LE interim Q1 2017 report

INTERIM REPORT I QUARTER 2017 2016 m. sausio 1 d. – 2016 m. gruodžio 31 d.

2017 m. sausio 1 d. – 2017 m. kovo 31 d.

CONSOLIDATED INRERIM REPORT OF THE COMPANY AND THE GROUP 1 January 2017 – 31 March 2017

1 INTERIM REPORT | I QUARTER 2017

Table of Contents Interim Report of the Company and the Group Report of the Board Chairman

5

About the Group and the Company

6

Most Significant Events

11

Analysis of the Group’s Financial and Operating Results

12

Overview of Activities by the Company and the Group

21

Corporate Responsibility

28

Corporate Governance

33

Main Information about the Company and the Group

41

2 INTERIM REPORT | I QUARTER 2017

Key indicators of Lietuvos Energija Group 1 Q 2017

I Q 2016

∆, million EUR

∆, %

Income

million EUR

309.6

335.1

-25.5

-7.6%

Purchase costs of electricity, gas, fuel, and associated services

million EUR

225.8

226.3

-0.5

-0.2%

Operating costs

million EUR

30.4

34.1

-3.7

-10.9%

EBITDA (1)

million EUR

71.3

67.5

3.8

5.7%

EBITDA margin

%

23.0%

20.1%

Net profit

million EUR

22.0

35.3

-13.3

-37.6%

Net profit margin

%

7.1%

10.5%

Net profit (comparative) (1)

million EUR

35.9

29.3

6.3

22.5%

Net profit (comparative) margin

%

11.6%

8.7%

Investments (2)

million EUR

25.7

86.5

-60.8

-70.3%

31/03/2017

31/12/2016

∆, million EUR

∆, %

Total assets

million EUR

2,411.9

2,432.2

-20.3

-0.8%

Equity capital

million EUR

1,338.6

1,319.5

19.0

1.4%

Financial debts

million EUR

488.3

494.4

-6.1

-1.2%

Net debt

million EUR

330.6

315.8

14.8

4.7%

Return on Equity (ROE)

%

10.7%

8.7%

Level of equity capital

%

55.5%

54.3%

Net debt / EBITDA 12 months

sometimes

1.33

1.24

Net debt / Equity ratio

%

24.7%

23.9%

Asset turnover indicator

sometimes

0.446

0.456

General liquidity coefficient

sometimes

1.050

1.046

Circulating capital

million EUR

158.3

145.4

12.9

8.9%

Circulating capital/ Income

%

14.7%

13.2%

Notes: financial data is provided in million EUR, definitions of financial indicators are provided in page 20, (1) In the annual report for 2015, an adjustment of asset revaluation and costs transfer from preceding periods was made that was decided to be eliminated in 2016 after more detailed calculations (2) In the annual report for 2015, an adjustment of LITGAS net profit due to windfall profit was not made; the number after making this adjustment is provided in the table. (3) In 2016, dividends cover actually paid dividends for I Q 2016 – EUR 40.9 million and dividends offered to be paid for II half year of 2016 – EUR 59.8 million.

3 INTERIM REPORT | I QUARTER 2017

Income of Lietuvos Energija Group reduced by 7.6% due to reduced electricity and gas transmission and distribution prices to consumers.

Lietuvos Energija Group’s net comparative profit grew by 22.5% up to EUR 35.9 million. Return on Equity exceeded 10%.

↓8%

400

10.7%

50

350

322

45

335 307

40,5

40

300 250

31,0

29,2

30

219

209

25

200

22,0

19,2

20

150

35,9

35,3

35

15 10

100

5,1

5

50

0 Q I of 2013

0 Q I of 2013

Q I of 2014

Q I of 2015

Q I of 2016

Q I of 2015

Q I of 2016

Q I of 2017

Q I of 2017

EBITDA of Lietuvos Energija Group grew by EUR 3.8 million, mostly due to better EBITDA results of electricity generation and the Group’s reduced operating costs.

100

Comparable net profit

↑6%

Net profit

Operating costs of Lietuvos Energija reduced by EUR 3.7 million due to more efficient activities.

50

90

45

80

70,6

70 60

Q I of 2014

50,5

67,5

71,3

35

56,5

30

50

37,0

40 29,7 29,6

29,3 29,3

28,2

34,1

30,4 26,6 23,5

25

40

20

30

15

20

10

10

5

0 Q I of 2013

Q I of 2014

Q I of 2015

Q I of 2016

Q I of 2017

0 Q I of 2013

Q I of 2014 Equity

4 INTERIM REPORT | I QUARTER 2017

Q I of 2015

Q I of 2016

Q I of 2017

Borrowings, net

Comparative costs - operating costs not associated with new businesses since 2013.

Financial data is provided in million EUR.

↓11%

Report of the Board Chairman Dear customers, partners, employees, shareholders, During IQ 2017, Lietuvos Energija Group of companies assuredly moved towards its strategic goal – to double the Group’s value by 2020.

Purified activity, responsibility, and concentration of the Group’s employees on the quality of provided services, as well as greater excellence of daily activity had a positive effect also on Lietuvos Energija financial results. As compared with the first quarter of the preceding year, the Group’s EBITDA grew by EUR 3.8 million, operating expenses reduced by 11 percent – EUR 3.7 million. Net comparative profit of Lietuvos Energija Group grew by 22.5 percent – up to EUR 35.9 million. The Group’s return on equity remained higher than the target set for companies controlled by the State of Lithuania and was over 10 percent.

This year, by continuing the implementation of energy projects of state significance, looking for development and financial possibilities in the field of renewable energy, we also employ digital technologies for value creation. Seeking to create even more convenient services to customers and enhance operating efficiency, we approved a digital transformation strategy “LE 4.0”. After implementing the measure provided for in this programme, we will become an organisation able to effectively employ progressive technologies in daily work.

4-year successful operation of Lietuvos Energija inspires us and encourages not to stop. By further setting ambitious goals we will seek sustainable results and greater added value for our customers and the shareholder – the State of Lithuania and its citizens.

Dr. Dalius Misiūnas The Board Chairman and CEO of Lietuvos Energija UAB

5 INTERIM REPORT | I QUARTER 2017

6 INTERIM REPORT | I QUARTER 2017

About the Group and the Company The Lietuvos Energija group is one of the largest state-owned groups of energy companies in the Baltic countries. The main activities of the Group include the generation and supply of electricity and heat, trading and distribution of electricity, trading and distribution of natural gas, as well as the servicing and development of the energy sector. The rights and obligations of the shareholder of the Lietuvos Energija group are implemented by the Ministry of Finance of the Republic of Lithuania.

The Lietuvos Energija group with 4800 employees manages and operates the key energy generation capacities of Lithuania that ensure the security of energy supply, a distribution network covering the entire territory of the country, and provides services to almost 1.6 million of consumers across Lithuania, offers electricity supply services to consumers abroad, operates gas distribution pipelines in the length of 8.5 thousand km, supplies gas to 570 thousand consumers, implements development projects of strategic value and pursues the objective set forth in the National Energy Strategy.

0,28 TWh of electricity generated

2,82 TWh of natural gas distributed

2,46 TWh of electricity distributed

More than 1,6 mln. customers served

During the QI of 2017 1,06 TWh of electricity were generated, 4,82 TWh of electricity were transmitted to consumers and 449 billion m3 of natural gas were transported via gas distribution pipelines.

The parent company of the Group – Lietuvos Energija, UAB (hereinafter – Lietuvos Energija or the Company) is responsible for transparent management and coordination of activities of the whole Group, improvement of the efficiency in order to ensure competitive services for consumers, and for socially responsible creation of long-term value for its shareholders. The Company analyses the activities of the Group, represents the Group, implements rights and obligations of the shareholder, establishes operational guidelines and rules, and coordinates the activities in the areas of production, commerce, finance, law, strategy and development, human resources, risk management, audit, technology, communication and others.

7 INTERIM REPORT | I QUARTER 2017

Structure of the Group

At the reporting date, the Lietuvos Energija group consisted of 21 companies: the parent Company and 20 directly and indirectly controlled companies and establishments. The main business activities of the Group are the generation of electricity and heat, transmission trading, distribution and supply, trade in natural gas and its distribution.

Activities of the Group’s companies servicing these main types of business activities

8 INTERIM REPORT | I QUARTER 2017

comprise ITT, real estate, transport, repair and construction of energy facilities, profesional development of employees, public procurement, accounting, administration of employment relationships and other services. The detailed list of the Group companies is presente don page 61 of this document. The organisational chart of the Group effective from 31 December 2016 is presented below.

The Group’s strategy

9 INTERIM REPORT | I QUARTER 2017

The main goal of the strategy of the Lietuvos Energija group is to double the value of the Group and to become the highest-value energy company in the Baltic countries by 2020. This value is perceived as a sustainable balance of three components: return on assets, improvement of competitiveness and responsibility towards employees, society and environment.

The Group's return on assets is increased through the development – by diversifying activities, indulging in new and economically feasible projects and activities, acquiring enterprises, ensuring the efficiency of daily operations and achieving the goals set by the shareholder. The Group will reinforce the country's competitiveness by ensuring a stable supply of electricity and natural gas, offering new products and promoting rational use of electricity and natural gas. The Group assumes responsibility towards society and its employees, proactively implements environmental requirements and ensures the continuity and improvement of skills The main strategic directions of the Group Ensuring quality services to consumers. The care is taken to achieve better servicing of consumers, develop electronic (time-saving) and new services responding to the needs of consumers, increase consumer choices and guarantee the reliability of generation, distribution and supply of electricity and of distribution and supply of natural gas.

Diversifying the operations. The diversification includes implementation of investment projects in the sectors of electricity, heat and natural gas. The projects increase the

10 INTERIM REPORT | I QUARTER 2017

competitiveness of the Group and the national economy at large as well as the country's energy independence, optimisation of the production and trading portfolio, development of new activities by extending the value chain of the Lietuvos Energija group. These goals will be achieved using the available resources and infrastructure, investing in the creation of new infrastructure and effective governance, as well as through acquisitions.

Enhancing the efficiency of operations. The efficiency is pursued in the main activities of the Group, as well as in the provision of support functions, management of assets and other resources across all Group companies. In order to achieve higher efficiency, the management and control system of the Group companies is integrated by setting the common principles of business management, division, coordination and control of responsibilities. Efficiency improvement measures covering all Group companies or identical or very similar activities at the individual company level are also continued.

Active sharing of best practices between companies is promoted and sought.

Building new organisational culture. A modern, effective and dynamic organisation is being created operating on the basis of common values, developing in a consistent and targeted manner the required competences and successors for key employees, and offering internal environment which encourages the involvement of employees.

The most significant events for I Q 2017 2017 January

2017 February

2 January . LITGAS, by cooperating with LDT, rendered the LNG filling services in Klaipėda LNG terminal for the first small scale LNG carrier “Coral Energy” to which about 15 thousand cubic m of LNG were transhipped that are carried to one of the small terminals in the Baltic Sea.

2 February. By further purifying its activities, Lietuvos Energija started the sale of EMC.

8 February. NTV announced a public auction of real estate offering to acquire 29 objects which total value is EUR 17.8 million.

1 March. Seeking to diversity the available debt portfolio, Lietuvos

2017 March

2017 April (after the reporting period)

Energija announced of its plan to distribute in the market up to EUR 200 million worth debentures. The funds received will be invested

by Lietuvos Energija into the green energy projects.

4 April. ESO company is the first in the Baltic States that launched trials of the smart joint – electricity and gas – accounting. The Company installed smart remote-sensing devices that transmit energy consumption data to ESO accounting system for 50 households in Vilnius using electricity and natural gas.

11 INTERIM REPORT | I QUARTER 2017

17 January . VKJ signed an agreement with AF-Consult company that will provide the engineer’s services provided for in FIDIC contract of works

20 January. Ignas Pranskevičius was appointed as a Board member of ESO company and Director of the Service Bureau.

24 February. LITGAS Company optimizes the schedule of prescribed supply of LNG cargo in 2017. This will enable to earn up to EUR 1 million. By this amount, maintenance costs of the natural gas infrastructure will be directly reduced for business and residents.

17 March. KKJ concluded agreements on equipment supply and designing, procurement, and construction management services (EPCM) for a new energy plant.

26 April. Vilnius authorities allowed to build a co-generation plant Vilnius Council approved a cooperation agreement among the municipality, VŠT, and Lietuvos Energija laying down that TECa co -3 holding should take it over by 1 October, and approved bigger height of the energy plant.

12 INTERIM REPORT | I QUARTER 2017

Analysis of the Group’s financial and operating results Key operating indicators

QI 2017

QI 2016

∆, +/-

∆, %

Electricity Generated electricity

TWh

0,28

0,34

-0,06

-18,27%

Generated electricity using renewable energy sources Distributed electricity via medium and low voltage networks

TWh TWh

0,17 2,46

0,15 2,38

0,02 0,08

10,40% 3,37%

Public and guaranteed supply

TWh

0,88

0,85

0,02

2,74%

Distributed to customers of independent suppliers

TWh

1,58

1,52

0,06

3,72%

Sales in retail market

TWh

0,46

0,43

0,02

5,69%

Number of newly connected customers

vnt.

