IFRS - Financial Statements at 31st December 2006

Balance Sheet at 31 December 2006

	All amounts are in millions of Slovak crowns unless stated otherwise		As at 31 December
		Note	2006	2005
	ASSETS
	Non-current assets
	Property, plant and equipment	5	10,634	9,326
	Intangible assets	6	278	354
	Investments	7	130	127
	Deferred income tax asset	14	-	1
			11,042	9,808
	Current assets
	Inventories	8	51	39
	Trade and other receivables	9	2,402	3,793
	Cash and cash equivalents	10	2,831	2,005
			5,284	5,837
	Total assets		16,326	15,645
	EQUITY AND LIABILITIES
	Share capital and reserves attributable to equity holders of the Company
	Share capital	11	5,935	5,935
	Legal reserve fund		1,186	1,186
	Other funds		876	676
	Retained earnings		3,652	3,044
	Total equity		11,649	10,841
	Non-current liabilities
	Provisions for liabilities and charges	15	281	270
	Deferred revenues	12	1,365	1,175
	Deferred income tax liability	14	86	-
			1,732	1,445
	Current liabilities
	Trade and other payables	13	2,765	3,249
	Income tax liabilities		146	86
	Provisions for liabilities and charges	15	34	24
			2,945	3,359
	Total liabilities		4,677	4,804
	Total equity and liabilities		16,326	15,645

These financial statements have been approved for issue by the Board of Directors on 29 March 2007.

Ing. Andrej Devečka
Member of the Board of Directors

Income Statement for the year ended 31 December 2006

	All amounts are in millions of Slovak crowns unless stated otherwise		Year ended 31 December
		Note	2006	2005
	Revenues	16	26,863	23,616
	Cost of sales	17	(19,351)	(16,892)
	Gross profit		7,512	6,724
	Operating expenses	18	(3,669)	(3,375)
	Other operating income	19	307	218
	Profit from operations		4,150	3,567
	Finance costs
	Interest income		97	78
	Interest expense		(7)	(9)
	Net Finance cost		90	69
	Profit before tax		4,240	3,636
	Profit before tax	20	(857)	(688)
	Net profit		3,383	2,948

Statement of Changes in Shareholders’ Equity for the year ended 31 December 2006

	All amounts are in millions of Slovak crowns unless stated otherwise
		Share capital	Legal reserve fund	Other funds	Retained earnings	Total
	Balance at 1 January 2005	5,935	1,096	376	2,699	10,106
	Net profit for the year	-	-	-	2,948	2,948
	Paid dividends	-	-	-	(2,213)	(2,213)
	Contribution to the legal fund	-	90	-	(90)	-
	Contribution to other reserves
	(Network recovery fund)	-	-	300	(300)	-
	Balance at 31 December 2005	5,935	1,186	676	3,044	10,841
	Net profit for the year	-	-	-	3,383	3,383
	Paid dividends	-	-	-	(2,715)	(2,715)
	Contribution to other funds	-	-	200	(200)	-
	(Investment base fund)
	Other	-	-	-	140	140
	Balance at 31 December 2006	5,935	1,186	876	3,652	11,649

Cash Flow Statement for the year ended 31 December 2006

	All amounts are in millions of Slovak crowns unless stated otherwise		Year ended 31 December
		Note	2006	2005
	Cash flows from operating activities
	Cash generated from operations	23	6,079	3,215
	Interest paid		-	-
	Interest received		96	77
	Tax paid		(713)	(638)
	Net cash from operating activities		5,462	2,654
	Cash flows from investing activities
	Purchase of property and equipment		(2,027)	(2,109)
	Proceeds from sale of property and equipment		106	33
	Net cash used in investing activities		(1,921)	(2,076)
	Cash flows from financing activities
	Dividends paid		(2,715)	(2,213)
	Net cash used in financing activities		(2,715)	(2,213)
	Net increase / (decrease) in cash and cash equivalents		826	(1,635)
	Cash and cash equivalents at beginning of year	10	2,005	3,640
	Cash and cash equivalents at end of year	10	2,831	2,005

(1) General information

Západoslovenská energetika, a.s. (“the Company”, „ZSE“), in its current legal form, was established on 15 October 2001 and incorporated on 1 November 2001.

The Company is one of the three legal successors of Západoslovenské energetické závody, štátny podnik, a state owned entity. At 31 October 2001, this state enterprise was wound up without liquidation based on the resolution No. 96/2001 of the Slovak Minister of Economy. One day later, its assets and liabilities were transferred to the National Property Fund (“NPF”) of the Slovak Republic in accordance with the privatisation project. On 1 November 2001, the NPF contributed them to the following joint-stock companies: Západoslovenská energetika, a.s., Bratislavská teplárenská, a.s., and Trnavská teplárenská, a.s.

The assets and liabilities were recorded by the successor companies at historic carrying amounts as reported by the Západoslovenské energetické závody, štátny podnik as at 31 October 2001.

On 5 September 2002 the National Property Fund of Slovak Republic sold 49% of total share capital of ZSE to E.ON Energie AG, Germany. On 16 December 2003 E.ON Energie AG transferred 9% of total share capital of ZSE to European Bank for Reconstruction and Development.

The Company provides electricity distribution and supply services primarily in the Western Slovakia region. Its operations are governed by the terms of its license granted under the Energy Law (“the Energy Licence”). The Regulatory Office of Network Industries of the Slovak Republic regulates certain aspects of the Company’s relationships with its customers, including the pricing of its services provided to certain groups of customers.

The structure of the Company’s shareholders at 31 December 2006 was as follows:

The Company’s Shareholders

	At 31 December 2006	Absolute amount in SKK millions	Interest in share capital	Voting rights
	National Property Fund (NPF)	3,027	51%	51%
	E.ON Energie AG, Munich	2,374	40%	40%
	EBRD, London	534	9%	9%
	Total	5,935	100%	100%

ZSE is an associate of E.ON Energie AG, Munich, Germany, which owns a 40% shareholding in the registered capital. The National Property Fund of the Slovak Republic, based in Bratislava, owns a 51% shareholding in its registered capital. E.ON Energie AG, is a subsidiary of E.ON AG, based in Düsseldorf, Germany. E.ON AG prepares the consolidated financial statements for all group companies of the consolidation group and acts as a direct consolidating company. ZSE is consolidated by E.ON AG using equity method of consolidation.

The Company is not a shareholder with unlimited liability in other accounting entities.

Throughout these financial statements, ZSE is referred to as “Company”.

The members of the statutory bodies during the year ended 31 December 2006 were as follows:

Board of Directors

		At 31 December 2006	At 31 December 2005
	Chairman	Konrad Kreuzer	Konrad Kreuzer
	Vice Chairman	Ing. Peter Vlasatý	Ing. Peter Vlasatý
	Members	Ing. Andrej Devečka	Ing. Andrej Devečka
		Dietrich Max Fey	Dietrich Max Fey
		PaedDr. Tibor Végh	PaedDr. Tibor Végh

Supervisory Board

		At 31 December 2006	At 31 December 2005
	Chairman	Prof. Ing. Peter Baláž, PhD. (appointed on 25 April 2006)	Ing. Ján Mitaľ (resigned on 2 December 2005)
	Members	Dr. Walter Hohlefelder	Dr. Walter Hohlefelder
		Ing. Ján Ďurana	Ing. Ján Ďurana
			Prof. Ing. Peter Baláž, PhD.
		Martin Ondko	Martin Ondko
		József Száraz	József Száraz
		Silvia Šmátralová	Silvia Šmátralová
		Ing. Kamil Doman	Ing. Kamil Doman
		Ing. Alojz Bahelka	Ing. Alojz Bahelka
		Ing. Igor Glosik	Ing. Igor Glosik

The Company employed 1,431 staff on average during 2006, of which 27 were management (2005: 1,408 employees on average, of which 25 were management).

