ANNUAL REPORT 2002

ANNUAL REPORT 2002

TABLE OF CONTENTS

HSE d.o.o. - The Company

1 Key Achievements for the Financial Year 2002 13

2 Business Report 162.1 General Company Profile 162.2 Mission, Vision and Strategic Goals 202.3 Human Resources Management 212.4 Electricity 232.5 Supply and Suppliers 242.6 Sales and Buyers 262.7 Risk Management 272.8 Financial Operations 312.9 Investments 342.10 Informatics 402.11 Quality 402.12 Relations with the Wider Social Environment 412.13 Research and Development 422.14 Important Events after the End of the Financial year 43

3 Financial Report of HSE d.o.o. 463.1 Introductory Explanations 463.2 Auditor’s Report 473.3 Balance Sheet 483.4 Income Statement 503.5 Cash Flow Statement 513.6 Statement of Changes in Equity 523.7 Notes to Financial Statements 53

HSE GROUP

4 HSE Group Key Achievements for the the Financial Year 65

5 Presentation of the HSE Group 685.1 HSE Group Activities and Structure 685.2 Human Resources Management 705.3 Electricity Generation 715.4 Other Activities 725.5 Investments in Other Companies of the HSE Group 725.6 Important Events after the End of the Financial Year 745.7 HSE Group in 2003 75

6 Financial Report of the HSE Group 786.1 Introductory Explanations 786.2 Auditor’s Report 796.3 Consolidated Balance Sheet 806.4 Consolidated Income Statement 826.5 Consolidated Cash Flow Statement 846.6 Consolidated Statement of Changes in Equity 856.7 Notes to Consolidated Financial Statements 86

Contacts

Statement by the Chairman of the Management BoardReport by the Supervisory Board

6 Holding Slovenske elektrarne is oneof the youngest companies in theSlovenian electricity market. It isnow only the second year since theGovernment of the Republic ofSlovenia established the companyand on 26 July 2002 made it the keyfactor in the process of transformingthe Slovenian power sector. In doingso they had presented us with threebold goals: to ensure a unified mar-ket approach by all electricity pro-ducing companies in free marketconditions, execute the Construc-tion of Hydropower Plants in theLower Sava River project and im-prove the level of competitivenessachieved by each of the companieswithin HSE Group. In order to ac-hieve these goals we were entrus-ted with six affiliated companies, allof which had been providing reliableand safe power supplies for deca-des before the establishment of theholding company. Their operational,professional, personnel related andtechnological advantages are now,as they have been joined in the HSEGroup, reflected in an increasedlevel of satisfaction with both theirand our key publics: shareholders,consumers, social environment, em-ployees and partners. All this in thelight and on behalf of the Group’s

basic mission, which is, in additionto preserving the leading role in thedomestic market, focused also onthe scientific and economic develop-ment of the Slovenian power marketas well as to ensure their establish-ment in the international context.

Financial year 2002, in which HSEwas in its first year of existence,was also pivotal for the company.This was indeed a time for us toestablish the fundamentals for un-disturbed operations, prove that weare able to meet the goals as setdown by the shareholders at thecompany’s establishment, as wellas present the ways of doing so inactual day-to-day operations. The an-nual report you are reading is there-fore an appraisal of the period, inwhich the company came to life,along with an in-depth analysis ofthe successfulness of our businessand market approach, while it alsoacts as a starting point of forecastsfor the periods ahead.

We are now able to claim that in 2002the company has been able to meet amajority of the goals set at its estab-lishment. Taking advantage of syner-gies between companies within HSEGroup has provided us with the most

significant competitive edge duringthe first months of operation. Bene-fits of HSE Group’s unified front inapproaching the domestic powermarket are currently above all dis-played in the reduction of negativefinancial effects as a result of unavai-lability by combining various produc-tion sources according to the currentmarket conditions, provision of amore comprehensive range of elec-tricity products, reduction of risks inrelation to long-term contracts andimprovement of the company’s for-eign market potential. Construction ofthe chain of hydropower plants on theLower Sava River, which will include -in addition to the already existingVrhovo HPP - 5 new hydropower plants,has commenced within scheduledtime limits, and the construction ofthe first of the fore-mentioned -Boπtanj HPP - is in full swing. Alongwith joint preparation of businessplans for 2003 the end of last yearhas also seen the start of an inten-sive operating rationalization programalong with efforts to raise the level ofcompetitiveness of the Slovenianelectricity and coal suppliers.

Our success in meeting the goalswas closely linked to the size of HSEand the overall interlinking of its

parts. In 2002, also due to theexpanded range of activities, theGroup has gained three new mem-bers. Holding Slovenske elektrarne,Dravske elektrarne Maribor, Savskeelektrarne Ljubljana, Soπke elektrarneNova Gorica, Termoelektrarna Bre-stanica, Termoelektrarna ©oπtanj andPremogovnik Velenje were joined byHSE Invest and HSE - IIP, both ofwhich are involved in investments inthe power sector, and TDR - Meta-lurgija. Last year HSE Group pro-duced more than one half of thetotal production of electricity inSlovenia. Due to the safety, reliabili-ty and quality of power supply,including the combining of differentpower sources, HSE has managedto become a pivotal partner to boththe domestic as well as foreign part-ners in 2002.

Undoubtedly our market positioningand performance-related successcannot be entirely linked to “hard”,specific factors and numbers, as wehave taken important steps also tobuild our image in the field of com-munications. We have created anew corporate visual identity, whichis already being linked to the com-pany, presentation materials givinginformation to all interested parties,

STATEMENT BY THE CHAIRMAN OF THE MANAGEMENT BOARD

7

and desire for the cocreation of jointsuccess. I would like to thank ourclients for their trust, our partners fortheir partnership, the media for dis-persing information about us. And letme also thank everybody else who isconnected to us in one way or another.For HSE is present everywhere at alltimes - connected to each and everyone of us. It is the power of energythat connects us.

Drago Fabijan, M. Sc., General Manager and President of the HSE

Management Board

an internal magazine that connectsus from the inside, and the firstadvertisement, aimed at the exter-nal publics. Using a variety of com-plementary communication activi-ties we have been building and en-forcing the organizational culture com-bined with a sense of belongingamong the employees, both throughmembership in the Power Sector Syn-dicate and the Worker’s Councils atindividual companies, all of whichhave been actively participating inmanagerial decisions. Of course wehave also been striving towards asymbiosis with the community weare cohabitating with.

As you are reading this AnnualReport we are therefore able toclaim that all of previous year’s busi-ness, strategic and communicationactivities have firmly set the founda-tions for the current financial year -2003, in which the opening of thepower market to foreign competi-tors sets the most important mile-stone in our operations. At HSE wehave prepared well for the arrival ofcompetition: we are introducingnew fields of operation, planning theestablishment of the so-called multi-utility concept, which in the long runwill include trading with an increa-

sed number of energy sources, andabove all - we are expanding. Notonly in knowledge, technology, andpersonnel, but also geographically.Slovenia is becoming too small forthe company, which is why interna-tionalization of its operations is oneof our strategic priorities. This yearwe are facing the registration of theBelgrade office and a subsidiary inItaly, while we are aiming to pene-trate other markets during the fol-lowing couple of years. We are by allmeans aware that we are facing anumber of challenges and we will betaking them on with joy and pride, aswe are in possession of all the nec-essary resources. But above all weare striving towards excellence - inall fields.

Let me thank everybody who hascontributed in making HSE and HSEGroup what they are today - thelargest and best power supplying for-mation in Slovenia. I would also like toacknowledge the management team’scontribution in successfully executingthe strategic guidelines, as well asthe Supervisory Board who havemanaged to keep track of our busi-ness plans and upgrade them produc-tively. Acknowledgements also go toeach of our employees for their will

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REPORT OF THE SUPERVISORY BOARD

The Supervisory Board of HoldingSlovenske elektrarne d.o.o., whichis the parent company in the HSEGroup, has been monitoring andsupervising the company’s manage-ment in 2002 as well as performingother tasks in accordance with thelegislation and the company’s Articlesof Association, over a total of 12meetings, of which eight were ordi-nary meetings, while four were ex-traordinary.

The company’s Management Boardprepared quality and correct writtenmaterials, with extensive explana-tions of individual items given at themeetings. Members of the Super-visory Board passed numerous sug-gestions and requests at these meet-ings, all of which were accordinglyaccepted and implemented by theManagement Board.

In financial year 2002 the Super-visory Board had been performingits supervisory task in two differentcompositions. Based on the amend-ed Articles of Association a nine-member Supervisory Board was con-stituted on 16 September 2002. Itconsisted of six representatives ofthe shareholder, that is the Republicof Slovenia, and according to the Act

• Kept track of the Construction ofHydropower Plants in the LowerSava River project

• The Supervisory Board consentedwith the establishment of twoaffiliated companies - HSE Investd.o.o. with its headquarters locat-ed in Maribor and HSE - IIP d.o.o.with its headquarters located inSevnica

• Financial performance in 2001both for the company as well asthe Group

• Kept track of business relationsand terms in relation to othercompanies within the HSE Group

• The Board was brought up to dateon the transfer of TDR Metalurgijad.d. shares to HSE

• Discussion on the problem of un-paid salaries at Premogovnik Ve-lenje

• Consented with the signing of theConcession Agreement on theGeneration of Power on theLower Sava River

• Consented with the establish-ment of Elektro.TK d.o.o.

The new nine-member SupervisoryBoard was constituted on 16 Sep-tember 2002; the owner relievedRobert Golob, Ph. D., Radovan Tav-zes, M. Sc., and Igor Kuπar of their

duties. They were replaced withDjordje Æebeljan, M. Sc. and DamjanLah. This was accompanied with theappointment of three employee rep-resentatives - Ervin Kos, PavelÆupevc and Janez Keræan.

The nine-member Supervisory Boardassembled five times in 2002 forthree ordinary and two extraordinarymeetings; in these meetings theyprimarily discussed and kept track ofthe following issues:• Keeping track of management

consolidation issues in compa-nies within HSE Group

• The Board consented to the re-newal of the company’s corpo-rate visual identity

• Getting acquainted to the termsof operation in 2003

• Discussing the solution to the is-sues concerning Verbund

• Approved the Boπtanj HPP In-vestment Program

• Consented to the signing of theBoπtanj HPP Preparatory WorksContract

• Getting acquainted with informa-tion on the Concession TransferAgreement

• Interim reports on the company’sperformance in 2002

on Workers’ Participation in Mana-gement also three representativesof the employees.

The original seven-member Super-visory Board:

• Robert Golob, Ph. D. - Presidentof the Supervisory Board

• Lucijan Rejec - Deputy President• Radovan Tavzes, M. Sc.• Jasna Kalπek• Igor Kuπar• Prof. Josip VorπiË, Ph. D.• Darinka Mravljak

had supervised the work done bythe company’s Management Boardover seven meetings, of which fivewere ordinary meetings, while twowere extraordinary.

In these meetings the SupervisoryBoard primarily focused on the fol-lowing strategic and operational is-sues: • Interim reports on the company’s

current operations• Electricity sales figures for 2002• Adopted the business plan for

2002• Reviewed the Valuation of Tangible

Assets in Power Supply and Coal-mining Companies project

9• Consented to the establishmentof an affiliated company in Italy

• Plan of power sales and purchas-es in 2003 and the export figures

• Kept track of the ongoing con-struction of Boπtanj HPP

At its 6th ordinary meeting on 28May 2003 the HSE SupervisoryBoard discussed the Holding Slo-venske elektrarne d.o.o. Annual Re-port and the HSE Group AnnualReport for 2002 along with Auditor’sReports and the management pro-posals regarding the appropriation ofgenerated profits.

The auditing company KPMGSlovenija, d.o.o, audited the HSEand HSE Group financial statementsalong with the HSE Annual Reportand the HSE Group Annual Reportfor the financial year 2002.

According to the audit opinion as of5 May 2003 HSE and HSE Groupfinancial statements with annexesgive a true and fair view of the com-pany and Group’s financial positionas of 31 December 2002, the resultsof its operation, cash flow andchanges in equity for the year thatended at the time according to theSlovenian Accounting Standards.

Annual Reports are in accordancewith the audited financial state-ments.

Based on the reviewed audit reportsand based on explanations as givenby the auditor at the SupervisoryBoard meeting, the HSE Super-visory Board has no remarks in rela-tion to the audit reports.

Based on constant tracking of thecompany’s operations, positive auditreports, very good financial perform-ance both for the company and theGroup, the achieved goals as setdown in the 2002 business plan andin accordance with its competencesthe HSE Supervisory Board has noremarks regarding the Holding Slo-venske elektrarne d.o.o. AnnualReport and the HSE Group AnnualReport for the financial year 2002and both are thereby approved.

In 2002 HSE accumulated a totalnet profit in the amount of SIT12,285,003,564.56. At its 5th ordi-nary meeting held on 21 March2003 the company’s SupervisoryBoard adopted the ManagementBoard’s proposal for the appropri-ation of accumulated profit of SIT6,142,501,782.28 into reserves at

the very composition of the 2002Annual Report.

The remaining part of the accumu-lated profit represents the undistri-buted net profit for the financialyear 2002 in a total amount of SIT6,142,501,782.28.

In compliance with the company’sstrategic goals and investment policythe HSE Supervisory Board agreeswith the Management Board’s pro-posal to distribute the generatedprofits of SIT 6,142,501,782.28 in itsfull amount into reserves.

The HSE Supervisory Board pre-pared its report in accordance withArticle 274a. of the Corporate Law.Supervisory Board report was pre-pared for the company’s GeneralMeeting.

Djordje Æebeljan, M. Sc.,President of the Supervisory Board

Holding Slovenske elektrarne d.o.o.

Ljubljana, 28 May 2003

2002 ANNUAL REPORT HSE D.O.O. - THE COMPANY

1. KEY ACHIEVEMENTS FOR THE FINANCIAL YEAR

In 2002 HSE Group and accordinglyalso HSE as the parent company man-aged to achieve a majority of the goalsas set down at the company’s foundingin July 2001 by the Government of theRepublic of Slovenia. Improved com-petitiveness of HSE Group in a deregu-lated electricity market isshown in theamount of total accumulated profit;especially in the field of an industry,which has been marked by substantiallosses. Taking advantage of synergiesbetween the power generation - hydroand thermal - companies within theHSE Group has proven to provide theGroup with the most substantial com-petitive edge at the very beginning of

its existence. Today the benefits of aunified front approach taken by the HSEGroup in the domestic power distribu-tion market are displayed primarilythrough the reduction of negative finan-cial influences of unavailability. Thiswas achieved by combining differentproduction sources, optimizing pro-duction capacities to suit the currentmarket conditions, providing a morecomprehensive range of electricity pro-ducts, reduced risks in relation to long-term contracts along with improvedopportunities for entering foreign mar-kets. Construction of the chain ofhydropower plants (HPPs) in the lowerpart of the Sava river, which will consist

of, in addition to the already existingVrhovo HPP, five new hydropowerplants (Boπtanj HPP, Blanca HPP, KrπkoHPP, Breæice HPP, Mokrice HPP) hadstarted within the scheduled time lim-its, on 22 November 2002, with thesigning of an agreement for the execu-tion of preparatory works for BoπtanjHPP that took place in Sevnica. Thejoint preparation of business plans forthe 2003 financial year is also the begin-ning of an operational rationalization andthe process of raising the level of com-petitiveness among the Slovenianpower and coal producing companies.

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Key information for the financial year 2002 in numbers

Total revenues in SIT 000 91,871,498

Operating profit in SIT 000 12,729,126

Net profit in SIT 000 12,285,004

Distributable net profit in SIT 000 6,142,502

Assets in SIT 000 191,964,427

Capital in 000 SIT 181,934,929

Operating cash flow in SIT 000 10,621,973

Market share in % 62

Electricity sale in GWh 9,332

Added value in SIT 000 13,353,741

Average number of employees 48

Investments in fixed assets in SIT 000 656,318

BUSINESS REPORT

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2 BUSINESS REPORT

Main ActivitiesThe company’s range of business ope-rations includes the field of power ma-nagement, environmental manage-ment and the management of relatedlogistic processes. Its wide range ofactivities can be grouped as follows:• Sales and trading of electricity• Optimization of production process-

es within the HSE Group• Providing ancillary services required

for the operation of the power sys-tem

• Energy and environment relatedproject management

Full Company Name: Holding Slovenske elektrarne d.o.o.

Short Company Name: HSE d.o.o.

Address: Cesta v Mestni log 88a, 1000 Ljubljana

Telephone: (01) 42 05 700

Fax: (01) 42 05 740

Entry Number: 1/35036/00, registered with the Ljubljana

Municipal Court

Subscribed Capital: SIT 1,156,216,668.00

Transactions Account: 04302-0000317271

Tax File Number: 99666189

Registration Number: 1662970

Number of Employees as of 31.12.2002 60

URL: www.hse.si

E-Mail: hse@hse.si; info@hse.si

2.1 GENERAL COMPANY PROFILE

2.1.1 Business Operations

Registered Activities:The company’s registered activities include:

C/10.20 Extraction of brown coal and lignite

E/40.101 Power generating in hydropower plants

E/40.102 Power generating in thermal power plants and nuclear power plants

E/40.103 Other forms of power generation

E/40.104 Power transportation

E/40.105 Power distribution

E/40.300 Steam and hot water supply

E/41.000 Water collecting, purifying and distributing

F/45.24 Hydro-construction and water management

F/45.25 Other construction works including special professions

G/51.70 Other wholesale trading

H/74.20 Project planning and technical consulting

J/65.23 Other financial services

K/74.15 Holding activities

K/74.14 Entrepreneurial and business consulting

K/74.12 Accounting, bookkeeping and auditing activities, tax consulting

K/74.84 Other various business operations

K/74.843 Other business activities, d.n.

O/93.05 Other services

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2001Important events in financial year 2001include:• Government of the Republic of Slo-

venia adopts the Act of Establishingthe Proprietary Limited CompanyHSE d.o.o., along with the resolutionon the nomination of an acting ma-nager for the position of the compa-ny’s CEO and a resolution on thenomination of members of the HSEd.o.o. Supervisory Board

• The Supervisory Board is constitut-ed

• HSE is registered in the companies’register with the Ljubljana MunicipalCourt

• The Competition Protection Officeof the Republic of Slovenia issues adecree on the conformity of concen-tration of companies DEM, SEL,SENG, TEB, TE© and PV intoHolding Slovenske elektrarne

• Attaining the “Trading in the Orga-nized electricity market” license andthe “Representation and Mediationin the Organized electricity market”

• Nomination of the HSE Manage-ment Board for a period of four years

the Act on Terms of GrantingConcession for the Generation ofPower on the Lower Sava River

• Signing the Concession Contract forthe Generation of Power on theLower Sava River

• Establishment of two affiliated com-panies; HSE Invest d.o.o. with itsheadquarters located in Mariborand HSE - IIP d.o.o. with its head-quarters located in Sevnica

• Attaining the building permit forthe execution of Phase I of theconstruction of Boπtanj HPP

• Signing of the first long-term elec-tricity sales contract

• Signing of the contract on the execu-tion of preparatory works forBoπtanj HPP, which also repre-sents the official start of constructionof the Lower Sava River hydro-power plant chain

• Signing of contracts for electricitysales in 2003

ManagementRepublic of Slovenia as the soleowner of the company manages itdirectly and through the companybodies:• The Supervisory Board and• The Management Board

Corporate GovernanceAt HSE we are aware of the impor-tance of relations between the Ma-nagement Board, the SupervisoryBoard and the shareholders as wellas advantages that come as a con-sequence of the introduction of ahigh-quality and corporate gover-nance system to the company. Po-sitive effects of the introduction ofthe governance system will primari-ly include:• Increased safety and transparen-

cy of the company’s operations• Improved company image• Reduced price of attaining long-

term capital• Long-term growth and sustained

development of the company

The C. D. system will enable a muchhigher level of unity, cooperation andtrust between individual stakehol-

• Execution of all activities with refer-ence to the documentation and theorganization of execution of the Hydro-power Plants in Lower Sava Riverproject, in accordance with the reso-lutions of the Government that theHydropower Plants in Lower SavaRiver Construction project is to berealized through HSE d.o.o.

• Signing of agreements on businesscooperation and settling mutual rela-tionships in the field of approachingthe electricity market between HSEand its subsidiaries

• Signing of agreements on re-alloca-tion of employees from subsidiariesto the parent company - HSE

• Signing of contracts for electricitysales in 2002

2002Important events in financial year2002 include:• First employments• HSE assumes the management

and production optimization tasksand commences the first electri-city supplies

• Changed company address• Attaining the “Distribution and

Supply of Heat for Long-DistanceHeating” license

• National Assembly of the Repub-lic of Slovenia adopts the novel to

2.1.2 Milestones in theCompany’s Operations

2.1.3 Company Organization

18 REPRESENTATIVES OF THE CAPITALDjordje Æebeljan, M. Sc. - President• State Secretary at the Ministry of the

Environment, Spatial Planning andEnergy,nominated with a resolution issued byGovernment of the Republic of Slo-venia dated 5 September 2002

Lucijan Rejec - Deputy President• Posoπki razvojni center (PosoËje

Development Center) Director, nominated with a resolution of theGovernment of the Republic of Slo-venia dated 26 July 2001

Damjan Lah• Head of the Office of the Prime Mini-

ster,nominated with a resolution of theGovernment of the Republic of Slo-venia dated 20 June 2002

Jasna Kalπek• State Undersecretary at the Ministry of

the Environment, Spatial Planning andEnergy, nominated with a resolution of theGovernment of the Republic of Slo-venia dated 26 July 2001

Prof. Josip VorπiË, Ph. D.• Professor at the Faculty of Electrical

Engineering, Computers and Informa-tics in Maribor,nominated with a resolution of theGovernment of the Republic of Slo-venia dated 26 July 2001

Darinka Mravljak• SGP Kograd Inæeniring d.o.o. CEO,

nominated with a resolution of theGovernment of the Republic of Slo-venia dated 26 July 2001

REPRESENTATIVES OF THE EMPLOYEESErvin Kos• Dravske elektrarne Maribor d.o.o.,

nominated at the meeting of the HSEWorkers’ Council on 16 September 2002

Pavel Æupevc• Premogovnik Velenje d.d.,

nominated at the meeting of the HSEWorkers’ Council on 16 September 2002

Janez Keræan• Holding Slovenske elektrarne d.o.o.,

nominated at the meeting of the HSEWorkers’ Council on 16 September 2002

All members of the Supervisory Boardare nominated for a period of fouryears.

HSE Supervisory BoardMembers of the HSE Supervisory Board are as follows:

ders in the company, thus improvingits economic efficiency, growth anddevelopment. It is also becoming in-creasingly important that the estab-lishment of a solid system will resultin an increased level of trust withinvestors, creditors and clients, andis therefore essential for the imageof both the company and its bodies.In this aspect of the company’soperations mass media will be play-ing an increasingly important role,which is an understandable conse-quence of strong demands for thetransparency of operations.

Management Board:Members of the HSE ManagementBoard are as follows:• Drago Fabijan, M. Sc.

General ManagerPresident of the Management Board

• Milan Medved, Ph. D.Business ManagerMember of the ManagementBoard

• Ladislav TomπiË Technical ManagerMember of the ManagementBoard

Drago Fabijan, M. Sc.

Milan Medved, Ph. D.

Ladislav TomπiË

19Workers’ Participation in ManagementHuman resources per se do not suf-fice for business goals as set down tobe achieved. Satisfaction that employ-ees gain from their work plays a vitalrole in activating their full potential. Thisis achieved also by providing variousforms of participation in management,which gives them the opportunity todirectly influence the making of impor-tant decisions in the company. One ofsuch forms of participation also includesworkers’ councils, which have become aperfectly ordinary form of contemporarymanagement.

