RON 520 million for financing the 2018 CAPEX plan as necessary 5 April 2018; - The approval for granting intercompany loan in favor of Servicii Energetice Muntenia SA (a Group subsidiary), up to a total amount of RON 5.5 million 26 April Conclusion of the Balancing Responsible Party (BRP) activity transfer from Electrica S.A. to Electrica Furnizare S.A. 28 March 2018 Appeal of the Competition Council s Decision no. 77/ , by which the Company has been sanctioned with a fine amounting to RON 10.8 million (2.98% of the total turnover achieved in the financial year 2016). Main requests: to cancel the sanction mentioned above as unlawful and unfounded and, additionally, to reduce the amount of the fine. The suspension of the enforcement of the Decision until the final settlement of the claim was requested on 15 May 2018 but rejected and the company filed for appeal. Subsequent events During the meeting held on 25 July 2018, the Board of Directors of Electrica SA approved the revocation of Mr. Dan Crisfalusi from the position of Chief IT&T Officer of Electrica SA starting with July Distribution Segment a) Implementing the transformation plan in the distribution area of activity (Electrica Serv, SDMN, SDTN, SDTS) - after the business transfer from Electrica Serv, beginning with 1 November 2017, a new target model of organizing the distribution segment was implemented, having as main objective the accomplishment of the ambitious investment plan for 2018, as well as the increase of the reaction capacity and improving the performance in the operational area: the activities internalized from Electrica Serv (design, acquisition and logistics, maintenance, investments execution, technical auto services) were integrated in the functions of the new organizational model, and the transferred employees were included in the new organizational structure; the network construction entitities (internal structures) were created, dedicated to the internally generated investments; 6

7 the business processes were redefined based on the unique responsibility principle with emphasis on streamlining and the quality of services provided to customers. b) A new business plan has been approved for Electrica 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. Distribution Activity: ANRE (Romanian Energy Regulatory Authority) issued orders that require additional efforts from the distribution operators in order to comply with the new requirements: a) New orders: ANRE order no. 34/2018 that supplements and amends the Investments Procedure approved through Order 8/2016 which stipulates the additional obligation of the distribution operator to realize 95% from the value of the investment plan and the right of the distribution operator to request the accord for setting the auto fleet, and as a result, Electrica Group s distribution companies have requested the approval for setting its own auto fleet, providing supporting documents; The Order no. 145/2014 regarding the implementation of electricity smart metering systems was supplemented and amended by Order no. 25/2018 that stipulates: the value of the investments related to the smart metering systems may not exceed 10% of the investment program approved for 2018; the limit for investments recognized in 2018 is the weighted average cost of distribution operators at which a 10% variance is allowed; ANRE will approve until 30 September 2018, the conditions for drawing up investment programs for the implementation of the smart metering systems. b) Regulations regarding network connection ANRE order no. 95/2018 for the approval of mandatory clauses in the connection works services contracts: it imposes terms to the DSOs regarding the payment of the works executed by certified operators; ANRE Order no. 113/2018 amending the Methodology for Establishing Connection Tariffs, approved by ANRE Order no. 11/2014, and also the ANRE Order no. 141/2014 for the approval of the specific tariffs and specific indices used for setting the connection tariffs: it stipulates the removal of the cost of the meter from the connection tariff and implicitly its bearing by the DSO (i.e. the decrease of the investments value made with financial contributions and the increase of the investments realised with own sources, recognized in the tariff, within the limit approved for 2018); c) Energy law no. 123/2012 amended by the law no. 167/2018: The timetable for implementation of the smart metering systems recognized in the investment plans will be approved by ANRE as follows: c1) 1 January 2024: customers with an annual consumption higher than a threshold established by ANRE and producers with an installed power of less than 10 Kw; c2) 31 December 2028: customers who do not fall under c1). New contraventions and increased fines, between 5% and 10% of the annual turnover, for: 7

8 - the refusal of a distribution operator to take over the power grid if the owner of the distribution network is unable to provide universal service to the users connected to that network; - non-compliance by the transmission and system operator (TSO) and the distribution operators of the maintenance and investment programs, within the terms and conditions established by the ANRE regulation. Investments In the first half of 2018, it is estimated that the three distribution operators of Electrica Group realized and commisioned investments amounting to RON 183 million out of total year value of RON 905 million, which represents the highest historical level of investments of Electrica Group; The Investment Plans were drafted in accordance with the Offering Prospectus and the requirements stipulated by the regulatory authority in the ANRE Order no. 8/2016 "Procedure regarding the elaboration and approval of the investment programs of the concessionaire distribution operators of the electricity distribution service". Thus, the total value of the investment plans accepted by ANRE for the current regulatory period ( ) is RON 3,2 billion (in real terms 2013, value adjustable with inflation). Supply Segment Starting 1 April 2018, the activity of Balancing Responsible Party (BRP) was transferred from Electrica S.A. to Electrica Furnizare S.A; Starting with 10 May 2018, the license for the electricity supply activity of Electrica SA ceased, according to the ANRE Decision no. 728/2018 at the request of the operator. Supply activity In the first half of the year 2018 the implementation of the identified functionalities for streamlining the customer relationships within Electrica Furnizare SA was continued as follows: - Resolving the reported issues in the MyElectrica mobile application and aligning it with the web interface; - Continuing the implementation of the Customer Relationship Management (CRM) system; - Implementing in the production environment of an Enterprise Service Bus (ESB) component for the integration facility; - Automation development in the process of transfering meters readings from the distributors of electricity; ANRE Order no. 75/2017, which applies to H1 2018, has established the conditions for the participation of suppliers of last resort (SoLR) in the purchase of electricity on Centralized Market for Universal Service (CMUS) being obliged to ask for offers on CMUS for at least 50% of the energy requirement for universal service (US) clients, and the remaining energy could be purchased from the other centralized forward markets (CFM). The value of the purchase price used to calculate the competitive market component (CMC) depends on: the weighted average price of contracts concluded on CMUS, the weighted average price of all contracts concluded on the CFM (Centralized Forward Markets) after the entry into force of the ANRE Order and a profiling rate of up to 8%. For purchased energy on the CFM, ANRE considers the minimum of the weighted average purchase price realized on the CFM by SoLR and the weighted average price of all contracts concluded on the CFM after the date of entry into force of the ANRE Order with delivery during that period. The cost of supply per unit considered by ANRE is RON 4.5/client/month. The regulated profit for supplying US customers is 1.5% of total costs. Adjustment of the regulated tariff/ CMC/ last instance of the previous period applies; Based on ANRE Order no. 119 from 2017, EFSA was assigned as SoLR for its own licensed areas until 1 July The tariffs for transmission services and for system service, approved by ANRE Order no. 122/2017, were maintained at the same values and respectively increased by 25.4% compared with the second half of The 8

9 tariff for the transmission service for the network insertion remained at the same value as in the second half of 2017; The contribution for high efficiency cogeneration decreased by 3% compared with the second half of 2017, according to ANRE Order no. 123/2017; As result of finalizing the schedule of elimination of regulated tariffs and the total liberalization of electricity market starting 1 January 2018, ANRE approved the regulatory package for the last resort supplying service/ universal service, which is applicable starting with H2 2018: - Regulation for organizing and conducting auctions on the Centralized Market for Universal Service ANRE Order no. 27/2018 CMUS becomes voluntary market for SoLR; - The competitive selection regulations for appointment of the suppliers of last resort and for the change of some regulations in the electricity sector ANRE Order no. 26/2018 appointment of the SoLRs is realized through a competitive process: the bound SoLRs are appointed for a period of 4 years on the basis of eligibility and capability criteria and the optional SoLRsare designed based on eligibility, capability and availability criteria; Electrica Furnizare S.A. was appointed as bound supplier of last resort for the network areas Muntenia Nord, Transilvania Nord and Transilvania Sud, through ANRE Decision no. 657/2018 until June 2022; - The methodology for determining the calculation method and conditions of prices approval applied by the obliged and optional last resort suppliers to the final customers ANRE Order no. 39/2018 ANRE establishes for each network area and each SoLR the maximum price for universal service based on three components: acquisition cost (based on acquisitions realized and the average price on the centralized markets), the cost of supply (which includes the recognized profit), adjustment cost (previous corrections) and endorses the proposed prices by SoLR as equal to the maximum prices for universal service Summary of financial indicators A summary of the main indicators is presented below: - During the first semester of 2018, EBITDA increased by RON 263 million to RON 477 million, as compared with the same period of 2017; - The volume of the investments in the distribution network in the first six months of 2018 was of RON million, increasing by RON 30.4 million, or 12%, from RON 259 million in the first semester of 2017; - The operating profit in the first semester of 2018 was of RON 261 million, posting a significant increase as compared with the same period of the previous year, when the Group recorded an operational profit of only RON 18 million, mainly due to the increased electricity acquisition prices in H1 2017, as a result of the energy crisis from the beginning of prior year; - The cost of electricity purchased decreased by RON million, or 17%, to RON 1,269 million in the six months period ended 30 June 2018, from RON 1,531 million recorded in the comparative period, when it has been recorded a significant electricity price increase; - Revenue from the distribution segment increased by RON 40 million, or 3%, to RON 1,244 million (out of which RON 671 million external revenues), compared to the first half of the prior year; the contribution of the electricity distribution segment to the Group s revenues is of 25%; - In the first semester of 2018, the revenue from the supply segment decreased by RON 166 million y-o-y, or 8%, to RON 1,979 million (out of which RON 1,964 million external revenues), mainly from the variation of 9

10 the revenues from BRP ( Balancing Responsible Party ); the contribution of the electricity supply segment to the Group s total revenue is of 74%. 3. Organizational Structure 3.1. Group Structure The Company is the parent company for the Group, which comprises four subsidiaries in its distribution segment: Societatea de Distributie a Energiei Electrice Transilvania Nord SA ( SDTN ), Societatea de Distributie a Energiei Electrice Transilvania Sud SA ( SDTS ), Societatea de Distributie a Energiei Electrice Muntenia Nord SA ( SDMN ), FISE Electrica Serv SA ( Electrica Serv ), whereas the supply segment comprises one subsidiary, Electrica Furnizare S.A. ( Electrica Furnizare ). The Company also owns all shares of Servicii Energetice Oltenia SA ( SE Oltenia ) and Servicii Energetice Muntenia SA ( SE Muntenia ). In January 2014, the Board of Directors of Servicii Energetice Oltenia and in October 2014, the Board of Directors of Servicii Energetice Muntenia decided the commencement of the insolvency procedure with a view to reorganization. The insolvency processes were initiated in As of 30 June 2018, the main shareholder of Electrica SA is the Romanian State, represented by the Ministry of Energy ( %). Figure 1: Entities included in the consolidation as of 30 June 2018: Source: Electrica 10

11 Presentation of Group subsidiaries Subsidiary Societatea de Distributie a Energiei Electrice Muntenia Nord SA ("SDMN") Societatea de Distributie a Energiei Electrice Transilvania Nord SA ("SDTN") Societatea de Distributie a Energiei Electrice Transilvania Sud SA ("SDTS") Electrica Furnizare SA ( EFSA ) Electrica Serv SA ( ELSERV ) Servicii Energetice Muntenia SA (in insolvency) ( SEM ) Servicii Energetice Oltenia SA (in insolvency) ( SEO ) Source: Electrica S.A. Activity Electricity distribution in North Muntenia geographical area Electricity distribution in Northern Transylvania geographical area Electricity distribution in Southern Transylvania geographical area 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) Registration code Headquarters % shareholdings as of 30 June Ploiesti 99, % Cluj-Napoca 99, % Brasov 99, % Bucharest 99, % Bucharest 100% Bucharest 100% Craiova 100% The main activities of the Group are the regulated distribution of electricity (through operation and development of electricity distribution networks) and the electricity supply to end consumers. The Group is the electricity distribution operator and the main electricity supplier in North Transylvania (Cluj, Maramures, Satu Mare, Salaj, Bihor and Bistrita-Nasaud counties), South Transylvania (Brasov, Alba, Sibiu, Mures, Harghita and Covasna counties) and North Muntenia (Prahova, Buzau, Dambovita, Braila, Galati and Vrancea counties), ensuring the electricity distribution service 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 (SDMN, SDTN and SDTS) invoice the electricity distribution service to electricity suppliers (mainly to Electrica Furnizare SA subsidiary, the main electricity supplier in Muntenia North, Transylvania North and Transylvania South areas), which further invoice the electricity consumption to final consumers. Electrica Furnizare is an electricity supplier in the competitive market and supplier of last resort ("SoLR", defined as a supplier designated by the regulator - ANRE - to provide the universal electricity supply under regulated conditions) in the Muntenia North, Transylvania North and Transylvania South regions. According to the regulations issued by the National Regulatory Authority for Energy ("ANRE"), the suppliers of last resort are obliged to ensure the supply of electricity to the final customers who have not exercised their eligibility right (the right to choose the electricity supplier) and to end customers who are in the position of not being able to secure electricity from any other source, including customers who have used eligibility. 11

12 The supply of electricity to customers in the competitive market is based on negotiated contracts within the limits of the regulations in force. Electricity consumption is invoiced, according to the contractual terms, at prices negociated with the final customer. The provision of electricity in regimes of universal service and in the last resort is performed based on contracts regulated by ANRE Orders Key information by segments DISTRIBUTION SEGMENT Essential information The Regulated Assets Base (RAB estimated) at the end of H was RON 4,788 million 197,257 km of electric lines 7,591 km for High Voltage ( HV ), 45,529 km for Medium Voltage ( MV ) and 144,138 km for Low Voltage ( LV ) Total area covered: 97,196 km 2, 40.7% of Romania s territory 3.72 million users at the end of H for the distribution activity 8.8 TWh of electricity distributed in H1 2018, a decrease of 1.8% as compared to H Figure 2: Romanian electricity distribution map 12

13 Figure 3: Quantity of electricity distributed on voltage levels (TWh) H H Low Voltage Medium Voltage High Voltage SUPPLY SEGMENT Essential market data (according to ANRE Report for April 2018) The supply market comprises both the competitive segment and the regulated segment The regulated segment comprises five suppliers of last resort, while the competitive market segment comprises 95 suppliers (including those of last resort active in the retail market competitive segment, of which 89 are relatively small - less than 4% market share) Electrica Furnizare has a market share of 17.70%. Electrica Furnizare is the market leader on the regulated market, with a market share of 43.06%, while for the competitive market has a share of 9.77%. By comparison, in 2017, Electrica Furnizare had a market share of 40.79% on the regulated market and a 11.58% market share on the competitive market (ANRE report for December 2017); In H1 2018, the Group supplied to a number of approx million final consumers 4.8 TWh of electricity, representing a decrease of 4.7% y-o-y. 4. Shareholders Structure Until July 2014, the Romanian State, acting through the Ministry of Energy was the sole shareholder of Electrica S.A. Starting with 4 July 2014 the Company s shares are listed on Bucharest Stock Exchange, and the GDRs are listed on London Stock Exchange. As of 30 June 2018, the shareholder s structure is: Shareholder Shares Percentage of share capital (%) Romanian State through the Ministry of Energy 168,751, % BERD 23,955, % Bank of New York Mellon - DRS 12,076, % Other legal persons 123,004, % Individual persons 18,152, % Total 345,939, % 13