Registered address
The registered address of the Company is:

Čulenova 6
816 47 Bratislava
Slovak Republic

(2) Summary of significant accounting policies

The principal accounting policies adopted in the preparation of these financial statements are described below. These policies have been consistently applied to all the years presented, unless otherwise stated.

(2.1) Basis of preparation

The Act on Accounting of the Slovak republic No. 431/2002 Coll. as amended requires certain companies to prepare individual financial statements for the year ended 31 December 2006 in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”).

These financial statements have been prepared in compliance with International Financial Reporting Standards (“IFRS”) as adopted by European Union (EU), on the going concern basis. The Company applies all IFRS and interpretations issued by International Accounting Standards Board (herein after “IASB”) as amended by European Union, which were in force as of 31 December 2006.

The financial statements have been prepared under the historical cost convention, as modified by the valuation of the available for sale investments and financial liabilities at fair value.

For purposes of the preparation of these financial statements according to IFRS the management of the Company defines critical assumptions and estimates which have an influence on recognized amounts of assets and liabilities in the balance sheet and on expenses and revenues recognized in the income statement. At the application of accounting policies of the Company the management makes certain critical decisions. The areas which require a more complex decision making and areas where the critical assumptions and estimates are material to these financial statements are presented in Note 4.

These financial statements are prepared in millions of Slovak crowns (“SKK”). Certain comparatives or the previous years have been reclassifies to conform to current year presentation.

Amendments to published standards effective in 2006
IAS 19 (Amendment), Employee Benefits. It is mandatory for the Company’s accounting periods beginning on or after 1 January 2006. It introduces the option of an alternative recognition approach for actuarial gains and losses. It may impose additional recognition requirements for multi-employer plans where insufficient information is available to apply defined benefit accounting. It also adds new disclosure requirements. As the Company does not intend to change the accounting policy adopted for recognition of actuarial gains and losses and does not participate in any multi-employer plans, adoption of this amendment only impacts the format and extent of disclosures presented in the accounts.

Standards early adopted by the Company
The Company has not adopted any standard prior its effective date.

Standards, amendments and interpretations effective in 2006 but not relevant
The following standards, amendments and interpretations are mandatory for accounting periods beginning on or after 1 January 2006, but not relevant for Company’s operations.

• IAS 21 (Amendment), Net Investment in a Foreign Operation. This amendment changes accounting for foreign exchange gains and losses arising on intercompany loans that form part of a net investment in a foreign operation.
  
   
• IAS 39 (Amendment), Cash Flow Hedge Accounting of Forecast Intragroup Transactions. The amendment allows the foreign currency risk of a highly probable forecast intragroup transaction to qualify as a hedged item in the consolidated financial statements, provided that: (a) the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction; and (b) the foreign currency risk will affect consolidated profit or loss.
  
   
• IAS 39 (Amendment), The Fair Value Option. IAS 39 (as revised in 2003) permitted entities to designate irrevocably on initial recognition practically any financial instrument as one to be measured at fair value with gains and losses recognized in profit and loss (‘fair value through profit and loss’). This amendment changes the definition of financial instruments classified at ‘fair value through profit or loss’ and restricts the ability to designate financial instruments as part of this category.
  
   
• IAS 39 and IFRS 4 (Amendment), Financial Guarantee Contracts. This amendment requires issued financial guarantees, other than those previously asserted by the entity to be insurance contracts, to be initially recognized at their fair value, and subsequently measured at the higher of (a) the unamortized balance of the related fees received and deferred, and (b) the expenditure required to settle the commitment at the balance sheet date. Different requirements apply for the subsequent measurement of issued financial guarantees that prevent derecognition of financial assets or result in continuing involvement accounting.
  
   
• IFRS 6 Exploration for and Evaluation of Mineral Resources. IFRS 6 is not relevant to the Company’s operations.
  
   
• IFRS 1 (Amendment) First time adoption of International Financial Reporting Standards and IFRS 6 (Amendment), Exploration for and Evaluation of Mineral Resources. This amendment is not relevant to the Company’s operations, as the Company is not a first-time adopter and does not carry out exploration for and evaluation of mineral resources.
  
   
• IFRIC 4 Determining whether an Arrangement contains a Lease. IFRIC 4 requires the determination of whether an arrangement is or contains a lease to be based on the substance of the arrangement. It requires an assessment of whether: (a) fulfilment of the arrangement is dependent on the use of a specific asset or assets (the asset); and (b) the arrangement conveys a right to use the asset.
  
   
• IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds. Subject to certain exceptions, this interpretation prohibits offsetting a liability for decommissioning costs with an asset representing an interest in a decomminissioning or similar fund and clarifies measurement of the reimbursement asset.
  
   
• IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment. IFRIC 6 is not relevant to the Company’s operations.

Interpretations to existing standards that are not yet effective and have been not early adopted by the Company
The following interpretations to existing standards have been published that are mandatory for the Company’s accounting periods beginning after 1 May 2006 but the Company has not early adopted:

• IFRIC 8, Scope of IFRS 2 (effective for annual periods beginning on or after 1 May 2006). IFRIC 8 requires consideration of transactions involving the issuance of equity instruments – where the identifiable consideration received is less than the fair value of the equity instruments issued – to establish whether or not they fall within the scope of IFRS 2. The Company will apply IFRIC 8 from 1 January 2007, but it is not expected to have any impact on the Company’s accounts.
  
   
• IFRIC 10, Interim Financial Reporting and Impairment (effective for annual periods beginning on or after 1 November 2006). IFRIC 10 prohibits the impairment losses recognised in an interim period on goodwill, investments in equity instruments and investments in financial assets carried at cost to be reversed at a subsequent balance sheet date. The Company will apply IFRIC 10 from 1 January 2007, but it is not expected to have any impact on the Company’s accounts.
  
   
• IFRS 7, Financial instruments: Disclosures and amendment of IAS 1, Presentation of financial statements – Capital Disclosures (effective since 1 January 2007). IFRS 7 implements new presentation in order to improve information on financial instruments. It requires qualitative and quantitative information on exposures to financial instruments risks, including specified minimum presentation of credit risk, liquidity risk and market risk covering the market risk sensitivity analysis. It replaces IAS 30 Disclosures in Financial Statements of Banks and Similar Financial Institutions and disclosure requirements of IAS 32 Financial Instruments: Disclosure and Presentation. It is mandatory for all entities reporting under IFRS. The amendment of IAS 1 introduces the presentation relating to capital level of entities and capital management. The Company will apply IFRS 7 and IAS 1 amendment in the accounting period starting 1 January 2007.

