Notes to the Consolidated Financial Statements – Contents

38. Related Entities

38.1. Related-party transactions

in PLN m

Related party Turnover from Jan 1 to Sales to related parties Purchases from related parties Balance as at Receivables from related parties, gross Receivables from related parties, net Loans to related parties, gross Loans to related parties, net Liabilities to related parties
Equity-accounted associates Dec 31 2013 35  -  Dec 31 2013 4 4  -   -  6
Dec 31 2012 29  -  Dec 31 2012 4 4  -   -  7
Non-consolidated subsidiaries and associates Dec 31 2013 21 (69) Dec 31 2013 11 6 216 185 10
Dec 31 2012 10 (111) Dec 31 2012 4 4 146 117 10
Related entities – total Dec 31 2013 56 (69) Dec 31 2013 15 10 216 185 16
Dec 31 2012 39 (111) Dec 31 2012 8 8 146 117 17
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In 2013, there were no material transactions with shareholders, other than the dividend distribution discussed in Note 10.
In 2013, neither the Parent nor its subsidiaries entered into any material transactions with related parties otherwise than on arm’s length terms.
The Group prepares documentation for related-party transactions in accordance with Art. 9a of the Corporate Income Tax Act. The procedure is applied each time the PGNiG Group entities execute agreements, annexes to agreements, orders (detailed agreements) or orders placed under framework agreements with related entities - if the total amounts payable/receivable (to/from one contractor under one agreement) or their equivalent in the złoty exceed in a calendar year the equivalent of EUR 100 thousand in the case of transactions involving merchandise or EUR 30 thousand in the case of transactions involving rendering of services, sale or provision of intangible assets.

38.2. Transactions with entities in which the State Treasury holds equity interests

With respect to the required detail of presentation for transactions entered into with parties related through the State Treasury, the Group applies the exemption provided for in paragraphs 25–27 of IAS 24. As there are no special transactions with such entities, the Company may present the minimum scope of information required under revised IAS 24 (presented below).
The main transactions with entities in which the State Treasury holds equity interests are executed in the course of the Group’s day-to-day operations, i.e. natural gas trading and distribution and sale of crude oil.
In 2013, the Group generated the highest turnover with the following entities in which the State Treasury holds (directly or indirectly) equity interests: Operator Gazociągów Przesyłowych GAZ-SYSTEM S.A., Polski Koncern Naftowy ORLEN S.A., PGE Górnictwo i Energetyka Konwencjonalna S.A., Grupa LOTOS S.A., KGHM Polska Miedź S.A., Krośnieńskie Huty Szkła KROSNO S.A. w upadłości (in bankruptcy), Grupa Azoty Zakłady Azotowe PUŁAWY S.A., Grupa Azoty Zakłady Chemiczne POLICE S.A., Grupa Azoty Zakłady Azotowe Kędzierzyn S.A., Zakłady Azotowe w Tarnowie - Mościcach S.A., Huta Cynku "Miasteczko Śląskie" S.A., Rafineria Trzebinia S.A. and Rafineria Nafty Jedlicze S.A.
In 2012, the Group generated the highest turnover with the following entities in which the State Treasury holds equity interests: Operator Gazociągów Przesyłowych GAZ-SYSTEM S.A., Polski Koncern Naftowy ORLEN S.A., PGE Górnictwo i Energetyka Konwencjonalna S.A., Grupa LOTOS S.A., KGHM Polska Miedź S.A., Krośnieńskie Huty Szkła KROSNO S.A. w upadłości (in bankruptcy), Zakłady Azotowe PUŁAWY S.A., Zakłady Chemiczne POLICE S.A., Zakłady Azotowe w Tarnowie-Mościcach S.A. and Huta Cynku "Miasteczko Śląskie" S.A.

