CEZ ROMANIA GROUP...Litigations 25 the domestic electricity market 26 CompAnIEs’ pREsEntAtIon wIthIn CEZ RomAnIA GRoup 31 CEZ România 31 CEZ distribuţie 32 operation of distribution

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CEZ ROMANIA GROUP

CEZ Romania GroupAnnual Report 2007

CONTENTS

IntRoduCtIon - CEZ GRoup pREsEntAtIon 3

KEy FIGuREs 7

ImpoRtAnt EvEnts In 2007 9

Awards 10

Corporate social Responsibilty & sponsorships 11

CountRy mAnAGER’s LEttER to thE shAREshoLdERs 13

dIRECtoRs & oFFICERs 15

FInAnCIAL pERFoRmAnCE 23

Revenue, costs and earnings 23

the structure of the Assets 24

Liabilities and Equitiy 24

politicy of financial risk management 24

Litigations 25

the domestic electricity market 26

CompAnIEs’ pREsEntAtIon wIthIn CEZ RomAnIA GRoup 31

CEZ România 31

CEZ distribuţie 32

operation of distribution network 32

priorities in the distribution Activity 32

Capital Investments 32

Environment protection 33

structure of the shareholding 34

human Resources and social policy 34

CEZ vânzare 36

CEZ servicii 37

FInAnCIAL stAtEmEnts oF CEZ dIstRIbuţIE 39

Independet auditor report 39

Assets 40

shareholders’ equity and liabilities 40

Income statement 41

statement of Changes in Equity 42

Cash Flow statement 43

Corporate Information 44

significant Accounting policies 45

property, plant and Equipment 55

Intangible Assets 58

other Fnancial Assests 59

Inventories & trade Receivables 59

Receivablees from related parties 60

other Current & Financial Assests 60

Cash and Cash Equivalents 61

Equity 61

deferred Income 64

trade payables 64

short term Liabilities to Related parties 65

other Current Liabilities 65

provisions 66

sale and distribution of Electricity 68

other operating Revenues 68

purchased Electricity 69

materials and supplies 69

Repairs and maintenance 69

salaries, wages and other Employee benefits 70

depreciation, Amortization and Impairment Charge 70

Financial Income, net 70

other operational Expenses 71

Income taxes 71

Related parties 73

Key management personnel 75

number of Employees 76

Financial Risk management objectives and policies 76

Commitments and Contingencies 78

subsequent Events 79

oRGAnIZAtIon ChARts 80

GLossARy oF tERms And AbbREvIAtIons 83

mEthod usEd to CALCuLAtE KEy FIGuREs 83

InFoRmAtIon FoR shAREhoLdERs And InvEstoRs 84

pERsons REsponsIbLE FoR thE AnnuAL REpoRt 84

PREZENTARE CEZ VÂNZARE

markets with CEZ Group assets

CEZ Group presence

trading license

target markets

thE LEAdER In thE powER mARKEt oF CEntRAL And southEAstERn EuRopE

CEZ Group is a dynamic, integrated electricity conglomerate

based in the Czech Republic and with operations in a number

of countries of Central and Southeastern Europe. Its principal

businesses encompass generation, distribution, and sale of

electricity and heat as well as coal mining. The shares of the

parent company ČEZ, a.s. are traded in Prague and Warsaw,

and form a significant part of the stock exchange indexes

there. In the NTX index of the best Central European stocks,

compiled by the Vienna Stock Exchange and Erste Bank, the

shares of ČEZ, a.s. have the highest weighting. With its market

capitalization of CZK 738 billion, ČEZ, a.s. has become the

largest corporation in the entire region. The Czech Republic

continues to be the company’s largest shareholder with a 66%

stake as of 31 December 2007.

A critical part of CEZ Group’s mission is to maximize returns

and ensure long-term growth in shareholder value. To this

end, CEZ Group focuses its efforts on fulfilling the vision of

becoming the leader in the power market of Central and

Southeastern Europe.

opERAtIonAL ExCELLEnCE

In May 2007, CEZ Group officially completed VIZE 2008 - the

project that became the most extensive and most demanding

corporate transformation yet in the Czech Republic. The pro-

ject, whose goal was to separate, or “unbundle“, electricity

sales from electricity distribution and, at the same time, trans-

form CEZ Group into an integrated, process-driven player, was

completed earlier, with higher financial benefits and a broader

scope of operational improvements than was originally plan-

ned. The project’s cumulative benefits in the 2004-2007 pe-

riod compared to the reference year 2003 amount to nearly

CZK 12 billion.

A new Operational Excellence program was announced in

March 2007. It will build on the now-completed integration in

the first pillar of the CEZ Group strategic temple.

The aim of the program is to increase performance and impro-

ve the cost effectiveness of key processes in order to make

CEZ Group one of the most efficient players in the European

power industry by 2012. In order to flesh out the new program,

in 2007 we selected over 20 initiatives and launched seven

strategic projects focusing on key processes in electricity ge-

neration and distribution both in the Czech Republic and ab-

road - i.e., processes related to customer service and principal

ancillary processes. The overall benefits from the newly laun-

ched initiatives are expected to reach CZK 19 billion per year

compared to the reference year 2007, starting in 2012. More

initiatives will be added to the program as time goes on.

IntERnAtIonAL ExpAnsIon

Another part of the CEZ Group vision is to develop operations

beyond the borders of the Czech Republic. CEZ Group’s priority

focus is on markets in Central and Southeastern Europe, where

we can best employ our unique experience in managing an elec-

tricity conglomerate during a period of transition to a liberalized

01iNTrOduCTiON

3

power market and with achieving operational excellence.

Successful acquisitions in Poland, Bulgaria, and Romania have

opened up new markets for CEZ Group. The Group’s subsidi-

aries in Hungary, Serbia, and Slovakia have gained a solid fo-

othold in their respective markets. A joint venture engaged in

upgrading and expanding a generating plant has been started

in Republika Srpska in Bosnia and Herzegovina. ČEZ, a.s. is in-

tegrating new companies into the Group and implementing best

practices in both core and ancillary processes. We would like to

play a role in building the Cernavodă Nuclear Power Station in

Romania and we are participating in a tender being organized

next door in Bulgaria to find a strategic partner for construction

and operation of the Belene Nuclear Power Station. In late 2007,

ČEZ, a.s. and Hungary-based MOL agreed to set up a joint ven-

ture whose mission will be to build and operate combined cycle

power plants in oil refineries in Hungary and Slovakia. Both part-

ners will reap significant synergies from the cooperation. CEZ

Group is also actively seeking opportunities to leverage environ-

mental energy sources by building wind power plants.

pLAnt poRtFoLIo REnEwAL

The third pillar for achieving CEZ Group’s ambitious goal is

the renewal of our existing coal-fired power stations. Plant re-

newal commenced on 2 June 2007 with the launch of a com-

plete retrofit of the brown coal-fired Tušimice II Power Station

in the Czech Republic. A second project, the complete retrofit

of the Prunéřov II Power Station, has also been launched. In

addition, work is now underway in a third project - a new 660

MW brown coal-fired plant in the Ledvice Power Station - to

prepare the power station grounds for construction of what

will be the first supercritical unit in the Czech Republic.

Thanks to their increased efficiency, the retrofitted and new

coal-fired power stations will bring fuel savings of 15-25%

compared to the plants currently in use and contribute sub-

stantially to reducing CO2 emissions. CEZ Group has decided

to build new low-emission gas-fired power plants in the Czech

Republic as well. The preferred sites are Počerady and Úžín.

Plant renewal will also take place, in the form of a joint venture,

in the Republika Srpska in Bosnia and Herzegovina, and we

are also considering plants in Poland. CEZ Group is interested

in developing similar activities in the target territory of Central

and Southeastern Europe and is participating in tenders to-

ward this end. ČEZ, a.s. placed a bid in a tender for a strate-

gic partner for the planned construction of a new power plant

in Borzeşti as well as a tender to upgrade an existing power

plant and potentially build a new one in Galaţi, Romania.

CoRpoRAtE CuLtuRE

If CEZ Group is to continue to successfully fulfill its vision and

achieve its demanding goals, it will be important to reinforce a

corporate culture based on performance. That corporate cul-

ture is defined by seven principles - core values to be shared

by all employees of CEZ Group:

1. creating value safely - our highest priority is to create

value, while maintaining safety standards at all times,

2. responsibility for results - we are all personally responsi-

ble for the results achieved,

3. playing as one team - the actions of each of us must

bring benefit to the Group as a whole,

4. developing our potential - we work continually to im-

prove ourselves in both our professional and personal

lives,

5. growing beyond borders - we are engaged in building

an international organization,

6. seeking new solutions - we are open to change and we

accept better solutions,

7. playing fair - we are honest and loyal to our principles

and to society.

INTRODUCTION

CoRpoRAtE CItIZEnshIp And EnvIRonmEntAL pRotECtIon

CEZ Group’s business is governed by strict ethical standards

that include behaving responsibly toward society and the envi-

ronment. CEZ Group is a major supporter of a number of non-

profit organizations and public-benefit projects. In addition to

continually reducing the environmental impact of coal mining

and electricity generation and distribution, in March 2007 CEZ

Group announced its CO2 Reduction Action Plan, containing

among other initiatives a pledge to increase generation from

renewable sources of energy. CEZ Group is also actively se-

eking opportunities to invest in CO2 emission reduction pro-

jects in developing countries through the so-called “flexible

mechanisms” of the Kyoto Protocol.

AntICIpAtEd CommERCIAL And FInAnCIAL

sItuAtIon In 2008

CEZ Group anticipates the active measures in the Operational

Excellence program and ongoing growth in electricity demand

and prices in Central Europe will lead to further improvements

in performance.

Consolidated net income is expected to reach CZK 46.6 billion

(i.e. up 18% from 2007 - before adjusting for extraordinary

impacts), income before other income (expenses) and income

taxes, depreciation and amortization (EBITDA) is to be CZK

85.5 billion (up 16%), and EBIT is anticipated at CZK 63.5

billion (up 23%).

5


02KEy figurES

CEZ ROMANIA GROUP

Indicator UM 2005 2006 2007

Employees headcount

as of December 31 Number 2,969 2,971 3,246

Revenues thousand RON 1,292,436 1,352,421 1,388,831

out of that: sold energy thousand RON 1,126,885 1,132,983 1,366,388

EBITDA thousand RON 166,949 246,047 245,951

EBIT thousand RON 65,582 143,130 141,486

net profit thousand RON 69,422 95,353 134,300

Return on the invested capital % 3.63 8.61 8.16

Total assets thousand RON 2,078,250 2,198,293 2,367,618

Equity thousand RON 1,599,117 1,728,721 1,863,003

Loans thousand RON 11,635 0 0

Loans, equity % 0,73 0 0

Investments thousand RON 103,265 208,792 220,479

Operating cash flow thousand RON 129,708 109,599 110,008

Selling area km2 41,828 41,828 41,828

Electricity sale GWh 4,145 3,852 4,306

Electricity distributed GWh 8,466 8,569 8,698

Total distribution services in region GWh 11,407 10,850 11,114

Eligible consumers GWh 53 397 695

Captive consumers GWh 4,023 3,048 2,939

Commercial GWh 2,945 2,274 2,479

Households GWh 1,077 1,171 1,155

Indicator UM 2005 2006 2007

Other sales GWh 69 407 672

Number of consumption points Number 1,394,321 1,369,873 1,365,661

Eligible consumers Number 392 135 492

Captive consumers Number 1,393,929 1,369,738 1,365,169

Commercial Number 96,301 83,368 81,096

Households Number 1,297,628 1,286,505 1,284,565

Peak load MW 992 1,292 972

Grid extention length km 50,321 50,792 50,301

of which: high voltage km 3,506 3,535 3,524

medium voltage km 19,640 19,624 19,652

low voltage km 27,175 27,633 27,125

Number of transformation points Number 9,985 10,089 10,043

of which: own Number 9,985 10,089 10,043

owned by third parties Number 0 0 0

Return on the invested capital (ROIC) % 3.63 8.61 8.16

Economic value added (EVA) thousand RON -56,800 -63,433 -35,802

Return on equity (ROE) % 5.17 5.73 7.48

Return on assets (ROA) % 3.76 4.46 5.88

EBIT margin % 5.07 10.58 10.19

Loans/ Equity % 0.73 0.00 0.00

Loans / EBITDA % 6.97 0.00 0.00

Current ratio % 224.08 258.90 282.99

Operating cash flow

to liabilities ratio % 27.07

23.3421.80

Turnover to total assets ratio 1 0.62 0.62 0.59

Coverage of non-current assets % 126.18 126.99 128.22

Extent of depreciation % 7.18 6.74 6.34

7


yEAR 2007

JAnuARy

n IMO Concept is implemented and LIFE Project is

defined;

n IMO-LIFE Project is launched, having as main object

an assembly of restructuring measures in order to

increase the efficiency of CEZ Romania Group activity.

mARCh

n The unbundling (separation of distribution and supply

activities) is approved in the Shareholders Assembly of

Electrica Oltenia;

n On March 15, 2007, CEZ Distribuţie and CEZ Vânzare,

successors of DFEE Electrica Oltenia S.A., are

founded and registered at the Trade Registry;

n CEZ Vânzare became operational;

n CEZ România Group defines its business model;

n Meter Reading Department is insourced in CEZ

Romania.

mAy

n Performance Boost Initiative project is launched;

n CEZ Servicii company is founded on May 16, 2007.

JuLy

n Support services externalization is approved in the

Shareholders Assembly of CEZ Distribuţie: Financial,

Human Resources, Customer Care, Communication,

IT, Quality, Logistics, Purchasing, Transportation;

n The employees working within the above-mentioned

activities are transferred to CEZ Servicii and CEZ

România;

n GO LIFE for SAP-ERP system.

sEptEmbER

n The project of reorganization of CEZ Distribuţie is

launched. Starting 2008, it becomes PROGRES IV

project and will be approved through the Decision of

the Board of Directors no. 3/11.02.2008;

n The project proposes to deeply transform the structure

of the company, by changing the organizational model

at county level to an organizational model at region

level, with three regions: Oltenia North, Oltenia East

and Oltenia West. It will also bring a new approach of

the responsibilities repartition within the operational

divisions;

n The project will be finalized on December 31, 2009.

Its main objectives are: increasing the profitability of

the company, fulfilling the performance standards,

increasing the organizational efficiency and labor

productivity, standardization of procedures;

n CEZ Vânzare obtains the certification for Integration

Management System-Quality-Environment-Work,

Health and Safety

9

03impOrTaNT EvENTS

2007 - 2008

CEZ ROMANIA GROUP

novEmbER

n The restructuring process of Customer Care Division

in CEZ Servicii starts.

dECEmbER

n CEZ Distribuţie obtains the certification for Integration

Management System-Quality-Environment-Work

Health and Safety;

n PROGRES IV Project is defined. It will lead the entire

reorganization process of CEZ Distribuţie.

yEAR 2008

ApRIL

n CEZ Servicii optimizes the structure of Customer Care

Centers.

mAy

n CEZ Distribuţie implements the new organizational

structure starting with Asset Management department

REmARKAbLE suCCEssEs In 2007

wIthIn CEZ RomAnIA GRoup

1. Over 700 employees were transferred (almost 25%);

2. Almost 200 employees were insourced;

3. Three newly founded companies are relating within

CEZ Romania Group;

4. We were the first distribution company finalizing in

time the unbundling (separation of distribution and

supply activities);

5. All transferred activities became fully operational;

6. New SAP system was put into function in record time;

7. Over 5 million RON were registered as savings.

AwARds oF thE yEAR 2007

1. Excellency Distinction for placing in the Companies’

Top for three consecutive years- granted by the Cham-

ber of Commerce Oltenia - CEZ Distribuţie.

2. First Prize in the category of very big enterprises of

Companies’ Top 2006 - granted by the Chamber of

Commerce and Industry Oltenia - CEZ Distribuţie.

3. 32nd place in the Top of the biggest 100 companies

from Romania- granted by Fin Media and Economical

Shaping Romanian Center - CEZ Distribuţie.

ImPORTANT EVENTs

CEZ RomAnIA GRoup - spRonsoRshIps & CsR In 2007 Corporate social Responsibility

InvEstInG FoR thE FutuRE

1. UNITER sponsorship contract (Theatre Union in Romania)

Sustaining the printing in 1000 copies of Dragoş

Buhagiar exhibition catalogue - “Dreaming with

Open Eyes - The Surrealist Face of the World”. This

catalogue represented Romania at the 11th edition

of scenography and theatre architecture Quadrennial

from Prague. CEZ Romania was the main sponsor

together with the Ministry of Culture and Cults.

2. “Tudor Vladimirescu” University Association in Craiova

sponsorship contract

Sustaining the manifestation held with the occasion of

celebrating 60 years of existence of University in Craiova.

3. CEZ LIGHT DESIGN Award

CEZ Romania sponsors and juries the scenography

contest organized by UNITER and grants a special

award named CEZ LIGHT DESIGN, within an internati-

onal cultural competition.

CEZ - youR Good nEIGhbouR

4. Partnership between CEZ Romania Group and Piteşti

City Hall (local authority)

Grid extension for helping a family without electricity

network access. Subsequently to the extension, more

families will have the possibility of connecting to the

network.

ChAmpIons bREEd ChAmpIons

5. WASHI Children Karate Club in Craiova sponsorship

The Karate Club trains in a sport hall belonging to

CEZ Distribuţie. CEZ Romania Group sponsored the

members’ participation to the Finals of Karate National

Championship from Cluj.

REspECtFuL to nAtuRE, ConsIdERAtE to pEopLE

6. CEZ Tree - recycling in schools

It’s an educational program in Ramnicu Valcea. There

are some pilot schools where the children will recycle

the paper. The amounts obtained by selling this paper

will be used to plant trees in every school courtyard.

7. Recycling paper in CEZ Romania Group offices

All the employees of CEZ Romania Group will separa-

te the paper form the regular garbage and this paper

will be sold to recycling companies. The money will go

to a special found meant to help colleagues in need.

11


dEAR shAREhoLdERs,

Hereby we present you the Annual Report which brings summary

of operational and financial performance of CEZ Romania Group

in year 2007. The results achieved could build your confidence

that our ambition to become a leader in electricity market of Sou-

theastern Europe is realistic and achievable. Romania is only one

piece of whole puzzle but CEZ Romania Group has contributed

well to the best CEZ Group results in the last 15 years ever.

Our effort in year 2007 was focused on three main targets:

economical performance, unbundling and integration, process

reengineering.

We have demonstrated a good economical performance by

posting EBITDA of 246 million RON and net profit of 134.3

million RON and thus made it by almost 2% better then budget

expectation for EBITDA and by 5% better then it was targeted

for the net profit in the budget.

We showed a good performance in distribution services and boo-

ked operating revenues of RON 1.6 billion and exceeded budget

by 18%. The sustained high level of economical performance al-

lowed us to continue with our ambitious program for investments

and we are ready to keep same philosophy for next coming years.

Very important trial for CEZ was the unbundling process driven

by EU Directive 54/2003 and Governmental Decision 890/2003

putting deadline on July 1st, 2007 for legal, accounting and

functional separation of regulated and non regulated business.

We satisfied all requirements prior to deadline and were men-

tioned as benchmark for this process. CEZ Distribuţie became

a successor of Electrica Oltenia S.A.; two new companies were

created, CEZ Vânzare as supply company and CEZ Servicii as

company providing selected shared services for all companies

within the group. CEZ Romania kept its role of holding and pro-

vider of corporate services for all holding business units. We

concentrated the best people of our group within the structure

of Project Life. Its main objective was to integrate all existing

and newly created activities aiming to limit harmful impact to

daily operational business on maximum. It would not be fair to

start to list all the achievements in last year because complete

list would require fair space. Nevertheless, successful unbun-

dling process, SAP implementation to its functional mode, pro-

gram of savings and process reengineering were the main hits

that we must be proud of. It’s a great deal of pleasure for me to

thank all our employees for their effort and very good orientation

and acceptance of new group order. My thanks belong also

to those shareholders who helped us bring company Electrica

Oltenia over this stage needed for our way to become respected

and successful company in Balkan.We have vision, we have

know-how, we have good dedicated people and we want to

have things realized. These factors are giving me the freedom

to promise you, dear shareholders, another interesting year of

2008 for CEZ Romania Group.

