CLEAN ENERGY green tomorrow We are Committed to Sharing Happiness With People and Society

> > > 04 CEO’s Message 23 Corporate Social Responsibility 06 Vision & History 24 Social Contribution 07 LNG Strategy 26 Ethics Management 08 Corporate Governance 27 Human Resource Management 11 Review of Operations 28 Environment Management 12 City Gas & CNG 30 Financial Review 14 Power Business 16 District Energy Business 18 LNG Business 20 Global Business Since the inception in 1999, SK E&S has evolved into Korea’s leading comprehensive energy service provider engaging in the city gas, power generation, district heating & cooling and LNG businesses.

Today, we have seven city gas companies, two subsidiaries in district heating & cooling business, power generation and LNG trading businesses, and two joint city gas ventures in the world. Through our subsidiaries, we are making endeavors to develop new growth engines in sectors such as power generation, district heating & cooling and LNG while maximizing the value of the city gas business.

Our focuses are also on laying the foundation for emerging as a comprehensive energy service provider in the global market. The entrance into the Chinese city gas market in 2007 was the first step to realize this business goal, and followed by the expansion of reach to other global energy markets such as the US.

SK E&S will be committed to creating new value through clean and environment-friendly energy businesses with the aim of sharing happiness with all people. CEO’s Message

Our progress has been remarkable in diverse business sectors such as city gas, power generation and district heating & cooling until now. Based on these performances, we will establish a foothold to grow into a world-class company by expanding the value chain in the LNG business, which will bring our vision to be the “Global Gas & Power Company” forward.

Our valued customers and shareholders!

SK E&S has solidified its growth foundation as a top-tier Global Gas & Power Company through the implementation of LNG value chain expansion strategies earlier than expected last year as well as the achievement of financial goals.

In the downstream sector, we consolidated fundamental competitiveness of the power and city gas business through the merger of K-Power and the acquisition of exclusive managerial right of KO-ONE Energy Service. Also, shortening the construction period of Oseong LNG Power Plant and Gimcheon District Heating & Cooling projects, and acquiring the business rights of Jangmun Combined Power Generation and Munjeong District Heating & Cooling projects allowed us to secure additional future growth engines.

In the mid & upstream sector, the Company laid the foundation for entering the independent LNG terminal operation and upstream businesses with the launch of the LNG business division within SK E&S. We also established SK LNG Trading, a local subsidiary in Singapore to enhance our competency of the direct LNG import business.

In the perspective of management infrastructure, we successfully unified five core business processes of city gas business, improved the HR and IT systems, and integrated the knowledge management system, which enabled us to concentrate of company-wide capabilities and promote a One-Company environment.

SK E&S will carry out the following core tasks for 2012 to become a global company by laying the growth foundation centered on gas & power businesses.

First, we will focus on securing operational excellence in the city gas and power businesses.

Above all, our top priorities lie in maintaining market dominance and creating Vice Chairman & CEO Chey Jae Won new demands in our flagship city gas business as well as maximizing the operational efficiency of Gwangyang LNG Power Plant. We will also continue to make significant progress by concentrating capabilities of all subsidiaries including Ko-one Energy Service in the city gas business.

Clean Energy Green Tomorrow 4 Second, we will establish advanced business portfolio as a global gas & power company.

It is very important for us to increase LNG demands and secure upstream options to meet growing demands through the expansion of city gas, power and district energy businesses. When each business organization organically cooperates and develops based on the LNG demand and supply master plan, we can leap forward as a true global gas & power company we have dreamed of. Beyond the acceleration of our businesses in the global markets including China and technology-driven business, we will continue to focus on creating synergy and sharing resources with Group affiliates to further expand our reach.

Third, business capabilities will be enhanced.

The required business capabilities should be procured and circulated internally. SK E&S conducts systematic job education and training programs to strengthen core business capabilities. Meanwhile, capabilities for specialized business sectors which are difficult to procure internally will be searched and secured by each business division, and the staff in all business departments will proactively support such efforts.

Fourth, our innovation respecting human and culture will be accelerated based on bottom-up corporate culture.

All employees of SK E&S are key players for our innovation, growth, and cultural development. For greater happiness for all, unnecessary rules should be done away with by using a bottom-up mode through members’ voluntary participation; the work modes, processes, and systems need to be changed as well. In this context, the SKMS guidelines should be actively used as tools for open communication between hierarchies; the ability to put human/culture innovation into practice should also be enhanced.

My dearest customers and shareholders,

One person’s dream may remain just a dream; when all of us dream of the same dream, however, it can come true. SK E&S will push forward to achieve President & CEO Duk Kyu Moon the second to-be model goal of laying the gas & power-centered growth foundation by consolidating all our competencies.

I wish all the best for you and your families in 2012. Thank you for your unwavering interest and support.

5 SK E&S Corporate Vision

SK E&S, a comprehensive energy service provider, is preparing a new leap forward beyond the No.1 player in the domestic city gas industry. We set a goal to emerge as the “Global Gas & Power Company” by 2020 in the global energy market, which is being executed by systematic strategies on the basis of accumulated capabilities and expertise. SK E&S will emerge as a truly global energy player by maximizing its strengths in the gas and electric power sectors such as expanding the value chain in the LNG business, enhancing capability in the power and district heating & cooling business and accelerating overseas business as well as improving the value in the city gas business.

• Expansion of Value Chain in LNG Business

• Expansion of District Heating & Cooling Business • Involvement in the Global Energy Business Leapfrog into Global Gas & Power Company by Expanding Energy Businesses

• Reinforcement of Capability in • Enhancement of the Value of Power Generation City Gas Business

History Since the establishment in 1999, SK E&S has played an important role in the development of the domestic energy industry through its city gas and power businesses. Today, the company is evolving into Korea’s leading comprehensive energy provider that operates district heating & cooling, power generation and LNG businesses.

