VÝCHODOSLOVENSKÁ DISTRIBUČNÁ, A.S. ANNUAL REPORT 2014

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TABLE OF CONTENTS

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Foreword by the Chairman of the Board of Directors

Supervisory Board Report

Basic Company Data

1. Formation and founding of the Company

2. Business activities

3. Shareholding structure

4. Organization structure

5. Company bodies

Grid Sales

Investments and Operations

Employees

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Environmental policy

Economic situation

1. Development of revenues costs and profit

2. Structure of assets and equity and liabilities

3. Financial situation

Business Plan 2015

Individual Financial Statements of VSD, a.s. as of December 31, 2014and Report of an Independent Auditor on theIndividual Financial Statements 2014

List of abbreviations

Contacts

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Main indicators03

Distribution area

Electricity distribution

No. of take-off points

Distribution revenue

EBIT

Profit after tax

Total assets

Cash flow from operating activities

Investment

Average headcount

Main indicators

km2

GWh

ths. EUR

ths. EUR

ths. EUR

ths. EUR

ths. EUR

ths. EUR

2014

15,746

3,710

624,385

303,942

25,879

17,315

740,932

79 ,849

51,034

1,004

2013

15,746

3,857

621,415

324,004

6,445

8,175

687,053

75,125

42,698

92

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FOREWORD BY THE CHAIRMAN OF THE BOARD OF DIRECTORS

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1 Foreword by the Chairman of the Board of Directors 05

Dear Customers, Business Partners, Colleagues,

The year 2014 was the year of the second phase of structural changes relating to the DSO+ Project as a response to the requirements for the unbundling of core activities of the distribution system operator arising out of the Energy Act. The first project phase was completed on January 1, 2014 by transferring technical competencies from parent company VSE Holding a.s. (hereinafter “VSE Holding”) to VSD, a.s. (hereinafter “VSD” or “Company”). The second phase was aimed at separating customer services in the area of distribution from those in electricity supply and information technologies. The aforesaid requirement was met on January 1, 2015. The changes made take into account the requirements of the Office for Regulation in Network Industries and of energy legislation with respect to transparency and non-discriminatory access to the distribution system for all participants on electricity markets.

Profit of the Company was still negatively impacted by unbalanced setting of the current support system of renewable sources and combined heat and power generation (hereinafter “RES/CHP”). Primarily the Company´s costs for bonus paid for electricity generated from RES/CHP significantly exceeded revenues (the so-called TPS tariff). Another principle factor that impacted profit of the Company was the sale of the electricity surplus generated from RES/CHP, which was not used to cover losses in the distribution system (hereinafter “DS”) at significantly lower prices than the regulated electricity price for the so-called compulsory purchase. That means that DS operators must bear the costs relating to the bonus paid to producers from RES/CHP and the sale of

the surplus electricity despite the fact that the system does not generate enough financial sources to cover those costs. It is necessary to consider the current situation, to modify the current system of promotion and to introduce new rules that take into account the market developments.

VSD, just as in the previous years, invested several millions in the renewal, upgrade and extension of the DS in its distribution area (Prešov, Košice and part of the Banská Bystrica self-governing regions). In 2014, the investments totalled more than EUR 50 million. Compared to the previous year, it is an increase by almost 20 percent at all voltage levels, including investment into automation control of the DS and in smart metering systems. The funds were spent in several municipalities of Eastern and Central Slovakia. One of the largest projects is a comprehensive upgrade and extension of 110 kV switchgear at electricity substation (hereinafter “ES“) Voľa. An important project is also a new ES in Dobšiná. Other major investment projects of 2014 included a comprehensive upgrade completed at ES Lipany and ES Kežmarok. Our core activities are also represented by investment projects in the upgrade and extension at the MV and LV levels aimed at quality improvement and security of the DS.

VSD actively supports and develops the installation of smart meters and the so-called “eDSO“ platform, which will be the main pillar for e-communication with customers and business partners. In the first half of 2015, we will offer the first service packages on the eDSO basis to our customers. Our objective is to

provide higher quality services, flexibility and effective inquiry solutions to our customers and business partners.

The key indicators of quality and reliability of electricity distribution, such as availability of the DS (ASAI), SAIDI and SAIFI, show a positive trend despite wind storms that affected Eastern Slovakia in May 2014. Our excellent results are supported by a systematic approach, process automation in maintenance, operation and elimination of faults, as well as by activities of occupational health and safety and quality assurance.

Dear customers, business partners, colleagues,I would like to thank our customers and business partners in particular for their openness and respectful relationships. My heartfelt thanks go out to our colleagues for their high quality work, their efforts when handling extraordinary situations and the achieved results that support development of the region of Eastern Slovakia.

