Annual Report 2013 Creating New Energy! We will release the Group’s consolidated interim reports for the financial year 2014 as follows: Click here to read the Corporate Social Responsibility Report st • 1 quarter – 30 April 2014 nd • 2 quarter – 31 July 2014 rd • 3 quarter – 31 October 2014 Corporate Social The audited results for the financial year 2014 Responsibility 2013 will be released on 27 February 2015 www.energia.ee/et/investor Contents Address by the Chairman of the Management Board 5 In Brief 8 Strategy 12 Operating Environment 16 Financial Results 26 The Environment 41 Corporate Governance and Risk Management 46 Consolidated Financial Statements 65 Independent Auditor’s Report 142 Profit Allocation Proposal 143 Consolidated Financial Statements Consolidated Income Statement 65 18. Share Capital, Statutory Reserve Capital and Retained Earnings 124 Consolidated Statement of Comprehensive Income 66 19. Dividends per Share 125 20. Hedge Reserve Consolidated Statement of Financial Position 67 21. Borrowings Consolidated Statement of Cash Flows 68 22. Trade and Other Payables 127 Consolidated Statement of Changes in Equity 69 23. Deferred Income Notes to the Consolidated Financial Statements 70 24. Provisions 128 25. Revenue 130 Notes to the Consolidated Financial Statements 26. Other Operating Income 131 27. Raw Materials and Consumables Used 1. General Information 70 28. Payroll Expenses 2. Summary of Principal Accounting and Reporting Policies 29. Other Operating Expenses 132 3. Financial Risk Management 94 30. Net Financial Income (-expense) 4. Critical Accounting Estimates and Assumptions 103 31. Corporate Income Tax 5. Segment Reporting 105 32. Cash Generated from Operations 133 6. Property, Plant and Equipment 109 33. Off-Balance Sheet Assets, Contingent Liabilities and Commitments 7. Op e r a t i n g Le a s e 111 34. Disposal of Subsidiaries 135 8. Intangible Assets 112 35. Acquisition of an Additional Interest in an Associate 136 9. Investments in Associates 114 36. Earnings per Share 10. Inventories 116 37. Related Party Transactions 11. Division of Financial Instruments by Category 38. Events After the Reporting Period 137 12. Trade and Other Receivables 118 39. Financial Information on the Parent Company 13. Derivative Financial Instruments 120 14. Credit Quality of Financial Assets 122 15. Financial Assets at Fair Value Through Profit or Loss 123 16. Deposits at Banks with Maturities of More than 3 Months 17. Cash and Cash Equivalents Contents Dear readers, Sandor Liive Eesti Energia met 2013 objectives for Chairman of the turnover and operating profit. Management Board 2013 Eesti Energia´s total revenues amounted to 975 million generation plant in Estonia. The new energy unit doubled euros, EBITDA to 310 million euros and net profit to the electricity generation of Iru gas-fired plant and ended 160 million euros. In 2013, we paid 190 million euros in large scale waste depositing in Estonia. The prices of dividends and different taxes to the Republic of Estonia waste handling and heat dropped. We all benefitted from and employed 7,000 employees, 5,000 of whom are this – the country, the environment and the people. working in Ida-Virumaa region. Last financial year was very successful for Eesti Energia Eesti Energia Annual Report Address by the Chairman of Management Board In 2013, we completed three new power plants and looked also in terms of electricity generation, which increased further into the company’s future. Shortly before year end 13% year-on-year. We have made significant progress in we finalised the renewed strategy for the next ten years. reducing environmental impacts of electricity generation. 5 We have successfully completed two projects reducing Ongoing investments have reached their final stages. air emissions. We reduced SO2 emissions 2.5 times and Only the construction of the new Auvere power plant is achieved good results in reducing NOx emissions. We will still in the process. In 2013, we opened two large wind reduce NOx emissions up to two times in four additional parks in Paldiski and Narva and first waste-to-energy co- energy units by 2016. Contents The retention of electricity generation capacity has of Estlink2, a 650 MW submarine cable between Estonia a material impact on our financial results. While the and Finland, at the end of 2013 improved the hedging Enefit280 oil plant is not yet working consistently the of price risks in financial market and decreased the role successful electricity generation fully compensated the of electricity retail sale as hedging instrument. While lacking income from oil plant. Progress made in the the connection with Finnish electricity market continues new oil plant is promising even better results in this to strengthen the importance of Latvian and Lithuanian financial year. electricity markets is declining. The beginning of 2013 marked the end of long prepa- Group distribution network provider Elektrilevi continues ration period for the full opening of electricity market in investments to network reliability by building on average