SADALES TĪKLS AS ANNUAL REPORT. SADALES TĪKLS AS Annual Report from 58

Transcription

1 2017 SADALES TĪKLS AS ANNUAL REPORT SADALES TĪKLS AS Annual Report from 58

2 CONTENT Key figures 3 Management report 4 Financial Statements* Statement of Profit or Loss 11 Statement of Comprehensive Income 11 Statement of Financial Position 12 Statement of Changes in Equity 13 Statement of Cash Flows 14 Notes to the Financial Statements 15 Independent auditor s report 57 * Financial Statements are prepared in accordance with International Financial Reporting Standards as adopted by the EU FINANCIAL CALENDAR Interim Condensed Financial Statements: for the 3 months of 2018 (unaudited) for the 6 months of 2018 (unaudited) for the 9 months of 2018 (unaudited) SADALES TĪKLS AS Annual Report from 58

3 KEY FIGURES Operational figures Length of power distribution lines km 93,560 93,813 94,120 94,609 94,705 Total installed capacity MVA 5,913 5,892 5,881 5,869 5,809 Capacity demanded by customers MVA 11,299 11,326 12,382 12,285 12,156 Distributed electricity GWh 6,463 6,465 6,263** 6,421 6,447 Electricity for the needs of the power distribution system GWh ** Electricity losses % 4.6 % 4.6 % 4.6 %** 4.8 % 5.0 % System Average Interruption Duration Index (SAIDI) minutes System Average Interruption Frequency Index (SAIFI) number 2,8 3,1 3,2 3,8 4,5 Capital expenditure 107, , , ,828 91,609 - including capital expenditure in transmission system assets 104,264 98,982 93,945 96,351 85,691 - investments in leased property, plant and equipment 3,412 7,285 7,940 6,477 5,918 Number of employees at the end of the year 2,344 2,521 2,568 2,545 2,505 Financial figures Revenue: 324, , , , ,418 including revenue from the distribution system services 302, , , , ,245 EBITDA 1) 102,751 98,090* 73,988 85,868 84,623 Profit / (loss) 124,268*** (79)* (10,837) 5,806 12,013 Total assets 1,626,641 1,597,690 1,310,085 1,289,427 1,269,831 Total equity 993, , , , ,305 Net cash flows from operating activities 113,742 94,851 77,622 87, ,423 Borrowings 391, , , , ,803 Financial ratios % EBITDA margin 2) 31,7 31* Operating margin 3) 38 0,0-3,7 1,9 4,0 Return on assets (ROA) 4) 7,7 0,0* -0,8 0,5 0,9 Return on equity (ROE) 5) 13,7 0,0-1,9 1,0 2,1 Debt-to-capital ratio 6) Capital ratio 7) 61 51* ) EBITDA earnings before interest, income tax, share of profit or loss of associates and subsidiaries, depreciation and amortisation, and impairment of intangible assets and property, plant and equipment 2) EBITDA margin EBITDA / revenue 3) Operating margin operating profit / revenue 4) Return on assets (ROA) profit / average value of assets (total assets at the beginning of the year + total assets at the end of the year/2) 5) Return on equity (ROE) profit / average value of equity (total equity at the beginning of the year + total equity at the end of the year/2) 6) Debt-to-capital ratio borrowings / (borrowings + total equity) 7) Capital ratio total equity / total assets (at the end of the year) * re-measured according to applied IFRS (see Note 2 point First time adoption of International Financial Reporting Standards) ** the volume of distributed electricity does no include 123 GWh, which corresponds to electricity revenue received according to the regulated rate in the beginning of 2015 and recognised in the results of 2014 and the volume of electricity losses includes 30 GWh, which is related to the recalculation of the electricity actually consumed and actually paid for by customers *** changes of tax regulations and laws of the Republic of Latvia came into force from 1 January 2018, in 2017 reversed deferred tax in the amount of EUR 102,535 thousand SADALES TĪKLS AS ANNUAL REPORT from 58

4 MANAGEMENT REPORT Sadales tīkls AS (The Company) is operating in compliance with the conditions of the licence issued by the Public Utilities Commission (hereinafter - the PUC) and provides the distribution service at the tariffs of distribution services approved by the PUC. The licence of Sadales tīkls AS is valid until 30 June The Licence provides for the obligation to perform distribution of electricity by fulfilling the functions of the distribution system operator (hereinafter - the DSO) within the area of operation defined by the licence, as well as to reconstruct, maintain and operate the infrastructure of the distribution system necessary for providing energy supply. In compliance with the terms of the licence, the Company is obliged to provide compliant quality of the electricity distribution service by following the requirements of applicable regulatory enactments and standards. Number of customers 818,570 Total length of power lines 93,560 km Installed capacity 5,913 MVA The Company provides the distribution system service to more than 818 thousand consumers of the power distribution system and continues to provide electricity supply to approximately 1.1 million sites of the consumers of the distribution system by covering 99 % of the territory of Latvia. The Company receives electricity for the sites of the customers of the distribution system from 330 kv and 110 kv transmission network, as well as from electricity generators connected to the distribution power network. The sites of the customers of the distribution system are connected to low voltage (0.4 kv) and medium voltage (6-20 kv) power distribution lines. Structure of power lines: At the end of 2017 the aggregate length of low voltage and medium voltage power distribution lines equals 93,560 km (93,813 km in 2016), the decrease of 30% Overhead lines (0,4 kv) 26% 0.3 % confirms more efficient use of the power network by increasing the volume Overhead lines (6-20 kv) of electricity distributed per 1 km by km 8% 0.3%, introduction of more suitable Cable lines (0,4 kv) technical solutions and improvements of 36% Cable lines (6-20 kv) the voltage quality indicators. The share of cable lines in the aggregate volume of power distribution lines is 34 % in 2017 (33 % in 2016), and the length and proportional share of low voltage overhead distribution lines is gradually decreasing accordingly. The number of distribution transformer substations is 27,085 (26,916 in 2016) and the number of distribution network transformers is 29,967 (29,899 in 2016). The total installed capacity amounts to 5,913 MVA (5,892 MVA in 2016). Medium Term Operational Strategy of Sadales tīkls AS The Medium Term Operational Strategy of the Company was approved by the General Meeting of Shareholders on 22 February The general strategic objective of the Company is to ensure a sustainable and economically viable electricity distribution service by effectively managing the power network and enhancing the security and quality of electricity supply, which is important for economic competitiveness and growth. The Company has defined the three following operational goals for ensuring achievement of this objective: development of the smart network based on digital technologies improvement of efficiency of operation of the company improvement of the quality and security of power supply The Company ensures balanced financial management and implements the capital investment which provides long-term contribution to the growing profitability, balance of the profit indicators, positive borrowing ability, balances capital structure and payment of dividends to the shareholders. The Company has defined the three following financial goals for the strategy period: 1) ensuring stable return on equity (ROE) 5 % 2) ensuring a stable capital structure indicator - the ratio of borrowed capital/ aggregate borrowed capital and equity 50 % 3) ensuring dividend payments > 80 % of the profit. In the result of evaluation of achievements of the first year of the strategy period and considering the results of the indicators of fulfilment of the goal in 2017, in order to secure the achievements defined by the Medium Term Operational Strategy, the Company will continue improving the smart and efficiently managed distribution power network based on digital technologies and compliant with the customer needs, ensuring sustainable and economically justified power distribution system service, simplifying the processes of connection to the power network and developing the power network that is safe to the public, the service personnel and environment. SADALES TĪKLS AS ANNUAL REPORT from 58

5 Business results Company s profit due to the results of annual economic operation in 2017 amounts to EUR 21,733 thousand. In compliance with the tax reform implemented in the Republic of Latvia and amendments of regulatory enactments, the deferred tax liabilities recognised during preceding report periods is reversed in the Statement of Profit or Loss in 2017 and in equity as of 31 December 2017, thus increasing the profit of Sadales tīkls AS in 2017 by EUR 102,535 thousand. The total profit of the Company in 2017 amounts to EUR 124,268 thousand. Revenue and EBITDA is growing The revenue of the Company in 2017 has increased by 3% in comparison to the relevant period of the preceding year and amount to EUR million, and EBITDA has increased by 4.7 % reaching the amount of EUR million. The revenue from the sale of the distribution system services, which accounts for 93 % of the revenue of the Company, have increased by EUR 11.9 million or 4.1 % in The increase was affected by the change of the tariffs of the distribution system services entering into force on 1 August 2016 and establishing differentiation of the tariffs into a fixed and variable parts. The fixed part of the tarriff allows covering Company s costs required for continuous provision of the infrastructure of the power network irrespective of electricity consumption. The reduction of the costs of the service of the transmission system operator by 2 % or EUR 1.4 million and the decrease of the electricity costs by 11 % or EUR 1.6 million contributed to the increase of the EBITDA. The Company continues implementation of the projects for improving the efficiency of the economic operation. By reviewing the processes of the economic operation, the Company plans to optimise the labour and resource management in the whole territory of Latvia by 2022, including reduction of the number of geographic locations from 50 to 27. The financial result of the Company was negatively affected by the recognition of provisions for employees termination benefits for years 2018 to In 2017 Sadales tīkls AS continued progress towards provision of sustainable and economically justified electricity distribution service. The following has been achieved in 2017: decrease construction time of a connection to the distribution system network, increase of the proportional share of smart meters, accomplishment of a considerable volume of work in the area of customer service, improvement of the quality and security of electricity supply, which is attested by the reduction of the System Average Interruption Duration per customer. Process of connection to the power networks is becoming faster The term of construction of a connection at sites with a construction design was reduced by 2 days and amounts to 98 days (100 days in 2016), and the term of construction of a connection at sites without a construction design was reduced by 4 days and amounts to 12 days (16 days in 2016). By improving the customer service, the Company offers a full scope service of constructing a connection to customers in 80 % of the municipalities in Latvia. Within this service, the Company organises construction of the connection by both preparing the construction design and performing the construction works, thus providing faster and more convenient construction of the connection to customers. 125 full scope service connections were constructed for customers in A convenient process of connection for households was introduced for the customer convenience in the e- environment, by offering 100% electronic document circulation, at the same time reducing the number of documents to be submitted. The service has been available to customers as from August % of applications from customers for distribution system services were submitted electronically in 2017 on the customer portal Increase of the proportional share of smart meters By developing the smart power network based on digital technologies, the Company continues installation of smart electricity meters for customers, thus providing data of electricity consumption per days and hours and the possibility of following up on them to more customers. The proportional share of smart electricity meters has reached 36 % of the total number of electricity meters installed in the network of 405 thousand in In order to ensure compatibility between the systems and the hardware of various manufacturers of smart electricity meters, a unified data protocol has been introduced (IDIS Country Specific Extencion). By improving the remote control of smart meters and improving the monitoring of transformer substations, the operativeness of the power network management has been introduced for receiving online information on the situation in the power network. Being aware of the fast development of the digital world, the arising risks and threats, cyber security is gaining an increasingly important role for ensuring high quality operations of the Company. The Company uses SADALES TĪKLS AS ANNUAL REPORT from 58

6 technological systems, including specific devices for control of the power network and provision of smart metering which are supported with various specific security solutions as required. For the purpose of ensuring cooperation possibilities, information and experience exchange, as well as for ensuring sustainable development in protection of information and improvement of processes, the Company has become a member of the ENCS (European Network for Cyber Security). The ENCS is a non-profit organisation founded in 2012 it is unifying companies of the critical infrastructure (including distribution system operators) and security experts in order to facilitate the information exchange and to support competence development for providing the cyber security of smart networks and secure infrastructure. Client satisfaction index Companies Households The Company is performing evaluation of the customer satisfaction index (CSI) every year in order to assess the quality of the service and customer servicing. In 2017 the overall satisfaction, loyalty, stability index of households and corporate customers has decreased by 3 index points in comparison to the preceding year and equals 58 index points that should be generally viewed as a medium high score. The total decrease of the index was mainly affected by a considerable decrease in the segment of corporate customers (from 61 points in 2016 to 55 points in 2017), however, the index of household customers has remained stable since 2016 (61 index points). The decrease in the group of corporate customers was determined by the representatives of the small companies, as their evaluation was affected by the balanced distribution system service tariffs introduced in 2016 which encouraged customers to evaluate their habits of use of the existing capacities and brought up the question of efficient use of the selected capacity of connection to the power network. The indices have improved in the groups of medium and large companies in comparison to Maintenance of the index on the level of 2016 in the household segment attests the successfully implemented communications and explanations of the introduction of tariffs. In order to become one of the best distribution system operators in Europe also in the area of customer service, it is important to follow up regularly on the quality aspects of the provided services process and customer service, as well as the impact of implemented actions and improvements on the general customer satisfaction. In 2017 customer experience monitoring was introduced providing monthly evaluation of the customer satisfaction with the quality of the received service and the servicing. The customer experience monitoring is performed for 7 most important services forming the customer experience (i.e. a call to the contact centre, a new connection or increase of the load, elimination of faults, meter replacement, information inquiries and claims, receipt of operative information, corporate customer service). The overall evaluation of all the services is 3.8 (on the scale of 5) in 2017 and this should be viewed as average high. By striving to achieve a high customer service and satisfaction level, the Company continues developing the quality of provided services, their accessibility in the e-environment, as well as the customer service and awareness. 129 general education establishments of Latvia were visited by the representatives of the Company in 2017 in order to raise the public awareness on electrical safety. Zelta Zivtiņa Championship 2017", participation at the trade shows Māja I" (Home) and Bērnu pasaule 2017" (Children's World), and participation at 22 public education and safety events all around Latvia should be mentioned as the broadest educating events. In cooperation with the children music project Brīnumskapis, an electrical safety project was implemented within which the concert performance Brīnumskapis un Elektriskā ģimene (Wonder Wardrobe and the electric family) was created and jointly with the rapper Edavārdi who is famous among youth, the song Respekts elektrībai! (Respect electricity!) and an animation video was created explaining the importance of electrical safety in a friendly manner. In the schools of Latvia using the Lattelecom Wi- Fi Internet connection a banner was posted on electrical safety leading to the information electrical safety site arelektribuneriske.lv. The volume of distributed electricity has not changed considerably in 2017 and amounts to 6,463 GWh (6,465 GWh in 2016). In comparison to the preceding year, in 2017 in all the consumption groups, except the household and trade sectors, the volume of distributed electricity has increased and the production sector was the biggest contributor to the increase of electricity consumption as the volume of output of industrial production has increased in all the industry sectors. Quality and security of power supply is increasing Safety of power networks and efficiency of economic operations still present the priorities of the Company. The number of failures of kv power networks amounts to 20,832 cases in 2017 and this is a decrease of 2,226 cases or 10 % (23,058 cases in 2016). Trees and bushes were cleaned from the routes of 5,742 km of power lines and trees in the protection area presenting potential threat were cut (6,677 km in 2016). By preventive cleaning of the routes of power lines, the impact of weather conditions for providing continuous distribution service is minimised. The structure of the power network was technically improved by rebuilding 1,103 km (1,119 km in 2016) of low voltage power network into a network with insulated wire and the volume of performed live works was increased. The quality of power supply was improved in 2017 and this is attested by the reduction of the System Average Interruption Duration Index per customer (SAIDI) and the System Average Interruption Frequency Index per customer (SAIFI). The System Average Interruption Duration Index per customer was reduced by 25 minutes SADALES TĪKLS AS ANNUAL REPORT from 58

