Annual Report 2015 VNG – Verbundnetz Gas Aktiengesellschaft Highlights VNG Group key financial data 2015 2014 EBIT* € million –54 230 Earnings after tax € million –53 184 Funds from Operations (FFO)** € million 224 238 Cash flow from operating activities*** € million 376 270 Financial liabilities**** € million 443 575 % 24 25 € million 590 722 Equity ratio Balance sheet equity * inclusive tax refund for exploration costs of VNG Norge **FFO: Result for the period adjusted by non-cash-effective expenses and income as well as profits and losses from the disposal of fixed assets *** Prior year figures adjusted due to the application of DRS 21 **** Due to external financing partners VNG Group key performance data 2015 2014 1,441 1,427 billion kWh 373 368 km 7,000 7,200 billion m³ 2.5 2.7 Number of employees at year-end Gas sendout Length of pipeline system at year-end Capacity of underground gas storage facilities at year-end Shareholders of VNG – Verbundnetz Gas Aktiengesellschaft EWE Aktiengesellschaft, Oldenburg 74.21 % VNG Verbundnetz Gas Verwaltungs- und Beteiligungsgesellschaft mbH, Erfurt* 25.79 % * Trustee for ten utilities and municipal companies (Annaberg-Buchholz | Chemnitz | Dresden | Erfurt | Hoyerswerda | Leipzig | Lutherstadt Wittenberg | Neubrandenburg | Rostock) As at December 31, 2015 Contents | Annual Report 2015 Contents A The VNG Group 5–15 The VNG Group 6 The fully consolidated companies of the VNG Group 7 Business Areas of the vng Group 8 B Foreword of the Executive Board 17–19 C Report of the Supervisory Board 21–23 D Management Report and Group Management Report for the 2015 Financial Year 25–43 A. The VNG Group undergoing a process of change 26 B. Background 26 C. The VNG Group—an overview 28 D. Review of operations in the business areas 30 E. Annual financial statements of VNG AG and consolidated financial statements of the VNG Group 35 F. Group-wide management of opportunities and risks 39 G. Outlook 41 E consolidated financial statements 45–72 Consolidated Balance Sheet as at December 31, 2015 46 Consolidated Income Statement for the Period from January 1 to December 31, 2015 47 Notes to the Consolidated Financial Statements 2015 48 Breakdown and Development of Consolidated Fixed Assets 70 Auditor’s Report 72 The statement of changes in equity and the cash flow statement of the VNG Group are published by disclosure in the company register. The VNG Group 5–15 The VNG Group The VNG Group, headquartered in Leipzig and employing about 1,400 people, is a horizontally and vertically integrated company group of the European gas industry and has more than 20 fully consolidated companies in eight countries. The core business, natural gas, breaks down into four business areas: Exploration & Production, Gas Trading & Service, Gas Transport and Gas Storage. VNG – Verbundnetz Gas Aktiengesellschaft as the parent company of the VNG Group is also responsible for gas trading business. VNG Norge AS concentrates on the exploration and production of natural gas off the Norwegian and Danish coasts. ONTRAS Gastransport GmbH as an independent transmission system operator, markets Germany’s second largest high-pressure network in an independent and non-discriminatory manner, while VNG Gasspeicher GmbH offers storage capacities from several underground gas storage facilities in central and northern Germany throughout Europe. Adjacent to the core business, companies of the VNG Group also provide numerous products and services for natural gas infrastructure and application. vnggroup.eu 6 The VNG Group | Annual Report 2015 The fully consolidated companies of the VNG Group Exploration & Production VNG Norge AS, Stavanger, Norway VNG Danmark ApS, Copenhagen, Denmark Gas Trading & Service VNG – Verbundnetz Gas Aktiengesellschaft, Leipzig BALANCE VNG Bioenergie GmbH, Leipzig ECG Erdgas-Consult GmbH, Leipzig ENERGIEUNION GmbH, Schwerin G.EN. Gaz Energia Sp. z o.o., Tarnowo Podgórne, Republic of Poland goldgas GmbH, Eschborn goldgas GmbH, Vienna, Austria HANDEN Sp. z o.o., Warsaw, Republic of Poland Leipziger Biogasgesellschaft mbH, Leipzig MBG Mitteldeutsche Biogasgesellschaft mbH, Leipzig SPIGAS S.r.l., La Spezia, Italy VNG Austria GmbH, Gleisdorf, Austria VNG Energie Czech s.r.o., Prague, Czech Republic VNG-Erdgascommerz GmbH, Leipzig VNG Italia S.r.l., Bologna, Italy VNG Polska Sp. z o.o., Tarnowo Podgórne, Republic of Poland VNG Slovakia, spol. s r.o., Bratislava, Slovak Republic Gas Transport ONTRAS Gastransport GmbH, Leipzig GDMcom Gesellschaft für Dokumentation und Telekommunikation mbH, Leipzig GEOMAGIC GmbH, Leipzig INFRACON Infrastruktur Service GmbH & Co. KG, Leipzig OSG ONTRAS Servicegesellschaft mbH, Leipzig Gas Storage VNG Gasspeicher GmbH, Leipzig As at December 31, 2015 7 EXPLORATION & PRODUCTION Bjørnøya 44 LICENSES 42 in Norway ( ) and 2 in Denmark ( ) Hammerfest Tromsø Andenes Harstad 1 6 Bodø 3 HYME DRAUGEN LICENSES AS OPERATOR Sandnessjøen NJORD 25 Namsos 4 PARTICIPATIONS IN PRODUCING FIELDS Trondheim 2 Florø BRAGE 8 3 Bergen STAVANGER OSLO Skagen offices of VNG Norge Ålborg Kristiansand 2 4 FIELD DEVELOPMENTs Århus Esbjerg Åbenrå As at December 31, 2015 8 COPENHAGEN office of VNG Danmark Odense Rønne The VNG Group | Annual Report 2015 VNG NORGE AS VNG Norge AS (VNG Norge) and its subsidiary VNG Danmark ApS with head offices in Stavanger and Copenhagen have been exploring and producing gas and oil off the Norwegian and Danish coasts since 2006. The development of VNG Group’s offshore commitment aims at an additional and sound resource base in the long term. This involves new options for customer-oriented products of the trading companies. The E&P companies of the VNG Group are currently operating approximately forty licenses as well as four participations in producing fields. Additional discoveries are currently being brought to production readiness. In receiving the renowned Rystad Energy’s Gullkronen award in the “Explorer of the Year” category, the still young VNG Norge was certified as having successfully established in the Norwegian E&P industry in 2015. vng.no 9 Gas Trading & Service 9 SALES OFFICES IN GERMANY ( ) Berlin | Düsseldorf | Erfurt | Frankfurt a. M. Hamburg | Kassel | Leipzig | Munich | Stuttgart WHOLESALE ON EUROPEAN SPOT AND FUTURES MARKETS m Procure e nt fro m N O (1) o Pr (1) cu re n me om t fr RU rom RU Procurement f EUROPE-WIDE GAS SALES (3) (14) LEIPZIG Head office of VNG AG (1) (1) Procurement from RU (2) 373 BILLION KWH GAS SENDOUT (2) Fully consolidated companies (number) Supply LNG terminal Spot and futures markets As at December 31, 2015 10 The VNG Group | Annual Report 2015 VNG – Verbundnetz Gas Aktiengesellschaft As the parent company of the VNG Group, VNG – Verbundnetz Gas Aktiengesellschaft (VNG AG) with its head office in Leipzig is also responsible for gas trading business. With its trading companies and further participating interests, the company is engaged in six European countries, providing support to the entire customer base ranging from utility companies, dealers, the industry, power plants and commercial enterprises through to household customers (e. g. through goldgas GmbH). Natural gas from highly diversified international sources forms the reference base of VNG AG. Long- and medium-term procurement contracts are interrelated with trading activities on the European spot and futures markets. The reliable, market- and demand-oriented products and services together with more than 50 years of industry experience provide the customers of VNG AG with a high degree of security, flexibility and efficiency. vng.de 11 Gas Transport Network interconnection points of ONTRAS with the European natural gas transport systems GASPOOL market area Transmission pipelines of ONTRAS Trans-regional transmission pipelines Flow direction N DA ST RE D EU PE I PE IPE II OP R PI AM EU R O P EU R NO NORD Greifswald Dornum Kamminke G RH 450 NETWORK INTERCONNECTION POINTS Neubrandenburg NEL M Steinitz OPAL NETRA ID AL W ED AL Berlin Frankfurt/O. JAGAL GASPOOL hub * Dortmund JAMAL Gubin Bobbau Head office of ONTRAS LEIPZIG Lasów STEGAL AS M EG G T4 Prague L NE M EG A Chemnitz Sayda/Deutschneudorf Hora Svaté Kateřiny AL Waidhaus EG AL TE NP M Lanžhot Munich 7,000 km HIGH-PRESSURE PIPELINES 130 DOWNSTREAM NETWORK OPERATORS As at December 31, 2015 12 * Trading partners who have a balancing group at their disposal in the GASPOOL market area can conduct trading transactions at the GASPOOL hub. The GASPOOL hub is not allocated to any physical entry or exit point and enables the purchase and sale of gas quantities without booking any capacity. The VNG Group | Annual Report 2015 ONTRAS Gastransport GmbH ONTRAS Gastransport GmbH (ONTRAS) with its head office in Leipzig is the independent transmission system operator in the VNG Group. As co-founder and shareholder of the GASPOOL market area, the company operates the pipeline network with a length of more than 7,000 kilometres in the European gas transport system. ONTRAS is responsible for all measures required for optimising, strengthening, expanding and ensuring the security of supply in a needs-based manner. ONTRAS’ core business is the marketing of transport capacities at approximately 450 network interconnection points as well as the organisation of gas transports together with the around 130 downstream network operators. In its service company INFRACON Infrastruktur Service GmbH & Co. KG, ONTRAS has additionally bundled network-related services for transport customers, dealers, other network operators and connectees. ontras.com 13 Gas Storage 4 UNDERGROUND GAS STORAGE FACILITIES 2.5 BILLION m WORKING GAS VOLUME 3 ETZEL NE RH G STORAGE LOCATIONS L Salt cavern Former gas field NETRA AL JAM AL W ED AL JA GA L ID OPAL M BERNBURG BAD LAUCHSTÄDT KIRCHHEILINGEN Head office of VGS ST M EG A L M EG EG AL Leipzig 2 MARKET AREA CONNECTIONS AL (and 1 access to the Dutch network) TE NP M WORKING GAS VOLUME IN MILLION m³ 151 190 Etzel Kirchheilingen 1,039 1,147 As at December 31, 2015 14 Bernburg Bad Lauchstädt EG AL The VNG Group | Annual Report 2015 VNG Gasspeicher GmbH VNG Gasspeicher GmbH (VGS) with its head office in Leipzig operates storage facilities at four locations in central and northern Germany. Across Europe the company markets 2.5 billion cubic metres of storage capacity. All storage locations are connected to the GASPOOL market area. The northern German Etzel location is additionally linked with NetConnect Germany (NCG) and currently with the Dutch transport network operator Gas Transport Services. Customers are thus provided with secure access to major European trading markets. VGS unifies the entire know-how of underground gas storage—from the operation of storage facilities and storage capacity marketing through to the execution and invoicing of storage contracts. With its storage facilities and the flexible storage options for natural gas, biomethane and other synthetic natural gas, VGS provides a significant infrastructure component in an energy system being increasingly marked by renewable energies. vng-gasspeicher.de 15 Foreword of the Executive Board 17–19 Foreword of the Executive Board Dear shareholders and business partners, dear friends of the Company, We have to state clearly that we have experienced a difficult year. We too have not been able to escape the effects of the overall negative development of the market, and in consequence we have not achieved our defined objectives in terms of earnings. With a loss of approximately Euro 53 million, the earnings of the VNG Group were considerably lower than our original expectations. It is true that the gas sendout of the Group, namely a total of 373 billion kilowatt hours, was slightly higher than the corresponding prior year figure. However, as a result of the negative development in market prices, sales of approximately Euro 9.4 billion were lower than the corresponding prior year figure. There are numerous reasons for this unsatisfactory development. The market for natural gas is fiercely competitive and characterised by excess supply and declining margins. In addition, the market climate for E&P business last year deteriorated considerably. The abrupt decline in oil prices, which was not foreseeable to this extent, had a particularly negative impact on the results. The value of the gas storage facilities—the security of supply—continues not to be remunerated to an adequate extent in the current market and regulatory climate, low seasonal gas price differences restrict the opportunities for marketing the storage capacities. On the other hand, our Gas Transport business area has again generated good and stable earnings. ONTRAS Gastransport GmbH has consistently utilised the opportunities offered by the regulated network business, and has also developed service models in non-regulated business. According to current estimates, the market climate and intensity of competition will remain challenging. In the medium term, we will therefore also have to live with low raw material prices in the E&P business area and low sales margins in the Gas Trading business area. It can also be assumed that the difference between summer prices and winter prices for gas will continue to be low. The flexibility offered by gas storage facilities will thus in future still not be reflected in adequate revenues in the Gas Storage business area. How will we now respond in an entrepreneurial manner to these developments? For this purpose, we are very precisely reviewing and analysing the strengths and weaknesses of every business area and are re-evaluating risks and opportunities. We will be determined in setting the right strategy with a view to future growth and earnings opportunities in the rapidly changing energy market. The main objective will be to again improve the future viability and thus in particular the profitability of the VNG Group. The VNG Group still enjoys a sound asset situation with a sound equity base and debt of manageable proportions. This will provide us with the necessary scope for setting the future direction of strategies. The future of energy supplies is becoming smarter and more decentralised. Here, we have identified strategic options for new business opportunities, innovative solutions and customised products. The world climate conference in Paris has shown that the fight against climate change requires a wide range of instruments. One of these instruments will be the increased use of the climate-friendly energy medium natural gas! With their clear commitment to achieving a further reduction of carbon emissions, the signatory states have set out guidelines within which modern gas applications will also have a place. They provide a unique combination of climate friendliness, supply reliability and social acceptability. With these characteristics, natural gas constitutes an essential link between the world of renewable energies and traditional energy generation. 18 Foreword of the Executive Board | Annual Report 2015 However, we will also develop new business opportunities. For this reason, we support convincing new ideas and start-ups in the energy sector as a strategic investor with our VNG Innovation GmbH. The investments focus on the following areas: Energy efficiency, energy storage, energy conversion, digitizing, mobility and sustainability. The need to identify and analyse business ideas and to ensure that they can be utilised for business purposes requires extensive experience of the energy industry. We are very pleased that the VNG Group has the appropriate know-how in this respect. This is not least the achievement of our highly qualified employees, who this year have again provided excellent work and great commitment. We would like to explicitly thank them for this, particularly in view of the changes which are about to take place. As a result of the market conditions, we have decided to set up a program designed to boost profitability. The aim is to ensure that the entire VNG Group has a better and more efficient position in the market. For this purpose, organisational structures will be streamlined, and personnel expenses, non-personnel costs and process costs will be reduced. Initial immediate measures have already resulted in considerable savings in terms of costs. The virtually group-wide restructuring process will also result in a considerable reduction in the headcount, which is to take place in a manner which is as socially acceptable as possible. This process will demand a lot of our employees and will require a high degree of flexibility. At the end of these exertions, there will be a company with a new focus, whose strategy, structures and processes aim to achieve innovation and efficiency. A company which will be able to provide a robust response to market requirements with even greater willingness to take on change. Dear shareholders, we would like to thank you again for the great trust which you have shown us in these difficult times. In 2016, we expect to see a return to positive results, also due to the implementation of the program for boosting profitability. Nevertheless, the current year will again not be easy. Changes require time and endurance. However, we are convinced that we are moving in the right direction, and will press on ahead with the necessary adjustments in a planned and consistent manner. Dr Karsten Heuchert Chairman of the Executive Board Hans-Joachim Polk Board Member, Infrastructure/Technical Affairs Bodo Rodestock Board Member, Finance/Human Resources 19 Report of the Supervisory Board 21–23 Report of the Supervisory Board The Supervisory Board has been provided by the Executive Board, regularly, comprehensively and promptly in written and verbal form regarding the development and the situation of the Company as well as regarding major business transactions. On the basis of these reports and the information provided, the Supervisory Board has supervised senior management and in particular has considered and received extensive advice regarding the development of the business areas, the financial situation of the Company, issues of financial, investment and personnel planning as well as all measures which, according to the articles of incorporation, require the approval of the Supervisory Board. In the 2015 financial year, the Supervisory Board held a total of five meetings. The individual meetings focused on the results of operations of the Company, the reasons for