Electrica Oltenia S.A.Annual Report2006
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 2011
CEZ Group
Energy without borders
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 2012
Electrica Oltenia S.A. is a joint stock company based in
Romania and is the main supplier of electricity in the counties
of Olt, Dolj, Gorj, Vâlcea, Arge[, Mehedin]i and Teleorman.
Since 2005, CEZ, a.s. has been the majority shareholder (51%)
of the Company.
The Company has 249 transformation stations and
51 thousand kilometers of power lines (0.4 kV and 110 kV).
Electrica S.A., a state owned company, used to be the
Company's sole shareholder. In October 1, 2005, ČEZ, a.s.
became the majority shareholder (51%) in the Company, with
Electrica S.A. retaining the remaining 49%. ČEZ, a.s. is based
in the Czech Republic, and its registered address is Duhová
2/1444, Prague 4, 140 53, Czech Republic.
On September 7, 2006, the Shareholders' General Assembly
decided to alter its ownership structure, and ČEZ, a.s. was
taken over by ZAPADOCESKA ENERGETIKA, a.s.,
SEVEROMORAVSKA ENERGETIKA, a.s. and
VYCHODOCESKA ENERGETIKA, a.s., with each entity taking
a single share in the Company.
In October 2006, 12% of Electrica S.A.'s shares in the
Company were transferred to S.C. Fondul Proprietatea S.A.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 2013
Electrica Oltenia S.A.in 2006
1,348,905Revenue
(thousand RON)
11.40ROIC
(Return on Invested Capital)
(%)
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 2014
95,203Net income
(thousand RON)
-61,553EVA
(Economic Value Added)
(thousand RON)
4.48ROA, net
(Return on Assets)
(%)
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 2015
CEZ Group2
CEZ Group
CEZ Group Territory
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 in the region 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 they are also a significant part of the
stock exchange indexes there. The company's largest
shareholder is the Czech Republic. Over the past few years,
ČEZ, a.s. has become one of the largest companies,
by market capitalization, in this entire region.
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 markets of Central and
Southeastern Europe.
Operational Excellence
The first pillar for fulfilling the CEZ Group's vision is operational
excellence through continual improvements in efficiency.
Increased productivity, cost savings, and improvements in the
services we provide comprise the foundation for sustained
growth in the company's market value and its competitiveness.
CEZ Group began pursuing integration and efficiency
improvements in the Czech Republic with the project VIZE 2008,
whose primary goal was to transform the legacy organization,
which was based on geographically defined subsidiaries,
into a standard process-based organization and implement
unbundling. The requirement of Czech and European Union
legislation to separate, or “unbundle”, the licensed and regulated
activity of distribution from the sale of electricity was fulfilled
at the beginning of 2006. Since 2003, VIZE 2008 and
subsequent changes to the organization and optimizing of
individual processes have yielded a cumulative savings of
CZK 7.9 billion. In addition, 2006 saw the commencement of
more key CEZ Group projects designed to focus companies
more on the customer, improving internal processes toward
this end, developing human resources, and thereby bringing
about a major improvement in the quality of customer services.
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 the markets of Central and Southeastern
Europe, where we can best employ our unique experience in
managing an electricity conglomerate during a period of
transition to a liberalized power market and unbundling of
regulated activities from the rest of the conglomerate.
Successful acquisitions in Poland, Bulgaria and Romania have
opened up new markets for CEZ Group. The Group's
subsidiaries in Hungary and Serbia have gained a solid foothold
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 quickly
integrating new companies into the Group and implementing
best practices in both core and ancillary processes.
Plant Portfolio Renewal
The third pillar for achieving CEZ Group's ambitious goal is the
renewal, or retrofitting, of our existing power stations. Currently
documentation is being prepared for a complete retrofit of the
brown coal-fired Tušimice II Power Station in the Czech
Republic, and the realization of the project is slated to begin in
June 2007. Another big project is the construction of a new
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 2
CEZ Group 3
660 MW brown coal-fired plant in the Ledvice Power Station
compound in North Bohemia. In this project, documentation
for administrative proceedings has been completed.
A third project – the complete retrofit of Prunéřov II Power
Station – has also been commenced.
The increased efficiency of the retrofitted and new coal-fired
power stations will increase fuel efficiency by 15 – 25%
compared to the technology currently in use. At the same time
there will be a reduction in the emissions of the gases produced
by coal combustion. The reduction in CO2 emissions is in line
with the reduction in fuel consumption, i.e. 15 – 25%. Emissions
of nitrogen oxides will be cut by approximately 60%, while
sulfur dioxide emissions will fall by roughly 50%.
Plant renewal is also taking place in the Republika Srpska in
Bosnia and Herzegovina, in the form of a joint venture.
Renewal of plants in Poland is in the planning stage.
CEZ Group is interested in developing similar activities in the
target territory of Central and Southeastern Europe and is
participating in tenders toward this end.
Corporate Culture
To accomplish these demanding goals in a long-term,
sustained fashion, CEZ Group will need to systematically
develop its corporate culture and human resources.
The corporate culture is based on the following seven
key principles:
1. creating value while maintaining safety standards,
2. individual responsibility for meeting ambitious targets,
3. building unity within CEZ Group,
4. developing human potential,
5. creating an international organization,
6. accepting constant change,
7. moral integrity.
Corporate Citizenship and Environmental StewardshipCEZ Group's business is governed by strict ethical standards
that include behaving responsibly toward society and the
environment. 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, CEZ Group
commenced two major environmental initiatives in 2006: first,
the disbursement of proceeds from the sale of Green Energy
to fund third-party projects for developing renewable sources
of energy and, second, a public declaration of CEZ Group's
contribution toward sustainable development. One of the main
points of the declaration is a pledge to utilize gains realized on
sales of CO2 allowances saved by investing them in
technologies that protect the environment.
Anticipated Commercial and Financial Situation in 2007
In 2007, CEZ Group anticipates continual rapid growth
in commercial performance, driven by the successful
implementation of strategic initiatives (operational excellence,
international growth, plant portfolio renewal) and changes
in the electricity markets (in particular, growth in wholesale
electricity prices). In view of the above, consolidated net
income is expected to be up over 24% compared to 2006
(i.e. more than CZK 35 billion) and income before other
income (expenses) and income taxes, depreciation and
amortization (EBITDA) are to rise by more than 12%
(i.e. to over CZK 70.9 billion). The aggregate contribution of
foreign operations to EBITDA is expected to be 19% higher,
i.e. a minimum of CZK 5.8 billion.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 3
Contents
Key Figures 6
Important Events of 2006 and 2007 Up to Annual Report Closing Date 7
A Message from Mr. Jan Veškrna 10
Directors and Officers 12
Financial Performance 18
Revenue, Costs and Earnings 18
Structure of Assets 19
Liabilities and Equity 20
Financial Risk Management Politics 20
Procurement and Supply of Electricity 22
Main Types of Customers 22
Customer Headcount 22
Sales Performance in 2006 22
Sales to End Customers in 2006 22
The Regulatory Framework for the Romanian Wholesale Energy Market 23
The Distribution Grid Operation 26
Strategic Objectives of Electrica Oltenia S.A. 27
Capital Expenditure 30
Integrated Management System for Quality - Environment - Security and Work Health 33
Environmental Protection 34
Shareholding and Securities 35
Human Resources and Social Policy 38
Workforce Size and Composition 38
Social Policy 39
Social Expenditure 39
On the Job Training Programmes and Courses 39
Donation and Sponsorship Programme 40
Litigations 40
Electrica Oltenia S.A. Contents4
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 4
Contents Electrica Oltenia S.A. 5
Independent Auditors’ Report 41
Financial Statements as at and for the Year Ended December 31, 2006 42
Balance Sheet 42
Income Statement 43
Statements of Changes in Equity 44
Cash Flow Statements 45
Notes to the Financial Statements 46
Corporate Information 46
Significant Accounting Policies 47
Property, Plant and Equipment 54
Intangible Assets 56
Other Financial Assets 57
Trade Receivables 57
Receivables from Related Parties 57
Cash and Cash Equivalents 58
Shareholders’ Equity 58
Long Term Liabilities to Related Parties 60
Deferred Income 60
Trade Payables 61
Short Term Liabilities to Related Parties 61
Other Current Liabilities 61
Provisions 62
Sales of Electricity 63
Other Operating Revenues 64
Electricity Purchased 64
Materials and Supplies 64
Repairs and Maintenance 64
Salaries, Wages and Other Employee Benefits 65
Depreciation, Amortization and Impairment Charges 65
Financial Income, Net 65
Other Operational Expenses 66
Income Taxes 66
Related Parties 68
Number of Employees 69
Financial Risk Management Objectives and Policies 69
Commitments and Contingencies 70
Restatement of Comparative Figures 72
Subsequent Events 72
Glossary of Terms and Abbreviations 73
Method Used to Calculate Key Figures 74
Information for Shareholders and Investors 75
Information on Persons Responsible for the Annual Report 76
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 5
Electrica Oltenia S.A. Key Figures6
Key Figures
Key Figures
units 2004 2005 2006
Employee headcount as of December 31 number 2,930 2,969 2,971
Revenue thousand RON 1,299,385 1,292,436 1,348,905
out of that: electricity thousand RON 1,227,877 1,126,885 1,120,448
EBITDA thousand RON 235,961 166,949 245,706
EBIT thousand RON -83,219 65,582 143,025
Net profit thousand RON -131,615 73,017 95,203
Total assets thousand RON 1,612,971 2,078,250 2,192,791
Equity thousand RON 1,088,140 1,599,117 1,728,087
Loans thousand RON 48,381 11,635 0
Loans / Equity % 4.45 0.73 0
Investments thousand RON 63,159 103,265 208,792
Operating cash flow thousand RON 44,381 129,708 107,568
Sales area km2 41,828 41,828 41,828
Electricity sale GWh 5,261 4,145 3,852
Eligible consumers GWh 0 53 397
Captive consumers GWh 5,261 4,023 3,048
Commercial GWh 4,238 2,945 2,274
Households GWh 1,023 1,077 1,171
Other sales GWh 0 69 407
Number of consumption points number 1,386,333 1,394,321 1,370,017
Eligible consumers number 191 392 134
Captive consumers number 1,386,142 1,393,929 1,369,883
Commercial number 94,812 96,301 83,442
Households number 1,291,330 1,297,628 1,286,575
Peak load MW 1,002 992 1,292
Grid extension length km 50,375 50,321 50,792
of which: high voltage km 3,512 3,506 3,535
medium voltage km 19,688 19,640 19,624
low voltage km 27,175 27,175 27,633
Number of conversion stations number 10,214 9,985 10,089
of which: own number 10,214 9,985 10,089
owned by third parties number 0 0 0
ROIC (Return on Invested Capital) % -6.81 3.63 11.40
EVA (Economic Value Added) thousand RON -221,266 -56,800 -61,553
ROE, net (Return on Equity) % -13.8 5.17 5.70
ROA, net (Return on Assets) % -9 3.76 4.48
EBIT margin % -6.4 5.07 10.89
Debt / Equity % 4.45 0.73 0.00
Debt/ EBITDA % 20.50 6.97 0.00
Current ratio % 80.41 224.08 236.44
Operating cash flow to liabilities ratio % 8.46 27.07 23.15
Asset turnover 1 0.81 0.62 0.62
Coverage of non-current assets % 94.74 126.18 125.22
Extent of depreciation % 24.06 7.18 6.73
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 6
Important Events of 2006
February
the official start of the Unbundling project.
March
selection of the Unbundling project team and the beginning of
an analysis of possible scenarios.
May
the management team of CEZ Romania visits the seven
subsidiaries of the company to explain to employees the
need for the Unbundling process.
June
Administration Council approves the partial separation that
generates two companies: CEZ Distribu]ie and CEZ Vånzare,
final stage of “Electrician’s Trophy” contest in Electrica
Oltenia,
initiation meeting of “Centralizing the financial function” (SSC)
project,
project initiation meeting for the new reading-invoicing-
collection in Electrica Oltenia.
July
national “Electrician’s Trophy” contest.
7
Important Events of 2006 and 2007 Up to Annual Report Closing Date
August
opening meeting for the implementation of the new ERP +
CIS software.
September
the second stage of the SSC project begins: design stage,
ERP + CIS project: process leaders team visits Prague.
October
first stage of the ERP project: Blueprint stage,
Electrica Oltenia wins “2005 Investor of the Year
in Romania” award.
November
Fondul Proprietatea becomes a shareholder of Electrica
Oltenia (12%),
Shareholders’ General Assembly approves the Unbundling
plan.
December
approval of Blueprints for ERP,
the CEZ Romania managerial team tours the region to
explain to employees the need to centralize the
financial function and other internal issues,
meeting in Râmnicu Vâlcea with the 30 largest clients of
Electrica Oltenia,
approval and publication of the separation plan,
optimizing the management of subsidiaries.
Important Events of 2006 and 2007 Up to Annual Report Closing Date Electrica Oltenia S.A.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 7
One of CEZ Group’s commitments during the
privatization process was to introduce best practices
into the distribution sector in Romania.
During 2006, the Company commenced
restructuring projects related to Unbundling, the
centralization of financial services and implementing
the new ERP software.
The general trend is towards the centralization of
administrative functions and introducing modern
technology to improve distribution operations.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 8
CEZ Group is proud to be building its corporate
citizenship in all the countries where it is present. CEZ
affiliates always try hard to build excellent relationships
both with the central authorities and local government.
Electrica Oltenia and its successors will continue to build
on these good relations.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 9
Electrica Oltenia S.A. A Message from Mr. Jan Veškrna
CEZ Romania, part of CEZ Group, one of the most important
electrical power producers, suppliers and distributors in
Europe, both in terms of operating capacity and in the number
of clients served, is beginning a very important year for its
consolidation and expansion plans. CEZ Romania holds a
majority stake in Electrica Oltenia, the shareholding structure of
which is as follows: CEZ 51%, Electrica 37% and Fondul
Proprietatea 12%.
Electrica Oltenia was declared “The best investor of 2005” by
the Romanian Chamber for Commerce and Industry in October
2006.
Posting good financial results, Electrica Oltenia reported a net
profit of 95,203 thousand RON for 2006, 0.22% less than its
target, and 37.14% more than last year's profit. This
substantial growth was due to revenue from the sale of
electricity, which grew by 4.37%; since the volume of power
sold was down by 7%, we can conclude that other sales
revenue are responsible for this development.
The steady plan for investment we made at the very beginning
has been totally and successfully implemented; moreover, the
plan was surpassed by 13%. As a result of the dedication
shown by CEZ Romania team, the plans for developing our
business are ongoing, even though the privatization process
has now been completed.
CEZ Romania is carrying out its most ambitious plan yet - the
project LIFE IMO (Integration management office). The principal
aim of this project is the reunification, supervision and
assessment of all separation and restructuring activities in
which CEZ Romania has been involved in this period. Basically,
the LIFE project gathers under its umbrella the restructuring
and unbundling project which is being carried out in order to
comply with European Directive 2003/54/EC on the unbundling
of businesses in the energy sector, which must be
implemented in Romania by July 1, 2007. To meet the
demands of the European Union, we have decided to separate
the distribution operator from other operations which do not
legally, functionally or from an accounting point of view involve
distribution.
We are looking to consolidate CEZ Group in Romania. I fully
trust that the future companies of CEZ Romania will lead the
Romanian energy market.
Jan Veškrna
Chairman of the Board of Directors
A Message fromMr. Jan Veškrna
10
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 10
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 11
Directors and Officers
Gabriel Negril` (* 1955)
General Director
Graduated in 1981 with a degree in Electrical Engineering from
Timi[oara State University, with a Major in power engineering.
He started his career as an engineer the Municipal Distribution
Centre of the Electricity Networks Enterprise of Târgu-Jiu.
Between 1983 and 1987 he headed the Operations
Department and from 1987 to 1998 he was the Head of the
Supply Department. He gained broad experience in both of the
company's main areas of business - the distribution and supply
of electricity. Throughout this period, he participated in training
in the field of repair optimisations (1984), and management
(1984, 1988, 1992, 1994, 1999). Between 1998 and1999 he
worked as the Chief Engineer of the Development Department,
and in 1999 he became the Head of Distribution Department in
S.D.F.E.E. Târgu-Jiu. He held this position until 2001, when he
joined the managerial team of D.F.E.E. Electrica Oltenia, as
Technical & Development Director.