14 Source: Electrica S.A. Following the stabilization process after the IPO, Electrica SA owns 6,890,593 of its own shares, representing % of the total share capital. These shares do not entitle Electrica to voting rights, nor dividends. Figure 4: Shareholders Structure as of 30 June % % % Romanian State EBRD BNY MELLON DRS - LSE Other legal persons % % Individual persons 14

15 5. Operational Results Selected financial information from the condensed consolidated statement of profit or loss in RON million. Indicator 30 June June 2017 Variation (%) Revenues 2,654 2,675-1% Other operating income % Electricity purchased (1,269) (1,531) -17% Green certificates (155) (183) -15% Construction costs related to concession agreements (290) (259) 12% Employee benefits (297) (317) -6% Repairs, maintenance and materials (42) (30) 42% Depreciation and amortization (216) (197) 10% Reversal of impairment of property, plant and equipment, net % Impairment of trade and other receivables, net (2) (17) -86% Change in provisions, net 0 (5) - Other operating expenses (196) (209) -6% Operating profit ,377% Finance income % Finance costs (3) (3) 30% Net finance income % Profit before tax % Income tax expense (54) (18) 195% Profit for the period ,467% Profit/ (Loss) for the period attributable to: - owners of the Company 210 (6) - - non-controlling interests % Profit for the period ,467% Key financial indicators for H1 2018: Revenues: RON 2.7 billion, a 1% y-o-y decrease; EBITDA: RON 477 million, a RON 263 million increase compared to same period of last year; EBIT: RON 261 million, a RON 244 million increase compared to H1 2017; EBT: RON 264 million, a RON 237 million increase compared to same period of last year; Net Profit: RON 210 million, a RON million y-o-y increase. 15

16 Revenues and other operating income Figure 5: Revenue for H and comparative information (RON mil.) 5,518 5, ,117 2, ,230 2, ,492 2, H H Revenues from Green Certificates Revenues (ex-green Certificates) Electrica s revenues and other operating income in the six month period ending 30 June 2018 and 30 June 2017 amounted to RON 2,728 million and RON 2,766 million, respectively, a decrease in revenue by RON 37 million, or 1%. Revenues As of January 1 st, 2018, the Group applied the treatment of IFRS 15 Revenue from contracts with customers, and the consequence is that the revenue and expenses from Balancing Responsible Party activity ( BRP ) have been eliminated, without affecting the margin. If this financial reporting standard wouldn t have been implemented, the Revenues and respectively Electricity purchased lines from the consolidated condensed statement of profit or loss for the six months period ended at 30 June 2018 would have been higher by RON 52 million, without any impact on the margin. The first semester of 2017 has been significantly affected by the balancing market, when there have been higher imbalances due to the energy crisis. The consolidated revenues presented for H include Balancing Responsible Party activity revenues of approx. RON 181 million, since the Group decided to apply IFRS 15 using the modified retrospective method, without restating the figures of the comparative period. The revenues decreased by RON 22 million, or 1%, being the cumulative effect of the following main factors: - external revenue (outside the Group): the electricity sales towards third parties have increased by RON 105 million, having a favorable impact on the consolidated revenue; - RON 40 million increase of the distribution segment s revenues; - decrease by RON 166 million of the supply segment, out of which RON 52 million are attributable to the change in the financial reporting standards. Revenue from the electricity distribution segment increased by RON 40 million, or 3%, to RON 1,244 million in the six month period ending 30 June 2018 from RON 1,204 million in the six month period ending 30 June 2017; even if the total quantity distributed decreased by 28%, evolution that influenced even the decrease of the total distributed quantity, the increases recorded on medium and low voltage by 7.8% and 1.6%, respectively, generated an overall positive effect on the distribution revenues, compensating even the reduction of the regulated distribution tariff; the increase of the revenues from reactive energy had also a positive impact on the revenues. The revenues 16

17 from electricity distribution segment are influenced also by the recognition of investments into the network under concession in accordance with IFRIC 12. In the six month period ending 30 June 2018, revenue from the electricity supply segment decreased by RON 166 million, or 8%, to RON 1,979 million from RON 2,145 million in the six month period ending 30 June The variation of the supply segment is generated by two elements: the electricity supply with a positive impact on the segment revenue, mainly due to the increase in the sale prices by 10.6%, which covers the impact of the quantity decrease by 4.7%, while the Balancing Responsible Party activity revenues variation had a negative influence mainly due to the accounting for BRP activity starting 1 January in accordance to IFRS 15, thus 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 RON 44.92/MWh in the six month period ending 30 June 2017 to RON 46.93/MWh in the six month period ending 30 June Other operating income The other operating income decreased by RON 15 million, or 17%, to RON 75 million in the six month period ending 30 June 2018 from RON 90 million realized in the six month period ending 30 June The decrease is generated by the fact that in H were recognized revenues from litigations won with customers, having as subject old receivables due and, also, from compensations for termination of contracts on the supply segment. Electricity purchased The expense for electricity purchased decreased by RON million, or 17%, to RON 1,269 million in the six month period ending 30 June 2018 from RON 1,531 million in the six month period ending 30 June The decrease is mainly due to the fact that the first part of 2017 was affected by the unfavorable events from the energy market, which generated significantly higher electricity prices as compared to H The cost of the electricity purchased for supply and balancing decreased by RON 210 million, or 19%, to RON 867 million in the first six months of 2018, from RON 1,077 million recorded in the same period of 2017, the main effect being the normalization of electricity purchase prices; out of this variance, RON 52 million decrease is attributable to the change in the financial reporting standards. Regarding the distribution segment, in the six months period ending 30 June 2018, the cost of the electricity purchased to cover network losses decreased by RON 28 million, or 9%, to RON 285 million, from RON 313 million recorded in the six month period ending 30 June 2017, the evolution being attributable mainly to the decrease in the electricity purchase price. The table below presents the structure of the electricity purchased expenses for the indicated periods: Six month period ending 30 June (RON million) Electricity purchased to cover network losses Transmission and system services Electricity purchased for supply and trading 867 1,077 Total electricity purchased 1,269 1,531 17

18 Green Certificates Green Certificates cost is recognized in the profit and loss account based on the quantitative quota set by the regulatory authority, representing the amount of the Green Certificates that the Group has to purchase for the current year and the price of Green Certificates on the centralized market. The cost with the acquisition of Green Certificates is a pass through cost. In the six months period ended 30 June 2018, the cost for the acquisition of the Green Certificates decreased by RON 28 million, or 15%, to RON 155 million, from RON 183 million in the six months period ending 30 June The decrease was mainly determined by: - lower supplied volumes by 8% (RON 15 million positive variance); - the regularization for 2017 with an impact in 2018 in the amount of RON 36 million compared to the regularization for 2016 with impact in 2017 in amount of RON 14 million (RON 22 million positive variance - these regularizations are reflected in both revenues and expenses and have no impact on the net result); - 1.4% increase in the average price from RON per Green Certificate in the six months period ending 30 June 2017 to RON per Green Certificate in the six-month period month ended 30 June 2018 (RON 9 million negative variance). In 2018, the regulatory Green Certificates quota imposed to the electricity suppliers by ANRE increased to Green Certificates per MWh supplied from Green Certificates per MWh supplied for the six month period ending 30 June 2017 (average value between the quota of for the first quarter and for the second quarter). Construction costs The costs related to concession agreements increased by RON 30.4 million, or 12%, to RON million in the six month period ending 30 June 2018 from RON 259 million in the six month period ending 30 June This increase is attributable to the realised investments related to the Regulated Asset Base. Salaries and other employee benefits The expenses for salaries and employee benefits decreased by RON 20 million, or 6%, to RON 297 million in the six month period ending 30 June 2018 from RON million in the six month period ending 30 June 2017, as an effect of the reduction in the number of employees, following the activity optimization measures taken by the Group. Repairs, maintenance and materials In the six months period ending 30 June 2018, the repairs, maintenance and materials expenses increased by RON 12.5 million, or 42%, to RON 42.3 million, from RON 29.8 million in the six month period ending 30 June 2017, considering the Group s reorganization of maintenance, investments and design activities to support the investments plan. Other operating expenses Other operating expenses decreased by RON 13 million in the six month period ending 30 June 2018 compared to the same period of 2017, to RON 196 million, from RON 209 million, mainly as a net effect of the following factors: 18

19 - although in 2018, the other operating expenses increased, as an effect of the aforementioned reorganization of the group for the maintenance, investments and design activities, which led to increases in several categories of expenses with third parties, the overall evolution is downward as in 2017 Electrica incurred a significant expense related to Termoelectrica litigation, expense that has no effect in EBITDA and EBITDA margin Figure 6: EBITDA and EBITDA margin for H and comparative information (RON million and %) 17% 18% 8% 11% H H Operating profit The Group EBIT increased by approx. RON 244 million y-o-y adding to the EBITDA evolution only the slight impact of the depreciation and amortization, an increase by RON 19 million or 10%, mainly due to the increase of investments commissioning and also to the results of revaluations performed as of 31 December Figure 7: EBIT and EBIT margin for H and comparative information (RON million and %) 11% 10% 586 4% 1% H H Net finance income The net financial result at group level decreased by 72% in the six month period ending 30 June 2018 compared to the similar period in 2017, due to lower finance income while the finance costs remained at the same level. Profit before tax The profit before tax increased by RON 237 million, to RON 264 million in the six month period ending 30 June 2018 from RON 27 million in the six month period ending 30 June

20 Income tax expense The income tax increased by RON 36 million, to RON 54 million in the six month period ending 30 June 2018 from RON 18 million in the six month period ending 30 June 2017, this evolution being in line with the increase of the profit before tax. Net profit for the period As a result of the factors described above, the net profit increased by RON million, to RON 210 million in the six month period ending 30 June 2018 from RON 8 million in the six month period ending 30 June Figure 8: Net profit and Net profit margin for H and comparative information (RON million and %) 8% 8% 469 3% 0% H H

21 6. Financial position Selected financial information from the consolidated statement of financial position in RON million Indicator 30 June December 2017 Variation (%) ASSETS Non-current assets Intangible assets related to concession agreements 4,431 4,331 2% Other intangible assets % Property, plant and equipment % Restricted cash % Deferred tax assets % Other non-current assets 1 1-4% Total non-current assets 5,459 5,409 1% Current assets Trade receivables % Other receivables % Cash and cash equivalents % Deposits, treasury bills and government bonds % Inventories % Prepayments % Green certificates % Income tax receivable % Total current assets 1,813 2,208-18% Total assets 7,271 7,617-5% EQUITY AND LIABILITIES Equity Share capital 3,814 3,814 0% Share premium % Treasury shares (75) (75) 0% Pre-paid capital contributions in kind from shareholders 5 5 0% Revaluation reserve % Other reserves % Retained earnings 1,330 1,358-2% Total equity attributable to the owners of the Company 5,620 5,656-1% Non-controlling interests - - Total equity 5,620 5,656-1% 21

22 Indicator Liabilities 30 June December 2017 Variation (%) Non-current liabilities Financing for network construction related to concession agreements % Deferred tax liabilities % Employee benefits % Other payables % Long-term bank borrowings % Total non-current liabilities % Current liabilities Financing for network construction related to concession agreements % Bank overdrafts % Trade payables % Other payables % Deferred revenue % Employee benefits % Provisions % Current income tax liability % Total current liabilities 909 1,224-26% Total liabilities 1,652 1,962-16% Total equity and liabilities 7,271 7,617-5% Non-current assets In the six month period ending 30 June 2018, Electrica s non-current assets increased by RON 50 million, to RON 5,459 million from RON 5,409 million as at 31 December 2017, mainly due to the net effect between the investments made by the distribution subsidiaries (the most relevant values of the investments and commisionings are presented in Annex 11.2) and several disposals that generate a decrease of property, plant and equipment. Current assets At the end of the first semester of 2018, the current assets went down by RON 396 million, as compared with 31 December 2017, from RON 2,208 million to RON 1,813 million, driven by the decrease of deposits, treasury bills and government bonds and of the trade receivables. Below is detailed the evolution of the elements of current assets that generate most of the variation. Trade receivables Trade receivables decreased by RON 122 million, to RON 682 million in the six month period ending 30 June 2018, from RON 804 million as at 31 December This variation is mainly generated by the lower level of revenues generated by the supply segment, correlated with the decrease of the average receivables collection period. 22

23 Deposits, treasury bills and government bonds The deposits, treasury bills and government bonds are denominated in RON with original maturity of more than three months and have an average interest rate (yield) of 2.16%. The variation of these elements from RON 747 million to RON 500 million is the result of using internal financing for investments. Share capital The issued share capital in nominal terms consists of 345,939,929 ordinary shares at 30 June 2018 with a nominal value of RON 10 per share and did not change since 31 December All shares rank equally with regard to the Company s residual assets. The holders of ordinary shares are entitled to receive dividends as declared, and are entitled to one vote per share at General Shareholders Meetings of the Company. The Company recognizes changes in share capital only after their approval in the General Shareholders Meeting and their registration by the Trade Register. The contributions made by the shareholders which are not yet registered with the Trade Register at the end of the period are recognized as pre-paid capital contributions in kind from shareholders. Treasury shares In July 2014 the Company purchased 5,206,593 ordinary shares and 421,000 Global Depositary Receipts, equivalent to 1,684,000 shares, for price stabilization purposes. The total amount paid for acquiring the shares and the Global Depositary Receipts was RON 75,372 thousand. Dividends Dividends for the year ended 31 December 2017, in amount of RON 245,370,004 were declared based on the Company s individual financial statements. The dividends in respect of the year ended 31 December 2017 were approved through Resolution of the OGMS no. 2 from 27 April 2018 and started to be paid from 22 June Gross dividend per share approved by the OGMS was RON Current liabilities Current liabilities decreased by 26% at the end of the first semester of 2018 compared to 31 December 2017, to RON 909 million from RON 1,224 million, mainly as a result of changes in the following categories: the decrease of the bank overdrafts by RON 117 million, or 47%; trade payables decreased by 216 million, or 31%, from RON 689 million to RON 474 million. The main categories included are: payables to electricity suppliers, CAPEX suppliers and other suppliers (of services, materials, consumables etc); the effect is the result of the payables turnover improvement. Provisions As at 30 June 2018, the provisions have a relatively constant value compared to 2017 year end and refer mainly to the fine from the Competition Council, amounting to RON 10,8 million, and other provisions for claims for which the Group, as defendant, might have the obligation to pay the amounts subject to litigations. 23