JAn vEšKRnA

Country manager of CEZ Romania

and Chairman of the board of directors

of CEZ România and CEZ distribuţie

13

04LETTEr Of mr. JaN vESKrNa

CEZ ROMANIA GROUP


05dirECTOrS aNd OffiCErS

CEZ ROMANIA GROUP

15

JAn vEsKRnA (*1965)

president of CEZ Romania

president of the board of directors of CEZ Romania and CEZ distribuţie

In 1988, he graduated The University of Electricity in Brno, Microelectronic specializati-

on. After graduation and after carrying out the military training, in 1989 he started to work

as an engineer designer within the company CHEPOS Engineering & NBS in Brno, wi-

thin the group of design organization for the automation of the management processes

systems technology. In 1990 he completed the post graduation in France (EN Nancy SIC)

in chemical engineering (Diplôme degénie chemical).

During 1990 - 1995 he participated as an engineer designer, in building the following

“key” projects Central Refinery Iraq, Vacuum Distillation Unit Egypt Suez, Alumina Plant

Project of IRAN, Hydro treater Charge Heater Syria Homs, as well as an entire series of

investments in Czech Republic on energetic and petrochemical fields.

In 1996, as deputy technical director, he accepted the offer from ABB Comapany and

became general manager of the company ABB Power Plant Control, which will act under

the major shareholder, KWL Mannheim Company.

The activity of the company focused exclusively on the energy field, more precisely, has

provided systems command assembly for the power equipments and low energy, for the

internal and external markets- Iran, India, Germany, Austria, Poland, Russia, Netherlands,

Great Britain, Slovakia.

In 1999, Mr. Veškrna took over the position of commercial manager of the company DA-

LKIA, dealing with the marketing electricity, heat agent and service system.

As a former member of the strategic planning team, as well as member within the State

committee, in 2003 he took over the position of commercial manager and also became

member of the Administration Committee of Severomoravská energetika (North Moravia

Energetica S.A.), company that is part of CEZ Group. In 2004 he became the President

of the Administrative Board and General Manager of Středočeská energetická, (Czech

Central Energy S.A.), part of CEZ Group. In 2005 he started his activity at ČEZ, a.s. Coun-

try Manager for Romania.

DIRECTORs AND OFFICERs

LEon vRsKA (*1972)

Chief Financial officer of CEZ Romania

In 1995 he graduated the Faculty of Electrical Engineering within the

Technical University of Brno, Czech Republic, and in 1996 he graduated

the Faculty of Business at the same university. In 1996 he started his

career as a Auditor at Delloitte & Touche, Prague and since 1999 he

held the position of Financial Director at Dental. In 2001 worked as

Financial Director of the company Carborundum Electrite where he

managed the finance, human resources and IT departments. In 2007 he

came to Romania and became the Chief Financial Officer of CEZ

Romania.

mARtIn pACovsKý (* 1973)

Chief operational officer of CEZ Romania

He studied the Economic School in Prague, then graduated the

Faculty of Finance and Accounting in Prague; after that he received

the MBA (Master of Business Administration) at Rochester Institute of

Technology. Previous experience: Finance Manager for Eastern Europe

at LAUFEN CZ (sanitary tools production) and at DELTAS SYSTEMS,

then Finance Manager for the Czech Republic at NKT CABLES

(cables production). In March 2005 he joined CEZ Group for

the restructuring of Electrica Oltenia and held position of Chief

Financial Officer until 2007, when he became IMO Manager. In

2008 he was appointed Chief Operational Officer of CEZ Romania.

17

GAbRIEL nEGRILĂ (*1955)

General manager of CEZ distribuţie

In 1981, he graduated the Electro technical Faculty within the University of Timisoara, Energy

specialization. After graduation, he started as an engineer at Electric Networks Tirgu-Jiu, within the

Distribution Department of Targu-Jiu District. During 1983-1987 he held the position of Head of the

Operation Department and during 1987-1998 Head of the Supply Department. He worked within

the two most important activities of the company: the distribution and supply of electricity. During

this period he participated to professional training activities for the optimum repair department

(1984), but also to management training (1984, 1988, 1992, 1994, and 1999). During 1998-1999

he worked as a chief development engineer and in 1999 he became the chief of the distribution

department at SDFEE Târgu-Jiu, until 2001, when he was appointed within the leading team of

FDFEE Electrica Oltenia, as manager of the Technical Development Department. In 2003 he

was the manager of the implementation system of the integrated system SAP R/3 within Oltenia

branch. From May 23, 2005 to October 31, 2005 he returned to the position held within Targu Jiu

Branch, and on November 1, 2005 he became the General Manager of CEZ Distribuţie.

ŞtEFAn GhEoRGhE (*1955)

General manager of CEZ servicii

He graduated Bucharest Polytechnics, The Faculty of Energetic, and Electro-energetic

specialization, in 1981. In 1994 he receives the Doctor degree in Electro-energetic at

Bucharest Polytechnics; in 2004 he graduated the Master of Business Administration

within the University OPEN Business School in England. After graduation, he started his

activity as probation engineer within Electrical Networks Entreprise in Ploiesti. During

1997-2000 he held the position of manager for the Distribution and Supply branch in

Targoviste and then the Commercial Manager of Electrica Bucharest. During 2001-2004

he is the General Manager of Electrica Muntenia S.A. During 2004-2006 he was the

Manager of the National Project for implementing the new commercial administration

system of the clients for 5 branches of Electrica. After the implementation was finished,

in 2006 he came to CEZ Romania and, starting with 2007 he becomes the General

Manager of CEZ Servicii.


FRAntIsEK RERuChA (*1953)

the president of the board of directors of CEZ servicii

He graduated the Technical Mechanic Engineering University in Brno in 1981 and

right after that he started his activity at the Nuclear Power Station Dukovany. For

8 years he held the position of Assistant Manager for the Services and Human

Resources Department. He received the MBA certificate at The International Busi-

ness School in Prague. He held the position of Manager of the Board of Directors

within companies like: Energetika Vitkovice, ENPRO, etc. In 2007 he came to

Romania and became The Manager of the Shared Services Department within

CEZ Romania.

mIRELA dImA (1962)

General manager of CEZ vânzare

In 1986 she graduated Polytechnic University, Bucharest and received the Management

Certificate at Open University Business School - CODECS (Challenge management, Financial

Management, Public Relations Management, Human Resources Management). Along the

years she received the Management Degree- Open University Business School - CODECS

(the management of performance, the management of Change and project). Now she attends

the classes of the Open University Business School - MBA (Master Business Affairs). Starting

with March 17, 2007 she holds the position of General Manager for CEZ Vânzare. Until now,

Mirela Dima held the position of Project Manager SAP CIS for CEZ Romania, senior councilor

for the electricity supply at FDFEE Electrica Muntenia Sud, and from April 2005 until May 05,

2006 held the position of Chief of the Customer Care and Supply Department at FDFEE Elec-

trica Muntenia Sud, Chief of the Customer Care and Supply Department at SDFEE Bucureşti,

Chief Delivery Engineer at Electrica Muntenia Sud - Bucharest branch.

19

ALEs dAmm (*1966)

the president of the board of directors of CEZ vânzare

In 1988 he graduated the Economic University in Prague, The Faculty of Business Administration,

specialization Foreign Trade. From 1994 until 1996 he graduated the courses: Weekend Executive

MBA at the Management Czech Centre (affiliated to the University in Pittsburgh), Čelákovice, Total

Quality Awareness, PA Consulting, Marketing and Sales Motorola University, Executive Program

Management at Katz Graduate School of Business at University of Pittsburgh.

In April 2005 he started his activity on the electricity field at Středočeská energetická. Starting with

December 2005, he held the position of Energy Sales Manager at CEZ Romania, responsible with

all the commercial operations in CEZ acquisitions on the Romanian market. He is the member of

the Romanian team of CEZ, responsible for the sales and acquisitions within Electrica Oltenia, as

well as for the transformation of the energy delivery of the company in order to open the unbundling

market. From March 2007 until now he is the president of the Board of Directors of CEZ Vânzare.

othER mEmbERs oF bod:

vALEntIn dobREboard member CEZ distribuţie

dAn moREGAboard member CEZ vânzare

pAvEL duChonboard member CEZ servicii

CRIstI sAnduLEsCuboard member CEZ servicii

RAdu EnEboard member CEZ servicii

CoRnELIu stAnboard member CEZ servicii


AuRoRA ŞARbAnboard member CEZ servicii

Ion LunGuboard member CEZ vânzare

AdRIAn boRotEAboard member CEZ distribuţie

pEtRE pâRCĂLĂboIuboard member CEZ vânzare

doRu voICuboard member CEZ Româniaboard member CEZ vânzare

tudoR ŞERbAnboard member CEZ distribuţie

21


REvEnuE, Costs And EARnInGs

In the year 2007, the companies within CEZ Romania had a

net profit of 134,300 thousand RON, growing compared to

the year 2006, when the net profit on group level was 95,353

thousand RON (95 203 thousand RON profit registered

by Electrica Oltenia and 150 thousand RON registered by

CEZ Romania). For the year 2007 was planned a net profit

amounted to 127,618 thousand RON for the companies in

Romania within CEZ Group.

Operational revenue increased in 2007, reaching 1,388,831

thousand RON, compared to the amount recorded in 2006,

namely 1,352,421 thousand RON, due to the revenues from

the sale and distribution of energy of CEZ Distribuţie and CEZ

Vânzare.

The operational costs have also increased in the year 2007

reaching 1,247,345 thousand RON, compared to the year

2006, valued at 1,209,291 thousand RON, mainly due to the

spending for the staff restructuring that took place in almost all

companies within CEZ Group, as well as due to the expenses

increasing for electricity purchase. Operating profit without

amortization (EBITDA) was higher than planned by 1,41%.

bRIEF FInAnCIAL InFoRmAtIon FoR thE yEARs 2006 - 2007

UM 2006 2007

total assets thousand Ron 2,198,293 2,367,618

Fixed assets thousand RON 1,526,937 1,647,757

Current assets thousand RON 671,356 719,861

total liabili-

ties

thousand Ron 2,198,293 2,367,618

Shareholder’s

equity

thousand RON 1,728,721 1,863,003

Total debts thousand RON 469,572 504,616

Operating

revenues

thousand RON 1,352,421 1,388,831

Operating

expenditures

thousand RON 1,209,291 1,247,345

Operating

results

thousand RON 143,130 141,486

Financial

result

thousand RON -5,499 13,092

Gross profit thousand RON 137,632 154,578

Income taxes thousand RON 42,279 20,278

Net profit thousand RON 95,353 134,300

Note: CEZ Trade Romania is not part of the consolidated Group

23

06fiNaNCiaL pErfOrmaNCE

CEZ ROMANIA GROUP

thE stRuCtuRE oF thE AssEts

At the end of 2007 the total assets was 2,367,618 thousand

RON, growing against the previous year - 2,198,293 thousand

RON (2,190,132 thousand RON, the value of the assets of

Electrica Oltenia and 8,161 thousand RON, the value of the

assets of CEZ Romania).

The tangible and intangible assets on group level increased in

2007 compared to the year 2006 by approximately 8%, in 2007

value reaching 1,647,592 thousand RON. A part of the assets in

CEZ Distribuţie were transferred to CEZ Vânzare on March 15,

2007, at the same time when the company was founded, and

others were sold to CEZ Servicii during September 2007.

In 2007, the value of the current assets was 719,861 thousand

RON, compared to 671,356 thousand RON in 2006, (664,256

thousand RON value recorded by CEZ Distribuţie and 7,100

thousand RON recorded by CEZ Romania). The debt grew

in 2007 in the detriment of cash and cash in bank which

have decreased in 2007 to 364,893 thousand RON, against

423,280 thousand RON. Main reason for increase are unpaid

receivables from CFR.

UM 2006 2007

Tangible and

intangible assetsthousand RON 1,523,383 1,647,592

Financial assets thousand RON 3,554 165

Current assets thousand RON 671,356 719,861

totAL 2,198,293 2,367,618

LIAbILItIEs And EQuIty

In 2007 the share capital of the company CEZ Distribuţie has

changed, due to transfer of the capital to the newly founded

company CEZ Vânzare. Thus, the share capital of the com-

pany CEZ Distribuţie was 799,033 thousand RON in 2006,

and 754,310 thousand RON at the end of 2007, registering a

44,723 thousand RON decrease.

In 2007 the share capital at group level increased to 805,633

thousand RON, compared to 799,533 thousand RON in 2006

(799,033 thousand RON, the share capital of CEZ Distribuţie

and 500 thousand RON, the share capital of CEZ Romania),

growth registered due to the establishment of the newly foun-

ded company CEZ Servicii.

UM 2006 2007

Share capital Th RON 799,533 805,633

Reserve and retained

earnings

Th RON 929,188 1,057,370

Liabilities and

deferred tax

Th RON 318,188 314,273

Provisions and

accruals

Th RON 151,384 190,343

total Th RON 2,198,293 2,367,618

mAnAGEmEnt poLICIEs oF thE FInAnCIAL RIsK

In 2007 the company completed the projects regarding the cen-

tralization and division of the financial services, as well as imple-

menting the new ERP and ISU software. For these projects, the

company was provided with the services of auditors and consul-

tants, most of them well known at the international level.

The financial debts of the company, other than derivatives,

comprise mainly the commercial debt. The company has nu-

merous financial assets such as trade receivables, cash and

cash equivalent and short-term deposits.

Other risks that significantly affect the results of the Company

are foreign exchange risk, credit risk, litigation and severance

payments for the dismissals of the employees.

The financial risk management policy is a major part of the

strategic management of the company. Its main objective is

to identify the risks and solve the problems related to financial

activities of the company, focusing on preventing and elimina-

ting any harmful influences.

the risk of currency exchange

Regarding the currency exchange risk, the company is addres-

sing the most suitable financial strategies, as the followings:

1. Passive approach: the level of certainty regarding the an-

ticipation of currency exchange rate is low and therefore

company may decide not to take any measure for a protec-

tion against this risk.

2. Active approach: the level of certainty regarding the antici-

pation of currency exchange rate is high and the company

decided to take measures in order to protect against cur-

rency exchange risk, as follows:

a) Anticipated Establishment of the rate exchange - the

FINANCIAL PERFORmANCE

25

company has the opportunity to establish in advance

the exchange rate that will be taken into consideration

for the exchange, both for sale and purchase.

b) The option of choosing the exchange rate - the com-

pany has the opportunity to acquire the entire or par-

tial protection against an unfavorable evolution of the

exchange rate and, at the same time, keep the oppor-

tunity to benefit from a favorable exchange rate.

The company is currently exposed to the risk of currency

exchange transactions through its transactions and its policy

is not to take measures to protect against this risk.

Credit Risk

The company is obliged to provide new consumers with elec-

tricity distribution services without checking their financial

situation. Against that risk, the company recorded provisions

according to the debts term. Regarding the corporate clients,

for whom there is a no clear evidence of paying its debts, the

bank guarantee is necessary.

For the eligible customers, the credit risk is assessed before

signing the contract. Uncertain clients are compensated by re-

gulating authority, which takes these costs into account when

setting the tarrifs.

Maximum exposure to credit risk is equal to the balance of

accounts receivables on December 31, 2007.

The cash is placed in financial institutions which are conside-

red to have the lowest risk level at the time of the deposit pro-

cess. The maximum exposure is equal to the amounts held in

these instruments.

the risk of liquidity

The policy of the company regarding the risk of liquidity is to

maintain liquidities in order to honor the obligations on due

date. The company monitors liquidity through regular budge-

tary process.

severance payments

According to the Collective Labor Agreement between the

trade unions and the company, the companies within CEZ

Group are obliged to severance payments to the dismissed

personnel pending, depending on the seniority, different from

one company to another.

For this reason, provisions were created.

LItIGAtIons

At the end of 2007, within the three companies of CEZ Gro-

up (CEZ Distribuţie, CEZ Vânzare si CEZ Servicii) there was

a number of approximately 2000 lawsuits litigations on legal

proceedings or execution.

CEZ Distribuţie won most of the litigations, having a number

of 1,900 briefs. CEZ Vânzare and CEZ Servicii own a smaller

number of litigations. CEZ Vânzare approximately 50 and CEZ

Servicii 10.

On the litigations that involve CEZ Distribuţie, the company is

both plaintiff and defendant.

The litigations that involve CEZ Distribuţie as defendant count

few hundreds and have as main object the demands for movi-

ng the pillars or transformers of CEZ Distribuţie located on the

grounds of different individuals or legal persons.

It is important to mention 3 important litigations due to the lar-

ge amount of money that is being required by the plaintiff,

namely the ones that involve, as plaintiff: S.C. Zaharul Calafat

S.A., S.C. Valnefer co S.A. and Preda Vasile.

For the litigations having as main object the recovering of the

claims for the delivery of electricity, the plaintiff is CEZ Distribu-

ţie. Individuals or legal persons hold the position of defendant.

It is important to mention that the largest debtor of CEZ Distri-

buţie for unpaid electricity invoices is S.N. CFR S.A. According

to the Governmental Decision no. 1007/2004 regarding the ap-

proval of the Electricity Supply Regulation, the company cannot

be disconnected even if it does not pay the invoices, because

is one of the consumers excepted from disconnection.

CEZ Vânzare has litigations with main object the recovery of

the claims for electricity supply after March 15, 2007 when

Electrica Oltenia was unbundled.

thE domEstIC ELECtRICIty mARKEt

Regulations in force:

The regulatory framework has been developed and harmoni-

zed in line with the EU legislation:

Energy Law no. 13/2007

ANRE Order no. 24/2004 - The Commercial Code of the who-

lesale electric power market;

ANRE Order no. 30/2005 regarding the functioning of the

wholesale electric power market;

ANRE Order no. 36/2005 regarding the functioning of the

wholesale electric power market;

ANRE Order no.11/2005 Methodology for establishment of the

regulated tariffs at the captive consumers of electric power;

ANRE Order no. 24/2005 Methodology for establishment of

prices and quantities of electric power sold by producers by

regulated contracts and of prices at thermal power supplied

from power stations with co-generation units, as modified by

Order 13/2006;

ANRE Order no. 25/2005 Regulations regarding the acquisi-

tion of electric power afferent to the own technological con-

sumption, in transport and distribution networks

Government Decision no. 958/2005 for establishment of the

system to promote electric power generated from renewable

sources of energy;

Government Decision no. 644/2005 regarding the opening of

the energy market;

ANRE Order no. 44/2005 - limitation of prices on the balan-

cing market;

ANRE Decision no. 1007/2006 procedure for adjustment of

quantities regulated by contracts concluded between produ-

cers and suppliers for captive consumers;

ANRE Order no. 61/2005 regarding the functioning rules ap-

plied to the wholesale electric power market;

ANRE Order 42/2005 Approval of Rules regarding the or-

ganized framework for trading bilateral contracts of electric

power;

ANRE Order no. 22/2006 Organization and functioning rules

for the green certificates’ market;

ANRE Order no. 37/2006 Adjustment of the obligatory quota

of green certificates acquisition by suppliers of electric power

for the year 2006;

ANRE Order 23/2006 - limitation of prices on the balancing

market;

ANRE Order 33/2006 - limitation of prices on the balancing

market;

ANRE Order no. 14/2007 Order for approval of Regulations

regarding the last resort supply of electric power

ANRE Order no. 15/2007 Order for appointment of last resort

suppliers of electric power for the period July 1st 2007-June

30th 2008

ANRE Order no. 19/2007 Approval of Methodology for establi-

shment, implementation and use of the technological service

of spare capacity system

ANRE Order no.. 20/2007 Approval of the Methodology for

establishment of tariffs for the system service

ANRE Order no. 21/2007 Approval of the framework Con-

tract for sale/purchase of technological system services be-

tween [The Supplier of technological system services] and the

transport and system operator

ANRE Order no. 28/2007 regarding approval of Performance

Standard for the electric power distribution service

ANRE Order no. 39/2007 Methodology for establishment of

tariffs at the electric power distribution service

ANRE Order no. 41/2007 Framework-Contract for running

the service of electric power transit from/to the countries wi-

thin the region through SEN, between [The transport and sys-

tem Operator] and [The Client]

ANRE Order no. 43/2007 Framework Contract for running the

service of electric power transit from/to the countries within

the region through SEN between [The transport and system

Operator] and [The Client]

ANRE Order no. 44/2007 Order regarding the establishment

of the way in which the electric power generated from renewa-

ble sources in production units qualified for priority producti-

on is traded.

