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1 ANNUAL REPORT 2011 severomoravská plynárenská

2 Key Consolidated Ratios (IFRS) 2011 Total sales (CZK m) 10,357 EBITDA (CZK m) 1,501 Operating result (CZK m) 1,220 Profit before taxation (CZK m) 1,212 Profit after taxation (CZK m) 972 Investments (CZK m) 618 Number of employees (FTE) 14 Wherever used in the text, the term Company or SMP refers to Severomoravská plynárenská, a.s. Wherever used in the text, the term SMP Group refers to the consolidated undertaking of Severomoravská plynárenská, a.s. and SMP Net, s.r.o.

3 Severomoravská plynárenská Annual Report TABLE OF CONTENTS 1 The Chairman s Statement 6 2 Report of the Supervisory Board for SMP Group Management Report for SMP Group Profile Results Strategy and Business Activities Marketing and Communication Activities Natural Gas Distribution Human Resources Information Technologies Environmental Protection Subsequent Events Outlook 19 4 Corporate Governance Statement Shareholders and Securities Governing Processes and Other Rules and Procedures Management and Administration Policies 27 5 About the Issuer General Information The Company's Governing and Supervisory Bodies Object of Business and Activities of Issuer of Listed Securities Equity Interests Persons Responsible for the Annual Report and Audit of Financial Statements 40 6 Financial part Financial Statement of the SMP Group Notes to Consolidated Financial Statements Severomoravská plynárenská, a.s. Financial Statements Notes to separate Financial Statements 97 7 Independent Auditor's Report Auditor's Report on the Consolidated Financial Statements Auditor's Report on the Consolidated Annual Report and the Severomoravská plynárenská, a.s. Report on Relations between Related Parties Auditor's Report on the Financial Statements of Severomoravská plynárenská, a.s Report of the Board of Directors of Severomoravská plynárenská, a.s. on Relations between Related Parties as at 31 December

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5 TRUST

6 6 The Chairman's Statement 1 THE CHAIRMAN'S STATEMENT Ladies and Gentlemen, The year 2011 brought several important events that have had a major impact on the situation in the energy sector. The accident at the Fukushima nuclear plant in Japan last March has sparked a worldwide discussion about the role of nuclear power. The subsequent decision of the German government to gradually shut down nuclear power plants had a negative effect on the situation on the electricity market throughout Europe. The global position of natural gas was affected significantly by the growing extraction of shale gas and LNG affecting European market prices. On the domestic scene, the preparation of the new Energy Concept of the Czech Republic continued. We strive to be as active as possible to strengthen the position of natural gas on the future energy market in the Czech Republic, particularly in connection with the production of electric power. We continued negotiations with our Russian partners because the terms of the long-term contract no longer correspond to the current market reality. In light of this situation, we lost over 70,000 gas customers last year, mainly in the retail segment. However, we are resolved to prevent the unfavorable situation from having an adverse impact on our performance. During 2011, we introduced new products and services with the aim to retain existing customers and to re-acquire those who have switched to other suppliers. I believe that our active approach to all customer segments will contribute to the stabilization of the Company on the natural gas market in the Czech Republic. I am happy to report that our activities in the electricity business have been very successful. Even though we have been offering this commodity to customers only for a second year, the results are highly encouraging. The Company has clearly demonstrated that we are able to design an interesting product that appeals to both existing and potential clients. The same success was achieved in our media campaigns that targeted the acquisition of new clients. Thanks to these efforts, close to 16,000 customers were receiving electric power from the Company at the end of I am convinced that this trend will successfully continue in the future.

7 Severomoravská plynárenská Annual Report On behalf of the entire Board of Directors of Severomoravská plynárenská, a.s., I want to thank our customers and business partners for their trust in We appreciate your support. In 2012, we will together celebrate a tenth anniversary of RWE's presence in the Czech Republic. I am convinced that it is the strict conformity to RWE's fundamental values, such as trust, reliability, and customer orientation, that will allow us to succeed on the Czech energy market in the upcoming years, as we have in the past. Many thanks also go to all the Company's employees for their hard work and initiative in Jindřich Broukal Chairman of the Board of Directors

8 8 Report of the Supervisory Board for Report of the Supervisory Board for 2011 In 2011, the Supervisory Board oversaw activities carried out by the Board of Directors as part of the conduct of the Company's business and supervised the compliance of the Board of Directors with generally binding regulations, the Articles of Association, and resolutions of the Company's General Meetings. During the period under review, the Supervisory Board held four regular and two extraordinary sessions and formed a quorum on all occasions. The Board of Directors regularly informed the Supervisory Board of the Company's current affairs, economic results, and financial situation. In doing so, the Board of Directors presented documents that were supplemented by verbal comments of its members during the Supervisory Board's discussions on individual matters. The oversight activity of the Supervisory Board in the reported year mainly focused on: financial results, including ongoing updates of forecasts for 2011; assessing and monitoring the negative development of the number of customers on the natural gas market caused by growing competition in the liberalized energy sector in the Czech Republic; monitoring the development of receivables and payables; preparing the General Meeting in 2011, including a review of the Company's Financial Statements, the Consolidated Financial Statements of the SMP Group as at 31 December 2010, and the 2010 Report of the Board of Directors compiled in accordance with Section 66a(9) of the Commercial Code; the ongoing performance of Audit Committee functions. The Supervisory Board confirms that all activities of the Board of Directors were carried out in accordance with the Company's Articles of Association and generally binding regulations. At its meeting held on 23 March 2011, the Supervisory Board, exercising the powers of the Audit Committee, approved a proposal for the appointment of the auditor of the Company's Annual Financial Statements as at 31 December The proposed auditor was PricewaterhouseCoopers Audit, s.r.o., which was subsequently approved on 16 May 2011 under a decision of the Company's annual General Meeting. On 26 March 2012, the Supervisory Board reviewed the report of the Board of Directors compiled in accordance with Section 66a(9) of the Commercial Code and stated no objections regarding the completeness and content of this report. At the same meeting, the Supervisory Board discussed and reviewed the Company's Annual Financial Statements and the SMP Group's Consolidated Financial Statements as at 31 December 2011, including the Auditor's Report and the Profit Distribution Proposal for 2011.

9 Severomoravská plynárenská Annual Report In line with the auditor, the Supervisory Board concluded that the submitted Financial Statements and Consolidated Financial Statements provide a true and fair view of the financial position of the Company and the SMP Group as at 31 December 2011 as well as of their business performance and cash flows in 2011 in accordance with the International Financial Reporting Standards approved by the European Union. The Supervisory Board recommends to the General Meeting to approve the Annual Financial Statements and the Consolidated Financial Statements as at 31 December 2011 as well as the Profit Distribution Proposal for 2011 submitted by the Board of Directors. The Supervisory Board thanks all employees for their work in Prague, 26 March 2012 Martin Herrmann Chairman of the Supervisory Board

10 10 SMP Group Management Report for 2011 SMP Group Profile 3 SMP Group Management Report for SMP Group Profile The SMP Group was created as a consolidated undertaking following the legal unbundling of natural gas trading and distribution in connection with the European Union's requirements and the ensuing amendment to the Energy Act. The SMP Group consists of Severomoravská plynárenská, a.s., as the consolidating company, and SMP Net, s.r.o., as the consolidated company. SMP Net, s.r.o. was founded to conduct business as a distribution system operator, a role it assumed on 1 January Additional information on the consolidated company is included in Section 5.4 of this Annual Report. 3.2 Results The SMP Group keeps its accounting books in accordance with International Financial Reporting Standards (IFRS) that were adopted by the European Union and are effective on the balance sheet date. During the reported year, the SMP Group did not experience any problems in the funding of operations and investments. Financing was secured through the cash-pooling arrangement of the RWE Group in the Czech Republic. Consolidated Revenues, Expenses, Profit In 2011, earnings before taxes (EBT) amounted to CZK 1,212 million, a CZK 860 million decrease from The SMP Group registered CZK 972 million in earnings after taxes (EAT), a year-on-year decrease by CZK 705 million. During the reported year, sales of natural gas, electricity, natural gas distribution, and other services amounted to CZK 10,357 million, CZK 2,158 million less than in the preceding year (-17.2%). There was a decrease in revenues from natural gas trading compared to 2010, mainly due to lower sales (customers' departures to other suppliers and unfavorable climatic conditions). The reduction in sales was somewhat compensated by a year-on-year increase in sales prices. Moreover, we recorded an increase in sales of electric power thanks to a rise in the number of customers.

11 Severomoravská plynárenská Annual Report Consolidated Assets As at 31 December 2011, the SMP Group's assets totaled CZK 8,154 million, a decrease by CZK 530 million (6.1%) from the value of assets at the end of Fixed assets accounted for the largest part of total assets, amounting to some 86.8%. They mainly consist of gas pipeline networks. Fixed assets grew by 4.7% on the preceding year. There was a decrease that mainly affected short-term assets whose share in total assets fell by 43.5% year-on-year, mostly due to a reduction in cash and cash equivalents and receivables consisting of unbilled gas and electricity supplies. Consolidated Liabilities As to equity and liabilities, there was a slight year-on-year decrease in equity, as the share of equity in the total value of equity and liabilities amounted to 60.3%, 4.5% less than in Short-term liabilities grew by CZK 125 million on the previous year, mainly due to an increase in other financial obligations. Long-term liabilities increased by CZK 56 million on the previous year. Investments During 2011, the SMP Group invested CZK 618 million in line with the approved investment plan, spending CZK 615 and CZK 3 million on the acquisition of tangible and intangible assets, respectively. The larger part of this sum, CZK 363 million, was invested into distribution network renewal projects. Investments into the acquisition of pipelines totaled CZK 176 million. Considering its high density, the expansion of the distribution system in the region has been essentially terminated. Investments into network development now mainly focus on reinforcing the capacity of the system and on improving its safety and reliability. The most important investment projects in 2011 included reconstruction projects involving the Suchá Albrechtice high-pressure pipeline, the local network in Hviezdoslavova Street in Hranice, and the local networks in Bruntál, Loštice, Olomouc, Ostrava, Zábřeh, and other cities. The projects were executed in coordination with municipal authorities and other utility operators. In addition, we reconstructed our customer service centers in Ostrava and Opava. The SMP Group executed all investment projects in the Czech Republic and funded all of them using financial resources of the RWE Group in the Czech Republic. The scope of planned investments has been optimized from the viewpoint of needs and resources until the year Projects foreseen in the approved mid-term plan mainly include investments into the expansion and reconstruction of process facilities. All investments will be made in the Czech Republic. The annual amount of planned accretions of assets during 2012 to 2014 has a slightly increasing trend and averages CZK 730 million.

12 12 SMP Group Management Report for 2011 Strategy and Business Activities 3.3 Strategy and Business Activities In 2011, the strategic priorities of trading mainly focused on maintaining our share of the natural gas market, entering actively the electric power market, and developing the electricity business. Due to the situation on spot markets, startup traders were able to offer lower natural gas prices, mainly due to large differences between market prices and prices negotiated under long-term purchasing contracts. We responded to pressures from other traders by trying to offer competitive natural gas prices and, more importantly, by offering new products and services. In addition, the SMP Group pursued intensively the electricity business throughout the reported year, offering customers the supply of both commodities. As to climatic conditions in North Moravia in 2011, the average temperature of 9.1 C was warmer than in the preceding year (7.9 C). The reported year was above-average warm vis-à-vis the long-term mean temperature. Gas Purchase In 2011, the Company purchased natural gas from RWE Transgas, a.s. (9,249,919 MWh), RWE Energie, a.s. (9,800 MWh), Jihomoravská plynárenská, a.s. (54,250 MWh), Východočeská plynárenská,a.s. (2,000 MWh), RWE Key Account CZ, s.r.o. (1,500 MWh), and external suppliers (145,666 MWh). The total gas volume purchased in 2011 amounted to 9,463,135 MWh, a decrease by 3,637,262 MWh from Gas Sale In the reported year, the Company sold 9,478,211 MWh of natural gas, where 8,948,825 MWh was sold to our end customers. Compared to 2010, sales decreased by 3,589,698 MWh. Lower revenues were recorded in the Key Account (-41%), Small Business (-28.1%), and Household (-21.4%) segments. The year-on-year decrease in sales in all customer segments was due to the number of clients who switched to other competitors and unfavorable climatic conditions, as temperatures fluctuated above the long-term average. Sales and Purchases of Natural Gas (MWh) Purchase 9,463,135 13,100,397 Sale Key Account (Industrial) 3,576,970 6,060,643 Small Business 1,517,543 2,110,190 Households 3,854,313 4,893,676 Other traders 529,386 3,400 Total sales 9,478,211 13,067,909 Customers As at 31 December 2011, the Company had 478,701 customers, a year-on-year decrease by 70,540.

13 Severomoravská plynárenská Annual Report Development of the Number of Customers Key Account (Industrial) Small Business 23,855 26,885 Households 454, ,676 Total 478, ,241 Electric Power In 2011, the Company continued its successful entry into the electricity market in all customer segments. The Company's present and future goals include offering comprehensive gas and electricity supply services that cater to the full range of our customers' demands. In 2011 we focused on the acquisition of customers, mostly in the retail segments, and the development of new products. In addition, the year was marked by a campaign focused on acquiring the projected sale of the electricity market and ensuring the full-scale supply of electric power. Electricity Purchase The concept for purchasing electric power is similar to our strategy for buying natural gas. From our supplier, RWE Key Account CZ, s.r.o., which purchases electric power on the free market, the Company buys structured electricity that is supplied to end customers. To secure the provision of composite supply services, we buy the "electricity distribution service" from ČEZ Distribuce, a. s., E.ON Distribuce, a.s., and PREdistribuce, a.s. In 2011, the Company purchased 58,978 MWh of electric power. Electricity Sale Electric power is sold to three basic customer segments. The most significant is the Household segment, followed by the Key Account and Small Business segments. Overall, the Company sold its 15,971 end customers 58,531 MWh of electric power. The highest number of new acquisitions were achieved in the Household segment, where we attracted 11,016 new end customers. Sales and Purchases of Electricity (MWh) Purchase 58,978 2,468 Sale Key Account (Industrial) 23,906 - Small Business 9, Household 25,269 2,190 Total sales 58,531 2,468

14 14 SMP Group Management Report for 2011 Marketing and Communication Activities Customers As at 31 December 2011, the Company had 15,971 customers. Development of the Number of Customers Key Account (Industrial) 14 - Small Business 1, Household 14,118 3,102 Total 15,971 3, Marketing and Communication Activities As is the case with most RWE Group member companies in the Czech Republic, marketing and communication activities for the SMP Group are coordinated by RWE Transgas, a.s. Thanks to this centralization, RWE's brand, products, services, and positions are presented in a uniform manner, and necessary information is provided effectively and on time. Marketing Marketing activities carried in 2011 concentrated on maintaining our existing customer portfolio on the natural gas market in the Household and Small Business segments and on stimulating a dynamic growth in the number of new electricity customers. These objectives were accomplished by the creation of new products and the continual improvement of customer care and related services. As to electricity sales, we introduced in 2011 new products that allow fixing the commodity price. As in the past, we continued to offer the product RWE Standard. Customers responded favorably to our newly introduced rate consulting service, which allows optimizing the distribution rate according to the offtake value. Another successful measure was the ongoing offer of a financial bonus for signing an aggregate contract for several offtake points. The related marketing communication met with a considerable response, both in the traditional media and in social networks, where it was viewed and commented on by tens of thousands of users. Compared to the preceding period, the SMP Group paid closer attention to the natural gas business and the development of attractive price offers. One successful product was an offer that allows fixing the natural gas price for up to two years. The free-of-charge web-based application RWE ONLINE SERVICE underwent further development and innovations. The system offers hundreds of thousands of users the convenience of managing all matters related to natural gas and electricity supply from their home or office as well as the option to contact RWE via a non-stop customer service line or a large network of client care centers.

15 Severomoravská plynárenská Annual Report The RWE PREMIUM loyalty program continued to play an important role in Under the program, we continue to offer the lowest prices on more than four thousand brand-name consumer goods, discount vouchers for Viessmann gas appliances, and DEKTRADE construction materials. The SMP Group also paid attention to issues concerning the rational use of energy and supported various activities related to this area. These efforts are evidenced by a website dedicated to energy savings that offers hundreds of tips and suggestions for reducing energy costs at home. Communication During the ten years RWE has been in the Czech Republic, brand awareness increased from zero to the nearly 100% today. Communication activities have played an important part in this achievement and the favorable perception of the RWE brand. The advantages of a single communication strategy are most apparent in media communication. In this area, RWE Group member companies in the Czech Republic strived in 2011 to present themselves as customer-oriented and respectable suppliers of natural gas and electric power. In view of RWE's entry into the electricity market and our efforts to maintain the existing share of the natural gas market, last year's communication activities focused more than in the past on acquiring new and retaining existing customers. In doing so, the SMP Group relied on the established sponsorship projects RWE Energy of Czech Film and RWE Energy of Czech Skiing. A successful measure was the introduction of the RWE CARD thanks to which RWE's customers enjoy discounts on the admission price for Czech films at associated cinemas and price reductions for ski passes at partner ski resorts. The community involvement of our staff was supported by RWE COMPANiUS, an initiative providing financial and organizational support for voluntary activities of RWE employees in their pastime. The SMP Group pays close attention to support for regional projects. Our effort to contribute to the development of the North Moravian Region is evidenced not only by marketing partnerships with cultural and sporting projects, but also by backing for various non-profit activities and projects in such areas as charity, education, health care, ecology, culture, and sports. 3.5 Natural Gas Distribution The core of the distribution system consists of high-pressure pipelines from which SMP Net, s.r.o. supplies natural gas directly to customers and to medium- and low-pressure distribution networks.

16 16 SMP Group Management Report for 2011 Human Resources The distribution capacity of existing pipelines covered fully the needs of customers. All prescribed inspections and maintenance tasks were completed. There were no extraordinary events or accidents. Corrosion protection was secured in accordance with the maintenance plan of SMP Net, s.r.o. The operation of the corrosion protection system was outsourced to RWE Distribuční služby, s.r.o. As in previous years, we continued to fine-tune end-customer consumption metering systems in response to both legislative requirements brought by the full liberalization of the market and changes in natural gas consumption at specific offtake points. 3.6 Human Resources Employees The development of the SMP Group headcount mainly reflected the 'NEW SALES' project, which resulted in new customer segmentation and, as a result, a new structure of sales managers. New centralized departments were created in RWE Transgas to which some employees of the Sales Division were transferred. The Business Sales Department was closed and replaced by the Individual Sales Department. In 2011, the average headcount (FTE) in SMP Net, s.r.o. equaled zero. All human resources were provided to SMP Net, s.r.o. based on internal service level agreements with RWE GasNet, s.r.o. and JMP Net, s.r.o. SMP Employee Headcount Development (FTE) Year

17 Severomoravská plynárenská Annual Report Wages The development of the average wage mainly reflected changes in the occupational and organizational structure of the SMP Group in the reported year. Wages increased in line with the development of inflation in SMP Average Wage Development (CZK) 38,366 42,302 Year Employee Training and Career Development In 2011, the SMP Group spent 3.2% of wage costs on the training and personal development of its workforce. The average annual cost of training per employee amounted to CZK 17,166. SMP Employee Structure by Education 64% 36% Secondary University Social Policy Working conditions and employee benefits guaranteed to the SMP Group's workers under the Collective Bargaining Agreement for the years 2010 and 2011 were provided at the standard level of the RWE Group in the Czech Republic.

18 18 SMP Group Management Report for 2011 Information Technologies During the reported year, the SMP Group supported sports, culture, and training activities of employees and their family members. Under the fringe benefit program, workers received retirement savings and life insurance contributions and Flexi Pass vouchers. 3.7 Information Technologies Information technology services were provided by RWE Interní služby on a contractual basis. Aiming to optimize processes, increase flexibility, and improve professionalism, RWE Interní služby outsourced some of the provided IT services. In mid-2011, Hewlett-Packard became the provider of end-user IT equipment logistics services. An important undertaking was the building of a new backbone network for the RWE Group in the Czech Republic and the launch of a new proxy server, which has increased the security of connection to the Internet and to RWE's internal networks. 3.8 Environmental Protection Due to its nature, the business of the SMP Group has a negligible harmful impact on the environment. In contrast, promoting and supporting actively the use of natural gas is an important positive aspect of our business. The priority of the SMP Group's strategy is focused on complying with legislative requirements in all areas of environmental protection with the aim of minimizing potential ecological risks. The Company continued implementing an ISO environmental management system, where we have committed ourselves not only to conforming to laws and regulations, but also to increasing our employees' awareness of the importance of environmental protection. By providing active support for the remediation of past environmental pollution, the SMP Group strives to alleviate the harmful impact of contamination in former city gas production facilities. The process is a long-term endeavor pursued in close cooperation with the Ministry of Environment, the Ministry of Finance, and the Czech Environmental Inspectorate. In 2011, no incident liable to have an effect on the environment occurred within the SMP Group. No government authority carried out an inspection in the area of environmental protection in the SMP Group during the reported year.

19 Severomoravská plynárenská Annual Report Subsequent Events No significant events have occurred after the balance sheet date Outlook The SMP Group plan forecasts CZK 1,309 million in earnings before tax (EBT) and CZK 1,078 million in earnings after taxes (EAT). The planned revenues from sale and distribution of natural gas and from sale of electricity will amount to CZK 9,832 million in As in the past, the SMP Group will improve and expand its products and services on the natural gas market in 2012 with the aim of retaining existing customers and re-acquiring those who have switched to other suppliers. On the electricity market, the SMP Group will continue to focus on the acquisition of new customers. Moreover, we will promote adherence to the RWE Group's fundamental values, such as trust, reliability, and customer orientation.

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21 SAFETY

22 22 Corporate Governance Statement Shareholders and Securities 4 Corporate Governance Statement 4.1. Shareholders and Securities Share capital The share capital was paid on the day the Company was incorporated by means of the contribution specified in the Memorandum of Association and appraised in the approved privatization project for Český plynárenský podnik, a state-owned enterprise with its registered office at Belgická 26, Prague 2. The share capital amounts to CZK 2,069,728,000 and is divided into 2,069,728 shares, each with a nominal value of CZK 1,000. There was no change in the value of the Company's share capital during the preceding two years. The rules for increasing or reducing the share capital are outlined in the Company's Articles of Association. Shares Shares were issued in connection with the Company's incorporation on 1 January 1994, and they are the Company's common shares. Bearer shares are listed on the official stock market in accordance with Act No. 256/2004 Coll. on Capital Market Undertakings. Type Common share Common share Form Bearer share Registered share Kind Book-entry share Book-entry share Volume 1,472, ,443 ISIN / SIN / SIN CZ CZ Total value CZK 1,472,285,000 CZK 597,443,000 Nominal value per share CZK 1,000 CZK 1,000 Taxation of revenues from shares in the issuer's domicile country Revenues from shares are taxed in accordance with Act No. 586/1992 Coll. on Income Tax, as amended Payer of tax on revenues from shares Issuer Issuer Share transfers Shares were formerly transferred through the Securities Center; as of 7 July 2010, shares are transferred through the Central Securities Depository (Centrální depozitář cenných papírů, a.s.) Transferability restrictions None None Trading on regulated markets in the Czech Burza cenných papírů Praha, Shares are not listed Republic a.s. (Prague Stock Exchange) free market Trading on regulated markets abroad Shares have not been accepted for trading on any foreign market Name and registered office of the bank or financial institution through which shareholders can exercise their ownership rights relating to shares, in particular through which revenues from shares are paid Komerční banka, a.s., Prague 1 Payments are made by the bank's branches and head office Net revenues to the issuer derived from the issue None None

23 Severomoravská plynárenská Annual Report Shareholders as at 31 December 2011 Name Registered office RWE Gas International N.V. 5211AK 's-hertogenbosch, Willemsplein 4, Kingdom of the Netherlands Stake in share capital (%) 49,64 SPP Bohemia a.s. Novodvorská 803/82, Prague 4, Czech Republic 20,65 RWE Transgas, a.s. Limuzská 12/3135, Prague 10, Czech Republic 18,09 Slovenský plynárenský Mlynské Nivy 44/a, Bratislava, Slovakia 8,52 priemysel, a.s. Other shareholders 3,10 Note: The stake in the share capital corresponds to the share in the issuer's voting rights. Based on the value of their stake in the share capital, shareholders are entitled to exercise their voting rights at the General Meeting. As at 31 December 2011, the Company was a member of the RWE Group. As at that date, RWE Aktiengesellschaft indirectly held a 67.73% stake in the Company's share capital. RWE Aktiengesellschaft controlled RWE Gas International N.V. and RWE Transgas, a.s. The main shareholders (RWE Gas International N.V. and RWE Transgas, a.s.) exercise their rights to the extent of their votes solely at the Company's General Meeting. For this reason, it has not been necessary to adopt any measures against a misuse of the main shareholder's control rights. The ties and control structure of companies associated under the RWE Group as at 31 December 2011 are described on the third page of the cover as an annex to the Report of the Severomoravská plynárenská, a.s. Board of Directors on Relations between Related Parties as at 31 December 2011, which is a part of this Annual Report (Section 8). Slovenský plynárenský priemysel, a.s. is the sole shareholder of SPP Bohemia a.s. The Company has no other information on the structure of indirect shares in the issuer's voting rights as far as other shareholders are concerned. Rights Attaching to Shares Shareholder rights and obligations are defined in generally binding legal regulations (Commercial Code) and the Company's Articles of Association. A shareholder of the Company may be a legal entity or a natural person. Shareholders have the right to participate in the management of the Company under the conditions set out under the law and the Articles of Association. As a rule, shareholders exercise this right at the General Meeting, where they must respect the General Meeting Procedure Rules. The voting rights of a shareholder depend on the nominal value of shares held by the shareholder, where every CZK 1,000 of the nominal value of a share represents one vote (one share equals one vote). A shareholder is entitled to a share in profit (dividend) allocated by the General Meeting for distribution based on the Company s financial performance. A shareholder is under no obligation to return to the Company a dividend accepted in good faith.

