Kauno Energija

Annual / Quarterly Financial Statement • Apr 26, 2018

AB KAUNO ENERGIJA

SET OF CONSOLIDATED AND PARENT COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR, ENDED 31 DECEMBER 2017, PREPARED ACCORDING TO INTERNATIONAL FINANCIAL REPORTING STANDARDS, AS ADOPTED BY THE EUROPEAN UNION, PRESENTED TOGETHER WITH CONSOLIDATED ANNUAL REPORT AND INDEPENDENT AUDITOR'S REPORT

Translation note

This set of Consolidated and Parent Company's Financial Statements presented together with Consolidated Annual Report and Independent Auditor's Report has been prepared in Lithuanian language and in English language. In all matters of interpretations of information, views or opinions, the Lithuanian language version of these documents takes precedence over the English version.

	Page
INDEPENDENT AUDITOR'S REPORT……………………………………………	3 – 8
SET OF CONSOLIDATED AND PARENT COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR 2017	9 – 56
Statements of Financial Position	9 – 10
Statements of Profit (loss) and Other Comprehensive Income	11 – 12
Statements of Changes in Equity	13
Statements of Cash flows	14 – 15
Notes to the Financial Statements	16 – 56
CONSOLIDATED ANNUAL REPORT……………………………………………….	57 – 152

KPMG Baltlcs, UAB Liepq st, 4 LT-92114 Klaipèda Lithuania

Phone: Fax: E-mail: Website:

+370 46 48 00 12 +370 46 48 00 13 klaipeda@kpmg.lt www.kpmg.lt

lndependent Audrtor s Re0ort

To the Shareholders of AB Kauno energija

Report on the Audit of the Separate and the Consolidated Financial Statements

Opinion

We have audited the separate financial statements of AB Kauno energija ("the CompanV") and the consolidated financial statements AB Kauno energija and its subsidiaries ("the Group"). The separate financial statements of the Company and the consolidated financial statements of the Group comprise:

• o the separate Statement of Financial position of the Company and the Consolidated Statement of Financial Position of the Group as at 31 December 2017,
• ¡ the separate Statement of Prof it (loss) of the Company and the consolidated Statement of Profit (loss) of the Group for the year then ended,
• . the separate statement of Other Comprehensive lncome of the Company and the consolidated statement of Other Comprehensive lncome of the Group for the year then ended,
• ¡ the separate statement of Changes in Equity of the Company and the consolidated statement of Changes in Equity of the Group for the year then ended,
• . the separate statement of Cash Flows of the Company and the consolidated statement of Cash Flows of the Group for the year then ended, and
• o the notes to the separate and consolidated financial statements of the Company and the Group, comprising significant accounting policies and other explanatory information.

ln our opinion, the accompanying separate and consolidated f¡nancial statements give a true and fair view of the unconsolidated financial position of the Company and the consolidated f inancial position of the Group as at 31 December 2017, respectively, and of their respective unconsolidated and consolidated financial performance and their cash f lows for the year then ended in accordance with lnternational Financial Reporting Standards, as adopted bythe European U nion.

Basis for Opinion

We conducted our audit in accordance with lnternational Standards on Auditing (lSAs). Our responsibilities under those standards are f urther described in the Auditor's Responsibilities for the Audit of the Separate and Consolidated Financial Statements section of our report. We are independent of the Company and the Group in accordance with the lnternational Ethics Standards Board forAccountants'Code of Ethics for ProfessionalAccountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the Law on Audit of Financial Statements of the Republic of Lithuania and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

@2018 KPMG Baltlcs, UAg, a L¡lhuanlan llmlted llablllty company ând a memberlìrm of ths KPMG network of Independent m€mberfirms afillated wlth KPMG lnlernatlonal Cooperatlvs ("KPMG lnlêrnatlonal"), å Swlss entlty. All r¡ghts reseN€d.

Key Audit Matters

Key audit matters are thôse matters that, in our professionaljudgment, were of most significance in our audit of the separate and consolidated f inancial statements of the current period, These matters were addressed in the context of our audit of the separate and consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Each audit matter and our respective response are described below,

lmpairment ðssessment of investments in subsidiaries (separate financial statements only)

See Note 1 and Note 5 to the financial statements

The carrying amount of investments in subsidiaries in the separate financial statements as at ³¹ December 201 7: EU R 1 ,908 thousand

lmpairment losses recognized in 2017: EUR 1,060 thousand.

The key audit matter	How the matter was addressed in our audit
The investments in subsidiaries are carried at cost in the separate financial statements of the Company, As disclosed in the note 1 to the financial statements both subsidiaries have generated losses in2017 which indicates that the investments might be impaired.	Our audit procedures included, among others: assessing objectivity, experience and professional qualifications of the external valuer; involving our own valuation specialists who assisted us in:
,As a result, the Company performed	o assessing the appropriateness of the
impairment tests for both investments as at	valuation methodologies applied by the
31 December 2017. The investments are	Company by comparing them to
individually assessed for impairment.	methodologies commonly used in
For the assessment of recoverability of	valuations of similar assets and the
investment in UAB "Kauno energija NT" the	requirements of the relevant accounting
Company engaged an external valuer. The	standards;
recoverable amount of the investment was	o challenging the key assumptions used in
estimated using the comparative method	the discounted cash flow model by
where the main assets underlying the	comparing key inputs, such us increase in
investment are office premises and'	revenues, expenses, capital expenditures
buildings.	to our understanding of the subsidiary's
For the assessment of recoverability of	current operations and trends, relevant
investment in UAB "Petraðiunq katiline" the	industry data, comparing the forecasted
Company applied the discounted future cash	growth rates, the discount rate to the ones
flow model.	used in the industry;
We focused on this area as the estimate of	o assessing the appropriateness of the key
the recoverable amounts of the investments	input data, such as location, size, type of
in subsidiaries requires the use of significant	the land usage and infrastructure, years of
judgement and subjective assumptions from	construction or reconstruction of office
the Company as to the future cash flows,	premises and buildings, used in the
the discount rate, selection of comparable	comparative valuation method by
properties and adjustments to their	comparing it to external market data and
valuations.	our knowledge of the industry;
Accordingly, we have identified this area as a key audit matter.	o checking mathematical accuracy of the discounted cash flow models used in the valuation of investment in subsidiary,

@2018 KPMG Baltlcs, UAB, a Lllhuanlan llmlted fiabiltty company and ã memberflrm of the KPMG network of lnd€pendent member flrms afflllâtêd wlth KPMG lnternatlonal Cooperallv€ ("KPMG lntematlonat'), a Swtss enüty. All rlghts reserved,

considering the Company's disclosure (Note 5) in relation to the use of estimates and judgements regarding the recoverable amount of investments in subsidiaries for compliance with the applicable financial reporting standards, o

Carrying amount of trade receivables (separate and consolidated financial statements)

See Note 7 and Note 22lo The separate and consolidâted financial statements.

Ïhe carrying value of trade receivable in the separate and consolidated f inancial statements as at 3'l December 2017 amounts to EUR 9.993 thousand. Change in impairment loss of the total account receivables recognized for the year ended 31 December 2017 amounts to EUR 833 thousand in the consolidated statement of Profit (loss) and Other Comprehensive lncome and EUR 859 thousand in the separate statement of Profit (loss)and Other Comprehensive lncome.

The key audit matter	How the matter was addressed in our audit
The Company and the Group recognize allowances for impairment loss that represent their estimates of incurred losses in respect of trade receivables. lmpairment losses are estimated on collective basis for trade receivables of similar nature and characteristics. The estimates are subject to the inherent uncertainty in forecasting the amount that will be recovered from the clients and timing of payment.	Our audit procedures included, among others: o evaluating the design and implementation of controls over the estimation of the impairment allowances; o assessing the impairment modelfor compliance with the relevant accounting standard; assessing the appropriateness of key
Collective impairment loss allowances are related to small corporate and private exposures and reflect both already existing credit losses and also losses that have been incurred but are not yet identifiable on an individual exposure level,	assumptions used in the impairment model such as the probability of default, loss identification period and loss given default by comparing them to the historical data of the Company and the Group, considering cash receipts obtained and losses reported after the year end;
The key assumptions in this area are the probability of client's default, the loss identification period defined as the time between the occurrence of the event and the date when the Company identifies it and the assessment of the non-recoverable amount from the client in the event of a default ("loss given default").	considering the adequacy of disclosure in describing the allowances for impairment loss in trade receivables
We focused on this area due to the materiality of the trade receivable balances and associated impairment loss allowances and the subjective nature of the impairment loss estimates.
Accordingly, we have identified this area as a key audit matter.

@2018 KPIVG Balt¡cs, UAB, a Llthuantan ttmtted ilabiltty company and a mêmber flrm of the KPMG network of lndependent memberflrms afflllated wlth KPMG lnternatlonal Cooperallve ("KPMG lnternaflonâl,), a Swlss enÍty, All rlghts reserued,

Other matters

Thefinancialstatementsasatandfortheyearended3l December2016wereauditedbyanother auditor, who on 31 March 2017 issued an unmodified opinion on these financial statements.

Other lnformal.ion

The other information comprises the information included in the consolidated annual management report, including Corporate Governance Statement and Corporate Social Responsibility Report, but does not include the separate and consolidated financial statements and our auditor's report thereon. Management is responsible for the other information.

Our opinion on the separate and consolidated financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

ln connection with our audit of the separate and consolidated f inancial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the separate and consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. lf, based on the work we have performed, we conclude that there is a material misstatement of this other ìnformation, we are required to report that fact. We have nothing to report in this regard.

ln addition, our responsibility is to considerwhether information included in the consolidated annual management report, including Corporate Governance Statement, for the f inancial year for which the separate and consolidated financial statements are prepared is consistent with the separate and consolidated f inancial statements and whether consolidated annual management report, including Corporate Governance Statement, has been prepared in compliance with applicable legal requirements. Based on the work carried out in the course of audit of the separate and consolidated financial statements, in our opinion, in all material respects:

• . The information given in the consolidated annual management report, including Corporate Governance Statement, for the financial year for which the separate and consolidated financial statements are prepared is consistent with the separate and consolidated financial statements; and
• o The consolidated annual management report, including Corporate Governance Statement, has been prepared in accordance with the requirements of the Law on Consolidated Financial Reporting by Groups of Undertakings of the Republic of Lithuania.

We also need to check that the Corporate Social Responsibility Report has been provided. lf we identify that Corporate Social Responsibility Report has not been provided, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance for the Separate and Consolidated Financial Statements

Management is responsible for the preparation of the separate and consolidated f inancial statements that give a true and fair view in accordance with lnternational Financial Reporting Standards, as adopted bythe European Union, and for such internalcontrol as management determines is necessary to enable the preparation of separate and consolidated f inancial statements that are free from material misstatement, whether due to fraud or error.

ln preparing the separate and consolidated financial statements, management is responsible for assessing the Company's and the Group'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 and the Group's or to cease operations, or has no realistic alternative but to do so.

@2018 KPMG Baltlcs, UAB, a Ltthuantan ltmtted ilabiltty company and a memberflrm of the KPMG network of lndêpêndent msñberflrmsafflllated w¡th.KPMG lnternatlonal Coopêratlve (.KpMc lnt€mailonat'), a Swtss enilty. All rlghts reserved.

Those charged with governance are responsible for overseeing the Company's and the Group's financial reporting process.

Auditor's Responsibilities for the Audit of lhe Separate and Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the separate and consolidated 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 lSAs 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 inf luence the economic decisions of users taken on the basis of these separate and consolidated f inancial statements.

As part of an audit in accordance with lSAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• e ldentify and assess the risks of material misstatement of the separate and consolidated 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 f raud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control,
• r 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 and the Group's internal control.
• o 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 and the Group's ability to continue as a going concern. lf we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the separate and consolidated 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 and the Group to cease to continue as a going concern,
• r Evaluate the overall presentation, structure and content of the separate and consolidated financial statements, including the disclosures, and whether the separate and consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• o Obtain sufficient appropriate audit evidence regarding the f inancial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

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 signif icant deficiencies in internal control that we identify durìng our audit,

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

@2018 KPMG Baltlcs, UAB, a Lilhuânlan llmlted llâbl¡lty company and a memberflrm of lhe KPMG n€twork of Independent memberfirms afftllated wlth KPMG lnternatlonal Cooperatlve ("KPMG lnternatlonal"), a Swlss enllty. All righls reseryed.

From the matters communicated with those charged with governance, we determine those matters that were of most signif icance in the audit of the separate and consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors' 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

^Under decision of the general shareholders' meeting we were appointed on 21 J uly 201 7 for the ^first time to audit the Company's and the Group's separate and consolidated financial statements The total uninterrupted period of engagement is 1 year.

We conf irm that our audit opinion expressed in the Opinion section of our report is consistent with the additional report presented to the Company and the Group and the Audit Committee.

We confirm that to the best of our knowledge and belief, we have not provided any prohibited non-audit servìces referred to in Article 5(1) of the Regulation (EU) No 537/2014 of the European Parliament and of the Council.

On behalf of KPMG Baltics, UAB

[¿ tt I /,, 11*

Rokas Kas Partner Certified Auditor IUS

Klaipeda, the Republic of Lithuania 28 March 2018

@2018 KPMG Baltlcs, UAB, a Lllhuanlan llmlted llablllty company and a memberflm of tho KPMG network of lndepend€nt memberllrms afflllated w¡th KPMG lnternatlonal Cooperatlve ("KPMG lnternatlonal"), â Swlss entlty, All rlghts reserved.

	Group		Company
Notes	As of 31 December 2017	As of 31 December 2016	As of 31 December 2017	As of 31 December 2016
3	56	107	56	107
$\overline{\mathbf{4}}$
		9,290	7,307	7,590
				84,207
				23,507
				448
				3,175
Construction in progress and prepayments	2,487	974	2,487	974
	282	299
Total property, plant and equipment	129,948	126,585	124,076	119,901
1;5			1,908	2,968
5			60
	1	1	1	$\mathbf{1}$
Total non-current financial assets	$\mathbf{1}$	$\mathbf{1}$	1,969	2,969
	130,005	126,693	126,101	122,977
6	1,429	486	1,342	416
	450	491	406	384
Total inventories and prepayments	1,879	977	1,748	800
$\overline{7}$
22;24	9,993	10,117	9,993	10,117
24	671	1,001	649	984
	10,664	11,118	10,642	11,101
8;22	6.610	6,285	6,511	6,193
	19,153	18,380	18,901	18,094
		8,857 89,857 24,594 648 3,223	84,919 27,420 497 3,186	89,213 21,233 620 3,216

		Group		Company
	Notes	As of 31 December 2017	As of 31 December 2016	As of 31 December 2017	As of 31 December 2016
EQUITY AND LIABILITIES
Equity
Share capital	$\mathbf{I}$	74,476	74,476	74,476	74,476
Legal reserve	9	3,267	2,922	3,267	2,922
Other reserve	9	100	2,977	100	2,977
Retained earnings (deficit)
Profit for the current year	$\mathbf{1}$	6,861	6,957	6,046	6,901
Profit (loss) for the prior year	$\mathbf{1}$	4,639	(313)	5,135	239
Total retained earnings (deficit)		11,500	6,644	11,181	7,140
Total equity		89,343	87,019	89,024	87,515
Liabilities
Non-current liabilities
Non-current borrowings	10;22	18,676	19,559	18,676	19,559
Financial lease obligations	11;22	185	39	185	39
Deferred tax liability	20	4,869	4,269	5,104	4,461
Grants (deferred income)	12	19,509	17,469	18,377	16,176
Employee benefit liability	13;24	864	1,069	859	1,066
Non-current trade liabilities	22	10	18	10	18
Total non-current liabilities		44,113	42,423	43,211	41,319
Current liabilities
Current portion of non-current borrowings and financial lease	10;11;22	6,144	6,252	3,308	2,849
Current borrowings	10;22
Trade payables	22	7,183	7.194	7.154	7,306
Payroll-related liabilities		800	668	785	657
Advances received		475	549	475	549
Taxes payable		375	391	353	343
Derivative financial instruments	14.22	16	34
Current portion of employee benefit liability	13	406	262	406	262
Other current liabilities		303	281	286	271
Total current liabilities		15,702	15,631	12,767	12,237
Total liabilities		59,815	58,054	55,978	53,556
Total equity and liabilities		149,158	145,073	145,002	141,071

General Manager	Rimantas Bakas		16 March 2018
Head of Finance Department	Gintautas Muznikas		16 March 2018
Chief Accountant	Violeta Staškūnienė	mar	16 March 2018

Group

	Notes	2017	2016
Income
Sales income	15	59,680	61,178
Other operating income	17	1,150	2,288
Total income		60,830	63,466
Expenses
Fuel and heat acquired		(31,271)	(34, 334)
Salaries and social security		(7, 734)	(6,992)
Depreciation and amortization	3:4	(7, 363)	(6,172)
Repairs and maintenance		(920)	(716)
Write-offs and change in allowance for accounts receivable	7	833	797
Taxes other than income tax		(1, 539)	(1, 496)
Electricity		(1, 195)	(1,212)
Raw materials and consumables		(639)	(622)
Water		(1,003)	(831)
Change in write-down to net realizable value of inventories and non-current assets	6	906	(22)
Other expenses	16	(2, 725)	(2,920)
Other activities expenses	17	(368)	(306)
Total expenses		(53, 018)	(54, 826)
Operating profit (losses)		7,812	8,640
Other interest and similar income	18	267	210
Financial assets and short-term investments impairment	19
Interest and other similar expenses	19	(563)	(574)
Finance cost, net		(296)	(364)
Profit before income tax		7,516	8,276
Income tax	20	(30)	(2)
Deferred tax income (losses)	20	(600)	(766)
Profit for the year		6,886	7,508
Employee benefit liability (accumulation)	13	(25)	(551)
Comprehensive income Profit for the year attributable to		6,861	6,957
owners of the Company		6,886	7,508
Total comprehensive income attributable to
owners of the Company		6,861	6,957
Basic and diluted earnings per share (EUR)	21	0.16	0.18

General Manager	Rimantas Bakas	16 March 2018
Head of Finance Department	Gintautas Muznikas	16 March 2018
Chief Accountant	Violeta Staškūnienė	16 March 2018

Company
	Notes	2017	2016
Income
Sales income	15	59,692	61,188
Other operating income	17	1,022	2,181
Total income		60,714	63,369
Expenses
Fuel and heat acquired		(32,087)	(34, 641)
Salaries and social security		(7, 591)	(6,953)
Depreciation and amortization	3;4	(6, 754)	(6,074)
Repairs and maintenance		(863)	(711)
Write-offs and change in allowance for accounts receivable	$\overline{7}$	859	810
Taxes other than income tax		(1, 513)	(1,490)
Electricity		(1,050)	(1, 159)
Raw materials and consumables		(630)	(619)
Water		(1,001)	(830)
Change in write-down to net realizable value of inventories and non-current assets	6	906	(22)
Other expenses	16	(2,663)	(2,907)
Other activities expenses	17	(259)	(231)
Total expenses		(52, 646)	(54, 827)
Operating profit (losses)		8,068	8,542
Other interest and similar income	18	248	213
Financial assets and short-term investments impairment	19	(1,060)
Interest and other similar expenses	19	(511)	(541)
Finance cost, net		(1, 323)	(328)
Profit before income tax		6,745	8,214
Income tax	20	(33)	1
Deferred tax income (losses)	20	(643)	(766)
Profit for the year		6,069	7,449
Employee benefit liability (accumulation)	13	(23)	(548)
Comprehensive income		6,046	6,901
Profit for the year attributable to owners of the Company		6,069	7,449
Total comprehensive income attributable to
owners of the Company		6,046	6,901
Basic and diluted earnings per share (EUR)	21	0.14	0.17

General Manager	Rimantas Bakas	16 March 2018
Head of Finance Department	Gintautas Muznikas	16 March 2018
Chief Accountant	Violeta Staškūnienė	16 March 2018

Group	Notes	Share capital	Legal reserve	Other reserve	Retained earnings (accumulate d deficit)	Total
Balance as of 31 December 2015		74,476	2,695	713	3,976	81,860
Transferred to reserves	9		227	2,977	(3,204)
Transferred from reserves	9			(713)	713
Dividends			1 .		(1,798)	(1,798)
Total comprehensive income					6,957	6,957
Balance as of 31 December 2016		74,476	2,922	2,977	6,644	87,019
Transferred to reserves	9		345	100	(445)
Transferred from reserves	9		-	(2,977)	2,977
Dividends			۰		(4, 537)	(4, 537)
Total comprehensive income					6,861	6,861
Balance as of 31 December 2017		74,476	3,267	100	11,500	89,343

Company	Notes	Share capital	Legal reserve	Other reserve	Retained earnings (accumulated deficit)	Total
Balance as of 31 December 2015		74,476	2,695	713	4,528	82,412
Transferred to reserves	9		227	2,977	(3,204)
Transferred from reserves	9		۰	(713)	713
Dividends			۰		(1,798)	(1,798)
Total comprehensive income		٠		$\qquad \qquad \blacksquare$	6,901	6,901
Balance as of 31 December 2016		74,476	2,922	2,977	7,140	87,515
Transferred to reserves	9		345	100	(445)
Transferred from reserves	9			(2,977)	2,977
Dividends					(4, 537)	(4, 537)
Total comprehensive income				-	6,046	6,046
Balance as of 31 December 2017		74,476	3,267	100	11,181	89,024

General Manager	Rimantas Bakas	16 March 2018
Head of Finance Department	Gintautas Muznikas	16 March 2018
Chief Accountant	Violeta Staškūnienė	16 March 2018

	Group		Company
	2017	2016	2017	2016
Cash flows from (to) operating activities
Comprehensive income	6,861	6,957	6,046	6,901
Adjustments for non-cash items:
Depreciation and amortization	9,049	7,587	8,237	7,466
Write-offs and change in allowance for accounts receivable	(827)	(792)	(853)	(805)
Interest expenses	563	557	512	541
Change in fair value of derivatives Loss (profit) from sale and write-off of	(18)	17
property, plant and equipment and value of the shares	(31)	(2)	I	(2)
(Amortization) of grants (deferred income)	(1, 244)	(1,090)	(1,083)	(1,050)
Change in write-down to net realizable value of inventories and non-current assets	(906)	22	(906)	22
Change employee benefit liability	25	551	23	548
Calculation of the value of shares
Income tax expenses	600	768	643	765
Change in accruals	136	87	134	85
Impairment of investment in subsidiary			1,060
Elimination of other financial and investing activity results	(249)	(210)	(248)	(210)
Total adjustments for non-cash items:	7,098	7,495	7,520	7,360
Changes in working capital:
(Increase) decrease in inventories	(13)	(170)	$\overline{4}$	(112)
(Increase) decrease in prepayments	41	237	(22)	332
(Increase) decrease in trade receivables	954	(317)	973	(307)
(Increase) decrease in other receivables	113	289	125	290
(Decrease) increase in other non-current liabilities		(8)		(8)
(Decrease) increase in current trade payables and advances received	(85)	(553)	(226)	(421)
(Decrease) increase in payroll-related liabilities	(73)	(114)	(74)	(102)
Increase (decrease) in other liabilities to budget	(16)	106	10	63
Increase (decrease) in other current liabilities	(4)	(60)	(12)	(40)
Total changes in working capital:	917	(590)	778	(305)
Net cash flows from operating activities	14,876	13,862	14,344	13,956

	Group		Company
	2017	2016	2017	2016
Cash flows from (to) the investing activities
(Acquisition) of tangible and intangible assets	(12,091)	(6, 678)	(12,091)	(6,680)
Proceeds from sale of tangible assets	36	3	4	$\overline{4}$
Interest received for overdue accounts receivable	249	210	248	210
Acquisition of subsidiaries		(1,706)		(1,894)
Loans granted			(60)
Decrease of non-current accounts receivable
Net cash (used in) investing activities	(11, 806)	(8,171)	(11, 899)	(8,360)
Cash flows from (to) financing activities
Proceeds from loans	2,501	2,974	2.501	2.974
(Repayment) of loans	(3,568)	(2,489)	(3,001)	(2,489)
Interest (paid)	(591)	(574)	(540)	(558)
Financial lease (payments)	(50)	(60)	(50)	(60)
Penalties and fines (paid)
Dividends, tantiemes (paid)	(4, 535)	(1,797)	(4, 535)	(1,797)
Received grants	3,498	9	3,498	9
Net cash flows from (used in) financing activities	(2,745)	(1, 937)	(2, 127)	(1, 921)
Net (decrease) increase in cash and cash equivalents	325	3,754	318	3,675
Cash and cash equivalents at the beginning of the period	6,285	2,531	6,193	2,518
Cash and cash equivalents at the end of the period	6,610	6,285	6,511	6,193

Notes to the Financial Statements

1. General information

AB Kauno Energija (hereinafter – the Company) is a public limited liability company registered in the Republic of Lithuania. The address of its registered office is as follows: Raudondvario Rd. 84, Kaunas, Lithuania. Data on the Company are collected and stored in the Register of Legal Entities.

AB Kauno Energija consists of the Company's head office and the branch of Jurbarko Šilumos Tinklai.

The Company is involved in heat and hot water supplies, electricity generation and distribution and also in maintenance of manifolds. The Company are also involved in maintenance of heating systems. The Company was registered on 1 July 1997 after the reorganization of AB Lietuvos Energija. The Company's shares are traded on the Baltic Secondary List of the AB Nasdaq Vilnius.

As of 31 December 2017 and of 31 December 2016 the shareholders of the Company were as follows:

		As of 31 December 2017	As of 31 December 2016
	Number of Percentage shares owned of ownership (unit) (percent)		Number of shares owned (unit)	Percentage of ownership (percent)
Kaunas city municipality	39,736,058	92.84	39,736,058	92.84
Kaunas district municipality	1,606,168	3.75	1,606,168	3.75
Jurbarkas district municipality	746,405	1.74	746,405	1.74
Other minor shareholders	713,512	1.67	713,512	1.67
	42,802,143	100.00	42,802,143	100.00

All the shares are ordinary shares. The Company owns no shares as at the end of the reporting periods. All shares were fully paid as of 31 December 2017 and as of 31 December 2016.

On 28 April 2017 the Annual General Meeting of Shareholders has made a decision to pay EUR 4,537 thousand, i.e. at 10.6 cents a share in dividends from the profit of the year 2016.

On 28 April 2016 the Annual General Meeting of Shareholders has made a decision to pay EUR 1,798 thousand, i.e. at 4.2 cents a share in dividends and EUR 32 thousand tantiemes for the members of the Company's board from the profit of the year 2015. Annual payments are accounted in salaries and social security line of Statements of Profit (loss) and Other Comprehensive Income.

Responding to changes in competition in Kaunas heat production sector, on 27 October 2016 the Company accomplished transaction of acquisition of UAB Petrašiūnų Katilinė, acquiring block of 100 % shares for EUR 1,894 thousand. This acquisition is a result of consistent planning of development of production capacities. Group's heat production capacity using biofuel increased at 19.2 MW after this acquisition, thus a reliability of heat supply to consumers increased additionally.

As of 31 December 2017 the Company and the subsidiaries UAB Kauno Energija NT and UAB Petrašiūnų Katilinė represent the Group (hereinafter – the Group):

Company	Principal place of business	Share held by the Group	Cost of investment	Profit (loss) for the year	Total equity	Main activities
UAB Kauno energija NT	Savanorių Ave. 347, Kaunas	100 percent	1,330	(138)	1,087	Rent
UAB Petrašiūnų katilinė	R. Kalantos g. 49, Kaunas	100 percent	1,894	(17)	336	Heat production

1. General information (cont'd)

Legal Regulations

According to the Heating Law of the Republic of Lithuania, the Company's activities are licensed and regulated by the State Price Regulation Commission of Energy Resources (hereinafter the Commission). On 26 February 2004 the Commission granted the Company the heat distribution license. The license has indefinite maturity, but is subject to meeting certain requirements and may be revoked based on the respective decision of the Commission. The Commission also sets price cap for the heat supply. On the 14 December 2012 the Commission determined by its decision No. 03-413 a new basic heat rates force components for the period from 1 January 2013 till 31 December 2016. As at 31 December 2017 basic heat rate for the period is not approved by the Commission. The basic heat rate force components, which were approved on 14 December 2012, are valid until Commission will approve new basic heat rates force components.

In 2017 the average number of employees at the Group was 522 (536 employees in 2016). In 2017 the average number of employees at the Company was 509 (523 employees in 2016).

Operational Activity

Group's generation capacities consist of Company's generation capacities and 1 subsidiary boiler-house in Kaunas. Company's generation capacities include Petrašiūnai power plant, 4 boiler-houses in Kaunas integrated network, 7 district boiler-houses in Kaunas district, 1 regional boiler-house in Jurbarkas city, 13 boiler-houses in isolated networks and 28 local boiler-house in Kaunas city and 8 water heating boiler-houses in Sargėnai catchment.

Total installed heat generation capacities of the Group consist of approx 607 MW (including 41 MW of condensational economizers) and total power generation capacities of the whole Group consist of approx 616 MW (including 41 MW of condensational economizers). Total installed heat generation capacities of Company amount to 588 MW (including 41 MW of condensing economizers). Electricity generation capacities amount up to 8.75 MW. 314.6 MW of heat generation capacities (including 17.8 MW condensing economizer) and 8 MW of electricity generation capacities are located in Petrašiūnai power plant. 34.8 MW of heat generation capacities (including 2.8 MW condensing economizer) are located in Jurbarkas city. Total Company's power generation capacities consist of approx. 597 MW (including 41 MW of condensing economizers).

The Company accomplished the last (of three) investment litigation with UAB Kauno Termofikacijos Elektrinė (hereinafter – KTE), after Vilnius Court of Commercial Arbitration approved on 29 January 2016 a peaceful agreement concluded on 28 December 2015. Following the terms of agreement the sides agreed to terminate Investment agreement of 31 March 2003, KTE taking obligations to pay compensation for the Company in amount of EUR 2.3 million. The Company has got EUR 0.24 million during the 2017 (EUR 1.8 million during 2016), which is disclosed in Note 17, the rest EUR 0.24 million is subject to pay by KTE until 28 February 2018. As an additional non-financial compensation according the terms of peaceful agreement KTE disposed to the Company a part of Kaunas centralized heat supplies infrastructure (manifolds building and coherent pipelines, as well as part of technological circuit equipment, necessary to the Company) and the rights of lease of land plot, coherent to the assets disposed. The Company leased out to KTE a technological circuit equipment taken from it for the 25 years period, manifolds building – for 15 years period and subleases land for the 15 year period holding the right for bargain regarding additional term. This juridical litigation with KTE continued from April 2013 and the litigations regarding a non-compliance of investments – from the year 2009. The Company is awarded and has got from KTE in total more than EUR 3.6 million of forfeit in 2011 and 2013 regarding a non-compliance of investment obligations.

The Company makes investments estimating economic situation, competition and financing possibilities. Investment plans are approved by shareholders, and regulated and controlled by Commission. The Company invested EUR 12,390 thousand in own assets in 2017, and EUR 6,761 thousand in 2016.

2. Accounting principles

2.1. Statement of Compliance

The financial statements are prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and interpretations of them. The standards are issued by the International Accounting Standards Board (IASB) and the interpretations by the International Financial Reporting Interpretations Committee (IFRIC).

2.2. Basis of the preparation of financial statements

The financial statements have been prepared on a cost basis, except for certain financial instruments, which are stated at fair value, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for assets.

The financial year of the Company and other Group companies coincides with the calendar year.

The amounts shown in these financial statements are measured and presented in the local currency of the Republic of Lithuania, Euro (EUR) (rounded to the nearest thousands, except when otherwise indicated), which is a functional and presentation currency of the Group.

2.3. Adoption of new and/or amended IFRS

Except for the changes below, the Company has consistently applied the accounting policies set out in Note 2 to all periods presented in these financial statements

The following amendments to the existing standards and new interpretation issued by the International Accounting Standards Board (IASB) and adopted by the EU are effective, but they are not mandatory for annual reporting periods beginning on 1 January 2017 and they were not applied when preparing these financial statements. The Company intends to apply these amendments, when they will become valid:

IFRS 15 "Revenue from Contracts with Customers", adopted by the EU on 22 September 2016 and Clarifications to IFRS 15 "Revenue from Contracts with Customers", adopted by the EU on 31 October 2017. (Effective for annual periods beginning on or after 1 January 2018. Earlier application is permitted.)

The new Standard provides a framework that replaces existing revenue recognition guidance in IFRS. Entities will adopt a five-step model to determine when to recognize revenue, and at what amount. The new model specifies that revenue should be recognized when (or as) an entity transfers control of goods or services to a customer at the amount to which the entity expects to be entitled. Depending on whether certain criteria are met, revenue is recognized:

• over time, in a manner that depicts the entity's performance; or
• at a point in time, when control of the goods or services is transferred to the customer.

IFRS 15 also establishes the principles that an entity shall apply to provide qualitative and quantitative disclosures which provide useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer.

The Clarifications to IFRS 15 clarify some of the Standard's requirements and provide additional transitional relief for companies that are implementing the new Standard.

The amendments clarify how to:

• identify a performance obligation the promise to transfer a good or a service to a customer- in a contract;
• determine whether a company is a principal (the provider of a good or service) or an agent (responsible for arranging for the good or service to be provided); and
• determine whether the revenue from granting a license should be recognized at a point in time or over time.

2.3. Adoption of new and/or amended IFRS (cont'd)

The amendments also provide entities with two additional practical expedients:

• an entity need not restate contracts that are completed contracts at the beginning of the earliest period presented (for entities that using the full retrospective method only);

• for contracts that were modified before the beginning of the earliest period presented, an entity need not retrospectively restate the contract but shall instead reflect the aggregate effect of all of the modifications that occur before the beginning of the earliest period presented (also for entities recognising the cumulative effect of initially applying the standard at the date of initial application).

The Group and the Company have completed its assessment of the impact of IFRS 15 on the financial statements. The management assessment showed, that the new Standard, when initially applied, will not have material impact on the Company's financial statements. The timing and measurement of the Company's revenues will not change under IFRS 15, because of the nature of the Company's operations and the types of revenues it earns.

IFRS 9 "Financial Instruments" adopted by the EU on 22 November 2016 (effective for annual periods beginning on or after 1 January 2018, to be applied retrospectively with some exemptions. The restatement of prior periods is not required, and is permitted only if information is available without the use of hindsight. (Early application is permitted).

This Standard replaces IAS 39, Financial Instruments: Recognition and Measurement, except that the IAS 39 exception for a fair value hedge of an interest rate exposure of a portfolio of financial assets or financial liabilities continues to apply, and entities have an accounting policy choice between applying the hedge accounting requirements of IFRS 9 or continuing to apply the existing hedge accounting requirements in IAS 39 for all hedge accounting until the standard resulting from the IASB's project in macro hedge accounting is effective.

Although the permissible measurement bases for financial assets – amortized cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL) – are similar to IAS 39, the criteria for classification into the appropriate measurement category are significantly different.

A financial asset is measured at amortized cost if the following two conditions are met:

• the assets is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and

• its contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal outstanding.

In addition, for a non-trading equity instrument, a company may elect to irrevocably present subsequent changes in fair value (including foreign exchange gains and losses) in OCI. These are not reclassified to profit or loss under any circumstances.

For debt instruments measured at FVOCI, interest revenue, expected credit losses and foreign exchange gains and losses are recognized in profit or loss in the same manner as for amortized cost assets. Other gains and losses are recognized in OCI and are reclassified to profit or loss on derecognition.

The impairment model in IFRS 9 replaces the 'incurred loss' model in IAS 39 with a forward-looking an 'expected credit loss' (ECL) model, which means that a loss event will no longer need to occur before an impairment allowance is recognized. The new impairment model will apply to financial assets measured at amortized cost or FVOCI, except for investments in equity instruments, and to contract assets.

Under IFRS 9, loss allowances will be measured on either of the following bases:

• 12-month ECLs: these are ECLs that result from possible default events within the 12 months after the reporting date; and

• lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial instrument.

2. Accounting principles (cont'd) 2.3. Adoption of new and/or amended IFRS (cont'd)

IFRS 9 includes a new general hedge accounting model, which aligns hedge accounting more closely with risk management. The types of hedging relationships – fair value, cash flow and foreign operation net investment – remain unchanged, but additional judgment will be required.

The standard contains new requirements to achieve, continue and discontinue hedge accounting and allows additional exposures to be designated as hedged items.

Extensive additional disclosures regarding an entity's risk management and hedging activities are required.

The Group and the Company completed assessment of the impact of IFRS 9 on the financial statements. The classification and measurement of the Company's and the Group's financial instruments are not expected to change under IFRS 9 because of the nature of the Company's and Group's operations and the types of financial instruments that it holds. However the Company and the Group evaluates that impairment losses will increase and become more volatile for assets in the scope of expected credit loss impairment model. The final impairment methodology according to IFRS 9 is not prepared in the Company yet.

IFRS 16 "Leases", adopted by the EU on 31 October 2017 (effective for annual periods beginning on or after 1 January 2019. Earlier application is permitted if the entity also applies IFRS 15.)

IFRS 16 supersedes IAS 17 Leases and related interpretations. The Standard eliminates the current dual accounting model for lessees and instead requires companies to bring most leases on-balance sheet under a single model, eliminating the distinction between operating and finance leases.

Under IFRS 16, a contract is, or contains, a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. For such contracts, the new model requires a lessee to recognize a right-of-use asset and a lease liability. The right-of-use asset is depreciated and the liability accrues interest. This will result in a front-loaded pattern of expense for most leases, even when the lessee pays constant annual rentals.

The new Standard introduces a number of limited scope exceptions for lessees which include:

• leases with a lease term of 12 months or less and containing no purchase options, and
• leases where the underlying asset has a low value ('small-ticket' leases).

Lessor accounting, however, shall remain largely unchanged and the distinction between operating and finance leases will be retained.

So far, the most significant impact identified is that the Group and the Company will recognise new assets and liabilities for its operating leases of land. As at 31 December 2017, the Group's future minimum lease payments under non-cancellable operating leases amounted to EUR 2,143 thousand on an undiscounted basis. As at 31 December 2017, the Company's future minimum lease payments under non-cancellable operating leases amounted to EUR 1,877 thousand on an undiscounted basis.

In addition, the nature of expenses related to those leases will now change as IFRS 16 replaces the straight-line operating lease expense by a depreciation charge for right-to-use assets and interest expense on lease liabilities.

Amendments to IFRS 10 "Consolidated Financial Statements" and IAS 28 "Investments in Associates and Joint Ventures" – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture and further amendments (effective date deferred indefinitely until the research project on the equity method has been concluded).

The Amendments clarify that in a transaction involving an associate or joint venture, the extent of gain or loss recognition depends on whether the assets sold or contributed constitute a business, such that:

• a full gain or loss is recognized when a transaction between an investor and its associate or joint venture involves the transfer of an asset or assets which constitute a business (whether it is housed in a subsidiary or not), while

2. Accounting principles (cont'd) 2.3. Adoption of new and/or amended IFRS (cont'd)

• a partial gain or loss is recognized when a transaction between an investor and its associate or joint venture involves assets that do not constitute a business, even if these assets are housed in a subsidiary.

IFRS 17 "Insurance Contracts" , adopted by the EU on 3 November 2017 (Effective for annual periods beginning on or after 1 January 2018; to be applied prospectively. Early application is permitted.)

IFRS 17 replaces IFRS 4, which was brought in as an interim Standard in 2004. IFRS 4 has given companies dispensation to carry on accounting for insurance contracts using national accounting standards, resulting in a multitude of different approaches.

IFRS 17 solves the comparison problems created by IFRS 4 by requiring all insurance contracts to be accounted for in a consistent manner, benefiting both investors and insurance companies. Insurance obligations will be accounted for using current values, instead of historical cost.

The Company expects that the amendments, when initially applied, will not have a material impact on the presentation of the financial statements of the entity because the Company does not operate in the insurance industry.

2.4. Principles of consolidation

Principles of consolidation

The consolidated financial statements of the Group include AB Kauno Energija and its subsidiaries. The financial statements of the subsidiaries are prepared for the same reporting period as the Company. Consolidated financial statements are prepared on the basis of the same accounting principles applied to similar transactions and other events under similar circumstances.

Income and expenses of subsidiaries acquired or disposed of during the year are included in the consolidated statement of Profit (loss) and Other Comprehensive Income from the effective date of acquisition and up to the effective date of disposal, as appropriate. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

Subsidiary is the company which is directly or indirectly controlled by the parent company. The control is normally evidenced when the Group owns, either directly or indirectly, more than 50 percent of the voting rights of a company's share capital or otherwise has power to govern the financial and operating policies of an enterprise so as to benefit from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases.

Changes in the Group's ownership interests in existing subsidiaries

Changes in the Group's ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group's interests and the noncontrolling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to owners of the Company.

When the Group loses control of a subsidiary, the profit or loss on disposal is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any noncontrolling interests. When assets of the subsidiary are carried at revalued amounts or fair values and the related cumulative gain or loss has been recognized in other comprehensive income and accumulated in equity, the amounts previously recognized in other comprehensive income and accumulated in equity are accounted for as if the Company had directly disposed of the relevant assets (i.e. reclassified to profit or loss or transferred directly to retained earnings as specified by applicable IFRS). The fair value of any investment retained in the former

2.4. Principles of consolidation (cont'd)

subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IAS 39 Financial Instruments: Recognition and Measurement or, when applicable, the cost on initial recognition of an investment in an associate or a jointly controlled entity.

2.5.Investments in subsidiaries

Investments in subsidiaries in the Company's Statements of Financial Position are recognized at cost. The dividend income from the investment is recognized in the Statement of profit (loss).) and Other Comprehensive Income.

The indicators of impairment in IAS 39 are applied to determine whether it is necessary to recognize any impairment loss with respect to the Group's investment in a subsidiary. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount. Any impairment loss recognized forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognized in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases.