Jan. 13 Founded SK-Enron Corp., a joint venture between SK Corp. and Enron Corp. (Subsidiaries: SK Gas, Daehan City Gas, Pusan City Gas, Kumi City Gas, Chongju City Gas, and Pohang City Gas) May Oct. 5 Managed the Process Standardization Project Feb. 8 Changed major shareholder from Enron including billing, finance & accounting and Acquired Choongnam to Macquarie, an Australian investment procurement City Gas bank Dec. 14 May. 20 Oct. 28 Nov. 21 Acquired Chonnam City Gas, Kangwon City Gas, Iksan Converted to a holding Changed the company name to SK E&S Merged Iksan City Gas with Iksan City Gas, and Iksan Energy company system Co., Ltd. Energy 1999 2000 2005 2006

Clean Energy Green Tomorrow 6 LNG Strategy

The SK Group is going ahead with the value chain integration in the LNG business after the success of the vertical integration of the petroleum business. The leader in the move is SK E&S growing into a global gas & power player. We will take the lead in integrating all value chains in the LNG sector by promoting LNG-based related businesses and reinforcing global competitiveness. By doing so, we will continue to create synergy effects and consequently leapfrog into a global utility company.

Power Generation Global / City Gas / District Technology- Heating & based Cooling

- Expansion of business domain into LNG-based related sectors - Enhancement of synergy effect among business portfolios

Laying the foundation for expanding LNG value chain through participating in midstream and upstream sectors

Global Gas & Power Company

Feb Jan Mar. 15 Opened SK E&S Beijing Representative Established Gimcheon Agreed upon a contract to established office District Heating & Cooling a joint venture named ‘China Gas-SK May Joint Venture and started Energy Holdings Co., Ltd.’ with China Gas Established a joint venture named construction Holdings ‘Jinhua Zhongran-SK City Gas Feb. 17 Aug. 1 Development Company’ in China Established SK LNG Trading Changed the subsidiary name from Kumi Established DOP Service Co., Ltd. to PTE.,ltd. in Singapore City Gas to ‘Yeongnam Energy Service’ promote Oseong combined cycle power plant project Jan. 01 Aug. 01 Aug. 24 Opened SK E&S Indonesia Merged with K-Power Jun Changed the subsidiary name from Office (Gwangyang LNG power Chongju City Gas to ‘Chungcheong Permission received to conduct the plant) Jan Energy Service’ Oseong combined cycle power plant project Permission received for Oct Aug Yeongnam Energy Service completed district heating & cooling Permission received for Established a joint venture named a solar power plant and started Apr business serving Myunji Jangmun LNG power plant ‘Taizhou Zhongran-SK City Gas commercial operation Opened SK E&S US District in Busan business Development Company’ Permission received for district heating Representative Office Jun Nov & cooling business serving Songpa New Oct. 1 Apr. 15 City (Wirye New City) Changed the subsidiary Disposed of Choongnam Changed the subsidiary name from Iksan Merged Daehan City Gas name from ‘DOP Service’ City Gas shares and acquired City Gas Company to ‘Jeonbuk Energy Sep Engineering with Daehan to ‘Pyeongtaek Energy exclusive management Service’ Permission received for district heating City Gas Service’ rights of Daehan City Gas & cooling business serving Gimcheon Oct May. 15 Oct. 13 Dec Established a joint venture named Dec. 1 Changed major Starting the construction Daehan City Gas changed ‘Wuhan SK E&S-SINO Gas Holdings Co., Merged Pohang City Gas with shareholder from of the Oseong LNG the company name to Ko- Ltd.’ Yeongnam Energy Service Macquarie to SK C&C power plant one Energy Service 2007 2008 2009 2010 2011

7 SK E&S Corporate Governance SK E&S is a holding company with a diverse energy business portfolio. The company plays a key role in the energy business sector of the SK Group and creates synergies in cooperation with the subsidiaries of the group.

Board of Directors

● Chey, Jae-won Vice Chairman & CEO

●● Moon, Duk-kyu President & CEO

●●● Park, Young-duk (Director) Head of Power Business General Division

●●●● Han, Chi-woo (Director) Head of Management Support Division

●●●●● Jang, Yong-Ho (Auditor) Managing Director of Business Support Division at SK Holdings

●●●● ●●● ● ●● ●●●●●

Organization CEO G&G Group

Management Support Business Development Power Business China Business LNG Business Division Division General Division Division Division

Corporate Planning Corporate Finance Energy Business Power Business China Business LNG Business Unit Unit Unit Development Unit Planning Team Planning Team China Business Strategy Planning Finance Team District Energy Power Business LNG Business Team Business Team Development Team Development Team Development Unit China Business Operation Planning Accounting Team New Business O&M Planning Team LNG Business Support Team Team Development Team Development Team Renewable Energy JV (Gimcheon, etc) LNG Procurement IT Planning Team Team Shenzhen Unit Team Corporate Culture Power Business Terminal Development Compliance Unit EPC Unit CSEH Unit Operation Unit & Operations Team · Planning Team SKMS Team Compliance Team Power Plant Power Business SK LNG Trading LTE. Project Team Planning Team · CHP Team LTD. Human Resources Communication Team District Energy Power Operation Team CGH Upstream Project Team Team Legal Team Development Unit Human Resources Engineering Gwangyang Plant Wuhan Unit Upstream Business Development Team Service Team Team · SK-SINO JV LNG Terminal PJT TF Upstream Technical Oseong Plant Business Team R&D Center Management Unit Business LNG Plant Unit Corporate R&D Team Management Team Management Divisional R&D Team Pyeongtaek ES Support Team

Clean Energy Green Tomorrow 8 SK E&S strives to supply clean and convenient energy to customers with eight subsidiaries engaging in the city gas business. For the purpose of carrying out the energy business more systematically and efficiently, we have a flexible organizational structure and corporate culture.