In 2003 he was appointed Project Manager for implementing
the SAP R/3 Application of the Oltenia subsidiary. Between
May 23, 2005 and October 31, 2005 he regained his position
at Târgu-Jiu, as Chief Engineer of the Distribution Department,
and, since November 1, 2005, he has been the General
Manager of Electrica Oltenia S.A.
Emi Mitrofan (* 1950)
Financial Director
Obtained a degree in Commerce from the Academy of
Economics in Bucharest in 1973, and began work as an
economist for OJT Drobeta. In 1976 he was transferred to IRE
Drobeta where, between January 1, 1983 and June 1, 2006,
he coordinated financial and accountancy operations, as chief
accountant (1983-1991 and 2002-2006) and as economic
director (1991-2002).
During this time, he also completed training courses in politics
and energy management (1999), managerial accounting (2001)
and the new accountancy system harmonized with international
standards (2001). Since June 1, 2006, he has been Financial
Director of Electrica Oltenia S.A.
Electrica Oltenia S.A. Directors and Officers12
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 12
Vicen]iu Alexandru (* 1947)
Technical and Development Director
Obtained a degree in Electrical Engineering 1969 from Timi[oara
State University. He started his career as an engineer at the
Electric Networks Enterprise in Craiova, in the High-Voltage
Section, where he worked until 1972. Between 1972 and 2005
he worked in the PRAM-TC Section, as Head Engineer (1978),
Head Specialist Engineer (1988), Deputy Head of Department
(1991) and Head of the PRAM-TC Section (1998). Throughout
this time he took part in training in PRAM and automation (1974,
1979, 1985, 1989), and participated in specialist courses in
power engineering (1977, 1987) and management (1997, 1998,
1999). Since December 2005 he has been theTechnical &
Development Director of Electrica Oltenia S.A.
Board of Directors
Jan Veškrna (* 1965)
President
Obtained a degree in Microelectronics from the Faculty of
Electronics in Brno. After graduation, in 1989, he started his
career as design engineer for CHEPOS Engineering&NBS
company in Brno, as part of the design group for technological
processes of automated control systems. In 1990 he finished
his postgraduate classes in France (EN SIC Nancy) in the field
of Chemical Engineering (“Diplôme de génie chimique“).
Between 1990 and 1995, in his capacity as a design engineer,
he took part in the creation of the following investments:
Central Refinery Iraq, Vacuum Distillation Unit Egypt Suez,
Alumina Plant Project of IRAN, Hydrotreater Charge Heater
Syria Homs, as well as in a whole series of investments in the
Czech Republic in the energy and petrochemical fields. Since
1996 he has been General Manager of ABB Power Plant
Control, the main shareholder of which was the German firm
KWL Mannheim. This company operated exclusively in the
energy sector, supplying monitoring systems and setting up
power and low power facilities, both for the internal market and
for export to Iran, India, Germany, Austria, Poland, Russia, The
Netherlands, Great Britain and Slovakia.
In 1999, Mr. Veškrna was appointed commercial director of
DALKIA, being in charge of selling power, heating and systems
services. He was a member of the strategic planning team, as
well as a member of the Managing Committee. In 2003 he was
named Commercial Director and he became a member of the
Managing Board of Severomoravská energetika, a. s. (Northern
Moravia Energy Co.), part of the CEZ Group. In 2004 he
became the Chairman of the Managing Board and the General
Manager of Středočeská energetická, a.s. (Central Czech
Energy Co.), which is also a member of CEZ Group. In 2005 he
began working for ČEZ, a.s., as Country Manager for Romania.
Directors and Officers Electrica Oltenia S.A. 13
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 13
Martin Pacovský (* 1973)
Member
Obtained a degree in Finance and Accounting from the faculty
of Economics, in Prague, and an M.A. in Business
Administration from The Rochester Institute of Technology.
He has worked for DELTAX Systems, a.s, where he started as
Chief Accountant and continued as Chief Financial Officer. In
LAUFEN CZ s.r.o. (sanitary ware producer, member of the
LAUFEN Group, Switzerland) he was CFO responsible for
Eastern Europe, and in NKT CABLES, a.s. (Danish cable
producer) he worked as a CFO for the Czech Republic and as
IT Manager for Eastern Europe. In March 2005 he joined CEZ
Group specifically for the project for restructuring Electrica
Oltenia S.A.
Luboš Pavlas (* 1957)
Member
After being Chief Executive Officer (CEO) of Pražská
teplárenská, a.s., Mr. Luboš Pavlas decided to come to work
for ČEZ. He is currently using his broad experience and know-
how to support the international expansion of the company,
working with of the managerial team in Romania. Until this year,
Mr. Pavlas was the Chairman of the Executive Council of the
Heating Companies Association, and Chairman of the Energy
Employers' Association in the Czech Republic.
Electrica Oltenia S.A. Directors and Officers14
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 14
Tudor {erban (* 1947)
Member
Obtained a degree in Power Engineering 1973 from the Faculty
of Electrical Engineering at Ia[i Polytechnic Institute. He is
currently working on his doctorate at the Polytechnic Institute
of Bucharest.
Between 1973 and 1999 he worked for Electric Networks
Enterprise in Constan]a, where he rose from engineer to
General Manager (1996-1999). Between 1999 and 2001 he
was General Manager of Electrica S.A. Bucharest, where he
also worked as a Consultant (2001-2005). Now he works as
Technical & Development Director of Electrica S.A. Bucharest.
Previously, he also been President of the Romanian Energy
Board C.I.G.R.E. (1999), President of the Romanian Energy
Employers (1999), Vice-president of ELPEGA Employers
(1999), President of the Romanian Energy Distributors and
Transport C.I.R.E.D. (2000).
In 2000, The Ministry of Industry and Resources awarded him
the Order of Merit, with the title “Knight for outstanding
achievements in the area of energy systems”.
Dan C`t`lin Stancu (* 1963)
Member
Graduated from the Faculty of Electric Engineering of the
Polytechnic Institute of Bucharest (1982-1988), then obtained an
M.A. in Business Administration” in England at the Codecs-Open
University and a “Professional Certificate in Management” (2002-
2003) and a “Diploma in Management” (2004-2005). He worked
in Electrica Muntenia Sud S.A. as Executive Manager (2001-
2004), as Project Manager of the SAP Application for the same
subsidiary and, since August 2005, he has been Deputy
Privatization Manager in Electrica S.A. Bucharest.
He has made a significant contribution to the SAP application and
to the development of the customer relations system. He has also
participated in projects involving the SRAC-IQNet certification for
the Quality System of Management ISO 9001/2000 at Electrica
Muntenia Sud, as well as in the privatization of Electrica S.A.
branches.
Directors and Officers Electrica Oltenia S.A. 15
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 15
The Company's share capital consists of 71,523,469
authorized, issued and fully paid shares with a
nominal value of RON 10 each.
As of December 31, 2006, the Company has tax
qualifying revaluation reserves amounting to
approximately RON 13,750 thousand arising out of
the revaluation of its tangible fixed assets as of
December 31, 2003.
By April 2006, the company repaid all Electrica S.A.’s
loans, thus eliminating a possible financial risk.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 16
Financial Risk Management Politics is central to the
strategic management of Electrica Oltenia S.A. Its main
objective is to identify and address the risks related to
the company's financial activities, focusing on
preventing and eliminating potential negative influences.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 17
Electrica Oltenia S.A. Financial Performance18
Revenue, Costs and Earnings
In 2006 the company posted a net income of 95,203 thousand RON,
0.22% below target, and 37.14% higher than the previous year. This
rise in profit was generated by revenue from the sale of electricity,
which rose by 4.37%; as the volume of electricity sold decreased by
7%, we can conclude that other operating revenue generated this
development.
For 2007, a net profit of 127,618 thousand RON was planned for
the Romanian companies in CEZ Group. Operational revenue was
13.04% above target and up 4.37% relative to 2005, while
operational costs were 1.71% lower than the previous year. The
target for operational costs in 2007 is 1,176,181 thousand RON,
8.38% higher than the target in 2006, and 2.46% lower than the
one achieved in 2006.
The greater part of operational costs - 66% - derived from the
purchase of electricity, followed by depreciation - 8%, labour
costs- 8%, repairs and maintenance - 8%, materials - under 1%,
and other operational costs - 9%.
Labour costs exceeded their 2006 targets by 1.71%, due to a 5%
wage increase for all employees from March 2006, promotions
during the year and bonuses for ECO projects that were not
accounted for when the budgets were drafted. A 60% increase in
labour costs is estimated for 2007, due to growth in business and
a 40% rise in employee numbers, as well as possible severance
payments.
Maintenance expenses increased in 2006 by 1% to 102,692
thousand RON; a 5% decrease of the maintenance expenses is
planned for 2007.
Financial Performance
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 18
In 2006, the costs of materials fell by approximately 55% through improved management of expenditure.
The company reported a 5,609 thousand RON loss on its financial operations due to exchange rate differences, caused by the
appreciation of the LEU against the EURO, from 3.6771 RON/EURO on December 31, 2005 to 3.3817 RON/EURO on December 31,
2006.
Summary of Financial Information for 2005-2006
units 2005 2006
Total assets thousand RON 2,078,250 2,192,791
Fixed assets thousand RON 1,411,049 1,525,876
Current assets thousand RON 667,201 666,915
Total liabilities thousand RON 2,078,250 2,192,791
Shareholders’ equity thousand RON 1,599,117 1,728,087
Total debts thousand RON 479,133 464,704
Operating revenue thousand RON 1,292,436 1,348,905
Operating expenditures thousand RON 1,226,854 1,205,880
Operating result thousand RON 65,582 143,025
Financial net profit / loss thousand RON 18,221 -5,609
Gross Profit thousand RON 83,803 137,416
Income taxes thousand RON 10,786 42,213
Net Profit thousand RON 73,017 95,203
Structure of Assets
At the end of 2006, total assets were worth 2,192,791 thousand RON. Due to investments, that doubled in 2006 compared to the
previous year. Tangible fixed assets went up to 116,480 thousand RON, representing almost 8% of the level reported at the end of
2005. Intangible fixed assets decreased slightly, by 709 thousand RON.
Assets under construction reached 666,915 thousand RON, an increase of below 0.1% on the previous year, but their structure was
significantly changed. Receivables were valued at 43,765 thousand RON (an increase of approximately 22% on the previous year) to the
detriment of cash and cash in bank, that fell 11.2% (51,936 thousand RON). This change suggests the collection of receivables. The
value of stocks of materials rose from 3,385 thousand RON to 3,992 thousand RON, due to decreased consumption.
Structure of Assets
units 2005 2006
Tangible and intangible assets thousand RON 1,406,551 1,522,322
Financial assets thousand RON 4,498 3,554
Current assets thousand RON 667,201 666,915
Total 2,078,250 2,192,791
Financial Performance Electrica Oltenia S.A. 19
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 19
Electrica Oltenia S.A. Financial Performance20
Liabilities and Equity
In 2006, the shareholders' equity in the company did not change, but the capital increased through an increase of profit. The premium
on capital registered last year remained unchanged at 114,095 thousand RON, although changes in the shareholding structure had
occurred. This suggests that the new shareholders bought the shares at their nominal value.
Overall, the company's liabilities rose to 464,704 thousand RON, 3% less than in 2005, and long-term liabilities amounted to 182,636
thousand RON. Current liabilities decreased from 297,756 thousand RON in 2005 to 282,068 thousand RON in 2006, of which 88,092
were accruals. Electrica Oltenia did not issue bonds, while the bank loans taken by Electrica S.A. before its privatization were paid in full
in April 2006.
Liabilities and Equity Structure
units 2005 2006
Share Capital thousand RON 799,033 799,033
Reserves, retained earnings and net result for the period thousand RON 800,084 929,054
Trade and other payables, deferred tax, long term liabilities thousand RON 363,520 313,320
Accruals, deferred income and prepaid expenses thousand RON 115,613 151,384
Total 2,078,250 2,192,791
Financial Risk Management Politics
In 2006, the project to reorganise Electrica Oltenia began: the project to separate its sales and distribution operations, the
centralization of its financial functions and implementation of the new ERP information system. For all these projects, Electrica Oltenia
has used the services of auditors and consultants, some internationally renowned, others locally.
In April 2006, the company repaid all Electrica S.A.'s loans, thus eliminating a possible financial risk. Other risks that can significantly
affect Electrica Oltenia's results are: exchange rate risks, credit risks, litigation and severance payments.
The Financial Risk Management Policy is central to Electrica Oltenia's management strategy. Its main objective is to identify and
address risks arising from the company's financial activities, focusing on preventing and eliminating any potential negative influences.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 20
The Exchange Rate Risk
Electrica Oltenia seeks to implement the most effective financial strategy possible, taking into account two main scenarios:
1. The passive approach: it is too difficult to predict exchange rates accurately and Electrica Oltenia could opt to take no measures
to protect itself against this risk.
2. The active approach: there is a good chance of being able to predict exchange rates and Electrica Oltenia opts to take measures to
protect itself, as below:
a) The exchange rate is established in advance - Electrica Oltenia gets the opportunity to decide the exchange rate in advance, for
transactions, sales and purchases.
b) The option of choosing the exchange rate: Electrica Oltenia retains the option of protecting itself totally or partially against
unfavourable fluctuations in the exchange rate, while at the same time retaining the option of reaping the advantages of a
favourable fluctuation.
The Credit Risk
Electrica Oltenia is compelled by law to provide new consumers with electricity distribution services, without assessing their financial
situation. To cover this risk, Electrica Oltenia constitutes accruals based on the aging of receivables. If the client has a poor credit
history, Electrica Oltenia requires a bank guarantee. For eligible consumers, the credit risk is evaluated prior to signing the contract.
The losses in receivables are compensated for by the regulation authority, which takes these costs into account when setting tariffs.
Litigations
The company is involved in a series of litigations regarding the ownership of land crossed by electricity distribution grids. In these
litigations, Electrica Oltenia has constituted provisions based on the demands of the claimees. The procedure for the collection of
receivables indicates the term in which Electrica Oltenia may take action against consumers who are unable (or unwilling) to pay.
Compensatory Salaries
Under the Collective Labour Agreement between unions and the Company, Electrica Oltenia must make severance payments to
employees who are fired, on the basis of the employee's number of years of service:
Number of years Number of gross salaries
1 - 5 years 4
5 - 10 years 6
10 - 20 years 7
over 20 years 10
Due to this situation, provisions were created.
21Financial Performance Electrica Oltenia S.A.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 21
22
Under license no. 458/29.04.2002, Electrica Oltenia S.A. supplies
electricity to various customers, who are classified into three
major groups: large customers, small customers and residential
customers in the Oltenia region, which is made up of 7 counties:
Arge[, Dolj, Mehedin]i, Olt, Vâlcea and Teleorman.
The Supply of Electric Power is undertaken in the
following fields:
contracting electrical power and building a relationship with
clients, in accordance with the frame contract approved by
ANRE - for captive customers only;
contracting electric power and building relationships with
clients through negotiation (for eligible customers);
purchasing electricity from the wholesale market at optimized
average acquisition costs and forecasting demand for electricity;
supplying electric power to customers, based on voltage type,
customer segment and corresponding price structure;
invoicing electric power to end customers;
collecting payment for electric power sold and establishing
procedures for recovering receivables from customers.
Main Types of Customers
Electrica Oltenia's customers can be grouped as follows:
Captive customers, who cannot choose their electric power
suppliers and who are invoiced at regulated prices;
Eligible customers, who can negotiate their contracts directly
with the license holder;
“Grey” customers, who may to negotiate their contracts, yet do
not avail of this option, and therefore receive their power at the
regulated price.
The distribution service is ensured through contracts between
Electrica Oltenia S.A. and the customer or between Electrica
Oltenia S.A. and the customer's supplier as an distributor, or
between Electrica Oltenia and another distributor for eligible
customers in the areas where Electrica Oltenia is not licensed as a
distributor.
Customer Headcount
At the end of 2006, Electrica Oltenia S.A. had 1,370,017
customers, of which 134 were eligible customers and 1,369,883
were captive customers (54 connected to high-voltage grids,
2,628 connected to medium voltage grids and 1,367,201
connected to low-voltage grids).
Under Government Decision No. 644/2005, the wholesale energy
market was modified as of July 1, 2005 and, as a result, Electrica
Oltenia S.A aimed to increase its number of eligible customers, so
that at the beginning of 2006, Electrica Oltenia S.A had in its
portfolio 16 ECO-eligible customers. At the end of 2006, Electrica
Oltenia S.A. provided electricity at negotiated rates for 134
consumption points, 7 of which were in distribution areas where
Electrica Oltenia was not an supplier of electricity.