24 7. Statement of cash flows Selected financial information from the consolidated statement of cash flows in RON million: Indicator 30 June June 2017 Variation (%) Cash flows from operating activities Profit for the period ,467% Adjustments for: Depreciation % Amortization % Reversal of impairment of property, plant and equipment, net (0) (1) -75% Loss/(Gain) on disposal of property, plant and equipment 0 (0) - Impairment of trade and other receivables, net % Change in provisions, net (0) 5 - Net finance income (2) (9) -72% Income tax expense % % Changes in : Trade receivables % Other receivables % Deposits, treasury bills and government bonds 4 (1) - Prepayments (5) (1) 441% Green certificates 10 (6) - Inventories (3) (2) 75% Trade payables (96) (233) -59% Other payables 10 (7) - Employee benefits (18) (20) -10% Restricted Cash - (168) -100% Deferred revenue (2) (1) 119% Cash (used in) / from operating activities 518 (103) - Interest paid (1) (1) 6% Income tax paid (11) (19) -41% Net cash (used in) / from operating activities 506 (123) - Cash flows from investing activities Payments for purchases of property, plant and equipment (2) (18) -90% Payments for network construction related to concession agreements (385) (230) 68% Payments for purchases of other intangible assets (2) - - Proceeds from sale of property, plant and equipment ,823% Purchase of treasury bills and government bonds (95) (543) -82% Proceeds on maturity of treasury bills and government bonds % Increase in deposits with maturity of 3 months or longer (452) (21) 2,042% Proceeds from deposits with maturity of 3 months or longer % 24

25 30 June June 2017 Variation Indicator (%) Interest received % Net cash from/ (used in) investing activities (126) Cash flows from financing activities Proceeds from long term bank loans % Proceeds from short term bank borrowings % Repayment of short term bank borrowings - (10) -100% Repayment of financing for network construction related to concession agreements (13) (48) -73% Dividends paid (244) (250) -2% Net cash used in financing activities (257) (117) 120% Net (decrease) / increase in cash and cash equivalents 119 (46) - Cash and cash equivalents at 1 January % Cash and cash equivalents at 30 June % In the six month period ending 30 June 2018, net cash generated by the operating activities amounted to RON 506 million. The profit before tax for the period was RON 264 million. The key adjustments to the net profit were: adding depreciation and amortization in the amount of RON 216 million, a net change in trade and other receivables of RON 138 million and deducting a change in trade and other payables of RON 104 million (out of which the change in employee benefits and provisions of RON 20 million). Income tax and interest paid amounted to a total of RON 12 million. In the six month period ending 30 June 2017, net cash used in operating activities amounted to RON 123 million. The profit before tax for the period was RON 27 million. The key adjustments brought to the net profit were: adding depreciation and amortisation in the amount of RON 197 million, a net change in trade and other receivables of RON 98 million, deducting the variation of RON 168 million of restricted cash (representing guarantees) and deducting a change in trade and other payables of RON 259 million (out of which the change in employee benefits and provisions of RON 20 million). Income tax and interest paid amounted to a total of RON 20 million. 8. Outlook Tendencies in the energy market Considering the developed EU energy policies, the following medium and long term trends are expected to characterize the Romanian electricity market: Through the completion of the liberalization calendar, the competition on the electricity supply market segment has an increasing trend at national level and will be accompanied by the diversification of the portfolio of products offered to customers (offers for gas, insurance, household appliances etc.) and digitalization of the services offered (mobile applications, invoices and online payments, expanding customer service through chat type solutions); 25

26 Customers who, in accordance with the legal provisions, have the right to benefit from the universal service and do not wish to migrate to the eligible segment, will be provided with the supply of electricity under regulated conditions. It is possible to have a moderate competition on this segment as well, with the new rules for optional suppliers of last resort; A trend in electricity distribution area is the remuneration of the distribution operator taking into consideration the quality of service, together with the operational costs and efficiency; Distributed energy generation technologies will determine the distribution operators to adapt their processes and strategies for the upgrade and development of the network and offer solutions to independent producers, considering the new prosumers, which are active participants on the energy market; in this context, significant investments are needed to improve infrastructure, both for transmission and for distribution; Full electric vehicles and light commercial vehicles are expected to increase the consumption of electricity in the transportation sector; Future technological development will support energy efficiency policies such as: - Development of transmission and distribution networks, including smart grid and smart metering; - End-use energy efficiency (thermal integrity of buildings, lighting, electric appliances, motor drives, heat pumps, etc); - The implementation of smart metering will offer to the consumers complex tariffs options, detailed information about the consumption profile, which might lead to increased flexibility and peak demand reduction. Thus, the consumers shall be better informed and involved in decision making process, as active participants. The pace of implementation of smart metering depends on the implementation timetable to be adopted at national level; - Significant cost reduction of photovoltaic technologies is a development opportunity for smaller-scale generation projects, especially in the household area; Development of the transmission and distribution infrastructure and long-distance interconnection will become a necessity. The Electricity Market Target Model, which implies the development of European Union s internal electricity market, will continue to evolve and be in line with future trends and challenges in the energy industry. The following table presents key drivers of changes in the electricity market: Key driver Description Impact on GDP evolution and industry structure Demographic evolution and technology development Economic growth is a key determinant of electricity demand. Although there is not a one-to-one relationship between GDP growth rates and electricity demand growth rates, there is a positive correlation, mainly between the industrial demand for electricity and economic growth. In the future, household and industrial electricity demand will also be influenced by energy efficiency policies. Intensification of electricity consumption is a major trend in Romania. Over , 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 (approx. 0.5% p.a.), 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 Electricity consumption Electricity consumption 26

27 Key driver Description Impact on Changes in regulations Technological development Increase in environmental awareness Source: Electrica 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. Also, changes of the methodology during the regulatory period created a lack of predictability and stability of regulatory environment, with a negative impact on the distribution operators operational and financial performance. From 2019, the 4th Regulatory Period will start, and among the proposals published by ANRE there are significant changes in the methodology for all tariff elements (Regulated Rate of Return, Regulated Assets Base, Network losses, Operating Expenses, etc), an increased focus on the efficiency in exploitation, maintenance, utilization as well as increasing the pace of network investments. Smart networks and smart meters will create benefits for 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 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. Electricity prices Electricity prices and consumption Electricity prices and consumption, regulatory framework Regulatory Framework The energy regulatory framework has experienced major changes in the past decade, including market liberalization, unbundling and support scheme for renewable energy. Other legislative changes that have recently occurred in Romania refer to the remuneration of the distribution operators - according to the ANRE Order no. 146/2014, starting with 2015 the distribution operators Regulated Rate of Return (RRR) was reduced to 7.7% from 8.52%. Also, ANRE Order no. 165/2015 has modified art. 105 para. 1 from the Methodology of establishing the electricity distribution tariffs, eliminating the cap regarding the maximum percentages by which the distribution tariffs could be diminished, keeping however the limits concerning the maximum percentage increase of these tariffs. ANRE s changes of the distribution tariff setting methodology, including the change in level of remuneration given by the Regulated Rate of Return, during the regulatory period, induce a lack of predictability and stability of regulatory environment and a negative impact on the Groups distribution operators operational and financial performance. For the distribution area, the following ANRE proposals for the 4 th regulatory period are relevant, published on ANRE website on 20 July 2018: Regulated Rate of Return (RRR) to be corrected annually (the risk free rate is defined in real terms, interest on government securities with a maturity of ten years); 27

28 Regulated Assets Base (RAB) ANRE propose the exclusion from RAB of the fixed assets not recorded and/or rented; the inflation is automatically considered by ANRE, until the difference between the inflated RAB and net book value of the assets included in RAB is lower than 5%; RAB will be decreased with the disposals from the initial RAB made in the period ; Investments in the case of the partial realization of the investment plan, annual corrections will be made, and the negative investment corrections from the end of the period will be penalized through a 10% increase; Network Losses ( NL ) the following targets have been proposed: the target for 2019 on voltage levels minimum between the target approved for 2018 and the percentage realized in RP3; the target for low voltage (LV) for 2019 is max. 15%; the target for RP4 (4th Regulatory Period) for LV will gradually decrease depending on the percentage of NL for 2019, as follows: - If the NL target for 2019 is higher or equal to 15%, the reduction of the NL target during the regulatory period will be at least of 25%; - If the NL target for 2019 is between 14% and 15%, the reduction of the NL target during the regulatory period will be at least of 20%; - If the NL target for 2019 is between 13% and 14%, the reduction of the NL target during the regulatory period will be at least of 15%; The price recognized for NL will be the minimum between the average prices of the distribution operators and the transport and system operator, additional to which is accepted a 2% price increase related to imbalances cost; The controllable costs (controllable OPEX) the costs taken into account as a reference at the start of the regulatory period are equal to the minimum of the controllable costs approved for 2018 and the minimum controllable costs incurred in RP3; annual corrections will be calculated and transmitted; 40% from the efficiency gain is attributable to the distribution operators; a detail of the costs unrecognized in tariff is presented; the efficiency factor considered for RP4 is higher or equal to 1,5% and is not applied for the maintenance costs, health and safety costs and personnel costs; the rules of cost allocation are strict, and without complying with them, the costs realized won t be recognized; Costs with affiliates the average cost per user will be established, and will not exceed the minimum of the average cost per user recorded in each year of the RP3 by all the distribution operators (DSO) and the one recorded by the distribution operator in each year of the RP3; Profit from other activities corrections will be made in order to keep the profit from other activities at max. 5%; Number of employees the distribution operator will maintain an optimal number of employees, assumed for the whole RP4; Working capital financing component - elimination from revenue (tariffs). Other significant changes to the Romanian legislation, relevant for the supply segment, refer to: The complete market liberalization starting January 1, 2018 may change, in the next period, the structure of the customer portfolio, through the migration of the household customers to the eligible segment; Amendments to the Electricity and Natural Gas Law no. 123/2012: - It introduces the obligation of the electricity suppliers to purchase electricity so as to ensure the coverage of their customers' consumption, with priority for the customers of the universal service in their own portfolio. The provision leads to the change/ revision of the energy acquisition strategy; 28

29 - The supplier does not have the right to unilaterally terminate the electricity supply contracts with the final customers. The effects of the application are major, the supplier being practically captive in a contract that may become unprofitable. Amending the Government Emergency Ordinance no.24/2017 regarding the amendment and completion of the Law no. 220/2008 for establishing the system of promoting the production of energy from renewable energy sources and for amending some normative acts: - Starting with the 2018 analysis year, by 1 March of each year, ANRE establishes through order the mandatory annual green certificate acquisition quota for the previous year, based on the final electricity consumption of the previous year, so that the average impact the final consumer will be up to 11.7 euro/mwh in 2018, 12.5 euro/mwh in 2019, 13 euro/mwh in 2020 and 2021 and 14.5 euro/mwh from 2022; - Prosumers who own electricity generating units with renewable power of up to 27 kw installed power on consumption place can sell electricity produced and delivered to the electricity network to the electricity suppliers with whom they have concluded contracts for the supply of electricity, according to ANRE regulations. Electrica Group Currently, Electrica is in the process of reviewing its medium and long-term strategy in order to incorporate and capitalize on changes in the national and international environment, taking also into account the organizational changes. The Group analyzes the strategic options and aims to implement streamlining measures, including through restructuring programs and transformation of group s divisions, training and staff development programs, redesigning business models, introducing a system of intra-group service contracts, or entering new business segments, in order to improve both the quality of the services offered and the financial performance. In this process, for the distribution area, an important element is the finalization and publication of the methodology for the 4th Regulatory Period by ANRE. The most important assumptions considered for the strategy review are as follows: The Romanian energy mix landscape is changing significantly, being heavily disrupted by the advent of renewables; Romanian GDP will have a positive trend in the future; however, divergent trends in the electricity consumption would lead to a stable long-term outlook (increasing trend of the electricity consumption on medium term, but stagnating/ decreasing on longer term); Romania will maintain its commitment towards the accomplishment of the strategy regarding the climate changes and the implementation of the new Framework for the period ; The remuneration mechanism for distribution companies will not change significantly in the year However, the remuneration mechanism, the tariff type and regulated rate of return could be subject to changes beginning with the next regulatory period and are key drivers for strategic planning; In supply, the market liberalization has changed the landscape significantly, requiring repositioning of all market players; in addition, impeding challenges to Supplier of Last Resort business model are expected and should be considered. No major geopolitical turbulences have been taken into account, which might significantly affect the Romanian electricity market; Financial markets would allow access to financing sources to support companies investment programs. 29

30 Please note that other factors not presented above and not considered by the Group may occur and may have a significant impact on the implementation and evolution of the Group s strategy. 9. Capital Expenditures A core part of Electrica business strategy includes implementing the investment plan. Electrica s operations require significant capital expenditures mostly connected with its operations in the electricity distribution segment. Furthermore, Electrica s assets require periodic maintenance and modernization in order to improve operational efficiency. Electrica s capital expenditures in the six month period ending 30 June 2018 and 30 June 2017 amounted to RON million and RON 266 million, respectively. The investments in the distribution network increased by RON 30.4 million, or 12%, to RON million in the six month period ending 30 June 2018 from RON 259 million realized in the same period of the previous year. This increase is mainly attributable to the realised investments related to the Regulated Asset Base. The volume of investments had a material impact, and, according to Electrica s expectations, will continue to have an impact on the results of Electrica s operations, Electrica s indebtedness, and future cash flows. Capital expenditures in the distribution network will only have the anticipated positive impact on Electrica s result of operations to the extent they are recognised in the Regulated Asset Base by ANRE and considering the rate of return approved by the regulatory authority. Figure 9: Network investments for all national DSOs for and the variation 2017 vs (RON mil.) Source: 2017 Annual ANRE report and Electrica During RP3, Electrica Group had the most ambitious medium term investment plan, correlated with the objectives assumed after the IPO. During 2017, the investments execution was supported by the optimization measures implemented within the distribution area, SDMN and SDTS significantly improving their performance y-o-y. The average performance of Electrica DSO in 2017 in terms of investment commissionings, which is 92.8% of the planned values, was approx. 69% higher than the national average achieved in 2017 by the other distribution operators. A list of the most significant investments of Electrica Group in H is presented in Annex

31 10. Statements We confirm to the best of our knowledge that the reviewed interim condensed consolidated financial statements for the six months period ended June 30, 2018 prepared in accordance with the International Accounting Standard IAS 34 Interim Financial Reporting give a true and fair view of Electrica Group s assets, liabilities, financial position and profit or loss, as required by the applicable accounting standards, and that this Report prepared in accordance with art. 65 of the law no. 24/2017 on issuers of financial instruments and market operations and to annex no. 14 to ASF Regulation no. 5/2018 provide a correct view of financial and economic situation of the company and its activity, the important events that have occurred during the period and a description of the principal risks and uncertainties. Chair of the Board of Directors, Doina Elena DASCALU Chief Executive Officer, Dan Catalin STANCU Chief Financial Officer, Mihai DARIE 31

