Short Form Audit Report PGNiG Supply & Trading GmbH (formerly PGNiG Sales & Trading GmbH) Munich

Annual Financial Statements for the Period ending December 31, 2015 and the Management Report for Financial Year 2015 Auditor's Report (Translation - the German text is authoritative)

0.0783549.001 (Translation – the German text is authoritative)

Index of Appendices Page

Management Report of PGNiG Supply & Trading GmbH, Munich, for financial year 2015 ............. 1

Financial Statement for the period from January 1 to December 31, 2015 ..................................... 1

1. Balance Sheet as of December 31, 2015 ................................................................................ 2

2. Income Statement for the period from January 1 to December 31, 2015................................. 5

3. Notes to the financial statements for the period from January 1 to December 31, 2015 ............................................................................................................................... 7

Auditor's Report .......................................................................................................................... 1

Appendix I 1

Management Report of PGNiG Supply & Trading GmbH, Munich,

(formerly PGNiG Sales & Trading GmbH, Munich)

for the Financial Year 2015

List of Contents

I. Background of the Company

II. Economic Report

III. Opportunity and Risk Report

IV. Events after the End of the Financial Year

V. Forecast Report

I. Background of the Company

1. Company Structure and Business Activity

PGNiG Supply & Trading GmbH (referred to in the following as “PST” or “the Company”) is the hub within the PGNiG Group for international gas trading outside Poland. The sole shareholder of PST is the listed Polskie Górnictwo Naftowe i Gazownictwo S.A. (referred to in the following as “PGNiG SA”), Warsaw/Poland.

With its activities, PST exercises an important function in the Group of PGNiG SA. In addition to procuring natural gas for the parent company (which continues to account for most of the business volume of PST), the Company also markets the gas extracted in the Norwegian Shelf by the Norwegian affiliated PGNiG Upstream International AS.

Whereas the focus in 2014 was on reorganizing and streamlining personnel structures, PST and its equity participations were restructured under Company Law in 2015. The key aspect of the restructuring process was the spinning-off, to the newly established wholly owned subsidiary PST Europe Sales GmbH (“PSTES”), of the assets of PST which belonged to the sales segment. The spinning-off process related to the part of the assets and liabilities comprising the activities of PST in relation to the sale and delivery of gas and electricity to end consumers in the standard load profile and with registering load profile measurement in Germany and Austria. The process of spinning-off to PSTES became effective with the entry and announcement in the commercial register in the autumn of 2015 with retroactive effect as of January 1, 2015.

 

Appendix I 2

In addition, the Company has been renamed PGNiG Supply & Trading GmbH (formerly PGNiG Sales & Trading GmbH). The business of PST now focuses on European wholesale trading of energy products, essentially electricity and gas, and providing support to industrial clients and distributors and supplying them with energy products. PSTES will continue to be responsible for selling and delivering gas and electricity products to end consumers in Germany and Austria. As part of the spinning-off process, XOOL GmbH has also been transferred to PSTES and has thus become the latter’s wholly owned subsidiary. XOOL GmbH continues to specialize in sales and deliveries of gas to household customers. In the financial year 2015, the Company carried out other activities within the gas sector and the electricity sector. The Company has a branch without operations in Prague, the Czech Republic.

2. General Conditions

a. Development of the general economic situation

Retrospective of the Year 2015

Looking back to the year 2015, the positive growth forecasts for the global economy have essentially turned out to be correct. The growth of 3.1 % was almost fully in line with the original forecasts of 3.3 %. The economic growth in the USA amounted to approximately 2.4 %, whereas the corresponding figure for the Euro zone was 1.6 %.

However, economic growth was not distributed equally around the globe; in particular, the emerging countries which export oil and coal were affected by the much lower fuel prices. The economic realignment process in China, changing over from exports to domestic demand, the associated slightly weaker demand as well as weak signals emanating from the emerging countries have had only a minor impact on global growth.

The situation in the Euro zone was also mixed in 2015. However, Italy and Spain have reported such a positive performance that overall growth was slightly higher than the original forecasts. The situation in France and Germany is somewhat different; both countries have reported weaker growth than originally anticipated. In line with the comparatively low rate of growth, the unemployment rate in the Euro zone was very high (11.1 %) in 2015. Support was provided by the very loose monetary policy of the European Central Bank as well as low energy prices.

Growth of 1.7 % reported for the German economy was only in the mid-field of overall European figures; however, it has been stable for the past three years and higher than the average figure for the past ten years. The reliable force behind the continuous development was strong exports, supported by strengthening private consumption – thanks to rising wages and salaries and the fact that inflation was very low (0.3 %). Falling energy prices, and in particular the price of oil, as well as the fact that the Euro was weaker compared with the US Dollar, have had a positive impact on the economy. Based on a year-on-year comparison, industry and manufacturing have performed well,

 

Appendix I 3

as have the manufacturers of capital goods. Additional economic impetus, albeit to a limited extent, was attributable in the second half of the year to the additional demand resulting from the influx of refugees.

Outlook for 2016

For the current year, the German economy is expected to achieve strong growth. The forecast of 1.7 to 1.8 % for gross domestic product is pointing to moderate but stable growth. As was the case in 2015, the main impetus will be provided by the domestic economy and private consumer spending – thanks to further increases in real wages. This year, many refugees and asylum seekers will reach the labor market, which means that unemployment figures will probably rise. Consumer prices will also start to rise more significantly (at an estimated rate of between 1.1 and 1.7 %), because the effect of sharply lower energy prices will decline. Many economists are assuming that state spending designed to overcome the refugee crisis might have the effect of a minor economic program. On the other hand, China is a factor of uncertainty: The forecasts fail to agree whether the declining economic growth and the turmoil on the markets in that country will have a significant impact on GDP in Germany, or whether the economy will be virtually unaffected – if sectors with significant levels of commitment in China – e.g. the German automotive industry, are disregarded. The prospects for the Euro zone are positive: Growth in the Euro zone will accelerate appreciably in 2016 (1.2 %), and the unemployment figures might also decline somewhat throughout Europe this year. According to the International Monetary Fund (IMF), the global economy will achieve 3.4 % growth this year. The major factors in this respect are again the forecasts for Chinese economic growth, the strong Dollar which is having a negative impact on the US economy as well as the price of oil which continues to fall.

The Energy Market in Germany

Last year, the energy market in Germany had to contend with two key issues. The first issue was the impact of the revised Renewable Energy Act (EEG) which came into force in August 2014 as well as the statutory and regulatory requirements which are about to be implemented in the course of transforming the market to the Energy Market 2.0 within the framework of the overhaul of German energy policy and which have already been announced by the Federal Economics Ministry or which are currently being discussed by that ministry. These include the Electricity Tax Act, the gas and capacity reserve as well as the consequences of the white paper regarding the energy market (see also the section Statutory and Regulatory Changes). The second issue dominating the market were the raw material and energy prices on the wholesale markets, which have declined for the third year in succession. Pressure on costs which is already extremely high and which is having a negative impact on companies as a result of the implementation of the overhaul of German energy policy was exacerbated further by the development in prices, also because grid fees increased in parallel with falling electricity and gas prices. This increase had to be passed on to end consumers by many companies by means of price adjustments. This in turn increased the pressure of competition; price differences are transparent as a result of the online comparison portals available for customers who are willing to change provider.

