SUSTAINABILITY and ANNUAL REPORT the Nature of Latvia Is Our Pride
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2016 SUSTAINABILITY AND ANNUAL REPORT The nature of Latvia is our pride. Its beauty is our joy. Its strength is our strength. Power transmission follows along the connection points of threads, covering the entire network of nature. Clean, green and natural energy is the precondition to sustainability. 2 TABLE OF CONTENTS Foreword 4 LATVENERGO GROUP LATVENERGO GROUP LATVENERGO CONSOLIDATED PROFILE PERFORMANCE INDICATORS ANNUAL REPORT 1.1 Report Overview 7 2.1 Economic Performance 55 Key Figures 87 1.2 Group Profile 8 2.2 Society 58 Management Report 88 1.3 Group Strategy 10 2.3 Product Responsibility 61 Consolidated Financial Statements 93 1.4 Corporate Social Responsibility 13 2.4 Environmental Protection 67 Consolidated Statement of Profit or Loss 93 1.5 Group Governance 16 2.5 Employees and the Work Environment 72 Consolidated Statement of Other 1.6 Group Management 25 Comprehensive Income 93 1.7 Corporate Governance Report Consolidated Statement of Financial and Audit Committee Report 30 Position 94 Green Bond Report 76 1.8 Stakeholder Engagement 32 Consolidated Statement of Changes in Materiality of Sustainability Aspects and 1.9 Materiality Assessment 38 Equity 95 Conformity to GRI Aspects 78 1.10 Operating Segments 40 Consolidated Statement of Cash Flows 96 GRI Index 79 1.10.1 Generation and Trade 40 Notes to the Consolidated Financial 97 Glossary 82 1.10.2 Distribution 48 Statements Independent Practitioner’s Assurance Report 84 1.10.3 Lease of Transmission System Independent Auditor’s Report 137 Assets 50 1.11 Group Procurement 52 3 Dear Readers, The past year was a year of changes. It was completed. Consequently, last year Latvenergo G4-1 characterised by dynamic business operations Group was the most valuable company in Latvia and events that will have a significant impact on the and among the most valuable in the Baltics, the energy sector in the Baltic region. First, the highly value of assets reaching close to EUR 4 billion. anticipated NordBalt electricity interconnection was When characterising the overall performance launched, furthering the integration of the Baltic results, it should be emphasized that last year the states into the Nordic electricity market. Second, market situation was favourable and Latvenergo active preparatory work was carried out for the Group operated accordingly. With a revenue volume liberalisation of the natural gas market in spring comparable to 2015, i.e., EUR 931.6 million, 2017. Third, a step towards the development of the Group improved profitability significantly – to an economically justified distribution network was EUR 130.6 million – while its EBITDA increased by made, promoted by the introduction of the new 28% to EUR 393.4 million. tariff structure of Sadales tīkls AS in the household segment. In 2016, Latvenergo was the largest electricity supplier in the Baltics, with a total market share to 2,206 GWh. Favourable conditions for electricity countries and price stability. Late in the year, the Latvenergo Group strategy for generation at the Riga CHPPs were created by of approximately 30%, including 73% in Latvia, Improvement of efficiency at the generation the period of 2017–2022 was approved, taking into the decrease in average natural gas prices of 24% 14% in Lithuania, and 11% in Estonia. The facilities continues through implementation of the account significant changes in the energy sector compared to 2015. The modernisation of gas achievement of this result required a targeted effort, Daugava HPP reconstruction project at Riga HPP, that the Group can use judiciously to further its turbines at CHPP-2 through the implementation considering that the share of the former monopoly Kegums HPP and Plavinas HPP; hydropower units growth. of the Opflex Reserve Turndown/Autotune system Latvenergo Group would initially shrink on account nearing the end of their terms are being replaced. was economically justified. It is capable of operating Energy is a sustainable sector, and the decisions of the opening of the electricity market and new Reconstruction of the Daugava HPP cascade the gas turbine at reduced capacity, and during low taken are important not only today, but also for market entrants. Through supplying electricity to is expected to be completed by 2022. Upon electricity demand periods this mode enables the future generations. This area requires continuous neighbouring countries Lithuania and Estonia under completion, the total capacity and output volume of continued operation of the gas turbine without a investment, the return on which can be expected the Elektrum brand, Latvenergo Group managed to the Daugava HPPs will increase, ensuring operation complete switch-off. The mode allows for optimised for thirty years and beyond. more than recover the share lost to the competition. of the hydropower units for another 40 years. In 2016, the amount of electricity supplied outside operation of the main equipment depending on fuel This is the moment when a boundary