Annual Report 2008 Annual Report 2008 HEP Group 2008 Change (2008/2007) Electricity sales 17.7 TWh 5.6 % Electricity production 14.3 TWh 3.0 % Heat sales 2.2 TWh 5.8 % Gas sales 166 mn. m3 8.5 % Operating income HRK 11,889.4 mn 9.9 % EBITDA HRK 1,922.9 mn 2.6% Group net profit HRK 31.1 mn 19.6 % Total assets HRK 32,635.4 mn 5.0 % Number of employees 14,375 0.6 % CONTENTS CHAIRMAN’S REPORT 4 PRESIDENT’S REPORT 6 COMPANY PROFILE 9 Mission and vision 11 HEP Group companies 11 Legal framework 12 Development and planned investments 13 Membership international organizations 14 Short historical overview 14 CORPORATE GOVERNANCE 16 Governing bodies of HEP d.d. 18 Organizational structure of HEP d.d. 19 Members of governing bodies 20 Audit 23 Certificates 23 BUSINESS OPERATIONS IN 2008 24 Macroeconomic environment 26 Business conditions 26 Financial results achieved 27 Results by activity 29 Financial position 30 Investments 31 Credit rating 31 REPORT ON IMPACT ON HEP GROUP STAKEHOLDERS 32 Employees 34 Customers 37 Other stakeholders 39 SUSTAINABLE DEVELOPMENT 40 Policy and organization of nature and environmental protection function 42 Basic indicators 42 Major achievements in 2008 45 FINANCIAL STATEMENTS 48 HEP Group – Consolidated financial statements 52 Hrvatska Elektroprivreda d.d. 119 REPORTS BY HEP GROUP COMPANIES WITH FINANCIAL STATEMENTS 124 HEP-Proizvodnja d.o.o. 126 HEP - Operator prijenosnog sustava d.o.o. 134 HEP - Operator distribucijskog sustava d.o.o. 142 HEP-Toplinarstvo d.o.o. 150 HEP-Plin d.o.o. 156 REPORTS BY OTHER HEP GROUP COMPANIES 164 HEP-Opskrba d.o.o. 166 HEP-Trgovina d.o.o. 168 HEP ESCO d.o.o. 170 APO d.o.o.usluge zaštite okoliša 172 HEP-Obnovljivi izvori energije d.o.o. 173 Ustanova HEP-Nastavno-obrazovni centar 174 NOTES 176 LIST OF ABBREVIATIONS 177 ADDRESS LIST 180 CHAIRMAN’S REPORT The energy sector in the Republic of Croatia in 2008 creation of preconditions for the fulfillment of the was strongly exposed to unfavorable movements in requirements of Chapter 15 Energy as part of the EU the world’s economy and uncertainties in the fuel accession negotiations, and the preparation of a market. The year began unexpectedly, with a sharp new Energy Development Strategy of the Republic of rise in oil price – from the initial 90 dollars a barrel Croatia. A number of primary and subordinate legis- it hit its all- time high of 147 dollars a barrel on July lative acts were passed which govern the energy sec- 11, 2008. This was followed by a sharp drop in oil tor and harmonize it with the EU legislation. Some prices of 20 percent by the end of July. Since oil is of the implementing documents elaborated on the the foundation of the world’s economy, the conse- basis of these acts are within the authority of public quences of these oscillations reflected on the global service providers which include HEP Group members economy. The world entered an unprecedented such as HEP Operator prijenosnog sustava and HEP recession which caused a further drop in oil prices, Operator distribucijskog sustava. Through the activi- to below 40 dollars a barrel at the end of the year. ties of the Energy Community, a single regulatory and market framework was established which is a In addition to the global movements, the Croa- precondition for attracting sound investments and tian electricity system, in which 35 percent of total reliable energy supply in both Croatia and the region. electricity is produced by hydro power plants, was Thus, the conditions for the energy sector and its par- exposed to exceptionally poor hydrological condi- ticipants have become, even before the entry into the tions during 2008. In such an unfavorable environ- European Union, the same as in the member states. ment HEP Group was able to maintain liquidity and provide citizens and industry in Croatia with a com- The new environment required a new strategic ap- petitive, quality and uninterrupted supply, primarily proach. Being aware of the significance of HEP as an of electricity but also of heat and gas. Given the exceptional and integral economic entity for which circumstances, not all planned investments in re- we must open prospects and allow competitiveness newal and modernization of existing facilities could in the region while ensuring adequate energy supply be made. In this segment the indispensible works for the Croatian citizens, in the new energy strategy were carried out, and construction of new facilities we paid special attention to the development of the which had began earlier continued at undiminished electricity system. Electricity is particularly demand- pace. All thermal power plants operated reliably and ing considering the fact that it must be generated at Krško Nuclear Power plant delivered the highest an- precisely the moment of its consumption. Therefore, nual production in its history. The transmission and the