SNGN Romgaz : Substantiation Note of the 2023 Individual Income and Expenditure Budget of SNGN Romgaz SA

Societatea Naţională de Gaze Naturale Romgaz S.A. - Mediaş - România

No. 2219/17.01.2023

ENDORSED,

Chairman of the Board of Directors

Dan Dragoș DRĂGAN

To,

SNGN ROMGAZ SA MEDIAȘ GENERAL MEETING OF SHAREHOLDERS

SUBSTANTIATION NOTE

OF THE

2023 INDIVIDUAL INCOME AND EXPENDITURE BUDGET

I. Substantiationof the 2023 Income and Expenditure Budget draft and the

2024-2025 forecast was based on the laws related to:

• implementing the International Financial Reporting Standards by the companies whose securities are traded on a regulated market;
• reinforcement of financial discipline and including the wages and salaries expenses in the 2023 budget at the level of economic operators where the state or administrative territorial units are sole or majority shareholders or hold, directly or indirectly, a majority interest;
• profit distribution by national companies and trade companies fully or majority state owned, as subsequently amended and supplemented;
• implementation of fiscal provisions - the Fiscal Code;

~layout and structure of the income and expenditure budget, as well as its related substantiation annexes;

1. • setting up fiscal-budgetary measures, amending and supplementing certain laws and prorogation of deadlines.
2. Drafting assumptionsof the income and expenditure draft budget are those published by the National Commission for Strategy and Prognosis in
3. 
   "Projection of the Main Macroeconomic Indicators for 2022-2026 the Autumn Forecast -2022"as follows:

Capital social: 385.422.400 RON

CIF: RO 14056826

Nr. Ord.reg.com/an : J32/392/2001

RO08 RNCB 0231 0195 2533 0001 - BCR Mediaş RO12 BRDE 330S V024 6190 3300 - BRD Mediaş

S.N.G.N. Romgaz S.A.

551130, Piaţa Constantin Motaş, nr.4, Mediaş, jud. Sibiu - România Telefon [phone]

Fax [phone]E-mail [e-mail] www.romgaz.ro

Table 1

	2023	2024	2025
Increase of consumption prices - annual	9.6%	5.7%	3.2%
average
RON/Euro - annual average	4.98	5.04	5.10
RON/USD - annual average	5.08	5.04	4.95

1. Outline and substantiation of indicators included in SNGN Romgaz SA 2023 Individual Income and Expenditure Draft Budget

1. Substantiation of Income

The substantiation of the main income categories of the income and expenditure budget is based on the forecasted evolution of gas demand and delivery price, gas and electricity production programs, underground gas storage of own gas. Revenues of Iernut Power Plant Branch (SPEE Iernut) are generated from electricity production and delivery, as well as from other field specific services.

Besides the main revenue categories, income is also recorded from other activities, namely supply of services to third parties (gas transmission, dehydration and compression, rental of goods and assets, chemical analyses, sale of condensate, sale of goods, re-invoicing of gas transmission, distribution and storage services to customers).

A. Operating Income

Operating income is estimated to RON 10 324 398 thousand.

The structure of the 2023 operating income is shown in the chart below:

Chart 1

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Operating Income is detailed in the table below:

Table 2

						Preliminary			Proposal			Ratio
			RON thousand							2023/2022
					2022			2023
										%
			Revenue from Romgaz gas sales
1			delivered from own production	11 567 453		8 806 305	76.1%
		(excluding partnerships, gas for
			electricity generation)
2			Revenue from joint ventures	56 179		48 471		86.3%
3			Revenue from commodity gas sales	14 654		6 104	41.7%
4			Revenue from electricity sales	1 328 291		388 507	29.2%
5			Income from in-house works	204 872		261 406	127.6%
		capitalized as non-current assets
			Other income from sold production
6			(transmission, distribution, storage,	474 847		813 604	171.3%
		subsidiary rent, goods, changes in
			inventories, CO2 cost recovery)
			Total operating income	13 646 295		10 324 398	75.7%

Revenues from Romgaz gas delivered from own production (excluding partnerships and gas for electricity generation) were determined based on the gas quantities estimated to be delivered to customers in 2023 and on the average delivery price of gas from current production and withdrawn from UGSs. The drop of revenues from gas sales is due to the decrease of quantities and delivery prices following implementation of GEO 27/2022. Therefore, it is estimated that 75.3% of production delivered to clients shall be sold at a regulated price of 150 RON/MWh.