 

Appendix I 4

The injection of considerable volumes of renewable energies has resulted in surplus supply on the market, which means that conventional power stations cannot cover their costs out of operations. Low wholesale prices are forcing in particular highly efficient gas power stations out of the market, although their high degree of flexibility would enable them to cope at short notice with load fluctuations in the electricity grid resulting from the injection of volatile solar and wind energy. Despite the fact that international coal prices are declining, new coal-fired power stations are also having to struggle to ensure that their operations are competitive. The pressure on the energy industry resulting from generation capacities is also reflected in the fact that RWE is following the frequently discussed and criticized example of E.ON and is pressing on ahead with the strategy of splitting the Group into one company which will be responsible for business with renewable energy, energy distribution and the grids as well as another company which will in future be responsible for the conventional power station capacities and energy trading. On the other hand, the process of splitting the E.ON Group into E.ON and Uniper has already been completed, and Uniper commenced operations at the beginning of 2016. The profitability of renewable generation capacities in 2015 also came under pressure as a result of the impact of the EEG – as a result of direct marketing and the “flexible cap”. Many energy companies have reviewed decisions regarding investments in expanding renewable energies, or have even entirely cancelled such projects. Weakening generation margins and lower revenues from energy trading have meant that many companies have increasingly concentrated on electricity and gas distribution activities. However, this has intensified the competition for customers, which had already reached a high level in previous years. Overall, the German energy industry is in the middle of a process of restructuring traditional energy supply activities. Many companies, including small municipal and local authority operations, are investing in regional renewable generation capacities and attempting to become somewhat independent of the price erosion on the wholesale markets and at the same time to reposition themselves in the field of distribution activities. Regional electricity products, the expansion of energy-related services, such as smart home and electro mobility, are considered to be areas in which the SMEs intend to defend their positions on the market. They are thus competing with companies with nation-wide operations which, as a result of their processes and structures, which usually also include online distribution channels, are frequently more efficient in terms of costs. The turmoil in the energy industry demonstrates that politicians in future will have to concentrate to a greater extent on issuing binding and long-term specifications for an Energy and Electricity Market 2.0. However, these specifications must not be such that they impose such constraints on the companies that they avoid carrying out urgently necessary investments, for instance in the electricity grids or the expansion of renewable generation. This would immediately have a negative impact on the competition which they are attempting to encourage with laws and regulations. However, at the same time, the energy industry must ensure that it is in a position to meet the challenges of the future and adapt to the changed conditions and objectives of energy policy.

 

Appendix I 5

c. Statutory and regulatory changes

With the principle of the so-called “flexible cap”, the revised version of the Renewable Energy Act (EEG) aimed to encourage economic expansion of renewable energy with correspondingly adjusted incentives in conjunction with market-oriented marketing. At the same time, the limites are imposed on the EEG levy which had frequently been increased in prior years as well as the related prices for end consumers. The results of the amendment are the subject of controversial discussions: Critics complain that, with the new EEG, the process of expanding photovoltaic had come to an almost complete standstill, whereas the EEG levy in 2016 attained a new record level at 6.35 ct/kWh and that political uncertainty affecting the sector had also considerably increased. The counter argument is that, if the amendment had not been carried out, the EEG levy and thus also the electricity prices for end consumers would have increased to an even greater extent. The impact of the EEG on innovation is considered to be positive. It means that generation techniques will become increasingly efficient and cost-effective, thus boosting efficiency and competitiveness of the energy generated by these means. The new EEG was and is still considered to be the starting point of an entire series of statutory changes which have been planned and to a certain extent have also come into force, with the aim of ensuring that the German energy market is environmentally-friendly and sustainable within the context of the policy of terminating nuclear power activities and long-term decarbonization. In the context of the Electricity Market 2.0, the Electricity Market Act (“Act Regarding the Further Development of the Electricity Market”) was adopted in the cabinet at the beginning of November 2015. With the aim of ensuring virtually unregulated pricing on the electricity market, the purpose of this act is to ensure a system (instead of a capacity market which merely maintains power station capacities) which is intended to ensure that the players cover their electricity requirement by way of adopting a flexible strategy of generation and consumption and also as a result of the opening-up of the balancing power market, or to fulfill their forecasts by buying and selling on the market possibly at extreme prices (Energy-Only-Market 2.0). It can be assumed that the act, which is based on the result of the BMWi white paper “An Electricity Market for the Overhaul of German Energy Policy”, after it comes into force, will force the energy companies to make considerable efforts with regard to adjusting their processes and structures. The Capacity Reserve Regulation, which was also adopted in the cabinet, specifies that lignite power stations are to be used for maintaining electricity generation capacities in order to assure reliable supplies in unforeseeable extreme situations. Last year, the reliability of gas supplies was also the focus of possible legislation. Due to the political crisis between Russia and the Ukraine as well as Turkey, and the fact that the contents of German gas storage facilities are at an all-time-low, intervention in the gas trading and gas storage market in order to guarantee reliability of supplies was the subject of debate. However, similar to the situation with regard to the Electricity Market 2.0, the German government decided to focus on a strategy of a fundamentally functioning market. This refers to long-term balancing energy products from the parties responsible for market territories as well as the utilization of load-related potential by means of demand side management as a new product category in the balancing energy market. However, depending on the development of the Ukraine crisis and the associated risk for reliability of supplies, this subject might be taken up again. A new GaBi-Gas 2.0 regulation came into force at the beginning of the gas year 2015/2016. In future, separate accounting levies will be applicable for suppliers in

 

Appendix I 6

accordance with SLP (Standard Load Profile) and RLM (recording load profile measurement), which might result in extensive adjustments to contract documents. In overall work routine, the implementation of the laws and regulations which have been promulgated in recent years, for instance EMIR (European Market Infrastructure Regulation), REMIT (Regulation on wholesale Energy Market Integrity and Transpa-rency) or GaBi Gas, require a degree of professional competence which has to be constantly expanded, constantly increasing staff resources and IT systems which have to constantly adjusted. These costs are frequently opposed by lower revenues generated by distribution and trading activities.

d. The Energy Markets in detail

The Gas Market

In the first half of the year, it appeared that gas prices on the wholesale futures market were rising slightly or at least moving sideways. However, over a 12-month period, the price of gas declined. On average, gas was trading at prices of approximately € 21 /MWh, which is approximately € 4/MWh lower than the average figure for 2014. Nor was any difference made by the surprisingly low gas storage levels in Germany at the end of the winter season (content levels on average amounted to only 27 %) and storage activities which otherwise tend to boost prices. The decline in prices had virtually no impact on private customer business, and industrial customers paid on average 6 % less than was the case in the prior year. With this price development, the market continued to be resistant against the still unresolved Ukraine crisis and the political crisis between Russia and Turkey. Both crises theoretically might have been able to pose a threat to the reliability of gas supplies in Germany and in Europe. However, by the middle of the year, both Russia and the Ukraine had complied with the terms of their delivery and transmission commitments. Many market players are assuming that the still unresolved political situation will not be reflected in the wholesale prices or reliability of supplies in the winter of 2015/16. Although the price of gas has to a large extent become decoupled from oil indexation, the development in prices correlated with the falling prices of crude oil – one reason why prices declined particularly after the mid-year point. The fact that global demand has been declining, particularly in China, and also the existing excess supply of fossil fuels have contributed to the price erosion. The supply situation is considered to be so good that the news in the autumn of 2015 that Russia might halt the gas deliveries for the Ukraine despite the fact that the winter was about to start did not have any significant impact on prices. The deal running into billions between the BASF subsidiary Wintershall and the Russian gas giant Gazprom is causing political tensions: With this deal, Wintershall will give up its gas trading and gas storage activities in Germany in return for shares in Siberian gas fields. As a result of this deal, Gazprom will gain access to approximately 25 % of German gas storage facilities. These also include the gas storage facility Rehden, which, as it accounts for 22 % of the entire German storage capacity, is considered to be the mainstay of secure gas supplies. The transaction which was considered in 2014 and which fell through at that time was the subject of significant concerns among German and European politicians. They fear

 

Appendix I 7

that the efforts to combat the reliance on Russian gas would suffer a considerable reversal as a result of the deal. This was the reason for demanding that the gas reserve regulation should be revised; however, this was rejected by the German government due to various reasons, including reference to a liquid global market for gas.

The Development on the Electricity Market in Detail

Between January and December 2015, the electricity forward price continuously declined. It is true that the price of electricity recovered somewhat in the summer, only to fall to a new all-time low in the third quarter. At the beginning of the year, the price for the delivery year 2016 was approximately 33 €/MWh, falling to only 28.08 €/MWh at the end of the year. On average for the year, the forward price was € 3 /MWh lower than the corresponding figure for 2014. As a result of the increasing production of EEG electricity with the priority treatment for the feeding of electricity into the grid, the influence of conventional power stations on the formation of electricity prices is declining. Unprofitable gas-fired and coal-fired power stations which produce electricity which is too expensive are being forced out of the market, and their influence on the formation of electricity prices is declining. On the spot and intra-day market, the feeding of renewable energies has become one of the parameters, if not the most important parameter, for determining prices in the opinion of many market participants. This factor is now considered by many to be more important than power station availability. Many market participants do not consider that there will be any major impetus for a reversal of the market in 2016, and many factors are pointing to a further decline in wholesale prices. It therefore appears to be paradoxical that the rising EEG-levy and rising grid fees will, in the final analysis, mean that electricity costs will nevertheless rise in 2016 for many consumers, private households and also industrial customers.

