Kauno Energija

Quarterly Report • Feb 5, 2014

AB KAUNO ENERGIJA SET OF CONSOLIDATED AND PARENT COMPANY'S FINANCIAL STATEMENTS FOR THE 12 MONTHS OF THE YEAR 2013, PREPARED ACCORDING TO INTERNATIONAL FINANCIAL REPORTING STANDARDS, AS ADOPTED BY THE EUROPEAN UNION

Statements of Financial Position

				Company
Notes	As of 31 December 2013	As of 31 December 2012	As of 31 December 2013	As of 31 December 2012
3	227	204	227	204
4
	27,097	26,577	25,799	25,220
	319,934	307,592	319,943	307,602
	848	413	903	441
	19,053	11,605	19,046	11,563
	7,228	2,198	7,228	2,198
	374,160	348,385	372,919	347,024
				4,754
				45
				433
	135	478	3,854	5,232
	374,522	349,067	377,000	352,460
7	3,897	4,246	3,844	4,155
	810	396	809	409
	4,707	4,642	4,653	4,564
8
23	59,414	82,086	59,402	81,981
	8,994	6,094	8,974	6,094
	68,408	88,180	68,376	88,075
9,23	2,155	5,332	2,135	5,308
	75,270	98,154	75,164	97,947
	449,792	447,221	452,164	450,407
	1 5 6	- 40 95	Group - 45 433	3,719 40 95

(cont'd on the next page)

			Group		Company
		As of 31	As of 31	As of 31	As of 31
	Notes		December December	December	December
		2013	2012	2013	2012
EQUITY AND LIABILITIES
Equity
Share capital	$\mathbf{1}$	256,392	256,392	256,392	256,392
Legal reserve	10	6,845	1,307	6,845	1,307
Other reserve	10	250	2,584	250	2,584
Retained earnings (deficit)
Profit for the current year		4,638	1,196	3,456	837
Profit (loss) for the prior year		(2, 292)	(284)	694	3,061
Total retained earnings (deficit)		2,346	912	4,150	3,898
Total equity		265,833	261,195	267,637	264,181
Liabilities
Non-current liabilities
Non-current borrowings	11,23	38,994	33,746	38,994	33,746
Financial lease obligations	12,23	125	67	125	67
Deferred tax liability	21	8,738	8,110	9,407	8,798
Grants (deferred income)	13	28,987	26,546	28,987	26,546
Employee benefit liability	14	2,079	2,173	2,079	1,996
Non-current trade liabilities	23	14	23	14	23
Total non-current liabilities		78,937	70,665	79,606	71,176
Current liabilities
Current portion of non-current borrowings		20,401	8,533	20,401	8,533
and financial lease	11,12,23
Current borrowings	11,23	16,997	27,631	16,997	27,631
Trade payables	23	61,312	72,865	61,296	72,897
Payroll-related liabilities		1,950	2,011	1,927	1,825
Advances received		1,444	878	1,444	878
Taxes payable		1,146	1,071	1,142	1,038
Derivative financial instruments	15	51	204	51	204
Current portion of employee benefit	14	937	1,124	879	1,003
liability
Other current liabilities		784	1,044	784	1,041
Total current liabilities		105,022	115,361	104,921	115,050
Total liabilities		183,959	186,026	184,527	186,226
Total equity and liabilities		449,792	447,221	452,164	450,407

General Manager	Rimantas Bakas		24 January 2014
Chief Accountant	Violeta Staškūnienė	cara	24 January 2014

	Notes	Group 2013 IV quarter	2013	2012 IV quarter	2012	2011
Income
Sales income	16	92,229	322,363	124,699	369,723	309,345
Other operating income	18	590	3,561	89	2,091	2,343
Total income		92,819	325,924	124,788	371,814	311,688
Expenses
Fuel and heat acquired		(71, 135)	(257, 154)	(95, 829)	(296, 717)	(233,756)
Salaries and social security		(6, 158)	(21, 631)	(6, 461)	(22, 827)	(22, 334)
Depreciation and amortisation	3,4	(3,999)	(15,899)	(3,979)	(15, 879)	(15,888)
Repairs and maintenance		(584)	(2, 530)	(1,190)	(5,948)	(5,703)
Write-offs and change in allowance for accounts receivable	5,8	(4, 654)	(8,022)	1,662	(5,896)	(2,189)
Taxes other than income tax		(1, 436)	(5,099)	(1,385)	(5,073)	(4,312)
Electricity		(747)	(2,919)	(794)	(2,574)	(2,515)
Raw materials and consumables		(540)	(1, 876)	(516)	(1, 857)	(1,962)
Maintenance of heating and hot water systems			(2)	$\frac{1}{2}$		(463)
Water		(665)	(2,167)	(427)	(1,172)	(1,160)
Change in write-down to net realisable value of inventories	7	100	(67)	(135)	(644)	(999)
Other expenses	17	(2,675)	(9, 791)	(2,364)	(10, 252)	(10,661)
Other activities expenses	18	(411)	(1,753)	(240)	(1,193)	(1, 334)
Total expenses		(92, 904)	(328, 910)	(111, 658)	(370, 032)	(303, 276)
Profit		(85)	(2,986)	13,130	1,782	8,412
Finance income	19	453	10,160	839	2,463	8,001
Finance costs	20	(724)	(1,909)	(411)	(1,710)	(1,653)
Finance cost, net		(271)	8,251	428	753	6,348
Profit before income tax		(356)	5,265	13,558	2,535	14,760
Income tax	21	(627)	(627)	(1, 339)	(1, 339)	(1,220)
Net profit		(983)	4,638	12,219	1,196	13,540
Basic and diluted earnings per share (LTL)	22	(0.02)	0.11	0.29	0.03	0.32
The accompanying notes are an integral part of these financial statements.
Rimantas Bakas General Manager						24 January 2014
Chief Accountant	Violeta Staškūnienė					24 January 2014

	Notes	2013 IV quarter	2013	2012 IV quarter	2012	2011
Income
Sales income	16	92,228	322,338	124,543	369,462	308,622
Other operating income	18	499	3,358	137	1,908	1,846
Total income		92,727	325,696	124,680	371,370	310,468
Expenses
Fuel and heat acquired		(71, 135)	(257, 154)	(95, 829)	(296, 717)	(233, 756)
Salaries and social security		(6,140)	(21, 455)	(6,253)	(22,078)	(21, 412)
Depreciation and amortisation	3,4	(4,019)	(15,976)	(3,967)	(15, 879)	(15, 842)
Repairs and maintenance		(584)	(2, 530)	(1,190)	(5,948)	(5,703)
Write-offs and change in allowance for accounts receivable	5,8	(4, 754)	(8,207)	1,348	(6,210)	(2,189)
Taxes other than income tax		(1, 436)	(5,099)	(1,369)	(5,043)	(4,286)
Electricity		(747)	(2,919)	(790)	(2, 565)	(2,504)
Raw materials and consumables		(534)	(1,881)	(468)	(1,766)	(1, 847)
Maintenance of heating and hot water systems		(9)	(95)	(88)	(388)	(1,026)
Water		(666)	(2,167)	(427)	(1,170)	(1,156)
Change in write-down to net realisable value of inventories	$\overline{7}$	100	(67)	(135)	(644)	(999)
Other expenses	17	(2,611)	(9,824)	(2, 344)	(10,210)	(10, 541)
Other activities expenses	18	(273)	(1,318)	(291)	(723)	(677)
Total expenses		(92, 808)	$(328,692)$ $(111,803)$		(369, 341)	(301, 938)
Profit		(81)	(2,996)	12,877	2,029	8,530
Finance income	19	453	10,160	839	2,463	8,001
Finance costs	20	(1,607)	(3,099)	(573)	(2, 297)	(1, 869)
Finance cost, net		(1, 154)	7,061	266	166	6,132
Profit before income tax		(1,235)	4,065	13,143	2,195	14,662
Income tax	21	(609)	(609)	(1,358)	(1,358)	(1,220)
Net profit		(1, 844)	3,456	11,785	837	13,442
Basic and diluted earnings per share (LTL)	22	(0.04)	0.08	0.28	0.02	0.31

Group	Notes	Share capital	Legal reserve	Other reserve	Retained earnings (accumulated deficit)	Total
Balance as of 31 December 2011		256,392	635	3,468	10,187	270,682
Transferred from reserves	10		$\overline{\phantom{0}}$	(3, 468)	3,468
Transferred to reserves	10	-	672	2,584	(3,256)
Dividends	1	$\overline{\phantom{a}}$	۰		(10, 683)	(10,683)
Total comprehensive income		$\overline{\phantom{a}}$			1,196	1,196
Balance as of 31 December 2012		256,392	1,307	2,584	912	261,195
Transferred from reserves	10		$\overline{\phantom{a}}$	(2, 584)	2,584
Transferred to reserves	10	۰	5,538	250	(5,788)
Total comprehensive income				$\overline{\phantom{0}}$	4,638	4,638
Balance as of 31 December 2013		256,392	6,845	250	2,346	265,833

Company	Notes	Share capital	Legal reserve	Other reserve	Retained earnings (accumulated deficit)	Total
Balance as of 31 December 2011		256,392	635	3,468	13,532	274,027
Transferred from reserves	10			(3, 468)	3,468
Transferred to reserves	10		672	2,584	(3,256)
Dividends	1		-		(10, 683)	(10,683)
Total comprehensive income					837	837
Balance as of 31 December 2012		256,392	1,307	2,584	3,898	264,181
Shareholder (contribution) to cover losses	1				(45)	(45)
Transferred from reserves	10		$\overline{\phantom{a}}$	(2, 584)	2,584
Transferred to reserves	10		5,538	250	(5,788)
Total comprehensive income					3,501	3,501
Balance as of 31 December 2013		256,392	6,845	250	4,150	267,637

General Manager	Rimantas Bakas		24 January 2014
Chief Accountant	Violeta Staškūnienė	recen	24 January 2014