the deterioration of the annual result as well as the measures taken by the Executive Board in order to boost profitability. The Supervisory Board has focused strongly on the earnings situation and the countermeasures initiated by the Executive Board. The Supervisory board has also intensively considered the strategic direction of the Company presented by the Executive Board. The meetings of the Supervisory Board have also focused on the acquisition of production licenses in the Norwegian Sea, the participation in various exploration activities in the Norwegian Sea and the Gas Trading activities of VNG, and in particular management of gas trading agreements. The Company’s other investment involvement, including restructurings under company law, has also been extensively discussed. The Supervisory Board has approved the disposal of one company and the acquisition of further shares in one company. On the basis of these discussions and also the reports and information provided by the Executive Board, the Supervisory Board has verified the adequacy of senior management. PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, Leipzig, has audited the annual financial statements and consolidated financial statements prepared by the Executive Board for the period ending December 31, 2015 as well as the combined management report and Group management report for the 2015 financial year, including the accounting records as well as compliance with the accounting obligations in accordance with Article 6b (3) EnWG, and has awarded them an unqualified auditor’s report. An audit in accordance with Article 53 Haushaltsgrundsätzegesetz (HGrG—The German Budgetary Principles Act) has also been carried out for VNG – Verbundnetz Gas Aktiengesellschaft. The audit reports have been handed to all members of the Supervisory Board. The Supervisory Board has noted and approved the results of these audits. The Supervisory Board has audited the annual financial statements and consolidated financial statements as well as the combined management report and Group management report, and has noted and analysed the report regarding the audit in accordance with Article 53 HGrG. Following the definitive result of its audit, no objections are to be raised. The auditor attended the accounts meeting of the Supervisory Board and reported to the Supervisory Board on the main results of the auditor’s audit. The Supervisory Board has approved the annual financial statements and consolidated financial statements prepared by the Executive Board for the period ending December 31, 2015. The annual financial statements have thus been adopted. The member of the Executive Board responsible for Trading, Prof. Dr Klaus-Dieter Barbknecht, laid down his Executive Board mandate as of the end of March 31, 2015, and stepped down from the Executive Board of VNG. Since April 1, 2015, Dr Karsten Heuchert has also been responsible for Trading until further notice. 22 Report of the Supervisory Board | Annual Report 2015 In the extraordinary meeting of the Supervisory Board on April 14, 2015, the Supervisory Board appointed Mr. Oliver F. Hill as general agent of VNG – Verbundnetz Gas Aktiengesellschaft. Mr. Hill provides Dr Heuchert with support for carrying out his management duties in the Executive Board Trading division. Messrs. Hans-Joachim Gornig, Vyacheslav Krupenkov and Matthias Warnig laid down their Supervisory Board mandates as of the end of August 26, 2015. Dr Sanders laid down his office as Chairman of the Supervisory Board as of the end of September 30, 2015. He also stepped down from the Supervisory Board as of the end of October 19, 2015. The Supervisory Board wishes to thank the members of the Supervisory Board who have stepped down for the excellent cooperation carried out within an atmosphere of mutual trust, and also wishes to thank them for their major commitment. Pursuant to a resolution of the shareholders’ meeting of October 26, 2015, Messrs. Dennis Rohde, Kristof Ogonovski, Thiemo Röhler and Alexander Freiherr von Ledebur were appointed as members of the Supervisory Board. Mr. Ulf Heitmüller was elected as the Chairman of the Supervisory Board in the Supervisory Board meeting on November 10, 2015. The Supervisory Board Leipzig, March 8, 2016 Ulf Heitmüller Chairman 23 Management Report and Group Management Report for the 2015 Financial Year 25–43 Management Report and Group Management Report for the 2015 Financial Year A. The VNG Group undergoing a process of change The challenges facing the energy sector have become even more intense last year. The development of the overall market climate has resulted in a significant impact on earnings in virtually all business areas of the VNG Group. With annual losses of approximately € 53 million for the VNG Group and approximately € 102 million for VNG AG, earnings were considerably lower than the corresponding prior year profit of the VNG Group (€ 184 million) and VNG AG (€ 224 million), and also fell below the Group’s own earnings expectations. The reasons for these losses are to be seen mainly in the developments in the overall market climate. The dramatic decline in oil prices has had a negative impact especially on E&P business. The low seasonal gas price differences (summer-winter spread) limited the marketing opportunities in the field of gas storage, and had a negative impact on the results of portfolio management in the wholesale sector. In addition, declining sales margins also had a negative impact on trading results. The current price developments have also meant that adjustments have had to be made in the balance sheet in relation to individual assets in the storage and E&P business areas. On the other hand, within a stable regulatory environment, the Gas Transport business area again made a considerable positive contribution to results of VNG AG and the VNG Group. The entire energy industry is currently undergoing a far-reaching process of change, because there is not expected to be any substantial improvement in the medium term to the still difficult economic climate. Nevertheless, future energy policy is providing opportunities for the flexible, reliable, cheap and clean energy medium natural gas, and the VNG Group will take advantage of these opportunities. This will be achieved by way of setting new strategic directions for the VNG Group and also by way of consistently unlocking all potential with the aim of achieving a sustainable improvement in earnings. In order to take advantage of these opportunities even more consistently, the VNG Group last year started a programme designed to improve profitability, and has already implemented 26 initial measures. The aim of the programme is to open up new business opportunities in the short to medium term, to reduce personnel expenses and non-personnel costs and also to create efficient personnel and organisation structures. One of the core tasks within this process of adjustment will be to involve the employees in shaping the future of the VNG Group. B. Background 1.Economic background Considerable increase in intensity of competition. The overall market climate within which the VNG Group is operating is characterised by fierce competition, volatile price movements and considerable pressure to implement change. The VNG Group is facing the challenges in an increasingly dynamic market climate which has now been completely liberalised. The situation is exacerbated by the fact that the German and also Pan-European gas send-out market is tending to contract. It is true that, due to weather conditions, gas consumption particularly for heat generation in the first half of 2015 increased by approximately 5 per cent compared with the prior year, and was thus higher than the growth of approximately 1.3 per cent reported for German primary energy consumption. However, due to the growth in renewable energies, there continues to be a decline in electricity production using natural gas. An increasing supply of electricity combined with falling prices has meant that natural gas has become less competitive in the power station market, and this trend will continue in the medium term. In addition, increasing energy efficiency tends to result in lower demand for natural gas, accompanied by a simultaneous increase in the intensity of competition. In the medium term, there is expected to be structural oversupply. On the supply side, the buyer market is characterised by fierce price competition. Slight economic growth. The economic development in Germany was similar to that in the prior year. Gross domestic product in Germany expanded by 1.7 per cent. For 2016, the economic institutions are expect- Management Report and Group Management Report for the 2015 Financial Year | Annual Report 2015 ing to see growth of 1.6 per cent for gross domestic product for Germany, and also expect a slightly lower level for the Eurozone. Considerable price movements. The VNG Group is exposed to a wide range of market-related factors, which may have an impact on the overall development of business and also the valuation of major assets. In particular, there was a further decline in the prices of oil and gas in the 2015 financial year. The level of interest rates continued to be very low. There have been significant changes in the exchange rates relevant for the VNG Group, namely the Norwegian Krone (NOK) and the US Dollar (USD). The Euro and NOK have weakened considerably compared with the USD. The NOK has also weakened against the Euro. Strengthening of downward trend in the oil market. Following an abrupt decline in the price of oil and a preliminary low seen in January 2015, the price recovered to almost USD 70/barrel by the beginning of May. However, as it became evident that the market expectations of a rapid decline in the existing excess supply would not be met, concerns regarding a considerable slowdown in the rate of economic growth in China and also the agreement reached in the nuclear dispute with Iran resulted in a fundamental turnaround in sentiment. The price of oil came under further pressure, falling to a level below USD 40/barrel by the end of the year, a level which was last seen in the year 2004. For the whole of 2015, the average price for Brent was approxi­ mately USD 54/barrel, compared with more than USD 99/barrel in 2014. The oil price has continued to fall at the beginning of 2016, and has already fallen below a level of USD 30/barrel. Gas prices also lower than the prior year level. The fall in prices in European gas trading observed in 2014 initially did not continue in the first half of 2015. At the end of January 2015, there was an unexpected turn­around on the gas market. The fact that some Russian deliveries failed to materialise and also the limitation of Dutch production volumes resulted in a market restriction and high levels of storage withdrawals. Spot and forward prices rose appreciably and, in the European spot market, remained above the level of € 21/MWh for a long time during the summer. How- ever, a good supply situation and the fact that cold temperatures failed to materialise meant that spot prices fell below the level of € 15/MWh in the second half of the year. Forward prices followed the downward trend on the spot markets and came under additional pressure in the expectation of additional deliveries of liquid natu­ral gasgas (LNG). On the Dutch trading point TTF, the leading market in continental Europe, the dayahead prices in 2015 were overall approximately € 20/ MWh on average, and were thus lower than the corresponding prior year figure of approximately € 21/MWh. Low seasonal gas price differences. The seasonal gas price differences which are important for the management and valuation of storage capacities continue to decline. Considerable storage withdrawals in February and March resulted in a significant increase in prices for the summer of 2015 and thus in a further decline in the summer-winter spread (SWS) in the first half of the year. Following a temporary recovery, the SWS continued to decline gradually in the second half of the year in view of expectations of additional LNG deliveries starting in spring 2016. Towards the end of the year, the spread was only just above the level of € 1/MWh, and was thus only slightly higher than the variable storage costs. 2. Energy policy Incentives for the heat market. German energy policy continues to be very much characterised by the further development of the electricity market. With the adoption of the amendment to the Co-Generation Act (Kraft-Wärme-Kopplungsgesetz), the German government met the long-standing requirement for planning reliability for the operators of co-generation units. The amendment will benefit existing gas co-generation units and also the construction of new smaller units. The German government has also outlined measures in the heat market which are intended to comply with the national objective of reducing greenhouse gases. For instance, the Federal Ministry for Industry and Energy (Bundesministerium für Wirtschaft und Energie; BMWi) has published a new “Incentive Programme Energy Efficiency”. The primary aim of this programme is to promote the launch of fuel cells in boiler rooms. 27 With the “Energy Efficiency Strategy Building”, the BMWi has also presented an overall strategy for future energy policy for buildings. The aim is to achieve a virtually climate-neutral building stock by the year 2050. Debate concerning storage regulation. A study commissioned by the BMWi was used in 2015 as the basis for discussing various instruments and models for adjusting the regulatory framework for gas storage facilities. The German government, which continues to be convinced of a high degree of supply reliability in Germany, has announced a range of measures for 2016. Discussions concerning European energy union. The EU Commission has published a concept for creating an “integrated, reliable, competitive and sustainable European energy system”. By the year 2030, the Commission intends to ensure harmonised conditions in the fields of supply reliability, internal energy market, energy efficiency, decarbonisation as well as research and development between the member states. Commitment to fewer emissions worldwide. At present, it is not possible to foresee the specific impact of the resolutions of the World Climate Conference in Paris on the policy of the German government. However, with their clear commitment to achieving a further reduction in carbon emissions, the signatory countries have laid down guidelines within which the climate friendly energy medium natural gas will also be able to play an important role. C. The VNG Group—an overview 1.Strategic orientation Intensification of strategy process. Natural gas will play a key role for reliable, economic and environmentally friendly energy supplies. Despite the difficult climate, the VNG Group, with its four business areas E&P, Gas Trading, Gas Storage and Gas Transport, has a good starting base which will enable it to achieve reasonable earnings in future by way of setting new 28 strategic directions. Accordingly, in the course of an intense strategy process, the strategies of the various business areas will be scrutinised, factors of success will be examined and strategic options as well as new business opportunities will be further developed for the future focus of the VNG Group. The aim is to achieve a sustainable improvement in the earnings situation. A sound business model with good credit standing and a balanced risk-return profile is again a major basis for the activities of the VNG Group, particularly for access to the capital markets and trading partners and thus for a high degree of room for manoeuvre and scope for action. Increasing challenges in E&P business. In view of the huge decline in raw material prices, there are increasing challenges to develop E&P activities as part of the growth strategy to form a self-sustaining business with stable long-term contributions to earnings for the VNG Group. The sustainable strengthening of the asset portfolio comprising gas and oil production licences will be carried out gradually, initially by way of participating in licensing rounds, by way of successfully transferring projects from exploration right through to development and production and also by way of investments in deposits which have already been developed. The VNG Group is concentrating on Norway and neighbouring regions with its subsidiaries VNG Norge AS (VNG Norge) and VNG Danmark ApS (VNG Danmark). Stabilisation of wholesale activities and expansion of end user activities. The trading activities of the VNG Group concentrate on wholesale activities which mainly reflect the activities of the VNG AG. These comprise traditional distribution business with redistributors, public utilities, industrial and power station users and management of the portfolio of purchasing and sales agreements as well as transport and storage capacities. ENERGIEUNION GmbH also assures access to the German wholesale electricity market and benefits from established portfolio management services in energy trading. Further contributions to earnings in the wholesale sector are provided by group companies in Italy, Austria, Poland, the Czech Republic and Slovakia. In addition to wholesale activities, end user business is becoming increasingly important for the Management Report and Group Management Report for the 2015 Financial Year | Annual Report 2015 earnings of the VNG Group—in particular via goldgas GmbH (goldgas). With further companies in Austria and Poland, the Group has an end user portfolio in Germany and abroad. Minority participations particularly in the end user field also make contributions to net trading income. Focus on high-capacity storage facilities. In the market climate which is currently difficult for storage operators, the VNG Group is focusing on its core stock of high-capacity and economic storage facilities. As a response to the demand situation, the storage products are further developed and costs are further optimised. As the third-largest storage operator in Germany, VNG Gasspeicher GmbH (VGS) will continue to take advantage of opportunities which become available, in order for instance to utilise the infrastructure as storage facilities for renewable energies. The effects of potential regulatory measures designed to maintain supply reliability in the