Interpretations to existing standards that are not yet effective and not relevant for the Company’s operations
The following interpretations to existing standards have been published that are mandatory for the Company’s accounting periods beginning on or after 1 May 2006 or later periods but are not relevant for the Company’s operations:

• IFRIC 7, Applying the Restatement Approach under IAS 29, Financial Reporting in Hyperinflationary Economies (effective from 1 March 2006). IFRIC 7 provides guidance on how to apply requirements of IAS 29 in a reporting period in which an entity identifies the existence of hyperinflation in the economy of its functional Currency, when the economy was not hyperinflationary in the prior period. As the Company does not have a currency of a hyperinflationary economy as its functional currency, IFRIC 7 is not relevant to the Company’s operations.
  
   
• IFRIC 9, Reassessment of embedded derivatives (effective for annual periods beginning on or after 1 June 2006). IFRIC 9 requires an entity to assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cash flows that otherwise would be required under the contract, in which case reassessment is required. As the entity has not changed the terms of its contracts, IFRIC 9 is not relevant to the Company’s operations.

(2.2) Subsidiaries, Associates and joint ventures

1. Subsidiaries
   Subsidiaries are all entities (including special purpose entities) over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are de-consolidated from the date that control ceases.
   
   Investments in subsidiaries are carried at cost in these individual financial statements according to IFRS 3 and IAS 27. Impairment losses are recognized using a provision account. Provisions are recognized based on the present value of estimated future cash flows.
   
   The purchase method of accounting is used to account for the acquisition of subsidiaries by the Company. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Company’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement.
   
   Inter-company transactions, balances and unrealized gains on transactions between group companies are eliminated. Unrealized losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Company.
   
   The Company does not hold any significant subsidiaries.
    
2. Associates and joint ventures
   Associates are all entities over which the Company has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Jointly controlled entities (“joint ventures”) are those in which the Company’s shares control of the operations with its joint venture partners. Investments in associates and joint ventures are accounted for using the equity method of accounting and are initially recognized at cost. The Company’s investment in these entities includes goodwill (net of any accumulated impairment loss) identified on acquisition.
   
   Investments in associates and joint ventures are carried at cost in these individual financial statements according to IFRS 3 and IAS 27. Impairment losses are recognized using a provision account. Provisions are recognized based on the present value of estimated future cash flows.
   
   The Company’s share of its associates’ and joint ventures’ post-acquisition profits or losses is recognized in the income statement, and its share of post-acquisition movements in reserves is recognized in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Company’s share of losses in an associate and joint ventures equals or exceeds its interest in the associate and the joint ventures, including any other unsecured receivables, the Company does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate and the joint ventures.
   
   Unrealized gains on transactions between the Company and its associates and joint ventures are eliminated to the extent of the Company’s interest in these entities. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates and joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Company.
   
   The Company does not hold any significant associates.

(2.3) Foreign currency translation

1. Functional and presentation currency
   Items included in the financial statements of each of the Company’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’).
   
   The financial statements are presented in Slovak crowns, which is the Company’s functional and presentation currency.
    
2. Transactions and balances
   Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except for the effective part of valuation differences from derivative financial instruments (cash flow hedging), which is recognized directly in equity.

(2.4) Property, plant and equipment

1. Cost
   All property, plant and equipment are stated at historical cost less depreciation less accumulated impairment loss. Historical cost includes expenditure that is directly attributable to the acquisition of the items, including borrowing costs incurred from the date of acquisition until the date the item is put in use.
   
   Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.
   
   The most significant part of property, plant and equipment is represented by the network. Network includes mainly power lines, pylons and switching stations. Useful life of network assets varies between 15 and 40 years.
    
2. Depreciation
   Land and assets under construction are not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives. Straight-line depreciation method is used. The estimated useful lives of individual groups of assets are as follows:
   
   

   	The estimated useful lives of individual groups of assets
   	Buildings, halls and constructions	30 – 40 years
   	Machinery and equipment	4 – 30 years
   	Vehicles	4 – 15 years
   	Other assets	4 – 30 years

   
   The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
   
   An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 2.6).
   
   Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately. The Company allocates the amount initially recognised in respect of an item of property, plant and equipment proportionally to its significant parts and depreciates separately each such part.
   
   Gains and losses on disposals are determined by comparing proceeds with carrying amount and are recognized within other (losses)/gains – net in the income statement. When revalued assets are sold, the amounts included in other reserves are transferred to retained earnings.

(2.5) Intangible assets

Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortized on the straight-line basis over their useful lives, not exceeding a period of 5 years.

Costs associated with developing or maintaining computer software programmes are recognized as an expense as incurred.

Subsequent expenditure which enhances or extends the performance of computer software programmes beyond their original specifications and meets criteria for recognizing it as an intangible asset according to IAS 38 is recognized as a capital improvement and added to the original cost of the software.

(2.6) Impairment of non-financial assets

Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount.

The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each balance sheet date.

(2.7) Financial assets

The Company classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.

1. Financial assets at fair value through profit or loss
   Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are classified as held for trading unless they are designated as hedges. Assets in this category are classified as current assets.
    
2. Loans and receivables
   Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. Loans and receivables are classified as trade and other receivables in the balance sheet (Note 2.10).
    
3. Available-for-sale financial assets
   Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date.
   
   Regular purchases and sales of investments are recognised on trade-date – the date on which the Company commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the income statement. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Available for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are carried at amortised cost using the effective interest method.
   
   The Company holds only available-for-sale investments.

(2.8) Leases

IAS 17 defines a lease as being an agreement whereby the lessor conveys to the lessee in return for a payment, or series of payments, the right to use the asset for an agreed period of time.

The Company leases certain property, plant and equipment. Leases of property, plant and equipment where the Company has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are recognized as assets in the Company’s balance sheet at the inception of the lease at the lease at the lower of the fair value of the leased property and the present value of the minimum lease payments.

Each lease payment is split into the liability and finance charges to achieve a constant periodic rate of interest on the remaining balance of the liability. The corresponding rental obligations, net of finance charges, are included in other long-term payables. If there is reasonable certainty that the lessee will obtain ownership of the asset by the end of the lease term, the period of expected use is the useful life of the asset and the asset is depreciated accordingly; otherwise the asset is depreciated over the shorter of the lease term and its useful life. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

(2.9) Inventories

Inventories are stated at the lower of cost and net realizable value. Weighted average method is used for the measurement at the disposal of inventories. The cost of material includes purchase price and directly attributable acquisition costs, such as customs duties or transportation costs. The cost of work-in-progress includes direct costs and related production overheads. Net realizable value is the estimated selling price in the ordinary course of business, less cost of completion and selling expenses.

(2.10) Trade receivables

Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. Revenue recognition policy is described in the Note 2.18.

A provision for impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all the amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter into bankruptcy or financial reorganization, default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of the estimated future cash flow discounted by the original effective interest rate.

Impairment of trade receivables is recognized on the account of provision for receivables. Set-up and release of the provision is recognized in the income statement within other operating costs. Trade receivables that cannot be collected are written off against the provision account for trade receivables. Trade receivables that were written off and subsequently paid by the debtors are recognized in the income statement within other operating revenues.