24 24 Corporate Governance Statement Shareholders and Securities Shareholders are not entitled to demand the return of their contributions during the existence of the Company and upon its winding up. After the Company is wound up in liquidation, shareholders will be entitled to a share in the liquidation balance. Additional Information on Shares No third party made a takeover offer for the Company's shares in either 2011 or the preceding year. The Company has made no share takeover offer to other companies. The Company has not invested into shares and bonds issued by other issuers. The Company has not issued any convertible or interim securities. The Company has not issued any shares with special rights. The Company is not aware of any restrictions on voting rights attaching to shares it has issued. The Company is not aware of any shareholder agreements liable to restrict the transferability of shares or the voting rights attaching to shares it has issued. Neither the Company nor any person holding a direct or indirect ownership interest in the Company exceeding 50% of the share capital or voting rights owns any shares of the issuer. The Company has not issued any shares not constituting a stake in the share capital. Increasing and reducing the share capital and changing the rights attaching to individual types of shares is subject to the applicable provisions of the Commercial Code and the Company's Articles of Association. The Company does not offer employees or members of the governing and supervisory bodies the possibility to acquire under special terms the Company's shares, options for the Company's shares, or other rights attaching to the Company's shares. There was no approved or conditional increase in the share capital in Members of the public hold 64,142 shares of the Company, which accounts for 3.10% of its share capital. Right to a Dividend and Dividend Payout Period Unless otherwise specified by the General Meeting, the record date is the reference date for attending the General Meeting that makes a decision to pay dividends. Unless otherwise decided by the General Meeting, dividends are payable within three months after the day on which the General Meeting decides to distribute profit. The right to a dividend payment expires after a four-year limitation period. Dividend per Share in the Last Three Accounting Periods Year Dividend per share (CZK) 488* * Proposal of the Board of Directors. Earnings and revenues in the last two accounting periods are specified in the financial section of the Annual Report.

25 Severomoravská plynárenská Annual Report Governing Processes and Other Rules and Procedures Decision-Making Processes and Main Powers of the General Meeting The General Meeting is the supreme body of the Company. Its exclusive powers include matters reserved to the General Meeting by the law (particularly the matters specified in Section 187 of the Commercial Code) and the Articles of Association. The General Meeting is held at least once per calendar year. A General Meeting notice is published in the Commercial Bulletin and using a method allowing online access in accordance with the Act on Capital Market Undertakings and the Company's Articles of Association within the period set out in the applicable legal regulation. By the same deadline, the Company sends a General Meeting invitation to shareholders holding registered shares included on the list of shareholders to their address specified therein. The General Meeting has a quorum if attended in person, through persons authorized to act on their behalf, or through their representatives by shareholders holding shares with a nominal value exceeding 30% of the Company's share capital. The General Meeting adopts decisions by a majority of votes of present shareholders unless a different majority is required by the Commercial Code or the Articles of Association. Each of the Company's shares carries one vote. Voting at the General Meeting is done using ballots distributed to shareholders at registration time or in the course of the General Meeting. A shareholder indicates the applicable vote ("IN FAVOR", "AGAINST", "ABSTAINED") by marking the selected option on a ballot and by signing the ballot. The progress of the General Meeting is recorded by means of minutes. A copy of minutes is sent to shareholders upon request. Procedure for Amending the Articles of Association Decisions to amend the Articles of Association are made by the General Meeting. The Company does not have any special rules for amending the Articles of Association. The rules for making changes and additions to the Articles of Association are contained therein. Decision-Making Processes of the Board of Directors The Board of Directors is the Company's governing body that manages its business and acts on its behalf. The Board of Directors has three members appointed and discharged by the Company's Supervisory Board. The term of office of individual members of the Board of Directors lasts five years. Meetings of the Board of Directors are held at least once a month. The Board of Directors has a quorum if its meeting is attended by a simple majority of its members. Decisions on all matters discussed by the Board of Directors must be voted for by a simple majority of all not only present members of the Board of Directors. Each member of the Board of Directors has one vote. The Board of Directors makes decisions on all matters concerning the Company not reserved to the General Meeting or the Supervisory Board by generally binding legal regulations or the Articles of Association.

26 26 Corporate Governance Statement Governing Processes and Other Rules and Procedures At its meetings, the Board of Directors mainly discusses the Company's business performance in relation to the plan for the applicable calendar year, including continually updated forecasts. Moreover, the Board of Directors monitors sales of natural gas and electric power as well as the development of accounts receivable in individual customer segments, taking measures in response to the situation on the natural gas market in the Czech Republic. Its other responsibilities include optimizing the risk management system, fine-tuning corporate processes, reducing costs, and handling the social policy and employee care. The Company does not have any special rules for appointing and discharging members of the Board of Directors. Members of the Board of Directors do not hold any special powers or authorizations in the sense of Sections 161a and 210 of the Commercial Code. Decision-Making Processes of the Supervisory Board The Supervisory Board oversees activities carried out by the Board of Directors and the conduct of the Company's business. The Supervisory Board has six members; four are elected by the General Meeting and two by the Company's employees. The term of office of individual members of the Supervisory Board lasts two years. Meetings of the Supervisory Board are held at least twice a year. The Supervisory Board has a quorum if its meeting is attended by a simple majority of its members. Decisions on all matters discussed by the Supervisory Board must be voted for by a simple majority of all not only present members of the Supervisory Board. Each member of the Supervisory Board has one vote. At its meetings, the Supervisory Board mainly discusses the Company's business performance in relation to the plan for the applicable calendar year, including continually updated forecasts. The Supervisory Board monitors the development of the Company's receivables and payables, overdue receivables in individual customer segments in particular. It oversees compliance with generally binding regulations, the Articles of Association, and resolutions of the General Meeting as well as the functioning of the risk management system. The Supervisory Board discusses documents submitted to the General Meeting. In particular, it reviews the financial statements and the profit distribution proposal (including the proposed amount and method for payment of dividends and performance bonuses), examines payments for losses, and presents its viewpoints to the General Meeting. Furthermore, the Supervisory Board reviews the report on relations with related parties and fulfills the role of the audit committee whenever necessary. The Company does not have any special rules for appointing and discharging members of the Supervisory Board. Internal Audit Policies and Processes and Methods for Handling Financial Reporting Risks The Company's internal audit system is based on the four-eye principle, which means that the signature or consent of two persons is required for entering into agreements and approving accounting records, where such persons must hold the applicable authorization as per the Signature Rules or another internal guideline.

27 Severomoravská plynárenská Annual Report Moreover, the Company employs an authorization concept that defines the process of assigning and modifying authorizations for the SAP financial system. This concept lays down the scope of approved access rights for individual work positions. The abovementioned control systems are regularly reviewed by means of internal audits. The Company's approach to risks and risk management is described in detail in Chapter 3 of the Notes to Financial Statements. Important Agreements to which the Issuer Is a Party That Are to Come into Effect, Be Amended, or Expire if Control over the Issuer Changes as a result of a Takeover Offer and the Resulting Effects The Company has not entered into agreements that are to come into effect, be amended, or expire in the event control over the issuer changes as a result of a takeover offer. Agreements between the Issuer and Members of Its Board of Directors or Employees under which the Issuer Is Required to Perform if Their Office or Employment Terminates in connection with a Takeover Offer The Company has not signed any agreements with members of the Board of Directors or employees under which the Company would be required to perform in the event their office or employment terminates in connection with a takeover offer. Programs Allowing Employees, Members of the Board of Directors, and Members of the Supervisory Board to Acquire under Special Terms the Company's Shares, Options for the Company's Shares, or Other Rights to the Company's Shares The Company has no programs allowing employees, members of the Board of Directors, and members of the Supervisory Board to acquire under special terms the Company's shares, options for the Company's shares, or other rights attaching to the Company's shares. Payments for Extraction Rights to the Government Extraction activities do not constitute the core of the Company's business. In 2011, the Company did not pay the government any fees for extraction rights. 4.3 Management and Administration Policies In 2011, the Company did not adopt or conformed to any generally known corporate governance and administration code in view of the fact that the Company has a very low number of employees and periodically adopts and applies the RWE Group's corporate guidelines, which is sufficient for the Company's management processes.

28 28 About the Issuer General Information 5 About the issuer 5.1 General Information Company name: Severomoravská plynárenská, a.s. Registered office: Plynární 2748/6, Ostrava Moravská Ostrava Company No.: Legal form: Joint-stock company The Company s Establishment and Inception: The Company was established in accordance with the law of the Czech Republic, specifically Section 171, paragraph 1 and Section 172, paragraphs 2 and 3 of Act No. 513/1991 Coll., the Commercial Code. The Company was founded on 13 December 1993 under a single act of the National Property Fund of the Czech Republic, as the sole founder, with its registered address at Rašínovo nábřeží 42, Prague 2, based on a Memorandum of Association in the form of a notarial deed. The Company was incorporated on 1 January 1994 by registration in the Commercial Register maintained by the Ostrava Regional Court under Section B, Entry 757. Object of Business: Articles of Association, Article 4 The object of the Company's business is: 1. Gas trading 2. Consulting for technical matters relating to the gas sector 3. Production of heat 4. Lease and rental of movables 5. Lease and rental of means of transportation 6. Lease or real estate, residential property, and commercial property 7. Accounting consultancy, bookkeeping, and tax administration services 8. Administration, organization, and financial services for legal entities and natural persons 9. Assembly, repair, inspection, and testing of specialty gas equipment and gas vessel filling 10. Electronic communications services 11. Brokerage of trade and services 12. Electricity trading Investor's Timetable 14 May 2012 Reference day for attending the annual General Meeting 21 May 2012 Annual General Meeting

29 Severomoravská plynárenská Annual Report Contact Details for Shareholders Shareholder affairs are handled by the Severomoravská plynárenská, a.s. Corporate Office. Contact Person: Radmila Kulínská T F E [email protected] Contact address: Severomoravská plynárenská, a.s. Plynární 2748/ Ostrava Moravská Ostrava

30 30 About the Issuer The Company's Governing and Supervisory Bodies 5.2 The Company's Governing and Supervisory Bodies Board of Directors as at 31 December 2011 Jindřich Broukal Member since 3 February 2011, Chairman since 8 February 2011; CEO Date of birth: 25 October 1960 Education: Institute of Chemical Technology, Prague, Faculty of Fuel and Hydro Technologies, Sheffield Hallam University, MBA Membership in the bodies of other companies during the last five years: Chairman of the Board of Directors Východočeská plynárenská, a.s., Member of the Supervisory Board GASFINAL, a.s. in liquidation Other business activities during the last five years: None in the past and at present Lukáš Roubíček Deputy Chairman since 1 July 2008; CFO Date of birth: 25 February 1971 Education: Mining University, Ostrava, Faculty of Economics Membership in the bodies of other companies during the last five years: Deputy Chairman of the Board of Directors Východočeská plynárenská, a.s. and RWE Energie, a.s., Managing Director RWE Gas Slovensko, s.r.o., Member of the Board of Directors GASFINAL, a.s. in liquidation, Managing Director RWR-LEASING, spol. s r.o., Deputy Chairman of the Board of Directors Středočeská plynárenská, a.s. and Západočeská plynárenská, a.s. Other business activities during the last five years: None in the past and at present Note: Memberships in the bodies of other companies written in italics were no longer active as of 31 December In case that a person holds more than one position in a company, only the current or the most important position is reported. The list includes only the current or most recent commercial names.

31 Severomoravská plynárenská Annual Report David Konvalina Member since 1 August 2009 Date of birth: 24 October 1976 Education: University of Economics, Prague, Faculty of International Relations Membership in the bodies of other companies during the last five years: Member of the Board of Directors Východočeská plynárenská, a.s. and RWE Energie, a.s. Other business activities during the last five years: None in the past and at present The term of office of members of the Company's Board of Directors lasts five years. Members of the Board of Directors are elected and discharged by the Company's Supervisory Board. Members of the Board of Directors declare that: they are in compliance with the provisions of Section 196 of the Commercial Code, as amended; no member of the Board of Directors has been convicted of fraudulent crime during the past five years; no statutory or regulatory body has made an official public accusation or levied a fine against any member of the Board of Directors during the past five years; during the past five years, no member of the Board of Directors has been declared inept to act as a member of an administrative, governing, or supervisory body, a management member, or a person responsible for the operation of the Company or another corporation that is a securities issuer; they have no family ties to other members of the Company's Board of Directors or Supervisory Board; no conflict of interest in the sense of Commission Regulation (EC) 809/2004 exists between their obligations to the Company and their private or other interests; during the past five years, no member of the Board of Directors has been a party to bankruptcy (insolvency) proceedings, liquidation, or sequestration as a natural person or a member of the Company's governing or supervisory bodies with the following exceptions: Ing. Jindřich Broukal was a member of the supervisory board of Gasfinal, a.s., a company that entered into liquidation on 1 January 2011 based on a decision of the general meeting. The liquidation has been duly completed, and the company was deleted from the Commercial Register on 22 November The liquidation balance has been paid out to shareholders; Ing. Lukáš Roubíček, Ph.D. was a member of the board of directors of Gasfinal, a.s., a company that entered into liquidation on 1 January 2011 based on a decision of the general meeting. The liquidation has been duly completed, and the company was deleted from the Commercial Register on 22 November The liquidation balance has been paid out to shareholders.

32 32 About the Issuer The Company's Governing and Supervisory Bodies Supervisory Board as at 31 December 2011 The Supervisory Board has six members. Four are elected by the General Meeting and two by the Company's employees. Martin Herrmann Member since 15 May 2010, Chairman since 28 June 2010 Date of birth: 3 July 1967 Education: Westfälische-Wilhelms-Universität, Münster, Economics Membership in the bodies of other companies during the last five years: Chairman of the Board of Directors RWE Transgas, a.s.; Managing Director RWE East, s.r.o.; Chairman of the Supervisory Board Jihomoravská plynárenská, a.s., Východočeská plynárenská, a.s., RWE Energie, a.s., and RWE Gas Storage, s.r.o.; Member of the Supervisory Board NET4GAS, s.r.o., RWE Supply & Trading GmbH, Budapesti Elektromos Müvek Nyrt., and ÉMÁSz Nyrt, Deputy Chairman of the Supervisory Board RWE Interní služby, a.s.; Chairman of the Supervisory Board Středočeská plynárenská, a.s. and Západočeská plynárenská, a.s.; Managing Director RWE Energy Czech Republic, s.r.o. in liquidation Other business activities during the last five years: None in the past and at present Vladimír Vurm Member since 15 May 2010, Deputy Chairman since 28 June 2010 Date of birth: 19 September 1946 Education: Czech Technical University, Prague, Faculty of Mechanical Engineering Membership in the bodies of other companies during the last five years: Deputy Chairman of the Supervisory Board Jihomoravská plynárenská a.s., Východočeská plynárenská, a.s., and RWE Energie, a.s.; Deputy Chairman of the Supervisory Board Středočeská plynárenská, a.s. and Západočeská plynárenská, a.s.; Managing Director RWE Energy Czech Republic s.r.o. in liquidation Other business activities during the last five years: None in the past and at present Note: Memberships in the bodies of other companies written in italics were no longer active as of 31 December In case that a person holds more than one position in a company, only the current or the most important position is reported. The list includes only the current or most recent commercial names.

33 Severomoravská plynárenská Annual Report Tomáš Varcop Member since 15 May 2010 Date of birth: 15 April 1965 Education: Brno Technical University, Faculty of Mechanical Engineering, University of Pittsburgh, MBA Membership in the bodies of other companies during the last five years: Member of the Board of Directors RWE Transgas, a.s., Member of the Supervisory Board Jihomoravská plynárenská a.s. and Východočeská plynárenská, a.s. Other business activities during the last five years: None in the past and at present Alena Rozsypalová Member since 16 May 2011 Date of birth: 30 December 1974 Education: Mendel University of Agriculture and Forestry in Brno Membership in the bodies of other companies during the last five years: Member of the Supervisory Board Východočeská plynárenská, a.s. Other business activities during the last five years: None in the past and at present Radek Martynek Member elected by employees since 1 June 2010 Date of birth: 26 April 1971 Education: Specialized Trade School, Ostrava, Mechanical Engineering Membership in the bodies of other companies during the last five years: None in the past and at present Other business activities during the last five years: None in the past and at present

34 34 About the Issuer The Company's Governing and Supervisory Bodies René Ulbrich Member elected by employees since 1 June 2010 Date of birth: 11 August 1967 Education: Mining University, Ostrava, Faculty of Economics Membership in the bodies of other companies during the last five years: None in the past and at present Other business activities during the last five years: None in the past and at present The term of office of members of the Company's Supervisory Board lasts two years. Members of the Supervisory Board are elected and discharged by the Company's General Meeting. Members of the Supervisory Board declare that: they are in compliance with the provisions of Section 196 of the Commercial Code, as amended; no member of the Supervisory Board has been convicted of fraudulent crime during the past five years; no statutory or regulatory body has made an official public accusation or levied a fine against any member of the Supervisory Board during the past five years; during the past five years, no member of the Supervisory Board has been declared inept to act as a member of an administrative, governing, or supervisory body, a management member, or a person responsible for the operation of the Company or another corporation that is a securities issuer; they have no family ties to other members of the Company's Supervisory Board or Board of Directors; no conflict of interest in the sense of Commission Regulation (EC) 809/2004 exists between their obligations to the Company and their private or other interests; during the past five years, no member of the Supervisory Board has been a party to bankruptcy (insolvency) proceedings, liquidation, or sequestration as a natural person or a member of the Company's governing or supervisory bodies with the following exceptions: From 5 March 2004 to 31 December 2009, Martin Herrmann was a Managing Director of RWE Energy Czech Republic, s.r.o., a company that entered into liquidation on 17 June 2008 based on a decision of the sole member, RWE Transgas, a.s. The liquidation has been duly completed, and the company was deleted from the Commercial Register on 31 December The liquidation balance has been paid out to the sole member; From 21 May 2008 to 31 December 2009, Ing. Vladimír Vurm, CSc. was a Managing Director of RWE Energy Czech Republic, s.r.o., a company that entered into liquidation on 17 June 2008 based on a decision of the sole member, RWE Transgas, a.s. The liquidation has been duly completed, and the company was deleted from the Commercial Register on 31 December The liquidation balance has been paid out to the sole member.

35 Severomoravská plynárenská Annual Report Members of the Board of Directors and the Supervisory Board Whose Office Terminated in 2011 (including Changes in 2011) In connection with the end of the five-year term of office, the Company's Supervisory Board discussed at its extraordinary meeting held on 2 February 2011 the re-election of Ing. Jindřich Broukal as a member of the Board of Directors effective as of 3 February At a subsequent meeting of the Company's Board of Directors held on 7 February 2011, members of the Board of Directors re-elected Ing. Jindřich Broukal the Chairman of the Board of Directors effective as of 8 February In connection with the end of the two-year term of office, the General Meeting held on 16 May 2011 re-elected Ing. Alena Rozsypalová a member of the Company's Supervisory Board. Remuneration of Members of the Board of Directors and the Supervisory Board Members of the Board of Directors perform their duties and receive remuneration in accordance with the applicable provisions of the Commercial Code. The General Meeting has set the remuneration paid to members of the Board of Directors as a fixed monthly sum. Members of the Board of Directors are not entitled to any cash or in-kind benefits upon the termination of their office. Members of the Board of Directors employed by the Company also receive income under an employment contract with the Company. Remuneration from this labor-law relationship consists of a fixed monthly sum that is based on part-time employment. Members of the Board of Directors do not have any benefits under the mentioned contract after its expiration, which would go beyond the provisions of generally binding laws and regulations. As to members of the Board of Directors who are not employees of the Company, only remuneration for board membership is reported. Benefits in kind received by some members of the Board of Directors in connection with their labor-law relationship with the Company consist of accident insurance contributions. Members of the Supervisory Board perform their duties and receive remuneration in accordance with the applicable provisions of the Commercial Code. The General Meeting has set the remuneration paid to members of the Supervisory Board as a fixed monthly sum. Members of the Supervisory Board are not entitled to any cash or in-kind benefits upon the termination of their office. Benefits in kind received by some members of the Supervisory Board in connection with their labor-law relationship with the Company consist of the use of a company car for private purposes and supplementary retirement scheme contributions. In addition to remuneration, members of the Board of Directors and members of the Supervisory Board are entitled to performance bonuses, subject to approval by the General Meeting. The General Meeting decides the total amount of bonuses and the payment terms at the time of making the dividend distribution decision. No performance bonuses were paid in The Company did not provide to or assume for members of the Board of Directors or members of the Supervisory Board any loans, financing, guarantees, collateral, or pledges.

36 36 About the Issuer Object of Business and Activities of Issuer of Listed Securities Remuneration of the Board of Directors and Supervisory Board Members in 2011 (CZK) Board of Directors Supervisory Board Remuneration for board membership 669, ,996 Income from labor-law relationship 119,862 1,163,218 Benefits in kind 19, ,484 All figures in the table indicate income before taxes. In addition to the above, members of the Company's bodies did not receive any additional cash or in-kind remuneration in In 2011, members of the Company's bodies did not have employment or other similar contracts with the issuer's subsidiaries. Consequently, they received no cash or in-kind remuneration from these companies. Treasury Shares Held by Members of the Board of Directors and Supervisory Board Members of the Board of Directors, members of the Supervisory Board, and persons related to these members held no shares of Severomoravská plynárenská, a.s. as at 31 December As at the said date, these persons had not completed any option or other similar transactions that would involve the Company's shares, and no such transactions had been completed in the interest of these persons. 5.3 Object of Business and Activities of Issuer of Listed Securities Main Activities Severomoravská plynárenská, a.s. is a gas company operating in North Moravia throughout the Moravian-Silesian and Olomouc Regions and in the Vsetín area in the Zlín Region. In 2011, the main object of the Company's business was purchase and sale of natural gas and electric power to all customer segments, ranging from households, small entrepreneurs, and sole traders to large industrial corporations. Details are specified in the SMP Group Management Report for Organization Units According to its incorporation data registered in the Commercial Register, the Company does not have any organization units in the Czech Republic or abroad.

37 Severomoravská plynárenská Annual Report Summary Description of the Company's Real Property The Company mainly owns tangible fixed assets that support its operations, such as administration buildings. Major Real Property Owned by the Company Ostrava Complex Plynární 2748/6 Olomouc Complex Wittgensteinova 6 Šumperk Complex Žerotínova 36 Nový Jičín Complex Štefánkova 5 Cadastral district Moravská Ostrava Land size (sq. m.) Floor size (sq. m.) Use 30,339 10,843 Administration buildings, office space, shops, garages, warehouses, etc. Olomouc-město 11,919 3,900 Administration buildings, office space, shops, garages, warehouses, etc. Šumperk 17,488 4,517 Administration buildings, office space, shops, garages, warehouses, etc. Nový Jičín Dolní předměstí 7,422 3,347 Administration buildings, office space, shops, garages, warehouses, etc. Structures Acquisition value (thousands of CZK) Accumulated depreciation (thousands of CZK) Net book value (thousands of CZK) Administration buildings 338, , ,484 Other 143,444 52,384 91,060 Total structures 481, , ,544 Land 28, ,683 Total land 28, ,683 No property is subject to any lien. The Issuer's Dependence on Patents or Licenses The Company does not use any of its own or contractually acquired patents. The Company has received the following licenses from the Energy Regulatory Office (ERO) in accordance with Act No. 458/2000 Coll., the Energy Act: Natural Gas Trading License No with Amendment 003 dated 6 November 2009 valid from 13 November 2009 to 17 January 2015; Electricity Trading License No dated 18 February 2010 valid from 19 February 2010 to 19 February 2015; Natural Gas Distribution License No with Amendment 006 dated 8 September 2011 valid from 1 January 2007 to 1 January 2032; the license holder is the subsidiary SMP Net, s.r.o. Major Commercial and Financial Contracts Business activities carried out by the Company in the area of purchase and sale of gas and purchase of electricity are fundamentally dependent on natural gas purchase and sale agreements signed with RWE Transgas, a.s., an electricity purchase agreement signed with RWE Key Account, s.r.o., and an aggregate natural gas distribution agreement signed with SMP Net, s.r.o.

38 38 About the Issuer Object of Business and Activities of Issuer of Listed Securities Court, Administrative, and Arbitration Proceedings The Company is neither a party to nor is it aware of any administrative proceedings liable to have an important effect on the Company's financial situation. Moreover, the Company is neither a party to nor is it aware of any arbitration proceedings before the Chamber of Commerce of the Czech Republic and the Agrarian Chamber of the Czech Republic. Research and Development The Company is not developing any new products and has not developed any such products in the last three years. Business Interruption Information The Company did not suspend its business activity in Changes in Equity The relevant information is specified in the Notes to Financial Statements of the SMP Group (Section 6.2 of the Annual Report). Average Employee Headcount The relevant information is specified in Section 3.6 Human Resources. Risk Factors in Financial Management In 2011, there were no risk factors in the Company's financial management that would have a negative impact on its financial stability. Considering the nature of its main business activity, the Company is not exposed to major financial risks. However, the Company faces market, operating, and other risks. Some of the important risks faced by the Company include: Market loss risk risk of losing the share of the natural gas and electricity markets due to the development of prices of substitutes, new energy sources, market liberalization, and economic recession; Credit risk risk consisting of the inability of counterparties to meet their contractual obligations; Flexibility risk risk stemming from the calculation of different flexibilities on the purchasing and selling side within the Company. The Company has implemented a risk management method that includes risk identification and analysis, counter-measure planning, monitoring, and management. Additional information on risk management in the Company is included in a separate section of the Notes to Financial Statements of the SMP Group (Section 6.2 of the Annual Report).