Overview of the Crude Oil Market

Compared with all fuels, the price of crude oil suffered the greatest decline in 2015, particularly in the final quarter of the year. Initially, the price of Brent recovered from approximately US$ 56 for a barrel ($/bbl) at the beginning of the year to more than US$ 68/bbl by approximately May. However, it then suffered a veritable crash by the end of last year; at the end of December, Brent was trading below US$ 37 per barrel. Last year, OPEC was again not able to agree any restriction to production volumes, nor was there any significant decline in the production of fracking oil in the USA (which had expanded considerably in recent years). The strategy of OPEC (namely of maintaining its market shares) encountered weakening demand on the market, including weaker demand in China, Russia and Brazil. Political crises and unrest, mainly in Iraq, Syria and Libya, which in the past had provided considerable support to the price of oil, appeared to have lost their influence on the market development. The IEA (International Energy Agency) is assuming that the market will not return to equilibrium before mid-2016 at the earliest. At the same time, it is warning that prices might explode in several years’ time, as urgent investments are being postponed by the oil industry as a result of the low prices.

 

Appendix I 8

3. Performance Indicators

Financial performance indicators

As key performance indicators, the Company uses indicators such as revenue, costs and EBIT. These performance indicators are the subject of regular reporting, and are reported to senior management and the shareholder. The budget adopted for the respective financial year forms the basis for the business activities.

Non-financial performance indicators

Sustainability – Environment and Climate

Sustainability is a major issue for PGNiG Supply & Trading GmbH (“PST”).

Since the autumn of 2015, the operations of PST and its sales subsidiary PST Europe

Sales GmbH (“PST ES”) as well as XOOL GmbH have been emission-neutral. After

determining the CO2 emissions which are caused by the organizational activities of the

PST Group for the years 2015-2016, we have structured our operations in such a way

that they are carried out on an emission-neutral basis. We have also carried out an

energy audit for the Group and will implement measures designed to optimize energy

savings in the current year.

Environment and the Climate

Sustainability, emission-neutrality and thus climate protection are also important aspects

for our products. Accordingly, we only distribute eco-electricity certified by the TÜV Nord

via our subsidiary PST Europe Sales GmbH.

Employees

We have excellent employees who do a lot to ensure that this situation remains

unchanged. Staff diversity has been an important objective from the beginning of the

Company’s activity. Accordingly, our workforce is made up of people from various

origins; at the end of the reporting period, we have employees from seven nations. As a

result of a reorganization, we have also ensured that more women are given

management responsibility. There is already a very balanced situation with regard to

men and women, i.e. 17 women and 20 men.

Our aim is to ensure that employees continue to develop. A management level has been

created as a result of a reorganization. Internal appointments were made to the positions

created in this way. We also offer specific further training measures for our employees.

At the end of the reporting period, our workforce comprised 37 employees.

 

Appendix I 9

II. Economic Report

1. Business Development

The foundation for restructuring the Company was laid in the financial year 2015, when the Company was still trading under the name PGNiG Sales & Trading GmbH. The aim of the restructuring process was to make further progress with professionalizing and optimizing the processes and structures at a high level and in a market- and competition-oriented manner. Since breaking into the energy market in 2011, PST has achieved rapid growth. In order to continue and sustainably assure this growth by organic means, PST has reduced the number of employees by approximately 20 % since the year 2014 as a result of a reorganization of staff and organizational resources, and has consolidated management from seven to four heads of department. Parallel to this process, the cost structures have been adjusted in such a way that operating costs have been reduced by approximately 25 % without any loss of efficiency and also without any restriction of the Company’s business activity. The reorganization and restructuring processes were essentially completed at the end of the financial year 2015, and additional improvements to the efficiency of our operating processes will be implemented in the current year. The Company can overall look back on a successful financial year in 2015. If an effect on results attributable to other periods is disregarded, the Company would have generated a positive overall result with its new business model. PST takes on task as “Security of Supply” In 2015, PST again positioned itself within the PGNiG Group as a reliable supplier of gas to Poland. Acting as a hub, PST ensured the secure delivery of a gas volume of 9.3 Terawatt hours to Poland via Germany and the Czech Republic in order to compensate for the delivery shortages from Russia and the Ukraine which occurred. With these “Security of Supply” measures, PST has thus made a significant contribution towards guaranteeing security of supplies in Poland and also in Germany. The mainstay of this task are the upstream activities of PST or the Company’s affiliate PGNiG Upstream International A.S. in Norway on a total of three gas and oil fields. The deliveries from Norway to Germany and from Germany to Poland are also reflected in a considerable increase in our gas trading volume. Positive Trading Result Risks arising from the sales portfolio have been actively managed as a result of starting active portfolio management for our sales portfolio. This anticipated the downturn in gas sales due to weather conditions, and trading was also able to participate in the price erosion of electricity and gas. As a result of the high professionalization level, energy trading and portfolio management have made a positive contribution to the annual result.

 

Appendix I 10

2. Presentation of the Situation

As a result of the spinning-off of “Sales”, assets and liabilities totaling € 20.6 million have been spun off to PST Europe Sales GmbH. A comparison with the prior year is therefore only possible to a very limited extent.

Cash flow statement for the financial year from January 1, 2015 through December 31, 2015

Jan.1 to Dec. 31, 2015

Operating activities

TEUR

Result for the period -1,885

Depreciation/amortization on intangible assets and property, plant and equipment 482

Changes in current provisions -199

Changes in trade accounts receivable -9,030

Changes in accounts due from affiliated companies 40,376

Changes in other assets -1,843

Changes in inventories

4,318

Changes in accounts due to affiliated companies -3,481

Changes in trade accounts payable -47,863

Changes in other liabilities -4,075

Interest expenses

-134

Income tax expense

-937

Cash flow from operating activities -24,271

Investing activities

Outflows for investments in intangible assets and property, plant and equipment -65

Outflows for the acquisition of fully consolidated companies -500

Cash flow from investing activities

-565

Financing activities

Interest paid 134

Outflows for the repayment of loans

-1,806

Cash flow from financing activities -1,672

Cash-effective changes in cash and cash equivalents -26,507

Cash and cash equivalents as of January 1, 2015

35,123

Cash and cash equivalents as of December 31, 2015

8,616

 

Appendix I 11

The balance sheet total has declined by almost 50 % from EUR 114.5 million as of January 1, 2015 (after completion of the spin-off process) to the current figure of EUR 55.2 million. Current assets account for approximately 92.9 % of total assets for 2015 (compared with 97.5 %). The reasons for this decline in the balance sheet total are the fact that cash backing is no longer required for bank guarantees which are issued within the framework of the restructuring of the collateral concept as well as a procurement volume within the Group which is considerably lower for the delivery period December.

The trade accounts receivable outside the PGNiG Group on the other hand increased from EUR 11.7 million to EUR 20.7 million in the current financial year. The accounts due from affiliated companies declined by EUR 40.4 million to the current figure of EUR 11.0 million. The trade accounts payable declined accordingly by 69.7 % to EUR 20.8 million in the financial year 2015. On the other hand, fixed assets remained constant at EUR 1.8 million. New investments particularly in the newly established PST Europe Sales GmbH compensated for depreciation. The provisions which are disclosed declined by 12.5 % (EUR 1.4 million compared with EUR 1.6 million). The equity ratio increased from 6.2 % to 9.4 % in the financial year. If the negative earnings effect attributable to other periods for the spun-off sales activities is disregarded, the increase in the equity ratio would have been even greater.

PST is able to access a bank line, and is also able to access a credit line of PGNiG SA for financing its activities. PST reports good liquidity (15.6 % compared with 30.7 %). Whereas as of January 1, 2015 88.7 % still served as cash collateral for market transactions and for bank guarantees which had been issued, this figure was only 33.1 % as a result of the restructuring of the collateral concept for 2015. The freely disposable liquidity has thus increased from 3.5 % to the current figure of 10.7 %. The Company’s liquidity is assured. PGNiG SA also provides the necessary securities for the transactions of PST and for backing the bank loan in the form of payment guarantees.

Performance indicators

2015 2014 Changes TEUR TEUR absolute in percent

Revenue 839,169 906,420 -67,251 -7.4 Costs (netted with other income)

840,946 908,066 -67,120 -7.4

EBIT -1,777 -1,646 -131 -8.0 Number of new customers (Gas)

0 13,619

Number of new customers (Electricity)

0 7,017

After the spin-off of “Sales”, the figure reported for revenue in 2015 only discloses revenue generated with gas trading and electricity trading activities. In the past, the revenue included sales revenue for SLP customers and also for load profile customers.