At HSE we are also aware of the impor-tance of employees’ participation in ac-ceptance of important decisions, whichis why we dedicate special attention tothis form of participation. Our co-work-ers are not merely participants in thework process, but are rather playing avital role in its creation.

Workers’ CouncilA three-member workers’ council wasconstituted at HSE on 19 June 2002.The council has three members:

• Ivan Sevπek - President• Janez Keræan - Deputy • Janez Selan - Member

Cooperation with the SyndicateSince the very beginning of its exis-tence HSE has been aiming to achievegood relations both within the powersector as well as the company itself.One of the key leverages that enablethis goal to be achieved is the regularand close cooperation with the syndi-cate. This form of cooperation is con-ducted in the form of regular monthlymeetings, at which representatives fromboth sides solve current issues andexchange pieces of information re-quired for the efficient operation of thesyndicate on one side and companyoperations on the other.

Company Organization Chart

GENERAL MANAGER

BUSINESS MANAGER

TECHNICAL MANAGER

Sales and Trading Division

Sales Office

Back Office

Middle Office

Financial Division

Purchase Department

Financial Department

Accounting Department

Investments Management Dept.

Plan and Analyses Dept.

Production Division

Operation Department

Power Systems Department

Operation Planning Department

Systems and Telecommunications

Department

Maintenance Division

Electricity Department

Engineering Department

Construction Department

Protective Systems Department

Business Administration

Internal Audit Department

Communications Department

Legal Office

Quality Systems

Strategic Development Dept.

The mission of HSE, Slovenia’s leadingcompany in the power sector, in additionto preserving its market leading positionin the domestic market, is the develop-ment of the Slovenian power sector ineconomic as well as scientific terms, aswell as establishing it in the internationalenvironment.

The company’s basic vision is to ensurethe optimum utilization of Slovenia’s po-wer and human resources, and to estab-lish a competitive enterprise in the globalenergy market that would be able tocompete in the domestic and foreign ele-ctricity market, while at the same timeexpanding its business activities andthereby reducing business risks arisingfrom market fluctuations in individualproduct markets.

HSE is a market-oriented enterprise,combining its subsidiaries’ business func-tions that enable the exploitation of syn-ergies and contribute to rationalization ofoperations on the level of a holding com-pany.

The introduction of joint marketing andentering the market under a commonbrand has denoted start of HSE develop-ment in the direction of becoming animportant and reliable Central Europeansupplier of power products. By doing so

the company is also ensuring safe andreliable power supplies for the domesticconsumers, social security for employeesin its subsidiaries and the sustained de-velopment of the Slovenian economy.

HSE business activities will mainly betaking place in the field of energy andenvironmental activities. In addition tofulfilling the basic goals as set down bythe Government of the Republic of Slo-venia at the company’s establishment,the company’s strategic developmentwill be going in the direction of buildinga so-called “multi-utility” concept and theestablishment of new sales programssuch as gas, oil, coal, water and waste.Diversification of the sales program is anecessity as it contributes to the balanc-ing of risk distribution. The planned“multi-utility” concept also includes theexpansion of HSE trading activities intocommodity markets as part of the so-called “multi-commodity trading” pro-gram. Trading in these markets repre-sents an opportunity for HSE to improveits financial performance and reduce risksin the field of electricity trading.

With its goal of sustained growth andinternationalization HSE will intensivelykeep on seeking business partners in theAlps - Adriatic region, the entire CentralEuropean area and the markets of the for-

mer Yugoslavia. This is why we are plan-ning to open an HSE office in Belgrade,while we will be doing the same in otherregions of former Yugoslavia dependingon the current needs, future possibilitiesand market conditions.

Affiliated company HSE Italia will beestablished in 2003 with the purpose ofattaining rights for the creation of balancegroups in Austria and Germany and thepenetration of the Italian market. One ofpre-conditions for the creation of a bal-ance group, which enables cheaper tran-sit via Austria to the German market, is tohave founded a company in the EuropeanUnion. The company is also going toserve as a means for direct sales in theItalian market and to enable the selectionprocess of clients or to seek ways of gain-ing access to the higher price range. Itwill also act as a link between the Italianpartners and HSE in potential investmentprojects to be undertaken in Italy.

The company’s strategic goals are as fol-lows:• Construction of the chain of hydropo-

wer plants in the lower part of theSava river

• Increasing the market share in thedomestic electricity market

• Increasing the market share in foreignelectricity markets

• Reduction of operating costs in com-panies within the Group

• Inclusion in trading with other com-modities (“multi-commodity trading”)

• Expansion of business operations tocommunal power distribution

• Controlled management and supervi-sion of power-related projects

• Managing the strategic developmentand investment programs

• Resolution of the stranded investments

As HSE is one of Slovenia’s largestenterprises it is of vital importance thatwe consistently keep on building itsbrand. This is why in 2002 specialattention was dedicated to raisingawareness on HSE mission and visionamong our key publics. The new cor-porate visual identity, presentationmaterials, corporate advertisement,website and internal magazine aremerely some of the tools that haveraised to a high level the knowledgeand perception of HSE as strategicallythe strongest player in the electricitymarket. Today the brand is suffi-ciently recognizable in Slovenia to beable to perform with confidence in therestless electricity market, while at thesame time bearing a sufficient commu-nication range internally within the HSEGroup so that each one of its employ-ees is able to find an opportunity for

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2.2 MISSION, VISION AND STRATEGIC GOALS

21personal growth and development inits name, mission and vision. People are each company’s largestasset. Using their knowledge, abilities,creative thinking, creative power and asense of loyalty they enable and cre-ate a competitive advantage and eventhe company’s very efficiency in thebusiness environment.

We are aware that numerous chal-lenges in the environment that HSE isfacing daily demand highly skilled andmotivated employees who are able tocope with these challenges today andwill be able to do so tomorrow. This iswhy we dedicate considerable atten-tion to our employees’ developmentand training, as this is the only way topreserve our competitive edge on themarket.

At HSE we employed the first peopleon 1 January 2002. The very purposeof establishing HSE had set the guide-lines for our employment policy; itsbasic motto was to seek human re-sources within HSE Group as it com-bines a wide range of skills or, putanother way, combines high-qualityexperts of different profiles. This isalso why our pool of employeesincludes quite a number of Ph. D. andM. Sc. degrees.

A majority of our employees, some 73percent, who were employed by HSEon 31 December 2002, were trans-ferred to the company from othercompanies in HSE Group, a further 12percent came from other companiesin the power sector that are not includ-ed in HSE Group, and 15 percent ofHSE employees came to the companyfrom other companies or institutions.

2.3 HUMAN RESOURCES MANAGEMENT

HSE Employee FiguresDate Number of Employees

1.1.2002 35

31.12.2002 60

Employee Transfers from Companieswithin the HSE Group in 2002Company Number of Employees

DEM 8

SEL 4

SENG 5

TEB 4

TE© 17

PV 6

TOTAL 44

Velenje unit mainly operates in theoperation of the domestic market, inter-nal trading relations within the HSEGroup, energy imbalances monitoringand calculating as well as long-termplanning. The Nova Gorica branch is res-ponsible for foreign markets.

With the dispersion of business opera-tions over different locations in Sloveniathat have the best resources for theirimplementation, HSE is running its ope-rations and managing its assets eco-nomically while achieving the highest

Business UnitsThe company runs its operations throughfour business units located in Ljubljana,Maribor, Velenje and Nova Gorica.

Ljubljana is where the HSE headquar-ters is situated; this is the location ofthe company’s Management Board, aswell as the marketing, finance, ac-counting, legal service, internal auditand communications departments. TheMaribor branch acts as the center forproduction management, investmentsand telecommunications divisions. The

BUSINESS UNITS OF HSE

A

H

CRO

I

Drava

SoËa

legend:

business unitshydropower plantsthermal power plantscoalmine

BU Nova Gorica

BU Ljubljana

BU Maribor

BU Velenje

Additional TrainingDespite the high level of educationamong the company’s employeesand a wide range of skills they pos-sess, at HSE we always stress theimportance of complementary formsof functional training and education;we are aware that nowadays acquir-ing new skills is of key relevance foremployees to be able to tackle novel-ties as we are facing fast develop-ments both in the field of informationtechnology as well as the fields ofmarketing and production technolo-gies. In 2002 employees participatedin additional training sessions fromthe fields of marketing, finance, fo-reign languages, internal audit, qua-lity systems etc.

22 possible level of human and technical re-source utilization with all companies with-in HSE Group. HSE business operationsthat are required for its joint operationsare situated where they enable the mosteffective utilization of the location’s com-petitive advantage.

EducationThe level of education among HSEemployees is quite high, as 76 percentof the employees are university gradu-ates. In addition the employees sharerich experience from the field of thepower system, power generation andcoalmining, telecommunications, ac-counting, finance, market analyses, etc.

A total of seven employees wereincluded in education programs; threeof them were included in pre-graduate

OVERVIEW OF EMPLOYEES BY BUSINESS UNITS ASOF 31 DECEMBER 2002

BU Nova Gorica: 47 %BU Velenje: 21

35 %BU Ljubljana: 22

36 %

BU Maribor: 1322 %

EMPLOYEE STRUCTURE AS OF 31 DECEMBER 2002

M. Sc.5 %

Ph. D.7 %

Vocational3 %

High13 % Higher

8 %

University64 %

3% 17% 27% 7% 22% 8% 12% 5%

56 - 60less than 25

26 - 30

31 - 35

36 - 40

41 - 45

46 - 50

51 - 55

EMPLOYEE AGE STRUCTURE AS OF 31 DECEMBER 2002

The average age of the com-pany’s employees is 39 ye-ars.

programs, two were in graduate spe-cialization programs, while two wereincluded in Master’s Degree programs.

23EU Starting PointsThe EU Directive for the InternalElectricity Market was introduced in theEU in February 1997. According to itsstipulations the Member States had twoyears to make the appropriate amend-ments to the national legislations. InFebruary 1999 each Member State wasto open at least 26 percent of its mar-ket, followed by a stipulated 28 percentin 2001, while in the third step in 2003a full 33 percent of the market has to beliberalized.

Deregulation of the Slovenian MarketIn the Energy Act, which was passed inSlovenia in September 1999, it was sti-pulated that the national electricity mar-ket would be liberalized gradually. Themarket was officially deregulated as of15 March 2001 when the internal mar-ket was deregulated for all eligible con-sumers, which includes all those withan installed capacity of over 41 kW at asingle point of supply (some 8,000 inSlovenia) and all power distributioncompanies. Before the end of 2001 theGovernment of the Republic of Sloveniaalso decreed that the external electrici-ty market is deregulated ahead of timefor six of the largest consumers, receiv-ing their electricity directly from the 110kW network. In 2003 all other eligibleconsumers joined them. All other con-

sumers (above all households and busi-ness consumers) are tariff consumers;for them the prices will remain in thedomain of the Government of the Re-public of Slovenia until the legally im-posed boundary of 41 kW is abolished.

Import and ExportThe legally stipulated processes of thederegulation of Slovenian electricitymarket are driving towards increasedcompetition. Thus since the beginningof 2003 according to the Energy Act allSlovenian authorized consumers ofelectricity are able to buy energy fromforeign suppliers. The quantity ofimported electricity is limited to 20-25percent of total consumption in Slo-venia with the purpose of providingreliable supplies. Partly deregulated im-port represents a substantially in-creased supply in the Slovenian elec-tricity market.

On the other hand we are recordingrapid growth in the consumption ofelectricity. In financial year 2002 thegrowth rate compared to the previousyear was at 7 percent. Forecasts for thefollowing years are also expecting con-sumption growth rates to be around 2-3 percent annually in Slovenia. The fore-mentioned growth rates and the plan-ned increase of cross-border transmis-

sion capacities for the export of elec-tricity to Italy will at least to some ex-tent alleviate the consequences of in-creased supply due to import deregula-tion.

The bilateral agreement on NEK (Krπkonuclear power plant) between Sloveniaand Croatia is of great relevance for thefuture development of the market posi-tion, as it puts Slovenia in a position ofbeing a net importer of electricity.

In general we can expect fierce compe-tition to be taking place in the market inthe future, for which we are well pre-pared.

2.4 ELECTRICITY

HSE GROUP SHARE IN THE TOTAL GENERATEDELECTRICITY IN SLOVENIA - 20021

Production of HSE Group companies:

6.698 GWh51%

Other Slovenian producers: 6.334 GWh

49%

1The figure for the HSE Group includes the 18GWh of electricity, generated in smallhydropower plants below 1 MW that wassold directly to distribution.

Consumption Growth ExceedingExpectationsIn 2002 consumers assumed 11,573GWh from the transmission network,which is a 760 GWh increase comparedto the previous year. But on the otherhand the production of domestic powerplants had increased by 1 percent com-pared to the previous year, which meantthat domestic energy sources contri-buted some 13,032 GWh of electricityinto the network. To provide uninterrupt-ed operating of the national power sys-tem we had to import 1,571 GWh toSlovenia, while export amounted to2,709 GWh.

SLOVENIAN ELECTRICITY MARKET 2002

Production

Consumption

Import

Export

11,5

73

13,0

32

1,57

1

2,70

9

GWh

Production of Companies within HSEGroupThe total amount of electricity gene-rated in HSE Group companies wouldbe sufficient to cover 58% of overallconsumption in Slovenia in 2002.

2.5.1 Electricity

SynergyAiming to achieve the highest possi-ble level of efficiency at HSE we arestriving to take advantage of syner-gies as a result of the comprehen-sive range of production units withinthe Group. Operating and cost-re-lated features of individual produtionunits differ substantially, which iswhy the appropriate combination ofproduction schedules can achievecost-efficient production of electrici-ty. In addition to this the price ofelectricity is volatile over periods oftime, which is why economic dis-patching of production units withregard to the technical criteria playsa vital role.

Electricity that HSE was supplyingto its consumers in 2002 was to alarge extent (74 percent) purchasedfrom the company’s subsidiaries.The remaining part (26 percent) waspurchased from NEK (Krπko nuclearplant) and in the organized market,while a part was also imported.

We were purchasing electricity forcovering deficits in cases of mal-functions and bad hydrologic condi-tions in the daily electricity market.

24

2.5 SUPPLY AND SUPPLIERS

Market ShareIn 2002 HSE supplied 62 percent ofoverall electricity consumption inSlovenia.

Purchase of electricity in 2002Source GWh ShareHSE group companies 6,9012 74%Other purchases in the domestic market 2,043 22%Import 388 4%Total purchase 9,332 100%

Import4%

Other purchasesin the domestic market

22%

Companies within HSE Group74%

ELECTRICITY PURCHASE STRUCTURE 2002

2 The figure for the purchased electricityincludes the required TE© own consumption

ELECTRICITY GENERATED WITHIN HSE GROUP IN 2002

DEM: 2,315 GWh35%

SEL:287 GWh

4%SENG:

407 GWh6%

TEB:30 GWh

0%

TE©: 3,659 GWh55%

HSE MARKET SHARE IN OVERALL ELECTRICITY CONSUMPTION IN SLOVENIA 2002

Other electricity suppliers

38%HSE62%

Supply OptimizationThe achieved average total price ofpurchased electricity exceeded 8 SIT/kWh, which was largely due to quiteunfavorable hydrologic conditions.This caused the production of lower-cost hydropower in companies withinHSE Group to remain 11.4 percentbelow the planned production level,and subsequently the higher-cost ©o-πtanj coal-fired thermal power plant pro-duction had to be increased by 11.5percent. This change in the structureof purchased power could in factcause a substantially larger increase inthe overall price. This was avoided byintroducing the following measures: • Purchases of additional quantities of

coal at a lower price• Specific coal consumption was kept

2.5 percent below the planned fig-ures

• Production levels in the most expen-sive gas power generators at theBrestanica thermal power plantwere reduced by 65 percent

By using the balance group and elec-tricity production system we producedthe appropriate market products ofband, day and night power, as well asindividual peak hour products thatwere included in the HSE corporaterange of products and services from

the supplied generated electricity.

CoalWe purchased a total of 41,093 TJof coal from PV (Velenje coalminingcompany) for the requirements of theproduction of electricity and heat atTE© (©oπtanj thermal power plant).

The energy value of coal stock at theend of 2002 amounted to 627 TJ.

In 2002 HSE also traded with heat.The planned overall production ofheat at TE© (©oπtanj thermal powerplant) for 2002 amounted to 375GWh, and the actual purchase figurewas 374 GWh. This means that the realization levelof the heating power purchase planwas at 99.7%.

Primary Raw MaterialsAmong primary raw materials for theproduction of electricity in 2002 coal wasthe most important (55%), followed byhydropower potential (45%), while naturalgas and liquid fuel represent less than onepercent. Premogovnik Velenje (Velenjecoal-mining company) provided us withcoal.

2.5.2 Heat

Natural gas and liquid fuel0%Hydro

potential 45 %

Coal55%

PRIMARY RAW MATERIALS FOR THE PRODUCTION OFELECTRICITY WITHIN HSE GROUP IN 2002

25

Largest Electricity Suppliers in 2002

• Termoelektrarna ©oπtanj d.o.o. (©oπtanj ther-mal power plant)

• Dravske elektrarne Maribor d.o.o. (DravaRiver hydropower plants Maribor)

• Nuklearna elektrarna Krπko d.o.o. (Krπkonuclear power plant)

• Soπke elektrarne Nova Gorica d.o.o. (SoËaRiver hydropower plants Nova Gorica)

• Savske elektrarne Ljubljana d.o.o. (SavaRiver hydropower plants Ljubljana)

2.6.1 Electricity

In addition to the sales of electricityproduced in HSE Group productionunits, the company’s financial perform-ance is also being improved by tradingwith electricity generated from othersources. Sales activities are thereforesynchronized with production and pur-chasing activities with the purpose ofachieving an improved financial resultat a reasonable level of risk.

Sales VolumeIn 2002 HSE sold 9,332 GWh of elec-tricity in the domestic and foreign mar-kets. Domestic market is also the com-pany’s most important one as 77% ofoverall sales volume was generated inSlovenia, of which 53% was sold to thefive power distribution companies,23% to other direct consumers and 1percent in the organized electricitymarket (Borzen, EEX). 23% of soldquantities were exported, mainly toItaly. We successfully participated inauctions for cross-border interruptibletransmission capacities for the exportof electricity to Italy, thereby building ourpresence in the Italian market, whichrepresents the most profitable marketfor HSE due to high prices of electrici-ty.

The entire amount of heat gene-rated in 2002 amounting to 374GWh was supplied to Komunalnopodjetje Velenje (Velenje utilitiescompany).

26

2.6 SALES AND BUYERS

2.6.2 Heat

NET SALES REVENUE STRUCTURE IN 2002

Ancillary services6%

Heating power1%

Electricity93%

Largest Buyers of Electricity in 2002

• Elektro Ljubljana d.d.• EGL AG Switzerland• Elektro Maribor d.d.• Elektro Celje d.d.• Talum d.d.• Elektro Primorska d.d.• Slovenske æelezarne d.d.• Elektro Gorenjska d.d.

Net Sales Revenues Structure

Last year HSE generated total netsales revenues of over SIT 91 bil-lion, of which just over 20% wasgenerated from sales abroad.Electricity was by far the mostimportant in the structure of rev-enues with 93 percent; ancillaryservices contributed about 6 per-cent, while heat made up for 1 per-cent of total revenues.

Long-term Contracts and Daily MarketThe bulk of sales were generatedthrough long-term contracts.

We sold surpluses of electricity resul-ting from increased water flow and theadditional electricity generated at timeswhen the market price exceeded pro-duction costs, in daily markets.

ELECTRICITY SALES STRUCTURE FOR 2002

Foreign market23%

Domestic market - others

23%

Domestic organised

market1%

Distribution53%

27

In addition to electricity and heat in2002 we also supplied the followingcontractually required ancillary services:• Voltage regulation with all power ge-

nerators• Primary frequency regulation with all

power generators• Secondary frequency regulation in

the regulation range of ±80 MW• Tertiary frequency regulation with a

less than 15-minute activation of coldand rotating reserve power <300 MW

• Black start capability of generators

In 2002 we commenced the project ofdesigning the risk management guide-lines and rules for the entire enterprise.The purpose of creating these guidelinesis to set the company policy towardsrisks, delimitation and delegation of re-sponsibilities, and the form of intertwiningof procedures used for determining therisks involved including risk management.

With an increasing volume of trading withelectricity comes an increase in marketrisk, volume risk and financial risk.

Market RiskPrice or market risk includes risks thecompany is facing due to volatile pricesof electricity in the market. Over timethe price is changing, which is why thevaluation of financial instruments servingto protect the company from risks andthe thereby connected trading-generat-ed profit or loss depend on the accuracyof the forecasts. In 2002 the companyfollowed conservative guidelines of risklimiting, which is why we sign long-termfixed price supply contracts for the bulkof electricity traded.

Quantity RiskQuantity risk includes risks arising fromuncertain production, volatile consump-tion and uncertain power supplies:

• Production uncertainty is mainly as-sociated with the question, whether theenergy can be generated; in this senseit is connected with the operational risk,which attempts to valuate the probabili-ty and influence of potential loss of anindividual power generator or anotherproduction element

• Consumption uncertainty is mainly aconsequence of weather and tempera-ture, stress elasticity, seasonal oscilla-tion and stochastic consumption growth

• Power supply uncertainty is a conse-quence of random outages of lines andother equipment, or they come as aconsequence of interventions by theoperator of the power transmission sys-tem due to overloaded transmissionlines

Risks of Electricity Supply in HSE GroupIn the production of electricity the follow-ing risks of deviations from the plannedsupplies:• Risks of electricity supply from hydro-

power plants depending on hydrologic-meteorological conditions

• Risks of electricity supply from thermalpower plants as a result of outages ortechnological and environmental pro-duction limitations

• Risks of coal supplies from PV (Velenjecoalmining company) due to potential

2.6.3 Ancillary Services

2.7 RISK MANAGEMENT

economic effects. This means thathydropower plants accumulate water dur-ing the nighttime according to the availablereservoir volumes and produce electricityduring times when higher prices areachieved (above all peak and hourly power).It is a common feature of all hydropowerplants within HSE Group that they are run-of-river projects and there is little possibilityfor the accumulation of hydro potential.With DEM (Drava river hydropower plantsMaribor) the largest achieved hourlyincrease in production was 324 MW, whilethe largest hourly decrease was 272 MW.At DEM the hourly peak productionamounted to 541 MWh. The largest dailyproduction at DEM amounted to 12,701MWh. SEL (Sava river hydropower plantsLjubljana) achieved the largest hourlyincrease in production of 20 MW, while thelargest hourly decrease was 23 MW. Thelargest hourly production amounted to 101MWh. The largest daily production was2,322 MWh. SENG (SoËa river hydropowerplants Nova Gorica) achieved the largesthourly increase of 35 MW, while the largesthourly decrease amounted to 24 MW. Thecompany’s largest hourly production was142 MWh, whereas the largest daily pro-duction amounted to 3,340 MWh.

Thermal Power Production ManagementTE© (©oπtanj thermal power plant) adaptedits production to the planned schedules.

Risks as a Result of Power PlantUnavailability or Technological andEnvironmental Limitations of Production

In addition to planned unavailability due tomajor repairs and overhauls with thermalpower plants we also have to count with 2-4 percent unplanned outages of potentialproduction - ten to twenty one-day produc-tion outages that can only be compensatedon short-term by activating gas-fired powerplants; otherwise we have to resort to thereallocation of the use of hydropowerplants’ accumulation and purchases of elec-tricity in the market. In 2002 TE© (©oπtanjcoal-fired power plant) recorded unplannedlosses of potential production of 3.24 per-cent. This figure is within the limits of com-parable power plants’ performance and isalso satisfying from other aspects i.e. thefact that at TE© overhauls come every 3 - 5years. Due to the simplicity of their produc-tion process hydropower plants are morereliable. With individual power generatorsthe unplanned outages of potential produc-tion vary from 0 to 0.5 percent.