32 11. Annexes Contracts concluded reported according to art. 82 of Law 24/2017 In the first semester of 2018 five current reports were issued with regard to the contracts concluded according to art. 82 of Law 24/2017 (previously art. 225 of Law 297/2004, annuled). Current report from 3 January 2018: Subsequent contract no. 344/ with Filiala de Intretinere si Servicii Energetice Electrica Serv : Transportation services for Electrica for the period 1 January June 2018 Current report from 29 March 2018: Business transfer contract no. 42/ with Electrica Furnizare: Business and assets transfer of Balancing Responsible Party activity Current report from 5 April 2018: Loan contract no. 74/ with Societatea de Distributie a Energiei Electrice Muntenia Nord : Granting a loan of max. RON 230 million Loan contract no. 75/ with Societatea de Distributie a Energiei Electrice Transilvania Nord : Granting a loan of max. RON 160 million Loan contract no. 73/ with Societatea de Distributie a Energiei Electrice Transilvania Sud : Granting a loan of max. RON 130 million Current report from 27 April 2018: Services contract no. 153/ with Societatea de Distributie a Energiei Electrice Muntenia Nord : Rendering of services using AMR system; Services contract no. 155/ with Societatea de Distributie a Energiei Electrice Transilvania Nord : Rendering of services using AMR system Services contract no. 154/ with Societatea de Distributie a Energiei Electrice Transilvania Sud : Rendering of services using AMR system. Current report from 29 May 2018: Loan contract no. 167/ with Servicii Energetice Muntenia: Granting a loan of max. RON 5,500,

33 11.2. List of major investments and commissioning works The achievements recorded during the 1 st semester of 2018 of the main* investment objectives are presented in the table below: CAPEX Description MUNTENIA NORD Modernization of MV/ LV distribution network and improvement of technical conditions of LV power supply Value (million RON) Modernization of transformer stations 4.2 Distribution Automation System 3.4 Modernization of OHL 110 kv 6.5 Modernization of 110/ 20 kv stations and integration into SCADA 9.6 Modernization of 110/ MT transformer stations (replacement of primary equipment) 15.2 TRANSILVANIA NORD Improvement of technical conditions of LV power supply 2.3 Increasing energy efficiency of distribution installations by switching them to 20 kv 4.7 Distribution Automation System 4.9 Modernization of 110/ MT transformer stations (replacement of primary equipment) 12.4 TRANSILVANIA SUD Improvement of technical conditions of LV power supply 9.1 Modernization of MV/ LV distribution network 15 Increasing energy efficiency of distribution installations by switching them to 20 kv 1.0 Modernization of transformer stations 9.5 Modernization of 110/ MT transformer stations 4 *) investments with an individual value above RON 1 million 3.5 The main* investments that were commisioned during the 1 st semester of 2018 are presented below by the main categories: Description Value (million RON) MUNTENIA NORD Modernization of MV/ LV distribution network and improvement of technical conditions of LV power supply 4.8 Modernization of transformer stations 5.3 Distribution Automation System 4.8 Modernization of OHL 110 kv 2.9 Modernization of 110/ 20 kv stations and integration into SCADA 4.4 Modernization of 110/ MT transformer stations (replacement of primary equipment) 11.7 TRANSILVANIA NORD Improvement of technical conditions of LV power supply 7.4 Modernization of MV distribution network 2.2 Modernization of transformer stations

34 Description Value (million RON) Modernization of 110/ MT transformer stations (replacement of primary equipment) 12.3 TRANSILVANIA SUD Improvement of technical conditions of LV power supply 17.8 Modernization of MV/ LV distribution network 1.4 Modernization of transformer stations 10.1 Distribution Automation System 2.7 *) investments commissioned having an individual value above RON 1 million List of major litigations as of 30 June 2018 As of , at the Electrica Group level, the status of the litigations was the following: - Total number of litigations involving Electrica SA and its subsidiaries: , out of which: 9,552 litigations - in which the Group Companies acts as plaintiff; 552 litigations - in which the Group Companies acts as defendant. The total number of litigations includes also the file no. 8019/2/2017 representing a litigation involving ANRE, file that is currently at the Bucharest Court of Appeal, in which both ELSA and the three distribution subsidiaries are plaintiffs. The litigations structure for each Group subsidiary (except of insolvency subsidies) is as follows: - Electrica SA: 245 litigations (plaintiff: 64 litigations, defendant: 181 litigations); - Electrica Furnizare SA: 8,338 litigations (plaintiff: 8,285 litigations, defendant: 53 litigations); - Societatea de Distributie a Energiei Electrice Muntenia Nord SA: 509 litigations (plaintiff: 381 litigations, defendant: 128 litigations); - Societatea de Distributie a Energiei Electrice Transilvania Nord SA: 540 litigations (plaintiff: 467 litigations, defendant: 73 litigations); - Societatea de Distributie a Energiei Electrice Transilvania Sud SA: 281 litigations (plaintiff: 214 litigations, defendant: 67 litigations); - Electrica Serv SA: 191 litigations (plaintiff: 141 litigations, defendant: 50 litigations). The status of resolved litigations involving the Group Companies: Beginning with and until a number of 16 litigations were resolved, out of which 12 litigations were settled in favor of Group Companies and 4 litigations were settled unfavorably. The status of litigation amounts at Group level As of , in the judicial settlement were in litigations files having as object claims in total amount of: - 3,712,255,593 RON - requested by third parties from the Group companies; - 2,039,088,208 RON and 655,164 EUR - to be recovered by group companies from third parties. 34

35 The status of the amounts to be recovered/paid by each Group Company: Electrica S.A. - Total amounts requested by third parties from Electrica: RON 3,653,510,543 RON (out of which 3,629,529,920 litigation with SAPE SA); - Total amounts to be recovered by Electrica: RON 812,452,077. Electrica Furnizare S.A. - Total amounts requested by third parties from Electrica Furnizare: RON 4,268,013; - Total amounts to be recovered by Electrica Furnizare: RON 947,067,561. SDEE Muntenia Nord S.A. (SDMN) - Total amounts requested by third parties from SDMN: RON 24,809,963 (out of which RON 22,500, with Vir Company International SRL); - Total amounts to be recovered by SDMN: RON 2,914,390. SDEE Transilvania Nord S.A. (SDTN) - Total amounts requested by third parties from SDTN: RON 6,763,091; - Total amounts to be recovered by SDTN: RON 13,221,602. SDEE Transilvania Sud S.A. (SDTS) - Total amounts requested by third parties from SDTS: RON 3,503,407; - Total amounts to be recovered by SDTS: RON 9,180,882. Electrica Serv S.A. - Total amounts requested by third parties from Electrica Serv SA: RON 19,400,576; - Total amounts to be recovered by Electrica Serv SA: RON 229,251,695 and EUR 655,164. Changes occurred during H regarding the litigations presented in the Board of Directors report for litigations registered beginning with Litigations against ANRE b) Electrica filed a request for lawsuit against ANRE, thus concluding the file no. 134/2/2016, having as object the suspension of the administrative act ANRE Order no. 165/2015 regarding the Methodology of establishing the tariffs for the electricity distribution service, approved through ANRE Order no. 72/2013, having Electrica as plaintiff, and ANRE as defendant; the file is in recourse, at the High Court of Cassation and Justice; the term for the recourse is ; c) SDEE Muntenia Nord filed a request against ANRE, thus file no. 165/2/2016, having as object the suspension of the execution of ANRE President's Order no. 165/2015 regarding the modification of the Tariff Pricing Methodology for Electricity Distribution Service, approved by the Order of the President of the National Regulatory Authority for Energy no. 72/2013, having SDEE Muntenia Nord as plaintiff, and ANRE as 35

36 defendant; the file is in recourse, as the High Court of Cassation and Justice; the term for the recourse is ; d) SDEE Muntenia Nord filed a request for a lawsuit against ANRE, thus file no. 42/42/2016, regarding the suspension of the execution of ANRE President's Order 172/2015 regarding the approval of the specific tariffs for the electricity distribution service and the reactive electricity price for the company " Filiala de Distribuţie a Energiei Electrice Electrica Distribuţie Muntenia Nord" - S.A, having SDEE Muntenia Nord as plaintiff, and ANRE as defendant; the file is recourse, as the High Court of Cassation and Justice; the term for the recourse is ; e) Electrica S.A. and the distribution subsidiaries filed a request for a lawsuit against ANRE, thus forming the file no. 8019/2/2017, having as object the cancellation of the address representing the refusal to issue a favorable opinion AMR system transfer, the obligation to issue the administrative acts for approval favorable transfer of the AMR system from ELSA to DSO, the obligation of ANRE to make corrections on the DSO distribution tariffs, in which Electrica SA and distribution subsidiaries have the status of plaintiffs, and ANRE has the status of defendant; the court of first instance dismissed the petition as inadmissible, and Electrica and the distribution subsidiaries filed an appeal in the filing procedure at the High Court of Cassation and Justice; f) SDEE Transilvania Nord filed a request for a lawsuit against ANRE, thus constituting file no. 353/2/2015, having as object the annulment 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 electricity, for Societatea Comercială "Filiala de Distribuţie a Energiei Electrice Electrica Distribuţie Transilvania Nord", in which SDEE Transilvania Nord is the plaintiff, and ANRE has the status of defendant; the High Court of Cassation and Justice has rejected the action definitively; g) SDEE Transilvania Nord filed an action against ANRE, thus constituting file no. 17/33/2016, having as object the suspension of the administrative act Order no. 165/2015 of ANRE regarding the modification of the Tariff Establishment Methodology for the Electricity Distribution Service, approved by the Order of the President of the National Energy Regulatory Authority no. 72/2013, in which SDEE Transilvania Nord has the status of plaintiff and ANRE has the status of a defendant; the High Court of Cassation and Justice has rejected the action definitively; h) SDEE Transilvania Sud formulated an action against ANRE, thus constituting the file no. 371/2/2015, having as object the annulment 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 electricity, for the Societatea Comercială "Filiala de Distributie a Energiei Electrice Electrica Distribuţie Transilvania Sud" - S.A., in which SDEE Transilvania Sud has the status of plaintiff, and ANRE has the status of defendant; the file in settlement at the Bucharest Court of Appeal and is suspended until the final settlement of the file 208/2/2015, in settlement at the Bucharest Court of Appeal; i) Electrica Furnizare S.A. filed a request for a lawsuit against ANRE, thus constituting the file no. 8201/2/2015, having as object judicial action for obliging the defendant to resolve a dispute regarding the procedure of changing the supplier, in which Electrica Furnizare S.A. is the plaintiff, and ANRE has the status of defendant; 36

37 the litigation was won by Electrica Furnizare SA; the appeal filed by ANRE is in settlement at the High Court of Cassation and Justice; 2. Litigations for fiscal matters a) Electrica filed a lawsuit against NAFA, which constituted the file no. 7614/2/2013, having as object the Complaint Decision no.147/ The amount of RON 2,387,992 (action for annulment of Decision No. 147/ , issued by NAFA in the procedure for solving the administrative complaints formulated against the debentures by which were set up accessories for late payment of the current budgetary obligations, through Decision No. 214/2012 in the amount of RON 2,387,992), in which Electrica has the status of plaintiff, and NAFA has the quality of defendant; in the first instance the court partially upheld the claim of Electrica and NAFA filed an appeal, which was finally rejected by the High Court of Cassation and Justice; b) Electrica filed an application against NAFA, thus constituting the file no. 9131/2/2017, having as object the annulment of the fiscal decisions issued by NAFA and communicated to the company through the address no. 665/ (new accessories approximately RON 39,000,000), in which Electrica is the plaintiff, and NAFA has the quality of defendant; the file is in settlement at the Bucharest Court of Appeal; c) Electrica filed a lawsuit in the contradictory with NAFA, thus constituting file no. 3430/2/2017, having as object opposition to enforcement, cancelation of forced execution for the amount of RON 39,083,190 Decision no. 665/17/03/2017, in which Electrica has the status of plaintiff and NAFA has the status of a defendant; the court of first instance rejected the application as unfounded. The appeal filed by Electrica S.A. has been finally dismissed by the High Court of Cassation and Justice; d) SDEE Muntenia Nord S.A filed a request for a lawsuit against SPFL Ploiesti (NAFA), constituting file no. 309/42/2015, having as object the annulment of the administrative act - tax decision no / The amount of the litigation: 11,963,955 RON, representing additional differences from the fiscal inspection report, out of which 8,528,896 RON additional tax on buildings for the period January September 2014 and 3,439,085 RON accessories calculated until , in which SDEE Muntenia Nord SA has the capacity of plaintiff, and SPFL Ploiesti has the status of defendant; the appeal filed by SDEE MN is in regularization procedure at the High Court of Cassation and Justice; 3. Other significant litigations with a value greater than 500,000 EURO a) SPEEH Hidroelectrica SA filed a request for a lawsuit against Electrica, representing the file no /3/2015, with the object of forcing Electrica to pay to SPEEH Hidroelectrica SA the amount of RON 5,444,761 (the loss suffered by selling the energy using an average price per MWh below the production cost of 1 MWh), the partial obligation to pay the unrealized benefit of Hidroelectrica by selling the total quantity of 398,300 MWh, calculated according to the ANRE regulations (RON 9,646,826, according to the written statements of 5 May 2015/ RON 5,444,761, according to the conclusions of the complainant mentioned in the Conclusion signed on March 15, 2017), forcing the defendant to pay the legal interest from the date of the decision and up to the actual payment, court costs, in which SPEEH Hidroelectrica SA is a complainant and Electrica SA has the status of defendant; the court of first instance rejected the exception to the limitation of the material right to action as unfounded and the action as groundless. Both parties have appealed, rejected by the Bucharest Court of Appeal as unfounded. Electrica SA will appeal; 37