In addition to the procurement costs for the gas quantities which correspond to the revenue, the costs of materials also include capacity costs for the gas deliveries to Poland and for the gas deliveries as well as balancing energy costs.

 

Appendix I 12

As a result of the spin-off, the cost structure has changed considerably compared with 2014. If the energy sourcing costs are disregarded, the main cost item were the other operating expenses. Compared with the prior year, the other operating expenses declined by approximately 30 % from TEUR 10,119 in 2014 to TEUR 7,188 in 2015. This is due to the spinning-off of the Sales activities to PST Europe Sales GmbH. Personnel expenses have virtually halved from TEUR 5,183 to the current figure of TEUR 2,796; this is due to the streamlining of personnel structures in 2014, which only became fully effective last year as the decline in the number of employees resulting from the spinning-off of sales activities. The depreciation of the prior year mainly comprised depreciation and impairments for a license which was used for sales purposes and which was transferred to PST ES in the course of the spinning-off arrangements. Accordingly, depreciation of the financial year 2015 has declined considerably, namely by 72.0 % to TEUR 482.

The budget planning carried out for the financial year 2015 had not taken account of the spinning-off of end consumer business with retrospective economic effect as of January 1, 2015. It is therefore virtually impossible to completely compare the business figures and the performance indicators of 2015 with corporate planning for 2015.

Instead of budgeted costs of TEUR 886,100 to TEUR 950,100, costs of TEUR 840,946 were incurred in the financial year 2015. Compared with the decline in revenues (TEUR 839,169, compared with budget 2015 of TEUR 884,400 to 948,500), costs did not decline to the same extent, so that EBIT of TEUR -1,777 was just below the budgeted figure of TEUR -1,700 to -1,600. However, if the expenses attributable to other periods are disregarded, EBIT would have been TEUR 1,048 and thus considerably higher than the budgeted figure. Because of the realignment of the Company's business activity, the performance indicator "number of new customers" is no longer applicable.

 

Appendix I 13

III. Opportunities and Risks Report

The monitoring and management of opportunities and risks are an integral component of management at PST. The Parent Company has set PST a risk framework in the form of limits, and in particular stop-loss limits, the risk management system of the Company operates within these limits.

1. Risk Report

a. Organization of Risk Management

A two-stage risk management system has been implemented at PST. Whereas operational risk management (i.e. continuous observation, monitoring and reporting of the Company's business development) is the responsibility of risk management, the task of the internal risk committee is not only to manage this but also to assess the opportunities and risks in connection with the introduction of new products or the entry into new markets. This committee consists of senior management and the division heads. In addition to feeling responsible for market and product release, the risk committee also takes decisions regarding the conclusion of significant transactions with already approved products in approved markets.

b. Risk Management Process

This process comprises the identification, evaluation, management and monitoring of risks as well as the related reporting. Basic procedures which are common in the sector (stop-loss limits, open-position limit as well as credit exposure) are used for evaluating risks and also for risk management purposes. The risks are recorded on a daily basis, and are evaluated and reported in accordance with uniform criteria.

The risk-aware actions of the Company are based on the risk policy, which is constantly updated. Senior management is notified of the current risk and opportunity situation by means of risk reports on every trading day; the basic data is derived directly from the trading system. The risk measuring procedures included in the trading system are basic procedures which are constantly being improved. These daily basic data are processed and are reported directly to the risk committee of PGNiG SA by means of weekly and monthly reports. In special cases, senior management or the risk committee is notified immediately, and in turn directly inform the supervisory board.

The risk management system and the related processes are constantly further developed in order to enable the Company to meet the challenges of the business and regulatory requirements which have expanded considerably in recent years. The implementation of formalized and challenging solutions is intended to take account of the increasingly complex nature of business and the further organic growth of the Company.

 

Appendix I 14

c. Definition of risks

Within the framework of the risk management system, the Company continuously and

systematically monitors the opportunities and risks as well as the development of

business. The following risks are listed in accordance with their highest probability of

occurrence. However, this does not provide any information regarding the associated

extent of the risk (either individually or on a cumulative basis). In view of its business

activity in the respective business units, PST monitors and manages the following risks: - Operational Risks - Market Price Risks - Counterparty Default Risks/ Credit Risks - Liquidity Risks

Operational risks

Operational risks arise as a result of organizational, process, technical or personnel

inadequacies or as a result of unfavorable external influences. Risks arising from errored

processes may have a negative impact on existing checks or on decisions which have to

be taken within the Group; these may then involve additional work or higher costs.

The Company efficiently combats these operational risks as a result of the

implementation of suitable processes or the automation of processes, redundancies and

the four-eye principle. An IT emergency concept has been implemented to cope with

potential IT risks.

In subsequent years, management of the operational risks will benefit from the results of

the risk management process which have been implemented (recording of results,

learning process, key-risk indicators, etc.).

Market price risks

Market price risks arise from the fact that the market price differs over a period of time from the contractually agreed price for the respective product. Market price changes are mainly attributable to fluctuations in supply and demand, for instance as a result of temperature changes or supply problems. A consistent risk management system is necessary with regard to the measurement, monitoring and management of the resultant risks. For this purpose, trading positions are recorded in the trading system and evaluated with current market parameters. Volume- as well as loss-related limits are applied at the ledger and strategy level in order to manage market price risks. Checks are performed on all transactions to determine whether they have been carried out on an arm's length basis. In addition, the market price risk is significantly limited by a back-to-back strategy which is applicable for most trades. With these measures, the market price risks for the Company are manageable.

 

Appendix I 15

Counterparty Default Risks / Credit Risks

Counterparty default or credit risks arise as a result of a trading or business partner not being able to deliver or accept products or not being able to pay. The counterparty default risk is established every trading day by pooling existing receivables and potential claims after taking account of cash collateral and bank guarantees which have been received and also after taking account of netting possibilities for each trading partner (= exposure). Credit risk management essentially comprises the following: - Evaluation of credit risk - Monitoring of credit limits - Collateral management

The trades are concluded on the basis of standard framework arrangements. A credit check is performed for potential trading partners, and is used as the basis for taking decisions regarding the creditworthiness of the partner and, where appropriate, the maximum permissible credit limits. The utilization of the limits is disclosed in the risk report which is published every trading day, and this information is made available to senior management. This report also monitors future limits utilization and, where necessary, limits are imposed on trades with affected trading partners. In addition, a regular credit check is also performed with regard to existing trading partners, and limits which have been agreed are reviewed. These measures which have been implemented by the risk management function thus considerably limit the risk.

Liquidity risks The liquidity risk arises from the possibility of the Company not being able to meet its payment obligations at the time at which they become due, or the risk that the Company might not have sufficient refinancing possibilities. Liquidity risk management consists of the following: - Liquidity budgeting and controlling - Management and agreement of receivables and liabilities as part of a standard

process - External financing and liquidity assurance, as described in IV. "Presentation of the

situation"

In order to establish the short-term liquidity requirement, (major) future liquidity flows are identified and used as the basis for determining the financing requirement. This information is regularly reported. In addition, the Company has also installed medium-term liquidity requirement reporting which also establishes the Company's liquidity requirement for new business units to be developed. The analysis and management of liquidity is the responsibility of the Finance business unit of PST. These measures mean that the risks are virtually avoided.

d. Overall statement concerning the risk situation

To the best of its knowledge, senior management is not aware of any individual risks or overall risk which might pose a threat to the going-concern assumption in future or which has a considerable impact on the net assets, financial position and results of operations.

 

Appendix I 16

2. Opportunities Report

The evaluation of opportunities forms part of the risk management system which has been established at PST (organization and processes).

a. Definition of opportunities

Corresponding to the defined risks of the Company, there are the following opportunities for PST (the sequence reflects the extent to which the opportunities can be influenced): Operational opportunities

Particularly in times in which energy utilities have had to report insolvency as a result of an excessively aggressive or non-sustainable business model in conjunction with the development in market prices, the membership of an established European energy group, whose roots can be traced back for more than 150 years, offers a sound basis which will enable the trust of customers to be gained. With regard to the strategic positioning and alignment of the PGNiG Group, the Company will play an increasingly significant role particularly with regard to the trading activities. In addition to the marketing of gas from the Norwegian deposits of the Group on the German and Central-European markets, this is also applicable for activities on the international LNG market. Lean structures and efficient processes in conjunction with the know how and long-

standing sector experience of its employees will enable the Company to establish an

optimum position to face the future competition.