7 or 9% in The duration of scheduled interruptions within the power supply interruption duration index has been reduced by 13 minutes and the duration of unscheduled interruptions has been reduced by 4 minutes in comparison to the indices of The System Average Interruption Duration Index per customer was reduced by 25 minutes scheduled unscheduled nature disasters The System Average Interruption Frequency per customer is 2.8 cases in 2017 and, in comparison to year 2016, the reduction of 0.3 times or 10 % (3.1 cases in 2016). The Company has been gradually reconstructing the obsolete Investment of EUR 108 million power network and purposefully introducing digital elements and solutions on the power network in the whole territory of Latvia. EUR million in total were invested in the distribution system assets in 2017 and, in comparison to year 2016, the increase equals 1.3 % (EUR million in 2016). In order to improve the continuity of the services offered to customers, use of innovative technical solutions and to provide a secure and high quality power supply service, the Company is implementing capital investment projects on the basis of the long-term perspective of use of the power network and efficient capital investment in compliance with the development plan of Sadales tīkls AS for ten years providing for modernisation of the distribution system infrastructure and its full-scale reconstruction maximum once per fifty years. 1,647 km of power lines were reconstructed 1,647 km of power lines were reconstructed in 2017, including 637 km of medium voltage power lines (768 km in 2016), 211 km of medium voltage lines were reconstructed by rebuilding them into cable lines (208 km in 2016), 799 km of low voltage power lines (673 km in 2016), 726 transformer substations were reconstructed or constructed anew (773 transformer substations in 2016). EUR 59.8 million (EUR 43.3 million in 2016) or 56% of the total investment of the period were invested in 2017 for implementation of the project of construction and reconstruction of power lines and transformer points. The implemented investments reduce the most frequent causes of failures in overhead lines, the time needed for localisation of faults and the number of affected customers, as well as improve the quality and security of voltage. Reconstruction of 110/20 kv substations Centrālā, Priekule, Rūjiena and Bišuciems was completed. For providing the connections of customers power installations 8,907 connections have been constructed in 2017 (9,242 connections in 2016), which is by 335 connections less. EUR 18.4 million were invested for construction of the customers' connections in 2017 (EUR 13.6 million in 2016). In order to improve the security of the power supply system, reconstruction of arc-suppression coils was completed in substations Daugava, Ilūkste, Ventspils, Priedaine, Koknese, Malta, Ezerkrasts and Madona. The investment in modernisation of medium voltage switchgear at the existing 110/10 kv substations amounted to 6.9 million EUR in 2017 (EUR 8.8 million in 2016). The Company continues development of the smart power network for the purpose of tracing energy consumption, loading of the power network, monitoring of the power supply quality and improvement of energy efficiency of energy end users. EUR 5.5 million were invested in installation of smart devices in 2017 (EUR 9.6 million in 2016). Financial Statements of Sadales tīkls AS 2017 are prepared in compliance with the International Financial Reporting Standards (IFRS) as approved by the European Union. The Company applied the IFRS according to IFRS 1 First-time adoption of International Financial Reporting Standards". The date of transition to IFRS is 1 January Further development Based on the aims set by the medium-term business strategy of the JAC Sadales tīkls and by implementing the efficiency projects, the JSC Sadales tīkls will continue purposeful development of modern and smart electrical distribution network that corresponds to the needs of its customers. The Company will continue introduction of smart network solutions, new methods of electrical network management, simplify the processes of electrical network connection, improve the effectiveness of costs and SADALES TĪKLS AS ANNUAL REPORT from 58

8 processes, as well as quality and safety of the electrical network. The Company has set financial goals for balanced financial governance that in the long term guarantee increasing profitability, commensurability of profit figures, positive creditworthiness and balanced capital structure. By developing the smart electrical network, based on digital technologies, the Company will continue to install its customers smart electricity meters. Gradual increase of the proportion of smart electrical network will decrease the costs of maintaining and operating the meters, thus ensuring fast and clear gathering of information, accessible at any time and place, about consumption, load and cuts in the electrical network. The Company has reviewed the project schedule of installation of smart electricity meters by accelerating it by one year and decreasing the projected costs of the project. By 2022 the smart electricity meters will be installed to all customers of the JSC Sadales tīkls, using the PLC (data powerline communications) as the main communication technology. The Company continues implementation of efficiency projects, the aim of which is provision of more rational solutions for resource management location, number, mobility of workforce, while increasing the qualitative indicators decreasing the amount of disturbance, the rate of power supply interruptions, the time for effecting connection to the electrical network and increasing customer satisfaction. In 2018 the Company will invest in capital projects that will allow to improve continuity of services offered to the customers, use of innovative technical solutions, by improving the service of electricity supply service to the customers that is safe and qualitative. Within implementation of the capital projects it is planned to build a new or reconstruct: an electric line of km, including 209 km within the framework of the cable program; 600 transformer substations. In 2018 modernisation and reconstruction is planned in several 110/6 20 kv substations Daugavpils, Ķemeri, Miezīte, Jāņciems, Auce. For construction of customers' demand in 2018 it is planned to complete the reconstruction of power supply connection in substations Bolderāja and Stīpnieki, to continue construction works at the substations Lizums and Latgale. In cooperation with the JSC Augstsprieguma tīkls it is planned to compete construction of the substations Skanste and Skrunda, as well as to carry out reconstruction of electrical equipment in possession of the Company at eleven substations of the JSC Augstsprieguma tīkls. In order to ensure standardised information flows at control centres, to increase the safety and data transmission rate of the unified dispatching service (DS), in 2018 it is planned to reconstruct terminal equipment of 60 DS objects. The Company will continue the project of implementation of smart electricity meters and in 2018 will install 130 thousand smart electricity meters. The JSC Sadales tīkls will continue purposeful decreasing of the average duration and number of electricity supply interruptions for one user. Decreasing of the said showings may be stimulated by maximally diminishing the outage time for the planned maintenance works of the electrical network, by continuing automation of the electrical network, as well as by increasing the proportion of live working, while carrying out field operation at low-voltage and medium voltage electrical network. In 2018 the Company is planning clearing of line routes from bushes and trees in the distance of km. Implementation of the tasks, planned in 2018, that further attaining the goals of the Company set for medium term, will in the long term ensure smart and effective distribution network management based on digital technologies that corresponds to the needs of customers, increase the safety and quality showings of electrical supply to any user of the distribution systems. Financial risk management Activities of the Company are exposed to a variety of financial risks, including market risk, interest rate risk, credit risk and liquidity risk. The Company's management minimizes the negative impact of potential financial risks on the Company's financial position. Financial risks are managed by the Parent company according to the agreement on management services concluded between the Parent Company and its wholly owned subsidiaries, providing financial resources and management services. Financial risk management is carried out in line with the principles set out in Latvenergo Group s Financial Risk Management Policy. a) Currency risk As the Company has no transactions, assets or liabilities measured in currencies other than the Euros, the currency risk is effectively limited. Foreign currency exchange risk arises when future transactions or recognised assets or liabilities are denominated in a currency other than the Company s functional currency. If for any reason a currency risk SADALES TĪKLS AS ANNUAL REPORT from 58

9 arises in the Company, then it will be effectively limited in accordance with the principles set out in the Financial risk management policy. b) Interest rate risk The interest rate risk for the Company mainly arises from the loans issued to and received from the Parent Company in accordance with the Latvenergo Group mutually concluded agreement On provision of mutual financial resources and with the concluded long-term borrowing agreements. As of 31 December 2017, total borrowing from the Parent company was EUR 363,497 thousand (31/12/2016: 362,376 thousand). As of 31 December 2017, 16 % (31/12/2016: 22 %) of Company s total long-term borrowings had a floating interest rate aligned to change in 6-month EURIBOR. The rest part of long-term borrowings had a fixed rate, thereby limiting the interest rate increase risk. According to the agreement On provision of mutual financial resources for mutual current loans and borrowings the annual interest rate is applied, which is equal to the sum of the EONIA index and previous month s weighted average interest rate margin for the Parent Company s current borrowings from financial institutions. In the reporting period, the interest payable on mutual short-term borrowings has not been material and has not caused significant interest rate risk. c) Credit risk Financial assets that potentially create some level of credit risk concentration for the Company are primarily current loans, outstanding trade receivables, advance payments to third parties and cash and cash equivalents. The Company has no significant concentration of credit risk in respect to a single counterparty or a counterparty group, Except for the Parent Company Latvenergo AS. As of 31 December 2017, the Company s concentration on single counterparty, Latvenergo AS, reached 64 % (31/12/2016: 69 %) of total outstanding trade receivables. The Company considers that trade receivables of the related parties are fully recoverable. and therefore assesses that they do not cause significant credit risk. Trade and other receivables arestated at their recoverable amount. The Company's partners in cash transactions are the largest local banks with good reputation and with assigned investment-grade credit ratings to their parent companies. d) Liquidity and cash flow risk The Company follows the precautionary approach in management of liquidity risk and cash-flow risk management by ensuring that adequate amount of financial resources are available to meet its obligations within the respective timeframe. The Company receives the necessary financial resources from the parent company in accordance with the agreement "On Provision of Mutual Financial Resources" concluded between the Parent Company and its wholly owned subsidiaries. The Company sources borrowings to cover refinancing needs and financing of investments on a timely basis, concluding respective long-term loan agreements with the Parent company Latvenergo AS. On 22 August 2016 long-term loan agreement in the amount of EUR 110 million was signed between the Company and Latvenergo AS to ensure the long-term borrowing requirements for the period from 2016 to The management of the Company estimates that it will not have any liquidity problems and that the Company will be able to settle its liabilities to creditors within the respective deadlines. The management believes that the Company will have sufficient financial resources to ensure that its liquidity is not endangered. e) Market risk The Company acts as a distribution system operator and provides electricity distribution services in the territory of the Republic in Latvia at tariffs that include projected operational costs, investments and profitability level approved by the Public utilities commission, i.e., operates in a regulated market. Therefore, the price of the services provided by the Company is largely fixed and is not a subject to market price volatility and the market risk is perceived as immaterial. f) Regulatory risk At the end of 2017 potential dishonest behaviour of several electricity producers in connection with obtaining permits for the production of electricity in the mandatory procurement process was discovered. The Company promptly initiated inspection of power plant connections, by the end of 2017 physically inspecting locations of 25 power plants to verify current situation in nature. Company cooperates with the Ministry of Economics and the Latvian regulatory authority (Public Utilities Commission) to evaluate and improve industry s regulations, specifying the processes and controls for the acceptance of power supply objects, clearly defining the responsibilities and responsibilities of each party involved. The Company has also improved the internal processes and regulations. The Public Utilities Commission has initiated an administrative proceeding in order to evaluate possible violations of the Company in the process of installing the system connections for electricity producers. In accordance with the assessment performed, violations indicated by the regulatory authority do not correspond to any definitions within applicable laws and regulations, including the obligation to pay a fine. Given that the administrative case is in the process of proceeding and the Company continues discussions with the regulatory authority, at the moment it is not possible to predict the outcome. However, the amount of penalty would not exceed 0.15 % of Company s revenues. SADALES TĪKLS AS ANNUAL REPORT from 58

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15 Notes to the Financial Statements 1. GENERAL INFORMATION ON THE COMPANY Sadales tīkls AS (hereinafter Sadales tīkls AS or the Company) is power supply utility engaged in electricity distribution, electric installation, as well construction of buildings and facilities or parts thereof, assembly of engineering systems and production of poles for distribution system lines. The registered address of the Company is 1 Šmerļa Street, Riga, Latvia, LV Registered in Commercial Register of the Republic of Latvia on 18 September 2006, No Objects of the Company are located throughout the territory of Latvia. The sole shareholder holding all of shares of Sadales tīkls AS and preparing consolidated annual report including Sadales tīkls AS as its subsidiary, is Latvenergo AS (The registered address of the Company is 12 Pulkveža Brieža Street, Riga, Latvia, LV 1230). Copy of consolidated annual report is available in the Register of Entities of the Republic of Latvia. The main objectives of Sadales tīkls AS, according to the Energy Law of the Republic of Latvia, Electricity Market Law of the Republic of Latvia and rules defined in Network Code is to ensure operation of unite distribution system, operation of distribution system, development and compability with another power supply systems, supply of electricity to electricity end-users in accordance with quality standard requirements and within demanded quantity, to ensure reliability of distribution system, considering environmental protection requirements, as well non-discriminatory distribution system use conditions for all users. The Management Board of Sadales tīkls AS since 2 November 2017 until the date of approving of the financial statements for year 2017 includes the following members: Baiba Priedīte (Chairman) since 2 No, Inga Āboliņa and Raimonds Skrebs. Until 1 November 2017 as the Chairman of the Management Board of Sadales tīkls AS has been acting Andis Pinkulis and until 17 September 2017 as members of the Management Board of Sadales tīkls AS also had been acting Signis Rīns and Rolands Lūsveris. The accounting service is provided by Latvenergo AS in accordance with the concluded accounting service agreement. The Company s auditor is the certified audit company Ernst & Young Baltic SIA (licence No. 17) and certified auditor in charge is Diāna Krišjāne (Latvian certified auditor with certificate No. 124). The Management Board of Sadales tīkls AS has approved 2017 Annual report, including the financial statements on 21 March 2018 (see on webpage section Financial Reports). The Company s financial statements are subject to Shareholder s approval after the issue. 2. SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these Company s financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Where it is necessary comparatives are reclassified Basis of preparation of the financial statements The Company s financial statements are prepared in accordance with the International Financial Reporting Standards as adopted for use in the European Union (IFRS). Due to the European Union s endorsement procedure, the standards and interpretations not approved for use in the European Union are also presented in this note as they may have impact on the Company s financial statements in the following periods if endorsed. The Company s financial statements are prepared under the historical cost convention, except for some financial assets and liabilities measured at fair value through profit or loss and for the revaluation of property, plant and equipment carried at revalued amounts through other comprehensive income as disclosed in accounting policies presented below. The Company s financial statements are presented in thousands of euros (EUR'000 or EUR thousand). The preparation of the Company s financial statements in conformity with IFRS requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on the Company s Management s best knowledge of current events and actions, actual results ultimately may differ from those. The areas involving SADALES TĪKLS AS ANNUAL REPORT from 58

16 a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the Company s financial statements are disclosed in Note Summary of significant accounting policies Statement of compliance Financial statements represent the first annual financial statements of the Company prepared in accordance with IFRS as issued by the International Accounting Standards Board (IASB) and as adopted by the European Union. The Company adopted IFRS in accordance with IFRS 1: First time adoption of International Financial Reporting Standards. The date of transition to IFRS is 1 January 2016 (see Note 2.3.). In accordance with IFRS, the Company has: Applied the same accounting policies throughout all periods presented; Retrospectively applied all effective IFRS standards as of 31 December 2017, as required; and Has not applied any of certain optional exemptions and certain mandatory exceptions as applicable for the first time IFRS adopters (see Note 2.3.). The Company has adopted all relevant new and/or amended International Financial Reporting Standards or interpretations that are published or revised, which became effective for annual periods beginning on or after 1 January The Company has early adopted IFRS 15 that is issued but not yet effective. The implication of the change in revenue recognition after application of IFRS 15 is shown in point New or revised standards and interpretations issued but not yet effective a) Standards issued and not yet effective, but early adopted by the Company IFRS 15: Revenue from Contracts with Customers The standard is effective for annual periods beginning on or after 1 January IFRS 15 establishes a five-step model that will apply to revenue earned from a contract with a customer (with limited exceptions), regardless of the type of revenue transaction or the industry. The standard s requirements will also apply to the recognition and measurement of gains and losses on the sale of some non-financial assets that are not an output of the entity s ordinary activities (e.g., sales of property, plant and equipment or intangibles). The Company has applied IFRS 15 Revenue from contracts with customers for the first time in the 2017 financial statements with initial application date as of 1 January 2017 and has chosen a modified retrospective application of IFRS 15 (point ). Implementation of standard has changed the total amount of revenue recognised for customer contracts and contract liabilities, as well as timing of revenue recognition. The Company does not have significant impact on its financial statements as the Company does not have significant long term contracts with multi element arrangements in scope of IFRS 15 and therefore impact on total revenue of the Company is not significant. b) Standards issued and not yet effective, but are relevant for the Company s operations and not early adopted by the Company IFRS 9: Financial Instruments: Classification and Measurement The standard is effective for annual periods beginning on or after 1 January 2018, with early application permitted. The final version of IFRS 9 Financial Instruments reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. The Company s Management has made an assessment of the effect of the standard by preparing business model tests respecting its financial assets trade receivables and other financial receivables and cash and cash equivalents. The purpose of business model is hold-to-collect contractual cash flows from these financial assets. During the SPPI (Solely Payments of Principle and Interest) tests has determined that contractual cash flows consist only from payments of the principal and interest. By evaluating results of tests is expected that implementation of Standard will not change the classification of financial assets and they will be recognised in financial statements at amortised cost. Company has elected to use a simplified approach for impairment calculation for financial assets. The Company s management expects that implementation of expected credit losses (ECL) model will not have a significant impact on financial statements as of 1 January 2018 because impairment of receivables from contracts with customers and other financial receivables will not change significantly considering that credit losses will be assessed at the level of various portfolios where major expected credit loss % increase refers only to portfolio of private clients whose debts are insignificant. Expected credit loss % of portfolios of related parties and other electricity trade companies will not increase because historical default rate of these portfolios SADALES TĪKLS AS ANNUAL REPORT from 58