Yours faithfully,

Ing. Radoslav HaluškaChairman of the Board of Directors

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SUPERVISORY BOARD REPORT21

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2 Supervisory Board Report07

In 2014, the VSD Supervisory Board supervised the exercise of activities of the Board of Directors, the Company’s business operations and management, as well as the implementation of the articles of association, in all cases in compliance with Slovak legislation and the articles of association. There were four regular meetings and one extraordinary meeting held in 2014.

The regular agenda of ordinary meetings of the Supervisory Board included information on the Company´s financial performance, price regulation, principle developments in asset management, grid sales and legislative regulation and in the operation of the distribution system. Information about the Company’s PR activities, resolutions adopted at the Board of Directors’ meetings and related party transactions is also provided.

At its extraordinary meeting, the Supervisory Board discussed and approved the Adjusted (updated) Strategic Plan 2015 – 2017.

The Supervisory Board, inter alia:

• appointed PricewaterhouseCoopers Slovensko, s.r.o. as the auditor to perform an audit of the VSD Financial Statements 2014 and recommended the General Meeting to approve it;

• approved the proposal of the VSD Board of Directors for the distribution of 2013 profit and recommended the General Meeting to approve it;

• approved the proposal for a change in the line of business of the Company and the proposal to amend

the VSD Articles of Association effective June 19, 2014;

• approved the proposal for a change in the line of business of the Company and the proposal to amend the VSD Articles of Association effective October 28, 2014;

• approved organization changes and the VSD Organization Rules with effect from April 1, 2014 and effective January 1, 2015.

In the course of the year 2014, the Supervisory Board was informed by the Board of Directors, in both oral and written form, of the facts concerning:

• financial results;• main developments in the regulatory framework

(price and legislative regulation);• investments and operational expenditure; • grid system reliability;• trend in the distributed quantity of electricity; • new customer connections to the DS.

The Supervisory Board, inter alia, discussed and took notice of the following:

• Information on the development and results of the VSD General Meetings held last year;

• Information on the approval of the VSD Business Plan 2014;

• VSD Annual Report 2013;• Information on the major plans of VSD management

for 2014 and projected trends in assets, finance and revenues;

• VSD Financial Statements 2013 and recommended the general meeting to approve it.

Based on the results of its continuous inspection, the Supervisory Board states that the Board of Directors carried out all necessary activities to develop business and maintain its good reputation.The Auditor’s report as well as the Financial Statements consisting of the balance sheet, income statement, statement of changes in equity, statement of cash-flows and notes to the financial statements were discussed by the Supervisory Board members at the meeting on March 25, 2015.

The Supervisory Board looked into the Financial Statements prepared as of December 31, 2014 and recommended the General Meeting to approve them. The Supervisory Board approved the proposal of the Board of Directors for distribution of 2014 profit. It has recommended the General Meeting to adopt a resolution on distribution of 2014 profit as proposed by the Board of Directors.

Košice, March 25, 2015

Ing. Juraj SlafkovskýChairman of the Supervisory Board

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BASIC COMPANY DATA31

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3 Basic Company Data 09

Formation and founding of the Company

Východoslovenská distribučná, s.r.o. was formed as a subsidiary of Východoslovenská energetika a.s. on October 14, 2005 in a form of a limited liability company. Its legal form was changed to a joint-stock company by the decision of the General Meeting on January 30, 2007.

Východoslovenská distribučná, a.s. launched its operation on July 1, 2007. Within the legal unbundling of the vertically-integrated company Východoslovenská energetika a.s. (hereinafter “VSE“), it took over all the assets and liabilities, all rights and obligations regarding the distribution activity of parent company VSE as of the same date. In accordance with legal requirements, the Grid Service Division of parent company VSE Holding (under business name VSE until July 1, 2014) was contributed in kind parent company to VSD on January 1, 2014, where the respective division carries out all activities pertaining to operation, maintenance and extension of the DS.

Business name: Východoslovenská distribučná, a.s.Registered seat: Mlynská 31, 042 91 Košice Company No.: 36 599 361

The Company is registered with the Commercial Register of District Court Košice I, File Sa, Insert No. 1411/V.

Business activities

VSD is a regional distribution system operator (hereinafter “DSO“) in its distribution area consisting of the Košice, Prešov and part of the Banská Bystrica self-governing region and carries out the following activities:

• Electricity distribution• Planning of grid development • Control and operation of the DS• Selling of capacity for grid connections• Supplier switching process for grid customers • Collection and provision of energy data • Purchase and lease of grid assets• Electrical equipment design and construction• Provision of services related to the operation of

electricity substations without voltage limitation• Installation of electricity meters

Production of electrical equipment: electric machinery, devices, distribution boards and objects without blasting hazard

Shareholding structure

The only shareholder of the Company is VSE Holding that holds 100% of its share capital.