38.3. Remuneration paid to members of management and supervisory bodies of the Group companies

in PLN m

Period from Jan 1 – Dec 31 2013 Period from Jan 1 – Dec 31 2012
Remuneration paid to management staff 37.29 31.01
Parent 5.20 1.89
Subsidiaries 23.02 21.6
Jointly-controlled entities 8.26 6.71
Associates 0.81 0.81
Remuneration paid to supervisory staff 5.42 12.11
Parent 0.36 0.36
Subsidiaries 3.25 7.84
Jointly-controlled entities 1.25 3.21
Associates 0.56 0.7
Total  42.71 43.12
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38.4. Loans advanced to members of the management and supervisory boards of the Group companies

in PLN m

Dec 31 2013 Dec 31 2012
Management Board members
Interest rate (%) 1%–3% 1%-4%
Maturing in 3–5 years 3–5 years
Value of outstanding loans 0.01 0.16
Supervisory Board members
Interest rate (%) -  4%
Maturing in -  5 years
Value of outstanding loans  -  0.01
Total value of outstanding loans 0.01 0.17
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38.5. Remuneration paid to members of management and supervisory bodies of the Parent

in PLN m

Jan 1 – Dec 31 2013
Name Total amount of remuneration, additional benefits and bonuses paid in 2013 Total amount of remuneration for holding offices in subordinates in 2013 Total remuneration paid in 2013
Total remuneration paid to Management Board members, including: 5.201 1.413 6.614
Jarosław Bauc  -   -   - 
Jerzy Kurella 0.550 0.255 0.805
Andrzej Parafianowicz  -   -   - 
Zbigniew Skrzypkiewicz 0.058  -  0.058
Violetta Jasińska-Jaśkowiak 0.009 0.003 0.012
Persons who were Management Board members in the reporting period but did not hold their positions at the end of the period
Radosław Dudziński 1.183 0.210 1.393
Sławomir Hinc 0.071 0.250 0.321
Jacek Murawski 0.966 0.283 1.249
Grażyna Piotrowska-Oliwa 1.284 0.228 1.512
Mirosław Szkałuba 1.080 0.184 1.264
Total remuneration paid to Supervisory Board members, including: 0.359 0.060 0.419
Chmielewski Wojciech 0.041  -  0.041
Marcin Moryń 0.041  -  0.041
Mieczysław Kawecki 0.041 0.044 0.085
Agnieszka Chmielarz 0.041 0.008 0.049
Józef Głowacki 0.041  -  0.041
Janusz Pilitowski  0.041  -  0.041
Jolanta Siergiej 0.041 0.008 0.049
Ewa Sibrecht-Ośka 0.041  -  0.041
Persons who were Supervisory Board members during the reporting period but did not hold their positions at the end of the period
Mieczysław Puławski 0.020  -  0.020
Zbigniew Skrzypkiewicz 0.011  -  0.011
Total 5.560 1.473 7.033
Jan 1 – Dec 31 2012
Name Total amount of remuneration, additional benefits and bonuses paid in 2012 Total amount of remuneration for holding offices in subordinates in 2012 Total remuneration paid in 2012
Total remuneration paid to Management Board members, including: 1.895 2.84 4.735
Grażyna Piotrowska-Oliwa 0.211 0.558 0.769
Radosław Dudziński 0.33 0.858 1.188
Sławomir Hinc 0.336 0.857 1.193
Mirosław Szkałuba 0.369 0.423 0.792
Persons who were Management Board members in the current period but not as at the end of the current period
Kazimierz Chrobak 0.222  -  0.222
Mieczysław Jakiel 0.091 0.018 0.109
Ewa Bernacik 0.106 0.037 0.143
Marek Karabuła 0.23 0.089 0.319
Total remuneration paid to Supervisory Board members, including: 0.36 0.213 0.573
Chmielewski Wojciech 0.04  -  0.04
Marcin Moryń 0.041  -  0.041
Mieczysław Kawecki 0.041 0.043 0.084
Agnieszka Chmielarz 0.041 0.045 0.086
Józef Głowacki 0.04  -  0.04
Mieczysław Puławski 0.041  -  0.041
Jolanta Siergiej 0.041 0.045 0.086
Janusz Pilitowski 0.04  -  0.04
Ewa Sibrecht-Ośka 0.033  -  0.033
Persons who were Supervisory Board members in the current period but not as at the end of the current period
Grzegorz Banaszek 0.001  -  0.001
Stanisław Rychlicki 0.001 0.08 0.081
Total 2.255 3.053 5.308
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38.6. Fees Paid to the audit firm for the mandatory audit of the annual consolidated financial statements of the Group and for the rendering of other services

in PLN m

Period from Jan 1 – Dec 31 2013 Period from Jan 1 – Dec 31 2012
Audit of the annual consolidated financial statements 0.09 0.1
Audit of the annual separate financial statements 0.1 0.12
Other certification services, including review of financial statements 0.5 0.53
Other services  -  0.01
Total 0.69 0.76
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38.7. Non-consolidated joint ventures