CEO of Subsidiary

Cho, Min-lae Cho, Yong-woo Sohn, Dong-sik Cho, Sung-dae Choi, Dae-Rim Min, Choong-sik Park, Cheol-kew Lee, Seung-ryul CEO of Ko-one CEO of Pusan CEO of Chungcheong CEO of Yeongnam CEO of Yeongnam CEO of Jeonbuk CEO of Chonnam CEO of Kangwon Energy Service City Gas Energy Service Energy Service Energy Service Energy Service City Gas City Gas

Ownership Structure

SK Holdings SK C&C

94.13% 5.37%

78.41% 40% 100% 100% 100% 100% 100% 100% 50% 45.82% 50% 100% Ko-one Energy Pusan City Yeongnam Chungcheong Chonnam City Kangwon City Jeonbuk Pyeongtaek Gimcheon CSEH SK E&S SK LNG Service Gas Energy Service Energy Service Gas Gas Energy Service Energy Service Energy HongKong Trading (as of Dec 2011) ① ② ③ PTE.,Ltd

50% 50% 49% 49% Taizhou JV Jinhua JV Wuhan SK SK E&S SINO E&S-SINO Hongkong ④ ⑤ ⑥ Listed Company

① Pyeongtaek Energy Service : This special purpose company (SPC) was established to build Oseong ③ SK E&S HongKong : SK E&S and Pusan City Gas jointly (50:50) established this special purpose LNG combined cycle power plant in Pyeongtaek, Korea. SK E&S holds 100% ownership. company (SPC) as a means for investing in Chinese energy business. ② CSEH (China Gas-SK Energy Holdings) : This joint venture between SK E&S and China Gas Holdings ④ Taizhou JV: Taizhou Zhongran-SK City Gas Development Company (a privately-run natural gas distributor) was established in 2007. The equity holders are SK E&S (45.82%), ⑤ Jinhua JV: Jinhua Zhongran-SK E&S City Gas Development Company SK Gas (4.18%) and China Gas Holdings (50%). ⑥ Wuhan SK E&S-SINO: Wuhan SK E&S-SINO Gas Holdings Co., Ltd.

9 SK E&S We are Expanding Our Business to the Global Energy Markets SK E&S is making efforts to leapfrog into a Global Gas & Power Company by expanding overseas business on the foundation of accumulated capabilities and experiences in the city gas, power, district heating & cooling, and LNG businesses.

With the business in China first in order, we will solidify our position as a general energy service company by speeding up our advancement into new markets through cooperation with overseas strategic partners.

> > > Review of Operations

City Gas & CNG

Power Business

District Energy Business

LNG Business

Global Business City Gas & CNG

SK E&S boasts the widest city gas supply Market Share in the City Gas Market (as of the end of 2011) network in the nation with about 3 million customers and 22.1% market share. 22.1 29.4 SK E&S Others The company will consolidate its dominant 16.4 6.1 A E position as a leading city gas player by 6.3 10.4 9.3 D B offering differentiated customer services C and improving managerial efficiency as well as continuously developing new customers.

Clean Energy Green Tomorrow Market Share 22.1 % 22.9 21.9

19.4 19.2

5.56 5.06 4.97 4.75

2008 2009 2010 2011

3 SK E&S Sales Volume (billion m ) National Sales

CNG Recharging Stations Creating bigger value thorough differentiated customer services and steady development of new demands. Classification Station Name Opening Hanam Jun. 2002 SK E&S is stably supplying clean and convenient city gas to major areas across the nation Songpa 1 Aug. 2002 through seven subsidiaries. Ko-one Energy Service Songpa 2 Aug. 2008 3 Seocho Nov. 2009 In 2011, total sales volume in the city gas business reached approximately 5.06 billion m Gangdong Nov. 2011 thanks to utmost efforts to create new demands such as encouraging industries to change Yeongsin Apr. 2001 main fuels and expanding gas air-conditioning systems and CNG buses. Our market share 3 Geumjeong Aug. 2007 stood at approximately 22.1% of the national sales of 22.9 billion m , consolidating our top Gijang Dec. 2007 position in the domestic market. Pusan City Gas Saha Mar. 2009 In addition, the company devoted itself to securing business rights to new areas. As a result, Yeonjae Mar. 2009 Chonnam City Gas secured business rights to Boseong-gun and Goheung-gun. Backed by Hoidong Nov. 2009 these efforts, the number of households using city gas from SK E&S increased 7.2% year on Yeongnam Gumi Aug. 2007 Energy Service Mundeok Dec. 2010 year to 3.42 million at the end of 2011. Biha Dec. 2003 Chungcheong On the other hand, total sales from the city gas business in 2011 rose 12% compared to Yongjeong Dec. 2005 Energy Service KRW3.66 trillion in the previous year to KRW4.10 trillion, recording double-digit growth for Mipyeong Sep. 2008 two years in a row. Chuncheon Dec. 2003 Kangwon City Gas Onui Mar. 2009 Jeonbuk Songhak Oct. 2004 Energy Service Sales Volume Growth in 2011 (over the previous year) Total number of stations 19 11.6 % 7.8 %

Industries CNG Bus

13 SK E&S Power Business

The ‘Gas & Power Integrated Business Model’ has been a foundation for SK E&S to leapfrog into a Global Gas & Power Company.

Since the commercial operation of Gwangyang LNG Power Plant in 2006, we have expanded our power generation capabilities by promoting same projects in Oseong and Jangmun.

Clean Energy Green Tomorrow Milestones in Power Business Securing future growth engines through the power business

