Kauno Energija

Quarterly Report • Feb 28, 2011

JSC ,,KAUNO ENERGIJA"

CONSOLIDATED AND COMPANY'S FINANCIAL STATEMENTS FOR THE 12 MONTHS OF THE YEAR 20 10 PREPARED ACCORDING TO THE INTERNATIONAL FINANCIAL REPORTING STANDARDS

Balance Sheets

			Group		Company
	Notes	As of 31 December 201 0	As of 31 December 2009	As of 31 December 201 0	As of 31 December 2009
ASSETS
Non-current assets
Intangible assets
Property, plant and equipment
Land and buildings
Structures and machinery
Vehicles
Equipment and tools
Construction in progress and prepayments
Total property, plant and equipment
Deferred tax asset
Non-current financial assets
Investments into subsidiaries
Non-current accounts receivable
Other financial assets
Total non-current financial assets
Total non-current assets
Current assets
lnventories and prepayments
lnventories
Prepayments
Total inventories and prepayments
Current accounts receivable
Trade receivables
Other receivables
Total accounts receivable
Cash and cash equivalents
Total current assets
Total assets		406.569	379.746

(cont'd on the next page)

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

Balance Sheets (cont'd)

			Group			Company
		Notes	Asof31 December 2010	Asof31 December 2009	Asof31 December 201 0	Asof31 December 2009
EQUITY AND LIABILITIES
Equity
Share capital
Legal reserve
Other reserve
Retained earnings (deficit)
Total comprehensive income (accumulated loss) for the current year Total comprehensive income (accumulated
loss) for the previous years
Total retained earnings (deficit)
Total equity
Liabilities
Non-current liabilities
Non-current borrowings
Financial lease obligations
Deferred tax liability
Grants (deferred income)
Employee benefit liability
Other non-current liabilities
Total non-current liabilities
Current liabilities
Current portion of non-current borrowings and
financial lease
Current borrowings
Trade payables
Payroll-related liabilities
Advances received
Taxes payable Derivative financial instruments
Current portion of employee benefit liability
Other current liabilities
Total current liabilities
Total liabilities			147.801	123.864	- 147.468	124.257
Total equity and liabilities			406.569	379.746	410.355	384.012
The accompanying notes are an integral part of these financial statements,				e	r	>
General Manager	Rimantas Bakas		--	/ &/		I 24 January 201

		/
Chief Accountant	Violeta StaSkOniene	&/ (HR--~.--	24 January 201 1

Statements of Comprehensive lncome

	Notes	Group IV quater, 201 0	201 0	IV quater, 2009	2009	2008
Operating income
Sales income	17
Other operating income	18
Total operating income
Operating expenses
Fuel and heat purchased
Salaries and social security 14
Raw materials
Taxes other than income tax
Electricity
Depreciation and
amortisation	3,4
Repairs and maintenance
Water
Change in allowance for
accounts receivable	8
Change in allowance for
inventories	7
PetraSiOnai power plant
operator expenses	1
Other expenses
Other operating expenses Total operating expenses	18
Operating profit
lncome from financial and
investment activity Expenses from financial and	19
investment activity	20
Net profit for financial and
investment activity
Profit before tax
Income tax		(1.831)	(1.831)	(2.1 18)	(2.1 18)	660
Net profit		1.738	5.793
				(1.054)	6.404	(4.234)
Basic earnings per share
(LTL)	2 1	0,04	0,14	(0,041	0,22	(021 )

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

General Manager	Rimantas Bakas	24 January 201 1
Chief Accountant	Violeta StaSkOniene	24 January 201 1

Statements of Comprehensive lncome

	Notes		Company IV quater, 2010	2010 2009	IV quater,	2009	2008
Operating income
Sales income
Other operating income
Total operating income
Operating expenses
Fuel and heat purchased
Salaries and social security
Raw materials
Taxes other than income
tax
Electricity
Depreciation and
amortisation
Repairs and maintenance
Water
Change in allowance for
accounts receivable
Change in allowance for inventories
Heating and hot water systems supervision
expenses
PetraSiGnai power plant
operator expenses
Other expenses
Other operating expenses
Total operating expenses
Operating profit			4.609	8.262	1.41 6	10.853	(2.260)
lncome from financial and investment activity		19	571	2.024	396	1.576	1.281
Expenses from financial
and investment activity		20	(2.083)	(3.085)	(390)	(3.606)	(3.800)
Net profit for financial and
investment activity			(1.51 2)	(1.061)	6	(2.030)	(2.519)
Profit before tax
lncome tax
Net profit			1.935	6.039	(473)	6.928	(4.343)
Basic earnings per share (LTL)			0,05	0,14	(0-02)	0,24	(022)

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

General Manager Rimantas Bakas 24 January 201 1 Chief Accountant Violeta StaSkOniene - 24 January 201 1

5

Statements of Changes in Equity

			Retained earnings
Group	Notes	Share capital	Legal reserve	Other reserve	(accumulated deficit)	Total
Balance as of 31 December 2008
Total comprehensive income (loss)
Transferred from reserves
lncrease in share capital
Balance as of 31 December 2009
Total comprehensive income
Transferred from reserves
Formed reserves
Dividends
lncrease in share capital
Balance as of 31 December 201 0

Company	Notes	Share capital	Legal reserve	Other reserve	Retained earnings (accumulated deficit)	Total
Balance as of 31 December 2008 Total comprehensive income
(loss)					6.928	6.928
Transferred from reserves
lncrease in share capital
Balance as of 31 December 2009
Total comprehensive income (loss)
Formed reserves
Dividends
lncrease in share capital
Balance as of 31 December 201 0
The accompanying notes are an integral part of these financial statements.
General Manager	Rimantas Bakas				24 January 201 1
Chief Accountant	Violeta StaSkOniene		14 2//d4--c~		/ 24January2011

AB KALINO ENERGIJA, company code 235014830, Raudondvario Rd. 84, Kaunas, Lithuania CONSOLIDATED AND PARENT COMPANY'S FINANCIAL STATEMENTS FOR THE 12 MONTHS-OF THE YEAR 2010 (all amounts are in LTL thousand unless otherwise stated)

Statements of Cash Flows

	Group		Company
	2010	2009	2010	2009
Cash flows from (to) operating activities
Net profit (loss)
Adjustments for non-cash items:
Depreciation and amortisation
Write-offs and change in allowance for accounts receivable
(Profit) loss from sale and write-off of property, plant and equipment
Accruals
Income tax (income)
Employee benefit liability
(Amortisation) of grants
Derivative financial instruments
lnterest expenses
Change in allowance for inventories
Impairment of investment in subsidiary
Elimination of other financial and investing activity results	(1.686)	(1.454)	(1.686)	(1.454)
Changes in working capital:	(1 2.961)	(1 5.497)	(1 2.880)	(1 5.61 5)-
Decrease in inventories
(Increase) in prepayments
(Increase) in trade receivables
(Increase) decrease in other receivables
lncrease (decrease) in other non-current liabilities
lncrease (decrease) in current trade payables and advances received
lncrease in payroll-related liabilities
(Decrease) in other liabilities to budget
lncrease in other current liabilities
Net cash flows from operating activities
Cash flows from investing activities (Acquisition) of tangible and intangible assets
Proceeds from sale of tangible assets
Penalty interest and fines received
(Increase) in cash flows from non-current accounts
receivable
Interest received	12	4	12	4
Net cash flows from investing activities	(23.451)	(16.715)	(23.439)	(1 6.730)
Proceeds from loans	21.963	19.855	21.963	19.855
(Repayment) of loans	(20.925)	(1 8.499)	(20.925)	(1 8.499)
Interest (paid)	(2.21 5)	(3.279)	(2.21 3)	(3.274)
Financial lease (payments)	(51)	(86)		(37)
Fine (paid)	(30)	(121)	(30)	(121)
Dividends	(3.589)		(3.589)
Net cash flows from financing activities	(4.847)	(2.1 30)	(4.794)	(2.076)
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at the beginning	443	(485)	430	(540)
of the period	3.131	3.61 6	3.094	3.604
Cash and cash equivalents at the end of the period	3.574	3.131	3.524	3.094
The accompanying notes are an integral part of these financial
General Manager Rimantas Bakas				24 January 201 1
	,A
Chief Accountant Violeta StaSkOniene	-	~/+3.c&r-		24 January 201 1

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 Silumos Tinklai.

