Separate Financial Statements for the year ended 31 December 2007

2.1 Basis of preparation

2.2 Subsidiaries, Associates and joint ventures

2.3 Foreign currency translation

2.4 Property, plant and equipment

2.5 Intangible assets

2.6 Impairment of non-current non-financial assets

2.7 Financial assets

2.8 Investments in subsidiaries

2.9 Financial liabilities

2.10 Leases

2.11 Inventories

2.12 Construction contracts

2.13 Trade receivables

2.14 Cash and cash equivalents

2.15 Share capital

2.16 Dividend distribution

2.17 Legal reserve fund

2.18 Trade payables

2.19 Taxation

2.20 Grants and contributions related to acquisition of property and equipment

2.21 Borrowings

2.22 Provisions / Contingent liabilities

2.23 Employee benefits

2.24 Revenue recognition

2.25 Discontinued operations

2.26 Comparatives

3.1 Financial risk factors

3.2 Capital risk management

3.3 Fair value estimation

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

Separate 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	1,068	10,634
Intangible assets	7	269	278
Investments in subsidiaries and associates	8	27,664	130
Deferred income tax asset	18	22	–
		29,023	11,042
Current assets
Inventories	10	45	51
Trade and other receivables	12	2,630	2,402
Income tax receivables		90	–
Cash and cash equivalents	13	3,589	2,831
		6,354	5,284
Total assets		35,377	16,326
EQUITY AND LIABILITIES
Share capital and reserves
Share capital	14	5,935	5,935
Legal reserve fund	14	1,186	1,186
Other funds	14	1,371	876
Retained earnings	14	21,993	3,652
Total equity		30,485	11,649

Non-current liabilities
Provisions for liabilities and charges	19	200	281
Deferred revenues	15	-	1,365
Deferred income tax liability	18	-	86
		200	1,732
Current liabilities
Trade and other payables	16	1,827	2,765
Income tax liabilities		–	146
Liabilities from cash pooling	17	2,831	–
Provisions for liabilities and charges	19	34	34
		4,692	2,945
Total liabilities		4,892	4,677
Total equity and liabilities		35,377	16,326

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

Dietrich Max Fey
Member of the Board of Directors

Ing. Andrej Devečka
Member of the Board of Directors

Separate Income Statement

All amounts are in millions of Slovak crowns unless stated otherwise		Year ended 31 December
	Note	2007	2006

Revenues	20	16,737	26,863
Cost of sales	21	(10,977)	(19,424)
Gross profit		5,760	7,439

Operating expenses	22	(2,952)	(3,596)
Gain on disposal of distribution business	5	19,048	–
Gain on disposal of supply business	5	269	–
Other operating income	23	158	307
Profit from operations		22,283	4,150

Net Finance cost
Interest income		124	97
Interest expense		(35)	(7)
Net Finance cost		89	90
Profit before tax		22,372	4,240
Income tax expense	24	(700)	(857)
Net profit		21,672	3,383
Profit after tax from discontinued operations and gain on disposal	5	21,398	-
Profit for the year from continuing operations		274	-
Profit for the year		21,672	3,383

Separate Statement of Changes in Shareholders’ 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 (Investment base fund)	-	-	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	-	-	-	21,672	21,672
Paid dividends	-	-	-	(2,836)	(2,836)
Contribution to other funds (Investment base fund)	-	-	495	(495)	–
Balance at 31 December 2007	5,935	1,186	1,371	21,993	30,485

Separate 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	27	5,727	6,079
Interest paid		(30)	–
Interest received		123	96
Income tax paid		(873)	(713)
Net cash from operating activities		4,947	5,462

Cash flows from investing activities
Purchase of property and equipment		(1,286)	(2,027)
Investment in subsidiary		(70)	–
Proceeds from sale of property and equipment		3	106
Net cash used in investing activities		(1,353)	(1,921)

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		758	826
Cash and cash equivalents at beginning of year	13	2,831	2,005
Cash and cash equivalents at end of year	13	3,589	2,831

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.

By 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.

From 1 July 2007, the Company provides supporting services for its subsidiaries ZSE Energia, a.s. and ZSE Distribúcia, a.s. as construction works, repair and maintenance services, services for administration and operation of distribution network, customer service activities, accounting, controlling and general administration services.

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 consolidated by E.ON AG using equity method of consolidation.

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

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

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

Board of Directors

	At 31 December 2007	At 31 December 2006

Chairman	Konrad Kreuzer	Konrad Kreuzer
Vice Chairman	Ing. Ján Rusnák (appointed on 25 January 2007)
	Ing. Peter Vlasatý (resigned on 25 January 2007)	Ing. Peter Vlasatý
Members	Ing. Andrej Devečka	Ing. Andrej Devečka
	Dietrich Max Fey	Dietrich Max Fey
	Ing. Vladimír Haršányi (appointed on 25 January 2007)	PaedDr. Tibor Végh
	PaedDr. Tibor Végh (resigned on 25 January 2007)

Supervisory Board

	At 31 December 2007	At 31 December 2006

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

The Company employed 1,339 staff on average during 2007, of which 24 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 financial statements are described below. These policies have been consistently applied to all the years presented, unless otherwise stated.

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

The Company’s financial statements at 31 December 2007 have been prepared as ordinary financial statements under § 17 Sec. 6 of the Slovak Act No. 431/ 2002 Coll. (“Accounting Act”) for the accounting period from 1 January 2007 to 31 December 2007.

The separate financial statements have been prepared in compliance with International Financial Reporting Standards as adopted by European Union (“IFRS”), on the going concern basis. The Company 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.

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

The separate 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 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 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 Company’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 financial statements are prepared in millions of Slovak crowns (“SKK”).
The Company applies all IFRS and interpretations issued by International Accounting Standards Board (hereinafter “IASB”), as amended by the European Union, which were in force as of
31 December 2007.

These separate financial statements relate to the consolidated financial statements of the Group Západoslovenská energetika, a.s.

