Annual Report of HSE 2011

WAY UPWARDS Annual Report of the Company HSE and HSE Group 2011 today rain tomorrow energy It is pleasant to feel warm summer's rain on the skin. It gives water to Earth. It cools warmed up bodies. It invites to dance in the rhythm of raindrops which magnificently fall on the ground. Full of energy and filled with loud laughter. Full of life. n 2011, we concluded the first decade of HSE’s operations. Ten I years of development, progress and seeking new challenges and solutions. Each day we were striving for better tomorrow. Tomorrow starts today. We are facing a new decade, in which we will continue to strive for tomorrow every day. Stronger, more decisive and oriented towards the bright future. Contents 1 Introduction 1.1 Foreword by the managing director 2 1.2 Report of the Supervisory Board 4 1.2.1 Monitoring and supervision of company operations 5 1.2.2 Examination of the annual report and position on the audit report 8 1.2.3 Determination and proposed allocation of accumulated profit 9 1.3 Electricity production and trading in the HSE Group 10 1.4 Operating highlights of the company and the group 11 1.5 Chronology of major developments in 2011 14 1.6 Important events after the end of the period 18 2 Business report 2.1 Controlling company 22 2.1.1 Profile of the controlling company 22 2.1.2 Organisational structure of the controlling company 23 2.1.3 Management of the controlling company 24 2.1.4 Corporate governance statement 26 2.1.5 Report on implementation of AUKN recommendations in 2011 30 2.2 Profile of the HSE Group 31 2.2.1 Management of the HSE Group 46 2.3 Business policy of the HSE Group 48 2.4 Strategic policies of the HSE Group 49 2.5 Management system policy 51 2.5.1 Achieving objectives in the area of quality 51 2.5.2 Achieving environmental management objectives 51 2.5.3 Achieving occupational health and safety objectives 51 2.5.4 Achieving information security objectives 52 2.5.5 Family-friendly company 52 2.5.6 Certificates obtained by HSE Group production companies 52 2.6 Market position 53 2.6.1 Characteristics of Slovenian economic climate in 2011 53 2.6.2 Market environment of the electricity industry 54 2.6.3 Situation in electricity markets in 2011 55 2.7 Sales and customers 60 2.7.1 Other activities 61 2.8 Purchasing and suppliers 62 2.8.1 Electricity 62 2.9 Investments 65 2.9.1 Replacement Unit 6 66 2.9.2 Srednja Sava 66 2.9.3 Hidroelektrarne na spodnji Savi 67 2.9.4 Reconstruction of the second stage of HPPs Doblar and Plave 67 2.9.5 NOP II 68 2.9.6 TET 68 2.9.7 PSP Kozjak 68 2.10 Informatics 69 2.11 Business performance analysis 70 2.11.1 Controlling company’s ratios 74 2.11.2 HSE Group’s ratios 79 2.12 Risk management 83 2.12.1 Report on work of the risk management committee of HSE d.o.o. 84 for the year 2011 2.12.2 Business risks 86 2.13 External communication 99 2.14 Research and development 100 2.14.1 Coordination of development activities on the HSE group level 100 and revision of the group Development plan 2.15 Plans for the future 102 3 Social responsibility report 3.1 Responsibility to employees 106 3.1.1 Employees in the controlling company 107 3.1.2 Employees in the HSE Group 108 3.2 Responsibility to the natural environment 110 3.3 Responsibility to the broader social community 113 4 Financial report of the company HSE 4.1 Auditor’s Report 116 4.2 Statement of management’s responsibility 118 4.3 Introduction to the preparation of financial statements 119 4.4 Financial statements 120 4.4.1 Statement of financial position 120 4.4.2 Income statement 121 4.4.3 Statement of other comprehensive income 121 4.4.4 Cash flow statement 122 4.4.5 Statement of changes in equity 123 4.5 Notes to the financial statements 124 4.5.1 Reporting company 124 4.5.2 Basis for preparation 124 4.5.3 Basis of measurement 125 4.5.4 Currency reports 125 4.5.5 Use of assessments and judgements 126 4.5.6 Branch and representative offices 126 4.5.7 Significant accounting policies 126 4.5.8 Disclosures to the company’s financial statements 136 5 Financial report of HSE Group 5.1 Auditor’s report for HSE group 166 5.2 Statement of management’s responsibility 168 5.3 Introduction to the preparation of financial statements 169 5.4 Consolidated financial statements 170 5.4.1 Consolidated statement of financial position 170 5.4.2 Consolidated income statement 171 5.4.3 Consolidated statement of other comprehensive income 171 5.4.4 Consolidated cash flow statement 172 5.4.5 Consolidated statement of changes in equity 173 5.5 Notes to the consolidated financial statements 174 5.5.1 Reporting group 174 5.5.2 Basis for preparation 175 5.5.3 Basis of measurement 176 5.5.4 Currency reports 176 5.5.5 Use of assessments and judgements 177 5.5.6 Branch and representative offices 177 5.5.7 Significant accounting policies 177 5.5.8 Notes to the consolidated financial statements 188 Contact information 222 Abbreviations 225 today forrest tomorrow energy How peaceful are mornings in the morning light gently penetrating through treetops. And how invigorating are walks through thousands of colours and numerous sounds in the late afternoon. The forest gives balance. The forest fills with energy. 