Statements of Cash Flows

	Group		Company
	2013	2012	2013	2012
Cash flows from (to) operating activities
Net profit	4,638	1,196	3,456	837
Adjustments for non-cash items:
Depreciation and amortisation	18,674	18,371	18,558	18,286
Write-offs and change in allowance for accounts receivable	8,053	5,913	8,222	6,227
Interest ехpenses	1,414	1,496	1,414	1,496
Change in fair value of derivatives	(153)	(129)	(153)	(129)
Loss (profit) from sale and write-off of property, plant and equipment and value of the shares	371	(413)	371	(412)
(Amortisation) of grants (deferred income)	(1,336)	(1,163)	(1,336)	(1,163)
Change in write-down to net realisable value of inventories	67	644	67	644
Change employee benefit liability	494	1,093	544	791
Income tax expenses	628	1,339	609	1,358
Change in accruals	(221)	(222)	(109)	(192)
Impairment of investment in subsidiary	-	-	1,035	587
Elimination of other financial and investing activity results	(9,850)	(1,782)	(9,695)	(1,782)
Total adjustments for non-cash items:	18,141	25,147	19,527	25,711
Changes in working capital:
(Increase) in inventories	269	(141)	246	(174)
(Increase) decrease in prepayments	(513)	6	(598)	2
(Increase) decrease in trade receivables	14,728	(28,919)	14,580	(29,023)
(Increase) in other receivables	(2,906)	(543)	(2,901)	(530)
(Decrease) increase in other non-current liabilities	(9)	(14)	(9)	(14)
Increase in current trade payables and advances received	(10,987)	17,863	(11,035)	17,829
(Decrease) increase in payroll-related liabilities	(769)	(207)	(528)	(199)
Increase (decrease) in other liabilities to budget	75	969	104	968
Increase (decrease) in other current liabilities	(128)	463	(125)	445
Total changes in working capital:	(240)	(10,523)	(266)	(10,696)
Net cash flows from operating activities	22,539	15,820	22,717	15,852

(cont'd on the next page)

The accompanying notes are an integral part of these financial statements.

	Group		Company
	2013	2012	2013	2012
Cash flows from (to) the investing activities
(Acquisition) of tangible and intangible assets	(44, 352)	(30, 172)	(44,369)	(30,201)
Proceeds from sale of tangible assets	209	166	207	165
Interest received for overdue accounts receivable	2,952	1,984	2,952	1,984
Penalties received	7,054		7,054
Decrease of non-current accounts receivable
Interest received	1	12	1	12
Net cash (used in) investing activities	(34, 136)	(28, 010)	(34, 155)	(28, 040)
Cash flows from (to) financing activities
Proceeds from loans	25,539	29,955	25,539	29,955
(Repayment) of loans	(19, 123)	(11,318)	(19, 123)	(11,318)
Interest (paid)	(1, 474)	(1, 552)	(1, 474)	(1, 552)
Financial lease (payments)	(142)	(67)	(142)	(56)
Penalties and fines (paid)	(157)	(214)	(157)	(214)
Shareholder (contributions) to a subsidiary			(155)
Dividends (paid)		(10,670)		(10,670)
Received grants	3,777	5,452	3,777	5,452
Net cash flows from (used in) financing activities	8,420	11,586	8,265	11,597
Net (decrease) increase in cash and cash equivalents	(3,177)	(604)	(3,173)	(591)
Cash and cash equivalents at the beginning of the period	5,332	5,936	5,308	5,899
Cash and cash equivalents at the end of the period	2,155	5,332	2,135	5,308

General Manager	Rimantas Bakas	24 January 2014
Chief Accountant	Violeta Staškūnienė	24 January 2014

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.

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 was registered on 1 July 1997 after the reorganisation of AB Lietuvos Energija. The Company's shares are traded on the Baltic Secondary List of the NASDAQ OMX Vilnius.

As of 31 December 2013 and of 31 December 2012 the shareholders of the Company were as follows:

		As of 31 December 2013	As of 31 December 2012
	Number of shares owned (unit)	Percentage of ownership (percent)	Number of shares owned (unit)	Percentage of ownership (percent)
Kaunas city municipality	39,665,892	92.82	39,665,892	92.82
Kaunas district municipality	1,606,168	3.76	1,606,168	3.76
Jurbarkas district municipality	746,405	1.75	746,405	1.75
Other minor shareholders	713,512	1.67	713,512	1.67
	42,731,977	100.00	42,731,977	100.00

All the shares with a par value of LTL 6 each are ordinary shares. The Company did not hold its own shares in 2013 and 2012.

On 23 July 2009 in the Company's Shareholders Meeting it was decided to increase the share capital by issuing 22,700,000 ordinary shares with the par value LTL 6 each. Priority right to acquire issued shares was granted to Kaunas city municipality. The issue price of shares is equal to their nominal value. For this share the Company received a contribution in-kind comprising manifolds in Kaunas city with the value of LTL 136,200 thousand which was established by the independent property valuators under the replacement cost method.

On 17 February 2010 in the Company's Extraordinary Shareholders Meeting it was decided to increase the share capital by LTL 682 thousand (from LTL 255,710 thousand to LTL 256,392 thousand) issuing 113,595 ordinary shares with the par value LTL 6 each. The issue price of shares is equal to their nominal value. A building of a boiler house located in Kaunas city, owned by Kaunas City Municipality, and engineering networks located in Jurbarkas city, owned by Jurbarkas Region Municipality, were received as a non-monetary contribution in kind for these shares. The value of this non-monetary contribution as of the transfer date was determined by independent valuators under the replacement cost method.

All shares were fully paid as of 31 December 2013 and as of 31 December 2012.

On 30 April 2012 the Annual General Meeting of Shareholders has made a decision to pay LTL 10,683 thousand, i.e. at 25 cents a share in dividends from the profit of the year 2011. The dividends were started to pay in the end of June 2012, as soon as the permissions under credit agreements from credit institutions were received. The unpaid part of dividends amounting to LTL 9 thousand as of 31 December 2013 (31 December 2012 – LTL 13 thousand) is accounted for in other current liabilities.

The Group and the Company are also involved in maintenance of heating systems. On 1 July 2006 on the basis of Kaunas Energy Services Department the Company established the subsidiary UAB Pastatų Priežiūros Paslaugos (hereinafter – PPP). The main activity of the PPP is exploitation and maintenance of building heating network and heating consumption equipment, internal engineering networks and systems as well as building structures. Starting from July 1, 2006 the Company contracted the PPP for permanent technical maintenance of heating and hot water supply systems of the buildings maintained by the Company. Whereas, according to the changes in the Law on Heat Sector, the PPP is not able to provide heating and hot water supply systems maintenance services starting from 1 July 2012, reorganization of the PPP in the way of separation was approved by the decision of the Company's Management Board of 6 April 2012. On 16 April, 2013 the Company completed procedures of reorganization of PPP in the way of separation. On 16 April, 2013 the new statutes of activity continuing PPP and newly established subsidiary UAB Kauno Energija NT (hereinafter – KENT) were registered in Register of Legal Entities. On 22 April, 2013 the Company announced a tender of sale of PPP. On 19 June, 2013 Company's Management Board decided not to sell block of shares of PPP at the price bid. On 24 September 2013 the Company's Management Board assigned Company's administration by protocol decision to pursue procedures of the end of PPP as of a legal entity in the way chosen by administration. On 25 October, 2013 Company's Board accepted by the protocol decision liquidation of PPP and pursuance of procedures of choosing of liquidator. On 11 December, 2013 the Company's Board decided as filling functions of the only shareholder of PPP to liquidate a subsidiary PPP starting from 16 December, 2013 and to appoint Attorney's Professional Community Magnusson ir Partneriai attorney Aiva Dumčaitienė as a liquidator.

The Group consists of the Company and the Subsidiaries PPP and KENT (hereinafter – the Group):

Company	Principal place of business	Share held by the Group	Cost of investment	Writing-off cost of investment reducing the capital	Loss reported after capital reduction and shareholder contribution	Total equity	Main activities
UAB Pastatų Priežiūros Paslaugos*	Savanorių Ave. 347, Kaunas	100 percent	6,518	(1,916)	107	4,709	Maintenance of heating and hot water systems
UAB Pastatų Priežiūros Paslaugos**	Savanorių Ave. 347, Kaunas	100 percent	10	-	(2)	8	Maintenance of heating and hot water systems
UAB Kauno Energija NT	Savanorių Ave. 347, Kaunas	100 percent	4,592	(883)	15	4,607	Rent

• *The data presented as of 31 March, 2013 – until company's separation;

• ** The data presented as of 31 December, 2013 – after company's separation.

As of 31 December 2013 accumulated impairment loss on investment in PPP amounted to LTL 2,799 thousand (31 December 2012 - LTL 1,764 thousand) in the Company's profit or loss in article of financial activity expenses (Note 20).

It has been decided by the decision of the meeting of PPP shareholders of 28th of May, 2012 to reduce authorised capital to LTL 4,915 thousand by adjusting accumulated loss of LTL 1,603 thousand. The new Articles of Association of PPP were registered on 13th of June, 2012. It has been decided by the decision of the meeting of shareholders of 16th of November, 2012 to reduce authorised capital to LTL 4,754 thousand by withdrawing accumulated loss of LTL 161 thousand. The new Articles of Association of PPP were registered on 7th of December, 2012. It has been decided by the decision of the meeting of shareholders of 21 February 2013 to reduce authorised capital to LTL 4,602 thousand by withdrawing accumulated loss of LTL 152 thousand. The new Articles of Association of PPP were registered on 6 March, 2013.