In 2013, PGNiG S.A. had working business relationships in Poland with the following companies: FX Energy Poland Sp. z o.o., CalEnergy Resources Poland Sp. z o.o., EuroGas Polska Sp. z o.o., Energia Bieszczady Sp. z o.o., Orlen Upstream Sp. z o.o., San Leon Energy PLC (a company that acquired shares of PGNiG S.A.’s former business partner, Aurelian Oil & Gas PLC) - through subsidiaries Energia Karpaty Zachodnie Sp. z o.o. Sp. k. and Energia Karpaty Wschodnie Sp. z o.o. Sp. k.
Also in 2013, PGNiG S.A., Tauron Polska Energia S.A., KGHM Polska Miedź S.A., PGE Polska Grupa Energetyczna S.A. and Enea S.A. held negotiations on detailed terms of their cooperation under the framework agreement of July 4th 2012 (concerning exploration for and production of shale gas and oil within the Wejherowo licence area). The framework agreement expired on December 31st 2013 due to non-fulfilment of certain conditions defined therein.
On August 14th 2013, PGNiG S.A. and LOTOS Petrobaltic S.A. signed an agreement for joint operations within the Kamień Pomorski licence area. The performance of the agreement will be possible upon fulfilment of certain conditions precedent, i.e. if positive tax interpretations are obtained from the Ministry of Finance and sub-lease of the mining usufruct (mineral extraction rights) is approved by the Ministry of Environment. By the end of 2013 not all of the conditions precedent had been fulfilled.

FX Energy Poland Sp. z o.o., registered office at ul. Chałubińskiego 8, 00-613 Warsaw
PGNiG S.A. cooperates with FX Energy Poland Sp. z o.o. in the following areas covered by licences awarded to PGNiG S.A:

Under licences awarded to FX Energy Poland Sp. z o.o., work is performed in the following areas:

EuroGas Polska Sp. z o.o., registered office at ul. Górnośląska 3, 43-200 Pszczyna

Energia Bieszczady Sp. z o.o., registered office at ul. Śniadeckich 17, 00-654 Warsaw
In 2013, PGNiG S.A. cooperated with EuroGas Polska Sp. z o.o. and Energia Bieszczady Sp. z o.o. in the “Bieszczady” licence area under the Agreement for Joint Operations of June 1st 2007. Interests in the project: PGNiG S.A. (operator) – 51%, EuroGas Polska Sp. z o.o. – 24%, and Energia Bieszczady Sp. z o.o. – 25%.

Orlen Upstream Sp. z o.o., registered office at ul. Przyokopowa 31, 01-208 Warsaw, Poland
In 2013, PGNiG S.A. continued its cooperations with Orlen Upstream Sp. z o.o. in the “Sieraków” area under the Agreement for Joint Operations of June 22nd 2009. Interests in the project: PGNiG S.A. (operator) – 51%, Orlen Upstream Sp. z o.o. – 49%.

San Leon Energy PLC (a company that acquired shares of PGNiG S.A.’s former business partner, Aurelian Oil & Gas PLC)

Energia Karpaty Zachodnie Sp. z o.o. Sp. k. (a subsidiary of San Leon Energy PLC)
Energia Karpaty Wschodnie Sp. z o.o. Sp. k. (a subsidiary of San Leon Energy PLC)
Under licences awarded to San Leon Energy PLC, work is performed in the following areas:

38.8. Foreign operations

PGNiG SA’s interests in foreign operations

Ukraine

Dewon Z.S.A. is a privately-held (unlisted) joint-stock company, established on November 17th 1999. The company’s core business consists in services related to production of natural gas, workover of wells and development and exploitation of fields in Ukraine.
The company’s share capital amounts to UAH 11.1m (equivalent to PLN 4.11m, translated at the exchange rate quoted by the NBP for December 31st 2013) and is divided into 120,000 shares with a par value of UAH 92.89 per share. DOCVARIABLE "FWC_Data_BZ_CY" As at December 31st 2013, the value of the shares disclosed in the Group’s consolidated financial statements was PLN 2.5m. An impairment loss was recognised for the full amount.
The company’s shareholder structure is as follows:

The company commenced production of natural gas in November 2003 and continued its gas production operations until April 24th 2009.
In mid-2012, after an over three-year break, the company resumed production from the Sakhalin field in eastern Ukraine. On May 15th 2012, a new trilateral joint venture agreement was executed by Ukrnaftoburienie (holder of the licence) and Golden Derrik.