The Oseong LNG power plant project, which is the first project in our power business 2006. 05 Started commercial operation of Gwangyang LNG power plant (former K-Power Co., Ltd.) with a total volume of KRW711.7 billion, started the construction in October 2010 and plans the commercial operation in January 2013. This project is expected to contribute to 2008. 05 Established DOP Service Co., Ltd., an SPC, to promote Oseong LNG power plant project the improvement of profitability by generation and sale of power and district heating & 2008. 06 Obtained the power business permission for cooling business through utilizing steam. Oseong LNG power plant The merger of K-Power Co., Ltd. in August 2011 allowed us not only to unify the operation 2010. 06 Changed the name from DOP Service to Pyeongtaek Energy Service and concluded an of SK Group’s power business but to lay the foundation for leapfrogging into a Global agreement on project financing with KDB Gas & Power Company by completing the Gas & Power Integrated Model. It also helped 2010. 10 Started the construction of Oseong LNG power us establish efficient LNG value chain by delivering experiences and know-how in direct plant import of LNG from Tangguh of Indonesia and accumulated power plant operation. Our 2010. 12 Jangmun LNG power plant Project was included Gwangyang LNG power plant will play a key role in consolidating and expanding the LNG in the government’s 5th basic plan for long-term electricity supply and demand. value chain in the future. 2011. 06 Established PMP Co., Ltd., an SPC, to promote Jangmun LNG power plant project In addition, we obtained the business permission for the operation of Jangmun LNG power plant in October 2011. It will also have a competitive edge as a power plant located 2011. 07 Obtained the power business permission for Milyang Wind Power by acquiring shares of in the Seoul metropolitan area with high demands for electricity. Gyeongnam New and Renewable Energy Co., Ltd. (50:50 joint investments with Eurus Energy Holdings of Japan) 2011. 08 Merged with K-Power Co., Ltd. 2011. 10 Obtained the power business permission for 1,074MW 833MW 1,600MW Jangmun LNG power plant 2012. 01 Plan to start commercial operation of Haman Generation of Capacity of Generation of Capacity of Generation of Capacity of Solar Power Plant Gwangyang LNG power Oseong LNG power plant Jangmun LNG power plant 2013. 01 Plan to start commercial operation of Oseong plant (Gas Turbine: 183MW*3 (Undecided) LNG Power Plant (Gas Turbine: 170MW*4, Steam Turbine: 284MW*1) Steam Turbine: 197MW*2) 15 SK E&S District Energy Business

Based on accumulated capability in the city gas business and synergy effect between LNG and power businesses, SK E&S is pushing ahead with the district heating and cooling business in the Gimcheon Industrial Complex, Wirye New City, Hanam Misa District and the Seokmun Industrial Complex.

This business will contribute to elevating the energy efficiency across the nation as well as stably supplying easy-to -use and safe energy to customers.

Clean Energy Green Tomorrow Gamil District (Ko-One Energy Service)

Gangdong District Hanam Misa District (Ko-One Energy Service) (Ko-One Energy Service) Munjeong District Wirye New City (Sk E&S) Status of District Heating & Cooling (Ko-One Energy Service) Sosabeol District Business of SK E&S (Pyeongtaek Energy Service) Seokmoon Industrial Service Area Complex (Sk E&S) Heat Supply Gimcheon Industrial Service Provider No. of Service Classification District Name Startup Complex (Gimcheon Energy) Household Wirye New City 56,000 District Heating & Cooling 2013

Iksan Industrial SK E&S Seokmoon 9,800 Industrial Complex 2014 Complex/Baesan Haeundae Myeongji District 18,500 District Heating & Cooling 2016 (Pusan City Gas) Jangshin District Gangdong District 55,000 District Heating & Cooling 2009 (Jeonbuk Energy Service) Busan Myeongji Ko-one Hanam Misa District 36,000 District Heating & Cooling 2013 District (Sk E&S) Energy Service Munjeong District - District Heating & Cooling 2013 Gamil district 12,700 District Heating & Cooling 2015 Pusan City Gas Haeundae 35,600 District Heating & Cooling 1996 Jeonbuk Energy Iksan - Industrial Complex 1992 Sercice Baesan/Jangsin 10,000 District Heating & Cooling 2010 · SK E&S (3 District) Pyeongtaek Sosabeol District 37,000 District Heating & Cooling 2012 · Subsidiaries (9 Districts) Energy Service Gimcheon Energy Gimcheon - Industrial Complex 2013

Supply target in the district heating Building a base for future growth by supplying environment-friendly and and cooling business in 2020 high-efficiency energy

The district heating and cooling business is to produce heat and electricity at a combined 250,000 (households) cycle power plant and supply them to apartments, buildings or factories, which contributes to saving energy, protecting and improving the environment as well as meet the government’s policy to expand the district heating and cooling system.

District Heating & Cooling System Supply Since the launch of this business in the Iksan Industrial Complex by Jeonbuk Energy Plan in Korea (unit: million households) Service in 1992, SK E&S has been at the forefront in the domestic market by securing business rights to supply the district heating and cooling system to twelve areas including 2009 our own three business rights covering about 85,000 households until now. 1.88 To this end, we are pursuing securing additional business rights in consideration of profitability and strategic value around strategic regions that can create synergies with 2010 2.02 existing businesses.

By solidifying the foundation of the district heating & cooling business, one of its future 2011 2.19 growth engines, SK E&S aims to leapfrog into the top player by 2020. In addition, we are planning to become a Global Gas & Power Company in a mid-/long-term by actively developing new markets at home and abroad. 2012 2.42

2013 2.54

※ Source: The 3rd district heating & cooling system supply plan of the Ministry of Knowledge Economy released in December 2009

17 SK E&S LNG Business

The LNG business is a growth engine that can enhance our corporate value, as well as one of the SK Group’s core future businesses. We are focusing on integrating the value chain in the LNG business with the Group to grow into a Global Gas & Power Company.

SK E&S is developing a distinctive business model to complete the value chain in the LNG business. At the same time, we are playing a pivot al role in leading the LNG business of the group by devising and executing strategic measures.

Clean Energy Green Tomorrow LNG Business Model Creating a new future through the completion of value chain in the LNG business Upstream The global LNG market is expected to expand thanks to growing demands for clean energy. •Gas Field With the market insight that the LNG business will be an important part in the future energy sectors, SK E&S has promoted the direct LNG import business and planned to expand the business into domestic wholesale with our own LNG receiving terminal.

•LNG Plant As the first step, the company will start LNG trading business and establish the presence in direct LNG import business. After that, we will focus on developing more demands to boost this business and gradually expanding our reach into gas field development and terminal operation. Our LNG business finally pursues the integration of value chain ranging •Trading from LNG production, gas terminal operation and sales at home and abroad. LNG Value Chain By practicing these strategies step by step, SK E&S will integrate whole value chain in the Integration LNG business so that we may play a leading role as Korea’s largest Gas & Power Company.