39 Severomoravská plynárenská Annual Report Equity Interests Companies in which the Company Held Equity Interests as at 31 December 2011: Commercial name: SMP Net, s.r.o. Identification No.: Registered office: Ostrava Moravská Ostrava, Hornopolní 3314/38, PSČ Share capital: CZK 5,031,462,000 Stake in share capital: 100% Object of business: Gas distribution Auditor: PricewaterhouseCoopers Audit, s.r.o. Key Ratios for 2011 (CAS) Total sales (CZK m) 2,741 EBITDA (CZK m) 1,239 Operating result (CZK m) 719 Profit before taxation (CZK m) 706 Profit after taxation (CZK m) 904 Number of employees (FTE) - Return on ownership interest in 2011 (CZK m) 904 The Company's stakes in the share capital of the individual companies have been paid in full. The Company held no indirect ownership interest in any company as at 31 December 2011.

40 40 About the Issuer Persons Responsible for the Annual Report and Audit of the Financial Statements 5.5 Persons Responsible for the Annual Report and Audit of the Financial Statements Audit Firm Responsible for Auditing the Financial Statements of both the Company and the SMP Group for 2004 to 2011 and the Auditor in Charge for 2011: Audit Firm: Auditor in Charge: PricewaterhouseCoopers Audit, s.r.o. Jitka Žaloudková Kateřinská 40/466 Certificate No Prague 2 Registered on the List of Audit Firms of the Chamber of Auditors of the Czech Republic under Certificate No. 021 Fees to Auditors in the Last Accounting Period Structured by Services Rendered The cost of auditing services provided by three audit firms in 2011 totaled CZK 6,243,000. Service SMP Group Company Audit of the financial statements and verification of data in the Annual Report, including information in the Report on Relations between Related Parties CZK 4,525,000 CZK 2,455,000 Internal audit CZK 907,200 CZK 326,592 Tax consulting CZK 811,039 CZK 193,898 Note: All prices are specified exclusive of VAT. Ostrava, 27 March 2012 Person Responsible for Accounting Lukáš Roubíček Deputy Chairman of the Board of Directors, CFO

41 Severomoravská plynárenská Annual Report Persons Responsible for the Annual Report of Severomoravská plynárenská, a.s. for 2011 We hereby certify that to our best knowledge this Annual Report provides a true and fair view of the financial situation, business operations, and economic results of the Company and the SMP Group in 2011 as well as the prospects of the future development of their financial situation, business operations, and economic results. Jindřich Broukal Chairman of the Board of Directors Lukáš Roubíček Deputy Chairman of the Board of Directors

42

43 A NEW LOOK

44 44 FinanCIAL PART Financial Statements of the SMP Group 6 FInancial part 6.1 Financial Statement of the SMP Group consolidated STATEMENT OF FINANCIAL POSITION 31 December December December 2010 ASSETS Non-current assets Property, plant and equipment 6,789 6,518 6 Investment property Intangible assets Derivatives Deferred tax asset Trade and other receivables Other non-current assets - 12 Total non-current assets 7,076 6,776 Current assets Trade and other receivables Derivatives Unbilled gas and electricity supplies Current income tax receivables VAT receivables Cash and cash equivalents ,078 1,899 Non-current assets held for sale Total current assets 1,078 1,908 TOTAL ASSETS 8,154 8,684 Note The notes on pages 48 to 92 are an integral part of these separate financial statements.

45 Severomoravská plynárenská Annual Report consolidated STATEMENT OF FINANCIAL POSITION (continued) 31 December 2011 EQUITY AND LIABILITIES 31 December December 2010 Equity Share capital 2,070 2, Retained earnings, reserve fund and other funds 2,843 3, Equity attributable to shareholders of the parent company 4,913 5,624 Non-current liabilities Provisions Other non-current liabilities Deferred income tax liability Total non-current liabilities Current liabilities Provisions 95 4 Trade and other liabilities Derivatives Advances received for gas and electricity supplies Current income tax liability VAT liabilities 7 31 Other tax liabilities 9 10 Other financial liabilities 1, Total current liabilities 2,568 2,443 TOTAL EQUITY AND LIABILITIES 8,154 8,684 Note The notes on pages 48 to 92 are an integral part of these separate financial statements.

46 46 FinanCIAL PART Financial Statements of the SMP Group consolidated STATEMENT OF COMPREHENSIVE INCOME Year ended 31 December Sales 10,357 12, Purchased gas and electricity and services related to gas and electricity supplies Note (7,832) (9,302) 21 Other operating income Employees benefits (13) (15) 23 Depreciation and amortization of fixed assets (281) (407) 6, 7, 8 Other operating expenses (1,326) (1,020) 24 Operating profit 1,220 2,072 Financial income Financial expense (14) (8) 25 Net financial expense (8) - Profit before income tax 1,212 2,072 Income tax (240) (395) 26 Net profit for the year 972 1,677 Total comprehensive income for the period 972 1,677 Earnings per share (expressed in CZK per share) Basic and diluted Consolidated statement of changes in equity Year ended 31 December 2011 Share capital Retained earnings Reserve fund, other capital funds Total equity Balance as at 1 January ,070 2, ,305 Comprehensive result for the period - 1,677-1,677 Dividends paid - (1,358) - (1,358) 27 Transfer to legal reserve fund - (951) Balance as at 31 December ,070 1,615 1,939 5,624 Comprehensive result for the period Dividends paid - (1,683) - (1,683) 27 Balance as at 31 December , ,939 4,913 Note The notes on pages 48 to 92 are an integral part of these separate financial statements.

47 Severomoravská plynárenská Annual Report Consolidated statement OF cash flows Year ended 31 December Cash flow from operating activities Profit before tax 1,212 2,072 Adjustments for non-cash movements: Depreciation, amortization and impairment of assets , 7, 8 Change in provisions and impairment Gain from disposal of property, plant and equipment (23) (5) 22 Change in fair value of derivatives 116 (175) 13 Net interest expense/(income) 8-25 Other non-cash movements 61-9 Cash flow from operating activities before tax and changes in working capital 1,729 2,326 Change in current receivables 110 (166) 9 Change in current liabilities (320) (150) 17 Cash generated from operating activities 1,519 2,010 Interest received Interest paid (14) (8) 25 Income tax paid (302) (311) 26 Dividends received 2 - Net cash flow from operating activities 1,211 1,699 Cash flow from investing activities Acquisition of property, plant and equipment and intangible assets (618) (626) 6, 7, 8 Proceeds from disposal of property, plant and equipment and intangible assets Proceeds from the sale of investment 8 - Net cash flow from investing activities (563) (601) Cash flow from financing activities Loan repayment cash-pooling (488) (280) 19 Received loans cash-pooling 1, Dividends paid (1,683) (1,357) 27 Finance lease principal and payable from purchases of gas network (15) (10) 19 Net cash flow from financing activities (1,184) (1,159) Cash and cash equivalent at the beginning of the year Change in cash and cash equivalents (536) (61) Cash and cash equivalents at the end of the year Note The notes on pages 48 to 92 are an integral part of these separate financial statements.

48 48 FinanCIAL PART Notes to Consolidated Financial Statements 6.2 Notes to Consolidated Financial Statements Year ended 31 December General information ON CONSOLIDATED COMPANIES Severomoravská plynárenská, a.s. ( the Company ) has been registered in the Commercial Register in the Czech Republic kept with the Regional Court in Ostrava, section B, insert 757. The Company was incorporated on 1 January 1994 and has its registered office at Ostrava-Moravská Ostrava, Plynární 2748/6.The Company s identification number is The Company has been traded on the Prague stock exchange since Act No. 458/2000 Coll. as amended, on conditions for undertaking the business and for the execution of state administration in the energy sector (the Energy Act) governs rendering of services and related rights and obligations except for general legal norms. SMP Net, s.r.o. ( the Subsidiary ) has been registered in the Commercial Register kept with the Regional Court in Ostrava, section C, insert The Subsidiary was incorporated on 2 June 2006 and has its registered office at Ostrava Moravská Ostrava, Hornopolní 3314/38. The Subsidiary s identification number is The main business activity of the Company and its Subsidiary ( the Group ) is sales of gas and electricity and distribution of gas. The ultimate parent and controlling company of the Group is RWE Aktiengesellschaft with its registered office at Opernplatz 1, Essen, Germany. Companies controlled directly or indirectly by RWE Aktiengesellschaft are referred in these financial statements as the RWE Group. The Company s ownership structure as at 31 December 2011 was as follows: Company name Share in % RWE Gas International N.V RWE Transgas, a.s Subtotal of RWE Group share SPP Bohemia a.s Slovenský plynárenský priemysel, a.s Other shareholders 3.10 Total Note The financial statements have been prepared in the Czech language and in English. In all matters of interpretation of information, views or opinions, the Czech version of the financial statements takes precedence over the English version.

49 Severomoravská plynárenská Annual Report ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The consolidated financial statements of the Group for the year ended 31 December 2011 include the Company and the Subsidiary. 2.1 Basis of preparation of consolidated financial statements The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ( IFRS ) effective as at the end of the reporting period. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial instruments at fair value through profit or loss. Changes to basis of preparation of consolidated financial statements and disclosures In 2011, the Group applied for the first time the following new, revised or amended standards: IAS 24, Related Party Disclosures (amended November 2009). IAS 24 was revised in 2009 by: (a) simplifying the definition of a related party, clarifying its intended meaning and eliminating inconsistencies from the definition; and (b) providing a partial exemption from the disclosure requirements for government-related entities. These amendments did not have a material impact on the consolidated financial statements of the Group. Improvements to International Financial Reporting Standards (issued in May 2010). The improvements consist of a combination of substantive changes and clarifications in the following standards and interpretations: IFRS 1, First-time Adoption of International Financial Reporting Standards. The revision is concerned with changes in accounting rules in the initial application of IFRS as well as determination of revaluation on the basis of deemed purchase costs and extension of the use of deemed purchase cost for companies which produce IFRS financial statements for the first time and whose activities have regulated rates; IFRS 3, Business Combinations. An amendment to the valuation of non-controlling interest, to specify a value for uncompensated and voluntarily compensated commitments of share-based payments, subsequently referring to the transitional requirements for contingent consideration in business combinations that occurred before the effective date of IFRS 3 (2008);

50 50 FinanCIAL PART Notes to Consolidated Financial Statements IFRS 7, Financial Instruments: Disclosures. The amendment clarifies certain disclosure requirements, in particular (i) by adding an explicit emphasis on the interaction between qualitative and quantitative disclosures about the nature and extent of financial risks, (ii) by removing the requirement to disclose carrying amount of renegotiated financial assets that would otherwise be past due or impaired, (iii) by replacing the requirement to disclose fair value of collateral by a more general requirement to disclose its financial effect, and (iv) by clarifying that an entity should disclose the amount of foreclosed collateral held at the reporting date and not the amount obtained during the reporting period; IAS 1, Presentation of Financial Statements. The amendment clarifies that an entity will present an analysis of other comprehensive income for each component of equity, either in the statement of changes in equity or in the notes to the financial statements; IAS 27, Consolidated and Separate Financial Statements was amended by clarifying the transition rules for amendments to IAS 21, Changes in Foreign Exchange Rates, IAS 28, Investments in Associates and IAS 31, Interests in Joint Ventures made by the revised IAS 27 (as amended in January 2008); IAS 34, Interim Financial Reporting emphasizes that information concerning significant events and transactions disclosed in interim financial statements should update the relevant information published in the latest annual financial statements. The standard clarifies how to apply this principle in relation to financial instruments and their fair value; IFRIC 13, Customer Loyalty Programmes states that the fair value of loyalty programs should take into account the amount of rebates or incentives not offered to customers during the initial sale transaction that would otherwise be offered to customers during the initial sale transaction. In addition, amount of loyalty credits which are not expected to be used by customers should be taken into account. These amendments do not have a material impact on the consolidated financial statements. The following standards, amendments and interpretations are mandatory for accounting periods beginning on or after 1 January 2011 but are not relevant for the Group s operations: The amendment to IFRS 1 First-time Adoption of International Financial Reporting Standards. Limited exemption from disclosure of comparable carrying amounts under IFRS 7 for companies transitioning to IFRS; Classification of Rights Issues Amendment to IAS 32, Financial Instruments: Presentation; IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments; Amendment to IFRIC 14, Prepayments of a Minimum Funding Requirement. New standards, amendments to standards and interpretations not yet effective and have not been early adopted by the Group:

51 Severomoravská plynárenská Annual Report The following standards, amendments and interpretations were issued and are mandatory for the Group s accounting periods beginning on or after 1 January 2012, subject to endorsement by the European Union as indicated below: Reporting items of other comprehensive income Amendment to IAS 1, Presentation of Financial Statements (effective for accounting periods beginning on 1 July 2012 or later, this amendment has not yet been approved by the European Union). Amendment changes the grouping of items reported in other comprehensive income. Items can be subsequently transferred to profit or loss will be reported separately from items that cannot be reclassified. The amendment will not have a material impact on consolidated financial statements of the Group; Amendment to IFRS 7, Financial Instruments: Disclosures Transfers of Financial Assets (issued in October 2010, effective from 1 July 2011). The amendment requires additional disclosures in respect of risk exposures arising from transferred financial assets. Where financial assets have been derecognised but the entity is still exposed to certain risks and rewards associated with the transferred assets, additional disclosure is required to enable the effects of those risks to be understood. The amendment will not have any impact on the consolidated financial statements of the Group; IFRS 7, Financial Instruments: Disclosures offsetting financial assets and financial liabilities (issued in December 2011, effective for annual periods beginning on or after 1 January 2013, this amendment has not yet been approved by the European Union). The amendment requires disclosure about the rights to offset and related arrangements for financial instruments, which are governed by enforceable framework agreements for a set off or other arrangements. This amendment is not expected to have any material impact on the consolidated financial statements of the Group; Amendment to IAS 32, Financial Instruments: Presentation offsetting financial assets and financial liabilities (issued in December 2011, effective for annual periods beginning on or after 1 January 2014, this amendment has not been yet approved by the European Union). The amendment clarifies meanings relating to offsetting financial assets and financial liabilities. This amendment is not expected to have any material impact on the consolidated financial statements of the Group; IFRS 9, Financial instruments, Classification and Measurement (effective for annual periods beginning on or after 1 January 2015 with earlier application permitted, this amendment has not yet been approved by the European Union). IFRS 9 issued in November 2009 replaces those parts of IAS 39 relating to the classification and measurement of financial assets. IFRS 9 was further amended in October 2010 to address the classification and measurement of financial liabilities and in December 2011 to (i) change its effective date to annual periods beginning on or after 1 January 2015 and (ii) add transition disclosures. Key features of the standard are as follows: Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised

52 52 FinanCIAL PART Notes to Consolidated Financial Statements cost. The decision is to be made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument; An instrument is subsequently measured at amortised cost only if it is a debt instrument and at the same time (i) the objective of the entity s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset s contractual cash flows represent only payments of principal and interest (that is, the asset has only basic loan features ). All other debt instruments are to be measured at fair value through profit or loss; All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable decision can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. This decision can be made on an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment; Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income. IFRS 10, Consolidated Financial Statements (issued in May 2011, effective for annual periods beginning on or after 1 January 2013, the standard has not been yet approved by the European Union). The new standard replaces a section of IAS 27, Consolidated Financial Statements and the related consolidated financial statements and SIC 12, Consolidation Special Purpose Entities. It also introduces a new definition of control. Group does not expect significant impact of this standard on the consolidated financial statements of the Group; IFRS 11, Joint arrangements (issued in May 2011, effective for accounting periods beginning 1 January 2013 or later, the standard has not been yet approved by the European Union). The standard replaces IAS 31, Interests in Joint Ventures and SIC 13, Jointly Controlled Entities Non-monetary Contributions by Venturers. IFRS 11 newly defines joint control, and shows only two forms of joint arrangements joint operations and joint ventures. It is also not possible to use a proportional method of consolidation. This standard will have no impact on the consolidated financial statements of the Group; IFRS 12, Disclosure of Interests in Other Entities (issued in May 2011, effective for accounting periods beginning 1 January 2013 or later, the standard has not been yet approved by the European Union). It contains all the requirements for disclosure of information relating to consolidation, which were previously contained in IAS 27, Consolidated and Separate Financial Statements, IAS 31, Interests in Joint Ventures, and IAS 28, Investments in Associates and introduces some new dislosures. Group does not expect a material impact of this standard on the consolidated financial statements of the Group;

53 Severomoravská plynárenská Annual Report IFRS 13, Fair value (issued in May 2011, effective for annual periods beginning on or before 1 January 2013, the standard has not been yet approved by the European Union). The standard specifies the definition of fair value and concentrates mainly on the techniques of its measurement. It replaces guidance for fair value measurement in other existing standards and interpretations. This standard is not expected to have any material impact on the consolidated financial statements of the Group; IAS 27, Separate Financial Statements (issued in May 2011, effective for accounting periods beginning 1 January 2013 or later, this amendment has not yet been approved by the European Union). This standard deals only with accounting treatment of subsidiaries, jointly controlled entities and associates in separate financial statements. This standard will have no impact on the consolidated financial statements of the Group; IAS 28, Investments in Associates (issued in May 2011, effective for annual periods beginning on or after 1 January 2013, the standard has not been yet approved by the European Union). The standard reflects changes caused by issuance of IFRS 10, IFRS 11 and IFRS 12. This amendment is not expected to have any material impact on the consolidated financial statements of the Group; Amendment to IAS 12, Income Taxes (effective for annual periods beginning on or after 1 January 2012, the amendment has not been yet approved by the European Union). IAS 12 requires an entity to measure the deferred tax relating to an asset depending on whether the entity expects to recover the carrying amount of the asset through use or sale. It can be difficult and subjective to assess whether the recovery will be through use or through sale when the asset is measured using the fair value model in IAS 40, Investment Property. The amendment provides a practical solution to the problem by introducing a presumption that recovery of the carrying amount will normally take place through sale. The amendment is not expected to have a material impact on the consolidated financial statements; Amendment IAS 19, Employee benefits (issued in June 2011, effective from 1 January 2013 or before, the amendment has not been yet approved by the European Union). Modification concerns defined benefit plans and termination benefits. This amendment will have no material impact on the consolidated financial statements of the Group; Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters of International Financial Reporting Standards (IFRSs) Amendment to IFRS 1, First-time Adoption of IFRSs (effective for annual periods beginning on or after 1 July 2011, it has not been yet approved by the European Union). The amendment is not relevant for the Group; IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (issued in October 2011, effective for annual periods beginning on or after 1 January 2013, the interpretation has not been yet approved by the European Union). This interpretation will have no impact on the consolidated financial statements of the Group.

54 54 FinanCIAL PART Notes to Consolidated Financial Statements Unless otherwise stated, the new standards and interpretations will not have a material impact on the consolidated financial statements. 2.2 Consolidation method Subsidiary over which the Company has direct or indirect control was consolidated. Subsidiary is fully consolidated from the date of control transfer to the Group and is excluded from consolidation from the date that control ceases. Accounting policies of the Company s subsidiary have been changed where necessary to ensure consistency with the policies adopted by the Group. Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. 2.3 Operating segments reporting Operating segments as required by IFRS 8 are reported in a manner consistent with the internal reporting provided to the chief decision-maker. The chief decision maker, responsible for allocating resources and assessing performance of the operating segments, has been identified by the Group as the Board of Directors of the Company for gas trading segment and statutory representatives of the Subsidiary for the gas distribution segment. 2.4 Foreign currency translation Items included in the consolidated financial statements of the Group are measured using the currency of the primary economic environment, in which the entities operate ( the functional currency ). The consolidated financial statements are presented in Czech Crowns, which is the Group s presentation currency and the Company s functional currency. Transactions denominated in a foreign currency are translated and recorded at the rate of exchange ruling as at the date of transaction. All foreign exchange gains and losses from such transactions and from translation of monetary assets and liabilities denominated in foreign currencies using the foreign exchange rate ruling at the end of the accounting period are recognised in profit or loss. 2.5 Property, plant and equipment Property, plant and equipment are recorded at acquisition cost less accumulated depreciation and accumulated impairment losses, if applicable. Subsequent costs are included to the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Repairs and maintenance are expensed when incurred. Borrowing costs directly attributable to the acquisition or construction of property, plant and equipment, are capitalised as a part of acquisition costs.

55 Severomoravská plynárenská Annual Report When payments for acquisition of property, plant and equipment are deferred (the due date is longer than usual), then the acquisition price of property, plant and equipment equals to the present value of the related future cash flows. The difference between the acquisition cost and the total amount of instalments is gradually recognised as interest in profit or loss. Certain property, plant and equipment were acquired with the assistance of government grants (see Note 2.15). Depreciation of property, plant and equipment is calculated using the straight-line method over their estimated useful lives. Land is not depreciated. The estimated useful lives of property, plant and equipment were set as follows: Buildings and constructions years Machinery and equipment 3 20 years Gas network 40 years Other machinery and office equipment 3 15 years The assets residual values and useful lives are reviewed and adjusted if appropriate, at each end of the reporting period. If the carrying amount of assets exceeds its estimated recoverable amount, a provision for impairment is created (see Note 2.8). Gains and losses on liquidation and disposals of assets are determined as difference between proceeds and the carrying amount and are charged to profit or loss. 2.6 Investment property Investment property is a property held to earn rentals or held for capital appreciation. Investment property consisting mainly of own administrative buildings are not used by the Group. The Group measures all of its investment property using the cost model. In the case that an investment property is partly used in the production or supply of services or goods and partly held to earn rentals, the part held to earn rentals is considered an investment property if it is separately marketable. If the part of a property held to earn rentals is not separately marketable, it is considered an investment property only if a smaller part, i.e. less than 50%, is used for the Group s purposes. The renting of apartments to its own employees is not considered an investment property. Disclosed fair values were calculated using valuation techniques that are derived from market rentals of comparable properties in the given region. Valuation was performed internally by the employees of the Group. The Group does not have significant contractual liabilities related to investment property with the exception of obligatory repair and maintenance. Depreciation is calculated applying the

56 56 FinanCIAL PART Notes to Consolidated Financial Statements straight-line method based on the estimated useful life of the given investment property and estimated residual values. The estimated useful lives were set as follows: Buildings and constructions years Rental income is recognised in profit or loss over the lease term. 2.7 Intangible assets Intangible assets are recorded at cost less accumulated amortization and accumulated losses from impairment, if applicable. Intangible assets and subsequent costs are capitalised only if it is probable that future economic benefits associated with the item and the cost of the item can be measured reliably. Intangible assets have definite useful lives and are amortised applying the straight-line method. The estimated useful lives of intangible assets were set as follows: Software Other intangible assets 3 5 years 5 7 years Research expenditure (studies costs of research focused on acquiring new pieces of information for future utilization in practice) is recognized as an expense when incurred. If the carrying amount of an asset exceeds its estimated recoverable amount at the end of the reporting period, a provision for impairment is created (see Note 2.8). 2.8 Impairment of non-financial assets Property, plant and equipment and other non-financial assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Intangible assets not yet available for use are tested for impairment annually. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).

57 Severomoravská plynárenská Annual Report Financial instruments The Group classifies its financial assets in the following categories: financial assets at fair value through profit or loss, and loans and receivables. Financial liabilities are classified to the following categories: financial liabilities at fair value through profit or loss and other financial liabilities. The classification depends on the purpose for which the financial assets and liabilities were acquired. As at 31 December 2011 and 2010, the Group recognised the following categories of financial assets and liabilities: a) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading with the receivable. They are included in current assets, except for maturities greater than 12 months after the reporting period. These are classified as non-current assets. Loans and receivables are included in Trade and other receivables and Unbilled gas and electricity supplies in the consolidated statement of financial position. Receivables represented mainly by trade receivables are initially recognised at fair value and are subsequently measured using the effective interest method, less a provision for impairment. A provision for impairment for receivables is established when there is an objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The Group creates provisions for impairment of trade receivables that are overdue: up to 1 month in the amount of 15%; 1 2 months in the amount of 30%; 2 3 months in the amount of 40%; 3 6 months in the amount of 50%; 6 12 months in the amount of 70%; and more than 12 months in the amount of 100% of their carrying amount before considering the provision for impairment. Effective from 1 January 2011 the Group creates provisions for impairment of due trade receivables of 3.5%. It is a change in the estimate that is recognised prospectively and its impact is immaterial.

58 58 FinanCIAL PART Notes to Consolidated Financial Statements A 100% provision for impairment is created for receivables under bankruptcy proceedings. These rules are based on the analysis of receivables ageing and the risk of default. The above mentioned values are determined so that the provision for impairment approximates the difference between the receivables carrying amount and the present value of estimated future cash flows discounted at the original effective interest rate. The Group does not create provisions for impairment for receivables due from the RWE Group companies. Impairment loss is recognised in profit or loss. When a trade receivable is uncollectible, it is written-off against the provision for impairment. Subsequently received recoveries of amounts previously written-off are credited to profit or loss. b) Other financial liabilities Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments. There is no intention of trading with the liability. They are included in current liabilities, except for maturities greater than 12 months after the reporting period. These are classified as non-current assets. Other financial liabilities are included in Trade and other liabilities, Other non-current liabilities and Other financial liabilities. Other financial liabilities mainly include trade liabilities that originate if the Group acquires goods and services in the ordinary course of business; borrowings that originate if the Group accepts cash and cash equivalents directly from the borrower and other financial liabilities. Other financial liabilities are recognised initially at fair value. Subsequently, other financial liabilities are stated at amortized costs using the effective interest rate method. c) Financial assets and liabilities at fair value through profit or loss Financial assets and liabilities at fair value through profit or loss represent financial assets and liabilities held for trading. A financial asset or liability is classified in this category if the Group acquired it principally for the purpose of selling or reselling in the short-term or if it is a derivative. Financial instruments at fair value through profit and loss are further classified according to degrees characterizing input information used in estimating the fair value: Level 1 quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 input data other than quoted prices included in Level 1 that are observable either directly (for example, as prices), or indirectly (for example, derived from prices); Level 3 input data that are not based on observable market data (unobservable data).