line is drawn Latvia exceeded the volume sold in Latvia by and electricity prices and demand. Balanced development of distribution networks – between two Latvenergo Group strategy periods: making them more efficient while improving their competing suppliers by 20%. The largest increase in the amount of electricity the period of the 2013–2016 strategy, approved technical condition – was an important process generated was observed at the Daugava HPP in 2012, has ended, and the next period, 2017– 2016 was successful in the area of generation: by in 2016. Compared to 2012, the frequency cascade: 36% compared to 2015 to a total of 2022, which will determine Latvenergo Group’s adjusting to the market flexibly and combining the and duration of power outages were reduced 2,449 GWh. This was facilitated by higher water operations and way forward for the next six years, operations of its generation facilities, Latvenergo significantly (SAIDI by 55% and SAIFI by 35%). inflow in the Daugava River in the second half just started. Group generated 21% more electricity (a total of A new and balanced tariff structure was introduced of 2016. Through the optimal combination of 4,707 GWh) and 11% more thermal energy (a total in 2016, serving as the basis for an economically The performance results described in this report fully generation at Latvenergo Group’s Riga CHPPs of 2,675 GWh) compared to 2015. justified development of the distribution network reflect the achievement of the Group’s objectives and Daugava HPPs with import possibilities in the and ensuring connection capacities where they set in the 2013–2016 strategy; the tasks for trade, 2016 was also outstanding for the operations of the region, consumers in the Baltics benefited from are needed and utilised. While capacities available generation and network development successfully Riga CHPPs; their electricity output increased by 9% both price approximation to the level of Nordic 4 for new connections were previously insufficient, less assigned them an excellent grade in Eastern appointed by the Shareholder’s decision. The main educational institutions, not only awarding the especially for enterprises, those reserved but not Europe. goal of the Supervisory Board is to enhance the Annual Prize in Power Engineering to accomplished utilised have now been freed up. Therefore, this is efficiency of company asset management, which scientists, but also paying special attention to new The Group’s efforts in the area of corporate an investment in the development of a balanced is an important element of corporate governance. talents. responsibility are also worth mentioning, since in network, which is a significant objective for the The Group has experienced the need for structured 2016, for the fourth year in a row, Latvenergo AS It was a year of achievements for Latvenergo Group, national economy in the long term. corporate governance in the past, especially during received the Platinum category (the highest) from and each and every employee helped make this the bond issue process, where, along with the Evidence of the Group’s successful strategic the Sustainability Index, proof of its long-term possible. At the same time, we must bear in mind Group’s efficiency ratios, many potential investors development can be seen not only in its performance and sustainable solutions in energy generation that an open market means competition, and the evaluated the compliance of corporate governance results; in February 2017, the international credit and trade. More than 80 Latvian companies competition will only continue to grow; therefore, with standards of good practice. rating agency Moody’s Investors Service reaffirmed participated in the Sustainability Index this year. the Group’s new strategic framework marks new the Baa2 credit rating of Latvenergo AS with a stable The overall Sustainability Index of Latvenergo AS With regard to corporate social responsibility, the challenges not only for the Group as a whole, but outlook. This demonstrates that Latvenergo AS is a is over 90%. This means that the company has Group’s contribution to education and science for every one of us. stable and reliable borrower and facilitates access fully integrated corporate responsibility into its should be highlighted. We believe that today’s to bank loans on favourable terms. operations, appointing responsible persons on education is the foundation for Latvia as we wish both the Management Board and the operational to see it in the future – a smart and prosperous In April 2016, Latvenergo AS issued green bonds level. country. The Experiment knowledge contest for in the amount of EUR 25 million with a record-high schoolchildren marked its 21st anniversary, the total demand. Thus, the second bond programme The past year was marked by an important event FIZMIX portal is gaining in popularity, and together Dr. sc. ing. Āris Žīgurs, has been completed with a total of EUR 100 million for the Group: following the recommendations of with sharp-witted children from Latvian schools we Chairman of the Management Board bonds issued.