2.6.Intangible assets

Intangible assets acquired separately

Intangible assets acquired separately are carried at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized on a straight-line basis over their estimated useful lives. The estimated useful life and amortization method are reviewed at the end of each annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Calculation of amortization is discontinued as of the first day of the next month after the disposal of asset or when the whole acquisition cost is expensed or reclassified as a part of other asset. Intangible assets with indefinite useful lives that are acquired separately are carried at cost less accumulated impairment losses.

Derecognition of intangible assets

An intangible asset is derecognized on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognized in profit or loss when the asset is derecognized.

Licenses

Amounts paid for licenses are capitalized and then amortized over useful life (3 – 4 years).

Software

The costs of acquisition of new software are capitalized and treated as an intangible asset if these costs are not an integral part of the related hardware. Software is amortized over a period not exceeding 3 years.

Costs incurred in order to restore or maintain the future economic benefits of performance of the existing software systems are recognized as an expense for the period when the restoration or maintenance work is carried out.

2.7. Accounting for emission rights

The Group and the Company apply a 'net liability' approach in accounting for the emission rights received. It records the emission allowances granted to it at nominal amount, as permitted by IAS 20 Accounting for Government Grants and Disclosure of Government Assistance.

Liabilities for emissions are recognized only as emissions are made (i.e. provisions are never made on the basis of expected future emissions) and only when the reporting entity has made emissions in excess of the rights held.

2. Accounting principles (cont'd) 2.7. Accounting for emission rights (cont'd)

When applying the net liability approach, the Group and the Company have chosen a system that measures deficits on the basis of an annual allocation of emission rights.

The outright sale of an emission right is recorded as a sale at the value of consideration received. Any difference between the fair value of the consideration received and its carrying amount is recorded as a gain or loss, irrespective of whether this creates an actual or an expected deficit of the allowances held. When a sale creates an actual deficit an additional liability is recognized with a charge to the profit or loss.

2.8. Property, plant and equipment

Property, plant and equipment are stated at cost, excluding the costs of day-to-day servicing, less accumulated depreciation and accumulated impairment losses, if any. Such cost includes the cost of replacing part of such property, plant and equipment when that cost is incurred if the asset recognition criteria are met.

Properties in the course of construction for production, supply or administrative purposes, or for purposes not yet determined, are carried at cost, less any recognized impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs capitalized in accordance with the Group's and the Company's accounting policy. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.

Depreciation is recognized so as to write off the cost of assets (other than freehold land and properties under construction) less their residual values over their useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at each year end, with the effect of any changes in estimate accounted for on a prospective basis. The useful lives are reviewed annually to ensure that the period of depreciation is consistent with the expected pattern of economic benefits from the items in property, plant and equipment.

Depreciation is computed on a straight-line basis over the following estimated useful lives:

	Years
Buildings	15 – 50
Investment property	50 – 50
Structures	15 – 70
Machinery and equipment	5 – 20
Vehicles	4 – 10
Instruments and tools	3 – 16

Freehold land is not depreciated. The Group and the Company capitalizes property, plant and equipment purchases with useful life over one year and an acquisition cost above EUR 144.81. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets.

An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of Profit (loss) and Other Comprehensive Income in the year the asset is derecognized.

Subsequent repair costs are included in the asset's carrying amount, only when it is probable that future economic benefits associated with the item will flow to the Group and the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are recognized in profit or loss in the period in which they are incurred.

Construction-in-progress is stated at cost. This includes the cost of construction, plant and equipment and other directly attributable costs. Construction-in-progress is not depreciated until the relevant assets are completed and put into operation.

2. Accounting principles (cont'd) 2.9.Impairment of property, plant and equipment and intangible assets excluding goodwill

At each Statements of Financial Position date, the Group and the Company reviews the carrying amounts of its property, plant and equipment and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group and the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, Group's and Company's assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax 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 amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognized immediately in profit or loss. The Group and the Company has one cash-generating unit for heating business.

Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss.

2.10. Financial assets

Financial assets are classified as either financial assets at fair value through profit or loss (hereafter – FVTPL), held-to-maturity financial assets, loans and receivables or available-for-sale assets, as appropriate. All purchases and sales of financial assets are recognized on the trade date. When financial assets are recognized initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs.

The Company initially recognizes loans and receivables on the date when they are originated. All other financial assets are initially recognized on the trade date.

Effective interest rate method

The effective interest method is a method of calculating the amortized cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.

Income is recognized on an effective interest basis for debt instruments other than those financial assets classified as at FVTPL.

Financial assets at FVTPL

Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at FVTPL.

2.10. Financial assets (cont'd)

A financial asset is classified as held for trading if:

• it has been acquired principally for the purpose of selling it in the near term; or
• on initial recognition it is part of a portfolio of identified financial instruments that the Group and the Company manages together and has a recent actual pattern of short-term profit-taking; or
• it is a derivative that is not designated and effective as a hedging instrument.

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if:

such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or

the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group's and the Company's documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or

it forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.

Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the 'other gains and losses' line item in the Statement of Profit (loss) and Other Comprehensive Income.

Held-to-maturity financial assets

These assets are initially recognized at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortized cost using the effective interest method. The effective interest rate is determined as the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are measured at amortized cost using the effective interest method, less any impairment. Gains or losses are recognized in profit or loss when the asset value decreases or it is amortized.

Interest income is recognized by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.

Available-for-sale financial assets (AFS financial assets)

Available-for-sale financial assets are non-derivatives that are either designated as AFS or are not classified as (a) loans and receivables, (b) held-to-maturity investments or (c) financial assets at fair value through profit or loss.

Listed redeemable notes held by the Group and the Company that are traded in an active market are classified as available-for-sale and are stated at fair value. The Group and the Company also has investments in unlisted shares that are not traded in an active market but that are also classified as available-for-sale financial assets and stated at fair value (because the directors consider that fair value can be reliably measured). Gains and losses arising from changes in fair value are recognized in other comprehensive income and accumulated in the investments revaluation reserve, with the exception of impairment losses, interest calculated using the effective interest method, and foreign exchange gains and losses on monetary assets, which are recognized in profit or loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserve is reclassified to profit or loss.

Dividends on available-for-sale equity instruments are recognized in profit or loss when the Group's and the Company's right to receive the dividends is established.

2.10. Financial assets (cont'd)

The fair value of available-for-sale monetary assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the end of the reporting period. The foreign exchange gains and losses that are recognized in profit or loss are determined based on the amortized cost of the monetary asset. Other foreign exchange gains and losses are recognized in profit or loss.

Impairment of financial assets

Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.

For listed and unlisted equity investments classified as AFS, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment.

For all other financial assets, including redeemable notes classified as AFS and finance lease receivables, objective evidence of impairment could include:

• significant financial difficulty of the issuer or counterparty; or
• default or delinquency in interest or principal payments; or
• it becomes probable that the borrower will enter bankruptcy or financial reorganization; or
• the disappearance of an active market for that financial asset because of financial difficulties.

For certain categories of financial asset, such as trade receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of receivables could include the Group's and the Company's past experience of collecting payments, an increase in the number of delayed payments in the portfolio past the average credit period of 30 days, as well as observable changes in national or local economic conditions that correlate with default on receivables.

Derecognition of financial assets

A financial asset (or, where applicable a part of a financial asset) is derecognized when:

• the rights to receive cash flows from the asset have expired;
• the Group and the Company retains 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 Group and the Company has transferred their 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.

Where the Group and the Company has transferred its rights to receive cash flows from an asset and has not transferred substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Company's continuing involvement in the asset.

2.11. Derivative financial instruments

The Group and the Company uses derivative financial instruments such as interest rate swaps to hedge its interest rate risks. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

Any gains or losses arising from changes in fair value on derivatives during the year are taken directly to the profit (loss) for the period.

The fair value of interest rate swap contracts is determined by the reference to market values for similar instruments.

2.12. Inventories

Inventories are stated at the lower of cost or net realizable value. Net realizable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale. Costs of inventories are determined on a first-in, first-out (FIFO) basis.

The cost of inventories is net of volume discounts and rebates received from suppliers during the reporting period but applicable to the inventories still held in stock.

2.13. Provisions

Provisions are recognized when the Group and the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group and the Company will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.

2.14. Cash and cash equivalents

Cash includes cash on hand, cash at banks and cash in transit. Cash equivalents are 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.

For the purposes of the cash flow statement, cash and cash equivalents comprise cash on hand, cash with banks, cash in transit, deposits held at call with banks, and other short-term highly liquid investments.

2.15. Employee benefits

Contributions to defined contribution retirement benefit plans are recognized as an expense when employees have rendered service entitling them to the contributions.

The retirement benefit obligation recognized in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognized actuarial gains and losses and unrecognized past service cost, and as reduced by the fair value of plan assets. Any asset resulting from this calculation is limited to unrecognized actuarial losses and past service cost, plus the present value of available refunds and reductions in future contributions to the plan. Actuarial gains and losses are included in Other Comprehensive Income.

2.16. Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.

Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization.

All other borrowing costs are recognized in profit or loss in the period in which they are incurred.

2.17. Financial liabilities and equity instruments

Classification as debt or equity

Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement and the definitions of a financial liability and an equity instrument.

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group and the Company are recognized at the proceeds received, net of direct issue costs.

Financial liabilities Financial liabilities are classified as either financial liabilities 'at FVTPL' or 'other financial liabilities'.

Financial liabilities at FVTPL

Financial liabilities are classified as at FVTPL when the financial liability is either held for trading or it is designated as at FVTPL.

Other financial liabilities

Other financial liabilities (including borrowings) are subsequently measured at amortized cost using the effective interest method.

The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.

Derecognition of financial liabilities

The Group and the Company derecognizes financial liabilities when, and only when, the Group's and the Company's obligations are discharged, cancelled or they expire.

2.18. Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Rental income from operating leases is recognized on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognized on a straight-line basis over the lease term.

The Group and the Company as lessee

Assets held under finance leases are initially recognized as assets of the Group and the Company at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the Statements of Financial Position as a finance lease obligation.

Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognized immediately in profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalized in accordance with the Group's and the Company's general policy on borrowing costs. Contingent rentals are recognized as expenses in the periods in which they are incurred.

Operating lease payments are recognized as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognized as an expense in the period in which they are incurred.

2. Accounting principles (cont'd) 2.18. Leasing (cont'd)

In the event that lease incentives are received to enter into operating leases, such incentives are recognized as a liability. The aggregate benefit of incentives is recognized as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

2.19. Grants (deferred income)

Government grants are not recognized until there is reasonable assurance that the Group and the Company will comply with the conditions attaching to them and that the grants will be received.

Government grants are recognized in profit or loss on a systematic basis over the periods in which the Group and the Company recognizes as expenses the related costs for which the grants are intended to compensate. Specifically, government grants whose primary condition is that the Group and the Company should purchase, construct or otherwise acquire non-current assets are recognized as deferred revenue in the Statements of Financial Position and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets.

Grants received in the form of non-current assets or intended for the purchase, construction or other acquisition of non-current assets are considered as asset-related grants. Assets received free of charge are also allocated to this group of grants. The amount of the grants related to assets is recognized as deferred income and is credited to profit or loss in equal annual amounts over the expected useful life of related asset. In the statement of Profit (loss) and Other Comprehensive Income, a relevant expense account is reduced by the amount of grant amortization.

Assets received free of charge are initially recognized at fair value.

Grants received as a compensation for the expenses or unearned income of the current or previous reporting period, also, all the grants, which are not grants related to assets, are considered as grants related to income. The incomerelated grants are recognized as used in parts to the extent of the expenses incurred during the reporting period or unearned income to be compensated by that grant.

The balance of unutilized grants is shown in the caption Grants (deferred income) in the balance sheet.

2.20. Income tax

Income tax expense represents the sum of the tax currently payable and deferred tax.

Current tax

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the statement of comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. Income tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. In 2017 the income tax applied to the Group and the Company was 15 percent (2016 - 15 percent).

Deferred tax

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Such deferred assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.

2. Accounting principles (cont'd) 2.20. Income tax (cont'd)

Deferred tax liabilities are recognized for taxable temporary differences associated with investments in subsidiaries, except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred income tax assets is reviewed at each Statements of Financial Position date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realized, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group and the Company expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.

Current and deferred tax for the period

Current and deferred tax are recognized as an expense or income in profit or loss, except when they relate to items that are recognized outside profit or loss (whether in other comprehensive income or directly in equity), in which case the tax is also recognized outside profit or loss, or where they arise from the initial accounting for a business combination. In the case of a business combination, the tax effect is included in the accounting for the business combination.

2.21. Basic and diluted earnings per share

Basic earnings per share are calculated by dividing the net profit attributable to the shareholders by the weighted average of ordinary registered shares issued. There are no instructions reducing earnings per share, there is no difference between the basic and diluted earnings per share.

2.22. Revenue recognition

Revenue is recognized when it is probable that the economic benefits associated with the transaction will flow to the enterprise and the amount of the revenue can be measured reliably. Sales are recognized net of VAT and discounts.

Revenue from sales of heat energy is recognized based on the bills issued to residential and other customers for heating and heating-up of cold water. The customers are billed monthly according to the readings of heat meters.

Revenue from the sale of goods is recognized when all the following conditions are satisfied:

the Group and the Company has transferred to the buyer the significant risks and rewards of ownership of the goods;

the Group and the Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

• the amount of revenue can be measured reliably;
• it is probable that the economic benefits associated with the transaction will flow to the Group and the Company; and
• the costs incurred or to be incurred in respect of the transaction can be measured reliably.

2. Accounting principles (cont'd) 2.22. Revenue recognition (cont'd)

Late payment interest income from overdue receivables is recognized upon receipt.

Dividend revenue from investments is recognized when the shareholder's right to receive payment has been established (provided that it is probable that the economic benefits will flow to the Group and the Company and the amount of revenue can be measured reliably).

Interest revenue is recognized when it is probable that the economic benefits will flow to the Group and the Company and the amount of revenue can be measured reliably. Interest revenue is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount on initial recognition.

The Group's and the Company's policy for recognition of revenue from operating leases is described in Note 2.18. above.

2.23. Expense recognition

Expenses are recognized on the basis of accrual and revenue and expense matching principles in the reporting period when the income related to these expenses was earned, irrespective of the time the money was spent. In those cases when the costs incurred cannot be directly attributed to the specific income and they will not bring income during the future periods, they are expensed as incurred.

The amount of expenses is usually accounted for as the amount paid or due, excluding VAT. In those cases when a long period of payment is established and the interest is not distinguished, the amount of expenses is estimated by discounting the amount of payment using the market interest rate.

2.24. Foreign currencies

In preparing the financial statements of the individual entities of the Group, transactions in currencies other than the entity's functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Nonmonetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

The presentation currency is euro (EUR). All transactions made in foreign currency are converted into Euros at the official exchange rate determined daily by the European Central Bank. Financial assets and liabilities are converted into Euros at currency rate of creation day of statements of financial state. Gains and losses arising on exchange are included in profit or loss for the period at the moment of its appearance. Income or expenditures arising on exchange when converting financial assets or liabilities into euros are included in profit or loss.

Exchange differences are recognized in profit or loss in the period in which they arise except for:

exchange differences on foreign currency borrowings relating to assets under construction for future productive use, which are included in the cost of those assets when they are regarded as an adjustment to interest costs on those foreign currency borrowings;

exchange differences on transactions entered into in order to hedge certain foreign currency risks; and

exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur (therefore forming part of the net investment in the foreign operation), which are recognized initially in other comprehensive income and reclassified from equity to profit or loss on disposal or partial disposal of the net investment.

2.25. Use of estimates in the preparation of financial statements

The preparation of financial statements requires the management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses and disclosure of contingencies, at the reporting

2.25. Use of estimates in the preparation of financial statements (cont'd)

date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future.

Estimates and assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty at the Statements of Financial Position date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

Property, plant and equipment – useful life

The key assumptions concerning determination the useful life of property, plant and equipment are as follows: expected usage of the asset, expected physical wear and tear, technical or commercial obsolescence arising from changes or improvements in the services, legal or similar limits on the use of the asset, such as the expiry dates of related leases (3, 4 notes).

Property, plant and equipment - fair value measurements and valuation processes

Some of the Group's assets are measured at fair value for financial reporting purposes. In estimating the fair value of an asset, the Group uses market-observable data to the extent it is available. Where Level 1 inputs are not available, the Group engages third party qualified valuers to perform the valuation, if necessary (Notes 3, 4).

Investments to subsidiaries – impairment losses

For assessment of recoverability of investment into subsidiaries the Company management estimates the recoverable amount of the investment by discounting the future cash flows of the subsidiaries to their present value using weighted average capital cost rate (WACC) that reflects current market assessment of the time value of money (Note 5).

Realizable value of inventory

Starting from 2011, the management of the Company forms a 100 percent adjustment to the net realizable value for inventory, (from 2017 except for technological fuels) bought more than one year ago (Note 6).

Allowances for accounts receivable

The Group and the Company makes allowances for doubtful accounts receivable. Significant judgment is used to estimate doubtful accounts. In estimating doubtful accounts historical and anticipated customer performance are considered. Changes in the economy, industry, or specific customer conditions may require adjustments to the allowance for doubtful accounts recorded in the financial statements (Note 7).

Deferred Tax Asset

Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies (Note 20).

Fair value of financial instruments

Fair value is defined as the price at which the financial assets or liabilities could be exchanged between knowledgeable willing parties in an arm's length transaction at the measurement date. Fair values are obtained from quoted market prices, discounted cash flow models and option pricing models as appropriate.

A number of the Company's accounting policies and disclosures require determination of fair value, for both financial and non-financial assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair values are obtained from quoted market prices, discounted cash flow models as appropriate.

2. Accounting principles (cont'd) 2.25. Use of estimates in the preparation of financial statements (cont'd)

Fair value hierarchy

The base for determination of fair values of financial assets and liabilities, traded in the active markets, are the market prices and prices determined by brokers. Fair value of all other financial instruments is determined using other valuation methods.

When measuring the fair value of an asset or a liability, the Company uses observable market data as far as possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:

• Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
• Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
• Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

If the inputs used to measure the fair value of an asset or a liability might be categorized within different levels of the fair value hierarchy, the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.

The Company recognized transfers between the fair value hierarchy from the end of the reporting period in which the change occurred. Below listed are financial assets and financial liabilities:

The tables below present the residual and fair value of financial assets and financial liabilities, including their levels according to the fair value hierarchy.

The Group and the Company's categories of financial instruments as of 31 December 2017:

Group	Carrying		Fair value hierarchy level
	amount	Level 1	Level 2	Level 3	All in:
Other financial assets	1	-	-	1	1
Trade receivables	9,993	-	-	-	-
Other receivables	671	-	-	-	-
Cash and cash equivalents	6,610	-	-	-	-
Non-current borrowings and financial lease obligations	(25,005)	-	-	(25,005)	(25,005)
Trade payables	(7,193)	-	-	-	-
Derivative financial instruments	(16)	-	(16)	-	(16)
Other current liabilities	(303)	-	-	-	-
	-	-	(16)	(25,004)	(25,020)

Company	Carrying		Fair value hierarchy level
	amount	Level 1	Level 2	Level 3	All in:
Other financial assets	1	-	-	1	1
Loans to entities of the entities group	60	-	-	-	-
Trade receivables	9,993	-	-	-	-
Other receivables	649	-	-	-	-
Cash and cash equivalents	6,511	-	-	-	-
Non-current borrowings and financial lease obligations	(22,169)	-	-	(22,169)	(22,169)
Trade payables	(7,164)	-	-	-	-
Other current liabilities	(286)	-	-	-	-
	-	-	-	(22,168)	(22,168)

2.25. Use of estimates in the preparation of financial statements (cont'd)

The Group and the Company's categories of financial instruments as of 31 December 2016:

Group	Carrying		Fair value hierarchy level
	amount	Level 1	Level 2	Level 3	All in:
Other financial assets	1	-	-	1	1
Trade receivables	10,117	-	-	-	-
Other receivables	1,001	-	-	-	-
Cash and cash equivalents	6,285	-	-	-	-
Non-current borrowings and financial lease obligations	(25,850)	-	-	(25,850)	(25,850)
Trade payables	(7,212)	-	-	-	-
Derivative financial instruments	(34)	-	(34)	-	(34)
Other current liabilities	(281)	-	-	-	-
	-	-	(34)	(25,849)	(25,883)

Company	Carrying		Fair value hierarchy level
	amount	Level 1	Level 2	Level 3	All in:
Other financial assets	1	-	-	1	1
Trade receivables	10,117	-	-	-	-
Other receivables	984	-	-	-	-
Cash and cash equivalents	6,193	-	-	-	-
Non-current borrowings and financial lease obligations	(22,447)	-	-	(22,447)	(22,447)
Trade payables	(7,324)	-	-	-	-
Other current liabilities	(271)	-	-	-	-
	-	-	-	(22,446)	(22,446)

2.26. Contingencies

Contingent liabilities are not recognized in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognized in the financial statements but disclosed when an inflow of economic benefits is probable.

2.27. Subsequent events

Post-balance sheet events that provide additional information about the Group's and the Company's position at the balance sheet date (adjusting events) are reflected in the financial statements. Post-balance sheet events that are not adjusting events are disclosed in the notes when material.

2.28. Offsetting and comparative figures

When preparing the financial statements, assets and liabilities, as well as revenue and expenses are not set off, except the cases when certain IFRS specifically require such set-off.

2.29. Segments

Operating segments are reported in a manner consistent with the internal reporting provided to the chief-operating decision-maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Board of Directors that makes strategic decisions. The activities of the Group and the Company are organized in one operating segment in Kaunas city, Kaunas district and Jurbarkas city, therefore further information on segments has not been disclosed in these financial statements.

3. Intangible assets

Movements of intangible assets for the current and prior reporting periods are as follows:

	Group	Company
	Acquired rights and software
Cost:
Balance as of 31 December 2015	1,405	1,405
Additions	45	45
Disposals and write-offs	(4)	(4)
Transfers from property, plant and equipment	0	0
Balance as of 31 December 2016	1,446	1,446
Additions	0	0
Disposals and write-offs	(28)	(28)
Transfers from property, plant and equipment	5	5
Balance as of 31 December 2017	1,423	1,423
Amortization:	-	-
Balance as of 31 December 2015	1,289	1,289
Charge for the year	54	54
Disposals and write-offs	(4)	(4)
Balance as of 31 December 2016	1,339	1,339
Charge for the year	56	56
Disposals and write-offs	(28)	(28)
Balance as of 31 December 2017	1,367	1,367
Net book value as of 31 December 2015	116	116
Net book value as of 31 December 2016	107	107
Net book value as of 31 December 2017	56	56

Amortization expenses of intangible assets are included in the operating expenses in the statement of Profit (loss) and Other Comprehensive Income.

As of 31 December 2017 part of the non-current intangible assets of the Group and the Company with the acquisition cost of EUR 1,303 thousand (as of 31 December 2016 – EUR 1,258 thousand) were fully amortized but were still in active use.

AB KAUNO ENERGIJA, Company code 235014830, Raudondvario rd. 84, Kaunas, Lithuania CONSOLIDATED AND PARENT COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR 2017 (all amounts are in EUR thousand unless otherwise stated)

4. Property, plant and equipment

Group	Buildings	Structures	Machinery and equipment	Vehicles	Instruments and tools	Construction in progress and prepayments	Investment property	Total
Cost:
Balance as of 31 December 2015	16,785	151,477	50,300	1,769	10,685	304	382	231,702
Additions	416	178	1,560	150	713	5,282	-	8,299
Acquisition of subsidiary	1,531	654	4,054	106	10	-	-	6,355
Disposals and write offs	-	(22)	(383)	(40)	(57)	-	-	(502)
Reclassifications	86	2,547	1,590	9	380	(4,612)	-	-
Transfers to	-	-	-	-	-	-	-	-
intangible assets
Impairment loss(-)	-	(97)	-	-	56	-	-	(41)
Balance as of 31 December 2016	18,818	154,737	57,121	1,994	11,787	974	382	245,813
Additions	-	-	195	292	404	11,499	-	12,390
Disposals and write offs	-	(662)	(357)	(154)	(205)	-	-	(1,378)
Reclassifications	55	8,565	826	33	502	(9,981)	-	-
Transfers to
intangible assets	-	-	-	-	-	(5)	-	(5)
Impairment loss(-)	-	(24)	-	-	-	-	-	(24)
Balance as of 31	18,873	162,616	57,785	2,165	12,488	2,487	382	256,796
December 2017
Accumulated depreciation: Balance as of 31
December 2015	8,914	66,644	25,831	1,386	7,895	-	78	110,748
Charge for the year	360	3,087	3,228	87	766	-	5	7,533
Acquisition of subsidiary	254	109	1,016	64	3	-	-	1,446
Disposals and write offs	-	(22)	(381)	(40)	(56)	-	-	(499)
Reclassifications	-	-	7	-	(7)	-	-	-
Balance as of 31 December 2016	9,528	69,818	29,701	1,497	8,601	-	83	119,228
Charge for the year	488	3,599	3,846	174	869	-	17	8,993
Disposals and write offs	-	(658)	(356)	(154)	(205)	-	-	(1,373)
Reclassifications	-	-	-	-	-	-	-	-
Balance as of 31 December 2017	10,016	72,759	33,191	1,517	9,265	-	100	126,848
Net book value as of 31 December 2015	7,871	84,833	24,469	383	2,790	304	304	120,954
Net book value as of 31 December 2016	9,290	84,919	27,420	497	3,186	974	299	126,585
Net book value as of 31 December 2017	8,857	89,857	24,594	648	3,223	2,487	282	129,948

4. Property, plant and equipment (cont'd)

Company	Buildings	Structures	Machinery and equipment	Vehicles	Instruments and tools	Construction in progress and prepayments	Total
Cost:
Balance as of 31 December 2015	16,431	151,477	50,151	1,553	10,631	304	230,547
Additions	-	-	584	134	708	5,290	6,716
Disposals and write-offs	-	(22)	(383)	(40)	(57)	-	(502)
Reclassifications	86	2,547	1,586	9	384	(4,612)	-
Transfers to intangible	8	-	-	-	-	(8)	-
assets
Impairment loss(-)	-	(97)	-	-	56	-	(41)
Balance as of 31	16,525	153,905	51,938	1,656	11,722	974	236,720
December 2016
Additions	-	-	195	292	404	11,499	12,390
Additions from subsidiary	-	-	-	-	-	-	-
Disposals and write-offs	-	(662)	(357)	(154)	(205)	-	(1,378)
Reclassifications	55	8,565	826	33	502	(9,981)	-
Transfers to intangible	-	-	-	-	-	(5)	(5)
assets
Impairment loss(-)	-	(24)	-	-	-	-	(24)
Balance as of 31 December 2017	16,580	161,784	52,602	1,827	12,423	2,487	247,703
Accumulated depreciation:
Balance as of 31	8,599	66,644	25,679	1,143	7,841	-	109,906
December 2015
Charge for the year	330	3,076	3,126	105	769	-	7,406
Charge for the year from	6	-	-	-	-	-	6
subsidiary
Disposals and write-offs	-	(22)	(381)	(40)	(56)	-	(499)
Reclassifications	-	-	7	-	(7)	-	-
Balance as of 31 December 2016	8,935	69,698	28,431	1,208	8,547	-	116,819
Charge for the year	338	3,531	3,294	153	865	-	8,181
Charge for the year from
subsidiary	-	-	-	-	-	-	-
Disposals and write-offs	-	(658)	(356)	(154)	(205)	-	(1,373)
Reclassifications	-	-	-	-	-	-	-
Balance as of 31 December 2017	9,273	72,571	31,369	1,207	9,207	-	123,627
Net book value as of 31 December 2015	7,832	84,833	24,472	410	2,790	304	120,641
Net book value as of 31 December 2016	7,590	84,207	23,507	448	3,175	974	119,901
Net book value as of 31 December 2017	7,307	89,213	21,233	620	3,216	2,487	124,076

The depreciation charge of the Group's and Company's property, plant and equipment in the 2017 amounts to EUR 7,751 thousand and EUR 7,101 thousand respectively (as of 31 December 2016 – EUR 6,451 thousand and EUR 6,370 thousand respectively). The amounts of EUR 7,641 thousand and EUR 7,010 thousand (as of 31 December 2016 – EUR 6,433 thousand and EUR 6,330 thousand respectively) the depreciation expenses were included into the expenses in statements of Profit (loss) and Other Comprehensive Income, the remaining

4. Property, plant and equipment (cont'd)

amounts EUR 110 thousand and EUR 91 thousand (as of 31 December 2016 – EUR 18 thousand and EUR 40 thousand) were included into other activity expenses in statements of Profit (loss) and Other Comprehensive Income.

The management of the Group and the Company, having assessed the internal and external features, has estimated impairment decrease for the property, plant and equipment in amount of EUR 24 thousand durig 2017 (EUR 41 thousand during 2016).

As of 31 December 2017 part of the property, plant and equipment of the Group with acquisition cost of EUR 51,275 thousand (EUR 51,372 thousand as of 31 December 2016) and the Company – EUR 51,230 thousand were fully depreciated (EUR 51,210 thousand as of 31 December 2016), but were still in active use.

As of 31 December 2017 and as of 31 December 2016 the major part of the Group's and Company's construction in progress consisted of reconstruction and overhaul works of boiler-houses equipment and heat supply networks.

As of 31 December 2017 the sum of the Group and the Company contractual commitments for the acquisition of property, plant and equipment amounted to EUR 8,070 thousand (as of 31 December 2016 – EUR 15,288 thousand).

As of 31 December 2017 property, plant and equipment of the Group with the net book value of EUR 52,225 thousand (EUR 55,788 thousand as of 31 December 2016) and the Company of EUR 48,036 thousand (EUR 51,021 thousand as of 31 December 2016) was pledged to banks as a collateral for loans (Note 10).

The sum of Group's and Company's capitalized interest was equal to EUR 31 thousand in 2017 (in 2016 – EUR 10 thousand). The capitalization rate varied from 0.93 percent to 1.09 percent in 2017 (in 2016 – from 0.95 percent to 1.29 percent).

As of 31 December 2017 the Group and the Company accounted for assets, not yet ready for use, amounting to EUR 241 thousand in the category Equipment and tools (EUR 416 thousand as of 31 December 2016).

The Group and The Company use assets in their operations, acquired by leasing. The acquisition cost of this asset was EUR 358 thousand at December 31 2017 (EUR 136 thousand in 2016 respectively), and the net book value respectively EUR 308 thousand and EUR 112 thousand. Unpaid part of it is disclosed in Note 11. The management of the Group and the Company did not determine impairment decrease after evaluating the internal and external features.

5. Investments in subsidiaries and loans to the subsidiaries

Investments to subsidiaries

		As of 31 December 2017			As of 31 December 2016
Investment to subsidiaries	Acquisition costs	Impairment	Net book value	Acquisition costs	Impairment	Net book value
UAB Kauno Energija NT	1,330	(258)	1,072	1,330	(256)	1,074
UAB Petrašiūnų Katilinė Total	1,894 3,224	(1,058) (1,316)	836 1,908	1,894 3,224	- (256)	1,894 2,968

AB KAUNO ENERGIJA, Company code 235014830, Raudondvario rd. 84, Kaunas, Lithuania CONSOLIDATED AND PARENT COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR 2017 (all amounts are in EUR thousand unless otherwise stated)

5. Investments in subsidiaries and loans to the subsidiaries (cont'd)

The management of the Company used valuation reports prepared by an independent appraiser korporacija UAB "Matininkai" to determine recoverable amount of the investmets. Valuation date was 31 August 2017. The independent appraiser used asset-based approach (adjusted balance sheet method) to determined recouvarable amount of investments. As a result of valuation, the Company recognized additional impairment loss amounting to EUR 2 thousand.

Impairment test for investments in UAB Petrašiūnų katilinė was performed according IAS 36. The value of shares is determined on a basis of the cash flows generated according to projections made for 5 years with terminal value component. The calculation includes change of net working capital and net debt. Discounting of cash flows is based on the weighted average capital cost rate (WACC). The calculated weighted average capital cost rate is 8.0%.

As a result of impairment teste performed as at 31 December 2017, the impairment allowance of EUR 1,058 thousand was recognized to UAB Petrašiūnų katilinė.

Calculation of the recoverable amount is particularly sensitive to the WACC. The table below shows possible impairment of the investment in UAB Petrašiūnų katilinė, if the actual income remains as currently forecasted and if the WACC rates, used for impairment test would 9% or 10%.

WACC base	Additional impairment losses
9%	444
10%	785

Loans to the subsidiaries

The Company granted the turnover loan in amount of EUR 60 thousand to the subsidiary UAB Petrašiūnų Katilinė as at 31 December 2017. Total amount of loan as to agreement – EUR 600 thousand, interest rate 6-month EURIBOR plus 1.2 % margin. The maturity date of the loan is 31 December, 2019. The outstanding balance of the loan was accounted for as the loans to the subsidiaries in the Company's Statements of Financial Position of the Company.

6. Inventories

	Group Company
	As of 31 December 2017	As of 31 December 2016	As of 31 December 2017	As of 31 December 2016
Technological fuel	1,182	1,187	1,096	1,120
Spare parts	466	446	466	444
Materials	433	435	432	434
	2,081	2,068	1,994	1,998
Less: write-down to netrealizable value of inventory at the end of the period	(652)	(1,582)	(652)	(1,582)
Carrying amount of inventories	1,429	486	1,342	416

As of 31 December 2017 Group's and Company's amounted to EUR 652 thousand (as of 31 December 2016 – EUR 1,582 thousand) write-down to net realizable value of inventories. December 2017 the Group and the Company individually assessed the possibility of actual usage of inventories, also evaluated the requirements Lithuanian legislation related to storage of the technological fuel reserve, as a result allowance for write off to the net realizable value was reversed for technological fuels. Changes in the Write-down to net realizable value of inventories for the 2017 and for the year 2016 were included into change in write-down to net realizable value of inventories caption in the Group's and the Company's statements of Profit (loss) and Other Comprehensive Income.

AB KAUNO ENERGIJA, Company code 235014830, Raudondvario rd. 84, Kaunas, Lithuania CONSOLIDATED AND PARENT COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR 2017 (all amounts are in EUR thousand unless otherwise stated)

7. Current accounts receivable

	Group		Company
	As of 31 December 2017	As of 31 December 2016	As of 31 December 2017	As of 31 December 2016
Trade receivables, gross	20,005	21,372	20,024	21,410
Less: impairment of doubtful receivables	(10,012)	(11,255)	(10,031)	(11,293)
	9,993	10,117	9,993	10,117

Change in impairment of doubtful receivables in 2017 and 2016 is included into the caption of write-offs and change in allowance for accounts receivables in the Group's and the Company's statements of Profit (loss) and Other Comprehensive Income. Impairment of doubtful receivables assessed on the basis of historical experience.

Movements in the allowance for impairment of the Group's and the Company's receivables were as follows:

	Group	Company
Balance as of 31 December 2015	12,410	12,458
Additional allowance formed	(825)	(835)
Write-off	(330)	(330)
Balance as of 31 December 2016	11,255	11,293
Additional allowance formed	(830)	(849)
Write-off	(413)	(413)
Balance as of 31 December 2017	10,012	10,031

In 2017 the Group and the Company wrote off EUR 413 thousand and EUR 413 thousand of bad debts respectively (in 2016 – EUR 330 thousand and EUR 330 thousand). In 2017 the Group recovered EUR 6 thousand and the Company – EUR 6 thousand (in 2016 the Group and the Company – EUR 5 thousand) of doubtful receivables, which were written off in the previous periods.

The ageing analysis of the Group's net value of trade receivables as of 31 December 2017 and 31 December 2016 is as follows:

	Trade receivables not past	Trade receivables past due
	due	Less than 60 days	60 - 150 days	151 - 240 days	241 - 360 days	More than 360 days	Total
2017	8,381	760	150	144	138	420	9,993
2016	8,312	996	194	153	171	291	10,117

The ageing analysis of the Company's net value of trade receivables as of 31 December 2017 and as of 31 December 2016 is as follows:

	Trade receivables not			Trade receivables past due
	past due	Less than 60 days	60 - 150 days	151 - 240 days	241 - 360 days	More than 360 days	Total
2017	8,381	760	150	144	138	420	9,993
2016	8,312	996	194	153	171	291	10,117

Trade receivables are non-interest bearing and the payment terms are usually 30 days or agreed individually.

7. Current accounts receivable (cont'd)

As of 31 December 2017 and 31 December 2016 the Group's and the Company's other receivables amounted receivable from state taxes, compensations from municipalities for low income families, receivables from sold inventories (metals, heating equipment) and services supplied (maintenance of manifolds and similar services).

Other Group's and the Company's receivables consisted of:

		Group		Company
	As of 31	As of 31	As of 31	As of 31
	December 2017	December 2016	December 2017	December 2016
Taxes	-	228	-	221
Other receivables	974	1,073	1,011	1,129
Less: value impairment of doubtful receivables	(303)	(300)	(362)	(366)
	671	1,001	649	984

Movements in the allowance for impairment of the Group's and the Company's other receivables were as follows:

	Group	Company
Balance as of 31 December 2015	267	336
Additional allowance formed	33	30
Write-off	-	-
Balance as of 31 December 2016	300	366
Additional allowance formed	3	(4)
Write-off	-	-
Balance as of 31 December 2017	303	362

The ageing analysis of the Group's net value of other receivables (excluding taxes) as of 31 December 2017 and as of 31 December 2016 is as follows:

	Other receivables not		Other receivables past due
	past due	Less than 60 days	60 - 150 days	151 - 240 days	241 - 360 days	More than 360 days	Total
2017	499	123	20	18	2	9	671
2016	535	191	23	13	4	7	773

The ageing analysis of the Company's net value of other receivables (excluding taxes) as of 31 December 2017 and 31 December 2016 is as follows:

	Other receivables not				Other receivables past due
	past due	Less than 60 days	60 - 150 days	151 - 240 days	241 - 360 days	More than 360 days	Total
2017	477	123	20	18	2	9	649
2016	525	191	23	13	4	7	763

The Group's and the Company's other receivables are non-interest bearing and the payment terms are usually 30 – 45 days.

According to the management opinion, there are no indications as of the reporting date that the debtors will not meet their payment obligations regarding trade receivables and other receivables that are neither impaired nor past due.

AB KAUNO ENERGIJA, Company code 235014830, Raudondvario rd. 84, Kaunas, Lithuania CONSOLIDATED AND PARENT COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR 2017 (all amounts are in EUR thousand unless otherwise stated)

8. Cash and cash equivalents

		Group	Company
	As of 31 December 2017	As of 31 December 2016	As of 31 December 2017	As of 31 December 2016
Cash in transit	428	396	428	396
Cash at bank	6,180	5,875	6,081	5,783
Cash on hand	2	14	2	14
	6,610	6,285	6,511	6,193

The Group's accounts in banks amounting to EUR 4,815 thousand as of 31 December 2017 (as of 31 December 2016 – EUR 4,977 thousand) and the Company's to EUR 4,749 thousand as of 31 December 2017 (as of 31 December 2016 – EUR 4,890 thousand) are pledged as collateral for the loans (Note 10).

9. Reserves

Legal and other reserves

A legal reserve is a compulsory reserve under Lithuanian legislation. Annual transfers of not less than 5 percent of net profit calculated in accordance with IFRS are compulsory until the reserve reaches 10 percent of the share capital. The legal reserve cannot be distributed as dividends but can be used to cover any future losses.

On 28 April, 2017 the Company annulled other reserves (EUR 2,977 thousand) by the decision of shareholders, EUR 345 thousand transferred from retained earnings to legal reserve and EUR 100 thousand to other reserves. Reserve was formed for support – EUR 100 thousand.

On 28 April, 2016 the Company annulled other reserves (EUR 713 thousand) by the decision of shareholders, EUR 227 thousand transferred from retained earnings to legal reserve and EUR 2,977 thousand to other reserves. Reserve was formed for long-term loan repayment – EUR 2,435 thousand, for investments – EUR 472 thousand, for support – EUR 50 thousand and for maintenance of heat units – EUR 20 thousand.

10. Borrowings

Terms of repayment of non-current borrowings are as follows: Group Company

	As of 31 December 2017	As of 31 December 2016	As of 31 December 2017	As of 31 December 2016
Non-current borrowings:	18,676	19,559	18,676	19,559
Payable in 2 to 5 years	10,207	9,605	10,207	9,605
Payable in more than 5 years	8,469	9,954	8,469	9,954
Current portion of non-current borrowings (except leasing which) is disclosed in Note 11)	6,028	6,212	3,192	2,809
	24,704	25,771	21,868	22,368

Average of interest rates (in percent) of borrowings weighted outstanding at the year-end were as follows:

	Group		Company
	As of 31	As of 31	As of 31	As of 31
	December 2017	December 2016	December 2017	December 2016
Current borrowings	-	-	-	-
Non-current borrowings	2.25	2.27	2.39	2.44

10. Borrowings (cont'd)

According to loan agreement signed between Luminor Bank AB and the Group's subsidiary UAB Petrašiūnų Katilinė on 22 August 2012 m., the subsidiary has to comply with following covenants: equity capital ratio (including support granted by the Lithuanian Business Support Agency) at least 40%, DSCR not less than 1.3, and total financial debt to EBITDA ratio should be not more than 3.5 in 2017 and not more than 3.0 in later years.

UAB Petrašiūnų Katilinė does not comply with financial rations determined by the bank. As a result, the carrying amount of loan as at 31 December 2017 (EUR 2,836 thousand) and as at 31 December 2016 (EUR 3,403 thousand) is accounted under the current portion of non-current borrowings and financial lease caption of the Group's Statements of Financial Position. The Company has provided a guarantee to the bank for this loan, as it is described in Note 23. Further progress is described in Note 26.