ANRE Order no. 60/2007 for approval of the Methodology re-

garding the establishment of tariffs for the electric power trans-

port service. (it abrogates Order no. 42/2006)

ANRE Order no. 63/2007 regarding the adjustment of the

obligatory quota for acquisition of green certificates by suppli-

ers of electric power, for year 2007;

ANRE Order no. 61/2007 for approval of specific tariffs at the

electric power distribution service run by the main distribution

operators;


27

ANRE Order no. 64/2007 for approval of the average tariff for

the transport service, of the tariff for the system service, of the

tariff for the services run by the centralized markets’ operator

for the participants to the markets administered by it and of the

regional tariffs afferent to the transport system, practiced by

the economic operators within the electric power sector.;

ANRE Order no. 70/2007 for approval of the regulated tariffs

at the electric power supplied by the implicit suppliers and by

the suppliers of last resort to the captive consumers, others

than the household consumers and those assimilated to the

household consumers, and of tariffs for reactive energy;

ANRE Order no. 71/2007 Order made by ANRE President

no.. 71/2007 for approval of regulated tariffs at electric power

supplied by the implicit suppliers and by the suppliers of last

option to the household consumers and to those assimilated

to the household consumers.

REGuLAtoRy bodIEs In thE EnERGy sECtoR

The National Regulatory Authority in the Energy Sector (ANRE);

The National Regulatory Authority in the Communal Services

Sector (ANRSC);

The Ministry of Economy and Commerce/The Ministry of Eco-

nomy and Finances;

The Competition Council.

pARtICIpAnts to thE whoLEsALE mARKEt oF ELECtRIC powER

Producers of electric power

Suppliers of electric power

Distributors of electric power

The transport, system services and measurement operator -

C.N. Transelectrica S.A.

The electric power market operator - OPCOM S.A.

stRuCtuRE oF thE whoLEsALE mARKEt oF ELECtRIC powER

The electric power market of Romania is structured as per the

following specific markets:

The market of bilateral, regulated or negotiated market - ow-

ners of licenses are free to enter bilateral contracts for trading

electric power;

The Day-Ahead Market (PZU) is an organized market where

contracts are traded on daily basis, for each trading period

of the corresponding day of supply, based on the offers sent

by the participants; this market is administered by the market

operator, OPCOM;

The balancing market (PE) is a centralized market obligatory

for the electric power producers where the transport and sys-

tem operator buys and sells active electric power from and to

the participants on the market, to compensate the scheduled

deviations between the energy production and consumption;

The market of technological system services - is a centrali-

zed market using market mechanisms - tenders on specific

periods and/or bilateral contracts - just enough as to secure

the volume of technological system services available for the

transport system and distribution operator ;

The centralized market for allocation of international inter-lin-

king capacities - is a voluntary market organized by OTS; al-

location is done based on tenders, separately for the imports

done for periods of up to one year and separately for the tran-

sactions on the Day-Ahead Market.

The Green Certificates Market - a centralized market organi-

zed by OPCOM for trading the certificates issued to promote

the electric power generated from renewable sources.

The centralized market of bilateral contracts (PCCB), awarded

based on public tender - is a voluntary market, organized by

the market operator, where there are traded the contracts with

physical delivery of electric power, among the participants to

the market, based on some specific rules. Staring from 2007,

OPCOM has also organized a new platform PCCB - NC (con-

tracts on term).

stRuCtuRE oF ELECtRIC powER pRoduCtIon In RomAnIA And stRuCtuRE oF ELECtRIC powER ACQuIsItIon

Based on statistic data supplied by ANRE, CEZ Vanzare draws

the Electric Power Label representing the structure of electric

power purchased during the respective year:

ELECtRICIty LAbELsupplier: S.C. CEZ Vânzare S.A.phone: 0251 405454web site: www.cez.ro

Electricity supplyed to end users of s.C. CEZ vânZARE s.A. in 2007

Energy source s.C. CEZ vânzare s.A. Electricity production in Romania

Coal 54.26% 41.69%Nuclear 24.31% 13.10%Gas 7.02% 17.42%Oil 0.54% 1.11%

Other conventional sources 4.95% 0.89%

Renewable: 8.92% 25.80%Hydro 8.92% 25.80%Wind 0.00% 0.00%Biomass 0.00% 0.00%Solar 0.00% 0.00%Other 0.00% 0.00%

0 % of electicity sold by S.C. CEZ Vânzare S.A. is importedEmissions of Co2 and nuclear waste

Coal54.26%

Nuclear 24.31%

Gas7.02%

Oil 0.54%

Otherconventional

sources 4.95%Renewable

8.92%

Electricity supplied in 2007 was produced in the following sources

100%=average level for Romania

Emmisions of CO2 (700 g/kWh)

Environment impact above country average

Radioactive waste (0.0048621 g/kWh)

environment impact under country average

Norm EN - European Directive 2003/54/EC

HG 1007/2004 - Supply Regulation

24,31 123,61


29

pARtICIpAtIon oF ELECtRICA oLtEnIA And Its suCCEssoRs (CEZ dIstRIbutIE And CEZ vAnZARE) to thE EnERGy mARKEt

Electrica Oltenia participated to the wholesale electric power

market on the basis of its license for distribution and supply of

electric power, specifically the license nr. 457/29.04.2002 for

distribution of electric power and license nr.458/29.04.2002

for supply of electric power, awarded by A.N.R.E., respecting

the conditions set therein.

To be able to participate in the day-ahead market (PZU),

Electrica Oltenia registered itself at OPCOM starting with

01.07.2005, with participation bargain no. 5912/27.06.2005.

Participation of Electrica Oltenia S.A. to the centralized mar-

ket of bilateral contracts (PCCB), is accepted by Participati-

on Bargain no. 895/19.01.2006.

Participation to Green Certificate Market (PCCV) is accepted

by Participation Bargain no. 6074/05.05.2006.

Starting from 01.07.2005, the date of beginning transactions on

the Balancing Market, Electrica Oltenia S.A. has transferred the

responsibility of balancing to Electrica S.A. - Agent on Equilibra-

tion Market (PRE - part responsible with balancing).

Starting with March 15th, 2007, as result of the unbundling

process, the company was legally divided into CEZ Distri-

butie and CEZ Vanzare and the licenses were changed

accordingly: no. 457/2005 for distribution and no.

776/15.03.2007 for supply.

By ANRE Order no. 15/2007, CEZ Vanzare was assigned as

Supplier of Last Resort (SoLR) for the period 1 of July 2007

to 30 June 2008 for the consumers in the geographical area

of CEZ Distributie.


31

07COmpaNiES prESENTaTiON

CEZ ROMANIA GROUP

shAREhoLdERs stRuCtuRE

ČEZ, a.s. Fondul

Proprietatea S.A. Electrica S.A

CEZ Distribuţie 51,0062159 30,0000004 18,9937837

CEZ Vânzare 51,0062159 30,0000004 18,9937837

CEZ Servicii 51 12 37

CEZ Romania 100 - -

CEZ Trade 100 - -

CEZ RomAnIA

CEZ Romania is the company that coordinates, in the name of

CEZ from Czech Republic, all the other companies within the

group in Romania: CEZ Distribuţie, CEZ Vânzare, CEZ Servicii

and CEZ Trade.

Starting with July 1, 2007, CEZ Romania incorporates the ser-

vices: Communication, Office Management, Corporate Affairs,

Business Development, Transport, IT and Shared Services.

Starting with November 1, it incorporated the services: Acquisi-

tions, Facility Management and Logistics. The implementation

of these services within the company CEZ Romania provided

many benefits such as: guarantee for the respect of the corpo-

rative identity, of the governing and offers specific instruments

to the ongoing corporative process.

CEZ Romania guarantees the vertical management. A distinct

management entity - CEZ Romania - means a consistent ap-

proach of the policies and strategies of CEZ Romania Group.

thE opERAtIon oF thE dIstRIbutIon nEtwoRK

In 2007, through the distribution network of CEZ Distribuţie there

has been transferred a volume of 12,344,810 MWh of electricity,

compared with the year 2006, 12,028,135 MWh. The peak load

was achieved on January 17, 2007 at 7 o’clock pm.

During August - November 2007, the operation of the distribu-

tion network under optimal conditions was affected by special

atmospheric phenomena which have led to numerous inci-

dents and faults within the network. Most of these incidents

and faults have been recorded (decreasing) in the networks of

20 kV and 0.4 kV to the Zonal Centres in Rm. Vâlcea, Drobeta

Turnu Severin, Alexandria, Slatina, Craiova, Piteşti, Târgu Jiu

(strong winds, floods and land sliding that produced destructi-

on of pillars, broken conductors and insulators.)

Weekly peak load diagram,

in CEZ Distributie distribution network (MWh/week)

The percentage loss in the network represents the difference

between the energy entered in the system (outline) and the

total energy distributed, measured as a percentage of energy

entered in outline.

The most important objective of the distribution activities are in-

creasing the safety in the electricity supply according to the con-

tracted parameters and reducing the tehnical network losses.

pRIoRItIEs In thE dIstRIbutIon ACtIvIty:

n Connecting new customers to the network;

n The transition from 6 kV power to 20kV;

n Elimination of double transformation;

n Reducing time interruption in the medium voltage

network (MV);

n Setting up remote control separators;

n Start realizing SCADA and developing SAD;

n Setting up the wire defectometers on medium voltage

cables (MV);

n Setting up numerical protection in the transformation

stations;

n Replacing the storage batteries in transformation stati-

ons with reduced maintenance storage batteries;

n Replacing the ceramic insulations from 110kV transfor-

mation stations bars with composite insulations;

n Replacing the VKLF(S) insulations with composite

insulations on 110kV aerial electric lines and ITFS and

ISNS on 20kV aerial electric network;

n Replacing horn arresters with metallic oxide made

arresters;

n Diagnosing the power transformers from transformati-

on stations;

n Expanding the tele-management system.

CApItAL InvEstmEnts

In 2007, CEZ Distribuţie had an investments program for

the distribution activity, financed from its own source, worth

208,819 thousand RON and putting in function 208,237

thousand RON.

n The investment achievements on 31.12.2007- 187,349

thousand RON

n Putting into function - 197,268 thousand RON

The main directions financed by these funds:

n The modernization of the electric network of low volta-

ge, 1195.8 km long and 48,967 connections

n The improvement of the voltage level of the

electric network of low voltage through setting 75

COmPANIEs PREsENTATION

CEZ Distribuţie - commercial outline

0

20.000

40.000

60.000

80.000

100.000

120.000

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51

[MW

h]

Weeks

33

new transformation posts, 7 of them for compact

transformation in outer cover.

n The modernization of the networks of medium voltage

for about 198,6 km of network and the installation of

15 reconnections and 13 remote control separators.

n the modernization of the network of high voltage,

201,3 km long.

n the modernization of 2 transformation stations, 13

supply points and 45 transformation posts.

In 2007 there has been put into function 355 works worth

193,695 thousand RON and endowments worth 3,574

thousand RON.

The main technical investments achieved and put into functi-

on in 2007 at CEZ Distribuţie have been:

1. The modernization of LEA 110kV Huşnicioara Motru,

Mehedinţi District - 2,026 thousand RON.

2. The modernization of PTA, network of low voltage and

subsequent connections PTA1, PTA2, PTA3, Gârla

Mare, Mehedinţi District - 1,790 thousand RON.

3. The modernization of Comani network of low voltage and

connections, Olt District - 1,774 thousand RON.

4. The modernization of Rusăneşti network of low voltage

and connections, Olt District - 2,134 thousand RON.

5. The modernization of PA GĂVANA - Hospital, Piteşti,

Argeş District - 1,126 thousand RON

6. The modernization of PA6 NORD, Piteşti, Argeş District

- 1,314 thousand RON.

Evolution of investments within distribution network

during the period 2005 - 2007

thE pRotECtIon oF thE EnvIRonmEnt

The policy regarding the protection of the environment is an

important part of the entire policy of the company, in line with

the provisions of a long lasting development and aims to:

n on short and medium term- reducing the negative im-

pact on environment for all the activities, according to

the legal demands in practice;

n on long term- achieving the higher standards regar-

ding the protection of the environment according to

the international demands.

n In order to achieve our objectives, in 2007 our activities

were focused on:

n forming, perfecting and stiring up the responsibility of

the employees regarding the knowledge, application

and fulfillment of the legal provisions and other rela-

ted demands regarding the environment;

n perfecting the management of the waste material

through its responsible sorting, removal under safe

conditions;

n identifying the operational intervention measures for

prevention or/and limitation of the negative effects on

the environment in case of incident, damage or disas-

ters;

n informing and training the employees in order to cre-

ate a culture of the environment, with a priority on

saving the natural resources: water, gas, electricity,

thermal energy, fuels.

The above mentioned actions have been reflected the annual

programs for management of environment. The inventory of

the condensers with PCB has been finalized. Until now, there

has been achieved the elimination of 19%, the rest following

to be eliminated until 2010.

The generated waste material in the company has been iden-

tified according to the provisions of the law in practice. It has

been collected and sorted on categories. The recycling or eli-

mination has been made by authorized companies, according

to the legal provisions in practice.

The construction/ fit up of the platforms for selective deposit

of the waste have been continued.

In 2007, the replacement of the opened batteries with capsu-

lated batteries has been continued.

The retention tanks of the transformers with oil leaks have

been repaired, and this action will continue permanently.

The replacement of the insulation has been made in order to

protect the birds.

In order to reduce the visual impact, the equipments and pil-

lars have been painted.

187,349

2005

2006

2007

181,469

91,059


Because of the natural phenomena, there have been made

certain consolidation works on water borders on the electrical

course where sliding has been noticed, as well as the recovery

of the pillars bases, of the courses and equipments, recon-

struction and recuperation of the grounds.

CEZ Distribuţie pays great attention to conserving the flora

and fauna.

The monitor and construction of stork nests, the deforesting

where electrical lines are installed have been continued, in or-

der to prevent forest fire; the ground around the station has

been arranged.

The actions for stirring up the responsibility of the employees

have been intensified.

In order to limit the impact of the accidents or damage on

the environment, simulation and training exercises have been

made for the entire personnel.

In order to stir up the responsibility of the employees of CEZ

regarding a good administration of the natural resources - wa-

ter, gas, electricity etc, training and specific programs of mea-

sures have been achieved.

Therefore, the transports, the maintenance of the water or ener-

gy equipment, the increase of the thermal isolation level have

been optimized and the action will continue in the future.

In 2007, as a proof of a good functioning of the environmental

management system, the contract as a SRAC company has

been renewed.

There has been no accidental pollution and no special proble-

ms regarding the protection of the environment happened.

The references and notifications from the Agencies for envi-

ronment protection and the National Administration of Water

will be received for projects.

One of our goals is to follow and achieve the plan of replacing

the roofs made of asbestos, in order to completely eliminate

the danger of accidental pollution.

The opened batteries will be completely replaced with the

capsulated batteries.

The reservoirs will be permanently checked, they will be repla-

ced if needed, or they will be removed through connecting to

the sewerage system.

thE stRuCtuRE oF thE shAREhoLdInG

At the beginning of 2007, CEZ Distribuţie had a share capital

subscribed and deposited, worth 799,033 thousand RON and

71,523,469 shares.

During the year 2007, the value of the share capital has been

modified after finishing the unbundling process and after the

founding of the two companies, CEZ Distribuţie and CEZ

Vânzare. The company CEZ Distribuţie got a share capital of

675,181.55 RON for the same number of shares.

Regarding the structure of the shareholding, it has been mo-

dified through the transfer of 12.874.225 shares by Electrica in

June 2007 to The Propriety Fund according to OUG 81/2007

and through the fusion of the shareholders Zapadoceska Ene-

regetika, a.s, Severomoravska Eneregetika, a.s. and Vychodo-

ceska Eneregetika, a.s. within CEZ.

Following these transformations, the structure of the share-

holding of CEZ Distribuţie on December 31, 2007 is the fol-

lowing (the value of the share capital is calculated according

to the bookkeeping standards in Romania and with the Trade

Register)

Shareholder Shares %value

(thousand RON)

ČEZ, a.s. 36,481,415 51% 384,745

Electrica S.A. 13,585,013 19% 143,272

Fondul Proprietatea S.A.

21,457,041 30% 226,293

total 71,523,469 100% 754,310

humAn REsouRCEs And soCIAL poLICy

the culture of the company -

principles and achievements

CEZ Distribuţie, as a member of CEZ Group, has an organiza-

tional culture focused on high achievements, as the main con-

dition for all the initiatives of the company and it is based on

the following principles: the creation of the value represents a

priority; encourage the individual responsibility in achieving

notable results; the development of the human resources; em-

brace a continuous process of change.

Comments regarding the working activities

and the social policy

According to the provisions of CLA (Collective Labor Agree-

ment) applicable at the level of CEZ Distribuţie, registered to

The Work and Social Solidarity and Family Authority in Dolj no.

35

144/13882/28.09.2005, the applied tariff rate is time excise.

The income rights of the employees refers to a monthly wage

according to the income graphic (years of seniority, years of

seniority within Electrica, isolation conditions, work provided

during spare days, stand by system, night shifts, systematic

working after hours, supplementary position, leading the wor-

king team, indemnity for leading position).

In 2007, CEZ Distribuţie separated the regulated and unregu-

lated activities on the energetic market, process imposed by

the European Union, followed by the separation of the services

that determined changes regarding the number and structure

of the employees.

Therefore, on March 15, 2007, when Electrica Oltenia became

CEZ Distribuţie and at the same time CEZ Vânzare was foun-

ded, 25 employees were transferred from CEZ Distribuţie to

CEZ Vânzare; at the end of the year 2007, the number of em-

ployees that have been transferred to CEZ Vânzare reached a

number of 33 persons.

Starting with 01.06.2007, a number of 576 employees ceased

their activity for CEZ Distribuţie and moved to CEZ Servicii,

and 95 to CEZ Romania.

In 2007, other 97 persons have been employed, 65 of them

with working contract, and the others on working contract for

a determined period during April within the customer service

department. At that time the Customer Service Department

was a part of CEZ Distribuţie.

In order to diminish the social consequences of reducing the

number of the employees, the measures taken into conside-

ration are developed in the future: the severance payment for

the employees according to CLA; additional payments besi-

des the ones provided by CLA;

In conclusion, CEZ Distribuţie provides the fact that the admi-

nistration will achieve these changes, paying attention to the

individual situations of the employees. CEZ Distribuţie will to-

tally respect the CLA and the Romanian law in force.

In 2007 there have been expenses for the social cultural and

sports activities worth 1,126 thousand RON; according to the

law in practice, in 2007 the employees were offered food vou-

chers worth 4,206 thousand RON. In order to spend their an-

nual holidays as pleasant as possible, in 2007, the employees

of CEZ Distribuţie were provided with bonuses worth 6,754

thousand RON.

Regarding the professional training of the employees of CEZ

Distribuţie, the main targets of the professional training policy

are the following: to allow the employees to adapt to the chan-

ges determined by privatization; to facilitate the assimilation of

the demands on the new job within the company: knowledge,

behavior, abilities, aptitudes, the improvement of the commu-

nication skills, preparing the changes.

CEZ Distribuţie will support the employees to establish toge-

ther the individual plans for professional development in order

to increase the individual high standards, as well as for increa-

sing the entire value of the company.

the educational program within the company

The increase of the efficiency on activity, as well as of the qua-

lity of services in distributing the electric energy can be achie-

ved through the education and training of the employees, thro-

ugh changing their attitude, their mentality and their behavior.

the relation with the trade unions

Within CEZ Distribuţie there are 8 basic organizations of the

trade unions, all of them affiliated to The National Univers Fe-

deration and to the Federation energy of the third millennium.

Over 95% of the employees are members of the trade uni-

ons.

The trade unions have the duty

to negotiate with CEZ Distribuţie:

n the wages and other material rights of the employees

n the working hours and holidays

n the working conditions and protection

n professional training

n provisions of CLA

n other rights and obligations regarding the working relations.


CEZ Vânzare, member of CEZ Romania Group, is a company

with a mixt capital that works within the electric energy supply

field. The company is the result of the unbundling of SCDFEE

Electrica Oltenia S.A. (the largest national company for electric

energy distribution and supply, according to the number of

the clients served, that became private in 2005, after the ta-

king over of the majority shares by the energetic holding CEZ

Group) on March 15, 2007.