(2.11) Cash and cash equivalents

Cash and cash equivalents comprise cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. In the balance sheet, bank overdrafts are included in borrowings in current liabilities.

(2.12) Trade payables

Trade payables are recognized initially at fair value and subsequently measured at amortized cost using effective interest method.

(2.13) Taxation

1. Deferred tax
   Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The deferred income tax not accounted for, arises from initial recognition of an asset or liability in a transaction other than a business combination. It does not affect the accounting nor the taxable profit or loss at the time of the transaction. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled.
   
   Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.
   
   Deferred income tax is provided on temporary differences arising on investments in associates and joint ventures, except where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future.
   
   The Company offsets deferred tax assets and deferred tax liabilities where the Company has a legally enforceable right to set off tax assets against tax liabilities and these relate to income taxes levied by the same taxation authority.
    
2. Corporate income tax
   Corporate income tax is expensed in the period when the tax liability arises. In the accompanying income statement, it is calculated on the basis of the profit/(loss) before taxes that has been adjusted for tax-deductible and tax non-deductible items due to permanent and temporary adjustments to the tax base, for tax relief, and any loss carried forward. The tax liability is stated net of corporate income tax advances that the Company paid during the year.

(2.14) Grants and contributions related to acquisition of property and equipment

The Company and its predecessor have over time received government grants for construction of the electricity distribution network, in particular for new municipal connections and networks. Certain customers of the Company contributed towards the cost of their connection.

Grants from the government and customer contributions are recognized at their fair value where there is a reasonable assurance that the grant or contribution will be received and the Company will comply with all attached conditions.

Government grants and customer contributions relating to acquisition of property and equipment have been accounted by setting up the grant as deferred income, which is recognized as other income over the life of depreciable asset. Both fixed assets and grants are recorded at fair values at acquisition.

Government grants relating to operating expenses are deferred and recognized in the income statement over the period necessary to match them with the costs they are intended to compensate.

(2.15) Borrowings

Borrowings are initially recognized at fair value, net of transaction cost incurred. Borrowings are subsequently stated at amortized cost. Any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method.

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

(2.16) Provisions

Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Provisions are not recognized for future operating losses.

Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax-rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase of the provision due to passage of time is recognized as interest expense.

(2.17) Employee benefits

1. Pension plans
   The Company has both defined benefit and defined contribution plans.
   
   A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually as a function of one or more factors such as age, years of service and compensation. A defined contribution plan is a pension plan under which the Company pays fixed contributions into a separate entity and will have no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.
    
2. Unfunded defined benefit pension plan
   According to the contract with the Trade Unions for the year 2006 and 2007 the Company is obliged to pay its employees on retirement or disability the average of their monthly salary (2005: 2 multiples of their average monthly salary). Additionally, if the employees decide to resign exactly at the date of retirement, the Company is obliged to pay its employees additional 6 multiples of their average monthly salary (2005: 5 multiples of their average monthly salary).
   
   The minimum requirement of the Labour Code of one-month average salary payment on retirement is included in the above multiples.
   
   The Company also pays certain life jubilees and fidelity bonuses.
   
   a) Jubilee benefits are paid by the Company in the amount of 1.5 multiples of their average monthly salary to each employee at the age of 50 regardless from the number of years of service for the Company.
   
   b) Fidelity bonuses paid by the Company are dependant on the number of year of service for the Company and is equal to the following amounts:
   
   

   	Fidelity bonuses paid by the Company
   	Number of year of service	Amounts
   	10 years	SKK 11 thousand
   	20 years	SKK 17 thousand
   	30 years	SKK 22 thousand
   	35 years	SKK 28 thousand

   
   The liability recognized in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date, together with adjustments for past service cost. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government securities which have terms to maturity approximating the terms of the related pension liability.
   
   Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to income when incurred. Amendments to pension plans are charged or credited to income over the average remaining service lives of the related employees.
    
3. Defined contribution pension plans
   The Company contributes to the government and private defined contribution pension plans.
   
   The Company makes contributions to the government health, retirement benefit, accidental and guaranty insurance and unemployment schemes at the statutory rates in force during the year, based on gross salary payments. Throughout the year, the Company made contributions amounting to 35.2% (2005: 35.2%) of gross salaries up to a monthly salary, which is defined by the relevant law, to such schemes, together with contributions by employees of a further 13.4% (2005: 13.4%). The cost of these payments is charged to the income statement in the same period as the related salary cost.
   
   In addition, with respect to employees who have chosen to participate in a supplementary pension scheme, the Company makes contributions to the supplementary scheme amounting to 3% (2005: 2.5%) from the total of monthly tariff wage in addition to an amount variable for each employee based on the number of years worked.
    
4. Termination benefits
   Termination benefits are payable whenever an employee’s employment is terminated by the Company before the normal retirement date or whenever an employee accepts voluntary redundancy in exchange for these benefits.
   
   The Company recognizes termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after balance sheet date are discounted to present value.
    
5. Profit sharing and bonus plans
   A liability for employee benefits in the form of profit sharing and bonus plans is recognized within other payables when there is no realistic alternative but to settle the liability and at least one of the following conditions is met:
   
   - there is a formal plan and the amounts to be paid are determined before the time of issuing the financial statements; or
   - past practice has created a valid expectation by employees that they will receive a bonus/profit sharing and the amount can be determined before the time of issuing the financial statements.
   
   Liabilities for profit sharing and bonus plans are expected to be settled within 12 months and are measured at the amounts expected to be paid when they are settled.

(2.18) Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Company’s activities. Revenue is shown, net of value-added tax, estimated returns, rebates and discounts.

The Company recognizes revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the Company and specific criteria will be met for each of the Company’s activities as described below.

1. Revenue from sale and distribution of electricity
   Revenue from sale and distribution of electricity is recognized when the electricity is delivered to the customer.
   
   Consumption to wholesale customers is metered and billed on monthly basis.
   
   Consumption of the retail customers in the segment of small entrepreneurs was metered as of 31 December 2006 and subsequently billed. This metering established conditions for billing of actual consumption of the retail customers in small entrepreneurs segment on the annual basis from 1 January till 31 December.
   
   Consumption of the retail customers in households segment is metered and billed on annual basis and the Company split its customer base to twelve billing cycles. The billing of electricity supplied in 2006 for all twelve billing cycles will be completed in December 2007. For calculation of the total supply to the retail customers the Company uses an estimate of network losses, which are incurred in the distribution system and the regularly measured amounts of overall electricity purchases, sales to the Company’s wholesale customers and its own consumption. Network losses are included in cost for purchase of electricity.
   
   Revenue from sale on the spot market is recognised when the contract is fulfilled.
   
   ZSE receives contribution from the customers to connect them to electricity network. Revenue from such contributions is recognized as deferred revenue and are released to revenues over the useful life of the asset (approximately 20 years).
    
2. Sales of services
   Sales of services are recognized in the accounting period in which the services are rendered, by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided.
    
3. Dividend income
   Dividend income is recognized when the right to receive the payment is established.
    
4. Interest income
   Interest income is recognized on accrual basis in the period when it is incurred, independent from the actual payments of the interest.
    
