Litgrid AB

Annual Report (ESEF) • Apr 11, 2023

529900CTIUKTEFNNH1572022-01-012022-12-31529900CTIUKTEFNNH1572022-12-31529900CTIUKTEFNNH1572021-12-31529900CTIUKTEFNNH1572021-01-012021-12-31529900CTIUKTEFNNH1572020-12-31ifrs-full:IssuedCapitalMember529900CTIUKTEFNNH1572020-12-31ifrs-full:SharePremiumMember529900CTIUKTEFNNH1572020-12-31ifrs-full:StatutoryReserveMember529900CTIUKTEFNNH1572020-12-31ifrs-full:OtherReservesMember529900CTIUKTEFNNH1572020-12-31ifrs-full:RetainedEarningsMemberiso4217:EURiso4217:EURxbrli:shares529900CTIUKTEFNNH1572020-12-31529900CTIUKTEFNNH1572021-01-012021-12-31ifrs-full:IssuedCapitalMember529900CTIUKTEFNNH1572021-01-012021-12-31ifrs-full:SharePremiumMember529900CTIUKTEFNNH1572021-01-012021-12-31ifrs-full:StatutoryReserveMember529900CTIUKTEFNNH1572021-01-012021-12-31ifrs-full:OtherReservesMember529900CTIUKTEFNNH1572021-01-012021-12-31ifrs-full:RetainedEarningsMember529900CTIUKTEFNNH1572021-12-31ifrs-full:IssuedCapitalMember529900CTIUKTEFNNH1572021-12-31ifrs-full:SharePremiumMember529900CTIUKTEFNNH1572021-12-31ifrs-full:StatutoryReserveMember529900CTIUKTEFNNH1572021-12-31ifrs-full:OtherReservesMember529900CTIUKTEFNNH1572021-12-31ifrs-full:RetainedEarningsMember529900CTIUKTEFNNH1572022-01-012022-12-31ifrs-full:IssuedCapitalMember529900CTIUKTEFNNH1572022-01-012022-12-31ifrs-full:SharePremiumMember529900CTIUKTEFNNH1572022-01-012022-12-31ifrs-full:StatutoryReserveMember529900CTIUKTEFNNH1572022-01-012022-12-31ifrs-full:OtherReservesMember529900CTIUKTEFNNH1572022-01-012022-12-31ifrs-full:RetainedEarningsMember529900CTIUKTEFNNH1572022-12-31ifrs-full:IssuedCapitalMember529900CTIUKTEFNNH1572022-12-31ifrs-full:SharePremiumMember529900CTIUKTEFNNH1572022-12-31ifrs-full:StatutoryReserveMember529900CTIUKTEFNNH1572022-12-31ifrs-full:OtherReservesMember529900CTIUKTEFNNH1572022-12-31ifrs-full:RetainedEarningsMember LITGRID AB The Company’s financial statements, annual report and independent auditor’s report for the year ended 31 December 2022 CONFIRMATION OF RESPONSIBLE PERSONS 16 March 2023, Vilnius Following the Law on Securities of the Republic of Lithuania and the Rules on Information Disclosure approved by the Bank of Lithuania, we, Rokas Masiulis, Chief Executive Officer of LITGRID AB, Darius Zagorskis, Head of the Finance Planning and Analysis Division, Acting Director of the Finance Department of LITGRID AB and Asta Vičkačkienė, Head of the Accounting Division of LITGRID AB, hereby confirm that, to the best of our knowledge, the attached financial statements of LITGRID AB for the year 2022 prepared in accordance with the International Financial Reporting Standards adopted by the European Union give a true and fair view of the Company’s assets, liabilities, financial position, profit and loss and cash flows; the annual report for the year 2022 presents a fair overview of the business development and performance, the Company’s financial position together with the description of its exposure to key risks and contingencies. Rokas Masiulis Chief Executive Officer (The document is signed by a qualified electronic signature) Darius Zagorskis Head of the Finance Planning and Analysis Division, Acting Director of the Finance Department (The document is signed by a qualified electronic signature) Asta Vičkačkienė Head of the Accounting Division (The document is signed by a qualified electronic signature) ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 3 Translation note This version of the accompanying documents is a translation from the original, which was prepared in Lithuanian. All possible care has been taken to ensure that the translation is an accurate representation of the original. However, in all matters of interpretation of information, views or opinions, the original language version of the accompanying documents takes precedence over this translation. TABLE OF CONTENTS Annual report 4 The Company’s statement of financial position 105 The Company’s statement of comprehensive income 106 The Company’s statement of changes in equity 107 The Company’s statement of cash flows 108 Notes to the Company’s financial statements 109 Independent auditor’s report 149 The financial statements were approved on 16 March 2023. Rokas Masiulis Chief Executive Officer (The document is signed by a qualified electronic signature) Darius Zagorskis Head of the Finance Planning and Analysis Division, Acting Director of the Finance Department (The document is signed by a qualified electronic signature) Asta Vičkačkienė Head of the Accounting Division (The document is signed by a qualified electronic signature) ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 4 The Company’s performance Report for 2022 ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 5 Litgrid’s key performance indicators: 2022 m. 2021 m. Change +/- % Revenue, EUR million 420.4 270.9 149.5 55.2 EBITDA, EUR million -36.5 46.2 -82.7 Profit/(loss) for the period, EUR million -49.5 20 -69.5 Return on equity -25.5 % 9.1 % Quantity of electricity transmitted, GWh 10 234 10 936 -703 -6.4 ENS(Energy Not Supplied due to interruptions) 10.617 MWh 3.356 MWh AIT (Average Interruption Time) 0.356 min. 0.112 min. Criteria extended by the National Energy Regulatory Council in 2022 to include cases when the ENS and AIT indicators are attributed to responsibility of the electricity transmission operator (the ENS and AIT indicators for 2022 were set to be below 27.251 MWh and 0.934 min., respectively (below 6.3 MWh and 0.29 min., respectively, for 2021). ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 6 Statement of the Chairman of the Board Dear all I have no doubt that many years from now on we will remember 2022 as one of the most important years in the history of Lithuanian energy. It was a very meaningful and important year in Lithuania's move towards energy independence. The thoughts and attention of many turned daily to Ukraine and the images of the ongoing war there. I am pleased with the Company's significant contribution to helping rebuild Ukraine's war-torn electricity grid and providing light and heat to a country in active war zone. We supported the fighting and suffering in Ukraine not only in thoughts and hearts. Despite many challenges, Litgrid successfully ensured the stability of the country's electricity system last year and continued the synchronisation projects with the Continental European networks at the planned pace. To accelerate the implementation of its ambitious renewable energy targets, Litgrid established a Renewable Energy Resource Centre in 2022 to coordinate the connection of new renewable energy power plants and battery projects into the electricity transmission grid. I hope that this will bring us all significantly closer to our goal of maximising the amount of energy generated from renewable sources. In 2022, the long-term objectives defined in the company's strategy were also successfully pursued, with a strong focus on preserving the environment and reducing climate change. As a result of Litgrid's adherence to the EPSO-G Sustainability Policy, the company's team is planning its activities responsibly, making significant changes to its habits and renewing its fleet of vehicles. A great achievement in procurement - three quarters of last year's procurement deals were green. In a climate of uncertainty, the Litgrid team demonstrated that the foundations of Lithuania's energy independence, which have been strengthened over the years, are very solid. Thank you to everyone who stood together during this important and significant year. And In the conditions of uncertainty, the Litgrid team demonstrated that the foundations of Lithuania's energy independence, which have been strengthened for many years, are extremely strong. Thank you to everyone who has been together in these significant and important year. I invite you to continue working together with the same focus in the future. Tomas Varneckas, Chairman of the Board of Litgrid ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 7 Statement of the CEO of Litgrid Dear all, I am proud to present to you Litgrid's 2022 Annual Report. In 2022, Litgrid's team achieved the key objectives of the strategic synchronisation projects with the continental European grid, ensured reliable electricity transmission, fostered innovation, and improved the conditions for the development of renewable energy sources. Last year was a challenging year, as the war and the energy crisis affected all areas of our business. Despite this, we have consistently delivered on the work that is essential for Lithuania's energy independence. We have maintained a fast pace in the implementation of synchronisation projects - we signed an agreement for additional EU funding, started the construction of strategic projects such as the 330 kV lines Darbėnai-Bitėnai and Kruonio HAE- Bitėnai and the Neris substation, and prepared the infrastructure for the connection of the two synchronous compensators. We have completed the last spatial planning works and all the public procurement of onshore construction projects - major and important milestones which we have successfully implemented. On the security side, in response to Russia's aggression against Ukraine, we have reduced the capacity of system interconnections with Russia in March 2022. Imports of electricity from Russia have been completely cut off since May, and since June the Baltic countries have started to balance the system on their own. The amount of electricity transmitted through Lithuania's transmission grids decreased last year compared to 2021. In 2022, the electricity transmitted to meet the country's needs amounted to 10.234 TWh, a 6.4% decrease compared to 10.936 TWh in 2021. The overall availability of the interconnectors with Sweden (NordBalt) and Poland (LitPol Link) was 98.26% and 98.34% respectively. The main impact on the availability of the interconnectors was due to planned works such as the annual maintenance of NordBalt and the implementation of the synchronisation projects with the continental European grids. In the area of innovation, Litgrid opened an experimental 1 MW battery to science and business and implemented the first joint tests with universities and companies. At the end of the year, Litgrid became the first grid operator in Europe to use a battery for system control functions, winning the prestigious Platts Global Energy Awards. In order to accelerate the implementation of the ambitious renewable energy targets, Litgrid has established a Renewable Energy Resource Centre to coordinate the connection of new renewable energy power plants and battery projects to the electricity transmission grid. Taking into account the projects already initiated by RES developers, the capacity of wind farms on the transmission grid is expected to increase from 803 MW to around 2.200 MW by 2025. With the implementation of the amendments to the Renewable Energy Law and the Electricity Law adopted in 2022, the development of wind and solar power plants will accelerate at a remarkably high pace by 2030. Litgrid estimates that in 2030 the consumption and export capacity of the Lithuanian electricity market will allow for at least 4,400 MW of solar and 5.000 MW of wind generation capacity to be connected, a total of 6 times more than today. We are preparing for this challenge already. We keep our focus on sustainable development as well. We conduct our operations in accordance with the principles of sustainability in the execution of our activities and commitments. As the CEO, I am particularly partial to the idea that we are responsible for a safe, sustainable environment and a safe and healthy working environment for our employees. In our day-to-day operations, we have taken many steps to reduce Litgrid's impact on environment- we are installing solar power plants at substations and we will generate our own electricity for our own use from a renewable source, we are replacing our fleet of cars, and we are upgrading our equipment with new, safer equipment. I firmly believe that the Litgrid team will successfully achieve all its goals and overcome any challenges. Sincerely Rokas Masiulis Litgrid CEO ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 8 1. BASIC DETAILS The annual report has been prepared for the period ended 31 December 2022. 1.1. The issuer and its contact details: Name LITGRID AB (Litgrid or the Company) Legal form Public limited liability company Date and place of registration 16 November 2010, the Register of Legal Entities of the Republic of Lithuania Company code 302564383 Registered office address Karlo Gustavo Emilio Manerheimo g. 8, LT-05131, Vilnius LEI code 529900CTIUKTEFNNH157 Registry State registry centre Address for correspondence Karlo Gustavo Emilio Manerheimo g. 8, LT-05131, Vilnius Telephone +370 707 02171 Email info@litgrid.eu; www.litgrid.eu Litgrid is part of the EPSO-G group of companies: EPSO-G UAB is a state-owned group of energy transmission and exchange companies. The rights and obligations of the shareholder of holding company EPSO-G UAB are implemented by the Ministry of Energy of the Republic of Lithuania. EPSO-G UAB owns 97.5 % of shares of Litgrid. Shares of other companies owned by Litgrid: Name TSO Holding AS (former name Nord Pool Holding AS) RCC Country of incorporation Kingdom of Norway The Republic of Estonia Registered office address PO Box 121, NO-1325 Lysaker, Norway Harju maakond, Tallinn, Mustamäe linnaosa, Kadaka tee 42, 12915 Litgrid’s shareholding 39,6 of shares and voting rights attached thereto 33,3 of shares and voting rights attached thereto Major changes Litgrid sold its shareholding in TSO Holding to EPSO-G UAB on 30 November 2022 The Baltic Regional Coordination Center established on 3 May 2022 Minor shareholders ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 9 1.2. Activities of Litgrid Litgrid, the Lithuanian electricity transmission system operator (the TSO), secures stable operation of the national electricity system, controls electricity flows and creates conditions for competition in the open electricity market. Main activities of Litgrid. The Company is responsible for maintaining the balance between electricity consumed and produced in the Lithuanian electricity system and reliable transmission of electricity, it implements strategic national electricity projects. Its vision and strategic operating guidelines are based on the long-term goals identified in the National Energy Independence Strategy (the NEIS). The most important activity areas and responsibilities of the Lithuanian TSO include the maintenance of the country’s electricity infrastructure and its integration with the electricity infrastructure of Western and Northern Europe; development of the electricity market and participation in the creation of a single electricity market of the Baltic States and the European countries; and integration of the electricity systems of Lithuania and continental Europe for synchronous operation. In implementing the programme on the synchronisation with the European continental networks, the Company carries out 19 projects of strategic importance approved by the Government of the Republic of Lithuania. As the Company systematically carries out its daily functions, ensures uninterrupted and smooth operation of the electricity transmission system and implements projects of national importance, it aims to create value for its customers – the Lithuanian society. Litgrid not only transmits electricity via high-voltage lines, but also takes care of the reliability of the operation of the entire transmission network: it is important for us that electricity is uninterruptedly supplied to electricity consumers and that all breakdowns are eliminated as soon as possible. Reliability of electricity supply guarantees the growth of the economy. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 10 2. BUSINESS ENVIRONMENT 2.1. Business model Litgrid is a Lithuanian-wide electricity transmission system operator. The Company maintains high-voltage electricity transmission networks and secures the stable operation of the country’s electricity system, manages electricity flows, and creates conditions for competition in the free electricity market, it is responsible for the integration of the Lithuanian electricity system into the European electricity infrastructure and the single electricity market. Electricity transmission is an intermediate link between electricity generation and distribution to consumers. The voltage of transmission networks is high or very high (110-440 kV). Electricity transmission networks consist of electricity transmission lines with substations. Electricity lines are connected in the electricity substations that contain the switchyards of a higher and lower voltage and the transformers linking them. In the substation transformers voltage is reduced to the voltage of distribution networks. Electricity transmission is a licensed activity. Prices of the electricity transmission service are regulated by the National Energy Regulatory Council (NERC) that sets the price caps for these services. 2.2. Services provided by electricity transmission system operator Litgrid Electricity transmission over high voltage (110-400 kV) electrical installations The electricity transmission service is electricity transmission over high voltage (400, 330, 300 and 110 kV) electrical installations. The transmission system operator transmits electricity from producers to consumers that are connected to the transmission network, and to the operators of the distribution networks. The main activities of the TSO include the management of the high voltage electricity transmission network and securing reliable, effective, high-quality, transparent and safe transmission of electricity. System services To maintain reliable system operations, Litgrid purchases from energy generating companies the services for the capacity reserve assurance at the electricity generation facilities, reactive power and voltage management, and emergency, disruption prevention and response services, isolated work ensurance and provides consumers with system services. The capacity reserve is needed when electricity production suddenly and unexpectedly falls or its consumption increases. Trade in imbalance and balancing electricity Litgrid ensures a balance between production and consumption of electricity in the country. Imbalance electricity is electricity that is consumed or produced outside of established electricity consumption or production schedules. Litgrid organises trade in imbalance electricity, buys and sells imbalance electricity that is necessary to ensure the country’s electricity production and consumption balance. Balancing electricity is electricity that is bought and/or sold on instruction of the transmission system operator as electricity necessary for performing the function of balancing the country’s electricity consumption and production. Litgrid organises trading in balancing electricity by auction. The auction participants are suppliers of balancing energy and TSOs of other countries possessing technical facilities that enable them to quickly change the electricity generation and consumption conditions and having concluded a relevant agreement with Litgrid. Services under public service obligation (PSO) scheme Public service obligations (PSO) in the electricity sector are services that ensure and enhance the national energy security and promote integration and use of electricity produced from renewable energy sources. The list of PSO services, their providers and procedures for the provision of PSO services are approved by the Government of the Republic of Lithuania, or an institution authorised by it, having regard to the public interests in the electricity sector. PSO funds are funds that are paid to the providers of PSO services. Until the end of 2022 Litgrid provided such VSO services: balancing of energy produced using the reusable sources of energy, balancing. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 11 Litgrid also provides services of granting and removal of guarantees of origin A guarantee of origin is a certificate proving that energy is produced from renewable sources or in the process of cogeneration. The guarantee of origin is valid for 12 months from the date of its issue. Guarantees of origin can be of two types: Guarantee of the origin of renewable energy sources that verifies the origin and quantity of electricity. A guarantee of origin is proof that all or part of energy has been produced from renewable energy sources. Guarantee of the origin of efficient cogeneration that verifies the origin and quantity of electricity produced during the process of high-efficiency cogeneration. 2.3. Customers of the transmission system operator Litgrid’s direct customers are the electricity transmission network’s users and suppliers of imbalance and balancing electricity. The users of the transmission network are as follows: Distribution network operators ESO, Dainavos Elektra UAB; Electricity consumers whose electrical installations are connected to the electricity transmission network and who purchase electricity for use; Electricity producers connected to the electricity transmission network. The suppliers of imbalance and balancing electricity include the electricity producers and suppliers. 2.4. Operating indicators of electricity transmission and the network’s reliability In accordance with the requirements approved by the NERC for reliability and quality of service of electricity transmission, the following indicators are used to determine the transmission reliability level: ENS (energy not supplied), i.e. the quantity of electricity not transmitted due to interruptions, and AIT (average interruption time), i.e. the average interruption duration in electricity transmission. TSO’s operating indicators 2022 2021 2020 Quantity of electricity transmitted, million kWh 10 234 10 936 10 277 Technological costs in the transmission network, % 3,09 2.67 2.88 ENS (Energy Not Supplied due to interruptions), MWh * 10.617 3.356 6.21 AIT (Average Interruption Time), min. ** 0.356 0.112 0.21 * Only due to the operator’s fault or due to undetermined causes. Criteria extended by the National Energy Regulatory Council in 2022 to include cases when the ENS and AIT indicators are attributed to responsibility of the electricity transmission operator (the ENS and AIT indicators for 2022 were set to be below 27.251 MWh and 0.934 min., respectively (below 6.3 MWh and 0.29 min., respectively, for 2021). 2.5. Electricity interconnections The reliably functioning interconnections are an essential part of the system enabling it to operate together with the energy systems of other Western and Northern European countries and to develop a single European market. Import and export flows of the interconnections with Sweden and Poland NordBalt and LitPol Link increased by 24.5 percent in 2022. LitPol Link is a double-circuit transmission line from Alytus in Lithuania to Elk in Poland and the Alytus back-to-back converter. The LitPol Link interconnection was available to the market 98.29% of the time throughout 2022. Scheduled works for the implementation of the project on the expansion of the interconnection had a major impact on the unavailability of the LitPol Link interconnection. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 12 The NordBalt electricity interconnection is one of the longest submarine cables in the world, the operation of which significantly increases safety of energy supply to Lithuania and the Baltic States. The NordBalt interconnection was available to the market 98.26% of the time throughout 2022. Scheduled repair works had a major impact on the unavailability of the NordBalt interconnection. 2.6. Maintenance of the electricity network In Lithuania, Litgrid’s employees maintain 6966,8 km of high-voltage lines, 259,3 km km of cables and 236 transformer substations and switchyards, two HVDC converter stations. To maintain a stable service life of overhead lines and ensure a stable operation of installations, during the 2022 repairs of main installations, verification of operation of relay protection and automation equipment, all scheduled works were carried out in 22 transformer substations and switchyards with the voltage of 110-330-400 kV. Scheduled maintenance works for overhead lines with the voltage of 110 kV and higher were performed (194 km in total) and 93 towers were replaced during the repair, the height of the cables in 32 places was increased at road and other junctions. In order to protect overhead lines their routes covering an area of 752 hectares were cleaned, 30,052 trees posing threat to a reliable functioning of lines were removed. Regular repair and maintenance of the transmission network’s objects have a direct impact on reliability of operation of the electricity system and electricity transmission. Scheduled works within the transmission network are carried out at the intervals established by the legal acts of the Republic of Lithuania, however when assessing the quantity and scope of works the actual condition of installations as well as the need to secure reliable operation of the network and efficient use of funds are taken into consideration. Aiming to enhance reliability of operation of autotransformers in the main transmission network’s installations a new investment project Introduction of New Automated Monitoring Systems (AMS) was initiated in 2022 which is focused on the monitoring the operation of autotransformers. This will involve the installation of five new AMSs at the main objects of the transmission network, including the NordBalt and LitPol Link converter stations. Flying steerable drones are successfully used by the Company for the identification of locations of breakdown in overhead lines and causes of breakdowns. Drones are equipped with high-resolution cameras that detect even small-scale faults in line wires, supporting structures and other elements of lines without disconnecting the lines. Overhead line engineers regard this new tool as a time-saving measure that also helps improve reliability of operation of lines. Three properly equipped drones are used for inspections of overhead lines, transformer substations and switchyards. Trained employees of the Company implement the objectives of increasing the reliability of operation of lines and prompt detection of faults. According to the data of December 2022, out of 1,276 operated transmission system devices, 75.6% of them were controlled remotely (about 965 units of connected equipment). 2.7. International cooperation and membership in organisations The Company actively participates in the international activities, cooperates with the transmission system operators of the Baltic region and Europe on a daily basis, implements the Company’s strategic and innovation projects with the assistance of foreign partners. In 2022, the Company’s business activities covered a very large number of geographical areas. The study for integration of the offshore wind power was carried out in cooperation with the Japanese transmission system operator Tepco Power Grid. Cooperation was started with the US National Renewable Energy Laboratory regarding the implementation of the study on the decarbonisation of the Lithuanian energy system in 2023. A pilot innovation project on a variable capacity of the transmission line was initiated in cooperation with Slovenian company Operato and the project on the testing of a satellite scanning solution was implemented together with Finish company HeadPower. In 2022, Litgrid initiated bilateral cooperation formats. Cooperation with colleagues from Denmark, Belgium, Ireland, Spain, the Netherlands is carried out in the fields of sustainability, integration of renewable energy sources, and offshore wind development. With regard to the synchronisation programme the projects are implemented together with colleagues from Poland, Latvia and Estonia. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 13 ENTSO-E (European Network of Transmission System Operators for Electricity) The Company actively participates in the activities of ENTSO-E which represents 39 electricity transmission system operators from 35 countries. The Company’s representatives are involved, as permanent members, in the activities of ENTSO-E’s committees and work groups that at the expert level implement joint projects ensuring smooth operation of the European transmission network, prepare and examine legal acts, methodologies and other documents regulating the operation of the electricity system that are relevant to the EU Member States and establish uniform operation conditions and rules for the European TSOs. Participation in the activities of ENTSO-E strengthens cooperation with other European transmission network operators and it’s crucial for Litgrid not only in implementing one of the priority tasks of the Lithuanian energy sector, i.e. integration into the synchronous zone of continental Europe, but also in developing the offshore grid for electricity transmission in a sustainable and integrated manner and ensuring effective implementation of the European offshore wind strategy. BEMIP (Baltic energy market interconnection plan) The objective of the BEMIP is to create operational and integrated electricity and gas markets, ensure necessary energy infrastructure aiming to create a competitive, sustainable, safe electricity market in the Baltic Sea region. Electricity-related commitments of Lithuania to BEMIP are implemented by Litgrid through the implementation of the projects ensuring integration to the synchronous zone of continental Europe and performance of preparatory works for offshore wind development in Lithuania. Steering Committee for the Baltic Sea Transmission System Development In 2020, the Company together with other six transmission system operators of the Baltic Sea region signed the cooperation memorandum on offshore wind energy development in the region. Within the framework of cooperation the Steering Committee for the Baltic Sea Transmission System Development was established which, with the help of the target working groups, will focus on assurance of adequacy of the electricity transmission system of the Baltic Sea region, integrity of the development of the onshore and offshore grid for electricity transmission, and will aim to develop common principles for the planning of the Baltic Sea network and to conduct studies allowing to form a common vision for offshore wind network development in the region Liutauras Varanavičius, Director of the Strategy Department of Litgrid, holds the position of the Vice-Chairman of this committee. Baltic Regional Coordination Centre (RCC) On 1 July 2022, the Baltic Regional Coordination Centre (RCC) started its activities and provides the grid security services to the electricity transmission system operators of the Baltic States – Lithuanian Litgrid, Estonian Elering and Latvian AST. The RCC was established by three electricity transmission system operators of the Baltic States according to the requirements of the Clean Energy Package of the European Union. The Baltic RCC is one of six regional coordination centres operating in Europe. The RCC implements five main tasks: calculation of the capacity of electricity lines between the countries, assessment of reliability, adequacy of the systems, planning of disconnections of lines and development of a common model of the network. This ensures smooth work in the countries which continue to strengthen their efforts in preparation for synchronisation and after its implementation will maintain close relationship when operating in the single network of continental Europe. The Company’s interests are also represented at the following associations: The Polish-Lithuanian Chamber of Commerce CIGRE The Lithuanian Power Association EnergyTech group As a member of the above-mentioned associations Litgrid maintains closer cooperation with the regional and national partners, ensures the representation of the Company’s interests, more effective implementation of the strategic projects and communication with the related parties and stakeholders on issues relevant to the Company. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 14 3. OPERATING AND REGULATORY ENVIRONMENT The strategic goal of Litgrid is the integration into the European market. The Company’s activities are also affected by the development trends of the country’s economy, objectives and targets of the European Union. 3.1. Energy sector environment in the EU Europe's biggest energy challenge for 2022 is reliable gas supply. Inevitably, the electricity market has become hostage to the gas market, with electricity prices reaching all-time highs. The biggest contributor to the rise in electricity prices has been the surge in fossil fuel prices. Gas prices have risen due to the uncertainty of gas supplies to Europe as Europe faces gas shortages due to the Russian hostilities, the alternatives being more expensive liquefied natural gas imported by ship, increased supplies from existing partners and increased consumption of other fossil fuels used for electricity generation. The average annual price of electricity in European countries has passed the 200 €/MWh mark, with a peak of 288 €/MWh in Italy. High electricity prices prevailed in countries where fossil-based electricity generation dominates. The Baltic Sea region and Norway were notable for lower prices, with average prices ranging from €24/MWh in the north of Norway to €235/MWh in Germany. This high price differential in the region is due to insufficient capacity between the northern and southern trading zones, especially in Scandinavia, where the northern zones are dominated by low consumption and where most of the generation from hydropower and other renewable sources is concentrated. In contrast, the south of Sweden and Norway has the highest consumption and is dominated by export links to continental Europe Fig.. 3.1 Average electricity prices in Europe in 2022 based on day-ahead auction results (source: ENTSO-E transparency). Already in the summer of 2021, gas prices started to rise, and in the last days of December they passed the €100/MWh mark, i.e. a 14-fold increase compared to mid-2020. Towards the end of the winter of 2021, the gas market normalised and prices started to fall, but the price dynamics changed abruptly due to a sharp change in the price level on 24 February. The Russian military action in Ukraine on 24 February 2424, and the price increase was further fuelled by the summer reduction and the final disruption of supply to Germany via the Nordstream 1 pipeline in September. In Lithuania, gas prices have kept pace with gas prices in Europe, with the Lithuanian price index above the 200 €/MWh mark in August-September. The situation was particularly complicated by the extremely hot and dry summer weather across Europe, which made it difficult to replace gas-fired power plants with other thermal plants. The extremely low river water levels posed many challenges for cooling thermal power plants and transporting coal by river. The prevailing summer weather led to a reduction in wind generation, which could not be compensated by limited water resources. The situation was saved by the arrival of windy and rainy autumn weather towards the end of the year and the very successful filling of gas reservoirs, which brought gas prices back to the level of the first half of the year. The first half of 2022 was a very volatile year in the market for emission allowances. At the start of the year, the price of allowances approached the historic level of €100/t, when the market was pricing 1 tonne of CO2 equivalent at €97.5/t. This surge in allowance prices is due to the reform of the European CO2 trading system and the EU's increasingly ambitious environmental requirements. The gas crisis in Europe led to speculation about the prospects for emission allowances, with prices falling by 40%, but as Europe showed its determination to further accelerate the transition to green energy, the price of emission allowances has stabilised at around €80/t. In the second half of the year, allowance prices also fluctuated considerably, falling below €65/t, before regaining the €80/t level towards the end of the year. At the end of May 2022, the Nord Pool Exchange suspended the electricity trading permits of UAB Inter RAO Lietuva. "The suspension of Inter RAO Lietuva's imports on the electricity exchange resulted in Lithuania's commercial imports from third countries falling to zero. In 2022, Lithuania's domestic generation accounted for one third of the country's electricity consumption, of which 60% was from renewable sources. Wind power plants accounted for the largest share of Lithuania's consumption, 12%, while hydro and pumped storage plants accounted for almost a tenth of consumption, and fossil fuels and other renewables accounted for 8% and 4% respectively. The remaining 67% was imported electricity. The largest share, 45%, was imported via NordBalt, 38% via the Latvian interconnectors and 10% via Litpol Link. Third countries accounted for 7% of electricity imports. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 15 In 2022, the Nordbalt link was used for imports for a record period. As electricity prices across Europe started to rise in the summer, there was a significant gap with the Nordic trading zones, resulting in maximum export flows from north to south. This had an impact on the capacity utilisation of the Nordbalt interconnector, which peaked at 597 consecutive hours in July-August and 901 hours in September-October. The total number of hours with flows equal to the 700 MW threshold was 4126 hours per year. Europe had very low gas reserves at the beginning of 2022, which started to be replenished from spring onwards, in the absence of gas supply disruptions from Russia. To ensure that all EU Member States are ready for winter, the European Commission has obliged Member States to fill their gas storage to at least 80% by 1 November 2022. Effective measures to reduce overall gas consumption and an increase in imports from alternative suppliers have enabled Europe to meet and even exceed its targets ahead of schedule. At the end of November, the overall storage fill rate reached 95%. 3.2. Regulatory environment in Lithuania Electricity transmission activities carried out by Litgrid are licensed activities. The licence grants exclusive rights to provide transmission services in Lithuania, thus the prices of services are regulated by the state. The regulatory function and supervision of the licensed activities in Lithuania are performed by the National Energy Regulatory Council. The decisions taken by the regulator directly affect Litgrid's financial performance, the funds available for necessary operating costs, investments to ensure the reliability of the electricity transmission system, as well as the ability to finance strategic and other development projects with own or borrowed funds. The price of the electricity transmission service shall be regulated by setting a price cap for the five-year regulatory period and a component for the acquisition of ancillary services on top of the price of the transmission service. The price cap shall be adjusted each year in response to changes in the volume of services, inflation and other objective factors beyond the control of the operator and may be adjusted no more than twice a year. The price cap shall take into account the reasonable indispensable costs of the regulated activity and a reasonable return on investment, calculated as the product of the rate of return on investment (WACC) and the value of the regulated assets (RAB). 4. THE COMPANY’S STRATEGY AND STRATEGIC PRIORITIES, PLANNING 4.1. Strategy A client-focused organisation and a centre of competences for the energy sector, state-of-the-art technological and digital solutions, sustainable energy development that will double the current generation volume of electricity, and opportunities for market participants to exchange electricity freely at a competitive price. These are the goals set out in the Litgrid’s strategy that was approved by the Company’s Board in January 2023. The strategy establishes the Litgrid’s long-term vision of becoming one of the smartest electricity transmission system operators in Europe. Litgrid plans to expand its activities by focusing on several priority areas. One of the most important priorities is the fight against climate change through the development and adaptation of the transmission system for electricity generation from renewable energy sources and the reduction of the impact of Litgrid’s own infrastructure on the environment. Energy independence of Lithuania is another objective set for Litgrid which is being achieved through the implementation of the programme on the country’s energy system synchronisation with the continental European networks. Following the completion of this project in 2025, Lithuania will again be able to independently control the frequency of the electricity system after more than 80 years. The Company is launching a digital transformation programme and implements a culture and ecosystem of data-driven solutions. One of the components of this change is a service portal that will bring together customers and enable more efficient digital delivery of services. Recent large investments in impeccable customer experience made in other industries and companies set significantly higher expectations of our customers with regard to our communication. Therefore, with the purpose of the implementation of our vision we direct large attention to the improvement of customer experience and aim to work following the best global practices for customer experience management. As Lithuania pursues its ambitious renewable energy targets and the implementation of the Breakthrough Package, the tense geopolitical situation and high electricity prices have further accelerated the development of renewable energy sources in the country. The Breakthrough Package, adopted by the Lithuanian Parliament in spring 2022, has led to a greater involvement of Litgrid, which has decided to concentrate its competences in renewable energy capacity planning, development, grid connection and data analytics in a single unit, which will work efficiently with both shareholders and customers - developers of solar, wind and battery farms in the country. At the end of 2022, Litgrid established a Renewable Energy Resource Centre. The specialised centre coordinates the connection of new power plants and battery projects to the Lithuanian electricity transmission grid and is expected to make a significant contribution to smoother RES development in Lithuania in the future. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 16 The strategy also pays particular attention to the development of the organisation. Litgrid aims to become an efficient exchange platform that enables and encourages market participants and consumers to exchange electricity freely, to choose to produce or consume climate-neutral energy, and to receive it at a competitive price. The Litgrid’s strategy is available at https://www.litgrid.eu/index.php/apie-litgrid/strategija-vizija-misija-ir-vertybes/452 4.2. Stakeholders Litgrid addresses such key stakeholders: ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 17 4.3. Strategic priorities ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 18 4.4. Measures for the implementation of the strategy The Company’s strategy is reviewed and updated annually referring to the National Energy Independence Strategy (NEIS), the Company’s activities and amendments to the legal acts regulating the electricity sector, the strategy of EPSO-G, a holding company of the group, significant events in the Lithuanian and foreign electricity systems and electricity markets, works performed during the year as well as by assessing new external circumstances beyond the Company’s control. The Litgrid’s strategy comprises a ten-year (long-term) implementation period based on the main and long-term objectives in the electricity sector laid down in the NEIS. Each year the Company updates and prepares a ten-year development plan of the transmission network which is an integral part of the strategy. In order to regularly assess the efficiency and application of the measures selected by the Company, the Company’s operational plan is reviewed after the end of each quarter. The implementation of the strategic objectives and the operational plan, performance of the divisions and employees are monitored. The measures stipulated in the operational plan are included in the operating objectives of the divisions and personal performance objectives of employees, the achievement of which at the end of the year determines a variable part of remuneration. The strategic planning and control mechanism at the Company is based on the Integrated Planning and Monitoring Policy of the EPSO-G Group of Companies which is applied in the activities of Litgrid to a full extent. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 19 4.5 Long-term development plan of the electricity transmission networks According to the Law on Electricity of the Republic of Lithuania, an electricity transmission system operator manages electricity transmission networks, ensures the operation, development, maintenance and long-term capacity of these networks to meet justified electricity transmission needs, and is also responsible for the interconnection of the electricity system of the Republic of Lithuania with electricity systems of other countries, performs balancing and dispatch control of the electricity system and has a corresponding operating licence. In 2022, Litgrid prepared the Plan for the Development of 400-110 kV Networks of the Lithuanian Electricity System for 2022– 2031. The plan presents forecasts of electric power and energy consumption needs, capacities of power plants (generation facilities), assessment of the electricity system adequacy, forecast of electric power and energy balances of the electricity market and system, as well as information on the electricity transmission network, its development and restoration, innovations introduced and planned investments. The ten-year network development plan stipulates that: ● Investments required for the development of the electricity transmission network may total to around EUR 2.03 billion in2022-2031. More than a half of the planned investments will be allocated for an effective development and systemic renewal of the network, physical and information security, development of the information systems as well as research and innovations. The other part of the investments (around 40%) is earmarked for the implementation of the strategic national projects. The implementation of the projects laid down in the ten-year network development plan will ensure reliable and stable operation of the Lithuanian electricity system, even distribution of power flows in the eastern and western directions of the Lithuanian electricity system, timely restoration and rational development of the transmission network, retention of the electricity quality and system reliability indicators (AIT and ENS) at the set level, consistent optimisation and modernisation of the electricity infrastructure, possibilities for the integration of renewable energy sources as stipulated in the state’s objectives, provision of information to responsible institutions on the prospects of generation adequacy at the national and regional level; ● During the preparation for connection to Europe, the following synchronisation-related projects will be implemented and completed: construction of the submarine electricity link with Poland Harmony Link, construction and reconstruction of internal electricity transmission lines with the length of around 430 km, installation of two new 330 kV switchyards, reconstruction of the 330 kV Neris substation, installation of new synchronous compensators, modernisation of control systems (relating to the frequency stability assessment, automatic generation control of the electricity system, renewal of the control system of the NordBalt high-voltage direct current interconnection to ensure frequency management, Statera and other systems); ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 20 ● In addition to the network’s development for connection to Europe, Litgrid plans to build new lines with the length of more than 300 km to secure the reliability of the electricity transmission network. The construction of the new 330 kV Darbėnai- Mūša-Panevėžys transmission line will account for the largest part of this length. The need for this line was identified following the assessment of the security aspects of the Lithuanian electricity system under the scenarios of emergency synchronous operation with Poland or isolated operation, particularly after desynchronisation and disconnection of all lines with Russia and Belarus; the need to connect the eastern and western parts of the Lithuanian electricity system in order to increase national energy security, to enable the integration of offshore wind and onshore renewable energy sources, which has a particularly high potential in the western part of the system, and to maintain and increase the level of integration in the electricity market with Latvia. There are also plans to complete, continue or start the reconstructions of about 116 330-110 kV substations between 2022 and 2031; ● It is projected that the total electricity consumption will increase by 4% annually on average over the next ten years and in 2031 it will reach 18.7 TWh (the actual value was 12.8 TWh in 2022). The electrification of the transport sector will cause the biggest increase in demand for electricity over the next decade (in particular, electrification of railway lines, development of electric cars, increase in the number of heat pumps) and the electrolysis (hydrogen production) industry, which is projected to increase electricity consumption even 13% by 2030; ● The number of electric cars may exceed 280 thousand in 2031 in the country (according to the National Action Plan in the Area of Energy and Climate) and they will consume around 600 kWh of electricity per year. Based on Litgrid’s estimates, a rising number of electric cars is not expected to cause difficulties with regard to the transmission system – the transmission system will be prepared for this; ● In line with the provisions of the hydrogen energy strategy adopted by the EU, the aim is to develop hydrogen generation projects in Lithuania that would contribute to balancing the surplus electricity from renewable energy sources. Having assessed the long-term development plans of industrial companies and the development of the hydrogen electrolysis at the national level, Litgrid estimates that the electricity consumption forecast will show an additional increase of around 2.23 TWh from 2030 due to these factors; ● Particular attention is paid to the assessment of the network’s ability to adapt for the integration of renewable energy sources and introduction of energy storage technologies.; ● As the volume of renewable energy sources increases, it is planned that in order to achieve national RES development goals, the share of RES in the total consumption may reach up to 94% in 2030; If the national RES development targets of 7 GW (3.6 GW from onshore wind power plants, 1.4 GW from offshore wind power plants in the Baltic Sea, 2 GW from solar power plants) are successfully met, Lithuania’s deficit balance would turn into surplus; ● For contributing to the implementation of the objectives of the green energy policy, it is planned to use the Baltic Sea regional cooperation in developing offshore wind energy and international energy transmission. Therefore, Litgrid pays special attention to the connection of offshore wind farms to the onshore transmission network. The Ten-Year Electricity Transmission Network Development Plan of Litgrid is available at the Company’s website at: https://www.litgrid.eu/index.php/tinklo-pletra/lietuvos-elektros-perdavimo-tinklu-10-metu-pletros-planas-/3850 ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 21 5. IMPLEMENTATION OF STRATEGIC PROJECTS One of the fundamental directions of the implementation of the National Energy Independence Strategy of the Republic of Lithuania adopted by the decision of the Parliament on 21 June 2018 establishes the connection of the electricity system of the Republic of Lithuania to the continental European networks for operation in a synchronised mode (the “Synchronisation”). Following a full-fledged integration of Lithuania into the European electricity system in 2025, the European system management standards will be introduced in the electricity sector ensuring management of electricity flows based on market principles and participation in maintaining the system’s frequency. A timely implementation of the synchronisation programme in the most economically efficient manner is one of the most important objectives of Litgrid. The synchronous operation with the continental European networks will ensure: reliable operation of energy systems and secure transmission of electricity; coordinated actions in facility maintenance and network development planning; common rules for the management of energy systems – network codes which will be applied uniformly in all countries in the European Union; availability of electricity from energy systems of Western Europe. In July 2021, the Government of the Republic of Lithuania approved the list of the energy projects carried out in implementing the synchronisation of the electricity system. Litgrid is responsible for the implementation of 19 out of 21 projects included in this list. According to the requirements of the Republic of Lithuania Law on the Protection of Objects of Importance to Ensuring National Security, before the conclusion of transactions that comply with the requirements of this law, in all cases Litgrid informs the Commission for Coordination of Protection of Objects of Importance to Ensuring National Security about such transactions. Such transactions are concluded only upon the receipt of the commission’s conclusions. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 22 5.1. The status of the implementation of the main strategic The stage of completion of the strategic projects under the synchronisation programme reached 51.5% in 2022 ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 23 5.2. Strategic infrastructure projects Reconstruction of the 330/110/10 kV Neris transformer substation The aim of the project is to reconstruct the Neris transformer substation to enable the planned connection of one of three synchronous compensators to the transmission network and the launch of operation of to be constructed 330 kV Vilnius-Neris electricity transmission line. This is one of the most important projects related to the synchronisation with the continental European networks that strengthens the country’s network for electricity transmission. Documents permitting the construction were received in May 2022 and already in June reconstruction works of the substation under the construction contract were started and are planned to be completed in 2025. Construction of the 330 kV Kruonis PSHP-Bitėnai electricity transmission line The aim of the project is to strengthen the electricity transmission network in the western part of Lithuania and to ensure its reliable operation by forming a new 330 kV transmission line, which is important for the smooth synchronous operation of the Lithuanian electricity system with the continental European electricity networks. The project covers the reconstruction of a part of the already existing line Jurbarkas-Bitėnai by replacing a single-circuit line with a double-circuit line, the construction of a new section between the line Jurbarkas-Bitėnai and the line Kruonis PSHP-Sovetsk and the reconstruction of the Bitėnai transformer substation. A document permitting the reconstruction of the section Jurbarkas-Bitėnai was received in January 2022. Reconstruction works are carried out from March and are planned to be completed in 2023. In November 2022, all necessary documents permitting the construction of the new section of the 330 kV overhead line from LN531 to LN447 were received, and preparation of the operational project was started. In March 2022, a contract was concluded for the design and construction works for the purpose of the reconstruction of the Bitėnai transformer substation, which is necessary for the connection of the 330 kV line Kruonis PSHP-Bitėnai to be built in 2025. The technical project of the reconstruction of the Bitėnai transformer substation was prepared and submitted for examination at the end of 2022. Construction of the 330 kV Darbėnai-Bitėnai electricity transmission line The aim of the project is to strengthen the electricity transmission network in the western part of Lithuania and to ensure its reliable operation by forming a new 330 kV transmission line, which is important for the smooth synchronous operation of the Lithuanian electricity system with the continental European electricity networks. In March 2022, reconstruction works of the Grobinė-Klaipėda overhead line (replacement of a single-circuit overhead line with a double-circuit line) were started and are expected to be completed in 2023. Moreover, in November 2022, all documents permitting the remaining construction and reconstruction works of the Darbėnai-Bitėnai overhead line were received, the operational projects are being prepared. Installation of new synchronous condensers in the Lithuanian electricity system The aim of the project is to implement the necessary measures for the synchronisation with the continental European networks: installation of three synchronous condencers, thus ensuring the required quantity of inertia and the dynamic stability of the system in the most efficient way. In 2022, the technical project of the Telšiai synchronous condenser was prepared and submitted for examination, design works of the Alytus synchronous condensers are being finalised, power transformers designated for the Alytus, Telšiai and Neris synchronous condenser stations were manufactured. In addition, after the reconstruction in 2022 for the purpose of the connection of synchronous condensers the 330 kV Telšiai and Alytus transformer substations were put into operation and the statements on the completion of their construction were received. Construction of the 330 kV Mūša switchyard The project’s aim is to strengthen the electricity transmission network of Western Lithuania and ensure its reliable operation by building a new 330 kV Mūša switchyard and connecting to it three overhead lines to Telšiai, Šiauliai and Viskali. In September 2022, the agreement on the design and construction of the 330 kV Mūša switchyard was signed. The works programme was approved by the end of the year and design works were started that are planned to be completed in September 2023. