Annual Report on the State of Affairs and Oper- Ations of HEP D.D

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Annual Report on the State of Affairs and Oper- Ations of HEP D.D Annual 2013 Report Annual 2013 Report Electricity sales HEP Group +5.1% 2013 17.4 TWh Electricity production Heat sales +21.1% -0.2% 14.7 TWh 2.2 TWh Gas sales Operating income -6.7% +4.8% HRK 3 125 mn m 14,694.9 mn EBITDA Group net profit (loss) +3,533.7% +91.1% HRK HRK 4,140.3 1,301.2 mn mn Total assets Number of employees +0.2% -12.6% HRK 35,560.9 11,877 mn *Change 2013/2012 (%) Contents CHAIRMAN’S REPORT 6 PRESIDENT’S REPORT 8 COMPANY PROFILE 15 1 Mission, vision and basic values 16 HEP Group companies 18 Legal framework 19 Development – objectives, current and planned projects 24 Membership in international organizations 27 Short historical overview 27 CORPORATE GOVERNANCE 29 2 Governing bodies of HEP d.d. 30 Members of governing bodies 32 General Shareholders Assembly 34 Audit 34 HEP BUSINESS OPERATIONS IN 2013 41 3 Business environment 42 Financial results achieved 43 Results by activity 46 Financial position 48 Investments 49 REPORT ON IMPACT ON STAKEHOLDERS 55 4 Basic principles in relations with stakeholders 56 Anti-Corruption Programme 57 Employees 58 Customers 61 Donations 64 SUSTAINABLE DEVELOPMENT 65 Policy and organization of nature and environmental protection function 66 5 Harmonization with the EU legislation 66 Basic indicators 68 Major achievements in 2013 69 FINANCIAL STATEMENTS 73 6 HEP Group – Consolidated financial statements and Auditor’s Report 78 HEP d.d. – Financial Statements 152 REPORTS BY HEP GROUP COMPANIES WITH FINANCIAL STATEMENTS 159 7 HEP Proizvodnja d.o.o. 160 HEP Operator distribucijskog sustava d.o.o. 169 HEP Toplinarstvo d.o.o. 181 HEP Plin d.o.o. 189 HEP Opskrba d.o.o. 197 REPORTS BY OTHER HEP GROUP COMPANIES 205 8 HEP Trgovina d.o.o. 206 HEP ESCO d.o.o. 208 APO d.o.o.usluge zaštite okoliša 210 HEP Obnovljivi izvori energije d.o.o. 212 Program Sava d.o.o. 214 HEP Odmor i rekreacija d.o.o. 216 Ustanova HEP Nastavno obrazovni centar 217 ADDRESS LIST 219 6 Chairman’s Report Nikola Bruketa Supervisory Board Chairman During fi scal year 2013, the Supervisory Board held eight meetings (two conference calls) in the period between two annual Assemblies. The Supervisory Board adopted the proposal submitted by the Management Board of HEP d.d. on appointing the auditor for the fi scal year 2013. BDO Croatia d.o.o. and Audit d.o.o. were jointly appointed as auditors of Hrvatska elektroprivreda d.d. and its dependant companies. During fi ve meetings of the Audit Committee of Hrvatska elektroprivreda d.d., which also took part in the Company’s operational supervision, numerous issues, in particular those regarding Company’s fi nancial reports, audit fi ndings and activities of external auditor were discussed as well as the report on the work conducted by the Department of Internal Audit and Risk Management of HEP d.d. in 2013. The Supervisory Board supervised the conduct of Company aff airs and carried out other work in ac- cordance with the Companies Act, Articles of Association of the Company and Rules of Procedure of the Supervisory Board. It discussed and accepted information provided by the Management Board concerning overall conditions in the Company, business policy and relations with related companies, decisions signifi cantly aff ecting the position of the Company, and matters in principle of future conduct of the Company. It also accepted the reports on the Company’s business operations submitted during the business year and gave all necessary consents to the Management Board decisions. The Supervisory Board analysed the execution of planned results and implementation of fundamental objectives set by the Company’s business policy for 2013. It also took active participation in monitoring the execution of the Work Programme of the Management Board for the term period 2013-2016 and meeting set key parameters of the Programme and planned activities. Pursuant to the Decision adopted by the Croatian Government from 3 October 2013, the Supervisory Board appointed Željko Štromar a member of the Management Board of HEP d.d. INTRODUCTION 7 At the proposal of the Company’s Management Board, the Supervisory Board gave its consent for the Consolidated Economic Plan and the Investment Plan of HEP Group for 2014. It also provided adequate prior consents regarding the following proposals: • establishment of HEP-Telekomunikacije d.o.o. (pursuant to the Decision of the Croatian Government on fiber optics integration in public companies to comply with all terms set by the Directive of the EC and the Electricity Market Act for the needs of the new independent trans- mission operator set up according to the ITO model); • establishment of the new limited liability company within HEP Group for performing the activity of wholesale gas market supplier; • conclusion of Annex IV of the Agreement made between HEP d.d. and HAC d.o.o. from 20 December 2006; • adoption of amended plan of financial and operational restructuring of Našicecement d.d. in the process of pre-bankruptcy