38 b) Electrica has filed a request for a call in contradiction with AAAS, thus file no /299/2015, on the role of District 1 Court, having as object the contestation against the enforcement of the Administrative Decision no. P/14/27055/ and all subsequent enforcement acts (administrative decision issued by the defendant AAAS against the subscription for the amount of RON 7,505,637 for the recovery of unlawful state aid that would have been granted to Electrica SA in the context of the privatization of Electrica Banat SA and CSR Resita SA) cancellation of this act; the cancellation of the payment order issued by BEJ-Oprescu Mihai in the enforcement file no.8/2015 (where it is stated that the interest is to be calculated starting with the date of the sums placed at the disposal of the beneficiary and up to the effective date of the flow plus RON 99, as the equivalent of enforcement costs and all subsequent execution costs ); cancellation of all execution documents issued in decision no.8/2015; suspension of forced execution started by the defendant until the irrevocable resolution of the present dispute; the temporary suspending until the settlement of the request for suspension claimed by the present petition for suing, in which Electrica has the status of contestant Electrica SA, and AAAS has the status of respondent; the court partially upheld the contestation of enforcement; canceled the order of March 26, 2015 and all the execution documents issued in the enforcement file no.8/2015 of BEJ Oprescu Mihai; dismissed as inadmissible the head of claim for annulment of Administrative Decision no. P/14/27055/ issued by AAAS; ordered the restitution to the contestants of the amount of RON 1,000, representing the judicial stamp duty related to the contestation of the execution, after the final decision was passed; AAAS can appeal; c) Electrica filed a request in contradiction to AAAS, thus file no.2155/2/2015, as the High Court of Cassation and Justice, having as object the annulment of Administrative Decision no. P/14/27055/ , of Order no. 883/ (the restitution by Electrica of the amount of RON 7,505,637 plus the calculated interest starting from 27 March 2006 until the date of the actual collection of the entire amount) and notification no. 883/ , issued by AAAS; suspending the execution of the contested administrative acts until the final settlement of the case; order the respondent to pay the costs, in which Electrica has the status of a contestant, and AAAS has the best quality; the court of first instance ordered the annulment of the administrative decision no. P/14/27055/ , of the Order no.883/ and of the notification no. 883/ issued by the defendant; AAAS declared appeal, which was dismissed as unfounded; d) AAAS has filed a lawsuit in contradiction with Electrica SA, thus file no /299/2016, having as object the contestation of execution execution file no. 1914/2015 of the Bailiff s Association Dorina Gont, Lucian Panait and Marian Panait RON 10,342,892, in which the AAAS as contestant and Electrica SA as defendant; the court of first instance admits in part the disputed appeal by the contestants. It ordered the abolition of the measure imposed in the enforcement file no. 1914/2015 by Bailiff s Association Dorina Gont, Lucian Panait and Marian Panait regarding the third parties, dismisses the application for the return of the execution as unfounded. The application for suspension of execution is rejected as being devoid of purpose, with call within 10 days of communication. Electrica has appealed, which is being solved by the Bucharest Tribunal; e) Electrica S.A. filed a request for a lawsuit against Termoelectrica S.A., thus file no /299/2017, having as object the enforcement against the execution 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, partial cancellation in terms of monitoring the amount of RON 1,561,105, representing the receivables offset by offsetting with the consequence of the return of the execution for this amount, the partial cancellation of the execution and the subsequent acts regarding the pursuit of the amount of RON , representing the 38

39 canceled claim by offsetting, with the consequence of the return for this amount; in the file, Electrica S.A. is the plaintiff and Termoelectrica S.A. is defendant. Stage: The court of law admits in part 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, in respect of undue enforcement costs. In any event, it denies the contestation as unreasonable. Electrica appealed, dismissed as unfounded by Bucharest Tribunal. Final; f) Electrica S.A. a is a creditor of the company Servicii Energetice Muntenia S.A. (SEM), in file no /3/2014, having as object SEM s insolvency, the Electrica claim being of RON 9,542, The file was in settlement at the Bucharest Tribunal, the proceedings being ongoing, and Electrica S.A. has fully recovered the claim enrolled at the creditors table of the debtor SEM; g) Electrica S.A. filed a complaint against the Competition Council, thus constituting the file no. 3889/2/2018, having as object the annulment of the Competition Council Decision no. 77/ , in which a fine of RON 10,800,984 was imposed to Electrica, in which Electrica S.A. has the capacity of plaintiff, and the Competition Council has the status of a defendant. The file is in the first instance settlement at the Bucharest Court of Appeal; h) Electrica S.A. filed a complaint against the Competition Council, thus constituting the file no. 3883/2/2018, having as object the suspension of the Competition Council's decision no. 77/ , pending final settlement of the file 3889/2/2018, whereby a fine of 10,800,984 RON was imposed on Electrica, in which Electrica S.A. has the capacity of plaintiff, and the Competition Council is the quality of the defendant. The request for suspension was rejected by the Bucharest Court of Appeal, Electrica S.A. filing appeal; i) FISE Electrica Serv S.A. filed a request for a lawsuit against the CNAS and CASMB, thus constituting file no /3/2015, having as object the recovery of social insurances - FNUASS RON 1,384,652 + interest, in which FISE has status of plaintiff, and CNAS and CASMB have the status of defendants; the file was finally settled by the Bucharest Court of Appeal, which rejects the appeal filed by FISE Electrica Serv SA as unfounded, admits the appeal filed by the Bucharest Health Insurance House, changes the part of the civil conviction in the sense that: the defendant to pay the plaintiff the sum of RON 161,657 representing sums to be recovered from the National Health Insurance Fund for January March 2013 and January 2014, as well as the payment of legal interest calculated from the date of maturity of each amount at the date of the actual payment. It keeps the civilian conviction; j) Carpatcement Holding S.A. filed a request for a lawsuit in against the Ministry of Economy, the Government of Romania and Electrica Furnizare S.A., constituting file no. 1665/2/2014, having as object the obligation to make - cancellation of penalties amounting RON 2,440,785 RON, based GEO 57/2002, in which Carpatcement is the plaintiff and Electrica Furnizare S.A. has the status of defendant. The court dismissed the applicant's action on the merits of the appeal. The High Court of Cassation and Justice finally rejected the plaintiff's appeal; k) Electrica Furnizare S.A. filed a petition for a lawsuit against European Drinks S.A., thus constituting file no. 998/111/2018, having as its object claims (the equivalent of tax invoices) in the amount of RON 4,132,755, in which Electrica Furnizare is the plaintiff, and European Drinks is the defendant; the file is to be solved by the substantive court, the Bihor Court. 39

40 4. Litigations against Romanian Court of Accounts a) Electrica S.A. filed a lawsuit against the Court of Accounts of Romania, constituting file no. 2268/2/2014, having as object the suspension and annulment of the administrative act (Decision no.3 / and Conclusion no. 23/ ), in which Electrica S.A. has the status of plaintiff, and the Romanian Court of Accounts has the status of a defendant. The court of first instance partially upheld the appeal, partially annulled the Conclusion no. 23/ , regarding items 1 and 5 and Decision no. 3/ with respect to items 4 and 8. It denies that the contestation regarding items 2, 3 and 4 of the Conclusion no. 23/ and 5, 6 and 7 of Decision no. 3/ Rejects the application for suspension of the enforcement of Decision no. 3/ , as unintentional. Electrica and the Romanian Court of Accounts filed an appeal, admitted by the court. The High Court of Cassation and Justice partially upheld the petition for annulment made by Electrica and sent the case back to retrial. b) SDEE Muntenia Nord S.A. filed a lawsuit against the Court of Accounts of Romania, constituting file no. 2763/62/2017, having as object the annulment of the Decision 7/ and of the Conclusion no. 24 / , in which SDEE Muntenia Nord S.A. is plaintiff and the Court of Accounts of Romania has the status of defendant. The court of first instance rejected the request, has admitted the exception to the inadmissibility of the plea of illegality raised by the defendants of the Romanian Court of Accounts and the Chamber of Accounts Brasov and the rejection of the objection of illegality raised by the plaintiff SDEE TS. The Brasov Tribunal dismisses the action brought by the plaintiff. SDEE TS has made an appeal. c) SDEE Muntenia Nord S.A. filed a lawsuit against the Court of Accounts of Romania, constituting file no. 1677/105/2017, having as object the Suspension and action for annulment of the Audit Report from the Chamber of Accounts Prahova no. 6618/ and Decision of the Chamber of Accounts Prahova no. 45/2016, in which SDEE Muntenia Nord S.A. is the plaintiff and the Court of Accounts of Romania has the status of defendant. The file is to be resolved by the court of first instance, the Prahova Tribunal. 5. Other litigations with significant impact a) Mr. Niculescu Vladimir filed an request for a lawsuit against with SDEE Muntenia Nord S.A., the City Hall of Valenii de Munte, thus forming the case file no. 1580/105/2008*, having as object the claim under Law no. 10/2001 for 1558 sqm of land and 202 sqm of constructions, located in Valenii de Munte, N. Iorga street, no. 129 and used by Centrul de Exploatare Valeni, where Niculescu Vladimir is a complainant and SDEE Muntenia Nord S.A. has the quality of defendant. Prahova Court, the court of first instance, partially admits the action. It is noted the complainant's right to repairs by equivalent for the land of 1402 sqm located in Valenii de Munte, Nicolae Iorga Bvd., no. 129 (currently no.131), Prahova County. The defendant is obligated to pay to the complainant the amount of RON 800 of legal costs, representing a reimbursement of expert's fee. Right to appeal within 30 days from notification; b) Mr. Stanciu Razvan filed a lawsuit against with Electrica S.A., thus forming the case file no /3/2017, having as object the action for annulment of the OGSM decision no. 2 dated October 26, 2017 regarding the election of the members of the BOD by the cumulative vote method, where Mr. Stanciu Razvan is the complainant and Electrica S.A. has the quality of defendant. The case file was settled in the first instance by 40

41 the Bucharest Court, which dismissed the action as unfounded, with a right of appeal within 30 days from notification; c) Mr. Dumitrascu Gabriel filed a lawsuit against Electrica S.A., thus forming the case file no /3/2017, having as object the action for annulment of the OGSM decision no. 2 dated October 26, 2017, regarding point 1 - the election of the members of the BOD by the cumulative vote method, Mr. Dumitrascu is a complainant and Electrica S.A. the quality of defendant. The case was pending before the Bucharest Court, and the complainant has dropped the claim, and the defendant dropped the request for court legal costs; d) The Companies Asito Kapital and Fast Broker filed a lawsuit against SDEE Transilvania Sud S.A. and Uniqua Asigurari, thus forming the case file no. 253/64/2018, having as object a complaint against Decision No. 1353/C11/1482 of the National Council for the solving of claims (auction cancellation), in which Asito Kapital and Fast Broker have the status of complainant and SDEE TS. the quality of defendant. The Brasov Court of Appeal has finally rejected the complainant's request; e) Mr. Triponescu Razvan Tudor filed a lawsuit in disagreement with SDEE Transilvania Sud S.A., thus forming the case file no. 5034/62/2015, having as object the obligation to do (moving poles) and damages for the nonuse, in which Mr. Triponescu is a complainant and SDEE Transilvania Sud S.A. has the quality of defendant. The case file is to be settled by a court of first instance, Brasov Court of Law; f) Mr. Zaharia Ioan filed a lawsuit in disagreement with SDEE Transilvania Sud S.A., thus forming the case file no. 6104/62/2016, having as object the obligation to do (remove the trafo station) and damages for the non-use, in which Mr. Zaharia is the complainant and SDEE Transilvania Sud S.A. has the quality of defendant. The case file is to be settled by a court of first instance, Brasov Court of Law; g) Mr. Anghel Radu and other 39 employees of Braila Distribution Branch filed a request for a lawsuit against SDEE Muntenia Nord S.A., thus forming the case file no. 7345/105/2015, regarding the granting of salary rights (overtime over the order period, isolation benefit, night benefit), in which the employees have the status of plaintiffs, and SDEE Muntenia Nord S.A. has the quality of defendant. The case file is to be settled by a court of first instance, Braila Court of Law; h) Mr. Costache Dinu and 12 other employees of the Galati Distribution Branch filed a request for a lawsuit against SDEE Muntenia Nord S.A., thus forming the case file no. 4906/121/2017, regarding the granting of salary rights (overtime over the order period, isolation benefit, night benefit), in which the employees have the status of plaintiffs, and SDEE Muntenia Nord S.A. has the quality of defendant. The case file is to be settled by a court of first instance, Galati Court of Law; i) Mr. Burlacu Daniel and 11 other employees of the Targoviste Distribution Branch filed a request for a lawsuit against SDEE Muntenia Nord S.A., thus forming the case file no. 5374/1220/2015, regarding the granting of salary rights (overtime over the order period, isolation benefit, night benefit), in which the employees have the status of plaintiffs, and SDEE Muntenia Nord S.A. has the quality of defendant. The case file is to be settled by a court of first instance, Dambovita Court of Law. 41

42 SOCIETATEA ENERGETICA ELECTRICA S.A. Condensed Consolidated Interim Financial Statements as at and for the six month period ended 30 June 2018 prepared in accordance with International Accounting Standard 34 Interim Financial Reporting, as adopted by the European Union

43 SOCIETATEA ENERGETICA ELECTRICA S.A. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 PREPARED IN ACCORDANCE WITH IAS 34 INTERIM FINANCIAL REPORTING AS ADOPTED BY THE EUROPEAN UNION Contents Condensed consolidated statement of financial position 1 Condensed consolidated statement of profit or loss 3 Condensed consolidated statement of comprehensive income 5 Condensed consolidated statement of changes in equity 7 Condensed consolidated statement of cash flows 9 Notes to the condensed consolidated interim financial statements 1. Reporting entity and general information Basis of accounting Basis of measurement Significant accounting policies Operating segments Revenue Other income Electricity purchased Earnings per share Dividends Income taxes Trade receivables Cash and cash equivalents Deposits, treasury bills and government bonds Other payables Bank borrowings Provisions Financial instruments - fair values Related parties Subsidiaries in financial distress Contingencies 29 i

44 SOCIETATEA ENERGETICA ELECTRICA S.A. CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) ASSETS Note 30 June December 2017 (audited) Non-current assets Intangible assets related to concession arrangements 4,431,450 4,330,909 Other intangible assets 11,605 14,053 Property, plant and equipment 671, ,510 Restricted cash , ,000 Deferred tax assets 22,781 41,100 Other non-current assets 1,258 1,305 Total non-current assets 5,458,520 5,408,877 Current assets Trade receivables , ,361 Other receivables 29,976 55,534 Cash and cash equivalents , ,493 Deposits, treasury bills and government bonds , ,981 Inventories 24,704 21,620 Prepayments 8,770 3,692 Green certificates 2,918 12,643 Income tax receivable - 1,134 Total current assets 1,812,895 2,208,458 Total assets 7,271,415 7,617,335 EQUITY AND LIABILITIES Equity Share capital 3,814,242 3,814,242 Share premium 103, ,049 Treasury shares reserve (75,372) (75,372) Pre-paid capital contributions in kind from shareholders 5,144 5,144 Revaluation reserve 116, ,748 Legal reserves 326, ,779 Retained earnings 1,329,949 1,357,966 Total equity attributable to the owners of the Company 5,619,810 5,655,556 Total equity 5,619,810 5,655,556 (Continued on page 2) 1

45 SOCIETATEA ENERGETICA ELECTRICA S.A. CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) Liabilities Note 30 June December 2017 (audited) Non-current liabilities Financing for network construction related to concession agreements 6,060 11,122 Deferred tax liabilities 208, ,504 Employee benefits 165, ,448 Other payables 15 41,822 40,440 Long-term bank borrowings , ,000 Total non-current liabilities 742, ,514 Current liabilities Financing for network construction related to concession agreements 22,723 32,709 Bank overdrafts , ,904 Trade payables 473, ,405 Other payables , ,226 Deferred revenue 5,847 7,364 Employee benefits 61,135 78,918 Provisions 17 29,810 29,889 Current income tax liability 19,244 3,850 Total current liabilities 909,372 1,224,265 Total liabilities 1,651,605 1,961,779 Total equity and liabilities 7,271,415 7,617,335 The accompanying notes are an integral part of these condensed consolidated interim financial statements. Chief Executive Officer Dan Catalin Stancu Chief Financial Officer Mihai Darie August 13 th