Risks of Interrupted Coal Supply from Premogovnik Velenje Interruptions in coal supply can take placeas a result of technical system malfunc-tions, disasters or other mountain-geologi-cal disturbances in coalmining. According

to the PV (Velenje coalmining company)technical management most of all potentialproblems can be solved without any dis-turbances to the production, only excep-tionally would malfunctions cause a 14 to20-day interruption of supplies. There isbut only a remote possibility that a majorbreakdown would take place causing a six-month interruption of production. Based onthese estimates we have set the minimumtotal stock of coal to be available at all time.The minimum limit is set between 2,000and 3,000 TJ. This amount would be suffi-cient for the sustaining of 20 days of elec-tricity production at TE© (©oπtanj coal-firedpower plant).

Production ManagementWithin HSE the electricity production ma-nagement is being run from the controlcenter in Maribor. Basic goals of produc-tion management are as follows:• Minimizing the variations in production

and with balance groups in relation tothe planned schedules

• Optimizing the power distributionamong the available power generators

• Activating the reserve capacities atextraordinary events

Hydropower Production ManagementIn hydropower production managementtendencies are to exploit all the availablehydro potential providing the maximum

28 hold-ups of production when interrup-tions or malfunctions of technologicalsystems occur, at accidents, disasters orother mountain-geological disturbances

Hydrology During the course of a single year the totalamount of electricity generated in hydro-power plants can differ from the plannedmean annual water quantity by as muchas ±800 GWh. At the planned productionof 3,100 GWh for TE© (©oπtanj thermalpower plant) we are able to increase itsproduction to make up for around 600 -700 GWh. Due to changes in the structureof production of course the costs of pur-chased electricity increase according tothe quantity of substitute power and thedifference between the price of hydro-and thermal production. In 2002 hydro-power plants generated 385 GWh powerbelow planned quantities. The energy losswas almost entirely covered by TE©,which exceeded its plan by 377 GWh.

The problems are also caused by discre-pancies in actual daily water inflows com-pared to the daily forecasts. These dis-crepancies are reflected in variances inhydropower plants’ production with re-gard to the forecasted schedules. Dis-crepancies are balanced to the largestpossible extent by adapting the thermalpower plants’ production.

29Units 4 and 5 were mainly included in theautomatic secondary frequency regulation.TE© achieved the largest daily productionin the amount of 17,852 MWh on thepower generator or 15,971 MWh on thethreshold. The largest hourly increase inproduction was 225 MW, while withdecreased production the largest hourlydecrease was 199 MW.

The role of TEB (Brestanica gas-fired po-wer plant) is to provide minute-reserve andsupply tertiary frequency regulation as partof ancillary services. The average Unitresponse time at TEB with unannouncednormal activations from the time that anactivation order is issued to the synchro-nization procedure is about 13 minutes,with activation times from the activationorder to the synchronization ranging from6 to 21 minutes. The achieved level ofresponsiveness is satisfactory. In 2002there were no requests for quick Unit acti-vation - action that is common with tem-porary outages of production units.

Balance Group ManagementThe quality of balance group managementis displayed through the minimized energyimbalances that a balance group is havingcompared to the planned schedules. In2002 HSE balance group comprised theproduction units of the HSE Group (com-bined with small hydropower plants), NEK

(Krπko nuclear power plant), some of con-sumers, and electricity import and exportas result of trading operations. Energyimbalances of the balance group include alldeviations from the planned schedules.

In 2002 the total of all deviations fromschedules amounted to 5.5 GWh. Withinthe ±80 MW regulation zone of the secon-dary frequency regulation, which was pro-vided to the system operator according tothe contract, imbalances amounted to 0.2GWh. Outside this zone the total of alldeviations amounted to 5.3 MWh.

Deviations outside of the ±80 MW regula-tion zone were partly caused by the systemoperator, while a part was caused internalywithin the HSE balance group. ELES - thegrid operator - caused a variance of 2,6GWh, while a total variance of 3.2 GWhwas caused internally by the HSE balancegroup. This includes all imbalances causedby various production problems at HSE andNEK as well as by discrepancies in con-sumption levels within the balance group(outages, ecology-induced reduced produc-tion, discrepancies regarding the forecast-ed water flows, unsold surpluses etc.).

Only imbalances outside the 80 MWh ±5percent of the planned schedule arepenalized - the total amount of these was1.86 GWh.

HSE BALANCE GROUP

ELES-UPO MC HSE

TEBTE©

SENG SEL DEM

Management Center

Thermal power plant unit

Hydropower plant (HPP)

Hydropower plant generator

Consumers,other Producers

Legend

Consumers,other Producers

BALANCE GROUP HSE DEVIATIONS FROM THE PROJECTED SCHEDULES FOR 2002

1 2 3 4 5 6 7 8 9 10 11 12

15.000

10.000

5.000

0

-5.000

-10.000

-15.000

too

smal

lto

o la

rge

Pro

du

ctio

n

Power (MWh)

Total variance

Variance under +- 80 MWh

factors such as legal complications,changes and inconsistencies in legalacts, and political decisions. This formof risk was especially present duringthe starting phase of restructuring inthe electricity sector and introductionof the electricity market. In Sloveniawe are still in the transition phase ofmarket deregulation as some legal actsare still being prepared; this meansthat the regulatory risk is still presentbut it is gradually being reduced as theconditions settle down.

Planned Developments in the Field ofRisk Management The company’s management hasaccepted the strategic guideline tointroduce a uniform electricity tradingsystem. This is why in the second partof 2002 we started choosing and intro-ducing trading software, which pro-vides substantial support to risk analy-ses and management as well as port-folio analysis. Special emphasis in riskmanagement is placed on the supportof valuation of forward contracts andderivatives used for hedging and pro-tection from other risks. Combinedwith the expanded range of tradingactivities and organization of portfolioanalyses these activities will providethe company with an opportunity totake advantage of synergetic effects of

the company’s production and salesdecisions.

Along with the development of riskmanagement tools we are also plan-ning to establish a Credit Risk Ma-nagement Department. This form ofrisk is becoming increasingly importantwith the expansion of trade volumegenerated with foreign partners, andespecially the expanded range of oper-ations with domestic partners underthe conditions of electricity marketderegulation in 2003.

30 Financial RisksIn addition to quantitative risks thecompany is also regularly monitoringthe financial risks it is facing in its oper-ations and takes measures in order tomanage them. We are safeguardingthe credit risks connected to individualpartners by carefully checking the cred-it ratings. Most of our receivables inthe domestic market are secured withtwo blank bills of exchange, whereasafter the second bill has been cashedin, the buyer has to present a bankguarantee at first demand withoutobjection.

In foreign markets annual sales con-tracts are secured with bank guaran-tees.

We are managing the liquidity risk asthe risk of providing sufficient amountsof cash required to meet the due liabil-ities by carefully planning the cashflows for the subsequent periods. Indoing so we are consistently investingthe excess funds into a diversifiedinvestment portfolio with Slovenia’smost established financial institutionsunder the most favorable current con-ditions in the capital market.

Regulatory Risks Regulatory risks include out-of-market

31Investment Portfolio As of 31 December 2002 the collectionratio for receivables generated fromelectricity trading in the domestic mar-ket was at 99.5 percent, while for theforeign markets the figure was 99.8percent. All receivables from the finan-cial year 2002 were collected to theirfull extent by the end of March 2003.

Capital MarketAt HSE we are continuously cooperat-ing with a majority of Slovenian banks.Our partners in daily operations include:• Nova KBM d.d. as the company’s

“home” bank• Nova Ljubljanska banka d.d.• SKB banka d.d.• Banka Celje d.d.• Bank Austria Creditanstalt d.d.• Gorenjska banka d.d.• Abanka Vipa d.d.• Volksbank Ljudska banka d.d.• Poπtna banka Slovenije d.d.

In addition to banks our operations alsoinclude cooperation with a number ofstock-broking organizations.

Foreign Currency OperationsWith foreign market electricity saleswe are accumulating surpluses of for-eign currency funds that are either opti-mized in the foreign currency or con-verted to the domestic currency ac-cording to the current market situationand the plan of future payments.

All our liabilities in 2002 were met indue time according to the contractualprovisions.

Basic GoalsDuring 2002 the HSE Group financialoperations were aimed at the following:• Providing a sufficient level of solven-

cy for the company and thereby indi-rectly also for companies within HSEGroup as contractual partners of HSE

• Investing• Risk management• Economically sound investing of sur-

plus funds• Organization of the Finance Sector

In its business decisions the companyhas to bear in mind the basic principlesof long-term as well as short-term sol-vency. The execution of the financialfunction was closely linked to the spe-cific form in which HSE was estab-lished, the financial performance inelectricity trading and the adoptedinvestment plan.

In February 2002 we received two short-term loans in a total amount of SIT 2.3billion (Banka Celje and Nova kreditnabanka Maribor) in order to bridge a liquid-ity gap. This was to amend the gapbetween the purchasing and selling sideof HSE operations, while at the sametime this meant that sustained liquiditywas provided to other companies actingas HSE suppliers. Both loans were paidoff in their full amount in June 2002.

Risk FundDue to potential negative effects ofelectricity trading we started establish-ing a liquidity risk fund in the secondpart of 2002. We were able to do so byconsistently collecting debts from all ofthe company’s buyers, utilizing detailedcash flow planning, and consistentlyinvesting short-term liquidity surplusfunds under the most favorable condi-tions currently available in the capitalmarket. In doing so we took into con-sideration the criteria of maximuminvestment diversification in:• Bank deposits in SIT• Foreign currency bank deposits• High-liquidity securities and treasury

bonds• Securities repurchase and granting

security loans

2.8 FINANCIAL OPERATIONS

Investments in securities

13%

Transaction and foreign

currency accounts0%

Short-term loans to others

11%

Bank deposits in SIT76%

DIVERSIFICATION OF THE COMPANY’S LIQUID FUNDS AS OF 31.12.2002

Participation Rate of CapitalThe company is being financed primarilywith its own financial resources. This iswhy the company’s participation rate ofcapital for 2002 is at a high 95 percent.The ratio has been reduced compared tothe previous year as a result of increasedshort-term trade liabilities. The high ratioalso shows that the company bears lowfinancial risks for the creditors.

Long-Term Financing RatioLong-term resources are used for thefinancing of some 95 percent of thecompany’s assets, while only 5 percentare financed by short-term liabilities.Compared to 2001 the long-term financ-ing ratio has been reduced by 5 percent-age points, which is understandableregarding the company’s participationrate of capital.

Share Capital to Capital RatioThe share of share capital in total capitalamounts to a mere 0.64 percent. Thismeans that other forms of capital, espe-cially reserves are prevalent. Due to anincrease in share capital in 2002 the sharecapital to capital ratio is higher comparedto the previous year.

Participation Rate of Fixed OperatingAssetsThe share of fixed operating assets in the

company’s assets is only 0.33 percent,which is understandable regarding thefacts that long-term investments repre-sent a majority of the company’s assetsand that the company is only commenc-ing with large investment projects. Theparticipation rate of fixed operating as-sets is higher compared to the previousyear.

Capital to Fixed Operating Assets Ratio The capital to fixed operating assets ratioamounts to 1.07, which means that cap-ital is used to finance the total amount ofthe most illiquid assets (intangible fixedassets, tangible fixed assets, long-terminvestments etc.) and also a part of cur-rent assets. In comparison with 2001 theratio has increased by 0.07.

Quick Ratio Quick ratio shows the relation betweenliquid assets and short-term liabilities.The ratio has dropped to 0.96 comparedto 2001 when it was set at 1.96. The com-pany has no problems regarding its sol-vency.

Accelerated Ratio The accelerated ratio shows, whetherthe company is financing its inventoriesand other short-term assets with short-term liabilities or also by using long-termfinancing. The ratio has been reduced to

32

Ratios2002 2001

FINANCING RATIOS1. Participation rate of capital 95.00% 99.98%2. Long-term financing ratio 95.00% 99.98%3. Share capital to capital 0.64% 0.00%INVESTMENT UTILIZATION RATIOS1. Participation rate of fixed operating assets 0.33% 0.004%RATIOS OF HORIZONTAL FINANCIAL STRUCTURE 1. Capital to fixed operating assets 1.07 1.00 2. Quick ratio 0.96 1.96 3. Accelerated ratio 2.15 2.87 4. Current ratio 2.18 2.87 5. Accounts receivable to accounts payable 6.61 TURNOVER RATIOS1. Fixed operating assets turnover ratio 0.04 RATIOS OF OPERATING EFFECTIVENESS1. Operating effectiveness ratio 1.16 3.40 2. Overall effectiveness ratio 1.15 0.01 3. Operating revenue profitability 13.92% 70.61%4. Total revenue net profitability 13.37% (9,513.16%)5. Added value (in SIT 000 ) 13,353,741 62,527RETURN RATIOS1. Net return on capital 0.07 (0.37)FUNDS FLOW RATIOS1. Operating revenues net inflow ratio 11.61%

2.8.1 Financial Criteria ofBusiness Success

Financial Valuation of the Company’s PerformanceAt HSE we are aware of the importance ofobjectively valuating the company’s perform-

ance from the aspect of the set strategicgoals, which is why we had started the firstphase of forming a balanced system ofratios. We believe that by doing so we willbe able to enable the company’s operationsto become even more efficient and transpar-ent, which is the goal of both the sharehold-ers as well as the company’s management.

332.15 compared to 2001 when was set at2.87. Both in 2002 as well as in 2001 thevalue has been above 1, which meansthat the company is using long-term fi-nancing not only for inventories but alsoother short-term assets.

Current RatioThe current ratio displays the level offinancing the company’s short-term as-sets by using short-term liabilities. Thecurrent ratio has dropped in 2002 to2.18 but it still displays that the compa-ny’s solvency is at a high level.

Accounts Receivable to AccountsPayable RatioThe HSE accounts receivable to accountspayable ratio shows us that the compa-ny’s accounts receivable substantially out-weigh its accounts payable. The value ofthis ratio for the financial year 2002 is 6.61.

Fixed Operating Assets Turnover RatioThe company’s fixed operating assetsturnover ratio for 2002 is set at 0.04. Thelow value of this ratio shows us that theturnover period for fixed assets is longand that the company’s fixed assets aredepreciated over an average period of 25years. Regarding the fact that a majorityof the company’s fixed assets are still tobe activated (they are still under con-struction or in process and are not yet

being depreciated) this is understand-able.

Operating Effectiveness RatioThe operating effectiveness ratio isabove 1, which means that the compa-ny’s operating revenues exceed the com-pany’s operating expenses. This showsthat the company is displaying an oper-ating profit. The value of this ratio hasbeen reduced from 3.40 in 2001 to 1.16in 2002. Regarding the volume of opera-tions generated during each year the fig-ures are not comparable.

Overall Effectiveness RatioThe value of the overall effectiveness ratioof 1.15 means that in 2002 HSE managedto achieve total revenues in the amount ofSIT 115 per SIT 100 of total expenses.

Operating Revenue ProfitabilityThe operating revenue profitabilityshows us that the company generatedan operating profit of SIT 13.92 per SIT100 of operating revenues.

Total Revenue Net ProfitabilityThe total revenue net profitability ratio isset at 13.37 percent; this shows us thatthe company generated a net profit of SIT13.37 per SIT 100 of total revenues.

Assets Liabilities

Capital and long-termliabili-ties

95 %

Long-term assets89 %

Short-term liabilities

5 %

Short-term assets11 %

HSE BALANCE SHEET STRUCTURE AS OF 31 DECEMBER 2002

Added ValueThe added value for 2002 amounted toSIT 13,353,741,000, which is a substantialrise compared to SIT 62,527,000 genera-ted in 2001.

Net Return on CapitalThe net return on capital coefficientshows us that the company managedto generate a net profit of SIT 7 per SIT100 of invested capital. Regarding thefact that HSE is a capital-intensive com-pany the value is quite reasonable.

Operating revenues net inflow ratioThe operating revenues net inflow ratiois calculated as the relation betweenthe surpluses of inflows from operatingactivity over operating revenues. Theratio of 11.61% shows us that the com-pany generated an excess of SIT 11.61of inflows from operating activity perSIT 100 of operating revenues.

2.9.1 Lower Sava RiverHydropower Plants

On the Sava River section from Suhadol tothe state border with the Republic of Croatiafive new hydropower plants will be con-structed, thereby enabling us to generate2.2-times more energy compared to the sta-tus before additionally exploiting the river’shydropower potential. The Construction ofHydropower Plants on the Lower Sava Ri-ver project is one of the largest projects inthe Slovenian power generation sector inthe last century. It is of the utmost impor-tance to Slovenia as a whole and is bringingmany positive effects to the country.

Renewable Source of EnergyIn addition to increasing our own productionof hydropower the Construction of Hydro-power Plants on the Lower Sava River willenable us to regulate the Sava river flow andhelp us to better exploit the potential of thisrenewable and price-efficient source of po-wer. Slovenia will enjoy an improved level ofreliability as well as independence in thesupply of electricity in addition to increasedstability of the power system’s operating,which will become more reliable and robust.

Flood Area Regulation From a broader point of view Slovenia, andindirectly also HSE, will also enjoy gains on

a regional and local level. The Constructionof Hydropower Plants on the Lower SavaRiver project also provides a higher level ofregional development as well as the regula-tion of flood areas. We will achieve a higherlevel of flood safety by executing the hydro-economic regulation and the construction ofhydro-economic infrastructure, while animproved level of regional development willbe achieved by arranging the national, local,and hydro infrastructure.

Important Complementary Source of PowerThe gross power potential of Slovenia’swaters is estimated at 19,400 GWh p.a., ofwhich we are only technically able to exploitsome 9,100 GWh p.a., whereas just 7,000to 8,500 GWh p.a. are currently economi-cally viable for exploitation. The current totaloutput of Slovenian hydropower plants is819 MW, while with the construction of theLower Sava River Hydropower Plants wewill be able to acquire an additional 187 MWof power. The annual production of hydro-power plants Boπtanj, Blanca, Krπko, Bre-æice and Mokrice will amount to 720 GWhon average, which represents 21 percent ofthe current total output of Slovenian hydro-power plants. The construction of hydropower plants onthe Lower Sava River will also contribute toa reduction in the country’s dependability onexternal sources, thereby improving the

34

2.9 INVESTMENTS

Changes in the HSE balance sheet structure

ITEM Structure as of Structure as of Changes in

31.12.2002 31.12.2001 percentage points

ASSETS 100,000% 100,000% 0,0000%

A. FIXED ASSETS 88.979% 99.947% (10.9677%)

I. Intangible fixed assets 0.169% 0.000% 0.1693%

II. Tangible fixed assets 0.163% 0.004% 0.1592%

III. Long-term investments 88.647% 99.943% (11.2963%)

B. CURRENT ASSETS 11.020% 0.053% 10.9673%

I. Inventories 0.171% 0.000% 0.1706%

II. Operating receivables 6.031% 0.017% 6.0143%

III. Short-term investments 4.784% 0.000% 4.7840%

IV. Cash on hand, cheques and bank 0.035% 0.036% (0.0016)%

C. DEFERRED EXPENSES AND

ACCRUED REVENUES 0.000% 0.000% 0.0004%

LIABILITIES AND CAPITAL 100.000% 100.000% 0.0000%

A. CAPITAL 94.775% 99.981% (5.2062)%

I. Called-up capital 0.602% 0.002% 0.6005%

II. Capital Reserves 86.513% 118.272% (31.7589)%

III. Revenue Reserves 3.200% 0.000% 3.1999%

IV. Net profit from previous periods 0.000% 0.000% 0.0000%

V. Net profit for the financial year 3.200% (18.292)% 21.4918%

VI. Capital revaluation adjustments 1.260% 0.000% 1.2604%

B. PROVISIONS 0.000% 0.000% 0.0000%

C. FINANCIAL AND OPERATING LIABILITIES 5.045% 0.019% 5.0268%

». ACCRUED COSTS AND DEFERRED REVENUES 0.179% 0.000% 0.1794%

35

Infrastructure Management ProgramAt the beginning of October 2002 HSEturned over the “Infrastructure Mana-gement Program” to the Ministry ofthe Environment, Spatial Planning andEnergy for discussion and approval. Theinter-sector workgroup, which wasnominated by the Minister of Environ-ment, Spatial Planning and Energy -Janez KopaË, M. Sc. was assembledfor one session. The program was notyet approved and confirmed in 2002.Adjustments of activities regarding thevalue and financing sources for the con-struction of infrastructure will be finish-ed during the first half of 2003.

Building Permit for Preparatory Works (Lot A1) The building permit for preparatoryworks was issued on 15 November2002.

Project DocumentationA contract was signed with IBE for theexecution of the following portions ofthe project documentation: PGD (con-struction works project), PZR (tenderproject) for construction works andmajor purchases of equipment (prepa-ratory works, main construction works,accumulation tank works, supply of tur-bine and generator equipment, hydro-mechanical equipment and elevators)and PZI (execution project) for prepara-tory works.

Project of Attaining the PGD (Construc-tion Works Project) Building PermitDue to the inadmissibility of a toler-ance in the Boπtanj HPP Location Planwe were forced to divide the PGD(Construction Works Project) into twoparts: the power generation structureand the reservoir. The ConstructionWorks Project for the power genera-tion structure was prepared beforethe end of 2002, while the deadline forthe preparation of the ReservoirConstruction Works Project is Sep-tember 2003.

level of prices of electricity.

Advantages: • Opportunity for local, regional and

national development• Environmentally friendly structures with

a long lifespan• Increased level of preparedness for in-

creases in the consumption of electricity• Increased power supply reliability and

independence• Increased stability of power system’s

operation• New jobs during construction and in

new power plants’ operation• Improved quality of life

The construction of all five power plants willbe taking place from 2002 to 2018, wherebythe estimated time limit for the constructionof each power plant is three and a half years.

Boπtanj HPP (Boπtanj Hydropower Plant)At the section of the Sava River where itcrosses the 46th parallel, in November2002 we started the construction of thefirst hydropower plant in a chain of power-generating structures, which will improveSlovenia’s power supply.

With the construction of Boπtanj HPP, aswith other hydropower plants in the chain,special attention is aimed at flooding safety.The execution of flooding safety and harm-

ful effect prevention measures is planned incooperation with the Ministry of the Envi-ronment, Spatial Planning and Energy aswell as the local community. We will makesure that the potential harmful waters areadequately drawn off, protect the Sava ri-verbanks with safety dykes, and ensuresafe operations that do not interfere withthe water regime. All the above-mentionedmeasures taken in the construction of thepower-generating structures will improvethe overall level of flooding safety in theLower Sava River.

Boπtanj HPP is a combined run-of-riverstorage hydropower plant featuring threebulb turbines with a total flow capacity of500 m3, five spillways with a total spillingcapacity of 3,500 m3/s and an average an-nual output of 115 GWh.

The power plant will basically beunmanned; it will be managed by the HPPchain’s remote control center. Only main-tenance personnel will be operating at thelocation itself, performing their daily tasksand annual overhauls. These personnel willalso be trained to take over the station’smanagement in case of problems in theremote control system.

The construction of Boπtanj HPP will take42 months, which means that it will com-mence its operation in May 2006.

Boπtanj HPP Basic Information

Rated flow 500 m3/sHead 8.20 mRated Power 32.5 MWAverage annual production 115 GWhUseful reservoir volume 1,000,000 m3

Average annual flow 235 m3/s

Estimated value of investment in power generation SIT 15.4 billion

Estimated value of infrastructure investments (Republic of Slovenia as the investor) SIT 4.9 billion

which ensure a good state of watersand water-dependent ecosystems tothe largest possible extent, while at thesame time enabling the satisfaction ofeconomic, social and other humanneeds for water by implementing a sus-tainable use of nature’s wealth. Thecharacteristic and most valuable partsof natural and cultural value will be doc-umented in their current condition be-fore any operations take place; any in-trusions in these parts will only be al-lowed upon obtaining the approval ofthe competent department for the pro-tection of natural and cultural heritage.