Oman

The share capital of Sahara Petroleum Technology Llc amounts to OMR 0.15m (Omani rial), equivalent to PLN 1.17m, translated at the mid rate quoted by the National Bank of Poland for December 31st 2013, and is divided into 150,000 shares with a par value of OMR 1 per share. As at December 31st 2013, the value of the shares disclosed in the Group’s consolidated financial statements was PLN 0.88m. An impairment loss was recognised for the full amount.
The company’s shareholder structure is as follows:

The company was established in 2000, on the initiative of Zakład Robót Górniczych Krosno Sp. z o.o. (currently a branch of Exalo Drilling S.A., a wholly-owned subsidiary of PGNiG S.A.). The company was established to offer well servicing services, such as application of enhanced recovery techniques or workovers, wireline services, or wellhead maintenance services, and to perform light and middle drilling work using PGNiG’s technological capabilities.
The company has never commenced operations. On June 7th 2009, the shareholders resolved to dissolve the company and appoint a liquidator. At present, the liquidation process is underway.

Germany

On July 1st 2005 in Potsdam, Germany, PGNiG S.A. and VNG-Verbundnetz Gas AG signed two deeds of incorporation whereby they established two companies under German law:

Each partner acquired a 50% interest in each of the companies. The share capital of each of the companies amounts to EUR 0.2m (equivalent to PLN 0.83m translated at the mid rate quoted by the NBP for December 31st 2013), and their registered offices are located in Potsdam (InterGas Trade GmbH) and Leipzig (InterTransGas GmbH).
InterGasTrade GmbH has not been registered.
InterTransGas GmbH was entered in the commercial register of Potsdam on August 9th 2005. The company’s core business consists in construction and operation of transmission infrastructure and sale of transmission capacities.
Since March 1st 2012, ONTRAS-VNG Gastransport GmbH (ONTRAS) (wholly-owned subsidiary of VNG AG, whose business consists in the provision of transmission services) has been the German shareholder. ITG shares were transferred by VNG to ONTRAS in the process of unbundling the network operations from production and trading activities.
As at December 31st 2013, the value of the shares disclosed in the Group’s consolidated financial statements was PLN 5.24m.
On December 12th 2013, the General Meeting of ITG passed a resolution to liquidate of the company (the resolution has not yet been entered into the German commercial register). Upon publication of the resolution in the German electronic Federal Monitor, a prescribed period of one year will start during which creditors may lodge claims against ITG. Upon lapse of the period, any assets remaining after satisfaction of creditors will be distributed among shareholders.
On December 21st 2010, PGNiG Sales & Trading GmbH of Munich was incorporated (until 2011: POGC Trading GmbH) (PST). All company shares were acquired by PGNiG S.A. in return for a cash contribution made in December 2010.
The company's business involves purchase and sale of, and trading in, gas, fuels and other forms of energy (related to such products in a physical form), as well as trading in derivatives and financial products, provided that the trading in derivatives and financial products is to be conducted for hedging purposes only.
In November 2011, the company began to purchase natural gas on the European market for PGNiG S.A. This activity continues.
In June 2012, PGNiG Sales & Trading GmbH acquired 100% shares in XOOL GmbH of Munich, with a share capital of EUR 0.5m, (equivalent to PLN 2.07m translated at the mid rate quoted by the NBP for December 31st 2013). XOOL GmbH is a natural gas operator with a network of 16,600 end-users in Germany.
In Q4 2013, the PST Group sold natural gas to approximately 29 thousand end users and electricity to over 6 thousand end users.
In June 2013, PST registered its branch in Prague, the Czech Republic.