The Company is involved in heat, electricity generation and distribution and maintenance of the heating and hot water systems. 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 2010 and of 31 December 2009 the shareholders of the Company were as follows:

		As of 31 December 2010		As of 31 December 2009
	Number of shares owned	Percentage of ownership	Number of shares owned	Percentage of ownership
Kaunas city municipality	39.665.892	92.82	39.654.892	93,05
Kaunas district municipality	1.606.168	3,76	1.606.168	3,77
Jurbarkas district municipality council	746.405	1,75	643.810	1,51
Other minor shareholders

All the shares with a par value of LTL 6 each are ordinary shares. The Company did not hold its own shares in 2009 and 2008.

On 26 June 2008 in the Company's shareholders meeting it was decided to increase the share capital by issuing 200,000 ordinary shares with the par value LTL 6 each. Priority right to acquire issued shares was granted to Jurbarkas district municipality council. The issue price of shares is equal to their nominal value.

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 valuers 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 L'fL 682 thousand (from LTL 255,710 thousand to LTLi 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 payment in kind for these shares.

All shares were fully paid as of 31 December 201 0,

On 13 May 2010 The Annual General Meeting of Shareholders has made a decision to pay LTL 3589 thousand in dividends from the profit of the year 2009. Dividends were paid in accordance with law. The part of dividends which was not paid without a company's fault is accounted in other current liabilities.

The Company is also involved in maintenance of heating systems. On 1 July 2006 on the basis of Kaunas Energy Services Department AB Kauno Energija established the subsidiary UAB Pastatq PrieiiDros Paslaugos (hereinafter the Subsidiary). The main activity of the Subsidiary is exploitation and maintenance of building heating network and heating consumption equipment, internal engineering networks and systems as well as building structures. After establishing of subsidiary the employees of the Company working at Kaunas Energy Services Department were dismissed from the Company and hired by UAB Pastatq PrietiDros Paslaugos. From 1 July 2006 the Company is contracting UAB Pastatq PrieiiOros Paslaugos for permanent technical maintenance of heating and hot water supply systems.

The Group consists of AB Kauno Energija and subsidiary UAB Pastatq PrieiiOros Paslaugos (hereinafter the Group):

		Share		Profit (loss) for the
Company	Registration address	held by the Group	Cost investment period	of reporting	Total equity	Main activities
UAB Pastatq PrieiiOros Paslaugos	Savanoriai Ave. 347, Kaunas	100 %	6,518	(177)	5.558	Maintenance of heating systems

As of 31 December 2010 accumulated impairment loss on investment in UAB Pastaty PrieiiOros Paslaugos amounted to LTL 960 thousand (31 December 2009: LTL 465 thousand) were accounted in the Company's financial statements.

Operations of AB Kauno Energija are regulated by the Heating Law No. IX-1565 of 20 May 2003 of the Republic of Lithuania. Starting 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.

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 12 September 2008 by the decision of the Commission, the territory in which the Company can provide heat distribution activity was re-defined, as the Company sold Paliai boiler house in Marijampole district.

The Company's generation capacity includes a power plant in PetraSiOnai, 3 district boiler-houses in Kaunas integrated network, 7 regional boiler-houses in Kaunas region, 1 regional boiler-house in Jurbarkas city, 14 isolated networks and 37 local gas burning boiler-houses in Kaunas.

Total heat and electricity generation capacity is 497.00 MW and 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 PetraSiOnai. 27 MW of heat generation capacity is located in Jurbarkas city. The total Company's power generation capacity is 505,75 MW.

In 2003 the Company sold part of the assets of the subdivision Kauno Elektrine to UAB Kauno Termofikacijos Elektrine (hereinafter KTE) and committed to purchase at least 80 % of the annual demand of the integrated heating network in Kaunas from this company. The contract is valid for 15 years from the sales agreement date. The contract established that the purchase price of heat energy from KTE would not increase during the first 5 years from the date of signing the contract. New heat sale price for KTE and the Company was approved by the Commission and became effective starting 1 December 2008. As described in Note 23, the Company participated as a third party in administrative litigation between KTE and the Commission.

On 8 June 2006 AB Kauno Energija signed the agreement with UAB Energijos Sistemy Servisas regarding the operation of PetraSiOnai power plant and its assets located at Jegaines Str. 12, Kaunas. 'The contract is valid for a period of three years. Starting from 4 July 2006, UAB Energijos Sistemq Servisas started to provide operation services of PetraSiOnai power plant. A new contract valid until 4 August 2010 for a purchase of this service was signed with UAB Energijos Sistemy Servisas on 3 July 2009. On 22 June 2006 the Company signed a lease agreement with UAB Kauno Termofikacijos Elektrine regarding the equipment used in production of heating energy operated by UAB Energijos Sistemy Servisas. The contract is valid for a period of three years. A new lease agreement was signed on 3 July, 2009 which is valid until 4 August, 2010. After the end of agreement, the company operates power plant itself.

In order to make the Company's operations more efficient and reduce management and production costs, with effect from 1 August 2009 the Company's management structure was changed by separating from the Company some structural units that are related to the production or provision of non-principal products or services.

As of 31 December 2010 the average number of employees at the Group was 622 (629 employees in 2009). In 31 December 2010 the average number of employees at the Company was 558 (569 employees in 2009).

On 19 April 2010 the College of the Kaunas City Council discussed the issue of establishing of the joint venture and has made a decision to agree in principle and to recommend to the Managing Board of SC "Kauno energija" to start the negotiations with JSC "Fortum Heat Lietuva" regarding construction of the new local fuel-fired power plant and the establishment of the new joint venture. A working group for negotiations with JSC Fortum Heat Lietuva formed.

2. Accounting principles

2.1. Basis of preparation

These financial statements have been prepared on a historical cost basis, except for financial assets and financial liabilities at fair value through profit or loss and available-for-sale financial assets that have been measured at fair value. The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (hereinafter EU).

2.2. Measurement and presentation currency

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 subsidiary and all values are rounded to the nearest thousand, except when otherwise indicated.

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

2.3. Principles of consolidation and business combinations

Principles of consolidation

The consolidated financial statements of the Group include AB Kauno Energija and its subsidiary. The financial statements of the subsidiary are prepared for the same reporting period as the c6mpany. Consolidated financial statements are prepared on the basis of the same accounting principles applied to similar transactions and other events under similar circumstances.

Subsidiaries acquired or sold during a year are included into the financial statements from the date when control is transferred to the Group until the date that control ceases. Inter-company balances and transactions, including unrealised profits and losses, are eliminated on consolidation.

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 % of the voting rights of a company's share capital or otherwise has power to govern the financial and operating policies of an enterprise so as to benefit from its activities. The equity and net income attributable to minority shareholders' interests are shown separately in the consolidated balance sheet and consolidated statement of comprehensive income.

Business combinations

The purchase method of accounting is used for acquired businesses. The Company accounts for the acquired identifiable assets and liabilities of another company at their fair value at acquisition date. Goodwill is initially measured at cost being the excess of the cost of the business combination over the Group's share in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities.

The goodwill is stated at cost, less impairment losses in the financial statements and it is presented under the intangible assets caption in the consolidated financial statements Negative goodwill is recognised as income in the profit or loss for the reporting period.

The goodwill is not amortised, however the goodwill is tested for impairment annually, and impairment loss is recognised as expenses for the period, when occurred. The impairment of goodwill in future periods is not reversed.

Investments in subsidiaries

In separate financial statements of the Company investments into subsidiaries and associated companies are accounted for applying the cost method less impairment losses.