46 SOCIETATEA ENERGETICA ELECTRICA S.A. CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, except per share data) Note Six month period ended 30 June June 2017 Revenues 6 2,653,549 2,675,390 Other income 7 74,879 90,123 Electricity purchased 8 (1,268,728) (1,531,463) Green certificates (154,670) (182,911) Construction costs related to concession agreements (289,509) (259,140) Employee benefits (297,373) (317,228) Repairs, maintenance and materials (42,326) (29,803) Depreciation and amortization (216,036) (196,886) Reversal of impairment of property, plant and equipment, net Impairment of trade and other receivables, net (2,471) (17,060) Change in provisions, net 79 (5,105) Other operating expenses (196,199) (208,967) Operating profit 261,382 17,696 Finance income 5,910 11,502 Finance costs (3,411) (2,614) Net finance income 2,499 8,888 Profit before tax 263,881 26,584 Income tax expense 11 (54,257) (18,417) Profit for the period 209,624 8,167 Profit for the period attributable to: - owners of the Company 209,624 (6,499) - non-controlling interests - 14,666 Profit for the period 209,624 8,167 Earnings per share Basic and diluted earnings per share (RON) (0.02) The accompanying notes are an integral part of these condensed consolidated interim financial statements. Chief Executive Officer Dan Catalin Stancu Chief Financial Officer Mihai Darie August 13 th

47 SOCIETATEA ENERGETICA ELECTRICA S.A. CONDENSED CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, except per share data) Note Three month period ended 30 June 2018 (unaudited and not reviewed) 30 June 2017 (unaudited and not reviewed) Revenues 6 1,303,789 1,286,458 Other income 7 35,212 35,325 Electricity purchased 8 (526,260) (579,194) Green certificates (89,415) (92,325) Construction costs related to concession agreements (168,663) (168,771) Employee benefits (155,049) (167,888) Repairs, maintenance and materials (24,583) (15,850) Depreciation and amortization (105,754) (99,492) Reversal of impairment of property, plant and equipment, net 12 - Impairment of trade and other receivables, net (928) (16,774) Change in provisions, net (3,547) (5,677) Other operating expenses (84,122) (111,214) Operating profit 180,692 64,598 Finance income 3,623 3,509 Finance costs (2,531) (495) Net finance income 1,092 3,014 Profit before tax 181,784 67,612 Income tax expense 11 (31,416) (8,228) Profit for the period 150,368 59,384 Profit for the period attributable to: - owners of the Company 150,368 34,829 - non-controlling interests - 24,555 Profit for the period 150,368 59,384 Earnings per share Basic and diluted earnings per share (RON) The accompanying notes are an integral part of these condensed consolidated interim financial statements. Chief Executive Officer Dan Catalin Stancu Chief Financial Officer Mihai Darie August 13 th

48 SOCIETATEA ENERGETICA ELECTRICA S.A. CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) Six month period ended 30 June June 2017 Profit for the period 209,624 8,167 Other comprehensive income - - Total comprehensive income 209,624 8,167 Total comprehensive income attributable to: - owners of the Company 209,624 (6,499) - non-controlling interests - 14,666 Total comprehensive income 209,624 8,167 The accompanying notes are an integral part of these condensed consolidated interim financial statements. Chief Executive Officer Dan Catalin Stancu Chief Financial Officer Mihai Darie August 13 th

49 SOCIETATEA ENERGETICA ELECTRICA S.A. CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) Three month period ended 30 June 2018 (unaudited and not reviewed) 30 June 2017 (unaudited and not reviewed) Profit for the period 150,368 59,384 Other comprehensive income - Total comprehensive income 150,368 59,384 Total comprehensive income attributable to: - owners of the Company 150,368 34,829 - non-controlling interests - 24,555 Total comprehensive income 150,368 59,384 The accompanying notes are an integral part of these condensed consolidated interim financial statements. Chief Executive Officer Dan Catalin Stancu Chief Financial Officer Mihai Darie August 13 th

50 SOCIETATEA ENERGETICA ELECTRICA S.A. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) Attributable to the owners of the Company Note Share capital Share premium Treasury shares reserve Pre-paid capital contributions in kind from shareholders Revaluation reserve Legal reserves Retained earnings Total equity Balance at 1 January 2018 (audited) 3,814, ,049 (75,372) 5, , ,779 1,357,966 5,655,556 Comprehensive income Profit for the period , ,624 Total comprehensive income , ,624 Transactions with owners of the Company Contributions and distributions Dividends to the owners of the 10 Company (245,370) (245,370) Total transactions with the owners of the Company (245,370) (245,370) Other changes in equity Transfer of revaluation reserve to retained earnings due to depreciation and disposals of property, plant and equipment (7,729) - 7,729 - Balance at 30 June ,814, ,049 (75,372) 5, , ,779 1,329,949 5,619,810 (Continued on page 8) 7

51 SOCIETATEA ENERGETICA ELECTRICA S.A. CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) Note Share capital Share premium Treasury shares reserve Attributable to the owners of the Company Pre-paid capital contributions in kind from shareholders Revaluation reserve Legal reserves Retained earnings Total Noncontrolling interests Total equity Balance at 1 January 2017 (audited) 3,814, ,049 (75,372) 5, , ,236 1,429,908 5,683, ,599 6,520,487 Comprehensive income Profit/(loss) for the period (6,499) (6,499) 14,666 8,167 Total comprehensive income (6,499) (6,499) 14,666 8,167 Transactions with owners of the Company Contributions and distributions Dividends to the owners of the Company (251,406) (251,406) - (251,406) Total transactions with the owners of the Company (251,406) (251,406) - (251,406) Other changes in equity Dividends to non-controlling interests (97,869) (97,869) Transfer of revaluation reserve to retained earnings due to depreciation and disposals of property, plant and equipment (2,995) - 2, Balance at 30 June ,814, ,049 (75,372) 5, , ,236 1,174,998 5,425, ,396 6,179,379 The accompanying notes are an integral part of these condensed consolidated interim financial statements. Chief Executive Officer Dan Catalin Stancu Chief Financial Officer Mihai Darie August 13 th

52 SOCIETATEA ENERGETICA ELECTRICA S.A. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) Note Six month period ended 30 June June 2017 Cash flows from operating activities Profit for the period 209,624 8,167 Adjustments for: Depreciation 19,861 23,890 Amortisation 196, ,996 Reversal of impairment of property, plant and equipment, net (187) (746) Loss/(gain) on disposal of property, plant and equipment 17 (498) Impairment of trade and other receivables, net 2,471 17,060 Change in provisions, net 17 (79) 5,105 Net finance income (2,499) (8,888) Income tax expense 11 54,257 18, , ,503 Changes in: Trade receivables 92,997 83,355 Other receivables 45,058 15,027 Deposits, treasury bills and government bonds 3,983 (1,091) Prepayments (5,078) (938) Green certificates 9,725 (5,699) Restricted cash - (168,072) Inventories (3,084) (1,761) Trade payables (96,344) (232,579) Other payables 10,025 (6,508) Employee benefits (17,783) (19,776) Deferred revenue (1,517) (692) Cash generated from/(used in) operating activities 517,622 (103,232) Interest paid (832) (881) Income tax paid (11,026) (18,708) Net cash from/(used in) operating activities 505,764 (122,821) (Continued on page 10) 9

53 SOCIETATEA ENERGETICA ELECTRICA S.A. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) Note Six month period ended 30 June June 2017 Cash flows (used in)/from investing activities Payments for purchases of property, plant and equipment (1,872) (18,306) Payments for network construction related to concession agreements (385,343) (229,860) Payments for purchases of intangible assets (1,672) - Proceeds from sale of property, plant and equipment 14, Purchase of treasury bills and government bonds 14 (95,339) (543,114) Proceeds from maturity of treasury bills and government bonds , ,577 Increase in deposits with maturity of 3 months or longer (451,700) (21,085) Proceeds from deposits with maturity of 3 months or longer 325, ,629 Interest received 4,616 10,142 Net cash (used in)/from investing activities (125,547) 193,713 Cash flows from financing activities Proceeds from long term bank loans - 174,822 Proceeds from short term bank loans - 17,000 Repayment of short term bank borrowings - (10,000) Repayment of financing for network construction related to concession agreements (17,138) (48,256) Dividends paid (244,147) (250,387) Net cash used in financing activities (261,285) (116,821) Net increase/(decrease) in cash and cash equivalents 118,932 (45,928) Cash and cash equivalents at 1 January 314, ,215 Cash and cash equivalents at 30 June , ,287 The accompanying notes are an integral part of these condensed consolidated interim financial statements. The non-cash transactions are disclosed in Note 13. Chief Executive Officer Dan Catalin Stancu Chief Financial Officer Mihai Darie August 13 th

54 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) 1 Reporting entity and general information These financial statements are the condensed consolidated interim financial statements of Societatea Energetica Electrica S.A. ( the Company or Electrica SA ) and its subsidiaries (together the Group ) as at and for the six month period ended 30 June The registered office of the Company is no. 9 Grigore Alexandrescu Street, Sector 1, Bucharest, Romania. The Company has sole registration code and Trade Register registration number J40/7425/2000. As at 30 June 2018 and 31 December 2017 the main shareholder of Societatea Energetica Electrica S.A. is the Romanian State, represented by the Ministry of Energy (48.78%). The Company s subsidiaries are the following: Subsidiary Societatea de Distributie a Energiei Electrice Muntenia Nord S.A. Societatea de Distributie a Energiei Electrice Transilvania Nord S.A. Societatea de Distributie a Energiei Electrice Transilvania Sud S.A. Electrica Furnizare S.A. Electrica Serv S.A. Servicii Energetice Muntenia S.A. Servicii Energetice Oltenia S.A. Activity Electricity distribution in geographical area of Muntenia Nord Electricity distribution in geographical area of Transilvania Nord Electricity distribution in geographical area of Transilvania Sud Sole registration code Head Office % shareholding as at 30 June 2018 % shareholding as at 31 Dec Ploiesti 99, % 99, % Cluj- Napoca 99, % 99, % Brasov 99, % 99, % Electricity Supply Bucuresti 99, % 99, % Services in the energy sector (maintenance, repairs, construction) Services in the energy sector (maintenance, repairs, construction) Services in the energy sector (maintenance, repairs, construction) Bucuresti 100% 100% Bucuresti 100% 100% Craiova 100% 100% The main activities of the Group include operation and construction of electricity distribution networks and electricity supply to final consumers. The Group is the electricity distribution operator and the main electricity supplier in Muntenia Nord area (Prahova, Buzau, Dambovita, Braila, Galati and Vrancea counties), Transilvania Nord area (Cluj, Maramures, Satu Mare, Salaj, Bihor and Bistrita-Nasaud counties) and Transilvania Sud area (Brasov, Alba, Sibiu, Mures, Harghita and Covasna counties), operating with electrical substations and power lines of 0.4 kv to 110 kv. 11

55 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) The electricity distribution tariffs approved by National Authority for Energy Regulation ( ANRE ) are as follows (RON/MWh, presented cumulatively for medium and low voltage levels): Order 115,114,116/ Order 113,114,112/ January-31 December January-31 December 2017 High voltage Medium voltage Low voltage High Voltage Medium voltage Low voltage Transilvania Nord Transilvania Sud Muntenia Nord Basis of accounting These condensed consolidated interim financial statements ( interim financial statements ) have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union. They do not include all the information required for a complete set of financial statements prepared in accordance with International Financial Reporting Standards ( IFRS ) as endorsed by the European Union ( IFRS-EU ) and these should be read together with the Annual Consolidated Financial Statements as at and for the year ended 31 December However, selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in the Group s financial position and performance since the last annual consolidated financial statements as at and for the year ended 31 December These condensed consolidated interim financial statements have been prepared for submission to the Bucharest Stock Exchange. These condensed consolidated interim financial statements were authorized for issue by the Board of Directors on 13 August The Company also issues an original version of these condensed consolidated interim financial statements prepared in Romanian language. Judgements and estimates In preparing these interim financial statements, management makes judgements, estimates and assumptions that affect the application of Group s accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. The significant judgements made by management in applying the Group s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended 31 December Basis of measurement The condensed consolidated interim financial statements have been prepared on the historical cost basis except for land and buildings which are measured based on the revaluation model. The assets and liabilities of the subsidiaries in financial distress are not measured on a going concern basis, but on an alternative basis. 4 Significant accounting policies The accounting policies applied in these interim financial statements are the same as those applied in the Group s consolidated financial statements as at and for the year ended 31 December 2017, except for the adoption of new standards effective as of January 1 st Starting with January 1 st 2018, the Group has applied for the first time two new standards, IFRS 9 Financial instruments and IFRS 15 Revenues from contracts with customers. 12

56 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) IFRS 15 Revenues from contracts with customers IFRS 15 Revenues from contracts with customers introduces a comprehensive model for revenue recognition and measurement. The standard replaces the existing criteria for revenue recognition, replacing the existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. Under the new standard, revenue is recognised when or as the customer acquires control over the goods or services rendered, at the amount which reflects the price at which the Group is expected to be entitled in exchange of those goods or services. Being permitted by the standard, the Group adopted IFRS 15 starting with January 1 st 2018 using the modified retrospective method, with cumulated adjustments from the initial application recognised in equity as of January 1 st 2018 and without restating the figures of the comparative period. The initial application has no impact on the Group s Retained Earnings. In applying IFRS 15, the Group has identified that it acts in the capacity of an agent in case of transactions as Balancing Responsible Party ( BRP ). Thus, in its quality as an agent, the Group recognizes revenue for the commission earned in exchange for facilitating the transfer of goods or services. According to the new standard, the valuation is made by considering whether the Group holds control over the specific goods or services before transferring them to the customer, rather than taking into account whether it has exposure to significant risks and rewards associated with the sale of the respective goods or services. Any holder of a production/supply/distribution license must be established as a Balancing Responsible Party or must delegate this responsibility to a Balancing Responsible Party. By delegating this responsibility to a BRP, there is the benefit of imbalance aggregation in the meaning of Balancing Market cost reduction by comparison with the case where the producer/supplier/distributor would form itself as a Balancing Responsible Party. Electrica S.A., and subsequently starting with April 1 st 2018 Electrica Furnizare S.A. acts as BRP for a large number of participants, electricity producers as well as electricity suppliers and distribution operators. For the settlement of imbalances, BRP Electrica is using the method of internal redistribution of payments, ensuring benefits of imbalance aggregation for all the participants included in the BRP. BRP Electrica provides the transmission of physical notifications to CNTEE Transelectrica SA and its role is to balance the differences between the electricity contracted and the electricity measured at the level of the entire BRP. Without the adoption of the new standard IFRS 15, the Revenues and Electricity purchased captions of the consolidated condensed statement of profit or loss for the six month period ended 30 June 2018 would have been higher with RON 51,901 thousand, having no impact on the margin. IFRS 9 Financial instruments IFRS 9 introduces changes regarding the recognition and measurement of financial assets and results in an earlier recognition of bad debt allowances for receivables. Being permitted by the standard, the Group adopted IFRS 9 starting with January 1 st 2018 using the modified retrospective method, with cumulated adjustments from the initial application recognised in equity as of January 1 st 2018 and without restating the figures of the comparative period. For the categories of the Group s financial assets, there are no significant differences between the initial evaluation method according to IAS 39 and the new evaluation criteria under IFRS 9. Also, a number of other amendments and interpretations have been effective starting with January 1 st 2018, but do not have a significant effect on these condensed consolidated interim financial statements. 13