5 443

4 807

636

13,23%

Duration of connection of new customers (average)

k.d.

51,09

74,66

-23,57

-31,57%

min.

16,02

14,89

1,13

7,61%

SAIFI, units (without force majeure)

units

0,2027

0,1961

0,01

3,37%

Technological costs in the distribution network

%

6,13%

7,27%

Distributed volume of gas

TWh

2,82

2,90

-0,08

-2,85%

Volume of gas sold

TWh

4,64

4,21

0,43

10,23%

Volume of gas purchased

TWh

4,30

3,69

0,61

16,44%

Volume of LNG purchased

TWh

1,33

2,42

-1,09

-45,01%

Volume of natural gas purchased

TWh

2,97

1,27

1,70

133,39%

Number of newly connected customers

units

2 309

698

1 611

230,80%

Duration of connection of new customers (average)

Calendar days

179,77

203,65

-23,88

-11,72%

Quality indicators of electricity supply SAIDI, min. (without force majeure)

Gas

Quality indicators of gas supply SAIDI, min. (without force majeure)

min.

0,0868

0,2268

-0,14

-61,74%

SAIFI, units (without force majeure)

units

0,00101

0,00250

-0,0015

-59,59%

Technological costs in the distribution network

%

1,55%

1,62%

The distribution of electricity QI 2017 comparing to QI 2016 increased and totalled 2,46 TWh (+3,4 proc., +0,08 TWh, compared to the previous year). The distribution of electricity to independent consumers also increased and totalled 1,58 TWh (+3,7 proc., +0,06 TWh, compared to the previous year), whereas the volumes of public and guaranteed supply remained at the similar level – 0,88 TWh (+2,7 proc.).

13 INTERIM REPORT | I QUARTER 2017

During QI 2017 electricity generation volumes at Kaunas Algirdas Brazauskas Hydro Power Plant increased by +12%. Such increase was mainly caused by a higher level of water in the Nemunas river. Electricity generation volumes at Kruonis Pumped Storage Power Plant decreased during 2016, i.e. 0,104 TWh of electricity was produced which is less than in 2016 (0,153 TWh). The volume of electricity generated at wind power parks operating in Estonia and Lithuania totalled 0,033 TWh. Electricity generation capacities of the combined-cycle gas turbine of the ElektrÄ—nai complex were started only after the occurrence of a high electricity price due to disconnections of the NordBalt interconnection and other reasons. Electricity generation volumes at the combinedcycle block decreased by 85% from 0,034 TWh to 0,006 TWh, because of the turning on and off of generation capacities during consumption peak time, i.e. when the electricity price was at the highest level and a competitive generation proposal could be offered in the neighbouring countries.

A portion of electricity generated from renewable energy sources increased 10.5%. This resulted from the increased amount of water in the river Nemunas.

During QI 2017 technological costs in the electricity distribution network declined by 6,13% (during QI 2017 7.27%). SAIDI ratio, without the causes of force majeure circumstances, improved and was 16,02 minutes and SAIFI ratio was 0,20 time in 2017 QI. The volume of natural gas distributed by the Group companies decreased by -2.8% or 0.08 TWh compared to 2016 QI mainly as a result of a higher gas consumption by heat and electric power generation plants because of colder weather during the heating season. The volume of gas sold by the Group companies increased by +10.2% (+0.43 TWh more than QI 2016). Mainly it was result of the amount of Lietuvos duju tiekimas exchange agreements.

Gas distribution SAIDI ratio, without the causes of force majeure circumstances, dropped during 2017 QI and was 0.08 minute (0.23 minutes in 2016 QI) and SAIFI ratio was approximately ~0,001 unit (approx 0,0025 unit in 2016 QI).

During QI 2017 new electricity customers number grew +13%. New gas customers numer was doubled compared to the same period last year. The average time periods for connection of customers in 2017 QI decreased compared to 2016 QI. The time for connecting electricity and gas consumers shortened by 23 and 24 days, respectively.

14 INTERIM REPORT | I QUARTER 2017

Electricity generation, distribution and sale, TWh 1,35 1,30 1,39 1,52 1,58

Distributed to customers of indemendent suppliers 0,86 0,91 0,84 0,85 0,88

Public and guaranteed supply

2,21 2,21 2,23 2,38 2,46

Distributed electricity via medium and low networks 0,30 0,25 0,25 0,34 0,28

Generated electricity

0 QI 2013

1 QI 2014

1 QI 2015

2 QI 2016

2 QI 2017

3

3

Volume of gas sold and distributed, TWh 4,20 3,68 3,91

Gas sold

4,21 4,64

3,92

3,17

Gas distributed

2,65 2,90 2,82

0

1 QI 2013

15 INTERIM REPORT | I QUARTER 2017

2 QI 2014

QI 2015

3 QI 2016

4 QI 2017

5

Key Financial Indicators

The Group's revenue structure for Q1 of 2017 Electricity transmission revenue

Financial indicators are indicated in million EUR, unless indicated otherwise.

Income Income of Lietuvos Energija Group during I Quarter 2017, as compared with the same period last year, reduced by 7.6 percent, or EUR 25.5 million and totalled EUR 309.6 million. The main reasons of change in the income:

16 INTERIM REPORT | I QUARTER 2017

PSO service revenue and revenue from the natural gas security component Revenue from provision of balancing, regulating and power reserve services Revenue from other activities Revenue from connection of new customers Heat energy revenue

0,1 309,6 -2,0

PSO service revenue and revenue from the natural…

-1,0

-0,1

Heat energy revenue

-4,8

Revenue from other activities

-6,8

Revenue from public and guaranteed supply

Electricity transmission revenue

-10,5

Revenue from gas distribution and sale

-11,0

Revenue for the QI of 2017

335,1

10,6

Revenue from sale of produced electricity,…

general income structure.

34,6 11%

Dynamics of the Group revenue by sector 360 340 320 300 280 260 240 220 200

Revenue from connection of new customers

3.

Revenue from sale of produced electricity, electricity trade and supply Revenue from public and guaranteed supply Revenue from gas distribution and sale

94,0 30%

22,3 7%

Revenue from provision of balancing, regulating and…

2.

The main reason for the reduction in income from the sale of generated electricity – significantly reduced electricity generation in Elektrėnai complex where only approximately 6 GWh were generated during the first three months. The Elektrėnai units were made to stand idle by slightly smaller electricity prices established on the exchange, as compared to the beginning of 2016, due to which the gas combined cycle unit could not operate in a competitive way, therefore, was turned on only once. Last year during the same period, the unit was turned on 9 times and generated nearly six times more electricity (34 GWh).

Income from electricity transmission decreased by EUR 10.5 million, as compared with the first quarter of 2016. An essential reason for this – reduced prices of electricity transmission to consumers.

Gas distribution and sale income decreased by EUR 6.8 million and one of the reasons that determined this – smaller gas prices for residents as compared to 2017 and the first quarters of 2016. Income from the electricity transmission activity (EUR 9.5 million during IQ 2017) account for the biggest share in the Group’s total income – 32 percent (I Quarter 2016 – 33 percent). Income from distribution and sale of gas (EUR 94 million during I Quarter 2017) account for 31 percent (I Quarter 2016 – 30 percent) in the

309,6 mln. EUR

Revenue for the Q1 2017

1.

27,8 9%

99,5 32%

Operating and Acquisition Costs During I Quarter 2017, the Group’s operating costs amounted to EUR 30.4 million, and, as compared to I Quarter 2016, reduced by -10.9 percent (-EUR 3.7 million). The decline in costs was determined by these factors:   

Smaller by 2 EUR million remuneration costs; Smaller by EUR 0.7 million repair and maintenance costs of the electricity grid and electricity generation facilities and other repairs; Also smaller by EUR 1 million other operating costs.

For new projects associated with businesses since 2015, during I Quarter 2017 operating costs amounted to EUR 0.5 million – more by EUR 0.2 million as compared to I Quarter 2016 due to accelerating activity of new companies. In the structure of operating costs associated with new businesses, the biggest share – 51 percent consisted of operating costs associated with wind power farms acquired during I Quarter 2016 in Lithuania and Estonia.

During the reporting period, the Group’s acquisition costs of electricity, gas, fuel, and associated services reduced insignificantly as compared to I Quarter 2016, by -0.2 percent, or EUR 0.5 million.

The purchase of electricity or associated services amounted to EUR 129.1 million, or less by -1.4 percent, as compared with a respective period in 2016.

Purchases of gas and associated services increased by + EUR 5 million or +6 percent, as compared to I Quarter 2016. This was determined by increased gas sale volumes what increased accordingly the acquisition costs of gas for sale.

17 INTERIM REPORT | I QUARTER 2017

Operating expenses

40 30 20

34,1 0,3

-10,9%

33,8

-11,7%

30,4 0,5 29,8

10 0 QI 2016 QI 2017 Operating expenses related to new businesses from 2015 Operating expenses not related to new businesses from 2015 Purchase expenses of electricity, gas, fuel and other services 250

226,4

-0,3%

225,7

84,3

+6%

89,3

200

150

7,29 100

50

130,9

1,4 %

129,1

0

QI 2016

QI2017

Purchases of electricity or related services Purchases of gas, biofuel andfuel oil for production Purchases of electricity or related services

18 INTERIM REPORT | I QUARTER 2017

EBITDA and Net Profit The Group’s EBITDA during IQ 2017 amounted to EUR 71.3 million – this is more by +5.7 percent or + EUR 3.8 million, as compared to the reporting period of 2016, when EBITDA was equal to EUR 67.5 million.

The biggest effect on the increase in the Group’s EBITDA was made by EBITDA increase by +EUR 4.9 million in electricity generation activity as compared with the same period last year. One of the most significant reasons that determined the increase in EBITDA was the fact that the beginning of 2017 distinguished for an early flood, what, as compared to 2016, increased generation by Kaunas A. Brazauskas Hydroelectric Power Plant. During January-March 2017, 132 GWh electricity was generated in this plant, i.e. more by + 12 percent as compared to January-March 2016 (118 GWh).

Besides, the increase in the Group’s EBITDA was determined by a positive (+ EUR 4.2 million) change in the electricity and gas distribution and supply activity. This change was affected by the recalculation of regulated income according to the procedure set by the National Commission for Energy Prices and Control.

During IQ 2017, the electricity sales result was less by EUR 2.9 million as compared to IQ 2016. This was affected by the NorBalt electricity link that was launched into operation in 2016 – in the course of the year, prices reduced in the Lithuanian bidding area of Nord Pool Spot Exchange. Accordingly, expectations of commercial energy buyers for the smaller price increased for the year 2017. As a result of fierce competition among suppliers on the market during IQ 2017, profitability of the electricity supply service reduced.

Dynamics EBITDA sources, % of EBITDA by sector 4,2 0,1 0,6 -2,9 -3,1 67,5 4,9

Group's 100 65%

80 60

72,0 mln.

40 EUR 9% 20 3%

Distribution Trade in gas

0

23% EBITDA QI 2016

Distribution

19 INTERIM REPORT | I QUARTER 2017

Other activities

Gas trading

71,3

Operating profit Depreciation and amortisation costs Value impairment cost ATL revaluation costs Change in the value of open derivative financial instruments Write-offs of IMT, stock and amounts receivable Adjustments made by the management Discount of Gazprom gas price (1) Recalculation of LITGAS regulated income (2) Recalculation of ESO regulated income (3) Recalculation of LDT regulated income (4) EBITDA

IQ 2017 29.0 20.3 -0.5 3.8

IQ 2016 48.8 18.9 0.3 5.9

∆, +/-19.8 1.4 -0.8 -2.1

1.5

-0.1

1.6

0.9

0.8

0.1

7.5 7.7 1.8 -0.7 71.3

3.6 -3.7 -6.1 -0.9 67.5

3.9 11.4 7.9 0.2 3.8

(1) Costs that are associated in the management’s opinion with preceding periods are eliminated.

(2) The deviation between the actual and regulated income of the prescribed supplier by which the company’s future results will be adjusted is eliminated.

(3) The effect of recalculation of the return on investment during the reporting period by the National Commissions for Energy Control and Prices related with the profit earned during previous periods exceeding the return on investment allowed by the Commission and the profit earned during the reporting period exceeding the return on investment allowed by the Commission is eliminated.

(4) The deviation between the actual and regulated income from gas supply by which the company’s future financial results will be adjusted is eliminated.

During I Quarter 2017, Lietuvos Energija Group earned a net profit of EUR 22 million, i.e. less by EUR 13.3 million, as compared to I Quarter 2016 (EUR 35.3 million). Group’s reduced income had the biggest impact on the net profit results of I Quarter 2017, as compared to 2016.