5. Contractual penalties
   Contractual penalties are recognized as revenue when the cash payment is received as contractual penalties mostly relate to contracts with customers who intended to defraud ZSE and as such are relatively difficult to collect.

(2.19) Dividend distribution

Dividend distribution to the Company’s shareholders is recognized as a liability in the Company’s financial statements in the period in which the dividends are approved by the Company’s shareholders.

(2.20) Comparatives

Certain comparatives have been reclassified in order to conform to the current year presentation.

Following adjustments were done:

Balance sheet

	Year ended 31 December	2005 before reclassification	Adjustments	2005 after reclassification
	Current trade and other payables	3,032	217	3,249
	Current provisions for liabilities and charges	241	(217)	24

(3) Financial risk management

The Company’s activities are exposed to a variety of financial risks: market risk (including risk of changes in foreign currency exchange rates and price risk), credit risk and liquidity risk. The strategy of risk management of the Company is focused on the mitigation of potential negative impacts on financial results of the Company. In 2006 the Company applied a risk management framework focusing on contractual, credit and financial risks.

1. Credit risk
   Credit risk relates to bank accounts, derivative financial instruments and trade receivables. As for the banks and financial institutions, Company has relationships only with those ones that have high independent rating assessment. As for the trade receivables, the Company does not have a significant concentration of credit risk mainly due to a large number of diverse customers. The Company uses a system of reminders, which may culminate in a service disconnection, as the prevailing contract enforcement method.
    
2. Liquidity risk
   Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Company Treasury aims to maintain flexibility in funding by keeping committed credit lines available.
    
3. Foreign exchange risk
   The Company is exposed to insignificant foreign exchange risk arising from currency exposures. Foreign currency exposures arise from foreign currency denominated capital expenditures and electricity business.
    
4. Interest rate risk
   The Company’s operating income and operating cash flows are substantially independent of changes in market interest rates. The Company has no significant interest-bearing assets.
    
5. Derivative financial instruments
   The Company has not entered into any significant transaction with derivative financial instruments. No derivative financial instruments were outstanding at 31 December 2006 and 2005.
    
6. Price risk
   The Company has agreed the prices for MWh and volume of purchased electricity with its suppliers in advance for the next year. The prices for distribution of electricity for all customers and sale of electricity for households are fully regulated by Regulatory Office for Network Industries. The price risk is continuously monitored by the management of Company.

(4) Critical accounting estimates and judgements

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

(4.1) Critical accounting estimates and assumptions

The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. Estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined below.

1. Unbilled electricity
   Unbilled electricity is an accounting estimate, which is based on the estimate of the electricity supply in technical units (GWh) at low voltage level and on the estimate of the price which will be used for billing of the supply in the future. The estimate of the electricity supply (Note 9) at this voltage level is based on:
   
   - the inputs for ZSE networks (measured amount)
   - the supplies at other voltage levels (measured amount)
   - the estimate of the network losses
   - the estimate of the supply at low voltage level
   - the estimate of the price which will be billed in the future for the supplies realized in the current year.
    
2. Revenue recognition
   The Company recognizes the revenues in the way described in Note 2.18.

(4.2.) Critical judgements in applying of accounting policies

1. Estimated useful life of network
   Useful life of network assets is based on accounting estimates described in Note 2.4. If the revised estimated useful life of network assets was shorter by 10% than management’s estimates at 31 December 2006, the Company would have recognized a further depreciation of network assets in amount of SKK 50 million.
    
2. Provisions
   The Company recognizes the provisions in the way described in Note 2.16.
   
   When determining the amount of the provision for litigations the Company makes the best estimate of present value of future cash outflow.

(5) Property, plant and equipment

Property, plant and equipment

		Land	Buildings, halls and constructions	Machinery, equipment, vehicles and other assets	Capital work in progress including advances (CIP)	Total
	At 1 January 2005
	Cost	380	9,108	4,193	1,391	15,072
	Accumulated depreciation including impairment charge	-	(4,354)	(2,896)	(24)	(7,274)
	Net book value	380	4,754	1,297	1,367	7,798
	Year ended 31 December 2005
	Additions	-	55	40	1,987	2,082
	Transfers	2	553	492	(1,047)	-
	Cost of disposals	(2)	(38)	(119)	(2)	(161)
	Accumulated depreciation of disposals	-	29	106	-	135
	Depreciation charge	-	(277)	(260)	-	(537)
	Impairment (charge)/ release	-	-	-	9	9
	Closing net book value	380	5,076	1,556	2,314	9,326
	At 31 December 2005
	Cost	380	9,678	4,606	2,329	16,993
	Accumulated depreciation including impairment charge	-	(4,602)	(3,050)	(15)	(7,667)
	Net book value	380	5,076	1,556	2,314	9,326
	Year ended 31 December 2006
	Additions	-	50	22	1,972	2,044
	Transfers	19	1,097	963	(2,079)	-
	Cost of disposals	(13)	(159)	(89)	(2)	(263)
	Accumulated depreciation of disposals	-	70	76	-	146
	Depreciation charge	-	(299)	(321)	-	(620)
	Impairment (charge)/ release	-	-	-	1	1
	Closing net book value	386	5,835	2,207	2,206	10,634
	At 31 December 2006
	Cost	386	10,666	5,502	2,220	18,774
	Accumulated depreciation including impairment charge	-	(4,831)	(3,295)	(14)	(8,140)
	Net book value	386	5,835	2,207	2,206	10,634

At 31 December 2006 and at 31 December 2005 the Company did not lease any fixed assets leased as finance lease (where Company is the lessee).

Property plant and equipment includes the capitalized interest on debt apportioned to the construction period of qualifying assets as part of their cost of acquisition in the amount of SKK 352 million (in the year ended 31 December 2005: SKK 352 million). No borrowing costs were capitalized during 2006 and 2005.

During the year ended 31 December 2006 the Company received from customers fixed assets and cash to finance construction of fixed assets at fair value of SKK 14 million (during the year ended 31 December 2005: SKK 24 million). As at 31 December 2006, the cost and net book value of fixed assets financed through grants and contributions amounts to SKK 1,586 million and SKK 1,140 million respectively (as at 31 December 2005: SKK 1,588 million and SKK 1,292 million respectively).

At 31 December 2006 no property, plant and equipment was collaterized or pledged.

Non-current tangible assets are insured in Česká poisťovna - Slovensko against damages caused by natural disaster and water from water piping up to the amount of SKK 21,589 million (2005: SKK 20,338 million).