Standards, amendment and interpretations to published standards effective in 2007
IFRS 7, Financial instruments: Disclosures, and the complementary amendment to IAS 1, Presentation of financial statements – Capital disclosures, (effective for annual periods beginning on or after 1 January 2007). The IFRS introduced new disclosures to improve the information about financial instruments, including about quantitative aspects of risk exposures and the methods of risk management. The new quantitative disclosures provide information about the extent of exposure to risk, based on information provided internally to the entity’s key management personnel. Qualitative and quantitative disclosures cover exposure to credit risk, liquidity risk and market risk including sensitivity analysis to market risk. IFRS 7 replaced IAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and some of the requirements in IAS 32, Financial Instruments: Disclosure and Presentation. The Amendment to IAS 1 introduced disclosures about the level of an entity’s capital and how it manages capital. The new disclosures are made in these separate Financial statements.

The adoption of all other new standards and interpretations that became effective from 1 January 2007 did not have effect on these financial statements.

Standards early adopted by the Company
The Company has not adopted any standards or interpretations prior its effective date.

Standards, amendments and interpretations to existing standards that are not yet effective and have been not early adopted by the Company
The following standards, amendments and interpretations to existing standards have been published that are mandatory for the Company’s accounting periods beginning after 1 January 2008 or later periods but the Company 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 Company 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 Company’s operations, as the Company’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 company will apply IFRIC 14 from 1 January 2008, but it is not expected to have any impact on the company’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 Company’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 Company’s operations.
IFRIC 11, IFRS 2 - 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 Company’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 Company’s operations because the Company 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 interpretation has not yet been endorsed by the EU and has no impact on the Company’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 Company 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 Company’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 Company.

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.

Investments in subsidiaries are carried at cost in these separate financial statements. The cost is represented by the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire the subsidiaries at the time of their acquisition (Note 4). Impairment losses are recognized using a provision account. Provisions are recognized based on the present value of estimated future cash flows.
Associates and joint ventures
Associates are all entities over which the Company has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Jointly controlled entities (“joint ventures”) are those in which the Company shares control of the operations with its joint venture partners, based on joint venture agreements.

Investments in associates and joint ventures are carried at cost in these separate financial statements.

The cost is represented by the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire the associates and joint ventures at the time of their acquisition. Impairment losses are recognized using a provision account. Provisions are recognized based on the present value of estimated future cash flows.

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

All property, plant and equipment are stated at historical cost less depreciation less accumulated impairment loss. Historical cost includes expenditure that is directly attributable to the acquisition of the items, including borrowing costs incurred from the date of acquisition until the date the item is put in use.

Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. 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 before 1 July 2007 was represented by the network. Network included mainly power lines, pylons and switching stations. Useful life of network assets varied between 15 and 40 years. The network has been subject to unbundling and was transferred to ZSE Distribúcia, a.s. the Company’s subsidiary, as at 1 July 2007. After 1 July 2007, the most significant part of property, plant and equipment is represented by office buildings and low value fixed assets.

Land and assets under construction are not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives. Straight-line depreciation method is used. The estimated useful lives of individual groups of assets are as follows:


	Useful lives in years

	Buildings, halls, network (1st half year) 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 Company 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 Company 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 Company 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 within other (losses)/gains – net in the income statement.

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 Company, 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. The Company 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 Company, and that will probably generate benefits exceeding costs beyond one year, are recognized as intangible assets. Costs includes 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.

Intangible assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. 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.

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

Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are classified as held for trading unless they are designated as hedges. Assets in this category are classified as current assets.
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 2.13).
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 Company commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit 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 Company has transferred substantially all risks and rewards of ownership.

Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables 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.

Investment in subsidiaries are measured at cost in these separate Financial statements in accordance with IAS 27 – Consolidated and Separate Financial Statements. The cost is represented by the amount of cash or cash equivalents paid and the fair value of the consideration given at the date of acquisition.

The Company classifies its financial liabilities to subsidiaries according to IAS 39 “Financial Instruments: Recognition and Measurement”. The classification depends on the contractual provisions of the instrument and the intentions with which management entered into the contract.

Management determines the classification of its financial liabilities at initial recognition and re-evaluates this designation at every reporting date. When a financial liability is recognised initially, the Company measures it at its fair value net of transaction costs that are directly attributable to the origination of the financial liability.

After initial recognition, the Company measures all financial liabilities at amortised cost using the effective interest method.

The gain or loss from financial liabilities is recognized in the income statement when the financial liability is derecognized and through the amortization process.

Financial liability (or a part of a financial liability) is removed from the Company’s balance sheet when, and only when it is extinguished—i.e. when the obligation specified in the contract is discharged or cancelled or expires.

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.
Finance lease
Leases of property, plant and equipment, where the Company 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 Company is not reasonably certain that it will obtain ownership by the end of the lease term.

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.

Contract costs are recognized when incurred.

When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognized only to the extent of contract costs incurred that are likely to be recoverable.

When the outcome of a construction contract can be estimated reliably and it is probable that the contract will be profitable, contract revenue is recognized over the period of the contract. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognized as an expense immediately.

Variations in contract work, claims and incentive payments are included in contract revenue to the extent that may have been agreed with the customer and are capable of being reliably measured.

The Company uses the ‘percentage-of-completion method’ to determine the appropriate amount to recognize in a given period. The stage of completion is measured by reference to the contract costs incurred up to the balance sheet date as a percentage of total estimated costs for each contract. Costs incurred in the year in connection with future activity on a contract are excluded from contract costs in determining the stage of completion.

The Company presents as an asset the gross amount due from customers for contract work for all contracts in progress for which costs incurred plus recognized profits (less recognized losses) exceed progress billings. Progress billings not yet paid by customers and retentions are included within ‘trade and other receivables’.

The Company presents as a liability the gross amount due to customers for contract work for all contracts in progress for which progress billings exceed costs incurred plus recognized profits
(less recognized losses).

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 2.24.

A provision for impairment of receivables is established when there is objective evidence that the Company 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.

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.

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.

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

The legal reserve fund is set up in accordance with the Commercial Code. Contributions to the legal reserve fund of the Company were made at 10% of net income based on Slovak statutory financial statements, 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.

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

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, associates and joint ventures, except where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. Dividend income is generally not subject to income taxes in the Slovak Republic.