•LNG Terminal

Phase_ I Phase_ II Phase_ III •LNG Power Establishing Expanding LNG Business Completing LNG Generation/ Environment for LNG •Developing more demands Value Chain District Business for LNG •Producing gas Heating & •Expanding direct LNG import •Building up the foundation •Operating terminals Cooling/City for directly importing LNG •Securing gas fields and •Starting sales at home Downstream terminals Gas •Starting LNG trading and abroad business

19 SK E&S Global Business

SK E&S has established a foothold to boost businesses in Chinese market by joining hands with China Gas Holdings, one of three major city gas companies in China.

In addition, the company is endeavoring to develop new business opportunities on the foundation of its technological prowess and financial power in the global market.

Clean Energy Green Tomorrow SK E&S US Representative Office SK E&S Beijing Representative Office Wuhan SK E&S-SINO Gas Holdings Taizhou Zhongran-SK City Gas Development Company China Gas SK Energy Holdings Jinhua Zhogran-SK E&S City Gas Development Company

Expected Natural Gas Consumption in China China in 2015 Our businesses in China started in 2007 with the establishment of China Gas-SK Energy Holdings by joining hands with China Gas Holdings, one of three major city gas companies 3 2,600 billion m in China. After then, through China Gas-SK Energy Holdings, we set up two more joint ventures engaging in city gas business in Zhejiang.

China Gas Holdings is a leading private city gas company in China and listed on Hong Expected City Gas Consumption in Kong Stock Exchange, with which SK E&S is cooperating in a wide range of businesses China in 2015 such as CHP and LNG as well as city gas through share acquisition and BOD membership.

We have also established Wuhan SK E&S-SINO Gas Holdings, a joint venture in Wuhan, 3 830 billion m Hubei to engage in city gas business there. Since 2010, our businesses in China have been spurred with the relocation of local headquarters into Beijing.

U.S.

SK E&S is involved in technology-centered businesses in order to generate financial and strategic accomplishments based on its technological competitiveness. Our US Representative office established in 2009 contributes to creating new business opportunities. Specifically, we are going after core technologies in the DG (Distributed Generation) sector, a new energy paradigm for the future. In addition, the competencies of SK Group affiliates are being combined to establish joint projects for future growth.

21 SK E&S We are Committed to Sharing Happiness With People and Society To realize our mission of the happiness management, we are always committed to creating new values through our businesses and sharing the results with all stakeholders.

In addition, the company has great sense of pride in developing new growth opportunities and taking the lead in providing clean and better environment to next generations through green businesses.

> > >

Corporate Social Responsibility

Social Contribution

Ethics Management

Human Resource Management

Environment Management Social Contribution

SK E&S established three principles to further fulfill the mission of sharing happiness: happy participation, happy win-win and happy change. SK E&S is involved in various volunteering activities under these principles.

All employees are participating in volunteering service and are involved in regular volunteering activities for at least 16 hours in a given year. They also complete social contribution education courses. Furthermore, we also collaborate closely with our subsidiaries in various corporate social responsibility activities to spread happiness across our communities.

Clean Energy Green Tomorrow 24 SK E&S contributes the sustainable development and happiness of society through environment-friendly management activities

Social Welfare SK E&S is carrying out various regular volunteering activities such as volunteering activities for communities with the CEO, purchasing and donating gift certificates, assisting the disabled with their meals, and serving lunches to needy teenagers and the elderly. Furthermore, we are closely cooperating with SK Group and subsidiaries to channel our efforts where needed in events such as “Happiness Sharing Bazaar”, “Emergency Rescue Kit Production”, “Making Kimchi for the Needed” and “Providing Briquet.” In addition, all of SK E&S subsidiaries are actively involved in providing heating to the underprivileged in the society including providing city gas equipment, electricity bill support and city gas maintenance inspection.

Environment Protection SK E&S and its city gas subsidiaries organize regular environment preservation activities including mountain, river and beach cleaning efforts and taking good care of gardens alongside major roads in various regions. In addition, to reduce CO2 emissions, we put our utmost efforts into using recycled printer toners, approving electronic documents and reusal of old papers.

Other Activities City gas subsidiaries of SK E&S are also devoted to involving in tailored volunteer services for local communities. They launched a campaign to protect school children from violence and kept them safe from traffic accidents. They dispatched safety management vehicles to patrol high-alert areas around local primary schools and managed traffic before and after school, thereby raising awareness for child safety. Furthermore, employees from subsidiaries are making proactive efforts to improve happiness of all stakeholders through various activities such as donating blood, raising money for charity and scholarship funds and supporting local cultural events.

Volunteer Service Corps All employees at SK E&S belong to volunteer service groups. They spent 16 hours on regular volunteer service activities on average in 2010.

25 SK E&S Ethics Management

SK E&S is geared toward becoming a transparent and honest corporate citizen by complying with ethical regulations thoroughly for the development of the company and interests of shareholders and customers. It also conforms to the management philosophy of SKMS which intends to contribute to maximizing the happiness of society. We will be committed to fulfilling our responsibility by accepting ethical awareness as our principles of our decision making and activities.

Building a transparent and honest company

Ethics Management We are always committed to becoming transparent and truthful company for the furtherance and happiness of customers, employees, shareholders and business partners. As part of those efforts, E&S has established Codes of Ethic and practical guidelines based on SKMS (SK Management System), which are in the process of being implemented through an oath and education programs every year. Other ethical activities include regular company- wide spontaneous checks on management system and individuals to minimize ethical risks and operation of on-/off-line channels for consultation and information.

Win-Win Growth with Business Partners SK E&S is committed to building win-win partnerships for stability and growth based on mutual trust. Operational strategies are formulated for long- term symbiotic relationships. In September 2008, a signing ceremony was held for the “Pact on Cooperation and Fair Trade”, a public expression of our commitment to work closely with our partners for mutual benefit of all parties. This promise is being kept through ongoing work process improvements and sharing of technology, finance and training assets.