AB SEB Bankas has determined to the Company to be in compliance with the quarterly net financial debt / EBITDA ratio, which must not exceed 4.5. According to loan agreement between the Company and OP Corporate Bank Plc Lithuanian branch, the Company's own capital ratio (equity/total assets), shall not be lower than 35%. The Company complied with financial covenants as at 31 December 2017 and 31 December 2016.

There are certain restrictions prescribed in the loan agreements. The Company cannot distribute dividends, issue or/and obtain new loans, provide charity, sell or rent pledged assets without banks written consent. The written consents were received from banks.

	Credit institution	Date of contract	Effective interest rate	Currency sum, thousand	Sum EUR thousand	Term of maturity	Balance as of 31.12.2017 EUR thousand	A part of 2018, EUR thousand
1	MF Lithuania*	09/04/2010	3.948	2,410	2,410	15/03/2034	1,591	94
2	MF Lithuania*	26/10/2010	3.948	807	807	15/03/2034	655	39
3	MF Lithuania*	02/09/2011	4.123	1,672	1,672	01/09/2034	1,478	87
4	Luminor**	22/08/2012	1.179	3,403	3,403	29/04/2022	2,836	2,836
5	AB SEB Bank	03/06/2013	1.049	2,760	799	30/06/2020	333	133
6	AB SEB Bank	03/06/2013	0.953	4,240	1,228	30/06/2020	507	205
7	AB SEB Bank	10/09/2013	1.413	5,200	1,506	30/09/2020	690	251
8	Luminor**	27/09/2013	1.92	1,300	377	30/09/2020	20	7
9	MF Lithuania*	15/01/2014	3.36	793	793	01/12/2034	707	42
10	AB SEB Bank	31/03/2014	1.359	5,400	1,564	15/01/2021	789	261
11	MF Lithuania*	31/03/2014	3.342	7,881	7,881	01/12/2034	7,030	414
12	AB SEB Bank	09/03/2015	1.63	579	579	28/02/2022	415	97
13	AB SEB Bank	09/03/2015	1.63	579	579	28/02/2022	267	96
14	OP Corporate***	02/12/2015	0.98	4,842	4,842	02/12/2022	3,458	691
15	AB SEB Bank	09/05/2016	0.94	459	459	30/04/2023	408	76
16	AB SEB Bank	09/05/2016	0.96	1,000	1,000	30/04/2021	667	200
17	AB SEB Bank	09/05/2016	0.94	579	579	30/04/2023	515	96
18	Luminor**	25/10/2016	1.12	1,894	1,894	29/09/2023	1,634	284
19	AB SEB Bank	22/12/2016	0.79	4,127	4,127	30/11/2024	704	119
20	AB SEB Bank	26/07/2017	-	697	697	30/07/2024	-	-
21	Danske Bank A/S	18/12/2017	-	2,340	2,340	18/12/2024	-	-
							24,704	6,028

The Group detailed information on loans as of 31 December 2017:

* Ministry of Finance of the Republic of Lithuania,

**Luminor bank AB,

*** OP Corporate Bank Plc Lithuanian branch.

10. Borrowings (cont'd)

The Company detailed information on loans as of 31 December 2017:

	Credit institution	Date of contract	Effective interest rate	Currency sum, thousand	Sum EUR thousand	Term of maturity	Balance as of 31.12.2017 EUR thousand	A part of 2018, EUR thousand
1	MF Lithuania*	09/04/2010	3.948	2,410	2,410	15/03/2034	1,591	94
2	MF Lithuania*	26/10/2010	3.948	807	807	15/03/2034	655	39
3	MF Lithuania*	02/09/2011	4.123	1,672	1,672	01/09/2034	1,478	87
4	AB SEB Bank	03/06/2013	1.049	2,760	799	30/06/2020	333	133
5	AB SEB Bank	03/06/2013	0.953	4,240	1,228	30/06/2020	507	205
6	AB SEB Bank	10/09/2013	1.413	5,200	1,506	30/09/2020	690	251
7	Luminor**	27/09/2013	1.92	1,300	377	30/09/2020	20	7
8	MF Lithuania*	15/01/2014	3.36	793	793	01/12/2034	707	42
9	AB SEB Bank	31/03/2014	1.359	5,400	1,564	15/01/2021	789	261
10	MF Lithuania*	31/03/2014	3.342	7,881	7,881	01/12/2034	7,030	414
11	AB SEB Bank	09/03/2015	1.63	579	579	28/02/2022	415	97
12	AB SEB Bank	09/03/2015	1.63	579	579	28/02/2022	267	96
13	OP Corporate***	02/12/2015	0.98	4,842	4,842	02/12/2022	3,458	691
14	AB SEB Bank	09/05/2016	0.94	459	459	30/04/2023	408	76
15	AB SEB Bank	09/05/2016	0.96	1,000	1,000	30/04/2021	667	200
16	AB SEB Bank	09/05/2016	0.94	579	579	30/04/2023	515	96
17	Luminor**	25/10/2016	1.12	1,894	1,894	29/09/2023	1,634	284
18	AB SEB Bank	22/12/2016	0.79	4,127	4,127	30/11/2024	704	119
19	AB SEB Bank	26/07/2017	-	697	697	30/07/2024	-	-
20	Danske Bank A/S	18/12/2017	-	2,340	2,340	18/12/2024	-	-
							21,868	3,192

* Ministry of Finance of the Republic of Lithuania, **Luminor bank AB,

*** OP Corporate Bank Plc Lithuanian branch.

The immovable property (Note 4), bank accounts (Note 8) and land lease right of the Group and the Company were pledged as collateral for the borrowings.

11. Finance lease obligations

The assets leased by the Group and the Company under finance lease contracts mainly consist of vehicles. The terms of financial lease are 3 years. The finance lease agreement is in EUR. Future minimal lease payments were:

	Group		Company
	As of 31	As of 31	As of 31	As of 31
	December	December	December	December
	2017	2016	2017	2016
Within one year	122	41	122	41
From one to five years	185	39	185	39
Total financial lease obligations	307	80	307	80
Interest	(10)	(2)	(10)	(2)
Present value of financial lease obligations	297	78	297	78
Financial lease obligations are accounted for as:
- current	116	40	116	40
- non-current	181	38	181	38

AB KAUNO ENERGIJA, Company code 235014830, Raudondvario rd. 84, Kaunas, Lithuania CONSOLIDATED AND PARENT COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR 2017 (all amounts are in EUR thousand unless otherwise stated)

12. Grants (deferred income)

	Group		Company
	As of 31	As of 31	As of 31	As of 31
	December	December	December	December
	2017	2016	2017	2016
Balance at the beginning of the reporting period	17,469	16,761	16,176	16,761
Received during the period	3,284	1,798	3,284	465
Amortization	(1,244)	(1,090)	(1,083)	(1,050)
Balance at the end of the reporting period	19,509	17,469	18,377	16,176

On 22 October 2012 the Group signed the agreement on the financing and administration of the project "Construction of boiler-house in Kaunas, installing two biofuel burned boilers at capacity of 8 MW each together with condensational economizer", according to which the Group will be receiving financing from the European Regional Development Fund in the amount of EUR 1,738 thousand after terms and conditions of the agreement are fulfilled. As of 31 December 2017 financing in amount of EUR 1,333 thousand has been received. The project is accomplished.

On 29 December 2016 the Group and the Company signed the agreement on the financing and administration of the project "The modernization of main pipeline 3Ž of Kaunas integrated network", according to which a financing in amount of EUR 450 thousand is allocated to the Company from the European Regional Development Fund after terms and conditions of the agreement are fulfilled. The Company received the financial support in the amount of EUR 450 thousand by 31 December 2017.The project is accomplished.

On 29 December 2016 the Group and the Company signed the agreement on the financing and administration of the project "The modernization of main pipeline 6T of Kaunas integrated network", according to which a financing in amount of EUR 184 thousand is allocated to the Company from the European Regional Development Fund after terms and conditions of the agreement are fulfilled. The Company received the financial support in the amount of EUR 3 thousand by 31 December 2017.

On 29 December 2016 the Group and the Company signed the agreement on the financing and administration of the project "The reconstruction of Kaunas integrated network in Eiguliai catchment" according to which a financing in amount of EUR 894 thousand is allocated to the Company from the European Regional Development Fund after terms and conditions of the agreement are fulfilled. The Company received the financial support in the amount of EUR 889 thousand by 31 December 2017, including EUR 39 thousand are accounted in Group's and Company's other receivables line.

On 29 December 2016 the Group and the Company signed the agreement on the financing and administration of the project "The modernization of main pipeline 1T of Kaunas integrated network", according to which a financing in amount of EUR 967 thousand is allocated to the Company from the European Regional Development Fund after terms and conditions of the agreement are fulfilled. The Company received the financial support in the amount of EUR 70 thousand by 31 December 2017, including EUR 2 thousand are accounted in Group's and Company's other receivables line.

On 29 December 2016 the Group and the Company signed the agreement on the financing and administration of the project "The reconstruction of Kaunas integrated network in Kalniečiai catchment" according to which a financing in amount of EUR 905 thousand is allocated to the Company from the European Regional Development Fund after terms and conditions of the agreement are fulfilled. The Company received the financial support in the amount of EUR 888 thousand by 31 December 2017, including EUR 110 thousand are accounted in Group's and Company's other receivables line.

On 29 December 2016 the Group and the Company signed the agreement on the financing and administration of the project "The modernization of main pipeline 4T of Kaunas integrated network", according to which a financing in amount of EUR 447 thousand is allocated to the Company from the European Regional Development Fund after terms and conditions of the agreement are fulfilled. The Company received the financial support in the amount of EUR 441 thousand by 31 December 2017, including EUR 13 thousand are accounted in Group's and Company's other receivables line.

12. Grants (deferred income) (cont'd)

On 29 December 2016 the Group and the Company signed the agreement on the financing and administration of the project "The reconstruction of heat supply network built from "Pergalė" boiler-house" according to which a financing in amount of EUR 449 thousand is allocated to the Company from the European Regional Development Fund after terms and conditions of the agreement are fulfilled. The Company received the financial support in the amount of EUR 264 thousand by 31 December 2017, including EUR 72 thousand are accounted in Group's and Company's other receivables line.

On 29 December 2016 the Group and the Company signed the agreement on the financing and administration of the project "The reconstruction of Kaunas integrated network in P. Lukšio str.", according to which a financing in amount of EUR 983 thousand is allocated to the Company from the European Regional Development Fund after terms and conditions of the agreement are fulfilled. The Company received the financial support in the amount of EUR 457 thousand by 31 December 2017, including EUR 2 thousand are accounted in Group's and Company's other receivables line.

On 29 December 2016 the Group and the Company signed the agreement on the financing and administration of the project "The reconstruction of main pipeline 2Ž of Kaunas integrated network", according to which a financing in amount of EUR 548 thousand is allocated to the Company from the European Regional Development Fund after terms and conditions of the agreement are fulfilled. The Company received the financial support in the amount of EUR 272 thousand by 31 December 2017, including EUR 5 thousand are accounted in Group's and Company's other receivables line.

13. Employee benefit liability

According to Lithuanian legislation and the conditions of the collective employment agreement, each employee of the Group and the Company is entitled to 1 - 6 months' salary payment when leaving the job at or after the start of the pension period and at the age of 40, 50 or 60 years, and having not less than15 years of work experience in the Company – jubilee gift of the value fixed in the collective employment agreement.

For calculation of the non-current employee benefits, the Group and the Company evaluated an impact of the mortality level in Lithuania, the discount rate, the retirement age, age and turnover of employees, growth of remuneration and inflation and other factors. Actuarial gain or loss related to the mentioned liabilities are presented under Employee benefit liability (accumulation) line in Statements of other comprehensive income as well as under Non-current employee benefit liability and current portion of employee benefit liability in the Statements of Financial Position.

The Group's and the Company's total employee benefit liability is stated below:

	Group		Company
	2017	2016	2017	2016
Employee benefit liability at the beginning of the year	1,331	891	1,328	891
Paid	(86)	(111)	(86)	(111)
Formed	25	551	23	548
Employee benefit liability at the end of the year	1,270	1,331	1,265	1,328
Non-current employee benefit liability	864	1,069	859	1,066
Current employee benefit liability	406	262	406	262

During the 2017 total amount of the benefit paid to the employees by the Group amounted to EUR 86 thousand (in 2016 – EUR 111 thousand), and by the Company – EUR 86 thousand (in 2016 – EUR 111 thousand) and are included in the caption of salaries and social security expenses in the Group's and the Company's Statements of Profit (loss) and Other Comprehensive Income.

The principal assumptions used in determining pension benefit obligation for the Group's and the Company's plan is shown below:

	As of 31 December 2017	As of 31 December 2016
Discount rate	1.099 percent	0.31 percent
Employee turnover rate	3.37 percent	3.37 percent
Expected average annual salary increases	1.5 percent	3.0 percent

14. Derivative financial instruments

On 16 December 2016, the Group has entered into interest rate SWAP agreement. According to the agreement, the Group pays to the bank a fixed interest rate (0.21%), while the bank pays to the Group a variable interest rate of 6 months EURIBOR. The nominal amount of the transaction was EUR 2,836 thousand as at 31 December 2017. This derivative instrument is recognized at fair value calculated by the bank as at 31 December 2017 – EUR 16 thousand (31 December 2016 – EUR 34 thousand). The accrued interest and change in the fair value at 2017 and 2016 are recognized in the Statement of Profit (loss) and Other Comprehensive Income under the financial activity account, as according to management's decision, financial instrument is not held for hedging.

15. Sales income

The Group's and the Company's activities are heat supplies, maintenance of manifolds, electricity production and other activities. Starting from the year 2010 a part of inhabitants chose the Company as the hot water supplier. Those activities are inter-related, so consequently for management purposes the Group's and the Company's activities are organized as one main segment – heat energy supply. The Group's and the Company's sales income according to the activities are stated below.

	Group		Company
	2017	2016	2017	2016
Heat supplies	56,084	58,004	56,096	58,013
Hot water supplies	2,981	2,611	2,981	2,611
Maintenance of hot water meters	355	288	355	288
Maintenance of manifolds	250	228	250	228
Maintenance of heat and hot water systems	10	9	10	10
Electric energy	-	38	-	38
	59,680	61,178	59,692	61,188

16. Other expenses

	Group		Company
	2017	2016	2017	2016
Equipment verification and inspection	542	542	541	542
Other expenses	402	845	361	834
Maintenance of manifolds	396	394	396	394
Sponsorship	287	94	287	94
Cash collection expenses	180	171	180	171
Customer bills issue and delivery expenses	117	139	117	139
Transport expenses	116	137	116	137
Debts collection expenses	102	54	102	54
Long term assets maintenance and related services	95	77	95	77
Employees related expenses	83	89	83	89
Membership fee	81	78	81	78
Consulting expenses	72	109	72	109
Insurance	68	67	60	65
Communication expenses	54	48	53	48
Advertising expenses	54	48	54	48
Audit expenses	52	14	41	14
Rent of equipment and machinery	24	14	24	14
	2,725	2,920	2,663	2,907

AB KAUNO ENERGIJA, Company code 235014830, Raudondvario rd. 84, Kaunas, Lithuania CONSOLIDATED AND PARENT COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR 2017 (all amounts are in EUR thousand unless otherwise stated)

17. Other activities income and expenses

	Group		Company
	2017	2016	2017	2016
Income from other operating activities
Materials sold	408	4	408	4
Miscellaneous services	375	387	259	280
Damage compensation	241	1.835	241	1.835
Other	111	61	111	61
Gain from sale of non-current assets	15	1	3	1
	1.150	2.288	1.022	2.181
Expenses from other operating activities
Cost of miscellaneous services	(258)	(236)	(149)	(161)
Other	(104)	(69)	(104)	(69)
Write off of non-current assets	(4)	-	(4)	-
Cost of materials sold	(2)	(1)	(2)	(1)
	(368)	(306)	(259)	(231)

The Group and the Company rents real estate, supplies, technical water, provide services of maintenance of heating equipment, transportation services. The compensation received from KTE is described in Note 1.

18. Other interest and similar income

	Group		Company
	2017	2016	2017	2016
Interest from late payment of accounts receivable	249	210	248	210
Change in fair value of derivative financial instruments	18	-	-	-
Other	-	-	-	3
	267	210	248	213

19. Financial assets and short-term investments impairment, interest and other similar expenses

	Group		Company
	2017	2016	2017	2016
Interest on bank loans	(563)	(557)	(511)	(541)
Impairment of non-current financial assets	-	-	(1,060)	-
Change in fair value of derivative financial instruments	-	(17)	-	-
	(563)	(574)	(1,571)	(541)

20. Income tax

As of 31 December 2017 and 31 December 2016 deferred income tax asset and liability were accounted for by applying 15 percent rate. All changes in deferred tax are reported in the Group's and the Company's the statement of Profit (loss) and Other Comprehensive Income.

20. Income tax (cont'd)

The recorded income tax for the year can be reconciled with the theoretical calculated income tax, which is computed by applying the standard income tax rate to profit before taxes as follows:

	Group		Company
	2017	2016	2017	2016
Profit before tax after the accumulation of employee benefit liability	7,491	7,725	6,722	7,666
Income tax (expenses) calculated at statutory rate	(1,124)	(1,159)	(1,008)	(1,150)
Permanent differences and impact of valuation allowance of deferred income tax asset	494	391	332	385
Income tax (expenses) reported in the statement of comprehensive income	(630)	(768)	(676)	(765)
Effective rate of income tax ( percent)	8.41	9.94	10.06	9.98
	Group 2017	2016	Company 2017	2016
Components of the income tax expense
Current income tax for the reporting year	(30)	(2)	(33)	1
Deferred income tax (expenses)	(600)	(766)	(643)	(766)
Income tax (expenses) recorded in the statement of comprehensive income	(630)	(768)	(676)	(765)

As of 31 December deferred income tax consists of:

	Group		Company
	2017	2016	2017	2016
Net deferred income tax asset
Tax loss carried forward	2,824	2,841	2,767	2,841
Accruals	220	222	216	222
The change in value of financial assets	19	19	19	19
Deferred income tax asset	3,063	3,082	3,002	3,082
Deferred income tax liability
Differences of depreciation	(7,904)	(7,323)	(7,904)	(7,323)
Investment relief	(28)	(28)	(28)	(28)
Revaluation of the assets transferred to subsidiary	-	-	(174)	(192)
Deferred income tax liabilities	(7,932)	(7,351)	(8,106)	(7,543)
Deferred income tax, net	(4,869)	(4,269)	(5,104)	(4,461)

Deferred income tax assets on tax losses carried forward have been recognized in full amount as the Group's and the Company's management believes it will be realized in the foreseeable future, based on taxable profit forecasts.

At 31 December unrecognized deferred tax assets of the Group and the Company consisted of:

	Group		Company
	2017	2016	2017	2016
Allowance for trade receivables	1,502	1,688	1,505	1,694
Property, plant and equipment depreciation	44	39	44	39
Allowance for other accounts receivable	40	38	50	50
Impairment for the investment into subsidiary	-	-	122	122
Accruals	98	(3)	98	(3)
Unrecognized deferred tax asset, net	1,684	1,762	1,819	1,902

21. Basic and diluted earnings (loss) per share

Calculations of the basic and diluted earnings per share of the Group are presented below:

	Group		Company
	2017	2016	2017	2016
Net profit	6,886	7,508	6,069	7,449
Number of shares (thousand), opening balance	42,802	7,508	42,802	42,802
Number of shares (thousand), closing balance	42,802	42,802	42,802	42,802
Average number of shares (thousand)	42,802	42,802	42,802	42,802
Basic and diluted earnings per share (EUR)	0.16	0.18	0.14	0.17

22.Financial assets and liabilities and risk management

Credit risk

The Group and the Company do not have any credit concentration risk because they work with a large number of customers.

Number of customers	Group		Company
	As of 31 December 2017	As of 31 December 2016	As of 31 December 2017	As of 31 December 2016
Private persons	114,843	114,455	114,843	114,455
Other legal entities	2,381	2,300	2,381	2,300
Legal entities financed from municipalities' and state budget	678	683	678	683
	117,902	117,438	117,902	117,438

Trade receivables of the Group and the Company by the customer groups:

	Group			Company
	As of 31 December 2017	As of 31 December 2016	As of 31 December 2017	As of 31 December 2016
Private persons	7,950	8,123	7,950	8,123
Other legal entities	1,186	1,202	1,186	1,202
Legal entities financed from municipalities' and state budget	857	792	857	792
	9,993	10,117	9,993	10,117

Considering trade and other accounts receivables, the terms of which is still not expired and their impairment as of date of financial statements is not determined, according to Management opinion there is no indications that debtors will not fulfil their payment liabilities, because a balance of receivables are controlled constantly. The Group and the Company considers that maximum risk is equal to the sum of receivables from buyers and other receivables, less recognized impairment losses as of the date of balance sheet (Note 7).

Cash and cash equivalents in banks, which were evaluated in accordance with long-term borrowing ratings*:

	Group			Company
	As of 31	As of 31	As of 31	As of 31
	December 2017	December 2016	December 2017	December 2016
AA-	2,716	2,202	2,617	2,110
A+	3,350	3,510	3,350	3,510
A	60	98	60	98
Bank with no rating attributed	54	65	54	65
	6,180	5,875	6,081	5,783

*- external credit ratings set by Standart & Poor's agency.

AB KAUNO ENERGIJA, Company code 235014830, Raudondvario rd. 84, Kaunas, Lithuania CONSOLIDATED AND PARENT COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR 2017 (all amounts are in EUR thousand unless otherwise stated)

22.Financial assets and liabilities and risk management (cont'd)

With respect to credit risk arising from the other financial assets of the Group and the Company, which comprise cash and cash equivalents and available-for-sale financial investments, the Group's and the Company's exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments.

Interest rate risk

All of the borrowings of the Group and the Company, except those loans signed with Ministry of Finance of the Republic of Lithuania, are at variable interest rates(1, 3, 6 and 12 month EURIBOR). Therefore the Group and the Company faces an interest rate risk. As of 31 December 2017 and as of 31 December 2016 the Group had valid interest rate swap agreement to Luminor Bank AB credit EUR thousand 3,403 of 22 August 2012 in order to manage variable rate risk, described in Note 14.

The following table demonstrates the sensitivity to a reasonably possible change in interest rates (increase and decrease in basis points was determined based on Lithuanian economic environment and the Group's and the Company's historical experience), with all other variables held constant, of the Group's and the Company's profit before tax (estimating debts with floating interest rate). There is no impact on the Group's and the Company's equity, other than current year profit impact.

	Increase/decrease in basis points	Effect on income tax
2017
EUR	50	(8)
EUR	(50)	8
2016
EUR	50	(8)
EUR	(50)	8

Liquidity risk

The Group's and the Company's policy is to maintain sufficient cash and cash equivalents or have available funding through an adequate amount of overdrafts and committed credit facilities to meet its commitments at a given date in accordance with its strategic plans. The Group's liquidity (total current assets / total current liabilities) and quick ((total current assets – inventories) / total current liabilities) ratios as of 31 December 2017 were 1.22 and 1.13 respectively (1.18 and 1.14 as of 31 December 2016). The Company's liquidity and quick ratios as of 31 December 2017 were 1.48 and 1.38 respectively (1.48 and 1.44 as of 31 December 2016). As of 31 December 2017 Groups' and Company's net working capital was plus respectively (EUR 3.454 thousand and EUR 6,137 thousand) (as of 31 December 2016 it was also plus – EUR 2,749 thousand and EUR 5,857 thousand).

In order to increase liquidity the Group and the Company implemented the following action plan:

• Considering the current situation the Group and the Company started to reduce its expenses;
• The Company increased heat production in its own effective production sources;
• The new measures of reducing losses in production and supply were implemented;
• The Company seeks to shorten money cycle increasing turnover of purchaser's debts and reducing turnover of debts to suppliers;
• Organized refinance of part of financial liabilities.

Unsecured bank overdraft and bank loan facilities:

		Group	Company
	As of 31 December 2017	As of 31 December 2016	As of 31 December 2017	As of 31 December 2016
Amount used	-	-	-	-
Amount unused	3,000	2,896	3,000	2,896
	3,000	2,896	3,000	2,896

22.Financial assets and liabilities and risk management (cont'd)

The table below summarizes the maturity profile of the Group's financial liabilities as of 31 December 2017 and as of 31 December 2016 based on contractual undiscounted payments (scheduled payments including interest):

Financial liabilities	Carrying amount	Contractual cash flows	Less than 3 months	Less than 1 year	2 to 5 years	More than 5 years
Borrowings and financial lease obligations	25,005	(28,836)	(3,774)	(2,901)	(11,892)	(10,269)
Trade payables	5,444	(5,444)	(5,444)	-	-	-
Payables to contractors	1,749	(1,749)	(1,749)	-	-	-
Derivative financial instruments	16	(16)	(16)	-	-	-
Balance as of 31 December 2017	32,214	(36,045)	(10,983)	(2,901)	(11,892)	(10,269)

Financial liabilities	Carrying amount	Contractual cash flows	Less than 3 months	Less than 1 year	2 to 5 years	More than 5 years
Borrowings and financial lease obligations	25,850	(29,492)	(431)	(5,718)	(11,274)	(12,069)
Trade payables	6,563	(6,563)	(6,563)	-	-	-
Payables to contractors	649	(649)	(649)	-	-	-
Derivative financial instruments	34	(34)	(34)	-	-	-
Balance as of 31 December 2016	33,096	(36,738)	(7,677)	(5,718)	(11,274)	(12,069)

The table below summarizes the maturity profile of the Company's financial liabilities, as of 31 December 2017 and as of 31 December 2016 based on contractual undiscounted payments (scheduled payments including interest):

Financial liabilities	Carrying amount	Contractual cash flows	Less than 3 months	Less than 1 year	2 to 5 years	More than 5 years
Borrowings and financial lease obligations	22,169	(25,992)	(930)	(2,901)	(11,892)	(10,269)
Trade payables	5,415	(5,415)	(5,415)	-	-	-
Payables to contractors	1,749	(1,749)	(1,749)	-	-	-
Balance as of 31 December 2017	29,333	(33,156)	(8,094)	(2,901)	(11,892)	(10,269)
Financial liabilities	Carrying amount	Contractual cash flows	Less than 3 months	Less than 1 year	2 to 5 years	More than 5 years
Borrowings and financial lease obligations	22,447	(26,044)	(135)	(2,566)	(11,274)	(12,069)
Trade payables	6,675	(6,675)	(6,675)	-	-	-
Payables to contractors	649	(649)	(649)	-	-	-

22.Financial assets and liabilities and risk management (cont'd)

Trade payables

Trade payables of the Group and the Company by supplier groups:

	Group		Company
	As of 31 December 2017	As of 31 December 2016	As of 31 December 2017	As of 31 December 2016
For heat purchased	3,740	4,375	3,976	4,375
Contractors	1,749	649	1,749	649
Other suppliers	1,704	2,188	1,439	2,300
	7,193	7,212	7,164	7,324

30 day settlement period is set with independent heat producers for purchased heat energy, 90–180 day settlement period – with contractors, 5–30 day settlement period – with other suppliers.

As of 31 December 2017 the Group and the Company had EUR 16 thousand (as of 31 December 2016 – EUR 55 thousand) of overdue trade creditors.

Foreign currency risk

All sales and purchases transactions as well as the financial debt portfolio of the Group and the Company are denominated in EUR, therefore, material foreign currency risk is not incurred.

Capital management

The primary objectives of the Group's and the Company's capital management are to ensure that the Group and the Company comply with externally imposed capital requirements and that the Group and the Company maintains healthy capital ratios in order to support its business and to maximize shareholders' value.

The Group and the Company manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. To maintain or adjust the capital structure, the Group and the Company may issue new shares, and return capital to shareholders. No changes were made in the objectives, policies or processes of capital management As of 31 December 2017 and as of 31 December 2016.

The Group and the Company is obliged to upkeep its equity of not less than 50 percent of its share capital, as imposed by the Law on Companies of Republic of Lithuania. The Group and the Company complies with equity requirements imposed by the Law on Companies of Republic of Lithuania. There were no other externally imposed capital requirements on the Group and the Company.

The Group and the Company monitor capital using debt to equity ratio. Capital includes ordinary shares, reserves, earnings retained attributable to the equity holders of the parent. There is no specific debt to equity ratio target set out by the Group's and the Company's management, however current ratios presented below are treated as sustainable performance indicators: as satisfactory performance indicators and as creditable performance indicators:

		Group		Company
	As of 31	As of 31	As of 31	As of 31
	December 2017	December 2016	December 2017	December 2016
Non-current liabilities (including
deferred tax and grants (deferred	44,113	42,423	43,211	41,319
income))
Current liabilities	15,702	15,631	12,767	12,237
Liabilities	59,815	58,054	55,978	53,556
Equity	89,343	87,019	89,024	87,515
Debt* to equity ratio ( percent)	66.95	66.71	62.88	61.20

* Debt contains all non-current (including deferred income tax liability and grants (deferred revenues)) and current liabilities.

22.Financial assets and liabilities and risk management (cont'd)

Market risk

External risk factors that make influence to the Group's and the Company's main activity: increase in fuel prices, unfavourable law and legal acts of Government and other institutions, decisions of local municipality, decrease of number of consumers, the cycle of activity, environmental requirements.

23. Commitments and contingencies

No full-scope tax audits were carried out by the tax authorities at the Company or the Group during the period starting 1 January 2013 and ending 31 December 2017. Pursuant to the effective laws, the State Tax Inspectorate is authorized to inspect the Company's and the Group's books and records at any time within 5 years (2013-2017) and consequently may additionally impose taxes or penalties. The Company's management is not aware of any circumstances, which may in the future give rise to potential significant tax liability in that respect.

Leasing and construction work purchase arrangements

According to the agreements in force as at 31 December 2017, Groups operating lease payments amounts to EUR 2,143 thousand, Company's operating lease payments amounts to EUR 1,877 thousand.

Future liabilities of the Group and the Company under valid purchase arrangements as of 31 December 2017 amounted to EUR 13,751 thousand.

On 20 December 2010 the Company entered into the lease arrangements with UAB ENG for the real estate. Under this lease arrangement the Company leases to UAB ENG Garliava boiler-house for building of heat production equipment. The Company undertakes obligations to procure heat produced in this equipment. The term of lease is 20 years.

On 29 January 2016 the Company let out a part of industrial assets to KTE as it is described in Note 1.

Guarantees

On November 28, 2016 the Company provided guarantee in amount of EUR 3,913 thousand to Luminor bank AB regarding liabilities of subsidiary UAB Petrašiūnų Katilinė to this bank according to credit agreement concluded on August 22, 2012 for the amount of EUR 3,403 thousand. On November 28, 2016 the Company provided guarantee in amount of EUR 95 thousand to Nordea Bank Finland Plc regarding liabilities of subsidiary UAB Petrašiūnų Katilinė to this bank according to transaction of derivative financial instruments, described in Note 14. Carrying amount of the loan mount to EUR 2,836 thousand.

24. Related parties transactions

The parties are considered related when one party has the possibility to control the other or have significant influence over the other party in making financial and operating decisions.

In 2017 and 2016 the Group and the Company did not have any significant transactions with the other companies controlled by Kaunas city municipality except for the purchases or sales of the utility services. The services provided to the Kaunas city municipality and the entities controlled by the Kaunas city municipality were executed at market prices. The Kaunas City Municipality related party list can be found here: http://www.kaunas.lt/administracija/struktura-ir-kontaktai/pavaldzios-imones-ir-istaigos/.

The Group's and the Company's As of 31 December 2017 allowance for overdue receivables from entities financed and controlled by municipalities amounted to EUR 271 thousand (as of 31 December 2016 – EUR 241 thousand). The amounts outstanding are unsecured and will be settled in cash. No guarantees on receivables have been received.

In 2017 and 2016 the Group's and the Company's transactions with Jurbarkas city municipality, Kaunas city municipality and the entities, financed and controlled by Kaunas city municipality and amounts of receivables from and liabilities to them at the end of the year were as follows:

24. Related parties transactions (cont'd)

2017	Purchases	Sales	Receivables	Payables
Kaunas city municipality and entities financed and controlled by Kaunas city municipality	1,144	4,755	960	239
Jurbarkas city municipality	1	391	120	-
2016	Purchases	Sales	Receivables	Payables
Kaunas city municipality and entities financed and controlled by Kaunas city municipality	972	5,241	777	181

As at 31 December 2017 and as at 31 December 2016 the Company's transactions with the subsidiaries and the balances at the end of the year were as follows:

UAB Petrašiūnų Katilinė	Purchases	Sales	Receivables	Payables
2017	1,813	2	60	236
2016	717	3	4	384
UAB Kauno Energija NT	Purchases	Sales	Receivables	Payables
2017	5	10	90	-

As at 31 December 2016 the Company has formed a value decrease in amount of EUR 90 thousand (as at 31 December 2016 in amount of EUR 111 thousand) for the receivables from subsidiaries.

Remuneration of the management and other payments

As at 31 December 2017 the Group's and the Company's management team comprised 7 and 4 persons respectively (as at 31 December 2016 – 7 and 4).

	Group		Company
	2017	2016	2017	2016
Key management remuneration	195	150	161	119
Calculated post-employment benefits	21	11	20	11

In the year 2017 and 2016 the management of the Group and the Company did not receive any loans or guarantees; no other payments or property transfers were made or accrued.

25. Business Combinations

As described in Note 1, in October 2016 the Company has acquired 100 percent UAB Petrašiūnų Katilinė shares for EUR 1,894 thousand. The Company's management has assessed the fair value of acquired assets, liabilities and contingent liabilities and accounted for this acquisition, based on the purchase price allocation.

The Company's management performed internal valuation to determine the fair value of the long term assets acquired by comparing production costs of similar boilers. The Company's management identified bio fuel boilers with similar technical characteristics and evaluation of the model was based on recent market transactions data. The Company's management estimated that purchased the 1 MW boiler price equals the market with similar characteristics 1 MW boilers installation costs.

As UAB Petrašiūnų Katilinė was purchased in 27 October 2016, financial reporting purposes, the acquisition date is 30 September 2016.

The acquired assets and liabilities

Fair and carrying value of the acquired assets and liabilities at the acquisition date (the Group became the controlling unit) were as follows (100 percent):

AB KAUNO ENERGIJA, Company code 235014830, Raudondvario rd. 84, Kaunas, Lithuania CONSOLIDATED AND PARENT COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR 2017 (all amounts are in EUR thousand unless otherwise stated)

25. Business Combinations (cont'd)

	Fair value	Carrying value
Property, plant and equipment	6,494	4,909
Inventories and prepayments	19	19
Current accounts receivable	6	6
Cash	188	188
	6,707	5,122
Borrowings	3,419	3,419
Trade payables	19	19
Other non current liabilities	1,334	1,334
Other current liabilities	41	41
	4,813	4,813
The fair value of the identifiable net assets	1,894	309
Attributable to shareholders of the company	1,894	309

The difference between the price paid and the acquired assets, liabilities and contingent liabilities to fair value at the acquisition date were as follows:

The real assets acquired and liabilities and
contingent liabilities is	1,894
The purchase price	1,894
Cash	(188)
The purchase price, net of cash acquired	1,706

UAB Petrašiūnų Katilinė supplied all goods and services to the Company in 2017 and 2016. In 2017 Expenditures of UAB Petrašiūnų Katilinė increased the expenditures of the Group by EUR 214 thousand (expenditures of fuel and energy purchased decreased by EUR 815 thousand, and expenditures of depreciation and all other expenditures increased by EUR 1,029 thousand), in 2016 – decreased by EUR 46 thousand (expenditures of fuel and energy purchased decreased by EUR 307 thousand, and expenditures of depreciation and all other expenditures increased by EUR 261 thousand) respectively.

26. Post balance sheet events

On 29 January 2018 the confirmation from Luminor Bank AB indicating that UAB Petrašiūnų Katilinė will not be required to repay the loan earlier than the contractual maturity, even though the subsidiary does not comply with the Bank's indicators until the Company's guarantee of 28 November 2016 is valid, has been received.

On 22 February 2018, the Company has issued a Support Letter to the subsidiaries UAB Kauno energija NT and UAB Petrašiūnų katilinė, stating that it will continue to support the subsidiaries financially through until separate financial statements of subsidiaries for financial year ended as at 31 December 2018, prepared and approved by the management, in case it will be necessary. Current liabilities of UAB Kauno energija NT amount to EUR 102 thousand as at 31 December 2017, current liabilities of UAB Petrašiūnų katilinė amount to EUR 922 thousand.

Pursuing decision of the Company's board of 24 November 2017 regarding termination of activity of Company's branch Jurbarko Šilumos Tinklai from 1 March 2018, on 5 March 2018 the Company submitted an application to the SC Registrų Centras regarding unregistering of the branch.

There were no other events that would have a significant impact on the financial statements or require a disclosure occurred subsequent to the reporting date.

***

Kaunas, 2018

CONTENTS

1.	Reporting period of the consolidated annual report 61
2.	Companies composing the group of companies and their contact details 61
3.	Nature of core activities of the companies composing the group of companies 61
4.	Issuer's agreements with credit institutions 62
5.	Trade in securities of companies composing the group of companies in regulated markets 63
6.	Overview of the condition, performance and development of the group of companies 63
6.1.	Overview of the condition, performance and development of the company 63
6.2.	Description of exposure to key risks and uncertainties we confront with and their impact on company's
	results 67
7.	Analysis of financial and non-financial performance results, information related to environmental issues . 70
8.	References and additional explanations 77
9.	Significant events after the end of the year 2017 77
10.	Plans and forecasts of activities of the group of companies 78
11.	Information on research and development activities of the group of companies 79
12.	Information on own shares acquired and held by the issuer 80
13.	Information on the aims of financial risk management, hedging instruments in use 81
14.	Information on the issuer's branch office and subsidiary undertakings 81
15.	Structure of authorized capital 82
16.	Data on shares issued by the issuer 83
17.	Information on the issuer's shareholders 85
18.	Employees 87
19.	Procedure for amending the issuer's articles of association 89
20.	Issuer's management bodies 89
	20.1. Data on the committees in the company 90
21.	Members of collegiate bodies, company's manager, chief financier 92
	21.1. Information about the members of the company's supervisory board: 92
	21.2. Information on the members of the company's management board 94
	21.3. Information on the general manager and chief accountant of the company: 95
22.	Information on significant agreements 96
23.	Information on agreements of the issuer and its managerial body members or employees 96
24.	Information on major transactions with related parties 96
25.	Information on harmful transactions concluded on behalf of the issuer during the reporting period 96
26.	Information on compliance with the governance code of companies and the company's corporate social
	initiatives and policies 96
27.	Data on publicised information 96
	27.1. Annex 1 – Company's report on the compliance with the Governance Code for the companies listed on the Stock Exchange Nasdaq Vilnius 98
	27.2. Annex 2 – AB Kauno Energija Corporate Social Responsibility Report 125

LIST OF TABLES

Table 1	Comparison of financial indicators of the Group of the year 2017 with the indicators of	72
	the years 2013–2016
Table 2	Comparison of financial indicators of the Company of the year 2017 with the indicators of
	the years 2013–2016	72
Table 3	Comparison of non-financial indicators of the Company of the year 2017 with the
	indicators of the years 2013–2016	74
Table 4	Comparison of the Company's pollutions to the atmosphere from stationary air pollution
	sources in 2017 with the amount in 2013-2016	77
Table 5	Structure of authorized share capital by types of shares	83
Table 6	History of trade in Company's securities in 2013–2017	83
Table 7	Information on Shareholders of the Issuer who owned as at 31 December 2017 more than	85
	5 per cent of the authorised capital of the Company
Table 8	Repartition of shareholders in accordance with groups at the end of the reporting period	85
Table 9	The shareholders, who owned more than 5 per cent of the shares issued for public trading	86
Table 10	The shareholders, who owned more than 5 per cent of the shares issued for non-public
	trading	86
Table 11	Changes in the number of employees of the Group in 2013–2017	87
Table 12	Changes in the number of employees of the Company in 2013–2017	87
Table 13	Education of employees of the Group at the end of the reporting period	87
Table 14	Education of employees of the Company at the end of the reporting period	87
Table 15	Average conditional number of employees and average monthly salary Eur	88

LIST OF CHARTS

Chart 1	Fuel structure	63
Chart 2	Heat purchase and production	64
Chart 3	Repartition of Company's heat consumers by groups	64
Chart 4	Dynamics of consumer's connections and disconnections	66
Chart 5	Implementation of investments by funding sources	67
Chart 6	Average monthly air temperature	71
Chart 7	Heat supplied to the network	74
Chart 8	Price of heat, supplied by AB Kauno Energija	75
Chart 9	Structural constituents of heat price	75
Chart 10	Heat price constant constituent	76
Chart 11	Heat price variable constituent in December 2017	76
Chart 12	Activity results of Company's branch office Jurbarko Šilumos Tinklai	81
Chart 13	Activity results of UAB Kauno Energija NT	82
Chart 14	Historical data on share prices (in euro) and turnovers in 2013–2017	84
Chart 15	Comparison of Company's share price with the index of own sector (utility services) and	84
	OMX Vilnius index
Chart 16	Structure of shareholders as at 31 December 2017	85

1. Reporting period of the Consolidated Annual Report

Reporting period, for which the Consolidated Report of AB Kauno Energija was prepared, is the year 2017.

2. Companies composing the group of companies and their contact details

AB Kauno Energija (hereinafter referred to as the Company or the Issuer) prepares both the Company's and the consolidated financial statements. The group (hereinafter referred to as the Group) consists of AB Kauno Energija and its subsidiaries – UAB Kauno Energija NT, in which the Issuer directly controls 100 per cent of the shares and UAB Petrašiūnų Katilinė, which also became the part of the Group starting from 27 October 2016 and the Issuer also directly controls 100 per cent of the shares of this company.

