Marius Mateescu: "The insolvency of Hidroelectrica indirectly affects the relations of Transelectrica with banks"

• "The financial loss posted by the company was mainly caused by the result of the depreciation of the national currency"

• "< Transelectrica > will have to invest approximately 500 million Euros in order to absorb the wind energy from the area of Dobrogea, and Moldova as well as the energy generated at the units 3 and 4 of the Cernavodă Nuclear Plant"

(Interview with Marius Ion Mateescu, the CEO of "Transelectrica")

Reporter: In the first semester, Transelectrica has seen its profit drop almost eight times compared to the similar period of last year, even though its profit had increased almost 50% in the first semester. What were the reasons behind such a steep drop?

Marius Ion Mateescu: In the first quarter of 2012, Transelectrica had a gross profit of 57 million lei, and on June 30th, 2012, the gross profit was 32 million lei. Both numbers were lower than the results of the similar period of 2011, mostly due to the current operations, as well as due to the financial result. On the operational line, we were affected by the drop in the quantity of electricity transported, which indirectly led to a drop in revenues, but we have also seen an increase in certain categories of expenses, and specifically: the payment liabilities of the tariff for functional energy system services - the part of the expense afferent to the PREs (ed. note: Parties In Charge of Balancing), international exchanges, amortization, minor maintenance, TELETRANS expenses and so on.

Reporter: In the profit and loss account, for the first semester, we can see a dramatic drop in the financial revenues, the financial result being in fact a loss of 37 million lei. What was the cause of this loss? How did the depreciation of the national financial results affect your financial results? Have you tried edging operations to protect against this kind of problems?

Marius Ion Mateescu: The financial loss was mostly the result of the depreciation of the leu compared to the currencies we have borrowed in (Euros, USD and yen), due to the legal obligation to recalculate at the end of each month the debts denominated in foreign currencies at the exchange rate valid at the end of the last day. There are no hedging mechanisms for these accounting procedures.

Reporter: How do you think the results of Transelectrica will be like in this semester?

Marius Ion Mateescu: As you know, we are a company listed on the Bucharest Stock Exchange, that is why the estimates and the predictions we make are disseminated according to the rules of the stock exchange. A prediction for the semester we are in (H2/2012) is in fact a prediction for the end of the year, given the application of the Government Decision no. 881/2012.

Reporter: How much did you spend on investments this year? What investments do you expect to make in the second semester of this year?

Marius Ion Mateescu: According to the proposal of the rectified Revenue and Expense Budget for the year 2012, the total value of the investments made by "Transelectrica" - SA will reach 544,944,000 lei (excluding VAT) of which 121,577,000 lei (without VAT) are investments financed using the fee for connecting to the RET (ed. note: the Electricity Transport Network). The company's investment program for 2012 mentions a number of new major investments which are at an advanced stage of the public procurement procedure, among which: the LEA 400 kV of interconnection between Reşiţa (Romania) - and Pancevo (Serbia), the Phase I of the switch to 400 kV tension of the Porţile de Fier - Reşiţa - Timişoara - Săcălaz - Arad - axis, retooling of the 220/110 kV Barboşi station, retooling of the 400/110/20 kV Tulcea Vest station, the retooling of the 220/110/20 kV station of Câmpia Turzii, the retooling of the 400/220/110/20 kV Bradu station, the retooling of the 400/110/20 kV station of Domneşti, the IVth phase of the integrated system in electric railway stations, and for some of them it is estimated execution contracts signed will be signed.

Reporter: What is the total value of the investments which Transelectrica has to make to be able to absorb the generated wind energy into the National Energy System? How quickly does the company have to make these investments to prevent the inability of the investors to access the network? Are they late or not?

Marius Ion Mateescu: According to the "Outlook plan for the National Energy Network for the period of 2012-2016 and tentatively for 2021" approved by the company and which is currently being discussed with a view for approval at the ANRE, CNTEE "Transelectrica" - SA will have to invest about 500 million Euros (VAT excluded) to be able to absorb into the National Energy System the wind energy from the areas of Dobrogea, Moldova as well as the energy generated at the units 3 and 4 of the Cernavodă Nuclear Electric Plant. These investments are expected to be made in the next 10 years and at the present time, they are not late.

