Consolidated Financial Statements for the Year Ended 31 December 2007

Západoslovenská energetika, a.s.

Consolidated Financial Statements for the year ended 31 December 2007 prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by European Union

Consolidated Balance Sheet at 31 December 2007 prepared in accordance with IFRS as adopted by the European Union

Consolidated Balance Sheet

	All amounts are in millions of Slovak crowns unless stated otherwise		As at 31 December
		Note	2007	2006
	ASSETS
	Non-current assets
	Property, plant and equipment	6	11,812	10,634
	Intangible assets	7	271	278
	Other		130	130
			12,213	11,042
	Current assets
	Inventories	9	45	51
	Trade and other receivables	10	2,623	2,402
	Cash and cash equivalents	11	3,698	2,831
			6,366	5,284
	Total assets		18,579	16,326
	EQUITY AND LIABILITIES
	Share capital and reserves
	Share capital	12	5,935	5,935
	Legal reserve fund	12	1,186	1,186
	Other funds	12	1,371	876
	Retained earnings	12	4,542	3,652
	Total equity		13,034	11,649
	Non-current liabilities
	Provisions for liabilities and charges	16	296	281
	Deferred revenues	13	1,534	1,365
	Deferred income tax liability	15	15	86
			1,845	1,732
	Current liabilities
	Trade and other payables	14	3,474	2,765
	Income tax liabilities		154	146
	Provisions for liabilities and charges	16	72	34
			3,700	2,945
	Total liabilities		5,545	4,677
	Total equity and liabilities		18,579	16,326

These consolidated financial statements have been approved for issue by the Board of Directors
on 14 April 2008.

Andrej Devečka
Member of the Board of Directors


Consolidated Income Statement for the year ended 31 December 2007 prepared in accordance with IFRS as adopted by the European Union
 

Consolidated Income Statement

	All amounts are in millions of Slovak crowns unless stated otherwise		Year ended 31 December
		Note	2007	2006
	Revenues	17	28,968	26,863
	Purchase of electricity and related fees	18	(20,035)	(19,351)
	Employee benefits expense	19	(1,035)	(920)
	Depreciation and amortisation	19	(1,061)	(751)
	Other operating expenses	19	(2,173)	(1,998)
	Other operating income	20	270	309
	Profit from operations		4,934	4,152
	Finance income
	Interest income		128	97
	Interest expense		(9)	(9)
	Net finance income		119	88
	Profit before tax		5,053	4,240
	Income tax expense	21	(832)	(857)
	Net profit		4,221	3,383

Consolidated Statement of Changes in Equity for the year ended 31 December 2007 prepared in accordance with IFRS as adopted by the European Union
 

Consolidated Statement of Changes in Equity

	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 2006	5,935	1,186	676	3,044	10,841
	Net profit for the year 2006	-	-	-	3,383	3,383
	Paid dividends	-	-	-	(2,715)	(2,715)
	Contribution to the other funds	-	-	200	(200)	-
	Other	-	-	-	140	140
	Balance at 31 December 2006	5,935	1,186	876	3,652	11,649
	Net profit for the year 2007	-	-	-	4,221	4,221
	Paid dividends	-	-	-	(2,836)	(2,836)
	Contribution to other funds	-	-	495	(495)	-
	Balance at 31 December 2007	5,935	1,186	1,371	4,542	13,034

Consolidated Cash Flow Statement for the year ended 31 December 2007 prepared in accordance with IFRS as adopted by the European Union
 

Consolidated Cash Flow Statement

	All amounts are in millions of Slovak crowns unless stated otherwise		Year ended 31 December
		Note	2007	2006
	Cash flows from operating activities
	Cash generated from operations	22	6,695	6,064
	Interest received		128	96
	Income tax paid		(895)	(713)
	Net cash from operating activities		5,928	5,447
	Cash flows from investing activities
	Purchase of property and equipment		(2,284)	(2,027)
	Restricted cash	11	(46)	(5)
	Proceeds from sale of property and equipment		59	121
	Net cash used in investing activities		(2,271)	(1,911)
	Cash flows from financing activities
	Dividends paid		(2,836)	(2,715)
	Net cash used in financing activities		(2,836)	(2,715)
	Net increase in cash and cash equivalents		821	821
	Cash and cash equivalents at beginning of year	11	2,826	2,005
	Cash and cash equivalents at end of year	11	3,647	2,826

(1) General information

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

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 Group provides electricity distribution and supply services primarily in the Western Slovakia region. The Group does not have own electricity generation facilities other than insignificant small hydroelectric plants. The Regulatory Office of Network Industries of the Slovak Republic (“ÚRSO”) regulates certain aspects of the Group’s relationships with its customers, including the pricing of electricity and services provided to certain of the Group’s customers.

As required by the directive of European Union 2003/54/ES and by Energy Law No. 656/2004 Coll. the Company implemented legal unbundling of distribution network from 1 July 2007 onwards. Until 1 July 2007 the Company provided 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”). As at 1 July 2007 the electricity distribution has been unbundled into the subsidiary ZSE Distribúcia, a.s. and the supply service has been unbundled into the subsidiary ZSE Energia, a.s. Both subsidiaries are fully consolidated in these consolidated financial statements.

The structure of the Company’s shareholders at 31 December 2007 was as follows:

The Structure of the Company’s Shareholders

		Absolute amount in SKK millions	Interest in share capital in %	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 included in the consolidated financial statements of E.ON AG Group as an associate using the equity method of accounting.

The members of the statutory bodies during the year ended 31 December 2007 were as follows:

Board of Directors

		At 31 December 2007	At 31 December 2006
	Chairman	Konrad Kreuzer	Konrad Kreuzer
	Vice Chairman	Ján Rusnák (appointed on 25 January 2007) Peter Vlasatý (resigned on 25 January 2007)	Peter Vlasatý
	Members	Andrej Devečka	Andrej Devečka
		Dietrich Max Fey	Dietrich Max Fey
		Vladimír Haršányi (appointed on 25 January 2007) Tibor Végh (resigned on 25 January 2007)	Tibor Végh

Supervisory Board

		At 31 December 2007	At 31 December 2006
	Chairman	Milan Chorvátik (appointed on 13 February 2007) Peter Baláž, PhD. (resigned on 25 January 2007)	Peter Baláž, PhD.
	Vice Chairman	Walter Hohlefelder	Walter Hohlefelder
	Members	Silvia Šmátralová	Silvia Šmátralová
		Kamil Doman	Kamil Doman
		Alojz Bahelka	Alojz Bahelka
		Andrej Danko (appointed on 25 January 2007) Ľuboš Majdán (appointed on 25 January 2007)
		Iveta Pauhofová, CSc. (appointed on 25 January 2007) Ladislav Jančo (appointed on 25 January 2007)
		Ján Ďurana (resigned on 25 January 2007) Martin Ondko (resigned on 25 January 2007)	Ján Ďurana Martin Ondko
		József Száraz (resigned on 25 January 2007)	József Száraz
		Igor Glosik (resigned on 25 January 2007)	Igor Glosik

Throughout these financial statements, ZSE together with its subsidiaries is referred to as “Group” (refer to Note 5).

Neither Západoslovenská energetika, a.s. nor its subsidiaries are shareholders with unlimited liability in other accounting entities.

The Group employed 1,442 staff on average during 2007, of which 27 were management (2006: 1,431 employees on average, of which 27 were management).

Registered address:

The registered address of the Company is:

Čulenova 6
816 47 Bratislava
Slovak Republic

Identification number (IČO) of the Company is: 35 823 551
Tax identification number (IČ DPH) of the Company is: SK2020285256

(2) Summary of significant accounting policies

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

(2.1) Basis of preparation

The Act on Accounting of the Slovak republic No. 431/2002 Coll. as amended requires certain companies to prepare consolidated financial statements for the year ended 31 December 2007 in accordance with International Financial Reporting Standards as adopted by the European Union (“IFRS”).

