PGNiG GROUP DIRECTORS’ REPORT ON THE OPERATIONS OF PGNIG S.A. AND THE PGNIG GROUP IN 2019 Page 1 of 108 PGNiG GROUP DIRECTORS’ REPORT ON THE OPERATIONS OF PGNIG S.A. AND THE PGNIG GROUP IN 2019 Page 2 of 108 PGNiG GROUP DIRECTORS’ REPORT ON THE OPERATIONS OF PGNIG S.A. AND THE PGNIG GROUP IN 2019 Financial highlights of the PGNiG Group Table 1 Financial highlights of the PGNiG Group for 2018–2019 PLNm EURm 2019 2018 2019 2018 Change (%) Change yoy Revenue 42 023 41 234 9 769 9 664 2% 789 Total operating expenses (39 575) (36 839) (9 200) (8 634) 7% (2 736) Operating profit before interest, taxes, depreciation 5 504 7 115 1 279 1 667 (23%) (1 611) and amortisation (EBITDA) Depreciation and amortisation expense (3 056) (2 720) (710) (637) 12% (336) Operating profit 2 448 4 395 569 1 030 (44%) (1 947) Profit before tax 2 159 4 502 502 1 055 (52%) (2 343) Net profit 1 371 3 209 319 752 (57%) (1 838) Net cash from operating activities 4 938 5 814 1 148 1 363 (15%) (876) Net cash from investing activities (6 152) (4 704) (1 430) (1 102) 31% (1 448) Net cash from financing activities 327 237 76 56 38% 90 Net increase/(decrease) in cash and cash equivalents (887) 1 347 (206) 316 (166%) (2 234) Dec 31 2019 Dec 31 2018 Dec 31 2019 Dec 31 2018 Change (%) Change yoy Total assets 59 185 53 271 13 898 12 389 11% 5 914 Non-current assets 43 939 38 898 10 318 9 046 13% 5 041 Current assets, including 15 246 14 373 3 580 3 343 6% 873 Inventories 4 042 3 364 949 782 20% 678 Total equity and liabilities 59 185 53 271 13 898 12 389 11% 5 914 Total equity 38 107 36 632 8 948 8 519 4% 1 475 Total non-current liabilities 10 378 7 255 2 437 1 687 43% 3 123 Total current liabilities 10 700 9 384 2 513 2 183 14% 1 316 Total liabilities 21 078 16 639 4 950 3 870 27% 4 439 Financial highlights of PGNiG Table 2 Financial highlights of PGNiG for 2018–2019 PLNm EURm 2019 2018 2019 2018 Change (%) Change yoy Revenue 22 615 22 344 5 257 5 237 1% 271 Total operating expenses, including (20 626) (18 667) (4 795) (4 375) 10% (1 959) Operating profit before interest, taxes, depreciation 1 241 2 637 288 618 (53%) (1 396) and amortisation (EBITDA) Depreciation and amortisation expense (856) (798) (199) (187) 7% (58) Operating profit 388 1 839 90 431 (79%) (1 451) Profit before tax 1 989 3 677 462 862 (46%) (1 688) Net profit 1 748 3 289 406 771 (47%) (1 541) Net cash from operating activities 1 989 2 658 462 623 (25%) (669) Net cash from investing activities (2 256) 644 (524) 151 (450%) (2 900) Net cash from financing activities (52) (138) (12) (32) (62%) 86 Net increase/(decrease) in cash and cash equivalents (319) 3 164 (74) 742 (110%) (3 483) Dec 31 2019 Dec 31 2018 Dec 31 2019 Dec 31 2018 Change (%) Change yoy Total assets 41 044 36 993 9 638 8 603 11% 4 051 Non-current assets 28 885 25 742 6 783 5 987 12% 3 143 Current assets, including 12 159 11 251 2 855 2 617 8% 908 Inventories 3 230 2 691 758 626 20% 539 Total equity and liabilities 41 044 36 993 9 638 8 603 11% 4 051 Total equity 30 618 28 833 7 190 6 705 6% 1 785 Total non-current liabilities 3 315 2 551 778 593 30% 764 Total current liabilities 7 111 5 609 1 670 1 304 27% 1 502 Total liabilities 10 426 8 160 2 448 1 898 28% 2 266 EUR/PLN mid exchange rates quoted by the National Bank of Poland: average exchange rate in 2019: 4.3018; 2018: 4.2669. exchange rate at period end: 2019: 4.2585; 2018: 4.3000. Page 3 of 108 PGNiG GROUP DIRECTORS’ REPORT ON THE OPERATIONS OF PGNIG S.A. AND THE PGNIG GROUP IN 2019 Page 4 of 108 PGNiG GROUP DIRECTORS’ REPORT ON THE OPERATIONS OF PGNIG S.A. AND THE PGNIG GROUP IN 2019 Table of contents 1. Business model and structure of the PGNiG Group ...................................................................................................................... 7 1.1 PGNiG Group’s business and business model .......................................................................................................................... 7 1.2 Structure of the PGNiG Group ................................................................................................................................................... 8 1.3 Shareholding structure and PGNiG on the WSE ....................................................................................................................... 8 1.3.1 Shareholding structure ........................................................................................................................................................ 8 1.3.2 Performance of the PGNiG stock ........................................................................................................................................ 9 1.3.3 Stock exchange indicators................................................................................................................................................. 10 1.3.4 Investor Relations .............................................................................................................................................................. 10 1.3.5 Dividend policy .................................................................................................................................................................. 11 2. Strategy of the PGNiG Group ...................................................................................................................................................... 12 2.1 Mission and vision.................................................................................................................................................................... 12 2.2 Key challenges ........................................................................................................................................................................ 12 2.3 PGNiG Group Strategy for 2017−2022 with an Outlook until 2026 .......................................................................................... 13 2.3.1 Objectives and ambitions for 2017−2022 Implementation of the Strategy in 2017–2019 .................................................. 13 2.3.2 Investment projects in 2017−2022..................................................................................................................................... 17 2.3.3 Capital expenditure in 2020 ............................................................................................................................................... 18 3. Business environment ................................................................................................................................................................. 20 3.1 Market overview ....................................................................................................................................................................... 20 3.1.1 Gas market in Europe and globally ................................................................................................................................... 20 3.1.2 Polish gas market .............................................................................................................................................................. 21 3.2 Regulatory environment ........................................................................................................................................................... 23 3.2.1 Regulatory environment in Poland .................................................................................................................................... 24 3.2.2 European regulatory environment ..................................................................................................................................... 24 4. Operating activities in 2019.......................................................................................................................................................... 27 4.1 Exploration and Production ...................................................................................................................................................... 27 4.1.1 Key operating metrics ........................................................................................................................................................ 28 4.1.2 Operations in Poland ......................................................................................................................................................... 28 4.1.3 Foreign operations ............................................................................................................................................................ 32 4.1.4 Activities supporting the segment in Poland and abroad ................................................................................................... 36 4.1.5 Growth prospects and future challenges ........................................................................................................................... 37 4.2 Trade and Storage ................................................................................................................................................................... 38 4.2.1 Key operating metrics ........................................................................................................................................................ 39 4.2.2 Wholesale business .......................................................................................................................................................... 39 4.2.3 Retail business .................................................................................................................................................................