It has been decided by the decision of the meeting of PPP's shareholders of 22th of March, 2013 to transfer to PPP LTL 45 thousand shareholder's contribution in, and LTL 110 thousand targeted shareholder contributions, that were transferred in 22 March 2013

Legal Regulations

Operations of the Company are regulated by the Heating Law No. IX-1565 of 20 May 2003 of the Republic of Lithuania. Starting from 1 January 2008, the Law amending the Heating Law No. X-1329 of 20 November 2007 of the Republic of Lithuania came in to force. On 13 of October, 2011 the change in Heating Law has been announced. It determines that heating and hot water systems as well as heat points of blocks of flats must be supervised by the supervisor unrelated to the supplier of heat and hot water, who must be chosen by inhabitants of this block of flats, without reference to ownership of these heat points. This prohibition, provided by the law, is not applied to the maintenance of heating and hot water systems of buildings which appear in populated localities with less than 50 000 inhabitants according to the data of the Lithuanian Department of Statistics, if the municipal council doesn't make a different decision. This change in the Law on Heat Sector of the Republic of Lithuania No XI-1613 came into force starting November 1, 2011. Any expenses, related to maintenance of the heat points are not included in a heat price since that date.

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. O3-413 a new basic heat rates force components for the period from 1 January 2013 till 31 December 2016.

Operational Activity

The Company's generation capacity includes a power plant in Petrašiūnai, 4 district boiler-houses in Kaunas integrated network, 7 regional boiler-houses in Kaunas region, 1 regional boiler-house in Jurbarkas city, 13 isolated networks and 31 local gas burning boiler-houses in Kaunas.

Total installed heat generation capacity is 443.4 MW and electricity - 8.75 MW, respectively, out of which 254.8 MW of heat generation and 8 MW of electric capacity are located at the power plant in Petrašiūnai. 27 MW of heat generation capacity is located in Jurbarkas city. The total Company's power generation capacity is 452.15 MW.

In the year 2003 the Company sold a part of the assets of the subdivision Kauno Elektrinė to UAB Kauno Termofikacijos Elektrinė (hereinafter – KTE) and committed to purchase at least 80 percent of the annual demand of Kaunas integrated heating network from this company. The contract is valid for 15 years from the signing day. It was determined in this contract that heat purchase price from KTE will not increase in 5 years from the day of contract signing. Starting from 1 December 2008 a new basic heat prices for each 4 years period are being approved by the Commission for KTE and for the Company according to valid legal acts.

The Company received an official note on 13th of April, 2012 confirming the decision of Gazprom OAO to sell its shares to the smaller shareholder "Clement Power Venture Inc.", and the provision, that Gazprom OAO as the main shareholder of KTE must ensure that during the term of agreement, i. e. until 30th of March, 2018 it will own the main block of shares and adequate (not less than 51 percent) number of votes in General meeting of shareholders, is confirmed in heat purchase agreement signed in 2003 between the Company and KTE, Company's Management Board decided on 10th of July, 2012 to approve the selling of all the shares of Kauno Termofikacijos Elektrinė UAB owned by Gazprom OAO to Clement Power Venture Inc., regularizing terms of change of contracts agreements signed with Kauno Termofikacijos Elektrinė UAB and seeking the best for the Company from this selling On 13 March 2013 KTE adduced to

Company an evidence, i.e. an extract from securities account, saying that ownership of the shares of KTE owned by Gazprom OAO is transferred to Clement Power Venture Inc. since 7 March 2013. The changes of Agreement on Investments and of Heat Sales Contract of 31 March 2003 which were signed respectively on 13 August 2012 and 28 September 2012, as well as termination of Contract of Guarantee signed between Company and Gazprom OAO on 13 August 2013 came into force since that date. Following changes of Heat Sales Contract that came into force, Company's obligation to purchase from KTE at least 80 per cent of produced heat, demanded in Kaunas integrated heat supply network was withdrawn. According to changes of Agreement on Investments it was newly agreed and investments objects were intended for a preliminary sum of LTL 350 million as well as detailed schedule of investments implementation for the years 2013 – 2017. Herewith KTE took the obligations from these investments to finance Company's investments in Company's infrastructure in amount of LTL 10 million, which will be fulfilled during the period of 2012 – 2016. KTE obliged to pay 10 percent forfeit from the value of unfulfilled investments. Notwithstanding agreements reached, on 30 April, 2013 KTE placed a claim to Vilnius Court of Commercial Arbitration. KTE seeks to argue obligations, determined by chapters 2 and 3 of Investments Agreement of 13 August, 2013 by this claim regarding investments in Company heat economy in amount of LTL 10 million and the terms of implementation as well as forfeit (penalties) determined if those investments would not be implemented. The session in this case is appointed on18 February 2014.

In 2013 the average number of employees at the Group was 575 (626 employees in 2012). In 2013 the average number of employees at the Company was 565 (589 employees in 2012).

Strategic Decisions

On 6 June, 2013 the Kaunas city council approved Company's investment plans for the years 2012 – 2015, according to which investments in amount of LTL 173,934 million are intended to invest into Company's assets during the period of the years 2012 – 2015. The Group and the Company invested LTL 44,701 and 44,718 thousand in the own property during 2012 (during 2012 – LTL 30,620 thousand and 30,661 thousand).

Estimating conditionally high price of the heat bought from KTE, which owns a main Kaunas heat production source, and seeking to contribute to the international liabilities of Lithuania to increase usage of renewable energy sources in heat production, to reduce Lithuania's dependence from imported fossil fuel and to provide the heat energy at a competitive price, the Company initiated reconstruction projects of existing boiler-houses, fitting them to work on wood fuel (wooden chips, waste of deforestation, sawdust).

In November – December 2013 the projects "Reconstruction of Noreikiškės boiler-house equipping it with biofuel burned 4 MW capacity water heating boiler" (value of the project is LTL 5.3 million, planned amount of produced heat – 6500 MWh per year) and "Reconstruction of Ežerėlis boiler-house equipping it with biofuel burned 3.5 MW capacity water heating boiler" (value of the project is LTL 4.6 million, planned amount of produced heat – 6710 MWh per year) were implemented. Both projects were implemented using financial support from Lithuanian Environmental Investment Fund (LEIF) in amount of LTL 4.1 million.

Biofuel burned 8 MW capacity fully automatized water heating boiler with 4 MW condensational economizer was installed in Šilkas boiler-house. Total installed capacity of boiler-house is 12 MW. Planned annual production with new equipment is 96 GWh of heat.

The new gas burned 18 MW capacity water heating boiler was installed in Pergalė boiler-house.

Indicator of fuel used for heat production decreased from 90.5 to 89.7 kgne/MWh i. e. 0.8 kgne/MWh. The total production was 22 433 MWh. Fuel economized – 17 946 tne or LTL 293 thousand per year.

The Company has already started and plans to equip in 2014 a biofuel burned 8 MW capacity water heating boiler and 4 MW capacity condensational economizer combined for boilers No 5 and No 6 in Šilkas boilerhouse (II stage of Šilkas boiler-house project). The total value of the project with support from LBSA is LTL 8 million.

It is planned in 2014 to install a new 15 MW capacity gas burned water heating boiler with 1.5 capacity condensational economizer in Šilkas boiler-house. Value of the project is LTL 2 million.

The Company has already started and plans to equip in 2014 in Inkaras boiler-house two biofuel burned 8 MW capacity water heating boilers with furnace and 4 MW capacity condensational economizer. The total value of the project with support from LBSA is LTL 14.994 million.

The Company has already started and plans to implement in 2014 a reconstruction of water heating boiler PTVM-100 No 2 in Petrašiūnai power plant equipping it with condensational economizer of capacity 10 MW. It is also planned to automatize it and to equip with frequency gear convertor. Total value of the project is LTL 7.25 million.

The Company plans to start a reconstruction of Petrašiūnai power plant in 2014 changing currently used fuel to biofuel. Total heat capacity of new equipment will reach 30 MW. It is planned to produce approximately 244 GWh of heat energy with these new equipment. It is also planned to use approximately 93 thousand tons of wooden fuel for heat production annually. Estimated value of the project with support from LBSA is LTL 25 million.

Further progress of Petrašiūnai power plant project is described in Note 26.

It is planned these projects will be implemented in 2014 – 2015 and it will possibly have an impact on heat consumer prices reduction.

The Company plans to reconstruct its own mains of integrated heat supply network named 5T, 6Ž, 1Ž, 3Ž and 4Ž. Total estimated value of these projects is LTL 13,889 thousand.

The Company has applications from 21 potential independent heat producers at the moment (with total capacity 526 MW) to connect to Company's integrated heat supply network.

2 independent heat producers, hereinafter – IHP, with total capacity of 30 MW supply heat produced from biofuel for the Company. It is presumable estimating real actions that 3 more IHP, i. e. UAB Pramonės Energija with capacity of 20 MW, UAB Okseta with capacity of 57 MW and UAB Aldec General with capacity of 20 MW, whose maximum total capacity of biofuel burned boilers will reach 97 MW will start to produce heat in 2014. However along with coming of IHP the new issues emerged: network management in case of unexpected stop of heat producer equipment, holding of network parameters, regulation of heat purchase procedure and its changes.

2. Accounting principles

2.1. Adoption of new and revised International Financial Reporting Standards

The following amendments to the existing standards issued by the International Accounting Standards Board and interpretations issued by the International Financial Reporting Interpretations Committee are effective for the current period.

2.2. 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).

2.3.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.

Items included in the financial statements of the Group and the Company are measured using the currency of the primary economic environment in which they operate (the 'functional currency'). The amounts shown in these financial statements are measured and presented in the local currency of the Republic of Lithuania, litas (LTL) which is a functional and presentation currency of the Company and its subsidiaries and all values are rounded to the nearest thousands, except when otherwise indicated.

Starting from 2 February 2002, Lithuanian litas is pegged to EUR at the rate of 3.4528 LTL for 1 EUR, and the exchange rates in relation to other currencies are set daily by the Bank of Lithuania.

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 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.

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 non-controlling 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 non-controlling 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 IFRSs). The fair value of any investment retained in the former 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 profit (loss).

The requirements of IAS 39 are applied to determine whether it is necessary to recognise 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 recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised 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. 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 capitalised and then amortised over useful life (3 - 4 years).

Software

The costs of acquisition of new software are capitalised and treated as an intangible asset if these costs are not an integral part of the related hardware. Software is amortised 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 recognised 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 recognised 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.