Liquidity opportunities: The financial strength and creditworthiness of the Parent

Company PGNiG SA enables the business to be rapidly expanded, particularly as a

result of providing the necessary collateral, which can be used for external company

financing and also as security for trades.

Market price opportunities: In particular, the fact that the Company has only been

operating on the German and European energy markets for the past three years offers

the opportunity of benefiting from the price developments on the relevant energy markets

by way of appropriate procurement strategies or by way of the development of suitable

products and services - without being dependent on long-term agreements which had

been concluded in the past.

b. Overall comment on the opportunity situation

Following the successful completion of the reorganization and restructuring processes, the Company considers that it is competitive and has established an excellent position as a result of its sound basis.

IV. Events after the End of the Financial Year

After the end of the financial year, there have been no significant reportable events which would have had an impact on the accounts.

 

Appendix I 17

V. Forecast Report

Outlook and forecast for 2016

We are assuming that we will be able to complete the professionalization and optimization of our processes in 2016. The PST Group will then be able to return to calmer waters in order to operate, and will be able to generate its growth by organic and sustainable means.

Last year, we started to make preparations for entering the British energy trading market. We plan to carry out initial trades in the first half of 2016.

Our trading business might also be boosted if our Parent Company PGNiG decides to establish international LNG trading via PST. This would involve breaking into a new area of business.

In the past two to three years, the energy prices on the European wholesale markets have repeatedly moved in directions other than those which had been previously predicted. Thanks to our lean processes, we are in a position to anticipate in a flexible manner different scenarios and price developments on the trading markets. This will make us more independent of uncertain long-term forecasts.

Unlike many other energy companies which are reliant on the trading market, PST has its own gas resources via its affiliated company PGNiG Upstream International A.S., Norway. We also emphasize this aspect in our communications with customers as a competitive advantage in order to distinguish the PST Group positively with regard to its competitors, particularly in the field of end consumer business of the sales subsidiary PSTES.

At present, we are assuming a positive result for the current financial year 2016. We are assuming that PST will continue to achieve further organic growth in all areas of business in the course of the next few years.

The following table shows the financial performance indicators of PST which are planned for 2016:

Munich; March 31, 2016

Management

2016

Revenue TEUR 632,455 – 773,001

Costs (netted with other income)

TEUR 631,743 – 772,131

EBIT TEUR 712 – 870

 

Appendix II

1

(Translation - the German text is authoritative)

Financial Statements

 

2Ap

pend

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5Appendix II.2

PGNiG Supply & Trading GmbH, München

Income Statementfor the Period from January 1 to December 31, 2015

2015 2014€ € € €

1. Sales revenues 839.168.811,29 910.422.616,45net of recognized energy tax 0,00 839.168.811,29 4.003.012,49 906.419.603,96

2. Other operating income 1.628.705,26 530.175,163. Cost of materials

a) Cost of raw materials and supplies 831.273.561,78 873.090.835,44b) Cost of purchased services 835.179,45 832.108.741,23 18.486.068,30 891.576.903,74

4. Personnel expensesa) Wages and salaries 2.477.195,27 4.650.593,22b) Social security and other pension costs 319.065,79 532.348,98

(thereof retirement benefits € 660,49;PY: € 0,00) 2.796.261,06 5.182.942,20

5. Amortization/depreciation of intangible assets and ofproperty, plant and equipment 481.716,07 1.717.487,48

6. Other operating expenses 7.187.755,97 10.119.218,837. Other interest and similar income 249,89 194,638. Interest and similar expenses 1.044.813,82 1.064.681,899. Profit/loss on ordinary activities -2.821.521,71 -2.711.260,39

10. Taxes on income -936.869,59 -831.605,56(thereof income from deferred taxes€ 936.869,59; PY: € 831.655,52)

11. Other taxes -298,00 -854,0012. Net loss for the year -1.884.950,12 -1.880.508,83

 

Appendix II.3 7

(Translation - the German text is authoritative)

PGNiG Supply & Trading GmbH, Munich (formerly PGNiG Sales & Trading GmbH, Munich)

Notes to the Financial Statements for the Financial Year

from January 1 to December 31, 2015

General Information The present annual financial statements were prepared in accordance with Section 242 et seqq., and Section 264 et seqq., HGB [Handelsgesetzbuch – German Commercial Code] and the relevant provisions of the GmbHG [Gesetz betreffend die Gesellschaften mit beschränkter Haftung) - German Limited Liability Companies Act]. The Company is a large corporation pursuant to Section 267 (3, 4) HGB. The income statement was prepared in accordance with the type of expenditure format. The Company spun off its "Sales" operations to the newly established subsidiary PST Europe Sales GmbH, Munich, with retroactive effect as of January 1, 2015. A comparison with the prior year is therefore only possible to a very limited extent. In order to improve overall transparency, the balance sheet additionally includes the figures applicable after completion of the spinning-off process as of January 1, 2015. In connection with this spinning-off process, the name of the Company was changed from PGNiG Sales & Trading GmbH to PGNiG Supply & Trading GmbH. The Company is a fully-owned (100 %) subsidiary of Polskie Gòrnictwo Naftowe i Gazownictwo Spòlka Akcyjna, Warsaw, Poland, a vertically integrated energy company in the field of gas production and gas supply. Consequently, the Company belongs to a group of companies which are interrelated pursuant to Article 3 (2) of Council Regulation (EC) No. 139/2004 of January 20, 2004 governing the control of business combinations, and which are active on the European Union electricity or gas market. Thus, the Company is a vertically integrated company within the meaning of Section 3 No. 38 EnWG [Energiewirtschaftsgesetz - German Energy Act]. The regulations of the German Energy Act apply. Accounting and Valuation Methods The following accounting and valuation methods were used for preparing the financial statements. Acquired intangible assets are stated at acquisition cost and, if depreciable, are reduced by scheduled amortization in accordance with their useful lives using the straight-line-method. Amortization write-downs on asset additions during the financial year are recorded on a pro rata basis. The useful lives of the assets are between one and five years. Property, plant and equipment are stated at acquisition cost and, if depreciable, are depreciated according to schedule in accordance with their useful lives using the straight line method. Depreciation on additions to property, plant and equipment is recorded on a pro rata basis. The useful lives are between three and 23 years. Low-value assets with purchase costs of up to EUR 150.00 are written off in full in the year of acquisition and assets with

 

Appendix II.3 8

(Translation - the German text is authoritative)

purchase costs of between EUR 150.00 and EUR 1,000.00 are written down over five years (pooling). Financial assets are measured at acquisition cost. If there is a permanent reduction in the value of assets, an impairment is recognized to reduce the value of the asset to its lower value in accordance with Section 253 (3) HGB. For recognizing the inventories, the pure procurement costs of the gas put into storage and also the capacity costs associated with storage are taken into consideration. This means that, when taken out of storage, the gas sourcing costs increased by the attributable incidental costs are recognized in the income statement. The costs are measured using the moving average method; it was not necessary for any depreciation to be recognized to reduce the value of the inventories to a lower fair value as of the reference date. Receivables and other assets are recognized at nominal value; any discernible risks were provided for through value adjustments. On the assets side of the balance sheet, deferred charges and prepaid expenses show spending which represents costs for a specific time after the balance sheet date. Cash in hand and bank credit balances are measured at nominal value. Foreign currencies were translated at the rate on the respective transaction date. Assets and liabilities denominated in foreign currencies were translated at the mean spot exchange rate at the balance sheet date. With respect to the determination of deferred taxes arising due to temporary or quasi-permanent differences between the values of assets, liabilities, prepaid expenses and deferred income reported in the commercial balance sheet and the tax balance sheet, or due to tax losses carried forward, the amounts of the resulting tax expense and tax relief are measured at the company-specific tax rates at the time the differences will reverse and are not discounted. Overall, the determination of deferred taxes resulted in a tax relief. The option for capitalization of deferred tax assets pursuant to Section 274 (1) Clause 2 HGB was exercised. Subscribed capital is stated at nominal value. Other provisions provide for all discernible risks and uncertain liabilities. They are recognized at settlement amounts determined in accordance with prudential business judgment. Long-term provisions are discounted at the market rate adequate for the remaining terms in accordance with Section 253 (2) HGB. Contrary to the method used in the prior year, the calculation of the bonus provision also takes account of the employer’s contribution to social insurance (fixed amount). Liabilities are recognized at their respective settlement value. On the liabilities side of the balance sheet, deferred items show income representing revenues for a specific time after the balance sheet date.