CEZ Vânzare has a determined goal in Romania - to become

the leader on the supply market. The mission of the company

is to completely meet the clients’ demands by selling energe-

tic products and services on a high basis.

In order to achieve that, CEZ Vânzare team focuses on identi-

fying the concepts of the clients’ value and on efficient delivery

of suitable offers for increasing the profit.

One of the main characteristics of the company is the flexi-

bility. This allows a good concentration on the client and its

demands. CEZ Vânzare is proud to have a team of professi-

onals. The entire personnel is highly qualified and has great

experience in solving the electricity supply problems, as well

as in completing analyses and assisting any issue regarding

the electric field.

CEZ Vânzare:

n anticipates the demands of the customers and treats

them properly in order to provide maximum satisfaction.

n it is involved in providing services and products that conti-

nuously offer valuable balance between price and quality

n provides support and assistance on the energetic field

n secures the increase of the energetic efficiency.

That is why this year too we intend to be present wherever

there are consumers need high quality energetic services.

CEZ Vânzare offers a package of services in order to make

the activity of its partners as efficient as possible.

Here are only few of the advantages that we offer:

n Key account managers are established for individuals

consumers, with a 24 hours and seven days a week avai-

lability to discuss all the demands of the customers.

n CEZ Vânzare combines the tradition of Electrica Oltenia

and CEZ experience on the liberalized markets.

n The client is in the center of our attention; we identify its

demands and respond with the most valuable techno-

logical solutions.

CEZ Vânzare provides its clients with:

n information regarding the measuring data of the suppli-

ed electricity

n presents the recordings regarding the prognosis and

the expenditure of (electric) energy

n invoices the supplied electricity

n access to the distribution/ transport electric network,

solving the steps for obtaining it.

n follows the evolution of the expenditure of electric ener-

gy of its clients in order to achieve an efficient activity

on energetic assistance.

Starting with September 2007, the new data system (SAP - Uti-

lity Integrated System) administrates all these activities. This

system provides fast information and flexibility according to

the highest European standards.

Therefore, CEZ Vânzare is a serious partner; with experience

and power on the European level that can provide the services

that the client really needs so that for the electric energy would

not become incertitude within the development.

The turnover for the year 2007 was 995,880 thousand RON.

Timisoara

Arad

Oradea

Satu Mare

Alba lulia

Bistrita

Tîrgu Jiu

Deva

Drobeta -Turnu

Seve rin

Suceava

Botosani

Iasi

Vaslui

Sibiu

Zalau

Miercurea Ciuc

Rîmnicu Vîlcea

Brasov

Pitesti

Sfîntu Gheorghe

Slatina

Focsani

Galati

Buzau

Ploiesti

Slobozia

Calarasi

Giurgiu

Alexandria

Braila

Tirgoviste

Tulcea

Tîrgu Mures

Piatra Neamt

Bacau

Resita

Baia Mare

Cluj -Napoca

ConstantaCraiova

Bucuresti

37

CEZ Servicii was established on May 17, 2007 and it is the

newest company within CEZ Romania Group. The company

became fully operational starting with July 1, 2007.

The shareholding of the company has the following structure: ČEZ,

a.s. 51%, Electrica S.A. 37% and the Property Fund 12%. At founding,

the share capital of the company was 6,100,000 RON. According to

the European Directive 2003/54/EC, founded as a consequence

of implementing the concept of unbundling, the activities registered

in 2007 within CEZ Servicii from CEZ Distribuţie were the following:

shared services (for CEZ Romania, CEZ Distribuţie, CEZ Vânzare,

CEZ Trade Romania) - human resources; finance, processing boo-

kkeeping data, controlling; IT, telecommunication - customer ser-

vices (for CEZ Distribuţie and CEZ Vânzare).

the relations among the companies within

CEZ Romania Group - Customer services

the relations among the companies within

CEZ Romania Group - support services

The year 2007 has been the year of the establishment of CEZ

Servicii, but also the year when the employees participated to

the implementation of the projects for transforming the com-

panies within CEZ Romania Group into profitable companies.

Through transferring the activities to CEZ Servicii the demands

of the European Directive have been achieved and the functio-

ning of the activities became possible. The corporate activities

have been centralized, and the activities for client service have

been restructured, invoice and claim department have been

centralized and Customer Relationship Centre have been

optimized, after implementing the management data systems-

SAP ERP and SAP ISU. Through these measures, the produc-

tivity of the company has been increased.

The setting on the straight line with the approved operational

types, the increase of the quality of the services provided to

the companies within CEZ Romania Group and the achieve-

ment of the higher activity standards represented the most

important objectives of the year 2007.

The consolidation of CEZ Servicii in the years that follow and

significant contributions to the consolidated profit of the com-

panies within CEZ Romania Group represent the major objec-

tives of the management on short and medium term.

The human resource of the companies of CEZ Romania Gro-

up, their most important asset, is administrated by CEZ Ser-

vicii.

Personnel Administration Department provides services for

more than 3000 employees.

Career Management Department assures the development of

the employees’ knowledge in order to prepare them for the

changes taking place in the companies.

The payroll activity for the employees of all the companies is

provided by a sole department from CEZ Servicii, using SAP

HR system already implemented.

The employees from the Human Resources Division in CEZ

Servicii are actively taking part in the implementation of all the

transformations /restructuring / reorganization projects.

CEZ Servicii, through the Financial Division provides data

processing, taxes, treasury and controlling services for all the

companies of CEZ Romania Group.

The shared financial services, organized by the model of the

international best practices and using the integrated system

SAP offers quality services based on unitary procedures, in ac-

cordance with the Romanian legislation, thus giving the sha-

reholders the possibility to use the resources for achieving the

strategic objectives. The ICT – End Users activities unrolled in

CEZ Servicii are aligned to the group’s strategy and are based

on the acquisition of infrastructure access services, system

and telephone exchanges from CEZ Romania and on ICT-End

User activities (ICT equipment installation, ICT maintenance)

for all the companies of CEZ Romania Group.

ICT – End User activity unrolled in CEZ Servicii, uses the fol-

lowing equipments’ structure:

Total amount of ICT equipment is 5.231.639 RON. 13% of this

equipment is new. Total amount of ICT equipment includes

50% PC & Laptop`s and 11 % printers.

Responsabiliăţi rezultate din licenţă şi metodologia de Servicii clienţi; Servicii pentru toţi clienţii mari şi eligibili.

Operatorul Sistemului de Distribuţie Distribuţia de electricitate - tuturor consumatorilor Servicii de exploatare şi întreruperi Montări şi demontări de contoare Conectări, deconectări, consumatori frauduloase

În numele companiei CEZ Distribuţie: Citirea contoarelor pentru toţi

consumatorii protejaţi

CEZVânzare

Grupul CEZRomânia

ClientCEZ ServiciiServiciul Clienţi

Pe cont propriuPe numele altora

CEZDistribuţie

CEZVânzare

CEZTrade

Grupul CEZRomânia

CEZ ServiciiServiciul Clienţi

CEZDistribuţie

Pe cont propriuContractul de Management

IT (nonSAP) Management Centru date Administrare reţea IT Servicii suport IT

Servicii Financiar & Contabilitate Contabilitate Trezorerie Control

Servicii Resurse Umane-Salarizare Administrare personal Managementul carierei Salariazare

PERFORmANŢE FINANCIARE

08fiNaNCiaL STaTEmENTS

to thE shAREhoLdERs oF CEZ

We have audited the accompanying financial statements of

CEZ Distribuţie (“the Company”), which comprise the balance

sheet as at December 31, 2007 and the income statement,

statement of changes in equity and cash flow statement for the

period then ended, and a summary of significant accounting

policies and other explanatory notes.

mAnAGEmEnt’s REsponsIbILIty FoR thE FInAnCIAL stAtEmEnts

Management is responsible for the preparation and fair pre-

sentation of these financial statements in accordance with In-

ternational Financial Reporting Standards. This responsibility

includes: designing, implementing and maintaining internal

control relevant to the preparation and fair presentation of fi-

nancial statements that are free from material misstatement,

whether due to fraud or error; selecting and applying appro-

priate accounting policies; and making accounting estimates

that are reasonable in the circumstances.

AudItoRs’ REsponsIbILIty

Our responsibility is to express an opinion on these financi-

al statements based on our audit. We conducted our audit in

accordance with International Standards on Auditing. Those

standards require that we comply with ethical requirements

and plan and perform the audit to obtain reasonable assuran-

ce whether the financial statements are free from material mis-

statement.

An audit involves performing procedures to obtain audit evi-

dence about the amounts and disclosures in the financial

statements. The procedures selected depend on the auditors’

judgment, including the assessment of the risks of material

misstatement of the financial statements, whether due to fraud

or error. In making those risk assessments, the auditor consi-

ders internal control relevant to the entity’s preparation and

fair presentation of the financial statements in order to design

audit procedures that are appropriate for the circumstances,

but not for the purpose of expressing an opinion on the effec-

tiveness of the entity’s internal control. An audit also includes

evaluating the appropriateness of accounting policies used

and the reasonableness of accounting estimates made by ma-

nagement, as well as evaluating the overall presentation of the

financial statements.

We believe that the audit evidence we have obtained is suffici-

ent and appropriate to provide a basis for our audit opinion.

opInIon

In our opinion the financial statements present fairly, in all

material respects, the financial position of the Company as of

December 31, 2007, and of its financial performance and its

cash flows for the period then ended in accordance with Inter-

national Financial Reporting Standards.

May 26, 2008, Bucharest, Romania

Ernst & Young S.R.L.

39

Notes December

31, 2007

December

31, 2006

AssEts

non-current Assets

Property, plant and equipment 3 1,639,304 1,517,977

Intangible assets 4 2,029 4,345

Other financial assets 5 154 3,554

total non-Current Assets 1,641,487 1,525,876

Current Assets

Inventories 6 5,619 3,992

Trade receivables 7 58,329 233,116

Receivables from related parties 8, 28 308,355 5,249

Other current assets 9 9,403 7,237

Other financial assets 10 2,898 5,471

Cash and cash equivalents 11 253,636 411,850

total Current Assets 638,240 666,915

totAL AssEts 2,279,727 2,192,791

shAREhoLdERs’ EQuIty And LIAbILItIEs

shareholders’ Equity

Share capital 12 754,310 799,033

Share premium 12 114,095 114,095

Contributions for share capital increase 929 929

Revaluation reserve 12 563,368 571,216

Retained earnings 12 379,062 201,541

Other reserves 12 18,515 41,273

total shareholders’ Equity 1,830,279 1,728,087

Notes December

31, 2007

December

31, 2006

Liabilities

non-current Liabilities

Deferred income 13 182,833 151,384

Deferred income tax liability 27 23,970 28,722

Other non-current liabilities - 2,530

Provisions for retirement benefits - non-current 17 35,643 27,629

Total Non-current Liabilities 242,446 210,265

Current Liabilities

Trade payables 14 51,718 138,340

Short term liabilities to related parties 15, 28 89,675 25,135

Current income tax liability 4,617 10,674

Other current liabilities 16 15,352 19,827

Provisions for retirement benefits - current 17 2,237 4,841

Other provisions 17 43,403 55,622

total Current Liabilities 207,002 254,439

totAL LIAbILItIEs 449,448 464,704

totAL shAREhoLdER’s EQuIty

And LIAbILItIEs

2,279,727 2,192,791

FINANCIAL sTATEmENTs

Notes December

31, 2007

December

31, 2006

Revenues

Sales and distribution of electricity 18 873,419 1,285,641

Other operating revenues 19 69,970 63,264

total revenues 943,389 1,348,905

Expenses

Electricity purchased 20 388,239 793,134

Materials and supplies 21 6,572 10,511

Repairs and maintenance 22 74,124 102,692

Salaries, wages and other employee benefits 23 96,270 93,394

Depreciation, amortization and impairment charge 24 103,139 102,681

Financial income, net 25 (7,666) 5,609

Other operational expenses 26 116,973 103,468

total expenses 777,651 1,211,489

profit before income tax 165,738 137,416

Income tax expense / (income) 27 17,373 42,213

profit for the year 148,365 95,203

These financial statements have been authorized for issue on May 26, 2008.

The accompanying notes are an integral part of these financial statements.

iNCOmE STaTEmENT

Gabriel negrilă

General Manager

41

Share

capital

Share

premium

Contribution

for share

capital

increase

Revaluation

reserve

Other

reserves

Retained

earnings

Total

balance as at January 1, 2006 (note 12) 799,033 114,095 929 542,410 30,893 111,757 1,599,117

Increase of the legal reserve (Note 12) - - - - 6,171 (6,171) -

Reversal of reserve for investments (Note 12) - - - - (26,846) 26,846 -

Reserve for investments for 2006 (Note 12) 31,055 (31,055) -

Reversal of revaluation surplus (Notes 3, 12) - - - (4,961) - 4,961 -

Deferred income tax impact on revaluation reserves (Notes 12, 27) - - - 33,767 - - 33,767

Profit for the year - - - - - 95,203 95,203

balance as at december 31, 2006 799,033 114,095 929 571,216 41,273 201,541 1,728,087

Share capital decrease (Note 12) (44,723) 4,670 (40,053)

Increase of the legal reserve (Note 12) 8,297 (8,297) -

Reserve for investments for 2006 (Note 12) (31,055) 31,055 -

Reversal of revaluation surplus (Notes 3, 12) (1,728) 1,728 -

Deferred income tax impact on revaluation reserves (Notes 12, 27) (6,120) (6,120)

Profit for the year 148,365 148,365

balance as at december 31, 2007 754,310 114,095 929 563,368 18,515 379,062 1,830,279

The accompanying notes are an integral part of these financial statements.

STaTEmENT Of CHaNgES iN EQuiTy


Notes December 31, 2007

December 31, 2006

Cash flows from operating activities

Profit before income tax 165,738 137,416

Adjustments to reconcile profit before income tax to net cash provided by operating activities:

Depreciation, amortization and impairment 24 103,139 102,681

Loss on disposal of property, plant and equipment

26 (1,637) 1,357

Income from subsidies 19 (7,429) (4,855)

Allowance for doubtful debtors 27,710 34,604

Write down of other current assets (10) 83

Provisions for risks and charges (6,809) 12,477

Interest revenue, net 25 (14,421) (19,352)

100,543 126,995

working capital adjustments:

Decrease / (Increase) in other financial assets 5,972 (4,527)

Increase in inventories (1,627) (607)

Decrease/(Increase) in receivables 147,077 (73,726)

Increase in receivables from related parties (303,106) (4,643)

Increase in other assets (2,156) (2,034)

(Decrease)/Increase in trade payables (86,622) 52,739

(Decrease)/Increase in liabilities to related parties

64,540 (83,264)

Decrease in other liabilities (7,005) (16,325)

Cash generated from operations 83,354 132,024

Notes December 31, 2007

December 31, 2006

Interest paid 25 - (327)

Income tax paid (34,301) (24,129)

net cash provided by operating activities 49,053 107,568

Cash flows from investing activities

Acquisition of property, plant and equipment, net

(220,304) (218,221)

Acquisition of intangible assets, net (207) (1,588)

Interest received 25 14,421 19,679

net cash used in investing activities (206,090) (200,130)

Cash flows from financing activities

Proceeds from issue of shares - -

Share capital decrease 12 (40,053) -

Subsidies received 38,876 40,626

net cash provided by financing activities (1,177) 40,626

net increase in cash and cash equivalents (158,214) (51,936)

Cash and cash equivalents at beginning of period

11 411,850 463,786

Cash and cash equivalents at end of period 11 253,636 411,850

CaSH fLOW STaTEmENT

43

CEZ Distribuţie (“the Company”), formerly Filiala de Distribu-

ţie și Furnizare a Energiei Electrice Electrica Oltenia S.A., is

a joint stock company domiciled in Romania. The principal

place of business is Brestei Street no. 2, Craiova, Romania.

The Company’s registered address is Brestei Street no. 44,

Craiova, Romania.

The Company is the main distributor of electricity in Olt, Dolj,

Gorj, Valcea, Arges, Mehedinti and Teleorman counties ope-

rating with 232 conversion stations 10,043 transformation po-

ints and electric lines (0.4 kV and 110 kV) having a total length

of 54 thousand kilometres.

The Company’s activities are regulated by the National Autho-

rity for Electricity Sector Regulation (“ANRE”). The acquisition

price paid to the electricity producers, which are owned by

the State, for the electricity received from the National Elec-

tricity System, as well as the electricity distribution tariffs and

the electricity supply tariffs are not exclusively influenced by

Company’s decisions, but they are regulated by ANRE.

Before September 30, 2005, Electrica S.A. was a State owned

company, and the State was 100% shareholder of the Com-

pany. Since September 30, 2005, ČEZ, a.s. became the ma-

jority shareholder (51%) of the Company, and Electrica S.A.

retained 49%.

As a subsidiary of ČEZ, a.s., a company domiciled in the Cze-

ch Republic with registered address at Duhová 2/1444, Praha

4, 140 53, Czech Republic. The Company is consolidated into

ČEZ, a.s. since October 1, 2005.

As a result of the Shareholder’s General Assembly Decision

dated September 7, 2006, the shareholding structure chan-

ged and ČEZ, a.s. sold to ZAPADOCESKA ENERGETIKA a.s,

SEVEROMORAVSKA ENERGETIKA a.s., and VYCHODOCES-

KA ENERGETIKA a.s. 3 shares, one share to each entity.

According to Law 247/2005, in October 2006 12% (8,582,816)

of the Company’s shares, currently held by Electrica S.A., were

transferred to Fondul Proprietatea S.A.

During 2007, ZAPADOCESKA ENERGETIKA a.s, SEVE-

ROMORAVSKA ENERGETIKA a.s. and VYCHODOCESKA

ENERGETIKA a.s were absorbed by CEZ as.

According to Government Ordinance 81/2007, in June 29,

2007, Electrica S.A. assigned 12,874,225 shares to Fondul

Proprietatea S.A.

In order to comply with the requirements of unbundling in

electricity imposed by the European Directive 2003/54/EC,

which had to be implemented in Romania by July 1, 2007, on

15 March 2007, a new Company, CEZ Vânzare was set up, to

which the electricity supply activity was transferred. CEZ Vân-

zare has the same shareholders as the Company and has as

activity the provision of electricity supply services.

Complying with the regulations of the industry in relation to

the transparency of services offered by CEZ Distribuţie to CEZ

Vânzare and vice versa, in June 2007 CEZ Servicii was set

up, which provides controlling, treasury, data processing, in-

formation technology, human resources, and Customer care

services to CEZ Distribuţie and CEZ Vânzare.

1. COrpOraTE iNfOrmaTiON


bAsIs oF pREpARAtIon

The attached financial statements are presented in Romanian

RON (“RON”), rounded to the nearest thousand. The financial

statements have been prepared under the historical cost con-

vention, modified to include tangible assets revaluation and

adjusted as required by IAS 29 (“Financial Reporting in Hype-

rinflationary Economies”) until December 31, 2003. Starting

from January 1, 2004, the Romanian economy is not conside-

red a hyperinflationary economy. The Company stopped the

application of IAS 29 from that date.

IAS 29, “Financial Reporting in Hyperinflationary Economies”,

requires that financial statements of enterprises that report in

the currency of a hyperinflationary economy should be stated

in terms of the measuring unit current at the balance sheet

date and that corresponding figures should be restated on the

same terms.

statement of Compliance

The Company is required to maintain its books and records in

accordance with accounting principles and practices manda-

ted by the Romanian Law on Accounting.

The accompanying financial statements of the Company are

prepared in accordance with International Financial Reporting

Standards (IFRS), which comprise standards and interpre-

tations approved by the International Accounting Standards

Board and International Accounting Standards and Standing

Interpretations Committee, respectively, that remain in effect

and as adopted by the European Union.