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 recognised 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 periods were revised as of 1 September 2008, as further described in Note 2.25.

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

	Years
Buildings	7 - 50
Structures and machinery	5 - 70
Vehicles	3 - 10
Equipment and tools	2 - 20
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 LTL 500.

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 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.

Lease hold improvement expenses related to property under rental and/or operating lease agreements which prolong the estimated useful life of the asset are capitalized and depreciated during the term of rental and/or operating lease agreements.

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.

2.9.Impairment of property, plant and equipment and intangible assets excluding goodwill

At each statement 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.

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, loans and receivables or available-for-sale financial assets, as appropriate. All purchases and sales of financial assets are recognised on the trade date. When financial assets are recognised 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.

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.

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 comprehensive income.

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.

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 other comprehensive income.

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.

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 re-organization; 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

The Group and the Company derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group and the Company neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group and the Company recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group and the Company retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group and the Company continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received.

On derecognition of a financial asset in its entirety, the difference between the asset's carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss.

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 recognised 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 if they do not qualify for hedge accounting.

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.

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 capitalisation.

All other borrowing costs are recognised 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 amortised cost using the effective interest method.

The effective interest method is a method of calculating the amortised 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 derecognises 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.

The Group and the Company as lessor

Amounts due from lessees under finance leases are recognised as receivables at the amount of the Group's and the Company's net investment in the leases. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group's and the Company's net investment outstanding in respect of the leases.

Rental income from operating leases is recognised 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 recognised on a straight-line basis over the lease term.

The Group and the Company as lessee

Assets held under finance leases are initially recognised 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 statement 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 recognised immediately in profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group's and the Company's general policy on borrowing costs. Contingent rentals are recognised as expenses in the periods in which they are incurred.

Operating lease payments are recognised 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 recognised as an expense in the period in which they are incurred.

In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straightline 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 recognised 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 recognised in profit or loss on a systematic basis over the periods in which the Group and the Company recognises 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 recognised as deferred revenue in the statement 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 comprehensive income, a relevant expense account is reduced by the amount of grant amortisation.

Assets received free of charge are initially recognised 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 income-related grants are recognised 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 benefit of a government loan at a below-market rate of interest is treated as a government grant, measured as the difference between proceeds received and the fair value of the loan based on prevailing market interest rates.

The balance of unutilised 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 2013 the income tax applied to the Group and the Company was 15 percent (2012 – 15 percent).

Deferred tax

Deferred tax is recognised 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.

Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, 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 recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise 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 statement 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 realised, 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 Group 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 recognised as an expense or income in profit or loss, except when they relate to items that are recognised outside profit or loss (whether in other comprehensive income or directly in equity), in which case the tax is also recognised 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 recognised 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 recognised net of VAT and discounts.

Revenue from sales of heat energy is recognised 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 recognised 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.

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

Dividend revenue from investments is recognised 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 recognised 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 below.

2.23. Expense recognition

Expenses are recognised 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. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

The presentation currency is Litas (LTL). All transactions had functional currency other than LTL translated into LTL at the official Bank of Lithuania exchange rate on the date of the transaction, which approximates the prevailing market rates. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Gains and losses arising on exchange are included in profit or loss for the period.

The applicable rates used for principal currencies were as follows:

As of 31 December 2013				As of 31 December 2012
1 EUR	=	3.4528	LTL	1 EUR	=	3.4528	LTL
1 USD	=	2.5098	LTL	1 USD	=	2.6060	LTL
1 GBP	=	4.1391	LTL	1 GBP	=	4.2015	LTL

Exchange differences are recognised 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 recognised 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 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.

The Group and the Company has considered the actual useful life of property, plant and equipment and increased a depreciation rate for the heating connections from 20 years to 30 years and for the heating stations from 10 years to 15 years respectively starting from 1 September 2008.

Realisable value of inventory

Starting from 2011, the management of the Company forms a 100 per cent adjustment to the net realizable value for inventory bought more than one year ago.

Carrying value of non-current assets received as a contribution in kind

In 2009 a new shares issue was paid by contribution in-kind - manifolds situated in Kaunas city: i.e. market value of assets determined upon their transfer by local qualified valuators using depreciated replacement costs method amounted to LTL 136 million.

In 2010 a new shares issue was paid by contribution in-kind: i.e. building – boiler-house situated in Kaunas city and by networks system situated in Jurbarkas city. Market value of assets estimated upon their transfer by local qualified valuators by using depreciated replacement costs method amounted to LTL 0.616 million.

Following decision of 12 August 2012 of the Commission stated in 2012, the Company performed an additional valuations of contribution in-kind, i. e. manifolds in 2012. It's emphasized in the valuation report, that in this particular case a value of manifolds calculated in the method of income is not correct market

value of the asset and the value of the manifolds, determined under the replacement cost method, is considered to be the market value of the assets.

As of 31 December 2013 carrying value of total contribution in-kind amounted to LTL 128,423 thousand, including the manifolds, which amounted to LTL 127,840 thousand (31 December 2012: LTL 130,395 thousand and LTL 129,785 thousand respectively).

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.

Deferred Tax Asset

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

Litigations

The Group and the Company reviews all legal cases for the end of the reporting period and disclose all relevant information in the Note 24.

2.26. Contingencies

Contingent liabilities are not recognised 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 recognised 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 chiefoperating 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 organised in one operating segment therefore further information on segments has not been disclosed in these financial statements

3. Intangible assets

Amortisation expenses of intangible assets are included in the operating expenses in the statement of comprehensive income.

As of 31 December 2013 part of the non-current intangible assets of the Group with the acquisition cost of LTL 4,816 thousand (LTL 4,909 thousand as of 31 December 2012) and the Company – LTL 4,816 thousand (LTL 4,858 thousand as of 31 December 2012) were fully amortised but were still in active use.

4. Property, plant and equipment

The depreciation charge of the Group's and Company's property, plant and equipment for the half ended as of 31 December 2013 amounts to LTL 17,220 thousand and LTL 17,151 thousand, respectively (as of 31 December 2012: LTL 18,178 thousand and LTL 18,099 thousand respectively). The amounts of LTL 17,119 thousand and LTL 17,050 thousand (as of 31 December 2012: LTL 16,844 thousand and LTL 16,764 thousand respectively) were included into operating expenses (under depreciation and amortisation and other expenses lines) in the Group's and the Company's statement of comprehensive income. The remaining amounts were included into other activity expenses.

As of 31 December 2013 part of the property, plant and equipment of the Group with acquisition cost of LTL 114,753 thousand (LTL 105,177 thousand as of 31 December 2012) and the Company – LTL 114,724 thousand were fully depreciated (LTL 104,726 thousand as of 31 December 2012), but were still in active use.

As of 31 December 2013 and as of 31 December 2012 the major part of the Group's and Company's construction in progress consisted of heat supply networks, boiler-houses reconstruction and repair works.

As of 31 December 2013 the sum of the Group's and the Company's contractual commitments for the acquisition of property, plant and equipment amounted to LTL 35,414 thousand (as of 31 December 2012 – LTL 2,020 thousand).

As of 31 December 2013 property, plant and equipment of the Group and the Company with the net book value of LTL 207,522 thousand (LTL 80,886 thousand as of 31 December 2012) was pledged to banks as a collateral for loans (Note 11).

The sum of Group's and Company's capitalized interest was equal to LTL 82 thousand in 2013 (as of 31 December 2012: LTL 295 thousand). The capitalization rate varied from 1.40 percent to 2.96 percent in 2013 (in 2012 – from 1.99 percent to 2.8 percent).

As of 31 December 2013 the Group and the Company accounted for assets, not yet ready for use, amounting to LTL 3,604 thousand in the category Equipment and tools (LTL 917 thousand as of 31 December 2012).

5. Non-current accounts receivable

						Group		Company
					As of 31 December 2013	As of 31 December 2012	As of 31 December 2013	As of 31 December 2012
Long-term Company's employees	loans	granted	to	the	40	45	40	45

Long-term loans granted to the employees of the Company for the period from 1997 to 2023 are non-interest bearing. These loans are accounted for at discounted value as of 31 December 2013 and as of 31 December 2012 using 3.47 percent interest rate. In 2013 effect of reversed discounting amounted to LTL 1 thousand (2012 – LTL 9 thousand). The reversal of discounting is accounted in the change of

depreciation of realisable value of receivables line in the Group's and Company's statement of comprehensive income

As of 31 December 2013 and as of 31 December 2012 the repayment term of non-current accounts receivable is not yet due and valuation allowance is not determined.

6. Other financial assets

		Group	Company
	As of 31 December 2013	As of 31 December 2012	As of 31 December 2013	As of 31 December 2012
Available-for-sale financial assets
Fair value of shares	95	433	95	433

Valuators performed the valuation of the assets of UAB Šilumos Ūkio Servisas, less than 19 percent of shares of which is owned by the Company, and determined a market value of the shares. As of 31 December 2013 a change in fair value of shares was loss in amount of LTL 338 thousand (as of 31 December 2012 – profit LTL 338 thousand). Impairment loss is accounted in the Group's and the Company's profit (loss).

7. Inventories

	Group		Company
	As of 31 December 2013	As of 31 December 2012	As of 31 December 2013	As of 31 December 2012
Technological fuel	3,502	3,461	3,502	3,461
Spare parts	1,140	1,292	1,140	1,292
Materials	1,175	1,347	1,122	1,256
	5,817	6,100	5,764	6,009
Less: write-down to net realisable value of inventory at the end of the period	(1,920)	(1,854)	(1,920)	(1,854)
Carrying amount of inventories	3,897	4,246	3,844	4,155

As of 31 December 2013 Group's and Company's amounted to LTL 1,920 thousand (as of 31 December 2012 – LTL 1,854 thousand) write-down to net realisable value of inventories. Changes in the Write-down to net realisable value of inventories for the 2013 and for the year 2012 were included into change in write-down to net realisable value of inventories caption in the Group's and the Company's statement of comprehensive income.