The Company offsets deferred tax assets and deferred tax liabilities where the Company has a legally enforceable right to set off tax assets against tax liabilities and these relate to income taxes levied by the same taxation authority.
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 Company paid during the year. If corporate income tax advances paid during the year exceed the tax liability for the period, the Company records a tax receivable.

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

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

Government grants and customer contributions relating to acquisition of property and equipment have been accounted by setting up the grant as deferred income, which is recognized as other income over the life of depreciable asset. Both fixed assets and grants are recorded at fair values at acquisition. As at 1 July 2007, all grants and donations were unbundled to ZSE Distribúcia, a.s.

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.

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

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

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

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

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

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.

The Company has both defined benefit and defined contribution plans.

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 Company pays fixed contributions into a separate entity and will have no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods.

Unfunded defined benefit pension plans
According to the contract with the Trade Unions for the year 2007 and 2008 the Company 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 Company 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 Company also pays certain life jubilees and fidelity bonuses.

a) Jubilee benefits are paid by the Company in the amount of 1.5 multiples of their average monthly salary to each employee at the age of 50 regardless from the number of years of service for the Company.

b) Fidelity bonuses (long-term service bonuses) paid by the Company are dependant on the number of year of service for the Company and equals to the following amounts:




	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.

Defined contribution pension plans
The Company contributes to the government and private defined contribution pension plans.

The Company makes contributions to the government health, retirement benefit, accidental and guarantee insurance and unemployment schemes at the statutory rates in force during the year, based on gross salary payments. Throughout the year, the Company made contributions amounting to 35.2% (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 Company makes contributions to the supplementary scheme amounting to 3% (2006: 3%) from the total of monthly tariff wage.
Termination benefits
Termination benefits are payable when employment is terminated by the Company before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Company 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.
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.

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

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

Until 30 June 2007 the Company provided mainly sale and distribution of electricity, when legal unbundling was completed and these activities were transferred to the Company’s subsidiaries ZSE Energia, a.s. and ZSE Distribúcia, a.s.

From 1 July 2007, the Company provides supporting services for its subsidiaries ZSE Energia, a.s. and ZSE Distribúcia, a.s. as construction works, repair and maintenance services, services for administration and operation of distribution network, customer service activities, accounting, controlling and general administration services.

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 is metered and billed on annual basis. This metering established conditions for billing of actual consumption of the retail customers in small entrepreneurs segment on the annual basis from 1 January till 31 December.

Consumption of the retail customers in households segment is metered and billed on annual basis. The Company split its household 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 up to 30 June 2007 used an estimate of network losses, which are incurred in the distribution system and the regularly measured amounts of overall electricity purchases, sales to the Company’s wholesale customers and its own consumption. Network losses are included in cost for purchase of electricity.

Revenue from sale 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.

The Company received till 30 June 2007 contribution from the customers to connect them to electricity network. Revenue from such contributions is recognized as deferred revenue and is released to revenues over the useful life of the asset (approximately 20 years).
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.
Dividend income
Dividend income is recognized when the right to receive the payment is established.
Interest income
Interest income is recognized on accrual basis in the period when it is incurred, independent from the actual payments of the interest.
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.

A discontinued operation is a component of the Company that either has been disposed of, or that is classified as held for sale, and: (a) represents a separate major line of business or geographical area of operations; (b) is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or (c) is a subsidiary acquired exclusively with a view to resale. Earnings and cash flows of discontinued operations, if any, are disclosed separately from continuing operations with comparatives being re-presented.

Following adjustments were done:

All amounts are in millions of Slovak crowns unless stated otherwise
Year ended 31 December	2006 pred 2006 before reclassification	Adjustments	2006 after reclassification

Cost of sales	-	73	73
Operating expenses	73	(73)	-

3. Financial risk management

The Company’s activities are exposed to a variety of financial risks: market risk (including risk of changes in foreign currency exchange rates, interest rate risk and price risk), credit risk and liquidity risk. The Company’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.

Market risk
1. Foreign exchange risk
  The Company 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 as a significant exposure to the Company’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 3.7 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 0 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 Company is not exposed to significant price risk, as it does not invest in equities. The Company has subsidiaries which are carried at cost according to IAS 27 as it is described in Note 2.8. IFRS 7 does not mandate price risk, including sensitivity disclosures, relating to subsidiaries carried at cost.
3. Cash flow and fair value interest rate risk
  As the Company 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. The short term bank deposits are denominated at fixed interest rates. At 31 December 2007, if the interest rates on short-term bank deposits would be higher/lower by 0.1% with all other variables constant, post-tax profit for the year would have been SKK 0.3 million (At 31 December 2006: SKK 0.3 million) higher or lower mainly as a result of higher/lower interest income on short term bank deposits.
  
  The Company had neither bank borrowings nor other similar instruments during the financial year 2007 and 2006.

Credit risk
Until 30 June 2007, credit risk arose from cash and cash equivalents, and deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables and transactions made. From 1 July 2007 after legal unbundling (Note 5), ZSE Distribúcia, a.s. and ZSE Energia, a.s. are the main customers of the Company.

The Company has credit management policies in place that ensure the minimization of credit risk. 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 Company does not set individual risk limits for counterparties. As for the trade receivables, the Company does not have a significant concentration of credit risk mainly due to a large number of diverse customers. The Company uses a system of reminders, which may culminate in a service disconnection, as the prevailing contract enforcement method until 30 June 2007.

From 1 July 2007, the enforcement of receivables is ensured by agreements entered between companies. Although the collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Company beyond the provisions already recorded.

In order to eliminate the credit risk related to bank accounts and financial instruments, the Company 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	2,809	Not stated by the Company	1,246
Banks rated	Aa1		104		1,105
Banks rated	Aa3 / P - 1		676		460
			3,589		2,811
Banks not rated			–		20
			3,589		2,831
ZSE Distribúcia, a.s.		Not stated by the Company	1,360		–
ZSE Energia, a.s.		Not stated by the Company	825		–
E.ON IS Slovakia, s.r.o.		Not stated by the Company	70	Not stated by the Company	70
Enermont		Not stated by the Company	12	Not stated by the Company	–
E.ON Sales & Trading GmbH			-	Not stated by the Company	110
Stredoslovenská energetika, a.s.			–	Not stated by the Company	58
			2,267		238

Liquidity risk
Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Company Treasury aims to maintain flexibility in funding by keeping committed credit lines available.