17 is insignificant and these customers operate under the regulated market conditions. All other receivables are fully impaired. Major macro elements that could affect the future growth of credit risk are negative changes of GDP (gross domestic product) and credit rating of State, unemployment rate, mortality rate, rising inflation as well as negative technology and business environment factors.. IFRS 16: Leases The standard is effective for annual periods beginning on or after 1 January IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e. the customer ( lessee ) and the supplier ( lessor ). The new standard requires lessees to recognize most leases on their financial statements. Lessees will have a single accounting model for all leases, with certain exemptions. Lessor accounting is substantially unchanged. The Company will adopt IFRS 16 for the financial year beginning as of 1 January The Company has assessed that the impact of adoption of this Standard will be material on the Company s financial statements, and considers that as the lessee the Company will have to recognize lease assets in its financial statements. Upon implementation of IFRS 16, among other considerations, the Company will make an assessment on the identified lease assets, non cancellable lease terms (including the extension and termination options) and lease payments (including fixed and variable payments, termination option penalties etc.). Detailed analysis on implementation of IFRS 16 will be finished in IAS 40: Transfers to Investment Property (Amendments) The Amendments are effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. The Amendments clarify when an entity should transfer property, including property under construction or development into, or out of investment property. The Amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. A mere change in management s intentions for the use of a property does not provide evidence of a change in use. These Amendments have not yet been endorsed by the EU. The Company s Management has assessed the impact of the implementation of the Amendments, but does not consider that these Amendments will have a significant effect to the Company s financial statements. IFRIC INTERPRETATION 22: Foreign Currency Transactions and Advance Consideration The Interpretation is effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. The Interpretation clarifies the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency. The Interpretation covers foreign currency transactions when an entity recognizes a non-monetary asset or a non-monetary liability arising from the payment or receipt of advance consideration before the entity recognizes the related asset, expense or income. The Interpretation states that the date of the transaction, for the purpose of determining the exchange rate, is the date of initial recognition of the non-monetary prepayment asset or deferred income liability. If there are multiple payments or receipts in advance, then the entity must determine a date of the transactions for each payment or receipt of advance consideration. This Interpretation has not yet been endorsed by the EU. The Company s Management has assessed the impact of the implementation of the IFRIC Interpretation, but does not consider that it will have a significant effect to the Company s financial statements, as the Company has not transactions in foreign currencies. IFRIC INTERPRETATION 23: Uncertainty over Income Tax Treatments The Interpretation is effective for annual periods beginning on or after 1 January 2019 with earlier application permitted. The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12. The Interpretation provides guidance on considering uncertain tax treatments separately or together, examination by tax authorities, the appropriate method to reflect uncertainty and accounting for changes in facts and circumstances. This Interpretation has not yet been endorsed by the EU. The Company s Management has not yet evaluated the impact of the implementation of the IFRIC Interpretation, but does not consider that it will have a significant effect to the Company s financial statements. IFRS 9: Prepayment features with negative compensation (Amendment) The Amendment is effective for annual reporting periods beginning on or after 1 January 2019 with earlier application permitted. The Amendment allows financial assets with prepayment features that permit or require a party to a contract either to pay or receive reasonable compensation for the early termination of the contract (so that, from the perspective of the holder of the asset there may be negative compensation ), to be measured at amortized cost or at fair value through other comprehensive income. These Amendments have not yet been endorsed by the EU. The Company s Management has not yet evaluated the impact of the implementation of the IFRIC Interpretation, but does not consider that it will have a significant effect to the Company s financial statements. SADALES TĪKLS AS ANNUAL REPORT from 58

18 c) Standards issued but not yet effective and not applicable for the Company IFRS 2: Classification and Measurement of Share based Payment Transactions (Amendments) The Amendments are effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. The Amendments provide requirements on the accounting for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments, for share-based payment transactions with a net settlement feature for withholding tax obligations and for modifications to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled. These Amendments have not yet been endorsed by the EU. Management has assessed that these Amendments of the Standard will not have a significant effect to the Company s financial statements, as the Company does not accomplisheshare-based payment transactions. IAS 28: Long-term Interests in Associates and Joint Ventures (Amendments) The Amendments are effective for annual reporting periods beginning on or after 1 January 2019 with earlier application permitted. The Amendments relate to whether the measurement, in particular impairment requirements, of long-term interests in associates and joint ventures that, in substance, form part of the net investment in the associate or joint venture should be governed by IFRS 9, IAS 28 or a combination of both. The Amendments clarify that an entity applies IFRS 9 Financial Instruments, before it applies IAS 28, to such long-term interests for which the equity method is not applied. In applying IFRS 9, the entity does not take account of any adjustments to the carrying amount of long-term interests that arise from applying IAS 28. These Amendments have not yet been endorsed by the EU. Management has assessed that these Amendments of the Standard will not have a significant effect to the Company s financial statements, as the Company does not have such long-term interests. Amendment in IFRS 10: Consolidated Financial Statements and IAS 28: Investments in Associates and Joint Ventures: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture The amendments address an acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28, in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognized when a transaction involves a business (whether it is housed in a subsidiary or not). A partial gain or loss is recognized when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. In December 2015 the IASB postponed the effective date of this amendment indefinitely pending the outcome of its research project on the equity method of accounting. The amendments have not yet been endorsed by the EU. Management has assessed that these Amendments of the Standard will not have a significant effect to the Company s financial statements, as the Company does not estimate to sell or invest such assets. The Management of the Company will not adopt these amendments because they will not be applicable for the Company. d) Improvements to IFRSs The IASB has issued the Annual Improvements to IFRSs Cycle, which is a collection of amendments to IFRSs. The amendments are effective for annual periods beginning on or after 1 January 2018 for IFRS 1 First-time Adoption of International Financial Reporting Standards and for IAS 28 Investments in Associates and Joint Ventures. Earlier application is permitted for IAS 28 Investments in Associates and Joint Ventures. These annual improvements have not yet been endorsed by the EU. IFRS 1 First-time Adoption of International Financial Reporting Standards. This improvement deletes the short-term exemptions regarding disclosures about financial instruments, employee benefits and investment entities, applicable for first time adopters. IAS 28 Investments in Associates and Joint Ventures. The amendments clarify that the election to measure at fair value through profit or loss an investment in an associate or a joint venture that is held by an entity that is venture capital organization, or other qualifying entity, is available for each investment in an associate or joint venture on an investment-by-investment basis, upon initial recognition. The Company has assessed that these improvements will have no impact on the Company's financial statements. The IASB has issued the Annual Improvements to IFRSs Cycle, which is a collection of amendments to IFRSs. The amendments are effective for annual periods beginning on or after 1 January 2019 with earlier application permitted. These annual improvements have not yet been endorsed by the EU. IFRS 3 Business Combinations and IFRS 11 Joint Arrangements: The amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, it re-measures previously held interests in that business. The amendments to IFRS 11 clarify that when an entity obtains joint control of a business that is a joint operation, the entity does not re-measure previously held interests in that business. SADALES TĪKLS AS ANNUAL REPORT from 58

19 IAS 12 Income Taxes: The amendments clarify that the income tax consequences of payments on financial instruments classified as equity should be recognized according to where the past transactions or events that generated distributable profits has been recognized. IAS 23 Borrowing Costs: The amendments clarify paragraph 14 of the standard that, when a qualifying asset is ready for its intended use or sale, and some of the specific borrowing related to that qualifying asset remains outstanding at that point, that borrowing is to be included in the funds that an entity borrows generally. The adoption of these amendments may result in changes to accounting policies or disclosures but impact of adoption on the financial position or performance of the Company has not assessed Going concern As of 31 December 2017 Company s current liabilities exceeded current assets by EUR 103,194 thousand (31/12/2016: EUR 101,573 thousand; 01/01/2016: EUR 108,784 thousand). Current liabilities mainly consist of borrowings from and liabilities to the Parent company. The Management of the Company foresees that in 2018 the Company will not have liquidity problems and will settle its liabilities to creditors within set terms as it is foreseen that the Company will have positive operating cash flow. Credit risk exposure in connection with trade receivables is managed by the Company s Management. The Company will not be influenced by significant liquidity risk as the liabilities mainly comprise of liabilities from related parties with low level of expected credit loss. On 7 March 2018 the Company has received support letter from the Parent Company. The letter verifies that annual report for the year 2017 of Sadales tīkls AS is prepared in accordance with going concern principle, acknowledging that Latvenergo AS position as 100 % shareholder is to ensure that subsidiary is managed so that it has sufficient financial resources and is able to carry its operations and settle its obligations, as well if necessary, not to request principal amount of the loan, as well repayment of accrued interest from Sadales tīkls AS, if that would cause doubt for Sadales tīkls AS to continue its operations at least 12 months after the approval of Sadales tīkls AS year 2017 Annual report. The management of the Company assess that going concern principle is applicable for preparation of these financial statements Financial investments Other financial investments are investments within other entities share capital not exceeding 20 % of entities share capital. The Company has applied judgement in determining that it has a financial investment with 0.62 % interest held in the company Pirmais Slēgtais Pensiju Fonds AS that manages closed pension plan in Latvia and has classified it as available for sale. Equity investments classified as financial assets available for sale are those that are neither classified as held for trading nor designated at fair value through profit or loss. After initial measurement, financial assets available for sale are subsequently measured at fair value with unrealised gains or losses recognised in other comprehensive income and credited in the available for sale reserve until the investment is derecognised. If a financial asset available for sale is determined to be impaired or the investment is derecognised, the cumulative gain or loss previously recognised in the statement of comprehensive income is recognised in the statement of comprehensive income. Given that the particular investment does not have a quoted price in active market, the company decided to measure it at cost. The Company is only a nominal shareholder as all risks and benefits arising from management of pension plan will accrue to the Company s employees who are members of the pension plan and the Company does not have existing rights that give it the current ability to direct the relevant activities of the investee. At the moment the Company does not have investment in associates Foreign currency translation a) Functional and presentation currency Items included in these financial statements are measured using the currency of the primary economic environment in which the Company operates ( the functional currency ). The Company s financial statements have been prepared in euros (EUR), which is the Company s functional currency. All figures, unless stated otherwise are rounded to the nearest thousand of euros. SADALES TĪKLS AS ANNUAL REPORT from 58

20 b) Transactions and balances All transactions denominated in foreign currencies are translated into the functional currency according to the European Central bank (ECB) exchange rates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into functional currency using the exchange rate of the European Central bank at the last day of the reporting year. The resulting gain or loss is charged to the Company s Statement of Profit or Loss Intangible assets Intangible assets are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the Company s Statement of Profit or Loss when the asset is derecognised. Assets under development and advance payments are recognised in Statement of Financial Position as upfront payments and measured at cost until the intangible assets are completed and received. a) Connection usage rights Connection usage rights are the payments for the rights to use the transmission system's power grid. The Company made upfront payments to transmission system operator for connection installation services. Connection usage rights are measured at cost net of amortisation and accumulated impairment that is calculated on straight line basis to allocate the cost of connection usage rights to the residual value over the estimated period of relationship with a supplier (connection installer) 20 years. b) Licenses and software Licenses and software which meet an asset recognition criteria, are measured at cost less accumulated amortisation and accumulated impairment losses. Amortisation is calculated using the straight-line method to allocate the cost of licenses and software over their estimated useful lives (5 years) Property, plant and equipment Property, plant and equipment (PPE) are measured on initial recognition at cost. Following initial recognition PPE are stated at historical cost or revalued amount (see point ), less accumulated depreciation and accumulated impairment losses, if any. Cost of property, plant and equipment comprises the purchase price, transportation costs, installation, and other direct expenses related to the acquisition or implementation. The cost of the self constructed item of PPE includes the cost of materials, services and workforce. Subsequent costs are included in the asset s carrying amount or recognised 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 an item can be measured reliably. All other repair and maintenance expenses are charged directly to the Company s Statement of Profit or Loss when the expenditure is incurred. Borrowing costs on qualifying assets are capitalised proportionally to the part of the cost of fixed assets under construction over the period of construction. If an item of PPE consists of components with different useful lives and the cost of these components are significant against the cost of an PPE item, these components are recognised separately. Land is not depreciated. Depreciation on the other assets is calculated using the straight line method to allocate their cost over their estimated useful lives, as follows: Type of property, plant and equipment (PPE) Estimated useful life, years Buildings and facilities electricity distribution lines Technology equipment and machinery (TEM) transformer substations 8 35 Other property, plant and equipment 3 12 The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. 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 (see point ). Gains or losses on property, plant and equipment disposals are determined by comparing proceeds with carrying amounts. Those are included in the Company s Statement of Profit or Loss. If revalued property, plant and equipment have been sold or disposed, appropriate amounts are reclassified from revaluation reserve to retained earnings. SADALES TĪKLS AS ANNUAL REPORT from 58

21 All fixed assets under construction are stated at historical cost and comprised costs of construction of assets. The initial cost includes construction and installation costs and other direct costs related to construction of fixed assets. Assets under construction are not depreciated as long as the relevant assets are completed and ready for intended use, but are tested for impairment annually, either individually or at the cash-generating unit level. The amount of any impairment loss identified is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows. The present value of the estimated future cash flows is discounted at the asset s original effective interest rate Revaluation of property, plant and equipment Revaluations have been made with sufficient regularity to ensure that the carrying amount of property, plant and equipment items subject to valuation does not differ materially from that which would be determined using fair value at the end of reporting period. Electricity distribution system property, plant and equipment categories grouped by following groups are revalued regularly but not less frequently than every five years: buildings and facilities technology equipment and machinery other equipment. Increase in the carrying amount arising on revaluation net of deferred tax is credited to the Other comprehensive income as Property, plant and equipment revaluation reserve in the Shareholder s equity. Decreases that offset previous increases of the same asset are charged in Other comprehensive income and debited against the revaluation reserve directly in equity; all other decreases are charged to the Company s current year s Statement of Profit or Loss. Any gross carrying amounts and accumulated depreciation at the date of revaluation is restated proportionately with the change in the gross carrying amount of the asset so that the carrying amount of the asset after the revaluation equals its revalued amount. Property, plant and equipment revaluation reserve is decreased at the moment, when revalued asset has been eliminated or disposed, and transferred to retained earnings. Revaluation reserve cannot be distributed in dividends, share capital, used for indemnity, reinvested in other reserves, or used for other purposes Impairment of assets Assets that are subject to depreciation or amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher amount of the asset s fair value less costs to sell and value in use. In assessing the value in use, the estimated future cash flows are discounted to their present value using a pre tax discount rate that reflects the current market expectations regarding the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit to which the asset belongs. Impairment losses are recognised in the Other comprehensive income within PPE revaluation reserve for the assets accounted at revalued amount and in the Company s Statement of Profit or Loss within amortisation, depreciation and impairment charge expenses for the assets that are accounted at cost, less depreciation and impairment, and for the assets accounted at revalued amount in case if impairment charge exceeds revaluation surplus previously recognised on individual asset. The key assumptions used in determining recoverable amount of the asset are based on the Company s management best estimation of the range of economic conditions that will exist over the remaining useful life of the asset, on the basis of the most recent financial budgets and forecasts approved by the Company s management for a maximum period of 10 years. Estimates are based on Latvian regulatory authority (Public Utilities Commission) stated methodology. Assets are reviewed for possible reversal of the impairment whenever events or changes in circumstances indicate that impairment must be reviewed. The reversal of impairment for the assets that are accounted at cost, less depreciation and impairment, is recognised in the Company s Statement of Profit or Loss. Reversal of impairment loss for revalued assets is recognised in the Company s Statement of Profit or Loss to the extent that an impairment loss on the same revalued asset was previously recognised in the Company s Statement of Profit or Loss; the remaining reversals of impairment losses of revalued assets are recognised in Other comprehensive income. SADALES TĪKLS AS ANNUAL REPORT from 58

22 Leases a) The Company is the lessee Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Operating lease agreement can not be classified as finance lease if does not provide that lessee overtakes all risks and benefits associated with the lease object overtake in its possession. Lease payments are charged to Statement of Profit or Loss over the period of the lease (see Note 13 d). b) The Company is the lessor Assets leased out under operating leases are recorded within property, plant and equipment at historic cost less depreciation and accumulated impairment loss, if any. Depreciation is calculated on a straight line basis to write down each asset to its estimated residual value over estimated useful life. Rental income from operating lease and advance payments received from clients (less any incentives given to lessee) are recognised in the Company s Statement of Profit or Loss on a straight line basis over the period of the lease (see Note 13 d) Inventories Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Cost is determined using the weighted average method. At the end of each reporting year the inventories are reviewed for any indications of obsolescence. In cases when obsolete or damaged inventories are identified allowances are recognised. Allowances for an impairment loss are recognised for those inventories. The following basic principles are used in determining impairment losses for idle and obsolete inventories: inventories that haven t turned over during last 6 months are impaired in amount of 50 %, inventories that have not turned over during last 12 months are fully impaired Trade and other receivables Trade receivables are recognised initially at fair value and subsequently carried at amortised cost. An allowance for impairment of trade 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 repayment. Significant financial difficulties of the debtor, probabilities that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered as indicators that the trade receivable is impaired. Trade receivables are generally due for settlement within 45 days and therefore classified as current. An allowance for impairment of doubtful debts is calculated on the basis of trade receivables aging analysis according to estimates defined by the Company s management, which are revised at least once a year (see Note 16 a) a) Distribution system services and mandatory procurement PSO fees receivables: payment term overdue days 50 % payment term overdue days 75 % payment term overdue more than 181 day 100 % b) connection fees and other debts: payment term overdue days 50 % payment term overdue more than 91 day 100 % c) if debtor has been announced as insolvent, allowances are established at 100 % Cash and cash equivalents Cash and cash equivalents include cash balances on bank accounts, demand deposits at bank and other short term deposits with original maturities of three months or less Dividend distribution Dividend distribution to the Shareholder of the Company is recognised as a liability in the Company s financial statements in the period in which the dividends are approved by the Company s Shareholder. SADALES TĪKLS AS ANNUAL REPORT from 58

