Romgaz S Regulatory News (SNGR)

IDENTIFICATION DETAILS ON REPORT AND ISSUER

Preliminary annual report according to Article 61 of Law 24/2017

Financial year: 2020

Report date: February 25, 2021

Name of the Company: Societatea Nationala de Gaze Naturale (S.N.G.N.) ROMGAZ SA

Headquarters: Medias, Constantin I. Motas Square, no.4, code 551130

Telephone/fax number: 004-0374-401020 / 004-0269-846901

Fiscal Code: RO14056826

LEI code: 2549009R7KJ38D9RW354

Trade Registry No: J32/392/2001

Subscribed and paid in share capital: RON 385,422,400

Regulated markets where the issued securities are traded: Bucharest Stock Exchange (BVB), London Stock Exchange (LSE)

PRELIMINARY CONSOLIDATED ANNUAL REPORT

(issued based on unaudited consolidated financial information prepared

 in compliance with the International Financial Reporting Standards)

ON THE ECONOMIC AND FINANCIAL ACTIVITY OF SNGN "ROMGAZ" SA GROUP[1] for 2020

OVERVIEW

S.N.G.N. Romgaz S.A. is a Romanian natural gas producer and supplier, the business segments of the Group being: gas exploration, gas production and supply, underground gas storage and electricity production.

Relevant Consolidated Financial Results

(RON millions, unless otherwise specified)

*p - preliminary

Romgaz Group's preliminary performances for the year ended December 31, 2020 were influenced by the following factors:

Ä Preliminary 2020 gas production was 4,519.7 million m3, 757.2 million m3 lower than the production recorded during the previous year (-14.35%) due to the effects of the COVID-19 pandemic on the Romanian economy; in the 4th quarter of this year (Q4) we can see a strong production comeback as compared to Q3 (estimated growth of 38.84%), the comeback being also confirmed by a production level similar to last year's Q4 (a mere 0.41% estimated production drop). Actual production was higher than budgeted by 4.7%.

Ä Preliminary revenue for 2020: RON 4.07 billion (2019: RON 5.08 billion), lower by 19.79% (in volume, the quantity of natural gas sold is 10.1% lower). For Q4 2020 an estimated 59.5% revenue growth is expected as compared to Q3 2020 due to an increase of 86.4% in volumes of natural gas sales. At a Group level, in gas storage activity, a 13.2% revenue increase is seen, being supported by a 92.6% increase in extraction services (+RON 20.7 million) and by a 6.2% increase (+RON 16.4 million) in capacity reservation services. Revenue from electricity sales increased by 29.9% compared to previous year (+RON 43.6 million) due to production being 58.9% higher.

Ä Preliminary net profit for the year 2020: RON 1.25 billion (2019: net profit RON 1.09 billion), increased by 15.14%;

Ä The estimated Q4 Net Profit was RON 312.70 million, higher by 121.6% as compared to Q3 2020.

Ä Decrease by RON 146.0 million (42.59%) of petroleum royalty expenses (RON 195.9 million in 2020 as compared to RON 342.9 million in 2019) pursuant to the decrease of the reference price taken into account.

Ä Decrease by RON 302.0 million (42.12%) of the windfall tax further to the deregulation of prices in the gas sector, pursuant to an average gas selling price 16% lower on average as compared to the previous year, and a lower quantity supplied by 10.1%.

Ä Due to existing market conditions the Group identified impairment indicators for assets used in the gas segment. The Group ran an impairment test which did not result in any additional impairment. The Group only recorded impairment for specific assets, for abandoned wells as dry holes. Due to this fact, the depreciation, amortisation and impairment expenses decreased by RON 880.9 million (-64.86%) as compared to previous year.

Ä In 2020 the Group did not encounter any major collection issues regarding current trade receivables, so that it recorded a net impairment gain on trade receivables of RON 17.6 million compared to a net loss of RON 81.2 million last year.

Ä In 2020 the Company was subject to an economic-financial inspection on the allocation of dividends according to art. 43 of Government Emergency Ordinance no. 114/2018. The inspectors concluded that the Company did not calculate the allocated dividends correctly, but rather it should have paid additional dividends of RON 34,852 thousand, of which RON 24,284 thousand payable to the main shareholder and penalties of RON 938 thousand. As the Company did not agree with the conclusions in the report, it started legal actions against it. The deemed dividends attributable to the main shareholder and related penalties were offset by the National Agency for Fiscal Administration ("NAFA") against receivables of the Company from NAFA, although the Company requested the receivables to be offset against other tax liabilities when due. Following the offset, the Company recorded an expense of RON 24,284 thousand, as there is no shareholders' decision to allocate additional dividends. As for the penalties of RON 938 thousand, these were written-off according to Government Emergency Ordinance no. 69/2020.