The Group’s consolidated financial statements at 31 December 2007 have been prepared as ordinary consolidated financial statements in accordance with the Slovak Act No. 431/ 2002 Coll. (“Accounting Act”) for the accounting period from 1 January 2007 to 31 December 2007.

The consolidated financial statements have been prepared in compliance with International Financial Reporting Standards as adopted by European Union (“IFRS”), on the going concern basis. The Group applies all IFRS and interpretations issued by International Accounting Standards Board (herein after “IASB”) as adopted by European Union, which were in force as of
31 December 2007.

These consolidated financial statements have also been prepared in compliance with IFRS 1 – First-time Adoption of IFRS as the Company has not previously prepared consolidated financial statements (Note 5), because until unbundling of the supply and electricity distribution businesses into new subsidiaries, it had no material subsidiaries. Unless stated otherwise, comparative data for 2006 were taken from the individual financial statements of the Company.

The consolidated financial statements have been prepared under the historical cost convention.

The consolidated financial statements were prepared on accrual basis and under the going concern principle.

The Board of Directors may propose to the Company’s shareholders to amend the consolidated financial statements after their approval by the General Shareholders Meeting. However, § 16, points 9 to 11 of the Accounting Act prohibit reopening an entity’s accounting records after the financial statements are prepared and approved. If, after the financial statements are approved, management identifies that comparative information would not be consistent with the current period information, the Accounting Act allows entities to restate comparative information in the accounting period in which the relevant facts are identified.

The preparation of consolidated financial statements in conformity with IFRS as adopted by EU requires the use of certain critical estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement of complexity, or areas where assumptions and estimates are significant for the financial statements are disclosed in Note 4.

These consolidated financial statements are prepared in millions of Slovak crowns (“SKK”).

Standards early adopted by the Group

The Group has not adopted any standards or interpretations prior to its effective date.

Standards, amendments and interpretations to existing standards that are not yet effective and have been not early adopted by the Group

The following standards, amendments and interpretations to existing standards have been published that are mandatory for the Group’s accounting periods beginning after 1 January 2008 or later periods but the Group has not early adopted:

• IAS 1, Presentation of Financial Statements (revised September 2007; effective for annual periods beginning on or after 1 January 2009). The main change in IAS 1 is the replacement of the income statement by a statement of comprehensive income, which will also include all non-owner changes in equity, such as the revaluation of available-for-sale financial assets. Alternatively, entities will be allowed to present two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1 also introduces a requirement to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. The Group will apply IAS 1 from 1 January 2009 or later, depending on EU endorsement of this standard.
   
• IAS 23 (Amendment), Borrowing costs (effective for annual periods beginning on or after 1 January 2009). It requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for use or sale) as part of the cost of that asset. The option of immediately expensing those borrowing costs will be removed. This standard will not have any impact on the Group’s operations, as the Group’s accounting policy for borrowing costs is already in compliance with IAS 23 (Amended).
   
• IFRIC 14, IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction (effective for annual periods beginning on or after 1 January 2008). IFRIC 14 provides guidance on assessing the limit in IAS 19 on the amount of the surplus that can be recognised as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. This interpretation has not yet been endorsed by the EU. The Group will apply IFRIC 14 from 1 January 2008, but it is not expected to have any impact on the Group’s accounts.
   
• IFRS 8, Operating segments (effective for annual periods beginning on or after 1 January 2009). IFRS 8 replaces IAS 14 and aligns segment reporting with the requirements of the US standard SFAS 131, ‘Disclosures about segments of an enterprise and related information’. The new standard requires a 'management approach', under which segment information is presented on the same basis as that used for internal reporting purposes. IFRS 8 is not relevant to the Group’s operations.
   
• IFRIC 12, Service concession arrangements (effective for annual periods beginning on or after 1 January 2008). IFRIC 12 applies to contractual arrangements whereby a private sector operator participates in the development, financing, operation and maintenance of infrastructure for public sector services. This interpretation has not yet been endorsed by the EU; however IFRIC 12 is not relevant to the Group’s operations.
   
• IFRIC 11, Group and Treasury Share Transactions (effective for annual periods beginning on or after 1 March 2007, i.e. 1 January 2008). IFRIC 11 provides guidance on whether share-based transactions involving treasury shares or involving group entities should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the parent and group companies. This interpretation does not have any impact on the Group’s financial statements.
   
• IFRIC 13, Customer loyalty programmes (effective for annual periods beginning on or after 1 July 2008, i.e. 1 January 2009). IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. IFRIC 13 is not relevant to the Group’s operations because the Group does not operate any loyalty programmes.
   
• IFRS 2 (Amendment) Share-based payment (effective for annual periods beginning on or after 1 January 2009). The amended standard clarifies that vesting conditions are service conditions and performance conditions only. Other features of share based payments are not vesting conditions. As such these features would need to be included in the grant date fair value for transactions with employees and others providing similar services, that is, these features would not impact the number of awards expected to vest or valuation thereof subsequent to grant date. It also specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. This amendment has not yet been endorsed by the EU and has no impact on the Group’s financial statements.
   
• IFRS 3 (revised) Business combinations (effective for annual periods beginning on or after 1 July 2009, i.e. 1 January 2010). The revised IFRS 3 will allow entities to choose to measure non-controlling interests using the existing IFRS 3 method (proportionate share of the acquiree’s identifiable net assets) or on the same basis as US GAAP (at fair value). The revised IFRS 3 is more detailed in providing guidance on the application of the purchase method to business combinations. The requirement to measure the fair value of every asset and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, goodwill will be measured as the difference at acquisition date, between the fair value of any investment in the business held before the acquisition, the consideration transferred and the net assets acquired. Acquisition-related costs will be accounted for separately from the business combination and therefore recognised as expenses rather than included in goodwill. An acquirer will have to recognise at the acquisition date a liability for contingent purchase consideration. Changes in the value of that liability after the acquisition date will be recognised in accordance with other applicable IFRSs, as appropriate, rather than by adjusting goodwill. The disclosures required to be made in relation to contingent consideration will be enhanced. The revised IFRS 3 brings in its scope business combinations involving only mutual entities and business combinations achieved by contract alone. The Group is currently assessing the impact of the amended standard on its consolidated financial statements. These amendments to IFRS 3 have not yet been endorsed by the EU.
   
• IAS 27 (revised) Consolidated and separate financial statements (effective for annual periods beginning on or after 1 July 2009, i.e. 1 January 2010). The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control. Such transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is remeasured to fair value and a gain or loss is recognized in profit or loss. This interpretation has not yet been endorsed by the EU and has no impact on the Group’s financial statements.
   
• IAS 32 and IAS 1 Amendment - Puttable financial instruments and obligations arising on liquidation (effective for annual periods beginning on or after 1 January 2009). The amendment requires classification as equity of some financial instruments that meet the definition of a financial liability. This amendment has not yet been endorsed by the EU and has no impact on these financial statements.
  
  Unless otherwise stated above, the new standards and interpretations are not expected to have a material effect on the financial statements of the Group.

(2.2) Consolidation

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 and are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, shares issued and liabilities undertaken 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 of the subsidiary 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 recognised directly in the income statement.
   
   Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised 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.

(2.3) Foreign currency translation

1. Functional and presentation currency
   Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Slovak crowns, rounded to millions, which is the Group’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.

(2.4) Property, plant and equipment

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 becomes available for 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 Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

The most significant part of property, plant and equipment owned 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 (2006: 15 and 40 years).