23 Pensions, post employment and employee termination benefits a) Pension obligations The Company makes monthly contributions to a closed defined contribution pension plan on behalf of its employees. The plan is managed by the non profit public limited company Pirmais Slēgtais Pensiju Fonds, with the participation of Sadales Tīkls AS amounting for 0.62 % of its share capital. A defined contribution plan is a pension plan under which the Company pays contributions into the plan. The Company has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees benefits relating to employee service in the current and prior periods. The contributions amount to 5 % of each pension plan member s salary. The Company recognises the contributions to the defined contribution plan as an expense when an employee has rendered services in exchange for those contributions. b) Provisions for post-employment obligations arising from collective agreement In addition to the aforementioned plan, the Company provides certain post employment benefits to employees whose employment meets certain criteria. Obligations for benefits are calculated taking into account the current level of salary and number of employees eligible to receive the payment, historical termination rates as well as number of actuarial assumptions. The defined benefit obligations are calculated annually by independent actuaries using the projected unit credit method. The liability is recognised in the Company s Statement of Financial Position in respect of post employment benefit plan is the present value of the defined benefit obligation at the end of the reporting period. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government bonds. The Company uses projected unit credit method to establish its present value of fixed benefit obligation and related present and previous employment expenses. According to this method it has been stated that each period of work makes benefit obligation extra unit and the sum of those units comprises total Company s obligations of post employment benefits. The Company uses available and mutually compatible actuarial assumptions disclosed in Note 4. Actuarial gains or losses arising from experience adjustments and changes in actuarial assumptions net of deferred income tax are charged or credited to the Company s Statement of Comprehensive Income in the period in which they arise. Past service costs are recognised immediately in the Statement of Profit or Loss. c) Provisions for termination benefits Termination benefits are measured in accordance with IAS 19 and are payable when employment is terminated by the Company before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these benefits. The Company recognises termination benefits at the earlier of the following dates: (a) when the Company can no longer withdraw the offer of those benefits; and (b) when the Company recognises costs for a restructuring that is within the scope of IAS 37 and involves the payment of terminations benefits. In the case of an offer made to encourage voluntary redundancy, the termination benefits are measured based on the number of employees expected to accept the offer. Benefits falling due more than 12 months after the end of the reporting period are discounted to present value. Management judgements related to the measurement of provisions for termination benefits is disclosed in Note Income tax Corporate income tax includes current and deferred taxes. Current corporate income tax is applied at the rate of 15% on taxable income generated by the Company during the taxation period. a) Corporate income tax Legal entities will not be required to pay income tax on earned profits starting from 1 January 2018 in accordance with amendments made to the Corporate Income Tax Law of the Republic of Latvia issued on 28 July Corporate income tax will be paid on distributed profits and deemed profit distributions. Consequently, current and deferred tax assets and liabilities are measured at the tax rate applicable to undistributed profits. Starting from 1 January 2018, both distributed profits and deemed profit distributions will be subject to the tax rate of 20% of their gross amount, or 20/80 of net expense. Corporate income tax on dividends is recognized in the statement of profit or loss as expense in the reporting period when respective dividends are declared, while, as regards other deemed profit items, at the time when expense is incurred in the reporting year. b) Deferred corporate income tax liabilities Deferred corporate income tax arising from temporary differences in the timing of the recognition of items in the tax returns and these financial statements was calculated using the liability method. Deferred corporate income tax assets and liabilities were determined on the basis of the tax rates that were expected to apply when the timing differences reverse. The principal temporary timing differences arose from differing rates of accounting and tax amortization and depreciation on the Company s non-current assets, the treatment of SADALES TĪKLS AS ANNUAL REPORT from 58

24 temporary non-taxable provisions and reserves, as well as temporary difference in interest in excess of set limits and tax losses carried forward for the subsequent years. Deferred tax assets and liabilities are not recognized for the year 2017 in accordance with amendments to the legislation of the Republic of Latvia, which entered into force on 1 January Accordingly, deferred tax liabilities which have been calculated and recognized in previous reporting periods are reversed through the current statement of profit or loss or reserves (depending on whether the original entry was recorded in the statement of profit or loss or reserves) in the financial statements for the year ended 31 December 2017, as it is laid down in the IAS 12, changes in the tax legislation must be presented in financial statements in the period when they are adopted (Note 11) Borrowing costs General and specific borrowing costs directly attributable to the acquisition or construction of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that the Company incurs in connection with the borrowing of funds Provisions Provisions are recognised when the Company has a present obligation as a result of past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and when a reliable estimate can be made of the amount of the obligation. Provisions are not recognised for future operating losses. Provisions are presented in the Company s Statement of Financial Position at the best estimate of the expenditure required to settle the present obligation at the end of reporting period. Provisions are used only for expenditures for which the provisions were originally recognised and are reversed if an outflow of resources is no longer probable. Provisions are measured at the present value of the expenditures expected to be required for settling the obligation by using pre tax rate that reflects current market assessments of the time value of the money and the risks specific to the obligation as a discount rate. The increase in provisions due to passage of time is recognised as interest expense Financial instruments initial recognition, subsequent measurement and de recognition a) Financial assets I) Initial recognition and measurement Financial assets within the scope of IAS 39 are classified as financial assets at fair value through profit or loss, loans and receivables, held to maturity investments, available for sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Company determines the classification of its financial assets at initial recognition. All financial assets are recognised initially at fair value plus transaction costs, except in the case of financial assets recorded at fair value through profit or loss. The Company s financial assets include loans and receivables. II) Subsequent measurement Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if expected to be settled within 12 months; otherwise, they are classified as non current. Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value presented as finance costs (negative net changes in fair value) or finance income (positive net changes in fair value) in the Company s Statement of Profit or Loss. Financial assets designated upon initial recognition at fair value through profit or loss are designated at their initial recognition date and only if the criteria under IAS 39 are satisfied. The Company has not designated any financial assets at fair value through profit or loss. Loans and receivables Loans and receivables are non derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at SADALES TĪKLS AS ANNUAL REPORT from 58

25 amortised cost using the effective interest rate (hereinafter EIR) method, less impairment. The losses arising from impairment are recognised in the Company s Statement of Profit or Loss in finance costs for loans and in other operating expenses for receivables. This category applies to trade and other receivables. Held to maturity investments Non derivative financial assets with fixed or determinable payments and fixed maturities are classified as held to maturity when the Company has the positive intention and ability to hold them to maturity. After initial measurement, held to maturity investments are measured at amortised cost using the effective interest rate (hereinafter EIR), less impairment. If the Company were to sell other than an insignificant amount of held to maturity financial assets, the whole category would be tainted and reclassified as available for sale. Held to maturity financial assets with maturities more than 12 months from the end of the reporting period are included in non current assets; however those with maturities less than 12 months from the end of the reporting period are classified as current assets. The Company does not have Held to maturity investments. Available for sale financial assets Available for sale financial assets include equity instruments and debt securities. After initial measurement available for sale financial assets are subsequently measured at fair value with unrealised gains or losses recognised in other comprehensive income and credited in the available for sale financial assets reserve until the investment is derecognised. The Company does not have such assets. III) De recognition A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when: the rights to receive cash flows from the asset have expired, the Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass through arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. b) Financial liabilities I) Initial recognition and measurement Financial liabilities within the scope of IAS 39 are classified as financial liabilities at fair value through profit or loss, loans and borrowings, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. The Company determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings, net of directly attributable transaction costs. The Company s financial liabilities include trade and other payables and loans and borrowings. II) Subsequent measurement Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. This category includes derivative financial instruments entered into by the Company that are not designated as hedging instruments in hedge relationships as defined by IAS 39. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognised in the Company s Statement of Profit or Loss. The Company has not designated any financial liabilities at fair value through profit or loss. Loans and borrowings Loans and borrowings are recognised initially at fair value. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the Company s Statement of Profit or Loss, except for the capitalised part. Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability at least for 12 months after the end of reporting period. SADALES TĪKLS AS ANNUAL REPORT from 58

26 Trade and other payables The Company s trade payables are recognised initially at fair value and subsequently measured at amortised cost using the EIR method. III) De recognition A financial liability is derecognised when the obligation under the liability is discharged or cancelled, or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the de recognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the Company s Statement of Profit or Loss Revenue recognition Revenue from contracts with customers Revenue from contracts with customers in scope for IFRS 15 encompasses sold goods or services provided as output of the entity s ordinary activities. Company uses method output method to measure progress towards complete satisfaction of a performance obligations. Revenue is recognized only when all of the following criteria are met: the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations; can be identified each party s rights regarding the goods or services to be transferred; can be identified the payment terms for the goods or services to be transferred; the contract has commercial substance (i.e. the risk, timing or amount of the entity s future cash flows is expected to change as a result of the contract); it is probable that the company will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, the Company uses portfolio approach practical expedient for all distribution services customers. Company reasonably expects that, the effects on the financial statements from applying these requirements to the portfolio would not differ materially from applying the requirements to the individual contracts within the portfolio. For other customers collectability is assessed individually. The Company considers only the customer s ability and intention to pay that amount of consideration when it is due. The Company recognises revenue when (or as) the it satisfies a performance obligation to transfer a promised good or service (i.e. an asset) to a customer. An asset is transferred when or as the customer obtains control of that asset. Revenue for providing continuous services and goods are recognised over time or at a point in time (Note 5). Performance obligation is recognised over time, if one of the following criteria is met: customer simultaneously receives and consumes the benefits; customer controls the asset as it is created or enhanced; Company s performance does not create an asset and has a right to payment for performance completed. If a performance obligation is not satisfied over time, the Company satisfies the performance obligation at a point in time, considering following: Company has a present right to receive payment; Customer has legal title; Company has transferred physical possession of the asset; Customer has the significant risks and rewards of ownership of the asset; Customer has accepted the asset. The Company recognises its revenue from contracts with customers as follows: I) Revenue recognised over time Sales of distribution services Revenues from electricity distribution services are based on regulated tariffs that are subject to approval by the Public Utilities Commission, revenues from reactive energy are based on regulations by Cabinet of Ministers of the Republic of Latvia Regulations on electricity trade and usage. The Company recognizes revenue from sales of distribution services and from reactive energy at the end of each month on the basis of the automatically made meter readings or customers reported meter readings, on the period in which the services are rendered. Distribution system service fee includes variable consideration, it can be reduced due to use of efficient connection load, which is measured on the basis of the rules defined by the Public Utilities Commission. SADALES TĪKLS AS ANNUAL REPORT from 58

27 Reduction is applied to the distributon service fee amounting to 0.5 coefficient after specified annual consumption levels are reached. There are certain limitations for the application of 0.5 coefficient (Note 4 d II). Network connection fees Network connection fees are non-refundable upfront fees paid by customers to secure connection to the distribution network. Connection fees partly reimburses for the cost of infrastructure to be built needed to connect the respective customer to the network. Network connection fee is calculated in accordance with Latvian regulatory authority (Public Utilities Commission) stated methodology. Revenue from electricity connection fees are initially recognised as contract liabilities and recognised over the estimated customer relationship period (Note 4 d I). II) Revenue recognised at a point in time Construction services Revenue from construction services are recognised when the customer has approved actually performed works and transferred control to a customer and the Company is entitled to receive payment. Payments for the works performed is received within one month. III)Revenue recognised applying agent accounting principle Mandatory procurement PSO fees Revenue from mandatory procurement public service obligation (PSO) fees is revenue which consists from payments of electricity end users for covering mandatory electricity procurement costs of electricity public trader Enerģijas publiskais tirgotājs AS. The Electricity Market Law provides that all electricity end users in Latvia shall compensate the mandatory electricity purchase costs. As a result, the PSO fees are included in bills paid by customers for electricity and system services. Sadales tīkls AS as a system operator has the obligation to collect revenues of PSO fees from customers or traders and further to transfer these revenues to Enerģijas publiskais tirgotājs AS. PSO fees are based on regulated tariffs that are subject to approval by the Public Utilities Commission. Due to lack of control over PSO fees before they are transferred to a customer, Company considers itself an agent in these transactions. Therefore, PSO fees are recognised in the Company s Statement of Profit or Loss in net amount by applying the agent accounting principles (Note 4 d, III) Related parties All shares of the Company belong to Latvenergo AS which is the Parent Company. The parties are considered related when one party has a possibility to control the other one or has significant influence over the other party in making financial and operating decisions. Related parties of the Company are Shareholder of the Company who could control or who has significant influence over the Company in accepting operating business decisions, members of Management board and close family members of any above mentioned persons, as well as entities over which those persons have control or significant influence. As the shares of Latvenergo AS belong 100% to the Republic of Latvia, the related parties also include entities under the control or significant influence of the state (Note 24) Share capital The Company s share capital consists of ordinary shares. All shares have been fully paid Events after the reporting period Events after the reporting period that provide additional information about the Company s position at the balance sheet date (adjusting events) are reflected in the financial statements. Events after the reporting period that are not adjusting events are disclosed in the notes when material Changes in accounting policies The Company has applied IFRS 15 Revenue from contracts with customers for the first time in the 2017 financial statements with initial application date: 1 January 2017 and has chosen a modified retrospective application of IFRS 15. In accordance with the transition provisions in IFRS 15 the Company has adopted the standard using the modified retrospective approach with cumulative effect only for the agreements that are not completed as of initial application date. All relevant figures in the financial statements for the year ended 31 December 2017 have been presented in accordance with IFRS 15. The Company has assessed its revenue, change in revenue recognition does not have significant impact on financial reports, however it has affected recognition of revenue from distribution system services for efficient use of connection load for its variable consideration. SADALES TĪKLS AS ANNUAL REPORT from 58

28 The cumulative impact of the adoption has been recognised in retained earnings as of 1 January 2017 and that comparatives are not restated. Cumulative effect upon adoption of IFRS 15 has increased accrued losses as of 1 January 2017 by EUR 10 thousand and adoption of standard has decreased year 2017 revenue by EUR 243 thousand, that is recognised as deferred income as of 31 December The cumulative effect upon adoption of IFRS 15: Statement of Financial Position (extract) 31/12/2016 Effect on IFRS 15 adoption Positions reclassified 01/01/2017 ASSETS Current assets Receivables from contracts with customers Trade receivables and other receivables (45 058) 156 Total current assets TOTAL ASSETS EQUITY AND LIABILITIES Equity Retained earnings / (accrued losses) (67 977) (10) (67 987) Total equity (67 977) (10) (67 987) Non current liabilities Deferred income from contracts with customers Total non current liabilities Current liabilities Deferred income from contracts with customers Total current liabilities TOTAL EQUITY AND LIABILITIES In accordance with the IFRS 15 requirements, the disclosure of the impact of adoption on Statement of profit of profit or loss and statement of financial position is as follows: Statement of Financial Position (extract) 31/12/2017 Financial Position As reported Without adoption Effect of Change of IFRS 15 (higher/(lower)) ASSETS Current assets Receivables from contracts with customers Trade receivables and other receivables (47 669) Total current assets TOTAL ASSETS EQUITY AND LIABILITIES Equity Retained earnings / (accrued losses) (253) Total equity (253) Non current liabilities Deferred income from contracts with customers Total non current liabilities Current liabilities Deferred income from contracts with customers Total current liabilities TOTAL EQUITY AND LIABILITIES SADALES TĪKLS AS ANNUAL REPORT from 58