During the first quarters of 2017 and 2016, net profit results were significantly affected by the deviation between the actual and regulated income by the Group’s Litgas prescribed supplier, as well as the recalculation of regulated income of the Group’s company Elektros Skirstymo Operatorius according to the procedure set out by the National Commission for Energy Control and Prices.

After eliminating the mentioned effect, the net comparative profit of I Quarter 2017 (EUR 35.9 million) was +22.5 percent, or +EUR 6.6 million bigger than during I Quarter 2016 (EUR 29.3 million).

The equity of Lietuvos Energija Group during I Quarter 2017 increased by 1.4 percent or

by EUR 19 million and amounted to EUR 1,338.6 million as of 31 March 2017. On 31 December 2016, the Group’s equity was equal to EUR 1,319.5 million. The increase in the Group’s equity was determined by profitable activity of the company during the reporting period. During the reporting period, the Group did not pay dividends to the shareholder.

The Group’s equity indicator differed insignificantly during the reporting period and was 55.5 percent as of 31 March 2017 (it was 54.3 percent as of 31 December 2016).

20 INTERIM REPORT | I QUARTER 2017

Net and net comparative profit of the Group 40 35 30 25 20 15 10 5 0

35,9

35,3

29,2 22,0

Net profit

Net comparable profit 2017

Net profit adjustments Net profit reporting result Discount on Gazprom gas price Recalculation of LITGAS regulated income Recalculation of ESO regulated income Recalculation of LDT regulated income Comparative net profit result

2016

IQ 2017 22.0 6.4 6.6 1.5 -0.6 35.9

I Q 2016 35.3 3.1 -3.1 -5.2 -0.8 29.3

∆, +/-13.3 3.3 9.7 6.7 0.2 6.6

Financial Debts As of 31 March 2017, the Group’s net debt amounted to EUR 330.6 million and, as compared with the previous net debt at the end of 2016, it increased by +5 percent or + EUR 14.8 million. The increase in these debts was determined by the reduction in the Group’s monetary funds.

The level of the Group’s financial debts during I Quarter 2017 reduced by 1.2 percent or EUR 6.1 million, and amounted to EUR 488.3 million as of 31 March 2017 (at the end of 2016 – EUR 494.4 million). Monetary funds of the Group’s companies and short-term investments as of 31 March 2017 amounted to EUR 157.8 million, i.e. EUR 20.8 million or less by 11.7 percent as compared to the end of 2016 (EUR 178.6 million). The reduction in monetary funds was determined by advance payments to gas suppliers and investments carried out by the Group.

Group's borrowings, net 350,0 340,0 330,0 320,0 310,0 300,0 290,0 280,0 270,0 260,0 250,0

A low level of the Group’s financial debt and high level of equity, profitability of typical activity reflect a firm and stable financial position of the Group, the Group’s financial possibilities to carry out investments necessary to ensure the provision of existing services, implement and finance the acquisition of new wind power farms, as well as their development, construction of co-generation plants and other projects, also ensure the Group’s sustainable development in the future.

330,6 315,8

-20,8

Net debt at 37 March Cash and short-term 2017 investments

The Group’s net debts and the Group’s EBITDA ratio increased during the last 12 months due to the Group’s grown-up net debt (by 1.24 times at the end of 2016 up to 1.33 time as of 31 March 2017).

The Group’s debt-to-equity ratio increased from 23.9 percent at the end of 2016 to 24.7 percent on 31 March 2017. The Group’s net debt level remains sufficiently low with respect to both, profit earned and capital structure.

-6,1

Borrowings

Net debt at 31 March 2017

The Group's net debt ratios 1,38

30,0% 1,33

1,33

23,9%

24,7%

25,0%

1,28 1,24 1,23

20,0%

1,18 15,0% 1,13 1,08

10,0% 2016 12 31

Net debt / 12-month EBITDA

21 INTERIM REPORT | I QUARTER 2017

2017 03 31

Net debt/ Equity (II axis)

Definitions Working capital

Current assets – current liabilities (excluding current portion of financial obligations)

EA

Emission allowances

Current liquidity

Current assets at the end of the period / current liabilities at the end of the period

EBITDA

Profit (loss) before tax + finance costs - finance income - dividends received + depreciation and amortisation expenses + impairment + write-offs of property, plant and equipment, inventories and amounts receivable +/- change in market value of open financial derivative instruments (including EA) + effect of the discount for the gas price to consumers - excess profit from LNG activity +loss from the construction of the biofuel boiler house.

EBITDA / Revenue

EBITDA margin Net debt Net profit margin

Borrowings - cash and cash equivalents - short-term investments and term deposits - a portion of non-current other financial assets representing investments in debt securities Net profit / Revenue

Net profit (comparable) margin

Net profit (comparable) / Revenue

Customers of independent suppliers

Electricity distribution to corporate customers

Return on equity (ROE) Equity ratio

Net comparable profit (loss) of a respective reporting period restated at annual value / average amount of equity during the reporting period Equity at the end of the period / total assets at the end of the period

Assets turnover ratio

Revenue / total assets at the end of the period

Return on capital employed (ROCE) SAIDI

Operating profit / (average amount of equity during the reporting period + average amount of borrowings during the reporting period) Average duration of unplanned interruptions in electricity or gas transmission

SAIFI

Average number of unplanned long interruptions per customer

Operating expenses

Operating expenses, excluding purchase expenses of electricity and related services, gas and fuel oil for production, depreciation and amortisation, impairment expenses (non-current assets, construction in progress, amounts receivable, etc.), expenses of revaluation of property, plant and equipment, write-offs of non-current assets, inventories and amounts receivable and EA revaluation expenses.

Electricity distribution to household customers

Public and guaranteed supply

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23 INTERIM REPORT | I QUARTER 2017

Overview of activities by the Company and the Group This overview of activities of Lietuvos Energija Group covers the period from 1 January 2017 to the date of preparing the report.

New services to Customers The purified activity of Lietuvos Energija Group allows the companies to place even greater focus on the creation of new services, enhancement of quality and accessibility of provided services, improvement of customer services, and upgrading of service channels.

Development of Smart Accounting The electricity and gas distribution company ESO launched a new service of automating the accounting of electricity. Customers who have ordered the service will be able to forget the trouble of declaring meter readings and will have more possibilities to use electricity in a rational way. The first 187 smart electricity meters were installed by cooperating with the real estate (RE) developers Eika and Merko. The new ESO service is also of interest to other RE developers. Besides, it is relevant for home owners’ associations, housing administrators, communication operators and other businesses that have a number of metering points and want to automate data collection. It has been planned that since February the service will be available for acquisition also by individual residents and companies. Residents who have smart electricity meters will receive electricity bills by email or self-service website at www.manogile.lt. It is expected that from May 2017, ESO customers who have smart electricity meters will be able to conveniently observe their hourly electricity consumption on the self-service portal. This will help to better understand their habits of electricity consumption and establish the premises for a more rational consumption of electricity.

ESCO Model Increases Energy Efficiency of the Business and Public Sector ESCO (Energy Service Company) is an energy saving services company that invests into energy efficiency improvement and during the agreement term it covers the investments sustained from the future energy savings. It has been calculated by applying this model that upon replacing the old-type light fixtures in Vilnius schools with modern LED light fixtures, it would be possible to save more than EUR 2 million a year without any initial investments. This was proved by an experiment carried out in Mickevičius Gymnasium

24 INTERIM REPORT | I QUARTER 2017

by Energijos Sprendimų Centras company belonging to the Group of companies during which time the lighting of one classroom was upgraded by installing LED light fixtures.

During the first month, 4 times less energy was consumed in this classroom, as compared to the old-type lighting system installed in the very same classroom.

Upon measuring electricity consumption data in two classrooms where an equal number of classes are held every day, huge difference was found: the classroom with the oldtype lighting system consumed 121.31 kWh of electricity, meanwhile the upgraded classroom consumed only 27.29 kWh of electricity.

Energijos Sprendimų Centras Company also calculates that upon upgrading the old-type light fixture on the basis of ESCO model used for street lighting, by replacing them with modern LED light fixtures, Lithuanian major cities would save approximately 60 percent of electricity. The benefit of the ESCO model was also found obvious by business companies operating in Lithuania that modernised the lighting of their buildings and territories.

Since the current year, EnePRO company of the Group providing services of energy contract works also launched new service – hook-up to the gas grids. The trends of using natural gas during the recent period show that the number of persons willing to be hooked up to the gas pipeline has markedly increased each year; therefore, EnePRO seeks to offer competitive services to the market. The company’s services are on demand – during the first quarter, EnePRO concluded three contracts for designing services and construction works of the new distribution medium pressure gas pipeline with leads – in the total value whereof is over EUR 100 thousand.

More Convenient Service and Faster Hook-up Last year electricity and gas were installed for residents and businesses in the country faster. Last year the average duration of getting electricity reduced by 20 calendar days – from 78 to 58 days, and of gas – by nearly 54 calendar days, from 216 to 162 days, as shown by data of the electricity and gas distribution company ESO. The duration of hook-up of new customers to the electricity and gas distribution grids retraced also due to digitalisation and automation of processes. This had the biggest effect for getting gas – the digitalisation of documentation and processes enabled to shorten the duration of hook-up to the gas grid by approximately 30 calendar days. Moreover, the number of

documentation per customer reduced by approximately 60 pages. Customers were also provided with the possibility to perform the whole process without paper documents – through the self-service website www.manogile.lt.

ESO, serving 1.6 million customers who pay for electricity on the self-service platform www.manogile.lt, installed novelty: since now it is possible to find out simply and clearly what the electricity price consists of. Upon declaring readings on the self-service website and willing to pay for consumed electricity, private customers have a possibility to see constituents of the final amount payable. Such itemisation of prices was installed with a view of increasing the transparency of payments and providing more information on the pricing of ESO services.

Greater convenience will also be felt by residents who have decided to get gas at home – their paperwork load will reduce. Since now they will not have to come to a customer service centre to sign a deed of the boundaries of liability. This is set out in the description renewed by the order of the Minister of Energy providing for the procedure of hoop-up of private customers to the gas distribution grid of ESO company. Until now, customers, in order to sign a document establishing the boundaries of their liability limits, had to come to an ESO customer service centre. Now they will not have to spend their time, as this deed of boundaries will be sent by mail and will enter into force automatically. A person will have to come to a customer service centre only in the case if boundaries of property do not coincide with the metering device, however, such cases are very rare.

From the beginning of 2017, ESO will submit agreements on electricity purchase/sale (transmission) services to the customers who acquired premises through purchase-sale, exchange of immovable property, or under other grounds. Since now, after the owners of premises change, the company’s specialists will send agreements by registered mail and post them in the customer’s account on the self-service portal www.manogile.lt.

Such novelty will enable private ESO customers to save time, as they will not have to do the paperwork and will be able to focus all their attention on house-warming. It has been planned that every month ESO will prepare about 6 thousand agreements. ESO will prepare such agreements within a week from the moment the data on the change of premises owner is updated in the Centre of Registers. If the customer’s email address is known to ESO, the customer will get an email with a special link by clicking which he will log to the self-service website www.manogile.lt and will be able to sign an agreement.

ESO also pays very great attention to the hook-up of consumers generating electricity to the distribution grid. At the end of March 2017, ESO publicly presented the prepared eight-step programme of promotion measures aimed to improve legal regulation of energy generating consumers for the first time. ESO suggests ceasing to prepare

25 INTERIM REPORT | I Q 2017

preliminary conditions, permits for development and generation, and in some cases refusing of the design documentation, reducing the price for hook-up to the grid of generating consumers, allowing generators to become undertakings, reviewing requirements for power limitation, changing financial motivation for the installation of solar power plants, abandoning the control accounting, as well as foreseeing investments necessary for sustainable integration of generating consumers in the ESO investment plan. Consumers who have installed solar power plants and generate electricity for their own need have already been actively participating in the exchange process with ESO. Currently, this way electricity is generated in Lithuania by nearly 300 consumers, and another 700 have been issued preliminary technical conditions.

Verslo Aptarnavimo Centras (VAC), Lietuvos Energija Group of companies that manages Gilė service centre of electricity and gas consuming customers expand the functionalities of the self-service website www.manogile.lt and of the smart application Gilė. Having regard to customers’ new habits, the company has rearranged its physical network for customer service. An increasing number of customers solve relevant issues not by visiting a customer service centre, but on the website www.manogile.lt, Gilė mobile application or short customer service telephone 1802. These are more convenient for customers and effective service channels. An analysis performed by VAC showed that only in exclusive cases (up to 1%) consumers were not able to resolve their issues without visiting customer service offices. Currently, it is possible to use the self-service portal www.manogile.lt in 46 public libraries. If necessary, library employees will advise how to use the self-service website. It is also possible to declare power readings in the closest division of the Lithuanian post office – currently, in 45 divisions of the Lithuanian post office.

