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 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 Report of the Audit Committee 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 Description of Operating Segments 40 Consolidated Statement of Cash Flows 96 GRI Index 79 1.10.1 Generation and Trade 40 Notes to the Consolidated Financial Glossary 82 1.10.2 Distribution 48 Statements 97 Independent Practitioner’s Assurance Report 83 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 network development successfully completed. G4-1 characterised by dynamic business operations Consequently, last year Latvenergo Group and events that will have significant impacts on was the most valuable company in Latvia and the energy sector in the Baltic region. First, the among the most valuable in the Baltics, the anticipated NordBalt electricity interconnection was value of assets reaching close to EUR 4 billion. launched, furthering deeper integration of the Baltic When characterising the overall performance states into the Nordic electricity market. Second, results, it should be emphasized that last year the active preparatory work was carried out for the market situation was favourable and Latvenergo liberalisation of the natural gas market in spring Group operated in an appropriate mode. With 2017. Third, a step towards the development of revenue volume comparable to 2015, i.e., an economically justified distribution network was EUR 931.6 million, we have significantly improved made, promoted by the introduction of a principally profitability to EUR 130.6 million, while the Group’s new tariff structure of Sadales tīkls AS in the EBITDA increased by 28% to EUR 393.4 million. household segment. In 2016, we were the largest electricity supplier Year 2016 was outstanding in the operations of Baltics benefited from both price approximation to Late in the year, the next period 2017–2022 in the Baltics, with a total market share of Riga CHPPs; its electricity output increased by the level of Nordic countries and its stability. Group strategy was approved, taking into account 9% to 2,206 GWh. Favourable conditions for approximately 30%, including 73% in Latvia, 14% Efficiency improvement of the generation facilities significant changes in the energy sector that can be electricity generation at Riga CHPPs were created in Lithuania, and 11% in Estonia. The achievement is continued by the Daugava HPPs reconstruction wisely used for further growth of the Group. due to the decrease in average natural gas prices of this result required targeted efforts, considering project implementation at Riga HPP, Kegums HPP by 24% compared to 2015. The modernisation of Energy is a sustainable sector, and the decisions that with the opening of the electricity market and and Plavinas HPP; the hydropower units that have gas turbines at CHPP-2, with the implementation taken must play a significant role not only today, new market entrants to the market, initially the share reached the end of their lives are being replaced. of the Opflex Reserve Turndown/Autotune system, but often for the future generations. This area of the historical monopoly Latvenergo Group would The completion of the Daugava HPPs cascade was economically justified.I t is capable of operating continuously requires huge investment, the return shrink. However, by supplying electricity to our reconstruction is expected by 2022. With the the gas turbine at reduced capacity, and during of which and service in users’ interests can be neighbouring countries Lithuania and Estonia under reconstruction programme completed, the total low electricity demand periods this mode enables expected for thirty years and beyond. the Elektrum brand, Latvenergo Group managed to capacity and output volume of the Daugava HPPs more than recover the share lost to competition. continued operation of the gas turbine without its This is a moment when a boundary line is drawn will increase, ensuring operation of its hydropower In 2016, the amount of electricity supplied outside complete switch-off. This mode allows optimised between two strategy periods of Latvenergo units for the coming 40 years. Latvia by 20% exceeded the volumes sold in Latvia operation of main equipment depending on fuel Group: the period of the 2013–2016 strategy by the competing suppliers. and electricity prices, and demand. A significant process in 2016 was balanced approved in 2012 has ended, and the next one, development of distribution networks, making them The largest increase in the amount of electricity the 2017–2022 strategy period determining the Last year was successful in the area of generation: more efficient and at the same time improving generated was observed at the Daugava HPPs operations and way forward of Latvenergo Group by flexibly adjusting to the market and combining their technical condition. Compared to 2012, the cascade: by 36% compared to the previous year, for the six coming years, just started. the operations of its generation facilities, in 2016 frequency and duration of power outages were reaching 2,449 GWh. It was facilitated by higher Latvenergo Group generated by 21% more or reduced significantly SAIDI( by 55% and SAIFI The performance results described in this water inflow in the Daugava River in the second half 4,707 GWh of electricity and by 11% more or by 35%). A principally new and balanced tariff report fully reflect the achievement of the of 2016. By optimally combining generation at Riga 2,675 GWh of thermal energy compared to the structure was introduced in 2016, serving as the Group’s objectives set by the 2013–2016 CHPPs and Daugava HPPs of Latvenergo Group preceding year. basis for an economically justified development of strategy, with the tasks for trade, generation and with import possibilities in the region, users in the 4 the distribution network and ensuring connection bonds issued, to which Moody’s assigned the highest and Development (OECD), a Supervisory Board sharp-witted children from Latvian schools we were capacities where they are needed and utilised. assessment GB1 (excellent). This marks the first time of Latvenergo AS consisting of five members in the “Smart, Even Smarter” game. We continued While previously capacities available for new when Moody’s assesses green bonds and even was appointed by Shareholder’s decision. The cooperation with higher educational institutions, connections, especially for enterprises, were assigns excellent grade for green bonds issued in main goal of the Supervisory Board is to enhance not only awarding the Annual Prize in Power insufficient, now the capacities reserved but not Eastern Europe. efficiency of management of company’s assets, Engineering to merited scientists, but also paying a utilised have been freed up. Therefore, it is an which is an important element of corporate special attention to new talents. Also, our efforts in the area of corporate responsibility investment into the development of a balanced governance. We have experienced the need for are worth mentioning, since in 2016, for the fourth It was a year of achievements for Latvenergo network, which is a significant objective for the a structured corporate governance in the past, year in a row, Latvenergo AS received Platinum Group, and each and every employee contributed national economy in the long term. especially during the bond issue process where (the highest) category from the Sustainability Index to attaining it. At the same time, we must bear in along with the Group’s efficiency ratios many of the Evidence of successful strategic development providing for long-term and sustainable solutions mind that an open market means competition, and potential investors benchmarked the compliance of the Group is not only its performance results: in energy generation and trade. More than 80 it will keep growing; therefore, the Group’s new of corporate governance with good practice in February 2017, the international credit rating Latvian companies participated in the Sustainability strategic framework marks new challenges not only standards. agency Moody’s Investors Service reaffirmed the Index this year. The overall Sustainability Index for the Group as a whole, but for every one of us. Baa2 credit rating of Latvenergo AS with a stable of Latvenergo AS is over 90%. This means that In the area of corporate social responsibility, the outlook. This demonstrates that Latvenergo AS is a the company has fully integrated corporate Group’s contribution to education and science stable and reliable borrower and facilitates access responsibility into its operations, appointing should be especially highlighted. We believe that to bank loans on favourable terms. responsible persons at both the Management education of today is the foundation for Latvia as Board and operational level. we want to see it in the future – a prosperous and In April 2016, Latvenergo AS issued green bonds in smart country.