Main details of the Company:

Public Limited Liability Company Kauno Energija
Public Limited Liability Company
Raudondvario pl. 84, 47179 Kaunas
235014830
(8 37) 305 650
(8 37) 305 622
info@kaunoenergija.lt
www.kaunoenergija.lt
22 August 1997, Kaunas, Order No 513
Kaunas Branch of State Enterprise Centre of Registers
LT350148314

Main information about the subsidiaries:

Company name	Private Limited Liability Company Petrašiūnų Katilinė
Legal-organizational form	Private Limited Liability Company
Headquarters address	R. Kalantos str. 49, 52303 Kaunas
Code of legal entity	304217723
Telephone	+370 687 48413
Registration date and place	1 April 2016, Kaunas
Register manager	Kaunas Branch of State Enterprise Centre of Registers
Company name	Private Limited Liability Company Kauno Energija NT
Legal-organizational form	Private Limited Liability Company
Headquarters address	Savanorių pr. 347, 49423 Kaunas
Code of legal entity	303042623
Telephone	(8 37) 305 693
E-mail	kent@kaunoenergija.lt
Registration date and place	16 April 2013, Kaunas
Register manager	Kaunas Branch of State Enterprise Centre of Registers

3. Nature of core activities of the companies composing the group of companies

The nature of core activities of the Group is manufacture and rendering of services. The Company is the parent company of the Group. The Company generates and supplies heat to consumers (for the purposes of heating and hot water making) in the cities of Kaunas and Jurbarkas and in Kaunas district (Akademija town, Ežerėlis town, Domeikava village, Garliava town, Girionys village, Neveronys village, Raudondvaris village), (hereinafter referred to as Kaunas district).

Also, following provisions of the Law on Heat Sector, the Company supplies hot water (is engaged in hot domestic water supplier activities) from 1 May 2010 for consumers in the cities of Kaunas and Jurbarkas and Kaunas district (hereinafter the supplies of heat and hot domestic water without cold water are referred to as heat, with the exception of information provided in Tables 7 and 8), who chose the Company as a hot water supplier. As at 31 December 2017, the Company was a hot water supplier for 660 residential buildings in Kaunas and Kaunas district

and 7 in Jurbarkas. Income from hot water supplies amounts to approximately 5.0 per cent of all of Company's sales revenue.

In addition, the Company maintains engineering structures (collectors – manifolds) and operates heat and electricity production facilities. The Group and the Company carries out a supervision of indoor heat and hot water supply systems, maintenance of heat unit equipment, repairs of heat units and other heating equipment, provides rental services premises under particular agreements. The Group and the Company are engaged in licensed activity in accordance with the licenses held. On 26 February 2004 the National Commission for Energy Control and Prices (hereinafter – NCC) issued a heat supplier licence to the Company. The licence is valid indefinitely. Maintenance of indoor heat and hot water supply systems is pursued following the provisions of Article 20 of The Law on Heat Sector of the Republic of Lithuania.

The vision of the Group and the Company is to be a modern, effective, competitive, and added value for shareholders creating group of companies engaged in heat and electric energy generation, supply of heat and hot water, maintenance of indoor heating and hot water supply systems and property lease.

Values of the Group and the Company:

• professionalism;
• reliability;
• transparency;
• being proactive;
• responsibility;
• cooperation.

Strategic goals of the Group and the Company:

• To implement strategic development plans formed by shareholders;
• To properly contribute to the implementation of goals of National Energetics Strategy;
• To reduce dependence from imported fuel, i.e. natural gas;
• To increase competition in heat generation sector;
• To expand current position of the Group companies in the market;
• Development by offering new products and services;
• To ensure implementation of Energy Efficiency Directive 2012/27/EU.

Principled guidelines of Company's heat economy strategy are as follows:

• Increase and expansion of heat economy Kaunas city needs at least one bigger than 100 MW capacity modern, up-to-date production facility – cogeneration power-plant, using renewable energy sources (hereinafter – RES) and / or waste, and / or natural gas. New power-plant should ensure tankage / use of reserved fuel, reservation of heat production facilities, stable hydraulic mode of centralized heat supply, flexible reaction to network peak demand changes, should have an emergency replenishment system and should be economically "balanced";
• Increase of safety and reliability of heat supply the Company intends to formulate an expert assessment of safety / vulnerability of heat supply system, to implement update and modernization of system of parameters data transfer, collection and evaluation, to implement optimization of the network hydraulic mode and increase of speed of parameters reaction / change, to reconstruct and optimize sections of thermofication pipelines and elements (average age of pipelines of district heating network (hereinafter – DHN) reaches approximately 38 years), to implement update and development of the system of DHN water reserve – emergency replenishment, to implement technical solutions and / or use a good practice increasing reliability and safety, ensuring stability of thermofication mode;
• to actively participate in formation of policy of Kaunas city supply with heat and in increase of Company's desirability and in expansion of district heating market;
• formation of good practice and its publicizing;

4. Issuer agreements with credit institutions

On 1 April 2003 the Issuer Service Agreement with AB SEB Bankas (company code 112021238, Gedimino pr. 12, Vilnius), represented by the Finance Markets Department was made.

5. Trade in securities of companies composing the group of companies in regulated markets

20,031,977 (twenty million thirty-one thousand nine hundred seventy-seven) of the Issuer ordinary registered shares (VP ISIN code LT0000123010) with the total nominal value equal to EUR 34,855,639.98 (thirty-four million eight hundred fifty-five thousand six hundred thirty-nine euro and 98 cents) as at 31 December 2017 were listed in the secondary trade list of Nasdaq Vilnius Baltic stock exchange. The beginning of listing of the Company's shares is 28 December 1998.

6. Overview of the condition, performance and development of the group of companies 6.1. Overview of the condition, performance and development of the Company

In the year 2017 the Company performed its activities with a main focus on development of capacities of production sources and increase of reliability of CHS network, considering Strategic guidelines of centralized heat supplies of Kaunas city.

When planning its activities, the Company also considers the AB Kauno Energija Strategy for the Heating System Development for the years 2007–2020 developed in 2016 by the Lithuanian Energy Institute under initiative of the Company. The main provisions and guidelines for heat supply to the city until 2021, reaching to ensure technical, economical and management effectiveness of the system of centralized heat supply and reliability of heat supply, without prejudice environmental requirements and considering provisions of Lithuanian legislation and obligatory aspirations of European Union (hereinafter – EU) directives are determined in the strategy.

The Company covers a major part of heat production and supply market in the cities of Kaunas and Jurbarkas and Kaunas district. Group's generation capacities consist of Company's boiler-houses capacities and subsidiary's UAB Petrašiūnų Katilinė capacities in Kaunas city. Company's generation capacities consist of Petrašiūnai power plant, 4 boiler-houses in Kaunas integrated network, 7 district boiler-houses in Kaunas district, 1 boiler-house in Jurbarkas city, 13 boiler-houses of isolated networks and 28 local gas burning boiler-houses (27 burned with gas and 1 with wooden pellets) in Kaunas city, also 8 local water heating boiler-houses in Sargėnai catchment. Total installed heat generation capacity is approximately 607 MW, and total energy generation capacity of the whole Group is approx. 616 MW (including 41 MW capacities of condensational economizers). Total installed heat production capacity of the Company consists of approx. 588 MW (including 41 MW capacities of condensational economizers), electricity generation capacities – 8.75 MW. 314.6 MW of heat generation capacities (including 17.8 MW capacities of condensational economizers) and 8 MW of electricity production capacities amongst them are in Petrašiūnai power plant. 34.8 MW of heat generation capacities (including 2.8 MW capacities of condensational economizer) are in Jurbarkas city. Total Company's power generation capacity is 597 MW (including 41 MW of condensational economizers' capacities).

Almost 38.5 per cent of heat supplied to consumers in 2017 was produced in Company's heat production facilities. The rest of required quantity of heat was purchased from independent heat producers (hereinafter – IHP) in monthly auctions, according to legal acts.

The fuel used for Company's heat production in 2017 is presented in Chart 1.

Chart 1

In the year 2017, the Company purchased heat from 11 IHP in Kaunas and Kaunas district: from UAB Kauno Termofikacijos Elektrinė, UAB Danpower Baltic Taika, UAB Danpower Baltic Taika elektrinė, UAB Lorizon energy, UAB Ekoresursai, UAB Petrašiūnų katilinė, UAB Aldec General, UAB ENG, UAB Danpower Baltic Biruliškių, UAB Ekopartneris and UAB Foksita. Total purchases consisted of 890.4 thousand MWh of heat, i.e. 61.5 per cent of heat supplied to the network (in the year 2016 – 59.1 per cent). Amounts of heat purchased from IHP and produced with Company's equipment during the period of 2013–2017 are presented in chart 2, thousand MWh:

As at 31 December 2017 the Company supplied this produced and purchased heat with integrated heating and local area networks to 3,462 businesses and organizations as well as to 115,429 households, in total – to 118,891 consumers (objects by addresses).

Chart 3

Chart 2

Repartition of Company's heat consumers by groups

Investments

Company's investments in the latest technologies (the reconstruction of heat generation facilities installing economizers, new biofuel burned boilers, automation of boiler-houses of integrated network, systems of electronic services, system of remote reading of heat meters and data transmission, customer service using "one stop" principle, etc.) help the Company to reduce the price of heat sold. Reconstruction of heat supply networks reduces Company's heat supply losses. All these investments help the Company to adapt to market changes and to be an

advanced company of heat and hot water supply, also of maintenance of heat production facilities in Kaunas and Jurbarkas cities and Kaunas district.

Investments are made in accordance with Company's revised investment plan for the year 2017, which was approved by decision No T-26 of Kaunas City Municipality Council of 7 February 2017 "Regarding investment plans of AB Kauno Energija for the year 2017 and 2017–2020 and their financing" (hereinafter – Investment plan).

The Company implements trunk pipeline replacement projects co-financed by the European Union structural funds, it also optimizes pipeline diameters, connects new objects to the DHN and modernises heat production facilities according to Investment plan.

Amendments to the Law on Heat Sector of the Republic of Lithuania and changes in NCC's regulation allowed favourable conditions to invest to construction and reconstruction of heat production facilities, thus increasing competition in heat production sector and effectively reducing heat price for consumers.

To reach these goals, the Company continued modernization of its' own heat generation facilities in 2017, installing new heat generation equipment in them. The following projects of heat generation facilities modernization were finished to implement:

1. In November 2016 the Company signed an outsourcing contract with the winner of procurement on installation of four gas burned boilers at capacity 15 MW each together with 1.5 MW capacity condensational economizers in Pergalė boiler-house. The planned value of continued project is approx. EUR 2.3 million. Accomplishment of the project is expected in 2017–2018. Works of the project are divided in two stages. One boiler of capacity 14.9 MW together with economizer of capacity 1.5 MW is installed on the first stage, and the rest three boilers will be installed on the second stage.

2. The new gas burned water heating boiler with a total capacity of 19.8 MW with a condensing economiser was installed in Petrasiūnai power plant in 2017. The new facility will be able to produce up to 160 GWh of heat per year. The new equipment is in line with the new, more stringent requirements of the European Parliament and Council Directive (EU) 2015/2193 on the limitation of emissions of certain pollutants from medium-sized combustion plants that will come into force from 2020. In the case of natural gas combustion, the concentration of NOx (nitrogen oxides) is expected to not exceed 80 mg / m³. The project value is EUR 0.7 million. It is pursued at the expense of the Company, consistently implementing the strategy of district heating of Kaunas city approved by the Kaunas City Municipality.

In 2017, seven projects for the modernization of heat supply networks have been completed, according to the 9 financial support agreements signed by the Company with the Public Institution Lithuanian Business Support Agency in December 2016. The value of the agreements is EUR 9.4 million. In 2018 the Company will complete two projects "Modernization of trunk pipeline 6T of the integrated network of Kaunas city" (code 04.3.2-LVPA-K-102-01-0010) and "Modernization of trunk pipeline 1T of the integrated network of Kaunas city" (code 04.3.2- LVPA-K-102-01-0024). Value of the projects is EUR 2.3 million, i.e. EUR 1.15 million is structural support from European Union.

The result of all these already implemented investment projects is decreased price of heat for Company's heat consumers. An average price of the heat sold was 4.83 ct/kWh in the year 2017 and in the year 2016 it was 5.02 ct/kWh, in the year 2015 it was 5.40 ct/kWh and in the year 2014 it was 6.69 ct/kWh.

In November 2017 the Company submitted 7 applications to the Lithuanian Business Support Agency under the measure No. 04.3.2-LVPA-K-102 "Modernisation and development of heat supply networks" the 2nd invitation of the 4th priority "Promoting energy efficiency and production and use of renewable energy" of Operational Programme for the European Union Funds' Investments in 2014-2020:

• "Modernisation of trunk pipeline 1T of Kaunas city" (code 04.3.2-LVPA-K-102-02-0028);
• "Modernisation of trunk pipelines 1Ž and 7Ž of Kaunas city" (code 04.3.2-LVPA-K-102-02-0029);
• "Modernisation of trunk pipeline 4T of Kaunas city" (code 04.3.2-LVPA-K-102-02-0030);
• "Modernisation of trunk pipeline 5T of Kaunas city" (code 04.3.2-LVPA-K-102-02-0031);
• "Modernisation of trunk pipeline 8K of Kaunas city" (code 04.3.2-LVPA-K-102-02-0032);
• "Modernisation of trunk pipelines 8Ž and 9Ž of Kaunas city" (code 04.3.2-LVPA-K-102-02-0034);

"Modernisation of heat supply networks in Chemijos and Medvėgalio streets" (code 04.3.2-LVPA-K-102-02-0035).

Accomplishment of these projects is scheduled in 2018–2019. Total value of the projects is EUR 20.1 million. European Union Structural support in amount of EUR 9.7 million is amongst them.

On 9 March 2018, the Company signed an agreement with the Lithuanian Business Support Agency for the financing of the project "Installation of a boiler with a capacity of 1 MW in the Noreikiškės boiler-house" (code 04.1.1-LVPA-K-109-01-0006). Value of the project is EUR 0.25 million, i.e. EUR 0.15 million is European Union Structural support. The project is oriented to the increase of efficiency of heat generation facilities and the reduction of greenhouse gas emissions. The new boiler will replace the natural gas used for heat production to biofuel.

The dynamics of consumer's connections to Company's DHN and disconnections from it in 2013–2017 is shown in Chart 4.

A total installed capacity of objects disconnected from DHN in 2017 was approx. 2.96 MW. Disconnection of heat equipment from centralized heat supply networks and the change of heating method is pursued following the order determined by the Civil Code of the Republic of Lithuania, the Law on Heat Sector of the Republic of Lithuania, the Law on Construction of the Republic of Lithuania and sub statutory legal acts implementing these Laws.

In 2017 the Company invested EUR 12.40 million (non-Company's funds are amongst them, i.e. EUR 6.08 million were loans from commercial banks, EUR 3.32 million was a financial support from European Union Structural Funds and Lithuanian Environmental Investment Fund). A major part of these investments was assigned for modernization of heat supply networks and renewal of heat production boilers. A part of these investments was assigned for connection of new objects to DHN, a total consumption capacity of whose is 13.66 MW. Company's investments by funding sources for the years 2013–2017 are shown in Chart 5.

Chart 4

Implementation of investments by funding sources, million euro

6.2. Description of exposure to key risks and uncertainties we confront with and their impact on Company's results

External risk factors affecting the Company's core business:

• Increasing competition between heat producers in Kaunas;
• Increase in final (i.e. including all expenditures) price of natural gas and biofuel;
• Ever-changing legal environment;
• Heat production pricing policies.

Competition environment risk factors. To operate effectively and reliably in creation the added value for shareholders, the Company is facing threats specific to the sphere of its activity, but also takes advantage of opportunities to work efficiently and effectively by exploiting the available potential. One of the biggest threats that the Company may face is a relatively high price for heat purchased from IHP, who are ranked as private business units committed to profit generation. Purchase of heat is pursued following valid law and the Description of procedure for purchase of heat from independent suppliers of heat approved by NCC. In turn, the Company invests extensively in modernization and construction of its own manufacturing facilities, to reduce the comparative costs of heat production. Thus, it takes advantage of the regulatory environment and reduces the energy purchase price.

Together with coming of new IHP the Company faced additional technical, economical, legal and other issues that need to solve: management of heat supply network and balancing of power of these producers in case of emergency stop of them, retaining of optimum working parameters of the network, regulation, change and applying of heat purchase from IHP order.

Commercial risk factors: The Company is a major supplier of the heat produced centrally to the city of Kaunas, part of Kaunas district and the city of Jurbarkas. To retain this market, it is necessary to implement modern and efficient heat production technologies in own production facilities and to focus on production at the lowest cost, benefiting from private differences of different types of fuel.

The Company's sales of heat are directly dependent on heat demand, i.e. heat consumption, which is mostly affected by the average outdoor air temperature, the amount of investment of consumers in energy-saving and rational use of heat and the pace of development of the heat sales.

Changes in fuel prices and the price of heat, produced by IHP have an impact on cost of Company's heat and electricity production.

Company's performance is affected by the decline in sales due to reduced and further reducing heat demand (in pursuance of residential buildings renovation and by installing a heat saving equipment), due to consumer's disconnections from DHN (due to the various reasons). Risks can be mitigated by Company current and further

investments in heat and electricity production facilities, using renewable energy sources, reducing heat production expenditures and the price heat, purchased from IHP as well as the price of heat supplied for consumers, and continually reasonably informing customers on the benefits of DHN systems (safety, reliability, correlation with one sort of fuel, fuel conversion, local pollution sources in residential areas, total environmental pollution, etc.) in comparison with autonomous heating.

The effects of other competing companies, propagating the only usage of natural gas, irrespective of approved special heating supplies plan, supplies reliability, affection to the only source of fuel, not yet regulated local pollution, in the heat supply sector with the Company are disconnections of consumers from DHN system. Heating equipment disconnection from the DHN is carried out in accordance with the procedures specified in the "Rules on heat supply and consumption" approved by order No 1-297 of 25 October 2010 of the Minister of Energy of the Republic of Lithuania (and their further amendments) and the Description of procedure for disconnection of the building or heating facilities of premises from heat supply networks at the initiative of consumers approved by order No A 1830 of the director of administration of Kaunas City Municipality of 14 May 2012. Kaunas City Municipality has approved a special heat supply plan, which provides a way to separate the heat supply in different urban areas. Disconnection of buildings in the district heating area from the DH network is only possible with the appropriate permit of Kaunas City Municipality. A special heat supply plan of Kaunas District Municipality was approved by the decision of Kaunas District Municipality No TS-43 of 26 January 2012. A special heat supply plan of Jurbarkas City and District was approved by the decision of Jurbarkas District Municipality No T2-67 of 10 March 2005.

Operational risk: Limited consumers' solvency and the debts. Risks can be mitigated by the factoring of debts and applying more stringent debt collection techniques / methods. Other possible operational risk – changes in interest rates in the banking market.

Detailed information on risk management policy and of risks of credit, currency rates, interest rates and liquidity are provided in Note 22 of Company's explanatory notes to the financial statements of the year 2017.

During the year 2017 in comparison with the year 2016, heat consumer debts decreased by approximately 12 % and consisted of EUR 11.152 million in 2017. During the year 2016 in comparison with the year 2015 heat consumer debts decreased by approximately 9 % and consisted of EUR 12.658 million. Decrease was affected by application of effective methods of debts administration and decrease in heat price.

To recover these debts as soon as possible, the Company actively uses a variety of legal debt management measures, such as pre-trial actions, judicial recovery and also cooperation with debt Collection Companies. In addition, when a debt becomes big, a restriction of heat supplies was started to apply as a prevention measure (if there are technical possibilities and according to the law).

In all cases, the Company first notifies the user of his indebtedness. When debtors respond to warnings and contact the Company, the Company discusses the options of debt settlement with them, signs documents guaranteeing the repayment of the debt. If the debtor does not respond to warnings and if pre-trial measures are not effective, the judicial recovery begins. The Company then applies to the court and after a decision accompanied with receiving-order – to bailiff. In such case the debtor must pay not only the debt but also the court and execution expenditures. Several debt prevention and pre-trial actions were made in 2017. A referral of information on debtors to Collection Company is among them. There were several debt management measures applied: more than 29,292 of written notices, 1,241 of telephone notices, 358 bills of exchange, 84 peaceful agreements concluded, and 144,828 of notices in bills.

Activities of the Company are cyclical. During the heating season (October – April) the highest operating income is earned. During the non-heating season, the Company's revenues are at their lowest since only heat for hot water is used. In addition, during the non-heating season, the Company incurs more costs because it must prepare for the upcoming heating season, i.e. to carry out the repairs and reconstruction of heat supply networks and heat production facilities.

Legal conformity risk: Energy activities are governed by the Law on Heat Sector, the Law on Energy, the Law on Electricity, the Law on Natural Gas, the Law on Drinking Water Supply and Wastewater Management, Government resolutions, Heat supply and consumption rules, Methodology of heat prices and payments for heat of NCC and other legislation. Their amendments affect the heating industry.

With new amendments of articles 2, 3, 20, 22, 28, 31, and 32 of the Law on Heat Sector No XI-1608 of the Republic of Lithuania that came in affect from 1 November 2011, in accordance with Article 7, the heat and hot water prices may not include any costs related with the indoor building heating (including heat units), and hot water systems. In implementing the legislation, from 1 November 2011, all these costs directly reduce the profit of the Company.

The political and legal risks also include political decisions of Kaunas City Municipality, with a controlling stake in the Company, that affect the Company's decision-making on the issues of agenda at the meetings of shareholders (the most significant issues, excluding the shareholder structure formation, are the distribution of profits and support), election of members of the Supervisory Board, who appoint the Company's Management Board members (who are often influenced by the politicians who elected them). The risk can be mitigated by informing the main shareholder of the Company's operations, performance, future and non-politicized notification of the board.

Legal conformity risk is a risk of increase in losses and (or) loss of prestige, an (or) decrease in confidence, which can be determined by the external environment factors (for example, violation of external legal acts, noncompliance of requirements of supervising institutions, etc.) or internal factors (for example, violation of internal legal acts and ethical standards, cases of employee's abuse, etc.).

The Company accomplished the last (of three) investment litigation with Kauno Termofikacijos Elektrinė (hereinafter – KTE), after Vilnius Court of Commercial Arbitration approved on 29 January 2016 a peaceful agreement concluded on 28 December 2015. Following the terms of agreement, the sides agreed to terminate Investment agreement of 31 March 2003, KTE taking obligations to pay compensation for the Company in amount of EUR 2.3 million paying in equal parts yearly until 28 February 2018. As an additional non-financial compensation according, the terms of peaceful agreement KTE disposed to the Company a part of Kaunas centralized heat supplies infrastructure (manifolds building and coherent pipelines, as well as part of technological circuit equipment, necessary to the Company) and the rights of lease of land plot, coherent to the assets disposed.

This juridical litigation with KTE continued from April 2013 and the litigations regarding a non-compliance of investments – from the year 2009.

Social factors: consumers' disconnections from the system of centralized heat supply can have a negative impact on Company's operations. Consumers with total consumption capacity of 2.96 MW were disconnected in 2017; also limited purchasing power of consumers and slow growth of it, unemployment and exceptionally negative opinion about district heating supplier in the public domain.

However, an increased number of consumers (from 118,504 in the year 2016 to 118,891 in the year 2017) had a positive impact. Total installed capacities of new consumer's amounts to 13.66 MW (mostly business organizations owning big, i.e. heated areas).

Social risk: Company's activities are socially sensitive to many Kaunas region residents and businesses due to the conditionally high costs for heating and hot water. These costs constitute a significant part of expenses for households. But as the price of heat sold is decreasing, several complaints regarding big bills also decrease. This decrease was determined by the latest Company's investments in production facilities that allowed reducing the prices of heat and hot water significantly. As measured in terms of Lithuania, the Company's heat price in the year 2017 was close to the average heat price of all heat supply companies.

This risk is mitigated by reasonably informing consumers about the Company's activities. Articles on Company's activities are coherently published in Company's website and in national or local media. The Company analyses consumer's complaints, provides written responses, advises consumers verbally (in Company's premises), also by phone and e-mails. Heat consumers periodically, i.e. 2 – 4 times per year, are invited to meet Company's specialists, and discuss consumer issues related to the Company's activities. Thus, an image of modern and socially responsible company is being created.

Technical and process factors: greatest process risks are so shaded with the condition of heating systems. Company's trunk pipelines are an average about 38 years old. Modernization rate of them is determined by lack of funds – it is necessary to reconstruct more than 13.5 km of pipelines per year to condition of age of heat supply system and

the minimum investments should consist of approximately 6 million euros. Hydraulic testing identifies their weakest points. Every year, about 200 points where cracks occur are identified during the tests. Upon discovery of defects, pipes are exposed and promptly repaired.

Trunk pipelines of heating networks are reconstructed in the most worn out places using support from the EU Structural Funds. New industrially (polyurethane foam insulation in polyethylene shell) insulated pipes not requiring concrete channels are mounted in the reconstructed sections of the heat supply network. Heat loss is very low in reconstructed sections (process level), while the pipelines no longer pose a threat of rupture and ensure reliable heat supply to consumers.

The greatest technical risk factor for heat generation facilities is their age. Some of heat generation facilities are already renewed now. Every year boiler repairs and preventive work is carried out during the non-heating season. They are necessary to make secure heat supplies and reliability, i.e. securing of heat production facilities and fuel reserves.

The other technical risk factor is the lack of own heat generation capacities after selling the main heat generation facility – Kaunas Termofication power-plant in 2003. Existing Company's own capacities of approx. 467 MW cannot secure customers demand in Kaunas integrated network. In addition, heat supplies companies must have reserve capacities that must be a 30 per cent more, than the maximum instantaneous demand of heat according to Lithuanian legal acts. Therefore, the Company is obliged by NCC to buy a reserve capacity security service. In the year 2017 this service was bought from KTE. Considering that and estimating common trends in development of heat economies in Kaunas and Lithuania, one of the aims of the Company is to continually reasonably invest in own heat production facilities, i.e. to modernize existing and to build new heat production capacities. More detailed information on Company's investments and modernization of production facilities is provided in chapters 6.1 and 7.

Technical risk can be reduced by reconstructing heat production facilities and supply pipelines, utilizing the latest and advanced technologies and thereby increasing the efficiency of the thermal system, capacity of own heat production facilities necessary for secure of reliability. In addition, significant investments in the modernization of the Company's assets must be made according to the country standards and regulations in line with European Union standards and normative acts regulating qualitative and technical indicators of heat supply systems.

Ecological factors: In terms of the Company they may be divided into those affecting the Company and there was influenced by the Company's operations.

In order not to adversely impact the environment and comply with the pollution limits, vibration and noise values, the Company is guided by the requirements of the Kyoto Protocol, the Helsinki Commission (HELCOM) and environmental constraints of Helsinki Convention, as well as the European Parliament and Council Directive 2001/80/EB of regulating energy emissions and Lithuanian environmental normative document LAND 43-2013 for the use of natural resources, and releases and emissions of air pollutants to the environment in its activities. Main sources of pollution of the Company: burning fossil fuel in the Company's heat sources, production of heat and waste water, are used in the industrial processes.

The Company pays taxes for atmospheric and water pollution. If allowable emission rate limits or annual limits are exceeded, the Company must pay the fines under the applicable laws of the Republic of Lithuania. There have been no pollution-related incidents and the Company was not imposed any penalties in 2017.

Main Company's emission reduction measures: modernization of heat generation sources, heat transfer loss reduction by replacing the existing pipes to the pipes with polyurethane foam insulation, installation of new technology and improvement of existing facilities, use of less polluting fuels, and continuous emission monitoring (in 2017, the fuel balance was dominated by solid biofuel – 80.06%, natural gas – 19.69%, biogas and other fuels – 0.25 %).

7. Analysis of financial and non-financial performance results, information related to environmental issues

The result of Company's activities of the year 2017 reflects an impact of investments that were implemented by the Company during the years 2014–2015. The Company implemented 3 big investment projects, focused to the

development of production sector, reaching to reduce costs of heat production and purchase, ensure reliable heat supplies, reduce losses of heat transmission, and increase effectiveness of heat supply system.

Company's sales revenue of the year 2017 was EUR 59,692 thousand and in comparison, with the year 2016 decreased by 2.44 per cent (in the year 2016 it consisted of EUR 61,188 thousand). Sales revenue of the Group of the year 2017 was EUR 59,680 thousand (in the year 2016 it consisted of EUR 61,178 thousand).

This change was mainly affected by less price of heat, the main part of which consist of fuel and purchased heat constituent, notwithstanding increased amount of heat sold. Amount of heat sold in 2017 in comparison with the year 2016 increased at 1.2 per cent. Average price of heat in the year 2017 decreased at 3.78 per cent (in 2017 it was 4.83 ct/kWh, and in 2016 it was 5.02 ct/kWh). Average air temperature of heating season of the year 2017 was 2.43 °C, and of the year 2016 – 0.6 °C.

The comprehensive income of the Group consisted of EUR 6,861 thousand in 2017, and the Company's – EUR 6,046 thousand.

Turnover from sales of the Group and the Company decreased by EUR 1.50 million. Company's comprehensive income of the year 2017 in comparison with the year 2016 decreased by EUR 0.86 million due to the compensation in amount of EUR 1.8 million, received in 2016 from UAB Kauno Termofikacijos Elektrinė under Peaceful Agreement, concluded on 28 December 2015, by which a litigation in Arbitration case regarding noncompliance of Investment Agreement of 31 March 2003 was terminated, and effective Company's activities that allowed to significantly decrease expenditures of fuel and heat purchased, also after start of usage of biofuel as a major part of fuel for heat production instead of natural gas. All of these allowed make heat cheaper both produced by the Company and purchased from IHP.

The Group and the Company accounts impairment loss in doubtful receivables. Change of impairment loss in doubtful receivables in 2017 in the Group's and the Company's write-offs and change in allowance for accounts receivable is included in the item of the cost of changes in the impairment of receivables and in 2017 amounted to EUR -830 thousand and EUR -849 thousand respectively, i.e. expenditures decreased an because of that profit increased (in 2016 – EUR -825 thousand and EUR -835 thousand). During 2017, the Group and the Company wrote of EUR 413 thousand and EUR 413 thousand of bad debts respectively (in 2016 – EUR 330 thousand and EUR 330 thousand). During 2017 the Group and the Company recovered EUR 6 thousand (in 2016 – EUR 5 thousand) of bad debts which were written off in prior years.

Comparison of financial indicators of the Group of the year 2017 with the indicators of the years 2013–2016 is presented in Table 1.

						Table 1
No	Indicator of the Group	2013	2014	2015	2016	2017
1	Revenue from sales, thousand euros	93,363	75,746	60,725	61,178	59,680
1.1	Including: Heat energy	90,239	72,484	57,396	58,004	56,084
1.2	Electric energy	222	220	253	38	0
1.3	Maintenance of indoor heating and hot water supply systems, heating substation facilities	81	27	21	10	10
1.4	Income from the maintenance of collectors	226	227	226	227	250
1.5	Hot water supply including cold water price	2,494	2,633	2,569	2,611	2,981
1.6	Income from maintenance of hot water meters	101	155	260	288	355
2	Profit, thousand euros	874	862	4,509	6,957	6,861
3	EBITDA, thousand euros	6,384	7,344	12,083	14,787	15,861
4	Profitability of core business, per cent	-2.1	0.9	9.1	10.0	11.7
5	Net profitability, per cent	0.9	1.1	7.4	11.4	11.5
6	Assets, thousand euros	129,688	145,130	134,442	145,073	149,158
7	Equity, thousand euros	76,522	77,382	81,860	87,019	89,343
8	Return on equity (ROE), per cent	1.1	1.1	5.7	8.5	8.2
9	Return on assets (ROA), per cent	0.7	0.6	3.2	5.0	4.8
10	Asset turnover ratio	0.72	0.52	0.45	0.42	0.40
11	Return on tangible assets, per cent	0.8	0.7	3.7	5.6	5.4
12	Debt ratio	0.41	0.47	0.39	0.40	0.40
13	Debt-to-equity ratio	0.7	0.9	0.6	0.7	0.7
14	General liquidity ratio	0.70	0.69	1.10	1.18	1.22
15	Quick ratio	0.66	0.68	1.07	1.14	1.13
16	Cash ratio	0.02	0.01	0.21	0.49	0.42
17	Net earnings per share	0.02	0.02	0.11	0.16	0.16
18	Equity per share, euros	1.8	1.8	1.9	2.0	2.09
19	Last share market price of the year /net profit /number of shares at year-end (P / E ratio)	8.34	6.99	4.36	3.45	7.36
20	Share capital, thousand euros	74,256	74,378	74,476	74,476	74,476
21	Share capital-to-assets ratio	0.57	0.51	0.55	0.51	0.5
22	Return on equity (capital), per cent	1.1	1.1	5.8	8.7	8.8
23	Dividend payment ratio	0.23	0.03	0.38	0.66

Comparison of financial indicators of the Company of the year 2017 with the indicators of the years 2013–2016 is presented in Table 2.

						Table 2
No	Indicator of the Company	2013	2014	2015	2016	2017
1	Revenue from sales, thousand euros	93,356	75,755	60,733	61,188	59,692
1.1	Including: Heat energy	90,255	72,494	57,404	58,013	56,096

CONSOLIDATED ANNUAL REPORT OF AB KAUNO ENERGIJA OF THE YEAR 2017
------------------------------------------------------------------	--	--	--

No	Indicator of the Company	2013	2014	2015	2016	2017
1.2	Electric energy	222	220	253	38	0
1.3	Maintenance of indoor heating and hot water supply systems, heating substation facilities	58	26	21	10	10
1.4	Income from the maintenance of collectors	226	227	226	227	250
1.5	Hot water supply including cold water price	2,494	2,633	2,569	2,611	2,981
1.6	Income from maintenance of hot water meters	101	155	260	288	355
2	Profit, thousand euros	538	867	4,528	6,901	6,046
3	EBITDA, thousand euros	6,007	7,339	12,085	14,631	14,391
4	Profitability of core business, per cent	-2.2	1.0	9.2	9.88	12.2
5	Net profitability, per cent	0.6	1.1	7.5	11.3	10.13
6	Assets, thousand euros	130,380	145,853	135,173	141,071	145,002
7	Equity, thousand euros	77,050	77,915	82,412	87,515	89,024
8	Return on equity (ROE), per cent	0.7	1.1	2.6	8.1	7.05
9	Return on assets (ROA), per cent	0.4	0.6	1.5	5.0	4.32
10	Asset turnover ratio	0.72	0.52	0.45	0.43	0.41
11	Return on tangible assets, per cent	0.5	0.7	1.8	5.7	4.9
12	Debt ratio	0.41	0.47	0.39	0.38	0.39
13	Debt-to-equity ratio	0.7	0.9	0.6	0.6	0.6
14	General liquidity ratio	0.70	0.69	1.10	1.48	1.48
15	Quick ratio	0.66	0.68	1.07	1.44	1.38
16	Cash ratio	0.02	0.01	0.21	0.51	0.51
17	Net earnings per share	0.01	0.02	0.11	0.16	0.14
18	Equity per share, euros	1.8	1.8	1.9	2.0	2.08
19	Last share market price of the year / net profit / number of shares at year-end (P / E ratio)	13.55	6.95	4.34	3.47	8.35
20	Share capital, thousand euros	74,256	74,378	74,476	74,476	74,476
21	Share capital-to-assets ratio	0.57	0.51	0.55	0.53	0.51
22	Return on equity (capital), per cent	0.7	1.1	5.8	8.6	7.8
23	Dividend payment ratio	0.23	0.03	0.38	0.66

A more detailed analysis of financial indicators of the Group and the Company is provided in notes to Consolidated and Company's financial statements for the year 2017.

Comparison of non-financial indicators of the Company of the year 2017 with the indicators of the years 2013–2016 is provided in Table 3.

						Table 3
No	Denomination of Indicator	2013	2014	2015	2016	2017
1.	Energy produced, purchased and supplied to the network, thous. MWh	1,442.2	1,364.8	1,326.3	1,428.1	1,447.1
1.1.	thermal energy	1,439.8	1,362.1	1,323.0	1,427.6	1,447.1
1.2.	electric energy	2.4	2.7	3.3	0.5	0
2.	Energy sold thous. MWh	1,179.3	1,113.9	1,098.6	1,188.0	1,201.7
2.1.	thermal energy	1,176.9	1,111.2	1,095.3	1,187.5	1,201.7
2.2.	electric energy	2.4	2.7	3.3	0.5	0
3.	Reconstructed heat supply pipelines, m	4,789	4,197	1,835	6,201	7,315
4.	Newly built heat supply pipelines, m	893	759	1,062	2,468	4,391

Chart 7

Heat supplied to the network, thous. MWh

Environmental impact on operations: The Company's performance can be affected by changes in sales turnovers caused by changed heat demand, which can be caused by consumer investments in the renovation of buildings, heat saving and rational consumption, average higher of lower outdoor temperature during the heating season, changes in fuel prices, heat purchase price from IHP.

Company's reconstructed heat production facilities changing fossil fuel to biofuel will make a serious competition with their costs of production to IHP, operating in Kaunas. With modernization of its own production facilities the Company reduced heat price for its consumers by 38 per cent during the last 5 years.

The dynamics of average price of heat of the Company in 2013–2017 is provided in Chart 8.

Average price of heat, supplied by AB Kauno energija, ct/kWh

Components of Company's heat price structure in 2013–2017 are provided in Chart 9.

Structural constituents of the heat price, ct/kWh

Management Board of AB Kauno Energija determined by its decision of 28 January 2016 No. 2016-2-2 (changed by the decision of AB Kauno Energija Management Board No. 2016-8-3 of 28 April 2016) heat price constituents for the third year of validity of basic heat price, which were agreed by NCC's decision of 25 May 2016 No. O3- 129. Constant constituent of heat price, valid until 31 May 2016 was 1.53 ct/kWh (including profit), and a new constant constituent, valid from 1 June 2016 is 1.95 ct/kWh (including profit) (increase of constant constituent was determined by change in realized heat quantity, inflation, change in investment depreciation and new "expenditures of assurance of reserve capacities" – 0.26 ct/kWh). Details of constant heat price constituent are provided in Chart 10.

Chart 9

Chart 10

Heat price constant constituent, euro ct/kWh

The Company recalculates values of variable constituents of heat price and final heat prices every month, considering changes in prices of fuel and purchased heat. Details of variable heat price constituent of December 2017 are provided in Chart 11.

Chart 11

Heat price variable constituent in December 2017, per cent

Information related to environmental issues. In carrying out their activities, the Group and the Company seek to prudently use natural resources, install less polluting technologies, and follow the environmental legislation and apply preventive measures to minimize the negative impact on the environment.

Waste management. The Group and the Company have organized the waste collection, sorting and disposal of them to waste managers, i.e. to licensed waste management businesses. In 2017, the Group and the Company disposed for recycling 0.883 tons of waste of electric and electronic equipment, 1,626.76 tons of ash, 170.55 tons of debris, 0.820 tons of used tires, 0.223 tons of fluorescent lamps.

Wastewater management. In accordance with the schedule agreed with Kaunas Regional Environmental Protection Department, the Group and the Company constantly monitor that the effluent discharges from stationary sources are within the permissible limits set out in the integrated pollution prevention and control permits.

Air pollution. The measurement laboratory of stationary air pollution sources of the Group and the Company, having the permit issued by the Environmental Protection Agency, continuously monitors that the emissions to the atmosphere from stationary sources would not exceed the permissible limits established in integrated pollution prevention and control permits. Company's Šilkas, Ežerėlis, Girionys and Noreikiškės boiler-houses, and starting from 2015 – Inkaras boiler-house and Petrašiūnai power-plant use biofuel, thus reducing atmospheric pollution. Below in Table 4 you will find the comparison of the Company's pollutions to the atmosphere from stationary air pollution sources in 2017 with the amount in 2013–2016.

							Table 4
Period	Particulates, t	Nitrogen oxides, t	Carbon monoxide, t	Sulphur dioxide, t	Hydrocarbons, t	Vanadium pentoxide, t	Other pollutants, t
2017	79.7242	285.6461	1,236.7667	145.0571	1.1982	0.0000	0.4297
2016	53.7542	265.0797	1,155.3349	231.4719	4.2871	0.0000	0.2818
2015	43.5783	203.6775	904.8513	193.3228	20.1586	0.0000	0.2818
2014	23.613	154.570	534.443	47.158	16.294	0.0000	0.440
2013	10.5967	101.3197	299.6656	5.0747	14.9647	0.0000	0.770

Cyclones for smoke cleaning from particulates are installed in Šilkas, Ežerėlis, Girionys, Noreikiškės, Inkaras boiler-houses and Petrašiūnai power-plant. Their working efficiency is checked every year. The Company is involved in the greenhouse gas emissions trading system. This system includes emission allowances (EA) allocated to Petrašiūnai power-plant, Šilkas, Pergalė, Garliava, Jurbarkas boiler-houses and Noreikiškės boiler-house with a cogeneration power-plant.

8. References and additional explanations

Main financial data of the Group and the Company are provided in the explanatory notes to the consolidated and Company's financial statements for the year 2017.

Internal control over consolidated statements. When preparing its consolidated financial statements, the Company combines the itemised financial statements of the Company and its subsidiaries, by summing up the items of assets, liabilities, equity, revenue and expenses. Afterwards, it eliminates the book value of the Company's investment in the subsidiary and Company's share of equity in the subsidiary; amounts on balance sheets, transactions, income and expenses inside the Group (for this purpose, it prepares a reconciled report of all transactions, income and expenses for the period); difference in depreciation of contribution in kind measured at market value as compared to its book value.

For the consolidated financial statements of the Group, the financial statements of the Company and subsidiaries are prepared for the same date.

It's controlled if the accounting policy of the company and its subsidiaries for accounting of similar transactions is the same. The subsidiaries' income and expenses are included into the consolidated financial statements as of the date of acquisition.