Fair Trade SK E&S is serious about faithfully following a given nation’s legal and ethical regulations and does not participate in unfair collision activities that go against the market or unfair trade practices. Instead, we engage in economic activities in a fair and independent manner. SK E&S employees adhere to all stipulations of the Fair Trade Act. We have also established a separate unit in charge of establishing appropriate processes concerning fair trade act compliance. Starting from July 2008, we have instituted a compliance program to prevent violations to the Fair Trade Act during the conduct of business activities. Compliance Program implementation plans have been established and results are reported to the Board of Directors at least twice a year.

Clean Energy Green Tomorrow 26 Human Resource Management

Talented people are key assets at SK E&S. We actively help employees accumulate experiences, offer them opportunities to develop their abilities and provide systematic education and training programs, which contributes to nurturing leaders and specialists with global competitiveness.

Create a corporate culture valuing human resource

Corporate Culture SK E&S wants to create a corporate culture which encourages employees to work while believing that the future of the company is none other than the future of theirs. We are ceaselessly striving to create an environment where all employees can share such a vision.

Nurturing Leaders with Global Competitiveness To nurture leaders with global competitiveness, SK E&S provide talented people with opportunities to participate in educational courses such as the SK-UW GM course (three months), the SK-Thunderbird course and the SK- Beijing University course (three months). Other programs include a two-month intensive Chinese course for beginner and intermediate level learners and a high level Chinese course for advanced learners. Moreover, we offer in- company foreign English and Chinese language lectures throughout the year.

* GLP Course: GLP Course was prepared to nurture Junior HIPO team leaders with global talents, in which employees who have served as team leaders for three years or under are able to take part. There are three choices: SK-UW Course and SK Thunderbird Course in the US, and SK-Beijing University Course in China. All of them are 12-week courses and include studies such as global management, regional research activities and benchmarks on global leading companies. Participants are evaluated by reporting on results.

Nurturing Specialists SK E&S is implementing systematic in-company educational programs to help employees become specialists in sectors such as strategy, finance, accounting and HR.

27 SK E&S Environment Management

Environmental management is a must-do task for the happiness of the next generations to come.

SK E&S is implementing detailed plans in accordance with goals of each sector under key environmental indicators of the Group such as Green Culture, Green Process and Green Product.

Pursuing a green energy company

Environment Management In compliance with the green management vision of the SK Group, SK E&S is committed to implementing a variety of environment-friendly activities to contribute to the sustainable development and happiness of society. Our environmental management is being carried out in accordance with three core indicators – Green Culture, Green Process and Green Product, which performances are being monitored steadily.

Green Culture We pursue a low-carbon green growth. To realize this, we are conducting ‘daily environmental action’ to maintain proper temperatures in the building and save electricity, ‘environmental social contribution’ to involve in environmental protection activities for local communities and take part or sponsor energy- related events, and ‘in-company environmental education programs.’

Green Process SK E&S is pushing for making its workplaces environment-friendly by reducing greenhouse gases and preventing pollution. To this end, the company is planning to build companywide greenhouse gas inventories, using more green cars for its city gas business while striving to minimize greenhouse gas emissions and introducing high-efficiency energy saving equipment and green business models.

Green Product We are involved in environmental growth by creating green products and services. The spread of clean energies such as CH4 and a campaign to send bills through e-mail or multimedia messaging system has been implementing.

Clean Energy Green Tomorrow 28 SK E&S focuses on developing new technologies for gas and new and renewable energy to seize business opportunities to take the lead in the green business era.

Developing future green energy businesses

New and Renewable Energy Business In May 2008, SK E&S established a solar power plant with a capacity of 200kW in Gumi, North Gyeongsang Province. The company is making endeavors to develop new and renewable energy business such as fuel cells to cope with RPS*. Moreover, we push forward with a wide array of businesses such as biogas, the SNG* business and the ESCO* business.

* RPS: Renewable Portfolio Standard. A law requiring energy providers to substitute a certain percentage of their total energy supply with new and renewable energy * SNG: Synthetic Natural Gas. Synthetic natural gas from petroleum and coal * ESCO: Energy Service Company. A company that provides comprehensive energy solutions and recovers the investments through the savings in energy costs

Carbon Credit Business SK E&S is involved in the business of acquiring UN’s CER (Certified Emission Reduction) by converting Bunker-C oil to clean city gas for corporate clients. The reduction in green house gas emissions as a result of our effort is equivalent to planting 11million pine trees.

29 SK E&S > > > Financial Review

Financial Highlights

Consolidated Statements of Financial Position

Consolidated Statements of Comprehensive Income

Consolidated Statements of Changes in Equity

Consolidated Statements of Cash Flows Financial Highlights

Summarized Consolidated Income Statements (Unit: KRW in billions)

2011 2010 Operating revenue 4,492.1 3,664.4 Operating income 316.9 136.4 Net income before income tax 305.5 117.8 Net income from continuing operations 175.9 99.6 Net income from discontinuing operations 48.8 19.2

Summarized Consolidated Financial Position (Unit: KRW in billions)

2011 2010 Total assets 4,403.6 3,345.6 Total liabilities 2,607.7 2,104.2 Total equity 1,796.0 1,241.3

Financial Ratio (Unit: %)

2011 2010 Current ratio 119.03 115.89 Debt-to-equity 145.20 169.51 Return on equity 9.79 8.02