Norway

On May 24th 2007, the Parent established its Norwegian subsidiary PGNiG Norway AS, incorporated as a company with limited liability, a special purpose vehicle to implement PGNiG S.A.’s projects in the Norwegian Continental Shelf (NCS). On May 23rd 2013, its amended articles of association were registered, changing its name to PGNiG Upstream International AS and expanding the scope of its business, to reflect the fact that PGNiG Upstream International AS had been appointed as the entity responsible for coordinating PGNiG's exploration operations outside of Poland. PGNiG S.A. is the sole owner of PGNiG Upstream International AS.
The company's business comprises crude oil and natural gas production, and other similar or related activities. PGNiG Upstream International AS may also engage in infrastructure projects related to transmission via subsea pipelines (e.g. construction and operation of gas pipelines), and conduct trading and financial activities and other types of activities at all stages of the crude oil and natural gas value chain.
PGNiG Upstream International AS was established in particular to perform the agreement executed on February 28th 2007 between PGNiG S.A., Mobil Development Norway AS and ExxonMobil Production Norway Inc. concerning the acquisition by the Company of licence interests in the Norwegian Continental Shelf covering the Skarv, Snadd and Idun field. Under the joint venture agreement, PGNiG Upstream International AS holds the rights to 12% of the production (other interest holders are British Petroleum – 24% (operator), Statoil – 36% and E.ON Ruhrgas – 28%) from the Skarv/Snadd/Idun field and has the obligation to participate in the investment expenditure in the same proportion. British Petroleum is the field operator.
Furthermore, in February 2010 PGNiG Upstream International AS obtained from the Norwegian Ministry of Petroleum and Energy the authorisation to act as an operator on the Norwegian Continental Shelf.
On December 31st 2012, the company and its partners launched production of crude oil and natural gas from the Skarv field at the Norwegian Continental Shelf.
The company began selling the extracted hydrocarbons in January 2013. The oil is sold directly from the FPSO vessel to Shell International Trading and Shipping Company Ltd. and transported by the buyer's fleet of shuttle tankers. The produced gas is transmitted over the Gassled Area B System gas pipeline to the onshore terminal in Kårsto, and then redirected to Germany over the Gassled Area D System gas pipeline, where it is received by PGNiG Sales & Trading GmbH (subsidiary of PGNiG S.A.).
In June 2013, the company signed an annex to a USD 400m credit facility agreement with seven international banks. Under the annex, the facility repayments previously scheduled for June and December 2013 can be postponed until 2014. As at the end of December 2013, the company’s debt outstanding under the credit facility was USD 354m.

The Netherlands – Libya

In January 2008, the PGNiG Management Board consented to use PGNiG Finance B.V. (established on September 14th 2001 to service Euronotes issued by PGNiG S.A.) for the purposes of conducting exploration and production activity in Libya. On the same date, the PGNiG Management Board passed a resolution concerning the amendment to the Articles of Association and change of the Management Board of PGNiG Finance B.V., and setting up of the company’s branch in Libya.
The amendments to the Articles of Association were registered in the Netherlands on February 4th 2008. In the new Articles of Association, the company’s name was changed to Polish Oil and Gas Company – Libya B.V. (POGC – Libya B.V.). PGNiG S.A. is its only shareholder.
The Management Board of POGC-Libya B.V took steps which led to the execution – in February 2008 – of an Exploration and Production Sharing Agreement (EPSA) with Libya’s National Oil Corporation. The Agreement, setting out the terms of an exploration and production project in Libya, was executed in connection with the award (following a licensing round) of Block 113, located between the Murzuq and Gadamesh basins, near the Algerian border.
Pursuant to the EPSA, if a commercial discovery of hydrocarbons is made within the licence area, the expenditures which the Agreement allocates to the licence as the basis for “cost recovery”, incurred by the Parent through POGC Libya B.V., may be recovered from the production revenues (cost oil).
Because of the events which had been taking place in Libya since mid-February 2011, the Management Board of POGC Libya B.V. made a decision to evacuate all international personnel from the country and notify National Oil Corporation in Libya of the occurrence of a force majeure event, which provided the basis for an extension of the term to perform obligations under the agreement. On November 21st 2012, POGC Libya B.V. signed an agreement with National Oil Corporation confirming the cessation of the force majeure event and extending the term of the performance of licence obligations. In 2013, the company completed preparatory work and began the first round of drilling, which consisted in drilling four exploration wells.
In 2012 and 2013, the company’s equity was increased by USD 25m and USD 18m respectively, without issuing any new shares, to finance the drilling of first exploratory wells. By the end of 2013, two wells were drilled and the acquired results were analysed.
On January 17th 2014, the PGNiG Management Board passed a resolution to recognise an impairment loss on the entire value of shares in and equity contributions to POGC-Libya B.V., which led to the recognition of an impairment loss of PLN 291,7m on the assets of POGC-Libya B.V. disclosed in the consolidated financial statements of the PGNiG Group.
Any decision to continue the work depends on the results of further geological surveys and economic analyses as well as the political developments in Libya.

