WAY UPWARDS - HSE

Contents11.11.21.31.41.51.622.12.22.32.42.52.62.72.82.92.102.112.12IntroductionForeword by the managing directorReport of the Supervisory Board1.2.1 Monitoring and supervision of company operations1.2.2 Examination of the annual report and position on the audit report1.2.3 Determination and proposed allocation of accumulated profitElectricity production and trading in the HSE GroupOperating highlights of the company and the groupChronology of major developments in 2011Important events after the end of the periodBusiness reportControlling company2.1.1 Profile of the controlling company2.1.2 Organisational structure of the controlling company2.1.3 Management of the controlling company2.1.4 Corporate governance statement2.1.5 Report on implementation of AUKN recommendations in 2011Profile of the HSE Group2.2.1 Management of the HSE GroupBusiness policy of the HSE GroupStrategic policies of the HSE GroupManagement system policy2.5.1 Achieving objectives in the area of quality2.5.2 Achieving environmental management objectives2.5.3 Achieving occupational health and safety objectives2.5.4 Achieving information security objectives2.5.5 Family-friendly company2.5.6 Certificates obtained by HSE Group production companiesMarket position2.6.1 Characteristics of Slovenian economic climate in 20112.6.2 Market environment of the electricity industry2.6.3 Situation in electricity markets in 2011Sales and customers2.7.1 Other activitiesPurchasing and suppliers2.8.1 ElectricityInvestments2.9.1 Replacement Unit 62.9.2 Srednja Sava2.9.3 Hidroelektrarne na spodnji Savi2.9.4 Reconstruction of the second stage of HPPs Doblar and Plave2.9.5 NOP II2.9.6 TET2.9.7 PSP KozjakInformaticsBusiness performance analysis2.11.1 Controlling company’s ratios2.11.2 HSE Group’s ratiosRisk management2.12.1 Report on work of the risk management committee of HSE d.o.o.for the year 20112.12.2 Business risks245891011141822222324263031464849515151515252525353545560616262656666676768686869707479838486

2.132.142.15External communicationResearch and development2.14.1 Coordination of development activities on the HSE group leveland revision of the group Development planPlans for the future9910010010233.13.23.344.14.24.34.44.555.15.25.35.45.5Social responsibility reportResponsibility to employees3.1.1 Employees in the controlling company3.1.2 Employees in the HSE GroupResponsibility to the natural environmentResponsibility to the broader social communityFinancial report of the company HSEAuditor’s ReportStatement of management’s responsibilityIntroduction to the preparation of financial statementsFinancial statements4.4.1 Statement of financial position4.4.2 Income statement4.4.3 Statement of other comprehensive income4.4.4 Cash flow statement4.4.5 Statement of changes in equityNotes to the financial statements4.5.1 Reporting company4.5.2 Basis for preparation4.5.3 Basis of measurement4.5.4 Currency reports4.5.5 Use of assessments and judgements4.5.6 Branch and representative offices4.5.7 Significant accounting policies4.5.8 Disclosures to the company’s financial statementsFinancial report of HSE GroupAuditor’s report for HSE groupStatement of management’s responsibilityIntroduction to the preparation of financial statementsConsolidated financial statements5.4.1 Consolidated statement of financial position5.4.2 Consolidated income statement5.4.3 Consolidated statement of other comprehensive income5.4.4 Consolidated cash flow statement5.4.5 Consolidated statement of changes in equityNotes to the consolidated financial statements5.5.1 Reporting group5.5.2 Basis for preparation5.5.3 Basis of measurement5.5.4 Currency reports5.5.5 Use of assessments and judgements5.5.6 Branch and representative offices5.5.7 Significant accounting policies5.5.8 Notes to the consolidated financial statements106107108110113116118119120120121121122123124124124125125126126126136166168169170170171171172173174174175176176177177177188Contact informationAbbreviations222225

today forresttomorrow energyHow peaceful aremornings in the morninglight gently penetratingthrough treetops. And howinvigorating are walksthrough thousands of coloursand numerous sounds in thelate afternoon. The forestgives balance. The forest fillswith energy.

1Introduction

Introduction3efforts, sacrifice and devotion to group goals are true factors of success. Thesegoals could not be reached without the owner‘s support. The expectations areclear: HSE is co-responsible for safe, reliable and environmentally friendly supplywith electricity, which has to be performed with the carefulness of a goodmanager. We endeavour to realise these expectations and to justify our owner‘strust and support with our work.It is also important to cooperate with local communities and other interestedpublic in whose environment we interfere and with whom we create better solutionsfor energy projects. In this aspect, journalists carefully watch over us andfollow our every move.In 2011, we changed many practices. A very important one is certainly the opennature of access to data and activities tied to project performance. We are awareof our responsibility to each citizen, although we represent the first link in productionand supply chain of electricity. Our goal is to produce stable and longtermcompetitive product regardless of unfavourable weather conditions or innon-market conditions. Such goal is realisable in case two basic conditions arefulfilled at the same time. The first condition is appropriate technological diversification,while the other one is assurance of relevant level of electricity selfsupply,both in Slovenia and the region, namely in all weather conditions. Allour existing production units as well as projects planned and being performedsatisfy these two conditions, thus, the goal will also be reached.Ljubljana, 17 May 2012Matjaž Janežič, M.Sc.,Managing Director of HSE d.o.o.

4 Annual Report 20111.2 Report of the Supervisory BoardIn accordance with provisions of Article 282 of the Companies Act (ZGD-1b), the Supervisory Boardof Holding Slovenske elektrarne d.o.o. hereby informs the Founder of the following:• The method and extent of examination of the Company’s operations in the 2011 financial year;• The review and confirmation of the annual report of the company HSE and the HSE Group for2011;• The examination of the proposal for allocation of accumulated profit;• The Supervisory Board’s position on the auditor’s reports.In the 2011 financial year, the Supervisory Board included the following owner’s representatives: from1 January 2011 to 31 December 2011, Drago Dolinar, Ph.D., Marjan Ravnikar, M.Sc., and VekoslavKorošec, M.Sc.; Jadranko Medak participated in the company‘s Supervisory Board from 1 January2011 to 19 January 2011, while Igor Šalamun, Ph.D. from 20 January 2011 to 31 December 2011.The employee representatives were: Rene Jeromel and Mojca Turnšek, M.Sc., from 1 January 2011 to31 December 2011.At its 4th regular meeting on 19 January 2011, the Supervisory Board adopted a decision on establishmentand structure of the Audit Committee which comprises three members: Marjan Ravnikar,M.Sc., President, Brane Podboršek, who was appointed to the Audit Committee in accordance withthe Article 280 of the Companies Act as an independent expert from accounting and tax area, Member,and Rene Jeromel who was appointed by the Worker‘s Council of the company HSE d.o.o. inaccordance with provisions of the Worker Participation in Management Act. Until the end of the year(31 December 2011), the Committee held its meetings in the same structure.At its 6th regular meeting on 11 March 2011, the Supervisory Board established the Committee forMonitoring Larger Investment Projects of the HSE Group. Vekoslav Korošec, M.Sc., was elected President,while Mojca Turnšek, M.Sc., was elected Member. Their term of office started with the appointmentof the third member at the 7th regular meeting as at 19 April 2011, i.e. Peter Groznik, Ph.D.. Asat 19 October 2011, Peter Groznik, Ph.D. submitted an irrevocable resignation statement. At its 12thregular meeting, the HSE Supervisory Board established that until the new member of Committeefor Monitoring Larger Investment Projects of the HSE Group is appointed, the status of other twoCommittee members, i.e. Vekoslav Korošec, M.Sc., and Mojca Turnšek, M.Sc., is also dormant, andtheir term of office will begin on the day of the new member‘s appointment. In this period, the HSESupervisory Board does not have the Committee for Monitoring Larger Investment Projects of theHSE Group. The Committee has not held any meeting.From 1 January 2011 to 31 December 2011, Matjaž Janežič, M.Sc., Managing Director of the companyattended the Supervisory Board meetings.

Introduction7• It was acquainted with the method of quarterly reporting on company/group operations toAUKN;• It gave approval to the company’s management to conclude a contract for D&O insurance of theHSE Group companies;• It was acquainted with legal opinions on the situation of public requestor under the PublicProcurement Act with regard to water, energy, transport and post services as well as Directive2004/17/ES;• It submitted AUKN the propositions of decisions related to remuneration of the SupervisoryBoard members, members of SB Committees and external members of SB Committees;• It was acquainted with measurable performance measures applicable for determining changeableremuneration to the Managing Director for 2010 and adopted new measures;• It was acquainted with trading activities of the company HSE d.o.o.;• It was acquainted with tables of consolidated cash flow statements for the period from 2011 to2020;• It was acquainted with the intention of the company’s management to prepare a comprehensiveplanning system for the HSE Group;• It was acquainted with the issue of Termoelektrarne Trbovlje d.o.o. and requested that by theend of the year the company’s management prepares a comprehensive plan of solving the issuerelated to the investment that Termoelektrarna Trbovlje d.o.o. holds in the company, particularlyin light of closing the RTH mine and maintaining energy locations;• It was acquainted with and approved the presentation strategy of selling own production and thepurchase of CO2 emission coupons for the purposes of HSE Group thermal production;• It approved the Constitutional Act on Internal Audit Operations within the Companies of theHSE Group;• It was acquainted with the Report on Procedures in the selection of ERP provider;• It approved the Business Plan of the company HSE and the HSE Group for 2012 with additionalplan for 2013 and 2014;• It discussed and was acquainted with the Report of HSE Worker’s Council on theimplementation of Worker Participation in Management Act in 2010 and in the period from1 January 2011 to 31 October 2011 within the company Holding Slovenske elektrarne d.o.o.In 2011, the Audit Committee of the company’s Supervisory Board held six regular meetings, at whichit discussed various strategic and business issues: All the members of Audit Committee participatedat the Commission meetings. In 2011, the Audit Committee discussed the following:• It was acquainted with key Business Plan assumptions of the company HSE and companies ofthe HSE Group for 2011;• It was acquainted with activities for performing the 2010 Annual Report of the HSE Group anddiscussed the Annual Report of the company HSE and the HSE Group for 2010;• It was acquainted with the information on the course of preliminary audit and the scheduleplanner on the course of audit in the company HSE and the companies of HSE Group;• It was acquainted with the information on transition to IFRS;• It discussed the Report on Management Review of Individual Transactions at TEŠ;• It discussed the received proposals for audit of the financial statements of the HSE Groupcompanies for 2011 and 2012 and formed a SB proposal for auditor selection;• It was acquainted with the information on conclusion of the contract for D&O insurance of theHSE Group companies.

Introduction13Total revenue (in € thousand)Net sales revenue (in € thousand)GroupGroup2011 1,391,428 20111,327,5462010 964,388 2010913,777CompanyCompany2011 1,364,705 20111,358,1182010 920,102 2010907,538Cash flows from operating activities (in € thousand)Net profit or loss (in € thousand)GroupGroup2011 135,505 201169,7532010 197,613 2010102,984CompanyCompany2011 29,798 201146,7302010 79,653 201079,491Assets (in € thousand)Equity (in € thousand)GroupGroup2011 2,275,886 20111,409,0982010 1,900,508 20101,344,136CompanyCompany2011 1,311,214 2011970,1292010 1,198,208 2010929,748Electricity production of HSE Group companies (in GWh)EmployeesGroupGroup2011 7,625 20113,8192010 8,429 20103,824Company20112010135123

14 Annual Report 20111.5 Chronology of major developments in 2011January••On 12 January 2011, a loan agreement with EBRDin the amount of € 200 million was signed forthe purposes of financing the construction of thereplacement Unit 6;••On 19 January 2011, the extended project groupfor the construction of replacement Unit 6 was approved.The new management of the project wasappointed. Miran Žgajner, M.Sc., was appointed adirector of the project and Branko Debeljak, M.Sc.,was appointed his deputy;••All conditions of drawing a € 110 million loan fromEIB were met since the Republic of Slovenia andAustria settled all environmental issues on crossbordereffects of the replacement Unit 6.February••On 16 February 2011, the Environmental Permit forOperation of the Large Combustion Plant of Unit 6was obtained;••On 17 February 2011, the government of theRepublic of Slovenia adopted a Decree on NationalSpatial Plan for PSP Kozjak and power transmissionline between the PSP and DTS Maribor; Thus, itspatially planned the facility and enabled the beginningof investment since the Decree enables theacquisition of necessary permits and approvals;••On 17 February 2011, EIB performed the transactionof the loan for the construction of the replacementUnit 6 at TEŠ;••At its 4th correspondence meeting on 18 February2011, HSE’s SB adopted the 2011 Business Planof HSE;••On 22 February 2011, the international review fullyapproved information on PV coal inventories, itscalorific value and cost manageability;••On 23 February 2011, an agreement for the constructionof HPP Krško reservoir was signed andthe construction works began;••On 23 February 2011, the SB of the company PVadopted its 2011 Business Plan;••At its 46th regular meeting on 28 February 2011,the SB of HSE Invest adopted the 2011 BusinessPlan of HSE;••Within the framework of regular maintenance,annual overhauls and revisions were performed atthe operating turbines on the Drava River; Fifteenannual revisions and six regular overhauls wereperformed as well as all preventive plant maintenancesand some improvements, replacements andupgrades of hardware and electric equipment;••Public presentation of supplemented nationaldetailed plan for the area of HPP Brežice and environmentalreport in Slovenia and public discussionin Brežice and Krško took place.March••At its 54th regular meeting on 3 March 2011,TEŠ’s Supervisory Board approved the proposed2011 Business Plan of the company. The memberadopted it on 23 March 2011.••At its 18th regular meeting on 4 March 2011,SENG’s Supervisory Board adopted the 2011 BusinessPlan, while on 21 April the Business Plan wasadopted with the decision by the sole companymember;••At the time of public disclosure of the supplementeddraft of the national detailed plan for HPPBrežice and environmental report in Croatia, apublic discussion was performed in Zagreb as at9 March;••On 17 March 2011, TEŠ obtained a final and legallyenforceable building permit for the cooling towerand main technological facility of the replacementUnit 6 at TEŠ;••On 18 March 2011, DEM’s Supervisory Boardapproved the 2011 Business Plan of the companyDEM;

Introduction15••On 18 March 2011, the operating permit for theHPP Boštanj reservoir was obtained;••On 28 March 2011, the change of Articles onIncorporation of TEŠ was entered in the CompaniesRegister. By this change the member expandedthe number of Supervisory Board’s members fromcurrent three members to six members, of whichfour represent the interests of the owner, whiletwo represent the interests of employees; On thebasis of this change, the owner appointed twonew members as at 6 April, while the other newmember was appointed by the Worker’s Council ofTEŠ as at 10 May;••An operating permit for the new coal conversionstation at TET was issued;••PSP Avče turbine audit was concluded.April••On 8 April 2011, the contractor for works on thecooling tower and main technological facility of thereplacement Unit 6 was selected;••On 13 April 2011, TET’s Supervisory Board adoptedthe 2011 Business Plan;••On 20 April, the Project Council TEŠ Unit 6 heldits first meeting. The representatives of the localcommunity, non-governmental organisations andcompetent ministries were invited to join the Council.The Project Council was established with thepurpose of more transparent and efficient managementof investments in the replacement Unit 6 atTEŠ;••On 22 April 2011, DEM’s General Meeting approvedthe 2011 Business Plan;••In order to prepare a comprehensive solutionand global strategy of the Mura River, a ProjectCouncil was established coordinated by the majorof Gornja Radgona, which comprises majors ofmunicipalities located on the banks of Mura Riverand representatives of the Ministry of the Environmentand Spatial Planning, Environment Agency ofthe Republic of Slovenia, the Ministry of Agriculture,Forestry and Food and Pomurje DevelopmentInstitute Murska Sobota.May••On 19 May 2011, the overhaul of 345 MW Unit 5was launched at TEŠ, which was prematurely successfullycompleted as at 15 July 2011;••The reconstruction of 110 kV switchyard HPP Dravogradwas successfully completed at DEM;••DEM and Hmezad Jeklo Ruše created a jointcompany MHE Lobnica in which DEM holds a65% stake; MHE Lobnica is expected to produce600 MWh energy per year;••The construction permit for demolition of boilerpart in gas power plants 1 and 2 at TET was obtained.June••On 27 June 2011, TET’s SB appointed FrancBlaznek as a new director;••PV signed an agreement on cooperation in modernisationof underground coal extraction in Indiawith the Fairwood Group, where PV will take therole of an engineer, project leader, auditor andconsultant.July••On 6 July 2011, an agreement for establishment ofdevelopment and research center (Razvojni centerenergija – »Energy Development Centre«) wassigned; The consortium of newly established centrecomprises key companies of the Savinje-ŠalekRegion, including the HSE Group companies: TEŠ,PV, PV Invest and HTZ;••At the 8th regular General Meeting of HSE Investon 27 July 2011, two new SB members were appointed;The General Meeting was also acquaintedwith election of worker representatives to theSupervisory Board;••The renovation of second HPP Zlatoličje turbinestarted at DEM; Renovation will increase the powerplant‘s operational reliability.August••The overhaul of Unit 4 will take place in TET between8 August 2011 and 22 August 2011;••On 11 August 2011, the District Court of Ljubljanaentered a newly established company SRESA inthe Companies Register. SRESA was establishedwith the purpose of performing and financing theconstruction and management of HPP on the middleSava River;

16 Annual Report 2011••On 18 August 2011, TEŠ approved the RevisedInvestment Programme »Construction of Replacement600 MW Unit 6 at TEŠ«, 4th Revision;••On 29 August 2011, the new SB member was appointedat the 9th HESS General Meeting;••On 30 August 2011, two additional SB memberswere elected at the 20th TET General Meeting;••The construction of MHE Markovci which will produce5,412 MWh electricity per year has begun;The beginning of power plant operations is envisagedin August 2012;••A failure of generator equipment of PSP Avčeoccurred at SENG, which resulted in shut-down ofoperation;••The installation of turbine 3 equipment in HPPDoblar I was finished at SENG;••At the HSE General Meeting on 29 August 2011,the Capital Assets Management Agency of theRepublic of Slovenia, as the representative of thefounder, reviewed the Annual Report of the companyand Group for 2010 and agreed with allocationof accumulated profit for 2010 in the amountof € 39,745,702 to other revenue reserves; AUKNalso adopted a decision on discharge from liabilityto the management and SB of the company HSEfor the year 2010;••On 31 August 2011, HSE, as the sole companymember, reviewed the Annual Report of TEŠ for the2010 financial year and adopted a decision to allocatethe total accumulated profit of TEŠ for 2010in the amount of € 3,992,285.60 to other revenuereserves with the purpose of the implementationof development projects and adopted the followingdecisions: that it does not grant a discharge toTEŠ Managing Director Uroš Rotnik, Ph.D. for theperiod from 1 January 2010 to 11 November 2011,that it grants discharge to TEŠ Managing DirectorSimon Tot, M.Sc. for the period from 11 November2010 to 31 December 2010 and that it grantsa discharge to SB members of the company TEŠfor the period from 1 January 2010 to 31 December2010.September••On 7 September 2011, the companies HSE, SELand GEN energija signed the Agreement on Cooperationin the Construction Project of HPPs on themiddle Sava River;••On 28 September 2011, the National Assembly ofthe Republic of Slovenia started a discussion on theproposal of the Act on Guarantee of the Republicof Slovenia for Liabilities from the Long-term Loanin the amount of € 440 million in order to financethe construction of replacement 600 MW Unit 6 atTEŠ;••Ten HPPs DEM were extended by the new solarpower plant »Sončni park Zlatočje« at energy facilityin Zlatoličje, which will produce approximately75 MWh of energy per year;••The dismantlement of turbine 2 at HPP Doblar Ibegan at SENG;••After a prior approval of TEŠ’s SB, the director ofTEŠ signed an Appendix no. 3 to the Contract forthe Supply of Main Technological Equipment (asat 27 June 2008) with Alstom (the supplier). TheAppendix finally limits the risk of increase in theprice of main technological equipment; Accordingto 2008 contract, the price of main technologicalequipment has been increasing on daily basis aswell as the price of metal, oil and labour costs; ForTEŠ this represented a non-manageable risk ofincrease in the final price of the project. Thus, thesigned Appendix capped the price of main technologicequipment for construction of replacementUnit 6.October••On 5 October 2011, the Committee on Financeand Monetary Policy of the National Assemblyof the Republic of Slovenia did not approve theproposal of the Act on Guarantee of the Republicof Slovenia for Liabilities from the Long-term Loanfrom EIB in the amount of € 440 million in order tofinance the construction of replacement 600 MWUnit 6 at TEŠ. Thus, the process of governmentguarantee acquisition in the National Assemblywas temporarily suspended;••On 11 October 2011, PV, Fairwood Group, Cigler &partners and Chescor Capital signed an agreementon establishment of a joint company Fairwood PVwhich will operate in the field of coal mining industryin Asian and Pacific Region;••On 19 October 2011, a highest daily productionwas realised in PV (12,860 tons) and on the samecoal mining site the highest shift production in thehistory of PV (5,940 tons);

Introduction17••On 19 October 2010, the National Assembly of theRepublic of Slovenia adopted the Act Governingthe Conditions of the Concession for the Exploitationof Energy Potential of the Lower Sava River(ZPKEPS-1); The Act introduced certain changes tothe relationship between the concession grantorand concessionaire HESS and it will significantlyimpact the company’s operations in the futureyears;••On 20 October 2011, the company PV establisheda branch office in Macedonia;••HPP Lobnica obtained a construction permit andstarted construction of the new energy facility onthe Lobnica River named HPP Ruše;••In TET they have finally managed to obtain thecontribution to cover eligible costs of electricityproduction from domestic primary sources thatrepresented more than 16% stake of all revenueplanned;••The public presentation of national spatial plan forGSPP was held in TET;••The technical inspection of turbine 3 in HPP Doblar1 was successfully performed at SENG;••At SENG the construction permit for extension ofPSP Avče surge chamber – ventilation tube wasobtained and the new rotor of PSP Avče generatorwas launched.November••On 17 November 2011, the HSE Group celebratedthe first decade of operation in the Slovenian PhilharmonicHall of Ljubljana;••On 25 November 2011, the companies HSE, SELand GEN energija signed the Contract of Membersby which they committed themselves to joint participationin the project of HPP construction on themedium Sava River. HSE has a 60% stake in SRESA,30% stake in SEL and 10% stake in Gen Energija;••On 29 November 2011, the Annex no. 4 wassigned to the Concession Agreement for Exploitationof the Energy Potential of the lower Sava River;••The construction of the second solar power plantDEM began, namely at HPP Formin, named the solarpower plant Formin. Its total output will amountto 112 kWp, while the envisaged energy productionwill amount to 119 MWh;••At DEM, the 60th anniversary of establishment wascelebrated;••At the 16th regular PV’s Supervisory Board meeting,a three-member Management Board wasappointed. The Management Board included MilanMedved, Ph.D. (Management Board President),Vladimir Malenković, Ph.D. (Management BoardMember) and Sonja Kugonič (Management BoardMember – Worker Director).December••On 12 December 2011, PV and subsidiary HTZVelenje received an international ISO 50001 certificatefor Energy Management;••On 8 December 2011, DEM received a certificate»Family-friendly company«;••On 15 December 2011, the 10th HESS GeneralMeeting was held where the company memberswere deciding upon appointment of new SB members;••At its 14th regular meeting on 20 December 2011,HSE‘s SB adopted the Business Plan of the companyand Group for 2012 with additional plan for2013 and 2014;••On 21 December 2011, the operating permit forthe HPP Blanca reservoir was obtained;••On 21 December 2011, PV’s SB approved the 2012Business Plan at its 17th regular meeting with theadditional plan for 2013 and 2014;••On 23 December 2011, TEŠ and Alstom consortiumsigned the Appendix 4 to the Contract forthe Supply of Main Technological Equipment forReplacement Unit 6 at TEŠ;••HSE performed a capital increase of TEŠ in theamount of € 8.2 million.

18 Annual Report 20111.6 Important events after the end of the period••On 3 January 2012, TEŠ signed an agreement onthe method of paying liabilities in the period untilthe issue of government guarantee with Alstom;On 15 February 2012, TEŠ handed over the boilerroom area of the replacement Unit 6 to Alstom andAlstom started with preparations for installation;On 13 March 2012, Alstom started with the installationof main steel construction of the boiler roomat Unit 6.••At the end of December 2011, HSE and TEŠ signedtwo agreements on bridging loan for investment inthe replacement Unit 6 at TEŠ in the total amountof € 159.4 million that started to be drawn as at3 January 2012 with the repayment deadline of31 July 2012. Here, HSE obtained assets by borrowingfrom commercial banks and in the contextof borrowing within the HSE Group (cash management).••At two meetings held by the end of February, theGovernment discussed the proposal of issuing agovernment guarantee for EIB loan in the amountof € 440 million for the investment of replacementUnit 6 at TEŠ; In its opinion the Government of theRepublic of Slovenia expressed general supportto the Act on Government Guarantee, while at thesame time it requested that the investor satisfiescertain conditions which shall be defined in thespecial agreement between the Government of theRepublic of Slovenia and TEŠ; TEŠ still faces therisk of non-issuing the guarantee within the properdeadline.••In February 2012, the Supreme Court refused therequest by the TEŠ Trade Union to audit the verdictof the Higher Labour and Social Court in Ljubljana,which approved the verdict of the Celje LabourCourt that the strike which took place at TEŠ inNovember 2010 was illegal.••Due to liquidity management of the HSE Group,the SB granted an approval for taking-out a shorttermloan in the amount of € 102 million for theperiod from 1 January 2012 to 31 December 2012.In January, the company drew assets in the amountof € 100 million.••On 30 January 2012, Igor Šalamun, Ph.D. resignedfrom the post of the member of the HSE’s SB.••In February 2012, a gala opening of the renewedPlanina boiler plant took place at Planina in Kranj;By performing all three investments (modernisationof heating stations and optimisation of hot-waternetwork, boiler replacement and constructionof cogeneration of heat and electricity), Planinaboiler room became a contemporary boiler roomequipped with the latest technological equipmentfrom the perspective of optimal and particularlymore rational production and distribution of heatand its direction and management.••In March 2012, the company HSE BH signed apreliminary contract for the purchase of Amitea 2which is the concessionaire for 3 HPPs.

Numerous fairy-tale forms andplayful moments, blushingcheeks and snowy pearls in thehair … The first snowflake isthe most beautiful. The secondone, third one … and the lastone. Each of them has itspower, the power to acceleratenumerous beats and fill heartswith energy.today snowtomorrow energy

2Businessreport2011

22 Annual Report 20112.1 Controlling company2.1.1 Profile of the controlling companyHolding Slovenske elektrarne d.o.o. is a limited liability company, entered intothe Companies Register with the District Court of Ljubljana.Company profile of Holding Slovenske elektrarne d.o.o. as at 31/12/2011Full company nameAbbreviated nameLegal formAddressHolding Slovenske elektrarne d.o.o.HSE d.o.o.Limited liability companyKoprska ulica 92, 1000 Ljubljana, SloveniaTelephone 01 470 41 00Fax 01 470 41 01Entry No.Nominal capital in € 29.558.7891/35036/00,registered with the District Court in LjubljanaSizeOwnership structureLarge company100% Republic of SloveniaYear of establishment 2001Tax number 99666189VAT ID numberSI99666189Registration number 1662970Main activityWebsiteE-mailManaging DirectorPresidentof the Supervisory Board35.140 Electricity tradingwww.hse.sihse@hse.si; info@hse.siMatjaž Janežič, M.Sc.Drago Dolinar, Ph.D.At the 38th meeting on 26 July 2001, the Government of the Republic of Sloveniaadopted the Articles of Incorporation of the limited liability company HSE,which is 100% owned by the Republic of Slovenia.The holding company was established to ensure a uniform market appearanceof its companies in the area of electricity sales, improve the competitiveness ofSlovenian production companies, and carry out the project for the constructionof hydropower plants on the lower Sava River.

Business report232.1.2 Organisational structure of the controlling companyThe company’s organisational chart as at 31/12/2011MANAGEMENTSECRETARIATCONTROLLINGDEPARTMENTCOMMUNICATIONDEPARTMENTFINANCIAL DEPARTMENTINTERNAL AUDITDEPARTMENTACCOUNTINGDEPARTMENTLEGAL OFFICEREPRESENTATIVE OFQUALITY AND ENVIRONMENTMANAGEMENTIT DEPARTMENTMARKETINGPRODUCTIONRESEARCH ANDDEVELOPMENTGENERALMARKET ANALYSISDEPARTMENTOPERATIONALDEPARTMENTDEVELOPMENTDEPARTMENTHR DEPARTMENTTRADING DEPARTMENTELECTRO DEPARTMENTRESEARCH DEPARTMENTPURCHASE DEPARTMENTCALCULATIONDEPARTMENTMAINTENANCEDEPARTMENTINTERNATIONALRELATIONSHIP DEPARTMENTINVESTMENT MONITORINGDEPARTMENTPROJECT MANAGEMENT ANDVALUATION DEPARTMENTHSE d.o.o. is the controlling company of the HSE Group. It is based in Ljubljanaand has business establishments in Maribor, Velenje and Nova Gorica. Its businessfunctions are divided depending on where various advantages can best beused. The management, administration, sales and marketing division, researchand development division, general division, and the departments of internal audit,communications, legal affairs, IT, controlling, finance and accounting arelocated in Ljubljana. In Maribor, the centre of managing production, investmentsand telecommunications is located. The business establishment in Velenjeis responsible for domestic market, trade relations between group companies,monitoring and calculation of deviations, long-term planning and electricity accounts.The establishment in Nova Gorica is responsible for foreign markets.

24 Annual Report 20112.1.3 Management of the controlling companyAs the sole owner, the Republic of Slovenia manages the controlling companyboth directly as well as through the Supervisory Board and the Managing Director.Governing bodies of the controlling company as at 1/1/2011GENERAL MEETING SUPERVISORY BOARD MANAGING DIRECTORCompany membersOwner's representativesRS – 100% stake Jadranko Medak (President) Matjaž Janežič, M.Sc.Representative:The Capital AssetsManagement Agencyof the Republic of SloveniaDrago Dolinar, Ph.D.(Vice-President)Vekoslav Korošec, M.Sc.Marjan Ravnikar, M.Sc.Employee representativesMojca Turnšek, M.Sc.Rene JeromelGoverning bodies of the controlling company as at 31/12/2011GENERAL MEETING SUPERVISORY BOARD MANAGING DIRECTORCompany membersOwner's representativesRS – 100% stake Drago Dolinar, Ph.D. (President) Matjaž Janežič, M.Sc.Representative:The Capital AssetsManagement Agencyof the Republic of SloveniaMarjan Ravnikar, M.Sc. (Deputy)Vekoslav Korošec, M.Sc.Igor Šalamun, Ph.D.Employee representativesMojca Turnšek, M.Sc.Rene JeromelAUDIT COMMITTEEMarjan Ravnikar, M.Sc. (President)Brane PodboršekRene Jeromel

Business report25Changes in HSE’s Supervisory Board in 2011Between 1 January 2011 and 19 January 2011, the owner’s representatives were:• Jadranko Medak;• Drago Dolinar, Ph.D., Deputy;• Vekoslav Korošec, M.Sc.;• Marjan Ravnikar, M.Sc., Member.Between 20 January 2011 and 31 December 2011, the owner’s representatives were:• Drago Dolinar, Ph.D., President;• Marjan Ravnikar, M.Sc., Deputy;• Vekoslav Korošec, M.Sc.;• Igor Šalamun, Ph.D..

26 Annual Report 20112.1.4 Corporate governance statementThe company Holding Slovenske elektrarne d.o.o., Koprska ulica 92, 1000 Ljubljanain accordance with Paragraph 5 of Article 70 of the Companies Act (ZGD-1) expresses a Corporate Governance Statement. The statement refers to the periodfrom 1 January 2011 to 31 December 2011.As the Managing Director of the company HSE, I hereby declare that the governanceof the company was in line with acts and other regulations, applicable Articlesof Incorporation of the limited liability company HSE, internal company‘sacts and in accordance with good business practice.As the Managing Director of the company HSE, I hereby declare in accordancewith Article 60.a of the Companies Act that the annual report and all its integralparts, including the corporate governance statement, is prepared and publishedin accordance with the Companies Act and International Financial ReportingStandards.1. Statement of compliance with the Corporate GovernanceCode for Companies with State Capital InvestmentsAs the Managing Director of HSE d.o.o., Matjaž Janežiš, M.Sc., I hereby declarethat the governance of the HSE company in 2011 was in accordance withrecommendations from the Corporate Governance Code for Companies withState Capital Investments (Code) adopted by the Capital Assets ManagementAgency of the Republic of Slovenia (AUKN) and published as at 18 January 2011at AUKN websites (www.auknrs.si), while respecting Reporting Guidelines ofthe Companies with State Capital Investments and individual applicable recommendationsof AUKN.As the Managing Director of the company HSE, I declare pursuant to point 73of the Code that the company HSE has opted to apply the AUKN Code on avoluntary basis.2. Company management bodiesIn accordance with the Articles of Incorporation of HSE, the founder managesthe company directly and through the company‘s bodies. The company bodiesare the Supervisory Board and the Managing Director.2.1 FounderThe founder decides independently on the following:• Amendments to the Articles of Association;• Adoption of the fundamentals of business policy and the companydevelopment plan;• Adoption of the annual report when the Supervisory Board has notconfirmed it and when the Managing Director and the Supervisory Boardleave the decision on the adoption of the annual report to the founder;

Business report27• The use of accumulated profit;• Granting a discharge from liability to the Managing Director and theSupervisory Board;• Allocation and termination of interests;• Changes in the company‘s nominal capital;• Changes to the status and dissolution of the company;• Election and dismissal of members of the company’s Supervisory Board;• Appointment of the company’s auditor;• Appointment of the company’s procurator and other authorised persons;and• Other matters in accordance with regulations and the Articles ofAssociation.Pursuant to Article 526 of the Companies Act, the founder enters its decisions inthe register of decisions.2.2 Managing DirectorThe company is managed and represented by the Managing Director, who is appointedand dismissed by the Supervisory Board. When his or her term of officeexpires, the Managing Director may be reappointed. In accordance with provisionsof the Articles of Association, the Managing Director represents and runsthe company on his/her own responsibility in line with the objectives, strategyand guidelines of the company.2.3 Supervisory BoardThe Companies Act, Articles of Incorporation of HSE and the Rules governingthe work of the Supervisory Board define the competences and decision-makingprocedures of the SB, organisation of work and other issues of significant importanceto its operations.The Articles of Incorporation of HSE defines the structure of the SupervisoryBoard. The Supervisory Board consists of six members, of which four membersrepresent the interests of the owner and are appointed and dismissed by theowner, while two members represent the interests of employees and are appointedand dismissed in accordance with the Worker Participation in ManagementAct. Supervisory Board members are appointed for a term of four years and canbe re-appointed when their term of office expires.Under the Articles of Incorporation, the Supervisory Board has the followingpowers:• It supervises the management of the company;• It examines the structure of the annual report and the proposal forallocation of accumulated profit;• It prepares a report on the results of the examination of the annual reportfor the General Meeting;• It confirms the annual report or makes comments thereon;• It gives an opinion on the foundations of business policy and thedevelopment plan of the company;• It approves the business plan of the company;

28 Annual Report 2011• It proposes to the founder the decisions falling within its area ofcompetence or gives opinions on the proposals made by the management inconnection with the decisions to be accepted by the founder;• It appoints or removes the management;• It concludes employment or management contracts with the management;• It authorises the management to take decisions at the general meetings ofsubsidiaries when there are changes in the status or equity structure;• It adopts the Rules governing the work of the Supervisory Board;• It may request reports on other matters; and• It issues preliminary approvals to the HSE Managing Director for legaltransactions such as acquiring, disposing of and pledging the shares andinterests in subsidiary and other companies; establishing or winding upother companies, branch offices and plants; acquiring, selling, exchangingor pledging real estate property owned by the company; and any legaltransactions (including investments, credit transactions and similar)exceeding 10% of the company’s nominal capital or € 2,955,000.00 otherthan electricity trading and related transactions, transactions related toshort-term cash management within the HSE Group and transactions forshort-term investing of assets in the form of deposits at commercial banks.The Supervisory Board may also carry out other tasks laid down in regulationsand company’s governing documents, or authorised by the decisions of thefounder.2.4 Audit committeeThe Audit Committee was established in accordance with the Companies Actand it ensures professional support to the SB. Tasks and competences of the AuditCommittee are determined by the Companies Act and SB decisions:• Monitoring of financial reporting procedure;• Monitoring of internal control efficiency within the company, internal auditand risk management systems;• Monitoring of statutory audit of annual and consolidated financialstatements;• Reviewing and monitoring of auditor’s independence for the company’sannual report, particularly assuring additional non-audit services;• Proposing SB the appointment of the candidate for the auditor of thecompany’s annual report;• Supervising the integrity of financial information prepared by the company;• Assessing the preparation of annual report and decision for the SupervisoryBoard;• Participating in the definition of the more important audit areas;• Participating in preparation of the contract between the auditor and thecompany;• Performing other tasks determined by the Articles of Association or SBDecision and• Cooperating with the auditor in the audit of the company’s annual report,particularly with mutual informing on main issues related to audit.The structure and operations of SB and Audit Committee are presented in theSB report.

Business report293. Internal controls and risk management within the companyin relation to the financial reporting procedureUnder the company’s internal control system we understand planned and systematicestablishment of procedures and methods which, in the course of theiroperation, assure punctuality, reliability and completeness of data and information,accurate and fair preparation of financial statements, prevent and detectdeficiencies in the system and assure compliance with acts and other regulationsand internal governing documents of the company.With the intention of ensuring greater transparency, efficiency and responsibleoperations, the company established an operating system of internal controlsand risk management through the company‘s organisational structure, standardof quality management ISO 9001, OHSAS 18001 standard, information securitymanagement as required by ISO/IEC 27001 and internal governing documentsof the company with a precisely prepared reporting system per individual organisationalunits. The internal control system is supported with IT control systemwhich also ensures relevant limitations and control over the network as well asprecise, up-to-date and complete data processing.The company established the advisory body HSE Risk Management Committeein order to establish the comprehensive risk management system within thecompany, to provide quality basis of company management and governance tothe company‘s management and founder and with the purpose of achieving thegoals planned. Organisation, structure, method of work and its tasks are definedin the Rules governing the work of Risk Management Committee of HSE d.o.o.The company established the Internal Audit in order to assure constant andcomprehensive examination of regularities and legalities as well as economy andregularity of business operations. The Internal Audit is an independent organisationalunit directly subordinated to the company‘s Managing Director. It performsindependent and objective audit activity within the company.The Managing Director is responsible for establishment, operation, control andconstant improvement of internal control system and accuracy and completenessof data.Ljubljana, 17 May 2012Matjaž Janežič, M.Sc.Managing Director of HSE d.o.o.

30 Annual Report 20112.1.5 Report on implementation of AUKN recommendationsin 2011In 2011, the company HSE regularly monitored recommendations by AUKN andinformed the HSE’s SB of the given recommendations on regular basis. The companyreasonably considered the given recommendations in its operations.

Business report312.2 Profile of the HSE GroupThe uniform market appearance of HSE Groupcompanies ensures greater competitiveness inthe market, optimum use of production capacitiesgiven the existing market conditions, mitigation ofnegative financial effects of production shortfalls, amore comprehensive supply of all types of electricity,fewer risks when entering into long-term contractsand better chances for penetrating foreign markets.The Group’s activityHSE Group is primarily engaged in energy andenvironmental management, and control of relatedprocesses and risks. This broad range of activitiescan be grouped into the following main categories:• Production of electricity and heat;• Lignite extraction;• Sale and trading with electricity and heat,electricity forward contracts, emission coupons,RECS certificates and gas;• Optimisation of HSE Group’s production;• Provision of ancillary services necessary foroperation of the electricity system;• Management and implementation of energy andenvironmental projects.Its main activities are electricity production andtrading, which is why the HSE Group seeks to takeadvantage of synergies associated with the widespectrum of production capacities in order to maximiseits operating efficiency. Because different productionunits have different operational and costcharacteristics, a more cost-effective electricity supplycan be achieved through appropriate combinationof production units. And because market pricesof electricity vary over time, planning and optimisationof production units, while observing technicalcriteria and conditions in electricity markets, are allthe more important.Related companies of the HSE GroupIn 2011, the HSE Group was comprised of the followingcompanies:• Holding Slovenske elektrarne d.o.o. asthe controlling company;• Dravske elektrarne Maribor d.o.o. withone subsidiary and one associate;• Soške elektrarne Nova Gorica d.o.o. witha subsidiary,• Hidroelektrarne na spodnji Savi d.o.o.,• Srednjesavske elektrarne d.o.o.;• Termoelektrarna Šoštanj d.o.o. withan associate;• Termoelektrarna Trbovlje d.o.o.;• Premogovnik Velenje d.d. with eightindependent companies, three associatedcompanies and Branch Office in Macedonia;• HSE Invest d.o.o.;• HSE Italia S.r.l.;• HSE Balkan Energy d.o.o.;• HSE Hungary Kft.;• HSE Adria d.o.o.;• HSE Bulgaria EOOD;• HSE MAK Energy DOOEL;• HSE BH d.o.o.;• HSE Prague Branch Office;• HSE Bratislava Branch Office;• HSE Bucharest Representative Office;• HSE Belgrade Representative Office.

32 Annual Report 2011HSE Group in Western, Central and South-Eastern European MarketsEEXPXEHSE PragueBranch OfficeOTEHSE BratislavaBranch OfficeOKTEEXAAEPEX SPOTHSE ItaliaSOUTHPOOLHSE HungaryHSE AdriaHSE Bucharestrepresentative officeHSE Belgraderepresentative officeHSE Balkan EnergyHSE BHHSE Bulgaria EOODIPEXHSE MAK Energy DOOELOMIEHSE has registered companies, branches and representative offices in Slovenia,Croatia, Serbia, Italy, Hungary, Bulgaria, Bosnia and Herzegovina, Czech Republic,Slovakia, Romania and Macedonia. It is a member of the German energy exchangeEPEX, Austrian energy exchange EXAA, French power exchange Powernext,Italian power exchange IPEX, Czech energy exchange OTE, Prague-basedenergy exchange PXE, Hungarian energy exchange HUPIX, regional energy exchangeSouthpool and Slovak stock exchange OKTE. In Greece, HSE obtainedan electricity trading licence on behalf of the controlling company; it also holdsa trading licence in Poland. In 2011, HSE finished the registration procedure inSpanish market and became the member of the Spanish stock exchange OMIE.The HSE Group’s other trading markets include:• Albania;• Montenegro;• Switzerland; and• Kosovo.

Business report33Related companies of the HSE Group as at 31/12/2011Foreign subsidiariesHSE Italia S.r.l.100%Foreign branch officesHSE Balkan Energy d.o.o.100%HSE Prague Branch OfficeHSE Hungary Kft.100%HSE Bratislava Branch OfficeHSE Adria d.o.o.100%Foreign representativeofficesHSE Bulgaria EOOD100%HSE Belgraderepresentative office25%Soenergetika d.o.o.HSE MAK Energy DOOEL100%HSE Bucharestrepresentative officeHSE Invest d.o.o.(HSE, DEM and SENG 25% each)HSE BH d.o.o.100%internationalnetworkcapitalinvestmentsHolding Slovenske elektrarne d.o.o.productionhpp productiontpp productionprimary sources100%Dravske elektrarne Maribor d.o.o.100%Termoelektrarna Šoštanj d.o.o.77.7%Premogovnik Velenje d.d.50%65%Eldom d.o.o.MHE Lobnica d.o.o.30.8%81.3%26%Erico d.o.o.Termoelektrarna Trbovlje d.o.o.23%100%Soške elektrarne Nova Gorica d.o.o.100%Elprom d.o.o.Golte d.o.o.16.6%HTZ IP d.o.o.100%100%Gost d.o.o.51%Hidroelektrarne na spodnji Savi d.o.o.2.8%SAŠA Inkubator d.o.o.36%61.2%60%RGP d.o.o.PV Invest d.o.o.64%100%42%26%Sipoteh d.o.o.PLP d.o.o.60%Srednjesavske elektrarne d.o.o.Jama Škale v zapiranjud.o.o.100%100%PV Zimzelen d.o.o.Branch officesin Macedonia

34 Annual Report 2011Hydro productionDravske elektrarne Maribor d.o.o. (DEM)Managing DirectorMain activitySupervisory Board composition as at 01/01/2011Supervisory Board composition as at 31/12/2011Viljem Pozeb, M.Sc.Electricity production in HPPStanislava Boban (President)Simon Tot, M.Sc.Marjan KirbišStanislava Boban (President)Đorđe Žebeljan, M.Sc.Marjan KirbišWith eight HPPs on Drava River (HPP Dravograd, HPP Vuzenica, HPP Vuhred,HPP Ožbalt, HPP Fala, HPP Mariborski otok, HPP Zlatoličje, HPP Formin),two small HPPs (Small HPP Melje and Small HPP Ceršak) and with two SPPs(SPP Zlatoličje and SPP formin) the company DEM produces almost one quarterof all Slovenian electricity. The average annual production of the companyDEM, which amounts to 2,660 GWh, represents 80% of Slovenian electricitywhich complies with criteria of renewable sources and standards of the internationallyaccepted RECS certificate (Renewable Energy Certificates System). Thetotal net output of DEM power plants amounts to 584 MW.The operations of the company that performs most of its activities on the DravaRiver are based on effective processes which are performed with minimum burdenon sources and environment. Significant operating principles are reliabilityof partner cooperation in all areas and adaptability to the challenges of employees,owners and external environment. In the area of hydropower activity thecompany fully controls and markets all processes, while the care for environmentis always criterion of assessing working and economic success at existingcapabilities and those that it still intends to establish. Efficiency, reliability,adaptability, completeness and environmental responsibility represent the basicvalues of the company DEM.Eldom d.o.o. is asubsidiary of DEM. Thecompany’s main activityis property management,organisation of mealsin restaurants andmanagement of holidayfacilities for Slovenia’selectricity sector.MHE Lobnica d.o.o.is a company that wasestablished in May 2011with the purpose ofelectricity production.

Business report35Hidroelektrarne na spodnji Savi d.o.o. (HESS)Managing DirectorMain activitySupervisory Board composition as at 01/01/2011Supervisory Board composition as at 31/12/2011Bogdan BarbičElectricity production in HPPJanez Keržan, M.Sc. (President)Jožef HebarPrimož StropnikNikola GalešaVladimir GabrijelčičJanez Keržan, M.Sc. (President)Andrej KovačPrimož StropnikNikola GalešaVladimir GabrijelčičThe company HESS was established in 2008, particularly with the purpose ofconstruction, operation and maintenance of HPP chain on the lower Sava Riverin accordance with the provisions of Concession Agreement for the Exploitationof Energy Potential of the Lower Sava River and the Act Governing the Conditionsof the Concession.The project of HPP construction on the lower Sava River classifies HESS as oneof the largest investors of RES construction in the Republic of Slovenia and widerarea.The company manages the construction of new HPPs Krško, Brežice andMokrice (HPP Boštanj and HPP Blanca are already constructed) in terms oftime schedule and financing by providing optimal and rational technical solutions.In addition to investments, the company also established the system ofoperation and maintenance of HPP Boštanj and HPP Blanca, which enables optimizationof HPP chain operation while assuring adequate safety and reliability.With regard to EU countries’ demands and commitments for the RES share ofthe largest possible extent, the company HESS contributes an important part ofthis energy to the Republic of Slovenia. In addition to already built HPP Boštanjand HPP Blanca, the construction of HPP Krško is in its final stage and it will befinished in 2012. Beginning of construction of HPP Brežice and HPP Mokricewhich are in the process of adopting NSP is planned for 2013 or 2014.The company HESS displays its mission in rational construction of new hydroproductionfacilities as well as reliable, competent, safe and environmentallyfriendly electricity production.

36 Annual Report 2011Soške elektrarne Nova Gorica d.o.o. (SENG)Managing DirectorMain activitySupervisory Board composition as at 31/12/2011Vladimir GabrijelčičElectricity production in HPPTomaž Štokelj, Ph.D. (President)Irena StareSilvester MedveščekFor 65 years the basic mission of the company SENG has been electricity productionfrom renewable water source. In the basin of the Soča River and its tributariesit produces so-called blue energy of 6 large and 21 small HPPs, while in2010 the HPP chain on the Soča River was supplemented by PSP Avče. SENG’smission – electricity production from a renewable water source – is performedwith the largest extent of responsibility to employees of local and wider communityand, last but not least, to the environment in which they operate. This fact isproved by numerous international certificates: ISO for quality and environmentalmanagement, OHSAS certificate for occupational safety and health, TÜVcertificate for production of electricity from water sources and RECS certificatefor production of electricity from renewable sources.Elprom d.o.o. is asubsidiary of SENG. Itwas established for thepurposes of electricitytrading. Elprom d.o.o. isa dormant company.Thus, the multi-purpose use of HPP has been a commitment and reflection ofSENG’s cooperation with local communities and population for several decades.SENG devotes a great deal of attention to the supply of local population withdrinking water, fish farming, fishing, preparation of touristic and recreation areas,maintenance of technical heritage and they contribute to greater flood protectionof Posočje and other possibilities for multi-purpose use of hydro powerplants.The company‘s vision is to optimally exploit the available water potential of theSoča River and its tributaries and produce electricity from other renewable energysources.SENG monitors events in the field of energy sector and preparation of new energyfacilities, while the rhythm of plan realisation lies within the responsibilityof the country.Srednjesavske elektrarne d.o.o. (SRESA)Managing DirectorMain activityMatjaž Janežič, M.Sc.Electricity production in HPPThe company SRESA d.o.o. was established in 2011 with its registered office onthe location of the company TET. It was established with the purpose of constructingHPP chain and exploitation of water energy potential for electricityproduction on the part of Sava water body from Ježica to Suhadol. The company’soperation will be particularly defined with the concession agreement (whichhas not been concluded yet) on the basis of which the company will manage theconstruction of new power plants Tacen, Gameljne, Šentjakob, Zalog, Jevnica,Kresnice, Ponoviče, Renke, Trbovlje, Suhadol in terms of time schedule and financingby providing optimal and rational technical solutions.

Business report37TPP productionTermoelektrarna Šoštanj d.o.o. (TEŠ)Managing DirectorMain activitySupervisory Board composition as at 01/01/2011Supervisory Board composition as at 31/12/2011Simon Tot, M.Sc.Production of electricity in thermal power plantsĐorđe Žebeljan, M.Sc. (President)Franc RosecJanez Keržan, M.S.c.Janez Keržan, M.Sc. (President)Franc RosecDean Besednjak, Ph.D.Vladimir Malenković, Ph.D.Aljoša TomažBranko SevčnikarTEŠ is the largest production facility in the HSE Group. Its main activity is theproduction of electricity and thermal energy for the purposes of district heating.With a net output of 779 MW, TEŠ produces approximately a third of the country’senergy, and in critical periods it can meet more than half of the nationaldemand. The average annual production of electricity ranges between 3,500 and3,800 GWh. The average annual production of thermal energy for district heatingof Šalek Valley ranges from 400 to 450 GWh. Moreover, TEŠ also providessystem services (primary regulation, secondary regulation, rotating reserve …).Since the useful life of existing TEŠ Units 1 to 5 is already coming to an end asthey are worn-out, uneconomical, technologically obsolete and environmentallyless appropriate (and environmentally inappropriate after 2016), we are buildingthe replacement 600 MW Unit 6 which will assure electricity and thermal energyproduction in the scope of the existing production and perform all abovementionedsystem services.The main long-term goal of TEŠ is construction of the replacement Unit 6, whichis connected with the further TEŠ development in future years and maintenanceof posts at TEŠ, PV and related activities.

38 Annual Report 2011Termoelektrarna Trbovlje d.o.o. (TET)Managing DirectorMain activitySupervisory Board composition as at 01/01/2011Supervisory Board composition as at 31/12/2011Franc BlaznekProduction of electricity in thermal power plantsDrago Skornšek (President)Jaroslav Vrtačnik, M.Sc.Mojca Turnšek, M.Sc.Drago Skornšek (President)Jaroslav Vrtačnik, M.Sc.Borut DolancZvonko Petan, M.Sc.Samo MoškonJanez BalogTET is one of the two power plants in Slovenia that produces electricity from locallyextracted coal. It has a long tradition and experience, with the first kilowatthours of electricity produced as early as 1906. TET is the largest energy productionfacility in the Zasavje region. The thermal power plant has three productionunits: a steam turbine unit, which uses brown coal from Zasavje coal mines asfuel, and two gas turbine units, which use extra light heating oil and serve as abackup for the Slovene energy system. The overall installed capacity of the powerplants at the end of 2011 stood at 168 MW.

Business report39Primary sourcesPremogovnik Velenje d.d.Management BoardMain activitySupervisory Board composition as at 01/01/2011Supervisory Board composition as at 31/12/2011Milan Medved, Ph.D. (President)Vladimir Malenković, Ph.D. (Member)Sonja Kugonič (Member, Worker Director)Mining and agglomeration of ligniteSimon Tot, M.Sc. (President)Irena StareMiran BožičMatjaž Janežič, M.Sc. (President)Irena StareMiran BožičPV is a company with more than 137 years of tradition. Technologically advancedextraction equipment and skilled employees, which direct the equipment, placePV among the most up-to-date underground coal mines in the world. With theuse of most up-to-date technology, they achieve exceptional production resultscomparable to the achievements of underground coal mines in Europe and allover the world. The entire process is based on consideration of natural resources,ensuring adequate security and predicting consequences for the environment.The production is performed in accordance with the principles of sustainabledevelopment, where they comply with and operate in accordance with fourquality standards: quality management system certificate, environmental managementsystem and occupational safety and health system in accordance withstandards ISO 9001, ISO 14001 and OHSAS 18001. With the purpose of moreefficient energy management, they obtained the international certificate for ISO50001 standard and additionally approved energy efficiency in the company asthe first coal mine and one of the first energy companies in the world.In addition to reliable and competitive supply of domestic coal for electricityproduction, it is also extremely important to transfer their highly professionalengineering expertise, technology or know-how out of Slovenia. In opinion ofinternational auditors, PV Velenje is the reference coal mine of Western Europe.Its technological expertise ranks it in the peak of world technology, while the topelectrical and mechanical equipment is the result of multiannual developmentand domestic engineering expertise. Their projects they are present in Asian-Pacific area, particularly in India, Australia, New Zealand and Vietnam, theycompete in Turkey, perform projects in Macedonia, work in Bosnia and Herzegovina,Serbia and Montenegro.Their future ambitions are even higher. In future they will also try to build theenvironment that they helped to co-create in the past and are still significantlyshaping it today.

40 Annual Report 2011Subsidiaries and associates of PVHTZ I.P. d.o.o. is the largest disability company inSlovenia with almost 1,000 employees and also thelargest company in the PV Group. It is particularly distinguishedby its rich expertise in maintenance and servicingof various devices and equipment for which itprovides project designs, production, installation andautomation. It cooperates with Western European producersof electrical, mechanical and protection equipmentin the areas of mining, construction and manufacturing.PV Invest d.o.o. is a young, fast growing company inthe area of spatial planning, construction engineering,cave surveying, geodesy and civil engineering surveying.Spatial planning, civil engineering and geodesyservices are oriented towards markets outside the PVGroup. The company is also engaged in the sale of realestate and the sale of apartments to lessees.GOST. d.o.o. is, next to its core activities, i.e. restaurantbusiness and tourism, also engaged in entertainmentactivity. The company organises events in the area ofthe tourist-recreational centre Jezero, entertainmentfor various occasions, banquets, and is successfully developingits catering activity. Its activities also includehotels.Jama Škale v zapiranju d.o.o. was established for thepurpose of closing down the Škale pit.Erico d.o.o., the main activity of which is performanceof environmental management services required under:the Environment Protection Act, National EnvironmentalAction Programme, legislation concerningwater, air, soil, waste, etc. Its services also include laboratoryanalysis and services, monitoring, various typesof environmental research, environment protectionprogrammes, restoration programmes, environmentaland occupational training, services related to environmentalissues and problems, sustainable development,and other services.Golte d.o.o. is a winter and summer resort. Its mainactivity involves ski resort services comprising: thetechnical division, which is responsible for operationand maintenance of cable car facilities, the hotel as anaccommodation facility, the restaurant and the touristagency.Saša Inkubator d.o.o. is a business incubator based inVelenje and operating in the Savinja and Šalek region(SAŠA). It is aimed at facilitating the establishment ofnew and accelerating the development of existing innovativeenterprises. By providing superior services,the incubator aims to support individuals with goodbusiness ideas and enable them to develop their businessesfaster and in a more successful way.PLP d.o.o. supplies the coal mine with timber products.To ensure maximum safety, the products suppliedhave to meet the highest quality standards.RGP d.o.o. provides services in the area of mining constructionand produces stone aggregates and concretemixtures. The core activity of stone aggregate productionis based on the extraction and processing of rockinto sand for construction.Sipoteh d.o.o. is engaged in the machinery and productionequipment business and in the production ofmetal structures and their components.PV Zimzelen d.o.o. is a retirement home for personsolder than 65 years. Through a family-like co-habitationin residential units and social and medical support, thehome operates in accordance with the guidelines forproviding quality and purposefulness in the lives of ourelders.