ChAnGEs In ACCountInG poLICIEs

The accounting policies adopted are consistent with those of

the previous financial year except as follows:

The Company has adopted the following new and amended

IFRS and IFRIC interpretations during the year. Adoption of

these revised standards and interpretations did not have any

effect on the financial statements of the Company. They did

however give rise to additional disclosures:

n IFRS 7 Financial Instruments: Disclosures

n IAS 1 Amendment - Presentation of Financial

Statements

n IFRIC 8 Scope of IFRS 2

n IFRIC 9 Reassessment of Embedded Derivatives

n IFRIC 10 Interim Financial Reporting and

Impairment

IFRs 7, Financial Instruments: disclosures (effective for fi-

nancial years beginning on or after 1 January 2007)

This standard requires disclosures that enable users of

the financial statements to evaluate the significance of the

Company’s financial instruments and the nature and extent of

risks arising from those financial instruments. The new disclo-

sures are included throughout the financial statements. While

there has been no effect on the financial position or results,

comparative information has been revised where needed.

IAs 1 presentation of Financial statements

This amendment requires the Company to make new disclo-

sures to enable users of the financial statements to evaluate

the Company’s objectives, policies and processes for managi-

ng capital. These new disclosures are presented in Note 31.

IFRIC 8, scope of IFRs 2 (effective for financial years begin-

ning on or after 1 May 2006).

This interpretation requires IFRS 2 to be applied to any arran-

gements in which the entity cannot identify specifically some

or all of the goods received, in particular where equity instru-

ments are issued for consideration which appears to be less

than fair value. As equity instruments are not issued by the

Company, the interpretation had no impact on the financial

position or performance of the Company.

IFRIC 8 is not relevant to the Company’s operations.

IFRIC 9, Reassessment of Embedded derivatives (effecti-

ve for financial years beginning on or after 1 June 2006)

IFRIC 9 requires an entity to assess whether a contract con-

tains an embedded derivative at the date an entity first beco-

mes a party to the contract and prohibits reassessment unless

there is a change to the contract that significantly modifies the

cash flows.

2. SigNifiCaNT aCCOuNTiNg pOLiCiES

45

As the Company has no embedded derivatives, the interpre-

tation had no impact on the financial position or performance

of the Company.

IFRIC 9 not relevant for the company.

IFRIC 10, Interim Financial Reporting and Impairment

(effective for financial years beginning on or after 1 November

2006).

This Interpretation may impact the financial statements should

any impairment losses be recognized in the interim financial

statements in relation to available for sale equity investments,

unquoted equity instruments carried at cost and goodwill as

these may not be reversed in later interim periods or when

preparing the annual financial statements.

As the Company had no impairment losses previously rever-

sed, the interpretation had no impact on the financial position

or performance of the Company.

sIGnIFICAnt EstImAtEs And AssumptIons

The preparation of financial statements in conformity with

International Financial Reporting Standards requires mana-

gement to make judgments, estimates and assumptions that

affect the reported amounts of assets and liabilities, disclosu-

re of contingent assets and liabilities at the date of the finan-

cial statements, and the reported amounts of revenues and

expenses during the reporting period. However, uncertainty

about these assumptions and estimates could result in outco-

mes that could require a material adjustment to the carrying

amount of the asset and liability affected in the future.

Judgments

In the process of applying the Company’s accounting policies,

management has made the following significant judgment,

apart form those involving estimations, which has the most

significant effect on the amounts recognised in the financial

statements.

Going concern

The accompanying financial statements have been prepared

based on the going concern principle, which assumes that

the Company will continue to operate in the foreseeable futu-

re. In order to assess the reasonability of this assumption, the

management reviews the forecasts of the future cash inflows

and outflows.

Based on these reviews, the management believes that the

Company will be able to continue to operate as a going con-

cern in the foreseeable future and, therefore, this principle

should be applied in the preparation of these financial state-

ments.

Estimates and assumptions

The key assumptions and other key sources of estimation

concerning future uncertainty at the balance sheet date that

have a significant risk of causing material adjustments to the

carrying amount of assets or liabilities within the next financial

year is as follows:

post employment benefits

The cost of post employment benefits is determined using actu-

arial estimation techniques. The actuarial valuation involves ma-

king assumptions about discount rates, expected rates of staff

turnover and future salary increases. Due to the long term natu-

re of such benefits, these estimations are subject to significant

uncertainty. The value of the provision for retirement benefits is

RON 37 880 thousand at December 31, 2007 (2006: RON 32

470 thousand). Further details are provided in Note 17.

summARy oF sIGnIFICAnt ACCountInG poLICIEs

property, plant and equipment

Following initial recognition at cost, property, plant and equip-

ment are carried at a revalued amount, which is the fair value

at the date of the revaluation, less any subsequent accumula-

ted depreciation (except for land) and subsequent accumula-

ted impairment losses.

The carrying values of property, plant and equipment are re-

viewed for impairment when events or changes in circumstan-

ces indicate that the carrying value may not be recoverable.

Valuations are performed frequently enough to ensure that the

fair value of revalued asset does not differ materially from its

carrying amount.

Any revaluation surplus is credited to the revaluation reserve


included in the equity section of the balance sheet except to

the extent that it reverses a revaluation decrease of the same

asset previously recognised in profit and loss, in which case

the increase is recognised in profit and loss. A revaluation defi-

cit is recognised in profit or loss except that a deficit offsetting

a previous surplus on the same asset is directly offset against

the surplus in the asset revaluation reserve.

An item of property, plant and equipment is derecognised

upon disposal or when no future economic benefits are ex-

pected from its use or disposal. Any gain or loss arising from

the derecognition of the asset is included in the income state-

ment in the year in which the asset is derecognised.

subsequent repairs and maintenance expenditure

Expenditure on repairs and maintenance of property, plant

and equipment, made to restore or to maintain the value of

these assets, are recognized in the income statement when

incurred, while expenditures made in order to improve tech-

nical performance are capitalized and depreciated over the

remaining useful life of that fixed asset.

depreciation

Depreciation is calculated on a straight-line basis over the use-

ful life of the assets.

The estimated useful lives (in years) used in the calculation of

depreciation of property, plant and equipment are as follows:

Category Useful lives

Buildings 53

Lines 24

Technological Equipment 18

Measurement instruments 3

Transportation means 8

Furniture 8

Meters 11

The useful lives and depreciation method are reviewed peri-

odically to ensure that they are consistent with the expected

pattern of economic benefits derived from the assets.

Intangible assets

The intangible assets are stated at their restated cost, as a re-

sult of the adjustments made up to December 31, 2003 to ac-

count for the effects of inflation as per the provisions of IAS 29

(“Financial Reporting in Hyperinflationary Economies”), less

any accumulated amortization and accumulated impairment

losses. All intangible assets have finite lives. The amortization

is recognized in the income statement on a straight-line basis

over the estimated useful lives of the intangible assets. Intan-

gible assets consist mainly of customized software. These are

amortized on a straight-line basis over 5 years.

Foreign currency transactions

Transactions in foreign currencies are translated into RON by

applying the exchange rates prevailing at the time of the tran-

saction. Assets and liabilities denominated in foreign curren-

cies at year-end are translated to RON at the exchange rates

prevailing on that date. Realized and unrealized exchange

gains and losses are charged to the income statement. The

exchange rate of RON/USD as at December 31, 2007 and

2006 was RON 2.4564 / USD 1, and RON 2.5676 / USD 1,

respectively. The exchange rate of RON/EURO as at Decem-

ber 31, 2007 and 2006 was RON 3.6102 / EURO 1, and RON

3.3817 / EURO 1, respectively.

trade receivables

Trade receivables include invoices issued at the balance

sheet date for the supply and distribution of electricity, late-

payment interest, as well as the estimated amount receivable

for electricity supplied at year-end but invoiced in the period

subsequent to the year-end. Receivables are stated at their

nominal value reduced to the estimated recoverable amount

through the allowance for doubtful receivables.

The general allowance for doubtful collection for trade recei-

vables at December 31, 2007 were recorded in accordance

with the CEZ group policy. The allowance for doubtful collec-

tion are established depending on the ageing of uncollected

invoices at December 31, 2007 as follows:

47

Past due Percent

1-3 month 5 %

3-6 month 20 %

6-12 month 50 %

Over 1 year 100 %

The Company also makes a full allowance for the balances

for which legal proceedings for their collection have been

initiated, or if there are reasons to doubt the collection of a

receivable.

The Company does not record provisions for the following tra-

de receivables:

n Radio and TV fee

n Penalties for radio and TV fee

n Electricity for retired employees that worked

in the energy field

n Group customers

Inventories

Inventories consist of consumables, spare parts and other in-

ventories, which include mainly maintenance materials for the

distribution network. These materials are recorded under in-

ventories when purchased and then expensed or capitalized,

as appropriate, when consumed. The cost of inventories com-

prises the purchase cost and other costs incurred in bringing

the inventories to their present location and condition.

Inventories are stated at the lower of cost and net realizable

value. Cost is determined mainly on a weighted average basis.

Where necessary, a write down of the carrying value of inven-

tories is made for excess, obsolete and defective inventories.

Cash and cash equivalents

Cash and cash equivalents include cash on hand, current ac-

counts and bank deposits with an original maturity of three

months or less. Cash denominated in foreign currency is

translated at period-end exchange rates.

Cash restricted in its use

Restricted balances of cash shown under other current finan-

cial assets as restricted funds (see Notes 5, 10 and 11) relate

to cash deposits held as collateral for the issuance of gua-

rantees and letters of credit. The non-current classification is

based on the expected timing of the release of the funds to

the Company.

Impairment of non - financial assets

The Company assesses at each reporting date whether there

is an indication that an asset may be impaired. If any such

indication exists, or when annual impairment testing for an as-

set is required, the asset’s recoverable amount is estimated.

An impairment loss is recognized in the income statement or

in shareholders’ equity whenever the carrying amount of an

asset exceeds its recoverable amount.

An asset’s recoverable amount is the higher of an asset’s or

cash generating unit’s fair value less costs to sell and its value

in use and is determined for an individual asset, unless the

asset does not generate cash inflows that are largely indepen-

dent of those from other assets or groups of assets. Where the

carrying amount of an asset exceeds its recoverable amount,

the asset is considered impaired and is written down to its

recoverable amount. In assessing value in use, the estimated

future cash flows are discounted to their present value using a

pre-tax discount rate that reflects current market assessments

of the time value of money and the risks specific to the asset.

Impairment losses of continuing operations are recognized in

the income statement in those expense categories consistent

with the function of the impaired asset.

trade payables and accruals

Trade payables to suppliers are recorded at invoiced values

and include amounts payable for the acquisition of electricity,

contracted work and services. Accruals are reported at expec-

ted settlement values.

Long term debt

Borrowings are initially recognized at the amount of the proce-

eds received, net of transaction costs. They are subsequently

carried at amortized cost using the effective interest rate me-

thod, the difference between net proceeds and redemption

value being recognized in the net income over the life of the


borrowings as interest expense.

Transaction costs include fees and commissions paid to

agents, advisers, brokers and dealers, levies by regulatory

agencies and securities exchanges.

Income and deferred taxes

Income tax on the profit or loss for the year comprises current

and deferred income tax. Current tax is the expected tax paid

or payable on the taxable income for the year or amounts ex-

pected to be recovered from tax authorities, using tax rates

and tax laws enacted or substantially enacted at the balance

sheet date, and any adjustment to tax payable in respect of

previous years.

Deferred income tax is provided using the balance sheet liabi-

lity method, providing for temporary differences between the

carrying amounts of assets and liabilities for financial repor-

ting purposes and the amounts used for taxation purposes.

The amount of deferred income tax provided is based on the

expected manner of realization or settlement of the carrying

amount of assets and liabilities, using tax rates enacted or

substantially enacted at the balance sheet date.

Deferred income tax assets and liabilities are recognized re-

gardless of when the temporary difference is likely to reverse.

Deferred income tax assets and liabilities are not discounted.

Deferred income tax assets are recognized when it is probable

that sufficient taxable profits will be available against which the

deferred income tax assets can be utilized. A deferred income

tax liability is recognized for all taxable temporary differences.

Current income tax and deferred income tax are charged or

credited directly to equity if the tax relates to items that are

credited or charged, in the same or a different period, directly

to equity.

value Added tax (vAt)

Revenues, expenses and assets are recognised net of the

amount of VAT except:

n where the VAT incurred on a purchase of assets or ser-

vices is not recoverable from the taxation authority, in

which case the VAT is recognised as part of the cost of

acquisition of the asset or as part of the expense item

as applicable; and

n receivables and payables that are stated with the amount

of VAT included.

The net amount of VAT recoverable from, or payable to, the ta-

xation authority is included as part of receivables or payables

in the balance sheet.

Financial instruments

Financial assets and financial liabilities carried on the accom-

panying balance sheet include cash and cash equivalents, tra-

de and other accounts receivable and payable, and long term

liabilities to related parties (including loans). The accounting

policies on recognition and measurement of these items are

disclosed in the respective accounting policies. Management

believes that the estimated fair values of these instruments ap-

proximate their carrying amounts.

Financial instruments are classified as liabilities or equity in

accordance with the substance of the contractual arrange-

ment. Interest, dividends, gains and losses relating to a finan-

cial instrument classified as liabilities are reported as expense

or income as incurred. Distributions to holders of financial

instruments classified as equity are charged directly to equi-

ty. Financial instruments are offset when the Company has a

legally enforceable right to offset and intends to settle either

on a net basis or to realize the asset and settle the liability

simultaneously.

Financial assets are derecognised when the rights to receive

cash flow from the asset has expired. Financial liabilities are

derecognised when the obligation under the liability is dis-

charged, cancelled or expires.

Employee benefits

short-term employee benefits

Short-term employee benefits include wages, salaries and so-

49

cial security contributions. Short-term employee benefits are

recognized as expenses as services are rendered.

post-employment benefits

The Company accounts for employee present, retirement and

post retirement benefits in accordance with IAS 19 “Employee

Benefits”. Retirement and post retirement benefits are estima-

ted on the basis of an actuarial evaluation. As of December 31,

2007, the related liability for current (accrued entitlement) and

retired employees was quantified by an independent, qualified

actuary.

Both the Company and its employees are legally obliged to

make defined contributions (included in the social security

contributions) to the National Pension Fund, managed by the

Romanian State Social Security (a defined contribution plan

financed on a pay-as-you-earn basis). As such, the Company

has no legal or constructive obligation to pay future benefits.

Its only obligation is to pay the contributions as they fall due.

If the Company ceases to employ members of the Romani-

an State Social Security plan, it will have no obligation to pay

the benefits earned by its own employees in previous years.

The Company’s contributions relating to defined contribution

plans are charged to income in the year to which they relate.

In accordance with the Collective Labour Agreement in force as

of December 31, 2007 the Company’s employees were entitled

to receive the following retirement and post retirement benefits:

n 1-3 base monthly salaries upon retirement, depending

on the number of years of employment with the Com-

pany;

n 1-3 base monthly salaries, payable in the month of reti-

rement as a loyalty bonus, depending of the number of

years of employment with Company;

n Free consumption of electricity of 1 150 KWh per an-

num, which also extends to the employees’ spouses

under certain conditions.

n Aid in case of death of an employee by causes other

then work accident or professional illness, of RON

1,773;

n Aid in case of death of an employee caused by work

accident or professional illness, of 12 basic monthly sa-

laries; and

n Aid in case of death of an employee’s family member,

of RON 926, plus RON 552 (or the difference from the

social security benefits in case of death, if they are gran-

ted, until the above mentioned level, provided that the

employee’s parent has a monthly salary below RON

552).

Revenue recognition

Revenue is recognized when it is probable that the econo-

mic benefits associated with the transaction will flow to the

enterprise and the amount of the revenue can be measured

reliably. Revenues, including interest for late payments, com-

prise primarily the value of electricity supplied. Revenues from

services are recognized when earned.

development tax

In accordance with the requirements of Government Ordi-

nance no. 26/1999, the Company has to invoice and collect

development tax, computed as 9% of the value of electricity

delivered to customers. The development tax collected has

to be transferred to the Ministry of Economy and Commer-

ce (“MEC”), the former Ministry of Industry and Resources

(“MIR”), together with related penalties, if any.

Before December 31, 2002, these funds were considered as

contributions to share capital at the moment when the corres-

ponding investment projects in progress were finished. Star-

ting from January 1, 2003, the amounts of the development

tax utilized are recorded as government subsidies in accor-

dance with IAS 20 “Accounting for Government Grants and

Disclosure of Government Assistance”.

Up to December 31, 2004, MEC allocated the development

tax collected to the companies operating in the electricity sec-

tor (including the Company), in order to be used for the deve-

lopment of the electricity network, on an investment project

basis.


Starting from January 1, 2005, according to Government Ordi-

nance 89/2004 approved by Law 529/2004, the development

tax is no longer transferred to the State Budget. The Company

records such reserves at the lower of 6% of revenues from the

sale of electricity and the level of profit for the year.

These reserves are used for financing in-house investments re-

garding the modernization and development of the electricity

network in accordance with the permitted use of these funds,

as per the relevant provisions contained within Government

Ordinance 89/2004. The provisions of Government Ordinan-

ce 89/2004 outlined above were in force until December 31,

2006.

subsidies

Subsidies are accounted for as deferred income and recog-

nized as income at the moment of recognition of the related

costs.

Connection fees

The value of new connections to the national electricity ne-

twork is invoiced to the consumers through the connection

fee (in accordance with Government’s Decision no. 2/1992)

and is recorded as deferred income. Regarding recognition

as income the policy was changed in August 2007. As per

the old policy, recognition was at the moment of recording

the depreciation of the related assets. Due to the changes in

useful life of related fix assets, Company implemented group

policy, section no. 2.5: “Revenues from connection fees recei-

ved from customers are deferred and recognized in income

over the expected term of the customer relationship, which is

currently estimated to be 20 years”.

In the case of legal entities, except for public institutions, the

connection fee also includes a fixed amount to be used for

the future development of the electricity network. The new

connections to the electricity network are the property of the

Company.

A financial guarantee contract is a contract that requires the

issuer to make specified payments to reimburse the holder for

a loss it incurs because a specified debtor fails to make pay-

ment when due in accordance with the original or modified

terms of a debt instrument.

Financial guarantees are initially recognised at fair value plus

any transaction costs that are directly attributable to the acqui-

sition or issue of the financial asset or financial liability.

After initial recognition the financial guarantee shall be mea-

sured at the higher of the amount initially recognized and the

amount determined in accordance with IAS 37 “Provisions,

Contingent Liabilities and Contingent Assets”.

provisions

A provision is recognized when, and only when, the enterprise

has a present obligation (legal or constructive) as a result of

a past event and it is probable (i.e. it is more likely than not

to occur) that an outflow of resources embodying economic

benefits will be required to settle the obligation, and a reliable

estimate can be made of the amount of the obligation. Where

the effect of the time value of money is material, the amount of

a provision is the present value of the expenditures expected

to be required to settle the obligation.

Contingencies

The Company recognizes in its financial statements contin-

gent liabilities only if the possibility of an outflow of resources

that represent economic benefits is probable (i.e. it is more li-

kely than not to occur). The Company discloses in its financial

statements contingent liabilities if the possibility of an outflow

of resources that represent economic benefits is possible (i.e.

it is less likely than not to occur).

The Company discloses in its financial statements contingent

assets only if the possibility of an inflow of economic benefits

is probable.

Geographical segments

The Company’s activities (electricity supply and distribution

activity) are conducted in several locations in Romania. Ma-

51

nagement considers the entire operations as one business

segment.

Functional Currency

Based on the economic substance of the underlying events

and circumstances relevant to the Company, the functional

currency of the Company has been determined to be the Ro-

manian Leu (RON).

Comparative information

Comparative information is disclosed in respect of the previo-

us period for all numerical information in the financial stateme-

nts. Comparative information is also included for narrative and

descriptive information when is relevant to an understanding

of the current period’s financial statements.

Fair value of financial instruments

Fair value is the amount for which a financial instrument could

be exchanged between knowledgeable and willing parties in

an arm’s length transaction.

Financial instruments carried on the balance sheet include

cash and bank balances, receivables, trade and other paya-

bles and borrowings. The particular recognition methods ad-

opted are disclosed in the individual policy statements associ-

ated with each item.

The carrying amounts of cash and cash equivalents, receiva-

bles, trade and other payables and borrowings, approximate

their fair values.

The Company does not utilize financial instruments to hedge

its exposure to fluctuation in interest and foreign exchange

rates on loans and trade payables.

derecognition of financial assets and liabilities instru-

ments

The derecognition of a financial instrument takes place when

the Company no longer controls the contractual rights that

comprise the financial instrument, which is normally the case

when the instrument is sold, or all the cash flows attributable

to the instrument are passed through to an independent third

party.

derivative financial instruments and hedging

The Company didn’t use any derivative financial instruments,

but developed hedging activities.

