ROMA EN VALDECORNEJA

Group Company Company

2005 2005 2004

LVL’000 LVL’000 LVL’000

At the beginning of the year 6,401 6,401 -

Received 11,621 11,621 6,537 Charged to the income statement (861) (861) (136)

At the end of the year 17,161 17,161 6,401

21. TRADE AND OTHER PAYABLES, ACCRUED EXPENSES

Group Company Company

31/12/2005 31/12/2005 31/12/2004

LVL’000 LVL’000 LVL’000

Payables for materials and services 23,393 20,888 15,405 Payables for electricity 4,360 4,361 3,349 Taxes and social security contributions 4,274 3,347 3,451 Advances received 3,236 3,236 2,136 Amounts due to related parties (Note 23) - 4,924 - Other payables and accrued expenses 9,304 8,854 4,403

44,567 45,610 28,744

22. DERIVATIVE FINANCIAL INSTRUMENTS

Start date Maturity Notional Rate Group Company Company

date amount receivable 31/12/2005 31/12/2005 31/12/2004

EUR’000 EURIBOR LVL’000 LVL’000 LVL’000 Swap 21.11.2003 21.11.2008 15,000 3 month (223) (223) (326) Swap 21.11.2003 21.11.2013 15,000 3 month (885) (885) (718) Swap 20.01.2005 24.01.2008 20,000 6 month 15 15 - Swap 24.01.2005 26.01.2010 20,000 6 month (33) (33) - Swap 16.12.2005 20.12.2010 20,000 6 month (58) (58) - Swap 19.12.2005 21.12.2015 20,000 6 month (155) (155) - (1,339) (1,339) (1,044)

The Group and the Company utilizes interest rate swaps that are commitments to exchange one set of cash flows for anoth- er. Swaps result in an economic exchange of interest rates. The notional amounts of certain types of financial instruments provide a basis for comparison with instruments recognized on the balance sheet but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and do not indicate the Group’s and the Company’s exposure to credit risk. The derivative instruments become favourable or unfavourable as a result of fluctuations in market rates relative to their terms.

The main target criteria stated in the Financial Risk Management policy are duration of 2-4 years and fixed rate portion more than 35% of borrowings, which both were effectively reached on 31 December 2005.

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23. RELATED PARTY TRANSACTIONS

The Group is controlled by the Latvian state. Related parties, other than subsidiaries and associates, are companies in which the State exercise control or significant influence.

Group Company Company

2005 2005 2004

LVL’000 LVL’000 LVL’000

a) Sale of goods and services

Sale of services:

Subsidiaries - 7,256 - Associates 46 46 80 Other entities 25,449 25,442 25,024

25,495 32,744 25,104

b) Purchases of goods and services

Purchase of services:

Subsidiaries - 12,781 - Associates 370 273 607 Other entities 1,672 1,641 1,439

2,042 14,695 2,046

c) Year – end balances arising from sale/purchase of goods/services

Receivables from: Subsidiaries - 2,803 - Associates 4,846 4,849 3,289 Other entities 13 6 1 4,859 7,658 3,290 Payables to: Subsidiaries - 4,924 - Associates 93 43 77 Other entities 40 37 28 133 5,004 105

The transactions disclosed above do not include sales of electricity on the ordinary course of business of the Group or the Company due to a very large volume of those transactions and the fact that these transactions are performed at tariffs regulat- ed by the Latvian Public Utilities Commission applicable to other similar customers.

Receivables and payables with related parties are current balances for services. None of the year-end balances are secured. d) Loans to related parties

The intra-group financial transactions between related parties are organized on a short-term overdraft facility basis. As of the end of the reporting year, loans to related parties consist of LVL 517 thousand as outstanding balance of a loan received by AS “Augstsprieguma tīkls” from AS “Latvenergo”.

e) Commitments and contingencies

Company 31/12/2005

LVL’000

Issued guarantees:

Short term guarantee on behalf of SIA “Liepājas enerģija” 4,875 Guarantee on behalf of “Nordic Energy Link” (15.12.2014) 14,759

19,634 LE_iekslapas 7/25/06 12:50 PM Page 82

83 Both guarantees are issued to guarantee bank loan facilities for related parties. Guarantee on behalf of SIA “Liepājas enerģija” is pro- vided for receiving short-term loan facility, while guarantee on behalf of “Nordic Energy Link” – for receiving long-term loan facility. Remuneration of the Members of the Supervisory Board, Members of the Management Board, and the authorised state representa- tive is presented in Note 5.