8. Current accounts receivable

	Group		Company
	As of 31 December 2013	As of 31 December 2012	As of 31 December 2013	As of 31 December 2012
Trade receivables, gross	111,872	129,841	112,037	129,858
Less: impairment of doubtful receivables	(52,458)	(47,755)	(52,635)	(47,877)
	59,414	82,086	59,402	81,981

Of 31 December 2013 Group's and Company's receivables as include the factored receivables amounting to LTL 2,453 thousand (as of 31 December 2012 – LTL 3,068 thousand), under the agreement with UAB Swedbank Lizingas, described in Note 11.

Change in impairment of doubtful receivables in 2013 and 2012 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 comprehensive income.

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 2011	43,315	43,315
Additional allowance formed	5,827	5,949
Write-off	(1,387)	(1,387)
Balance as of 31 December 2012	47,755	47,877
Additional allowance formed	7,944	7,999
Write-off	(3,241)	(3,241)
Balance as of 31 December 2013	52,458	52,635

In 2013 the Group and the Company wrote off LTL 3,241 thousand (2012 – LTL 1,387 thousand) of bad debts. In 2013 the Group and the Company also recovered LTL 15 thousand (2012 - LTL 17 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 2013 and 31 December 2012 is as follows:

	Trade receivables past due
	Trade receivables neither past due nor impaired	Less than 60 days	60 - 150 days	151 - 240 days	241 - 360 days	More than 360 days	Total
2013	40,891	3,295	994	973	1,231	12,030	59,414
2012	61,676	6,026	1,243	712	1,594	10,835	82,086

The ageing analysis of the Company's net value of trade receivables as of 31 December 2013 and 31 December 2012 is as follows:

		Trade receivables past due
	Trade receivables neither past due nor impaired	Less than 60 days	60 - 150 days	151 - 240 days	241 - 360 days	More than 360 days	Total
2013	40,879	3,295	994	973	1,231	12,030	59,402
2012	61,571	6,026	1,243	712	1,594	10,835	81,981

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

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

		Group	Company
	As of 31	As of 31	As of 31 December	As of 31
	December 2013	December 2012	2013	December 2012
Taxes	4,128	3,535	4,128	3,535
Other receivables	5,542	3,126	5,828	3,318
Less: value impairment of doubtful receivables	(676)	(567)	(982)	(759)
	8,994	6,094	8,974	6,094

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 2011	481	481
Additional allowance formed	113	305
Write-off	(27)	(27)
Balance as of 31 December 2012	567	759
Additional allowance formed	109	223
Balance as of 31 December 2013	676	982

As of 31 December 2013 and 31 December 2012 the major part of the Group's and the Company's other receivables consisted of compensations from municipalities for low income families, receivables from sold inventories (metals, heating equipment) and services supplied (maintenance of manifolds and similar services).

The ageing analysis of the Group's net value of other receivables (excluding taxes) as of 31 December 2013 and 31 December 2012 is as follows:

	Other receivables	Other receivables past due but
	neither past due nor impaired	Less than 60 days	60 - 150 days	151 - 240 days	241 - 360 days	More than 360 days	Total
2013	1,598	32	37	6	3,071	122	4,866
2012	2,451	44	51	11	2	-	2,559

The ageing analysis of the Company's net value of other receivables (excluding taxes) as of 31 December 2013 and 31 December 2012 is as follows:

	Other receivables	Other receivables past due but
	neither past due nor impaired	Less than 60 days	60 - 150 days	151 - 240 days	241 - 360 days	More than 360 days	Total
2013	1,578	32	37	6	3,071	122	4,846
2012	2,451	44	51	11	2	-	2,559

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.

9. Cash and cash equivalents

		Group	Company
	As of 31	As of 31	As of 31	As of 31
	December 2013	December 2012	December 2013	December 2012
Cash in transit	977	4,181	977	4,181
Cash at bank	1,160	1,141	1,140	1,117
Cash on hand	18	10	18	10
	2,155	5,332	2,135	5,308

The Group's and the Company's accounts in banks amounting to LTL 1,137 thousand as of 31 December 2013 (31 December 2012 – LTL 459 thousand) are pledged as collateral for the loans (Note 11).

10. 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.

The Company allocated LTL 672 thousand from profit brought forward to legal reserve by the decision of shareholders of 30th of April, 2012 and LTL 2,584 thousand from profit brought forward to other reserves. The reserve has been formed for investments.

On 30 April, 2013 the Company annulled other reserves (LTL 2,584 thousand) by the decision of shareholders, LTL 5,538 thousand transferred from retained earnings to legal reserve and LTL 250 thousand to other reserves. Reserve was formed for investments.

11. Borrowings

		Group	Company
	As of 31 December 2013	As of 31 December 2012	As of 31 December 2013	As of 31 December 2012
Non-current borrowings	38,994	33,746	38,994	33,746
Current portion of non-current borrowings (except leasing which) is disclosed in Note 12)	20,291	8,489	20,291	8,489
Current borrowings (including credit line)	14,544	24,563	14,544	24,563
Factoring with recourse agreement	2,453	3,068	2,453	3,068
Current borrowings	37,288	36,120	37,288	36,120
	76,282	69,866	76,282	69,866

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

	Group		Company
	As of 31	As of 31	As of 31	As of 31
	December 2013	December 2012	December 2013	December 2012
2013	-	8,489	-	8,489
2014	20,291	8,761	20,291	8,761
2015	8,568	5,908	8,568	5,908
2016	7,121	4,188	7,121	4,188
2017	4,993	2,439	4,993	2,439
2018	3,780	1,944	3,780	1,944
2019	2,551	913	2,551	913
2020	1,432	640	1,432	640
2021	754	639	754	639
2022	753	640	753	640
2023	754	639	754	639
2024	753	640	753	640
2025	754	640	754	640
2026	753	640	753	640
2027	754	639	754	639
2028	753	640	753	640
2029	753	639	753	639
2030	754	640	754	640
2031	754	639	754	639
2032	753	640	753	640
2033	754	639	754	639
2034	753	639	753	639
	59,285	42,235	59,285	42,235

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 2013	December 2012	December 2013	December 2012
Current borrowings	0.97	1.01	0.97	1.01
Non-current borrowings	2.59	2.78	2.59	2.78

Balance of borrowings (except factoring) at the end of the term in national and foreign currencies was as follows:

		Group		Company
Currency of the loan:	As of 31 December 2013	As of 31 December 2012	As of 31 December 2013	As of 31 December 2012
EUR	36,816	39,765	36,816	39,765
LTL	37,013	27,033	37,013	27,033
	73,829	66,798	73,829	66,798

Detailed information on loans as of 31 December 2013:

							Balance as of	A part of
	Credit institution	Date of	Currency	Currency sum,	Sum LTL	Term of	31.12.2013	2014,
		contract		thousand	thousand	maturity	LTL	LTL
							thousand	thousand
1.	AB SEB Bank	8/23/2005	EUR	8,776	30,300	12/31/2014	2,500	2,500
2.	Nordea*	12/1/2006	LTL	6,090	6,090	12/31/2015	1,632	839
3.	AB SEB Bank	12/21/2006	EUR	2,059	7,108	11/30/2016	891	395
4.	AB DNB bankas	11/14/2007	EUR	576	1,989	12/31/2016	746	248
5.	Danske**	7/31/2008	EUR	984	3,398	12/31/2018	1,736	350
6.	Danske**	7/31/2008	EUR	1,158	4,000	9/30/2017	1,955	600
7.	Swedbank, AB	12/2/2009	EUR	3,815	9,819	12/2/2016	3,236	1,203
8.	MF Lithuania***	4/9/2010	EUR	2,410	8,323	3/15/2034	6,139	-
9.	Swedbank, AB	6/21/2010	EUR	649	2,240	6/21/2017	599	404
	10. Nordea*	9/17/2010	EUR	1,625	5,611	5/31/2016	2,390	989
	11. MF Lithuania***	10/26/2010	EUR	807	2,788	3/15/2034	2,526	-
	12. AB SEB Bank	2/11/2011	EUR	1,031	3,560	2/10/2019	2,830	548
	13. Nordea*	4/19/2011	EUR	921	3,180	4/30/2019	2,907	545
	14. MF Lithuania***	9/2/2011	EUR	1,672	5,773	9/1/2034	5,652	-
	15. AB SEB Bank	10/13/2011	EUR	290	1,000	11/30/2019	448	141
	16. AB SEB bankas	5/23/2013	LTL	10,567	10,567	11/30/2014	10,567	10,567
	17. AB DNB bank	6/28/2013	LTL	15,000	15,000	6/27/2014	12,758	12,758
	18. AB SEB Bank	8/22/2013	LTL	10,000	10,000	8/22/2014	1,786	1,786
	19. AB SEB Bank	9/10/2013	LTL	5,200	5,200	9/30/2020	4,709	217
	20. Nordea*	9/27/2013	LTL	1,300	1,300	9/30/2020	206	-
	21. Nordea*	6/3/2013	LTL	9,000	9,000	6/3/2020	212	20
	22. AB SEB Bank	6/3/2013	LTL	2,760	2,760	6/30/2020	1,685	230
	23. AB SEB Bank	6/3/2013	LTL	4,240	4,240	6/30/2020	2,197	353
	24. Nordea*	9/27/2013	EUR	655	2,261	9/30/2020	2,261	124
	25. Nordea*	11/15/2013	LTL	2,000	2,000	11/30/2012	1,261	18
							73,829	34,835

* Nordea Bank Finland Plc. Lithuanian branch;

** Danske Bank A/S Lithuania branch;

*** Ministry of Finance of the Republic of Lithuania.

On 24 October 2012 the Group and the Company signed a factoring with recourse agreement with Swedbank Lizingas, UAB amounted to the limit LTL 8,500 thousand. Factoring advance is 90 percent. The

term of validity of agreement is 31 December 2013. Liability of the factoring with recourse, amounting to LTL 2,453 thousand as of 31 December 2013 (31 December 2012 – LTL 3,068 thousand) is accounted within the caption of current borrowings.