Big customers 1,853
Small customers 81,589
Residential customers 1,286,575
Sales Performance in 2006 (MWh)
In 2006 Electrica Oltenia S.A. sold 3,445,253 MWh, as follows:
3,048,340 MWh (88.48%) captive customers, including other
license holders' industrial points of consumption from the area
covered by Electrica Oltenia S.A.;
396,913 MWh (11.52%) to Electrica Oltenia S.A.'s own eligible
customers
Sales to End Customers in 2006 (MWh)
Electrica Oltenia S.A., as a distributor and supplier of electricity,
aims to continuously improve both its relationship with its
customers and the company's image, by increasing the quality of
its services. These consist of professional customer care at all
points of contact with the customer, including meter reading,
simple and easy-to-understand invoicing, and providing an
uninterrupted supply of energy.
Customers connected to high-voltage grids 461,794 MWh
Customers connected to medium-voltage grids 977,275 MWh
Customers connected to low-voltage grids 2,006,183 MWh
Electrica Oltenia S.A. Electricity Procurement and Supply
Procurement and Supply of Electricity
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 22
23Electricity Procurement and Supply Electrica Oltenia S.A.
The Regulatory Framework for the RomanianWholesale Energy Market
1. Romanian Legislation
The Commercial Code for the wholesale energy market,
approved by A.N.R.E. (The National Authority for Energy
Regulation) Decision no. 25/2004;
A.N.R.E. Decision no. 30/2005 on the regulatory framework for
the wholesale energy market;
A.N.R.E. Decision no. 36/2005 for the working framework for
the wholesale energy market;
Energy Law no. 318/2003;
The methodology for setting tariffs for electricity for captive
customers, approved through ANRE Decision no. 11/2005;
The procedure for modifying sums from regulated contracts
concluded between producers and suppliers of captive
customers, approved by A.N.R.E. Decision no. 1007/2006;
The methodology for establishing prices and quantities for
electricity sold by producers through regulated contracts and
the methodology of price settlement for thermal energy delivered
from plants with co-generation groups, approved under
A.N.R.E. Order no. 24/2005;
The regulation of the organization and functioning of the Green
Certificate Market, approved through A.N.R.E. Order no.
22/2006;
ANRE Order no. 37/2006, approving changes in the compulsory
quote of Green Certificates for 2006;
Government Decision no. 958/2005, outlining policy on the
system for promoting electric power obtained from renewable
sources of energy;
The operating procedure - allotting the interconnectivity capacity
of SEN (The National Power System) with neighboring electrical
grids, issued by C.N. Transelectrica S.A.;
Government Decision no. 644/2005 on the liberalisation of the
energy market;
ANRE Order no. 44/2005, on capping prices on the equilibrium
market;
ANRE Order no. 23/2006 on capping prices on the equilibrium
market;
ANRE Order no. 33/2006 on capping prices on the equilibrium
market;
Decision no. 42/2005, approving the regulatory framework for
trading bilateral electrical power contracts;
The framework for the Centralized Market of Bilateral Contracts
for electric power;
A.N.R.E. Decision no. 61/2005 on the regulatory framework for
the wholesale energy market.
2. Regulators on the Energy Market
The Ministry of Economy and Trade
The National Authority for Energy Regulation (A.N.R.E.)
3. The Participants on the Wholesale Energy Market
Electricity producers;
Electricity suppliers
Electricity distributors;
Transmission System Operator / Measurement Operator -
C.N. Transelectrica S.A.;
Electricity Market Operator / Settlement Operator -
S.C. OPCOM S.A.
4. The Structure of the Wholesale Energy Market
The Romanian energy market consists of the following specific
markets:
The bilateral, regulated or negotiated contracts market - the
license holders are free to enter bilateral electric power
transactions, which are made legal through fixed term sale-
purchase contracts;
The Day-Ahead Market (PZU) is a centralized voluntary market in
which one concludes daily firm electric power contracts and
transactions for each period of trading for the corresponding
delivery day, based on the offers sent by its participants; this
market is managed by the electric power market operator;
The Equilibrium Market is a centralized mandatory market for
electricity producers, on which the transport and the system
operator buys and sells active electricity from other suppliers in
order to compensate for deviations between forecast energy
production and actual power consumption;
The technological system services market is a centralized
voluntary market which uses no discriminating market
mechanisms - fixed term tenders and/or bilateral contracts - to
ensure a sufficient quantity of technological system services
available for the Transmission System Operator and for
distribution operators;
The centralized market for the allocation of international
interconnectivity capacities is a voluntary market organized by
OTS (The Transmission System Operator); the allocation is
performed through tenders, separately for imports done through
contracts on periods up to one year and through Day- Ahead
Market transactions;
The Green Certificates Market is a centralized market organized
by OPCOM (The Romanian Electricity Market Operator) in order
to trade Green Certificates, with the purpose of promoting
electric energy produced from renewable sources;
The centralized market of bilateral contracts assigned through
public tender is a voluntary market, organized by electric power
suppliers, where contracts with physical delivery for electric
power are traded among market participants, under specific
rules.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 23
5. The Participation of Electrica Oltenia S.A. in the Wholesale Energy Market
Electrica Oltenia S.A. is licenced to distribute and supply electricity on the wholesale energy market in Romania. It distributes electricity
under license no. 457/29.04.2002, and may supply electricity under license no. 458/29.04.2002. Both licences are granted by A.N.R.E.,
as the statutory authority.
Participation in the Day-Ahead Market (PZU) is ensured by Participation Convention no. 5912/27.06.2005.
Participation in the energy market segment constituted by the Centralized Market of Bilateral Contracts (PCCB) is ensured under
Participation Convention no. 895/19.01.2006.
Participation in the Centralized Market of Green Certificates (PCCV) is ensured under Participation Convention no. 6074/05.05.2006.
On July 1, 2005, the day the Equilibrium Market began to function, Electrica Oltenia S.A. transferred responsibility for equilibrium to the
Part Responsible for Equilibrium (PRE) Electrica S.A.
Energy Market Liberalization in Electrica Oltenia S.A. in 2006 (%)
The Acquisition of Electricity for Sale to Captive Customers and to Cover Grid Losses (Regulated Market)
The acquisition of electric power intended for sale to captive customers and to cover own industrial consumption (CPT) was achieved in
2006 under:
Bilateral regulated contracts for the sale and purchase of electricity;
Bilateral contracts for the sale and purchase of electricity with the purpose of covering own industrial consumption in the distribution grids;
Transactions on the Day-Ahead Market;
Energy ensured by C.N.Transelectrica S.A. as a result of recorded unbalanced energy;
Contracts negotiated between electricity producers and suppliers in order to cover the volumes of electricity not realized through
A.N.R.E. regulated contracts, in the period up to December 31, 2006.
Electrica Oltenia S.A. Electricity Procurement and Supply24
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 24
Electricity Procurement and Supply Electrica Oltenia S.A. 25
For 2006, A.N.R.E. established a portfolio of producers for each supplier to captive customers to ensure the captive customers' demand
for electricity and to cover own industrial consumption for electricity distribution grids.
For Electrica Oltenia S.A. these producers are:
S.C. Hidroelectrica S.A. - producer;
S.N. Nuclearelectrica S.A. - producer;
S.C. Complexul Energetic Rovinari S.A. - producer;
S.C. Complexul Energetic Turceni S.A. - producer;
S.C. Complexul Energetic Craiova S.A. - producer;
Regia Autonom` pentru Activit`]i Nucleare - self-producer;
S.C. CET Govora S.A. - producer;
S.C. Electrocentrale Deva S.A. - producer;
S.C. Electrocentrale Bucure[ti S.A. - producer;
S.C. Termoelectrica S.A. - producer.
Electric Power Purchase Structure in 2006 (%)
Electrica Oltenia S.A. concluded sale-purchase contracts with each of these electricity producers in order to ensure the sale of electricity
to captive customers and contracts to ensure its own industrial consumption.
6. The Purchase of Electric Power for Eligible Customers
In 2006, the purchase of electricity for sale to eligible customers of Electrica Oltenia S.A. was achieved by:
Fixed term bilateral negotiated contracts for the sale and purchase of electricity, closed for determined periods of time, whose contents
are set forth by the parties through direct negotiation, in compliance with the Regulations of the Commercial Code; these contracts can
be concluded with producers or other suppliers, in their capacity as participants on the wholesale energy market;
Bilateral contracts with a foreign partner. For the unfolding of import contracts, both parties must ensure that the necessary
international interconnectivity capacity is met (annexes on ensuring interconnection capacity);
Transactions on the Day- Ahead Market;
Energy provided by C.N. Transelectrica S.A. as a result of recorded imbalances.
SN Nuclearelectrica
Electrica Bucure[ti
Hidroelectrica
Complex Energetic Turceni
Electrocentrale Bucure[ti
Electrocentrale Deva
Complex Energetic Craiova
Complex Energetic Rovinari
Termoelectrica
RAAN
Hidroelectrica-MHC
Day-Ahead Market
S.C. CET Govora S.A.
Other suppliers
0.41% 1.41%1.17%2.43% 9.95%
7.65%
2.55%
4.61%
3.90%
14.68%
25.90%
13.36%
6.61%
5.37%
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 25
26 Electrica Oltenia S.A. The Distribution Grid Operation
In 2006, Electrica Oltenia S.A.'s distribution grid provided a total
volume of 12,028,135 MWh (compared with 2005 - 12,659,325
MWh). The highest hourly peak load, that of 1,292 MW, was
recorded on January 18, 2006 at 7:00 p.m.
From February to May 2006 severe weather caused floods and
landslides that led to numerous incidents in Electrica Oltenia
S.A's distribution grids. Most of these incidents were registered
in the 20 kV and 0.4 kV grids in branches in Craiova, Târgu Jiu,
Drobeta Turnu Severin, Vâlcea, Pite[ti and Slatina (broken
pylons, landslides, and destroyed conductors and insulations).
Average weekly peak load in Electrica Oltenia’s network (MW/week)
The losses coefficient in the distribution grid represents the
difference between the energy received in the system (contour)
and the total energy delivered, measured as a percentage of the
energy received in the system. Among the most important
objectives of the distribution activities are improved safety in
supplying electricity at contracted parameters and the reduction
of own industrial consumption.
Priorities in the Distribution Sector:
Connecting new consumers to the network;
Passing from 6 kV voltage to 20 kV voltage;
Eliminating double transformation;
Reducing the interruption number in the MV (medium voltage)
network by:
– Setting up re-closers;
– Setting up remote control separators;
– Developing SCADA (Supervisory Control and Data
Acquisition);
– Setting up the wire defectometers on medium voltage
cables.
Replacing the storage batteries in transforming stations with
reduced maintenance storage batteries;
Replacing the ceramic insulations from 110 kV transforming
stations bars with composite insulations;
Replacing the VKLF(S) isolators with 110 kV and 20 kV aerial
electric lines made of composite insulations;
Replacing horn arresters with metallic oxide made arresters;
Diagnosing and rehabilitating the power transformers from
transformer stations;
Expanding the tele-management system.
The DistributionGrid Operation
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
734
445
Week
MW
800
700
600
500
400
300
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 26
Strategic Objectives of Electrica Oltenia S.A. Electrica Oltenia S.A.
Strategic Objectivesof Electrica Oltenia S.A.
Unbundling
As part of EU membership, Romania imposed unbundling
requirements on its energy distributors, including Electrica
Oltenia. Under this process, Electrica Oltenia will be divided into 2
separate legal entities containing regulated (CEZ Distribu]ie S.A.)
and non-regulated (CEZ Vânzare S.A.) activities. As part of this
process, the new shared-service company CEZ Servicii S.A. will
be created in order to provide shared services to both CEZ
Distribu]ie and CEZ Vânzare.
Improvements in Efficiency
One of CEZ Group's commitments during the privatization
process was to bring best practices to the distribution sector in
Romania. As part of the implementation of best practices, CEZ
plans to improve the efficiency of its entire operation in Electrica
Oltenia and its successors. The general trend is towards
administrative centralization and the introduction of more efficient
modern technology to improve distribution.
Corporate Citizenship
CEZ Group is proud to build its corporate citizenship in all the
countries where it is present. CEZ affiliates always try hard to
build excellent relationships with both central and local
government. Electrica Oltenia and its successors will continue to
build positive relations.
27
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 27
As of December 31, 2006, cash and cash equivalents
included foreign currency deposits of 254,615
thousand RON, earning interest at a rate of 3.91%.
Among the advantages for clients of Electrica Oltenia S.A.
as a result of implementating the Integrated Management
System, is that their requests and suggestions are
responded to speedily through the imposition of terms and
responsibilities.
At the end of 2006, Electrica Oltenia S.A. had 1,370,017
customers, of which 134 were eligible customers and
1,369,883 captive customers (54 connected to high-voltage
grids, 2,628 connected to medium voltage grids and
1,367,201 connected to low-voltage grids).
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 28
In the long run, through the Environment Management
Programs designed for fixed periods, Electrica Oltenia
S.A. will aim to improve its operations in order to rapidly
prevent its plants from having a damaging effect on the
environment.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 29
30
In 2006 Electrica Oltenia S.A. had an investment programme
financed from internal resources worth 183,276 thousand RON
for distribution activities and 2,306 thousand RON for sales
activities. Putting this programme in place cost 166,676 thousand
RON for distribution activities and 2,282 thousand RON for sales
operations.
Achievements as of December 31, 2006 were as follows:
Value of work units units amount
Investment works financed from internal resources for distribution operations thousand RON 180,406
Investment works financed from internal resources for sales operations thousand RON 1,062
Investment works financed from connection tariff thousand RON 27,322
Total thousand RON 208,791
Putting in Operation at December 31, 2006:
Putting in operation units amount units amount
Putting in operation investment financed from internal resources for distribution operations thousand RON 174,859
Putting in operation investment financed from internal resources for sales operations thousand RON 2,282
Putting in operation investment financed from connection tariff thousand RON 28,914
Total thousand RON 206,056
Main Areas to which Funds were Assigned:
The upgrade of 896.85 km-length low voltage grids and of
39,632 electric taps;
The improvement of voltage level in low voltage grids by
installing 88 new transformer points;
The upgrade of 136.72 km-length medium voltage grids and
the installation of 149 remote control re-closers;
The upgrade of 20.46 km-length high voltage grids;
The upgrading of 11 transformer stations and of 8 connection
points;
199,449 thousand RON has been assigned to the distribution grid.
To comply with Environmental Law No. 137/1995, approved by
Emergency Government Ordinance No. 195/2005, the roofs of
transformer stations were modernized by replacing the asbestos
cement tiles with non-polluting materials, at a cost of 970
thousand RON.
In order to upgrade the informational system, 5,831 thousand
RON were allocated and used to buy computers, laptops,
servers and licenses.
Additional investments of 2,541 thousand RON were made in
equipment, tools and other instruments, appliances and tools,
out of which 1,906 thousand RON was for distribution operations
and 635 thousand RON for sales operations.
In 2006, 625 investments were contracted, worth a total of
225,993 thousand RON.
Capital Expenditure
Electrica Oltenia S.A. Capital Expenditure
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 30
31Capital Expenditure Electrica Oltenia S.A.
The Most Important Investments from the Technical Point of View, Achieved and Functional in 2006 by Electrica Oltenia S.A.,
Consisted of:
1. Upgrading a low voltage electricity grid and connection in V`d`stri]a, Olt county belonging to SDFEE Slatina, with an execution
period of two months and a contracted value of 1,165 thousand RON.
Start-up date: August 17, 2006, upgrading an aerial low voltage electric grid measuring 8.1 km in length, by replacing the classic Al
conductors with twisted conductor type TYIR 50 OLAL+3x70 mmp and upgrading 565 connections.
2. Upgrading a low voltage electric grid, connections and improvement of voltage level in the village of Bârlogu, Negra[i -
belonging to SDFEE Pite[ti, with an execution period of 5 months and a contracted value of 1,055 thousand RON.
Start-up date: August 7, 2006, upgrading 8.3 km of a low voltage electric grid by replacing the classic Al conductors with a twisted
conductor type TYIR 50 OLAL+3x70 mmp, upgrading 272 connections, and setting up a new 100 kVA transformation point and a
0.155 km medium voltage aerial electric grid.