Related parties

Parties are considered related when one party, either through

ownership, contractual rights, family relationship or otherwise,

has the ability to directly or indirectly control or significantly

influence the other party. Related parties also include individu-

als that are principal owners, management and members of

the Board of Directors and members of their families, parties

with joint control over the Company’s joint ventures in which

the Company is a venturer, post-employment benefit plans for

the benefit of employees of the Company or any entity that

is a related party to the Company’s entities. To the best of

management’s knowledge all the transactions with the related

parties are conducted on an arm’s length basis.

FutuRE ChAnGEs In ACCountInG poLICIEs

Certain new standards, amendments and interpretations to

existing standards have been published that are mandatory

for accounting periods beginning on or after January 1, 2008

or later periods which the Company has not early adopted,

are as follows:

IFRs 8, operating segments

(effective for financial years beginning on or after 1 January

2009)

IFRS 8 replaces IAS 14 Segment Reporting and adopts a ma-

nagement approach to segment reporting.

The information reported would be that which management

uses internally for evaluating the performance of operating

segments and allocating resources to those segments. This

information may be different from that reported in the balance

sheet and income statement and entities will need to provide


explanations and reconciliations of the differences.

IAs 23 (revised), borrowing Costs


2009)

The benchmark treatment in the existing standard of expen-

sing all borrowing costs to the income statement is eliminated

in the case of qualifying assets. All borrowing costs that are

directly attributable to the acquisition or construction of a qua-

lifying asset must be capitalised. A qualifying asset is an asset

that necessarily takes a substantial period of time to get ready

for its intended use or sale. In accordance with the transitional

requirements of the Standard, the Company will adopt this as

a prospective change.

Accordingly, borrowing costs will be capitalised on qualifying

assets with a commencement date after January1, 2009. No

changes will be made for borrowing costs incurred to this date

that have been expensed.

IFRIC 11, IFRs 2-Group and treasury share transactions

(effective for financial years beginning on or after 1 March

2007)

This Interpretation requires arrangements whereby an emplo-

yee is granted rights to an entity’s equity instruments to be

accounted for as an equity-settled scheme by an entity even

if the entity chooses or is required to buy those equity instru-

ments from another party, or the shareholders of the entity

provide the equity instruments needed. The Interpretation also

extends to the way in which subsidiaries, in their separate fi-

nancial statements, account for schemes when their employe-

es receive rights to equity instruments of the parent.

This Interpretation applies to the way the Group’s subsidiaries

account, in their individual financial statements, for options

granted to their employees to buy equity shares of the Com-

pany.

IFRIC 11 is not currently applicable to the Company’s opera-

tions.

IFRIC 12, service Concession Arrangements


2008)

IFRIC 12 outlines an approach to account for contractual (ser-

vice concession) arrangements arising from entities providing

public services. It provides that the operator should not ac-

count for the infrastructure as property, plant and equipment,

but recognise a financial asset and/or an intangible asset.


tions.

IFRIC 13, Customer Loyalty programs

(effective for financial years beginning on or after 1 July

2008)

IFRIC 13 requires customer loyalty award credits to be ac-

counted for as a separate component of the sales transaction

in which they are granted and therefore part of the fair value

of the consideration received is allocated to the award credits

and deferred over the period that the award credits are fulfil-

led.


tions.

IFRIC 14, IAs 19 - the Limit on a defined benefit Asset,

minimum Funding Requirements and their Interaction


2008)

IFRIC 14 provides guidance on how to assess the limit on the

amount of surplus in a defined benefit scheme that can be re-

cognised as an asset under IAS 19 Employee Benefits. It also

explains how this limit, also referred to as the “asset ceiling

test”, may be influenced by a minimum funding requirement

and aims to standardize current practice.

The Company expects that this Interpretation will have no im-

pact on its financial statements.

IAs 1 ‘presentation of Financial statements’

(effective for annual periods beginning on or after 1 January

2009)

IAS 1 has been revised to enhance the usefulness of informati-

on presented in the financial statements. Of the main revisions

are the requirement that the statement of changes in equity in-

53

cludes only transactions with shareholders; the introduction of

a new statement of comprehensive income that combines all

items of income and expense recognised in profit or loss toge-

ther with “other comprehensive income”; and the requirement

to present restatements of financial statements or retrospecti-

ve application of a new accounting policy as at the beginning

of the earliest comparative period, i.e. a third column on the

balance sheet.

The Company will make the necessary changes to the presen-

tation of its financial statements in 2009, as applicable.

IFRs 2 ‘share based payment’ - vesting Conditions and

Cancellations (effective for annual periods beginning on or

after 1 January 2009)

The amendment clarifies two issues: The definition of “ves-

ting condition”, introducing the term “nonvesting condition”

for conditions other than service conditions and performance

conditions. It also clarifies that the same accounting treatment

applies to awards that are effectively cancelled by either the

entity or the counterparty.

The Company expects that this Interpretation will have no im-

pact on its financial statements.

IFRs 3 ‘business Combinations’ and IAs 27 ‘Consolida-

ted and separate Financial statements’(effective for annual

periods beginning on or after 1 July 2009)

A revised version of IFRS 3 Business Combinations and an

amended version of IAS 27 Consolidated and Separate Finan-

cial Statements were issued by IASB on January 10, 2008.

IFRS 3R introduces a number of changes in the accounting

for business combinations which will impact the amount of

goodwill recognized, the reported results in the period that an

acquisition occurs, and future reported results. Such changes

include the expensing of acquisition-related costs and recog-

nizing subsequent changes in fair value of contingent consi-

deration in the profit or loss (rather than by adjusting goodwill).

IAS 27 revised requires that a change in ownership interest of

a subsidiary is accounted for as an equity transaction.

Therefore such a change will have no impact on goodwill, nor

will it give raise to a gain or loss.

Furthermore the amended standard changes the accounting

for losses incurred by the subsidiary as well as the loss of con-

trol of a subsidiary.

The changes introduced by IFRS 3 revised and IAS 27 revised

must be applied prospectively and will affect future acquisiti-

ons and transactions with minority interests.

IAs 32 and IAs 1 puttable Financial Instruments (effective

for annual periods beginning on or after 1 January 2009).

The amendment to IAS 32 requires certain puttable financial

instruments and obligations arising on liquidation to be classi-

fied as equity if certain criteria are met. The amendment to IAS

1 requires disclosure of certain information relating to puttable

instruments classified as equity.

The Company does not expect these amendments to impact

the financial statements.


The movement in the carrying value of property plant and equipment during the year ended December 31, 2007 is as follows:

Land Buildings Plant and

equipment

Other fixed

assets

In progress Total

Cost or valuation

balance as at January 1, 2007 18,147 1,234,797 421,017 3,026 39,474 1,716,461

Additions - 188,111 45,829 76 216,994 451,010

Disposals - (78) (6,038) (453) (225,583) (232,152)

balance as at december 31, 2007 18,147 1,422,830 460,808 2,649 30,885 1,935,319

Accumulated depreciation

balance as at January 1, 2007 - (114,484) (67,032) (901) - (182,417)

Depreciation expense - (63,296) (37,397) (450) - (101,143)

Accumulated depreciation of disposals - 24 3252 227 - 3,503

balance as at december 31, 2007 - (177,756) (101,177) (1,124) - (280,057)

Accumulated impairment

balance as at January 1, 2007 - (7,000) (2,903) (2) (6,493) (16,398)

Increase in impairment provision - (85) (110) - (172) (367)

Decrease in impairment provision - 281 195 - - 476

balance as at december 31, 2007 - (6,804) (2,818) (2) (6,665) (16,289)

net book value after impairment loss, before revaluation surplus at de-

cember 31, 2007

18,147 1,238,270 356,813 1,523 24,220 1,638,973

Accumulated revaluation surplus

Balance as at January 1, 2007 and December 31, 2007 - 330 - 1 - 331

Carrying amount

balance at december 31, 2007 18,147 1,238,600 356,813 1,524 24,220 1,639,304


3. prOpErTy, pLaNT aNd EQuipmENT

55

The movement in the carrying value of property plant and equipment during the year ended December 31, 2006 was as follows:

Land Buildings Plant and

equipment

Other fixed

assets

In progress Total

Cost or valuation


Additions - 147,838 68,210 416 189,653 406,117

Disposals - (2,224) (953) (6) (186,977) (190,160)

balance as at december 31, 2006 18,147 1,234,797 421,017 3,026 39,474 1,716,461

Accumulated depreciation

balance as at January 1, 2006 - (56,945) (30,478) (455) - (87,878)

Depreciation expense - (58,190) (36,922) (449) - (95,561)

Accumulated depreciation of disposals - 651 368 3 - 1,022

balance as at december 31, 2006 - (114,484) (67,032) (901) - (182,417)

Accumulated impairment

balance as at January 1, 2006 - (3,611) (1,354) (2) (6,493) (11,460)

Increase in impairment provision - (3,389) (1,549) (4,938)

balance as at december 31, 2006 - (7,000) (2,903), (2) (6,493) (16,398)

net book value after impairment loss, before revaluation surplus at decem-

ber 31, 2006

18,147 1,113,313 351,082 2,123 32,981 1,517,646

Accumulated revaluation surplus

balance as at January 1, 2006 and december 31, 2006 - 330 - 1 - 331

Carrying amount

balance at december 31, 2006 18,147 1,113,643 351,082 2,124 32,981 1,517,977



As of December 31, 2003 and September 30, 2005, the

Company’s property, plant and equipment were valued by an

independent valuator at their fair value. The fair value of the

property, plant and equipment, estimated in accordance with

the International Accounting Standards 16 “Property, Plant

and Equipment” and 36 “Impairment of Assets”, is their mar-

ket value. When there is no evidence of market value because

of the specialized nature of the plant and equipment and be-

cause these items are rarely sold, except as part of a continu-

ing business, they are valued at their depreciated replacement

cost. These values have been adjusted in accordance with IAS

36 “Impairment of Assets” in order to reflect the recoverable

amount.

In order to value property, plant and equipment as of Septem-

ber 30, 2005, these have been split by the independent valua-

tor into two groups, according to their contribution to the two

main activities of the Company, i.e. the distribution and supply

activities, and also into three further groups formed, according

to the valuation method employed, in order to derive their fair

value, as follows:

n Assets valued at market value;

n Assets valued at replacement cost new using informati-

on collected from the market, and depreciated by phy-

sical, functional and economic obsolescence, where

applicable; and

n Assets valued by indexing their historical value using an

appropriate index.

Revaluation differences were recorded for each property,

plant and equipment item.

For buildings used for special purposes (sub-station buildings,

transfer stations, etc), the reconstruction/replacement cost

method was applied. In the case of administrative buildings,

residential property and some of the warehouses, one mar-

ket-oriented method was applied, namely, the rental income

capitalisation approach or market comparison approach.

Lines, cables and other technical equipment were valued

using the depreciated replacement cost (DRC) method, ta-

king into account the particular nature of these fixed assets

that may not be sold separately but as part of the business, or

that may be sold in extremely rare situations and only within a

power distribution entity that generates revenues.

Other fixed assets, including vehicles and office furniture and

equipment were revalued based mainly on second-hand pri-

ces obtained from the market.

The Company does not have temporarily idle plant and equip-

ment as of December 31, 2007.

There are no pledged buildings in patrimony.

The basis of calculation for the impairment charges in 2007

and 2006 was the valuation exercise carried out by the inde-

pendent valuator as of September 30, 2005.

The Company received RON 4,979 thousand for tangibles

sold in 2007 (2006: RON 800 thousand).

Impairment losses for property, plant and equipment are dis-

closed under “Depreciation, amortisation and impairment

charges” in the income statement.

The Company has commitments to purchase property plant

and equipment of RON

34,420 thousand as of December 31, 2007 (2006: RON 36

277 thousand).

The Company has not disclosed information on what the car-

rying value of its property, plant and equipment would have

been had it stated these at cost instead of at valuation, as this

would have resulted in undue cost to estimate such amounts

in comparison to the benefit that may be derived by the users

of these financial statements from providing such disclosure.

57

The movement in the carrying value of intangible assets during the year ended December 31,

2007 is as follows:

Software Rights and

other

Intangible

assets in

progress

Total

Cost

At January 1, 2007 9,651 - 27 9,678

Additions 509 - 227 736

Retirements (869) - - (869)

Transfers - - (254) (254)

At december 31, 2007 9,291 - - 9,291

Accumulated amortisation

At January 1, 2007 (5,333) - - (5,333)

Amortization charge for the year (2,524) - - (2,524)

Transfers 595 - - 595

At december 31, 2007 (7,262) - - (7,262)

net carrying amount -

At december 31, 2007 2,029 - - 2,029

At January 1, 2007 4,318 - 27 4,345

The remaining useful life of software at December 31, 2007 is 25 months.

The movement in the carrying value of intangible assets during the year ended December 31,

2006 was as follows:

Software Rights and

other

Intangible

assets in

progress

Total

Cost

At January 1, 2006 8,034 56 - 8,090

Additions 1,561 - 27 1,588

Retirements - - - -

Transfers 56 (56) - -

At december 31, 2006 9,651 - 27 9,678

Accumulated amortisation

At January 1, 2006 (3,001) (35) - (3,036)

Amortization charge for the year (2,297) - - (2,297)

Transfers (35) 35 - -

At december 31, 2006 (5,333) - - (5,333)

net carrying amount

At december 31, 2006 4,318 - 27 4,345

At January 1, 2006 5,033 21 - 5,054

Software licenses, rights and other intangible assets are amortized using the straight line me-

thod over a period of 5 years.

Amortization of intangibles is disclosed under ‘Depreciation, amortisation and impairment char-

ges’ in the income statement.

The Company has commitments to purchase intangibles of RON 647 thousand as of Decem-

ber 31, 2007 (no contractual commitments to purchase intangibles existed as of December 31,

2006).

4. iNTaNgiBLE aSSETS


The composition of other financial assets at December 31,

2007 and 2006, included under non-current assets, is as fol-

lows:

31.12.2007 31.12.2006

Guarantee letter - 2,898

Administrators’ and others

guarantees

58 560

Other financial assets 96 96

total 154 3,554

The Guarantee letter at December 31 2006 relates to a real

estate guarantee without dispossession over a collateral de-

posit account of RON 2,898 thousand for the period from

November 25, 2005 to January 31, 2008. The applicable in-

terest rate is 5.25%, based on the Guarantee Agreement no

192/35185.

Administrators’ guarantees at December 31, 2007 and 2006

relates to guarantees provided by the Company’s warehouses

Administrators.

Other financial assets of RON 96 thousand relates to ACUE

(Association of Companies for Energy Utilities ) shares (RON

34 thousand) and guarantees for good performance (RON 62

thousand).

The composition of inventories at December 31, 2007 and

2006 is as follows:

31.12.2007 31.12.2006

Raw materials and consu-

mables

5,551 4,176

Finished goods and mer-

chandises

379 -

Advances to inventory sup-

pliers

- 21

Allowance for slow moving

and obsolete inventories

(311) (205)

total 5,619 3,992

The composition of trade receivables at December 31, 2007

and 2006 is as follows:

31.12.2007 31.12.2006

Receivables from sale of

electricity

96,552 250,733

Receivables from others

services rendered

34,732 42,868

Allowance for receivables:

Allowance for doubtful ac-

counts receivable from the

sale of electricity

(70,459) (54,704)

Allowance for receivables

from other services rende-

red

(2,496) (5,781)

total 58,329 233,116

Trade receivables are non-interest bearing and are generally

on 30-60 days’ payment term. No guarantees have been provi-

ded for any receivables and they are unsecured.

5. OTHEr fiNaNCiaL aSSETS 6. iNvENTOriES 7. TradE rECEivaBLES

59

The composition of receivables from related parties at Decem-

ber 31, 2007 and 2006 is as follows:

31.12.2007 31.12.2006

Electrica S.A. 92 1,962

E.on Moldova S.A. - 23

ENEL Electrica Dobrogea

S.A.

- 44

ENEL Energie S.R.L. 476 -

Electrica Muntenia Sud

S.A.

141 166

ENEL Electrica Banat S.A. - 89

Electrica Transilvania Nord

S.A.

- 20

Electrica Transilvania Sud

S.A.

- 84

SISEE si AISEE Oltenia 81 199

SISEE si AISEE Banat - 1

CEZ Romania S.R.L. 3,539 2,659

CEZ Vânzare S.A. 303,919 -

CEZ Servicii S.A. 105 -

CEZ Sluzby s.r.o. 2 -

CEZ Data s.r.o. - 2

total 308,355 5,249

For details on the related parties referred to above see Note

28.

The composition of other current assets at December 31,

2007 and 2006 is as follows:

31.12.2007 31.12.2006

VAT payable - 3,361

VAT under settlement 4,167 781

Other employee - related

claims

44 -

Contribution for medical le-

ave

57 57

Excise 4 -

Development tax 1,747 1,747

Other claims receivable

from Treasury

74 -

Sundry debtors 17,552 -

Allowances for sundry deb-

tors

(15,240)

Prepaid expenses 131 10

Amounts under settlement 79 -

Accrued interest receivable 788 1,281

total 9,403 7,237

The composition of other financial assets at December 31,

2007 and 2006, included under current assets, is as follows:

31.12.2007 31.12.2006

Guarantee letter 2,898 5,471

total 2,898 5,471

The Guarantee letter at December 31, 2007 relates to a real

estate guarantee without dispossession over a collateral de-

posit account of RON 2,898 thousand for the period from

November 25, 2005 to January 31, 2008. The applicable in-

terest rate is 5.25%, based on the Guarantee Agreement no

192/35185.

8. rECEivaBLES frOm rELaTEd parTiES

9. OTHEr CurrENT aSSETS 10. OTHEr fiNaNCiaL aSSETS


The composition of cash and cash equivalents at December

31, 2007 and 2006 is as follows:

31.12.2007 31.12.2006

Cash on hand and current

accounts with banks

31,983 6,901

Cash equivalents 11 -

Short-term deposits 221,642 404,949

total 253,636 411,850

At December 31, 2007, cash and cash equivalents included

foreign currency deposits of RON 56,934 thousand and RON

164,708 thousand, respectively, earning interest at a rate of

6.56% (2006: 6.01%).

share capital

The Company’s share capital consists of 71,523,469 autho-

rised, issued and fully paid shares with a nominal value as

included in the registration documents is RON 9.44 each.

As at December 31, 2007 the share capital structure is as fal-

lows:

Numbers of

shares

Percentage

of holding

Amount

ČEZ, a.s. 36,481,415 51% 384,745

Electrica S.A. 13,585,013 19% 143,272

Fondul Pro-

prietatea S.A.

21,457,041 30% 226,293

total 71,523,469 100% 754,310

As at December 31, 2006, the share capital structure and split

of the inflation restated value of share capital presented in the

balance sheet is as follows:

Numbers of

shares

Percentage

of holding

Amount

ČEZ, a.s. 36,481,412 51% 407,507.80

ZAPADOCES-

KA ENERGE-

TIKA a.s

1 0% 0.01

SEVERO-

MORAVSKA

ENERGETIKA

a.s.

1 0% 0.01

VYCHO-

DOCESKA

ENERGETIKA

a.s.

1 0% 0.01

Electrica S.A. 26,459,238 37% 295,630.05

Fondul Pro-

prietatea S.A.

8,582,816 12% 95,896.13

Total 71,523,469 100% 799,033.00

11. CaSH aNd CaSH EQuivaLENTS

12. SHarEHOLdErS’ EQuiTy

61

The movement in number and value of shares during the years

ended December 31, 2007 and 2006 is presented below:

Number of

Shares

Amount

As at January 1, 2006 71,523,469 799,033

Issued in 2006 - -

As at December 31, 2006 71,523,469 799,033

Decrease nominal value

2007

- (44,723)

As at december 31, 2007 71,523,469 754,310

Following an international tender process, on April 5, 2005,

a privatization agreement was concluded between Electrica

S.A. (the “Seller”) and ČEZ, a.s. (the “Purchaser”). The Gene-

ral Shareholder’s Meeting held on September 30, 2005 ap-

proved the transfer of 11 445 150 shares from the Seller to the

Purchaser and the increase of share capital by the issuance

of 25 036 265 new shares to ČEZ, a.s., which were settled in

cash.