Project StatusIn 2002 we have been preparing proj-ect tasks for the execution of the ideaproject and cooperating in concession-aire’s preparatory studies.

Lower Sava River HydropowerStations Project Investment Value for2002A total of SIT 220,545,000 was investedas part of the Lower Sava RiverHydropower Stations Project in 2002.

The analyses of needs for connected-ness and for exchange of informationas an indispensable tool for successfulperformance in a deregulated marketshow that by establishing our own tele-communication network we are alsopresented with new options of market-ing certain telecommunication servicesand that by utilizing the previously in-stalled telecommunication systems incompanies within HSE Group relativelylow infrastructure and equipment in-vestments are required.

Purpose of the ProjectThe project’s purpose is to provide tele-communication services of high quali-ty, speed, reliability and sufficient ca-pacity, which can be upgraded andthereby satisfy the needs of:• The management system of the HSE

balance group and production• Business informatics• The measurements and counter sta-

tus calculation system• System of communication links bet-

ween HSE business units and HSEGroup companies

36 2.9.2 OverheadTelecommunicationsNetwork

PZR - Tender ProjectThe preparation of Lot A1 for the execu-tion of preparatory works was the foun-dation for the execution of the tender.

Lot TG for the purchase of turbines andgenerators and Lot A2 for main con-struction works have been published inthe Official Gazette of the Republic ofSlovenia on 13 December 2002.

The Course of Purchasing Equipmentand Services for Execution - Lot A1The tender procedure and the placing ofthe order for execution of preparatoryworks were completed on 22 Novem-ber 2002, when we signed a contractwith the Gradis NG / GIZ Gradis consor-tium.

Blanca HPP (Blanca Hydropower Plant)Three years after commencing the con-struction of the first hydropower planton Lower Sava River is the plannedstart of construction of Blanca HPP.

Blanca HPP is a combined run-of riverstorage hydropower plant featuringKaplan turbines with a total spilling capa-city of 500 m3/s, five spillways with a totalcapacity of approximately 3,500 m3/s andan average annual output of 160 GWh.

The power station will be basically un-manned. It will be managed by thechain’s control center.

Natural and Cultural Heritage ProtectionIn planning the Blanca HPP structuresand dam we will keep the intrusionsinto locations, areas and objects of na-tural value and cultural heritage to aminimum, as stated in the overall planof construction of the Lower Sava Riverhydropower plants. The appropriate de-partments for the protection of naturaltreasures and cultural heritage will beincluded in the planning of structures,

Blanca HPP Basic Information

Rated flow 500 m3/sHead 10.70 mRated output 42.5 MWAverage annual production 160 GWhUseful reservoir volume 1,390,000 m3

Average annual flow 243 m3/s

Estimated value of investment in power generation SIT 13.5 billion

Estimated value of infrastructure investments (Republic of Slovenia as the investor) SIT 4.5 billion

37TOPOLOGY OF THE HSE OVERHEAD TELECOMMUNICATION NETWORK

A

H

CRO

I

7-x infrastructure Telecommunications nodes Telecommunications Room

Cabinet 1

WDM

Telecommunicationequipment

Cabinet 2

Power supply

HPP Moste

9 x FunkcionalTelecommunications nodes

Telecommunications Room

Cabinet 1

WDM

Telecommunication equipment

Cabinet 2

Power supply

HSE Ljubljana

PV

HSE Velenje

MC DEMHSE Maribor

TPP ©oπtanj

RTP BeriËevo

HPP MedvodeMC SEL

MC SENGHSE Nova Gorica

RTP Tolmin

RTP DivaËa

TPP Trbovlje

HPP Formin

RTP Cirkovce

ViËDravograd

RTP Redipuglia

KW Koralpe

HPP Varaædin

TPP Brestanica

Control system

Optical line leasing:

ELES 470HSE-DEM 117HSE-SENG 85Total km: 672

Functional nodes of the HSE overhead telecommunication network Infrastructure nodes of the HSE overhead telecommunication network Transfer connections of the HSE overhead telecommunication network Access connections

ELES fibers DEM fibers SENG fibers

Legend

38 2.9.3 Metering System

Efficient MonitoringIn order to ensure efficient monitoringand calculations of the quantities of ele-ctricity and heat as well as ancillaryservices produced and sold, at HSEwe had decided to install a uniformelectricity measurement and account-ing system. The planned system wastechnically coordinated with compa-nies within the Group and the operatorof the transmission network ELES-UPO.The system is conceived in a way thatenables simple inclusions or exclusionsof producers and consumers of ele-ctricity, thereby establishing an effi-cient form of monitoring the perform-ance of any balance group. The goalswere to choose a technologically up-to-date, reliable and safe system andto take into consideration the principleof rationality in order to maximize theuse of pre-installed devices and sour-ces.

Project StatusThe metering system already includesdata from TEB (Brestanica TPP), DEM(Drava River HPPs) and PV (Velenjecoalmining company). We will startextracting data from TE© (©oπtanj TPP),SENG (SoËa River HPPs) and SEL (Sava

River HPPs) in the first half of 2003.

Investment Value in 2002The project’s total annual investmentvalue for 2002 was SIT 111,222,000.

Project StatusThe Idea Project was prepared andaudited. The most favorable technicalsolution was chosen - this is theCWDM (course wave division multi-plexing) technology of wave multiplex-ing on the transport layer combinedwith a channeling packet switching plat-form. We will prepare an investmentprogram to show the economic viabilityof the project. The project will be concluded in the firsthalf of 2004.

Investment Value in 2002The project’s total annual investmentvalue for 2002 was SIT 13,829,000.

• System of communications and datatransfer to external users (domesticand foreign consumers)

• Marketing of excess telecommunica-tion capacities

• Other technical and business sys-tems

The HSE overhead telecommunicationnetwork represents an informationhighway, which will enable all of us tosend and interconnect all informationsystems within and outside the HSEGroup. The network will be conceivedas part of the new generation of tele-communication networks. On the infor-mation transfer layer the so-called wavemultiplexing will be used, while on thepacket transfer and routing layer thenetwork will be using GB Ethernet con-nections, whereas Internet protocolswill be used for the interconnection ofoverhead network nodes. We willinclude all currently existing and newtelecommunication networks in the cor-porate system, which will enable uswith sufficient options of capacity ex-panding. The overhead telecommunica-tion network will be supervised andmanaged from a central post with theinclusion of all the functions of a mod-ern control center (configuration setup,element setup, alarm management, cal-culations etc.).

39

Metering System

Converge Datenbank Server

DCG 2000 Connection DCG 300 Connection DCG 300

RS 232

DCG 300DCG 300DCG 300

FAG 12.4FAG 12.4 FAG 12.4 FAG 12.4

FAG 12.4 FAG 12.4 FAG 12.4

REGISTRATOR

Call line

HSE balance group

PVTE©TEB

DEM SEL SENG1..........................10 1..........................5 1.........................2

ELES ELES ELESELESELES

RS 232 RS 232 RS 232 RS 232 RS 232 RS 232

RS 232 RS 232

ELES ELES ELES

RS 232

Modem

RS 232

FMUX-MC DEMn X RS232

FMUX-MC SELn X RS232

FMUX-MC SENGn X RS232

FMUX DEMn X RS232

Existing HSE and ELES telecommunication network

2 Mb/s

LAN HSE Users of HSE Group

RS 232FMUX

RS 232FMUX

RS 232FMUX

RS 232FMUX

RS 232FMUX

RS 232FMUX

FMUXRS 232

FMUXn X RS232

FAG 12.4 FAG 12.4

CONVERGE HSE

Connection

TECHNICAL SCHEME OF THE HSE METER SYSTEM

40

2.11 QUALITY

Since the company’s establishmentwe have been aware that a successfuldrive in the domestic and foreign mar-ket is significantly dependent upon ourdisplay of a high quality of organizationmanagement. Our striving for quality istherefore the basic part of our day-to-day activities, strategies and tactics,that are being realized through rela-tions with our environment, whereinand whereby we are cohabitating. Allthe production companies of the HSEGroup have acquired the ISO 9001 cer-tificates as a display of the companyoperations’ compliance with interna-tional standards. According to plansHSE as the parent company will ac-quire the ISO quality certificate as soonas in 2003 after the final formation ofits organization structure.

Building of the HSE information system iscoordinated with the shaping and develop-ment of the company’s business functions.

Solutions are based both on the use ofmaterial (hardware, systems and applica-tions) as well as personnel and organiza-tional resources from the companieswithin HSE Group with the purpose ofsupporting the basic business functionsand thereby enabling their execution.

2.10 INFORMATICS

Management Information System UPIS

Production ISPRIS

Business ISPOIS

• Operating• Dispatching• Optimizing• Measurements• Analyses/Statistics• Information system

maintenance

• Sales, purchasing• Marketing• Finance, accounting• Salaries, personnel• Website

PRIS DB

Database

Production process

POIS DB

Database

Business events

Product (quantity, price, guarantees,

penalties, discrepancies)

HSE INFORMATION SYSTEM

Significant ActivitiesIn 2002 the following activities wereundertaken in the field of informatics:• Establishment of a local network with

all the business unit locations• Establishment of the HSE domain• Establishment of the required sup-

port to the basic business functionsand equipping the personnel with toolsneeded for normal operations

• Realization of support to the businessinformation system by using an appli-cation, which was already introducedin one of the subsidiaries

• Production information system had tobe built anew. A CONVERGE jointcentral was installed in Maribor forthe coverage of meter measurments.The installed piece of equipment en-ables:- Inclusion of electricity information(hydropower plants, thermal TPP)

- Inclusion of heat information (TE© -©oπtanj TPP)

- Inclusion of system-related hydrodata (Velenje municipal heat conduc-tion system)

- Inclusion of coal quantity data (Vele-nje coalmining company, TE©, HSE)

- Inclusion of liquid fuel data (Bre-stanica TPP)

• Establishment of the WEB businessportal intended for internal and exter-nal informing

• Management information systemwas started being built as an appli-cation, which will form the correctand accurate data for the company’smanagement based on the acquireddata

• Started the establishment of theEndur trading support system

Investment value in 2002 is SIT232,999,000.

41

2.12 RELATIONS WITH THE WIDER SOCIAL ENVIRONMENT

environmentally acceptable techno-logical level. With the construction ofthe final two Units they are providingan additional 228 MW of environmen-tally friendly threshold power, while arefurbishment of environmentallyfriendly steam technology is alsoplanned.

Coalmining CompanyAt PV (Velenje coalmining company)the environment management sys-tem is one of the company’s strategicgoals. By actively improving workingprocesses they are constantly reduc-ing harmful influences on the environ-ment. The construction of the environ-ment management system includeseleven environmental segments (water,air, waste, hazardous substances,transportation, energy, noise, develop-ment, surface ground, raw materialsand seismic characteristic). The coal-mining company had obtained the ISO14001 environment management cer-tification in 2000. By achieving this itbecame one of the first coalmines inthe world to be acknowledged for itsenvironmentally friendly operations.

Cohabitation with the Local andWider Community as an ObligationThe field of environmental awarenessalso includes responsibility to the

with international standards and usingthe appropriate technological solu-tions HSE is providing a safe and envi-ronmentally friendly form of powergeneration. DEM (Drava River Hydro-power Plants, Maribor), SEL (SavaRiver Hydropower Plants, Ljubljana)and SENG (SoËa River HydropowerPlants, Nova Gorica) have alreadyobtained the ISO 14001 environment-care certification.

Thermal Power PlantsThe beginnings of environmentalawareness at TE© (©oπtanj ThermalPower Plant) reach as far back as1978. Nine years later a program for acorporate environment rehabilitationof the thermal power plant was adopt-ed. After introducing numerous tech-nical improvements and renewals in1993 the construction of a desulphur-ization plant was commenced on Unit4, and in 2000 it was finished on Unit5. Environment rehabilitation is beingcontinued with the project of reducingthe emissions of NOx and the intro-duction of the ISO 14001 environmentmanagement system, for which thecompany obtained a certificate at theend of 2002.

With the modernization of old Unitsthe thermal power plant achieved an

As we are aware of the fact that anycompany in the power generation anddistribution sector has to put environ-mental responsibility at the center ofits efforts, we have made environ-ment protection and the utilization ofrenewable sources of energy one ofour primary values. We are living up toour responsibility towards the environ-ment in a number of ways. We arereplacing the old goals of increasingproduction capacities with the con-cept of sustained economizing, aimingto balance the utilization of naturalresources with the nature’s regenera-tion capabilities. It is the awareness ofour dependence on natural sourcesthat drives HSE towards the develop-ment of new modern technologiesand processes that increase produc-tiveness and simultaneously reduceproduction’s negative effects on theenvironment.

Most of the companies in the Grouphave already obtained the ISO 14001environmental certification.

Hydropower PlantsThe largest hydropower-plant-relatedintrusion in the environment is theconstruction of reservoirs and theinfluences on the environment infra-structure. By consistently complying

wider social environment, with whichHSE is in co-habitation. By supportinga variety of organizations, societies,projects and individuals we are creat-ing close linkages with the communityaround us, connected to our opera-tions in one way or another. As we areaware of the fact that our businesssuccess is closely linked to its senseof benevolence, loyalty, and alliance,we have dedicated a certain portion ofour funds to certain activities both inthe national as well as regional level.

42 Prepared for ChallengesForecasting the future is an immenselyungrateful action in the ever-changingconditions of the Slovenian as well aswider electricity market. Despite thiswe are almost certain in our claims thatthe competition will become evenstiffer during the following years. AtHSE we are prepared for challenges,we are expanding to new fields ofactivity, and are also executing addi-tional activities to improve our positionin the competitive environment. De-spite the increasing level of competi-tion of foreign and domestic powersuppliers it is the goal of both the par-ent company as well as HSE Group toremain the largest electricity producersand traders in Slovenia. The signedannual contracts with our consumersfor 2003 confirm the feasibility of theset goals. Based on signed annual con-tracts we will sell a total of 4,620 GWhto domestic power distribution compa-nies and 1,050 GWh to direct con-sumers. At ELES’ (Slovenia’s operatorof the power transmission system)tender at the end of 2002 HSE Groupmanaged to attain cross-border trans-mission capacities for the export toItaly of some 1,500 GWh annually, ofwhich one half was awarded in theform of long-term three-year contracts.Based on the attained cross-border

transmission capacities we have sign-ed long-term contracts with Italian con-sumers. As the Italian market, espec-ially with the submission of certifica-tions that the power is generated fromsustainable sources of energy, pro-vides us with the possibility of achiev-ing extremely favorable prices, thesecontracts provide a solid foundation forthe realization of the set goals.

InternationalizationInternationalization is essential for HSE,as the Slovenian market will not allowsufficient growth rates and develop-ment after 1 January 2003 due to itssmall size and the additional foreigncompetition.

We are estimating that our foreign mar-ket sales will amount to some 80 mil-lion EUR in 2003. Traffic in both direc-tions will be worth over 100 EUR mil-lion. At the moment we are conductingintensive discussions with partners forthe entrance to the Italian market, evenfor a joint representative network,while at the same time talks are heldon the opening of offices in Serbia,Bosnia and Herzegovina, and Croatia.We are not aiming only to be traders inthese markets, but rather to becomealso involved with capital; not merely inthe field of electricity generation, but

also in the field of electricity distribu-tion. HSE will establish balance groups incertain countries of the European Uni-on, which will enable the company todirectly trade in the Western-Europeanelectricity markets and thereby achievemore favorable prices. We will try andcapitalize on our knowledge of SouthEuropean markets and our reputationas a reliable business partner amongthe Western European electricity tra-ders and use our strategic position as abridge between trade flows in differentregions. Substantial increase in thetrade volume with countries to thesoutheast of Slovenia can be expectedat the end of 2003 with the establish-ment of a 400 kV network throughoutCroatia. Electricity surpluses in Bosniaand Herzegovina combined with mas-sive demand for it in Montenegro,Serbia, Macedonia and Greece presentus with a major challenge. As trade isincreasing both in volume as well as inthe number of partners involved andproduct diversity, in 2003 we are start-ing the use of a specialized programpackage, which will enable integraltracking and supervision of all tradingactivities.

We are expecting that most of the par-ticipants in the Slovenian electricity

market will join our balance group in2003.

Alternative Power SourcesA part of the company’s activities wasalso focused on alternative powersources, which currently do not repre-sent a substantial share in the HSEpower balance sheet, but they areessential regarding the future trends inthe sector.

Cooperation with Governmental AgenciesCooperation with governmental agenci-es was established in the preparationof two documents, namely theNational Energy Program of the Re-public of Slovenia and the Long-termSpatial Planning Documents of the Re-public of Slovenia. Both documents,which are to be adopted in 2003, willco-influence the HSE field of develop-ment.

Despite the stiff competitive conditionsin the electricity market we venture toclaim that HSE will keep on strength-ening its role as Slovenia’s leading elec-tricity supplier and trader in 2003, whileat the same time establishing itself as arespectable partner in the wider area.

2.13 RESEARCH AND DEVELOPMENT

43Krπko Nuclear Power PlantThe bilateral contract on the Krπkonuclear power plant (NEK) becamevalid on 11 March 2003. The CroatianSabor (parliament) ratified the contract,which was signed by the Slovenian andthe Croatian government on 19 Decem-ber 2001, on 3 July 2002, while theNational Assembly of the Republic ofSlovenia did the same on 25 February2003.

Ratification of the NEK agreement inthe Slovenian parliament represents afoundation for the supply of one half ofpower generated by the nuclear plantto HEP (Hrvatska Elektroprivreda -Croatian power supplier and trader).This means that HSE will have toensure substitute power from the com-mencement of supplies to Croatia untilthe end of 2003.

A part of additional supplies will be cov-ered by additionally engaging the sub-sidiaries’ production units, especially atTE© (©oπtanj thermal power plant). Butusing merely our own productionsources would not enable us to meetall of our liabilities, which means that apart of additional quantities will have tobe imported. As the available cross-border capacities at the Austrian - Slo-venian border will not be sufficient for

the coverage of HSE requirements, apart of the demands will have to bemet by importing via the Croatian - Slo-venian border.

Elektro.TK d.o.o.The HSE stake in the establishment ofElektro.TK d.o.o., which makes the com-pany the owner of a 19% share in thenew enterprise, was paid in at thebeginning of 2003.

2.14 IMPORTANT EVENTS AFTER THE END OF THE FINANCIAL YEAR

FINANCIAL REPORT OF HSE D.O.O.

46

3. FINANCIAL REPORT OF HSE D.O.O.

Ground basis The financial statements have beenprepared in accordance with the provi-sions of the Companies Act (here-inafter referred to as the CA) and thevalid Slovene Accounting Standards2001 (hereinafter referred to as theSAS) issued by the Slovene Instituteof Auditors.

The Company is subject to taxationunder the Corporate Income Tax Actand the VAT Act.

Accounting policies The following fundamental accountingassumptions have been taken intoaccount during the preparation of thefinancial statements:

• Accrual basis• Going concern• Fair presentation under the circum-

stances of changes occurring in theEuro value and in individual prices

The Company has considered thegeneral valuation rules for the valua-tion of items in the financial state-ments:

• The company is viewed as a goingconcern, i.e. as continuing in opera-tion for the foreseeable future

• Consistency• Prudence• Consideration of revenues and

expenses irrespective of their pay-ment

• Individual valuation of assets and lia-bilities

Methods valuating economic categoriesThe items in the balance sheet, in-come statement and/or other state-ments are to be recorded and valuedin compliance with the provisions ofthe Slovene Accounting Standards, ex-cept for those items that may be, inaccordance with the respective stan-dards, accounted for at freely selectedmethods. The Company has determinedvaluation methods for these cases inits Accounting rules or in the decisionstaken by the Management Board.

3.1 INTRODUCTORY EXPLANATIONS

3.2 AUDITOR’S REPORT

47

48

ITEM Year 2002 Year 2001 Index 02/01

ASSETS 191,964,427 166,104,301 116%

A. FIXED ASSETS 170,808,659 166,016,003 103%I. Intangible fixed assets 325,079 0 1. Long-term deferred costs of organisation 182,602 0 3. Long-term property rights 142,477 0 II. Tangible fixed assets 313,343 6,660 4,705%3. Other plant and equipment 150,849 0 4. Tangible fixed assets under construction 162,494 6,660 2,440%

b) fixed assets under construction and in process 162,494 6,660 2,440%III. Long-term investments 170,170,237 166,009,343 103%1. Shares in the group 170,170,237 166,009,343 103%

B. CURRENT ASSETS 21,154,966 88,298 23,959%I. Inventories 327,502 0 1. Material 327,502 0 II. Operating receivables 11,577,213 27,811 41,628%b) Short-term operating receivables 11,577,213 27,811 41,628%

1. Short-term trade receivables 9,202,865 0 2. Short-term receivables due from the Group (except associates) 1,008,453 26,343 3,828%4. Short-term receivables due from third parties 1,365,895 1,468 93,045%

III. Short-term investments 9,183,423 0 4. Other short-term investments 9,183,423 0 IV. Bank balances, cheques and cash 66,828 60,487 110%

C. DEFERRED COSTS, DEFERRED EXPENSES AND ACCRUED REVENUES 802 0

OFF-BALANCE-SHEET RECORD 1,475,785 0

3.3 BALANCE SHEETin SIT 000

ITEM Year 2002 Year 2001 Index 02/01

LIABILITIES AND CAPITAL 191,964,427 166,104,301 116%

A. CAPITAL 181,934,929 166,073,501 110%I. Called-up capital 1,156,217 3,000 38,541%1. Share capital 1,156,217 3,000 38,541%II. Capital reserves 166,070,474 196,454,189 85%III. Revenue reserves 6,142,502 0 4. Other reserves 6,142,502 0 IV. Retained net profit or loss from previous periods 0 0 V. Net profit or loss for the financial year 6,142,502 (30,383,715)VI. Equity revaluation adjustment 2,423,234 27 8,974,941%1. General equity revaluation adjustment 27 27 100%2. Specific equity revaluation adjustment 2,423,207 0

B. PROVISIONS 0 0

C. FINANCIAL AND OPERATING LIABILITIES 9,685,165 30,800 31,445%b) Short-term financial and operating liabilities 9,685,165 30,800 31,445%

4. Short-term trade payables 1,391,216 13,648 10,194%6. Short-term financial and operating liabilities to the Group 8,233,934 0 8. Short-term financial and operating liabilities to other entities 60,015 17,152 350%

». ACCRUED COSTS (EXPENSES) AND DEFERRED REVENUES 344,333 0

OFF-BALANCE-SHEET RECORD 1,475,785 0

in SIT 000

49

50

ITEM Year 2002 Year 2001 Index 02/01

1. Net sales revenues 91,457,765 88,548 103,286%a) Domestic market 70,763,762 88,548 79,916%

- from group enterprises 3,264,240 88,548 3,686%- from others 67,499,522 0

b) Foreign market 20,694,003 05. Costs of goods, material and services 78,103,834 26,021 300,157%a) Cost of goods and material sold 77,831,306 298 26,117,888%b) Costs of services 272,528 25,723 1,059%6. Labour costs 600,077 0a) Cost of wages and salaries 418,367 0b) Social insurance costs 86,869 0

- costs of retirement insurance 54,786 0c) Other labour costs 94,841 07. Amortisation, depreciation and assets write-offs 24,538 0a) Amortisation of intangible fixed assets, depreciation of tangible fixed assets and revaluatory operating expenses 24,538 08. Other operating expenses 190 0

