2 0 1 1 - DEM · The renovation of the second HPP Zlatoličje generating unit started in July. Only work directly related to the generating unit 1 will be performed on it since all

A N N U A L R E P O R T

2 0 1 1

2 Audited annual report 2011

CONTENTS

01 I N T R O D U C T I O N 4

1.1 FOREWORD BY THE MANAGING DIRECTOR 5

1.2 REPORT OF THE SUPERVISORY BOARD 6

1.3 OPERATING HIGHLIGHTS IN 2011 8

1.4 OVERVIEW OF SIGNIFICANT DEVELOPMENTS IN 2011 11

02 B U S I N E S S R E P O R T 16

2.1 PRESENTATION OF THE COMPANY 17 COMPANY PROFILE 17

OWNERSHIP STRUCTURE OF THE COMPANY 18

COMPANY BODIES AND REPRESENTATIVES 18

CORPORATE GOVERNANCE STATEMENT 19

TRADE UNION AND WORKERS’ COUNCIL 20

ORGANISATIONAL STRUCTURE OF THE COMPANY WITH THE ORGANISATIONAL CHART 20

COMPANY’S BUSINESS ACTIVITIES 21

OWNERSHIP LINKS WITH OTHER COMPANIES 22

A BRIEF HISTORY ON THE CONSTRUCTION OF THE DRAVA RIVER POWER PLANTS 23

2.2 COMPANY’S BUSINESS POLICY 24 MISSION 24

VISION 25

STRATEGIC GOALS 25

2.3 ECONOMIC CLIMATE IN 2011 26

2.4 PURCHASING AND SUPPLIERS 27

2.5 SALES AND CUSTOMERS 28

2.6 PRODUCTION AND OPERATION 28 BASIC INFORMATION ON PP FACILITIES 28

PRODUCTION IN 2011 29

PRODUCTION SHARES OF INDIVIDUAL HPPs 30

WATER FLOW AND HIGH WATER LEVELS 31

FAILURES AND MAJOR OUTAGES 32

PRODUCTION LOSSES IN 2011 33

2.7 MAINTENANCE 34

2.8 INVESTMENTS 35 DESCRIPTION OF INDIVIDUAL MAJOR INVESTMENTS 36

2.9 RECRUITMENT AND STAFF 40 EMPLOYEES 40

EDUCATIONAL STRUCTURE OF EMPLOYEES 40

EMPLOYEE MOTIVATION 41

SCHOLARSHIPS 42

OCCUPATIONAL HEALTH AND SAFETY AND FIRE SAFETY 42

2.10 ENVIRONMENT AND ECOLOGY 43 ENVIRONMENTAL RESPONSIBILITY 43

SUSTAINABLE DEVELOPMENT 44

ENVIRONMENTAL PROJECTS 44

2.11 ANALYSIS OF BUSINESS PERFORMANCE 47 FINANCIAL OPERATIONS 47 SELECTED FINANCIAL DATA OF THE COMPANY 48

2.12 RISK MANAGEMENT 50

3 Audited Annual Report 2011

2.13 COMMUNICATION AND PUBLIC RELATIONS 52

2.14 RESEARCH AND DEVELOPMENT 53

2.15 PLANS FOR THE FUTURE 53

2.16 IMPORTANT EVENTS AFTER THE END OF THE PERIOD 54

03 F I N A N C I A L R E P O R T 55

3.1 AUDITOR'S REPORT 56

3.2 INTRODUCTORY NOTES TO FINANCIAL STATEMENTS 58

3.3 STATEMENT BY THE MANAGING DIRECTOR 59

3.4 FINANCIAL STATEMENTS 60 STATEMENT OF FINANCIAL POSITION 60

INCOME STATEMENT 61

STATEMENT OF OTHER COMPREHENSIVE INCOME 61

STATEMENT OF CHANGES IN EQUITY 62

CASH FLOW STATEMENT 63

3.5 NOTES TO THE FINANCIAL STATEMENTS 64 REPORTING COMPANY 64

BASIS FOR PREPARATION 64

BASIS OF MEASUREMENT 65

CURRENCY REPORTINGS 66

USE OF ESTIMATES AND JUDGEMENTS 66

BRANCH AND REPRESENTATION OFFICES 66

SIGNIFICANT ACCOUNTING POLICIES 66

FAIR VALUE DETERMINATION 74

FINANCIAL RISK MANAGEMENT 74

NOTES TO THE FINANCIAL STATEMENTS 75

04 A P P E N D I C E S 94

4.1 CONTACT INFORMATION 95

4.2 LIST OF ABBREVIATIONS 96

01 I N T R O D U C T I O N

FOREWORD BY THE MANAGING DIRECTOR

REPORT OF THE SUPERVISORY BOARD

OPERATING HIGHLIGHTS IN 2011

OVERVIEW OF SIGNIFICANT DEVELOPMENTS IN 2011


1.1 FOREWORD BY THE MANAGING DIRECTOR


1.2 REPORT OF THE SUPERVISORY BOARD



1.3 OPERATING HIGHLIGHTS IN 2011 In 2011, the company Dravske elektrarne Maribor d.o.o. (hereinafter: “DEM”) operated in accordance with

the 2011 Business Plan, which was approved by the Supervisory Board on 18 March 2011.

The table below presenting the essential data of the company shows that our operations in 2011 were again successful. DEM continued its outlined course of action and achieved most of its planned objectives, some of which were even exceeded.

Compared to 2010, DEM achieved:

a 19.12 % lower net profit;

6.01 % lower total revenues, amounting to € 72,088,287;

2.57 % lower expenses, totalling € 58,963,168;

a 19.31 % lower EBIT;

1.66 % lower labour costs;

14.54 % lower electricity production;

a 2.34 % increase in assets which totalled € 555,414,448 as at 31.12.2011 and

a 1.99 % increase in equity which totalled € 538,912,014 as at 31.12.2011. NET SALES REVENUE IN €


NET PROFIT IN €

TOTAL REVENUE IN €

EXPENSES IN €

LABOUR COSTS IN €

EBIT IN €


ASSETS IN €

EQUITY IN €

ELECTRICITY PRODUCTION IN GWh

NUMBER OF EMPLOYEES AT THE END OF THE PERIOD


1.4 OVERVIEW OF SIGNIFICANT DEVELOPMENTS IN 2011

JANUARY

Visit by the Government of the Republic of Slovenia

On 26 January 2011, Borut Pahor, the Prime Minister of the

Republic of Slovenia, and Darja Radič, M.Sc., the Minister of

the Economy, visited the company together with their

delegations. They were received by the HSE Managing

Director Matjaž Janežič, M.Sc., and the Managing Director of

DEM Viljem Pozeb, M.Sc. They were introduced to key

development projects of DEM: pumped-storage power plant Kozjak and the planned construction of

hydropower plants on the Mura River.

FEBRUARY

Issue of NSP Decree for PSP Kozjak

On 17 February 2011, the government of the Republic of Slovenia adopted a Decree on National Spatial

Plan (NSP) for pumped-storage power plant on the Drava River (PSP Kozjak) and power transmission line

between PSP and DTS Maribor. Thus, it spatially planned the facility and issued the permission for the

beginning of investment as the Decree enables the acquisition of necessary permits and approvals.

Finished overhauls and inspections of generating units on the Drava River

In the context of regular maintenance, annual overhauls and audits were concluded at the operating

generating units on the Drava River. They included control over power plant operations, planning necessary

improvements by replacing equipment and performing modification, purchase of material and timely

agreements with external contractors. Fifteen regular audits and six regular overhauls were performed as

well as all preventive maintenances of plants and some improvements, replacements and upgrades of

mechanical and electrical equipment.

MARCH

Approval of the SB to the company's 2011 Business Plan

On 18 March 2011, the company’s Supervisory Board approved the DEM’s Business Plan for 2011.

Elections to DEM’s Workers’ Council

At the end of March, elections to the Workers’ Council were held at DEM. Twenty candidates ran for nine

positions. They were nominated at the Workers’ Council or in the group of employees.

APRIL

The company's 2011 Business Plan was also approved by the General Meeting

On 22 April 2011, the company’s General Meeting approved DEM’s Business Plan for 2011.


PDI gets a place in the Project Council for the Preparation of Mura River Global Strategy

At the beginning of April, a special body called the Project Council was established to prepare a

comprehensive solution and global strategy of the Mura River.

This Council is coordinated by the major of Gornja Radgona Anton Kampuš and it comprises majors of

municipalities located on the bank of the Mura River and representatives of the Ministry of the Environment

and Spatial Planning of the Republic of Slovenia, Environmental Agency of the Republic of Slovenia, Ministry

for Agriculture, Forestry and Food of the Republic of Slovenia and Pomurje Development Institute Murska

Sobota (PDI).

MAY

Finished reconstruction of the switchyard at HPP Dravograd

In May, DEM successfully concluded the

reconstruction of a 110 kV switchyard at HPP

Dravograd. After final construction work and last

measurements performed, the technical inspection of

reconstructed switchyard was conducted, thereby

having concluded a € 2.1 million investment. With the

switchyard reconstruction one of key conditions is fulfilled in order to enable reliable operations of power

plant and electricity power supply to the users in Koroška region.

Establishment of the company MHE Lobnica

In the last week of May, DEM established a joint company

MHE Lobnica d.o.o. pursuant to the approval by the

Supervisory Board and the company Hmezad Jeklo d.o.o.,

Ruše. In the new company DEM holds a 65 % stake, while

the company Hmezad Jeklo d.o.o. hold a 35 % stake. MHE

Lobnica will produce approximately 600 MWh of electricity

per year.

JUNE

Sports event of the HSE Group

On 4 June 2011, a sports event of the HSE Group took place at Kodeljevo in Ljubljana. The event was

organised by the sports association of the HSE Group. Eight companies of the HSE Group competed in ten

sports disciplines. DEM’s athletes were successful as they took the third place in the group.

DEM day

On 10 June 2011, the traditional annual meeting of the company’s employees, the so-called “DEM Day”,

was held at the Limbuško nabrežje boathouse. At the gathering, jubilee awards were distributed for the time

of service in the company.

One day before (on 9 June), a gathering was organised for the now retired workers of the company.


Successful performance of management systems recertification

The integrated management systems assessment, which was performed in DEM for the first time last year,

was also organised this year. This year’s recertification took place from 22 to 24 June 2011. It was

organised by four external auditors from the company Bureau Veritas in Ljubljana. No inconsistency was

identified during the assessment, while the committee of DEM’s directors was responsible for the

performance of all proposed measures. The committee will monitor and control the measures on regular

basis.

JULY

Beginning of generating unit 1 renovation at HPP Zlatoličje

The renovation of the second HPP Zlatoličje generating unit started in July. Only work directly related to the

generating unit 1 will be performed on it since all the remaining work was already performed during the

renovation of generating unit 2. The work on this generating unit shall be concluded at the end of May 2012,

while at the end of June 2012 the generating unit should be included in the energy system. The renovation

will increase the operational reliability of another power plant in the DEM chain.

Establishment of Risk Management Committee of the company DEM d.o.o.

On 15 July 2011, a founding meeting of DEM’s Risk Management Committee took place (hereinafter: the

“Committee”). The Committee was appointed pursuant to the decision of the company’s Managing Director

as at 16 June 2011, while its main task was to establish a comprehensive system of risk controlling and

management within the company. The basic purpose of the Committee is to assure central determination

and risk management in the company in a structured, consistent and coordinated manner and thus provide

to the management and owner quality bases for management and governing of the company with the aim to

achieve goals planned.

AUGUST

Beginning of construction of a new part of office building

After prior reconciliation with the DEM’s Supervisory Board and numerous preparation procedures, all the

conditions for the beginning of construction of the new part of office building were met on 2 August 2011.

The selected contractor is the company Pomgrad, which, in accordance with the time schedule, predicts the

end of all work in May 2012. The construction of the new business office is necessary particularly due to the

envisaged central management of DEM and related spatial requirements as well as additional HR integration

of the companies HSE and HSE Invest.

MHE Markovci

At the beginning of August, the construction of MHE Markovci began. Soon after, the business partner

Konstruktor terminated its work due to business issues. At the end of August, the construction was continued

by the company Granit Slovenska Bistrica. The work is progressing after the constructor was replaced.

However, it will not be possible to make-up for the delay of approximately three months. The end of work or

beginning of MHE Markovci operations, which will produce 5412 MWh of electricity on the annual level, is

planned in August 2012.


SEPTEMBER

Launch of the solar power plant in Zlatoličje

In September, a new power plant that exploits solar energy was built

in addition to ten hydropower plants in Zlatoličje. The power plant

was named “Sončni park Zlatoličje”. The plant is placed on the

rooftop of the powerhouse. Its installed capacity amounts to

68.4 kWp by which it will annually produce approximately 75 MWh of

electricity. The project is worth 320,000. In the future, the company

plans to further upgrade the solar system in Zlatoličje. With additional solar modules, the company wants to

increase the annual production of electricity to 890 mWh using the solar power.

OCTOBER

Beginning of MHE Ruše construction

At the end of May, the companies DEM and Hmezad Jeklo Ruše established a joint company MHE Lobnica.

In October, the company acquired the working permission and as early as at 3 September 2011 officially

began constructing the new energy facility on the Lobnica River called small HPP Ruše. The work and

equipment supply are performed in accordance with the time schedule. It is envisaged that the work will be

finished by the middle of February 2012.

NOVEMBER

Solar power plant Formin

At the end of November, the construction of the second solar power plant DEM began at HPP Formin, which

was named Solar power plant Formin (SPP Formin). Its total output amounts to 112 kWp and it will be placed

on the rooftop of the powerhouse and jutting roof. The total projected annual production of electricity

amounts to 119,390 kWh.

Celebrating the 60th anniversary

In November, DEM celebrated its 60th anniversary of the

company’s establishment. For this purpose, a ceremony took place

at SNG Maribor, at which the extensive company’s history was

presented in an extraordinary manner under the guidance of the

artist Jure Ivanušič. The cultural programme was followed by

informal meeting with a banquet. The anniversary was

commemorated by DEM’s pensioners at its special meeting at the Limburško nabrežje boathouse. On this

occasion, the pensioners also presented a new film and a book about inhabitants of the Drava riverbank.

DECEMBER

DEM acquired the “Family Friendly Company” certificate

After DEM's management, Ekvilib Institute and their Audit Committee had approved that DEM would obtain a

“Family Friendly Company” certificate on 25 November 2011.


The company officially obtained the certificate at the ceremony held on 8 December 2011. Thus, the

company confirmed special measures, which it had adopted in

relation to working hours, informing and communication policy,

management skills, structure of payment and bonuses for

achievements and services provided to families. Measures

prescribed by the certificate are thoroughly presented to DEM’s

employees in a special booklet.

Traditional donation to Pomurje Educational Foundation (PEF)

In December, Pomurje Development Institute (PDI) left a mark on its fourth year of operations with a

traditional humanitarian gesture. Even this time, Pomurje Development Institute (PDI) and its founder DEM

granted a donation in the amount of EUR 1.500 to Pomurje Educational Foundation (PEF). The

organisations supported students of Pomurje region with the donation and enabled them “New Year’s

scholarships” programme, as referred to by PEF.

02 B U S I N E S S R E P O R T

PRESENTATION OF THE COMPANY

PURCHASING, SALES AND PRODUCTION

MAINTENANCE, INVESTMENTS, HUMAN RESOURCES AND THE ENVIRONMENT

ANALYSIS OF BUSINESS PERFORMANCE AND FUTURE PLANS


2.1 PRESENTATION OF THE COMPANY DEM is a limited liability company entered into the Companies register of the Maribor District Court under the entry no. 1/00278-00. The company has no subsidiaries.

COMPANY PROFILE

DEM GENERATES ELECTRICITY BY HARVESTING THE ENERGY OF WATER, OR HYDRO ENERGY.

WATER IS ONE OF THE OLDEST ENERGY RESOURCES MAN HAS LEARNED TO EXPLOIT.

IT IS ALSO THE MOST IMPORTANT RENEWABLE ENERGY SOURCE. AS MUCH AS 21.6 % OF ELECTRICITY

PRODUCED AROUND THE WORLD IS PRODUCED BY HARVESTING THE ENERGY OF WATER. THE CONVERSION OF

HYDROPOWER TO ELECTRICITY TAKES PLACE IN HYDROPOWER PLANTS. WITH THE EXCEPTION OF OLD MILLS

THAT ARE POWERED BY THE WEIGHT OF WATER,

MODERN HYDROPOWER PLANTS TAKE ADVANTAGE OF THE KINETIC ENERGY OF HEAD OF WATER.

Full company name: DRAVSKE ELEKTRARNE MARIBOR d.o.o. Abbreviated name: DEM d.o.o. Legal form: Limited liability company Address: Obrežna ulica 170, 2000 Maribor Telephone: 02 300 50 00 Fax: 02 300 56 55 Companies Register entry no.: 1/278/000 Nominal capital: € 395,011,180 Size: large company Year of establishment: 1918 Bank account: 04515-0000337195 with NKBM Tax number: 96254459 VAT ID: SI96254459 Registration number: 5044286 Website: www.dem.si E – mail: [email protected] Activity code: D35.111 Managing Director: VILJEM POZEB, M.Sc.


With the average annual output accounting for 25 % of total electricity produced in Slovenia and by meeting

37 % of electricity demands during the summer and 20 % in the winter, the power plants on the Drava River

are extremely important for the Slovene electricity system.

The exploitation of the Drava River’s energy potential began in 1918 when the Fala power plant was built.

This was followed by the construction and opening of the Dravograd power plant in 1943, Mariborski otok

power plant in 1948, Vuzenica power plant in 1953, Ožbalt power plant in 1960, Zlatoličje power plant in

1968 and Formin power plant in 1978.

The power plant chain on the Slovene section of the Drava River is made up of eight power plants with the

total rated generating unit power of 585 MW. If the Melje and Ceršak small power plants are taken into

account, the total rated turbine power amounts to 587 MW. Together, the power plant reservoirs hold 78

million m3 of water, of which 12.4 million can be used for electricity production.

