Special audit at Eesti Energia identified 35 breaches

Special audit at Eesti Energia identified 35 breaches. Photo: Dmitri Kotjuh

A special audit by the law firm Sorainen of the activities of Estonia's state-owned energy group Eesti Energia and its subsidiaries in 2020-2023 identified 35 violations, nine of which were more serious, Finance Minister Jürgen Ligi told reporters on Thursday.

The report of the special audit, commissioned by the Finance Ministry in the spring, was made public on Thursday. The special audit was prompted by the findings of internal audits, which had raised doubts over the way the company had been managed. The focus was on four areas: compliance with environmental requirements, hedging and derivative transactions, ensuring the reliability of the distribution network, and intragroup governance of the distribution network.

«It was identified that between 2020 and 2023, various management bodies of the group, on several occasions, violated their duty of diligence and took unjustified risks, leading to environmental violations, economic damage, and affecting the reliability of the distribution network. A total of 35 observations were made, nine of which were more serious. Major violations were identified in the compliance with environmental requirements, the presentation of false data, and the taking of financial risks,» Ligi said at the government’s press conference.

According to the Reform Party minister, the government has a very good and constructive cooperation with the current management of Eesti Energia.

«Further decisions probably need to be made, the Environmental Board will need to make its decisions, the board itself, but the general meeting is also ready to take steps on its part. In fact, this is a situation that has been recognized for quite some time and most of the problems have been addressed effectively -- the Enefit Power management board has been replaced; the derivatives trading system, which was a major failure, is being reorganized; the split of Elektrilevi has been reversed,» Ligi said.

«Now the question is for the general meeting to decide what to do next, and the question is for the government to decide how the nomination committee system works. In any case, we have a strong reason to review both governance and the appointment of managers,» the minister added.

Hedging transactions resulted in losses of EUR 288 mln for Enefit Power

The report of a special audit of the activities of the state-owned Eesti Energia group and its subsidiaries from 2020 to 2023, published on Thursday, says that adversely settled liquid fuel hedging transactions resulted in a loss of 288.2 million euros for the group's subsidiary Enefit Power over four years.

Considering also the transactions that generated a positive result, the balance of the transactions was 175.8 million euros over the four-year period, according to the final report of the special audit. The loss was attributed to deficiencies in the hedging methodology, which resulted in hedging transactions being concluded under unfavorable conditions.

The damage resulting from the hedging of transactions for liquid fuels directly affected Enefit Power, but the auditors do not see the members of the company's management body as responsible for the incurred damage, concluding that the board exercised the necessary due diligence. Enefit Power had hedged the market risk related to the sale of output by entering into a service agreement with Eesti Energia, which handled the risk hedging and had a separate system in place for this.

However, the special audit found that the management board of Eesti Energia did not exercise the necessary due diligence, which has potentially resulted in damage.

«If Enefit Power were to have a claim for damages against Eesti Energia, this could serve as a basis for the liability of the members of the management body of Eesti Energia,» the report states.

According to the special audit, the management board of Eesti Energia can be accused of violating its duty of diligence in the period from the first quarter of 2021 to the third quarter of 2021 in failing to consider possible and necessary measures and, if appropriate, failing to implement measures that could have minimized the loss from liquid fuel hedging transactions that were to be settled in 2022 and 2023.

The supervisory board of Eesti Energia also failed to act with the necessary diligence, the special audit finds. More precisely, at the beginning of 2022, when it was evident from the group's annual report for 2021 that significant losses had been incurred from hedging transactions in liquid fuels. The supervisory board did not ask the management board for further explanations or justification for the loss, nor did the supervisory board instruct the management board at the beginning of 2022 to look into the causes of the problem or otherwise address it.

The report points out that changes to the hedging mandate started to be made already during the period of the special audit. Entry into hedging transactions for liquid fuels under the previous mandate were suspended in June 2023.

The special audit by the law firm Sorainen of the activities of Eesti Energia and its subsidiaries in 2020-2023 identified 35 violations, nine of which were more serious, Finance Minister Jürgen Ligi told reporters on Thursday. The special audit was prompted by the findings of internal audits, which had raised doubts over the way the company had been managed. The focus was on four areas: compliance with environmental requirements, hedging and derivative transactions, ensuring the reliability of the distribution network, and intragroup governance of the distribution network.