2.4. lntangible assets

lntangible assets are initially measured at cost. lntangible assets are recognised if it is probable that future economic benefits that are attributable to the asset will flow to the enterprise and the cost of asset can be measured reliably. After initial recognition, intangible assets are measured at cost less accumulated amortisation (except for goodwill which is not amortised) and any accumulated impairment losses. lntangible assets are amortised on a straight-line basis over their estimated useful lives.

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.

2.5. 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.

2.6. Property, plant and equipment

Property, plant and equipment of the Group and the Company are stated at cost less accumulated depreciation and impairment losses.

When assets are sold or retired, their cost, accumulated depreciation and impairment are eliminated from the accounting records, and any gain or loss resulting from their disposal is included in the profit or loss.

The initial cost of property, plant and equipment comprises its purchase price, including any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditures incurred after the property, plant and equipment have been put into operation, such as repair and maintenance costs, are normally charged to the profit or loss in the period the costs are incurred.

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

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 2.22.

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.

2.7. Financial instruments

According to IAS 39 "Financial Instruments: Recognition and Measurement" financial assets are classified as either financial assets at fair value through profit or loss, held-to-maturity investments, 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.

Financial assets or financial liabilities desiqnated at fair value throuah profit or loss

The category 'a financial asset at fair value through profit or loss' includes financial assets classified as held for trading. Financial assets are classified as held for trading if they are derivatives or are acquired for the purpose of selling in the near term. Gains or losses on investments held for trading are recognised in the profit (loss) for the period.

Held-to-maturity investments

Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Group and the Company have the positive intention and ability to hold to maturity, Investments that are intended to be held-to-maturity are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the profit (loss) for the period when the investments are derecognised or impaired, as well as through the amortisation process.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in the profit (loss) for the period when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

Available-for-sale investments

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition available-for-sale financial assets are measured at fair value with gains or losses (except impairment and gain or losses from foreign currencies exchange) being recognised in other comprehensive income until the investment is derecognised or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in other comprehensive income is included in the profit (loss) for the period.

The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business on the balance sheet date. For investments where there is no active market, fair value is determined using valuation techniques. Such technique includes using recent arm's length market transactions; reference to the current market value of another instrument which is substantially the same; discounted cash flow analysis or other valuation models.

2.8. 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,

2.9. lnventories

lnventories are valued at the lower of cost or net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion, marketing and distribution. Cost is determined by the first-in, firstout (FIFO) method. Unrealisable inventory is written off.

2.10. 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.

2.11. Employee benefits

Lona-term employee benefits

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 according to Lithuanian legislation and the conditions of the collective bargaining agreement. The liability recognised in the balance sheet in respect of long-term employee benefits is the present value of the defined benefit obligation at the balance sheet date. The defined benefit obligation is calculated at each balance sheet date in accordance to actuarial assumptions using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using interest rates of government bonds that are denominated in the currency in which the benefits will be paid, and that have terms of maturity approximating to the terms of the related liability.

Actuarial gains and losses are recognised immediately in the incomelexpense in the caption "Salaries and social security" and no "corridor" is applied. All past service costs are recognised immediately.

Other emplovee benefits

Wages, salaries, contributions to the state social insurance funds, vacation and sick leave are accrued in the year in which the employees provide their services to the Group and the Company.

2.12. Borrowings

Borrowings are initially recognised at fair value, less the costs of transaction. They are subsequently carried at amortised cost, the difference between the value at the inception and redemption value being recognised in the net profit or loss over the period of the borrowings using effective interest rate method.

Borrowings are classified as current liabilities unless the Group and Company has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet.

Borrowing costs are expensed as incurred. Since 2009 1 January borrowing costs that are directly associated with assets that are up for sale or use of long duration, acquisition, construction or production, are capitalized as part of the cost of that asset.

2.13. Finance and operating leases - the Group and the Company as lessor

The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception date of whether the fulfillment of the arrangement is dependent on the use of specific asset or assets or the arrangement conveys a right to use the asset.

Finance lease

Leases where the Group and the Company transfer substantially all the risks and benefits of ownership of the asset are classified as finance leases. The Group and the Company recognise lease receivables at the value equal to the net investment in the lease, starting from the date of commencement of the lease term. Finance income is based on a pattern reflecting a constant periodic rate of return on the net investment outstanding. Initial direct costs are included in the initial measurement of the lease receivables.

Oueratinq lease

Leases where the G~OUD and the Com~anv does not transfer substantiallv all the risks and benefits of owners hi^ of the asset are classified as dperating lease;. ~ie Group and the Company presents assets subject to operating lease's in the balance sheets according to the nature of the asset. Lease income from operating leases is recognised in the profit or loss on a straight-line basis over the lease term as other income. Initial direct costs incurred specifically to earn revenues from an operating lease are added to the carrying amount of the leased asset.

The depreciation policy for leased assets is consistent with the Group's and the Company's depreciation policy for similar assets and depreciation is calculated in accordance with the accounting policies, used for the property, plant and equipment.

2.14. Operating leases -the Group and the Company as lessee

Leases where the lessor retains all the risk and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term.

The gains from discounts provided by the lessor are recognised as a decrease in lease expenses over the period of the lease using the straight-line method.

If the result of sales and lease back transactions is operating lease and it is obvious that the transaction has been carried out at fair value, any profit or loss is recognised immediately. If the sales price is lower than the fair value, any profit or loss is recognised immediately, except for the cases when the loss is compensated by lower than market prices for lease payments in the future. The profit is then deferred and amortised in proportion to the lease payments over a period, during which the assets are expected to be operated. If the sales price exceeds the fair value, a deferral is made for the amount by which the fair value is exceeded and it is amortised over a period, during which the assets are expected to be operated.

2.15. Grants (deferred income)

Grants received in the form of non-current assets or intended for the purchase, construction or other acquisition of noncurrent 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 balance of unutilised grants is shown in the caption "Grants (deferred income)" in the balance sheet.

2.16. lncome tax

lncome tax charge comprises current and deferred tax and is recognised based on profit for the year considering deferred taxation. Income tax is calculated based on the Lithuanian tax legislation.

The current income tax is based on taxable pre-tax profit for the year, excluding the items of income or expense that are not taxable or deductable. The tax rates used to compute the income tax expenses are those that are enacted by the balance sheet date. In 2009 the income tax rate in Lithuania was 20 % (15% in 2008). Starting 1 January 2010 a new tax rate of 15% is to be applied.

Tax losses can be carried forward for indefinite period, except for the losses incurred as a result of disposal of securities andlor derivative financial instruments. Such carrying forward is disrupted if the Company changes its activities due to which these losses incurred except when the Group and the Company does not continue its activities due to reasons which do not

depend on the Group and the Company itself. The losses from disposal of securities andlor derivative financial instruments can be carried forward for 5 consecutive years and only be used to reduce the taxable income earned from the transactions of the same nature.

Deferred taxes are calculated using the balance sheet liability method on temporary differences and tax loss carried forward. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse based on tax rates enacted or substantially enacted at the balance sheet date.

Deferred tax assets have been recognised in the balance sheet to the extent the Group's and the Company's management believes it will be realised in the foreseeable future, based on taxable profit forecasts. If it is believed that part of the deferred tax asset is not going to be realised, this part of the deferred tax asset is not recognised in the financial statements.

2.17. 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. Provided that the number of shareholders changes without causing a change in the economical resources, the weighted average of ordinary registered shares is adjusted in proportion to the change in the number of shares as if this change took place at the beginning of the previous period presented. Since there are no instruments reducing earnings per share, there is no difference between the basic and diluted earnings per share.

2.18. 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.

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

2.19. 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.

2.20. Foreign currencies

Foreign currency transactions are accounted for at the exchange rates prevailing at the date of the transactions. Gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies on the balance sheet date are recognised in the profit or loss. Such balances denominated in foreign currencies are translated at period-end exchange rates.

2.21. Impairment of assets

Financial assets

Financial assets are reviewed for impairment at each balance sheet date.