29 Statement of Profit or Loss (extract) Year ended 31 December 2017 Profit or Loss As reported Without adoption Effect of change of IFRS 15 (higher/(lower)) Revenue Distribution system services (243) Profit / (loss) for the year (243) Disaggregation of revenue from contracts with customers has not changed existing categorising and presents the nature of the revenue as reviewed by the Company s management and Latvian regulatory authority (Public Utilities Commission). The calculation of the connection fee is based on Latvian regulatory authority (Public Utilities Commission) stated methodology and is recognised as deferred income (as contract liabilities) and amortised to Statement of Profit or Loss over estimated customer relationship period as estimated period for performing its obligations (Note , 4 d, I) First time adoption of IFRS These financial statements, for the year ended 31 December 2017, are the first the Company has prepared in accordance with IFRS. For periods up to and including the year ended 31 December 2016, the Company prepared its financial statements in accordance with local generally accepted accounting principles as defined by the Annual Accounts Law of the Republic of Latvia (Local GAAP). Accordingly, the Company has prepared its financial statements that comply with IFRS applicable as at 31 December 2017, together with the comparative period data for the year ended 31 December 2016, as described in the summary of significant accounting policies. In preparing the financial statements, the Company s opening Statement of Financial Position was prepared as of 1 January 2016, the Company s date of transition to IFRS. This note explains the principal adjustments ( Remeasurements ) made by the Company in restating its Local GAAP financial statements in accordance with IFRS, including the Statement of Financial Position as of 1 January 2016 and the financial statements for the year ended 31 December All other position transitions which have no material impact on financial results are disclosed as Positions reclassified. Exemptions applied IFRS 1 allows first time adopters certain exemptions from the retrospective application of certain requirements under IFRS, but the Company has not applied any of these exemptions. Estimates The estimates at 1 January 2016 and at 31 December 2016 are consistent with those made for the same dates in accordance with Local GAAP (after adjustments to reflect any differences in accounting policies). SADALES TĪKLS AS ANNUAL REPORT from 58

30 Reconciliation of the Company s equity as of 1 January 2016 (date of transition to IFRS) Local GAAP 01/01/2016 Remea surements* Positions reclassified IFRS 01/01/2016 ASSETS Non current assets Intangible assets 25,207 25,207 Property, plant and equipment 1,223,831 1,223,831 Buildings and facilities 861,137 (861,137) Technology equipment and machinery 329,819 (329,819) Other property, plant and equipment 10,211 (10,211) Creation of property, plant and equipment and assets under construction 22,664 (22,664) Financial investments 1 1 Other shares and non-current investments 1 (1) Total non current assets 1,249,039 1,249,039 Current assets Inventories 16,114 16,114 Raw materials, basic materials and consumables 15,197 (15,197) Finished products and goods for sale 918 (918) Trade receivables and other receivables 43,749 43,749 Trade receivables 9,774 (9,774) Receivables from related companies 32,188 (32,188) Other receivables 1,786 (1,786) Deferred expenses Cash and cash equivalents Total current assets 61,046 61,046 TOTAL ASSETS 1,310,085 1,310,085 EQUITY AND LIABILITIES Equity Share capital 627, ,656 Reserves 19,707 19,707 Non current assets revaluation reserve 19,707 (19,707) Uncovered losses of previous years (57,582) 57,582 Loss for the year (10,837) 10,837 Accrued loss 161 (68,419) (68,258) Total equity 578, ,105 PROVISIONS Provisions for pensions and similar obligations 8,111 (8,111) Total provisions 8,111 (8,111) LIABILITIES Non current liabilities Accounts payable to related companies 302,376 (302,376) Borrowings from the Parent Company 302, ,376 Deferred income tax liabilities 108,231 (161) 108,070 Provisions 8,111 8,111 Deferred income 142,593 (142,593) Deferred income 142, ,593 Total non current liabilities 553,200 (161) 8, ,150 Current liabilities Borrowings from the Parent Company 98,118 98,118 Trade and other payables 60,657 60,657 Advances received from customers 4,936 (4,936) Trade payables 19,757 (19,757) Accounts payable to related companies 125,232 (125,232) Taxes and the state social security contributions 3,329 (3,329) Other payables 3,108 (3,108) Deferred income 11,055 11,055 Accrued liabilities 2,413 (2,413) Total current liabilities 169, ,830 Total liabilities 723,030 (161) 8, ,980 TOTAL EQUITY AND LIABILITIES 1,310,085 1,310,085 * in accordance with IFRS, the Company has recognised deferred tax liability for re measurement on defined post employment benefit plan in accrued losses at the date of initial application of IFRS as of 1 January 2016 SADALES TĪKLS AS ANNUAL REPORT from 58

31 Reconciliation of the Company s equity as of 31 December 2016 Local GAAP 31/12/2016 Remea surements* Positions reclassified IFRS 31/12/2016 ASSETS Non current assets Intangible assets 28,542 28,542 Property, plant and equipment 1,507,158 1,507,158 Buildings and facilities 1,133,199 (1,133,199) Technology equipment and machinery 331,835 (331,835) Other property, plant and equipment 19,638 (19,638) Creation of property, plant and equipment and assets under construction 22,471 (22,471) Advance payments for PPE 15 (15) Non current financial investments 1 1 Other shares and non-current investments 1 (1) Total non current assets 1,535,701 1,535,701 Current assets Inventories 15,483 15,483 Raw materials, basic materials and consumables 14,753 (14,753) Finished products and goods for sale 730 (730) Trade receivables and other receivables 45,214 45,214 Trade receivables 14,018 (14,018) Receivables from related companies 31,096 (31,096) Other receivables 100 (100) Deferred expenses Cash and cash equivalents Total current assets 61,989 61,989 TOTAL ASSETS 1,597,690 1,597,690 EQUITY AND LIABILITIES Equity Share capital 627, ,656 Reserves 261, ,313 Non current assets revaluation reserve 261,313 (261,313) Uncovered losses of previous years (68,420) 68,420 Profit for the year 2 (2) Accrued loss 441 (68,418) (67,977) Total equity 820, ,992 PROVISIONS Provisions for pensions and similar obligations 9,615 (9,615) Total provisions 9,615 (9,615) LIABILITIES Non current liabilities Accounts payable to related companies 313,496 (313,496) Borrowings from the Parent Company 313, ,496 Deferred income tax liabilities 148,649 (441) 148,208 Provisions 9,615 9,615 Deferred non-current income 141,817 (141,817) Other and deferred income 141, ,817 Total non current liabilities 603,962 (441) 9, ,136 Current liabilities Borrowings from the Parent Company 90,531 90,531 Trade and other payables 61,146 61,146 Advances received from customers 5,604 (5,604) Trade payables 18,240 (18,240) Accounts payable to related companies 117,594 (117,594) Taxes and the state social security contributions 5,026 (5,026) Income tax payable Other payables 3,043 (3,043) Deferred income 11,611 11,611 Accrued liabilities 2,444 (2,444) Total current liabilities 163, ,562 Total liabilities 767,524 (441) 9, ,698 TOTAL EQUITY AND LIABILITIES 1,597,690 1,597,690 * in accordance with IFRS, the Company has recognised deferred tax liability for re measurement on defined post employment benefit plan in accrued losses as of 31 December 2016 SADALES TĪKLS AS ANNUAL REPORT from 58

32 Reconciliation of profit or loss for the year ended 31 December 2016 Local GAAP for the 31/12/2016 Remea surements* Positions reclassified IFRS for the 31/12/2016 Revenue 315, ,697 Capitalised costs attributable to non-current assets 138 (138) Other income 1,092 1,092 Other operating income 1,092 (1,092) Raw materials and consumables used (107,161) (107,161) Personnel expenses (55,746) 1, (53,799) Adjustment for impairment of property, plant and equipment and intangible assets (93,362) 93,362 Depreciation, amortisation and impairment of intangible assets and property, plant and equipment (93,362) (93,362) Other operating expenses (55,506) (2,286) 53 (57,739) Operating profit 5,152 (424) 4,728 Interest costs and similar costs (6,515) 6,515 Finance costs (6,515) (6,515) Loss before tax (1,363) (424) (1,787) Corporate income tax for the year (854) 854 Loss after tax for the year (2,217) (424) 854 (1,787) Revenue or cost of deferred income tax assets or liabilities changes 2,219 (2,219) Income tax 343 1,365 1,708 Profit / (loss) for the year 2 (81) (79) * under Local GAAP, the Company recognised costs or income related to re measurement on defined post employment benefit plan in profit or loss as Personnel expenses and revenue from disposal of property, plant and equipment revaluation reserve when revalued asset has been eliminated or disposed in profit or loss as Other income Reconciliation of the comprehensive income for the year ended 31 December 2016 Local GAAP for the 31/12/2016 Remea surements* Positions reclassified IFRS for the 31/12/2016 Profit for the year 2 (81) (79) Other comprehensive income not to be reclassified to profit or loss in subsequent periods (net of tax): Gains on revaluation of property, plant and equipment 243, ,549 Loss as a result of re measurement on defined post employment benefit plan (1,583) (1,583) Other comprehensive income for the year, net of tax 241, ,966 Total comprehensive income for the year 2 241, ,887 * under IFRS gains on revaluation of property, plant and equipment and results of re measurement on defined post employment benefit plan are recognised as Other comprehensive income, but disposal of property, plant and equipment revaluation reserve as a direct transfer from reserve to retained earnings of the Company SADALES TĪKLS AS ANNUAL REPORT from 58

33 Reconciliation of the cash flows for the year ended 31 December 2016 The transition from Local GAAP to IFRS has not had a material impact on the Company s Statement of Cash Flows except remeasurement effect on Profit before tax arising from remeasurement on defined post employment benefit plan which is recognised as Other comprehensive income and disposal of property, plant and equipment revaluation reserve as a direct transfer from reserve to retained earnings of the Company. Local GAAP for the 31/12/2016 Remea surements Positions reclassified IFRS for the 31/12/2016 Cash flows from operating activities Loss before tax (1,363) (424) (1,787) Adjustments: Amortisation, depreciation and impairment of intangible assets and property, plant and equipment 93,362 93,362 Impairment of property, plant and equipment 93,362 (93,362) Loss from disposal of non current assets 2,286 3,193 5,479 Disposal of intangible assets 3,193 (3,193) Interest costs 6,515 6,515 Increase / (decrease) in provisions 1,504 (1,862) (358) Operating profit before working capital adjustments 103, ,211 Decrease in inventories Increase in trade and other receivables (3,315) (3,315) Increase in trade and other payables Cash generated from operating activities 100, ,743 Interest paid (7,052) (7,052) Repaid corporate income tax 1,160 1,160 Net cash flows generated from operating activities 94,851 94,851 Cash flows from investing activities Purchase of intangible assets and property, plant and equipment (98,392) (98,392) Proceeds from sales of intangible assets and property, plant and equipment 8 8 Net cash flows used in investing activities (98,384) (98,384) Cash flows from financing activities Borrowings received 60,000 (60,000) Proceeds on borrowings from the Parent Company 60,000 60,000 Repayment of borrowings (56,467) 56,467 Repayment of borrowings received from the Parent Company (56,467) (56,467) Net cash flows generated from financing activities 3,533 Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the reporting year Cash and cash equivalents at the end of reporting year FINANCIAL RISK MANAGEMENT 3.1. Financial risk factors The Company s activities expose it to a variety of financial risks: market risks (including pricing risk for regulated activities distribution system tariffs, currency risk and interest rate risk), credit risk, liquidity and cash flow risk. Risk management (except for pricing risk for regulated activities) is carried out by the Parent Company s Treasury department (the Latvenergo AS Treasury) according to Latvenergo Group s Financial Risk Management Policy approved by the Management Board of the Parent Company. The overall financial risk management programme focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the financial performance of Group Companies.The Latvenergo AS Treasury identifies, evaluates and hedges financial risks in close co operation with the Company s operating units. The Management Board of the Parent Company by approving Latvenergo Group s Financial Risk Management Policy provides written principles for overall risk management, as well as written policies covering specific areas, such as interest rate risk, foreign exchange risk, liquidity risk and credit risk, use of investment for excess liquidity. SADALES TĪKLS AS ANNUAL REPORT from 58

34 Financial assets by categories: Notes Non current financial investments Trade receivables and other receivables Cash and cash equivalents Financial assets as of 31 December 2017 Non current financial investments 14 1 Receivables from contracts with customers, net 16 a 47,669 Other current financial receivables and receivables from related parties for lease 16 b, 24 c, d 144 Cash and cash equivalents , Financial assets as of 31 December 2016 Non current financial investments 14 1 Receivables from contracts with customers, net 16 a 45,058 Other current financial receivables and receivables from related parties for lease 16 b, 24 c, d 149 Cash and cash equivalents , Financial assets as of 1 January 2016 Non current financial investments 14 1 Receivables from contracts with customers, net 16 a 41,915 Other current financial receivables and receivables from related parties for lease 16 b, 24 c, d 88 Cash and cash equivalents , Financial liabilities by categories: Notes Borrowings Other financial liabilities at amortised cost Financial liabilities as of 31 December 2017 Borrowings from the Parent Company 20 I 391,654 Trade and other financial payables 23 55, ,654 55,849 Financial liabilities as of 31 December 2016 Borrowings from the Parent Company 20 I 404,027 Trade and other financial payables 23 48, ,027 48,610 Financial liabilities as of 1 January 2016 Borrowings from the Parent Company 20 I 400,494 Trade and other financial payables 23 50, ,494 50,120 a) Market risk I) Foreign currencies exchange risk The introduction of euro in Latvia as of 1 January 2014 prevented the euro currency risk, which primarily was arising from settlements in foreign currencies for capital expenditures. Latvenergo Group s Financial Risk Management Policy foresees management of the foreign currencies exchange risk against functional currency. Foreign currencies exchange risk arises when future transactions or recognised assets or liabilities are denominated in a currency that is not the Company s functional currency. During 2017 the Company had no substantial foreign currency risk as almost all financial transactions were completed in euros only. Latvenergo Group s Financial Risk Management Policy is to hedge all anticipated cash flows (capital expenditure and purchase of goods and services) in each major foreign currency that might create significant currency risk. During 2017 the Company had no capital expenditure project which expected transactions would create significant currency risk. In 2017, the Company had no certain investments, which were exposed to foreign currency risks. SADALES TĪKLS AS ANNUAL REPORT from 58

35 II) Cash flow and fair value interest rate risk As the Company has not significant floating interest bearing assets and liabilities exposed to interest rate risk, the Company s financial income / costs and operating cash flows are not substantially dependent on changes in market interest rates. During 2017, if euro interest rates had been 50 basis points higher or lower with all other variables held constant, there would not have been significant impact on the Company s income from the cash reserves held at bank for the year. The Company s cash flow interest rate risk mainly arises from long term borrowings at variable rates. They expose the Company to a risk that finance costs might increase significantly when interest rates rise up. The Company s policy is to maintain at least 35% of its borrowings as fixed interest rates borrowings with duration between 2 4 years. As of 31 December % of the total Company s borrowings (31/12/2016: 70%; 01/01/2016: 60%) had fixed interest rate and average fixed rate duration was 5.91 years (2016: 5.87 years). The Company analyses its interest rate risk exposure on a dynamic basis. Various scenarios are simulated taking into consideration refinancing, renewal of existing positions and hedging. Based on these scenarios, the Company calculates the impact on profit and loss as well as on cash flows of a defined interest rate shift. During 2017, if interest rates on euro denominated borrowings at floating base interest rate (after considering hedging effect) had been 50 basis points higher or lower with all other variables held constant, the Company s profit for the year net of taxes would have been EUR 415 thousand lower or higher (2016: EUR 606 thousand lower or higher). The Company s borrowings with fixed rates do not impose fair value interest rate risk. III) Price risk Price risk is the risk that the fair value and cash flows of financial assets and liabilities will fluctuate in the future due to reasons other than changes in the market prices resulting from interest rate risk or foreign exchange risk. The purchase and sale of the services provided by the Company under the free market conditions, as well as the purchases of resources used in capital expenditure are impacted by the price risk. The most significant price risk is related to purchase of services. IV) Market risk The Company acts as a distribution system operator and provides electricity distribution services in the territory of the Republic in Latvia at tariffs that include projected operational costs, investments and profitability level approved by the Public utilities commission, i.e., operates in a regulated market. Therefore, the price of the services provided by the Company is largely fixed and is not a subject to market price volatility and the market risk is perceived as immaterial. V) Regulatory risk At the end of 2017 potential dishonest behaviour of several electricity producers in connection with obtaining permits for the production of electricity in the mandatory procurement process was discovered. The Company promptly initiated inspection of power plant connections, by the end of 2017 physically inspecting locations of 25 power plants to verify current situation in nature. Company cooperates with the Ministry of Economics and the Latvian regulatory authority (Public Utilities Commission) to evaluate and improve industry s regulations, specifying the processes and controls for the acceptance of power supply objects, clearly defining the responsibilities and responsibilities of each party involved. The Company has also improved the internal processes and regulations. The Public Utilities Commission has initiated an administrative proceeding in order to evaluate possible violations of the Company in the process of installing the system connections for electricity producers. In accordance with the assessment performed, violations indicated by the regulatory authority do not correspond to any definitions within applicable laws and regulations, including the obligation to pay a fine. Given that the administrative case is in the process of proceeding and the Company continues discussions with the regulatory authority, at the moment it is not possible to predict the outcome. However, the amount of penalty would not exceed 0.15 % of Company s revenues. b) Credit risk Company s credit risk arises from cash and cash equivalents and outstanding receivables. Credit risk exposure in connection with cash and cash equivalents is managed by the Latvenergo AS Treasury according to Latvenergo Group s Financial Risk Management Policy. Credit risk exposure in connection with trade receivables is managed by the Company s Management. This exposure has significantly concentrated on trade transactions with Latvenergo AS (distribution system services and mandatory procurement PSO fees transactions). Impairment loss has been deducted from gross accounts receivable (Note 16). The maximum credit risk exposure related to financial assets comprises of carrying amounts of cash and cash equivalents (see table below and Note 17) and trade and other receivables (Note 16). SADALES TĪKLS AS ANNUAL REPORT from 58