As of December 31, 2014, the share capital of the Company amounting to EUR 437,735,515 (December 31, 2013: EUR 432,815,515) consisted of 10 registered shares with a nominal value of EUR 3,320 per share, 1 registered share with a nominal value of EUR 432,782,315 and one share of a nominal value of EUR 4,920,000.

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3 Basic Company Data 10

General Meeting

Supervisory Board

Compliance Officer

Board of Directors

CEO

Grid SalesAsset Management Controlling and Internal ServicesGrid Services Enerkos

Organization structure as of December 31, 2014

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3 Basic Company Data11

Organisational structure as of December 31, 2014

Board of Directors

Ing. Jaroslav Hrušč – Chairman of the Board of Directors (until March 31, 2014)Ing. Radoslav Haluška – Chairman of the Board of Directors (since April 1, 2014)Dr.h.c. prof. Ing. Michal Kolcun, PhD. – Deputy Chairman of the Board of Directors Ing. Marcel Fitere – Member of the Board of Directors (until March 31, 2014)Ing. Klaus Buhl – Member of the Board of Directors (since April 1, 2014)Ing. Jana Palková – Member of the Board of DirectorsJUDr. Ing. Eduard Hulík – Member of the Board of Directors

Supervisory Board

Ing. Juraj Slafkovský – Chairman of the Supervisory Board Ing. Marián Suchý – Deputy Chairman of the Supervisory Board (until June 30, 2014)Thomas Merker – Deputy Chairman of the Supervisory Board (since July 1, 2014)Mgr. Radoslav Rigo – Member of the Supervisory BoardIng. Artúr Benes – Member of the Supervisory BoardIng. Richard Tušan – Member of the Supervisory BoardMUDr. Renáta Lenártová – Member of the Supervisory BoardIng. Vladimír Katuščák* – Member of the Supervisory Board (until September 29, 2014)Ing. Zuzana Kisidayová* – Member of the Supervisory Board (since September 30, 2014) Marián Palenčar* – Member of the Supervisory Board Ing. Slavomír Veseleňák* – Member of the Supervisory Board (until January 15, 2014)Ing. Melánia Kožejová* – Member of the Supervisory Board (since January 16, 2014)

* representative of employees in the Supervisory Board

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GRID SALES41

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4 Grid Sales13

Electricity distribution 2014 in figures:

Distribution of electricity to end consumers*: 3,710 GWhNumber of take-off points: 624,385

*includes electricity distribution to the local distribution systems

The Company’s main task is to operate a secure and reliable distribution system, to provide electricity distribution and access to the system to all its users. Regulated business in the field of electricity distribution has its specific features to which VSD must adapt. It is not only the commodity which cannot be stored, there are also legislative requirements and limits, as well as demanding technical standards, which are necessary to be met for the provision of high-quality and reliable distribution services. To ensure that this main objective of VSD is delivered, a high-quality and stable distribution system is required to provide flawless electricity distribution to our customers.

In 2014, VSD distributed electricity to more than 624,000 take-off points of households, companies and organizations, for more than 780 power stations and 39 operators of local distribution systems.

Voltage level

LV Households

LV Business

MV

HV

Total

549,256

72,196

2,908

25

624,385

549,943

72,569

2,882

21

621,415

As of December 31, 2014

As of December 31, 2014

Number of take-off points with a valid contract

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The total quantity of electricity distributed to end consumers (including operators of the local distribution systems) in 2014 reached 3,710 GWh (2013: 3,857GWh).

Energy commodities represent a major cost item for manufacturing companies as well as for other business entities. The market environment and competitive pressure are the factors that influence companies to look for energy saving solutions. This also impacts the quantity of electricity distributed to end consumers, which saw a slight decrease in 2014 compared to the previous year. Loss of industrial production of the steel mill in Strážske resulted in a significant drop in electricity distribution and together with the growth of electricity generation from customer own, in particular, renewable energy sources decreases the quantity distributed to end consumers.

Structure of electricity in 2014 (2013)

Losses and own consumption7% (8%)

LV Households29% (28%)

LV Business17% (16%)

MV35% (34%)

HV12% (14%)

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Regional development support

We are aware of the fact that VSD, within its corporate responsibility, significantly contributes to the development of the region concerning searching and implementing investment opportunities in Slovakia as well as in Central Europe. In the long term, our company, therefore, creates favourable conditions for new connections particularly for industrial companies and residential localities.

Stabilization or slight recovery of Slovakia’s economy has had a positive effect on the number of connections to the distribution system. In 2014, VSD saw an increase of 11% in the number of new connections to the distribution system compared to last year, e.g. more than 6,800 connections. Those new connections generated requests for capacity of nearly 28 MW at the MV level and about 112 MW at the LV level.