The Company manages liquidity risk by utilizing bank overdrafts, which should cover an immediate shortage of cash. These means of financing are used only in exceptional cases. The Company regularly monitors its liquidity position and uses overdrafts minimally. The Company also uses the advantages of commercial terms between the Company and its suppliers to secure sufficient financing funds to cover its needs. The maturity of supplier’s invoices is 60 days, on average.

The Company 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 Company; and
2) expected future cash outflows securing operation of the Company and leading to settlement of all liabilities of the Company, 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 Company to make term deposits.

The table below places the Company’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	1,257	-	-
Financial liabilities	2,831	-	-
	4,088	-	-
At 31 December 2006
Trade payables	1,833	-	-
	1,833	-	-

The Company’s objectives when managing capital are to safeguard the Company’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 Company’s management manages capital reported under IFRS amounting to, as at 31 December 2007, SKK 30,485 million (31 December 2006: SKK 11,649 million).

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

The Company’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.

All amounts are in millions of Slovak crowns unless stated otherwise

At 1 January 2007

At 31 December 2007

Materials and spare parts

Total inventories

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 Company for similar financial instruments.

4. Critical accounting estimates and judgements

The Company 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.

Unbilled electricity
Unbilled electricity is an accounting estimate, which is based on the estimate of the electricity supply in technical units (MWh) 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 price which will be billed in the future for the supplies realized in the current year.

The Company has used as of 31 December 2006 for estimation of unbilled electricity methodology of network losses. On 30 June 2007 the Company has unbundled its supply business to ZSE Energia, a.s. and accordingly no unbilled electricity accrual has been calculated as of 31 December 2007.

The Company 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 higher by 1%, the percentage of network losses would be 0.2 points higher in 2006, and the amount of unbilled electricity in the balance sheet would be changed by SKK 75 million higher and recorded as revenue and an increase of trade receivables.
(ii) Estimated useful life of network
Since 1 July 2007, the distribution network assets have been carved-out to subsidiary ZSE Distribúcia, a.s.

Until the unbundling date, 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 Company would have recognized an additional depreciation of network assets of SKK 26 million (2006: SKK 50 million).
Cost of investment in subsidiaries
According to IAS 27 „Consolidated and Separate Financial Statements”, paragraph 37, investments in subsidiaries, jointly controlled entities and associates shall be accounted for in the separate financial statements either at cost, or in accordance with IAS 39 “Financial Instruments: Recognition and Measurement”.

Investment in subsidiary ZSE Distribúcia, a.s. and ZSE Energia, a.s. is measured at cost in these separate Financial Statements.

From the perspective of the parent as separate reporting entity, the unbundling transaction is an exchange of non-monetary asset (the distribution business) for another non-monetary asset (equity investments in the subsidiaries). Exchanges of non-monetary assets (including groups of monetary and non-monetary assets) are addressed in IAS 16.24-25 and IAS 38.45-46 referring to the commercial substance of the transaction. The cost of the non-monetary asset acquired through the exchange transaction is measured at fair value unless the transaction lacks commercial substance.

The configuration of relevant cash flows differs before and after the exchange transaction, therefore the unbundling transaction has commercial substance and accordingly the fair value of the distribution business transferred to the subsidiary was set as historical cost of investment in subsidiary. The gain on disposal of the net assets arising from the difference of the fair value of consideration and the carrying amount of the disposed net assets is recorded in the income statement.

In determining the fair value of consideration given, the assets and liabilities of ZSE Distribúcia, a.s. and ZSE Energia, a.s. were revalued to their fair value as at the date of unbundling. Based on the regulatory asset base mechanism used for the regulation of the distribution business, the fair value of assets and liabilities approximates the fair value of the business.

5. Discontinued operations

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 unbundled distribution as well as supply business into separate subsidiaries. The Company 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.

As of 30 June 2007 assets and liabilities of the distribution part of business were revaluated by independent valuator to their fair value using depreciated replacement cost method.

As of 30 June 2007 of the supply part of business was sold to ZSE Energia, a.s. at it’s fair value confirmed by independent valuator.

Analysis of the result of discontinued operations, and the result recognised on the re-measurement of assets or disposal group, is as follows:

All amounts are in millions of Slovak crowns unless stated otherwise
Year ended 31 December	6 months 2007 until disposal	12 months 2006

Revenues	12,759	24,905
Expenses	(10,060)	(20,879)
Profit before tax of discontinued operations	2,699	4,026
Income tax	(618)	(814)
Profit after tax of discontinued operations	2,081	3,212
Pre-tax gain recognised on disposal of the distribution business by contribution to ZSE Distribúcia and ZSE Energia	19,317	–
Income tax	–	–
After tax gain recognised on disposal of the distribution business by contribution to ZSE Distribúcia and ZSE Energia	19,317	–
Profit for the year from discontinued operations	21,398	3,212

All amounts are in millions of Slovak crowns unless stated otherwise
Year ended 31 December	6 months 2007 until disposal	2006

Cash generated from discontinued operating activities	2,507	5,186
Cash generated from discontinued investing activities	(967)	(1,836)
Cash generated from discontinued financing activities	(2,836)	(2,715)
Total cash flows	(1,296)	635

The Company contributed its distribution business to its subsidiary, ZSE Distribúcia, a.s. The details of the assets and liabilities disposed and disposal consideration are as follows:

All amounts are in millions of Slovak crowns unless stated otherwise	Note	At 1 July 2007
ASSETS

Non-current assets
Property, plant and equipment
Land	6	245
Buildings	6	5,699
Machinery, equipment, vehicles and other assets	6	2,482
Capital work in progress including advances (CIP)	6	1,858
		10,284
Intangible assets
Computer software	7	1
		1
		10,285
Current assets
Trade and other receivables		28
		28
TOTAL ASSETS		10,313
LIABILITIES
Non-current liabilities
Non-current provisions for liabilities	19	12
Non-current part of deferred revenues		1,518
Non-current payables and deferred tax liability	18	187
		1,717
Current liabilities
Trade and other payables		310
		310
		2,027
TOTAL LIABILITIES
Net assets of disposed distribution business		8,286
Total disposal consideration – fair value of investment in ZSE Distribúcia, a.s.		27,334
Gain on disposal of distribution business to ZSE Distribúcia, a.s.		19,048