Reporter: How would you comment on the situation on the Balancing Market, which has a very large share of the total consumption? Is it true that the producers are acting like a cartel and that they deliberately avoid selling their available energy on the spot market so they could get a better price on the Balancing Market?

Marius Ion Mateescu: Since its creation and until the present day, the Balancing Market (PE) saw a trend of continued decrease of its weight compared to the total domestic consumption. Thus, in 2005, when it was created, it had a weight of 7.24% of the total gross domestic consumption and it continuously fell until 2012 when it had a weight of 5.12% of the total gross domestic consumption. In 2011 and 2012 the weight of the Balancing Market increased to over 8% of the domestic gross consumption.

This evolution shows that if the previous markets, (as trading duration) operate correctly (meaning that they trade the entire volume of energy needed to cover the domestic consumption plus the external exchanges) then the weight of the Balancing Market is reasonable.

The major weight of the balancing market appears in two situations which are specific to the Romanian electricity system, namely when there is a high hydraulicity, far above the multi-annual average, or when there is a low hydraulicity, far below the multi-annual average.

In the case of high hydraulicity there are large volumes of energy available on the PE market. The hydroelectric maker usually can't sell the energy on the Day-Ahead Market because of the price (there are restrictions at the producer level concerning the minimum ask price) and thus, it is left with energy available on the balancing market where price is formed automatically, not based on the asking price of the producer.

In the deficit situation (see 2011 and 2012 when Hidroelectrica obtained certificates of force majeure) there is a shortage of energy on the market. The other producers (of thermoelectric energy) can't take on this energy on the Day-Ahead Market PZU because it is usually peak energy, and the availability of the thermoelectric producers to take on peak energy are low.

Thus, it comes to the point where much of this energy deficit is taken on by the Balancing market. This is the explanation on the increase in the weight of the Balancing Market in 2011 and 2012.

It is not true that the producers are acting like a cartel. Besides, there are situations where the price of the Day-Ahead Market is higher than the deficit price of the PE. The thermoelectric producers avoid offering on the Day-Ahead Market the energy produced by reserve dispatchable units because they do not have the guarantee that they can obtain a technically feasible functioning schedule.

On the other hand, the thermoelectric producers are divided, with the exception of the Oltenia Energy Complex, into small plants, with a small number of dispatchable units (DU), and out of precaution they continue to maintain in reserve one UD to compensate for the potential accidental disruptions of some of their own DU.

Reporter: Were there any negative influences of the insolvency of Hidroelectrica on the activity of Transelectrica?

Marius Ion Mateescu: The insolvency of Hidroelectrica SA indirectly affects the banking relations of C.N.T.E.E. Transelectrica S.A. (the size of the loans, the interest rate, the collateral requirements) and implicitly the price of its stock.

It can't be concluded, however that the insolvency of Hidroelectrica SA significantly affects the market behavior of C.N.T.E.E. Transelectrica SA, as it has a very good financial situation, with revenues high above the budgeted level of the period.

Reporter: Brokers consider that the evolution of the stock of TEL, after the secondary public offer, is disappointing, but they are expecting it to recover. How would you comment? Do you believe that, had the secondary offer of TEL been done in the current market circumstances, it would have still been successful?

Marius Ion Mateescu: The secondary public offer in itself, was a success for the Romanian government, which has therefore managed to reach its goal. Apparently we caught an adequate moment in the international context. As for the evolution of the company, we think that a completely liberalized electricity market and an independent regulatory authority will constitute a good starting point for a recovery, but at the same time, let's not forget that the recovery of consumption is also a factor of importance for us.

Reporter: How far along is the process for the appointment of the private management in?

Marius Ion Mateescu: At the level of C.N.T.E.E Transelectrica SA, the tender book drawn up for the selection of the human resources expert was selected for the application of the Government Emergency Ordinance no. 109/2011 and in compliance with the dispositions of the updated Emergency Government Ordinance 34/2006, which was approved in the CTES of May 3rd, 2012, and which was subjected to the approval of the Board of Directors in May 2012. At that time, the Board of Directors decided to postpone the talks on that matter, due to the Ministry of the Economy performing the procedure previously mentioned by the MECMA.