24. COMMITMENTS

As of 31 December 2005 the Company has had commitments amounting to LVL 243,857 thousand (2004: 39,627 thousand) for capital expenditure contracted but not delivered at the balance sheet date.

25. BUSINESS COMBINATIONS

In July 2005, the Company established SIA “Liepājas enerģija”, electricity and heating producer, transmitter and seller in Liepāja region. The Company owns 51% of the share capital of newly established company. Shares in SIA “Liepājas enerģija” were acquired for LVL 255 thousand. The established business contributed revenues of LVL 1,937 thousand, and loss before allocations to minorities would have been LVL 90 thousand. These amounts have been calculated using the Group's accounting policies. In September 2005, the Company increased the share capital of AS Augstsprieguma tīkls by investing property, plant and equip- ment in amount of LVL 2,010 thousand.

26. FINANCIAL RISK MANAGEMENT

In order to mitigate financial risks and to formalise financial risk management, the Group and the Company have developed and main- tained the Financial Risk Management Policy. The policy deals with interest rate, currency, liquidity and credit risks, establishes formalised procedures, deductibles and defines acceptable financial instruments.

a) Credit risk

Financial assets that potentially expose the Group and the Company for some extent to credit risk are mainly short-term deposits, trade receivables and advance payments made to third parties. Credit risk exposure in connection with trade receivables is limited due to broad range of the Group's and the Company's customers. The Group and the Company have no significant concentration of credit risk with any single counterpart or group of counterparts having similar characteristics. Advance payments subject to substantial credit risk have been secured by bank guarantees. Credit risk related to the short-term deposits in banks is managed by balancing the placement of finan- cial assets and instruments in order to maintain the possibility to choose the best offers and to reduce probability to lose any financial instruments.

b) Interest rate risk

Interest rate risk emerges from floating interest rate borrowings, resulting in the risk that the borrowing interest payments significantly increase when an interest rate increases. Sensitivity analysis is used for assessing interest rate risk. To hedge the risk, the Group and the Company have entered into six interest rate swap agreements with the notional amount EUR 110 million (see Note 22).

The main target criteria stated in the Financial Risk Management policy are duration of 2-4 years and fixed rate portion more than 35% of borrowings. As at the end of the financial year 45% of the Group's and the Company's borrowings had a fixed interest rate (incl. an interest rate swap).

c) Liquidity risk

The Group's and the Company's policy is to maintain sufficient cash and cash equivalents or have available funding through an adequate amount of committed credit facilities to meet its commitments according with the Group's and the Company's strategic plans as well as to compensate the fluctuations in the cash flow due to occurrence of variety of financial risks (see Note 18).

d) Currency risk

The Group and the Company are exposed to currency risk mainly in connection with settlements in foreign currencies for borrowings, capital expenditures and imported electricity (transaction risk) as well as a part of the Group's and the Company's borrowings and trade and other payables denominated in foreign currency are exposed to currency risk (translation risk).

However, the peg of Lats to the Euro at the beginning of the year 2005 resulted in significantly reduced currency risk, as the Group and the Company had not any substantial payments in any other foreign currency except Euro. At the beginning of 2005 the Group and the Company had only 1% of its borrowings expressed in other currencies than Latvian Lats and to the Euro (Note 18).

Nevertheless, the Group and the Company continue to monitor currency markets on daily basis and maintain respective cash flow fore- casting in order to identify any potential currency risk before it arises.

e) Fair value risk

The fair value of financial assets and liabilities in all material respects approximate their carrying amounts.

27. EVENTS AFTER THE BALANCE SHEET DATE

There have been no significant events subsequent to the end of the reporting year that might have a material effect on the Group's con- solidated financial statements and the Company's separate financial statements for the year ended on 31 December 2005.

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Ar 2005.gada pārskatu plašākā izklāstā piedāvājam iepazīties elektroniskajā versijā- CD, USB un www.latvenergo.lv

Deeper insight into the Annual Report of the year 2005 we provide electronically- CD, USB or at www.latvenergo.lv

AS „Latvenergo”, Pulkveža Brieža iela 12, Rīga, LV-1230, Latvija

Tālr.: +371 7728222, Fakss: +371 7728880, e-pasts: [email protected], www.latvenergo.lv

AS „Latvenergo”, 12 Pulkveža Brieža Str., Riga, LV-1230, Latvia

Phone: +371 7728222, Fax: +371 7728880, e-mail: [email protected], www.latvenergo.lv