The Company sold part of its supply business and contributed part of the production business (small water power plants) to its subsidiary, ZSE Energia, a.s. The details of the assets and liabilities disposed and disposal consideration are as follows:

All amounts are in millions of Slovak crowns unless stated otherwise	Note	At 1 July 2007
ASSETS

Non-current assets
Property, plant and equipment
Land	6	1
Buildings	6	1
Machinery, equipment, vehicles and other assets	6	9
		11
Deferred tax assets	18	36
		47
Current assets
Trade and other receivables		1,847
		1,847
TOTAL ASSETS		1,894
LIABILITIES
Non-current liabilities
Non-current provisions for liabilities	19	58
		58
Current liabilities
Trade and other payables		1,255
Current provisions	19	11
		1,266
TOTAL LIABILITIES		1,324
Net assets of disposed supply business		570
Sales price		762
Fair value of contributed part of business in ZSE Energia, a.s.		77
Total disposal consideration		839
Gain on disposal of supply business to ZSE Energia, a.s.		269

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	–	17	4	1,161	1,182
Transfers	5	569	754	(1,328)	–
Contribution to ZSE Distribúcia, a.s.	(245)	(5,699)	(2,482)	(1,858)	(10,284)
Contribution to ZSE Energia, a.s.	(1)	(1)	(9)	–	(11)
Depreciation charge	–	(159)	(250)	–	(409)
Disposals	(6)	(8)	(44)	–	(58)
Impairment (charge)/ release	–	–	–	14	14
Closing net book value	139	554	180	195	1,068
At 31 December 2007
Cost	139	874	969	195	2,177
Accumulated depreciation including impairment charge	–	(320)	(789)	–	(1,109)
Net book value	139	554	180	195	1,068

At 31 December 2007 and at 31 December 2006 the Company did not lease any fixed assets leased as finance lease (where Company is the lessee).

Property plant and equipment includes the capitalized interest on debt apportioned to the construction period of qualifying assets as part of their cost of acquisition in the amount of SKK 0 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 Company 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 0 million and SKK 0 million respectively as all the relevant items of property, plant and equipment have been unbundled to ZSE Distribúcia, a.s. (Note 5); (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 collaterized or pledged.

Non-current tangible assets are insured in Česká poisťovna - Slovensko against damages caused by natural disaster and water from water piping up to the amount of SKK 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	–	125	125
Contribution to ZSE Distribúcia, a.s.	(1)	–	(1)
Transfers	16	(16)	–
Amortisation charge	(133)	–	(133)
Closing net book value	116	153	269
At 31 December 2007
Cost	503	153	656
Accumulated depreciation including impairment charge	(387)	–	(387)
Net book value	116	153	269

8. Investment in subsidiaries and associates

All amounts are in millions of Slovak crowns unless stated otherwise	2007	2006

At the beginning of the year	130	127
Additions	27,534	3
Disposals	–	–
At end of the year	27,664	130

All amounts are in millions of Slovak crowns unless stated otherwise			Amount of investment at 31 December
Name	Country of incorporation	% Ownership interest and voting rights held	Activities	2007	2006

Enermont, s.r.o.	Slovak Republic	100%	Construction	64	64
OTC, s.r.o.	Slovak Republic	100%	Meters calibration	17	17
ZSE Energia, a.s.	Slovak Republic	100%	Purchase and sale of electricity	200	1
ZSE Distribúcia, a.s.	Slovak Republic	100%	Distribution of electricity	27,334	1
				27,615	83
Investment in subsidiaries
E.ON IS Slovakia, s.r.o.	Slovak Republic	49%	IT services	33	33
				33	33
Investment in associates
Other				16	14
Total				27,664	130

All amounts are in millions of Slovak crowns unless stated otherwise	Assets	Liabilities	Revenues	Profit/(Loss)	% Interest held
2007*

Enermont, s.r.o.	1,203	399	1,561	209	100%
OTC, s.r.o.	172	15	124	40	100%
ZSE Energia, a.s.	4,748	4,019	15,700	528	100%
ZSE Distribúcia, a.s.	29,487	5,725	6,355	3,761	100%
E.ON IS Slovakia, s.r.o.	394	218	585	18	49%
2006*
Enermont, s.r.o.	914	318	1,640	175	100%
OTC, s.r.o.	125	17	119	34	100%
ZSE Energia, a.s.	1	–	–	–	100%
ZSE Distribúcia, a.s.	1	–	–	–	100%
E.ON IS Slovakia, s.r.o.	411	253	615	28	49%

*) As at the date of authorisation of these separate Financial statements for issue, the audited financial statements of subsidiaries for the year ended 31 December 2007 were not available. The table is prepared based on preliminary non-audited financial statements for the year then ended.

9. 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 and intra-company receivables	2,283	2,283
Cash and cash equivalents	3,589	3,589
Total	5,872	5,872

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 and other receivables	2,128	2,128
Cash and cash equivalents	2,831	2,831
Total	4,959	4,959

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
Financial liabilities towards subsidiaries	–	2,831	2,831
Total	–	2,831	2,831

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	Total

Liabilities as per balance sheet
Financial liabilities towards subsidiaries	–	–	–
Total	–	–	–

10. 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:

The cost of inventories recognized as expense and included in ‘cost of sales’ amounted to SKK 502 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).

11. Amounts due from / due to customers for contract work

All amounts are in millions of Slovak crowns unless stated otherwise
As at 31 December	2007	2006

The aggregate costs incurred and recognised profits (less recognised losses) to date	978	–
Less: Progress billings	(827)	–
Total	151	–
Amounts due from customers for contract work (Note 12)	209	–
Amounts due to customers for contract work (Note 16)	(58)	–
Total	151	–

The contract revenue recognised as revenue in the year ended 31 December 2007 amounted
to SKK 978 million (2006: SKK 0 million).