German gas market are also taken into consideration. Network activities in a stable climate. ONTRAS Gastransport GmbH (ONTRAS) plays a major role in the Gas Transport business area of the VNG Group. As a transmission network operator, ONTRAS guarantees reliable gas transport in excess of 7,000 kilometres of pipelines and approximately 450 interconnection points. The economic success of transport activities is very much determined by the regulatory conditions. In the infrastructure field, the expansion of network-related service activities and the development of innovative solutions in connection with renewable energies means that it is possible for added value to be created beyond regulated business. The fully consolidated companies of the VNG Group Exploration & Production VNG Norge AS, Stavanger, Norway VNG Danmark ApS, Copenhagen, Denmark Gas Transport ONTRAS Gastransport GmbH, Leipzig GDMcom Gesellschaft für Dokumentation und Telekommunikation mbH, Leipzig GEOMAGIC GmbH, Leipzig INFRACON Infrastruktur Service GmbH & Co. KG, Leipzig OSG ONTRAS Servicegesellschaft mbH, Leipzig Gas Storage VNG Gasspeicher GmbH, Leipzig Gas Trading & Service VNG – Verbundnetz Gas Aktiengesellschaft, Leipzig BALANCE VNG Bioenergie GmbH, Leipzig ECG Erdgas-Consult GmbH, Leipzig ENERGIEUNION GmbH, Schwerin G.EN. Gaz Energia Sp. z o.o., Tarnowo Podgórne, Republic of Poland goldgas GmbH, Eschborn goldgas GmbH, Vienna, Austria HANDEN Sp. z o.o., Warsaw, Republic of Poland 2. Investment portfolio of the VNG Group The investment portfolio reflects the strategic focus of the VNG Group, and was continued to be optimised in the 2015 financial year. Details of changes are set out in the notes to the financial statements of VNG AG and the VNG Group. The respective group companies are managed by the business areas. Leipziger Biogasgesellschaft mbH, Leipzig MBG Mitteldeutsche Biogasgesellschaft mbH, Leipzig SPIGAS S.r.l., La Spezia, Italy VNG Austria GmbH, Gleisdorf, Austria VNG Energie Czech s.r.o., Prague, Czech Republic VNG-Erdgascommerz GmbH, Leipzig VNG Italia S.r.l., Bologna, Italy VNG Polska Sp. z o.o., Tarnowo Podgórne, Republic of Poland VNG Slovakia, spol. s r.o., Bratislava, Slovak Republic 29 3. Personnel development in the VNG Group Important employer in the region. As of December 31, 2015 the VNG Group employed a total of 1,441 persons in the parent company and in the fully consolidated companies. This means that the Group continues to be a major employer in the region and beyond. The slight increase in the number of employees compared with 2014 is due to growth for the stable business of ONTRAS and for the still expanding VNG Norge. On the other hand, the number of employees at VNG AG is declining. The following table sets out the development in the headcount of the VNG Group and VNG AG1): 1,600 1,400 1,378 1,343 1,440 1,427 1,441 of Gas Trading, Gas Storage and the Group functions. This reduction is to be carried out in a manner which is as socially responsible as possible, and will also include semi-retirement arrangements which have already been agreed. Involvement of employees in the process of change. One of the core tasks of this process of adjustment will be to retain highly motivated employees with excellent training for the Group, to encourage them and to involve them in shaping the future of the VNG Group. With their skills and achievements, they constitute the most valuable resource for the future success of the company. Corporate governance statement. In accordance with § (Article) 289a HGB, the “corporate governance statement” is disclosed on the web site of VNG AG. 1,200 1,000 D. Review of operations in the business areas 800 692 600 393 400 395 408 394 a)Business development 200 0 2011 VNG AG 2012 2013 2014 2015 VNG Group Efficient structures necessary. The significant changes in overall conditions mean that it is also necessary for the existing personnel and organisation structure to be adjusted to the needs of the market. Steps were taken last year to create efficient structures and thus to achieve savings in personnel expenses, non-personnel costs and process costs. The adjustment process will be continued in 2016 and will require employees to be extremely flexible and willing to take on new or changed tasks. However, the virtually group-wide restructuring process will also result in considerable reductions in headcount in the areas 1) 30 1. Gas Trading at year end Fierce competition resulting in low margins. The excess supply on the European trading markets has again resulted in a decline in the price level. The completely liberalised gas market is extremely competi­ tive; this has had a further negative impact on the attainable margins and means that the compensation for structuring and flexibility services is still inadequate. These tougher conditions have had a negative impact on the wholesale result of the VNG Group and VNG AG. In addition, the lower gas prices have meant that it was necessary for a considerable write-down on inventories to be recognised as a result of reference date factors. Gas Trading facing up to the competition. In contract negotiations, customers are focusing on the wholesale prices which are evident on the market. At the same time, customer wishes are now considerably more complex and contract durations are shorter than it Management Report and Group Management Report for the 2015 Financial Year | Annual Report 2015 has been the case in the past. On the sales side, the continuous development of customised products and services is strengthening the competitive position. In addition, on the purchasing side, the business area is undertaking further efforts to improve purchase conditions, reduce infrastructure costs and also adjust cost structures. The continuing further development of trading and portfolio management systems is to guarantee portfolio management with the optimum use of capital, utilising the European spot and futures markets. The business area is able to access the Group’s many years of know-how on the German and European wholesale markets. In addition, the programme designed to boost profitability aims to achieve more efficient structures and processes in order to further strengthen competitiveness. Increase in send-out on the wholesale markets. The gas send-out of the VNG Group in the 2015 financial year totalled 373 billion kWh, which was slightly higher than the corresponding prior year figure (368 billion kWh). Whereas there was a further increase in send-out to trading companies, there was a decline in send-out to industrial and power-station customers. The corresponding figure for redistributors and end users is slightly higher than the corresponding prior year level. In 2015, gas send-out was broken down as follows compared with 2014: Client groups 2015 2014 102.9 99.6 Redistributors billion kWh Industry and power stations billion kWh 42.0 49.0 Trading companies billion kWh 222.3 214.7 End users billion kWh 5.3 5.1 Of the total send-out of approximately 373 billion kWh, 255 billion kWh is attributable to the European spot and futures markets. The send-out in Germany amounted to 84 billion kWh. The VNG Group has established a nationwide presence in all regions of Germany with its nine sales offices. Other countries, and in particular Italy, Poland and Luxembourg, account for 34 billion kWh. The VNG Group has also established a presence in other European countries, with its trading subsidiaries in Italy, Poland, the Czech Republic, the Republic of Slovakia and Austria. The send-out of VNG AG increased to 323 billion kWh (prior year: 310 billion kWh) in 2015 as a result of higher sales to trading companies. Diversification in terms of procurement. The VNG Group in the 2015 financial year procured a total of 370 billion kWh of natural gas (prior year: 365 billion kWh). Most of these volumes were procured via VNG AG. The optimisation of the portfolio again resulted in a higher level of sourcing via the spot and futures markets. In addition, the volumes sourced via long-term delivery agreements particularly from Russian and Norwegian sources constituted a major element of procurement. The gas sourcing of the VNG Group is broken down as follows: Sources 2015 2014 57.0 57.0 Russia billion kWh Norway billion kWh 42.8 43.9 Spot/futures markets and other billion kWh 269.9 263.6 Further growth in the end user segment. In addition to wholesale activities, end user business is becoming increasingly important for the earnings of the VNG Group. Retail business in the international trading companies as well as goldgas SL GmbH represents this part of the business area. In 2015, the process of consolidating goldgas SL GmbH with its subsidiaries was completed by way of various new internal allocations and adjustments. The company was also renamed goldgas GmbH. In the electricity field, the company achieved considerable growth and identified and analysed numerous investment projects for external growth (distribution companies for electricity and gas), and entered into purchase negotiations. The aim is to utilise optimisation opportunities by way of pooling customer support and billing activities. The internal processes and IT systems were also further improved in 2015. In view of the fact that competition continues to become more intense, products and services are becoming increasingly important factors in addition to the actual process of energy distribution. goldgas has received further awards from well-known portals for its customer orientation. The company has 31 also amended its image, which is now also reflected in a new web site. The positive result for the year is in line with expectations. Optimisation of distribution channels. The retail business of goldgas will continue to be characterised by active competition for new and existing customers and also by the entry of new distribution companies into the market. This is reflected particularly in high price discounts and bonus payments, which are provided in order to acquire new customers in the market. The process of economic optimisation of the distribution channels of goldgas is to be continued online, via telesales and distribution partners. Priority will continue to be given to the efficient maintenance of existing customers. A further focus will be external growth by way of acquiring other distribution companies. Compliance with trading regulation requirements. The VNG Group complies with the current reporting obligations and the risk mitigation requirements of EMIR (European Market Infrastructure Regulation). VNG AG is also currently preparing to comply with the requirements of REMIT (Regulation on Energy Market Integrity and Transparency). The process of translating MiFID II (Market in Financial Instruments Directive) into national law is still ongoing. Further development of the IT systems. The trading business and the ongoing changes in the background conditions are posing major challenges to the stability and reliability of the business processes. With the further development particularly of the trading systems, the VNG Group guarantees a high degree of process reliability. 2.Exploration & Production b) Opportunities and risks a)Business development Continuous monitoring of the overall portfolio. For the VNG Group, the opportunities and risks arising from gas trading operations result from the price fluctuations on the raw material markets. The positions of purchasing and sales contracts are pooled, monitored and managed within the companies in an overall portfolio. Taking account of natural hedging effects in the portfolio, the Group also uses derivative financial instruments to limit potentially negative changes to results of the trading portfolio. The activities of the business area are carried out within a risk-limiting trading framework specified by the Group. Broadly positioned on purchasing and sales side. VNG AG has a structurally diversified and market-related purchasing portfolio. The existing contracts are managed by the company itself or are used for assuring distribution activities. On the sales side, the VNG Group is developing new products and opening up additional distribution channels in traditional wholesale business and also on the end user market. The VNG Group also consistently uses the opportunities which arise in spot and futures trading for optimising its portfolios. 32 Downturn in earnings due to declining oil price. The market climate for E&P business deteriorated considerably in the course of the 2015 financial year. In particular, the decline of oil prices has had a negative impact on the result situation of VNG Norge, which is already producing in the Njord, Brage, Hyme and Draugen fields on the Norwegian continental shelf. In terms of results, the specific aspect of the Norwegian tax system as well as opposite exchange rate effects between the group currency Euro and raw material prices which are quoted in USD have provided a certain amount of compensation for this negative development in prices. Overall, higher sales were generated compared with the prior year because the production volumes from the Draugen field which was acquired in 2014 were for the first time included for a full 12-month period in the consolidated financial statements. The dramatic decline in prices has meant that considerable write-downs had have to be recognised in the balance sheet in relation to individual assets of the VNG Group and the figure recognised for the participation of VNG Norge at VNG AG respectively. However, at the end of the medium-term period, the VNG Group expects to see oil prices gradually recover to a level of up to USD 80/barrel by the year 2020. Management Report and Group Management Report for the 2015 Financial Year | Annual Report 2015 Award for exploration success. At the end of the 2015, VNG Norge held shares in 42 production licenses on the Norwegian continental shelf and also shares in two licenses in the western Danish North Sea via its subsidiary VNG Danmark. In six of its licences, VNG Norge acts as the operations manager. For its successful drilling in 2014 in the Pil and Bue prospects, VNG Norge received the Rystad Energy’s “Gullkronen Award” at the beginning of 2015. In the category “Explorer of the Year”, the company was recognised for its success in the field of exploration. This is awarded annually to companies, working parties or persons with excellent achievements on the Norwegian continental shelf. In addition to the successful award of licenses, this clearly underlines the fact that VNG Norge in Norway is perceived to be a competent and capable partner in the field of exploration and production business. Consistent conversion of discoveries into production. In order to develop the Ivar Aasen field, in which VNG Norge owns a participation, the framework of the future production platform has been installed and work has started on sinking production drillings. Oil production will probably commence in the fourth quarter of 2016. In the “Solsort” field unit, work started on assessing the recovery of identified hydrocarbons via the Hejre and Syd-Arne field. The first phase of project planning for developing the promising Pil and Bue discoveries was completed. Drilling campaign in the area of the Pil and Bue discoveries. VNG Norge has carried out various exploration and appraisal drillings in the area of the successful Pil and Bue drillings. As the operation manager, VNG Norge was able to identify additional resources with the first drilling in the Boomerang prospect, and also gained valuable knowledge for the further development of Pil and Bue. On the other hand, further exploration drillings on the Lorry, Hagar and Portrush prospects failed to identify any resources. Research and development. VNG Norge carries out research and development work for hydrocarbon deposits which is typical for E&P business. Research activities naturally focus on constantly improving the process of prospecting for, developing and producing such deposits. b)Opportunities and risks Balanced portfolio of licenses for diversifying the risks. The VNG Group has a balanced portfolio of licenses in the exploration phase and also increasingly in the development and production phase. There are also risks to be seen in unsuccessful exploration drillings. As the licenses are increasingly further developed, these risks tend to become less significant. The result of the business area very much depends on the development of the market prices of natural gas and oil. It is currently being assumed that the current pressure on prices will continue in the medium term. Accordingly, with regard to management of the exploration portfolio and also with regard to the development of existing discoveries, the overriding aim will be to pursue only those projects which will also be financially viable in a market climate with low raw material prices. The underlying scenarios take account of the current developments of the exchange rates and raw material prices. Overall, with regard to the composition of its portfolio, the VNG Group concentrates on prospects where the risks are manageable, aims to achieve shareholdings in licenses which are commensurate for the level of risk involved, and also works together with experienced partners within the framework of syndicates. Compliance with stringent standards. The company has taken out standard insurance for the sector in order to avoid environmental and accident risks. In addition, cooperation with experienced operating managers and companies plays a key role for complying with the environmental, health and safety standards in Norway and Denmark which are stringent in terms of an international comparison. VNG Norge also guarantees compliance with these standards by including internal regulations and regular training and staff development. 