Electronic payments for services are chosen by an increasing number of residents – currently, nearly half of Gilė customers pay for services online, and a part of them have chosen Mano Gilė. Verslo Aptarnavimo Centras has also shifted other services to the electronic space – customers may conveniently declare meter readings, see payment history and precise tariffs of electricity and natural gas, submit requests or send documents – this is like a customer service centre in the computer.

Assurance of Quality Services When making investment into electricity and natural gas grids, services are improved By further improving the services quality, during 2017 ESO plans to install 94 smart grid installations and replace about 2.7 thousand km of overhead power lines with the underground ones. Modern technologies will enable to monitor parameters or modes

of specific grid elements in real time, respond to non-typical situations more expeditiously, remove electrical failures faster. This way, the service quality will improve for approximately 100 thousand of the company’s customers. The intended investments will also help to improve the voltage quality. The main reason of voltage fluctuations noticeable in the electricity distribution network – too long lines connecting the customer’s objects and transformers, too small diameter wires in these lines. Such a situation has arised because the current grid infrastructure designed as far back as in 1960-1980 no longer meets the customers’ modern needs.

On 19 January, ESO and the public institution Lithuanian Business Support Agency signed an agreement for European Union financial assistance for upgrading the gas distribution grid. Assistance is designated for the installation of a smart remote control and diagnostics system in gas pressure regulating installations. A modern natural gas distribution system will enable to increase safety and reliability of the natural gas distribution system. EU assistance of about EUR 663.7 thousand is designated for the installation of modern equipment in 494 gas pressure regulating installations controlled

by ESO in Kaunas, Klaipėda, Panevėžys, and Šiauliai regions. The total value of the project planned to be implemented within two years is EUR 1.327 million. Implemented modern solutions will not only bring an economic effect and enable to avoid undesired gas losses when performing the distribution functions. A smart gas distribution grid will be able to monitor by itself a flow of natural gas running in it and adapt to the changing conditions – increasing or declining pressure. The operations that could have been performed manually by ESO specialists by arriving physically to the object may now be performed by the dispatcher’s centre staff through connection by a special system. It will be possible to correct operation of the grid automatically by aligning gas flows or, if necessary, to suspend gas supply. A possibility to monitor, measure, and control the gas grid in a remote way is also important in the environmental respect, as in the event of possible gas leaks, also repair and reconstruction works, less carbon dioxide causing a greenhouse effect will be released into the environment.

For the first time, at the end of March 2017, in Druskininkai, ESO successfully performed a pilot filling of the distribution system with natural gas transported with a special gas carrier. By cooperating with the natural gas transmission system operator Amber Grid, the pilot filling was performed seeking to ensure reliable supply of natural gas if gas supply safety is endangered. Seeking to ensure reliable supply of natural gas in Druskininkai, ESO intends to install a degasification station of liquefied natural gas. The first degasification station of LNG in Lithuania will enable to increase the reliability and safety of gas supply significantly, as the grid existing in Druskininkai has not been connected to the Lithuanian transmission or distribution system of natural gas.

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Diversification of Activities The diversification of activities of the Group’s companies is one of the main conditions seeking to increase the Group’s value. By 2020, the Group plans to invest nearly EUR 1 billion into different fields: into the heat sector by building new co-generation plants, supply, and sale of natural gas using the potential of the LNG terminal, also into renewal energy sources.

Energy Innovations Will Be Attracted by the Venture Capital Fund Lietuvos Energija initiates the setting up of a venture capital fund. The new fund will finance starters in the energy field. It is intended to invest into the selected best projects up to EUR 1 million every year. This is the first energy innovation fund in the Baltic States and it will contribute to the growth of investments into starting projects. For the Lithuanian Energy Innovation Fund I being set up, last year selection was announced aimed to choose a financial partner – founder and governor of the fund and an associated accelerator and/or incubator who would also become an operator of the acceleration and/or incubation programme. The financial partner will ensure the fund’s activity by acting together with Lietuvos Energija representatives. Currently, the selection procedures for the financial partner of the Lithuanian Energy Innovation Fund I are carried out – the winner of the selection will be announced upon signing all constituent documents necessary for the Lithuanian Energy Innovation Fund I. Green Debentures – for Financing the Green Energy Projects Seeking to diversify its debt portfolio, Lietuvos Energija plans to distribute in the market debentures with a value up to EUR 200 million. Investors’ funds received in exchange are planned to be used only for the green energy projects – renewal energy, energy efficiency solutions, smart grid development, and waste management.

Similar practices of distributing the debentures are carried out by such European energy enterprises as E.ON, Fortum, DONG Energy, Eesti Energia, Latvenergo, etc. As compared with them, currently Lietuvos Energija has not only one type financing, but also one of the smallest debt portfolios in general. It is planned that the first issue of the debenture programme will be distributed in 2017 under appropriate conditions in the market.

Projects on Co-generation Plants are Carried out in Vilnius and Kaunas Lietuvos Energija Group is implementing modern projects of high-efficiency cogeneration plants using waste and biofuel in Vilnius and Kaunas. By generating heat and electricity, the plants will insure smaller prices of heat generation for urban consumers, also additional generation of local electricity at a competitive price, and solve waste

management problems. According to resolution of the Government of the RL of 28 May 2014, the projects were recognized as economic projects of state significance. Upon implementing important economic projects of state significance, the price of heat generated in the new plants would be less by approximately 20 percent, as compared with the existing alternatives.

Besides, in January, also the second small-scale LNG cargo was transshipped. It has been calculated that these two transactions brought approximately EUR 220 thousand income for the LNG terminal and the port, as well as increased income of Lietuvos Energija Group. At the same time this activity also reduces technological costs of the terminal included in the safety constituent of the LNG terminal.

In Vilnius, Lietuvos Energija is implementing the project independently, and a possibility to attract partners in other project implementation stages has been foreseen. The environmental protection agency has recognized the planned activities of Vilnius cogeneration plant as permissible. Last year, Vilnius cogeneration plant already signed with the contractors who had won the tendering procedures agreements for the construction of co-generation plant that will burn biofuel and waste. In January 2017, the company signed an agreement with AF-Consult company that will provide the services of FIDIC (International Consulting Engineers Federation) engineer contemplated in the works contract. Apart from the FIDIC engineer’s functions, a selected independent engineering company will have to perform the functions of a construction technical supervisor of construction works regulated in legal acts of Lithuania, also represent the builder in ensuring the selection of the strictest environmental and most advanced technological solutions.

This is an actual beginning of new activities and one of the strategic directions in the gas trade business For Lietuvos Energija Group.

In March 2017, the common company of the state-controlled company Lietuvos Energija and Fortum - Kauno Kogeneracinė Jėgainė – concluded contracts for the provision of supply and design services of the most important equipment for the new plant, procurement and construction management (EPCM). In the new plant meeting modern environmental and technological requirements, non-hazardous household and industrial waste remaining after sorting and not suitable for recycling, as well as wastewater treatment sludge will be used for generating energy and heat. The plant will enable to resolve not only waste problems in the region, but cut down heating costs for Kaunas residents. Another project stage is to finish the designing works. It is planned to start the construction of main structures of the plant in the autumn of 2017.

The First LNG Transshipment Transactions Lithuania and Lietuvos Energija Group started the year 2017 with historical news – at the beginning of January the first small–scale gas carrier of liquefied natural gas (LNG) Coral Energy sailed into Klaipėda for which LNG transshipment services were rendered by LITGAS in cooperation with Lietuvos Dujų tiekimas (LDT).

This was the first small-scale LNG carrier filled up in Klaipėda according to the cooperation on small-scope LNG supply agreements signed in September 2016 by LITGAS, Lietuvos Dujų Tiekimas, and Statoil. 15 cubic meters of LNG were transshipped into Coral Energy.

27 INTERIM REPORT | I Q 2017

Prescribed Supply Costs are Optimized Using the temporary imbalance between the LNG supply and demand, and after the LNG prices far exceeded in the market of spot transactions the price of gas purchased by LITGAS, LITGAS optimized the schedule of prescribed cargo supply by directing half of the planned cargo to the markets paying a bigger price.

Instead of that, this quantity will be acquired during the summer time, when LNG prices go down.

It has been forecasted that due to the price difference this optimization will enable to earn up to EUR 1 million. By this amount the infrastructure maintenance costs for business and residents will be directly reduced.

Annual minimum LNG quantity necessary for the terminal’s activity will not change as a result of that and will remain about 3.8 TWh. Project of a Wind Power Fleet in Kruonis Pumped Storage Plant At the beginning of 2015, complex measurements of wind speed, direction, and other meteorological conditions were finished enabling to assess the primary potential of the land plot for installing a wind power fleet. Based on positive results of wind measurements, the Company initiated the preparatory works of installing a wind power plant in the territory of Kruonis pumped storage plant. By 2017, a study on impact of the Kruonis wind power fleet on NATURA 2000 territories, a feasibility study on evaluation of the wind resource and electricity generation volumes, and an environmental impact assessment programme were prepared, also a birds and bats monitoring programme in the territory was completed. The most important works in January-March 2017 were associated with the approval procedures of the environmental impact report. The environmental protection agency approved the environmental impact report at the end of 2017 and this way turned on green light for the wind power fleet in Kruonis vicinities.

In the exclusive territory of energy generation infrastructure where the Kruonis pumped storage plant has already operated and a solar panel park has been installed for own needs, it is planned to install 9 or 10 wind plants. Their total capacity could amount to

35 MW. The environmental impact assessment of the planned activity was the last procedure that could be currently initiated by the Company willing to install a wind power fleet in the territory of Kruonis pumped storage plant. The project implementation will be continued after the responsible state institutions will adopt decisions on further development of wind energy in Lithuania.

On 14 August 2015, the Group of Lietuvos Energija companies declared plans to shift to the uniform integrated business management system, thus seeking to enhance energy efficiency, flexibility and establish better conditions for development. It has been estimated that this exclusive scope project will last up to three years. The installer will also have to provide servicing for three more years after the system installation.

Operation Efficiency Enhancement

Companies controlled by Lietuvos Energija currently use more than 70 separate information systems with the average age of more than 15 years. A third of these systems have not been maintained and serviced for some time – this restricts their activity, does not ensure sufficient safety and efficiency. The new information system will cover the fields of accounting and finance, procurements, staff and project management, booking and customer services, as well as management of technological assets. Customers of Lietuvos Energija Group of companies will also feel the benefit of the new system – they will be provided with a possibility to create more flexible services plans, serve customers in centres and on the internet. The new system will enable to furnish and analyse information in real time; reliability and speed, configuration possibilities will increase; the volume of manual labour will reduce; possible discrepancies between different systems will be eliminated.

More effective activity of the Group ensures sustainable balance between greater profit and return to shareholders, also smaller rates to consumers. Lietuvos Energija strategy for the years 2014-2020 lays down that it seeks to enhance its operating efficiency by applying the most progressive management practices in the fields of corporate governance, activity planning and monitoring, finance, purchases, risk management, and internal audit.

A uniform management and control system has been currently implemented and developed in the Group, also a management and control system policy, risk management policy and methodology, integrated planning and monitoring system policy, innovation management policy, project management policy and procedure, processes management standard have been approved, portfolio formation and monitoring procedure is being prepared, etc. The uniform management and control system helps to achieve efficiency, synergy in activities of the Group, as well as implementation of the set goals.

Processes are being centralised and made more efficient, and activities are purified further on Having previously centralized and concentrated the real estate management with NT Valdos, the Group, by enhancing operational efficiency and concentrating on the core activity commences, starts the sale of real estate having no strategic significance for the energy sector. During five auctions arranged by NT Valdos last year and in 2017, 34 real estate objects were sold for over EUR 7.0 million, including the VAT. This real estate not used in the core activity by the Lietuvos Energija is sold in order to increase operational efficiency of the Group’s energy companies. In May, the sixth auction is announced.

Lietuvos Energija has further purified its activities – in February 2017, a sale process of the public institution Energetikų Mokymo Centras (EMC), one of the largest centre in Lithuania, engaged in the certification of power engineers, qualification improvement and consulting activities was initiated.

A Uniform Integrated Business Management System is Planned

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Old Units are No Longer Operated in Elektrėnai At the end of March 2017, the Company finished the project of disassembly of the 1st and 2nd units of the reserve energy plant of Elektrėnai complex. Upon completing the project of heat generation installations in Elektrėnai in 2015, operation of the 1st and 2nd units of the electrical plant used until that time for generating heat to residents of Elektrėnai city and industry during the cold season became no longer expedient.

Therefore, having assessed that the price of electricity generated by these units is not competitive in the market, whereas their abandonment will help to reduce the need for funds for the services implementing public interests (SIPI) and together the final electricity tariff for consumers, it was decided to disassemble these old and inefficient 150 MW power units of the reserve electrical plant built in 1962–1965. Thermal insulation of the units, masonry of furnaces, installations and devices were disassembled and utilised by selling a part of them as metal scrap, and the remaining equipment still suitable for use – by selling on the market.

