SUSTAINABILITY AND ANNUAL REPORT 2018 HOW TO USE THE REPORT Return to Navigate the Contents page between sections GRI indicators disclosed in the section Link to an external source or another section in the report 2 CONTENTS ABOUT LATVENERGO GROUP 1 CORPORATE GOVERNANCE 2 OPERATING SEGMENTS 3 Foreword 5 Corporate Governance Model 18 Generation and Trade 36 About the Report 7 Governance Bodies 19 Generation 37 About the Group 8 Group Management 25 Trade 42 Group Strategy 11 Internal Control System and Risk Management 26 Mandatory Procurement 44 Corporate Social Responsibility 13 Group Procurement 28 Distribution 45 Awards 16 Stakeholder Engagement 30 Lease of Transmission System Assets 47 LATVENERGO GROUP ANNEXES TO THE CONSOLIDATED AND PERFORMANCE INDICATORS 4 SUSTAINABILITY REPORT 5 LATVENERGO AS ANNUAL REPORT 6 Materiality Assessment 50 Green Bond Report 72 Key Figures 81 Economic Topics 52 GRI Index 74 Management Report 83 Social Topics 57 Abbreviations 77 Financial Statements 89 Product Responsibility 57 Independent Practitioner’s Assurance Report 78 Statement of Profit or Loss 89 Society 61 Statement of Comprehensive Income 89 Employees and the Work 62 Statement of Financial Position 90 Environment Environmental Topics 66 Statement of Changes in Equity 91 Statement of Cash Flows 92 Notes to Financial Statements 93 Independent Auditor’s Report 147 About Latvenergo Group Corporate Governance Operating Segments Performance Indicators Annexes to the Sustainability Report Annual Report | Foreword | About the Report | About the Group | Group Strategy | Corporate Social Responsibility | Awards | ABOUT LATVENERGO GROUP 4 About Latvenergo Group Corporate Governance Operating Segments Performance Indicators Annexes to the Sustainability Report Annual Report | Foreword | About the Report | About the Group | Group Strategy | Corporate Social Responsibility | Awards | GRI 102-14 DEAR READERS, of warm and dry weather, and throughout the year the water inflow pipelines from Russia, but also from Lithuania and its liquefied into rivers in Scandinavia as well as our Daugava was among the natural gas terminal in Klaipeda. The opening of the market allows lowest in the history of observations and the power generation at for working with several gas suppliers to obtain a better price. We hydro power plants was very low. Global factors and the low water store purchased resources according to necessity in the Inčukalns level contributed to an increase in electricity prices in Latvia of 44% underground gas storage facility, and we provide heat and electricity compared to the previous year, reaching 50 EUR per megawatt hour. in full to our customers and also offer natural gas to customers in all three Baltic countries. Latvenergo Group generated more than 5 TWh of electricity in 2018. Of this amount, 2.6 TWh were generated by the combined heat and Latvenergo continues to develop new business directions and power plants (CHPPs), 2.4 TWh were generated by the HPPs, and services. Smart services are an area with a high growth potential; 47% of the total electricity output was generated from renewable therefore, Elektrum has diversified its range of services by offering energy resources. Optimally combining generation by the CHPPs customers solar panels through its Elektrum Solar service. The and HPPs with import possibilities from other trading areas of the service Smart Home allows for remote control of electrical appliances Āris Žīgurs Andris Ozoliņš Nord Pool exchange, the prices for consumers in the Baltics are both at home and at companies according to one’s needs. This is Chairman of the Supervisory Board Chairman of the Management Board of Latvenergo AS and Chief Executive Officer approaching those of the electricity market in Nordic countries, an opportunity to improve the comfort level and to save money of Latvenergo AS which is historically the region with the lowest prices in Europe. In during the heating season. We are glad to see that the number of total, 7 TWh of electricity were sold to retail customers in the Baltics customers of the service Elektrum Insured has continued to grow, in 2018. This amount is about the same as in the previous year and reaching more than 41 thousand at the end of 2018. In 2018 Important events took place in the energy industry in 2018 because around a third of it was sold outside Latvia. Latvenergo started a pilot project for analysing the future business of its continuous and rapid development, and while this process opportunities of e-mobility. is creating new challenges, it is also providing solutions to them. In October 2017 Latvenergo AS applied for a one-off compensation The word “energy” now means involvement, knowledge, mastering from the state, forgoing the receipt of 75% of the annual electricity To ensure the competitiveness of Latvenergo in accordance with the new habits and use of new services by customers. It is only natural capacity payment to cogeneration plants CHPP-1 and CHPP-2. Group Strategy 2017–2022, a strategic development and efficiency that digitalisation, robotization, e-mobility