OPERATING PROFIT OR LOSS 12,729,126 62,527 20,358%

9. Financial revenues from participation 0 230,707 0%a) Fnancial revenues from participation in group enterprises (except in associates) 0 230,707 0%11. Financial revenues from short-term receivables 413,733 131 315,827%a) Interest revenues and revenues from short-term receivables due from group enterprises (except associates) 14 0c) Other interest revenues and revenues from short-term receivables (including revaluatory financial revenues) 413,719 131 315,816%12. Financial expenses for long-term and short-term investments write-offs 786,289 30,677,066 3%a) Revaluatory financial expenses arising from investments in group enterprises (except in associates) 786,289 30,677,066 3%13. Interest expenses and financial expenses from other liabilities 70,816 14 505,829%c) Other interest expenses and expenses from other liabilities 70,816 14 505,829%

PROFIT OR LOSS FROM ORDINARY ACTIVITY 12,285,754 (30,383,715)

15. NET PROFIT OR LOSS FROM ORDINARY ACTIVITY 12,285,754 (30,383,715)17. Extraordinary expenses 750 0a) Extraordinary expenses exclusive of equity revaluation adjustment 750 0

18. PROFIT OR LOSS FROM EXTRAORDINARY ACTIVITIES (750) 0

TOTAL PROFIT OR LOSS 12,285,004 (30,383,715)19. Income tax 0 021. NET PROFIT OR LOSS FOR THE FINANCIAL YEAR 12,285,004 (30,383,715)

3.4 INCOME STATEMENT in SIT 000

ITEM Year 2002 Year 2002 - plan

A. CASH FLOWS FROM OPERATING ACTIVITYa) Inflows from operating activity 80,020,293 75,848,775 Operating revenues 91,531,604 83,506,469 Opening minus closing operating receivables (11,510,509) (7,657,694)Opening minus closing deferred costs, deferred expenses and accrued revenues (802) 0 b) Outflows from operating activity 69,398,320 74,434,461 Operating expenses exclusive of depreciation and long-term provisions 78,710,724 82,747,911 Extraordinary expenses relating to operating activity 750 0 Income tax and other taxes not included among operating expenses 0 37,197 Closing minus opening inventories 327,502 0 Opening minus closing operating liabilities (9,296,323) (8,350,647)Opening minus closing accrued costs (expenses) and deferred revenues (344,333) 0

c) Net inflows from operating activity 10,621,973 1,414,314

B. CASH FLOWS FROM INVESTING ACTIVITYa) Inflows from investing activity 269,765 46,000 Financial revenues relating to investing activity (excluding revaluation) 269,765 46,000 b) Outflows from investing activity 10,852,556 2,372,726 Offset increase in intangible fixed assets (excluding revaluation) 120,084 198,999 Offset increase in tangible fixed assets (excluding revaluation and increase of non-cash equity) 178,290 1,415,122 Offset increase in long-term investments (excluding revaluation) 1,370,759 0 Offset increase in short-term investments (excluding revaluation) 9,183,423 758,605

c) Net outflows from investing activity (10,582,791) (2,326,726)

Net inflows from operating and investing activity 39,182 (912,412)

C. CASH FLOWS FROM FINANCING ACTIVITYa) Inflows from financing activity 31,236 899,420 Financial revenues relating to financing activity (excluding revaluation) 31,236 0 Offset increase in short-term financial liabilities (excluding revaluation) 0 899,420 b) Outflows from financing activity 64,077 46,000 Financial expenses relating to financing activity (excludig revaluation) 64,077 46,000

c) Net outflows from financing (32,841) 853,420

Total net inflows for the finacial year 6,341 (58,992)

». CLOSING BALANCE OF CASH AND CASH EQUIVALENTS 66,828 1,495 x) Net cash flow for the financial year 6,341 (58,992)Y) Opening balance of cash and cash equivalents 60,487 60,487

3.5 CASH FLOW STATEMENT in SIT 000

51

52

3.6 STATEMENT OF CHANGES IN EQUITY in SIT 000

Reserves for General SpecificCalled-up Uncalled repurchase Net profit Net loss equity equity

capital capital Legal of own Stautory Other Retained Retained for the for the revaluation revaluation(deduction item) reserves shares reserves reserves net profit net loss financial year financial year adjustment adjustment TOTAL

A. Opening balance 3,000 0 196,454,189 0 0 0 0 0 (30,383,715) 0 0 27 0 166,073,501

B. Transfer to equality 1,153,217 0 0 0 0 0 0 0 0 12,285,004 0 0 2,423,207 15,861,428

a) Called-up capital 1,153,217 0 0 0 0 0 0 0 0 0 0 0 0 1,153,217

d) Net profit forthe financial year 0 0 0 0 0 0 0 0 0 12,285,004 0 0 0 12,285,004

f) Special equityrevaluation adjustment 0 0 0 0 0 0 0 0 0 0 0 0 2,423,207 2,423,207

C. Transfer within equity 0 0 (30,383,715) 0 0 0 6,142,502 0 30,383,715 (6,142,502) 0 0 0 0

a) Appropriation of net profit(as an item of equity) under theresolution adopted by the ManagementBoard and the Supervisory Board 0 0 0 0 0 0 6,142,502 0 0 (6,142,502) 0 0 0 0

c) Loss covering as adeduction item of capital 0 0 (30,383,715) 0 0 0 0 0 30,383,715 0 0 0 0 0

». Transfer from equity 0 0 0 0 0 0 0 0 0 0 0 0 0 0

D. Closing balance 1,156,217 0 166,070,474 0 0 0 6,142,502 0 0 6,142,502 0 27 2,423,207 181,934,929

DISTRIBUTABLE NET PROFIT 0 0 0 0 0 0 0 0 0 6,142,502 0 0 0 6,142,502

Sharecapital

ITEM Capitalreserves

Revenue reserves Retained net profit or lossfrom previous periods

Net profit or loss forthe finacial year

Equity revaluationadjustment

53GeneralTransactions expressed in foreign cur-rencies are translated into domesticcurrency on the date of their accrual atthe mean exchange rate of the Bank ofSlovenia on the respective date.

The financial statements have been pre-pared in Slovenian tolars (SIT), round-ed off to one thousand units.

GeneralThe information about the basis for thepreparation of the balance sheet andabout special accounting policies, select-ed and used in important business oper-ations and other transactions of theCompany are presented in the disclo-sure of individual important assets andliabilities.

Due to the introduction and application ofthe new Slovenian Accounting Standar-ds (SAS), the balance sheets for the year2002 and for the year 2001 are not fullycomparable.

In accordance with the interpretation 1 tothe SAS 24 issued by the SlovenianInstitute of Auditors the data for the pre-vious accounting period have not beentranslated during the preparation of thefinancial statements 2002 in accordancewith the new Slovenian AccountingStandards but reasonably recorded incorresponding items in terms of materi-ality.

Intangible fixed assets SIT 325,079,000 0.17% of assets

The Company presents long-termdeferred operating costs and long-term

industrial property rights among intangi-ble fixed assets.

Intangible fixed assets purchased abroadare not revalued by the changes inexchange rates in which they had beenpurchased.

The Company applies the straight-linedepreciation. Intangible fixed assets areamortised individually. The Company

applies the amortisation rates defined onthe basis of the foreseen useful life forindividual kind of assets. The amortisa-tion rates do not exceed the rates atwhich amortisation expense is taxdeductible.

In 2002 the Company did not impair anyintangible fixed assets. The presentedbook value of individual assets complieswith their fair value.

3.7 NOTES TO FINANCIAL STATEMENTS

3.7.1 Balance sheet

Movements in intangible fixed assets in 2002Long-term Intangible fixed assets

industrial under construction property rights or in manufacture Total

COST OF PURCHASEBalance at the beginning of the year 0 0 0Acquisitions 40,834 321,719 362,553Disposals 0 (36,431) (36,431)Revaluation 0 0 0Balance at the end of the year 40,834 285,288 326,122

ADJUSTMENT FOR VALUEBalance at the beginning of the year 0 0Acquisitions 0 0Disposals 0 0Amortisation 1,043 1,043Revaluation 0 0Balance at the end of the year 1,043 1,043

Net carrying amount at the beginning of the year 0 0 0Net carrying amount at the end of the year 39,791 285,288 325,079

in SIT 000

54 Movements of tangible fixed assets in 2002in SIT 000

Equipment Low value Equipment and other tangibleand spare parts assets fixed asstes under construction Total

COST OF PURCHASEBalance at the beggining of the year 0 0 6,660 6,660Acquisitions 173,631 713 162,494 336,838Disposals 0 0 (6,660) (6,660)Revaluation 0 0 0 0Balance at the end of the year 173,631 713 162,494 336,838

ADJUSTMENT FOR VALUEBalance at the beggining of the year 0 0 0Acquisitions 0 0 0Disposals 0 0 0Amortization 23,368 127 23,495Revaluation 0 0 0Balance at the end of the year 23,368 127 23,495

Net carrying amount at the beginning of the year 0 0 6,660 6,660Net carrying amount at the end of the year 150,263 586 162,494 313,343

Tangible fixed assets SIT 313,343,000 0.16% of assets

Tangible assets of the Company includeequipment, low value assets amongfixed assets as well as tangible fixed as-sets under construction or in manufac-ture.

Tangible fixed assets purchased abroadare not revalued by the changes in ex-change rates in which they had beenpurchased.

The Company applies the straight-linedepreciation. Tangible fixed assets aredepreciated individually. The Companyapplies the depreciation rates definedon the basis of the foreseen useful lifefor individual kind of assets. Depreci-ation rates applied do not exceed therates at which depreciation expense istax deductible.

The Company did not increase thevalue of tangible fixed assets or impairthem in 2002. The presented book valueof individual assets complies with theirfair value.

Long-term investmentsSIT 170,170,237,000 88.65% of assets

Long-term investments include in-vestments in capital of associates.

On initial recognition, long-term invest-ments in capital of other enterprisesare valued at the cost of purchasethat is either equal to the paidamount of cash or cash equivalents,or to the fair value of other consider-ation for acquisition given by theCompany on the day of exchange,increased by the costs directly at-tributable to the investment.

Important amortisation / depreciation rates of fixed assets

Furniture and equipment 10% (10 years)Hardware 33.33% (3 years)Low value assets 33.33% (3 years)Cars 20% (5 years)Other equipment 25% (4 years)Software 20%-33.33% (3 to 5 years)

55

Impairment of long-term investments If the proved fair value of a long-terminvestment is lower than the bookvalue in case of decrease in value, anadjustment of long-term investments ismade for this part of value and revalua-tory financial expenses are increased.

In 2002 the company increased anadjustment in value of long-term in-vestments of HSE - IIP and simultane-ously the revaluatory financial ex-pense by SIT 15,000 due to its loss inoperations.

In accordance with the agreement of theSupervisory Board the Company pur-chased 48,260 shares of the companyPremogovnik Velenje in 2002. The pur-chase is related to the final solution ofthe problems of salaries paid out in toolow amounts in the electric power sup-ply system in the years 1991 and 1992.At the end of the year was establishedthat the book value of a share of Pre-mogovnik Velenje was lower; thereforean adjustment of value of this long-terminvestment was made and simultaneouslyrevaluatory financial expense of SIT786,273,000 incurred.

Increase in value of long-term investments Long-term investments in capital of asso-ciates included in the consolidated financialstatements are valued according to thecapital method in the financial statementsof the parent company. This means thatthese investments are increased annuallyby that part of net profit of associates thatbelongs to the parent company. Equityrevaluation adjustment is increased by the

revaluation effect in relation to long-terminvestments. Subsequently received sharesin profit decrease the initially presentedincrease in investments based on the par-ticipation in profit

In 2002 the Company increased its long-term investments by SIT 2,423,207,000,which corresponds to the share in net profitof associates.

In 2002 long-term investments increased by SIT 2,523,975,000.

Changes in long-term investments in 2002 in SIT 000

Net carrying amount as of 1 January 2002 166,009,343Acquisitions 2,523,975Revaluation 1,636,919Net carrying amount as of 31 December 2002 170,170,237

Increase in value of long-term investments in 2002in SIT 000

Dravske elektrarne Maribor d.o.o. 1,905,665Savske elektrarne Ljubljana d.o.o. 195,787Soπke elektrarne Nova Gorica d.o.o. 218,262Termoelektrarna Brestanica d.o.o. 95,675 HSE Invest d.o.o. 7,818

Increase in long-term investments in 2002 in SIT 000

Purchase of 48,260 shares of Premogovnik Velenje 1,365,758

Increase in capital of the company by an investment in kind of the Republic of Slovenia - 3,313,841 ordinary shares of TDR - Metalurgija d.d. 1,153,217

Establishment of HSE INVEST d.o.o. 2,500Establishment of HSE - IIP d.o.o. 2,500

Long-term investments as of 31 December 2002in SIT 000

Dravske elektrarne Maribor d.o.o. 75,150,836Savske elektrarne Ljubljana d.o.o. 27,842,585Soπke elektrarne Nova Gorica d.o.o. 26,488,978Termoelektrarna Brestanica d.o.o. 2,407,454Termoelektrarna ©oπtanj d.o.o. 15,640,427Premogovnik Velenje d.o.o. 21,473,937HSE Invest d.o.o. 10,318HSE - IIP d.o.o. 2,485TDR - Metalurgija d.d. 1,153,217

56

It was estimated that the fair value oflong-term investments equals theirbook value.

Inventories SIT 327,502,000 0.17% of assets

Inventories include coal for the pro-duction of electric and thermal ener-gy provided in TE©.

If prices of newly purchased quantityunits differ from the prices of quantityunits of the same kind in stock, themethod of successive prices (FIFO) isapplied during the year for the de-crease of these quantities.

Relevant data about long-term investments for 2002

Company Registrated Ownership share Capital as Net

office of HSE d.o.o. as of of 31. December profit/loss

31. December 2002 2002 in SIT 000 in SIT 000

Dravske elektrarne Maribor d.o.o. Maribor 79.4% 94,660,480 2,400,388Savske elektrarne Ljubljana d.o.o. Medvode 79.5% 35,022,119 246,273Soπke elektrarne Nova Gorica d.o.o. Nova Gorica 79.5% 33,319,469 274,543Termoelektrarna Brestanica d.o.o. Brestanica 79.5% 8,437,087 120,346Termoelektrarna ©oπtanj d.o.o. ©oπtanj 79.5% 49,015,012 (795,902)Premogovnik Velenje d.d. Velenje 77.7% 32,743,836 (597,260)HSE Invest d.o.o. Maribor 100.0% 10,318 7,818HSE - IIP d.o.o. Sevnica 100.0% 2,485 (15)TDR - Metalurgija d.d. Ruπe 74.4% 3,693,826 (2,539,221)

Since inventories are currently used,the net realizable vale of inventorieshas not been established.

ReceivablesSIT 11,577,213,000 6.03% of assets

On initial recognition, receivables ofall categories are reported in amountsrecorded in the relevant book-keep-ing documents under the assumptionthat the amounts owed will also becollected. Initial receivables may besubsequently increased or, irrespec-tive of the received payment or anoth-er settlement, also decreased by anyamount based on a contract.

Granted advances are recorded inthe balance sheet in connection withthe items to which they refer.

Short-term operating receivablesmainly include receivables due fromcustomers, from the sales of electric

power. Receivables due from thestate for the refund of the VAT alsorepresent an important share.

In 2002 the value of receivables wasneither increased not impaired,since the receivables were paid ontime or slightly later and correspondto their fair value. At the end of theyear 92% of the receivables due fromcustomers were not due yet and 8%were due up to three months.

Receivables due from foreign part-ners are translated on the date oftheir accrual at the middle exchangerate of the Bank of Slovenia. If the

exchange rate changes subsequent-ly, the amount of receivables is ade-quately corrected or revalued andexchange losses/gains increase finan-cial revenues or expense.

Short-term operating receivables as of 31 December 2002in SIT 000

Short-term trade receivables 10,211,304Short-term advances for services 2,633Short-term receivables for interest 38,160Short-term receivables from the state 1,324,092Other short-term receivables 1,024

57Short-term Investments SIT 9,183,423,000 4.78% of assets

On initial recognition, a short-terminvestment in equity securities ofother companies or debt securitiesof other companies is carried at costwhich is either equal to the paidamount of cash or cash equivalents,increased by the costs directly at-tributable to the investment.

On initial recognition, a short-term in-vestment in a short-term loan grant-ed is carried at the amount paid thatis the principal sum of the loan.

Short-term investments are not reval-ued due to increase in their value, butare revalued due to impairment, if theproved fair value is lower than thebook value. In 2002 the Company hadno reason to revalue short-term in-vestments.

The majority of short-term investmentsrepresent deposits in important Slo-vene banks; therefore the exposure torisks is low.

The total collateral loan was repaidat the beginning of the year 2003.

CashSIT 66,828,000 0.04% of assets

This item includes cash on the trans-action account, tolar deposits on calland cash in foreign currency account.

The carrying value of cash is equal toits initial nominal value until theneed appears to be revalued. Cashdenominated in foreign currency istranslated into domestic currency atthe middle exchange rate on thedate of receipt.

Revaluation of cash is effected in thecase of cash denominated in foreign

currencies if the exchange rate chan-ges after the first recognition. Theexchange rate difference incurredmay either increase or decrease theoriginally recorded value and repre-sents ordinary financial revenue orordinary financial expense.

Deferred costs and accrued revenues SIT 802,000 <0.1% of assets

Deferred costs (expenses) and ac-crued revenues include short-termdeferred costs that do not have anyinfluence on the profit or loss.

Off-balance-sheet records SIT 1,475,785,000

Off-balance-sheet records includereceived and granted bank guaran-tees as well as received securitiesas guarantees for short-term invest-ments.

CapitalSIT 181,934,929,000 94.78% of liabilities

The total capital is classified ascalled-up capital, capital reserves, re-venue reserves, equity revaluationadjustments, and temporarily undis-tributed net profit for the financialyear.

The share capital is recognised upon thepayment of cash and investments in kindin the company. Called-up capital is ofvital important for its recognition. Sharecapital is recorded in the local currency.

In 2002 the sole owner (the companyTDR - Metalurgija d.d.) increased thecapital of the company by an investmentin kind amounting to SIT 1,153,217,000.

Revaluation of capital is a change in itsbook value. It appears as general or spe-cific equity revaluation. There was no ge-neral equity revaluation in 2002, but theCompany made a specific equity revalu-ation adjustment due to the increase invalue of long-term investments amoun-ting to SIT 2,423,207,000.

The Company presents capital reservesthat were shown as capital reserve paidin the previous year. The reserves wereformed on the establishment of the com-pany as a payment of the owner, exceed-ing the initial capital of the Company.

In accordance with the decision of theshareholders’ meeting the capital reserveswere reduced by SIT 30,383,715,000 in2002 due to covering of loss from 2001.

Short-term investments as of 31 December 2002in SIT 000

Shares, purchased for sale 1,238,423Short-term loans to associates 20,000Collateral loan 1,000,000Deposits in banks 6,895,000Deposits for guarantees 30,000

58 In accordance with the agreement ofthe Supervisory Board, the Mana-gement Board of the Company distrib-uted 50% of net profit of the financialyear amounting to SIT 6,142,502,000to other revenue reserves. The other50% of net profit for the financial yearamounting to SIT 6,142,502,000 is dis-tributable net profit.

Short-term liabilities SIT 9,685,165,000 5.04% of liabilities

Short-term operating liabilities appearsince suppliers deliver goods that areneeded in the production and for theprovision of services. Initially, they arecarried at amounts recorded in therelevant documents, assuming thatthe creditors demand their payment.

95% of total short-term liabilities of theCompany represent liabilities for thesupply of electric and thermal energy,

coal and for its processing in electric andthermal energy.

The book value of short-term liabilitiesis equal to their historical value, cor-rected by their increases or decreases,in accordance with the agreementsreached with the creditors, until theneed for their revaluation appears.

Revaluation of short-term operating lia-bilities expressed in foreign currenciesis carried out if the exchange rate haschanged after the initial recognition.Exchange losses/gains that appear mayincrease or decrease the initially pre-sented value and presents regular fi-nancial revenues or regular financial ex-pense.

Short-term operating liabilities express-ed in foreign currencies are translatedon the date of their accrual at the mid-dle exchange rate of the Bank of Slo-venia ruling on the respective date.

Capital of the Company as of 31 December 2002in SIT 000

Share capital 1,156,217Capital reserves 166,070,474Other revenue reserves 6,142,502Net profit / loss 6,142,502General equity revaluation adjustment 27Specific equity revaluation adjustment 2,423,207

Profit / loss in 2002in SIT 000

Net profit / loss 12,285,004Profit / loss upon restatement by means of EUR 5,637,746

Profit / loss upon restatement by means of cost of living 320,793

Distributable net profit of HSE in 2002in SIT 000

a) Net profit for the financial year 12,285,004 b) Net profit / loss carried forward 0 c) Decrease in revenue reserves 0 Ë) Increase in revenue reserves in accordance with the decision of the Management

Board (legal reserves, reserves for own shares and statutory reserves) 0d) Increase in revenue reserves in accordance with the decisionof the Management

Board and the Supervisory Board (other revenue reserves) 6,142,502e) Distributable net profit (a+b+c-Ë-d) 6,142,502

Short-term operating liabilities as of 31 December 2002in SIT 000

Short-term liabilities to suppliers 9,625,007Short-term liabilities to employees 47,199Short-term liabilities to the state 12,265Other short-term liabilities 694

593.7.2 Income statement

GeneralThe information about the basis for thepreparation of the income statementand about special accounting policies,selected and applied in important busi-ness operations and other transactions,are presented in disclosure of individualimportant revenues and expenses.

The income statement has been pre-pared in accordance with the version Iin SAS 25.

In accordance with the interpretation 1 tothe SAS 25 issued by the SlovenianInstitute of Auditors the data for the pre-vious accounting period have not beentranslated during the preparation of thefinancial statements 2002 according tothe new Slovenian Accounting Standardsbut reasonably recorded in correspon-ding items of revenues and expensesand profit/loss of the statement currentlyvalid. Thereby the Company took intoaccount prudence and the profits/lossesremained unchanged.

In accordance with the explanation 2 tothe SAS 25 issued by the SlovenianInstitute of Auditors expenses or liabili-ties for the corporate income tax areascertained from the joint base (from

ordinary and extraordinary activities) inaccordance with the provisions, tax onprofit from ordinary and extraordinaryactivities is not presented separately inthe income statement, but it is present-ed as an accumulated item 19 of the in-come statement.

Revenues SIT 91,871,498,000

Revenues are recognised if during theaccounting period the increase in eco-nomic benefits is related to the in-crease of asset or to the decrease ofliability and if the relevant increasecan be measured without fail.

Revenues are recognised when nosignificant uncertainty as to their col-lectability exists.

Operating revenuesSIT 91,457,765,000 99.5% of revenues

Revenues from the sale of products,merchandise and materials are meas-ured on the basis of selling prices indi-cated in invoices or other documents,decreased by discounts that have beenapproved during the sale or later, alsodue to earlier payment. They are recog-nised on calculation, irrespective ofreceipts they are related to.

Short-term deferred revenues occur ifthe services have not been providedyet, but already charged and paid.

Accrued costs include liabilities for thepayment of taxes for cross-border trad-ing, charged by the Italian businesspartner GRTN. The invoices have beenrejected since the legal basis will haveto be provided first, but the Companyis well aware of its obligations.

Short-term deferred revenues includethe charged tender documentation forthe construction of the HPP Boπtanj.Since this is an investment in pro-gress, the costs are not presented inthe profit/loss yet, and at present therevenues referring to this investmentare deferred.

Short-term operating liabilities to the HSE Group enterprises as of 31 December 2002in SIT 000

Dravske elektrarne Maribor d.o.o. 2,311,926Savske elektrarne Ljubljana d.o.o. 264,507Soπke elektrarne Nova Gorica d.o.o. 316,157Termoelektrarna Brestanica d.o.o. 191,743Termoelektrarna ©oπtanj d.o.o. 2,670,934Premogovnik Velenje d.o.o. 2,478,067HSE Invest d.o.o. 600

At the end of 2002 the Company pre-sented short-term liabilities to the HSEGroup enterprises amounting to SIT8,233,934,000. The majority of theseamounts referred to liabilities for thepurchased electricity, coal and its pro-cessing into electric and thermal energy.