construction of new base-load power plants is of distribution systems also functioned reliably. primary significance for future security of supply. In 2008, the activities in the Ministry of Economy, Today, Croatia imports more than 20 percent of elec- Labor and Entrepreneurship went in two directions: tricity. The strategic goal is to meet domestic needs with domestic production by 2020. By 2020, due to old age and uneconomical production, 1,100 MW in thermal power plants will be retired. To compensate this and to meet increasing electricity consumption, new power plants must be built. Since domestic po- tential for large hydro power plants have been practi- cally used up, and some of potential sites are bound by intergovernmental agreements, the Government of the Republic of Croatia opted in the new strategy for base-load power plants which use gas or coal but also for undertaking analyses and preliminary work needed to make a decision by 2012 on whether to build a nuclear power plant. Considering the modest domestic energy resources and in order to diversify the sources, achieve competitiveness of base-load production and greenhouse emission control, no energy option can be ruled out in advance. Regarding the fulfillment of goals in the limiting of greenhouse gases emission, a significant contri- bution is expected from renewable sources. It a national target to maintain the share of 35 percent of electricity production from renewable sources. We support HEP in the use of renewable sources and we are sure that it will be more successful if it becomes competitive in electricity production from base-load plants. It is necessary for HEP to continue to participate in interstate projects for interconnection of electricity transmission systems, and in other energy projects of interest to the Republic of Croatia. Only as such, strong and integral, HEP can go into the common market and become the leader in the region, and support the Government of the Republic of Croatia in its efforts to provide the citizens with affordable, adequate and reliable energy supply. Leo Begović Chairman of Supervisory Board PRESIDENTS’S REPORT In 2008, HEP Group operated in extremely unfavor- core businesses. I will mention the most important able conditions, especially during the first half of the ones. Construction continued of the high-efficiency year. Oil, coal and electricity prices in the interna- combined-cycle cogeneration unit L at TE-TO Zagreb tional market continued to grow. Gas purchase (100 MW electrical and 80 MW thermal power) price, contractually agreed to gradually reach market which will be put into operation in 2009. Before the price, increased by 65 percent, and due to lower wa- end of 2009, Lešće hydro power plant (42 MW) will ter inflow hydroelectric production decreased by 10 go into service, the first hydro power plant built by percent compared to the plan. As a result, operating HEP since Croatia became independent. Preparatory costs rose sharply, affecting HEP Group liquidity. works were also carried out for the construction of Unit C at Sisak TPP (230 MW electrical and 80 MW On July 1 the Government approved higher electric- thermal power). In the transmission business the ity prices based on new tariff systems, separately for most important event was the start of construction each of the regulated electricity businesses. With the of a 2x400 kV interconnecting double circuit line increased electricity prices, income in the second Ernestinovo – Pecs (Hungary). half of the year grew and the liquidity downward Together with savings measures, the continued trend was stopped (thanks also to receiving a 125 opening of the Croatian electricity market also had million euro loan). a favorable effect on HEP’s business result. Specifi- In 2008 HEP Group achieved the highest operating cally, in the situation where the electricity price for income ever – 11.9 billion kuna and an operating tariff customers did not keep up with costs of fuel profit of 31.1 million kuna. The positive business and imported electricity, bilateral contracts were result was achieved thanks to the implemented concluded between HEP and eligible customers measures for consolidation of the financial situa- which provide not only for payment security but tion, which resulted in a decrease in operating costs also for price change to reflect movements in world of 291 million kuna compared to the business plan, market fuel prices. In 2008, we had contracts with while the investment plan was curtailed by 880 mil- large customers who account for about 30 percent lion kuna. of annual electricity consumption, and we began to Early in the year we adopted decisions to imple- conclude supply contracts with medium enterprises ment plant maintenance plans by introducing an bound by the Public Procurement Act. At the end of event-based maintenance system.