9. Significant events after the end of the year

On 2 January 2018, the united Kaunas customer service center "Mano Kaunas" was opened in Statybininkų str. 3, Kaunas, in premises of UAB Kauno Švara. Consumers can receive a prompt information / advice on the services provided by Kaunas Municipality companies AB Kauno Energija, UAB Kauno Švara, UAB Kauno Autobusai, UAB Kauno Butų Ūkis, UAB Kauno Gatvių Apšvietimas and UAB Kauno Vandenys, as well as to conclude agreements, pay bills, submit requests, obtain certificates, etc.

On 22 February 2018 Mr. Židrunas Garšva was withdrawn from the Company's Supervisory Board until the end of tenure by the decision of the Extraordinary General Meeting of Shareholders. Darius Razmislevičius was elected instead of him.

A decision to approve the amendment of the Company's Statutes, specifying the scope of competence and the functions performed by the Supervisory Board, the Management Board and the Head of the Company was taken at the Extraordinary General Meeting of Shareholders held on 22 February 2018.

On 19 March 2018, the branch of the Company Jurbarko Šilumos Tinklai was removed from the Register of Legal Entities, having terminated its activities on 1 March 2018, in accordance with the decision of the Board of the Company of 24 November 2017 No. 2017-31-2 "Regarding approval of the new management structure of AB Kauno energija", on the basis of which the structural management reorganizations optimizing Company's administrative activities were performed. The functions of the branch (their administration), ensuring the continuity of Jurbarkas boiler-house operation, were transferred from 1 March 2018 to the structural units of the Company in accordance with their competence, fully ensuring the operation of Jurbarkas boiler-house as the Company's heat production facility, supplying district heating to the residents of Jurbarkas.

On 28 March 2018, the audit of the financial statements for 2017 is completed. It was performed by KPMG Baltics, UAB (auditor certificate No 001446). The Company's audit company, performing the audit of the financial statements for 2017, was nominated by the Board for the General Meeting of Shareholders following the results of the Company's 2017 public procurement. This Company's Annual Report is presented in conjunction with the Audited Financial Statements for the year 2017 and the independent auditor's report on it.

10. Plans and forecasts of activities of the group of companies

Inasmuch investments allow continual business development and profitability, the aims of the Group's and the Company's investment program for the year 2018 is further increase in volumes of heat production and effectiveness, expansion of heat selling market, through increase of use of biofuel for heat production, development of heat transmission and distribution increasing safety and reliability, developing services of maintenance of engineering systems and further improvement of consumers services quality.

In compliance with the provisions of the plan for the facilities on the implementation of the National Renewable Energy Development Strategy, in order to implement the Company's key business objectives and the provisions of the National Energy Independence Strategy related to the assurance of technical requirements for reliability of heat facilities and heat supply networks, to guarantee the quality keeps apply to consumers, Kaunas city municipality decided to approve Company's investment plans for the new regulation period by the decision No T-26 "Regarding Investment Plans of AB Kauno Energija for the Year 2017 and for the Years 2017–2020 and Its Financing" of 7 February 2017. On 6 February 2018 Kaunas City Municipality approved new investment plans by the decision No T-14 "Regarding Investment Plans of AB Kauno Energija of the years 2018 and 2017–2020 and their financing".

The main investment goals of the Company for the regulation period of the years 2017–2020 are as follows: use of renewable energy sources, increase in reliability of heat supply to consumers in Kaunas and Jurbarkas cities an Kaunas district, and anticipated reception of EU Structural support under the 4 priority "Promoting energy efficiency and production and use of renewable energy" of Operational Programme for the European Union Funds' Investments in 2014–2020.

In 2018 the implementation of Company's investment program will involve further modernization of boiler-houses owned by the Company automating the production process and installing condensational economizers; reconstruction of heat networks; replacement of heat meters. Implementation of these measures will allow to reduce losses of heat transmission and to perform optimization of heat supply to the consumers and to ensure heat supplies reliability.

It is planned that in 2018 in comparison with 2017, the Group's sales turnover and the amount of heat sold will remain in the similar level as in 2017. The greatest impact on the Group's and the Company's income and expenses will be made by fuel and purchased heat price changes, as the price of heat under the requirements of the law is recalculated every month. A significant influence on the price of purchased heat is provided by the procedure established by the NCC (for example, a description of the procedure and conditions for the purchase of heat from independent heat producers), the conditions of competition between the heat supplier and IHP. The Group's profit in comparison with 2017 is planned to be less due to the recalculated constituents of heat price and compensation to consumers. Planned results may be adjusted by change in heat demand, i.e. consumption, which

is mainly affected by the average outdoor air temperature, the size of user investment in housing renovation, energy-saving and its rational use, as well as changes in the economic situation in Lithuania.

11. Information on research and development activities of the group of companies

It's indicated in EU Directive of renewable sources and in Lithuanian national legal acts, that a part of renewable sources in total end energy consumption must consist not less, than 23 per cent until the year 2020, and the part falling on heating – up to 40 per cent. Meanwhile in Kaunas this indicator exceeds 80 per cent already.

Company's representatives are constantly invited to work in committees of preparation of Energy Engineering studies programs of Kaunas University of Technology and in groups of external and self-evaluation. Working in these groups and committees Company's representatives analyse aims of programs and goals of studies, composition of training plans, appropriateness of staff, material basis, process and evaluation of studies, as well as program management. Performing external and self-evaluation, committees apply recommendations for improvement of program structures and implementation process, to satisfy the needs of employers and to meet the requirements of national and European legal acts in the field of higher education.

Like every year Company's representatives take part in national conference "Heat energetics and technologies" organized by Kaunas University of Technology at the end of January. This year the Company presented steps, which were made for further modernisation of Kaunas heat economy to reduce heat price for consumers. It was emphasized in the report that the Company further improved its efficiency indicators in 2016, which allowed to reach 4 – 5% less heat prices in the 2016–2017 heating season, than in the heating season of 2015–2016.

In April 2017 the Company participated in the Energy Conference organized by Seimas of the Republic of Lithuania "Competition in the Heat Production Sector - Results and Prospects", in which a report on Kaunas city experience in the reformation of heat economy has been presented.

On 20 April 2017 Company's General Manager dr. Rimantas Bakas attended the International Gas Conference BALTIC GAS CONFERENCE 2017 in Vilnius, where he spoke about changes in the use of gas and other fuels in the heat production process in Kaunas. He stated, that in Kaunas, like in most Lithuanian heat production and supply companies, gas is being continuously replaced by local biofuel in the energy production process, which makes it possible to lower the final price of heat to consumers. This conference is one of three gas energy conferences organized by the Chamber of Commerce of Germany and the Baltic States in Tallinn, Riga and Vilnius, aimed at economic analysis and modelling of market trends, considering infrastructure projects implemented in the Baltic region up to 2020. This conference was dedicated to the study of gas supply security and diversification of gas sources, the focus of the discussion was on the liquefied gas terminal in Klaipėda.

In May 2017 the 14th international conference of young scientists on energy issues "CYSENI 2017" was held at the Lithuanian Energy Institute. It brings together young scientists from Lithuania and foreign countries to share knowledge and experience gained from research in various fields of energy. The young scientists were welcomed by General Manager of AB Kauno Energija dr. Rimantas Bakas. The conference encourages interdisciplinary and inter-institutional co-operation, in which each participant broadens his horizons and circles of scientific acquaintances, which is crucial in increasing the country's scientific potential. In addition, the conference topics such as renewable energy sources and their use, energy efficiency and savings, modern smart grids, knowledge for energy policy making, hydrogen and fuel cells, fusion research, nuclear energy and radiation protection, research into combustion and plasma processes, research into thermal physics, fluid and gas mechanics and metrology, research into multifunctional materials, global change and ecosystems, nanoscience and nanotechnologies – are undoubtedly relevant and important for the development of the energy sector.

On May 2017 the Company was visited by colleagues from another heat supply company – AB Klaipedos Energija. The colleagues were interested in the experience of the Kaunas colleagues in carrying out the hydraulic testing of the heat supply pipelines. The experience of the Company's specialists in dividing the city's pipelines into 42 zones and performing individual tests in it was interesting for our colleagues from Klaipeda. This kind of tests is carried out dividing the city only in two separate parts in the port city and stopping the supply of hot water to relatively large parts of the city and for a longer period. Meanwhile, in Kaunas city, in order to reduce the time of nondelivery of hot water as much as possible, a new procedure for hydraulic tests and planned repairs has been implemented that allows for the carrying out of hydraulic tests in 42 smaller areas, thus preventing hot water supply to large urban areas simultaneously and shortening the time of hydraulic tests and planned repairs until two to four

days instead of the previous 2 weeks. Accordingly, the time when hot water was not supplied to consumers has also been shortened. Many of the citizens of Kaunas have already felt it.

The Board of the Company adopted a decision on 2017 July 20, by which obliged the administration of the Company to carry out activities regarding the acquisition of the Palemonas heat economy located in the territory of Kaunas city municipality in accordance with the procedure established by legal acts, for the price agreed in negotiations with the UAB Fortum Heat Lietuva and other acquisition conditions and to accomplish other procedures of acquisition of Palemonas heat economy submitting the results of the negotiations to the Board of the Company and, in addition, to obtain the approval of the Director of Administration representing the main shareholder of AB Kauno Energija – Kaunas City Municipality, to complete the transaction.

The Company along with Lithuanian Energy Institute takes part in READY project ("Resource efficient cities implementing advanced smart city solutions") supported by European Commission. 23 companies from Denmark, Sweden, Austria, France and Lithuania take part in it. Project will be pursued until the year 2022 by applying the latest measures of effective energy consumption in Kaunas city.

On 22 August 2017 the Company together with partners applied for funding under Horizon 2020 (Horizon 2020), the EU's largest research and innovation program. The project code name FLEXCHX (Flexible Combined Production of Power, Heat and Transport Fuels from Renewable Energy Sources). The essence of the project is to ensure that biomass plants can operate full load all year round. The goal of the project is to develop a flexible energy production process that could be used in future for various energy sources in Europe to achieve high efficiency at the lowest cost. The European Commission was asked EUR 4.5 million support. Project Coordinator is VTT – Finnish Applied Research Institute, partners: Enerstena UAB, Lithuanian Energy Institute, German Airspace Centre, Neste and technology companies from Germany, Finland and the United Kingdom.

On 28 February 2018 the Company and 9 other European companies and research institutions with the Innovation and Network Program Institution (INEA), which manages infrastructure and research programs in the EU transport, energy and telecommunications sectors, signed a financing agreement that will provide financial support to the Company for participation in an international research project "Flexible Combined Production of Power, Heat and Transport Fuels from Renewable Energy Sources" (FLEXCHX).

Furthermore, the Company takes part in programmes "Green Light" and "Motor Challenge", supported by European Commission, the aim of whose is effective energy consumption in lighting and pumps operation systems.

The project of implementation of quality management system (ISO 9001), standards of employee's safety and health (OHSAS 18001) and environment protection management system (ISO 14001) was started in the Company in 2016 and it is accomplished in 2017.

To ensure the prevention of corruption the Board of the Company approved the policy of preventing corruption of AB Kauno Energija and its subsidiaries on 24 February 2017. The Company has a confidential Trust Line (email address), all employees of the Company introduced in written into approved policy. In March 2017 a responsible employee appointed for the supervision and control of corruption prevention issues at the Company and its subsidiaries. In 2017, representatives of the Company participated in seminars organized by the Special Investigation Service of the Republic of Lithuania "Identification of the probability of corruption" and "Creation of anticorruption environment in a state and municipal institution". The heads of structural divisions participated in trainings individually prepared for the Company aimed at introduction of employees with the principles of anticorruption and general ethics and transparency in June 2017. The training program was conducted by the public institution Transparency International.

12. Information on own shares acquired and held by the Issuer

The Company does not hold the shares of its own. The Company's subsidiaries have not purchased any of the Company's shares. Neither the Company nor its subsidiaries purchased or sold own shares during the reporting period.

13. Information on the aims of financial risk management, hedging instruments in use

All relevant information on this issue is provided in Notes 2.11, 14, 22 to the consolidated financial statements for the year 2017 of AB Kauno Energija.

14. Information on the Issuer branch office and subsidiary undertakings

The Company's branch Jurbarko Šilumos Tinklai was established by the decision of the Company's Management Board and registered on 9 September 1997 at the address V. Kudirkos g. 33, 4430 Jurbarkas. The Company's branch produces and sells heat to consumers in the city of Jurbarkas.

The Company's branch Jurbarko Šilumos Tinklai had 31 employees as at 31 December 2017.

Comparison of financial indicators of Company's branch Jurbarko Šilumos Tinklai of the year 2017 with the indicators of the years 2013–2016 is provided in Chart 12.

Chart 12

Activity results of Company's branch office Jurbarko šilumos tinklai, thous. Eur

On 19 March 2018, the branch of the Company Jurbarko Šilumos Tinklai was removed from the Register of Legal Entities, having terminated its activities on 1 March 2018, in accordance with the decision of the Board of the Company No. 2017-31-2 of 24 November 2017 "Regarding the approval of the new management structure of AB Kauno Energija", on the basis of which the structural management reorganizations optimizing Company's administrative activities were performed. The functions of the branch (their administration), ensuring the continuity of Jurbarkas boiler-house operation, were transferred from 1 March 2018 to the structural units of the Company in accordance with their competence, fully ensuring the operation of Jurbarkas boiler-house as the Company's heat production facility, supplying district heating to the residents of Jurbarkas. The changes in the management structure of the Company terminating the activities of the branch as a structural unit of the Company from 1 March 2018 had no impact on the reliability and uninterrupted supply of district heating in Jurbarkas city.

Company's Board approved by its decision of 6 April 2012 a reorganization of subsidiary UAB Pastatų Priežiūros Paslaugos by separating assets from activities and by creating on the base of separated assets a new company with the same legal form, named UAB Kauno Energija NT.

After completion of the procedures of reorganisation in the way of separation of AB Kauno Energija subsidiary UAB Pastatų Priežiūros Paslaugos, a statutes of the newly established entity UAB Kauno Energija NT were registered in the Register of Legal Entities on 16 April 2013. Company's headquarter address is Savanorių pr. 347, 49423 Kaunas, company number 303042623.

The authorised capital of UAB Kauno Energija NT registered in the Register of Legal Entities on 31 December 2017 in total of 1,329,872 euros is divided into 45,921 ordinary nominal shares with the par value of 28.96 euros each.

UAB Kauno Energija NT has no holdings directly or indirectly managed in other companies.

Activities of UAB Kauno Energija NT include the real estate development, management, leases, purchase and sale.

Turnover of UAB Kauno Energija NT of the year 2017 was EUR 133 thousand, Comprehensive income was amounted to EUR (138) thousand.

As at 31 December 2017 UAB Kauno Energija NT had 4 employees.

Comparison of financial indicators of UAB Kauno Energija NT of the year 2017 with the indicators of the years 2013–2016 is provided in Chart 13.

Chart 13

Activity results of UAB Kauno Energija NT, thous. euros

Procedures of acquisition of 100 per cent of the shares of UAB Petrašiūnų Katilinė accomplished on 27 October 2016. The residence address of newly established legal entity is R. Kalantos str. 49, 52303 Kaunas, code 304217723. Statutes were registered at the Register of Legal Entities on 22 May 2017.

Authorized capital of UAB Petrašiūnų Katilinė registered at the Register of Legal Entities as at 31 December 2017 amounts to EUR 231,696 and is divided into 800 units of ordinary registered shares at par value of EUR 289.62 each.

UAB Petrašiūnų katilinė has no holdings directly or indirectly managed in other companies.

Activities of UAB Petrašiūnų Katilinė include production of heat.

UAB Petrašiūnų Katilinė had 9 employees as at 31 December 2017.

UAB Petrašiūnų Katilinė financial indicators of the year 2017 are as follows: operating revenue is EUR 1,813 thousand, operating expenses are EUR 1,858 and Comprehensive income is EUR (17) thousand.

15. Structure of authorized capital

The authorised capital of the Company registered in the Register of Legal Entities of the Republic of Lithuania on 31 December 2017 is EUR 74,475,728.82 (seventy-four million four hundred seventy five thousand seven hundred twenty eight euros and 82 cents).

Structure of authorized share capital by types of shares is specified in Table 5.

					Table 5
Type of shares	Number of shares, units	Nominal value, euros	Total nominal value, euros	Municipal share in the authorised capital, per cent	Share of private shareholders in the authorised capital, per cent
Ordinary nominal shares	42,802,143	1.74	74,475,728.82	98.33	1.67

16. Data on shares issued by the Issuer

The authorised capital of AB Kauno Energija was registered on 18 May 2015 by the decision of General Meeting of Shareholders held on 28 April 2015 and amounts to EUR 74,475,728.82 (seventy four million four hundred seventy five thousand seven hundred twenty eight euros and 82 cents) and it is divided to 42,802,143 (forty two million eight hundred and two thousand one hundred forty three) ordinary shares of par value of 1.74 euros each. There are no limitations on the transfer of securities.

16.1. Main characteristics of shares released into free circulation of securities (as at 31 December 2017).

A01031430
LT0000123010
20 031 977 ordinary nominal shares
EUR 1.74
EUR 34,855,639.98

16.2. Main characteristics of shares issued and registered for non-public trading (as at 31 December 2017). ISON code of securities LT0000128407 Number of shares

22,770,166 ordinary nominal shares

Nominal value

EUR 1.74

Total nominal value of shares EUR 39,620,088.84

History of trade in Company's securities in 2013–2017 is provided in Table 6.

					Table 6
Indicator	2013	2014	2015	2016	2017
Opening price, euro	0.578	0.589	0.486	0.459	0.592
Highest price, euro	0.589	0.600	0.479	0.600	1.180
Lowest price, euro	0.458	0.430	0.400	0.401	0.571
Last price, euro	0.589	0.486	0.459	0.560	1.180
Circulation, units	36,355	70,160	41,193	190,801	229,220
Circulation, million euro	0.02	0.04	0.02	0.10	0.19
Capitalisation, million euro	11.80	9.74	9.19	11.22	23.64

Historical data on share prices (in euro) and turnovers in 2013–2017 is provided in Chart 14.

Comparison of Company's share price with the index of own sector (utility services) and OMX Vilnius index is given in Chart 15.

	Data of Chart 15:
--	-------------------	--

Index/Shares	01.01.2013	31.12.2017	+/-%
OMX Baltic Benchmark GI	546.98	944.09	72.6
OMX Vilnius	355.08	653.29	83.98
B7000GI Utilities	988.68	2,321.18	134.78
KNR1L	0.578 EUR	1.180 EUR	104.15

17. Information on the Issuer shareholders

The total number of Company's shareholders (securities of other accounts keepers (not AB SEB bank) clients accounting them as one shareholder) as at 31 December 2017 was 285.

Information on Shareholders of the Issuer who owned as at 31 December 2017 more than 5 per cent of the authorised capital of the Company registered on 18 May 2015 (42,802,143 ordinary nominal shares), is provided in Table 7 and Chart 16.

				Table 7
Full name of shareholder (company name, type, headquartered dress, code)	Number of ordinary nominal shares owned by the shareholder, units	Owned share in the authorised capital, per cent	Share of votes carried by owned shares. per cent	Share of votes owned by the shareholder together with acting entities, per cent
Kaunas City Municipality Laisvės al. 96, 44251 Kaunas Code 111106319	39,736,058	92.84	92.84	-
Other shareholders	3,066,085	7.16	7.16	-
Total:	42,802,143	100	100	-

Chart 16

Structure of shareholders as at 31 December 2017

Repartition of shareholders in accordance with groups at the end of the reporting period is provided in table 8.

		Table 8
The name of the Group	Number of shares owned by the Group, pcs.	Own part of share capital, per cent from all the shares
Local authorities	42,088,631	98.33
Households	300,380	0.70
Securities of other accounts keepers clients	301,799	0.71
Private non-financial enterprises	83,508	0.20
Other financial brokers, except insurance companies and pension funds and other auxiliary enterprises	27,825	0.06
Other shareholders (non-financial enterprises controlled from abroad, financial auxiliary enterprises, companies holing deposits, except central bank	0	0.00
Total	42,802,143	100

17.1. The shareholders, who owned more than 5 per cent of the shares (20,031,977 ORS) issued for public trading (reg. No. A01031430, VP ISIN code – LT0000123010) as at 31 December 2017 are listed in Table 9.

					Table 9
Name	Type of shares	Number of shares, units	Total nominal value of shares, euros	Percentage of shares from those released into the public circulation	Share of the authorised capital (%)
Kaunas City Municipality Laisvės al. 96, 44251 Kaunas Code 111106319	Ordinary registered shares	16,965,892	29,520,652	84.69	39.64
Kaunas District Municipality Savanorių pr. 371, 49500 Kaunas, Code 111100622	Ordinary registered shares	1,606,168	2,794,732	8.02	3.75
Other shareholders	Ordinary registered shares	1,459,917	2,540,256	7.29	3.41
Total:		20,031,977	34,855,640	100	46.80

17.2. The shareholders, who owned more than 5 per cent of the shares (22,770,166 ORS) issued for non-public trading (VP ISIN code – LT0000128407) as at 31 December 2017 are listed in Table 10.

					Table 10
Name	Type of shares	Number of shares, units	Total nominal value of shares, Euro	Percentage of shares from those released into the public circulation	Share of the authorised capital (%)
Kaunas City Municipality Laisvės al. 96, 44251 Kaunas Code 111106319	Ordinary registered shares	22,770,166	39,620,089	100	53.20

None of the shareholders of the Issuer holds any special rights of control. The rights of all shareholders are the same; they are specified in article 4 of the Law on Companies of the Republic of Lithuania. The number of shares carrying votes at the General Meeting of Shareholders of the Company is 42,802,143 units.

The Company has not been notified on the limitations of voting rights or any other mutual agreements of shareholders which may limit the transfer of securities and / or voting rights.

In 2013, no dividends from the profit of the year 2012 were allocated and paid to the shareholders of the Issuer. Following the decision of the General Meeting of Shareholders held on 30 April 2013, the profit was allocated to the statutory reserve, other reserves (repair of heating units), support, and part of the profit was transferred to the next financial year. A total of 0.043 million euros was allocated for sponsorship and charity.

In 2014, the dividends from the profit of the year 2013 were allocated and paid to the shareholders of the Issuer. Dividend per share was 0.0028962 euro, in total – 0.124 million euro. The profit was allocated to the statutory reserve, other reserves, support and annual payments for members of the Board. A total of 0.333 million euros was allocated for sponsorship and charity.

In 2015, the dividends from the profit of the year 2014 were allocated and paid to the shareholders of the Issuer. Dividend per share was 0.003 euro, in total – 0.129 million euro. The profit was allocated to the statutory reserve, other reserves. A total of 0.2 million euros was allocated for sponsorship and charity.

In 2016, the dividends from the profit of the year 2015 were allocated and paid to the shareholders of the Issuer. Dividend per share was 0.042 euro, in total – 1.798 million euro. The profit was allocated to the statutory reserve, other reserves, bonuses for the members of the Management Board and bonuses for employees. A total of 0.05 million euros was allocated for sponsorship.

In 2017, the dividends from the profit of the year 2016 were allocated and paid to the shareholders of the Issuer. Dividend per share was 0,106 euro, in total – 4.537 million euro. The profit was allocated to the statutory reserve, to other reserves, bonuses for employees. A total of 0.1 million euros was allocated for sponsorship.

18. Employees

A total of 513 employees were employed in the Group as at 31 December 2017. Changes in the number of employees of the Group in 2013–2017 are specified in Table 11.

					Table 11
Actual number of employees	Group 2013-12-31	Group 2014-12-31	Group 2015-12-31	Group 2016-12-31	Group 2017-12-31
Total:	561	545	526	521	513
including: management	7	6	4	6	6
specialists	292	290	279	284	272
workers	262	249	243	231	235

Changes in the number of employees of the Company in 2013–2017 are specified in Table 12.

					Table 12
Actual number of employees	Company 2013-12-31	Company 2014-12-31	Company 2015-12-31	Company 2016-12-31	Company 2017-12-31
Total:	548	542	523	508	501
including: management	5	4	3	4	4
specialists	288	290	278	280	269
workers	255	248	242	224	228

Education of employees of the Group at the end of the reporting period.

						Table 13
No	Education	Group 2013-12-31	Group 2014-12-31	Group 2015-12-31	Group 2016-12-31	Group 2017-12-31
1	Secondary incomplete	6	6	7	5	5
2	Secondary	217	206	195	187	185
3	College	80	77	72	73	75
4	Higher	258	256	252	256	248
	Total:	561	545	526	521	513

Education of employees of the Company at the end of the reporting period.

						Table 14
No	Education	Company 2013-12-31	Company 2014-12-31	Company 2015-12-31	Company 2016-12-31	Company 2017-12-31
1	Secondary incomplete	5	6	7	5	5
2	Secondary	211	205	194	183	181
3	College	78	77	72	71	73
4	Higher	254	254	250	249	242
	Total:	548	542	523	508	501

Average conditional number of employees and average monthly salary Eur (at the end of 2017 before taxes)

			Table 15
No	Employees	Company	Group
1.1.	Average conditional number of managers	4	5.5
1.2.	Average monthly salary of managers	3,155.2	2,616.3
2.1.	Average conditional number of specialists	255.5	257.5
2.2.	Average monthly salary of specialists	1,024.9	1,022.5
3.1.	Average conditional number of workers	214.5	223.4
3.2.	Average monthly salary of workers	764.2	772.0

Company's management pays a lot of attention to increase in work efficiency, to improve working conditions, to supply of the latest working tools, professional development, planning of internal activities and control implementation, also for improvement of consumer service quality. Executive and professional qualification levels suit their positions, and work experience and practical knowledge of subject of other employees makes them possible to work in their positions. Staff turnover in the Group and the Company is inconsiderable.

In order to increase work efficiency, the company conducts an annual work performance evaluation of managers of structural units, the main goal of which is to evaluate the employee's qualifications and abilities to perform functions assigned in job regulations, to properly evaluate employees' activities, provide feedback on the goals execution in order to increase employee loyalty, satisfaction with conducted work, encouraging them to improve. The result of this process is information allowing for better coordination of the Company's activities and for encouraging employees to improve their working activities.

The company actively cooperates with educational institutions and allow high school students to apply their theoretical knowledge and gain practical skills. 4 students performed their internship in the Company in 2017. With demand for new workers, the most active and best students are provided with access to employment in the Company.

In 2015–2017, the Company participated in the implementation of the National targeted financing studies program and in cooperation with the Kaunas University of Technology signed tripartite targeted study financing agreements with two first-year students of Heat energy and technology program and one first-year student of Building engineering system study program.

The salary of employees of the Issuer consists of the constant part of salary, variable part of salary, benefits and allocations paid according to the Labour Code of the Republic of Lithuania and other laws, Collective agreement of the Company, and bonuses. Bonuses are paid from net profit, if the General Meeting of Shareholders allocates part of the profit for the bonuses of the Company employees. From 1998 till 2014, the General Meeting of Shareholders has never allocated any part of the profit for the bonuses of the Issuer's employees. EUR 500 thousand were allocated as bonuses to employees from the profit of the year 2016 by the meeting of shareholders in 2017.

The Collective agreement provides the special rights and responsibilities of the Issuer's employees or part of them. Under the Collective agreement that became effective in the Company on 28 January 2013:

1. For continuous employment within the Company employees are granted additional paid leave.

2. The length of service of employees of the Lithuanian power system companies transferred to the Company according to the corporate employer agreement, i.e. when the transfer was carried out according to the Labour Code or the Law on Employment Contract, is considered not interrupted, and such employees are granted additional paid leave for a continuous period of employment with the Company.

3. At the agreement of the employer and employee, the employee may be granted unpaid leave for family related issues and other important reasons.

4. Company's employees are entitled to additional paid leave.

The employer obligates:

1. To ensure the conditions of preventive health check and, if necessary, rehabilitation treatment of employees, to provide free health services at the Company's occupational health unit;

2. In case of death of an employee, the Company pays an allowance in the amount of two monthly average salaries of the last year of the Company or a branch (depending on where the employee has worked), gives free transport or covers transport costs. The allowance is granted to the burying person;

3. In case of death of a close relative of the employee (father, mother, child, or spouse), the employee is granted the allowance of the average salary of the previous year of the Company or an affiliate (depending on where the employee works), given free transport or transport costs are covered;

4. In case of birth of one or more children, employees are granted 50 per cent of the of the average salary of the previous year of the Company or an affiliate (depending on where the employee works) for each child;

5. In case of wedding, employees are granted 50 per cent of the of the average salary of the previous year of the Company or an affiliate (depending on where the employee works);

6. Employees who are raising three or more children under the age of 16, widows (widowers) and unmarried persons who raise one child or children alone, if they are studying at secondary schools until the age of 19, and while studying at higher schools or colleges full-time till the age of 21, or if they are caring for other family members with heavy or moderate disability level or lower than 55 per cent working ability level, or family members who have reached the retirement age, which according to the laws are established a major or moderate level of special needs, once a year are granted 50 per cent of the of the average salary of the previous year of the Company or an affiliate (depending on where the employee works) according to the date of request;

7. For the 40th, 50th and 60th anniversary, as proposed by the head of the division, for excellent performance of employees having the 15 and 20 years of continuous employment with the Company are granted a monetary gift of 25 per cent, and having over 20 years of continuous work experience – a monetary gift of 50 per cent of the average salary of the previous year of the Company or an affiliate (depending on where the employee worked);

8. In other cases, where the material support is needed (loss due to natural disasters or other reasons beyond the employee's control), at the agreement of the representatives who have signed the Collective Agreement, employees are granted a benefit of up to 580 euros,

9. In the event of a serious illness or accident of the employee, he is granted an allowance of up to 5 average salaries of the previous year of the Company or an affiliate (depending on where the employee worked) at the agreement of the representatives who have signed the Collective Agreement;

10. For the occasions of the Lithuanian Energy Day and jubilees of the Company deserving employees are granted a monetary gift of up to 145 euros.

19. Procedure for amending the Issuer Articles of Association

The statutes of the Issuer say that the General Meeting of Shareholders of the Company has the exceptional right to amend the statutes other than the exceptions provided in the Law on Companies of the Republic of Lithuania. The resolution on the amendment of the Company's statutes 2/3 qualified majority of votes of the members participating in the meeting of shareholders is needed.

The statutes of the Company were amended on 22 February 2018 by the decision of the General Meeting of Shareholders. Scope of competence and functions of Supervisory Board, Management Board and General Manager were specified in these Statutes. The new version of the statutes was registered in the Register of Legal Entities of the Republic of Lithuania on 13 March 2018. It can be found in the Internet website of the Company at www.kaunoenergija.lt.

20. Issuer management bodies

According to the Statutes of the Company, the management bodies of the Company include the General Meeting of Shareholders, a collegial management body – the Supervisory Board, a collegial management body – the Management Board, and a sole management body – General Manager.

Decisions of the General Meeting of Shareholders made on the issues within the competence of the General Meeting of Shareholders provided for in the Statutes of the Company are binding to its shareholders, the Supervisory Board, the Management Board and the General Manager, and to other employees of the Company.

All persons who are the shareholders of the Company on the date of the General Meeting of Shareholders have the right to attend the Company's General Meeting of Shareholders personally or by proxy or be represented by persons with whom they had entered into the agreement on the transfer of the voting right. The record date of the meeting of the Company is the fifth working day before the General Meeting of Shareholders or the fifth working day before the repeat General Meeting of Shareholders. A person attending the General Meeting and entitled to vote shall provide a document which is a proof of his personal identity and sign the registration list of the Meeting of Shareholders. A person who is not a shareholder shall additionally provide a document attesting to his right to vote at the General Meeting of Shareholders.

2 (two) General Meetings of Shareholders were convoked in 2017. Company's General Manager and the Chief Finance Officer took part in them. Issuers' shareholders can ask questions and to get answers or explanations from Company's managers and speakers.

The collegial management body – Supervisory Board is elected by the General Meeting of Shareholders according to the procedure specified in the Law on Companies of the Republic of Lithuania. The Supervisory Board consists of 7 (seven) members. The Supervisory Board is elected for a term of 4 (four) years. The Supervisory Board elects the chairman of the Supervisory Board from among its members. The General Meeting of shareholders may remove from office the entire Supervisory Board or its individual members before the expiry of the term of office of the Supervisory Board. Where individual members of the Supervisory Board are elected, they shall be elected only until the expiry of the term of office of the current Supervisory Board.

The Supervisory Board elects and dismisses the Board members and supervises the activities of the Board and the General manager of the Company; submits its comments and proposals to the General Meeting of Shareholders on the Company's operating strategy, set of annual financial statements, draft of profit / loss allocation and the annual report of the Company as well as the activities of the Board and the General manager of the Company; submits proposals to the Board and the General manager of the Company to revoke their decisions which are in conflict with laws and other legal acts, the statutes of the Company or decisions of the General Meeting of Shareholders; addresses other issues assigned to the scope of powers of the Supervisory Board by decisions of the General Meeting of Shareholders regarding the supervision of the activities of the Company and its management bodies. The Supervisory Board shall not be entitled to assign or delegate the functions assigned to the scope of its powers by the Law on Companies of the Republic of Lithuania and the statutes of the Company to other organs of the Company.

The Supervisory Board, following resolution No 1K-18 of 21 August 2008 of the Securities Commission of the Republic of Lithuania "On the requirement for Audit Committees", "Guidelines for the application of requirements for Audit Committees", approved in the decision of 28 November 2008 of the Securities Commission, approves the internal rules of procedure for forming the Audit Committee, and electing the Audit Committee members.

The Supervisory Board of the Company approved a new version of the internal rules of procedure of the Audit Committee of AB Kauno Energija on 26 October 2015.

The Management Board is a collegial management body of the Company. The Management Board is comprised of 5 (five) members. The Management Board is elected for the period of 4 (four) years by the Supervisory Board. The Supervisory Board can remove from office the entire Management Board incorpore or its individual members before the expiry of their term. If individual members of the Management Board are elected, they shall serve only until the expiry of the term of office of the current Management Board. The Management Board elects the chairman of the management Board from among its members.

The General Manager is the manager of the Company. The manager of the Company is a sole person management body of the Company organising its activities. Powers and responsibilities of the administration members of the Company are established in the order of the General Manager.

20.1.Data on the committees in the Company

On 26 October 2015 the Supervisory Board appointed by the decision No. 2015-4 the members of Audit Committee:

Full name	Position	Beginning of term	End of term*
Edita Plūkienė	Independent member of Audit Committee	27 October 2015	29 May 2019
Židrūnas Garšva	Independent member of Audit Committee	27 October 2015	29 May 2019
Audrius Lukoševičius	Independent member of Audit Committee	27 October 2015	29 May 2019
Inga Šliačkuvienė	Member of Audit Committee	27 October 2015	29 May 2019
Aušra Smolskienė	Member of Audit Committee	27 October 2015	29 May 2019
Juozas Gontis	Member of Audit Committee	27 October 2015	29 May 2019

* The term of office of the Audit Committee coincides with the term of office of the Supervisory Board of the Company.

In carrying out its activities, the Audit Committee follows the internal rules of procedure of the Company's Audit Committee approved by decision No 2015-4 of 26 October 2015 of the meeting of the Supervisory Board of the Company. The Audit Committee performs its functions provided for in article 52 of the Law on Audit of the Republic of Lithuania. The Audit Committee had 1 session in 2017.

Mrs. Edita Plūkienė is a Project Manager of UAB Aksa Holdingas, Director of UAB Amžiaus Pasaka, Director of UAB Savas Kazino, and member of public organization Vieningas Kaunas, member of Kaunas city municipality council. She was elected as a member of Company's independent Audit Committee on 26 October 2015. Education – University degree, master in agricultural economy from Aleksandras Stulginskis University (1993). Mrs. Edita Plūkienė holds no shares of the Company. No interest in the capital of other Lithuanian companies.

Mr. Židrūnas Garšva is a member of the Kaunas City Municipality Council, member of Committee of City Economy and Services, member of Supervisory Board of AB Kauno Energija, General Manager of UAB Dextera, member of supervisory board of Public Institution K. Grinius Nursing and Sustaining Treatment Hospital, Chairman of the Supervisory Board of Public institution Kaunas Central Clinic, also involved in personal business (activities such as head offices and management consultancy activities). He was elected as a member of Company's independent Audit Committee on 26 October 2015. Education – University degree, bachelor's in economy from Kaunas University of Technology (2007). Workplaces and positions held over the last 10 years: 1996 – 2008 and from 2015 – General Manager of UAB Dextera. Mr. Židrūnas Garšva holds no shares of the Company. Mr. Ž. Garšva holds the shares of UAB Dextera Holding.

Mr. Audrius Lukoševičius is Director of budgetary institution "Kauno biudžetinių įstaigų buhalterinė apskaita" Specialist of supervision of credit unions of Lithuanian Central Credit Union, voluntary assistant of member of Kaunas city municipality Rimantas Mikaitis, member of the board of Public institution "Automobilių stovėjimo aikštelės", member of the board of association "Kauno mažoji beisbolo lyga". He was elected as an independent member of Company's Audit Committee on 26 October 2015. Education – University degree, bachelor's in business administration and management from Vilnius University (1996), master's in business administration and management from Vilnius University (1998). Workplaces and positions held over the last 10 years: 08.2004– 12.2013 – Manager of customer service centre at Swedbank, AB, 04.2015–12.2015 – Specialist of supervision of credit unions of Lithuanian Central Credit Union. Mr. Audrius Lukoševičius holds no shares of the Company. No interest in the capital of other Lithuanian companies.

Mrs. Inga Šliačkuvienė is a Deputy Chief Accountant of the Company. She was elected as a member of Company's Audit Committee on 26 October 2015. Education – University degree, bachelor's in economy from Faculty of Economy and Management of Kaunas University of Technology (2007). Workplaces and positions held over the last 10 years: 08.2009–05.2014 – senior accountant of the Company. Mrs. Inga Šliačkuvienė holds no shares of the Company. No interest in the capital of other Lithuanian companies.

Mrs Aušra Smolskienė is a senior economist of Economy and Planning Division of the Company. She was elected as a member of Company's Audit Committee on 26 October 2015. Education – University degree, bachelor's in management and business from Faculty of Economy and Management of Kaunas University of Technology (2008), master's in economy from Faculty of Economy and Management of Kaunas University of Technology

(2010). Workplaces and positions held over the last 10 years: 10.2003–02.2007 – Technical secretary of Public Relations Division of the Company. Mrs. Aušra Smolskienė holds no shares of the Company. No interest in the capital of other Lithuanian companies.

Mr. Juozas Gontis is a senior lawyer of the Law Division of the Department of Law and Purchases of the Company. He was elected as a member of Company's Audit Committee on 26 October 2015. Education – University degree, bachelor in English philology from Vilnius University (1998), master's in international law from Vytautas Magnus University (2002). Workplaces and positions held over the last 10 years: 08.2002–06.2010 – senior solicitor of Kaunas branch of Bank of Lithuania, 08.2010–03.2012 – lawyer of UAB Vilniaus Valda, 04.2014–11.2014 – lawyer of AB Kauno Dujotiekio Statyba, 09.2010–12.2014 – lawyer of UAB Rotada, 08.2010–12.2014 – lawyer of UAB KDS Group. Mr. Juozas Gontis holds no shares of the Company. No interest in the capital of other Lithuanian companies.

21. Members of collegiate bodies, Company's manager, chief financier

21.1.Information about the members of the Company's Supervisory Board:

Full name	Position	Beginning of term	End of term
Visvaldas Matijošaitis	Chairman of the Supervisory Board	29 May 2015	29 May 2019
Povilas Mačiulis	Deputy Chairman of the Supervisory Board	29 May 2015	29 May 2019
Tomas Bagdonavičius	Member of the Supervisory Board	29 May 2015	29 May 2019
Visvaldas Varžinskas	Member of the Supervisory Board	29 May 2015	29 May 2019
Rimantas Mikaitis	Member of the Supervisory Board	29 May 2015	29 May 2019
Židrūnas Garšva	Member of the Supervisory Board	29 May 2015	22 February 2018
Andrius Palionis	Member of the Supervisory Board	29 May 2015	29 May 2019

Members of the Supervisory Board of the Company as at 31 December 2017:

The Company's Supervisory Board consists of seven dependant members, who are also the members of the Kaunas City Municipality Council, as they partially represent the controlling shareholder, i.e. Kaunas City Municipality, holding 92.84 per cent of the Company's voting shares.

3 sessions of the Supervisory Board were held during the year 2017. More than ½ of members of the Supervisory Board attended all the sessions.

Mr. Visvaldas Matijošaitis is a Mayor of Kaunas city, Member of the Kaunas City Municipality Council. He is also a founder, leader and Chairman of the board of public organization Vieningas Kaunas (United Kaunas), Chairman of the board of association Mentor Lietuva, President of association Žalgirio Fondas (Žalgiris Fund).

Mr. Visvaldas Matijošaitis holds no shares of the Company. Mr. V. Matijošaitis holds the shares of Vičiūnai Group of companies.

Mr. Povilas Mačiulis is a Deputy Mayor of Kaunas city, member of the Kaunas City Municipality Council (Deputy Chairman of Committee of City Economy and Services), Deputy Chairman of Kaunas Regional Development Council, and member of the board of public organization Vieningas Kaunas (United Kaunas), Director of Public Institution Maironio Fondas (Maironis Fund).

Mr. Povilas Mačiulis holds no shares of the Company. Mr. P. Mačiulis holds the shares of UAB Munava, UAB Erudito Licėjus and UAB Pakelti Antakiai.

Mr. Rimantas Mikaitis is a member of the Kaunas City Municipality Council (Chairman of Committee of City Economy and Services).

Mr. Rimantas Mikaitis holds no shares of the Company. No interest in the capital of other Lithuanian companies.