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. The estimated useful lives of individual groups of assets are as follows:

		Useful lives in years
	Buildings, halls, network, constructions	30 – 40 years
	Machinery and equipment	4 – 30 years
	Vehicles	4 – 15 years
	Other assets	4 – 30 years

The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Group expects to use the asset until the end of its physical life. 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 Group allocates the amount initially recognized in respect of an item of property, plant and equipment proportionally to its significant parts and depreciates separately each such part.

Items that are retired or otherwise disposed of are eliminated from the balance sheet, along with the corresponding accumulated depreciation. Gains and losses on disposals are determined by comparing proceeds with carrying amount and are recognized in the income statement.

(2.5) Intangible assets

Intangible assets are initially measured at cost. Intangible assets are recognized if it is probable that the future economic benefits that are attributable to the asset will flow to the Group, and the cost of the asset can be measured reliably. After initial recognition, the intangible assets are measured at cost less accumulated amortization and any accumulated impairment losses. Borrowing costs are capitalized during the period from acquisition until the asset becomes available for intended use. The Group does not have intangible assets with indefinite useful lives. Intangible assets are amortized on the straight-line basis over their useful lives, not exceeding a period of 4 years.

Costs associated with developing or maintaining computer software programmes are recognized as an expense as incurred. Costs that are directly associated with the development of identifiable and unique software programmes controlled by the Group, and that will probably generate benefits exceeding costs beyond one year, are recognized as intangible assets. Costs include the software development employee costs, external consultants’ costs and an appropriate portion of relevant overheads.

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-current non-financial assets

Property, plant and equipment and intangible assets that are subject to amortization or depreciation 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 purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

(2.7) Financial assets

The Group classifies its investments according to IAS 39 “Financial Instruments: Recognition and Measurement” in the following categories: financial assets at fair value through profit or loss, held-to-maturity investments, available-for-sale financial assets and loans and receivables. The classification depends on the purpose for which the investments were acquired, whether they are quoted in an active market and on management intentions.

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 also categorized as held for trading. 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 2.11).
    
3. Held-to-maturity investments
   Held-to-maturity investments are non-derivative financial assets quoted in an active market with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity.
    
4. 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.
   Purchases and sales of investments are recognised on trade-date – the date on which the Group 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 and 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. Investments are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group 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 are carried at amortised cost using the effective interest method.
   
   Realised and unrealised gains and losses arising from changes in the fair value of the ‘financial assets at fair value through profit or loss’ category are included in the income statement in the period in which they arise.
   
   Gains or losses arising from changes in the fair value of the "available for sale financial assets" are recognised in equity in the period in which they arise and are recycled to the income statement upon disposal or impairment.

(2.8) Leases

1. Operating leases
   Leases, in which a significant portion of the risks and rewards of the 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. Finance lease
   Leases of property, plant and equipment, where the Group has substantially all the risks and rewards of the ownership of the asset, are classified as finance leases. Finance leases are capitalized at the lease’s commencement at the lower of the fair value of the leased property and the present value of minimum lease payments.
   
   Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of future finance charges, are included in borrowings. 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. The assets acquired under finance leases are depreciated over their useful life or the shorter lease term if the Group is not reasonably certain that it will obtain ownership by the end of the lease term.

(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. 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, net of provision for impairment. Revenue recognition policy is described in Note 2.22.

A provision for impairment of receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, default or delinquency in payments (more than 1 month overdue) 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 estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the income statement within “other operating expenses”. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against “other operating income” in the income statement.

(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. They are carried at amortized cost.

(2.12) Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds.

(2.13) Dividend distribution

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

(2.14) Legal reserve fund

The legal reserve fund is set up in accordance with the Commercial Code. Contributions to the legal reserve fund of the Group were made at 10% of net income based on Slovak statutory financial statements of the Company, up to 20% of the share capital. Such funds are not distributable and may only be used to increase share capital or to cover losses.

(2.15) Other funds

The Group has set up additional funds from profits to reserve funding for future capital expenditure as allowed by the Commercial Code and Articles of Association. The allocations to these funds have been approved by the General meeting of Shareholders. Such funds are not distributable unless otherwise decided by shareholders.

(2.16) Trade payables

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

(2.17) Taxation

1. Deferred tax
   Deferred income tax is provided in full, using the balance sheet liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination and the transaction, when initially recorded, affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively 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 subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Dividend income is generally not subject to income taxes in the Slovak Republic.
   
   The Group offsets deferred tax assets and deferred tax liabilities where the Group 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. Current income tax
   The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date. 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 differences between accounting and taxable profit. The current tax liability is stated net of corporate income tax advances that the Group paid during the year. If corporate income tax advances paid during the year exceed the tax liability for the period, the Group records a tax receivable.

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

The Group 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 Group 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 Group 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.

(2.19) Borrowings

Borrowings are recognized initially at fair value, net of transaction cost incurred. Borrowings are subsequently stated at amortized cost. Any difference between the fair value at initial recognition (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.

(2.20) Provisions / Contingent liabilities

Provisions are recognized when the Group 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.

Contingent liabilities are not recognized in the financial statements. They are disclosed in the notes, unless the possibility of an outflow of resources embodying the economic benefits is remote.

(2.21) Employee benefits

The Group has both defined benefit and defined contribution plans.

1. Pension obligations
   A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. A defined contribution plan is a pension plan under which the Group 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 plans and other long-term benefits
   According to the contract with the Trade Unions for the year 2007 and 2008 the Group is obliged to pay its employees on retirement or disability the average of their monthly salary (2006: average of their monthly salary). Additionally, if the employees decide to resign exactly at the date of retirement, the Group is obliged to pay its employees additional 6 multiples of their average monthly salary (2006: 6 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 Group also pays certain life and work jubilees bonuses.
   
   a) Jubilee benefits are paid by the Group 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 with the Group.
   
   b) Work jubilee bonuses (long-term service bonuses) paid by the Group are dependant on the number of year of service with the Group and equal to the following amounts:
   
   

   	Year of service with the Group	Bonus
   	10 years	SKK 11 thousand
   	20 years	SKK 17 thousand
   	30 years	SKK 22 thousand
   	35 years	SKK 28 thousand

   
   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 (a) by discounting the estimated future cash outflows using interest rates of government bonds which have terms to maturity approximating the terms of the related pension liability and (b) then attributing the calculated present value to the periods of service based on the plan’s benefit formula.
   
   Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to income when incurred.
    
3. Defined contribution pension plans
   The Group contributes to the government and private defined contribution pension plans.
   
   The Group makes contributions to the government health, retirement benefit, accidental and guarantee insurance and unemployment schemes at the statutory rates in force during the year, based on gross salary payments. Throughout the year, the Group made contributions amounting to 35.2% (2006: 35.2%) of gross salaries up to a monthly salary ceiling, which is defined by the relevant law, to such schemes, together with contributions by employees of a further 13.4% (2006: 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 Group makes contributions to the supplementary scheme amounting to 3% (2006: 3%) from the total of monthly tariff wage.
    
4. Termination benefits
   Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises 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 the balance sheet date are discounted to their 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.

(2.22) 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 Group’s activities. Revenue is shown, net of value-added tax, estimated returns, rebates and discounts.

The Group recognizes revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the Group and specific criteria will be met for each of the Group’s activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved.

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 or close to 31 December 2007 and subsequently billed 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 2007 for all twelve billing cycles will be completed in December 2008. 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 small entrepreneurs and its own consumption. Network losses are included in cost for purchase of electricity.
   
   Revenue from sale of electricity on the spot market, settlement of variations in consumption and cross - border profile recharges represent mainly revenues from sale of electricity purchased on short-term market for regular customers due to unexpected short-term deviation in their consumption diagrams and revenue from fees paid by the regular customers for deviating from the planned consumption curve. These revenues are usually realised on a spot market or from sale abroad. All these revenues are recognized when the electricity is delivered or the contract is fulfilled.
   