For financial assets carried at amortised cost, whenever it is probable that the Group and the Company will not collect all amounts due according to the contractual terms of loans or receivables, an impairment or bad debt loss is recognised through an allowance account in the profit or loss. The reversal of impairment losses previously recognised is recorded when the decrease in impairment loss can be justified by an event occurring after the write-down. Such reversal is recorded in the profit or loss. However, the increased carrying amount is only recognised to the extent it does not exceed the amortised cost that would have been had the impairment not been recognised.

If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in profit or loss, is transferred from other comprehensive income to profit or loss. Reversals in respect of equity instruments classified as available-for-sale are not recognised in profit or loss. Reversals of impairment losses on debt instruments are reversed through profit or loss; if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised in profit or loss.

In relation to trade and other receivables, a provision for impairment is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Group and the Company will not be able to collect all of the amounts due under the original terms of the invoice. The carrying amount of the receivable is reduced through use of an allowance account. Impaired debts are derecognised when they are assessed as uncollectible.

Other assets

Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognised in the profit or loss. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. Reversal of impairment losses recognised in prior years is recorded when there is an indication that the impairment losses recognised for the asset no longer exist or have decreased. Reversal is accounted for in the same caption of the statement of comprehensive income as impairment losses.

2.22. Use of estimates in the preparation of financial statements

The preparation of financial statements in conformity with IFRS requires 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 balance sheet 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.

Propetfy, 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.

Change in accounting estimate

The Group and the Company has considered the actual useful life of property, plant and equipment and increased depreciation period for the heating connections from 20 years to 30 years and for the heating stations from 10 years to 15 years. If the Group and the Company would continue using 20 and 10 years depreciation period, depreciation expenses for 12 months of the year 2010 would be higher by LTL 3.771 thousand and property plant and equipment balance as at 31 December, 2010 would be lower by LTL 9.844 thousand (depreciation expenses for the year 2009 would be higher by LTL 4,473 thousand and property plant and equipment balance as at 31 December, 2009 would be lower by LTL 6,073 thousand).

Impairment of non-financial assets

When value in use calculations are undertaken, management must estimate the expected future cash flows from the asset or cash generating unit and choose a suitable discount rate in order to calculate the present value of those cash flows. Change in accouting estimate.

For evaluation of impairment of assets the entire Group and Company was considered as a cash generating unit as of 31 December 2008. As at 31 December 2010 and 31 December 2009 there were two cash generating units in the Group and the Company, as manifolds received as a contribution in kind from the shareholders in 2009 are used not only in the activity of the Company but also in the activities of other companies providing utility and communication services for a separate fee and, therefore, are treated as a separate cash generating unit.

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

In 2009 for a new shares issue manifolds in Kaunas city were received as a contrinbution in-kind. Market value of assets estimated upon their transfer by local independent qualified valuers using depreciated replacement costs method amounted to LTL 136 mln, however, it was not subject to adequate profitability test as required by International Valuation Standards. Value in use of assets received as a contribution in kind estimated using future discounted cashflows approximates LTL 23 mln as at 31 December 2009. Significant difference between values of assets estimated using depreciated replacement costs method and using discounted future cash flows indicate that depreciated replacement cost method may not be a reliable estimate of fair value of these assets. However, management has no information available about possible fair value of these non-current assets determined using other valuation methods.

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

On 17 February 2010 Vilnius Court of Commercial Arbitration finalised the hearing the civil case concerning the performance of the investment agreement concluded between the Company and the private company UAB Kauno Termofikacijos Elektrine (Kaunas Power Plant) and passed the ruling in favour of the Company ordering UAB Kauno Termofikacijos Elektrine to pay to the Company a fine of LTL 5,420 thousand and interest on this amount as well as a compensation of a part of litigation costs. UAB Kauno Termofikacijos Elektrine has placed a complaint to Lithuanian Court of appeal regarding this decision. The Court of Appeal denied this appeal by it's ruling from 19 October 2010 and has left the ruling of the Court of Commercial Arbitration unchanged. On 22 October 2010 the Company applied to Vilnius 2 parish Court in order to get the receiving-order for recovering of awarded sums but the ligitation regarding the jurisdiction of this appeal is still in progress and a final date of ruling is still not set. Meanwhile on 08 November 2010 UAB Kauno Termofikacijos Elektrine has applied a cassation complaint to the Lithuanian Supreme Court regarding a repeal of rulings of the Commercial Arbitration and of the Court of appeal. On 11 November 2010 this cassation complaint was registered in the trial docket but the date of the ligitation is still not set. As of 31 December 2010 the accumulation of awarded sum has not been made in financial statements of the Group and the Company, because the income from fines and from interest is shown in those statements only when it is paid-in.

2.23. Segments

Operating segments are reported in a manner consistent with the internal reporting provided to the chief-operating decisionmaker. 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 futher information on segments has not been disclosed in these financial statements.

2.24. 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.

2.25. 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.

2.26. 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.

Comparative figures have been adjusted to correspond to the presentation of the current year where necessary.

3. Intangible assets

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

Part of the non-current intangible assets of the Group and the Company with the acquisition cost of LTL 3.177 thousand as of 31 December 2010 (LTL 2.782 thousand as of 31 December 2009) were fully amortised but were still in active use.

Property, plant and equipment

The depreciation charge of the Group's and Company's property, plant and equipment for 31 December 2010 amounts to LTL 16.724 thousand and LTL 11.950 thousand, respectively (LTL 16.965 thousand and LTL 16.798 thousand in 2009). The amounts of LTL 15.166 thousand and LTL 15.096 thousand (LTL 16.024 thousand and LTL 15.856 thousand for the year 2009), respectively, were included into operating expenses in the Group's and the Company's statement of comprehensive income. The remaining amounts were included into other expenses caption.

Part of the property, plant and equipment of the Company with acquisition cost of LTL 87.212 thousand were fully depreciated as of 31 December 2010 (LTL 78.905 thousand as of 31 December 2009) but were still in active use.

As of 31 December 2010 and of 31 December 2009 the major part of the Group's and Company's construction in progress consisted of reconstruction works.

As of 31 December 2010 property, plant and equipment of the Group and the Company with the net book value of LTL 123.319 thousand (LTL 114.153 thousand as of 31 December 2009) was pledged to banks as a collateral for loans (Note 11).

5. Non-current accounts receivable

	Group		Company
	Asof31 December 2010	Asof31 December 2009	Asof31 December 2010	Asof31 December 2009
Long-term loans granted to the Company's employees Other	6 1	6 1	6 1	61 48
	6 1	6 1	61	109

Long-term loans granted to the employees of the Company for the period from 1997 to 2023 and are non-interest bearing. 'These loans are accounted for at discounted value using 10.4 % interest rate.

All non-current accounts receivable as of 31 December 2010 and of 31 December 2009 are neither past due nor impaired.

6. Other financial assets

	Group		Company
	Asof31 December 201 0	Asof31 December 2009	Asof31 December 201 0	Asof31 December 2009
Available-for-sale financial assets
Ordinary shares - unquoted purchase price
Depreciation of the shares
The market price of the shares

7. Inventories

	Group		Company
	Asof31 December 201 0	Asof31 December 2009	-- Asof31 December 201 0	Asof31 December 2009
Technological fuel	3.409	3.429	3.409	3.429
Spare parts	1.211	1.197	1.21 1	1.047
Materials	87 3	954	747	958
	5.493	5.580	5.367	5.434
Valuation allowance at the end of the year	(21 1)	(208)	(21 1)	(208)
	5.282	5.372	5.156	5.226

Changes in the valuation allowance for inventories for the 2010 and 2009 was included into change in inventories allowance caption in the Group's and the Company's statement of comprehensive income.

8. Current accounts receivable

	Group		Company
	Asof31 December 2010	Asof31 December 2009	Asof31 December 2010	Asof31 December 2009
Trade receivables, gross	114.154	85.005	1 13.897	84.690
Less: impairment of doubtful receivables	(41.908)	(25.177)	(41.908)	(25.177)
Trade receivables, net	72.246	59.828	71.989	59.513

Change in impairment of doubtful receivables in the 2010 and 2009 is included into the write offs and change in allowance for accounts receivables caption in the Group's and the Company's statements of comprehensive income.