Dr. Visvaldas Varžinskas is a member of the Kaunas City Municipality Council, Chairman of Committee of Sustainable Development and Investments, Docent of Environmental Engineering Institute of Kaunas University of Technology, Head of Centre of Packaging Innovations and research of Kaunas University of Technology, member of the Committee of Circular Economics Policy Formation of the European Commission (Urban Agenda), expert of Lithuanian Standards Board (LST) Technical Committee TK 42, member of the board of public organization Vieningas Kaunas, member of council of National Cluster of Renewable Energy of Baltic Littoral.

Mr. Visvaldas Varžinskas holds no shares of the Company. No interest in the capital of other Lithuanian companies.

Mr. Tomas Bagdonavičius is a member of the Kaunas City Municipality Council, head of Business planning and analysis of UAB Vičiūnai Group, member of public organization Vieningas Kaunas (United Kaunas).

Mr. Tomas Bagdonavičius holds no shares of the Company. Mr. T. Bagdonavičius holds the shares of UAB Baltic Fish Export.

Mr. Židrūnas Garšva is a Member of the Kaunas City Municipality Council, member of Committee of City Economy and Services of Kaunas City Council, General Manager of UAB Dextera, Member of supervisory board of Public Institution K. Grinius Nursing and Sustaining Treatment Hospital also involved in personal business (activities such as head offices and management consultancy activities).

Member of the Supervisory Board from 29 May 2015 to 22 February 2018.

Mr. Židrūnas Garšva holds no shares of the Company. Mr. Ž. Garšva holds the shares of UAB Dextera Holding.

Mr. Andrius Palionis is a member of the Kaunas City Municipality Council, Director of Irena Matijošaitienė fund, Director of public organization Vieningas Kaunas (United Kaunas), member of Kaunas city Youth Affairs Council. Mr. Andrius Palionis holds no shares of the Company. No interest in the capital of other Lithuanian companies.

21.2.Information on the members of the Company's Management Board

Full name	Position	Beginning of term	End of term
Ramūnas Paškevičius	Chairman of the Management Board	10 April 2017	1 March 2019
Algimantas Stasys Anužis	Deputy chairman of the Management Board	1 June 2015	1 June 2019
Eugenijus Ušpuras	Member of the Management Board	1 June 2015	1 June 2019
Nerijus Mordas	Member of the Management Board	1 June 2015	1 June 2019
Giedrius Bielskus	Member of the Management Board	1 June 2015	1 June 2019

Members of Company's Management Board as at 31 December 2017:

34 sessions of Company's Management Board were held in the year 2017. More than 2/3 members of the Management Board attended all the sessions.

Ramūnas Paškevičius. Director of UAB Frostera. Member of Supervisory Board of AB Panevėžio Stiklas. Member of Company's Management Board from 10 April 2017. Mr. Ramūnas Paškevičius holds no shares of the Company. He holds the shares of UAB Frostera (12.5 %), UAB CARGO WAGONS (12.5 %), UAB Stiklo Investicija (25 %), UAB Keturtaktis (25 %), UAB Balduva (33 %).

Mr. Ramūnas Paškevičius charged EUR 10.79 thousand of remuneration under agreement of activity of member of the Management Board, no bonuses, nor any assets were transferred or guarantees issued during the reporting period.

Mr. Algimantas Stasys Anužis is a member of the Management Board of UAB Kauno Švara, member of the Council of Kaunas Chamber of Commerce, Industry and Crafts, president of Lithuanian Veterans Basketball League. He is a member of Company's Management Board from 1 June 2015.

Mr. Algimantas Stasys Anužis holds no shares of the Company. No interest in the capital of other Lithuanian companies.

Mr. Algimantas Stasys Anužis charged EUR 8.82 thousand of remuneration under agreement of activity of member of the Management Board, no bonuses, nor any assets were transferred or guarantees issued during the reporting period.

Mr. Eugenijus Ušpuras is a habilitated doctor, chief of Laboratory of Nuclear Installation Safety, Lithuanian Energetic, full member of the Lithuanian Academy of Sciences, professor, and member of Company's Management Board from 1 June 2015.

Mr. Eugenijus Ušpuras holds no shares of the Company. No interest in the capital of other Lithuanian companies.

Mr. Eugenijus Ušpuras charged EUR 8.82 thousand of remuneration under agreement of activity of member of the Management Board, no bonuses, nor any assets were transferred or guarantees issued during the reporting period.

Mr. Giedrius Bielskus is a director of public institution S. Dariaus ir S. Girėno Sporto Centras (S. Darius and S. Girėnas Sports Centre), member of Company's Management Board from 1 June 2015.

Mr. Giedrius Bielskus holds no shares of the Company. No interest in the capital of other Lithuanian companies.

Mr. Giedrius Bielskus charged EUR 8.82 thousand of remuneration under agreement of activity of member of the Management Board, no bonuses, nor any assets were transferred or guarantees issued during the reporting period.

Mr. Nerijus Mordas is a Chief Finance Officer of UAB Vičiūnų Grupė (UAB Vičiūnai Group). Member of Company's Management Board from 1 June 2015.

Mr. Nerijus Mordas holds no shares of the Company. No interest in the capital of other Lithuanian companies.

Mr. Nerijus Mordas charged EUR 8.82 thousand of remuneration under agreement of activity of member of the Management Board, no bonuses, nor any assets were transferred or guarantees issued during the reporting period.

Members of Company's Management Board until 6 March 2017:

Mr. Vytautas Mikaila is a doctor in Technical sciences, Director of UAB MVE Group, member of Association of Heating Technics Engineers, member of Rotary Club Kauno Tauras, honorary consul of Slovak Republic in Lithuania. Manager of the Company's Strategy and Investment Projects department from 1 July 2015 to 13 May 2016. He was a chairman of the Company's Management Board from 1 June 2015 to 6 March 2017.

Mr. Vytautas Mikaila holds no shares of the Company. He holds 55 % of shares of UAB MVE Group.

Mr. Vytautas Mikaila charged EUR 2.60 thousand of remuneration under agreement of activity of member of the Management Board, no bonuses, nor any assets were transferred or guarantees issued during the reporting period.

21.3.Information on the General Manager and Chief accountant of the Company:

Mr. Rimantas Bakas is Doctor in Technical sciences. Company's General Manager since 24 November 2008. Member of the Lithuanian Thermal Engineers Association, member of council of PI Kaunas Regional Energy Agency, member of Council of The Lithuanian District Heating Association, member of Scientific Council of Lithuanian Energy Institute, chairman of Master Qualification Committee of the Thermal and Nuclear Energy Department of Kaunas University of Technology, certified expert of the PET Lithuanian Committee on Energy approved by the Lithuanian committee of the World Energy Council, member of the Company's Management Board from 3 May 2011 to 2 January 2012 and from 28 September 2012 to 1 June 2015. Mr. Rimantas Bakas has a higher university education of Kaunas University of Technology, graduated in 1985, industrial thermal energy engineer. Workplaces and positions over the last 10 years: Manager of Strategy Division – 01.2006–11.2008.

Company's General Manager Rimantas Bakas was awarded with letters of appreciation from the Lithuanian District Heating Association (2007), Lithuanian Electricity Association (2008), Lithuanian Committee of World Energy Council (2010), Minister of Energy of the Republic of Lithuania (2013), Chairman of the Seimas of the Republic of Lithuania (2013), Lithuanian Committee of World Energy Council (2013), and the 600th Anniversary medal of Kaunas City Municipality (2008), Medal of Honour of Lithuanian energetics (2011), silver-plated brassy medal of Jonas Vileišis, burgomaster of Kaunas city for the merits in development of energy economy of the city (2015).

Mr. Rimantas Bakas holds no shares of the Company. No interest in the capital of other Lithuanian companies.

Mrs. Violeta Staškūnienė is a Company's Chief Accountant since 16 January 2003. She has a University education from Vilnius University, graduated in 1984, labour economics, profession – economist. Mrs. Violeta Staškūnienė holds 2,641 of the Company's shares, which represent less than 5 per cent of the authorised capital. No interest in the capital of other Lithuanian companies.

Company's General Manager and the Chief Accountant charged EUR 101.2 thousand of remuneration during the year 2017, and the average amount per member is EUR 50.6 thousand. No other assets have been transferred, no guarantees granted.

22. Information on significant agreements

There are no significant agreements that would come into force, change or termination in case of change in controls of Issuer (their impact as well, except cases when due to the character of agreements the disclosure of them would make a significant harm).

23. Information on agreements of the Issuer and its managerial body members or employees

There are no agreements of the Issuer or its managerial body members or employees (which provide for compensation in case of their resignation or termination of employment on no grounds or in case their employment is terminated due to changes in controls of the Issuer).

24. Information on major transactions with related parties

There were no larger individual transactions. More detailed information is provided in Note 25 of the explanatory notes to financial statements.

25. Information on harmful transactions concluded on behalf of the Issuer during the reporting period

There are no harmful transactions concluded on behalf of the Issuer during the reporting period (not complying with the Company's objectives, normal market conditions, detrimental to the interests of shareholders and other interest groups etc.) which were or are likely to have an adverse effect on the Issuer's activities and (or) performance in the future, as well as information on transactions entered into in a conflict of interest between the Issuer's management, controlling shareholders or other related parties' obligations to the Issuer and their private interests and (or) other duties.

26. Information on compliance with the Governance Code of Companies and the Company's corporate social initiatives and policies

Information on compliance with the corporate governance code is provided in Annex 1 to this annual report. Annual reports on the Company's corporate social initiatives and policies are provided in Annex 2 to this annual report named AB Kauno Energija Consolidated Sustainability Report in Accordance with GRI Standards and on the Company's website.

27. Data on publicised information

In performing its obligations under the applicable legislation regulating the securities market, the Issuer has announced the following information starting from 1 January 2017 over the GlobeNewswire news distribution service, in which notices are disseminated within the European Union. This information was also posted on the website of the Issuer. All information is available on Nasdaq Vilnius websites (http://www.baltic.omxgroup.com/?id=3304) and the issuer's website (http://www.kaunoenergija.lt).

Title.	Announcement category	Language	Time
Resolutions of the Extraordinary General Meeting of	General meeting	EN, LT	2018-02-22
Shareholders of AB Kauno Energija	of shareholders		16:00
Supplement of the agenda of the Extraordinary General	General meeting	EN, LT	2018-02-08
Meeting of Shareholders of PLLC Kauno Energija	of shareholders		16:17
Activity results of 12 months of the year 2017	Interim information	EN, LT	2018-01-30 16:41
Convocation of the Extraordinary General Meeting of	General meeting	EN, LT	2018-01-18
Shareholders of PLLC Kauno Energija	of shareholders		16:22
CORRECTION: Activity results of 9 months of the year 2017	Interim information	EN, LT	$2017 - 11 - 03$ 16:00
Activity results of 9 months of the year 2017	Interim information	EN, LT	2017-10-30 16:33
AB Kauno Energija interim reports and unaudited financial	Half-Yearly	EN, LT	2017-09-21
statements for the 1 half of the year 2017	information		08:35
Business activity results of the 1 half of the year 2017	Half-Yearly information	EN, LT	2017-07-27 17:22
Resolutions of the Extraordinary General Meeting of	General meeting	EN, LT	2017-07-21
Shareholders of AB Kauno Energija	of shareholders		16:00
CORRECTION: Convocation of the Extraordinary General	Notification on	EN, LT	2017-06-26
Meeting of Shareholders of AB Kauno Energija	material event		15:14
Convocation of the Extraordinary General Meeting of	Notification on	EN, LT	2017-06-23
Shareholders of AB Kauno Energija	material event		16:00
Audited annual information of AB Kauno energija for 2016	Annual information	EN, LT	2017-04-28 16:00
Resolutions of the General Meeting of Shareholders of AB	General meeting	EN, LT	2017-04-28
Kauno Energija	of shareholders		16:00
Activity results of the 1 quarter of the year 2017	Interim information	EN, LT	2017-04-27 16:14
Information on election of the member of Management Board	Notification on	EN, LT	2017-04-10
of AB Kauno Energija	material event		13:00
Convocation of General Meeting of Shareholders of AB	Notification on	EN, LT	2017-04-03
Kauno Energija	material event		19:12
The audited activity results of AB Kauno Energija of the year	Notification on	EN, LT	2017-03-07
2016	material event		16:30
Information on recall of the member of Management Board of	Notification on	EN, LT	2017-03-07
AB Kauno Energija	material event		16:30
AB Kauno Energija Interim information on the 12 months of	Interim	EN, LT	2017-01-31
the year 2016	information		16:00
Activity results of 12 months of the year 2016	Notification on material event	EN, LT	2017-01-30 16:08

AB Kauno Energija report on the compliance with the Governance Code for the companies listed on the Stock Exchange Nasdaq Vilnius

AB Kauno Energija (hereinafter – the Company), following paragraph item 3of Article 22 of the Law on Securities of the Republic of Lithuania and item 24.5 of The Listing Rules of AB Nasdaq Vilnius, discloses its compliance with the Governance Code, approved by the Stock Exchange Nasdaq Vilnius, for the companies listed on the regulated market, and its specific provisions.

PRINCIPLES/ RECOMMENDATIONS	YES/NO /NOT APPLICA BLE	COMMENTARY
Principle I: Basic Provisions
The overriding objective of a company should be to operate in common interests of all the shareholders by optimizing over time shareholder value.
1.1. A company should adopt and make public the company's development strategy and objectives by clearly declaring how the company intends to meet the interests of its shareholders and optimize shareholder value.	Yes	The Company prepares and revises the strategies of heat production and supply system development every year, specifies investment plans and the sources of their financing. Investment plans are being presented for ratifying to Kaunas city, Kaunas region and Jurbarkas region municipalities as well as to The National Control Commission for Prices and Energy (NCC). The provisions of the Company's strategy which contain no confidential information and the decisions-making process, as well as the Company's development policies and objectives are published in Company's interim and annual reports and company's website. Periodic reports and notifications are disclosing the directions for Company's growth. Those reports, notification on stock event and notifications are presented by the Company's managers and are published in press.
1.2. All management bodies of a company should act in furtherance of the declared strategic objectives in view of the need to optimize shareholder value.	Yes	The Company's board accepts strategic decisions and approves Company's activities strategy. The Company's board has also created a long-term and short-term Company's development strategic objectives. Company's Supervisory Board renders responses and suggestions for shareholders regarding Company's activities strategy. The management of the Company, the heads of the areas concerned are making their every effort in order to implement those objectives – the structure of the Company and of the subdivision of the Group is optimised.
1.3. A company's supervisory and management bodies should act in close co-operation in order to attain maximum benefit for the company and its shareholders.	Yes	The Supervisory Board and the Management Board are formed. All the bodies of the Company (Manager, the Management board and the Supervisory board) aim to implement this recommendation, mutual meetings of the Management board and the Supervisory board are held during the year.

1.4. A company's supervisory and management bodies	Yes	The Company's supervisory and managing
should ensure that the rights and interests of persons		bodies aim to ensure with their activities all
other than the company's shareholders (e.g. employees,		interests of the persons concerned. The
creditors, suppliers, clients, local community),		Company's management and the separate areas
participating in or connected with the company's		managers spend a lot of time communicating
operation, are duly respected.		with customers, suppliers, contractors,
		representatives of the municipalities, in order to
		find optimal solutions, related to the Company's
		activities.
		Company's politics in respect of employees,
		customers and local society is stated in
		Company's Social Responsibility politics and
		implementation of this politics is described in
		Company's Corporate Social Responsibility
		reports.
		The specific of Company's activities ensures that
		consumers (customers) are periodically, i.e. 2-3
		times per year invited to attend meetings where
		the relevant issues related to the activity of the
		Company are discussed. In addition the "Open
		doors days" are being arranged in order to better
		inform customers and to ensure closer relations
		with them.

Principle II: The corporate governance framework

The corporate governance framework should ensure the strategic guidance of the company, the effective oversight of the company's management bodies, an appropriate balance and distribution of functions between the company's bodies, protection of the shareholders' interests.

2.1. Besides obligatory bodies provided for in the Law	Yes	The General Meeting of Shareholders and the
on Companies of the Republic of Lithuania – a general		Company's general manager are compulsory
shareholders' meeting and the chief executive officer, it		management bodies of the Company set by the
is recommended that a company should set up both a		Law on Joint Stock Companies of the Republic
collegial supervisory body and a collegial management		of Lithuania. The collegial supervisory body - the
body. The setting up of collegial bodies for supervision		Supervisory Board and the collegial management
and management facilitates clear separation of		body – the Management Board are also being
management and supervisory functions in the company,		formed.
accountability and control on the part of the chief		Division of Company's management bodies'
executive officer, which, in its turn, facilitate a more		competences and responsibility is determined in
efficient and transparent management process.		Company's statute, regulations of management
		bodies' activities, are published Company's web
		site and in Company's managers' job description.
2.2. A collegial management body is responsible for the	Yes	A collegial management body of the Company –
strategic management of the company and performs		the Management Board is responsible for the
other key functions of corporate governance. A collegial		strategic management of the Company and also
supervisory body is responsible for the effective		performs other key functions of the Company
supervision of the company's management bodies.		management. A collegial supervisory body – the
		Supervisory Board is responsible for the effective
		supervision of activities of the Company's
		managing bodies.
2.3. Where a company chooses to form only one	Not	The Supervisory Board and the Management
collegial body, it is recommended that it should be a	applicable	Board is being formed.
supervisory body, i.e. the supervisory board. In such a
case, the supervisory board is responsible for the
effective monitoring of the functions performed by the
company's chief executive officer.
2.4. The collegial supervisory body to be elected by the	Yes	The Supervisory Board of the Company is
general shareholders' meeting should be set up and		elected and it acts partly in compliance with the

should act in the manner defined in Principles III and IV. Where a company should decide not to set up a collegial supervisory body but rather a collegial management body, i.e. the board, Principles III and IV should apply to the board as long as that does not contradict the essence and purpose of this body.1		principles III and IV set out in the procedures and basic principles for the requirements are not violated.
2.5. Company's management and supervisory bodies should comprise such number of board (executive directors) and supervisory (non-executive directors) board members that no individual or small group of individuals can dominate decision-making on the part of these bodies.2	Yes	According to the Statute of the Company the Supervisory Board of 7 (seven) members is elected and the Supervisory Board elects the Management Board. It is elected of 5 (five) members.
2.6. Non-executive directors or members of the supervisory board should be appointed for specified terms subject to individual re-election, at maximum intervals provided for in the Lithuanian legislation with a view to ensuring necessary development of professional experience and sufficiently frequent reconfirmation of their status. A possibility to remove them should also be stipulated however this procedure should not be easier than the removal procedure for an executive director or a member of the management board.	Yes	The Supervisory Board of the Company is elected for 4 (four) years. According to the Statute of the Company and to the practice it is not forbidden to re-elect the single members of the Supervisory Board for the new term (Supervisory Board member's number of terms of office is not limited). Also the General meeting of shareholders is able to recall the Supervisory Board in-corpore or its individual members before the end of term of Supervisory Board and the member of Supervisory Board is able to resign before the end of term giving a 14 days written warning.
2.7. Chairman of the collegial body elected by the general shareholders' meeting may be a person whose current or past office constitutes no obstacle to conduct independent and impartial supervision. Where a company should decide not to set up a supervisory board but rather the board, it is recommended that the chairman of the board and chief executive officer of the company should be a different person. Former company's chief executive officer should not be immediately nominated as the chairman of the collegial body elected by the general shareholders' meeting. When a company chooses to departure from these recommendations, it should furnish information on the measures it has taken to ensure impartiality of the supervision.	Yes	The Chairman of the Company's Supervisory Board hasn't been the General Manager of the Company. His current or past position is not an obstacle for independent and impartial supervision.
Principle III: The order of the formation of a collegial body to be elected by a general shareholders' meeting

¹ Provisions of Principles III and IV are more applicable to those instances when the general shareholders' meeting elects the supervisory board, i.e. a body that is essentially formed to ensure oversight of the company's board and the chief executive officer and to represent the company's shareholders. However, in case the company does not form the supervisory board but rather the board, most of the recommendations set out in Principles III and IV become important and applicable to the board as well. Furthermore, it should be noted that certain recommendations, which are in their essence and nature applicable exclusively to the supervisory board (e.g. formation of the committees), should not be applied to the board, as the competence and functions of these bodies according to the Law on Companies of the Republic of Lithuania (Official Gazette, 2003, No 123-5574) are different. For instance, item 3.1 of the Code concerning oversight of the management bodies applies to the extent it concerns the oversight of the chief executive officer of the company, but not of the board itself; item 4.1 of the Code concerning recommendations to the management bodies applies to the extent it relates to the provision of recommendations to the company's chief executive officer; item 4.4 of the Code concerning independence of the collegial body elected by the general meeting from the company's management bodies is applied to the extent it concerns independence from the chief executive officer.

² Definitions 'executive director' and 'non-executive director' are used in cases when a company has only one collegial body.

The order of the formation a collegial body to be elected by a general shareholders' meeting should ensure representation of minority shareholders, accountability of this body to the shareholders and objective monitoring

of the company's operation and its management bodies.3
3.1. The mechanism of the formation of a collegial body to be elected by a general shareholders' meeting (hereinafter in this Principle referred to as the 'collegial body') should ensure objective and fair monitoring of the company's management bodies as well as representation of minority shareholders.	Yes	The mechanism of forming of the Supervisory Board, which corresponds to the requirements of the Law on Joint Stock Companies of the Republic of Lithuania, ensures the objective supervision of the collegial management body.
3.2. Names and surnames of the candidates to become members of a collegial body, information about their education, qualification, professional background, positions taken and potential conflicts of interest should be disclosed early enough before the general shareholders' meeting so that the shareholders would have sufficient time to make an informed voting decision. All factors affecting the candidate's independence, the sample list of which is set out in Recommendation 3.7, should be also disclosed. The collegial body should also be informed on any subsequent changes in the provided information. The collegial body should, on yearly basis, collect data provided in this item on its members and disclose this in the company's annual report.	Yes	Information regarding candidates for the members of Supervisory Board is being disclosed for shareholders even before and during General meeting of shareholders. Information regarding their education, qualifications, professional experience, occupation and other important professional obligations is being presented in Company's annual and interim reports and publicized in Company's website as well. It is foreseen in the work regulations of the Supervisory Board that every member of the body has to inform the Chairman of the Supervisory Board and the Company about his data changes and this data is being presented in the Company's annual and interim reports and publicized in Company's website as well.
3.3. Should a person be nominated for members of a collegial body, such nomination should be followed by the disclosure of information on candidate's particular competences relevant to his/her service on the collegial body. In order shareholders and investors are able to ascertain whether member's competence is further relevant, the collegial body should, in its annual report, disclose the information on its composition and particular competences of individual members which are relevant to their service on the collegial body.	Yes	The shareholders of the Company by offering candidates for the collegial body must ensure that these members have the required competence. The Company publishes only the information which is provided by the members of the collegial body. Information which is presented in the annual and in interim report (data on participation of the issuer's statute capital, data on participation in other undertakings, bodies and organisations (title of the company, institution or organization and personal occupation), is publicized in Company's website.
3.4 In order to maintain a proper balance in terms of the current qualifications possessed by its members, the desired composition of the collegial body shall be determined with regard to the company's structure and activities, and have this periodically evaluated. The collegial body should ensure that it is composed of members who, as a whole, have the required diversity of knowledge, judgment and experience to complete their tasks properly. The members of the audit committee, collectively, should have a recent knowledge and relevant experience in the fields of finance, accounting and/or audit for the stock exchange listed companies. At least one of the members of the remuneration committee should have knowledge of and experience in the field of remuneration policy.	Yes	According to the Company's structure and activities, the main shareholder of the Company introduces candidates for members of the collegial body with relevant qualifications. The Collegial body as a unit has a versatile knowledge, opinions and experience enabling them to perform their tasks properly. Audit Committee as a unit, has up-to-date knowledge and relevant experience in finance, accounting, and (or) auditing.

3 Attention should be drawn to the fact that in the situation where the collegial body elected by the general shareholders' meeting is the board, it is natural that being a management body it should ensure oversight not of all management bodies of the company, but only of the singleperson body of management, i.e. the company's chief executive officer. This note shall apply in respect of item 3.1 as well.

3.5. All new members of the collegial body should be offered a tailored program focused on introducing a member with his/her duties, corporate organization and activities. The collegial body should conduct an annual review to identify fields where its members need to update their skills and knowledge.	Yes	In the practice of the Company all the new members of Supervisory Board are regularly informed about Company's activities and its alterations, as well as substantial changes of legal acts, regulating Company's activities and of circumstances, making an influence on Company's activities at the sessions of Supervisory Board of individually if there is such need or upon request of members.
3.6. In order to ensure that all material conflicts of interest related with a member of the collegial body are resolved properly, the collegial body should comprise a sufficient4 number of independent5 members.	No	The Company does not make any influence on the composition of the collegial body. Candidates to the members of the Company's collegial body are offered by the main shareholder. Detailed information is provided in article 3.7.
3.7. A member of the collegial body should be considered to be independent only if he is free of any business, family or other relationship with the company, its controlling shareholder or the management of either, that creates a conflict of interest such as to impair his judgment. Since all cases when member of the collegial body is likely to become dependent are impossible to list, moreover, relationships and circumstances associated with the determination of independence may vary amongst companies and the best practices of solving this problem are yet to evolve in the course of time, assessment of independence of a member of the collegial body should be based on the contents of the relationship and circumstances rather than their form. The key criteria for identifying whether a member of the collegial body can be considered to be independent are the following: 1) He/she is not an executive director or member of the board (if a collegial body elected by the general shareholders' meeting is the supervisory board) of the company or any associated company and has not been such during the last five years; 2) He/she is not an employee of the company or some any company and has not been such during the last three years, except for cases when a member of the collegial body does not belong to the senior management and was elected to the collegial body as a representative of the employees; 3) He/she is not receiving or has been not receiving significant additional remuneration from the	No	Elected Company's Supervisory Board consists of seven dependent members who are also the members of the Kaunas City Council. All the members of Supervisory Board meet criteria indicated in item 3.7 of recommendations, except criteria 4, because all the members of Supervisory Board partly represent controlling shareholder, i.e. Kaunas city municipality having 92.84 % of votes.
company or associated company other than remuneration for the office in the collegial body.

⁴ The Code does not provide for a concrete number of independent members to comprise a collegial body. Many codes in foreign countries fix a concrete number of independent members (e.g. at least 1/3 or 1/2 of the members of the collegial body) to comprise the collegial body. However, having regard to the novelty of the institution of independent members in Lithuania and potential problems in finding and electing a concrete number of independent members, the Code provides for a more flexible wording and allows the companies themselves to decide what number of independent members is sufficient. Of course, a larger number of independent members in a collegial body is encouraged

and will constitute an example of more suitable corporate governance. 5 It is notable that in some companies all members of the collegial body may, due to a very small number of minority shareholders, be elected by the votes of the majority shareholder or a few major shareholders. But even a member of the collegial body elected by the majority shareholders may be considered independent if he/she meets the independence criteria set out in the Code.

	Such additional remuneration includes
	participation in share options or some other
	performance based pay systems; it does not
	include compensation payments for the previous
	office in the company (provided that such
	payment is no way related with later position) as
	per pension plans (inclusive of deferred
	compensations);
4)	He/she is not a controlling shareholder or
	representative of such shareholder (control as
	defined in the Council Directive 83/349/EEC
	Article 1 Part 1);
5)	He/she does not have and did not have any
	material business relations with the company or
	associated company within the past year directly
	or as a partner, shareholder, director or superior
	employee of the subject having such relationship.
	A subject is considered to have business relations
	when it is a major supplier or service provider
	(inclusive of financial, legal, advisory and
	consulting services), major client or organization
	receiving significant payments from the company
	or its group;
6)	He/she is not and has not been, during the last
	three years, partner or employee of the current or
	former external audit company of the company or
	associated company;
7)	He/she is not an executive director or member of
	the board in some other company where executive
	director of the company or member of the board
	(if a collegial body elected by the general
	shareholders' meeting is the supervisory board) is
	non-executive director or member of the
	supervisory board, he/she may not also have any
	other material relationships with executive
	directors of the company that arise from their
	participation in activities of other companies or
	bodies;
8)	He/she has not been in the position of a member
	of the collegial body for over than 12 years;
9)	He/she is not a close relative to an executive
	director or member of the board (if a collegial
	body elected by the general shareholders' meeting
	is the supervisory board) or to any person listed in
	above items 1 to 8. Close relative is considered to
	be a spouse (common-law spouse), children and
	parents.
3.8.	The determination of what constitutes	Yes	Company's Supervisory Board does not
	independence is fundamentally an issue for the collegial		determine the term of independence,
	body itself to determine. The collegial body may decide		notwithstanding that a particular member meets
	that, despite a particular member meets all the criteria of		all the requirements for independence indicated
	independence laid down in this Code, he cannot be		in this Code, because the elected Company's
	considered independent due to special personal or		Supervisory Board consists of seven dependent
	company-related circumstances.		members who are also the members of Kaunas
			City Municipality Council.

3.9. Necessary information on conclusions the collegial	Yes	The Company discloses dependence of the
body has come to in its determination of whether a		members of Supervisory Board in this report.
particular member of the body should be considered to
be independent should be disclosed. When a person is
nominated to become a member of the collegial body,
the company should disclose whether it considers the
person to be independent. When a particular member of
the collegial body does not meet one or more criteria of
independence set out in this Code, the company should
disclose its reasons for nevertheless considering the
member to be independent. In addition, the company
should annually disclose which members of the collegial
body it considers to be independent.
3.10. When one or more criteria of independence set out	Not	Information provided by members of the
in this Code has not been met throughout the year, the	applicable	Supervisory Board regarding their professional
company should disclose its reasons for considering a		experience, occupation and other important
particular member of the collegial body to be		professional obligations and their relations with
independent. To ensure accuracy of the information		the Company is being presented in Company's
disclosed in relation with the independence of the		annual and interim reports.
members of the collegial body, the company should
require independent members to have their
independence periodically re-confirmed.
3.11. In order to remunerate members of a collegial body	Not	The members of the Supervisory Board are not
for their work and participation in the meetings of the	applicable	remunerated from the Company's funds. So, this
collegial body, they may be remunerated from the		provision is not relevant for the Company.
company's funds.6. The general shareholders' meeting
should approve the amount of such remuneration.
Principle IV: The duties and liabilities of a collegial body elected by the general shareholders' meeting
The corporate governance framework should ensure proper and effective functioning of the collegial body elected

by the general shareholders' meeting, and the powers granted to the collegial body should ensure effective monitoring7 of the company's management bodies and protection of interests of all the company's shareholders.

4.1. The collegial body elected by the general	Yes	The Supervisory Board presents to the general
shareholders' meeting (hereinafter in this Principle		shareholders meeting their opinions and
referred to as the 'collegial body') should ensure		proposals about the Company's activities, set of
integrity and transparency of the company's financial		the annual financial statements, profit allocation
statements and the control system. The collegial body		project, the Company's annual report, the activity
should issue recommendations to the company's		of the Company's general manager and the
management bodies and monitor and control the		Management Board, and also carries out other
company's management performance.8		functions allotted to the Supervisory Board
		competence regarding the Company's and it's
		managing bodies activity supervision. The
		Chairman of the Supervisory Board regularly
		meets the Chairman of the Management Board
		and the General Manager to discuss the events or
		changes of the Company that have taken place,

6 It is notable that currently it is not yet completely clear, in what form members of the supervisory board or the board may be remunerated for their work in these bodies. The Law on Companies of the Republic of Lithuania (Official Gazette, 2003, No 123-5574) provides that members of the supervisory board or the board may be remunerated for their work in the supervisory board or the board by payment of annual bonuses (tantiems) in the manner prescribed by Article 59 of this Law, i.e. from the company's profit. The current wording, contrary to the wording effective before 1 January 2004, eliminates the exclusive requirement that annual bonuses (tantiems) should be the only form of the company's compensation to members of the supervisory board or the board. So it seems that the Law contains no prohibition to remunerate members of the supervisory board or the board for their work in other forms, besides bonuses, although this possibility is not expressly stated either.

⁷ See Footnote 3.

⁸ See Footnote 3. In the event the collegial body elected by the general shareholders' meeting is the board, it should provide recommendations to the company's single-person body of management, i.e. the company's chief executive officer.

		also the essential questions of the Company's activity.
4.2. Members of the collegial body should act in good faith, with care and responsibility for the benefit and in the interests of the company and its shareholders with due regard to the interests of employees and public welfare. Independent members of the collegial body should (a) under all circumstances maintain independence of their analysis, decision-making and actions (b) do not seek and accept any unjustified privileges that might compromise their independence, and (c) clearly express their objections should a member consider that decision of the collegial body is against the interests of the company. Should a collegial body have passed decisions independent member has serious doubts about, the member should make adequate conclusions. Should an independent member resign from his office, he should explain the reasons in a letter addressed to the collegial body or audit committee and, if necessary, respective company-not pertaining body (institution).	Yes	According to the knowledge of the Company all the members of the Supervisory Board are acting in good faith in the interests of the Company following the Company's but not the own interests or interests of the third persons.
4.3. Each member should devote sufficient time and attention to perform his duties as a member of the collegial body. Each member of the collegial body should limit other professional obligations of his (in particular any directorships held in other companies) in such a manner they do not interfere with proper performance of duties of a member of the collegial body. In the event a member of the collegial body should be present in less than a half9 of the meetings of the collegial body throughout the financial year of the company, shareholders of the company should be notified.	Yes	The members of the Company's Supervisory Board devote enough time and pay enough attention individually and collectively for the functions assigned to the competence of the Supervisory Board to carry properly. All the members of Supervisory Board took part in more than a half sessions of the Supervisory Board during Company's financial year. A quorum determined in all standard acts was present in all sessions (was attended by more than 2/3 of the Supervisory Board members) of Supervisory Board in 2017. Members of Supervisory Board participating in session are registered in session protocol and in list of session participants.
4.4. Where decisions of a collegial body may have a different effect on the company's shareholders, the collegial body should treat all shareholders impartially and fairly. It should ensure that shareholders are properly informed on the company's affairs, strategies, risk management and resolution of conflicts of interest. The company should have a clearly established role of members of the collegial body when communicating with and committing to shareholders.	Yes	The Company's Supervisory Board in its work aim to behave honestly and impartially with all of the Company's shareholders and by the knowledge of the Company, there was no such kind of the contrary case. The Chairman of the Company's Supervisory Board and the Chairman of the Management Board harmonizes and coordinates interaction with Company's General Manager and in the name of Supervisory and Management Boards communicates with shareholders, informs the shareholders about the Company's strategy, activity and other essential questions.

9 It is notable that companies can make this requirement more stringent and provide that shareholders should be informed about failure to participate at the meetings of the collegial body if, for instance, a member of the collegial body participated at less than 2/3 or 3/4 of the meetings. Such measures, which ensure active participation in the meetings of the collegial body, are encouraged and will constitute an example of more suitable corporate governance.

4.5. It is recommended that transactions (except insignificant ones due to their low value or concluded when carrying out routine operations in the company under usual conditions), concluded between the company and its shareholders, members of the supervisory or managing bodies or other natural or legal persons that exert or may exert influence on the company's management should be subject to approval of the collegial body. The decision concerning approval of such transactions should be deemed adopted only provided the majority of the independent members of the collegial body voted for such a	Yes	Company's management bodies conclude and approve their contracts following requirements of legal acts and Company's Statute. Members of Company's supervision or management bodies or shareholders are not concluded any contracts with Company, including of a big value or concluded in non-standard conditions. More detailed information is provided in Note 25 of explanatory notes to the financial statements.
decision.
4.6. The collegial body should be independent in passing decisions that are significant for the company's operations and strategy. Taken separately, the collegial body should be independent of the company's management bodies10. Members of the collegial body should act and pass decisions without an outside influence from the persons who have elected it. Companies should ensure that the collegial body and its committees are provided with sufficient administrative and financial resources to discharge their duties, including the right to obtain, in particular from employees of the company, all the necessary information or to seek independent legal, accounting or any other advice on issues pertaining to the competence of the collegial body and its committees. When using the services of a consultant with a view to obtaining information on market standards for remuneration systems, the remuneration committee should ensure that the consultant concerned does not at the same time advice the human resources department, executive directors or collegial management organs of the company concerned.	Yes	As members of the Supervisory Board are partly related with Kaunas city municipality because they are members of Kaunas City Municipality Council, all their decisions are made only following Company's interests. Company's Supervisory Board is independent from Company's management bodies. Based on the Company's opinion, the collegial body and the Audit Committee are provided with sufficient resources, including their right to get all the necessary information, especially from the employees of the Company. Remuneration Committee is not set up in the Company because the salaries of the managers of the Company, their deputies and of the chief accountant are determined according to the schedule approved by Kaunas Municipality used in the municipality enterprises. Salary of Company's General Manager is determined by the Company's Board. The schedule of accounting and allocation of employees' variable part of salary is presented in the annex of the Company's collective agreement. Determination of per cent of variable part of salary, accounting and allocation of

¹⁰ In the event the collegial body elected by the general shareholders' meeting is the board, the recommendation concerning its independence from the company's management bodies applies to the extent it relates to the independence from the company's chief executive officer.

4.7. Activities of the collegial body should be organized in a manner that independent members of the collegial body could have major influence in relevant areas where chances of occurrence of conflicts of interest are very high. Such areas to be considered as highly relevant are issues of nomination of company's directors, determination of directors' remuneration and control and assessment of company's audit. Therefore when the mentioned issues are attributable to the competence of the collegial body, it is recommended that the collegial body should establish nomination, remuneration, and audit committees11. Companies should ensure that the functions attributable to the nomination, remuneration, and audit committees are carried out. However they may decide to merge these functions and set up less than three committees. In such case a company should explain in detail reasons behind the selection of alternative approach and how the selected approach complies with the objectives set forth for the three different committees. Should the collegial body of the company comprise small number of members, the functions assigned to the three committees may be performed by the collegial body itself, provided that it meets composition requirements advocated for the committees and that adequate information is provided in this respect. In such case provisions of this Code relating to the committees of the collegial body (in particular with respect to their role, operation, and transparency) should apply, where relevant, to the collegial body as a whole.	Not applicable	Company's Audit Committee is formed by the Supervisory Board starting from 31 March 2009. The Supervisory Board appointed six member of Audit Committee from 29 May 2015. The Nomination and the Remuneration Committees are not formed in the Company. The Remuneration Committee is not formed according to the circumstances shown in the article No. 4.6. Nomination Committee, which would be obliged to perform all the functions appointed for this committee is not formed in Company and these functions are partly performed by the Supervisory Board and / or Company's Board. The Company will seek to implement this provision In the future.
4.8. The key objective of the committees is to increase efficiency of the activities of the collegial body by ensuring that decisions are based on due consideration, and to help organize its work with a view to ensuring that the decisions it takes are free of material conflicts of interest. Committees should exercise independent judgement and integrity when exercising its functions as well as present the collegial body with recommendations concerning the decisions of the collegial body. Nevertheless the final decision shall be adopted by the collegial body. The recommendation on creation of committees is not intended, in principle, to constrict the competence of the collegial body or to remove the matters considered from the purview of the collegial body itself, which remains fully responsible for the decisions taken in its field of competence. 4.9. Committees established by the collegial body	Yes Yes	Audit committee is being formed in the Company. Al least one member of this Committee is independent. Three independent members act in Audit committee starting from 29 May 2015. The Committee acts independently and principally and renders recommendations and prepares reports that are presented to Supervisory Board The Supervisory Board is responsible for decisions made within its competence. Audit Committee acts in the Company and it
should normally be composed of at least three members. In companies with small number of members of the collegial body, they could		consists of six members, three of whom are independent members. Term of office of this Committee coincides with the term of office of the Company's Supervisory Board.