59 Severomoravská plynárenská Annual Report d) Derivatives Derivatives are initially recognised at fair value as at the date when the contract is concluded. Derivatives are subsequently measured at fair value. The Group does not use hedge accounting. All derivatives are classified as Derivatives under assets, if their fair value is positive or under liabilities, if their fair value is negative. Changes in fair value are recognised in profit or loss within Other operating expenses (-)/income (+). The fair value of derivatives is calculated as the present value of expected future cash flows from derivatives. The expected cash flows are based on current market conditions (commodity prices, foreign exchange rates, interest rates) as at the end of the reporting period Non-current assets held for sale Non-current assets (or disposal groups) are classified as assets held for sale and stated at the lower of their residual amount and fair value less costs to sell if their carrying amount is to be recovered principally through a sale transaction rather than through continuing use. Non-current assets held for sale are not depreciated Unbilled supplies and advances received for gas and electricity The Group offsets the amount of unbilled gas and electricity supplies with the amount of advance payments received for gas and electricity for each customer. The resulting balance approximates the amount of receivable from and payable to customers. Receivable from customers is a financial asset, which will be settled by cash. Since 2011 the Group creates provisions for impairment of these receivables in amount of 3.5%. The impact of this change is immaterial. Payable to customers is a non-financial liability (advance received), which will be settled by supply of gas or electricity Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less. The Group uses cash-pooling within the RWE Group. A receivable/(liability) that arises from cash-pooling is presented in the Consolidated statement of cash flows as part of cash and cash equivalents. If the liability arising from cash-pooling represents a form of financing, then it is not presented in the consolidated statement of cash flows as part of cash and cash equivalents Share capital Share capital of the Company is represented by ordinary shares. No preference shares were issued. The Company does not own any of its own equity instruments.

60 60 FinanCIAL PART Notes to Consolidated Financial Statements 2.14 Employee benefits a) Contributions to the State pension scheme The Group pays its employees contributions to the State pension system, which is managed on the basis of defined benefit scheme. The Group has no other liabilities related to the State pension scheme after paying contributions in amount defined by law. b) Pension and life insurance In accordance with the valid Collective Agreement, the Group makes monthly contributions to pension and life insurance schemes for its employees. The contributions are paid to an independent entity under a defined contribution scheme. The contributions are recognised in profit or loss as incurred. c) Other obligations Other benefits (e.g. for paid holidays) are continuously recognised as expenses when incurred Government grants Government grants related to the purchase of property, plant and equipment are recognised at their fair value in current and non-current liabilities upon their receipt by the Group. Government grants are released to profit or loss on straight line basis over the expected useful life of the assets purchased from the grants Provisions Provisions are recognised if the Group has a present legal or constructive obligation as a result of past events, and if it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Provisions are not recognised for future operating losses. Provisions are recognised in the amount of the best estimate of the expenditure required to settle the present obligation as at the reporting date. If the impact of discounting is significant, the provisions are carried at present value of future costs. Subsequent increase in provisions due to time impact is recorded as interest expense Revenue recognition Revenue is recognised when the risks and rewards from the ownership have been transferred to the buyer or when services that can be reliably measured are rendered and it is probable that the economic benefits associated with the transaction will flow to the Group.

61 Severomoravská plynárenská Annual Report Revenues from sales of goods and services are presented net of Value Added Tax net of discounts and are measured at fair value of the consideration received or receivable. a) Revenues from sales of natural gas Revenue from gas supplies is recognised when the commodity is delivered. Revenue from the sale of gas on the liberalised market, that was fully liberalised effective 1 January 2007 in accordance with article 55 of Act No. 458/2000 Coll., is measured based on the commodity value reflecting all costs for purchase of natural gas including the gross margin that covers costs of gas trade, profit and also other energy services related to gas deliveries to the customer in the required quantity and at the required time. The price for end customers consists of the price for consumed gas and for gas related services (transport, storage and trading services) and the distribution price. The price for consumed gas and gas related services consists of the commodity part, fixed monthly payment or payment for capacity (depending on a customer size). For households and low-volume customers the price is fixed, mostly for a period of a quarter. For middle-volume customers and high-volume customers the price can either be determined for a month or based on a selected product offered by the Company. For example, products are as follows: price formula (linked to quotation of reference fuels and exchange rates), fixed price or a single price covering both the commodity and capacity part. The price for transport is regulated by Energy Regulatory Office. The distribution price consists of three parts: fixed price for consumed gas, fixed monthly payment or payment for capacity (depending on a customer size) and a fee for the market operator service. All parts of the distribution price are regulated by Energy Regulatory Office. Gas supply and distribution to high-volume ( VO ) and middle-volume categories ( SO ) is billed on a monthly basis based on measured consumption. Gas supplies to low-volume categories ( MO ) and households ( DOM ) are billed periodically, based on the reading of the consumption of each connecting point, which is performed at least once in 18 months. Revenues from MO and DOM categories consist of actually billed revenues and revenues from so called unbilled gas (see Note 18). The amount of unbilled gas is calculated from the total amount of purchased gas in the particular year based on past behaviour of individual customers, divided into periods on the basis of the so-called load profiles ( TDD ) and is valued in relation to the valid price list of the Company.

62 62 FinanCIAL PART Notes to Consolidated Financial Statements b) Revenues from sales of electricity In accordance with Act No. 458/2000 Coll., the electricity market was fully liberalised effective 1 January Revenues from electricity sold are derived from commodity valuation that is based on electricity purchase costs and gross margin which covers trade costs, profit and other energy-related services used to supply electricity to customers in required quantity and at required time. Individual fixed price based on the expected supply diagram is set up for the priority customers. For other customers, the price is set as fixed for predetermined period depending on the selected product groups according to the current price list of the Group. Energy activity reflected in the final price of the electricity supply is distribution. Distribution prices are regulated by the Energy Regulatory Office. Electricity supply and distribution to high-volume ( VO ) categories is billed on a monthly basis based on measured consumption. Electricity supplies to low-volume categories ( MOP ) and households ( MOO ) are billed periodically, based on the reading of the consumption of each connecting point, which is performed at least once in 18 months. Revenues from MOP and MOO categories consist of actually billed revenues and revenues from so called unbilled electricity (see Note 10). The amount of unbilled electricity is calculated from the total amount of purchased electricity in the particular year based on so called load-profiles ( TDD ), to which the customers are assigned, and it is valued in relation to the price list valid when the supply or composite supply contract is signed. c) Other income Other income of the Group is recognised as follows: Revenues from service level agreements ( SLA ) are recognised when services are provided; Revenues from rentals are recognised when the service is provided; Interest income is recognised on a time-proportion basis using the effective interest rate method; Income relating to connecting to gas distribution network is released to profit or loss over 20 years from the date of their receipt Leasing Leases of property, plant and equipment where majority part of the risks and rewards of ownership have been transferred to the Group are classified as finance leases.

63 Severomoravská plynárenská Annual Report Finance leases are capitalised at the inception of the lease at the lower of the fair value of the leased property or the present value of the minimum lease payments. Each lease payment is allocated between the settlement of the liability and finance charges. Related lease obligations are included in current or non-current liabilities in the consolidated statement of financial position. The interest is charged directly to profit or loss over the lease period so as to achieve a constant interest rate on the liability. The property, plant and equipment acquired via finance leases are recorded in the consolidated statement of financial position and depreciated over their estimated useful lives. Leases in which significant portion of risks and rewards of ownership are retained by the lessor are classified as operating leases. Operating lease instalments are charged to profit or loss on a straightline basis over the lease term Dividend distribution Dividend distribution to the Company s shareholders is recognised as a liability in the period in which the dividends distribution is approved by the General meeting of shareholders Income tax Income tax for the accounting period consists of current and deferred tax. Current income tax represents the estimated tax payable for the accounting period calculated by using tax rate and laws enacted or substantially enacted as at the end of the reporting period and valid for the period. Deferred tax is recognised on all temporary differences between the carrying amount of an asset or liability in the consolidated statement of financial position and their tax bases. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination. A deferred tax asset is recognised when it is probable that future taxable profit will be available against which the temporary differences can be utilised. The deferred tax asset and liability are determined using the tax rate expected to be valid in the period, in which the tax asset is realised or tax liability is settled, according to tax law enacted or substantially enacted as at the end of the reporting period.

64 64 FinanCIAL PART Notes to Consolidated Financial Statements 3 Financial risk management 3.1 Credit risks Credit risk (counterparties credit risk) represents a risk of inability of counterparty to fulfil their finance obligations to the Group. The Group is subject to two basic categories of credit risk: (i) credit risk by virtue of distribution and sale of natural gas and electricity to the customers and (ii) credit risk by virtue of management of available resources. Management of credit risk arising from the sale of natural gas to the Group s customers follows the internal directive Management of Credit Risk, the wording of which is based on group rules for credit risk management within RWE Group. Customer target groups, for which the risk is evaluated, were defined and the assessment was modified in such a manner that it factors in a probability of customer s insolvency. A maximum credit exposure and expected loss is assessed for each customer with the annual natural gas consumption above 40 GWh or for a customer with annual natural gas consumption of GWh, who intends to conclude or has already concluded a contract with the Company containing non-standard payment conditions. The maximum credit exposure and expected potential loss are determined by the Company based on the methodology set in the internal directive. The expected potential loss level depends on customer s expected consumption diagram, payment terms and expected natural gas prices and other parameters entering into the calculation. The credit limit and expected potential loss is determined using the maximum credit exposure and credit assessment of the customer expressed by the credit rating set by Creditreform, an independent rating agency. Debt collection for VO and SO categories is managed by the Group. Customers in VO and SO categories are monitored weekly by the sales department representatives on an individual basis. Debt collection process for MO, MOP and DOM, MOO categories is outsourced to a related party from RWE Group based on the Service level agreement and might include procedures such as customer disconnection or court proceedings. The Group participates in cash-pooling project of RWE Transgas, a.s. Under the terms of the cash-pooling project the Group deposits all of its available financial funds with RWE Transgas, a.s., either in the form of short-term loans maturing within 1 year or in the form of overnight roll-over overdrafts. RWE Transgas, a.s. is a related company controlled by RWE Aktiengesellschaft, whose (A-) S&P rating represents an acceptable level of credit exposure. Credit quality of financial assets The credit quality of financial assets which are neither past due nor individually impaired is based on credit ratings or historical data on individual customer groups.

65 Severomoravská plynárenská Annual Report The credit quality structure is as follows: Receivables 31 December December 2010 with a Creditreform rating - 1 without a Creditreform rating with rating a S&P (rating A-) 47 8 Other receivables 4 4 Derivatives Receivables from unbilled gas and electricity with a Creditreform rating 24 - without a Creditreform rating Cash and cash equivalents cash-pooling RWE Transgas, a.s. (rating A-) bank account (rating A) 1 2 Total not past due and not impaired financial assets 897 1, Liquidity risk Liquidity risk represents a risk of insufficient free cash. Continuous management and forecasting of Group s future cash flows represents the basic tool of liquidity risk management. The Group prepares forecasted cash flows on a daily basis for the next 12 months. The forecast is updated on a weekly basis. Based on the forecast the Group must have a sufficient volume of liquid instruments to finance its activities for the monitored period. The Group participates in cash-pooling project of RWE Transgas, a.s. Under the terms of the cash-pooling project the Group concluded a framework loan agreement with RWE Transgas, a.s., in accordance with which the Group is entitled to draw roll-over overdrafts up to CZK 600 million and short-term loans for financing investing activities ( special purpose loan ) and for financing operating activities up to the amount of CZK 2,560 million, from which the investment loan up to the amount of CZK 1,800 million. The credit limits for short-term credits are updated at least once a year based on the expected Group cash flow. The short-term loans bear the interest rate of PRIBOR plus 70 basis points. Individual tranches can be granted for the period from 7 to 364 days for financing of operating activities, and for the period of 28 to 364 days for financing of investing activities. Roll-over overdrafts bear the interest rate of one-day PRIBOR plus 80 basis points.

66 66 FinanCIAL PART Notes to Consolidated Financial Statements The table below shows the financial liabilities of the Group classified according to remaining contractual maturities as at the balance sheet date. The amounts in the table represent contractual undiscounted cash flows, including interest payable, where applicable. Up to 6 months 6 12 months 1 5 years Total As at 31 December 2011 Trade and other liabilities Liabilities from cash-pooling roll-over Short-term loan for financing operating activities Special purpose loan Derivatives Finance lease liabilities Other financial and non-current liabilities As at 31 December 2010 Trade and other liabilities Liabilities from cash-pooling roll-over Short-term loan for financing operating activities Derivatives Finance lease liabilities Other financial and non-current liabilities Trade and other payables are payable within a month. The Group expects to have the following balances from cash-pooling roll-over facilities: as at 31 December 2012 as at 31 December 2013 as at 31 December 2014 CZK (1,207) million CZK (1,244) million CZK (1,650) million The Group is profitable with significant positive operating cash flows. Although the current liabilities exceed current assets, the deficit is not significant compared to the operating cash-flow of the Group. Furthermore the most significant current liability balances are of a rolling nature (advances for gas and electricity supplies and cash-pooling facilities), therefore management does not expect significant cash outlflows in respect of these line items in the foreseeable future.

67 Severomoravská plynárenská Annual Report Market risks The Group offers to its customers term contracts on gas supplies with fixed price, or contracts on gas supplies with the price derived from a price formula. Based on these contracts, a customer commits to purchase the contracted amount of natural gas. The Group hedges the risks arising from the differences between the commodity purchase prices and the contractual prices with customers, derived from the above-mentioned price formulas, by concluding commodity derivative contracts type CIS (commodity index swap), CCS (commodity currency swap) or GSS (gas spread swap) with RWE Transgas, a.s. in accordance with the framework agreement. Price agreements with customers are not recognised as derivatives (see Note 4.2). Commodity derivatives are measured at fair value through profit or loss. The purchase price for natural gas is derived from a price formula dependent on market prices of oil products (light and heavy fuel oil), black coal, foreign currency exchange rates EUR and USD against CZK and interest rates of CZK and EUR. The price at which the Group sells gas is directly linked to the purchase price of gas. By this the Group is hedged against commodity risks. a) Interest rate risk All drawings of short-term and roll-over overdrafts lent to or borrowed by the Group under the terms of RWE Transgas, a.s. cash-pooling as at 31 December 2011 and 2010, including the special purpose loan, bear interest rates, which are derived from the relevant interbank rate PRIBOR or PRIBID respectively. Sensitivity analysis: As at 31 December 2011, if the interest rate had decreased by 50 basic points with all other variables held constant; profit for the year before tax would have been CZK 0.1 million higher; mainly as a result of decreased expenses from cash-pooling. Alternatively, as at 31 December 2011 if the interest rate had increased by 50 basis points with all other variables held constant; profit for the year before tax would have been CZK 0.1 million lower; mainly as a result of increased interest expenses from cash-pooling. b) Foreign exchange risk The Group s business activities (including purchases and sales of natural gas) are mainly realised in Czech Crowns. As a result of this, the foreign exchange risk is not significant for the Group. Sensitivity analysis: Individual foreign exchange rate scenarios were based on the statistical analysis of data. Increases and decreases in foreign exchange rates are determined based on their historical volatility. Currency pairs shown in the sensitivity analysis are only those that are actively used to hedge against foreign exchange risk. Contracts are concluded only for currency pairs EUR/CZK and EUR/USD and are not concluded for USD/CZK.

68 68 FinanCIAL PART Notes to Consolidated Financial Statements The selected foreign exchange scenarios demonstrate the impact on the Group s financial result assuming that only one factor changes and the other variables affecting derivatives fair values remaining constant. In the scenario EUR/CZK the foreign exchange rate EUR/USD is constant. It means that if CZK depreciates/appreciates against EUR it depreciates/appreciates against USD at the same time. On the contrary, in the scenario EUR/USD the foreign exchange rate EUR/CZK is constant. It means that the depreciation/appreciation of USD against EUR results in the depreciation/appreciation against CZK as well. The movement in the currency pair USD/CZK is thus included in the following scenarios: Estimated yearly deviation Currency pair Decrease Increase EUR/CZK (5)% 5% EUR/USD (9)% 9% Impact on profit before tax Currency pair EUR/CZK (17) 18 EUR/USD 31 (28) As at 31 December 2011 if the CZK had appreciated by 5% against the EUR with all other variables held constant; profit before tax for the year would have been CZK 17 million lower as a result of the decrease in the fair value of derivatives. Alternatively, as at 31 December 2011, if the CZK had depreciated by 5% against the EUR with all other variables held constant profit before tax for the year would have been CZK 18 million higher mainly as a result of the increase in the fair value of derivatives. As at 31 December 2011 if the USD had appreciated by 9% against the EUR with all other variables held constant; profit before tax for the year would have been CZK 31 million higher as a result of the increase in the fair value of derivatives. Alternatively, as at 31 December 2011, if the USD had depreciated by 9% against the EUR with all other variables held constant; profit before tax for the year would have been by CZK 28 million lower as a result of the increase in the negative fair value of derivatives. c) Commodity risk The value of receivables and liabilities arising from the purchase and sale of natural gas recognised by the Group as at 31 December 2011 and 2010 is not dependent on further development of oil derivatives and coal prices. As at 31 December 2011 and 2010 the Group did not recognise any material assets or liabilities, the value of which would depend on changes in other market drivers, except for derivatives.

69 Severomoravská plynárenská Annual Report The Group is exposed to commodity risk from natural gas supplies for fixed price customer contracts (see above). Sensitivity analysis: Individual commodity scenarios were based on the statistical analysis of commodity prices. The scenarios demonstrate the possible impact on the Group s financial results assuming that only one factor changes with the other variables affecting the fair value of derivatives remaining constant. Estimated yearly deviation Commodity Decrease Increase Gasoil [USD] (25)% 33% Fuel Oil [USD] (27)% 37% Hard Coal ICR [USD] (19)% 24% Hard Coal StaBu [EUR] (19)% 23% Impact on profit before tax Commodity Gasoil [USD] (32) 43 Fuel Oil [USD] (27) 37 Hard Coal ICR [USD] (1) 1 Hard Coal StaBu [EUR] (1) Capital management The Group does not actively manage capital. The capital is managed at the RWE Group level. All the equity components shown in the consolidated statement of financial position within equity are considered to be the capital of the Group. For additional information, see Note 12 and the consolidated statement of changes in equity.

70 70 FinanCIAL PART Notes to Consolidated Financial Statements 3.5 Classes of financial assets and liabilities reconciliation to consolidated statement of financial position lines Assets as at 31 December 2011: Consolidated statement of financial position lines / Categories Financial assets loans and receivables Financial assets at fair value through profit or loss (Level 2) Financial assets total Nonfinancial assets Total Trade and other receivables Unbilled gas and electricity supplies Derivatives Cash and cash equivalents Total Assets as at 31 December 2010: Consolidated statement of financial position lines/ Categories Financial assets loans and receivables Financial assets at fair value through profit or loss (Level 2) Financial assets total Nonfinancial assets Total Trade and other receivables Unbilled gas and electricity supplies Derivatives Cash and cash equivalents Total 1, , ,834 No financial assets have been provided as collateral for liabilities.

71 Severomoravská plynárenská Annual Report Liabilities as at 31 December 2011: Consolidated statement of financial position lines / Categories Financial liabilities valuated at amortized cost Financial liabilities at fair value through profit or loss (Level 2) Financial liabilities total Nonfinancial liabilities Total Other long-term liabilities Trade and other liabilities Advance payments received for gas and electricity Derivatives Other financial liabilities 1,246-1,246-1,246 Total 1, , ,446 Liabilities as at 31 December 2010: Consolidated statement of financial position lines / Categories Financial liabilities valuated at amortized cost Financial liabilities at fair value through profit or loss (Level 2) Financial liabilities total Nonfinancial liabilities Total Other long-term liabilities Trade and other liabilities Advance payments received for gas and electricity Derivatives Other financial liabilities Total 1, , ,288 As at 31 December 2011 the Group paid advance payments as a deposit for its liabilities in the amount of CZK 20 million (31 December 2010: CZK 21 million). No financial assets were provided as collateral for liabilities. 3.6 Fair value measurement Fair values of financial assets and liabilities that are not traded in an active market are determined by using valuation techniques based on discounted future cash flow. The expected cash flows are based on current market conditions, such as commodity prices, foreign exchange rates, interest rates, etc. as at the end of the reporting period. As at the end of the reporting period, the Group classified its financial assets and liabilities at fair value through profit or loss under the Level 2 of the fair value measurement hierarchy (see Note 3.5).

72 72 FinanCIAL PART Notes to Consolidated Financial Statements The carrying amounts of short-term receivables less impairment provision and short-term payables approximate their fair values. The fair value of non-current liabilities for disclosure purposes is estimated using the method of estimated discounted cash flows based on the current interest market rate available to the Group for similar financial instruments and is not materially different from their carrying amounts. 4 Critical accounting estimates and judgements The Group makes estimates and assumptions related to the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. Estimates and judgments are continuously evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 4.1 Unbilled supplies of natural gas The estimates and assumptions that have significant risk of causing material adjustments to the carrying amounts of assets and liabilities within the next financial year relate to unbilled supplies of natural gas. Revenues from gas supplies for MO and DOM categories comprise of revenues, which are invoiced based on individual billing cycles at least once every 18 months, and unbilled revenues from sold gas for the given period. Unbilled gas supplies estimate is influenced by the accuracy of assigning customers to corresponding supply and price categories and also by applying the load-profiles set by the Energetic Regulatory Office for allocating the gas consumption to individual months (in 2010 the allocation was based on heat curves that were also set by the Energetic Regulatory Office). These factors have an impact on the average price of unbilled gas supplies. As at 31 December 2011 if the average price of unbilled gas supplies had been by 1% higher (lower) all other variables held constant; profit before tax for the year would have been by CZK 26 million higher (lower). Unbilled gas supplies estimate is also influenced by the accuracy of network losses. As at 31 December 2011 if the network losses in distribution network of Subsidiary had been by 1% higher (lower) and all other variables held constant, profit before tax for the year would have been by CZK 122 million lower (higher). 4.2 Price agreements with customers for natural gas supplies The Group offers to its customers several products, for example contracts on natural gas supplies with fixed price, or contracts on natural gas supplies with the price derived from a price formula linked to quotation of reference fuels. Based on these contracts, a customer commits to purchase the contracted amount of natural gas.

73 Severomoravská plynárenská Annual Report The price formula is linked to quotation of reference fuels, as listed in note 3.3 c). Commodity prices of these reference fuels included in the price formula are quoted only in USD. Average foreign exchange rate of EUR/USD announced by the European Central bank and average foreign exchange rate of CZK/EUR announced by the Czech National Bank for the invoiced period are used for the purpose of translating the quoted prices into final sales prices. If a customer is not willing to be exposed to commodity or foreign exchange risks, the gas sales price can be fixed for a certain period (into EUR or CZK depending on the contractual currency). Sales prices are thus translated using spot foreign exchange rates or are fixed to commonly used currencies in the Czech Republic (CZK and EUR). Using EUR, USD and reference fuels for determining the final sales price are closely related to natural gas supplies. These specific price agreements bear the same economic risks as the host contract. As a result, the price agreements are not separated from the host contract and are not accounted for as derivatives. 4.3 Income taxes The Group is uncertain about its current income tax position. Due to the uncertainty in interpreting income tax legislation, the Group recognised a current income tax payable at the maximum amount of CZK 122 million despite the fact that the tax authority may evaluate the situation in favour of the Group. In this case the Group would recognize a correction of its current income tax position in the future. 5 Segment reporting The Group identified two product segments sale of natural gas and distribution of natural gas. The Group realises almost all of its revenues in the Czech Republic, mainly in the Northern Moravia region. The segment distribution realises revenues from sale of gas distribution services that are realised intra-group to the sale of gas segment as well as to other external customers (external revenues). The segment sale of gas realises revenues from the sale of gas, which also includes the reinvoiced cost of distribution services plus margin realised by the distribution segment.

74 74 FinanCIAL PART Notes to Consolidated Financial Statements Year ended 31 December 2011 Sale of gas Distribution Sum of Segments Other CZK million Elimination Consolidated data External revenues 9, , ,357 Proceeds between 159 1,929 2, (2,098) - segments Segments revenue 9,489 2,741 12, Other operating income 1, , (905) 315 Purchased gas and services (9,164) (563) (9,727) (196) 2,091 (7,832) related to gas supplies Depreciation (2) (271) (273) (9) 1 (281) Employee benefits (10) - (10) (3) (13) Other operating expenses (463) (829) (1,292) (41) 7 (1,326) Operating result 1,024 1,097 2,121 3 (904)* 1,220 Interest income Interest expenses - (14) (14) - (14) Profit before tax 1,030 1,083 2,113 3 (904)* 1,212 Income tax (23) (217) (240) - (240) Net profit 1, ,873 3 (904)* 972 Assets total 5,997 6,953 12, (5,067) 8,154 * Represents the profit transfer from the Subsidiary, which is eliminated in the consolidation. Year ended 31 December 2010 Sale of gas Distribution Sum of Segments Elimination Consolidated data External revenues 11, ,515 12,515 Proceeds between segments 191 2,532 2,723 (2,723) - Segments revenue 12,179 3,059 15,238 Other operating income 1, ,482 (1,181) 301 Purchased gas and services related to (11,360) (658) (12,018) 2,716 (9,302) distribution and gas supplies Depreciation (134) (274) (408) 1 (407) Employee benefits (15) - (15) (15) Other operating expenses 340 (687) (1,027) 7 (1,020) Operating result 1,795 1,457 3,252 (1,180)* 2,072 Interest income Interest expenses - (8) (8) (8) Profit before tax 1,803 1,449 3,252 (1,180)* 2,072 Income tax 120 (275) (395) (395) Net profit 1,683 1,174 2,857 (1,180)* 1,677 Assets total 7,376 6,567 13,943 (5,259) 8,684 * Represents the profit transfer from the Subsidiary, which is eliminated in the consolidation.