With 8 hydropower plants on the Drava River and 2 small hydropower plants, DEM produces as much as

80 % of Slovenia's electricity which conforms with the criteria of renewable energy sources and the

internationally recognised RECS certificate (Renewable Energy Certificates System). High-quality

hydropower is provided in an environment friendly way and in line with the principles of sustainable

development.

Pursuant to its development plans, the company – which is owned by HSE – is also one of the most

important investors in the construction of power plants on the lower Sava River, the biggest development

project in the Slovene electricity sector.

OWNERSHIP STRUCTURE OF THE COMPANY Pursuant to the resolution of the Government of Slovenia on the transfer of the Government’s share to HSE, HSE became DEM’s sole owner on 21 August 2007. As at 31.12.2011, HSE’s share in DEM’s equity was € 395,011,180.

COMPANY BODIES AND REPRESENTATIVES The Articles of Incorporation of a limited liability company Dravske elektrarne Maribor d.o.o. of 22.04.2011, which have been adopted by HSE, the company’s sole member (founder), provide for the following company bodies:

SUPERVISORY BOARD

MANAGING DIRECTOR In accordance with DEM's Articles of Incorporation and applicable legislation, the founder has the function and powers of a General Meeting provided that the legal form of a limited liability company with a single member is observed. SUPERVISORY BOARD

Stanislava Boban – president (appointed: 17.06.2009 – end of term: 30.11.2012);

Djordje Ţebeljan, M.Sc. – member (appointed: 15.02.2011 – end of term: 30.11.2012);


Marjan Kirbiš – member, employee representative (appointed: 18.03.2008 – end of term: until recalled or until the next election in the Workers’ Council).

MANAGING DIRECTOR

The company has a single-member management. The company is represented by the director, subject to limitations. The Managing Director of the company is Viljem Pozeb, M.Sc., who started his term on 30 September 2009. The Managing Director is appointed for a term of 4 years.

CORPORATE GOVERNANCE STATEMENT The company is managed in accordance with applicable legal standards and Articles of Incorporation of the limited liability company Dravske elektrarne Maribor d.o.o. adopted by HSE as the sole member of the company DEM on 22 April 2011.

Under the Articles of Incorporation, the company is managed directly through the founder and the company bodies, i.e. the Supervisory Board and the Managing Director.

The founder independently decides on the following matters: amendments to the Articles of Incorporation; change of registered office following the proposal of the Managing Director; adoption of the company’s development strategy proposed by the Managing Director after an opinion

is received from the Supervisory Board; the business plan of the company; adoption of the annual report if the Supervisory Board does not approve it or if the Managing Director and

the Supervisory Board assign the responsibility of adopting the annual report to the founder; distribution of accumulated profit and offsetting of losses; discharge from liability to the Managing Director and Supervisory Board; purchase, allocation and termination of business interests; measures for increasing or decreasing the capital; changes to the company's nominal capital; changes to the Articles of Association and dissolution of the company; appointment of the company’s auditor; appointment and dismissal of Supervisory Board members; appointment of the company’s procurator and other authorised persons; amount of attendance fees paid to the members of the Supervisory Board and its commissions; adoption of measures for improvement of company’s operations and elimination of identified

shortcomings and irregularities; and other matters in accordance with regulations and Articles of Incorporation.

The founder cannot decide on questions related to the handling of transactions unless the managing director requires so in the event the Supervisory Board disagrees with a certain type of transaction. The founder records its decisions in the register of decisions.

The Supervisory Board is comprised of three members, of which two represent the interests of the founder that appoints and discharges them, while one represents the interests of employees and is appointed and discharged in accordance with the Workers Participation in Management Act. Supervisory Board members are appointed for a term of four years and can be re-appointed when their term of office expires. The Supervisory Board is responsible for the following matters: it monitors the management of the company’s business operations; it reviews the contents of the annual report, examines the proposal for allocation of accumulated profit

and reports, in written form, about the findings of the review to the founder; it approves the annual report or raises objections to it; it gives an opinion on the foundations of the business policy and the development plan of the

company; it approves company business plans; it approves business transactions entered into by the Managing Director in accordance with the

Articles of Incorporation; it proposes to the founder the decisions falling within its area of competence or gives opinions on the

proposals made by the Managing Director in connection with the decisions to be accepted by the founder; it appoints and dismisses the Managing Director;


it concludes a contract of employment with the Managing Director; it adopts the Supervisory Board Rules of Procedure; it may request reports on other issues.

The Supervisory Board can also perform other tasks stipulated by the company’s regulations, internal documents and the founder’s decisions.

The Managing Director manages the company’s activities and operations on his own responsibility and represents the company independently. The Managing Director is appointed and discharged by the company’s Supervisory Board. His/her term of office is 4 (four) years with the possibility of reappointment. Without the Supervisory Board’s consent the Managing Director may not enter into transactions or adopt decisions concerning: legal transactions and borrowing in excess of € 333,834.08 for the same item in a financial year; disposal and mortgaging of property; equity investments made by the company in other legal entities; the beginning of individual investment where the envisaged value exceeds € 100,000.00 (due to the

needs for coordinated strategic plan of the HSE Group); and the beginning of individual investment related to IT, where the envisaged value exceeds € 50,000.00 (due

to the needs for coordinated development of IT within the HSE Group) after having acquired the opinion by the head of IT department at the company’s member.

I, Viljem Pozeb, the Managing Director of the company Dravske elektrarne Maribor d.o.o., hereby declare that I have been acquainted with the Corporate Governance Code for Companies with State Capital Investments (hereinafter: the ―Code‖) in 2011. It is my estimate that in 2011 the governance of the company Dravske elektrarne Maribor d.o.o. was in line with the recommendations laid down by the Code adopted by The Capital Assets Management Agency of the Republic of Slovenia (hereinafter: AUKN) and published on 18 November 2011 on AUKN’s website (www.auknrs.si). As the managing director of Dravske elektrarne Maribor d.o.o., I declare, pursuant to point 73 of the Code that the company Dravske elektrarne Maribor d.o.o. has opted to apply the AUKN Code on a voluntary basis.

TRADE UNION AND WORKERS’ COUNCIL

ORGANISATIONAL STRUCTURE OF THE COMPANY WITH THE ORGANISATIONAL CHART The company has the following organisational units:

Managing Director;


assistant to the Managing Director;

advisory to the Managing Director;

departments managed by the Managing Director;

technical area with the following organisational levels: business units, departments, divisions;

sector for development and construction and general business division with the following organisational levels: departments, divisions;

temporary organisational units – projects. Their activities and tasks are performed within distinct areas of expertise, with responsibilities being delegated hierarchically. All activities within the company are well coordinated thanks to proper management. The company’s organisational chart as at 31.12.2011:

COMPANY’S BUSINESS ACTIVITIES The company’s core business activity is production of electricity in HPPs. Other activities include:

intercity and other road passengers transport; freight transport by road; wired telecommunications services; hardware and software consultancy; other information technology and computer related services; rental and operation of own or leased real estate property; accounting, bookkeeping and auditing services; tax consulting services – other than auditing; other management and business advisory services; other engineering activities and technical consulting; sports facilities operation.


In addition to the above activities, the company provides other registered activities in accordance with the Articles of Incorporation.

OWNERSHIP LINKS WITH OTHER COMPANIES RELATION TO THE CONTROLLING COMPANY HSE

DEM is a part of Holding Slovenske elektrarne Group. On 26 July 2001, the Government of the Republic of Slovenia founded HSE with the objective of establishing a joint presence of electricity suppliers in the market, improving their competitiveness and constructing a HPP chain on the lower Sava River. Six companies were incorporated into the new company. HSE is thus the holding company, while the other companies are its subsidiaries. Both HSE and subsidiaries are legally independent entities. As at 31.12.2011, the company HSE, based in Ljubljana at Koprska 92, is the company's controlling (holding) company which prepared the 2011 consolidated annual report for the group of companies under its control. Pursuant to Article 545 of the Companies Act (ZGD-1), DEM’s management prepared a Report on relations with related companies for 2011. The report was submitted to the certified auditor, as provided by Article 546 of the Companies Act. The report shows that, in view of the circumstances known at the time legal transactions were carried out, DEM estimates that it was not disadvantaged in any such transaction with the controlling company and its related parties, and that in 2011 no legal transaction, act or omission that could be potentially damaging to the company took place as a result of influence exercised by HSE. RELATION TO SUBSIDIARIES AND ASSOCIATES

DEM holds an equity interest in five companies:

HSE Invest 25.0 % stake

ELDOM 50.0 % stake

HESS 30.8 % stake

PDI 100.0 % stake

MHE Lobnica 65.0 % stake The abovementioned stakes are disclosed under long-term assets as long-term investments. In the following table, the stakes in HSE Invest, ELDOM and HESS are disclosed in section ―Associates‖ – taking into account the fact that an associate is a company in which the controlling company has a higher than 20 % but lower than 50 % interest. Pomurje Development Institute and small HPP Lobnica are presented in the section "Subsidiaries" – taking into account the fact that subsidiaries are companies in which the controlling company has a higher than 50 % interest. HSE INVEST HSE Invest d.o.o., a company for engineering and construction of energy plants, was established on 25 April 2002 with the adoption of the Articles of Incorporation of a Limited Liability Company. HSE Invest is thus a subsidiary, whose founders and members are HSE, DEM, SENG and SEL, all with an equal stake. In the company HSE Invest d.o.o., based at Obreţna ulica 170a in Maribor, DEM holds a 25 % stake which represents an investment in the amount of € 80,000. ELDOM ELDOM d.o.o., a company for maintenance of buildings and restaurant services, was established on 1 July 1991. Its founders are Slovenian power companies:

Dravske elektrarne Maribor; Elektro Maribor; Elektro Slovenija.

In 2004, four companies had a stake in ELDOM, namely, the three abovementioned founders and the company Elektroinštitut Milan Vidmar. Each company had a 25 % stake in ELDOM. In January 2005, we bought a 25 % stake in ELDOM which was owned by the company Elektroinštitut Milan Vidmar. Thus, we now hold a 50 % stake in the company ELDOM, based at Vetrinjska ulica 2 in Maribor.


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HESS - Hidroelektrarne na spodnji Savi HESS d.o.o. was founded on 12 February 2008 by the companies HSE, DEM, SENG, Termoelektrarna Brestanica and Gen Energija. The company HESS was established with the transformation of the previous project coordinator, the so-called Joint venture, into a legal entity for the purposes of securing transparent investments and compliance with the concession agreement as well as the Concessions Act. HESS’s priority will be the construction of remaining hydropower plants on the lower Sava River with the possibility of further construction of the HPP chain on the middle Sava River. DEM has a 30.8 % stake in HESS. PRI - Pomurski razvojni inštitut (PDI - The Pomurje Development Institute) In June 2008, DEM established PDI with the purpose of bringing the project for the construction of HPPs on the Mura River closer to the interested public. The institute was founded with the desire to attract experts from various professional backgrounds and different areas of expertise. The institute is based in Murska Sobota. The main responsibility of the institute is mostly informing the stakeholders about the expert studies on exploitation of the Mura River water potential (environmental topics, studies of flora and fauna, as well as agricultural, economic and tourism studies) and their presentation to the general public. MHE Lobnica In May 2011, DEM and the company Hmezad Jeklo d.o.o. established a joint company ―Mala hidroelektrarna Lobnica, druţba za proizvodnjo električne energije d.o.o.‖ We hold a 65 % stake in the company small hydropower plant Lobnica d.o.o. with its registered office at Obreţna ulica 170 in Maribor. The remaining stake in the amount of 35 % belongs to another company member Hmezad Jeklo d.o.o. The company’s core business activity is hydroelectricity generation. Other activities include: other electricity production, transfer of electricity, electricity trading, construction of water facilities. On the basis of contract of members with the limited liability company small HPP Lobnica, the following company's bodies are appointed: General Meeting and Managing Director. The Managing Director of the company is Ladislav Tomšič, M.Sc. The company also has a procurator.

A BRIEF HISTORY ON THE CONSTRUCTION OF THE DRAVA RIVER POWER PLANTS 1918 1942 – 1958 1960 - 1978

HPP Fala HPP Dravograd, HPP M. otok, HPP Vuzenica, HPP Vuhred HPP Ožbalt, HPP Zlatoličje, HPP Formin

The chain of 8 HPPs on the Drava River was constructed between 1918 and 1978, and the already finished and planned renovation projects will preserve their capabilities for many decades to come. At the time of its construction, after WWI, the first Drava River hydropower plant in Slovenia, HPP Fala, was the most technologically advanced and powerful hydropower plant in the eastern Alpine region and Central Europe and a driver of industrial development and electricity network in central and northeast Slovenia.

ENERGY TIME FLOW OF CAPACITY FROM FALA TO FORMIN


Due to a changed economic and political situation arising from the dissolution of Austria-Hungary and the emergence of pre-WWII Yugoslavia, the construction of hydropower plants on the Drava River came to a halt.

During World War II, pier-type power plants HPP Dravograd and HPP Mariborski otok were constructed. At HPP Dravograd, which was already operational during the war, extensive renovation and completion works were carried out with which the damages from airstrikes were repaired and operation of the first two turbines restored. At HPP Mariborski otok, which was nothing more than an abandoned construction site after the war, the first turbine started operating in 1948 and was joined by another two by 1960. Construction of HPP Mariborski otok

After the end of the war, pier-type power plants HPP Vuzenica and HPP Vuhred were constructed. The first generating unit of HPP VUZENICA began operating in 1953, while the last (third) was put into operation in 1956. During the construction of HPP Vuzenica, designs were prepared for the next downstream section, HPP Vuhred. The first generating unit of HPP Vuhred was put into operation in 1955. All three generating units became operational in 1958. During the construction of HPP Vuhred, the final section of the upper Drava River power plants, i.e. a pier-type power plant HPP Ožbalt, was designed. The first generating unit at HPP Ožbalt began operating in 1960. The plant began operating at full capacity in 1962. The basic project for the so called “lower” Drava River was prepared in 1956. HPP Zlatoličje, constructed between 1964 and 1969, was the first channel-type power plant on the river. The power plant, which receives water through a 17.2 km inlet channel from the Melje dam, while the water returns to the riverbed through a 6.2 km outlet channel, is the most powerful HPP in Slovenia. With a few years’ intermission, the construction of HPP Formin, a channel-type power plant, began which started operating in 1978. Its large reservoir allows for greater flexibility of operation and ensures larger production at peak hours. This was the final stage in the process of construction of Slovenia’s power plants on the Drava River. MODERNISATION AND REFURBISHMENTS

In 1977 the capacity of the oldest power plant on the Drava River, HPP Fala, was increased through installation of an eighth generating unit. In 1991, two more generating units were installed to replace the oldest seven, which were decommissioned. Over the past two decades, the other five upper Drava River power plants were refurbished, thus increasing their capacity and peak output. The overall increase in capacity is comparable to the capacity of an additional power plant. Between 1918, when the first kilowatt hours of electricity were produced, and the end of 2010, the power plants on the Drava River generated more than 125 billion kWh of electricity. DEM’s total output, which stood at 20 MW in 1918, now totals 584 MW.

2.2 COMPANY’S BUSINESS POLICY

ENERGY FROM NATURE - FOR MANKIND AND NATURE

MISSION

DEM is the leading company in the area of efficient use of renewable energy resources in Slovenia. Due to

its focus on development it provides for quality and environment-friendly energy supply with the objective of

achieving economic success and ensuring sustainable development of the environment and markets in

which it operates.


VISION

To maintain its position as the leading hydroelectric power system in Slovenia through effective use of

renewable resources and optimal allocation of resources, and to expand, by means of strategic partnerships

and sensible diversification, to other interesting market areas.

STRATEGIC GOALS The company’s main strategic goals are derived from the company’s Strategic development plan for the period until 2018 and the development plan of the HSE Group for the period 2006 to 2015, looking ahead to 2025. DEM’s Supervisory Board discussed and adopted the long-term plan of renovation and development for the period 2003 to 2018 at its 13

th regular meeting on 6 May 2003.

DEM’s main strategic goals for the period until 2018 are as follows: Goals pertaining to safe and reliable production and construction of additional production capacities:

To pursue an optimal and joint maintenance policy:

maintenance on the majority of HPP facilities of the HSE Group,

ensuring safe operation of HPPs,

monitoring of facilities and equipment.

To carry out planned investments in additional production capacities:

construction of PSP Kozjak until 2019,

construction of a HPP chain on the Mura River,

renovation of existing facilities and increased output (overhaul of HPP Zlatoličje completed by the end of 2013).

To promote sustainable development;

To maximise utilisation of the natural potential of the Drava River and its tributaries;

To achieve rational utilisation of the hydroelectric potential through the use of small HPPs;

To become the core hydroelectric pillar in the HSE Group;

To fully provide (staff, organisation, financing) for the execution of strategic projects. Goals pertaining to streamlining of operations:

To ensure competitiveness through the lowering of operating costs Goals pertaining to human resources management:

To provide for educated, competent, satisfied and motivated employees;

To maintain optimal staff numbers;

To maintain optimal staff structure;

To provide for continuous training;

To care for the quality of working life. Goals pertaining to financial management:

To ensure short-term and long-term solvency;

To manage financial risks;

To secure optimal financing sources;

To pursue an optimal financial policy;

To optimise the structure of financing sources and equity structure.


2.3 ECONOMIC CLIMATE IN 20111 During the last months of 2011, the economic activity in Euro-zone additionally decelerated, while the

continuation of bad conditions is indicated by economic indicators. The conditions in national bond markets

and interbank market remain deteriorated.

The changes in short-term ratios in October and November indicate deceleration of economic activity in

Slovenia during the last quarter of the previous year. According to IMAD estimate, the real export of goods in

October and November in average remained below the level of the third quarter. The real volume of

manufacturing activity production, which had already decreased in the middle of 2011, remained on the

achieved level during the autumn months. The activity in the construction sector remained on an extremely

low level from July to November. After a weak growth during the summer months, the real revenue in retail

store has somewhat decreased in November, while the fall was mitigated by the increase in revenue in

engine fuel store.