   ZSE receives contribution from the customers to connect them to electricity network – connection fees. Revenue from such contributions is recognized as deferred revenue and is 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 and inflow of economic benefits is probable.
    
4. Interest income
   Interest income is recognized on accrual basis in the period when it is earned, 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.

(3) Financial risk management

(3.1) Financial risk factors

The Group’s activities are exposed to a variety of financial risks: market risk (including risk of changes in foreign currency exchange rates, interest rate risk and price risk), credit risk and liquidity risk. The Group’s principal financial instruments comprise trade receivables and payables, cash and short-term bank deposits. The main purpose of these financial instruments is to raise finance or to invest excess liquidity.

Risk management is carried out under policies approved by the board of directors. The board provides written principles for overall risk management, as well as written policies covering specific areas, such as credit risk and the investment of excess liquidity.

1. Market risk
   1. Foreign exchange risk
      The Group operates mainly in the domestic market, and most of its sales, purchases and short-term deposits are denominated in Slovak crowns. However, it is exposed to foreign currency risk relating to purchases from certain suppliers, primarily with respect to the Euro.
      
      Management does not consider foreign exchange risk to be a significant exposure to the Group’s operations. At 31 December 2007, if the Slovak crown had weakened or strengthened by 10% against the Euro, with all other variables constant, post-tax profit for the year would have been SKK 54.3 million (At 31 December 2006: SKK 15.2 million) lower or higher, mainly as a result of foreign exchange losses or gains on the conversion of trade receivables, financial assets and trade and other payables denominated in Euros.
      
      At 31 December 2007, if the Slovak crown had weakened or strengthened by 10% against the Czech Crown, with all other variables constant, post-tax profit for the year would have been SKK 1 million (At 31 December 2006: SKK 1 million) lower or higher, mainly as a result of foreign exchange losses or gains on the conversion of trade and other payables denominated in Czech Crowns.
       
   2. Price risk
      The Group is not exposed to significant price risk, as it does not invest in equities.
       
   3. Cash flow and fair value interest rate risk
      As the Group has no significant interest earning assets other than short-term bank deposits and cash at bank accounts as of 31 December 2007 and 2006, the interest income and operating cash flow are only to a small extent dependent on the market interest rate fluctuations. At 31 December 2007, if the interest rates would be higher/lower by 1% (100 basis points) with all other variables constant, post-tax profit for the year would have been SKK 0.3 million (At 31 December 2006: SKK 0.9 million) higher or lower mainly as a result of higher/lower interest income on short term bank deposits.
      
      The Group had neither bank borrowings nor other similar instruments during the financial year 2007 and 2006.
       
2. Credit risk
   The credit risk arises from cash and cash equivalents, deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables and transactions made.
   
   As for the banks and financial institutions, Group has relationships only with those ones that have high independent rating assessment. If wholesale customers are independently rated, these rating are used. If no independent rating is available, management assesses the credit quality of customer, taking into account its financial position, past experience and other factors. The Group does not set individual risk limits for counterparties. As for the trade receivables, the Group 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. The collection of receivables could be influenced by economic factors; management believes that there is no significant risk of loss to the Group beyond the provisions already recorded.
   
   In order to eliminate the credit risk related to bank accounts and financial instruments, the Group enters into transactions only with banks and financial institutions that have a high rating.
   
   The table below shows the credit limit and balance of the major counterparties at the balance sheet date:
   
   

   	All amounts are in millions of Slovak crowns unless stated otherwise		31 December 2007		31 December 2006
   		Counterparty Rating ***	Credit limit	Balance	Credit limit	Balance
   	Banks rated	A 1-/ P - 1	Not stated by the Company	2,847	Not stated by the Company	1,246
   	Banks rated	Aa1		160		1,105
   	Banks rated	Aa3 / P - 1		676		460
   				3,683		2,811
   	Banks not rated			15		20
   				3,698		2,831

    
3. 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. Group Treasury aims to maintain flexibility in funding by keeping committed credit lines available.
   
   The Group regularly monitors its liquidity position and uses overdrafts minimally only in exceptional cases. The Group also uses the advantages of commercial terms between the Group and its suppliers to secure sufficient financing funds to cover its needs. The maturity of supplier’s invoices is 60 days, on average.
   
   The Group monitors movements of financial resources in bank accounts on a regular basis. Expected cash flow is prepared as follows:
   
   1) expected future cash inflows from main operation of the Group; and
   2) expected future cash outflows securing operation of the Group and leading to settlement of all liabilities of the Group, including tax payables.
   
   A cash flow forecast is prepared weekly. It identifies the immediate need for cash and, if funds are available, it enables the Group to make term deposits.
   
   The table below places the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows:
   
   

   	All amounts are in millions of Slovak crowns unless stated otherwise	Less than one year	Between one and five years	Over five years
   	At 31 December 2007
   	Trade payables (Note 14)	2,883	-	-
   	Other accrued liabilities (Note 14)	169	-	-
   		3,052	-	-
   	At 31 December 2006
   	Trade payables (Note 14)	1,833
   	Other accrued liabilities (Note 14)	502	-	-
   		2,335	-	-

   
   The table below analyzes the Group’s derivative financial instruments which will be settled on a gross basis into relevant maturity groupings based on remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash-flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant:
   
   

   	All amounts are in millions of Slovak crowns unless stated otherwise	Less than one year	Between one and five years	Over five years
   	At 31 December 2007
   	Forward foreign exchange contracts
   	Outflow	(151)	-	-
   	Inflow	150	-	-
   		(1)	-	-

   
   There were no derivatives used by the Group in 2006.

(3.2) Capital risk management

The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders, and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital. The Group’s management manages capital reported under IFRS amounting to, as at 31 December 2007, SKK 13,034 million (31 December 2006: SKK 11,649 million).

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders or return capital to shareholders.

The Group’s management considers the most relevant indicator of capital management to be the return on capital employed (ROCE). Management expect return on capital employed to be higher than cost of capital.

(3.3) Fair value estimation

The nominal value of trade receivables, net of impairment provision for bad and doubtful debts and the nominal value of payables, approximates their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments.

The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined by using discounted cash-flow method.

(4) Critical accounting estimates and judgements

The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. Critical 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 discussed 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 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 tariff price which will be billed in the future for the supplies realized in the current year.
   
   The Group has used methodology for the estimate of network losses that is consistent with the methodology used in prior periods. The percentage of network losses is calculated as a share of losses against amount of distribution in MWh. Losses in MWh are calculated from value of supply to the customers on low voltage level, purchase of electricity and percentage of losses. If the estimate of supply at the low voltage level was lower by 1%, the percentage of network losses would be 0.2 points higher and the amount of unbilled electricity in the balance sheet would be higher by SKK 77 million (2006: SKK 75 million) and recorded as revenue and an increase of trade receivables.
    
2. Estimated useful life of network
   The useful life of network assets was based on accounting estimates described in Note 2.4. If the estimated useful life of network assets had been shorter by 10% than management’s estimates at 31 December 2007, the Group would have recognized an additional depreciation of network assets of SKK 59 million (2006: SKK 50 million).

(5) Group structure

The Group structure as of 31 December 2007 has been as follows:

	Name	Country of incorporation	Percentage of shareholdingin the ordinary share capital	Principal activities
	ZSE Distribúcia, a.s.	Slovakia	100%	Distribution of electricity
	ZSE Energia, a.s.	Slovakia	100%	Supply of electricity
	Enermont s.r.o.	Slovakia	100%	Construction works
	OTC, s.r.o.	Slovakia	100%	Meters calibration
	ZSE prenos, s.r.o.	Slovakia	100%	Wholesale and retail

Enermont s.r.o. was established on 14 April 2003 and incorporated on 10 June 2003 as a company fully owned by ZSE. On 1 July 2003 ZSE transferred to Enermont s.r.o. part of its business relating to construction of electricity distribution structures.