The immovable property (Note 4), bank accounts (Note 9) and land lease right of the Group and the Company were pledged as collateral for the borrowings.

12. 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
	2013	2012	2013	2012
Within one year	116	48	116	48
From one to five years	125	67	125	67
Total financial lease obligations	241	115	241	115
Interest	(8)	(6)	(8)	(6)
Present value of financial lease obligations	233	109	233	109
Financial lease obligations are accounted for as:	-	-	-	-
- current	110	44	110	44
- non-current	123	65	123	65

13. Grants (deferred income)

	Group			Company
	As of 31	As of 31	As of 31	As of 31
	December	December	December	December
	2013	2012	2013	2012
Balance at the beginning of the reporting period	26,546	22,211	26,546	22,211
Received during the year	3,777	5,498	3,777	5,498
Amortisation	(1,336)	(1,163)	(1,336)	(1,163)
Balance at the end of the reporting period	28,987	26,546	28,987	26,546

On 15 October 2009 the Group and the Company signed the agreement on the financing and administration of the project "Renovation of Centralised Heat Networks in the Kaunas City by Installing Advanced Technologies (Reconstruction of Heat Supply Networks at V. Krėvės Ave. 82 A, 118 H, Kaunas)", according to which the Company will be receiving financing from the European Regional Development Fund in the amount of LTL 6,000 thousand after terms and conditions of the agreement are fulfilled. The Company received the financial support in the amount of LTL 5,843 thousand by 31 December 2013. The project is completed.

On 15 October 2009 the Group and the Company signed the agreement on the financing and administration of the project "Modernisation of Kaunas City Integrated Network Centre Main (4T)", according to which the Company will be receiving financing from the European Regional Development Fund in the amount of LTL 5,990 thousand after terms and conditions of the agreement are fulfilled. The Company received the financial support in the amount of LTL 4,414 thousand by 31 December 2013. The project is completed.

On 15 October 2009 the Group and the Company signed the agreement on the financing and administration of the project "Kaunas City Main Heat Supply Networks 6T at Kuršių St. 49C, Jonavos St. between NA-7 and NA-9 and Networks under the Bridge through the river Neris in the auto-highway Vilnius–Klaipėda near Kaunas city, Complex Reconstruction for the Increase of Reliability by Installing Advanced Technologies", according to which the Company will be receiving financing from the European Regional Development Fund in the amount of LTL 2,333 thousand after terms and conditions of the agreement are fulfilled. The Company received the financial support in the amount of LTL 1,725 thousand by 31 December 2013. The project is completed.

On 21 July 2010 the Group and the Company signed the agreement on the financing and administration of the project "The development of centralized heat supply by building a new heat supply trace (heat supply network from A. Juozapavičiaus ave. 23A to A. Juozapavičiaus ave. 90)", according to which the Company will be receiving financing from the European Regional Development Fund in the amount of LTL 1,566 thousand after terms and conditions of the agreement are fulfilled. As of 31 December 2013 financing in amount of LTL 1,426 thousand has been received. The project is completed.

On 21 July 2010 the Group and the Company signed the agreement on the financing and administration of the project "The modernisation of Žaliakalnis main of Kaunas integrated network (4Ž)", according to which the Company will be receiving financing from the European Regional Development Fund in the amount of LTL 2,788 thousand after terms and conditions of the agreement are fulfilled. As of 31 December 2013 financing in amount of LTL 2,526 thousand has been received. The project is completed.

On 21 July 2011 the Group and the Company signed the agreement on the financing and administration of the project "The modernisation of Dainava area main of Kaunas integrated network (1T)", according to which the Company will be receiving financing from the European Regional Development Fund in the amount of LTL 1,560 thousand after terms and conditions of the agreement are fulfilled As of 31 December 2013 financial support in amount of LTL 1,489 thousand has been received. The project is completed.

On 21 July 2011 the Group and the Company signed the agreement on the financing and administration of the project "The modernisation of Aukštieji Šančiai area main of Kaunas integrated network (2Ž)", according to which the Company will be receiving financing from the European Regional Development Fund in the amount of LTL 1,618 thousand after terms and conditions of the agreement are fulfilled. As of 31 December 2013 financial support in amount of LTL 1,593 thousand has been received.

On 21 July 2011 the Group and the Company signed the agreement on the financing and administration of the project "The modernisation of Vilijampolė area heating network of Kaunas integrated network (9K)", according to which the Company will be receiving financing from the European Regional Development Fund in the amount of LTL 595 thousand after terms and conditions of the agreement are fulfilled. As of 31 December 2013 financial support in amount of LTL 570 thousand has been received.

On 21 July 2011 the Group and the Company signed the agreement on the financing and administration of the project "The modernisation of Pramonė area main of Kaunas integrated network (1Ž)", according to which the Company will be receiving financing from the European Regional Development Fund in the amount of LTL 2,000 thousand after terms and conditions of the agreement are fulfilled. As of 31 December 2013 financing in amount of LTL 2,000 thousand has been received. The project is completed.

On 16 January 2013 the Group and the Company signed a financing agreement for the project "Reconstruction of Ežerėlis boiler-house equipping it with bio-fuel burned 3.5 MW capacity water boiler", according to which the financing in amount of LTL 1,791 thousand is provided for the Company from the funds of LEIF Climate Change Special Program after terms and conditions of the agreement are fulfilled. As of 31 December 2013 financial support in amount of LTL 537 thousand has been received.

On 16 January 2013 the Group and the Company signed a financing agreement for the project "Reconstruction of Noreikiškės boiler-house equipping it with bio-fuel burned 4 MW capacity water boiler", according to which the financing in amount of LTL 2,299 thousand is provided for the Company from the funds of LEIF Climate Change Special Program after terms and conditions of the agreement are fulfilled. As of 31 December 2013 financial support in amount of LTL 690 thousand has been received.

On 8 July 2013 the Group and the Company signed a financing agreement of the project "Reconstruction of Pergalė boiler-house equipping it with condensational economizer", under which financing in amount of

LTL 638 thousand is provided for the Company from Lithuanian Environmental Investment Fund after the terms of agreement are fulfilled. As of 31 December 2013 financial support in amount of LTL 383 thousand has been received.

On 28 November 2013 the Group and the Company signed agreement of financing of the project "Reconstruction of Šilkas boiler-house, changing used fuel to biofuel (stage II)" under which a financing in amount of LTL 3,990 thousand is allocated to the Company from Cohesion fund after fulfilling of the terms of agreement.

On 28 November 2013 the Group and the Company signed agreement of financing of the project "Reconstruction of Petrašiūnai power plant, changing used fuel to biofuel (stage I)" under which a financing in amount of LTL 6,000 thousand is allocated to the Company from Cohesion fund after fulfilling of the terms of agreement.

On 28 November 2013 the Group and the Company signed agreement of financing of the project "Reconstruction of Inkaras boiler-house, changing used fuel to biofuel" under which a financing in amount of LTL 6,000 thousand is allocated to the Company from Cohesion fund after fulfilling of the terms of agreement.

On 31 December 2013 the Group and the Company signed agreement of financing and administration of the project "Reconstruction of Kaunas main 1Ž between heat cameras 1Ž-7 and 1Ž-8 and between heat cameras 1Ž-10 and 1ž-12" under which a financing in amount of LTL 2,000 thousand is allocated to the Company from European Regional Development Fund after fulfilling of the terms of agreement.

On 31 December 2013 the Group and the Company signed agreement of financing and administration of the project "Modernization of Kaunas integrated network main 6Ž" under which a financing in amount of LTL 1,033 thousand is allocated to the Company from European Regional Development Fund after fulfilling of the terms of agreement.

On 31 December 2013 the Group and the Company signed agreement of financing and administration of the project "Modernization of Kaunas integrated network main 5T" under which a financing in amount of LTL 1,706 thousand is allocated to the Company from European Regional Development Fund after fulfilling of the terms of agreement.

14. 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.

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

	Group		Company
	2013	2012	2013	2012
Employee benefit liability at the beginning of the year	3,297	2,406	2,999	2,406
Paid	(775)	(202)	(585)	(198)
Formed	494	1,093	544	791
Employee benefit liability at the end of the year	3,016	3,297	2,958	2,999
Non-current employee benefit liability	2,079	2,173	2,079	1,996
Current employee benefit liability	937	1,124	879	1,003

During the year 2013 total amount of the benefit paid to the employees by the Group amounted to LTL 775 thousand (in 2012 – LTL 202 thousand), and by the Company – LTL 585 thousand (in 2012 – LTL 198 thousand) and are included in the caption of salaries and social security expenses in the Group's and the Company's statement of 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 2013	As of 31 December 2012
Discount rate	4.0 percent	4.0 percent
Employee turnover rate	18.9 percent	18.9 percent
Expected average annual salary increases	3.0 percent	3.0 percent

15. Derivative financial instruments

On 9 April 2009, the Group and the Company concluded an interest rate swap agreement. For the period from 24 August 2009 to 22 August 2014 the Group and the Company set a fixed interest rate at 4.15 percent for a floating interest rate at 6-month EUR LIBOR. The nominal amount of the transaction was EUR 784 thousand (the equivalent of LTL 2,708 thousand) as at 31 December 2013 (EUR 1,508 thousand (the equivalent of LTL 5,208 thousand) as at 31 December 2012). Market value of swap agreement as of 31 December 2013 amounted to LTL 51 thousand (LTL 204 thousands as of 31 December 2012). This transaction does not have material impact on the future cash flows of the Group and the Company.