3. Upgrading distribution capacity and improvement of the degree of continuity Stolniceni - Râmnicu Vâlcea - belonging to SDFEE
Râmnicu Vâlcea, with an execution period of 4 months and a contracted value of 1,011 thousand RON. Start-up date: April 27, 2006,
upgrading a 4.5 km low voltage electric grid by replacing the classic Al conductors with a type TYIR 50 OLAL+3x70 mmp twisted
conductor, upgrading 141 connections, and setting up two new160 kVA transformation points and a 2.3 km medium voltage aerial
electric grid.
4. The setting up of automatic re-closers in the medium voltage aerial electric grid belonging to SDFEE Slatina - with a deadline of
2 months and a contract value of 825 thousand RON.
Start-up date: December 22, 2005, assembling 11 automatic re-closers in medium voltage electric grid lines.
5. The retrofit of the 110/20kV transformer station from Ro[iorii de Vede, Teleorman County - belonging to SDFEE Alexandria with
a deadline of 2 months and a contract value of 744 thousand RON.
Start-up date: November 23, 2005, upgrading 11 line cells on 110 kV.
6. The retrofit of the 110/20kV transformer station from Vâlcea Nord, Vâlcea county - belonging to SDFEE Râmnicu Vâlcea, with a
deadline of 2 months and a contract value of 917 thousand RON.
Start-up date: December 7, 2005, upgrading 22 line cells on 20 kV.
7. Upgrading 6 kV feeders supplying PA 1 Motru and passing to 20 kV, Motru, Gorj county - belonging to SDFEE Târgu Jiu with a
deadline of 2 months and a contract value of 640 thousand RON.
Start-up date: November 1, 2006, laying 2.3 km of medium voltage underground electric line.
The Most Important Investments in 2006 (thousand RON)
Investment Plan 2006 Achieved 2006 Plan 2006 Achieved 2006
Rehabilitation of electric grids in order to reduce CPT, Alexandria 2, Teleorman county 768 1,710
Upgrading of electric grid and connection V`d`stri]a, Olt county 1,165 1,249
Upgrading of electric grid and connection Gvardeni]a, Mehedin]i county 1,290 1,229
Upgrading of electric grid and connection Schela Cladovei, Mehedin]i county 1,243 1,148
Upgrading of electric grid and connection Zâmbreasca, Teleorman county 635 1,147
Upgrading of electric grid and connection Strehaia, Mehedin]i county 1,150 1,124
Automatic process of distribution by installing remote control separators and re-closers
in electric grids belonging to S.D.F.E.E Slatina, Olt county 100 1,115
Upgrading of electric grids and correspondent connections PTCZ3 Caracal, Olt county 1,010 1,102
Upgrading of low voltage electric grid, connections and improvement of voltage level village of Bârlogu, Negra[i 895 1,078
Upgrading distribution capacity and improvement of continuity Stolniceni - Râmnicu Vâlcea, Vâlcea county 1,059 1,059
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 31
The main investments which Electrica Oltenia S.A. must make in the coming period:
Upgrading and re-technologizing its 110 kV / MT transforming stations;
Passing from 6 kV voltage installations to 20 kV voltage installations;
Developing an automated distribution system (SAD) by setting up remote control operated re-closers and separators;
Integrating all transformation stations in SCADA;
Replacing ceramic insulation in 110 kV aerial electric grids and 20 kV aerial electric grids with composite-type insulation;
Integral upgrading of aerial electric grids, 0,4 kV underground electric grids and connection;
Expanding the telex-management and monitoring system of electricity quality parameters;
Implementing the GIS system;
Finalizing the CALL CENTRE system;
Implementing a management and customer relation system.
The stated investments should bring about:
An increase in the safety of electricity distribution for all customers;
A reduction of electricity losses;
An improvement in safety in operating electric devices and general operational safety;
Less faults in electrical equipment and shorter interruption of supply to the customers;
Ensuring the quality parameters for electricity supplied in accordance with ANRE regulations;
Decrease in the volumes of electricity not delivered to customers as a result of incidental power cuts;
Reduction of expenses for maintenance and repairs.
Grid Investment Evolution Between 2005 - 2006 (thousand RON):
Research and Development Expenditure
In 2006 the Company had no research and development expenditure.
32
2006
2005
80,000
181,468.79
91,059.00
120,000 160,000 total000,040
Electrica Oltenia S.A. Capital Expenditure
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 32
Integrated Management System for Quality - Environment - Security and Work Health Electrica Oltenia S.A.
Integrated ManagementSystem for Quality -Environment - Security andLabour Safety
The integrated management system (SIM) in the quality -
environment - security and labour safety fields was maintained
and improved under Electrica Oltenia S.A.'s management policy
on increasing customers trust and satisfaction in the quality of
services.
1. Planning consisted in:
customizing the Company's policy for developing the
Unbundling project framework;
ensuring human resources (personnel monitored with
decisions with direct responsibilities regarding SIM) as well as
financial resources;
drafting the management programmes (general objectives and
specific objectives on divisions), of training programmes,
internal audits, process monitoring and improvement);
initiating the identification of main and support processes and
subprocesses of management for the future CEZ companies
(CEZ Distribu]ie, CEZ Vånzare, CEZ Servicii and CEZ Romania);
updating SIM documentation (SIM Manual,19 General
Procedures and some Operational Procedures) under to the new
procedures identified.
2. The very action of maintaining and improving SIM consisted in
the development of business under the requirements in SR EN
ISO 9001/2001, SR EN ISO 14001/1997 and in the second
half of SR EN ISO 14001/2005 and OHSAS/2004.
3. The control and supervision of SIM functioning was done
through:
monitoring processes,
internal audit and external audit processes,
Internal audits of the approved programmes took place and
were performed by trained and certified auditors with
competency in internal and external audits of quality,
environment and work safety under the ISO SR EN
19001/2003 standard. These audits checked the applicability
of all reference standards and of the documents describing the
operations.
External audits: in May 2006 the supervisory audit was
performed by SRAC - Romanian Society for Quality Insurance -
SRAC - a company that also benefits from recognition
agreements with bodies from countries that are members of
IQNet, the International Quality Network..
4. As a result of these monitoring operations and audits,
corrective and preventive action was taken, leading to an
improvement of SIM efficiency and efficacy. The advantages
perceived by Electrica Oltenia S.A. clients as a result of the
implementation of this system are: the speedy response to
their requests and suggestions by imposing terms and
responsibilities; reducing the time taken to address
customers’ complaints; efficient monitoring of the distribution
and supply of electricity at the quality level imposed by
performance standards; preventing environmental pollution as
an general objective and, last but not least, the transparency
imposed by “external communication with the interested
audience” - another requirement imposed by international
standards.
33
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 33
34 Electrica Oltenia S.A. Environmental Protection
Environmental Protection
In 2006, Electrica Oltenia S.A. was involved in environmental
issues, relating to the field of possible damage caused by
electrical distribution and supply on the environment, on
communities, soil, flora and fauna, and that potentially caused by
telecommunications, signalling, and transmission networks in
Oltenia Electrica S.A.'s region. These environmental issues were
identified in order for action to be taken to prevent, reduce and
even eliminate possible or known damage by electrical
installations on the environment.
These actions take place in compliance with:
legal requirements and other requirements related to the
environment: European Directives, Laws, Governmental
Decisions, Emergency Governmental Ordinances, MMGA
(The Ministry for Environment and Water Management)
Regulations and Norms;
requirements of the System of Environment Management: The
SR EN ISO 14001/2004 standard (SR EN ISO - the Romanian
Standard in accordance with International Organization for
Standardization), the Management Policy and Program,
General Procedures, Operational Environment Procedures;
classified list of the environment protection works of
Electrica Oltenia S.A.
To this end, the management of Electrica Oltenia S.A. drew up
an annual action plan for environmental protection, consisting of
works, prevention and improvements to reduce, limit and
eliminate possible and known impacts on the environment
resulting from operations and plant.
Most of the programme's changes consist of routine work done
on a regular basis on Electrica Oltenia S.A.'s installations (and
which can be found in the company's investment programs, in
maintenance/ repair programs), but which, to a certain extent,
involve environmental protection.
The programme also includes works outsourced to local
companies specializing in environmental protection in specific
communities. Thus, through the environment protection program
drawn up for 2006, work has been carried out to:
decrease atmospheric emissions:
– replace ceramic insulation on 110 kV aerial electric grids,
where electric discharges with an ozone generating effect
were found, with insulation made of composite materials;
– replace asbestos-cement tile roofs with tiles made of non-
polluting materials - 10,200 sqm;
the collection, transport and disposal of waste waters into
sewerage;
the collection, transport and disposal of urban waste;
the collection, transport and disposal of industrial waste;
the collection, transport and disposal of dangerous waste:
preventing soil pollution by:
– replacing storage batteries in transformer plants with
watertight batteries;
– replacing wooden poles with concrete poles;
– repairing electrical equipment in order to stop dielectric oil
leakage;
– replacing some OSB cables insulated with oil impregnated
paper;
– repairing the damaged edges of concrete tubs which are
placed under electric transformers in order to prevent the
leakage of the oil accumulated in rainwater
creating firebreaks in the path of aerial electric grids in order to
prevent forest fires;
measures to protect soil and help it recover: reclaiming land
affected by work on the underground electric grid.
Electrica Oltenia S.A. considers that, through work carried out in
2006, it has contributed to the decrease, limitation and even to
the elimination of the known impact of energy installations on the
environment, as well as to complying with legislation and with
other environmental requirements relevant to its activities -
objectives which were also stated in the Environment
Management Program.
In the long run, through the Environment Management
Programmes designed for fixed periods, Electrica Oltenia S.A.
will aim to improve its operations in order to eliminate, as soon
as possible, potential environmental risks arising from its
installations.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 34
35Shareholding and Securities Electrica Oltenia S.A.
At the beginning of 2006, Electrica Oltenia had a social capital of
799,033 thousand RON and 71,523,469 shares divided between
the two shareholders:
Shareholder Number of shares % Amount (thousand RON)
CEZ, a.s. 36,481,415 51% 407,507
Electrica S.A. 35,042,054 49% 391,526
Total 71,523,469 100% 799,033
As a result of the Shareholder's General Assembly on September
7, 2006, the structure of the shareholding was changed as follows:
Shareholder Number of shares % Amount (thousand RON)
CEZ, a.s. 36,481,412 51% 407,506.80
ZAPADOCESKA ENERGETIKA, a.s. 1 0% 0.01
SEVEROMORAVSKA ENERGETIKA, a.s. 1 0% 0.01
VYCHODOCESKA ENERGETIKA, a.s. 1 0% 0.01
Electrica S.A. 35,042,054 49% 391,526.17
Total 71,523,469 100% 799,033.00
The structure of the shareholding was again changed at the end
of October 2006, as follows:
Shareholder Number of shares % Amount (thousand RON)
CEZ, a.s. 36,481,412 51% 407,506.80
ZAPADOCESKA ENERGETIKA, a.s. 1 0% 0.01
SEVEROMORAVSKA ENERGETIKA, a.s. 1 0% 0.01
VYCHODOCESKA ENERGETIKA, a.s. 1 0% 0.01
Electrica S.A. 26,459,238 37% 295,630.05
S.C. Fondul Proprietatea S.A. 8,582,816 12% 95,896.13
Total 71,523,469 100% 799,033.00
The value of the social capital on December 31, 2006, according
to the Romanian Accounting System and the Register of Trade
was 715,235 thousand RON.
Shareholding and Securities
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 35
In 2006, 115 employees took part in professional
training courses organized by specialized and
certified companies.
The main areas tackled during the professional training
programmes in 2006 included economic and financial
culture, know-how in cost structures and quality
control.
The aim of the participants was to ongoing personal
development and to use the knowledge acquired to
improve the Company's operations and the quality of
customer services.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 36
To comply with industry regulations on transparency in
providing services offered by CEZ Distribu]ie S.A. to CEZ
Vânzare S.A. and vice versa, in February 2007 the
Company's Administrative Council approved the setting up of
another company, CEZ Servicii S.R.L., to provide finance,
controlling, accounting, IT, HR, and Customer Care Services
to CEZ Distribu]ie S.A. and CEZ Vânzare S.A.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 37
38 Electrica Oltenia S.A. Human Resources and Social Policy
3. Workforce Depending on Seniority in 2006
Workforce Size and Composition
Herein we shall present the structure of the staff:
Human Resources and Social Policy
1. Workforce Education Structure in 2006
2. Workforce Age Structure in 2006
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 38
39Human Resources and Social Policy Electrica Oltenia S.A.
Social Policy
Under The Collective Labour Agreement of Electrica Oltenia S.A., registered at the Dolj Labour and Social Security and Family
Office, number 144/13882/28.09.2005:
a. The approved form of payment is on an hourly basis;
b. The payment rights granted to employees consist of:– Gross salary according to the salary grid;
– Bonuses in addition to gross salary (seniority, seniority in Electrica Oltenia S.A., unsocial working conditions, working on
nonworking days, sickness or injury leave, night work, sustained overtime work, additional duties, supervisory and/or
coordinating work);
– Management position bonus.
c. The gross salary is established through negotiation, within the parameters set by the Functions and Profession Classified List
which is appended to the Collective Labor Agreement of Electrica Oltenia S.A;
d. Employees enjoy other rights, too, depending on position (jubilee bonuses, retirement bonuses, holidays bonus, end-of-year
bonus, marriage bonus, difference between monthly wage and sick leave payment for incapacitation following hospitalization -
sick leave is at 75%, 85% or 100% of the employee's monthly wage, depending on the type of sickness - leaving indemnity);
e. Former employees of Electrica Oltenia S.A., now retirees, receive 1200 KWh worth of electricity free per year.
Social Expenses
A. In 2006, expenditure on socio-cultural and sports activities totalled 1,148 thousand RON, of which:
a) 560 thousand RON was allocated for the part-payment of holidays and vouchers granted to employees;
b) 28 thousand RON was aid granted yearly for medicines, prostheses and health materials for seriously ill employees only;
c) 266 thousand was RON allocated to Christmas gifts for employees with children;
d) 294 thousand RON was granted for other expenses (death indemnity, birth indemnity, prizes for Electrician's Trophy, Women's Day).
B. As permitted by law, in 2006 employees received food vouchers worth 4,595 thousand RON.
On the Job Training Programmes and Courses
The main targets of the professional training programmes and courses in Electrica Oltenia S.A. are:
to help employees adapt to the changes produced by privatization;
to help employees adapt to the requirements of their job: knowledge, behaviour, skills, attitude;
to help employees improve their communications skills;
to help employees prepare for any other changes.
In 2006, 115 employees took part in professional training courses organized by specialized and certified companies, in order to
achieve continuous personal development and to use the knowledge acquired for the improvement of the company's operations and
of the quality of customer services.
The main areas tackled during the professional training programs in 2006 were:
economic and financial culture;
know-how in costs structure;
modern methods for the exploitation and maintenance of the electric grid;
efficient electric power distribution and supply;
environmental protection;
safety and first aid;
quality management;
new technologies for development and rehabilitation projects.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 39
40 Electrica Oltenia S.A. Donation and Sponsorship Programme | Litigations
Electrica Oltenia S.A. does not have a programme for donations
and sponsorships. Therefore, no related expenditure was made
in 2006.
At the end of 2006, Electrica Oltenia S.A. had 16 ongoing
litigations, with individual claims of over 100 thousand RON.
However, only five of them have the potential to have a negative
impact upon the company's results. Electrica Oltenia S.A. is a
claimant in 3 lawsuits against SNCFR S.A. (Romanian National
Railway Company), the requested cumulated value being 20,454
thousand RON.
Electrica Oltenia S.A. is the defendant in two other lawsuits, as
follows:
in the first lawsuit, the claimant is Preda Victoria in Arge[ county,
seeking damages totalling 10,323 thousand RON for her inability
to use her own property, which is being used by assets
belonging to Electrica Oltenia;
in the second lawsuit, the claimant is S.C. Zah`rul Calafat,
seeking damages totalling 23,138 thousand RON, due to
power cuts.
Donation and SponsorshipProgramme
Litigations
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 40
41Independent Auditors' Report Electrica Oltenia S.A.
Independent Auditors' Report
To the Shareholders of S.C. CEZ Distribu]ie S.A.
We have audited the accompanying financial statements of S.C. CEZ Distribu]ie S.A. (“the Company”), formerly S.C. Filiala de
Distribu]ie [i Furnizare a Energiei Electrice Electrica Oltenia S.A., which comprise the balance sheet as at December 31, 2006 and the
income statement, statement of changes in equity and cash flow statement for the year 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 presentation of these financial statements in accordance with International
Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the
preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error;
selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Auditors' Responsibility
Our responsibility is to express an opinion on these financial 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 assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditors' judgement, 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 considers 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 effectiveness 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
management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient 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,
2006, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting
Standards.
