ANNUAL REPORT 2OO5/O6 TOTAL ELECTRICITY GENERATION THE POWER TRANSMISSION NETWORK OF THE NORTH EUROPE BY ENERGY SOURCE IN 2OO4/O5 (22O-75O KV) ESTONIA 220 KV300-330 KV 380-400 KV 500 KV 750 KV Existing lines Lines under construction/consideration 9 510 Oil shale Lines for 2 circuits Lines under construction/consid. for 2 circuits 60 Renewable High voltage direct current existing cable 15 Peat HVDC existing cable for 2 circuits 34 Oil shale oil HVDC cable/line under construction/consideration 196 Pyrolysis gas HVDC cable/line under construction/consideration for 2 circuits 486 Natural gas GWh 10 301 Total Nuclear power plants Thermal power plants Hydroelectric power plants LITHUANIA Pump storage power plants Substations AC/DC/AC Back-to-back-station 15 102 Nuclear Capitals of states 3 229 Natural gas 943 Hydropower 1,2 Wind Estonia 19 275 Total Latvia Lithuania GWh Finland Sweden LATVIA Norway Denmark 3 109 Hydropower Germany 1 531 Natural gas Czech 49 Wind 4 689 Total Poland Belarus Russia GWh Ukraine FINLAND 21 800 Nuclear 15 800 Goal 14 700 Hydropower 10 100 Natural gas 10 100 Biofuel 6 500 Peat 1 800 Oil 1 000 Waste 1 00 Wind GWh 81 900 Total Loviisa Helsinki HVDC Balti EJ Inkoo Tallinn Oslo Stockholm Pskov Moscow Riga Ignalina Copenhagen Kaliningrad Vilnius Minsk Berlin Warsaw Kiev Prague HIGHLIGHTS OF 2OO5/2OO6 • Moody’s raised the company’s credit rating to A1/outlook posi- • A trilateral agreement was concluded by Eesti Energia, tive, while Standard & Poor’s maintained the credit rating of A-, Latvenergo and Lietuvos Energija on exploring the options changing the negative outlook to stable. of establishing a new nuclear power plant in Lithuania. • The launch of construction of the Estonian-Finnish undersea • A change was introduced in the Eesti Energia Management cable Estlink. It is the first step in connecting Estonia with the Board. Sandor Liive was appointed Chairman of the Manage- European power system. ment Board, Tiit Nigul the Director of the Supply and Margus • A bond issue was conducted by Eesti Energia in order to extend Kaasik the CFO. the term of its borrowings. The company exchanged bonds to • With revenues of 533.5 million euros, Eesti Energia Group be redeemed in 2009 with those to be redeemed in 2020. posted a profit of 135.4 million euros in the financial year Eesti Energia has thus provided itself with long-term financing ended on 31 March 2006. Total investments amounted at a favourable fixed interest rate. to 152.8 million euros. MAIN FINANCIAL INDICATORS OF THE GROUP 2005/2006 2004/2005 2003/2004 2002/2003 2001/2002 Sales of electric power GWh 8,002 7,983 7,675 6,931 6,067 Sales of electric power (domestic) GWh 6,235 5,947 5,702 5,369 5,276 Sales of electric power (export) GWh 1,766 2,036 1,973 1,562 791 Sales of thermal power GWh 1,981 1,977 2,168 2,361 2,169 Total domestic power network losses 12.1% 12.5% 13.9% 15.6% 14.6% Distribution network losses 9.8% 10.2% 11.1% 11.9% 11.8% Net sales MEUR 453 395 377 366 313 Operating profit before depreciation MEUR 264 149 133 132 98 Net profit MEUR 135 43 33 41 22 Cash flow from operating activities MEUR 228 125 118 115 77 Investments MEUR 153 160 199 238 118 Assets at the end of the year MEUR 1,497 1,318 1,245 1,185 947 Borrowings at the end of the year MEUR 345 309 295 276 124 Owner’s equity at the end of the year MEUR 971 840 795 762 719 Owner’s equity/assets at the end of