In January 2017, a disassembly project of the 5th and 5th units of the reserve power plant of Elektrėnai complex was started. Operation of these units was stopped at the beginning of 2016, upon assessing that the price of electricity generated by these units is not competitive in the market, whereas their abandonment will help to reduce the final electricity tariff for consumers. Units, each with the power of 300 MW, are planned to be disassembled until January 2021. It is sought to ensure that the major part of associated

works are performed by the Company’s employees themselves, whereas upon the sale of disassembled materials and installations, income received would cover the project costs.

Services to Customers are Becoming Cheaper Further On 23 December 2016, the National Commission for Energy Control and Prices (NCECP) announced updated public electricity prices for the year 2017 of the ESO electricity and gas distribution company ESO. From 1 January 2017, electricity prices for private customers reduced by 4.9 percent on average. It has been estimated that electricity expenses per household will reduce by nearly EUR 10 a year.

Since 2017, electricity prices have decreased due to smaller price of distribution services, reduced electricity acquisition costs owing to international links with Sweden and Poland. This was also positively affected by the change in price for services meeting public interests (SIPI). Electricity prices for residents have also gone down for the fourth year in a row. From 2013, an average electricity price for residences has reduced by 22 percent.

For the first half-year of 2017, the National Commission for Energy Control and Prices has approved a proposal of Lietuvos Dujų Tiekimas to maintain the same record-low prices as during the 2nd half of 2016. It will be possible to maintain the stable final gas prices for residents irrespective of the existing and forecasted growth in gas prices in the international markets. This increase is eliminated by the rationally used compensation negotiated by Lithuania for gas purchased in 2013-2014, also reducing prices of gas transportation services.

From 1 July 2016, the forecasted market price for natural gas for which gas is purchased from the prescribed supplier LITGAS by regulated energy producers was reduced by decision of the NCECP by 10 percent – up to EUR 15.26 /MWh – with consideration to changes in the prices and quantities of purchased gas. The new price will be valid by the end of 2016.

For the year 2017, the NCECP set the forecasted price of natural gas at EUR 16.45/MWh. The price increased upon assessing the 40 percent-reduction in the amount of accrued discount to which extent the price for consumers will be reduced in 2017.

Return to the Shareholder The state-controlled energy Group Lietuvos Energija transferred to the state budget the second part of dividends for the year 2016 – EUR 59.8 million. Including the interim

29 INTERIM REPORT | I Q 2017

dividends of EUR 40.95 million paid last October, Lietuvos Energija paid to the State for 2016 the total amount of EUR 100.75 million. In 2016, this amount was EUR 97.2 million.

Corporate responsibility

Relationships with employees and society

Environmental protection

The Lietuvos Energija group aims to conduct its operations in a responsible manner with a particular regard to corporate social responsibility (CSR). The Group ensures that its operations are based on the principles laid down in the Global Compact, a United Nations initiative. The latter principles define corporate responsibility in the areas of human rights, rights at work, environment, and anti-corruption. The Group is a participant of the Global Compact initiative. The model of responsible business of the Lietuvos Energija group is implemented through targeted and consistent activities in the following areas: relationships with employees and society, environmental protection, and transparent, responsible market operations.

Lietuvos Energija aims to reduce the impact of its operations on the environment, community, and other businesses, and to joint its efforts with public authorities and nongovernmental organisation in dealing with social and environmental issues, thereby contributing to the development of the society and economic growth.

Lietuvos Energija has a purpose of ensuring a long-term progress of business and society, aims to contribute to the development of society and promotion of its welfare.

The Group has established the Sponsorship Fund and supports initiatives and projects that are significant to the state and society.

Environmental protection

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Responsible and transparent market operations

In its responsible activities Lietuvos Energija follows the Global Compact principles that also define environmental responsibility and the social responsibility policies approved by the Board that provide common CSR directions and principles to be followed by all companies of the Group aiming to create the conduct and standards of socially responsible and sustainably developed business of the Lietuvos Energija group.

In its operations the Group seeks to use advanced measures, technologies and processes that help reducing the impact of operations on environment, promoting efficient management and utilisation of resources; it implements activities to reduce costs and waste. The Group companies promote and actively participate in environmental campaigns and preventive programmes.

The companies of Lietuvos Energija pay particular attention to the education of society and businesses in the field of energy saving (including security, energy efficiency and promotion of rational energy consumption) by creating its own initiatives and engaging in those organised by society, encouraging responsibility and awareness; it actively cooperates with local communities.

Work safety and health Safety of operations is one of the most important priorities of the Lietuvos Energija group. All companies of the Group are required to follow the occupational safety and

health policies. Top-level managers are responsible for safe and healthy work environment.

Starting from the end of 2015, ESO continues the internal initiative Safety Agents, the aim of which is to encourage employees outside the working hours to identify and report about disorderly and potentially dangerous devices. 12 notifications with photos were received during 2016. Such information is reported to responsible divisions and made available on the Company’s intranet. This also expands knowledge of personnel not directly related to the network’s infrastructure.

Responsibility and transparency The Lietuvos Energija group has approved the zero-tolerance policy against corruption, which applies to all employees of the Group and interested parties, i.e. contractors, suppliers, consultants, agents and other intermediaries. Persons responsible for the implementation of this policy have been appointed.

The policy sets out public commitments to comply with legal norms applicable to the operations and to fight corruption. All employees of the Group are acquainted with this policy and its requirements.

Procedures regarding gifts and other benefits have been established. The Trust Line is available for employees and all interested parties – its telephone number and email are announced publicly, indicated on the website. The Group commits to ensure confidentiality and keep the identity of the person giving the information secret.

Accountability For more information on corporate responsibility and initiatives conducted please visit the websites indicated below (the sections of social responsibility and CSR progress reports): http://www.le.lt/lt/socialine-atsakomybe/12, www.eso.lt/Socialinėatsakomybe, https://gamyba.le.lt/lt/socialine-atsakomybe.

Relationships with society: sponsorship Pursuant to the Order of the Minister of Finance of the Republic of Lithuania, Lietuvos Energija has set up the Sponsorship Fund (the Fund), which supports initiatives and projects that are significant to the state and society.

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In 2016, the Policy for the allocation of financial support and the Rules on the management of financial support were revised. Between 21 March and 4 April, potential beneficiaries were invited to submit applications for the allocation of financial support.

The following priority areas at the national level were established for 2016:  Sports (excluding extreme sports) by promoting professional sports clubs that unite the country and build its name and sports organisations that raise new sports talents;  Support to children with cancer diseases by promoting public organisations or movements whose activities or projects are being carried out and bring benefit at the country-wide level, that have acquired experience in the implementation of international social projects and whose activities promote a good practice of implementation of such projects, that provide knowledge and cooperate with health care establishments and families having children with cancer diseases, encourage family and social communication of such children;  Promotion of science and innovations by supporting ideas, researches and works of young scientists, the implementation of which would consolidate Lithuania’s positions in the international innovations market, would help strengthening the educational and scientific system of Lithuania, would increase society’s interest in science, would establish long-term traditions of cooperation between scientific institutions, academic society, business and public organisations and would assist young talents of science and innovations to gain their positions in the Lithuanian and global scientific community.

On 31 May 2016, the Sponsorship Fund of Lietuvos Energija allocated financial support amounting to EUR 620 thousand, which was designated for 25 activities and projects that best met the Fund’s criteria and priorities.

At the national level support was allocated to 14 applications: Initiatives of the Baltic Institute of Advanced Technology Researchers’ Night, Meadow of Science, the Charity and Sponsorship Fund Rugutė (genetic testing for a more targeted and effective treatment of each little patient), the Lithuanian Sports Federation of People with Disabilities, Š.

Marčiulionis basketball academy, Kaunas men’s basketball club Žalgiris, XXI Pažaislis Music Festival, Kaunas University of Technology, the National Student Academy, the women's world hot air balloon championship organised by Prienai hot air balloon club Audenis, the Lithuanian Handball Federation, the Lithuanian Rugby Federation, the Lithuanian Union of Young Scientists.

At the regional level support was allocated to social, educational, artistic, cultural, scientific and sports (excluding extreme and higher risk sports) projects and activities of the communities, in the close proximity of which companies of the Group operate.

Support was allocated to 11 beneficiaries: Association TEDxVilnius, the Lithuanian Youth

Centre, Elektrėnai ice-hockey club LRK ENERGIJA, the community of Rotuliai village, the Lithuanian National Committee for UNICEF and other organisations. For more information on beneficiaries please visit the website www.le.lt.

In November 2016, the Sponsorship Fund of Lietuvos Energija selected five Lithuanian universities whose Master’s degree students studying the programmes related to the energy sector and technologies will be eligible for named scholarships already this year.

Ten scholarships are planned to be granted to the highest achieving Master’s degree students for the 2016–2017 school year. A named scholarship will amount to EUR 1,500.

Named scholarships of the Sponsorship Fund of Lietuvos Energija will be granted to two Master’s degree students from Vilnius University, Kaunas University of Technology, Vilnius Gediminas Technical University, Vytautas Magnus University and Klaipėda University each. This initiative of Lietuvos Energija will serve as an encouragement of young people who have chosen study fields and topics of master thesis relevant to the strategic business directions of the Group companies.

Social initiatives Each year the Group companies are actively involved in the events of the traditional Days of Energy Professionals organised by the National Lithuanian Energy Association (NLEA).

On 15-16 April 2016, free educational events were hosted at the Lithuanian Energy and Technology Museum – excursions for the public were organised. During the excursions visitors were able to familiarise with the Lithuanian energy system and its topicalities and to learn more about the energy specialist’s occupation.

Aiming to strengthen relationship with the community of Elektrėnai region, where the principal activity of Lietuvos Energijos Gamyba is concentrated, the company organises traditional events Lietuvos Energijos Gamyba Presents. In March 2016, the meeting with a well-known Swedish publicist, director, translator John Ohman was held and in June the professional LRT team of sports journalists spoke of the highest level sports tournaments. In September the company invited Professor Alfredas Bumblauskas to visit Elektrėnai where a large audience enjoyed listening to his impressions on the national expedition along the Nemunas in Lithuania. In November ethnologist Gražina Kadžytė together with the city’s community rediscovered a traditional Lithuanian calendar.

Starting from December 2012, seventeen meetings of this cycle have already been organised.

In order to enhance natural environment in May Lietuvos Energijos Gamyba helped foresters of Kaišiadoriai replanting 2 ha of forest and was also traditionally involved in arrangement works of the surroundings in the territories in which it operates, i.e.

Elektrėnai, Kruonis and Kaunas.

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The Group allows to charge electric cars at the quick charging station at no cost. At the first in the country station for quick charging of electric cars, which was opened in cooperation with partners Nissan and NT Valdos in Vilnius at J. Lelevelio street in July 2014, around 1,000 kWh of electricity is charged per month. At present, free of charge power supply to the station is guaranteed by the largest supplier of energy of the Lithuanian capital – Energijos Tiekimas.

In order to contribute to raising awareness about energy among society and young generation in particular, Lietuvos Energijos Gamyba welcomes free of charge excursions to the objects under its control: the combined cycle block, Kruonis PSHP, Kaunas A. Brazauskas HPP. During 2016, the power plants were visited by more than 2,200 visitors from different enterprises, schools and other institutions as well as by delegations from foreign countries.

In order to raise awareness of school communities and contribute to the creation of a sustainable, energy-efficient and environmentally-friendly society of Lithuania, the Lithuanian Youth Centre and ESO together with partners invited the country’s educational institutions to participate in a one-year educational programme Sustainable School. This project was elected as the best social responsibility initiative of 2014 during the Swedish business award ceremony.

In spring 2016, ESO launched a large-scale campaign, which was aimed at a safe use of electricity and gas, theft prevention of technological property, provision of useful advice to the general public. In mass media – television, radio, newspapers and the internet – the campaign covered safety issues related to the commencement of fieldworks, with emphasis placed on the underground electricity and gas network, as well as educational advice on safe behaviour during storms.

Before Easter a charity fair was organised at the ESO’s head office at which employees purchased handmade works of members of the fine crafts’ centre for people with disabilities Mažoji Guboja. All funds received during the fair is allocated for the educational activities of the centre’s members, the organisation of excursions and events.

The information security campaign Safe Energy was conducted by ESO in the third quarter of 2016. The educational campaign on a safe use of electricity, storms prevention, responsible attitude when carrying out fieldworks close to electricity and gas distribution networks was launched through different means of mass media with the use of visual measures. Large attention was directed towards the theft prevention of ESO’s technological property, meetings with the representative of local police, community and mass media were organised in the regions.