Operating revenue (KRW in billions) 2011 4492.1 2010 3664.4

Net income (KRW in billions) 2011 224.7 2010 118.8

Total assets (KRW in billions) 2011 4403.6 2010 3345.6

31 SK E&S SK E&S Financial Review

Consolidated Statements of Financial Position as of December 31, 2011 and 2010 and January 1, 2010

sK E&s Co., ltd. and its subsidiaries (Krw in millions) 2011 2010 2009 assets Ⅰ. non-current assets 2,637,998 1,967,187 1,672,259 tangible assets 2,167,801 1,568,982 1,333,849 investment property 96,854 96,934 97,015 intangible assets 84,880 127,360 123,787 investments in subsidiaries and joint ventures 201,136 134,609 73,649 Deferred tax assets 5,786 8,473 14,484 available-for-sale financial assets 63,576 14,384 12,997 held-to-maturity financial assets 14 88 3,748 Other financial assets 14,995 11,561 9,993 Other assets 2,956 4,797 2,737 Ⅱ. Current assets 1,765,629 1,378,365 1,103,742 inventories 21,939 3,000 3,009 trade receivables 800,853 760,682 748,971 available-for-sale financial assets - - 13 held-to-maturity financial assets 4 38 4,913 Other financial assets 18,093 6,571 5,851 Other assets 27,475 38,834 35,001 short-term financial instruments 82,250 162,419 84,007 Cash and cash equivalent 815,015 406,821 221,977 Total assets 4,403,627 3,345,552 2,776,001 Liabilities Ⅰ. non-current liabilities 1,124,361 914,826 530,409 Borrowings 979,473 795,006 457,248 Other financial liabilities 4,531 4,574 4,287 Deferred tax liabilities 53,400 51,867 48,499 retirement benefit obligations 23,218 18,862 18,449 advances received 62,271 42,182 - Other liabilities 1,468 2,334 1,926 Ⅱ. Current liabilities 1,483,313 1,189,387 1,068,464 trade payables 950,050 957,720 903,220 Other financial liabilities 110,347 90,031 62,024 Other liabilities 31,793 33,334 16,901 income tax liabilities 77,036 16,076 16,450 Borrowings 314,087 92,226 69,869 Total liabilities 569,491 569,491 346,949 Equity Ⅰ. Controlling interest 1,447,680 760,910 701,273 share capital 221,059 50,000 50,000 Capital surplus 420,107 420,107 420,107 retained earnings 414,084 286,730 236,153 Other equity items 392,429 4,073 4,988 Ⅱ. non-controlling interest 348,274 480,430 475,855 Total equity 1,795,954 1,241,340 1,177,128 Total equity and liabilities 4,403,627 3,345,552 2,776,001

Clean Energy Green Tomorrow 32 SK E&S Financial Review

Consolidated Statements of Comprehensive Income for the years ended December 31, 2011 and 2010

sK E&s Co., ltd. and its subsidiaries (Krw in millions) 2011 2010 Ⅰ. Sales revenue 4,492,093 3,664,420 Ⅱ. Cost of sales 3,854,075 3,241,805 Ⅲ. gross profit 638,018 422,615 sales and administrative expenses 329,646 290,864 Other operating income 21,228 18,609 Other operating expenses 12,746 13,925 Ⅳ. Operating profit 316,855 136,436 gain (loss) on equity method investments 6,447 (1,980) finance income 23,505 15,186 finance costs 41,275 31,885 Ⅴ. net income before income tax 305,531 117,757 income tax expenses 80,833 37,317 Ⅵ. net income from continuing operations 224,698 80,440 Discontinuing operations Ⅶ. net income (loss) from discontinuing operations (48,848) 19,171 Ⅷ. net income for the year 175,850 99,611 Ⅸ. Profit attributable to: Controlling interest Operating profit from continuing operations 192,233 43,159 Operating profit from discontinuing operations (48,848) 19,171 net income of controlling interest 143,385 62,331 non-controlling interest Operating from continuing operations 32,465 37,281 net income of non-controlling interest 32,465 37,281 Ⅹ. Earnings per share of controlling interest Earnings per share from contiuing operations (Krw) 8,781 5,716 Earnings per share from discontiuing operations (Krw) (2,231) 2,539

33 SK E&S SK E&S Financial Review

Consolidated Statements of Changes in Equity for the years ended December 31, 2011 and 2010

sK E&s Co., ltd. and its subsidiaries (Krw in millions) Controlling interest non- Share Share retained Other controlling Total equity Total capital premium earnings reserves interest Balance at January 1, 2010 50,000 420,107 236,153 (4,988) 701,273 475,855 1,177,128 Comprehensive income: net income for the year - - 62,331 - 62,331 37,281 99,611 Defined benefit plan actuarial loss - - (829) - (829) (470) (1,299) net change in fair value of available-for-sale financial assets - - - (174) (174) (300) (474) Change in equity of equity method investee - - - 1,802 1,802 783 2,585 Overseas business translation income, net - - - 9 9 4 12 transactions with owners Dividends - - (11,325) - (11,325) (11,946) (23,271) Discounts on stock issuance - - - (272) (272) (3) (274) Effect of equity changes of subsidiaries - - - 7,696 7,696 (20,273) (12,577) Effect of equity disposal of subsidiaries - - - - - (101) (101) Effect of dividends of treasury shares - - 400 - 400 (400) - Balance at December 31, 2010 50,000 420,107 286,730 4,073 760,910 480,430 1,241,340 Balance at January 1, 2011 50,000 420,107 286,730 4,073 760,910 480,430 1,241,340 Comprehensive income: net income for the year - - 143,385 - 143,385 32,465 175,850 Defined benefit plan actuarial loss - - (5,105) - (5,105) (1,186) (6,291) net change in fair value of available-for-sale - - 654 654 (85) 569 financial assets Change in equity of equity method investee - - 1,092 1,092 (78) 1,014 Overseas business translation income, net - - (80) (80) (48) (128) transactions with owners - Merger 171,059 - 387,878 558,937 - 558,937 Dividends - - (11,325) - (11,325) (12,679) (24,004) Discounts on stock issuance - - (142) (142) - (142) Effect of equity changes of subsidiaries - - (1,046) (1,046) (150,144) (151,190) Effect of dividends of treasury shares - - 400 - 400 (400) - Balance at December 31, 2011 221,059 420,107 414,084 392,429 1,447,680 348,274 1,795,954

