DRAVA, KUPA, RJE»INA, LOKVARKA, LI»ANKA LIKA, DOBRA ...

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HEP ANNUAL REPORT 2010
CHAPTER 3 - HEP’S BUSINESS OPERATIONS IN 2010
BUSINESS
ENVIRONMENT
ONE OF THE MAIN OBJECTIVES of the Management Board in 2010, besides secure and reliable supply of electricity,
heat and natural gas to domestic customers, was to consolidate the financial state of the Group. In addition,
conclusions and demands posed by the Government on management boards of state-owned companies related
to reduction in the number of employees and payroll costs, and to fulfilling of obligations towards creditors by due
dates. Therefore, a whole series of measures was undertaken to improve efficiency of business operations, which
contributed to achieving these objectives.
Business operations in 2010 were carried out in the circumstances of global recovery from the consequences
of the economic crisis. Neighboring countries as well as most European countries, but not Croatia, achieved growth
in economic activities. The prices of oil, coal, gas and electricity rose during 2010, but the uncertainty about the pace
of recovery of the world economy kept them below the level they were at before the crisis.
The fall in the consumption of electricity, heat and gas, which occurred in 2009, was stopped and consumption
somewhat rose in 2010. With above-average hydrological circumstances, a record electricity production was achieved
by hydropower plants allowing lower production by thermal power plants and lower electricity purchase on the
market. Thanks to such a structure of electricity sources, production costs decreased despite increased fuel prices.
In addition to reducing production costs, cuts in other operating costs, namely manageable general costs and
payroll and other employees’ receipts, were planned and achieved.
The income growth achieved as a result of growth in consumption of electricity, heat and gas, as well as decreased
costs of production and electricity purchase allowed the Group’s liquidity to improve satisfactorily. Since July
2010 all HEP Group companies have been fulfilling their obligations toward suppliers by due dates. However, due
to illiquidity and unemployment in Croatia, problems in debt collection from customers continued so that provisions
for uncertain debt as well as their share in total accounts receivable increased.
In order to financially consolidate the Group, with an emphasis on liquidity improvement, the planned scope
of investment in construction, replacement and reconstruction of energy plants, networks and facilities and other
investments was reduced for 2010. Investment priority was given to the completion of significant construction projects
in progress, which increase the Group’s electricity and heat generating capacity (Lešče HPP and new units at TE-TO
Zagreb and Sisak TPP), preparation of new power plant construction projects and all investments necessary for the
safety and reliability of energy systems of the Group.
In spite of the curtailed investment plan, the actual investment in construction of new plants and in replacement
and reconstruction of existing facilities amounted to almost 1.7 billion kuna whereby the Group retained the
position of being one of the largest investors in Croatia. The new hydro power plant Lešće – the first hydropower
plant to have been built in Croatia since the country’s becoming independent, was connected to the electricity system.
Of the new generating facilities, HEP is preparing construction of the Ombla hydro power plant, 68 MW, and a
replacement coal-fired unit of 500 MW at the Plomin power plant.
The prices of electricity and heat for domestic customers have not changed during 2010. Only the selling price
of gas in the supply activity increased, as a consequence of the simultaneous increase of gas purchase price approved
by the Government at the beginning of the year.
In September, the rating agency Standard&Poor’s downgraded the credit rating of Hrvatska elektroprivreda
from BB+ to BB, and in December, as a consequence of the downgrade of sovereign credit rating, to BB- with stable
outlook. Since one of the weaknesses of the Group is a relatively short maturity of long-term debt, the financial
consolidation included the restructuring of debt maturity. Some short-terms loans were repaid and the use of
short-term credit lines was reduced. New loans, agreed in the first quarter, totaling 110 million euro with a 5 year
maturity are being used, in addition to investment financing, for the needs of working capital. For a new long-term
loan agreement of 100 million euro, which ensures timely financing of planned investments and working capital in
2010, a government guarantee was used.