Business report41International networkHSE Italia S.r.lBoard of directorsMain activityTomaž Štokelj, Ph.D. (President)Ana ZaljeteljDamjan LipuščekElectricity tradingEstablished in 2003, the subsidiary company HSE Italia is involved in supportingelectricity trading activities in the Italian market. The company acts as a linkbetween HSE and its partners to facilitate potential investments in the territoryof Italy. Prior to Slovenia’s entry into the EU, the company represented a basis forthe establishment of balancing groups in the territory of the EU.HSE Balkan Energy d.o.o.Managing DirectorMain activityBoris Mezgec, M.Sc.Electricity tradingThe company HSE Balkan Energy, which is based in Belgrade, was established asa result of HSE’s expansion to SE Europe. Serbia plays an important geographicaland energy role in its region. It also has a developed electricity system andimportant resources such as water, coal and geothermal energy. The companytrades in electricity and assists the HSE Group in its expansion to SE Europe.HSE Hungary Kft.Managing directors as at 1/1/2011Managing directors as at 31/12/2011Main activityTomaž Štokelj, Ph.D.Irena StareTomaž Štokelj, Ph.D.Borut MehElectricity tradingThe company HSE Hungary facilitates connections with electricity markets ofCentral and Eastern Europe, mainly with Poland, the Czech Republic and Slovakia.In 2010, trading activities were transferred to the controlling company. At thebeginning of 2012, HSE, as the owner, adopted a decision to begin voluntaryliquidation of the company.

42 Annual Report 2011HSE Adria d.o.o.Managing DirectorsMain activityTomaž Štokelj, Ph.D.Irena StareElectricity tradingThe Zagreb-based company is engaged in cross-border electricity trade, electricitysales and purchase contracts, and technical consulting.HSE Bulgaria EOODManaging DirectorsMain activityDrago SkornšekIrena ŠlemicElectricity tradingThe HSE Bulgaria subsidiary was established with the purpose of expandingelectricity trading operations to SE European markets.HSE Mak Energy DOOELManaging DirectorsMain activityTomaž Štokelj, Ph.D.Drago SkornšekElectricity tradingIn May 2009, the company HSE MAK Energy DOOEL was established in Macedoniafor the purposes of entering the Macedonian electricity market and increasingtrading opportunities in the area from the Balkans to Greece.HSE BH d.o.o.Managing DirectorMain activityZlatko SahadžićElectricity tradingIn June 2010, HSE BH Energetsko preduzeće d.o.o. Sarajevo was established inBosnia and Herzegovina for the purposes of electricity trading. The companyacquired both licences for this field.

Business report43HSE Prague branch officeManagerMain activityTomaž Štokelj, Ph.D.Electricity tradingThe main reason for establishing a branch office in the Czech Republic was acquisitionof an electricity trading licence enabling trade inside the Czech Republicand on OTE and PXE energy exchanges.In 2010, trading activities were transferred to the controlling company.HSE Bratislava branch officeManagerMain activityTomaž Štokelj, Ph.D.Electricity tradingThe main reason for establishing a branch office in Slovakia was to fill the voidbetween the Czech Republic and Hungary and enable transfer of energy fromthe Czech Republic, which will remain a net exporter of electricity in the comingyears, through Slovakia and Hungary to the Balkans.In Slovakia, electricity trading also takes place through the controlling companywhich enables greater credibility and flexibility in trading transactions.HSE Belgrade representative officeManagerMain activityBoris Mezgec, M.Sc.Internationalisation of HSE's operationsAn own representative office in Belgrade was established for HSE to form oneof the bases for expansion of activities to the markets of former Yugoslavia andthe wider area of SE Europe. After the establishment of a subsidiary in Serbia, allactivities were transferred to it, while at the beginning of 2012, HSE received adecision on termination with regard to representative office.HSE Bucharest representative officeManagerMain activityDrago SkornšekElectricity tradingAfter Bulgaria joined the EU and two reactors at NPP Kozloduy were shut down,Romania became the main electricity exporter in the region. Romania also hasthe largest power exchange in SE Europe and a liberalised market. For thesereasons, HSE decided to open a representative office in Bucharest and obtain anelectricity trading licence.

44 Annual Report 2011InvestmentsHSE Invest d.o.o.Managing DirectorMain activitySupervisory Board composition as at 31/12/2011Supervisory Board composition as at 31/12/2011Miran Žgajner, M.Sc.Other project engineering and technicalconsultingIrena Šlemic (President)Alida Rejec, M.Sc.Jožef HebarDrago PolakIrena Šlemic (President)Alida Rejec, M.Sc.Andrej TumpejDrago PolakIgor ŽurgaNives PodgornikHSE Invest d.o.o., a company specialised in engineering and construction of energyplants was established in 2002, at the beginning for the purposes of constructingHPPs on the lower Sava River, while subsequently the company startedto cooperate in other energy projects within the HSE Group. In the period fromthe establishment until today, the company plays an important role in the fieldof advisory engineering or projecting in the project of constructing HPP chainon the lower Sava River, project of constructing HPP on the middle Sava River,construction of PSP Avče, project of renovation of HPP Zlatoličje, projects ofrenovation of HPP on the Soča River, project of constructing HPP on the MuraRiver, project of constructing PSP Kozjak, project of constructing the replacementUnit 6 TEŠ and a larger number of smaller projects, particularly in the areaof renewable sources.The company has its registered office in Maribor and business premises in Ljubljana,Nova Gorica, Sevnica and Šoštanj.

Business report45Soenergetika d.o.o.Managing DirectorMain activityAleš AžmanProduction of electricity and thermal energyAs part of activities in the area of EEU and distribution of electricity production,HSE has been searching for potential projects as well as reliable partnersthat would be willing to participate in such projects in cooperation with HSE.The result of these activities was the Co-generation Planina project, where themunicipality of Kranj carried out a tender to grant the right to construct andoperate the infrastructure and plants for »Co-generation of heat and electricityin Planina Kranj boiler plant« under a direct contract.The project partners are: Elektro-Gorenjska, Petrol, Domplan and HSE. Eachpartner’s participation in the project amounts to 25%. The leading partner of theconsortium is Elektro-Gorenjska. The consortium of abovementioned partnerswas also selected by the municipality of Kranj as the most favourable bidder withits proposal dated 15 January 2010.On 10 February 2010, project partners signed a contract of members establishinga limited liability company.The objective of the investments is implementation of a project for co-generationof heat and electricity in the area of Planina boiler plant. The boiler plant will befitted with two co-generation motors with a power of 999 kWe (1,177 kWt) and3.3 MWe (3,218 MWt), respectively. The projected total annual production of themotors is 21,000 MWhe and 22,500 MWht.In 2011, a legally enforceable construction permit was obtained. Activities werecarried out in accordance with time schedule and thus an applicable permit forboth plants was obtained in January 2012.

46 Annual Report 20112.2.1 Management of the HSE GroupIn itself, the establishment of HSE had two principalobjectives: coordination of main activities andutilisation of synergy effects in all companies withinthe HSE Group. The main purpose behind the establishmentof HSE was to found, finance and managecompanies in which it holds a majority stake. In thecourse of HSE Group’s development, the desire forfurther integration and exploitation of mutual synergiesgrew intensively.When NEP and Strategy of Capital Assets Managementof the Republic of Slovenia are adopted, anew Development Plan of the HSE Group will beprepared, in which we will redefine the HSE Groupmanagement and consider the written recommendationsof AUKN.The basic goals of introducing CG in the HSEGroup were to:• Ensure greater efficiency of operation;• Maximise mutual synergies;• Provide for better management of operations;• Provide conditions for effective execution oflarge capital investments (such as constructionof replacement Unit 6 at TEŠ); and• (Subsequently) achieve even better operatingresults.Management bodiesThe majority of subsidiaries in Slovenia are runby a single-member management or managementboard. The subsidiary PV has a three-member ManagementBoard, while abroad they usually have atwo-member management. Most companies are supervisedby a three-member supervisory board.HSE manages the companies of the HSE Groupthrough representatives in Supervisory Boards ofsubsidiaries as well as through committees responsiblefor supervision of major investments.Worker participation in managementEmployees exercise their rights through tradeunions, workers’ councils and representatives in theSupervisory Board.Regular and close cooperation with labour unionsand workers’ councils of the HSE Group is apractice that was introduced along with the establishmentof the HSE Group. Such method of cooperationensures a balance of various interests and,consequently, a broad consensus regarding both theGroup‘s development plans as well as provision ofsocial security for employees.Trade union activitiesTrade union activities at DEM, SENG, TET andTEŠ are co-ordinated by Sindikat delavcev dejavnostienergetike Slovenije (SDE – the Slovene PowerSector Union), one of the strongest within Zvezasvobodnih sindikatov Slovenije (ZSSS – the Associationof Free Trade Unions of Slovenia).The SDE’s Electrical Energy Sector Conferenceencompasses the Coordination of union activities ofthe HSE Group, which is comprised of trade unionrepresentatives of DEM, SENG, TET and TEŠ. TheCoordination communicates directly with HSE’smanagement as well as with the managing directorsof individual companies, thus ensuring that issuesare addressed in a timely manner. Such cooperationalso extends to the Joint Workers’ Council of theHSE Group.Operating within the HSE Group there are alsothe trade unions Neodvisnost and Sindikat pridobivanjaenergetskih surovin Slovenije (SPESS – Unionof Coalminers), which operates within the PVGroup.The actions of the SDE Coordination and othertrade unions operating within the HSE Group havea cohesive function.Active supervision committeeAs early as in 2009, we have established an ActiveSupervision Committee responsible for active oversightof investment in the Unit 6 at TEŠ. The committeeproved useful also in 2011 and assured bettermutual communication with its operations, while itcontributed to visibility of investment. The Committeeregularly reported to the management of HSE,TEŠ, SB, ME, AUKN and others.

Business report47Joint Workers’ Council of the HSEGroupHSE Group employees exercise their right toparticipate in management through workers’ councilsof individual companies. Among other things,the councils elect employee representatives to thecompany’s Supervisory Board. On the basis of theAgreement on the establishment of a Joint Workers’Council for related companies, the workers’ councilsof the HSE Group established the Joint Workers’Council of the HSE Group (JWC).The JWC is responsible for addressing issuesconcerning employees in all related companies,which include: the annual report of HSE and HSEGroup, development strategy and business policy,changes in activities and status changes within theHSE Group, sale of individual companies and significantchanges in ownership, common platformsfor resolving individual issues, and status and rightsof workers, such as: a common methodological approachfor classification and evaluation of work, useof common resources of the workers’ standard, educationpolicy and occupational health and safety.In addition, the JWC’s task is to supervise implementationof the Worker Participation in ManagementAct. The JWC thus acts as a facilitator betweenall employees of the HSE Group, cooperates withthe management in a manner laid down by the lawand the Participation agreement and, together withthe union, represents the interests of employees. Animportant contribution of the JWC to the successfulbusiness policy of the HSE Group is the unanimoussupport of common projects defined in the developmentplans of the HSE Group.Economic and Social Council (ESC)In 2010, and Economic and Social Council (ESC)was founded with the goal of intensifying cooperationbetween the management boards, workers’councils and representative labour unions in theHSE Group companies.

48 Annual Report 20112.3 Business policy of the HSE GroupMissionThe mission of HSE, the leading Slovenian energy producer, is to maintain itsleading position in the domestic market and adopt a leading role in the marketsof SE Europe as well as to develop the Slovene energy sector and science, establishingthem in an international context.VisionHSE group vision is to ensure optimum utilisation of Slovene energy sourcesand personnel, and to establish a competitive and innovative company in theglobal energy market, while also expanding its business operations so as to reducebusiness risks arising from market fluctuations in relation to individualmarket products.HSE valuesThe HSE group values are reflected in the Group’s attitude towards customers,the community, employees, business partners and owners. We focus on:• Providing satisfaction of HSE service users;• Building responsible, long-term partnerships with business partners;• Environment protection, being conscious of carbon imprint and use of RES;• Striving to achieve professional competence;• Permanent education and establishment of a motivating workingenvironment for employees;• Providing secure and stable jobs and creative working environment;• Efficient operation and generation of returns for the owners;• Continuous improvement of the management system.

Business report492.4 Strategic policies of the HSE GroupThe HSE Group is bound to contribute its shareto solve the key challenge of European and thusnational energetics: assure safe, competent and sustainableenergy supply to users. This challenge demandsthat we remain active in light of achievingambitious goals in all priority areas: RES exploitation,reducing CO2 emissions and providing efficientand reliable supply of domestic users. This frameworkalso contains our long-term investments innew production facilities that we always assess alsofrom the perspective of contribution to long-termcommitments of the State in the climate and environmentalarea.In future, the HSE Group wishes to:• Maintain the position of the largest E-RESproducer in Slovenia;• Contribute to significant reduction in CO2emission in electricity production;• Provide stable supply to users in a competitivemanner through exploitation of the soledomestic primary energy product;• Develop the centre for new energy technologies;• Maintain the position of leading electricitytrader in the region;• Expand its role in SE Europe.These demanding goals can only be achieved by coordinatedactions of the entire group. Reinforcementof coordinated actions was present in all our activities.Our short-term and long-term goals are beingadapted to the new economic situation which indicatesgreat challenges for the HSE Group the future.Nowadays, timely identification and interpretationof influential factors and a prompt, but deliberate,reaction are strategically important in order to maintaina leading role in the country and strengthen ourposition in foreign markets of the region.In 2011, we continued to perform the planned investmentprojects since the provision of undisturbedelectricity production is indispensable for safe andreliable supply to users. However, for the purpose offurther growth of operations, it is necessary to ensureconstant growth of production capacities, increasethe volume of trading quantities and expandnew business fields. In 2011, we have realised thesepolicies by continuation of activities on the projects,which are already in process, particularly the constructionof HPP chain on the lower Sava River, thereplacement Unit 6 at TEŠ and a new exportableshaft in PV as well as by performing other projectswithin this period (HPP on the medium Sava River,PSP Kozjak etc.).The HSE Group currently operates in very unstablecircumstances, which are not connected solelyto recuperation of national economy, but also withthe absence of national energy strategy for the followingmedium and long-term period. Thus, our activitiesdepended on dynamics of adopting the newNEP, which will outline the key orientations andinvestments in Slovene energetics until 2013. A newlegal arrangement of energy area is in the course ofpreparation, which should be entirely prescribed bythe new Energy Act that was publicly discussed inthe second half of 2011 besides the Act Amendingthe Energy Act. All the abovementioned key documentsshould be adopted as early as in 2011, but sincethe adoption was delayed, the HSE Group has facedthe fact that clearer time schedule and the volumeof some long-term projects shall not be defined beforethe adoption of new NEP. Therefore, the adoptionof revised long-term Development Plan of thecompany is still in preparation, although the draft ofrevised Development Plan was already prepared in2010.The activities of achieving more efficient coordinationbetween the controlling company and subsidiarieswithin the group with the goal to maximizethe available group potentials and exploit mutualsynergy effects had begun as early as in 2010, whilethey intensively continued in 2011. These activitieswere also enforced through clearly and qualitativelydefined politics and larger unification of businessfunctions and through more consistent operations

50 Annual Report 2011on all levels within the group. All the areas of HSEoperations in 2011 penetrated by the aim to achievegreater unification within the group and exploit synergies.European global frameworkThe Europa 2020 strategy remained of key importancefor our operations on the level of Europe.The strategy determines 5 key goals until 2020, whiletwo of them directly affect our operations – thefirst one is to achieve goals 3x20 in the area of environmentand energetics, while the other one is toachieve 3% GDP of the European Union for researchand development. The year 2011 was also marked bythe adoption of new Action Plan for energy efficiency,which also affects the efficiency of electricity production,while the EU plan for low carbon economyuntil 2050 was also presented.At the end of 2011, a new global climate conferencewas held in Durban (South Africa), where theworld leaders reached the turning point agreementthat by 2015 all 195 Member States of United NationsClimate Change Convention will adopt a bindingagreement for decrease in emissions which wouldbecome effective in 2020 at latest. They also reachedan agreement on second Kyoto target period thatwill begin on 1 January 2013.Optimisation of Group’s operationsWe must be aware of the fact that only througha unified approach of all companies which make upthe HSE Group we can ensure greater competitivenessin the market, utilise production and other capacitiesin an optimal manner, enable a more roundedrange of products, reduce risks when concludinglong-term contracts and implementing larger projectsetc. By unifying the strategic goals, strategiesand business policies and utilising the existing resourcesof all HSE Group companies we will be ableto achieve greater synergies of the Group. The decisionof National Assembly on the Act on Guaranteewill be of key importance to the HSE Group. Untilthe Act is adopted, TEŠ, HSE and the HSE Group areexposed to significant risk.Foreign investmentsIn addition to ensuring safe, reliable, sufficientand environment-friendly production in Sloveniaand electricity supply at competitive prices, ourfundamental goal is development and growth ofthe HSE Group by assuming a more important rolewithin the SE European region. These markets offeropportunities for further expansion of the company’soperations, while the risks associated with themcan still mostly be attributed to unstable politicaland regulatory conditions and dominant positionsof local vertically integrated companies and unconsolidatedcompanies.In light of important investments in Slovenia,all additional investments have to be very carefullyplanned. In today’s changing market conditions,both at home and abroad, HSE is aware of potentialdrawbacks of foreign investments and is extremelycareful when engaging in such investments.

Business report512.5 Management system policyIn the HSE Group we are trying to establish a comprehensivequality policy and meet the basic qualityand business policy objectives of the group in thearea of quality, environmental management, occupationalsafety and health, information security andknow-how.2.5.1 Achieving objectives in the area ofqualityOur permanent objectives regarding quality are asfollows:• to meet customer demands;• to achieve the strategic and tactical businessobjectives;• to attain optimal organisational structure andtransparency of business operations;• to operate in accordance with applicableregulations; and• to exercise permanent control over theeconomic aspects of business to ensuresuccessful performance.The objectives set for 2011 have been achieved. Wehave started the works on preparation of unifiedrules of procedure of the HSE Group. System procedureswere amended and supplemented. Employeeswere trained in the area of management systems. Wehave performed a recertification audit for OHSAS18001:2007 certificate, while regular audits were performedfor others.In the previous year, internal and external auditswere carried out and successfully completed, as wasthe external audit of RES production at HPP chainsat DEM, SENG and HESS (HPP Boštjan and HPPBlanca) according to the criteria of EE TÜV SÜSand RECS. In 2011, EE+ (Certificate for productionof E-RES by providing guarantee of operations andefficiency) was added to the certificate.2.5.2 Achieving environmentalmanagement objectivesThe HSE Group is an environmentally consciousgroup of companies, which provide their employeeswith pleasant and healthy working environment andfoster good relations with their neighbours. Theyare implementing the principle of sustainable developmenton a local and national level, and theirgoal is constant improvement of working and livingconditions of employees and people living in theirvicinity. The companies’ environmental policy hasbeen reconciled with the requirements of the ISO14001:2004 standard. In 2011, an internal and externalrecertification audit of environment protectionwas carried out and successfully completed based onthe ISO 14001 standard. The key objective of the HSEGroup’s environmental policy is to establish a permanentbalance, which is achieved by implementingpreventive measures, avoiding any environmentalcontamination, sharing responsibility and includingenvironmental management in individual operatingprocesses.2.5.3 Achieving occupational health andsafety objectivesCaring for the improvement of occupational healthand safety conditions in the working environmentwhile taking into account the specifics of processesof HSE Group companies is an integral part of theGroup’s culture and reflects our care for our employeesand the Group’s attitude towards the social environmentin which we live and operate.For HSE Group, compliance with relevant legislationrepresents merely a minimum level which isobserved and supplemented with the requirementsof the OHSAS 18001 standard. After the internal andexternal recertification audit was carried out andsuccessfully completed, the auditors determined thatthe area of occupational health and safety is managedin accordance with the standard.

52 Annual Report 20112.5.4 Achieving information securityobjectivesIn 2011, the implementation of information securitymanagement measures continued in accordancewith the ISO 27001 standard and included:• An inventory count of IT resources withinindividual systems at TEŠ and HSE;• Updated risk assessment for all IT resources,paper documents, services (contracts) andpeople;• Amended procedures for monitoring of eventsin the area of information security and businessIT, as well as methods for their classificationbased on changes, possible incidents and actualincidents, and their appropriate allocation andresolution;• A revised system management manual;• A revised SP 30-41 Business IT procedure inaccordance with organisational changes;• A review (in accordance with the personal dataprotection act) of all data-bases, where HSEprocesses personal data, which will be reportedas data-base catalogues to the InformationCommissioner as required by the law.We also performed an external assessment accordingto the criteria of ISO/IEC 27001:2005.2.5.5 Family-friendly companyThe certificate was granted to the HSE companypursuant to decision of Audit Committee as at10 May 2010. After the certificate was obtained, theManaging Director appointed the team for coordinationof professional and family life which continuesto work on certificate in accordance withmeasures. Since September 2011 the internal portalof HSE contains the section FFC (Family FriendlyCompany) where employees can find basic informationand documents referring to activities within theframework of Family Friendly Company certificate.2.5.6 Certificates obtained by HSE Groupproduction companiesOpen market conditions in the Slovene electricitymarket and in foreign markets in particular requirecertified quality in terms of system and environmentalmanagement, as well as appropriate approachto the production of electricity and other energyproducts. Appropriately certified products result inimproved sales, and sometimes certain markets canonly be penetrated if products have been appropriatelycertified.HSE DEM SENG HESS TEŠ TET PV HSE InvestISO 9001 √ √ √ √ √ √ √ISO 14001 √ √ √ √ √ √OHSAS 18001 √ √ √ √ √ √ √ISO 27001 √ √ √ISO 50001√EE TÜV √ √ √ √EE + TÜV √ √ √ √RECS √ √ √ √HACCP √ √GOO √ √ √FFP √ √ISO 9001Quality management system under standardrequirementsISO 14001Environment management system under standardrequirementsOHSAS 18001Occupational health and safety system understandard requirementsISO 27001Information security management system understandard requirementsISO 50001Energy Management system – Requirements withinstructionsEE TÜV(CMS Standard 83: Erzeugungb EE (04/2011))EE + TÜVCertification assessment in accordance withTÜV TMS criteria for electricity production fromrenewable sources by providing guarantee ofoperations and efficiency (CMS Standard 87:Erzeugungb EE+ (04/2011))RECSRenewable Energy Certificate System = Internationalcertification system of electricity produced fromrenewable sources of energyHACCPHazard Analysis Critical Control Point = Analysis ofcritical control point risk Standard for measuring labsGOOGuarantee of originFFPFamily-friendly company

Business report532.6 Market position2.6.1 Characteristics of Slovenianeconomic climate in 2011Decrease in GDPThe drop of economic activity in Slovenia additionallydeteriorated in the last quarter of 2011,particularly due to decrease in domestic consumption,while GDP decreased by 0.2% in 2011. The 4%decrease in final domestic consumption stood outsince the consumption by households and State waslower in the middle of the year. In addition to furtherdrop of gross investments in fixed assets, the changein inventories also negatively affected the GDP volumein the last quarter of 2011 contrary to first threequarters of 2011. Due to the abovementioned facts,the growth risks for 2012 have increased. Uncertaintiesin international environment remain high andthey decelerate growth of foreign demand, while atthe same time the trust in Slovenian economy remainslow.Annual inflation of 2.1%In 2011, the increase in consumer prices of Eurozonewas larger than in 2010 and it was more extensivethan in Slovenia. The key reason was the increasein prices of energy products due to the impactof increased oil prices at the beginning of 2011 andfood prices at the end of 2010 in world markets. InSlovenia, the inflation in 2011 amounted to 2.1% andit was on a similar level than in the previous year.Despite key inflation factors that remain the same asin Euro-zone, inflation is lower in Slovenia, particularlydue to the impact of weaker economic activity.Prices of imported productsincreased by 1.8% in a yearIn the period from December 2010 to December2011, the growth of imported products amounted to1.8%. Prices of products supplied from the Euro-zonecountries increased by 1.9% in this period, while theprices of products imported from the countries outsidethe Euro-zone increased by 1.6%.Higher prices of energy productsand raw materialsIn 2011, the import prices of energy products increasedby 13.3%, while the import prices of raw materialsincreased by 8.5%. They are followed by pricesof non-durable consumer goods (by 5.7%) and theprices of consumer products (by 4.1%). On the otherhand, the import prices of investment productsdecreased by 1.9% and durable consumer goody by1.0% in 2011.The rate of registered unemployedas high as 12.1%In 2011, the deterioration of labour market conditionscontinued. At the end of 2011, the number ofregistered unemployed reached 112,754; the unemploymentrate in Slovenia thus amounted to 12.1%and increased by 2.5% relative to the end of 2010.A decrease in the number ofemployed of 0.2%Compared to December 2010, the number ofemployed in 2011 decreased by 0.2%, mostly in constructionand processing industry activities.Larger export and import in 2011than in 2010In the period January to December 2011, the exportincreased by 12.2% and import by 11.2% comparedto the same period in 2010; export to importratio amounted to 92.5%.Government deficit6.4% GDPIn 2011, the total government revenue increasednominally by 1.2%, while total expenses increasedby 2.0% more. Therefore, the government deficit in2011 was larger than in the previous year: In 2011, itamounted to € 2,289 million or 6.4% GDP, while in2010 it amounted to € 2,124 million or 6.0% GDP.

54 Annual Report 2011Lower industry production only inthe mining areaCompared to 2010, the value of industry productionthroughout the entire 2011 was lower only in thearea of mining (by 8.0%), while it was higher in theremaining two activities.2.6.2 Market environment of theelectricity industryAfter the recuperation of European economy in2010, the European debt crisis came to the forefrontin 2011. However, this was not a surprise since thenational debts of individual EU member states in theperiod after the financial crisis exceeded the maintainedlevels, which also reflected in mistrust of themarket with regard to debt repayment capabilities.When it was clear that Greece cannot repay its debts,speculations on possible solutions for the currentsituation followed each other. The European debtcrisis arose. This affected the impaired euro currenciesagainst American dollar, which on one handimproved the competitiveness of European exportersin the world market, while on the other hand itincreased the prices of energy products within theEU quoted in American dollars.In addition to the impact on impaired Europeancurrencies, the discovery that Greece will not be ableto repay its debts negatively affected the Europeanbanking sector. The expected large write-downs inGreek national debt could also mean the collapse ofseveral European banks. Thus, the activities in theEuropean interbank market slowed down in the secondhalf of 2011, while non-functioning of the bankingsystem was also transferred to real sector at theend of the year. This was reflected in reduced industryproduction and consequently in lower electricityconsumption in the second half of 2011.With regard to the transmission of electricityacross Slovene borders we should mention that theSlovene transmission network operator, ELES, inaccordance with the European directive concerningthe allocation of cross-border transmission capacities,continued with market-based allocation ofcross-border transmission capacities through explicitauctions. The allocation of daily cross-bordertransfer capabilities to Slovenian – Italian border wasperformed with the help of market coupling as of1 January 2011, which increased the volume of electricitytrade in the Slovenian electricity exchange.One of significant changes in the Slovenian retailmarket was elimination of market share of distributioncompanies on the basis of European legislationrequirements to separate market and regulatory activityin the area of electricity supply. Thus, the electricitydistribution companies eliminated the marketactivity and transferred it to newly established subsidiaries.With the intention to establish stable saleschannels in the domestic electricity market, HSElaunched activities for capital entry into four newlyestablished companies. At the end of 2011, the applicationfor notification to the Competition ProtectionOffice was submitted, while the procedures are currentlyin progress.Liquidity crunch in European area and recessionhave also affected the market of emission coupons.As a result of liquidity crunch, the companies preferredto sell their extra emission coupons ratherthan save them for future needs, while on the basis ofrecession and lower demand for products, the needfor emission coupons decreased. On the basis of theabovementioned factors and general mistrust in Europeancommercial scheme, the price of emissioncoupons decreased from € 17/t CO2 to € 12/t CO2in the middle of 2011. After this radical drop, thedecrease in prices continued also in the second halfof 2011. At the end of the year, EIB started with thesale of 20 million emission coupons per month onthe basis of NER300 programme implementation,which additionally increased the offer of emissioncoupons and due to this fact their price slightly exceeded7 €/t CO2 at the end of the year. With regardto current price levels of emission coupons, it is perfectlyclear that the industry sector is not sufficientlystimulated to reduce the greenhouse gas emissions.

Business report552.6.3 Situation in electricity markets in2011In 2011, HSE continued to increase the volume ofsales and significantly exceeded ambitiously setgoals. High trade amounts were followed by profitgrowth. The main reason was the accident in thenuclear power plant in Fukushima. European publicresponded to possible consequences of accidentsin nuclear facilities in various ways. German publicdecided to close nuclear power plants with politicalsupport, which reflected in smaller amounts offeredin the market and consequently higher price. Thus,in France they did not decide to adopt such drasticmeasures. German price exceeded the French oneand the conditions in our most liquid purchase markethave changed. The weather also played an importantrole (long-lasting drought since August).As a result of closing the Nuclear power plant,also Japan was forced to purchase larger amounts ofLiquified Natural Gas. The amount of gas in worldmarkets decreased, while the price increased. Theincrease in price of primary energy product in Italy(over 50% of electricity is produced from gas) alsoresulted in increased price in the Italian market,which continued throughout the entire 2011, whilethe trend has not changed. The energy consumptionwas increasing during the year; however, high pricesmostly resulted from the price of oil.SloveniaSlovenia is located on the intersection of three liquidenergy markets: German, Italian and Hungarian.This puts it into good strategic position with regardto exploitation of differences in price and structureof products in electricity market. Electricity price inthe Hungarian market has exceeded the price in theGerman market, particularly due to poor hydrologicconditions and lack of energy in SE Europe in thesecond half of the year, which consequently affectedthe increase in the prices of cross-border transfer capacitiesfrom Austria to Slovenia.In 2011, the electricity production in Sloveniadecreased by 647 GWh. The main reason of this decreaseis a low HPP production. On the other hand,the production of NPP in Slovenian part increasedby 264 GWh, which mostly results from lower productionin 2010, when the regular overhaul was performed.The entire Slovenian electricity productionin 2011 thus amounted to 11,194 GWh.While the production in 2011 decreased relativeto 2010, the use increased from 12,435 GWh to12,882 GWh. This resulted from the increased consumptionof Talum, which used 487 GWh moreelectricity. No larger changes occurred with regardto take-over of distributions from the transfer network.In 2011, we have again recorded a larger energyimport than export in Slovenia. According to ELESdata, the energy was mainly imported from Austriaand Croatia. The average price of daily capacities ofenergy import from Austria to Slovenia amounted to3.88 €/MWh compared to solely 0.18 €/MWh in theprevious year. The higher price is mainly a reflectionof longer drought period, which lasts from the summeronwards and affects poor hydrologic conditionsin the entire area of SE Europe. Such condition wasalso reflected in prices of daily capacities from Croatiato Slovenia, which have decreased from 1.26 €/MWh to 0.05 €/MWh.As regards energy export, in 2011 we noticed anincrease in export to Italy and Croatia, while the exportto Austria decreased. Decrease in export to Austriawas so extensive that due to increase of exportin other two directions, 2,683 GWh less energy wasexported compared to 2010 or 5,348 GWh in total.Decreased export indeed affected the low prices ofexport capacities towards Austria, which amountedto 0.03 €/MWh on average daily level in 2011, whiletowards Croatia they amounted to 0.09 €/MWh.The flexibility of HPP production was used toour advantage by allocating a significant portion ofenergy to more expensive peak hours and, dependingon the price levels or economic purpose, sellingit on the liquid Italian and German markets and onthe market of SE Europe in the second half of theyear. Production was also being optimised at thermalpower plants, where, while observing technicallimitations, we exploited the differences in pricesbetween individual hours. During nights, weekendsand bank holidays, when the price of electricity andcross-border transmission capacities was lower thanthe variable costs of coal-fired power plants, productionunits operated at minimum levels or wereshut off. During the more expensive peak hours, theunits, when economically viable, were operating attheir technical maximum.The HSE Group responded to the high pricevolatility in the market by adopting a strategy forthe sale of own production. The strategy thus envisagesthat in the current year, a certain percentage ofproduction can be sold for several years in advance.Such method of own production sale contributes tolarger stability of group revenue.

56 Annual Report 2011Balance of European electricity markets in 2011 (in TWh)NL−8.81B−3.02L−4.41D6.28CZ17.05PL5.24SK−0.73F57.04CH−3.09I−45.64A−8.23SLO−1.69 HR−4.56H−6.38BIH1.49SRB0.23RO1.90BG10.73P−2.81E−0.55MK−2.66GR−3.23Markets with a positive energy balanceMarkets with a negative energy balanceSlovene electricity market in 2011 and 2010 (in GWh)Production11,19411,841Consumption12,43512,882Import7,0378,625Export5,3488,0320 2,0004,0006,0008,00010,000 12,00014,0002011 2010 * Source: ELES

Business report57Share of HSE Group’s production in total electricity production in Sloveniain 2011 and 2010 (in GWh)2011201071%72%7,625 3,5698,429 3,4120 2,0004,0006,0008,00010,000 12,000Production HSEProduction othersShare of electricity produced from RES in production of HSE Group201142% 58%201047% 53%0 2,0004,0006,0008,00010,000E-RES in HSE GroupOther electricity production of HSE GroupNet electricity production of the HSE Group in 2011 and 2010 (in GWh)5558081953206695132,4282,8413,7793,9467,6258,429DEMSENGHESSTEŠTETTotal2011 2010

58 Annual Report 2011Continental EuropeIn 2011, the energy sector was mostly subject topolitical interventions which suddenly changed theborder conditions of energy company operationsand indirectly affected the European energy market.The event in Fukushima resulted in a wave of secondthoughts on the closing of the existing nuclear powerplants in SE Europe. Germany went so far with itsdecision that it immediately shut down the operationof eight oldest nuclear power plants, the usefullife of certain nuclear power plants was shortened,projects of constructing new nuclear power plantswere terminated or they received an adverse opinion,while in Italy the moratorium related to decisionof nuclear option was again extended and the proceduresof stress tests of nuclear power plants startedthroughout Europe. This caused an immediate leapof electricity supply prices in March 2011, both indaily and forward markets. In the second half ofthe year, the prices of supply were decreasing due todeterioration of debt crisis in Europe and expectedrecession.The market of continental Europe representsthe market in which we generate a large part of ourturnover, while the 2011 turnover was additionallyincreased. This market is exploited particularly dueto high liquidity for price risk management in tradingin other regional markets.In 2011, we maintained the same presence in theCzech market as in 2010. This market was exploitedfor the purchase of electricity which we placed in theGerman and Hungarian market. Market couplingwas one of the factors that balanced the electricityprice in Czech and Slovak market. In the Czech Republicwe trade with short-term and long-term energycontracts, while in Slovakia we trade solely ondaily level due to poor liquidity of long-term contracts.The trading quantities realised in Slovakiaare lower than in Czech Republic, while in 2011 wemaintained the same presence in Slovak market asin 2010.SE EuropeIn 2011, the recession in the area of SE Europeadditionally deteriorated, which had a significantimpact on trading with electricity. Electricity pricesremained low in the first half of the year as therewere no conditions for their increase. Due to continueddecline in industrial consumption, certaincountries further reduced their electricity purchasesin the market. As a result, SE European markets experiencedlower liquidity which also disturbed trading.Due to insufficient financial liquidity of companies,operating risks increased which led to strictermonitoring of credit ratings of all business partnersas well as increased trading in organised electricitymarkets and lower number of bilateral deals.The second half of 2011 in SE Europe was markedby drought causing the lack of energy which causedthe increase in electricity prices. As a result, theprices of cross-border transfer capacities towardsBalkans increased. We took good advantage of thesituation and thus the planned trading quantitieswere exceeded in Serbia as well as in Bosnia andHerzegovina.In 2011, HSE participated – directly or throughits subsidiaries abroad – in most auctions for crossbordercapacities in SE Europe. Hungary remainedthe most important market, with trading reaching alittle less than a half of the whole SE Europe portfolio.In Romania, HSE traded mostly on daily levels,where we took advantage of current conditions andnon-balances in neighbouring markets. Romaniawas mainly used as transit state in the direction fromHungary towards Serbia.Due to financial problems of Greece in this market,in 2011 HSE limited trade and thus the exposureand the related risk. Even in other markets it carefullywatched over the financial situation of partners.However, the activities were performed without interruption.The subsidiary HSE MAK Energy mostlyperformed the transit from Bulgaria towards Serbiaand thus contributed added value. Bulgaria was particularlyinteresting in the second half of the yearsince it enabled the purchase of energy which wasnot sufficient in the region due to drought.

Business report59In 2011, HSE was successful in the annual callfor tender of the company EPCG for the purchaseof electricity and thus created a long-term positionthat significantly contributed to realisation of plansset. Subsidiary HSE BH in Bosnia and Herzegovinawas used for the purchase of cheap water surplusesin Bosnia and Herzegovina, particularly at the beginningof the year. Subsequently the company wasdevoted to electricity transit and connection of markets.Even in 2011, HSE Adria presented a significantlink within the HSE Group, since it connects the domesticmarket with the markets of SE Europe.Switzerland and SpainVolume of trade in Swiss market increased in2011, while the planned values were not realised.The reason is a relative non-liquidity of the market,which is evident in large differences between thepurchase and selling price on all significant products.Therefore, the market price is extremely unclear andunpredictable. The consumption chart has also beenchanging. It puts Switzerland in the position of anextremely intensive importer for own purposes inwinter period and intensive seller in spring/summerperiod. With 2012 the border between France andthe Czech Republic is opening for trading. However,more transparent market situation cannot be expected.In 2011, we acquired a certificate in Spain withwhich the Spanish TSO confirms that we are registeredas a subject, which can trade with electricityin the Spanish market and on the French-Spanishboarder. We have also obtained a confirmation oftechnical accreditation by which the same TSOconfirms our qualification for nominating timetablesusing their system e.sios. We have initiated theprocedures of registration on the Spanish stock exchangeOMEL.

60 Annual Report 20112.7 Sales and customersElectricity and electricity pricesIn 2008 and 2009, we witnessed lower electricityconsumption in comparison with previous years,particularly due to deteriorated economic conditions.At the end of 2010 and in 2011, the trend of useincreased particularly among direct users, while thetrend of increase in distribution network was slightlylower in comparison to direct users.The data proves that consumption of direct usersincreased by 37%. The consumption in distributionnetwork increased by approximately one half of percentagepoint.If the hydrology and electricity production fromthese sources had been favourable until 2011, wecan say that in 2011 the situation changed. Withinthe HSE Group the HPPs sent 79 GWh less thanplanned to the network. This means that 751 GWhless electricity was produced in HPP than in 2010 oralmost 20% less than in the previous year.Sales volume and structureThe HSE Group sold 23,779 GWh of electricity in2011. As already mentioned, HSE sold 10,065 GWhof electricity in domestic market or slightly over42%, while 13,714 GWh of electricity was sold in foreignmarkets (almost 58%).In domestic market, 74% of electricity was soldto distribution companies. Large consumers bought15% of electricity, while 8% of electricity was soldto ELES (energy of secondary and tertiary control,deviations) and other consumers in Slovenia. Electricitywas also sold to foreign partners in Slovenia,which reached 3% of all electricity sold in domesticmarket.Structure of electricity sales in 2011 and 2010 in terms of volumeOther sales indomestic market11%2011Salesin foreignmarket58%Other sales indomestic market12%2010Salesin foreignmarket51%Distribution31%Distribution37%

Business report61Long-term contracts and day-aheadmarketThe bulk of the company’s sales were generatedthrough long-term contracts. The trading in dayaheadmarkets was carried out to match contractualobligations with the production capacities of HSEGroup companies and to optimise the company’sportfolio and take advantage of market opportunities.Electricity surpluses generated at the time ofhigh water levels and additional electricity producedduring periods when the market price exceeded thecost of extra production were sold in day-aheadmarkets.Ancillary servicesIn addition to electricity, the following contractuallyrequired ancillary services were provided in2011:• Secondary frequency control in the regulatoryrange of ± 77 MW;• Black start capability;• Reactive power support;• Secondary control services.2.7.1 Other activitiesNet sales revenue structureThe HSE Group generated almost € 1,328 millionin net sales revenue in 2011. Accounting for97%, electricity was by far the most important in thestructure of the HSE Group’s net sales revenue, withother revenue amounting to 3%.Structure of net sales revenue in 2011 and 2010Other revenue3%Other revenue4%2011Revenuefromelectricitysales97%2010Revenuefromelectricitysales96%Other products and servicesOther revenue from sales of products and servicesinclude revenue from the sales of apartmentsand rentals, revenue from hospitality services, salesof thermal energy and storage, supply with steamand hot water and disposal of fly ash.HeatIn 2011, 367 GWh of heat was produced, which is10% less than in 2010.

62 Annual Report 20112.8 Purchasing and suppliers2.8.1 ElectricitySynergyTo maximise efficiency, HSE endeavours to take advantage of the synergiesof production units within the Group. Because the operating and cost-relatedcharacteristics of individual production plants differ, cost-effective productionof electricity can be achieved through appropriate production scheduling. Andbecause electricity market prices fluctuate over time, rational dispatching of productionunits, while observing technical criteria, is all the more important.HSE Group’s electricity production units in 2011DEMDravograd Vuzenica Vuhred Ožbalt Fala MB otok Zlatoličje Formin Small HPPsNo. of turbines 3 3 3 3 3 3 2 2 2 TOTALNet output MW 26 56 72 73 58 60 120 116 1.3 582.3Rated generator capacity MVA 36 78 90 90 74 78 159 148 2.9 755.9Gross head m 8.9 13.7 17.4 17.4 14.6 14.2 33 29 148.2Rated flow Qi m 3 /s 405 550 550 550 505 550 463 500HESSBoštanj BlancaNo. of turbines 3 3 TOTALNet output MW 31.5 42.5 74Rated generator capacity MVA 43.5 50 93.5Gross head m 7.6 8.8 16.4Rated flow Qi m 3 /s 500 500SENGDoblar I. Doblar II. Plave I. Plave II. Solkan ČHE Avče Zadlaščica Small HPPsNo. of turbines 3 1 2 1 3 1 2 26 TOTALNet output MW 30 40 15 19 32 180 8 11.4 335.4Rated generator capacity MVA 48 50 22 23 39 195 10 15.6 402.6Gross head m 47.2 48.5 27.5 27.5 23 521 440 1,134.7Rated flow Qi m 3 /s 90 105 75 105 180 40 2.2

Business report63TEŠGT 51 GT 52 Unit 3 Unit 4 Unit 5 TOTALNet output MW 42 42 50 248 305 687Rated generator capacity MVA 56.3 56.3 94 324 377 907.5TETPB I. PB II. Unit 4 TOTALNet output MW 29 29 110 168Rated generator capacity MVA 39.7 39.7 156 235.4Structure of sourcesElectricity that the HSE Group supplied to its customers in 2011 was purchasedin the domestic market from the HSE Group companies (34%), otherforeign partners in Slovenia and other electricity suppliers in Slovenia (7%). Theremaining energy (59%) was bought in foreign markets by the HSE Group.Structure of electricity purchases in 2011 and 2010Other purchasesin domestic market7%2011Purchasesinforeignmarkets59%Other purchasesin domestic market2%2010Purchasesinforeignmarkets43%Group companies34%Group companies55%Optimising purchasesIn order to offset shortfalls arising from supply interruptions or unfavourablehydrology, as well as optimise production and trading, HSE purchased electricityin the day-ahead electricity market.

64 Annual Report 2011Primary raw materialsIn 2011, primary raw materials used in the production of electricity includedcoal (56%), water potential (42%), and natural gas and extra light heating oil(2%).Primary raw materials used in electricity production in 2011 and 2010Natural gasand liquid fuel2%Water42%Natural gasand liquid fuel3%Water47%20112010Coal56%Coal50%Purchase priceIn 2011, the purchase price of electricity was mostly affected by the followingfactors:• 1.5% higher than planned electricity production from coal at TEŠ;• 101.3% of realised electricity production from gas at TEŠ;• 23.9% higher than planned electricity production at TET;• conditions in the electricity market.CoalAt TEŠ, 43,119 TJ of coal was used in the production of electricity and heat.At TET, 7,575 TJ of coal was used for production of electricity.Coal suppliesOn 31 December 2011, PV’s coal supplies totalled 4,553 TJ while at TET theystood at 1,242 TJ.

Business report652.9 InvestmentsThe replacement Unit 6 at TEŠ is currently thelargest energy investment in Slovenia and it representsa new chapter in the energy supply of Slovenia.This is a modern, extremely effective unit, whichwill gradually replace the operating units. With regardto significance of the project, its complexity andvalue, the key attention of the HSE Group in 2011was devoted to this project.Moreover, the HSE Group is always looking fornew projects and investments by which it could assuresafe, reliable, competitive and environmentallyfriendly long-term electricity supply to Slovenia. Weare namely aware that:• Our customers depend on quality of electricity;• In electricity production it is necessary to ensureoptimal use of domestic sources, thus decreasingdependence on imports;• Operations have to be expanded and activeparticipation is needed in the commonEuropean and international market in orderto look for sources, also outside Slovenia, tocompensate for the gap in the domestic supply;• High level of efficiency can only be achievedthrough effective use of primary sources;therefore we are constantly followingtechnological developments and modernisingour production facilities;• Highly reliable supply can only be achievedthrough appropriate diversification of sources;• New sources and know-how should bedeveloped on a continuous basis.The investments of the HSE Group are aimed atconstruction of new energy producing facilities andmodernisation of existing thermal power plants andhydropower plants. In this respect, the HSE Grouppursues the following major objectives:• Increasing the share of renewable energysources;• Applying new technologies in use of fossil fuels;• Reducing greenhouse gas emissions;• Increasing energy efficiency;• Ensuring sustainable, environment-friendly useof sources; and• Identifying and taking advantage of investmentopportunities abroad.Major investments of the HSE Group in 2011 are presentedbelow.

66 Annual Report 20112.9.1 Replacement Unit 6The replacement Unit 6 at TEŠ will generate3,500 GWh of electricity per year, for which it willrequire 2.9 million tonnes of coal, and emit 3.1 milliontonnes of CO2 which is almost one third lessthan the currently operating units. This is, therefore,a more acceptable production facility in termsof energy and environment, which will produce thesame quantity of electricity with 30% less coal. Theconstruction of the replacement Unit 6 at TEŠ willenable a reduction of approximately 30% in specificCO2 emissions for the same amount of electricityproduced. Namely, the new replacement Unit 6 willemit 0.87 kg/kWh of specific CO2 emissions, whilethe existing facilities emit 1.25 kg/kWh.Basic technical dataoutput600 MWspecific net consumption8,451 kJ/kWhprice of coal2.25 EUR/GJhours of operation at full capacity 6,650 hrs/yearnumber of employees 200useful life40 yearsCO2 emission0.87 kg/kWhIn 2011, the Environmental Permit for Operationof the Large Combustion Plant was obtained. Thispermit means that all the conditions for the issue ofa building permit have been met. In March, we receiveda construction permit from the Ministry ofthe Environment and Spatial Planning for the constructionof cooling tower and main technologicalfacility and construction immediately began. Dueto more realistic cost estimate of all project items,changed financing conditions and realisation of governmentdecisions, in April we started to implementRIP 4, which had been approved in August 2011. Inaddition to the abovementioned facts, the project activitiesin 2011 were primarily oriented towards theacquisition of sufficient sources for financing of theproject.Due to the delay in obtaining the EnvironmentalPermit, the construction work also started with adelay of several months. By the end of 2011, the coolingtower was constructed up to the height of 58 m,while work is expected to be finished in the first halfof 2012 and it will be followed by equipment installation.The project investor is the company TEŠ.2.9.2 Srednja SavaThe purpose of the project is to improve the utilisationof the Sava River’s hydro potential and increasethe installed capacity. The construction of a HPPchain on the middle Sava River will contribute to theincrease in base load and peak load energy producedfrom RES.The project is expected to involve construction of10 power plants on the middle Sava River, increasingthe Group’s E-RES production by 1,029 GWh, andthe installed capacity by 338 MW, and expanding thevolume of ancillary services.Basic technical dataHead(m)Installedcapacity (MW)Electricity(GWh/year)1 HPP Suhadol 12.5 43.8 148.92 HPP Trbovlje 10.1 35.2 117.13 HPP Renke 9.9 36.2 118.34 HPP Ponoviče 19.5 68.0 215.45 HPP Kresnice 8.5 29.8 92.26 HPP Jevnica 8.5 29.8 91.67 HPP Zalog 7.5 16.8 43.48 HPP Šentjakob 7.5 16.8 43.49 HPP Gameljne* 12.5 27.6 69.710 HPP Tacen* 15.5 34.8 89.1* HPP Gameljne and HPP Tacen are a replacement for the planned constructionof the derivation HPP Ježica which was envisaged in the Regulation.In 2011, the project was developing in a set direction,however, with lower intensity than expected sincethe Ministry of the Environment and Spatial Planninghas not arranged all the amendments to theRegulation (Regulation on concession for the use ofwater in electricity production in the section of theSava River between Ježica and Suhadol).The essential substantive amendment to the Regulationis that construction concession is replacedby the concession of water potential use. Thus, theregulation will not include the definition of HPPnumber nor the locations (construction principles),but it shall define solely the area of energy potentialuse (principles of the Companies Act for water use).The proposed solution is more appropriate and lessbinding for concessionaire, which is of significantimportance as the concessionaire obtains more freedomin defining the location of future new facilities,easily complies with CEIA regulations and improvesthe company economics.

Business report67In 2011, the company SRESA was established withthe purpose to enable the execution and financing ofconstruction and HPP management on the middleSava River, while numerous professional bases wereperformed as well as research, studies and PCD forfirst three HPPs, including Investment Project IdentificationDocument.The project investor is the company HSE, towhich the concession right was granted.As at 22 December 2005, HSE was granted aconcession right for exploitation of water potentialof the middle Sava River (concession right). Despitethe fact that concession right was granted to HSE,on this basis HSE does not perform the activity ingeneral interest. Concession agreement has not beenconcluded yet and therefore the mutual rights and liabilitiesbetween the concession grantor and concessionairehave not been agreed yet. Thus, it is evidentthat on the basis of the concession right granted, thefinancial relations between the government bodiesand HSE, as the owner of this right, have not beenestablished yet.2.9.3 Hidroelektrarne na spodnji SaviHPPs Boštanj, Blanca, Krško, Brežice and Mokricewill more than double electricity production on theSava River – a river with the least utilised energypotential. Electricity generated by the new powerplants, which will be gradually constructed until2017, will account for 21% of Slovene HPP productionand is expected to cover 6% of total electricityconsumption in the country. In addition to 188 MWof additional installed power and 684 GWh of extraaverage annual production, the project will enablebetter development of local communities in the areaof the new HPPs, improved environmental protectionand faster regional development.Basic technical dataHead(m)Installedcapacity (MW)Electricity(GWh/year)1 HPP Boštanj 7.7 32 1152 HPP Blanca 9.2 38 1443 HPP Krško 9.2 38 1444 HPP Brežice 11 46 1485 HPP Mokrice 7.5 33.7 133.2In 2011, the construction of HPP Krško continued,where a delay of eight months appeared with regardto the time schedule. The work was delayed as a consequenceof the floods of the Sava River during theprevious years, while a part of delay is reflected onthe account of consortium partners and liquidityproblems of the leading partner in performance ofconstruction work.The professional part of NSP and ER (EnvironmentalReport) performance procedure was performedat HPP Brežice. At the end of 2011, PCD wasalso concluded. Various professional bases, studiesas well as investment and projection documentationwere also performed.At HPP Mokrice a procedure and performanceof supplemented NSP and OP draft was performedin 2011. NSP and OP are currently in the procedureof consolidation and preparation of arguments ofthe most proper version. In 2011, other professionalbases, studies as well as investment and projectiondocumentation were also performed.The project investor is the company HESS. Thecompanies HSE, DEM, SENG and GEN energija arefinancing the HPP construction on the lower SavaRiver in proportion to their equity stakes in HESSand in accordance with the investment paymentplans.2.9.4 Reconstruction of the second stageof HPPs Doblar and PlaveWithin the framework of reconstruction of the secondstage of HPPs Plave and Doblar, the turbines atHPP Doblar I are being replaced. Reconstruction ofthe second stage of HPP Plave will begin after theend of reconstruction at HPP Doblar I. In 2011, turbine3 was replaced at HPP Doblar, which was thensubject to contractual trial run. The works continuedat turbine 2, where dismantlement has already beenconcluded.The project investor is the company SENG.

68 Annual Report 20112.9.5 NOP IIWith realisation of this project, the transport linesfrom the pit to coal disposal will be shortened fromapproximately 3.8 km to 1.1 km. As a result of 72%shorter transport line, the realised investment willresult in 25% decrease in energy costs and 55% decreasein labour costs and at the same time in reducedrisk of production shutdown. In terms of location,the exportable shaft is placed in an optimalway with regard to long-term planned coal shafts.The subject of investment is the renewal of maincoal transport from PV pit (new location, new technology),while the aim of investment is to shortenthe main transport path, decrease costs of removaland maintenance, reduce adverse effects on environment(noise, dust), move the exportable shaft closerto extraction areas and concentrate facilities withinthe industry zone as well as to improve and increasereliable operation.In 2011, preparatory work was performed to setup the shaft plateau as well as electric preparatorywork and preparatory work for shaft deepening andmanufacturing. Mining works have already begun.The project investor is the company PV.2.9.7 PSP KozjakIn 2011, within the project PSP Kozjak on the DravaRiver the stage of facility spatial planning – NSP wasconcluded.Basic technical dataQi (max. discharge – turbine oper.) 65 m 3 /sQp (max. discharge – pumped oper.) 46.1 m 3 /sHgross max. (maximum gross head)710.31 mPi (median installed capacity in generatoroperation mode)400 MWPp (median installed capacity in pump operationmode)Eap (annual electricity production)Eac (annual electricity consumption for pumpoperation)352 MW985 GWh1,208 GWhIn 2011, particularly the activities of PCD supplementationand audit and IP revision were performed.The project investor is the company DEM.2.9.6 TETThe appropriate bases for adopting a decision on along-term solution of energy location of TET after2015 were also prepared in 2011.

Business report692.10 InformaticsReorganisation of the HSE groupsupport centreWithin the framework of system and applicationservice consolidation, the Support Centre was reorganisedin 2011. The centre assures uninterruptedfunctioning of IT system of the HSE Group (TEŠ,PV, HESS and HSE). The Support Centre employsrepresentatives of individual companies and externalpartner, which take care of several levels of technicalsupport (accepting reported failures, initial analysisof reported failures, control and management ofestablished IT systems, support to final users etc.).Such approach is important for the controlling companyparticularly from the perspective of controllingthe management of HSE information system and detailedmonitoring of related costs.HSE IT security policyWithin the framework of ISO-27001 standard, in2011 several security mechanisms were introducedin the area of IT security. They assure a high levelof security of electronic documents and at the sametime enable tracing of changes.ConsolidationWe have reviewed the situation in the area of ITin all companies of the HSE Group. The review wasfocused on the infrastructure, application software,system services, security, and IT control and staff.On the basis of the review, we have prepared a shorttermaction plan for consolidation of the IT area inthe companies of the HSE Group. We created individualproject groups responsible for specific tasksinvolving performance of clearly defined activities.We also prepared a framework policy for the IT area.In addition, we performed a thorough review ofcommunication network in all HSE Group companieswhich will serve as a basis for further developmentof the network infrastructure.As the first step towards business-IT consolidation,a project entitled »Energy« was started in 2010with the aim to implement the IT-supported processfor consolidation of financial statements of the wholeHSE Group. The project was concluded in 2011.E-archive accreditationWe prepared a »Programme for implementationof digital storage at HSE and accreditation of service«,in which we laid down the purpose and goalsof accreditation and the conditions required for implementingdigital storage.The requirements for implementation of digitalstorage in the HSE Group involve preparation andapproval of internal rules and use of appropriatelyaccredited hardware and software.The requirements for accreditation of services involvefulfilment of organisational and technologicalconditions of the service provider. These conditionsare much more demanding. Here, HSE will play adual role, which is why we must meet the conditionsboth of the user as well as the provider of services.The project is continued with the aim to prepare aclassification plan which precisely defines types andquantity of documents that individual HSE departmentsmust archive.Standardisation of business ITsystems in the GroupThe project team performed a thorough analysisof existing solutions in all HSE Group companiesand proposed a solution on the basis of evaluationand elimination criteria that it estimates will be appropriatefor the whole Group. For this purpose, aninventory of all business processes of the companyHSE was performed in 2011, which should enablequality and sufficiently clear preparation of projectdocumentation for implementation of integral informationsystem ERP.