57 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) 5 Operating segments (a) Information about reportable segments Six month period ended 30 June 2018 Electricity supply Electricity distribution External electricity network maintenance Headquarter Total for reportable segments Consolidation eliminations and adjustments Consolidated total External revenues 1,963, ,750 18,859-2,653,549-2,653,549 Inter-segment revenue 15, , ,955 (588,955) - Segment revenue 1,979,347 1,244,014 19,143-3,242,504 (588,955) 2,653,549 Segment profit/(loss) before tax 158, ,965 (3,837) 304, ,806 (319,925) 263,881 Net finance income/(cost) 1,724 (4,135) , ,991 (301,492) 2,499 Depreciation, amortization and impairment, net (7,087) (206,901) (584) (2,606) (217,178) 1,329 (215,849) EBITDA* 163, ,001 (3,305) ,993 (19,762) 477,231 Segment net profit/(loss) 132,742 96,330 (3,837) 304, ,549 (319,925) 209,624 Employee benefits (36,388) (232,923) (13,149) (14,913) (297,373) - (297,373) Capital expenditure , , ,462 Six month period ended 30 June 2017 External revenues 2,069, ,040 20,752-2,675,390-2,675,390 Inter-segment revenue 75, , ,063 (694,063) - Segment revenue 2,145,112 1,203,589 20,752-3,369,453 (694,063) 2,675,390 Segment profit/(loss) before tax (38,769) 105,682 2, , ,925 (347,341) 26,584 Net finance income/(cost) 869 (1,526) , ,229 (347,341) 8,888 Depreciation, amortization and impairment, net (6,413) (188,753) (513) (461) (196,140) - (196,140) EBITDA* (33,225) 295,961 3,235 (52,135) 213, ,836 Segment net profit/(loss) (33,703) 82,199 2, , ,508 (347,341) 8,167 Employee benefits (42,099) (253,747) (11,544) (9,838) (317,228) - (317,228) Capital expenditure , , ,656 14

58 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) External Consolidation Total for Electricity Electricity electricity eliminations Consolidated At 30 June 2018 Headquarter reportable supply distribution network and total segments maintenance adjustments Segment assets 950,292 6,063, ,451 1,057,711 8,215,174 (943,759) 7,271,415 Trade and other receivables 514, ,417 18,009 65,411 1,040,790 (328,756) 712,034 Cash and cash equivalents 306, ,750 5, , , ,860 Restricted cash , , ,000 Deposits, treasury bills and government bonds - 32, , , ,609 Trade and other payables and short term employee 609, ,184 48,090 13,194 1,055,196 (312,965) 742,231 benefits Bank overdrafts - 131, , ,339 Financing for network construction related to - 348, , ,783 concession agreements and bank loans At 31 December 2017 (audited) Segment assets 1,067,230 5,769, ,458 1,222,115 8,203,432 (586,097) 7,617,335 Trade and other receivables 697, ,032 27, ,172,307 (312,412) 859,895 Cash and cash equivalents 219, ,391 8, , , ,493 Restricted cash , , ,000 Deposits, treasury bills and government bonds , , ,981 Trade and other payables, and short term employee benefits 710, ,322 58,397 12,449 1,263,964 (320,975) 942,989 Bank overdrafts - 247, , ,904 Financing for network construction related to concession agreements and bank loans - 363, , ,831 15

59 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) The breakdown of the Electricity distribution reportable segment is as follows: Six month period ended 30 June 2018 Distribution Muntenia Nord Distribution Transilvania Nord Distribution Transilvania Sud Electricity network maintenance Eliminations Total Electricity distribution External revenues 215, , ,239 13, ,750 Inter-segment revenue 200, , ,119 66,898 (63,377) 573,264 Segment revenue 415, , ,358 80,379 (63,377) 1,244,014 Segment profit (loss) before tax 18,056 53,024 43,808 10, ,965 Net finance income/(cost) (2,195) (1,622) (788) (4,135) Depreciation, amortization and impairment, net (64,456) (68,889) (68,981) (4,575) - (206,901) EBITDA* 84, , ,577 14, ,001 Net profit 11,362 40,809 34,954 9,205-96,330 Employee benefits (73,711) (68,617) (71,671) (18,924) - (232,923) Capital expenditure 108, ,419 78, ,299 Six month period ended 30 June 2017 External revenues 170, , ,303 17, ,040 Inter-segment revenue 212, , , ,840 (127,321) 618,549 Segment revenue 382, , , ,317 (127,321) 1,203,589 Segment profit (loss) before tax 7,059 40,838 55,606 2,181 (2) 105,682 Net finance income/(cost) 145 (488) (1,089) (94) - (1,526) Depreciation, amortization and impairment, net (56,896) (65,265) (64,156) (5,223) 2,787 (188,753) EBITDA* 63, , ,851 7,498 (2,789) 295,961 Net profit 3,729 31,639 44,787 2,044-82,199 Employee benefits (64,738) (63,506) (59,197) (70,792) 4,486 (253,747) Capital expenditure 82,590 83,881 97, ,131 16

60 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) At 30 June 2018 Distribution Muntenia Nord Distribution Transilvania Nord Distribution Transilvania Sud Electricity network maintenance Eliminations Total Electricity distribution Segment assets 2,040,122 1,947,139 1,721, ,701 (39,178) 6,063,720 Trade and other receivables 132, , ,205 96,048 (39,178) 442,417 Cash and cash equivalents 69,657 23,455 27,701 22, ,750 Deposits, treasury bills and government bonds 7, ,000-32,610 Trade and other payables and short term employee 95, , ,318 30,211 (39,178) 384,184 benefits Bank overdrafts 6, ,574 22, ,339 Financing for network construction related to concession 91, , , ,783 agreements and bank loans At 31 December 2017 (audited) Segment assets 1,908,339 1,772,965 1,691, ,321 (72,296) 5,769,629 Trade and other receivables 138, , , ,550 (72,296) 447,032 Cash and cash equivalents 96,140 23,972 59,367 28, ,391 Deposits, treasury bills and government bonds Trade and other payables, and short term employee benefits 155, , ,883 54,073 (72,296) 482,322 Bank overdrafts 21, ,511 98, ,904 Financing for network construction related to concession agreements and bank loans 99, , , ,831 *EBITDA (Earnings before interest, tax, depreciation and amortisation) for operating segments is defined and calculated as segment profit (loss) before tax of a given operating segment adjusted for i) depreciation, amortization and impairment/ reversal of impairment of property, plant and equipment and intangible assets in the operating segment and ii) net finance income in the operating segment. EBITDA is not an IFRS measure and should not be treated as an alternative to IFRS measures. Moreover, EBITDA is not uniformly defined. The method used to calculate EBITDA by other companies may differ significantly from that used by the Group. As a consequence, the EBITDA presented in this note cannot, as such, be relied upon for the purpose of comparison to EBITDA of other companies. 17

61 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) (b) Reconciliation of information on reportable segments to IFRS measures 30 June December 2017 (audited) Total assets Total assets for reportable segments 8,215,174 8,203,432 Elimination of inter-segment assets (966,540) (627,197) Unallocated amounts 22,781 41,100 Consolidated total assets 7,271,415 7,617,335 Trade and other receivables Trade and other receivables for reportable segments 1,040,790 1,172,307 Elimination of inter-segment trade and other receivables (328,756) (312,412) Consolidated trade and other receivables 712, ,895 Trade and other payables and short term employee benefits Trade and other payable and short term employee benefits for reportable segments Elimination of inter-segment trade and other payables and short term employee benefits Consolidated trade and other payables and short term employee benefits 1,055,196 1,263,964 (312,965) (320,975) 742, ,989 6 Revenue Six month period ended 30 June June 2017 Electricity distribution and supply 2,313,520 2,359,300 Construction revenue related to concession agreements 295, ,254 Repairs and maintenance and other services rendered 37,776 36,743 Re-connection fees 3,514 4,629 Sales of merchandise 3,440 10,464 Total 2,653,549 2,675,390 Starting with January 1 st 2018, with the adoption of the new IFRS 15 Revenues from contracts with customers, the Group identified that it acts in the capacity of an agent in case of transactions as Balancing Responsible Party. Without the adoption of the new standard IFRS 15, Revenues from supply and distribution of electricity for the six month period ended 30 June 2018 would have been higher with RON 51,901 thousands. In respect to the timing of the revenue recognition, most of the Group s services provided are transferred to the customer over time, only a small part amounting to RON 1,046 thousand being transferred at a point in time (e.g. metering services provided by the distribution companies, providing periodic data analysis to the customer for certain taxes collected on behalf of the customer). 18

62 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) 7 Other income Six month period ended 30 June June 2017 Rental income 53,007 44,308 Revenues from notices 7,838 10,301 Late payment penalties from customers 5,048 9,268 Commissions for the collection of radio and TV taxes - 2,645 Other 8,986 23,601 Total 74,879 90,123 8 Electricity purchased The cost of the electricity purchased decreased during the six month period ended 30 June 2018, as a result of the stabilization and reduced volatility of electricity market prices as compared to the same period of the previous year, when historically high prices were reached. Starting with January 1 st 2018, with the adoption of the new IFRS 15 Revenues from contracts with customers, the Group identified that it acts in the capacity of an agent in case of transactions as Balancing Responsible Party. Without the adoption of the new standard IFRS 15, Electricity purchased for the six month period ended 30 June 2018 would have been higher with RON 51,901 thousands. 9 Earnings per share The calculation of basic and diluted earnings per share has been based on the following profit or loss attributable to ordinary shareholders and weighted-average number of ordinary shares outstanding. Profit or loss attributable to ordinary shareholders Profit/(Loss) for the period attributable to the owners of the Company Six month period ended 30 June June ,624 (6,499) Profit/(Loss) attributable to ordinary shareholders 209,624 (6,499) Weighted-average number of outstanding ordinary shares (in number of shares) For the calculation of the basic and diluted earnings per share, treasury shares (6,890,593 shares) were not treated as outstanding ordinary shares and were deducted from the number of issued ordinary shares. The weighted average number of outstanding ordinary shares as at 30 June 2018 is of 339,049,336 (30 June 2017: 339,049,336). Earnings per share Six month period ended 30 June June 2017 Basic and diluted earnings per share (RON per share) 0.62 (0.02) 19

63 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) 10 Dividends On 27 April 2018 the General Shareholders Meeting of the Company approved dividend distribution of RON 245,370 thousand. The dividend per share distributed is RON per share. During the six month period ended 30 June 2017, dividends of RON 97,869 thousand were approved for distribution to non-controlling interests - Fondul Proprietatea S.A., by the General Shareholders Meeting of the following subsidiaries: Electrica Furnizare, Electrica Distributie Muntenia Nord, Electrica Distributie Transilvania Nord and Electrica Distributie Transilvania Sud. In 2018, Fondul Proprietatea is no longer a shareholder of the above mentioned subsidiaries. 11 Income taxes Six month period ended 30 June June 2017 Current period tax expense 27,539 18,894 Deferred tax expense/(income) 26,718 (477) Total income tax expense 54,257 18, Trade receivables 30 June December 2017 (audited) Trade receivables, gross 1,738,036 1,863,868 Bad debt allowance (1,055,978) (1,059,507) Total trade receivables, net 682, ,361 Receivables from related parties are disclosed in Note 19. The movement in the bad debt allowance for trade receivables is as follows: Bad debt allowance Balance as at 1 January 2018 (audited) 1,059,507 Impairment recognized 10,655 Impairment reversed (8,177) Amounts written off (6,007) Balance as at 30 June ,055,978 A significant part of the bad debt allowances refers to clients in litigation, insolvency or bankruptcy procedures, many of them being older than three years. The Group will derecognize these receivables together with the related allowances after the finalization of the bankruptcy process. Starting with January 1 st 2018, the Group has applied for the first time the new standard IFRS 9 Financial instruments, resulting in an earlier recognition of bad debt allowances for receivables. Being permitted by the standard, the Group adopted IFRS 9 starting with January 1 st 2018 using the modified retrospective method, with cumulated adjustments from the initial application recognised in equity as of January 1 st 2018 and without restating the figures of the comparative period. For the Group s trade receivables, there are no significant differences between the initial evaluation method according to IAS 39 and the new evaluation criteria under IFRS 9. 20

64 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) 13 Cash and cash equivalents 30 June June 2017 Total cash and cash equivalents in the condensed consolidated statement of financial position 564, ,542 Overdrafts used for cash management purposes (131,339) (118,255) Total cash and cash equivalents in the condensed consolidated statement of cash flows 433, ,287 The Group has overdrafts as follows: Bank BRD Groupe Societe Generale Raiffeisen Bank Contract date Facility type Maturity Overdraft limit (th RON) Balance at 30 June 2018 overdraft facility for financing the current 29-May-18 activity Until 29 May ,000 6,838 overdraft facility for financing the current 19-Jan-18 activity Until 15 April , ,574 overdraft facility for financing current 6-Nov-17 activity Until 6 November ,000 22,927 Raiffeisen Bank Total 330, ,339 As at 30 June 2018, Electrica SA has collateral deposits at BRD - Groupe Societe Generale as guarantees for the long term borrowings received from BRD by Societatea de Distributie a Energiei Electrice Transilvania Sud, Societatea de Distributie a Energiei Electrice Transilvania Nord and Societatea de Distributie a Energiei Electrice Muntenia Nord. The amount of the collateral deposits as at 30 June 2018 is RON 320,000 thousands (31 December 2017: RON 320,000 thousands) presented in the statement of financial position as long-term restricted cash. Refer also to Note 16. The following information is relevant in the context of the statement of cash-flows. Non-cash activity includes: set-off between trade receivables and trade payables of RON 27 million during the six month period ended 30 June 2018 (six month period ended 30 June 2017: RON 33 million). 14 Deposits, treasury bills and government bonds Treasury bills and government bonds denominated in RON with original maturity of more than three months 30 June December 2017 (audited) 89, ,739 Deposits with maturity of more than three months 409, ,242 Total deposits, treasury bills and government bonds 499, ,981 Treasury bills and government bonds with original maturity of more than three months have an average interest rate (yield) of 2.16% (2017: 1.34%). Treasury bills and government bonds were classified as held to maturity investments. 21