OTC, s.r.o. was established on 14 April 2003 and incorporated on 2 June 2003 as a private company fully owned by ZSE. On 1 July 2003 ZSE transferred to OTC, s.r.o. part of its business relating to calibration of electricity metering equipment.

ZSE prenos, s.r.o. was established on 9 February 2005 and incorporated on 25 March 2005 as a company fully owned by ZSE. ZSE prenos, s.r.o. is currently dormant.

ZSE Distribúcia, a.s. was established on 20 April 2006 and incorporated in trade register on 20 May 2006 as a company fully owned by ZSE. Since 1 July 2007 the company engages in distribution of electricity in the region of Western Slovakia, when it was unbundled from the Západoslovenská energetika.

ZSE Energia, a.s. was established on 18 August 2006 and incorporated in trade register on 22 September 2006 as a company fully owned by ZSE. Since 1 July 2007 the company engages in supply of electricity mainly in the region of Western Slovakia, when it was unbundled from the Západoslovenská energetika.

The requirement to legally unbundle the distribution business from other commercial activities of integrated electricity companies has been established by the European directive 2003/54 on common rules for internal market with electricity. The directive has been transposed into Slovak legislation by the Act on energy (656/2004) issued in 2004. The Act prescribed legal unbundling by 30 June 2007 at the latest.

ZSE has started preparatory works for unbundling already in early 2005. At the beginning of 2006 a detailed evaluation of possible unbundling models has been performed based on the following major criteria: full compliance with legislation and regulatory requirements; acceptance of shareholders, stakeholders and general public; minimum disruption to customers; no negative impact on quality of provided service, standard solutions implemented within E.ON Group and implementation feasibility and efficiency.

ZSE has also chosen to unbundle distribution as well as supply business into separate subsidiaries. For the distribution business the Company has chosen such model of new distribution business subsidiary, what resulted into transfer of all core activities of distribution to ZSE Distribúcia, a.s. Energy supply business has been transferred to ZSE Energia, a.s. ZSE has been left with central services, customer services, network and other services, which are provided to the subsidiaries ZSE Distribúcia, a.s. and ZSE Energia, a.s.

The unbundling has no impact on consolidated financial statements of the Group.

Enermont s.r.o., OTC s.r.o., ZSE prenos, s.r.o., ZSE Distribúcia, a.s. and ZSE Energia, a.s. do not have subsidiaries of their own.

(6) Property, plant and equipment

	All amounts are in millions of Slovak crowns unless stated otherwise	Land	Buildings, halls and constructions	Machinery, equipment, vehicles and other assets	Capital work in progress including advances (CIP)	Total
	At 1 January 2006
	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)	–
	Disposals	(13)	(89)	(13)	(2)	(117)
	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
	Year ended 31 December 2007
	Additions	5	12	4	2,137	2,158
	Transfers	–	589	765	(1,354)	–
	Depreciation charge	–	(454)	(474)	–	(928)
	Disposals	(4)	(8)	(44)	–	(56)
	Impairment (charge)/ release	–	–	–	4	4
	Closing net book value	387	5,974	2,458	2,993	11,812
	At 31 December 2007
	Cost	387	11,226	6,103	3,008	20,724
	Accumulated depreciation including impairment charge	–	(5,252)	(3,645)	(15)	(8,912)
	Net book value	387	5,974	2,458	2,993	11,812

At 31 December 2007 and at 31 December 2006 the Group did not lease any fixed assets leased as finance lease (where Group 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 2006: SKK 352 million). No borrowing costs were capitalized during 2007 and 2006.

During the year ended 31 December 2007 the Group received from customers fixed assets and cash to finance construction of fixed assets at fair value of SKK 1 million (during the year ended 31 December 2006: SKK 14 million). As at 31 December 2007, the cost and net book value of fixed assets financed through grants and contributions amounts to SKK 1,637 million and SKK 858 million respectively (as at 31 December 2006: SKK 1,586 million and SKK 1,140 million respectively).

At 31 December 2007 no property, plant and equipment was collateralized 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 23,020 million (2006: SKK 21,589 million).

(7) Intangible assets

	All amounts are in millions of Slovak crowns unless stated otherwise	Computer software and other	Assets not yet available for use	Total
	At 1 January 2006
	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)
	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
	Year ended 31 December 2007
	Additions	–	126	126
	Transfers	16	(16)	–
	Amortisation charge	(133)	–	(133)
	Closing net book value	117	154	271
	At 31 December 2007
	Cost	511	154	665
	Accumulated depreciation including impairment charge	(394)	–	(394)
	Net book value	117	154	271

(8) Financial instruments by category

The reconciliation of classes of financial instruments with measurement categories under IAS 39 is as follows:

	All amounts are in millions of Slovak crowns unless stated otherwise
	As at 31 December 2007	Loans and receivables	Total
	Assets as per balance sheet
	Trade receivables (Note 10)	2,225	2,225
	Cash and cash equivalents (Note 11)	3,698	3,698
	Total	5,923	5,923

	All amounts are in millions of Slovak crowns unless stated otherwise
	As at 31 December 2006	Loans and receivables	Total
	Assets as per balance sheet
	Trade receivables (Note 10)	2,058	2,058
	Cash and cash equivalents (Note 11)	2,831	2,831
	Total	4,889	4,889

	All amounts are in millions of Slovak crowns unless stated otherwise
	As at 31 December 2007	Derivatives used for hedging	Other financial liabilities – carried at amortised cost	Total
	Liabilities as per balance sheet
	Trade payables (Note 14)	–	2,883	2,883
	Derivative financial instruments	1	–	1
	Total	1	2,883	2,884

	All amounts are in millions of Slovak crowns unless stated otherwise
	As at 31 December 2006	Derivatives used for hedging	Other financial liabilities – carried at amortised cost	Totals
	Liabilities as per balance sheet
	Trade payables (Note 14)	–	1,833	1,833
	Total	–	1,833	1,833

(9) Inventories

	All amounts are in millions of Slovak crowns unless stated otherwise
	As at 31 December	2007	2006
	Materials and spare parts	45	51
		45	51

The inventory items are shown after provision for slow-moving materials of SKK 1 million
(2006: SKK 1 million).

Movements in provision for slow-moving items for year ended 31 December 2007 are presented below:

	All amounts are in millions of Slovak crowns unless stated otherwise
		At 1 January 2007	Set-up	Release	At 31 December 2007
	Materials and spare parts	1	-	-	1
	Total inventories	1	-	-	1

The cost of inventories recognized as expense and included in ‘cost of sales’ amounted to SKK 405 million (2006: SKK 431 million).

Inventories are insured against damages caused by natural disaster or water from water piping up to SKK 47 million (2006: SKK 47 million).