As of 31 December 2010 trade receivables with the nominal value of LTL 41.908 thousand (as of 31 December 2009 - LTL 25.1 77 thousand) were impaired and fully provided for.

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

	Total
Balance as of 31 December 2008	19.480
Used
Additional allowance formed
Balance as of 31 December 2009
Additional allowance formed
Balance as of 31 December 201 0

In 2010 the Group and the Company wrote off LTL 469 thousand (in 2009 - LTL 856 thousand) of bad debts.

In 2010 the Group and the Company also recovered LTL 32 thousand of bad debts (in 2009 - LTL 29 thousand), which were written off in the previous periods.

The ageing analysis of the Group's trade receivables as of 31 December 2010 and of 31 December 2009 is as follows:

	Trade receivables past due but not impaired
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

The ageing analysis of the Company's trade receivables as of 31 December 2010 and 31 December 2009 is as follows:

	Trade receivables past due but not impaired
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

Trade receivables are non-interest bearing and are generally on 30 days terms or individually agreed.

The major part of the Group's and the Company's trade receivables, past due more than 360 days, comprise the accounts receivable from budget organisations, financed from budgets of the State and municipalities, and from institutions financed by Patient's Funds, for which the depreciation is not accrued by the Group and the Company in 2009.

Other receivables of the Group and the Company can be analysed as follows:

		Group		Company
	Asof31 December 201 0	Asof31 December 2009	Asof31 December 2010	Asof31 December 2009
Taxes	2.719	2.806	2.71 9	2.806
Other receivables	2.840	1.555	3.01 5	1.841
Total	5.559	4.361	5.734	4.647

As of 31 December 2010 and of 31 December 2009, the major part of other receivables consists of debt of municipalities for compensations to low income families, the receivables from sold inventories (metals, heating equipments) and other services supplied (maintenance of transportation and permanent heating systems as well as manifolds).

The ageing analysis of the Group's other receivables (excluding taxes) as of 31 December 2010 and of 31 December 2009 is as follows:

AB KAUNO ENERGIJA, company code 235014830, Raudondvario Rd. 84, Kaunas, Lithuania CONSOLIDATED AND PARENT COMPANY'S FINANCIAL STATEMENTS FOR THE 12 MONTHS-OF THE YEAR 2010 (all amounts are in LTL thousand unless otherwise stated)

	Other receivables past due but not impaired
Other receivables neither past due nor impaired	Less than 60 days	60 - 150 days	151 - 240 days	241 - 360 days	More than 360 days	Total

The ageing analysis of the Company's other receivables (excluding taxes) as of 31 December 2010 and 31 December 2009 is as follows:

	Other receivables past due but not impaired
Other receivables neither past due nor impaired	Less than 60 days	60 - 150 days	151 - 240 days	241 - 360 days	More than 360 days	Total

The Group's and the Company's other receivables are non-interest bearing and are generally on 30 - 45 days terms.

Credit quality of financial assets neither past due nor impaired

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

9. Cash and cash equivalents

		Group		Company
	Asof31 December 2010	Asof31 December 2009	Asof31 December 201 0	Asof31 December 2009
Cash in transit
Cash at bank
Cash on hand

The Group's and the Company's accounts in national currency in banks amounting to LTL 951 thousand as at 31 December 2010 (31 December 2009 - LTL 1.327 thousand) are pledged as collateral for the loans (Note 11).

10. Reserves

Leqal and other reserves

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

On 29 April 2008, based on the decision of the shareholders the Company transferred an amount of LTL 8,515 thousand from legal reserve to cover losses of 2007. On 7 March 2008 based on the decision of the shareholders the Subsidiary transferred an amount of LTL 183 thousand from other reserve and retained earnings to the legal reserve.

On 28 April 2009, based on the decision of the shareholders the Company transferred an amount of LTL 2,808 thousand from legal reserve to cover losses of 2008.

On 4 March 2010, based on the decision of the shareholders the Group transferred an amount of LTL 233 thousand from legal reserve to cover losses of 2009.

On 13 May 2010 the company transferred LTL 448 thousand from retained earnings to legal reserve by the decision of shareholders.

11. Borrowings

		Group		Company
	Asof31 December 201 0	- Asof31 December 2009	Asof31 December 201 0	Asof31 Decern ber 2009
Non-current borrowings
Non-current borrowings
Current borrowings
Current portion of non-current borrowings	13.703	12.884	13.703	12.884
Current borrowings (including credit line)	8.808	5.964	8.808	5.964
Other interest bearing liabilities	6.21 5	3.699	6.21 5	3.699
	28.726	22.547	28.726	22.547
Total	60.537	59.745	-p 60.537	- 59.745
Terms of repayment of non-current borrowings are as follows (all loans are with variable interest rate):

	Group		Company
Asof31 December 201 0	Asof31 Decern ber 2009	Asof31 December 201 0	Asof31 December 2009

Actual interest rates are close to effective interest rates. Weighted average effective interest rates (in %) of borrowings outstanding at the year-end are as follows:

		Group		Company
	Asof31 December 201 0	Asof31 December 2009	Asof31 December 2010	Asof31 December 2009
Current borrowings
Non-current borrowings

Parts of borrowings at the end of the period in national and foreign currencies are as follows:

		Group		Company
	Asof31 December 201 0	Asof31 December 2009	As of 31 December 2010	As of 31 December 2009
Currency of the loan:
EUR
LTL

On 1 August 2005 the Group and the Company signed a long-term loan agreement with AB Bankas Hansabankas for the amount of LTL 5,000 thousand. 'The maturity date of the last portion of the loan is 1 August 2012. As of 31 December 2010 the outstanding balance of the loan amounted to LTL 1.258 thousand of which LTL 832 thousand was accounted for as the current portion of non-current borrowings in the financial statements of the Group and the Company. The loan bears 6 month VII-IBOR plus 0.77 % interest rate.

On 23 August 2005 the Group and the Company signed a long-term loan agreement with AB SEE Bankas for the amount of EUR 8,776 thousand (the equivalent of LTL 30,300 thousand). The maturity date of the last portion of the loan is 31 December 2014. The outstanding balance of the loan amounted to EUR 2.896 thousand (the equivalent of LTL 10.000 thousand) as of 31 December 2010, of which LTL 2.500 thousand was accounted for as the current portion of non-current borrowings in the financial statements of the Group and the Company. The loan bears 6-month EUR LlBOR plus 1.9 % interest rate.

On 1 December 2006 the Group and the Company signed a long-term loan agreement with Nordea Bank Finland Plc. Lithuanian branch for the amount of LTL 2,090 thousand. On 18 April 2007 the loan amount increased up to LTL6,090 thousand. The maturity date of the last portion of the loan is 31 October 2015. As of 31 December 2010 the outstanding balance of the loan amounted to LTL 4.148 thousand, of which LTL 839 thousand was accounted for as the current portion of non-current borrowings in the financial statements of the Group and the Company. The loan bears 3 month VlLlBOR plus 0.45 % interest rate.

On 21 December 2006 the Group and the Company signed a long-term loan agreement with AB SEB Bankas for the amount of EUR 2,059 thousand (the equivalent of LTL 7,108 thousand). The maturity date of the last portion of the loan is 30 November 2016. As of 31 December 2010 the outstanding balance of the loan amounted to EUR 601 thousand (the equivalent of LTL 2.076 thousand), of which LTL 395 thousand was accounted for as the current portion of non-current borrowings in the financial statements of the Group and the Company. The loan bears 6-month EUR LlBOR plus 0.4 % interest rate.

On 14 November 2007 the Group and the Company signed a long-term loan agreement with AB DnB NORD Bankas for the amount of EUR 576 thousand (the equivalent of LTL 1,989 thousand). The maturity date of the last portion of the loan is 31 December 2016. As of 31 December 2010 the outstanding balance of the loan amounted to EUR 432 thousand (the equivalent of LTL 1 491 thousand), of which LTL 248 thousand was accounted for as the current portion of non-current borrowings in the financial statements of the Group and the Company. The loan bears 12-month ELlR LlBOR plus 0.59 % interest rate.