70 Annual Report 20112.11 Business performance analysisIn 2011, the HSE Group realised net sales revenuein the amount of € 1,327,546,308 and exceeded therevenue realised in the same period of the previousyear by 45% due to larger sales quantities of controllingcompanies, particularly in the foreign market.The realised operating profit or loss of theGroup in 2011 amounts to € 96,190,255 and represents76% of profit or loss from 2010. In 2011, the groupcreated a net profit in the amount of € 69,753,103,which is 32% less than in the previous year. Despitetrading amounts, which increased by 47%, the decreasein net profit was mostly affected by a lowertrading result in the controlling company, which isa consequence of the following factors: lower HPPproduction, decrease in revenue arising from systemservices, unfavourable ratio Peak/Pas in daily marketdue to which a lower added value was createdon the basis of optimisation of production per hour.As at 31 December 2011, the assets of the HSEGroup amounted to € 2,275,886,031 and were 20%higher compared to the end of 2010, particularly dueto high group investments.As at 31 December 2011, the HSE Group equityamounted to € 1,409,097,763, which is by 5% morethan at the end of 2010, particularly due to net profitin 2011.The HSE Group companies produced 7,625 GWhEE in the reviewed period, which is 10% less thanproduced in the same period of the previous yeardue to lower hydrology.In 2011, the Group realised positive cash flowfrom operating and financing activities, which is ofkey importance, despite the fact that negative cashflow was realised from investment activities due tofinancing of extensive HSE Group investments, particularlythe investments in the replacement Unit 6at TEŠ. In 2010, the investments were significantlylower.Structure of the statement of financial position ofthe HSE Group and the controlling company as at31/12/2011HSE GroupAssetsLiabilitiesControlling companyAssetsLiabilities13%16%Short-term22%18%Short-term87%84%Long-term78%82%Long-termStatement of financial positionstructureOn the basis of the statement of financial positionof the HSE Group, it is evident that as at 31 December2011 the HSE Group provides short-termfinancing sources for a part of long-term assets. Thisresults from a not yet acquired government guaranteefor the replacement Unit 6 at TEŠ. Due to thisfact, the planned drawing of a long-term loan fromEIB has not been realised yet.

Business report71Capital adequacyEnsuring capital adequacy is one the most importantresponsibilities of HSE Group managers. Itis estimated that at the end of 2011 the HSE Groupcompanies complied with capital adequacy requirements,since they dispose of sufficient funds giventhe volume and type of business activities and giventhe risk, to which they are exposed in pursuit ofthese activities.Debt ratioThe debt ratio is an important indicator of thebusiness and financial situation. The analysis of thefinancial position of HSE Group companies revealsthat from the perspective of debt the business andfinancial position of HSE Group companies is undercontrol, with the debt ratios not exceeding thethresholds of safe operation at the end of 2011.The share of debts (the items of long-term andshort-term financial liabilities are taken into accountas well as long-term and short-term operating liabilitiesfrom the statement of financial position) inthe financing of the controlling company amounts to25% and to 35% within the group. In the debt structureof the parent company and the Group, financialliabilities account for 55% and 64%, respectively. Amore detailed structure of liabilities is presented inthe financial report of the controlling company HSEand the HSE Group.HSE Group’s equity-to-debt ratio as at 31/12/2011Equity65%Equity75%2011Liabilities35%2010Liabilities25%Operating36%Operating29%Financial64%Financial71%Equity-to-debt ratio within the controlling company as at 31/12/2011Equity75%Equity79%2011Liabilities25%2010Liabilities21%Operating45%Operating48%Financial55%Financial52%

72 Annual Report 2011At the end of 2011, the indebtedness of the controllingcompany to banks was 4% lower than at the endof 2010, while the indebtedness of the Group was56% higher, particularly due to loans of the companyTEŠ for the replacement Unit 6.The net financial debt of the controlling companyat the end of 2011 was 75% higher than at the end of2010, while the net financial debt of the Group was93% higher than in 2010. Thus, the controlling companyand Group have taken out the loans for financingof the HSE Group investments.Net finance debt of the HSE Group and the controlling company as at 31/12/2011HSE Group2011426 € million2010221 € millionControlling company2011162 € million201092 € millionCash management is established within the HSEGroup. Its main goal is the optimisation of liquidityof group companies and it is performed in form ofborrowing among the group companies.Structure of mutual borrowingLoansreceived bysubsidiaries46%31/12/2011Loans grantedto subsidiaries54%Loansreceived bysubsidiaries40%31/12/2010Loans grantedto subsidiaries60%

Business report73The value of assets and total equity as at 31/12/2011 and operating results of HSE Group companies in 2011Holding Slovenske elektrarne d.o.o.Total assets in €Total equity in €Net profit or loss in €1,311,214,398970,128,94546,729,619sloveniaDravske elektrarne Maribor d.o.o.Termoelektrarna Šoštanj d.o.o.HSE Invest d.o.o.HSE's stakeTotal assets in €Total equity in €Net profit or loss in €100%555,414,448538,912,01410,495,516HSE's stakeTotal assets in €Total equity in €Net profit or loss in €100%859,641,851362,807,7006,060,687Direct HSE's stakeIndirect HSE's stakeTotal assets in €Total equity in €Net profit or loss in €25%75%2,257,428971,092154,096Soške elektrarne Nova Gorica d.o.o.Termoelektrarna Trbovlje d.o.o.Soenergetika d.o.o.HSE's stakeTotal assets in €Total equity in €Net profit or loss in €100%264,669,299183,627,8726,162,269HSE's stakeTotal assets in €Total equity in €Net profit or loss in €81.3%57,353,75434,427,84152,482HSE's stakeTotal assets in €Total equity in €Net profit or loss in €25%5,484,681483,588(42,131)Hidroelektrarne na spodnji Savi d.o.o.Premogovnik Velenje d.d.* n 2011, Soenergetika d.o.o. performed activitiesof constructing cogeneration Planina.Direct HSE's stakeIndirect HSE's stakeTotal assets in €Total equity in €Net profit or loss in €51%84.6%260,473,830252,318,722447,057HSE's stakeTotal assets in €Total equity in €Net profit or loss in €77.7%215,489,400111,436,4641,010,389Srednjesavske elektrarne d.o.o.HSE's stakeTotal assets in €Total equity in €Net profit or loss in €60%100,16899,110(890)abroadHSE Italia S.r.l.HSE Hungary Kft.HSE Balkan Energy d.o.o.HSE Adria d.o.o.HSE's stakeTotal assets in €Total equity in €Net profit or loss in €100%2,680,300120,7871,608HSE's stakeTotal assets in €Total equity in €Net profit or loss in €100%4,357,7283,178,8411,236,094HSE's stakeTotal assets in €Total equity in €Net profit or loss in €100%3,656,6591,280,115170,307HSE's stakeTotal assets in €Total equity in €Net profit or loss in €100%5,001,7451,488,557370,392HSE Bulgaria EOODHSE BH d.o.o.HSE MAK Energy DOOELHSE's stakeTotal assets in €Total equity in €Net profit or loss in €100%963,145486,20243,068HSE's stakeTotal assets in €Total equity in €Net profit or loss in €100%1,697,604599,987107,551HSE's stakeTotal assets in €Total equity in €Net profit or loss in €100%253,68844,56336,913

74 Annual Report 20112.11.1 Controlling company’s ratiosEquity financing ratein EUR 31/12/2011 31/12/20101. Equity and liabilities 1,311,214,398 1,198,207,9872. Equity 970,128,945 929,748,299Equity financing rate = 2 / 1 73.99 77.59At the end of the year, the company’sequity constituted almost 74% of its totalliabilities. Compared to 2010, the equityfinancing rate decreased despite theincrease in equity due to the net profitrealised in 2011. The equity financing ratemostly decreased due to increase in shorttermfinancial liabilities as a result of notyet acquired government guarantee forthe replacement Unit 6 project.Long-term financing ratein EUR 31/12/2011 31/12/20101. Equity 970,128,945 929,748,2992. Long-term liabilities 108,727,007 116,414,0393. Total (1+2) 1,078,855,952 1,046,162,3384. Equity and liabilities 1,311,214,398 1,198,207,987Long-term financing rate = 3 / 4 82.28 87.31The company financed 82% of its assetsfrom long-term sources and 18% fromshort-term sources. Compared to the endof 2010, the long-term financing ratedecreased by 5 p.p. as a result of decreasein long-term loans due to repayments andincrease in short-term loans.Operating fixed assets ratein EUR 31/12/2011 31/12/20101. Property, plant and equipment 12,832,828 9,804,1602. Intangible assets 19,888,785 6,388,6823. Total fixed assets at carrying amount (1+2) 32,721,613 16,192,8424. Assets 1,311,214,398 1,198,207,987Operating fixed assets rate = 3 / 4 2.50 1.35The share of fixed assets among thecompany’s assets amounts to 2.5% andis higher compared to the end of 2010,mostly due to increased inventories ofemission coupons.Long-term assets ratein EUR 31/12/2011 31/12/20101. Property, plant and equipment 12,832,828 9,804,1602. Intangible assets 19,888,785 6,388,6824. Long-term investments in subsidiaries 982,338,595 965,079,6955. Other long-term investments and loans 246,500 246,5006. Long-term operating receivables 870,313 885,9318. Total (1+2+3+4+5+6+7) 1,016,177,021 982,404,9689. Assets 1,311,214,398 1,198,207,987Long-term assets rate = 8 / 9 77.50 81.99Total long-term assets account foralmost 78% of its total assets. Theratio decreased compared to the endof 2010, mainly due to an increase inshort-term loans granted to the Groupcompanies.

Business report75Equity to fixed assets ratioin EUR 31/12/2011 31/12/20101. Equity 970,128,945 929,748,2992. Property, plant and equipment 12,832,828 9,804,1603. Intangible assets 19,888,785 6,388,6824. Total fixed assets at carrying amount (2+3) 32,721,613 16,192,842Equity to fixed assets ratio = 1 / 4 29.65 57.42The ratio stood at 30 at the end of 2011,meaning that all of the company’s mostilliquid assets were financed from equity.A ratio, which is lower than in 2010,results from the increase in inventoriesof emission coupons intended for theperiod after 2012.Acid test ratioin EUR 31/12/2011 31/12/20101. Cash and cash equivalents 18,203,132 39,443,8392. Short-term investments and loans 109,317,324 48,336,9043. Total liquid assets (1+2) 127,520,456 87,780,7434. Short-term liabilities 232,358,446 152,045,649Acid test ratio = 3 / 4 0.55 0.58The acid test ratio describes therelationship between liquid assetsand short-term liabilities. At the end of2011, it stood at 0.6, meaning that morethan a half of the company’s short-termliabilities were covered by liquid assets.Compared to 2010, the ratio remains onthe same level.Quick ratioin EUR 31/12/2011 31/12/20101. Cash and cash equivalents 18,203,132 39,443,8392. Short-term investments and loans 109,317,324 48,336,9043. Short-term operating receivables 150,285,915 118,253,8954. Total (1+2+3) 277,806,371 206,034,6385. Short-term liabilities 232,358,446 152,045,649Quick ratio = 4 / 5 1.20 1.36The quick ratio stood at 1.2 at the endof 2011, meaning that the companyprovides short-term financial sourcesalso for a part of long-term liabilities.Compared to the end of 2010, the ratiois lower, particularly due to higher shorttermfinancial liabilities, as a result ofnot yet acquired government guaranteefor the replacement Unit 6 project.Current ratioin EUR 31/12/2011 31/12/20101. Short-term assets 291,420,090 212,662,6802. Short-term liabilities 232,358,446 152,045,649Current ratio (short-term liabilities) =1 / 2 1.25 1.40The current ratio amounted to 1.25 atthe end of 2011, which indicates thecompany is solvent as it was able tocover all its short-term liabilities withcurrent assets. Compared to the end of2010, the ratio is lower, particularly dueto higher short-term financial liabilities,as a result of not yet acquired governmentguarantee for the replacementUnit 6 project.

76 Annual Report 2011Controlling company’s ratiosOperating efficiency ratioin EUR 2011 20101. Operating revenue 1,359,019,422 910,086,5702. Operating expenses 1,303,401,998 818,504,429Operating efficiency ratio = 1 / 2 1.04 1.11The company’s operating revenueexceeded its operating expenses by 4%in 2011. Compared to 2010, the ratio issomewhat lower since a lower tradingresult was realised in 2011, mostly dueto lower hydrology.Net return on equity ratio (ROE)in EUR 2011 20101. Net profit for the period 46,729,619 79,491,4042. Average equity 949,938,622 887,796,468ROE = 1 / 2 0.049 0.090In 2011, the company generated € 5 ofnet profit per € 100 of equity invested.The value of ratio is lower than in 2010,mainly due to lower net profit realisedin 2011 as a result of unfavourablehydrology.Net return on assets ratio (ROA)in EUR 2011 20101. Net profit for the period 46,729,619 79,491,4042. Average assets 1,254,711,192 1,187,548,118ROA = 1 / 2 0.037 0.067The return on assets in 2011 of 3.7%was lower compared to the previousyear, mainly due to lower net profitrealised in 2011 and higher averageassets (higher short-term loans grantedto group companies).Added valuein EUR 2011 20101. Operating revenue 1,359,019,422 910,086,5702. Costs of goods, materials and services 1,292,558,665 808,047,7513. Other operating expenses 830,847 1,328,028Added value = 1-2-3 65,629,910 100,710,791The value added is lower compared to2010, mostly due to a lower hydrologyand consequently a lower trading result.Added value / employeein EUR 2011 20101. Added value 65,629,910 100,710,7912. Average number of employees 129 120Added value/employee = 1/2 508,759 839,257The value added per employee is lowercompared to 2010 due to a lower valueadded and a higher average number ofemployees.

Business report77Debt-to-equity ratioin EUR 2011 20101. Short-term financial liabilities 80,108,197 25,311,3032. Long-term financial liabilities 100,009,595 106,619,0943. Total financial liabilities (1+2) 180,117,792 131,930,3974. Equity 970,128,945 929,748,299Debt-to-equity ratio = 3 / 4 0.19 0.14The ratio shows the relationship betweenthe company’s debt and equity.The ratio is higher than at the end of2010 due to larger short-term indebtednessas a result of not yet acquiredgovernment guarantee for the replacementUnit 6 project. The ratio complieswith the conditions set by the banks.Total financial liabilities / EBITDAin EUR 31/12/2011 31/12/20101. Short-term financial liabilities 80,108,197 25,311,3032. Long-term financial liabilities 100,009,595 106,619,0943. Total financial liabilities (1+2) 180,117,792 131,930,3974. EBIT – Operating profit or loss 55,617,424 91,582,1415. Amortisation/depreciation 1,425,928 1,139,8946. EBITDA (4+5) 57,043,353 92,722,035Total financial liabilities / EBITDA = 3 / 6 3.16 1.42The ratio shows the relationship betweenthe company’s debt and EBITDA.Compared to the end of 2010, the ratiois lower due to higher short-term financialindebtedness of the group and dueto lower operating profit or loss.EBITDA / Financial expenses from loans receivedin EUR 2011 20101. EBIT – Operating profit or loss 55,617,424 91,582,1412. Amortisation/depreciation 1,425,928 1,139,8943. EBITDA (1+2) 57,043,353 92,722,0354. Financial expenses from loans received 3,298,008 2,693,119EBITDA / Financial expenses from loans received= 3 / 417.30 34.43Compared to 2010, the ratio is lower,particularly due to lower operatingprofit or loss and higher expenses forinterest which is the consequence ofhigher indebtedness.Total financial liabilities / Assetsin EUR 2011 20101. Long-term financial liabilities 100,009,595 106,619,0942. Short-term financial liabilities 80,108,197 25,311,3033. Total financial liabilities (1+2) 180,117,792 131,930,3974. Assets 1,311,214,398 1,198,207,987Total financial liabilities / Assets = 3 / 4 0.14 0.11The total financial liabilities to assets ratioincreased relative to the end of 2010due to increased short-term financialliabilities.

78 Annual Report 2011Dividends to share capital ratioThe management and SB of the company HSEproposes to the owner that the 2011 accumulatedprofit in the amount of € 23.4 million shall be reallocatedto other revenue reserves due to high groupinvestments planned. AUKN expects that the dividendsto share capital ratio will amount to 1.5% since2015. With the adoption of new development plan,the target dividends to share capital ratio will be defined.Here, it is important to take into account theequity intensity of activity, high equity share in thestructure of financing assets, particularly due to investmentcycle which causes additional expenses butnot products and services.

Business report792.11.2 HSE Group’s ratiosEquity financing ratein EUR 31/12/2011 31/12/20101. Equity and liabilities 2,275,886,031 1,900,508,3532. Equity 1,409,097,763 1,344,136,467Equity financing rate = 2 / 1 61.91 70.73At the end of 2011, the Group’s equityamounted to 62% of its total liabilities.Due to the net profit of the HSE Group inthe amount of € 69.8 million, at the endof 2011 the equity is higher than in theprevious year. However, the equity financingrate has decreased despite this fact,mostly due to increase in long-term loansof the group for financing of the replacementUnit 6 at TEŠ.Long-term financing ratein EUR 31/12/2011 31/12/20101. Equity 1,409,097,763 1,344,136,4672. Long-term liabilities 501,407,398 354,855,6253. Total (1+2) 1,910,505,161 1,698,992,0924. Equity and liabilities 2,275,886,031 1,900,508,353Long-term financing rate = 3 / 4 83.95 89.40The Group financed 84% of its assetsfrom long-term sources and 16% fromshort-term sources. Compared to the endof 2010, the long-term financing ratedecreased since the equity increased lessthan long-term liabilities relative to 2010.Long-term liabilities increased due tofinancing of the replacement Unit 6 at TEŠ.Operating fixed assets ratein EUR 31/12/2011 31/12/20101. Property, plant and equipment 1,900,121,752 1,557,286,4572. Intangible assets 47,817,146 36,801,4063. Total fixed assets at carrying amount in € (1+2) 1,947,938,898 1,594,087,8634. Assets 2,275,886,031 1,900,508,353Operating fixed assets rate = 3 / 4 85.59 83.88The share of fixed assets in the Group’stotal assets stood at 86% at the end of2011. The operating fixed assets rateincreased compared to the end of 2010as a result of high investments of theGroup, particularly in the replacementUnit 6 at TEŠ.Long-term assets ratein EUR 31/12/2011 31/12/20101. Property, plant and equipment 1,900,121,752 1,557,286,4572. Intangible assets 47,817,146 36,801,4063. Investment property 281,019 295,9644. Long-term investments in subsidiaries 4,378,971 6,461,7995. Other long-term investments and loans 5,137,980 4,130,2476. Long-term operating receivables 1,685,613 8,008,3937. Other long-term assets 632,148 206,3858. Total (1+2+3+4+5+6+7) 1,960,054,629 1,613,190,6519. Assets 2,275,886,031 1,900,508,353Long-term assets rate = 8 / 9 86.12 84.88The Group’s total long-term assetsaccount for 86% of its total assets. Thelong-term assets rate increased comparedto the end of 2010 as a result ofhigher investments of the Group.

80 Annual Report 2011HSE Group’s ratiosEquity to fixed assets ratioin EUR 31/12/2011 31/12/20101. Equity 1,409,097,763 1,344,136,4672. Property, plant and equipment 1,900,121,752 1,557,286,4573. Intangible assets 47,817,146 36,801,4064. Total fixed assets at carrying amount (2+3) 1,947,938,898 1,594,087,863Equity to fixed assets ratio = 1 / 4 0.72 0.84The equity to fixed assets ratio stood at0.72 at the end of 2011, meaning thatthe majority of the most illiquid assetswere financed from equity. Comparedto the balance at the end of 2010, theratio decreased as the equity increasedless than the fixed assets. This resultsfrom financing investments with longtermloans.Acid test ratioin EUR 31/12/2011 31/12/20101. Cash and cash equivalents 67,007,238 92,708,7912. Short-term investments and loans 1,894,071 782,4013. Total liquidity assets (1+2) 68,901,309 93,491,1924. Short-term liabilities 365,380,870 201,516,261Acid test ratio = 3 / 4 0.19 0.46The acid test ratio describes therelationship between liquid assets andshort-term liabilities. At the end of 2011,it stood at 0.19, meaning that less thanone quarter of the Group’s short-termliabilities were covered by liquid assets.Compared to 2010, the ratio deteriorateddue to the increase in short-termoperating liabilities to the supplier forthe replacement Unit 6 at TEŠ as a resultof not yet acquired government guaranteeand consequently not yet drawnlong-term EIB loan.Quick ratioin EUR 31/12/2011 31/12/20101. Cash and cash equivalents 67,007,238 92,708,7912. Short-term investments and loans 1,894,071 782,4013. Short-term operating receivables 188,986,897 137,003,4954. Total (1+2+3) 257,888,206 230,494,6875. Short-term liabilities 365,380,870 201,516,261Quick ratio = 4 / 5 0.71 1.14The quick ratio stood at 0.71 at theend of 2011, meaning that the Groupfinances 71% of all short-term liabilitiesfrom current assets. Compared to theend of 2010, the ratio deteriorated dueto the increase in short-term operatingliabilities to the supplier for the replacementUnit 6 at TEŠ as a result of not yetacquired government guarantee andconsequently not yet drawn long-termEIB loan.Current ratioin EUR 31/12/2011 31/12/20101. Current assets 305,056,555 277,158,2052. Short-term liabilities 365,380,870 201,516,261Current ratio = 1 / 2 0.83 1.38The current ratio amounted to 0.83at the end of 2011, meaning thatthe Group finances 83% of all shorttermliabilities from its current assets.Compared to the balance at the endof 2010, the ratio deteriorated due tothe increase in short-term operatingliabilities to the supplier for the replacementUnit 6 at TEŠ as a result of not yetacquired government guarantee andconsequently not yet drawn long-termEIB loan.

Business report81Operating efficiency ratioin EUR 2011 20101. Current assets 1,388,711,186 953,548,0772. Short-term liabilities 1,294,235,872 831,180,252Current ratio = 1 / 2 1.07 1.15The Group’s operating revenue exceededits operating expenses by 7%in 2011. The ratio decreased comparedto 2010, mostly due to lower operatingprofit (lower hydrology and consequentlylower trading result of thecontrolling company).Net return on equity ratio (ROE)in EUR 2011 20101. Net profit for the period 69,753,103 102,984,1282. Average equity 1,376,617,115 1,289,070,729ROE = 1 / 2 0.051 0.080Net return on equity ratio – ROE in 2011amounts to 5.1%, which is less thanin 2010 when it amounted to 8%. Theratio decreased due to lower net profitof the Group in 2011. AUKN expectsthat ROE will amount to 9% after 2015.It is estimated that after 2015, whenthe replacement Unit 6 will start its fulloperation, ROE will start increasing dueto reduced production costs.Net return on asset ratio (ROA)in EUR 2011 20101. Net profit for the period 69,753,103 102,984,1282. Average assets 2,088,197,192 1,887,431,751ROA = 1 / 2 0.033 0.055Net return on assets ratio – ROA in 2011amounts to 3.3%, which is less than in2010 when it amounted to 5.5% sincethe average assets have increased morethan net profit of the Group. The averageassets have increased due to highinvestments of the Group.Added valuein EUR 2011 20101. Operating revenue 1,388,711,186 953,548,0772. Costs of goods, materials and services 995,533,662 533,100,1333. Other operating expenses 56,205,456 61,223,271Added value = 1-2-3 336,972,068 359,224,673Compared to 2010, the value addedof the Group in 2011 was lower by 6%,mostly due to lower operating profit orloss.Added value / employeein EUR 2011 20101. Added value 336,972,068 359,224,6732. Average number of employees 3,822 3,828Added value/employee = 1 / 2 88,178 93,854Compared to 2010, the value addedper employee of the Group in 2011 waslower by 6%, mostly due to lower valueadded of the Group.

82 Annual Report 2011HSE Group’s ratiosDebt-to-equity ratioin EUR 2011 20101. Short-term financial liabilities 81,031,495 60,204,8642. Long-term financial liabilities 411,791,973 253,668,4593. Total financial liabilities (1+2) 492,823,468 313,873,3234. Equity 1,409,097,763 1,344,136,467Debt-to-equity ratio = 3 / 4 0.35 0.23The ratio shows the relationship betweenthe Group’s indebtedness and equity.The value of the ratio is higher than at theend of 2010, mostly due to higher longtermindebtedness of the HSE Group asa consequence of financing investmentin the replacement Unit 6 at TEŠ. Due tonet profit of the HSE Group realised inthe amount of € 69.8 million, the equityhas also increased. However, the increasein equity is lower than increase in Groupindebtedness. The ratio remains withinthe conditions determined by the banksincluded in the financing of investments.Total financial liabilities / EBITDAin EUR 31/12/2011 31/12/20101. Short-term financial liabilities 81,031,495 60,204,8642. Long-term financial liabilities 411,791,973 253,668,4593. Total financial liabilities (1+2) 492,823,468 313,873,3234. EBIT – Operating profit or loss 96,190,255 126,243,9745. Amortisation/depreciation 92,705,604 88,630,0476. EBITDA (4+5) 188,895,859 214,874,021Total financial liabilities / EBITDA = 3 / 6 2.61 1.46The ratio shows the relationship betweenthe Group’s debt and EBITDA. The ratiois higher than at the end of 2010, mostlydue to higher long-term indebtednessof the HSE Group as a consequence offinancing investment in the replacementUnit 6 at TEŠ and lower EBITDA. Despitethe fact that the ratio is somewhat lowerthan in the previous year, it complies withthe conditions determined by the banksincluded in financing of investments.EBITDA / Financial expenses from loans receivedin EUR 2011 20101. EBIT – Operating profit or loss 96,190,255 126,243,9742. Amortisation/depreciation 92,705,604 88,630,0473. EBITDA (1+2) 188,895,859 214,874,0214. Financial expenses from loans received 8,387,544 7,468,061EBITDA / Financial expenses from loans received= 3 / 422.52 28.77The ratio showing the relationshipbetween the indebtedness of the Groupand financial expenses from loans is lowerthan in 2010 due to lower EBITDA and itcomplies with conditions determined bybanks included in the financing of investments.Total financial liabilities / Assetsin EUR 2011 20101. Long-term financial liabilities 411,791,973 253,668,4592. Short-term financial liabilities 81,031,495 60,204,8643. Total financial liabilities (1+2) 492,823,468 313,873,3234. Assets 2,275,886,031 1,900,508,353Total financial liabilities / Assets = 3 / 4 0.22 0.17The ratio showing the relationshipbetween indebtedness and assets of theGroup is higher compared to 2010 sincethe assets have increased more than theGroup’s indebtedness. The ratio complieswith conditions determined by the banksincluded in the financing of investments.

Business report832.12 Risk managementWithin the HSE Group we have established a system of business risk management.Exposure to various risk types that the HSE Group faces in allareas of operations, particularly in the production and marketing of electricityand consequently also in the financial area has been regularly monitored andactivities for their management have been performed. Risks can be broadly classifiedinto the following categories:• Market risk;• Quantity risk;• Financial risks;• Corporative risks;• Information system risks;• R&R risks;• Human resources risk;• etc.Risk management involves identification, measurement or assessment, controllingand monitoring of risks the group is or might be exposed to. In doing so, ourgoals are most of all timely identification of potential threats and related risks,their monitoring and prompt actions to ensure they only result in the smallestpossible deviations from projected results.Based on the analysis of HSE Group‘s operations in 2011, it is our estimatethat risks were managed successfully.With the purpose to improve control over the risk management system withinthe HSE Group companies, risk management committees were establishedin the companies of the HSE Group in the area of Republic of Slovenia and theConstitutional Act on Internal Audit Operations within the companies of theHSE Group was signed.

84 Annual Report 20112.12.1 Report on work of the risk management committeeof HSE d.o.o. for the year 2011Risk Management Committee (hereinafter: the »Committee«) operates as anadvisory body of the management established with the purpose of control overthe risk management system in the company by providing the managementand owner of the company quality bases for management and governing of thecompany with the purpose to achieve the goals set. The committee operates inaccordance with the adopted the HSE Committee Rules of Procedure for riskmanagement.Committee meetingsIn 2011, the Committee held nine meetings, on which it adopted 170 decisionswhich have been mostly realised. Decisions still being performed are thosewhose performance requires a longer period of time and it is tied to realisationof certain preliminary activity or project.Content of work – work programme of the committeeThe Committee was operating in accordance with the adopted 2011 WorkProgramme and within the framework of its competencies actively monitoredand suggested decisions and recommendations to the Managing Director, organisationalmanagers, directors of subsidiaries and other individuals responsiblefor individual areas of all significant risks identified in the course of companyoperations, while its permanent task was to regularly monitor credit risks andrisks detected in current operations of the company HSE and the HSE Groupwith the following significant contents:• It was acquainted with 2010 Risk Registry and the signing of the HSE Grouprisks for 2011;• It was acquainted with the strategy of electricity marketing in 2011 and 2012;• It was acquainted with the procedure of RIP 4 for the replacement Unit6 project at TEŠ and with the amended risks, and it suggested to theHSE management to supplement the document »Programme for theManagement of Risks Related to the Investment in Replacement Unit 6from the Perspective of the Parent company and the HSE Group« with thenew risk assessment;• It was acquainted with the summary of contractual provisions related tofinancing of the construction of replacement Unit 6 at TEŠ and resultingobligations for HSE and other signatory companies, instructed heads oflocal committees of lawyers and financers to include the considerationof obligations to the agenda of both local HSE Group committees andinstructed the managing directors of the companies, which signed contractson financing construction of the replacement Unit 6 at TEŠ, that theyshould inform the SB of the HSE Group companies on the list of obligationsthrough a precisely determined reporting system on implementingobligations;• It was acquainted with the quarterly reports on issued and received bankingguarantees and parent guarantees and collaterals under the electricitytrading contracts;

Business report85• It was acquainted with the CO2 Emission Coupons Trading Strategy forthe period 2013-2020 and suggested its approval, and monitored quarterlyreporting on concluded transactions with CO2 coupons and long-term riskmanagement activities in the purchase of CO2 coupons for the purposes ofthermal production of the HSE Group after 2012;• It was acquainted with the Report on Analysed Risks from the transfer pricesystem – April 2011;• It suggested to the Managing Director to accelerate all activities in the fieldof introducing new ERP in the company’s business processes;• It discussed the revision of organisational regulations (AccountingManual of the HSE Group, Controlling Department Manual, Manual onProject Management, Rules on Preparation, Valuation, Management andMonitoring of the HSE Group companies);• It discussed and approved the »Implementation Policy of Interest Rate Riskwithin the HSE Group« with the proposition to the Managing Directorof HSE and managing directors of subsidiaries to adopt and approve thepolicy. The adopted policy is already performed in practice;• It was acquainted with the Report on Implementation of FinancialOperations, Insolvency Proceedings and Compulsory Dissolution Act –ZFPPIPP in 2010;• It instructed the Committee President to examine (together with heads oforganisational units) the possibility to shorten the deadline of preparing themonthly reports on operations from the 20th working day in the currentmonth for the previous month to 5th to 10th working day of the currentmonth;• It monitored the levels of certainty of the following projects:• It discussed the temporary non-audited and shortened financial report ofthe company HSE for 2010 and annual report of the company HSE andthe HSE Group for 2010;• the consolidation and IFRS transition project and instructed the projectgroup to prepare »Financial Instruments Disclosure – in accordance withIFRS 7« in 2011 Annual Report;• the project »inventory of business processes« and Report of the ProjectManager on Established Critical Points in Business Processes establishedin the course of Project Implementation; and• the project Partner Card.Ljubljana, 17 May 2012Borut MehPresident of the Risk Management Committee

86 Annual Report 20112.12.2 Business risksMarket risksIn 2011, the energy sector was mostly subject to politicalinterventions which suddenly changed theborder conditions of energy company operationsand indirectly affected the European energy market.The event in Fukushima resulted in a wave of secondthoughts in relation to the closing of the existing nuclearpower plants in SE Europe. Germany went sofar with its decision that it immediately shut downthe operation of eight oldest nuclear power plants,the useful life of certain nuclear power plants wasshortened, the projects of constructing new nuclearpower plants were terminated or they received anadverse opinion, in Italy the moratoriums on the decisionof nuclear option was again extended and theprocedures of stress tests started throughout Europe.An increasing number of parameters proved thatthe European economy is or it will face recessionagain. Due to increasing budget issues, the countriesadopted decisions on decrease in RES subsidies.As a result of solving bankruptcy of some Europeancountries, the stability of euro currency wasalso strongly affected and it has been losing in valuecompared to American dollar since September. Thiscaused the increase in prices of imported goods suchas oil, gas and coal, which are important inputs inthe production process of European power plants.Despite recession, the European policy persistedon restraining the policy of greenhouse gas emissionsand even ideas arose with regard to decreasein free quotas or decrease in auctioned quantitiesof emission coupons in the period after 2012. In addition,the electricity market volatility was also impactedby the spring uprising of nations in the MiddleEast, which strongly affected the oil market andconsequently also the gas market.The change in market structure, increasing RESproduction, constant price fluctuations of electricityand other primary energy products brought numerousbusiness challenges as well as control of professionalmanagement of market risks. Systematic recording,valuation and risk control is a key elementof professional risk management which must at thesame time enable the seizing of new market opportunities.The risk management policy is based on rules,strategies and registers adopted in the period 2008– 2010, and has been designed to ensure an increasein the value of HSE by assuming risks that fall withinthe prescribed limits enabling identification and exploitationof market opportunities. The risk managementprocess is incorporated in daily operations ofthe company HSE. HSE therefore continues its conservativerisk management policy.Based on the adopted market risk managementpolicy, the company monitors exposure of portfolios(groups of transactions with similar purpose) on thelevel of individual portfolios as well as overall exposureof all portfolios. The company monitors exposureof portfolios in individual trading years as wellas in the whole trading period.From the analytical perspective, the company iscontinuing the development of tools for monitoringinfluencing factors of market exposures in trade.This predominantly involves monitoring of price dynamics,volatility and correlations in individual marketsin certain periods, and the company’s position.Parallel to that, improvements and amendments arebeing made to the optimisation models and projectionsof future operation of power plants owned bythe company. In addition, models and mechanismsare being prepared to provide a data base for newproducts with which the company may, given thecircumstances, trade in the future.Market risk associated with marketilliquidityMarket risks associated with market illiquidity arisefrom trading activities where lower trading quantitiesappear on the supply or demand side. Such exposurecan also arise due to low market participationof traders or non-conclusion of EFET agreements.The result is inability, or inappropriate timing, toclose a position or closing of a position at unfavourableprices.In view of operations and risk management ofthe company HSE, the illiquid wholesale electricitymarkets or countries are those where there is nomarket organiser, nor electricity exchange.In 2011, the company HSE controlled or managedrisks with the following activities and methods:

Business report87• Segmentation and prioritisation of markets andpartners;• Design of a margin policy in relation to marketliquidity and market conditions;• Promotion of long-term relations with partners;• Conclusion of contracts with adequate maturityand sufficient contractual safeguards;• Daily analysis of the company’s position,trading quantities and product prices in illiquidmarkets, and of the coverage used for pricefluctuations for transactions aimed at generatingadded value or minimising the risk of lossesin accordance with the principle of goodmanagement;• Limitation of trade or open position of thecompany HSE in illiquid markets;• Trading with instruments for hedging againstprice risks;• Conclusion of EFET agreements.Market risk associated with nontransparencyof the marketMarket risks associated with non-transparency ofthe market arise from trading activities which canlead to transactions being concluded at unfavourableprices, incorrect valuation of price curves and,subsequently, incorrect valuation of the HSE’s portfolio.In view of operations and risk management ofthe company HSE, the non-transparent wholesaleelectricity markets are identical to illiquid markets.In 2011, risks were managed with the followingactivities and methods:• Weekly review of the fundamental analysis ofchanges in electricity prices;• Weekly examination of events taking place innon-transparent markets that could lead tochanges in market conditions in the electricitymarket;• Daily analysis of HSE’s position;• Monthly reviews of price curves in relation totransactions concluded in various countriesand the value of cross-border transmissioncapacities;• Gathering of quality and up-to-date informationfrom local sources.Price riskPrice risk is the risk arising from fluctuationsin market prices of electricity and market prices ofother energy products (coal, gas, emission coupons,oil etc.) that have a direct impact on electricity pricesor HSE’s operations. On the one hand, price risksaffect the sales revenue (e.g. lower market prices ofelectricity lead to lower market values of electricitynot yet sold by HSE subsidiaries), and on the other,expenses associated with the company’s operations(e.g. higher prices of CO2 emission coupons increaseproduction costs of subsidiaries emitting CO2).The exposure of the company HSE to electricityprices depends on entire open position of thecompany in the given moment. In case the positionis closed, this means that purchase and sales transactionscoincide with regard to quantity and supplydeadline, while the company is not exposed tochanges in market prices of electricity. In case theposition is open, this means that transactions do notcoincide with regard to quantity and maturity deadlineand the company is exposed to price risks in thesize of open or net position. With regard to the factthat the company HSE operates in various countries,it is necessary to additionally take for granted thenet positions, electricity prices in various countriesor regional markets and their correlations.In its trading activities the HSE company takesaccount of the adopted strategy of selling its ownproduction, according to which the major part ofthe HSE company position is closed before the beginningof the trading year. Thus, in the current yearthe company is exposed to price risks in a minimumextent. The share of exposure to price risks can increasesolely in case of hydrology below the plannedlevel, unplanned failures of power plants and due tocredit exposure (failure of assuming or supply of energyin accordance with concluded contracts, bankruptciesof business partners etc.). The company isthus mostly exposed to price risks at the beginningof the year, while these risks are decreasing towardsthe end of the calendar year. At the end of calendaryear, the company’s position is always closed due tothe sole nature of electricity (incapability of storage,production or supply must be equal to demand ortake-over of electricity in each moment).Prices of CO2 emission coupons Being an EUmember and subject to Kyoto Protocol, Sloveniacommitted itself to decrease the greenhouse gasemissions, which did or will also affect the operationsof the company HSE since a part of the company’sproduction park is represented by the thermal

88 Annual Report 2011power plants Šoštanj and Trbovlje. CO2 emissioncoupons awarded to TEŠ free of charge by the governmentwere received by the subsidiaries and wereintended for use in 2011. In terms of amount, theywere not sufficient to cover all CO2 quantities emittedin 2011. HSE had to cover the difference by thepurchase of emission coupons in regulated marketsor stock exchanges with emission coupons.For the purposes of operations of gas units atTEŠ, the company HSE is also exposed to changes ingas prices which are significantly correlated with oilprices with a certain time delay. The company has asigned contract on the supply of natural gas for thepurposes of gas unit operations; however, the gasprice is tied to the package of oil derivatives and ithas been changing during the year in a certain timeinterval.In 2011, the company HSE was not exposed to thechanges in coal price since the company TEŠ has asigned contract on the supply of coal at fixed price.The impact of price risk on the company’s operationscan be quantified on the basis of four keyvariables: market position of the company HSE inindividual markets at a specific moment of supply;volatility or fluctuation of prices in individual marketsat a specific moment of supply; correlation orinterconnectedness of prices between individualmarkets at specific points of supply; and the pricelevels in individual markets at a specific moment ofsupply.Market positionAs part of its operations, the company concludespurchase and sales agreements in the electricitymarket and sells the energy produced in its subsidiaries.In order to optimise return and due to marketfeatures, the company does not hold, for the purposesof future supply, purchase or sale contracts forthe same quantities at any given time. The purchaseand sales activities for a certain year in the future areregulated by internal rules of the company HSE. Theresult is that in a certain period, the company purchasesmore energy than it sells (long position) orsells more energy than it purchases (short position)for the purposes of supply in a specific future period.When, for a specific period in the future, the companyhas concluded purchase and sale contracts forthe same quantities of energy, the position is closed.A long and short position bring about the risk of decreasedvalue of HSE’s portfolio in case of unfavourabledevelopments in market prices, i.e. a danger thatin the event of a short position, purchase of quantitiesat prices higher than the current prices will berequired, or that in the event of a long position, saleof quantities at prices lower than the current priceswill be required. The closed position is not subjectto price risks.VolatilityVolatility represents a measure of fluctuation of marketprices in individual markets at a certain point ofsupply. As a result, volatility defines the expected futureprice deviations in normal market conditions.The degree of volatility is normally associated withthe liquidity of an individual market and the liquidityof an individual period of supply – as a rule, lessliquid markets experience higher price volatility and,similarly, the periods of supply that are further awayexperience higher volatility on markets with greaterliquidity than periods of supply that are closer. Volatilityis an external factor that cannot be changedor corrected, but can be hedged against by ensuringthat there are no large open positions in illiquidmarkets or in liquid markets with supplies plannedfar in the future.CorrelationCorrelation or interconnectedness of markets dictateshow the prices in one market will changecompared to the prices in another. This parameteris important in the event when the company makespurchases in one market and sales in another. In theevent that the correlation between the prices of differentcountries is highly positive, the probabilitythat the value of the company HSE will decrease as aresult of a purchase of electricity in one country andits sale in another is low. The opposite is true in theevent of a negative correlation. Correlation is an externalfactor; therefore, we can use the same instrumentsfor hedging against price risks as in the case ofvolatility. It is also important to monitor the correlationof prices between individual energy products,e.g. correlation of the price of CO2 emission coupons,gas and oil with the prices of electricity.Price levelThe absolute level of prices can affect the absolutelevel of market exposure via the volatility rate whichis represented in percentage points.The abovementioned variables are included inthe calculation of VaR parameter (Eng. Value-at-Risk), which is the key indicator of company’s directexposure to price fluctuations and indirect exposureto quantity risks (through market position). In HSE,

Business report89we decided to monitor the 5-day VaR with a 95%confidence interval for a period of 6 years. This tellsus, with a 95% probability, what the maximum tradingloss of HSE’s trading activities can be in a 5-dayperiod given the market data on prices, HSE’s position,volatility and correlation.In 2011, risks were managed with the followingactivities and methods:• Daily monitoring of the market position ongroup-level and on the level of HSE by countriesand individual groups of transactions that havea similar purpose and/or significance. In theevent that in a certain moment the positionexceeds the quantities allowed by the rules,it is corrected accordingly (conclusion of apurchase or sale transaction). For optimisationof the market position, we use both contractsfor supply, i.e. sale, of physical energy andderivatives involving physical settlement(forwards). In 2011, the market position neverexceeded the limit defined by the rules;• Daily monitoring and limitation of trade inilliquid markets, as well as liquid markets wheresupply is expected further away in the future, inconnection with market volatility;• Daily hedging – conclusion of countertransactionsinvolving the same quantity inthe same market, or purchase of derivativesinvolving financial settlement (futures), if theyexist for the market in question, depending onthe type of the trading transaction;• Daily monitoring and analyses of prices ofenergy products and projections regarding theexpected changes in prices of energy products invarious markets;• Daily monitoring of market activities in the CO2emission coupons market, investment decisionsin the EU energy sector, and monitoring ofeconomic growth of leading countries;• Daily monitoring and analyses of the value ofVaR and MtM (Mark-to-Market) parametersby individual groups of transactions of thecompany HSE with a similar purpose orsignificance, taking into account the limitationsor values of VaR determined by the rules;• Daily monitoring of the value of the coverageused for price fluctuations for transactionsintended to generate added value or minimisethe risk of losses in accordance with theprinciple of good management;• Weekly examination of conditions, prices anddevelopments in the electricity market. Biweeklyexamination of the company’s exposureto risks by individual groups of transactionswith similar purpose and examination ofconditions in oil and coal markets.VaR Dynamics for AllWoSubsidary scenario for entire trading period in 2011Value (in € thousand)6,0005,0004,0003,0002,0001,00001.1. 1.2. 1.3. 1.4. 1.5. 1.6. 1.7. 1.8. 1.9. 1.10. 1.11. 1.12. DateSource: Internal calculations of HSE.

90 Annual Report 2011Quantity risk associated with deviationsfrom contractual quantitiesQuantity risk associated with deviations fromcontractual quantities is represented by the differencebetween the actually supplied or receivedquantities and the projected quantities. The differencemust be additionally purchased or sold in themarket, frequently under less favourable conditions;similarly, production shortfalls must be coveredwith electricity purchases, the market price of whichis usually higher than the contractual price.In 2011, risks were managed with the followingactivities and methods:• Daily recording of measurements (actual takeoveror production), monitoring of deviationsof actual schedules from the planned, i.e.contractual, quantities, which provides for dailymonitoring of realised deliveries and subsequentanalysis, by partner, of the risk of non-deliveryor failure to take over;• Daily analysis of scenarios involving differenthydrology conditions or failure of TPPgeneration units (stress testing);• Daily monitoring of market conditions (pricesof energy products and transmission capacities),position of the company, and VaR and MtM byindividual groups of transactions with similarpurpose;Quantity risk associated withchanges in NTC (cross-bordertransmission capacities)Quantity risk associated with changes in crossbordertransfer capacities arises from changes inpermeability of major individual transport routes(e.g. reduction of daily cross-border transfer capacitiesdue to wild currents). As a consequence, situationscan arise where obligations from long-termcontracts are not fulfilled, leading to a need to purchasemore expensive energy as replacement fromother sources (countries) and possibility of deviationsin balances.In 2011, risks were managed with the followingactivities and methods:• Monthly monitoring of legislation (regulations)by country and the balance of transmissioncapacities;• Monthly scenario analysis of market conditionsgiven the previous probabilities of eventsand subsequently with regard to findingson limitations to trading quantities betweencountries;• Daily monitoring of the market position atGroup and company-level by country and byindividual groups of transactions with similarpurpose or significance, and monitoring ofpublished annual, monthly and daily valuesof cross-border transmission capacities onindividual borders.Regulatory riskRegulatory risks arise from changes in marketrules or legislation in the Slovene and foreign electricityand CO2 emission coupon markets and affectthe business results of the company/Group. Theirmanagement is the most demanding as it is difficultto predict, identify and quantify them and prevent ormitigate their effects. Laws and other regulations inenergetic sector are frequently changed an amended.Therefore, it is necessary to adequately adapt proceduresand methods related to the managementof regulatory risks. In 2011, risks were managed orcontrolled mostly with the following activities andmethods:• Constant monitoring of development of theSlovenian and foreign markets for electricity andother energy products and the CO2 emissioncoupons market as well as the associatedregulatory framework, and response to suchchanges by adapting the trading strategy;• Performance of long- and medium-termscenario analyses in light of the expectedchanges to the regulatory framework;• Continuous reporting and informing about legislativechanges in domestic and local marketsby the domestic and local legal departments;• Daily monitoring of investment decisions inthe EU energy sector and economic policy, andadaptation of market measures;• Adequate responding to propositions of changesand adopted amendments to legislation.Methodology risksMethodology risk is a risk arising from changesin actual value of individual groups of transactionsdue to inappropriate methodology, incorrect modellingitems, modelling errors or incompatible models.The result is incorrect projection of price dynamicsor inaccurate valuation of products in the market.In 2011, risks were managed with the followingactivities and methods:

Business report91• Regular monitoring of all stages of modelling;• Regular examination of changes in the valueof individual groups of transactions in case ofdifferent models and consideration of otherdefaults;• Regular recording of changes and a list ofvaluation models.It is estimated that market risks were appropriatelymanaged in the previous year.Quantity risksQuantity risk comprises risks arising from productionuncertainty, consumption uncertainty and energysupply uncertainty.• Production uncertainty is mainly associatedwith the question whether electricity willbe available in the market. It is also linkedto operational risk, which aims to assess theprobability and effect of a turbine or any otherproduction unit failing. Particularly importantis the impact of uncertain hydrology becausea large share of electricity is supplied byhydropower plants;• Consumption uncertainty arises from theimpact of weather and temperature, loadflexibility and seasonal cycles;• Energy supply uncertainty arises from randomfailures of power lines and other equipment orfrom interventions by the power transmissionnetwork operator due to transmission lineoverload.Risk associated with electricitysupply from HSE GroupElectricity production is exposed to the followingrisks of deviation from the planned supply:• Risk of (absence of) supply of electricity fromhydropower plants due to hydrological andmeteorological conditions, and failures andtechnological limitations to production;• Risk of (absence of) supply of electricityfrom thermal power plants due to outages ortechnological and ecological limitations ofproduction;• Risk of (absence of) supply of coal from theVelenje coal mine due to production hold-upscaused by outages, failures of technologicalsystems, accidents or other disturbances;• In periods of increased TPP production,economic limitations or any changes in theoverall method of CO2 duty payments and intrading in CO2 emission coupons should also beconsidered.Departure from plansIn 2011, the production of HPPs of the HSEGroup was 287 GWh lower than planned, whereas atTEŠ the plan was exceeded by 56 GWh and at TETby 129 GWh. This resulted in the HSE productiondeficit in the amount of 102 GWh.The deviations of actual daily flows of water fromdaily forecasts are also reflected in deviations of hydropowerproduction from the forecast schedules.To the extent possible, the deviations were balancedout by adjusting production at TPPs and increasingsales and purchases.At the thermal power plants, a 2 to 4% unexpectedproduction shortfall has to be considered inaddition to the planned shutdowns due to overhauls.This percentage corresponds to ten to twelve dailyproduction shortfalls, which can be offset by startingup gas-fired power plants, but only for shorter periods.Alternatively, to the extent possible, shortfallscan be offset by reallocating the use of HPP accumulationand purchasing electricity on the market. In2011, TEŠ‘s unexpected production outage amountedto 5.2%, and TET’s to 6.1%.Risks of interrupted coal supplyfrom PVCoal supply may be interrupted due to breakdownsof technological systems and accidents orother disturbances affecting the extraction of coal.According to an assessment of the coalmine’s technicalmanagement, the majority of potential shortfallscould be addressed without significant interruptionsto production, and rarely would such breakdownsresult in 14-20 days of supply interruptions. Thereis a relatively low probability of a major breakdownthat would require a six-month shutdown. Based onthe above assessment, minimum joint coal stocks ofthe HSE Group have been determined. They amountto 3,000 TJ (February–October) and 4,000 TJ (November–January).

92 Annual Report 2011Production managementThe HSE Group’s electricity production is managedfrom the Control Centre in Maribor. The mainobjectives of production management are as follows:• to ensure minimum deviations of productionand of the balancing group from schedules;• to ensure optimal distribution of power betweenavailable turbines;• to promptly activate back-up capacities inemergency situations.The quality of management of the HSE balancinggroup is reflected in the minimisation of deviationcosts thanks to the deviations of balancing groupmembers being reduced through adjustment of theirproduction. In 2011, the members of HSE balancinggroup were production units of the HSE Group,including HPP, PV, larger consumers connected totransmission network, balancing subgroup of fourdistribution companies, one balancing subgroupSODO and some smaller consumers. The balancinggroup’s deviations include all production andconsumption deviations from forecast schedules.The HSE Group estimates that the management ofbalancing group of the HSE Group in 2011 was successfulsince deviations arose in the framework of setgoals. The capacity was allocated optimally with regardto daily conditions, while all reserve capabilitieswere timely activated in case of emergencies.Financial risksIn 2011, the management of financial risks was alsocharacterised by world financial and economic crisiswhich was extended by the Euro-zone debt crisis.The global crisis mostly affected the financialsector and it was significantly reflected in real economicsector, which is particularly evident in overindebtednessof companies, deteriorated solvencyand delayed payments, incapability of acquiringnew financing sources or extension of existing loansand necessary financial restructuring. Therefore, theHSE Group must act with due diligence of the businessand financial profession and devote its effortsto ensuring short-term and long-term solvency andcapital adequacy.In 2011, the HSE Group also monitored the exposureto individual types of risks and adopted measuresand engaged in activities for their management.Management and thus limitation of financial risks insuch conditions is namely crucial for ensuring stableoperations and development and, consequently,stable growth and value of the Group. Therefore, theHSE Group devotes special attention to financialrisks it is exposed to in the course of its operationand adopts and executes appropriate measures in orderto manage these risks.Interest rate riskInterest rate risk is a risk of an increase in thecosts of financing tied to a variable interest rate asa result of changed interest rates in the market. Thecompany has taken out long-term loans at variableinterest rate Euribor and is therefore exposed to interestrate risk. The interest rate risk is adequatelymanaged within the HSE Group, as we have adopteda risk management strategy, approved by HSE’s RiskManagement Committee, which defined the share orlevel up to which the company must hedge againstrisks and the instruments used for hedging. The interestrisk management is aimed at protecting cashflow of the Group against negative impacts of Euriborgrowth on the costs of financing loans receivedand the sole risk dispersion. With regard to the latter,the companies HSE, SENG and PV protectedup to 50% of a long-term loan portfolio with interestrate swaps concluded with commercial banks.The company TEŠ adopted a strategy of protectinga long-term loan portfolio by dispersing the loanstaken-out at the fixed and variable interest rate inthe ratio 50%:50%. The transactions of interest ratehedging are concluded exclusively with the intentionto hedge against risks and not for the purposes ofspeculation. In view of hedge accounting, the concludedtransactions of interest rate hedging are consideredas highly effective since the concluded interestrate hedging perfectly matches the hedged item(loan) in all characteristics.The appropriateness and correctness of contractsconcluded for interest rate risk hedging is also managedthrough the monitoring of events in the moneymarket and regular examination of predictions ofchanges in interest rate.Currency RiskCurrency risk is a risk associated with transactionsinvolving foreign currencies and is subject tochanges in exchange rates. In operations the currencyrisk is present in a smaller extent and it mainly occursin trading with electricity in Hungary (in HUF).Currency risk is managed through appropriatehedging strategy with the use of derivatives, namely

Business report93with currency FX Forward concluded with commercialbanks, by which the exchange rate of a foreigncurrency against the domestic currency is fixed. Thefixation of exchange rate ensures stable cash flowand at the same time prevents the impact of changesin foreign currency exchange rate on operations.The transactions of currency hedging are concludedexclusively with the intention to hedge against risksand not for purposes of speculation. The appropriatenessand correctness of contracts concluded forcurrency risk hedging is also managed through themonitoring of macroeconomic events and expectationson changes in exchange rates.Solvency riskSolvency risk is the risk associated with insufficientfinancial sources and the subsequent inabilityof the company to settle its liabilities in due time.The aim of measures of solvency risk managementis ensuring optimum solvency of the Group with regardto covering its current obligations, both in normalas well as in more demanding conditions.In conditions of financial crisis, the managementof the solvency risk is of utmost importance, whichis why our carefulness in managing solvency riskhas additionally increased. The companies withinthe HSE Group are aware of this fact and thereforethey thoroughly and regularly monitor and plancash flows on daily, monthly and annual level. Cashmanagement is established within the HSE Groupand its main goal is the optimisation of liquidity ofgroup companies and it is performed in form of indebtednessamong the group companies. The primarysource of financing short-term deficits of Groupcompanies is surpluses of available cash in otherGroup companies. This means better conditions forboth borrowing and investing of cash, but, most ofall, better exploitation of synergies of the Group asa whole by making it possible for the financial positionof individual companies in financial marketsnot to deteriorate. Cash management is performedin accordance with adopted internal regulations ofthe HSE Group companies for cash managementand cash pooling of the HSE Group. In additionto own assets, the group has approved credit linesat commercial banks, where the high liquidity andcredit rating of the Group represent the basis of approvalof favourable financing conditions.Short-term surpluses are allocated to safe andliquid short-term deposits at commercial banks.Within the framework of HSE Group, cash poolingis performed in form of actual, automatic pooling ofcash surpluses at the end of the day from subordinatedaccounts of individual HSE Group companies onthe treasury (main) account held by the controllingcompany, i.e. HSE. Thus, due to cash pooling on thetreasury account, a higher positive effect is realiseddue to higher interest rate on treasury account thanthe company would realise individually. The basicpurpose of cash pooling is optimisation of interestincome and efficient liquidity management. Cashpooling is performed in accordance with adoptedinternal regulations of the HSE Group companiesfor cash management and cash pooling of the HSEGroup.The solvency risk is assessed as efficiently controlledand it is reduced by the Group’s credit ratingas a result of good operations, regular coordinationof maturity of receivables and liabilities, consistentcollection of receivables overdue, liquidity reserveand availability of adequate credit lines and possibilityof sustainable creation of operating cash flows.Risk of financial indiscipline ofbanks and financial institutionsThe risk of financial indiscipline of banks andfinancial institutions in relation to investment offree cash is a risk associated with the global financialcrisis and the inability of financial institutionsand banks to settle their liabilities from investmentof free cash within due dates and on time. We assessthat the risk is properly controlled since it is managedby respecting the principle of deposit diversificationper individual banks, investment of cash for currentshort-term operations (in form of »overnight« and»redeemable at notice« deposits) and by unificationof cash in form of cash pooling service. Transactionsof derivatives for protection against interest rate andcurrency risk are concluded with commercial bankson the basis of standard ISDA contracts and it is estimatedthat the possibility of failure to fulfil thesetransactions is minimal.Moreover, the data on current operations ofbanks, with which the controlling company cooperates,is also monitored. The controlling companysends subsidiaries within the HSE Group recommendationsin relation to investment of free cash.Credit RiskWhile performing operations with our partners,suppliers and buyers of electricity and relatedproducts as well as buyers and suppliers of servicessuch as financial institutions and other actors inthe energy market, we face the risk that contractual

94 Annual Report 2011obligations will not be fully covered after they falldue (credit risk). The volume of credit risk dependson credit rating of our partners, level of market pricesand general economic situation. Therefore, we regularlymonitor the abovementioned elements. Creditrisk management is regulated by internal regulationswhich define procedures of accepting the partner,defining its credit limit, monitoring of partner andacceptable forms of insurance if the partner’s creditrating is insufficient or decreased.The credit risk is mostly managed by definingand adopting credit limits on the basis of financialas well as other internal and external available dataon our partners, comprehensive arrangement ofcontractual relations in form of framework EFETagreements and others as well as additional insuringof payments or complying with contractual liabilitiesby the partner and in the form of cash deposit orbanking guarantees.Most partners with whom we operate are largercompanies with an excellent credit rating. In orderto estimate credit rating of our partners we use ourown assessments as well as the assessments by creditrating firms. A large part of trading activity is generatedthrough stock exchanges, where the certainty ofphysical and financial settlement with insurance systemis provided by clearing firms, which is extremelyimportant for partners with a lower credit rating.The volume of credit risk and balance of open (not)overdue items to our partners is monitored on dailybasis, while the process of reminding and collectionis also connected with them.Corporative risksThe following corporative risks of the HSE Grouparise from the risk registry:• Control of the HSE Group management;• Risk due to non-current Development Plan;• Control of the HSE company management, toofrequent replacement of management and SB;and• Consolidation of the HSE Group management.It is estimated that the risks were appropriately managedtaking into account additional limitations.Information system risksThere is a risk, that heterogeneous information systems(supporting operations) will not meet the actualneeds of the Group. In relation to uncoordinatedinformation systems of Group companies, particularlythe following risks could have a long-term effect:• Decreased possibilities of consistent andoptimised common work – the projectof renovation of the HSE IT system is inpreparation. This project has to assure efficientand standard compatibility to existing businessinformation systems of subsidiaries and at thesame time enable reliable expansion if needed;• Smaller power of negotiations with externalproviders of IT services and equipment andconsequently higher purchase prices of servicesand equipment – with this intention, in 2011the purchase of the entire IT infrastructureof subsidiaries was performed and given intothe management of the HSE company, which,on the basis of IT unification, already startedto decrease costs of maintenance of hardwareand software, more definite on the account ofquantity discounts;• Various levels of information security inindividual company – within the frameworkof HR reorganisation of IT departments ofindividual companies, a thorough reductionof »key« domain administrator was performed(4). In this manner, a high level of security wasprovided as well as transparency of systemsources and higher level of trust at end userswas achieved;• Smaller flow of know-how between Groupcompanies;• In the area of maintenance, in 2011 a pilotproject IPS-Energy was established, which willbe expanded throughout the entire HSE Groupon the basis of results, cost estimate and finaltechnical estimate.Consolidation of information systems in dispersedcompanies also represents an opportunity for increasingthe ability to move human resources betweencompanies and easier management of commonprojects.The results of non-functioning or failures ininformation systems are inability to trade on exchanges,disturbed communications, unavailability

Business report95of e-mail, disturbed payment transactions, disabledproduction control etc.In order to reduce these risks, we have movedthe users to a highly available and duplicated computercentre. In this area, in 2011 the project of datacentre upgrade was successfully concluded. Pursuantto the HSE strategy, in future it will represent thebasis of reliable highly available duplication centre,i.e. »DCR – Disaster Recovery Centre«. In addition,the study on optimisation of the existing situationof data warehouses is in course of preparation and itwill be performed in the near future.The acquired quality standard ISO 27001 requiresdeployment and maintenance of processes which ensurea high level of reliability and availability whichmust be measured and maintained on a continuousbasis. In May, we successfully underwent an externalassessment of compliance with the standard. We alsoperformed a security check of WAN and LAN networksat HSE. All these facts are reflected in great ISreliability – in September 2011, a test of permeabilityof HSE ITC network was performed and on the basisof results, one month later we performed the optimisationor upgrade of a part of network which additionallycontributed to better responsiveness andstability of communication links.Short-term future strategy is mostly in the renovationof business information system which currentlyrepresents the largest business informationsystem risk of the company HSE.R&R riskRisk of late execution of plannedinvestmentsThe basis of planning and performing investmentprojects is represented by the DevelopmentPlan of the HSE Group, Business Plan of individualcompanies as well as investment and project documentationfor individual investment. In order to assuretimely performance of planned investments, itis of key significance that all individual stages fromthe preparation to performance of investment areprepared and approved in a timely manner, whichis ensured through procedures and the method ofpreparation of investment projects and project managementin accordance with the internal governingdocuments and applicable national legislation in allstages of the project.For this purpose, the responsible project leaderswere appointed to perform individual projects. Theyare responsible for timely preparation of investmentdocumentation and performance of subcontractingprocedures. An important aspect is also timely provisionof financial sources for the execution of investmentsand risk management process. The statusof all investment projects is monitored on a regularbasis, also at the level of development committees,which are periodically held throughout the entirefinancial year. In addition, the investment plan iscoordinated during preparation of the long-termdevelopment plan and, at the annual level, duringpreparation of annual business plans. In order to beable to identify and prepare our business policies ontime, we also organise an annual strategic conferenceof the HSE Group. The control over the preparationof investment documentation is establishedas well as active monitoring of performing of investmentactivities and control over the key risks. In caseof deviations of key investment parameters and timeparameters set, corrective measures are performed.Risk of misdirected priorities inpreparation and implementation ofthe company’s strategic policiesThrough continuous monitoring of developmentsand policies in the area of national and EUwideenergy and environmental policies we are ensuringregular incorporation of such policies intothe development and strategic policy of the companyand the Group. For this purpose, we regularly monitorthe preparation of sector strategies and politicson the national, EU and global level. We have implementeda system for communication and transfer ofinformation within the HSE Group both at the levelof responsible sectors and departments in individualsubsidiaries as well as at the level of relevant strategicdocuments of the HSE Group. In 2011, draftsof amendments to climate and energy strategy wereperformed on the national level, which we activelymonitored and prepared the assessment of impacton the HSE Group operations. Within the processwe initiated as early as in 2010, strategic and developmentorientations of the HSE Group were updatedas a result of the adopted climate and energy EUlegislation and orientations of new sector strategy onthe national level. The strategic orientations and theproposal of long-term development plan of the HSEGroup were updated, but they were not approved bythe owner due to non-adoption of national energypolicy and sector legislation.