Deteriorated circumstances in the labour market continued at the end of the year, while the November

changes in salaries were characterised by the payments of thirteenth salaries and Christmas bonuses, which

were the lowest during the last six years. According to deseasonalized data, the number of employed

excluding self-employed farmers also decreased in November. According to IMAD estimate, this was mainly

the consequence of decrease in construction sector. The number of registered unemployed further increased

in December. At the end of the year, it amounted to 112,754, which is 2.5 % more than at the end of 2010.

According to deseasonalized data, the average gross salary in the public sector slightly decreased in

November, while the average gross salary in private sector remained on the previous month's level. The

share of revenue and average amount of payment were lower than in 2010. Even in the previous year, the

amount of employees receiving irregular payments remained the highest in the activities with the highest

average salaries and at the same time a large stake of state ownership (supply wit electricity and gas,

mining, water supply as well as financial and insurance activities).

In 2011, the increase of consume prices in Euro-zone was higher than in 2010 and it was more extensive

than in Slovenia. The key reason for increased inflation was the growth of energy product prices as a result

of the impact of increased oil prices at the beginning of 2011 and food prices at the end of 2010 in the world

markets. Last year the inflation in Slovenia amounted to 2.1 % and it was on the similar level as in the

previous three years. The key inflation factors were the same as in Euro-zone, but we estimate that last year

the inflation in Slovenia was lower particularly due to the impact of weaker domestic economic activity.

During the nine months of the previous year, the cost competitiveness improved on mid-annual level.

However, Slovenia was still in the group of Euro-zone members with a relatively larger decrease in cost

competitiveness during the time of crisis. The last year’s improvement of cost competitiveness was mostly

the consequence of lower growth of costs per employee in comparison to productivity growth.

In December, the net repayments of loans by domestic non-banking sectors were so far the highest. The

same applies to creation of provisions and impairments.

1 Source: IMAD


The deficit in consolidated balance sheet of public financing amounted to € 1,377 million during the ten

months of the previous year, which is almost € 500 million less than in the same period of the previous year.

QUANTITY BALANCE SHEET OF ELECTRICITY

In 2011, the electricity production in Slovenia decreased mostly as a result of deteriorated river stage, while the consumption increased almost exclusively due to reinforced aluminium production. The production decreased by 5.5 %, while the consumption increased by 3.6 %. The hydropower plants production decreased by more than one fifth compared to high levels of the previous two years, while on the other hand the nuclear power plant production increased by one tenth and the thermal power plant production remained approximately the same. As a result of higher aluminium prices, the domestic production of this metal and thus electricity consumption were significantly reinforced and almost in total contributed to the growth of electricity consumption in Slovenia. International exchange of electricity was substantially reinforced also in 2011. The export of electricity (taking into account solely the Slovenian production of the nuclear power plant) increased by 17.5 %, while the import of electricity increased by 30.5 %. Thus, we imported over 1,700 GWh or 13 % of electricity that we use in Slovenia. Approximately one half (around 45 %) of increase in export was the result of increased domestic demand for electricity, while the other portion of increase resulted from increased electricity trade. The latter partly resulted from the increase in transfer capacities on the Slovene-Italian border. At the beginning of the year, the trade on this border was additionally facilitated by introduction of implicit auctions when concluding transactions.

2.4 PURCHASING AND SUPPLIERS Suppliers play an increasingly important role in implementation of development and strategic goals. DEM’s purchasing procedures are governed by rules on purchasing procedures and rules on placement of suppliers on approved suppliers list. As laid down in both sets of rules, an increasing amount of purchases are made from approved suppliers that meet the requirements of applicable standards and have recognised credentials. At DEM we aim to further centralise the purchasing function to the greatest extent possible, but due to the nature of our work this cannot be always fully achieved. With the aim to streamline our operations and negotiate better purchasing conditions, we are gravitating towards reducing the number of suppliers. One of the most important purchasing-related tasks is finding the best sources of high-quality goods and services that are provided by renowned domestic and foreign suppliers. The largest suppliers are normally the suppliers of capital equipment and contractors engaged to carry out large-scale maintenance work. The quality of materials and services provided by suppliers directly affects the faultless functioning of our plants, which is vital for uninterrupted electricity production. Because ensuring uninterrupted electricity production is paramount, selecting high-quality suppliers is all the more important. In accordance with quality assurance requirements under the ISO 9001 and ISO 14001 standards, DEM has been carrying out a systematic assessment of suppliers for ten years running, classifying them into groups A, B, C or D on the list of the approved suppliers. When assessing and placing approved suppliers on the list, DEM considers the suppliers of important strategic products and services that are important for the process of production and maintenance of electricity plants and equipment. In 2010, all suppliers of strategic relevance were placed in group B, which is the result of changed supplier assessment criteria. The largest foreign supplier in 2011 was the company Lahmeyer International GmbH from Germany. The biggest domestic suppliers, which supplied the capital equipment, carried out major repairs and performed maintenance services in 2011, include:

Esotech, d.d.

HSE Invest d.o.o.


SGP Pomgrad d.d.;

Metalna SRM d.o.o.;

Fira d.o.o.;

Iskra sistemi d.d.;

Litostroj Power d.o.o.;

VGP Drava Ptuj d.d;

CM Celje d.d.;

Montavar Metalna Nova d.o.o.

2.5 SALES AND CUSTOMERS NET SALES REVENUE STRUCTURE

In 2011, DEM generated € 67,675,469 in net sales revenue, which is 0.45 % more than in 2010 when the revenue totalled € 67,371,150. The company generated 99.96 % of net sales revenue in the domestic market and the remaining 0.04 % in foreign markets. Sales revenue structure in 2011:

Revenue from the sale of electricity accounts for the largest share of sales revenue (98.64 %), while the sale of other products and services accounts for 1.36 %. ELECTRICITY

The company generates the majority of net sales revenue from electricity sales. Electricity is sold to HSE (revenue generated from the sale of electricity produced by Drava River HPPs in 2011 stood at € 65,899,471; revenue from the sale of electricity produced by Ceršak small HPP in 2011 totalled € 518,611; revenue from the sale of electricity produced by small HPP Melje in 2011 totalled € 208,779, revenue from the sale of electricity produced in the solar power plant Sončni park Zlatoličje in 2011 amounted to € 856), with which DEM has an annual electricity sales contract in place, and to Borzen (revenue generated from electricity sales in 2011 totalled € 129,445). OTHER SALES

Other net sales revenue is comprised of revenue generated abroad, revenue from services, rents and the canteen, and of other sales revenue.

2.6 PRODUCTION AND OPERATION

BASIC INFORMATION ON PP FACILITIES The following table represents general technical data on power plants:


* The new generating units taken into account; generating unit 1 will be operating until the middle of 2012.

PRODUCTION IN 2011 The planned power plant production which is included in the power balance is the production that can be generated by power plants when they maintain constant operational capacity and when the monthly inflow is equivalent to an inflow corresponding to a 57 % probability that median monthly flows will be reached. The overall production or supply of electricity to the grid by all the generating units combined in 2011 – including the small HPPs – totalled 2,427,807,057 kWh of electricity, which is 102.76 % of planned production. The large generating units produced and supplied 2,412,946,668 kWh or 102.72 % of planned production, the generating units at small HPP Ceršak 4,260,789 kWh or 85.22 % of planned production and the generating units at small HPP Melje 10,583,895 kWh or 121.79 % of planned production. The solar power plants that were included into operations in 2011 produced 24.046 kWh of electricity in Zlatoličje and 1.269 kWh of electricity in Formin and altogether supplied 15,705 kWh of electricity to the grid. The entire production was supplied to HSE. Monthly production in 2011:

The planned production was not achieved in April, May, July, August and December, while during the other months it was achieved and exceeded, mostly in January when we exceeded the planned production by 77.4 %.


Monthly production in 2011:

The annual production chart for 2011:

PRODUCTION SHARES OF INDIVIDUAL HPPs The production share of a power plant in the chain depends on the plant's installed capacity, flow and head. The power plants built in the river bed (Dravograd, Vuzenica, Vuhred, Oţbalt, Fala and Mariborski otok) produced 58.7 %, while the channel-type power plants (Zlatoličje and Formin) produced 40.7 % of total electricity supplied to the grid. The remaining 0.6 % of electricity supplied to the grid was produced by small HPPs Ceršak and Melje as well as solar power plants Zlatoličje and Formin that were included into operations in 2011. Production of individual HPPs in 2011:

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Production shares of individual HPPs in 2011:

During HPPs operation since 1918 until the end of 2011, DEM supplied 127,741,452,346 kWh of energy to the grid. In view of current consumption, Slovenia could be supplied for more than 10 years with this energy. The following table presents total production of individual power plants from the beginning of power plant's operation until (including) 2011 and its share in total production. Here, it is necessary to state that this is the share of electricity supplied to the grid.

WATER FLOW AND HIGH WATER LEVELS The average annual flow in power plants on the Drava River in 2011 was 242 m

3/s or 89.3 %, while at

Mariborski otok it totalled 245 m3/s or 90.4 % of the flow balance, which in both cases amounts to 271 m

3/s.

In 2011, the flows in January, February and October were higher, while during all the other months they were lower than planned.

The water flow of over 800 m3/s, at which measures foreseen for the event of high water levels had to be

adopted was recorded on two occasions in 2011, namely:

on 19 and 20 June 2011, when the highest water flow from Austria stood at 1,300 m3/s and in

Slovenia at 1,442 m3/s at HPP Vuhred;

on 19 and 20 September 2011, when the highest water flow from Austria stood at 1,200 m3/s and in

Slovenia at 1,365 m3/s at HPP Zlatoličje.


We also record several days when the flow was higher than the highest mutual flow of generating units in the individual power plant. However, it was still not necessary to adopt measures envisaged in case of high water levels. These days were, as follows:

on 28 May 2011, when the highest water flow from Austria stood at 687 m3/s and the highest water

flow in Slovenia stood at 783 m3/s at HPP Vuzenica;

on 26 and 28 October 2011, when the highest water flow from Austria stood at 680 m3/s and the

highest water flow in Slovenia stood at 789 m3/s at HPP Fala.

Water flow chart for 2011:

FAILURES AND MAJOR OUTAGES Minor maintenance work on generating units and other plants and elimination of failures were carried out by power plant maintenance crews in accordance with the programme of operations and during night time. Most frequent failures were as follows:

failures on turbine regulators (Vuzenica, Oţbalt, Fala, Mariborski otok, HPP Melje); failures of excitation systems (Dravograd, Vuzenica, Vuhred); issues with cooling water for turbine shaft seals and bearings (Vuzenica, Oţbalt, Zlatoličje,

HPP Ceršak); issues with pressure and levels in the turbine pressure unit (Fala); failure of water level measurement on the turbine cover (Zlatoličje); functioning of electricity safeties (Dravograd, Vuzenica, Vuhred, Fala, Mariborski otok, small HPP

Melje); issues with supply of electricity for own consumption (Zlatoličje); foreign object between guide vanes (Dravograd).

After having performed the activities to increase the rigidity of the turbine cover on the generating unit 2 of HPP Zlatoličje in December 2010, the generating unit was operating without interruptions. Between 11.07.2011 and 14.07.2011, secondary oil was replaced at the generating unit 2. However, the work had to be finished quickly since a disruptive discharge in the stator winding of generating unit 1 occurred on 12.07.2011 and from that time the generating unit 1 is in renovation. Thus, in the period from 12.07.2011 to 15.07.2011, HPP Zlatoličje had no generating unit without taking into account the generating units of small HPP Melje. The overall amount of water spilled as a result of failures (excluding small HPPs) in 2011 was equivalent to 353 MWh of electricity or 0.015 % of electricity supplied to the grid. The amount of water spilled due to overhauls and inspections was equivalent to 4,765 MWh of electricity or 0.2 % of planned production and due to the renovation of generating unit 1 at HPP Zlatoličje, the water was spilled for 26,396 MWh or 1.09 % of electricity supplied to the grid.

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The water spilled as a result of surpluses was equivalent to 1,325 MWh or 0.05 % of electricity, while the water spilled due to cleaning of generating unit inlets amounted to 315 MWh of electricity or 0.0013 % of electricity supplied to the grid. Total losses in 2011 thus amounted to 33,154 MWh of electricity or 1.37 % of electricity supplied to the grid. Considering the above data, it is evident that the generating units operated at high availability, using most of the water for electricity production. This is further supported by the fact that most losses (80.2 %) arose as a result of the overhaul on generating unit 1 at HPP Zlatoličje. Operation during the year was in line with the programme of operation. The turbines of Dravske elektrarne

Maribor that have the control power of 30 MW ( 45 MW) are included in the provision of the system service concerning the secondary power and frequency control, subject to the level of water in power plant reservoirs.

PRODUCTION LOSSES IN 2011 Production losses refer to lost energy that could have been produced, but instead water was spilled over the locks for various reasons. Total losses since 1988 until (including) 2011 are presented in the following table:

In 2011, losses occurred in all power plants. Total losses amount to 1.37 % of electricity supplied to the grid. Most losses are a result of renovation of the generating unit 1 at HPP Zlatoličje (26,396 MWh), which accounts for the majority of losses in 2011. Total losses (MWh) in 2011 by month and by power plant:


Losses occur due to defects, overhauls, refurbishments, cleaning of turbine inlets and grid surpluses. Shares of individual losses (by cause) in 2011:

DEFECT RELATED LOSSES

Defect related losses occur when available water cannot be utilised for electricity production due to a generating unit failure, which results in spilling of water over the locks. In 2011, such losses occurred at all power plants, except for HPPs Dravograd, Vuhred and Formin. Overall, 353 MWh of electricity were lost due to defects. OVERHAUL RELATED LOSSES

Overhaul-related losses occur when water flows during overhauls and inspections are greater than the intake capacity of operational turbines. As a rule, works are carried out in the first two months of the year, when the water flows are statistically at their lowest. In 2011, overhaul-related losses were recorded at HPPs Mariborski otok, Zlatoličje and Formin. Losses at HPP Zlatoličje were the result of works carried out on generating unit 2 due to changing turbine oil. LOSSES RELATED TO THE CLEANING OF TURBINE INLETS

In 2011, we also started to record losses as a result of cleaning of turbine inlets which occur when turbine inlets need to be cleaned due to jammed grates, while the water cannot be accumulated in the power plant pools. In 2011, losses due to cleaning occurred at power plants Mariborski otok and Zlatoličje. GRID SURPLUS RELATED LOSSES

Grid surplus related losses occur when power plant reservoirs are full and there is an excess of energy that cannot be sold in the market. In such cases, the grid is controlled by spilling water over the locks. DEM has no control over such losses. Overall, 1,325 MWh of electricity were lost due to grid surpluses. REFURBISHMENT RELATED LOSSES

In 2011, 26,396 MWh of electricity were lost due to refurbishment.

2.7 MAINTENANCE All planned overhauls and inspections of generating units, switchyards and locks were carried out to the extent planned. In addition to the abovementioned works, professional services and maintenance crews also carried out planned large-scale maintenance works. Moreover, various maintenance works were carried out on joint facilities and systems of HPPs in accordance with the maintenance plan. Maintenance costs in 2011 totalled € 3,377,532 (2010: € 2,334,013), of which:

costs of spare parts and maintenance materials of fixed assets account for € 360,323,

costs of maintenance services account for € 3,017,209.


The total actual maintenance costs represent 102.32 % of the plan for 2011. Costs of spare parts and maintenance materials reached 75.97 %, while the costs of maintenance services reached 106.74 % of planned costs. Overview of realised maintenance costs in 2011:

The majority of maintenance costs are represented by construction maintenance costs, the largest part of which is comprised of costs arising from obligations under the concession agreement (monitoring of barriers, canals, maintenance works on the water infrastructure), which have been increasing due to growing environmental requirements. Realised maintenance costs in the period 2007 to 2011:

Through high-quality maintenance we want to ensure that, over the long-term, production facilities and buildings will be in proper condition to operate throughout their useful lives in the manner for which they were designed. The growing complexity of installed equipment that is being deployed in renovated power plants requires expert and more and more specialised maintenance services, which require higher qualification structure of contractors and additional training. The company’s long-term goal is the greatest possible self-sufficiency in the area of maintenance, because due to long useful lives of facilities all specialised expertise that is not available on the market must be preserved.

2.8 INVESTMENTS The value of capital investments in 2011 is € 15,748,830 (2010: € 9,860,500), of which:

€ 9,020,905 was financed from depreciation assets,

€ 6,727,925 was financed from other own sources.


Overview of capital investments realised in 2011:

Total capital investments represent 32.71 % of the plan for 2011. Investments in new buildings reached 21.54 % of the plan, investments in reliable production 39.95 %, investments in control centres 83.42 %, investments in security systems 109.31 %, investments in reconstructions 31.69 %, investments in studies, investment and project documentation 31.43 %, investments in seismic monitoring 48.98 %, investments in counter systems 116.78 %, minor capital investments 92.38 %, and investments in business information system 110.35 % while other investments reached 77.20 % of the plan.

Realised capital investments in the period 2007 to 2011:

DESCRIPTION OF INDIVIDUAL MAJOR INVESTMENTS CONSTRUCTION OF PSP KOZJAK

Within the framework of PSP project on the Drava River and the OPL to DTS Maribor, the stage of spatial planning of the facility was concluded - National Spatial Plan (NSP). On 25 February 2011, the government of the Republic of Slovenia published a Decree on National Spatial Plan for pumped-storage power plant on the Drava River and power transmission line between the PSP and DTS Maribor in the Official Gazette no. 12. The decree represents the basis of continuation of legal procedures to acquire approvals by individuals responsible for spatial development, acquisition of land and preparation of projects to obtain the building permit in accordance with regulations governing facility construction, on the basis of which the building permit is issued. The Environmental Impact Report is in preparation as well as expert bases for the Environmental Impact Report in the field of EMS, noise, vibrations and archaeology.