Liabilities of the Company are set-tled in the terms agreed.

Accrued costs and deferred revenues SIT 344,333,000 0.18% of liabilities

Accrued costs and deferred revenuesinclude short-term accrued expensesand short-term deferred revenues.

Short-term deferred expenses occur onthe basis of the uniform burdening of theactivity or profit or loss by expected coststhat have not appeared yet.

60 Total operating revenues of 2002 weregenerated by sale of electric and thermalenergy.

Financial revenues SIT 413,733,000 0.5% of revenues

Financial revenues represent revenuesfrom investments and appear in connec-tion with short-term investments, as wellas in connection with receivables.

Financial revenues are recognised oncalculation, irrespective of receipts oncondition that there is no significant un-certainty as to their amount, maturity andcollectability.

Interest is accounted for in proportion tothe period elapsed, as well as with refer-ence to the unpaid part of the principaland the valid interest rate.

Expenses SIT 79,586,494,000

Expenses are recognised if during theaccounting period the decrease in eco-nomic benefits is related to the decreaseof asset or to the increase of liability andif the relevant decrease can be meas-ured without fail.

Operating expenses SIT 78,728,639,000 98.9% of expenses

Operating expenses are recognisedwhen the merchandise has been sold.Operating expenses include costs of pur-chase of the merchandise and materialsold.

98.8 percent of total operating expensesare expenses for the purchase of electricand thermal energy, coal and the relatedcosts.

Financial expenses SIT 857,105,000 1.1% of expenses

Financial expenses are expenses forfinancing and expenses for investing.They are recognised on calculation, irre-spective of receipts they are related to.

Revaluatory financial expenses arise inconnection with long-term and short-term investments due to their impair-ment and in connection with the in-crease in value of long-term and short-term liabilities.

Extraordinary expenses SIT 750,000 <1% of expenses

Extraordinary expenses include extraor-dinary items, which are recorded inactual amounts. Donations are presentedamong extraordinary expenses.

Profit SIT 12,285,004,000

Due to the tax loss formed in previous ye-ar the Company established no liabilitiesfor the payment of tax on profit for 2002.

Segments Business operations of the Company aredivided into two geographical segments;net sales revenues are divided into: • Domestic market SIT 70,763,762,000• Foreign market SIT 20,694,003,000

Since the conditions of operations and influ-ences of risks for individual groups of productsare the same, the Company does not break-down the operation into business segments.

3.7.3 Cash flow statement

General The cash flow statement showschanges in the balance of cash duringthe financial year and has been pre-pared by applying the indirect method(version II in the SAS 26) on the basis ofthe data from the balance sheet as of31 December 2002, balance sheet as of31 December 2001, the income state-ment for the year 2002, as well as theadditional data required for the adjust-ment of inflows and outflows and forthe suitable breakdown of significantitems.

The Company did not prepare the cashflow statement for 2001, since it wasits first year of operation and it had noadequate basis for its preparation in thebalance sheet from the previous year.For the sake of comparison dataplanned for the same period are pre-sented along the data implemented in2002 in the income statement.

Foreign market

23%Domestic market

77%

STRUCTURE OF SALES REVENUES IN 2002 BYGEOGRAPHICAL SEGMENT

Income of members of the Manage-ment Board and staff employed in ac-cordance with the individual contractsinclude:• Gross income contained in the notice

about the income tax return• Jubilee awards• Premiums for optional additional pen-

sion insurance paid by the company

Income of members of the SupervisoryBoard include:• Gross meeting fees and travel

expenses

In 2002 no advances, loans and guaran-tees were granted to these groups ofpersons and no receivables due fromthem are therefore presented.

3.7.5 Other disclosures 3.7.4 Statement of changesin equity

Cost by functional groupin SIT 000

Value of operating effects sold 77,978,429Cost of sales 173,762Costs of general activities (purchase and administration) 576,448

In 2002 the capital reserves were re-duced by SIT 30,383,715,000, due to thefact that the Company covered the lossfrom 2001 in accordance with the deci-sion of the shareholders’ meeting.

The distributable net profit for 2002amounted to SIT 6,142,502,000.

Income of individual groups of personsin SIT 000

Members of the Management Board 67,771Other staff employed on the basis of individual contracts 162,999Members of the Supervisory Board 7,644

61

The statement of changes in equity pre-sents changes of capital elements in thefinancial year. The statement has beenprepared in accordance with the versionII contained in the SAS 27.

In 2002 the capital of the Company wasincreased by an investment in kind madeby the sole owner - TDR - Metalurgijad.o.o. The share capital increased by SIT1,153,217,000. A long-term investmentamong the assets in the balance sheetincreased by the same amount.

In the income statement for 2002 ne pro-fit of SIT 12,285,004,000 was ascertained,50% amounting to SIT 6,142,502,000was allocated to other revenue reservesin accordance with the proposal of theManagement Board and the agreementof the Supervisory Board.

By the application of the capital methodthe Company increased the value oflong-term investments in subsidiariesby the share in their profits and in-creased the specific equity revaluationadjustment by SIT 2,423,207,000.

2002 ANNUAL REPORT - HSE GROUP

4 HSE GROUP KEY ACHIEVEMENTS FOR THE FINANCIAL YEAR

Net sales revenues in SIT 000 98,440,705Total revenues in SIT 000 107,451,408Operating profit in SIT 000 13,601,407Net profit in SIT 000 14,389,006Assets in SIT 000 339,629,666Capital in SIT 000 235,475,484Operating cash flow in SIT 000 36,447,041Added value in SIT 000 60,070,617Added value per employee in SIT 000 11,140Produced electricity in GWh 6,698Electricity sales3 in GWh 8,714Number of employees as of 31 December 2002 5,282Number of companies in the Group as of 31 December 2002 20

3 Electricity sales exclusive of intra-group HSE sales - 636 GWh.

65

PRESENTATION OF HSE GROUP

68

5. PRESENTATION OF HSE GROUP

Main Activities of the HSE GroupHSE Group activities include primarilythe field of power management and en-vironmental management as well asthe management of related logistic pro-cesses.

The broad spectrum of business activi-ties can be grouped as follows: • Production of electricity and heat• Production of lignite• Electricity and heat sales and trading• Production optimizing at all HSE

companies• Provision of ancillary services

required for the operation of thepower system

• Project management and implemen-tation of projects in the field of ener-gy and environment

• Production of calcium carbide, fer-rosilicon, calcium silicon and com-plex alloys

The Group’s core business activities re-late to the processes of electricity gene-ration and trading, which is why thecentral focus of this Annual Report isset on this field.

Increased Management EfficiencyHSE Group, which overall employs over5,000 employees, produces a total ofjust over 50 percent of all electricity ge-

nerated in Slovenia; with its supply,which includes combining various po-wer sources, the Group also plays a vitalrole in providing safe, reliable and quali-ty supply to domestic and foreign con-sumers. The unified market approachby companies of the HSE Group, pro-vides them with an additional competi-tive edge in the market along with opti-mum use of production capacities withregard to the current market conditions,reduction of negative financial effects asresult of production losses, a more com-prehensive range of electricity products,reduced risks in signing long-term con-tracts and improved opportunities onthe foreign markets - therefore a muchmore efficient way of economizingcompared to the conditions appliedwhen the companies of the HSE Groupwere still operating independently.

Companies in the GroupHSE Group comprises the followingcompanies:• Holding Slovenske elektrarne d.o.o.

as the parent company• Dravske elektrarne Maribor d.o.o.• Savske elektrarne Ljubljana d.o.o.

with one affiliated company• Soπke elektrarne Nova Gorica d.o.o.

with one affiliated company• Termoelektrarna Brestanica d.o.o.• Termoelektrarna ©oπtanj d.o.o.

Holding Slovenske elektrarne d.o.o.

Soπke elektrarne Nova Gorica d.o.o. (SENG)

Termoelektrarna Brestanica d.o.o. (TEB)

Savske elektrarne Ljubljana d.o.o. (SEL)

Termoelektrarna ©oπtanj d.o.o. (TE©)

Premogovnik Velenje d.d. (PV)

HSE Invest d.o.o.

HSE - IIP d.o.o.

TDR - Metalurgija d.d.

Dravske elektrarne Maribor d.o.o. (DEM)

Sava d.o.o.

Elprom d.o.o.

PLP d.o.o.

Gost d.o.o.

Kamnolom Paka d.o.o.

Habit d.o.o.

HTZ d.o.o.

Telkom sistemi d.o.o.

Karbon d.o.o.

Zavod ERICo

HSE Group

5.1 HSE GROUP ACTIVITIES AND STRUCTURE

69• Premogovnik Velenje d.d. with sevenaffiliated companies

• HSE Invest d.o.o.• HSE - IIP d.o.o.• TDR - Metalurgija d.d.

TE© (©oπtanj TPP) and PV (VelenjeCoalmining Company) each have a 30-percent share in the ERICo institute,which is also displayed in the HSEGroup scheme, while its financial per-formance is not included in the Group’sAnnual Report.

Dravske elektrarne Maribor d.o.o.DEM (Drava River HPPs Maribor) totalthreshold capacity is 566 MW. Withtheir total output combined, they canmeet approximately 26 percent of thetotal electricity demand in Slovenia.The chain includes eight hydropowerplants (HPPs): Dravograd HPP, Vuze-nica HPP, Vuhred HPP, Oæbalt HPP,Fala HPP, Mariborski otok HPP, Zlato-liËje HPP and Formin HPP.

DEM is also the location of the HSEcontrol center, which is used for controlof operational electricity productionwithin HSE Group.

Savske elektrarne Ljubljana d.o.o.SEL (Sava River HPPs Ljubljana) produc-tion units include the following hydro-

power plants (HPPs): Moste HPP, Med-vode HPP, MavËiËe HPP and VrhovoHPP. In addition to the company’s corebusiness, which is electricity generationin hydropower plants, SEL also performsthe functions of operation and mainte-nance for uninterrupted electricity gener-ation in hydropower plants (maintenanceof power equipment, hardware, tele-communication equipment and buildingsand structures). The company also per-forms investment services for powerinfrastructure and equipment, providesassembly services, testing, metering,start-up, and commissioning.

Sava d.o.o.Sava - SEL subsidiary, was establishedfor the needs of the Construction of theLower Sava River Hydropower Plantsproject.

Soπke elektrarne Nova Gorica d.o.o.There are three major hydropowerplants (HPPs) stationed on the SoËaRiver: Doblar HPP, Plave HPP and Sol-kan HPP, while ZadlaπËica HPP and 19small HPPs operate on the SoËa Rivertributary streams. In addition to gene-rating electricity in hydropower plants,SENG (SoËa River HPPs) also performsservices of project engineering andtechnical consulting, technical testingand analyses.

Elprom d.o.o.This SENG subsidiary was establishedwith the purpose of electricity trading.

Termoelektrarna Brestanica d.o.o.As part of HSE Group the TEB(Brestanica gas-fired TPP) excels in itsshort response times. In emergencysituations the power plant is able togenerate all of its 312 MW of powerwithin 15 minutes. It mainly uses na-tural gas and a special light fuel oil asfuel or a combination of both. In addi-tion to generating electricity the com-pany’s activities also include produc-tion of steam and hot water, ware-housing, project engineering and tech-nical consulting, technical testing andanalyzing, and other services.

Termoelektrarna ©oπtanj d.o.o.TE© (©oπtanj coal-fired TPP) is the elec-tricity producer with the highest in-stalled power in the HSE Group andduring critical times it covers over onehalf of the electricity consumption inSlovenia. In addition to electricity thecompany also produces heat, which isused for the heating of the larger part of©aleπka dolina (©aleπka valley). With itsnewly constructed emissions treatmentplants the power plant is able to meetthe European and global ecological

standards. Lignite from PV (VelenjeCoalmining Company) is used as theprimary fuel.

Premogovnik Velenje d.d.PV (Velenje Coalmining Company) isconsidered as one of the most up-to-date equipped coalmines in Europe,with an annual production of some 4million metric tons of coal. Almost allof its production is used at TE© (©oπ-tanj coal-fired power plant). Despitethe hardships of coalmining and geo-logical conditions the company’s state-of-the-art technological equipment andpersonnel qualifications ensure thesafety of all employees and a highlevel of productivity. The company’sother activities include project engi-neering in terms of mining, mechani-cal and electrical design of under-ground structures and open cuts, con-struction of all types of undergroundstructures, drilling, geo-mechanicalresearch, and the provision of mine-surveying, hydro-geological and tech-nological services. Premogovnik Vele-nje Group includes eight subsidiaries.

HTZ d.o.o.HTZ is a company for the training andemploying of invalids.

70 HSE Invest d.o.o.The company was established to meetthe needs of executing the investmentconstruction of power generating struc-tures; during the first phase for therequirements of the construction ofLower Sava River power plants, whilelater its range of activities will expand.

HSE - IIP d.o.o.HSE - IIP has its headquarters located inSevnica, and it was established for themanagement of the construction of infra-structure on the locations of the futureLower Sava River Hydropower Plants.

TDR - Metalurgija d.d.TDR - Metalurgija represents thelargest electro-metallurgic part of theformer Tovarna duπika Ruπe. The plantwas one of the first producers of elec-tro-chemical products in this part ofEurope. It was established in 1918.The company’s main activity is theproduction of calcium carbide and fer-rolegure.

Kamnolom Paka d.o.o.The company’s core business activitiesinclude the extraction, processing andsales of stone aggregates, pit sandsand other materials.

Habit d.o.o.Habit manages real estate.

Gost d.o.o.Gost is in the restaurant business.

PLP d.o.o.The company’s activities include pro-duction of wood products, wood saw-ing, chipping and impregnating.

Telkom sistemi d.o.o.Telkom sistemi deals with telecommu-nications.

Karbon d.o.o.Karbon was established in 2002 for thepurposes of research and experimentaldevelopment in the field of technology.

ERICoErico institute deals with research andexperimental development in the fieldsof nature sciences, technology, socialsciences and humanities.

I - unqualifiedII - semi-qualifiedIII - 2-year vocational high school IV - 3-year vocational high school V - 4-year high school graduateVI - higher school graduateVII - university graduateVIII - M. Sc. or Ph. D.

Number of EmployeesAs of 31 December 2002 HSE Groupemployed 5,282 people. This enablesus to state that in accordance with thegoal of operating rationalization thenumber of employees has fallen by 4percent. The trend of reducing the nu-mber of employees is continued th-rough 2003.

5.2 HUMAN RESOURCES MANAGEMENT

Company 1 January 2002 31 December 2002 Index Dec/Jan 2002

HSE 35 60 171%DEM 336 309 92%SEL 135 130 96%SENG 155 141 91%TEB 127 127 100%TE© 601 585 97%PV Group 3,708 3,524 95%HSE Invest 0 9HSE - IIP 0 0TDR Metalurgija 406 397 98%

TOTAL 5,503 5,282 96%

Employee status in HSE Group

Parent company

HSE Group

IV46 %

V25 %

VI4 %

VII7 %

II8 %

I8 %

III2 %

VIII0 %

VII69 %

V13 %

VI8 %

VIII7 %

IV3 %

EMPLOYEE EDUCATION STRUCTURE AS OF 31 DECEMBER 2002

71Dravograd Vuzenica Vuhred Oæbalt Fala MB otok ZlatoliËje Formin Total

DEM Number of generators 3 3 3 3 1+2 3 2+1 2

Threshold power MW 27 57 60 60 58 60 127 116 565Installed generator power MVA 36 78 66 66 74 78 149 148 695Gross drop m 8,9 13,7 17,4 17,4 14,6 14,2 33 29 148Installed flow m3’/s 405 550 480 465 505 550 510 500

Moste I. Moste II. MavËiËe Medvode Vrhovo TotalSEL Number of generators 3 2 2 3

Threshold power MW 13,5 8 38 21 37 118Installed generator power MVA 22,5 11 50 27 42,9 153Gross drop m 70,45 177,2 17,5 21,2 8,12 294Installed flow m3/s 3x9,5 6 2x130 2x71 3x166,7

Doblar I. Doblar II. Plave I. Plave II. Solkan ZadlaπËica Male HE TotalSENG Number of generators 3 1 2 1 3 2

Threshold power MW 30 40 15 19 32,4 8 15,8 160Installed generator power MVA 48 50 22 23 39 10 19,4 211Gross drop m 47,2 48,5 27,5 27,5 23Installed flow m3/s 90 105 75 105 180 2,2

TEB Parna 1 Parna 2 PB I. PB II. PB III. PB IV. PB V. Total

Threshold power MW 10 11 21 21 21 114 114 312Installed generator power MVA 16 15 32 32 32 155 155 437

TE© Blok 1 Blok 2 Blok 3 Blok 4 Blok 5 Total

Threshold power MW 27 27 68 246 315 683Installed generator power MVA 37,5 37,5 94 324 406 899

5.3 ELECTRICITY GENERATION

ELECTRICITY GENERATING UNITS IN THE HSE GROUP

HSE Group is Slovenia’s largest pro-ducer and supplier of electricity, as weproduce more than half of Slovenia’soverall production of electricity. Thecompanies of the Group represent acombination of production resources

(hydropower plants, coal-fired and gas-fired thermal power plants) thatenables flexible production of electrici-ty and the coverage of all types of con-sumers and providing all forms of ancil-lary services.

In addition to a substantial marketshare in the Slovenian power supplymarket HSE Group was also the mostimportant ancillary service supplier forthe Slovenian operator of the powertransmission system in 2002. Besides

competing in the Slovenian electricitymarket the Group is also active in thewider region. Italy represents our mainexport market, and we trade with mostof Europe’s most important compa-nies.

72 Other Products and Services Production of calcium carbide, ferrosili-con, calcium silicon, and complex alloysrepresent the largest share amongother activities. 22 percent of thesesales were generated in the domesticmarket, while a majority was exportedto foreign markets, especially Italy, Au-stria and Germany.

Other activities include heat and coalproduction and supply as well as otherservices and products that are part ofthe Group’s subsidiaries’ activities.

Structure of Total Net Sales RevenuesLast year Group HSE had a total of SIT98 billion of net sales revenues, ofwhich just over 26 percent were gener-ated from sales abroad.

Within the revenue structure the mostimportant share of 89 percent is repre-sented by electricity sales, while rev-enues from the sales of other productsand services represented 11 percent ofthe Group’s net sales revenues.

DEMMain activities at DEM were part ofthe Drava River Hydropower PlantsRenewal project - Phase 2. Investmentsare being carried out with the purposeof a complete overhaul of hydropowerplants Vuhred and Oæbalt, which werein need of renewal due to their ageand technological obsoleteness.

The renewal project began in 2001and according to plans it will be finish-ed at the end of 2004.

Effects of this investment project willbe displayed in a substantially increasedproduction of electricity, a higher levelof exploitation of the hydro potential,reduced maintenance costs and areduced size of the managementteam.

SELMeasurements and analyses of theisolation material at all three genera-tors of the Moste hydropower plantshowed critical status with the Ge-nerator 3 equipment, which necessi-tated a replacement.

This investment project will be fin-ished in 2003 and it will result in in-creased power of the new generatorfrom 7.5 to 9 MVA, increased opera-

tional reliability and safety, and anincreased generator lifespan.

The construction of RTP 100/20/6.3 kVMedvode with the purpose to loop inthe existing 2x110 kV KleËe - Labore -Okroglo transmission line instead ofthe old T-connection to the 110 kVsystem in Slovenia, the canceling ofthe 35 and 10 kV voltage level, re-placement of technologically obsoleteand unreliable 110 kV equipment andreduction of effects on the environ-ment. These effects are mainly to bedisplayed in the increased flexibility ofthe Medvode hydropower plant to the110 kV network and an increased se-lectivity of protection at malfunctions.The power of all transformations willbe increased. The investment projectwill be finished in 2004.

A turbine and secondary equipmentrenewal is underway at the Medvodehydropower plant due to the plant’sobsoleteness as it has been in opera-tion since 1951.

The investment project will be con-cluded in 2005 and its positive effectswill include the technological modern-ization of the plant’s equipment andconsequentially an increased flowthrough the power plant (150 m3/s),

5.4 OTHER ACTIVITIES 5.5 INVESTMENTS IN OTHER COMPANIES OF THE HSE GROUP

SALES REVENUE STRUCTURE IN 2002

Other products and services11%

Electricity89%

73increased maximum power from 10.2to 13.23 MW and thereby an increaseof 8.5 percent in the power plant’sproduction.

SENGThe most important long-term invest-ment, which was started with thepreparation of documents before 1990,is the project of renewal and addition-al installation at the SoËa River hydro-power plants Doblar I + II and Plave I+ II. The project was concluded on 24April 2003. The project included theconstruction of two new hydropowerplants Plave II and Doblar II and afterthe construction also the gradual re-newal of the existing hydropowerplants Plave I and Doblar I. The signif-icance of the investment is in increas-ed efficiency of exploiting the avail-able hydro potential on SoËa River,production of peak power, covering thepotential needs for reserve and regu-lation power, and improved structureof production capacities in the Slo-venian power system. Constructionwas commenced in 1998 and alreadyin 2002 both new power plants wereactivated. With the new power plantsthe production capacities have beenincreased by 60 MW, overall produc-tion has been increased by a total of107 GWh and the installed flow of the

SoËa River hydropower plant chainhas been unified. The investment hasa positive effect on overall power sys-tem’s operations.

TEBSpecial attention at TEB was dedicat-ed to the completion of the construc-tion of two 2 x 114 MW gas turbinesand the elimination of faults displayedin testing procedures. A lot of activi-ties have been executed in the prepa-ration of documents required for themaking of the final professional evalu-ation, which was prepared by theauthorized professional institution inJuly 2002.

An additional technical inspection ofthe new 2 x 114 MW gas turbines andthe adhering structures was conduct-ed on 17 September 2002, and nofaults were discovered. A serviceabili-ty permit was granted for the newlybuilt structure.

According to the TEB strategic goalsactivities were also aimed at thepreparation and elaboration of spatialurbanistic documents for the refur-bishment of steam technology. A pro-posal of Changes and Amendments tothe Planning Act of the Krπko Muni-cipality was prepared as well as a pro-

posal of Changes and Amendments tothe Spatial Plan for TEB, both of whichwere discussed and approved at theKrπko Municipal Council in October2002.

TE©As part of ecology projects TE© car-ried out the investment projects ofUnit 5 gas fumes de-sulfurizing, proj-ects related to the Unit 4 overhaulrealization (investments in increasedreliability of Unit 4 production) and in-vestments in the reliability of produc-tion of Units 1 through 3 and Unit 5 aswell as joint structures.

The projects already underway and willbe concluded before the end of 2003are Unit 4 gas fume de-sulphurizationand chemical preparation of water.

PVA reconstruction of the electric powersupply of PV from TE© in underway atPV aimed at reducing the networkcosts. This investment project will beconcluded in 2003.

Simultaneously the company is alsorunning the project of diverting thecoal cartage. Export of the overall PVproduction is conducted with rubberbelt transporters via the Pesje export

route to the surface and then via theclassifier system to the depot. Ex-ploitation of the stratum on the east isnearly finished with the focal point ofexcavation switching westbound,which is to the opposite side of themain exportation route. New solutionsrange from diverting the existingtransport routes to export shaft Bar-bara, abandoning coal classification,crumbling the coal in the cave in frontof the shaft, coal exportation withskips and discarding the coal directlyto the depot, from where it is used forthe requirements of TE©.

This investment, too, will be finishedin 2003.

TDR - MetalurgijaAn investment project was finished in2002 at TDR - Metalurgija, which en-ables the crumbling and sieving ofFeSiMg with over 7.5 percent of Mg.Devices were activated for testingoperation.

An ICP-AES apparatus was purchasedand a gas station for laboratory gasseswas established, which provides op-portunity for more detailed and ex-panded material analyses.