96 Annual Report 2011Risk of key projects of thecompanies not being placed undernational prioritiesIn the process of continued monitoring of developmentsin the area of national and EU environmentalenergy policy, we are actively collaborating withthe competent ministries. We are enabling mutualexchange of information and communication regardingcurrent projects and other development andstrategic policies. Given the fact that the electricitysector belongs to development areas that are of nationalimportance, such importance has also beenassigned to certain projects being developed in theHSE Group. As we have entered a period where, dueto technical challenges (age of production facilitiesand parts of the network) and challenges related tothe new energy policy, the whole energy sector inthe EU is facing demands for upgrades and investmentsthe Group is currently preparing several keyenergy projects some of which are also of strategicimportance due to their role in the electricity system.Therefore, in such projects we cooperate withrelevant ministries which are competent for placingsuch projects under national priorities which generallyrepresents a certain advantage and involvesassistance by the government. The HSE Group hasbeen in the process of developing several such projects,of which we should point out projects in thearea of E-RES production (HPPs on Sava and MuraRiver etc.) and the construction of replacement Unit6 at TEŠ.Risk associated with investmentactivitiesThe key risks of the replacement Unit 6 at TEŠ are:• Risk related to acquisition of financing sourcesnecessary for Unit 6 construction;• Risks related to investment value of the project;• Risks that the project will not be terminated inaccordance with time schedule;• Risk of lack of coal or its quality;• Market risk related to the price of electricity andemission coupons; and• Risk that environmental legislation will bedeteriorated.There is a risk of non-issuing the government guaranteeto EIB. According to all assurances to financialinstitutions (No objection letter, Letter of support bythe Government of the Republic of Slovenia) cannotbe assumed neither by HSE nor investor. Nonissuingof the guarantee would negatively affect thecredibility of not solely the HSE Group, but the entireState. After non-issuing of the guarantee, it is difficultto imagine a high international financial creditrating of the State and maintenance of its credibilityto international financial institutions. EBRD loansare also related to EIB arrangement.If in 2010 we estimated that there is a risk of nonissuingof the government guarantee to EIB for theloan in the amount of € 440 million, at the end of2011 this risk must be exposed. The risk is not solelynon-issuing of the guarantee but also delay of issue.In case the guarantee will not be issued before autumn2012, this could cause liquidity problems notonly in HSE, but within the entire Group. In case theguarantee is not issued, the largest risk is certainlyassumed by our owner, i.e. the State, which withthis action consciously agrees on impairments of itsproperty and consequently adopts liability of capitalincrease of the company HSE.Managing risk of delay in acquiring governmentguarantee is controlled by up-to-date alternativescenarios, short-term borrowing and optimizing liquidityand operations. It is estimated that the riskwas appropriately managed in 2011.Risk of non-issuing government guarantee iscontrolled by performing scenarios of alternative financingof replacement Unit 6 in TEŠ. It is estimatedthat the risk was appropriately managed in 2011.TET strategic riskTPP Trbovlje which has been operating since1968 has entered the last period of its useful life.Therefore, the key strategic goal is the maintenanceof location in TET, namely the construction of newgas power plant and/or replacement of the existingTPP with contemporary and environmentally appropriatepower plant on the same location. The decisionon further development of TET has not beenadopted yet. However, it is planned that energy activityin Trbovlje will be maintained.

Business report97Human resources riskThe company’s activities, its intensive growth andthe implementation of strategic plans require itsemployees to constantly improve their existingknowledge, acquire new skills and competences, anddemonstrate a dynamic, multidisciplinary approach,self-initiative and the ability to work in a team.The risk of potential loss of key employees isconsidered the main human resources risk. This canonly be prevented through good management andcommunication with/among employees, continuousprofessional growth and motivation, and throughstimulating working conditions and environment.The exposure to human resources risk is estimatedas low.Insurance of the HSE groupcompanies responsibilityIn 2011, HSE concluded a contract on insurance ofresponsibility of the management and supervisorybody members and managers (D&O insurance),which comprises all companies of the HSE Group,where HSE directly or indirectly holds more than50% of ownership stake and they are not dormant orin their initial stage of operations. All managementsof the HSE Group companies agree that the conclusionof such insurance is needed as it complies withcriteria of sound management and principal rules onhedging risks of the company in performing managementand supervisory functions. In accordancewith requirements of Criteria for remuneration ofmembers of governing bodies in entities representingcapital investments by the state, the HSE Groupcompanies arrange D&O insurance with the purposeto insure company interests, particularly inview of risk management of the companies. D&Oinsurance is concluded as corporate insurance,within the framework of which the responsibility ofmanagement and/or supervisory body is insured asa whole, while with regard to D&O insurance conditionsthe responsibility to managers is also insured.D&O insurance protects the property of the HSEGroup companies and personal property of individualsinsured at the HSE Group companies. The latteris compliant with currently applicable tax legislationin Slovenia.Data securityRisk management is aimed at decreasing risks to theacceptable level. Due to significant connection withsubsidiaries, it is necessary to continue implementingmeasures in accordance with ISO 27001 also insubsidiaries.All risks are stated in the HSE registry of risksper individual year. We have assessed risks of intangibleassets, software, data bases, paper documents,people and services.In 2011, new information assets are recognisedwith regard to location where significant informationassets are placed in relation to which the followingrisks are recognised: fire, floods, voltage failures/fluctuation, air-conditioning and physical break-in,which could mean the loss of data or incapability ofservice functioning. Risk management instrumentis the establishment of security policies of physicalaccess to important locations (card access, the listof authorised individuals for the access to importantserver rooms, diary of visits and interventionin server rooms, establishment of video-surveillancesystem, appropriate organisation of fire security, appropriateflood protection on endangered locations,regular maintenance of air-conditioning devicesand UPS device in the safe room and other serverrooms).In the field of personal data protection, in 2011new personal data catalogues were established andreported to information commissioner of the Republicof Slovenia in accordance with the law. Personaldata catalogues are processed in individualHSE departments.Management systemWithin the company HSE, a management systemis integrated, which is based on process approachand unites the quality management system certificatein accordance with the requirements of ISO9001 standard, environmental management systemin accordance with the requirements of ISO 14001standard, occupational safety and health systemin accordance with requirements of OHSAS 18001standard, information security system in accordancewith ISO 27001 standard and EMAS certificate.The elements of the abovementioned systemsare tightly connected among all business processeswithin the company and represent a part of companymanagement policy. Their management assures that

98 Annual Report 2011environmental aspects, risks of occupational safetyand health as well as information management andsecurity are properly considered in preforming allprocedures.The company‘s organisational culture is reflectedin the certificate Family Friendly Company (FFC).For the purpose of larger recognition and offerof greater quality, we obtained the following certificatesin the market: For production E-RES accordingto TÜV TMS criteria EE TUV (CMS Standard83: Erzeugungb EE (04/2011)), for production ofE-RES with providing guarantee of functioningand efficiency in accordance with TÜV TMS criteriaEE+ TUV (CMS Standard 87: Erzeugungb EE+(04/2011)), Renewable Energy Certificate System(RECS) and guarantees of origin.Certificates are mostly assessed on annual basis,while the assessment of certificates is repeated everythree years.Certificates show the credibility of the company‘sorganisation. Losing any of the abovementionedcertificates would mean an increased risk in organisationof company‘s operations, which refers to theloss of independent reviews and independent confirmationof company‘s operations. Thus, the companywould be exposed to greater critical assessments,problems would arise with regard to opening branchoffices abroad, negotiating positions related to acquisitionof new financial sources would deteriorateand greater problems would appear with regard tooptimising processes and integrating new tools andmethods of management.The omission of certificate would cause a decreasein the need to identify good practices amongthe companies and in the need to mutually coordinatethe procedures among individual companieswithin the framework of the HSE Group and thusin the need for coordination of approaches and improvementswithin the framework of the HSE ManagementCouncil’s operations.International networkThe foreign network is primarily aimed at supportingthe HSE Group in the implementation of tradingstrategy in regional energy markets of Centraland SE Europe, while at the same time it allows us toobtain data and enables us the access to new energyprojects in individual region. In view of expandingHSE operations to individual European markets, itis necessary to consider national energy legislationwhich does not enable HSE operations without establishingpermanent unit. HSE monitors the adaptationof national energy legislation to EU Directivesand launches procedures of acquiring energy licencesand consequently redirection of trading directly toHSE. At the end of 2011, the winding-up proceedingsof the Hungarian company began since HSE had acquiredthe Hungarian trading licence and assessedthat without entering the Hungarian retail energymarket the subsidiary had no possibility to acquirerevenue, while the winding-up was envisaged in thefirst half of 2012.In 2011, the foreign network maximally ensuredthe support of HSE marketing function in performanceof trading strategy in Central and SE Europesince all the companies with their registered officeabroad operated with profit. The companies operatewith minimum costs, (normally) without employeesand with a professional central support to HSE. Anengagement team was established, which is responsiblefor verification of optimality pf foreign network.In case of change in national energy legislation, it assessesthe reasonableness of existence of individualsubsidiary.We assess that the risk is managed.

Business report992.13 External communicationIn the tenth year of HSE operations, the generaland professional public mostly discussed the replacementUnit 6 at TEŠ. A press conference wasorganised, several press releases were sent, answersto journalist questions were prepared and we tookpart in all professional meetings, round tables andmedia events and prepared a public presentation ofthe company and Group.The HSE Group companies have actively communicatedthe construction of other production facilitiesof the HSE Group (HPP on the lower SavaRiver, HPP on the middle Sava River, PSP Avče, PSPKozjak, renovation of HPP on the Soča and DravaRivers …) through their websites and internal journals.In the area of raising awareness on significanceof environmental protection among the youngest,we started the year with the action »Small house,large shelter« (»Majhna hišica, veliko zavetje«), bywhich we promoted creativity and presented the significanceof care for birds in winter period amongchildren in kindergartens. For the latter we alsoprepared a summer action »I Plant a Flower, I TakeCare of Nature« (»Rožico posadim, za naravo skrbim«),by which we tried to present the importanceof planting new plants, while at the same time it emphasizedthe benefits of healthy way of life (providedby riding a bike or walking, therefore without a car).Our last action this year intended for children »ToMake the Environment Happy« (»Da bo okolje dobrevolje«) was intended to getting informed on efficientuse of energy.The success of the first environmental projectamong the Slovenian primary schools was concludedwith the publication of »Blue Book« that containsall Eco Projects and it stimulated us to repeat theproject also this year and named it Eco Project 2.We have also published four issues of environmentalmagazine for children Modri Jan (»BlueJan«), which has more and more faithful readers.We have also updated our website www.modrijan.siby adding an interactive chat room, first ofsuch kind in Slovenia, where children can chat withtheir peers on the significance of environmentalprotection under the guidance of moderator. At thecompany’s tenth anniversary, the corporative websitewww.hse.si was also updated. Other communicationactivities comprised updating of the websitewww.modra-energija.si and informing media on allkey projects of the HSE Group, both through publicreleases and press conferences.

100 Annual Report 20112.14 Research and developmentThe main activities in the area of research and development were orientatedtowards active monitoring of changes in energy and environmental legislationas well as implementation of the HSE Group investment projects. In accordancewith the adopted EU legal framework in the field of environmental andenergy policy and energy market liberalisation, in 2011 the changes in legislationand simultaneous adoption of strategic documents in the field of environmentaland energy policy of the Republic of Slovenia were planned on the national level.The planned program of changes in national level was not realised in full. Allsignificant drafts of legal proposals and sector politics and strategies were prepared.They were also submitted to public discussion, but they were not finallydiscussed nor adopted. We have actively monitored the preparation and publicdiscussion of all documents in the European as well as national level. We haveprepared a formal position of the HSE Group for all key documents and propositionsof amendments and changes.A significant area of work was represented by activities in the support ofrealisation of the demanding investment programme of new production facilitieswhose basic purpose is to increase the electricity production within the HSEGroup and ensure safe and reliable market supply. With planned investmentprogrammes we follow the goal of target sustainability of electricity production,increase of share of electricity production from renewable sources, decrease ingreenhouse gas emissions and target efficient use in the production and consumptionof electricity. Since the HSE Group is in the period of difficult investmentcycle, the change and coordination of preparation and implementation ofinvestment projects represents a significant part of development activities.2.14.1 Coordination of development activities on the HSE grouplevel and revision of the group Development planHSE Group development planIn light of changes in climate and energy policy of the EU and expected revisionof national energy strategy, we initiated the activities of revising the HSEGroup Development Plan as early as in 2010. The draft of new Development Planhad to be coordinated with priorities of the national energy strategy and commitmentsof the climate and energy package. The development plan was neitherrealised nor adopted due to the failure to adopt the National Energy Programmeand other strategic documents on the national level. Therefore, this task remainspriority in 2012.

Business report101Changes in legislation and climate and energy policyIn 2011, the preparation of numerous legislative propositions took place, bothon the level of the EU as well as on the national level, where the renovationof climate and energy strategy was performed at the same time. We have activelymonitored the preparation and public discussion of all documents. Wehave carefully examined all the presented drafts (NEP, Sector Policy Energetics,Energy Act EZ-1, Energy Act EZ-E and new European legislation for the area ofenergetics and energy strategy of the EU) and prepared the draft of key changesand their impact on the HSE Group operations for responsible individuals. Forall documents in public discussion we have prepared a formal position of theHSE Group and proposals of changes and amendments that we submitted to theauthor. We have also participated at public discussions and round tables.Acquisition of non-refundable fundsGroup companies monitor the acquisition of non-refundable funds for implementationof R&D activities in the following European projects:• CH2OICE – environmental certification of HPP;• AQUAVIVA project;• Projects within the framework of seventh framework EU programme forresearch and development (7OP);• Horizon 2020 (Obzorje 2020);• NER 300;• Instruments for connecting Europe aimed at filling missing connections inEuropean, energy, transport and digital networks;• Intelligent European Energy (IEE) aimed at accelerating the growth of RESmarket in Europe.Collaboration with knowledge centresCollaboration with knowledge centres represents a direct form of cooperationof the HSE Group in the projects from the area of technological development.Following the development of latest technologies in electricity productionenables the company to adopt timely decisions for the transit to the use ofnew technologies in production process, which enables competitiveness in themarket and assures successful operations. HSE currently cooperates with severalknowledge centres and in various organisational forms of R&D project implementation.Such cooperation is performed as mutual R&D projects in the performanceof professional analysis and studies with cooperation at professional conferencesetc. Currently we actively participate in the Centre of Excellence Low-carbonTechnologies (Center odličnosti nizkoogljične tehnologije – CO NOT), which isa consortium of 22 research-economic companies.

102 Annual Report 20112.15 Plans for the futureThe principle objectives that the HSE Group will be pursuing in the future inthe area of development of the European and Slovenian electricity marketsare:• Increasing market share in foreign electricity markets;• Increasing the share of quantities sold in foreign markets;• Geographic expansion of trading activities;• Increasing presence in SE European markets; and• Expanding operations to other energy-related activities.Electricity trading opportunities in wholesale markets can only be exploitedthrough presence in various national markets. In order to increase trading volumesand the presence in foreign markets, the company will continue establishingenterprises, acquiring trading licences and strengthening its trade network.The achievement of energy and climate objectives is also possible throughjoint international projects, which represents a special challenge for HSE in thearea of SE Europe where the majority of countries are already in the process ofEU accession. Thus, in the middle of 2013 Croatia will join the EU, meaning thatalso in that national market the producers of electricity from fossil fuels will besubject to restrictions arising from greenhouse gas limitation. HSE Group willremain active in the area of SE Europe, to which we will appropriately adjust ourinvestment policy, acquisition of financial and other resources and the policy ofentering into beneficial business partnerships.A good understanding of conditions in these markets, capital power of HSEand previous cooperation are the advantages that allow HSE to take part in suchjoint projects. The construction and acquisition of new production capacitiesand international trade in electricity contribute significantly to ensuring sustainablesupply of Slovenia, reducing its long-term dependence on imports and exposureto geopolitical risks, as well as achieving solid operating results. Finally,through its activities in the region, HSE keeps consolidating its market positionand reputation as an important regional player.Moreover, the HSE Group is looking for new projects and investments bywhich it could assure safe, reliable, competitive and environmentally friendlylong-term supply electricity of Slovenia. The investment projects of the HSEGroup are coordinated with orientations of national energy strategy and climateand energy EU policy. They will contribute to the transition to low-carbon economy.Future goals of the HSE Group investment policy are:

Business report103• Increase in production and trading quantities of electricity;• Increase in installed capacity and produced E-RES;• Technological update of production plants for electricity production fromfossil-fuels with the purpose to decrease emissions;• The construction of new plants and update of the existing ones with thepurpose to use the latest technologies, realise highest possible efficiency andthus effective use of energy sources;• Social responsibility and sustainable operation.With the purpose of complying with requirements of new energy legislation andgoals set until 2020, the HSE Group has strongly orientated towards the implementationof projects that will, in the largest extent possible, help to realise thegoals of climate and energy package in the area of RES use, decrease in emissionsand EEU. Besides the replacement Unit 6 at TEŠ a significant attention will bedevoted to exploitation of HPP. We intend to significantly improve these indicatorswith the following projects: Termination of HPP chain on the lower SavaRiver, HPP on the medium Sava River, HPP on the Mura River, HPP on the IdrijcaRiver, renovation of HPP Zlatoličje, HPP Formin, HPP Doblar 1, HPP Plave1, HPP Učja, HPP Kobarid, HPP Kamno and PSP Kozjak.HSE Group will remain active in the area of SE Europe, to which we willappropriately adjust our investment policy, acquisition of financial and other resourcesand the policy of entering into beneficial business partnerships.

today firetomorrow energyThe power of fire isextremely attractive.It accompanies ourevery step in all itsroles. We recogniseit in the cup of warmaromatic coffee,playful red dress,romantic dinner withcandles and hypnoticdancing flame. Theenergy of fire isconquering.

3Socialresponsibilityreport2011

106 Annual Report 20113.1 Responsibility to employeesIn 2011, we maintained the planned growth of thecompany’s and Group’s operations, achieving operatingresults that benefit all our key stakeholders:the owner, employees, business partners and thecommunity a part of which we are. We are successfulin combining the policies and sources in individualareas, keep track of the present and play an activerole in creating the future. We became partners withall major stakeholders in the company, which is oursource of strength and competitive advantage and acatalyst for changes that bring about new challengesand opportunities and provide possibilities for progressand development in accordance with our plans.We respond to global changes by focusing on ouremployees and by constantly raising awareness notonly about our own but also wider social responsibility.We are proud of the fact that HSE Group isdistinguished by employees with a broad range ofexpertise, interests and skills. They are namely important»architects« of our organisational cultureand our spokespersons both inside and outside theGroup.HR policyOne of the sources of our advantage is our abilityto create and ensure proper conditions and an atmospherethat help our employees achieve their personalgoals and encourage taking reasonable risks, whichis a precondition for being able to develop furtherand build up strength in uncertain situations as wellas to achieve the strategic goals of the HSE Group.We are focused on constant development of our employeeson all levels with an emphasis on trainingand motivation, through which we are able to ensuretheir satisfaction, confidence and commitment,and their loyalty to the Group, which in turn ensuresour future development, synergies and successfulperformance. We need individuals who are willingto commit to achieving noticeable and measurableoperating results and who are dedicated to implementingour business visions and strategies. We areaware that strategies alone do not lead to success.Success is achieved by people and the values guidingthem. People are the ones who create a vision,determine the mission, foster culture, set values andchoose strategies in order to make them a reality. It isimportant to be capable of recognising new businessopportunities and design relevant products and services.If we are successful in doing so, the possibilityof our Group remaining successful will increase.The key elements of our human resources managementstrategy remain as follows:• to support business and strategic goals of theGroup;• to employ highly qualified staff and improve theeducational structure;• to maintain an optimal number of employees;• to invest in the development and transfer ofknowledge and competences of employees,focusing on the development of our ownexpertise and training of team leaders;• to establish a knowledge registry of the HSEGroup;• to set up a flexible remuneration and promotionsystem;• to invest in high-quality and healthy workingenvironment and to continue the programmefor protection and strengthening of health inworking and living environments.Regular and close cooperation with labour unionsand workers’ councils of the HSE Group is a practicethat was introduced along with the establishmentof the HSE Group. Such method of cooperation ensuresa balance between various interests and, consequently,a broad consensus regarding the Group‘sdevelopment plans and provision of social security.

Social responsibility report1073.1.1 Employees in the controllingcompanyEmploying staffThe leading position of the HSE Group in theSlovene energy system, which also means being themain vehicle of secure and reliable electricity supplyin Slovenia, makes us a very attractive employer: jobapplications are received both from applicants withestablished careers as well as those whose careers areonly just beginning. The recruitment policy is basedon a combination of:• Recruitment from within the HSE Group orthe internal labour market, which offers highlyqualified experts of various profiles with a widerange of general and specific competences;for staff being transferred to the controllingcompany, such recruitment representspromotion, a reward for successful performanceand a prospective career opportunity; and• The external labour market, by means of whichan inflow of fresh ideas, energy, different viewsand experience is ensured.As regards executives and experts, the policy oftraining our own staff prevailed.All of the above is also reflected in recruitment.In the period from January to December 2011, thenumber of employees increased by 16 comparedwith 31 December 2011, while 4 employees left thecompany. As at 31 December 2011 the Company had135 employees.The recruitment dynamics was even, since newemployees were being recruited throughout the year.Voluntary pension insuranceHSE has had its pension plan or a voluntary supplementarypension insurance programme in placesince 2002 when the first workers were transferred toHSE from its subsidiaries. The programme is managedby Kapitalska družba d.d. and includes mostof the employees. At the end of 2011, the companyKapitalska družba d.d. as the current manager ofpension fund PP1 restructured and transferred thepension plan PP1 to the newly founded insurancecompany Modra zavarovalnica d.d. Thus, the collectivesupplementary pension insurance premiumis performed at Modra zavarovalnica d.d. Most employeesare subject to this insurance. Offering a longtermform of saving in each individual’s personalaccount, we aim to provide our employees with anadditional pension and a higher quality of life whenthey end their careers.Employees and the communityEmployees have obligations not only to their employerand themselves but also to the wider community.For this reason, they actively participate in numerousbusinesses as well as professional and sportsassociations. Since it cares for their health and wellbeing,HSE promotes and financially supports sportand recreational activities of its employees throughthe HSE Sports Club.Education and trainingDevelopments in the business environment andour ambition to create new, added value for the widestrange of users, as well as the need to react quicklyto the environment, be flexible and innovative, requireus to engage in systematic training activitiesand our employees to continuously participate ineducation and training, to demonstrate new ways ofthinking and to ensure transfer of knowledge.Given the fact that training, in the widest sensepossible, is positively linked to performance, thecompany does not perceive it merely as cost or anexpenditure item; rather, training represents a longterminvestment or capital.Structure of all trainings indicates that in 2011most time was devoted to professional trainings andlanguage courses.In addition to the development of knowledgeand employee training, HSE’s education activitiesalso comprised part-time studies and scholarships.Part-time studiesHSE currently financially supports studies of 15employees, mostly in the area of engineering andeconomy.ScholarshipsThe students involved in development activitiescontribute new ideas and views on solving workrelatedproblems. HSE provides support to studentsof technical, social and natural sciences both in theform of financing as well as practical training andgradual integration into the organisational environment.In 2011 we had two scholarship holders. Oneof them successfully finished the studies.

108 Annual Report 20113.1.2 Employees in the HSE GroupAt the end of 2011, the HSE Group had 3,819 employees,which is by 5 less than as at 31 December 2010.The number of employees mostly decreased withinthe PV Group.Number of HSE Group employees31/12/2011 % 31/12/2010 % IND 11 / 10Holding Slovenske elektrarne d.o.o. 135 4 123 3 110Dravske elektrarne Maribor d.o.o. 285 7 282 7 101Soške elektrarne Nova Gorica d.o.o. 133 3 126 3 106Termoelektrarna Šoštanj d.o.o. 477 12 488 13 98Termoelektrarna Trbovlje d.o.o. 204 5 209 5 98Premogovnik Velenje Group 2,482 65 2,507 66 99HSE Invest d.o.o. 73 2 59 2 124Hidroelektrarne na spodnji Savi d.o.o. 26 1 26 1 100HSE Italia S.r.l. 0 0 0 0 0HSE Balkan Energy d.o.o. 2 0 2 0 100HSE Hungary Kft. 0 0 0 0 0HSE Adria d.o.o. 1 0 1 0 100HSE Bulgaria EOOD 0 0 0 0 0HSE Mak Energy DOOEL 0 0 0 0 0HSE BH d.o.o. 1 0 1 0 100TOTAL 3,819 100 3,824 100 100The employee education structure of the HSE Grouphas been improving over the years. Compared to2010, in the HSE Group the number of employeeswith level VII education mostly increased (by 10%)and with level VIII and IX level education (by 9%),while the number of employees with V or lower leveleducation decreased again.

Social responsibility report109Number of employees as at 31/12/2011 and average number ofemployees in 2011 by educationNumber of employeesas at 31/12/2011Average number of employeesin 2011Education levelControllingcompanyHSE GroupControllingcompanyHSE GroupI. 0 218 0 225II. 0 153 0 153III. 0 14 0 14IV. 1 1,381 1 1,409V. 17 1,081 17 1,083VI. 13 370 13 364VII. 81 551 76 527VIII. and IX. 23 51 23 49TOTAL 135 3,819 129 3,823Education in the HSE GroupInvestments in education alone do not guaranteesuccess of a company or group. That is why we havebeen organising thematic workshops at multiple levelsfor the entire Group since 2004. The workshopshave become an efficient component of the HSEGroup’s training system. In 2011, we organised twotopical workshops in the HSE Group.Through additional education and training, HSEGroup is providing for adequate professional qualification,quality and safety of work and personal developmentof employees. The HSE Group employeesunderwent training in the areas of productionprocesses, occupational health and safety, leadershipand communication, management of integratedquality systems, foreign languages, IT systems andother areas which were subject to amended legislation.

110 Annual Report 20113.2 Responsibility to the natural environmentEnvironment-friendlySlovenia entered the EU with relatively well preservednature and with the awareness that the environmentis one of the pillars of sustainable developmentin the future.The HSE Group designed its environmental policyat the very beginning of its operation. Its basiccomponents can be summarised as follows:• to produce electricity with a minimum impacton the environment;• to observe all legal standards andrecommendations;• to introduce the best technologies availablein order to minimise the impact on theenvironment;• to promote development of RES;• to achieve a partnership with local communitiesand together solve environmental issues andplan for sustainable development of electricityproduction;• to achieve sustainable operation anddevelopment of energy capacities.All electricity-producing companies in the HSEGroup and the controlling company have the ISO9001 international quality certificate and the ISO14001 international environmental certificate.Through consistent observance of these standards,the companies ensure safe and environmentfriendlyproduction of electricity in all hydropowerplants. Thanks to environmental rehabilitation andmodernisation, both thermal power plants also introducedmore environment-friendly technologies,while PV was among the first coalmines in the worldto demonstrate comprehensive and responsible environmentalmanagement in compliance with therequirements of the respective standard.Renewable energy sourcesThe HSE Group is aware of its responsibility tothe environment in which it operates; therefore, itaims to produce electricity from RES and to use itrationally.In terms of volume, energy from hydropowerplants is the most important source of E-RES inSlovenia. The area of renewable energy sources istherefore highly important, both for operation andthe future external image of the Group. In the areaof energy supply from renewable sources, activitieswere launched in the second half of 2004 in connectionwith the establishment of the domestic E-RESmarket (Blue Energy), participation in the drawingup of implementing regulations covering this areaand international activities relating to the sale of renewablecertificates at home and abroad.Blue EnergyHSE designed the Blue Energy project in 2004in collaboration with distribution companies. Blueenergy stands for electricity produced from environment-friendly,renewable sources. The projectis aimed at encouraging the development of energyproduction from renewable sources, establishingthe market in such energy and selling this energy inSlovenia. The Blue energy project enabled Slovenianelectricity users on the whole territory of Slovenia tochoose by themselves from which sources the energythey use will be produced. Since 1 July 2007 we offerBlue Energy to business and household consumers.All hydropower plants of the HSE Group holdingthe international RECS certificate participate inthe Blue Energy project. In Slovenia, HSE and distributioncompanies sell the energy produced fromrenewable sources under the Blue Energy brand.HSE guarantees renewability of energy to its projectpartners by cashing in an appropriate numberof RECS certificates on their behalf. In 2011, BlueEnergy was uniformly priced at 0.001 €/kWh. Thebrand is owned by HSE, which coordinates the projectand takes care of communication with the public

Social responsibility report111and the promotion of Blue Energy. The brand andthe logo that were designed as part of the project arecopyrighted.In accordance with the contract entered into byBlue Energy project partners, the majority of proceedsfrom the sale of Blue Energy (60%) goes intothe Blue Fund, which is intended to promote productionof E-RES, research aimed at acceleratingproduction of E-RES and development, and refurbishmentand construction of E-RES facilities. Weused the proceeds from the fund for several extensiveeducation projects, research papers and studies, andhelped with organisation of a number of summereducation camps in the area of E-RES and EEU. Atthe end of 2010, proceeds from the Blue Fund wereused to construct a Blue solar power plant GimnazijaVelenje at the Centre of Secondary Schools Velenje.The solar power plant will have several purposes,as it will not only be used for environment-friendlyE-RES production, but will also serve educational,promotional, demonstration and research purposes.Modri Jan (Blue Jan)We have thus created a project called ModriJan (a play on words; translated literally, Modri Janmeans Blue Jan, when read together as a single wordit could be translated as Wise man) accompanied bya website www.modri-jan.si. On the website, childrencan learn about energy and environment-relatedtopics through entertaining content. They canalso learn that they themselves are able to contributeto the protection of the environment by choosingRES and saving energy. The project also includesvarious competitions and contests, which encouragethe children to think about the significance of RESand EEU.Efficient energy useSince its establishment, HSE has been promotingthe use of RES and the protection of environment inwhich it operates. A part of these activities are alsoefforts to educate the public on rational use of energy,the purpose of which is not only more rationalmanagement of the environment but also preventionof extreme circumstances that can be caused by unreasonableuse of electricity (e.g. blackouts, systemcollapse…).Since September 2006, HSE has been carryingout an information campaign Energija.si that educateson the efficient use of energy in an innovativeway. By promoting environmental protection andrational use of energy, HSE is recognisable in theSlovenian and international public as a consciousand socially responsible company.— Blue Energy for heat pumpsAt the end of 2010, HSE, in cooperation with electricitydistributors EE Elektro Celje, Elektro Maribor,Elektro Gorenjska and Elektro Primorska andseveral suppliers of heat pumps, initiated a campaignentitled Blue Energy for Heat Pumps. In the campaign,the suppliers of heat pumps and electricitydistributors joined forces and offered extremely attractiveconditions for end buyers, all for the purposesof promotion of EEU and RES. Both offer adiscount for their products to households that willchoose a heat pump as their method of heating, usingenvironment-friendly energy. Until the end of2012, the suppliers of heat pumps will enable theirbuyers a 10% discount on the price of heat pumpsmeeting the criteria of the campaign. Electricitysuppliers will supply »Blue Energy« to the buyers ofthese heat pumps.— EkomobilWithin the framework of promoting E-RES use, thecompany HSE set a goal, with regard to the adoptedtraffic policy in the Republic of Slovenia, to becomean energy company which will stimulate the use ofE-RES in turnover together with optimisation oftraffic system. Therefore, in 2011 HSE started theEkomobil project with the support of the GovernmentOffice of the Republic of Slovenia of ClimateChange, MoE, Ministry of Transport and Eco Fund.The Ekomobil project provides environmentallyfriendly e-mobility and it is a part of campaign»You Are Energy, Be Effective« (»Energija si, bodiučinkovit«). The project devotes special attentionto the source of energy for electric vehicle. Therefore,a filling spot was placed in front of the businessbuilding, which is charged by Blue Energy. With thepresentation of sample electric car and filling spot ofthe HSE Group, we wish to present the beginning oflong-term planned action Ekomobil aimed at promotingenvironmentally friendly mobility, which isbased on renewable energy sources and other advancedtechnologies of ecological mobility whichwe wish to establish within the entire HSE Group.

112 Annual Report 2011In the following stages of Ekomobil action we expectthat the initiation of environmentally friendly mobilitywill not only be followed by government institutions,but also the companies and establishmentswhich recognise their challenge.Ekomobil action was initiated by signing theletter of intent as at 18 April 2011 for cooperationin demonstration project of setting filling spots forelectric battery vehicles and the purchase of electricvehicles related to the use of RES with the purposeto decrease greenhouse gas emissions in traffic andelectricity production. With Ekomobil action, thesignatories of the letter wish to establish a commonpoint which will enable the coordination of variousinterests in the area of use of energy and mobility.Changes in technologies and habits in order toassure environmentally friendly mobility will begradual. Therefore, the support and cooperation ofgovernment institutions and companies is of keyimportance for achieving the highest possible extentof joint environmental protection effects with groupefforts.

Social responsibility report1133.3 Responsibility to the broader social communityNot only standards prescribed by the State, but mostly the organisationalculture have bound us to socially responsible behaviour from the beginning.In the summer months, we used the proceeds collected in the Blue EnergyFund to provide support to the Institute for Environmental Studies ERICO Velenje,which organised the 23rd international summer camp for recipients of theZois scholarship and gifted students from other countries.Throughout the whole year, we have helped organizations, associations, individuals,who especially need help or support, meetings and conferences from thearea of EE, RES and EEU in the form of dedicated sponsorships and donations.We concluded the year with humanitarian action »We Bring Gifts to SafeHouses with Our Letters« (»S pismi obdarujemo, varne hiše nagrajujemo«) inthe moderated chat room Blue Jan the visitors of Santa’s land wrote letters to theSanta and the company HSE transformed the letters in donation and intended itto safe houses in Slovenia.

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4Financial reportof the companyHSE2011

116 Annual Report 20114.1 Auditor’s Report

Financial report of the company HSE117

118 Annual Report 20114.2 Statement of management’s responsibilityThe Managing Director is responsible to prepare the financial statements foreach individual financial year in accordance with the International FinancialReporting Standards (»IFRS«) as adopted by the European Union in a mannerthat they give a true and fair view of the financial position of the companyHolding Slovenske elektrarne d.o.o.The management reasonably expects that in the foreseeable future thecompany will have sufficient assets to continue its operations and therefore thefinancial statements are prepared on a going concern basis.The management’s responsibility in preparation of the financial statementsincludes the following:• Accounting policies are appropriately selected and consistently used;• Judgements and assessments are reasonable and wise;• Financial statements are prepared in accordance with IFRS adopted bythe European Union.The management is responsible for keeping relevant records, which ineach moment represent the company’s financial position with a reasonableprecision, and for ensuring that the company’s financial statements areconsistent with IFRS adopted by the EU. The management is also responsiblefor protecting company’s property and preventing and discovering abuses andother irregularities.The management confirms that the financial statements are prepared inaccordance with the provisions of IFRS without reservation when used.As at 17 May 2012, the Managing Director adopted the financial statements ofthe company Holding Slovenske elektrarne d.o.o. for the financial year endedas at 31 December 2011.Ljubljana, 17 May 2012Matjaž Janežič, M.Sc.Managing Director of HSE d.o.o.

Financial report of the company HSE1194.3 Introduction to the preparation of financial statementsOn the basis of the General Meeting decision of the owner of thecompany Termoelektrarna Šoštanj as at 29 November 2010, all financialstatements and explanatory notes for 2011 are prepared in accordancewith the International Financial Reporting Standards (hereinafter: IFRS)as adopted by the EU, for the first time. 1 January 2010 is the date oftransition after which the company prepared the opening statement ofthe financial position in accordance with IFRS. Until 2011, the companyhad been preparing the financial statements in accordance with theSlovene Accounting Standards and the interpretations by the SloveneInstitute of Auditors.

120 Annual Report 20114.4 Financial statements4.4.1 Statement of financial positionin EUR Note* 31 December 2011 31 December 2010 1 January 2010ASSETS 1,311,214,398 1,198,207,987 1,176,888,248A. LONG-TERM ASSETS 1,019,794,308 985,545,307 976,637,084I. Intangible assets 1 19,888,785 6,388,682 4,166,278II. Property, plant and equipment 2 12,832,828 9,804,160 8,523,248IV. Long-term investments in subsidiaries 3 982,338,595 965,079,695 957,170,705V. Other long-term investments and loans 246,500 246,500 655,350VI. Long-term operating receivables 870,313 885,931 2,872,054VIII. Deferred tax assets 4 3,617,287 3,140,339 3,249,449B. CURRENT ASSETS 291,420,090 212,662,680 200,251,164II. Inventories 1,324 471 563III. Short-term investments and loans 109,317,324 48,336,904 43,427,5211. Short-term investments 0 143,079 43,427,5212. Short-term financial receivables and loans 5 109,317,324 48,193,825 0IV. Short-term operating receivables 6 150,285,915 118,253,895 119,438,043V. Current tax assets 22 6,041,373 1,405 0VI. Other short-term assets 7 7,571,022 6,626,166 7,165,751VII. Cash and cash equivalents 8 18,203,132 39,443,839 30,219,286EQUITY AND LIABILITIES 1,311,214,398 1,198,207,987 1,176,888,248A. EQUITY 9 970,128,945 929,748,299 845,844,637I. Called-up capital 29,558,789 29,558,789 29,558,789II. Capital surplus 561,243,185 561,243,185 561,243,185III. Revenue reserves 359,472,048 296,361,537 226,498,386IV. Fair value reserve −3,509,887 2,839,086 −1,573,172V. Retained earnings 23,364,810 39,745,702 30,117,449B. LONG-TERM LIABILITIES 108,727,007 116,414,039 132,461,777I. Provisions for termination and jubilee benefits 10 734,698 639,825 495,138II. Other provisions 11 7,982,714 7,657,477 13,899,743III. Other long-term liabilities 0 1,471,334 1,471,334IV. Long-term financial liabilities 12 100,009,595 106,619,094 116,595,562VI. Deferred tax assets 0 26,309 0C. SHORT-TERM LIABILITIES 232,358,446 152,045,649 198,581,834II. Short-term financial liabilities 13 80,108,197 25,311,303 75,274,272III. Short-term operating liabilities 14 146,082,532 116,949,788 111,057,674IV. Current tax liabilities 0 3,443,610 10,888,497V. Other short-term liabilities 15 6,167,717 6,340,948 1,361,391* The accompanying notes are an integral part of the financial statements and should be read in conjunction with them.

Financial report of the company HSE1214.4.2 Income statementin EUR Note* 2011 20101. Net sales revenue 17 1,358,117,730 907,537,5914. Other operating revenue 901,692 2,548,979GROSS RETURN ON OPERATIONS 1,359,019,422 910,086,5705. Costs of goods, materials and services 18 1,292,558,665 808,047,7516. Labour costs 19 8,551,082 7,948,8737. Write-downs in value 1,461,403 1,179,7778. Other operating expenses 830,847 1,328,028OPERATING PROFIT OR LOSS 55,617,425 91,582,1419. Financial revenue 20 5,685,349 10,015,70810. Financial expenses 21 3,298,008 3,237,347TOTAL PROFIT OR LOSS 2,387,341 6,778,361PROFIT OR LOSS BEFORE TAX 58,004,766 98,360,50211. Corporate income tax 11,190,185 18,792,89112. Deferred taxes 84,962 76,207TAX 22 11,275,147 18,869,09813. NET PROFIT OR LOSS FOR THE ACCOUNTING PERIOD 23 46,729,619 79,491,404* The accompanying notes are an integral part of the financial statements and should be read in conjunction with them.4.4.3 Statement of other comprehensive incomein EUR Note* 2011 201013. NET PROFIT OR LOSS FOR THE FINANCIAL YEAR 23 46,729,619 79,491,40418. Net effective part of change in fair value of instrument for cash flow hedging 24 −6,348,973 4,412,25819. TOTAL COMPREHENSIVE INCOME FOR THE FINANCIAL YEAR 40,380,646 83,903,662* The accompanying notes are an integral part of the financial statements and should be read in conjunction with them.

122 Annual Report 20114.4.4 Cash flow statementin EUR 2011 2010A. Cash flows from operating activitiesa) Items of income statement 35,064,614 83,341,946Operating revenue (except from revaluation) and financial income from operating receivables 1,360,553,426 913,724,759Operating revenue (except from revaluation and amortisation/depreciation) and financial expensesfor operating liabilities−1,305,269,023−815,092,745Income taxes and other taxes not included in operating expenses −20,219,789 −15,290,068b) Changes in net operating assets in statement of financial position items −5,266,260 −3,688,882Opening less closing operating receivables −31,850,038 3,127,696Opening less closing other assets −944,856 539,835Opening less closing deferred tax assets −476,948 −32,903Opening less closing inventories −853 92Closing less opening operating liabilities 29,640,313 −5,012,584Closing less opening other liabilities and provisions −1,660,187 −2,284,709Closing less opening deferred tax liabilities 26,309 −26,309c) Net cash from operating activities 29,798,354 79,653,064B. Cash flows from investing activitiesa) Cash receipts from investing activities 212,038,811 69,168,309Cash receipts from interest 1,757,878 621,379Cash receipts from dividends and shares in profits of associates 1,847,040 0Cash receipts from intangible assets (including advances) 5,659,866 3,619,343Cash receipts from property, plant and equipment (including advances) 19,027 377,315Cash receipty from short-term loans 202,755,000 12,090,000Cash receipts from other long-term investments 0 183,622Cash receipts from other short-term investments 0 52,276,650b) Cash disbursements for investing activities −305,166,831 −77,127,278Cash disbursements to acquire intangible assets (including advances) −19,609,806 −6,424,925Cash disbursements to acquire property, plant and equipment (including advances) −4,543,125 −2,468,363Cash disbursements from short-term loans −263,755,000 −60,190,000Cash disbursements from investments in subsidiaries, associates and jointly controlled companies −17,258,900 −8,043,990c) Net cash from investing activities −93,128,020 −7,958,969C. Cash flows from financing activitiesa) Cash receipts from financing activities 187,350,000 19,000,000Cash receipts from short-term loans received 187,350,000 19,000,000b) Cash disbursements from financing activities −145,258,629 −81,464,573Interest paid on loans received −3,096,673 −2,777,617Cash disbursements from long-term loans received −9,811,956 −44,686,956Cash disbursements from short-term loans received −132,350,000 −34,000,000c) Net cash from financing activities 42,091,371 −62,464,573D. Cash and cash equivalents at the beginning of period 39,443,839 30,219,286Effects of changes in exchange rates on cash and cash equivalents −2,412 −4,969Increase/(decrease) of cash and cash equivalents −21,238,295 9,229,522E. Cash and cash equivalents at the end of period 18,203,132 39,443,839* The accompanying notes are an integral part of the financial statements and should be read in conjunction with them.

Financial report of the company HSE1234.4.5 Statement of changes in equityCalled-up capitalRevenue reservesRetained earningsin EUR Share capitalCapital surplusOther revenuereservesFair valuereservesRetainednet profitNet profit or loss for the year TOTALA.1. Balance as at 1/1/2010 29,558,789 561,243,185 226,498,386 −1,573,172 30,117,449 0 845,844,637B.2. Changes in total comprehensive income 0 0 0 4,412,258 0 79,491,404 83,903,662a) Net profit or loss for the year 79,491,404 79,491,404b) Other changes in total comprehensive income 4,412,258 4,412,258B.3. Changes in equity 0 0 69,863,151 0 −30,117,449 −39,745,702 0b) Allocation of portion of net profit for the reporting period toother components of equity in accordance with the decision ofmanagement and supervisory bodies39,745,702 −39,745,702 0c) Allocation of a portion of net profit to additional reserves inaccordance with the general meeting resolution30,117,449 −30,117,449 0C. Balance as at 31/12/2010 29,558,789 561,243,185 296,361,537 2,839,086 0 39,745,702 929,748,299A.2. Balance as at 1/1/2011 29,558,789 561,243,185 296,361,537 2,839,086 39,745,702 0 929,748,299B.2. Changes in total comprehensive income 0 0 0 −6,348,973 46,729,619 40,380,646a) Net profit or loss for the year 46,729,619 46,729,619b) Other changes in total comprehensive income −6,348,973 −6,348,973B.3. Changes in equity 0 0 63,110,511 0 −39,745,702 −23,364,809 0b) Allocation of portion of net profit for the reporting period toother components of equity in accordance with the decision ofmanagement and supervisory bodies23,364,809 −23,364,809 0c) Allocation of a portion of net profit to additional reserves inaccordance with a general meeting resolution39,745,702 −39,745,702 0C. Balance as at 31/12/2011 29,558,789 561,243,185 359,472,048 −3,509,887 0 23,364,810 970,128,945ACCUMULATED PROFIT 0 0 0 0 0 23,364,810 23,364,810* The accompanying notes are an integral part of the financial statements and should be read in conjunction with them.

124 Annual Report 20114.5 Notes to the financial statements4.5.1 Reporting companyTermoelektrarna Šoštanj d.o.o. (hereinafter: the »company«)is a company with its registered office in Slovenia.The address of the registered office is Koprskaulica 92, Ljubljana. The separate financial statementsof the company for the year ended 31 December 2011are presented below.The company Holding Slovenske elektrarne d.o.o.is the controlling company of Holding Slovenske elektrarneGroup in Slovenia.4.5.2 Basis for preparationIn the preparation of financial statements as at 31 December2011, the company considered:••IFRS, which include International AccountingStandards (IAS), Interpretations issued by theStanding Interpretations Committee (SIC),International Financial Reporting Standards(IFRS) and Interpretations issued by InternationalFinancial Reporting Interpretations Committee(IFRIC) as adopted by the European Union(hereinafter: the »EU«);••Companies Act;••Energy Act;••Corporate Income Tax Act;••Corporate Income Tax Act;••Accounting Rules of the Company; and••Other applicable legislation.••Amendments to various standards andinterpretations »Improvements to IFRSs (2010)«resulting from the annual improvement projectof IFRS published on 6 May 2010 (IFRS 1, IFRS 3,IFRS 7, IAS 1, IAS 27, IAS 34, IFRIC 13) primarily witha view to removing inconsistencies and clarifyingwording, adopted by the EU on 18 February 2011(amendments are to be applied for annual periodsbeginning on or after 1 July 2010 or 1 January 2011depending on standard/interpretation);••Amendments to IFRIC 14 »IAS 19 — The Limiton a defined benefit Asset, Minimum FundingRequirements and their Interaction« – Prepaymentsof a Minimum Funding Requirement, adopted bythe EU on 19 July 2010 (effective for annual periodsbeginning on or after 1 January 2011);••IFRIC 19 »Extinguishing Financial Liabilitieswith Equity Instruments«, adopted by the EUon 23 July 2010 (effective for annual periodsbeginning on or after 1 July 2010).The adoption of these amendments to the existingstandards has not led to any changes in the Entity’saccounting policies.b) Standards and Interpretations issued by IFRIC andadopted by the EU but not yet effective••Amendments to IFRS 7 »Financial Instruments:disclosures« – Transfer of assets, adopted by the EUon 22 November 2011 (effective for annual periodsbeginning on or after 1 July 2011).a) Standards and Interpretations effectivein the current period••Amendments to IAS 24 »Related Party Disclosures«– Simplifying the disclosure requirements forgovernment-related entities and clarifying thedefinition of a related party, adopted by the EUon 19 July 2010 (effective for annual periodsbeginning on or after 1 January 2011);••Amendments to IAS 32 »Financial Instruments:presentation« – Accounting for rights issues,adopted by the EU on 23 December 2009(effective for annual periods beginning on or after1 February 2010);••Amendments to IFRS 1 »First-time Adoption ofIFRS« – Limited Exemption from ComparativeIFRS 7 Disclosures for First-time Adopters, adoptedby the EU on 30 June 2010 (effective for annualperiods beginning on or after 1 July 2010);The company has elected not to adopt these standards,revisions and interpretations in advance of theireffective dates. The company anticipates that theadoption of these standards, revisions and interpretationswill have no material impact on the financialstatements of the company in the period of initial application.c) Standards and Interpretations issued by IFRIC butnot yet adopted by the EUAt present, IFRS as adopted by the EU do not significantlydiffer from regulations adopted by the InternationalAccounting Standards Board (IASB) except fromthe following standards, amendments to the existingstandards and interpretations, which were not endorsedfor use as at 17 May 2012.