Ä Consolidated Net profit margin (30.79%) and Consolidated EBIT margin (34.00%) have risen strongly from previous year's levels (21.45%, respectively, 24.35%) and show a high profitability of the group despite a drop in revenue. Consolidated EBIDTA margin (45.71%) decreased from last year, but it maintains a high rate.

VOLUME INDICATORS

Estimated volumes of gas production, gas deliveries, gas injected in/withdrawn from storages, gas used for power generation, electricity production and invoiced extraction from/injection in storages services in the reviewed period are shown in the table below:

(million m3, unless otherwise specified)

ECONOMIC-FINANCIAL INDICATORS

The economic-financial indicators have been calculated based on unaudited preliminary consolidated financial statements and may be different from the actual audited results.

The Group's revenue is mainly generated by the sale of natural gas, underground gas storage services and electricity production and sale.

Preliminary statement of consolidated comprehensive income for the year ended December 31, 2020 (unaudited)

(RON thousand)

Revenue

In 2020, Romgaz estimates consolidated revenues of RON 4.1 billion as compared to RON 5.1 billion achieved in 2019.

The decrease resides in a 24.48% fall of revenue from sales of gas produced by Romgaz and of gas purchased for resale, as well as gas from joint ventures. On the other hand, consolidated revenue from storage services increased by 13.32% and revenue from electricity sales increased by 29.90%.

The main components of revenue are show below:

(RON thousand)

Tariffs of storage services were:

- April 1, 2019 - March 31, 2020 storage cycle

o Capacity reservation tariff: RON 9.98/MWh/annual cycle;

o Injection tariff: RON 1.90/MWh;

o Withdrawal tariff: RON 1.61/MWh.

- April 1, 2020 - March 31, 2021 storage cycle

o Capacity reservation tariff: RON 7.58/MWh/annual cycle (-24.05%);

o Injection tariff: RON 3.67/MWh (+93.16%);

o Withdrawal tariff: RON 2.03/MWh (+26.09%)

Please note that consolidated storage revenues include revenue from services invoiced by Romgaz; non-consolidated storage revenue are down 3.87% compared to 2019.

As for volumes, as compared to 2019, the Group estimates that in 2020:

- it sold 10.01 % less gas;

it provided gas withdrawal services from storages by 42.8% higher, gas injection services in storages by 57.4% lower;

- it produced 58.9% more electricity.

Cost of commodities sold

In 2020, cost of commodities sold decreased by 82.73% as compared to the previous year, mainly due to the fact that no gas was imported in 2020.

Other gains and losses

The largest items recorded in Other Gains and Losses are losses from write-offs of non-current assets (RON 65,7 million) mainly representing abandoned gas wells as dry holes; the effect of these losses is offset by the reversal of the impairment previously recorded by the Group for these wells.

Net losses/gains from impairment of trade receivables

The Group records impairments for trade receivables depending on non-collection risks. In 2020, the Group recorded a net gain from impairment of trade receivables of RON 17.6 million. Non-collection risk estimated in 2019 was reduced for one of the clients undergoing an insolvency procedure due to timely collection of receivables, which led to a decrease of the impairment recorded for this client.

Changes in inventory

During 2020 the gas quantity withdrawn from storages was higher than the quantity injected in storages, thus generating negative changes in inventory (loss), unlike the year 2019 when the injected quantity was higher than the withdrawn quantity generating a favourable change in inventories (income). The quantity of gas injected in storage by the Company in 2020 as compared to 2019 decreased by 57.1% while the withdrawn quantity increased by 42.7%.

Raw materials and consumables used

The decrease of raw materials and consumables is due to a volume of technological consumption 19.3% lower (-40.1% in terms of value) and 31.5% lower fuel expenses during 2020 as compared to 2019.

Depreciation, amortization and impairment

In 2020, the depreciation, amortization and impairment of non-current assets expenses dropped by 64.86% due to a reduction by 13.9% of depreciation expenses and a 96.54% decrease in fixed assets impairment.

Due to existing market conditions the Group identified impairment indicators for assets used in the gas segment. The Group ran an impairment test which did not result in any additional impairment. The Group only recorded impairments for specific assets, for abandoned wells as dry holes.

Exploration expenses

Exploration expenses recorded in 2020 of RON 155.57 million increased by 533.37% compared to the previous year.

The increase is due to higher exploration expenses (seismic works) by RON 23.4 million.

Exploration expenses also include the costs of wells written off. In 2020 the cost of these decommissioned investments was of RON 130.67 million, compared to RON 23.1 million in 2019. These costs are mostly offset by net impairment income.

Other expenses

In 2020 other expenses decreased by 25.79% as compared to 2019. The decrease of RON 400.21 million is mainly due to lower windfall tax and lower royalties.