Number of Concluded Grid Connection Contracts in 2013 and 2014

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15,000

5,000

Concluded contracts

New connections

20,000

10,000

25,000

2013 2014

18

,291

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,451

6,8

16

6,8

83

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Quality improvement in customer service

The year of 2014 was dynamic for VSD and brought along several changes. In the Grid Sales, the changes were made with respect to setting new processes in electricity distribution as well as customer connection to the DS in order to improve the quality of services rendered.

The major change in service provision is connected with the opening of client centres in Michalovce, Poprad, Prešov and Košice as a contact point for all customer- related inquiries - e.g. amendments of the connection contract, change of maximum reserve capacity, guidance in distribution price list and processes pertaining to electricity distribution.

The client centres enable faster, more effective handling of customer requests and thus improve customer satisfaction.

On January 1, 2014 VSD is the first company among the distribution system operators that successfully launched a billing system harmonized with the current legal requirements. The first aggregated invoices for electricity distribution were successfully issued for January 2014 and sent to the electricity suppliers by the deadline set by legislation.

In 2014, VSD registered 30 electricity suppliers with a valid framework distribution contract in its distribution area. There are two new electricity suppliers, compared

to the previous year, but at the same time, there was terminated distribution in the case of two suppliers and supply of last resort was applied. Possible insolvency of electricity suppliers is a risk factor that is still present and therefore it is necessary to search for solutions in accordance with legal requirements to improve the collection of receivables of the distribution companies.

In the VSD distribution area, there are active apart from traditional electricity supplier VSE, several new as well as established electricity suppliers. Their share in electricity distributed also steadily increased in 2014 and that reflected the liberalized electricity market in Slovakia.

Development of the number of customers at alternative suppliers

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4 Grid Sales17

Distribution losses

Losses relating to electricity distribution continued to drop in 2014. On the one hand it is a consequence of investments into the upgrade of core elements of the DS, e.g. into overhead and cable lines, transformers and installation of more sensitive electronic meters. On the other hand it is a result of company activities to identify and reduce illegal electricity usage.

To cover distribution losses, we are obliged by law to preferentially buy electricity generated from RES/CHP. Last year, we purchased a quantity twice as high as the quantity necessary for covering losses, thus there was a significant electricity surplus.

A large-scale construction of RES power plants, their commissioning, and production of electricity from those sources, which are significantly promoted by the current incentive scheme, widened substantial differences between the quantity of electricity necessary for covering losses in the distribution system and the quantity of electricity from the compulsory purchase. The surplus of electricity arising from such disproportions is sold in the electricity spot market.

That surplus can only be sold with a loss that results from the difference between market electricity price and regulated price of electricity from compulsory purchase, since the selling market price of electricity was significantly lower. The situation in the system of promotion and compulsory purchase is long overdue and caused that the significant surplus of electricity had considerably reduced its liquidity.

The share of electricity supply sources to cover losses by type in 2014

CGU Coal and Natural Gas31.67%

CGU Biomass Waste11.96%

CGU Communal Waste 4.94%

CGU Heating Oil0.16%

Photovoltaic Source19.08%

Hydropower Plant8.07%

CGU Biomass and Fossil Fuel4.99%

CGU Biogass18.43%

CGU Natural Gas0.70%

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4 Grid Sales18

Development in RES electricity production

At the end of 2013, VSD took measures to ensure security and reliability of the power system of the Slovak Republic, since our distribution system forms an integral part of it. Therefore, since December 4, 2013 VSD has only approved applications for the connection of the so-called small power stations with nominal active power of up to 10 kW that will meet technical conditions for the connection to the system. The aforesaid complies with the objectives of the governmental “Concept for development of electricity generated from small renewable energy sources in the Slovak Republic.” The concept sets limits to further connection of the power stations, except for small power stations, by strengthening the power system of the Slovak Republic, particularly on the cross-border profiles with Hungary. Otherwise, the connection of new power stations may pose a serious threat to secure and reliable operation of the Slovak power system.

Legislative changes influenced the behaviour of investors constructing new power stations. All in all, there is a prevailing trend when power plants primarily produce electricity to cover own consumption of their producers without using the DS.

Biogas power stations dominated with their share of almost 75 percent in the number of power stations and with a total power of 4.2 MW. Power stations based on incineration of natural gas within combined heat and power generation saw the second most significant increase and the third most important power source were small photovoltaic power plants in 2014.