 

Appendix II.3 9

(Translation - the German text is authoritative)

Notes to the balance sheet Non-current assets The development of individual items of fixed assets, including amortization, depreciation and write-downs for the financial year, is presented in the schedule of non-current assets. PST Europe Sales GmbH, which was established in 2015, is shown under the financial assets. The previous 100% holding in XOOL GmbH, Munich, was the subject of the spinning-off of "Sales" operations.

Investment amount

Equity Financial year result

PST Europe Sales GmbH, Munich

100% 1,000,000.00 5/82015 – 12/31/2015

487,882.41

XOOL GmbH, Munich 100% (indirectly)

500,000.00 5/1/2013 -4/30/2014

244,564.69

Vorratsvermögen

The gas stored in rented storage facilities is shown under inventories EUR 3,558,082.44 (prior year/ 1/1/2015 EUR 7,876,121.12). As a result of the development in overall prices, it was necessary for an impairment of EUR 902,113.57 to be recognized as of the balance sheet date in order to write down the value of the stored gas to the lower fair market price. Receivables and other assets 12/31/2015 12/31/2014 1/1/2015 EUR EUR EUR

Trade receivables 20,684,240.45 15,318,316.68 11,653,741.12

Thereof due in more than one year

0.00 0.00 0.00

Receivables from affiliated companies

10,916,430.42 51,292,508.13 51,292,508.13

Thereof due in more than one year

0.00 0,00 0.00

Other assets 7,347,154.19 8,519,678.57 5,534,757.53

Thereof due in more than one year

0.00 224,152.08 0.00

38,947,825.06 75,130,503.38 68,481,006.78

In the financial year 2015, the trade receivables only disclosed receivables from trading partners for the delivery period December 2015. On the other hand, the receivables due from end consumers have been spun off to PST Europe Sales GmbH as part of the spinning-off process.

 

Appendix II.3 10

(Translation - the German text is authoritative)

12/31/2015 12/31/2014 1/1/2015 EUR EUR EUR

Polskie Górnictwo Naftowe i Gazownictwo Spólka Akcyjna, Warsaw, Poland

35.794,48 48.519.181,85 48.519.181,85

PST Europe Sales GmbH, Munich 9.634.499,58 0,00 0,00 XOOL GmbH, Munich 1.246.136,36 2.773.326,28 2.773.326,28

10.916.430,42 51.292.508,13 51.292.508,13

The receivables from affiliated companies mainly comprise receivables of EUR 4,487,192.81 due from PST Europe Sales GmbH in connection with the spinning off of "Sales" operations and also trade receivables of EUR 4,134,469.50 (prior year or January 1, 2015 EUR 50,671,660.84). The remainder is attributable to the liability of XOOL GmbH and PST Europe Sales GmbH in relation to the VAT which has to be paid. The other assets include security payments which have been made as well as variation margins paid for gas and electricity futures for delivery periods after December 31, 2015 EUR 2,975,093.08 (prior year or 1/1/2015 EUR 1,078,300.20). Cash in hand and cash at banks The restricted liquid assets which in the prior year were used for backing the guarantee loans provided by a domestic bank (EUR 29,218,422.35) no longer had to be maintained as a result of an overhaul of the collateral concept. Deferred charges and prepaid expenses The main item shown under deferred charges and prepaid expenses are commissions paid to sales partners, which however are only recognized in the income statement at the point at which deliveries commence and over the life of the gas and electricity supply agreements concluded with end consumers. If the end consumers fail to fulfill the delivery agreement, PGNiG Supply & Trading GmbH has a right to obtain a refund from the respective sales partner.

 

Appendix II.3 11

(Translation - the German text is authoritative)

Deferred taxes Deferred tax assets resulted from the following:

12/31/2015 12/31/2014 1/1/2015 EUR EUR EUR

Deferred tax assets on tax losses carried forward

2,074,531.09

1,137,661.50

1,137,661.50

The calculation was based on a tax rate of 32.975 %, as in the previous year. Deferred tax assets were taken into account with respect to losses in the amount of EUR 6,291,223.94. The deferred tax assets on tax losses carried forward were capitalized under the assumption that the Company will earn positive tax results in the future. There is a payout restriction in this amount, as there was no freely disposable equity as of the balance sheet date. Subscribed capital The Company's subscribed capital in the amount of EUR 10,000,000.00 was fully held by the sole shareholder, Polskie Gòrnictwo Naftowe i Gazownictwo Spòlka Akcyjna, Warsaw, Poland. There is a restriction on dividend payments equivalent to the deferred tax assets which have been recognized, because there are no freely disposable equity elements as of the reference date. Other provisions Other provisions related mainly to restructuring, bonus and vacation obligations concerning the personnel area, as well as for a case of compensation. The risk of compensation results from different interpretations respecting a concluded purchase agreement. In addition, provisions were recorded, in particular, for the annual financial statements preparation and annual audit costs, the preparation of tax returns, and outstanding invoices. The provisions for contingent losses shown in the prior year related in full to the spun-off "Sales" operations. Last year, no provisions for contingent losses had to be booked for the trading activities which were retained in the Company.

 

Appendix II.3 12

(Translation - the German text is authoritative)

Liabilities The classification of liabilities, and their terms, is presented in the following schedule of liabilities:

Total Amount

€

Due in up to 1 year

€

Liabilities to banks (prior year) (1/1/2015)

Trade payables (prior year)

(1/1/2015)

17,914,781.60 (19,720,549.38) (19,720,549.38)

20,776,932.37 (70,045,843.46) (68,639,669.16)

17,914,781.60 (19,720,549.38) (19,720,549.38)

20,776,932.37 (70,045,843.46) (68,639,669.16)

Liabilities to affiliated companies

(prior year) (1/1/2015)

9,254,455.95

(12,735,116.97) (12,735,116.97)

9,254,455.95

(12,735,116.97) (12,735,116.97)

Other liabilities (prior year) (1/1/2015)

691,809.80

(14,294,470.44) (4,766,523.97)

691,809.80

(14,294,470.44) (4,766,523.97)

48,637,979.72

(116,795,980.25) (105,861,859.48)

48,637,979.72 (116,795,980.25) (105,861,859.48)

Trade payables related mainly to costs for energy purchases. The liabilities to affiliated companies mainly comprise trade payables of EUR 9,253,583.57 (prior year or January 1, 2015 EUR 5,732,283.13) due to the affiliated company PGNiG Upstream SA, Stavanger, Norway. Apart from the above, there were only liabilities due to the sole shareholder Polskie Górnictwo Naftowe i Gazownictwo Spólka Akcyjna, Warsaw, Poland (EUR 872.38; prior year or January 1, 2015 EUR 7,002,833.84). As of the balance sheet date, only outstanding charges for Parent Company guarantees were disclosed under this item.

 

Appendix II.3 13

(Translation - the German text is authoritative)

The other liabilities mainly obtain variation margins for gas and electricity futures received for delivery periods after December 31, 2015 (a total of EUR 525,939.16; prior year or January 1, 2015 EUR 886,138.73). The overpayments of customers which were deferred and recognized under the other liabilities in the prior year (resulting from the sales deferral process), the outstanding instalments for the acquisition of the shares and loan receivables with regard to XOOL GmbH as well as the liability due to the Hauptzollamt (main customs office) were part of the process of spinning-off the "Sales" operations to PST Europe Sales GmbH. Deferred income

The deferred item disclosed in the prior year related to end consumer business, and was

thus part of the process of spinning-off operations to the subsidiary.

Contingencies Contingencies arising from warranty agreements At the balance sheet date, warranty related contingencies vis à vis the sole shareholder, Polskie Gòrnictwo Naftowe i Gazownictwo Spòlka Akcyjna, Warsaw, Poland, were reported involving a maximum amount of EUR 200.0 million. The warranty contract of December 23, 2011 (with a supplement dated March 30, 2012) was concluded due to the fact that the sole shareholder had signed guarantee agreements with external suppliers of PGNiG Sales & Trading GmbH to hedge the risk of non-payment by the subsidiary. In the event of utilization by external suppliers, the sole shareholder is entitled to reclaim the money from the subsidiary. The shareholder guarantees in the amount of up to EUR 200.0 million relate to individual transactions between the Company and external suppliers. Each guarantee arrangement concluded within the framework of the warranty contract is subject to the suspensive condition that the receivable to be secured is settled by the external suppliers or the term of the respective guarantee expires. At the balance sheet date the Company reported outstanding liabilities vis à vis external suppliers and, consequently, payment guarantees by the parent company, in the amount of EUR 20.8 million, so that utilization at the same amount would be possible at the balance

sheet date. Since the Company has sufficient liquid assets and meets all its payment obligations, utilization of the parent company’s warranty obligation by external suppliers and thus utilization of the Company’s warranty obligation by the parent company is not be expected. The risk is considered as minor. For the event that the former shareholder GETEC Daten- und Abrechnungsmanagement GmbH fails to meet obligations to absorb all losses for the short financial year ending April 30, 2012 (a total amount of EUR 1.7 million), the Company has agreed to pay the difference to its former equity participation XOOL GmbH.