12. 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	11	1,841
Individually impaired trade receivables	568	1,171
Less: Provision for impairment of receivables	(551)	(954)
Trade receivables – net	28	2,058

Intra-company receivables not yet due	2,171	70
Intra-company receivables past due but not impaired	84	–
Intra-company receivables - total	2,255	70

Prepayments	5	260
Amounts due from customers to contract work	209	–
Other receivables and other accrued income	133	14
Total trade and other receivables	2,630	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	2,529	2,185
Overdue receivables	652	1,171
Less: Provision for impairment of receivables	(551)	(954)
Total trade and other receivables	2,630	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	–	342
Small and medium businesses	11	940
Large businesses	–	559
Trade receivables not yet due	11	1,841

As of 31 December 2007, trade receivables of SKK 568 million (2006: SKK 1,171 million) were impaired and provided for. The amount of the provision was SKK 551 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	23	199
31 to 60 days	3	73
61 to 90 days	2	40
91 to 120 days	1	34
121 to 180 days	13	57
181 to 360 days	19	272
Over 360 days	507	496
Total individually impaired receivables	568	1,171

The movements in the provision for impairment of trade receivables are recognized in income statement in Other operating expenses. Movements are presented below:

All amounts are in millions of Slovak crowns unless stated otherwise	2007	2006

At the beginning of the year	954	1,028
Additional provision for receivables impairment	–	36
Unused amounts reversed	–	(110)
Amounts relating to Unbundling	(368)	–
Receivables written off during the year as uncollectible	(35)	–
At end of the year	551	954

The release of bad debt provisions was caused by sale of receivables unexpected that were originally provided for. 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 for other receivables is calculated based on ageing analysis of individual receivables and the type of the customer.

All amounts are in millions of Slovak crowns unless stated otherwise
As at 31 December	2007	2006

Receivables against ZSE Distribúcia, a.s.	1,360	–
Receivables against ZSE Energia, a.s.	825	–
E.ON IS Slovakia, s.r.o.	70	70
	2,255	70
Intra-company receivables not yet due	2,171	70
Receivables past due but not impaired	84	–
Intra-company receivables	2,255	70

As of 31 December 2007, intra-company receivables of SKK 84 million (2006: SKK 0 million) were past due but not impaired. These receivables represent amounts due from the Company’s subsidiaries and associates and their ageing analysis is as follows:

All amounts are in millions of Slovak crowns unless stated otherwise
As at 31 December	2007	2006

1 to 30 days	84	–
Total past due but not impaired trade receivables	84	–

The carrying amounts of trade and other receivables as of 31 December 2007 are not substantially different from their fair value. The maximum exposure to credit risk is limited by the carrying value of receivables. There was no concentration of credit risk with respect to trade receivables in 2006 as the Company has a large number of customers. There is no concentration of credit risk with respect of intra-company receivables as the Company has with its subsidiaries cash-pooling agreement (Note 17).

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

The carrying amounts of the Company’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	3,170	3,270
EUR	11	86
Less: Provision for impairment of receivables	(551)	(954)
Total	2,630	2,402

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

13. 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	2,581	383
Short term bank deposits	1,008	2,448
	3,589	2,831

The effective interest rate on short term bank deposits was 3.4 % (in the year ended 31 December 2006: 3.5%) and these deposits have an average maturity of 2 days (in the year ended 31 December 2006: 3 days). As at 31 December 2007 the restricted cash amounted to SKK 248 million (as at 31 December 2006: SKK 4.5 million).

The cash and short-term deposits are kept by the Company 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)	2,005	378
Banks rates – A2 (Moody’s)	–	–
Banks rates – A3 (Moody’s)	576	1
Not rated banks	–	4
	2,581	383
Short-term bank deposits
Banks rates – A1 (Moody’s)	908	1,973
Banks rates – A3 (Moody’s)	100	459
Not rated banks	-	16
	1,008	2,448
Total cash in the bank and short-term bank deposits	3,589	2,831

All balances are neither past due nor impaired.

14. 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). The usage of these funds is limited to the defined purposes.

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

The accumulated statutory profits of the Company under the Slovak law at 31 December 2007 available for profit distribution amounted to SKK 21,993 million (2006: SKK 3,652 million). Decision on the use of the 2007 statutory profit of SKK 21,672 million will be made by the General Meeting. Earnings per share are SKK 3,652 for the year ended 31 December 2007 (2006: SKK 570).

15. 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)	–	1,179
Connection fee – long-term portion	–	186
	–	1,365
Current
Grants and contributions – current portion (a)	–	53
Connection fee – short-term portion	–	10
	–	63

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.

16. Trade and other payables

All amounts are in millions of Slovak crowns unless stated otherwise
As at 31 December	2007	2006

Trade payables	1,257	1,833
Other payables and accrued expenses
Deferred revenues – capital expenditure grant (Note 15)	–	53
Deferred revenues – connection fee (Note 15)	–	10
Payables to employees	33	42
Social security	20	24
Accrued personnel expenses	113	111
Other accrued liabilities	196	502
VAT payable	76	118
Amounts due to customers for contract work	58	–
Other payables	74	72
	570	932
	1,827	2,765

Out of the total payables at 31 December 2007, overdue payables are SKK 19 million
(at 31 December 2006: SKK 6 million).

The fair value of trade and other payables 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	1,670	2,508
EUR	151	250
CZK	6	7
Other	–	–
Total trade and other payables	1,827	2,765

Social fund
Appropriations to and withdrawals from the social fund during the accounting period are shown in the following table:

All amounts are in millions of Slovak crowns unless stated otherwise	2007	2006

Opening balance at 1 January	10	9
Appropriations expensed	34	23
Usage	(44)	(22)
Other	–	–
Closing balance at 31 December	–	10

17. Liabilities from cash pooling

All amounts are in millions of Slovak crowns unless stated otherwise	2007	2006

At the beginning of the year	–	–
Additions (cash pooling)	2,831	–
Disposals	–	–
At the end of the year	2,831	–

The fair value of the cash-pooling liability approximates the carrying value of the financial liabilities.