In 2020, other expenses include net expenses with provisions of RON 84.0 million compared to 2019 when there was a net income from provisions of RON 57.2 million. The most significant provision expenses are:

- CO2 certificates consumed in 2020 that will be bought in 2021 (the net expense of RON 57.8 million is influenced by the use in 2020 of the provision recorded for this purpose in 2019);

- increase in the decommissioning provision(net expense of RON 24.3 million), following a lower discount rate used in the computation (4.41% in 2019; 2.97% in 2020); this rate considers the yield of 10-year government bonds.

Other income

Other income decreased by 22.52% in the year ended December 31, 2020 as compared to the same period of 2019, due to the decrease of income from penalties for uncollected amounts according to contract terms or incompliance by suppliers with execution terms.

Preliminary Statement of Consolidated Financial Position as of December 31, 2020 (unaudited)

(RON thousand)

NON CURRENT ASSETS

The total of non-current assets increased by 2.07% by the end of 2020, compared to the end of 2019, meaning by RON 120.58 million, from RON 5,822.04 million on December 31, 2019 to RON 5,942.61 million, on December 31, 2020.

In 2020 the Group invested a total of RON 637.25 million, representing 71.19% of the investment budget.

Of the net increase of RON 69.95 million recorded in Non-current Assets during 2020 RON 136.04 million relates to the increase of the decommissioning provision. As mentioned above, the increase in this provision is caused by the decrease of 10-year government bonds yield, this rate being used as a discount factor.

Investments in associates are accounted for in the consolidated financial statements by the equity method which implies that the investment is initially recognized as cost and adjusted afterwards, depending on the post-acquisition modifications, in the apportioned share of the Group in the associate's net assets in which the investment had been made. The Group's profit or loss includes its share of the associate's profit or loss.

Deferred tax asset

Deferred tax asset is based on the temporary differences between the accounting value and the tax value of balance sheet items. These temporary differences may be taxable, meaning they will result in taxable values when determining the taxable result of future periods, or deductible, meaning they will result in values that are deductible when determining the taxable result of future periods.

The increase in the deferred tax asset is mainly caused by the increase in the decommissioning provision (which generated an increase in the deferred tax asset of RON 28.28 million) and the bankruptcy of one of the Group's clients (which generated an increase in the deferred tax asset of RON 36.2 million).

CURRENT ASSETS

Current assets increased by RON 887.4 million on December 31 2020, due to the increase of cash, cash equivalents and other financial assets by RON 973.3 million; this increase is due to a lower level of investments, cost reductions and lower dividends distributed to shareholders.

Inventories

Inventories decreased at the end of 2020, as compared to December 31, 2019 by 21.37% as a result of the decrease of gas stock in storages (367.8 million cm3 were extracted, while only 225.9 million cm3 were injected in storages).

Trade and other receivables

Trade receivables decreased in 2020 as compared to December 31, 2019 by 7.10% as a result of lower prices charged for gas deliveries in 2020 compared to 2019.

NON-CURRENT LIABILITIES

At the end of 2020, non-current liabilities increased by 58.92% as compared to December 31, 2019, mainly due to the increase of the decommissioning provision for wells with 45.99% (RON 176.7 million, of which RON 4.2 million related to the short-term portion) and from RON 115 million received from the National Investment Plan ("NIP") for Iernut Power Plant construction - the NIP amounts received are a government grant and will be recorded as income as the plant depreciates.

CURRENT LIABILITIES

Current liabilities increased with RON 87.08 million from RON 568.32 million recorded on December 31, 2019 to RON 655.40 million at the end of 2020.

Trade payables and other liabilities

Trade payables decreased compared to December 31, 2019 by 18.90% due to lower payables to non-current assets suppliers (-RON 25.6 million) because of the lower level of investments in 2020.

Contract liabilities

These liabilities represent advances received from customers on December 31, 2020 for 2021 deliveries.

Other liabilities

Other liabilities recorded a small decrease of 0.17% as compared to December 31, 2019. Most of these liabilities are liabilities to state budget that are due in January 2021, according to regulations, and liabilities to employees.

Provisions

On December 31, 2020, current provisions recorded an increase of 81.01% as compared to December 31, 2019. This increase is due, mainly, to the provision for greenhouse gas emission certificates (RON 81.2 million at December 31, 2020, the equivalent of 525,067 certificates compared to RON 23.4 million at December 31, 2019, the equivalent of 181,277 certificates).

EQUITY AND RESERVES

Group's equity increased by 8.8%. The changes in the Group's equity in 2020, respectively 2019, are presented below:

(RON thousand)

(RON thousand)

Preliminary Statement of Consolidated Statement of cash flow for the year ended on December 31, 2020 (unaudited)

The consolidated cash flows registered during January-December 2020 and the similar period of 2019 are as follows:

(RON thousand)