(10) Trade and other receivables

	All amounts are in millions of Slovak crowns unless stated otherwise
	As at 31 December	2007	2006
	Trade receivables not yet due	1,910	1,841
	Individually impaired trade receivables	1,371	1,171
	Less: Provision for impairment of receivables	(1,056)	(954)
	Trade receivables – net	2,225	2,058
	Receivables towards E.ON Group companies not yet due and not impaired	188	70
	VAT receivable	164	–
	Prepayments	41	260
	Other receivables and other accrued income	5	14
	Total trade and other receivables	2,623	2,402

The structure of trade receivables and other receivables by maturity is shown in the following table:

	All amounts are in millions of Slovak crowns unless stated otherwise
	As at 31 December	2007	2006
	Receivables within due date	2,401	2,185
	Overdue receivables	1,278	1,171
	Less: Provision for impairment of receivables	(1,056)	(954)
	Total trade and other receivables	2,623	2,402

The analysis of trade receivables that are neither past due nor impaired by their credit quality is as follows:

	All amounts are in millions of Slovak crowns unless stated otherwise
	As at 31 December	2007	2006
	Households and individuals	341	342
	Small and medium businesses	550	940
	Large businesses	1,019	559
	Trade receivables not yet due	1,910	1,841

As of 31 December 2007, trade receivables of SKK 1,371 million (2006: SKK 1,171 million) were impaired and provided for. The amount of the provision was SKK 1,056 million as of 31 December 2007 (2006: SKK 954 million). The individually impaired receivables mainly relate to customers, which are in unexpectedly difficult economic situations. It was assessed that a portion of the receivables is expected to be recovered. The ageing of these receivables is as follows:

	All amounts are in millions of Slovak crowns unless stated otherwise
	As at 31 December	2007	2006
	1 to 30 days	204	199
	31 to 60 days	90	73
	61 to 90 days	49	40
	91 to 120 days	33	34
	121 to 180 days	99	57
	181 to 360 days	115	272
	Over 360 days	781	496
	Total individually impaired receivables	1,371	1,171

The movements in the provision for impairment of trade receivables are presented below:

	All amounts are in millions of Slovak crowns unless stated otherwise
	As at 31 December	2007	2006
	At the beginning of the year	954	1,028
	Additional provision for receivables impairment (Note 19)	122	36
	Unused amounts reversed (Note 20)	–	(110)
	Receivables written off during the year as uncollectible	(20)	–
	At end of the year	1,056	954

The release of bad debt provisions in 2006 was caused by unexpected subsequent collection of certain receivables that were originally provided for or written-off. Bad debt provision is calculated in the amount of 100% of the value of individual receivables from companies in bankruptcy and receivables subject to court proceedings. Bad debt provision is calculated based on ageing analysis of individual receivables and the type of the customer.

The carrying amount of trade and other receivables as of 31 December 2007 and 2006 is not substantially different from their fair value. The maximum exposure to credit risk is limited by the carrying value of receivables. There is no concentration of credit risk with respect to trade receivables as the Group has a large number of customers. There is a concentration of credit risk with respect to E.ON Group companies refer to Note 25.

The Group does not hold any collateral as security of the receivables.

The carrying amounts of the Group’s trade and other receivables are denominated in the following currencies:

	All amounts are in millions of Slovak crowns unless stated otherwise
	As at 31 December	2007	2006
	SKK	3,678	3,270
	EUR	1	86
	Less: Provision for impairment of receivables	(1,056)	(954)
	Total	2,623	2,402

No receivables have been pledged in favour of a bank or a pledgee. There no other restrictions relating to Group’s receivables.

(11) Cash and cash equivalents

	All amounts are in millions of Slovak crowns unless stated otherwise
	As at 31 December	2007	2006
	Cash at bank and in hand	2,666	383
	Short term bank deposits	1,032	2,448
		3,698	2,831

The effective interest rate on short term bank deposits was 3.4% (2006: 3.5%) and these deposits have an average maturity of 2 days (2006: 3 days). As at 31 December 2007 the restricted cash amounted to SKK 51 million (as at 31 December 2006: SKK 4.5 million) and was excluded from cash and cash equivalents for the purposes of the cash flow statement.

The cash and short-term deposits are kept by the Group in 6 banks. The credit quality of cash in the bank and bank deposits can be assessed by external credit ratings (Moody’s):

	All amounts are in millions of Slovak crowns unless stated otherwise
	As at 31 December	2007	2006
	Cash at bank
	Banks rates – A1 (Moody’s)	2,075	378
	Banks rates – A3 (Moody’s)	576	1
	Not rated banks	15	4
		2,666	383
	Short-term bank deposits
	Banks rates – A1 (Moody’s)	932	1,973
	Banks rates – A3 (Moody’s)	100	459
	Not rated banks	-	16
		1,032	2,448
	Total cash in the bank and short-term bank deposits	3,698	2,831

All balances are neither past due nor impaired.

(12) 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.

No changes in share capital of the Company occurred during the year 2007 and year 2006. The Company does not have any equity subscribed but not recorded in the Commercial Register.

As at 31 December 2007 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.

Legal reserve fund is obligatorily created from profit of the Company in accordance with the Slovak Commercial Code, paragraph 67. The minimum prescribed creation of the Legal reserve fund is specified in paragraph 217 of the Commercial Code and it defines that the Company is obliged to create legal reserve fund in the amount of 10% of its share capital at the time of the incorporation of the Company. This amount must be increased annually by at least 10% from net profit, until the Legal reserve fund achieves 20% of the share capital. Use of this fund is restricted under the Commercial Code only to cover losses of the Company and it is not a distributable reserve. Legal reserve fund amounted to SKK 1,186 million as at 31 December 2007 (as at 31 December 2006: SKK 1,186 million).

Other funds include 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, which amounts to SKK 676 million as at 31 December 2007 (at 31 December 2006: 676 million). The investment base fund was set up in 2006, which amounts to SKK 695 million as at 31 December 2007 (at 31 December 2006: 200 million).

General Meeting held at 31 May 2007 approved the statutory financial statements for previous periods as follows:

	Appropriation to the social fund	27 million SKK
	Appropriation to the investment base fund	495 million SKK
	Dividends	2,836 million SKK
	Royalties	26 million SKK

Dividend per share represents SKK 478 per share for the year ended 31 December 2007 (2006: SKK 457 per share).

The distributable retained earnings of the parent Company of the Group at 31 December 2007 amounted to SKK 13,034 million (31 December 2006: SKK 11,649 million).

As at the date of authorisation of these consolidated financial statements for issue, the statutory body has not yet proposed the distribution of the 2007 profit.

(13) Deferred revenues

	All amounts are in millions of Slovak crowns unless stated otherwise
	As at 31 December	2007	2006
	Non current
	Grants and contributions – long-term portion (a)	1,131	1,179
	Connection fee – long-term portion	403	186
		1,534	1,365
	Current (Note 14)
	Grants and contributions – current portion (a)	53	53
	Connection fee – short-term portion	21	10
		74	63

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.

(14) Trade and other payables

	All amounts are in millions of Slovak crowns unless stated otherwise
	As at 31 December	2007	2006
	Trade payables	2,883	1,833
	Other payables and accrued expenses
	Deferred revenues – capital expenditure grant (Note 13)	53	53
	Deferred revenues – connection fee (Note 13)	21	10
	Payables to employees	44	42
	Social security	23	24
	Accrued personnel expenses	138	111
	Other accrued liabilities	169	502
	VAT payable	-	118
	Other payables	143	72
		591	932
		3,474	2,765

Out of the total payables at 31 December 2007, overdue trade payables are SKK 52 million (at 31 December 2006: SKK 6 million). All other payables are within due date.

The fair value of trade payables and of other accrued liabilities is not significantly different from their carrying amount.