Financial report of the company HSE125••IFRS 9 »Financial Instruments« (effective for annualperiods beginning on or after 1 January 2015);••IFRS 10 »Consolidated financial statements«(effective for annual periods beginning on or after1 January 2013);••IFRS 11 »Joint Arrangements« (effective for annualperiods beginning on or after 1 January 2013);••IFRS 12 »Disclosures of Involvement with otherEntities« (effective for annual periods beginningon or after 1 January 2013);••IFRS 13 »Fair Value Measurement« (effectivefor annual periods beginning on or after1 January 2013);••IAS 27 (revised in 2011) »Separate FinancialStatements« (effective for annual periodsbeginning on or after 1 January 2013);••IAS 28 (revised in 2011) »Investments in Associatesand Joint Ventures« (effective for annual periodsbeginning on or after 1 January 2013);••Amendments to IFRS 1 »First-time Adoption ofIFRS« – Severe Hyperinflation and Removal of FixedDates for First-time Adopters (effective for annualperiods beginning on or after 1 July 2011);••Amendments to IFRS 7 »Financial Instruments:Disclosures«- Offsetting Financial Assets andFinancial Liabilities (effective for annual periodsbeginning on or after 1 January 2013);••Amendments to IFRS 9 »Financial Instruments«and IFRS 7 »Financial Instruments: Disclosures«– Mandatory Effective Date and TransitionDisclosures;••Amendment to IAS 1 »Presentation of financialstatements« – Presentation of Items of OtherComprehensive Income (effective for annualperiods beginning on or after 1 July 2012);••Amendments to IAS 12 »Income Taxes« – Deferredtax: Recovery of Underlying Assets (effective forannual periods beginning on or after 1 January2012);••Amendment to IAS 19 »Employee Benefits«– Improvements to the Accounting for PostemploymentBenefits (effective for annual periodsbeginning on or after 1 January 2013);••Amendments to IAS 32 »Financial Instruments:Disclosures«- Offsetting Financial Assets andFinancial Liabilities (effective for annual periodsbeginning on or after 1 January 2014);••IFRIC 20 »Stripping Costs in the Production Phaseof a Surface Mine« (effective for annual periodsbeginning on or after 1 January 2013).The company anticipates that the adoption of thesestandards, amendments to the existing standards andinterpretations will have no material impact on the financialstatements of the company in the period ofinitial application.At the same time, hedge accounting regardingthe portfolio of financial assets and liabilities, whoseprinciples have not been adopted by the EU, is stillunregulated.According to the company’s estimates, applicationof hedge accounting for the portfolio of financial assetsor liabilities pursuant to IAS 39: »Financial instruments:recognition and measurement«, would notsignificantly impact the financial statements, if appliedas at the balance sheet date.4.5.3 Basis of measurementCompany’s financial statements are prepared on thebasis of balance sheet items historical values, exceptthe following assets and liabilities carried at fair value.4.5.4 Currency reports4.5.4.1 Functional and presentation currencyThe financial statements contained in this Report arepresented in euro (€) without cents. The €o has beenthe functional and presentation currency of the company.Due to the rounding of amounts, minor but insignificantdeviations exist in the tables.4.5.4.2 Foreign currency translationTransactions expressed in a foreign currency aretranslated into the relevant functional currency at theexchange rate applicable on the date of transaction.Cash and liabilities expressed in a foreign currencyat the end of the reporting period are converted intofunctional currency at then applicable exchange rate.Positive or negative foreign exchange differences aredifferences between amortised cost in the functionalcurrency at the beginning of the period, which is repairedfor the amount of effective interest and paymentsduring the period, as well as amortised costin foreign currency converted at the exchange rate atthe end of the period. Non-cash assets and liabilitiesexpressed in a foreign currency and measured at fair

126 Annual Report 2011value are converted in the functional currency at theexchange rate on the date when the amount of fairvalue is determined. Foreign exchange differencesare recognised in the income statement, namely accordingthe net principle (difference between positiveand negative foreign exchange differences amongrevenue or difference between negative and positiveforeign exchange differences and expenses).4.5.5 Use of assessments and judgementsThe preparation of financial statements requires thatthe management forms certain assessments and assumptionswhich affect the disclosed amounts ofassets and liabilities, revenue and expenses and disclosuresof contingent assets and expenses in the reportingperiod.Assessments and judgements are based on pastexperience and other factors that are considered reasonablein the given circumstances and on the basisof which the judgements on the carrying amount ofassets and liabilities are expressed. Since the assessmentsand assumptions are subject to subjectivejudgement and certain level of uncertainty, subsequentactual results can differ from assessments. Theassessments are examined on regular basis. Changesin accounting estimates are recognised in the periodin which the assessments were changed if the changeaffects only that period or in the period of change andin future periods in case the change affects future periods.Assessments and assumptions are present at leastat the following judgements:••Assessment of useful life of amortisable assets(disclosures 4.5.7.1 and 4.5.7.2);••Test of impairment of assets (Disclosure 4.5.8.1Points 1, 2 and 3);••Assessment of fair value of derivatives (Disclosures4.5.8.8.3 and 4.5.8.8.4);••Assessment of realisable values of receivables(disclosure 4.5.8.8.1);••Assessment of provisions for jubilee andtermination benefits (Disclosure 4.5.8.1 Point 10);••Assessment of other provisions (Disclosure 4.5.8.1Point 11); and••Assessment of contingent liabilities and assets(Disclosure 4.5.8.1 Point 16).4.5.6 Branch and representative officesThe company has two foreign branch offices in CzechRepublic and Slovakia and two representative officesin Serbia and Romania. In 2011, the company did notperform transactions through branch offices sincethe trade with electricity was transferred to the solecompany. The operations of branch and representativeoffices are included in financial statements of thecompany.4.5.7 Significant accounting policiesThe company’s financial statements are prepared onthe basis of accounting policies presented below. Theabovementioned accounting policies are used for allyears presented, unless otherwise indicated.The comparative data was adopted when neededso that they are in accordance with the presentation ofdata in the current year.4.5.7.1 Intangible assetsIntangible assets are long-term assets enabling performanceof the company’s registered activities,whereas physically they do not exist. The company’sintangible assets comprise long-term property rightsand emission coupons for the purposes of electricityproduction in the HSE Group. Emission coupons fortrading are disclosed among inventories.Upon initial recognition, an intangible asset ismeasured at cost. The cost also includes import andnon-refundable purchase taxes after the commercialand other discounts have been deducted and all costsdirectly attributable to preparation of an asset for theintended use.Intangible assets are subsequently measured usingthe cost model.Amortisation is accounted for on a straight-linebasis, taking into account the useful life of each individual(integral) part of an intangible asset. The amortisationbegins to be calculated from the cost when anasset is available for use.Emission coupons are not depreciated. The valueof the use of emission coupons is calculated on thebasis of method of weighted average cost.The company has no intangible assets, for which itwould record the residual value when purchased.

Financial report of the company HSE127Depreciation methods, useful life and other valuesof groups of assets are examined at the end of eachfinancial year and adapted if needed.Individual items of intangible assets have the followinguseful lives:Amortisation categories of intangible assetsAmortisation rateUseful lifeComputer software 10 – 33.33% 3 – 10 yearsSubsequent costs in relation to intangible assets arecapitalised only in cases when they increase futureeconomic benefits arising from an asset to which thecosts refer. All other costs are recognised in profit orloss as expenses as soon as they are incurred.4.5.7.2 Property, plant and equipmentProperty, plant and equipment are long-term assetsowned by the company and used for the performanceof its registered activities. Property, plant and equipmentcomprise land, buildings, production equipment,other equipment and assets in the course ofconstruction.Property, plant and equipment (hereinafter: »operatingfixed assets«) are disclosed at cost less accumulateddepreciation and accumulated loss fromimpairment. Cost includes costs that can be directlyattributed to the acquisition of an item of property,plant and equipment. The parts of items of plant andequipment with different useful lives are accountedfor as individual assets.For later measurement of property, plant andequipment the cost model is used.The company has no intangible assets, for which itwould record the residual value when purchased.Amortisation is calculated on a straight-line basis,taking into account the useful life of individual (integral)part of a fixed asset and residual value. The amortisationbegins to be calculated from the cost whenan asset is available for use. Assets in the course ofconstruction or production are not depreciated.Individual items of property, plant and equipmenthave the following useful lives:Amortisation categories of property, plant andequipmentAmortisation rateUseful lifeBuildings 2% 50 yearsProduction equipment 4% 25 yearsComputer equipment 20 – 50% 2 – 5 yearsFurniture 10 – 25% 4 – 10 yearsSmall tools 20 – 33.33% 3 – 5 yearsCars 20% 5 yearsOther plants and equipment 20 – 33.33% 3 – 5 yearsDepreciation methods, useful life and other values ofgroups of assets are examined at the end of each financialyear and adapted if needed.The costs of replacement a part of fixed asset areattributed to the carrying amount of this asset in caseit is possible that future economic benefits related to apart of this asset will flow to the company and if costscan be reliably measured. All other costs (e.g. regularmaintenance) are recognised in profit or loss as expensesas soon as they are incurred.Gains and losses that occur in disposal of property,plant and equipment are recognised as a differencebetween the net sales value and carrying amount of adisposed asset and are recognised among other operatingrevenue or write-downs in value.4.5.7.3 Long-term investments in subsidiariesInvestments in subsidiaries are those where the companyhas the controlling influence and it performsconsolidated financial statements for this group ofcompanies.In financial statements, investments in subsidiariesare valued at cost.The company recognises revenue from investmentin the period when the decision on payment ofprofit shares was adopted.Additional inputs in subsidiaries increase the costof investments.Any indications of impairment of investments insubsidiaries are determined on an annual basis.In the event impartial evidence exists that a lossdue to impairment was incurred, the amount of lossis measured as the difference between the carryingamount of a financial asset and the present value ofestimated future cash flows discounted at the marketinterest rate for similar financial assets, and recognisedas revaluation operating expense.

128 Annual Report 20114.5.7.4 Financial instruments4.5.7.4.2 Non-derivative financial liabilitiesFinancial instruments include the following assumptions:••Non-derivative financial assets;••Non-derivative financial liabilities;••Derivatives.4.5.7.4.1 Non-derivative financial assetsNon-derivative financial assets comprise cash andcash equivalents, receivables and loans and investment.Financial asset is derecognised when contractualrights to cash flows from this asset are discontinued orwhen the rights to contractual cash flows from the financialasset are transferred on the basis of a transactionin which all risks and benefits from the ownershipof financial asset are transferred.— Loans and receivablesLoans and receivables are non-derivative financial assetswith fixed or determinable payments that are notquoted in an active market.At initial recognition, loans and receivables aredisclosed at fair value increased by direct costs oftransaction. After initial recognition, loans and receivablesare measured at amortised cost and decreasedby the loss due to impairment. Loans and receivablesare recorded as financial and business assets and includeloans received, receivables due from buyersand receivables due from others.In the books of account loans are recognised in accordancewith settlement date, while receivables arerecognised in accordance with trading date.They are included under current assets, except incase of maturities of more than 12 months after thedate of the statement of financial position. In suchcase they are classified under long-term assets.— Cash and cash equivalentsCash and cash equivalents comprise cash, bank depositsup to three months and other short-term quicklyrealisable investments with original maturity of threemonths or less. They are carried at cost. Overdrafts onbank accounts are included under short-term financialliabilities.Non-derivative financial liabilities comprise operating,financial and other liabilities. Financial liabilities areinitially carried at fair value increased by the costs thatare directly attributable to the transaction. After theinitial recognition, financial liabilities are measured atamortised cost using the effective interest method.Among them the company records loans receivedwith interest, liabilities to suppliers and liabilities toothers.Loans received are initially recognised on the dateof their settlement (payment), while other non-derivativefinancial liabilities are recognised on the tradedate.The portion of long-term financial liabilities thatfalls due within less than a year after the cash flow statementdate is disclosed under short-term liabilities.4.5.7.4.3 DerivativesDerivatives are used for the hedging of company’sexposure against interest rate risks. The company hasconcluded interest and currency swaps as well as forwardcontracts for the purchase of electricity in the followingyears.They are financial instruments that do not requireinitial financial investment, while their value is changingdue to change in interest rate.Derivatives are initially recognised at fair value,namely according to net principle, which means thatthe sole value of transaction concluded is not disclosedin financial statements.After the initial recognition, derivatives are measuredat fair value, while the corresponding changesare considered in the following manner:••When a derivative is defined as hedging in caseof exposure to changeability of cash flows thatmay be attributed to an individual risk relatedto recognised asset, liability or very probableenvisaged transactions, which can affect the profitor loss, the successful portion of changes in fairvalue of derivative is recognised in comprehensiveincome and disclosed in risk hedging reserve.Unsuccessful portion of changes in the fair valueof financial instrument is directly recognisedin the income statement. The company shalldiscontinue prospectively the hedge accounting ifthe hedge no longer meets the criteria for hedgeaccounting, if the hedging instrument is sold,terminated or exercised. The accumulated profit

Financial report of the company HSE129or loss recognised in comprehensive incomeremains recorded in the hedging reserve untilthe envisaged transaction impacts the profit orloss. If the envisaged transactions cannot beexpected any more, the amount recognised inother comprehensive income must be directlyrecognised in profit or loss. In other cases, theamount recognised as comprehensive income istransferred to profit or loss for the same period inwhich the protected item affects the profit or loss.••Effects of other derivatives, which are notdetermined as risk hedges in case of exposure tocash flow changeability or cannot be attributedto individual risk related to recognised asset orliability, are recognised in profit or loss.4.5.7.5 InventoriesInventories mostly include emission trading coupons(at the end of 2011, emission coupons were not in inventory).Inventories are carried at the lower of the two: historicalcost or net realisable value. The historical costincludes cost that is composed of purchase price, importduties and direct costs of purchase. The purchaseprice is reduced by discounts received. Direct costs ofpurchase are costs of transport services, costs of loading,cargo handling and unloading, costs of monitoringof goods and other costs that can be attributedto directly obtained merchandise, materials and services.Purchase price discounts comprise discountsindicated in the invoice as well as discounts that arereceived later and refer to individual purchase.If the prices of the items that are purchased anewin the accounting period differ from the prices of inventoryitems of the same class, the first-in first-out(FIFO) method is applied to decrease the quantities ofinventories during the year.Net realisable value is assessed on the basis ofselling price in the normal course of business reducedby the estimated costs of completion and sales.At least once per year, namely as at the date ofpreparation of annual financial statements, the evidenceon impairment of inventories is assessed. Theimpairment of inventories is assessed for each individualtype of inventories. Individual types of inventoriesare classified as groups of inventories with similarcharacteristics on the basis of time component ofchanges in inventories. In the assessment of impairmentfor an individual group, the criteria of professionalassessment, further utilisation or sale are used.4.5.7.6 Impairment of assets4.5.7.6.1 Financial assetsA financial asset is considered impaired if there is objectiveevidence from which it is evident that, due toone or more events, the expected future cash flowsarising from this assets that can be reliably measuredhave been decreased.Objective evidence on the impairment of financialassets can be: non-compliance or violation by thedebtor, deterioration of borrowers’ solvency, signsthat the debtor will bankrupt and disappearance ofactive market for such instrument.— Impairment of receivables and loansThe company individually assesses the evidence onimpairment of receivables.Whether it is assessed that the carrying amountof receivable has exceeded its fair value (realisablevalue), the receivable is impaired.Doubtful receivables from others are those whichare not settled within 180 days after their due date.Disputed receivables are those which comply withone of the following conditions:••The legal collection procedure began at the court;••The decision on beginning of enforcementsettlement, liquidation or bankruptcy is published.For subsequent write-offs of receivables relevant documentsof proof are needed: legally enforceable decisionsof enforced settlement, bankruptcy proceeding,court ruling or other relevant document.In case all actions were performed with the carefulnessof a good manager, with intention to repaycertain unsettled receivable and in case that due tothe amount of receivable, it would not be economicfor the company to enter the collection procedurethrough court, receivables are finally written down infull based on the management‘s decision.The company assesses evidence on loan impairmentfor each significant loan.Loss due to impairment related to financial assetcarried at amortised cost is calculated as differencebetween the carrying amount of an asset and expectedcash flows discounted at historical interest rate.Loss is recognised in profit or loss.

130 Annual Report 20114.5.7.6.2 Non-financial assetsOn each reporting date the company verifies the carryingamount of significant non-financial assets withthe purpose to establish whether there are any signsof impairment. If such signs exist, the recoverableamount of the asset is estimated.The recoverable amount of an asset or cash-generatingunit is the higher of the two: value in use or fairvalue less costs of sale. When determining the valueof an asset in use, the expected future cash flows arediscounted to their current value by using the discountrate before tax that reflects regular market assessmentsof the time value of money and risks thattypically occur in relation to the asset. For the purposeof impairment test, the assets that cannot be individuallytested are classified in the smallest possible groupof assets that generate cash flows from further use andare mostly independent from receipts of other assetsand groups of assets (cash-generating unit).The impairment of an asset or the cash-generatingunit is recognised when its carrying amount exceedsits recoverable amount. Impairment is disclosed in theincome statement.At the end of the reporting period, the companyevaluates losses due to impairment in previous periodsand thus establishes whether the loss has decreasedor even disappeared. Loss due to impairmentis reversed in case there has been a change in assessments,on the basis of which the company definesthe recoverable amount of an asset. The impairmentloss is reversed to the amount up to which the asset’sincreased carrying amount does not exceed the carryingamount that would have been determined netof depreciation had no impairment loss been recognisedfor the asset in prior periods.As at 31 December 2002, the general equity revaluationadjustments included the revaluation ofshare capital before 2002 in accordance with thenapplicable Slovene Accounting Standards. The adjustmentdue to the transfer to new Slovene AccountingStandards has been transferred to capital surplus. Theamount can only be used for increase in share capital.Other reserves are amounts, which are purposelyretained earnings from the previous years. They arecreated on the basis of the decision by relevant managementand supervisory body.Fair value reserve represents the revaluationamounts of individual categories of assets.Unallocated profit of the current year is disclosedin retained earnings.4.5.7.8 Provisions for jubilee andtermination benefitsIn accordance with legal regulations, collective agreementand internal rules, the company is obliged topay jubilee benefits to employees and terminationbenefits on their retirement for which long-term provisionsare created. There are no other existing pensionliabilities.Provisions are created in the amount of estimatedfuture payments for termination and jubilee benefitsdiscounted at the end of the financial year. The calculationis prepared for each employee by taking intoaccount the costs of termination benefits on retirementand costs of all expected jubilee benefits untilretirement. The calculation with the use of projectedunit is prepared by actuary. Payments for terminationbenefits on retirement and jubilee benefits decreasethe created provisions.4.5.7.7 Equity4.5.7.9 Other provisionsTotal equity of the company represents its liability toowners which falls due if the company ceases to operate,whereby the amount of equity is adjusted withrespect to the then attainable price for the company’snet assets. It is determined by both the amounts investedby owners and the amounts generated in thecourse of operation that belong to the owners. It isdecreased by the loss incurred in the course of operationsand increased by the profit in the period.Nominal capital and capital surplus representowner’s cash contributions and contributions in kind.Provisions are recognised when the company has a legalor constructive obligations arising from past event,which can be reliably assessed, and when it is likelythat that an outflow of resources embodying economicbenefits will be required to settle the liability.The amount of the provision must be equal tothe present value of the expenditure expected to berequired to settle the liability. Since provisions are intendedfor covering probable, but not certain obligations,the amount recognised as a provision is merelythe best estimate of the expenditure needed for the

Financial report of the company HSE131settlement of obligation existing on the date of thestatement of financial position. In reaching the bestestimate of a provision, the risks and uncertainties thatinevitably surround the events and circumstances aretaken into account.Provisions are directly decreased by costs or expenses,for which they were created to cover. Thismeans that in the financial year such costs or expensesdo not appear in the profit or loss anymore.Whether the expected liabilities do not appear,the reversal of created provisions is charged againstoperating expenses.4.5.7.10 Other assets and liabilitiesOther assets include long-term and short-term deferredcosts and accrued revenue.Deferred costs or expenses are amounts incurredbut not yet charged against the profit or loss. Accruedrevenue is revenue that is taken into account in theprofit or loss, although they have not been chargedyet.Other liabilities include long-term and short-termaccrued costs and deferred revenue.Accrued costs are amounts that have not occurredyet, but they will in the future and are already influencingthe profit or loss.Deferred revenue is deferred revenue that willcover estimated expenses during a period of morethan one year.4.5.7.11 Contingent liabilities and assetsContingent liability is:••A possible liability arising from past eventsand whose existence is confirmed solely by theoccurrence or non-occurrence of one or moreuncertain future events that the company does notfully control; or••a present obligation arising from past events,which is not recognised, since it is not probablethat the outflow of resources embodying economicbenefits will be required to settle the obligationor the amount of obligation cannot be reliablymeasured.A contingent asset is a possible asset arising frompast events and whose existence is confirmed solelyby the occurrence or non-occurrence of one or moreuncertain future events that the company does notfully control.The company does not recognise contingent assetsand liabilities in the statement of financial position.4.5.7.12 RevenueThe sales revenue is recognised at fair value of the receivedpayment of receivables, namely decreased bydiscounts. The revenue is disclosed when the buyerassumes all significant types of risks and benefits relatedto the ownership of the asset, when there is acertainty in relation to recoverability of a fee and relatedcosts or possibility of repayment of products andwhen the company stops deciding on products sold.Sale of goods is recognised when the companydelivers the products to the client. The client acceptsthe products, while the collectability of associated receivablesis reasonably ensured. In case the companyhas more positive than negative operating foreign exchangedifferences, they are recorded as net revenuefrom the sales of merchandise.Sale of services is recognised in the accountingperiod in which the services are performed as regardsthe conclusion of the transaction estimated on the basisof actually performed service as the proportionalportion of all services performed.Revenue arising from default interest charges andrelated receivables are recognised upon occurrenceif it is probable that the economic benefits related totransaction will inflow to the company. On the contrary,default interest charges are recorded as contingentassets and are recognised in the company’s books ofaccount upon payments. Recording of default interestis considered individually.Other operating revenue related to products andservices is revenue from the reversal of provisions,gains arising from sales of fixed assets, reversal of impairmentof receivables, received compensations andcontractual penalties and similar revenue.Financial revenue comprises revenue from investmentshares, interest of loans and deposits grantedand revenue from parent guarantees granted.

132 Annual Report 20114.5.7.13 Expenses4.5.7.14 Income taxExpenses are recognised if a decrease in economicbenefits in the accounting period gives rise to a decreasein assets or increase in debt and this decreasecan be reliably measured.Operating expenses are recognised once the merchandisehas been sold.Costs of goods sold includes expenses related tothe sales of electricity, trading emission coupons anddependent costs of electricity. In case the companyhas more negative than positive operating foreignexchange differences, they are recorded as costs ofgoods sold.Costs of materials are historical costs of materialspurchased, namely costs of protection equipment,small tools, whose useful life does not exceed oneyear, electricity and fuel, office material, technical literatureand other materials.Costs of services are historical costs of servicespurchased, namely maintenance services, advertisingservices, entertainment, insurance premiums, paymenttransaction and other banking services (exceptinterest), rentals, advisory services, business travelsand similar services.Write-downs in value include amortisation/depreciationcosts related to consistent transfer of value ofamortisable intangible assets and property, plant andequipment.Write-downs in value also include impairments,write-downs and losses from the sales of intangibleassets and property, plant and equipment as well asimpairments or write down of receivables.Labour costs are historical costs that refer to salariesand similar values in gross amounts as well as dutiesthat are calculated from this basis and are not anintegral part of gross amounts.Other operating expenses occur in relation to creationof provisions, environmental charges and otherduties.Financial expenses comprise borrowing costs,including related derivatives and losses from tradingwith emission coupons.Taxes include current and deferred tax liabilities. Currenttax is included in the income statement. The deferredtax is recorded in the income statement and thestatement of financial position.Current tax assets are based on taxable profit forthe period. The taxable profit defers from net profit reportedin the profit or loss, since it excludes the itemsof revenue or expenses that are taxable or deductiblein other years as well as items that are never taxableor deductible. The company’s current tax liabilities arecalculated with tax rates that are applicable on the reportingdate. In case the current tax liability is lowerthan advances paid, the current tax receivable is incurred.Deferred tax is completely disclosed using the liabilitiesmethod after the statement of financial positionfor temporary differences arising between thetax base of assets and liabilities and their carryingamounts in financial statements. Deferred income taxis defined using tax rates (and legislation) applicableon the date of financial position and for which it is expectedto be in use when the receivable for deferredtax is realised or the liability for deferred tax is settled.A deferred tax asset is recognised if there is a possibilitythat a taxable profit will be available in the future,from which it will be possible to utilise temporarydifferences. It represents the amount of the calculatedcorporate income tax on deductible temporary differences.4.5.7.15 Statement of other comprehensiveincomeThe company does not present deferred taxes arisingfrom items of other comprehensive income separatelyin the statement, but it discloses the amount of tax foreach individual item in the explanatory notes.4.5.7.16 Cash flow statementCash flow statement represents changes in cash andcash equivalents of the financial year, for which it isprepared. The part of cash flow statement related tooperations is prepared according to direct methodbased on data of the statement of financial position,while the part related to investment and financing activitiesis prepared according to indirect method.

Financial report of the company HSE1334.5.7.17 Segment reporting4.5.7.19 Specification of IFRS transition effectsThe company does not disclose operations by segmentsin the annual report. Segment reporting mustbe disclosed by the companies whose treasury ordebt securities are traded in the market and companieswhich are issuing treasury or debt securities inpublic security markets.4.5.7.18 Comparable dataIn 2011, the company prepared financial statements inaccordance with IFRS for the first time. In accordancewith the provisions of IFRS 1, 1 January 2010 is consideredas the transition date. Therefore, it was necessaryto convert financial statements for 2010 or reallocatethem and prepare in accordance with IFRS in order toassure comparability as one of basic IFRS principles.Impacts of conversions or transition from SAS to IFRSare presented below.According to the provisions of IFRS 1, the group hasprepared the opening statement of financial positionupon the transition to IFRS, in which all assets and liabilitieswhose recognition is required by IFRS aredisclosed. The values of differences have not beenidentified. However, individual items of assets and liabilities,revenue and expenses in the financial statementsin accordance with IFRS are presented differentlythan in the financial statements in accordancewith SAS. These reclassifications are:a) Income statement for 2010••Operating foreign exchange differences recordedunder financial revenue and expenses are set offand disclosed under net sales revenue;••Default interest to buyers, which were disclosedunder financial revenue, are recorded under otheroperating revenue;••Default interest to suppliers, which were disclosedunder financial expenses, are recorded under otheroperating expenses;••Other revenue is disclosed under other operatingrevenue;••Other expenses are disclosed under otheroperating expenses.Changes in income statement items due to transition to IFRSType of revenue or expenseaccording to SASin EURType of revenue or expenseaccording to IFRS in EUR DisclosureFinancial revenue 530,219 Net sales revenue 386,334 Foreign exchange differences from receivedFinancial expenses −143,885and issued invoicesFinancial revenue 401,294 Other operating revenue 401,294 Revenue from default interest to customersOther revenue 1,443,373 Other operating revenue 1,443,373 Compensations, subsidies, other revenueOther expenses −5,254 Other operating expenses −5,254 Other expensesFinancial expenses −5,990 Other operating expenses −5,990 Expenses for default interestTOTAL 2,219,757 2,219,757

134 Annual Report 2011b) The statement of financial position as at 1/1/2010••Deposits up to three months, which were disclosedunder short-term investments, are part of cash;••Interest on loans received, which were disclosedunder short-term operating liabilities, are part ofshort-term financial liabilities (together with loan);••Current tax liabilities, which were disclosed underother operating liabilities, are separately disclosedin the statement of financial position;Changes in statement of financial position items due to transition to IFRSType of asset or liability accordingto SASin EURType of asset or liability accordingto IFRS in EUR DisclosureShort-term loans to others 28,040,000 Cash and cash equivalents 28,040,000 Deposits up to three monthsShort-term operating liabilities −587,315 Short-term financial liabilities −587,315 Interest on loansShort-term operating liabilities −10,888,497 Current tax liabilities −10,888,497 Separate disclosureof current tax assetsTOTAL 16,564,188 16,564,188c) Cash flow statement for 2010••Receipts and disbursements for acquisition ordisposal of short-term financial investments(deposits up to three months), which weredisclosed under cash flows from investmentactivities, are set off and included under cash;••Initial cash balance is increased by all depositsup to three months, which were open as at1 January 2010;••Disbursements and receipts for acquisitions ordisposals of short-term loans are presented undera separate item among disbursements and receiptsfrom investing activities, separately from other cashflows from short-term financial investments;••Receipts for acquisition of short/term loans aredisclosed under a separate item among receiptsfrom financing activities;••Disbursements for repayment od received long/term and short/term loans are presented undera separate item among disbursements fromfinancing activities;••Foreign exchange differences accounted onthe balance of cash at the end of 2010, whichwere disclosed among operating expenses, arepresented separately among effects of changes inforeign exchange rates.

Financial report of the company HSE135Changes of cash flow statements items due to transition to IFRSType of revenue or expenseaccording to SASCash disbursementsto acquire short-terminvestmentsCash receipts from disposalof short-term investmentsCash disbursementsto acquire short-terminvestmentsCash receipts from disposalof short-term investmentsCash receipts for acquisitionof short-term financialliabilitiesCash repaymentsof long-term financialliabilitiesCash repaymentsof short-term financialliabilitiesv EURType of revenue or expenseaccording to IFRS v EUR Disclosure−286,500,000 Cash and cash equivalents −7,680,000 Deposits tied up to three monthsare disclosed among cash278,820,000−60,190,000Cash disbursements fromshort-term loans granted12,090,000 Cash receipts from short-termloans19,000,000 Cash receipts for acquisitionof short-term loans−44,686,956−34,000,000Cash disbursements fromlong-term loans receivedCash disbursements fromshort-term loans receivedOperating expenses −4,969 Effects of change in foreignexchange rates−60,190,000Separate disclosure of cashdisbursements for short-term loansgranted12,090,000 Separate disclosure of cash receiptsfor short-term loans granted19,000,000 Separate disclosure of cash receiptsfor short-term loans received−44,686,956−34,000,000TOTAL −115,471,925 −115,471,925Separate disclosure of cashdisbursements for long-term loansreceivedSeparate disclosure of disbursementsfor short-term loans received−4,969 Separate disclosure of effects ofchange in foreign exchange rates4.5.7.20 Fair value definition4.5.7.21 Management of financial risksFinancial instruments are disclosed at their fair value.Fair value is the amount by which an asset can be sold,or a liability settled, between knowledgeable, willingparties in an arm’s length transaction.When determining fair value of financial instruments,the following hierarchy of fair value defininglevels is considered:Detection and management of financial risks is determinedin more detail in the business report.In notes to financial statements, the financial risksare presented in connection with items in financialstatements (Point 4.5.8.8 Financial Instruments andRisks).••First level comprises quoted prices (unmodified) inactive markets for equal assets or liabilities;••Second level comprises inputs besides quotedprices included in the first level that are directly (i.e.as prices) or indirectly (i.e. as derived from prices)evident for asset or liability;••Third level comprises input data for an asset orliability that are not based on evident market data.In order to determine the fair value of interest andcurrency swaps we use information submitted to thecompany by the bank where it has concluded an individualswap. Values are verified in the company’sfinancial department.

136 Annual Report 20114.5.8 Disclosures to the company’s financial statements4.5.8.1 Statement of financial position(1) Intangible assetsIntangible assetsin EUR 31 December 2011 31 December 2010 1 January 2010Emission coupons 17,981,378 4,318,112 2,244,000Other long-term property rights 1,907,407 2,070,570 1,922,278Intangible assets 19,888,785 6,388,682 4,166,278Intangible assets comprise emission coupons forthe purposes of electricity production within the HSEGroup and software.In 2011, the company reviewed the useful lives ofimportant software items, determining that the usefullives were appropriate given the current expectationsregarding the usability of these assets.Changes in intangible assetsin EUR Emission coupons Other long-term property rights TOTALCost as at 1/1/2010 2,641,000 4,170,558 6,811,558Acquisitions 10,380,631 560,341 10,940,972Disposals −7,649,744 −154 −7,649,898Cost as at 31/12/2010 5,371,887 4,730,745 10,102,632Written-down value as at 1/1/2010 397,000 2,248,280 2,645,280Amortisation 0 412,049 412,049Disposals −397,000 −154 −397,154Impairments 1,053,775 0 1,053,775Written-down value as at 31/12/2010 1,053,775 2,660,175 3,713,950Carrying amount as at 1/1/2010 2,244,000 1,922,278 4,166,278Carrying amount as at 31/12/2010 4,318,112 2,070,570 6,388,682Cost as at 1/1/2011 5,371,887 4,730,745 10,102,632Acquisitions 27,377,412 286,674 27,664,086Disposals −14,767,921 0 −14,767,921Cost as at 31/12/2011 17,981,378 5,017,419 22,998,797Written-down value as at 1/1/2011 1,053,775 2,660,175 3,713,950Amortisation 0 449,837 449,837Disposals −1,053,775 0 −1,053,775Written-down value as at 31/12/2011 0 3,110,012 3,110,012Carrying amount as at 1/1/2011 4,318,112 2,070,570 6,388,682Carrying amount as at 1/1/2011 17,981,378 1,907,407 19,888,785

Financial report of the company HSE137(2) Property, plant and equipmentProperty, plant and equipmentin EUR 31 December 2011 31 December 2010 1 January 2010Buildings 1,469,574 1,502,449 1,695,415Production equipment 121,930 127,010 0Other equipment 4,099,328 2,168,151 2,343,847Property, plant and equipment being acquired 7,141,996 6,006,550 4,483,986Property, plant and equipment 12,832,828 9,804,160 8,523,248The company’s property, plant and equipment includebusiness premises, equipment and an investment inthe construction of a HPP on the middle Sava River.The company does not have any item of property,plant and equipment under mortgage or financelease.The company has not established any reasons forimpairment of property, plant and equipment in 2011.Changes in property, plant and equipmentProperty, plant andin EURBuildingsProductionequipment Other equipmentequipment beingacquiredTOTALCost as at 1/1/2010 1,948,127 0 6,221,782 4,483,986 12,653,895Acquisitions 0 0 0 2,285,309 2,285,309Disposals −303,372 0 −328,701 0 −632,073Transfers from ongoing investments 86,455 127,010 549,280 −762,745 0Cost as at 31/12/2010 1,731,210 127,010 6,442,361 6,006,550 14,307,131Written-down value as at 1/1/2010 252,712 0 3,877,935 0 4,130,647Depreciation 38,999 0 688,846 0 727,845Disposals −62,950 0 −292,571 0 −355,521Written-down value as at 31/12/2010 228,761 0 4,274,210 0 4,502,971Carrying amount as at 1/1/2010 1,695,415 0 2,343,847 4,483,986 8,523,248Carrying amount as at 1/1/2010 1,502,449 127,010 2,168,151 6,006,550 9,804,160Cost as at 1/1/2011 1,731,210 127,010 6,442,361 6,006,550 14,307,131Acquisitions 0 0 0 4,045,147 4,045,147Disposals 0 0 −364,725 0 −364,725Transfers from ongoing investments 2,074 0 2,907,627 −2,909,701 0Cost as at 31/12/2011 1,733,284 127,010 8,985,263 7,141,996 17,987,553Written-down value as at 1/1/2011 228,761 0 4,274,210 0 4,502,971Depreciation 34,949 5,080 936,062 0 976,091Disposals 0 0 −324,337 0 −324,337Written-down value as at 31/12/2011 263,710 5,080 4,885,935 0 5,154,725Carrying amount as at 1/1/2011 1,502,449 127,010 2,168,151 6,006,550 9,804,160Carrying amount as at 31/12/2011 1,469,574 121,930 4,099,328 7,141,996 12,832,828

138 Annual Report 2011(3) Long-term investments in subsidiariesin EUR 31 December 2011 31 December 2010 1 January 2010DEM d.o.o. 387,058,979 387,058,979 387,058,979SENG d.o.o. 152,692,249 152,692,249 152,692,249HESS d.o.o. 127,029,548 118,002,548 110,607,548TEŠ d.o.o. 224,289,677 216,117,777 216,117,777TET d.o.o. 24,503,340 24,503,340 24,503,340PV d.d. 60,408,543 60,408,543 60,408,543HSE Invest d.o.o. 80,000 80,000 80,000HSE Italia S.r.l. 29,690 29,690 29,690HSE Hungary Kft. 4,004,965 4,004,965 4,004,965HSE Balkan Energy d.o.o. 1,025,063 1,025,063 1,025,063HSE Adria d.o.o. 102,553 102,553 102,553HSE Bulgaria EOOD 513,220 513,220 513,220HSE MAK Energy DOOEL 26,778 26,778 26,778HSE BH d.o.o. 513,990 513,990 0SRESA d.o.o. 60,000 0 0TOTAL 982,338,595 965,079,695 957,170,705Majority of company’s assets is represented by longterminvestments in subsidiaries. They include investmentsin companies, in which the company – directlyor indirectly through other owners – owns a majoritystake and prepares consolidated financial statementsfor this group of companies.SubsidiaryActivity%ownership%voting rightsDEM d.o.o. Obrežna ulica 170 Maribor, Slovenia Hydroelectricity generation 100% 100%SENG d.o.o. Erjavčeva ulica 20 Nova Gorica, Slovenia Hydroelectricity generation 100% 100%HESS d.o.o. Cesta bratov Cerjakov 33a Brežice, Slovenia Hydroelectricity generation 51% 51%TEŠ d.o.o. Cesta Lole Ribarja 18 Šoštanj, Slovenia Electricity productionat thermal power plants100% 100%PV d.d. Partizanska cesta 78 Velenje, Slovenia Mining and agglomerationof ligniteTET d.o.o. Ob železnici 27 Trbovlje, Slovenia Electricity productionat thermal power plantsHSE Invest d.o.o. Obrežna ulica 170a Maribor, Slovenia Other project engineeringand technical consulting77.73% 77.73%81.33% 81.33%25% 25%SRESA d.o.o. Ob železnici 27 Trbovlje, Slovenia Hydroelectricity generation 60% 60%HSE Italia S.r.l. Via Roma 20 Gorizia, Italy Electricity trading 100% 100%HSE Hungary Kft. Karolyi Mihaly u. 12 Budapest, Hungary Electricity trading 100% 100%HSE Balkan Energy d.o.o. Bulevar Mihaila Pupina 117 Beograd, Serbia Electricity trading 100% 100%HSE Adria d.o.o. Miramarska 24 Zagreb, Croatia Electricity trading 100% 100%HSE Bulgaria EOOD 45a Bulgaria Blvd., Triaditza Region Sofia, Bulgaria Electricity trading 100% 100%HSE MAK Energy DOOEL Belasica no. 2 Skopje, Macedonia Electricity trading 100% 100%HSE BH d.o.o. Ul. Bulevar Meše Selimovića br. 16 Sarajevo, Bosnia andHerzegovinaElectricity trading 100% 100%

Financial report of the company HSE139Significant amounts from statements of subsidiaries for 2011in EURAssetsLiabilities(without equity)RevenueNet profit or lossfor the yearTOTAL equityDEM d.o.o. 555,414,448 16,502,434 72,088,287 10,495,516 538,912,014SENG d.o.o. 264,669,299 81,041,427 40,299,632 6,162,269 183,627,872HESS d.o.o. 260,473,830 8,155,108 9,988,642 447,057 252,318,722TEŠ d.o.o. 859,641,851 496,834,151 244,751,465 6,060,687 362,807,700PV d.d. 215,489,400 104,052,936 123,763,459 1,010,389 111,436,464TET d.o.o. 57,353,754 22,925,913 52,681,665 52,482 34,427,841HSE Invest d.o.o. 2,257,428 1,286,336 6,628,412 154,096 971,092SRESA d.o.o. 100,168 1,058 9 −890 99,110HSE Italia S.r.l. 2,680,300 2,559,513 4,813,643 1,608 120,787HSE Hungary Kft. 4,357,728 14,758 3,446,685 1,164,128 4,342,970HSE Balkan Energy d.o.o. 3,656,659 2,376,543 18,545,496 173,462 1,280,116HSE Adria d.o.o. 5,001,744 3,513,190 65,987,412 366,608 1,488,554HSE Bulgaria EOOD 963,146 476,943 2,482,365 43,058 486,203HSE MAK Energy DOOEL 253,689 209,125 1,830,241 36,591 44,564HSE BH d.o.o. 1,697,578 1,097,599 13,674,347 107,551 599,979TOTAL 2,234,011,022 741,047,034 660,981,760 26,274,612 1,492,963,988In 2011, the increased values of investments in subsidiariescomprised the following changes:Changes in long-term investmentsin EUR 2011Increase in investment in the company HESS d.o.o. 9,027,000Capital increase of the company TEŠ d.o.o. 8,171,900Establishment of the company SRESA d.o.o. 60,000TOTAL 17,258,900The audit of Slovenian subsidiaries for 2011 wasperformed by the audit company Deloitte revizijad.o.o., while the companies HSE Hungary, HSE BalkanEnergy, HSE Adria in HSE BH were audited abroad.Other foreign companies are not audited due to incompliancewith auditing criteria under the local legislation.The company SRESA was also not audited in 2011since it discloses solely the founding contribution,while the activity has not been performed yet.No subsidiary is quoted on the stock exchange. Therefore,the reasons for possible impairment could not beestablished on the basis of stock exchange prices. Butthe company did check potential reasons for impairmentby comparing the difference between the carryingamount of the company’s long-term investmentswith the proportionate share of the carrying amountof subsidiaries’ and associates’ total equity. No reasonsfor impairment were identified, as in the majorityof companies the carrying amount of total equity ishigher than the carrying amount of long-term investments.Changes in long-term investments in subsidiariesin EUR 2011 2010Balance as at 1 January 965,079,695 957,170,705Acquisitions, increases 17,258,900 7,908,990Balance as at 31 December 982,338,595 965,079,695

140 Annual Report 2011(4) Deferred tax assetsDeferred tax assets are created from expenses, whichaffect the profit or loss of individual year, but are notdeductible for tax purposes in the current year, andthe fair value of derivatives disclosed in the reservefor fair value and does not yet affect the profit or loss.In 2011, changes in deferred tax receivablesamount to € 476.948. In the income statement it is disclosedin the amount of € 84,962 and in the statementof financial position in is disclosed in the amount of€ 561,910.Changes in deferred tax assetsin EUR Provisions ImpairmentAmortisation/depreciation Derivatives TOTALBalance as at 1/1/2010 84,470 3,097,493 34,585 32,901 3,249,449In debit/(credit) of profit or loss 10,334 −83,015 −3,528 0 −76,209In debit/(credit) of other comprehensiveincome0 0 0 −32,901 −32,901Balance as at 31/12/2010 94,804 3,014,478 31,057 0 3,140,339Balance as at 1/1/2011 94,804 3,014,478 31,057 0 3,140,339In debit/(credit) of profit or loss 7,925 −85,792 −7,095 0 −84,962In debit/(credit) of other comprehensiveincome0 0 0 561,910 561,910Balance as at 31/12/2011 102,729 2,928,686 23,962 561,910 3,617,287(5) Short-term loansShort-term financial receivables and loansin EUR 31 December 2011 31 December 2010 1 January 2010Loans to group companies 109,317,324 48,193,825 0TOTAL 109,317,324 48,193,825 0Short-term loans granted to group companies includeshort term framework loans to subsidiaries.Loans were approved within the framework of cashmanagement within the HSE Group – indebtednessamong the HSE Group companies.The larger portion of loan is the loan for replacementinvestment in Unit 6 at TEŠ and has not beensecured with collateral. The repayment deadline isJuly 2012, while the interest rate is one-month €IBORplus a minimum mark-up. Interest is calculated onmonthly basis with the due date on the 20th day ofthe current month for the previous month.As at 31 December 2011, the company discloses€ 109,100,000 of loans granted and € 217,324 of notyet due interest charged.Changes in short-term loansin EUR 31 December 2011 31 December 2010Balance as at 1 January 48,193,825 0Increase 265,213,040 60,795,259Repayments −204,089,541 −12,601,434Balance as at 31 December 109,317,324 48,193,825

Financial report of the company HSE141(6) Current operating receivablesShort-term operating receivablesin EUR 31 December 2011 31 December 2010 1 January 2010From group companies 9,676,573 8,754,920 1,880,440From buyers 132,818,196 98,128,112 102,994,225Allowance for receivables from buyers −10,569 −15,252 −29Advances given 99,175 51,087 6,804From government and other institutions 5,450,488 11,064,362 14,042,821From others 2,271,448 714,336 1,387,748Allowance for receivables from others −19,396 −443,670 −873,966TOTAL 150,285,915 118,253,895 119,438,043Current operating receivables to group companies inthe amount of € 9,676,573 represent receivables fromelectricity sold, receivables from services of performingcertain functions for subsidiaries (trading, financialfunction etc.) and receivables arising from rentals.Short-term operating receivables to group companiesin EUR 31 December 2011 31 December 2010Dravske elektrarne Maribor d.o.o. 0 9,000Soške elektrarne Nova Gorica d.o.o. 23,102 3,688,478Premogovnik Velenje d.d. 861,889 409,918HESS d.o.o. 58,529 103,969Termoelektrarna Trbovlje d.o.o. 0 4,464Termoelektrarna Šoštanj d.o.o. 1,768,948 313,319HSE Invest d.o.o. 3,120 0Golte d.o.o. 486 0Gost d.o.o. 465 0HSE Balkan Energy d.o.o. 1,886,090 589,990HSE Hungary Kft. 1,737 3,011HSE Adria d.o.o. 3,116,204 2,504,650HSE Bulgaria EOOD 3,821 6,069HSE BH d.o.o. 17,422 1,566HSE Italia S.r.l. 1,932,278 1,112,605HSE MAK Energy DOOEL 2,482 7,881TOTAL 9,676,573 8,754,920Short-term trade receivables (excluding group companies)in the amount of € 132,807,627 are predominantlycomprised of receivables from the sale of electricityin Slovenia and abroad.The company had no receivables due from managementand Supervisory Board members at the endof 2011.The section on credit risk includes disclosures inrelation to maturity of receivables, allowances for receivablesand insuring receivables.

142 Annual Report 2011(7) Other short-term assetsOther short-term assets comprise short-term deferredcosts and short-term accrued revenue, mostly relatedto electricity trade.Other short-term assetsin EUR 31 December 2011 31 December 2010 1 January 2010Deferred costs 5,081,798 5,015,247 4,962,988Accrued revenue 2,489,224 1,610,919 2,202,763TOTAL 7,571,022 6,626,166 7,165,751(8) Cash and cash equivalentsCash and cash equivalentsin EUR 31 December 2011 31 December 2010 1 January 2010Cash in bank accounts 2,690,360 3,198,890 1,471,634Overnight deposits 17,332 3,277 0Deposits redeemable at notice 7,195,440 521,672 707,652Deposits tied up to three months 8,300,000 35,720,000 28,040,000TOTAL 18,203,132 39,443,839 30,219,286With transition to IFRS the company changed the accountingpolicy and among cash it discloses depositstied up to three months. Before it disclosed depositsunder short-term investments.(9) EquityEquityin EUR 31 December 2011 31 December 2010 1 January 2010Called-up capital 29,558,789 29,558,789 29,558,789Capital surplus 561,243,185 561,243,185 561,243,185Revenue reserves 359,472,048 296,361,537 226,498,386Fair value reserve −3,509,887 2,839,086 −1,573,172Retained earnings 23,364,810 39,745,702 30,117,449TOTAL equity 970,128,945 929,748,299 845,844,637

Financial report of the company HSE143The value of nominal capital and capital surplus remainedunchanged in 2011.Other revenue reserves increased by € 63,110,511,namely:••by a portion of accumulated profit for 2008 in theamount of € 26,878,108 in accordance with theGeneral Meeting’s resolution; and••by a portion of net profit for 2011 amounting to€ 26,878,107 in accordance with a SupervisoryBoard decision taken on the management‘sproposal.Under fair value reserve in the total amount of€ 3,509,887, at the end of 2011, the company discloses:••Results of standard futures for electricity (forwardcontracts);••Fair value of currency changes; and••Fair value of interest rate swaps.Fair value reserve decreased by € 6,348,973 in total,which is mostly the result of closing transactions instandard futures and negative fair value of currencyand interest swaps.Electricity futures are concerned with closing ofdeals on purchase of electricity on a foreign stock exchangefor the period from 2012 to 2014, thus securingthe already concluded deals for the sale of electricityin the same period. Fair value reserve decreased bythe amounts of electricity purchases in 2011 that werehedged using futures and the cost of goods sold inthe income statement decreased cumulatively by€ 1,021,718. On the basis of electricity fluctuations onstock exchange, a cumulative negative financial effectin the amount of € -2,974,379 was realised in forwardsconcluded in 2011. The negative final amount of fairvalue reserve at standard futures for electricity in theperiod from 2012 to 2014 is a result of lower electricityprices on the stock exchange at the end of 2011 than inthe period of conclusion of futures for electricity purchaseand it amounts to € 1,262,247.At the end of March 2011, the company closed outan interest swap, the negative fair value of which atthe end of 2011 amounted to € -1,998,986 (taking intoaccount deferred taxes).At the end of 2011, the company discloses negativefair value of currency swaps in the amount of€ -248,654 (including deferred taxes).Change in fair value reservein EURStandard futures forelectricityForward contracts foremission coupons Interest rate swaps Currency swaps TOTALBalance as at 1/1/2010 −1,441,563 0 −131,609 0 −1,573,172Creation, increase 6,833,847 69,408 0 105,236 7,008,491Decrease −3,871,216 −70,998 131,609 0 −3,810,605Transfer to expenses 1,212,782 0 0 1,212,782Transfer to revenue 1,590 0 1,590Balance as at 31/12/2010 2,733,850 0 0 105,236 2,839,086Balance as at 1/1/2011 2,733,850 0 0 105,236 2,839,086Creation, increase 16,994,711 0 −1,998,986 −248,654 14,747,071Decrease −19,969,090 0 0 −105,236 −20,074,326Transfer to expenses −1,021,718 0 0 0 −1,021,718Balance as at 31/12/2011 −1,262,247 0 −1,998,986 −248,654 −3,509,887Retained net earnings comprises the company‘s accumulatedprofit in the amount of € 23,364,810.

144 Annual Report 2011(10) Provisions for termination and jubilee benefitsAt the end of 2011, the company discloses provisionsfor termination and jubilee benefits in the amount of€ 734,698 created on the basis of actuarial calculationas at 31 December 2011.The actuarial calculation was based on:••The number of employees in the company as at31 December 2011 (gender, age, overall and pensionqualifying period of service, average net andgross salary for the period July – September 2011);••Method for calculating termination and jubileebenefits in the company;••3.5% increase in average salary;••Discount interest rate of 5.1% p.a.;••Employee turnover by age category.Changes in provisions for termination and jubilee benefitsin EURProvisionsfor termination benefitsProvisionsfor jubilee benefitsTOTALBalance as at 1/1/2010 369,994 125,144 495,138Creation, increase 136,922 49,102 186,024Decrease – drawing −27,013 −14,324 −41,337Balance as at 31/12/2010 479,903 159,922 639,825Balance as at 1/1/2011 479,903 159,922 639,825Creation, increase 67,594 42,901 110,495Decrease – drawing 0 −15,622 −15,622Balance as at 31/12/2011 547,497 187,201 734,698(11) Other provisionsOther provisions comprise provisions for lawsuits,namely:••Provision for a required fee for the limited areause that the company created in 2007 since sevenlawsuits were filed by the recipients of the feefor the limited area use. On the basis of two fromseven procedures on the court, the companyreceived a legally enforceable decision in 2011, inwhich the court rejected the plaintiffs‘ claim; Forthese two lawsuits the reservation was eliminated;Despite this fact, it is impossible to predictthe outcome of lawsuits in the five remainingprocedures; Therefore, for them the company hascreated provisions with default interest.••Provision for lawsuits filed by the company TDR-Metalurgija d.d. – in bankruptcy proceeding, andits related companies and employees that thecompany created in 2008. The default interest isalso included in the amount.Changes of other provisionsin EURFor lawsuitsBalance as at 1/1/2010 13,899,742Creation, increase 979,564Decrease – drawing−7,221,829Balance as at 31/12/2010 7,657,477Balance as at 1/1/2011 7,657,477Creation, increase 554,761Decrease – drawing −229,524Balance as at 31/12/2011 7,982,714

Financial report of the company HSE145(12) Long-term financial liabilitiesLong-term financial liabilitiesin EUR 31 December 2011 31 December 2010 1 January 2010To banks 97,510,862 106,619,094 116,431,050Other 2,498,733 0 164,512TOTAL 100,009,595 106,619,094 116,595,562The company’s long-term liabilities include the followinglong-term financial loans to banks, namely:••The long-term financial loan taken out with asyndicate of Slovene banks in 2003 for the periodof 12 years;••The long-term financial loan taken out with aSlovene bank in 2007 for the period of 10 years;••The long-term financial loan taken out with theEuropean Investment Bank in 2008 for the periodof 20 years.The values of loan principals due in 2012 are recordedas short-term liabilities to banks.Interest on loans received is settled on a quarterlyor semi-annual basis, and its undue portion payable in2011 is recorded under short-term operating liabilities.The long-term loan taken out in 2003 will be fullyrepaid in October 2015. The principal is repaid on aquarterly basis. The agreed-upon interest rate is a3-month €IBOR plus a minimal mark-up. The loan issecured with ten blank bills of exchange.The long-term loan taken out in 2007 will be fullyrepaid in January 2017. The principal is repaid on asemi-annual basis. The agreed-upon interest rate isthe 6-month EURIBOR plus a minimal mark-up. Theloan is secured with six blank bills of exchange.The long-term loan taken out in 2008 will be fullyrepaid in September 2028. The principal will be repaidon a semi-annual basis (the first payment is duein September 2012). The agreed-upon interest rate isthe 6-month €IBOR plus a minimal mark-up. The loanis fully secured with a guarantee issued by a foreignbank for a seven-year period.The company settles instalments on principal thatare due and attributable interest on time.In 2011, the company concluded a transactionof interest rate hedging with derivative interest rateswap (IRS) for the amount of € 50 million. The initialhedging date is 30 March 2011 and the maturity dateis 1 March 2016. The assessed fair value of interestrate swap as at 31 December 2011 in the amount of€ -2,498,733 is disclosed among other long-term financialliabilities and the fair value reserve. More detaileddisclosures are in section 4.5.8.8 in interest raterisk disclosure.Changes in long-term financial liabilitiesin EUR Loans received Fair value of derivatives TOTALBalance as at 1 January 106,619,094 0 106,619,094Acquisitions 0 2,498,733 2,498,733Transfer to short-term part −9,108,232 0 −9,108,232Balance as at 31 December 97,510,862 2,498,733 100,009,595Maturity deadlines of long-term liabilities are disclosedin item 4.5.8.8 under liquidity risk.

146 Annual Report 2011(13) Short-term financial liabilitiesShort-term financial liabilitiesin EUR 31 December 2011 31 December 2010 1 January 2010To group companies 50,099,536 7,082 0To banks 29,697,845 25,292,687 75,274,272Other 310,816 11,534 0TOTAL 80,108,197 25,311,303 75,274,272The value of short-term financial liabilities to bankscomprises a portion of principles of long-term loanswhich fall due in 2012 and short-term loans taken outin 2011.Short-term loans are repayable in November 2012.The agreed-upon interest rate is the 1-month EURI-BOR plus a minimal mark-up. The loans are securedwith blank bills of exchange.Not yet due interest on loans received and interestfrom interest swap (IRS) amount to € 689,149, whilethe deferred costs and accrued revenue comprise accruedinterest for which we have not yet received thecalculation in the amount of € 441,369 from the banks.Other short-term financial liabilities comprisenegative fair value of currency swaps in the amountof € 310,816.Changes in short-term financial liabilitiesin EUR Loans received Fair value of derivatives TOTALBalance as at 1 January 25,299,769 11,534 25,311,303Acquisitions 190,599,164 310,816 190,909,980Transfer to short-term part 9,108,232 0 9,108,232Repayments −145,209,784 0 −145,209,784Other 0 −11,534 −11,534Balance as at 31 December 79,797,381 310,816 80,108,197(14) Short-term operating liabilitiesShort-term operating liabilitiesin EUR 31 December 2011 31 December 2010 1 January 2010To group companies 61,178,574 78,306,822 81,089,140To suppliers 81,210,143 36,938,021 28,744,589Advances 355,977 135,726 1,250To employees 757,824 710,930 588,212To government and other institutions 2,539,361 825,319 627,053Other 40,653 32,970 7,430TOTAL 146,082,532 116,949,788 111,057,674The company’s short-term operating liabilities togroup companies in the amount of € 61,178,574 mainlyrelate to liabilities associated with the electricity purchasedfrom subsidiaries.

Financial report of the company HSE147Short-term operating liabilities to group companiesin EUR 31 December 2011 31 December 2010Termoelektrarna Šoštanj d.o.o. Slovenia 33,785,172 40,415,619Dravske elektrarne Maribor d.o.o. Slovenia 9,299,893 15,921,263Soške elektrarne Nova Gorica d.o.o. Slovenia 4,974,527 9,293,906Termoelektrarna Trbovlje d.o.o. Slovenia 8,029,239 6,899,515HESS d.o.o. Slovenia 1,222,254 1,269,250HSE Invest d.o.o. Slovenia 142,408 79,843HTZ VELENJE I.P. d.d. Slovenia 37,137 29,869Premogovnik Velenje d.d. Slovenia 53,572 10,977HSE Adria d.o.o. Croatia 2,426,788 2,949,507HSE Italia S.r.l. Italy 1,013,438HSE Balkan Energy d.o.o. Serbia 211,642 421,670HSE Hungary Kft. Hungary 1,965HSE BH d.o.o. Bosnia and Herzegovina 798,907 0HSE Bulgaria EOOD Bulgaria 195,300 0GOST d.o.o. Slovenia 1,735 0TOTAL 61,178,574 78,306,822The company’s short-term operating liabilities to suppliers(excluding group companies) in the amount of€ 81,210,143 mainly relate to liabilities associated withthe electricity purchased in Slovenia and abroad.(15) Other current liabilitiesOther short-term liabilitiesin EUR 31 December 2011 31 December 2010 1 January 2010Accrued costs 6,167,717 6,340,948 1,361,391TOTAL 6,167,717 6,340,948 1,361,391Under other short-term liabilities the company disclosesaccrued costs mostly connected with the purchaseof electricity and related contingent costs.