75 Severomoravská plynárenská Annual Report PROPERTY, PLANT AND EQUIPMENT Buildings, constructions and land Equipment Gas network Other machinery and office equipment Tangible fixed assets under construction including advances paid Total As at 1 January 2010 Cost , ,960 Accumulated depreciation (156) (716) (3,500) (385) - (4,757) Net book value , ,203 as at 1 January 2010 Year ended 31 December 2010 Opening book value , ,203 as at 1 January 2010 Additions Disposals and transfers (140) (36) (383) (16) Investment property (5) (4) Depreciation (6) (76) (184) (16) - (282) Impairment (5) (5) Closing net book value , ,518 as at 31 December 2010 As at 31 December 2010 Cost 229 1,313 9, ,310 Accumulated depreciation (63) (874) (3,682) (173) - (4,792) Net book value , ,518 as at 31 December 2010 As at 31 December 2011 Opening book value , ,518 as at 1 January 2011 Additions Disposals and transfers (1) 3 73 (8) (75) (8) Investment property (60) (1) (61) Depreciation (6) (63) (197) (9) - (275) Closing net book value , ,789 as at 31 December 2011 As at 31 December 2011 Cost 154 1,345 9, ,665 Accumulated depreciation (41) (906) (3,876) (53) - (4,876) and impairment Net book value as at 31 December , ,789 The Company has capitalised interest in the amount CZK 2 million in the purchase price of property, plant and equipment in 2011 (2010: CZK 2 million).

76 76 FinanCIAL PART Notes to Consolidated Financial Statements Advances paid relate mainly to constructions of gas network. In cases when the Group is a lessee under finance lease contract, machines, machinery and technical equipment and other machinery and office equipment include the following: Equipment Gas networks Other machinery and office equipment Total As at 31 December 2010 Cost Accumulated depreciation (217) (40) (22) (279) Net book value as at 31 December As at 31 December 2011 Cost Accumulated depreciation - (11) (10) (21) Net book value as at 31 December investment property Investment property is outlined as follows: Opening net book value as at 1 January Transfer from property, plant and equipment 56 1 Disposals (3) 2 Assets available for sale - 9 Depreciation (9) (10) Impairment 5 (108) Closing net book value as at 31 December December December 2010 Cost Accumulated depreciation and impairment (262) (232) Net book value The Group has recognised in 2010 an impairment loss on buildings due to a decrease in their recoverable amounts resulting from lower expected future income.

77 Severomoravská plynárenská Annual Report December December 2010 Fair value of the investment property Amounts recognized in the consolidated statement of comprehensive income rental income from investment property direct costs related to the lease 3 6 depreciation intangible assets As at 1 January 2010 Software Other Total Cost Accumulated amortization (77) (4) (81) Net book value as at 31 December Year ended 31 December 2010 Opening net book value as at 1 January Additions Disposals and transfers 5-5 Amortization (1) (1) (2) Closing net book value as at 31 December As at 31 December 2010 Cost Accumulated amortization (77) (5) (82) Net book value as at 31 December Year ended 31 December 2011 Opening net book value as at 1 January Additions Disposals and transfers - (1) (1) Amortization (2) (1) (1) Net book value as at 31 December As at 31 December 2011 Cost Accumulated amortization (77) (5) (82) Net book value as at 31 December

78 78 FinanCIAL PART Notes to Consolidated Financial Statements 9 Trade and other receivables 31 December December 2010 Trade receivables from third parties Trade receivables from related parties 47 8 Total trade receivables Provision for impairment of receivables (262) (285) Net book value of trade receivables Other receivables financial Provision for impairment of other receivables (19) (19) Net carrying amount of other receivables financial 4 4 Unbilled supplies Financial trade and other receivables Operating long-term advances paid Other receivables non financial 1 1 Trade and other receivables non financial Trade and other receivables short-term Operating long-term advances paid Total trade and other receivables Trade receivables outstanding have not been secured. Receivables from related parties are analysed in Note 31. The ageing of trade and other receivables overdue which are not determined to be impaired as at the balance sheet date is as follows: 31 December December 2010 Up to 6 months 4 2 The ageing of trade and other receivables which are considered to be impaired as at balance sheet date is as follows (in netto value): 31 December December 2010 Up to 6 months to 12 months Total 51 45

79 Severomoravská plynárenská Annual Report Movements of the provision for impairment of trade and other receivables can be analysed as follows: Opening balance as at 1 January Charge for the year Write off of unrecoverable receivables (56) (14) Closing balance as at 31 December The following table analyses income and expenses related to trade and other receivables: Net loss from receivables cash and cash equivalents Cash and cash equivalents disclosed in the cash flow statement can be analysed as follows: 31 December December 2010 Cash at bank accounts and cash in hand 1 2 Cash equivalents from cash-pooling Total cash and cash equivalents Cash-pooling overdraft (200) (236) Total cash and cash equivalents at the end of the year Cash equivalents drawn or lent in a form of roll-over overdrafts under cash-pooling yield the interest rates derived from a one-day PRIBOR or PRIBID, determined for each day. As at 31 December 2011 the lent roll-over borrowing yields an interest rate of 0.15% (as at 31 December 2010: 0.04% and 0.15% depending on the chosen bank) and the drawn roll-over overdraft is bearing an interest rate of 1.30% (as at 31 December 2010: 1.31%).

80 80 FinanCIAL PART Notes to Consolidated Financial Statements 11 Non-current assets held for sale In 2011, sale of the land and buildings was completed, presented as held for sale as at 31 December As at 31 December 2011 no assets held for sale were recognised by the Group. 31 December December 2010 Land and buildings Net book value SHARE CAPITAL AND OTHER FUNDS 31 December December 2010 Bearer shares 1,472 1,472 Registered shares Total share capital registered in the Commercial Register 2,070 2,070 Share capital of the Company consists of 2,069,728 shares fully subscribed and paid. Nominal value of one share is CZK 1 thousand. Both categories of bearer and ordinary registered shares hold the same rights. The Group creates the following funds: 31 December December 2010 Retained earnings 904 1,615 Reserve fund 1,485 1,485 Other funds Retained earnings, reserve fund and other funds 2,843 3,554 The reserve fund is represented by the reserve fund of the Company and the Subsidiary. The reserve fund comprises funds that the Group is required to retain according to the Commercial Code. Use of the legal reserve fund is limited by legislation and the Statutes of the Company and the Subsidiary and is not available for distribution to the shareholders, but may be used to offset losses. Other funds consist of gifts accepted till 2002 (before the acquisition of the Company by the RWE Group). The Group s management decided to keep these gifts in a specific fund, the distribution of which may be approved. In compliance with the Statutes of the Company, the distribution of these funds to shareholders is subject to the General meeting approval based on a proposal submitted by the Board of Directors as approved by the Supervisory Board.

81 Severomoravská plynárenská Annual Report DERIVATIVES Within 1 year 31 December December 2010 Over 1 year Total Within 1 year Over 1 year Total Receivables Derivative type CIS (commodity index swap) Derivative type GSS (gas spread swap) Total Liabilites Derivative type CIS (commodity index swap) Derivate type GSS (gas spread swap) Total PROVISIONS Balance 31 December December 2010 Short-term part Balance Short-term part Provision for restructuring Other provisions Total Movements in provisions during the year: 1 January 2011 Charge Cancellation of unused amounts Usage 31 December 2011 Provision for restructuring (2) 4 Other provisions Total (2) 97

82 82 FinanCIAL PART Notes to Consolidated Financial Statements 15 OTHER non-current liabilities 31 December December 2010 Liabilities from finance lease - 1 Other non-current financial liabilities Total financial non-current liabilities Deferred income 7 8 Other non-current liabilities non-financial Total non-financial non-current liabilities Total non-current liabilities Liabilities from finance lease are disclosed in Note 19. Other non-current liabilities include deferred income arising from received subsidies for acquisition of distribution network and non-current investment liabilities. 16 Deferred tax (LIABILITY)/Assets Offsetting of deferred income tax assets and liabilities is allowed when there is a legally enforceable right to offset due tax assets and due tax liabilities and when the deferred income tax assets and liabilities related to income tax are collected by the same tax authority. Compensation of deferred tax receivable 31 December December 2010 Deferred tax asset to be recovered after more than 12 months 9 9 Deferred tax asset to be recovered within 12 months Net deferred tax asset Compensation of deferred tax liability 31 December December 2010 Deferred tax asset to be recovered after more than 12 months 3 3 Deferred tax asset to be recovered within 12 months 9 3 Deferred tax liability payable after more than 12 months (603) (548) Net deferred tax liability (591) (542)

83 Severomoravská plynárenská Annual Report Changes in deferred tax assets and liabilities have the following structure: Deferred tax asset / (liability) Non-current assets Receivables Provisions Liabilities Total Balance as at 1 January 2010 (512) (494) Impact on consolidated profit or loss (26) 3 - (6) (29) Balance as at 31 December 2010 (538) (523) Impact on consolidated profit or loss (56) 1 7 (1) (49) Balance as at 31 December 2011 (594) (572) The deferred tax as at 31 December 2011 and 2010 is calculated at 19% (the rate valid for 2011 and subsequent years). 17 trade and other liabilities 31 December December 2010 Trade liabilities to third parties Trade liabilities to related parties Total trade liabilities Other financial liabilities financial 3 2 Total financial liabilities Liabilities to employees 6 6 Operating short-term advances received 6 2 Other liabilities non-financial 1 1 Total non-financial liabilities 13 9 Total trade and other liabilities Liabilities to related parties are disclosed in Note 31. Trade and other payables have not been secured over any assets of the Group.

84 84 FinanCIAL PART Notes to Consolidated Financial Statements 18 UNBILLED SUPPLIES AND ADVANCES RECEIVED FOR GAS AND ELECTRICITY The Group recognised the following amounts for unbilled gas and electricity supplies and related advances: 31 December December 2010 Before compensation per individual customers Unbilled gas and electricity supplies 3,025 3,710 Provision for impairment of unbilled gas and electricity supplies (7) - receivables Advance payment received for gas and electricity (3,348) (3,851) Total (330) (141) Result of compensation presented in the Statement of Financial Position Unbilled gas and electricity supplies Advances received for gas and electricity (664) (659) The following table analyses expenses and income from unbilled supplies for gas and electricity: Total net loss 7-19 other financial liabilities 31 December December 2010 Finance lease liabilities 1 4 Short-term loan for operating activities Special purpose loan Roll-over overdraft Total liabilities arising from cash-pooling 1, Other financial liabilities Total 1, From which non-current liabilities from financial lease - (1) Total financial liabilities 1, Roll-over overdraft is classified as cash and cash equivalents in cash flow statement (see Note 10).

85 Severomoravská plynárenská Annual Report Other financial liabilities represent mainly liabilities from purchase of gas network. Liabilities from finance lease minimal lease payments are analyzed as follows: 31 December December 2010 Outstanding amount payable within one year 1 3 Outstanding amount payable within 1 5 years - 1 Total 1 4 Present value of finance lease liabilities 1 4 Present values are set based on discounted cash flow using average borrowing rate 5.38 % in 2011 (2010: 9.32%). 20 Sales Revenues from sales of natural gas 7,395 9,463 Revenues from distribution services for natural gas 2,745 3,031 Revenues from sales of electricity 75 3 Revenues from distribution of services of electricity 96 4 Sales of heat 1 4 Sales of services Total 10,357 12, Purchased gas AND ELECTRICITY and services related to gas AND ELECTRICITY SUPPLIES Purchase of natural gas 7,228 8,799 Purchase of electricity 80 3 Raw materials and consumables related to gas and electricity supplies Purchased services related to gas and electricity supplies Total 7,832 9,302 Other costs of raw material and consumables related to gas and electricity supplies comprise of purchases of gas for own consumption, own electricity consumption, consumption of gas meters and material for maintenance of gas facilities.

86 86 FinanCIAL PART Notes to Consolidated Financial Statements Costs of purchased services related to gas supplies represent mainly costs of gas meters readings, lease of gas equipment and other services related to operation of gas equipment. 22 OTHER OPERATING INCOME Profit from sale of property, plant and equipment 24 8 Change in fair value of derivatives Realised commodity derivates Income from penalties, interest and indemnities Other Total EMPLOYEE BENEFITS Salaries and current employee benefits Social security costs 1 1 Pension costs defined contribution plans 2 3 Total staff costs Other operating expenses Loss on disposal of property, plant and equipment 1 3 Consumption of raw material 1 1 Services and repairs Realised commodity derivates Change in fair value of derivatives Change in provisions for doubtful receivables and write-off of unrecoverable receivables Other Total 1,326 1,020 Services and repairs are incurred mainly from service level agreements with companies in the RWE Group, which relate mainly to IT services, telecommunications, invoicing, call centre, debt collection and costs for gas network repairs.

87 Severomoravská plynárenská Annual Report Finance EXPENSE and income Interests income 6 8 Interest expense (16) (10) Capitalized interest expense 2 2 Net finance expense (8) - 26 Income tax The income tax expense recognised in the consolidated statement of comprehensive income consists of the following: Current income tax Deferred income tax (Note 16) Total Reconciliation of tax base and theoretical tax charge computed from consolidated accounting profit before tax multiplied by the actual tax rate for the year: Net profit before tax 1,212 2,072 Theoretical income tax at 19% (2010: 19%) Non-taxable income (2) (1) Tax non-deductible expense 13 5 Tax related to previous accounting period (1) (1) Other - (2) Total income tax charge

88 88 FinanCIAL PART Notes to Consolidated Financial Statements 27 Earnings AND DIVIDENDS per share Basic earnings per share ratio is calculated as a profit attributable to the Company s shareholders divided by the weighted arithmetic average number of ordinary shares during the year. The value of diluted earnings per share ratio equals the basic earnings per share ratio because the Company does not have any dilutive equity instruments Profit attributable to equity holders of the Company () 972 1,677 Number of ordinary shares in circulation (thousand) 2,070 2,070 Basic earnings per share ratio (CZK per share) Diluted earnings per share ratio (CZK per share) In 2011 the Company approved the payment of dividends of CZK 1,683 million (CZK 813 per share), in 2010: CZK 1,358 million (CZK 656 per share). The dividends were distributed as follows: RWE Gas International N.V SPP Bohemia a.s Other shareholders Total 1,683 1, contingent liabilities Tax authorities are allowed to inspect accounting books and records at any time within three years subsequent to the reported tax year, and consequently may additionally impose income tax and penalties. The Group s management is not aware of any circumstances which may in the future give rise to a potential material contingent liability in this respect. Management of the Group is not aware of any other significant contingent liabilities as at 31 December 2011.

89 Severomoravská plynárenská Annual Report COMMITMENTS Significant contracted capital commitments: 31 December December 2010 Property, plant and equipment regulatory framework Since 1 January 2007, the legal unbundling of distribution services from the originally vertically integrated gas organization has been in place. Based on licences acquired the Company carries on trading with natural gas and electricity and the subsidiary SMP Net, s.r.o. operates the gas distribution network. As at 1 January 2007, the Company separated part of its business in accordance with the European Union Directives and the amendment of the Energy Act and contributed this part of the business related to gas distribution to its Subsidiary which assumed the role of the distribution network provider. a) Price regulation gas sale The natural gas market is fully liberalised and all end customers have a choice of their gas supplier. With respect to the dominant position of regional gas companies of RWE Group on the Czech market, Energy Regulatory Office performs a general oversight over price levels in accordance with the act number 526/1990 Coll., Act on prices, as amended. b) Price regulation distribution The prices for natural gas distribution on Czech gas market are regulated in accordance with the energy act and published in an annual price list of the independent regulatory body, the Energy Regulatory Office. Year 2011 was the second year of so-called 3rd Regulatory period which is effective until The Energy Regulatory Office sets the ultimate level of allowed revenues for the distribution companies and it also sets the procedures for calculation of tariffs for the usage of distribution network. These tariffs were set for 2011 in Pricing Decision of Energy Regulatory Office No. 3/2010 from 29 November In the Authority s competence it is also to protect the legitimate interests of licensees whose activity is regulated (Act No. 458/2000 Coll. Energy Act, as amended, 17, article 4). The methodology of distribution regulation should enable each gas distribution company to cover their allowed costs including depreciation and allowed return on assets needed for the provision of licensed activities. In case of variance between the allowed and actual generated regulated revenues, the Energy Regulatory Office applies corrections in future tariffs for gas distribution.

90 90 FinanCIAL PART Notes to Consolidated Financial Statements 31 RELATED PARTY TRANSACTIONS AND BALANCEs The Group is directly controlled by RWE Gas International N.V. The ultimate controlling party and parent company is RWE Aktiengesellschaft. The Group was involved in the following transactions with related parties: Other related parties controlled by RWE Akiengesellschaft Revenues from sales of natural gas Other gas distribution and regional companies Other related companies within RWE Group Other revenues RWE Transgas, a.s. services 2 1 RWE Transgas, a.s. realised commodity derivatives RWE Transgas, a.s. interest income 5 8 RWE Transgas, a.s. change in fair value of unrealised derivatives Other gas distribution and regional companies services 1 2 Other related companies within RWE Group services Total revenues Parent company controlling whole Group RWE Aktiengesellschaft settled currency derivatives 1 - Other related parties controlled by RWE Akiengesellschaft Costs related to supplies of natural gas and electricity RWE Transgas, a.s. 7,108 8,514 Other gas distribution and regional companies Other related companies within RWE Group 82 - Other costs RWE Transgas, a.s. services RWE Transgas, a.s. realised commodity derivatives RWE Transgas, a.s. change in fair value of unrealised derivatives RWE Transgas, a.s interest expense 13 7 Other gas distribution and regional companies services Other related companies within RWE Group services Total costs 8,777 10,167

91 Severomoravská plynárenská Annual Report The following related party balances were outstanding: 31 December December 2010 Other related parties controlled by RWE Akiengesellschaft Receivables RWE Transgas, a.s RWE Transgas, a.s. cash-pooling RWE Transgas a.s. commodity derivatives revaluation Other gas distribution and regional companies services 16 1 Other related companies within RWE Group Total receivables 502 1,168 Other related parties controlled by RWE Akiengesellschaft Liabilities RWE Transgas, a.s RWE Transgas, a.s. cash-pooling 1, RWE Transgas a.s. commodity derivatives revaluation 7 17 Other gas distribution and regional companies services Other related companies within RWE Group Total liabilities 1,567 1,477 The Company did not recognize any transactions or balances at the end of the accounting period 2011 and 2010 with RWE Gas International N.V., except for dividends payment, which is described in Note 27. The Company also recognized no balances at the end of 2011 and 2010 with RWE Aktiengesellschaft. Services are received and provided based on price agreements and framework agreements. Price agreements are amended annually by the amendments to the agreements for rendering the services. Types of received services are described in note 24. Provided services include mainly rentals and services in the area of finance, accounting and controlling. The Group purchases gas and electricity based on framework agreements concluded with RWE Transgas, a.s. and RWE Key Account CZ, a.s. The business terms and agreements are available also to third parties.

92 92 FinanCIAL PART Notes to Consolidated Financial Statements The Group has framework loan agreements with RWE Transgas, a.s. that are described in detail in notes 3.2, 10 and 19. The Group is concluding CIS (commodity index swap) and CCS (commodity currency swap) and GSS (gas spread swap) contracts with RWE Transgas, a.s. for decreasing its market risk exposure. The contracts are described in detail in note 3.3 and 13 and the Company concludes currency forwards with RWE Aktiengesellschaft. Dividends paid to shareholders in 2011 and 2010 are disclosed in Note 27. Remuneration of key members of management and members of statutory bodies: Wages and current employee benefits 1 3 Social security costs 1 1 Total Subsequent events No events have occurred subsequent to year-end that would have a material impact on the financial statements as at 31 December Statutory approvals These consolidated financial statements have been approved for submission to the general meeting of shareholders by the Company s Board of Directors and may be modified. 27 February 2012 Jindřich Broukal Chairman of the Board of Directors Lukáš Roubíček vicechairman of the Board of Directors

93 Severomoravská plynárenská Annual Report Severomoravská plynárenská, a.s. Financial Statements STATEMENT OF FINANCIAL POSITION 31 December December December 2010 ASSETS Non-current assets Property, plant and equipment 39, ,943 5 Investment property 236, ,401 6 Intangible assets Investment in subsidiary 3,916,661 3,916,661 8 Trade and other receivables 20,000 20,000 9 Derivatives 695 7, Other non-current assets - 11,947 Deferred tax asset 18,863 18, Total non-current assets 4,232,425 4,266,466 Current assets Trade and other receivables 1,134,310 1,347,304 9 Derivatives 38, , Unbilled gas and electricity supplies 339, , Current income tax receivables 20,705 - VAT receivables 92,544 93,565 Cash and cash equivalents 410, , ,036,056 3,100,890 Non-current assets held for sale - 8, Total current assets 2,036,056 3,109,872 TOTAL ASSETS 6,268,481 7,376,338 Note The notes on pages 97 to 139 are an integral part of these separate financial statements.

94 94 FinanCIAL PART Severomoravská plynárenská, a.s. Financial Statements STATEMENT OF FINANCIAL POSITION (continued) 31 December 2011 EQUITY AND LIABILITIES 31 December December 2010 Equity Share capital 2,069,728 2,069, Retained earnings and other funds 3,042,418 3,715, Total equity 5,112,146 5,784,785 Non-current liabilities Provisions 1,941 2,746 Derivatives Other non-current liabilities Total non-current liabilities 2,153 3,041 Current liabilities Provisions 2,820 3,219 Trade and other liabilities 434, , Derivatives 7,588 16, Advances received for gas and electricity supplies 697, , Current income tax liability - 108, Other tax liabilities 8,589 9,685 Other financial liabilities 3,803 3,730 Total current liabilities 1,154,182 1,588,512 TOTAL EQUITY AND LIABILITIES 6,268,481 7,376,338 Note The notes on pages 97 to 139 are an integral part of these separate financial statements.

95 Severomoravská plynárenská Annual Report STATEMENT OF COMPREHENSIVE INCOME Year ended 31 December Sales 9,713,571 12,178, Purchased gas and electricity and services related to gas and electricity supplies Note (9,359,609) (11,360,391) 18 Other operating income 1,200,800 1,464, Employees benefits (13,043) (14,858) 20 Depreciation and amortization of fixed assets (11,058) (134,131) Other operating expenses (503,364) (339,229) 21 Operating profit 1,027,297 1,795,020 Financial income 5,397 8, Financial expense (11) (40) 22 Net financial income 5,386 8,082 Profit before income tax 1,032,683 1,803,102 Income tax (22,633) (120,232) 23 Profit for the year 1,010,050 1,682,870 Total comprehensive income for the period 1,010,050 1,682,870 statement of changes in equity Year ended 31 December 2011 Share capital Retained earnings Reserve fund, other capital funds Total equity Balance as at 1 January ,069,728 2,526, ,534 5,459,656 Comprehensive result for the period - 1,682,870-1,682, Dividends paid - (1,357,741) - (1,357,741) Transfer to legal reserve fund - (4,357) 4,357 - Balance as at 31 December ,069,728 2,847, ,891 5,784,785 Comprehensive result for the period - 1,010,050-1,010,050 Dividends paid - (1,682,689) - (1,682,689) 24 Balance as at 31 December ,069,728 2,174, ,891 5,112,146 Note The notes on pages 97 to 139 are an integral part of these separate financial statements.

96 96 FinanCIAL PART Severomoravská plynárenská, a.s. Financial Statements statement OF cash flows Year ended 31 December Cash flow from operating activities Profit before tax 1,032,683 1,803,102 Adjustments for non-cash movements Depreciation, amortization and impairment of assets 11, ,962 5, 6, 7 Change in provisions and impairment (23,594) 19,049 9 (Gain) / loss from disposal of property, plant and equipment (20,160) (5,084) Change in fair value of derivatives 116,415 (174,849) 19, 21 Net interest (income)/expense (5,386) (8,082) 22 Unpaid income from profit transfer (904,447) (1,179,593) 19 Other non-cash movements 59,752 - Cash flow from operating activities before tax and changes in working capital 266, ,505 Change in current receivables 84,161 (27,326) 9, 16 Change in current liabilities (316,510) (227,294) 14, 16 Cash generated from operating activities 34, ,885 Interest received 5,397 8,122 Interest paid (11) (40) Income tax (paid) / received (151,380) (71,238) 23 Profit transfer 1,181,741 1,032, Net cash flow from operating activities 1,070,121 1,304,398 Cash flow from investing activities Acquisition of property, plant and equipment and intangible assets (11,130) (1,102) 5, 6 Proceeds from disposal of property, plant and equipment and intangible assets 44,021 12,769 Revenues associated with the withdrawal of the equity 8,256 - Net cash flow from investing activities 41,147 11,667 Cash flow from financing activities Dividends paid (1,682,617) (1,356,690) 24 Net cash flow from financing activities (1,682,617) (1,356,690) Cash and cash equivalent at the beginning of the year 981,559 1,022, Change in cash and cash equivalents (571,349) (40,623) Cash and cash equivalents at the end of the year 410, , Note The notes on pages 97 to 139 are an integral part of these separate financial statements.

97 Severomoravská plynárenská Annual Report Notes to separate Financial Statements Year ended 31 December General information Severomoravská plynárenská, a.s. ( the Company ) has been registered in the Commercial Register in the Czech Republic kept with the Regional Court in Ostrava, section B, insert 757 on the 1 January 1994, and has its registered office at Ostrava-Moravská Ostrava, Plynární 2748/6. The Company s identification number is The Company has been traded on the Prague stock exchange since Act No. 458/2000 Coll. as amended, on conditions for undertaking the business and for the execution of state administration in the energy sector (the Energy Act) governs rendering of services and related rights and obligations except for general legal norms. The Company s main business activity is trade with gas and electricity. The ultimate parent and controlling company of the Company is RWE Aktiengesellschaft with its registered office at Opernplatz 1, Essen, Germany. Companies controlled directly or indirectly by RWE Aktiengesellschaft are referred in these financial statements as the RWE Group. The Company s ownership structure as at 31 December 2011 was as follows: Company name Share in % RWE Gas International N.V RWE Transgas, a.s Subtotal of RWE Group share SPP Bohemia a.s Slovenský plynárenský priemysel, a.s Other shareholders 3.10 Total As at 1 January 2007, the Company separated part of its business in accordance with the European Union Directives and the amendment of the Energy Act and contributed this part of the business related to gas distribution to its subsidiary SMP Net, s.r.o. SMP Net, s.r.o. assumed the role of the distribution network provider. The Company carries on trading with natural gas and electricity and the subsidiary SMP Net, s.r.o. operates the distribution network. Note The financial statements have been prepared in the Czech language and in English. In all matters of interpretation of information, views or opinions, the Czech version of the financial statements takes precedence over the English version.