Ernst & Young SRL
April 30, 2007
Bucharest, Romania
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 41
42 Electrica Oltenia S.A. Financial Statements
CEZ Distribu]ie S.A.Balance SheetFinancial Statements as at and for the Year Ended December 31, 2006
(thousand RON)
Notes December 31, December 31, 20052006 (Note 30)
Assets
Non-current Assets
Property, plant and equipment 3 1,517,977 1,401,497
Intangible assets 4 4,345 5,054
Other financial assets 5 3,554 4,498
Total Non-Current Assets 1,525,876 1,411,049
Current Assets
Inventories 3,992 3,385
Trade receivables 6 33,116 193,994
Receivables from related parties 7, 26 5,249 606
Current income tax receivable - 144
Other current assets 7,237 5,286
Other financial assets 5 5,471
Cash and cash equivalents 8 411,850 463,786
Total Current Assets 666,915 667,201
Total assets 2,192,791 2,078,250
Shareholders Equity and Liabilities
Shareholders' Equity
Share capital 9 799,033 799,033
Share premium 9 114,095 114,095
Contributions for share capital increase 929 929
Revaluation reserve 9 571,216 542,410
Retained earnings 9 201,541 111,757
Other reserves 9 41,273 30,893
Total Shareholders' Equity 1,728,087 1,599,117
Liabilities
Non-current Liabilities
Long term liabilities to related parties 10, 26 - 8,125
Deferred income 11 151,384 115,613
Deferred tax liability 25 28,722 55,223
Other non-current liabilities 2,530 2,416
Total Non-current Liabilities 182,636 181,377
Current Liabilities
Trade payables 12 138,340 85,601
Short term liabilities to related parties 13, 26 25,135 100,274
Current income tax liability 10,674 -
Other current liabilities 14 19,827 36,266
Provisions 15 88,092 75,615
Total Current Liabilities 282,068 297,756
Total Liabilities 464,704 479,133
Total shareholders equity and liabilities 2,192,791 2,078,250
The accompanying notes are an integral part of these financial statements.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 42
43Financial Statements Electrica Oltenia S.A.
CEZ Distribu]ie S.A.Income StatementFinancial Statements as at and for the Year Ended December 31, 2006
(thousand RON)
Notes December 31, 2006 December 31, 2005(Note 30)
Revenues
Sales of electricity 16 1,120,448 1,126,885
Other operating revenues 17 228,457 165,551
Total revenues 1,348,905 1,292,436
Expenses
Electricity purchased 18 793,134 814,736
Materials and supplies 19 10,511 26,158
Repairs and maintenance 20 102,692 111,353
Salaries, wages and other employee benefits 21 93,394 76,174
Depreciation, amortization and impairment charge 22 102,681 101,367
Financial income, net 23 5,609 (18,221)
Other operational expenses 24 103,468 97,066
Total expenses 1,211,489 1,208,633
Profit before income tax 137,416 83,803
Income tax expense / (income) 25 42,213 10,786
Profit for the year 95,203 73,017
The accompanying notes are an integral part of these financial statements.
These financial statements have been authorized for issue on April 30, 2007:
Emi Mitrofan Gabriel Negril`
Finance Director General Manager
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 43
44 Electrica Oltenia S.A. Financial Statements
CEZ Distribu]ie S.A.Statements of Changes in EquityFinancial Statements as at and for the Year Ended December 31, 2006
(thousand RON)
Share Share Contribution for Revaluation Other Retained Totalcapital premium share capital reserve reserve earnings
increase
Balance as at January 1, 2005 (Note 30) 548,671 - 929 468,606 4,348 65,586 1,088,140
Reversal of public patrimony (Note 9) - - - - (301) - (301)
Share premium (Note 9) - 114,095 - -- - 114,095
Share capital increase (Note 9) 250,362 - - - - - 250,362
Revaluation surplus (Notes 3, 9) - - - 78,727 - - 78,727
Reversal of revaluation surplus (Note 9) - - - (1,328) - - (1,328)
Reserve for investments (Note 9) - - 26,846 (26,846) -
Deferred tax impact
on revaluation reserves (Note 9, 25) (3,595) - - (3,595)
Profit for the year - - - - - 73,017 73,017
Balance as at December 31, 2005 (Note 30) 799,033 114,095 929 542,410 30,893 111,757 1,599,117
Increase of the legal reserve 6,171 (6,171)
Reversal of reserve for investments (Note 9) (26,846) 26,846 -
Reserve for investments for 2006 (Note 9) 31,055 (31,055) -
Reversal of revaluation surplus (Note 9) - - - (4,961) - 4,961
Deferred tax impact on
revaluation reserves (Notes 9, 25) - - - 33,767 - - 33,766
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
The accompanying notes are an integral part of these financial statements.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 44
45Financial Statements Electrica Oltenia S.A.
CEZ Distribu]ie S.A.Cash flow statementsFinancial Statements as at and for the Year Ended December 31, 2006
(thousand RON)
Notes December 31, 2006 December 31, 2005(Note 30)
Cash flows from operating activities
Profit before income tax 137,416 83,803
Adjustments to reconcile profit before income tax to net cash provided by operating activities:
Depreciation, amortization and impairment 22 102,681 101,367
Loss on disposal of property, plant and equipment 24 1,357 2,068
Income from subsidies 17 (4,855) (5,101)
Allowance for doubtful debtors 6 34,604 8,115
Write down of other current assets 83 3,180
Provisions for risks and charges 15 12,477 30,481
Interest revenue, net 23 (19,352) (1,200)
Total 126,995 138,910
Changes in assets and liabilities:
Increase in other financial assets 5 (4,527) (3,267)
Increase in inventories (607) (1,404)
Increase in receivables 6 (73,726) (11,157)
Decrease / (Increase) in receivables from related parties 7, 26 (4,643) 49,801
Increase in other assets (2,034) (7,975)
Decrease / (Increase) in trade payables 12 52,739 77,402
Decrease / (Increase) in liabilities to related parties 13, 26 (83,264) (147,913)
(Decrease) in other liabilities (16,325) (14,501)
Cash generated from operations 132,024 163,699
Interest paid 23 (327) (2,890)
Income tax paid (24,129) (31,101)
Net cash provided by operating activities 107,568 129,708
Cash flows from investing activities
Acquisition of property, plant and equipment, net (218,221) (106,849)
Acquisition of intangible assets, net (1,588) (491)
Interest received 23 19,679 4,090
Net cash used in investing activities (200,130) (103,250)
Cash flows from financing activities
Proceeds from issue of shares - 364,457
Subsidies received 40,626 30,510
Net cash provided by financing activities 40,626 394,967
Net increase in cash and cash equivalents (51,936) 421,425
Cash and cash equivalents at beginning of period 463,786 42,361
Cash and cash equivalents at end of period 8 411,850 463,786
The accompanying notes are an integral part of these financial statements.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 45
46 Electrica Oltenia S.A. Notes to the Financial Statements
Notes to the Financial Statements
1. Corporate Information
S.C. CEZ Distribu]ie S.A. (“the Company”), formerly S.C. Filiala de Distribu]ie [i Furnizare a Energiei Electrice Electrica Oltenia S.A.), is
a joint stock company domiciled in Romania. The principal place of business is 2 Brestei Street, Craiova, Romania. The Company's
registered address is 44 Brestei Street, Craiova, Romania.
The Company is the main supplier of electricity in Olt, Dolj, Gorj, Vâlcea, Arge[, Mehedin]i and Teleorman counties operating with 249
conversion stations and electric lines (0.4 kV and 110 kV) having a total length of 51 thousand kilometers.
The Company's activities are regulated by the National Authority 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 Electricity System, as well as
the electricity distribution tariffs and the electricity supply tariffs are not exclusively influenced by the Company's decisions, but they
are regulated by ANRE.
The Company's operations are conducted through the following units:
– the headquarters (located in Craiova)
– electricity distribution and supply branches (SDFEE).
The electricity distribution and supply regional branches of the Company are the following:
a) S.C. Sucursala de Distribu]ie [i Furnizare a Energiei Electrice Electrica Craiova;
b) S.C. Sucursala de Distribu]ie [i Furnizare a Energiei Electrice Electrica Alexandria;
c) S.C. Sucursala de Distribu]ie [i Furnizare a Energiei Electrice Electrica Drobeta Turnu Severin;
d) S.C. Sucursala de Distribu]ie [i Furnizare a Energiei Electrice Electrica Pite[ti;
e) S.C. Sucursala de Distribu]ie [i Furnizare a Energiei Electrice Electrica Slatina;
f) S.C. Sucursala de Distribu]ie [i Furnizare a Energiei Electrice Electrica Târgu Jiu;
g) S.C. Sucursala de Distribu]ie [i Furnizare a Energiei Electrice Electrica Vâlcea.
Before September 30, 2005, Electrica S.A., a State owned company, was a 100% shareholder of the Company.
Since September 30, 2005, ČEZ, a.s. has been the majority shareholder (51%) of the Company, Electrica S.A. retaining 49%.
As a subsidiary of ČEZ, a.s., a company domiciled in the Czech Republic with registered address at Duhová 2/1444, Praha 4, 140
53, Czech Republic. The ultimate parent company of the Company is ČEZ, a.s. The Company is consolidated into ČEZ, a.s. since
October 1, 2005.
As a result of the decision of the Shareholder's General Assembly on 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.
In accordance with Law 247/2005, in October 2006 12% (8,582,816) of the Company's shares, currently held by Electrica S.A., were
transferred to S.C. Fondul Proprietatea S.A.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 46
47Notes to the Financial Statements Electrica Oltenia S.A.
2. Significant Accounting Policies
2.1. Basis of Preparation
The attached financial statements are presented in Romanian Lei (“RON”), rounded to the nearest thousand. The financial statements
have been prepared under the historical cost convention, modified to include tangible assets revaluation and adjusted as required by
IAS 29 (“Financial Reporting in Hyperinflationary Economies”) until December 31, 2003. Starting from January 1, 2004, the Romanian
economy is not considered 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 mandated 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 interpretations approved by the International Accounting Standards Board and International
Accounting Standards and Standing Interpretations Committee, respectively, that remain in effect.
2.2 Changes in Accounting Policies
The accounting policies adopted are consistent with those of the previous financial year except the following:
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:
– IAS 1 and IAS 19 Amendment - Actuarial Gains and Losses, Group Plans and Disclosures
– IAS 21 Amendment - The Effects of Changes in Foreign Exchange Rates
– IAS 39 Amendment - Cash Flow Hedge Accounting of Forecast Intragroup Transactions
– IAS 39 Amendment - The Fair Value Option
– IAS 39 and IFRS 4 Amendment - Financial Guarantee Contracts
– IFRS 6 - Exploration for and Evaluation of Mineral Resources
– IFRIC 4 - Determining whether an Arrangement Contains a Lease
– IFRIC 5 - Rights to Interests arising from Decommissioning, Restoration, and Environmental Rehabilitation Funds
– IFRIC 6 - Liabilities arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment
IAS 1 and IAS 19 Amendment - Actuarial Gains and Losses, Group Plans and Disclosures
As of January 1, 2006, the Company adopted the amendments to IAS 19. As a result, additional disclosures are made providing
information about trends in the assets and liabilities in the defined benefit plans and the assumptions underlying the components of
the defined benefit cost. This statement is not applicable to the Company's financial statements.
IAS 21 The Effects of Changes in Foreign Exchange Rates
As of January 1, 2006, the Company adopted the amendments to IAS 21. They require that all exchange differences arising from a
monetary item that forms part of the Company's net investment in a foreign operation shall be recognized in a separate component of
equity in the consolidated financial statements regardless of the currency in which the monetary item is denominated. This change did
not have an effect on the Company's financial statements.
IAS 39 Amendment - Cash Flow Hedge Accounting of Forecast Intra-group Transactions
IAS 39 was amended to permit the foreign currency risk of a highly probable intragroup forecast transaction to qualify as the hedged
item in a cash flow hedge, provided that the transaction is denominated in a currency other than the functional currency of the entity
entering into that transaction and that the foreign currency risk will affect the consolidated income statement. As the Company
currently has no such transactions, the amendment did not have an effect on the financial statements.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 47
48
IAS 39 Amendment - The Fair Value Option
IAS 39 was amended to restrict the use of the option to designate any financial asset or any financial liability to be measured at fair
value through the income statement. The Company had not previously used this option, hence the amendment did not have an effect
on the financial statements.
IAS 39 and IFRS 4 Amendment - Financial Guarantee Contracts
IAS 39 was amended to require financial guarantee contracts that are not considered to be insurance contracts to be recognized
initially at fair value and to be remeasured at the higher of the amount determined in accordance with IAS 37 Provisions, Contingent
Liabilities and Contingent Assets and the amount initially recognized less, when appropriate, cumulative amortization recognized in
accordance with IAS 18 Revenue. This amendment did not have an effect on the financial statements.
IFRS 6 - Exploration for and Evaluation of Mineral Resources
The Company adopted IFRS 6 as of January 1, 2006, which provides guidance for accounting for expenditures incurred in the
exploration and evaluation of mineral resources. It is limited to considering the nature of such costs that may be capitalized as assets
and the facts and circumstances which indicate when such assets may be impaired and the level at which impairment is assessed.
This standard did not have an effect on the financial statements.
IFRIC 4 - Determining whether an Arrangement Contains a Lease
The Company adopted IFRIC Interpretation 4 as of January 1, 2006, which provides guidance in determining whether arrangements
contain a lease to which lease accounting must be applied. This change in accounting policy did not have any impact on the
Company as at December 31, 2006.
IFRIC 5 - Rights to Interests Arising from Decommissioning, Restoration, and Environmental Rehabilitation Funds
The Company adopted IFRIC Interpretation 5 as of January 1, 2006, which establishes the accounting treatment for funds established
to help finance decommissioning for a companies assets. As the entity does not currently operate in a country where such funds exist,
this interpretation has had no impact on the financial statements.
IFRIC 6 - Liabilities Arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment
The Company adopted IFRIC Interpretation 6 as of January 1, 2006, which established the recognition date for liabilities arising from
the EU Directive relating to the disposal of Waste Electrical and Electronic Equipment. This interpretation did not have an effect on the
financial statements.
2.3. Significant Estimates and Assumptions
The preparation of financial statements in conformity with International Financial Reporting Standards requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
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 are as
follows:
Post Employment Benefits
The cost of post employment benefits is determined using actuarial valuations. The actuarial valuation involves making assumptions
about discount rates, expected rates of staff turnover and future salary increases. Due to the long term nature of such benefits, these
estimations are subject to significant uncertainty. The value of the provision for retirement benefits is 32,470 thousand RON at
December 31, 2006 and 32,784 thousand RON at December 31, 2005. Further details are provided in Note 15.
Electrica Oltenia S.A. Notes to the Financial Statements
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 48
49
2.4. Summary of Significant Accounting Policies
Property, Plant and Equipment
Following initial recognition at cost, land and buildings are carried at a revalued amount, which is the fair value at the date of the
revaluation, less any subsequent accumulated depreciation (except for land) and subsequent accumulated impairment losses.
The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate
that the carrying value may not be recoverable.
Valuations are performed frequently enough to ensure that the fair value of a 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 recognized in profit and loss, in which case the increase is
recognized in profit and loss. A revaluation deficit is recognized in profit and in 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 derecognized upon disposal or when no future economic benefits are expected from its
use or disposal. Any gain or loss arising from the derecognition of the asset is included in the income statement in the year in which
the asset is derecognized.
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 technical 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 useful 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 periodically to ensure that they are consistent with the expected pattern of
economic benefits derived from the assets.
Intangible Assets
Intangible assets are stated at their restated cost, as a result of the adjustments made up to December 31, 2003 to account 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. Amortization is recognized in the income
statement on a straight-line basis over the estimated useful lives of the intangible assets. Intangible 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 to RON by applying the exchange rates prevailing at the time of the transaction. Assets
and liabilities denominated in foreign currencies 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,
2005 and 2006 was RON 2.5676 / USD 1, and RON 3.1078 / USD 1, respectively. The exchange rate of RON/EUR as at December 31,
2006 and 2005 was RON 3.3817 / EUR 1, and RON 3.6771 / EUR 1, respectively.