3. Gas Storage a)Business development Storage capacities still exposed to fierce price pressure. The Gas Storage business area continues to 33 be confronted with a difficult market climate. For instance, the difference between summer and winter prices for natural gas, which is a key indicator for the value of flexibility and thus storage capacity, has again declined significantly in recent months. With the decline in seasonal price fluctuations, the storage fees which are attainable on the market also continue to be subject to fierce competitive pressure. The situation is not likely to recover in the short to medium term. Accordingly, it has again been necessary to recognise impairments in relation to individual storage units. Further assessment of the asset portfolio. The major contribution made by natural gas storage facilities towards ensuring reliable supplies, network stability and portfolio optimisation is not being sufficiently rewarded by storage customers as a result of the excess supply of flexibility. VGS is therefore concentrating its activities on the economically sound and efficient core portfolio. For the other assets, all options are being impartially considered. Accordingly, a decision has been taken to decommission the underground gas storage facility at the location in Buchholz. Storage capacities fully booked. With its underground gas storage facilities in Bad Lauchstädt, Bernburg, Etzel and Kirchheilingen, VGS has a working gas volume of around 2.5 billion m³. The underground storage facilities have been or are fully booked in the storage year. Following the completion of the Etzel storage facility at the end of 2014 and following the commissioning of the third and thus final cavern tranche, final work will now be completed by 2016. In addition, VGS is also involved in the development and operation of the underground gas storage facility “Katharina” together with Gazprom export LLC via Erdgasspeicher Peissen GmbH. Initial cavities are already operating. The development work will probably last until 2024. VGS with innovative ideas in competition. VGS is facing up to the competition on the German storage market with its know-how which it has established over many decades in the field of establishing and operating storage facilities and also with the development of innovative, customer-related products and services. The online platform “easystore” provides storage customers with an independent, quick and easy method 34 of individually configuring a suitable combination of working gas volume as well as entry and exit capacities. VGS also offers its customers various gas transition points. In this way, storage capacities can now also be recorded directly at the virtual trading points. b) Opportunities and risks Improving efficiency. The intensity of competition has had various consequences, including an increasing percentage of short-term storage bookings. The fact that market prices are volatile and simultaneously declining has resulted in uncertainty for the future marketing of storage capacities and the revenues attainable with these capacities. The VNG Group is facing up to this development by means of product innovations, demand-oriented investment decisions as well as measures designed to improve efficiency. In response to the demand situation, the cost structures are being further optimised and the organisation is being restructured to reflect the needs of the market. Within the context of reliable supplies in the German gas market, the possible impact of potential market intervention is also being assessed. There are also opportunities for the existing infrastructure to be used as a storage facility for renewable energies. In the storage facilities operated jointly with partners, VGS aims to achieve mutually acceptable solutions for financial optimisation of the projects in the course of commercial negotiations with its project partners. If the negotiations have not produced a result, VGS considered that it was compelled to initiate arbitration proceedings in order to enforce its claims which are currently still pending. High safety standards. The constant maintenance and monitoring of the underground gas storage facilities on the basis of technical rules and internal regulations and also the regular assessment of the condition of all underground and overground installations guarantee a high technological safety standard which is also consistent with mining law. Annual training plans designed to ensure the ongoing qualifications of employees and service providers of VGS as well as regular internal and external audits also guarantee stringent quality standards. Management Report and Group Management Report for the 2015 Financial Year | Annual Report 2015 4.Gas Transport a)Business development Independent transport network operator ONTRAS. In a stable climate, the Gas Transport business area was again able to make a considerably positive contribution to the result of VNG AG and the VNG Group. The development of business is determined by ONTRAS which is organised in the form of an independent and fully equipped network operator. ONTRAS in incentive regulation. Since 2010, ONTRAS has been subject to incentive regulation. As was the case for the first period of regulation, 100 per cent efficiency has again been certified for ONTRAS for the period 2013 to 2017. Development and expansion of the network. In the Lausitz region, ONTRAS is constructing two new gas pipelines each with a length of approximately 35 kilometres. The aim is to improve the energy infrastructure and provide long-term reliable natural gas supplies in individual regions of Brandenburg and Saxony. Furthermore, ONTRAS and the other German transmission network operators are obliged to prepare a joint network development plan (“NEP“) every year so that they will be able to continue to guarantee supply reliability in future. The NEP 2015 which was finally available in binding form at the end of 2015, does not contain any network expansion obligations for ONTRAS. At present, the transmission network operators are drawing up the NEP 2016 on the basis of the scenario framework confirmed by the Federal Network Agency in December 2015. b)Opportunities and risks ONTRAS in regulation. The economic development in the Gas Transport business area very much depends on the regulatory conditions and the resultant permissible revenue caps. With regard to the planned amendment to the incentive regulation, ONTRAS does not expect to see any major changes to the overall conditions. ONTRAS in competition. ONTRAS continues to take advantage of the opportunities offered by the regulated transport market, and also takes advantage of the possibilities of rendering services in the non-regulated energy infrastructure field. For this reason, the transmission network operator pooled its entire service activities in 2015 in its subsidiary INFRACON Infrastruktur Service GmbH & Co. KG. ONTRAS has also identified opportunities in the development and further development of national and international cooperations with other network operators. In order to strengthen its leading market position as a transmission network operator in the field of integrating renewable energies, ONTRAS has joined the European Green Gas initiative. The aim of this initiative is to support carbon-neutral energy supply by the year 2050. ONTRAS is also involved in the Dena project “Powerto-gas potential atlas for Germany”. Technical safety is guaranteed. ONTRAS continuously carries out any necessary refurbishment and modernisation work on its technical installations in order to guarantee maximum reliability within the network and thus ensure its contractual obligation with regard to supplying the downstream networks and end users with gas. Technical safety and the availability of the transmission network with its corresponding installations were also guaranteed at all times throughout 2015. E. Annual financial statements of VNG AG and consolidated financial statements of the VNG Group Core objectives of financial strategy. The guiding principles of the VNG Group define the common values of partnership, openess, entrepreneurship and responsibility as key aspects of economic success in these challenging times. This is the basis on which the VNG Group and the Group’s business areas are managed on the basis of key financials (EBIT incl. tax refund; earnings after taxes) as well as further financials indicators. The core objectives of the financial strategy are as follows: An adequate dividend for shareholders, 35 the avoidance of risks posing a threat to the company, the generation of positive cash flows and an adequate return as well as the assurance of sound creditworthiness. Earnings expectations have not been met. The difficult market situation has had a considerably negative impact on the overall development of business. This is reflected particularly in the earnings parameters, which had been affected by considerable impairments and, unlike the situation in the prior year, do not include any significant positive one-off effects. With regard to the impact of impairments on earnings, please refer to the notes to the financial statements of VNG AG and of the VNG Group. Notwithstanding these exceptional factors, VNG AG and the VNG Group overall fell below their own earnings expectations also with their operations. The exceptional factors have had a negative impact on results, but have not had the same impact on the funds from operations. Accordingly, the cash flow from operations, which additionally benefitted from changes in working capital has also been used for repaying financial liabilities. The VNG Group and also VNG AG continue to enjoy a sound asset situation with a sound equity ratio. The indicators of the VNG Group and VNG AG which are relevant for management purposes have developed in detail as follows in the 2015 financial year: VNG Group VNG AG 2015 2014 2015 2014 EBIT incl. tax refund € million –54 230 –98 253 Earnings after taxes € million –53 184 –102 224 Funds from operations * € million 224 238 82 317 Cash flow from operating activities ** € million 376 270 20 –31 Financial liabilities *** € million 443 575 370 501 % 24 25 33 32 Equity ratio *FFO: Result for the period adjusted by non-cash-effective expenses and income as well as profits and losses from the disposal of fixed assets ** Prior year figures adjusted due to the application of DRS 21 *** Due to external financing partners 36 1.VNG Group a)Earnings situation The VNG Group reports a net loss of € 53 million for the 2015 financial year, whereas it had generated a net income after tax of € 184 million in the prior year. The developments in earnings in the business areas varied, as was the case in prior years. Gas Transport again made a very positive contribution to the Group result. On the other hand, in Gas Trading segment, the net trading income of operations failed to match the prior year figure, and also fell below the company’s own expectations. As a result of the further decline in gas prices, it was necessary to recognise an impairment to gas inventories as of the reference date. In Gas Storage segment, risk provisioning recognised in relation to storage assets again had a negative impact on earnings. In the E&P business area, the result was affected by costs incurred in connection with the exploration activities, 78 per cent of which are refunded by the Norwegian state. The considerable changes in the price of oil also meant that it was necessary for impairments to be recognised in relation to production licenses and property, plant and equipment. On the other hand, production from the Draugen field which was acquired in the prior year had a positive impact on the results of the business area. The development of individual items of the income statement is shown in the following: Sales amounted to approximately € 9.4 billion, despite higher volume sales, and was lower than the corresponding prior year figure (€ 10.0 billion) because the average sales prices which were achieved declined compared with the prior year period as a result of the market price developments. The development in cost of materials reflected the development in sales. Compared with the prior year period, depreciation and amortisation increased as a result of the higher volume of impairments recognised in relation to the storage and E&P assets. The income from participating interests mainly reflects associated companies recognised using the at-equity Management Report and Group Management Report for the 2015 Financial Year | Annual Report 2015 valuation. Due to the change in the portfolio of partici­ pating interests and lower contributions to earnings made by the participating interests, earnings had declined compared with the prior year. The factors described above as well as the reduction in other operating income, which in the prior year mainly reflected the one-off income from the disposal of the participating interest Erdgasversorgungsgesellschaft Thüringen-Sachsen mbh (EVG), resulted in a much lower EBIT 2) of the VNG Group (€ –54 million) compared with the prior year. Net interest income has improved compared with the prior year. This is due mainly to a lower average borrowing requirement and a lower level of interest rates. Interest income was also generated by means of loans to participating interests. On the other hand, the interest expenses in connection with the creation of provisions have increased and have had a negative impact on net interest income. In addition to tax income arising from tax refunds, current tax expenses as well as income from deferred taxes have affected the tax result. Compared with the prior year, considerably higher deferred tax income has been generated particularly in connection with the impairments. b)Financial situation 2015 2014 € million 41 28 € million 376 270 Thereof: Funds from operations (FFO) € million 224 238 Thereof: Other payments from current 32 Cash and cash equivalents at the beginning of the period Cash flow from operating activities € million 152 Cash flow from investing activities € million –155 11 Cash flow from financing activities € million –236 –266 Changes due to exchange rate and consolidation-related factors € million 0 –2 Cash and cash equivalents at the end of the period € million 26 41 2) Due to the developments of operating business, the FFO has declined by approximately € 14 million compared with the prior year. This decline, which is moderate in comparison with the result, is due to the fact that the FFO in both years were not affected by one-off effects. Compared with the FFO of VNG AG, the FFO of the VNG Group are higher, as they contain the cash-effective results of all fully consolidated subsidiaries which, particularly in the case of ONTRAS and VGS, are also higher than the investment income recognised in the separate financial statements. The cash flow from operating activities3) is approximately € 106 million higher than the corresponding prior year figure, and amounted to approximately € 376 million. This is due to the changes in working capital and the fact that the resultant amount of capital tied up was considerably lower. Cash outflows within the cash flow from investing activities amounted to a net amount of approximately € 155 million. The investments mainly relate to the network and exploration activities as well as loans paid out to EPG. Higher investment payments were incurred in the prior year, particularly in connection with the acquisition of the Draugen field. On the other hand, inflows have been reported in the prior year from the sale of shares in EVG. Cash-effective dividends of participating interests (€ 29 million; prior year period: € 38 million) and interest received (€ 3 million; prior year period: € 5 million) are disclosed within the cash flow from investing activities. Within the cash flow from financing activities, the VNG Group repaid financial liabilities of approximately € 132 million to external financing partners, and made interest payments of approximately € 31 million (prior year period: € 34 million). A dividend of € 73 million was paid to the shareholders for the prior year. The companies in the VNG Group were solvent at all times. Credit lines of approximately € 1.2 billion were available as of December 31, 2015. 3) incl. tax refund for exploration costs of VNG Norge ue to the application of DRS 21, dividends and interest received as well as D outflows for creating cover funds are attributable to cash flow from investing activities. Outflows for interest payments are shown under cash flow from financing activities. 