Installed capacity (MW) of power plants in 2014

CGU Biomass4.2

Hydropower Plant0.2

CGU Natural Gas1.0

FVE Roof – household0.2

FVE Roof – household (non-business in EEN)0.1

FVE Roof0.2

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INVESTMENTS AND OPERATIONS51

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5 Investments and Operations20

A large-scale DS with a total length of 21,000 km and surface area of nearly 16,000 km2 requires continuous operation, maintenance and control. The main priority of our company is to provide reliable and secure electricity distribution to all customers regardless of their place of connection. All our internal processes such as upgrade planning and extension of the system, technical standards and improvement in total efficiency of electricity distribution conform to that objective. All investment activities are aimed at the provision of high-quality services corresponding with the existing quality standards.For distribution of electricity, an interconnected DS at high voltage, medium and low voltage levels is used. The HV distribution system is supplied from four superior electrical substations of the transmission system with voltage levels of 400 kV and 220 kV. At the HV and MV levels, VSD operates 56 electrical transformer and switching substations altogether, out of which

• 4 switching substation of 110/22kV with TS/DS transformation,

• 29 transformer substations of 110/22 kV,• 1 switching substation of 110/110 kV,• 1 transformer substation of 35/22 kV,• 4 transformer substations of 22/10 kV,• 17 switching substations of 22/22 kV.

*ES Lemešany also has 110/22 kV transformation that is not included in the number of substations that

correspond to transformer stations of 110/22 kV

Innovations

Even such a conservative business sector, as the energy industry definitely is, cannot exist without new technologies and innovations. VSD closely monitors trends in this area and puts them into practice by using them in an appropriate, effective way.

The smart metering systems (hereinafter “SMS”), the so-called “Smart metering“, is one of the most popular topics of the EU energy policy.

In 2014, VSD built a basis for the future implementation of the SMS by establishing a data and communications centre for two-way communication with SMS electricity meters. The data and communications centre was integrated into existing systems and shall provide for necessary and required functions of that progressive technology.

The eDSO project – Innovations in on-line communication had been launched by the Company at the beginning of 2014 in order to introduce an e-communication channel with VSD partners. It will be the basic pillar for the provision of information to customers and the first point of contact for receiving inquiries. Internally, it will contribute to process monitoring and automation. All in all, the project objective is to create a web platform with a possibility of adding other functionalities for effective e-communication. One of the first practical information the eDSO may provide are the notifications of planned interruptions to electricity supply and an overview of consumption to customers with smart metering systems.

Reliability of electricity distribution

In 2014, we again succeeded in maintaining 99.96% of ASAI (Average Service Availability Index – grid availability) in the DS, while taking into account extreme weather conditions and interruption to distribution caused by a third party. The VSD programme of regular renewal and upgrade significantly helps provide enough electricity for new investors and the growing industry in Eastern Slovakia. 1

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5 Investments and Operations21

Main investment projects and activities in 2014

1. Upgrade of substation Voľa Completion of an important and strategic project of SEPS and VSD that will create a stable connection node in eastern Slovakia

2. Upgrade of substations Kežmarok, LipanyUpgrade of the substation due to an expected increase in installed capacity and compliance with operational safety and reliability of electricity distribution in the regions of the High Tatras, city of Prešov and its region

3. Construction of a new substation Dobšiná Investment project based on the obligation of VSD arising out of the contract with SE

4. Introduction of Smart metering systems (SMS)In 2014, we started to implement the first elements of SMS according to ordinance No. 358/2013 Coll. dated 28 October 2013 and the communications and data centre

5. eDSO Project – Innovations in on-line communication Started in 2014 in order to provide an e-communication channel for communication with VSD partners

6. Regular renewal of the MV and LV distribution systems Improvement in operational safety and quality of the DS Reduction of grid losses

7. Grid expansion reflecting customer requirements New grid connections based on customer requirements

8. Centralization of logistics and servicing activities in the locality of Košice-JuhCentralization of resources and respective technical infrastructureCentral material warehouse, cost-effective, low-energy administration and technical facilities

In 2014, VSD invested EUR 51,034 ths. (2013: EUR 42,698 ths.), with the largest volume of funds invested as usual into grid renewal with the aim of further quality enhancement of services for its customers. With respect to the upgrade of substation Voľa, the Company paid the connection fee to SEPS of more than EUR 5 million, which influenced investments in 2014 on a one-off basis.

Structure of GRID investment in 2014 (2013)

Grid renewal 53% (74%)

Operation CAPEX7% (3%)

Customer projects15% (19%)

Legally required projects25% (3.5%)

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OHS and quality management

Occupational health and safety activities and quality assurance were again one the Company´s priorities in the last year. In 2014, attention was in particular paid to the following areas:

1. Extension of ISO certification to whole VSD: In the autumn, a surveillance and extension audit was successfully completed of the integrated management system for all organizational units of VSD concerning:ISO 9001 – qualityISO 14001 – environmental protectionOHSAS 18001 – OHS

2. Integrated inspections of suppliers:The Company continued with its programme of inspections by adding internal suppliers to the external ones. The outcomes of those inspections aimed at quality of goods, services and work, legislative requirements for environmental protection and OHS are included in the overall evaluation of suppliers that is taken into account in the tendering processes.