The most important approval is represented by the Environmental Impact Report as the end of the Comprehensive Environmental Impact Assessment (CEIA) of this project. In the previous year, the activities for preparation and expert bases of the Environmental Impact Report and land acquisition were not performed due to the agreement on the adapted speed of the project with regard to HSE recommendations. PCD was reviewed in the time of preparation and amendment. The audit of revised PCD was performed by Lahmeyer Internacional. Audit conclusions approve the PSP Kozjak project, both from the technical as well as constructive point of view. The audit also envisaged the review of powerhouse construction in the cavern being constructed. The cavern version of powerhouse will be constructed on the level of PCD with the purpose to confirm the most favourable technical-economic performance on the discussed location. Since the Conceptual design represents a technical basis for preparation of the Investment programme, special attention was devoted to investment cost estimate during the preparation of amendments to PCD. The basic investment programme was performed in 2008 and audited by the Audit Committee. The committee adopted a decision approving the investment programme together with its components of value and financial structure. PCD was approved by the DEM Supervisory Board and discussed by the HSE Supervisory Board in 2008. After the amendment and PCD audit in 2011 as well as the performed investment programme Studies of electricity market and PSP Kozjak products, the revised investment programme was prepared and presented to HSE in November 2011. CONSTRUCTION OF HPPs ON THE MURA RIVER

Based on concessionaire’s appointment, DEM, as investor, intend to exploit the energy of Mura River by constructing hydro power plants. In 2006, the programme ―Possibilities for the utilisation of the Mura River for energy production‖ was prepared. The programme determined the role of examination of the region’s sustainable development taking into account the construction of HPP on the Mura River. The study of the sustainable development of the area will explain the condition of environment and impacts on environment and nature. The necessary expert bases will be performed indicating possible locations of energy exploitation and HPP project-technical solutions where it is possible to construct HPP under the existing conditions. After the sustainable examination of energy exploitation of the area, the attention was devoted to expert bases, namely to the ―Examination of Locations from the Perspective of Environmental Protection‖ where the Conceptual Technical Solutions of HPP in relation to severe restrictions of environment and nature are discussed. The latter proved to be one of the most important factors. The exploitation of entire Mura River potential needs to be discussed in detail in currently prepared expert bases and Conceptual Technical Solutions in numerous versions. On the basis of the latter, the proposition of NSP proposal was prepared for HPP on the location between the inflow of the Kučnica River and highway passage over the Mura River – HPP Hrastje Mota. The proposition of the proposal was submitted to the MoE supplier and coordinator of NSP preparation at the Ministry of the Environment and Spatial Planning. This is the first stage of spatial planning procedure in accordance with applicable legislation. DEM expects that the initiative will be coordinated, thereby the working procedure will begin with the initiative and the first activity represented by the preparation of materials to obtain guidelines, which will represent the starting point for the beginning of NSP procedure. Based on findings of sustainable development study, which includes the examination of HPP construction impact on sustainability, and expert bases for consideration of HPP on the Mura River with the guidelines to investor for further decisions, the documentation for the following locations is discussed and prepared:

on the segment between Ceršak and Sladki vrh (replacement facility for small HPP Ceršak); and in the wider area of Gornja Radgona in connection with the intended construction of flood protection

of the area – construction of high water level embankments. RENOVATION OF THE MARKOVCI DAM AND CONSTRUCTION OF A SMALL HPP

The project comprises three areas:

restoration and stabilisation of the Drava riverbed; renovation of the dam; and construction of the small HPP and MV switchyard.


Project performance in 2011 Project work is performed in accordance with the audited time schedule taking into account the actual condition of work performance. Construction work on the intake segment of facility is concluded and the installation of mechanical and hydro-mechanical equipment is in progress. The construction work on powerhouse and outtake canals is completed up to the height of 210.00 m. In this segment of powerhouse the first elements of mechanical generator equipment are built as well as hydro-mechanical equipment of outtake gates. SONČNI PARK ZLATOLIČJE

As regards the investor, the construction of solar power plant ―Sončni park Zlatoličje‖ represents a possibility of additional exploitation of natural potentials in the area of renewable sources, while in the development and technical area they represent a possibility of planning, projecting, construction, maintenance and solar power plant management. The project comprises the construction of solar power plant in the area of Zlatoličje hydropower plant. The following activities were carried out in 2011:

preparation of tender documentation in relation to construction of SPP ―Sončni park Zlatoličje‖ – first phase,

preparation of tender documentation in relation to construction of SPP ―Sončni park Zlatoličje‖ – second phase,

preparation of tender documentation in relation to equipment supply of connection to 20kV distribution network,

preparation of tender documentation for installation of equipment of connection to 20kV distribution network,

preparation of PZI project documentation, end of SPP ―Sončni park Zlatoličje‖ construction – first phase, end of construction work, end of call for tender in relation to installation of equipment for connection to distribution network, take-over of equipment for connection to distribution network, dismantlement of on-site equipment in the project of HPP Zlatoličje renovation, construction of cable line for 20kV transmission line, performance of installation work related to connection of solar power plant equipment to distribution

network, performance of procedures of launching the equipment for connection to distribution network, solar power plant was connected to distribution network on 29 July 2011, A partial internal technical inspection of the facility ―Sončni park Zlatoličje‖ was performed – the solar

power plant was connected to distribution network on 4 August 2011, technical inspection of the facility ―Sončni park Zlatoličje‖ for the purposes of beginning of operations

as at 18 August 2011, beginning of solar power plant operations on 18 August 2011, inspection review on 6 September 2011.

On 8 October 2011, a trail run was successfully completed and the solar power plant is in operation. SOLAR POWER PLANT FORMIN

In April 2011, the project group for construction of solar power plant Formin was appointed with the task of constructing a solar power plant on the rooftop of powerhouse and garages. We obtained information on location and concluded a contract with the company HSE Invest in order to prepare project and tender documentation and participate in construction of the solar power plant at HPP Formin. On 8 November 2011, a contract for construction of SPP Formin was concluded with the company HTZ IP d.o.o. On 20 November 2011, we started the construction, while on 16 December 2011 the technical inspection of the facility SPP Formin was successfully performed for the purposes of beginning the operation of facility. On 22 December 2011, the solar power plant was connected to the network and the contractual trial run began. ANNEX TO OFFICE BUILDING – MAIN CONTROL CENTRE III CONSTRUCTION

Investment value is calculated on the basis of project value estimate (project documentation for acquisition of working permit – DOBP, which was prepared by the company Arhitekt Maribor d.o.o. in May 2007. Project number: 92/06).This value is converted to the level of fixed prices in the time when investment documentation was prepared.


Total investment value of constructing business facility – Control centre III including the equipment of business premises at fixed prices in June 2010 amounted to € 5,920,232 excluding VAT. Until now the following documentation was prepared and approved for the facility:

project documentation for building permit (DOBP) acquisition, which was prepared by the company

Arhitekt Maribor d.o.o. in May 2007 (Project number: 92/06),

Investment Project Identification Document (DIIP), which was prepared by the company HSE Invest

d.o.o. in June 2010,

Investment programme (IP) no. HIPM-12/2010, which was performed by the company HSE Invest

d.o.o. in July 2010,

preparatory work project is completed,

IP project is completed.

The works began on 1 August 2011 pursuant to the contract and they are performed in accordance with the approved time schedule. Currently there are no delays. The supply of all mechanical elements and installation are performed in accordance with the plan. RENOVATION OF HPP ZLATOLIČJE, MELJE DAM AND SMALL HPP MELJE

Melje Dam In November, the contractor was selected for the reconstruction of Melje dam and crane rails. Final Pasarič was selected as the most favourable contractor among three suppliers. At the beginning of December, the contract on construction work was submitted to him. Since the selected contractor had not returned the signed contract by the end of 2012, the requestor again asked him to sign it. Pursuant to a new appeal to sign the contract, the contractor sent a memo that he withdrew from the contract. Due to withdrawal from the contract, the requestor was obligated to call upon the other least expensive supplier, namely the company MAP Trade. Since MAP Trade also responded that the prices offered were not relevant anymore and that it increased the price for the abovementioned volume of work, the requestor decided to perform a new call for tender for work envisaged. Small HPP Melje Since the company Montavar is in liquidation process, while certain deficiencies remained opened and were not abolished despite several appeals by the requestor, the requestor started to realise the banking guarantee. The banking guarantee was realised by the bank on 01.12.2011 in the total amount of € 148,240.30. On the basis of realised banking guarantee, the requestor will thus settle all the opened issues alone or it will conclude appropriate orders with other contractors. HPP Zlatoličje With the beginning of generating unit 1 renovation in July, the contractor ESOTECH faced minor problems since it seemed that it would remain without the contractor due to Konstruktor's liquidity problems. Since the probability of Konstructor’s bankruptcy was increasing, Esotech informed us that it decided to replace the subcontractor pursuant to the contract LOT DM, namely the new subcontractor for the abovementioned construction work became the company MAT Trade. As a result of contractual partner's bankruptcy in accordance with the contract LOT PGO - Konstruktor VGR, the requestor started the realisation of banking guarantee concluded at Banka Koper and termination of the contract due to failure to fulfil contractual obligations. For the abovementioned work, which remained unrealised in accordance with the contract LOT PGO, a new contractor will be selected through collection of offers. Dismantlement of old generating unit 1 was slightly delayed (approximately 10 days) due to bad organisation of the contractor. With the beginning of traverse ring restoration, the installation of generating unit 1 officially began. Work on traverse ring restoration was actually performed in a larger extent than envisaged in the time schedule since during the review it had been established that it was in worse condition than traverse ring of generating unit 2, on the basis of which the volume was envisaged according to time schedule. With regard to the fact that more work is needed, the delay additionally increased with regard to the currently applicable time schedule R08. Due to the abovementioned delay, it will be necessary to perform the audit of time schedule. Equipment for T1 renovation is at the facility, while the part of equipment is in the factory waiting to be transported. All equipment in the factory was successfully taken over or final take-overs are being performed for some positions of supply. The construction of factory equipment is not critical. Litostroj preforms constant control with its installation supervisor and performs all necessary activities for undisturbed course of installation work.


All the equipment for generating unit G1 is supplied and adequately protected or preserved and it is waiting for installation to begin. Coordination and management are coordinated each Friday at regular coordination meetings where work is regularly controlled and possible problems during work performance are being solved. Additional work of replacing the fence around the facility and switchyard is completed as well as setting grounding strip around the facility. The replacement of external facility lightning is also in progress. The external lightning was not included in the context of renovation project, but it needs to be replaced in accordance with decree on decrease in light pollution. MINOR CAPITAL INVESTMENTS

In order to provide conditions for uninterrupted production, maintenance and operating processes, the company must also invest in minor capital investments. In 2011, minor capital investments comprised purchases of various equipment for providing uninterrupted operation and functioning. We also purchased various tools and devices, machines, vehicles and instruments.

2.9 RECRUITMENT AND STAFF

EMPLOYEES As at 31.12.2011, the company had 285 employees, of which:

277 were permanent employees; and

8 were fixed-term employees.

The number of employees increased by 3 or 1.06 % compared to the previous year. During the year, nine workers left the company, in particular due to retirement, and 12 new workers were employed.

EDUCATIONAL STRUCTURE OF EMPLOYEES The average level of education (as measured on the scale of 1 (level I) to 9 (level IX)) stood at 5.32 at the end of December 2011. The average education level improved relative to 2010, when it stood at 5.25.


The above table shows that relative to the previous year the number of employees with higher vocational and university education as well as employees holding a PhD increased. Educational structure of employees as at 31.12.2011 is presented in the following chart:

Monthly changes in number of employees from January to December 2011 are presented in the following chart:

EMPLOYEE MOTIVATION A lot of attention was devoted to education and training of employees in 2011. Technical training and training in the area of legislative amendments and other current issues were performed. Special attention was also devoted to occupational safety training, tax legislation amendments, advanced computer applications, and other current topics. In 2011, 269 employees participated in various trainings held from 01.01.2011 to 31.12.2011. 2,693.5 hours of training were performed, which represents 9 hours per employee. In accordance with the company’s operating objectives, we again supported our employees in attaining higher professional education. At the end of 2011, the company had 18 employees attending part-time education programmes. In this period we have six new part-time students, of which one student is attending PhD studies, two students are attending graduate school, two students are enrolled in postgraduate studies and one student is attending graduate studies under the Bologna programme.


Of the existing employees who were attending part-time studies, three completed their studies in 2011. Two students obtained Master's degree and thus acquired the 8

th level of education and one is undergoing

training for obtaining the title of certified internal auditor.

SCHOLARSHIPS At the beginning of 2011, we had 44 scholarship agreements in place (of which one dormant scholarship agreement). In the first half of the year, one scholarship contract ended due to completion of studies. On 30.06.2011, we had a total of 43 scholarship-receiving students (of which one dormant scholarship-receiving student). In the second half of the year, 14 scholarship agreements ended in regular terms. We concluded 27 new scholarship agreements, of which 16 were for secondary education programmes and 11 for higher vocational or university programmes. As at 31.12.2011, the company had 56 scholarship holders, of wich 6 scholarship agreements were dormant.

OCCUPATIONAL HEALTH AND SAFETY AND FIRE SAFETY DEM devotes a lot of attention to ensuring occupational health and safety and fire safety. Periodic activities in the area of occupational health and safety and fire safety pursued in 2011 include:

occupational and fire safety training of employees, new employees, pupils, students, trainees and interns (213 persons),

occupational safety training in the area of lifting machinery (145 persons), occupational safety training in the area of forklift use (31 persons), occupational safety training in the area of heavy constructional mechanisation use (10 persons), occupational safety training in the area of managers and senior employees (13 persons), occupational safety training in the area of performing fire guard (11 persons), medical examinations of employees (207 persons), inspections of working equipment, internal inspections of facilities, coordination meetings of occupational safety and health and fire safety professionals, collection of accreditation points by technical staff and participation in seminars for occupational

safety and health coordinators at buildings sites, analyses of accidents and incidents, sharing of good practices, external assessment under OHSAS 18001:2007, ISO 14001 and ISO 9001, cooperation with competent inspectorates, supply of personal safety equipment, implementation of the preventive health programme (52 persons), supervision of waste disposal (hazardous materials, debris), supervision of drinking water quality in own water sources.

OCCUPATIONAL SAFETY AND HEALTH

In 2011, the following new regulations were revised and adopted:

SP 28 System of occupational safety and health and fire safety, PR 28-01 Rules on occupational health and safety, SN 28-03 Programme and training in occupational safety and health, fire safety and functional

expertise, TP 28-01 Technical rules on general safety measures in energy facilities, TP 28-02 Technical rules for performing measures of occupational safety at energy installation, DN 28-01-02 Guidance on inspections and tests of working equipment, DN 28-01-01 Incident reporting and assessment instructions, DN 28-01-03 Personal safety equipment and work clothes instruction, PR 28-02 Rules on implementing preventive health programmes, SN 28-04 Fire safety rules.

In 2011, eight accidents at the workplace and one accident on the way to and from work were recorded. The most common were fall, slip and cut. The accidents at the workplace were of a minor nature. Due to these accidents, only 22 working days were lost.


In 2011, one incident was recorded which resulted in no serious personal injuries but only material damages.

FIRE SAFETY

All employees have been trained in accordance with the legislation. Where required, evacuation drills have been executed. Fire extinguishing equipment and active fire protection systems are maintained and inspected in accordance with the legislation. On the location of HPP Dravograd a fire-fighter drill was performed on 22 October 2011 in cooperation with PGD Dravograd. In addition to PGD Dravograd, operational centres PGD Trbonje, PGD Muta and PGD Lavamund (Austria) participated at the drill. There were 56 operational fire-fighters with nine fire engines.

2.10 ENVIRONMENT AND ECOLOGY The Drava River rises in the Dobbiaco Plain in Italy near the Austrian border. It enters Slovenia near Dravograd and leaves its territory near Ormož, after 133 km and a 148 m descent. The river ends its journey near Osijek, Croatia, where it flows into the Danube. On its path it connects the Alpine and the Pannonia bio-geographical area. Drava has a fluvioglacial water regime, which means that the river has the highest flow rate in June, when glaciers melt and the majority of other rivers already show signs of summer drought. The river achieves its second peak in November, when it is filled by autumn rain from the wide Alpine hinterland.

The Drava spring at Toblaško polje

The precipitation area of Drava River in Italy and Austria covers 10,964 km

2, and additional 2700 km

2 in

Slovenia. The precipitation area in Central Alps determines the basic characteristics of the Drava River water flows. Due to the strong impact of the Mediterranean climate, the tributaries from the southern part of the river basin cause short-lived but large water flows in the spring, and particularly in the autumn, which can once every hundred years reach as much as 2800 m

3/s, although the median annual water flow is only 297 m

3/s.

The favourable hydrology of the Drava River has caught attention of hydropower plant builders early on. So far, 22 power plants have been built on the Drava River, their total capacity amounting to 1400 MW and their annual output to 7,000 million kWh. In Austria, in South Tyrol, a channel-type power plant with significant head was constructed and is followed by a consecutive chain of the remaining 21 power plants. Of these, 11 are located in Austria, 8 in Slovenia and 3 in Croatia.

ENVIRONMENTAL RESPONSIBILITY Wherever man seeks energy in nature, infringements on the environment are bound to occur. Pier-type power plants placed in the riverbed have less influence on the environment than do channel-type ones. Undertakings performed with regard to channel-type power plants are more extensive; however, through more carefully thought out solutions, they could also protect and enrich the environment. Industrial development and the exploitation of the Drava River led to pollution of the watercourse in the past, but the quality of water has improved over the last decade. The operation of hydroelectric power plants using suitable technological solutions does not place burdens on the environment, though, through their construction, they possibly influence the layout of the landscape, leading to a change in the aquatic environment of the river and that of its surroundings. Responsible management of the environment thus begins as early as during the planning of technological solutions by preventing potential undesirable effects and by constantly monitoring potential effects of HPP operation on the environment. Unfortunately, some effects are impossible to avoid completely. Therefore, efforts to eliminate their consequences are all the more important.


In the last decade, DEM’s ecological projects have been mainly directed towards the maintenance of reservoirs and, through this, the revitalisation and maintenance of embankments and the removal of floating debris, together with the ecological use of organic waste. A company whose operations are fully integrated with the principles of sustainable development and responsible environment management performs its ecological projects in cooperation with relevant nature-protection agencies.