Clean Energy Green Tomorrow 34 SK E&S Financial Review

Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010

sK E&s Co., ltd. and its subsidiaries (Krw in millions) 2011 2010 Ⅰ. Cash flows from operating activities: 386,109 304,619 1. Cash generated from (used in) operating activities 482,895 349,963 (1) net income 175,850 99,611 (2) adjustments of income and expenses 278,372 155,243 (3) Changes in assets and liabilities 28,673 95,108 2. interest received 20,009 14,031 3. interest paid (34,262) (29,290) 4. Dividends received 1,767 349 5. income taxes paid (84,301) (30,434) Ⅱ. Cash flows from investing activities: (122,549) (441,898) 1. Cash inflow from investing activities 568,038 196,569 Disposal of tangible assets 1,909 6,985 Disposal of intangible assets 2,498 3,099 Disposal of available-for-sale financial assets 5,743 9,098 Disposal of held-to-maturity financial assets 20 4 Decrease in other financial assets 3,259 12,324 Disposal of short-term financial assets 218,814 131,569 Disposal of assets scheduled to be sold 2,975 2,970 Disposal of investments in associates and joint ventures - 9,591 increase in cash excluded from the consolidation - 8,913 increase in cash from the merger 310,070 - Others 22,749 12,016 2. Cash outflow from investing activities (690,587) (638,467) acquisition of tangible assets 448,614 329,344 acquisition of intangible assets 4,418 3,989 acquisition of available-for-sale financial assets 22,473 10,240 acquisition of investments in associates and joint ventures 55,770 69,448 increase in other financial assets 3,319 5,995 acquisition of short-term financial instruments 137,626 219,452 Decrease in cash excluded from the consolidation 18,366 - Ⅲ. Cash flows from financing activities: 145,670 322,114 1. Cash inflow from financing activities 283,901 536,047 increase in borrowings 283,181 535,480 Others 720 567 2. Cash outflow from financing activities (138,230) (213,933) repayments of borrowings 80,769 176,168 Dividends paid 24,004 23,271 acquisition of non-controlling interest 33,190 11,836 Others 267 2,659 Ⅳ. Changes in cash and cash equivalent from translation of (1,036) 9 foreign currency Ⅴ. net increase in cash and cash equivalent 408,193 184,845 Ⅵ. Cash and cash equivalents at beginning of the year 406,821 221,977 Ⅶ. Cash and cash equivalents at end of the year 815,015 406,821

35 SK E&S > > >

Domestic Network Kangwon City Gas

SK E&S SK E&S Ko-one Energy Service SK Bldg. 99, Seorin-dong, Jongno- gu, Seoul (110-728) Tel. 82-2-2121-3114 Pyeongtaek Energy Service Fax. 82-2-2121-3229 Chungcheong Energy Service

Ko-one Energy Service Jeonbuk Energy Service 27-1 Daechi-dong, Gangnam-gu, [City Gas BU] Seoul (135-280) 837 Palbong-dong, Iksan, Jeollabuk-do Tel. 82-2-3410-8000 (570-998) Yeongnam Energy Service[Gumi] Fax. 82-2-3410-8080 Tel. 82-63-830-8500 Gimcheon Energy Fax. 82-63-461-8549 Yeongnam Energy Service[Pohang] Pusan City Gas [District Heating & Cooling BU] Jeonbuk Energy Service 545 Namcheon-dong, Suyeong-gu, 803-24 Sinheung-dong, Iksan, Busan (613-010) Jeollabuk-do (570-978) Tel. 82-51-607-1234 Tel. 82-63-830-2233 Fax. 82-51-623-9870 Fax. 82-63-830-2239 Pusan City Gas

Yeongnam Energy Service Kangwon City Gas Chonnam City Gas Gwangyang LNG Power Plant [Gumi] 311-8 Hupyeong 1-dong, Chuncheon, 303 Gongdan 2-dong, Gumi, Gangwon-do (200-161) Gyeongsangbuk-do (730-030) Tel. 82-33-258-8800 Tel. 82-54-460-6000 Fax. 82-33-258-8899 Fax. 82-54-461-0600 [Pohang] Pyeongtaek Energy Service 586 Changpo-dong, Buk-gu, Pohang 255-5 Anhwa-ri, Oseong-myeon, Gyeongsangbuk-do (791-846) Pyeongtaek, Gyeonggi-do (451-873) Tel. 82-54-280-5114 Tel. 82-2-2121-3066 Fax. 82-54-280-5005

Chungcheong Energy Service Gimcheon Energy 1016 Eungmeyong-dong, Gimcheon 419-1 Songjeol-dong, Heungdeok-gu, Gyeongsangbuk-do (740-180) Cheongju, Chungcheongbuk-do (361-540) Tel. 82-43-261-4114 Gwangyang LNG power plant Fax. 82-43-266-8958 877 Geumho-dong, Gwangyang, Jeollanam-do (545-826) Chonnam City Gas Tel. 82-61-797-0700 Fax. 82-61-797-0776 1603-9 Jorye-dong, Suncheon, Jeollanam-do (540-320) Tel. 82-61-720-9000 Fax. 82-61-720-9001 > > > Overseas Network

U.S.A. / New Jersey China / Wuhan China / Beijing China / Shenzhen SK E&S Co., Ltd. Wuhan SK E&S- SINO gas SK E&S Co., Ltd. SK E&S US Representative Office holdings Co., Ltd. Beijing Representative Office HK China gas- SK energy 400 Kelby Street 17F, Fort Lee, 9F No.227, Qingnianlu District 23 Floor, SK Tower, No. 6 jia holdings Co., Ltd. NJ 07024, USA 430032, Hankou, Wuhan, China Jianguomenwai Avenue Shenzhen Office TEL 1-201-613-8182 TEL 86-27-8362-0232 Beijing 100022, P.R. China 6F, B, United Plaza, No.5022, FAX 86-27-8362-0203 Binhe Road, Futian District 518033, Shenzhen, China Singapore TEL 86-755-8290-1120 FAX 86-755-8290-1361 SK LNG Trading PTE., LTD. 50 Raffles Place #27-01 & 06 Singapore Land Tower Singapore 048623 TEL 65-6220-0758 FAX 65-6220-0217

U.S.A. / New Jersey China / Beijing

China / Wuhan China / Shenzhen

Singapore 99, Seorin-dong, Jongno-gu, Seoul 110-728, Korea Tel +82-2-2121-3114 Fax +82-2-2121-3229 www.skens.com Copyright © 2012 by SK E&S Produced by IR-Plus

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