74 HSE Italia S.r.l.In April 2003 HSE as the only founder es-tablished a new company named HSEItalia S.r.l.

Decree on the Concession for theGeneration of Power on the Drava RiverThe Decree on the Concession for theGeneration of Power on the Drava River,which was passed by the Governmentof the Republic of Slovenia on 27 Feb-ruary 2003, will have important effectson the future performance of DEM.According to the first estimates thedecree is going to substantially reduceoperating costs - the cost of building landcompensation in 2003 and the follow-ing years.

No Reduction of the SEL Subscribed CapitalAt the first level the registration courtdenied the motion for the suspensionof the procedure for the reduction ofSEL subscribed capital and issued adecree on the reduction of subscribedcapital. The decree did not becomelegally binding though as minority share-holders filed a complaint, which pre-vents the company (until the decreebecomes legally binding) to cover thelosses from previous periods by reduc-ing the company’s subscribed capital.

Decree on the Specification of the Concessionaire for Economic Exploitation of Water for the Production of Electricity forUpper Sava River Hydropower PlantsOn 18 March 2003 SEL received theDecree on the Specification of theConcessionaire for Economic Exploit-ation of Water for the Production of Ele-ctricity for Moste HPP (hydropowerplant), MavËiËe HPP and MedvodeHPP. Based on this decree the compa-ny will become concessionaire for theabove-listed power plants, providingthat it signs a concession contract withthe Government of the Republic ofSlovenia within three months from thedate of issuing the decree.

Reduction of Subscribed Capital at SENGA reduction of the SENG subscribedcapital was entered in the register ofcompanies on March 12th, 2003, fol-lowing an accelerated procedure, whichwas impossible to realize in 2002 asthere was a complaint filed against it.Based on new legal acts the loss ge-nerated in 2001 was covered with thepositive operating financial result of2002. This meant that with the registra-tion of the reduced subscribed capital inMarch 2003 there was a double cover-

age of the loss generated in 2001,which will be amended in 2003 with thetransfer of 2002 generated profit to theundistributed net profit of the financialyear 2003.

Severe Accident at PVUnfortunately, among the importantevents we need to mention a severeindustrial accident that happened at PVat the beginning of 2003 and claimedthe lives of two miners and caused aloss of lignite production.

Start of Re-structuring at TDR - MetalurgijaIn February 2003 the TDR - MetalurgijaSupervisory Board adopted the Modern-ization of Complex Composites Pro-duction investment program, which de-notes the start of re-structuring in thesense of increasing the production ofless power-intensive products.

ISO 9001/2000 Granted to TDR - MetalurgijaIn March 2003 TDR Metalurgija attainedthe ISO 9001/2000 certification.

5.6 IMPORTANT EVENTS AFTER THE END OF FINANCIAL YEAR

75At HSE Group we have set bold goalsfor 2003.

We will retain the position of Slovenia’sleading electricity supplier by nurturingour partnership with the existing electric-ity buyers.

We will proceed with the constructionof the Lower Sava River HydropowerPlants and all the other important in-vestment projects in the Group.

We will bring ourselves even closer tothe end-users by further developing oursales network and by cooperating withindividual distribution companies.

We are planning the optimum use ofcapacities regarding the current marketconditions by balancing the scheduleswith trading schedules, which are ad-apted to the goal of achieving maxi-mum trading profit.

We want to include almost all players inthe Slovenian electricity sector in theHSE balance group, with the exceptionof preferential dispatch. We are estimat-ing that in 2003 our balance group willcomprise 90 percent of consumers and90 percent of production in Slovenia.

We will establish balance groups in

individual EU Member States, whichwill enable us to expand the currenttrading at Slovenia’s borders to theWestern European electricity markets,thereby achieving higher prices. Thiswill also increase our options for tradingvia organized markets (EEX ...), whichwill help us to achieve the optimumsales or purchases of electricity.

We will take advantage of our know-ledge of Southeastern European mar-kets as well as our strategic positionand the reputation of a reliable businesspartner among Western European elec-tricity traders as a bridge betweenflows of trade in different regions.

In the field of measurements and billingof sales and purchases of electricity andheat products as well as raw materialpurchases we will provide the requireddata for the billing and quantity controlof purchases, sales and imbalances.

We will monitor the fulfilling of environ-ment protection requirements.

5.7 HSE GROUP IN 2003

FINANCIAL REPORT OF THE GROUP

78

6. FINANCIAL REPORT OF THE HSE GROUP

6.1. INTRODUCTORY EXPLANATIONS

BasisThe consolidated financial statementsdiscussed in this report have been pre-pared in accordance with the provisionsof the Companies Act (CA) and the validSlovene Accounting Standards (SAS).

The consolidated financial statementsinclude:• Consolidated balance sheet • Consolidated income statement • Consolidated cash flow statement • Consolidated statement of changes

in equity

Companies included in the consolida-ted financial statements The group of companies is an economic,but not a legal unit and it is not an inde-pendent subject of rights and duties.Financial statements have been pre-pared for the group of companies as if itwere only one company. They havebeen prepared on the basis of the origi-nal financial statements of group enter-prises under the consideration of theconsolidated adjustments.

The HSE Group does not consist onlyfrom the parent company and subsi-diaries, since these individual subsi-diaries are sole or partial owners of othercompanies. In accordance with the me-thod of chain consolidation the consoli-

dated financial statements are preparedalready at the level of subsidiaries. Thenthey are included in the consolidatedfinancial statements of the HSE Group.Consolidation of the PV Group has beencarried out before the consolidation ofthe HSE Group.

The institution ERICo (where TE© andPV own 30% each) is not included inthe consolidated financial statementseither, since it is not a company withshare capital.

Complete consolidation Financial statements of the Groupenterprises are joined in consolidatedfinancial statements on the basis of thecomplete consolidation. Financial state-ments are aggregated from item toitem and similar items of assets, liabili-ties, capital, revenues and expenses areadded. Since the Group has to be pre-sented as one company the followinghas been excluded:• Investments of the parent company

in the capital of subsidiaries and ade-quate shares of the parent companyin the capital of subsidiaries anddebts of the subsidiaries

• Mutual receivables and liabilities • Mutual revenues and expenses • Net profits not yet realised as results

of transactions within the Group

The consolidated income statementpresents a share of minority owners inthe profit/loss of the Group. The conso-lidated balance sheet and the consoli-dated statement of changes in equitypresent the minority share in the capitalof the Group.

Companies included in the consolidated financial statements

Company Ownership share of HSE d.o.o.Holding Slovenske elektrarne d.o.o. Parent company Dravske elektrarne Maribor d.o.o. 79.4%Savske elektrarne Ljubljana d.o.o. 79.5%Soπke elektrarne Nova Gorica d.o.o. 79.5%Termoelektrarna Brestanica d.o.o. 79.5%Termoelektrarna ©oπtanj d.o.o. 79.5%Premogovnik Velenje d.d. 77.7%HSE Invest d.o.o. 100.0%TDR - Metalurgija d.d. 74.4%HTZ d.o.o. 77.7%Gost d.o.o. 77.7%PLP d.o.o. 77.7%Kamnolom Paka d.o.o. 77.7%Habit d.o.o. 77.7%Telkom sistemi d.o.o. 77.7%Karbon d.o.o. 77.7%

Companies not included in theconsolidated financial statements

Company Ownership share of HSE d.o.o.

Sava d.o.o. 51.7%Elprom d.o.o. 79.5%HSE - IIP d.o.o. 100.0%

In further sections the term “Group” isused for the HSE companies included inthe consolidated financial statements.

HSE Invest started its operation on 25 April2002, and Karbon on 16 October 2002.

HSE - IIP is not included in the consoli-dated financial statements, since it isnot relevant for a true and fair presenta-tion of the Group operations due to itsstatic position. For the same reason,the companies Sava and Elprom are notincluded in the consolidation.

79

6. 2. AUDITOR’S REPORT

ITEM Year 2002 Year 2001 Index 02/01

ASSETS 339,629,666 320,281,382 106%

A. FIXED ASSETS 295,991,607 292,546,216 101%

I. Intangible fixed assets 3,182,373 3,016,144 106%1. Long-term deferred costs of organisation 183,573 58,660 313%2. Long-term deferred costs of development 2,739,792 2,831,689 97%3. Long-term property rights 259,008 69,776 371%5. Advances for intangible fixed assets 0 56,019 0%II. Tangible fixed assets 284,882,725 287,380,275 99%1. Land and buildings 148,541,750 133,697,383 111%

a) Land 11,536,140 10,727,011 108%b) Buildings 137,005,610 122,970,372 111%

2. Production plant and equipment 124,262,532 111,525,972 111%3. Other plant and equipment 1,269,849 10,960,089 12%4. Tangible fixed assets under construction 10,808,594 31,196,473 35%

a) Advances for tangible fixed assets 1,060,285 1,554,466 68%b) Tangible fixed assets under construction and in process 9,748,309 29,642,007 33%

5. Rearing herd 0 358 0%III. Long-term investments 7,926,509 2,149,797 369%1. Shares in the group enterprises 8,523 0 3. Shares in associates 0 14,453 0%5. Other long-term investments 917,530 1,443,807 64%6. Other long-term financial receivables 7,000,456 691,537 1,012%

B. CURRENT ASSETS 43,544,562 26,868,766 162%I. Inventories 6,330,481 5,525,708 115%1. Material 4,772,108 4,531,434 105%2. Work in process 235,188 10,390 2,264%3. Products and merchandise 1,036,867 729,766 142%4. Advances for inventories 286,318 254,118 113%II. Operating receivables 14,460,166 10,728,939 135%a) Long-term operating receivables 323,302 397,849 81%

1. Long-term trade receivables 0 397,849 0%4. Long-term receivables due from others 323,302 0

b) Short-term operating receivables 14,136,864 10,331,090 137%1. Short-term trade receivables 11,397,423 5,014,562 227%2. Short-term receivables due from the Group (except associates) 0 3,706,077 0%3. Short-term receivables due from associates 0 5,615 0%4. Short-term receivables due from third parties 2,739,441 1,604,836 171%

III. Short-term investments 20,458,027 7,716,356 265%2. Shares in associates 0 28,050 0%4. Other short-term investments 20,458,027 7,688,306 266%IV. Bank balances, cheques and cash 2,295,888 2,897,763 79%

C. DEFERRED COSTS, DEFERRED EXPENSES AND ACCRUED REVENUES 93,497 866,400 11%OFF-BALANCE-SHEET RECORD 23,653,726 85,783,161 28%

6.3. CONSOLIDATED BALANCE SHEET in SIT 000

80

ITEM Year 2002 Year 2001 Index 02/01

LIABILITIES AND CAPITAL 339,629,666 320,281,382 106%A. CAPITAL 235,475,484 192,157,389 123%I. Called-up capital 1,156,217 3,000 38,541%1. Share capital 1,156,217 3,000 38,541%II. Capital reserves 166,070,474 196,454,189 85%III. Revenue reserves 6,142,502 0 4. Other reserves 6,142,502 0 V. Net profit or loss for the financial year 6,142,502 (57,158,403)VI. Equity revaluation adjustment 2,423,234 27 8,974,941%1. General equity revaluation adjustment 27 27 100%2. Specific equity revaluation adjustment 2,423,207 0 VIII. Minority equity interest 53,540,555 52,858,576 101%

B. PROVISIONS 39,685,033 68,323,068 58%3. Other provisions 39,685,033 68,323,068 58%

C. FINANCIAL AND OPERATING LIABILITIES 63,871,695 58,620,227 109%a) Long-term financial and operating liabilities 40,631,573 41,088,742 99%

2. Long-term financial liabilities to banks 40,543,283 40,864,455 99%4. Long-term trade payables 28,938 0 8. Long-term financial and operating liabilities to other entities 59,352 224,287 26%

b) Short-term financial and operating liabilities 23,240,122 17,531,485 133%2. Short-term financial liabilities to banks 9,714,385 8,995,462 108%3. Short-term operating liabilities arising from advances 18,270 3,797 481%4. Short-term trade payables 9,121,596 5,222,219 175%7. Short-term financial and operating liabilities to associates 0 10,837 0%8. Short-term financial and operating liabilities to other entities 4,385,871 3,299,170 133%

». ACCRUED COSTS (EXPENSES) AND DEFERRED REVENUES 597,454 1,180,698 51%

OFF-BALANCE-SHEET RECORD 23,653,726 85,783,161 28%

in SIT 000

81

ITEM Year 2002 Year 2001 Index 02/01

1. Net sales revenues 98,440,705 64,488,281 153%a) Domestic market 72,398,586 63,595,043 114%

- from others 72,398,586 63,595,043 114%b) Foreign market 26,042,119 893,238 2,915%2. Changes in the value of inventory of products and work in process 292,669 (1,227,250) (24%)3. Capitalised own products and/or services 968,033 6,722,711 14%4. Operating revenues 1,189,872 3,570,940 33%

- other operating revenues 1,105,920 3,565,890 31%- revaluatory operating revenues 83,952 5,050 1,662%

5. Costs of goods, material and services 35,623,513 25,526,846 140%a) Cost of goods and material sold 24,588,778 17,321,636 142%b) Costs of services 11,034,735 8,205,210 134%6. Labour costs 26,294,305 22,052,851 119%a) Costs of wages and salaries 18,183,782 15,810,139 115%b) Social insurance costs 5,072,874 3,894,994 130%

- costs of retirement insurance 1,154,728 1,884,616 61%c) Other labour costs 3,037,649 2,347,718 129%7 Amortisation, depreciation and assets write-offs 20,174,905 270,492,447 7%a) Amortisation of intangible fixed assets, depreciation of tangible fixed assets

and revaluatory operating expenses 20,087,866 270,481,418 7%b) Revaluatory operating expenses from current assets 87,039 11,029 789%8. Other operating expenses 5,197,149 5,524,731 94%

OPERATING PROFIT OR LOSS 13.601.407 (250.042.193)

6.4. CONSOLIDATED INCOME STATEMENT in SIT 000

82

ITEM Year 2002 Year 2001 Index 02/01

9. Financial revenues from participation 78,089 62,221 126%c) Other financial revenues from participation in associates (including revaluatory financial revenues) 78,089 62,221 126%10. Financial revenues from long-term receivables 252,362 7,564 3,336%c) Other financial revenues from long-term receivables (including revaluatory financial revenues) 252,362 7,564 3,336%11. Financial revenues from short-term receivables 1,807,824 980,528 184%b) Interest revenues and revenues from short-term receivables due from associates 0 16,401 0%c) Other interest revenues and revenues from short-term receivables (including revaluatory financial revenues) 1,807,824 964,127 188%12. Financial expenses for long-term and short-term investments write-offs 1,091,293 2,957 36,905%a) Revaluatory financial expenses arising from investments in the Group (except in associates) 786,289 694 113,298%c) Other revaluatory financial expenses 305,004 2,263 13,478%13. Interest expenses and financial expenses from other liabilities 4,373,122 3,031,574 144%b) Interest expenses and expenses from other liabilities due from associates 0 7 0%c) Other interest expenses and expenses from other liabilities 4,373,122 3,031,567 144%

PROFIT OR LOSS FROM ORDINARY ACTIVITY 10,275,267 (252,026,411)

15. NET PROFIT OR LOSS FROM ORDINARY ACTIVITY 10,275,267 (252,026,411) (4%)16. Extraordinary revenues 4,421,854 133,243,448 3%17. Extraordinary expenses 303,450 22,186,466 1%a) Extraordinary expenses exclusive of equity revaluation adjustment 303,450 22,186,466 1%

18. PROFIT OR LOSS FROM EXTRAORDINARY ACTIVITIES 4,118,404 111,056,982 4%

TOTAL PROFIT OR LOSS 14,393,671 (140,969,429)

19. Income tax 4,665 3,308 141%20. Other taxes not disclosed under other items 0 0

21. NET PROFIT OR LOSS FOR THE FINANCIAL YEAR 14,389,006 (140,972,737)Majority owner’s share in net profit or loss 14,708,211 (83,951,270)Minority owner’s share in net profit or loss (319,205) (57,021,467) 1%

in SIT 000

83

ITEM Year 2002

A. CASH FLOWS FROM OPERATING ACTIVITYa) Inflows from operating activity 95,927,978 Operating revenues 94,525,655 Extraordinary revenues relating to operating activity 4,421,854 Opening minus closing operating receivables (3,792,434)Opening minus closing deferred costs, deferred expenses and accrued revenues 772,903 b) Outflows from operating activity 59,480,937 Operating expenses exclusive of depreciation and long-term provisions 62,612,690 Extraordinary expenses relating to operating activity 303,450 Income tax and other taxes not included among operating expenses 4,665 Closing minus opening inventories 830,605 Opening minus closing operating liabilities (4,853,717)Opening minus closing accrued costs (expenses) and deferred revenues 583,244 c) Net inflows from operating activity 36,447,041

B. CASH FLOWS FROM INVESTING ACTIVITYa) Inflows from investing activity 2,138,275 Financial revenues relating to investing activity (excluding revaluation) 2,138,275 b) Outflows from investing activity 37,366,221 Financial expenses relating to investing activity (excluding revaluation) 1,091,293 Offset increase in intangible fixed assets (excluding revaluation) 896,238 Offset increase in tangible fixed assets (excluding revaluation and increase of non-cash equity) 16,860,307 Offset increase in long-term investments (excluding revaluation) 5,776,712 Offset increase in short-term investments (excluding revaluation) 12,741,671 c) Net outflows from investing activity (35,227,946)Net inflows from operating and investing activity 1,219,095

C. CASH FLOWS FROM FINANCING ACTIVITYa) Inflows from financing activity 2,873,324 Increase in capital (excluding net profit) 2,154,401 Offset increase in short-term financial liabilities (excluding revaluation) 718,923 b) Outflows from financing activity 4,694,294 Financial expenses relating to financing activity (excluding revaluation) 4,373,122 Offset decrease in long-term financial liabilities (excluding revaluation) 321,172 c) Net outflows from financing (1,820,970)

Total net inflows/outflows for finanical year (601,875)

». CLOSING BALANCE OF CASH AND CASH EQUIVALENTS 2,295,888 x) Net cash flow for the financial year (601,875)y) Opening balance of cash and cash equivalents 2,897,763

6.5. CONSOLIDATED CASH FLOW STATEMENT in SIT 000

84

6.6 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Uncalledrepurchase Reserves for General Specific

capital repurchase Net profit Net loss equity equityCalled-up (deduction Legal of own Stautory Other Retained Retained for the for the revaluation revaluation

capital item) shares shares reserves reserves net profit net loss financial yearfinancial year adjustment adjustment TOTALA. Opening balance 3,000 0 196,454,189 0 0 0 0 0 (30,383,715) 0 0 27 0 0 52,858,576 218,932,077

B. Transfer to equality 1,153,217 0 0 0 0 0 0 0 0 12,285,004 0 0 2,423,207 0 681,979 16,543,407

a) Called-up capital 1,153,217 0 0 0 0 0 0 0 0 0 0 0 0 0 1,001,184 2,154,401

d) Net profit forthe financial year 0 0 0 0 0 0 0 0 0 12,285,004 0 0 0 0 (319,205) 11,965,799

f) Special equityrevaluation adjustment 0 0 0 0 0 0 0 0 0 0 0 0 2,423,207 0 2,423,207

C. Transfer within equity 0 0 (30,383,715) 0 0 0 6,142,502 0 30,383,715 (6,142,502) 0 0 0 0 0 0

a) Appropriation of net profit(as an item of equity) under theresolution adopted by the ManagementBoard and the Supervisory Board 0 0 0 0 0 6,142,502 0 0 (6,142,502) 0 0 0 0 0 0

c) Loss covering as adeduction item of capital 0 0 (30,383,715) 0 0 0 0 0 30,383,715 0 0 0 0 0 0 0

». Transfer from equity 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

D. Closing balance 1,156,217 0 166,070,474 0 0 0 6,142,502 0 0 6,142,502 0 27 2,423,207 0 53,540,555 235,475,484

Share capitalITEM Revenue reserves Retained net profit or lossfrom previous periods

Capitalreserves

Net profit or loss forthe finacial year

Equity revaluationadjustment

Equityadjustment

from translation

Minorityequity

interest

in SIT 000

86 General disclosure The provisions of the Companies Actand of the Slovene Accounting Stan-dards are directly applied to the disclo-sure of items in consolidated financialstatements, except for those items thatmay be, in accordance with the respectivestandards, accounted for at freely se-lected methods. In these cases theGroup has taken into account the provi-sions of the Consolidation rules or deci-sions taken by the Management Boardof the parent company.

Transactions expressed in foreign cur-rencies are translated into domestic cur-rency on the date of their accrual at themiddle exchange rate of the Bank of Slo-venia ruling on the respective date.

The consolidated financial statementshave been prepared in Slovenian tolars(SIT), rounded off to one thousand units.

Group enterprises, except HTZ that isliable to account for the tax, but not topay it, are subject to taxation under theCorporate Income Tax Act.

Group enterprises are also subject totaxation under the VAT Tax, except Kar-bon.

GeneralThe information about the basis for thepreparation of the consolidated balancesheet and about special accounting poli-cies, selected and used in important bu-siness operations and other transac-tions of the Group are presented in thedisclosure of individual important assetsand liabilities.

Due to the introduction and applica-tion of the new Slovenian AccountingStandards (SAS), the consolidated ba-lance sheets for the year 2002 and forthe year 2001 are not fully comparable.

In accordance with the interpretation 1to the SAS 24 issued by the SlovenianInstitute of Auditors the data for the pre-vious accounting period have not beentranslated according to the new Slo-venian Accounting Standards in the pre-paration of the consolidated balancesheet, but reasonably recorded in corre-sponding items in terms of materiality.

Intangible fixed assets SIT 3,182,373,000 0.94% of assets

86% of total intangible fixed assets rep-resent long-term deferred developmentcosts, which mainly include costs of stu-dies and projects as well as generalcosts of major investments.

At the beginning of 2002 the net carry-ing amount of intangible fixed assets isnot comparable to the data stated in theconsolidated balance sheet for 2001,due to the fact that new companieswere included in the consolidation in2002.

Tangible fixed assets SIT 284,882,725,000 83.88% of assets

On initial recognition, a tangible fixedasset is evaluated at cost of purchase.The cost of purchase includes its pur-chase price, import duties and non-refundable purchase taxes, as well asdirectly attributable costs of bringing theasset to working condition for its in-tended use, particularly the costs oftransport and installation. The cost ofpurchase also comprises the interest onloans for acquisition of a tangible fixedasset until its bringing to working condi-tion for use.

Donations and grants for the acquisitionof tangible fixed assets are not deductedfrom their cost of purchase. They are in-cluded in long-term provisions and areutilised in accordance with the depreci-ation accounted for.

The difference between the sales valueand carrying amount of the disposed

6.7.1 Consolidatedbalance sheet

6.7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Movement of intangible fixed assets in 2002

in SIT 000 COST OF PURCHASE TotalBalance at the beginning of the year 5,553,817Increase 1,086,678Decrease (225,379)Revaluation (372,038)Balance at the end of the year 6,043,078

ADJUSTMENT FOR VALUEBalance at the beginning of the year 2,541,790Increase 0Decrease (39,168)Amortisation 358,083Amortisationof revaluation 0Balance at the end of the year 2,860,705Net carrying amount at the beginning of the year 3,012,027Net carrying amount at the end of the year 3,182,373

87tangible fixed asset is carried underrevaluatory operating revenues if thenet sales value exceeds the carryingamount, or under revaluatory operatingexpenses if the carrying amount ex-ceeds the net sales value.

Subsequent expenditure relating to atangible fixed asset increases its pur-chase value if it increases its future be-nefits compared to those assessedoriginally; in such case, the expenditureenabling the prolongation of the usefullife of a tangible fixed asset first re-

duces its accumulated depreciation ac-counted for so far.

Repairs and maintenance of tangible fixedassets are intended to restore or maintainthe future economic benefits that are ex-pected from the originally assessed rate

of performance of an asset. They are rec-ognized as expenses when incurred.