(6) Intangible assets

Intangible assets

		Computer software and other	Capital work in progress including advances	Total
	At 1 January 2005
	Cost	187	163	350
	Accumulated depreciation including impairment charge	(48)	(1)	(49)
	Net book value	139	162	301
	Year ended 31 December 2005
	Additions	-	134	134
	Transfers	234	(234)	-
	Amortisation charge	(82)	-	(82)
	Impairment (charge)/ release	-	1	1
	Closing net book value	291	63	354
	At 31 December 2005
	Cost	421	63	484
	Accumulated depreciation including impairment charge	(130)	-	(130)
	Net book value	291	63	354
	Year ended 31 December 2006
	Additions	-	55	55
	Transfers	74	(74)	-
	Amortisation charge	(131)	-	(131)
	Impairment (charge)/ release	-	-	-
	Closing net book value	234	44	278
	At 31 December 2006
	Cost	495	44	539
	Accumulated depreciation including impairment charge	(261)	-	(261)
	Net book value	234	44	278

(7) Investments

1. Available for sale financial assets
   
   

   Available for sale financial assets

   	As at 31 December	2006	2005
   	At the beginning of the year	127	127
   	Additions	3	-
   	Disposals	-	-
   	At end of the year	130	127

   
   On 20 May 2006 ZSE acquired the share of 100% in ZSE distribúcia, a.s. by payment of its contribution amounting to SKK 1.1 million.
   
   On 18 August 2006 ZSE acquired the share of 100% in ZSE Energia, a.s. by payment of its contribution amounting to SKK 1.1 million.
   
   Both companies were incorporated with the purpose to create conditions for legal unbundling of electricity distribution and trade which is required by Energy Law no. 656/2004 from July, 1 2007.
   
   It is not possible to reliably determine the fair value of shares on equity of subsidiaries, associates and joint ventures.

(8) Inventories

Inventories

	As at 31 December	2006	2005
	Materials and spare parts	51	39
		51	39

The inventory items are shown after provision for slow-moving materials of SKK 1 million (2005: SKK 2 million).

The cost of inventories recognized as expense and included in ‘cost of sales’ amounted to SKK 431 million (2005: SKK 432 million).

Inventories are insured against damages caused by natural disaster or water from water piping up to SKK 47 million (2005: SKK 50 million).

(9) Trade and other receivables

Trade and other receivables

	As at 31 December	2006	2005
	Trade receivables	2,464	3,708
	Less: Provision for impairment of receivables	(954)	(1,028)
	Trade receivables – net	1,510	2,680
	Receivables from related parties (Note 24)	491	482
	Accrued unbilled electricity net of advances from customers (a)	-	324
	Other receivables including prepayments and other accrued income	401	307
		2,402	3,793

Out of the total receivables at 31 December 2006, overdue receivables are SKK 1,221 million
(at 31 December 2005: SKK 1,480 million).

1. Accrued revenues represent unbilled supplies of electricity to retail household customers net of advances received and progress billings. The consumption of the retail customers is metered and billed on annual basis (in the year ended 31 December 2004: on semi-annual basis) and the Company split its customer base to twelve billing cycles (in the year ended 31 December 2004: to six billing cycles). The billing of electricity supplied in 2004 for all six billing cycles was completed in June 2005. The billing of electricity supplied in 2005 for all 12 billing cycles was completed in December 2006. For calculation of the total supply to the retail customers the Company uses an estimate of network losses, which are incurred in the distribution system and the regularly measured amounts of overall electricity purchases, sales to the Company’s wholesale customers and its own consumption.

(10) Cash and cash equivalents

Cash and cash equivalents

	As at 31 December	2006	2005
	Cash at bank and in hand	363	35
	Short term bank deposits	2,468	1,970
		2,831	2,005

The effective interest rate on short term bank deposits was 3.5 % (in the year ended 31 December 2005: 2.7%) and these deposits have an average maturity of 3 days (in the year ended
31 December 2005: 3 days). As at 31 December 2006 the restricted cash amounted to SKK 4.5 million
(as at 31 December 2005: SKK 4.5 million).

(11) Shareholders’ equity

The total authorized number of ordinary shares is 5,934,594 shares with a par value of SKK 1 thousand per share. All authorized shares are issued and fully paid in. 

As at 31 December 2006 the total number of 3,026,643 shares (51%) are owned by the National Property Fund of the Slovak Republic, 2,373,838 shares (40%) are owned by E. ON Energie AG, Germany and 534,113 shares (9%) are owned by European Bank for Reconstruction and Development.

General Meeting held at 29 May 2006 approved the statutory financial statements for previous periods as follows:

	The statutory financial statements for previous periods
		Amounts
	Appropriation to the social fund	SKK 15 million
	Appropriation to the investment base fund SKK	SKK 200 million
	Dividends	SKK 2,715 million
	Royalties	SKK 15 million

Retained earnings and other funds include legal reserve fund, the use of which is restricted under the Slovak Commercial code. As at 31 December 2006 the reserve fund amounted to SKK 1,186 million (as at 31 December 2005: SKK 1,186 million). Retained earnings include furthermore a regional development fund which has been set up based on the agreement of Company’s Shareholders in 2004 and distribution network recovery fund set up based on the agreement of Company’s Shareholders and by initiative of Ministry of Economy of Slovak Republic in 2005. The investment base fund was set up in 2006. The usage of these funds is limited to the defined purposes.
 
The accumulated statutory profits of the Company under the Slovak law at 31 December 2006 available for profit distribution amounted to SKK 3,652 million (2005: SKK 2,998 million). Decision on the use of the 2006 statutory profit of SKK 3,383 million will be made by the General Meeting. Earnings per share are SKK 570 for the year ended 31 December 2006.

(12) Deferred revenues

Deferred revenues

	As at 31 December	2006	2005
	Non current
	Grants and contributions – long-term portion (a)	1,179	1,148
	Connection fee – long-term portion	186	27
		1,365	1,175
	Current
	Grants and contributions – current portion (a)	53	52
	Connection fee – short-term portion	10	1
		63	53

1. Grants and contributions are paid primarily by customers for capital expenditures made on their behalf, and access network assets transferred to the Company by its customers free of charge. The grants are non-refundable and are recognized in other operating income based upon depreciable lives of the related assets.

(13) Trade and other payables

Trade and other payables

	As at 31 December	2006	2005
	Trade payables	543	1,028
	Payables to related parties (Note 24)	1,290	1,244
	Deferred revenues – capital expenditure grant (Note 12)	53	52
	Deferred revenues – connection fee (Note 12)	10	1
	Payables to employees	42	35
	Social security	24	20
	Accrued personnel expenses	111	77
	Other accrued liabilities	502	421
	VAT payable	118	103
	Other payables	72	268
		2,765	3,249

Out of the total payables at 31 December 2006, overdue payables are SKK 6 million
(at 31 December 2005: SKK 167 million).