and artificial intelligence Thus, the share of the CHPPs in the payment of the mandatory programme providing for review of the Group’s business processes, are playing an increasingly important role in the daily operations of procurement and capacity decreased from 37% to 15%, i.e. by their centralisation and digitalisation, is being implemented. Along Latvenergo. EUR 74.2 million, in 2018. with these efficiency measures until 2022, the number of staff at Latvenergo Group will be gradually reduced by one quarter. The At the same time, the industry as a whole and the operations of The development of trade has continued successfully in accordance number of employees at Sadales tīkls AS will decrease by 800, Latvenergo Group are affected by global environmental and climate with the Group’s strategy. At the end of 2018, trade of natural gas and this is possible thanks to an intense review of processes and factors. Long drought and dry weather conditions across Europe was started in Lithuania under the brand Elektrum and at present digitalisation. Within the programme, smart meter installation and reduced power generation at hydro power plants considerably. Latvenergo Group is active in all the energy trade segments in Latvia, changes in the customer relations management processes are However, Latvenergo generated power successfully in this situation Lithuania and Estonia. The volume of natural gas sold to corporate continuing, and the number of vehicles and technical bases is using the mutually complementary possibilities of its plants. This was customers continued to grow in the reporting year, and the number being reduced. More than 540 thousand smart electricity meters, possible because professional energy experts and engineers had of customers exceeded 400 at the end of 2018. In February 2019, accounting for approximately one half of the total fleet of meters, taken decisions on reconstruction and maintenance of Latvenergo sale of natural gas to households in Latvia was begun. were installed by 31 December 2018. power plants in due time based on a long-term vision. Latvenergo actively used the opportunities offered by the free EUR 95.1 million were invested in the distribution segment in 2018. At the beginning of the year there was a very high water inflow into natural gas market. Since liberalisation of the gas market, deliveries The investments are aimed at promoting quality and reliable energy the Daugava, and the Latvenergo hydro power plants (HPPs) were of natural gas in Latvia have been diversified; in particular, during supply, reducing the frequency and duration of scheduled and working at their full capacity. Latvia even became the biggest power the first year of the free market, gas was delivered not only by unscheduled power supply outages due to damage, and ensuring exporter in the Baltics for a time. This was followed by a long period adequate voltage quality. Investments in distribution network 5 About Latvenergo Group Corporate Governance Operating Segments Performance Indicators Annexes to the Sustainability Report Annual Report | Foreword | About the Report | About the Group | Group Strategy | Corporate Social Responsibility | Awards | upgrades have improved the quality of the distribution service: and deposited in the Daugava in the spring. We also help the and the Strategic Communication Committee of the Supervisory compared to 2017, the System Average Interruption Frequency Latvian Ornithological Society with the monitoring of white storks. Board was established. Index per customer and the System Average Interruption Duration The Group’s employees have surveyed more than 12% of the nests Index per customer were reduced by 11% and 13% respectively. covered by the programme. This was the year of the hundredth anniversary of Latvia, when many of us did something for the benefit of our families and our state. During the reporting year, EUR 87.1 million were invested in It is good to know that our achievements are also appreciated by A great achievement of Latvenergo Group in this anniversary year transmission system assets, an increase of 38% compared to the experts on a broader scale. 2018 marked the 10th time in a row that was the historically highest electricity output at our CHPPs since preceding year. The largest amount, EUR 65.2 million, was invested Latvenergo received the title of the most valuable company in Latvia 1980, when CHPP-2 was put in operation. The role of our CHPPs in in the energy infrastructure project Kurzeme Ring. in the TOP 101 most valuable Latvian companies, organised jointly meeting regional demand in 2018 confirms the importance of these by Prudentia AS and Nasdaq Riga AS. plants for national energy independence along with commercial At the end of 2018 Latvenergo organised a stakeholders’ workshop gains. Guaranteeing and being able to ensure the national energy to secure involvement of various partners important for the national The international credit rating agency Moody’s approved the credit supply at any moment are the largest contributions by our Group.