 

Appendix II.3 14

(Translation - the German text is authoritative)

Contingencies from the provision of collateral for third-party liabilities

In connection with the marketing of electricity, there were contingencies as of December 31,

2015 relating to the provision of securities for external liabilities of EUR 28,485,268.97, which

are backed by assigned cash at banks. In view of the knowledge gained at the point at which

these financial statements were prepared, it is not likely that these contingencies will be

utilized, the risk is low.

In addition, the Company has provided an irrevocable guarantee of PLN 10 million for PST Europe Sales GmbH; this is required for its licensing procedure in Poland. In view of the knowledge gained up to the point at which the financial statements were prepared, it is not likely that this guarantee will be utilized, and the risk is thus low. Other financial obligations The following other financial obligations were reported as of December 31, 2015:

2016 2017 2018 2019 2020-2021 Total

€ € € € € €

176,634,387.38 33,724,327.31 11,251,320.50 335,709.60 55,951.60 222,001,696.39

The obligations related mainly to pending gas futures transactions (purchases) with

third parties.

The figures for 2016 include obligations of EUR 1,096,177.06 due to PGNiG Upstream

International SA as well as EUR 5,233,310.88 due to PGNiG SA. as affiliated companies.

 

Appendix II.3 15

(Translation - the German text is authoritative)

Notes to the income statement Sales revenues The process of renewing the sale-support processes and the Company's internal structures, which commenced in 2014, was completed in such a way that the operational segregation of end consumer business and wholesale business was completed for the purposes of company law. For this purpose, PST Europe Sales GmbH was established in the financial year 2015. The entry in the commercial register was made on July 23, 2015. As part of the process of spinning-off the "Sales" operating unit of the Company, the subsidiary acquired all assets and liability items related with these operations. The spin-off at book values was carried out, with economic effect as of January 1, 2015; it was recorded in the commercial register on October 13, 2015. Unlike the situation in prior years, the revenues therefore only disclose the revenues of wholesale activities. In the financial year, these amount to EUR 839 million (prior year EUR 728 million trading revenues as well as EUR 186 million revenues from gas and electricity sales). Despite lower energy prices, trading revenues again increased compared with the prior year. This is due mainly to the "reclassification" of sales revenues as trading revenues due to the spinning-off of end consumer business into an separate company. However, on the basis of absolute revenues, it was unable to maintain the level of the previous year as the part of grid charges in the sales revenues is no longer applicable as a result of the restructuring process at the company. The revenues were generated mainly with the sole shareholder Polskie Górnictwo Naftowe i Gazownictwo Spólka Akcyjna, Warsaw, Poland, and are broken down over the various regions and raw materials as follows: Germany Outside of Germany Total € € € Sales revenues (prior year)

443,858,062.51 (562,005,249.62)

395,310,748.78 (344,414,354.34)

839,168,811.29 (906,419,603.96)

Trading revenues are distributed over the commodities as follows: Gas Electricity Total € € € Sales revenues (prior year)

712,640,871.02 (720,486,483.95)

126,527,940.27 (185,933,120.01)

839,168,811.29 (906,419,603.96)

Cost of materials Cost of material includes the cost of raw materials and supplies as well as the cost of purchased services. Similar to the situation applicable for revenues, most of this is attributable to gas sourcing costs. The decline compared with the prior year is attributable to the fact that grid charges in connection with end consumer business are now no longer

 

Appendix II.3 16

(Translation - the German text is authoritative)

applicable, and is also attributable to a lower procurement volume in conjunction with lower prices. Amortization/Depreciation Unlike the situation in the prior year, it was not necessary for any extraordinary depreciation as a result of a permanent decrease in value in accordance with Section 253 (3) HGB. Only depreciation was recognized to tangible assets and intangible assets. Other operating income and other operating expenses The other operating income mainly comprises fees of EUR 1,486,774.43 (prior year 145,000.00 only from XOOL GmbH) from PST Europe Sales GmbH and XOOL GmbH as well as income attributable to other periods from the reversal of provisions (EUR 13,400.00; prior year EUR 211,032.73). The currency translation income in 2015 amounted to EUR 111,096.04 (prior year EUR 65,151.34). The other operating expenses include currency translation expenses of EUR 55,528.92 (prior year EUR 119,236.46). They also include charges for gas storage facilities, incidental trading costs, third-party services, consultancy fees as well as expenses incurred in relation to the infrastructure of the Company. There were no costs incurred last year from payments into provisions for contingent losses. A considerable amount of the costs of the prior year related to the spun-off "Sales" operations, and were thus no longer incurred in 2015 (mainly sales commissions, cost-to-serve for sales customer business as well as impairment of receivables). The other operating expenses include expenses of EUR 2,825,186.36 incurred in relation to other periods in connection with the spun-off end consumer operations. Other interest and similar income The other interest and similar income of EUR 249.89 (prior year EUR 194.63) does not include any interest due from affiliated companies. Interest and similar expenses Interest and similar expenses mainly comprise interest expenses in relation to loans which have been utilized as well as guarantee commissions due to the Parent Company totalling EUR 706,105.10 (prior year EUR 657,218.43). Of this figure, EUR 25,909.33 (prior year EUR 52,629.73) is attributable to interest expenses. Taxes on income The income from taxes on income of EUR 936,869.59 (prior year: cost of EUR 831,605.56) relates to the capitalization of deferred taxes for loss carry forwards.

 

Appendix II.3 17

(Translation - the German text is authoritative)

Other notes Major business transactions with affiliated companies pursuant to Section 6b (2) EnWG In the course of the financial year, the Company sold 0.319 GWh [Gigawatt hours] to its sole shareholder Polskie Górnictwo Naftowe i Gazownictwo Spólka Akcyjna, Warsaw, Poland, thereby generating revenues of approximately EUR 202 million. With its subsidiary PST Europe Sales GmbH, the Company sold approximately 1.349 GWh (gas and electricity) generating revenues of EUR 37 million, and to XOOL GmbH it sold 373 GWh (gas) generating revenues of EUR 10 million. For PGNiG Upstream International SA, the Company marketed the percentage of the gas produced in the Norwegian gas field Skarv which was attributable to the affiliated company. The procurement costs amounted to EUR 125 million (6.267 GWh). The revolving loan agreement between PST and PGNiG SA, which was originally due to end on December 31, 2015, has been prolonged until December 31, 2018. The loan had not been utilized as of December 31, 2015. In the financial year, interest costs of EUR 25,909.33 were incurred in relation to the Parent Company. In addition, mutual loan agreements for carrying out a cash pooling arrangement were concluded within the PST Group. Activity Report pursuant to Section 6b (3) EnWG In the financial year 2014, the Company carried out other activities within the gas sector as well as other activities within the electricity sector. The Company therefore maintains separate accounts for these activities. Valuation units The Company forms valuation units pursuant to Section 254 HGB for pending transactions in the form of portfolio hedges – classified according to the respective business purpose. The related hedging transactions are used for hedging the price change risks resulting from market price fluctuations. The valuation units are effective due to the congruence of type, quantity and maturity of the underlying- and corresponding hedging transaction(s). The effectiveness is documented within the scope of the existing risk management system by means of a critical-terms match and regression analyses. If negative mtm valuations for a valuation unit arise in an annual analysis, a provision for impending losses is recorded. Due to the creation of valuation units risks arising from individual transactions in the amount of kEUR 60,842 are hedged. The volume of hedged underlying transactions amounted to kEUR 255,820 and related to monthly invoicing periods until the end of the year 2018.