the year 65% 64% 64% 64% 76% Return on invested capital 13.3% 5.5% 4.7% 5.7% 3.4% Net debt/operating profit before depreciation 0.7 1.8 1.9 1.4 0.9 Interest cover ratio 9.4 8.1 7.5 9.1 15.8 Average number of employees 8,983 9,542 9,754 9,768 10,349 Eesti Energia in brief 2 Strategic Goals 3 Vision, missioon of Eesti Energia Group 4 Letter from the Chairman of the Management Board 5 SUMMARY OF THE FINANCIAL RESULTS Overview 8 Operating profit showed sudden increase 13 EVA on the upswing 15 Investment activities focused on transmission and distribution networks Cash flows and financing 17 Short-term forecast 18 FIELDS OF ACTIVITY Supply and customer service 22 OÜ Jaotusvõrk 23 OÜ Põhivõrk 24 Estlink AS Narva Elektrijaamad 25 OÜ Iru Elektrijaam AS Kohtla-Järve Soojus 26 Renewable Energy Business Unit 27 AS Eesti Põlevkivi AS Elektriteenused 30 AS Elpec AS Energoremont 31 Televõrgu AS OÜ Elektrikontrollikeskus We value professional skills and cooperation 32 Future Energy Fund 34 Supporting development in Estonia 35 ENVIRONMENTAL REPORT The environmental policy and objectives of Eesti Energia 39 The environmental impact of power production in Estonia 40 Environmental and quality management of Eesti Energia 47 OSELCA project or the oil shale electricity life cycle assessment Green Energy and renewable energy 48 Energy saving activities 50 Ecological laboratory of Eesti Energia Working environment 51 FiNANCiAL STATEMENTS Declaration of the Management Board 54 Balance sheet 55 Income statement 56 Cash flow statement 57 Statement of changes in equity 58 Notes to the financial statements 60 Auditor’s report 101 Profit Distribution Proposal 102 Signatures of the Management Board and Supervisory Board to the Annual Report 103 2 EESTI ENERGIA 2OO5/O6 EESTI ENERGIA IN BRIEF Eesti Energia is engaged in the production, sale and transmission of electric and thermal power. The main fuel for energy production – oil shale – is extracted from mines owned by the company. Eesti Energia is also involved in the construction and maintenance of energy systems. • Eesti Energia was established in 1939. • Eesti Energia is fully owned by the Republic of Estonia. • The Estonian energy system is the only predominantly oil-shale- fired energy production system in the world. • Standard & Poor’s has given Eesti Energia an A-/stable rating. The Moody’s rating of the company is A1/outlook positive. • Eesti Energia’s bonds are listed on the London Stock Exchange. • Eesti Energia will contribute at least 9.6 million euros in the foundation established for energy technology research over the next three years. • Eesti Energia has over 480,000 private customers and over 22,000 corporate customers. The number of corporate customer consumption locations is double the number of corporate customers. • OÜ Jaotusvõrk (Distribution Network) is in charge of 18,862 substations and 57,493 kilometres of power lines, while OÜ Põhivõrk (National Grid) manages 143 substations and 4,991 kilometres of high-voltage power lines. • At the end of the financial year 2005/2006, total installed capacity amounted to 2,380 MW in AS Narva Elektrijaamad (Narva Power Plants), 190 MW in Iru Power Plant, and 30 MW in Ahtme co-generation plant. • A total of 6,100 MWh of renewable energy was produced in the financial year. • Televõrgu AS (Telecommunications Network) launched a high-speed Internet service at the beginning