(14) Deferred income taxes

Deferred income taxes are calculated in full on temporary differences under the liability method using a principal tax rate of 19%.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current asset against current liabilities and when the deferred income taxes relate to the same fiscal authority. The offset amounts are as follows:

Deferred income tax assets and liabilities

	As at 31 December	2006	2005
	Deferred tax asset
	to be recovered after more than 12 months	59	68
	to be recovered within 12 months	64	83
		123	151
	Deferred tax liability
	to be recovered after more than 12 months	(184)	(127)
	to be recovered within 12 months	(25)	(23)
		(209)	(150)
	Total	(86)	1

The movement in deferred tax assets and liabilities during the year is as follows:

The movement in deferred tax assets and liabilities during

		As at 1 January 2005	Charged/(credited) to the Income statement	As at 31 December 2005
	Accelerated tax depreciation	(89)	(13)	(102)
	Pension liability and similar provisions	50	(14)	36
	Other provisions and accrued expenses	41	(27)	14
	Provisions against bad debts	32	23	55
	Tax losses carried forward	11	(5)	6
	Capitalized interest and capitalized foreign exchange differences	(50)	2	(48)
	Other	-	40	40
		(5)	6	1

The movement in deferred tax assets and liabilities during

		As at 1 January 2006	Charged/(credited) to the Income statement	As at 31 December 2006
	Accelerated tax depreciation	(102)	(51)	(153)
	Pension liability and similar provisions	36	7	43
	Other provisions and accrued expenses	14	(2)	12
	Provisions against bad debts	55	(20)	35
	Tax losses carried forward	6	-	6
	Capitalized interest and capitalized foreign exchange differences	(48)	(5)	(53)
	Other	40	(16)	24
		1	(87)	(86)

(15) Provisions for liabilities and charges

Provisions for liabilities and charges

		Pensions and other staff benefits (a)	Onerous contracts (b)	Legal claims (c)	Total
	At 1 January 2006	191	76	27	294
	Charged to income statement
	- Additional provisions	33	-	-	33
	Used/paid during year	-	(12)	-	(12)
	At 31 December 2006	224	64	27	315

Analysis of total provisions

	As at 31 December	2006	2005
	Non-current	281	270
	Current	34	24
		315	294

(a) Pension and other staff benefits
The following amounts have been recognised with respect of the defined benefit pension plan and other defined benefits:

Pension and other staff benefits

	As at 31 December	2006	2005
	Present value of unfunded retirement obligations	182	148
	Unrecognized portion of past service costs	-	-
	Present value of recognised unfunded retirement obligations	182	148
	Jubilee awards	25	24
	Fidelity bonus	17	19
		224	191

The amounts recognised in the income statement are as follows:

The amounts recognised in the income statement

	Year ended 31 December	2006	2005
	Current service cost	11	19
	Past service cost	3	2
	Actuarial gain	14	(80)
	Jubilee awards and fidelity bonus	4	(20)
	Total (credit)/charge, included in staff costs	32	(79)
	Interest expense	7	9
	Benefits paid	(6)	-
	Total (gain) / losss	33	(70)

The principal actuarial assumptions to determine the pension liability were as follows:

The principal actuarial assumptions to determine the pension liability

	Average number of employees at 31 December 2006	1,441
	Percentage of employees, who will terminate their employment with ZSE prior to retirement (withdrawal rate)	Approximately 2% p.a., differing with age and sex
	Expected salary increases short-term	6.5% p.a.
	Expected salary increases long-term	6.5% p.a.
	Discount rate	4% p.a.

(b) Provision for onerous contracts
Provision for onerous contract related to a long term contract on sales of electricity, which terminates in 2011. Provision has been recognized on future losses arising from the unavoidable costs of meeting the obligations of the Company under the contract. It is expected that SKK 14 million will be utilised in 2007, and SKK 50 million will be utilised proportionally up to the year 2011.

(c) Provision for legal claims
Provision for legal claims includes amount in respect of a legal dispute with Tax authority relating to tax returns from 2002 and 2003 respectively. In the opinion of the Company’s management, after taking appropriate legal advice, the outcome of these legal claims will not give rise to any significant loss beyond the amounts provided.

(16) Revenues

Revenues include the following:

Revenues

	Year ended 31 December	2006	2005
	Electricity sales
	Sales of electricity to industrial customers (wholesale)	13,162	11,821
	Sales of electricity to residential and commercial customers (retail)	11,743	11,008
	Other	40	151
	Trading on the spot market	1,745	560
	Other revenue
	Maintenance and operation of the transmission grid	17	23
	Revenues for connection works and testing fees	30	1
	Construction works for third parties	23	19
	Other revenue	103	33
		26,863	23,616

Slovakia is currently in the process of full implementation of the European Union electricity market directive, which is expected to result in phased complete liberalization of the market, whereby all customers but households became eligible from 1 January 2005 and households are expected to become eligible in July 2007.

(17) Cost of sales

The following amounts have been charged to cost of sales:

Cost of sales

	Year ended 31 December	2006	2005
	Purchases of electricity from:
	Slovenské elektrárne (“SE”) and SEPS	8,981	7,576
	Own consumption	8	32
	Other domestic electricity producers	419	388
	Water dams	57	51
	Imports from abroad	2,973	2,540
	Trading on the spot market	2,161	937
	Electricity transmission fees (including system access and ancillary service charges)	4,321	4,850
	Cost of equipment and spare parts	431	437
	Other	-	81
		19,351	16,892

(18) Operating expenses

Operating expenses

	Year ended 31 December	2006	2005
	Wages and salaries	920	702
	Repairs and maintenance of electrical network related assets	249	221
	Other repairs and maintenance	377	427
	External services provided in connection with internally run capital projects	56	51
	IT maintenance fees	430	392
	Training and business restructuring consulting	16	4
	Post and telecommunication costs	36	36
	Rental costs	17	9
	Other services	519	405
	Depreciation	620	537
	Amortisation	131	82
	Bad debt expense	-	452
	Bad debt write-offs	42	24
	Other operating expense	256	33
		3,669	3,375

(19) Other operating income

Other operating income

	Year ended 31 December	2006	2005
	Income from contractual penalties (a)	41	-
	Customer grants (b)	57	54
	Income from rental and social facilities	33	59
	Gain on disposal of fixed assets	4	12
	Bad debt release	74	-
	Other	98	93
		307	218

1. Income from contractual penalties related mainly to penalties charged to late paying customers. In 2005 the process penalty claiming was temporarily stopped. In 2006 the process was reestablished.
   
   
2. Customer grants are received from municipalities and customers to cover costs of connections. The grants are generally non-refundable and are recognized as other operating income over the useful life of the related assets.

(20) Income tax expense

A reconciliation between the reported income tax charge and the theoretical amount that would arise using the statutory tax rates is as follows:

Income tax expense

	Year ended 31 December	2006	2005
	Income before tax	4,240	3,636
	Theoretical income tax related to current period at 19%	806	691
	Non-deductible provision for doubtful accounts and inventory	6	20
	Tax effect of release provision not subject to tax	-	(29)
	Income tax related to prior periods	-	13
	Other tax non-deductible items, net	45	(7)
		857	688
	Income tax expense for the period
	The tax charge for the period comprises:
	Deferred tax charge/ (credit) (Note 14)	87	(6)
	Tax charge in respect of current period	770	681
	Income tax related to prior periods	-	13
		857	688

(21) Contingencies

Taxation
Due to the fact that Slovak tax law contains certain provisions allowing for more than one interpretation, as well as the practice, developed in the generally unstable environment by the tax authority of making arbitrary judgements on business activities, Management’s interpretation of the Company’s business activities may not coincide with the interpretation of these activities by the tax authorities. The fiscal years from 2001 through to 2006 remain open to tax inspection.

(22) Commitments

At 31 December 2006, the Company concluded contracts for the delivery of long-term assets totalling SKK 370 million to be effected after this date.

In addition, the Board of Directors estimates that around another SKK 95 million are needed to ensure that the Company’s activities comply with the Water Act. This need is reflected in the Company’s long-term capital and operational plan.