¹¹The Law on Audit of the Republic of Lithuania (Official Gazette, 2008, No 82-53233) determines that an Audit Committee shall be formed in each public interest entity (including, but not limited to public companies whose securities are traded in the regulated market of the Republic of Lithuania and/or any other member state ).

exceptionally be composed of two members. Majority
of the members of each committee should be
constituted from independent members of the
collegial body. In cases when the company chooses not
to set up a supervisory board, remuneration and audit
committees should be entirely comprised of non
executive directors. Chairmanship and membership of
the committees should be decided with due regard to
the need to ensure that committee membership is
refreshed and that undue reliance is not placed on
particular individuals. Chairmanship and membership
of the committees should be decided with due regard
to the need to ensure that committee membership is
refreshed and that undue reliance is not placed on
particular individuals.
4.10. Authority of each of the committees should be	No	The Company does not follow this
determined by the collegial body. Committees should		recommendation partly because there are no
perform their duties in line with authority delegated to		Committees of Nomination and Remuneration
them and inform the collegial body on their activities		at the Company. The Remuneration Committee
and performance on regular basis. Authority of every		is not formed according to the circumstances
committee stipulating the role and rights and duties of		shown in the article No 4.6. Allocation
the committee should be made public at least once a		Committee, which would be obliged to
year (as part of the information disclosed by the		implement all the functions allocated to this
company annually on its corporate governance		committee, is not being formed in Company and
structures and practices). Companies should also make		all these functions are being performed by the
public annually a statement by existing committees on		Supervisoty Board and / or Management Board.
their composition, number of meetings and attendance		The information on composition of the Audit
over the year, and their main activities. Audit		Committee, the number of sessions and
committee should confirm that it is satisfied with the		attendance during the year 2017 is being
independence of the audit process and describe briefly		announced in this Annual Report.
the actions it has taken to reach this conclusion.
4.11. In order to ensure independence and	No	The Company does not follow this
impartiality of the committees, members of the		recommendation partly because there are no
collegial body that are not members of the committee		Committees of Nomination and Remuneration
should commonly have a right to participate in the		at the Company. The Remuneration Committee
meetings of the committee only if invited by the
		is not formed according to the circumstances
committee. A committee may invite or demand		shown in the article No 4.6.
participation in the meeting of particular officers or
experts. Chairman of each of the committees should
have a possibility to maintain direct communication
with the shareholders. Events when such are to be
performed should be specified in the regulations for
committee activities.
4.12. Nomination Committee.
4.12.1. Key functions of the nomination committee	No	The Company does not form the committee
should be the following:		which would be obligated to perform all of the
• Identify and recommend, for the approval of the		tasks that were designated for the Nomination
collegial body, candidates to fill board vacancies. The		Committee. These functions are partly being
nomination committee should evaluate the balance of		performed by Supervisory Board and / or
skills, knowledge and experience on the management		Company's Management Board.
body, prepare a description of the roles and capabilities required to assume a particular office, and assess the
time commitment expected. Nomination committee
can also consider candidates to members of the
collegial body delegated by the shareholders of the
company;
• Assess on regular basis the structure, size, composition and performance of the supervisory and

the collegial body regarding the means of achieving
necessary changes;
• Assess on regular basis the skills, knowledge and
experience of individual directors and report on this to
the collegial body;
• Properly consider issues related to succession
planning;
• Review the policy of the management bodies for
selection and appointment of senior management.
4.12.2. Nomination committee should consider
proposals by other parties, including management
and shareholders. When dealing with issues related to
executive directors or members of the board (if a
collegial body elected by the general shareholders'
meeting is the supervisory board) and senior
management, chief executive officer of the company
should be consulted by, and entitled to submit
proposals to the nomination committee.
4.13. Remuneration Committee.	Not	The Committee of Remuneration is not formed
4.13.1. Key functions of the remuneration committee	applicable	according to the circumstances shown in the
should be the following:		article No 4.6.
• Make proposals, for the approval of the collegial
body, on the remuneration policy for members of
management bodies and executive directors. Such
policy should address all forms of compensation,
including the fixed remuneration, performance-based
remuneration schemes, pension arrangements, and
termination payments. Proposals considering
performance-based remuneration schemes should be
accompanied with recommendations on the related
objectives and evaluation criteria, with a view to
properly aligning the pay of executive director and
members of the management bodies with the long
term interests of the shareholders and the objectives
set by the collegial body;
• Make proposals to the collegial body on the
individual remuneration for executive directors and
member of management bodies in order their
remunerations are consistent with company's
remuneration policy and the evaluation of the
performance of these persons concerned. In doing so,
the committee should be properly informed on the
total compensation obtained by executive directors
and members of the management bodies from the
affiliated companies;
• Ensure that remuneration of individual executive
directors or members of management body is
proportionate to the remuneration of other executive
directors or members of management body and other
staff members of the company;
• Periodically review the remuneration policy for
executive directors or members of management body,
including the policy regarding share-based
remuneration, and its implementation;
• Make proposals to the collegial body on suitable
forms of contracts for executive directors and
members of the management bodies;

• Assist the collegial body in overseeing how the company complies with applicable provisions regarding the remuneration-related information disclosure (in particular the remuneration policy applied and individual remuneration of directors); • Make general recommendations to the executive directors and members of the management bodies on the level and structure of remuneration for senior management (as defined by the collegial body) with regard to the respective information provided by the executive directors and members of the management bodies. 4.13.2. With respect to stock options and other share based incentives which may be granted to directors or
other employees, the committee should: • Consider general policy regarding the granting of the above mentioned schemes, in particular stock options, and make any related proposals to the collegial body;
• Examine the related information that is given in the company's annual report and documents intended for the use during the shareholders meeting; • Make proposals to the collegial body regarding the choice between granting options to subscribe shares or
granting options to purchase shares, specifying the reasons for its choice as well as the consequences that this choice has. 4.13.3. Upon resolution of the issues attributable to the
competence of the remuneration committee, the committee should at least address the chairman of the collegial body and/or chief executive officer of the company for their opinion on the remuneration of
other executive directors or members of the management bodies. 4.13.4. The remuneration committee should report on the exercise of its functions to the shareholders and be
present at the annual general meeting for this purpose. 4.14. Audit Committee. 4.14.1. Key functions of the audit committee should be the following: • Observe the integrity of the financial information provided by the company, in particular by reviewing the relevance and consistency of the accounting methods used by the company and its group (including the criteria for the consolidation of the accounts of companies in the group); • At least once a year review the systems of internal control and risk management to ensure that the key risks (inclusive of the risks in relation with compliance with existing laws and regulations) are properly identified, managed and reflected in the information provided; • Ensure the efficiency of the internal audit function, among other things, by making recommendations on the selection, appointment, reappointment and removal of the head of the internal audit department and on the budget of the department, and by monitoring the responsiveness of the management to	Yes	However, as of 31 March 2009 the Audit Committee was formed by the Supervisory Board. The term of office of this committee coincides with the term of office of the Company's Supervisory Board. This committee will seek to fully implement functions assigned to it by this recommendation.

its findings and recommendations. Should there be no internal audit authority in the company, the need for one should be reviewed at least annually;

• Make recommendations to the collegial body related with selection, appointment, reappointment and removal of the external auditor (to be done by the general shareholders' meeting) and with the terms and conditions of his engagement. The committee should investigate situations that lead to a resignation of the audit company or auditor and make recommendations on required actions in such situations;

• Monitor independence and impartiality of the external auditor, in particular by reviewing the audit company's compliance with applicable guidance relating to the rotation of audit partners, the level of fees paid by the company, and similar issues. In order to prevent occurrence of material conflicts of interest, the committee, based on the auditor's disclosed inter alia data on all remunerations paid by the company to the auditor and network, should at all times monitor nature and extent of the non-audit services. Having regard to the principals and guidelines established in the 16 May 2002 Commission Recommendation 2002/590/EC, the committee should determine and apply a formal policy establishing types of non-audit services that are (a) excluded, (b) permissible only after review by the committee, and (c) permissible without referral to the committee;

• Review efficiency of the external audit process and responsiveness of management to recommendations made in the external auditor's management letter.

4.14.2. All members of the committee should be furnished with complete information on particulars of accounting, financial and other operations of the company. Company's management should inform the audit committee of the methods used to account for significant and unusual transactions where the accounting treatment may be open to different approaches. In such case a special consideration should be given to company's operations in offshore centres and/or activities carried out through special purpose vehicles (organizations) and justification of such operations.

4.14.3. The audit committee should decide whether participation of the chairman of the collegial body, chief executive officer of the company, chief financial officer (or superior employees in charge of finances, treasury and accounting), or internal and external auditors in the meetings of the committee is required (if required, when). The committee should be entitled, when needed, to meet with any relevant person without executive directors and members of the management bodies present.

4.14.4. Internal and external auditors should be secured with not only effective working relationship with management, but also with free access to the collegial body. For this purpose the audit committee

should act as the principal contact person for the internal and external auditors. 4.14.5. The audit committee should be informed of the internal auditor's work program, and should be furnished with internal audit's reports or periodic summaries. The audit committee should also be informed of the work program of the external auditor and should be furnished with report disclosing all relationships between the independent auditor and the company and its group. The committee should be timely furnished information on all issues arising from the audit. 4.14.6. The audit committee should examine whether the company is following applicable provisions regarding the possibility for employees to report alleged significant irregularities in the company, by way of complaints or through anonymous submissions (normally to an independent member of the collegial body), and should ensure that there is a procedure established for proportionate and independent investigation of these issues and for appropriate follow-up action. 4.14.7. The audit committee should report on its activities to the collegial body at least once in every six months, at the time the yearly and half-yearly statements are approved. 4.15. Every year the collegial body should conduct the assessment of its activities. The assessment should include evaluation of collegial body's structure, work organization and ability to act as a group, evaluation of each of the collegial body member's and committee's competence and work efficiency and assessment whether the collegial body has achieved its objectives. The collegial body should, at least once a year, make public (as part of the information the company	No	There was no practice of assessment of the activity of Supervisory Board at the Company and of informing shareholders about that up to now because the controlling shareholder who proposes candidates to the Supervisory Board exhaustively knows the experiences and competences of each candidate.
annually discloses on its management structures and practices) respective information on its internal organization and working procedures, and specify what material changes were made as a result of the assessment of the collegial body of its own activities.
Principle V: The working procedure of the company's collegial bodies
The working procedure of supervisory and management bodies established in the company should ensure efficient operation of these bodies and decision-making and encourage active co-operation between the company's bodies.
5.1. The company's supervisory and management	Yes	The Company fully implements this
bodies (hereinafter in this Principle the concept		recommendation. The Company's Supervisory
'collegial bodies' covers both the collegial bodies of		Board and Management Board are run by the
supervision and the collegial bodies of management)		Chairman de jure and de facto. In accordance
should be chaired by chairpersons of these bodies. The		with the work regulations of the bodies the
chairperson of a collegial body is responsible for		chairmen of Supervisory Board and Managing

112

Board convenes meetings, ensures proper informing about convening meeting and about agenda of the meeting. This recommendation is fully implemented by the Supervisory Board and

by the Managing Board.

proper convocation of the collegial body meetings. The chairperson should ensure that information about the meeting being convened and its agenda are communicated to all members of the body. The chairperson of a collegial body should ensure

appropriate conducting of the meetings of the collegial body. The chairperson should ensure order and
working atmosphere during the meeting.
5.2. It is recommended that meetings of the company's collegial bodies should be carried out according to the	Yes	This recommendation is implemented by the Supervisory Board and by the Management
schedule approved in advance at certain intervals of		Board.
time. Each company is free to decide how often to convene meetings of the collegial bodies, but it is
recommended that these meetings should be convened at such intervals, which would guarantee an
interrupted resolution of the essential corporate
governance issues. Meetings of the company's
supervisory board should be convened at least once in
a quarter, and the company's board should meet at
least once a month12.
5.3. Members of a collegial body should be notified	Yes	The Company follows the order foreseen in the
about the meeting being convened in advance in order		work regulations of the Supervisory Board and
to allow sufficient time for proper preparation for the		the Management Board and the information
issues on the agenda of the meeting and to ensure		about the convened meeting is presented in
fruitful discussion and adoption of appropriate		advance together with an agenda and all the
decisions. Alongside with the notice about the meeting		necessary information and documents related to
being convened, all the documents relevant to the		the meeting agenda.
issues on the agenda of the meeting should be		The Supervisory Board and the Board meeting
submitted to the members of the collegial body. The		agenda may be changed or added during the
agenda of the meeting should not be changed or		meeting, in the presence of all members of the
supplemented during the meeting, unless all members		collegial body, or when there is an urgent need to deal with Company's certain key issues.
of the collegial body are present or certain issues of
great importance to the company require immediate
resolution.
5.4. In order to co-ordinate operation of the	Yes	The chairmen of Company's supervisory and
company's collegial bodies and ensure effective		management bodies coordinate dates of the
decision-making process, chairpersons of the		meetings, their agendas and cooperate in solving
company's collegial bodies of supervision and		other issues of corporate governance.
management should closely co-operate by co
coordinating dates of the meetings, their agendas and
resolving other issues of corporate governance.
Members of the company's board should be free to
attend meetings of the company's supervisory board,
especially where issues concerning removal of the
board members, their liability or remuneration are
discussed.
Principle VI: The equitable treatment of shareholders and shareholder rights
The corporate governance framework should ensure the equitable treatment of all shareholders, including
minority and foreign shareholders. The corporate governance framework should protect the rights of the
shareholders.
6.1. It is recommended that the company's capital	Yes	The ordinary registered shares which make the
should consist only of the shares that grant the same		authorized capital of the Company give the equal
rights to voting, ownership, dividend and other rights		rights for all share owners.
to all their holders.

12 The frequency of meetings of the collegial body provided for in the recommendation must be applied in those cases when both additional collegial bodies are formed at the company, the board and the supervisory board. In the event only one additional collegial body is formed in the company, the frequency of its meetings may be as established for the supervisory board, i.e. at least once in a quarter.

6.2. 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. 6.3. Transactions that are important to the company and its shareholders, such as transfer, investment, and pledge of the company's assets or any other type of	Yes Yes	The Company allows investors to take a look at the rights conceded by newly issued or already issued shares. Company's Statute in which the rights conceded to Company's shareholders are determined, are publicized in Company's website. In compliance with the Law on the Companies and the Company's statutes the transactions confirmation issues foreseen in this
encumbrance should be subject to approval of the general shareholders' meeting.13 All shareholders should be furnished with equal opportunity to familiarize with and participate in the decision-making process when significant corporate issues, including approval of transactions referred to above, are discussed.		recommendation are ascribed to the competence of the Management Board but in individual cases for the asset disposal transactions the Company applies to the Meeting of Shareholders, as it is prescribed in Company's statutes.
6.4. Procedures of convening and conducting a general shareholders' meeting should ensure equal opportunities for the shareholders to effectively participate at the meetings and should not prejudice the rights and interests of the shareholders. The venue, date, and time of the shareholders' meeting should not hinder wide attendance of the shareholders.	Yes	There is a possibility for shareholders to vote in advance by filling up a general vote bulletin.
6.5. If it is possible, in order to ensure shareholders living abroad the right to access to the information, it is recommended that documents on the course of the general shareholders' meeting should be placed on the publicly accessible website of the company not only in Lithuanian language, but in English and /or other foreign languages in advance. It is recommended that the minutes of the general shareholders' meeting after signing them and/or adopted resolutions should be also placed on the publicly accessible website of the company. Seeking to ensure the right of foreigners to familiarize with the information, whenever feasible, documents referred to in this recommendation should be published in Lithuanian, English and/or other foreign languages. Documents referred to in this recommendation may be published on the publicly accessible website of the company to the extent that publishing of these documents is not detrimental to the company or the company's commercial secrets are not revealed.	Yes	Draft decisions of convoked meeting and decisions taken by meeting are being disclosed publicly by the Company in Company's website and using GlobeNewswire information dissemination system of Nasdaq Vilnius Stock Exchange as it is foreseen in the Law on Companies not only in Lithuanian, but also in English.
6.6. Shareholders should be furnished with the opportunity to vote in the general shareholders' meeting in person and in absentia. Shareholders should not be prevented from voting in writing in advance by completing the general voting ballot.	Yes	The shareholders of the Company can implement the right to participate in the General meeting of shareholders personally or through their representatives if the person has a proper authorization or the voting right delegation

¹³ The Law on Companies of the Republic of Lithuania (Official Gazette, 2003, No 123-5574) no longer assigns resolutions concerning the investment, transfer, lease, mortgage or acquisition of the long-terms assets accounting for more than 1/20 of the company's authorised capital to the competence of the general shareholders' meeting. However, transactions that are important and material for the company's activity should be considered and approved by the general shareholders' meeting. The Law on Companies contains no prohibition to this effect either. Yet, in order not to encumber the company's activity and escape an unreasonably frequent consideration of transactions at the meetings, companies are free to establish their own criteria of material transactions, which are subject to the approval of the meeting. While establishing these criteria of material transactions, companies may follow the criteria set out in items 3, 4, 5 and 6 of paragraph 4 of Article 34 of the Law on Companies or derogate from them in view of the specific nature of their operation and their attempt to ensure uninterrupted, efficient functioning of the company.

		agreement is made with him in compliance with
		the legal acts order. The Company also creates
		conditions for the shareholders to vote in
		advance in writing by completing the general
		voting bulletin as it is foreseen by the Law on the
		Joint Stock Companies.
6.7. With a view to increasing the shareholders'	Not	According to the order of the Company's
opportunities to participate effectively at shareholders'	applicable	shareholders meetings and the lists of
meetings, the companies are recommended to expand		shareholders, there was no need to implement
use of modern technologies by allowing the		this recommendation in the Company up to now.
shareholders to participate and vote in general
meetings via electronic means of communication. In
such cases security of transmitted information and a
possibility to identify the identity of the participating
and voting person should be guaranteed. Moreover,
companies could furnish its shareholders, especially
shareholders living abroad, with the opportunity to
watch shareholder meetings by means of modern
technologies.

Principle VII: The avoidance of conflicts of interest and their disclosure

The corporate governance framework should encourage members of the corporate bodies to avoid conflicts of interest and assure transparent and effective mechanism of disclosure of conflicts of interest regarding members of the corporate bodies.

7.1. Any member of the company's supervisory and	Yes	The members of the Company's Supervisory and
management body should avoid a situation, in which		of the managing bodies act in according with the
his/her personal interests are in conflict or may be in		interests of the Company and their competences
conflict with the company's interests. In case such a		and individual features suggest that they behave
situation did occur, a member of the company's		so as to avoid conflicts of interests and they were
supervisory and management body should, within		not observed in practice. The members of the
reasonable time, inform other members of the same		Company's Supervisory and of the managing
collegial body or the company's body that has elected		bodies did not conclude deals with the Company,
him/her, or to the company's shareholders about a		including high value deals or ones made in not
situation of a conflict of interest, indicate the nature of		standard conditions.
the conflict and value, where possible.
7.2. Any member of the company's supervisory and	Yes
management body may not mix the company's assets,
the use of which has not been mutually agreed upon,
with his/her personal assets or use them or the
information which he/she learns by virtue of his/her
position as a member of a corporate body for his/her
personal benefit or for the benefit of any third person
without a prior agreement of the general shareholders'
meeting or any other corporate body authorized by the
meeting.

7.3. Any member of the company's supervisory and management body may conclude a transaction with the company, a member of a corporate body of which he/she is. Such a transaction (except insignificant ones due to their low value or concluded when carrying out routine operations in the company under usual conditions) must be immediately reported in writing or orally, by recording this in the minutes of the meeting, to other members of the same corporate body or to the corporate body that has elected him/her or to the company's shareholders. Transactions specified in this recommendation are also subject to recommendation 4.5.	Yes	The members of the Company's supervisory and management body are not entered into transactions with the Company, including those consisting of high value or non-standard conditions.
7.4. Any member of the company's supervisory and management body should abstain from voting when decisions concerning transactions or other issues of personal or business interest are voted on.	Yes	In accordance with regulations of Company's supervisory and management bodies, the provisions of the Law on Joint Stock companies of the Republic of Lithuania, the members of the Company's Supervisory and of the managing bodies must abstain from voting when decisions on deals or other questions in which they have a personal or professional interest.
Principle VIII: Company's remuneration policy
Remuneration policy and procedure for approval, revision and disclosure of directors' remuneration established in the company should prevent potential conflicts of interest and abuse in determining remuneration of directors, in addition it should ensure publicity and transparency both of company's remuneration policy and remuneration of directors.
8.1. A company should make a public statement of the company's remuneration policy (hereinafter the remuneration statement) which should be clear and easily understandable. This remuneration statement should be published as a part of the company's annual statement as well as posted on the company's website.	Not applicable	The Company publicizes average wages of employees of the Company (by category) and the average wage of all employees of the Company. The remuneration policy as provided in this recommendation is not confirmed in the Company because this is not determined by the valid legal acts. The remuneration for the Supervisory Board and the Management Board of the Company is determined by the meeting of shareholders. Remuneration for the members of the Management Board for the results of the year 2016 was no allocated. Remuneration for members of the Management Board is paid following the order determined in Company's Statutes. The remuneration of the managing director is determined by the Managing Board considering the schedule of remuneration order of managers of municipal enterprises, companies, municipal controlled joint-stock and close-end companies, their deputies and chief accountants approved by Kaunas municipality. Considering this schedule the remuneration of the General Manager and chief accountant of the Company is determined. Estimating this there was no need to prepare separate remuneration policy. Nevertheless in compliance with the legal acts orders, the Company publicly announces the information on the termination payments and loans for the members of the Supervisory Board,

		the Management Board and General Manager, Chief accountant in the annual report. The information regarding average remuneration of employees of the Company is also announced in Company's website.
8.2. Remuneration statement should mainly focus on directors' remuneration policy for the following year and, if appropriate, the subsequent years. The statement should contain a summary of the implementation of the remuneration policy in the previous financial year. Special attention should be given to any significant changes in company's remuneration policy as compared to the previous financial year.	Not applicable	Because of the reasons foreseen in the recommendation No. 8.1 the remuneration policy according to which the report on remuneration would be prepared is not approved by the Company.
8.3. Remuneration statement should leastwise include the following information: • Explanation of the relative importance of the variable and non-variable components of directors' remuneration; • Sufficient information on performance criteria that entitles directors to share options, shares or variable components of remuneration; • An explanation how the choice of performance criteria contributes to the long-term interests of the company; • An explanation of the methods, applied in order to determine whether performance criteria have been fulfilled; • Sufficient information on deferment periods with regard to variable components of remuneration; • Sufficient information on the linkage between the remuneration and performance; • The main parameters and rationale for any annual bonus scheme and any other non-cash benefits; • Sufficient information on the policy regarding termination payments; • Sufficient information with regard to vesting periods for share-based remuneration, as referred to in point 8.13 of this Code; • Sufficient information on the policy regarding retention of shares after vesting, as referred to in point 8.15 of this Code; • Sufficient information on the composition of peer groups of companies the remuneration policy of which has been examined in relation to the establishment of the remuneration policy of the company concerned; • A description of the main characteristics of supplementary pension or early retirement schemes for directors; • Remuneration statement should not include commercially sensitive information.	Not applicable	Because of the reasons foreseen in the recommendation No. 8.1. the remuneration policy according to which the report on remuneration would be prepared is not approved by the Company.

8.4. Remuneration statement should also summarize	Not	Because of the reasons foreseen in the
and explain company's policy regarding the terms of	applicable	recommendation No. 8.1 the remuneration
the contracts executed with executive directors and		policy according to which the report on
members of the management bodies. It should		remuneration would be prepared is not approved
include, inter alia, information on the duration of		by the Company, but the information on the
contracts with executive directors and members of the		termination and other payments is publicly
management bodies, the applicable notice periods and		announced in the Company's annual report
details of provisions for termination payments linked		Also Company publicizes average wages of
to early termination under contracts for executive		employees of the Company (by category).
directors and members of the management bodies.
8.5. Remuneration statement should also contain	Not	Because of the reasons foreseen in the
detailed information on the entire amount of	applicable	recommendation No. 8.1 the remuneration
remuneration, inclusive of other benefits, that was paid		policy according to which the report on
to individual directors over the relevant financial year.		remuneration would be prepared is not approved
This document should list at least the information set		by the Company.
out in items 8.5.1 to 8.5.4 for each person who has
served as a director of the company at any time during
the relevant financial year.
8.5.1. The following remuneration and/or
emoluments-related information should be disclosed:
• The total amount of remuneration paid or due to the
director for services performed during the relevant
financial year, inclusive of, where relevant, attendance
fees fixed by the annual general shareholders meeting;
• The remuneration and advantages received from any
undertaking belonging to the same group;
• The remuneration paid in the form of profit sharing
and/or bonus payments and the reasons why such
bonus payments and/or profit sharing were granted;
• If permissible by the law, any significant additional
remuneration paid to directors for special services
outside the scope of the usual functions of a director;
• Compensation receivable or paid to each former
executive director or member of the management
body as a result of his resignation from the office
during the previous financial year;
• Total estimated value of non-cash benefits
considered as remuneration, other than the items
covered in the above points.
8.5.2. As regards shares and/or rights to acquire share
options and/or all other share-incentive schemes, the
following information should be disclosed:
• The number of share options offered or shares
granted by the company during the relevant financial
year and their conditions of application;
• The number of shares options exercised during the
relevant financial year and, for each of them, the
number of shares involved and the exercise price or
the value of the interest in the share incentive scheme
at the end of the financial year;
• The number of share options unexercised at the end
of the financial year; their exercise price, the exercise
date and the main conditions for the exercise of the
rights;
• All changes in the terms and conditions of existing
share options occurring during the financial year.

related information should be disclosed: • When the pension scheme is a defined-benefit scheme, changes in the directors' accrued benefits under that scheme during the relevant financial year; • When the pension scheme is defined-contribution scheme, detailed information on contributions paid or payable by the company in respect of that director during the relevant financial year. 8.5.4. The statement should also state amounts that the company or any subsidiary company or entity included in the consolidated annual financial report of the company has paid to each person who has served as a director in the company at any time during the relevant financial year in the form of loans, advance payments or guarantees, including the amount outstanding and the interest rate. 8.6. Where the remuneration policy includes variable Not Because of the reasons foreseen in the components of remuneration, companies should set applicable recommendation No. 8.1 the remuneration limits on the variable component(s). The non-variable policy according to which the report on component of remuneration should be sufficient to remuneration would be prepared is not approved allow the company to withhold variable components by the Company. of remuneration when performance criteria are not met. 8.7. Award of variable components of remuneration Not Because of the reasons foreseen in the applicable recommendation No. 8.1 the remuneration should be subject to predetermined and measurable performance criteria. policy according to which the report on remuneration would be prepared is not approved 8.8. Where a variable component of remuneration is by the Company. Not awarded, a major part of the variable component applicable should be deferred for a minimum period of time. The part of the variable component subject to deferment should be determined in relation to the relative weight of the variable component compared to the non-variable component of remuneration. 8.9. Contractual arrangements with executive or managing directors should include provisions that Not permit the company to reclaim variable components applicable of remuneration that were awarded on the basis of data which subsequently proved to be manifestly misstated. 8.10. Termination payments should not exceed a fixed amount or fixed number of years of annual remuneration, which should, in general, not be higher Not than two years of the non-variable component of applicable remuneration or the equivalent thereof. 8.11. Termination payments should not be paid if the termination is due to inadequate performance Not
	8.5.3. The following supplementary pension schemes
		applicable

8.12. The information on preparatory and decision making processes, during which a policy of remuneration of directors is being established, should also be disclosed. Information should include data, if applicable, on authorities and composition of the remuneration committee, names and surnames of external consultants whose services have been used in determination of the remuneration policy as well as the role of shareholders' annual general meeting. 8.13. Shares should not vest for at least three years after their award. 8.14. Share options or any other right to acquire shares or to be remunerated on the basis of share price movements should not be exercisable for at least three years after their award. Vesting of shares	Not applicable Not applicable Not applicable	Because of the reasons foreseen in the recommendation No. 8.1 the remuneration policy according to which the report on remuneration would be prepared is not approved by the Company.
and the right to exercise share options or any other right to acquire shares or to be remunerated on the basis of share price movements, should be subject to predetermined and measurable performance criteria. 8.15. After vesting, directors should retain a number of shares, until the end of their mandate, subject to the need to finance any costs related to acquisition of the shares. The number of shares to be retained should be fixed, for example, twice the value of total annual remuneration (the non-variable plus the variable components). 8.16. Remuneration of non-executive or supervisory directors should not include share options.	Not applicable
	Not
	applicable
8.17. Shareholders, in particular institutional shareholders, should be encouraged to attend general	Not applicable
meetings where appropriate and make considered use
of their votes regarding directors' remuneration.
8.18. Without prejudice to the role and organization of	Not
the relevant bodies responsible for setting directors'	applicable
remunerations, the remuneration policy or any other
significant change in remuneration policy should be
included into the agenda of the shareholders' annual
general meeting. Remuneration statement should be
put for voting in shareholders' annual general meeting.
The vote may be either mandatory or advisory.

8.19. Schemes anticipating remuneration of directors	Not	Because of the reasons foreseen in the
in shares, share options or any other right to purchase	applicable	recommendation No. 8.1., remuneration policy
shares or be remunerated on the basis of share price		according to which the report on remuneration
movements should be subject to the prior approval		would be prepared is not approved by the
of shareholders' annual general meeting by way of a		Company. Nevertheless, the Company publishes
resolution prior to their adoption. The approval of		information on the remuneration and other
scheme should be related with the scheme itself and
not to the grant of such share-based benefits under		payments of the members of the Supervisory
that scheme to individual directors. All significant		Board, Management Board, General Manager
changes in scheme provisions should also be subject		and to the chief accountant in Company's annual
to shareholders' approval prior to their adoption; the		reports in accordance with the legislation.
approval decision should be made in shareholders'		Information on average remuneration of
annual general meeting. In such case shareholders		Company's employees is also announced in
should be notified on all terms of suggested changes		Company's website. The Company does not use
		schemes under which the directors can be paid
and get an explanation on the impact of the suggested		with the shares, stock selection transactions or
changes.		other rights to acquire shares, or to be paid by
		the stock price changes.
8.20. The following issues should be subject to	Not	Because of the reasons foreseen in the
approval by the shareholders' annual general meeting:	applicable	recommendation No. 8.1. the Company does not
1) Grant of share-based schemes, including share		use schemes under which the directors can be
options, to directors;		remunerated with the shares, stock selection
2) Determination of maximum number of shares and		transactions or other rights to acquire shares, or
main conditions of share granting;		to be paid by the stock price changes.
3) The term within which options can be exercised;
4) The conditions for any subsequent change in the
exercise of the options, if permissible by law;
5) All other long-term incentive schemes for which
directors are eligible and which are not available to
other employees of the company under similar terms.
Annual general meeting should also set the deadline
within which the body responsible for remuneration
of directors may award compensations listed in this
article to individual directors.
8.21. Should national law or company's Articles of	Not
Association allow, any discounted option	applicable
arrangement under which any rights are granted to
subscribe to shares at a price lower than the market
value of the share prevailing on the day of the price
determination, or the average of the market values
over a number of days preceding the date when the
exercise price is determined, should also be subject to
the shareholders' approval.
8.22. Provisions of Articles 8.19 and 8.20 should not
be applicable to schemes allowing for participation	Not
under similar conditions to company's employees or	applicable
employees of any subsidiary company whose
employees are eligible to participate in the scheme
and which has been approved in the shareholders'
annual general meeting.

8.23. Prior to the annual general meeting that is
intended to consider decision stipulated in Article
8.19, the shareholders must be provided an
opportunity to familiarize with draft resolution and
project-related notice (the documents should be
posted on the company's website). The notice should
contain the full text of the share-based remuneration
schemes or a description of their key terms, as well as
full names of the participants in the schemes. Notice
should also specify the relationship of the schemes
and the overall remuneration policy of the directors.
Draft resolution must have a clear reference to the
scheme itself or to the summary of its key terms.
Shareholders must also be presented with
information on how the company intends to provide
for the shares required to meet its obligations under
incentive schemes. It should be clearly stated whether
the company intends to buy shares in the market,
hold the shares in reserve or issue new ones. There
should also be a summary on scheme-related
expenses the company will suffer due to the
anticipated application of the scheme. All information
given in this article must be posted on the company's
website.

Principle IX: The role of stakeholders in corporate governance

The corporate governance framework should recognize the rights of stakeholders as established by law and encourage active co-operation between companies and stakeholders in creating the company value, jobs and financial sustainability. For the purposes of this Principle, the concept "stakeholders" includes investors, employees, creditors, suppliers, clients, local community and other persons having certain interest in the company concerned.

9.1. The corporate governance framework should assure that the rights of stakeholders that are protected by law are respected. 9.2. The corporate governance framework should create conditions for the stakeholders to participate in corporate governance in the manner prescribed by law. Examples of mechanisms of stakeholder participation	Yes	The Company follows all the requirements foreseen by the law for the stakeholders' opportunities to participate in the management of the Company, but any group of interest, having the right to participate in management of the Company, determined by the law, is not created yet in accordance with law.
in corporate governance include: employee participation in adoption of certain key decisions for the company; consulting the employees on corporate governance and other important issues; employee participation in the company's share capital; creditor involvement in governance in the context of the company's insolvency, etc. 9.3. Where stakeholders participate in the corporate governance process, they should have access to relevant information.

Principle X: Information disclosure and transparency

The corporate governance framework should ensure that timely and accurate disclosure is made on all material information regarding the company, including the financial situation, performance and governance of the company.

10.1. The company should disclose information on: 1) The financial and operating results of the company; 2) Company objectives; 3) Persons holding by the right of ownership or in control of a block of shares in the company; 4) Members of the company's supervisory and management bodies, chief executive officer of the company and their remuneration; 5) Material foreseeable risk factors;	Yes	The Company discloses information, provided in this recommendation, in the reports, in the annual and interim reports, the Company's website and Centre of Registers electronic publication, in which the public information of legal persons are announced, except the report of remuneration policy determined in VIII principle. This report is not prepared in the Company because of the reasons foreseen in the
6) Transactions between the company and connected persons, as well as transactions concluded outside the course of the company's regular operations; 7) Material issues regarding employees and other stakeholders; 8) Governance structures and strategy. This list should be deemed as a minimum recommendation, while the companies are encouraged not to limit themselves to disclosure of the information specified in this list. 10.2. It is recommended to the company, which is the parent of other companies, that consolidated results of the whole group to which the company belongs should be disclosed when information specified in item 1 of Recommendation 10.1 is under disclosure. 10.3. It is recommended that information on the professional background, qualifications of the members of supervisory and management bodies, chief executive officer of the company should be disclosed as well as potential conflicts of interest that may have an effect on their decisions when information specified in item 4 of Recommendation 10.1 about the members of the company's supervisory and management bodies is under disclosure. It is also recommended that information about the amount of remuneration received from the company and other income should be disclosed with regard to members of the company's supervisory and management bodies and chief executive officer as per Principle VIII. 10.4. It is recommended that information about the links between the company and its stakeholders, including employees, creditors, suppliers, local community, as well as the company's policy with regard to human resources, employee participation schemes in the company's share capital, etc. should be disclosed when information specified in item 7 of		article No. 8.1., and it is not approved, as it is not required by the law. According to the Law on Companies and to Company's Statute the remuneration for the members of the Company's Supervisory Board and of the Management Board can be determined by the meeting of shareholders. In the year 2017 remuneration has been allotted for the members of Company's Management Board for the results of the year 2017 and it is paid following the order determined in Company's Statutes. The company also attempts not to disclose the information that can affect the price of Securities issued by the Company in the comments, interviews or other means, as long as such information will be publicly announced at the Nasdaq Vilnius Stock Exchange GlobeNewswire dissemination system on the Company's website.
Recommendation 10.1 is under disclosure.
10.5. Information should be disclosed in such a way that neither shareholders nor investors are	Yes	The Company simultaneously presents the information using the Nasdaq Vilnius Stock
discriminated with regard to the manner or scope of		Exchange information dissemination system
access to information. Information should be		GlobeNewswire in Lithuanian and English
disclosed to all simultaneously. It is recommended that		languages as it possible. The Stock Exchange
notices about material events should be announced		places received information on its website and in
before or after a trading session on the Vilnius Stock		trading system assuring simultaneous
Exchange, so that all the company's shareholders and		presentation of this information to all. In
investors should have equal access to the information		addition, the Company strives to announce the
and make informed investing decisions.		information before or after a trading session on

		the Nasdaq Vilnius Stock Exchange and to present it to all the markets in whom the trade in Company's stocks is being in progress at the same time. The Company does not provide the information which can have an influence on the price of its issued stocks on comments, interview and other ways till this information is publicly announced using the Nasdaq Vilnius Stock Exchange dissemination system.
10.6. Channels for disseminating information should provide for fair, timely and cost-efficient or in cases provided by the legal acts free of charge access to relevant information by users. It is recommended that information technologies should be employed for wider dissemination of information, for instance, by placing the information on the company's website. It is recommended that information should be published and placed on the company's website not only in Lithuanian, but also in English, and, whenever possible and necessary, in other languages as well.	Yes	Company's information is published on its website in Lithuanian. Topical information for investors is published also in English.
10.7. It is recommended that the company's annual reports and other periodical accounts prepared by the company should be placed on the company's website. It is recommended that the company should announce information about material events and changes in the price of the company's shares on the Stock Exchange on the company's website too.	Yes	All the information provided in this recommendation is announced publicly and placed on the Company's website, on the website of Nasdaq Vilnius Stock Exchange and it can be reached by all the interested persons.
Principle XI: The selection of the company's auditor The mechanism of the selection of the company's auditor should ensure independence of the firm of auditor's conclusion and opinion.
11.1. An annual audit of the company's financial reports and interim reports should be conducted by an independent firm of auditors in order to provide an external and objective opinion on the company's financial statements	Yes	The set of annual financial statements and the annual report of the Company is verified by the independent audit company.
11.2. It is recommended that the company's supervisory board and, where it is not set up, the company's board should propose a candidate firm of auditors to the general shareholders' meeting.	No	The candidature of the Company's audit company which accomplished audit of financial statements of the year 2017, was presented to the General meeting of shareholders by the Management Board in compliance with the results of the public procurement implemented in 2017.
11.3. It is recommended that the company should disclose to its shareholders the level of fees paid to the firm of auditors for non-audit services rendered to the company. This information should be also known to the company's supervisory board and, where it is not formed, the company's board upon their consideration which firm of auditors to propose for the general shareholders' meeting.	Not applicable	The information provided in the recommendation was not presented to the shareholders because the audit company did not provide non-audit services for the Company in the year 2017.

CONSOLIDATED SUSTAINABILITY REPORT IN ACCORDANCE WITH GRI STANDARDS

INTRODUCTION

The GRI Standards will come into full use from 2018, although organisations are being encouraged to adopt them sooner. This report has been prepared in accordance with GRI Standards: Core option.

There are two options for preparation in accordance with GRI Standards Core and Comprehensive. The company chose to apply the 'Core' option – providing the minimum information required to understand the nature of the company and how it manages its material topics and related impacts.

The GRI Standards list 33 categories of material topics under three topic specific standards: Economic (GRI 200 x 6); Environmental (GRI 300 x 8); and Social (GRI 400 x 19). The GRI 101: Foundation clause 1.3 is quite clear on how to choose the material topics for Core reporting:

The report shall cover topics that:

1.3.1 reflect the reporting organization's significant economic, environmental, and social impacts; or

1.3.2 substantively influence the assessments and decisions of stakeholders.

Therefore, only those material topics which the company believes to bear a significance upon the company's and its subsidiaries economic, social and environmental impacts, or if the topics have an influence on the decisions of stakeholders, should be reported on.

Comprehensive information is reported on only those topics with significance under clause 1.3 (quoted above) in full and with reference to the comprehensive conditions of GRI 103.

In all other cases where a required disclosure is reported using a reference to another source where the information is located, all efforts have been made to ensure that a specific location is referenced, as well as ensuring that this location is readily and publicly available. These additional sources may include other materials produced by the company such as its annual report and full financial statements. In this case, a section name or other specific information is provided. If disclosures are not provided, then any reason for omission is within the GRI 101 / Clause 3.2 'Reasons for Omission'.

Under the GRI Standards, the reporting conditions are clear. There are three inclusions to consider:

Requirements. These are mandatory instructions and are read in the context of recommendations and guidance. An organization is required to comply with all applicable requirements to claim that its report has been prepared in accordance with the GRI Standards.

Recommendations. These are cases where a course of action is encouraged, but not required.

Guidance. These sections include background information, explanations and examples to help organizations better understand the requirements. However, an organization is not required to comply with recommendations or guidance to claim that a report has been prepared in accordance with the Standards.

This report has fulfilled all applicable requirements, and where possible, all applicable recommendations.

The material topics chosen for this report are as follows:

GRI 204 Procurement Practices: the company (in 2017) procured some 61% of its heat provision from independent heat producers, this GRI standard is perhaps the most important within this topic.

GRI 205 Anticorruption: The anticorruption policy is adopted and publicly announced in the company, employees of the company and its subsidiaries and stakeholders are encouraged to comply with it.

GRI 302 Energy: The company and its subsidiaries use quite a lot of electricity in their activities. The section contains information on the implementation of energy-saving technologies and tools.

GRI 303 Water: This section provides information on changes in water consumption.

GRI 305 Emissions: (2017 figures) emissions increased marginally against previous periods. There are objective reasons for this. This topic is perhaps also the most relevant for GRI 300.

GRI 306 Effluents and Waste: The company collects effluents and waste and hand it over to effluents and waste handlers.

GRI 307 Environmental Compliance: because Kauno Energija is compliant, this is a highly positive reporting standard for the company.

GRI 308 Supplier Environmental Assessment: included because it needs to improve as there is currently no environmental assessment of suppliers. To comply with GRI standards this situation will need to improve.

GRI 403 Occupational Health and Safety: the company is strong on employee relations. This topic is mainly related to illnesses and trade union agreements - for which the information is readily available.

GRI 404 Training and education: The company pays much attention on staff training and can provide positive information about it.

GRI 405 Diversity and Equal Opportunity: The company respects and adheres to the principles of diversity and gender equality.

GRI 406 Non-discrimination; the company respects and adheres to the principles of racial and other kind of non-discrimination.

GRI 407 Freedom of Association and Collective Bargaining: there is a trade-union in the company and the company has positive information on this topic.

GRI 408 Child Labour: the company does not tolerate child labour; no cases of child labour are recorded. The company considers it important to provide this information.

GRI 409 Forced or Compulsory Labour: There is no tolerated forced labour in the company, no cases of forced labour are recorded. The company considers it important to provide this information.

GRI 414 Supplier Social Assessment: Linked to GRI 308, and important also for the same reasons

GRI 415 Public Policy: connected to contributions / connections to political parties and lobbying.

GRI 416 Customer Health and Safety: compliance to regulations and to list any serious accidents or issues.

This report presents the AB Kauno Energija activity in 2016. This GRI Standards Report forms part of the seventh AB Kauno Energija "Social responsibility report", which is produced annually and published in conjunction with the company's consolidated annual report and financial statement.

To the best of our knowledge, the ten reporting principles as laid down in GRI 101 have been applied, disclosures provide contextual information about the company, and every relevant material topic has been identified and reported on.

REPORTING PRINCIPLES FOR DEFINING	REPORTING PRINCIPLES FOR DEFINING
REPORT CONTENT	REPORT QUALITY
▪ Stakeholder Inclusiveness ▪ Sustainability Context ▪ Materiality ▪ Completeness	▪ Accuracy ▪ Balance ▪ Clarity ▪ Comparability ▪ Reliability ▪ Timeliness

With this report AB Kauno Energija seeks to provide non-financial corporate responsibility information to its stakeholders: clients (users), shareholders, investors, employees, suppliers, business and social partners and the public.