Estonia. Before market ope- 5 kilometres of cables and two substations a day. The The beginning of 2013 ning we could only hope and network is upgraded by building weather resistant land and marked the end of long believe that we can handle air cables. This has allowed us to reduce outages 17% the competition. Today we compared to previous financial year in spite of storms preparation period for know that we did. The mar- at the end of 2013. This all proves that the investment the full opening of elect- ket share of Eesti Energia of 100 million euros annually in distribution network ricity market in Estonia. in Estonian electricity retail has served its purpose. In 2013, Elektrilevi started with market remained around extensive replacement of remote power meters. By the 70% during the first year of end of the year 167,000 meters were replaced. Network 2013 operations under open market conditions despite heavy losses were with 5.2% at record low. competition from eight market participants. The custo- mers prefer Eesti Energia also when signing contracts We will focus on produc- We renewed the stra- for the second year. tegy of Eesti Energia tion of shale oil from oil for the next ten years. Since June last year Estonian and Nordic electricity sellers shale and diversification We will focus on pro- can no longer hedge Estonia-Latvia border-crossing costs of fuels used in electricity duction of shale oil in advance. This decision has negative impact on the from oil shale and Eesti Energia Annual Report Address by the Chairman of Management Board financial results of Eesti Energia. Therefore, we decided generation. diversification of fuels to stop signing fixed-priced electricity sale contracts in used in electricity Latvia and Lithuania. The solution that would allow Enefit generation. We have developed methods how to remain 6 SIA and Enefit UAB, the subsidiaries of Eesti Energia, a competitive oil and electricity producer under stricter to start selling fixed-prices electricity contracts in Latvia climate policy. We extract twice more energy from oil and Lithuania, has not been agreed yet. The launching shale than ever before. Contents To increase the value added we direct the largest pos- We are testing the usage of mining residue by mixing sible quantity of high-quality oil shale to oil industry. If lower-quality oil shale with fuels of high calorific value you would ask whether Eesti Energia is withdrawing from such as coal. By mixing different fuels we reduce also electricity generation then the answer is – certainly not. SO2 emissions. The diversification of fuels improves More oil means that also more electricity is produced significantly our flexibility in the competitive regional from local fuel with lower CO2 intensity. We have the electricity market. power plants that can operate for decades. In addition, we are soon completing the construction of new Auvere We prepare for the construction of oil shale based power power plant. Our long-term perspective is to maintain the plant in Jordan with one of the largest unit capacity in the domestic support free electricity generation on a level world. We have submitted our offer to the Jordanian gover- exceeding the actual Esto- nment, signed preliminary agreements with construction The diversification nian electricity consumption. and financing partners. We expect to hear good news from Jordan in the near future. of fuels is the future The diversification of fuels of electricity genera- is the future of electricity Year 2014 will welcome us with several changes in EU tion. We see that diffe- generation. We see that and Estonian renewable energy regulations. In Estonia, two different oil shale products important national development plans impacting energy rent oil shale products including oil shale gas, production and oil shale exploitation, will be updated. Under including oil shale gas, lower-quality oil shale and uncertain market conditions our key focus will be on cost 2013 lower-quality oil shale biomass, will play important cutting and more efficient production. These key words and biomass, will play role in this. Semicoke and describe our targets also for next years. Our priority in oil shale gas, the by-pro- 2014 will be on fine-tuning the new oil plant in order to important role in this. ducts of pyrolysis process in guarantee the smooth operation of the plant. The first oil production, allow us to Enefit280 plant will definitely not be the last one. produce more electricity while the oil volumes increase. By doing this, using the production by-products, we are basically copying the success story of US shale gas. It Eesti Energia Annual Report Address by the Chairman of Management Board is the fastest method how to decrease CO2 emissions significantly and without any additional financial support. 7 Sandor Liive Eesti Energia, Chairman of the Management Board Contents In Brief Eesti Energia is an international energy SALES REVENUES EBITDA company operating in the unified energy 966.4 million euros 310.5 million euros market of the Baltic and Nordic countries.