In the section of tangible fixed assetsthe bookkeeping records include spe-cial presentation of costs of purchaseand adjustment for value. In the balance

Movement of tangible fixed assets in 2002Land Buildings Equipment and Advances for Tangible fixed Rearing Total

spare parts, low tangible fixed assets herdvalue assets assets under construction

COST OF PURCHASEBalance at the beginning of the year 11,455,214 287,972,824 429,350,270 1,566,906 28,614,196 385 758,959,795Acquisitions 168,689 18,441,465 15,134,490 2,627,835 10,662,662 0 47,035,141Disposals (58,098) (8,677,226) (2,671,863) (3,134,510) (29,528,549) (385) (44,070,631)Revaluation (29,665) (3,553,279) (1,053,563) 54 0 0 (4,636,453)Balance at the end of the year 11,536,140 294,183,784 440,759,334 1,060,285 9,748,309 0 757,287,852

ADJUSTMENT FOR VALUEBalance at the beginning of the year 161,445,077 306,413,230 27 467,858,334Acquisitions 0 18,491 0 18,491Disposals (8,324,053) (2,843,470) (27) (11,167,550)Amortisation 3,108,158 10,562,878 0 13,671,036Amortisation of revaluation 1,584,759 1,556,734 0 3,141,493Revaluation (635,767) (480,910) 0 (1,116,677)Balance at the end of the year 157,178,174 315,226,953 0 472,405,127

Net carrying amount at the beginning of the year 11,455,214 126,527,747 122,937,040 1,566,906 28,614,196 358 291,101,461Net carrying amount at the end of the year 11,536,140 137,005,610 125,532,381 1,060,285 9,748,309 0 284,882,725

in SIT 000

88 sheet the tangible fixed assets are car-ried at their carrying amount as a dif-ference between the cost of purchaseand adjustment for value.

At the beginning of 2002 the net carryingamount of tangible fixed assets is notcomparable to the data stated in the con-solidated balance sheet for 2001, due tothe fact that new companies were in-cluded in the consolidation in 2002.

The Group has no tangible fixed assetsunder finance lease.

TDR - Metalurgija pledged real estate in atotal value of SIT 280,000,000 for short-term loans and the guarantees issued.

At the end of 2001 the appraisal of non-financial assets was carried out in the com-panies of the electric power energy sys-tem in Slovenia. As of 31 December 2001the majority of companies in the Group har-monised the book values with the ap-praisals. Therefore, there was no reasonfor the revaluation of tangible fixed assetsin these companies. Revaluation was per-formed in TDR - Metalurgija and HTZ.

Both appraisals were conducted byauthorised appraisers in October and De-cember 2002, the appraisal effect wasimpairment of value amounting to SIT

3,519,830,000, and the revaluated bookvalue amounted to SIT 3,336,612,000.

Long-term investmentsSIT 7,926,509,000 2.33% of assets

In the process of consolidation SIT170,167,752 worth of long-term invest-

ments were allotted to entities in theGroup.

At the beginning of 2002 the net carry-ing amount of long-term investmentsis not comparable to the data statedin the consolidated balance sheet for2001, due to the fact that new compa-nies were included in the consolidationin 2002.

InventoriesSIT 6,330,481,000 1.86% of assets

Inventories of spare parts, material formaintenance and fuel represent thehighest value.

Receivables SIT 14,460,166,000 4.26% of assets

The parent company holds 73% of totalreceivables, PV follows with 13% andTDR - Metalurgija with 8%, receivablesof other Group enterprises amount to6% in total.

The majority of receivables are not matureyet; the share of receivables due is 4%.

Short-term receivables among theGroup enterprises amounting to SIT9,266,227,000 were eliminated in theprocess of consolidation.

Short-term investments SIT 20,458,027,000 6.02% of assets

On initial recognition, a short-term in-vestment in equity securities of othercompanies and debt securities of othercompanies is carried at cost which iseither equal to the paid amount of cashor cash equivalents, increased by thecosts directly attributable to the invest-ment.

On initial recognition, a short-terminvestment in a short-term loan grantedis measured by the paid amount that isthe principal of the loan.

Short-term investments include alsolong-term investments that will be duefor payment within a year from the ba-lance sheet date.

Short-term investments expressed inforeign currency are translated intodomestic currency on the date of theiraccrual at the middle exchange rate ofthe Bank of Slovenia ruling on the re-spective date. If the exchange ratechanges subsequently, the amount ofthe short-term investment is correct-ed or revalued adequately and ex-change losses / gains increase regularfinancial revenues or expenses.

Movement of long-term investments in 2002

in SIT 000 COST OF PURCHASE TotalBalance at the beginning of the year 2,236,686Increase 6,887,841Decrease (1,157,669)Revaluation 10,172Balance at the end of the year 7,977,030

ADJUSTMENT FOR VALUEBalance at the beginning of the year 40,501Increase 10,020Decrease 0Amortisation 0Amortisationof revaluation 0Balance at the end of the year 50,521

Net carrying amount at the beginning of the year 2,196,185Net carrying amountat the end of the year 7,926,509

89Short-term investments are not revalueddue to increase in their value. But they arerevalued due to impairment, if the provenfair value is lower than the book value.

The majority of short-term investmentsof the Group present deposits in impor-tant Slovene banks and therefore expo-sure to risks is minimal.

A short-term loan amounting to SIT669,434,000 was eliminated in theprocess of consolidation.

CashSIT 2,295,888,000 0.68% of assets

Cash of the Group includes cash on hand,deposits on transaction accounts and de-posits on call with commercial banks.

Deferred costs and accrued revenues SIT 93,497,000 0.03% of assets

Deferred costs and accrued revenuesinclude short-term deferred costs thatdo not have any influence on the prof-it/loss.

Off-balance-sheet records SIT 23,653,726,000

The major part represents the record oftax loss from previous years in one ofthe Group enterprises.

Capital SIT 235,475,484,000 69.33% of liabilities

In the process of consolidation the capi-tal of subsidiaries was eliminated in atotal of SIT 203,361,592,000. The con-solidated balance sheet thus presentsonly the capital of the parent companydisclosed in its financial statements aswell as the capital of minority ownersamounting to SIT 53,540,555,000.

Specific equity revaluation adjustmentderives from the increases in long-terminvestments of subsidiaries based onthe share in profit of these companiesand was not eliminated in the processof consolidation.

As of 1 January 2002 an adjustment forthe value of net loss for the financialyear was made. It is presented in theconsolidated balance sheet for 2001,and it was made in relation to the lossof TE© from 2001 amounting to SIT26,774,688,000. Negative goodwillamong long-term provisions was de-creased by the same amount; it wasmade for covering of future losses insubsidiaries.

Long-term provisions SIT 39,685,033,000 11.69% of liabilities

Total long-term provisions are included inother provisions of which negative good-will of SIT 32,544,406,000 was made inthe process of consolidation.

Negative goodwill appears in the con-solidation, when an investment of theparent company in the capital share of asubsidiary is lower than the value of re-cognised assets and liabilities and whenthe subsidiary still operates as an inde-pendent legal person. Negative good-will is drawn for covering of future lossin subsidiaries.

It has already been mentioned in thedisclosure of capital that negativegoodwill presented in the consolidatedbalance sheet for 2001 amounting toSIT 59,458,421,000 was decreased bySIT 26,774,688,000 as of 1 January 2002.After the adjustment made the balanceof negative goodwill amounted to SIT32,683,733,000. But it appeared againin TDR - Metalurgija in the consolida-tion of 2002; TDR was included in theconsolidation of 2002 for the first time.The negative goodwill was drawn forcovering of loss of subsidiaries in thecurrent year.Capital of the Group as of 31 December 2002

in SIT 000 Share capital 1,156,217Capital reserves 166,070,474Revenue reserves (other revenue reserves) 6,142,502Net profit / loss 6,142,502General equity revaluation adjustment 27Specific equity revaluation adjustment 2,423,207Capital of minority owners 53,540,555

Movement of negative goodwill in 2002in SIT 000

Balance at the beginning of the year 32,683,733Increase 3,497,124Decrease (3,636,451)Balance at the end of the year 32,544.406

90 Other long-term provisions are long-term provisions relating to long-termdeferred revenues and long-term provi-sions relating to long-term accruedcosts or expenses. The majority of pro-visions were made in the previousyears. In 2002 the provisions weredrawn for covering of depreciation oftangible fixed assets purchased by agovernment grant and for the coveringof loss due to impairment of tangiblefixed assets.

Long-term liabilities SIT 40,631,573,000 11.96% of liabilities

Long-term bank loans represent al-most total long-term liabilities. Theloans were insured by drafts, accept-ance orders, guarantees or warranty ofthe Republic of Slovenia.

Loans were taken from domestic andforeign banks. Interest rates depend onthe kind of a loan, maturity and the timeof loan taking. They include also loansthat are due to be paid in a period,longer than five years, latest to 30 June2013. Detailed presentations of long-term liabilities are given in annualreports of individual companies.

Total liabilities arising from long-termloans are settled regularly.

Short-term liabilities SIT 23,240,122,000 6.84% of liabilities

The major share (42%) of short-termliabilities includes bank loans and thelargest share belongs to short-term por-tions of long-term loans.

The second largest share (39%) repre-sents supplier liabilities, followed by pay-ables to the state and employees(19%).

Operating and financial liabilities amongGroup enterprises amounting to SIT9,286,227,000 were eliminated in theconsolidation process.

Accrued costs and deferred revenues SIT 597,454,000 0.18% of liabilities

Accrued costs (expenses) and deferredrevenues include short-term accrued ex-penses and short-term deferred reve-nues.

General The information about the basis for thepreparation of the consolidated incomestatement and about special accountingpolicies, selected and applied in impor-tant business operations and other tran-sactions, are presented in disclosure ofindividual important revenues and ex-penses.

The consolidated income statementhas been prepared in accordance withthe version I in SAS 25.

In accordance with the interpretation 1to the SAS 25 issued by the SlovenianInstitute of Auditors the data for the pre-vious accounting period have not beentranslated in the preparation of the in-come statement according to the newSlovenian Accounting Standards, butreasonably recorded in correspondingitems of revenues and expenses andprofit/loss of the statement currentlyvalid. Thereby the Group took into ac-count prudence and the profits/lossesremained unchanged.

In accordance with the explanation 2 tothe SAS 25 issued by the Slovenian

Institute of Auditors expenses or liabili-ties for the corporate income tax areascertained from the joint base (fromordinary and extraordinary activities) inaccordance with the provisions, tax onprofit from ordinary and extraordinaryactivities is not presented separately inthe income statement, but is presentedas an accumulated item 19 of the in-come statement.

RevenuesSIT 107,451,408,000

Revenues are recognised if during theaccounting period the increase in eco-nomic benefits is related to the increaseof asset or to the decrease of liability andif the relevant increase can be measuredwithout fail.

Revenues are recognised when no sig-nificant uncertainty as to their collectabil-ity exists.

Revenues denote operating, financialand extraordinary revenues.

Operating revenuesSIT 100,891,279,000 93.89% of revenues

Sale of electric energy represents 89%of total operating revenues of the Group.

6.7.2 Consolidated income statement

91Operating revenues among theGroup enterprises amounting to SIT69,636,658,000 were eliminated inthe consolidation process.

Financial revenues SIT 2,138,275,000 1.99% of revenues

Financial revenues of the Group are re-venues from the sale of investments,revenues from interest on investmentsand revenues from revaluation of in-vestments and receivables.

Financial revenues among the Groupenterprises amounting to SIT649,459,000 were eliminated in theconsolidation process.

Extraordinary revenues SIT 4,421,854,000 4.12% of revenues

Extraordinary revenues from the draw-ing of negative goodwill for covering ofcurrent loss of subsidiaries amountingto SIT 3,636,451,000 were presented inthe consolidation process, other extra-ordinary revenues mostly refer to thecompensation received.

ExpensesSIT 93,057,737,000

Expenses are recognised if during the

accounting period the decrease in eco-nomic benefits is related to the de-crease of asset or to the increase of lia-bility and if the relevant decrease can bemeasured without fail.

Expenses denote operating, financialand extraordinary expenses.

Operating expenses SIT 87,289,872,000 93,80% of revenues

Costs of goods, material and servicesmainly include:• Cost of purchase of electricity • Cost of material, spare parts and

services for the maintenance oftangible fixed assets

• Cost of fuel and lubricants.

Labour costs include cost of wages andsalaries, social security contributions,cost of additional pension insurance and

other labour cost. The Group formed noshort-term provisions related to therevaluation of labour cost because of theprofit/loss.

The majority of write-offs of value repre-sent amortisation/depreciation of intan-gible and tangible fixed assets amount-ing to SIT 17,170,486,000; a minor sharerepresents revaluatory operating expen-ses because of appraisals.

The Group applies straight-line depreci-ation. Assets are amortised/depreciatedindividually on the basis of the foreseenuseful life.

In case of tangible fixed assets pur-chased by government grants thedepreciation is accounted for separatelyand long-term provisions are drawn forits amount and adequate revenues arepresented.

Similar depreciation rates are used forsimilar tangible fixed assets in theGroup; uniformity of production equip-ment is unreal, since the activities ofthe companies are very different.

Other operating expenses mainly inclu-de contribution for the use of buildingland, water-related contribution, expens-es for protection of the environment andlicence contribution to the state.

Operating expenses among the Groupenterprises amounting to SIT69,636,658,000 were excluded in theconsolidation process.

Financial expenses SIT 5,464,415,000 5.87% of revenues

Financial expenses of the Group areexpenses for interest on short- andlong-term liabilities and expenses forthe revaluation of these liabilities.

Financial expenses among the Groupenterprises amounting to SIT 25,000 wereexcluded in the consolidation process.

Extraordinary expenses SIT 303,450,000 0.33% of revenues

Financial expenses of the Group areexpenses for interest on short- and

Amortisation/depreciation rates of intangible and tangible fixed assets of the Group

Buildings 1 - 8%Production equipment 1 -15%Other equipment 5 - 33.33%Hardware 33.33 - 50%Intangible fixed assets 20 - 33.33%

92 long-term liabilities and expenses forthe revaluation of these liabilities.

Financial expenses among the Groupenterprises amounting to SIT 25,000were excluded in the consolidation pro-cess.

Tax on profit SIT 4,665,000

Three companies in the Group present-ed liabilities for tax on profit for 2002and other companies did not establishany basis for its payment.

Net profit SIT 14,389,006,000

Net profit of the Group presents net prof-it of the parent company amounting toSIT 12,285,004,000 and shares of theparent company in the net profit of sub-sidiaries amounting to SIT 2,423,207,000.It was decreased by the consolidatedprofit/loss of other (minority) owners inthe Group amounting to SIT 319,205,000.

The share in net profit of the sub-sidiaries was not eliminated in the con-solidation process, since the parentcompany presents these shares amongthe specific revaluation adjustments inthe balance sheet.

Segments The Group breaks down the opera-tions into two geographical segments.Net sales revenues are divided into:

• Domestic market SIT 72,398,586,000

• Foreign market SIT 26,042,119,000

The Group breaks down the opera-tions into two business segments.Net sales revenues are divided into:

• Sale of electric energy SIT 87,591,168,000

• Other SIT 10,849,537,000

GeneralThe consolidated cash flow statementhas been prepared by applying the indi-rect method (version II in the SAS 26) onthe basis of the data from the consolidatedbalance sheet as of 31 December 2002,consolidated balance sheet as of 31December 2001 the consolidated incomestatement for the year 2002, as well asthe additional data required for the adjust-ment of inflows and outflows and for thesuitable itemisation of significant items.

The increase in capital presented amongthe inflows from financing activityamounting to SIT 2,154,401,000 doesnot denote any cash flow, but is a con-sequence of other companies joining theGroup and of an increase in capital of theparent company by means of an invest-ment in kind.

The Group did not prepare the consolidat-ed cash flow statement for the year 2001,since it prepared consolidated financialstatements for the first time and had notadequate basis for its preparation in theconsolidated balance sheet of the pre-vious year. Therefore the Group does notpresent data for the previous year in con-solidated cash flow statement.

The consolidated statement of changesin equity presents changes in the ele-ments of capital in the financial year.

The consolidated statement ofchanges in equity was prepared in ac-cordance with version II in SRS 27.

All items in the statement of changesin equity, except capital of minorityowners, are presented in the financialstatements of the parent company.Participation in profit/loss of the Groupenterprises and changes in ratios ofownership shares influence the changein equity of minority owners in 2002.

6.7.3 Consolidated cashflow statement

6.7.4 Consolidated statement of changes in equity

93

Income of members of ManagementBoards and administration and personsemployed on the basis of individual con-tracts include:• Gross income contained in the notice

about the income tax return• Jubilee awards and termination bene-

fits• Premiums for optional additional pen-

sion insurance relating to the portionpaid by the companies in the Group

Income of members of the SupervisoryBoard include:• Gross meeting fees and travel expen-

ses

In 2002 no advances, loans and guaran-tees were granted to these groups ofpersons.

Receivables from loans due from individual groups of person in SIT 000

Members of Management Boards and administration 551Other persons employed on the basis of individual contracts 20,138Members of Supervisory Boards 1,329

6.7.5 Other disclosures Cost by functional group in SIT 000

Cost of goods sold 11,667,935Production costs of quantities sold 51,903,054Cost of sales 6,308,288Cost of general and administrative activities (purchase, etc.) 16,149,893

Income of individual groups of persons in SIT 000

Members of Management Boards and administration 308,745Other persons employed on the basis of individual contracts 853,301Members of Supervisory Boards 21,003

CONTACTS

96 List of companiesin the Group with contacts

Holding Slovenske elektrarne d.o.o.CEO: Drago Fabijan M. Sc.Address: Cesta v Mestni log 88a, 1000 Ljubljana, SloveniaTelephone (central): +386 1 42 05 700Telephone (CEO secretary’s office):+386 1 42 05 700Fax: +386 1 42 05 740E-mail: hse@hse.si; info@hse.siURL: www.hse.si

Dravske elektrarne Maribor d.o.o.CEO: Danilo ©efAddress: Obreæna 170, 2000 Maribor, SloveniaTelephone (central): +386 2 30 05 000Telephone (CEO secretary’s office):+386 2 30 05 755Fax: +386 2 30 05 765E-mail: dem@dem.si URL: www.dem.si

Savske elektrarne Ljubljana d.o.o.CEO: Drago PolakAddress: Gorenjska cesta 46, 1215 Medvode, SloveniaTelephone (central): +386 1 474 9 274Telephone (CEO secretary’s office):+386 1 474 9 201Fax: +386 1 474 92 02E-mail: webinfo@savske-el.si URL: www.savske-el.si

Soπke elektrarne Nova Gorica d.o.o.CEO: Vladimir GabrijelËiËAddress: ErjavËeva cesta 20, 5000 Nova Gorica, SloveniaTelephone (central): +386 5 339 63 10Telephone (CEO secretary’s office):+386 5 339 63 64Fax: +386 5 339 63 15E-mail: seng@seng.si URL: www.seng.si

Termoelektrarna Brestanica d.o.o.CEO: Bogdan BarbiËAddress: Cesta prvih borcev 18, 8280 Brestanica, SloveniaTelephone (central): +386 7 48 16 112Telephone (CEO secretary’s office):+386 7 48 16 125Fax: +386 7 49 22 262E-mail: jozica.abram@teb.si URL: www.teb.si

Termoelektrarna ©oπtanj d.o.o.CEO: Uroπ Rotnik, M. Sc.Address: Cesta Lole Ribarja 18, 3325 ©oπtanj, SloveniaTelephone (central): +386 3 899 3 100Telephone (CEO secretary’s office):+386 3 899 3 200Fax: +386 3 588 2 162E-mail: info@te-sostanj.si URL: www.te-sostanj.si

CONTACTS

Management Board

Drago Fabijan, M. Sc.General Manager and President of theManagement BoardTelephone: +386 1 42 05 700Fax: +386 1 42 05 740E-mail: drago.fabijan@hse.si

Milan Medved, Ph. D.General Manager, Business Operationsand Member of the ManagementBoardTelephone: +386 1 42 05 700Fax: +386 1 42 05 740E-mail: milan.medved@hse.si

Ladislav TomπiËGeneral Manager, Technical Depart-ment and Member of the ManagementBoardTelephone: +386 2 30 05 782Fax: +386 2 30 05 879E-mail: ladislav.tomsic@hse.si

Executive Managers

Tomaæ ©tokelj, Ph. D.Executive Manager, MarketingTelephone: +386 1 42 05 700Fax: +386 1 42 05 740E-mail: tomaz.stokelj@hse.si

Boris MezgecExecutive Manager, ProductionTelephone: +386 2 30 05 870Fax: +386 2 30 05 879E-mail: boris.mezgec@hse.si

Irena StareExecutive Manager, FinanceTelephone: +386 1 42 05 700Fax: +386 1 42 05 740E-mail: irena.stare@hse.si

97Premogovnik Velenje d.d.CEO: Evgen DervariË, Ph. D.Address: Partizanska 78, 3320 Velenje,SloveniaTelephone (central): +386 3 899 6 100Telephone (CEO secretary’s office):+386 3 898 2 311Fax: +386 3 587 5007E-mail: info@rlv.si URL: www.rlv.si

HSE Invest d.o.o.CEO: Vili VindiπAddress: Obreæna 170a, 2000 Maribor,SloveniaTelephone (central): +386 2 300 5 892Telephone (CEO secretary’s office):+386 2 300 5 892Fax: +386 2 300 5 899E-mail: vili.vindis@hse-invest.si

HSE - IIP d.o.o.CEO: Vojko Sotoπek, M. Sc.Address: Trg svobode 9, 8290 Sevnica,SloveniaTelephone (central): +386 7 81 63 100Telephone (CEO secretary’s office):+386 7 81 63 100Fax: +386 7 81 63 110

Tovarna duπika Ruπe - Metalurgija d.d.CEO: Miran KunstAddress: Tovarniπka cesta 51, 2342 Ruπe, SloveniaTelephone (central): (02) 661 1081Telephone (CEO secretary’s office): (02) 661 4301Fax: (02) 662 89 01E-mail: info@tdr-metalurgija.si URL: www.tdr-metalurgija.si

Acronym MeaningBS Bank of SloveniaDEM Dravske elektrarne Maribor d.o.o.EES Electricity SystemEEX European Energy ExchangeELES Elektro-Slovenija d.o.o.EZ Energy ActHSE Holding Slovenske elektrarne d.o.o.MOPE Ministry of the Environment, Spatial Planning and EnergyNEK Nuklearna elektrarna Krπko d.o.o.Nox Nitrogen oxidesPGD Construction works projectPV Premogovnik Velenje d.d.PZI Project for ExecutionPZR Tender projectRECS Renewable Energy Certificate SystemSEL Savske elektrarne Ljubljana, d.o.o.SENG Soπke elektrarne Nova Gorica d.o.o.SRS Slovene Accounting StandardsTDR - Metalurgija Tovarna duπika Ruπe - Metalurgija d.d.TEB Termoelektrarna Brestanica d.o.o.TE© Termoelektrarna ©oπtanj d.o.o.UPO Operator of the power transmission systemZGD Corporate Law

Acronyms used in the Annual Report

Annual Report 2002

HSE d.o.o.,

Cesta v Mestni log 88a

1000 Ljubljana, Slovenia

Telephone: +386 1 42 057 00

Fax: +386 1 42 057 40

www.hse.si

E-mail: info@hse.si; hse@hse.si

Text: HSE d.o.o.

Production: Pristop d.o.o.

Translation: Primoæ Pusar

Printed by: Gorenjski tisk d.d.

Number of copies printed: 200 copies

Photography by: Borut Krajnc

This document is published in accordance with Paragraph 8, Article 55 of the Corporate Law - F - novel

The Slovenian version of this annual report is authoritative.

The Power of Energy