36 Assessment of maximum possible exposure to credit risk Notes 31/12/ /12/ /01/2016 Receivables from contracts with customers, net 16 a 47,669 45,058 41,915 Other current financial receivables 16 b Receivables from related parties for lease 16 b, 24 c, d Cash and cash equivalents ,113 45,507 42,303 For banks and financial institutions, independently rated parties with own or parent bank s minimum rating of investment grade are accepted. Otherwise, if there is no independent rating, Latvenergo AS Treasury according to Latvenergo Group s Financial Risk Management Policy performs risk control to assess the credit quality of the financial counterparty, taking into account its financial position, past co operation experience and other factors and after performed assessment individual credit limits are set. The basis for estimating the credit quality of financial assets not past due and not impaired is credit ratings assigned by the rating agencies or, in their absence, the earlier credit behaviour of clients and other parties to the contract. For estimation of the credit quality of fully performing trade receivables two rating categories are used: Customers with no overdue receivables, Customers with overdue receivables. Credit limits are regularly monitored. Credit risk related to cash and cash equivalents is managed by balancing the placement of financial assets in order to maintain the possibility to choose the best offers and to reduce probability to incur losses. All cash and cash equivalents at the end of the reporting period in the amount of EUR 300 thousand (31/12/2016: EUR 300 thousand; 01/01/2016: EUR 300 thousand) are placed in SEB Banka AS with investment level credit rating assigned for the parent company of this bank. No credit limits were exceeded during the reporting period, and the Company s management does not expect any losses due to occurrence of credit risk. c) Liquidity risk Latvenergo AS Treasury monitors the liquidity situation of the Company to ensure that subsidiary has sufficient financial resources and is able to carry its operations and settle its obligations. Sadales tīkls AS is the member of both Group Accounts in SEB Banka AS and Swedbank AS, which were conluded with the purpose to efficiently and unitedly manage financial resources of Latvenergo Group. The Company s liquidity risk is managed through Group Accoounts, Latvenergo Group mutually concluded agreement On provision of mutual financial resources and long term financing agreemnts; therefore, sufficient amount of cash and cash equivalents, the availability of long and short term funding are provided to meet commitments according to the Company s strategic plans as well as to compensate the fluctuations in the cash flows due to occurrence of variety of financial risks. The Company s management is monitoring rolling forecasts of the Company s liquidity reserve, which comprises cash and cash equivalents (Note 17). The table below analyses the Company s financial liabilities into relevant maturity groupings based on the settlement terms. The amounts disclosed in the table are the contractual undiscounted cash flows. Contractual undiscounted cash flows originated by the borrowings are calculated taking into account the actual interest rates at the end of the reporting period. SADALES TĪKLS AS ANNUAL REPORT from 58

37 Liquidity analysis (contractual undiscounted cash flows) Less than 1 year From 1 to 2 years From 3 to 5 years Over 5 years TOTAL At 31 December 2017 Borrowings from the Parent Company 85,285 55, , , ,433 Current financial liabilities (Note 23)* 55,849 55, ,134 55, , , ,282 At 31 December 2016 Borrowings from the Parent Company 97,446 57, , , ,721 Current financial liabilities (Note 23)* 48,610 48, ,056 57, , , ,331 At 1 January 2016 Borrowings from the Parent Company 104,950 55, , , ,020 Current financial liabilities (Note 23)* 50,120 50, ,070 55, , , ,140 * excluding advances received, tax related liabilities and other current non financial liabilities 3.2. Capital risk management For the purpose of the Company s capital management, capital includes share capital and all other equity reserves attributable to the equity holders.the Company s objectives when managing capital are to safeguard the Company s ability to continue as a going concern as well as to ensure necessary financing for investment program. In order to maintain or adjust the capital structure, the Company may evaluate the amount and timing of raising new debt due to investment programs or initiate new investments in the share capital by shareholder. Also asset revaluation directly influences the capital structure. The capital ratio figures were as follows: 31/12/ /12/ /01/2016 Total equity 993, , ,105 Total assets 1,626,641 1,597,690 1,310,085 Capital Ratio 61 % 51 % 44 % 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS Estimates and judgments are regularly evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The 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: a) Estimates concerning property, plant and equipment and intangible assets I) Useful lives of property, plant and equipment and intangible assets The Company makes estimates concerning the expected useful lives and residual values of property, plant and equipment and intangible assets. These are reviewed at the end of each reporting period and are based on the past experience as well as industry practice. Previous experience has shown that the actual useful lives have sometimes been longer than the estimates. As of 31 December 2017, the net book amount of property, plant and equipment and intangible assets of the Company totalled EUR 1,563,175 thousand (31/12/2016: EUR 1,535,700 thousand; 01/01/2016: EUR 1,249,038 thousand), and the depreciation charge for the reporting period was EUR 71,334 thousand (2016: EUR 69,465 thousand) (Note 12 and 13 a). Estimating of useful lives assessed as impracticable therefore sensitivity analysis of the depreciation rate changes effect in future periods is not disclosed. II) Recoverable amount of property, plant and equipment When the events and circumstances indicate a potential impairment, the Company performs impairment tests for items of property, plant and equipment. According to these tests assets are written down to their recoverable amounts, if necessary. When carrying out impairment tests management uses various estimates for the cash flows arising from the use of the assets, sales, maintenance, and repairs of the assets, as well as in respect of the inflation and growth rates. The estimates are based on the forecasts of the general economic environment, consumption and the price of transmission services. The estimates are based on Latvian regulatory authority (Public Utilities Commission) stated methodology.there is no impairment charge recognised during the current reporting year (see Note 13 c). SADALES TĪKLS AS ANNUAL REPORT from 58

38 III) Revaluation External, certified valuers have performed revaluation of the Company s property, plant and equipment (distribution system assets) by applying the depreciated replacement cost model. Valuation has been performed according to standards on property valuation and IAS 36, Impairment of assets, based on current use of property, plant and equipment that is estimated as the highest and best use of these assets. As a result of valuation, depreciated replacement cost was determined for each asset. Depreciated replacement cost is difference between the cost of replacement or renewal of similar asset at the time of revaluation and the obsolescence of an asset that encompasses physical deterioration, functional (technological) obsolescence and economic (external) obsolescence. In 2016 the Company carried out the process of distribution system assets revaluation. Amounts of revalued distribution system assets had been determined as of 1 April The key assumptions made to determine the revalued amount in are provided in Note 13 b. b) Recoverable amount of trade receivables The estimated collectability of accounts receivable is assessed on the basis of trade receivables aging analysis according to estimates defined by the Company s management. In case individual assessment is not possible due to the large number of individual balances, receivables are classified into groups of similar credit risk characteristics and are collectively assessed for impairment, using historical loss experience. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The circumstances indicating an impairment loss may include initiated insolvency of the debtor and inability to meet payment terms (point ). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss incurred (Note 16). c) Financial investments The Company has applied judgement in determining that it has a financial investment with 0.62 % interest held in the company Pirmais Slēgtais Pensiju Fonds AS that manages closed pension plan in Latvia as investment that has been valued at cost. The Company is only a nominal shareholder as all risks and benefits arising from management of pension plan will accrue to the Company s employees who are members of the pension plan and the Company does not have existing rights that give it the current ability to direct the relevant activities of the investee. d) Estimates concerning revenue recognition from contracts with customers I) Recognition of connection service fees Network connection fees are not considered as separate (distinct) performance obligations, as are not distict individually or within the context of the contract. Sales of distribution services are provided after customers have paid for the network connection, therefore network connection fees and sales of distribution services are highly interdependent and interrelated. Income from connection and other service fees is deferred as an ongoing service is identified as part of the agreement with customers and accounted as deferred income from contracts with customers under IFRS 15 (see Note 22). Connection and other service fees are recognised as income over the estimated customer relationship period. Based on Company s Management estimate, 20 years is the estimated customer relationship period, which is estimated as period after which requested power output for connection object could significantly change due to technological reasons. Thus period over which revenue is recognised is based on Company s Management estimate, as it is reasonably certain that assets, whose costs are partly reimbursed by connection service fees will be used by distribution system customers for a longer period that original system services agreement term.(note ). II) Recognition of efficient use of permitted load Distribution system services from efficient use of permitted load are recognised in accordance with IFRS 15 as constrained variable consideration. Based on historical expierence on application of the 0.5 coefficient using a portfolio of data, Company s Management has estimated that from distribution system revenues earned from those customers, who qualified for efficient use of permitted load by meeting certain criteria, are decreased in amount of 6%. See note III) Recognition of mandatory procurement PSO fees Company s Management has evaluated that it does not control PSO fees and therefore acts as an agent. In particular, Company s Management has considered the following indicators that the Company is acting as an agent: The Company does not control mandatory procurement PSO fees; The Company has duty for including the mandatory procurement PSO fee per invoices issued to the customers, but is not entitled on revenues from mandatory procurement PSO fee. These fees are determined by state support mechanism and are covered by all electricity end-users in proportion to their electricity consumption; The Company has no discretion in establishing mandatory procurement PSO fees price, either directly or indirectly; The Company has no inventory risk that would arise. SADALES TĪKLS AS ANNUAL REPORT from 58

39 e) Recognition and revaluation of provisions The Company has set up provisions for post employment benefits The amount and timing of the settlement of these obligations is uncertain. A number of assumptions and estimates have been used to determine the present value of provisions, including the amount of future expenditure, inflation rates, and the timing of settlement of the expenditure. The actual expenditure may also differ from the provisions recognised as a result of possible changes in legislative norms. For revaluation of provisions for post employment obligations probabilities of retirement in different employees aging groups as well as variable demographic factors and financial factors (including expected remuneration increase and determined changes in benefit amounts) have been estimated. The probabilities and other factors are determined on the basis of previous experience. There is also provided provisions for employees termination benefits as specified in the Medium Term Operational Strategy of Sadales tīkls AS in which it is planned to implement the efficiency program, by which it is intended to reduce the number of employees by The key assumptions made to determine the amount of provisions are provided in Note 21. f) Lease classification In order to carry out its economic activities, the Company has entered into a lease agreement for the lease of land, buildings and engineering structures related to the distribution system network infrastructure. Based on an evaluation of the terms of the agreement, such as rights of the ownership is not transferred, the lessor retains all the significant risks and rewards of ownership of these assets, and accounts lease of the agreements as operating lease. 5. REVENUE IFRS or IAS applied Revenue from contracts with customers recognised over time: Distribution system services IFRS , ,923 Connection service fees IFRS 15 12,453 11,817 Reactive energy IFRS 15 3,311 3,409 Other services IFRS 15 1,966 2, , ,266 Revenue from contracts with customers recognised at a point in time: Income from construction services IFRS 15 3,412 7,285 3,412 7,285 Total revenue from contracts with customers 323, ,551 Other revenue: Income from lease of assets (Note 13 d) IAS Total other revenue TOTAL revenue 324, ,697 Sales market for the services provided and goods sold by Sadales tīkls AS is the territory of Latvia. The Company has recognised the following revenue from customers related contract liabilities: 31/12/ /01/ /12/2016 Non current contract liabilities on deferred income from connection fees (Note 22) 142, , ,817 Current contract liabilities on deferred income from connection fees (Note 22) 12,253 11,611 11,611 Contract liabilities deferred income from use of allowed effective electrica (distribution system services) TOTAL liabilities 154, , ,428 Movement in deferred connection fees contract liability from contracts with customers (non current and current part): At the beginning of the year 153, ,648 Received fees 12,848 11,098 Credited to the Company s Statement of Profit or Loss (11,891) (11,318) Charged to the Company s Statement of Profit or Loss (IFRS 15) 243 Charged to the Company s retained earnings 10 At the end of the year 154, ,438 In 2017 contract liabilities on deferred income from distribution system services has increased by EUR 243 thousand as expected that the customers who have qualified for 0.5 tariffs for distribution system services from efficient use of permitted load will reach its determined consumption level in the next financial year. This amount was charged to the Statement of Profit or Loss as reduction of distribution system services revenues (see Note ). SADALES TĪKLS AS ANNUAL REPORT from 58

40 The Company has recognised in year 2017 distribution system services revenues from all contract liabilities and at the beginning of the year cumulative effect in retained earnings upon modified retrospective approach in amount of EUR 10 thousand. 6. OTHER INCOME Penalties and interest on past due payments Compensation for damages and insurance indemnity Net gain from sale of property, plant and equipment 7 Other customer payments TOTAL other income 872 1, RAW MATERIALS AND CONSUMABLES USED Transmission system services 70,199 71,575 Electricity expenses 12,649 14,210 Distribution network repair and maintenance costs 11,787 13,627 Raw materials and spare parts used 6,720 7,749 TOTAL raw materials and consumables used 101, , PERSONNEL EXPENSES Wages and salaries 40,740 40,064 Expenditure of employment termination (Note 21) 11, Pension costs defined contribution 1,315 1,353 State social insurance contributions, other benefits defined in the Collective Agreement 10,177 10,014 Life insurance costs 1,839 1,556 Capitalised personnel expenses (61) (85) TOTAL personnel expenses, including remuneration to the management 65,212 53,799 Remuneration to the Management Board: Wages and salaries Expenditure of employment termination 29 Pension costs defined contribution plan and state social insurance contributions State social insurance contributions 4 TOTAL remuneration to the Management Board Number of employees at the end of the year 2,344 2,521 Average number of employees during the year 2,466 2,554 SADALES TĪKLS AS ANNUAL REPORT from 58

41 9. OTHER OPERATING EXPENSES Rental expense (Note 13 d) 14,224 12,743 Information technology maintenance 9,331 8,867 Transportation expenses 7,984 7,821 Expenses on investments in leased property, plant and equipment 3,412 7,285 Telecommunication services 4,814 4,950 Selling expenses and customer services 1,945 2,537 Corporate management services 3,428 3,402 Premises maintenance and utilities expenses 2,082 2,007 Net loss on disposal and sales of property, plant and equipment 2,326 2,538 Amortisation charge of connection usage rights (Note 12) 1,452 1,407 Environment protection and work safety Public utilities regulation fee Audit fee* Other expenses 3,535 3,153 TOTAL other operating expenses 55,668 57,739 * fee for certified audit company Ernst & Young Baltic SIA for performed obligatory audit of Annual financial statements 10. FINANCE INCOME AND COSTS a) Finance income Interest income on current loans to the Parent Company 1 TOTAL finance income 1 b) Finance costs Interest expense on current borrowings from the Parent Company Interest expense on non current borrowings from the Parent Company 6,757 6,873 Capitalised borrowing costs (Note 12 a) (572) (600) TOTAL finance costs 6,308 6, CURRENT AND DEFERRED INCOME TAX Current income tax for the year 3, Deferred income tax relating to origination and reversal of temporary differences 22 (2,562) Reversal of deferred tax (102,557) TOTAL income tax (99,147) (1,708) The movement on the deferred income tax accounts: Deferred tax liabilities at the beginning of the year 148, ,070 Changes attributable to the equity 42,700 Changes attributable to the Statement of Profit or Loss 22 (2,562) Deferred tax liabilities at the end of the year before reversal 148, ,208 Reversed to the equity (45,673) Reversed in the Statement of Profit or Loss (102,557) Deferred tax liabilities at the end of the year 148,208 SADALES TĪKLS AS ANNUAL REPORT from 58