Projected capital investments and repairs in individual years are presented in the following table:

Projected capital investments and repairs in individual years

	Years	Year ended 31 December 2006
	2007	1,514
	2008	1,687
	2009	1,635
	2010	1,690
	2011	1,525
	Total	8,051

By directive of European Union 2003/54/ES and by Energy Law No. 656/2004 Coll. the Company has an obligation to implement legal unbundling of distribution network before 1 July 2007. This implicates that the operator of distribution network shall be an independent legal subject from original vertical integrated company that, besides distribution, provides also electricity supply.

(23) Cash generated from operations

Cash generated from operations

				Year ended 31 December
			Note	2006	2005
	Profit before tax			4,240	3,636
	Adjustments for:
		Depreciation	5, 18	620	537
		Amortisation	6, 18	131	82
		Impairment charge	5,6	(1)	(10)
		(Profit) on sale of property and equipment	19	(4)	(12)
		Interest income		(97)	(78)
		Interest expense		7	9
		Net movements in provisions and deferred revenues	12, 15	211	(140)
	Changes in working capital (excluding the effects of acquisition and disposal of subsidiaries):
		Inventories		(12)	16
		Trade and other receivables		1,391	(1,484)
		Trade and other payables		(407)	659
	Cash generated from operations			6,079	3,215

(24) Related party transactions

During the periods presented in these financial statements, the Company also had transactions with Slovenské elektrárne a.s. (Slovak incumbent electricity generation company) and SEPS a.s. (Slovak transit grid operator), Slovak Railway, Bratislavská vodárenská spoločnosť, a.s. and Západoslovenská vodárenská spoločnosť, a.s which were under common control by the Slovak Republic represented by the Ministry of Economy and National Property Fund. Furthermore the Company had transactions with E.ON Sales & Trading, Munich, E.ON Czech republic, E.ON Hungary, E.ON IS Slovakia, s.r.o., E.ON Energiakereskedő Kft, E.ON Energie, Czech Republic, E.ON Engineering GmbH Gelsenkirchen, E.ON Energie Human Res. Int. Munich, E.ON Risk Consulting Munich that belong to the E.ON Group. In addition to that the Company had also transactions with EFR CEE Kft.

Price policy with related parties
All transactions with related parties have been carried out based on contracts and under the arm’s length principle (usual business terms and conditions). The Company also sells products to government bodies and state-owned business entities under usual business terms and conditions.

1. Other related parties
   
   

   Other related parties

   	Year ended 31 December	2006	2005
   	Sales:
   	E.ON IS Slovakia, s.r.o.	6	5
   	Energotel, a.s., Bratislava	26	27
   	Slovenské elektrárne, a. s., Bratislava	4	33
   	SEPS, a.s.	72	93
   	Slovak Railways	350	567
   	Bratislavská vodárenská spoločnosť, a.s.	113	196
   	Západoslovenská vodárenská spoločnosť, a.s.	75	135
   	E.ON Energie, Czech Republic	1	1
   	E.ON Energiakereskedö Kft	-	3
   	E.ON Sales & Trading, Munich	1,492	502
   	E.ON Hungary	-	1
   	Total	2,139	1,563

   
   

   Other related parties

   	Year ended 31 December	2006	2005
   	Purchases:
   	E.ON IS Slovakia, s.r.o.	472	368
   	Energotel, a.s., Bratislava	29	27
   	EFR CEE Ktf.	3	-
   	Slovenské elektrárne, a. s., Bratislava	9,094	7,668
   	SEPS, a.s.	4,384	4,676
   	E.ON IS Czech Republic, s.r.o.	-	6
   	E.ON Energie, Czech Republic	578	425
   	E.ON Engeneering GmbH, Gelsenkirchen	-	16
   	E.ON Energie BSC, Munich	35	35
   	E.ON Energie Human Res.Int., Munich	-	20
   	E.ON Risk Consulting, Munich	3	1
   	E.ON Sales & Trading, Munich	3,323	2,395
   	E.ON Czech republic	2	-
   	Total	17,923	15,637

   
   

   Other related parties

   	Year ended 31 December	2006	2005
   	Purchases of fixed assets:
   	E.ON IS Slovakia, s.r.o.	65	83
   	E.ON IS Czech republic	-	12
   	Energotel, a.s., Bratislava	10	-
   	Total	75	95

   
   

   Other related parties

   	As at 31 December	2006	2005
   	Receivables:
   	E.ON IS Slovakia, s.r.o.	71	71
   	Energotel, a.s., Bratislava	5	5
   	Slovenské elektrárne, a. s., Bratislava	-	11
   	SEPS, a.s.	249	274
   	Slovak Railways	47	23
   	Bratislavská vodárenská spoločnosť, a.s.	3	8
   	Západoslovenská vodárenská spoločnosť, a.s.	5	6
   	E.ON Sales & Trading, Munich	111	83
   	E.ON Hungary	-	1
   	Total	491	482

   
   

   Other related parties

   	As at 31 December	2006	2005
   	Payables:
   	E.ON IS Slovakia	154	78
   	Energotel, a.s., Bratislava	5	4
   	EFR CEE Kft.	1	-
   	Slovenské elektrárne, a.s., Bratislava	424	379
   	SEPS, a.s.	351	439
   	E.ON Energie, Czech republic	19	19
   	E.ON Engineering GmbH, Gelsenkirchen	-	16
   	E.ON Energie BSC, Munich	34	29
   	E.ON Energie Human Resources Int., Munich	-	20
   	E.ON Sales & Trading, Munich	302	260
   	Total	1,290	1,244

   
   
2. Directors’ remuneration
   The structure of remuneration received by the directors in 2006 and in 2005:
   
   

   The structure of remuneration received by the directors

   	Year ended 31 December	2006	2005
   	Salaries	16	12
   	Short term benefits	18	24
   	Total	34	36

(25) Post balance sheet events

After 31 December 2006, following significant events have occurred:

Changes in Board of Directors

	After 31 December 2006
	Vice Chairman	Ing. Peter Vlasatý (resigned on 25 January 2007)
		Ing. Ján Rusnák (appointed on 25 January 2007)
	Members	PaedDr. Tibor Végh (resigned on 25 January 2007)
		Ing. Vladimír Haršányi (appointed on 25 January 2007)

Changes in Supervisory Board

	After 31 December 2006
	Chairman	Prof. Ing. Peter Baláž, PhD. (resigned on 25 January 2007)
		Ing. Milan Chorvátik (appointed on 13 February 2007)
	Members	Dr. Walter Hohlefelder (resigned on 25 January 2007) (appointed on 25 January 2007)
		Ing. Ján Ďurana (resigned on 25 January 2007)
		Martin Ondko (resigned on 25 January 2007)
		József Száraz (resigned on 25 January 2007)
		Ing. Igor Glosik (resigned on 25 January 2007)
		JUDr. Andrej Danko (appointed on 25 January 2007)
		Ing. Ľuboš Majdán (appointed on 25 January 2007)
		Ing. Iveta Pauhofová, CSc. (appointed on 25 January 2007)
		JUDr. Ladislav Jančo (appointed on 25 January 2007)

After 31 December 2006, no other significant events have occurred that would require recognition or disclosure.




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