The value of the registered share capital in accordance with

the Romanian Statutory accounting records and trade registry

of RON 675 182 thousand as of December 31, 2007 and of

RON 715 235 thousand as of December 2006. The difference

between the value of share capital per the Romanian Statutory

accounting records and the value presented in these financial

statements relates to the adjustment made in these financial

statements in accordance with the provisions of IAS 29 (“Fi-

nancial Reporting in Hyperinflationary Economies”), which

are not applied under the applicable Romanian Accounting

Regulations.

As a result of Shareholder’s General Assembly Decision, da-

ted September 7, 2006, the shareholders structure changed

and ČEZ, a.s. sold to ZAPADOCESKA ENERGETIKA a.s,

SEVEROMORAVSKA ENERGETIKA a.s., VYCHODOCESKA

ENERGETIKA a.s. 3 shares, one share to each entity.

According to Law 247/2005, in October 2006 12% (8,582,816)

of the Company’s shares, that were held by Electrica S.A.,

were transferred to Fondul Proprietatea S.A.

As of March 15, 2007, a new company was set up, CEZ Vân-

zare, to which the electricity supply activity was transferred

from the Company. CEZ Vânzare has the same shareholding

structure as the Company. After CEZ Vânzare was set up, the

share capital of the Company decreased by RON 44,723 tho-

usand (RON 40,053 thousand historic value).

In June 29, 2007, 12,874,225 shares held by Electrica S.A.

were assigned to Fondul Proprietatea S.A. in accordance with

Government Ordinance 81/2007.

share premium

The balance of the share premium account at January 1,

2006, December 31, 2006 and December 31, 2007 was RON

114,095 and represents the difference between the nominal

value of shares acquired by ČEZ, a.s. (RON equivalent of

EURO 71 million) and total cash paid by ČEZ, a.s. for its sha-

res in the Company.

Revaluation reserve

The movement in the revaluation reserve during the years en-

ded December 31, 2007 and 2006 is presented below:

Balance

balance as at January 1, 2006 542,410

Reversal of revaluation surplus (4,961)

Deferred income tax impact on fixed assets

and revaluation reserve (Note 27)

33,767

balance as at december 31, 2006 571,216

Reversal of revaluation surplus (1,728)

Deferred income tax impact on fixed assets

and revaluation reserve (Note 27)

(6,120)


As of December 31, 2007, the Company has tax qualifying

revaluation reserves of approximately RON 13,750 thousand

arising out of the revaluation of its tangible fixed assets as of

12. SHarEHOLdErS’ EQuiTy (continued)


December 31, 2003.

The tax qualifying revaluation reserve becomes taxable if

amounts are intended for or distributed to shareholders and

in certain other cases, including use to offset statutory accoun-

ting losses.

The amount of the income tax liability that would arise in the

event of the utilisation of the revaluation reserve in future,

using the current income tax rate of 16%, was approximately

RON 2,200 thousand.

The revaluation reserve related to fixed assets disposed or

sold during year 2007, of RON 1,728 thousand, was transfer-

red to retained earnings.

Retained earnings

The movement in retained earnings during the years ended

December 31, 2007 and 2006 is presented below:

Amount

balance as at January 1, 2006 111,757

Reversal of reserve for investments 26,846

Reserve for investments (31,055)

Legal reserve (6,171)

Reversal of revaluation surplus 4,961

Profit for the year 95,203


Reversal of reserve for investments 31,055

Adjustment on share capital transferred to

CEZ Vânzare S.A.

4,670

Legal reserve (8,297)

Reversal of revaluation surplus 1,728

Profit for the year 148,365


The retained earnings per the Romanian Statutory accounting

records as of December 31, 2007, which are available for dis-

tribution were RON 102,371 thousand (2006: RON nil). The

profit for the year based on Romanian Statutory accounting

records as of December 31, 2007 is RON 137,696 thousand

(2006: RON 104,113 thousand), while the figure stated under

IFRS is RON 148,365 thousand.

other reserves

The movement in other reserves during the years ended De-

cember 31, 2007 and 2006 is presented below:

Amount

At January 1, 2006 30,893

Reversal of reserve for investments (26,846)

Legal reserve 6,171

Reserve for investments 31,055

At december 31, 2006 41,273

Reversal of reserve for investments (31,055)

Legal reserve 8,297

At december 31, 2007 18,515

Included under other reserves as of December 31, 2007 are

legal reserves of RON 18,515 thousand restricted from distri-

bution under Statutory requirements.

As of December 31, 2007 the Company distributed from the

result for the year 2007, legal reserves of RON 8,297 thou-

sand, as per the provisions of the Romanian Company Law.

The legal reserve is deductible within the limit of 5% of the

accounting profit, before the determination of the profit tax,

from which non-taxable income is deducted and to which

expenses related to such non-taxable income are added,

until the reserve fund equals one-fifth of the subscribed and

63

paid-in share capital, as the case may be, according to laws

of organization and operation. In the case where this is used

to cover losses or is distributed in any form, the subsequent

reconstitution of the reserve is no longer deductible in com-

puting taxable profit. As an exception, the reserve constituted

by legal persons that furnish utilities to companies that are un-

dergoing restructuring, reorganization or privatization may be

used to cover the losses of value of share packages obtained

further to the procedure of conversion of receivables and the

amounts intended for subsequent reconstitution are deducti-

ble in computing taxable profit.

Deferred income as of December 31, 2007 and 2006 consists

of the following:

31.12.2007 31.12.2006

Connection fees subsidies 182,833 151,048

Rental income - 336

total 182,833 151,384

Connection fees subsidies include the unamortized portion

of capitalized connection fees received from customers upon

their connection to the national electricity network.

Trade payables as of December 31, 2007 and 2006 consist of

the following:

31.12.2007 31.12.2006

Domestic suppliers - purc-

hases of electricity

28,355 72,378

Domestic suppliers - other

supplies and services

2,218 15,295

Fixed asset suppliers 15,383 28,356

Accruals for supplier’s invoi-

ces not received

5,762 22,311

total 51,718 138,340

Trade payables are non interest bearing and are normally

settled on 30-day terms, except for amounts payable to fixed

asset suppliers which are normally settled on 60-day terms.

12. SHarEHOLdErS’ EQuiTy 13. dEfErrEd iNCOmE 14. TradE payaBLES


Short-term liabilities to related parties as of December 31,

2007 and 2006 consist of the following:

31.12.2007 31.12.2006

Services, energy and mana-

gement fee performed by

CEZ Romania S.R.L.

24,649 2,565

Energy acquisitions from

Electrica S.A.

4,833 4,465

Repairs and maintenance

services performed by SISE

and AISEE Muntenia Sud

33 -


services performed by

SISEE and AISEE Oltenia

9,256 17,287


services performed by SISE

and AISEE BANAT

- 31

Guarantee for auction

participation from ČEZ

Logistika s.r.o

747 787

Energy acquisitions from

CEZ Vânzare S.A.

43,948 -

Services rendered by CEZ

Servicii S.A.

6,209 -

total 89,675 25,135

For details on the related parties referred to above see Note 28.

Other current liabilities at December 31, 2007 and 2006 are

as follows:

31.12.2007 31.12.2006

Payables to employees 2,645 2,917

Social security payable 3,609 3,895

VAT payable 3,569 5,925

Salary tax and other taxes 1,079 400

TV Tax payable to Romani-

an Television Company

- 863

Radio Tax payable to Roma-

nian Television Company

- 1,613

Other payables 4,450 4,214

total 15,352 19,827

15. SHOrT TErm LiaBiLiTiES TO rELaTEd parTiES

16. OTHEr CurrENT LiaBiLiTiES

65

Other current liabilities at December 31, 2006 and 2007 are

as follows:

31.12.2006 IncreasesDecreases

31.12.2007Utilized Reversed

Provision for penalties and cost of replacement of old meters in accordance with Law 178/2003 24,790 1,758 - 11,303 15,245

Provision for retirement benefits 32,470 5,796 - 386 37,880

Provision for green certificates not acquired by the Company for energy supplied 241 113 354 - -

Provision for environmental obligations related to the cost of disposal of roof tiles containing asbestos and ob-

solete condensers

1,000 - - - 1,000

Provision for penalties payable to SISEE Oltenia (2003-2005) 1,597 - - 1,597 -

Provision for restructuring 11,197 16,974 3,432 11,132 13,607

Provision for holiday indemnity - 1,056 1,056 - -

Provision for salary increase - 6,845 - - 6,845

Litigation provision - Pitesti 127 7,455 - 6,939 643

Litigation provision - Pitesti, land 3,384 - - 3,384 -

Provision for litigation - Craiova Zaharul Calafat 6,941 - - 3,000 3,941

Provision for litigation - Valnefer company 150 350 - - 500

Provision for restructuring of the finance, controlling, accounting, IT, HR, and customer care functions 1,501 (854) 647 - -

Provision for payments from profit to employees 2,654 - 895 1,759 -

Provisions for staff bonuses for the unbundling and financial service support projects, 1,866 (58) 868 710 230

Others litigation 174 1,326 33 75 1,392

total 88,092 40,761 7,285 40,285 81,283

17. prOviSiONS


The Company recorded a provision of RON 15,245 thousand

for penalties that may be levied and the cost of replacing old

meters in accordance with Law 178/1003. The Company fol-

lows a continuous program for the replacement of old meters

and intends to release and / or increase the provision made

in proportion with the number of old meters replaced, or the

number of additional old meters categorized as such in each

financial year, respectively. Due to the fact that in previous

years there were no significant penalties paid, the Company

decided to change the estimate for penalties from 90% to

10%.

Retirement and post retirement benefits are estimated on the

basis of an actuarial evaluation performed by an independent,

qualified actuary.

The key assumptions used in the actuarial evaluation are as

follows:

n 7.25% for discount rate for 2008 and thereafter decrea-

sing to 3.53% in 2051.

n 32.5 % increase in the level of salaries in 2007; the in-

crease in the salaries level is reduced to 2% in 2051.

n 1% turnover of the number of employees

n 17.6 % decrease of the number of employees.

n All employees will retire when they reach retirement

age.

The provision for environmental obligations related to the cost

of replacement of roof tiles containing asbestos and disposal

of obsolete condensers relate to the cost of disposal of roof

tiles containing asbestos and obsolete condensers and repre-

sents the estimated cost of complying with the Government

Decision 124/2003 dealing with the disposal of construction

materials containing asbestos and the costs of complying with

Government Decision 173/2000, as modified by Government

Decision 291/2005, dealing with waste management and en-

vironmental protection. The level of the provision represents

Management’s best estimate, based on information provided

by the Company’s technical experts in the case of the dispo-

sal of roof tiles containing asbestos and based on a contract

signed with a company specializing in the disposal of obsole-

te condensers in the case of the condensers. The Company

follows a continuous program for the replacement of roof tiles

containing asbestos and disposal of obsolete condensers and

intends to release the provision made in proportion with the

percentage of completion of the related programme in each

financial year.

The provision for restructuring of RON 13,607 thousand in-

cludes the estimated cost for compensatory payments to em-

ployees participating in the restructuring process of the Com-

pany.

The prior year provision for restructuring of the finance, con-

trolling, accounting, IT, HR, and customer care functions rela-

ted to the costs for the implementation of the shared services

centre for the respective functions of the Company, which

commenced in year 2006 and was finalized during the cur-

rent year.

The provision for salary increase refers to salaries increase as

per Contract Labour for period April 2007 - December 2007.

The payment was made in April 2008.

The provision for discretionary employee bonuses relates to

an accrual for discretionary performance bonuses, which the

Management decided to award to certain employees involved

in special projects. These bonuses will be paid to employees

during the year 2008.

Prior year provision for payments from profit to employees re-

lates to an accrual for the payment of bonuses to employees

based on the relative level of salaries costs for the year 2005

for the respective employees, and the level of profit for the

current year.

The provision for Zaharul Calafat is for a litigation were the

plaintiff claims damages related to the cost of damaged pro-

duction as a result of a fault in the voltage of electricity sup-

plied to their factory (RON 3,941 thousand). The timing of the

67

related cash outflows is uncertain and would depend on the

timing of the conclusion of the legal proceedings.

The provision for litigation with Valnefer company relates to

the claim initiated by this company for the cost of repairing

its timber warehouse which was damaged as a result of fire,

which was allegedly caused by the electricity meter. The Com-

pany anticipates that the litigation proceedings will be conclu-

ded during the year 2008. During 2007 the value of the pro-

vision was increased as per lawyer estimates and the plaintiff

complaints.

The composition of sales and distribution of electricity for the

years ended December 31, 2007 and 2006 is as follows:

2007 2006

Corporate customers 164,271 672,081

Reactive electrical energy 41,978 23,127

Households 65,965 357,788

Retired employees of the

Company

690 2,885

Other electricity distribution

companies

35,166 64,567

Sales from distribution of

electricity

565,349 165,193

total 873,419 1,285,641

Other operating revenues for the years ended December 31,


2007 2006

Services rendered 1,807 1,177

Rental revenues 18,704 15,767

Sales of merchandise 1,895 2,002

Revenues from activity - lo-

cal households

15 30

IT services rendered 180 495

Revenues from sundry acti-

vities

19,758 8,703

Revenues from inventories

movement

226 -

Operating subsidies 23 45

Fines, penalties and dama-

ges

19,445 26,990

Subsidies received for in-

vestments made

7,429 4,855

Other operating revenues 488 3,200

total 69,970 63,264

18. SaLE aNd diSTriBuTiON Of ELECTriCiTy

19. OTHEr OpEraTiNg rEvENuES


Electricity purchased during the years ended December 31,


2007 2006

Energy purchased from the

transmission system

388,239 782,381

Energy purchased from

third parties

- 10,753

total 388,239 793,134

Materials and supplies during the years ended December 31,


2007 2006

Purchases of auxiliary ma-

terials

1,218 1,694

Expenses regarding the non

technological fuel used

108 180

Expenses regarding spare

parts used

1,155 2,342

Expenses regarding materi-

als used for protection and

security

1,299 2,634

Expenses regarding the

protection equipments

817 1,572

Expenses regarding other

consumables

1,075 1,029

Electricity, heating and wa-

ter

900 1,060

total 6,572 10,511

Repairs and maintenance during the years ended December

31, 2007 and 2006 consist of the following:

2007 2006

Maintenance works 63,223 79,331

Maintenance services recei-

ved from related parties

10,901 23,361

total 74,124 102,692

21. maTEriaLS aNd SuppLiES20. ELECTriCiTy purCHaSEd 22. rEpairS aNd maiNTENaNCE

69

Salaries, wages and other employee benefits during the years

ended December 31, 2007 and 2006 consist of the following:

2007 2006

Salaries (including bonu-

ses)

70,232 66,650

Company’s contribution to

social security funds

20,706 21,002

Other employees’ expenses 1,126 1,147

Meal tickets 4,206 4,595

total 96,270 93,394

Depreciation, amortization and impairment charge for the years

ended December 31, 2007 and 2006 is analysed as follows:

2007 2006

Depreciation of property,

plant and equipment

101,143 95,561

Amortization of intangible

assets

2,524 2,297

Impairment charge (528) 4,823

total 103,139 102,681

Expenses with depreciation for years 2007 ad 2006 is related

to the loss from depreciation recognized in the profit and loss

account as result of the physical inventory of company`s fixed

assets.

Financial income, net, for the years ended December 31, 2007

and 2006 consists of the following:

2007 2006

Interest revenue 14,421 19,679

Foreign exchange gains 24,328 10,279

Other financial costs 544 1,129

Interest expenses - (327)

Foreign exchange losses (31,627) (36,369)

total income / (expense) 7,666 (5,609)

The income generated from the interest collected resulted

from the financial investments made in the Romanian money

market. The financial investments consisted of time deposits

and Treasury Bills issued by Finance Ministry, with regular ma-

turities of one month. In 2007 Company has no contracted

loans.

The net foreign exchange losses of RON 7,299 thousand

resulted mainly from foreign currencies sold on a lower ex-

change rate comparing with December 2006, and also from

exchange rate fluctuation during 2007.

24. dEprECiaTiON, amOrTiZa-TiON aNd impairmENT CHargE

23. SaLariES, WagES aNd OTHEr EmpLOyEE BENEfiTS

25. fiNaNCiaL iNCOmE, NET


Other operational expenses during the years ended Decem-

ber 31, 2007 and 2006 consist of the following:

2007 2006

Expenses regarding other non-storable materials

539 226

Cost of merchandise sold 867 1,900

Packaging costs 1 5

Rental expenses 4,404 5,075

Insurance expenses 3 -

Cost of services rendered by individuals 311 356

Commissions and fees 118 40

Protocol expenses 58 40

Advertising and promotion expenses 126 166

Transport of goods and personnel expenses

8,469 48

Travelling expenses 1,605 1,200

Postal expenses 5,394 4,803

Bank commissions and similar charges 8,390 607

Others services received 63,108 35,860

Other Taxes 2,111 1,977

Write off of bad debts - 83

Damages payments 60 177

Fines and penalties 164 7

Net additional provisions / (release) of provisions

21,007 47,282

Loss on disposal of property, plant and equipment

(1,637) 1,357

Other operational expenses 1,875 2,259

total 116,973 103,468

Income tax Legislation

Corporate income tax is calculated in accordance with Roma-

nian tax regulations at the rate of 16% for 2007 and 2006.

The legal and fiscal environment in Romania and its imple-

mentation into practice changes frequently and is subject to

different interpretations by various Ministries of the Govern-

ment. The Romanian government has a number of agencies

that are authorized to conduct audits (“controls”) of Romanian

companies as well as foreign companies doing business in

Romania. These controls are similar in nature to tax audits per-

formed by tax authorities in many countries, but may extend

not only to tax matters but to other legal or regulatory matters

in which the applicable agency may be interested. In addition,

the agencies conducting these controls may be subject to sig-

nificantly less regulation and the company under review may

have significantly less practical safeguards than is customary

in many countries.

Income tax returns are subject to review and correction by the

tax authorities for a period of five years subsequent to their fi-

ling. Management believes that it has adequately provided for

tax liabilities in the accompanying financial statements; howe-

ver, the risk remains that tax authorities could take differing

positions with regards to the interpretation of these issues and

the effect could be significant.

As at December 31, 2007 and 2006, the income tax expense

is analysed as follows:

31.12.2007 31.12.2006

Current income tax 28,245 34,947

Deferred income tax (10,872) 7,266

Total 17,373 42,213

2007 2006

Profit before tax 165,738 137,416

Statutory income tax rate 16% 16%

"Expected" Income tax expense 26,518 21,987

Add (deduct) tax effect of:

Deductible depreciation (963) 3,207

Deductible legal reserve (1,328) (1,079)

Other deductible items - (1,574)

Non-taxable income (14,208) (15,046)

Fixed assets (depreciation, amor-tization and deferred income tax effect on revaluation of land)

- -

Non deductible provisions and reserves

17,739 21,530

Other non-deductible items (10,385) 13,187

Income taxes 17,373 42,213

Effective tax rate 10% 31%

27. iNCOmE TaXES26. OTHEr OpEraTiONaL EXpENSES

71

As at December 31, 2007 and 2006, the net deferred income

tax liability on temporary differences is analysed as follows:

Balance sheet Income statement

31.12.07 31.12.06 2007 2006

Deferred

income

2,529 2,502 (27) 253

Property

Plant &

Equipment

(39,613) (33,493) - -

Intangible

assets

(6) (35) (29) (34)

Other assets 50 729 679 (955)

Liabilities 13,070 1,575 (11,495) 8,002

total (23,970) (28,722) (10,872) 7,266

The movement in the deferred income tax liability on property,

plant and equipment during the years ended December 31,

2007 and 2006 has been credited / debited into the revalua-

tion reserve account within equity, respectively. Similarly, the

movement in the deferred income tax liability on the revalu-

ation reserve during the year ended December 31, 2007 has

also been credited into the revaluation reserve account within

equity.

The reconciliation of deferred income tax liability movements in

the years ended December 31, 2007 and 2006 is as follows:

2007 2006

opening deferred income

tax liability as of January 1

28,722 55,223

Deferred income tax liability

charged / (credited) directly

to equity

6,120 (33,767)

deferred income tax char-

ge / (income) for the year

(10,872) 7,266

Closing deferred income tax

liability as of December 31

23,970 28,722

27. iNCOmE TaXES (continued)


Receivables and payables from / to related parties as of December 31, 2007 and 2006 are presented in the following table:

Amounts payable to Electrica S.A. consist mainly of payables related to the repairs and maintenance and other services.