1Introduction 2 AnnuAl RepoRt 2011 1.1 Foreword by the managing director Challenges make us stronger he challenges were ambitiously set also for 2011, while a great deal of exer- T tion, efforts and sacrifice was devoted to their realisation. Within the frame- work of these endeavours, the time was solely a relative category of measuring intervals between events, which were changing the conditions of trading and electricity production. While simultaneously performing the largest energy investment, it was necessary to make additional endeavours and face challenges besides responding to changing circumstances in ordinary operating conditions. The construction of replacement Unit 6 at TEŠ was under the spotlight in 2011. In HSE and TEŠ we have been daily facing the critics of the project and responding to dilemmas and issues, explaining figures, denying false statements and arguing facts in favour of investment. Numerous activities were oriented towards ensuring proper conditions to obtain the government guarantee for the loan from the European Investment Bank. The timely acquisition of guarantee is namely extremely important for a stable and costly efficient conclusion of investment in the replacement Unit 6. It is entirely reasonable that in addition to market permeability and revenue growth, costs are decreasing and economy is increasing since the combination of measures on the level of revenue as well as costs enables long-term competitive capability and consequently good business results. In this regard, we can esti- mate 2011 as successful, especially if we consider extremely unfavourable natural conditions, which have added a slightly bitter taste to successful electricity trade. Several months of deteriorated hydrologic conditions in the wider area of South- East Europe resulted in a slightly lower electricity production in hydropower plants within the HSE Group, while in the wider region such condition changed price ratios for electricity and costs of cross-border transfer capacities. We hope that in 2012 nature will be more prone to us and that the draught period will be followed by more extensive precipitation and thus the door will be opened to better product and trade conditions. Even the goals we have set for the current year are full of challenges and we will reach them solely with responsible and enthusiastic work, cooperation of individuals and legal entities within the HSE Group and the support of our owners. HR and professional potential of the HSE Group is exceptional and the time people devote to our projects, their IntRoductIon 3 efforts, sacrifice and devotion to group goals are true factors of success. These goals could not be reached without the owner‘s support. The expectations are clear: HSE is co-responsible for safe, reliable and environmentally friendly supply with electricity, which has to be performed with the carefulness of a good manager. We endeavour to realise these expectations and to justify our owner‘s trust and support with our work. It is also important to cooperate with local communities and other interested public in whose environment we interfere and with whom we create better solutions for energy projects. In this aspect, journalists carefully watch over us and follow our every move. In 2011, we changed many practices. A very important one is certainly the open nature of access to data and activities tied to project performance. We are aware of our responsibility to each citizen, although we represent the first link in production and supply chain of electricity. Our goal is to produce stable and long- term competitive product regardless of unfavourable weather conditions or in non-market conditions. Such goal is realisable in case two basic conditions are fulfilled at the same time. The first condition is appropriate technological diver- sification, while the other one is assurance of relevant level of electricity self- supply, both in Slovenia and the region, namely in all weather conditions.

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