98 98 Financial part Notes to Separate Financial Statements As at 18 July 2006, the Company concluded an agreement with its subsidiary SMP Net, s.r.o. on profit transfer, effective from 1 January The company SMP Net, s.r.o. is obliged to transfer its profit after the obligatory allocation to the legal reserve and social funds to the Company based on the agreement. The Company is obliged to settle losses of the company SMP Net, s.r.o., which cannot be settled from the legal reserve fund or other funds of the company SMP Net, s.r.o. 2 ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of preparation of financial statements The separate financial statements of the Company have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ( IFRS ) effective as at the end of the reporting period. The Company has prepared these separate financial statements in accordance with Act on Accounting. The Company has also prepared consolidated financial statements in accordance with IFRS for the Company and its subsidiary (the Group ). Subsidiaries those companies in which the Company, directly or indirectly, has an interest of more than half of the voting rights or otherwise has power to exercise control over the operations -have been fully consolidated in the consolidated financial statements. The consolidated financial statements can be obtained at the Company s registered office. Users of these separate financial statements should read them together with the Group s consolidated financial statements as at 31 December 2011 and for the year 2011 in order to obtain full information on the financial position, results of operations and changes in financial position of the Group as a whole. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial instruments at fair value through profit or loss. Changes to basis of preparation of financial statements and disclosures In 2011, the Company applied for the first time the following new, revised or amended standards: IAS 24, Related Party Disclosures (amended November 2009). IAS 24 was revised in 2009 by: (a) simplifying the definition of a related party, clarifying its intended meaning and eliminating inconsistencies from the definition; and (b) providing a partial exemption from the disclosure requirements for government-related entities. These amendments did not have a material impact on the financial statements of the Company.

99 Severomoravská plynárenská Annual Report Improvements to International Financial Reporting Standards (issued in May 2010). The improvements consist of a combination of substantive changes and clarifications in the following standards and interpretations: IFRS 1, First-time Adoption of International Financial Reporting Standards. The revision is concerned with changes in accounting rules in the initial application of IFRS as well as determination of revaluation on the basis of deemed purchase costs and extension of the use of deemed purchase cost for companies which produce IFRS financial statements for the first time and whose activities have regulated rates; IFRS 3, Business Combinations. An amendment to the valuation of non-controlling interest, to specify a value for uncompensated and voluntarily compensated commitments of share-based payments, subsequently referring to the transitional requirements for contingent consideration in business combinations that occurred before the effective date of IFRS 3 (2008); IFRS 7, Financial Instruments: Disclosures. The amendment clarifies certain disclosure requirements, in particular (i) by adding an explicit emphasis on the interaction between qualitative and quantitative disclosures about the nature and extent of financial risks, (ii) by removing the requirement to disclose carrying amount of renegotiated financial assets that would otherwise be past due or impaired, (iii) by replacing the requirement to disclose fair value of collateral by a more general requirement to disclose its financial effect, and (iv) by clarifying that an entity should disclose the amount of foreclosed collateral held at the reporting date and not the amount obtained during the reporting period; IAS 1, Presentation of Financial Statements. The amendment clarifies that an entity will present an analysis of other comprehensive income for each component of equity, either in the statement of changes in equity or in the notes to the financial statements; IAS 27, Consolidated and Separate Financial Statements was amended by clarifying the transition rules for amendments to IAS 21, Changes in Foreign Exchange Rates, IAS 28, Investments in Associates and IAS 31, Interests in Joint Ventures made by the revised IAS 27 (as amended in January 2008); IAS 34, Interim Financial Reporting emphasizes that information concerning significant events and transactions disclosed in interim financial statements should update the relevant information published in the latest annual financial statements. The standard clarifies how to apply this principle in relation to financial instruments and their fair value; IFRIC 13, Customer Loyalty Programmes states that the fair value of loyalty programs should take into account the amount of rebates or incentives not offered to customers during the initial sale transaction that would otherwise be offered to customers during the initial sale transaction. In addition, amount of loyalty credits which are not expected to be used by customers should be taken into account. These amendments do not have a material impact on the financial statements of the Company.

100 100 Financial part Notes to Separate Financial Statements The following standards, amendments and interpretations are mandatory for accounting periods beginning on or after 1 January 2011 but are not relevant for the Company s operations: The amendment to IFRS 1, First-time Adoption of International Financial Reporting Standards. Limited exemption from disclosure of comparable carrying amounts under IFRS 7 for companies transitioning to IFRS; Classification of Rights Issues Amendment to IAS 32, Financial Instruments: Presentation; IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments; Amendment to IFRIC 14, Prepayments of a Minimum Funding Requirement. New standards, amendments to standards and interpretations not yet effective and have not been early adopted by the Company: The following standards, amendments and interpretations were issued and are mandatory for the Company s accounting periods beginning on or after 1 January 2012, subject to endorsement by the European Union as indicated below: Reporting items of other comprehensive income Amendment to IAS 1, Presentation of Financial Statements (effective for accounting periods beginning on 1 July 2012 or later, this amendment has not yet been approved by the European Union). Amendment changes the grouping of items reported in other comprehensive income. Items can be subsequently transferred to profit or loss will be reported separately from items that cannot be reclassified. The amendment will not have a material impact on financial statements of the Company; Amendment to IFRS 7, Financial Instruments: Disclosures Transfers of Financial Assets (issued in October 2010, effective from 1 July 2011). The amendment requires additional disclosures in respect of risk exposures arising from transferred financial assets. Where financial assets have been derecognised but the entity is still exposed to certain risks and rewards associated with the transferred assets, additional disclosure is required to enable the effects of those risks to be understood. The amendment will not have any impact on the financial statements of the Company; IFRS 7, Financial Instruments: Disclosures offsetting financial assets and financial liabilities (issued in December 2011, effective for annual periods beginning on or after 1 January 2013, this amendment has not yet been approved by the European Union). The amendment requires disclosure about the rights to offset and related arrangements for financial instruments, which are governed by enforceable framework agreements for a set off or other arrangements. This amendment is not expected to have any material impact on the financial statements of the Company; Amendment to IAS 32, Financial Instruments: Presentation offsetting financial assets and financial liabilities (issued in December 2011, effective for annual periods beginning on or after 1 January 2014, this amendment has not been yet approved by the European Union). The amendment clarifies

101 Severomoravská plynárenská Annual Report meanings relating to offsetting financial assets and financial liabilities. This amendment is not expected to have any material impact on the financial statements of the Company; IFRS 9, Financial instruments, Classification and Measurement (effective for annual periods beginning on or after 1 January 2015 with earlier application permitted, this amendment has not yet been approved by the European Union). IFRS 9 issued in November 2009 replaces those parts of IAS 39 relating to the classification and measurement of financial assets. IFRS 9 was further amended in October 2010 to address the classification and measurement of financial liabilities and in December 2011 to change its effective date to annual periods beginning on or after 1 January 2015 and add transition disclosures. Key features of the standard are as follows: Financial assets are required to be classified into two measurement categories: those to be measured subsequently at fair value, and those to be measured subsequently at amortised cost. The decision is to be made at initial recognition. The classification depends on the entity s business model for managing its financial instruments and the contractual cash flow characteristics of the instrument; An instrument is subsequently measured at amortised cost only if it is a debt instrument and at the same time (i) the objective of the entity s business model is to hold the asset to collect the contractual cash flows, and (ii) the asset s contractual cash flows represent only payments of principal and interest (that is, the asset has only basic loan features ). All other debt instruments are to be measured at fair value through profit or loss; All equity instruments are to be measured subsequently at fair value. Equity instruments that are held for trading will be measured at fair value through profit or loss. For all other equity investments, an irrevocable decision can be made at initial recognition, to recognise unrealised and realised fair value gains and losses through other comprehensive income rather than profit or loss. This decision can be made on an instrument-by-instrument basis. Dividends are to be presented in profit or loss, as long as they represent a return on investment; Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income. IFRS 10, Consolidated Financial Statements (issued in May 2011, effective for annual periods beginning on or after 1 January 2013, the standard has not been yet approved by the European Union). The new standard replaces a section of IAS 27, Consolidated Financial Statements and the related consolidated financial statements and SIC 12, Consolidation Special Purpose Entities. It also introduces a new definition of control. This standard is not relevant for the Company s financial statements; IFRS 11, Joint arrangements (issued in May 2011, effective for accounting periods beginning 1 January 2013 or later, the standard has not been yet approved by the European Union). The standard replaces IAS 31, Interests in Joint Ventures and SIC 13, Jointly Controlled Entities Non-monetary

102 102 FinanCIAL PART Notes to Separate Financial Statements Contributions by Venturers. IFRS 11 newly defines joint control, and shows only two forms of joint arrangements joint operations and joint ventures. It is also not possible to use a proportional method of consolidation. This standard will have no impact on the Company s financial statements; IFRS 12, Disclosure of Interests in Other Entities (issued in May 2011, effective for accounting periods beginning 1 January 2013 or later, the standard has not been yet approved by the European Union). It contains all the requirements for disclosure of information relating to consolidation, which were previously contained in IAS 27, Consolidated and Separate Financial Statements, IAS 31, Interests in Joint Ventures, and IAS 28, Investments in Associates and introduces some new disclosures. The Company does not expect a material impact of this standard on the financial statements of the Company; IFRS 13, Fair value (issued in May 2011, effective for annual periods beginning on or before 1 January 2013, with earlier application permitted, the standard has not been yet approved by the European Union). The standard specifies the definition of fair value and concentrates mainly on the techniques of its measurement. It replaces guidance for fair value measurement in other existing standards and interpretations. This standard is not expected to have any material impact on the financial statements of the Company; IAS 27, Separate Financial Statements (issued in May 2011, effective for accounting periods beginning 1 January 2013 or later, this amendment has not yet been approved by the European Union). This standard deals only with accounting treatment of subsidiaries, jointly controlled entities and associates in separate financial statements. This standard will have no impact on the financial statements of the Company; IAS 28, Investments in Associates (issued in May 2011, effective for annual periods beginning on or after 1 January 2013, the standard has not been yet approved by the European Union). The standard reflects changes caused by issuance of IFRS 10, IFRS 11 and IFRS 12. This amendment is not expected to have any material impact on the financial statements of the Company; Amendment to IAS 12, Income Taxes (effective for annual periods beginning on or after 1 January 2012, the amendment has not been yet approved by the European Union). IAS 12 requires an entity to measure the deferred tax relating to an asset depending on whether the entity expects to recover the carrying amount of the asset through use or sale. It can be difficult and subjective to assess whether the recovery will be through use or through sale when the asset is measured using the fair value model in IAS 40, Investment Property. The amendment provides a practical solution to the problem by introducing a presumption that recovery of the carrying amount will normally take place through sale. The amendment is not expected to have a material impact on the financial statements of the Company; Amendment IAS 19, Employee benefits (issued in June 2011, effective from 1 January 2013 or before, the amendment has not been yet approved by the European Union). Modification

103 Severomoravská plynárenská Annual Report concerns defined benefit plans and termination benefits. This amendment is not expected to have any material impact on the financial statements of the Company; Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters of International Financial Reporting Standards (IFRSs) Amendment to IFRS 1, First-time Adoption of IFRSs (effective for annual periods beginning on or after 1 July 2011, it has not been yet approved by the European Union). The amendment is not relevant for the Company; IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine (issued in October 2011, effective for annual periods beginning on or after 1 January 2013, the interpretation has not been yet approved by the European Union). This interpretation will have no impact on the financial statements of the Company. Unless otherwise stated, the new standards and interpretations will not have a material impact on the Company s separate financial statements. 2.2 Operating segments reporting Operating segments are disclosed only in the consolidated financial statement of the Group. These separate financial statements are not distributed without the consolidated financial statements. 2.3 Foreign currency translation Items included in the financial statements of the Company are measured using the currency of the primary economic environment, in which the entities operate ( the functional currency ). The financial statements are presented in Czech Crowns, which is the Company s presentation currency and the Company s functional currency. Transactions denominated in a foreign currency are translated and recorded at the rate of exchange ruling at the date of transaction. All foreign exchange gains and losses from such transactions and from translation of monetary assets and liabilities denominated in foreign currencies using the foreign exchange rate ruling at the end of the accounting period are recognised in profit or loss. 2.4 Property, plant and equipment Property, plant and equipment are recorded at acquisition cost less accumulated depreciation and accumulated impairment losses, if applicable. Subsequent costs are included to the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. Repairs and maintenance are expensed when incurred. Borrowing costs directly attributable to the acquisition or construction of property, plant and equipment, are capitalised as a part of acquisition costs.

104 104 FinanCIAL PART Notes to Separate Financial Statements Depreciation of property, plant and equipment is calculated using the straight-line method over their estimated useful lives. Land is not depreciated. The estimated useful lives of assets were set as follows: Buildings and constructions years Machinery and equipment 3 15 years Other machinery and office equipment 3 15 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, as at each end of the reporting period. If the carrying amount of assets exceeds its estimated recoverable amount, a provision for impairment is created (see Note 2.7). Gains and losses on liquidation and disposals of assets are determined as the difference between proceeds and the carrying amount and are charged to profit or loss. 2.5 Investment property Investment property is a property held to earn rentals or held for capital appreciation. Investment property consisting mainly of own administrative buildings are not used by the Company. The Company measures all of its investment property using the cost model. In the case that an investment property is partly used in the production or supply of services or goods and partly held to earn rentals, the part held to earn rentals is considered an investment property if it is separately marketable. If the part of a property held to earn rentals is not separately marketable, it is considered an investment property only if a smaller part, i.e. less than 50%, is used for the Company s purposes. The renting of apartments to its own employees is not considered an investment property. Disclosed fair values were calculated using valuation techniques that are derived from market rentals of comparable properties in the given region. Valuation was performed internally by the employees of the Company. The Company does not have significant contractual liabilities related to investment property with the exception of obligatory repair and maintenance. Depreciation is calculated applying the straight-line method based on the estimated useful life of the given investment property and estimated residual values. The estimated useful lives were set as follows: Buildings and constructions years Rental income is recognised in profit or loss over the lease term.

105 Severomoravská plynárenská Annual Report Intangible assets Intangible assets are recorded at cost less accumulated amortization and accumulated losses from impairment, if applicable. Intangible assets and subsequent costs are capitalised only if it is probable that future economic benefits associated with the item and the cost of the item can be measured reliably. Intangible assets have definite useful lives and are amortised applying the straight-line method. The estimated useful lives of intangible assets were set as follows: Software Other intangible assets 3 5 years 5 6 years Research expenditure (studies costs of research focused on acquiring new pieces of information for future utilization in practice) is recognized as an expense when incurred. If the carrying amount of an asset exceeds its estimated recoverable amount at the end of the reporting period, a provision for impairment is created (see Note 2.7). 2.7 Impairment of non-financial assets Property, plant and equipment and other non-financial assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Intangible assets not yet available for use are tested for impairment annually. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). 2.8 Financial instruments The Company classifies its financial assets in the following categories: financial assets at fair value through profit or loss, and loans and receivables. Financial liabilities are classified to the following categories: financial liabilities at fair value through profit or loss and other financial liabilities. The classification depends on the purpose for which the financial assets and liabilities were acquired. As at 31 December 2011 and 2010, the Company recognised the following categories of financial assets and liabilities:

106 106 FinanCIAL PART Notes to Separate Financial Statements a) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Company provides money, goods or services directly to a debtor with no intention of trading with the receivable. They are included in current assets, except for maturities greater than 12 months after the reporting period. These are classified as non-current assets. Loans and receivables are included in Trade and other receivables and Unbilled gas and electricity supplies in the statement of financial position. Receivables represented mainly by trade receivables are initially recognised at fair value and are subsequently measured using the effective interest method, less a provision for impairment. A provision for impairment for receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of receivables. The Company creates provisions for impairment of trade receivables that are overdue: up to 1 month in the amount of 15%; 1 2 months in the amount of 30%; 2 3 months in the amount of 40%; 3 6 months in the amount of 50%; 6 12 months in the amount of 70%; and more than 12 months in the amount of 100% of their carrying amount before considering the provision for impairment. Effective from 1 January 2011 the Company creates provisions for impairment of due trade receivables of 3.5%. It is a change in the estimate that is recognised prospectively and its impact is immaterial. A 100% provision for impairment is created for receivables under bankruptcy proceedings. These rules are based on the analysis of receivables ageing and the risk of default. The amount of the provision for impairment approximates the difference between the receivables carrying amount and the present value of estimated future cash flows discounted at the original effective interest rate. Provisions for impairment for receivables due from the RWE Group companies are not created. Impairment loss is recognised in profit and loss. When a trade receivable is uncollectible, it is written-off against the provision for impairment. Subsequently received recoveries of amounts previously written-off are credited to profit and loss.

107 Severomoravská plynárenská Annual Report b) Other financial liabilities Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments. There is no intention of trading with the liability. They are included in current liabilities, except for maturities greater than 12 months after the reporting period. These are classified as non-current liabilities. Other financial liabilities are included in Trade and other liabilities, Other non-current liabilities and Other financial liabilities. Other financial liabilities mainly include trade liabilities that originate if the Company acquires goods and services in the ordinary course of business; borrowings that originate if the Company accepts cash and cash equivalents directly from the borrower and other financial liabilities. Other financial liabilities are recognised initially at fair value. Subsequently, other financial liabilities are stated at amortized costs using the effective interest rate method. c) Financial assets and liabilities at fair value through profit or loss Financial assets and liabilities at fair value through profit or loss represent financial assets and liabilities held for trading. A financial asset or liability is classified in this category if acquired principally for the purpose of selling or reselling in the short-term or if it is a derivative. Financial instruments at fair value through profit and loss are further classified according to degrees characterizing input information used in estimating the fair value: Level 1 quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 input data other than quoted prices included in Level 1 that are observable either directly (for example, as prices), or indirectly (for example, derived from prices); Level 3 input data that are not based on observable market data (unobservable data). d) Investment in subsidiary Investment in subsidiary is measured at acquisition cost, which includes acquisition price and costs related to the acquisition. If the carrying amount of the investment exceeds its estimated recoverable amount, a provision for impairment is created (see Note 2.7). The Company has an agreement with its subsidiary on profit transfer. The effect of the agreement is that the whole profit after allocation of its predefined portion to the legal reserve and social funds has to be distributed to the Company. Consequently, the Company recognises the subsidiary s profit determined for distribution in the period, in which it is generated by the subsidiary.

108 108 FinanCIAL PART Notes to Separate Financial Statements e) Derivatives Derivatives are initially recognised at fair value as at the date when the contract is concluded. Derivatives are subsequently measured at fair value. The Company does not use hedge accounting. All derivatives are classified as Derivatives under assets, if their fair value is positive, and under liabilities, if their fair value is negative for the Company. Changes in fair value are recognised in profit or loss within Other operating expenses (-)/income (+). The fair value of derivatives is calculated as the present value of expected future cash flows from derivatives. The expected cash flows are based on current market conditions (commodity prices, foreign exchange rates, interest rates) as at the end of the reporting period. 2.9 Non-current assets held for sale Non-current assets (or disposal groups) are classified as assets held for sale and stated at the lower of their residual amount and fair value less costs to sell if their carrying amount is to be recovered principally through a sale transaction rather than through continuing use. Non-current assets held for sale are not depreciated Unbilled supplies and advances received for gas and electricity The Company offsets the amount of unbilled gas and electricity supplies with the amount of advance payments received for gas and electricity for each customer. The resulting balance approximates the amount of receivable from and payable to customers. Receivable from customers is a financial asset, which will be settled by cash. Since 2011 the Company creates provisions for impairment of these receivables in amount of 3.5%. The impact of this change is immaterial. Payable to customers is a non-financial liability (advance received), which will be settled by supply of gas or electricity Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less. The Company uses cash-pooling within the RWE Group. A receivable/(liability) that arises from cash-pooling is presented in the statement of cash flows as part of cash and cash equivalents. If the liability arising from cash-pooling represents a form of financing, then it is not presented in the statement of cash flows as part of cash and cash equivalents Share capital Share capital of the Company is represented by ordinary shares. No preference shares were issued. The Company does not own any of its own equity instruments.

109 Severomoravská plynárenská Annual Report Employee benefits a) Contributions to the State pension scheme The Company pays its employees contributions to the State pension system, which is managed on the basis of defined benefit scheme. The Company has no other liabilities related to the State pension scheme after paying contributions in amount defined by law. b) Pension and life insurance In accordance with the valid Collective Agreement, the Company makes monthly contributions to pension and life insurance schemes for its employees. The contributions are paid to an independent entity under a defined contribution scheme. The contributions are recognised in profit or loss as incurred. c) Other obligations Other benefits (e.g. for paid holidays) are continuously recognised as expenses when incurred Provisions Provisions are recognised if the Company has a present legal or constructive obligation as a result of past events, and if it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Provisions are not recognised for future operating losses. Provisions are recognised in the amount of the best estimate of the expenditure required to settle the present obligation as at the reporting date. If the impact of discounting is significant, the provisions are carried at present value of future costs. Subsequent increase in provisions due to time impact is recorded as interest expense Revenue recognition Revenue is recognised when the risks and rewards from the ownership have been transferred to the buyer or when services that can be reliably measured are rendered and it is probable that the economic benefits associated with the transaction will flow to the Company. Revenues from sales of goods and services are presented net of Value Added Tax net of discounts and are measured at fair value of the consideration received or receivable. a) Revenues from sales of natural gas Revenue from gas supplies is recognised when the commodity is delivered. Revenue from the sale of gas on the liberalised market, that was fully liberalised effective 1 January 2007 in accordance with article 55 of Act No. 458/2000 Coll., is measured based on the commodity value reflecting all costs for purchase of natural gas including the gross margin that covers costs of gas trade, profit and also other energy services related to gas deliveries to the customer in the required quantity and at the required time.

110 110 FinanCIAL PART Notes to Separate Financial Statements The price for end customers consists of the price for consumed gas and for gas related services (transport, storage and trading services) and the distribution price. The price for consumed gas and gas related services consists of the commodity part, fixed monthly payment or payment for capacity (depending on a customer size). For households and low-volume customers the price is fixed, mostly for a period of a quarter. For middle-volume customers and high-volume customers the price can either be determined for a month or based on a selected product offered by the Company. For example, products are as follows: price formula (linked to quotation of reference fuels and exchange rates), fixed price or a single price covering both the commodity and capacity part. The price for transport is regulated by Energy Regulatory Office. The distribution price consists of three parts: fixed price for consumed gas, fixed monthly payment or payment for capacity (depending on a customer size) and a fee for the market operator service. All parts of the distribution price are regulated by Energy Regulatory Office. Gas supply and distribution to high-volume ( VO ) and middle-volume categories ( SO ) is billed on a monthly basis based on measured consumption. Gas supplies to low-volume categories ( MO ) and households ( DOM ) are billed periodically, based on the reading of the consumption of each connecting point, which is performed at least once in 18 months. Revenues from MO and DOM categories consist of actually billed revenues and revenues from so called unbilled gas (see Note 16). The amount of unbilled gas is calculated from the total amount of purchased gas in the particular year based on past behaviour of individual customers, divided into periods on the basis of the so-called load profiles ( TDD ) and is valued in relation to the valid price list of the Company. b) Revenues from sales of electricity In accordance with Act No. 458/2000 Coll., the electricity market was fully liberalised effective 1 January Revenues from electricity sold are derived from commodity valuation that is based on electricity purchase costs and gross margin which covers trade costs, profit and other energy-related services used to supply electricity to customers in required quantity and at required time. Individual fixed price based on the expected supply diagram is set up for the priority customers. For other customers, the price is set as fixed for predetermined period depending on the selected product groups according to the current price list of the Company. Energy activity reflected in the final price of the electricity supply is distribution. Distribution prices are regulated by the Energy Regulatory Office.

111 Severomoravská plynárenská Annual Report Electricity supply and distribution to high-volume ( VO ) categories is billed on a monthly basis based on measured consumption. Electricity supplies to low-volume categories ( MOP ) and households ( MOO ) are billed periodically, based on the reading of the consumption of each connecting point, which is performed at least once in 18 months. Revenues from MOP and MOO categories consist of actually billed revenues and revenues from so called unbilled electricity. The amount of unbilled electricity is calculated from the total amount of purchased electricity in the particular year based on so called load-profiles ( TDD ), to which the customers are assigned, and it is valued in relation to the price list valid when the supply or composite supply contract is signed. c) Other income Other income of the Company is recognised as follows: Revenues from service level agreements ( SLA ) are recognised when services are provided; Revenues from rentals are recognised when the service is provided; Interest income is recognised on a time-proportion basis using the effective interest rate method; Profit transfer from the subsidiary is recognised when the right to receive the payment is established Leasing Leases of property, plant and equipment where majority part of the risks and rewards of ownership have been transferred to the Company are classified as finance leases. Finance leases are capitalised at the inception of the lease at the lower of the fair value of the leased property or the present value of the minimum lease payments. Each lease payment is allocated between the settlement of the liability and finance charges. Related lease obligations are included in current or non-current liabilities in the Statement of financial position. The interest is charged directly to profit or loss over the lease period so as to achieve a constant rate of interest on the liability. The property, plant and equipment acquired via finance leases are recorded in the statement of financial position and depreciated over their estimated useful lives. Leases in which significant portion of risks and rewards of ownership are retained by the lessor are classified as operating leases. Operating lease instalments are charged to profit or loss on a straightline basis over the lease term Dividend distribution Dividend distribution to the Company s shareholders is recognised as a liability in the period in which the dividends distribution is approved by the General meeting of shareholders.