37 c)Net assets The balance sheet structure of the VNG Group changed as follows compared with the prior year: Assets Equity and liabilities € 2,470 million Fixed assets 43 % Current assets 49 % Deferred tax assets 7 % Other assets 1 % Dec. 31, 2015 € 2,847 million 40 % € 2,847 million 24 % 25 % Equity 76 % 75 % Liabilities 54 % 6 % Dec. 31, 2014 Compared with the prior year reference date, the balance sheet total of the VNG Group declined by approximately € 377 million (13 per cent) to € 2,470 million. This is due to the impairments recognised in relation to fixed assets in the storage and E&P business areas. The stocks of stored gas in current assets have also declined compared with the prior year. The lower market prices have also had an impact on the extent of inventories and receivables, also reflecting the lower level of gas send-out in December due to the weather conditions. The development in assets has resulted in a shift in balance sheet ratios in favour of fixed assets. Compared with the prior year reference date, the equity ratio of the VNG Group has declined only slightly, namely by one percentage point to 24 per cent. 2. VNG AG a)Earnings situation With EBIT of € –98 million (prior year period: € 253 million) and earnings after taxes of € –102 million (prior year period: € 224 million), VNG AG has reported a significant decline in earnings. This is due mainly to 38 € 2,470 million Dec. 31, 2015 Dec. 31, 2014 an impairment recognised in relation to the shares in VNG Norge. As is the case in the consolidated financial statements, the negative price development on the business areas of Gas Trading and Gas Storage has also had a negative impact in the financial statements of VNG AG. In addition, the disposal of the shares in EVG also had a positive impact on the results of VNG AG in the prior year. b) Financial situation 2015 2014 € million 9 4 € million 20 –31 Thereof: Funds from operations (FFO) € million 82 317 Thereof: Other payments from other operating Cash and cash equivalents at the beginning of the period Cash flow from operating activities € million –62 –348 Cash flow from investing activities € million 354 44 Cash flow from financing activities € million –378 –8 Cash and cash equivalents at the end of the period € million 5 9 Management Report and Group Management Report for the 2015 Financial Year | Annual Report 2015 In line with the development in overall earnings, the FFO of VNG AG have declined to approximately € 82 million. In addition, in the prior year, much higher results of the subsidiaries had a positive impact on the FFO. However, unlike the situation regarding the result for the year, the FFO are not affected by the non-cash-effective exceptional factors. The changes in working capital and the resultant reduction in the amount of capital tied up have resulted in a higher cash flow from operating activities4) compared with the prior year. The cash flow from investing activities very much reflects the payment inflows from profit transfers and dividends from subsidiaries and other equity participations, which at € 393 million were higher than the corresponding prior year figure (€ 288 million). As was the case in the prior year, the cash outflows for investments (a net figure of € 54 million; prior year period: € 267 million) mainly comprised payments of equity and loans to subsidiaries. The cash flow from investing activities includes interest received of € 15 million (prior year period: € 23 million). The cash inflows from operating activities in conjunction with the high cash flow from investing activities were used for repaying liabilities due to external financing partners. The cash pool liabilities have also declined. Interest payments of € 22 million were made in the 2015 financial year (prior year period: € 25 million). The dividend payment for the prior year of € 73 million is also included in the cash flow from financing activities. c)Net assets The balance sheet total has declined by € 622 million (23 per cent) compared with the prior year to € 2,143 million. This is due to the adjustment to the value of shares in VNG Norge’s fixed assets. In addition, as was the case in the consolidated financial statements, a decline in storage inventories compared with the prior year as well as lower market prices have resulted 4) Due to the application of DRS 21, dividends and interest received as well as outflows for creating cover funds are attributable to cash flow from investing activities. Outflows for interest payments are shown under cash flow from financing activities. in a decline in current assets. The development in assets has resulted in a shift in balance sheet ratios in favour of fixed assets. Compared with the prior year reference date, the decline in the balance sheet total has resulted in the equity ratio improving slightly by one percentage point to 33 per cent. There have been no major events after the reporting date. F. Group-wide management of opportunities and risks Risk diversification by means of strategic positioning. With four business areas, the VNG Group has established a position in relation to the product natural gas. The purpose of this strategic positioning is to promote risk diversification, and also enables the Group to take advantage of the opportunities within a dynamic market environment. The Group responds promptly to current changes in the financial and legal conditions of its core business, and the potential opportunities and risks are identified and evaluated (with regard to the opportunities and risks of the individual business areas, please refer to the comments in section D). Group-wide risk management. For ensuring that there is a permanent balance between opportunities and risks, the VNG Group has an extensive risk management system in which all business areas and group companies are integrated. The principles of group risk management are implemented in the individual companies and business areas on the basis of company-specific risk management regulations and transparent reporting. Systematic recording and evaluation of opportunities and risks. In addition to the operational measures and monitoring of risks, a comprehensive inventory is carried out twice every year; this inventory systematically records, evaluates and aggregates all opportunities and risks. There is also an ad-hoc reporting 39 system on the basis of defined benchmarks guaranteeing that changes in the opportunity/risk portfolio are recognised at an early stage. Monitoring and management of the portfolio of participating interests. The earnings forecasts which are regularly updated by the participating interests are included in the reporting system. The value of the participating interests is continuously monitored. In the case of major fully-consolidated participating interests, the Group has introduced instruments and procedures of functional management which enable the VNG Group to focus on its objectives and also which enable opportunities and risks to be identified at an earlier stage. The VNG Group observes all relevant markets of its participating interests, and is also able to respond promptly to risks if necessary as a result of its presence on the executive bodies of the companies. Impairments are recognised if there are any future risks to results with an impact on the value recognised for the participating interests. Group-wide compliance management. The VNG Group has a Group-wide compliance management system (CMS). The aim of this system is to ensure that the conduct of all employees complies with all legal requirements so as not to pose a risk to the confidence of customers, business partners, shareholders and the public in the VNG Group. In addition to organisational precautions and guidelines, there is also an extensive reporting system as well as goal-oriented training for employees. The effectiveness and adequacy of the CMS were assessed and certified in 2015 by an auditing company. Accordingly, the principles and measures of the CMS are suitable, with adequate reliability, for ensuring the timely recognition of risks of significant violations of laws and internal regulations in the fields of the prevention of corruption, cartel law and trade regulation within the VNG Group, and are also suitable for preventing such irregularities. Certified integrated management system. VNG AG also has a certified integrated management system with the elements of quality, environmental and information security. The reliability of the work procedures and the adequate implementation of all standards are regularly monitored. 40 Systematic financial risk management. The financial risk structure of the VNG Group is virtually unchanged compared with last year. The VNG Group is exposed particularly to risks arising from changes in raw material prices, exchange rates and interest rates as well as credit risks. The fundamentally conservative approach of the company is reflected in its systematic financial risk management system. The functions of trading, clearing and financial risk controlling are segregated within the Group’s organisation. Hedging of price, currency and interest rate risks. The sole purpose of the derivative standard financial instruments used within the framework of financial risk management is to hedge existing risks of underlyings. Commodity futures are used for managing price risks arising from gas purchasing and sales contracts. For daily measurement and monitoring of these risks, statistical risk measures are used and the potential changes in the present value of the trading portfolio are limited. All currency exposures of the VNG Group are, where possible, concentrated and completely hedged at VNG AG. Contracts with Group companies outside the Eurozone are concluded in the domestic currency of such companies. The main instruments used for hedging purposes are currency futures and natural portfolio hedge effects. VNG AG operates an active policy of interest rate risk management, with regular evaluation of all interest rate risks. Derivative financial instruments are also used for this purpose. Financing assured. The Group’s solvency is guaranteed at all times as a result of adequate liquidity reserves in the form of committed credit lines and also as a result of optimised allocation of the Group’s internal liquidity. The core elements of financing are a sound syndicate loan line and borrower’s note loans with various financing partners. At the beginning of the financial year, VNG AG was successfully able to refinance its syndicate loan line of approximately € 1.3 billion for a further five years. The rolling liquidity planning covering several years regularly establishes the future peak financing requirement which, as of the reference date, was always covered by adequate sources of finance even in risk scenarios. Management Report and Group Management Report for the 2015 Financial Year | Annual Report 2015 Increase in number of business partners reflected in credit risk management. The main credit risks are attributable to the continued increase in the number of gas supply and trading agreements with national and international business partners. Credit risks also arise from financial instruments agreed for the purpose of hedging currency, raw material price and interest rate risk positions. The rating assessment of our business partners (customers and suppliers, trading partners as well as financial institutions) is evaluated and continuously monitored within the framework of established credit risk management on the basis of available information and using standard market procedures. The standard hedging instruments (e. g. guarantees) and credit insurance for factoring are used selectively for managing credit risks. Foreseeable risk position. Apart from the general risks associated with business, there are no indications at present of any risks which might have a sustainable and significantly negative impact on the net assets, financial position and results of operations of VNG AG and the VNG Group. G. Outlook The market continues to be challenging. There will not be any fundamental recovery in the low raw material prices, distribution margins and seasonal gas price differences in the short to medium term. The competition on a market which is tending to contract will also become more intense. Accordingly, it is not possible to assume that there will be any substantial improvement in the economic conditions particularly for the business areas Gas Trading, Gas Storage and E&P in the near future. Review of the strategic direction. The ongoing market turmoil means that it will be essential for the strategic direction of the VNG Group to be reviewed. The VNG Group has already initiated this process. Accordingly, strategies of the various business areas will be scrutinised, factors of success will be examined and strategic options as well as new business opportunities will be developed for the future focus of the VNG Group. Previous activities will be put up for negotiation if they do not meet the necessary profitability requirements. Convincing new business ideas in the energy sector are for instance supported by the newly established VNG Innovation GmbH as a strategic partner of start-up companies. Implementation of measures in order to boost profit­ ability. The programme which was started last year to boost profitability will also be continued with great intensity. Initial immediate measures have already resulted in significant cost savings. Further efficiency and earnings potential is to be unlocked in the short to medium term. This process will include leaner structures and processes as well as a significant reduction in the number of personnel. Improvement in earnings expected for 2016. Gas Transport activities are again expected to report stable results in future. The challenging market situation will continue to have an impact in the other business areas. In particular, the very uncertain development in raw material prices is having a significant influence on the short- and medium-term earnings situation. Recovery in Gas Trading is only expected to take place slowly by way of further improvements to purchasing conditions and also by way of focusing on customer groups and business models providing strong returns. The process of establishing profitable E&P business will continue to require considerable volumes of funding in the course of the next few years, taking account of the internal financing resources of the VNG Group. As part of the process of implementing the programme designed to boost profitability, effects designed to improve results are expected to be seen from 2016 onwards. Overall, positive results again for VNG AG and the VNG Group are expected for 2016. Earnings are also expected to improve because last year was affected by considerable one-off effects. Possible settings of new strategic directions might also have a considerable impact on the net assets, financial position and results of operations. Investment activity will continue to be high. In the course of the next few financial years, investments will continue to focus on maintaining profitability in the 41 transport field and also on expanding E&P activities with the aim of assuring future growth opportunities. Further investments are also planned for expanding end user business in Gas Trading. As has been the case in the past, the extent of the anticipated cash flow from operating activities may be subject to significant fluctuations as a result of the development in working capital in trading business as of the reference date, and will continue to have a significant influence on group debt. For 2016, the level of debt is expected to increase mainly as a result of the high levels of investment activity. On the other hand, the equity ratio, which is a measure of creditworthiness, is expected to be stable. Change in group of shareholders. In the fourth quarter of 2015, EnBW Energie Baden-Württemberg AG signed an agreement regarding the purchase of the shares in VNG AG held by EWE Aktiengesellschaft. The acquisition is not yet effective due to conditions precedent. Willingness to change in the future. The future energy policy will offer major opportunities of significantly improving the earnings situation. New business opportunities and efficient structures as well as well trained, experienced and highly motivated employees are essential in this respect. The VNG Group has for this purpose initiated a process of change within the company and is thus setting the right course in a difficult market situation. The VNG Group is convinced that it will thus be able to meet the major challenges. 42 Management Report and Group Management Report for the 2015 Financial Year | Annual Report 2015 43 consolidated financial statements 45–72 Consolidated Balance Sheet as at December 31, 2015 Assets Notes Dec. 31, 2015 T€ Dec. 31, 2014T€ 74,835 109,555 II. Property, plant and equipment 720,316 760,364 III. Financial assets 279,396 258,745 1,074,547 1,128,664 A. Fixed assets I. Intangible assets B. Current assets I. Inventories 1 255,853 378,109 II. Receivables and other assets 2 917,288 1,105,652 25,503 40,738 1,198,644 1,524,499 III. Cash and cash equivalents C. Special loss item from provisions formed pursuant to Article 17 (4) DMBilG [DM Balance Sheet Act] D. Prepaid expenses E. Deferred tax assets 3 F. Surplus resulting from asset offsetting and capitalised 4 2,219 2,594 10,481 10,403 184,503 180,676 0 627 2,470,394 2,847,463 Notes Dec. 31, 2015 T€ Dec. 31, 2014 T€ 5 328,000 328,000 Equity and Liabilities A.Equity I.Subscribed capital II.Retained earnings 6 316,042 205,437 III. Profit participation capital 7 772 695 IV.Equity difference from currency conversion 8 V. Consolidated balance sheet loss/profit B.Special items 3,975 183,605 590,357 721,712 2,565 3,624 C.Provisions 9 490,135 469,975 D.Liabilities 10 1,330,414 1,550,948 6,377 20,638 11 50,546 80,566 2,470,394 2,847,463 E.Deferred income F.Deferred tax liabilities 46 –1,648 –52,809 Consolidated Financial Statements | Annual Report 2015 Consolidated Income Statement for the Period from January 1 to December 31, 2015 Notes Jan. 1 to Dec. 31, 2015 Jan. 1 to Dec. 31, 2014 T € T € 1. Sales 12 2. Changes in work in progress 3. Work performed by the Company and capitalised 4. Other operating income 5. Cost of materials 9,402,655 9,977,949 1,197 55 4,031 2,782 110,167 307,783 9,518,050 10,288,569 14 9,137,389 9,721,314 13 6. Personnel expenses 15 122,886 122,762 7. Depreciation and amortisation expense 16 216,692 143,439 8. Other operating expenses 17 161,770 144,064 9. Financial result 18 –24,148 –6,202 –144,835 150,788 93,661 34,427 1,635 1,465 –52,809 183,750 0 –145 –52,809 183,605 10. Loss/profit on ordinary activities 11. Income from taxes on income 12. Other taxes 13. Consolidated net loss/net income for the year 14. Profit or loss attributable to other shareholders 15. Consolidated balance sheet loss/profit 19 47 VNG – Verbundnetz Gas Aktiengesellschaft, Leipzig Notes to the Consolidated Financial Statements 2015 I. General notes The consolidated financial statements of VNG – Verbundnetz Gas Aktiengesellschaft, Leipzig (VNG), have been drawn up in accordance with the provisions of the German Commercial Code [Handelsgesetzbuch—HGB], the German Stock Corporation Act [Aktiengesetz—AktG], the Act on the Preparation of Deutschmark Financial Statements [D-Markbilanzgesetz—DMBilG] and the German Accounting Standard [Deutscher Rechnungslegungs Standard—DRS]. The consolidated financial statements for the period ending December 31, 2015 have been drawn up as “fast close” financial statements. In particular, the reduction in the time available for preparing the financial statements has led to the use of estimating procedures in December 2015. The estimates concerned were made on the basis of all information available at the time when the financial statements were drawn up. For clearer and more effective presentation, individual items of the balance sheet and the income statement are grouped together. These items are explained in these notes. The notes to the balance sheet and income statement items required by law and the notes which may either be presented in the balance sheet itself or in the notes to the financial statements are presented separately in these notes. The income statement has been prepared using the nature of expense method in accordance with Article 275 (2) HGB. Information concerning the consolidated group German companies included in the Group: Share Direct % 1 100.00 BALANCE VNG Bioenergie GmbH, Leipzig 2 100.00 goldgas GmbH, Eschborn 1) 3 100.00 ONTRAS Gastransport GmbH, Leipzig 4 100.00 VNG-Erdgascommerz GmbH, Leipzig 5 100.00 VNG Gasspeicher GmbH, Leipzig 6 100.00 ECG