SUSTAINABLE DEVELOPMENT Promoting sustainable development means caring for the quality of life of current and future generations. We should be close to nature, which provides for our existence, and to the people we share it with. Our desire is to help shape the environment in which we operate in a responsible and productive manner, which is why our attention is directed towards numerous projects in all the areas of DEM’s operation, from Dravograd to Formin. In accordance with our financial capabilities, we support a number of humanitarian, sports, art, educational and other projects, as well as socially advantageous activities on the local, regional and national level.

ENVIRONMENTAL PROJECTS FLOATING DEBRIS DISPOSAL SITES

Construction of debris disposal site HPP Dravograd Project documentation for debris disposal sites and acquisition of all approvals was performed in 2010. In

2011, the construction of last debris disposal site at the upper Drava River was started and finished.

Floating debris disposal site HPP Dravogard

Construction of debris disposal site HPP Vuzenica The construction of disposal site of debris at HPP Vuzenica was extended in 2011 due to problems with the selection of contractor. In February 2011, the new selection of most favourable supplier was performed. In March 2011, the construction of disposal site of debris at HPP Vuzenica began and it was finished in June 2011. Repair of riverside protection in the area of DEM facilities According to the reports of the Slovene Building and Civil Engineering Institute (ZAG), it was necessary to repair the damaged embankments with concrete plates, partly with quarry stone – gabions and packed rockfill.

Riverbank insurance HPP Vuzenica podslapje


MONITORINGS OF CONSTRUCTION FACILITIES

Monitoring of construction facilities is regularly performed as well as each year. With the purpose to protect the environment, the banks of accumulations and channels are regularly monitored and in the context of maintenance restorations are regularly performed. Setting monitoring at small power plant Ceršak In 2011, we started to regularly monitor the condition of small HPP Ceršak facility. The facility is very old and it was poorly maintained in the past. In case of eventual demolition of any auxiliary facility (dam, embankments of downstream or tailrace channel), environment can be significantly affected. Therefore, the abovementioned monitoring will be performed in 2011. ECOLOGICAL RESTORATION

Restoration of railway culverts A crammed up railway culvert, which is composed of gravel, silt and stones was cleaned. The embankments were also fixed.

Railway culvert Vuhreščica, inflow in the Drava River

Restoration of inflow emissions in the Drava River in Vuzenica and Dravograd As a concessionaire for inflows in the Drava River, VGP Ptuj d.o.o. cleaned three inflows in the Drava River (gravel, silt and stones). Thus, the intake in the Drava River will be smaller in case of increased waters. Cleaning and restoration of Tilkova mlaka, project, phase I In 2011, the first phase of cleaning Tilkova mlaka was concluded. The sampling of deposited silt was performed indicating that the silt in this location was not polluted and it did not represent a special waste. Finishing works at Trbonjsko Lake In 2011, the final cleaning of Trbonjsko Lake was performed and the surroundings of the lake were arranged. The embankments were planted with vegetation, which resulted in a very well arranged lake that would offer a pleasant recreational and relaxation environment to people and animals, while at the same time the stabilisation prevented larger damage. Study of method of cleaning silt in the pool of HPP Mariborski otok Some years ago the silt was cleaned above the hydropower plant Mariborski otok. Now there is so much silt that it will have to be removed again. Since the area is a part of Natura 2000, we have to acquire permission for intervention in the nature by the Environmental Protection Institution. Currently, a task is under preparation which will give answers on probability of disposing silt. Cleaning and restoration of Črneški bay, 1

st phase and project

In 2011, only the lower channel of Črneški bay was cleaned due to fish spawning. Annual cleaning of sedimentation chambers Due to storms, the Drava stream was cleaned in 2011. According to the plan, the deposited materials were removed on annual basis. Cleaning of silt in the Ptuj Lake In 2011, silt was cleaned on two segments of the Ptuj Lake, namely the conclusion on the left side to Puh Bridge in the length of approximately 200 m and on the right side from the Puh Bridge to the reed in the length of 150 m. Renaturalization will continue in 2012. Arrangement of embankment near the DEM boathouse The bank protection in the bay near Limburško nabreţje boathouse was renovated within the framework of regular bank maintenance. Bank was severely affected by erosion which is a result of various factors. It could cause demolition of bank protections.


Monitoring of dunes in the Drava riverbed from Maribor to Ptuj – habitation segment We have been monitoring the effects of intervention into Drava riverbed for the third year. The work is performed by the company Vodnogospodarski biro Maribor. The task has to provide results of regular dune cleaning and indicate the guidelines for further work under the concession agreement. Liabilities under the concession agreement with ARSO (Environmental Agency of the Republic of Slovenia) for maintaining the Drava River flow In accordance with the requirements of concession agreement and project terms of ZRSVN no. 4-II-421/9-=-10/SK and VGB Maribor guidelines from the project no. 3139/09, IP is performed in order to arrange dunes in the old Drava riverbed from Malečnik to Starš. In 2011, the restoration of dunes no. 3, 4, 5, 8 and 9 was performed. All work was performed in accordance with the Environmental Protection Institute Maribor and ARSO, Maribor unit. Since the restoration of HPP Zlatoličje was performed in 2011, the flows in the old riverbed were too big to perform gabions and therefore the restoration of dune 5 was performed in accordance with the agreement.

MANAGEMENT SYSTEM Due to non-coordinated deadlines of performing regular control and recertification assessments, simultaneous recertification assessment of all three standards, which form the management system, was performed in 2011: the ISO 9001:2008 quality standard, the ISO 14001:2004 environment management system and the OHSAS 18001:2007 occupational health and safety system. The training of internal auditors was performed within the framework of preparations for the performance of recertification external assessment. Fifteen internal auditors participated at the training, which was performed by the SIQ representative Kunc, M.Sc. The qualification of internal auditors proved effective in the execution of internal audits since the auditors discovered numerous deficiencies and 56 measures were created on the basis of these deficiencies. For each measure operator and performance deadline were defined. Certain problems occurred in performance of measures. The problems caused that numerous measures were not performed within the set deadline. The management review was performed on 2 June 2011. The management assessed that the management system represents a significant instrument in the company’s management, while there are numerous possibilities to improve the functioning of the system and approve the urgency of performing preventive and corrective measures. Four leading auditors from the firm Bureau Veritas performed the external assessment from 22 to 24 June 2011. The review was very thorough and detailed. During the review the auditors did not establish any deficiencies, solely prepared numerous reports. The external assessment of management system indicated that the system was entering a period of maturity, but it was still facing certain beginner's problems. External assessment did not establish any inconsistencies in the area of quality management system, while attention was drawn to numerous possible improvements. In the previous year, we worked intensely in the area of improving ODOS document system. Despite occasional problems, the document system became a very important document management system. A new procedure of input and maintenance of management system documents was prepared. We adapted the procedure for normal work through certain amendments. Workshops were performed in order to ensure greater qualification of process owners and administrators for work with documents. At these workshops, the representatives of PIA applications performer presented the process of document input and management. With the help of the abovementioned application, numerous management system documents were revised or amended in the previous year, which indicates that the process administrators are aware of the need for regular amendment of documentation. In 2011, 85 system documents were revised or amended, of which 6 new system regulations were issued. The system of management system control was also improved. In the previous year, the Management Council of DEM was established in order to assure larger coordination of implementing management systems. The Council includes process administrators or managers of ecological and security team. At the end of the year, the Council was extended by the leader of information security team. In the previous year, the Council met twice. In December 2011, a certification of new standard ISO/IEC 27001 (information security management system) was performed in the area of management system development.


Preparations for certification lasted several months and intensive work of project group members and other participants bore fruit since the certification assessment had positively assessed and complemented work performed. Until the next audit, it will be necessary to perform certain measures, which were identified at the time of preparations for the audit and could not be performed before the audit as well as measures and recommendations of certification assessment.

2.11 ANALYSIS OF BUSINESS PERFORMANCE

FINANCIAL OPERATIONS The company’s liquidity situation is not represented only by activities for ensuring sufficient cash flows, but also availability of liquid assets in a form that enables settlement of financial liabilities as they fall due. The cash flow statement mostly provides information about the potential exposure of the company to liquidity risk and is the most important part of financial risk management. In light of this fact and the current economic situation, the company’s financial operations in 2011 were directed mostly towards:

ensuring solvency,

creation of adequate liquidity reserves, and

financial risk management. The activities for ensuring solvency did not burden the company’s operations, since we provided for adequate solvency by means of cash flow management. Receivables for electricity sold were settled within deadlines which enabled timely settlement of short-term liabilities. For the settlement of all the company’s liabilities we created a liquidity reserve in the form of time deposits with banks. The company’s exposure to financial risks is low mostly as a result of integration in the HSE Group. We namely generate almost 90 % of revenue through cooperation with a single, reliable customer on the basis of an annual contract for the sale of electricity, which contains elements of credit insurance. Due to the fact the amount of investments in securities is minimal (NLB shares), and the deposited funds are held only with banks which are majority owned by the government, the risks in the area of liquidity are minimal as well. All payments from our largest customer (HSE) are foreseeable and stable, while trade liabilities and other financial liabilities are known in advance. STRUCTURE OF STATEMENT OF FINANCIAL POSITION AS AT 31.12.2011

CAPITAL ADEQUACY Capital adequacy can be defined as the company’s investment capabilities. The company complies with capital adequacy requirements, since it disposes of sufficient long-term financing sources given the volume and type of transactions, and an adequate policy to manage risks we are exposed to in our operations.


An analysis of financial operations and other non-financial elements shows that the company, while considering socially responsible management, operates in a financially sound manner and in line with its objectives.

SELECTED FINANCIAL DATA OF THE COMPANY FINANCING RATIOS

Equity financing rate: 97.03

At the end of 2011, the company’s equity amounted to 97.03 % of its total equity and liabilities. The company’s operations were thus almost entirely financed from its own sources, which translates into high security of creditors’ investments and a stable return for owners. The equity financing rate slightly decreased compared to the end of 2010.

Long-term financing rate: 97.64

The rate is slightly higher than the equity financing rate. 97.64 % of the company’s assets were financed from long-term sources, and 2.36 % was financed from short-term sources. Compared to the end of 2010, the long-term financing rate decreased. INVESTMENT RATIOS

Operating fixed assets rate: 70.77

The company's total assets include 70.77 % of property, plant and equipment and intangible assets. Although the ratio decreased compared to end of the previous year, we expect that in the future the share of fixed assets in total assets will increase due to new investments.


Long-term assets rate: 85.00

The company’s long-term assets account for 85.00 % of its total assets. The remaining assets represent inventories, short-term investments, short-term operating receivables, other short-term assets and cash and cash equivalents. Compared to the end of 2010, the ratio decreased slightly. HORIZONTAL FINANCIAL STRUCTURE RATIOS

Equity to operating fixed assets ratio: 1.37

In 2011, the company financed all its fixed assets with its own sources at carrying amount. The value of the ratio is higher than in the previous year.

Acid test ratio: 5.46

The acid test ratio shows the relation between liquid assets and short-term debts. In the period under review, the company covered all its short-term liabilities with its liquid assets. Compared to 2010, the ratio slightly decreased.

Quick ratio: 6.30

At the end of 2011, the company’s quick ratio stood at 6.30, meaning that in the period under review the company’s short-term liabilities were fully covered with its credit balances with banks (cash) and short-term operating receivables. Compared to the end of 2010, the ratio slightly decreased.


Current ratio: 6.32

The current ratio describes the financing of current assets from short-term liabilities. At the end of 2011, the company covered all of its short-term liabilities with current assets. Compared to the end of 2010, the ratio considerably decreased. EFFICIENCY RATIOS

Operating efficiency ratio: 1.20

In 2011, the company’s operating revenue exceeded its operating expenses by 20 %. The ratio decreased relative to the previous year. PROFITABILITY RATIOS

Net return on equity ratio: 0.020

In 2011, the company generated € 10,495,516 in net profit meaning that for each euro of equity invested € 0.020 of net profit was generated. The company's operations in 2011 were successful and stable. The ratio decreased compared to 2010.

2.12 RISK MANAGEMENT DEM is aware of its exposure to various categories of risks which affect its operations, fulfilment of its mission and achievement of its strategic goals. It is also aware of the importance of timely and early identification of the following risks: operational risks, business risks and financial risks. The risks the company is exposed to are shown in the picture below:


OPERATIONAL RISKS

These risks pose the greatest threat to the company. In connection with operational risks, the company conducted risk monitoring in the following areas in 2011: Quantity risk, which arises from uncertainty as to the achievement of planned production and availability of production units. This directly affects business performance. The key factors of quantity risk are as follows:

Hydrology of the Drava River which could result in production fluctuation of ± 10%, given the long-term average.

Quality of maintenance of the company’s fixed assets and the related outages and overhauls. The company has so far managed to secure funds that are sufficient for the level of maintenance ensuring safe and uninterrupted operation. At the same time, it has been preparing long-term plans for maintenance activities required for timely elimination of major risks.

Risk of damage to the property, which is reduced through a property insurance policy. Property insurance covers: fire insurance, burglary and machinery breakdown insurance, liability insurance, computer insurance, etc.

Management of legislation and standards: Here we focused on VAT legislation to the greatest extent possible. Operational risks are also managed with standards that are prepared in accordance with the rules set out in internal regulations and ISO standards. BUSINESS RISKS

Business risks are related to the ability to generate revenue and contain costs, the ability to maintain the value of business assets, and the ability to settle operating liabilities. The exposure to business risks is low, and no major uncertainties regarding the performance, development and condition of the property have been identified because:

99 % of sales revenue is generated on the basis of electricity sales to the customer: HSE with which we have an annual contract for the sale of almost the whole of electricity produced,

and we have a price-competitive and high-quality product, and electricity demand is increasing year by year; we ensure efficient operation through professionally qualified staff and good organisation of operations; we are committed to introducing constant improvements and overall quality of operations as a result of

certification and standardisation of our business operations; our competitive advantage is increased through modern technological equipment and regular

maintenance, investments in increased capacity of the existing plants and equipment, and numerous other production opportunities;

we regularly monitor and control our operating costs; we are part of the HSE Group, which gives us long-term stability. FINANCIAL RISKS

Financial risks are related to the ability to generate financial revenue and manage financial expenses, and the ability to settle financial obligations and ensure solvency. Next to legally prescribed activities, management of financial risks is also of great importance for the existence of the company in the current market conditions. Below we present some of the most important financial risks: Credit risk is the risk of trade receivables and receivables from other legal entities not being settled in full or not being settled at all. DEM minimises credit risk by:

generating more than 90 % of revenue on the basis of cooperation with a single, reliable customer (the annual contract for the sale of electricity, which contains elements of credit insurance).

Liquidity risk is the risk of reduced liquidity and changing prices of securities. The amount of investments in securities being minimal, only the risk of reduced liquidity has been identified, which is estimated as low given the predictability and security of payments made by our largest customer. Trade and financing liabilities are known in advance. Liquidity risks are well managed because:

cash flows are monitored on a daily, weekly and monthly basis;


surplus liquidity is deposited with established banks according to the principles of risk diversification and profit maximisation;

adequate liquidity reserve is set aside. Interest rate risk is considered as low, which is why no active policies for the management of such risks have been prepared for 2010. Inflation risk was managed by entering into fixed price contracts with suppliers. The types of risks and the mechanisms for their management are shown in the table below:

* Probability is ranked as: H= high, M= medium, L= low Impact is ranked as: H= high, M= medium, L= low In order to assure better and more transparent monitoring and management of the company's risks, the Risk Management Committee was appointed in July 2011 (hereinafter: the »Committee«). The basic task of the Committee is to ensure the establishment of comprehensive risk control and management system within the company. The basic purpose of the Committee is to assure central determination and management of risk in the company in a structured, consistent and coordinated manner and thus provide the management and owner a quality basis for management and governing of the company with the aim to achieve goals planned.

2.13 COMMUNICATION AND PUBLIC RELATIONS In 2011, DEM’s communication with stakeholders and the public was in line with its social responsibility strategy, which is mainly aimed at:

enhancing reputation,

increasing recognition, and

ensuring understanding of DEM’s business and development decisions. A number of activities are related to sustainable development, which is also a basis for PR support to the refurbishment of HPP Zlatoličje and new projects (PSP Kozjak, power plants on the Mura River). To this end, we designed an appropriate selection, i.e. combination, of communication tools which include in particular:

press releases that are used to inform media about business and other events;

occasional press conferences and events;

updates of internet and intranet sites, which enable quick, high-quality and rational communication to internal and external public;

sponsorship and donation strategy as a form of implementing social responsibility in the area of DEM’s operations, i.e. from Dravograd to Formin, through financial support to art, sports and other activities falling within the scope of sponsorships and donations.

Press clippings were regularly monitored and analysed in 2011 as well.


In the area of internal communication, we continued to issue the annual journal ―Dravski val‖ (―Drava wave‖) – we have published four issues. We have also prepared the most important information on developments within the company for the journal of the HSE Energija group and the journal of Slovene economy ―Naš stik‖ (―Our Touch‖). Due to a wide geographical distribution of DEM's employees, joint events of DEM's employees are of utmost importance. In June, we organised a traditional meeting of employees - DEM Day - and the meeting of DEM pensioners. Since in 2011 we celebrated the 60

th anniversary of the company, the celebration was

commemorated with the autumn event in SNG Maribor that was intended to DEM's employees and guests from the HSE companies, while in November we also met the pensioners who helped co-creating the company. The year 2011 was concluded with two events: New Year’s meeting of employees and reception of business partners.

2.14 RESEARCH AND DEVELOPMENT Next to the regular annual planning of operations, DEM also prepares a long-term development strategy. Our long-term planning is based on the vision and mission of our company:

safe and stable supply of customers and electricity consumers;

streamlining of all operating costs;

safe and reliable operation;

continuous upgrading of production equipment and production control equipment;

a safe working environment for all our colleagues; and

compliance with all environmental regulations.