42 Deferred income tax has been calculated from the following temporary differences between assets and liabilities values for financial reporting and tax purposes: Statement of profit or Statement of financial position loss 31/12/ /12/ /01/ Deferred corporate income tax liabilities Accelerated depreciation for tax purposes 104, , , (3,067) Attributable to non current assets revaluation reserve 45,740 46,114 3,478 (343) Attributable to re measurement on defined post employment benefit plan (441) (162) Gross deferred corporate income tax liabilities 150, , , (3,410) Deferred corporate income tax assets Tax loss carried forward (794) 794 Accrued personnel expenses (2,154) (1,523) (1,578) (632) 56 Provisions for impaired inventories (75) (90) (88) 15 (2) Gross deferred corporate income tax assets (2,229) (1,613) (2,460) (617) 848 Net deferred corporate income tax liabilities before reversal 148, , ,070 Net deferred corporate income tax income / (expenses) before reversal 22 (2,562) Reversal of deferred tax*: In statement of profit or loss (102,557) (102,557) In reserves (45,740) Net deferred corporate income tax (liabilities) 148, ,070 Net income from deferred corporate income tax (102,535) (2,562) *Deferred tax liabilities for the year 2017 are reversed from the Statement of Profit or Loss and from reserves, as they have initally been recorded in reserves pursuant to amendments made to the tax legislation of the Republic of Latvia, which entered into force on 1 January Actual corporate income tax charge for the reporting year, if compared with theoretical calculations: Profit / (loss) before tax 25,121 (1,787) Tax at the applicable tax rate of 15% 3,768 (268) Permanent differences: Other expenses (358) (1,440) Actual income tax for the reporting year: 3,410 (1,708) Reversal of deferred tax (102,557) Corporate income tax charged to the statement of profit or loss (99,147) (1,708) Effective income tax rate 13,6 % 95,6 % SADALES TĪKLS AS ANNUAL REPORT from 58

43 12. INTANGIBLE ASSETS Connection usage rights Software Assets under development and advance payments TOTAL As of 1 January 2016 Cost 21,201 1,457 2,731 25,389 Accumulated amortisation (182) (182) Net book amount 21,201 1,275 2,731 25,207 Year ended 31 December 2016 Opening net book amount 21,201 1,275 2,731 25,207 Additions ,825 4,892 Disposals* (1,408) (1,408) Amortisation charge (149) (149) Closing net book amount 20,653 1,333 6,556 28,542 As of 31 December 2016 Cost 20,653 1,664 6,556 28,873 Accumulated amortisation (331) (331) Net book amount 20,653 1,333 6,556 28,542 Year ended 31 December 2017 Opening net book amount 20,653 1,333 6,556 28,542 Additions 1, ,530 11,843 Disposals* (1,451) (1,451) Amortisation charge (309) (309) Closing net book amount 20,571 1,968 16,086 38,625 As of 31 December 2017 Cost 20,571 2,608 16,086 39,265 Accumulated amortisation (640) (640) Net book amount 20,571 1,968 16,086 38,625 * amortisation charge of connection usage rights is included in the Company s Statement of Profit or Loss position Other operating expenses (Note 9) SADALES TĪKLS AS ANNUAL REPORT from 58

44 13. PROPERTY, PLANT AND EQUIPMENT a) Property, plant and equipment Assets under Technology Other property, Property, plant Buildings and construction equipment and plant and and equipment, facilities and advance machinery equipment TOTAL payments As of 1 January 2016 Cost or valuation 1,984, ,714 16,685 22,887 2,721,927 Accumulated depreciation and impairment (1,123,504) (367,895) (6,474) (223) (1,498,096) Net book amount 861, ,819 10,211 22,664 1,223,831 Year ended 31 December 2016 Additions 94,091 94,091 Transfers 58,393 24,084 11,884 (94,361) Increase due to PPE revaluation 286, ,528 Impairment charge due to PPE revaluation (23,987) (23,987) Disposals (2,551) (1,480) (50) (4,081) Reversed impairment charge Depreciation (46,322) (20,587) (2,407) (69,316) Closing net book amount 1,133, ,836 19,638 22,486 1,507,158 As of 31 December 2016 Cost or valuation 2,116, ,345 26,804 22,618 2,869,266 Accumulated depreciation and impairment (983,301) (371,509) (7,166) (132) (1,362,108) Net book amount 1,133, ,836 19,638 22,486 1,507,158 Year ended 31 December 2017 Additions 92,421 92,421 Transfers 59,981 20,150 6,411 (86,542) Disposals (2,742) (1,214) (57) (2) (4,015) Reversed impairment charge Depreciation (47,061) (19,472) (4,492) (71,025) Closing net book amount 1,143, ,300 21,500 28,374 1,524,550 As of 31 December 2017 Cost or valuation 2,145, ,475 32,817 28,495 2,911,502 Accumulated depreciation and impairment (1,002,339) (373,175) (11,317) (121) (1,386,952) Net book amount 1,143, ,300 21,500 28,374 1,524,550 Property, plant and equipment of the Company has not been pledged or exposed to other ownership constraints. The Company does not own land. As of 31 December 2017 cost of fully depreciated property, plant and equipment, which are still in use, amounted to EUR 37,602 thousand (31/12/2016: EUR 21,380 thousand). In 2017 the Company has capitalised borrowing costs in the amount of EUR 572 thousand (2016: EUR 600 thousand) (Note 10 b). b) Property, plant and equipment revaluation In 2016 the Company finished revaluation process with the revaluation of groups of distribution system facilities. Revaluation have been done in accordance with the principal accounting policies (see point ). Valuation of property, plant and equipment of distribution system have been done by independent certified valuator. Amounts of revalued property, plant and equipment categories of distribution system had been determined as of 1 April As a result of revaluation in 2016 the carrying amounts of revalued distribution system property, plant and equipment increased by EUR 262,541 thousand (2015: 7,732 thousand). Increase of property, plant and equipment in the amount of EUR 286,528 thousand (2015: EUR 23,961 thousand), less deferred income tax, is included in the Company s equity as non-current assets revaluation reserve (see Note 19 a), while impairment charge due to property, plant and equipment revaluation in the amount of EUR 23,987 thousand (2015: EUR 16,229 thousand) in the Statement of Profit or Loss position Depreciation, amortisation and impairment of intangible assets and property, plant and equipment. SADALES TĪKLS AS ANNUAL REPORT from 58

45 Depreciation of revalued property, plant and equipment is included in the Company s Statement of Profit or Loss as Depreciation, amortisation and impairment of intangible assets and property, plant and equipment, and according to the Law on Corporate income tax of the Republic of Latvia calculated depreciation increases the Company s taxable income. When the Company calculates tax depreciation in accordance with the conditions of the Law on Corporate income tax, amounts of the categories of property, plant and equipment are determined as appropriate to their initial values, disregarding the revaluation of these assets. The carrying amounts of revalued categories of property, plant and equipment groups (see point ) at revalued amounts and their cost basis are as follows: Buildings and facilities Revalued property, plant and equipment groups* Technology equipment and machinery Other property, plant and equipment TOTAL revalued PPE AT REVALUED AMOUNTS As of 1 January 2016 Revalued 696,255 7, ,612 Accumulated depreciation and impairment (367,505) (4,636) (372,141) Revalued net book amount 328,750 2, ,471 As of 31 December 2016 Revalued 2,116, ,886 7,772 2,826,157 Accumulated depreciation and impairment (983,301) (370,933) (3,548) (1,357,782) Revalued net book amount 1,133, ,953 4,224 1,468,375 As of 31 December 2017 Revalued 2,145, ,974 8,512 2,857,201 Accumulated depreciation and impairment (1,002,339) (372,381) (3,981) (1,378,701) Revalued net book amount 1,143, ,593 4,531 1,478,500 AT AMOUNTS STATED ON HISTORICAL COST BASIS As of 1 January 2016 Cost 733,942 7, ,287 Accumulated depreciation and impairment (392,619) (4,571) (397,190) Net book amount 341,323 2, ,097 As of 31 December 2016 Cost 2,009, ,896 7,758 2,718,658 Accumulated depreciation and impairment (1,132,627) (371,039) (3,499) (1,507,165) Net book amount 876, ,857 4,259 1,211,493 As of 31 December 2017 Cost 2,038, ,013 13,776 2,755,017 Accumulated depreciation and impairment (1,145,854) (370,732) (7,646) (1,524,232) Net book amount 892, ,281 6,130 1,230,785 * for revalued property, plant and equipment groups see point c) Impairment Impairment review performed for electricity distribution system assets in accordance with IAS 36 Impairment of Assets and based on value in use calculations and there is no additional impairment loss recognised in The cash generating unit is defined as the distribution system assets. Nominal pre tax discount rate used to determine value in use of cash generating units by discounting cash flows is 5.23 % (2016: 5.22 %) as included in the electricity distribution system service tariff calculation methodologies. Performance of impairment review also considered pricing forecast for major revenue streams, which are contingent on regulatory pre approvals, and assumptions related to capital investment plans. For other significant accounting estimates, judgements and sensitivity analysis see Note 4 a, II. SADALES TĪKLS AS ANNUAL REPORT from 58

46 d) Leases Rental income (the Company is the lessor) (Note 5) of which, Lease of land and real estate Rental expense (the Company is the lessee) (Note 9) (14,224) (12,743) of which, Operating lease of the real estate (13,556) (12,395) According to concluded contracts for lease of land, real estate and other non current assets, the Company has the following lease receivables at the end of the year: Future minimum lease receivables under non cancellable operating lease contracts by due dates (the Company is the lessor) < 1 year years TOTAL rental income According to concluded contracts for lease of real estate and non-current assets, the Company has the following lease payments at the end of the year: Future minimum lease payments under non cancellable operating lease contracts by due dates (the Company is the lessee): a) Real estate lease payments < 1 year years 1,467 1,834 2,140 2,489 b) Non current assets lease payments < 1 year 13,482 13, years 53,928 52,453 67,410 65,566 TOTAL rental expenses 69,550 68,055 In order to support operating activities of distribution system Sadales tīkls AS has entered into agreement with the Parent Company Latvenergo AS for lease of the land, buildings and facilities related to distribution system assets (see Note 9). Assets lease payments for the next five years is calculated on the basis of the Company s management estimates for the foreseeable value changes of leased assets. 14. FINANCIAL INVESTMENTS Name of the company Country of incorporation Business activity held Interest held, % 31/12/ /12/ /01/2016 EUR'000 Interest held, % EUR'000 Interest held, % EUR'000 Pirmais Slēgtais Pensiju Fonds AS Latvia Management of pension plans 0.62 % % % 1 As of 31 December 2017 the Company owns 0.62 % of the shares of the closed pension fund Pirmais Slēgtais Pensiju Fonds AS. However, the Company is only a nominal shareholder as all risks and benefits arising from associate s activities will accrue to the Company s employees who are members of the pension fund. Therefore, investment in Pirmais Slēgtais Pensiju Fonds AS is valued at cost (see point ). SADALES TĪKLS AS ANNUAL REPORT from 58

47 15. INVENTORIES 31/12/ /12/ /01/2016 Raw materials and materials 14,027 15,342 15,770 Technological fuel and oils Goods for sale Provisions for impaired inventories (502) (599) (588) 14,353 15,483 16,114 Movements in provisions for impaired inventories: EUR' At the beginning of the year Impairment charged / (credited) to the Statement of Profit or Loss (97) 11 At the end of the year Changes in provisions for impaired inventories are included as an expense during the period in the Statement of Profit or Loss position Raw materials and consumables used. 16. RECEIVABLES FROM CONTRACTS WITH CUSTOMERS AND OTHER TRADE AND CURRENT RECEIVABLES a) Receivables from contracts with customers, net EUR'000 31/12/ /12/ /01/2016 Receivables from contracts with customers: Electricity distribution services customers 17,562 13,946 9,419 Connection fees and other distribution services customers 3,256 3,265 3,019 Related parties (Note 24 c, d) 30,256 31,041 32,140 51,074 48,252 44,578 Provisions for impaired receivables from contracts with customers: Electricity distribution services customers (531) (434) (391) Connection fees and other distribution services customers (2,874) (2,760) (2,272) (3 405) (3 194) (2 663) Receivables from contracts with customers, net: Electricity distribution services customers 17,031 13,512 9,028 Connection fees and other distribution services customers Related parties (Note 24 c, d) 30,256 31,041 32,140 47,669 45,058 41,915 There is no significant concentration of credit risk with respect to trade receivables, as the Company has a large number of customers except the major electricity distribution services customer Latvenergo AS (see Note 24 c, d) the net debt of which as of 31 December 2017 amounted to EUR 30,299 thousand (31/12/2016: EUR 31,093 thousand; 01/01/2016: EUR 32,186 thousand). SADALES TĪKLS AS ANNUAL REPORT from 58

48 Electricity distribution services receivables from contracts with customers grouped by past due days and calculated impairment loss: 31/12/ /12/ /01/2016 Electricity distribution services customers: Fully performing receivables 13,397 12,195 8,605 Receivables past due but not impaired: Receivables past due by 1 45 days 3,587 1, Impaired receivables: Receivables past due by days Receivables past due by days Receivables past due by more than 181 day Individually impaired receivables with scheduled payments* ,562 13,946 9,419 Provisions for impaired receivables: Receivables past due by days (22) (9) (11) Receivables past due by days (23) (19) (20) Receivables past due by more than 181 day (330) (328) (240) Individually impaired receivables with scheduled payments* (156) (78) (120) (531) (434) (391) Electricity distribution services customers, net: Fully performing receivables 13,397 12,195 8,605 Receivables past due but not impaired: Receivables past due by 1 45 days 3,587 1, Net impaired receivables: Receivables past due by days Receivables past due by days Individually impaired receivables with scheduled payments* 16 17,031 13,512 9,028 * receivables under insolvency process and other individually impaired receivables Connection fees and other distribution services customers grouped by past due days and calculated impairment loss: 31/12/ /12/ /01/2016 Connection fees and other distribution services customers: Fully performing receivables Receivables past due but not impaired: Receivables past due by 1 30 days Impaired receivables: Receivables past due by days Receivables past due by more than 91 day 2,739 2,530 2,079 Individually impaired receivables with scheduled payments* ,256 3,265 3,019 Allowances for impaired connection fees and other distribution services customers: Receivables past due by days (53) (84) (60) Receivables past due by more than 91 day (2,739) (2,530) (2,079) Individually impaired receivables with scheduled payments* (82) (146) (133) (2,874) (2,760) (2,272) Connection fees and other distribution services customers, net Fully performing receivables Receivables past due but not impaired: Receivables past due by 1 30 days Net impaired receivables: Receivables past due by days Individually impaired receivables with scheduled payments* * receivables under insolvency process and other individually impaired receivables All receivables of the Company s related parties are fully performing receivables, therefore not impaired. The Company s management has estimated allowances for impairment of receivables on the basis of aging of trade receivables and by evaluating liquidity and history of previous payments of each significant debtor (see point ). The carrying amount of trade receivables, less allowances for impairment, is assumed to approximate their fair values. The Company s management assumptions and methodology for estimation of recoverable amount of trade receivables and evaluation of impairment risk are described in Note 4 e. SADALES TĪKLS AS ANNUAL REPORT from 58

49 Receivables from contracts with customers credit quality: 31/12/ /12/ /01/2016 Fully performing electricity distribution services customers: customers with no overdue receivables 9,789 10,598 7,937 customers with overdue receivables 3,608 1, ,397 12,195 8,605 Fully performing connection fees and other distribution services customers: customers with no overdue receivables customers with overdue receivables The basis for estimating the credit quality of fully performing receivables from contracts with customers not due yet and not written down are internal ratings by reference to earlier credit behaviour of clients. Movements on allowances for impairment of receivables from contracts with customers are as follows: EUR' At the beginning of the year 3,194 2,663 Receivables written off as uncollectible (154) (193) Allowances for impaired receivables At the end of the year 3,405 3,194 The charge and release of allowance for impaired receivables from contracts with customers due to delayed payments have been recorded in the Company s Statement of profit or loss position Other operating expenses as selling expenses and customer services costs (Note 9). b) Other trade and current receivables EUR'000 31/12/ /12/ /01/2016 Receivables from related parties for lease (Note 24 c, d) Pre tax and overpaid taxes 5 4 1,745 Other current financial receivables Other current receivables ,834 None of the Company s receivables are secured with pledges or otherwise. The carrying amounts of other receivables are assumed to approximate their fair values. 17. CASH AND CASH EQUIVALENTS 31/12/ /12/ /01/2016 Cash at bank TOTAL cash and cash equivalents Latvenergo AS and its subsidiaries associated and entered into two Group Accounts in SEB Banka AS and Swedbank AS with the purpose to efficiently and unitedly manage financial resources of Latvenergo Group. Sadales tīkls AS is the member of both Group Accounts and with the entering into these contracts has assumed the rights and obligations of the subsidiary. The carrying amounts of cash and cash equivalents are assumed to correspond their fair values. 18. SHARE CAPITAL As of 31 December 2017 the registered share capital of Sadales tīkls AS is EUR 627,656 thousand (31/12/2016: EUR 627,656 thousand; 01/01/2016: EUR 627,656 thousand) and consists of 627,656 thousand ordinary shares (31/12/2016: 627,656 thousand; 01/01/2016: 627,656 thousand) with the nominal value of EUR 1 per share (31/12/2016: EUR 1 per share; 01/01/2016: EUR 1 per share). All shares have been fully paid. SADALES TĪKLS AS ANNUAL REPORT from 58