Receivable from Payable to 31.12.07 31.12.06 31.12.07 31.12.06

Electrica S.A. 92 1,962 4,833 4,465E.on Moldova S.A. - 23 - -ENEL Electrica Dobrogea S.A. - 44 - -ENEL Energie S.R.L. 476 - -Electrica Muntenia Nord S.A. - - - -Electrica Muntenia Sud S.A. 141 166 - -ENEL Electrica Banat S.A. - 89 - -Electrica Transilvania Nord S.A. - 20 - -Electrica Transilvania Sud S.A. - 84 - -SISEE si AISEE Oltenia 81 199 9,256 17,287SISEE si AISEE Banat - 1 - 31SISEE si AISEE Muntenia Sud - - 33 -CEZ Romania S.R.L. 3,539 2,659 24,649 2,565CEZ Vânzare S.A. 303,919 - 43,948 -CEZ Servicii S.A. 105 - 6,209 -CEZ Sluzby s.r.o. 2 - - -CEZ Logistika s.r.o. - - 747 787CEZ Data s.r.o. - 2 - -Total 308,355 5,249 89,675 25,135 Presented under:Current assets 308,355 5,249 -Non-current liabilities - - -Current liabilities - - 89,675 25,135total 308,355 5,249 89,675 25,135

28. rELaTEd parTiES

73

Transactions with products and services between related parti-

es during 2007 and 2006 are presented in the following table:

Sales /

Revenues

in 2007

Sales /

Revenues

in 2006

Purchases /

expenses

in 2007

Purchases /

expenses

in 2006

Electrica S.A. 6,976 27,352 18,161 103,369

E.on Moldova S.A. 791 529 28,216 131

ENEL Distribuţie Dobrogea S.A. 125 294 23 59

Electrica Distribuţie Muntenia Nord S.A. 117 566 36 24

Electrica Muntenia Sud S.A. 1,227 2,044 50 75

ENEL Distribuţie Banat S.A. 1,127 676 75 229

ENEL Energie S.R.L. 1,067 - - -

Electrica Distribuţie Transilvania Nord S.A. 3,035 877 - 52

Electrica Distribuţie Transilvania Sud S.A. 1,040 2,238 98 160

SISEE si AISEE Oltenia 1,100 2,995 81,670 145,727

SISEE si AISEE Muntenia Nord - - - 1

SISEE si AISEE Muntenia Sud - 1 28 -

SISEE si AISEE Banat - 7 57 669

SISEE si AISEE Moldova - - - -

CEZ Romania S.R.L. 2,778 2,733 16,763 15,378

CEZ Vânzare S.A. 504,856 - 60,199 -

CEZ Servicii S.A. 712 - 14,057 -

ČEZ Logistika s.r.o. - - 8,335 787

ČEZ Data s.r.o. - 2 - -

ČEZ, a.s. - 44 - -

total 524,951 40,358 227,768 266,661

Transactions with assets between related parties during 2007

and 2006 are presented in the following table:

Sales /

Revenues

in 2007

CEZ Romania S.R.L. 342

CEZ Servicii S.A. 3,427

total 3,769

Transactions with management fee between related parties

during 2007 and 2006 are presented in the following table:

Purchases /

expenses

in 2007

Purchases /

expenses

in 2006

CEZ Romania S.R.L. 17,953 11,932

total 17,953 11,932

Transactions with related parties relate mainly to the cross-

selling of electricity among the members of the electricity

market in Romania. The only exception being the transactions

with Electrica S.A. where certain other services were provided

to the Company and SISEE, the maintenance services provider

within the Electrica S.A. group. All related party transactions

are concluded on an arms’ length basis. All balances are

28. rELaTEd parTiES (continued)


unsecured and no guarantees have been provided or received

for related party receivables or payables.

Electrica S.A. is a shareholder of the Company, holding 19%

of its share capital as of December 31, 2007 (December 31,

2006: held 37% of the share capital). Electrica Distribuţie

Muntenia Nord S.A., Electrica Distribuţie Muntenia Sud S.A.,

Electrica Distribuţie Transilvania Nord S.A. and Electrica

Distribuţie Transilvania Sud S.A. are subsidiaries of Electrica

S.A., engaged in the supply and distribution of electricity in

their respective regions of coverage.

In 2007 as a result of privatization of E.on Moldova S.A., ENEL

Distribuţie Dobrogea S.A. and ENEL Distribuţie Banat S.A.,

which were previously subsidiaries of Electrica S.A., continued

to be considered as related parties with the Company, as

Electrica S.A. maintained a minority shareholding in these

entities following the completion of the privatisation process

in 2006.

SISEE Oltenia, SISEE Muntenia Nord, SISEE Muntenia Sud,

SISEE Banat and SISEE Moldova are branches of Electrica

S.A. engaged mainly in the maintenance of the electricity

distribution networks in their respective regions of coverage.

Each SISEE branch includes a number of Agencies of

Maintenance and Energy Services (AISEE).

28. rELaTEd parTiES (continued) 29. KEy maNagEmENT pErSONNEL (as of 31.12.2007)

CEZ Romania, CEZ Trade Romania, CEZ Vânzare, ČEZ

Logistika s.r.o., ČEZ Data s.r.o., ČEZ Sluzby s.r.o are wholly

owned subsidiaries of ČEZ, a.s., the Company’s ultimate

parent company.

Transactions with CEZ Romania relate to the provision of

various management services by this entity to the Company.

Transactions with ČEZ Logistika s.r.o. relate to the acquisition

of meters.

Transactions with CEZ Vânzare relate mainly to distribution

of electricity and with CEZ Servicii to IT services, customer

services, HR and data processing.

The short term employee benefits of the key management

personnel of the Company for 2007 were RON 592 thousand

(2006: RON 367 thousand). Other employee benefits to key

management personnel are the same as those offered to

other employees, including termination, retirement and post

retirement benefits (see Note 2.3).

The short term employee benefits of the Board of Directors

members of the Company for 2007 was RON 300 thousand

(2006: RON 300 thousand). No other benefits are granted to

Board of Directors members.

Key management personnel on 31.12.2007:

n Gabriel NEGRILĂ - General Manager CEZ Distributie

n Emi MITROFAN - Financial Director

n Vicenţiu ALEXANDRU - Technical & Development Director

board of directors members (as of 31.12.2007)

The Company’s Board of Directors members are the following:

n Jan VEŠKRNA - Chairman

n Martin PACOVSKÝ - Member

n Adrian BOROTEA - Member

n Tudor SERBAN - Member

n Valentin DOBRE - Member

75

The average number of employees for the years ended Decem-

ber 31, 2007 and 2006 was as follows:

2007 % 2006 %

Workers 1,519 58% 1,949 66%

Other

categories

1,110 42% 1,022 34%

total 2,629 100% 2,971 100%

During the year 2007 the Company finalized reorganization pro-

jects related to the unbundling, financial services centralization

and new ERP software implementation. For all these projects,

the Company used advisors and consultants, most of them with

international recognition.

The Company’s principal financial liabilities, other then derivati-

ves, comprise mainly trade payable. The Company has various

financial assets such as trade receivable and cash and cash

equivalents including short term deposits.

Other risks which significantly affect the results of the Company

are foreign exchange risk, credit risk, litigation and lay-off in-

demnities.

The Risk Management Policy is a central part of the Company’s

strategic management. Its main objective is to identify and treat

the risks related to the financial activities of the Company, being

focused on the prevention and elimination of potential harmful

influences.

Foreign exchange risk

Regarding the foreign exchange risk, the Company has in view

the embracing of the most suitable financial strategy, out of the

major scenarios:

1. The passive approach: the certainty degree related to the

exchange rate prediction is too low and the Company mi-

ght decide to not take any steps for the protection against

this risk;

2. The active approach: the certainty degree related to

the exchange rate prediction is high and the Company

decides to take steps for the protection purpose against

the exchange risk, as follows:

a) Exchange rate anticipated settlement - the Company

has the opportunity to set in advance the level of the

exchange rate that will be considered for the currency

trade, both selling and buying.

b) Option on exchange rate: - the Company has the op-

portunity to purchase total or partial protection against

an unfavourable evolution of the rate and, in the same

time, keeps the chance to take advantage from the fa-

vourable movement of the rate.

Currently the Company is exposed to foreign exchange rate risk

through its purchase transactions and its policy is not to hedge

this risk.

The following table demonstrates the sensitivity to a reasonably

possible change in Euro exchange rate, with all other variables

held constant, of the Company’s profit before tax (due to the

changes in the fair value of the monetary assets and liabilities):

30. NumBEr Of EmpLOyEES 31. fiNaNCiaL riSK maNagEmENT OBJECTivES aNd pOLiCiES


2007 Increase/

decrease in

EURO exchan-

ge rate

Effect on profit before

tax

In thousand RON EURO

EuRo 5% 2,820 781

EuRo -5% (2,820) (781)

2006 Increase/

decrease in

EURO exchan-

ge rate

Effect on profit before

tax

In thousand RON EURO

EuRo 5% 12,691 3,753

EuRo -5% (12,691) (3,753)

Credit risk

The Company is obliged by the law to provide electricity distri-

bution services to new customers without performing a credit

check. For this risk the Company adjusts the carrying value of

receivables based on an aging analysis. For corporate custo-

mers investigations are undertaken for those that may have a

history of late payment and for these the Company requests a

bank guarantee.

For eligible customers the credit risk is assessed before signing

up. Bad debts are compensated by the regulatory authority, re-

cognizing the related costs in tariffs.

The maximum credit risk exposure is equal to the trade receiva-

bles balance at December 31, 2007.

Cash is placed in financial institutions, which are considered at

the time of deposit to have minimal risk of default. Maximum ex-

posure is equal to the carrying amounts of these instruments.

Categories of financial instruments and fair values of financial

instruments

Fair value is the amount at which the instrument could be ex-

changed in a current transaction between knowledgeable wil-

ling parties in an arm’s length transaction, other than in forced

or liquidation sale.

Liquidity risk

The Company’s policy on liquidity is to maintain sufficient liquid

resources to meet its obligations as they fall due. The Company

monitors liquidity through a regular budgeting process.

The table below summarises the maturity profile of the

Company’s financial liabilities at 31 December 2007 and 31 De-

cember 2006 based on contractual undiscounted payments.

31.12.2007 Trade and other

payables

On demand - -

Less than 3 months 156,745 156,745

3 to 12

months

- -

1 to 5 years - -

>5 years - -

total 156,745 156,745

31.12.2006 Trade and other

payables

On demand - -

Less than 3 months 183,302 183,302

3 to 12

months

- -

1 to 5 years - -

>5 years - -

total 183,302 183,302

77

Capital management

The primary objective of the Company’s capital management

is to ensure that it maintains a strong credit rating and healthy

capital ratios in order to support its business and maximise sha-

reholder value.

The Company manages its capital structure and makes adjust-

ments to it, in light of changes in economic conditions.

Litigation

The Company is involved in a series of lawsuits related to ow-

nership title deeds for land on which electricity and distribution

networks lie. For all these litigation the Company sets up provi-

sions depending on the claimants’ demands.

The receivables recovery procedure stipulates the deadline by

which the Company should bring an action against the custo-

mer if he cannot (or does not) pay.

As of December 31, 2007 and 2006, the Company had commit-

ted to the following capital investment program for distribution

activity:

31.12.2007 Financed from

Own resources Total

Investments on installations 33,614 33,614

Project works 647 647

Equipment and other invest-

ment expenses

806 806

total 35,067 35,067

31.12.2006 Financed from

Own resources Total

Investments on installations 39,120 39,120

Production centre /

units development

44 44

Equipment and other invest-

ment expenses

813 813

total 39,977 39,977

These capital expenditure projects are reviewed periodically.

Consequently the actual figures may be different from those

estimated above.

The Company has no operating lease commitments.

Environmental matters

During 2007 the Company developed its program aimed at

monitoring and reducing the pollution level of its installati-

ons. The environment protection expenses incurred by the

Company in 2007 and 2006 were approximately RON 224

thousand (2006: RON 69 thousand). The main expenses

were made for the prevention of water and soil pollution and

for the recovery and protection of land. The accompanying

financial statements do not include any provision for contin-

gent environmental liabilities.

ownership titles for land

According to the Company’s policy, the financial statements

include only the value of land for which title deeds were obtai-

ned as at the date of issuance of these financial statements.

According to Law 99/1999, in case the Company obtains

the title deeds to land after the privatisation, the land will be

considered as contribution in kind of the State or local au-

thorities. In this respect, the Company will increase the share

capital in line with the value of the land, and the beneficiary of

this increase will be the State or local authorities.

According to Law 318/2003, the land on which transformer

stations, electricity distribution networks are located, until

the date of this law being effective in use (August 16, 2003),

32. COmmiTmENTS aNd CONTiNgENCiES


are and remain in the State ownership. Moreover, licenses

holders for exploiting the capacities of production, distributi-

on and transport of electricity will obtain the right to use and

to have access to public facilities in relation with the land,

public or private ownership, located in the neighbourhood of

energetic capacities.

The Law does not prohibit the Company from obtaining title

deeds for land on which conversion stations or electricity dis-

tribution networks are located.

The Company is involved in a series of lawsuits related to ow-

nership title deeds for land on which electricity and distribu-

tion networks lie (lawsuits in progress when Law 318/2003

was effective). The final outcome of these legal actions could

not be estimated as of the date of issuance of these financial

statements.

Lay-off staff indemnities

According to the Collective Labour Agreement between the

Company and the Trade Unions, the Company is obliged to

pay lay-off indemnities to the employees made redundant

based on the number of years of employment with the Com-

pany, as follows:

33. SuBSEQuENT EvENTS

Number of years No. of gross salaries

1 - 5 years 4

5 -10 years 6

10 - 20 years 7

over 20 years 10

other contingencies

The Company is and may become party to certain lawsuits

or governmental actions before various courts and govern-

mental agencies arising from the course of normal business

and involving contractual matters, income and value added

taxes and other matters. These lawsuits or actions may have

a material impact upon the Company’s financial position or

results of operations.

In 2008 the implementation of PROGRES IV project was initi-

ated. Progres IV is a project of company restructuring and has

as a goal structural transformation of the Company not only

through passing from county organization to 3 districts orga-

nization (Oltenia Nord, Oltenia Vest and Oltenia Est), but also

through a new approach on tasks distribution in operational

divisions.

The goals of those transformations are: an increase of the

Company’s profitability, security in customers supplier; fulfil-

ment of performance standards; social responsibility in under

- privileged geographical area; and organizational efficiency

and work performance.

During 2008 the Company has received 441 voluntary termi-

nation requests from the employees, of which 393 requests

were accepted by the Company, 33 requests were rejected

and 15 request are still under consideration. The gross value

of compensatory payments for the 393 employees with accep-

ted requests for voluntary termination from the company were

estimated to be RON 17, 206 thousand, and will be paid in

2008.

For the implementation of the project, after the registration of

the voluntary termination leave request, a 91 employees will

be included in the procedure of collective dismissal and also

there will be 90 available positions, with possibility that, some

of those dismissed may be transferred to other available po-

sitions.

79

ORGANIZATIONAL sTRUCTURE

General meeting CEZ Romania

bod CEZ Romania

CEo

Communication & PRCorporate affairsProject OfficeFinance Office Management

Distribution NetworkManagement

Shared ServicesProcurementand Logistics

BusinessDevelopment

CEZ RomânIA

OrgaNiZaTiONaL STruCTurE

81

General meeting vânzare

bod CEZ vânzare

CEo

Administrative& Financial

Support ServicesStrategy

& Marketing Sales

New marketsdevelopment

Craiova Area

Vâlcea Area

Piteşti Area

CEZ dIstRIbuţIE

CEZ vânZARE

OrgaNiZaTiONaL STruCTurE

General meeting CEZ distribuţie

bod CEZ distribuţie

CEo

Administration& Finance

Network Planning& Management

Network Operations& Maintenance

Strategy &Asset Development

Metering

ORGANIZATIONAL sTRUCTURE

General Meeting CEZ Servicii

CEO

Bod CEZ Servicii

Company Administration& Departments reporting directly to CEOHuman Resources DIRECTIONFinancial DIRECTION Customer Services DIRECTIONIT & Telecom. DIRECTION

User Support Manager

Telco Manager

Payroll & Motiv. Coordinator

Customer Relations Center Manager

Billing Manager Personal Admin. Coordinator

Career Mgmt Coordinator

Debts ManagerKey Account Manager

(1=CEZ R, 1=CEZ D, 1=CEZ V)

Quality & Environment +Safety & Fire Protection Officer

Office Manager

Internal Audit Officer

CEO's Assistant

Legal Officer

Interpreter

Treasury Senior Manager

Controlling Senior Manager

Accounting Senior Manager

CEZ sERvICII

83

term description

sIsE, sIsEE Maintenance and Energy Services Branch

of S.C. Electrica Serv. S.A.

AnRE The National Authority for Energy

Regulation

bmp Measurement and Protection Unit

CCm Collective Labor Contract

CEt Thermal Power Plant

CFR Romanian Railroad Company

CLA Collective Labour Agreement

Cn National Company

Cpt Own Technological Consumption

EbIt Earnings Before Interests and Taxes

EbItdA Earnings Before Interests, Taxes,

Depreciations and Amortization

EvA Economic Value Added

hG Governmental Decision

IAs International Accounting Standards

IFRs International Financial Reporting Standards

Int Improvement of Voltage Level

IQnet International Quality Network

IRE Electrical Networks Enterprise

Iso The International Standards Organization

kvA kilo Volt Ampere

LEA Aerial Electric Power Grid

LEs Underground Electric Power Grid

mhC Small Hydro Power Plant

mmGA The Ministry for Environment and

Water Management

ohsAs Occupational Health and Safety

Assessment Series

oJt County Office for Tourism

opCom The Romanian Electricity Market Operator

ots Transmission System Operator

ouG Emergency Government Ordinance

pCb Poly Chlorine Biphenyl

pRAm TC Protections, Relays and Measurement

Devices - Telecommunications

pt Transformer Point

ptA Aerial Transformer Point

pZu The Day-Ahead Market

RoA Return on Assets

RoE Return on Equity

RoIC Return on Invested Capital

sEn The National Power System

sIm The Integrated Management System

sn CFR Romanian National Railway Company

sR En Iso Romanian Quality Standards in Compliance

with ISO Standards

sRAC National Committee for Quality Assurance

gLOSSary Of TErmS aNd aBBrEviaTiONS

Key Figures method used to Calculate Key Figures

Return on Invested Capital (ROIC)

Adjusted EBIT x (1-corporate inco-me tax) / Average invested capital

Return on Equity (ROE)

Net Profit after tax / Average shareholders’ equity

Return on Assets (ROA)

Net Profit after tax / Average total assets

EBIT margin EBIT Turnover

Debt / Equity Debt / Shareholders’ equity

Total indebtedness (provisions excluded)

(Liabilities + Other liabilities - Provisions) / Total liabilities and equity

Long-term indebtedness

Long-term borrowings / Total liabilities and equity

Current ratio Current assets / Current liabilities

Operating cash flow to liabilities ratio

Operating cash flow / Liabilities

Assets turnover Total revenues / Total assets

Coverage of non-current assets

(Shareholders’ equity + Long-term liabilities) / Fixed Assets

Extent of depreciation Depreciation / Total fixed assets

mETHOd uSEd TO CaLCuLaTE KEy figurES

iNfOrmaTiON fOr SHarEHOLdErS aNd iNvESTOrSContacts

General manager

Gabriel NEGRILĂ

Tel.: +40 251 40 50 00

e-mail: [email protected]

Financial director

Daniel RĂDUţ

Tel.: +40 251 40 54 00


Communication and public Relation director

Maria ANDREI


Statutory Declaration:

I hereby declare that the information presented in the Annu-

al Report is factual and that no material circumstances have

been omitted or distorted.

Gabriel nEGRILĂ

General manager

CEZ distribuţie s.A.

pErSONS rESpONSiBLE fOr THE aNNuaL rEpOrT

Documents

CEZ ROMANIA GROUP...Litigations 25 the domestic electricity market 26 CompAnIEs’ pREsEntAtIon wIthIn CEZ RomAnIA GRoup 31 CEZ România 31 CEZ distribuţie 32 operation of distribution