In November 2016, Lietuvos Energija together with public institution Versli Lietuva offered designers, programmers, energy professionals and business developers a possibility to develop over a few-day period smart energy projects or their prototypes that in a long-term could transform into new products or businesses. The company joined the largest workshop-competition for young creators in Lithuania Hacker Games and established a new category of smart energy along with traditional sessions of technical devices, games and software. The participants of the event, i.e. engineers, designers, programmers, project managers and professionals of other fields, were able to create products, solutions or services at their own discretion within the topic of smart energy, they received consultations from experienced mentors of Lietuvos Energija and the winners were awarded with a EUR 1,000 prize.

Cooperation Lietuvos Energija Group of energy companies, controlling companies having strategic significance for national security, and the Police Department will cooperate in fight against offenders and prepare common prevention projects. To this effect, an agreement was signed at the end of February 2017 by Dalius MisiĹŤnas, CEO of Lietuvos Energija, and Linas Pernavas, Police Commissioner General.

The Agreement provides for that Lietuvos Energija, Energijos Skirstymo Operatorius (ESO), and Lietuvos Energijos Gamyba will coordinate actions with the police in liquidating extreme situations as a result of illegal physical impact. They will also provide information associated with the investigated event, cooperate with officers. If necessary, Lietuvos Energija and the Police will confer on physical security issues and prepare common training aimed to avoid potential threats.

At the same time the Police Department undertook to provide assistance to ESO and Lietuvos Energijos Gamyba necessary for the prevention law offences, emergency aid in liquidating extreme situations established due to illegal physical impact. If necessary, by coordinating common actions the parties will implement preventive measures in the territories of companies, eliminate threats in their strategic objects, as well as exchange information.

Risk management and process review Following the internal audit of the risk management function carried out in 2016 and the assessment of the effectiveness of the risk management function for 2015, the plan on the improvement of the risk management function was drawn up and the risk management policy was updated.

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Monitoring of risk factors at the Risk Management Supervision Committee of the Supervisory Council In 2016, six sittings of the Risk Management Supervision Committee of the Supervisory Council were held. At least once in a quarter the Risk Management Supervision Committee overviews predetermined or new risk factors, in particular, after the occurrence of incidents. The areas regularly discussed in 2016 included regulation and compliance, market, project management, safety and health, and information security which were defined as priority areas in 2016. In case of occurrence of incidents/external events the purchase and going concern issues were discussed. In addition to issues related to its principal activities the Committee also deliberates organisational matters related to the risk management function: prepares the report on the Committee's activity once in a half of the year which presents an overview of the situation on the implementation of the Committee’s recommendations, assesses the progress in and results of the risk management area.

Results of a regular risk assessment for 2016 – risk factors for 2017 determined As every year during the performance of the risk assessment for 2017 at the Group areas were identified in which the main risk management measures and initiatives are concentrated and coordinated at the Group level. All other risks specific to individual companies are managed by respective companies. The Risk Management Supervision Committee regularly assesses and reviews the effectiveness of management of these risks. The main risk factors and management policies for 2017 are listed below.

Risk factor Health and safety of employees, residents and contractors

Information security (cyber security)

Market changes and competitiveness

Description With regard to the principal business activity companies due to a specific character of the activity and nature of works the Company bears an inherent risk of health and safety of employees and residents. This risk remains a priority area for a number of years and the main causes of this risk, in addition to highrisk working environment, include the lack of awareness or experience/knowledge.

Although the Group does not directly influence the safety of contractors, however accidents that still occur make the Group take (motivational/disciplinary) measures.

By observing external factors, geopolitical situation the Group understands its strategic importance for the country’s security and by cooperating with external establishments and by introducing internal measures it aims to ensure that both the Company’s strategic information and the main management systems are protected from the impact of any external/internal crime. The relevance of this area is increased by the initiatives carried out by the Group such as digitalisation, which increases the need for high information security requirements due to the transfer of an increasing quantity of operational processes to the information systems.

Market changes that range from fluctuations in prices of raw materials to strategic initiatives is an inherent risk of the energy sector. The major risk faced by the principal business activity companies includes the country’s macroeconomic indicators that determine the level of consumption of electricity and gas. The energy sector is also affected by the competitive environment and changes in prices of raw materials. Trade in

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Main risk management policies  Motivational and disciplinary system for employees and contractors;  External and internal educational activity;  Modern training bases;  Regular control and monitoring of (employees’/contract ors’) occupational safety.  Improvement of resistance through tests/trainings;  Enhancement of detection/suspension;  Cooperation with external establishments.



The diversification policy is applied by the majority of companies encouraging search for supply of alternative raw materials and ensurance of long-

electricity is quite heavily influenced by new markets that emerged after the launch of the NordBalt and LitPolink interconnections.

Companies operating in a competitive environment face traditional market risks that encourage the increase of service quality aiming to retain the existing and attract new clients.





Management of strategic and internal change projects

The implementation of the internal projects on efficiency enhancement, development of new services and other development projects requires specific experience related to the implementation of such projects.

The project’s success makes a direct impact on the implementation of the Group’s strategy, therefore it is very important to ensure their timely implementation and achievement of projected benefit. Besides a high quality project management the project’s success is also dependent on external environment and its resulting decisions, therefore the management of stakeholder expectations becomes one of the main project management tasks.



 

term stability of the Group; Risk management financial instruments and control measures are used in electricity and gas trading activity; In view of changes in competitive environment the high quality services strategic policy is established for purpose of the market share retention.

Involvement of a sufficient number of both external and internal experts in project implementation; Regular monitoring of strategic projects; External and internal application of transparent and open communication principles.

Regulation and compliance

Regulatory risk manifests through a complicated planning of cash flows and risk of damage to reputation. The National Control Commission for Prices and Energy remains the main regulatory authority making the largest impact on the prices of services provided by the companies and their revenue by establishing ceilings for them. At the same time external requirements are being increased in other areas as well such as trade in raw materials and personal data security where a possible financial and reputational damage impact on the Group companies will become increasingly significant in future.

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



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Efforts are made to fulfil the requirements of the regulatory authority in as specific manner as possible and to unify the principles of cooperation with the regulatory authority at the Group level; To ensure compliance with new requirements projects are organised at the Group level that engage the best specialists of the Group with regard to the issue concerned; The compliance function is strengthened and formed at the Group.

Long-term projects The large scale long-term social responsibility projects for children, youth and general public continued by the Group company ESO are characterised by an active involvement of communities and different social groups, and ideas of safety, energy efficiency and conservation of environment.

To the extent needed. The promotion of rational use of energy is one of the priority directions of ESO’s social responsibility contributing to the conservation of environment and energy resources as well as the implementation of the country's obligations under the European Union's climate change program. The project is aimed at creating traditions of rational living by looking for solutions on rational use of electricity, with a particular focus on consumption by businesses and industrial entities. The mentioned business conferenced is one of the initiatives of this idea.

Green protocol. This is an agreement initiated by ESO (in its sixth consecutive year), the purpose of which is that the signatory companies and organisations confirm that they accept and agree with environment-friendly ideas, and commit to apply them in practice.

Corporate governance The aim of the Lietuvos Energija group, with the State of Lithuania as its shareholder, is to ensure effective and transparent operations. In order to achieve this aim, the reorganisation of governance was carried out in 2013, during which the corporate governance of the Group was reorganised and improved.

The new governance structure and model of the Group have been developed on the basis of the most advanced international and national practices, following the recommendations published by the Organisation for Economic Cooperation and Development (OECD), having regard to the Corporate Governance Code of companies listed on the NASDAQ OMX Vilnius exchange, Guidelines on the Governance for Stateowned Enterprises recommended by the Baltic Institute of Corporate Governance. The corporate governance model of the power generation companies’ group was implemented in observance of the Corporate Governance Guidelines approved by the Ministry of Finance of the Republic of Lithuania on 7 June 2013 (the Guidelines are available at www.le.lt).

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The primary goal of the corporate governance is to achieve the effect of synergy aligning different activities of the Lietuvos Energija group companies and targeting them at the achievement of the common goals at the Group level.

The Group’s governance structure has been formed according to the principles of corporate governance and contributes to their implementation. The Company’s shareholder is the State which controls 100% of its shares. The rights and obligations of the shareholder are implemented by the Ministry of Finance of the Republic of Lithuania, which adopts the main decisions relating to the implementation of the ownership rights and obligations.

In 2016, for three consecutive years the Lietuvos Energija group was recognised as the best managed state-owned entity. The analysis was carried out by the Management Coordination Centre which assesses state-owned companies based on different criteria and sets the good governance index.

Supervisory bodies Supervisory Council The Supervisory Council is a collegial supervisory body provided for in the Articles of Association of the Company and elected by the General Meeting of Shareholders for a term of four years. The Supervisory Council of Lietuvos Energija consists of seven members – natural persons representing the Ministry of Finance, the Ministry of Energy, the Ministry of Economy, the Office of the Government of the Republic of Lithuania, and three independent members. The Chairman is elected from the members of the Supervisory Council. This model of formation of the Supervisory Council complies with the principles of corporate governance. The term of office of the current Supervisory Council is the period from 19 July 2013 to 19 July 2017. The composition of the Supervisory Council functioning at Lietuvos Energija as at 31 March 2017 was as follows*:

Šarūnas Kliokys Antanas Danys (born in 1959) (born in 1975) Chairman, independent member Independent member

Dr. Virginijus Lepeška Tomas (born in 1955) Garasimavičius (born in 1978) Independent member Member

Educational Vyrautas Magnus University; Vilnius University, Master’s Vilnius University, Doctoral degree in Business degree in Social Sciences. background Baltic Management Institute, Master's degree in Administration (MBA); Business Administration Boston College, Bachelor’s (EMBA); degree Vilnius University, Economist’s Diploma.

Creighton University, Master’s studies of Political Science; Institute of International Relations and Political Science (IIRPS) of Vilnius University, Master’s studies of Political Science; IIRPS of Vilnius University, Bachelor's degree in Political Science.

Director of Grinvest Workplace, Chairman of the Board of Ekonovus UAB; Chairman of PTE.LTD; position

Consultant, Chairman of the Government of the Republic Board of Organizacijų of Lithuania, Advisor to the the Board Kilimai AB; Development Director of Vystymo Centras UAB; Prime Minister for Energy.

Member of the Board of the Kaštonų Kalva UAB; Consultant at OVC Mokymai state enterprise Centre of Member of the Board of UAB; Advisor to the Chairman Registers, Member of the Kruonis OU; Chairman of of the Board of Vilandra UAB; Board of the association the Board of Neo Finance Advisor to General Manager EUROCHAMBERS, President UAB; Director of Asian of AL Holdingas UAB; of the Lithuanian Chamber Pacific Green Energy Pte. Member of the Board of the of Commerce, Industry and Ltd.; Association Mentor Lietuva; Crafts.

Director of Powerful United Member of the Board of the Limited; Member of the public institution Paramos Board of Misen Enterprises; Vaikams Centras; Member of Member of the Board of the Commission for the Argentum Mobile.

Selection of Candidates for Judge.

*None of the members of the Supervisory Council has any ownership interest in the capital of the Company or the Group of the companies.

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Aloyzas Vitkauskas (born in 1954)

Rasa Noreikienė (born in 1959)

Rokas Baliukovas (born in 1977)

Agnė Bagočiutė (born in 1977)

Member (until 26 May

Member

Member (from 17

Member (from 26 May

December 2014 to 27 December 2016)

2016)

2016) Vilnius Civil Engineering Institute, Post-graduate studies of Technical Sciences; Vilnius Civil Engineering Institute, Master’s degree in Civil Engineering.

Kaunas University of Technology, Master’s degree in Public Administration; Vilnius University, Lawyer’s speciality.

Kaunas University of Technology, Bachelor's degree in Electrical Engineering; Šiauliai University, Master's degree in Power Engineering; Šiauliai University, Master's degree in Management and Business Administration.

Vilnius University, Bachelor's degree in Public (Economic) Geography; Vilnius University, Master's degree in General Geography and Land-Use Planning.

Ministry of Finance of the Republic of Lithuania; Deputy Minister (until 29 April 2016).

Ministry of Economy of the Republic of Lithuania; Deputy Minister (until 13 December 2016).

Ministry of Energy of the Republic of Lithuania; Deputy Minister (until 27 December 2016).

Ministry of Finance of the Republic of Lithuania; ViceMinister (until 13 December 2016). At the reporting date – Chief Advisor of the Ministry.

The main functions and responsibilities of the Supervisory Council are as follows: election and removal of the Board Members, supervision of activities of the Board and the CEO, provision of comments to the General Meeting of Shareholders on the Company’s strategy, a set of financial statements, appropriation of profit or loss, and annual report. The Supervisory Council also addresses other matters within its competence.

The Supervisory Council is functioning at the Group level, i.e. where appropriate, it addresses the issues related not only to the activities of the Company, but also to the activities of its subsidiaries or the activities of their management and supervisory bodies.

According to the Corporate Governance Guidelines approved by the Ministry of Finance, independent members of the Supervisory Council and the Committees are remunerated for their activities at the Supervisory Council and the Committees. The amount of the remuneration is established by the Ministry of Finance, an institution implementing the rights of the Company’s shareholder. In 2016, remuneration paid to the independent members of the Supervisory Council amounted to EUR 12,337 (before tax).