Receivables
Receivables include invoices issued at the balance sheet date for the supply 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.
Notes to the Financial Statements Electrica Oltenia S.A.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 49
50
Inventories
Inventories consist of consumables, spare parts and other inventories, which include mainly maintenance materials for the distribution
network. These materials are recorded under inventories when purchased and then expensed or capitalized, as appropriate, when
consumed. The cost of inventories comprises 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 inventories is made for excess, obsolete and defective inventories.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, current accounts 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 non-current financial assets as restricted funds (see Notes 5 and 8) relate to cash
deposits held as collateral for the issuance of guarantees and letters of credit. The non-current classification is based on the expected
timing of the release of the funds to the Company.
Impairment
The carrying amounts of the Company's assets, other than inventories and deferred tax assets are reviewed at each balance sheet
date to determine whether there is any indication of impairment. If any such indication exists, 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.
Computation of 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 independent 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 Accounts Payable and Accruals
Trade accounts payable to suppliers are recorded at invoiced values and include amounts payable for the acquisition of electricity,
contracted work and services. Accruals are reported at expected settlement values.
Long Term Debt
Borrowings are initially recognized at the amount of the proceeds received, net of transaction costs. They are subsequently carried at
amortized cost using the effective interest rate method, 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 Taxes
Income tax on the profit or loss for the year comprises current and deferred tax. Current tax is the expected tax payable on the taxable
income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in
respect of previous years.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred 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 tax assets and liabilities are recognized regardless of when the temporary difference is likely to reverse. Deferred tax assets and
liabilities are not discounted. Deferred tax assets are recognized when it is probable that sufficient taxable profits will be available against
which the deferred tax assets can be utilized. A deferred tax liability is recognized for all taxable temporary differences.
Current tax and deferred 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.
Electrica Oltenia S.A. Notes to the Financial Statements
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 50
51
Related Parties
Parties are considered related when one controls the other directly or indirectly, or is in the position to exert significant influence on the
other party, through ownership, contractual rights, family relationship, or otherwise.
Financial Instruments
Financial assets and financial liabilities carried on the accompanying balance sheet include cash and cash equivalents, trade 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 approximate their carrying amounts.
Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest,
dividends, gains and losses relating to a financial instrument classified as a liability are reported as expense or income as incurred.
Distributions to holders of financial instruments classified as equity are charged directly to equity. 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 derecognized when the rights to receive cash flow from the asset has expired. Financial liabilities are derecognized
when the obligation under the liability is discharged, cancelled or expires.
Employee 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 estimated on the basis of an actuarial evaluation. As of December 31, 2006, 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 Romanian 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.
Short-term employee benefits include wages, salaries and social security contributions. Short-term employee benefits are recognized as
expenses as services are rendered.
In accordance with the Collective Labor Agreement in force as of December 31, 2006 the Company's employees were entitled to receive
the following retirement and post retirement benefits:
– 1-3 base monthly salaries upon retirement, depending on the number of years of employment with the Company;
– 1-3 base monthly salaries, payable in the month of retirement as a loyalty bonus, depending of the number of years of employment
with Company;
– Free consumption of electricity of 1,150 KWh per annum, which also extends to the employees' spouses under certain conditions;
– Aid in the event of death of an employee by causes other than work accident or professional illness, of RON 1,542;
– Aid in the event of death of an employee caused by work accident or professional illness, of 12 basic monthly salaries.
Revenue Recognition
Revenues are recognized when it is probable that the economic 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, comprise primarily the value of electricity
supplied. Revenues from services are recognized when earned.
Development Tax
In accordance with the requirements of Government Ordinance 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 Commerce ("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 corresponding
investment projects in progress were finished. Starting from January 1, 2003, the amounts of the development tax utilized are recorded
as government subsidies in accordance 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 sector (including
the Company), in order to be used for the development of the electricity network, on an investment project basis.
Starting from January 1, 2005, according to Government Ordinance 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 regarding 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 Ordinance 89/2004 outlined above were in force until December 31, 2006.
Notes to the Financial Statements Electrica Oltenia S.A.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 51
52
Subsidies
Subsidies are accounted for as deferred income and recognized as income at the moment of recognition of the related costs.
Connection Fees
The value of new connections to the national electricity network is invoiced to consumers through the connection fee (in accordance with
Government Decision no. 2/1992) and is recorded as deferred income and recognized as income at the moment of recording the
depreciation of the related assets. 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. New connections to the electricity network are the property of
the Company.
Financial Guarantee Contracts
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 payment when due in accordance with the original or modified terms of a debt instrument.
Financial guarantees are initially recognized at fair value plus any transaction costs that are directly attributable to the acquisition or issue
of the financial asset or financial liability.
After initial recognition the financial guarantee shall be measured 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 contingent liabilities only if the possibility of an outflow of resources that represent
economic benefits is probable (i.e. it is more likely 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. Management
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 Romanian Leu (RON).
Restatement of Comparative Figures
Certain adjustments affecting the financial statements as of and for the year ended December 31, 2005 and December 31, 2004 have
been made during the year, restating the year 2005 comparative figures and opening balances as of January 1, 2005 (see Note 30).
Electrica Oltenia S.A. Notes to the Financial Statements
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 52
53
2.5. 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, 2007 or later periods which the Company has not early adopted, are as follows:
IFRS 7, Financial Instruments: Disclosures, and a complementary amendment to IAS 1, Presentation of Financial Statements -
Capital Disclosures (effective for financial years beginning on or after January 1, 2007).
IFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and
quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit
risk, liquidity risk and market risk, including sensitivity analysis to market risk. It replaces IAS 30, Disclosures in the Financial Statements of
Banks and Similar Financial Institutions, and disclosure requirements in IAS 32, Financial Instruments: Disclosure and Presentation. It is
applicable to all entities that report under IFRS. The amendment to IAS 1 introduces disclosures about the level of an entity's capital and
how it manages capital. The Company assessed the impact of IFRS 7 and the amendment to IAS 1 and concluded that the main
additional disclosures will be the sensitivity analysis to market risk and the capital.
IFRS 8, Operating Segments (effective for financial years beginning on or after January 1, 2009).
IFRS 8 replaces IAS 14 Segment Reporting and adopts a management 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. This standard will have no effect on the Company's operations.
IFRIC 7, Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies (effective for financial
years beginning on or after March 1, 2006).
IFRIC 7 requires entities to apply IAS 29 Financial Reporting in Hyper-inflationary Economies in the reporting period in which an entity first
identifies the existence of hyperinflation in the economy of its functional currency as if the economy had always been hyperinflationary.
IFRIC 7 is not relevant to the Company's operations.
IFRIC 8, Scope of IFRS 2 (effective for financial years beginning on or after May 1, 2006).
IFRIC 8 clarifies that IFRS 2 Share-based payment will apply to any arrangement when equity instruments are granted or liabilities (based
on the value of an entity's equity instrument) are incurred by an entity, when the identifiable consideration appears to be less that the fair
value of the instruments given.
IFRIC 8 is not relevant to the Company's operations.
IFRIC 9, Reassessment of Embedded Derivatives (effective for financial years beginning on or after June 1, 2006).
IFRIC 9 requires an entity to assess whether a contract contains an embedded derivative at the date an entity first becomes a party to the
contract and prohibits reassessment unless there is a change to the contract that significantly modifies the cash flows.
IFRIC 9 is not relevant to the Company's operations.
IFRIC 10, Interim Financial Reporting and Impairment (effective for financial years beginning on or after November 1, 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.
IFRIC 11, IFRS 2-Group and Treasury Share Transactions (effective for financial years beginning on or after March 1, 2007).
This Interpretation requires arrangements whereby an employee 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 instruments 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 financial statements, account for schemes when their employees receive rights to equity instruments of the parent. IFRIC 11 is
not relevant to the Company's operations.
IFRIC 12, Service Concession Arrangements (effective for financial years beginning on or after January 1, 2008).
The interpretation outlines an approach to account for contractual arrangements arising from entities providing public services. It provides
for the operator not to account for the infrastructure as property, plant and equipment, but recognize a financial asset and / or an
intangible asset. IFRIC 12 is not relevant to the Company's operations.
Notes to the Financial Statements Electrica Oltenia S.A.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 53
54
3. Property, Plant and Equipment
The movement in the carrying value of property plant and equipment during the year ended December 31, 2006
is as follows (thousand RON):
Land Buildings Plant and Other fixed Construction in Totalequipment assets progress
Cost or valuation
Balance as at January 1, 2006 18,147 1,089,183 353,760 2,616 36,798 1,500,504
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 impairmentloss, before revaluation surplusat December 31, 2006 18,147 1,116,924 352,436 2,125 39,474 1,529,106
Accumulated revaluation surplus
Balance as at January 1, 2006 and December 31, 2006 - 330 - 1 - 331
Carrying amount
Balance as at January 1, 2006 18,147 1,028,957 321,928 2,160 30,305 1,401,497
Balance at December 31, 2006 18,147 1,113,643 351,082 2,124 32,981 1,517,977
The movement in the carrying value of property plant and equipment during the year ended December 31, 2005
was as follows (thousand RON):
Land Buildings Plant and Other fixed Construction in Totalequipment assets progress
Cost or valuation
Balance as at January 1, 2005 18,146 1,017,436 250,200 2,215 30,958 1,318,955
Additions 2 71,794 25,228 401 91,059 188,484
Disposals (1) (47) (65) - (85,219) (85,332)
Adjustment for capitalization of meters - - 78,397 - - 78,397
Balance as at December 31, 2005 18,147 1,089,183 353,760 2,616 36,798 1,500,504
Accumulated depreciation
Balance as at January 1, 2005 - - - - - -
Depreciation expense - (56,945) (30,478) (455) - (87,878)
Accumulated depreciation of disposals - - - - - -
Balance as at December 31, 2005 - (56,945) (30,478) (455) - (87,878)
Accumulated impairment
Balance as at January 1, 2005 - - - - - -
Increase in impairment provision - (3,611) (1,354) (2) (6,493) (11,460)
Balance as at December 31, 2005 - (3,611) (1,354) (2) (6,493) (11,460)
Net book value after impairmentloss, before revaluation surplusat December 31, 2005 18,147 1,028,627 321,928 2,159 30,305 1,401,166
Accumulated revaluation surplus
Balance as at January 1, 2005 - - - - - -
Revaluation surplus in year - 330 - 1 - 331
Balance as at December 31, 2005 - 330 - 1 - 331
Carrying amount
Balance as at January 1, 2005 18,146 1,017,436 250,200 2,215 30,958 1,318,955
Balance as at December 31, 2005 18,147 1,028,957 321,928 2,160 30,305 1,401,497
Electrica Oltenia S.A. Notes to the Financial Statements
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 54
55
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 market value. When there is no
evidence of market value because of the specialized nature of the plant and equipment and because these items are rarely sold,
except as part of a continuing 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 September 30, 2005, these have been split by the independent valuator 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:
– Assets valued at market value;
– Assets valued at replacement cost new using information collected from the market, and depreciated by physical, functional and
economic obsolescence, where applicable;
– 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 market-oriented method was
applied, namely, the rental income capitalization approach or market comparison approach.
Lines, cables and other technical equipment were valued using the depreciated replacement cost (DRC) method, taking 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 prices obtained
from the market.
The Company does not have temporarily idle plant and equipment as of December 31, 2006.
There are no pledged buildings in patrimony.
The basis of calculation for the impairment charges in 2005 and 2006 was the valuation exercise carried out by the independent
valuator as of September 30, 2005.
Assets that are proposed to be disposed, as well as those for which their disposal has been approved have a nil carrying amount as
of December 31, 2006.
The Company received 800 thousand RON for the sale of property, plant and equipment during the year (2005: 230 thousand RON).
Impairment losses of property, plant and equipment are disclosed under 'Depreciation, amortization and impairment charges' in the
income statement.
The Company has commitments to purchase property plant and equipment amounting to 36,277 thousand RON as of December 31,
2006.
The Company has not disclosed information on what the carrying 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.
Notes to the Financial Statements Electrica Oltenia S.A.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 55
56
4. Intangible Assets
The movement in the carrying value of intangible assets during the year ended December 31, 2006 is as follows (thousand RON):
Software Rights and other Total
Cost
At January 1, 2006 8,034 56 8,090
Additions 1,561 - 1,561
Retirements - - -
Transfers 56 (56) -
At December 31, 2006 9,651 - 9,651
Accumulated amortization
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
Intangible assets in progress 27 27
Net carrying amount
At December 31, 2006 4,345 - 4,345
The remaining useful life of software at December 31, 2006 is 2 years.
The movement in the carrying value of intangible assets during the year ended December 31, 2005 was as follows (thousand RON):
Software Rights and other Total
Cost
At January 1, 2005 6,644 181 6,825
Additions 1,390 - 1,390
Retirements - (125) (125)
At December 31, 2005 8,034 56 8,090
Accumulated amortization
At January 1, 2005 999 93 1,092
Amortization charge for the year 2,002 27 2,029
Disposals - (85) (85)
At December 31, 2005 3,001 35 3,036
Intangible assets in progress - - -
Net carrying amount
At December 31, 2005 5,033 21 5,054
Software licenses, rights and other intangible assets are amortized using the straight line method over a period of 5 years.
Amortization of intangibles is disclosed under 'Depreciation, amortization and impairment charges' in the income statement.
There are no contractual commitments for the acquisition of intangible assets.
Electrica Oltenia S.A. Notes to the Financial Statements
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 56
57
5. Other Financial Assets
The composition of other financial assets at December 31, 2006 and 2005, included under non-current assets,
is as follows (thousand RON):
31.12.2006 31.12.2005
Guarantee letter 2,898 2,898
Administrators' guarantees 560 526
Completion bonds received from suppliers - 812
Other financial assets 96 262
Total 3,554 4,498
The Guarantee letter at December 31, 2005 and 2006 relates to a real estate guarantee without dispossession over a collateral
deposit account of 2,898 thousand RON for the period from November 25, 2005 to January 31, 2008. The applicable interest rate is
5.25%, based on the Guarantee Agreement no 192/35185.
Administrators' guarantees at December 31, 2005 and 2006 relate to guarantees provided by the Company's warehouses Administrators.
Completion bonds received from suppliers at December 31, 2005 represent guarantees provided for good performance.
Other financial assets at December 31, 2006, included under current assets, comprise the following letters of guarantee:
– A guarantee for OPCOM auction participation with dispossession over a collateral deposit account of 1,189 thousand RON for the
period from December 22, 2006 to January 5, 2007.
– A guarantee for OPCOM auction participation with dispossession over a collateral deposit account of 4,260 thousand RON for the
period from December 20, 2006 to January 5, 2007.
– A payment guarantee for the rent of collection cash with dispossession over a collateral deposit account of 15 thousand RON for
the period from November 24, 2006 to April 30, 2007.
– A payment guarantee for the rent of collection cash with dispossession over a collateral deposit account of 7 thousand RON for the
period from November 24, 2006 to April 30, 2007.
6. Trade Receivables
The composition of trade receivables at December 31, 2006 and 2005 is as follows (thousand RON):
31.12.2006 31.12.2005
Receivables from sale of electricity 250,733 206,740
Receivables from others services rendered 42,868 13,135
Allowance for receivables:
Allowance for doubtful accounts receivable from the sale of electricity (54,704) (18,135)
Allowance for receivables from other services rendered (5,781) (7,746)
Total 233,116 193,994
Trade receivables are non-interest bearing and are generally on 30-60 days' payment term. No guarantees have been provided for any
receivables and they are unsecured.
7. Receivables from Related Parties
The composition of receivables from related parties at December 31, 2006 and 2005 is as follows (thousand RON):
31.12.2006 31.12.2005
Electrica S.A. 1,962 404
E.on Moldova S.A. 23 -
ENEL Electrica Dobrogea S.A. 44 -
Electrica Muntenia Sud S.A. 166 -
ENEL Electrica Banat S.A. 89 2
Electrica Transilvania Nord S.A. 20 -
Electrica Transilvania Sud S.A. 84 -
SISEE and AISEE Oltenia 199 200
SISEE and AISEE Banat 1 -
CEZ România S.R.L. 2,659 -
CEZ Data s.r.o 2 -
Total 5,249 606
For details on the related parties referred to above see Note 26.