On 31 July 2008 the Group and the Company signed a long-term investment credit agreement with Danske Bank NS Lithuania Branch for the amount of EUR 984 thousand (the equivalent of LTL 3.398 thousand). The maturity date of the last portion of the loan is 2018. As of 31 December 2010 the outstanding balance of the investment credit amounted to EUR 523 thousand (the equivalent of LTL 1.807 thousand), of which LTL 350 thousand was accounted for as the current portion of non-current borrowings in the financial statements of the Group and the Company. The loan bears 3-month EURlBOR plus 0.385 % interest rate.

On 31 July 2008 the Group and the Company signed a long-term investment credit agreement with Danske Bank NS Lithuania Branch for the amount of EUR 1,158 thousand (the equivalent of LTL 4.000 thousand). The maturity date of the last portion of the loan is 31 December 2017. As of 31 December 2010 the outstanding balance of the investment credit amounted to EUR 1088 thousand (the equivalent of LTL 3.756 thousand), of which LTL 600 thousand was accounted for as the current portion of non-current borrowings in the financial statements of the Group and the Company. The loan bears 3 month EURIBOR plus 0.7 % interest rate.

On 22 September 2008 the Group and Company signed a long-term loan agreement with AB SEB Bankas for the amount of EUR 3,333 thousand (the equivalent of LTL 11,508 thousand). The maturity date of the last portion of the loan is 31 December 2011. As of 17 September, 2010 the outstanding balance of the loan was refinanced through Lithuanian branch of Nordea Bank Finland Plc. The loan beared I-month EUR LlBOR plus 0.7 % interest rate.

On 25 September 2009 the Group and the Company signed a loan agreement with Swedbank AB for the amount of EUR 2,896 thousand (the equivalent of LTL 10,000 thousand), with the maturity date of 25 September 2012. As of 31 December 2010 the Group and the Company's balance of used loan was ELlR 1.876 thousand (the equivalent of LTL 6.478 thousand), of which 3.320 thousand was accounted for as the current portion of non-current borrowings in the financial statements of the Group and the Company. The loan bears &month EURIBOR plus 3.85 % interest rate.

On 2 December 2009 the Group and the Company signed a loan agreement with Swedbank AB for the amount of EUR 3,815 thousand (the equivalent of LTL 13,171 thousand), with the maturity date of the last portion of the loan on 2 December 2016. As of 31 December 2010 the balance of used loan was EUR 1.997 thousand (the equivalent of LTL 6.895 thousand), of which LTL 3.597 thousand was accounted for as the current portion of non-current borrowings in the financial statements of the Group and the Company. The loan bears 6-month EURIBOR plus 4.5 % interest rate.

On 9 April 2010 the Group and the Company signed a credit agreement with the Lithuanian Ministry of Finance regarding the loan of EUR 2.410 thousand (LTL 8,323 thousand equivalent). The term of repayment of the last part of the loan is 15 March 2034. As of 31 December 2010 the balance of used loan was EUR 234 thousand (the equivalent of LTL808 thousand), which was accounted for within non-current borrowings in the financial statements of the Group and the Company. The loan bears 3.948 % annual interest rate until 31 March 201 9.

On 21 June 2010 the Group and the Company signed a credit agreement with Swedbank AB regarding the loan of EUR 649 thousand (LTL 2,240 thousand equivalent). The term of repayment of the last part of the loan is 21 June 2017. As of 31 December 2010 the outstanding balance of the credit amounted to EUR 417 thousand (the equivalent of LTL 1.440 thousand), of which 33 thousand LTL is accounted for as the current portion of non-current borrowings in the financial statements of the Group and the Company. The loan bears 6-month EURIBOR plus 4 % annual interest rate.

On 17 September, 2010 the Group and the Company signed a long-term credit agreement with Nordea Bank Finland PIC Lithuanian Branch for the amount of EUR 1,625 thousand (the equivalent of LTL 5.61 1 thousand). The maturity date of the last portion of the loan is 31 May, 2016. As of 31 December 2010 the outstanding balance of the credit amounted to EUR 1.551 thousand (the equivalent of I-TL 5.357 thousand), of which LTL 989 thousand was accounted for as the current portion of non-current borrowings in the financial statements of the Group and the Company. The loan bears I-month EURIBOR plus 0.7 % interest rate.

On 4 June 1999 the Group and the Company signed a credit line agreement with AB SEB Bankas for the amount of LTL 7,000 thousand, with the maturity date of 19 July 2009. As of 31 December 2009 the Group and the Company's balances of used credit line was LTL 1,560 thousand. On 19 August 2009 the agreement was prolonged until 19 July 2010. The credit line bears I-month VlLlBOR plus 2.4 % interest rate.

On 8 July 2004, the Group and the Company signed an overdraft agreement with AB DnB NORD Bankas for the amount of LTL 18,000 thousand and for the term expiring on 31 May 2008. On 27 May 2008, the limit of the overdrafl line of credit was reduced to the amount of LTL 10,000 thousand and the repayment term was extended until 31 May 2009. On 29 May 2009, the validity term of the agreement was extended until 29 May 201 0 by changing the overdraft limit to EUR 2,896 thousand (LTL 9,999 thousand). On 31 May 201 0 the validity term of the agreement was extended until 23 June 201 0 and on 22 June 2010 the validity term of the agreement was extended until 30 May 201 1. As at 31 December 2010 the used amount of the overdraft by the Group and the Company was EUR 1.206 thousand (CrL 4.162 thousand) (31 December 2009: LTL 4.380 thousand). The overdrafl bears I-month EURIBOR plus 3 % annual interest.

On 23 August 2010 the Group and the Company signed a credit line agreement with AB SEB Bankas for the amount of LTL 10,000 thousand, with the maturity date of 23 August 201 1. As of 31 December 2010 the Group and the Company's balances of used credit line was LTL 4.646 thousand. The credit line bears I-month VlLlBOR plus 1.49 % interest rate.

On 26 February 2009, the Company, UAB Nordea Finance Lithuania and UAB Kauno Termofikacijos Elektrine signed an agreement on the deferral of the payment for heat energy for an additional term of 30 days thus amending the original term established in the Head energy purchase and sale agreement as described in Note 1. This agreement was signed in connection with the factoring contract concluded on 26 February 2009 between UAB Nordea Finance Lithuania and UAB Kauno Termofikacijos Elektrine regarding the billings for heat energy issued to the Company. The amount of the liability is EUR 1,000 thousand (LTL 3.453 thousand) as at 31 December 2009. Interest of I-night EURIBOR plus 3.5 % is payable on the amount outstanding.

On 19 October 2010 the Company signed a tripartle agreement with AB Okio bankas for the factoring of UAB Kauno Termofikacijos elektrine on the deferral of the payment for heat energy for an additional term of 30 days thus amending the original term established in the Heat energy purchase and sale agreement as described in Note 1. The term of factoring is 31 July, 2011. As of 31 December, 2010 an outstanding factorised balance is EUR 1.800 thousand (LTL 6.215 equalent). Annual interest of 6-months EURIBOR plus 2.5 % but not less than 3,6 % is payable on the amount outstanding.

On 9 December, 2010 the Company signed an agreement with AB DnB NORD bank for the factoring of heat selling to the institutions financed from Kaunas municipality. The limit of the factoring is LTL 8.440 thousand. The term of factoring is 09 December 201 1. As of 31 December, 2010 the limit of factoring is still unused. Annual interest of 3-months VlLlBOR plus 2.85 % is payable on the limit amount used.

On 26 October 2010 the Group and the Company signed a credit agreement with the Lithuanian Ministry of Finance regarding the loan of EUR 807 thousand (LTL 2.788 thousand equivalent). The term of repayment of the last part of the loan is 15 March 2034. The loan is still not used as of date of these statements. The loan bears 3.948 % annual interest rate until 31 March 201 9.