Remuneration paid to the independent members of the Committees of the Supervisory Council amounted to EUR 9,513 (before tax).

Committees of the Supervisory Council For the purpose of effective fulfilment of its functions and obligations, the Supervisory Council forms the committees. The committees of the Supervisory Board provide their conclusions, opinions and proposals to the Supervisory Council within their competence. A committee consists of at least three members, of whom at least one member is a member of the Supervisory Council and at least one member is an independent member.

The following committees have been established at Lietuvos Energija:







Risk Management Supervision Committee is responsible for the submission of conclusions or proposals to the Supervisory Council on the functioning of management and control system in the Group and (or) main risk factors and implementation of risk management or prevention measures; Audit Committee is responsible for the submission of the objective and impartial conclusions or proposals to the Supervisory Council on the functioning of the audit and control system in the Group; Appointment and Remuneration Committee is responsible for the submission of conclusions or proposals on the matters of appointment, removal or

38 INTERIM REPORT | I Q 2017

promotion of the Board Members to the Supervisory Council, also for the assessment of activities of the Board and its members and for issuing the respective opinion. The functions of the committee also cover the formation of the common remuneration policy at the Group level, establishment of the amount and composition of remuneration, principles of promotion, etc.

Where appropriate, the Company may also form other ad hoc committees (e.g. for addressing specific issues, preparation, supervision or coordination of strategic projects, etc.).

Audit Committee Member of the Committee Rasa Noreikienė Chair of the Committee

Number of shares of the Company and the Group companies held -

Workplace Ministry of Economy of the Republic of Lithuania, Vice-Minister (until 13 December 2016)

Danielius Merkinas Independent member

-

General Manager of Nordnet UAB

Aušra Vičkačkienė Member

-

Ministry of Finance of the Republic of Lithuania, Director of the Asset Management Department

Gintaras Adžgauskas Member

-

Director of the Lithuanian Committee of the World Energy Council

Irena Petruškevičienė Independent member

-

Member of Audit Development Committee of the European Commission

Main functions of the Committee are as follows: 





to monitor the process of preparation of financial statements of the Company and the Group companies, with a special focus on the relevance and consistency of accounting methods used; to monitor the effectiveness of internal controls and risk management systems of the Company and the Group companies, to analyse the need for and relevance of these systems and perform the review of the existing internal control management systems; to monitor the adherence to the principles of independence and objectivity by the certified auditor and audit firm, to provide related recommendations, as well as proposals for the selection of an audit firm;









 

to monitor the audit performance processes of the Company and the Group companies, to examine the effectiveness of audit and response of the administration to the recommendations provided in the management letter; to monitor the effectiveness of the internal audit function of the Company and the Group companies, to analyse the need for and relevance of this function, to provide recommendations on the need for, effectiveness of the internal audit function, and on other internal audit related matters; to provide proposals for the internal audit plans of the Company and the Group companies, recommendations for the regulations of the internal audit units of the Company and the Group companies, appointment and dismissal of the head of a structural unit performing the functions of the internal audit, approval of his (her) job description, imposition of incentives and penalties; to monitor the compliance of activities of the Company and the Group companies with laws and other legal acts of the Republic of Lithuania, articles of association and operational strategy; to assess and analyse other issues attributed to the competence of the Committee by the decision of the Supervisory Council; to perform other functions related to the functions of the Committee set forth by legal acts of the Republic of Lithuania and in the Corporate Governance Code of companies listed on NASDAQ Vilnius Stock Exchange.

Risk Management Supervision Committee Member of the Committee

Number of shares of the Company and the Group companies held

Workplace

Antanas Danys Chairman of the Committee, Independent Member Raimundas Petrauskas Independent member

-

Director of Grinvest PTE.LTD

-

General Manager of Schmitz Cargobull Baltic UAB

Donatas Kaubrys Independent member

-

Director of Dovirma UAB

Tomas Garasimavičius Member

-

Advisor to the Prime Minister of Lithuania for Energy

        

Appointment and Remuneration Committee Number of shares of the Workplace Company and the Group companies held Aloyzas Vitkauskas Ministry of Finance of the Republic of Chairman of the Committee (until 26 Lithuania, Vice-Minister (until 29 April 2016) May 2016) Member of the Committee

Virginijus Lepeška Independent member, Chairman of the Commitee (from 14 June 2016) Tomas Garasimavičius Member Agnė Bagočiutė Member (from 14 June 2016)

to monitor the identification, assessment and management of risks relevant for the accomplishment of goals of the Company and the Group companies;

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-

Chairman of the Board of Organizacijų Vystymo Centras UAB

-

Advisor to the Prime Minister of Lithuania for Energy Ministry of Finance of the Republic of Lithuania; Vice-Minister (until 13 December 2016), Chief Advisor of the Ministry

Main functions of the Committee are as follows: 

Main functions of the Committee are as follows: 

to assess the relevance of internal control procedures and risk management measures with respect to the identified risks; to assess the status of implementation of risk management measures; to monitor the implementation of risk management process; to analyse financial possibilities for the implementation of risk management measures; to assess the risks and risk management plan of the Company and the Group companies; to assess the regular risk identification and assessment cycle; to control the establishment of risk registers, analyse their data and provide proposals; to monitor the drafting of risk management related internal documents; to perform other functions attributed to the competence of the Committee by the Supervisory Council.



to assess and provide proposals on the long-term remuneration policy of the Company and Group companies (the main fixed part of the remuneration, performance based remuneration, pension insurance, other guarantees and forms of remuneration, compensations, termination benefits, other parts of the remuneration package), principles of compensation for costs related to the individual’s performance; to assess and provide proposals on the policy of bonuses of the Company and the Group companies;









to monitor the compliance of the policy of remunerations and bonuses of the Company and the Group companies with the international practice and good governance practice recommendations, and provide respective proposals for the improvement of the policy of remunerations and bonuses; to provide proposals concerning bonuses upon appropriation of profit (losses) to be appropriated of the Company and the Group companies of the respective financial year; to assess the terms and conditions of agreements of the Company and the Group companies with members of management bodies of the Company and the Group companies; to assess the procedures of recruitment and selection of candidates to members and senior management of the Company and the Group companies and establishment of the qualification requirements;

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







to perform regular reviews of the structure, size, composition and activities of the management and supervisory bodies of the Company and the Group companies; to supervise how members of management bodies and employees of the Company and Group companies are notified of the professional development possibilities and how they upgrade their skills regularly; to supervise and assess the implementation of measures ensuring the continuity of operations of the management bodies and employees of the Company and the Group companies; to perform other functions attributed to the competence of the Committee by the Supervisory Council.

Management bodies Board The Board is a collegial management body provided for in the Articles of Association of the Company. The members of the Board are elected for a term of four years and removed by the Supervisory Council on the proposal of the Appointment and Remuneration Committee. The Board consists of five members and elects from among its members the Chairman of the Board – the Chief Executive Officer of the Company. The members of the Board, acting within their competence, must ensure the proper performance of the Company’s activities / supervision of the respective areas at the Group level. The term of office of the current Board is the period from 22 July 2013 to 22 July 2017. The composition of the Board functioning at Lietuvos Energija as at 31 March 2017 was as follows*:

Dr Dalius Misiūnas (born in 1978)

Ilona Daugėlaitė (born in 1970)

Darius Kašauskas (born in 1972)

Mindaugas Keizeris (born in 1980)

Dominykas Tučkus (born in 1981)

Chairman of the Board, CEO

Member of the Board, Organisational Development Director

Member of the Board, Finance and Treasury Director

Member of the Board, Strategy and Development Director

Member of the Board, Production and Services Director from January 2016

Educational background

Lund University, Doctoral degree in Technological Sciences; Lund University, Master’s degree in Industrial Electrical Engineering and Automatics; Kaunas University of Technology, Bachelor's degree in Electrical Engineering.

Vilnius University, Master’s degree in Hydrogeology and Engineering Geology.

ISM University of Management and Economics, Doctoral studies of Social Sciences in the field of Economics; ISM University of Management and Economics, BI Norwegian Business School, Master’s degree in Management; Vilnius University, Master’s degree in Economics.

Vilnius University, Master’s degree in International Business.

Vilnius University, Bachelor’s degree in Business Administration and Management.

L. Bocconi University (Italy), Master's degree in Finance; L. Bocconi University (Italy), Bachelor’s degree in Business Management and Administration.

Workplaces, position

Chairman of the Supervisory Council of Energijos Skirstymo Operatorius AB (from Dec 2015); Member of the Board of Directors of the Association Eurelectric; President of the Lithuanian Power Association; President of the Alumni Association of Kaunas University of Technology; Member of the Board of the Sponsorship Fund of Lietuvos Energija (from Oct 2014); Member of the Council of the Lithuanian Confederation of Industrialists. Member of the Council for Higher Education; Member of the Board of ISM University of Management and Economics; Professor-practician at Kaunas University of Technology.

Member of the Supervisory Council of Energijos Skirstymo Operatorius AB (from Dec 2015); Chair of the Board of Technologijų ir Inovacijų Centras UAB (from Dec 2013); Chair of the Board of Duomenų Logistikos Centras UAB (until Jan 2016); Chair of the Board of Verslo Aptarnavimo Centras UAB (from Jan 2016); Member of the Supervisory Council of Elektroninių Mokėjimų Agentūra UAB (from Dec 2015).

Chairman of the Board of NT Valdos UAB (from Dec 2013); Chairman of the Board of Verslo Aptarnavimo Centras UAB (until Jan 2016); Chairman of the Board of Elektroninių Mokėjimų Agentūra UAB (from Dec 2015); Chairman of the Board of Duomenų Logistikos Centras UAB (from Jan 2016).

Chairman of the Supervisory Council of Lietuvos Energijos Gamyba AB (from Dec 2015); Chairman of the Board of Energijos Teikimas UAB (until Feb 2016); Chairman of the Board of LITGAS UAB (until Jan 2016); Member of the Board of Lietuvos Dujų Tiekimas UAB (until Jan 2016); Chairman of the Board of Energetikos Paslaugų ir Rangos Organizacija UAB (from Oct 2015); Chairman of the Board of Vilniaus Kogeneracinė Jėgainė UAB (from Nov 2015); Member of the Board of the Sponsorship Fund of Lietuvos Energija (from March 2016); Member of the Supervisory Council of Elektroninių Mokėjimų Agentūra UAB (from Jan 2016).

Member of the Supervisory Council of Lietuvos Energijos Gamyba AB (from Jan 2016); Chairman of the Board of LITGAS UAB (from Jan 2016); Member of the Board of Lietuvos Dujų Tiekimas UAB (from Jan 2016); Member of the Board of Energijos Tiekimas UAB (from Jan 2016); Chairman of the Supervisory Council of Elektroninių Mokėjimų Agentūra UAB (from Jan 2016); Member of the Board of Tuuleenergia OU UAB (from Feb 2016); Member of the Board of EURAKRAS (from March 2016).

*None of the members of the Board has any ownership interest in the capital of the Company or the Group of the companies. Activities at the Board are remunerated according to the guidelines set by the company‘s shareholder.

41 INTERIM REPORT | I Q 2017

Organisational culture and employees Employees of the Company are the key element in implementing the operational strategy of the Lietuvos Energija group. The aim is to build and maintain the organisational culture based on values that motivate employees to assume responsibility, cooperate, and joint efforts to achieve the best result.

In implementing the objectives set by the shareholder and pursuing a socially responsible business, we aim at attracting and retaining skilled specialists at the Group and creating with them the long-term partnership relationships and joint successful future while ensuring the mutual benefits.

As at 31 March 2017, the Group had 47261 employees.

Company

Lietuvos energija UAB Energijos skirstymo operatorius AB Lietuvos energijos gamyba AB Energetikos paslaugų ir rangos organizacija UAB Technologijų ir inovacijų centras UAB Duomenų logistikos centras UAB Energijos tiekimas UAB Elektroninių mokėjimų agentūra UAB NT Valdos UAB VšĮ Energetikų mokymo centras LITGAS UAB VAE SPB UAB Verslo aptarnavimo centras UAB Lietuvos dujų tiekimas UAB Vilniaus kogeneracinė jėgainė UAB Kauno kogeneracinė jėgainė UAB Energijos sprendimų centras UAB Total

1

Number of existing contracts

42 INTERIM REPORT | I QUARTER 2017

As at 31 March 2017, the Company had 103 employees. The total of 98.04% of the Company’s employees have higher university education, of whom 4 have doctoral degrees. The Company employs two certified professional project managers (PRINCE2 and PMP), one certified financial analyst (CFA), one certified internal auditor (CIA), one certified fraud examiner (CFE), two certified risk management assurance experts (CRMA), one certified risk management expert (ISO 31000:2009), five employees holding the professional Board Member’s qualification of the Baltic Institute of Corporate Governance. The employees are active members of the associations, unions, and academic community (Scientific Council of the Lithuanian Energy Institute, Business Council of Kaunas University, the Supervisory Council of the Lithuanian Energy Institute; Technological Development Committee of the Agency for Science, Innovation and Technology).