Erdgas-Consult GmbH, Leipzig 7 100.00 ENERGIEUNION GmbH, Schwerin 8 100.00 GDMcom Gesellschaft für Dokumentation und Telekommunikation mbH, Leipzig 9 100.00 GEOMAGIC GmbH, Leipzig 10 100.00 INFRACON Infrastruktur Service GmbH & Co. KG, Leipzig 11 100.00 Leipziger Biogasgesellschaft mbH, Leipzig 12 100.00 MBG Mitteldeutsche Biogasgesellschaft mbH, Leipzig 13 100.00 OSG ONTRAS Servicegesellschaft mbH, Leipzig 1) 48 Name and registered office of the company Indirect % Formerly goldgas SL GmbH, Eschborn. Consolidated Financial Statements | Annual Report 2015 Foreign companies included in the Group: Share Direct % Name and registered office of the company Indirect % 14 100.00 VNG Austria GmbH, Gleisdorf (Austria) 15 100.00 VNG Energie Czech s.r.o., Prague (Czech Republic) 16 100.00 VNG Italia S.r.l., Bologna (Italy) 17 100.00 VNG Norge AS, Stavanger (Norway) 18 100.00 VNG Polska Sp. z o.o., Tarnowo Podgórne (Republic of Poland) 19 100.00 VNG Slovakia, spol. s r.o., Bratislava (Slovak Republic) 20 100.00 G.EN. Gaz Energia Sp. z o.o., Tarnowo Podgórne (Republic of Poland) 21 100.00 goldgas GmbH, Vienna (Austria) 22 100.00 HANDEN Sp. z o.o., Warsaw (Republic of Poland) 23 100.00 SPIGAS S.r.l., La Spezia (Italy) 24 100.00 VNG Danmark ApS, Copenhagen (Denmark) Associated companies valued at equity in the consolidated financial statements German associated companies: Share Direct % Name and registered office of the company Direct % 25 50.00 Heizkraftwerk Halle-Trotha GmbH, Halle (Saale) 26 20.00 GasLINE Telekommunikationsnetzgesellschaft deutscher Gasversorgungsunternehmen mbH & Co. KG, Straelen 27 50.00 Erdgasspeicher Peissen GmbH, Halle (Saale) 28 40.00 Untergrundspeicher- und Geotechnologie-Systeme Gesellschaft mit beschränkter Haftung, Mittenwalde 29 25.10 EMB Energie Mark Brandenburg GmbH, Potsdam 30 24.60 MITGAS Mitteldeutsche Gasversorgung GmbH, Halle (Saale) 31 23.38 Stadt- und Überlandwerke GmbH Luckau-Lübbenau, Luckau Foreign associated companies: Share Direct % 32 Name and registered office of the company Indirect % 49.00 Nitrianska teplárenská spoločnosť, a.s., Nitra (Slovak Republic) 49 The balance sheet and income statement to be disclosed for major associated companies in accordance with DRS 8 have been submitted electronically to the operator of the Federal Gazette, and can be obtained via the company register (www.unternehmensregister.de). Other companies in accordance with Article 313 (2) No. 4 HGB Share Direct % Indirect % Net income or loss for the year € € –673 1) 3) 4) VNG Vertriebs-GmbH Thüringen/Bayern, Erfurt 34,995 0 1) 2) GasLINE TelekommunikationsnetzGeschäftsführungsgesellschaft deutscher Gasversorgungsunternehmen mbH, Straelen 62,261 1,077 5) 6) 835,614 21,648 1) 5) 30,062 0 1) 5) 7) 8) 2,800,000 0 1) 9) 100.00 VNG Innovation GmbH, Leipzig 34 100.00 20.00 Equity capital 124,327 33 35 Name and registered office of the company 36 100.00 EnergieFinanz GmbH, Schwerin 37 100.00 goldgas UK Ltd., London (England) 38 100.00 VNG-Erdgastankstellen GmbH, Leipzig 39 50.00 lictor GmbH, Leipzig 170,987 43,855 5) 6) 40 50.00 Robotron|ECG solutions GmbH, Dresden 309,227 60,644 5) 6) 41 49.00 PROMETHEUS - Gesellschaft für Erdgas­ anwendungsanlagen mbH, Leipzig 108,650 6,391 5) 6) 7) 42 37.34 caplog-x GmbH, Leipzig 646,597 446,597 5) 6) 43 35.00 SPIGAS CLIENTI S.r.l., La Spezia (Italy) 285,139 176,251 6) 10) 44 32.00 store-x Storage Capacity Exchange GmbH, Leipzig 451,194 151,194 5) 6) Not included in accordance with Article 296 (2) HGB. There is a profit and loss transfer agreement with VNG. 3) Figures taken from the short financial year as at December 31, 2015. 4) Before preparation of the annual financial statements. 5) Figures taken from the annual financial statements as at December 31, 2014. 6) Not valued at equity in accordance with Article 311 (2) HGB. 7) Subscribed capital partly outstanding and not called-up, figure refers to paid-up capital. 8) Converted at middle rate on December 31, 2014. 9) There is a profit and loss transfer agreement with VNG-Erdgascommerz GmbH. 10) Figures taken from the annual financial statements as at September 30, 2014. 1) 2) II. Information concerning the consolidation methods Reference date The consolidated financial statements as well as the separate financial statements of the companies included in the Group have been prepared for the period ending December 31, 2015. 50 Consolidated Financial Statements | Annual Report 2015 Consolidation principles Fully consolidated companies The separate financial statements of the subsidiaries included in the consolidated financial statements of VNG are prepared in accordance with the statutory regulations and uniformly in accordance with the accounting principles applicable at VNG. In order to guarantee uniform accounting principles, reconciliation statements (commercial balance sheet II) are prepared for the foreign subsidiaries included in the Group. The capital of the subsidiaries is consolidated in accordance with the revaluation method specified in Article 301 HGB. There are no material differences between the carrying amount method in accordance with Article 301 (1) Sentence 2 No. 1 HGB (old version) which was applied until the year 2003 and the revaluation method. In accordance with Article 309 (1) HGB, the goodwill resulting from initial consolidation is written down over the expected useful life of the assets; up to and including the 2009 financial year, such goodwill was netted against retained earnings in accordance with Article 309 (1) Sentence 3 HGB (old version). If the differences are attributable to profits retained in previous years, they have been allocated to the retained earnings of the Group. The initial consolidation of the goldgas Group in 2013 has resulted in goodwill of 14,179 T€, which has been written down over a period of two years. Receivables, liabilities as well as expenses and income between the companies included in the consolidated financial statements are netted against each other. Intercompany profits and losses are eliminated. Currency conversion in the Group is carried out in accordance with Article 308a HGB. The financial statements of foreign subsidiaries are accordingly converted using the modified reference date rate method in order to be included in the consolidated financial statements. VNG Innovation GmbH, Leipzig, was founded in the past financial year. In accordance with Article 296 (2) HGB, it has not been included in the consolidated financial statements due to its minor importance for the net assets, financial position and results of operations of the Group. With economic effect as from January 1, 2015, goldpower GmbH, Eschborn, was merged with and into goldgas SL GmbH (now goldgas GmbH), Eschborn. In accordance with Article 296 (2) HGB, VNG-Erdgastankstellen GmbH, Leipzig, was deconsolidated due to its minor importance for the net assets, financial position and results of operations of the Group. Associated companies The carrying amount method in accordance with Article 312 (1) Sentence 1 HGB is used for the initial equity valuation of all companies. Any goodwill resulting from initial integration is written down as scheduled over a useful life of five years. In accordance with Article 312 (2) HGB in conjunction with Article 309 (1) HGB (old version), the goodwill which resulted up to December 31, 2009 is amortised as scheduled over a useful life of 20 years. 51 The carrying amount of the goodwill was 24,333 T€ as at the balance sheet date. The liability differences of 1,682 T€ were allocated to the retained earnings of the Group to the extent that they result from profits retained in previous years. Intercompany profits or losses were eliminat-ed only in the case of upstream transactions; DRS 8 has not been applied in the case of down-stream transactions. The valuation methods applied for the associated companies have not been adjusted to the valuation principles applicable at VNG. The companies caplog-x GmbH, Leipzig, lictor GmbH, Leipzig, Robotron|ECG solutions GmbH, Dresden, and store-x Storage Capacity Exchange GmbH, Leipzig, were for the first time not accounted for using the equity method in accordance with Article 311 (2) HGB due to their minor importance for the net assets, financial position and results of operations of the Group. The above companies are shown under participating interests on the reference date and valued in accordance with the historical cost method at the equity value as at the time of transfer pursuant to DRS 8. As at September 23, 2015, the shareholding ratio in SPIGAS CLIENTI S.r.l., La Spezia (Italy), was increased by 25 percentage points to 35 per cent. Valuation at equity in accordance with Article 311 (2) HGB is not applied to this company either. As at October 8, 2015, InterTransGas GmbH i.L., Leipzig, was liquidated. In addition, VNG Italia S.r.l., Bologna (Italy), sold all of its shares in BLUEFIN S.r.l., Bologna (Italy), (50 per cent) with effect as from December 10, 2015. III. Accounting and valuation principles Fixed assets Gas production licenses and capitalised exploration costs are recognised with their purchase costs less performance-related amortisation (units of production method). Costs incurred for geological and geophysical surveys are recognised immediately in the income statement. The Company took advantage of the option specified in Article 248 (2) HGB for capitalising self-created intangible assets for exploration costs. Accordingly, exploration costs are recognised with their costs of production in accordance with Article 253 (1) Sentence 1 in conjunction with Article 255 (2a) Sentence 1 HGB. The Company capitalises all exploration costs which are capable of being capitalised and which are incurred in the financial year in which oil or gas reserves which will probably be commercially viable are discovered. Goodwill is written down over the probable useful life. The remaining intangible assets are valued with their purchase costs less straight-line amortisation. The underlying standard useful lives are between three and five years. Property, plant and equipment are carried at procurement or production cost taking into consideration appropriate overheads in accordance with Article 255 (2) HGB. Buildings and other structures are valued at procurement or production cost with straight-line depreciation. Technical plant and machinery, and other equipment, fixtures, furniture and office equipment were generally depreciated following the declining-balance method up to and including the 2009 financial year. Upon the first-time application of the German Financial Reporting Modernisation Act [Gesetz zur Modernisierung des Bilanzrechts—BilMoG] as at January 1, 2010, VNG exercised the option allowed by Article 67 (4) Sentence 1 of the Act Introducing the German Commercial Code [Einführungsgesetz zum Handelsgesetzbuch—EGHGB], to continue the previous valuations and to apply declining-balance depreciation. If straight-line depreciation had been applied in 2015, additional depreciation of 2,108 T€ would have resulted. Since 2010, newly-acquired assets have been depreciated using the straight-line method. The depreciation periods for tangible assets correspond to the expected useful life of the assets which is based on the useful life determined by tax regulations in the case of domestic 52 Consolidated Financial Statements | Annual Report 2015 subsidiaries. Investment grants received in previous years have been allocated to a special item, which is reversed in instalments in line with commercial law depreciation. Building cost subsidies are deducted from assets. Low-value assets with a value of less than 150 € are fully charged as an expense in the year of addition. A collective item is formed for low-value assets of property, plant and equipment with a value above 150 € but not exceeding 1,000 €. This collective item is written down over a period of five years on a straight-line basis. If the fair values of individual items of property, plant and equipment are lower than the corresponding carrying amounts, additional impairments are recognised if the reduction in value is probably of a permanent nature. If the reasons for the write-downs are no longer applicable, corresponding write-ups are recognised. Shares in affiliated companies and other participating interests are recognised at their purchase cost. Shares in associated companies are measured at the lower of their equity value or fair value. The equity value is based on financial statements which are prepared in accordance with the accounting policies of the HGB. In accordance with Article 312 (5) Sentence 1 HGB, no adjustments are made to the uniform accounting policies in the Group. Loans are recognised with their nominal value. Current assets Raw materials, consumables and supplies are valued at average cost. The last-in first-out (Lifo) method using the monthly inventory layer principle and taking into consideration the strict lower-of-cost-or-market principle in accordance with Article 253 (4) HGB was applied for gas inventories stated as merchandise. Work in progress was recognised at production costs required to be capitalised. Emission rights received for no consideration (market value of 257 T€) are carried at a memo value. They will be used up for planned emissions up to 2016. Emission rights acquired for a consideration are carried at the lower of cost or market value on the closing date and will be used up for respective emissions in 2016. Receivables and other assets are shown at principal. Reasonable allowance is made for irrecoverable individual accounts. A percentage of outstanding accounts was deducted to cover the general credit risks. Provisions Provisions are recognised for uncertain liabilities at the amount which will probably be required on the basis of reasonable commercial assessment. Provisions cover all foreseeable risks. Provisions with a term of more than one year are discounted over their remaining term using a discount rate in accordance with the average market interest rates of the past seven financial years. For discounting, the average discount rates published by Deutsche Bundesbank under a statutory instrument are used in accordance with Article 253 (2) Sentence 4 HGB. Provisions for pensions and similar obligations are determined on the basis of actuarial reports using the projected unit credit method. Provisions for pensions are valued on the basis of the “Richttafeln 2005 G” (actuarial tables) of Prof. Dr Klaus Heubeck taking into consideration future salary increases for different groups of 53 persons of 4 per cent p. a., 3 per cent p. a. or 0 per cent (for employees under semi-retirement arrangements) and pension increases of 1.75 per cent p. a. Pension obligations are discounted in accordance with Article 253 (2) Sentence 2 HGB at the average market interest rate for an assumed remaining term of 15 years (3.89 per cent p. a.; previous year’s reporting date 4.54 per cent p. a.). Before being transferred to an insurance company, the obligations from pensions and similar obligations of an affiliated company were netted against the asset items which serve the exclusive purpose of settling liabilities relating to old-age pensions and similar obligations and which are protected against access by third parties (cover funds). The cover funds are measured at their fair value. Provisions for semi-retirement obligations are formed on the basis of the block model for semi-retirement agreements entered into as at the balance sheet date. For recognition in accordance with German commercial law, the top-up amounts were fully charged as an expense due to their nature. Semi-retirement provisions are valued in accordance with actuarial principles on the basis of an interest rate of 3.89 per cent p. a. (previous year’s reporting date 4.54 per cent p. a.) and the “Richttafeln 2005 G” (actuarial tables) of Prof. Dr Klaus Heubeck. Annual wage and salary increases of 3 per cent have been assumed for determining the semi-retirement provisions. For provisions which had to be created in the DM opening balance sheet due to the initial application of Article 249 (1) Sentence 1 HGB, a special loss item from provisions formed has been shown on the assets side of the balance sheet; this is depreciated in accordance with the utilisation or reversal of these provisions. In the income statement, additions to provisions, to the extent that provisions of this type were recognised for the first time, were recognised on the basis of the net presentation principle. The effects on profit or loss arising from the change in the discount rate are disclosed in the financial result. Liabilities Liabilities are stated at the amounts required to settle the obligations. Currency conversion Foreign currency transactions are valued at the spot middle exchange rate prevailing at the time of first entry. Long-term receivables denominated in foreign currencies are, where required, written down on the basis of the lower spot middle exchange rate as at the balance sheet date (following the principle that unrealised exchange losses are to be recognised, whereas unrealised exchange gains are not to be recognised). Short-term foreign currency receivables (with a remaining term of one year or less) as well as cash and cash equivalents and other current assets denominated in foreign currencies are converted at the spot middle exchange rate as at the balance sheet date. Payables denominated in foreign currencies are carried at the spot middle exchange rate as at the date when the payable arose. Long-term payables denominated in foreign currencies are, where required, carried on the basis of the higher spot middle exchange rate as at the balance sheet date (following the principle that unrealised exchange losses are to be recognised, whereas unrealised exchange gains are not to be recognised). 