The property, plant and equipment (Note 4) and accounts in banks (Note 9) of the Group and the Company were pledged as collateral for the borrowings.

12. Finance lease obligations

The assets leased by the Group under finance lease contracts mainly consist of vehicles. The terms of financial lease are from 2 to 5 years. The distribution of the net book value of the assets acquired under financial lease is as follows:

		Group		Company
	Asof31 December	Asof31 December		Asof31 December
	2010	2009	201 0	2009
Vehicles	2 9	80

As of 31 December 2010 the interest rate on the financial lease obligations is fixed and variable. Fixed interest rate is equal to 3.99 %. The variable interest rate varies depending on 6-month ELIRIBOR plus 1.5 %.

Future minimal lease payments under the financial lease contracts as of 31 December 2010 are as follows:

	Group		Company
	Asof31 Decem ber 2010	Asof31 Decem ber 2009	As of 31 Decem ber 2010	As of 31 Decem ber 2009
Within one year	3 5	54
From one to five years	10	45
Total financial lease obligations	4 5	99
Interest	(1 )	(4)
Present value of financial lease obligations	- 44	9 5
Financial lease obligations are accounted for as:
- current
- non-current

13. Grants (deferred income)

	Group		Company
	Asof31 December	Asof31 December	As of 31 December	As of 31 December
Balance at the beginning of the reporting period
Received during the period
Amortisation
Balance at the end of the reporting period

In 2008 the Company received the heating network located in fiemgaliy Str. and Raudondvario Rd. for free, fair value of which at the date of the transfer amounted to LTL 149 thousand. As well, in 2008 the Group and the Company received telecommunication equipment, the fair value of which at the date of the transfer amounted to LTL 140 thousand. On 10 October 2008 the branch of the Company Jurbarko Silumos Tinklai received LTL 600 thousand subsidies for the change of the boiler burned by fuel oil to the boiler burned by gas from VS[ Lietuvos Aplinkos Apsaugos lnvesticij~ Fondas (LAAIF). As of 31 December 2008 the ~\$1 LAAlF transferred LTL360 thousand to the Company, the remaining part of LTL 240 thousand was accounted for by the Group and the Company under other accounts receivable caption as of 31 December 2008. As at 31 December 2009 v\$[ LAAlF fully settled its liability to the Company.

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 Kreves Ave. 82 A.118H, 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 5.566 thousand by 31 December 2010.

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.

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 KurSi~ St. 49C, Jonavos St. between NA-7 and NA-9 and Networks under the Bridge through the river Neris in the auto-highway Vilnius-Klaipeda 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 808 thousand by 31 December 2010.

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. JuozapaviEiaus pr. 23A to A. JuozapaviEiaus pr. 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 2010 financing in amount LTL 844 thousand has been received, LTL 582 thousand was accounted for by the Group and the Company under other accounts receivable caption as of 31 December 201 0.

On 21 July 2010, the Group and the Company signed the agreement on the financing and administration of the project "The modernisation of faliakalnis main of Kaunas integrated network (42)" 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.

14. Employee benefit liability

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 according to Lithuanian legislation and the conditions of the collective bargaining agreement.

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

		Group		Company
	As of 31 December 2010	As of 31 December 2009	Asof31 December 201 0	Asof31 December 2009
Non-current employee benefit liability
Current employee benefit liability

Total amount of the Group and the Company employee benefit expenses is LTL 284 thousand during the period which ended 31 December 2010 (LTL 521 thousand during the year which ended 31 December 2009). These expenses are included in salaries and social security expenses in the Group's and the Company's statement of comprehensive income.

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

	As of 31 December 201 0	As of 31 December 2009
Discount rate	7,O proc.	7,O proc.
Employee turnover rate	18,9 proc.	18,9 proc.
Expected average annual salary increases	3,O proc.	3,O proc.

15. Trade payables

Trade payables are non-interest bearing and are normally settled on 30 - 90 day terms.

16. Derivative financial instruments

On 29 October 2008, the Group and the Company concluded an interest rate swap agreement for the period from 24 November 2008 to 22 November 2010. The Group and the Company set a fixed interest rate at 3.86 Oh for a floating interest rate at I-month EURIBOR. The nominal amount of the transaction was EUR 2,433 thousand (the equivalent of I-TL 8.401 thousand) as at 31 December 2009.

On 24 October 2008, the Group and the Company concluded an interest rate swap agreement. For the period from 22 October 2008 to 23 August 2010 the Group and the Company set a fixed interest rate at 4,24 % for a floating interest rate at 6-month EUR I-IBOR. The nominal amount of the transaction was EUR 4,344 thousand (the equivalent of LTL 15,000 thousand) as at 31 December 2008. The agreement was terminated on 9 April 2009.

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 % for a floating interest rate at 6-month EURIBOR. The nominal amount of the transaction was EUR 2.896 thousand (the equivalent of LTL 10.000 thousand) as at 31 December 2010 (EUR 3,620 thousand (the equivalent of LTL 12.500 thousand) as at 31 December 2009). Market value of swap amounted to LTL 479 thousand as at 31 December 2010.

17. Sales income

The Group's and the Company's activities are heat energy supply, electricity production, maintenance of heating and hot water supply systems, electricity production and other activities. In the year 2010 a part of the Kaunas' inhabitants chose the company as the supplier of hot water. These activities are inter-related, consequently for management purposes the Group's and the Company's activities are organised as one main segment - heat energy supply. The Group and the Company's sales by activities are stated below:

AB KAUNO ENERGIJA, company code 235014830, Raudondvario Rd. 84, Kaunas, Lithuania CONSOLIDATED AND PARENT COMPANY'S FINANCIAL STATEMENTS FOR THE 12 MONTHS-OF THE YEAR 2010 (all amounts are in LTL thousand unless otherwise stated)

	Group		Company
	2010	2009	201 0	2009
Heat energy
Hot water supply
Maintenance of the heating and hot water supply systems of
buildings
Electricity energy
Revenue from sale of emission rights
Maintainance of manifolds

18. Other activities income and expenses

	Group		Company
	201 0	2009	201 0	2009
Income from other operating activities
Miscallenious services
Materials sold
Gain from sale of non-current assets
Other
Expenses from other operating activities
Cost of miscallenious services
Cost of materials sold
Loss from sale of non-current assets
Write off of non-current assets
Other

19. Finance income

	Group		Company
	2010	2009	2010	2009
Income from financial and investment activities
Interest from late payment of accounts receivable
Bank interest receivable
Dividends received
Other
20. Finance costs

	Group		Company
	201 0	2009	2010	2009
Finance costs
Interest on bank loans and overdrafts
Change in fair value of derivative financial instruments
Impairment loss of investment in subsidiary
Late interest penalties
Other

21. Basic and diluted earnings (loss) per share

AB KAUNO ENERGIJA, company code 235014830, Raudondvario Rd. 84, Kaunas, Lithuania CONSOLIDATED AND PARENT COMPANY'S FINANCIAL STATEMENTS FOR THE 12 MONTHS-OF THE YEAR 2010 (all amounts are in LTL thousand unless otherwise stated)

	Group
	201 0	2009
Total comprehensive income (loss)
Number of shares (thousand), opening balance
Number of shares (thousand), closing balance
Average number of shares (thousand)
Basic and diluted earnings (loss) per share (LTL)

22. Financial assets and liabilities and risk management

Credit risk

Cash and cash equivalents in banks (assessed in accordance with long-term borrowing ratings*):

	31 December 2010
	Group	Company
A	1.420	1.370
A+	100	100
AA	3	3
B +	7	7
	62	62
	1.592	1.542

*- external credit ratings set by Fitch Ratings agency.

The Group and the Company do not guarantee obligations of the other parties in 2010.

With respect to trade receivables and other receivables that are neither impaired nor past due, there are no indications as of the reporting date that the debtors will not meet their payments obligations since receivables balances are monitored on an ongoing basis. The Group and the Company consider that their maximum exposure to credit risk is reflected by the amount of trade receivables and other receivables, net of allowance for doubtful accounts recognised at the balance sheet date.