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 24 Construction of a new 330 kV Vilnius-Neris electricity transmission line The project’s aim is to strengthen the electricity hub in Vilnius by ensuring the reliability of electricity supply after the synchronisation with the continental European networks and meeting an increasing demand for electricity in the capital, by constructing the 330 kV electricity transmission line linking the Vilnius and Neris 330 kV transformer substations. To this purpose, a part of the existing 330 kV overhead line Vilnius-Molodečno will be reconstructed and a section of the new line to the Neris 330 kV substation will be constructed. In September 2022, the agreement on the design and construction of the 330 kV Vilnius-Neris electricity transmission line was signed. The works programme was approved by the end of the year and design works were started that are planned to be completed in July 2023. Construction of the 330 kV Darbėnai switchyard The project’s aim is to enhance the reliability of the transmission network and security of electricity supply during the synchronous operation of the Lithuanian electricity system with the continental European networks by building a new 330 kV Darbėnai switchyard and connecting to it three overhead lines with the voltage of 330 kV to Bitėnai, Klaipėda, Grobinė and the direct current interconnection to Harmony Link.The interconnections with the wind power parks will also be designed at the 330 kV switchyard. In 2022, a document permitting the construction of a section of the overhead line was received, construction works were started and the preparation of the technical project for a part on the Darbėnai switchyard was finalised. Construction of the Harmony Link interconnection The project’s aim is to ensure the integration of the electricity market after the synchronisation with the continental European networks by constructing a new submarine HVDC link (Harmony link) with Poland. The Harmony Link interconnection will ensure commercial trade in electricity after the synchronisation of the Baltic States with the continental European networks. Negotiations regarding the procurement for the main converter and the cable for Harmony link were finalised in 2022. Final proposals from the participants in the procurement for the cable were received, the proposal of the converter was still pending in 2023. Litgrid AB implements the project together with the Polish electricity transmission system operator PSE 5.3. Strategic non infrastructure projects Installation of Automatic Generation Management (AGM) The aim of the project is to automatically activate the frequency restoration reserves and restore the system frequency and power balance by installing an automatic generation management system. On 28th January 2022, a contract was signed with the Supplier of the dispatching control and AGV software to upgrade the system. Final report of the AGV study prepared and submitted to the Baltic operators on 13 th July 2022. Contracts with contractors for the purchase of hardware signed on 28th October 2022. Isolated operation test of the power system of the Republic of Lithuania An isolated operation test of the Lithuanian Electricity System (hereinafter EES) was planned for September 2022, during which the Lithuanian EES was planned to be disconnected from the IPS/UPS system. The test will test the quality of the frequency control systems of the power plants and DC-DC converters in maintaining the frequency in the Lithuanian EES and was postponed to 2023. On 25 January 2022, a contract was signed for the study required for the test to investigate the impact of potential disturbances on the stability of the power system, to identify the critical grid parameters, to select the optimal frequency control parameters for the DC links, to investigate the logic schemes for the generator frequency control, and to carry out naturalistic tests on the generator control systems. On 16 September 2022, following an assessment of the situation on the electricity market, a decision was taken to postpone the isolated operation test of the Lithuanian electricity system and to carry it out in the second quarter of 2023. Installation of the Frequency Stability Assessment System (FSAS). The aim of the project is to install a system to ensure the frequency stability of the Baltic electricity system in the event of an unforeseen disconnection from the continental European grids and in the event of islanding of the Baltic electricity system. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 25 The final FSAS study report was prepared and submitted to the Baltic operators on 8 September 2022. Based on the result, the preparation of the FSAS technical specification and procurement documents has started. Development of a new energy balance and ancillary services management system In May 2019, Litgrid, together with the Estonian and Latvian TSOs, signed the Baltic Power System Connection Agreement with the Continental European Power Grids, which sets out the technical requirements (hereafter referred to as the Catalogue Requirements) that need to be implemented in order to ensure the reliable operation of the Baltic Power Systems and the Continental European Synchronous Area. The most of the balance and system service management processes will be upgraded prior to the final synchronisation with the Continental European grids. As part of the implementation of the European Commission Regulation 2017/2195 of 23 November 2017 laying down guidelines for electricity balancing, Litgrid will update the processes related to balancing and imbalance accounting and balance management. On 29 July 2022, a contract was signed with the supplier for the development of the new energy balance and ancillary services management system and programming work has started. 5.4. Development of infrastructure projects in 2022 Litgrid’s activities contribute to the development of green energy in Lithuania and, in its role as the electricity transmission network operator, Litgrid implements projects for the connection of renewable energy sources to the transmission network. These projects result in the connection of green electricity producers to the transmission network, enabling electricity consumers to use clean and sustainable energy. In 2022, Litgrid was engaged in the development of 11 projects on the connection of the wind power parks with a capacity of 651 MW; not less than 47 projects on the connection of the RES producers (wind) are planned to be started. Four projects on the reconstruction of electricity transmission overhead lines were under implementation by Litgrid in 2022. In 2023, the Company plans to start 27 new projects on the reconstruction of overhead lines, which will contribute to the stability and reliability of the electricity transmission network and will ensure the necessary capacities for connecting RES to the transmission network. The implementation of the projects on the connection of consumers to the transmission network contributes to the development of the electrification of the infrastructure of the Lithuanian railways. The projects on the electrification of the Lithuanian railways that comprise connections to the electricity transmission network and securing electricity supply are one of the activity directions of Litgrid in the upcoming year. The implementation of these projects will smooth the transition from fossil fuels to the use of renewable energy sources, ensure rational consumption of electricity and use of green energy thereby contributing towards the achievement of the objectives laid down in the European Green Deal. There are also plans to complete, continue or start the implementation of the projects on the reconstruction of 116 substations with the voltage of 330-110 kV between 2022 and 203. In 2022, the projects on the reconstruction of six transformer substations were started, works related to the projects on the reconstruction of 30 transformer substations were continued and projects on the reconstruction of 11 transformer substations were completed. There has been a significant increase in the total number of the reconstruction projects carried out by Litgrid and it is expected to reach 106 (RES connection projects) in 2024 5.5. Financing of strategic projects In March 2022, the European Commission confirmed that a financial support of EUR 170 million was granted to the second part of the second phase of the synchronisation of the Baltic States with the continental European networks (Litgrid’s share is EUR 30.7 million . The support was granted under the Connecting Europe Facility (CEF) for the period 2021-2027 in the field of trans- European energy infrastructure and the grant agreement was concluded in June. This latest phase of funding will be allocated for the implementation of the projects on the network’s upgrade, frequency management tools and information systems and will allow the Baltic States operate independently on the same frequency as Poland and the rest of Europe in 2025. The value of the projects to be funded is EUR 41 million for Lithuania, EUR 49 million for Latvia, EUR 37 million for Estonia and EUR 111 million for Poland. Four projects are financed in Lithuania: the construction of the Darbėnai substation, the reconstruction of the 330 kV Klaipėda-Grobinė transmission line on the border with Latvia, information technology systems for the transmission system, and the modernisation of the control system for the Lithuania-Sweden interconnection NordBalt. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 26 With the grant approved for 2022, the total amount of the EITP synchronisation programme funds for Lithuania will amount to nearly EUR 460 million. The previously initiated projects received funding of EUR 23.5 million from the EU Structural Funds. 5.6. Project portfolio Stable, reliable operation of the electricity system, capacity and energy balances depend not only on the behaviour of market participants, but also on the establishment of proper parameters of the operation of the power plants being connected, coordination of the operation of the power plants and timely expansion. Litgrid, as the Lithuanian TSO, plans the operation of the electricity system in the long-term by assessing the requirements for electricity supply and safety, reliability, quality, efficiency, consumption, management and environmental protection. The ten-year plan for the development of the 400-110 kV networks of the Lithuanian electricity system is being developed for that purpose which, among other objectives, aims to project the transmission network’s development directions, restoration volumes, preliminary investments in the expansion and restoration of the network by drafting a long-term investment plan. The project portfolio is defined in the investment plan. The portfolio comprises projects that are necessary for the achievement of the strategic objectives of the state, assurance of the reliability of the transmission network and electricity supply, update or introduction of information technologies, or projects that are initiated by users of the transmission network. Dozens of new projects are planned to be started over the period of 10 years, i.e. 22 projects per year on average. More than half a hundred projects are planned to be performed every year, i.e. their number will exceed 100 after 2025. Every year the average of 89 projects are planned to be implemented. Based on the long-term project portfolio, a short-term (one year) project portfolio is prepared at the Company. 5.7. Inovation, research and development The Company’s actions in the field of innovations aim to contribute to the effective implementation of the strategy of Litgrid and the National Energy Independence Strategy. This objective is being achieved by developing an effective ecosystem of innovations where innovative ideas are initiated, experts’ time is allocated for their analysis and testing, they are implemented and introduced to daily activities. The Company’s activities in the field of innovations are conducted in accordance with the Guidelines for Scientific Research and Experimental Development and Innovative Activities of the EPSO-G UAB Group approved by the Board of EPSO-G UAB (the “SREDI Guidelines”). The purpose of the SREDI Guidelines is to ensure continuity and efficiency, competitiveness or facilitation of competition of the companies of the UAB EPSO-G group through research, innovation and new solutions, as well as to contribute to the implementation of the National Energy Independence Strategy and the creation of added value for the society. The SREDI Guidelines set out the common concepts of scientific research and experimental development, and innovations and innovative activities across the Group, common directions and priorities of the SREDI activities, classification principles and recommendations for the transmission system operators regarding the allocation of funds for the SREDI activities that are not attributed to the regulated activities. Development of the ecosystem of innovations The System of Scientific Research and Experimental Development and Innovations (SREDI) was introduced at the Company. The system establishes the key principles of an environment favourable to creativity and introduction of innovations and presents innovation processes. Innovation activities are directed towards the implementation of objectives and tasks laid down in the Climate Change Strategy and the National Energy Independence Strategy as the reliable operation of the electricity system without innovations is hard to imagine or even impossible when moving away from the power plans using fossil fuels to renewable energy sources and creating a competitive economy of the country in the region of the Baltic, Scandinavian and Central and Eastern European countries. Along with the implementation of the EPSO-G functional action plan for innovations, to which the Company acceded on 18 February 2022, in 2022 the Company implemented the following activities stipulated in this plan: An innovation workshop on the Virtual Connectivity Map; Organised an innovation workshop on challenges relevant to Litgrid employees; Developed rules for conducting benefit-cost analysis of innovation for individual projects and developed a template and examples. Developed principles for calculating the return on the whole portfolio. Criteria for selecting innovative projects have been updated based on the experience of previous years; Mentors of innovative projects implemented in 2021 have been evaluated and rewarded in accordance with the innovation promotion procedures adopted by the EPSO-G group; ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 27 Successful implementation of the variable line capacity pilot project included in the company's annual targets, and the first results obtained and evaluated; A model of a 1 MW battery as an innovation platform has been developed and publicised, and the pilot project Investigation of synergies between the virtual power management of the Kaunas Hydroelectric Power Plant (KHPP) unit and the 1 MW energy storage system has been implemented; A project initiated in 2021 with Vilniaus Šilumos Tinklais and EPSO-G on the development of a cross-sectoral Power- to-Heat (P2H) concept was carried out as planned. A P2H study was carried out with the consultant EDIS LAB, which verified the baseline calculation methodology and developed a model for the assessment of P2X projects; EV stacking pilot completed; Study on the application of innovative measures in the integration of RES power plants has been carried out and a methodology for identifying optimal solutions has been developed; ENTSO-E and ESA cooperation pilot project on the use of satellite imagery for airline maintenance implemented; Public communication of innovative projects; 10 new innovation projects initiated and 9 innovation projects brought to life in the framework of R&D&I activities and priorities. Raising the innovation ecosystem - Innovation Workshop In April 2022, specialists from different areas of the Company participated in an innovation workshop on the development of the Virtual Connectivity Map (VCM). Through creative thinking, the teams identified the main challenges in developing such a system and paved the way for the start of the project. A needs analysis was carried out, a list of initial deliverables was gathered, a vision for the map was requested and the scope of the vision was approved by Litgrid's Project Development Committee. The concept and the Phase I Action Plan were approved on 22 December 2022. In August 2022, the Innovation Unit conducted an internal survey of the company's employees to identify the challenges faced by the company. We started to analyse the most complex challenges during the Innovation Workshop on 19 October 2022. The three topics covered were renewable energy management, company resource accounting and the need for a tool to work with contractors. The ideas generated will be further developed and potentially become innovative projects in the course of 2023. One of the ideas generated has already turned into a project entitled "Renewable Energy Management System": As the number of RES in the transmission grid increases and the methodology for calculating their connection changes, there is a risk that elements of the transmission grid may become overloaded and that over-generation may affect the system imbalance. There is a need to manage these resources properly. A control system is to be put in place to manage renewable energy sources in real time and to create the possibility of curtailing these sources in the day-ahead market. Developing an innovation ecosystem - an innovation platform In early 2022, we opened the 1MW Battery Energy Storage System (BESS) innovation platform to the public. The aim of the platform is to enable science, business, manufacturers and the market as a whole to benefit from the 1MW BEKS by testing innovative ideas that bring benefits to both Litgrid and the stakeholder. We have created an open and transparent model for the use of the 1MW battery for new, innovative projects. During 2022, we initiated the following projects: Collaboration with KTU to model and demonstrate a hybrid thermal storage system with BEKS; Cooperation with Ignitis Gamyba to study the technical feasibility of frequency balancing of the Kaunas HPP; Collaboration with Green Genius to investigate the performance of the BEKS under simulated electricity market conditions and to assess the technical feasibility of the BEKS working in conjunction with a RES source. The 1MW BEKS has even been recognised in two prestigious international energy awards: The Smarter E Award in Munich, where it won the Outstanding Project category. The Platts Global Energy Awards in New York won the Grid Edge category. Innovation portfolio During 2022, the company managed its innovation portfolio in line with the priorities defined by the RDI: Intelligent and efficient asset management (7 projects): Use of four-legged robots in Litgrid's operations Study on the reconstruction of substations using advanced digital technologies and elimination of SF6 gas ENTSO-E and ESA cooperation pilot project on the use of satellite imagery for airline maintenance ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 28 Scanning of electricity grids and creation of a digital database of spatial data. Pilot project on lightweight structural supports Study to investigate the performance of BEKS under simulated electricity market conditions and to assess the technical feasibility of BEKS working in conjunction with a RES source Intelligent and efficient system management and monitoring (13 projects in total) Use of 1 MW BEKS to optimise active power loss costs 1 MW BEKS and KHE co-operation pilot Integrated relay protection testing system in electricity substations Variable line capacity pilot project Solution for IEC61850 protocol analysis, simulation, rapid problem detection and complex testing across the substation Power quality monitoring system RES integration study (part of 110 kV network) Integration of EVs into the electricity grid Development of OneNet flexible services Renewable energy management system Study on the most suitable locations for the development of high power EV charging stations Modelling and demonstration of a hybrid thermal storage system with BEKS Study to assess the supply of frequency regulation services on the electricity grid and the participation model in the balancing market ITT and digitalisation (5 projects) Virtual Connection Map Implementation of a centralised IED (Intelligent Electronic Device) database with a suite of advanced applications Digitisation of RAA telecommand transmission between substations Specialised IT system for data collection Application of an artificial intelligence algorithm for troubleshooting IT systems Radical and breakthrough innovations completed in 2022: TEPCO study "Offshore Grid Planning and Design for the Introduction of Offshore Wind Power in Lithuania" ENTSO-E and ESA cooperation pilot project on the use of satellite imagery for airline maintenance Variable Line Capacity Pilot Project ENTSO-E and ESA cooperation pilot project on the use of satellite imagery for overhead line maintenance Project initiated in Q2 2020. Project completed in 2022 Q3. The aim of the project is to use satellite imagery from space to identify vegetation defects in the airline protection zone and to develop vegetation rate modelling, as well as to record the activities taking place in the airline protection zone. The project has resulted in a WEB-based tool developed by a Finnish supplier, which allows to see all identified changes in vegetation and construction sites in the airline protection zones (within the scope of the pilot). "Litgrid has decided not to apply this tool to the whole overhead line network until the accuracy of change detection improves. A revision of the technology is foreseen in Q3 2023. Variable line capacity pilot project Project initiated in 2021 Q4. Project completed in 2022 Q4. The aim of the project is to determine the potential of the technology for Litgrid's needs. Variable Line Capacity technology allows to calculate the effective capacity of overhead lines up to 24 hours in advance based on weather forecast data. Sensors suspended on the overhead line measure wire temperature and ambient temperature, solar gain, humidity, wind speed and direction. The collected real-time parameters are used to train a mathematical model. The project has resulted in an average increase in overhead line capacity of about 57% between October and November, and a direct correlation of capacity with wind turbine generation. These results suggest that the technology will be a useful tool for the integration of renewable energy sources into the transmission grid. We will continue observations until Q4 2023, after which we will draw final conclusions on the wider use of the technology. In 2022, EUR 270 thousand from Litgrid's Innovation Budget was used to implement innovative projects. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 29 6. FINANCIAL INFORMATION The Company’s key financial indicators 2022 2021 2020 Financial indicators, EUR thousand Revenue from electricity sales 418,953 267,258 206,399 Other income (including dividend income) 1,398 3,637 2,012 EBITDA (36,513) 46,206 51,789 Profit/(loss) before income tax (58,347) 24,101 30,881 Profit/(loss) for the period (49,484) 20,013 26,603 Cash flows from operating activities (52,627) 66,373 27,103 Ratios EBITDA margin -8.7% 17.1% 25.0% Operating profit margin -13.7% 9.2% 14.9% Annual return on equity (ROE) -25.5% 9.1% 12.9% Annual return on assets (ROA) -8.2% 4.4% 6.7% Shareholders’ equity / Assets 23.2% 45.2% 52.6% Financial liabilities / Equity 24.2% 29.6% 36.6% Liquidity ratio 0.81 1.01 0.59 Total assets turnover ratio 0.70 0.60 0.53 Adjusted financial indicators, EUR thousand *** Profit for the period 10,628 14,583 10,195 EBITDA 34,207 39,817 32,487 Annual return on equity (ROE) 4.7% 6.7% 5.1% EBITDA = operating profit + depreciation and amortisation + impairment expenses of assets + write-off expenses of assets – dividend income; calculated based on the average at the beginning of the year and at the end of the year. *** Adjusted profitability indicators are calculated due to temporary regulatory deviations from a regulated profitability approved by the NERC. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 30 Revenue Revenue earned by Litgrid in 2022 increased by 55.2% compared to 2021 and amounted to EUR 420.4 million. Revenue from electricity transmission amounted to EUR 72.5 million, which is a 9.4% decline compared to 2021 resulting from a 3.2% lower average actual electricity transmission price and a 6.4% lower quantity of transmitted electricity due to decline in consumption and rise in the number of producers-consumers (prosumers) generating electricity from renewable energy sources that were connected to the distribution network. The total quantity of electricity transmitted for domestic consumption was equal to 10,234 million kWh. The NERC established a 5.1% lower price cap for the transmission service for 2022. One of the main reasons for the establishment of a lower price cap was that permitted revenue for 2022 was reduced by EUR 15.3 million (or EUR 5.3 million more than in 2021), i.e. by a part of the Company’s investment return (profit) for 2018-2020 in excess of the amount permitted by the NERC. Sales volumes of imbalance and balancing electricity declined by 1%, however revenue from imbalance and balancing electricity increased 2.4 times to EUR 175.1 million due to 2.5 times higher average sale price. Change in revenue does not affect the Company’s profitability because according to the regulated imbalance pricing the current year revenue compensates expenses, including the Company’s internal expenses, attributable to this activity according to the description of the regulation accounting. Revenue from additional (previously named system) services increased by 49.7% and amounted to EUR 137.2 million. Higher revenue from additional services resulted from a 61.5% increase in the acquisition component of additional services (formerly named the price of system services), while a volume declined by 7.3%. According to the regulated pricing of the additional services, revenue must compensate expenses, including the Company’s internal expenses, attributable to this activity according to the description of the regulation accounting. Difference between revenue and expenses for the N-year is taken into consideration when determining the acquisition component of additional services for the N+2 year. Other income related to the transmission activity include: Fee for electricity imported from or exported to countries other than the EU and inter-EU transit compensation revenue from ITC fund (ITC income – income resulting from participation in the European Inter-Transmission Operator Compensation Mechanism): EUR 1.6 million and reactive energy income: EUR 1.6 million. This income group is assessed when determining the price of the transmission service and calculating the actual return on investments in the transmission service. Revenue from PSO services amounting to EUR 28.9 million. Change in this revenue does not affect the Company’s profitability because the current year revenue compensates expenses, including the Company’s internal expenses, attributable to this activity according to the description of the regulation accounting. Revenue from congestion management services amounting to EUR 1.9 million. Change in this revenue does not affect the Company’s profitability because revenue compensates expenses incurred in ensuring the use of allocated capacity of the interconnections. Income from administration of guarantees of electricity origin amounting to EUR 0.1 million. 83.4 80.1 72.5 21.2 71.7 175.1 86.7 91.7 137.2 15.1 23.8 34.1 2.0 3.6 1.4 .0 50.0 100.0 150.0 200.0 250.0 300.0 350.0 400.0 450.0 2020Y 2021Y 2022Y Company's revenue structure, million euros Rent and other revenue Other electricity-related revenue Additional services revenue Balancing energy revenue Transmission revenue ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 31 Other income decreased by 61.6% to EUR 1.4 million due to a EUR 2.1 million decrease in default charges calculated in respect of the contractors for delays in the performance of works. Expenses The Company’s operating expenses totalled EUR 477.8 million in 2022, which is 94.2% more compared to 2021. Expenses of purchase of electricity and related services accounted for a major portion of the Company‘s operating expenses: EUR 420.1 million (87.9% of the Company’s total expenses). These expenses increased 2.2 times compared to 2021. Expenses for additional services increased 2.5 times to EUR 111.6 million. Imbalance and balancing electricity expenses increased 2.5 times and amounted to EUR 174.8 million due to 2.5 times higher average purchase price. Expenses of compensating for electricity purchase technological losses in the transmission network increased 2.5 times and amounted to EUR 99.6 million due to 2.1 times higher average purchase price of electricity and 17.2% higher technological losses. Transit (ITC) expenses totalled EUR 3.4 million, expenses for provision of PSO services equalled EUR 28.8 million and expenses of ensuring the allocated capacity of the interconnections totalled EUR 1.9 million. Depreciation and amortisation expenses declined 3.5% and amounted to EUR 20.6 million. Repair and maintenance expenses of the electricity network increased by EUR 0.7 million due to a larger scope of annual scheduled repair and maintenance works performed that are carried out under the multi-annual work plan and rise in prices of services. Increase in remuneration expenses by EUR 3.2 million compared to 2021 was affected by a 16.2% increase in the average number of employees due to the implementation of the synchronisation project and a higher average salary. Other expenses increased by EUR 2.6 million. 20.8 71.1 174.8 81.7 61.9 111.6 15.2 40.2 99.6 10.6 21.3 34.1 20.4 21.3 20.6 11.2 12.4 15.6 9.4 8.1 8.8 8.1 9.8 12.8 .0 100.0 200.0 300.0 400.0 500.0 600.0 2020Y 2021Y 2022Y Company's cost structure, million euros Other costs without asset revaluation Electricity network repair and maintenance costs Wages & related costs Depreciation Other electricity-related costs Costs of compensating losses in the grid Additional services costs Balancing energy costs ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 32 Profit and return indicators EBITDA for 2022 decreased by EUR 82.7 million compared to 2021 and amounted to EUR -36.5 million. The Company’s net losses for 2022 totalled EUR 49.9 million, whereas net profit of EUR 20 million was earned in 2021. The main reasons for decrease in the Company’s EBITDA were as follows: Increase in expenses of compensating technological losses by EUR 59.4 million; Decrease in transmission revenue by EUR 7.6 million; Decrease in the balance of revenue and expenses of additional services by EUR 4.3 million; Decrease in the result of other transmission activity by EUR 2.5 million; Decrease in other income by EUR 2 million; Increase in operating expenses by EUR 6.8 million. The adjusted profitability indicators are calculated due to temporary regulatory deviations from a regulated profitability approved by the NERC. The adjusted indicators are calculated by assessing a revenue adjustment for the prior periods, which has already been approved by the NERC’s decision when establishing regulated prices for the reporting period, and by assessing deviation of an actual profitability from a reporting period profitability permitted (regulated) by the NERC, which will be assessed when establishing regulated prices for the upcoming year by the NERC. 51.8 46.2 -36.5 26.6 20.0 -49.5 -60.0 -40.0 -20.0 .0 20.0 40.0 60.0 2020Y 2021Y 2022Y EBITDA and net profit, million euros EBITDA Net profit 32.5 39.8 34.2 10.2 14.6 10.6 .0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 2020Y 2021Y 2022Y Corrected EBITDA and net profit, million euros Corrected EBITDA Corrected net profit ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 33 Adjusted EBITDA for 2022 was calculated by making the following adjustments to actual EBITDA: addition of EUR 4.4 million. This is a result of additional services for 2020 (revenue less expenses), by which revenue from additional services for 2022 was reduced; subtraction of EUR 29.9 million. This is a result of additional services for 2022, by which revenue from additional services for 2024 should be reduced; addition of EUR 15.3 million. This is a part of the return on investments made in 2018-2020 in the transmission activity in excess of the permitted amount, by which transmission revenue for 2022 was reduced; addition of EUR 81 million. This is a projected difference between an actual and permitted return on transmission activity investments for 2022, by which transmission revenue for the upcoming year should be increased. Calculated by the Company, not yet approved by the Auditor and the Council (EUR 13.4 million added in 2021, EUR 14.3 million deducted in 2020). The main reasons for decrease in the Company’s adjusted EBITDA were as follows (in 2021 compared to 2020 increased): EUR 3 million lower capital costs (return on investment, including OPEX savings which increased the return on investment + depreciation costs + costs for the write-off of tangible fixed assets, which are included in regulated operating income) are the main reason for the decrease in the regulated rate of return on investment from 5.34% to 4.03% in 2021. EUR 3.4 million higher capital costs compared to 2020: EUR 1.2 million higher return on investment due to the increase in the rate of return on investment from 5.01% to 5.34%, EUR 2.2 million higher depreciation and asset retirement costs); EUR 2.2 million lower non-regulated operating income (mainly interest and contractors' penalties) and income-cost imbalance (EUR 2.6 million higher non-regulated operating income and income-cost imbalance in 2021 compared to 2020); EUR 0.4 million increase in uncompensated operating costs through regulated revenues (EUR 1.4 million decrease in uncompensated operating costs in 2021 compared to 2020). Adjusted net profit = actual net profit + EBITDA adjustments x (1-15% income tax). In 2022, the ROE and ROA ratios decreased from 9.1% and 4.4% and to -25.5% and -8.2%, respectively, compared to 2021. 12.9% 9.1% -25.5% 6.8% 4.4% -8.2% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 2020Y 2021Y 2022Y Return ratios, % Return on equity (last 12 months) Return on assets (last 12 months) ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 34 Adjusted ROE = adjusted net profit/((actual equity at the beginning of the period + actual equity at the end of the period + EBITDA adjustments x (1-15% income tax))/2. Balance sheet and cash flows During the year the Company’s assets increased by EUR 228.7 million (46.7%) and amounted to EUR 718.5 million as at 31 December 2022. Non-current assets representing 53.4% of the Company’s total assets increased by EUR 16.6 million (4.5%), the main reason – investment in assets was higher than depreciation costs. Current assets increased by EUR 212.1 million (2.7 times). Trade receivables increased by EUR 3 million, grants receivable from the European Union declined by EUR 9.6 million, other amounts receivable and deferred expenses increased by EUR 1.1 million, loans granted (fee funds linked to the Group account and loaned to EPSO-G) increased by EUR 188.4 million, and other financial assets and cash and cash equivalents increased by EUR 0.7 million. Shareholders’ equity decreased by EUR 54.5 million (24.6%) during the year and accounted for 23.2% of the total assets at the end of 2022. As at 31 December 2022, the Company’s financial liabilities to credit institutions amounted to EUR 40.4 million (declined by EUR 25.2 million during the year, of which current financial liabilities declined by EUR 8.1 million). Financial liabilities to equity ratio was 24.2%. Borrowings repayable within one year accounted for 15.2% of the total borrowings. Other non-current liabilities increased by EUR 9.4 million (9.9%), of which a non-current portion of accumulated funds balance of congestion revenue decreased by EUR 24.2 million, advance amounts received rose by EUR 32.3 million. Current liabilities, excluding a current portion of non-current borrowings, increased by EUR 299,1 million (3.8 times), whereof a current portion of accumulated congestion revenue increased by EUR 266.6 million (of which EUR 142.3 million were allocated for the reduction of the transmission tariff for 2023), advance amounts received were EUR 25.2 million higher, whereas other current amounts payable and liabilities increased by EUR 7.3 million mostly due to trade payables (In December of 2022 trade costs were higher than in December of 2021) Congestion revenue received during 2022 amounted to EUR 267.3 million, of which EUR 1.9 million were used for ensuring the availability of allocated capacities and EUR 23 million were allocated for the funding of investments. Accumulated congestion revenue balance amounted to EUR 350.5 million as at 31 December 2022, of which EUR 118 million were temporarily used for the financing of the Company’s activities and EUR 232 million were linked to the EPSO-G Group account. The Company’s net cash flows (excluding cash flows from financing activities and from loans granted by the Company and their repayments) totalled EUR 218.5 million in 2022. The cash balance amounted to EUR 0.5 million at the end of 2022. Investments in non-current assets In 2022, investments of transmission system operator LITGRID (works performed and assets acquired, irrespective of payment deadlines) amounted to EUR 56.2 million, of which 41% were earmarked for the implementation of strategic electricity projects of national significance, and 59% for the reconstruction and development of the electricity transmission network and ensuring the continuity of the Company’s activities. Major investments were allocated for the following projects: Reconstruction of the 330 kV overhead line Lietuvos Elektrinė–Alytus (LN 330) co-financed by the EU Structural Funds: EUR 14.3 million; Reconstruction of the 330/110/10 kV Neris transformer substation and the 110 kV switchyards: EUR 3.3 million. 5.1% 6.7% 4.7% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 2020Y 2021Y 2022Y Corrected return ratios, % Corrected return ratios, % ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 35 Projects co-financed under the Connecting Europe Facility (CEF) of the European Union: Construction of the 330 kV Darbėnai-Bitėnai electricity transmission line: EUR 7.3 million; Construction of the 330 kV Kruonis PSHP-Bitėnai electricity transmission line: EUR 6.8 million; Installation of new synchronous compensators in the Lithuanian electricity system: EUR 2.7 million. 7. COMPANY TARGETS AND THEIR IMPLEMENTATION The implementation of the Strategy is measured through the implementation of the Company's 3-year business plan and the Company's annual objectives, which prioritise measures in line with the priorities identified in the Company's Strategy. The evaluation of the achievement of the objectives is carried out by the Company's Board of Directors and the CEO reports to the Board of Directors on the achievement of the objectives. The financial and non-financial performance targets set for the Company are identical to those set for the CEO of Litgrid. The assessment of the achievement of the objectives determines the variable remuneration of all employees and the CEO. Achievement of the 2022 targets is 94.85%, with the targets to be approved by the Board in the first quarter of 2023. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 36 Implementation of the operational plan The company's medium-term 3-year action plan is based on the Lean tool Hoshin Kanri, known in the business world. As at the end of 2022, 95% of the measures in the 3-year action plan have been implemented to the extent and within the timeframe envisaged. All targets of the 3 year 2022 business plan have been achieved except for the return on equity target which is exceeded due to the higher than planned cost of compensating for technological losses: ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 37 8. REMUNERATION POLICY AND EMPLOYEES 8.1. EMPLOYEES A team of highly competent employees enables the Company to successfully achieve its goals. It consists of 391 professionals, 95% of whom have a university degree. 76% of the workforce is male and 24% female, with an average age of 42 years. Three quarters of Litgrid's team are experienced male and female engineers who are essential to the smooth operation of the transmission system operator. The average length of service in the energy system is 8.9 years. The employee turnover rate is 9.3% in 2022, compared to 8.2% in 2021 and 11.7% in 2020 and 2019. The voluntary turnover rate has dropped to 7.1% from 7.2% in 2021, compared to 9% in 2019 and 2020. 8.1. Remuneration policy and additional benefits Litgrid has an Employee Compensation, Performance Management and Development Policy that applies to all employees. Litgrid's remuneration system is a combination of financial and non-financial remuneration elements. The elements of the remuneration package are monthly remuneration, financial incentives, one-off bonuses, fringe benefits and non-financial remuneration. The basis of Litgrid's remuneration system is the company's job structure (job map), which consists of positions divided into levels according to the nature of the work, the required competence, the complexity/complexity of the problems and issues to be solved, the level of responsibility, and the remuneration scales for each level of position.  The core principles of reward management are internal equity and external competitiveness. The package of fringe benefits for Litgrid employees is focused on these areas: Ensuring the employee's working conditions and well-being; Attention to the employee's personal events, family and social activities; Investment in employee development. Litgrid is proud to provide employees with non-financial rewards that include: Meaningful company performance, stability and a sense of security; A professional team and a working environment that promotes efficiency; A values-based organisational culture; Interesting, challenging work content, international projects and unique experiences; Recognition and growth.. 8.2. Hybrid work From May 2022. Litgrid employees can choose a hybrid (mixed) working model, where the number of days required to work in the office is not fixed, but managers and employees are expected to be actively involved in certain organisational processes, events, and initiatives, common guidelines are set for maintaining and increasing teamwork and employee engagement, and the Emotional Pulse Indicator, turnover and engagement dynamics of new employees are measured. In April 2022, employees who are able to perform their job functions well and without hindrance while working abroad can take advantage of the possibility to telework from abroad for an agreed period of time. In 2022, 6 staff members took advantage of this option. 8.3. Employee engagement survey Litgrid aims to become an organisation that creates the best employee experience and to become an employer of choice. To achieve these goals, each year we use the Employee Engagement Survey to measure employees' engagement with the organisation through their relational and emotional connection to it. It measures factors such as engagement and empowerment, work performance and conditions, communication and corporate image, talent management and career opportunities, rewards and fringe benefits, etc. The tool provides extended results which, when analysed, lead to targeted initiatives that increase employee engagement and contribute to fostering a culture of continuous improvement. It is a valuable tool to help build the employer image of those who work here and those who will work here. The last survey carried out had an engagement rate of 80 per cent. This is a high rating not only for Lithuania, but also for high- performing global organisations. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 38 8.4. Professional training and development A progressive organisation is unthinkable without top-level professionals, thanks to whom Litgrid can call itself a competence centre. The company strives to provide its employees with the opportunity to learn and develop, to broaden their knowledge and horizons, and to participate as effectively as possible in the implementation of Litgrid's strategic goals. All employees are given the opportunity to acquire or update the knowledge and skills necessary to perform their direct work. Both the individual employee and the organisation are committed to the development of competences relevant to the employee and the organisation's activities, and the development system includes not only formal training, but other forms of development and learning. Staff have been able to attend conferences, seminars, lectures, mandatory, qualifying and generic competency training. The ratio of investment in the different competency areas is the same as in previous years, with 70% for training in the professional qualification profile and 30% for strengthening general, leadership and managerial competences. In 2022, about 50% of the staff members were distance learners (in 2021, about 90%). This trend in the organisation of training reflects the market practices developed during the Covid-19 pandemic and the hybrid working model in the organisation. Participating remotely means fewer journeys and less carbon dioxide (CO2) and other pollutants being emitted into the atmosphere, thus contributing to the reduction of negative environmental impacts. It also enables staff to balance their educational and work goals more effectively and to maintain a better work-life balance. 8.5. Performance management Litgrid has an Employee Compensation, Performance Management and Development Policy applicable to all employees. Employee performance management is one of Litgrid's most important management and effective leadership techniques, helping to achieve the organisation's objectives and to build clear, positive relationships between managers and employees, enabling employees to plan for their development and career progression, and to increase motivation.  A performance management system links the organisation's overarching goals and objectives to the individual performance and achievements of each staff member. The chosen performance management approach enables Litgrid's core values of cooperation, progress and professionalism to be fostered by agreeing on common principles and expectations for value-based behaviour to achieve goals. This allows Litgrid to maintain a high level of communication, cooperation and a performance-oriented culture. 8.6. Selection and integration Litgrid has a Selection Policy that applies to all selections in the company. Litgrid pays great attention to professional recruitment and a smooth start of employment. In 2021, the meaningful "New Colleague Day" initiative was relaunched, where recently joined colleagues get to know each other and listen to presentations on key topics related to Litgrid's operations and organisational culture. In order to attract new members of the power engineering team, cooperation with Kaunas Technical University was especially strengthened to increase the level of practical knowledge of students and to present Litgrid as a potential employer for the development of acquired competences. Despite the challenges posed by the pandemic, the recruitment process has been and continues to be successfully conducted remotely. In 2022, 90 employees joined the Litgrid team (55 in 2021 and 51 in 2020). Particular attention has been paid to the induction of new employees. Time is taken to get to know colleagues by meeting in the office, creating an informal, friendly and sustainable atmosphere, and strengthening new employee engagement. Taking into account the labour market situation and in order to attract motivated, competent candidates to Litgrid and to motivate employees who have recommended candidates, a recommendation procedure has been introduced as of 2022: a one-off payment is made to the employee who has recommended a candidate, who is hired and completes a probationary period. Litgrid invites its employees to actively participate in internal recruitment and to develop their competences. There were 41 internal recruitments in 2022 and 55 in 2021 (in 2021 we had a structural change which brought many career opportunities). 8.7. Cooperation with universities Litgrid cooperates with higher education institutions. In 2022, Litgrid participated in the Career Days, where a representative of the company gave a presentation on the transformation taking place in the energy sector, future plans and trends to which Litgrid contributes. Other colleagues shared their career experiences with the students, presenting their job positions and inviting them to do internships. Group-wide, academic institutions were given the opportunity to receive support for student incentive scholarships. Litgrid has signed a support agreement with Kaunas Technical University, whose first and second year students will be granted incentive scholarships until 2025 according to an agreed and approved methodology and selection criteria. In 2022, 7 students received incentive scholarships. Last year, special attention was paid to sharing know-how on energy topics, and Litgrid employees travelled to universities by teleconference and contact to lecture on topics relevant to their studies and complementing them with practical examples. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 39 Litgrid welcomes motivated trainees who want to gain knowledge and learn from professionals in their field. In 2022, a comprehensive internship programme has been developed, allowing students to learn not only about the operations of the unit where they are interning, but also to get to know, see and perform real tasks in other Litgrid's core business units. In 2022, the company had 11 such young professionals. 8.9. Staff interchangability Due to the specific nature of Litgrid's operations and the competences of employees acquired over time, the company has identified critical positions that have a significant impact on business continuity and are difficult to replace. To this end, Litgrid carries out a job evaluation, which identifies critical positions requiring shift preparation, and develops and implements shift preparation plans for critical positions and managers. Each year, the company strives to develop the necessary competences to ensure that business continuity is always guaranteed when needed. 8.10. Equal opportunities The more positive the emotional environment at work, the less stressful it is, the more likely it is that productivity will improve, workers' health and safety will improve, and everyone - employers, workers and society - will benefit. Litgrid is therefore boldly embarking on this path of equal opportunities to create and foster a safe and inclusive work environment where every employee is respected and valued, regardless of their age, social status, gender, beliefs, religion, sexual orientation and many other aspects. Equal opportunities is one of our priorities and we make every effort to implement equal opportunities within the organisation. In 2022, Litgrid is very active on the topic of equal opportunities, and the Equality Embassy, a group of active employees formed in 2021 on a voluntary basis, is a major contributor to this. The most important things done in 2022 are: various lectures and trainings for managers and employees; November has been declared as Equal Opportunities Month with an event and various forms of information on equal opportunities for employees; Litgrid has been presented as an Equal Opportunities Employer in job advertisements since 2022. In 2022, the priorities and indicators for equal opportunities for the period 2023-2025 were adopted and Litgrid has set an important target of 0 justified cases of discrimination in its 2023-2025 strategy. Litgrid's activities are guided by the principles of non-discrimination in all areas: in recruitment, selection and dismissal procedures, by objective, non-stereotyped criteria; in the design of the working environment and by providing equal working conditions for all employees. The aim is to create an open, flexible and inclusive working environment in the hope that this will help all Litgrid employees to successfully balance work and family commitments. Employee sports and volunteering initiatives are encouraged and supported. Every employee's ideas are listened to and encouraged. The principles of fairness and gender equality are applied in the formulation and implementation of the remuneration policy. Following the adoption of equal opportunities measures, Litgrid is committed to responding swiftly and effectively to everyday incidents of unwanted behaviour and to ensuring a level playing field for all employees and job applicants. The aim is to ensure that equal opportunities are not just on paper, but that the Litgrid community is modern, caring, tolerant and open. 8.11. Trade unions and collective agreements Litgrid cooperates closely with the company's trade union for electricity transmission network workers. On 18 February 2022, Litgrid signed a renewed Collective Agreement, the benefits of which are available to all Litgrid employees. The collective agreement includes: A long-term collective agreement confirming the existence of high level, harmonious and balanced relations; an agreement on a system of fringe benefits for the company's employees, ensuring socially responsible and market- competitive working conditions, employee engagement, guarantees and the implementation of the company's strategy. The collective agreement agrees on the benefits to be received by employees, such as additional holiday days and longer annual leave, material support for major life events, "sick days", social responsibility day, funds to promote and support sports, health and cultural activities, for the general education and training of employees, for the mobilisation of the collective/team, for the promotion of the company's values, and for supplementary occupational health and safety conditions and measures. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 40 Employee remuneration: Average salary 2018-2022 , EUR 2022 2021 2020 2019 2018. CEO 11,855 9,406 13,729 12,980 12,291 Top management 8,732 8,957 8,697 8,560 8,249 Middle management 5,143 4,778 4,482 4,326 4,041 Experts and specialists 3,269 3,041 2,792 2,556 2,403 Total 3,680 3,421 3,167 2,972 2,818 2022 2021 2020 2019 2018 Company profit/loss in thousand EURr (49,484) 20,013 26,603 2,959 (38,090) Dynamics of average salaries with variable part and without: Titles 2022 2021 Average monthly salary (Eur) Variable part for 2021 (Eur) Avera ge salary with variabl e part (Eur) Average salary change without variable part . Average salary change with variable part Average salary (Eur) Variable part for 2020 (Eur) Salary plus variabl e part (Eur) CEO 9,583 2,272 11,855 2 26 9,406 - 9,406 TOP management 7,209 1,523 8,732 2 3 7,088 1,869 8,957 Middle and senior managers 4,503 640 5,143 9 9 4,117 661 4,778 Experts and specialists 2,911 358 3,269 9 10 2,659 382 3,041 Total 3,253 427 3,680 9 10 2,984 437 3,421 ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 41 9. INFORMATION ON THE SHARE CAPITAL AND THE SHAREHOLDERS AND THEIR RIGHTS Since 22 nd December 2010, Litgrid’s shares are traded on the Secondary List on the NASDAQ OMX Vilnius exchange, ISIN code of securities: LT0000128415. Litgrid has not acquired its own shares. During the reporting period Litgrid neither acquired nor disposed of its own shares. The share capital of Litgrid amounts to EUR 146,256,100.2, and it is divided into 504,331,380 ordinary registered shares with the nominal value of EUR 0.29 each. EPSO-G UAB (Gedimino pr. 20, LT-01103 Vilnius, company code 302826889), a company wholly owned by the Ministry of Energy of the Republic of Lithuania, controls 97.5% of Litgrid ’s shares. EPSO-G UAB possesses a decisive vote in making decisions at the general meeting of shareholders. The Company has not received any information on mutual agreements between the shareholders due to which restrictions on transfer of securities and/or voting rights may be imposed. There are no restrictions regarding voting rights at the Company. SEB Bankas AB was the provider of accounting and related services for Litgrid ’s securities from september 15th 2020. Data on trading in Litgrid securities on the regulated markets: Rodiklis 2020 2021 2022 Opening price, EUR 0,59 0.58 0.805 Highest price, EUR 0.63 0.89 0.805 Lowest price, EUR 0.49 0.575 0.63 Closing price, EUR 0.585 0.795 0.7 Turnover, units 680 371 894 468 435 981 Turnover, EUR million 0.39 0.67 0.33 Capitalisation, EUR million 259.51 400.94 353.03 ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 42 9.1. Turnover and prices of Litgrid’s shares during the reporting period, in EUR: https://nasdaqbaltic.com/statistics/lt/instrument/LT0000128415/trading 9.2 Benchmark of LGD1L,OMX Baltic Benchmark GI (OMXBBGI) and OMX Vilnius (OMXV) ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 43 9.3. Dividends 18 August 2017 The Board of Litgrid has adopted a decision to apply the dividend policy of UAB EPSO-G Group, approved by the decision of the Board of Directors of UAB EPSO-G on 14 July 2017 (renewed 7 th February 2020), to Litgrid in full. EPSO-G's Dividend Policy regulates the procedure for setting, paying and declaring dividends for all the companies in the group, sets clear guidelines for the expected return on equity and investment for existing and potential shareholders, while ensuring sustainable long-term growth of corporate value, timely implementation of nationally important strategic projects, and purposefully building trust in the entire group of energy transmission and exchange companies. At Litgrid's Ordinary General Meeting of Shareholders held on 20 April 2022, it was resolved to pay a dividend of EUR 0.01 per share, for a total dividend of EUR 5 043 314. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 44 10. Governance 10.1. The Company’s management bodies The company's management bodies are set out in the Articles of Association and comprise the General Meeting of Shareholders, the Board of Directors and the company's sole director, the Chief Executive Officer. The Company's Articles of Association provide that, given that the Company belongs to a group of companies and that the Board of Directors of the Parent Company oversees the functioning of the internal control system and the management of risks at the Group level, the Company's General Meeting of Shareholders and the Board of Directors may take into account the suggestions and feedback of the Board of Directors of the parent company on matters within the competence of the relevant body of the Company. The audit committee established in the parent company shall act as the audit committee of the group as a whole, inter alia by performing the functions of the audit committee of the company. The Remuneration and Nomination Committee and the Audit Committee of the parent company, EPSO-G UAB, shall act as the audit committee of the group as a whole. The Audit Committee also performs the functions of the Company's Audit Committee. Until 1 December 2022, the Group also had an Innovation and Development Committee. 10.2. Management principles The basic principles of corporate governance are set out in the Civil Code of the Republic of Lithuania, the Law on Joint-Stock Companies and the company's Articles of Association. The Company's General Meeting of Shareholders decides on amendments to the Company's Articles of Association and authorised capital, on the conversion of shares, elects the Board of Directors and the auditor, approves the annual financial statements and the distribution of profits, decides on major transactions and on other issues. The Board of Directors determines the organisational structure of the Company, elects the Chief Executive Officer, approves the business strategy, budget, investments, decides on major transactions and other important management issues. The Chief Executive Officer is the company's sole governing body and organises the company's activities and concludes the company's transactions. The powers of the Company's organs are detailed in the Company's Articles of Association. The Company complies with the Code of Corporate Governance for Listed Companies. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 45 10.3. Articles of association The Articles of Association of Litgrid shall be amended in accordance with the procedure established by the Law on Joint Stock Companies of the Republic of Lithuania. During the reporting period, the Company's Articles of Association have not changed (available at www.litgrid.eu). 10.4. General meeting of shareholders The General Meeting of Shareholders is the company's supreme governing body. The competence of the General Meeting of Shareholders, the rights of shareholders and their exercise are provided for in the ABA and the company's Articles of Association. The competence, convening and decision-making procedures of the General Meeting of Shareholders shall be laid down by the Law, other legal acts and the Articles of Association. 10.5. The Board The Board of the Company consisting of five members, is elected for a four-year term. The term of office of the Board begins at the end of the General Meeting of Shareholders that elected the Board and ends on the day of the Ordinary General Meeting of Shareholders to be held in the year of the end of the term of office of the Board. If the Board or a member of the Board is revoked, resigns or for other reasons ceases to hold office before the end of the term of office, a new Board or a member of the Board shall be elected for the remaining term of office. According to the requirements of the amended new Articles of Association, the election of the members of the Board ensures that the Board consists of at least 2 (two) independent members, determining their independence taking into account the requirements of the applicable legislation; it is ensured that at least 3 (three) members of the Board are not related to the employment relationship with the Company, and if possible, the aim is not to appoint employees of the Company to the Board. The Board elects the Chairman of the Board from its members. In its activities, the Board follows the laws, other legal acts, the Articles of Association, the decisions of the General Meeting of Shareholders and the Rules of Procedure of the Board. The Board is a collegial management body of the Company. The competence of the Board, the decision-making procedure and the procedure for election and removal of members shall be established by laws, other legal acts and the Articles of Association. The Board is accountable to the General Meeting of Shareholders. 31 December 2022 Members of Litgrid's Management Board, CEO and CFO: CVs of the members of the Board and the Company’s Chief Executive Officer (information is also published on the website at www.litgrid.eu). Position Name Start date End date Number of the issuer’s shares held Chairman of the Board Tomas Varneckas 2022 04 20 Elected Chairman of the Board 29 12 2022 - Independent Board member Domas Sidaravičius 2016 07 29 - Chairman of the Board Algirdas Juozaponis 2018 09 07 2022 12 22 - Board member Mindaugas Keizeris 2022 12 22 - Board member Gediminas Karalius 2022 04 20 - Independent Board member Artūras Vilimas 2020 04 20 2022 11 04 - Board member Jūratė Marcinkonienė 2020 04 20 2022 04 20 - CEO Rokas Masiulis 2021 02 22 - CFO Vytautas Tauras 2019 03 01 76 shares ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 46 10.6.2. The areas of the activities of the Board The Board of the Company considers and approves the Strategy, three-year action plan, 10-year development plan, the budget, charity and sponsorship, other Company’s documents of strategic importance. The Board makes decisions for the Company to start a new type of activity or to terminate a specific activity, when it does not contradict the purpose of the Company's activity. Also, the decisions related to the issuance of bonds, transfer of shares held by the Company to other persons, decisions on financial transactions with a value of more than EUR 3 million must be approved by the Board. The Board also resolves other issues assigned to it in the Company's Articles of Association. 10.6.3. The Board Tomas Varneckas Chairman of the Board Head UAB „EPSO-G“ infrastructure (company code 302826889, Gedimino avenue. 20, 01103 Vilnius). T. Varneckas does not hold shares of Litgrid. Mindaugas Keizeris Board member UAB UAB EPSO-G CEO (įm. kodas 302826889, Gedimino avenue. 20, 01103 Vilnius). M. Keizeris does not hold shares of Litgrid. Gediminas Karalius Board member The ministry of Energy, senior advisor to Energey security group. G. Karalius does not hold shares of Litgrid. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 47 Domas Sidaravičius Independent board member Other position: Tuvlita UAB Strategy and development director (reg. code 1105840917, Lentvario g. 7A, LT-02300, Vilnius). D. Sidaravičius does not hold shares of Litgrid. 10.7. Board activities and self evaluation In line with the guidelines for the annual performance evaluation of the Group's collegiate bodies approved by EPSO-G's Remuneration and Nomination Committee, Litgrid's Board of Directors completed its performance evaluation for 2022 at the beginning of 2023. The summarised assessments of each of the Board members were discussed at the Board's performance evaluation session, which identified areas for improvement and set out directions for improving business processes, with an action plan for 2023: organise a strategy session to map out how we envision the company's performance in 2030, to seek to obtain concentrated, structured information of high quality on the Company's current issues, to always receive prepared material at least 7 days before a regular Board meeting, and to receive feedback from members at the end of each regular Board meeting on the timeliness and quality of material. In accordance with the Guidelines for the annual performance evaluation of the Group's collegiate bodies, the overall assessment of the performance of all the Group's collegiate bodies shall be summarised by the Remuneration and Nomination Committee of the EPSO-G and submitted to the Board of Directors together with a report. In total 26 Board meetings were held in 2022. Participation statistics of board meetings in 2022: Attended Did not attend Attendance of the meetings of the Board of LITGRID AB in 2022 and decisions taken: Nr. Date Algirdas Juozaponis Jūratė Marcinkonienė Domas Sidaravičius Artūras Vilimas Gediminas Karalius Tomas Varneckas Mindaugas Keizeris 1. Jan 10 (not ordinary) Not yet elected Not yet elected Not yet elected 2. Jan 13 (not ordinary) Not yet elected Not yet elected Not yet elected 3. Jan 21. Not yet elected Not yet elected Not yet elected 4. Feb 4 Not yet elected Not yet elected Not yet elected ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 48 Nr. Date Algirdas Juozaponis Jūratė Marcinkonienė Domas Sidaravičius Artūras Vilimas Gediminas Karalius Tomas Varneckas Mindaugas Keizeris (not ordinary) 5. Feb 8 (Not ordinary) Not yet elected Not yet elected Not yet elected 6. Feb 11. (Not ordinary) Not yet elected Not yet elected Not yet elected 7. March 4 Not yet elected Not yet elected Not yet elected 8. March 24. Not yet elected Not yet elected Not yet elected 9. April 8 (Not ordinary) Not yet elected Not yet elected Not yet elected 10. April 19. (Not ordinary) Not yet elected Not yet elected Not yet elected 11. April 28 Was recalled Not yet elected 12. May 20 Was recalled Not yet elected 13. May 30 (Not ordinary) Was recalled Not yet elected 14. June 17 Was recalled Not yet elected 15. July 1. ((Not ordinary) Was recalled Not yet elected 16. July 22 Was recalled Not yet elected 17. July 29 ((Not ordinary) Was recalled Not yet elected 18. Aug 12 d. Was recalled Not yet elected ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 49 Nr. Date Algirdas Juozaponis Jūratė Marcinkonienė Domas Sidaravičius Artūras Vilimas Gediminas Karalius Tomas Varneckas Mindaugas Keizeris (Not ordinary) 19. Sept 22 Was recalled Not yet elected 20. Oct 21. Was recalled Resigned Not yet elected 21. Nov . (Not ordinary) Was recalled Resigned Not yet elected 22. Nov 18 Was recalled Resigned Not yet elected 23. Nov 30 (neeilinė) Was recalled Resigned Not yet elected 24. Dec 2 (neeilinė) Was recalled Resigned Not yet elected 25. Dec 15 Was recalled Resigned Not yet elected 26. Dec 29. Resigned Was recalled Resigned Key decisions taken by the Litgrid Board in 2022: 10 January. Litgrid's 2030 Strategy and the Strategic Priorities 3-5 of Litgrid's 2022-2024 Operational Plan for Electricity Transmission System Operator Litgrid and the objectives of the 2022 Operational Plan were approved. The creation of fixed assets through the conclusion of a design and contract works contract for the reconstruction of the 330/110/10 kV Jonava TP with the joint stock company Kauno Tiltai was approved, the material terms of the contract were approved and an Extraordinary General Meeting of Shareholders was convened. 13 January. The conclusion of an agreement with UAB EPSO-G for the repayment of tax losses transferred in 2019 is approved and the essential terms of the agreement are agreed. 21 January. To approve the creation of fixed assets by concluding a design and contract work contract for the reconstruction of the Varduva 110 kV switchyard with UAB TETAS, a company incorporated and operating under the laws of the Republic of Lithuania, legal entity code 300513148, with registered office at Senamiesčio g. 102 B, LT-35116 Panevėžys. Contract price € 4 350 000 excluding VAT. The submission of the updated methodology for the determination and allocation of interconnection capacity with third parties to VERT for approval was approved. The UAB EPSO-G Group's Occupational Health and Safety Policy, Environmental Policy and Share Sale Transactions Policy are signed. Litgrid CEO's 2022 targets, target weights and measurement indicators approved. 4 February. The decision was taken to seek to acquire all of the shares of TSO Holding AS to be sold by Energinet and Fingrid (18.8% and 18.8% respectively, for a total of 37.6%). The signing of the shareholders' agreement of Baltic RCC OÜ was approved and its material terms were confirmed. Approval was given to deviate from the terms of the standard connection service contract by including an additional clause in the transmission service contract with LTG Infra AB. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 50 8 February. The conclusion of the Supplementary Agreement to the Purchase and Sale Agreement for the purchase and sale of the Isolated Power System Operation Service for the preparation of the Isolated Operation Service with the related party Ignitis Production AB was approved, and the essential terms of the Agreement were approved. 11 February. The creation of fixed assets concluding of a contract for the design and works for the extension of the Bitėnai TP 330 kV switchyard with UAB Stiemo was approved.. 4 March. Litgrid's CEO's report on the implementation of the 2021 performance targets is approved. Signed up to the UAB EPSO- G Group's Equal Opportunities Policy, Sustainability Policy and Procurement Policy. 24 March. Approval was given for the submission of the updated methodology for the identification and allocation of interconnection capacity with third parties to VERT for approval. Litgrid's Annual Report 2021 was approved. Approval of Litgrid's set of financial statements for 2021. A decision was taken to propose to the General Meeting of Shareholders to allocate a total of EUR 175,000 from the 2021 profit to donations, i.e. not more than the amount provided for in Article 9(1) of the Law of the Republic of Lithuania on Charity and Donations. The draft distribution of Litgrid's profit for 2021 was approved. Approved Litgrid's remuneration report for 2021, which is part of Litgrid's annual report for 2021. The Ordinary General Meeting of Shareholders is convened. A decision was taken not to apply to the contractor AB Kauno Tiltai late payment interest due to objective circumstances beyond the control of the contractor. The independence of the independent members of the Board of Directors, A. Vilimas and D. Sidaravičius, was assessed. 8 April. Approved the creation of fixed assets by concluding a design and contract works contract for the 330 kV Vilnius-Neris PPA with Žilinskis ir Co, UAB, approved the material terms of the contract and convened a General Meeting of Shareholders. 19 April. In view of the assessment of the achievement of the objectives set by the Litgrid Board for the CEO for 2021, the assessment of the values and leadership principles, the CEO was awarded a one-off annual variable remuneration for 2021. 28 April. Approved the action plan for the implementation of the recommendations of the internal audit of Litgrid's procurement in 2021. Decision on voting at the Ordinary General Meeting of Shareholders of TSO Holding AS on 28 April 2022. The Group of companies of EPSO-G UAB has joined the policy on prevention of corruption. The new version of Litgrid's list of risks for 2022 was approved. 20 May. Action plan for the implementation of Litgrid's 2022 Project Management Internal Audit Recommendations approved. The appointment of members of the Supervisory Board of Baltic RCC OÜ was approved. The updated version of the Articles of Association of Baltic RCC OÜ was approved. The terms and conditions of the Agreement No.1 "On the amendment of the Contract No. 21VP-SUT-10 "Reconstruction of the 330 kV single-circuit OL Klaipėda-Grobinė into a double-circuit" dated 15.01.2021" were approved. Approval was given to the signing on 23-03-2021 of the contract No 21VP-SUT-40 330 kV for the design and contracting works for the reconstruction of the single-circuit overhead line Jurbarkas-Bitėnai (LN 531) into a double-circuit line, which was concluded with a group of suppliers consisting of UAB Empower-Fidelitas (legal entity code: 123855155, registered office address: Galinės g. 8, Galinė, LT-14247 Vilniaus r.) and EMPOWER AS (legal entity code: 11445550, registered office address: K. A. Hermanni 8a, 10121 Tallinn, Estonia), the material terms of the transaction were amended and an extraordinary general meeting of shareholders was called.. 30 May. Approved the purchase of SCADA/EMS upgrade services with integrated AGV module from GE Energy Management Services, LLC and approved the material terms of the SCADA/EMS upgrade services with integrated AGV module service contract. The conclusion of contracts with EPSO-G UAB and Energy Cells, UAB for the transfer of tax losses for 2021 was approved and the material terms of the contracts were approved. The differentiated prices for electricity transmission services for 2022, calculated on the basis of the transmission service price cap and the system service price approved by the State Energy Regulatory Council, were established and the procedure for their application was approved. On 17 June. Litgrid's list of risks for 2022 was approved in a new version. Approval was given to grant EUR 42 000 to Kaunas University of Technology and EUR 8 000 to Klaipėda University. Agreement No 5 "On the amendment of the contract No 20VP- SUT47 of 30 April 2020 for the design and construction works for the reconstruction of the 330 KV overhead line Lietuvos E- Alytus (LN 330)" with AB Kauno Tiltai and UAB LITENERGOSERVIS was approved and an Extraordinary General Shareholders' Meeting was convened. The proposed agenda for the Extraordinary Shareholders' Meeting is also approved. 1 July. Approval of the Development Plan for the 400-110 kV Networks of the Lithuanian Power System for 2022-2031. 22 July. Standard terms and conditions of Litgrid's standard service agreement for the connection of the consumer's electrical equipment / relocation (reconstruction) of the operator's electrical equipment are approved. The support policy of the UAB EPSO- G group of companies is signed. Agreement No 1 "On the amendment of the Contract No 21VP-SUT-220 of 25 November 2021 for the construction of the 330 kV overhead line Darbėnai-Bitėnai" was approved and the Extraordinary General Meeting of Shareholders was convened. The amendment to the cooperation agreement No 20SUT-236 for the implementation of Phase II of the Baltic Synchronisation Project, signed on 31.12.2020, was approved, and the substantive terms of the agreement were confirmed. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 51 29 July. Approval of Supplementary Agreement No 3 to the Agreement of 31 December 2021. The conclusion of the Isolated Power System Operation Service Purchase and Sale Agreement No 21SUT-286 of 20 December 2021 (for the preparation of the Isolated Operation Service) with the related party Ignitis Production AB and the material terms of the transaction were approved. 12 August. Approved the creation of fixed assets by concluding a design and contract works contract for the construction of the 330 kV Mūša switchyard with Žilinskis ir Co, UAB and approved the material terms of the contract, approved the creation of fixed assets by concluding a design and contract works contract for the construction of the 330 kV Vilnius-Neris substation with Žilinskis ir Co, UAB and approved the material terms of the contract, approved the creation of fixed assets by concluding the design and contract works contract for the reconstruction of the 330/110/10 kV Kruonis HAE 330 kVdistribution plant with the joint stock company Kaunotiltai and approved the material terms of the contract. The Extraordinary General Meeting of Shareholders is convened. With a view to the meeting of 20 April 2022. "Litgrid's General Meeting of Shareholders, which approved a total support amount of EUR 175,000 for the year under review, and in accordance with the Group's Support Policy, p. 2.1.3, 3.1. In addition, taking into account the situation regarding the military invasion of Ukraine by the Russian Federation and the request received from the Ukrainian company Ukrenergo, a decision was taken to provide this company with support (both directly and through other charitable and aid institutions or organisations) for the provision of equipment in the field of energy, and a total amount of EUR 125,000 was approved for the above purposes. 22 September. The updated list of Litgrid's confidential, commercial/production secret information is approved. The conclusion of the Information Security Management Service (ISMS) transaction between Litgrid and the related party Baltic RCC OÜ was approved and the material terms of the contract were confirmed. The decision to buy back from Energinet and Fingrid the 18,8 % and 18,8 % respectively, for a total of 37,6 % (5 760 units) of the shares of TSO Holding AS was adopted and the material terms of the agreements were approved. The Project Management Policy and the Selection Policy of the EPSO-G Group of UAB have been signed. Approved the action plan for the implementation of the recommendations of the internal audit on the connection of renewable resources. Litgrid's updated organisational governance structure was approved. 21 October. Joins the EPSO-G Group's Remuneration, Performance Appraisal and Development Policy and Equal Opportunities Policy. Approved the inclusion of additional (non-standard) services in the tripartite service contracts for the connection of electrical equipment to electricity transmission grids / relocation (reconstruction) services to be signed with LTG Infra AB for the transmission networks of Litgrid that are being reconstructed during the implementation of the Rail Baltica project. Differentiated prices for electricity transmission services for 2023 have been set and the procedure for their application has been approved. The draft Litgrid 2030 Strategy was approved and approved for submission to the Public Enterprise Management Coordination Centre for review. The decision was taken not to apply to the consultant ILF CONSULTINGENGINEERS POLSKA Spolka z.o.o. EUR 102 319,52 in liquidated damages for objective reasons beyond the control of the Contractor. The creation of fixed assets through the conclusion of a design and contract for the design and contracting works for the "Installation of the temporary interconnector for the 330/110/10 kV Kruonis HAE 330 kV switchyard" with the joint stock company Kauno Tiltai was approved, and the essential terms of the Contract were approved. On 9 November, a decision was adopted to sell 39.6%, i.e. 6 066 units, of the shares of the company "Kauno Kauno Kauno Vilas". TSO Holding AS shares to the parent shareholder UAB EPSO-G by concluding a share sale and purchase agreement, under the following material terms and conditions. Agreed by Agreement No 4 'Concerning the Agreement of 10 September 2021 on the following "The Extraordinary General Meeting of Shareholders was convened to approve the amendment of the Design and Construction Contract No 21VP-SUT-156 for the "Reconstruction of the 330/110/10 kV Neries TP" with Žilinskis ir Co, UAB. The conclusion of the Management Holding Services Agreement with EPSO-G, UAB was approved and the essential terms of the Agreement were confirmed. 18 November. The amendment of the contract price by Agreement No 7 "Concerning the Contract No 21VP-SUT-10 of 15 January 2021 "Reconstruction of the 330 kV single-circuit overhead line Klaipėda-Grobinė into a double-circuit overhead line" was approved. The creation of fixed assets through the conclusion of a design and contract for the design and contract works for the "Reconstruction of the 110/10 kV Zokniai substation" with UAB Tetas was approved, and the essential terms of the contract were approved. 30 November. The Extraordinary General Meeting of Shareholders was convened to set the remuneration levels for the members of the Litgrid Management Board and to set the Management Board's operating budget for 2023 and the following years. 2 December. The conclusion of a purchase and sale agreement for the provision of the isolated standby power system operation service with the related party Energy Cells, UAB was approved, and the material terms of the agreement were confirmed. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 52 15 December. Litgrid's list of risks and management measures plan for 2023 is approved. Agreement No. 1 "On the amendment of the Contract No. 22VP-SUT-34 of 2 March 2022 "Bitėnai TP 330 kV Switchyard Expansion Works" was approved as an amendment to an essential term of the transaction. Approval of the creation of fixed assets by concluding the design and contract works contract for the "Connection of the third 410-345-10 kV autotransformer AT-41 at Alytus TP" with the Supplier Group consisting of UAB Connecto Lietuva and AS Connecto Eesti was approved. The treasury and financial risk management policy of the UAB EPSO-G group of companies has been joined. Amendments to the material special terms of the Loan and Borrowing Agreement of 26 February 2021 between Litgrid and UAB EPSO-G were approved. The Personal Data Protection Policy and the Supplier Code of Conduct of the UAB EPSO-G Group were signed. 29 December Mr Varneckas is elected Chairman of the Board. The conclusion of the Electricity Generating Facilities Availability Service with the related party Ignitis gamyba AB was approved and the essential terms of the contract were confirmed. The conclusion of the Electricity Generation Facilities Availability Service with UAB Kauno Termofikacijos elektrinė, a non-affiliated party, was approved, and the essential terms of the contract were confirmed. The conclusion of the supplementary service contract for the regulation of voltage regulation in the loss state with Ignitis Production AB was approved, the essential terms of the contract were confirmed. 10.6.4. Areas of activities of the CEO The CEO is the sole governing body of the Company. The CEO organizes the activities of the Company, manages it, acts on behalf of the Company and has the right to conclude transactions unilaterally. The competence of the CEO, the procedure of election and revocation shall be established by laws, other legal acts and the Articles of Association. Rokas Masiulis CEO Other positions: independent board member at „Connect Pay“ UAB (reg, nr. 304696889 Algirdo g. 48, LT-03218 Vilnius). R. Masiulis does not hold Litgrid shares. 10.6.5. Governance and control The requirements for the governance of the Company are set forth by the Lithuanian Government’s resolutions on the governance of state-owned or state-controlled companies, insofar as they apply to the EPSO-G group companies, and the Governance Code, insofar as the Company’s Articles of Association do not state otherwise. In accordance with the Integrated Planning and Monitoring Policy of the EPSO-G Group of Companies, which was approved at the meeting of the Board of the Company No 12 held on 19 May 2017 and which is directly applied at the Company in its entirety, the Company is preparing the strategy of the Company for a period of 5–10 years. The period of the strategy must coincide with the period of the parent company’s strategy. The prepared strategy of the Company currently covers the period of 10 years up to 2028. The implementation of the strategic objectives set out in the strategy of the Company is ensured by the Company’s performance, control, and risk management systems. The strategy of the Company is approved and its implementation is controlled by the Board. The Board of the Company prepares (updates) and approves the operational plan for a period of 3 years before the end of the current year. A monthly strategy implementation supervision system is introduced at the Company and is linked with the Company’s administrative staff remuneration system. The composition of the Company’s Board is disclosed on the Company’s website. The Company’s activities of the transmission system operator are regulated by the national regulatory authority, i.e. the National Energy Regulatory Council. Within its competence, the Council performs the functions of the state regulation in the electricity sector in the Republic of Lithuania, by ensuring, inter alia, the supervision of and control over the performance of regulated activities in the energy sector, as well as the proper implementation of the rights and duties of electricity undertakings and consumers. The strategy and operational plan of the Company are implemented by and the activities of the Company’s administrative staff are organised by the Company’s Chief Executive Officer. The Company’s administrative management personnel consists of the Chief Executive Officer, the Finance Department Director, the System Department Director, the Transmission Network Department Director, the Strategic Infrastructure Department Director, the Strategy Department Director, and the ITT and Administration Department Director. The composition of the Company’s management is disclosed on the Company’s website. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 53 Corporate governance accommodates the principles of good governance practice and the policies on the governance of state- controlled companies. The Board of the Company approves the following policies, the implementation of which is to be ensured by the administrative staff of the Company: corruption prevention, remuneration, remuneration for activities in the management bodies of the group companies, assessment of employees' performance, project management, integrated planning and monitoring, corporate governance, accounting, support, dividends, transport, technological property, transparency and communication, protection of sensitive information, management of interests of collegial management bodies, executives and employees, treasury management and financial risks, risk management, social responsibility and other policies, the content of which is published on the Company’s website. The internal control systems of the Company are supported by the organisational structure, management culture and implemented good governance practices, as well as process management which is currently being implemented. It should be noted that the supervisory functions are carried out by the Board of EPSO-G UAB, meanwhile recommendations, proposals and conclusions on matters which are key to the Company’s activities are provided by the Remuneration and Nomination Committee and the Audit Committee. The internal control system is initiated by the Company’s Board and implemented by the administrative staff, assisted by the Audit Committee of EPSO-G UAB, the external independent audit, and divisions supporting the principal activity. The procedures and policies effective at the Company ensure the reliability of accounting and financial reporting, the compliance of the Company’s activities with legal acts, operational efficiency, and achievement of operational objectives. The Minister of Energy of the Republic of Lithuania by Order No 1-212 of 7 September 2015 approved the Corporate Governance Guidelines for the State-Owned Group of Energy Companies (the “Guidelines”). The Guidelines establish uniform principles of corporate governance to be applied to the entire EPSO-G group of companies and prescribe the purpose of the group of companies, its operational objectives, corporate governance organisation model, governance structure, as well as the system for accountability, supervision and control of operations. These Corporate Governance Guidelines are intended to support and further improve the procedures and policies of good governance practice applied at the Company. Good governance practice of the EPSO-G group of companies upon the approval of the Guidelines by the Minister of Energy, the company controlling the EPSO-G group of companies is improving the governance practice in its operations and the operations of the group of companies, with reference to the recommendations set forth in the Governance Code and by implementing the recommendations of the international organisations, such as the OECD, intended to enhance the governance of state-controlled companies. The basis for the practical realisation of these Guidelines was created on 17 December 2015, with the approval of the newly revised Articles of Association of EPSO-G (the “Articles of Association of EPSO-G”), as the company controlling the entire EPSO-G group of companies, by the Ministry of Energy, which is the owner of the shares of EPSO-G. The newly revised Articles of Association of EPSO-G laid down the foundations for the establishment of the new management bodies at the level of EPSO- G, i.e. the Board, the Audit Committee, and the Remuneration and Nomination Committee, which, in turn, perform certain supervisory and management functions at the level of the entire group of companies. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 54 11. REMUNERATION REPORT 11.1. Employees A team of highly competent employees helps the company to achieve its goals. It consists of 391 professionals, 95% of whom have a university degree. The increase in headcount is due to the acceleration of synchronisation and the pooling of critical competencies. Reinforcements in the areas of digitisation and innovation, which are part of the strategic objectives. 76% of the workforce is male and 24% female, with an average age of 42 years. Three quarters of Litgrid's team members are experienced engineers who are crucial to the smooth operation of the transmission system operator. The average length of service in the energy system is 10 years. The staff turnover rate is 8% in 2022, compared to 8.2% in 2021 and 11.7% in 2020. Average remuneration in 2018-2022, Eur 2022 2021 2020 2019 2018 CEO 11885 9403 13 729 12 980 12 291 Top management 8732 8957 8 697 8 560 8 249 Middle management 5143 4778 4 482 4 326 4 041 Experts and specialists 3269 3041 2 792 2 556 2 403 In total 3680 3421 3 167 2 972 2 818 Information on the Remuneration Policy, the Employee Performance Appraisal Policy, the remuneration paid and the company's objectives is available on Litgrid's website. 11.2. Remuneration of collegial management bodies The principles of remuneration of members of the management bodies of the EPSO-G group of companies are laid down in the Guidelines for the determination of remuneration for activities in the bodies of group companies, approved by a decision of the sole shareholder of EPSO-G UAB. On 17 December 2019, Litgrid's Extraordinary General Meeting of Shareholders adopted resolutions on the establishment of the annual remuneration budget for the remuneration of independent members of the Management Board and the costs related to the performance of functions in the Management Board, as well as on the standard terms of the agreement with independent members of the Management Board on the performance of their activities in the Management Board of Litgrid. The Company follows the remuneration policy for the CEO and the Board of Directors, updated on 20 April 2020 (https://www.litgrid.eu/uploads/files/dir523/dir26/dir1/16_0.php) No remuneration was paid to the Board members delegated by the shareholder in 2022. Remuneration of the Board members, Eur: 2022 2021 2020 2019 2018. Domas Sidaravičius (from 2016.07) 17 107 16 800 16 800 8 820 9025 Tomas Varneckas (from 2022.12.29) - - - - - Mindaugas Keizeris (from 2022.12.29 - - - - - Algirdas Juozaponis (from 2018.09) - - - - - Artūras Vilimas (from 2020.04 to 2022.11) 22 370 21 000 14 197 - - Gediminas Karalius (from 12.2022) 607 - - - - Viso 40 084 37 800 37 414 18 307 12 225 No other bonuses, royalties or other benefits were paid to the members of the Board. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 55 Fixed and variable remuneration for the Chief Executive Officer is determined by the Board of Directors, and for the most senior executives by the Chief Executive Officer, in accordance with a remuneration policy approved by the Board. The variable remuneration is paid once a year to the CEO and the senior management after the Board has approved the achievement of the company's objectives. The male:female ratio on the 2022 Board was 100% male. 12. SPECIAL OBLIGATIONS There are no special obligations for Litgrid. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 56 12. RISK FACTORS 12.1. Risk factors, their management and audit The Company's activities are guided by the "Risk Management Policy of the UAB EPSO-G Group" approved by the Board of Directors' Decision No VLD-19-02 of 25 January 2019 (link). "The Board of Litgrid, in order to ensure an efficient and unified risk management process, by its Decision No. 7.1 of 8 March 2019 (Minutes No. 5), decided to apply the provisions of the Policy to the Company's activities. In order to elaborate on the provisions of the Policy, the Board of Directors of UAB EPSO-G, by its Decision No VLD-20-02 of 7 February 2020, approved the "Risk Management Methodology of UAB EPSO-G" (hereinafter referred to as the "Methodology"), which details the processes of risk management both at the Company's level and at the Group level. "The Methodology was approved by Litgrid's Management Board Decision No. 7 of 24 April 2020 (Minutes No. 7), which is also used to guide the Company's risk management activities and information exchange with EPSO-G UAB. The risk management model (Policy and Methodology) applied by the Company is based on the COSO ERM (Committee of Sponsoring Organisations of the Treadway Commission Enterprise Risk Management) methodology, which is recognised in international practice, and on the standard AS/NZS ISO 31000:2009 (Risk management - Principles and guidelines), which defines the guidelines and responsibilities for the identification, assessment and management of risks. Responsibilities of the Company’s bodies in the risk management system The EPSO-G Board The Audit Committee Assesses management of risks, is responsible for an effective risk management system at the Group. An advisory committee of the EPSO-G Board – oversees management of risks at the Group level, assesses effectiveness of the risk management system. The Chief Executive Officer of EPSO-G Organises the implementation of the Risk Management Policy and other decisions of the Board, within the area of his/her competence aims to achieve a proper management of risks of the companies. Risks at the Group level Risks at the level of the Group companies The Board The Audit Committee Responsible for a proper management of risks at the company. An advisory committee of the Board – oversees management of risks. The Chief Executive Officer Responsible for the implementation of risk management measures Risk management helps Litgrid meet its strategic objectives and: to increase the stability of Litgrid's operations and ensure the efficiency of its processes; Ensure the provision of correct information to decision makers, shareholders and other stakeholders; increase public and state confidence in Litgrid and protect the company's reputation; anticipate threats and implement threat management measures in a coordinated manner to prevent threats from occurring or to reduce their negative impact and/or probability of occurrence. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 57 In order to ensure that the Company's objectives are met, a process of risk identification and assessment is carried out at a fixed time each year and risk management measures are planned. In addition, existing and new risks are monitored on a quarterly basis, and additional risk management measures are planned on an operational basis if necessary (continuous monitoring of the implementation of the measures planned to manage risks). "Litgrid determines its risk appetite and tolerance limits and continuously monitors the values of key risk indicators. Risk management process Litgrid's 2022 risk map has a high and medium risk distribution - 3 (three) risks exceeded the company's appetite limits. Risk No. Risk title Description Risk level 1 Delay in the critical work stream "Ensuring preparation for full synchronisation with continental European grids" The company has to ensure that Lithuania's electricity system is ready for full synchronisation with the continental European grids on schedule. The risk may materialise if at least one of the measures or actions foreseen in the Action and Measures Plan of the power system synchronisation project is not carried out in the timeframe envisaged. Synchronisation projects are subject to a zero tolerance for the risk of project delays. Extreem level of risk 7 Upside risk to the investment value of Synchronisation Programme projects There is a risk that the total investment costs of synchronisation projects will be higher than planned. The deviation of the total investment costs may be due to: - price inflation; - shortages of certain commodities (metal, timber, reinforcement) on the market. - lack of competition in purchasing.. Extreem risk level ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 58 10 Delay in the critical workflow "Ensuring the readiness of the Lithuanian electricity system for isolated operation" Certain activities/projects carried out by Litgrid are included in the critical workflow. Delays of projects identified in the critical work stream may have a negative impact on the overall critical work stream. Very high risk level Risk management map for 2022: In 2022, in response to the changing environment (Russian invasion of Ukraine, the ongoing Covid-19 pandemic, disruptions in commodity supply chains and rising inflation), the company made 23 changes to the risks in the company's risk register in the period 2022 (adjustments to the causes of risks, risk management measures, risk monitoring indicators, with more ambitious indicator values, and adjustments to the probability of risks and impact values), 2 new risks were added and 3 risks were managed. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 59 In 2022, the Company has also focused on monitoring and managing the risks identified in the table below. Risk Nr. Risk name Risk level 37 Risk of lack of competition between suppliers in public procurement Medium level 12 Risk of non-compliance with personal data protection requirements Medium level 24 Disclosure of confidential information due to cyber-attack or mismanagement Medium level 38 Lack of appropriately skilled professionals Medium level 14 Risk of disconnection of the NordBalt interconnector Medium level 20 Failure to ensure power quality and the N-1 criteria in the management of the electricity system Medium level 44 Disruption of the operation of facilities of national security importance due to malicious acts of third parties Medium level 19 Damage to the environment and/or third parties caused by Litgrid's activities Medium level 39 Risk of non-compliance with regulatory legislation Medium level The Company continuously monitors the market situation and analyses the latest information, external and internal factors and their potential impact on the Company's business. It also makes every effort to ensure uninterrupted energy supply and business continuity. Although additional risks arise, the Company has taken the necessary steps to manage them. 12.2. Information security Based on the findings of external audits, Litgrid's organisational and technical information security measures are in line with globally recognised best practices. In 2022, a maintenance audit of information security management was carried out and the ISO/IEC 27001:2017 certificate was renewed (granted in 2021). The certification covered risk management, security policies, standards and procedures, physical and environmental security, access control, communication and operations management, incident management, business and business continuity, resource and asset management, and regulatory compliance. In 2022, an audit of the information security requirements for members of ENTSO-E, the international organisation of electricity transmission system operators, was also carried out, and ENTSO-E's assessment of the results of the audit confirmed that Litgrid's measures comply with the cybersecurity requirements for ENTSO-E members. The National Cyber Security Centre (NCSC) has been the subject of intensive cooperation to ensure cyber security in 2022. The NSCC carried out a review of the technological electricity transmission systems and assessed Litgrid's cyber security status positively. Since the beginning of the war in Ukraine, LITGRID has been exchanging information with the NSCC on the cybersecurity situation in order to manage the increased risks. The company successfully participated in the cyber security exercise "Cyber Shield 2022" organised by the NCSC, as well as represented Lithuania together with the NCSC in the international exercise "WEST ZONE RANSOMWARE RESILIENCE EXERCISE" Litgrid consistently and purposefully conducts cyber security education for its employees. E-learning courses have been developed and completed for all employees, a month-long "October - Cyber Security Month" initiative was organised in October, and periodic phishing tests reflect the increasing awareness of employees in the field of cyber security. Special attention is paid to the competences of IT and cybersecurity professionals and, in addition to the above-mentioned exercises with the NCSC, in 2022, professionals trained in exercises organised by our US partners, ENTSO-E, and the Polish transmission system operator. Cybersecurity specialists also obtained individual certificates as professionals in their field. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 60 13.SUSTAINABILITY REPORT Basis information and the scope of reporting In preparing the annual Sustainability Report (the Report), LITGRID AB (hereinafter referred to as the Company, Litgrid) has followed the recommendations of the Global Reporting Initiative (GRI), which help to assess the Company's performance in terms of relevant economic, environmental, employee, human rights, market and public relations indicators, the Law on Corporate Reporting of the Republic of Lithuania and the European Union's Non-Financial Information Disclosure Directive, and the Bank of Lithuania's recommendations. This report is available on the Company's and NASDAQ Stock Exchange's websites and is accessible to all stakeholders: shareholders, business partners, investors, employees and their trade union, media representatives, social partners, citizens and local communities, and other relevant organisations. Last year's report is available on the company's website: https://www.litgrid.eu/index.php/apie-litgrid/darni-veikla/468 This report presents Litgrid's work and achievements in the field of sustainable development in 2022. For questions or comments and suggestions on how to improve the Sustainability Report, please contact jurga.eivaite@litgrid.eu This report is unaudited and is available in both Lithuanian and English. Information on the operating model Litgrid is the electricity transmission system operator in Lithuanian. The company is responsible for maintaining the balance of electricity consumed and generated in the Lithuanian electricity system and for reliable transmission of electricity, carries out strategic electricity projects in Lithuania, and bases its vision and strategic operational guidelines on the long-term goals set out in the National Energy Independence Strategy (hereinafter - NENS). Litgrid, as the electricity transmission system operator, plays a key role in ensuring Lithuania's smooth and reliable transition to a RES-intensive energy system, enabling the decarbonisation of the sector, initiating system interconnection projects and facilitating the exchange of climate neutral energy. Litgrid aims to achieve the transformation of the energy sector by striking a balanced balance between environmental, social and economic objectives. Detailed information on activities, services, environment, regulatory environment, objectives and strategy is provided in the Annual Report. 13.1. General information on sustainability at Litgrid Litgrid plays an important role in ensuring Lithuania's smooth and reliable transition to an energy system integrating large amounts of renewable energy sources (RES). Litgrid aims to achieve the transformation of the electricity sector by striking a sustainable balance between environmental, social and economic objectives. All companies in the EPSO-G Group strive to integrate sustainability principles into their operations and processes. Litgrid also aims to contribute directly to the United Nations Sustainable Development Goals by focusing on ensuring access to clean and modern energy, combating climate change, developing modern infrastructure and innovation, safe and decent working conditions, employee well-being and a sustainable supply chain. The main thrusts of sustainable development stem from the activities defined in the Group's long-term strategy to 2030. In the environmental field, the empowerment of climate-neutral energy by reducing the environmental impact of activities; Social - building a progressive, sustainable organisation; Governance - transparent management and development of the company. Litgrid's sustainability performance is disclosed in the context of a group-wide impact materiality analysis. This analysis, carried out in 2022 on a Group-wide basis, included three steps: identification of the most significant environmental, social and governance impacts; survey of stakeholders and Group management; and identification of the most significant operational impacts. The survey, implemented in early 2022, involved 645 respondents, including employees, suppliers, customers, business partners, local communities, associations, trade unions, the Ministry of Energy, investors, and managers and board members of the Group companies. Litgrid's Sustainability Policy, approved by the Board of Directors in 2022, stipulates that the Group commits to review environmental, socio-economic impacts and sustainability priority topics on a regular basis, but at least once every two years, through a materiality assessment, ensuring stakeholder involvement. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 61 The survey carried out at the beginning of 2022 involved 232 respondents, including employees, suppliers, customers, business partners, local communities, associations, trade unions, the Ministry of Energy, investors, and the Group's managers and board members. Materiality matrix of sustainability themes: Environmental sustainability themes: Reducing environmental impacts and GHG emissions in operations - reducing environmental impacts (air, water, soil quality), pollution and GHG emissions (CO2, CH4, SF6, etc.) in the company's operations. Biodiversity and ecosystem conservation - protection of terrestrial and aquatic wildlife, natural vegetation and habitats of high ecological value in the course of operations. Sustainable and efficient use of resources in the company's operations - use of green energy in the company's operations, efficient use of water and other resources. Waste minimisation, responsible segregation and management - minimising the amount of waste generated by the activities, ensuring safe and proper management of hazardous and non-hazardous waste. Facilitating the growth of RES - ensuring efficient grid connection of renewable energy producers, smooth operation of the Energy Guarantee System. Adapting energy systems to decarbonisation - adapting the transmission grid to reliably transport new and increased volumes of renewable energy sources. Social sustainability themes: Ensuring human rights and equal opportunities for employees - Ensuring human rights, creating a culture based on equal opportunities and non-discrimination within the company. Ensuring the professional development of employees - providing professional and personal development opportunities for employees, actively developing the necessary competences. Employee well-being and job satisfaction - creating an environment that enhances employee well-being and satisfaction and ensures work-life balance. Occupational health and safety - ensuring that the Company's and its contractors' employees comply with safety requirements when carrying out their work, and actively ensuring the good health of employees. Dialogue and involvement of local communities - actively informing local communities about the activities taking place in their environment, fostering a culture of dialogue and community involvement. Customer satisfaction - quality of customer service, improvement of customer-oriented services. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 62 Social action, volunteering and social partnerships - promotion of volunteering, educational activities and targeted cooperation with NGOs, academia and government. Sustainability themes in governance: Transmission network reliability and security - ensuring the safe, reliable and efficient operation of energy transmission systems. Transparent governance and creating an anti-corruption environment - following standards of transparency and business ethics, not tolerating corruption and actively combating all forms of corruption. Cybersecurity and data protection - Ensuring the security of critical data, building a cyber-attack-resistant IT infrastructure and creating an organisational culture. Sustainable value for the economy and financial return for the State - Achieving financial return targets set by shareholders, ensuring return on investment, economic and social returns. Innovation, research, digitalisation - Creating an organisational culture that fosters innovation and ensuring adequate funding for innovation. Sustainable supply chain management - Increasing the share of public procurement of goods and services that meet environmental and sustainability standards, actively encouraging contractors, suppliers and other partners to follow recognised environmental, anti-corruption and social standards. The sustainability objectives have been set by assessing the main environmental, social and economic impacts of the Group's businesses, as well as the actions set out in the Group's long-term business strategy, the implementation of which will help to ensure the transformation of the energy sector and the transition to climate-neutral energy. The EPSO-G Group's long-term sustainability targets for 2030 include the following indicators: Area KPI’s Environmental • - Reduction of operational GHG emissions by 2/3 (compared to 2019) • - 0 significant environmental incidents in operations • - Enabling conditions for connecting green energy producers to infrastructure Social • - 0 cases of human rights violations or discrimination • - 0 serious or fatal accidents • - Customer satisfaction - at least 80 according to the GCSI methodology Governance • - 0 cases of corruption • - VCC Good Governance Index - A+ • - 100% of public procurement is green • - Reliable and safe operation of electricity and gas transmission systems • - Sustainability criteria integrated into supplier requirements 13.2. Sustainability and risk management At EPSO-G Group companies, sustainability principles are integrated into business processes, and the management of sustainability areas by competency covers all levels. The Board of Directors is responsible for setting, reviewing and monitoring long-term strategic sustainability objectives and indicators. The Board also approves policies on the environment, equal opportunities, health and safety, anti-corruption, remuneration, performance measurement and development. Within its remit, the Board also approves the company's annual objectives, which include sustainability-related objectives. "EPSO-G's Board of Directors also approves a list of risks at Group level, which includes risks related to sustainability, such as the risk of non-compliance with occupational health and safety requirements, the risk of lack of adequate skills, the risk of turnover, the risk of motivation, the risk of damage caused by natural phenomena, etc. The results of the monitoring of the implementation of the identified risks and the risk management plan are regularly communicated to the Group's corporate managers, the corporate and Group Boards of Directors, and the Audit Committee, in accordance with the remit of each of them. The Group Sustainability Development Manager is responsible for monitoring and coordinating the achievement of the Group's sustainability objectives. Meanwhile, within the Group companies, the relevant environmental, social and governance objectives are delegated to individual functional units within the EPSO-G Group companies (e.g. environmental, occupational safety, human resources, risk and compliance management, etc.) according to their respective competences. "Litgrid has employees responsible for ensuring equal opportunities within the company, as well as a self-initiated "Equal Opportunities Embassy", which organises training and activities for employees. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 63 Litgrid has policies that cover environmental, social and governance management. Litgrid sees sustainable development as an integral and inseparable part of its operations. The company follows the following policies: Corporate governance policy. Its purpose is to ensure good corporate governance practices within the group by establishing uniform corporate governance principles across the group and ensuring interaction between the parent company and other group companies. Sustainability Policy. The Sustainability Policy defines the key directions and principles for the development of sustainability to guide the development of the Group's corporate activities and to create a progressive organisational culture. The implementation of this Policy is the responsibility of the Group's Chief Executive Officers and the Sustainability Functional Area Mentors. Occupational Safety and Health Policy. This Policy defines the general principles of occupational safety and health and the main guidelines for its implementation. The aim of the Policy is to ensure the health of employees in the workplace and to create a healthy, safe and productive working environment. Equal opportunities policy. The Equal Opportunities Policy defines the key principles that are applied in the Group's companies to ensure that the principles of equal opportunities and non-discrimination are respected in all areas of the employment relationship. The implementation of the provisions of the Equal Opportunities Policy is the responsibility of the managers of each Group company. Environmental Policy. This policy defines the key environmental principles that are applied in the Group to reduce the environmental impact of its activities and to establish a culture based on the principles of sustainable development within the Group and its environment. Transparency and Communication Policy. Its aim is to facilitate more effective communication with each other and with external stakeholders: the public, shareholders, market regulators, etc. Anti-corruption policy. Its objective is to set out the main principles and requirements for the prevention of corruption within the Group and the guidelines for ensuring compliance with these principles and requirements, the implementation of which creates the preconditions and conditions for the implementation of the highest standards of transparent business conduct. Remuneration, performance appraisal and development policies. The aim is to establish clear and transparent principles and a reward system for the Group's employees, based on which payroll costs can be managed effectively and employees can be motivated to achieve the objectives set for the organisation. Accounting policy. Its purpose is to ensure that stakeholders are able to assess the performance and prospects of group companies and to make appropriate economic decisions. Dividend policy. Its objective is to set clear benchmarks for the expected return on equity and investment for existing and potential shareholders, while ensuring sustainable long-term growth in corporate value, the timely implementation of nationally important strategic projects, and thus consistently building confidence in the entire group of transmission and exchange companies. Interest management policy. The objective is to establish a unified and best practice interest management system within the Group, which will ensure objective and impartial decision-making within the Group companies, as well as create an environment that is not conducive to corruption and enhance confidence in the Group companies. Policy for the development and exploitation of technological assets. The objective is to consistently apply cost- benefit principles to the management and development of electricity infrastructure, to introduce advanced technologies, and to manage and develop the transmission infrastructure in a socially responsible manner, taking into account occupational health and safety and environmental requirements. Support policy. The aim is to ensure that the support provided is publicly available and does not lead the public to question its appropriateness or the transparency of the allocation process. Codes of ethics and supplier codes of conduct. Their purpose is to establish uniform general guidelines for behaviour in dealing and cooperating with internal and external stakeholders: service users, contractors, business partners, shareholders, state and municipal authorities, the public, etc. The provisions of the Code are based not only on the employer's duty, but also on the employee's personal understanding that good behaviour enhances the reputation and value of the company, as well as the Group as a whole, and reduces the likelihood of reputational risk. The provisions of the Code are directly derived from the Group's values, leadership principles and complement the related operational policies. Litgrid undertakes to review environmental, socio-economic impacts and sustainability priority topics on a regular basis, but at least once every two years, together with the Group companies, through a materiality analysis, ensuring stakeholder involvement. Group companies report annually on the implementation of their sustainability activities through separate public sustainability reports. Long-term sustainability objectives are integrated into the operational strategy approved by the Board until 2030. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 64 13.3. Sustainability in environment protection In the environmental field, Litgrid's main objective is to enable climate-neutral energy and to reduce environmental impacts and greenhouse gas emissions from its operations. "In the environmental policy approved by Litgrid's Board of Directors, the company has committed itself to monitoring the environmental impact of its operations, and to introducing state-of-the-art technologies and measures to reduce significant environmental impacts. When operating, expanding or modernising the infrastructure of energy systems, the company undertook to ensure the protection of biodiversity, and to implement environmental management systems in its operations and to ensure that these systems comply with the requirements set. All EPSO-G Group companies have the objective of ensuring zero tolerance to environmental pollution and zero environmental incidents. "Litgrid also aims to oblige contractors and other business partners to take responsibility for the environmental impact of their activities and to strive to reduce it. The company also takes a precautionary approach by carrying out environmental impact assessment procedures, either in accordance with legal requirements or on its own initiative, before undertaking projects that may have a significant impact on the environment, biodiversity or society. The implementation of the environmental policy is the responsibility of the environmental staff, who ensure that environmental aspects are identified in a timely manner, environmental objectives are set, plans are developed, tasks are set to improve the environmental status and sufficient resources are allocated to their implementation, results are monitored periodically, and the processes, technologies and working methods used are audited. During 2022, no breaches of environmental legislation were recorded and no fines were imposed. Nor were there any significant environmental incidents reported during the year under review, either by the company's employees or by contractors. 13.3.1. Monitoring and reducing GHG emissions. Climate change is one of the greatest human challenges of this century and requires the involvement of both the public and private sectors and everyone to limit the average increase in the Earth's temperature to 1.5 degrees Celsius. Litgrid has carried out a GHG emissions inventory. The inventory assessed direct (Scope 1) and indirect (Scope 2) GHG emissions resulting from the activities and impacts of the Group's companies. Scope 2 emissions were calculated using a "market based approach". The base (reference) year from which the Group plans to reduce GHG emissions is 2019, which is the year in which none of the Group's companies were affected by the operational restrictions resulting from COVID-19, which also affected Litgrid's operations. 2019, kgCO2e 2020, kgCO2e 2021, kgCO2e 2022, kgCO2e Scope 1 Scope 2 Scope 1 Scope 2 Scope 1 Scope 2 Scope 1 Scope 2 Litgrid 757380,3 221027861,8 388165,4 200455993 661047,97 194484654 813472 209505433 Total 221785242,1 200844158,4 195145701,9 210318905 Decrease compared to base year % 0 – base year -9,4 % -12,0 % -5,2 % Comparing the 2022 GHG data with the 2021 data, there is an increase in emissions from electricity transmission network activities. The increase in Scope 2 GHG emissions is due to increased losses in the electricity transmission network. These losses are largely due to higher disconnections and reconstruction works on the network and higher fuel costs for transport. Actions and initiatives In 2022, Litgrid prepared a plan of emission reduction measures until 2030 based on the GHG inventory data. The main measures focus on the most GHG-emitting sources in the operations and include investments in the development of RES production for own use and the use of green energy, as well as the electrification of the vehicle fleet. 13.3.2. Preserving biodiversity and ecosystems Litgrid is committed to protecting biodiversity when operating, expanding or upgrading the infrastructure of energy systems by carrying out biodiversity monitoring where necessary and, in the event of unavoidable objective circumstances, by planning and implementing the necessary mitigation or compensation measures. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 65 Litgrid continued to apply bird protection measures in 2022 for the infrastructure it manages. The aim is to reduce the mortality of migratory birds, to improve the environmental conditions for migratory birds by monitoring bird fatalities near the HV transmission network and to respond accordingly. Special bird guards have been installed on 110 kV OL pylons to prevent birds from gliding over the insulators with "fork" type devices, and the top insulators in the festoons have been replaced with larger diameter ones. These measures reduce the possibility of short-circuiting when large birds (white storks) land, thus reducing mortality. During the bird nesting season, Litgrid takes measures to minimise interference during maintenance and construction works and to delay the cleaning of the lines. On the recommendation of ornithologists, due to the disturbance of birds during the breeding season, the execution of line clearing works shall be restricted from 1 May to 31 July, and this shall be responsibly assessed prior to the scheduling of project works. "Litgrid takes a precautionary approach by carrying out environmental impact assessments when undertaking significant development projects. In 2022, the following actions were carried out in the course of these projects to monitor the impact on protected species: During the reconstruction of the 330 kV power transmission line Lietuvos elektrinė-Vilnius, environmental impact monitoring was carried out, consisting of monitoring of environmental components, i.e. birds and natural habitats. In 2022, bird monitoring was carried out during the spring season on the Obeniai-Karkučiai (1.7 km), Asakiai-Veličkava (2.3 km) routes under the overhead transmission line and in the vicinity, and no birds were observed or killed. During the autumn survey, the remains of thrush feathers were detected on the Asakiai-Veličkava route at pylon 16. The body of the bird was not found and the cause of death cannot be determined. In 2022, the projected vegetation cover in the damaged areas under the overhead transmission line pylons was 80-95 %. There are no extant habitats in the immediate vicinity that meet the criteria for EU habitat of conservation concern 6270 'Species-rich grassland and grazed grassland' (in 2021, the fields that were not under cereal crops had a projected vegetation cover of 0-30%). In the construction of the 110 kV Pagėgiai-Bitėnai transmission line, the monitoring programme covers the following environmental components: soil (only in 2021), landscape (only in 2021), wildlife (birds). No bird contacts with overhead power lines and no bird mortalities were observed in 2022. In 2021, a mute swan was in contact with the wires but the bird survived. No significance of the power line for bird populations has been identified. In 2021, the observed sites were undergoing normal renaturalisation. The landscape monitoring in 2021 concluded that the analysis site is too small to have a visual impact on the skyline. No significant adverse effects on any protected species of animals, birds or plants have been recorded in 2022. 13.3.3. Sustainable and efficient use of resources in operations "Litgrid strives to create an organisational culture based on the philosophy of conservation of nature and other resources. In the Group's environmental policy, the companies are committed to using certified green electricity in their administrative activities, to expanding the use of RES sources to meet the technological energy needs of the transmission network infrastructure, to prioritising and expanding the use of clean transport, and to consistently reducing the use of polluting fuels and energy efficiency measures. "Litgrid has already started installing solar power plants in transformer substations under reconstruction. The energy they generate will be used in the transformer substations themselves. By 2023, 21 transformer substations under reconstruction will be equipped with solar power plants. The energy generated by the installed solar plants will be sufficient to fully or partially meet the needs of the transformer substations, depending on the solar irradiation, and will increase the reliability of the power supply. The installed capacity of the solar power plants is expected to reach up to 15 kW in each of the transformer substations. The Lithuanian electricity transmission system operator has renewed its car fleet, replacing its predominantly internal combustion cars with electric and hybrid vehicles. Employees will move to 72 electric and rechargeable hybrid cars. This decision is one of the steps towards the company's commitment to reduce its greenhouse gas emissions by two-thirds by 2030. "Litgrid will lease 28 electric cars and 44 plug-in hybrids. Until now, 99% of the company's fleet has been made up of vehicles powered by internal combustion engines. In the renewed fleet, such vehicles will account for 11 per cent. The use of electric vehicles will reduce the company's CO2 emissions by an average of 102 tonnes per year. The switch to less polluting vehicles will result in about 30,000 litres less fuel consumption per year than would be required to maintain the same fleet of internal combustion engine vehicles. 13.3.4. Waste reduction, responsible sorting and management Litgrid's activities are guided by the principles of pollution prevention and aim to reduce the amount of waste generated in its operations and to ensure safe and responsible waste management. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 66 Significant amounts of waste are generated during the construction, reconstruction or repair of electricity transmission networks. In its administrative activities, the company sorts household, glass, paper and plastic waste, with special bins for sorting; separate bins in offices have been eliminated. The company contracts with specialised companies for the safe treatment and disposal of waste generated by its production activities. Hazadous waste Non hazardous waste Paper, glass, plastics 2022 136,622 t. 2113,722 t n.d. 2021 175,25 t. 2693,3141 t. n.d. 2020 202,54 t. 1043,54 t. n.d. Litgrid consistently checks suppliers for environmental compliance. Number of cases of non-compliance detected during suppliers' environmental inspections, preventive actions taken: Year Non compliance cases Warnings issued Significant non complienaces 2022 6 2 0 2021 5 0 0 2020 n.d. n.d. No verification of contractors' compliance with environmental requirements In 2022, the company's operations complied with environmental requirements and the company received no penalties in 2022. 13.3.5. Facilitating the growth of RES Well-developed electricity grids within the country, ensuring reliable and secure operation of the transmission system, as well as well-developed infrastructural links with neighbouring countries, provide favourable conditions for increasing electricity transmission flows, thus developing a liquid regional market and creating an attractive infrastructure for investment in energy production. By exploiting these opportunities, the company aims to create the preconditions for a more efficient use of the available capacity of the electricity transmission system. Litgrid, the electricity transmission system operator, has set a target to ensure that there are 0 cases of restriction of RES- generated electricity supply to the transmission grid each year due to breaches of the legislation and/or the terms of the connection agreements. In 2022, Litgrid's target was 0 cases. Actions and initiatives 2022 was a historic year for green energy in Lithuania. For the first time, the share of electricity generated by renewable energy plants accounts for around 60% of the total electricity generated in the country. In 2021, 48% of the country's electricity was generated by renewable energy plants. The increase in the number of renewable power plants connected to the transmission and distribution grids has led to a significant increase in the amount of clean energy produced by both wind and solar power plants. Compared to 2021, clean energy production in Lithuania's wind farms increased by 11.6% and in solar farms by 74%. "According to Litgrid's data, 273.7 MW of solar, 142.8 MW of wind and 3.3 MW of other renewable energy (biomass/biogas) generation capacities were connected to the Lithuanian electricity grid in 2022. In total, the installed capacity of renewable energy sources in Lithuania increased by 419.8 MW to 1572.5 MW in 2022. 13.4. Social sustainability Litgrid's social ambition is to create a progressive, sustainable culture. Inherent elements of this culture include: caring for the well-being and development of employees, fostering a culture of safe work, promoting equal opportunities, building open and mutually trusting relationships with local communities, and ensuring customer satisfaction with the services provided. The company aims to become an organisation that is perceived by the majority of its suppliers, producers, consumers, employees, communities and other stakeholders as a sustainable organisation. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 67 Employee remuneration by group, ratio between men and women: Titles Remuneration based on sex Average salary without variable part Men Women Men:women CEO 9,583 - - Top management 7,209 - - Mid level management 4,514 4,469 1:0,99 Experts and specialists 2,954 2,776 1:0,94 Total 3,317 3,051 1:0,92 Staff on parental leave/parental leave: Men Women Number of employees on parental leave in 2022 - - Number of workers returning from parental leave in 2022 1 1 Number of employees returning from parental leave who have been with the company for more than 12 months 1 0 Voluntary staff turnover is 8% (9% in 2021). Information on the Remuneration Policy, the Employee Performance Appraisal Policy, remuneration paid and the company's objectives is available on Litgrid's website.. 13.4.1. Staff training and continuous performance improvement The company aims to provide its employees with opportunities to learn and develop, to broaden their knowledge and horizons, and to participate as effectively as possible in the implementation of Litgrid's strategic goals. All employees are given the opportunity to acquire or update the knowledge and skills necessary to perform their direct work. Both the individual employee and the organisation are committed to the development of competences relevant to the employee and the organisation's activities, and the development system includes not only formal training, but other forms of development and learning. The company does not organise centralised retraining programmes and recruits employees on a targeted basis according to the company's needs and functions. In cases of internal career progression or recruitment of a less experienced professional, where there is a need to acquire additional competences, an individual learning plan is drawn up by the employee together with his/her line manager, and a training programme is organised to strengthen management skills for employees promoted from professional to managerial positions. Based on the company's competency model, we focus on strengthening general, managerial and leadership competencies, and periodic assessments of these competencies allow us to monitor our progress for both employees and managers. In key areas of the company's operations, we assess not only current professional competences, but also future functional competences that will Age of emplyees 2022 Dec 31 st . <20-30 years 41 30-40 years 119 40-50 years 91 50-60 years 54 >70 years 30 ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 68 be required for the company's long-term operations. Engineering employees participate in refresher training and acquire the necessary knowledge and skills related to energy engineering, equipment and technologies used in the company's operations. The Company periodically develops the digital literacy competences of all its employees. The average annual number of training hours per employee in 2022 was 25 hours (3.2 days). The performance and career progression of all the Company's employees is regularly reviewed at least once a year. Employee performance is evaluated on different dimensions and at different intervals, depending on the nature of the employee's activities and responsibilities. An annual performance appraisal, which takes place once a year, in which the employee and the manager discuss and evaluate the achievement of the employee's annual objectives and competences, and the manager determines the overall result of the performance appraisal. Project-based performance appraisal, which assesses the results achieved by staff members in projects or phases of projects, based on established indicators. 13.4.2. Ensuring human rights and equal opportunities for employees Litgrid aims to actively contribute to the implementation of the human rights and equal opportunities goals of the United Nations 2030 Agenda for Sustainable Development and the equal opportunities obligations set out in national laws. Litgrid prohibits any form of discrimination and does not tolerate mobbing, psychological violence, bullying or abuse of position. Group companies respect and protect the rights of every employee, treat them with respect and fairness, provide safe working conditions that meet their needs, promote their personal and professional development, and do not discriminate against employees in any form. The CEO of Litgrid is responsible for the implementation of the Equal Opportunities Policy. "Litgrid has in force since October 2022 the Description of Procedures for the Prevention of Discrimination, Violence and/or Harassment and Sexual Harassment, which sets out the main principles of the prevention of discrimination, violence and/or harassment and sexual harassment in the Company and the procedures for their implementation. It provides for: An Employee who wishes to make a formal report of Discrimination, Violence and/or Harassment or Sexual Harassment, or any Employee who observes or receives information about possible Discrimination, Violence and/or Harassment or Sexual Harassment, may make a report in the following ways: 1. To a dedicated email address - pranesk@epsog.lt; 2. By completing the online reporting form on the website https://pranesk.epsog.lt; 3. By sending the information by post to the Company's registered office; 4. Directly to the employee directly responsible for equal opportunities or, in his/her absence, to a substitute employee. The Company shall allow the person to submit the report both anonymously, in particular in cases where the identification of the person is not necessary for the investigation of the Report (e.g., reporting harassment of another person by specifying the person who has been harassed or assaulted and the alleged violator of the present Schedule of Procedure), and by disclosing his/her identity. All reports received shall be recorded and must be investigated. The internal investigation shall be carried out within the shortest possible time, but not more than 30 calendar days from the date of receipt of the report, with the possibility of an extension of another 30 calendar days. The findings of the internal investigation committee, as approved by the internal investigation committee, shall be submitted to the company's head of management, who shall decide whether to open an investigation into the breach of labour law or to take other measures, if necessary. The persons concerned (the victim and the complainant) shall be informed in writing of the conclusion. Depending on the nature of the breach, the employee may be subject to disciplinary action for breach of his/her duties. There were no cases of discrimination recorded by Litgrid in 2022. 13.4.3. Providing professional development for staff The Company continuously encourages and creates opportunities for employees to develop their skills and qualifications. The aim is to develop employees' professional (functional) and generic (values-based) competences. In order to maintain and enhance the quality of management processes, a strong focus is placed on developing the competences of managers. Staff development is based on the 70-20-10 principle, whereby 70% of development, improvement and learning activities take place through the staff member's work experience, 20% through interaction and collaboration with colleagues and managers with diverse experiences and competences, and 10% through structured training events. Staff development activities are planned in relation to strategy, values, performance appraisal, competency model, shift planning, assessment of professional and technical skills. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 69 13.4.5. Employee well-being and job satisfaction Litgrid is building an open, progressive and sustainable organisation, where professional partnership between employer and employees prevails, each employee has opportunities for self-development, grows with the organisation and is able to take responsibility for his/her own decisions. Employees are paid a performance-related salary and incentives for achieving challenging targets. The company also provides employees with health and welfare benefits. "A uniform remuneration policy based on the principles of responsibility and accountability is in place and operational in EPSO-G Group companies. The aim is to manage the Group's payroll costs effectively and to create motivational incentives so that the level of remuneration is directly linked to the achievement of the objectives set for the company and for each employee. This means that performance appraisals are taken into account in determining remuneration. Therefore, the remuneration of managers and employees consists of two parts: fixed and variable. The fixed part depends on the level of responsibility of the post, which is determined according to a methodology used in international practice. The variable part of the remuneration is paid when the individual targets set in the annual appraisal are achieved and the company reports to the shareholder and the board on the achievement of the annual company targets. The CEO's objectives are aligned with those of the Company. They are evaluated by the Board. Principles of remuneration policy: The principles of the remuneration policy are the same for all employees (including managers). The remuneration pool is approved by the boards of directors. The Remuneration and Nomination Committee monitors the balance between controlling salary costs and rewarding employees who perform their duties properly. The remuneration of EPSO-G managers and staff consists of two components: fixed and variable. The fixed part depends on the level of responsibility of the post. It is determined according to a methodology that is recognised and widely used in international practice. The variable part of the remuneration is paid when the individual targets set in the annual appraisal are achieved and the company reports to the Board on the achievement of the annual company targets. Annual targets for managers and employees are set in accordance with the EPSO-G Group's performance appraisal policy. No variable remuneration is paid to an employee when performance does not meet expectations according to the established evaluation criteria or when the company's operational and financial performance is judged to be unsatisfactory, Variable remuneration is not a bonus. It may not exceed 20-30% of the fixed remuneration. The amount of the variable remuneration shall be budgeted in the Company's budget and accounted for in the financial result, which shall be audited and made public. The variable remuneration of the Chief Executive Officer of the Company depends on the achievement of the objectives set out in the Company's strategy, which are published on the Company's website. No variable remuneration is paid to members of the collegiate bodies. Employees are paid severance payments in accordance with the procedure laid down in the Labour Code and employment contracts. Severance payments shall not exceed the amounts laid down by the legislation of the Republic of Lithuania, except in exceptional cases where, for objective reasons, higher payments are agreed. The payment of such benefits and the grounds for their payment must be reported to the relevant Board of Directors of the Group company at its next meeting. The amount of the employment, remuneration, including severance pay, of the most senior executives shall be determined by the Board of Directors of the company. It is foreseen that, in exceptional cases, an incentive payment not exceeding the amount set out in the policy may be granted for exceptional performance not covered by the employee's annual targets. This must be reported to the relevant Board of Directors of the group company at its next meeting. No prior agreements shall be made on the amount of severance payments, except for the CEOs of companies whose terms of employment are determined by the Board. The Remuneration Policy does not provide for any remuneration that entitles an executive officer, a member of a collegiate body or an employee to shares, share options or to remuneration based on changes in the share price or other financial instruments. To promote employee engagement and loyalty, non-financial emotional rewards. Indirect rewards include employee events, recognition and appreciation for outstanding performance. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 70 Litgrid has a trade union and a collective agreement, which sets out working, remuneration, social, economic and professional conditions and guarantees that are not regulated by law or other normative legal acts. The collective agreement provides employees with additional financial guarantees (benefits in the event of accidents, sickness, death of relatives, support for the birth of a child, support for raising three or more children or a child with disabilities), additional days of leave (for the birth of a child, death of a relative, etc.), and other guarantees. Unionised workers and the proportion of workers covered by a collective agreement: Members of trade union Number of emplyees having benefits of agreement 99 100% 13.5. Employees safety and Health One of the most important strengths of Litgrid as a whole is its experienced and competent employees, whose safe working environment, well-being and health are a prerequisite for the implementation of the strategy and goals. The Occupational Safety and Health Policy, approved by the EPSO-G Board of Directors in 2021 and applicable to all Group companies, sets out the aim of ensuring safe and healthy working conditions for employees in their workplaces, preventing work- related injuries and occupational diseases, and creating a company-wide culture of fostering a safe and healthy working environment that commits every employee to strive for and contribute to this. Litgrid strives to ensure that no serious or fatal accident occurs each year in the course of its operations, either among its employees or among contractors and subcontractors hired to carry out the work. Accidents at work in Litgrid and contractors' and subcontractors' companies, 31 December 2022: Year Light accidents Injuries Deadly accidents 2022 0 0 0 2021 0 0 0 2020 0 0 0 "Litgrid places great emphasis on raising the competence of its employees in occupational safety issues. This includes not only mandatory briefings for both employees and hired contractors, but also additional training, certification of employees, risk assessment at remote workplaces, preparation of safety and health manuals, technology cards, installation of collective safety equipment, provision of personal safety equipment, organisation and periodic briefings. Number of workers trained in occupational safety, fire safety, first aid, including certifications: 262 employees trained in 2020; 526 employees trained in 2021; 743 employees trained in 2022. The average number of training hours per worker in 2022 is 4 hours. "Litgrid cares about the health of its employees and constantly promotes healthy lifestyles and activity, organising sports and activities, with a gym in the office. Litgrid employees are subject to periodic health checks according to a schedule, they are vaccinated against tick-borne encephalitis in accordance with the approved list of positions, they have the opportunity to get a flu vaccination if they wish, and they are given the opportunity to take the Covid rapid test if they need it. Defibrillators are installed in the company's buildings. 13.6. Dialogue and involvement of local communities "Litgrid and contractors inform local communities in advance about projects in their neighbourhood. During the implementation of the projects, the timing of works is coordinated with the residents. The aim is to minimise inconvenience to residents throughout the project. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 71 Litgrid, which is implementing projects important for synchronisation with the continental European grid, also continued its series of meetings with stakeholders in 2022, holding 9 meetings with the administrations and elders of 8 municipalities, some of them with residents. These meetings were aimed at presenting the projects, the phases and timeframes of future works, and providing information to the population. 18 meetings were held in 2021 with the communities where land-use planning works were carried out. 13.7. Client orientation One of Litgrid's key objectives is to increase customer orientation in order to create a customer-oriented organisation. Group-wide customer satisfaction surveys based on GCSI and NPS methodologies will be conducted for the first time in 2021. The results of the survey showed that Litgrid achieved the highest customer satisfaction score among the Group companies, with 84 points, according to the GCSI (Global Customer Satisfaction Index) methodology. This score places it among the market leaders, which are companies with a GCSI score above 80. The GCSI index consists of a score from 0 to 100, calculated by assessing three criteria: overall satisfaction with the company, its compliance with expectations and its comparison with an imaginary ideal company. The survey confirmed that customer satisfaction with Litgrid's services is increasing: Litgrid GSCI results KPI 2021 79 ≥ 70% 2022 84 ≥ 70% 13.8. Community action, volunteering and social partnerships Contributing to causes that are important to society or the local community, the company continued to encourage voluntary, unpaid involvement of employees in charitable activities in 2022. Employee volunteering is encouraged and is allocated 1 day per year in accordance with the collective agreement applicable to all employees. The company organised a traditional forest planting event, employees volunteered in the initiatives of the Food Bank, and volunteers from Litgrid organised the accommodation and integration of the families of Ukrainian electricity transmission system employees in Lithuania. In 2022, Litgrid organised a traditional forest planting event where, together with Litgrid colleagues, the families of the employees of the Ukrainian electricity transmission system company Ukrenergo planted a forest under the auspices of the company. Since the beginning of the war, Litgrid has organised the accommodation of 100 people in Vilnius, helping them to integrate and deal with the daily challenges of moving to another country. Following a request for assistance from the Ukrainian electricity transmission system operator, the Lithuanian Electricity Transmission System Operator provided support for equipment for the restoration of the electricity grid in Ukraine: it shipped 110- 330 kV primary equipment, current and combined transformers, insulators, current transformers and splitters, and a 330/110 kV autotransformer. The equipment available in Lithuania is technologically suitable for the reconstruction of the Ukrainian grid, making Lithuania one of the most important suppliers of equipment to the war-torn country. 13.9. Anticorruption environment Litgrid implements strategic projects of importance to Lithuania, the success of which depends on the trust of the state, the public and the shareholder. Recognising this, the company has put in place measures that could help manage corruption risks that may arise in its operations. Litgrid implements these measures in compliance with the requirements of the legislation of the Republic of Lithuania and in accordance with the EPSO-G Group's Corruption Prevention Policy. It defines key principles, the most important of which are: Leadership of managers and involvement of employees - managers are directly responsible for the implementation of corruption prevention measures, and by their example and communication they instil a culture of zero tolerance to corruption in their employees. Employees actively participate in corruption prevention training and are responsible for applying corruption prevention policies in their daily work; Adherence to the highest standards of transparency and integrity; periodic assessment and management of corruption-related risks; Implementation of targeted corruption prevention measures such as balancing public and private interests and managing conflicts of interest, implementing procedures to ensure the credibility of staff, implementing internal whistleblowing channels, restrictions on the acceptance and provision of gifts, requirements for transparent and ethical behaviour towards employees and business partners, ensuring transparent public procurement and other measures. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 72 Litgrid annually approves a Corruption Prevention Plan (CPP), which aims to consistently and efficiently improve the company's transparency system, to ensure the implementation of prevention and control measures and the continuity of the existing ones, by positively influencing the company's most sensitive areas of activity and by increasing the transparency of the company. Each measure in the Action Plan is evaluated according to a set of evaluation criteria and an outcome. Key measures implemented in 2022: Legislation drafted/updated: Description of the Procedure for the Anti-Corruption Behaviour of Staff / Description of the Procedure for the Establishment of Internal Channels for Reporting Irregularities and Ensuring Their Functioning / Description of the Procedures for Internal Investigations; adherence to the Corruption Prevention Policy of UAB EPSO-G Group and the Supplier Code of Conduct, which Litgrid applies in full. The provisions of the Supplier Code of Conduct will be implemented in Litgrid's operations by 31 December 2024; Identification and assessment of the likelihood of corruption has been carried out in the area of preparation and issuance of connection conditions; Preventive procurement checks and analysis of complaints received; a survey to assess the anti-corruption culture of the company's employees, the results of which show that the anti- corruption awareness of the employees has been increasing year by year and remains very high: 97% of employees have a negative attitude towards persons who pay bribes. / Know where to go to report a case of corruption - 95% / Know what to do if they are offered a bribe or are otherwise confronted with corruption - 99% / Are aware of the company's corruption prevention measures - 92% / Would report corruption if they were confronted with it - 96%. More detailed information on the results of the implemented measures can be found on the company's website. Corruption risk assessment In order to properly manage corruption risk, Litgrid periodically identifies and assesses corruption risk factors and plans management measures, including determining the likelihood of corruption occurrence. On the basis of the assessment of corruption risk factors, a corruption risk map is prepared and integrated into the Company's risk management plan. Ethics Committee "Litgrid has established an Ethics Committee and has a Code of Ethics and Conduct (available on the Company's website, www.litgrid.eu), whose value framework is adhered to as a matter of principle not only internally, but also in cooperation with third parties. Declaration of private interests and management of conflicts of interest The Company places particular emphasis on the management of conflicts of interest. The Company implements measures to prevent conflicts of interest and to control the declaration of private interests as part of its policy on the management of the interests of the members of the collegial bodies, managers and employees of the UAB EPSO-G group of companies, in accordance with the Law of the Republic of Lithuania on the Harmonisation of Public and Private Interests (the "Law on the Harmonisation of Interests") and the policy on the management of the interests of the members of the collective organs of the EPSO-G group: All employees of the Company who are required by law to declare their interests have made public declarations of interests in accordance with the requirements of the Law on Harmonisation of Interests; content analysis of the declarations of interests submitted (internal declarations as well as those submitted to the SCEC) has been carried out and preliminary recommendations have been made to heads of departments and employees; preventive checks have been carried out to assess the implementation of the provisions of the Law on Harmonisation of Interests (no breaches have been found). Staff training and individual counselling provided where necessary. Screening of staff and contractors/suppliers In order to ensure that the Company employs only persons of impeccable repute, the measures provided for in the Laws on the Prevention of Corruption of the Republic of Lithuania and on the Protection of Objects Important to the National Security of the Republic of Lithuania are implemented to ensure the reliability of personnel (lists of positions for which applicants are screened in accordance with the procedure laid down by law have been approved and made publicly available; the responsible authorities have been contacted for each position (85 persons have been contacted); and the screening of contractors/suppliers has been carried out in accordance with the procedure provided for by the law). Risks arising from nepotism and cronyism are managed and there are no persons related by kinship/marriage who are linked by a relationship of direct subordination or control. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 73 Receiving and giving gifts "At Litgrid, we do not tolerate any gifts given in connection with employment or position, except for gifts permitted under the EPSO- G Group's Corruption Prevention Policy. Employees are prohibited from accepting any gifts of money, gift vouchers or alcoholic beverages, including gifts of low value, if the circumstances in which they are given or accepted could lead to a misunderstanding or contradiction and create the appearance of a conflict of interest. Line of trust The Company has established and operates a Helpline which encourages both employees and other interested parties to come forward with information on possible, ongoing or anticipated breaches, and allows them to report breaches anonymously or confidentially. The Company has implemented the principles of the Law on the Protection of Whistleblowers of the Republic of Lithuania by creating internal reporting channels, updating its internal legal framework and introducing technical measures to ensure full compliance with the requirements of the Law. A report on the information received through the internal reporting channels and the actions taken is periodically submitted to the parent company EPSO-G. Information on infringements can be submitted via the following helpline channels: The helpline received 28 reports in 2022. 1 report was received for a breach of the company's communication ethics, mobbing. The investigation into the violation was closed following a request by the person who made the report. 27 reports were of a promotional nature or received for testing purposes and therefore no further action was taken. Staff education on anti-corruption and ethics The involvement of the Company's employees in corruption prevention activities is improved by other means. Employees improve their knowledge through internal Company and STT e-learning. 99% of the Company's employees have completed the STT e- learning in 2022. Training on corruption prevention is organised for new colleagues who have joined Litgrid, and employees also participate in the STT Transparency Academy events (mentoring, etc.). Internal communication is also a major focus, informing about changes, reminding about internal procedures, etc. 13. 9. Sustainable supply chain management The Company's procurement is primarily based on transparency, ethical behaviour, equity, promotion of competition and proportionality, enhancing transparency in procurement processes and strengthening anti-corruption measures. The updated procurement policy also integrates green procurement criteria. The Company aims to reduce its environmental impact and is therefore committed to prioritising green procurement, in line with the Green Procurement Objectives set out in the Resolution of the Government of the Republic of Lithuania on the Establishment and Implementation of Green Procurement Objectives, and is committed to achieving the following: - At least 50% of green procurement in 2022 (75% achieved). - At least 100% of green procurement deals every year from 2023. The Company has awarded contracts for a total amount of €162,306 thousand excluding VAT in 2022, where environmental requirements were imposed on suppliers. Construction of the 330 kV switching station Mūša (EUR 15 361 thousand excluding VAT), cabling and installation of a fibre optic cable in the 110 kV double-circuit OL Šiauliai-Gubernija II, Šiauliai-Meškuičiai section between Šiauliai TP and Zokniai TP (EUR 5 879 thousand excluding VAT). The company booked EUR 2 511 thousand of operating costs (OPEX) and EUR 6 750 thousand of investment costs (CAPEX) in 2022 under the contracts concluded in 2021 and 2022, where suppliers were subject to environmental requirements. The implementation of the ESG policy will not have a significant impact on the financial indicators, as under Lithuanian regulation all reasonable costs of the company's regulated activities are reimbursed through the revenue from regulated activities. Email: pranesk@litgrid.eu Send by mail Fill in form online https://www.litgrid.eu/index.php/apie- litgrid/pasitikejimo-linija/32290 Provide information to prevention personnel ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 74 13.10. Stakeholders and their involvement In designing and implementing sustainable development actions, Litgrid seeks the full involvement of stakeholders and promotes transparent and fair cooperation with consumers, producers and suppliers, the public, the owner, employees, the media and other interested parties. Stakeholders We oblige How we cooperate Clients • - Building professional and trusted partnerships for mutual benefit. • - Group companies initiate and organize timely information events for their clients, taking into account the complexity of their services and economic expectations. • - Developing services and/or solutions to meet customer needs. Employees • - To work in a targeted way to ensure that the Group's uniform corporate culture and remuneration policies promote employee engagement and motivation in the achievement of the objectives of the strategy; • - We conduct employee engagement surveys and adjust action plans accordingly; • - We follow the same reward and social responsibility policies for employees; • - We hold at least quarterly meetings between managers and employees to discuss issues of importance to employees. • - Improving the methods and content of internal communication. Shareholders • - Ensure that Group employees are sufficiently and timely informed about the Group's values, objectives, activities and developments. • - We hold regular meetings to discuss topical issues; • - At least quarterly, we report on our financial and non-financial performance against the objectives set out in the "Shareholder Expectations Letter". • - We ensure the communication of the most important news from the Group's companies on a Group-wide basis in the Daily News column published every working day. • - Ensure the sustainable management of the Group, its growth and long-term benefits; • - We are members of the governing bodies of group companies; • - We apply the functional leadership operating model. • - We develop and implement uniform operational policies across the Group, enabling us to coordinate our actions in implementing good governance practices. Group companies • - Provide relevant, fair and timely information to enable shareholders to assess the Group's performance and prospects and to make appropriate decisions; • - We aim to establish and regularly maintain a businesslike relationship based on mutual trust; • - Initiate and participate in professional meetings and/or conferences to present the objectives of the strategy Foreign partners - energy transmission and biofuel exchange operators • - Provide relevant information in a clear and accessible format to provide a reliable basis for assessing the performance, results and benefits to society of the Group's companies. • - We initiate meetings as needed to discuss relevant issues; • - Presenting or speaking on topical issues in the committees of the LRS and at the meetings of the LRC; • - Participate in inter-institutional working groups. State representatives • - Ensure consistent compliance with legal • - Providing the information needed to carry out the regulator's functions in a timely manner; ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 75 requirements within the Group; • - Cooperate in the implementation of new market mechanisms; • - Initiate meetings to discuss relevant issues. Contractors • - Establish a culture of open and transparent dialogue with the regulator. • - We organize annual information events for potential contractors; • - We make procurement plans and consultations public in advance to ensure greater competition between market players. Suppliers of services and goods • - Work with professional and ethical contractors. • - We consult with market players and carry out market research; • - Publishing plans for planned purchases. Non- governmental organizations (NGOs) • - Competitively source quality services from reputable suppliers; • Together with the Ornithological Society we are implementing measures to reduce environmental impact. Trade Unions • - Communicating and cooperating with environmental and transparency organizations to identify public needs and solutions. • - By enabling trade unions and/or works councils to operate. • - By concluding a collective agreement with trade unions and/or works councils. • - Discussing the implementation of the collective agreement at periodic meetings with workers and/or their representatives. • - Informing and consulting trade union and/or works council representatives in decisions relating to labor relations. General public and media • - Ensure constructive and positive social dialogue between employer and employee representatives. • -- We follow the Group's transparency and communication policy; • - We maintain a constructive relationship with the energy media by providing sufficient information to assess the Group's financial and non-financial performance and the projects under way. Local communities • - To create added value for society, business and the competitiveness of the national economy; • - Group companies share their experience on spatial planning; • - Information events for local communities. • - Adjustments are made to the project implementation based on valid comments received at the meetings. 10. GRI list Index Topics Pages 102-47 List of key topics 63 102-50 Reporting period 61 102-51 Date of last report 61 102-52 Reporting cycle 61 102-53 Contact person for questions about the report 61 102-54 Indication of compliance of reports with GRI standards 61 102-55 List of GRI indicators 77 102-56 External verification 63 103-2 Disclosure of management's approach to managing material sustainability topics 7 ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 76 103-3 Assessment of management's approach to material sustainability topics 7 205-2 Communication and training on anti- corruption policies and procedures 73 205-3 Confirmed corruption incidents and actions taken 74 305-1 Direct GHG emissions 66 304-2 Significant impacts of activities, products and services on biodiversity 67 306-1 Waste generation and significant waste-related impacts 67 306-2 Management of significant waste- related impacts 68 306-3 Waste generated by type 68 307-1 Non-compliance with environmental laws and regulations 68 401-1 Recruitment and turnover of staff 69 308-1 Suppliers subject to environmental inspections 74, 75 401-2 Benefits for full-time staff that are not available to temporary or part-time staff 71 403-1 Occupational health and safety management system 71 403-2 Hazard identification, risk assessment and incident investigation 72 403-3 Occupational health services 72 403-4 Occupational health and safety training 72 403-9 Work-related injuries 72 404-1 Average number of hours of training per worker per year 72 404-2 Employee skills development and career transition assistance programs 72 403-3 Proportion of staff whose performance and career progression is regularly reviewed 72 405-1 Diversity of management bodies and staff 55, 68 406-1 Incidents of discrimination and actions taken to address them 73 413-1 Activities related to local community involvement, impact assessment, development programmes 72 ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 77 14. SIGNIFICANT EVENTS DURING THE REPORTING PERIOD As the Company is executing its duties in accordance with the applicable laws regulating the securities market, it publishes information on significant events and other regulated information on the EU-wide basis. This information is available on the website of the Company (www.litgrid.eu) and on the website of NASDAQ Vilnius stock exchange (www.nasdaqbaltic.com). Summary of Litgrid operations and achievements during 2022 January The electricity transmission prices set by Litgrid and approved by the National Energy Regulatory Council came into force with effect from 1 January 2022. As from 1 January 2022, the average price for electricity transmission services was approved at 0.684 ct/kWh (5.1% lower compared to 2021), and the price for system services at 0.589 ct/kWh (22.7% lower). On 14 January 2022 the Police Department and the Lithuanian electricity transmission system operator Litgrid signed a long-term memorandum of cooperation. Both organisations will cooperate more closely in ensuring the local energy security by the following means: joint exercises will take place; the police will patrol more actively near important infrastructure facilities, and information will be exchanged. As from 21 January 2022, the Lithuanian electricity transmission system operator Litgrid started implementing the project for installation of synchronous compensators (i.e. solutions designed to improve the system reliability and promote the green energy development), where it will be provided with engineering consulting services by Italian company CESI SpA. The experts from this company with expertise in implementing and supervising the projects of synchronous compensators, will help the Company ensure a smooth construction process involving technically extremely complex devices in Lithuania. The value of the contract for the provision of engineering consulting services in relation to the installation of synchronous compensators is EUR 0.9 million (VAT excl.). As from 28 January 2022, Litgrid launched a pilot study on isolated operation. The study is conducted by Turkish company EPRA Elektrik Enerji İnş. ve Tic. Ltd. Şti., which was awarded the contract as a result of the public procurement procedure, and the contract value is EUR 287 thousand. On 31 January 2022, Litgrid informed the market that from 22 February 2022 it will start applying the updated version of methodology for setting and allocating inter-system capacities with third countries, which was approved by the National Energy Regulatory Council on 31 January 2022. February On 11 February 2022, EPSO-G (a group of energy transmission and exchange companies) announced about the election of candidates to the position of Board members of Litgrid. A total of two members will be elected to the Board of Litgrid. They will replace the employees of the parent company (EPSO-G) who have been holding the position of the Board members until now; and one civil servant will be elected to the Board, thereby implementing the requirements of the Lithuanian Law on the Protection of Objects of Importance to Ensuring National Security. The Law establishes that at least one civil servant must be appointed to the collegial supervisory or management body elected by the general meeting of shareholders of companies from the first and second categories of importance to ensuring national security. March On 2 March 2022, the electricity transmission system operators from the Baltic States made a joint decision to reduce commercial electricity imports through the existing connections with Russia. As the new decision regarding the capacity levels came into force, the total electricity imports to the Baltic States from Russia must not exceed 300 MW as from 3 March 2022. Accordingly, the inter-system capacity between Lithuania and Russia and between Latvia and Russia must not exceed 150 MW. On 15 March 2022, the Lithuanian electricity transmission system operator Litgrid together with Rail Baltica joint venture RB Rail AS signed a memorandum of cooperation in the implementation of Rail Baltica project. Based on the memorandum, the parties agreed on the main principles for mutual cooperation during the implementation of the project. On 16 March 2022, the Lithuanian electricity transmission system operator Litgrid installed new or relocated the existing power autotransformers at ten transformer substations. The electricity transmission network has been strengthened in the regions with a growing volume of transmitted energy, whereas elsewhere it has been optimized, and the expected useful life of the main substation equipment has been extended. The total investment value of the autotransformer renewal project is EUR 35.5 million. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 78 April On 14 April 2022, a survey commissioned by Litgrid revealed that 4 out of 5 residents support the national strategic goal to disconnect from the Russian-controlled energy system. Overall, 79% of population support Lithuania's goal to achieve energy independence and disconnect from the BRELL system. Compared to the results of the previous survey conducted last year in autumn, support for energy independence increased by even 18%. At the same time, there was a significant decrease in the number of respondents who disagreed and were uncertain about the aforementioned national strategic goals. At the Extraordinary General Meeting of Shareholders held on 20 April 2022, new candidates were approved for the position of the Board members: Tomas Varneckas and Gediminas Karalius were elected as the Board members of Litgrid. Litgrid's Board consists of 5 members elected for the term of office of 4 years: two Board members delegated by the parent company EPSO-G, two independent Board members, and one Board member as a civil servant. May On 10 May 2022, the project of the Lithuanian electricity transmission system operator Litgrid – the first 1 MW battery connected to the electricity transmission network in the Baltic States – achieved recognition at a global level: it was among the finalists in the Outstanding project category at the biggest European renewable energy awards ‘The Smarter E Award’. The innovative battery at Vilnius substation was connected to the grid at the end of last year, and this year Litgrid specialists have successfully completed its testing. They concluded that the battery with power of 1 MW and storage capacity of 1 MWh can contribute to the control of electricity system parameters. On 10 May 2022, the National Energy Regulatory Council approved the updated version of Litgrid AB methodology for setting and allocating inter-system capacities with third countries. On 20 May 2022, the electricity exchange operator Nord Pool decided to discontinue the trading of the Russian electricity by Inter RAO group companies, which are the only ones importing electricity from Russia to the Baltic States. The trading used to be carried out by the sole supplier – Inter RAO group. The decision to discontinue the trading was made by the electricity exchange operator Nord Pool on 20 May 2022. As from 22 May 2022, the Russian energy in the Baltic States was replaced by the local generation and imports from the Western and Nordic countries. June As at 1 June 2022, the electricity transmission system operators in the Baltic States – Litgrid in Lithuania, Augstprieguma Tikls in Latvia, and Elering in Estonia – are jointly balancing the electricity system and at the same time maintaining the balance with the Russian electricity system that meets the BRELL standards. On 1 June 2022, Litgrid completed the transaction with Transporent UAB and Mobility Lietuva UAB, based on which the electricity transmission system operator will lease 28 electric cars and 44 plug-in hybrid cars. So far, 99% of the Company's car fleet comprised vehicles powered by internal combustion engines. Such cars will make up 11% of the renewed car fleet. This transaction is one of the steps towards implementing the Company's commitment to reduce greenhouse gas emissions by two thirds by the year 2030. As from 29 June 2022, the operators from nine countries of the Baltic Sea region will cooperate to ensure the adequacy of the electricity system across the region. Such decision was made by management of the electricity transmission system operators Litgrid in Lithuania, AST in Latvia, Elering in Estonia, Energinet in Denmark, Fingrid in Finland, Svenska Kraftnät in Sweden, Statnett in Norway, PSE in Poland, and 50Hertz in Germany, during the meeting of leaders of electricity transmission system operators from the Baltic Sea region held on 28 June 2022 in Tallinn. July On 1 July 2022, Litgrid submitted to the National Energy Regulatory Council a ten-year development plan for 110-440 kV networks of the Lithuanian electricity system. As from 1 July 2022, the Baltic Regional Coordination Centre (RCC) has been launched to provide network security services to the electricity transmission system operators in the Baltic States: Litgrid in Lithuania, Elering in Estonia, and AST in Latvia. The RCC will operate as an independent body. The RCC was established by the electricity transmission system operators from the three Baltic States, in accordance with the requirements set forth in the EU Clean Energy Package. The RCC headquarters are located in Tallinn, the capital of Estonia, while its regional units operate in Latvia and Lithuania. The Baltic RCC is one of the six regional coordination centres operating in Europe. The network security services are provided by Nordic RSC in the Nordic countries, TSC Net and Coreso in the Central Europe, and Selene and SCC in the Southern Europe. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 79 26 July 2022 Litgrid completed one of the most important projects for synchronisation with the continental European grid - the installation of an automatic generation management system (AGM). This is an important step not only for a country seeking energy independence, but also for electricity market participants, who will have additional opportunities to earn money by providing power reserve services. Litgrid has signed a software purchase agreement with GE Energy Management Services, LLC, a US company. In parallel, Litgrid is preparing to launch a tender for the upgrade of its computer system management infrastructure. The total planned investment for the project will amount to approximately EUR 4.2 million. August 8 August 2022 Litgrid signed a contract for the implementation of a new energy balance and ancillary services management system. The state-of-the-art software will enable the implementation of the conditions for the exchange of electricity consumption and production data necessary for synchronisation with continental Europe. The tender for the software was awarded to the Czech company Unicorn. The total value of the project is €1.65 million. The project is part-financed by the Connecting Europe Facility. 26 August 2022 Litgrid appealed to the State Energy Regulatory Council to return to consumers the congestion revenues the company generated in 2022. These revenues will be returned through investments in infrastructure upgrades and synchronisation projects and will not be included in the transmission tariff for 2023 and beyond. This will allow for the continued reliable operation of the electricity network without shifting the planned investments onto the shoulders of consumers. September 29 September 2022 Litgrid, the Lithuanian electricity transmission system operator, has completed the spatial planning phase for the construction of the Harmony Link international maritime link with Poland and the 330 kV Darbėnai switchyard. Following the completion of these works, Litgrid has implemented two more milestones of the synchronisation action and measure plan approved by the Government. October As Lithuania pursues its ambitious renewable energy goals and implements the Breakthrough Package, the Lithuanian electricity transmission operator Litgrid is setting up a Renewable Energy Centre. The dedicated centre will coordinate the connection of new renewable energy power plants and battery projects to the Lithuanian electricity transmission grid. 7 October 2022. Litgrid, the system operator of Lithuania's electricity transmission grid, joined the international public procurement platform DevelopmentAid on 2007. The new system will increase competition among suppliers and attract more international partners to help Litgrid deliver more than €2 billion worth of infrastructure and grid improvement projects over the next decade. 19 October 2022 Litgrid, Lithuania's electricity transmission system operator, has started trials of artificial intelligence and sensor technologies that could contribute to the development of renewable energy sources in the country. Special devices installed on overhead lines measure weather conditions and predict potential line capacity. This technology is expected to allow around 30% more wind and solar electricity to be transmitted over the same overhead power lines in the future. The variable capacity technology was installed for the first time in the Baltic States on a currently heavily loaded 110 kV line in western Lithuania, linking transformers in Palanga and Vydmantai. Special equipment mounted on the line's poles monitors air temperature, wind direction, wind speed, solar intensity, humidity and line temperature. The information collected is used to continuously improve the model used to calculate the capacity of the overhead line. 21 October 2022 Mr Vilimas, an independent member of Litgrid's Management Board, announced his resignation for personal reasons as of 5 November. November 4 November 2022 Litgrid, the Lithuanian electricity transmission system operator, has carried out scheduled annual maintenance work on the NordBalt electricity link between Lithuania and Sweden. On 11 November 2022, a pilot project between Litgrid, the Lithuanian electricity transmission system operator, and Fluence, an energy storage technology company, to connect a 1 MW battery to the transmission grid was nominated for a prestigious award. The project, completed last year, was shortlisted for the Platts Global Energy Awards and won the award. Litgrid's pilot project, using Fluence equipment, is one of the first in the world where a battery that stores electricity has become an integral part of the transmission grid - a device managed by the system operator. Most of the energy storage currently used in transmission grids is owned by electricity generators or consumers and is not widely used for system management. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 80 December 2 December 2022 Algirdas Juozaponis, Chairman of the Board of Litgrid, the Lithuanian electricity transmission system operator, has decided to step down from the Board of Litgrid and leave the EPSO-G group of companies, as well as to step down as CFO of EPSO-G as of January. 22 December 2022 The Extraordinary General Meeting of Shareholders of Lithuanian electricity transmission system operator Litgrid has elected Mindaugas Keizeris, CEO of the EPSO-G group of energy transmission and exchange companies, as a member of the Board of Directors. 29 December 2022 Tomas Varneckas, Head of Infrastructure at EPSO-G, is elected Chairman of the Board of Litgrid. 15. MATERIAL EVENTS IN 2022 (https://nasdaqbaltic.com/statistics/lt/news?num=100&page=1&issuer=LGD&filter=1 ) EVENTS 12.29 Concerning the opinion of the Audit Committee 12.29 Tomas Varneckas was elected as the Chairman of the Board of LITGRID AB 12.22 Decisions taken at the Extraordinary General Meeting of Shareholders of LITGRID AB 12.07 Supplement to the agenda of the Extraordinary General Meeting of Shareholders dated 22 December 2022 12.07 Concerning the opinion of the Audit Committee 12.02 Algirdas Juozaponis, the Chairman of the Board of LITGRID AB, leaves EPSO-G group 11.30 Calling of the Extraordinary General Meeting of Shareholders of LITGRID AB 11.30 Decisions taken at the Extraordinary General Meeting of Shareholders of LITGRID AB 11.30 LITGRID AB sold its 39.6% stake in TSO Holding to EPSO-G UAB 11.25 Concerning the opinion of the Audit Committee 11.09 Calling of the Extraordinary General Meeting of Shareholders of LITGRID AB 11.08 Concerning the opinion of the Audit Committee 11.04 LITGRID AB publishes its results for the nine-month period of 2022 10.31 LITGRID AB signed agreements with Energinet and Fingrid regarding acquisition of shareholding in TSO Holding 10.21 Regarding the resignation of Artūras Vilimas from the position of the Board member of LITGRID AB 09.16 Concerning the opinion of the Audit Committee 09.16 LITGRID AB intends to acquire two share packages in TSO Holding from Fingrid and Energinet 09.05 Decisions taken at the Extraordinary General Meeting of Shareholders of LITGRID AB 08.16 Decisions taken at the Extraordinary General Meeting of Shareholders of LITGRID AB 08.12 Concerning the opinion of the Audit Committee 08.04 LITGRID AB publishes its results for the first half of 2022 07.27 Concerning the opinion of the Audit Committee 07.25 Calling of the Extraordinary General Meeting of Shareholders of LITGRID AB 07.12 Decisions taken at the Extraordinary General Meeting of Shareholders of LITGRID AB 06.17 Calling of the Extraordinary General Meeting of Shareholders of LITGRID AB 06.13 Decisions taken at the Extraordinary General Meeting of Shareholders of LITGRID AB 06.09 Nasdaq event ‘CEO Meets Investors 2022‘ 05.25 Concerning the opinion of the Audit Committee 05.20 Calling of the Extraordinary General Meeting of Shareholders of LITGRID AB 05.05 Regarding the contract for designing and construction of 330 kV power transmission line Vilnius-Neris 05.05 LITGRID publishes its results for the three-month period of 2022 ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 81 05.02 Decisions taken at the Extraordinary General Meeting of Shareholders of LITGRID AB 04.22 Ex-dividend date 04.22 LITGRID AB procedure for the payment of dividends for 2021 04.20 Decisions taken at the Extraordinary General Meeting of Shareholders of LITGRID AB 04.08 Calling of the Extraordinary General Meeting of Shareholders of LITGRID AB 04.08 EPSO-G UAB‘s proposal regarding nomination of the Board members of LITGRID AB 03.25 Calling of the Extraordinary General Meeting of Shareholders of LITGRID AB 03.18 LITGRID AB publishes its audited financial statements and annual report for 2021 02.08 Regarding additional arrangement to the contract on purchase/sale of isolated operation services for electricity system 02.04 LITGRID AB publishes its unaudited condensed financial statements for the 12-month period of 2021 02.04 Concerning the opinion of the Audit Committee 02.02 Decisions taken at the Extraordinary General Meeting of Shareholders of LITGRID AB 01.11 Concerning the opinion of the Audit Committee 01.11 Calling of the Extraordinary General Meeting of Shareholders of LITGRID AB 16. SIGNIFICANT EVENTS AFTER THE REPORTING PERIOD 3 February 2023 Litgrid, the Lithuanian electricity transmission system operator, has published an update of its strategy until 2030. In addition to the objectives set out above, it focuses on meeting the expectations of renewable energy generators, reducing greenhouse gas emissions and improving customer satisfaction. The strategy, adopted in 2021 and updated in 2023, maintains the objectives of strategic synchronisation, implementation of offshore wind projects, data openness and financial sustainability. 17. TRANSPARENCY REPORT Litgrid complies with the Business Transparency and Communication Policy of the EPSO-G UAB Group (approved by the Board of Litgrid AB on 23 October 2017 in its entirety), which considers in detail the requirements set forth in the Transparency Guidelines and defines their applicability to the companies of the EPSO-G group. The implementation of the Transparency Guidelines is largely ensured by LitgriD AB through disclosure of information in the annual report and on the official website of the Company and through notices on the NASDAQ stock exchange, where information is disclosed in the format that is acceptable and comprehensible to the stakeholders. Article 3 of Resolution No 1052 of 14 July 2010 of the Government of the Republic of Lithuania On the approval of the Description of Guidelines for Ensuring the Transparency of State-owned Enterprises (the Transparency Guidelines) stipulates that a state- owned enterprise (the “SOE”) complies with the provisions of the Corporate Governance Guidelines for the Companies Listed on Nasdaq Vilnius AB that are related to public disclosure of information. Structured information on implementation of the Transparency Guidelines is presented below: The following information must be published/other requirements must be implemented on the official website of Litgrid AB www.litgrid.eu: Company’s name, code, registered address, and a register in which data on the Company is compiled and stored Implemented Legal form, in case Litgrid AB is restructured, reorganised (the way of reorganisation is to be indicated), under liquidation, in the process of bankruptcy or bankrupt Not applicable Information on the authority representing the State, i.e. the Ministry of Energy, and link to its official website Implemented Goals, vision and mission of the activities Implemented Structure Implemented ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 82 2 When information is treated as a commercial (industrial) secret or as confidential information of the SOE, the SOE is allowed not to disclose such information; however, in its annual report the SOE must indicate such non-disclosure and provide the reasons for non-disclosure. Data on the chief executive officer Implemented Data on the chairperson and members of the board Implemented Data on the chairperson and members of the supervisory board Not applicable Names of the committees, data on their chairpersons and members Not applicable * The following data must be provided: name, surname, start date of the term of office, other executive positions in other legal entities, education, qualification, and professional experience; indication of whether a member of a collegial body has been elected or appointed as an independent member. Sum of the nominal values (in euros and cents) of shares and interest (in percentage) held by the State in the share capital of Litgrid AB under the title of ownership Implemented Information on initiatives and measures of social responsibility, significant ongoing or planned investment projects Implemented If Litgrid AB is a member of other legal entities (not applicable to subsidiaries and second-tier subsidiaries), the name, code, and register in which data on the Company is compiled and stored, registered address, and official websites of such legal entities Implemented A set of Litgrid AB annual financial statements, Litgrid AB annual report, as well as an auditor’s report on Litgrid AB annual financial statements must be placed on Litgrid AB official website within 10 working days from the date of approval of the set of annual financial statements Implemented The sets of Litgrid AB interim financial statements and Litgrid AB interim reports must be placed on the official website not later than within 2 months after the end of the reporting period Implemented The following documents must be provided/other requirements must be implemented on the official website of Litgrid AB www.litgrid.eu: Articles of Association of Litgrid AB Implemented Operational strategy or its summary in cases when the operational strategy contains confidential information or information that is treated as a commercial (industrial) secret Implemented Remuneration policy that covers determination of remuneration for CEO and members of the collegial bodies and the committees of Litgrid AB Implemented Annual and interim reports of Litgrid AB Implemented Data disclosure is performed in accordance with the requirements of Lithuanian legal acts and good practice Implemented The sets of annual and interim financial statements for at least 5 years and the auditor’s reports on the annual financial statements Implemented The above-mentioned documents must be provided in a PDF format with a technical possibility to be printed out Implemented The following information must be provided/other requirements must be implemented in the sets of financial statements: Litgrid AB keeps its accounting records in a way that ensures preparation of the financial statements in accordance with the International Accounting Standards Implemented Litgrid AB prepares a set of financial statements for the period of 6 months Implemented In addition to the annual report, Litgrid AB prepares an interim report for the period 6 months Implemented In addition to the content requirements set in the Law on Financial Reporting by Undertakings of the Republic of Lithuania, the following information must be disclosed in the annual report of Litgrid AB 1 : Brief description of the business model of Litgrid AB Implemented Information on significant events occurring during the financial year and after the end of the financial year (until the date of preparation of annual report) that had material impact on the activities of Litgrid Implemented Results of implementation of the objectives set in the operational strategy Implemented Profitability, liquidity, asset turnover, and debt ratios Implemented ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 83 17. Litgrid AB NOTICE OF COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE FOR THE COMPANIES LISTED ON NASDAQ OMX AB In line with Article 23(3) of the Law on Securities of the Republic of Lithuania and paragraph 24.5 of the Listing Rules of Nasdaq Vilnius AB, public limited liability company Litgrid AB (the “Company”) discloses its compliance with the Corporate Governance Code for the Companies Listed on Nasdaq Vilnius and its specific provisions or recommendations. In case of non-compliance with this Code or some of its provisions or recommendations, the specific provisions or recommendations that are not complied with must be indicated, the reasons of such non-compliance must be specified and other explanatory information indicated in this form must be presented. Free-form summary of the Company’s corporate governance report Litgrid AB is part of the EPSO-G UAB group of companies (the “Group”). The Company’s corporate governance structure and the governance model are established by the Company’s Articles of Association, the Corporate Governance Guidelines of the EPSO-G Group of Companies approved by the Ministry of Energy (the ME), the sole shareholder of the parent company EPSO- G UAB, on 24 April 2018 and the Corporate Governance Policy of the EPSO-G Group of Companies. All the above-mentioned documents are published on the Company’s website and the website of EPSO-G UAB. Chart 1. Main scheme of the implementation of corporate governance at the Group level. Implementation of special obligations Implemented Implementation of the investment policy, ongoing and planned investment projects, and investments implemented during the reporting year Implemented Implementation of the risk management policy applied by Litgrid AB Implemented Implementation of the dividend policy Implemented Implementation of the remuneration policy Implemented Total annual wage bill, average monthly salary by category of employees and/or business units Implemented The SOEs that are not required to prepare the social responsibility report, are recommended to provide information related to environmental, social and personnel, human rights, anti-corruption and anti-bribery matters in their annual report or annual activity report Implemented The consolidated annual report includes the following information: structure of the group, name, code and register in which data on the company is compiled and stored, registered address of each of the group companies, interest (percentage) held in the share capital of a subsidiary, financial and non-financial performance during the financial year Not applicable The interim report of Litgrid AB includes the following information: analysis of financial performance during the reporting period, information on significant events occurring during the reporting period, profitability, liquidity, asset turnover and debt ratios and changes therein compared to the respective period in the previous year Implemented ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 84 Being part of the Group does not deny the Company’s independence. The Company operates independently aiming to achieve the objectives set in the Company’s Articles of Association and has the obligation to independently assess whether compliance with the Group’s corporate governance documents does not harm interests of the Company, its creditors, shareholders or other stakeholders. The corporate governance structure established in the Company’s Articles of Association is as follows: The General Meeting of Shareholders; The Board (five members, two of whom are independent members, the other three members are nominated by the shareholder EPSO-G UAB); The committees operating at the Group level: The Remuneration and Nomination Committee (mainly composed of independent members); The Audit Committee (mainly composed of independent members). The Chief Executive Officer. The Group has a centralised internal audit function. In order to ensure the independence of the internal audit, it is established that the head of the internal audit function is appointed and dismissed by the Board of EPSO-G UAB, which is mainly composed of independent members. The internal audit is also accountable to the Audit Committee, which is also mainly composed of independent members. The internal audit recommendations are analysed by the Company’s Board, which also approves the plan of measures for the implementation of audit recommendations. On the basis of the Risk Management Policy of the EPSO-G UAB Group of Companies, the uniform risk management system of the Group is implemented at the Company according to the COSO ERM standards applicable in the international practice setting out risk identification, assessment and management principles and responsibilities. Risk management coordination is performed at the Group level. The aim of the Group’s operating policies is to introduce a consistent and effective management system of the organisation helping employees successfully implement important strategic projects and create value to residents and businesses of the country in a transparent and effective manner. To ensure the effectiveness of the operating policies, the Company annually reports on the progress of the implementation of the operating policies. On the basis of the Compliance Management Policy of the EPSO-G UAB Group of Companies, the uniform compliance management system of the Group is implemented at the Company. Compliance management coordination is performed at the Group level. The policies that are currently effective at the Company are published on corporate website www.litgrid.eu. Structured table: PRINCIPLES/RECOMMENDATIONS YES/NO/ NOT APPLICABLE COMMENTARY Principle 1: General meeting of shareholders, equitable treatment of shareholders, and shareholders’ rights. The corporate governance framework should ensure the equitable treatment of all shareholders. The corporate governance framework should protect the rights of shareholders. 1.1. All shareholders should be provided with access to the infor- mation and/or documents established in the legal acts on equal terms. All shareholders should be furnished with equal opportunity to participate in the decision-making process where significant corporate matters are discussed. YES Pursuant to the Law on Companies of the Republic of Lithuania and Chapter IX of the Company’s Articles of Association, information on general meetings of shareholders being convened, their draft decisions and decisions made is published on the Company’s website and on NASDAQ OMX Vilnius stock exchange in the Lithuanian and English languages. 1.2. It is recommended that the company’s capital should consist only of the shares that grant the same rights to voting, ownership, dividend and other rights to their holders. YES Paragraphs 13–15 of the Company’s Articles of the Association define that all shares of the Company are ordinary registered shares with the nominal value of EUR 0.29 each. All shares are intangible and recorded in the personal securities accounts of the shareholders managed by the securities account manager contracted to manage the share accounting. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 85 1.3. It is recommended that investors should have access to the information concerning the rights attached to the shares of the new issue or those issued earlier in advance, i.e. before they purchase shares. YES Please refer to the commentary in paragraph 1.2. Chapter IV of the Company’s Articles of Association also establishes shareholders’ rights and obligations. 1.4. Exclusive transactions that are particularly important to the company, such as transfer of all or almost all assets of the company which in principle would mean the transfer of the company, should be subject to approval of the general meeting of shareholders. YES Paragraph 38 of the Company’s Articles of Association specifies the cases when the Board’s decision regarding the transfer of the Company’s assets is subject to the approval of the General Meeting of Shareholders. 1.5. Procedures for convening and conducting a general meeting of shareholders should provide shareholders with equal opportunities to participate in the general meeting of shareholders and should not prejudice the rights and interests of shareholders. The chosen venue, date and time of the general meeting of shareholders should not prevent active participation of shareholders at the general meeting. In the notice of the general meeting of shareholders being convened, the company should specify the last day on which the proposed draft decisions should be submitted at the latest. YES Each time the General Meeting of Shareholders is convened, the general rights of the shareholders are published on the Company’s website. 1.6. With a view to ensure the right of shareholders living abroad to access the information, it is recommended, where possible, that documents prepared for the general meeting of shareholders in advance should be announced publicly not only in Lithuanian language but also in English and/or other foreign languages in advance. It is recommended that the minutes of the general meeting of shareholders after the signing thereof and/or adopted decisions should be made available publicly not only in Lithuanian language but also in English and/or other foreign languages. It is recommended that this information should be placed on the website of the company. Such documents may be published to the extent that their public disclosure is not detrimental to the company or the company's commercial secrets are not revealed. YES Please refer to the commentary in paragraph 1.1. 1.7. Shareholders who are entitled to vote should be furnished with the opportunity to vote at the general meeting of shareholders both in person and in absentia. Shareholders should not be prevented from voting in writing in advance by completing the general voting ballot. YES A standard notice on convening of the General Meeting of Shareholders always indicates a possibility for shareholders to vote in writing by filling in the attached form of a voting ballot. 1.8. With a view to increasing the shareholders’ opportunities to participate effectively at general meetings of shareholders, it is recommended that companies should apply modern technologies on a wider scale and thus provide shareholders with the conditions to participate and vote in general meetings of shareholders via electronic means of communication. In such cases, the security of transmitted information must be ensured and it must be possible to identify the participating and voting person. NO A standard notice on convening of the General Meeting of Shareholders always indicates that the participation and voting by electronic means of communication will not take place. So far there is no need to vote by electronic means of communication. Upon requests by the shareholders, the introduction of such a voting option would be considered. 1.9. It is recommended that the notice on the draft decisions of the general meeting of shareholders being convened should specify new candidatures of members of the collegial body, their proposed remuneration and the proposed audit company if these issues are included into the agenda of the general meeting of shareholders. Where it is proposed to elect a new member of the collegial body, it is recommended that the information about his/her educational background, work experience and other managerial positions held (or proposed) should be provided. YES A standard notice on convening of the General Meeting of Shareholders always indicates draft decisions containing information required by the Law on Companies of the Republic of Lithuania, including candidatures of members of new collegial bodies, their proposed remuneration, a proposed audit ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 86 company and its proposed remuneration. Information on the collegial body member who is proposed to be elected is not released publicly, however, the standard notice on convening of the General Meeting of Shareholders always specifies that the shareholders may additionally familiarise with documents related to the agenda of the meeting, draft decisions, a general voting ballot at the premises of LITGRID AB at the registered office during specifically indicated hours. 1.10. Members of the company’s collegial management body, heads of the administration 2 or other competent persons related to the company who can provide information related to the agenda of the general meeting of shareholders should take part in the general meeting of shareholders. Proposed candidates to member of the collegial body should also participate in the general meeting of shareholders in case the election of new members is included into the agenda of the general meeting of shareholders. YES/NO Relevant competent persons who can provide information related to the agenda of the General Meeting of Shareholders always attend the General Meeting of Shareholders. Meanwhile the proposed candidates to the members of the collegial body not always attend the General Meetings of Shareholders. Principle 2: Supervisory board 2.1. Functions and liability of the supervisory board The supervisory board of the company should ensure representation of the interests of the company and its shareholders, accountability of this body to the shareholders and objective monitoring of the company’s operations and its management bodies as well as constantly provide recommendations to the management bodies of the company. The supervisory board should ensure the integrity and transparency of the company’s financial accounting and control system. 2.1.1. Members of the supervisory board should act in good faith, with care and responsibility for the benefit and in the interests of the company and its shareholders and represent their interests, having regard to the interests of employees and public welfare. NOT APPLICABLE The Supervisory Board is not formed at the Company. 2.1.2. Where decisions of the supervisory board may have a different effect on the interests of the company’s shareholders, the supervisory board should treat all shareholders impartially and fairly. It should ensure that shareholders are properly informed about the company’s strategy, risk management and control, and resolution of conflicts of interest. NOT APPLICABLE - 2.1.3. The supervisory board should be impartial in passing decisions that are significant for the company's operations and strategy. Members of the supervisory board should act and pass decisions without an external influence from the persons who elected them. NOT APPLICABLE - 2 For the purposes of this Code, heads of the administration are the employees of the company who hold top level management positions. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 87 2.1.4. Members of the supervisory board should clearly voice their objections in case they believe that a decision of the supervisory board is against the interests of the company. Independent 3 members of the supervisory board should: a) maintain independence of their analysis and decision-making; b) not seek or accept any unjustified privileges that might compromise their independence. NOT APPLICABLE - 2.1.5. The supervisory board should oversee that the company’s tax planning strategies are designed and implemented in accordance with the legal acts in order to avoid faulty practice that is not related to the long-term interests of the company and its shareholders, which may give rise to reputational, legal or other risks. NOT APPLICABLE - 2.1.6. The company should ensure that the supervisory board is provided with sufficient resources (including financial ones) to discharge their duties, including the right to obtain all the necessary information or to seek independent professional advice from external legal, accounting or other experts on matters pertaining to the competence of the supervisory board and its committees. NOT APPLICABLE - 2.2. Formation of the supervisory board The procedure of the formation of the supervisory board should ensure proper resolution of conflicts of interest and effective and fair corporate governance. 2.2.1. The members of the supervisory board elected by the general meeting of shareholders should collectively ensure the diversity of qualifications, professional experience and competences and seek for gender equality. With a view to maintain a proper balance between the qualifications of the members of the supervisory board, it should be ensured that members of the supervisory board, as a whole, should have diverse knowledge, opinions and experience to duly perform their tasks. NOT APPLICABLE - 2.2.2. Members of the supervisory board should be appointed for a specific term, subject to individual re-election for a new term in office in order to ensure necessary development of professional experience. NOT APPLICABLE - 2.2.3. Chair of the supervisory board should be a person, whose current or past positions constituted no obstacle to carry out impartial activities. A former manager or management board member of the company should not be immediately appointed as chair of the supervisory board either. Where the company decides to depart from these recommendations, it should provide information on the measures taken to ensure impartiality of the supervision. NOT APPLICABLE - 3 For the purposes of this Code, the criteria of independence of the members of the supervisory board are interpreted as the criteria of unrelated parties defined in Article 31(7) and (8) of the Law on Companies of the Republic of Lithuania. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 88 2.2.4. Each member should devote sufficient time and attention to perform his duties as a member of the supervisory board. Each member of the supervisory board should undertake to limit his other professional obligations (particularly the managing positions in other companies) so that they would not interfere with the proper performance of the duties of a member of the supervisory board. Should a member of the supervisory board attend less than a half of the meetings of the supervisory board throughout the financial year of the company, the shareholders of the company should be notified thereof. NOT APPLICABLE - 2.2.5. When it is proposed to appoint a member of the supervisory board, it should be announced which members of the supervisory board are deemed to be independent. The supervisory board may decide that, despite the fact that a particular member meets all the criteria of independence, he/she cannot be considered independent due to special personal or company-related circumstances. NOT APPLICABLE - 2.2.6. The amount of remuneration to members of the supervisory board for their activity and participation in meetings of the supervisory board should be approved by the general meeting of shareholders. NOT APPLICABLE - 2.2.7. Every year the supervisory board should carry out an assessment of its activities. It should include evaluation of the structure of the supervisory board, its work organisation and ability to act as a group, evaluation of the competence and work efficiency of each member of the supervisory board, and evaluation whether the supervisory board has achieved its objectives. The supervisory board should, at least once a year, make public respective information about its internal structure and operational procedures. NOT APPLICABLE - Principle 3: Management board 3.1. Functions and liability of the management board The management board should ensure the implementation of the company’s strategy and good corporate governance with due regard to the interests of its shareholders, employees and other interest groups. 3.1.1. The management board should ensure the implementation of the company’s strategy approved by the supervisory board if the latter has been formed at the company. In such cases where the supervisory board is not formed, the management board is also responsible for the approval of the company’s strategy. YES Paragraph 36 of the Company’s Articles of Association defines that the Company’s Board approves the Company’s strategy. In addition, in carrying out its supervisory function the Board regularly reviews reports on the implementation of the strategy. 3.1.2. As a collegial management body of the company, the management board performs the functions assigned to it by the Law and in the articles of association of the company, and in such cases where the supervisory board is not formed in the company, it performs inter alia the supervisory functions established in the Law. By performing the functions assigned to it, the management board should take into account the needs of the company’s shareholders, employees and other interest groups by respectively striving to achieve sustainable business development. YES Paragraph 7.3 of the Company’s Articles of Association provides that the Company’s Board performs supervisory functions. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 89 3.1.3. The management board should ensure compliance with the laws and the internal policy of the company applicable to the company or a group of companies to which this company belongs. It should also establish the respective risk management and control measures aimed at ensuring regular and direct liability of managers. YES Point (xi) of Paragraph 36 of the Company’s Articles of Association defines that the Company’s Board deliberates the documents of the group of companies (guidelines, policies, procedures, etc.) and decides on the scope of their application by the Company. In addition, by separate decisions, the Board instructs the CEO to provide regular reports on the indi- cators to be followed by the Board (e.g. the Company’s strategy, activity plan, budget, etc.). 3.1.4. Moreover, the management board should ensure that the measures included into the OECD Good Practice Guidance 4 on Internal Controls, Ethics and Compliance are applied at the company in order to ensure adherence to the applicable laws, rules and standards. YES The Company applies the following various documents in its activities that ensure implementation of the highest level internal control, ethics and compliance management tools: - internal audit is accountable to the Board which is formed from external members (2 members are independent); - the Audit Committee is mainly composed of independent members to whom internal audit is also accountable; - The Company applies the Code of Conduct and the Corruption Prevention Policy of the EPSO- G UAB Group of Companies, the Sponsorship and Charity Policy of the EPSO-G UAB Group of Companies, the Policy of Management of Interests of the EPSO-G UAB Group of Companies, the Risk Management Policy of the EPSO-G UAB Group of Companies, the Transparency and Communication Policy of the EPSO-G UAB Group of Companies, the Compliance Management Policy of the EPSO-G UAB Group of Companies, etc. 3.1.5. When appointing the manager of the company, the management board should take into account the appropriate balance between the candidate’s qualifications, experience and competence. YES Paragraph 54 of the Company’s Articles of Association establishes that the Company’s CEO is appointed by the Board taking into account the recommendations of the Remuneration and Nomination Committee. 4 Link to the OECD Good Practice Guidance on Internal Controls, Ethics and Compliance: https://www.oecd.org/daf/anti- bribery/44884389.pdf ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 90 Paragraph 56 of the Company’s Articles of Association defines that in assessment of suitability of the candidate for the position of the CEO the Board shall consider his/her compliance with the requirements specified by these Articles of As- sociation and the legal acts, and therefore may require that the candidate submit documents supporting this compliance and/or contact competent authorities for obtaining necessary information about the candidate. 3.2. Formation of the management board 3.2.1. The members of the management board elected by the supervisory board or, if the supervisory board is not formed, by the general meeting of shareholders should collectively ensure the required diversity of qualifications, professional experience and competences and seek for gender equality. With a view to maintain a proper balance in terms of the current qualifications possessed by the members of the management board, it should be ensured that the members of the management board would have, as a whole, diverse knowledge, opinions and experience to duly perform their tasks. YES The selection of the members of the Company’s Board is carried out in compliance with the procedure set by the Government of the Republic of Lithuania. Paragraph 28 of the Company’s Articles of Association stipulates that in the process of selection of the Board members it is ensured that the Board consists of at least 2 (two) independent members. Their independence is established in accordance with the criteria laid down in the Corporate Governance Code and the Policy of Management of Interests of Members of Collegial Bodies, Executives and Employees of the Group of Companies (the “Policy of Management of Interests”) as well as the requirements set forth by other applicable legal acts. It is ensured that at least 3 (three) members of the Board have no employment relationship with the Company and, when possible, it is aimed that employees of the Company are not appointed to the Board and that the Board members have competences taking into account the areas of responsibility and functions of the Board. The selection of Company’s Board members is carried out by the Remuneration and Appointment Committee in accordance with the approved matrix of the Board competences. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 91 The Board members carry out an assessment of their activities every year. In addition, the Remuneration and Nomination Committee evaluates the performance of the Board on an annual basis and provides recommendations on performance improvement. 3.2.2. Names and surnames of the candidates to become members of the management board, information on their educational background, qualifications, professional experience, current positions, other important professional obligations and potential conflicts of interest should be disclosed without violating the requirements of the legal acts regulating the handling of perso- nal data at the meeting of the supervisory board in which the management board or individual members of the management board are elected. In the event that the supervisory board is not formed, the information specified in this paragraph should be submitted to the general meeting of shareholders. The management board should, on yearly basis, collect data provided in this paragraph on its members and disclose it in the company’s annual report. YES The indicated information is published and updated on the Company’s website. This information is not repeatedly disclosed in the Annual Report, however the Annual Report contains the information on the chairperson of the Board, the CEO, the chief accountant and the head of the Internal Audit Unit. 3.2.3. All new members of the management board should be familiarised with their duties and the structure and operations of the company. YES The members of the Board are in- troduced to the structure and ac- tivities of the Company during the first sitting. The key corporate documents of the Company are shared. 3.2.4. Members of the management board should be appointed for a specific term, subject to individual re-election for a new term in office in order to ensure necessary development of professional experience and sufficiently frequent reconfirmation of their status. YES Paragraph 27 of the Company’s Articles of the Association defines that the Board is a collegial management body of the Company consisting of 5 members. The Board members are elected for a term of 4 years by the General Meeting of Shareholders, for which the Board is accountable, taking into account recommendations of the Remuneration and Nomination Committee. A member of the Board may continuously serve maximum 2 subsequent full terms of office, i.e. no longer than 8 years in a row. 3.2.5. Chair of the management board should be a person, whose current or past positions constitute no obstacle to carry out impartial activity. Where the supervisory board is not formed, the former manager of the company should not be immediately appointed as chair of the management board. When a company decides to depart from these recommendations, it should furnish information on the measures it has taken to ensure the impartiality of supervision. YES Paragraph 29 of the Company’s Articles of Association provides the criteria according to which a person cannot be elected as a member of the Board. One of the measures for ensuring the impartiality of the chairperson of the Board is established in paragraph 46 of the Company’s Articles of Association which states that the chairperson of the Board cannot be elected from among the Company’s employees elected to the Company’s Board. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 92 3.2.6. Each member should devote sufficient time and attention to perform his duties as a member of the management board. Should a member of the management board attend less than a half of the meetings of the management board throughout the financial year of the company, the supervisory board of the company or, if the supervisory board is not formed at the company, the general meeting of shareholders should be notified thereof. YES The Company’s minutes record the attendance and voting of the Board members during a decision-making process. As it is specified in paragraph 52 of the Company’s Articles of the Association, each year the Board members perform an assessment of their activities, the results of which are submitted to the shareholders and the Remuneration and Nomination Committee. The participation of the Board members in the sitting is disclosed in the annual report. 3.2.7. In the event that the management board is elected in the cases established by the Law where the supervisory board is not formed at the company, and some of its members will be independent 5 , it should be announced which members of the management board are deemed as independent. The management board may decide that, despite the fact that a particular member meets all the criteria of independence established by the Law, he/she cannot be considered independent due to special personal or company related circumstances. YES The Company’s website and the annual report contain information about the members of the Company’s Board specifying the independent members. 3.2.8. The general meeting of shareholders of the company should approve the amount of remuneration to the members of the management board for their activity and participation in the meetings of the management board. YES Paragraph 34 of the Company’s Articles of Association provides that the General Meeting of Shareholders may adopt a decision regarding the payment of remuneration to the Board members. 3.2.9. The members of the management board should act in good faith, with care and responsibility for the benefit and the interests of the company and its shareholders with due regard to other stakeholders. When adopting decisions, they should not act in their personal interest; they should be subject to no-compete agreements and they should not use the business information or opportunities related to the company’s operations in violation of the company’s interests. YES Taking into account the objective to monitor the absence of conflicts of interest of the members of the Company’s Board, each year the members of the Board renew their declarations of interests. In addition, paragraph 33 of the Company’s Articles of Association stipulates that the Board members may have another job or occupy another position compatible with their activities in the Board, including but not limited to executive positions in other legal entities, a job in a state or statutory service, duties at the Company and other legal entities (in conformity with restrictions set by Article 29 of the Articles of Association), as well as in legal entities, where the Company or the parent company acts as a participant, only by providing a prior notice to the Company’s Board. 5 For the purposes of this Code, the criteria of independence of the members of the board are interpreted as the criteria of unrelated persons defined in Article 33(7) of the Law on Companies of the Republic of Lithuania. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 93 The Company has adopted the Policy of Management of Interests of Members of Collegial Bodies, Executives and Employees of the EPSO-G Group of Companies. The Board members have signed commitments to protect confidential information. No-compete agreements are not concluded with the members of the Board. The need for such agreements was not established because the Company conducts a monopoly business. 3.2.10. Every year the management board should carry out an assessment of its activities. It should include evaluation of the structure of the management board, its work organisation and ability to act as a group, evaluation of the competence and work efficiency of each member of the management board, and evaluation whether the management board has achieved its objectives. The management board should, at least once a year, make public respective information about its internal structure and working procedures in observance of the legal acts regulating the processing of personal data. YES The Board carries out an assess- ment of its activities every year and prepares a performance im- provement plan on its basis. In addition, the Remuneration and Nomination Committee and the Audit Committee acting at the level of the EPSO-G UAB group of companies evaluate annually decisions made by the Board and provide recommendations on performance improvement The results of the assessment of the Board’s performance are presented in the Company’s annual report. Principle 4: Rules of procedure of the supervisory board and the management board of the company The rules of procedure of the supervisory board, if it is formed at the company, and of the management board should ensure efficient operation and decision-making of these bodies and promote active cooperation between the company’s management bodies. 4.1. The management board and the supervisory board, if the latter is formed at the company, should act in close cooperation in order to attain benefit for the company and its shareholders. Good corporate governance requires an open discussion between the management board and the supervisory board. The management board should regularly and, where necessary, immediately inform the supervisory board about any matters significant for the company that are related to planning, business development, risk management and control, and compliance with the obligations at the company. The management board should inform the supervisory board about any derogations in its business development from the previously formulated plans and objectives by specifying the reasons for this. NOT APPLICABLE The Supervisory Board is not formed at the Company. 4.2. It is recommended that meetings of the company's collegial bodies should be held at the respective intervals, according to the pre-approved schedule. Each company is free to decide how often meetings of the collegial bodies should be convened but it is recommended that these meetings should be convened at such intervals that uninterruptable resolution of essential corporate governance issues would be ensured. Meetings of the company’s collegial bodies should be convened at least once per quarter. YES Paragraph 45 of the Company’s Articles of Association stipulates that the Board takes its decisions at the Board’s meetings that are usually convened as often as it is necessary for the Board to be able to properly perform its functions and take decisions attributed to its competence, however not less than 12 times during a calendar year. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 94 At the beginning of each year, the Company’s Board approves the schedule for the current year meetings and the activity plan (preliminary questions for a respective meeting of the Board). 4.3. Members of a collegial body should be notified of the meeting being convened in advance so that they would have sufficient time for proper preparation for the issues to be considered at the meeting and a fruitful discussion could be held and appropriate decisions could be adopted. Along with the notice of the meeting being convened all materials relevant to the issues on the agenda of the meeting should be submitted to the members of the collegial body. The agenda of the meeting should not be changed or supplemented during the meeting, unless all members of the collegial body present at the meeting agree with such change or supplement to the agenda, or certain issues that are important to the company require immediate resolution. YES According to the Regulations of the Board, the material is submitted to the Board five working days before the date of the ordinary meeting. 4.4. In order to coordinate the activities of the company’s collegial bodies and ensure effective decision-making process, the chairs of the company’s collegial supervision and management bodies should mutually agree on the dates and agendas of the meetings and close cooperate in resolving other matters related to corporate governance. Meetings of the company’s supervisory board should be open to members of the management board, particularly in such cases where issues concerning the removal of the management board members, their responsibility or remuneration are discussed. NOT APPLICABLE The Supervisory Board is not formed at the Company. Principle 5: Nomination, remuneration and audit committees 5.1. Purpose and formation of committees The committees formed at the company should increase the work efficiency of the supervisory board or, where the supervisory board is not formed, of the management board which performs the supervisory functions by ensuring that decisions are based on due consideration and help organise its work in such a way that the decisions it takes would be free of material conflicts of interest. Committees should exercise independent judgment and integrity when performing their functions and provide the collegial body with recommendations concerning the decisions of the collegial body. However, the final decision should be adopted by the collegial body. 5.1.1. Taking due account of the company-related circumstances and the chosen corporate governance structure, the supervisory board of the company or, in cases where the supervisory board is not formed, the management board which performs the supervisory functions, establishes committees. It is recommended that the collegial body should form the nomination, remuneration and audit committees 6 . YES The Company has the Remuneration and Nomination Committee formed by the Board of EPSO-G UAB acting in accordance with the regulations approved by the body that forms it; and the Audit Committee operating at the Group level formed by the sole 6 The legal acts may provide for the obligation to form a respective committee. For example, the Law on the Audit of Financial Statements of the Republic of Lithuania provides that public-interest entities (including but not limited to public limited liability companies whose securities are traded on a regulated market of the Republic of Lithuania and/or of any other Member State) are under the obligation to set up an audit committee (the legal acts provide for the exemptions where the functions of the audit committee may be carried out by the collegial body performing the supervisory functions). ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 95 5.1.2. Companies may decide to set up less than three committees. In such case, companies should explain in detail why they have chosen the alternative approach, and how the chosen approach corresponds with the objectives set for the three different committees. YES shareholder EPSO-G UAB and acting in accordance with the regulations approved by the body that forms it. Given that the issues of remunera- tion and nomination are closely related and experts with the same qualifications are required to deal with these issues, it was decided to form a single Remuneration and Nomination Committee. 5.1.3. In the cases established by the legal acts the functions assigned to the committees formed at companies may be performed by the collegial body itself. In such case, the provisions of this Code pertaining to the committees (particularly those related to their role, operation and transparency) should apply, where relevant, to the collegial body as a whole. NOT APPLICABLE Please refer to the commentary in paragraph 5.1.1. 5.1.4. Committees established by the collegial body should normally be composed of at least three members. Subject to the requirements of the legal acts, committees could be comprised only of two members as well. Members of each committee should be selected on the basis of their competences by giving priority to independent members of the collegial body. The chair of the management board should not serve as the chair of committees. YES Chapters 7.8 and 7.9 of the Articles of Association of EPSO-G UAB regulate the formation of the committees within the EPSO-G group of companies and the areas of their competence. The aforementioned Articles of Association stipulate that the Remuneration and Nomination Committee and the Audit Committee shall consist of not less than three members. It is ensured that from among three members there is at least one independent member in the Remuneration and Nomination Committee and at least two indepen- dent members in the Audit Com- mittee. Not all members of the Remune- ration and Nomination Committee and the Audit Committee are appointed from the Board of EPSO- G. One member to each of the committees is appointed on the basis of competence when performing the external selection of an independent member of the committee. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 96 5.1.5. The authority of each committee formed should be determined by the collegial body itself. Committees should perform their duties according to the authority delegated to them and regularly inform the collegial body about their activities and performance on a regular basis. The authority of each committee defining its role and specifying its rights and duties should be made public at least once a year (as part of the information disclosed by the company on its governance structure and practice on an annual basis). In compliance with the legal acts regulating the processing of personal data, companies should also include in their annual reports the statements of the existing committees on their composition, the number of meetings and attendance over the year as well as the main directions of their activities and performance. YES The authority of the committees is determined in the Articles of Association of EPSO-G UAB and under the decision of the body for- ming the committee – the Regulations of the Remuneration and Nomination Committee are approved by the decision of the Board of EPSO-G UAB, and the Regulations of the Audit Committee are approved by the decision of the sole shareholder EPSO-G UAB, as it is permitted by the Requirements for Members of the Audit Committee approved by the Bank of Lithuania (Article 5). The Regulations of the committees are published on the EPSO-G website. Information about the composition, activities of the committees and other information is presented in the consolidated Group’s annual report. 