2.15 PLANS FOR THE FUTURE At DEM we are aware that a competitive price of electricity and its safe, high-quality and reliable supply are crucial for the company’s successful market appearance. In 2011 and future years we will continue to carry out tasks in accordance with our strategic plans. Until 2018, we will continue to develop our business in the following strategic areas: Ensuring additional production capacities including two development areas:

Electricity production – safe, high-quality and reliable electricity production represents the company's main objective for the long-term period concerned. We wish not only to maintain but also increase the existing production capacities.

Maintenance of facilities and buildings – through high-quality maintenance we wish to make sure that over the long-term production facilities and buildings are in a condition to operate throughout their useful lives in the manner for which they were designed.

Securing economic efficiency of the company (which includes human resources and trainings, the company's organisation, quality management systems, the company's reputation, organisation of the sale of products and services, cooperation of DEM in the HSE system and preservation of the technical and cultural heritage) Ensuring safe and reliable functioning and operations (which includes operational safety, management of environmental requirements, occupational health and safety and fire safety) In accordance with the 2012 business plan, our plans for 2012 are as follows:

net sales revenue of € 67 million;


net profit of € 7.5 million;

electricity production of 2,341.534 GWh;

capital investments in the amount of € 41.8 million;

291 employees at the end of the period.

2.16 IMPORTANT EVENTS AFTER THE END OF THE PERIOD The end of 2011 and the beginning of 2012 were marked by the following business events of major

significance:

After a successful beginning of operations of the first solar power plant DEM at HPP Zlatoličje last August, we continued the new project in the area of electricity production from a renewable source, energy of sun. The result is already evident since we built the second solar power plant at HPP Forimn, which was named Solar power plant Formin with the total capacity of 112 kWp. Its construction began last November, while on 22 December 2011 it was connected to the network.


03 F I N A N C I A L R E P O R T

AUDITOR'S REPORT

INTRODUCTORY NOTES

STATEMENT BY THE MANAGING DIRECTOR

FINANCIAL STATEMENTS AND NOTES TO THE STATEMENTS


3.1 AUDITOR'S REPORT



3.2 INTRODUCTORY NOTES TO FINANCIAL STATEMENTS On the basis of the General Meeting’s decision of the owner of the company DEM, all financial statements and explanatory notes for 2011 are for the first time prepared in accordance with the International Financial Reporting Standards (hereinafter: ―IFRS‖) as adopted by the EU. 1. 1 January 2010 is the date of transition after which the company prepared the opening statement of the financial position in accordance with IFRS. Until 2011, the company had been preparing the financial statements in accordance with the Slovene Accounting Standards and the interpretations by the Slovene Institute of Auditors. The audit firm Deloitte revizija d.o.o. has audited the financial statements with explanatory notes and prepared the Independent Auditor's Report included in the beginning of the section. The statement of Managing Director’s responsibility published below includes responsibility for all financial statements of the company. The annual report of the company DEM for 2011 financial year is available at the registered office of DEM, Obreţna ulica 170, Maribor and at the website www.dem.si.


3.3 STATEMENT BY THE MANAGING DIRECTOR


3.4 FINANCIAL STATEMENTS

STATEMENT OF FINANCIAL POSITION


INCOME STATEMENT

STATEMENT OF OTHER COMPREHENSIVE INCOME


STATEMENT OF CHANGES IN EQUITY


CASH FLOW STATEMENT


3.5 NOTES TO THE FINANCIAL STATEMENTS

REPORTING COMPANY DEM is a company with its registered office in Slovenia. Its registered office is located at Obreţna ulica 170, Maribor. The separate financial statements of the company for the year ended 31 December 2011 are presented below. The consolidated financial statements for HSE Group are prepared by the company HSE. The consolidated annual report for the HSE Group is available at the registered office of HSE. DEM’s core business activity is production of electricity in HPPs.

BASIS FOR PREPARATION In the preparation of financial statements as at 31.12.2011, the company considered:

IFRS, which include International Accounting Standards (IAS), Interpretations issued by the Standing Interpretations Committee (SIC), International Financial Reporting Standards (IFRS) and Interpretations issued by International Financial Reporting Interpretations Committee (IFRIC) as adopted by the European Union (hereinafter: the ―EU‖);

the Companies Act;

the Corporate Income Tax Act;

Implementing regulations of Corporate Income Tax Act,

Accounting Rules of the company DEM; and

other relevant legislation. a) Standards and Interpretations effective in the current period

Amendments to IAS 24 ―Related Party Disclosures‖ - Simplifying the disclosure requirements for government-related entities and clarifying the definition of a related party adopted by the EU on 19 July 2010 (effective for annual periods beginning on or after 1 January 2011);

Amendments to IAS 32 ―Financial Instruments: Presentation‖ – Accounting for rights issues, adopted by the EU on 23 December 2009 (effective for annual periods beginning on or after 1 February 2010);

Amendments to IFRS 1 ―First-time Adoption of IFRS‖ - Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters, adopted by the EU on 30 June 2010 (effective for annual periods beginning on or after 1 July 2010);

Amendments to various standards and interpretations ―Improvements to IFRSs (2010)‖ resulting from the annual improvement project of IFRS published on 6 May 2010 (IFRS 1, IFRS 3, IFRS 7, IAS 1, IAS 27, IAS 34, IFRIC 13) primarily with a view to removing inconsistencies and clarifying wording (amendments are to be applied for annual periods beginning on or after 1 July 2010 or 1 January 2011 depending on standard/interpretation);

Amendments to IFRIC 14 ―IAS 19 — The Limit on a defined benefit Asset, Minimum Funding Requirements and their Interaction‖ - Prepayments of a Minimum Funding Requirement, adopted by the EU on 19 July 2010 (effective for annual periods beginning on or after 1 January 2011);

IFRIC 19 ―Extinguishing Financial Liabilities with Equity Instruments‖, adopted by the EU on 23 July 2010 (effective for annual periods beginning on or after 1 July 2010).

The adoption of these amendments to the existing standards has not led to any changes in the Entity’s accounting policies. b) Standards and Interpretations issued by IFRIC and adopted by the EU but not yet effective

Amendments to IFRS 7 ―Financial Instruments: Disclosures‖ - Transfers of Financial Assets, adopted by the EU on 22 November 2011 (effective for annual periods beginning on or after 1 July 2011).


The Entity has elected not to adopt these standards, revisions and interpretations in advance of their effective dates. The Entity anticipates that the adoption of these standards, revisions and interpretations will have no material impact on the financial statements of the Entity in the period of initial application. c) Standards and Interpretations issued by IFRIC but not yet adopted by the EU

IFRS 9 ―Financial Instruments‖ (effective for annual periods beginning on or after 1 January 2015);

IFRS 10 ―Consolidated Financial Statements‖ (effective for annual periods beginning on or after 1 January 2013);

IFRS 11 ―Joint Arrangements‖ (effective for annual periods beginning on or after 1 January 2013);

IFRS 12 ―Disclosures of Involvement with other Entities‖ (effective for annual periods beginning on or after 1 January 2013);

IFRS 13 ―Fair Value Measurement‖ (effective for annual periods beginning on or after 1 January 2013);

IAS 27 (revised in 2011) ―Separate Financial Statements‖ (effective for annual periods beginning on or after 1 January 2013);

IAS 28 (revised in 2011) ―Investments in Associates and Joint Ventures‖ (effective for annual periods beginning on or after 1 January 2013);

Amendments to IFRS 1 ―First-time Adoption of IFRS‖ - Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters (effective for annual periods beginning on or after 1 July 2011);

Amendments to IFRS 7 ―Financial Instruments: Disclosures‖- Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after 1 January 2013);

Amendments to IFRS 9 ―Financial Instruments‖ and IFRS 7 ―Financial Instruments: Disclosures‖ - Mandatory Effective Date and Transition Disclosures;

Amendment to IAS 1 ―Presentation of financial statements‖ – Presentation of Items of Other Comprehensive Income (effective for annual periods beginning on or after 1 July 2012);

Amendments to IAS 12 ―Income Taxes‖ - Deferred Tax: Recovery of Underlying Assets (effective for annual periods beginning on or after 1 January 2012);

Amendment to IAS 19 ―Employee Benefits‖ - Improvements to the Accounting for Post-employment Benefits (effective for annual periods beginning on or after 1 January 2013);

Amendments to IAS 32 ―Financial Instruments: Presentation‖- Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after 1 January 2014);

IFRIC 20 ―Stripping Costs in the Production Phase of a Surface Mine‖ (effective for annual periods beginning on or after 1 January 2013).

The Entity anticipates that the adoption of these standards, revisions and interpretations will have no material impact on the financial statements of the Entity in the period of initial application. At the same time, hedge accounting regarding the portfolio of financial assets and liabilities, whose principles have not been adopted by the EU, is still unregulated. According to the Entity’s estimates, application of hedge accounting for the portfolio of financial assets and liabilities pursuant to IAS 39: “Financial instruments: Recognition and Measurement‖, would not significantly impact the financial statements, if applied as at the balance sheet date.

BASIS OF MEASUREMENT The company’s financial statements are prepared on the basis of historical values of balance sheet items, except the following assets and liabilities carried at fair value:

derivatives;

financial assets at fair value through profit and loss;

available-for-sale financial assets (in case the fair value can be determined).


CURRENCY REPORTINGS

FUNCTIONAL AND PRESENTATION CURRENCY The financial statements contained in this Report are presented in euro (EUR) without cents. The euro has been the functional and presentation currency of the company. Due to the rounding of amounts, minor but insignificant deviations exist in the tables.

TRANSLATION OF FOREIGN CURRENCIES Transactions expressed in a foreign currency are translated into the relevant functional currency at the exchange rate applicable on the date of transaction. Cash and liabilities expressed in a foreign currency at the end of the reporting period are converted into functional currency at then applicable exchange rate. Positive or negative foreign exchange differences are differences between amortised cost in the functional currency at the beginning of the period, which is repaired for the amount of effective interest and payments during the period, as well as amortised cost in foreign currency converted at the exchange rate at the end of the period. Non-cash assets and liabilities expressed in a foreign currency and measured at fair value are converted in the functional currency at the exchange rate on the date when the amount of fair value is determined. Foreign exchange differences are recognised in the income statement.

USE OF ESTIMATES AND JUDGEMENTS The preparation of financial statements requires that the Managing Director forms certain assessments and assumptions which affect the disclosed amounts of assets and liabilities, revenue and expenses and disclosures of contingent assets and expenses in the reporting period. Assessments and judgements are based on past experience and other factors that are considered reasonable in the given circumstances and on the basis of which the judgements on the carrying amount of assets and liabilities are expressed. Since the assessments and assumptions are subject to subjective judgement and certain level of uncertainty, subsequent actual results can differ from assessments. The assessments are examined on regular basis. Changes in accounting estimates are recognised in the period in which the assessments were changed if the change affects only that period or in the period of change and in future periods in case the change affects future periods. Assessments and assumptions are present at least at the following judgements:

assessment of useful life of amortisable assets; test of impairment of assets; assessment of fair value of available-for-sale financial assets; assessment of fair value of derivatives; assessment of net realisable value of inventories, assessment of realisable values of receivables; and assessment of provisions for jubilee and termination benefits.

BRANCH AND REPRESENTATION OFFICES The company has no branch offices.

SIGNIFICANT ACCOUNTING POLICIES The company’s financial statements are prepared on the basis of accounting policies presented below. The abovementioned accounting policies are used for all years presented, unless otherwise indicated. Comparative data is compliant with the presentation of data in the current year. The comparative data was adopted when needed so that it is in accordance with the presentation of data in the current year.


INTANGIBLE ASSETS

Intangible assets are long-term assets enabling performance of the company’s registered activities, whereas physically they do not exist. Among intangible assets the company records long-term property rights and other intangible assets. Upon initial recognition, an intangible asset is measured at cost. The cost also includes import and non-refundable purchase taxes after the commercial and other discounts have been deducted and all costs directly attributable to preparation of an asset for the intended use. Intangible assets are subsequently measured using the cost model. Amortisation is accounted for on a straight-line basis, taking into account the useful life of each individual (integral) part of an intangible asset. The amortisation begins to be calculated from the cost when an asset is available for use. Intangible assets with indefinite useful life are not amortised, but impaired. Amortisation methods, useful lives and other asset group values are examined at the end of each financial year and adapted if needed. Individual items of intangible assets have the following useful lives:

Subsequent costs in relation to intangible assets are capitalised only in cases when they increase future economic benefits arising from an asset to which the costs refer. All other costs are recognised in profit or loss as expenses as soon as they are incurred.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are long-term assets owned by the company and used for the performance of its registered activities. Property, plant and equipment comprise land, buildings, production equipment, other equipment and assets in the course of construction. Property, plant and equipment are carried at cost less accumulated depreciation and accumulated losses from impairments, except land and other assets that are not amortised and are presented at its cost less all impairments. Cost includes costs that can be directly attributed to the acquisition of an item of property, plant and equipment. The parts of items of plant and equipment with different useful lives are accounted for as individual assets. Borrowing costs that are directly allocated to the purchase, construction or production of a qualifying asset, i.e. until the capitalisation of an asset, are recognised as a part of cost of such an asset. For later measurement of property, plant and equipment the cost model is used. Amortisation is calculated on a straight-line basis, taking into account the useful life of individual (integral) part of a fixed asset and residual value. Land and certain other assets are not depreciated. Depreciation begins when an asset is available for use. Constructions in progress are not depreciated. Individual items of property, plant and equipment have the following useful lives:


Amortisation methods, useful lives and other values of groups of assets are examined at the end of each financial year and adapted if needed. In case useful life is extended, the company decreases accrued depreciation costs in the discussed financial year, while in case the useful life is shortened, it increases them. The adjustment of useful life has to be calculated in a manner that the asset will be depreciated in the new predicted useful life. The change in useful life is considered as a change in accounting estimate and it affects solely the period in which the accounting estimate was changed and every following period of the remaining useful life. The costs of replacement of a part of fixed asset are attributed to the carrying amount of this asset if it is possible that future economic benefits related to a part of this asset will flow to the company and if cost can be reliably measured. All other costs (e.g. regular maintenance) are recognised in profit or loss as expenses as soon as they are incurred. Costs that occur in relation to a fixed asset increase its carrying amount when they increase its future economic benefits in comparison with the originally assessed future economic benefits. Gains and losses that occur in disposal of property, plant and equipment are recognised as a difference between the net sales value and carrying amount of a disposed asset and are recognised among other operating revenue or write-downs in value.

INVESTMENTS IN SUBSIDIARIES

Investments in subsidiaries are those where the company has the controlling influence and it usually also performs consolidated financial statements for this group of companies. In financial statements, investments in subsidiaries are valued at cost. The company recognises income from the investment in the extent that the company receives distributions from accumulated profit arising after the date of acquisition. Any indications of impairment of investments in subsidiaries are determined on an annual basis. In the event impartial evidence exists that a loss due to impairment was incurred, the amount of loss is measured as the difference between the carrying amount of a financial asset and the present value of estimated future cash flows discounted at the market interest rate for similar financial assets, and recognised as revaluation operating expense.

INVESTMENTS IN ASSOCIATES AND JOINTLY CONTROLLED COMPANIES (INVESTMENTS IN OTHER COMPANIES OF THE HSE GROUP)

Investments in associates are investments in which the company has an important influence and usually its stake in such company ranges between 20 and 50 %. Investments in jointly controlled companies are investments in which the company controls the operations of such companies together with other owners, namely on the basis of contractually agreed division of control. In the company’s financial statements, investments in associates as well investments in jointly controlled companies are carried at cost. The company recognises income from the investment in the extent that the company receives distributions from accumulated profit arising after the date of acquisition.

FINANCIAL INSTRUMENTS

Financial instruments include the following assumptions: non-derivative financial assets; non-derivative financial liabilities; derivatives.

NON-DERIVATIVE FINANCIAL ASSETS

Non-derivative financial assets comprise cash and cash equivalents, receivables and loans and investments. Financial asset is derecognised when contractual rights to cash flows from this asset are discontinued or when the rights to contractual cash flows from the financial asset are transferred on the basis of a transaction in which all risks and benefits from the ownership of financial asset are transferred.


Available-for-sale financial assets Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as loans and receivables or financial assets at fair value through profit or loss. They are valued at fair value in case the latter can be determined and whether profit or loss is recognised directly in the comprehensive income or equity, except losses due to impairment and profit and loss from the conversion of foreign exchange differences until the financial asset is recognised. At derecognition of investment, the accumulated profit and loss recorded in the comprehensive income are transferred to profit or loss. In case the fair value cannot be reliably measured since the range of justified fair value assessments is of significant importance and the probability of various assessments is difficult to be assessed, but it assesses the signs of impairment, the company measures the financial asset at cost. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included under current assets, except in case of maturities of more than 12 months after the date of the statement of financial position. In such case they are classified under long-term assets. Loans and receivables are carried in the statement of financial position under operating, financial and other receivables at amortised cost taking into account the applicable interest rate. Cash and cash equivalents Cash and cash equivalents comprise cash, bank deposits up to three months and other short-term quickly realisable investments with original maturity of three months or less. They are carried at cost. Overdrafts on bank accounts are included under short-term financial liabilities. NON-DERIVATIVE FINANCIAL LIABILITIES

Non-derivative financial liabilities comprise operating, financial and other liabilities. Financial liabilities are initially carried at fair value increased by the costs that are directly attributable to the transaction. After the initial recognition, financial liabilities are measured at amortised cost using the effective interest method. The portion of long-term financial liabilities that falls due within less than a year after the income statement date is disclosed under short-term liabilities.

ASSETS HELD FOR SALE

Asset or group of assets held for sale are those assets for which it can be reasonably expected that their value will be settled, mostly with the sales in the following 12 months and not with further use. Asset or group of assets held for sale are measured at the lower of the two: their carrying amount or fair value less costs of sale.