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

The entire Group's and the Company's borrowings are at variable interest rates, therefore the Group and the Company faces an interest rate risk. In 2008 and 2009 to manage variable rate risk the Company has entered into interest rate swaps agreements, in which the Company agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts as described in Note 16, 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 (through the impact on floating rate borrowings). There is no impact on the Group's and the Company's equity, other than current year profit impact.

	lncreaseldecrease in basis points	Effect on profit before tax
201 0
LTL
LTL
EUR
EUR
2009
LTL
LTL
EUR
EUR

Li~uidity 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 I total current liabilities) and quick ((total current assets - inventories) I total current liabilities) ratios as of 31 December 2010 were 0,93 and 0,88 respectively (1.04 and 0.97 as of 31 December 2009). The Company's liquidity and quick ratios as of 31 December 2010 were 0,94 and 0,88, respectively (1.05 and 0.97 as of 31 December 2009).

The Group and the Company expects to overcome liquidity issues implementing the following action plan:

(1) The price effective from 1 December 2008 and the price effective from 1 June 2009 include costs for fuel and heat energy purchased that were actually incurred during the previous period but not yet covered. From 1 October 2009, the heat price for consumers is calculated using two components. A constant component of the heat price remains unchanged for the period during which the recalculated heat price is valid. Only a variable component changes depending on changes in fuel prices thus allowing the Company to reduce possible losses in case of rise in fuel prices.

(2) The Company attempts to receive part of investments funds from the EU Structural Funds. The Company has submitted 9 projects, the support for three of them (50 % of the cost of the project, but not more than LTL 6 million) was received in 2009 as described in note 13;

(3) Non-priority investments are suspended;

(4), implementation of production and transfer loss reduction plan.

The table below summarises the maturity profile of the Group's financial liabilities as of 31 December 2010 and of 31 December 2009 based on contractual undiscounted payments (scheduled payments including interest).

	Less than 3 months	3 to 12 months	1 to 5 years	More than 5 years	Total
Interest bearing loans and borrowings	11.054	19.196	31.073	2.525	63.848
Trade payables	60.398	454	3	0	60.855
Balance as of 31 December 2010	71.452	19.650	31.076	2.525	124.703
Interest bearing loans and borrowings	6.731	17.724	36.344	3.240	64.039
Trade payables	39.1 16	2.334	52	-	41.502
Other current liabilities
Balance as of 31 December 2009	45.847	20.058	36.396	3.240	105.541

The table below summarises the maturity profile of the Company's financial liabilities as of 31 December 2010 and of 31 December 2009 based on contractual undiscounted payments (scheduled payments including interest).

	Less than 3 months	3 to 12 months	1 to 5 years	More than 5 years	Total
Interest bearing loans and borrowings	11.045	19.170	31.063	2.525	63.803
Trade payables	60.393	454	3	0	60.850
Balance as of 30 June 2010	71.438	19.624	31.066	2.525	124.653
Interest bearing loans and borrowings	6.731	17.670	36.299	3.240	63.940
Trade payables	39.300	2.224	5	-	41.529
Balance as of 31 December 2009	- 46.031	19.894	36.304	3.240	105.469

Foreiqn currency risk

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

Monetary assets and liabilities denominated in local and foreign currencies as of 31 December 2010 were as follows (stated in LTL):

	Group		Company
	Assets	Liabilities	Assets	Liabilities
LTL
EUR

Fair value of financial instruments

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:

• (a) The carrying amount of current trade accounts receivable, current trade accounts payable, other receivables and other payables and current borrowings approximate their fair value.
• (b) 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.

Capital manaqement

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 economics conditions and the risk characteristics of its activities. To maintain or adjust the capital structure, the Group and the Company may issue new shares, adjust the dividend payment to shareholders, and return capital to shareholders. No changes were made in the objectives, policies or processes of capital management during the year which ended 31 December 2009 and during the period which ended 31 December 2010, except for increase in share capital paid by contributions in kind as disclosed in Note 1.

The Group and the Company is obliged to upkeep its equity of not less than 50 Oh 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, retained earnings 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.

	Group		Company
	As of 31 December 201 0	As of 31 December 2009	As of 31 December 201 0	As of 31 December 2009
Non-current liabilities (including deferred tax and grants)	54.546	53.659	54.536	54.284
Current liabilities	93.255	70.205	92.932	69.973
Liabilities	147.801	123.864	147.468	124.257
Equity	258.768	255.882 -	262.887	259.755
Debt* to equity ratio	57,12	48,41	56,lO --	47,84

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

23. Commitments and contingencies

The Company participates as a third part in the administrative litigation regarding the UAB Kauno Termofikacijos Elektrine complaint on the Commission decree "On the UAB Kauno Termofikacijos Elektrine heat production base price fixing" annulment on 24 October 2008. KTE claims that the heat production price, calculated on 30 June 2003 according to the terms of Heat energy purchase and sales agreement, should continue to be applied, not the revised price determined by the Commission. Based on the Civil Code of the Republic of Lithuania, decrees of the courts of the Republic of Lithuania and responses of Kaunas city municipality and the Commission, the Company believes that the Heating Law of the Republic of Lithuania which came into force on 1 January 2008 prevails over the Heat energy purchase and sales agreement signed on 30 June 2003 by the Company and KTE, therefore the possibility that the claim will be set by KTE is remote and no provision related to this possible case was recognized in the Group's and the Company's financial statements. At the date of issuance of these financial statements all claims were rejected by Vilnius County Court and KTE appealed against these decisions. The Lithuanian Supreme Administrative Court investigated all of the claims and rejected it.

On 30 June 2003 the Company has signed the agreement with KTE for an investment plan. As KTE fails to fulfil obligations assumed with regard to the amount of investments in due time and according to this agreement KTE is committed the pay to

the Company a fine of CrL 17.7 million of the amount of unimplemented investments, the parties initiated negotiations with the purpose of amending the investment agreement and the term of investments. As at 31 December 2009, an agreement acceptable to both parties regarding the amendment of the investment agreement was not reached. The dispute over the amount of LTL 17.7 million is being solved in the Arbitration Court at the Association International Chamber of Commerce - Lithuania. The Arbitration Court accepted the Company's claim and commenced the arbitral proceedings. The decision adopted in these proceedings is described in Note 2.22.

24. Related parties transactions

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

In 2010 and 2009 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 2010 and 2009 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 the balances at the end of the year were as follows:

	Purchases	Sales	Receivables	Payables
Kaunas city municipality and entities financed and controlled by Kaunas city municipality	974	30.383	20.231	185
Jurbarkas district municipality	4	2.168	716	0

2009	Purchases	Sales	Receivables	Paya bles
Kaunas city municipality and entities financed and controlled by Kaunas city municipality	443	24.597	15.063	18
Jurbarkas district municipality	3	1.866	278	37

In 2010 and 2009 the Company's transactions with the subsidiary and the balances at the end of the year were as follows:

2010	Purchases	Sales		Payables
Pastat4 prieiinros paslaugos UAB	1.247	133	308	80
	Purchases	Sales		Payables
Pastatq prieiiOros paslaugos UAB	1.546	347	396	94

Remuneration of the management and other payments

As at 31 December 2010 the Group's and the Company's management team comprised 6 and 4 persons (6 and 4 persons as of 31 December 2009).

0

	Group	Company
	2010	2009	2010	2009
Key management remuneration
Post-employment benefits paid
		Group		Company
	Asof31 December 201 0	Asof31 December 2009	Asof31 December 201 0	Asof31 December 2009
Calculated post-employment benefits

In 2010 and 2009 the management of the Group and the Company did not receive any loans or guarantees; no other payments or property transfers were made or accrued.

25. Non balance sheet events

AB Kauno energija will not increase the prices of centrally supplied heat since 1 February, 201 1. This decision with the number 201 1-2-2 was made by company board on 24 January, 201 1.