148 Annual Report 2011(16) Contingent liabilities and assetsContingent liabilitiesin EUR 31 December 2011 31 December 2010 1 January 2010Bank guarantees granted and other forms of loans 44,521,473 31,975,164 35,636,422Standard futures – electricity purchase 55,397,388 61,648,764 20,748,385Other 1,375,200 664,127 33,519TOTAL* 101,294,061 94,288,055 56,418,326*Besides, a part of the company’s contingent liabilities are guarantees granted and parent guarantees for independent companies in Slovenia.The tax authorities have the right to audit the company’soperations within 5 years after the year in whichthe tax has been levied, which can subsequently leadto additional tax charges, penalty interest charges andpenalties arising from corporate income tax, valueadded tax and other taxes and duties.The Management Board is not aware of any circumstancesthat could give rise to possible materialliability in this respect.Guarantees and parent guarantees granted to subsidiaries in SloveniaBeneficiary Debtor Guarantee type Basic legal transaction From To Value in EUR millionEuropeanInvestment Bank/bank consortiumSENGGuarantee forbank guaranteeGeoplin d.o.o. TEŠ GuaranteestatementAlstomconsortiumEuropeanInvestment Bank/bank consortiumTEŠTEŠParentguaranteeGuarantee forbank guaranteeUniCredit Slo, SID TEŠ Guarantee forbank loanEBRD TEŠ Guarantee forEBRD loanGuarantee FacilityAgreement as at15/02/2006Long-term purchase andsales agreement for naturalgas no. 277 betweenTEŠ and Geoplin as at23/11/2006, 17/02/2010Agreement betweenTEŠ d.o.o. and Alstomconsortium (Contract onthe design, procurementand erection of the powerisland for the facility called"Sostanj Unit 6"),as at27/06/2008, 19/10/2009Guarantee FacilityAgreement as at24/11/2010Loan agreement no.K 1967/07-SIN-107/07 asat 21/12/2007, 24/11/2010Agreement on guaranteeand loss reimbursementbetween HSE and EBRDas at 12/01/201115.2.2006 Effective for theperiod of agreementapplicability23.11.2006 Effective for theperiod of agreementapplicability25.11.2009 Effective for theperiod of agreementapplicability24.11.2010 Effective for theperiod of agreementapplicability21.12.2007 Effective for theperiod of agreementapplicability12.1.2011 Effective forthe period ofloan agreementapplicabilityTotal EUR 43 million+ interest + costsFor the period2011-2015total EUR 96 million+ costs + interestTotal EUR 695 million+ escalation clause+ installation(ca. € 80 million+ 25% commission)+ interest + costsTotal EUR 88 million+ interest + costsTotal EUR 24 million+ interest + costsTotal EUR 160 million+ interest + costsContingentliability in EURas at 31/12/201137,550,00091,083,000467,300,00088,000,0009,870,96766,000,000TOTAL contingent liabilities from guarantees and parent guarantees granted to subsidiaries 759,803,967Contingent assets include banking guaranteesreceived and a principle of penalty, which it paid in2009 as the controlling company of then operatingsubsidiary TDR Metalurgija, when it was accused ofcartel agreement. The company filed a judicial reviewat the European Commission for repayment of penaltyin the amount of € 9,100,000. The final outcome cannotbe predicted.

Financial report of the company HSE149Contingent assetsin EUR 31 December 2011 31 December 2010 1 January 2010Bank guarantees received and other forms of loans 46,980,832 37,195,173 69,326,054Lawsuit before EU Commission 9,100,000 9,100,000 0Other 165,494 230,608 1,218,145TOTAL 56,246,326 46,525,781 70,544,1994.5.8.2 Income statement(17) Net sales revenueThe company generates net sales revenue mostlythrough sale of electricity. The revenue from the saleof electricity accounts for 99% of all net sales revenue.€ 1,344,809,509.Revenue from merchandise is represented by thesales value of emission coupons for trading.Revenue from services performed in the amountof € 6,012,299 was generated through electricity services(profit in the sales of emission coupons for electricityproduction within the HSE Group, guarantee oforigin, sales of border capacities, charged manipulativecosts), services performed for foreign subsidiariesand rentals.Net sales revenuein EUR 2011 2010a) in domestic market 568,940,352 452,705,149Electricity 565,983,279 451,981,993Merchandise 1,062,344 20,675Services 1,894,729 702,481b) in foreign market 789,177,378 454,832,442Electricity 778,826,230 446,726,838Merchandise 6,233,578 3,918,940Services 4,117,570 4,186,664TOTAL net 1,358,117,730 907,537,591(18) Costs of goods, materials and servicesThe cost of goods sold, which accounts for 99% oftotal operating expenses or € 1,286,285,191, consistsof expenses for the purchase of electricity and emissioncoupons for trading as well as contingent costs ofelectricity purchases.This value includes positive result from concludedtransactions of securing electricity purchases withstandard futures, namely in the amount of € 1,021,718.Costs of materials in the amount of € 213,105 aremostly represented by costs of fuel, office materialsand technical literature.Costs of services in the amount of € 6,060,369are mostly represented by the costs of intellectual services,costs of fixed assets maintenance, sponsorships,advertising and costs of banking guarantees.Costs of goods, materials and servicesin EUR 2011 2010Cost of goods sold 1,245,037,346 756,739,460Contingent costsof goods sold41,247,845 45,524,276TOTAL cost of goods sold 1,286,285,191 802,263,736Costs of materials 213,105 184,120Costs of services 6,060,369 5,599,895Costs of goods, materialsand servicesCosts of auditor1,292,558,665 808,047,751in EUR 2011 2010Audit of annual reports 25,270 30,064Other non-audit services 4,800 0TOTAL 30,070 30,064

150 Annual Report 2011(19) Labour costsCosts of labour comprise costs of salaries and otherreceipts by employees, including employer’s contributions.The costs of compensations for unutilisedleaves (which can be utilised until 30 June 2012) in2011 are also charged.The company did not receive any claims by employeesfor payments on the basis of legal provisions,the collective labour agreement or the company’s Articlesof Association.Labour costsin EUR 2011 2010Salaries 6,570,563 6,090,291Pension insurance costs 838,709 768,672Other insurance costs 490,457 460,519Other labour costs 651,353 629,391TOTAL 8,551,082 7,948,873(20) Financial revenueFinancial revenue from shares comprise the paidprofit of the subsidiary.Financial revenue from interest is mostly comprisedof interest on loans granted within the companyin the amount of € 1,458,040 and interest chargedon bank deposits in the amount of € 423,338.In 2011, € 1,951,855 was charged to subsidiaries forparent guarantees granted.Financial revenuein EUR 2011 2010From dividends and other1,847,040 8,849,129shares of profitInterest on loans anddeposits granted1,886,454 716,790Other 1,951,855 449,789TOTAL 5,685,349 10,015,708(21) Financial expensesFinancial expenses for interest mainly comprise theinterest on received long-term and short-term loansfrom banks in the amount of € 2,168,273, interest onreceived short-term loans of the companies within theHSE Group in the amount of € 598,844 and interest oninterest rate swaps in the amount of € 530,750.Financial expensesin EUR 2011 2010From loans received 3,298,008 2,693,119From sales of available-forsalefinancial assets0 544,228TOTAL 3,298,008 3,237,347

Financial report of the company HSE151(22) TaxThe company is subject to the Value Added Tax Act,the Excise Duty Act, and the Corporate Income TaxAct. The branch offices in the Czech Republic and inSlovakia are liable to pay corporate income tax. In2011, in both branch offices an application for terminationof liability to pay value added tax was submittedto the tax office. In Czech Republic we have alreadyreceived the decision on termination of liability to payvalue added tax, while in Slovakia we are still waitingfor it.In accordance with the Corporate Income Tax Act,the tax for 2011 amounted to 20% of the taxable basereported in the company’s tax return. The currenttax of the company for 2011 amounts to € 11,190,185.Based on the 2011 tax assessment, the company paid€ 742,496 in advance income tax payments in 2010.Its income tax liability thus amounted to € 6,041,373 atthe end of 2011.Deferred taxes include deferred tax assets. Thevalues of deferred taxes created and used are presentedin the table showing deferred tax assets.In establishing the basis for current tax, revenueand expenses established in accordance with IFRSwere corrected in terms of decrease and increase intax base.Tax calculationin EUR 2011 2010Profit or loss before tax 58,004,766 98,360,502Tax calculated at applicabletax rate (20%)11,600,953 19,672,100Tax from revenue reducingtax base—407,215 —982,572Tax from tax breaks —79,002 —67,263Tax from expenses reducingtax baseTax from non-deductableexpensesTax from other changes intax calculation—62,147 —8,457122,250 143,10415,346 35,979Tax 11,190,185 18,792,891Effective tax rate 19.29% 19.11%(23) Net operating profit or lossThe company ended the year 2011 with total profit of€ 46,729,619.Profit or loss of the companyin EUR 2011 2010Gross return on operations 1,359,019,422 910,086,570Operating profit or loss 55,617,425 91,582,141Net cash 2,387,341 6,778,361Profit or loss before tax 58,004,766 98,360,502Net profit or lossfrom the period46,729,619 79,491,404

152 Annual Report 20114.5.8.3 Statement of other comprehensiveincomeThe statement of other comprehensive income includesresults of standard futures for the purchaseof electricity and fair value of interest and currencyswaps in the total amount of € 6,348,973.Results arising from realised and newly concludedstandard futures for electricity in 2011 amount to€ -3,996,097. More detailed disclosures are presentedunder equity disclosure. As a result, the company didnot account for deferred taxes since upon the realisationit will pay the price agreed-upon when the transactionwas concluded.In 2011, the company concluded an interest rateswap for which the net effect of fair value amounts to€ -1,998,986, which means negative fair value of interestrate swap in the amount of € -2,498,733, of whichthe company accounted for € 499.747 of deferred taxassets.In 2011, the company closed the currency swaptransactions whose fair value as at 31 December 2010amounted to € -105.236 taking into account deferredtaxes. At the end of 2011, the fair value of currencyswaps concluded in 2011 amounts to € 310,817, ofwhich the company accounted for € 62,163 of deferredtax assets. Thus, the net effect amounts to € -248,654.Taking into account all of the above, the totalcomprehensive income at the end of 2011 amounts to€ 40,380,646.Cash flowsin EUR 2011 2010Operating cash flows 29,798,354 79,653,064Cash flows from investingactivitiesCash flows from financingactivities—93,128,020 —7,958,96942,091,371 —62,464,573Cash flow for the period —21,238,295 9,229,5224.5.8.5 Statement of changes in equityThe statement of changes in equity shows changes inequity components during the financial year.The statement of changes in equity is prepared inthe form of a composite spread sheet.In 2011, no transactions took place that would resultin changes in equity.Total comprehensive income of the reporting periodincreased by € 40,380,646, with the increase consistingof:••The net profit for the year in the amount of€ 46,729,619;••Change in other components of comprehensiveincome in the amount of € -6,348,973 (value ofstandardised futures for the purchase of electricity).In the reporting period, individual items of equitychanged by € 63,110,511, due to:4.5.8.4 Cash flow statementData from the cash flow statement is obtained fromthe balance sheets for the current and previous yearand the income statement for the current period.In order for the inflows to be as close as possibleto receipts, and outflows as close as possible to expenses,additional eliminations were made in the cashflow statement:••Transfer of accumulated profit of the previous year(in accordance with a General Meeting resolution)in the amount of € 39,745,702 to other revenuereserves; and••Allocation of half of the net profit for the year in theamount of € 23,364,809 to other revenue reserves,in accordance with a Supervisory Board decisionadopted on the proposal of the company‘smanagement.••Decrease arising from standard future for electricityon the fair value reserve and business expenses;••Decrease arising from fair value of interest rateand currency swap on fair value reserve anddisbursements from financing activities.Accumulated profit for 2011 totals € 23,364,810 whichrepresents half of net profit for the period. The decisionregarding allocation of accumulated profit ismade by the owner.

Financial report of the company HSE153Accumulated profitin EUR 2011 2010Net profit or loss for thecurrent yearIncrease in revenuereserves according to theManagement Board decision(legal reserves, reserves forown shares and statutoryreserves)46,729,619 79,491,404—23,364,809 —39,745,702Accumulated profit 23,364,810 39,745,7024.5.8.5 Related partiesTransactions with associatesin EUR Sales Purchases Loans granted Loans receivedRevenue from parentguarantees grantedDEM d.o.o. 0 67,532,221 0 50,085,796 0SENG d.o.o. 7,182,123 38,995,218 6,807,004 0 240,731HESS d.o.o. 183,141 8,173,185 0 0 0TEŠ d.o.o. 2,378,419 227,619,184 102,509,393 0 1,711,124TET d.o.o. 152,035 43,150,783 0 5,546 0PV d.d. 3,391,218 178,840 851 0 0HSE Invest d.o.o. 13,000 640,946 0 0 0HSE Italia S.r.l. 4,061,730 0 77 0 0HSE Hungary Kft 1,850,683 20,395 0 8,193 0HSE Balkan Energy d.o.o. 9,749,851 7,085,049 0 0 0HSE Adria d.o.o. 61,873,151 58,068,656 0 0 0HSE Bulgaria EOOD 244,050 1,197,451 0 0 0HSE MAK Energy DOOEL 8,191 906,948 0 0 0HSE BH d.o.o. 160,642 8,902,729 0 0 0TOTAL group companies 91,248,234 462,471,605 109,317,325 50,099,535 1,951,855ERICO d.o.o. 0 2,400 0 0 0TOTAL associates 0 2,400 0 0 0Soenergetika d.o.o. 15,040 0 0 0 0TOTAL controlled companies 15,040 0 0 0 0TOTAL 91,263,274 462,474,005 109,317,325 50,099,535 1,951,855The columns sales and purchases represent the turnoverof all transactions (excl. VAT), including interest ofloans received and granted among the associates ofthe HSE Group in 2011. For loans granted and receivedthe balance at the end of 2011 is presented (loan withinterest). Revenue from parent guarantees granted in2011 are separately disclosed, namely in the net value(excl. VAT). The values of parent guarantees are disclosedunder contingent liabilities.The balance of open operating receivables withrelated parties is disclosed under short-term operatingreceivables, while the balance of open operatingliabilities is disclosed under short-term operating liabilities.

154 Annual Report 2011Transactions with the Republic of Slovenia and legal entities which are directly or indirectly ownedby the Republic of Sloveniain EUROpen receivablesas at 31/12/2011Open liabilitiesas at 31/12/2011 Expenses in 2011 Revenue in 2011Elektro-Slovenija 3,970,479 2,237,470 15,978,590 26,177,405Elektro Maribor d.d. /Elektro Maribor Energija plus d.o.o.7,871,358 0 95,490 70,150,309Elektro Ljubljana d.d. / Elektro energija d.o.o. 20,436,668 1,750,040 17,226,995 186,596,851Elektro Primorska d.d. /E3, energetika, ekologija, ekonomija d.o.o.14,153,600 307,469 2,162,726 63,412,378Elektro Celje d.d. / Elektro Celje Energija d.o.o. 7,133,362 157,492 1,755,131 69,230,491Elektro Gorenjska d.d. /Elektro Gorenjska Prodaja d.o.o.4,233,226 157,063 1,749,338 40,580,836Talum d.d. 3,834,572 0 0 36,087,323GEN-I d.d. 1,063,627 359,145 7,798,559 10,144,728HSE is fully owned by the Republic of Slovenia. In 2011,the company did not conclude any transactions withthe government.The table presents transactions with legal entitieswhich are directly or indirectly majority owned by theRepublic of Slovenia and perform energy activity orthey are majority owned by these companies and areimportant for HSE from the perspective of significanceof transactions. Other transactions with companies,ministries, agencies and other legal entities, where theRepublic of Slovenia is a majority or minority ownerare important in terms of reporting. All transactionswith the abovementioned legal entities are concludedin accordance with market conditions effective forconclusion of transactions with other business partners.4.5.8.5 RemunerationRemuneration of managers and employees who arenot subject to the tariff part of the collective agreementcomprises:••Gross receipts included in the income tax returnnotice,••Other remuneration (meals, transportation, perdiems, untaxed portion of jubilee benefits),••Premiums paid for voluntary supplementarypension insurance.Remuneration of Supervisory Board members includesgross attendance fees of all members (compositionof the SB changed during the year), includingtravel expenses related to the performance of tasks inthe SB and the audit committee.No advances, loans or guarantees were extendedto these groups of persons in 2011.Short-term operating liabilities include Decembersalaries for managers and employees who are notsubject to the tariff part of the collective agreementas well as December attendance fees payable to SupervisoryBoard members for their work in the SupervisoryBoard.

Financial report of the company HSE155Receipts of the management, Supervisory Board members and employees who are not subject to the tariff partof the collective agreementin EUR Salary Other receipts BonusesTravel costreimbursementTOTALManagement 134,655 13,194 5,535 1,721 155,105Supervisory Board and Audit Committeemembers0 71,992 247 4,585 76,824Employees who are not subject to the tariffpart of the collective agreement1,808,205 261,457 52,664 41,417 2,163,743TOTAL receipts 1,942,860 346,643 58,446 47,723 2,395,672On the basis of recommendation 12 of The Capital AssetsManagement Agency of the Republic of Slovenia,the remunerations of Management Board and SupervisoryBoard members are presented in the followingtable:Receipts of the management in 2011in EUR Gross salary Net salaryOther receipts– bonus forworkingperformancein 2010Otherreceipts– recourseVoluntraysupplementarypensioninsuranceBonus useof carBonus D&OinsuranceCost reimbursementMatjaž Janežič 134,655 70,362 8,811 1,700 2,683 5,412 123 1,721 155,105TOTALReceipts of the Supervisory Board members in 2011in EUR Gross attendance fee Net attendance fee Travel costs Educational cost D&O bonus TOTALDolinar Drago 12,834 11,882 2,603 0 82 15,437Jeromel Rene 9,846 7,548 0 0 82 9,846Korošec Vekoslav 9,846 7,797 321 247 82 10,414Medak Jadranko 1,502 1,178 19 0 0 1,521Ravnikar Marjan 10,137 7,902 165 0 82 10,303Šalamun Igor 8,691 6,846 249 0 82 8,940Turnšek Mojca 9,846 8,344 1,065 0 82 10,910TOTAL 62,701 51,498 4,422 247 493 67,370Receipts of the Audit Committee members in 2011in EUR Gross attendance fee Net attendance fee Travel costs Educational cost D&O bonus TOTALJeromel Rene 2,324 1,801 0 0 0 2,324Ravnikar Marjan 3,101 2,463 76 0 0 3,177TOTAL 7,749 6,132 163 0 0 7,912Receipts of members for monitoring investment projects in 2011in EUR Gross attendance fee Net attendance fee Travel costs Educational cost D&O bonus TOTALKorošec Vekoslav 661 512 0 0 0 661Turnšek Mojca 440 341 0 0 0 440TOTAL 1,542 1,195 0 0 0 1,542

156 Annual Report 20114.5.8.8 FINANCIAL INSTRUMENTS AND RISKSThis section is connected with the section 4.3.6 of thefinancial report as well as with the section 2.11 on financialrisks in the business report.4.5.8.8.1 Credit RiskThe major part of activity, where we face the risk ofnon-compliance by the counterparty, results fromtrading and financial activity where the majority ofthese activities are represented by contractual relationswith partners with high credit rating. We decideupon the form of business relationship with other partnerson the basis of prior analysis of partner’s creditrating, which further defines the possible volume andtime horizon of operations, elements of contractualrelationship and particularly the necessary volume ofadditional collaterals for complying with contractualliabilities in form of banking guarantees, advancesreceived and other adequate forms of insurance. Informing contractual relationship and selecting insurancewe particularly consider possible limitations ofpartner’s local legislation, since it is significant in theprocedure of collection of possible unfulfilled obligationsor realisation of insurance received.Credit risk at partners is monitored on daily basisand managed by adopting limits of operations andtimely demands to submit possible additional insurancesin case we assess that the partner‘s credit ratinghas deteriorated or the increase in credit rating was aresult of increase in general (expected) level of marketprices.Unsecured part of receivables is the sum of portionof sales to partners on open account within theframework of defined loan limits. The sales on openaccount are in accordance with internal regulationspossible within the framework of approved limits topartners with regard to their financial capacity andrisk. Among unsecured risks the most frequent are receivablesto partners with good credit rating and topartners which belong to a highly regulated activityand are frequently owned by the state. The latter alsoinclude the providers of system services, where theacquisition of insurance risks is not possible similarlyas for stock exchange, while they belong to credit ratingcategory with a low risk of non-compliance.Regardless the estimated low risk of the partnerseach credit rating class represents higher or loweraverage risk of loss due to non-payment or non-compliancewith contractual liabilities. Even the securedreceivables carry a certain risk of non-compliancewith regard to credit rating class of guarantor. Bothare monitored with the rating of value of possible lossdue to non-compliance.In 2011, our partners have regularly complied withtheir obligations with rare exceptions.In case of delays, the customers in Slovenia andabroad are charged default interest at the contractualrate. The majority of overdue receivables at the endof 2011 refer to invoices issued for electricity sold thathave already been settled by the time this report wasprepared.At the end of 2011, the company has € 29,965 ofdoubtful receivables.In 2011, the company received € 184,412 from thecompany TDR Metalurgija d.d. – in bankruptcy proceedings,by which it fully repaid the created doubtfulreceivable from payment of benefits to ex-employeesof the company. It also received € 4,623 of doubtfulreceivables paid for electricity.In 2011, the company finally wrote-off € 259,258 ofshort-term receivables, namely on the basis of legallyenforceable decision on conclusion of bankruptcyproceedings of the company TDR-INVAP d.o.o.Changes in allowances for short-term receivablesin EUR 2011 2010Balance as at 1 January 458,922 873,996Written-off receivablescollected—189,035 —430,296Allowances for receivables 19,336 15,251Final write-down ofreceivables—259,258 —29Balance as at 31 December 29,965 458,922

Financial report of the company HSE157Receivables by maturity datein EUR Not yet due Up to 3 monthsFrom 3 to 6monthsFrom 6 to 12months Over one year TOTALShort-term operating receivables 113,157,442 5,094,670 1,783 0 458,922 118,712,817Short-term financial receivables 48,193,825 0 0 0 0 48,193,825Long-term operating receivables 885,931 0 0 0 0 885,931Balance as at 31/12/2010 162,237,198 5,094,670 1,783 0 458,922 167,792,573Short-term operating receivables 142,868,760 7,417,155 0 29,965 0 150,315,880Short-term financial receivables 109,317,324 0 0 0 0 109,317,324Long-term operating receivables 870,313 0 0 0 0 870,313Balance as at 31/12/2011 253,056,397 7,417,155 0 29,965 0 260,503,5174.5.8.8.2 Liquidity riskThe company has been successfully managing the liquidityrisk and thus ensures optimal solvency in thesettlement of its current liabilities. The company’s liquidityrisk actively manages with:••Regular monitoring of cash flows on daily, monthlyand annual level;••Cash management on the level of the group,whose main goal is optimisation of liquidity ofgroup companies through exploitation of synergyeffects of the Group as a whole;••Assuring liquidity reserve in form of credit linesapproved at commercial banks (in form offramework loans and limits on bank accounts);••Allocation of short-term liquidity surpluses inform of safe and liquid short-term deposits atcommercial banks and cash pooling on the levelof the Group;••Active relationship to financial markets.In conditions of financial crisis, the management of thesolvency risk is of utmost importance, which is why ourcarefulness in managing solvency risk has additionallyincreased. The company devotes special attention toefficient cash flow planning, which enables timely predictionof possible liquidity surpluses and deficits andtheir optimal management.The company timely settles its liabilities.Maturity dates of long-term liabilities as at 31/12/2010Maturity dateUp to 2 years after the From 3 to 5 years after Over 5 years after thedate of the statement the date of the statement date of the statementin EURof financial positionof financial position of financial positionTOTALLong-term financial liabilities to banks 18,216,464 24,943,737 63,458,893 106,619,094TOTAL 18,216,464 24,943,737 63,458,893 106,619,094Maturity dates of long-term liabilities as at 31/12/2011Maturity dateUp to 2 years after the From 3 to 5 years after Over 5 years after thedate of the statement the date of the statement date of the statementin EURof financial positionof financial position of financial positionTOTALLong-term financial liabilities to banks 11,350,657 27,186,161 58,974,044 97,510,862TOTAL 11,350,657 27,186,161 58,974,044 97,510,862

158 Annual Report 2011There is a risk of non-issuing the government guaranteeto EIB. According to all assurances to financial institutions(No objection letter, Letter of support by theGovernment of the Republic of Slovenia) cannot beassumed neither by HSE nor investor. Non-issuing ofthe guarantee would negatively affect the credibilityof not solely the HSE Group, but the entire State. Afternon-issuing of the guarantee, it is difficult to imaginea high international financial credit rating of the Stateand maintenance of its credibility to international financialinstitutions. EBRD loans are also related to EIBarrangement.If in 2010 we estimated that there is a risk of nonissuingof the government guarantee to EIB for theloan in the amount of € 440 million, at the end of 2011this risk must be exposed. The risk is not solely nonissuingof the guarantee but also delay of issue. Incase the guarantee will not be issued before autumn2012, this could cause liquidity problems not only inHSE, but within the entire Group. In case the guaranteeis not issued, the largest risk is certainly assumedby our owner, i.e. the State, which with this action consciouslyagrees on impairments of its property andconsequently adopts liability of capital increase of thecompany HSE.Managing risk of delay in acquiring governmentguarantee is controlled by up-to-date alternative scenarios,short-term borrowing and optimizing liquidityand operations. It is estimated that the risk was appropriatelymanaged in 2011.Risk of non-issuing government guarantee is controlledby performing scenarios of alternative financingof replacement Unit 6 in TEŠ. It is estimated thatthe risk was appropriately managed in 2011.4.5.8.8.3 Currency riskThe company is exposed to currency risk in a lesserextent since the majority of inflows and outflows arerelated to domestic currency euro. Currency risk occursparticularly in trading with electricity in Hungary(purchase of electricity in HUF). For the purpose ofrisk management, the company hedged against thechanges in foreign exchange risk with derivatives,namely FX Forward. By fixation of the foreign exchangerate the company ensures the requested andknown electricity price in € and at the same time thealready known cash flow from payments in foreigncurrency. Currency swap transactions are concludedon the basis of standard contracts ISDA with commercialbanks and it is estimated that the possibility ofnon-performing these transactions is minimal.Other currencies are present in minimum extentand therefore the company does not perform sensitivityanalysis for the change in foreign exchange rates,since the change in exchange rate would not significantlyaffect the profit or loss.The following exchange rates were used to conversassets and liabilities:CountryCurrencydesignationClosing exchangerate in EURfor 2011Closing exchangerate in EURfor 2010Czech Republic CZK 25.7870 25.0610Bulgaria BGN 1.9558 1.9558Bosnia andHerzegovinaBAM 1.95583 1.95583Croatia HRK 7.5370 7.3830Hungary HUF 314.5800 277.9500Macedonia MKD 62.0600 60.9770Romania RON 4.3233 4.2620Srbia RSD 103.6300 107.4700Switzerland CHF 1.2156 1.2504USA USD 1.2939 1.3362

Financial report of the company HSE159Type of financial instruments as at 31/12/2010in EUR EUR HUF Other currencies TOTALShort-term operating receivables 118,253,887 0 8 118,253,895Short-term financial receivables and loans 48,193,825 0 0 48,193,825Long-term operating receivables 686,418 0 199,513 885,931Short-term operating liabilities —115,807,136 —329,566 —813,086 —116,949,788Short-term financial liabilities —25,311,303 0 0 —25,311,303Long-term financial liabilities —106,619,094 0 0 —106,619,094Net exposure of the statement of financial position —80,603,403 —329,566 —613,565 —81,546,534Type of financial instruments as at 31/12/2011in EUR EUR HUF Other currencies TOTALShort-term operating receivables 150,207,417 0 78,498 150,285,915Short-term financial receivables and loans 109,317,324 0 0 109,317,324Long-term operating receivables 676,417 0 193,896 870,313Short-term operating liabilities —143,891,732 —2,135,327 —55,473 —146,082,532Short-term financial liabilities —80,108,197 0 0 —80,108,197Long-term financial liabilities —100,009,595 0 0 —100,009,595Net exposure of the statement of financial position —63,808,366 —2,135,327 216,921 —65,726,772Contracts concluded for currency swaps by maturityin EUR 31 December 2011 31 December 2010Up to 12 months 3,961,257 17,999,708From 1 to 5 years 0 688,817TOTAL 3,961,257 18,688,525

160 Annual Report 20114.5.8.8.4 Interest rate riskThe company is exposed to interest rate risk in financialliabilities since it has contracts concluded atvariable interest rate tied to Euribor which changeson daily basis. In accordance with the adopted »ImplementationPolicy of Interest Rate Risk Managementwithin the HSE Group« the company has up to 50% oflong-term loan portfolio hedged against interest raterisk. For this purpose, the company has a transactionof interest rate hedging with derivative interest swap(IRS). The concluded transaction of interest rate swapis highly efficient since the interest rate hedging in allits characteristics fully complies with the hedged item.The purpose of interest rate hedging is solely hedgingagainst risks and achieving unchangeable cash flow.The hedged ratio was formally determined and documentedat the beginning of hedging. The interest ratehedging strategy was set as well as the hedged item,hedging instrument and the manner of testing hedgingefficiency. Since the hedging was successful, thechanges in fair value are directly recognised in equity.Interest rate hedging transaction was concluded onthe basis of standard contract ISDA with the first-classcommercial bank and it is estimated that the possibilityof not meeting the transaction is minimal.Contracts concluded for interest rate swapsby maturityin EUR 31 December 2011 31 December 2010From 1 to 5 years 50,000,000 0TOTAL 50,000,000 0— Sensitivity analysis of cash flow at financialinstruments with a variable interest rateThe change in interest rate for 50 basis points on thereporting date would increase (decrease) the netprofit or loss for the values stated below. Analysis preparedfor both years assumes that all variables, particularlyforeign currency rates, remain unchanged. Inthe calculation, the receivables/liabilities are at variableinterest rate decreased by the total amount oftransactions of interest rate swaps (IRS) concluded.Financial instrumentsNet profit or loss 2011 Net profit or loss 2010in EURIncrease by 50 b.p. Decrease by 50 b.p. Increase by 50 b.p. Decrease by 50 b.p.Financial instruments at variable interest rateFinancial assets 256,231 —256,231 83,590 —83,590Financial liabilities —429,434 429,434 —693,279 693,279

Financial report of the company HSE1614.5.8.8.5 Price risk— Forward contracts for electricityThe company has an adopted strategy and all otherinternal governing documents, by which it assuredlong-term trading with electricity and thus taking advantageof favourable market opportunities, whichensure better company’s operations and increase inmarket shares in electricity markets, while at the sametime it defined the measures of price risk assessmentand limits of company’s exposure to the abovementionedrisks.One form of long-term electricity trading are alsofutures, which have two completely diametric basicpurposes: position trading or insurance against pricerisks. The company trades with futures with the purposeto insure long-term transactions against pricerisks. In sales and purchase of electricity with physicalpurchase after 2011 (operations through OTC market,bilateral conclusion of contracts) the company simultaneouslyconcludes future with the position contraryquantity and the same maturity. Thus, the companyfinancially fixes the revenue from sold or purchasedtransaction, meaning that loss arising from the purchaseof forward contracts is compensated with revenuearising from physical contract on sales of electricity.The purchase or sales of forward contract withthe purpose of position trading increases the priceexposure of the company since it is concluded withthe intention to create larger revenue on the accountof changes in the prices of electricity, while it is notclosed in terms of position with position contra forwardcontract. The prise exposure is decreased solelyin case of concluding position contra forward contract.In 2011, the company concluded solely forwardcontracts for insurance against price fluctuation ofalready concluded contracts with physical supply ofelectricity after 2011.Disclosures of transactions with forward contractsare discussed in fair value reserve (equity) and othercomprehensive income.— Emission couponsThe company has the adopted strategy of selling ownproduction with the purpose to ensure long-term stablerevenue from the sales of electricity. The basis forperforming strategy of selling own production is expectedelectricity production of subsidiaries. Thus, thecompany sells electricity to subsidiary for some yearsin advance. The main goal of the strategy is the insuranceagainst price risks.Slovenia as the EU member and the signatoryof Kyoto protocol committed itself to decrease CO2emissions. The largest burden of decrease in CO2emissions will be carried by energy companies orthose companies that use carbon energy sources inelectricity production (coal, gas, mazut, ELKO etc.).However, the cost of reducing CO2 emissions in thefirst (2005-2007) and second (2008-2012) tradingperiod was not significant since the abovementionedproduction companies covered a larger part of CO2emissions with CO2 coupons received from the State.In 2013, drastic changes will appear in energy sectorwith regard to the manner of allocating coupons sincethe abovementioned power plants will have to fullycover all CO2 emissions with the purchase of CO2coupons in the free market. This will increase operatingcosts of power plants and the risk of change inmarket value of CO2 coupon with each sales of electricityfrom the abovementioned production companieswithout simultaneous purchase of CO2 couponswith regard to emission factor CO2/MWh. This alsoapplies to our two subsidiaries.In 2011, the company decided to partly protect itselfagainst risks of change in the price of CO2 couponsby adopting the Strategy of the Purchase of CO2Emission Coupons for the purposes of own productionafter 2012. The strategy stipulates that the companyhas to buy a certain share of emission couponsfrom thermal production subsidiaries in a certaindeadline from the sales of own electricity production.As a result, in 2011 an Agreement on Emission CouponPortfolio Management was signed with the two subsidiaries,which stipulates that the company managesthe emission coupons of both companies and takescare for the sufficient amount of coupons to cover liabilitiesto the State.By the end of 2011, the company purchased a certainamount of CO2 coupons which the subsidiarieswill need after 2012. With the purchase of the relevantcoupons the HSE company secured a part of profitfrom long-term sold own production of the abovementionedsubsidiaries against changes in price ofCO2 coupon.

162 Annual Report 20114.5.8.8.6 Capital managementThe main purpose of capital management is to ensurethe best credit rating possible and capital adequacyfor the purposes of financing operations and investments.An adequate volume of capital enables thecompany the trust of creditors and market as well asmaintains the future development of activities.The company monitors changes in equity usingthe financial leverage ratio calculated by splitting netliabilities with the total amount of net liabilities andtotal amount of equity. In terms of net liabilities, thecompany includes received notices and other financialliabilities less cash.The ratio shows the relationship between the company‘sdebt and equity. Compared to the end of 2010,the ratios is higher due to higher short-term indebtednessas a result of not yet acquired government guaranteefor the project of replacement Unit 6 at TEŠ.Ratio complies with conditions determined by banks.Capital managementin EUR 31 December 2011 31 December 2010Long-term financial100,009,595 106,619,094liabilitiesShort-term financialliabilities80,108,197 25,311,303TOTAL financial liabilities 180,117,792 131,930,397Total equity 970,128,945 929,748,299Financial liabilities/equity 0.19 0.14Net financial liability 161,914,660 92,486,558Net debt/equity 0.17 0.104.5.8.9 Fair valueThe company estimates that the carrying amount issufficient approximation for its financial instruments,except derivatives, which are recorded at fair value.Financial instruments31 December 2011 31 December 2010in EURCarrying amount Fair value Carrying amount Fair valueNon-derivative financial assets at fair value 246,500 246,500 389,579 389,579Available-for-sale financial assets 246,500 246,500 246,500 246,500Derivatives (assets) 0 0 143,079 143,079Non-derivative financial assets at amortised cost 278,676,684 278,676,684 206,777,490 206,777,490Financial receivables 109,317,324 109,317,324 48,193,825 48,193,825Operating receivables 151,156,228 151,156,228 119,139,826 119,139,826Cash 18,203,132 18,203,132 39,443,839 39,443,839TOTAL non-derivative financial assets 278,923,184 278,923,184 207,167,069 207,167,069Non-derivative financial liabilities at fair value 2,809,549 2,809,549 11,534 11,534Derivatives (liabilities) 2,809,549 2,809,549 11,534 11,534Non-derivative financial liabilities323,390,775 323,390,775 248,868,651 248,868,651at amortised costBank loans 177,308,243 177,308,243 131,918,863 131,918,863Operating liabilities 146,082,532 146,082,532 116,949,788 116,949,788TOTAL non-derivative liabilities 326,200,324 326,200,324 248,880,185 248,880,185

Financial report of the company HSE163Financial assets carried at fair value by hierarchyin EUR 31 December 2011 31 December 2010Financial assetsat second-level fair valueFinancial assetsat third-level fair valueTOTAL financial assetsat fair value0 143,079246,500 246,500246,500 389,5794.5.8.10 Other disclosuresIn 2011, the company started producing electricity inSPP Velenje, meaning that besides electricity tradingit also performs the production activity. With regard toprovisions of Electricity Act, the company separatelymonitors the electricity production activity in SPP. In2011, the company thus created € 7,306 of sales revenue,while the sole power plant is disclosed as productionequipment in the context of the company’sproperty, plant and equipment.4.5.8.11 Events after the reporting dateAfter the date of statement of financial position, noevents in the company occurred that could affect consolidatedfinancial statements for 2011 and related disclosures.

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5Financial reportof HSE Group2011

166 Annual Report 20115.1 Auditor’s report for HSE group

Financial report of HSE Group167

168 Annual Report 20115.2 Statement of management’s responsibilityThe Managing Director is responsible to prepare the financial statements foreach individual financial year in accordance with the International FinancialReporting Standards (»IFRS«) as adopted by the European Union in a mannerthat they give a true and fair view of the financial position of the companyHolding Slovenske elektrarne d.o.o.The management reasonably expects that in the foreseeable future thecompany will have sufficient assets to continue its operations and therefore thefinancial statements are prepared on a going concern basis.The management’s responsibility in preparation of the financial statementsincludes the following:• Accounting policies are appropriately selected and consistently used;• Judgements and assessments are reasonable and wise;• Financial statements are prepared in accordance with IFRS adopted bythe European Union.The management confirms that the financial statements are prepared inaccordance with the provisions of IFRS without reservation when used.As at 17 May 2012, the Managing Director adopted the consolidated financialstatements of the company Holding Slovenske elektrarne d.o.o. for the financialyear ended as at 31 December 2011.Ljubljana, 17 May 2012Matjaž Janežič, M.Sc.Managing Director of HSE d.o.o.

Financial report of HSE Group1695.3 Introduction to the preparation of financial statementsOn the basis of the General Meeting decision of the owner of the companyTermoelektrarna Šoštanj as at 29 November 2010, all financial statements andexplanatory notes for 2011 are prepared in accordance with the InternationalFinancial Reporting Standards (hereinafter: IFRS) as adopted by the EU, forthe first time. 1 January 2010 is the date of transition after which the companyprepared the opening statement of the financial position in accordance withIFRS. Until 2011, the company had been preparing the financial statements inaccordance with the Slovene Accounting Standards and the interpretations bythe Slovene Institute of Auditors.

170 Annual Report 20115.4 Consolidated financial statements5.4.1 Consolidated statement of financial positionin EUR Note* 31 December 2011 31 December 2010 1 January 2010ASSETS 2,275,886,031 1,900,508,353 1,874,355,148A. LONG-TERM ASSETS 1,970,829,476 1,623,350,148 1,513,726,565I. Intangible assets 1 47,817,146 36,801,406 41,011,922II. Property, plant and equipment 2 1,900,121,752 1,557,286,457 1,442,670,731III. Investment property 281,019 295,964 1,065,418IV. Long-term investments in subsidiaries 3 4,378,971 6,461,799 3,024,971V. Other long-term investments and loans 4 5,137,980 4,130,247 4,874,984VI. Long-term operating receivables 5 1,685,613 8,008,393 10,021,230VII. Other long-term assets 632,148 206,385 212,968VIII. Deferred tax assets 6 10,774,847 10,159,497 10,844,341B. CURRENT ASSETS 305,056,555 277,158,205 360,628,583I. Assets held for sale 213,830 210,556 210,556II. Inventories 7 33,177,324 36,224,926 37,798,852III. Short-term investments and loans 8 1,894,071 782,401 87,131,282IV. Short-term operating receivables 9 188,986,897 137,003,495 151,648,396V. Current tax assets 32 6,814,899 3,080,824 3,009,653VI. Othershort-term assets 10 6,962,296 7,147,212 7,554,436VII. Cash and cash equivalents 11 67,007,238 92,708,791 73,275,408EQUITY AND LIABILITIES 2,275,886,031 1,900,508,353 1,874,355,148A. EQUITY 12 1,409,097,763 1,344,136,467 1,234,004,990I. Called-up capital 29,558,789 29,558,789 29,558,789II. Capital surplus 561,243,185 561,243,185 561,243,185III. Revenue reserves 359,472,047 296,361,536 226,498,386IV. Fair value reserve −4,292,977 2,763,640 −2,255,517V. Retained earnings 392,977,563 386,328,588 353,388,467VI. Consolidation equity adjustmen −823,705 −453,831 −218,671VII. Minority interest 70,962,861 68,334,560 65,790,351B. LONG-TERM LIABILITIES 501,407,398 354,855,625 380,872,298I. Provisions for termination and jubilee benefits 13 14,010,145 14,305,734 13,250,729II. Other provisions 14 53,403,922 62,545,806 72,961,757III. Other long-term liabilities 15 18,131,459 19,875,657 26,198,237IV. Long-term financial liabilities 16 411,791,973 253,668,459 265,817,089V. Long-term operating liabilities 17 4,068,412 4,415,443 2,575,141VI. Deferred tax assets 1,487 44,526 69,345C. SHORT-TERM LIABILITIES 365,380,870 201,516,261 259,477,860II. Short-term financial liabilities 18 81,031,495 60,204,864 109,948,976III. Short-term operating liabilities 19 273,158,937 126,323,400 120,841,771IV. Current tax liabilities 32 1,388,703 6,012,557 15,197,728V. Other short-term liabilities 20 9,801,735 8,975,440 13,489,385* The accompanying notes are an integral part of the financial statements and should be read in conjunction with them.

Financial report of HSE Group1715.4.2 Consolidated income statementin EUR Note* 2011 20101. Net sales revenue 22 1,327,546,308 913,777,4942. Changes in inventories of products and work in progress 23 1,714,941 3,876,1493. Capitalised own products and own services 24 32,264,464 12,378,0254. Other operating revenue 25 28,900,414 27,392,558GROSS RETURN ON OPERATIONS 1,390,426,127 957,424,2265. Costs of goods, materials and services 26 995,533,662 533,100,1336. Labour costs 27 146,313,727 143,331,1957. Write-downs in value 28 96,183,027 93,525,6538. Other operating expenses 29 56,205,456 61,223,271OPERATING PROFIT OR LOSS 96,190,255 126,243,9749. Financial revenue 30 2,716,453 10,839,81010. Financial expenses 31 11,461,164 8,479,092TOTAL PROFIT OR LOSS −8,744,711 2,360,718PROFIT OR LOSS BEFORE TAX 87,445,544 128,604,69211. Corporate income tax 17,563,285 24,768,27512. Deferred taxes 129,156 852,289TAX 32 17,692,441 25,620,56413. NET PROFIT OR LOSS FOR THE ACCOUNTING PERIOD 33 69,753,103 102,984,128Majority owner's net profit or loss for the year 69,759,487 102,707,417Minority owner's net profit or loss for the year −6,384 276,711* The accompanying notes are an integral part of the financial statements and should be read in conjunction with them.5.4.3 Consolidated statement of other comprehensive incomein EUR Note* 2011 201013. NET PROFIT OR LOSS FOR THE FINANCIAL YEAR 33 69,753,103 102,984,12816. Gains and losses arising from translation of financial statements of entities located abroad 12 −369,873 −235,15617. Net profit (loss) for the sales of available financial assets 4 −108,266 343,58618. Net effective part of change in fair value of instrument for cash flow hedging 12 −7,079,467 4,805,91919. TOTAL COMPREHENSIVE INCOME FOR THE FINANCIAL YEAR 62,195,497 107,898,477Majority owner's total comprehensive income for the year 62,332,996 107,587,268Minority owner's total comprehensive income for the year −137,499 311,209* The accompanying notes are an integral part of the financial statements and should be read in conjunction with them.

172 Annual Report 20115.4.4 Consolidated cash flow statementin EUR 2011 2010A. Cash flows from operating activitiesa) Items of consolidated income statement 133,802,117 200,425,535Operating revenue (except from revaluation) and financial income from operating receivables 1,354,779,496 949,842,243Operating revenue (except from revaluation and amortisation/depreciation) and financial expenses foroperating liabilities−1,194,232,263−727,033,493Income taxes and other taxes not included in operating expenses −26,745,116 −22,383,215b) Changes in net operating assets in statement of financial position items 1,703,341 −2,812,273Opening less closing operating receivables −47,632,525 11,731,423Opening less closing other assets −39,147 1,010,255Opening less closing deferred tax assets −472,448 1,694,969Opening less closing assets (disposal groups) held for sale −3,274 0Opening less closing inventories 1,068,825 −1,158,251Closing less opening operating liabilities 54,538,913 2,042,564Closing less opening other liabilities and provisions −5,768,409 −18,057,523Closing less opening deferred tax liabilities 11,406 −75,710c) Net cash from operating activities 135,505,458 197,613,262B. Cash flows from investing activitiesa) Cash receipts from investing activities 23,694,020 215,966,463Cash receipts from interest 1,526,945 1,248,246Cash receipts from dividends and shares in profits of others 523 3,719Cash receipts from intangible assets (including advances) 619,244 3,634,131Cash receipts from property, plant and equipment (including advances) 607,560 2,854,207Cash receipts from investment property (including advances) 21,377 0Cash receipty from short-term loans 20,429,670 155,756,503Cash receipts from other long-term investments 488,701 191,930Cash receipts from other short-term investments 0 52,277,727b) Cash disbursements from investing activities −359,818,894 −319,846,724Cash disbursements to acquire intangible assets (including advances) −20,548,497 −7,592,938Cash disbursements to acquire property, plant and equipment (including advances) −318,666,285 −196,081,513Cash disbursements from investment property (including advances) 0 −142,441Cash disbursements from short-term loans −18,491,488 −112,424,930Cash disbursements from investments in subsidiaries, associates and jointly controlled companies −348,717 0Cash disbursements from other long-term investments −1,763,907 −3,604,902c) Net cash from investing activities −336,124,874 −103,880,261C. Cash flows from financing activitiesa) Cash receipts from financing activities 407,599,511 181,974,335Cash receipts from paid-in capital 2,765,800 2,233,000Cash receipts from long-term loans received 197,214,363 32,299,211Cash receipts from short-term loans received 207,619,348 147,442,124b) Cash disbursements from financing activities −232,280,577 −256,182,125Interest paid on loans received −8,309,626 −8,241,686Cash disbursements from long-term loans received −41,560,579 −66,165,811Cash disbursements from short-term loans received −182,410,372 −181,774,628c) Net cash from financing activities 175,318,934 −74,207,790D. Cash and cash equivalents at the beginning of period 92,708,791 73,275,408Effects of changes in exchange rates on cash and cash equivalents −401,071 −91,828Increase/(decrease) of cash and cash equivalents −25,300,482 19,525,211E. Cash and cash equivalents at the end of period 67,007,238 92,708,791* The accompanying notes are an integral part of the financial statements and should be read in conjunction with them.

Financial report of HSE Group1735.4.5 Consolidated statement of changes in equityCalled-upcapitalin EUR Share capitalCapitalsurplusRevenuereservesOther revenuereservesFair valuereservesRetainednet profitRetained earningsNet profit or lossfor the year ConsolidationequityadjustmentMinorityinterestTOTALA.1. Balance as at 1/1/2010 29,558,789 561,243,185 226,498,385 −2,255,517 353,388,468 0 −218,671 65,790,351 1,234,004,990Transition to IFRS −95,854 95,854 0A.2. Balance as at 1/1/2010 29,558,789 561,243,185 226,498,385 −2,351,371 353,484,322 0 −218,671 65,790,351 1,234,004,990B.1. Transactions with owners 0 0 0 0 0 0 0 2,233,000 2,233,000d) Additional paid-in capital 2,233,000 2,233,000B.2. Changes in total comprehensive income 0 0 0 5,115,011 0 102,707,417 −235,160 311,209 107,898,477a) Net profit or loss for the year 102,707,417 276,711 102,984,128b) Other changes in total comprehensive income 5,115,011 −235,160 34,498 4,914,349B.3. Changes in equity 0 0 69,863,151 0 −30,117,449 −39,745,702 0b) Allocation of portion of net profit for the reporting periodto other components of equity in accordance with thedecision of management and supervisory bodies39,745,702 −39,745,702 0c) Allocation of a portion of net profit to additional reservesin accordance with the general meeting resolution30,117,449 −30,117,449 0C. Balance as at 31/12/2010 29,558,789 561,243,185 296,361,536 2,763,640 323,366,873 62,961,715 −453,831 68,334,560 1,344,136,467A.2. Balance as at 1/1/2011 29,558,789 561,243,185 296,361,536 2,763,640 386,328,588 0 −453,831 68,334,560 1,344,136,467B.1. Transactions with owners 0 0 0 0 0 0 0 2,765,800 2,765,800a) Subscription of called-up nominal capital 40,000 40,000d) Additional paid-in capital 2,725,800 2,725,800B.2. Changes in total comprehensive income 0 0 0 −7,056,617 0 69,759,487 −369,874 −137,499 62,195,497a) Net profit or loss for the year 69,759,487 −6,384 69,753,103b) Other changes in total comprehensive income −7,056,617 −369,874 −131,115 −7,557,606B.3. Changes in equity 0 0 63,110,511 0 −39,745,702 −23,364,809 0 0 0b) Allocation of portion of net profit for the reporting periodto other components of equity in accordance with thedecision of management and supervisory bodies23,364,809 −23,364,809 0c) Allocation of a portion of net profit to additional reservesin accordance with a general meeting resolution39,745,702 −39,745,702 0C. Balance as at 31/12/2011 29,558,789 561,243,185 359,472,047 −4,292,977 346,582,886 46,394,678 −823,705 70,962,861 1,409,097,764* The accompanying notes are an integral part of the financial statements and should be read in conjunction with them.

174 Annual Report 20115.5 Notes to the consolidated financial statements5.5.1 Reporting groupConsolidated financial statements for the HSE Groupare prepared by the controlling company HoldingSlovenske elektrarne d.o.o. (hereinafter: »the controllingcompany«). The registered office of the controllingcompany is located at Koprska ulica 92, Ljubljana,where consolidated financial statements are availableas a part of Group’s annual report.The separate financial statements of the companyfor the year ended 31 December 2011 are presentedbelow.5.5.1.1 Companies within the HSE groupPrior to the consolidation of the HSE Group, the PremogovnikVelenje Group had been consolidated. Inaccordance with the consecutive consolidation method,consolidated financial statements are alreadyprepared at the level of subsidiaries and are thenincluded in the consolidated financial statements ofthe HSE Group. The consolidated annual report of thecompany PV is available at the registered office of thecompany Premogovnik Velenje d.d., Partizanska cesta78, Velenje.Companies included in consolidated financialstatements of PV groupTitle of the companyPremogovnik Velenje d.d.GOST, podjetje za gostinstvo, turizemin trgovino d.o.o.HTZ, Harmonija tehnologije in znanja,invalidsko podjetje d.o.o.PV Invest, Naložbe, urejanje okolja,geodetske storitve d.o.o.PV Center starejših Zimzelen d.o.o.RGP, Rudarski gradbeni programi d.o.o.Country of residenceof the companySloveniaSloveniaSloveniaSloveniaSloveniaSloveniaCompanies and groups included in consolidatedfinancial statements of HSE groupTitle of the company or groupHolding Slovenske elektrarne d.o.o.Dravske elektrarne Maribor d.o.o.Soške elektrarne Nova Gorica d.o.o.Termoelektrarna Šoštanj d.o.o.Premogovnik Velenje GroupTermoelektrarna Trbovlje d.o.o.Hidroelektrarne na spodnji Savi d.o.o.Srednjesavske elektrarne d.o.o.HSE Invest d.o.o.HSE Italia S.r.l.HSE Balkan Energy d.o.o.HSE Hungary Kft.HSE Adria d.o.o.HSE Bulgaria EOODHSE Mak Energy DOOELHSE BH d.o.o.Country of residenceof the companySloveniaSloveniaSloveniaSloveniaSloveniaSloveniaSloveniaSloveniaSloveniaItalySerbiaHungaryCroatiaBulgariaMacedoniaBosnia and HerzegovinaThe HSE Group subsidiaries Elprom d.o.o., Golted.o.o., Jama Škale v zapiranju d.o.o. and Saša Inkubatord.o.o. are dormant companies and have not beenconsolidated either at the level of their controllingcompanies or at the Group level due to their immateriality.These companies are not material for a true andfair presentation of the Group’s operations.5.5.1.2 AssociatesAssociates are companies in which the Group exercisessignificant but not dominant control over businessdecisions. The interest in these companies ranges between20 and 50%.Associated companiesHereinafter the term »Group« (or »group«) refers toHSE Group companies that are included in the consolidatedfinancial statements. In addition to PV group,fifteen more companies are included in the group.In 2011, the consolidated financial statements forthe first time included the company Srednjesavskeelektrarne d.o.o. established in 2011.Title of the companyEldom, družba za storitve in gostinstvo d.o.o.Erico, inštitut za ekološke raziskave d.o.o.PLP, lesna industrija d.o.o.Sipoteh, strojna in proizvodna industrija d.o.o.Country of residenceof the companySloveniaSloveniaSloveniaSlovenia

Financial report of HSE Group1755.5.1.3 Jointly controlled companiesInvestments in jointly controlled companies are investmentsin which the company controls the operationsof such companies together with other owners,namely on the basis of contractually agreed divisionof control.Jointly controlled companiesCountry of residenceof the companyCo-owner –HSE group companySoenergetika d.o.o. Slovenia Holding Slovenskeelektrarne d.o.o.5.5.2 Basis for preparationIn the preparation of financial statements as at 31 December2011, the company considered:••IFRS, which include International AccountingStandards (IAS), Interpretations issued by theStanding Interpretations Committee (SIC),International Financial Reporting Standards(IFRS) and Interpretations issued by InternationalFinancial Reporting Interpretations Committee(IFRIC) as adopted by the European Union(hereinafter: the »EU«);••Companies Act;••Energy Act;••Mining Act;••Accounting Rules of the Company and••Other applicable legislation.by the EU on 30 June 2010 (effective for annualperiods beginning on or after 1 July 2010);••Amendments to various standards andinterpretations »Improvements to IFRSs (2010)«resulting from the annual improvement projectof IFRS published on 6 May 2010 (IFRS 1, IFRS 3,IFRS 7, IAS 1, IAS 27, IAS 34, IFRIC 13) primarily witha view to removing inconsistencies and clarifyingwording (most amendments are to be applied forannual periods beginning on or after 1 January2011, depending on standard/note);••Amendments to IFRIC 14 »IAS 19 — The Limiton a defined benefit Asset, Minimum FundingRequirements and their Interaction« – Prepaymentsof a Minimum Funding Requirement, adopted bythe EU on 19 July 2010 (effective for annual periodsbeginning on or after 1 January 2011);••IFRIC 19 »Extinguishing Financial Liabilitieswith Equity Instruments«, adopted by the EUon 23 July 2010 (effective for annual periodsbeginning on or after 1 July 2010).The adoption of these amendments to the existingstandards has not led to any changes in the Entity’saccounting policies.b) Standards and Interpretations issued by IFRIC andadopted by the EU but not yet effective••Amendments to IFRS 7 »Financial Instruments:disclosures« – Transfer of assets, adopted by the EUon 22 November 2011 (effective for annual periodsbeginning on or after 1 July 2011).a) Standards and Interpretations effective inthe current period••Amendments to IAS 24 »Related Party Disclosures«– Simplifying the disclosure requirements forgovernment-related entities and clarifying thedefinition of a related party, adopted by the EUon 19 July 2010 (effective for annual periodsbeginning on or after 1 January 2011);••Amendments to IAS 32 »Financial Instruments:presentation« – Accounting for rights issues,adopted by the EU on 23 December 2009(effective for annual periods beginning on or after 1February 2010),••Amendments to IFRS 1 »First-time Adoption ofIFRS« – Limited Exemption from ComparativeIFRS 7 Disclosures for First-time Adopters, adoptedThe company opted not to adopt these standards,amendments and interpretations before they enterinto force. The company anticipates that the adoptionof these standards, revisions and interpretations willhave no material impact on the financial statements ofthe Entity in the period of initial application.c) Standards and Interpretations issued by IFRIC butnot yet adopted by the EUAt present, IFRS as adopted by the EU do not significantlydiffer from regulations adopted by the InternationalAccounting Standards Board (IASB) except fromthe following standards, amendments to the existingstandards and interpretations, which were not endorsedfor use as at 17.5.12.