Revenues from joint ventures represent the value of natural gas delivered under joint ventures (AMROMCO ENERGY SRL) pro rata to Romgaz participating interest.

Revenues from commodity gas sales represent that value of natural gas purchased and resold by Romgaz to clients.

Revenues from electricity deliveries were determined based on the quantities of delivered electricity and on the estimated average delivery prices. Decrease of revenues is caused by sale of entire electricity production at a regulated price of 450 RON/MWh in compliance with effective legal provisions.

Income from in-house works capitalized as non-current assets represents the value of capitalizable works performed in-house.

Other income represents income from gas distribution, rentals, condensate deliveries, sale of goods, transmission/distribution/storage services re-invoiced to customers (also

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to be found at expenses), fines, penalties, recovery of costs with CO2 certificates, according to GEO 27/2022 as subsequently amended (see Annex 6 to GEO 27/2022).

1. Financial Income in amount of RON 84 087 thousand is mostly generated by dividends distributed by Depogaz and the interest for the loan granted to Romgaz Black Sea Limited for supporting operational activities and investments in Neptun Deep Block.

2. Substantiation of expenditures

• Operating expenses are classified in the following main chapters:

1. Expenses with goods and services;
2. Expenses with taxes, duties and similar payments;

C. Personnel related expenses;

D. Other operating expenses.

Table 3

	RON thousand			Preliminary			Proposal			Ratio
			2022			2023			2023/2022
A. Expenses with goods and services	748 851	964 019	128.7%
B. Taxes, duties and similar payments	8 150 884	4 181 777	51.3%
C. Personnel related expenses	892 210	1 066 619	119.5%
D. Other operating expenses	982 251	1 390 613	141.6%
	Total Operating Expenses			10 774 197			7 603 029			70.6%

Below is a graphic representation of operating expenses divided on the 4 categories:

Chart 2

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A. Expenses with Goods and Services

For this expense category (A), in amount of RON 964 019 thousand, we estimate an increase by 28.7% as compared to the 2022 preliminary, influenced by the increased expenses with services supplied by third parties (expenses with repairs and maintenance, rentals, consultancy, fees and commission expenses, travel and daily allowances, IT licenses, geological studies). The increase is mainly generated by higher expenses with geological studies as compared to 2022, as well as by the necessity to perform well repairs and recompletion operations, works which could not be performed in 2022, and by higher expenses with consumables, spare parts needed for repairs, periodic repairs.

B. Expenses with Taxes, Duties and Similar Payments

These expenses include royalty calculated as percentage from the physical production and condensate (RON 1 047 822 thousand), windfall tax (RON 2 202 924.5 thousand), contribution to the energy transition fund (RON 1 794.8 thousand), contributions due to ANRE (RON 13 997 thousand), solidarity contribution (RON 906 104 thousand), as well as land and building taxes, all permitting, environmental and other taxes and duties.

Expenses with taxes and duties represent 55% of all expenses.

Expenses with taxes and duties decreased due to legislative amendments enforced by GEO 27/2022 as regards petroleum royalty, windfall tax and Romgaz gas and electricity sales price.

C. Personnel Related Expenses

Personnel related expenses were estimated based on Law no. 368/December 19, 2022 on the 2023 State Budget, providing under Chapter III "Final Provisions" art. 63, the government's policy on the salary policy in order to substantiate the salary costs of economic operators to which GO no. 26/2013 applies.

SNGN Romgaz SA Mediaș, complies with the provisions of art. 63, paragraph (1) items a) and c) stating that economic operators may provide increases of salary expenses compared to the level scheduled in the last approved budget "by amounts representing increases in salaries expenses related to the average price increase index forecasted for 2023" and "by the amounts representing increases in salary expenses relating to their replenishment for the full year 2023, determined as a result of salary increases and bonuses in 2022 and/or personnel increases in 2022".

The resulted salary costs are RON 994 648 thousand, by 15.8% higher than the approved 2022 budget and by 17.8% higher than the 2022 preliminary expenses. Personnel expenses are higher by 19.5% as compared to the preliminary expenses for 2022.

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