5.1.6. With a view to ensure the independence and impartiality of the committees, the members of the collegial body who are not members of the committees should normally have a right to participate in the meetings of the committee only if invited by the committee. A committee may invite or request that certain employees of the company or experts would participate in the meeting. Chair of each committee should have the possibility to maintain direct communication with the shareholders. Cases where such practice is to be applied should be specified in the rules regulating the activities of the committee. YES The Regulations of the Committees provide for the right of the members of the Committees to invite, at their discretion, to their meetings the members of the bodies of the companies of the EPSO-G UAB group of companies, employees, representatives, candidates for cer- tain positions or other persons and to obtain from them the necessary explanations within their compe- tence as well as require for that purpose that necessary actions would be carried out needed for the performance of the functions of the Committees. 5.2. Nomination committee 5.2.1. The key functions of the nomination committee should be the following: 1) to select candidates to fill vacancies in the membership of supervisory and management bodies and the administration and recommend the collegial body to approve them. The nomination committee should evaluate the balance of skills, knowledge and experience in the management body, prepare a description of the functions and capabilities required to assume a particular position and assess the time commitment expected; 2) assess, on a regular basis, the structure, size and composition of the supervisory and management bodies as well as the skills, knowledge and activity of its members, and provide the collegial body with recommendations on how the required changes should be sought; 3) devote the attention necessary to ensure succession planning. YES The Remuneration and Nomination Committee of EPSO-G UAB serves as the advisory body to the Board of EPSO-G UAB and to the Company’s Board. The main functions of the Committee are as follows: - assistance in the selection of candidates for members of the bodies in all entities of the group of companies; ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 97 - provision of recommendations for the entities of the group of companies on the appointment of members of the management bodies, conclusion of contracts with them and determination of remuneration for them; - provision of recommendations on the policies of the group of compa- nies that govern the remuneration policy and employee performance assessment; - provision of recommendations on the planning system of succession of critical positions. 5.2.2. When dealing with issues related to members of the collegial body who have employment relationships with the company and the heads of the administration, the manager of the company should be consulted by granting him/her the right to submit proposals to the Nomination Committee. YES The Regulations establish that the right of initiative to convene the Remuneration and Nomination Committee is exercised by the boards or general managers of the group of companies that also propose the agenda of the meeting by submitting issue-related materials and draft resolutions. Currently, this provision is not practically relevant, as employees of the Company are not included in the composition of the Board. 5.3. Remuneration committee The main functions of the remuneration committee should be the following: 1) submit to the collegial body proposals on the remuneration policy applied to members of the supervisory and management bodies and the heads of the administration for approval. Such policy should include all forms of remu- neration, including the fixed-rate remuneration, performance-based remuneration, financial incentive schemes, pension arrangements and termination payments as well as conditions which would allow the company to recover the amounts or suspend the payments by specifying the circumstances under which it would be expedient to do so; 2) submit to the collegial body proposals regarding individual remuneration for members of the collegial bodies and the heads of the administration in order to ensure that they would be consistent with the company's remuneration policy and the evaluation of the performance of the persons concerned; 3) review, on a regular basis, the remuneration policy and its implementation. YES Please refer to the commentary in paragraph 5.2.1. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 98 5.4. Audit committee YES The Audit Committee of EPSO-G UAB serves as the advisory body to the Board of EPSO-G UAB and to the Company’s Board. The main functions of the Committee are as follows: - supervision of the preparation of the financial statements of the companies of the Group and performance of their audit; - responsibility for ensuring compliance with the principles of independence and objectivity by the auditors and audit firms of the companies of the Group; - responsibility for the supervision of the internal control, risk management and internal audit systems, effectiveness of opera- tional processes of the companies of the Group; - responsibility for control of provision of non-audit services by the auditor and/or audit firm of the companies of the Group; - ensurance of the functioning of the complaints system and complaints handling; - evaluation of transactions with related parties. 5.4.1. The key functions of the audit committee are defined in the legal acts regulating the activities of the audit committee 7 . 5.4.2. All members of the committee should be provided with detailed information on specific issues of the company’s accounting system, finances and operations. The heads of the company’s administration should inform the audit committee about the methods of accounting for significant and unusual transactions where the accounting may be subject to different approaches. 5.4.3. The audit committee should decide whether the participation of the chair of the management board, the manager of the company, the chief finance officer (or senior employees responsible for finance and accounting), the internal and external auditors in its meetings is required (and, if required, when). The committee should be entitled, when needed, to meet the relevant persons without members of the management bodies present. YES The Regulations of the Audit Committee stipulate that the members of the Committee, at their own discretion, may invite to their meetings the members of the bodies of the companies of the group, their employees, representatives, candidates for certain positions or other persons, and obtain from them the necessary explanations within their competence, as well as require for that purpose that necessary actions would be taken for the performance of the functions of the Committee. 7 Issues related to the activities of audit committees are regulated by Regulation No 537/2014 of the European Parliament and the Council of 16 April 2014 on specific requirements regarding statutory audit of public-interest entities, the Law on the Audit of Financial Statements of the Republic of Lithuania, and the Rules Regulating the Activities of Audit Committees approved by the Bank of Lithuania. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 99 5.4.4. The audit committee should be informed about the internal auditor’s work programme and should be furnished with internal audit reports or periodic summaries. The audit committee should also be informed about the work programme of external auditors and should receive from the audit firm a report describing all relationships between the independent audit firm and the company and its group. YES The Audit Committee is regularly, at least quarterly, informed about the internal audit reports and at least once every six months, with the internal audit plan and it may provide recommendations with regard to them to the boards of the companies of the EPSO-G UAB group. The Audit Committee organises meetings with the external auditors to discuss the auditors’ work program and uncertainties arising during the audit, and after the performance of the external audit, their conclusions and recommendations are discussed with the external auditors. Each year before the start of annual audits the audit firm submits its declaration of independence to the Audit Committee and to the companies. 5.4.5. The audit committee should examine whether the company complies with the applicable provisions regulating the possibility of lodging a complaint or reporting anonymously his/her suspicions of potential violations committed at the company and should also ensure that there is a procedure in place for proportionate and independent investigation of such issues and appropriate follow-up actions. YES The Regulations of the Audit Committee stipulate that the Audit Committee ensures the effective functioning of the complaints system and the proportionate and independent investigation of sub- mitted complaints. In the implementation of this function, the Chairperson of the Audit Committee is immediately informed about significant complaints received. In addition, the Audit Committee is regularly reported on all complaints received by the companies of the EPSO-G UAB group, their investi- gation and decisions made on the basis of the findings of investigations carried out. 5.4.6. The audit committee should submit to the supervisory board or, where the supervisory board is not formed, to the management board its activity report at least once in every six months, at the time that annual and half-yearly reports are approved. YES The Regulations of the Audit Committee stipulate that the Audit Committee shall submit a quarterly activity report to the Board. In addition, it shall submit a consolidated activity report to the Ordinary General Meeting of Shareholders and to the Board of EPSO-G UAB. Principle 6: Prevention and disclosure of conflicts of interest The corporate governance framework should encourage members of the company’s supervisory and management bodies to avoid conflicts of interest and ensure a transparent and effective mechanism of disclosure of conflicts of interest related to members of the supervisory and management bodies. The corporate governance framework should recognise the rights of stakeholders established in the laws and encourage active cooperation between the company and stakeholders in creating the company value, jobs and financial sustainability. In the context of this principle, the concept “stakeholders” includes investors, employees, creditors, suppliers, clients, local community and other persons having certain interests in the company concerned. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 100 Any member of the company’s supervisory and management body should avoid a situation where his/her personal interests are or may be in conflict with the company’s interests. In case such a situation did occur, a member of the company’s supervisory or management body should, within a reasonable period of time, notify other members of the same body or the body of the company which elected him/her or the company’s shareholders of such situation of a conflict of interest, indicate the nature of interests and, where possible, their value. YES This obligation is set out in paragraphs 57-58 of the Company’s Articles of Association, the regulations of the management bodies and the Policy of Mana- gement of Interests of Members of Collegial Bodies, Executives and Employees of the EPSO-G Group of Companies. Principle 7: Remuneration policy of the Company The remuneration policy and the procedure for review and disclosure of such policy established at the company should prevent potential conflicts of interest and abuse in determining remuneration of members of the collegial bodies and heads of the administration, in addition it should ensure the publicity and transparency of the company’s remuneration policy and its long- term strategy. 7.1. The company should approve and post the remuneration policy on the website of the company; such policy should be reviewed on a regular basis and be consistent with the company’s long-term strategy. YES The Company applies the Guidelines on the Establishment of Re- muneration for the Activity at the Bodies of EPSO-G UAB and the Companies of the EPSO-G UAB Group of Companies, which are approved by the sole shareholder of EPSO-G UAB and available in a public domain. The Company applies the Remu- neration Policy of the EPSO-G UAB Group of Companies and the Employee Performance Assessment Policy of the EPSO-G UAB Group of Companies in full. The Remuneration Policy is available in a public domain. 7.2. The remuneration policy should include all forms of remuneration, including the fixed-rate remuneration, performance- based remuneration, financial incentive schemes, pension arrangements and termination payments as well as the conditions specifying the cases where the company can recover the disbursed amounts or suspend the payments. YES All possible forms of remuneration of the collegial bodies and employees are established in the Guidelines on the Establishment of Remuneration for the Activity at the Bodies of EPSO-G UAB and the Companies of the EPSO-G UAB Group of Companies and the Remuneration Policy of the EPSO-G UAB Group of Companies. Both these documents are available in a public domain. 7.3. With a view to avoid potential conflicts of interest, the remuneration policy should provide that members of the collegial bodies which perform the supervisory functions should not receive remuneration based on the company’s performance. YES The Company applies the Guidelines on the Establishment of Remuneration for the Activity at the Bodies of EPSO-G UAB and the Companies of the EPSO-G UAB Group of Companies that regulate a fixed remuneration for members of the collegial bodies. The members of the Board do not receive remuneration based on the Compa- ny’s performance. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 101 7.4. The remuneration policy should provide sufficient information on the policy regarding termination payments. Termination payments should not exceed a fixed amount or a fixed number of annual wages and in general should not be higher than the non-variable component of remuneration for two years or the equivalent thereof. Termination payments should not be paid if the contract is terminated due to inadequate performance. YES/NO The Remuneration Policy of the EPSO-G UAB Group of Companies stipulates that the companies of the Group do not conclude advance agreements on the amounts of termination benefits (except for the CEOs whose terms of employment are determined by the Board). The amounts of benefits related to the termination of employment relationships are determined by taking into account the mandatory minimum amounts of such benefits established by the norms of labour law, except for exceptional cases when there are objective reasons for the agreement on higher benefits. The relevant Board of the Group company shall be informed of the disbursement of such benefits and the grounds for their payment at its forthcoming meeting. 7.5. In the event that the financial incentive scheme is applied at the company, the remuneration policy should contain sufficient information about the retention of shares after the award thereof. Where remuneration is based on the award of shares, shares should not be vested at least for three years after the award thereof. After vesting, members of the collegial bodies and heads of the administration should retain a certain number of shares until the end of their term in office, subject to the need to compensate for any costs related to the acquisition of shares. NOT APPLICABLE Such schemes are not applied at the Company. 7.6. The company should publish information about the implementation of the remuneration policy on its website, with a key focus on the remuneration policy in respect of the collegial bodies and managers in the next and, where relevant, subsequent financial years. It should also contain a review of how the remuneration policy was implemented during the previous financial year. The information of such nature should not include any details having a commercial value. Particular attention should be paid on the major changes in the company’s remuneration policy, compared to the previous financial year. YES General information on the implementation of the Company’s Remuneration Policy and average salary levels of individual employee groups are publicly disclosed in the Company’s annual report. According to Article 25(5) of the Law of Energy of the Republic of Lithuania, the Company discloses remuneration established to the members of the Company’s management bodies and other benefits related to the functions of the members of the management bodies. Information on remuneration of employees is published on the Company’s website on a quarterly basis. 7.7. It is recommended that the remuneration policy or any major change of the policy should be included on the agenda of the general meeting of shareholders. The schemes under which members and employees of a collegial body receive remuneration in shares or share options should be approved by the general meeting of shareholders. YES The remuneration of the members of the Company’s Board is determined by the General Meeting of Shareholders of the Company. Such schemes are not applied at the Company. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 102 Principle 8: Role of stakeholders in corporate governance The corporate governance framework should recognise the rights of stakeholders entrenched in the laws or mutual agreements and encourage active cooperation between the company and stakeholders in creating the company value, jobs and financial sustainability. In the context of this principle, the concept “stakeholders” includes investors, employees, creditors, suppliers, clients, local community and other persons having certain interests in the company concerned. 8.1. The corporate governance framework should ensure that the rights and lawful interests of stakeholders are protected. YES The Company has adopted the Transparency and Communication Policy of the EPSO-G UAB Group of Companies, which establishes goals to increase awareness and unders- tanding of stakeholders about the activities of the EPSO-G UAB group of companies and individual group companies; to ensure employee engagement; to create and maintain sustainable relationship with stakeholders based on mutual respect. 8.2. The corporate governance framework should create conditions for stakeholders to participate in corporate governance in the manner prescribed by law. Examples of participation by stakeholders in corporate governance include the participation of employees or their representatives in the adoption of decisions that are important for the company, consultations with employees or their representatives on corporate governance and other important matters, participation of employees in the company’s authorised capital, involvement of creditors in corporate governance in the cases of the company's insolvency, etc. YES The Company, together with the representatives of the Company’s employees, conducts consultations, negotiations and briefings on the processes for improving efficiency of the Company’s activities. Under the Company’s collective agreement signed with the representatives of the Company’s employees, the Company informs the representatives of the trade unions about projected changes in the Company, the Company’s financial position, etc. Stakeholders can take part in the corporate governance to the extent permitted by law. 8.3. Where stakeholders participate in the corporate governance process, they should have access to relevant information. YES Please refer to commentary in paragraphs 8.1. and 8.2. 8.4. Stakeholders should be provided with the possibility of reporting confidentially any illegal or unethical practices to the collegial body performing the supervisory function. NO The Company’s website contains the Company’s Code of Conduct that indicates the Trust Line contacts. The Audit Committee operating at the level of the EPSO-G group of companies ensures the functioning of the system of lodging complaints and their handling. It is expected that a system will be developed in the near future to provide information to the Audit Committee operating at the Group level. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 103 Principle 9: Disclosure of information The corporate governance framework should ensure the timely and accurate disclosure of all material corporate issues, including the financial situation, operations and governance of the company. 9.1. In accordance with the company’s procedure on confidential information and commercial secrets and the legal acts regulating the processing of personal data, the information publicly disclosed by the company should include but not be limited to the following: YES The Transparency and Communication Policy of the EPSO-G UAB Group of Companies has been adopted by the Company. Information indicated in this Policy is presented in the Company’s annual report and on the Company’s website. 9.1.1. operating and financial results of the company; YES 9.1.2. objectives and non-financial information of the company; YES 9.1.3. persons holding a stake in the company or controlling it directly and/ or indirectly and/or together with related persons as well as the structure of the group of companies and their relationships by specifying the final beneficiary; YES 9.1.4. members of the company’s supervisory and management bodies who are deemed independent, the manager of the company, the shares or votes held by them at the company, participation in corporate governance of other companies, their competence and remuneration; YES 9.1.5. reports of the existing committees on their composition, number of meetings and attendance of members during the last year as well as the main directions and results of their activities; YES 9.1.6. potential key risk factors, the company’s risk management and supervision policy; YES 9.1.7. the company’s transactions with related parties; YES 9.1.8. main issues related to employees and other stakeholders (for instance, human resource policy, participation of employees in corporate governance, award of the company’s shares or share options as incentives, relationships with creditors, suppliers, local community, etc.); YES 9.1.9. structure and strategy of corporate governance; YES 9.1.10. initiatives and measures of social responsibility policy and anti-corruption fight, significant current or planned investment projects. This list is deemed minimum and companies are encouraged not to restrict themselves to the disclosure of information included into this list. This principle of the Code does not exempt companies from their obligation to disclose information as provided for in the applicable legal acts. YES 9.2. When disclosing the information specified in Item 9.1.1 of recommendation 9.1, it is recommended that the company which is a parent company in respect of other companies should disclose information about the consolidated results of the whole group of companies. YES EPSO-G UAB, as a parent company, discloses consolidated information in the consolidated annual report. ANNUAL REPORT (All amounts are in EUR thousands unless otherwise stated) 104 9.3. When disclosing the information specified in Item 9.1.4 of recommendation 9.1, it is recommended that the information on the professional experience and qualifications of members of the company’s supervisory and management bodies and the manager of the company as well as potential conflicts of interest which could affect their decisions should be provided. It is further recommended that the remuneration or other income of members of the company's supervisory and management bodies and the manager of the company should be disclosed, as provided for in greater detail in Principle 7. YES This information is disclosed in the Company’s annual report and on the Company’s website. 9.4. Information should be disclosed in such manner that no shareholders or investors are discriminated in terms of the method of receipt and scope of information. Information should be disclosed to all parties concerned at the same time. YES The Company publishes information through the information system of the Vilnius Securities Exchange in Lithuanian and English at the same time. The Company publishes information prior to or after a trading session at Vilnius Securities Exchange and presents it at the same time to all markets in which the Company’s securities are traded. The Company does not disclose information that may influence the price of its securities in any comments, interviews or by any other means until such information is published in the information system of the securities exchange. Principle 10: Selection of the company’s audit firm The company’s audit firm selection mechanism should ensure the independence of the report and opinion of the audit firm. 10.1. With a view to obtain an objective opinion on the company’s financial condition and financial results, the company’s annual financial statements and the financial information provided in its annual report should be audited by an independent audit firm. YES An independent auditor is appointed by the General Meeting of Shareholders. 10.2. It is recommended that the audit firm would be proposed to the general meeting of shareholders by the supervisory board or, if the supervisory board is not formed at the company, by the management board of the company. YES The Audit Committee operating at the Group level is actively involved in the selection process of an auditor. The Audit Committee provides a recommendation to the Company’s Board on the auditor’s nomination. The final decision is made by the General Meeting of Shareholders convened by the Board, which also proposes draft decisions. 10.3. In the event that the audit firm has received remuneration from the company for the non-audit services provided, the company should disclose this publicly. This information should also be available to the supervisory board or, if the supervisory board is not formed at the company, by the management board of the company when considering which audit firm should be proposed to the general meeting of shareholders. YES The audit firm provides non-audit services in accordance with the EPSO-G UAB policy on the procurement of non-audit services by EPSO-G UAB group of companies from an audit firm or from any other firm that is part of the audit firm network. The latter policy is approved by the Audit Committee. The provision of non-audit services is supervised by the Audit Committee operating at the Group level, which, as mentioned in paragraph 10.2, is actively involved in the selection process of an auditor. Therefore, the Audit Committee, when submitting a recommendation to the Board on the auditor, has all the necessary information on the auditors. THE COMPANY’S STATEMENT OF FINANCIAL POSITION (All amounts are in EUR thousands unless otherwise stated) 105 Notes At 31 December At 31 December 2022 2021 ASSETS Non-current assets Intangible assets 5 5,484 4,952 Property, plant and equipment 6 361,718 338,051 Right-of-use assets 7 5,592 4,509 Investments in a joint venture 45 - Deferred income tax assets 25 11,085 18,994 Financial assets 9 - 781 Total non-current assets 383,924 367,287 Current assets Inventories 10 3 7 Prepayments 1,622 1,127 Trade receivables under contracts with customers 11 61,080 50,463 Trade receivables 12 2,558 10,200 Other amounts receivable 13 892 9,969 Prepaid income tax 25 28 598 - Loans granted 8 232,008 43,594 Other financial assets 14 7,361 5,359 Cash and cash equivalents 15 499 1,819 Total current assets 334,621 122,538 TOTAL ASSETS 718,545 489,825 EQUITY AND LIABILITIES Equity Share capital 16 146,256 146,256 Share premium 16 8,579 8,579 Legal reserve 17 14,626 14,626 Other reserves 17 47,003 32,034 Retained earnings/(deficit) 17 (49,484) 20,013 Total equity 166,980 221,508 Liabilities Non-current liabilities Non-current borrowings 20 34,285 51,452 Lease liabilities 21 5,299 4,414 Congestion management revenue 22 64,095 88,267 Provisions 23 941 352 Other non-current amounts payable and liabilities 24 34,392 2,270 Total non-current liabilities 139,012 146,755 Current liabilities Current portion of non-current borrowings 20 6,143 14,225 Current portion of lease liabilities 21 403 180 Trade payables 26 70,146 59,454 Current portion of congestion management revenue 22 287,400 20,820 Advance amounts received 27 35,506 10,328 Income tax payable - 3,162 Provisions 23 648 2,507 Other current amounts payable and liabilities 28 12,307 10,886 Total current liabilities 412,553 121,562 Total liabilities 551,565 268,317 TOTAL EQUITY AND LIABILITIES 718,545 489,825 The accompanying notes are an integral part of the financial statements. THE COMPANY’S STATEMENT OF COMPREHENSIVE INCOME (All amounts are in EUR thousands unless otherwise stated) 106 CONFIDENTIAL INFORMATION Notes 2022 2021 Revenue Revenue from electricity transmission and related services 29 418,953 267,258 Other income 30 1,355 3,330 Dividend income 43 307 Total revenue, other and dividend income 420,351 270,895 Operating expenses Expenses for imbalance and balancing electricity 31 (203,588) (91,007) Expenses for electricity ancillary (system) services 31 (111,633) (61,860) Expenses for electricity technological needs 31 (99,576) (40,165) Expenses for electricity and related services (5,309) (1,428) Depreciation and amortisation 5,6,7 (20,582) (21,337) Wages and salaries and related expenses (15,601) (12,365) Repair and maintenance expenses (8,771) (8,058) Telecommunications and IT system expenses (2,214) (1,952) Transport expenses (301) (190) Write-off expenses of property, plant and equipment (461) (127) Reversal of impairment of inventories and amounts receivable 55 97 Impairment of investments 9 - (307) Other expenses (9,833) (7,364) Total operating expenses (477,814) (246,063) Operating profit/(loss) (57,463) 24,832 Finance income 63 21 Finance costs (947) (752) Profit/(loss) before income tax (58,347) 24,101 Income tax Current year income tax income/(expenses) 25 16,772 (9,576) Deferred income tax income/(expenses) 25 (7,909) 5,488 Total income tax 8,863 (4,088) Profit/(loss) for the period (49,484) 20,013 Other comprehensive income that will not be reclassified to profit or loss - - Total comprehensive income/(expenses) for the period (49,484) 20,013 Basic and diluted earnings/(deficit) per share (in EUR) (0.098) 0.040 The accompanying notes are an integral part of the financial statements. THE COMPANY’S STATEMENT OF CHANGES IN EQUITY (All amounts are in EUR thousands unless otherwise stated) 107 CONFIDENTIAL INFORMATION Share Other Retained Share capital premium Legal reserve reserves earnings/(deficit) Total Balance at 1 January 2021 146,256 8,579 14,626 23,144 25,432 218,037 Comprehensive income/(expenses) for the period - - - - 20,013 20,013 Transfer to reserves 17 - - - 8,890 (8,890) - Dividends 18 - - - - (16,542) (16,542) Balance at 31 December 2021 146,256 8,579 14,626 32,034 20,013 221,508 Balance at 1 January 2022 146,256 8,579 14,626 32,034 20,013 221,508 Comprehensive income/(expenses) for the period - - - - (49,484) (49,484) Transfer to reserves 17 - - - 14,969 (14,969) - Dividends 18 - - - - (5,044) (5,044) Balance at 31 December 2022 146,256 8,579 14,626 47,003 (49,484) 166,980 The accompanying notes are an integral part of the financial statements. THE COMPANY’S STATEMENT OF CASH FLOWS (All amounts are in EUR thousands unless otherwise stated) 108 CONFIDENTIAL INFORMATION Notes 2022 2021 Cash flows from operating activities Profit/(loss) for the period (49,484) 20,013 Adjustments for non-cash items: Depreciation and amortisation expenses 5,6,7 20,582 21,337 Impairment of financial assets - 307 Impairment/(reversal of impairment) of assets (55) (97) Loss on disposal of financial assets 9 121 - Income tax expenses/(income) 25 (8,863) 4,088 (Gain)/loss on disposal/write-off of property, plant and equipment 461 127 Elimination of results of financing and investing activities: Interest income (20) (11) Interest expenses 678 749 Dividend income (43) (307) Other finance costs/(income) 226 (7) Changes in working capital: (Increase)/decrease in trade receivables and other amounts receivable (22,423) (28,210) (Increase)/decrease in inventories, prepayments and other current 726 (9) assets Increase/(decrease) in amounts payable, grants, deferred revenue and advance amounts received 22,456 39,583 Changes in other financial assets (2,002) 21,161 Income tax (paid) (14,987) (12,351) Net cash inflow/(outflow) from operating activities (52,627) 66,373 Cash flows from investing activities (Acquisition) of property, plant and equipment and intangible assets (74,157) (57,457) Grants received 19 72,086 22,496 Loans granted to related parties 8 (188,414) (43,594) Loan repayments received 8 - 1,000 Congestion management revenue received 22 272,502 44,505 Acquisition of a joint venture 1 (45) - Interest received - 29 Dividends received 43 307 Financial assets acquired 9 (13,090) - Financial assets disposed 9 13,786 - Net cash inflow/(outflow) from in investing activities 82,711 (32,714) Cash flows from financing activities Repayments of borrowings (25,249) (14,225) Settlement of lease liabilities 21 (362) (333) Interest paid (757) (817) Dividends paid (5,036) (16,498) Net cash (outflow) from financing activities (31,404) (31,873) Increase/(decrease) in cash and cash equivalents (1,320) 1,786 Cash and cash equivalents at the beginning of the period 15 1,819 33 Cash and cash equivalents at the end of the period 15 499 1,819 The accompanying notes are an integral part of the financial statements. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 109 1. General information LITGRID AB (the “Company”) is a public limited liability company registered in the Republic of Lithuania. The address of its registered office is Karlo Gustavo Emilio Manerheimo g. 8, LT-05131, Vilnius, Lithuania. The Company was established as a result of the unbundling of Lietuvos Energija AB operations. The Company was registered with the Register of Legal Entities on 16 November 2010. The Company’s code is 302564383. LITGRID AB is an operator of electricity transmission system, operating electricity transmissions in the territory of Lithuania and ensuring stability of operation of the whole electric power system. The Company is also responsible for the integration of the Lithuanian electric power system into the European electricity infrastructure and the single electricity market. On 27 August 2013, the National Energy Regulatory Council (the “NERC”) granted a licence to the Company to engage in electricity transmission activities for an indefinite term. The principal objectives of the Company’s activities include ensuring stability and reliability of the electricity system in the territory of the Republic of Lithuania within the areas of its competence, creation of objective and non-discriminatory conditions for the use of the transmission networks, management, use and disposal of electricity transmission system assets and its appurtenances. As at 31 December 2022, the Company’s authorised share capital amounted to EUR 146,256,100.20 and it was divided into 504,331,380 ordinary registered shares with the nominal value of EUR 0.29 each. All shares are fully paid. As at 31 December 2022 and 31 December 2021, the Company’s shareholder structure was as follows: The Company’s shareholders Number of shares held shares held (%) EPSO-G UAB 491,736,153 97.5 Other shareholders 12,595,227 2.5 Total 504,331,380 100.0 The ultimate controlling shareholder of EPSO-G UAB (company code 302826889, address: Gedimino pr. 20, Vilnius) is the Ministry of Energy of the Republic of Lithuania. As from 22 December 2010, the shares of the Company are listed on the additional trading list of NASDAQ OMX Vilnius Stock Exchange, issue ISIN code LT0000128415. The Company’s investments in the joint venture were as follows: Shareholding Shareholding Address of the as at as at company’s registered 31 December 31 December Company name office 2022 2021 Provision of services ensuring safety Profile of activities Kadaka tee 42, EE- and reliability of the electricity system Baltic RCC OÜ 12915 Tallinn Eesti 33.33% - and coordination between the transmission network operators of the Baltic region As at 31 December 2022, the Company had 389 (31 December 2021: 335) employees. 2. Summary of principal accounting policies The principal accounting policies adopted in the preparation of the Company’s financial statements for the year ended 31 December 2022 are summarised below. 2.1 Basis of preparation The Company’s financial statements for the year ended 31 December 2022 have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and meet them. The financial statements have been prepared on a historical cost basis, except for property, plant and equipment which is recorded at revalued amount, less accumulated depreciation and estimated impairment losses, and financial assets measured at fair value through other comprehensive income. Amounts in these financial statements are presented in thousands of euro (EUR), unless otherwise stated. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 110 The statement of cash flows is prepared indirectly. The Company's financial year coincides with the calendar year. The Company’s management approved these financial statements on 16 March 2023. The shareholders of the Company have a statutory right to approve or not to approve these financial statements and require that management prepare a new set of financial statements. Accounting policies adopted in the preparation of the financial statements are consistent with those of the previous financial year except as follows: a) Adoption of new and/or amended IFRS and interpretations of the International Financial Reporting Interpretations Committee (IFRIC) For the year ended 31 December 2022 the Company for the first time have been adopted these IFRS and their amendments and IFRIC: Proceeds before intended use, Onerous contracts – cost of fulfilling a contract, Reference to the Conceptual Framework – narrow scope amendments to IAS 16, IAS 37 and IFRS 3, and Annual Improvements to IFRSs 2018-2020 – amendments to IFRS 1, IFRS 9, IFRS 16 and IAS 41 (issued on 14 May 2020 and effective for annual periods beginning on or after 1 January 2022). • The amendment to IAS 16 prohibits an entity from deducting from the cost of an item of PPE any proceeds received from selling items produced while the entity is preparing the asset for its intended use. The proceeds from selling such items, together with the costs of producing them, are now recognised in profit or loss. An entity will use IAS 2 to measure the cost of those items. Cost will not include depreciation of the asset being tested because it is not ready for its intended use. The amendment to IAS 16 also clarifies that an entity is ‘testing whether the asset is functioning properly’ when it assesses the technical and physical performance of the asset. The financial performance of the asset is not relevant to this assessment. An asset might therefore be capable of operating as intended by management and subject to depreciation before it has achieved the level of operating performance expected by management. • The amendment to IAS 37 clarifies the meaning of ‘costs to fulfil a contract’. The amendment explains that the direct cost of fulfilling a contract comprises the incremental costs of fulfilling that contract; and an allocation of other costs that relate directly to fulfilling. The amendment also clarifies that, before a separate provision for an onerous contract is established, an entity recognises any impairment loss that has occurred on assets used in fulfilling the contract, rather than on assets dedicated to that contract. • IFRS 3 was amended to refer to the 2018 Conceptual Framework for Financial Reporting, in order to determine what constitutes an asset or a liability in a business combination. It was also clarified that the acquirer should not recognise contingent assets, as defined in IAS 37, at the acquisition date. • The amendment to IFRS 9 addresses which fees should be included in the 10% test for derecognition of financial liabilities. Costs or fees could be paid to either third parties or the lender. Under the amendment, costs or fees paid to third parties will not be included in the 10% test. • Illustrative Example 13 that accompanies IFRS 16 was amended to remove the illustration of payments from the lessor relating to leasehold improvements. The reason for the amendment is to remove any potential confusion about the treatment of lease incentives. • IFRS 1 allows an exemption if a subsidiary adopts IFRS at a later date than its parent. • The requirement for entities to exclude cash flows for taxation when measuring fair value under IAS 41 was removed. This amendment is intended to align with the requirement in the standard to discount cash flows on a post-tax basis. The Company’s management has assessed that these amendments will have no impact on the Company’s financial statements. Covid-19-Related Rent Concessions – Amendments to IFRS 16 (issued on 31 March 2021 and effective for annual periods beginning on or after 1 April 2021). In May 2020 an amendment to IFRS 16 was issued that provided an optional practical expedient for lessees from assessing whether a rent concession related to COVID-19, resulting in a reduction in lease payments due on or before 30 June 2021, was a lease modification. An amendment issued on 31 March 2021 extended the date of the practical expedient from 30 June 2021 to 30 June 2022. The Company’s management has assessed that these amendments will have no significant impact on the Company’s financial statements because of a rent concession related to COVID-19 do not apply to the Company. b) Standards, amendments and interpretations that have been endorsed by the European Union, but are not yet effective and have not been early adopted by the Company Amendments to IAS 1 and IFRS Practice Statement 2: Disclosure of Accounting policies (issued on 12 February 2021 and effective for annual periods beginning on or after 1 January 2023). IAS 1 was amended to require companies to disclose their material accounting policy information rather than their significant accounting policies. The amendment provided the definition of material accounting policy information. The amendment also clarified that accounting policy information is expected to be material if, without it, the users of the financial statements would be unable to understand other material information in the financial statements. The amendment provided illustrative examples of accounting policy information that is likely to be considered material NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 111 to the entity’s financial statements. Further, the amendment to IAS 1 clarified that immaterial accounting policy information need not be disclosed. However, if it is disclosed, it should not obscure material accounting policy information. To support this amendment, IFRS Practice Statement 2, ‘Making Materiality Judgements’ was also amended to provide guidance on how to apply the concept of materiality to accounting policy disclosures. The Company’s management intends to review the accounting policy disclosures. Amendments to IAS 8: Definition of Accounting Estimates (issued on 12 February 2021 and effective for annual periods beginning on or after 1 January 2023). The amendment to IAS 8 clarified how companies should distinguish changes in accounting policies from changes in accounting estimates. The Company’s management is currently assessing the impact of these amendments on its financial statements. Deferred tax related to assets and liabilities arising from a single transaction – Amendments to IAS 12 (issued on 7 May 2021 and effective for annual periods beginning on or after 1 January 2023). The amendments to IAS 12 specify how to account for deferred tax on transactions such as leases and decommissioning obligations. In specified circumstances, entities are exempt from recognising deferred tax when they recognise assets or liabilities for the first time. Previously, there had been some uncertainty about whether the exemption applied to transactions such as leases and decommissioning obligations – transactions for which both an asset and a liability are recognised. The amendments clarify that the exemption does not apply and that entities are required to recognise deferred tax on such transactions. The amendments require companies to recognise deferred tax on transactions that, on initial recognition, give rise to equal amounts of taxable and deductible temporary differences. The Company’s management is currently assessing the impact of these amendments on its financial statements. IFRS 17 Insurance contracts (issued on 18 May 2017 and amended on 1 January 2021 and effective for annual periods beginning on or after 1 January 2023). IFRS 17 replaces IFRS 4, which has given companies dispensation to carry on accounting for insurance contracts using existing practices. As a consequence, it was difficult for investors to compare the financial performance of insurance companies, which would otherwise be similar. IFRS 17 is a single standard establishing recognition, measurement, presentation and disclosure requirements for all types of insurance contracts, including reinsurance contracts that an insurer holds. The standard requires that similar principles are applied to reinsurance contracts held and to investment contracts containing a discretionary participation feature. Amendments to IFRS 17 and an amendment to IFRS 4 (issued on 25 June 2020 and effective for annual periods beginning on or after 1 January 2023). The amendments include a number of clarifications intended to ease implementation of IFRS 17, simplify some requirements of the standard and transition. For the Company’s management assessment the amendment of IFRS 17 will have no significant impact on the Company’s financial statements since it is not engaged in any insurance activities. 2.2 Assets held for sale The Company classifies non-current assets and disposal groups as held for sale, if their carrying amount is recovered through a disposal rather than through continuing use. Such non-current assets and disposal groups classified as held for sale are measured at the lower of carrying amount and fair value, less costs to sell. An asset or disposal group can qualify for recognition as held for sale only when the sale is highly probable and as asset or disposal group is available for immediate sale in its present condition. Actions required to complete the sale should indicate that it is unlikely that the sale will be withdrawn. Management must be committed to implement a probable sale within one year after the date of the reclassification. Assets and liabilities classified as held for sale are presented separately in the statement of financial position as current items. 2.3 Investments in a joint venture Joint control is the contractually agreed sharing of control over an economic activity, and exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers). 2.4 Property, plant and equipment and intangible assets Assets with the useful life over one year are classified as property, plant and equipment. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 112 All property, plant and equipment is shown at revalued amounts, based on periodic (at least every 5 years) property valuations, less the amounts of accumulated depreciation, recognised grants and impairment losses. Any accumulated depreciation and impairment losses at the date of revaluation are eliminated against gross carrying amount of the asset and net amount is restated to the revalued amount of the assets. Increases in the carrying amount arising on the first revaluation of property, plant and equipment are credited to the revaluation reserve directly in equity and decreases are recognised in profit or loss. During the first revaluation each object of the asset and the item within that object were evaluated by indicating the remaining useful life established for that item of the asset. Decreases in the carrying amount arising on the subsequent revaluation of property, plant and equipment that offset previous increases of the same asset are charged against the revaluation reserve directly in equity, and all other decreases are charged to profit or loss. Increases in the value of property plant and equipment are allocated in proportion to the net book amount of each item of the asset by indicating the remaining useful life established for that item, by eliminating capitalised interest, assets of funds of new consumers from 2015 to 2018 accounted for as revenue, assets depreciated to residual value through the reduction of the items’ accumulated impairment of the previous years. Revaluation increases in the value of property plant and equipment that offset previous decreases are recognised in profit or loss. All other increases in the carrying amount arising on subsequent revaluations of property, plant and equipment are credited to revaluation reserve. Decreases in the value of property plant and equipment are allocated in proportion to the net book amount of each item of the asset by indicating the remaining useful life established for that item, by eliminating capitalised interest, assets of funds of new consumers from 2015 to 2018 accounted for as revenue, assets depreciated to residual value through the reduction of accumulated increases of the previous years which were accounted for as a revaluation reserve. Each year the difference between depreciation based on the revalued carrying amount of the asset charged to the statement of comprehensive income and depreciation based on the asset’s original cost is transferred from revaluation reserve to retained earnings taking into account the effect of deferred income tax. After the sale or write-off of a property unit, any balance of the revaluation reserve related to this property is transferred to retained earnings. Construction work in progress represents non-current fixed assets under construction. The cost of such assets includes design, construction works, plant and equipment being installed, and other directly attributable costs. Property, plant, and equipment is recorded at acquisition (production) cost, less grants received/receivable for the acquisition of property, property, plant, and equipment. Grants comprise financing from the EU support funds, a portion of congestion management revenue designated for the financing of investments, payments for the expenses incurred during the connection of producers to the transmission network and performance of works for the relocation/reconstruction of the transmission network’s installations initiated by Intangible assets Intangible assets are initially recognised at cost. Intangible assets are recognised only when it is probable that future economic benefits associated with these assets will flow to the Company and the value of assets can be measured reliably. After initial recognition, intangible assets are carried at cost, less accumulated amortisation and accumulated impairment losses, if any. Goodwill at initial recognition is measured as a positive difference between the historical cost and acquired net asset value and after the initial recognitions it is carried at acquisition value less accumulated impairment, if any. Depreciation and amortisation Depreciation of property, plant and equipment and amortisation of intangible assets, except for land, construction work in progress, statutory servitudes and protection zones of the transmission network, is calculated using the straight-line method over estimated useful lives of the asset. The estimated useful lives, residual values and depreciation/amortisation method are reviewed by the Company at each year-end to ensure that they are consistent with the expected pattern of economic benefits from these assets. The effect of changes in estimates, if any, is accounted for on a prospective basis. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 113 Estimated useful lives of property, plant and equipment and intangible assets are as follows: Categories of property, plant and equipment and intangible assets Useful lives (in years) Buildings 20 – 75 Structures and machinery, whereof - Constructions of transformer substations 30 - Structures, machinery and equipment, whereof: - 400, 330, 110, 35 kV electricity transmission lines 40 – 55 - 400, 330, 110, 35, 6-10 kV switchyard’s electrical installations 30 – 35 - 400, 330, 110, 35, 6-10 kV capacity transformers 35 - electricity and communication devices 20 – 25 - electrical installations, whereof: 15 – 35 - relay security and automation equipment 15 – 35 - technological and dispatch control equipment 8 - other equipment 5 – 20 Other property, plant and equipment, whereof: - computer hardware and communication equipment 3 – 10 - inventory, tools 4 – 10 Intangible assets, whereof: 3 – 4 - statutory servitudes and protection zones of the transmission network Not subject to amortisation Statutory servitudes and protection zones of the transmission network have an indefinite useful life because the right to use the established zones is unlimited in time. Gain or loss on disposal of non-current assets is calculated as the difference between the proceeds from sale and the book value of the disposed asset and is recognised in the statement of comprehensive income of the reporting year. Subsequent repair costs incurred when performing major improvements are included in the carrying amount of property, plant and equipment, only when it is probable that future economic benefits associated with these costs will flow to the Company and these costs can be measured reliably. Repair costs for the asset category of overhead lines and cables are accounted for as component of item of assets by estimating the useful life of the new asset. The carrying amount of the replaced part is derecognised. All other repair and maintenance costs are recognised as expenses in the statement of comprehensive income during the financial period in which they are incurred. 2.5 Impairment of property, plant and equipment and intangible assets At each reporting date, the Company reviews the carrying amounts of property, plant and equipment (including right-of-use assets) and intangible assets to determine whether there are any indications that those assets have suffered an impairment loss. If any such indication exists, the recoverable value of the asset is estimated in order to determine the extent of the impairment loss (if any). The recoverable amount is the higher of the asset’s fair value less costs to sell and value in use. In assessing value in use, the expected future cash flows are discounted to their present value using the discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying value, the carrying value of the asset (cash-generating unit) is reduced to its recoverable value. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a decrease of revaluation reserve. Where an impairment loss subsequently reverses, the carrying value of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying value does not exceed the carrying value that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase (without exceeding the amount of previous impairment). Each year the Company estimates the recoverable amount of intangible assets with indefinite life in order to estimate the impairment of such assets (if any). 2.6 Financial assets As a result of the adoption of IFRS 9 Financial instruments, the Company classifies its financial assets into the following three new categories: - financial assets subsequently measured at amortised cost; NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 114 - financial assets subsequently measured at fair value through other comprehensive income; and - financial assets subsequently measured at fair through profit or loss. Subsequent to initial recognition, financial assets are classified into the afore-mentioned categories based on the business model the Company applies when managing its financial assets. The business model applied to the group of financial assets is determined at a level that reflects how all groups of financial assets are managed together to achieve a particular business objective of the Company. The intentions of the Company’s management regarding separate instruments has no effect on the applied business model. The Company may apply more than one business model to manage its financial assets. The business model for managing financial assets is a matter of fact and not merely an assertion. It is typically observable through the activities that the Company undertakes to achieve the objective of the business model. The Company recognises a financial asset in its statement of financial position when, and only when, the Company becomes party to the contractual provisions of the instrument. The purchase or sale of financial assets is recognised and derecognised, as applicable, using the trade date accounting. At initial recognition, the Company measures financial assets at fair value, except for trade receivables that do not have a significant financing component. At initial recognition, the Company measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs comprise all fees and commission that the Company would not have paid if it had not entered into an agreement on the financial instrument. If the fair value of the financial asset at initial recognition differs from the transaction price, the difference is recognised in profit or loss. In view of the business model applied for managing the group of financial assets, the accounting for financial assets is as follows: Financial assets measured at amortised cost Cash and cash equivalents comprise cash balances in the Company’s bank accounts and their equivalents in various currencies the use of which is not restricted. Cash equivalents comprise short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less and that are subject to an insignificant risk of change in value. Loans granted by the Company and amounts receivable are accounted for under the business model the purpose of which is to hold financial assets in order to collect contractual cash flows that can contain cash flows related to the payment of the principal amount and interest inflows. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the date of the statement of financial position. These are classified as non-current assets. Loans and receivables are initially recognised at cost (the fair value of consideration receivable) and subsequently carried at amortised cost using the effective interest rate method. Gains or losses are recognised in the statement of comprehensive income when the loans and receivables are derecognised, impaired or amortised Financial assets measured at fair value through profit or loss The Company measures financial assets, which are stated at fair value in subsequent periods, through profit or loss, using the business model whose objective is achieved by both collecting contractual cash flows and selling financial assets. The Company does not have any financial assets held for trading and acquired for the purpose of selling in the near term and attributes to this category only financial assets arising from the disposal of business or investments classified as non-equity contingent consideration. Financial assets measured at fair value through other comprehensive income The Company had equity securities that were classified under the category of financial assets measured at fair value through comprehensive income. Effective interest method The effective interest method is used in the calculation of the amortised cost of a financial asset and in the allocation of interest income over the relevant period in the statement of comprehensive income. The effective interest rate is the rate that exactly discounts estimated future cash inflows through the expected life of the financial asset to the gross carrying amount of the financial asset that shows the amortised cost of the financial asset, before adjusting for any loss allowance. When calculating the effective interest rate, the Company estimates the expected cash flows by considering all the contractual terms of the financial instrument (for example, prepayment, extension, call and similar options) but does not NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 115 consider the expected credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts. There is a presumption that the cash flows and the expected life of a group of similar financial instruments can be estimated reliably. However, when it is not possible to reliably estimate the cash flows or the expected life of a financial instrument (or group of financial instruments), the Company uses the contractual cash flows over the full contractual term of the financial instrument (or group of financial instruments). Expected credit losses Credit losses incurred by the Company are calculated as the difference between all contractual cash flows that are due to the Company in accordance with the contract and all the cash flows that the Company expects to receive (i.e. all cash shortfalls), discounted at the original effective interest rate. The Company estimates cash flows by considering all contractual terms of the financial instrument through the expected life of that financial instrument, including cash flows from the collateral held or other credit enhancements that are integral to the contractual terms. Expected credit losses show the weighted average of credit losses with the respective risks (probability) of a default occurring as the weights. Lifetime expected credit losses are the expected credit losses that result from all possible default events over the period from the date of initial recognition of a financial asset to the subsequent date of settlement of the financial asset or ultimate write-off of the financial asset. The Company seeks for lifetime expected credit losses to be recognised before a financial instrument becomes past due. Typically, credit risk increases significantly before a financial instrument becomes past due or other lagging borrower-specific factors (for example, a modification or restructuring) are observed. Consequently, when reasonable and supportable information that is more forward-looking than past due information is available without undue cost or effort, it must be used to assess changes in credit risk. Expected credit losses are recognised by taking into consideration individually or collectively assessed credit risk of loans granted and trade receivables. Credit risk is assessed based on all reasonable and verifiable information including future oriented information. The lifetime expected credit losses of trade receivables are assessed based on the individual assessment basis. The Company’s management decides on the performance of the assessment on an individual basis reflecting the possibility of obtaining information on the credit history of a particular borrower, its financial position as at the date of assessment, including forward- looking information that would allow to timely determine whether there has been a significant increase in the credit risk of that particular borrower, thus enabling making judgement on the recognition of lifetime expected credit losses in respect of that particular borrower. The lifetime expected credit losses of trade receivables are recognised at the recognition of amounts receivable. When granting the loan, the Company assesses and recognises 12-month expected credit losses. In subsequent reporting periods, in case there is no significant increase in credit risk related to the borrower, the Company adjusts the balance of 12- month expected credit losses in view of the outstanding balance of the loan at the assessment date. Having determined that the financial position of the borrower has deteriorated significantly compared to the financial position that existed upon the issue of the loan, the Company records all lifetime expected credit losses of the loan. The latest point at which the Company recognises all lifetime expected credit losses of the loan granted is identified when the borrower is late to pay a periodic amount or the total debt for more than 30 days. In case of other evidence available, the Company accounts for all lifetime expected credit losses of the loan granted regardless of the more than 30 days past due presumption. Loans for which lifetime expected credit losses were calculated are considered credit-impaired financial assets. Credit-impaired financial assets A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash flows of that financial asset have occurred. Evidence that a financial asset is credit-impaired include observable data about the following events: a) significant financial difficulties of the borrower; b) a breach of contract, such as failure to pay the debt or regular payment in due time; c) a concession granted to the borrower due to economic or contractual reasons relating to the borrower’s financial difficulties, which otherwise would not be granted by the lender; d) it is becoming probable that the borrower will enter bankruptcy or other financial reorganisation; e) the disappearance of an active market for that financial asset because of financial difficulties; f) financial assets are purchased or granted at a deep discount that reflects the incurred credit losses. The combined effect of several events that may occur simultaneously or subsequently throughout the term of validity of the agreement on the financial assets may have caused financial assets to become credit-impaired. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 116 The lifetime expected credit losses of loans receivable and trade receivables is recognised in profit or loss through the contrary account of doubtful receivables. The Company derecognises loans receivable and trade receivables when it loses the right to receive contractual cash flows from financial assets. Derecognition of financial assets The Company derecognises financial assets in case of the following: - the rights to receive cash flows from the asset have expired; - the Company has retained the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a “pass through” arrangement; or - the Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset: - if the Company has not retained control, it shall derecognise the financial asset and recognise separately as assets or liabilities any rights and obligations created or retained in the transfer; - if the Company has retained control, it shall continue to recognise the financial asset to the extent of its continuing involvement in the financial asset. Whether the Company has retained control of the transferred asset depends on the transferee's ability to sell the asset. If the transferee has the practical ability to sell the asset in its entirety to an unrelated third party and is able to exercise that ability unilaterally and without needing to impose additional restrictions on the transfer, the Company has not retained control. In all other cases, the Company has retained control. 2.7 Inventories Inventories are initially recorded at acquisition cost. Subsequent to initial recognition, inventories are stated at the lower of cost and net realisable value. Acquisition cost of inventories includes acquisition price and related taxes that are not subsequently recovered from tax administration authorities and costs associated with bringing inventory into their current condition and location. Cost is determined on the first-in, first-out (FIFO) basis. Net realisable value is the estimated selling price, less the estimated costs of completion and selling expenses. Inventories required to be stored as a reserve and the management does not expected these inventories to be used over the normal business cycle of the Company or 12 months are classified as non-current assets. Depreciation is calculated for reserve inventories that are classified as non-current assets. The depreciation rate applied reflects an expected useful life of such inventories. 2.8 Trade payables and other financial liabilities, borrowings Financial liabilities, borrowings Financial liabilities, including borrowings, are recognised initially at fair value, less transaction costs. In subsequent periods, financial liabilities are measured at amortised cost using the effective interest rate method. Interest expense is recognised using the effective interest rate method as disclosed in paragraph 2.6 of the notes to the financial statements. If a financing agreement concluded before the date of the statement of financial position proves that the liability was non-current as of the date of the statement of financial position, that financial liability is classified as non-current. Derecognition of financial liabilities A financial liability is derecognised when the obligation under the liability is settled, cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts of financial liabilities is recognised in the statement of comprehensive income. Trade payables Trade payables represent commitments to pay for goods and services acquired from suppliers in the ordinary course of business. Trade payables are classified as current liabilities if the term of their settlement is not longer than one year; otherwise they are included in non-current liabilities. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 117 2.9 Dividend distribution Dividend distribution to the Company’s shareholders is recognised as a liability in the Company’s financial statements in the period in which dividends are approved by the Company’s shareholders. If dividends for equity holders (as laid down in IAS 32 Financial instruments: Disclosure and presentation) are recognised and declared after the date of the statement of financial position, the Company is not required to recognise these dividends as liabilities as at the date of the statement of financial position. If dividends are recognised and declared after the date of the statement of financial position but before the date when the management is authorised to issue financial statements, in such a case dividends are not recognised as a liability as at the date of the statement of financial position because they do not meet the criteria of a present obligation according to IAS 37. Such dividends are disclosed in notes to the financial statements based on IAS 1 Presentation of financial statements. 2.10 Foreign currency Items included in the Company’s financial statements are measured using the national currency of the primary economic environment in which the entity operates, i.e. the euros. All financial information presented in the euros has been rounded to the nearest thousand unless otherwise stated. Due to rounding effects, some of the tabular amounts may not add up. Foreign currency transactions are recorded in the euros using the exchange rates of the euro against foreign currencies prevailing at the dates of transactions as established by the European Central Bank and the Bank of Lithuania. Monetary assets and liabilities are translated into the euros using the exchange rate prevailing at the date of preparation of financial statements. Gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities are recognised as the profit or loss of the reporting period. 2.11 Grants Asset-related grants The government and the EU grants received in the form of non-current assets or designated for the purchase of non-current are treated as asset-related grants. Public service obligation (“PSO”) service fees allocated to the Company for the preparation and implementation of the strategic projects and a portion of congestion management revenue, which is designated to finance investments, are recognised as asset-related grants. These grants are accounted for by reducing by the carrying amount of respective non-current assets. In the statement of comprehensive income grants are recognised over the useful life of the asset by reducing depreciation expenses. Grants received in advance related to the acquisition of non-current assets are stated as non-current liabilities until the moment of acquisition of such assets. Grants receivable are included in other amounts receivable when the agreement whereby the European Commission commits to finance the strategic projects provides firm evidence confirming that the financing will be received. Income-related grants Grants received as a compensation for expenses or unearned income of the current or previous reporting period, also, all grants, which are not grants related to assets, are defined as grants related to income. Income-related grants are recognised as used in parts to the extent of expenses incurred during the reporting period or unearned income to be compensated by that grant. Income-related grants are recognised in profit or loss by increasing other income over the period in which the grant is received or when there is reasonable assurance that the grant will be received and that the Company complies with the conditions for the allocation of the grant established in the grant agreement. 2.12 Connection of new consumers and producers The connection of producers is accounted for similarly to the principle applicable to grants by offsetting the acquisition cost of assets created for the connection of the producer against the compensation receivable from the connected producer. In case of relocation works of the electricity transmission network when major improvements are performed and when the assets are created by the Company, the grant principle is applied and the cost of the created assets is offset against the amount of compensations receivable from the customer, and when the assets are created by the customer and transferred to the Company free of charge, the assets received from the third parties are offset against the value of the assets. If the major improvement was not performed during the relocation and the asset was created by the Company, such asset is not recognised, i.e. compensation income from the customer and expenses for the creation of such asset are accounted for. When no major improvement is performed and the asset is created by the customer, the asset received from the customer free of charge is not recognised and accounted for in off- balance sheet accounts. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 118 Revenue received from connection of new consumers is accounted for by the Company over the useful life of the created asset because the connection of a new consumer is related to further consumption and related revenue. 2.13 Lease liabilities Initial measurement of lease liability The amount of the initial measurement of lease liability is calculated as the present value of lease payments not paid at the commencement date. Lease payments are discounted using the incremental borrowing rate, which is applied when the contractual interest rate is not known. The incremental borrowing rate is determined by the rate at which the Company would be able to borrow funds for the purpose of acquiring certain assets for a respective period. At the commencement date, lease payments included in the measurement of a lease liability include: - fixed lease payments less any lease incentives receivable; - variable lease payments that depend on an index or a rate; - amounts expected to be payable by the Company under residual value guarantees; - the exercise price of the purchase option, if exercise of that option by the Company is reasonably certain; - fines for the termination of the lease, if it is assumed that the Company will exercise the option to terminate the lease during the lease term. Subsequent measurement of lease liability Subsequent to initial recognition, changes in the value of the Company’s lease liability are reflected by: - increasing the value of the liability by the amount of interest charged; - reducing the carrying amount by the lease payments made; - remeasuring the liability for lease modifications or revised payments. Remeasurement of lease liability Subsequent to initial recognition, the lease liability is remeasured to reflect changes in lease payments. The Company treats remeasurements as adjustments to the right-of-use assets. If the carrying amount the right-of-use assets is reduced to zero and the lease liability is reduced as well, the Company recognises any remaining amount of the remeasurement in profit or loss. Revised discount rate The Company remeasures the lease liability by discounting the revised lease payments using the revised discount rate if the lease term changes. The Company calculates the revised lease payments on the basis of the revised lease term or whenever there is a change in the option to purchase the leased property, depending on events and circumstances, in the context of the option to purchase. In the event of a change in the lease term or a change in the assessment of a purchase option, the Company sets the revised discount rate as the lessee's incremental borrowing rate at the remeasurement date. Unchanged discount rate The Company determines the revised lease payments for the remaining lease term on the basis of the revised contractual payments. When discounting revised rents, the Company uses the unchanged discount rate unless lease payments change due to changes in variable interest rates. In this case, the Company uses a revised discount rate that reflects changes in the interest rate. Lease modifications The Company treats a lease modification as a separate lease if both of the following conditions are met: - the modification increases the scope of the lease by adding the right to use one or more underlying assets; and - the consideration for the lease increases by an amount equivalent to the stand-alone price for the increase in scope and any appropriate adjustments to that stand-alone price to reflect the circumstances of the particular contract. For a modification that is not a separate lease, at the effective date of the modification the Company: - allocates the consideration in the modified contract; - establishes the term of the modified lease; and - remeasures the lease liability by discounting the revised lease payments using the revised discount rate. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 119 When a lease modification is not accounted for as a separate lease, the Company accounts for the adjustment to the lease liability: - by decreasing the carrying amount of the right-of-use assets to reflect the full or partial termination of the lease due to lease modifications by which the scope of the lease is reduced. Any gain or loss related to a full or partial termination of the lease is recognised by the Company in profit or loss; - by making a corresponding adjustment to the right-of-use asset for all other lease modifications. The Company presents lease liabilities separately from other liabilities in the statement of financial position. Interest expenses related to lease liabilities are reported separately from the depreciation of the right-of-use assets. Interest expenses related to lease liabilities is a component of finance costs which is presented in the statement of comprehensive income. 2.14 Provisions Provisions are recognised only when the Company has a legal obligation or irrevocable commitment as a result of past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the effect of the time value of money is material, the amount of provision is discounted using the effective pre-tax discount rate set based on the interest rates for the period and taking into account specific risks associated with the provision as appropriate. Where discounting is used, the increase in the provision due to the passage of time is recognised as borrowing costs. 2.15 Employee benefits (a) Social security contributions The Company pays social security contributions to the state Social Security Fund (the “Fund”) on behalf of its employees based on the defined contribution plan in accordance with the local legal requirements. A defined contribution is a plan under which the Company pays fixed contributions into the Fund and will have no legal or constructive obligations to pay further contributions if the Fund does not hold sufficient assets to pay all employees benefits relating to employee service in the current and prior period. Social security contributions are recognised as expenses on an accrual basis and included in payroll expenses. (b) Bonus plans The Company recognises a liability and an expense for bonuses where contractually obliged or where there is a past practice that has created a constructive obligation. (c) Pension benefits to employees of retirement age According to the laws of the Republic of Lithuania and the Collective Agreement effective at LITGRID AB, each employee leaving the Company at the retirement age is entitled to a one-off benefit. A liability for such payments is recognised in the balance sheet and it reflects the present value of these payments at the date of the financial statements. At each reporting date, the long-term employee benefit obligation is estimated with reference to actuary valuations using the projected relative unit method. The present value of the defined long-term employee benefit obligation is determined by discounting the estimated future cash flows using the effective interest rates as set for government debentures denominated in a currency in which payments to employees are expected to be made and with maturity similar to that of the related liability. 2.16 Congestion management revenue The Company acquires the right to congestion management revenue when different electricity market prices occur in Lithuania, Sweden, Poland and Latvia as a result of insufficient capacity of electricity lines. Revenue that was received as a result of price differences at different bidding areas is distributed equally by the power exchange operator (Nord Pool AS) to the transmission system operators of the countries which operate the interconnections. Regulation (EU) No 2019/943 of the European Parliament and of the Council of 5 June 2019 on conditions for access to the network for cross-border exchanges in electricity stipulates that congestion management revenue may be used in the following order of priority: a) When revenue is used for guaranteeing availability of the allocated capacity of the interconnections, it is recognised as income in the period during which the related expenses are incurred. In case of unplanned disconnection of the electricity interconnection and when the trade in the interconnection’s capacities has already been completed at the electricity exchange (i.e. when they have already been allocated), the operators of the line ensure that the capacities traded are available to the market participants. In such a case, the operators incur costs that arise as a result of the price difference between the price of electricity traded by the operators and the price of balancing and (or) imbalance electricity purchased/sold by the Company. b) When revenue is used for maintaining or increasing the interconnections’ capacities, congestion management revenue is accounted for using the accounting policies applicable to grants, i.e. initially congestion management revenue is recognised as liability and recorded by reducing the value of the asset concerned, and subsequently it is recognised by reducing depreciation expenses of the related asset over the useful life of that asset. Land 99 years Motor vehicles from 2 to 4 years Buildings from 2 to 3 years Other property, plant and equipment from 2 to 3 years NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 121 Revenue is recognised when it is probable that economic benefits associated with a transaction will flow to the Company, and when a reliable estimate of the amount of revenue can be made. Revenue is measured at the fair value of the consideration received or receivable, net of value added tax and discounts. Revenue from electricity transmission and related services This group of the Company’s revenue comprises revenue from electricity transmission, provision of system services, trade in imbalance and balancing electricity, congestion revenue, revenue from connection of new consumers, PSO services and other revenue related to electricity transmission and system services. Revenue from contracts with customers comprises revenue from electricity transmission, system services, trade in imbalance and balancing electricity and revenue from connection of new consumers, PSO services and other related revenue. The Company recognises revenue from contracts with customers over the reporting period in which the performance obligation is satisfied, i.e. the control of the good is transferred or the service is provided, except for revenue from connection of new consumers which is recognised by the Company over the useful life of the created asset (Note 2.12). When recognising other income related to electricity transmission and system services the Company takes into consideration the terms of contracts signed with customers and all significant facts and circumstances, including the nature, amount, timing and uncertainty relating to cash flows arising from the contract with the customer. The main sale contracts are signed for the term of one year and coincide with the reporting period. All subsequent value adjustments for previous periods are not made, and contract modifications are rare. Prices of the electricity transmission services are regulated by the NERC which establishes the upper limits of the prices for the transmission service. Specific prices and tariffs for the transmission services are established by the Company’s Board within the limits approved by the NERC. When establishing prices for the next year, deviations of the current year (the year not yet ended) and deviations of the previous year (the year that already ended) and various forecasts for the upcoming year are assessed, i.e. they increase or decrease the prices for the next year, i.e. the prices are not adjusted retrospectively. All possible price adjustments in the future periods for excess profit/higher loss incurred in the previous/current years are not treated as a variable part of the price under IFRS 15. Such decrease (due to excess profit earned) or increase (due to higher expenses incurred) in future revenue does meet the general accounting criteria for the recognition of liabilities or assets because it depends on the Company’s operations in the future and is treated as the regulated assets or liabilities and therefore, in the opinion of the Company’s management, it does not fall within the scope of IFRS 15. The Company purchases system services from the producers and later provides this service to the distribution network operators and electricity consumers using the tariff established by the NERC. The Company recognises the gross amounts of revenue as it acts as a principal in the provision of system services. PSO service funds are the fees paid to the suppliers of electricity under the public service obligations scheme, with the list of such suppliers established by the Lithuanian Government or other institution authorised by it. The annual quantities of PSO funds are established by the NERC. PSO service funds allocated by the NERC are accounted for by the Company as grants related to income as they are designated to compensate for the loss of revenue from services provided by electricity producers using renewable energy sources. Such grants are recognised as income: - PSO service funds allocated by the NERC to the Company for balancing electricity produced from the renewable energy resources. - when the NERC allocates PSO service funds to the Company for the connection of electricity generation installations using wind, biomass, solar energy or hydro energy in the process of electricity generation to transmission networks, for the optimisation, development and/or reconstruction of transmission networks in relation to acceptance and transmission of electricity from producers using the renewable energy resources. Other income Interest income is recognised on accrual basis considering the outstanding balance of debt and the applicable interest rate. Interest received is recorded in the statement of cash flows as cash flows from investing activities. Gain from disposal of property, plant and equipment, lease income, income from default charges and fines collected from the contractors as a result of late fulfilment of works, including property, plant and equipment under construction, are recognised by the Company as other income. Default charges and fines collected from the contractors as a result of late fulfilment of works are calculated upon the completion of a project or a stage thereof and upon notifying a supplier, and they are offset against the supplier’s debt. In case of a legal dispute over the amount of default charges or fines and when it is more likely than unlikely that the amounts of default charges or fines will be reduced or annulled, provisions are recognised. Dividend income is recognised when the right to receive payment is established. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 122 Recognition of expenses Expenses are recognised in the statement of comprehensive income as incurred by the accrual method. 2.21 Borrowing costs Borrowing costs that are directly attributable to the production, getting ready for use or sale of an asset that necessarily takes a substantial period of time to produce, get ready for its intended use or sale, are capitalised as part of the cost of that asset until the asset is ready for use or sale in full. Interest income related to temporary investment of borrowed funds until their use for the acquisition of the assets is deducted from the acquisition cost of the assets. Other borrowing costs are recognised as expenses in the statement of comprehensive income as incurred. 2.22 Income tax Income tax expenses for the period comprises the current year income tax and deferred income tax expenses. Income tax Income tax expenses for the current year are calculated on the current year profit before tax, as adjusted for certain non-deductible expenses/non-taxable income. Income tax is calculated using the tax rate effective as at the date of issue of the financial statements. Income tax rate was 15% in 2022 and 2021. Tax losses can be carried forward for indefinite period, except for the losses incurred as a result of disposal of securities and/or derivative financial instruments. Such carrying forward is disrupted if the Company changes its activities due to which these losses were incurred except when the Company does not continue its activities due to reasons which do not depend on the Company itself. The losses from disposal of securities and/or derivative financial instruments can be carried forward for 5 consecutive years and only be used to reduce the taxable income earned from the transactions of the same nature. Tax losses carried forward can be used to reduce the taxable income earned during the reporting year by maximum of 70%. In addition, the Company can take over tax losses of the group companies, if the requirements laid down in the Law on Corporate Income Tax are met. Deferred income tax Deferred income tax is accounted for using the balance sheet liability method. Deferred income tax assets and deferred tax liability are recognised for future tax purposes to reflect differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred income tax liabilities are recognised on all temporary differences that will increase the taxable profit in future, whereas deferred income tax assets are recognised to the extent it is probable that they will reduce the taxable profit in future. Deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting, nor taxable profit or loss. The Company reviews the carrying amount of a deferred income tax assets at each reporting date and reduces it to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of a part or all of that deferred income tax assets to be utilised. Deferred income tax assets and liabilities are estimated using the tax rate that has been applied when calculating income tax for the year when the related temporary differences are to be realised or settled. Deferred income tax assets and liabilities are offset only where they relate to income taxes assessed by the same fiscal authority or where there is a legally enforceable right to offset current tax assets and current tax liabilities. Current income tax and deferred income tax Current income tax and deferred income tax are recognised as income or expenses and included in profit or loss for the reporting period, except for the cases when tax arises from a transaction or event that is recognised directly in equity or in other comprehensive income, in which case taxes are also recorded in equity and in other comprehensive income respectively. 2.23 Earnings per share Earnings per share is calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary registered shares issued. The Company has no dilutive share options, therefore, basic and diluted earnings per share do not differ. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 123 2.24 Related parties Parties are considered to be related if: a) A person or a close member of that person’s family is related to a reporting entity if that person: 1) has control or joint control of the reporting entity; 2) has significant influence over the reporting entity; or 3) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity; b) An entity is related to a reporting entity if any of the following conditions applies: 1) The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others); 2) One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member); 3) Both entities are joint ventures of the same third party; 4) One entity is a joint venture of a third entity and the other entity is an associate of the third entity; 5) The entity is controlled or jointly controlled by a person identified in point a; 6) A person identified in subpoint 1) of point a has a significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity); 7) The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity. 2.25 Contingencies Contingent liabilities are not recognised in the financial statements. They are disclosed in the financial statements unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognised in the financial statements but disclosed when an inflow of income or economic benefits is probable. 2.26 Events after the reporting period Events after the reporting period that provide additional information about the Company’s position at the date of the financial statements (adjusting events) are disclosed in the financial statements. Events after the reporting period that are not adjusting events are disclosed in the notes when material. 2.27 Inter-company offsetting For the purpose of the financial statements, assets and liabilities, income and expenses are not offset, except for the cases when such offsetting is specifically required by an individual standard. 2.28 Fair value measurement Fair value is the amount for which, at the measurement date, an asset or a service could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be available to the Company. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1 — Quoted (unadjusted) prices in active markets for identical assets or liabilities; Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable; NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 124 Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable in the market. For assets and liabilities that are recognised in the financial statements on a recurring basis, the Company determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. Valuations are performed by the management at each reporting date. For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of assets or liabilities and the level of the fair value hierarchy as explained above. In the financial statements as at 31 December 2022 and 2021, the Company did not have any significant assets or liabilities measured or re-measured at fair value measured at fair value through other comprehensive income: financial assets (Notes 2.6 and 9) and property, plant and equipment (Notes 2.4 and 6). The Company’s principal financial assets not at fair value comprise cash and cash equivalents, trade and other receivables, trade and other payables and borrowings. Fair value , and assets is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. The fair value of a financial asset is not less than the amount discounted from the first day, on which payment may be required. 3. Accounting estimates and assumptions Significant accounting estimates and assumptions The preparation of financial statements according to International Financial Reporting Standards requires management to make estimates and assumptions that affect the accounting policies applied, the reported amounts of assets, liabilities, income and expenses, and the disclosures of contingencies. Actual results may differ from those estimates. The significant management estimates and assumptions and the main sources for uncertainties used in the preparation of these financial statements that might cause substantial changes in the carrying amounts of the related assets and liabilities in the next financial year are described below: Valuation of property, plant and equipment As described in Note 6, the Company tested the value of property, plant and equipment to determine whether it is consistent with its fair value. The determination of the assets’ fair value is mainly affected by assumptions used in assessing the transmission service income for the future periods. The assumptions used in determining the fair value of property, plant and equipment are described in more detail in the above-mentioned note. Depreciation rates of property, plant and equipment The useful life of property, plant and equipment is determined separately for each item (component) of the asset by estimating future economic benefit in view of the expected period of use in the Company’s activities, the intensity of use, the environment of use, changes in the asset’s original standard performance over its entire useful life, technological and economic progress morally outdating the asset, legal and similar factors restricting the useful life of property, plant and equipment. Useful lives are reviewed annually to ensure that the depreciation period would correspond to the expected useful life of property, plant and equipment. The effect of changes in estimates, if any, is accounted for on a prospective basis. Congestion management revenue and deferred income tax assets Based on the accounting policies described in Note 2.16, accounting for congestion management revenue depends on the purpose for which revenue is used. These purposes are described in Regulation (EU) No 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity. Based on the NERC’s decision and the assessment of the Company, a congestion revenue balance as at 31 December 2022 will be used to: 1) reduce the transmission tariff for 2023 by recognising the amount of EUR 142.3 million as transmission revenue in year 2023; 2) finance the synchronisation projects agreed with the NERC. Deferred income tax assets arising from congestion revenue received in 2014 - 2017 and due to taxation with profit tax at the year as they received will be realised over the useful life of the asset acquired using congestion revenue. In the long term, regulation ensures the Company’s profitability, therefore, in the management’s opinion, deferred income tax assets will be realised in the future by reducing income tax payable. The congestion management revenues received from 2018 are subject to profit tax at the time of use of congestion management revenues, so there is no difference between financial and tax accounting. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 125 4. Impact of war in Ukraine on key accounting estimates and assumptions On 24 February 2022, Russia started a military aggression against Ukraine. The effects of the war on the Company’s financial performance in 2022 included a significant increase in technological loss expenses incurred by the Company due to rise in electricity prices in the market. It should be noted that this impact is of a short-term nature as the regulator will compensate incurred losses in the subsequent periods. Moreover, as the contractors no longer use materials or components imported from Russia, Belarus or Ukraine, the values of certain investment projects have increased as a result of the war. In addition to other financing sources, the Company meets a higher demand for investment funds by using congestion management revenue which has increased significantly due to high market prices of electricity. The impact of the war could be observed in the future in case of the disconnection from the BRELL ring. If this occurs, it is probable that expenses for ancillary (system) services could increase. However, if that were to happen, the impact on the Company’s financial indicators would be of a short-term nature, because higher expenses incurred for ancillary (system) services, similarly as currently incurred higher expenses for compensation of technological losses, would be compensated by including them in the prices of the regulated services for the subsequent years. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 126 5. Intangible assets Statutory Other servitudes and Patents and Computer intangible protection licences software assets zones Total At 31 December 2020 Acquisition cost 600 7,087 127 3,674 11,488 Accumulated amortisation (489) (4,713) (38) - (5,240) Net book amount 111 2,374 89 3,674 6,248 Net book amount at 31 December 2020 111 2,374 89 3,674 6,248 Acquisitions 21 1,025 - - 1,046 Reclassification to/from PP&E - - 37 - 37 Reclassification between categories 4 (182) 178 - - Value adjustment due to change in assumptions - - - (1,188) (1,188) Amortisation charge (75) (1,059) (57) - (1,191) Net book amount at 31 December 2021 61 2,158 247 2,486 4,952 At 31 December 2021 Acquisition cost 625 7,930 342 2,486 11,383 Accumulated amortisation (564) (5,772) (95) - (6,431) Net book amount 61 2,158 247 2,486 4,952 Net book amount at 31 December 2021 61 2,158 247 2,486 4,952 Acquisitions 86 2,546 2,632 Write-offs (298) (298) Reclassification to/from PP&E 89 89 Reclassification between categories 239 (239) - Value adjustment due to change in assumptions (795) (795) Amortisation charge (70) (941) (85) (1,096) Net book amount at 31 December 2022 316 3,315 162 1,691 5,484 At 31 December 2022 Acquisition cost 950 10,028 342 1,691 13,011 Accumulated amortisation 634) (6,713) (180) - (7,527) Net book amount 316 3,315 162 1,691 5,484 * Assets related to statutory servitudes amounted to EUR 1,100 thousand as at 31 December 2022 (31 December 2021: EUR 840 thousand) and assets related to protection zones amounted to EUR 591 thousand as at 31 December 2022 (31 December 2021: EUR 1,646 thousand) NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 127 6. Property, plant, and equipment Other Structures property, Constructio and plant and n work in Land Buildings machinery equipment progress Total At 31 December 2020 Acquisition cost 908 18,907 312,238 13,594 24,009 369,656 Accumulated amortisation - (1,020) (32,994) (3,700) - (37,714) Accumulated impairment - - (233) - - (233) Net book amount 908 17,887 279,011 9,894 24,009 331,709 Net book amount at 31 December 2020 908 17,887 279,011 9,894 24,009 331,709 Acquisitions - 54 903 778 51,242 52,977 Change in prepayments for PP&E - - - - 3,641 3,641 Write-offs - - (1,965) - - (1,965) Reclassification to inventories - - - (171) 47 (124) Reclassification to intangible assets - - - - (37) (37) Reclassification between categories (388) 1,823 23,883 1,063 (26,381) - Off-set of connection revenue against non- current assets - (54) (958) (74) - (1,086) Off-set of grants against non-current assets - - - - (27,210) (27,210) Depreciation charge - (551) (17,379) (1,924) - (19,854) Net book amount at 31 December 2021 520 19,159 283,495 9,566 25,311 338,051 At 31 December 2021 Acquisition cost 520 20,731 333,194 15,189 25,311 394,945 Accumulated amortisation - (1,572) (49,466) (5,623) - (56,661) Accumulated impairment - - (233) - - (233) Net book amount 520 19,159 283,495 9,566 25,311 338,051 Net book amount at 31 December 2021 520 19,159 283,495 9,566 25,311 338,051 Acquisitions 1,092 804 54,318 56,214 Change in prepayments for PP&E 18,225 18,225 Write-offs (1,299) (1,299) Reclassification to inventories (71) (71) Reclassification to intangible assets (89) (89) Reclassifications between grant categories (4,878) (465) 5,343 - Reclassification between categories 656 11,782 1,091 (13,529) - Off-set of connection revenue against non- current assets (914) (50) (964) Off-set of grants against non-current assets (29,182) (29,182) Depreciation charge (640) (16,599) (1,928) (19,167) Net book amount at 31 December 2022 520 19,175 272,679 8,997 60,347 361,718 At 31 December 2022 Acquisition cost 520 21,387 338,384 16,517 60,347 437,155 Accumulated amortisation (2,212) (65,705) (7,520) - (75,437) Accumulated impairment - - Net book amount 520 19,175 272,679 8,997 60,347 361,718 Write-offs mainly represent derecognition of replaced parts of the assets during reconstruction. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 128 Prepayments for property, plant, equipment (PPE): 2022 2021 Carrying amount at the beginning of the period 4,547 906 Prepayments paid for PPE over the period 23,056 6,828 Transfer to construction work in progress (4,831) (3,187) Carrying amount at the end of the period 22,772 4,547 Interest capitalised at the Company during the period ended 31 December 2022 amounted to EUR 36 thousand (EUR 46 thousand during the period ended 31 December 2021). The annual interest rate of capitalisation was 1.46% during the period ended 31 December 2022 (1.14% during the period ended 31 December 2021). In 2022, investments of transmission system operator LITGRID (works performed and assets acquired, irrespective of payment deadlines) amounted to EUR 56.2 million, of which 41% were earmarked for the implementation of strategic electricity projects of national significance, and 59% for the reconstruction and development of the electricity transmission network and ensuring the continuity of the Company’s activities. In 2021, major investments were made in the strategic projects of national significance (around 62%) and in the projects on the restoration and modernisation of the electricity transmission network (around 26%). The company's property, plant and equipment are shown at revalued amounts. The company performed the last revaluation of its property, plant and equipment at 31 December 2018, it was performed with internal resources and without using the services of an independent external evaluator. No regulatory decisions that could materially affect the value of the assets were adopted in 2022. The Company performed the valuation of property, plant and equipment as at 31 December 2022 and 31 December 2021 and established that the carrying amount of the assets within the materiality limits corresponds to their fair value. The valuation corresponded to Level 3 of the fair value hierarchy (Note 2.28), it was performed using the Company’s internal resources and not engaging an independent external valuer. The Company estimated the fair value of the assets as at 31 December 2022 and 31 December 2021 under the income method using the discounted cash flows calculation technique. The value of assets was determined as the present value of net future cash flows. The company’s activity is regulated. The property operates as an integral electrical grid. The fair value of the electrical grid is appraised using the income approach, but its assessment excludes all activities related to the transmission network development (and not related to the present assets being assessed), i.e. investments in development projects, connection of new consumers/producers, grants to development projects. The value of the assets as at 31 December 2022 was calculated using the following main assumptions: • The updated LRAIC model for the establishment of the regulated asset base and the cost of capital is applied in the regulatory pricing from 2022. The cost of capital comprises depreciation expenses of the regulated assets and return on investments, which is calculated by multiplying the regulated asset base by the rate of return on investments. Over the regulatory period of five years, the cost of assets under optimisation (planned to be restored) is determined using the present (restored) value and investments in the optimised assets over the regulatory period of five years are consistent with the value of assets being restored, which is calculated under the LRAIC model. The cost of capital of the assets that are not optimised is determined using historic cost. Furthermore, taking into consideration available financing sources and aiming to retain a sustainable level of the Company’s debt, an additional component was established for the financing of investments increasing the level of revenue from the regulated activities. • The amounts of investments until 2031 are taken from the ten-year investment plan adjusted according to the actual data with all development investments eliminated from it. • All operating expenses attributable to the regulated activities are compensated through transmission revenue, except for the compensation of remuneration expenses, the compensation assumption of which is 94%. • The calculation of cash flows for the years 2023-2025 included a difference between the permitted and actual return on transmission activity investments for the years 2021-2022 as well as the estimation of efficient saving of operating expenses that increases the permitted investment return (a regulated loss to be refunded through a higher transmission price and revenue) and the refund of the result of ancillary (system) services in excess of the amount permitted by the NERC to the network consumers (a lower component and revenue of additional services). • The rate of return on investments (ROI before tax) is equal to 4.09% for 2023-2026 (equivalent to a 3.48% after tax) and from 2027 it is the same as the discount rate, i.e. 5.5% (are equal to WACC 4.68% after tax). In the calculations of the assets’ value as at 31 December 202, the rate of return on investments (ROI before tax) was equal to 4.03% for 2022-2026 (equivalent to a 3.42% after tax), and from 2027 it is the same as the discount rate, i.e. 4.09% (are equal to WACC 3.48% after tax). NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 129 • Net cash flows generated from the assets were discounted using the discount rate (WACC after tax) equal to 4.68%, which was calculated by the Company. As at 31 December 2021, net cash flows generated from the assets were discounted using the discount rate (WACC after tax) equal to 3.48%, which was calculated by the Company. As at 31 December 2022, the Company’s commitments for the acquisition of property, plant and equipment to be fulfilled in the upcoming periods amounted to EUR 417,269 thousand (31 December 2021: EUR 150,653 thousand). The table below presents the net book amounts of the Company’s property, plant and equipment, which would have been recognised had the historical cost method been used, excluding prepayments but including grants, and negative revaluations that would represent impairment, as at 31 December 2022 and 31 December 2021: Other Structures property, Construction and plant and work in Land Buildings machinery equipment progress Total At 31 December 2022 520 19,175 272,679 8,997 37,575 338,946 At 31 December 2021 520 19,159 283,495 9,566 20,764 333,504 Property, plant, and equipment is stated at acquisition cost, less grants received/receivable for the acquisition of property, property, plant, and equipment. Grants comprise financing from the EU support funds, a portion of congestion management revenue designated for the financing of investments, payments for the expenses incurred during the connection of producers to the transmission network and performance of works for the relocation/reconstruction of the transmission network’s installations initiated by customers. Had the value of property, plant and equipment not been reduced by the amount of grants, its carrying amount would have been EUR 354,323 thousand higher as at 31 December 2022 (31 December 2021: EUR 334,322 thousand). The following table shows information on property, plant and equipment, the value of which was reduced by the amount of grants received/receivable: 2022 2021 Carrying amount at the beginning of the period 334,322 315,178 Acquisitions 30,146 28,296 Depreciation charge (9,889) (9,141) Write-offs (256) (11) Carrying amount at the end of the period 354,323 334,322 NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 130 7. Right-of-use assets As indicated below, the Company leases land, office premises, motor vehicles and other property, plant and equipment. The lease terms of the lease contracts (except for the lease of land) is 2-4 years. The lease terms of the land lease contracts is 99 years. When recognising right-of-use assets and lease liabilities and determining the lease terms the Company assessed extension and early termination options of the lease contracts. As the useful life of the right-of-use assets is longer than the lease term, depreciation is calculated from the commencement date of the lease till the end of the lease term. The Company’s right-of-use assets comprise as follows: Other property, Motor plant and Land Buildings vehicles equipment Total At 31 December 2020 Acquisition cost 4,465 47 714 127 5,353 Accumulated depreciation (90) - (370) (98) (558) Net book amount 4,375 47 344 29 4,795 Net book amount at 31 December 2020 4,375 47 344 29 4,795 Acquisitions - - 6 - 6 Depreciation charge (45) (16) (202) (29) (292) Net book amount at 31 December 2021 4,330 31 148 - 4,509 At 31 December 2021 Acquisition cost 4,465 47 720 127 5,359 Accumulated depreciation (135) (16) (572) (127) (850) Net book amount 4,330 31 148 - 4,509 Net book amount at 31 December 2021 4,330 31 148 - 4,509 Acquisitions 1,402 1,402 Write-offs (661) (127) (788) Depreciation charge (45) (16) (258) (319) Depreciation (write-offs) 661 127 788 Net book amount at 31 December 2022 4,285 15 1,292 - 5,592 At 31 December 2022 Acquisition cost 4,465 47 1,461 - 5,973 Accumulated depreciation (180) (32) (169) - (381) Net book amount 4,285 15 1,292 - 5,592 By way of a public tender and following the criteria for green procurement, motor vehicles were leased in 2022. 8. Loans granted At 31 At 31 December 2022 December 2021 Loan to EPSO-G UAB (under the cashpool agreement) 232,008 43,594 Carrying amount 232,008 43,594 After the issuing of the permission by the NERC, the Company and EPSO-G UAB concluded the group account (cashpool) agreement (with a 0% fixed interest rate) on 26 February 2021. The agreement establishes the possibility to temporarily use free congestion management revenue for inter-company lending and borrowing purposes. The agreement was valid until 26 February 2022 and contained two possible extensions of 12 months each. In 2022, the agreement was extended until 26 February 2023 and a fixed interest rate was applied from 20 December 2022. The agreement was extended on 26 February 2023 (Note 41). Under the group account (cashpool) agreement the Company’s positive funds balance transferred to the disposal of EPSO-G UAB is accounted for as amounts receivable (loans granted) in the statement of financial position and is not included in the line item of cash and cash equivalents. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 131 9. Financial assets The Company’s financial assets measured at fair value through comprehensive income comprised shares of TSO Holding AS: 2022 2021 Carrying amount at 1 January 781 1 089 Financial assets acquired 13,090 - Financial assets disposed (13,871) - Change in impairment (308) Carrying amount at 31 December - 781 * transfer price EUR 13,786 thousand, and EUR 85 thousand the disposal of the previously held 2% shareholding. In November 2022, 2% of shares of TSO Holding held by the Company at the beginning of the year and 37.6% of shares additionally acquired by the Company in October 2022 all 39.6% were transferred by the Company to parent company EPSO-G UAB for the same price of the one share. The transactions on additional acquisition and disposal of shares did not affect the Company’s results of operations for 2022, whereas the disposal of the previously held 2% shareholding resulted in a loss of EUR 85 thousand. Dividends received by the Company from TSO Holding AS in 2022 amounted to EUR 43 thousand (2021: EUR 308 thousand). 10. Inventories The Company’s inventories comprise as follows: At 31 December 2022 At 31 December 2021 Materials, spare parts and other inventories 166 180 Less: impairment (163) (173) Carrying amount 3 7 Movements in write-down allowance for inventories in 2022 and 2021 are indicated below: 2022 2021 Carrying amount at 1 January 173 160 Change in impairment (10) 13 Carrying amount at 31 December 163 173 In 2022, the Company reversed and in 2021, it established additional provisions for inventory write-down to net realisable value in relation to inventories stored at the warehouse and not moving or slow-moving inventories and accounted for in operating expenses in the statement of comprehensive income. The Company’s inventories recognised as expenses in 2022 amounted to EUR 254 thousand (2021: EUR 316 thousand). 11. Trade receivables under contracts with customers Trade receivables under contracts with customers comprise as follows: At 31 At 31 December December 2022 2021 Amounts receivable for electricity transmission and related services 58,414 49,776 Accumulated amounts receivable for electricity services 2,666 732 Less: expected credit losses of trade receivables - (45) Carrying amount 61,080 50,463 As at 31 December 2022, amounts receivable for electricity transmission and related services increased compared to 31 December 2021 because the price of ancillary (system) services increased 2.7 times in December 2022 and the volume decreased by 14% compared to December 2021. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) The fair value of trade receivables under contracts with customers approximates their carrying amount. In 2021, the Company reversed EUR 45 thousand of expected credit losses with regard to amounts paid (31 December 2020: EUR 110 thousand). In 2022, the Company did not recognise any expected credit losses related to trade receivables under contracts with customers. At 31 December 31 there were no amounts past due (at 31 December 31 2021: EUR 45 thousand and a 100% impairment was formed for them). The Company applies a simplified credit risk assessment approach as required by IFRS 9 and accounts for loss allowances for lifetime credit losses from initial recognition of amounts receivable. To determine credit losses of amounts receivable the Company applies the individual assessment and a loss coefficient matrix. The loss coefficient matrix is based on historical data for a period exceeding 36 months on settlements of debts by customers. The loss coefficients may be adjusted in view of macroeconomic forecasts. The loss coefficients are classified into separate groups of receivables on the basis of credit risk characteristics and overdue period. 12. Trade receivables Trade receivables comprise as follows: At 31 At 31 December December 2022 2021 Amounts receivable for electricity transmission and related services 17 143 Congestion management revenue receivable 649 3,741 PSO funds receivable 354 3,189 Accumulated amounts receivable for electricity transmission 1,477 3,074 Other trade receivables 61 53 Carrying amount 2,558 10,200 The fair value of trade receivables approximates their carrying amount. In 2022, the Company did not recognise any expected credit losses related to trade. At 31 December 31 there were no amounts past due (at 31 December 31 2021: there were no). 13. Other amounts receivable Other amounts receivable comprise as follows: At 31 At 31 December 2022 December 2021 Grants receivable 302 9 900 Other amounts receivable 613 92 Less: impairment of other receivables (23) (23) Carrying amount 892 9 969 The fair value of other amounts receivable approximates their carrying amount. At 31 December 31 other amounts receivable past due were EUR 23 thousand (at 31 December 31 2021: EUR 23 thousand). A 100% impairment was formed for them. 14. Other financial assets At 31 At 31 December 2022 December 2021 Funds deposited for guarantees 5,000 3000 Deposits received (Note 28) 2,334 2359 Other financial assets 27 Carrying amount 7,361 5,359 The fair value of other financial assets as at 31 December 2022 and 2021 approximated their carrying amount. 132 NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 133 15. Cash and cash equivalents At 31 At 31 December 2022 December 2021 Cash at bank 499 1,819 Carrying amount 499 1,819 The fair value of cash and cash equivalents approximates their carrying amount. 16. Share capital and share premium As at 31 December 2022 and 31 December 2021, the Company’s share capital amounted to EUR 146,256 thousand and it was divided into 504,331,380 units of ordinary registered shares with the nominal value of EUR 0.29 each. All the shares have been fully paid. Share premium represents a difference between the nominal value of shares and consideration received for shares, they were formed in 2010 and amount to EUR 8,579 thousand. Capital management Capital consists of the equity capital disclosed in the statement of financial position. According to the Law on Companies of the Republic of Lithuania, the equity of the Company must account for at least ½ of the amount of the authorised share capital. The Company complied with this requirement as at 31 December 2022 and 31 December 2021. No other external capital requirements have been imposed on the Company. Dividends are allocated pursuant to the approved dividend policy, under which dividends payable are directly linked with the effective use of the company’s equity, i.e. the higher benefits created by the Company for the shareholders are, the larger portion of profit can be allocated by the Company for a further development or implementation of other significant projects. The Company’s main objectives when managing capital are to safeguard the Company’s ability to continue as a going concern. In order to maintain or change the capital structure, the amount of dividends to be paid to the shareholders may be adjusted, capital may be returned to the shareholders, or new shares may be issued. 17. Legal reserve, reserve for changes in fair value of financial assets and other reserves Legal reserve A legal reserve is a compulsory reserve under the Lithuanian legislation. The legal reserve should not be less than 10 per cent of the authorised share capital and can only be used to cover the Company’s losses only. The legal reserve accumulated by the Company complies with the requirements of the legal acts of the Republic of Lithuania and represent 10 per cent of the authorised share capital. Other reserves Other reserves are formed based on the decision of shareholders and can be redistributed on the distribution of the next year’s profit. The Ordinary General Meeting of Shareholders of LITGRID AB held on 20 April 2022 approved the proposed profit appropriation and resolved to transfer EUR 14,794 thousand from profit to be appropriated to other reserves and EUR 175 thousand to be appropriated to reserve for support. The Ordinary General Meeting of Shareholders of LITGRID AB held on 20 April 2021 approved the proposed profit appropriation and resolved to transfer EUR 8,890 thousand from profit to be appropriated to other reserves. 18. Dividends The Ordinary General Meeting of Shareholders of LITGRID AB held on 20 April 2022 adopted the decision to pay dividends of EUR 5,043 thousand. Dividends per share amounted to EUR 0.01. The Ordinary General Meeting of Shareholders of LITGRID AB held on 20 April 2021 adopted the decision to pay dividends of EUR 16,542 thousand. Dividends per share amounted to EUR 0.0328. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 134 19. Grants The grants at the Company are mainly designated for the acquisition of non-current assets. Movements in grants in 2022 and 2021 were as follows: Opening balance at 1 January 2022 2021 Grants receivable (Note 13) 9,900 3,191 Grants received in advance (non-current liabilities) (Note 24) * (1,677) (1,677) Grants received in advance (current liabilities) (Note 27) * (9,705) (4,787) (1,482) (3,273) Recognised grants Transfer to property, plant and equipment (Note 6) 30,146 28,296 Grants used for compensation of expenses 8 - 30,154 28,296 Grants received Grants received in the form of monetary funds (cash flow statement) 72,086 22,496 Congestion revenue transferred to grants (Note 22) 22,992 2,954 Grants received during the previous years 26 (31) 95,104 25,419 Grants received in the form of assets ** 964 1,086 Closing balance at 31 December Grants receivable (Note 13) 302 9,900 Grants received in advance (non-current liabilities) (Note 24) * (32,802) (1,677) Grants received in advance (current liabilities) (Note 27) * (34,896) (9,705) (67,396) (1,482) * a grant received in advance is accounted for as non-current or current liabilities until the moment of the acquisition of such assets (Note 2.11). ** the asset is created by the client and transferred to the Company free of charge, i.e. the assets received from the third parties are offset against the value of the assets (Note 2.12). 20. Borrowings The Company’s borrowings comprise as follows: At 31 At 31 December 2022 December 2021 Non-current borrowings Bank borrowings 34,285 51,452 Current borrowings Current portion of non-current borrowings 6,143 14,225 Total borrowings 40,428 65,677 Non-current borrowings grouped by maturity profile: At 31 At 31 December 2022 December 2021 From 1 to 2 years 6,143 14,225 From 2 to 5 years 14,142 19,227 After 5 years 14,000 18,000 Total 34,285 51,452 As at 31 December 2022 and 2021, no assets were pledged as collateral by the Company. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 135 As at 31 December 2022, the weighted average interest rate on the Company’s borrowings was 0.94% (31 December 2021: 0.97%). As at 31 December 2022, the outstanding balance of the Company’s borrowings with the fixed interest rate amounted to EUR 40,428 thousand (31 December 2021: EUR 46,571 thousand). As at 31 December 2022 and 2021, the Company had no unwithdrawn borrowings or overdrafts. Under the loan agreement signed by the Company with the European Investment Bank, the Company is committed to comply with the net debt to EBITDA ratio, which should not exceed 6.5 and with the interest coverage ratio, which should be above 3, these ratios are calculated two times per year at 31 December and at 30 June. The outstanding balance of a borrowing, which is subject to this requirement, amounted to EUR 40,428 thousand as at 31 December 2022 (31 December 2021: the outstanding balance of a borrowing, which is subject to this requirement, EUR 46,571 thousand (European Investment Bank) and EUR 19,106 thousand (Nordic Investment Bank), which was repaid as at 31 December 2022). As at 31 December 2022, the Company did not comply with the requirements laid down in the loan agreement. However, at the Company’s request European Investment Bank sent a notification in December 2022, whereby it informed that the Bank waives its right to demand that Company repay the loan prior to its maturity, if the Company does not comply with the requirements as at 31 December 2022 and as at 30 June 2023, on this basis, the part of borrowing is classified as non-current. As at 31 December 2021, the Company complied with the requirements laid down in the loan agreements. Reconciliation of net debt balances and cash flows from financing activities in 2022 and 2021: At 31 At 31 December December 2022 2021 Cash and cash equivalents 499 1,819 Non-current borrowings (34,285) (51,452) Lease liabilities (5,299) (4,414) Current portion of non-current borrowings (6,143) (14,225) Interest charged on borrowings (49) (92) Current portion of lease liabilities (403) (180) Net debt (45,680) (68,544) Cash and cash equivalents 499 1,819 Borrowings with a fixed interest rate (46,179) (51,257) Borrowings with a variable interest rate (19,106) Net debt (45,680) (68,544) Cash Borrowings Other Leases Total financing Net debt as at 31 December 2020 33 (80,017) - (4,857) (84,841) Increase (decrease) in cash and cash equivalents 1,786 - - 1,786 New leases - - (6) (6) Lease payments - - 269 269 Repayment of a borrowing - 14,225 - 14,225 Interest charged (8) (722) (64) (794) Interest paid 8 745 64 817 Net debt as at 31 December 2021 1,819 (65,769) - (4,594) (68,544) Increase (decrease) in cash and cash equivalents (1,320) (1,320) New leases (1,402) (1,402) Lease payments 294 294 Repayment of a borrowing 25,249 25,249 Interest charged (621) (25) (68) (714) Interest paid 664 25 68 757 Net debt as at 31 December 2022 499 (40,477) - (5,702) (45,680) NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 136 21. Lease liabilities The Company’s lease liabilities and their movements: 2022 2021 Carrying amount at the beginning of the period 4,594 4,857 Leases 1,402 6 Expenses of interest charged 68 64 Lease payments (principal and interest) (362) (333) Carrying amount at the end of the period 5,702 4,594 Non-current lease liabilities 5,299 4,414 Current lease liabilities 403 180 Total liabilities 5,702 4,594 The Company’s lease liabilities comprise as follows: At 31 At 31 December 2022 December 2021 Current portion 403 180 Repayment terms of non-current liabilities: From 1 to 2 years 373 44 From 2 to 3 years 370 22 From 3 to 5 years 275 46 After 5 years 4,281 4,302 Total 5,702 4,594 The Company’s short-term lease (up to 12 months) and low-value lease (up to EUR 4 thousand) expenses amounted to EUR 175 thousand in 2022 (2021: EUR 172 thousand). The Company had no leases with variable payments not included in the value of lease liabilities . 22. Congestion management revenue At 31 At 31 December December 2022 2021 Non-current portion of congestion management revenue included in liabilities 64,095 88,267 Current portion of congestion management revenue included in liabilities 287,400 20,820 Total congestion management revenue 351,495 109,087 2022 2021 Congestion management revenue at 1 January 109,087 62,519 Congestion management revenue received during the period 267,296 50,112 Transfer to property, plant and equipment (22,992) (2,954)) Congestion management revenue recognised as income during the period (1,896) (,590) Congestion management revenue at 31 December 351,495 109,087 The principles of receipt and use of congestion management revenue are set out in Note 2.16. As at 31 December 2022, the unused balance of congestion management revenue presented as part of liabilities amounted to EUR 351,495 thousand. The projected use is specified in Note 3. The current portion of liabilities is expected to be settled (used) within 12 months. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 137 23. Provisions At 31 At 31 December 2022 December 2021 Provisions for pension benefits to employees (Note 2.15) 654 275 Provisions for servitude liabilities 468 277 Provisions for registration of protection zones 367 1,646 Provisions for settlement of current liabilities (Note 39) 100 661 Carrying amount 1,589 2,859 Non-current provisions 941 352 Current provisions 648 2,507 Movements in provisions were as follows: Provisions for Provisions for pension benefit Provisions for registration of obligations to servitude protection Provisions for employees liabilities zones litigations and claims Total Carrying amount at 31 December 2020 218 1,250 1,909 15 3,392 Calculated - Revised estimate 57 (925) (263) 646 (485) Payments made (48) (48) Carrying amount at 31 December 2021 275 277 1,646 661 2,859 Calculated 100 100 Revised estimate 379 260 (1,055) (416) Payments made (69) (224) (661) (954) Carrying amount at 31 December 2022 654 468 367 100 1,589 The assumptions applied when calculating provisions for pension benefit obligations to employees were as follows: long-term salary growth rate in 2022 – 4% (2021: 4%), discount rate in 2022 – 0.83% (2021: 0.37%), employee turnover rate in 2022 – 8.7% (2021: 11.14%), benefit rate in 2022 – the amount of 2-4 monthly average salaries (2021: the amount of 2 monthly average salaries). As at 31 December 2022, the provision for statutory servitudes amounted to EUR 468 thousand (assumptions applied: number of applications expected to be received – 1,213, average compensation amount per application – EUR 231, discount rate – 1.24%), and as at 31 December 2021, the provision amounted to EUR 277 thousand (assumptions applied: number of applications expected to be received – 830, average compensation amount per application – EUR 229, discount rate – 0.62%). As at 31 December 2022, the provision for protection zones amounted to EUR 367 thousand (assumptions applied: expected value of services according to purchases effected, discount rate – 1.24%), and as at 31 December 2021, the provision amounted to EUR 1,646 thousand (assumptions applied: expected value of services according to effected purchases, discount rate – 0.62%). Reasons for decrease in the provision for protection zones were as follows: 1) The actual price for the performance of works was established following the completion of the procurement for services of the development of plans in 2022; 2) The registration of special land use conditions in the cadastre was no longer required following the amendments to the provisions of the Lithuanian Law on Special Land Use Conditions No XIII-2166 of 6 June 2019. As at 31 December 2021, the provision for litigations was made the provision for dispute in the case with Šiaulių Energija UAB. Considering that Article 279(1) of the Lithuanian Civil Procedure Code stipulates that rulings passed by the court of appeal instance come into effect from the date of their adoption, the obligation for the Company to execute the ruling in the case with Šiaulių Energija UAB arose on 24 March 2022. Under the court’s ruling, the claimant was paid a loss compensation, procedural interest and litigation expenses. The part of an amount was received by the Company from an insurance company as compensation for damage. Šiaulių Energija UAB the claimant was accounted in the statement of comprehensive income in year 2022 for EUR 162 thousand (2021: EUR 661 thousand). NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 138 As at 31 December 2021, the provision for litigations was made the provision for dispute in the case with Žilinskis ir CO UAB. On 30 May 2022, Žilinskis ir CO UAB filed a claim with Vilnius Regional Court for the annulment of the decision of LITGRID AB regarding the use of a bank guarantee and of the claim to Luminor Bank AS Lithuania division, and for the awarding of an amount of EUR 100 thousand. Case-law is not well-developed in this area, therefore a provision of EUR 100 thousand was established as at 31 December 2022. 24. Other non-current amounts payable and liabilities At 31 At 31 December 2022 December 2021 Advance amounts received from connection of new consumers 1,115 - Non-current trade payables 321 430 Deferred revenue 154 163 Grants received in advance 32,802 1,677 Carrying amount 34,392 2,270 Grants received in advance mainly consist of funds received from the CEF (Connecting Europe Facility) fund for the implementation of the synchronisation programme. Expenditures for which a grant was received are planned to be incurred in 2023 and the grant is planned to be recognised in 2024. 25. Current and deferred income tax Income tax expenses comprise as follows: 2022 2021 Income tax expenses of the current year - 11,395 Income tax expenses of the previous year (16,772) (1,819) Deferred income tax income/(benefit) (8,275) (7,307) Deferred income tax income/(benefit) of the previous year 16,184 1,819 Income tax expenses/(benefit) of the current year (8,863) 4,088 Since 2014 when calculating income tax, the Company recognises congestion management revenue as taxable income in the year in which it is accounted for, although only a part of congestion management revenue has been recognised as income or has been used as a reduction of depreciation expenses in the same period. At the end of 2020, the Company revised the income tax return for 2018, in which it eliminated congestion management revenue from taxable income and aimed to reduce the income tax for 2018 by an amount of EUR 1,819 thousand. During 2022, the Company also revised the returns for 2019 and 2021. The State Tax Inspectorate started a tax inspection on 28 March 2022, which was completed on 6 March 2023. On the basis of the received decision of the State Tax Inspectorate, the Company understands that the State Tax Inspectorate has agreed that with effect from 2018 uniform accounting policies should be applied to congestion management revenue for financial reporting and tax purposes. A change in the recognition of congestion management revenue as taxable income resulted in a reduction of the prior year income tax expenses of EUR 16,184 thousand and in a respective increase of deferred income tax expenses due to the assets that were previously recognised on the reduction of congestion management revenue. Consequently, a significant income tax overpayment related to previous and current reporting year and amounting to EUR 28,598 thousand arose following a change in the moment of taxation of congestion management revenue. The Company calculated income tax expenses for 2022 by recognising congestion revenue received as income not subject to tax. Other adjustments During the revision of the income tax returns for the year 2019, the Company also returned to EPSO-G UAB a tax loss of EUR 2,567 thousand that had been taken over from it and transferred a refunded consideration of EUR 385 thousand representing 15% of the returned amount to the State Tax Inspectorate as income tax payable. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 139 The movement in deferred income tax assets and liabilities prior to offsetting the balances related to the same fiscal authority was as follows: Deferred income tax assets mpairment of revalued property, Statutory plant and servitudes equipment and and financial Impairment of Congestion protection assets assets revenue zones Tax loss Other Total At 31 December 2020 1,381 147 13,079 474 - 497 15,578 Recognised in profit and loss 44 (9) 5,532 (186) - 180 5,561 At 31 December 2021 1,425 138 18,611 288 - 677 21,139 Recognised in profit and loss (179) (45) (16,233) (163) 8,305 (51) (8,366) At 31 December 2022 1,246 93 2,378 125 8,305 626 12,773 Deferred income tax liabilities ncrease in value of revalued property, Statutory plant and servitudes Effect of equipment Differences in Tax relief on and capitalis and financial depreciation acquisition protection ation of assets rates of PP&E zones interest Total At 31 December 2020 - 186 (1,426) (551) (281) (2,072) Recognised in profit and loss - (392) 138 178 3 (73) At 31 December 2021 - (206) (1,288) (373) (278) (2,145) Recognised in profit and loss - 418 (87) 119 7 457 At 31 December 2022 - 212 (1,375) (254) (271) (1,688) Deferred income tax assets, net, at 31 December 2021 21,139 Deferred income tax assets, net, at 31 December 2022 12,773 Deferred income tax liability, net, at 31 December 2021 (2,145) Deferred income tax liability, net, at 31 December 2022 (1,688) Deferred income tax, net, at 31 December 2021 18,994 Deferred income tax, net, at 31 December 2022 1,085 The analysis of movements in deferred income tax assets and liabilities over time is as follows: At 31 At 31 December 2022 December 2021 Deferred income tax assets: Deferred income tax assets to be realised after more than 12 months 4,285 20,990 Deferred income tax assets to be realised within 12 months 8,488 149 Total 12,773 21,139 Deferred income tax liabilities: Deferred income tax liabilities to be settled after more than 12 months (1,314) (2,032) Deferred income tax liabilities to be settled within 12 months (374) (113) Total (1,688) (2,145) The table below presents reconciliation of income tax expenses reported in the statement of comprehensive income to income tax expenses calculated at a statutory income tax rate on profit before income tax: At 31 December 2022 At 31 December 2021 Profit/(loss) before income tax (58,347) 24,101 Income tax calculated at a rate of 15% (8,752) 3,615 Income tax expenses/(benefit) for the previous year (378) 41 Effect of non-allowable deductions and non-taxable income 267 432 Income tax expenses/(benefit) recognised in profit or loss (8,863) 4,088 NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 140 26. Trade payables At 31 At 31 December 2022 December 2021 Amounts payable for electricity 53,737 42,280 Amounts payable for repair works, services 4,900 7,691 Amounts payable for property, plant and equipment 11,509 9,483 Carrying amount 70,146 59,454 The fair value of trade payables approximates their carrying amounts. 27. Advance amounts received At 31 At 31 December 2022 December 2021 Deferred revenue 13 11 Advance amounts received from new consumers and producers 568 581 Grants received in advance 34,896 9,705 Other advance amounts received 29 31 Carrying amount 35,506 10,328 Advance amounts received from new consumers and producers include advance amounts received from new consumers and producers for connection to electricity networks and for electricity infrastructure relocation services. 28. Other amounts payable At 31 At 31 December December 2022 2021 Non-financial liabilities Employment-related liabilities 303 227 Accrued expenses relating to vacation reserve 1,442 1,131 VAT payable 4,055 3,762 Real estate tax payable 622 512 Total non-financial liabilities 6,422 5,632 Financial liabilities Dividends payable 522 514 Interest payable 49 92 Accrued other expenses 2,580 2,014 Deposits received 2,334 2,359 Fee payable to the regulator 394 258 Other amounts payable and current liabilities 6 17 Total financial liabilities 5,885 5,254 Total carrying amount of financial and non-financial liabilities 12,307 10,886 * Deposits received consist of deposits received from customers under imbalance purchase - sale contracts. The fair value of other amounts payable approximates their carrying amoun t. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 141 29. Revenue from electricity transmission and related services Revenue from contracts with customers 2022 2021 Revenue from electricity transmission and related services Electricity transmission services 72,516 80,070 Trade in balancing/imbalance electricity 175,145 71,720 Electricity ancillary (system) services 137,175 91,653 Revenue from other sales of electricity and related services 2,025 2,618 Total revenue from electricity transmission and related services 386,861 246,061 Other income from contracts with customers Income from administration of guarantees of origin 129 126 Total other income 129 126 Total revenue from contracts with customers 386,990 246,187 Revenue not attributable to contracts with customers PSO services 28,893 19,978 Congestion revenue 1,896 590 Other electricity-related services 1,161 495 Revenue from connection of producers and relocation of electrical installations 13 8 Total revenue not attributable to contracts with customers 31,963 21,071 Total revenue 418,953 267,258 All revenues are recognised over – time. Revenue from electricity transmission and related services increased by 56.8% in 2022 compared to 2021. Revenue growth resulted mainly from a EUR 103.4 million (2.4 times) increase in revenue from imbalance and balancing energy due to 2.5 times higher average sale price, although the volume sold was 1% lower. Revenue from electricity ancillary (system) services increased by EUR 45.5 million (49.7%) as a result of a 61.7% increase in an average price. Revenue from PSO services (balancing of electricity produced from renewable energy sources) increased by EUR 8.9 million as a result of a 86% increase in the price, although the volume sold declined by 36.1%. 30. Other income 2022 2021 Income from lease of assets 534 512 Interest on late payment and default charges (Note 2.20) 696 2,786 Other income 125 32 Total 1,355 3,330 NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 142 31. Significant changes in operating expenses 2022 2021 Expenses for purchase of imbalance and balancing electricity 203,588 91,007 Expenses for electricity ancillary (system) services 111,633 61,860 Expenses for electricity technological needs 99,576 40,165 Due to an increase in the average purchase price, expenses for imbalance and balancing electricity rose 2.2 times in 2022 compared to 2021 and amounted to EUR 203.6 million. Expenses for electricity ancillary (system) services increased by 80.5% in 2022 compared to 2021 and totalled EUR 111.6 million. Expenses of compensating for electricity purchase technological losses in the transmission network increased 2.5 times in 2022 compared to 2021 and amounted to EUR 99.6 million due to 2.1 times higher average purchase price of electricity and 17.2% higher technological losses. 32. Segment information The Company is engaged in the provision of electricity transmission and related services and its business activities are organised as a single segment. The main indicator for the segment’s profit or loss is a net profit. All non-current assets of the Company are allocated in Lithuania where the Company conducts its business activities. In 2022, revenue from the Lithuanian clients accounted for 82% of the Company’s total revenue (89% in 2021). In 2022 and 2021, the Company’s revenue by geographical location of customers: 2022 2021 Lithuania 344,221 242,169 Estonia 43,862 10,176 Sweden 15,840 7,231 Poland 5,846 5,823 Latvia 1,448 2,192 Norway 7,838 2,304 Other countries 1,253 693 Total 420,308 270,588 The Company’s revenue from the major clients in 2022: Company name 2022 Energijos Skirstymo Operatorius AB 200 602 Ignitis UAB 48 486 Ignitis Gamyba AB 27 705 The Company’s revenue from the major clients in 2021: Company name 2021 Energijos Skirstymo Operatorius AB 158 956 Ignitis UAB 23 756 Ignitis Gamyba AB 13 687 NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 143 33. Related-party transactions EPSO-G UAB was the parent company as at 31 December 2022 and 2021. The parent entity of this company was the Republic of Lithuania represented by the Ministry of Energy of the Republic of Lithuania. For the purposes of the related-party disclosure the Republic of Lithuania excludes central and local government authorities. The disclosures comprise transactions with the companies of the EPSO-G UAB group, associates and all entities controlled by or under a significant influence of the state (transactions with these entities are disclosed only if the amount of the transactions exceeds EUR 100 thousand during a calendar year) and with the management, and balances arising from these transactions.The list of entities controlled by or under a significant influence of the state, with which the transactions are disclosed, is presented at address: https://vkc.sipa.lt/apie- imones/vvi-sarasas/. The Company’s related parties in 2022 and 2021 were as follows: - The Company’s parent EPSO-G, which is wholly owned by the Ministry of Energy of the Republic of Lithuania: - The companies of the EPSO-G UAB group: - Amber Grid AB (jointly controlling shareholders); - TETAS UAB (jointly controlling shareholders); - Energy Cells UAB (jointly controlling shareholders); - BALTPOOL UAB (jointly controlling shareholders). - The companies of Ignitis Grupė UAB - Other state-owned entities: - State Enterprise Ignalina Nuclear Power Plant - State Enterprise Centre of Registers - Other state-owned companies or those under significant influence. - Management. Transactions with related parties are carried out in accordance with the public procurement requirements or the tariffs approved by the legal acts. The Company’s transactions conducted with related parties in 2022 and balances arising from these transactions as at 31 December 2022 were as follows: Amounts Related parties Amounts payable and receivable and accrued EPSO-G UAB group companies accrued revenue expenses Loans granted Purchases Sales Other sales EPSO-G UAB 25 79 232,008 242 - 13,850 TETAS UAB 365 2,046 - 9,702 180 - BALTPOOL UAB 354 - - - 12,279 - ENERGY CELLS UAB 123 48 - 38 200 - State-owned companies Energijos Skirstymo Operatorius AB 33,059 985 - 4,039 200,591 - Ignitis Gamyba AB 3,712 25,387 - 181,932 27,705 - Ignitis Grupės Paslaugų Centras UAB 27 - - - 295 - Ignitis UAB 10,138 - - 11,176 48,486 - Vilniaus Kogeneracinė Jėgainė UAB 8 100 - 579 212 - Kauno Kogeneracinė Jėgainė UAB - 81 - 771 194 - Transporto Valdymas UAB - - - 123 - - State Enterprise Lithuanian Road Administration - 321 - - - - STATE ENTERPRISE IGNALINA NUCLEAR POWER PLANT 159 - - - 1,152 - LTG Infra AB 127 15 - - 652 - State Enterprise Centre of Registers - 205 - 240 - - 48,097 29,267 232,008 208,842 292,011 13,785 The Company’s transactions with the state-owned enterprises mainly comprise sales of electricity transmission, balancing, imbalance and electricity ancillary (system) services, purchase of electricity. EPSO-G UAB provides management services, TETAS UAB provides services under construction contracts, Baltpool UAB transfers PSO funds allocated to the Company. * - Income from financing activities comprised as follows: sale of shares of TSO Holding AS to EPSO-G UAB (EUR 13,785 thousand); compensation of expenses related to the sale of shares of TSO Holding AS to EPSO-G UAB (EUR 45 thousand); and interest charged to EPSO-G UAB on the loan granted (EUR 20 thousand). NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 144 Dividends paid to related parties 2022 2021 EPSO-G UAB 4,917 16,129 Total 4,917 16,129 The Company’s transactions conducted with related parties in 2021 and balances arising from these transactions as at 31 December 2021 were as follows: Related parties Amounts Amounts payable receivable and and accrued Loans EPSO-G UAB group companies accrued revenue expenses granted Purchases Sales Other sales EPSO-G UAB - 53 43,594 628 - - TETAS UAB 618 958 11,522 89 13 BALTPOOL UAB 3,189 - - 203 10,527 - State-owned companies Energijos Skirstymo Operatorius AB 20,543 273 - 3,907 159,142 - Ignitis Gamyba AB 4,620 19,003 - 82,846 13,687 - Ignitis Grupės Paslaugų Centras UAB 30 - - - 278 - Ignitis UAB 13,543 - - 3,151 23,756 - Vilniaus Kogeneracinė Jėgainė UAB - 175 - 243 396 - Kauno Kogeneracinė Jėgainė UAB - 43 - 262 125 - Transporto Valdymas UAB - 18 - 181 - - Projektų Ekspertizė UAB - 46 - 103 - - State Enterprise Lithuanian Road Administration - 321 - - - - State Enterprise Ignalina Nuclear Power Plant 94 10 - 128 923 - LTG Infra AB 69 - - - 499 - 42,706 20,900 43,594 103,174 209,422 13 Dividends paid to related parties 2021 2020 EPSO-G UAB 16,129 3,983 Total 16,129 3,983 Payments to key management personnel 2022 2021 Employment-related payments 803 802 Whereof: Termination benefits* 37 Number of key management personnel (average annual) 7 7 * - including social security contributions paid by the employer. No loans, guarantees or any other benefits were paid or calculated, nor any assets were transferred to the Company’s management in 2022 and 2021. Key management personnel consists of the Company’s heads of administration, directors of the departments and members of the collegial management bodies. In 2022, payments to the members of the collegial management bodies amounted to EUR 40 thousand (2021: EUR 38 thousand). 34. Basic and diluted earnings per share In 2022 and 2021, the Company’s basic and diluted earnings/(deficit) per share were as follows: 2022 2021 Profit/(loss) for the period attributable to the Company’s shareholders (EUR thousands) (49,449) 20,013 Weighted average number of shares (units) 504,331,380 504,331,380 Basic and diluted earnings/(deficit) per share (in EUR) (0.098) 0.040 NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 145 35. Additional information on cash flows Change in the Company’s payables for non-current assets amounting to EUR 1,964 thousand (2021: EUR 841 thousand) and capitalised interest amounting to EUR 36 thousand (2021: EUR 46 thousand) were taken into account when calculating cash flows from investing activities in 2022. 36. Financial risk factors The Company is exposed to financial risks in its operations. In managing these risks, the Company seeks to mitigate the effect of factors which could make a negative effect on the financial performance of the Company. Financial risk management is conducted by the Company’s Finance Planning and Analysis Division in accordance with the Treasury and Financial Risk Management Policy of the EPSO-G UAB Group approved by the Board of LITGRID AB which is published on the website of EPSO-G UAB www.epsog.lt. Financial instruments by category (as per the statement of financial position): Financial assets At 31 At 31 December 2022 December 2021 Trade receivables under contracts with customers (Note 11) 61,080 50,463 Trade receivables (Note 12) 2,558 10,200 Other amounts receivable (Note 13) 892 9,969 Loans granted (Note 8) 232,008 43,594 Other financial assets (Note 14) 7,361 5,359 Cash and cash equivalents (Note 15) 499 1,819 Financial assets measured at amortised cost 304,398 121,404 Other financial assets Financial assets measured at fair value through other comprehensive income (Note 9) - 781 Total financial assets 304,398 122,185 Financial liabilities At 31 December At 31 December 2022 2021 Borrowings (Note 20) 40,428 65,677 Lease liabilities (Note 21) 5,702 4,594 Trade payables (Note 26) 70,146 59,454 Dividends payable (Note 28) 522 514 Accrued other expenses and deferred revenue (Note 28) 2,580 2,014 Guarantee on the fulfilment of obligations (Note 28) 2,334 2,359 Total 121,712 134,612 Credit risk As at 31 December 2022 and 31 December 2021, credit risk was related to the following line items: At 31 At 31 December 2022 December 2021 Financial assets, excluding assets measured at fair value through other comprehensive income 304,398 121,404 The Company has a significant credit risk concentration, because exposure to credit risk is shared among 10 main customers, amounts receivables from which accounted for about 95% of the Company’s total trade and other receivables as at 31 December 2022 (31 December 2021: 94%). As at 31 December 2022, amounts receivable from the major customer, i.e. distribution network operator Energijos Skirstymo Operatorius AB, accounted for 54% of the Company’s total amounts receivable (31 December 2021: 36%). When entering into imbalance contracts with participants of the electricity market, the Company requires to pay a cash deposit of the established amount ( note 14 and note 28) or to provide a bank guarantee in accordance with terms and conditions set out in the imbalance contract. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 146 The Company holds unused cash and cash equivalents at the banks assigned with a credit rating not lower than AA-. The table below shows the long-term credit ratings of the parent banks of the banks at which the Company holds cash and cash equivalents (Note 15): Swedbank A+ SEB AA- OP Corporate Bank AA- Trade and other receivables are mainly from the state-owned entities and large manufacturers with no history of significant defaults. The Company has granted the loan to EPSO-G UAB, which is wholly owned by the state and has a Baa1 investment rating assigned by rating agency Moody’s Investors Service. Liquidity risk The main objective of the Company’s liquidity policy is to ensure funding of its operations, i.e. to ensure that the Company will have sufficient cash and/or committed credit facilities and overdrafts to meet its contractual obligations at any time. The liquidity risk is managed by making forecasts of cash flows of the Company. The Company’s cash flows from operations were negative in 2022, therefore its exposure to liquidity risk became more significant. The Company’s current ratio (total current assets / total current liabilities) and quick ratio ((total current assets – inventories) / total current liabilities) as at 31 December 2022 were 0.71 (31 December 2021: 1). As described in Note 2.16, the Company may use congestion management revenue when necessary. The next year’s liquidity will be ensured by the next year’s operating profit and congestion funds received which, when necessary, will be used for the financing of the activities, and by obtaining additional borrowings from financial institutions. The table below summarise the contractual maturity dates of the Company’s financial liabilities. This information has been prepared based on undiscounted cash flows of financial liabilities based on the earliest date on which the Company can be required to pay. Balances of trade and other amounts payable with repayment terms up to 12 months are equal to their carrying amounts, because the impact of discounting is insignificant. Up to 3 Between Within the Within After five Total months 4 months second third – fifth years liabilities and 1 year year year At 31 December 2022 Trade and other amounts payable 75,582 - - - - 75,582 Borrowings - 6,509 6,452 14,757 14,267 41,985 Lease liabilities 120 345 442 850 7,587 9,344 75,702 6,854 6,894 15,607 21,854 126,911 At 31 December 2021 Trade and other amounts payable 64,341 - - - - 64,341 Borrowings 1,262 13,559 14,675 19,989 18,415 67,900 Lease liabilities 75 165 107 253 7,671 8,271 65,678 13,724 14,782 20,242 26,086 140,512 Market risk a) Interest rate risk The Company’s income, expenses and cash flows from operating activities are substantially independent of changes in market interest rates. From November 2022, the Company has non-current borrowings bearing fixed interest rates. b) Foreign exchange risk To manage the foreign exchange risk, the Company enters into purchase/sale contracts only in the euros. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 147 37. Fair value of financial assets and financial liabilities The Company’s principal financial assets and liabilities not carried at fair value are trade and other amounts receivable, cash and cash equivalents, loans, trade and other amounts payable and other financial assets. The following methods and assumptions are used to estimate the value of each category of financial instruments that are not measured at fair value: • The carrying amount of current trade and other amounts receivable, other financial assets, cash and cash equivalents, loans to the related parties, current trade payables and other amounts payable approximates their fair value (Level 3). • The fair value of non-current borrowings is based on the quoted market price for the same or similar issues or on the current rates available for borrowings with the same maturity profile. The fair value of the Company’s non-current borrowings with fixed interest rates was approximately EUR 4,681 thousand lower than their carrying amount as at 31 December 2022 (31 December 2021: EUR 2,959 thousand). 38. Regulation of prices and the Company’s profitability The electricity transmission service result for 2018-2021 (difference between permitted and actual investment return) accrued as at 31 December 2022 and already approved by the NERC is negative totalling EUR (4.1) million, and it has already been assessed (revenue has been increased) when establishing the transmission service price for 2023. The electricity transmission service result for 2022 is negative due to a significant increase in electricity market prices in 2022 leading to higher expenses for compensating for electricity purchase technological losses in the transmission network and it has not yet been approved by the NERC. When establishing the price for 2024-2025, it should be assessed by increasing the price of and revenue from the electricity transmission service. The result of ancillary (system) services for 2021 (difference between revenue and expenses which is to be refunded) accrued as at 31 December 2022 and already approved by the NERC totals EUR 27.1 million, and it has already been assessed (revenue has been reduced) when establishing the acquisition component of ancillary (system) services for 2023. The result of ancillary (system) services for 2022 is positive and has not yet been approved by the NERC. When establishing the price for 2023, it should be assessed by reducing the price of and revenue from the services. 39. Litigations A legal dispute with Šiaulių Energija UAB is ongoing from 12 March 2020, during which Vilnius Regional Court passed the ruling on 6 April 2021 whereby it obligated to the Company to indemnify losses, procedural interest and compensate litigation expenses. As at 31 December 2021, the Company established a provision of EUR 661 thousand for a possible claim. On 24 March 2022, the Court of Appeal passed a final ruling and ordered the Company to indemnify a loss of EUR 1,360 thousand, procedural interest and compensate litigation expenses. Under the ruling of the Court of Appeal the total amount awarded was paid to Šiaulių Energija UAB as according to Article 279(1) of the Lithuanian Civil Procedure Code rulings passed by the court of appeal instance come into effect from the date of their adoption. At the present moment, LITGRID AB has fully executed the ruling of the Court of Appeal of Lithuania. The appeal in cassation of LITGRID AB was accepted on 3 June 2022. The case is under investigation by the court of cassation instance regarding the annulment of the ruling of the court of appeal for the amount of EUR 1,360 thousand. The Company cannot predict the course of the case, it has fully executed its obligations, therefore no provisions were established in respect of this case as at 31 December 2022 (Note 23). In the procurement Purchase of construction works of the 330 kV Vilnius-Neris electricity transmission line conducted by LITGRID AB, the contractor refused to sign the contract. Consequently, the proposal guarantee, i.e. a bank guarantee for the amount of EUR 100 thousand, was used. On 30 May 2022, Žilinskis ir CO UAB filed a claim with Vilnius Regional Court for the annulment of the decision of LITGRID AB regarding the use of a bank guarantee and of the claim to Luminor Bank AS Lithuania division, and for the awarding of an amount of EUR 100 thousand. Case-law is not well-developed in this area, therefore a provision of EUR 100 thousand was established as at 31 December 2022 (Note 23). On 24 January 2023, Vilnius Regional Court finalised the investigation of the case and rejected the claim. On 23 February 2023 Žilinskis ir CO UAB has applied the appeal against the decision to the Court of Appeal of Lithuania. NOTES TO THE COMPANY’S FINANCIAL STATEMENTS (All amounts are in EUR thousands unless otherwise stated) 148 40. Services provided by the audit firm Non-audit services provided to the Company by the audit firm in 2022 amounted to EUR 18 thousand (2021: EUR 21 thousand). 41. Events after the reporting period On 26 February 2023 the company extended the borrowing agreement with UAB "EPSO-G" for the second time until 26 February 2024, applying from 1 March 2023 variable interest rate linked to ESTR (euro short-term rate). _ PricewaterhouseCoopers UAB, J. Jasinskio str. 16B, 03163 Vilnius, Lithuania +370 (5) 239 2300, ltvilnius@pwc.com, www.pwc.lt Company code 111473315, registered with the Legal Entities’ Register of the Republic of Lithuania Independent auditor’s report To the shareholders of LITGRID AB Report on the audit of the financial statements Our opinion In our opinion, the financial statements give a true and fair view of the financial position of LITGRID AB (the “Company”) as at 31 December 2022 and of the Company’s financial performance and cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union. Our opinion is consistent with our additional report to the Audit Committee dated 16 March 2023. What we have audited The Company’s financial statements comprise: ● the statement of financial position as at 31 December 2022; ● the statement of comprehensive income for the year then ended; ● the statement of changes in equity for the year then ended; ● the statement of cash flows for the year then ended; and ● the notes to the financial statements, which include significant accounting policies and other explanatory information. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Company in accordance with the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (IESBA Code) and the Law of the Republic of Lithuania on the Audit of Financial Statements that are relevant to our audit of the financial statements in the Republic of Lithuania. We have fulfilled our other ethical responsibilities in accordance with the IESBA Code and the Law of the Republic of Lithuania on the Audit of Financial Statements. To the best of our knowledge and belief, we declare that non-audit services that we have provided to the Company are in accordance with the applicable law and regulations in the Republic of Lithuania and that we have not provided non-audit services that are prohibited under Article 5(1) of Regulation (EU) No 537/2014 considering the exemptions of Regulation (EU) No 537/2014 endorsed in the Law of the Republic of Lithuania on the Audit of Financial Statements. The non-audit services that we have provided to the Company, in the period from 1 January 2022 to 31 December 2022, are disclosed in note 40 to the financial statements. Our audit approach Overview Materiality ● Overall materiality: EUR 2,975 thousand Key audit matters ● Value of Property, plant and equipment As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including, among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the financial statements as a whole, taking into account the structure of the Company, the accounting processes and controls, and the industry in which the Company operates. Materiality The scope of our audit was influenced by our application of materiality. An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Company materiality for the financial statements as a whole as set out in the table below. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, if any, both individually and in aggregate on the financial statements as a whole. Overall Company materiality EUR 2,975 thousand (EUR 2,670 thousand) How we determined it 1% of the average revenue for the last three years Rationale for the materiality benchmark applied We chose revenue as the benchmark for the Company because it is the measure against which the performance of the Company is assessed by the regulatory bodies as well as external creditors and other stakeholders. The Company’s results depend on approved tariffs for regulated activities, therefore the Company‘s profit before tax fluctuate widely year over year, whereas its revenue is more stable and growth-oriented indicator which can be compared to other market participants. Since electricity prices were significantly increasing in the market in 2022, we chose the average revenue for the last three years as the benchmark to determine the materiality levels. We chose 1%, which is within the range of acceptable quantitative materiality thresholds. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above EUR 200 thousand, as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter How our audit addressed the key audit matter Value of Property, plant and equipment (refer note 2.4 and 6) The Company applies the revaluation model for subsequent recognition of property, plant and equipment (‘PPE’). As at 31 December 2022 the carrying value of PPE amounted to EUR 361,718 thousand, being its fair value at the date of the revaluation less subsequent accumulated depreciation and less subsequent accumulated impairment losses. The management has assessed whether the carrying value of PPE does not materially differ from that which would be determined using fair value at the end of the reporting period. The Company used the income approach using the discounted cash flows technique and concluded that carrying amount of the PPE is the reasonable approximation of the fair value and therefore no valuation adjustments have been recognised as at 31 December 2022. We focused on this area due to significance of the PPE balance for the statement of financial position and because the management’s assessment of values of PPE is an area of significant management judgements. We understood and evaluated management’s policies, processes and controls in determination of fair value of PPE. We have examined management’s valuation methodology and their assessment of incurred changes in tariff setting regulations. We obtained the cash flow models used by the management to assess the value of assets. We checked the models and tested that they are mathematically accurate and that the results are accurately compared to the carrying values of assets. We examined the management’s assumptions which have material impacts on valuation results: rate of return on regulated assets and discount rate, expected capital expenditures, additional tariff component to finance investments, values of regulated assets and values of assets at historic cost. As appropriate, we traced them to Company’s internal budgets and investment plans, or market information. We involved our internal valuation specialists to assist us in discount rate and terminal value assessment and in an overall assessment of model’s methodology. Also, we assessed sensitivity of the cash flow model to changes in the rate of return, discount rate, additional tariff component to finance investments and to changes in congestion income. We considered whether the overall estimate is reasonable and whether the management judgement that no valuation adjustments are needed is appropriate to the circumstances. We have considered the adequacy of disclosures in Notes 2.4 and 6. Reporting on other information including the annual report Management is responsible for the other information. The other information comprises the annual report, including the corporate governance report and the remuneration report and social responsibility (sustainability) report (but does not include the financial statements and our auditor’s report thereon). Our opinion on the financial statements does not cover the other information, including the annual report. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. With respect to the annual report, including the corporate governance report and the remuneration report, we considered whether the annual report, including the corporate governance report and the remuneration report, includes the disclosures required by the Law of the Republic of Lithuania on Financial Reporting by Undertakings. Based on the work undertaken in the course of our audit, in our opinion: ● the information given in the annual report, including the corporate governance report and the remuneration report, for the financial year for which the financial statements are prepared, is consistent with the financial statements; and ● the annual report, including the corporate governance report and the remuneration report, has been prepared in accordance with the Law of the Republic of Lithuania on Financial Reporting by Undertakings. The Company presented the social responsibility (sustainability) report as a part of the annual report. In addition, in light of the knowledge and understanding of the Company and its environment obtained in the course of the audit, we are required to report if we have identified material misstatements in the annual report which we obtained prior to the date of this auditor’s report. We have nothing to report in this regard. Responsibilities of management and those charged with governance for the financial statements Management is responsible for the preparation of the financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the European Union, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: ● Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. ● Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. ● Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. ● Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. ● Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence and have communicated with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on other legal and regulatory requirements Report on the compliance of the format of the financial statements with the requirements of the European Single Electronic Reporting Format We have been engaged based on the amendment to our audit agreement by the management of the Company to conduct a reasonable assurance engagement for the verification of compliance with the applicable requirements of the European single electronic reporting format of the Company’s financial statements, including the annual report, for the year ended 31 December 2022 (the “Single Electronic Reporting Format of the financial statements”). Description of a subject matter and applicable criteria The Single Electronic Reporting Format of the financial statements has been applied by the management of the Company to comply with the requirements of art. 3 and 4 of the Commission Delegated Regulation (EU) 2019/815 of 17 December 2018 supplementing Directive 2004/109/EC of the European Parliament and of the Council with regard to regulatory technical standards on the specification of a single electronic reporting format (the “ESEF Regulation”). The applicable requirements regarding the Single Electronic Reporting Format of the financial statements are contained in the ESEF Regulation. The requirements described in the preceding sentence determine the basis for application of the Single Electronic Reporting Format of the financial statements and, in our view, constitute appropriate criteria to form a reasonable assurance conclusion. Responsibility of the management and those charged with governance The management of the Company is responsible for the application of the Single Electronic Reporting Format of the financial statements that complies with the requirements of the ESEF Regulation. This responsibility includes the selection and application of appropriate markups in iXBRL using ESEF taxonomy and designing, implementing and maintaining internal controls relevant for the preparation of the Single Electronic Reporting Format of the financial statements which is free from material non- compliance with the requirements of the ESEF Regulation. Those charged with governance are responsible for overseeing the financial reporting process, which should also be understood as the preparation of financial statements in accordance with the format resulting from the ESEF Regulation. Our responsibility Our responsibility was to express a reasonable assurance conclusion whether the Single Electronic Reporting Format of the financial statements complies, in all material aspects, with the ESEF Regulation. We conducted our engagement in accordance with International Standard on Assurance Engagements 3000 (Revised) ‘Assurance Engagements other than Audits and Reviews of Historical Financial Information’ (“ISAE 3000 (R)”). This standard requires that we comply with ethical requirements, plan and perform procedures to obtain reasonable assurance whether the Single Electronic Reporting Format of the financial statements complies, in all material aspects, with the applicable requirements. Reasonable assurance is a high level of assurance, but it does not guarantee that the service performed in accordance ISAE 3000 (R) will always detect the existing material misstatement (significant non-compliance with the requirements). Summary of the work performed Our planned and performed procedures were aimed at obtaining reasonable assurance that the Single Electronic Reporting Format of the financial statements was applied, in all material aspects, in accordance with the applicable requirements and such application is free from material errors or omissions. Our procedures included in particular: • obtaining an understanding of the internal control system and processes relevant to the application of the Single Electronic Reporting Format of the financial statements, including the preparation of the XHTML format and marking up the financial statements; • verification whether the XHTML format was applied properly; • evaluating the completeness of marking up the financial statements using the iXBRL markup language according to the requirements of the implementation of single electronic format as described in the ESEF Regulation; • evaluating the appropriateness of the Company’s use of XBRL markups selected from the ESEF taxonomy and the creation of extension markups where no suitable element in the ESEF taxonomy has been identified; and • evaluating the appropriateness of anchoring of the extension elements to the ESEF taxonomy. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our conclusion. Conclusion In our opinion, the Single Electronic Reporting Format of the financial statements for the year ended 31 December 2022 complies, in all material aspects, with the ESEF Regulation. Appointment We were first appointed as auditors of the Company on 24 April 2015 and had an uninterrupted engagement appointment of 3 years. After a 2-year break our appointment was renewed on 18 September 2020, representing a total period of engagement appointment of 6 years. Our appointment to audit the financial statements for the year ended 31 December 2022 was approved by the shareholder’s resolution on 11 July 2022. The key audit partner on the audit resulting in this independent auditor’s report is Rasa Radzevičienė. On behalf of PricewaterhouseCoopers UAB Rasa Radzevičienė Partner Auditor's Certificate No. 000377 Vilnius, Republic of Lithuania 16 March 2023 The auditor's electronic signature is used herein to sign only the Independent Auditor's Report