54 Consolidated Financial Statements | Annual Report 2015 Short-term foreign currency payables (with a remaining term of one year or less) are converted at the spot middle exchange rate as at the balance sheet date. Contingent liabilities denominated in foreign currencies are converted at the spot middle exchange rate on the balance sheet date. Deferred taxes Deferred taxes are formed for differences between the balance sheet valuations in the commercial and tax balance sheets to the extent that such differences will probably be eliminated in future financial years with an impact on tax. In addition, deferred tax assets are formed on accumulated losses carried forward if it is expected that such losses will be set off against income within the next five years. Deferred tax assets and deferred tax liabilities are shown as non-netted figures. The calculation of the deferred tax assets and deferred tax liabilities is based on the relevant tax rate of the respective group companies. IV. Notes to the consolidated balance sheet Fixed assets Fixed assets shown in the balance sheet and changes in the fixed assets are detailed in the statement of changes in fixed assets (appendix to the notes). Current assets (1) Inventories Dec. 31, 2015 T € Dec. 31, 2014 T € Raw materials, consumables and supplies 7,909 8,688 Work in progress 2,916 1,719 243,818 367,221 799 100 Merchandise Emission rights Advance payments made 411 381 255,853 378,109 The application of the Lifo method resulted in a difference in the sense of Article 284 (2) No. 4 HGB of 21,524 T€ as at December 31, 2015 (December 31, 2014: 33,855 T€). Depreciation in accordance with Article 253 (4) HGB was recognised in the amount of 51,472 T€ (December 31, 2014: 37,302 T€). 55 (2) Receivables and other assets Trade receivables (thereof with a remaining term of more than one year) Accounts receivable from affiliated companies Accounts receivable from companies with which the Company is connected by a participating interest Other assets (thereof with a remaining term of more than one year) Dec. 31, 2015 T € Dec. 31, 2014 T € 725,284 952,776 0 0 1,167 1,045 48,800 18,545 142,037 133,286 510 6 917,288 1,105,652 Of the figure shown for accounts receivable from affiliated companies, trade receivables account for 1,148 T€ (December 31, 2014: 1,036 T€) and taxes account for 19 T€ (December 31, 2014: 9 T€). In addition, accounts receivable from companies with which the Company is connected by a participating interest are composed of trade receivables in the amount of 47,400 T€ (December 31, 2014: 18,545 T€) and interest receivables of 1,400 T€ (December 31, 2014: 0 T€). The other assets include accounts receivable from the Finanzamt (revenue authorities) due to input tax refund claims in the amount of 253 T€ which legally arise only after the balance sheet date (December 31, 2014: 206 T€). (3) Deferred tax assets Deferred tax assets are attributable to temporary differences between figures shown in balance sheets, tax loss carry forwards as well as other tax differences which are allowable abroad. The temporary differences are mainly attributable to the different figures shown in commercial balance sheets and tax balance sheets for the intangible assets, property, plant and equipment, inventories, receivables and other assets, the provisions for pensions and similar obligations as well as the other provisions and the liabilities. Company-individual tax rates of 19–78 per cent have been used as the basis of calculating the deferred tax assets. (4) Surplus resulting from asset offsetting and capitalised The pension obligations of an affiliated company, for which provisions have to be created, which so far had been offset against cover funds (pension fund) in accordance with Article 246 (2) Sentence 2 HGB were transferred to an insurance company in 2015. The income from cover funds which had until then been recognised (59 T€) has been netted against the interest payments (215 T€) in accordance with Article 246 (2) Sentence 2 HGB. The resultant balance of 156 T€ is included in the financial result under “Interest payable and similar charges”. Equity The breakdown and development of equity are detailed in the statement of changes in equity. 56 Consolidated Financial Statements | Annual Report 2015 (5) Subscribed capital The share capital of the parent company is € 328 million and consists of 128,000,000 no-par-value shares. (6) Retained earnings Statutory reserve pursuant to Article 150 (2) AktG Other retained earnings Dec. 31, 2015 T € Dec. 31, 2014 T € 32,800 32,800 283,242 172,637 316,042 205,437 Pursuant to a resolution of the ordinary general meeting of April 14, 2015, the amount of 73,000 T€ was distributed as a dividend to the shareholders out of VNG’s cumulative profit for the 2014 financial year. The remaining consolidated cumulative profit was paid into the other retained earnings. (7) Profit participation capital At one affiliated company, a further 307 (December 31, 2014: 188) profit participation rights were issued in the 2015 financial year at a nominal value of 250 € each. The purpose of issuing profit participation rights is to enable senior executives to participate in the success of the company. (8) Equity difference from currency conversion The equity difference from currency conversion (–1,648 T€) is due to the conversion of the consolidated foreign currency financial statements of the subgroup of VNG Polska Sp. z o.o., Tarnowo Podgórne (Republic of Poland), VNG Energie Czech s.r.o., Prague (Czech Republic), VNG Norge AS, Stavanger (Norway), and VNG Danmark ApS, Copenhagen (Denmark). Liabilities (9) Provisions Dec. 31, 2015 T € Dec. 31, 2014 T € Provisions for pensions and similar obligations 24,340 22,595 Provisions for taxes 14,356 26,998 Other provisions 451,439 420,382 490,135 469,975 In accordance with Article 28 (1) Sentence 2 EGHGB, provisions for indirect pension obligations to be met by an assistance fund were not shown on the balance sheet. The difference between the present values of the pension obligations of the assistance fund and the cash and cash equivalents held by the assistance fund as at December 31, 2015 was 3,975 T€. 57 The other provisions mainly comprise obligations for shutting down underground storage facilities, pipelines and drilling rigs. Additionally, provisions for outstanding invoices, risks in connection with gas business, human resources, restructuring and other uncertain liabilities were created. (10) Liabilities Dec. 31, 2015 Remaining term Remaining term up to 1 year more than 5 years (prev. year) (prev. year) Dec. 31, 2014 T€ T€ T€ T€ Liabilities to banks 359,971 115,060 4,639 495,496 (116,295) (36,733) Advance payments 15,029 15,029 0 (27,818) (0) 714,329 0 Trade payables Liabilities to affiliated companies Liabilities to companies with which the Company is connected by a participating interest Other liabilities (thereof taxes) (thereof social security contributions) 714,695 (812,775) (0) 3,004 3,004 0 (742) (0) 10,484 10,484 0 227,231 33,080 1,330 1,330,414 (11,126) (0) 86,451 127,515 (57,920) (131,976) 33,080 0 (37,253) (0) 1,330 0 (1,571) (0) 944,357 132,154 (1,026,676) (168,709) 27,818 814,125 742 11,126 201,641 37,253 1,571 1,550,948 The liabilities to affiliated companies relate to investment transactions within the framework of cash management (1,417 T€; December 31, 2014: 34 T€), trade payables (777 T€; December 31, 2014: 674 T€), loss transfers as a result of profit and loss transfer agreements (777 T€; December 31, 2014: 1 T€) and outstanding contributions (33 T€; December 31, 2014: 33 T€). Liabilities to companies with which the Company is connected by a participating interest concern outstanding capital contributions not called up (8,200 T€; December 31, 2014: 8,200 T€) and trade transactions (2,284 T€; December 31, 2014: 2,926 T€). As was the case last year, borrower’s note loans of 76,000 T€ were disclosed under the other liabilities. Liabilities of 5,471 T€ due to the Finanzamt (revenue authorities) (December 31, 2014: 9,663 T€) legally arise only after the closing date. Loan liabilities of 10,771 T€ are mainly secured by property register charges. 58 Consolidated Financial Statements | Annual Report 2015 (11) Deferred tax liabilities Deferred tax liabilities are mainly attributable to temporary differences resulting from different figures shown in commercial balance sheets and tax balance sheets for intangible assets and property, plant and equipment as well as the non-recognition for tax purposes of the special loss item from provisions formed pursuant to Article 17 (4) DMBilG. Company-individual tax rates of 19–78 per cent have been used as the basis of calculating the deferred tax liabilities. Contingencies Contingent liabilities to be reported pursuant to Article 251 HGB amount to 1,560 T€. They relate to a guarantee for an associated company. According to our current state of knowledge, no claims are expected to arise from the contingent liability, as the underlying obligation will probably be met by the company concerned. Other financial obligations The other financial obligations pursuant to Article 314 (1) No. 2a HGB amount to € 67 million. These chiefly concern obligations arising from leasing/rental and service agreements and obligations for the use of transport and storage capacities in the 2016 financial year. VNG has undertaken long-term purchase commitments with gas suppliers to cover gas demand. In addition, payment obligations exist in connection with the order commitment. V. Notes to the consolidated income statement (12) Sales Sales were chiefly accounted for by income from the gas business: 90 per cent of sales were realised in Germany, and 10 per cent were realised in other European countries. For the sake of simplicity, sales on the spot/futures markets have been completely allocated to domestic sales. (13) Other operating income The other operating income includes foreign currency translation income of 4,715 T€ (2014: 6 T€). Income attributable to other accounting periods (10,619 T€) is also disclosed; this mainly relates to credit notes for previous years. Income of 573 T€ results from the appreciation of fixed assets. 59 (14) Cost of materials Cost of raw materials, consumables and supplies and purchased merchandise Cost of purchased services 2015 T € 2014 T € 8,955,178 9,566,818 182,211 154,496 9,137,389 9,721,314 In the financial year, exploration costs of 74,364 T€ were incurred; of this figure, 16,923 T€ has been capitalised. (15) Personnel expenses Wages and salaries Social security costs, pensions and assistance expenses 2015 T € 2014 T € 100,733 101,569 22,153 21,193 122,886 122,762 Personnel expenses include expenses incurred for pensions totalling 4,825 T€ (2014: 4,932 T€). (16) Depreciation and amortisation expense Non-scheduled depreciation in accordance with Article 253 (3) Sentence 3 HGB was recognised in the amount of 113,730 T€ (2014: 57,978 T€). This is mainly attributable to the depreciation of storage and production facilities as well as exploration licenses due to the reduction in value which is probably of a permanent nature. (17) Other operating expenses Other operating expenses include expenses of 13,972 T€ (2014: 18,694 T€) resulting from currency conversion. (18) Financial result Income from participating interests Profit/loss from associated companies 2014 T € 1,626 2,369 12,466 31,549 Income from loans carried as fixed assets 2,462 1,773 Interest receivable and similar income (thereof income of 0 T€ from affiliated companies; previous year 2 T€) 1,882 3,208 Income from absorption of losses Expenses from absorption of losses Amortisation of financial assets Interest payable and similar charges 60 2015 T € 0 8 819 47 0 14 41,765 45,048 –24,148 –6,202 Consolidated Financial Statements | Annual Report 2015 Interest payables include an amount of 13,186 T€ (2014: 10,706 T€) with respect to the compounding of interest on provisions. (19) Taxes on income In addition to trade and corporation tax, this item includes income of 34,851 T€ (net) due to the change in deferred taxes as well as a tax refund of the Norwegian state for exploration costs of VNG Norge in the amount of 66,916 T€. Taxes on income include a figure of 7,708 T€ for tax income attributable to other accounting periods. The following tax reconciliation statement has been prepared in accordance with DRS 18. 2015 T€ 2014 T€ –146,470 149,323 45,406 –46,290 Income due to different foreign tax charges 70,614 47,891 Income due to tax-free income 10,810 13,880 Cost due to expenses not deductible for tax purposes –13,507 –22,945 Cost due to temporary differences and losses for which no deferred taxes were recognised (previous year: income) –28,597 47,118 7,708 –5,573 Tax reconciliation statement Result before taxes on income Tax reconciliation statement Group tax rate: 31.0% Reconciliation: Tax income attributable to other accounting periods (previous year: tax expense) Income due to other tax effects Recognised income of taxes on income 1,227 346 93,661 34,427 VI. Valuation units in accordance with Article 254 HGB a) Valuation units using derivative financial instruments Within the scope of its business activities, the VNG Group is exposed to currency, interest rate and price risks. These are hedged chiefly using derivative financial instruments. All the derivatives are OTC transactions with contract parties of sound financial standing in the banking sector. They include currency futures, interest rate swaps and commodity swaps. The use of derivatives is subject to uniform standards and stringent internal monitoring and is limited to hedging the business operations of the VNG Group and related investments and financing transactions. The objective of using derivative financial instruments is to reduce fluctuations in profit and inflows and outflows of cash caused by changes in exchange rates, interest rates and market prices. The use of derivative financial instruments for speculative purposes is not permitted. Derivative financial instruments are normally used for hedging underlying transactions in the case of receivables or payables denominated in foreign currencies and planned transactions in foreign currencies, and 61 for hedging interest rate risks in connection with loans and risks of price changes under gas purchase and sales contracts. Where the statutory requirements are met, hedge accounting in accordance with Article 254 HGB is applied. The effective portions of hedges are presented in the balance sheet in accordance with the net hedge presentation method. The effectiveness of hedge relations is reviewed by appropriate methods (especially the critical term match method and the dollar offset method) both prospectively and retrospectively as at each balance sheet date. The basis for the effectiveness of a hedge is the agreement between the parameters of the underlying and hedging transaction which are relevant to valuation. Loss peaks are recognised as expenses, while gain peaks are not recognised. As at the balance sheet date, the VNG Group held derivative financial instruments with reference to currencies, interest rates and commodity prices. Dec. 31, 2015 Face value Dec. 31, 2015 Positive fair values Dec. 31, 2015 Negative fair values T€ T€ T€ 216,484 1,205 910 224,500 2,261 2,018 543,845 11,540 100,898 984,829 15,006 103,826 Currency derivatives Currency futures Interest rate derivatives Interest rate swaps Commodity derivatives Commodity swaps The fair value of derivative financial instruments depends on the development of the underlying market factors. Individual fair values were determined on the basis of market data as at the balance sheet date using accepted market methods. Currency futures are carried at the futures exchange rate as at the balance sheet date. The fair values of commodity swaps are determined by discounting future cash flows. Futures exchange rates are determined from current exchange rates using the premiums and discounts for futures. Interest rate swaps are valued using recognised analysis methods on the basis of the interest rate structure curve as at the balance sheet date. Valuation units for hedging against foreign currency risks A loan receivable in the amount of NOK 603 million as at the balance sheet date was hedged against the risk of changes in the NOK exchange rate by a micro-hedge. For the loan, currency future contracts with a face value of 63,474 T€ were concluded with a term corresponding to the earliest repayment date of the loan (underlying) in 2016. The currency futures had a positive fair value of 751 T€ as at the balance sheet date. A loan receivable in the amount of DKK 142 million as at the balance sheet date was also hedged against the risk of changes in the DKK exchange rate by a micro-hedge. The currency future contract concluded for this purpose had a face value of 18,990 T€; the fair value was 0 T€. Furthermore, a loan receivable in the amount of USD 101 million as at the balance sheet date was hedged against the risk of changes in the USD exchange rate by a micro-hedge. The currency future contracts concluded for this purpose had a face value of 91,959 T€; the negative fair value was 761 T€. 