settlement; • adopting the Decision on transferring the real-estate title to HOPS d.o.o. The active role undertaken by the Supervisory Board in 2013 in the execution of HEP Group restructuring processes must be pointed out. It received regular reports from the Management Board of HEP d.d., expressed its opinions and provided recommendations to the Management Board focusing on enhancing operational efficiency and future strategic determinants of HEP Group in view of new circumstances emerging on the electricity market and taking an equal part in competition. By receiving regular reports and information from the Management Board of the Company, the Supervisory Board has been continuously participating and following the activities regarding HEP Group’s capital investment projects, annual investment plans and documents setting the strategic framework for investments, During fiscal 2013, the Supervisory Board held two thematic meetings of the Management and Supervisory Boards. During the first meeting held in October 2013, the capacity and technological efficiency of the electric power system were discussed as well as investment planning and execution, operational organization, staffing development and possibilities of improving economic operating parameters. The topic discussed during the second meeting held in February 2014 was the implementation of the Work Programme of the Management Board of HEP d.d. in the period 2013-2016. Apart from regular reports submitted by the Management Board of HEP d.d. on operating results and environment, the Supervisory Board also discussed individual current topics in detail including: devel- opment of gas activity in HEP, development of windpower plant projects in Croatia of business interest for HEP, status of TPP Plomin C 500 project, the position of HEP Group on the electricity market, status of the EDM/ECM SAP project and relations with HEP’s trade unions. After having reviewed business and financial reports, it was determined that the joint-stock company Hrvatska elektroprivreda and the group of its subsidiary companies had been conducting their af- fairs in accordance with the provisions of the Companies Act, Articles of Association, decisions of the Shareholders Assembly and the internal rules and regulations of the Company. The Supervisory Board stated that the annual financial reports were drafted in line with the figures existing in the Company books, showing accurate property-related and operational situation of the Company without expressing any objections to auditor’s report on examining Company’s annual financial statements and HEP Group’s consolidated financial statements for 2013. 8 President’s Report Tomislav Šerić President of the Management Board Despite strong challenges set by the business environment in 2013, HEP Group fully achieved its mission of safe and quality energy supply to its customers. Major positive operating results were recorded: oper- ating profi t of HRK 2.5 billion and Group’s net profi t of HRK 1.3 billion. Investments into the construction of new and replacement and re- construction of existing facilities reached considerable HRK 2.2 billion. Group’s own generation facilities produced 14.7 TWh of electricity. Appropriate availability of power plants, transmission and distribution network was recorded without any signifi cant disturbances in electricity, heat energy and gas supply. Furthermore, trade liabilities were signifi cantly reduced and medium-term multi-purpose frameworks agreed with banks. The restructuring of HEP Distribution System Operator and Croatian Transmission System Operator was conducted in early 2013 resulting in a reduced number of the employed and lowered staff cost. Having summarized the most important operating indicators in 2013, I would like to single out several events and processes which aff ected HEP’s operations strongly not only during 2013 but also in 2014, as their full eff ect on the HEP’s business position is still expected in the following years. Firstly, the implementation of the EU third energy package. Legal and organizational preparations for unbundling the independent transmission system operator from the vertical structure of HEP Group took place in 2013. Croatian Transmission System Operator, registered on July 2, a date which almost coincided with the Croatian accession to EU, is now waiting for regulator’s certifi cation. Operational harmonization of HEP Distribution System Operator with the Electricity Market Act will follow including partial independence and autonomy of the distribution system and meeting its obligation of a household supplier within the universal service as well as its role as a last resort supplier. The second most important event in 2013 was the emergence of several alternative electricity suppliers on the Croatian residential market (households) as well as their aggressive presence on the commercial sector i.e. other customers. One can’t but notice that the emergence of alternative suppliers coincided INTRODUCTION 9 with a significant decrease of electricity prices on power exchanges.
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