The carrying value of payables is denominated in the following currencies:   

	All amounts are in millions of Slovak crowns unless stated otherwise
	As at 31 December	2007	2006
	SKK	2,883	2,508
	EUR	584	250
	CZK	7	7
	Other	–	–
	Total trade and other payables	3,474	2,765

(15) Deferred income taxes

Deferred income taxes are calculated in full on temporary differences under the balance sheet 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 tax asset against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The offset amounts are as follows:

	All amounts are in millions of Slovak crowns unless stated otherwise
	As at 31 December	2007	2006
	Deferred tax asset:
	to be recovered after more than 12 months	45	59
	to be recovered within 12 months	23	64
		68	123
	Deferred tax liability:
	to be recovered after more than 12 months	(68)	(184)
	to be recovered within 12 months	(15)	(25)
		(83)	(209)
	Total	(15)	(86)

The movements in deferred tax assets and liabilities during the year are as follows:

	All amounts are in millions of Slovak crowns unless stated otherwise	As at 1 January 2007	Charged/ (credited) to the Income statement	As at 31 December 2007
	Accelerated tax depreciation	(153)	112	(41)
	Pension liability and other provisions	55	(5)	50
	Provisions against bad debts	35	(17)	18
	Capitalized interest and capitalized foreign exchange differences	(53)	15	(38)
	Other	30	(34)	(4)
		(86)	71	(15)

	All amounts are in millions of Slovak crowns unless stated otherwise	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 other provisions	50	5	55
	Provisions against bad debts	55	(20)	35
	Capitalized interest and capitalized foreign exchange differences	(48)	(5)	(53)
	Other	46	(16)	30
		1	(87)	(86)

(16) Provisions for liabilities and charges

Provisions for Liabilities and Charges

	All amounts are in millions of Slovak crowns unless stated otherwise	Pensions and other staff benefits (a)	Onerous contracts (b)	Legal claims (c)	Total
	At 1 January 2007	224	64	27	315
	Additional provisions	29	42	–	71
	Used/paid during year	(3)	(15)	–	(18)
	At 31 December 2007	250	91	27	368

Analysis of Total Provisions

	All amounts are in millions of Slovak crowns unless stated otherwise
	As at 31 December	2007	2006
	Non-current	296	281
	Current	72	34
		368	315

1. Pension and other staff benefits
   The following amounts have been recognized with respect of the defined benefit pension plan and other long-term benefits:
   
   
   1. post employment benefits
      
      

      	All amounts are in millions of Slovak crowns unless stated otherwise
      	As at 31 December	2007	2006
      	Present value of unfunded retirement obligations	202	182
      	Unrecognised actuarial losses/(gains)	–	–
      	Liability in the balance sheet	202	182

      
      The amounts recognised in the income statement are as follows:
      
      

      	All amounts are in millions of Slovak crowns unless stated otherwise
      	Year ended 31 December	2007	2006
      	Current service cost	16	13
      	Actuarial loss	6	15
      	Interest expense	7	7
      		29	35

      
      Movements in the present value of defined benefit obligation are:
      
      

      	All amounts are in millions of Slovak crowns unless stated otherwise
      	As at 31 December	2007	2006
      	Present value of unfunded retirement obligations at beginning of the year	182	149
      	Current service cost	16	13
      	Interest expense	7	7
      	Paid	(4)	(2)
      	Other	(5)	–
      	Actuarial losses/(gains)	6	15
      	Present value of unfunded retirement obligations at the end of the year	202	182

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

      	All amounts are in millions of Slovak crowns unless stated otherwise
      	Number of employees at 31 December 2007	1,464
      	Percentage of employees, who will terminate their employment with ZSE prior to retirement (staff turnover)	Approximately 2.1% p.a., differing with age and sex
      	Expected salary increases short-term	6.5% p.a.
      	Expected salary increases long-term	6.1% p.a.
      	Discount rate	4% p.a.
      	Number of employees at 31 December 2006	1,441
      	Percentage of employees, who will terminate their employment with ZSE prior to retirement (staff turnover)	Approximately 2.0% 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.

       
   2. other long-term benefits (jubilees and fidelity bonuses)
      
      

      	All amounts are in millions of Slovak crowns unless stated otherwise
      	As at 31 December	2007	2006
      	Present value of unfunded obligations	48	45
      	Liability in the balance sheet	48	45

      
      The amounts recognised in the income statement are as follows:
      
      

      	All amounts are in millions of Slovak crowns unless stated otherwise
      	Year ended 31 December	2007	2006
      	Current service cost	5	4
      	Interest expense	2	2
      	Total (credit) / charge, included in staff costs	7	6

      
      Movements in the present value of defined benefit obligation are:
      
      

      	All amounts are in millions of Slovak crowns unless stated otherwise
      	As at 31 December	2007	2006
      	Present value of the obligation at beginning of the year	45	43
      	Current service cost	5	4
      	Interest cost	2	2
      	Paid	(4)	(4)
      	Present value of unfunded retirement obligations at the end of the year	48	45

      
      
2. Provision for onerous contracts
   Provision for onerous contract relates 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 24 million will be utilised in 2008.
    
3. 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.

(17) Revenues

Revenues include the following:

	All amounts are in millions of Slovak crowns unless stated otherwise
	Year ended 31 December	2007	2006
	Electricity sales
	Sales of electricity to industrial customers (wholesale)	15,703	13,162
	Sales of electricity to residential and commercial customers (retail)	12,754	11,743
	Sales on the spot market	161	1,745
	Other	30	40
	Other revenue
	Maintenance and operation of the transmission grid	14	17
	Revenues for connection works and testing fees	24	30
	Other	282	126
		28,968	26,863

Group provides access to the distribution network at regulated prices. Slovakia has fully implemented the European Union electricity market directive, which resulted in a complete liberalization of the market, whereby all customers including households became eligible to acquire electricity in an open market from July 2007.

(18) Purchases of electricity and related fees

The following amounts have been charged to cost of sales:

	All amounts are in millions of Slovak crowns unless stated otherwise
	Year ended 31 December	2007	2006
	Purchases of electricity from:
	Slovenské elektrárne (“SE”) and SEPS	8,412	8,981
	Other domestic electricity producers	2,563	419
	Water dams	-	57
	Imports from abroad	2,104	2,973
	Purchases on the spot market	2,193	2,161
	Electricity transmission fees (including system access and ancillary service charges)	4,256	4,321
	Cost of equipment and spare parts	405	431
	Other	102	8
		20,035	19,351

(19) Operating expenses

	All amounts are in millions of Slovak crowns unless stated otherwise
	Year ended 31 December	2007	2006
	Employee benefit costs
	Wages and salaries	708	609
	Pension costs – defined contribution plans	93	82
	Other social costs	234	229
		1,035	920
	Depreciation and amortisation
	Depreciation (Note 6)	928	620
	Amortisation (Note 7)	133	131
		1,061	751

	All amounts are in millions of Slovak crowns unless stated otherwise
	Year ended 31 December	2007	2006
	Operating expenses
	Repairs and maintenance of electrical network related assets	544	249
	Other repairs and maintenance	131	377
	External consulting services	34	56
	IT maintenance fees	441	430
	Training and business restructuring consulting	16	16
	Post and telecommunication costs	48	36
	Rental costs	36	17
	Advertising	31	47
	Advisory services	87	87
	Travel expenses	27	23
	Security services	29	25
	Other services	270	264
	Bad debt expense	122	36
	Other operating expense	357	335
		2,173	1,998

(20) Other operating income

	All amounts are in millions of Slovak crowns unless stated otherwise
	Year ended 31 December	2007	2006
	Customer grants (a)	62	57
	Income from rental and social facilities	35	33
	Gain on disposal of fixed assets	3	4
	Foreign exchange gains	64	63
	Bad debt release	–	110
	Other	106	42
		270	309

1. 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.