 

Appendix II.3 18

(Translation - the German text is authoritative)

Management The Managing Directors of PGNiG Sales & Trading GmbH in the 2015 financial year were:

Mr. Uwe Bode, Head of Trading PST, Munich (since January 1, 2015) Mr. Uwe Bode is exempted from the restrictions of Section 181 BGB [Bürgerliches Gesetzbuch – German Commercial Code]. . Supervisory Board The Supervisory Board members of PGNiG Sales & Trading GmbH in the 2015 financial year were:

Maciej Wozniak, Warsaw/Poland (member and chairman since December 23, 2015)

Janusz Kowalski, Warsaw/Poland (member since December 23, 2015)

Piotr Szlagowski, Warsaw/Poland

Bartlomiej Korzeniewski Warsaw/Poland (member and chairman January 1, 2015 until December 22, 2015)

Beata Stępniak, Warsaw/Poland (member January 1, 2015 until December 22, 2015)

Lukasz Dziekonski, Warsaw/Poland (member until December 31, 2015)

Remuneration of Active and Former Board Members The protection clause set out in Section 286 (4) HGB has been utilized with regard to the total remuneration of senior management. For their activity in the financial year, the members of the supervisory board received remuneration of EUR 121,259.70 (prior year EUR 0.00). Employees In the financial year from January 1, 2015 through December 31, 2015, the Company employed a staff of 42 on average (prior year: 49). The employees are classified as follows:

salaried employees: 39

executive staff: 3

 

Appendix II.3 19

(Translation - the German text is authoritative)

Group relationships The Company's annual financial statements are included in the consolidated financial statements of Polskie Gòrnictwo Naftowe i Gazownictwo Spòlka Akcyjna, Warsaw, Poland (largest consolidation group). The consolidated financial statements are available at the registered office of the parent company. In 2015, the Company established PST Europe Sales GmbH. It now holds 100% of the shares in the latter company. The shares in XOOL GmbH, which previously had been held directly, was part of the process of spinning-off the "Sales" operations to PST Europe Sales GmbH, and is now fully held by the latter company. A VAT tax group has been established with both companies. In prior years, the Company was not required to prepare consolidated financial statements and a group management report in line with commercial law in accordance with Section 290 (5) HGB, because PST, with regard to XOOL GmbH, made use of the consolidation option in accordance with Section 296 (2) HGB because this subsidiary was only of minor significance for the net assets, financial position and results of operations of the PGNiG Supply & Trading GmbH Group. Now that the process of spinning-off the "Sales" operations has been completed, the Company is now obliged to prepare consolidated financial statements and a group management report in line with commercial law in accordance with Section 290 HGB (smallest consolidation group). Auditor’s fees Regarding the fee of the auditor, we refer in accordance with Section 285 No. 17 HGB to the disclosures in the consolidated financial statements of PST for the period ending December 31, 2015. Appropriation of profits Management proposes that the net loss for 2015 and the loss carry forward should be carried forward to the new account. Munich, March 31, 2016

The Management

 

21Appendix II.3

PGNiG Supply & Trading GmbH (formerly: PGNiG Sales & Trading GmbH), München

Schedule of Non-Current Assets for the period from January 1 through December 31, 2015

Acquisition and manufacturing costs01/01/2015 Additions Disposals Reclassifications 12/31/2015

€ € € € €

I. Intangible assets

1. Acquired concessions, industrial property rights and similar rights and assets and licensesin such rights and assets 3.558.789,21 39.278,00 0,00 -1.599.748,44 1.998.318,77

2. Prepayments made 25.000,00 0,00 0,00 -25.000,00 0,003.583.789,21 39.278,00 0,00 -1.624.748,44 1.998.318,77

II. Property, plant and equipment

1. Other equipment, operating and office equipment 503.835,98 25.586,07 298,69 0,00 529.123,36503.835,98 25.586,07 298,69 0,00 529.123,36

III. Financial assets

1. Shares in affiliated companies 2.453.257,81 1.000.000,00 0,00 -2.453.257,81 1.000.000,002.453.257,81 1.000.000,00 0,00 -2.453.257,81 1.000.000,00

Total non-current assets 6.540.883,00 1.064.864,07 298,69 -4.078.006,25 3.527.442,13

 

22Appendix II.3

Amortization/depreciation Book values01/01/2015 Additions Disposals Reclassifications 12/31/2015 12/31/2015 12/31/2014

€ € € € € € €

2.354.446,77 410.658,00 0,00 -1.403.470,00 1.361.634,77 636.684,00 1.204.342,44

24.999,00 0,00 0,00 -24.999,00 0,00 0,00 1,002.379.445,77 410.658,00 0,00 -1.428.469,00 1.361.634,77 636.684,00 1.204.343,44

257.410,98 71.058,07 298,69 0,00 328.170,36 200.953,00 246.425,00257.410,98 71.058,07 298,69 0,00 328.170,36 200.953,00 246.425,00

0,00 0,00 0,00 0,00 0,00 1.000.000,00 2.453.257,810,00 0,00 0,00 0,00 0,00 1.000.000,00 2.453.257,81

2.636.856,75 481.716,07 298,69 -1.428.469,00 1.689.805,13 1.837.637,00 3.904.026,25

Schedule of Non-Current Assets for the period from January 1 through December 31, 2015

 

1

0.0783549.001 (Translation – the German text is authoritative)

"Auditor's Report

We have audited the annual financial statements, comprising the balance sheet, the income state-

ment and the notes to the financial statements, together with the bookkeeping system, and the

management report of the PGNiG Supply & Trading GmbH (formerly PGNiG Sales & Trading

GmbH), Munich, for the business year from January 1 to December 31, 2015. As required by Arti-

cle 6b (5) EnWG ("Energiewirtschaftsgesetz", "German Energy Act"), the audit also included the

company's observance of obligations for the unbundling of accounting pursuant to Article 6b (3)

EnWG, according to which separate accounts are to be kept for the activities pursuant to Section 6b

(3) EnWG. The maintenance of the books and records and the preparation of the annual financial

statements and management report in accordance with German commercial law as well as the ob-

servance of the obligations pursuant to Article 6b (3) EnWG are the responsibility of the Com-

pany’s Managing Director. Our responsibility is to express an opinion on the annual financial state-

ments, together with the bookkeeping system and the management report and the observance of

the obligations with regard to accounting pursuant to Section 6b (3) EnWG based on our audit.

We conducted our audit of the annual financial statements in accordance with § (Article) 317 HGB

("Handelsgesetzbuch": "German Commercial Code") and German generally accepted standards for

the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer (Institute of

Public Auditors in Germany) (IDW). Those standards require that we plan and perform the audit

such that misstatements materially affecting the presentation of the net assets, financial position

and results of operations in the annual financial statements in accordance with (German) princi-

ples of proper accounting and in the management report are detected with reasonable assurance

and that it is possible to determine with sufficient certainty that the obligations with regard to ac-

counting pursuant to Section 6b (3) EnWG are fulfilled in all their significant aspects. Knowledge

of the business activities and the economic and legal environment of the Company and expecta-

tions as to possible misstatements are taken into account in the determination of audit procedures.

The effectiveness of the accounting-related internal control system and the evidence supporting

the disclosures in the books and records, the annual financial statements and the management re-

port and the observance of the obligations pursuant to Section 6b (3) EnWG are examined primar-

ily on a test basis within the framework of the audit. The audit includes assessing the accounting

principles used and significant estimates made by the Company’s Managing Director, as well as

evaluating the overall presentation of the annual financial statements and management report and

the assessment of whether the disclosures and the classification of the accounts pursuant to Sec-

tion 6b (3) EnWG were made in a proper and comprehensible manner and whether the con-

sistency principle was regarded. We believe that our audit provides a reasonable basis for our opin-

ion.

2

0.0783549.001 (Translation – the German text is authoritative)

Our audit of the annual financial statements, together with the bookkeeping system, and of the

management report has not led to any reservations.

In our opinion based on the findings of our audit, the annual financial statements comply with the

legal requirements and give a true and fair view of the net assets, financial position and results of

operations of the Company in accordance with (German) principles of proper accounting. The

management report is consistent with the annual financial statements and as a whole provides a

suitable view of the Company's position and suitably presents the opportunities and risks of future

development.

The audit of the observance of the obligations with regard to the accounting pursuant to Section 6b

(3) EnWG, according to which separate accounts are to be kept for activities pursuant to Section 6b

(3) EnWG, did not lead to any objections.

Munich, April 5, 2016

PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft

sgd. Kerstin Krauß sgd. Claus Röger Wirtschaftsprüferin Wirtschaftsprüfer (German Public Auditor) (German Public Auditor)"

 

2000

0002

8196

50

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