Sweden

On April 29th 2011, PGNiG S.A. acquired shares in Goldcup 5839 AB of Stockholm. On June 20th 2011, a change of the company’s name to PGNiG Finance AB was registered.
The Company’s objective is to raise financing, including through the issue of Euronotes on the international markets, as well as to borrow funds and advance loans to private investors, other than as part of any activities which in Sweden require a licence.
In February 2012, the company (in cooperation with PGNiG S.A.) issued the first tranche of Euronotes for EUR 500m, i.e. PLN 2,073.6m (translated at the exchange rate quoted by the NBP for December 31st 2013). The notes are listed on the Luxembourg Stock Exchange. All proceeds from the issue, net of consideration for the institutions involved in its execution, were transferred to PGNiG S.A. as an on-loan.

The Parent's direct operations abroad – interests in exploration licences

The Parent conducts exploration work in Pakistan under an agreement on hydrocarbon exploration and production in the Kirthar licence area executed between PGNiG S.A. and the government of Pakistan on May 18th 2005. Work in the Kirthar block is conducted jointly with Pakistan Petroleum Ltd. (PPL), with production and expenses shared proportionately to the parties' interests in the licence: PGNiG S.A. (operator) – 70%, PPL – 30%. In 2012, the operator decided to move to the second exploration stage on the Kirthar licence, as part of which a new exploratory well is to be drilled by July 2014. In 2013, the construction of pipelines and temporary surface installations was completed and test production from the Rehman-1 and Hallel X-1 wells began. The gas produced is sold to the Pakistani transmission system. Also, in 2013, preparatory work began for drilling of Rizq-1 exploratory well, which is scheduled for completion in 2014.
In Egypt, the Parent conducted exploration work in the Bahariya licence area (Block 3) under an Exploration and Production Sharing Agreement (EPSA) executed with the government of Egypt on May 17th 2009. The Company holds a 100% interest in the licence. In 2013, two exploratory wells were drilled. The wells were abandoned as no commercial hydrocarbon flows were recorded. Bahariya licence potential was re-evaluated using newly-acquired geological data, which proved that further work was not economically viable. Therefore, a decision was made to terminate the licence and liquidate the Egypt branch.

Foreign branches of the Group

PGNiG Group companies have a number of foreign branches, which conduct operations or support the Group’s development outside of Poland.

PGNiG SA – the Parent:
Operating Branch in Pakistan – Islamabad,
Branch in Egypt – Cairo (in liquidation),
Branch in Denmark – Copenhagen (in the process of liquidation).

Geofizyka Kraków S.A.
Branch in Pakistan – Islamabad,
Branch in Libya – Tripoli,
Branch in Georgia – Tbilisi,
Branch in Oman – Muscat.

Geofizyka Toruń S.A.
Branch in Egypt – Suez.

Exalo Drilling S.A.
Branch in Libya – Tripoli,
Branch in Egypt – Cairo,
Branch in the Czech Republic – Ostrava,
Branch in Pakistan – Islamabad,
Branch in Kazakhstan – Almaty,
Branch in the Republic of Uganda – Kampala,
Branch in Georgia – Tbilisi,
Branch in Lithuania – Dirvupiu,
Branch in Slovakia – Bratislava,
Branch in Ethiopia – Bole Sub City, Addis Ababa.

Polish Oil and Gas Company – Libya B.V.
Branch in Lybya – Benghazi.

PGNiG Sales & Trading GmbH
Branch in the Czech Republic – Prague.

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