62 Consolidated Financial Statements | Annual Report 2015 Loans receivable totalling PLN 91 million as at the balance sheet date were also hedged against the risk of changes in the PLN exchange rate by a micro-hedge. The currency future contracts concluded for this purpose had a face value of 21,504 T€; the positive fair value was 102 T€. The contrary changes in the values of the loans receivable and the currency future contracts offset each other as the underlying and the hedging transactions are exposed to the same foreign currency risk. The underlying and hedging transactions are denominated in the same currency as the loans receivable in NOK, DKK, USD and PLN as of the due date are offset by payables in NOK, DKK, USD and PLN respectively at a fixed NOK/ Euro, DKK/Euro, USD/Euro or PLN/Euro exchange rate. To hedge currency risks connected with pending transactions in gas trading business, currency future contracts with a face value of 16,315 T€ were concluded with external partners. The terms of these contracts were in accordance with the expected due dates of the underlying transactions. As at the balance sheet date, the currency futures had a positive fair value of 352 T€ and a negative fair value of 126 T€. Furthermore, currency future contracts were concluded for hedging bank balances in PLN with a face value of 4,242 T€; the negative fair value was 23 T€. Valuation units for hedging against interest rate risks Interest rate swaps in the amount of 74,500 T€ have been used for financial liabilities in order to participate in the declining interest rate level. The term of the fixed-interest loans concerned expires in 2018. In addition, variable-interest financial liabilities in the amount of 75,500 T€ were hedged over time against the risk of interest rate changes by means of interest rate swaps. The term of the loans concerned expires in 2018 and 2020 respectively. In accordance with the amount of the loans, the interest rate swaps have a face value of 150,000 T€. The interest rate swaps form a micro-hedge with the loans in each case. The effectiveness of the hedges is reviewed prospectively and retrospectively. As cash inflows and outflows offset each other, the interest rate swaps are not recognised in the balance sheet. Positive fair values of 2,261 T€ are opposed by negative fair values of 1,152 T€ as at the balance sheet date. In addition, the fixed-interest financial liabilities combined to form a valuation unit in the amount of 74,500 T€ and the fixed-interest receiver swaps were hedged against a renewed rise in interest rates by means of fixedinterest payer swaps. These derivatives were not included in the valuation unit and had a negative fair value of 866 T€ as at the balance sheet date. Valuation units for hedging against commodity price risks Commodity futures in the form of commodity swaps with a face value of 542,186 T€ were concluded as microhedges to minimise price risks in connection with gas purchase and sales contracts. The agreed purchasing prices for quantities to be purchased in 2016 are fixed by means of commodity swaps with a face value of 460,146 T€. Positive fair values of 8,350 T€ are opposed by negative fair values of 96,184 T€ as at the balance sheet date. In addition, existing fixed price in gas delivery agreements have been hedged by means of commodity swaps with a face value of 82,040 T€. These commodity swaps have terms until 2016. Positive fair values of 2,478 T€ are opposed by negative fair values of 4,714 T€ as at the balance sheet date. Furthermore, 63 oil price swaps with a face value of 1,659 T€ were used to hedge against price risks at portfolio level. This derivative was not included in a valuation unit and had a positive fair value of 712 T€ as at the balance sheet date. b) Valuation units for physical electricity and gas trading transactions Risks from electricity and gas trading transactions for one subsidiary arise from price fluctuations on the respective trading markets. As part of a portfolio creation process, the risk positions arising from individual contracts for purchasing and selling electricity and gas have been aggregated to form an overall risk position for each trading type and calendar year; this position is continuously monitored and effectively managed. The portfolio has been created in line with the Group specifications for risk management and the risk manual of the Company. A documented, adequate and functioning risk management system exists for monitoring and managing the overall risk position for each trading type. The trading framework, responsibilities as well as controls are fixed. Trading is carried out within specified limits which are defined and monitored daily by organisationally independent entities. The Company creates valuation units in accordance with Article 254 HGB at the portfolio level for pending physical electricity and gas trading transactions. The risk-compensating effect of the purchasing and sales contracts of the respective trading type in the trading period is summarised in the portfolios; open risk positions are measured on the basis of fair value. The fair values depend on the development of the underlying market factors. Fair values were determined on the basis of market data as at the valuation date using accepted market methods. Purchasing and sales contracts are measured on an hourly basis with an hourly price-forward curve (HPFC) generated on the basis of the market data available as at the final trading day of the year. This valuation of the contracts is netted, and results in the pending position recognised on the closing date. The following pending transactions were included in the portfolio valuation units as of the balance sheet date: Face value T€ Electricity Purchasing contracts 109,355 Sales contracts 110,388 Gas Purchasing contracts 58,174 Sales contracts 58,202 The net hedge presentation method is used for showing the effective portions of the valuation units in the balance sheet; in this method, opposite changes in value in the balance sheet and income statement which balance each other out are disregarded. If the valuation of the open risk positions of the pending purchasing and sales contracts included in the electricity and gas portfolios result in negative balances, provisions are created and recognised in the income statement in order to cover these loss peaks, with due consideration being given to the principle of imparity. Positive balances are not recognised in the balance sheet. From the subsidiary’s perspective, there were on balance positive fair values of 113 T€ on the closing date for pending transactions of the portfolio valuation unit electricity for the years 2016 to 2018 (December 31, 2014: 64 Consolidated Financial Statements | Annual Report 2015 39 T€). For the portfolio valuation unit gas, there was a negative fair value for pending transactions of 23 T€ for 2016, and positive fair values to a total amount of 47 T€ for the years 2017 and 2018. Accordingly, it was necessary for provisions for potential losses of 23 T€ to be recognised as at the balance sheet date. VII. Cash flow statement The cash flow statement was prepared in accordance with the principles of DRS 21; the previous year’s figures were adjusted accordingly. The cash and cash equivalents of 25,503 T€ comprise cash in hand and cash at banks of all German and foreign companies included in the consolidated financial statements. Liquid assets of 2,961 T€ are subject to restrictions. VIII. Other disclosures Employees The parent company VNG employed an average of 403 persons in the 2015 financial year. This figure included 396 white-collar workers, six blue-collar workers and one assistant/student trainee. In addition, the Company employed an average of eleven persons in the passive phase of semi-retirement and ten vocational trainees. The average number of employees at the companies fully consolidated in the consolidated financial statements was 1,046. Of this figure, 940 were white-collar workers, 102 were blue-collar workers and four were assistants/ student trainees. At the fully consolidated companies, an average of 32 persons was in the passive phase of semi-retirement and eleven persons were vocational trainees. Fees and services of the auditor On April 14, 2015, the ordinary general meeting of VNG appointed PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft as the auditor. The total audit fees charged for the 2015 financial year comprise the fees for auditing the consolidated financial statements as well as for the audit of the financial statements of VNG and its German subsidiaries to the amount of 542 T€. The fees for other certification or valuation services amounted to 290 T€. Furthermore, a figure of 7 T€ related to tax consultancy services. 65 Members of the Executive Board Dr Karsten Heuchert Chairman of the Executive Board/Trading Department (since April 1, 2015) Prof. Dr Klaus-Dieter Barbknecht Hans-Joachim Polk Bodo Rodestock Board Member Trading (until March 31, 2015) Board Member Infrastructure/Technical Affairs Board Member Finance/Human Resources Members of the Supervisory Board Ulf Heitmüller Chairman (since November 10, 2015) Head of Trading of EnBW Energie Baden-Württemberg AG Dr Heiko Sanders (until October 19, 2015) Chairman (until September 30, 2015) Former Member of the Executive Board of EWE Aktiengesellschaft Holger Hanson 1st Vice-Chairman (Chairman from September 30 to November 10, 2015) Chairman of the Board of Management of Neubrandenburger Stadtwerke GmbH Peter Leisebein 2nd Vice-Chairman Chairman of the General Works Council of VNG – Verbundnetz Gas Aktiengesellschaft Günther Boekhoff Honorary Mayor of the City of Leer Matthias Brückmann Chairman of the Executive Board of EWE Aktiengesellschaft Joachim Ebert Telecommunications Systems Engineer at GDMcom Gesellschaft für Dokumentation und Telekommunikation mbH Hans-Joachim Gornig Former Managing Director of GAZPROM Germania GmbH (until August 26, 2015) Johannes Hegewald Foreman in the compressor station of the Bad Lauchstädt underground storage facility at VNG Gasspeicher GmbH Dr Torsten Köhne Chairman of the Executive Board of swb AG Vyacheslav V. Krupenkov General Manager of GAZPROM Germania GmbH (until August 26, 2015) Alexander Freiherr von Ledebur Investment management of EWE Aktiengesellschaft (since October 26, 2015) Christina Ledong Deputy Chair of the General Works Council of VNG – Verbundnetz Gas Aktiengesellschaft Detlef Nonnen Former Commercial Director of eins energie in sachsen GmbH & Co. KG Kristof Ogonovski Speaker of the local Oldenburg Chamber of Industry and Commerce (since October 26, 2015) Josef Rahmen 66 Former Chairman of the Board of Management of LVV Leipziger Versorgungs- und Verkehrsgesellschaft mbH Consolidated Financial Statements | Annual Report 2015 Andreas Reichelt Pipeline System Technology Officer at ONTRAS Gastransport GmbH Dr Reinhard Richter Managing Director of DREWAG Stadtwerke Dresden GmbH Dennis Rohde Member of the German Bundestag (since October 26, 2015) Thiemo Röhler Attorney-at-law (since October 26, 2015) Dr Benno Seebach Head of Strategic Network Planning at ONTRAS Gastransport GmbH Petra Steuer Scheduling employee at ONTRAS Gastransport GmbH Björn Thümler Member of the Regional Parliament of Lower Saxony Matthias Warnig Managing Director of Nord Stream AG (until August 26, 2015) Dr Jochen Weise Senior Advisor of Allianz Capital Partners GmbH Emoluments of board members The total emoluments of the Executive Board of VNG – Verbundnetz Gas Aktiengesellschaft, Leipzig, for the 2015 financial year amounted to 934,931.02 € (2014: 2,506,033.33 €). The total emoluments of retired Execu­ tive Board members and their surviving dependants in the 2015 financial year amounted to 1,081,702.33 € (2014: 661,759.25 €). Provisions for ongoing pensions to former Executive Board members and their surviving dependants amount to 12,991,334.00 € (2014: 10,827,059.00 €). A provision of 112,300.00 € (2014: 202,084.40 €) was formed in the 2015 financial year for the emoluments of the Supervisory Board. Notification in accordance with Article 20 (6) AktG VNG Verbundnetz Gas Verwaltungs- und Beteiligungsgesellschaft mbH, Erfurt, notified us, in accordance with Article 20 (1) AktG, that it directly holds more than one-fourth of the shares and voting rights in VNG. EWE Aktiengesellschaft, Oldenburg (EWE), notified us, in accordance with Article 20 (4) AktG, that it directly holds the majority of the shares and voting rights in VNG. Weser-Ems-Energiebeteiligungen GmbH, Oldenburg, and Ems-Weser-Elbe Versorgungs- und Entsorgungsverband Beteiligungsgesellschaft mbH, Oldenburg, as well as Ems-Weser-Elbe Versorgungs- und Entsorgungsverband, Oldenburg, notified us, in accordance with Article 20 (4) AktG, that they indirectly hold the majority of shares and voting rights in VNG, as the shares and voting rights held by EWE in VNG are attributable to them pursuant to Article 16 (4) AktG. EWE is a dependent company of Weser-Ems-Energiebeteiligungen GmbH, Oldenburg, and, via the latter, it is indirectly a dependent company of Ems-Weser-Elbe Versorgungs- und Entsorgungsverband Beteiligungsgesellschaft mbH, Oldenburg, and Ems-Weser-Elbe Versorgungs- und Entsorgungsverband, Oldenburg. 67 Consolidated financial statements EWE prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS), as to be applied in the EU, for the largest and smallest group of companies. The consolidated financial statements of EWE, in which VNG has so far been included as an associated company, are electroni­ cally submitted to the operator of the Federal Gazette and can be obtained via the company register (www. unternehmensregister.de). Leipzig, January 22, 2016 VNG – Verbundnetz Gas Aktiengesellschaft The Executive Board Dr Heuchert 68 Polk Rodestock Consolidated Financial Statements | Annual Report 2015 69 Breakdown and Development of Consolidated Fixed Assets Procurement/production cost Disposals Changes due to equity from consolivaluation dated group Transfers Jan. 1, 2015 Currency differences Additions Changes from deconsoli­ dation Disposals T€ T€ T€ T€ T€ T€ T€ T€ I. Intangible assets 1. P urchased concessions, industrial property and similar rights and assets, and licenses in such rights and assets 55,680 2 5,386 0 7,322 0 0 3,293 2. Gas production licenses 87,228 –5,096 0 0 0 0 0 0 3. Exploration costs 47,049 –3,392 16,923 0 421 0 0 0 4. Advance payments made 5. Goodwill 2,655 0 1,216 0 62 0 0 –2,498 14,811 0 0 0 0 0 0 0 207,423 –8,486 23,525 0 7,805 0 0 795 II. Property, plant and equipment 1. Land, land rights and buildings including buildings on third-party land 2. Technical plant and machinery 3.Other equipment, fixtures, furniture and office equipment 4. A dvance payments made and assets under construction 120,594 5 697 0 1,370 0 0 2,852 2,295,645 –11,870 55,870 0 31,873 3,077 0 59,635 51,848 –504 5,530 0 6,637 7 0 1,302 209,361 –3,421 76,335 0 3,465 192 0 –64,584 2,677,448 –15,790 138,432 0 43,345 3,276 0 –795 885 0 125 2,800 0 0 0 0 160,414 32,773 0 12 115 500 0 0 7,886 815 0 54 –15,128 0 –846 846 65,600 0 51,200 0 10,800 0 0 0 32 0 324 0 9 0 0 0 259,704 12 52,264 2,800 19,510 54 –15,128 0 3,144,575 –24,264 214,221 2,800 70,660 3,330 –15,128 0 III. Financial assets 1. Shares in affiliated companies 2. P articipations in associated companies 3. Participating interests 4. Loans to companies with which the Company is connected by a participating interest 5. Other loans 70 Consolidated Financial Statements | Annual Report 2015 Depreciation/amortisation Dec. 31, Jan. 1, 2015 2015 Carrying amounts Additions Currency differences Disposals Disposals from consolidated group Transfers Appreciation Dec. 31, 2015 Dec. 31, 2015 Dec. 31, 2014 T€ T€ T€ T€ T€ T€ T€ T€ T€ 12,276 T€ T€ 57,039 43,404 7,502 2 7,228 0 0 6 43,674 13,365 82,132 41,426 46,149 –5,443 0 0 0 0 82,132 0 45,802 60,159 0 0 0 0 0 0 0 0 60,159 47,049 1,311 0 0 0 0 0 0 0 0 1,311 2,655 14,811 13,038 1,773 0 0 0 0 0 14,811 0 1,773 215,452 97,868 55,424 –5,441 7,228 0 0 6 140,617 74,835 109,555 122,778 74,207 8,273 0 1,309 0 684 0 81,855 40,923 46,387 2,364,330 1,773,724 122,690 –6,642 29,304 1,127 4,247 567 1,863,021 501,309 521,921 51,532 37,935 5,317 –377 6,593 4 –139 0 36,139 15,393 13,913 214,034 31,218 24,988 –3 68 0 –4,792 0 51,343 162,691 178,143 2,752,674 1,917,084 161,268 –7,022 37,274 1,131 0 567 2,032,358 720,316 760,364 3,810 0 0 0 0 0 0 0 0 3,810 885 136,669 33,262 575 384 0 0 0 0 0 253 0 14 0 0 0 0 575 117 136,094 33,145 159,839 32,389 106,000 0 0 0 0 0 0 0 0 106,000 65,600 347 0 0 0 0 0 0 0 0 347 32 280,088 959 0 0 253 14 0 0 692 279,396 258,745 3,248,214 2,015,911 216,692 –12,463 44,755 1,145 0 573 2,173,667 1,074,547 1,128,664 71 The consolidated financial statements presented herein are an abridged version. With regard to the complete set of consolidated financial statements and group management report, which is combined with the management report of the Company, the following auditor’s report was issued: Auditor’s Report We have audited the consolidated financial statements prepared by VNG – Verbundnetz Gas Aktiengesellschaft, Leipzig, comprising the balance sheet, the income statement, statement of changes in equity, cash flow statement and the notes to the consolidated financial statements, together with the Group management report, which is combined with the management report of the Company, for the business year from January 1 to December 31, 2015. The preparation of the consolidated financial statements and the combined management report in accordance with German commercial law is the responsibility of the Company’s Board of Managing Directors. Our responsibility is to express an opinion on the consolidated financial statements and the combined management report based on our audit. We conducted our audit of the consolidated 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 consolidated financial statements in accordance with [German] principles of proper accounting and in the combined management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations 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 consolidated financial statements and the combined management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial statements of the companies included in consolidation, the determination of the companies to be included in consolidation, the accounting and consolidation principles used and significant estimates made by the Company’s Board of Managing Directors, as well as evaluating the overall presentation of the consolidated financial statements and the combined management report. We believe that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations. In our opinion, based on the findings of our audit, the consolidated financial statements comply with the legal requirements and give a true and fair view of the net assets, financial position and result of operations of the Group in accordance with [German] principles of proper accounting. The combined management report is consistent with the consolidated financial statements and as a whole provides a suitable view of the Group’s position and suitably presents the opportunities and risks of future development. Leipzig, January 22, 2016 PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (sgd. Rainer Altvater) Wirtschaftsprüfer (German Public Auditor) 72 (sgd. ppa. Werner Horn) Wirtschaftsprüfer (German Public Auditor) 73 IMPRINT Published by VNG – Verbundnetz Gas Aktiengesellschaft | Braunstrasse 7 | 04347 Leipzig | Germany Corporate communication Bernhard Kaltefleiter Contact Phone +49 341 443-0 | Fax +49 341 443-1500 info@vng.de | www.vng.de Editorial deadline February 5, 2016 Design, layout and production Militzer & Kollegen GmbH Reproduction and printing Sepio GmbH, Leipzig photographs Dirk Brzoska (S. 1) | EnBW (p. 23) | Jörg Gläscher (p. 19) | Michael Handelmann (p. 19) Helge Hansen/VNG Norge (p. 1) | Jeibmann Photographik (p. 1) | Eric Kemnitz (p. 1) VNG – Verbundnetz Gas Aktiengesellschaft Braunstrasse 7 | 04347 Leipzig | Germany Postfach 24 12 63 | 04332 Leipzig | Germany Phone +49 341 443-0 | Fax +49 341 443-1500 info@vng.de | www.vnggroup.eu/press-conference