3. Vendor portal: By launching the productive operation of this web application, communication with suppliers achieved a higher quality level. The portal functions cover the main areas of extension, renewal and upgrade of electricity distribution equipment and thus significantly contribute to higher efficiency and transparency.

4. Investment into personal protective equipment: The year 2014 was influenced by ongoing modernization of all types of PPE and mechanisms. Emphasis was put on quality, by which the Company maintained high-quality levels in this area.

5. Inspections carried out by state supervision: In 2014, the authorities of state supervision (Labour Inspectorate, Fire and Rescue Service Corps) conducted several inspections at VSD and all without significant findings.

All the aforesaid activities were and are performed with the main objective: to increase safety of our employees as well as the security of the whole distribution system.

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EMPLOYEES61

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6 Employees24

VSD is one of the stable employers in Eastern Slovakia, providing a high-standard of employment benefits in all aspects. The Company has carried out programmes focused on work-life balance, employee health and well-being, employee diversity and graduate jobs for several years and they have been an integral part of the Company´s activities.

In 2014, we incorporated priorities in the field “people“ into transformation projects in respect of legislative requirements for further separation of DSO activities from those of electricity supplier and projects aimed at internal optimization of existing processes.

Transformation of the organization

Due to the legislation requirements for separation of distribution activities from those pertaining to electricity supply, VSD continued with the transformation of the whole organization in 2014. In the beginning of the year, the Company had to deal with large-scale organizational changes, by transferring technical competencies from parent company VSE Holding to VSD. The second project phase focused on the separation of customer service in the field of distribution from electricity supply and IT that took place in autumn 2014, and was completed as of January 1, 2015.

Increasing electronisation and HR “dashboard“

In the area of HR electronisation, VSD picked up on the previous year by completing projects of electronic approval process flow for organizational and personnel changes and changes in employment contract terms. The Company also started with a project aimed at the electronization of other forms which are necessary when hiring, transferring employees and when terminating employment.

In 2014, steering of HR key performance indicators on the so-called HR was also implemented. It is designed for managers that enable cross-departmental comparisons to be made. In this way, the Company wants to support greater transparency and to improve basic indicators such as absence, overtime, leave, planning and using of personnel costs in the respective areas.

At the end of 2014, VSD had 1,007 employees. The significant increase in headcount compared to 2013 was caused by the aforesaid transfer of technical competencies from parent company VSE Holding to VSD and the integration of more than 900 employees in VSD. Voluntary employee turnover remained low (0.9%); that is a standard turnover rate in network industries. Average employee age was 44 years and average seniority was represented by 19 years.

Employee structure

Men as of 31 December

Woman as of 31 December

Total as of 31 December

FTE

Shortened time equivalent

New hires

Voluntary staff turnover

Overall staff turnover

2014

907

100

1,007

1,004

4

42

0.9%

5%

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22

92

92

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4

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7%

Overview of main indicators:

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ENVIRONMENTAL POLICY 71

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7 Environmental policy 26

Protecting the environment and ensuring the stability of respective ecosystems was one of the VSD priorities in 2014. Soil-decontamination works for the elimination of historic environmental burdens (contamination of soil base of electrical substations by oils from equipment in operation). In 2014, there was concluded a partnership agreement for the project “Energy in the country – electric power lines and protection of priority bird species in Natura 2000 sites.” The project is also funded by the European Commission within the LIFE13 programme and will be implemented by 2019. The focus on environmental protection has become an inseparable part of all work activities related to the operation, maintenance and renewal of electricity distribution equipment. Environmental aspects of every activity pertaining to electricity distribution, including related legal requirements are regularly analysed and evaluated. In 2014, many environmental projects and measures had been carried out with the aim of eliminating emissions of polluting substances into the environment, minimizing environmental damage resulting from potential serious emissions of pollutants into the environment and reducing the risk that electricity lines pose to birds. Internal and external audits performed in 2014 confirmed improvement both in the area of waste management and in the area of protecting nature and the landscape. No fines were imposed by state administration bodies on the Company for violating the environmental legislation with respect to the operation, maintenance, repair or construction of electricity distribution equipment.