18. Deferred income taxes

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

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

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	38	59
to be recovered within 12 months	8	64
	46	123
Deferred tax liability:
to be recovered after more than 12 months	(18)	(184)
to be recovered within 12 months	(6)	(25)
	(24)	(209)
Total	22	(86)

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

All amounts are in millions of Slovak crowns unless stated otherwise	As at 1 January 2007	Unbundled at 1 July 2007	Charged/ (credited) to the Income statement	As at 31 December 2007

Accelerated tax depreciation	(153)	148	(19)	(24)
Pension liability and similar provisions	43	(6)	2	39
Other provisions and accrued expenses	12	(12)	–	–
Provisions against bad debts	35	(19)	(10)	6
Capitalized interest and capitalized foreign exchange differences	(53)	53	–	–
Other	30	(13)	(16)	1
	(86)	151	(43)	22

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 similar provisions	36	7	43
Other provisions and accrued expenses	14	(2)	12
Provisions against bad debts	55	(20)	35
Capitalized interest and capitalized foreign exchange differences	(48)	(5)	(53)
Other	46	(16)	30
	1	(87)	(86)

19. 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	18	–	–	18
Used/paid during year	(3)	(15)	–	(18)
Reversal on unused provisions	–	–	–	–
Provisions unbundled	(32)	(49)	–	(81)
At 31 December 2007	207	–	27	234

Analysis of Total Provisions

All amounts are in millions of Slovak crowns unless stated otherwise
As at 31 December	2007	2006

Non-current	200	281
Current	34	34
	234	315

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

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	168	179
Unrecognised actuarial (gains)/ losses	–	–
Liability in the balance sheet	168	179

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	12	10
Actuarial loss	6	15
Interest expense	7	7
	25	32

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	179	149
Current service cost	12	10
Interest expense	6	7
Unbundled portion of provision	-30	–
Paid	-2	-2
Other	-3	–
Actuarial gains/(losses)	6	15
Present value of unfunded retirement obligations at the end of the year	168	179

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	1,258
	Percentage of employees, who will terminate their employment with ZSE prior to retirement (withdrawal rate)	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 (withdrawal rate)	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.

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	39	45
Liability in the balance sheet	39	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	1	4
Recognised actuarial gains/loss	(2)	–
Interest expense	–	–
Total (credit) / charge, included in staff costs	(1)	4

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	1	4
Interest expense	–	–
Paid	(3)	(2)
Unbundled portion of provision	(2)	–
Actuarial gains/(losses)	(2)	–
Present value of unfunded retirement obligations at the end of the year	39	45

Provision for onerous contracts
Provision for onerous contract related to a long term contract on sales of electricity, which terminates in 2011. Provision has been recognized on future losses arising from the unavoidable costs of meeting the obligations of the Company under the contract. It is expected that SKK 15 million was utilised in 2007. SKK 49 million has been unbundled to ZSE Energia, a.s.
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.

20. 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)	7,691	13,162
Sales of electricity to residential and commercial customers (retail)	6,119	11,743
Short-term sales	40	1,745
Other	16	40
Services provide to ZSE Distribúcia, a.s. and ZSE Energia, a.s.	1,635	–
Revenue from construction work	978	–
Other revenue
Maintenance and operation of the transmission grid	14	17
Revenues for connection works and testing fees	11	30
Other	233	126
	16,737	26,863

Until 30 June 2007 the Company electricity supply services and provided access to the distribution network at a regulated fee. Slovakia has fully implemented the European Union electricity market directive, which resulted in a phased complete liberalization of the market, whereby all customers including households became eligible from 1 July 2007. Since this date also providing of access to the distribution network has been transferred to ZSE-Distribúcia, a.s. and electricity supply services to ZSE Energia, a.s.

21. Cost of sales

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	4,317	8,981
Own consumption	15	8
Other domestic electricity producers	353	419
Water dams	–	57
Imports from abroad	1,829	2,973
Trading on the spot market	802	2,161
Electricity transmission fees (including system access and ancillary service charges)	2,025	4,321
Repair and maintenance services from subsidiaries	422	–
Subcontracted construction works	664	–
Cost of equipment and spare parts	502	431
Distribution services purchased from other distribution companies	48	73
	10,977	19,424

22. Operating expenses

All amounts are in millions of Slovak crowns unless stated otherwise
Year ended 31 December	2007	2006

Wages and salaries	634	609
Pension costs – defined contribution plans	77	82
Other social costs	216	229
	927	920
Repairs and maintenance of electrical network related assets	122	249
Other repairs and maintenance	131	377
External consultation services	34	56
IT maintenance fees	439	430
Training and business restructuring consulting	16	16
Post and telecommunication costs	47	36
Rental costs	26	17
Advertising	30	47
Advisory services	81	87
Travel expenses	27	23
Security services	29	25
Other services	262	264
Depreciation	409	620
Amortisation	133	131
Bad debt write-offs	35	42
Other operating expense	204	256
	2,952	3,596

23. Other operating income

All amounts are in millions of Slovak crowns unless stated otherwise
Year ended 31 December	2007	2006

Customer grants (a)	30	57
Income from rental and social facilities	38	33
Gain on disposal of fixed assets	3	4
Foreign exchange gains	44	63
Bad debt release	–	74
Other	43	76
	158	307

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.

24. Income tax expense

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

All amounts are in millions of Slovak crowns unless stated otherwise
Year ended 31 December	2007	2006

Income before tax	22,372	4,240
Theoretical income tax related to current period at 19%	4,251	806
Gain on disposals of distribution and supply business	(3,670)	–
Non-deductible expenses (permanent) - Unbundling	125	–
Income tax related to prior periods	(14)	–
Other tax non-deductible items, net	8	51
	700	857
Income tax expense for the period
The tax charge for the period comprises:
Deferred tax charge/ (credit) (Note 18)	43	87
Tax charge in respect of current period	671	770
Income tax related to prior periods	(14)	–
	700	857

25. Contingencies

Taxation
Due to the fact that Slovak tax law contains certain provisions allowing for more than one interpretation, as well as the practice, developed in the generally unstable environment by the tax authority of making arbitrary judgements on business activities, Management’s interpretation of the Company’s business activities may not coincide with the interpretation of these activities by the tax authorities. The fiscal years from 2001 through to 2007 remain open to tax inspection.