Notes to the Financial Statements Electrica Oltenia S.A.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 57
58
8. Cash and Cash Equivalents
The composition of cash and cash equivalents at December 31, 2006 and 2005 is as follows (thousand RON):
31.12.2006 31.12.2005
Cash on hand and current accounts with banks 6,901 206,750
Cash equivalents - 50
Short-term deposits 404,949 256,986
Total 411,850 463,786
At December 31, 2006 and 2005, cash and cash equivalents included foreign currency deposits of thousand RON 254,615 and
thousand RON 377,144, respectively, earning interest at a rate of 3.91% (2005: 2.5%).
9. Shareholders' Equity
Share Capital
The Company's share capital consists of 71,523,469 authorized, issued and fully paid shares with a nominal value of RON 10 each.
As at December 31, 2006 the share capital structure is as follows:
Numbers of shares Numbers of Amountshares of holding
ČEZ, a.s. 36,481,412 51% 407,507.80
ZAPADOCESKA ENERGETIKA, a.s. 1 0% 0.01
SEVEROMORAVSKA ENERGETIKA, a.s. 1 0% 0.01
VYCHODOCESKA ENERGETIKA, a.s. 1 0% 0.01
Electrica S.A. 26,459,238 37% 295,630.05
S.C. Fondul Proprietatea S.A. 8,582,816 12% 95,896.13
Total 71,523,469 100% 799,033.00
As at December 31, 2005, the share capital structure and split of the inflation restated value of share capital presented in the balance
sheet is as follows:
Number of shares Percentage of holding Amount
ČEZ, a.s. 36,481,415 51% 407,507
Electrica S.A. 35,042,054 49% 391,526
Total 71,523,469 100% 799,033
The movement in the share account as number and value during the years ended December 31, 2006 and December 31, 2005
is presented below (thousand RON):
Number of shares Amount
As at January 1, 2005 46,487,204 548,671
Issued in 2005 25,036,265 250,362
As at December 31, 2005 and 2006 71,523,469 799,033
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 Shareholder's General Meeting held on September 30, 2005 approved 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 amounts to
RON 715,235 thousand as of December 31, 2006 and as of December 2005. 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 (“Financial Reporting in Hyperinflationary Economies”), which is
not applicable under the applicable Romanian Accounting Regulations.
As a result of Shareholders' General Assembly Decision, dated 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, currently held by Electrica S.A., were
transferred to S.C. Fondul Proprietatea S.A.
Electrica Oltenia S.A. Notes to the Financial Statements
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 58
59
Share Premium
The balance of the share premium account at January 1, 2005, December 31, 2005 and December 31, 2006 amounts to RON 114,095
and represents the difference between the nominal value of shares acquired by ČEZ, a.s. (RON equivalent of EUR 71 million) and total cash
paid was recorded by the Company as share premium.
Revaluation Reserve
The movement in the revaluation reserve during the years ended December 31, 2006 and 2005 is presented below (thousand RON):
Amount (Note 30)
Balance as at January 1, 2005 (Note 30) 468,606
Revaluation surplus 78,727
Reversal of revaluation surplus (1,328)
Deferred tax impact on fixed assets and revaluation reserve (Note 25) (3,595)
Balance as at December 31, 2005 (Note 30) 542,410
Reversal of revaluation surplus (4,961)
Deferred tax impact on fixed assets and revaluation reserve (Note 25) 33,767
Balance as at December 31, 2006 571,216
As of December 31, 2006, the Company has tax qualifying revaluation reserves amounting to approximately 13,750 thousand RON
arising out of the revaluation of its tangible fixed assets as of 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 accounting losses.
The amount of the income tax liability that would arise in the event of the utilization of the revaluation reserve in future, using the
current income tax rate of 16%, amounts to approximately 2,200 thousand RON.
Retained Earnings
The movement in retained earnings during the years ended December 31, 2006 and 2005 is presented below (thousand RON):
Amount
Balance as at January 1, 2005 (Note 30) 65,586
Reserve for investments (26,846)
Profit for the year 73,017
Balance as at December 31, 2005 (Note 30) 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
Balance as at December 31, 2006 201,541
The retained earnings per the Romanian Statutory accounting records as of December 31, 2006, which are available for distribution,
amount to 68,831 thousand RON (December 31, 2005: RON mil). The accumulated profit per the Romanian Statutory accounting
records as of December 31, 2006, amount to 106,057 thousand RON (December 31, 2005: 164,356 thousand RON loss).
Other Reserves
The movement in other reserves during the years ended December 31, 2006 and 2005 is presented below (thousand RON):
Amount
At January 1, 2005 4,348
Reversal of public patrimony (301)
Reserve for investments 26,846
At December 31, 2005 30,893
Reversal of reserve for investments (26,846)
Legal reserve 6,171
Reserve for investments 31,055
At December 31, 2006 41,273
Included under other reserves as of December 31, 2006 are legal reserves of 6,171 thousand RON restricted from distribution under
Statutory requirements and reserves for investments, related to the Energy Fund, of 31,055 thousand RON, which were set up in
accordance with Government Ordinance 89/2004, which may be used for specific investments made to the Company's distribution
network.
Notes to the Financial Statements Electrica Oltenia S.A.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 59
60
10. Long Term Liabilities to Related Parties
As of December 31, 2006, the Company has no long term liabilities to related parties. Loans contracted through Electrica S.A. were
repaid during the year ended December 31, 2006.
Composition of long term liabilities to related parties at December 31, 2005 was as follows (thousand RON):
Name of credit Balance as of 31.12.2005 Balance as of 31.12.2005in foreign currency in local currency
(thousand RON )
Loan BEI 1.8194/1995: EUR 654,962 436,642 2,007
Loan BIRD 3636/1995: USD 103,020 89,647 301
Loan ING: 10,803 thousand RON - 9,260
Other - 67
Total 11,635
Name of credit Short term Long term BalancePortion portion
Loan BEI 1.8194/1995 EUR 401 1,606 2,007
Loan BIRD 3636/1995 USD 22 279 301
Loan ING 3,087 6,173 9,260
Other - 67 67
Total 3,510 8,125 11,635
The interest rates indicated above are historical rates for fixed rate debt and current market rates for floating rate debt.
The following table analyses the long-term debt at December 31, 2005 by currency (in thousand):
Name of credit Foreign currency 31.12.2005RON
USD 97 300
EUR 546 2,007
RON - 9,328
Total long-term debt 11,635
11. Deferred Income
Deferred income as of December 31, 2006 and 2005 consists of the following (thousand RON):
31.12.2006 31.12.2005
Connection fees subsidies 151,048 115,322
Rental income 336 291
Total 151,384 115,613
Connection fees subsidies include the unamortized portion of capitalized connection fees received from customers upon their
connection to the national electricity network.
Electrica Oltenia S.A. Notes to the Financial Statements
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 60
61
12. Trade Payables
Trade payables as of December 31, 2006 and 2005 consist of the following (thousand RON):
31.12.2006 31.12.2005
Domestic suppliers - purchases of electricity 72,378 61,486
Domestic suppliers - other supplies and services 15,295 4,244
Fixed asset suppliers 28,356 17,547
Accruals for supplier's invoices not received 22,311 2,324
Total 138,340 85,601
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.
13. Short Term Liabilities to Related Parties
Short-term liabilities to related parties as of December 31, 2006 and 2005 consist of the following (thousand RON):
31.12.2006 31.12.2005
Energy acquisitions from CEZ Romania S.R.L. 2,565 -
Energy acquisitions from Electrica S.A. 4,465 58,577
Loans payable to Electrica S.A. - current portion - 3,510
Repairs and maintenance services performed by SISEE and AISEE Oltenia 17,287 38,055
Repairs and maintenance services performed by SISEE and AISEE Banat 31 -
Guarantee for auction participation from ČEZ Logistika s.r.o. 787 -
Repairs and maintenance services received from and operating leasing liabilities and other liabilities payable
to E.on Moldova SA and Electrica Muntenia Nord S.A. - 132
Total 25,135 100,274
For details on the related parties referred to above see Note 26.
14. Other Current Liabilities
Other current liabilities at December 31, 2006 and 2005 are as follows (thousand RON):
31.12.2006 31.12.2005
Payables to employees 2,917 1,908
Social security payable 3,895 2,671
VAT payable 5,925 4,473
Salary tax and other taxes 400 864
TV Tax payable to RTV 863 12,441
Radio Tax payable to RTV 1,613 7,839
Other payables 4,214 6,070
Total 19,827 36,266
Notes to the Financial Statements Electrica Oltenia S.A.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 61
62
15. Provisions
The movement in provisions between December 31, 2005 and December 31, 2006 is presented in the following table (thousand RON):
Explanation Decreases31.12.2005 Increases Utilized Reversed 31.12.2006
Provision for penalties and cost of
replacement of old meters in
accordance with Law 178/2003 32,000 - 7,210 - 24,790
Provision for retirement benefits 32,784 1,272 1,586 - 32,470
Provision for green certificates not acquired by the Company
for energy supplied 120 241 - 121 240
Provision for environmental obligations related to the cost of
disposal of roof tiles containing asbestos and obsolete condensers 1,115 1,000 1,115 1,000
Provision for penalties payable to SISEE Oltenia (2003-2005) 1,598 - - - 1,598
Provision for restructuring 6,300 13,171 4,160 4,114 11,197
Provision for discretionary employees bonuses 1,010 - 940 70 -
Provision for litigation against Drobeta branch 69 10 69 - 10
Provision for litigation for land at Pite[ti branch 256 127 256 - 127
Provision for litigation - Pitesti, land - 10,323 - 6,939 3,384
Provision for litigation - Craiova Zaharul Calafat - 6,941 - - 6,941
Provision for litigation - Valnefer company 363 150 - 363 150
Provision for restructuring of the finance, controlling, accounting,
IT, HR, and customer care functions - 3,288 1,786 - 1,502
Provision for payments from profit to employees - 2,654 - - 2,654
Provisions for staff bonuses as a result of their participation in
the Company's profits, as the Collective Labor Agreement specifies - 1,788 43 - 1,745
Provision related to SINDSERV's claims - 2,080 - 2,080 -
Provision for audit fees - 97 - - 97
Others litigations - 256 69 - 187
Total 75,615 43,398 17,234 13,687 88,092
The Company has booked a provision, amounting to 24,790 thousand RON, for penalties that may be levied and the cost of replacing
old meters in accordance with Law 178/1003. The Company follows 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.
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:
– Discount rate of 7.49% for 2007 and thereafter decreasing to 3.53% in 2051.
– A 12.6 % increase of the level of salaries in 2006; the increase in the salaries level is reduced to 2% in 2051.
– A 1% turnover of the number of employees and also assuming that the Company does not have any plans to reduce the number of
employees.
– All employees will retire when they reach retirement age.
Electrica Oltenia S.A. Notes to the Financial Statements
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 62
63
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 represents 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 environmental 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 disposal of roof tiles containing asbestos and based on a
contract signed with a company specializing in the disposal of obsolete 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 penalties payable to SISEE Oltenia (2003-2005) relates to estimated penalties payable for the years 2003 and 2004,
as well as the nine month period ended September 30, 2005, in accordance with the provisions of the maintenance contract between
the Company and SISEE Oltenia. The Company anticipates reaching an agreement with SISEE Oltenia, in relation to the final amount
of the penalties payable, during the year 2007.
The provision for restructuring costs, amounting to 11,197 thousand RON, includes the estimated remaining costs associated with the
legal and accounting separation of the Company's supply and distribution activities so as to comply with local Energy Sector
regulations in force. The restructuring process is expected to be completed by July 2007 (see Note 30 for further details).
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 2007.
Two significant litigations are in progress, for which the provision as of December 31, 2006 amounts to 10,325 thousand RON. This
provision comprises a provision in relation to the litigation with Preda Victoria, amounting to 3,384 thousand RON, related to the claim
initiated by an individual for the rent for his land, which is by the electricity network, and the provision for Zah`rul Calafat were the
plaintiff claims damages related to the cost of damaged production as a result of a fault in the voltage of electricity supplied to their
factory (6,941 thousand RON). The timing of the 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 Company anticipates that
the litigation proceedings will be concluded during the year 2007.
The provision for restructuring of the finance, controlling, accounting, IT, HR, and customer care functions relates to the costs for the
implementation of the shared services structure for the respective functions of the Company, which commenced in the year 2006.
16. Sales of Electricity
The composition of sales of electricity for the years ended December 31, 2006 and 2005 is as follows (thousand RON):
2006 2005
Corporate customers 672,081 806,197
Reactive electrical energy 23,127 20,178
Households 357,788 289,839
Retired employees of the Company 2,885 2,683
Other electricity distribution companies 64,567 7,988
Total 1,120,448 1,126,885
Notes to the Financial Statements Electrica Oltenia S.A.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 63
64
17. Other Operating Revenues
Other operating revenues for the years ended December 31, 2006 and 2005 consist of the following (thousand RON):
2006 2005
Services rendered 166,370 118,460
Rental revenues 15,767 13,708
Sales of merchandise 2,002 917
Revenues from activity - local households 30 176
IT services rendered 495 458
Revenues from sundry activities 8,703 13,556
Operating subsidies 45 57
Fines, penalties and damages 26,990 11,728
Subsidies received for investments made 4,855 5,101
Other operating revenues 3,200 1,390
Total 228,457 165,551
18. Electricity Purchased
Electricity purchased during the years ended December 31, 2006 and 2005 consist of the following (thousand RON):
2006 2005
Energy purchased from the transmission system 782,381 80,484
Energy purchased from third parties 10,753 734,252
Total 793,134 814,736
19. Materials and Supplies
Materials and supplies during the years ended December 31, 2006 and 2005 consist of the following (thousand RON):
2006 2005
Purchases of auxiliary materials 1,694 1,045
Expenses regarding the non technological fuel used 180 140
Expenses regarding spare parts used 2,342 18,939
Expenses regarding materials used for protection and security 2,634 2,512
Expenses regarding the protection equipments 1,572 1,224
Expenses regarding other consumables 1,029 1,495
Electricity, heating and water 1,060 803
Total 10,511 26,158
20. Repairs and Maintenance
Repairs and maintenance during the years ended December 31, 2006 and 2005 consist of the following (thousand RON):
2006 2005
Maintenance works 79,331 86,248
Maintenance services received from related parties 23,361 25,105
Total 102,692 111,353
Electrica Oltenia S.A. Notes to the Financial Statements
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 64
65
21. Salaries, Wages and Other Employee Benefits
Salaries, wages and other employee benefits during the years ended December 31, 2006 and 2005
consist of the following (thousand RON):
2006 2005
Salaries (including bonuses) 66,650 56,343
Company's contribution to social security funds 21,002 18,811
Other employees' expenses 1,147 1,020
Meal tickets 4,595 -
Total 93,394 76,174
22. Depreciation, Amortization and Impairment Charge
Depreciation, amortization and impairment charge for the years ended December 31, 2006 and 2005
is analyzed as follows (thousand RON):
2006 2005
Depreciation of property, plant and equipment 95,561 87,878
Amortization of intangible assets 2,297 2,029
Impairment charge 4,823 11,460
Total 102,681 101,367
The impairment charge for years 2006 and 2005 relates to the impairment loss recognized in the income statement as a result of the
physical inventory of the Company's fixed assets.
23. Financial Income, Net
Financial income, net, for the years ended December 31, 2006 and 2005 consists of the following (thousand RON):
2006 2005
Interest revenue 19,679 4,090
Foreign exchange gains 10,279 16,633
Other financial costs 1,129 432
Interest expenses (327) (2,890)
Foreign exchange losses (36,369) (44)
Total income / (expense) (5,609) 18,221
The major drivers of the financial result during 2006 were the net foreign exchange losses and interest revenue. The high value of the
foreign exchange losses in 2006 was generated by the appreciation of the local currency against the EUR (by 8%), from
RON 3.6771 / EUR 1 to RON 3.3817 / EUR 1 between December 31, 2005 and December 31, 2006.
The above mentioned losses were mainly covered by the income generated from the interest collected as the result of the free cash,
denominated both in RON and in EURO, invested in the Romanian money market. The financial investments consisted of time
deposits and Treasury Bills issued by Finance Ministry, with regular maturities of one month. In the first half of 2006, the credits
engaged by the Company were fully reimbursed, including accrued interest.