Aspect: Biodiversity

Distribution grid is also located in landscape conservation areas. Their total area accounts for 16 percent of the total area of the territory within which VSD distributes electricity. Overhead electric lines pose a specific threat to birds. There are more than 60 endangered bird species registered in the current Red List of Threatened Species of the International Union for the Conservation of Nature and Natural Resources – IUCN. In co-operation with the State Environmental Protection Agency and non-governmental organisations, we agreed on a strategy for eliminating such negative impacts. In line with priorities set for 2014, we adjusted 22 kV lines in protection areas for birds and in national parks in a way that does not constitute a danger to birds. There were 621 support points adjusted in total, which accounts for 47 km of lines. We built nest pads for the relocation of the white stork (Ciconia ciconia) nests. We moved dozens of nests from the LV overhead lines to nest pads.

Aspect : Emissions, sewage and waste

VSD does not operate any technology that could be considered a source of emissions according to the current legislation. The SF6 gas, which is categorized under the category of greenhouse gases, is used as an insulating and quenching medium for technological equipment (switchgear, distribution boards). Due to some relatively small leaks, 2.1 kg of this gas was released into the atmosphere in 2014. Cleaning plants operated by VSD released 1,892 m3 of sewage into recipients. A total of 496 tons of hazardous waste and 3,539 tons of other waste were produced in 2014 from renovation, repairs, maintenance and operation of the system. Moreover, the employees produced 1,280 tons of municipal waste. 60% of total waste was recycled and 40% was deposited at waste disposal sites with the relevant licence. In 2014, we did not record any larger oil leakage from our equipment. Every, even small leakage, of transformer oil was recorded and adequate measures were taken.

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ECONOMIC SITUATION81

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8 Economic Situation28

Financial data stated below are based on financial statements of Východoslovenská distribučná, a.s. for the year 2014 which are prepared in accordance with International Financial Reporting Standards (IFRS) valid in the European Union.

Development in revenues, costs and profit

Distribution revenues decreased compared to the previous year and that reflects the trend in reduction of the total quantity of distributed electricity over the last few years, as well as the impact of formula for the calculation of distribution revenues that from 2014 onwards will include a component that decreases those revenues. In 2014, there was a problem pertaining to costs for promotion of the RES/CHP scheme long overdue. Since those costs were not fully included in a tariff for system cost that has to cover them, even in 2014 the Company was facing again the deficit problem in that respect. The deficit, compared to 2013, was significantly reduced, however, it still negatively affects profit of the Company and will be corrected in two years. Revenues and costs on a year-on-year basis were also influenced by the introduction of central billing, as a result of which the system services and support of electricity produced from domestic coal are not charged by the distribution system operator. The corporate income tax rate in 2014 did not change and remained at 22% that represented a tax obligation of EUR 8 million including a special levy for regulated industries. In 2014, the Company achieved a total comprehensive profit of EUR 17,315 ths. Compared to 2013, it increased by approx. EUR 9.1 million.

Profit structure in 2014 (in ths. EUR)

0

150,000

50,000

200,000

100,000

250,000

300,000

350,000

Revenues315,859

Costs290,751

Income tax7,793

Total comprehensive income*17,315*

* incl. EUR 770 ths. (other comprehensive profit)

Profit structure in 2013 (in ths. EUR)

0

150,000

50,000

200,000

100,000

250,000

300,000

350,000

Revenues326 746

Costs320 295

Income tax- 1,708

Total comprehensive income*8,175*

* incl. EUR 16 ths. (other comprehensive profit)

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8 Economic Situation29

Total revenues

In 2014, the Company achieved total revenues in the amount of EUR 315,859 ths. in the area of operating and financial activities, which represents a year-over-year decrease by EUR 11 million. The structure of VSD revenues remains the same as in the past, i.e. the main component of the revenues of the Company as a distribution system operator are distribution revenues with the share of 96% on the total revenues. Due to the incorporation of activities pertaining to the extension of the distribution system in VSD, capitalization becomes part of revenues.

Total costs

In 2014, the Company spent total costs including corporate income tax expenses in amount of EUR 298,544 ths., which represents year-over-year decrease by EUR 22 million., i. e. by 6.3%.More than 57% of the total costs were spent on electricity purchase to cover losses and the bonus within the RES/CHP support scheme and costs for transmission. The year-on-year decrease in those costs was a result of the aforesaid central billing system. Costs for services include in particular costs pertaining to services that are provided to VSD by parent company VSE Holding according to service level agreements for shared services and customer services. Their quantity was significantly reduced compared to the last year since the Grid Service Division with more than 900 employees, was transferred to VSE Holing on January 1, 2014 and this division carries out all activities concerning operation, maintenance and extension of the distribution system. That resulted in a

change in cost structure and increase in personnel costs.Growing costs for depreciation of fixed assets reflect the intensive long-term investment programme. In the tax area, the corporate income tax expense in 2014 was higher due to higher profit before tax.

