The Distribution segment’s operating result (EBIT) rose by 54% year on year, to PLN 1,138m, while its EBITDA came in at PLN 2,002m, up by PLN 406m on the year before. The segment’s improved operating performance was attributable to a PLN 366m decrease in operating expenses relative to 2013, which was caused by:

• employee benefit expenses being lower by PLN 229m (17%), chiefly as a result of reversing the provision for annual bonuses and lower costs following a change in liabilities under length-of-service awards; costs recognised under this item in 2013 were high due to changes in the pension system and revision of other actuarial assumptions,
• cost of services being lower by PLN 108m (12%), which was chiefly attributable to lower transmission costs due to lower volumes of transmitted gas.

* Own networks

** Customer − anyone receiving or drawing gas fuel under an agreement with a gas supplier; User − anyone using gas for their own needs under an agreement with a utility or without such agreement − applies only to households (including housing communities and cooperatives).

The Distribution segment is regulated by a combination of Polish and EU laws. The laws of key importance for the Group’s operations in the natural gas distribution segment include:

• the Energy Law,
• the Regulation of the Minister of the Economy of 28 June 2013 on detailed rules for determining and calculating gas fuel tariffs and on settlements in gas fuel trading,
• the Act on Stocks of Crude Oil, Petroleum Products and Natural Gas, and on the Rules to be Followed in the Event of a Threat to National Fuel Security or Disruptions on the Petroleum Market,
• the Regulation of the Minister of the Economy of 2 July 2010 on detailed conditions of operation of the gas system,
• the Regulation of the Council of Ministers of 19 September 2007 on the method and procedure of introducing restrictions on the consumption of natural gas.

As a natural monopoly, the distribution activity is regulated by tariffs, calculated in accordance with the detailed rules specified in the Tariff Regulation. The tariffs are subject to approval by the President of the Energy Regulatory Office.

Until 31 July 2014, all of PSG’s settlements with its customers were performed based on Tariff No1 for Gas Fuel Distribution Services and LNG Regasification Services, as approved by the President of the Energy Regulatory Office on 17 December 2013. In connection with the energy-unit-based settlement system implemented as of 1 August 2014, the President of the Energy Regulatory Office, by virtue of a decision of 18 June 2014, approved Tariff No 2 for Gas Fuel Distribution Services and LNG Regasification Services, effective from 1 August to 31 December 2014.

On 17 December 2014 the President of the Energy Regulatory Office approved Tariff No 3 for Gas Fuel Distribution Services and LNG Regasification Services, to be effective from 1 January to 31 December 2015. The new tariff applies to settlements related to distribution services provided in specific conditions and specifies a uniform capacity range, based on which allocation to tariff groups is made for customers in whose case the pressure at the point of fuel offtake exceeds 0.5 MPa. The average rates of distribution service charges have increased by 3%.

The Distribution Grid Code for Polska Spółka Gazownictwa Sp. z o.o., approved on 23 December 2013 by the President of the Energy Regulatory Office, was effective until 31 July 2014. On 29 July 2014 the President of the Energy Regulatory Office approved a new Distribution Grid Code that has been in effect since 1 August 2014. The new Distribution Grid Code provides for a change in the settlement system. On 30 September 2014 the company applied to the President of the Energy Regulatory Office for approval of a draft Distribution Grid Code changing the rules of cooperation with operators of other distribution systems.

Legislation

The complex provisions of the Building Law and regulations governing construction projects impose the obligation to prepare extensive project and legal documentation, which is an integral part of any investment process. The need to prepare such documentation protracts the investment process and thus may slow down the company’s growth.

Tariff policy

By setting tariffs, the President of the Energy Regulatory Office limits the growth of regulated revenue, which is the basis for calculation of charge rates. This prevents the company from enjoying the full return on capital employed, leading to lower revenue from the provision of distribution services.

Direct competition

The gas market liberalisation is exposing the segment to intensified competition. Other companies distributing natural gas are progressively expanding their gas networks and attracting new customers. Additionally, companies have emerged that offer LNG distribution services. The market entry barriers are significantly lower here, as LNG distribution involves much lower capital expenditure and does not require a connection to the gas system or adequate reserve capacity to be maintained in the transmission and distribution networks. However, the risk of PSG losing its dominant market position is low.

Claims raised by property owners

More and more frequently, the PGNiG Group is facing excessive financial claims raised by owners of land where the gas network was developed in the past. A transmission easement serves as a basis for determining the extent of use of third-party property by a transmission company, for which relevant consideration is due to the owner. The owners’ claims give rise to additional, frequently considerable costs, and thus may adversely affect the financial performance of the segment.

Sources of gas supply for the distribution system

PSG’s distribution network is connected to the transmission system operated by OGP Gaz-System SA, which is its main source of gas supplies. The transmission system’s limited capacity in terms of the volume and pressure of supplied gas hinders or sometimes prevents the further development of the gas grid within the company’s key areas of operation.

In 2014 PSG continued 18 projects involving the construction, extension and modernisation of its distribution networks for which agreements for EU co-financing under the Infrastructure and Environment Operational Programme had been signed. In 2014 PSG was also implementing ten investment projects under the Regional Operational Programmes; eight of them have been completed. In addition, in 2014 there were projects financed directly by PSG.

It also connected new customers to the gas grid. In 2014, there were 80 thousand newly connected customers.

The company also executed projects of local network roll-out using the LNG technology and switch-over of customers from propane-butane-air to natural gas supplied from PGNiG’s LNG regasification stations. A total of 17 thousand customers were switched over to natural gas.

In 2015, PSG will continue working on projects for which EU co-financing agreements have been signed and projects financed with its own funds.

In the following years, the company will focus on:

• new customer connections and infrastructure extension,
• network upgrade,
• deployment of integrated IT systems.

Infrastructure extension to enable new connections is a vital factor in the Company’s operations. In some areas, upfront investments are needed to eliminate certain infrastructure inadequacies before new customers can be connected to the network, particularly in the provinces of Warsaw, Białystok and Łódź, where the company plans its major capacity expansion projects. Plans are also in place to extend the distribution network into unserved areas.

The majority of the company’s network assets are over 40 years old. The degree of physical obsolescence is a particular issue in the case of key sections of the high-pressure gas network, which should be in good technical condition as it enables the supply of gas to large areas of the country. Therefore, the company plans to increase the share of upgrade projects in its capex budget.

Furthermore, steps are being taken to extend the functionality of the existing gas infrastructure to enable the transmission of other gases, notably hydrogen; these steps pertain to both technical and regulatory issues. After this gas network upgrade is completed, the company will be able to launch new services and connect new customers from the power generation, automotive and other industrial sectors where hydrogen is used in production processes.

The implementation of integrated IT systems will facilitate the management of the company’s nationwide operations. Changes to the rules governing the European gas market necessitate investment in systems for automated network balancing, settlement of distributed gas volumes and change of gas suppliers.