50 19. RESERVES AND DIVIDENDS a) Reserves As of 31 December 2017 the Company s reserves are in the amount EUR 304,933 thousand (31/12/2016: EUR 261,313 thousand; 01/01/2016: EUR 19,707 thousand) and consist of the non current assets (property, plant and equipment) revaluation reserve. The Company cannot distribute as dividends the non current assets revaluation reserve. Non current assets revaluation reserve Deferred tax related to non current assets revaluation reserve TOTAL reserve As of 1 January ,185 (3,478) 19,707 Increase of non current assets revaluation reserve as a result of revaluation 286,528 (42,979) 243,549 Disposal of non current assets revaluation reserve (2,286) 343 (1,943) As of 31 December ,427 (46,114) 261,313 Disposal of non current assets revaluation reserve (2,494) (2,494) Reversed deferred corporate income tax 46,114 46,114 As of 31 December , ,933 b) Dividends The dividends declared to equity holder of the Company for 2016 were EUR 2 thousand or EUR per share (2015: nil). Considering the law On Governance of Capital Shares of a Public Person and Capital Companies and ratios of the Company s capital structure the Management Board of Sadales tīkls AS proposes to redirect the Company s profit for the 2017 in the amount of EUR 62,996 thousand to cover the accumulated losses of the previous years and to allocate the rest profit for the 2017 in the amount of EUR 61,272 thousand to be paid out in dividends to the Shareholder. These financial statements do not reflect this amount as a liability as the dividends have not been approved by the Company s shareholder as of 31 December The distribution of net profit of Sadales tīkls AS for the 2017 is subject to a resolution of the Company s Shareholders Meeting. 20. FINANCIAL ASSETS AND LIABILITIES I) Borrowings 31/12/ /12/ /01/2016 Non current borrowings from the Parent Company 312, , ,376 TOTAL non current borrowings 312, , ,376 Current portion of non current borrowings from the Parent Company 50,915 48,880 49,578 Current borrowings from the Parent Company 28,157 41,651 48,540 TOTAL current borrowings 79,072 90,531 98,118 TOTAL borrowings 391, , ,494 Movement in borrowings: At the beginning of the year 404, ,494 Borrowings received from the Parent Company 50,000 60,000 Borrowings repaid to the Parent Company (62,373) (56,467) At the end of the year 391, ,027 Borrowings by categories of lenders: 31/12/ /12/ /01/2016 The Parent Company 391, , ,494 TOTAL borrowings 391, , ,494 SADALES TĪKLS AS ANNUAL REPORT from 58

51 Borrowings by maturity: 31/12/ /12/ /01/2016 Fixed rate non current and current borrowings: < 1 year (current portion of non-current borrowings) 40,204 28,537 18, years 194, , ,686 > 5 years 70,000 80,935 80, , , ,895 Floating rate non current and current borrowings: < 1 year (current borrowings) 28,157 41,651 48,540 < 1 year (current portion of non-current borrowings) 10,711 20,343 31, years 43,809 46,138 58,099 > 5 years 4,157 12,538 20,919 86, , ,599 TOTAL borrowings 391, , ,494 As of 31 December 2017, as of 31 December 2016 and as of 1 January 2016 the Company had all of its borrowings denominated in euros. The fair value of current and non current borrowings with floating rates equals their carrying amount, as their actual floating interest rates approximate the market price of similar financial instruments available to the Company, and the effect of fair value revaluation is not significant. The fair value of current and non current borrowings with fixed rates exceeds their carrying amounts by EUR 11,312 thousand (2016: EUR 16,519 thousand). The fair value calculations are based on discounted cash flows using discount factor of respective EUR swap rates increased by the Company s credit risk margin. The average interest rate for discounting cash flows of non current borrowings was 0.83 % (2016: 0.71 %). a) Borrowings from related parties Sadales tīkls AS issues loans and receives borrowings from the Parent Company in accordance with Latvenergo Group mutually concluded agreement On provision of mutual financial resources for mutual current loans and borrowings is applied the annual interest rate, which is equal with the total amount of the actual EONIA index and previous month s weighted average add-on interest rate for the Parent Company s current borrowings from financial institutions. In the current year calculated interest for borrowings from related parties has not been significant and not exposed significant interest rate risk. b) Current loans to related parties Financial transactions between related parties have been carried out by using current loans with a target to effectively and centrally manage Latvenergo Group companies financial resources, using Group accounts (Note 16). In the reporting period Sadales tīkls AS issued loans to the Parent Company Latvenergo AS in accordance with mutually concluded agreement On provision of mutual financial resources. As of the end of current year all current loans issued by Sadales tīkls AS to Latvenergo AS are repaid. In 2017 the effective average interest rate for issued loans was 0.52% (2016: 0.55 %). c) Current borrowings from related parties Financial transactions between related parties have been carried out by using current borrowings with a target to effectively and centrally manage Latvenergo Group companies financial resources, using Group accounts. In the reporting period Sadales tīkls AS received borrowings from the Parent Company Latvenergo AS in accordance with mutually concluded agreement On provision of mutual financial resources. In 2017 the effective average interest rate for borrowings was 0.52 % (2016: 0.55 %). Movement on current borrowings from related parties: At the beginning of the year 41,651 48,540 Borrowing received during the year 237, ,025 Borrowings repaid during the year (200,805) (181,907) Borrowings toggled from current to non current borrowings (50,000) (60,000) Calculated interest Interest paid (129) (249) At the end of the year 28,157 41,651 SADALES TĪKLS AS ANNUAL REPORT from 58

52 d) Non current borrowings from the Parent Company No. Agreement conclusion date Principal amount of the Interest rate Maturity date borrowings 1. 29/09/ ,271 6 months EURIBOR + fixed rate 01/09/ /02/ ,686 fixed rate 10/09/ /09/ ,686 fixed rate 10/08/ /10/ ,000 fixed rate 10/09/ /10/ ,000 fixed rate 21/10/ /08/ ,000 fixed rate 22/08/2026 TOTAL amount: 691,643 Total outstanding amount of non-current borrowings as of 31 December 2017 amounted to EUR 363,497 thousand (31/12/2016: EUR 362,376 thousand; 01/01/2016: EUR 351,954 thousand), including current portion of the borrowing repayable in 2018 EUR 50,915 thousand (31/12/2016: EUR 48,880 thousand; 01/01/2016: EUR 49,578 thousand). As of 31 December % of the borrowings received from the Parent Company (31/12/2016: 21%; 01/01/2016: 31%) was set floating interest rate, which was influenced by 6 months EURIBOR interbank fluctuations. During 2017 the effective average interest rate of non current borrowings was 1.84% (2016: 1.96%). Non current borrowings are not secured with a pledge or otherwise At the beginning of the year 362, ,954 Borrowings toggled from non current to current borrowings 50,000 60,000 Borrowings repaid during the year (48,880) (49,578) Calculated interest 6,757 6,872 Interest paid (5,228) (5,236) Accrued interest on non current borrowings (1,528) (1,636) At the end of the year 363, ,376 including: Non current portion 312, ,496 Current portion 50,915 48,880 Non current and current borrowings by maturity: 31/12/ /12/ /01/2016 < 1 year 79,072 90,531 98, years 238, , ,785 > 5 years 74,157 93, , , , ,494 e) Pledges The Company s assets are not pledged to secure the borrowings. f) Weighted average effective interest rate During the reporting year the weighted average effective interest rate on non current borrowings was 1.84% (2016: 1.96%), weighted average effective interest rate for current borrowings was 0.52% (2016: 0.55%). As of 31 December 2017 interest rates for non current borrowings in euros were 6 month EURIBOR % (31/12/2016: EURIBOR %; 01/01/2016: EURIBOR %). II) Fair values and fair value measurement In this Note are disclosed the fair value measurement hierarchy for the Company s assets and liabilities. Quantitative disclosures of fair value measurement hierarchy for assets at the end of the year: Fair value measurement using Date of disclosure Quoted prices in active markets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3) TOTAL Assets measured at fair value Property, plant and equipment 31/12/2017 1,496,176 1,496,176 31/12/2016 1,484,672 1,484,672 01/01/2016 1,201,167 1,201,167 SADALES TĪKLS AS ANNUAL REPORT from 58

53 Quantitative disclosures of fair value measurement hierarchy for liabilities at the end of the year: Fair value measurement using Date of disclosure Quoted prices in active markets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3) TOTAL Financial liabilities for which fair values are disclosed Floating rate borrowings (Note 20 I) Fixed rate borrowings (Note 20 I) 31/12/ ,834 86,834 31/12/ , ,670 01/01/ , ,599 31/12/ , ,820 31/12/ , ,357 01/01/ , ,895 There have been no transfers for liabilities between Level 1, Level 2 and Level 3 during the reporting period. Set out below, is a comparison by class of the carrying amounts and fair value of the Company s financial instruments, other than those with carrying amounts which approximates their fair values: Carrying amount Fair value 31/12/ /12/ /01/ /12/ /12/ /01/2016 Financial liabilities Interest bearing liabilities, including: floating rate borrowings 86, , ,599 86, , ,599 fixed rate borrowings 304, , , , , ,901 The Company s management assessed that fair values of cash and cash equivalents, trade receivables, trade payables and other current financial receivables and liabilities approximate their carrying amounts largely due to the short term maturities of these instruments. The fair value of the financial assets and liabilities is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following methods and assumptions were used to estimate the fair values of the Company s borrowings: The fair values of borrowings with floating interest rates are equal their carrying amount, as their actual floating interest rates approximate the market price of similar financial instruments available to the Company; The borrowings with fixed interest rates had the fixed repayment period and the financial instrument is not traded in the active market; the financial instrument, which is not traded in the active market, the fair value is measured, using valuation techniques. The Company uses various methods and models and make assumptions, which are based on the market conditions regarding the interest rates and other market conditions, existing at the end of reporting period. The fair value calculations are based on discounted cash flows using discount factor of respective EUR swap rates increased by the Company s credit risk margin. 21. PROVISIONS a) Provisions for post employment benefits At the beginning of the year 9,615 8,111 Current service cost Interest cost Post employment benefits paid (479) (1,028) Income / (losses) as a result of changes in actuarial assumptions (2,408) 1,583 Deferred income tax on re measurement on defined post employment benefit plan 279 At the end of the year 7,718 9,615 Total charged / credited provisions are included in the Company s Statement of Profit or Loss position Personnel expenses within expenditure of employment termination (Note 8) while income / (losses) as a result of changes in actuarial assumptions - in the Company s Statement of Comprehensive Income: At the beginning of the year 9,615 8,111 Charged to the Statement of Comprehensive Income (2,408) 1,583 Charged / (credited) to the Statement of Profit or Loss 511 (79) At the end of the year 7,718 9,615 Weighted average discount rate used for discounting benefit obligations in 2017 was 1.85 % (2016: 1.50 %), considering the market yields on government bonds at the end of the reporting year. The Company s Collective Agreement provides indexation of employees wages at least at the level of inflation. Long term inflation determined SADALES TĪKLS AS ANNUAL REPORT from 58

54 for 2017 at the level of 3.0 % (2016: 3.0 %) when calculating non current post employment benefits. In calculation of these liabilities also the probability, determined on the basis of previous experience, of retirement in different employees aging groups was also considered. A quantitative sensitivity analysis for significant assumptions as of the end of the year is as shown below: Future salary Retirement probability Discount rate Date of changes changes Assumptions valuation 1% increase 1% decrease 1% increase 1% decrease 1% increase 1% decrease Impact on provisions for post employment benefits 31/12/ (747) 877 (743) 977 (815) 31/12/2016 1,181 (968) 1,146 (961) 1,258 (1,041) 01/01/ (753) 894 (750) 987 (817) The sensitivity analysis above have been determined based on a method that extrapolates the impact on defined benefit obligation as a result of reasonable changes in key assumptions occurring at the end of the reporting period. b) Provisions for termination benefits Termination benefits paid out in 2017 are included in the Company s Statement of Profit or Loss position Personnel expenses within expenditure of employment termination (Note 8), while termination benefits and projected future liability values for years 2018 to 2022 is recognised as a liability in the Statement of Financial Position and as accrued costs within expenditure of employment termination (Note 8): At the beginning of the year Termination benefits paid (3,567) Provisions for current termination benefits 6,054 Provisions for non current termination benefits 4,221 At the end of the year 6,708 Provisions for employees termination benefits are included in the Medium Term Operational Strategy of Sadales tīkls AS in which it is planned to implement the efficiency program, by which it is intended to reduce the number of employees till Assumptions used in calculation of termination benefits are as follow average employee earnings at the time of termination - average earnings per year, with projected increase (salary indexation) in the following years by 2.5 %, average employee length of service at the time of termination, the State Social Insurance Contributions rate is % in 2018 and in subsequent years. The amount of provisions at the end of reporting year is estimated in accordance with the estimated future liability value as of 31 December 2017, using the fixed discount rate of 1.093% as adopted by the Latvenergo Group. The discount rate is comprised of a 5-year EUROSWAP rate of 0.314% and a corporate risk premium of % (determined on the basis of interest rate on Latvenergo AS issued bonds yield spreads above the market rate). A quantitative sensitivity analysis for significant assumptions used for calculation of termination benefits as of the end of the year is as shown below: Average employee length Discount rate Future salary changes Date of of service Assumptions valuation 1% increase 1% decrease 1% increase 1% decrease 1% increase % decrease Impact on provisions for termination benefits 31/12/2017 (66) (187) 38 (38) 22. DEFERRED INCOME 31/12/ /12/ /01/2016 a) Non current deferred income Deferred income from contracts with customers for connection fees 142, , , , , ,593 b) Current deferred income Deferred income from contracts with customers for connection fees 12,253 11,611 11,055 Contract liabilities on use of allowed effective electrical load (distribution system service) (Note 5) ,506 11,611 11,055 SADALES TĪKLS AS ANNUAL REPORT from 58

55 Movement in deferred connection fees contract liability from contracts with customers (non current and current part): At the beginning of the year 153, ,648 Received fees 12,848 11,098 Credited to the Company s Statement of Profit or Loss (Note 5) (11,891) (11,318) At the end of the year 154, ,428 Deferred income from contracts with customers by receipt period: 31/12/ /12/ /01/2016 Deferred income from contracts with customers for connection fees < 1 year 12,253 11,611 11, years 49,012 46,444 44,222 > 5 years 93,120 95,373 98, , , , TRADE AND OTHER PAYABLES 31/12/ /12/ /01/2016 Current financial liabilities: Trade payables to related parties (Note 24 c) 25,032 22,659 21,632 Payables for materials and services 24,679 18,102 19,603 Accrued expenses on transactions with related parties (Note 24 e) 1,979 4,643 5,635 Other accrued expenses 2,656 2,444 2,412 Other financial current payables 1, TOTAL current financial liabilities 55,849 48,610 50,120 Current non financial liabilities: State social security contributions and other taxes 5,279 4,752 3,329 Advances received 6,756 5,604 4,936 Other current payables 2,177 2,180 2,272 TOTAL current non financial liabilities 14,212 12,536 10,537 TOTAL trade and other payables 70,061 61,146 60,657 The carrying amounts of trade and other financial payables are assumed to approximate their fair values. 24. RELATED PARTY TRANSACTIONS The Company is 100 % subsidiary of Latvenergo AS. The Parent Company and, indirectly, Sadales tīkls AS and other companies of Latvenergo Group are controlled by the Latvian state. Related parties of the Company are Shareholder of the Company or the Parent Company who controls or who has significant influence over the Company in accepting operating business decisions, members of Management board and close family members of any above mentioned persons, as well as entities over which those persons have control or significant influence a) Income from transactions with related parties: Latvenergo AS 337, ,756 Latvijas elektriskie tīkli AS , ,783 including income from transactions with related parties recognised in net amount through profit or loss : Latvenergo AS (mandatory procurement PSO fees) 114, ,345 b) Expenses from transactions with related parties: Latvenergo AS (44,152) (57,068) Latvijas elektriskie tīkli AS (1,452) (1,407) Enerģijas publiskais tirgotājs AS (173,105) (173,518) (218,709) (231,993) including expenses from transactions with related parties recognised in net amount through profit or loss : Enerģijas publiskais tirgotājs AS (mandatory procurement PSO fees) (172,805) (173,206) SADALES TĪKLS AS ANNUAL REPORT from 58

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