INVENTORIES

Inventories are carried at the lower of the two: historical cost or net realisable value. The historical cost includes cost that is composed of purchase price, import duties and direct costs of purchase. The purchase price is reduced by discounts received. Direct costs of purchase are costs of transport services, costs of loading, cargo handling and unloading, costs of monitoring of goods and other costs that can be attributed to directly obtained merchandise, materials and services. Purchase price discounts comprise discounts indicated in the invoice as well as discounts that are received later and refer to individual purchase. The value of finished products and work in progress includes total production costs in the narrow sense, which comprise direct costs of materials, direct costs of services, direct labour costs, direct depreciation/amortisation costs and general production costs. General production costs are costs of materials, services, salaries and amortisation/depreciation, which are charged in the framework of production process, but cannot be directly connected to products or services being produced or rendered. A part of production costs in total costs (materials, services, labour costs and amortisation) are established once per year on the basis of data from the previous year.


If the prices of the items that are purchased anew in the accounting period differ from the prices of inventory items of the same class, the first-in first-out (FIFO) method is applied to decrease the quantities of inventories during the year. Net realisable value is assessed on the basis of selling price in the normal course of business reduced by the estimated costs of completion and sales. The write-downs of damaged, expired and useless inventories are regularly performed during the year by individual items. At least once per year (namely as at the date of preparation of annual financial statements), the evidence on impairment of inventories is assessed. The impairment of inventories is assessed for each individual type of inventories. Individual types of inventories are classified as groups of inventories with similar characteristics on the basis of time component of changes in inventories. In the assessment of impairment for an individual group, the criteria of professional assessment, further utilisation or sale are used.

IMPAIRMENT OF ASSETS FINANCIAL ASSETS

A financial asset is considered impaired if there is objective evidence from which it is evident that, due to one or more events, the expected future cash flows arising from this assets that can be reliably measured have been decreased. Objective evidence on the impairment of financial assets can be: non-compliance or violation by the debtor; restructuring of the amount that others owe to the company in case the latter agrees; signs that the debtor will face bankruptcy; disappearance of active market for such instrument. Impairment of receivables and loans The company individually assesses the evidence on impairment of receivables. All significant receivables are individually measured for the purpose of special impairment. Whether it is assessed that the carrying amount of receivable has exceeded its fair value (realisable value), the receivable is impaired. The company assesses evidence on loan impairment for each significant loan. Loss due to impairment related to financial asset carried at amortised cost is calculated as difference between the carrying amount of an asset and expected cash flows discounted at historical interest rate. Loss is recognised in profit or loss. Impairment of available-for-sale financial assets Loss of investment securities available-for-sale due to impairment is recognised by transferring the possible accumulated loss, which was previously recognised in other comprehensive income of the period and recorded in fair value reserve, to profit or loss. Subsequent increase in fair value of impaired available-for-sale equity security is recognised under other comprehensive income for the period or fair value reserve. NON-FINANCIAL ASSETS

On each reporting date the company verifies the carrying amount of significant non-financial assets with the purpose to establish whether there are any signs of impairment. If such signs exist, the recoverable amount of the asset is estimated. The recoverable amount of an asset or cash-generating unit is the higher of the two: value in use or fair value less costs of sale. When determining the value of an asset in use, the expected future cash flows are discounted to their current value by using the discount rate before tax that reflects regular market assessments of the time value of money and risks that typically occur in relation to the asset. For the purpose of impairment test, the assets that cannot be individually tested are classified in the smallest possible group of assets that generate cash flows from further use and are mostly independent from receipts of other assets and groups of assets (cash-generating unit). The impairment of an asset or the cash-generating unit is recognised when its carrying amount exceeds its recoverable amount. Impairment is disclosed in the income statement. At the end of the reporting period, the company evaluates losses due to impairment in previous periods and thus establishes whether the loss has decreased or even disappeared. Loss due to impairment is reversed in case there has been a change in assessments, on the basis of which the company defines the recoverable amount of an asset.


The impairment loss is reversed to the amount up to which the asset’s increased carrying amount does not exceed the carrying amount that would have been determined net of depreciation had no impairment loss been recognised for the asset in prior periods.

EQUITY

Total equity of the company represents its liability to owners which falls due if the company ceases to operate, whereby the amount of equity is adjusted with respect to the then attainable price for the company’s net assets. It is determined by both the amounts invested by owners and the amounts generated in the course of operation that belong to the owners. It is decreased by the loss incurred in the course of operations and increased by the profit in the period.

As at 31 December 2002, the general equity revaluation adjustments included the revaluation of share capital before 2002 in accordance with then applicable Slovene Accounting Standards. The adjustment due to the transfer to new Slovene Accounting Standards has been transferred to capital surplus. The amount can only be used for increase in share capital. Legal and other reserves are amounts that are intentionally retained from the previous years’ revenue. They are created on the basis of the decision by relevant management and supervisory body. Fair value reserve represents the revaluation amounts of individual categories of assets. Retained earnings also include unallocated profits from the previous years and current year.

PROVISIONS FOR TERMINATION AND JUBILEE BENEFITS

In accordance with legal regulations, collective agreement and internal rules, the company is obliged to pay jubilee benefits to employees and termination benefits on their retirement for which long-term provisions are created. There are no other existing pension liabilities. Provisions are created in the amount of estimated future payments for termination and jubilee benefits discounted at the end of the financial year. The calculation is prepared for each employee by taking into account the costs of termination benefits on retirement and costs of all expected jubilee benefits until retirement. The calculation is prepared by the actuary using the projected unit. The actuary is selected at the level of the group. Payments for termination benefits on retirement and jubilee benefits decrease the created provisions.

OTHER ASSETS AND LIABILITIES

Other assets include long-term and short-term accrued revenue and deferred costs. Deferred costs or expenses are amounts incurred but not yet charged against the profit or loss. Accrued revenue is revenue that is taken into account in the profit or loss, although it has not been charged yet. Other liabilities include long-term and short-term accrued costs and deferred revenue. Accrued costs are amounts that have not occurred yet, but they will in the future and are already influencing the profit or loss. Deferred revenue is deferred revenue that will cover estimated expenses during a period of more than one year. They also include received state aids and aids connected with assets.

CONTINGENT LIABILITIES AND ASSETS Contingent liability is:

A possible liability arising from past events and whose existence is confirmed solely by the occurrence or non-occurrence of one or more uncertain future events that the company does not fully control, or

a present liability arising from past events, which is not recognised, since it is not probable that the outflow of resources embodying economic benefits will be required to settle the obligation or the amount of obligation cannot be reliably measured.

A contingent asset is a possible asset arising from past events and whose existence is confirmed solely by the occurrence or non-occurrence of one or more uncertain future events that the company does not fully control.


The company does not recognise contingent assets and liabilities in the statement of financial position.

REVENUE Sales revenue is recognised at fair value of the received repayment or receivable arising from this repayment decreased by repayments and discounts, rebates for further sale and quantity discounts. The revenue is disclosed when the buyer assumes all significant types of risks and benefits related to the ownership of the asset, when there is a certainty in relation to recoverability of a fee and related costs or possibility of repayment of products and when the company stops deciding on products sold. Operating revenue is recognised as follows: Sale of goods is recognised when the company delivers the products to the client. The client accepts the products, while the collectability of associated receivables is reasonably ensured. Sale of services is recognised in the accounting period in which the services are performed as regards the conclusion of the transaction estimated on the basis of actually performed service as the proportional portion of all services performed. Revenue arising from default interest charges and related receivables are recognised upon occurrence if it is probable that the economic benefits related to transaction will inflow to the company. On the contrary, default interest charges are recorded as contingent assets and are recognised in the company’s books of account upon payments. Recording of default interest is considered individually. Other operating revenue related to products and services is revenue from the reversal of provisions, revenue from utilisation of deferred revenue, gains arising from sales of fixed assets, reversal of impairment of receivables, received compensations and contractual penalties, subsidies, grants, recourses, premiums and similar revenue. State aid is considered as deferred revenue that the company strictly consistently and wisely recognises as other operating revenue over the useful life of the relevant asset (on the other hand, the company discloses the amortisation/depreciation cost of this asset among operating expenses). Financial revenue comprises revenue from interest on investments, revenue from the disposal of available-for-sale financial assets, positive foreign exchange differences incurred in financing and investing activities and profits from derivative instruments for cash-flow hedging that are recognised in the income statement.

EXPENSES Expenses are recognised if a decrease in economic benefits in the accounting period gives rise to a decrease in assets or increase in debt and this decrease can be reliably measured. Operating expenses are recognised once costs are no longer held in inventories of products and work in progress or once merchandise has been sold. Costs that cannot be held in inventories of products and work in progress are recognised as operating expenses upon its occurrence. The cost of goods sold includes expenses related to sales of goods when the costs of goods are not held in inventories since this is a trading activity. Costs of materials are historical costs of materials purchased that are directly used for creating products and services (direct costs of material) as well as costs of material that do not have such nature and are included in relevant purpose (functional) groups of indirect operating costs. The first subgroup includes costs of raw materials, other materials and purchased parts and semi-finished products whose consumption can be related to creating products and services. The second group includes costs of auxiliary materials for maintenance of property, plant and equipment, small tools whose useful life does not exceed one year, spare parts for servicing of products after their sale, office supplies, specialised literature and other items. Costs of materials cover also the accrued costs of shrinkage, spilling, breakage and failure. Costs of services are historical costs of purchased services that are directly used for creating products and services (costs of direct services) as well as costs of services that do not have such nature and are included in adequate purpose (functional) groups of indirect operating costs. The first group mostly includes the costs of services for production of goods, while the second group includes mainly the costs of transport services, maintenance services, services of fairs, marketing and entertainment, costs of insurance premiums, payment transactions and other banking services (except interest), rents, advisory services, business travels and similar services.


Depreciation/amortisation costs are historical costs related to strictly consistent transfer of value of amortisable property, plant and equipment, amortisable intangible assets and investment property. Write-downs in value also include impairments, write-downs and losses from the sales of intangible assets and property, plant and equipment and impairments or write-downs in receivables and inventories. Labour costs are historical costs that refer to salaries and similar values in gross amounts as well as duties that are calculated from this basis and are not an integral part of gross amounts. These costs can be directly charged against creation of products and services (costs of direct work) or they have the nature of indirect costs and are comprised in relevant purpose (functional) groups of indirect costs. Other operating expenses occur in relation to creation of provisions, concessions, environmental charges and other duties. Operating expenses also include donations. Financial expenses comprise borrowing costs (if they are not capitalised), negative foreign exchange differences that occur in financing and investment activities, changes in fair value of financial assets at fair value through profit or loss and losses due to impairment of value of financial assets and loss from hedging instruments recognised in the income statement. Borrowing costs are recognised in the income statement using the effective interest rate method.

TAX

Taxes include current and deferred tax liabilities. Current tax is included in the income statement. Current tax liabilities are based on taxable profit for the period. The taxable profit defers from net profit reported in the profit or loss, since it excludes the items of revenue or expenses that are taxable or deductible in other years as well as items that are never taxable or deductible. The company’s current tax liabilities are calculated with tax rates that are applicable on the reporting date. Deferred tax is completely disclosed using the liabilities method after the statement of financial position for temporary differences arising between the tax base of assets and liabilities and their carrying amounts in financial statements. Deferred income tax is defined using tax rates (and legislation) applicable on the date of financial position and for which it is expected to be in use when the receivable for deferred tax is realised or the liability for deferred tax is settled. A deferred tax asset is recognised if there is a possibility that a taxable profit will be available in the future, from which it will be possible to utilise temporary differences. It represents the amount of corporate income tax, deductible temporary differences, unused tax losses and unused tax credits. Deferred tax liability represents the assessed amount of corporate income tax on taxable temporary differences that the company will be liable to pay in the coming years.

STATEMENT OF OTHER COMPREHENSIVE INCOME The statement of other comprehensive income comprises all changes in equity in the current period, which arose from all transactions and events, except those resulting from transactions with the owner.

CASH FLOW STATEMENT Cash flow statement represents changes in cash and cash equivalents of the financial year, for which it is prepared. The part of cash flow statement related to operations is prepared according to direct method based on data of the statement of financial position, while the part related to investing and financing activities is prepared according to indirect method.

SEGMENT REPORTING

The company does not disclose operations by segments in the annual report. Segment reporting must be disclosed by the companies whose treasury or debt securities are traded in the market and companies which are issuing treasury or debt securities in public security markets.


COMPARABLE DATA The company prepared financial statements in accordance with IFRS for the first time for 2011. In accordance with the provisions of IFRS 1, the transition date is considered 1 January 2010 and therefore it was necessary to convert all categories of assets and liabilities to funding sources on this date. In order to ensure comparability as one of basic IFRS principles, it was necessary to convert the 2010 financial statements and prepare them in accordance with IFRS. Impacts of conversions or transition from SAS to IFRS are presented below.

SPECIFICATION OF IFRS TRANSITION EFFECTS According to the provisions of IFRS 1, the group has prepared the opening statement of financial position upon the transition to IFRS, in which all assets and liabilities whose recognition is required by IFRS are disclosed. The values of differences have not been identified. However, individual items of assets and liabilities, revenue and expenses in the financial statements in accordance with IFRS are presented differently than in the financial statements in accordance with SAS. These reclassifications are:

FAIR VALUE DETERMINATION Financial instruments are disclosed at their fair value. Fair value is the amount by which an asset can be sold, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. When determining fair value of financial instruments, the following hierarchy of fair value defining levels is considered:

first level comprises quoted prices (unmodified) in active markets for same assets or liabilities;

second level comprises inputs besides quoted prices included in the first level that are directly (i.e. as prices) or indirectly (i.e. as derived from prices) evident for asset or liability;

third level comprises input data for an asset or liability that are not based on evident market data. Quoted prices are used as a basis for determining fair value of financial instruments. In case the financial instrument is not quoted in the regulated market or the market is assessed as inactive, the second and third level input data is used to assess the fair value of financial instrument.

FINANCIAL RISK MANAGEMENT The company is exposed to the following financial risks: credit risk, liquidity risk, interest rate risk and inflation rate risk. All types of risks are described in more detail in the business report (section 2.13 – risk management).


NOTES TO THE FINANCIAL STATEMENTS

1 INTANGIBLE ASSETS Intangible fixed assets comprise:

easement, computer software, licences and other intangible assets.

The increase in intangible assets refers to an increase in long-term property rights and intangible long-term assets in the course of construction. Accounting for a substantial share in the increase in long-term property rights is the purchase of:

software for controlling uninterrupted power supply in the amount of € 41.921, software for integration of IP telephony in IT network in the amount of € 29,196, Microsoft EA licence agreement in the amount of € 115,367, system for control of protection plant operations – licences in the amount of € 21,096, Checkpoint software in the amount of € 13,387, ODOS system licence for 200 users in the amount of € 14,177, Poqviewp software in the amount of € 19,432, ODOS system modules licences in the amount of € 13,378.

Other increases in long-term property rights are a result of minor purchases of software and licences and investments in software in the amount of € 172,222.


2 PROPERTY, PLANT AND EQUIPMENT

LAND

The decrease in the value of land relates to the sale of land in the amount of € 12,720. BUILDINGS

The company owns the following types of buildings: dams; canals, embankments; HPP production facilities; other buildings; cable lines; office buildings; residential buildings; recreational facilities.

In 2011, the cost of buildings increased predominantly as a result of:

reconstruction of 110 kV switchyard at HPP Dravograd in the amount of € 116,148; renovation of downstream bank protection of HPP Vuzenica in the amount of € 141.817; regulation of a floating debris disposal site at HPP Vuzenica in the amount of € 68,405; restoration of the Ptuj Lake asphalt in the oscillation area in the amount of € 367,843; renovations of telecommunication room of the control centre in the amount of € 117,081; renovations of Melje dam and small HPP Melje – dam facility in the amount of € 1,256,265; renovation of HPP Zlatoličje – powerhouse buildings in the amount of € 506,086; other construction works.

The decrease in the value of buildings relates to the:

elimination of telecommunications cable Mariborski otok-Pekre in the amount of € 24.028; sales of apartments in the amount of € 37,380; sales of garages in the amount of € 13,549; elimination of other worn-out fixed assets in the amount of € 9,412.

EQUIPMENT

The increase in the cost of equipment relates primarily to the following: replacement of the 110 kV field Vuzenica – HPP Dravograd in the amount of € 194,091; replacement of the 110 kV measurement field HPP Dravograd in the amount of € 120,757; replacement of the 110 kV connecting field HPP Dravograd in the amount of € 138,911; replacement of the 110 kV field DTS Dravograd in the amount of € 194,091; renovation of operating lock of HPP Vuzenica spillway 2 in the amount of € 1,190,701; construction of the solar power plant HPP Zlatoličje in the amount of € 199,168; renovation of bridge cranes at HPP Formin powerhouse in the amount of € 394,146; construction of the solar power plant HPP Formin in the amount of € 228,899; purchase of hydraulic disposal machine A904C HPP Zlatoličje in the amount of € 164,277; other equipment.

The decrease in the value of equipment relates primarily to the following:

elimination of operating locks equipment of Z2 HPP Vuzenica in the amount of € 3,054,582; elimination of Melje dam crane in the amount of € 62,594;


sale of personal vehicles and lorries in the amount of € 107,590; elimination of optical line CC equipment in the amount of € 80,800; elimination of server and monitor for CC presentation in the amount of € 317,426; elimination of other worn-out fixed assets.

FIXED ASSETS IN THE PROCESS OF ACQUISITION

In the 2011 financial year, the company’s property, plant and equipment in the process of construction or manufacture included the following items:

buildings in the course of construction (€ 19,528,525); equipment in the course of manufacture (€ 20,566,446).

A larger part of fixed assets being acquired comprises replacement of portal crane HPP Dravograd, project of renovation of HPP Zlatoličje, Markovci dam and small HPP Markovci, construction of new business facility DEM III, PSP Kozjak and HPP Mura. Signs of impairment have not been identified; therefore, no impairments were made.

The company discloses no financial liabilities for the purchase of fixed assets in 2011. The company neither discloses any assets under finance lease or pledged or mortgaged fixed assets.


3 INVESTMENTS IN SUBSIDIARIES

Investments in subsidiaries in the total amount of 100 % stake in Pomurski razvojni inštitut Murska Sobota in the amount of € 1,000; pursuant to

Article 56 of the Companies Act, a consolidated annual report is prepared for the parent company and the associated companies, which are organized as companies with share capital. Pomurje Development Institute Murska Sobota has been established as a private institution under the Institutes Act. Pomurje development institute Murska Sobota is not included in the consolidation report, because its results are not material for a fair representation.