16. 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 organised 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
	2013	2012	2013	2012
Heat supplies	311,576	362,667	311,632	362,728
Hot water supplies	8,612	4,818	8,612	4,818
Maintenance of manifolds	779	775	779	775
Maintenance of heat and hot water systems	280	721	199	399
Electric energy	767	460	767	460
Maintenance of hot water meters	349	282	349	282
	322,363	369,723	322,338	369,462

17. Other expenses

	Group		Company
	2013	2012	2013	2012
Cash collection expenses	1,838	2,217	1,838	2,203
Equipment verification and inspection	1,651	1,490	1,651	1,487
Maintenance of manifolds	1,863	1,883	1,863	1,883
Debts collection expenses	198	917	198	917
Sponsorship	157	503	157	503
Consulting expenses	633	285	633	283
Customer bills issue and delivery expenses	457	455	457	455
Communication expenses	188	193	188	182
Employees related expenses	251	234	251	228
Insurance	261	223	261	213
Long term assets maintenance and related services	212	173	212	161
Membership fee	292	281	292	281
Transport expenses	101	52	100	115
Advertising expenses	170	111	170	109
Audit expenses	36	56	36	52
Rent of equipment and machinery	32	32	32	18
Other expenses	1,451	1,147	1,485	1,120
	9,791	10,252	9,824	10,210

18. Other activities income and expenses

	Group		Company
	2013	2012	2013	2012
Income from other operating activities
Miscellaneous services	3,204	1,575	3,023	1,416
Materials sold	219	260	201	251
Gain from sale of non-current assets	13	92	13	91
Other	125	164	121	150
	3,561	2,091	3,358	1,908
Expenses from other operating activities
Cost of miscellaneous services	(1,689)	(1,139)	(1,248)	(691)
Cost of materials sold	(1)	(29)	(1)	(7)
Write off of non-current assets	(8)	(12)	(14)	(12)
Loss from sale of non-current assets	(32)	(5)	(32)	(5)
Other	(23)	(8)	(23)	(8)
	(1,753)	(1,193)	(1,318)	(723)

19. Finance income

	Group		Company
	2013	2012	2013	2012
Interest from late payment of accounts receivable	2,952	1,984	2,952	1,984
Fines	7,054	-	7,054	-
Impairment of non-current financial assets	-	338	-	338
Change in fair value of derivative financial instruments	153	129	153	129
Bank interest	1	11	1	11
Other	-	1	-	1
	10,160	2,463	10,160	2,463

20. Finance costs

	Group		Company
	2013	2012	2013	2012
Interest on bank loans and overdrafts	(1,414)	(1,496)	(1,414)	(1,496)
Impairment of non-current financial assets	(338)	-	(1,373)	(587)
Penalties	(157)	(214)	(157)	(214)
Shareholder's contributions in subsidiary	-	-	(155)	-
	(1,909)	(1,710)	(3,099)	(2,297)

21. Income tax

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
	2013	2012	2013	2012
Profit before tax	5,265	2,535	4,065	2,195
Income tax (expenses) calculated at statutory rate	(790)	(380)	(610)	(329)
Permanent differences and impact of valuation allowance of deferred income tax asset	163	(959)	1	(1,029)
Income tax (expenses) reported in the statement of comprehensive income	(627)	(1,339)	(609)	(1,358)
Effective rate of income tax ( percent)	11.91	52.80	14.98	61.87

	Group		Company
	2013	2012	2013	2012
Components of the income tax expense Current income tax for the reporting year	-	-	-	-
Deferred income tax (expenses)	(627)	(1,339)	(609)	(1,358)
Income tax (expenses) recorded in the statement of comprehensive income	(627)	(1,339)	(609)	(1,358)

As of 31 December 2013 and 31 December 2012 deferred income tax asset and liability were accounted for by applying 15 percent rate. All changes in deferred tax are reported in the statement of comprehensive income.

As of 31 December deferred income tax consists of:

Group			Company
2013	2012	2013	2012
			3,942
			475
51	112	51	112
6,538	4,548	6,538	4,529
(15,114)	(12,455)	(15,114)	(12,455)
			(203)
			(669)
(15,276)	(12,658)	(15,945)	(13,327)
(8,738)	(8,110)	(9,407)	(8,798)
	5,646 841 (162) -	3,942 494 (203) -	5,646 841 (162) (669)

Deferred income tax assets on tax losses carried forward have been recognised in full amount as the Group's and the Company's management believes it will be realised 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
	2013	2012	2013	2012
Allowance for trade receivables	7,869	7,161	7,895	7,179
Property, plant and equipment depreciation	98	90	98	90
Allowance for other accounts receivable	72	82	119	111
Impairment for the investment into subsidiary	-	-	420	264
Unrecognized deferred tax asset, net	8,039	7,333	8,532	7,644

22. Basic and diluted earnings (loss) per share

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

	Group		Company
	2013	2012	2013	2012
Net profit	4,638	1,196	3,456	837
Number of shares (thousand), opening balance	42,732	42,732	42,732	42,732
Number of shares (thousand), closing balance	42,732	42,732	42,732	42,732
Average number of shares (thousand)	42,732	42,732	42,732	42,732
Basic and diluted earnings per share (LTL)	0.11	0.03	0.08	0.02

23. 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.

			Company
As of 31	As of 31	As of 31	As of 31
December 2013	December 2012	December 2013	December 2012
114,240	114,711	114,240	114,499
2,098	2,110	2,082	2,055
345	365	336	333
116,683	117,186	116,658	116,887
		Group

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

	Group			Company
	As of 31	As of 31	As of 31	As of 31
	December 2013	December 2012	December 2013	December 2012
Individuals	41,462	57,211	41,461	57,208
Other legal entities	8,658	10,387	8,651	10,330
Legal entities financed from municipalities' and state budget	9,294	14,488	9,290	14,443
	59,414	82,086	59,402	81,981

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 8).

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 2013	December 2012	December 2013	December 2012
A	322	407	302	383
A+	674	674	674	674
AA-	138	29	138	29
Bank with no rating attributed	26	31	26	31
	1,160	1,141	1,140	1,117

*- external credit ratings set by Fitch Ratings agency.

The Group and the Company do not guarantee obligations of the other parties in 2013 and in 2012.

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, therefore the Group and the Company faces an

interest rate risk. In 2013 and 2012 to manage variable rate risk the Company has entered into interest rate swap agreements, in which the Company agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts as described in Note 15, calculated by the reference to an agreed upon notional principal amount.

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
2013
LTL	200	(111)
LTL	(200)	111
EUR	50	(15)
EUR	(50)	15
2012
LTL	200	(81)
LTL	(200)	81
EUR	50	(21)
EUR	(50)	21

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 2013 were 0.72 and 0.68, respectively (0.85 and 0.81 as of 31 December 2012). The Company's liquidity and quick ratios as of 31 December 2013 were 0.72 and 0.68, respectively (0.85 and 0.82 as of 31 December 2012).

To solve all liquidity issues the Group and the Company implement the following action plan:

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

•

Unsecured bank overdraft and bank loan facilities:

		Group		Company
	As of 31 December 2013	As of 31 December 2012	As of 31 December 2013	As of 31 December 2012
Amount used	14,544	24,563	14,544	24,563
Amount unused	10,456	437	10,456	437
	25,000	25,000	25,000	25,000

The table below summarises the maturity profile of the Group's financial liabilities as of 31 December 2013 and as of 31 December 2012 based on contractual undiscounted payments (scheduled payments including interest).

	Less than 3 months	From 4 to 12 months	2 to 5 years	More than 5 years	Total
Interest bearing loans and borrowings	5,180	31,174	27,610	18,408	82,372
Trade payables	61,201	111	14	-	61,326
Balance as of 31 December 2013	66,381	31,285	27,624	18,408	143,698
	Less than 3 months	From 4 to 12 months	2 to 5 years	More than 5 years	Total
Interest bearing loans and borrowings	2,422	31,900	24,038	16,061	74,421
Trade payables	72,592	273	23	-	72,888
Balance as of 31 December 2012	75,014	32,173	24,061	16,061	147,309

The table below summarises the maturity profile of the Company's financial liabilities, as of 31 December 2013 and as of 31 December 2012 based on contractual undiscounted payments (scheduled payments including interest).

	Less than 3 months	From 4 to 12 months	2 to 5 years	More than 5 years	Total
Interest bearing loans and borrowings	5,180	31,174	27,610	18,408	82,372
Trade payables	61,185	111	14	-	61,310
Balance as of 31 December 2013	66,365	31,285	27,624	18,408	143,682
	Less than 3 months	From 4 to 12 months	2 to 5 years	More than 5 years	Total
Interest bearing loans and borrowings	2,422	31,900	24,038	16,061	74,421
Trade payables	72,624	273	23	-	72,920
Balance as of 31 December 2012	75,046	32,173	24,061	16,061	147,341

Trade payables

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

		Group		Company
	As of 31	As of 31	As of 31	As of 31
	December 2013	December 2012	December 2013	December 2012
For heat purchased	35,826	55,308	35,826	55,308
Contractors	14,904	9,689	14,904	9,689
Other suppliers	10,596	7,891	10,580	7,923
	61,326	72,888	61,310	72,920

30 day settlement period is set with KTE for purchased heat energy, 90-180 day settlement period – with contractors, 5-30 day settlement period – with other suppliers,

As of 31 December 2013 the Group had an LTL 2,667 thousand (31 December 2012 – LTL 9,828 thousand) of overdue trade creditors, and the Company – LTL 2,667 thousand (31 December 2012 – LTL 9,817 thousand).

Foreign currency risk

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

Fair value of financial instruments

The Group and the Company's principal financial instruments accounted for at amortised cost are trade and other current and non-current receivables, trade and other payables, long-term and short-term borrowings. The net book value of these amounts is similar to their fair value.

Fair value is defined as the amount at which the instrument could be exchanged between knowledgeable willing parties in an arm's length transaction, other than in forced or liquidation sale. Fair values are obtained from quoted market prices, discounted cash flow models and option pricing models as appropriate.

The following methods and assumptions are used to estimate the fair value of each class of financial instruments:

• The carrying amount of current trade accounts receivable, current trade accounts payable, other receivables and other payables and current borrowings approximate their fair value.
• The fair value of trade and other payables, long-term and short-term borrowings is based on the quoted market price for the same or similar issues or on the current rates available for borrowings with the same maturity profile. The fair value of non-current borrowings with variable and fixed interest rates approximates their carrying amounts.