(21) Income tax expense

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

	All amounts are in millions of Slovak crowns unless stated otherwise
	Year ended 31 December	2007	2006
	Income before tax	5,053	4,240
	Theoretical income tax related to current period at 19%	960	806
	Effect of Group restructuring at 19%	(152)	–
	Income tax related to prior periods	(14)	–
	Other tax non-deductible items	38	51
		832	857
	Income tax expense for the period
	The tax charge for the period comprises:
	Deferred tax charge/ (credit) (Note 15)	(71)	87
	Current tax charge in respect of current period	917	770
	Income tax related to prior periods	(14)	–
		832	857

(22) Cash generated from operations

	All amounts are in millions of Slovak crowns unless stated otherwise
	Year ended 31 December	Note	2007	2006
	Profit before tax		5,053	4,240
	Adjustments for:
	Depreciation	6, 19	928	620
	Amortisation	7, 19	133	131
	Impairment charge	6, 7	(4)	(1)
	Gain on sale of property and equipment	20	(3)	(4)
	Interest income		(128)	(97)
	Interest expense		9	9
	Net movements in provisions and deferred revenues	13, 16	215	211
	Changes in working capital (excluding the effects of acquisition and disposal of subsidiaries):		6	(12)
	Inventories		(221)	1,391
	Trade and other receivables		707	(424)
	Trade and other payables
	Cash generated from operations		6,695	6,064

	All amounts are in millions of Slovak crowns unless stated otherwise
	Year ended 31 December	2007	2006
	Net book amount of disposals (Note 6)	56	117
	Gain on disposal of property, plant and equipment (Note 20)	3	4
	Proceeds from disposals	59	121

(23) 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 2002 through to 2007 remain open to tax inspection.

(24) Commitments

At 31 December 2007, the Company concluded contracts for the purchase of long-term assets totalling SKK 290 million to be effected after this date (2006: SKK 370 million).

In addition, the Board of Directors estimates that around another SKK 30 million (2006: 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 in individual years are presented in the following table:

	All amounts are in millions of Slovak crowns unless stated otherwise
	Years	Year ended 31 December 2007	Year ended 31 December 2006
	2007	–	1,514
	2008	2,424	1,687
	2009	2,262	1,635
	2010	2,160	1,690
	2011	2,170	1,525
	Total	9,016	8,051

(25) Related party transactions

During the periods presented in these financial statements, the Company had transactions with following related parties:

1. Shareholders
   - State represented by National property fund
   - E.ON Energie AG
   - EBRD
    
2. Entities under common control of the shareholders and E.ON AG
   - E.ON Sales & Trading, Munich
   - E.ON Czech republic
   - E.ON IS Czech Republic, s.r.o
   - E.ON Hungary
   - 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
   - E.ON Energie BSC, Munich
   - E.ON Energie Human Res.Int., Munich
   - E.ON Risk Consulting, Munich
   - E.ON Hungaria
   - E.ON Bulgaria
   - E.ON Energie Romania
    
3. State controlled entities
   The Government of the Slovak Republic has control over the Company and is therefore its related party. Currently the Government of the Slovak Republic does not provide to the general public or entities under its influence a complete list of the entities which are owned or controlled directly or indirectly by the State. Under these circumstances the Management of the Company disclosed only information that its current internal management accounting system allows to present in relation to operations with state-controlled entities and where the Management believes such entities could be considered as state-controlled based on its best knowledge.
   
   These consolidated financial statements disclose operations with government bodies and entities, in which the government directly owns more than 50% of the share capital. In relation to state-controlled entities, Management analysed the Company’s transactions with its largest customers and extracted balances and results of operations in relation to the following groups of entities which were included in the tables below: 1) 100% State subsidiaries and government bodies and 2) largest entities where the State controls over 50% of their share capital. These separate financial statements disclose those transactions meeting the above criteria, where the annual turnover exceeds SKK 30 million or the open balances at year end exceed SKK 10 million.
   
   

   	All amounts are in millions of Slovak crowns unless stated otherwise
   	Year ended 31 December	2007	2006
   	Payment of dividends
   	(i) Shareholders
   	National property fund (FNM)	1,446	1,385
   	E.ON Energie AG	1,134	1,086
   	EBRD	256	244
   		2,836	2,715

   
   

   	All amounts are in millions of Slovak crowns unless stated otherwise
   	Year ended 31 December	2007	2006
   	Sales
   	(i) Shareholders
   	E.ON Energie AG	2	–
   		2	–
   	(ii) Entities under common control of the shareholders and E.ON AG
   	E.ON Energie, Czech Republic	–	1
   	E.ON Sales & Trading, Munich	119	1,492
   	E.ON Czech republic	7	–
   		126	1,493
   	(iv) State controlled entities
   	SEPS, a.s.	87	72
   	Slovak Railways	332	350
   	Bratislavská vodárenská spoločnosť, a.s.	101	113
   	Západoslovenská vodárenská spoločnosť, a.s.	70	75
   		590	610
   	Total	718	2,103

   
   

   	All amounts are in millions of Slovak crowns unless stated otherwise
   	Year ended 31 December	2007	2006
   	Purchases and expenses
   	(i) Shareholders
   	E.ON Energie AG	2	–
   		2	–
   	(ii) Entities under common control of the shareholders and E.ON AG
   	E.ON IS Czech Republic, s.r.o.	–	–
   	E.ON Energie, Czech Republic	560	578
   	E.ON Energie BSC, Munich	–	35
   	E.ON Risk Consulting, Munich	–	3
   	E.ON Sales & Trading, Munich	3,744	3,323
   	E.ON Czech republic	24	2
   	E.ON Hungaria	15	–
   	E.ON Bulgaria	1	–
   	E.ON GAZ Romania	1	–
   		4,345	3,941
   	(iv) State controlled entities
   	Slovenské elektrárne, a. s., Bratislava	8,524	9,094
   	SEPS, a.s.	4,509	4,384
   		13,033	13,478
   	(v) Taxes
   	Income tax	903	770
   	Property and motor vehicle tax	15	15
   		918	785
   	Total	18,298	18,204

   
   

   	All amounts are in millions of Slovak crowns unless stated otherwise
   	As at 31 December	2007	2006
   	Receivables
   	(i) Shareholders
   	E.ON Energie AG	3	–
   		3	–
   	(ii) Entities under common control of the shareholders and E.ON AG
   	E.ON Energie Romania	29	–
   	E.ON Czech republic	37	–
   	E.ON Sales & Trading, Munich	28	111
   	E.ON Hungary	37	–
   	E.ON Bulgaria	15	–
   		146	111
   	(iv) State controlled entities
   	Slovak Railways	–	47
   	SEPS, a.s.	9	249
   		9	296
   	(v) Taxes
   	VAT receivable	164	–
   		164	–
   	Total	322	407

   
   

   	All amounts are in millions of Slovak crowns unless stated otherwise
   	As at 31 December	2007	2006
   	Payables
   	(ii) Entities under common control of the shareholders and E.ON AG
   	E.ON Energie Czech republic	64	19
   	E.ON Energie BSC, Munich	–	34
   	E.ON Sales & Trading, Munich	347	302
   	E.ON Czech republic	24	–
   	E.ON Hungaria	15	–
   	E.ON Bulgaria	1	–
   	E.ON Energie Romania	1	–
   		452	355
   	(iv) State controlled entities
   	Slovenské elektrárne, a.s., Bratislava	844	424
   	SEPS, a.s.	219	351
   		1,063	775
   	(v) Taxes
   	Income tax payable	154	146
   	VAT tax payable	–	118
   		154	264
   	Total	1,669	1,394

   
   Payables and receivables with the related parties except for the receivables and payables towards entities under the control of E.ON AG are denominated in Slovak Crows are short-term. Payables and receivables towards entities under the control of E.ON AG are denominated in EUR.
   
   
4. Key management personnel of the entity or its parent
   - Members of the Board of Directors
   - Members of the Supervisory Board
   - Divisional directors
   
   

   	All amounts are in millions of Slovak crowns unless stated otherwise
   	Year ended 31 December	2007	2006
   	Board of directors and other key management personnel
   	Salaries and short-term employee benefits	48	34
   	Royalties (profit sharing bonus)	18	10
   	Total	66	44
   	Supervisory board
   	Salaries and short-term employee benefits	4	2
   	Royalties (profit sharing bonus)	7	4
   	Total	11	6

(26) Events after balance sheet date

After 31 December 2007, no significant events have occurred that would require recognition or disclosure.




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