65 % stake in small HPP Lobnica d.o.o. in the amount of € 374,613.

4 OTHER LONG-TERM INVESTMENTS


INVESTMENTS IN ASSOCIATED COMPANIES

Investments in associates in the total amount of € 76,822,598 include:

50 % stake in the company ELDOM d.o.o. in the amount of € 106,712 (capital increase of € 100,000 in 2009), ELDOM company is not consolidated due to immateriality,

30.8 % stake in the company HESS in the amount of € 76,715,886; in 2011 we again provided additional monthly contributions in the total amount of € 5,451,600.

INVESTMENTS IN JOINTLY CONTROLLED COMPANIES (INVESTMENTS IN OTHER COMPANIES OF THE HSE GROUP)


Investments in jointly controlled companies include 25 % stake in the company HSE Invest d.o.o. in the amount of € 80,000.

AVAILABLE-FOR-SALE FINANCIAL ASSETS

Available-for-sale financial assets in the amount of € 1.728.625 comprise:

a receivable from the ex-Nova Ljubljanska banka, d.d., Ljubljana (hereinafter: ―NLB‖) in the amount of € 2,035,925 arising from the acquisition of E banka, d.d., Maribor (the initial receivable of € 495,873 and the purchase of shares in 2007 in the amount of € 237,004 and in 2008 in the amount of € 710,752 and in 2011 in the amount of € 592.296); As at 31 December 2011, NLB shares were impaired in the amount of € 307,300; In order to assure the fair value of shares, the comparison of market value and carrying amount of comparable bank shares from five Central European countries was used. In accordance with this comparison, the fair value of NLB shares amounts to 76 % of carrying amount published as at 31.12.2011.

5 LONG-TERM FINANCIAL RECEIVABLES AND LOANS

Long-term financial receivables and loans represent long-term loans granted to others in the amount of € 24,000.


6 LONG-TERM OPERATING RECEIVABLES

Long-term operating receivables to others include receivables from employees arising from the sale of apartments under the Housing Act and they are all not yet due.

7 OTHER LONG-TERM ASSETS

Other long-term assets include the reserve fund SZ Smreka in the amount of € 2,871.

8 DEFERRED TAX ASSETS Deferred tax assets include deferred receivables arising from jubilee benefits in the amount of € 108,300, termination benefits in the amount of € 276,247, deferred receivables for impairment of investments in the amount of € 128,103, and deferred receivables for impairment of receivables in the amount of € 163,052.

9 ASSETS HELD FOR SALE Assets held for sale including two garages and land amount to € 12,107 at the end of 2011.

10 INVENTORIES Inventories include materials at the canteen in the amount of € 1,320.


11 SHORT-TERM FINANCIAL RECEIVABLES AND LOANS

At the end of 2011, the company’s short-term receivables and loans include: short-term financial receivables and loans to group companies in the amount of € 50,085,796; short-term financial receivables and loans to others in the amount of € 78,387.

Short-term financial receivables and loans to group companies comprise other short-term loans granted to the company HSE in the amount of € 50.000.000 and interest receivables from loans granted in the amount of € 85,796. Short-term financial receivables and loans to others include:

funds pooled for apartment maintenance purposes in the amount of € 951; and loans granted in the amount of € 421 with a due date in the following year, interest receivables from loans and deposits granted in the amount of € 77,015.

12 SHORT-TERM OPERATING RECEIVABLES

Short-term operating receivables from group companies mainly refer to receivables arising from electricity sales to HSE and receivables arising from services of performing certain functions for the company HSE. Short-term operating receivables from group companies comprise receivables from the company Eldom in the amount of € 3.497. Short-term operating receivables from jointly-controlled companies comprise receivables from services of performing certain functions for the company HSE Invest.


Short-term receivables from buyers mainly comprise receivables from local customers in the amount of € 1,016,774. Short-term operating receivables from government and other institutions comprise receivables from input VAT and other receivables in the total amount of € 394,538. Short-term operating receivables also include short-term advances granted in the amount of € 132,312 and receivables due from others in the amount of € 17,493. At the end of 2011The company had no receivables from the management and Supervisory Board members. At the end of 2011, the company’s outstanding short-term operating receivables comprised not yet due receivables in the amount of € 10,882,337, receivables up to three months overdue in the amount of € 37,893, receivables from three to six months overdue in the amount of € 278 and receivables overdue from six to twelve months in the amount of € 93.

13 OTHER CURRENT ASSETS The company’s other short-term assets mostly include insurance premium liabilities settled in advance in the amount of € 204,188 and subscriptions and other liabilities settled in advance in the amount of € 49,279.

14 CASH AND CASH EQUIVALENTS Cash and cash equivalents include:

deposits redeemable at notice (Raiffeisen bank in the amount of € 87,657 and HSE treasury account in the amount of € 3,196,840), and

deposits tied up to three months (A bank in the amount of € 14,000,000 and Gorenjska banka in the amount of € 4,000,000).


15 EQUITY The company’s total equity consists of called-up capital, revenue reserves and retained earnings for the financial year. Compared to 2010, equity increased by 1.99 %. The company's nominal (share) capital totals € 395,011,180 and it remained unchanged compared to 2010. Revenue reserves amount to € 97,485,663, of which:

legal reserves amount to € 39,501,118, and other revenue reserves in the amount of € 57,984,545 which increased by a half of net profit or loss

for the year in the amount of € 5,247,758. Retained earnings amount to € 46,415,171. It is comprised of retained earnings in the amount of € 41,167,413 and a half of net profit or loss for the year in the amount of € 5,247,758. In accordance with the Supervisory Board’s decision pursuant to the proposition of the Managing Director, the net profit or loss for 2011 in the amount of € 10,495,516 is allocated in the following manner: 50 % of net profit in the amount of € 5.247.758 is allocated among other revenue reserves, while the difference in the amount of € 5,247,758 remains unallocated. Relevant information in relation to the balance and changes in equity components is also evident in the statement of changes in equity.

The company’s accumulated profit for 2011 totalled € 46,415,171.

16 PROVISIONS FOR TERMINATION AND JUBILEE BENEFITS At the end of 2011, provisions comprised:

provisions for jubilee benefits in the amount of € 1,082,998, and provisions for termination benefits in the amount of € 2,093,899.

Provisions for termination and jubilee benefits were created based on an actuarial calculation as at 31.12.2011. The actuarial calculation was based on:

the number of employees as at 30.09.2011 (gender, date of birth, overall and pension qualifying period of service, years of service in the company, type of employment contract, amount of basis for termination benefit – gross salary for September 2011),

method for calculating termination and jubilee benefits in the company, growth of salaries in the amount of 3.0 % p.a., employee turnover by age category, retirement conditions.


17 OTHER LONG-TERM LIABILITIES

Other long-term liabilities include quotas for disabled in the amount of € 187,793.

18 LONG-TERM OPERATING LIABILITIES The company’s long-term operating liabilities include long-term trade payables – long-term collaterals in the amount of € 56,431. All long-term trade payables have not yet fallen due.

19 SHORT-TERM OPERATING LIABILITIES


Short-term operating liabilities to associates comprise liabilities to the company Eldom in the amount of € 7,200. Short-term operating liabilities to jointly controlled companies comprise liabilities to the company HSE Invest in the amount of € 299,638. The company’s short-term operating trade liabilities include liabilities to:

domestic suppliers in the amount of € 6,353,275, and foreign suppliers in the amount of € 33,758.

Short-term operating liabilities to employees comprise liabilities for net salaries, net compensations, tax and gross salary contributions and other liabilities arising from salaries in the total amount of € 1,025,168. Liabilities to government and other institutions include liabilities for VAT payment and taxes and contributions in the total amount of € 1.599.124. Other liabilities mostly include insurance premium liabilities, donations, attachments of earnings, other liabilities to employees and other in the total amount of € 1.389.609. Short-term operating liabilities of the company include short-term advances received in the amount of € 6,259. The company has no short-term or long-term liabilities to the Management Board member. At the end of 2011, the company’s outstanding short-term operating liabilities comprised € 10,627,347 of not yet due liabilities and € 86,684 of liabilities overdue up to three months.

20 CURRENT TAX LIABILITIES Within the framework of current tax liabilities, the company discloses liabilities for corporate income tax payment in the amount of € 836,767.

21 OTHER SHORT-TERM LIABILITIES Other short-term liabilities comprise accrued costs of concession, fees for the building site use, legal entities and other accrued costs, liabilities for unused annual leaves and loss in the sales of fixed assets in the total amount of € 1,530,515. The account of concession will be made after the end of the business year with regard to actual production.

22 CONTINGENT LIABILITIES AND ASSETS Contingent assets represent received banking guarantees for investments in the amount of € 5,144,464.


There were no contingent liabilities in 2011. As at 31 December 2010, contingent liabilities comprise other banking guarantees granted in the amount of € 643,389.

23 NET SALES REVENUE The company achieved net sales revenue of € 67,675,469, which is 0.45 % higher compared to the net sales revenue of the previous year. Net sales revenue comprises revenue from sales in domestic market in the amount of € 67,646,980 and revenue from sales in foreign market in the amount of € 28,489. Revenue from electricity sales (€ 66,757,162) accounts for 98.68 % of sales in the domestic market, i.e. sales of electricity to the company HSE in the amount of € 66,627,716 and to the company Borzen in the amount of € 129,446.

24 OTHER OPERATING REVENUE Other operating revenue comprises revenue in the sales of fixed assets in the amount of € 178,190, revenue from compensations and contractual penalties in the amount of € 1,404,195, drawing of deferred revenue in the amount of € 87,567 and other operating revenue in the amount of € 1,293,296.

25 COSTS OF GOODS, MATERIALS AND SERVICES Majority of costs of materials are represented by costs of spare parts and maintenance materials, energy costs, auxiliary material costs and other costs of materials. Compared to 2010, costs of materials increased by 1.12 % mostly due to increase in costs of spare parts and maintenance materials and are 10.59 % lower compared to the costs planned for 2011. Costs of services comprise maintenance services, costs of intellectual and personal services, costs of trade fairs, advertising and entertainment, costs of insurance and banking services, costs of transport services and other costs of services. Costs of services increased by 28.39 % compared to the previous year. Particularly maintenance costs and costs of intellectual and personal services have increased. Compared to the planned costs for 2011, the realised costs of services are higher by 6.47 %.


Costs of services also include the costs of auditor which amounted to € 22,800 in 2011.

26 LABOUR COSTS Labour costs total € 11,461,823 and are 1.66 % lower relative to 2010 and 0.41 % higher compared to the costs planned for 2011. Labour costs are accounted for in accordance with the Employment Relationship Act, Collective labour agreement for the Slovenian energy sector and individual employment contracts. Labour costs include salaries and salary compensations to employees, while other labour costs include annual leave allowance, termination benefits, jubilee benefits, meals and transportation. Costs of social insurance contributions include employer’s contributions in the amount of 16.1 % and costs of supplementary pension insurance.


27 WRITE-DOWNS IN VALUE Write-downs in value comprise the amortisation of intangible assets in the amount of € 374,432, depreciation of property, plant and equipment in the amount of € 15,410,628, expenses in the sales and write-downs in property, plant and equipment and intangible assets in the amount of € 58,103 and expenses due to impairment of inventories and receivables in the amount of € 344,087.

28 OTHER OPERATING EXPENSES Other operating expenses comprise:

provisions for jubilee and termination benefits in the amount of € 227,175, fee for the building site use in the amount of € 3,149,259, concessions in the amount of € 12,234,059, environmental charges (expenditures for water charges and environmental rehabilitation) in the

amount of € 7,053,437, donations in the amount of € 440,594, grants and scholarships to pupils and students in the amount of € 142,210, and other costs in the amount of € 264,119.


29 FINANCIAL REVENUE Revenue from financing activities amount to € 1,449,570 and represent 2.01 % of all revenue (175.05 % of revenue planned). They are 9.38 % higher than the revenue realised in 2010. Financial revenue comprise interest on loans granted (a loan to the companies HSE and TEŠ) and deposits (various banks and HSE treasury account).

30 FINANCIAL EXPENSES

Financial expenses amount to € 307,979. Financial expenses comprise expenses from impairment of investments in the amount of € 307,300 and interest on unused encouragements for disabled above the quota in the amount of € 679.

31 TAX In accordance with the Corporate Income Tax Act, the tax for 2011 amounted to 20 % of the taxable base reported in the company’s tax return.

32 NET PROFIT OR LOSS After deducting corporate income tax and deferred tax assets, the net profit totalled € 10,495,516.

33 TOTAL COMPREHENSIVE INCOME Total comprehensive income in 2011 amounts to € 10,495,516 and it is equal to the net operating profit or loss from 2011.


34 RELATED PARTIES

The company entered into transactions with related entities (parties) on the basis of contracts. Transactions between related companies complied with the market principles and rules of obligation. Individual transactions with related entities (parties) are disclosed in the report on transactions with related parties which is available at the company’s headquarters. In 2011, the company received an award by the Fund of the Republic of Slovenia for Promoting Employment of Disabled above the quota in the amount of € 14,377 and assets in the amount of € 1.977 by the Public Fund for Development of Company Scholarships. REPORT ON RELATIONS WITH THE CONTROLLING COMPANY DEM is a part of Holding Slovenske elektrarne Group. As at 31.12.2011, Holding Slovenske elektrarne d.o.o., based in Ljubljana at Koprska 92, was the company's controlling company which prepared the 2011 consolidated annual report for the group of companies under its control. In accordance with Articles 545 and 546 of the Companies Act, the DEM's management states that in relation with the controlling company Holding Slovenske elektrarne d.o.o. and its related companies, it suffered neither losses nor disadvantages in course of contractual or business relations. Total statement in accordance with Article 545 of the Companies Act is available at DEM’s registered office.

35 RECEIPTS

Remuneration of Supervisory Board members represents gross attendance fees and travel expenses related to the performance of Supervisory Board functions. No advances, loans or guarantees were extended to these groups of persons in 2011.


36 FINANCIAL INSTRUMENTS AND RISKS CREDIT (TRUST) RISK

The company has only one important customer, which settles receivables regularly within 32 days. Receivables from the sale of electricity have been secured with a blank bill of exchange. The company minimises credit risk, i.e. the risk of trade receivables and receivables from other legal entities not being settled in full or not being settled at all, by entering into annual contracts for the sale of electricity, which contain elements of credit insurance. We assess that the risks arising from receivables to buyers are managed with regard to the abovementioned measures and that the exposure to credit risks in 2011 was relatively low. LIQUIDITY RISK

Liquidity risk is the risk of reduced liquidity and changing prices of securities. The amount of investments in securities being minimal, only the risk of reduced liquidity has been identified, which is estimated as low given the predictability and security of payments made by our largest customer. Trade and financing liabilities are known in advance. In 2011, liquidity risks were well managed as cash flows were monitored on daily, weekly and monthly bases, surplus liquidity was deposited with established banks according to the principles of risk diversification and profit maximisation, and adequate liquidity reserve was set aside.

FOREIGN EXCHANGE RISK


The company is not exposed to any currency risk since it operates solely in euro. INTEREST RATE RISK

Interest rate risk in DEM is estimated as low, which is why no active policies for the management of such risks have been prepared for 2011. CAPITAL MANAGEMENT

FAIR VALUES

37 EVENTS AFTER THE DATE OF THE STATEMENT OF FINANCIAL POSITION No business events took place up to the date of this financial report that would affect the financial statements and their disclosures in the financial report.


04 A P P E N D I C E S

CONTACT INFORMATION

LIST OF ABBREVIATIONS


4.1 CONTACT INFORMATION

DRAVSKE ELEKTRARNE MARIBOR d.o.o.

Obrežna ulica 170

2000 Maribor

Telephone: 02 300 50 00 Fax: 02 300 56 55 Website: www.dem.si E-mail: [email protected]

COMPANY MANAGEMENT

Viljem Pozeb, M.Sc. Managing Director

Telephone: 02 300 57 50 E-mail: [email protected] Vili Vindiš Assistant to the Managing Director

Telephone: 02 300 57 60 E-mail: [email protected] Andrej Tumpej Director of Operations

Telephone: 02 300 52 50 E-mail: [email protected]


4.2 LIST OF ABBREVIATIONS ARDC Deferred costs and accrued revenues

CC Control centre

PSP Pumped-storage power plant

VAT Value-added tax

DEM Dravske elektrarne Maribor d.o.o.

NSP National spatial plan

OPL Overhead power line

EBIT Earnings before interest and taxes

EBITDA Earnings before interest and taxes, depreciation and amortisation

ES Electricity system

ELES Elektro Slovenija d.o.o.

EMU Economic and monetary union

EU European Union

€ The euro

HPP Hydropower plant

HESS Hidroelektrarne na spodnji Savi d.o.o.

HSE Holding Slovenske elektrarne d.o.o.

PCD Preliminary conceptual design

IS Information system

ISO International Organisation for Standardisation

MoE Ministry of the Economy

SHPP Small hydropower plant

MESP Ministry of the Environment and Spatial Planning

PHP Preventive health programme

IFRS International Financial Reporting Standards

NEK Nuklearna elektrarna Krško d.o.o.

NFI Non-financial institutions

NLB Nova ljubljanska banka

SB Supervisory Board

ODOS Electronic document system

OHSAS Occupational health and safety management system

ACDR Accrued costs and deferred revenue

PEF Pomurje Educational Foundation

ACP Anti-corrosion protection

PDI Pomurje Development Institute

TD Tender documents

RECS Renewable energy certificate system

RS Republic of Slovenia

DTS Distribution transformer station

SENG Soške elektrarne Nova Gorica d.o.o.


SAS Slovene Accounting Standards

SORS Statistical Office of the Republic of Slovenia

TI Technical inspection

IMAD Institute of Macroeconomic Analysis and Development

ZGD the Companies Act

ZGO Construction Act

Documents

2 0 1 1 - DEM · The renovation of the second HPP Zlatoličje generating unit started in July. Only work directly related to the generating unit 1 will be performed on it since all