112 112 FinanCIAL PART Notes to Separate Financial Statements 2.18 Income tax Income tax for the accounting period consists of current and deferred tax. Current income tax represents the estimated tax payable for the accounting period calculated by using tax rate and laws enacted or substantially enacted as at the end of the reporting period and valid for the period. Deferred tax is recognised on all temporary differences between the carrying amount of an asset or liability in the statement of financial position and their tax bases. However the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination. A deferred tax asset is recognised when it is probable that future taxable profit will be available against which the temporary differences can be utilised. The deferred tax asset and liability are determined using the tax rate expected to be valid in the period, in which the tax asset is realised or tax liability is settled, according to tax law enacted or substantially enacted as at the end of the reporting period. 3 Financial risk management 3.1 Credit risks Credit risk (counterparties credit risk) represents a risk of inability of counterparty to fulfil their finance obligations to the Company. The Company is subject to two basic categories of credit risk: (i) credit risk by virtue of distribution and sale of natural gas and electricity to the customers and (ii) credit risk by virtue of management of available resources. Management of credit risk arising from the sale of natural gas to the Company s customers follows the internal directive Management of Credit Risk, the wording of which is based on group rules for credit risk management within RWE Group. Customer target groups, for which the risk is evaluated, were defined and the assessment was modified in such a manner that it factors in a probability of customer s insolvency. A maximum credit exposure and expected loss is assessed for each customer with the annual natural gas consumption above 40 GWh or for a customer with annual natural gas consumption of GWh, who intends to conclude or has already concluded a contract with the Company containing non-standard payment conditions. The maximum credit exposure and expected potential loss are determined by the Company based on the methodology set in the internal directive. The expected potential loss level depends on customer s expected consumption diagram, payment terms and expected natural gas prices and other parameters entering into the calculation. The credit limit and expected potential loss is determined using the maximum credit exposure and credit assessment of the customer expressed by the credit rating set by Creditreform, an independent rating agency.

113 Severomoravská plynárenská Annual Report Debt collection for VO and SO categories is managed by the Company. Customers in VO and SO categories are monitored weekly by the sales department representatives on an individual basis. Debt collection process for MO, MOP and DOM, MOO categories is outsourced to a related party from RWE Group based on the Service level agreement and might include procedures such as customer disconnection or court proceedings. The Company participates in cash-pooling project of RWE Transgas, a.s. Under the terms of the cash-pooling project the Company deposits all of its available financial funds with RWE Transgas, a.s., either in the form of short-term loans maturing within 1 year or in the form of overnight roll-over overdrafts. RWE Transgas, a.s. is a related company controlled by RWE Aktiengesellschaft, whose (A-) S&P rating represents an acceptable level of credit exposure. Credit quality of financial assets The credit quality of financial assets which are neither past due nor individually impaired is based on credit ratings or historical data on individual customer groups. The credit quality structure is as follows: Receivables 31 December December 2010 with a Creditreform rating without a Creditreform rating 14,550 17,736 with rating a S&P (A-) 49,895 6,169 Other receivables 4,552 4,150 Trade and other receivables 68,997 28,575 Profit transfer receivable from SMP Net, s.r.o. (rating A-) 904,447 1,179,593 Derivatives 39, ,432 Receivables from unbilled gas and electricity with a Creditreform rating 23,709 - without a Creditreform rating 309, ,917 with rating a S&P (A-) 6,593 2,514 Cash and cash equivalents cash-pooling RWE Transgas, a.s. (rating A-) 408, ,142 bank (rating A) 1,361 1,363 other (without rating) Total not past due and not impaired financial assets 1,762,636 2,

114 114 FinanCIAL PART Notes to Separate Financial Statements 3.2 Liquidity risk Liquidity risk represents a risk of insufficient free cash. Continuous management and forecasting of Company s future cash flows represents the basic tool of liquidity risk management. The Company prepares forecasted cash flows on a daily basis for the next 12 months. The forecast is updated at least on a weekly basis. Based on the forecast the Company must have a sufficient volume of liquid instruments to finance its activities for the monitored period. The Company participates in cash-pooling project of RWE Transgas, a.s. Under the terms of the cash-pooling project the Company concluded framework loan agreements with RWE Transgas, a.s., in accordance with which the Company is entitled to draw short-term borrowings due within one year up to the amount of CZK 760,000 thousand, and roll-over overdrafts up to CZK 300,000 thousand. The credit limits for short-term loans are updated at least once a year based on the Company s expected cash flow. The short-term loans bear the interest rate of PRIBOR plus 60 basis points. Individual tranches can be granted for the period from 7 to 364 days. Roll-over overdrafts bear the interest rate of one-day PRIBOR plus 70 basis points. The table below shows the financial liabilities of the Company classified according to remaining contractual maturities as at the balance sheet date. The amounts in the table represent contractual undiscounted cash flows, including interest payable, where applicable. Up to 6 months 6 12 months 1 2 years Total As at 31 December 2011 Trade and other liabilities 428, ,273 Derivatives 5,355 2,233-7,588 Other financial and non-current liabilities 3, ,015 As at 31 December 2010 Trade and other liabilities 781, ,364 Derivatives 14,084 2, ,042 Other financial and non-current liabilities 3, ,930 Trade and other payables are usually payable within a month.

115 Severomoravská plynárenská Annual Report The Company expects to have the following balances from cash-pooling roll-over facilities: as at 31 December 2012 as at 31 December 2013 as at 31 December 2014 CZK 375 million CZK 518 million CZK 625 million 3.3 Market risks The Company offers to its customers term contracts on gas supplies with fixed price, or contracts on gas supplies with the price derived from a price formula. Based on these contracts, a customer commits to purchase the contracted amount of natural gas. The Company hedges the risks arising from the differences between the commodity purchase prices and the contractual prices with customers, derived from the above-mentioned price formulas, by concluding commodity derivative contracts type CIS (commodity index swap), CCS (commodity currency swap) or GSS (gas spread swap) with RWE Transgas, a.s. in accordance with the framework agreement. Price agreements with customers are not recognised as derivatives (see Note 4.2). Commodity derivatives are measured at fair value through profit or loss. The purchase price for natural gas is derived from a price formula dependent on market prices of oil products (light and heavy fuel oil), black coal, foreign currency exchange rates EUR and USD against CZK and interest rates of CZK and EUR. The price at which the Company sells gas is directly linked to the purchase price of gas. By this the Company is hedged against commodity risks. a) Interest rate risk All drawings of short-term and roll-over overdrafts lent to or borrowed by the Company under the terms of RWE Transgas, a.s. cash-pooling as at 31 December 2011 and 2010, bear interest rates, which are derived from the relevant interbank rate PRIBOR or PRIBID respectively. Sensitivity analysis: As at 31 December 2011 if the interest rate had decreased by 50 basis points with all other variables held constant; profit for the year before tax would have been CZK 4,552 thousand lower; mainly as a result of decreased interest income from cash-pooling. Alternatively, as at 31 December 2011, if the interest rate had increased by 50 basic points with all other variables held constant; profit for the year before tax would have been CZK 4,552 thousand higher; mainly as a result of increased interest income from cash-pooling. b) Foreign exchange risk The Company s business activities (including purchases and sales of natural gas) are mainly realised in Czech Crowns. As a result of this, the foreign exchange risk is not significant for the Company.

116 116 FinanCIAL PART Notes to Separate Financial Statements Sensitivity analysis: Individual foreign exchange rate scenarios were based on the statistical analysis of data. Increases and decreases in foreign exchange rates are determined based on their historical volatility. Currency pairs shown in the sensitivity analysis are only those that are actively used to hedge against foreign exchange risk. Contracts are concluded only for currency pairs EUR/CZK and EUR/USD and are not concluded for USD/CZK. The selected foreign exchange scenarios demonstrate the impact on the Company s financial result assuming that only one factor changes and the other variables affecting derivatives fair values remain constant. In the scenario EUR/CZK the foreign exchange rate EUR/USD is constant. It means that if CZK depreciates/appreciates against EUR it depreciates/appreciates against USD at the same time. On the contrary, in the scenario EUR/USD the foreign exchange rate EUR/CZK is constant. It means that the depreciation/appreciation of USD against EUR results in the depreciation/appreciation against CZK as well. The movement in the currency pair USD/CZK is thus included in the following scenarios: Estimated yearly deviation Currency pair Decrease Increase EUR/CZK (5)% 5% EUR/USD (9)% 9% Impact on profit before tax Currency pair EUR/CZK (17,095) 17,972 EUR/USD 30,564 (27,921) As at 31 December 2011 if the CZK had appreciated by 5% against the EUR with all other variables held constant; profit before tax for the year would have been CZK 17,095 thousand lower as a result of the decrease in the fair value of derivatives. Alternatively, as at 31 December 2011, if the CZK had depreciated by 5% against the EUR with all other variables held constant profit before tax for the year would have been CZK 17,972 thousand higher mainly as a result of the increase in the fair value of derivatives. As at 31 December 2011 if the USD had appreciated by 9% against the EUR with all other variables held constant; profit before tax for the year would have been CZK 30,564 thousand higher as a result of the increase in the fair value of derivatives. Alternatively, as at 31 December 2011, if the USD had depreciated by 9% against the EUR with all other variables held constant; profit before tax for the year would have been by CZK 27,921 thousand lower as a result of the increase in the negative fair value of derivatives.

117 Severomoravská plynárenská Annual Report c) Commodity risk The value of receivables and liabilities arising from the purchase and sale of natural gas recognised by the Company as at 31 December 2011 and 2010 is not dependent on further development of oil derivatives and coal prices. As at 31 December 2011 and 2010 the Company did not recognise any material assets or liabilities, the value of which would depend on changes in other market drivers, except for derivatives. The Company is exposed to commodity risk from natural gas supplies for fixed price customer contracts (see above). Sensitivity analysis: Individual commodity scenarios were based on the statistical analysis of commodity prices. The scenarios demonstrate the possible impact on the Company s financial results assuming that only one factor changes with the other variables affecting the fair value of derivatives remaining constant. Estimated yearly deviation Commodity Decrease Increase Gasoil [USD] (25)% 33% Fuel Oil [USD] (27)% 37% Hard Coal ICR [USD] (19)% 24% Hard Coal StaBu [EUR] (19)% 23% Impact on profit before tax Commodity Gasoil [USD] (32,193) 42,842 Fuel Oil [USD] (26,962) 37,032 Hard Coal ICR [USD] (1,155) 1,429 Hard Coal StaBu [EUR] (1,190) 1, Capital management The Company does not actively manage capital. The capital is managed at the RWE Group level. All the equity components shown in the statement of financial position within equity are considered to be the capital of the Company. For additional information, see Note 12 and the Statement of changes in equity.

118 118 FinanCIAL PART Notes to Separate Financial Statements 3.5 Classes of financial assets and liabilities reconciliation to consolidated statement of financial position lines Assets as at 31 December 2011: Statement of financial position lines /Categories Financial assets loans and receivables Financial assets at fair value through profit or loss (Level 2) Financial assets total Nonfinancial assets Total Trade and other receivables 1,025,161-1,025, ,149 1,154,310 Unbilled gas and electricity 339, , ,419 receivables Derivatives - 39,563 39,563-39,563 Cash and cash equivalents 410, , ,210 Total 1,774,790 39,563 1,814, ,149 1,943,502 Assets as at 31 December 2010: Statement of financial position lines /Categories Financial assets loans and receivables Financial assets at fair value through profit or loss (Level 2) Financial assets total Nonfinancial assets Total Trade and other receivables 1,253,122-1,253, ,182 1,367,304 Unbilled gas and electricity 520, , ,431 receivables Derivatives - 165, , ,432 Cash and cash equivalents 981, , ,559 Total 2,755, ,432 2,920, ,182 3,034,726 No financial assets have been provided as collateral for liabilities.

119 Severomoravská plynárenská Annual Report Liabilities as at 31 December 2011: Statement of financial position lines / Categories Financial liabilities valuated at amortized cost Financial liabilities at fair value through profit or loss (Level 2) Financial Liabilities total Nonfinancial liabilities Total Other long-term liabilities Trade and other liabilities 428, ,273 6, ,300 Advance payments received , ,082 for gas and electricity Derivatives - 7,588 7,588-7,588 Other financial liabilities 3,803-3,803-3,803 Total 432,288 7, , ,109 1,142,985 Liabilities as at 31 December 2010: Statement of financial position lines / Categories Financial liabilities valuated at amortized cost Financial liabilities at fair value through profit or loss (Level 2) Financial Liabilities total Nonfinancial liabilities Total Other long-term liabilities Trade and other liabilities 781, ,364 6, ,165 Advance payments received , ,643 for gas and electricity Derivatives - 17,042 17,042-17,042 Other financial liabilities 3,730-3,730-3,730 Total 785,294 17, , ,444 1,467,780 As at 31 December 2011 the Company paid advance payments as a deposit for its liabilities in the amount of CZK 20,000 thousand (31 December 2010: CZK 20,000 thousand).

120 120 FinanCIAL PART Notes to Separate Financial Statements 3.6 Fair value measurement Fair values of financial assets and liabilities that are not traded in an active market are determined by using valuation techniques based on discounted future cash flows. The expected cash flows are based on current market conditions, such as commodity prices, foreign exchange rates, interest rates, etc. as at the end of the reporting period. As at the end of the reporting period, the Company classified its financial assets and liabilities at fair value through profit or loss under the Level 2 of the fair value measurement hierarchy (see Note 3.5). The carrying amounts of short-term receivables less impairment provision and short-term payables approximate their fair values. The fair value of non-current liabilities for disclosure purposes is estimated using the method of estimated discounted cash flows based on the current interest market rate available to the Company for similar financial instruments and is not materially different from their carrying amounts. 4 Critical accounting estimates and judgements The Company makes estimates and assumptions related to the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. Estimates and judgments are continuously evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 4.1 Unbilled supplies of natural gas The estimates and assumptions that have significant risk of causing material adjustments to the carrying amounts of assets and liabilities within the next financial year relate to unbilled supplies of natural gas. Revenues from gas supplies for MO and DOM categories comprise of revenues, which are invoiced based on individual billing cycles at least once every 18 months, and unbilled revenues from sold gas for the given period. Unbilled gas supplies estimate is influenced by the accuracy of assigning customers to corresponding supply and price categories and also by applying the load-profiles set by the Energetic Regulatory Office for allocating the gas consumption to individual months (in 2010 the allocation was based on heat curves that were also set by the Energetic Regulatory Office). These factors have an impact on the average price of unbilled gas supplies. As at 31 December 2011 if the average price of unbilled gas supplies had been by 1% higher (lower) all other variables held constant; profit before tax for the year would have been by CZK 26,445 thousand higher (lower). Unbilled gas supplies estimate is also influenced by the accuracy of network losses. As at 31 December 2011 if the network losses in distribution network of subsidiary had been by 1% higher (lower) and all other variables held constant, profit before tax for the year would have been by CZK 11,216 thousand lower (higher).

121 Severomoravská plynárenská Annual Report Price agreements with customers for gas supplies The Company offers to its customers several products, for example contracts on gas supplies with fixed price, or contracts on gas supplies with the price derived from a price formula linked to quotation of reference fuels. Based on these contracts, a customer commits to purchase the contracted amount of natural gas. The price formula is linked to quotation of reference fuels, as listed in note 3.3 c). Commodity prices of these reference fuels included in the price formula are quoted only in USD. Average foreign exchange rate of EUR/USD announced by the European Central bank and average foreign exchange rate of CZK/EUR announced by the Czech National Bank for the invoicing period are used for the purpose of translating the quoted prices into final sales prices. If a customer is not willing to be exposed to commodity or foreign exchange risks, the gas sales price can be fixed for a certain period (into EUR or CZK depending on the contractual currency). Sales prices are thus translated using spot foreign exchange rates or are fixed to commonly used currencies in the Czech Republic (CZK and EUR). Using EUR, USD and reference fuels for determining the final sales price are closely related to gas supplies. These specific price agreements bear the same economic risks as the host contract. As a result, the price agreements are not separated from the host contract and are not accounted for as derivatives.

122 122 FinanCIAL PART Notes to Separate Financial Statements 5 PROPERTY, PLANT AND EQUIPMENT Buildings constructions and land Equipment Other machinery and office equipment Tangible fixed assets under construction including advances paid Total As at 1 January 2010 Cost 109,843 5,482 96, ,587 Accumulated depreciation (17,045) (3,040) (76,754) - (96,839) and impairment Closing net book value 92,798 2,442 19, ,748 as at 1 January 2010 Year ended 31 December 2010 Opening net book value 92,798 2,442 19, ,748 as at 1 January 2010 Additions ,054 1,102 Disposals and transfers 1,043 (491) (151) (1,416) (1,015) Investment property 2,558 1, ,979 Depreciation (3,011) (467) (7,593) - (11,071) Impairment charge (4,800) (4,800) Closing net book value 86,636 2,905 12, ,943 as at 31 December 2010 As at 31 December 2010 Cost 119,045 7,970 84, ,193 Accumulated depreciation (30,409) (5,065) (72,776) - (108,250) and impairment Closing net book value 88,636 2,905 12, ,943 as at 31 December 2010 As at 31 December 2011 Opening net book value 88,636 2,905 12, ,943 as at 1 January 2011 Additions 11, (14) 11,130 Disposals and transfers (1,061) (448) (7,259) (150) (8,918) Investment property (58,936) (1,086) (59,759) Depreciation (2,704) (394) (3,655) - (6,753) Closing net book value 37, , ,643 as at 31 December 2011 As at 31 December 2011 Cost 41,475 2,706 19, ,349 Accumulated depreciation (4,426) (1,729) (17,551) - (23,706) and impairment Net book value as at 31 December , , ,643

123 Severomoravská plynárenská Annual Report In cases when the Company is a lessee under finance lease contract, machines, machinery and technical equipment and other machinery and office equipment include the following: Other machinery and office equipment As at 31 December 2010 Cost 21,667 Accumulated depreciation (21,667) Net book value as at 31 December As at 31 December 2011 Cost 10,269 Accumulated depreciation and impairment (10,269) Net book value as at 31 December investment property Opening net book value as at 1 January 187, ,812 Transfer from property plant and equipment 56, Disposals (2,770) (4,575) Assets available for sale - 8,647 Depreciation (9,105) (9,990) Impairment 4,800 (108,200) Closing net book value as at 31 December 236, , December December 2010 Cost 498, ,056 Accumulated depreciation and impairment (261,987) (231,655) Net book value and impairment 236, , December December 2010 Fair value of the investment property 347, ,943

124 124 FinanCIAL PART Notes to Separate Financial Statements Amounts recognized in the statement of comprehensive income rental income from investment property 40,666 33,689 direct costs related to the lease 3,169 5,795 Depreciation 9,105 9,990 In 2010 the Company recognized an impairment loss on buildings due to a decrease in their recoverable amounts resulting from lower expected future income. 7 intangible assets Software Other Total As at 1 January 2010 Cost 74, ,577 Accumulated amortization and impairment (74,707) (583) (75,290) of non-current assets Net book value as at 1 January Year ended 31 December 2010 Opening net book value as at 1 January Amortization - (117) (117) Closing net book value as at 31 December As at 31 December 2010 Cost 74, ,093 Accumulated amortization and impairment (74,223) (700) (74,923) of non-current assets Net book value as at 31 December Year ended 31 December 2011 Opening net book value as at 1 January Amortization Disposals and transfers - (170) (170) Net book value as at 31 December As at 31 December 2011 Cost 74,064-74,064 Accumulated amortization and impairment (74,064) - (74,064) of non-current assets Net book value as at 31 December

125 Severomoravská plynárenská Annual Report INVESTMENT IN SUBSIDIARy 31 December December 2010 Investment in subsidiary 3,916,661 3,916,661 Investment in subsidiary represents investment in SMP Net, s.r.o., which is a 100% subsidiary of the Company incorporated in the Czech Republic. SMP Net, s.r.o. was registered in the Commercial Register on 2 June As at 1 January 2007 the Company contributed part of a business related to gas distribution to SMP Net, s.r.o. 9 Trade and other receivables 31 December December 2010 Trade receivables from third parties 307, ,825 Trade receivables from related parties 49,895 6,169 Total trade receivables 357, ,994 Provision for impairment of trade receivables (242,671) (271,691) Net book value of trade receivables 114,911 69,303 Other receivables financial 23,595 23,193 Provision for impairment of other receivables (19,043) (19,043) Net book value of other receivables financial 4,552 4,150 Unpaid income from profit transfer and other unbilled supplies 905,698 1,179,669 Financial trade and other receivables 1,025,161 1,253,122 Operating short-term advances paid 5,254 4,160 Operating advances paid to related parties 103,830 89,956 Other receivables non financial Non financial trade and other receivables 109,149 94,182 Trade and other receivables short-term 1,134,310 1,347,304 Operating long-term advances paid 20,000 20,000 Total trade and other receivables 1,154,310 1,367,304 Trade receivables outstanding have not been secured. Receivables from related parties are analysed in Note 28. As at 31 December 2011 trade receivables of CZK 3 thousand (as at 31 December 2010: CZK 378 thousand) were past due but not impaired.

126 126 FinanCIAL PART Notes to Separate Financial Statements The ageing of trade and other payables which are determined to be impaired is as follows: 31 December December 2010 Up to 6 months The ageing of trade and other receivables which are considered to be impaired as at balance sheet date is as follows (in netto value): 31 December December 2010 Up to 6 months 40,389 34,846 6 to 12 months 10,882 9,572 Over 1 year Total 51,714 44,500 Movements of the provision for impairment of trade receivables can be analysed as follows: Opening balance as at 1 January 290, ,414 Charge for the year 26,943 40,155 Written off of unrecoverable receivables (55,963) (13,835) Closing balance as at 31 December 261, ,734 The following table analyses income and expenses related to trade and other receivables: Impairment loss from receivables 26,257 39,749

127 Severomoravská plynárenská Annual Report Cash and cash equivalents Cash and cash equivalents disclosed in the cash flow statement can be analysed as follows: 31 December December 2010 Cash and cash equivalents 1,407 1,417 Overdrafts under cash-pooling 408, ,142 Total cash and cash equivalents 410, ,559 Cash equivalents drawn or provided in a form of roll-over overdrafts under cash-pooling yield the interest rates derived from a one-day PRIBOR or PRIBID, determined for each day. As at 31 December 2011 the lent roll-over facility yields an interest rate of 0.15% (as at 31 December 2010: 0.04% and 0.15% depending on the chosen bank) and the drawn roll-over overdraft bears interest rate of 1.20 % (as at 31 December 2010: 1.31%). 11 NON-current assets held-for-sale Sale of the land and buildings presented as held for sale as at 31 December 2011 was completed in As at 31 December 2011 no assets held for sale were recognised by the Company. Net book value 31 December 2011 Net book value 31 December 2010 Land and buildings - 8, SHARE CAPITAL and OTHER FUNDs 31 December December 2010 Bearer shares 1,472,285 1,472,285 Registered shares 597, ,443 Total share capital registered in the Commercial Register 2,069,728 2,069,728 Share capital of the Company consists of 2,069,728 shares fully subscribed and paid. Nominal value of one share is CZK 1 thousand. Both categories of bearer and ordinary registered shares hold the same rights.

128 128 FinanCIAL PART Notes to Separate Financial Statements The Company creates the following funds: 31 December December 2010 Retained earnings 2,174,527 2,847,166 Reserve fund 413, ,945 Other funds 453, ,946 Retained earnings, reserve fund and other funds 3,042,418 3,715,057 The legal reserve fund represents funds that the Company is required to retain according to the Commercial Code. Use of the legal reserve fund is limited by the legislation and the Statutes of the Company and is not available for distribution to the shareholders, but may be used only to offset losses. Other funds represent gifts received before 2002 (i.e. before the Company was acquired by RWE Group in May 2002). The Company s management decided to allocate the gifts in a specific fund, the distribution of which will be decided. In accordance with the Company s Statutes, the distribution of these funds to the shareholders is subject to the General Meeting approval usually based on the proposal submitted by the Board of Directors as approved by the Supervisory Board. 13 Deferred tax Assets Offsetting of deferred income tax assets and liabilities is allowed when there is a legally enforceable right to offset due tax assets and due tax liabilities and when the deferred income tax assets and liabilities related to income tax are collected by the same tax authority. The offset deferred tax assets and liabilities are as follows: 31 December December 2010 Deferred tax asset to be recovered after more than 12 months 9,152 8,930 Deferred tax asset to be recovered within 12 months 9,711 10,045 Deferred tax liability payable after more than 12 months - (32) Total net deferred tax asset 18,863 18,943

129 Severomoravská plynárenská Annual Report Changes in deferred tax assets and liabilities have the following structure: Deferred tax asset / (liability) Non-current assets Receivables Provisions Total Balance as at 1 January 2010 (13,390) 7,234 1,028 (5,128) Impact on profit or loss 21,766 2, ,071 Balance as at 31 December ,376 9,434 1,133 18,943 Impact on profit or loss 407 (259) (228) (80) Balance as at 31 December ,783 9, ,863 The deferred tax as at 31 December 2011 and 2010 is calculated at 19% (the rate valid for 2010 and subsequent years). 14 trade and other liabilities 31 December December 2010 Trade and other liabilities Trade liabilities to third parties 65,535 40,666 Trade liabilities to related parties 359, ,954 Total trade liabilities 425, ,620 Other liabilities financial 3,104 2,744 Total financial liabilities 428, ,364 Liabilities to employees 5,721 6,317 Liabilities to social security institutions Operating short-term advances received Total non-financial liabilities 6,027 6,801 Total trade and other liabilities 434, ,165 Liabilities to related parties are analysed in Note 28. Trade and other payables have not been secured over any assets of the Company.