The Group and the Company's categories of financial instruments:

Financial assets:

	Group			Company
	As of 31 December 2013	As of 31 December 2012	As of 31 December 2011	As of 31 December 2013	As of 31 December 2012	As of 31 December 2011
Cash and bank balances	2,155	5,332	5,936	2,135	5,308	5,899
Loans and receivables	68,448	88,225	64,639	68,416	88,120	64,690
Financial assets	95	433	95	95	433	95
	70,698	93,990	70,670	70,646	93,861	70,684
Financial liabilities:	As of 31 December 2013	Group As of 31 December 2012	As of 31 December 2011	As of 31 December 2013	Company As of 31 December 2012	As of 31 December 2011
Carried at fair value through profit or loss (level 2 in the fair value hierarchy)	51	204	333	51	204	333
Carried at amortised cost	123,513	142,842	106,203	123,497	142,874	106,266

The carrying amounts of financial assets and financial liabilities approximate their fair values.

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 maximise 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, reconsider the dividend payment to shareholders, and return capital to shareholders. No changes were made in the objectives, policies or processes of capital management as of 31 December 2013 and 31 December 2012.

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 December 2013	As of 31 December 2012	As of 31 December 2013	As of 31 December 2012
Non-current liabilities (including deferred tax and grants (deferred income))	78,937	70,665	79,606	71,176
Current liabilities	105,022	115,361	104,921	115,050
Liabilities	183,959	186,026	184,527	186,226
Equity	265,833	261,195	267,637	264,181
Debt* to equity ratio ( percent)	69.20	71.22	68.95	70.49

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

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.

24. Commitments and contingencies

Litigations

On 3 of November, 2010 the Company placed claim to Vilnius Commercial Arbitration Court (hereafter – VCAC) regarding additional forfeit in amount LTL 12,352 thousand from defendant KTE due to the improper fulfilment of the Investments agreement. VCAC satisfied Company's claim partly by its decision of 19 of December, 2011: a fine in amount of LTL 7,054 thousand, 6 percent annual interest for the period from 4 of November, 2010 until the day of fulfilment of this decision from the sum awarded, LTL 37 thousand and LTL 42 thousand of compensation expenses were awarded from the defendant KTE in favour of the Company. On 23 December, 2011 KTE placed a claim to Lithuanian Court of Appeal in order to discharge a decision of VCAC, also an application to stop prosecution of this decision until the case will be investigated. KTE agreed to refuse the appeal in Vilnius Commercial Arbitration Court case No 203, and with no further litigation to pay to Company a fine in amount of a little bit more than LTL 7 million,

adjudged from KTE in this case. On 11 April, 2013 the Company and KTE signed the internecine indebtedness harmonization act regarding inclusion of sums adjudged (LTL 8,164 thousand).

As of 31 December, 2012 the accrual for the sum of claims was not made in financial statements of the Group and the Company, because the income from fines and penalties is shown in those statements only when it is paid-in.

On 15 April, 2013 the Company applied to Vilnius Regional Court with the claim "Due to the defendant's UAB GECO Kaunas claim to recalculate AB Kauno Energija heat purchase prices of November and December 2012 according to comparative expenditures of heat production". Company's claim was rejected. Decision was not appealed in appellation order.

On 17 April, 2013 the Company got a message from Vilnius Court of Commercial Arbitration (hereinafter – Arbitration) saying that KTE claim to the Company regarding LTL 1,340 thousand has been received in Arbitration on 12 April, 2013. According to KTE allegation, the debt formed due to the Company's lower neither it was determined by KTE payment for heat amount in December 2012 and January 2013. Considering Company's comparative expenditures of heat production and following provision of chapter 10 of the Law on Heat Sector of the Republic of Lithuania, that in all occasions the heat, purchased from independent heat producers cannot be more expensive than heat supplier's comparative expenditures of heat production, the Company purchased heat from KTE following provision of the law. On 17 May, 2013 the Company placed an objection to the Court regarding the claim. A session in this case is appointed on 3 February 2014.

On September 2013 the Company has been incorporated as a third party in the civil case under claimant's UAB KTE claim to defendant BAB Ūkio Bankas regarding the termination of factoring contract ant regarding the recognizing as a property of UAB KTE a sum of LTL 3,063 thousand, which were transferred by the Company when implementing its liability and which are now on hand of notary deposit account. A session in this case is still not appointed. On September 2013 a preliminary court decision under the specified claim of claimant BAB Ūkio Bankas to the Company regarding adjudgement of debt in amount of LTL 3,063 thousand, penalty, process interest and litigation expenses was delivered to the Company. The Company placed an objection to the Court regarding this preliminary decision and regarding rejection of specified claim of claimant BAB Ūkio Bankas Both cases were integrated by the decision of Kaunas Regional court of 2 December 2013.

The National Control Commission for Prices and Energy (NCC) brought a decision on 18 July 2013 by which satisfied application of KTE to acknowledge that the Company infringed legal acts regarding heat purchasing from IHP by refusing to purchase a part, i. e. 11,181.5 MWh of heat energy purchased from KTE in July 2013. If this decision of NCC would come into force, KTE would gain a right to ask to make amends (loss of income) for not purchased heat amount. The Company placed a claim to Vilnius Regional court objecting this decision of NCC. A session in this case is appointed on 29 November 2014.

Leasing and construction work purchase arrangements

On 18 March, 2010 The Company entered into the lease arrangements with KTE for the real estate. Under this lease arrangement the Company leases to KTE the boiler with technological pipelines for heat production, located in Petrašiūnai power plant territory. The term of lease is 5 years.

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.

Future liabilities of Group and the Company under valid purchase arrangements as of 31 December 2013 amounted to LTL 88,013 thousand.

25. 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 2013 and 2012 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.

In 2013 and 2012 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:

2013	Purchases	Sales	Receivables	Payables
Kaunas city municipality and entities financed and controlled by Kaunas city municipality	2,687	37,791	20,705	524
Jurbarkas city municipality	4	2,535	237	2

2012	Purchases	Sales	Receivables	Payables
Kaunas city municipality and entities financed and controlled by Kaunas city municipality	1,351	41,896	20,312	440
Jurbarkas city municipality	4	2,947	427	1

The Group's and the Company's as of 31 December 2013 allowance for overdue receivables from entities financed and controlled by municipalities amounted to LTL 10,362 thousand (as of 31 December 2012 – LTL 10,905 thousand). The amounts outstanding are unsecured and will be settled in cash. No guarantees on receivables have been received.

In 2013 and 2012 the Company's transactions with the subsidiaries and the balances at the end of the year were as follows:

Pastatų Priežiūros Paslaugos UAB	Purchases	Sales	Receivables	Payables
2013	544	69	-	7
2012	1,204	87	-	143
Kauno Energija NT UAB	Purchases	Sales	Receivables	Payables
2013	1	14	-	-

As of 31 December, 2013 the Company has formed an LTL 483 thousand (as of 31 December 2012 – LTL 314 thousand) of common postponements for the receivables from subsidiaries.

Remuneration of the management and other payments

As at 31 December 2013 the Group's and the Company's management team comprised 7 and 4 persons respectively (as at 31 December 2012 – 6 and 4).

	Group		Company
	2013	2012	2013	2012
Key management remuneration	455	528	400	417
Calculated post-employment benefits	104	97	104	90

In the year 2013 and 2012 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.

26. Post balance sheet events

It is decided in Company's Extraordinary meeting of shareholders held on 6 January 2014:

• to increase Company's authorised capital by LTL 420,996 from LTL 256,391,826 to LTL 256,812,858 by issuing 70,166 ordinary shares at a nominal value of LTL 6, whose emission price is equal to nominal value of the share and to withdraw a priority right of all shareholders to buy a newly issued 70,166 Company's shares, giving the right to buy those shares to Kaunas city municipality, seeking that Kaunas city municipality would dispose its own heat supply pipeline – heat network, situated in Karaliaus Mindaugo av. 50, Kaunas;
• to allocate support for public institution "Žalgirio krepšinio centras" in amount of LTL up to 1.000 thousand, including this support in Company's audited activity profit (loss) appropriation project of the year 2013.

On 15 January 2014 the Group and the Company signed a credit agreement with Ministry of Finances of the Republic of Lithuania in amount of EUR 793 thousand (equivalent LTL 2,739 thousand). The term of repayment of last portion of the loan is 1 December 2034.

On 21 January 2014 the Prime Minister of the Republic of Lithuania Algirdas Butkevičius visited Company's Petrašiūnai power plant. Prime Minister was interested in possibilities of modernization of power plant and also in perspectives of development of heat sector of Kaunas city. Current situation of the sector, already implemented projects of modernization of Company's production sources and networks was presented to Prime Minister during the visit. Projects of modernization of Company's production sources that are planned to implement in 2014 were also presented. Prime Minister was also interested in possibilities of modernization of power plant together with AB Lietuvos Energija. It was presented to Prime Minister that it is planned to build 2 biofuel burned water heating boilers 12 MW capacity each and 6 MW capacity condensational economizer for these boilers in power plant territory until the year 2015 as well as 10 MW capacity biofuel burned water heating boiler with 3 MW capacity condensational economizer. Project of equipment of 10 MW capacity condensational economizer, currently implemented in power plant was also presented to the Prime Minister. After equipment of these boilers heat production price in this object will be approximately 12 – 13 ct/kWh excluding VAT.

On 22 January 2014 Company's Board considering propositions of UAB Fortum Heat Lietuva regarding strategic cooperation, decided to start consultations with UAB Fortum heat Lietuva regarding proposed strategic investment of UAB Fortum Heat Lietuva in Company. Report on results of consultations will be presented to Company's Board for consideration and decision making regarding further pursuance and harmonization of conditions of preliminary agreements with shareholders of AB Kauno Energija.

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