of 2006. • Eesti Energia companies employed an average of 8,983 people in the financial year 2005/2006. • For the second time in the company’s history, Eesti Energia was declared the most environmentally friendly Estonian company. • Having planted a total of 11.4 thousand hectares of forest, AS Eesti Põlevkivi (Estonian Oil Shale Company) is one of the biggest forest planters in Estonia. • Eesti Energia Group supported different ventures with a total of 0.4 million euros in the financial year 2005/2006, incl. a 0.2-million-euro donation for the Eesti Terviserajad (Estonian Recreational Trails) project. EESTI ENERGIA STRUCTURE Eesti Energia AS Subsidiaries Business units AS Narva Elektrijaamad (Narva Power Plants) 100% Narva Soojusvõrk 66% (Narva Heating Network) Supply Mäetehnika Ltd. AS Eesti Põlevkivi (Oil-shale Mining Company) 100% (Mining machinery enterprise) Renewable Energy Business Unit Põlevkivi Kaevandamise AS OÜ Põhivõrk (Transmission Grid) 100% Support services (Quarries and mines) Põlevkivi Raudtee Ltd. OÜ Jaotusvõrk (Distribution Network) 100% (A railway enetrprise) Televõrgu AS (Telecommunications network) 100% AS Elektriteenused (Maintenance and electrical services) 100% AS Energoremont (Equipment maintenance and supply) 100% AS ER BEA AS Kohtla-Järve Soojus (Kohtla-Järve heat and power) 59% OÜ ER Test Service AS Elpec (Electrical planning and consulting) 100% OÜ Elektrikontrollikeskus (Inspection of electrical installations) 100% OÜ Iru Elektrijaam (Iru Power Plant) 100% 2OO5/O6 EESTI ENERGIA 3 STRATEGIC GOALS NETWORK QUALITY OÜ JAOTUSVÕRK IN 2O1O: • distribution network failures will have been reduced by 50% • distribution network losses will have been cut back to 7% • all of the customers’ voltage problems will have been solved OÜ PÕHIVÕRK IN 2O1O: • the number of power line and substation failures will have been reduced by 20% • power line and substation maintenance expenses will have been reduced by 20% • 80% of the 330 KV substations in Estonia will have been modernised EXPANSION OF THE PRODUCT PORTFOLIO WE WILL CONTINUE TO DEVELOP THE TECHNOLOGY FOR THE PRODUCTION OF ELECTRICITY FROM OIL SHALE WE WILL PARTICIPATE IN NUCLEAR POWER PLANT DEVELOPMENT PROJECTS WE WILL PRIORITISE CO-GENERATION AND RENEWABLE ENERGY WE WILL SET UP COMBUSTION TURBINES AS A BACKUP TO WIND ENERGY NEW CONNECTIONS, PRODUCTS AND MARKETS EXPANSION OF THE OPTIONS PROVIDED BY OIL SHALE THE ESTABLISHMENT OF A SECOND ESTONIAN-FINNISH UNDERSEA CABLE WE AIM TO SECURE A 1O% SHARE OF THE ESTONIAN INTERNET SERVICE MARKET BY 2O1O PROSPECTS FOR GROWTH IN THE ELECTRICITY BUSINESS TO LAUNCH SALES IN THE FINNISH ELECTRICITY MARKET IN 2OO7 • We will launch sales to Finland after completing the Estlink project TO ACQUIRE DISTRIBUTION NETWORK COMPANIES • We are interested in acquiring distribution network companies in the Baltic States TO ENTER PARTNERSHIPS WITH ENERGY COMPANIES IN THE NORDIC COUNTRIES AND BALTIC STATES • We are willing to pursue various projects in co-operation with different energy companies 4 EESTI ENERGIA 2OO5/O6 THE VISION OF EESTI ENERGIA FOR 2O15: TO SELL ENERGY TO TWO MILLION CUSTOMERS IN THE BALTIC SEA REGION THE MISSION OF EESTI ENERGIA: TO DEVOTE ALL OF OUR ENERGY FOR THE GOOD OF THE PEOPLE 2OO5/O6 EESTI ENERGIA 5 HEADING TOWARDS THE FUTURE It is my desire that the head of Eesti Energia in 2039 be at the helm of Europe’s finest energy com- pany.