Energy Supply South East Europe

The Energy Supply South East Europe Segment is responsible for the operation of electricity networks and the sale of electricity to end customers in Bulgaria and Macedonia, the production of electricity in Macedonia, the generation and sale of heat in Bulgaria, the sale of natural gas to end customers in Croatia and energy trading throughout the region.

Highlights 2013/14

Regulatory framework

The regulatory authority in Bulgaria reduced the end customer prices for electricity by 4.2% as of 1 August 2013 and followed this step with a further reduction of roughly 1.0% and 10.0%, respectively, in the day and night tariffs for household customers as of 1 January 2014. The next change involved a slight increase of 0.6% in end customer prices as of 1 July 2014. This adjustment did not create any advantage for the EVN companies in Bulgaria because the electricity purchase prices for EVN Bulgaria Electrosnabdjavane, which is responsible for supply, were increased substantially and the allowable margin was cut from 3% to 2%. The tariff decision also included the repayment of revenue from previous periods to customers. Clarification was also received that the national electricity company NEK is the direct recipient of the claim filed by EVN Bulgaria Electrosnabdjavane in 2012/13 for the compensation of additional costs associated with eco-electricity. Accordingly, this claim is now directed against NEK.

The 5.9% reduction in the end customer prices for heat in Bulgaria as of 1 January 2013 was partially reversed by an increase of 5.1% through a tariff decision issued on 1 July 2014.

EVN is continuing its active pursuit of the arbitration proceedings started last year at the World Bank’s International Centre for the Settlement of Investment Disputes (ICSID). The proceedings initiated in March 2014 to revoke the license of the Bulgarian electricity company EVN Bulgaria Electrosnabdjavane EAD are unjustified from EVN’s point of view. However, these proceedings are still pending.

The regulatory authority in Macedonia increased end customer prices by 3.5% on average as of 1 July 2014. The network tariff included in this price, which is relevant for EVN in Macedonia, was raised by only a slight amount and remains below the expected level. The next liberalisation step in Macedonia started at the beginning of the third quarter of 2013/14 and allows large local companies to select their own energy supplier. This liberalisation process will continue on a step-by-step basis over the coming years.

In Croatia, the natural gas distribution and supply project is proceeding. The underlying gas tariffs have been based on European regulatory standards since 1 January 2014, which also reflect the position of EVN Croatia Plin as a “greenfield investor“.

Energy sector development

The mild winter in 2013/14 led to a decline in the heating degree total (Bulgaria –7.6 and Macedonia –5.7 percentage points) and to a further reduction in electricity and heat sales compared with the mild winter in the previous year.

EVN’s companies in South Eastern Europe generated 400 GWh of electricity in 2013/14, a year-on-year decline of 27 GWh, or 6.4%. Of the total production, 127 GWh represented generation from hydropower and windpower plants and 273 GWh from thermal generation. The low volume of precipitation during the winter was reflected in reduced water flows throughout the region. The decline in production was also related to technical downtime at the co-generation plant in Plovdiv.

Network sales volumes were stable in comparison with the previous year and totalled 13,034 GWh. A primarily temperature-related decline in energy sales volumes was partly offset by further network loss reductions in Bulgaria und Macedonia.

Revenue development

Revenue generated by the Energy Supply South East Europe Segment fell by EUR 106.9m, or 10.6%, to EUR 900.8m in 2013/14. This development resulted primarily from the mild winter in 2013/14, effects from previous price decisions and the liability that was recognised in Bulgaria in connection with the tariff decision on 1 July 2014 and the required repayment of revenue from previous periods.

Operating expenses und operating results

Operating expenses were EUR 10.0m, or 1.1%, lower at EUR 880.6m, above all due to the additional expenses for eco-electricity that were included in the previous year. This reduction only offset the decline in revenue by a slight amount, and EBITDA fell by 82.8% to EUR 20.2m. Depreciation and amortisation, including the effects of impairment testing, rose from EUR 65.8m in the previous year to EUR 252.9m in 2013/14. The increase was caused primarily by the impairment losses recognised on goodwill and customer bases in the third quarter of 2013/14 based on the respective tariff decisions from 1 July 2014 in Bulgaria und Macedonia. The above effects resulted in EBIT of EUR –232.8m for 2013/14, compared with EUR 51.2m in the previous year.

Financial results and profit before tax

Financial results declined by EUR 1.7m to EUR –29.2m. Profit before tax was lower than the previous year at EUR –262.0m in 2013/14.

Investments

Investments in the Energy Supply South East Europe Segment were EUR 5.0m, or 6.0%, lower at EUR 77.5m year-on-year in 2013/14. However, the projects continued to focus on the improvement of supply security and network infrastructure. Further investments were also made in the expansion of natural gas supplies in Croatia.

Outlook

The Energy Supply South East Europe Segment is expected to record positive operating results in 2014/15. EVN will continue its efforts to realise further efficiency improvements and reduce network losses. In Macedonia, the challenges lie in the continued liberalisation of the electricity market. EVN will only benefit in part from the 9.7% increase in end customer electricity prices that was implemented in Bulgaria on 1 October 2014 because procurement costs were raised at the same time. In Bulgaria, EVN will also continue to enforce its rights before all responsible (arbitration) courts and bodies in the proceedings currently in progress.