65 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) 15 Other payables 30 June December 2017 (audited) Current Non-current Current Non-current VAT payable 92,533-85,832 - Liabilities towards the State 12,937-21,003 - Liabilities related to green certificates acquisition obligation - - 6,665 - Other liabilities 60,257 41,822 20,726 40,440 Total 165,727 41, ,226 40,440 Other liabilities include mainly guarantees, sundry creditors, connection fees, habitat tax and cogeneration contribution. Other non-current liabilities refer to guarantees from customers related to electricity supply. 16 Bank borrowings 30 June December 2017 (audited) Long-term bank borrowings 320, ,000 Total 320, ,000 On 17 October 2016, the Company s distribution subsidiaries (Societatea de Distributie a Energiei Electrice Transilvania Sud, Societatea de Distributie a Energiei Electrice Muntenia Nord and Societatea de Distributie a Energiei Electrice Transilvania Nord) concluded long term loan contracts with BRD Groupe Societe Generale, in which Electrica SA has the quality of guarantor. These are fully reimbursable at maturity (16 October 2021). Details of the long term bank borrowings are as follows: Lender Facility type Maturity Loan amount BRD BRD BRD term loan, non-revolving facility, financing the treasury deficit generated by the investment activity term loan, non-revolving facility, financing the treasury deficit generated by the investment activity term loan, non-revolving facility, financing the treasury deficit generated by the investment activity until 16 October 2021 until 16 October 2021 until 16 October 2021 Balance at 30 June 2018 Balance at 31 December 2017 (audited) 80,000 80,000 80, , , , , , ,000 Total 320, , ,000 22

66 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) 17 Provisions Provisions Balance at 1 January 2018 (audited) 29,889 Provisions recorded during the period 5,370 Provisions used (4,927) Provisions reversed (522) Balance at 30 June ,810 As at 30 June 2018, provisions refer mainly to: - RON 3,439 thousand representing potential tax charges of the Group (including interest and penalties); - RON 2,069 thousand referring to work litigations; - RON 24,302 thousand representing mainly the provision for the fine from Competition Council, RON 10,801 thousand, and other provisions for claims for which the Group might have the obligation to pay the amounts subject to litigations and other claims in the future. The provisions recorded during the period refer mainly to: - RON 1,900 thousand for a litigation of Societatea de Distributie a Energiei Electrice Muntenia Nord S.A. in with Sinaia City Hall; - RON 1,397 thousand representing claims in work litigations. The provisions used during the period refer mainly to: - the payment obligation of RON 4,670 thousand based on the decision issued and communicated by tax authorities to Electrica Furnizare S.A. following the completion of the fiscal inspections. The amount represents additional fiscal obligations in the form of interest and penalties. As at 31 December 2017, provisions refer mainly to: - RON 7,244 thousand representing potential tax charges of the Group (including interest and penalties); - RON 22,645 thousand representing mainly the provision for the fine from Competition Council, RON 10,801 thousand, and other provisions for claims for which the Group might have the obligation to pay the amounts subject to litigations and other claims in the future. 23

67 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) 18 Financial instruments fair values (a) Accounting classifications and fair values The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value. 30 June 2018 Loans and receivables Carrying amount Held to maturity financial assets Other financial liabilities Total Level 1 Level 2 Fair value Level 3 Total Financial assets not measured at fair value Trade receivables 682, ,058 Deposits, treasury bills and government bonds - 499, ,609 Cash and cash equivalents 564, ,860 Restricted cash 320, ,000 Total 1,566, ,609 2,066,527 Financial liabilities not measured at fair value Bank overdrafts 131, ,339 Financing for network construction related to 28,783 28,783 28,094 28,094 concession agreements Long-term bank borrowings 320, ,000 Trade payables 473, ,547 Total 953, , December 2017 (audited) Loans and receivables Carrying amount Held to maturity financial assets Other financial liabilities Total Level 1 Level 2 Fair value Level 3 Total Financial assets not measured at fair value Trade receivables 804, ,361 Deposits, treasury bills and government bonds - 746, ,981 Cash and cash equivalents 562, ,493 Restricted cash 320, ,000 Total 1,686, ,981 2,433,835 24

68 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) 31 December 2017 (audited) Loans and receivables Carrying amount Held to maturity financial assets Other financial liabilities Total Level 1 Level 2 Fair value Level 3 Total Financial liabilities not measured at fair value Bank overdrafts 247, ,904 Financing for network construction related to 43,831 43,831 45,367 45,367 concession agreements Long-term bank borrowings 320, ,000 Trade payables 689, ,405 Total 1,301,140 1,301,140 (b) Measurement of fair values Fair value hierarchy The fair value measurements are categorised into different levels in the fair value hierarchy based on the inputs to valuation techniques used. The different levels are defined as follows: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities that the Group can access at the measurement date; Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; Level 3: unobservable inputs for the asset or liability. The following table describes the valuation techniques used in measuring Level 2 fair values. Financial instruments not measured at fair value Type Other financial liabilities Valuation technique Discounted cash flows (DCF) method The discount rates used are the average 12 M ROBID-ROBOR interest rates of 3.11 % as at 30 June 2018 (31 December 2017: 2.07%). 25

69 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) 19 Related parties (a) Main shareholders As at 30 June 2018 and 31 December 2017 the main shareholder of Societatea Energetica Electrica S.A. is the Romanian State, represented by the Ministry of Energy (48.78%). (b) Management and administrators compensation Six month period ended 30 June June 2017 Executive Management compensation 10,961 11,192 Executive management compensation refers to both the managers with mandate contract and those with labor contract, from both the subsidiaries and Electrica S.A. Compensations granted to the members of the Board of Directors were as follows: Six month period ended 30 June June 2017 Members of Board of Directors 1,728 1,449 (c) Transactions with companies in which the state has control or significant influence The Group has transactions with companies in which the State has control or significant influence in the ordinary course of business, related mainly to the acquisition of electricity, transmission and system services and sale of electricity. Significant purchases and balances are mainly with energy suppliers, as follows: Supplier Purchases (excluding VAT) Six month period ended 30 June 2018 Six month period ended 30 June 2017 Balance (including VAT) 30 June December 2017 (audited) Transelectrica 232, ,128 66,135 94,150 OPCOM 190, ,603 3,596 4,298 Hidroelectrica 168, ,693 31,123 16,840 Complexul Energetic Oltenia 153,796 37,478 20,052 42,700 Nuclearelectrica 74, ,327 9,026 22,176 Electrocentrale Bucuresti 9, CN Posta Romana SA Others 6,661 9,063 2,352 4,119 Total 836,754 1,242, , ,305 26

70 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) The Group also makes sales to companies in which the State has control or significant influence representing electricity supplied, of which the significant transactions are the following: Sales (excluding VAT) Balance, gross (including VAT) Allowance Balance, net Client Six month period ended 30 June June 2018 Societatea Comerciala "Cupru Min" 15,872 6,285-6,285 OPCOM 9,647 2,808-2,808 CN Romarm 5, Hidroelectrica 4,601 3,614-3,614 SNGN Romgaz 3,007 5,613-5,613 CFR Electrificare 2,763 1,375-1,375 Transelectrica 2, CNCF CFR Bucuresti SA 1,839 2,188-2,188 CN Posta Romana 1, Baita SA (613) - CN Remin SA ,178 (71,148) 30 Complex Energetic Electrica C.N.C.A.F. MINVEST S.A. - 29,903 (29,903) - Oltchim - 715,259 (715,259) - CET Braila - 3,826 (3,826) - Termoelectrica - 1,508 (1,504) 4 Others 4,886 2,968 (1,769) 1,199 Total 52, ,511 (824,022) 23,489 Sales (excluding VAT) Balance, gross (including VAT) Allowance Balance, net Client Six month period ended 30 June December 2017 (audited) Societatea Comerciala "Cupru Min" 16,201 6,635-6,635 OPCOM 10,240 3,662-3,662 CN Romarm 5, SNGN Romgaz 7,150 1,279-1,279 Transelectrica 8,552 1,841-1,841 CFR Electrificare 3, Baita SA (726) 96 CN Remin SA ,219 (71,219) - CFR Telecomunicatii 3, C.N.C.A.F. MINVEST S.A. - 29,903 (29,903) - Oltchim - 715,259 (715,259) - Others 20,870 15,546 (6,817) 8,729 Total 76, ,397 (823,924) 23,473 27

71 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) 20 Subsidiaries in financial distress In January 2014 the Board of Directors of Servicii Energetice Oltenia and in October 2014, the Board of Directors of Servicii Energetice Muntenia decided the commencement of the insolvency procedure with a view to reorganization. The insolvency procedures were initiated in Due to the above conditions that indicated the existence of significant uncertainties that cast significant doubt on the ability of these subsidiaries to continue to operate as going concerns, the Group has measured the carrying amounts of the assets and liabilities of these subsidiaries on a liquidation basis starting the commencement of their insolvency procedures. As at 30 June 2018 and at 31 December 2017, the carrying amount of the assets and liabilities of these companies included in the consolidated financial information are as follows: 30 June 2018 Servicii Energetice Muntenia Servicii Energetice Oltenia Property, plant and equipment 99,259 20, ,837 Trade receivables 5,069 8,859 13,928 Cash and cash equivalents 3,405 1,887 5,292 Total assets 107,733 31, ,057 Trade payables (4,216) (3,253) (7,469) Payables to the State budget (533) (7,917) (8,450) Social security and other salary taxes (538) (5,258) (5,796) Provisions, employee benefits and deferred taxes (24,186) (12,586) (36,772) Total liabilities (29,473) (29,014) (58,487) Total 31 December 2017 (audited) Servicii Energetice Muntenia Servicii Energetice Oltenia Property, plant and equipment 89,989 20, ,388 Trade receivables 9,464 8,957 18,421 Cash and cash equivalents 6,657 2,145 8,802 Total assets 106,110 31, ,611 Trade payables (15,404) (3,071) (18,475) Payables to the State budget (406) (5,128) (5,534) Social security and other salary taxes (483) (5,250) (5,733) Provisions, employee benefits and deferred taxes (19,349) (9,066) (28,415) Total liabilities (35,642) (22,515) (58,157) Total The Group has not classified the assets and liabilities of these subsidiaries as held for sale as at 30 June 2018, as the assets or disposal groups were not actively marketed for sale, the Group is not committed to a plan to sell the assets or disposal groups, and it has not initiated an active programme to locate a buyer and complete the disposal plan. Consequently, the Group has not presented these subsidiaries as discontinued operations in the income statement for the six month period ended 30 June At the date of approval of these financial statements, Servicii Energetice Muntenia completed the reorganization plan, the payables included in the payment schedule being fully paid, thus the legal procedures for exiting the insolvency procedures will be completed in the following period. 28

72 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) Until June, 24th 2018, the expiry date of the judicial reorganization period, Servicii Energetice Oltenia could not fulfill the measures stipulated in the plan, thus the related legal procedures will be carried out in the following period. 21 Contingencies a) Contingent Liabilities Tax inspection report for Electrica Serv In May 2017 a tax inspection at Electrica Serv was finalized and the tax authorities concluded that additional tax obligations of RON 12,281 thousand should be paid by the subsidiary. This amount represents VAT (and related interest and penalties) that was deducted in the period in relation with certain invoices issued by a lease supplier who was inactive at that time. The company appealed in court the measures imposed by the tax authorities, the action being in progress. Management estimates that it is likely that a favorable outcome will result out of this dispute, based on, among other aspects, similar case favourable settled at the Court of Justice of the European Union. Litigation with National Agency of Fiscal Administration ( NAFA ) In May 2017, after the revision of Electica s tax record, the tax authorities issued an enforcement order for additional interest and penalties of RON 39,248 thousand as a result of certain tax record allocations for prior periods. Electrica filed a complaint with the tax authorities against the enforcement order and also opened a legal action to suspend the enforced payment by the resolution of the above mentioned complaint. These additional interest and penalties are related to the prior enforcement orders received by Electrica in the prior years of RON 73,460 thousand and which were settled by enforced payments in Since there were uncertainties regarding the outcome of these legal actions, Electrica recognized a provision of RON 12,200 thousand which was the management best estimate as of the end of the first semester In February 2018, Electrica has obtained a favourable Supreme Court ruling in one of the litigations with NAFA, which essentially maintains into force a prior Court of Appeal decisions, which is favourable for the Group, in management s view. Based on this Court ruling and in conjunction with all other litigations with NAFA on the same historical 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 is that Electrica shall be able to obtain favourable Court rulings with the end result of no future cash outflows. As a result, the previous recognized provision of RON 12,200 thousand has been reversed in full as of 31 December 2017 and there is no provision recognized subsequent to 31 December 2017 related to NAFA litigations. Other litigations and claims The Group is involved in many litigations and claims (ie. with SAPE, ANRE, ANAF, Court of Accounts, claims for damages, claims over land titles, labour related litigations etc.). As summarised in Note 17, the Group set-up provisions for the litigations or claims for which the management assessed as probable the outflow of resources embodying economic benefits due to low chances of favourable outcomes of those litigations or disputes. The Group does not present information in the financial statements and did not set-up provisions for items for which the management assessed as remote the possibility of outflow of economic benefits. The Group discloses below information on the most significant items of litigations or claims for which the Group did not set-up provisions as they relate to possible obligations that arise from past events whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future events not wholly within the control of the Group (ie. litigations for which different inconsistent sentences were issued by the Courts, or litigations which are in early stages and no preliminary ruling were issued so far): 29

73 SOCIETATEA ENERGETICA ELECTRICA S.A. NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS AS AT AND FOR THE SIX MONTH PERIOD ENDED 30 JUNE 2018 (All amounts are in THOUSAND RON, if not otherwise stated) In 2015 Electrica SA was sued by Hidroelectrica S.A., which claimed the payment of RON 5,445 thousand and other damages, representing claims related to acquisition of electricity by the Company from Hidroelectrica S.A. at a price alleged to be unfair. As of the date of these financial statements, both parties have filed an appeal. Fiscal environment Tax audits are frequent in Romania, consisting of detailed verifications of the accounting records of tax payers. Such audits sometimes take place after months, even years, from the date liabilities are established. Consequently, companies may be found liable for significant taxes and fines. Moreover, tax legislation is subject to frequent changes and the authorities demonstrate inconsistency in interpretation of the law. Income tax returns may be subject to revision and corrections by tax authorities, generally for a five year period after they are completed. The Group incurred significant expense related to previous years tax adjustments as a result of controls and litigations with tax authorities. The management of the Group believes that adequate provisions and liabilities were recorded in the consolidated financial statements for all significant tax obligations; however a risk persists that the tax authorities might have different positions. Chief Executive Officer Dan Catalin Stancu Chief Financial Officer Mihai Darie August 13 th

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