26. Commitments

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

	2008	421
	2009	375
	2010	273
	2011	270
	Total	1,339

27. 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		22,372	4,240
Adjustments for:
Depreciation	6, 18	409	620
Amortisation	7, 18	133	131
Impairment charge	6, 7	(14)	(1)
(Profit) on sale of property and equipment	19	(3)	(4)
Interest income		(124)	(97)
Interest expense		35	7
Gain on disposal of distribution and supply business	5	(19,317)	–
Net movements in provisions and deferred revenues	12, 19	(81)	211

Changes in working capital (excluding the effects of acquisition and disposal of subsidiaries):
Inventories		6	(12)
Trade and other receivables		228	1,391
Liabilities from cash pooling		2,831	–
Trade and other payables		(748)	(407)
Cash generated from operations		5,727	6,079

28. Related party transactions

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

Shareholders
- E.ON Energie AG
Entities under common control of E.ON Group
- 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
Subsidiaries
- ZSE Distribúcia, a.s.
- ZSE Energia, a.s.
- Enermont, s.r.o.
- OTC, s.r.o.
Associates and joint ventures
- E.ON IS Slovakia, s.r.o.
- EFR CEE Kft.
- Energotel, a.s.

State controlled entities
The Government of the Slovak Republic has significant influence 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 separate 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
Sales

(i) Shareholders
E.ON Energie AG	1	–
	1	–
(ii) Entities under common control of E.ON Group
E.ON Energie, Czech Republic	–	1
E.ON Sales & Trading, Munich	39	1,492
E.ON Czech republic	7	–
	46	1,493
(iii) Subsidiaries
ZSE Energia	196	–
ZSE Distribúcia	2,421	–
OTC s.r.o., Hlohovec	4	–
Enermont s.r.o., Bratislava	73	–
	2,694	–
(iv) Associates and joint ventures
E.ON IS Slovakia, s.r.o.	8	6
Energotel, a.s., Bratislava	24	26
	32	32
(v) State controlled entities
SEPS, a.s.	58	72
Slovak Railways	332	350
Bratislavská vodárenská spoločnosť, a.s.	101	113
Západoslovenská vodárenská spoločnosť, a.s.	70	75
	561	610
Total	3,334	2,135

All amounts are in millions of Slovak crowns unless stated otherwise
Year ended 31 December	2007	2006
Purchases

(i) Shareholders
E.ON Energie AG	2	–
	2	–
(ii) Entities under common control of E.ON Group
E.ON IS Czech Republic, s.r.o.	–	–
E.ON Energie, Česká republika	283	578
E.ON Energie BSC, Mníchov	–	35
E.ON Energie Human Res.Int., Mníchov	–	–
E.ON Risk Consulting Mníchov	–	3
E.ON Sales & Trading, Mníchov	1,924	3,323
E.ON Czech republic	24	2
E.ON Hungaria	15	–
E.ON Bulgaria	1	–
E.ON GAZ Romania	1	–
	2,248	3,941
(iii) Subsidiaries
ZSE Energia, a.s.	84	–
ZSE Distribúcia, a.s.	82	–
Enermont s.r.o., Bratislava	1,453	–
OTC, s.r.o., Hlohovec	110
	1,729	–
(iv) Associates and joint ventures
EFR CEE Kft.	3	3
E.ON IS Slovakia, s.r.o.	569	472
Energotel, a.s., Bratislava	81	29
	653	504
(v) State controlled entities
Slovenské elektrárne, a. s., Bratislava	4,365	9,094
SEPS, a.s.	2,344	4,384
	6,709	13,478
Total	11,341	17,923

All amounts are in millions of Slovak crowns unless stated otherwise
As at 31 December	2007	2006
Receivables

(i) Shareholders
E.ON Energie AG	2	–
	2	–
(ii) Entities under common control of E.ON Group
E.ON Energie Romania	29	–
E.ON Czech republic	37	–
E.ON Sales & Trading, Munich	–	111
E.ON Hungary	37	–
E.ON Bulgaria	15	–
	118	111
(iii) Subsidiaries
ZSE Energia, a.s.	825	–
ZSE Distribúcia, a.s.	1,365	–
	2,190	–
(iv) Associates and joint ventures
E.ON IS Slovakia, s.r.o.	71	71
Energotel, a.s., Bratislava	3	5
	74	76
(v) State controlled entities
Slovak Railways	–	47
SEPS, a.s.	3	249
	3	296
Total	2,387	483

All amounts are in millions of Slovak crowns unless stated otherwise
As at 31 December	2007	2006
Payables

(ii) Entities under common control of E.ON Group
E.ON Energie Czech republic	–	19
E.ON Engineering GmbH, Gelsenkirchen	–	–
E.ON Energie BSC, Munich	–	34
E.ON Sales & Trading, Munich	–	302
E.ON Czech republic	24	–
E.ON Hungaria	15	–
E.ON Bulgaria	1	–
E.ON Energie Romania	1	–
	41	355
(iii) Subsidiaries
ZSE Energia	2,227	–
ZSE Distribúcia	757	–
Enermont s.r.o., Bratislava	516	–
OTC, s.r.o., Hlohovec	17	–
	3,517	–
(iv) Associates and joint ventures
E.ON IS Slovakia	135	154
Energotel, a.s., Bratislava	63	5
EFR CEE Kft.	–	1
	198	160
(v) State controlled entities
Slovenské elektrárne, a.s., Bratislava	–	424
SEPS, a.s.	2	351
	2	775
Total	3,758	1,290

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 key management personnel

Salaries and short-term employee benefits	40	34
Royalties	18	10
Total	58	44
Supervisory board
Salaries and short-term employee benefits	2	2
Royalties	7	4
Total	9	6

29. Events after balance sheet date

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

Dietrich Max Fey
Member of the Board of Directors
Written record of members
of entity’s statutory body

Andrej Devečka
Member of the Board of Directors
Written record of members
of entity’s statutory body

Alena Hejčíková
Written record of member
of entity responsible for accounting

Boris Németh
Written record of member
of entity responsible for preparation
of financial statement

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