AB Kauno Energija (hereinafter referred to as the Company) prepares consolidated statements of both the Company and AB Kauno Energija group of companies (hereinafter referred to as the Group or the Company). The Group consists of: AB Kauno Energija and its subsidiaries – UAB Kauno Energija NT, in which the Company directly controls 100% of the shares, and UAB Petrašiūnų Katilinė, in which the Company also directly controls 100% of the shares.

The Company is a parent company of the Group. It is the second largest regional heat production and supply company in Lithuania, which produces and supplies heat to Kaunas, Jurbarkas and Kaunas region consumers for more than 50 years.

UAB Kauno Energija NT is a subsidiary of AB Kauno Energija, whose activities are real estate development, management, rental, purchase and sale.

UAB Petrašiūnų Katilinė is a subsidiary of AB Kauno Energija, whose activity is heat production.

Detailed information on subsidiaries activities of the year 2017 is provided in section 14 of the Consolidated Annual Report of the Company.

GRI CONTENT INDEX

GRI 102 GENERAL DISCLOSURES

ORGANIZATIONAL PROFILE

102-1	Name of the organization		AB Kauno Energija (Public Limited Liability Company Kaunas Energy)
102-2	Activities, brands, products, and services	14)	http://www.kaunoenergija.lt/bendroves-veikla/apie-bendrove/ Information is also provided in the annual report (Sections 2, 3 and
102-3	Location of headquarters		Raudondvario pl. 84, 47179 Kaunas, Lietuva.
102-4	Location of operations		Lietuva, Kaunas, Kauno rajonas, Jurbarkas.
102-5	Ownership and legal form		Informacija pateikta metiniame pranešime (2 skirsnis)
102-6	Markets served		Informacija pateikta metiniame pranešime (3 skirsnis)
102-7	Scale of the Organisation:		Information presented in the annual report: i) total number of employees (sections 14 and 18) ii) total number of operations (sections 5 and 14) iii) net revenues (section 7 and 14) iv) Not Applicable v) quantity of products / services provided (sections 6.1, page 7)
102-8	Information on employees and other workers		Information about employees (data Kauno Energija including Jur bakas Branch and subsidiaries) as at 31 December 2017.
			Total Number of Employees 2017-12-31		Fixed-term employment contracts			Open-ended contracts
				Total	Women	Men	Total	Women	Men
		a)	513	14	5	9	499	156	343
			Total Number of	Full-time Employees		Part-time Employees
			Employees 2017-12-31	Total	Women	Men	Total	Women	Men
		b)	513	481	138	343	32	23	9

		c) All these employees work within the Kaunas and Jurbarkas region.
		d) The major part of the company's activities is carried out by com pany employees. There are external service contractors employed on projects and these are selected and employed through Public Procurement in accordance with Lithuanian law. The percentage of work that they perform is not monitored.
		e) No significant changes in these figures.
		f) All employee data is compiled and processed by the company's staff and administration departments.
102-9	Supply chain	The main suppliers in terms of bulk services bought are the independ ent heat producers of which, in accordance with legislation, the com pany buys heat from, and supplies heat to consumers. In 2016, the company bought from 11 suppliers in Kaunas and the Kaunas area. These suppliers are: ▪ UAB Kauno Termofikacijos Elektrinė ▪ UAB Danpower Baltic Taika Elektrinė
		▪ UAB Lorizon Energy ▪ UAB Ekoresursai ▪ UAB Petrašiūnų Katilinė ▪ UAB Aldec General ▪ UAB ENG ▪ UAB Danpower Baltic Biruliškių ▪ UAB Ekopartneris ▪ UAB Danpower Baltic Taika ▪ UAB Foksita
		Information on produced and purchased heat is disclosed in section 6.1 of annual report. In 2016, the Company engaged with a total of 651 suppliers: 645 Lithuanian suppliers and six external to Lithuania
		The company delivered produced and from independent producers purchased heat using own heat supply networks to 118 000 consum ers in Kaunas, Kaunas region and Jurbarkas in 2017.
102-10	Significant changes to the organization and its supply chain	During 2017, the Company experienced even several significant changes that could have an environmental and economic impact. A new gas or liquid fuel burned 19.8 MW boiler, which will allow a flex ible response to sudden changes in consumer heat demand, possible disturbances of other production sources, and which will increase the mandatory power reserve available in the company, was launched in Petrašiūnai Power Plant.
		In addition, AB Kauno Energija installed in 2017 another gas burned boiler in the Company's Pergalė boiler-house. A 14.9 MW gas or die sel burned boiler with a 1.5 MW condensing economiser is built here, instead of worn and already demolished DKVR-type boilers.
		These new facilities are in line with the new, more stringent re quirements of the European Parliament and Council Directive (EU) 2015/2193 on the limitation of emissions of certain pollutants from medium-sized combustion plants that will come into force from 2020. Using these boilers, nitrogen oxide emissions (NOx) will not exceed 80 mg / m3.

		Also, the Company completed even 8 projects of reconstruction of heat supply pipelines in 2017, during which replaced approximately 4,2 km pipelines with new polyurethane insulated pipes of various di ameters. Heat losses were decreased up to 60 per cent in reconstruct ed sections, and reliability of heat supply increased. More detailed information on reconstruction of heat supply pipelines is provided in Section 6.1 of the Consolidated Annual Report of the Company. On 24 November 2017 the Board of the Company decided to ap prove the new management structure of AB Kauno Energija, by which the management structure of the Company has been reorganized. The Law and Procurement Department and two technical services were withdrawn, and some new departments were established: Fi nancial Control, Communication and Prevention departments. The number of positions was reduced by 54 positions (or 10.5%), as well as, according to the above-mentioned decision, the branch Jurbarko Šilumos Tinklai was withdrawn 1 March 2018. 14 of 30 employees of the branch were transferred to the Company. In total, starting from 1 March 2018 the Company employs 459 employees. More information on the corporate governance structure is available here: http://www.kaunoenergija.lt/bendroves-veikla/apie-bendrove/ bendroves-valdymas/.
102-11	Precautionary Principle or approach	The EU policy on the environment states that it shall aim at a high lev el of protection considering the diversity of situations in the various regions of the Union. It shall be based on the precautionary principle and on the principles that preventive action should be taken, that environmental damage should as a priority be rectified at source and that the polluter should pay. Within this understanding, the company applies where practical the
		same precautionary principle in seeking not to generate significant environmental impact, and where there is impact of any nature the company seeks to address this quickly and clearly.
102-12	External initiatives	The Company also supports and encourages its employees to partici pate in the national and regional initiative "MesDarom.lt" (http://mes darom.lt/aktualijos.html ). This is scheme for community and compa nies to clean up the local areas.
102-13	Membership of associations	The company is a member of the following associations: ▪ Lithuanian District Heating Association ▪ Lithuanian Electricity Association ▪ Kaunas Region Industrialists and Employers Association ▪ Kaunas Regional Energy Agency (Kauno Energija is one of the four founders of this Agency) ▪ Lithuanian Thermal Technology Engineers Association

010 / GRI CONTENT INDEX

STRATEGY

102-14	Statement from senior decision-maker	The year 2017 proved to be an also very significant year in progress made.
		We have already disclosed information on significant changes that have had an impact on both the environment and the social and eco nomic environment of the Company in the earlier chapters of this report, but it is also important to mention that we have achieved one of our strategic goals – we have further reduced the average price of heat to consumers. The average price of heat for consumers de creased by 3.78 % from 5,02 to 4.83 ct/kWh without VAT during the year.
		We constantly seek to improve our range of environmental manage ment initiatives in all our day-to-day activities, from the attention paid to strict control of emissions from our heat sources, to the emission data collected from our use of fluorescent lamps, tyres, wastewater and other waste amounts.
		The Company commitment to social responsible reporting has stepped up a gear to now include the GRI Standards methodology, further strengthening our commitment to be a socially and environ mentally supportive company.
		Our company strategy remains one that is fully focused on strength ening our role as a leader in transparent and inclusive social, econom ic and environmental reporting.
102-15	Key impacts, risks, and opportunities	The information is disclosed in section 6.2 of the consolidated annual report of the Company.

ETHNICS AND INTEGRITY

102-16	Values, principles, standards, and norms of behaviour	Information provided on the company website under mission and vi sion, and values and strategic objectives: http://www.kaunoenergija. lt/bendroves-veikla/apie-bendrove/misija-ir-vertybes/
102-17	Mechanisms for advice and concerns about ethics	The Code of Ethics is functioning and publicly disclosed in the Com pany: http://www.kaunoenergija.lt/bendroves-veikla/apie-bendrove/ etikos-kodeksas/
		It is clearly applicable to all employees, agents, brokers, contractors, subcontractors or suppliers of the Company. The mechanism for solv ing ethical problems is disclosed in the Code of Ethics itself.

	GOVERNANCE
102-18	Governance structure	a) Information about the company's management structure is here http://www.kaunoenergija.lt/bendroves-veikla/apie-bendrove/ben droves-valdymas/ b) Committees responsible for decision-making on economic, envi ronmental, and social topics include: ▪ Audit Committee made up from a minimum of three members, at least one of which is independent. There are currently six mem bers: three external and independent, and three from among the company's employees (Economic, Accounting, and Judicial/Legal department). The Audit Committee operates under the Com pany's audit committee's internal rules approved by Superviso ry Board on 26 October 2015: the (http://www.kaunoenergija. lt/wp-content/uploads/2016/02/Audito-komiteto-vidaus-tai sykl%C4%97s_20151026.pdf ); ▪ Technical Board (established by order of General Director), which examines adopted resolutions and makes recommendations to the company's General Manager on a range of economic, social and environmental topics. During 2017, the Technical Council met 15 times; ▪ A few permanent committees established to address specific op erational issues; ▪ Occupational health & safety committee established in 2017.
102-19 to 102- 39	Governance	Not required for CORE reporting
	STAKEHOLDER ENGAGEMENT
102-40	List of stakeholder groups	These stakeholders are those individuals or groups to whom the com pany considers itself accountable and those to whom we expect to be affected by the company's activities or provision of services: ▪ Company's heat consumers (residents of Kaunas, Kaunas District and Jurbarkas, and organizations consuming heat and / or hot water from the district heating network); ▪ Company's shareholders (Municipalities of the city of Kaunas, and Kaunas and Jurbarkas Districts are among them). A full list of the 300 or so individual shareholders is held by our financial partner SEB Bank; ▪ The company's managers and employees, and trade union; ▪ Non-employee workers (connected to key service providers for the company), and service customers; ▪ Business partners - including suppliers of goods, service provid

		ers, contractors, independent heat producers.
102-41	Collective bargaining agreements	A Collective Agreement is set up and operates in the Company. It is published on the Company's intranet site and updated periodically. It applies not only to employees trade union members, but also to all employees of the Company (100%).
		The Company's intranet site is provided here (but please note that it is only accessible from within the company's local network):
		http://web/sharepoint/portal/Shared%20Documents/KOLEK TYVINE_SUTARTIS_2013.pdf

012 / GRI CONTENT INDEX

102-42	Identifying and selecting stakeholders	All stakeholders and interest groups are identified through their di rect connection to the company and the company activities. Any oth er interested individuals or groups are encouraged to be involved in our engagement activities or events. Regarding the goods suppliers, service providers and works contrac tors are selected through public procurement in accordance with Lithuanian and/or EU law.
102-43	Approach to stakeholder engagement	The company's shareholders receive periodical activity reports, an nual reports, CSR reports, and reports on coordinated investment projects.
		The company's managers and employees communicate daily through departmental and inter-departmental communication.
		Customers with queries about their service provision can be in touch with the common service of Kaunas residents "Mano Kaunas" via telephone, e-mail or Facebook account. Information is also available to consumers and the media through the Company and Kaunas Mu nicipality websites.
		Once a year the company carries out customer quality service sur veys. Also, two to three times a year there are face to face meetings with customers held at the company premises and organised to re spond to relevant new development sin the company services. Here members of the management take questions from participants. An nouncement of the meetings are published in local newspaper "Kau no diena", also on the company web site and at the entrance to the company's Customer Service Department building door. In 2017 we held two such meetings.
		The purpose of the company's interaction with stakeholders is to en sure that the company remains an open and transparent company, constantly seeking to improve its performance and service delivery standards.
102-44	Key topics and concerns raised	With customers the key issues relate to costs and technical problems with the heating system.
		Company's Production and Sales Departments are expeditious in dealing with the problems of heat and hot water supply, as well as accounting.
		The company also has regular issues to respond to, that are raised by the main shareholder Kaunas City Municipality as well as the National Commission for Energy Control and Prices.

REPORTING PRACTICE

102-45	Entities included in the consolidated financial statements	a) A list of all entities included in the organization's consolidated fi nancial statements or equivalent documents: please see AR Section 4 to 14. b) The organization's consolidated financial statements or related documents cover the activities of AB Kauno Energija (including its branch Jurbarko šilumos tinklai, which was withdrawn by the deci sion of Company's Board of 24 November 2017) and its subsidiaries – UAB Kauno Energija NT and UAB Petrašiūnų Katilinė.
102-46	Defining report content and topic Boundaries	a) Due to the GRI Standards being a new methodology, Kauno Energi ja have chosen those material topics that have the biggest bearing on their day to day activities, and that constitute the biggest part of their economic, social and environmental impact. Notwithstanding, the choice of material topics increased in the 2017- year report in comparison with Company's report of 2016. Material topics are listed in GRI 102-47. b) the Company has used material topics that have been previous ly reported on through the inclusion of stakeholders. These material topics are within our previous sustainability reporting structures.
102-47	List of material topics	GRI 204 – Procurement Practices GRI 205 – Anticorruption GRI 302 – Energy GRI 303 – Water GRI 305 – Emissions GRI 306 – Effluents and Waste GRI 307 – Environmental Compliance GRI 308 – Supplier Environmental Assessment GRI 403 – Occupational Health and Safety GRI 404 – Training and education GRI 405 – Diversity and Equal Opportunity GRI 406 – Non-discrimination GRI 407 – Freedom of Association and Collective Bargaining GRI 408 – Child Labour GRI 409 – Forced or Compulsory Labour GRI 414 - Supplier Social Assessment GRI 415 – Public Policy GRI 416 – Customer Health and Safety

014 / GRI CONTENT INDEX

102-48	Restatements of information	There are no reasons for restatements of information during the re porting period of 2017.
102-49	Changes in Reporting	None to report
102-50	Reporting Period	January 1st, 2017 to December 31st 2017
102-51	Date of most recent report	This is the first report produced under GRI Standards. There are how ever annual reports and financial statements available for the period 2015
102-52	Reporting Cycle	Annual
102-53	Contact point for questions regarding the report	Mr. Ūdrys Staselka Public Relations Officer AB Kauno Energija Tel. +370 37 30 58 85 / Mob. +370 650 96 883 e-mail: u.staselka@kaunoenergija.lt / www.kaunoenergija.lt
102-54	Claims of reporting in accordance with the GRI Standards	This report has been prepared in accordance with the GRI Standards: Core option
102-55	GRI content index	This report represents this GRI standard in full and in doing so fulfils the reporting requirements.
102-56	External assurance	This report has been prepared by the Company itself. The preparation of the report takes information prepared for the audited accounts and annual report. However, the assurance of the quality of this GRI Standards Report is limited to the preparation following the guide lines of the GRI Standards only. This GRI Standards report has not been externally assured. However, the completed audited accounts and annual report have been passed and assured by the company board as part of its normal quality con trol of all information that is prepared for shareholders.

GRI 103 MANAGEMENT APPROACH

GRI 204 – PROCUREMENT PRACTICES

103-1 GRI 204	Explanation of the material topic and its Boundary	The company main procurement of services comes through the monthly procurement of provision of heating services from inde pendent heat producers. These services represent 61% of consumers heat demand. This is a substantial amount of procurement, making this topic an obvious choice. The boundary is with all the business and residential customers who receive heating using these sources, and it is here where any potential impacts will be felt. The company seeks to minimise these and any other boundary im
		pacts through close management and quality control of these re lationships on a regular basis. If serious impacts are likely to occur, we can correct through improved procurement procedure month by month
103-2 GRI 204	The management approach and its components	Company's Procurement policy is determined in the Rules of Procure ment, which is announced publicly on Company's website: http://www.kaunoenergija.lt/bendroves-veikla/viesieji-pirkimai/ viesuju-pirkimu-taisykles/
		Company goals and targets for procurement practices are defined in law as we are obliged to provide the lowest price. All heat providers have technical measurements made of their service delivery to make sure it satisfies the conditions of the procurement contract.
		The Company's procurement procedures are organized by the Pro curement Commission constituted by the order of General Manager or Procurement Organizer, subject to procurement amount.
		All procurement announcements and winning contracts are published on the Central Procurement Portal: https://cvpp.eviesiejipirkimai.lt/.
		As much of our procurements consist of purchase of heat from in dependent heat producers, Heat Procurement Commission operates in Company. It consists from company's employees from various de partments.
		Much of procurement procedures are governed by national regula tions based on legislation. This governs all heat providers in Lithuania.
		https://www.e-tar.lt/portal/lt/legalAct/TAR.A37C2263838C/qCQg CxIhFq

		Responsibilities are within the company's Heat Procurement Com mission and associated company departments. Grievances are dealt with here also.
		http://www.kaunoenergija.lt/bendroves-veikla/viesieji-pirkimai/bi okuro-isigijimas/?ay=2017&am=2
		http://www.kaunoenergija.lt/verslui/nepriklausomiems-silumos-ga mintojams/silumos-supirkimas/
103-3 GRI 204	Evaluation of the management approach	Evaluation of the management approach is not formally carried out. However, the management approach is systematically linked to the procurement process and although evaluation is not carried out, ad justments can be made to the management approach through em ployee or client feedback.

GRI 205 – ANTICORRUPTION

103-1 GRI 205	Explanation of the material topic and its Boundary	AB Kauno Energija and its subsidiaries are guided by the anticorrup tion policy aimed at identifying the main principles and requirements for the prevention of corruption in AB Kauno Energija and its subsid iaries, and the guidelines for ensuring compliance with them, imple mentation of which creates preconditions and conditions for imple menting the Company's scale the highest standards of transparent business conduct. The Company's anticorruption policy is not in conflict with the laws of the Republic of Lithuania.
		The company constantly strives to minimize the risk of corruption through a range of management and quality control measures related to managing this relationship. Upon revealing of the case of corrup tion, all internal documents of the Company and measures provided by the legal acts of the Republic of Lithuania are taken.
103-2 GRI 205	The management approach and its components	To prevent corruption, a system has been created in which anony mous or personally possible cases of abusive or corrupt practices can be reported to the Company. The Company invites to use it if Compa ny's employees are observed in improper performance of their duties or abusing them, reaching personal gain in working relationships, ex ceeding powers granted, assimilating or disposing Company's assets, disclosing official or commercial secrets, carrying out acts of bribery or bribe-taking.
		The information can be submitted by e-mail: pasitikejimo.linija@kau noenergija.lt or by filling out the notification form, which is published on the website of the Company here: http://www.kaunoenergija.lt/ korupcijos-prevencijos-kontaktu-forma/

		AB Kauno energija guarantees complete confidentiality and assures the anonymity of the data. When reporting on a possible violation or act, the notifiers are asked to indicate as precisely as possible their lo cation, time, information on the offender (name, surname) and a brief description of the nature of the violation. Also, notifiers are invited but not forced to provide their contact information. It is stated that this is a freely chosen right of the notifier and not a duty. Compliance with Corruption Prevention Requirements and Standards is an integral part of the Company's business ethics, and AB Kauno Energija and its subsidiaries' corruption prevention policy is applica ble to representatives of AB Kauno Energija, and its contractors, sub contractors, suppliers and intermediaries.
103-3 GRI 205	Evaluation of the management approach	Evaluation of the management approach is not formally carried out.
		With reference to clause 1.1 of GRI 103 Management Approach, the disclosures are combined for GRI 300 'Environmental' material topics.
	GRI 302 – ENERGY GRI 303 – WATER GRI 305 – EMISSIONS GRI 306 – EFFLUENTS AND WASTE GRI 307 – ENVIRONMENTAL COMPLIANCE	GRI 308 – SUPPLIER ENVIRONMENTAL ASSESSMENT
103-1 GRI 300	Explanation of the material topic and its Boundary	Six material topics have been chosen here as the most relevant for re porting purposes: Energy, Water, Emissions, Effluents and waste, En vironmental Compliance and Supplier Environmental Assessment. Due to the particularity of activities the Company uses a lot of elec tricity and water, has high emissions into the air; also generates a specific amount of effluents and waste. The saving of energy and its resources is very important for Company's economic performance. Environmental compliance is crucial if the company wants to maintain its commitment to the environment, to stay compliant, and to contin ue its high level of transparency in reporting such actions.
		Supplier environmental assessment needs to improve, which is why it is included here. The company wants to break with old practices and establish itself as positively encouraging suppliers to adopt a more environmental approach to business. Emissions and environmental compliance have an impact wider than local sites. Therefore, the boundary for impacts for these material topics are within all company sites as well as throughout the whole country.
103-2 GRI 300	The management approach and its components	The company does a good job of managing the topic within the com pany but could improve its management approach outside the com pany in relationships with clients / service providers. Internally the management systems in place to record and report on environmental impact are very strong. There is a special certified en vironmental laboratory installed to manage, collect, and process all relevant environmental data on company activities.

103-3 GRI	Evaluation of the management approach	suppliers, conditions for environmental goods, materials, or equip ment to be used or provided. The printing of the Company's Annual Report and Financial State ment are printed on recycled or environmentally friendly paper. The Sustainability Report is not even printed but is just about to be pre pared for publishing an online version. The report could be printed if such a need arises. Such small improvements to the company's environmental commit ment can be more easily implemented than any similar such improve ments to larger technical service providers whose contracts are regu lated based on national guidelines. Evaluation of the management approach is not formally carried out. However, the management approach is systematically linked to the
300		company's commitment to non-financial reporting and although eval uation is not carried out, suggestions can be made to the manage ment approach through employee or client feedback.
	combined for GRI 400 ''Social' material topics.	With reference to clause 1.1 of GRI 103 Management Approach, the disclosures are
	GRI 404 – TRAINING AND EDUCATION GRI 406 – NON-DISCRIMINATION GRI 408 – CHILD LABOUR GRI 414 – SUPPLIER SOCIAL ASSESSMENT GRI 415 – PUBLIC POLICY GRI 416 – CUSTOMER HEALTH AND SAFETY	GRI 403 – OCCUPATIONAL HEALTH AND SAFETY GRI 405 – DIVERSITY AND EQUAL OPPORTUNITY GRI 407 – FREEDOM OF ASSOCIATION AND COLLECTIVE BARGAINING GRI 409 – FORCED OR COMPULSORY LABOUR
103-1 GRI 400	Explanation of the material topic and its	The company has identified and chosen even 12 material topics with

		Customer health and safety is tantamount to our company, and as such, it should be included here. The company follows a strict regime of compliance to regulations. Here the boundary for impacts remains mainly focused on local and regional sites, along with all stakeholders within these areas.
103-2 GRI 400	The management approach and its components	Internally the Company has a strong management approach for social and health and safety issues related to employees. This includes a col lective agreement for all employees, an employee's safety and health service (reorganized into Work Safety Department from 1 March 2018), health and safety committee established in Company in 2017, and procedures for employees to voice their concerns, suggestions, or grievances established.
		Employee's safety and health service had five staff: three for safety issues and two for health issues. Starting from 1 March 2018 after service reorganization into Work Safety Department, four staff work in it. Department includes Company's medical team on site in the head office. They follow and implement regulations as laid down by national state institutions.
		Regular articles and campaign notices related to health and safety issues are posted on the company intranet for employees.
		New employees are provided with instructions on basic health and safety company policies.
		The Company's Work Safety Department carry out regular workplace inspections both of company sites where employees are working, as well as company sites where non-employees are working.
		The Company pays much attention to the qualification improvement of employees. Employees are sent annually to various types of cours es and training.
		Both in 2017 and in previous years, the Company did not record any violation of the principles of gender equality, non-discrimination.
		The trade-union operates in the Company. 147 of employees belonged to the trade-union as at 31 December 2017. Both the trade-union and individual employees are free to enter associations and negotiate collectively for better working conditions or pay.
		No cases of child or forced labour occurred neither in 2017 nor the previous years in the Company.
103-3 GRI 400	Evaluation of the management approach	Evaluation of the management approach is not formally carried out. However, the management approach is systematically linked to the Company's commitment to non-financial reporting and although evaluation is not carried out, suggestions can be made to the man agement approach through employee or client feedback.

Please note: Reasons for omissions are permitted for all topic-specific disclosures (see clause 3.2)

TOPIC SPECIFIC STANDARDS

TOPIC SPECIFIC STANDARDS

GRI 200 – ECONOMIC

201	Economic Performance	Informacija pateikiama tik tais klausimais, kurie, bendrovės įsitikinimu,
202	Market Presence	yra reikšmingi bendrovės veiklos ekonominiam, socialiniam ir aplinkos
203	Indirect Economic Impacts	apsaugos poveikiui arba turi įtakos suinteresuotų šalių sprendimams (GRI 101 Foundation: 3.1 guidance).
204	Procurement Practices 204-1: Proportion of spending on local suppliers	The percentage of procurement budget that is spent on suppliers lo cal to that operation (such as percentage of products and services purchased locally) is 100%. Local is defined as being within Lithuania. Our definition of 'significant locations of operation' is as above: the wider areas in which the company operates
205	Anticorruption 205-1: Operations assessed for risks related to corruption	a. The specific number and percentage of corruption-related risk factors has not been assessed so far. However, the Company has a proven anticorruption policy that includes a mechanism for assessing corruption risk factors, defining all types of corruption, responsibili ties and roles. b. As no specific corruption risk assessment has been carried out so far, no significant dangers related to corruption have been identified. It is likely that corruption risk assessment will be carried out in the future.
	205-2: Communication and training about anti corruption policies and procedures	The company has approved the Corruption Prevention Policy, which is published on its website here: http://www.kaunoenergija.lt/ wp-content/uploads/AB-Kauno-energija-ir---periodic-immunity-cor ruption-prevention-politi. pdf a. The total number and percentage of members of the governing bodies who have been notified of the organization's anticorruption policies and procedures, broken down by region, is 100% members of the management bodies of the Company.

		b. The total number and percentage of employees who have been notified of the organization's anticorruption policies and procedures, broken down by employee category and region, is 100% of Company employees.
		c. The organization's anticorruption policy and procedures have been communicated to contractors and suppliers participating in public procurement procedures on a compulsory basis.
		Compliance with the requirements and standards of corruption pre vention is an integral part of business ethics, and the above-men tioned policy of corruption prevention of AB Kauno Energija and its subsidiaries, approved on 24 February 2017 by the decision of the Company's Board No. 2017-4-3, applies also to representatives (in termediaries) of AB Kauno Energija, articles 3 and 16. d. The training was carried out at the Company on 6 June 2017 with the aim of introduction of employees with the principles of anticor ruption and about transparency in the organization. The anticor ruption training program was conducted by the public institution Transparency International. The training was attended by 7 senior management staff. e. The above-mentioned trainings were attended by 23 middle-level
		organization specialists.
	205-3: Confirmed incidents of corruption and actions taken	No case of corruption was identified in the Company during 2017.
206	Anti-competitive behaviour	Only those material topics which the company believes to bear a sig nificance upon the company's economic, social and environmental impacts, or those which have an influence on the decisions of stake holders, have been included and reported on (GRI 101 Foundation: 3.1 guidance).

GRI 300 – ENVIRONMENTAL

301 Materials Only those material topics which the company believes to bear a significance upon the company's economic, social and environmental impacts, or those which have an influence on the decisions of stakeholders, have been included and reported on (GRI 101 Foundation: 3.1 guidance).

302	Energy 302-1: Energy consump tion within the organi zation	The organization itself is a producer of heat energy, so the largest part of electricity is consumed for the production and supply of heat energy. a., b. Information on fuel used is disclosed in section 6.1 of the
		annual report of the Company.
		c. In total, internally consumed:
		i. electricity consumption, kWh:
		Internal needs	For heat production and supply
		1 685 224 kWh	12 520 667 kWh
		ii. heating consumption – 6 842 109 kWh;
		iii. cooling consumption – 0 kWh;
		iv. steam consumption – 0 tons; d. Energy sold:
			i. electricity sold – 692 487 kWh resold and used under loan
		agreements.
		of the annual report of the Company;	ii. Information on heat produced and sold is disclosed in section 7
		iii. cooling sold – 0 kWh;
		iv. steam sold – the Company did not produce steam in 2017;
			e. Total energy consumption in organization – 21 048 000 kWh.
		f. Meters of energy consumed and produced.
		g. None.
	302-2: Energy con sumption outside of the organization	Omission of Disclosure (allowed under GRI 101 Foundation – section
	302-3: Energy intensity	3.2)
	302-4: Reduction of energy consumption
303	Water 303-1: Water withdrawal by source	lowing sources:	a. Total amount of water withdrawn, with a breakdown by the fol
		oceans – 282 095 m3;	i. Surface water, including water from wetlands, rivers, lakes, and
		ii. Ground water - 46 275 m3;
		m3;	iii Rainwater collected directly and stored by the organization – 0
		iv. Waste water from another organization – 0 m3;
		ties – 25 354 m3.	v. Municipal water supplies or other public or private water utili
		water meters	b. Standards, methodologies and assumptions – calculated with
	303-2: Water sources significantly affected by withdrawal of water	3.2)	Omission of Disclosure (allowed under GRI 101 Foundation – section
	303-3: Water recycled and reused	3.2):	Omission of Disclosure (allowed under GRI 101 Foundation – section
		the required format in the next year report.	Full disclosure information is available but not in the format required for this report. The Company intends to provide all the information in

304	Biodiversity
305	Emissions 305-1: Direct (Scope 1) GHG emissions.	As the Company itself is a producer of heat energy, it monitors emis sions from these sources of production and provides data to public authorities in accordance with the procedures established by law. We provide data from the company's production sources.
		a. The total direct emissions from the Company's heat production sources in 2017 was 8870 metric tonnes CO2 equivalent.
		b. Gases included in the calculations are CO2 only.
		c. The biological emissions of CO2 in metric tonnes are not counted in CO2 equivalents.
		d. The base year of the calculation shall be applied based on the indi vidual production sources, including:
		i. justification of the choice. The base year for calculating of all pro duction sources is chosen due to the higher median of activity data (reports and justifications are available):
		▪ Base year of calculation of Petrašiūnai power plant - 2005-2008;
		▪ Baseline calculation of Pergalė boiler house - 2005-2008;
		▪ Baseline calculation of Šilkas boiler house - 2009-2010;
		▪ Baseline calculation of Noreikiškės boiler house - 2005-2008;
		▪ Baseline calculation of Garliava boiler house - 2005-2008;
		▪ Base year of calculation of Jurbarkas boiler house - 2009-2010
		ii. emissions in the base year (reports and justifications are available): ▪ in Petrašiūnai power plant 28568 tonnes of CO2 emitted during the period of 2005-2008;
		▪ in "Pergalė" boiler house 7506 tonnes of CO2 emitted during the period of 2005-2008;
		▪ in "Šilkas" boiler house 6853 tonnes of CO2 emitted during the period of 2009-2010;
		▪ in Noreikiškės boiler house 22700 tonnes of CO2 emitted during the period of 2005-2008;
		▪ in Garliava boiler house 30594 tonnes of CO2 emitted during the period of 2005-2008;
		▪ in Jurbarkas boiler house 19088 tonnes of CO2 emitted during the period of 2009-2010.
		iii. The base year has not been recalculated since 2011.
		e. Source of Emission Factor and Global Warming Potential (GWP) or reference to GWP Source:
		▪ Directive 2003/87 / EC of the European Parliament and of the Council;
		▪ Commission Regulation No 600/2012;
		▪ Commission Regulation No 601/2012;
		▪ Standard ISO 14065.
		f. Performance control.
		g. Standards, methodologies, assumptions and / or calculating tools: ▪ Directive 2003/87 / EC of the European Parliament and of the Council;
		▪ Commission Regulation No 600/2012;
		▪ Commission Regulation No 601/2012;
		▪ Standard ISO 14065.
		GHG emissions from Company's heat production facilities

		Year	Emissions of GHG, t CO2 equivalent
		2013	36042
		2014	32711
		2015	8607
		2016	8480
		2017	8870
	305-2: Energy indirect (Scope 2) GHG emis sions	Omission of Disclosure (allowed under GRI 101 Foundation – section 3.2): Full disclosure information is available but not in the format required for this report. A new company data collection system is currently
		being implemented and this disclosure will be fully on in 2017.
	305-3: Other indirect (Scope 3) GHG emis	3.2):	Omission of Disclosure (allowed under GRI 101 Foundation – section
	sions		Full disclosure information is available but not in the format required for this report. A new company data collection system is currently being implemented and this disclosure will be fully on in 2017.
	305-4: GHG emissions intensity	3.2):	Omission of Disclosure (allowed under GRI 101 Foundation – section
		Full disclosure information is available but not in the format required for this report. A new company data collection system is currently being implemented and this disclosure will be fully on in 2017.
	305-5: Reduction of GHG emissions	a. Greenhouse gas emissions slightly increased compared to 2016 (8480 tonnes CO2 in 2016, 8870 tonnes in 2017). The reason is the increased demand for heat from consumers.
		b. Gases included in the calculations are CO2 only.
		c. The base period or baseline, including the justification for its choice, is given in the "i" point of the GRI 305-1 part "d".
			d. Scope - Direct (Scope 1) and Indirect energy (Scope 2).
		▪ Council;	e. Standards, methodologies, assumptions and / or calculating tools. Directive 2003/87 / EC of the European Parliament and of the
		▪ Commission Regulation No 600/2012;
		▪ Commission Regulation No 601/2012;
		▪ Standard ISO 14065.
		are used in the industrial processes.	In order not to adversely impact the environment and comply with the pollution limits, vibration and noise values, the Company is guided by the requirements of the Kyoto Protocol, the Helsinki Commission (HELCOM) and environmental constraints of Helsinki Convention, as well as the European Parliament and Council Directive 2001/80/EB of regulating energy emissions and Lithuanian environmental norma tive document LAND 43-2013 for the use of natural resources, and releases and emissions of air pollutants to the environment in its ac tivities. Main sources of pollution of the Company: burning fossil fuel in the Company's heat sources, production of heat and waste water,
		Company was not imposed any penalties in 2017.	The Company pays taxes for atmospheric and water pollution. If al lowable emission rate limits or annual limits are exceeded, the Com pany must pay the fines under the applicable laws of the Republic of Lithuania. There have been no pollution-related incidents and the

		The measurement laboratory of stationary air pollution sources of the Group and the Company, having the permit issued by the Envi ronmental Protection Agency, continuously monitors that the emis sions to the atmosphere from stationary sources would not exceed the permissible limits established in integrated pollution prevention and control permits. Boiler-houses of Šilkas, Ežerėlis, Girionys and Noreikiškės, and starting from 2015 – Inkaras boiler-house and Pe trašiūnai power-plant use biofuels, thus reducing atmospheric pollu tion.
	305-6: Emissions of ozone-depleting sub stances (ODS)	Omission of Disclosure (allowed under GRI 101 Foundation – section 3.2): Full disclosure information is available but not in the format required for this report.
	305-7: Nitrogen oxides (NOX), sulphur oxides				closure is contained in AR Section 7.			Full reporting of those available and relevant requirements of this dis
	(SOX), and other signifi cant air emissions	Per Year, t	Particu lates	Nitrogen Oxides	Carbon Monoxide	Sulphur Dioxide	Hy dro-car bons	Vanadium Pentoxide	Others
		2017 m.	79,7242	285,6461	1236,7667	145,0571	1,1982	0,0000	0,4297
		2016 m.	53,7542	265,0797	1155,3349	231,4719	4,2871	0,0000	0,2818
		2015 m.	43,5783	203,6775	904,8513	193,3228	20,1586	0,0000	0,2818
		2014 m.	23,613	154,570	534,443	47,158	16,294	0,0000	0,440
		2013 m.	10,5967	101,3197	299,6656	5,0747	14,9647	0,0000	0,770
		2012 m.	7,6130	54,3160	135,1510	6,0280	1,2080	0,0000	0,4397
306	Effluents and waste	Information is disclosed in section 7 of the annual report of the Com pany.
307	Environmental compli ance 307-1: Non-compliance with environmental laws and regulations	During this reporting period, the company did not receive any fines or sanctions for non-compliance with environmental laws and/or reg ulations at all, nor were any legal cases brought against the company during this time.
308	Supplier environmental assessment 308-1: New suppliers that were screened using environmental criteria	No suppliers were screened using environmental criteria during this reporting period.
	308-2: Negative envi ronmental impacts in the supply chain and actions taken	No suppliers were screened or assessed for environmental impacts using environmental criteria during this reporting period.

	GRI 400 – SOCIAL

401	Employment	Only those material topics which the company believes to bear a sig
402	Labour management relations	nificance upon the company's economic, social and environmental impacts, or those which have an influence on the decisions of stake holders, have been included and reported on (GRI 101 Foundation: 3.1 guidance).

403	Occupational health and safety 403-1 Workers rep resentation in formal joint management– worker health and safety committees	An occupational health and safety committee operates in the Compa ny and it follows the principles, roles and responsibilities as defined by the Occupational Safety and Health Committees of the General Regulations, approved by the Lithuanian Ministry of Social Security and Labour Minister in 2013. 9 September. Order no. A1-502. This committee operates at a senior management level within the company, reporting directly to the Company Director / Board. This committee represent 100% of the workforce employees.
	403-2 Types of injury and rates of injury, oc cupational diseases, lost days, and absenteeism, and number of work-re lated fatalities	Omission of Disclosure (allowed under GRI 101 Foundation – section 3.2): Full disclosure information is available but not in the format required for this report. All accidents are recorded and investigated if necessary under minor or major categories. Much of this reporting is required and covered by legal requirements and linked to information required by the national Social Insurance organisation (SODRA).
	403-3 Workers with high incidence or high risk of diseases related to their occupation	The company does not have any occupational activities that would put its workers at high incidence rate, or high risk of specific diseases.
	403-4 Health and safety topics covered in formal agreements with trade unions	An occupational health and safety committee operates in the Compa ny and it follows the principles, roles and responsibilities as defined by the Occupational Safety and Health Committees of the General Regulations, approved by the Lithuanian Ministry of Social Security and Labour Minister in 2013. 9 September. Order no. A1-502. This committee works with the trade union and covers 100% of all health and safety topics within the work place and work broader work environment.
404	Training and Education	The Company has a special emphasis on employee qualifications, which is why they are sent annually to different types of refresher courses and trainings, participate in various seminars and conferenc es. In 2017, the Company allocated 26370 euros for employees training and refresher courses. 202 employees were sent to participate in var ious trainings and seminars. At the initiative of the General Manager of the Company, lectures are delivered to the employees on topics related to the production or supply of heat at least once a year. Recognized experts are invited to deliver those lectures.
405	Diversity and Equal Op portunity 405-1 Diversity of governance bodies and employees	The share of individuals in the management bodies of each of the following categories of diversity: i. The Group's management bodies employ 8 men and 0 women; ii. Age group: younger than 30 years – 0, 30-50 years – 1, over 50 years – 5; iii. The Company does not have any information on persons belonging to minorities or vulnerable groups. b. Percentage of employees by category of employees in each of the following categories of diversity: i. The Group employs 161 women and 352 men; ii. Age group: younger than 30 years old – 44, 30-50 years old – 165, over 50 years old – 304; iii. The Company does not have data on the belonging of workers to minorities or vulnerable groups.

	405-2 Ratio of basic salary and remuneration of women to men	The salaries of women and men with the same qualifications and working in the same positions are not different in the Company.
406	Non-discrimination	No cases of discrimination were recorded in the Company in 2017.
407	Freedom of association and collective bargaining	All employees of the Company and of the Group are free to join any association and negotiate collectively for better working conditions or pay. A trade union operates in the Company joining 147 employees as at 31 December 2017.
		A collective agreement operates in the Company, which does not only cover issues related to employee's working conditions or motiva tion, but also the issues of learning and professional development and social security, which guarantee to each employee of the Company better working conditions and remuneration than those provided by the laws of the Republic of Lithuania.
408	Child labour	There is no child labour in the Company or its subsidiaries.
409	Forced or compulsory labour	There is no forced or compulsory labour in the Company or its sub sidiaries.
410	Security practices
411	Rights of indigenous peoples	Only those material topics which the company believes to bear a sig nificance upon the company's economic, social and environmental impacts, or those which have an influence on the decisions of stake holders, have been included and reported on (GRI 101 Foundation: 3.1 guidance).
412	Human rights assess ment
413	Local communities
414	Supplier social assess ment 414-1: New suppliers that were screened using social criteria	No suppliers were screened using social criteria during this reporting period.
	414-2 Negative social impacts in the supply chain and actions taken	No suppliers were screened or assessed for social impacts using so cial criteria during this reporting period.
415	Public policy: 415-1 Political contribu tions	No financial or in-kind political contributions made directly or indi rectly.
416	Customer health and safety 416-1 Assessment of the health and safety impacts of product and service categories	No significant product and service categories for which health and safety impacts are assessed for improvement.
	416-2 Incidents of non-compliance con cerning the health and safety impacts of prod ucts and services	The Company has had no identified or recorded non-compliance with regulations and/or voluntary codes.
417	Marketing and labelling	Only those material topics which the company believes to bear a sig nificance upon the company's economic, social and environmental impacts, or those which have an influence on the decisions of stake holders, have been included and reported on (GRI 101 Foundation: 3.1 guidance).
418	Customer privacy
419	Socioeconomic compliance

Company Contact Informaঞon

Name of the company: Public limited liability company "Kauno energija" Address of the company: Raudondvario rd. 84, 47179, Kaunas Telephone: (8 37) 305 650 Fax: (8 37) 305 622 E-mail: info@kaunoenergija.lt Website address: www.kaunoenergija.lt