176 Annual Report 2011••IFRS 9 »Financial Instruments« (effective for annualperiods beginning on or after 1 January 2015);••IFRS 10 »Consolidated financial statements«(effective for annual periods beginning on or after1 January 2013);••IFRS 11 »Joint Arrangements« (effective for annualperiods beginning on or after 1 January 2013);••IFRS 12 »Disclosures of Involvement with otherEntities« (effective for annual periods beginningon or after 1 January 2013);••IFRS 13 »Fair Value Measurement« (effectivefor annual periods beginning on or after1 January 2013);••IAS 27 (revised in 2011) »Separate FinancialStatements« (effective for annual periodsbeginning on or after 1 January 2013);••IAS 28 (revised in 2011) »Investments in Associatesand Joint Ventures« (effective for annual periodsbeginning on or after 1 January 2013);••Amendments to IFRS 1 »First-time Adoption ofIFRS« – Severe Hyperinflation and Removal of FixedDates for First-time Adopters (effective for annualperiods beginning on or after 1 July 2011);••Amendments to IFRS 7 »Financial Instruments:Disclosures«- Offsetting Financial Assets andFinancial Liabilities (effective for annual periodsbeginning on or after 1 January 2013).••Amendments to IFRS 9 »Financial Instruments«and IFRS 7 »Financial Instruments: Disclosures«– Mandatory Effective Date and TransitionDisclosures;••Amendment to IAS 1 »Presentation of financialstatements« – Presentation of Items of OtherComprehensive Income (effective for annualperiods beginning on or after 1 July 2012);••Amendments to IAS 12 »Income Taxes« – Deferredtax: Recovery of Underlying Assets (effective forannual periods beginning on or after 1 January2012),••Amendment to IAS 19 »Employee Benefits«– Improvements to the Accounting for PostemploymentBenefits (effective for annual periodsbeginning on or after 1 January 2013);••Amendments to IAS 32 »Financial Instruments:Disclosures«- Offsetting Financial Assets andFinancial Liabilities (effective for annual periodsbeginning on or after 1 January 2014).••IFRIC 20 »Stripping Costs in the Production Phaseof a Surface Mine« (effective for annual periodsbeginning on or after 1 January 2013).The Group anticipates that the adoption of thesestandards, amendments to the existing standards andinterpretations will have no material impact on the financialstatements of the Group in the period of initialapplication.At the same time, hedge accounting regardingthe portfolio of financial assets and liabilities, whoseprinciples have not been adopted by the EU, is stillunregulated.According to the company’s estimates, applicationof hedge accounting for the portfolio of financial assetsor liabilities pursuant to IAS 39: »Financial instruments:recognition and measurement«, would notsignificantly impact the financial statements, if appliedas at the balance sheet date.5.5.3 Basis of measurementThe company’s financial statements are prepared onthe basis of historical values of balance sheet itemsexcept the following assets and liabilities carried atfair value:••Derivatives.••Available-for-sale financial assets (in case the fairvalue can be determined).5.5.4 Currency reports5.5.4.1 Functional and presentation currencyThe financial statements contained in this Report arepresented in €o (€) without cents. The €o has been thefunctional and presentation currency of the company.Due to the rounding of amounts, minor but insignificantdeviations exist in the tables.5.5.4.2 Foreign currency translationTransactions expressed in a foreign currency aretranslated into the relevant functional currency at theexchange rate applicable on the date of transaction.Cash and liabilities expressed in a foreign currencyat the end of the reporting period are converted intofunctional currency at then applicable exchange rate.Positive or negative foreign exchange differences aredifferences between amortised cost in the functional

Financial report of HSE Group177currency at the beginning of the period, which is repairedfor the amount of effective interest and paymentsduring the period, as well as amortised costin foreign currency converted at the exchange rate atthe end of the period. Non-cash assets and liabilitiesexpressed in a foreign currency and measured at fairvalue are converted in the functional currency at theexchange rate on the date when the amount of fairvalue is determined. Foreign exchange differencesare recognised in the consolidated income statement,namely according the net principle (differencebetween positive and negative foreign exchange differencesamong revenue or difference between negativeand positive foreign exchange differences andexpenses).In translation of financial statements of subsidiariesabroad, whose functional value is not equal topresentation value of the group, the following exchangerates are used:••Assets and liabilities »except equity« translatedaccording to the exchange rate on the reportingdate;••Equity according to historical exchange rate;••Revenue and expenses according to averageexchange rate in the year of reporting.••Assessment of useful life of amortisable assets(Point 1, 2);••Test of impairment of assets (Disclosure 5.5.8.1. –Point 1, 2, 3, 4);••Assessment of fair value of derivatives (Disclosures5.5.8.8.3 and 5.5.8.8.4);••Assessment of realisable values of receivables;••Assessment of net realisable value of inventories;– Point 7);••Assessment of provisions for jubilee andtermination benefits; – Point 13);••Assessment of other provisions (Disclosure 5.5.8.1.– Point 14); and••Assessment of contingent liabilities and assets(Disclosure 5.5.8.1. – Point 21).5.5.6 Branch and representative officesThe company has two foreign branch offices in CzechRepublic and Slovakia and two representative officesin Serbia and Romania. In 2011, the group companiesdid not perform transactions through subsidiaries.The operations of branch and representative officesare included in financial statements of the Group.5.5.5 Use of assessments and judgementsThe preparation of financial statements requires thatthe management forms certain assessments and assumptionswhich affect the disclosed amounts ofassets and liabilities, revenue and expenses and disclosuresof contingent assets and expenses in the reportingperiod.Assessments and judgements are based on pastexperience and other factors that are considered reasonablein the given circumstances and on the basisof which the judgements on the carrying amount ofassets and liabilities are expressed. Since the assessmentsand assumptions are subject to subjectivejudgement and certain level of uncertainty, subsequentactual results can differ from assessments. Theassessments are examined on regular basis. Changesin accounting estimates are recognised in the periodin which the assessments were changed if the changeaffects only that period or in the period of change andin future periods in case the change affects future periods.Assessments and assumptions are present at leastat the following judgements:5.5.7 Significant accounting policiesThe company’s financial statements are prepared onthe basis of accounting policies presented below. Theabovementioned accounting policies are used for allyears presented, unless otherwise indicated.The comparative data was adopted when neededso that they are in accordance with the presentation ofdata in the current year.5.5.7.1 Basis for consolidationConsolidated financial statements comprise financialstatements of the controlling company and subsidiaries.Subsidiaries are companies controlled by theGroup. This means that the Group is able to decide onfinancial and business orientations of the company forobtaining benefits from its operations. Financial statementsof subsidiaries are included in consolidated financialstatements from the date when the controllingbegins to the date when it stops.Transactions with the owners of non-controllingshare are considered in a same way as transactionswith external partners. Profits and losses of the owners

178 Annual Report 2011of non-controlling share are disclosed in the consolidatedincome statement. The equity of non-controllingshare owners in the consolidated statement of financialposition is disclosed separately from other equityitems. Losses that refer to non-controlling shares insubsidiary are allocated in the item non-controllingshares, although the item discloses negative balance.The financial statements of group companies havebeen incorporated into the consolidated financialstatements on the basis of full consolidation. The financialstatements were merged item by item by addingup similar items of assets, liabilities, equity, revenueand expenses.Consolidated financial statements do not includebalances of receivables and liabilities among thegroup companies, revenue and expenses and unrealisedprofits and losses from transactions within thegroup.Foreign exchange differences from translation offinancial statements of subsidiaries, whose functionalcurrency is not the same as presentation currency ofthe Group, are recognised in consolidated equity adjustmentor other comprehensive income.5.5.7.2 Intangible assetsIntangible assets are long-term assets enabling theperformance of the company’s registered activities,whereas physically they do not exist.Intangible assets comprise long-term propertyrights (also emission coupons), goodwill and otherintangible assets.Upon initial recognition, an intangible asset ismeasured at cost. The cost also includes import andnon-refundable purchase taxes after the commercialand other discounts have been deducted and all costsdirectly attributable to preparation of an asset for theintended use. Borrowing costs that are directly allocatedto the purchase, construction or production of aqualifying asset, i.e. until the capitalisation of an asset,are recognised as a part of cost of such an asset.Intangible assets are subsequently measured usingthe cost model.Amortisation is accounted for on a straight-linebasis, taking into account the useful life of each individual(integral) part of an intangible asset. The amortisationbegins to be calculated from the cost when anasset is available for use.Emission coupons are not depreciated. The valueof the use of emission coupons is calculated on thebasis of method of weighted average cost. Emissioncoupons received from the State are initially valuatedas 1 euro per coupon at simultaneous increase in longtermdeferred revenue.Goodwill appears in consolidation and it representsa surplus of cost over the company‘s share infair value of recognisable assets acquired, liabilitiesand contingent liabilities of the company on the dateof acquisition. Goodwill is recognised as asset and isexamined at least once per year due to impairment.Individual impairment is immediately recognised inthe consolidated income statement and is not subsequentlyreversed. In case of disposal of subsidiary,the adequate amount of goodwill is included in theestablishment of profit/loss in sales and effect on theGroup‘s profit or loss.The Group has no intangible assets, for which itwould record the residual value when purchased.Depreciation methods, useful life and other valuesof groups of assets are examined at the end ofeach financial year and adapted if needed. In case theuseful life is extended, the costs of amortisation in thefinancial year are decreased, while in case of shorteningof useful life they increase. The adjustment of usefullife has to be calculated in a manner that the assetwill be depreciated in the new predicted useful life.The change in useful life is considered as a changein accounting estimate and it affects solely the periodin which the accounting estimate was changed andevery following period of the remaining useful life.Individual items of intangible assets have the followinguseful lives:Amortisation categories of intangible assetsIntangible assets Amortisation rate Useful lifeComputer software 7.6 – 50% 2 – 13 yearsLicences 10 – 50% 2 – 10 yearsConcession rights 2% 50 yearsOther long-term property rights 10 – 25% 4 – 10 yearsOther intangible assets 10% 10 yearsSubsequent costs in relation to intangible assets arecapitalised only in cases when they increase futureeconomic benefits arising from an asset to which thecosts refer. All other costs are recognised in profit orloss as expenses as soon as they are incurred.On disposal, intangible assets are eliminated fromthe books of account, and the difference between thenet sales value and the carrying amount of a disposedof intangible asset is transferred to revaluation revenueor expenses.

Financial report of HSE Group1795.5.7.3 Property, plant and equipmentProperty, plant and equipment are long-term assetsowned by the company and used for the performanceof its registered activities.Property, plant and equipment comprise land,buildings, production equipment, other equipmentand assets in the course of construction.Property, plant and equipment (hereinafter: »operatingfixed assets«) are disclosed at cost less accumulateddepreciation and loss from impairments. Costincludes costs that can be directly attributed to the acquisitionof an item of property, plant and equipment.Cost includes borrowing costs related to the acquisitionof an item of property, plant and equipment upuntil the asset is in working condition. The cost doesnot include the costs incurred upon the dismantling orrenovation of items of property, plant and equipment.The parts of items of plant and equipment withdifferent useful lives are accounted for as individualassets. Spare parts of higher value are recorded asproperty, plant and equipment and depreciated overthe useful life of the related asset.The anticipated costs of regular inspections andrepairs of property, plant and equipment are consideredas parts of property, plant and equipment. Theyinclude repairs that are usually carried out every fewyears (periodically) and require substantial resources.The cost of an item of property, plant and equipmentconstructed or manufactured within the Groupconsists of the costs incurred as a result of its constructionor manufacturing and of indirect construction ormanufacturing costs that can be attributed to the item.For later measurement of property, plant andequipment the cost model is used.Group companies have no intangible assets, forwhich it would record the residual value when purchased.Assets acquired free-of-charge are not amortised/depreciated, while at the same time a part of longtermdeferred revenue is transferred to other operatingrevenue. This part is equal to the value of depreciation/amortisationcharged.Amortisation is calculated using the straight-lineamortisation method, taking into account the usefullife of individual (integral) part of an intangible asset.The amortisation begins to be calculated from thecost when an asset is available for use. Land, quarriesand assets in course of construction or preparationare not depreciated.Individual items of property, plant and equipmenthave the following useful lives:Amortisation categories of property, plant andequipmentProperty, plant and equipment Amortisation rate Useful lifeBuildings 1 – 10% 10 – 100 yearsParts of buildings 2.5 – 20% 5 – 40 yearsProduction equipment 1.3 – 20% 5 – 77 yearsParts of productionequipment5 – 33% 3 – 20 yearsComputer equipment 20 – 50% 2 – 5 yearsFurniture 10 – 25% 4 – 10 yearsSmall tools 12.5 – 33.33% 3 – 8 yearsCars 10 – 20% 5 – 1 yearsOther vehicles 4 – 25% 4 – 25 yearsOther plants and equipment 4 – 33.33% 3 – 25 yearsDepreciation methods, useful life and other values ofgroups of assets are examined at the end of each financialyear and adapted if needed. In case the usefullife is increased, the amortisation costs in the financialyear decrease, while in case of shortened useful life,they increase. The adjustment of useful life has to becalculated in a manner that the asset will be depreciatedin the new predicted useful life. The change inuseful life is considered as a change in accounting estimateand it affects solely the period in which the accountingestimate was changed and every followingperiod of the remaining useful life.The costs of replacement a part of fixed asset areattributed to the carrying amount of this asset in caseit is possible that future economic benefits related to apart of this asset will flow to the company and if costscan be reliably measured. All other costs (e.g. regularmaintenance) are recognised in profit or loss as expensesas soon as they are incurred.Gains and losses that occur in disposal of property,plant and equipment are recognised as a differencebetween the net sales value and carrying amount of adisposed asset and are recognised among other operatingrevenue or write-downs in value.

180 Annual Report 20115.5.7.4 Assets leased5.5.7.7 Financial instrumentsLease is classified as finance lease in case significantrisks of ownership benefits are transferred to the lesseewith lease conditions.5.5.7.5 Long-term investments in subsidiariesFinancial instruments include the following assumptions:••Non-derivative financial assets;••Non-derivative financial liabilities;••Derivatives.Investments in subsidiaries are investments in whichthe company has a majority stake.Consolidated financial statements do not includeinvestments in subsidiaries, except in case of companies,which are not important from the Group‘s perspective.These are carried at cost.Group companies recognise revenue from investmentin the period when the decision on payment ofprofit shares was adopted. Additional inputs in subsidiariesincrease the cost of investments.Any indications of impairment of investments insubsidiaries are determined on an annual basis. Inthe event impartial evidence exists that a loss due toimpairment was incurred, the amount of loss is measuredas the difference between the carrying amountof a financial asset and the present value of estimatedfuture cash flows discounted at the market interestrate for similar financial assets, and recognised as revaluationoperating expense.5.5.7.6 Investments in associates and jointlycontrolled companiesInvestments in associates are investments in which thecompany has an important influence and usually itsstake in such company ranges between 20 and 50%.Investments in jointly controlled companies areinvestments in which the company controls the operationsof such companies together with other owners,namely on the basis of contractually agreed divisionof control.In the company’s financial statements investmentsin associates and investments in jointly controlledcompanies are carried at cost.In consolidated financial statements the investmentsin associates and jointly controlled companiesare accounted for with capital method.5.5.7.7.1 Non-derivative financial assetsNon-derivative financial assets of the Group includeavailable-for-sale financial assets, receivables andloans and cash and cash equivalents.Financial asset is derecognised when contractualrights to cash flows from this asset are discontinued orwhen the rights to contractual cash flows from the financialasset are transferred on the basis of a transactionin which all risks and benefits from the ownershipof financial asset are transferred.— Available-for-sale financial assetsAvailable-for-sale financial assets are those non-derivativefinancial assets that are designated as availablefor sale or are not classified as loans and receivablesor financial assets at fair value through profit or loss.Available-for-sale financial assets are recognisedafter the trading date.They are carried at fair value if the fair value canbe established and the profit and loss in valuation isrecognised directly in other comprehensive incomeor equity, except loss due to impairment. These arerecognised so that the possible accumulated losswhich is prior recognised in other comprehensive incomeand disclosed in fair value reserve, transferredto profit or loss. Subsequent increase in fair value ofimpaired available-for-sale equity security is recognisedunder the fair value reserve.At derecognition of investment, the accumulatedprofit and loss recorded in the comprehensive incomeare transferred to profit or loss.In case the fair value cannot be reliably measuredsince the range of justified fair value assessments is ofsignificant importance and the probability of variousassessments is difficult to be assessed, but it assessesthe signs of impairment, the company measures thefinancial asset at cost.

Financial report of HSE Group181— Loans and receivablesLoans and receivables are non-derivative financial assetswith fixed or determinable payments that are notquoted in an active market.At initial recognition, loans and receivables aredisclosed at fair value increased by direct costs oftransaction. After initial recognition, loans and receivablesare measured at amortised cost and decreasedby the loss due to impairment. Loans and receivablesare recorded as financial and business assets and includeloans granted, deposits, receivables due frombuyers and receivables due from others.In the books of account loans are recognised in accordancewith settlement date, while receivables arerecognised in accordance with trading date.They are included under current assets, except incase of maturities of more than 12 months after thedate of the statement of financial position. In suchcase they are classified under long-term assets.— Cash and cash equivalentsCash and cash equivalents comprise cash, bank depositsup to three months and other short-term quicklyrealisable investments with original maturity of threemonths or less. They are carried at cost. Overdrafts onbank accounts are included under short-term financialliabilities.5.5.7.7.2 Non-derivative financial liabilitiesNon-derivative financial liabilities comprise operating,financial and other liabilities. Financial liabilities areinitially carried at fair value increased by the costs thatare directly attributable to the transaction. After theinitial recognition, financial liabilities are measured atamortised cost using the effective interest method.Under this item group companies record loans receivedwith interest, other financial liabilities, liabilitiesto suppliers and liabilities to others.Loans received are initially recognised on the dateof their settlement (payment), while other non-derivativefinancial liabilities are recognised on the tradedate.The portion of long-term financial liabilities thatfalls due within less than a year after the cash flowstatement date is disclosed under short-term liabilities.5.5.7.7.3 DerivativesDerivatives are used for the hedging of company’s exposureto interest rate risks. Group companies haveconcluded interest rate and currency swaps and forwardcontracts for the purchase of electricity in thefollowing years.They are financial instruments that do not requireinitial financial investment, while their value is changingdue to change in interest rate.Derivatives are initially recognised at fair value,namely according to net principle, which means thatthe sole value of transaction concluded is not disclosedin financial statements.After the initial recognition, derivatives are measuredat fair value, while the corresponding changesare considered in the following manner:••when a derivative is defined as hedging in caseof exposure to changeability of cash flows thatmay be attributed to an individual risk relatedto recognised asset, liability or very probableenvisaged transactions, which can affect the profitor loss, the successful portion of changes in fairvalue of derivative is recognised in comprehensiveincome and disclosed in risk hedging reserve;Unsuccessful portion of changes in the fair valueof financial instrument is directly recognisedin the income statement; The company shalldiscontinue prospectively the hedge accounting ifthe hedge no longer meets the criteria for hedgeaccounting, if the hedging instrument is sold,terminated or exercised. The accumulated profitor loss recognised in comprehensive incomeremains recorded in the hedging reserve until theenvisaged transaction impacts the profit or loss. Ifthe envisaged transaction cannot be expected anymore, amount recognised in other comprehensiveincome shall be recognised directly in the profitor loss. In other cases, the amount recognised ascomprehensive income is transferred to profit orloss for the same period in which the protecteditem affects the profit or loss.••effects of other derivatives, which are notdetermined as risk hedges in case of exposure tocash flow changeability or cannot be attributedto individual risk related to recognised asset orliability, are recognised in profit or loss.

182 Annual Report 20115.5.7.8 Inventories5.5.7.9 Impairment of assetsInventories are carried at the lower of the two: historicalcost or net realisable value. The historical costincludes cost that is composed of purchase price, importduties and direct costs of purchase. The purchaseprice is reduced by discounts received. Direct costs ofpurchase are costs of transport services, costs of loading,cargo handling and unloading, costs of monitoringof goods and other costs that can be attributedto directly obtained merchandise, materials and services.Purchase price discounts comprise discountsindicated in the invoice as well as discounts that arereceived later and refer to individual purchase.The value of finished products and unfinishedproduction includes total production costs in Generalproduction costs are costs of material, services, salariesand amortisation which are charged in the frameworkof production process, but cannot be directlyconnected to products or services being producedor rendered. A part of production costs in purchasedcosts (materials, services, labour costs and amortisation)are established once per year on the basis ofdata from the previous year.If the prices of the items that are purchased anewin the accounting period differ from the prices of inventoryitems of the same class, the first-in first-out(FIFO) method is applied to decrease the quantitiesof inventories during the year. Another subsidiaryvaluates the inventories according to the method ofweighted average prices of inventory. However, interms of value this does not represent a significantdeviation from accounting policies of the Group andtherefore the adjustment is not performed on thegroup level.Net realisable value is assessed on the basis ofselling price in the normal course of business reducedby the estimated costs of completion and sales. Thewrite-downs of damaged, expired and useless inventoriesare regularly performed during the year by individualitems;At least once per year, namely as at the date ofpreparation of annual financial statements, the evidenceon impairment of inventories is assessed. Theimpairment of inventories is assessed for each individualtype of inventories. Individual types of inventoriesare classified as groups of inventories with similarcharacteristics on the basis of time component ofchanges in inventories. In the assessment of impairmentfor an individual group, the criteria of professionalassessment, further utilisation or sale are used.5.5.7.9.1 Financial assetsA financial asset is considered impaired if there is objectiveevidence from which it is evident that, due toone or more events, the expected future cash flowsarising from this assets that can be reliably measuredhave been decreased.Objective evidence on the impairment of financialassets can be: non-compliance or violation by thedebtor, deterioration of borrowers’ solvency, signsthat the debtor will bankrupt and disappearance ofactive market for such instrument.— Impairment of receivables and loans grantedThe company individually assesses the evidence onimpairment of receivables.Whether it is assessed that the carrying amountof receivable has exceeded its fair value (realisablevalue), the receivable is impaired.Doubtful receivables from others are those whichare not settled within 180 days after their due date.Disputed receivables are those which comply withone of the following conditions:••The legal collection procedure began at the court;••The decision on beginning of enforcementsettlement, liquidation or bankruptcy is published.For subsequent write-offs of receivables relevant documentsof proof are needed: legally enforceable decisionsof enforced settlement, bankruptcy proceeding,court ruling or other relevant document.In case all actions were performed with the carefulnessof a good manager, with intention to repaycertain unsettled receivable and in case that due tothe amount of receivable, it would not be economicfor the group companies to enter the collection procedurethrough court, receivables are finally writtendown in full based on the management‘s decision.The group companies assess evidence on loan impairmentfor each significant loan.Loss due to impairment related to financial assetcarried at amortised cost is calculated as differencebetween the carrying amount of an asset and expectedcash flows discounted at historical interest rate.Loss is recognised in profit or loss.

Financial report of HSE Group1835.5.7.9.2 Non-financial assetsOn each reporting date the company verifies the carryingamount of significant non-financial assets withthe purpose to establish whether there are any signsof impairment. If such signs exist, the recoverableamount of the asset is estimated.The recoverable amount of an asset or cash-generatingunit is the higher of the two: value in use or fairvalue less costs of sale. When determining the valueof an asset in use, the expected future cash flows arediscounted to their current value by using the discountrate before tax that reflects regular market assessmentsof the time value of money and risks thattypically occur in relation to the asset. For the purposeof impairment test, the assets that cannot be individuallytested are classified in the smallest possible groupof assets that generate cash flows from further use andare mostly independent from receipts of other assetsand groups of assets (cash-generating unit).The impairment of an asset or the cash-generatingunit is recognised when its carrying amount exceedsits recoverable amount. Impairment is disclosed in theincome statement.At the end of the reporting period, the companyevaluates losses due to impairment in previous periodsand thus establishes whether the loss has decreasedor even disappeared. Loss due to impairmentis reversed in case there has been a change in assessments,on the basis of which the company definesthe recoverable amount of an asset. The impairmentloss is reversed to the amount up to which the asset’sincreased carrying amount does not exceed the carryingamount that would have been determined netof depreciation had no impairment loss been recognisedfor the asset in prior periods.previous years. They are created on the basis of thedecision by relevant management and supervisorybody.Fair value reserve represents signs of revaluationof derivatives and available-for-sale financial-assets ofgroup companies.The retained earnings include profits or loss of thegroup companies in the previous years and in the currentyear.The consolidated equity adjustment includes exchangerate differences from translations of items infinancial statements of the group companies operatingabroad.Minority interest represents the share of minorityowners in the total equity of subsidiaries.5.5.7.11 Provisions for jubilee andtermination benefitsIn accordance with legal regulations, collective agreementand internal rules, the company is obliged topay jubilee benefits to employees and terminationbenefits on their retirement for which long-term provisionsare created. There are no other existing pensionliabilities.Provisions are created in the amount of estimatedfuture payments for termination and jubilee benefitsdiscounted at the end of the financial year. The calculationis prepared for each employee by taking intoaccount the costs of termination benefits on retirementand costs of all expected jubilee benefits untilretirement. Calculation with the use of projected unitis prepared by actuary for all group companies. Paymentsfor termination benefits on retirement and jubileebenefits decrease the created provisions.5.5.7.10 Equity5.5.7.12 Other provisionsNominal capital and capital surplus represent cashcontributions and in-kind contributions made by theowner of the controlling company.As at 31 December 2002, the general equity revaluationadjustments included the revaluation ofshare capital before 2002 in accordance with thenapplicable Slovene Accounting Standards. The adjustmentdue to the transfer to new Slovene AccountingStandards has been transferred to capital surplus. Theamount can only be used for increase in share capital.Other reserves are amounts, which are purposelyretained earnings of the controlling company from theProvisions are recognised when the company has alegal or constructive liability arising from a past event,and when it is likely that that an outflow of resourcesembodying economic benefits will be required to settlethe liability.The amount of the provision must be equal tothe present value of the expenditure expected to berequired to settle the liability. Since provisions are intendedfor covering probable, but not certain obligations,the amount recognised as a provision is merelythe best estimate of the expenditure needed for thesettlement of obligation existing on the date of the

184 Annual Report 2011statement of financial position. In reaching the bestestimate of a provision, the risks and uncertainties thatinevitably surround the events and circumstances aretaken into account.Provisions are directly decreased by costs or expensesfor covering of which they were created. Thismeans that in the financial year such costs or expensesdo not appear in the profit or loss anymore.Whether the expected liabilities do not appear,the reversal of created provisions is charged againstoperating expenses.5.5.7.13 Other assets and liabilitiesOther assets include long-term and short-term accruedrevenue and deferred costs.Deferred costs or expenses are amounts incurredbut not yet charged against the profit or loss. Accruedrevenue is revenue that is taken into account in theprofit or loss, although they have not been chargedyet.Other liabilities include long-term and short-termaccrued costs and deferred revenue.Accrued costs are amounts that have not occurredyet, but they will in the future and are already influencingthe profit or loss.Deferred revenue is deferred revenue that willcover estimated expenses during a period of morethan one year.5.5.7.14 Contingent liabilities and assetsContingent liability is:••A possible liability arising from past eventsand whose existence is confirmed solely by theoccurrence or non-occurrence of one or moreuncertain future events that the company does notfully control; or••A present obligation arising from past events,which is not recognised, since it is not probablethat the outflow of resources embodying economicbenefits will be required to settle the obligationor the amount of obligation cannot be reliablymeasured.A contingent asset is a possible asset arising frompast events and whose existence is confirmed solelyby the occurrence or non-occurrence of one or moreuncertain future events that the company does notfully control.5.5.7.15 RevenueSales revenue is recognised at fair value of receivedpayment or receivable decreased by discounts. Therevenue is disclosed when the buyer assumes all significantforms of risk and benefits related to the ownershipof the asset when there exists certainty withregard to collectability of compensation and relatedcosts and when the group company stops decidingupon products sold.Sales of goods is recognised when the companydelivers the products to the client. The client acceptsthe products, while the collectability of associatedreceivables is reasonably ensured. In case the groupcompanies have more positive than negative operatingforeign exchange differences, they are recordedas net revenue from the sales of merchandise.Sales of services is recognised in the accountingperiod in which the services are performed as regardsthe conclusion of the transaction estimated on the basisof actually performed service as the proportionalportion of all services performed.Revenue arising from default interest charges andrelated receivables are recognised upon occurrenceif it is probable that the economic benefits related totransaction will inflow to the company. On the contrary,default interest charges are recorded as contingentassets and are recognised in the company’s books ofaccount upon payments. Recording of default interestis considered individually.Other operating revenue related to products andservices is revenue from the reversal of provisions, revenuefrom utilisation of deferred revenue, gains arisingfrom sales of fixed assets, reversal of impairmentof receivables, received compensations and contractualpenalties, subsidies, grants, recourses, premiumsand similar revenue.State aid is considered as deferred revenue thatthe company strictly consistently and wisely recognisesas other operating revenue over the useful lifeof the relevant asset (on the other hand, the companydiscloses the amortisation/depreciation cost of thisasset among operating expenses).Financial revenue comprise revenue from investmentshares, interest on loans granted and deposits,positive difference of exchange rates from financingactivities and revenue of associates.

Financial report of HSE Group1855.5.7.16 ExpensesExpenses are recognised if a decrease in economicbenefits in the accounting period gives rise to a decreasein assets or increase in debt and this decreasecan be reliably measured. Operating expenses arerecognised once costs are no longer held in inventoriesof products and work in progress or once merchandisehas been sold. Costs that cannot be held ininventories of products and work in progress are recognisedas operating expenses upon its occurrence.Costs of goods sold includes expenses related tothe sales of electricity, trading emission coupons anddependent costs of electricity. In case group companieshave more negative than positive operating foreignexchange differences, they are recorded as costsof goods sold.Costs of materials are historical costs of materialspurchased that are directly used for creating productsand services (direct costs of material) as well ascosts of material that do not have such nature and areincluded in relevant purpose (functional) groups ofindirect operating costs. The first subgroup includescosts of raw materials, other materials and purchasedparts and semi-finished products whose consumptioncan be related to creating products and services. Thesecond group includes costs of auxiliary materials formaintenance of property, plant and equipment, smalltools whose useful life does not exceed one year,spare parts for servicing of products after their sale,office supplies, specialised literature and other items.Costs of materials cover also the accrued costs ofshrinkage, spilling, breakage and failure.Costs of services are historical costs of purchasedservices that are directly used for creating productsand services (costs of direct services) as well as costsof services that do not have such nature and are includedin adequate purpose (functional) groups of indirectoperating costs. The first group mostly includesthe costs of services for production of goods, whilethe second group includes mainly the costs of transportservices, maintenance services, services of fairs,marketing and entertainment, costs of insurance premiums,payment transactions and other banking services(except interest), rents, advisory services, businesstravels and similar services.Write-downs in value include amortisation/depreciationcosts related to consistent transfer of value ofamortisable intangible assets and property, plant andequipment and investment property.Write-downs in value also include impairments,write-downs and losses from the sales of intangibleassets and property, plant and equipment as well asimpairments or write down of receivables and inventories.Labour costs are historical costs that refer to salariesand similar values in gross amounts as well asduties that are calculated from this basis and are notan integral part of gross amounts. These costs can bedirectly charged against creation of products and services(costs of direct work) or they have the nature ofindirect costs and are comprised in relevant purpose(functional) groups of indirect costs.Other operating expenses occur in relation to creationof provisions, environmental charges and otherduties.Financial expenses comprise borrowing costs,including related derivatives, impairments of investmentsand losses of associates.5.5.7.17 Income taxTaxes include current and deferred tax liabilities. Currenttax is included in the income statement. Deferredtax is disclosed in consolidated income statement andstatement of financial position.Current tax assets are based on taxable profit forthe period. The taxable profit defers from net profit reportedin the profit or loss, since it excludes the itemsof revenue or expenses that are taxable or deductiblein other years as well as items that are never taxableor deductible. The company’s current tax liabilities arecalculated with tax rates that are applicable on the reportingdate. In case the current tax liability is lowerthan advances paid, the current tax receivable is incurred.Deferred tax is completely disclosed using the liabilitiesmethod after the statement of financial positionfor temporary differences arising between thetax base of assets and liabilities and their carryingamounts in financial statements. Deferred income taxis defined using tax rates (and legislation) applicableon the date of financial position and for which it is expectedto be in use when the receivable for deferredtax is realised or the liability for deferred tax is settled.A deferred tax asset is recognised if there is a possibilitythat a taxable profit will be available in the future,from which it will be possible to utilise temporarydifferences. It represents the amount of the calculatedcorporate income tax on deductible temporary differences.

186 Annual Report 2011Deferred tax liabilities represent the assessedamount of corporate income tax and taxable temporarydifferences, which results in a higher tax payablein the future.5.5.7.18 Consolidated statement of othercomprehensive incomeThe Group does not present deferred taxes arisingfrom items of other comprehensive income separatelyin the statement, but it discloses the amount of tax foreach individual item in the explanatory notes.5.5.7.22 Specification of IFRS transitioneffectsAccording to the provisions of IFRS 1, the Group hasprepared the opening statement of financial positionupon the transition to IFRS, in which all assets and liabilitieswhose recognition is required by IFRS aredisclosed. The values of differences have not beenidentified. However, individual items of assets and liabilities,revenue and expenses in the financial statementsin accordance with IFRS are presented differentlythan in the financial statements in accordancewith SAS. These reclassifications are:5.5.7.19 Consolidated cash flow statementCash flow statement represents changes in cash andcash equivalents of the financial year, for which it isprepared. The part of cash flow statement related tooperations is prepared according to direct methodbased on data of the statement of financial position,while the part related to investment and financing activitiesis prepared according to indirect method.5.5.7.20 Segment reportingThe Group does not disclose operations by segmentsin the annual report. Segment reporting must be disclosedby the companies whose treasury or debt securitiesare traded in the market and companies whichare issuing treasury or debt securities in public securitymarkets.A) Consolidated income statement for 2010••Operating foreign exchange differences recordedunder financial revenue and expenses are setoff and disclosed under net sales revenue in theamount of € 434,675;••Default interest to buyers, which were disclosedunder financial revenue, is recorded under otheroperating revenue in the amount of € 586,511.••Default interest to suppliers, which was disclosedunder financial expenses, is recorded under otheroperating revenue in the amount of € 7,549.••Other revenue is disclosed under other operatingrevenue in the amount of € 2,546,339;••Other expenses are disclosed under otheroperating expenses in the amount of € 1,180,521.••Revenue of associates disclosed in the fair valuereserve are transferred to financial revenue in theamount of € 86,586, which positively affected thedisclosed net profit of the Group according to IFRScompared to SAS.5.5.7.21 Comparable dataIn 2011, the consolidated financial statements were forthe first time prepared in accordance with IFRS. In accordancewith the provisions of IFRS, 1 January 2010is considered as the transition date. Therefore, it wasnecessary to convert financial statements for 2010 orreallocate them and prepare in accordance with IFRSin order to assure comparability as one of basic IFRSprinciples. Impacts of conversions or transition fromSAS to IFRS are presented below.At the same time, with the transfer to IFRS the chart ofaccounts was unified in group companies, particularlyin recording costs. This fact was taken into account bythe companies in preparation of comparable data for2010 (e.g. transfer of part costs of services to otheroperating expenses).b) Consolidated statement of financial positionas at 1/1/2010••Long-term accrued costs and deferred revenuedisclosed among intangible assets represent apart of other long-term assets in the amount of€ 212.968;

Financial report of HSE Group187••The advances for property, plant and equipment,which were disclosed as part of property, plant andequipment, are part of long-term or short-termoperating receivables (depending on envisagedutilisation) in the amount of € 14,859,718;••Advances for inventories disclosed withininventories are part of short-term operatingreceivables in the amount of € 70,514;••Deposits up to three months, which were disclosedamong short-term investments, are part of cash inthe amount of € 62,994,293;••Interest on loans granted, which were disclosed asshort-term operating receivables, are part of shorttermfinancial liabilities (together with loan) in theamount of € 51,474;••Current tax assets disclosed under other operatingreceivables are disclosed as an individual item inthe consolidated statement of financial position inthe amount of € 3,009,653;••Current tax liabilities disclosed under otheroperating liabilities are disclosed as an individualitem in the consolidated statement of financialposition in the amount of € 15,197,728;••Revenue of associates disclosed in fait valuereserve was transferred to retained earnings in theamount of € 95,854.c) Consolidated Cash flow statement for 2010••Initial cash balance is increased by all depositsup to three months, which were open as at1 January 2010 in the amount of € 62,994,293;••Disbursements and receipts for acquisitions ordisposals of short-term loans are presented undera separate item among disbursements and receiptsfrom investing activities, separately from other cashflows from short-term financial investments;••Disbursements and receipts for acquisitionsor disposals of short-term and long-term loansreceived are presented under a separate itemamong disbursements and receipts from investingactivities, separately from other cash flows fromlong-term or short-term financial liabilities;••Foreign exchange differences accounted onthe balance of cash at the end of 2010, whichwere disclosed among operating expenses, arepresented separately among effects of changes inforeign exchange rates in the amount of € 4,969;d) Consolidated statement of changes in equityas at 1/1/2010••Revenue of associates disclosed in fair valuereserve was transferred to retained earnings in theamount of € 95,854 (no impact on equity value inaccordance with IFRS compared to SAS).5.5.7.23 Fair value definitionFinancial instruments are disclosed at their fair value.Fair value is the amount by which an asset can be sold,or a liability settled, between knowledgeable, willingparties in an arm’s length transaction.When determining fair value of financial instruments,the following hierarchy of fair value defininglevels is considered:••First level comprises quoted prices (unmodified) inactive markets for equal assets or liabilities;••Second level comprises inputs besides quotedprices included in the first level that are directly (i.e.as prices) or indirectly (i.e. as derived from prices)evident for asset or liability;••Third level comprises input data for an asset orliability that are not based on evident market data.Quoted prices are used as a basis for determining fairvalue of financial instruments. In case the financial instrumentis not quoted on the regulated market or themarket is assessed as inactive, the second and thirdlevel input data is used to assess the fair value of financialinstrument.In order to determine fair value of interest rateand currency swaps, data is used, which is submittedto group companies by the banks where they haveconcluded individual swaps. Values are examined infinancial departments of the companies.5.5.7.24 Management of financial risksDetection and management of financial risks is determinedin more detail in the business report.In the notes to consolidated financial statements,financial risks are presented in relation with items inthe consolidated financial statements (point 5.5.8.8.Financial Instruments and Risks).

188 Annual Report 20115.5.8 Notes to the consolidated financial statements5.5.8.1 consolidated statementof financial position(1) Intangible assetsIntangible assetsin EUR 31 December 2011 31 December 2010 1 January 2010Long-term property rights 35,365,667 24,355,820 28,508,109Goodwill 12,387,056 12,387,056 12,387,056Other intangible assets 64,423 58,530 116,757Intangible assets 47,817,146 36,801,406 41,011,922The majority of long-term property rights are comprisedof emission coupons and computer software.In 2008, two of the group companies receivedemission coupons (for the period 2008-2012) on thebasis of the Environment Protection Act, Ordinance onthe National Plan for the Allocation of Emission Couponsand Decision on Emission Coupons. These couponsare disclosed in value 1 €/coupon, while on theother hand long-term deferred revenue is disclosedin the same amount. Emission coupons are also disclosedby the controlling company, namely for thepurposes of electricity production in the group in thefollowing years.Initial balance of emission coupons in the Groupamounts to 14,359,096 or € 14,727,161. In 2011,2,463,407 emission coupons were purchased and6,168,384 emission coupons were sold or used. Thus,at the end of 2011 the company has 10,654,199 emissioncoupons, whose value amounts to € 26,128,868.The majority of increase in property rights is representedby the purchases of emission coupons in thecontrolling company for the following years.Goodwill in the amount of € 12,387,056 wasformed in 2007 as a result of the cost of a long-terminvestment exceeding the carrying amount of equityof a subsidiary. During this time, no reasons for impairinggoodwill have been determined.Other intangible assets comprise long-term deferreddevelopment costs.During consolidation, € 1,305,800 worth of emissioncoupons was eliminated on account of intragroupsales.In 2011, no reasons for impairment of intangibleassets were identified in the Group, or reasons tochange the assessment of useful life of intangible assetswhich are amortised.In 2011, the group companies did not allocate interestfrom purchase before making available for useto the cost of intangible assets.

Financial report of HSE Group189Changes in intangible assetsin EURLong-termproperty rightsGoodwillOtherintangible assetsCost as at 1/1/2010 34,594,606 12,387,056 121,676 47,103,338Acquisitions 11,672,931 0 0 11,672,931Disposals −13,459,573 0 −57,613 −13,517,186Transfers – re-entries 123,000 0 0 123,000Foreign exchange differences −71 0 0 −71Cost as at 31/12/2010 32,930,893 12,387,056 64,063 45,382,012Written-down value as at 1/1/2010 6,086,497 0 4,919 6,091,416Amortisation 1,446,604 0 614 1,447,218Disposals −11,792 0 0 −11,792Impairments 1,053,775 0 0 1,053,775Foreign exchange differences −11 0 0 −11Written-down value as at 31/12/2010 8,575,073 0 5,533 8,580,606Carrying amount as at 1/1/2010 28,508,109 12,387,056 116,757 41,011,922TOTALCarrying amount as at 31/12/2010 24,355,820 12,387,056 58,530 36,801,406Cost as at 1/1/2011 32,930,893 12,387,056 64,063 45,382,012Acquisitions 27,717,545 0 58,568 27,776,113Disposals −15,532,610 0 −52,060 −15,584,670Transfers – re-entries 709 0 0 709Foreign exchange differences −1,650 0 0 −1,650Cost as at 31/12/2011 45,114,887 12,387,056 70,571 57,572,514Written-down value as at 1/1/2011 8,575,073 0 5,533 8,580,606Amortisation 1,529,467 0 615 1,530,082Disposals −354,415 0 0 −354,415Foreign exchange differences −905 0 0 −905Written-down value as at 31/12/2011 9,749,220 0 6,148 9,755,368Carrying amount as at 1/1/2011 24,355,820 12,387,056 58,530 36,801,406Carrying amount as at 31/12/2011 35,365,667 12,387,056 64,423 47,817,146

190 Annual Report 2011(2) Property, plant and equipmentProperty, plant and equipmentin EUR 31 December 2011 31 December 2010 1 January 2010Land 38,667,781 38,592,355 36,498,176Buildings 568,214,238 581,141,808 539,081,608Production equipment 557,041,519 569,406,436 517,447,215Other equipment 22,144,302 16,985,799 10,888,699Property, plant and equipment being acquired 714,053,912 351,160,059 338,755,033Property, plant and equipment 1,900,121,752 1,557,286,457 1,442,670,731The majority of group companies are engaged inproduction of electricity or extraction of raw materialsused for electricity production. This requires specialisedequipment and buildings, where the equipmentis located. Thus, property, plant and equipment representthe largest share of group assets.The most important investments in property, plantand equipment of group companies in 2011 includefinishing works regarding construction of PSP Avče,construction of HPP on the lower Sava River, investmentsin Unit 6 at TEŠ and renovation of other productionplants. Additional information on Group‘s investmentsis available in the business report (section 2.9Investments).In 2011, the companies included € 3,906,517 ofborrowing costs to the cost of property, plant andequipment.In 2011, the company reviewed the useful lives ofmajor intangible assets, determining that the usefullives were appropriate given the current expectationsregarding the usability of these assets. In the groupof properties, which includes apartments, it was establishedthat the initially estimated useful life significantlydefers from the expected useful life. Due to theabovementioned fact, this group of assets was againdepreciated in financial year 2011, while the effect isdecreased depreciation in the amount of € 172,770.No reasons for impairment of property, plant andequipment were determined in 2011; however, somewrite-offs took place. The majority is represented bywrite-offs of overhauls of Unit 5 and write-offs of wornoutequipment in other production companies, whichare mostly replaced with new equipment.One of the group companies holds equipmentunder a finance lease in the amount of € 32,609. Thecompany has mortgages on property up to the totalamount of € 24,065,765 (of which the mortgage onbuildings amounts up to € 21,983,000, the mortgageon land amounts up to € 600,000 and the mortgageon equipment up to € 1,482,765). Precise balance ofmortgages depends on the current balance of loanexposure and conditions of banks with regard tomortgage collateral.

Financial report of HSE Group191Changes in property, plant and equipmentin EUR Land BuildingsProductionequipmentOtherequipmentProperty, plant andequipment beingacquiredCost as at 1/1/2010 36,498,176 1,232,794,628 1,908,868,540 41,410,288 338,755,033 3,558,326,665Acquisitions 0 0 0 193,740,964 193,740,964Disposals −210,995 −31,527,529 −15,875,397 −895,767 −203,735 −48,713,423Transfers from ongoinginvestments2,305,174 67,164,869 114,943,544 8,241,439 −180,799,078 11,855,948Other transfers 67,112 −67,982 −333,125 −333,995Foreign exchange differences −1,929 −1,929Cost as at 31/12/2010 38,592,355 1,268,431,968 2,008,003,799 48,686,049 351,160,059 3,714,874,230Written-down valueas at 1/1/20100 693,713,020 1,391,421,325 30,521,589 0 2,115,655,934Depreciation 0 22,438,927 61,907,505 2,805,193 0 87,151,625Acquisitions 0 1,835 0 0 0 1,835Disposals 0 −28,863,619 −14,732,120 −1,625,321 0 −45,221,060Other transfers 0 −3 653 118 0 768Foreign exchange differences 0 0 0 −1,329 0 −1,329Written-down valueas at 31/12/2010Carrying amountas at 1/1/2010Carrying amountas at 31/12/20100 687,290,160 1,438,597,363 31,700,250 0 2,157,587,77336,498,176 539,081,608 517,447,215 10,888,699 338,755,033 1,442,670,73138,592,355 581,141,808 569,406,436 16,985,799 351,160,059 1,557,286,457TOTALCost as at 1/1/2011 38,592,355 1,268,431,968 2,008,003,799 48,686,049 351,160,059 3,714,874,230Acquisitions 0 0 0 6,381 437,347,916 437,354,297Disposals −15,202 −605,561 −34,132,188 −5,420,521 −168,918 −40,342,390Transfers from ongoinginvestments164,758 11,276,152 52,222,686 10,828,426 −74,469,109 22,913Other transfers −74,130 −710,360 −1,066,569 1,258,293 183,964 −408,802Foreign exchange differences 0 0 0 600 0 600Cost as at 31/12/2011 38,667,781 1,278,392,199 2,025,027,728 55,359,228 714,053,912 4,111,500,848Written-down valueas at 1/1/20110 687,290,160 1,438,597,363 31,700,250 0 2,157,587,773Depreciation 0 23,270,942 64,055,911 3,833,723 0 91,160,576Acquisitions 0 0 0 0 0 0Disposals 0 −344,555 −33,689,935 −3,289,353 0 −37,323,843Other transfers 0 −38,586 −977,130 969,909 0 −45,807Foreign exchange differences 0 0 0 397 0 397Written-down valueas at 31/12/2011Carrying amountas at 1/1/2011Carrying amountas at 31/12/20110 710,177,961 1,467,986,209 33,214,926 0 2,211,379,09638,592,355 581,141,808 569,406,436 16,985,799 351,160,059 1,557,286,45738,667,781 568,214,238 557,041,519 22,144,302 714,053,912 1,900,121,752

192 Annual Report 2011(3) Long-term investments in subsidiariesLong-term investments in subsidiariesin EURSubsidiary 31 December 2011 31 December 2010 1 January 2010ELPROM d.o.o. 9,066 9,110 9,402MHE Lobnica d.o.o. 374,613 0 0GOLTE d.o.o. 3,989,292 6,446,689 3,009,569SAŠA INKUBATOR d.o.o. 6,000 6,000 6,000TOTAL 4,378,971 6,461,799 3,024,971The increase in investments in shares and interests ofgroup companies refers to an increase in investmentin the company Golte d.o.o..In 2011, reasons were determined for impairmentof certain long-term investments, as a result of whichrevaluation operating expenses increased. Impairmentwas performed on the basis of valuation in theamount of € 2,457,397.In the process of consolidation, € 1,066,188,653 oflong-term investments in Group companies has beeneliminated.Information on subsidiaries as at 31/12/2011SubsidiaryActivityOwner orco-owner company%ownershipELPROM d.o.o. Erjavčeva ulica 20 Nova Gorica, Slovenia Electricity production SENG d.o.o. 100%MHE Lobnica d.o.o. Obrežna ulica 170 Maribor, Slovenia Hydroelectricity generation DEM d.o.o. 65%GOLTE d.o.o. Radegunda 19c Mozirje, Slovenia Ski resort activity PV Invest d.o.o.HTZ d.o.o.61.24%16.55%JAMA ŠKALE v zapiranju d.o.o. Partizanska cesta 78 Velenje, Slovenia Land preparatory works PV d.d. 100%SAŠA INKUBATOR d.o.o. Koroška cesta 62b Velenje, Slovenia Other company and businesscounsellingPV Invest d.o.o. 60%Significant amounts from financial statements of subsdiaries for 2011in EURSubsidiaryAssetsLiabilities(without equity)RevenueNet profit or lossfor the yearTOTAL equityELPROM d.o.o. 9,082 16 172 −44 9,066MHE Lobnica d.o.o. 624,170 136,845 297 −1,981 487,325GOLTE d.o.o. 14,637,830 7,919,161 1,727,145 −765,072 6,718,669JAMA ŠKALE v zapiranju d.o.o. 8,082 6 8 −104 8,078SAŠA INKUBATOR d.o.o. 38,470 25,978 166,732 515 12,492TOTAL 15,317,634 8,082,006 1,894,354 −766,686 7,235,630Changes in long-term investments in subsidiariesin EUR 2011 2010Balance as at 1 January 6,461,799 3,024,971Acquisitions, increases 374,613 3,437,120Transfers 0 −292Impairments −2,457,441 0Balance as at 31 December 4,378,971 6,461,799

Financial report of HSE Group193(4) Other long-term investments and loansOther long-term investmentsin EUR 31 December 2011 31 December 2010 1 January 2010In associates 802,184 599,747 1,070,338In jointly controlled companies 120,897 131,430 0Available-for-sale financial assets 3,879,701 2,817,917 3,243,452Other long-term investments 2,000 2,000 126,065TOTAL 4,804,782 3,551,094 4,439,855In the process of consolidation, the value of investmentsin associated companies on the basis of usingthe equity method increased by € 173,902.Changes in long-term investmentsin EUR 2011 2010Balance as at 1 January 3,551,094 4,439,855Acquisitions 1,742,200 489,996Transfers −10,101 −143,573Disposals −33,070 −559,109Increases 169,367 86,587Impairments −614,708 −762,662Balance as at 31 December 4,804,782 3,551,094Information on associates as at 31/12/2011Associate Activity Co-owner company % co-owershipELDOM d.o.o. Vetrinjska ulica 2 Nova Gorica, Slovenia Property management forpayment or under contractDravske elektrarne Maribor d.o.o. 50%ERICO d.o.o. Koroška cesta 58 Maribor, Slovenia Ecologic research, monitoring Termoelektrarna Šoštanj d.o.o.Premogovnik Velenje d.d.PLP d.o.o. Partizanska cesta 78 Velenje, Slovenia Timber activity Premogovnik Velenje d.d. 26%SIPOTEH d.o.o. Partizanska cesta 79 Velenje, Slovenia Production of technologicaland mining equipment26%23%Premogovnik Velenje d.d. 42%Significant amounts from statements of associates for 2011in EURAssociateAssetsLiabilities(without equity)RevenueNet profit or lossfor the yearTOTAL equityELDOM d.o.o. 424,773 200,794 1,199,059 6,713 223,979ERICO d.o.o. 1,789,843 522,469 2,318,248 34,980 1,267,374PLP d.o.o. 1,869,170 1,196,757 2,694,791 32,313 672,413SIPOTEH d.o.o. 3,061,963 2,719,485 3,075,637 36,383 342,478

194 Annual Report 2011Amounts of long-term investments in associatesChanges in long-term investments in associatesin EURAssociate31 December201131 December2010ELDOM d.o.o. 111,992 106,712ERICO d.o.o. 370,655 230,250PLP d.o.o. 135,480 127,079SIPOTEH d.o.o. 184,057 168,776ROBINOKS d.o.o. 0 —33,070TOTAL 802,184 599,747in EUR 2011 2010Balance as at 1 January 599,747 1,070,338Disposals 33,070 —555,336Increases 169,367 86,587Impairments 0 —1,842Balance as at 31 December 802,184 599,747Long-term financial receivables and loansin EUR 31 December 2011 31 December 2010 1 January 2010To others 24,000 433,420 435,129Long-term deposits to others 309,198 145,733 0TOTAL 333,198 579,153 435,129(5) Long-term operating receivablesLong-term operating receivablesin EUR 31 December 2011 31 December 2010 1 January 2010To associates 551,582 689,477 827,373Advances given 192,465 6,277,756 5,977,393To others 941,566 1,041,160 3,216,464TOTAL 1,685,613 8,008,393 10,021,230The subsidiary discloses long-term operating receivablesto associate from sales of equipment with deferredpayment deadline.Compared to 2010, long-term advances granteddecreased due to transfer among short-term due tothe envisaged utilisation in the period shorter thanone year.The largest part of long-term operating receivablesis represented by deposits granted as collateralfor trading with electricity at the controlling companyand they are disclosed among other long-term operatingreceivables.

Financial report of HSE Group195(6) Deferred tax assetsIn 2011 deferred tax assets were created anew in connectionwith:The utilisation of or decrease in deferred tax assetswas a result of:••Creation of provisions for jubilee and terminationbenefits,••Creation of other provisions,••Creation of doubtful receivables,••Impairment of investments,••Fair values of derivatives,••Differences between operating and taxdepreciation and amortisation.••Use of provisions for jubilee and terminationbenefits,••Reversal and use of other provisions,••Reversal of doubtful receivables,••Utilisation of differences between operating andtax depreciation and amortisation.In the income statement a change in deferred tax assetsof € 129,156 is recognised and of € 167,327 in equity.The amount of deferred tax assets eliminated inconsolidation totalled € 2,922,694.Changes in deferred tax assetsin EUR Provisions ImpairmentAmortisation/depreciation Other TOTALBalance as at 1/1/2010 7,090,599 489,448 39,885 3,224,409 10,844,341In debit/(credit) of profit or loss −504,536 −1,706,945 227,781 −188,472 −2,172,172In debit/(credit) of other comprehensiveincome0 1,677,857 0 −190,529 1,487,328Balance as at 31/12/2010 6,586,063 460,360 267,666 2,845,408 10,159,497Balance as at 1/1/2011 6,586,063 460,360 267,666 2,845,408 10,159,497In debit/(credit) of profit or loss −221,167 114,103 −17,334 −4,784 −129,182In debit/(credit) of other comprehensiveincome0 0 0 744,532 744,532Balance as at 31/12/2011 6,364,896 574,463 250,332 3,585,156 10,774,847

196 Annual Report 2011(7) InventoriesInventoriesin EUR 31 December 2011 31 December 2010 1 January 2010Spare parts and materials 22,614,188 25,548,559 28,410,337Unfinished production 59,922 51,233 42,222Finished products and merchandise 10,503,214 10,625,134 9,346,293TOTAL 33,177,324 36,224,926 37,798,852The majority of group inventories is represented bythe inventory of spare parts, materials and finishedproducts;The largest amount in the inventories of spareparts and materials is represented by inventories ofspare parts and maintenance materials necessary forfast repair of defects of production equipment andthus ensuring reliable production, inventory of coaland heating oil;Inventories of products mostly consist of coal,where an impairment of inventories was made due toan excessive carrying amount relative to the net realisablevalue in the amount of € 1,828,169;In case of other inventories, net realisable value isnot lower than the carrying amount;In 2011, € 228,979 worth of material was written offfrom inventory due to changes in its quality and value;No inventories have been used as collateral.Inventory surpluses and deficitsin EUR 2011 2010Inventory surpluses 43,039 705,108Inventory deficits −70,855 −463,996TOTAL −27,816 241,112(8) Short-term investments and loansShort-term financial receivables and loansin EUR 31 December 2011 31 December 2010 1 January 2010To group companies 1,620,948 472,572 0To associates 69,893 83 50,000To others 76,594 166,667 43,653,761Deposits given to others 126,636 0 0TOTAL 1,894,071 639,322 43,703,761Majority of short-term financial receivables and loansis represented by loans granted to subsidiary which isnot included in consolidation.Within the Group, € 449,655 worth of allowancesfor receivables has been created.The amount of short-term loans eliminated in consolidationtotalled € 159,408,666.

Financial report of HSE Group197(9) Current operating receivablesShort-term operating receivablesin EUR 31 December 2011 31 December 2010 1 January 2010To group companies 433,658 51,196 64,683To associates 203,906 3,453 4,766To buyers 152,079,207 115,515,051 119,432,692Adjustment of receivables from buyers −2,735,681 −1,686,705 −444,931Advances given 9,168,989 4,015,267 8,952,839To government and other institutions 24,882,072 18,078,593 21,410,351To others 4,956,025 1,470,371 3,101,963Allowances of receivables from others −1,279 −443,731 −873,967TOTAL 188,986,897 137,003,495 151,648,396Due to production of electricity by subsidiaries andpurchase of electricity by the controlling company, themajority of short-term trade receivables are related tothe sale of electricity by the controlling company.€ 2,736,960 worth of allowances for receivableshas been created within the Group.The amount of short-term receivables eliminatedin consolidation totalled € 97,486,449.Disclosures in relation to maturity of receivables,allowances for receivables and insuring receivablesare represented in the section on credit risk.(10) Other short-term assetsOther short-term assetsin EUR 31 December 2011 31 December 2010 1 January 2010Deferred costs 5,603,063 5,669,372 5,376,440Accrued revenue 1,359,233 1,477,840 2,177,996TOTAL 6,962,296 7,147,212 7,554,436Other short-term assets include short-term accruedrevenue and deferred costs which mainly refer totransactions connected with electricity trading at thecontrolling company.The amount of short-term accrued revenue anddeferred costs eliminated in consolidation totalled €4,605,814.