130 130 FinanCIAL PART Notes to Separate Financial Statements 15 derivatives Within 1 year 31 December December 2010 Over 1 year Total Within 1 year Over 1 year Total Receivables Derivative type CIS 24, , (commodity index swap) Derivative type CCS (commodity currency swap) Derivative type GSS 13,975-13, ,998 7, ,399 (gas spread swap) Currency forwards Total 38, , ,031 7, ,432 Liabilites Derivative type CIS (commodity ,923-16,923 index swap) Derivative type CCS (commodity currency swap) Derivative type GSS 7,248-7, (gas spread swap) Currency forwards Total 7,588-7,588 16, , UNBILLED SUPPLIES AND ADVANCES RECEIVED FOR GAS AND ELECTRICITY The Company recognised the following amounts for unbilled gas and electricity supplies and related advances. 31 December December 2010 Before offsetting per individual customers Unbilled gas and electricity supplies 3,030,036 3,738,211 Provision for impairment of unbilled gas and electricity (6,629) - supplies receivable Advances received for gas and electricity (3,381,070) (3,876,423) Total (357,663) (138,212) Unbilled gas and electricity supplies 339, ,431 Advances received for gas and electricity (697,082) (658,643)

131 Severomoravská plynárenská Annual Report The following table analyses income and expenses related to unbilled gas and electricity: Total net loss from payables 6, Sales Revenue from sales of natural gas 7,554,323 9,654,097 Revenue from distribution services for gas 1,934,614 2,504,565 Revenue from sale of electricity 78,691 3,040 Revenue from distribution services for electricity 101,579 4,445 Sale of heat 742 3,482 Other 43,622 9,048 Total 9,713,571 12,178, Purchased gas AND ELECTRICITY and services related to gas AND ELECTRICITY SUPPLIES Purchase of natural gas 7,228,187 8,798,616 Purchase of electricity 80,073 3,301 Other raw material and energy consumption related 13,864 18,123 to gas and electricity supplies Purchased services related to gas and electricity supplies 2,037,485 2,540,351 Total 9,359,609 11,360,391 Other raw material and consumption related to gas and electricity supplies comprise of purchases of gas and electricity for own consumption and energy consumption. Costs of purchased services related to gas and electricity supplies represent mainly costs of gas and electricity distribution and consumption readings.

132 132 FinanCIAL PART Notes to Separate Financial Statements 19 OTHER OPERATING INCOME Profit from sale of property, plant and equipment 20,936 5,084 Profit transfer from the subsidiary 904,447 1,179,593 Change in fair value of derivatives 53, ,876 Realised commodity derivatives 195,019 7,457 Income from penalties, interest and indemnities 13,935 28,976 Other 12,995 50,966 Total 1,200,800 1,464, EMPLOYEE BENEFITS Wages and other current employee benefits 9,560 10,882 Social security costs 923 1,333 Pension costs defined contribution plans 2,560 2,643 Total staff costs 13,043 14, OTHER OPERATING EXPENSES Consumption of raw material Costs from service level agreements 236, ,253 Realised commodity derivates 41,944 35,358 Change in fair value of derivatives 169,883 18,027 Impairment of receivables and write-off of unrecoverable receivables 32,886 39,749 Other 21,178 5,936 Total 503, ,229 Costs from service level agreements contain mainly purchased services from related parties, such as IT infrastructure, telecommunications, invoicing, call centre services and debts collection.

133 Severomoravská plynárenská Annual Report finance INCOME AND EXPENSE Interests income 5,397 8,122 Interest expense (11) (40) Net finance income 5,386 8, Income tax The income tax expense recognised in the statement of comprehensive income consists of the following: Current income tax 22, ,303 Deferred income tax (Note 13) 80 (24,071) Total 22, ,232 Reconciliation between theoretical tax charge computed from accounting profit before tax multiplied by the statutory income tax rate for the year and actual tax charge for the year: Net profit before tax 1,032,683 1,803,102 Theoretical income tax at 19% 196, ,589 Profit transfer and other non-taxable income (174,546) (224,629) Tax non-deductible expense 2,091 3,863 Prior year adjustment (804) (1,238) Gifts (318) (335) Tax relieves - (18) Total income tax charge 22, ,232

134 134 FinanCIAL PART Notes to Separate Financial Statements 24 DIVIDENDS per share In 2011 the Company approved payment of dividends of CZK 1,682,689 thousand (CZK 813 per share), in 2010: CZK 1,357,741 thousand (CZK 656 per share). The dividends were distributed as follows: RWE Gas International N.V. 835, ,065 SPP Bohemia a.s. 347, ,343 Other shareholders 499, ,333 Total 1,682,689 1,357, contingent liabilities Tax authorities are allowed to inspect accounting books and records at any time within three years subsequent to the reported tax year, and consequently may additionally impose income tax and penalties. The Company s management is not aware of any circumstances which may in the future give rise to a potential material contingent liability in this respect. Management of the Company is not aware of any other significant contingent liabilities as at 31 December COMMITMENTS As at 31 December 2011 and 2010 the Company did not have any significant contractual capital or other commitments. 27 regulatory framework The gas market is fully liberalised and all end customers have a choice of their gas supplier. With respect to the dominant position of regional RWE gas companies on the Czech market, Energy Regulatory Office performs a general oversight over price levels in accordance with the act number 526/1990 Coll., Act on prices, as amended.

135 Severomoravská plynárenská Annual Report RELATED PARTY TRANSACTIONS AND BALANCEs The Company is directly controlled by RWE Gas International N.V. The ultimate controlling party and parent company is RWE Aktiengesellschaft. The Company was involved in the following transactions with related parties: The ultimate parent company of whole Group RWE Aktiengesellschaft realised currency derivatives RWE Aktiengesellschaft revaluation of currency derivatives Subsidiary Revenue from sale of natural gas SMP Net, s.r.o. 158, ,940 Other revenues and income: SMP Net, s.r.o. services and electricity 9, SMP Net, s.r.o. (profit transfer) 904,447 1,179,593 Other related parties controlled by RWE Aktiengesellschaft Revenues from sale of gas RWE Trangas, a.s Other gas distribution and regional companies 28,610 2,558 Other related companies within RWE Group 92,108 16,317 Other revenues and income: RWE Transgas, a.s. services 1, RWE Transgas, a.s. interest income 5,315 8,029 RWE Transgas, a.s. realised commodity derivatives 195,019 7,457 RWE Transgas, a.s. change in the fair value of unrealised derivates 53, ,843 Other gas distribution and regional companies services 665 2,027 Other related companies within RWE group services, assets 59,360 45,316 Total revenues 1,509,935 1,646,813

136 136 FinanCIAL PART Notes to Separate Financial Statements The ultimate parent company of whole Group RWE Aktiengesellschaft realised currency derivatives RWE Aktiengesellschaft revaluation of currency derivatives Subsidiary Cost related to supplies of natural gas to the Company SMP Net, s.r.o. 1,929,037 2,531,595 Other costs SMP Net, s.r.o Other related parties controlled by RWE Aktiengesellschaft: Cost related to supplies of natural gas and electricity to the Company RWE Transgas, a.s. 7,108,008 8,514,243 Other gas distribution and regional companies 40, ,987 Other related companies of RWE Group 81,804 - Other expenses RWE Transgas, a.s. services 57,482 89,773 RWE Transgas, a.s. realised commodity derivatives 41,944 31,460 RWE Transgas, a.s. change in the fair value of unrealised derivatives 169,586 17,988 RWE Transgas, a.s. interest expense Other gas distribution and regional companies services 15,022 15,610 Other related companies within RWE group services 154, ,368 Total costs 9,598,989 11,580,937

137 Severomoravská plynárenská Annual Report The following related party balances were outstanding: 31 December December 2010 Receivables The ultimate parent company of whole Group RWE Aktiengesellschaft receivable from revaluation of currency derivatives Subsidiary SMP Net, s.r.o. 111,956 93,125 SMP Net, s.r.o (receivable from the profit transfer) 904,447 1,179,593 Other related parties controlled by RWE Aktiengesellschaft RWE Transgas, a.s. 27, RWE Transgas, a.s. receivable from cash-pooling 408, ,142 RWE Transgas, a.s. receivable from commodity derivatives 39, ,399 revaluation Other gas distribution and regional companies services 14, Other related companies within RWE group 8,011 6,668 Total receivables 1,514,360 2,425,314 Liabilities The ultimate parent company of whole Group RWE Aktiengesellschaft liability from revaluation of currency derivatives Subsidiary SMP Net, s.r.o. 118,942 53,988 Other related parties controlled by RWE Aktiengesellschaft: RWE Transgas, a.s. 242, ,891 RWE Transgas, a.s. liability from commodity derivatives 7,324 17,018 revaluation Other gas distribution and regional companies services 3,935 1,653 Other related companies within RWE group 26,726 20,422 Total liabilities 400, ,996 Except for dividend payment described in the note 24 the Company did not have any balances or transactions with RWE GAS International N.V. as at and for the years ended 2011 and 2010.

138 138 Services are received and provided based on price agreements and framework agreements. Price agreements are amended annually by appendices to service contracts. Types of received services are described in note 21. Provided services include mainly rentals and services in the area of finance, accounting and controlling. The Company purchases gas and electricity based on framework agreements concluded with RWE Transgas, a.s. and RWE Key Account CZ, s.r.o based on the business terms available also to third parties. The Company purchases the gas distribution from SMP Net, s.r.o. for regulated prices. The Company has framework loan agreements with RWE Transgas, a.s. that are described in detail in notes 3.2 and 10. The Company is concluding CIS (commodity index swap), CCS (commodity currency swap) and GSS (gas spread swap) contracts with RWE Transgas, a.s. for decreasing its market risk exposure. The contracts are described in detail in note 3.3 and 15 the Company concluded currency forwards with RWE Aktiengesellschaft. Dividends paid to shareholders in 2011 and 2010 are disclosed in Note 24. Remuneration of key members of management and members of statutory bodies: Wages and other current employee benefits 1,307 2,775 Social security costs Pension costs defined contribution plans Total 1,938 3, Subsequent events No events have occurred subsequent to year-end that would have a material impact on the financial statements as at 31 December 2011.

139 Severomoravská plynárenská Annual Report Statutory approvals These separate financial statements have been approved for submission to the general meeting of shareholders by the Company s Board of Directors and may be modified. 27 February 2012 Jindřich Broukal Chairman of the Board of Directors Lukáš Roubíček vicechairman of the Board of Directors

140 140 Independent Auditor s Report Auditor s Report on the Consolidated Financial Statements 7 Independent Auditor s Report 7.1 Auditor s Report on the Consolidated Financial Statements To the shareholders of Severomoravská plynárenská, a.s. We have audited the accompanying consolidated financial statements of Severomoravská plynárenská, a.s., identification number , with registered office at Plynární 2748/6, Ostrava, Moravská Ostrava ( the Company ) and its subsidiary (together the Group ), which comprise the consolidated statement of financial position as at 31 December 2011, the consolidated statements of comprehensive income, changes in equity and cash flows for the year then ended and notes, including a summary of significant accounting policies ( the consolidated financial statements ). Board of Directors Responsibility for the Consolidated Financial Statements The Board of Directors is responsible for the preparation of the consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the European Union, and for such internal controls as the Board of Directors determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the Act on Auditors of the Czech Republic, International Standards on Auditing and the related application guidance of the Chamber of Auditors of the Czech Republic. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. PricewaterhouseCoopers Audit, s.r.o., Kateřinská 40/466 Prague 2, Czech Republic T: , F: , PricewaterhouseCoopers Audit, s.r.o., registered seat Kateřinská 40/466, Prague 2, Czech Republic, Identification Number: , registered with the Commercial Register kept by the Municipal Court in Prague, Section C, Insert 3637, and in the Register of Audit Companies with the Chamber of Auditors of the Czech Republic under Licence No 021.

141 Severomoravská plynárenská Annual Report Shareholders of Severomoravská plynárenská, a.s. Independent auditor s report Auditor s Responsibility (continued) An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Group's preparation of the financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements give a true and fair view of the financial position of the Group as at 31 December 2011, its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union. 27 February 2012 PricewaterhouseCoopers Audit, s.r.o. represented by Václav Prýmek Jitka Žaloudková Partner Statutory Auditor, Licence No Note Our report has been prepared in the Czech language and in English. In all matters of interpretation of information, views or opinions, the Czech version of our report takes precedence over the English version.

142 142 Independent Auditor's Report Auditor's Report on the Consolidated Annual Report and the Severomoravská plynárenská, a.s. Report on Relations between Related Parties 7.2 Auditor's Report on the Consolidated Annual Report and the Severomoravská plynárenská, a.s. Report on Relations between Related Parties To the shareholders of Severomoravská plynárenská, a.s. We have audited the financial statements of Severomoravská plynárenská, a.s., identification number , with registered office Plynární 2748/6, Ostrava, Moravská Ostrava ( the Company ) for the year ended 31 December 2011 disclosed in the annual report on pages and issued the opinion dated 27 February 2012 and disclosed on pages We have also audited the consolidated financial statements of the Company for the year ended 31 December 2011 disclosed on pages and issued the opinion dated 27 February 2012 and disclosed on pages (hereinafter collectively referred to as the financial statements ). Report on the Annual Report We have verified that the other information included in the annual report of the Company for the year ended 31 December 2011 is consistent with the financial statements referred to above. The Statutory Body is responsible for the accuracy of the annual report. Our responsibility is to express an opinion on the consistency of the annual report with the financial statements based on our verification procedures. Auditor s Responsibility We conducted our verification procedures in accordance with the International Standards on Auditing and the related application guidance of the Chamber of Auditors of the Czech Republic. Those standards require that we plan and perform the verification procedures to obtain reasonable assurance about whether the other information included in the annual report which describes matters that are also presented in the financial statements is, in all material respects, consistent with the relevant financial statements. We believe that the verification procedures performed provide a reasonable basis for our opinion. Opinion In our opinion, the other information included in the annual report of the Company for the year ended 31 December 2011 is consistent, in all material respects, with the financial statements. PricewaterhouseCoopers Audit, s.r.o., Kateřinská 40/466 Prague 2, Czech Republic T: , F: , PricewaterhouseCoopers Audit, s.r.o., registered seat Kateřinská 40/466, Prague 2, Czech Republic, Identification Number: , registered with the Commercial Register kept by the Municipal Court in Prague, Section C, Insert 3637, and in the Register of Audit Companies with the Chamber of Auditors of the Czech Republic under Licence No 021.

143 Severomoravská plynárenská Annual Report Shareholders of Severomoravská plynárenská, a.s. Independent auditor s report Report on review of the Report on Relations In addition we have also reviewed the accompanying report on relations between the Company and its controlling party and between the Company and the other persons controlled by the same controlling party for the year ended 31 December 2011 (the Report ). The completeness and accuracy of the Report is the responsibility of the Statutory Body of the Company. Our responsibility is to express our opinion on the Report based on performed review. Scope of Review We conducted our review in accordance with Audit standard 56 of the Chamber of Auditors of the Czech Republic. This standard requires that we plan and perform the review to obtain limited assurance as to whether the Report is free of material factual misstatement. A review is limited primarily to inquiries of Company personnel, analytical procedures and examination, on a test basis, of factual accuracy of data. A review therefore provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the accompanying Report has not been properly prepared, in all material respects, in accordance with the requirements of Article 66a of the Commercial Code. 30 March 2012 PricewaterhouseCoopers Audit, s.r.o. represented by Václav Prýmek Jitka Žaloudková Partner Statutory Auditor, Licence No Note Our report has been prepared in the Czech language and in English. In all matters of interpretation of information, views or opinions, the Czech version of our report takes precedence over the English version.

144 144 Independent Auditor s Report Auditor s Report on the Financial Statements of Severomoravská plynárenská, a.s. 7.3 Auditor s Report on the Financial Statements of Severomoravská plynárenská, a.s. To the shareholders of Severomoravská plynárenská, a.s. We have audited the accompanying separate financial statements of Severomoravská plynárenská, a.s., identification number , with registered office at Plynární 2748/6, Ostrava, Moravská Ostrava ( the Company ), which comprise the statement of financial position as at 31 December 2011, the statements of comprehensive income, changes in equity and cash flows for the year then ended and notes, including a summary of significant accounting policies ( the separate financial statements ). Board of Directors Responsibility for the Separate Financial Statements The Board of Directors is responsible for the preparation of the separate financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the European Union, and for such internal controls as the Board of Directors determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these separate financial statements based on our audit. We conducted our audit in accordance with the Act on Auditors of the Czech Republic, International Standards on Auditing and the related application guidance of the Chamber of Auditors of the Czech Republic. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. PricewaterhouseCoopers Audit, s.r.o., Kateřinská 40/466 Prague 2, Czech Republic T: , F: , PricewaterhouseCoopers Audit, s.r.o., registered seat Kateřinská 40/466, Prague 2, Czech Republic, Identification Number: , registered with the Commercial Register kept by the Municipal Court in Prague, Section C, Insert 3637, and in the Register of Audit Companies with the Chamber of Auditors of the Czech Republic under Licence No 021.

145 Severomoravská plynárenská Annual Report Shareholders of Severomoravská plynárenská, a.s. Independent auditor s report Auditor s Responsibility (continued) An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the preparation of the financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the separate financial statements give a true and fair view of the financial position of the Company as at 31 December 2011, its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union. 27 February 2012 PricewaterhouseCoopers Audit, s.r.o. represented by Václav Prýmek Jitka Žaloudková Partner Statutory Auditor, Licence No Note Our report has been prepared in the Czech language and in English. In all matters of interpretation of information, views or opinions, the Czech version of our report takes precedence over the English version.

146 146 Report of the Board of Directors of Severomoravská plynárenská, a.s. on Relations between Related Parties as at 31 December report of the Board of Directors of Severomoravská plynárenská, a.s. on Relations between Related Parties as at 31 December 2011 Whereas Severomoravská plynárenská, a.s. ('Company') has not entered into a controlling contract as a controlled entity, which would be in effect in 2011, the Company's Board of Directors has compiled this report on relations between the Company and controlling parties and between the Company and other parties controlled by the same controlling parties ('related parties') for 2011 insofar as such parties are known to the Company. The report was compiled in accordance with Section 66a(9) of Act No. 513/1991 Coll., the Commercial Code, as amended, and it constitutes an integral part of the Company's Annual Report for The Company's shareholders will have the report available at the same time and under the same conditions as the Financial Statements. 1. Controlling Parties Throughout the last accounting period, the Company was controlled by the following parties: a) Directly RWE Gas International N.V. with its registered office at 5211AK 's-hertogenbosch, Willemsplein 4, Kingdom of the Netherlands, a shareholder of the Company holding 49.64% of the Company's voting rights, and RWE Transgas, a.s. with its registered office at Limuzská 12/3135, Prague 10, Company No , a shareholder of the Company holding 18.09% of the Company's voting rights that was directly controlled by its shareholder RWE Gas International N.V. The total share of both companies acting in concert in the Company's voting rights amounted to 67.73%. b) Indirectly RWE Aktiengesellschaft with its registered address at Opernplatz 1, Essen, Federal Republic of Germany, the sole shareholder of RWE Gas International N.V. 2. Other Related Parties The Company has requested the above controlling parties to provide a list of other parties that were controlled by the same controlling parties in the last fiscal reporting period. This report has been compiled based on information provided by the controlling parties and other information available to the Company's Board of Directors. The controlling structure and ties between RWE Group member companies along the relevant line as at 31 December 2011 are shown on the third page of the cover of this Annual Report.

147 Severomoravská plynárenská Annual Report Contracts Signed by the Company and Related Parties, Services Rendered, and Payments Received In the last fiscal reporting period, the Company and related parties signed the contracts listed in Annex No. 1. The Company has not incurred any losses by performing these contracts, including contracts signed in preceding accounting periods. For this reason, there was no need to secure compensation for losses or to enter into agreements to this effect. The value of services rendered and payments made between related parties in the last fiscal reporting period is specified in Note 28 of the Notes to the Financial Statements as at 31 December Other Legal Acts Completed in the Interest of Related Parties In the last fiscal reporting period, the Company did not complete any legal acts in the interest of related parties. 5. Measures Adopted in the Interest or at the Request of Related Parties In the last fiscal reporting period, the Company did not adopt or implement any measures in the interest or at the request of related parties. 6. Non-Existence of Damage In the last fiscal reporting period, the Company did not incur any losses under contracts with related parties, other legal acts completed in the interest of related parties, or measures carried out in the interest or at the request of such parties, where their execution or adoption took place during or prior to the last fiscal reporting period. 7. Confidentiality This report does not contain any information constituting the Company's trade secret. 8. Summary This report was approved by the Company's Board of Directors on 8 March 2012, and it has been presented for examination to the Company's Supervisory Board and auditor who reviews the Financial Statements in accordance with the law. Ostrava, 27 March 2012 Jindřich Broukal Chairman of the Board of Directors Lukáš Roubíček Deputy Chairman of the Board of Directors

148 148 Report of the Board of Directors of Severomoravská plynárenská, a.s. on Relations between Related Parties as at 31 December 2011 Annex No. 1 Contracts Signed between the Company and Related Parties in the Last Accounting Period Contracting party Contract type/subject matter Quantity RWE Transgas, a.s. Annexes No. 12 and 13 to Marketing Services Agreement 2 Annexes No. 8 and 9 to Commercial Lease Agreement 2 Annex No. 5 to Consulting TG Governance SLA Service Agreement 1 Annex No. 3 to POIM Consulting Services SLA Agreement 1 Annex No. 5 to Sales Management and Support Services Agreement 1 Termination Agreement 1 Annex No. 3 to Mandate Agreement 1 Human Resources Management Services Agreement and Annex 2 No. 1 to Human Resources Management Services Agreement Facility Management Services Agreement 1 Rolling Stock Management Services Agreement 1 Transport Services Agreement 1 Purchasing and Logistics Services Agreement 1 Annex No. 9 to Master Agreement on Natural Gas Sale and Purchase 1 Annex No. 3 to Natural Gas Purchase and Sale Agreement One-Year 1 with Structuring Service No. 4 Annex No. 3 to Master Agreement on Natural Gas Sale and Purchase 1 Annex No. 2 to Natural Gas Purchase and Sale Agreement 1 Baseload No. 1 Annexes No. 3 and 4 to Natural Gas Purchase and Sale Agreement 2 Daily Flexibility No. 3 Annex No. 2 to Natural Gas Purchase and Sale Agreement 1 Standard No. 5 Annexes No. 9 and 10 to Loan Agreement 2 Natural Gas Purchase and Sale Agreement Baseload No. 7 2 and Annex No. 1 to Natural Gas Purchase and Sale Agreement Natural Gas Purchase and Sale Agreement Standard No. 8 1 Annexes No. 1 and 2 to Natural Gas Purchase and Sale Agreement 2 ne-year with Structuring Service No. 5 Východočeská Annex No. 4 to Financial, Accounting, and Controlling Services 1 plynárenská, a.s. Agreement RWE Energie, a.s., Jihomoravská plynárenská, a.s., Východočeská plynárenská, a.s. Agreement Terminating Cooperation Agreement 1

149 Severomoravská plynárenská Annual Report Contracting party Contract type/subject matter Quantity RWE Zákaznické služby, s.r.o. Annexes No. 7 and 8 to Agreement on Communication Services 2 for Customers in the Household and Small Business Segments Annexes No. 8 and 9 to Debt Collection Services Agreement 2 regarding Customers in the Household and Small Business Segments Annexes No. 7 and 8 to Call Center Services Agreement 2 Annex No. 6 to Billing Services Agreement 1 Annexes No. 8 and 9 to Commercial Lease Agreement 2 Annexes No. 2 and 3 to Acquisition Services Agreement 2 RWE Interní služby, s.r.o. Termination Agreement 3 Annex No. 6 to Information Technology Services Agreement 1 Annex No. 5 to Mobile Telephone and IP Telephone Lease, 1 Logistics, and Billing Services Agreement Information Technology Services Agreement 1 Annexes No. 7, 8, and 9 to Commercial Lease Agreement 3 RWE Distribuční služby, s.r.o. Annexes No. 4 and 5 to Security Management Services Agreement 2 Annexes No. 7, 8, and 9 to Commercial Lease Agreement 3 Purchase Agreement 1 RWE GasNet, s.r.o. Annex No. 5 to Commercial Lease Agreement 1 Termination Agreement 1 RWE Plynoprojekt, s.r.o. Annexes No. 4 and 5 to Commercial Lease Agreement 2 RWE Key Account CZ, s.r.o. Cooperation Agreement on Securing Electricity Supplies 1 GASFINAL, a.s. "in liquidation" Annex No. 4 to Commercial Lease Agreement 1

150

151 Scheme of the relations between and control of companies along the relevant line within the RWE Group as at 31 December 2011 RWE Aktiengesellschaft % RWE Beteiligungsverwaltung Ausland GmbH 98.00% RWE East, s.r.o % EČS Elektrárna Čechy-Střed, a.s % RWE Gas International N.V % RWE Transgas, a.s % NET4GAS, s.r.o % BRAWA, a.s % RWE Gas Storage, s.r.o % RWE Interní služby, s.r.o % RWE Distribuční služby, s.r.o % RWE Zákaznické služby, s.r.o % RWE Plynoprojekt, s.r.o % RWE Key Account CZ, s.r.o % RWE Gas Slovensko, s.r.o % Severomoravská plynárenská, a.s. 2.95% Východočeská plynárenská, a.s. 2.46% Jihomoravská plynárenská, a.s % RWE Energie, a.s % RWE GasNet, s.r.o % Východočeská plynárenská, a.s % VČP Net, s.r.o % Severomoravská plynárenská, a.s % SMP Net, s.r.o % Jihomoravská plynárenská, a.s % JMP Net, s.r.o % RWE Energy Hungária Tanácsadó Kft. 2.00% RWE East, s.r.o.

152 Severomoravská plynárenská, a.s. Plynární 2748/ Ostrava Moravská Ostrava T F I