Notes to the Financial Statements Electrica Oltenia S.A.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 65
66
24. Other Operational Expenses
Other operational expenses during the years ended December 31, 2006 and 2005 consist of the following (thousand RON):
2006 2005
Expenses regarding other non-storable materials 226 4,446
Cost of merchandise sold 1,900 869
Packaging costs 5 9
Rental expenses 5,075 4,974
Insurance expenses - 12
Cost of services rendered by individuals 356 70
Commissions and fees 40 5,932
Protocol expenses 40 86
Advertising and promotion expenses 166 55
Transport of goods and personnel expenses 48 27
Travel expenses 1,200 955
Postal expenses 4,803 3,880
Bank commissions and similar charges 607 1,008
Others services received 35,860 25,165
Other Taxes 1,977 2,702
Write off of bad debts 83 7,861
Damages payments 177 280
Fines and penalties 7 159
Net additional provisions / (release) of provisions 47,282 33,662
Loss on disposal of property, plant and equipment 1,357 2,068
Other operational expenses 2,259 2,846
Total 103,468 97,066
25. Income Taxes
Income Tax Legislation
Corporate income tax is calculated in accordance with Romanian tax regulations at the rate of 16% for 2006 and 2005.
The legal and fiscal environment in Romania and its implementation into practice changes frequently and is subject to different
interpretations by various Ministries of the Government. 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 performed 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 significantly 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 filing.
Management believes that it has adequately provided for tax liabilities in the accompanying financial statements; however, the risk
remains that tax authorities could take differing positions with regards to the interpretation of these issues and the effect could be
significant.
Electrica Oltenia S.A. Notes to the Financial Statements
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 66
67
As at December 31, 2006 and 2005, the income tax expense is analyzed as follows (thousand RON):
31.12.2006 31.12.2005(Note 30)
Current income tax 34,947 18,706
Deferred income tax 7,266 (7,920)
Total 42,213 10,786
As at December 31, 2006 and 2005, the income tax expense is analyzed as follows (thousand RON):
2006 2005(Note 30)
Profit before tax 137,416 83,803
Statutory income tax rate 16% 16%
Expected Income tax expense 21,987 13,408
Add (deduct) tax effect of:
Deductible depreciation (3,207) (13,556)
Deductible legal reserve (1,079) (438)
Other deductible items (1,574) (4,725)
Non-taxable income (15,046) (24,873)
Fixed assets (depreciation, amortization and deferred tax effect on revaluation of land) - 11,979
Non deductible provisions and reserves 21,530 26,356
Other non-deductible items 13,187 2,635
Income taxes 42,213 10,786
Effective tax rate 31% 13%
As at December 31, 2006 and 2005, the net deferred tax liability on temporary differences is analyzed as follows (thousand RON):
Balance sheet Income statement31.12.2006 31.12.2005 2006 2005
(Note 30) (Note 30)
Deferred income 2,502 2,755 253 124
Property Plant & Equipment (33,493) (65,060) - -
Intangible assets (35) (69) 34 (164)
Other assets 729 (226) (955) 226
Revaluation reserve - (2,200) - -
Liabilities 1,575 9,577 8,002 (8,106)
Total (28,722) (55,223) 7,266 (7,920)
The movement in the deferred tax liability on property, plant and equipment during the years ended December 31, 2006 and 2005 has
been credited / debited into the revaluation reserve account within equity, respectively. Similarly, the movement in the deferred tax
liability on the revaluation reserve during the year ended December 31, 2006 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, 2006 and 2005
is as follows (thousand RON):
2006 2005 (Note 30)
Opening deferred tax liability as of January 1 55,223 59,548
Deferred tax liability charged / (credited) directly to equity (33,767) 3,595
Deferred income tax charge / (income) for the year 7,266 (7,920)
Closing deferred tax liability as of December 31 28,722 55,223
Notes to the Financial Statements Electrica Oltenia S.A.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 67
68
26. Related Parties
Receivables and payables from / to related parties as of December 31, 2006 and 2005
are presented in the following table (thousand RON):
Receivable from Payable to31.12.2006 31.12.2005 31.12.2006 31.12.2005
Electrica S.A. 1,962 404 4,465 70,145
E.on Moldova S.A. 23 - - 131
ENEL Electrica Dobrogea S.A. 44 - - 30
Electrica Muntenia Nord S.A. - - - 1
Electrica Muntenia Sud S.A. 166 - - 31
ENEL Electrica Banat S.A. 89 2 - 6
Electrica Transilvania Nord S.A. 20 - - -
Electrica Transilvania Sud S.A. 84 - - -
SISEE and AISEE Oltenia 199 200 17,287 38,055
SISEE and AISEE Banat 1 - 31 -
CEZ România S.R.L. 2,659 - 2,565 -
CEZ Logistika s.r.o. - - 787 -
CEZ Data s.r.o. 2 - - -
Total 5,249 606 25,135 108,399
Presented under:
Current assets 5,249 606 - -
Non-current liabilities - - 8,125
Current liabilities - 25,135 100,274
Total 5,249 606 25,135 108,399
Amounts payable to Electrica S.A. consist mainly of payables related to the purchase of electricity, repairs and maintenance and other
services.
Transactions with related parties during 2006 and 2005 are presented in the following table (thousand RON):
Sales/Revenues Sales/Revenues Purchases/expenses Purchases/expensesin 2006 in 2005 in 2006 in 2005
Electrica S.A. 27,352 4,923 103,370 443,931
E.on Moldova S.A. 529 671 131 248
ENEL Electrica Dobrogea S.A. 294 458 59 700
Electrica Muntenia Nord S.A. 566 807 24 2,790
Electrica Muntenia Sud S.A. 2,044 1,304 75 366
ENEL Electrica Banat S.A. 676 774 229 276
Electrica Transilvania Nord S.A. 877 1,011 52 365
Electrica Transilvania Sud S.A. 2,238 1,914 160 212
SISEE and AISEE Oltenia 2,995 - 145,727 133,410
SISEE and AISEE Muntenia Nord - - 1 30
SISEE and AISEE Muntenia Sud 1 - - -
SISEE and AISEE Banat 7 - 669 11
SISEE and AISEE Moldova - - 26
CEZ Romania S.R.L. 2,733 - 15,378 -
CEZ Logistika s.r.o. - - 787 -
CEZ Data s.r.o. 2 - - -
CEZ a.s. 44 - - -
Total 40,358 11,862 266,662 582,365
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 Electrica S.A. group. All related party transactions are concluded on an arms'
length basis. All balances are 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 37% of its share capital as of December 31, 2006 (December 31, 2005: held
49% of the share capital). Electrica Muntenia Nord S.A., Electrica Muntenia Sud S.A., Electrica Transilvania Nord S.A. and Electrica
Transilvania Sud S.A. are subsidiaries of Electrica S.A., engaged in the supply and distribution of electricity in their respective regions
of coverage.
E.on Moldova S.A., ENEL Electrica Dobrogea S.A. and ENEL Electrica 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 privatization 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).
Electrica Oltenia S.A. Notes to the Financial Statements
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 68
CEZ România SRL, ČEZ Logistika, s.r.o., ČEZ Data, s.r.o. are wholly owned subsidiaries of ČEZ, a.s., the Company's ultimate parent
company.
Transactions with CEZ Romania S.R.L. relate to the acquisition of electricity from this entity and 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.
The short term employee benefits of the key management personnel of the Company for 2006 amount to 367 thousand RON while for
2005 they amounted to 349 thousand RON. Other employee benefits to key management personnel are the same as those offered to
other employees, including termination, retirement and post retirement benefits (see Notes 2.3 and 29).
The short term employee benefits of the Board of Directors members of the Company for 2006 amount to RON 300 thousand while
for 2005 they amounted to 75 thousand RON. No other benefits are granted to Board of Directors members.
Key Management Personnel (as of December 31, 2006)
The Company's key management personnel are the following:
– Gabriel Negril` - General Manager
– Emi Mitrofan - Finance Director
– Vicen]iu Alexandru - Technical & Development Director
Board of Directors Members (as of December 31, 2006)
The Company's Board of Directors members are the following:
– Jan Veškrna - President
– Martin Pacovský - Member
– Luboš Pavlas - Member
– Tudor {erban - Member
– Dan C`t`lin Stancu - Member
27. Number of Employees
The average number of employees for the years ended December 31, 2006 and 2005 was as follows:
2006 % 2005 %
Workers 1,949 66% 1,929 65%
Other categories 1,022 34% 1,040 35%
Total 2,971 100% 2,969 100%
28. Financial Risk Management Objectives and Policies
During the year 2006 the Company commenced reorganization projects 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 financial instruments of the Company are composed of trade receivable and payable, cash and cash equivalents and long-term
liabilities to related parties (including loans).
In April 2006, the Company paid the loans contracted through Electrica S.A. and, in that way, it has been eliminated the related
financial risk. Other risks which significantly affect the results of the Company are foreign exchange risk, credit risk, litigation and lay-
off indemnities.
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.
69Notes to the Financial Statements Electrica Oltenia S.A.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 69
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:
– The passive approach: the certainty degree related to the exchange rate prediction is too low and the Company might decide to not
take any steps for the protection against this risk;
– 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:
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;
Option on exchange rate: - the Company has the opportunity to purchase total or partial protection against an unfavorable
evolution of the rate and, at the same time, keeps the chance to take advantage from the favorable 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.
Credit Risk
The Company is obliged by the law to provide electricity distribution services to new customers without performing a credit check. For
this risk the Company raise provisions depending on receivables’ age. If the corporate customers have a poor track record on their
payables history, the Company requests a bank guarantee.
From eligible customers the credit risk is assessed before signing up. Bad debts are compensated by the regulatory authority,
recognizing the related costs in tariffs.
The maximum credit risk exposure is equal to the accounts receivable balance at December 31, 2006.
Litigation
The Company is involved in a series of lawsuits related to ownership title deeds for land on which electricity and distribution networks
lie. For all these litigation the Company sets up provisions depending on the claimants' demands.
The receivables recovery procedure stipulates the deadline by which the Company should bring an action against the customer if he
cannot (or does not) pay.
29. Commitments and Contingencies
As of December 31, 2006 and 2005, the Company had committed to the following capital expenditure program:
a) Distribution activity (thousand RON)
Objective 31.12.2006Financed from
Own resources Total
Investments on installations 39,120 39,120
Production centre / units development 44 44
Equipment and other investment expenses 813 813
Total 39,977 39,977
Objective 31.12.2005Financed from
Own resources Total
Investments on installations 1,602 1,602
Production centre / units development 17,159 17,159
Equipment and other investment expenses - -
Supplying new subscribers with energy 124,249 124,249
Fixtures and fittings 40,123 40,123
Electrification, ANL dwellings 143 143
Total 183,276 183,276
70 Electrica Oltenia S.A. Notes to the Financial Statements
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 70
b) Supply activity (thousand RON)
There was no committed capital expenditure for the supply activity as of December 31, 2006.
Objective 31.12.2005Financed from
Own resources Total
Servicing users; Arrangement pay office 1,097 1,097
Fixtures and fittings 1,209 1,209
Total 2,306 2,306
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 2006, the Company developed its program aimed at monitoring and reducing the pollution level of its installations.
The environment protection expenses incurred by the Company in 2006 and 2005 amounted to approximately RON 68,515 and RON
34,109, respectively. 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 contingent 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 obtained 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 privatization, the land will be considered as
contribution in kind of the State or local authorities. 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.
Financial Risk Management Objectives and Policies
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), is and remains in the State ownership. Moreover, licenses holders for exploiting the
capacities of production, distribution 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 neighborhood of energetic capacities.
The Law does not prohibit the Company from obtaining title deeds for land on which conversion stations or electricity distribution
networks are located.
The Company is involved in a series of lawsuits related to ownership title deeds for land on which electricity and distribution 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.
Staff Lay-Off Indemnities
According to the Collective Labor Agreement between the Company and the Labor Union, the Company is obliged to pay lay-off
indemnities to the employees made redundant based on the number of years of employment with the Company, as follows:
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 governmental 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.
71Notes to the Financial Statements Electrica Oltenia S.A.
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 71
30. Restatement of Comparative Figures
Certain adjustments affecting the financial statements as of and for the year ended December 31, 2005 and December 31, 2004 have
been made during the year, restating the year 2005 comparative figures and opening balances as of January 1, 2005.
The adjustments made relate to the recording of the impact of the movement in the deferred tax liability, related to the revaluation of
fixed assets and the revaluation reserve, in the income statement instead of being charged or credited directly to equity.
The corrections made to the balances as of December 31, 2005 are presented in the following table (thousand RON):
December 31, 2005Balance Sheet As reported Adjustments Restated
Revaluation reserve 609,669 (67,259) 542,410
Retained earnings 44,498 67,259 111,757
The corrections made to the balances as of January 1, 2005 are presented in the following table (thousand RON):
January 1, 2005Balance Sheet As reported Adjustments Restated
Revaluation reserve 532,270 (63,664) 468,606
Retained earnings 1,922 63,664 65,586
The corrections made to the income statement for the year ended December 31, 2005
are presented in the following table (thousand RON):
Year ended December 31, 2005Income Statement As reported Adjustments Restated
Income tax expense 14,381 (3,595) 10,786
Net profit for the year 69,422 3,595 73,017
31. Subsequent Events
During 2006 the Company initiated the process of separation of the electricity distribution and supply activities of the Company in
order to implement the unbundling of its two activities, as per the European Directive 2003/54/EC and the Romanian Government's
Decision no. 890/2003.
As of March 15, 2007, a new company was set up, CEZ Vânzare S.A., to which the electricity supply activity was transferred from the
Company. CEZ Vânzare S.A. has the same shareholding structure as the Company and it will supply electricity to eligible consumers.
The Company, which on March 15, 2007 was renamed CEZ Distribu]ie S.A., will continue as an operator of the distribution system
and owner of the distribution-related assets.
Complying with the regulations of the industry in relation to the transparency in relation to services to be offered by CEZ Distribu]ie S.A. to
CEZ Vânzare S.A. and vice versa, in February 2007 the Company's Administration Council approved the setting up of another company,
CEZ Servicii S.R.L., which will provide finance, controlling, accounting, IT, HR, and Customer care services to CEZ Distribu]ie S.A. and CEZ
Vânzare S.A.
Regarding the finance, controlling, accounting, IT, HR, and Customer care functions, following CEZ Group's model, the Company is in
the process of implementing a shared services structure. The objective of this structure is to improve the quality of service, accuracy
and timeliness of the provided services, as well as streamline costs. The establishment of the shared services centre, to be located in
Pite[ti, is anticipated to be completed by June 30, 2007. Although in the short run the Company will incur one-off costs, in the
medium and long run the savings that will be achieved through the new structure are anticipated to be significant.
72 Electrica Oltenia S.A. Notes to the Financial Statements
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 72
Glossary of Terms and Abbreviations Electrica Oltenia S.A. 73
Glossary of Terms and Abbreviations
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
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
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 73
Method Used to Calculate Key Figures
Key Figures Method Used to Calculate Key Figures
Return on Invested Capital (ROIC) Adjusted EBIT x (1-corporate income 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
74 Electrica Oltenia S.A. Method Used to Calculate Key Figures
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 74
75Information for Shareholders and Investors Electrica Oltenia S.A.
Information for Shareholders and Investors
Contacts
General Manager Technical and Development Director
Gabriel Negril` Vicen]iu Alexandru
Tel.: +40 251 40 50 00 Tel.: +40 251 40 51 00
e-mail: [email protected] e-mail: [email protected]
Financial Director Public Relations
Emi Mitrofan Liana T`t`ranu
Tel.: +40 251 40 54 00 Tel.: +40 251 40 50 65
e-mail: [email protected] e-mail: [email protected]
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 75
76 Electrica Oltenia S.A. Information on Persons Responsible for the Annual Report
Information on Persons Responsible for the Annual Report
Responsibility for the Annual Report
Statutory Declaration:
I hereby declare that the information presented in the Annual Report is factual and that no material circumstances have been omitted
or distorted.
Gabriel Negril` Emi Mitrofan
General Manager Financial Director
Electrica Oltenia S.A. Electrica Oltenia S.A
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 76
Electrica Oltenia S.A.
2 Brestei Street
Craiova, Dolj
Romania
Recorded in the Commercial Register of Craiova under the number J16/148/2002
Year of inception: 2002
ID No: J16/148/2002
CUI : R 14491102
Legal Form: joint stock company
Bankers : Banca Comercial` Român` ; IBAN Account: RO22 RNCB 2600 0001 5489 0001
Tel. : +40 251 40 50 02
Fax : +40 251 40 50 04
2006 Annual Report closing date: May 31, 2007
Design and coordination:
© B.I.G. Prague, Hill & Knowlton Associate, 2007
Adaptation and execution:
© BtB Advertising, Bucharest, 2007
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 77
CEZOltenia_engl.qxd 8/2/07 6:22 PM Page 78