198 Annual Report 2011(11) Cash and cash equivalentsCash and cash equivalentsin EUR 31 December 2011 31 December 2010 1 January 2010Cash in bank accounts and cheques 4,782 7,177 7,837Cash in bank accounts 13,898,960 13,889,825 10,273,281Deposits tied up to three months 53,103,496 78,811,789 62,994,290TOTAL 67,007,238 92,708,791 73,275,408With transition to IFRS the Group changed the accountingpolicy and among cash it discloses depositstied up to three months. Before, deposits tied up tothree months were disclosed as short-term financialassets.At the balance sheet date, group companies hadin place automatic borrowing facilities in the form ofoverdrafts on transaction accounts with banks, whichamounted to € 2,839,894 but were not used as at31 December 2011.(12) EquityEquityin EUR 31 December 2011 31 December 2010 1 January 2010Called-up capital 29,558,789 29,558,789 29,558,789Capital surplus 561,243,185 561,243,185 561,243,185Revenue reserves 359,472,047 296,361,536 226,498,386Fair value reserve —4,292,977 2,763,640 —2,255,517Retained earnings 392,977,563 386,328,588 353,388,467Consolidation equity adjustment —823,705 —453,831 —218,671Minority interest 70,962,861 68,334,560 65,790,351TOTAL equity 1,409,097,763 1,344,136,467 1,234,004,990The value of nominal capital and capital surplus remainedunchanged in 2011.Other revenue reserves represent a part of retainedearnings of the controlling company and theyare disclosed in more detail in the consolidated statementof changes in equity.Fair value reserve comprises values of fair valuereserve at the controlling company in the amount of€ -3,509,887 (disclosed in more detail in the financialreport of the controlling company) and the share ofthe controlling company in fair value reserve of subsidiariesin the amount of € -783,090 (in majority thisis fair value of hedges against the changeability ofcash flows).Retained earnings are comprised of the controllingcompany‘s share in retained earnings of subsidiariesin the amount of € 346,582,886, unallocated profitof the current year of the controlling company in theamount of € 23,364,809 and the share of the controllingcompany in operating profit or loss of the currentyear of subsidiaries in the amount of € 24,790,380,decreased in consolidation procedure by € 1,760,512,which is disclosed in more detail in the statement ofchanges of equity.Consolidation equity adjustment represents foreignexchange differences in translation of financialstatements of subsidiaries abroad in presentation currencyof the Group.The equity of minority owners which participate inequity of five subsidiaries is separately presented andis disclosed in more detail in the consolidated statementof changes in equity.The amount of subsidiaries‘ equity eliminated duringconsolidation totalled € 1,056,584,982.

Financial report of HSE Group199(13) Provisions for termination and jubileebenefitsAt the end of 2011, the group companies disclose provisionsfor termination and jubilee benefits createdon the basis of actuarial calculation as at 31 December2011.The actuarial calculations were based on the following:••The number of employees in the company as at31 December 2011 (gender, age, overall and pensionqualifying period of service, average net andgross salary for the period July – September 2011);••Method for calculating termination and jubileebenefits in the company;••3.5% increase in average salary;••Discount interest rate of 5.1% p.a.;••Employee turnover by age category.Changes in provisions for termination and jubilee benefitsin EURProvisions fortermination benefitsProvisions forjubilee benefitsTOTALBalance as at 1/1/2010 9,499,594 3,751,135 13,250,729Creation, increase 1,959,238 895,499 2,854,737Decrease – drawing −1,303,001 −496,731 −1,799,732Balance as at 31/12/2010 10,155,831 4,149,903 14,305,734Balance as at 1/1/2011 10,155,831 4,149,903 14,305,734Creation, increase 721,546 359,502 1,081,048Decrease – drawing −839,967 −499,015 −1,338,982Decrease – reversal 0 −37,655 −37,655Balance as at 31/12/2011 10,037,410 3,972,735 14,010,145

200 Annual Report 2011(14) Other provisionsOther provisionsin EUR 31 December 2011 31 December 2010 1 January 2010For lawsuits 12,319,134 10,785,609 19,067,777For closing Škale pit and other coal mining sites 37,331,283 38,811,344 39,573,910For compensations 43,293 1,016,903 1,300,000Other 3,710,212 11,931,950 13,020,070TOTAL 53,403,922 62,545,806 72,961,757Provisions for closing the Škale pit and the remainingpart of Velenje extraction are created on the basis ofinternally performed expert reports and are utilisedfor the costs of mining works, hydrological costs andecological restoration.The majority of provisions for lawsuits are representedby provisions created at the controlling companywhich are disclosed in more detail in its financialreport. The creation of provisions in majority refers toincrease arising from charging default interest.Provisions for compensations are mostly representedby compensations of mining losses and weredrawn in full on the basis of activities realised in 2011.The majority of other provisions are representedby provision for restoration of disposal site of wasteproducts at subsidiary.Transfers include value of contributions of the disabilitycompany in the Group, which was transferredto other long-term liabilities.Changes in other provisionsin EURFor lawsuitsFor closing Škale pitand othercoal mining sites For compensations Other TOTALBalance as at 1/1/2010 19,067,777 39,573,910 1,300,000 13,020,070 72,961,757Creation, increase 979,564 547,434 43,293 10,219,894 11,790,185Decrease – drawing −7,221,829 −1,310,000 −326,390 −11,308,015 −20,166,234Decrease – reversal −2,039,902 0 0 0 −2,039,902Balance as at 31/12/2010 10,785,610 38,811,344 1,016,903 11,931,949 62,545,806Balance as at 1/1/2011 10,785,610 38,811,344 1,016,903 11,931,949 62,545,806Creation, increase 1,763,048 554,576 6,918 2,324,542Decrease – drawing −229,524 −2,034,637 −973,610 −8,003 −3,245,774Transfers 0 0 0 −8,220,652 −8,220,652Balance as at 31/12/2011 12,319,134 37,331,283 43,293 3,710,212 53,403,922

Financial report of HSE Group201(15) Other long-term liabilitiesOther long-term financial liabilitiesin EUR 31 December 2011 31 December 2010 1 January 2010Emission coupons 5,152,334 10,058,110 14,952,074Quotas for disabled 456,381 464,157 399,355Others state aids received 12,299,404 7,684,285 9,284,441Other 223,340 1,669,105 1,562,367TOTAL 18,131,459 19,875,657 26,198,237Other State aids received include contributions ofthe disability company (transferred from other provisions),which are used to cover amortisation/depreciation,a portion of salaries of disabled and losses of thedisability company. Besides they also include Stateaids received in order to acquire fixed assets, whichdecrease the charged amortisation.Changes in other long-term liabilitiesin EUR Emission coupons Quotas for disabledOther state aidsreceived Other TOTALBalance as at 1/1/2010 14,952,074 399,355 9,284,441 1,562,367 26,198,237Creation, increase 0 108,991 0 110,445 219,436Decrease – drawing −4,893,964 −44,189 −1,600,156 −3,707 −6,542,016Balance as at 31/12/2010 10,058,110 464,157 7,684,285 1,669,105 19,875,657Balance as at 1/1/2011 10,058,110 464,157 7,684,285 1,669,105 19,875,657Creation, increase 0 36,805 8,377,889 226,311 8,641,005Decrease – drawing −4,905,776 −44,581 −11,983,422 −1,672,076 −18,605,855Transfers 0 0 8,220,652 0 8,220,652Balance as at 31/12/2011 5,152,334 456,381 12,299,404 223,340 18,131,459

202 Annual Report 2011(16) Long-term financial liabilitiesLong-term financial liabilitiesin EUR 31 December 2011 31 December 2010 1 January 2010To banks 407,863,636 253,148,607 264,340,954Other 3,928,337 519,852 1,476,135TOTAL 411,791,973 253,668,459 265,817,089Long-term financial liabilities of group companiesmainly relate to long-term bank loans. Loans havebeen taken with Slovene and foreign banks, and interestrates range between 1.27% and 6.06%, dependingon the type of the loan, maturity and the timing ofborrowing. They also include loans which fall due in aperiod of more than five years, but not later than 2036.Long-term loans are mostly intended for the financingof property, plant and equipment.Long-term loans are secured with bills of exchange,guarantees, mortgages taken out on real estate,receivables, and a guarantee by the controllingcompany or the Republic of Slovenia.Long-term loans are disclosed in greater detail inannual reports of individual Group companies.For a part of the Group‘s long-term loans interestrate swaps have been concluded in order to lower therisk of increases in variable interest rates. Due to a fallin interest rates, their fair values have been recordedas part of other long-term financial liabilities and revaluationdeficit. More detailed disclosures are presentedin the section on interest rate risk.Maturity deadlines of long-term liabilities are disclosedunder liquidity risk.(17) Long-term operating liabilitiesLong-term operating liabilitiesin EUR 31 December 2011 31 December 2010 1 January 2010To suppliers 3,441,001 4,201,257 2,350,303Advances 67,284 14,162 13,460Other 560,127 200,024 211,378TOTAL 4,068,412 4,415,443 2,575,141Long-term operating liabilities to suppliers particularlyrefer to insurances concluded for the constructionsite of the replacement Unit 6 with a deferred paymentdeadline.The majority of other long-term operating liabilitiesare liabilities arising from compensations and coparticipationfor apartments.

Financial report of HSE Group203(18) Short-term financial liabilitiesShort-term financial liabilitiesin EUR 31 December 2011 31 December 2010 1 January 2010To banks 80,533,337 60,033,452 109,863,835Other 498,158 171,412 85,141TOTAL 81,031,495 60,204,864 109,948,976Short-term financial liabilities to banks comprise apart of long-term loans of group companies, whichfall overdue in a year after the date of financial position,and short-term loans of the controlling company.Short-term financial liabilities to others mostly referto negative fair value of currency swaps of the controllingcompany.Short-term loans are disclosed in more detail inthe financial report of the controlling company.The amount of short-term investments eliminatedin consolidation procedure totalled € 159,416,860.(19) Short-term operating liabilitiesShort-term operating liabilitiesin EUR 31 December 2011 31 December 2010 1 January 2010To group companies 80,815 11,614 1,560To associates 719,192 323,526 7,200To suppliers 240,448,368 97,630,391 96,620,240Advances 607,039 248,567 111,062To employees 11,074,143 8,297,290 9,276,316To government and other institutions 15,765,379 17,837,908 13,380,024Other 4,464,001 1,974,104 1,445,369TOTAL 273,158,937 126,323,400 120,841,771Short-term operating liabilities to suppliers representalmost one half of liabilities to suppliers for the replacementUnit 6, while one third is represented bythe liabilities for the electricity purchased in Sloveniaand abroad.The amount of short-term receivables eliminatedin consolidation totalled € 97,379,605.Maturity of liabilities is disclosed under liquidityrisk.

204 Annual Report 2011(20) Other current liabilitiesOther short-term liabilitiesin EUR 31 December 2011 31 December 2010 1 January 2010Short-term deferred revenue 0 2,134 42,979Accrued costs 9,801,735 8,973,306 13,446,406TOTAL 9,801,735 8,975,440 13,489,385Other short-term liabilities include accrued costs,which in majority represent costs connected withelectricity purchases, costs for unutilised leaves andconcession costs.The costs of services eliminated during consolidationtotalled € 6,026,037.(21) Contingent liabilities and assetsContingent liabilitiesin EUR 31 December 2011 31 December 2010 1 January 2010Bank guarantees granted and other forms of collateral 60,358,187 41,693,691 252,854,282Forward contracts for electricity purchase 55,397,388 61,648,764 20,748,385Other contingent liabilities 1,467,440 1,038,240 79,251Contingent liabilities* 117,223,015 104,380,695 273,681,918* Besides, a part of contingent liabilities of the Group are guarantees granted and parent guarantees.The Group also records contingent liabilities in theamount of € 19,647,297 related to the costs of dismantlementof fixed assets. The provisions have not yetbeen created as no decision has been made as to thetiming and the manner of dismantling.The tax authorities have the right to audit the company’soperations within 5 years after the year in whichthe tax has been levied, which can subsequently leadto additional tax charges, penalty interest charges andpenalties arising from corporate income tax, valueadded tax and other taxes and duties.The Management Board is not aware of any circumstancesthat could give rise to possible materialliability in this respect.

Financial report of HSE Group205Guarantees and parent guarantees grantedBeneficiary Debtor Guarantee type Basic legal transaction From To Value in EUR millionEuropeanInvestment Bank/bank consortiumSENGGuarantee forbank guaranteeGeoplin d.o.o. TEŠ GuaranteestatementAlstomconsortiumEuropeanInvestment Bank/bank consortiumTEŠTEŠParentguaranteeGuarantee forbank guaranteeUniCredit Slo, SID TEŠ Guarantee forbank loanEBRD TEŠ Guarantee forEBRD loanGuarantee FacilityAgreement as at15/02/2006Long-term purchase andsales agreement for naturalgas no. 277 betweenTEŠ and Geoplin as at23/11/2006, 17/02/2010Agreement betweenTEŠ d.o.o. and Alstomconsortium (Contract onthe design, procurementand erection of the powerisland for the facility called"Sostanj Unit 6"),as at27/06/2008, 19/10/2009Guarantee FacilityAgreement as at24/11/2010Loan agreement no.K 1967/07-SIN-107/07 asat 21/12/2007, 24/11/2010Agreement on guaranteeand loss reimbursementbetween HSE and EBRDas at 12/01/201115.2.2006 Effective for theperiod of agreementapplicability23.11.2006 Effective for theperiod of agreementapplicability25.11.2009 Effective for theperiod of agreementapplicability24.11.2010 Effective for theperiod of agreementapplicability21.12.2007 Effective for theperiod of agreementapplicability12.1.2011 Effective forthe period ofloan agreementapplicabilityTotal EUR 43 million+ interest + costsFor the period2011-2015total EUR 96 million+ costs + interestTotal EUR 695 million+ escalation clause+ installation(ca. € 80 million+ 25% commission)+ interest + costsTotal EUR 88 million+ interest + costsTotal EUR 24 million+ interest + costsTotal EUR 160 million+ interest + costsContingentliability in EURas at 31/12/201137,550,00091,083,000467,300,00088,000,0009,870,96766,000,000TOTAL contingent liabilities from guarantees and parent guarantees granted to subsidiaries 759,803,967Contingent assetsin EUR 31 December 2011 31 December 2010 1 January 2010Bank guarantees received and other forms of collateral 274,688,107 262,584,642 117,744,851Lawsuit before EU Commission 9,100,000 9,100,000 0Other 3,418,837 230,608 1,218,145TOTAL contingent assets 287,206,944 271,915,250 118,962,996

206 Annual Report 20115.5.8.2 Consolidated income statement(24) Capitalised own products(22) Net salesMost of the net sales revenue refers to the revenuegenerated through the sale of electricity.The amount of net sales revenue eliminated duringconsolidation totalled € 697,181,810.Net sales revenuein EUR 2011 2010a) in domestic market 598,333,930 482,112,884Electricity 565,314,612 451,138,579Thermal energy 4,041,945 4,478,110Other products 142,177 116,854Other merchandise andmaterials2,134,224 1,209,392Other services 26,700,972 25,169,949b) in foreign market 729,212,378 431,664,610Electricity 718,633,430 422,869,809Other products 50,395 0Other merchandise andmaterials6,574,303 4,012,739Other services 3,954,250 4,782,062TOTAL 1,327,546,308 913,777,494(23) Changes in inventories of productsand work-in-progressCapitalised own products and services mostly refer to:••Large-scale overhaul of Unit 5 and gas turbine 2;••Construction work tied to investment shaft NOP II;••Construction and engineering work in theconstruction of HPP on the lower Sava River;••Construction of the replacement Unit 6;••Construction of waste water reservoir;••Performance of transfer lines in the pit and workson pumping stations; and••Construction of solar power plant.In consolidation, the value of capitalised own productsand services increased by € 18,193,412, whichrepresents the sale of property, plant and equipmentwithin the Group.(25) Other operating revenueOther operating revenue is mostly composed of revenuearising from utilisation of assets assigned in accordancewith legislation on disability organisations,revenue from emission coupons received by theRepublic of Slovenia and revenue from penalties received.The amount of financial revenue eliminated duringconsolidation procedure totalled € 200.Other operating revenueChange in value of group inventories represents increasein coal inventory in 2011 by 564,882 GJ, whichrepresents the increase in value of € 1,671,611. The increasein coal inventories in 2011 positively affectedthe result. Moreover, the change in value of inventorieswas positively affected by the change in inventories ofother finished products in the amount of € 43.330.in EUR 2011 2010Revenue from reversal of2,301,815 3,328,837provisionsDrawing of deferred revenue 17,564,413 6,566,727Profit at sales of fixed assetsand reversed impairment ofreceivablesRevenue fromcompensations andcontractual penalties764,383 1,211,0415,007,249 1,707,723Other operating revenue 3,262,554 14,578,230TOTAL 28,900,414 27,392,558

Financial report of HSE Group207(26) Costs of goods, materials andservicesThe cost of merchandise sold in the amount of€ 840,914,670 comprises expenses for electricity purchase,emission coupons for trading and contingentcosts of electricity purchase.The cost of goods and materials sold eliminatedduring consolidation totalled € 551,936,704.The majority of costs of materials in the amount of€ 88,253,480 is represented by the costs of gas, coaland other energy products, necessary for electricityproduction, and costs of spare parts and maintenancematerial.The costs of services eliminated during consolidationtotalled € 126,137,025.The majority of costs of services in the amount of€ 66.365.512 is represented by the costs of services increating products, costs of maintenance of fixed assetsof the group companies, costs of maintenance ofproperty, plant and equipment, insurance premiumsand utility services.The costs of services eliminated during consolidationtotalled € 3,285,552.Costs of goods, materials and servicesin EUR 2011 2010Cost of goods sold 840,914,670 415,701,773Costs of materials 88,253,480 56,226,745Costs of services 66,365,512 61,171,615TOTAL 995,533,662 533,100,133(27) Labour costsLabour costs comprise salaries and allowances, socialinsurance contributions, additional pension insuranceand other labour costs (meal allowance, commutingallowance, holiday allowance, jubilee benefits, financialsupport, termination benefits, etc.). The costs ofcompensations for unutilised leaves (which can beutilised until 30 June 2012) in 2011 are also charged.As a result of unified presentation of meal allowancesof employees in the group companies wherethey prepare hot meals, in consolidation process€ 639,662 was included among labour costs and onthe other hand among net sales revenue. Even thedata for 2010 is presented in a similar manner.The company did not receive any employee claimsfor payment on the basis of legal provisions, the collectivelabour agreement or the company’s Articles ofAssociation.Labour costsin EUR 2011 2010Salaries 105,002,437 102,684,698Pension insurance costs 18,228,861 17,807,179Other insurance costs 7,904,988 7,704,531Other labour costs 15,177,441 15,134,787TOTAL 146,313,727 143,331,195In 2011, the audit of financial statements of the companieswithin the HSE Group in Slovenia was performedby Deloitte revizija d.o.o., which reviewed the companiesabroad, which are included in consolidatedfinancial statements, but they were not audited inthe country of residence. Four companies registeredabroad were audited by the audit companies in theircountries, namely four by KPMG and two by Deloitte.Costs of auditorin EUR 2011 2010Audit of annual reports 168,744 204,307Other audit services 12,996 6,082Tax advisory services 0 1,795Other non-audit services 52,800 0TOTAL 234,540 212,184

208 Annual Report 2011(28) Write-downs in value(29) Other operating expensesThe majority of write-downs in value are representedby depreciation of property, plant and equipment.The Group applies similar rates of depreciation tointangible assets and property, plant and equipmentof the same kind. As for the manufacturing plant andequipment, individual subsidiaries apply depreciationrates that correspond to the activity carried out.Depreciation of fixed assets acquired throughgovernment grants or free of charge is accounted forseparately. For the amount of accumulated depreciation,long-term deferred revenue items are utilisedand other operating revenue recorded.The majority of allowances for receivables and inventoriesrefer to impairments of values of coal inventoriesto net realisable value and doubtful receivablesfrom operations.Write-downs in valueThe majority of other operating expenses are representedby environmental charges (costs of emissioncoupons and water charges), concession fee payableto the State, contributions for building sites and contractualpenalties.The amount of short-term receivables eliminatedin consolidation totalled € 941,826.Other operating expensesin EUR 2011 2010Provisions 2,450,898 6,307,461Fee for building site use 6,766,799 6,731,105Concessions 15,398,579 18,989,722Environmental charges 22,044,550 22,176,564Donations 1,474,260 1,353,785Other operating expenses 8,070,370 5,664,634TOTAL 56,205,456 61,223,271in EUR 2011 2010Amortisation of intangibleassetsDepreciation of property,plant and equipmentDepreciation of investmentpropertyAllowance for or writedownin receivables andinventoriesSales and write-downsin intangible assetsand property, plant andequipment1,530,082 1,447,21891,160,576 87,151,62514,946 31,2043,011,550 3,744,260465,873 1,151,346TOTAL 96,183,027 93,525,653(30) Financial revenueMajority of financial revenue is represented by intereston deposits and loans granted.The amount of financial revenue eliminated duringconsolidation totalled € 5,798,724.Financial revenuein EUR 2011 2010From dividends and other9,463 8,855,568shares of profitShare in profit or loss ofassociates and joint venturesvalued using equity methodInterest on loans anddeposits grantedNet exchange differencesfrom financing activities202,437 86,5861,765,811 1,474,679399,026 147,396Other 339,716 275,581TOTAL 2,716,453 10,839,810

Financial report of HSE Group209(31) Financial expensesMajority of financial expenses is represented by expensesfor interest on long-term and short-term loans.Interest on loans for the purchase of property, plantand equipment charged up until they became availablefor use is disclosed as a part of the value of property,plant and equipment.In 2011, group companies impaired part of theirinvestments, while the principle refers to the impairmentof the company Golte d.o.o.The amount of financial expenses eliminated duringconsolidation totalled € 725,703.Financial expensesin EUR 2011 2010From loans received 8,387,544 7,468,061Share in profit or loss ofassociates and joint venturesvalued using equity method10,533 3,570Change in fair value ofinvestments through profitor lossFrom sales of available-forsalefinancial assets3,044,239 398,02712,945 360,228Other 5,903 249,206TOTAL 11,461,164 8,479,092utilised in the future or the amount up to which expenseshave been included in tax statements for thecurrent year. Deferred taxes comprise deferred taxassets in the amount of € 10,744,847 and € 1,487 ofdeferred tax liabilities. More detailed disclosures ofdeferred tax assets are disclosed in Section 6.At the end of 2011, the group companies‘ unusedtax losses stood at € 30,087,342.Tax calculationin EUR 2011 2010Profit or loss before tax 87,445,544 128,604,692Tax calculated at applicabletax rate (20%)17,633,929 25,743,621Tax from revenue reducingtax base—847,292 —1,383,705Tax from tax breaks —1,484,827 —1,513,770Tax from expenses reducingtax baseTax from non-deductableexpensesTax from other changes intax calculation—115,156 —1,177,1021,366,736 1,231,3431,009,895 1,867,888Tax 17,563,285 24,768,275Effective tax rate 20.08% 19.26%(32) TaxIn establishing the basis for current tax, revenue andexpenses established in accordance with IFRS werecorrected in terms of decrease and increase in taxbase.In 2011, seven group companies in Slovenia andfour out of seven abroad were liable to pay corporateincome tax. Owing to tax breaks or tax losses, the remainingcompanies did not calculate the basis for thepayment of the tax.Current tax of the group companies in 2011amounts to € 17,563,285. On the basis of current taxat the end of 2011, the group companies disclose€ 6,814,899 of current tax assets (higher advancesfrom calculated tax) and € 1,388,703 of current tax liabilities.Deferred taxes refer to deferred tax assets recognisedin the likely amount of available profit againstwhich they can be used in the future. Deferred tax assetsare decreased by the amount up to which it is nolonger probable that tax deductible expenses can be(33) Net profit or lossNet operating profit or loss in the amount of€ 69,753,103 comprises net profit of the company inthe amount of € 46,729,619, the share of the controllingcompany in the profit or loss of subsidiaries in theamount of € 24,790,380, cumulative decrease in profitor loss in the amount of € -1,760,512, which mostlyrefers to the exclusion of financial revenue from theshares of subsidiaries in the controlling company, andnet loss of minority owners in the amount of € -6,384.Profit or loss of the companyin EUR 2011 2010Gross return on operations 1,390,426,127 957,424,226Operating profit or loss 96,190,255 126,243,974Net cash —8,744,711 2,360,718Profit or loss before tax 87,445,544 128,604,692Net profit or lossfrom the period69,753,103 102,984,128

210 Annual Report 20115.5.8.3 Consolidated statement ofother comprehensive income5.5.8.5 Consolidated statement of changesin equityThe comprehensive income statement records changesin fair value of hedges against changeability ofcash flows, the change in fair value of available-forsalefinancial assets and foreign exchange differencesarising from the translation of financial statements offoreign subsidiaries. In 2011, the total value of changeamounted to € -7,557.606.Change in available-for-sale financial assetsamounts to € 108.266.Change in fair value of hedges against changeabilityof cash flows amounts to € -7,079,467 and itincludes € 744,533 of deferred tax assets.In 2011, the translation of financial statements inforeign subsidiaries discloses negative effect in theamount of € -369.873.Considering the abovementioned facts, the totalcomprehensive income, which includes the net profitor loss in the amount of € 69,753,103 and changesin other comprehensive income in the amount of€ 7,557,606, amounts to € 62,195,497 at the end of2011, of which € 62,332,996 is owned by the majorityowner and € -137.499 by the minority owner.5.5.8.4 Consolidated cash flow statementThe consolidated cash flow statement shows changesin the balance of cash during a financial year.Cash comprises cash in hand, deposit money intransaction accounts, and deposits redeemable at notice.The data in the consolidated cash flow statementhas been obtained from cash flow statements ofGroup companies, taking into account eliminations inthe process of consolidation.Cash flowsin EUR 2011 2010Operating cash flows 135,505,458 197,613,262Cash flows from investingactivities—336,124,874 —103,880,261Cash flows from financingactivities175,318,934 —74,207,790Cash flow for the period —25,300,482 19,525,211The consolidated statement of changes in equityshows all changes in equity components during a financialyear.Transactions with minority owners in the amountof € 2,765,800 include input of minority owners in theamount of € 40,000 in the company SRESA d.o.o. andadditional payments of minority owners to the companyHESS d.o.o.Total comprehensive income of the reporting periodincreased by € 62,195,497, with the increase consistingof:••The net profit for the year in the amount of€ 69,759,487, attributable to the controllingcompany;••The net profit for the year in the amount of€ -6,384, attributable to the controlling company;••Change in other items of total comprehensiveincome, which is owned by the majority owner inthe amount of € -7,056,617;••Change in other items of total comprehensiveincome, which is owned by the minority owner inthe amount of € -131.115;••Loss arising from conversion of financial statementsof companies in other countries in the amount of€ -369,874.In the reporting period, individual items of the Group’sequity changed (changes occurred in the controllingcompany) by € 63,110,511, due to:••According to the General Meeting decision, apart of 2010 accumulated profit in the amountof € 39.745.702 was transferred to other revenuereserves;••According to the Supervisory Board decision onthe management’s proposition, a part of 2011 netprofit or loss in the amount of € 23,364,809 wastransferred among other revenue reserves.Accumulated profit is not determined at the Grouplevel.

Financial report of HSE Group2115.5.8.6 Related partiesTransactions with associatesin EUR Sales in 2011 Purchases in 2011Loans grantedas at 31/12/2011Other receivablesas at 31/12/2011Other liabilitiesas at 31/12/2011Group companies 744,702 51,758 1,620,948 433,658 80,815Associates 596,988 1,554,071 69,893 755,488 719,192Jointly controlled companies 15,040 10,533 0 0 0TOTAL 612,028 1,564,604 69,893 755,488 719,1925.5.8.7 RemunerationRemuneration of managers and employees who arenot subject to the tariff part of the collective agreementcomprises:••Gross receipts included in the income tax returnnotice,••Other remuneration (meals, transportation, perdiems, untaxed portion of jubilee benefits),••Premiums paid for voluntary supplementarypension insurance.Remuneration of Supervisory Board members includesgross attendance fees of all members (compositionof the SB changed during the year), includingtravel expenses related to the performance of tasks inthe SB and the audit committee.In 2011 managers, employees who are not subjectto the tariff part of the collective agreement andmembers of the Group’s Supervisory Boards did notreceive shares of profits under General Meeting resolutions,nor were they approved any advances, loansor guarantees by group companies.Receipts of the management, Supervisory Board members and employees who are not subject to the tariffpart of the collective agreementin EUR Salary Other receipts BonusesTravel costreimbursementTOTALManagement 1,131,714 153,772 61,483 23,164 1,370,133Supervisory Board and Audit Committeemembers0 209,227 1,232 4,659 215,118Employees who are not subject to the tariffpart of the collective agreement3,998,068 549,445 144,171 72,864 4,764,548TOTAL receipts 5,129,782 912,444 206,886 100,687 6,349,799Receivables to employeesin EUR Interest rate Repayment dedline 31 December 2011 31 December 2010Employees who are not subject to the tariffpart of the collective agreementValue of unit used for determiningthe value of apartments2020 16,703 19,703

212 Annual Report 20115.5.8.8 FINANCIAL INSTRUMENTS AND RISKSThis section is connected with the section 4.3.6 of thefinancial report as well as with the section 2.11 on financialrisks in the business report.5.5.8.8.1 Credit RiskMost group companies sell the majority of its productionto the controlling company, which settles its receivableswithin the set deadline. Thus, the exposureto credit risk is the largest at the controlling company,which is disclosed in its financial report.Premogovnik Velenje Group manages credit riskthrough the use of tools, such as: monitoring of customers‘credit ratings and information on operatingactivities of customers, insuring of at-risk receivables(bills of exchange, bank guarantees), limiting exposureto individual business partners and similar.Group companies have secured approximately70% of short-term receivables to buyers, which representthe majority of all group receivables. Approxi-mately on third of advances given is secured, whilemost other receivables do not require the insurancedue to their nature.In 2011, our partners have regularly complied withtheir obligations with rare exceptions.In case of delays, the customers in Slovenia andabroad are charged default interest at the contractualrate.At the end of 2011, group companies have€ 449,655 of short-term receivables and € 2,736,960of doubtful short-term operating receivables.The allowances from short-term financial receivablesrefer to the loan granted to associate.In 2011, the group companies received € 573,464of doubtful and disputed receivables.The allowances for operating receivables mainlyrefer to receivables that the group companies had toconstruction companies and amount to € 1,499,635 intotal.Finally, € 319,647 of receivables was written-off.The majority of receivables were written-off at thecontrolling company which explained in more detailin the disclosure of credit risks in the financial report.Long-term receivables by maturity date as at 31/12/2010Maturity dateUp to 2 years after the From 3 to 5 years after Over 5 years after thedate of the statement the date of the statement date of the statementin EURof financial positionof financial position of financial positionTOTALFinancial receivables from others 433,420 0 0 433,420Financial receivables from deposits given to others 145,733 0 0 145,733Operating receivables from associates 551,583 68,947 68,947 689,477Operating receivables from advances given 6,184,291 11,147 82,318 6,277,756Operating receivables from others 1,023,326 9,876 7,958 1,041,160TOTAL 8,338,353 89,970 159,223 8,587,546Long-term receivables by maturity date as at 31/12/2011Maturity dateUp to 2 years after the From 3 to 5 years after Over 5 years after thedate of the statement the date of the statement date of the statementin EURof financial positionof financial position of financial positionTOTALFinancial receivables from others 24,000 0 0 24,000Financial receivables from deposits given to others 309,198 0 0 309,198Operating receivables from associates 275,791 275,791 0 551,582Operating receivables from advances given 100,000 10,147 82,318 192,465Operating receivables from others 929,376 4,232 7,958 941,566TOTAL 1,638,365 290,170 90,276 2,018,811

Financial report of HSE Group213Short-term receivables by maturity date as at 31/12/2010in EURFinancial receivablesfrom group companiesFinancial receivablesfrom associatesFinancial receivablesfrom othersOperating receivablesfrom group companiesOperating receivablesfrom associatesOperating receivablesfrom buyersOperating receivablesfrom advances givenOperating receivablesfrom government andother institutionsOperating receivablesfrom othersNot yet dueDue upto 3 monthsBreakdown by maturity datesDue from 3to 6 monthsDue from 6to 9 monthsDue from 9to 12 monthsDueover 1 year472,572 0 0 0 0 0 472,57283 0 0 0 0 449,655 449,738166,667 0 0 0 0 0 166,66751,196 0 0 0 0 0 51,1963,453 0 0 0 0 0 3,453103,747,521 8,397,830 807,761 822,623 1,157,780 581,536 115,515,0514,001,714 0 13,553 0 0 0 4,015,26718,078,593 0 0 0 0 0 18,078,5931,026,412 0 0 60 0 443,899 1,470,371TOTAL 127,548,211 8,397,830 821,314 822,683 1,157,780 1,475,090 140,222,908TOTALShort-term receivables by maturity date as at 31/12/2011in EURFinancial receivablesfrom group companiesFinancial receivablesfrom associatesFinancial receivablesfrom othersNot yet dueDue upto 3 monthsBreakdown by maturity datesDue from 3to 6 monthsDue from 6to 9 monthsDue from 9to 12 monthsDueover 1 year1,620,948 0 0 0 0 0 1,620,94869,893 0 0 0 0 449,655 519,54876,594 0 0 0 0 0 76,594Deposits granted to others 126,636 0 0 0 0 0 126,636Operating receivablesfrom group companiesOperating receivablesfrom associatesOperating receivablesfrom buyersOperating receivablesfrom advances givenOperating receivablesfrom government andother institutionsOperating receivablesfrom others433,658 0 0 0 0 0 433,658203,906 0 0 0 0 0 203,906139,279,089 9,323,511 723,389 469,173 709,266 1,574,779 152,079,2079,165,989 0 0 0 0 3,000 9,168,98924,882,072 0 0 0 0 0 24,882,0724,938,400 17,477 89 59 0 0 4,956,025TOTAL 180,797,185 9,340,988 723,478 469,232 709,266 2,027,434 194,067,583TOTAL

214 Annual Report 2011Changes in allowances for short-term financialreceivables and loansin EUR 2011 2010Balance as at 1 January 449,655 224,827Allowances for receivablesand loans0 224,828Balance as at 31 December 449,655 449,655Changes in allowances for short-term receivablesin EUR 2011 2010Balance as at 1 January 2,130,436 1,318,898Written-off receivablescollected—573,464 —831,181Allowances for receivables 1,499,635 1,675,879Final write-off of receivables —319,647 —33,160Balance as at 31 December 2,736,960 2,130,4365.5.8.8.2 Liquidity riskIn financial crisis the liquidity risk management is ofextreme importance. The group companies havebeen successfully managing the liquidity risk and thusensure optimal solvency in the settlement of its currentliabilities. For the purpose of optimisation of companies’liquidity, cash management is implementedwithin the Group. It is performed in accordance withthe adopted Internal Regulations of group companiesfor cash management and cash pooling. Cash managementwithin the Group is performed as borrowingamong the group companies: the primary source offinancing of short-term deficits of group companiesis surpluses of available cash in other group companies.In order to manage liquidity risk, the groupcompanies have credit lines approved at commercialbanks in form of framework loans and limits on bankaccounts. Short-term liquidity surpluses are allocatedto safe and liquid short-term deposits at commercialbanks through cash pooling on treasury account.Maturity dates of long-term liabilities as at 31/12/2010Maturity dateUp to 2 years after the From 3 to 5 years after Over 5 years after thedate of the statement the date of the statement date of the statementin EURof financial positionof financial position of financial positionTOTALLong-term financial liabilities to banks 71,539,998 57,512,279 124,096,330 253,148,607Long-term financial liabilities to others 519,852 0 0 519,852Long-term operating liabilities to suppliers 4,201,257 0 0 4,201,257Long-term operating liabilities based on advances 0 0 14,162 14,162Long-term operating liabilities to others 7,678 76 192,270 200,024TOTAL 76,268,785 57,512,355 124,302,762 258,083,902

Financial report of HSE Group215Maturity dates of long-term liabilities as at 31/12/2011Maturity dateUp to 2 years after the From 3 to 5 years after Over 5 years after thedate of the statement the date of the statement date of the statementin EURof financial positionof financial position of financial positionTOTALLong-term financial liabilities to banks 37,912,325 89,670,235 280,281,076 407,863,636Long-term financial liabilities to others 3,128,842 799,495 0 3,928,337Long-term operating liabilities to suppliers 3,441,001 0 0 3,441,001Long-term operating liabilities based on advances 53,122 0 14,162 67,284Long-term operating liabilities to others 401,308 0 158,819 560,127TOTAL 44,936,598 90,469,730 280,454,057 415,860,385There is a risk of non-issuing the government guaranteeto EIB. According to all assurances to financial institutions(No objection letter, Letter of support by theGovernment of the Republic of Slovenia) cannot beassumed neither by HSE nor investor. Non-issuing ofthe guarantee would negatively affect the credibilityof not solely the HSE Group, but the entire State. Afternon-issuing of the guarantee, it is difficult to imaginea high international financial credit rating of the Stateand maintenance of its credibility to international financialinstitutions. EBRD loans are also related to EIBarrangement.If in 2010 we estimated that there is a risk of nonissuingof the government guarantee to EIB for theloan in the amount of € 440 million, at the end of 2011this risk must be exposed. The risk is not solely nonissuingof the guarantee but also delay of issue. Incase the guarantee will not be issued before autumn2012, this could cause liquidity problems not only inHSE, but within the entire Group. In case the guaranteeis not issued, the largest risk is certainly assumedby our owner, i.e. the State, which with this action consciouslyagrees on impairments of its property andconsequently adopts liability of capital increase of thecompany HSE.Managing risk of delay in acquiring governmentguarantee is controlled by up-to-date alternative scenarios,short-term borrowing and optimizing liquidityand operations. It is estimated that the risk was appropriatelymanaged in 2011.Risk of non-issuing government guarantee is controlledby performing scenarios of alternative financingof replacement Unit 6 in TEŠ. It is estimated thatthe risk was appropriately managed in 2011.

216 Annual Report 20115.5.8.8.3 Currency riskThe Group is exposed to currency risk in a lesser extentsince the majority of inflows and outflows areperformed in domestic currency euro. The exposureto currency risk is related to electricity trade in foreignmarkets.The controlling company is mainly exposed to currencyrisk in electricity trading in Hungary (purchase ofelectricity in HUF) which is managed by the use of forwards,namely the currency forward swap FX Forward.The exposure to currency risk occurs in operationsof subsidiaries in SE Europe. With regard to the factthat operations of subsidiaries in SE Europe representa smaller segment of operations in comparison withtotal HSE Group operations, the exposure to currencyrisk is thus minimum.Since other currencies are used in smaller extent,the Group does not perform sensitivity analysis to thechange in exchange rates of other currencies, sincethe change in these exchange rate would not significantlyaffect the Group‘s profit or loss.The following exchange rates were used for translationof financial statements of the foreign companies:CountryCurrencydesignationClosing exchangerate in EURfor 2011Closing exchangerate in EURor 2010Bulgaria BGN 1.9558 1.9558Bosnia andHerzegovinaBAM 1.95583 1.95583Croatia HRK 7.5370 7.4600Hungary HUF 314.5800 296.2650Macedonia MKD 62.0600 61.5185Serbia RSD 103.6300 105.5500Contracts concluded for currency swaps by maturityin EUR 31 December 2011 31 December 2010Up to 12 months 3,961,257 17,999,708From 1 to 5 years 0 688,817TOTAL 3,961,257 18,688,525Type of financial instruments as at 31/12/2010in EUR EUR HUF RSD Other currencies TOTALShort-term operating receivables 136,292,467 118,588 559,284 33,156 137,003,495Short-term financial receivables and loans 639,322 0 0 0 639,322Long-term operating receivables 7,799,165 0 0 209,228 8,008,393Long-term financial receivables and loans 579,153 0 0 0 579,153Short-term operating liabilities —125,031,692 —339,138 —76,596 —875,974 —126,323,400Short-term financial liabilities —60,204,864 0 0 0 —60,204,864Long-term operating liabilities —4,415,443 0 0 0 —4,415,443Long-term financial liabilities —253,668,459 0 0 0 —253,668,459Net exposure of the statementof financial position—298,010,351 —220,550 482,688 —633,590 —298,381,803Type of financial instruments as at 31/12/2011in EUR EUR HUF RSD Other currencies TOTALShort-term operating receivables 185,602,941 16,055 2,331,629 1,036,272 188,986,897Short-term financial receivables and loans 1,846,648 0 0 47,423 1,894,071Long-term operating receivables 1,491,717 0 0 193,896 1,685,613Long-term financial receivables and loans 333,198 0 0 0 333,198Short-term operating liabilities —270,760,043 —2,139,490 —33,606 —225,798 —273,158,937Short-term financial liabilities —81,031,495 0 0 0 —81,031,495Long-term operating liabilities —4,068,412 0 0 0 —4,068,412Long-term financial liabilities —411,791,973 0 0 0 —411,791,973Net exposure of the statementof financial position—578,377,419 —2,123,435 2,298,023 1,051,793 —577,151,038

Financial report of HSE Group2175.5.8.8.4 Interest rate riskThe controlling company and three subsidiaries areexposed to interest rate risk in financial liabilitiessince they have contracts concluded for long-termloan agreements at variable interest rate tied to Euriborwhich is changing on daily basis. In accordancewith the adopted »Implementation Policy of InterestRate Risk Management within the HSE Group«, thecontrolling company and two subsidiaries hedgedagainst the interest rate risk up to 50% of long-termloan portfolio of individual company with interest rateswaps (IRS). The third subsidiary adopted a strategy ofinterest rate hedging of a long-term loan portfolio bydispersing the loans taken-out at the fixed and variableinterest rate in the ratio 50%:50%. The purposeof interest rate hedging in the Group is solely riskhedging and assuring unchangeable cash flow. Therefore,they are highly effective in the aspect of hedgeaccounting. The abovementioned group companieshave concluded transactions of interest rate hedgingon the basis of standard contract ISDA with first-classcommercial banks and it is estimated that there existsa minimum possibility of not realising the transactions.Contracts concluded for interest rate swapsby maturityin EUR 31 December 2011 31 December 2010Up to 12 months 0 20,000,000From 1 to 5 years 80,481,250 0TOTAL 80,481,250 20,000,000— Sensitivity analysis of cash flow at financialinstruments with a variable interest rateThe change in interest rate for 50 basis points on thereporting date would increase (decrease) the netprofit or loss for the values stated below. Analysis preparedfor both years assumes that all variables, particularlyforeign currency rates, remain unchanged. Inthe calculation, the receivables/liabilities are at variableinterest rate decreased by the total amount oftransactions of interest rate swaps (IRS) concluded.Financial instrumentsNet profit or loss 2011 Net profit or loss 2010in EURIncrease by 50 b.p. Decrease by 50 b.p. Increase by 50 b.p. Decrease by 50 b.p.Financial instruments at variable interest rateFinancial assets 66,680 —66,680 56,756 —56,756Financial liabilities —1,046,132 1,046,132 —1,480,178 1,480,1785.5.8.8.5 Price riskFrom the perspective of the Group, the majority partof price risk is based on controlling company’s operations,which is revealed in its financial report.

218 Annual Report 20115.5.8.8.6 Capital managementThe main purpose of capital management is to ensurethe best possible credit rating and capital adequacyfor the purposes of financing operations and investments.An adequate volume of capital enables thecompany the trust of creditors and market as well asmaintains the future development of activities.The company monitors changes in equity usingthe financial leverage ratio calculated by splitting netliabilities with the total amount of net liabilities andtotal amount of equity. In terms of net liabilities, thecompany includes received notices and other financialliabilities less cash.The ratio shows the relationship between theGroup’s indebtedness and equity. The value of theratio is higher than at the end of 2010, mostly due tohigher long-term indebtedness of the HSE Group as aconsequence of financing investment in the replacementUnit 6 at TEŠ. Due to net profit of the HSE Grouprealised in the amount of € 69.8 million, the equityhas also increased. However, the increase in equity islower than increase in Group indebtedness. The ratiocomplies with conditions determined by the banks includedin the financing of investments.It is estimated that the group companies disposeof adequate capital with regard to their activity..Capital managementin EUR 31 December 2011 31 December 2010Long-term financial411,791,973 253,668,459liabilitiesShort-term financialliabilities81,031,495 60,204,864Total financial liabilities 492,823,468 313,873,323Total equity 1,409,097,763 1,344,136,467Financial liabilities/equity 0.35 0.23Net financial liability 425,816,230 221,164,532Net debt/equity 0.30 0.16

Financial report of HSE Group2195.5.8.9 Fair valuesThe Group estimates that the carrying amount is a sufficientapproximation for its financial instruments, exceptderivatives, which are recorded at fair value.Financial instruments31 December 2011 31 December 2010in EURCarrying amount Fair value Carrying amount Fair valueNon-derivative financial assets at fair value 3,881,701 3,881,701 2,962,996 2,962,996Available-for-sale financial assets 3,881,701 3,881,701 2,819,917 2,819,917Derivatives (assets) 0 0 143,079 143,079Non-derivative financial assets at amortised cost 259,907,017 259,907,017 238,939,154 238,939,154Financial receivables 2,227,269 2,227,269 1,218,475 1,218,475Operating receivables 190,672,510 190,672,510 145,011,888 145,011,888Cash 67,007,238 67,007,238 92,708,791 92,708,791Total non-derivative financial assets 263,788,718 263,788,718 241,902,150 241,902,150Non-derivative financial liabilities at fair value 4,230,652 4,230,652 507,985 507,985Derivatives (liabilities) 4,230,652 4,230,652 507,985 507,985Non-derivative financial liabilities765,820,165 765,820,165 444,104,181 444,104,181at amortised costBank loans 488,396,973 488,396,973 313,182,059 313,182,059Other financial liabilities 195,843 195,843 183,279 183,279Operating liabilities 277,227,349 277,227,349 130,738,843 130,738,843Total non-derivative liabilities 770,050,817 770,050,817 444,612,166 444,612,166Financial assets carried at fair value by hierarchyin EUR 31 December 2011 31 December 2010Financial assetsat first-level fair valueFinancial assetsat second-level fair valueFinancial assetsat third-level fair valueTOTAL financial assetsat fair value328,920 579,2222,446,879 2,028,7931,105,902 354,9813,881,701 2,962,9965.5.8.10 Events after the reporting dateAfter the date of consolidated statement of financialposition, no events in the group companies occurredthat could affect consolidated financial statements for2011 and related disclosures.

today energytomorrow energy

Everything is changing. Itgrows, spreads, bursts,settles down and fades.The circle of life is concluded.The energy does not disappear.We carry it inside, light it inothers and look for it in things.Forever, eternally … The circleof energy is concluded.

222Contact informationHolding Slovenskeelektrarne d.o.o.Koprska ulica 92SI-1000 LjubljanaSloveniaManaging Director:Matjaž Janežič, M.Sc.T. +386 1 470 41 00F. +386 1 470 41 01hse@hse.si; info@hse.siwww.hse.siSoške elektrarneNova Gorica d.o.o.Erjavčeva ulica 20SI-5000 Nova GoricaSloveniaManaging Director:Vladimir GabrijelčičT. +386 5 339 63 10F. +386 5 339 63 15seng@seng.siwww.seng.siSrednjesavskeelektrarne d.o.o.Ob železnici 27SI-1420 TrbovljeSloveniaManaging Director:Matjaž Janežič, M.Sc.Dravske elektrarneMaribor d.o.o.Obrežna ulica 170SI-2000 MariborSloveniaManaging Director:Viljem Pozeb, M.Sc.T. +386 2 300 50 00F. +386 2 300 56 55dem@dem.siwww.dem.siHidroelektrarnena Spodnji Savi d.o.o.Cesta bratov Cerjakov 33aSI-8250 BrežiceSloveniaManaging Director:Bogdan BarbičT. +386 7 49 92 860F. +386 7 49 92 880info@he-ss.siwww.he-ss.siTermoelektrarnaŠoštanj d.o.o.Cesta Lole Ribarja 18SI-3325 ŠoštanjSloveniaManaging Director:Simon Tot, M.Sc.T. +386 3 899 32 00F. +386 3 899 34 85info@te-sostanj.siwww.te-sostanj.si

Contact information223TermoelektrarnaTrbovlje d.o.o.Ob železnici 27SI-1420 TrbovljeSloveniaManaging Director:Franc BlaznekT. +386 3 565 12 00F. +386 3 565 14 66info@tet.siwww.tet.siPremogovnik Velenje d.d.Partizanska cesta 78SI-3320 VelenjeSloveniaManagement BoardPresident:Milan Medved, Ph.D.Members:Vladimir Malenković, Ph.D.Sonja KugoničT. +386 3 899 61 00F. +386 3 586 91 31info@rlv.siwww@rlv.siHSE Invest d.o.o.Obrežna ulica 170aSI-2000 MariborSloveniaManaging Director:Miran Žgajner, M.Sc.T. +386 2 300 59 92F. +386 2 300 59 91info@hse-invest.siwww.hse-invest.siSoenergetika d.o.o.Ulica Mirka Vadnova 3aSI-4000 KranjSloveniaManaging Director:Aleš AžmanT. +386 4 2083 531F. +386 4 2083 512HSE Italia S.r.l.Via Roma 2034170 GoriziaItalyBoard of Directors:Tomaž Štokelj, Ph.D.Ana ZaljeteljDamjan LipuščekT. +390 481 521 720F. +390 481 525 917hse.italia@hse.siwww.hse.si/skupina_italiaHSE Hungary Kft.Károlyi Mihály u. 121053 BudapestHungaryManaging Directors:Tomaž Štokelj, Ph.D.Borut MehT. +361 48 62 200F. +361 48 62 201hse.hungary@hse.siwww.hse.si/skupina_hungaryHSE Adria d.o.o.Miramarska 2410 000 ZagrebCroatiaManaging Directors:Tomaž Štokelj, Ph.D.Irena StareT. +385 161 77 010hse.adria@hse.siwww.hse.si/skupina_adriaHSE Bulgaria EOOD45A Bulgaria Blvd.Triaditza Region1404 SofiaBulgariaManaging Directors:Drago SkornšekIrena ŠlemicT. +359 2 96 97 600F. +359 2 98 05 340hse.bulgaria@hse.siwww.hse.si/skupina_bolgarijaHSE Balkan Energy d.o.o.Bulevar Mihaila Pupina 11711 070 BeogradSerbiaManaging Directors:Irena StareDrago SkornšekT. +381 11 311 55 86F. +381 11 311 55 87hse_beograd@hse.siww.hse.si/skupina_balkanenergy

224 Annual Report 2011HSE MAK Energy DOOELBelasica no. 21000 SkopjeMacedoniaManaging Directors:Tomaž Štokelj, Ph.D.Drago SkornšekT. +389 23 118 825F. +389 23 114 862www.hse.si/skupina-hse/hse-mak-energyHSE PragueBranch OfficeUjezd 409/19118 00 Praha 1 –Mala StranaCzech RepublicManager:Tomaž Štokelj, Ph.D.T. +420 257 311 210F. +420 257 317 238hse.praha@hse.siwww.hse.si/skupina_prahaHSE BH d.o.o.Bulevar Meše Selimovićabroj 1671000 Sarajevo, Novi GradBosnia and HerzegovinaT. +387 33 774 775F. +387 33 774 722hse.bh@hse.siwww.hse.si/skupina-hse/hse-bh-d-o-oHSE BratislavaBranch OfficeSvätoplukova 30821 08 BratislavaSlovakiaHSE BucharestRepresentative OfficeStr. Economu Cezărescunr. 31bRO-060754, sector 6,BucharestRomaniaManager:Drago SkornšekT. +40 (0) 312 292 600F. +40 (0) 312 292 601www.hse.si/skupina_bukarestaManager:Tomaž Štokelj, Ph.D.T. +421 23 30 147 60F. +421 23 30 147 58www.hse.si/skupina_bratislava

225Abbreviations€ The euroAACERACIAP RESAUKNBBIHBUCCCCCICCSCDCH2OICECIGRECO2SINKCPHECVPODDDDEMDIIPDIIPDPDRPEEAEAEBITEuropean Agency for Cooperation of EnergyRegulatorsActive Communications InternationalAction Plan for RESAgencija za upravljanje kapitalskih naložb RS(The Capital Assets Management Agency ofthe Republic of Slovenia)Bosnia and HerzegovinaBusiness unitControl centreChamber of Commerce and Industry ofSloveniaCarbon capture and storageConceptual designCertification for Hydro: Improving CleanEnergyInternational non-government and non-profitassociation of energetics expertsCO2 Storage by Injection into a Saline Aquifierat KetzinCogeneration of heat and electricityCommunity Plant Variety OfficeDetailed designDravske elektrarne Maribor d.o.o.Investment Project Identification DocumentInvestment Project Identification DocumentDevelopment planDevelopment research projectEnvironmental Agency of RSEnergy ActEarnings before interest and taxesEBITDAEBRDEBRSECECECSEEEERPEEUEEXEFETEIBEICEIMVELESEMASENDUREPCGERERPESETSEUGGGGSPPHHEOHEPHERAHESSHPPEarnings before interest and taxes,depreciation and amortisationEuropean Bank for Reconstruction andDevelopmentEnergy balance of the Republic of SloveniaEuropean CommissionEuropean CommunityEnergy Chamber of SloveniaElectricityEuropean Energy Recovery ProgrammeEfficient energy useEuropean Energy ExchangeStandard electricity trading contractEuropean Investment BankEnergy Identification CodingElectric Power Research Institute ElektroinštitutMilan VidmarElektro – Slovenija d.o.o.The EU Eco-Management and Audit SchemeComputer programme for electricity tradingElektroprivreda Crne Gore (company)Environmental reportEnterprise resource planningElectricity systemEuropean trading schemeEuropean UnionGreenhouse gasesGas and steam power plantHungarian energy officeHrvatska elektroprivreda (company)Hrvatska energetska regulatorna agencija(Croatian Energy Regulatory Agency)Hidroelektrarne na spodnji Savi d.o.o.Hydropower plant

226 Annual Report 2011HPUSNGHSEHSE BBHSE BHIIASIASBIEAIEDIEEIFRICIFRSIGCCIMADIPIPPCIRENAISOITIZVRSLLANLCPsLNGMMEPSOMESPMoENNANACNAPNEKNEPNKBMNLBNPPNSPOODOSOGOHSASHigh-pressure underground storage of naturalgasHolding Slovenske elektrarne d.o.o.HSE Balkan Energy d.o.o.HSE BH Energetsko produzeće d.o.o.International Accounting StandardsInternational Accounting Standards BoardInternational Energy AgencyDirective on industry emissionsIntelligent Energy EuropeInterpretations issued by InternationalFinancial Reporting Interpretations CommitteeInternational Financial Reporting StandardsIntegrated Gasification Combined CycleInstitute of Macroeconomic Analysis andDevelopmentInvestment programmeStandards in the area of comprehensiveprevention and controlling industry pollutionThe International Renewable Energy AgencyInternational Organisation for StandardisationInformation technologyInštitut za vode RS (Water Institute of theRepublic of Slovenia)Local area networkLarge combustion plantsLiquified Natural GasElectricity Transmission System Operator ofMacedoniaMinistry of the Environment and SpatialPlanningMinistry of the EconomyNational AssemblyNetwork Access ControlNetwork Access ProtectionNuklearna elektrarna Krško d.o.o.National Energy ProgrammeNova Kreditna banka Maribor d.d.Nova Ljubljanska banka d.d.Nuclear power plantNational spatial planElectronic document systemOfficial GazetteOccupational health and safety managementsystemPPCPCDPRPSPPTPVRRECSRESRIPRPSRSSSASSBSCADASCALARSENGSETSHPPSISICSIQSORSSPPSRCSRESASUVITTCTEBTEN-ETEŠTETTPPTSOUUNUPISUVKVVATProtection centrePreliminary conceptual designProtection ReleyPumped-storage power plantProject taskPremogovnik Velenje d.d.Renewable energy certificate systemRenewable energy sourcesRevised investment programmeUninterrupted power supply systemRepublic of SloveniaSlovene Accounting StandardsSupervisory BoardSupervisory control and data acquisitionSlovenski center za avtomatsko lokalizacijoatmosferskih razelektritev (Slovenian Centrefor Automatic Localization of AtmosphericDischarges)Soške elektrarne Nova Gorica d.o.o.Strategic energy technologiesSmall hydropower plantsSystem instructionInterpretations issued by the StandingInterpretations CommitteeSlovenian Institute of Quality and MetrologyStatistical Office of the Republic of SloveniaSolar power plantScientific research centreSrednjesavske elektrarne d.o.o.System of managing information securityTelecommunicationsTermoelektrarna Brestanica d.o.o.Trans-European energy NetworkTermoelektrarna Šoštanj d.o.o.Termoelektrarna Trbovlje d.o.o.Thermal power plantSystem operator of transmission networksUnited NationsManagement information systemCompetition Protection OfficeValue-added taxOSOccupational safetyOSHOccupational safety and health

Abbreviations227WWAWANWCZZETePOZFPPIPPZGDZGOZSDUZUPEVIPWater ActWide area networkWorkers’ councilReduction of greenhouse gas emissions inthe Slovene energy industry in the post-Kyotoprotocol periodFinancial Operations, Insolvency Proceedingsand Compulsory Dissolution ActCompanies ActConstruction ActZakon o sodelovanju delavcev pri upravljanjuAct on Spatial Planning of EnergyInfrastructure

The Slovenian version of this annual report is authoritative.Publisher: Holding Slovenske elektrarne d.o.o.Text: Specialist Services of HSEDesign: AV Studio d.o.o.Print: HTZ Velenje I.P. d.o.o.Total print: 60July 2011

Holding Slovenske elektrarne d.o.o.Koprska ulica 92SI-1000 Ljubljana, SloveniaT. +386 1 470 41 00F. +386 1 470 41 01hse@hse.si, info@hse.siwww.hse.si