Structure of costs in 2014 (2013)

Electricity purchase for losses, transmission costs, costs for system services, system costs 57.2% (66.6%) Other operating costs

0.2% (0.4%)

Income tax expenses 2.6% (-0.5%)

Services and material consumption13.3% (17.1%)

Personnel costs7.8% (0.9%)

Deprecation18.9% (15.5%)

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8 Economic Situation30

Structure of assets and equity and liabilities

Balance of the assets as of December 31, 2014 was EUR 740,932 ths.. It means that total assets rose by EUR 53,879 ths., i.e. by 7.8 % compared to the last year. Increase in intangible fixed assets arose out of contribution in kind and relating goodwill.Equity increased by 11.5% and accounts for nearly 80% in total liabilities. Increase in share capital, legal reserve fund and retained profits also relates to contribution in kind of the Grid Service division from the parent company to VSD.Total indebtedness of the Company was reduced as a result of full repayment of a bank credit facility at the end of 2014.

Financial situation

As of December 31, 2014, the balance of cash and cash equivalents of the Company was EUR 35,266 ths.. The Company repaid in full its investment loan of EUR 8,680 ths. so that the Company has no bank loans at present. As for external funding sources, VSD uses only financial leasing for the purchase of tangible fixed assets. A divident of EUR 8,175 ths. for 2013 was paid out to the VSE Holding parent company. The Company has had enough liquid sources for smooth paying of all its liabilities and available financial sources were valorized through cash-pooling within the VSE Group.

Structure of assets in 2014 (2013)

Tangible fixedassets 89.1% (94.5%)

Intangible fixed assets 4% (0.4%)

Receivables1.8% (1.7%)

Inventories0.3% (0.04%)

Financial assets4.8% (3.4%)

Structure of equity and liabilities 2014 (2013)

Equity 79.3% (76.8%)

Short-term liabilities 5.8% (7.5%)

Provisions0.7% (0.4%)

Long-term liabilities14.2% (15.3%)

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BUSINESS PLAN 2015 91

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9 Business Plan 2015 32

After the year 2014, that significantly influenced operations of the Company due to integration of technical activities pertaining to operation, maintenance and extension of the DS, 2015 shall also begin with the measures that will further strengthen the principles of unbundling in customer services and IT in accordance with the requirements of the regulator. Together with an enduring stability of the current regulatory period and ongoing efficiency programmes, it shall create a framework necessary for stable and reliable electricity distribution.

A future without innovations and new technologies is inconceivable to us since it influences everybody. For VSD it means that the Company will invest in smart meters or search for new market opportunities for the use of existing know-how and experience. Moreover, the Company will continue to maintain its investment budget aimed at the upgrade or extension of the DS.

The ongoing deficit in the RES and CHP promotion system, which is corrected 2 years behind, will impact the Company´s profit also in 2015. The quantity of electricity produced from RES and CHP, which significantly exceeds losses or a negative influence of a decrease in electricity market prices, only prove the fact that transparent and optimal functioning of the promotion system requires necessary system changes and participation of all market players.

Further electronization of processes and communication with customers and business partners, observance of quality standards and best efforts of VSD employees create preconditions for maintaining secure and reliable electricity distribution to satisfied customers.

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FINANCIAL STATEMENTS OF VSD, A.S. AS OF DECEMBER 31, 2014 AND REPORT OF AN INDEPENDENT AUDITOR ON VSD FINANCIAL STATEMENTS 2014

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10 Financial Statements of VSD, a.s. as of December 31, 2014 and Report of an Independent Auditor on VSD Financial Statements 2014

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ONLINE VERSION

11 List of Abbreviations35

ASAI – Average Service Availability IndexCGU – Co-generation UnitEBIT – Earnings before interest and taxesES – Electrical substationHR – Human resourcesHV – High voltageIFRS – International Financial Reporting StandardsLDS – Local Distribution SystemLDSO – Local distribution system operatorsLV – Low voltageMV – Medium voltageOKTE – Short-term electricity Market OperatorPV – Photovoltaic SystemRES/CHP – Renewable energy sources/Combined heat and powerSAIDI – System Average Interruption Duration IndexSEPS – Slovenská elektrizačná prenosová sústava, a.s.SMS – Smart Metering SystemTPS – Tariff for system costsÚRSO – Regulatory Office for Network IndustriesVSD – Východoslovenská distribučná, a.s.VSE – Východoslovenská energetika a.s. VSE Holding – Východoslovenská energetika Holding a.s.

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12 Contacts35

Východoslovenská distribučná, a.s.Mlynská 31042 91 KošiceSlovakia

T +421 (0) 850 123 312F +421 55 678–6516E info@vsds.sk I www.vsds.sk

Klientske centrum KošiceHollého 3Košice

Klientske centrum MichalovceTopolianska 2Michalovce

Klientske centrum PopradTovárenská 3924/1Poprad

Klientske centrum PrešovStrojnícka 3Prešov

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