Structure of the Company's employees according to the educational background, %

Total number of employees

103 2602 404 554 175 17 30 5 224 75 14 10 451 31 20 3 7 4726

98,04%

0,00%

20,00% Higher education

40,00%

0,98% 0,98%

60,00%

Advanced vocational education

80,00%

100,00%

Secondary education

The total of 59,48% of the Group’s employees have higher education, of whom 21 have doctoral degrees, 29,35% of employees have acquired advanced vocational education and 9,01% have secondary education.

Average monthly wage of the Group's employees January – March 2017

Structure of the Group's employees according to the educational background Higher education 59,5%

Category

9,0%2,2% Advanced vocational education Secondary education

29,4%

Other

0,0%

20,0%

40,0%

60,0%

80,0%

The percentage of men and women employed at the Group is equal to 76.41% and 23.59%, respectively. The breakdown of managers by gender is similar, i.e. male managers make up 78,4% and female managers – 21,6%.

Darbuotojų pasiskirstymas pagal lytį,

Breakdown of all managers by gender

21,6

23,6

Men

Women

Men

Top-level executives

4 182

Middle-level managers

2 066 976

Development of the organisation and its culture

Following the reorganisation of the management of the Lietuvos Energija group in 2017 attention was focused on a coordinated development of the organisation, management of human resources, formation of a new organisational culture, enhancement of efficiency of organisation of operations, training of new employees and development and maintenance of competences. At the end of QI first time this year day for the new employees of the Lietuvos energija group was held. Arround 100 employees attended this event. In the Lietuvos energija Group we have 12 trade unions with which we cooperate in renumeration, additional benefits, structural changes or other issues. Also we discuss on relevant issues regarding Labor Code and are preparing for implementation of it. We successfully continue career management and rotation structurization processes ( in the QI 2017 11 employees rotated and 158 did internal career).

78,4

76,4

4 680

Experts, specialists, workers

100,0%

Avarage salary, EUR

Head of the company

Women

Development of competences

The total wage bill of the Company for January–March 2017 amounted to

EUR

670 206.

Average monthly wage of the Group's employees January – March 2017 31 March 2017 4726 emploeeys were working in the Group. The total wage bill of the Company for January–March 2017 amounted to 14,99 mln. Eur.

Category

Avarage salary, EUR

Head of the company

6 777

Top-level executives

5 063

Middle-level managers

3 212

Experts, specialists, workers

1 872

43 INTERIM REPORT | I QUARTER 2017

Each year we organise annual evaluation. In order to receive best results out of it, we introduced updated employee performance management system. Since now we call it GPS. The GPS system helps to reveal each employee's skills, directs efforts to promote the results and encourages success of the employees. This is the way how we create organizational culture which promotes openness and improvement. In the QI 2017 new renumeration management system based on Hay Group methodology started. Since system started renumeration management in all group is unified. Till the end of this year “LE academy“ training shedule was updated. “LE academy“ is managed by internal trainers – employees of the Group. The most popular topics – public speaking, how to prepare good ppt, project management. Lietuvos energija Group consistently cared for staff training and ensure that employees have all the statutory work required certificates, improve work competencies. Depending on the holding level organizations to organize a variety of general, professional and managerial excellence in teaching, eg., Leadership, team building, change management, communication, project management, business process management, and so on.

Internship opportunities In order to attract foreign students to do internship in the Group's companies we participated in the program “Talentai Lietuvai�. We initiated contest for the positions of

44 INTERIM REPORT | I QUARTER 2017

strategic projects analyst and network development engineer-analyst. Group companies give opportunities for the students from universities and professional schools to adapt their theoretical knowledge and gain experience. During QI 2017 we had 36 interns in the Group.

Supervisory and management bodies of the listed companies of the Group As at 31 March 2017, the composition of the Supervisory Council of Energijos Skirstymo Operatorius (the term of office expires on 3 December 2019) was as follows: Full name

Participation in the capital of the Company and Group companies, %

Term of office

Workplace

Dalius Misiūnas Chairman

-

3 Dec 2015 – Dec 2019

Lietuvos Energija UAB, Chief Executive Officer

Ilona Daugėlaitė Member

-

3 Dec 2015 – Dec 2019

Lietuvos Energija UAB, Director of Organisational Development

Petras Povilas Čėsna Independent Member

-

3 Dec 2015 – Dec 2019

LITEXPO, Chairman of the Board

As at 31 March 2017, the composition of the Board of Energijos Skirstymo Operatorius (the term of office expires on 3 December 2019) was as follows: Full name

Participation in the capital of the Company and Group companies, %

Dalia Andrulionienė Chair from 4 Nov 2016 2016 Rytis Borkys

Term of office Workplace

-

3 Dec 2015 – Energijos Skirstymo Operatorius AB, December 2019 Chief Executive Officer

-

3 Dec 2015 – Energijos Skirstymo Operatorius AB, December 2019 Director of Networks Maintenance Service

Dalius Svetulevičius Member until 28 Feb 2017 Augustas Dragūnas Member

-

As at 31 March 2017, the composition of the Supervisory Council of Lietuvos Energijos Gamyba (the term of office expires on 5 August 2017) was as follows: Participation in the capital of the Company and Group companies, %

Full name

Term of office

Workplace

Mindaugas Keizeris Chairman from 2 Dec 2015

-

20 Nov 2014 – August 2017

Lietuvos Energija UAB, Director of Strategy and Development

Pranas Vilkas Independent Member

-

August 2013 – August 2017

-

Dominykas Tučkus Member

-

21 Dec 2015 – August 2017

Lietuvos Energija UAB, Director of Production and Services

As at 31 March 2017, the composition of the Board of Lietuvos Energijos Gamyba (the term of office expires on 5 August 2017) was as follows:

Full name

Participation in the capital of the Company and Group companies, %

Term of office

Workplace

Eglė Čiužaitė Chair

-

February 2016 – September 2017

Lietuvos Energijos Gamyba AB, Chief Executive Officer

3 Dec 2015 – Energijos Skirstymo Operatorius AB, December 2019 Director of Networks Development Service

Adomas Birulis Member

-

September 2013 January 2017

Lietuvos Energijos Gamyba AB, Director of Business Development Department

-

February 2016 – Energijos Skirstymo Operatorius AB, December 2019 Director of Finance and Administration Service

Darius Kucinas Member

-

September 2013 September 2017

Lietuvos Energijos Gamyba AB, Director of Production Department

Ignas Pranskevičius Member

-

20 Jan 2017– Energijos Skirstymo Operatorius AB, December 2019 Director of Services Division

Mindaugas Kvekšas Member

December 2015 – September 2017

Lietuvos Energijos Gamyba AB, Director of Finance and Legal Department

Liudas Liutkevičius Chairman

-

Mindaugas Gražys Member

6 Jan 2017 – September 2017

Lietuvos Energijos Gamyba AB, Director of Business Development Department

Member

31 Dec 2015 – Energijos Skirstymo Operatorius AB, Chief 4 Nov 2016 Executive Officer

General Manager: Dalia Andrulionienė, Chief Executive Officer of Energijos Skirstymo Operatorius AB.

45 INTERIM REPORT | I QUARTER 2017

General Manager: Eglė Čiužaitė, Chief Executive Officer of Lietuvos Energijos Gamyba AB.

Basic information about the Company and the Group The annual report of Lietuvos Energija and its subsidiaries is prepared in compliance with Resolution No 1052 of the Government of the Republic of Lithuania of 14 July 2010 On the Approval of the Guidelines for Ensuring the Transparency of Activities of the Stateowned Enterprises and Appointment of the Coordinating Authority and published on the Company’s website at www.le.lt.

Company name

Lietuvos Energija, UAB

Company code

301844044

Authorised share capital

EUR 1,212,156 thousand

Paid-up share capital

EUR 1,212,156 thousand

Address

Žvejų g. 14, LT-09310, Vilnius, Lithuania

Telephone

(8 5) 278 2998

Fax

(8 5) 278 2115

E-mail

biuras@le.lt

Website

www.le.lt

Legal form

Private limited liability company

Date and place of registration

28 August 2008, Register of Legal Entities

Register accumulating and storing data about the Company

Register of Legal Entities, State Enterprise the Centre of Registers

On 13 February 2013, the Company’s shares were transferred to the Ministry of Finance by the right of trust.

With effect from 30 August 2013, the Company's name Visagino Atominė Elektrinė UAB was changed to Lietuvos Energija, UAB. As at 31 March 2017, the authorised share capital was divided into ordinary registered shares with the nominal value of LTL 1 (EUR 0.29) each. All the shares are fully paid.

The control of the implementation of the budgets of the Group companies and the consolidated budget of the entire Group is performed on a monthly basis. If needed the actual results of the components of the budget are presented to responsible persons each day. Each month employees responsible for the budgetary implementation prepare explanations and submit substantiations and reasons for deviations of actual results under the separate line items of the budget to the Finance and Treasury Management Service.

Every month the Finance and Treasury Service prepares the presentation on the companies‘ performance which includes the analysis of the budgetary implementation by the companies and the Group, and presents it at regularly held meetings of the companies‘ management. The assessment of the performance report includes the assessment of occurred deviations from the budgets and their causes. Employees responsible for the budgetary implementation can make proposals on budgetary changes in case of significant deviations from income/expenses plans and (or) the components of the budget.

The Group‘s set of the consolidated financial statements for the year ended 31 December 2016 was audited by the independent audit firm PricewaterhouseCooper UAB which presented an unqualified auditor‘s opinion on this set of the financial statements. A fee for the mentioned audit of the financial statements amounted to EUR 9,200 (excl. VAT).

Information on the opinion of the auditor that carried out an independent audit:

The Company’s shareholders

The Republic of Lithuania represented by the Ministry of Finance of the Republic of Lithuania

Share capital (EUR ‘000)

%

1,212,156

100

Year

Auditor

Opinion

2016

PricewaterhouseCoopers UAB

Unqualified

2015

PricewaterhouseCoopers UAB

Qualified*

2014

PricewaterhouseCoopers UAB

Qualified

* Qualified opinion issued in 2015 is related to the qualified opinion issued by the same independent auditor following the audit of the financial statements for 2013.

46 INTERIM REPORT | I QUARTER 2017

Information on subsidiaries, branches and representative offices Companies directly or indirectly controlled by Lietuvos Energija UAB at the end of the reporting period (31 March 2017) were as follows: Company

Lietuvos Energijos Gamyba, AB

Registered office address

Effective ownership interest at 31 Mar 2017, (%) Elektrinės g. 21, Elektrėnai 96.75

Share capital (EUR ‘000) at 31 Mar 2017 184,174 Production, supply and trade in electricity

Profile of activities

Energijos Skirstymo Operatorius, (until 1 January 2016, LESTO AB and AB Lietuvos Dujos AB) NT Valdos, UAB

Aguonų g. 24, Vilnius

94.98

259,443

Electricity supply and distribution to customers; natural gas supply

Geologų g. 16, Vilnius

100

85,550

Disposal of real estate, other related activities and service provision

Duomenų Logistikos Centras UAB

A. Juozapavičiaus g. 13, Vilnius

79.64

4,033

Support services for information technology and telecommunications

Energetikos Paslaugų ir Rangos Organizacija UAB (until 1 January 2016, ELEKTROS TINKLO PASLAUGOS UAB and Kauno Energetikos Remontas UAB)

Motorų g. 2, Vilnius

100

7,003

Construction, repair and maintenance of electricity networks and related equipment, connection of customers to the grid, energy equipment repair, production of metal structures

LITGAS UAB

Žvejų g. 14, Vilnius

66.67

13,050

Supply of liquid natural gas via the terminal and trade in natural gas

Elektroninių Mokėjimų Agentūra UAB

Žvejų g. 14, Vilnius

100

437

Energijos Tiekimas UAB

P. Lukšio g. 1, Vilnius

100

17,240

Public Institution Training Centre for Energy Specialists

Jeruzalės g. 21, Vilnius

100

85

Professional development and further professional training of energy sector specialists

Geton Energy OÜ

Narva mnt 5, 10117 Talinas

100

35

Electricity supply

Geton Energy SIA

Bezdelingu 12, LV-1048, Ryga

100

28

Electricity supply

Technologijų ir Inovacijų Centras UAB

A. Juozapavičiaus g. 13, Vilnius

97.80

6,440

VAE SPB UAB

Smolensko g. 5, Vilnius

100

293

Business and other management consultations

Verslo Aptarnavimo Centras UAB

P. Lukšio g. 5 b, Vilnius

97.00

580

Lietuvos Dujų Tiekimas UAB

Žvejų g. 14, Vilnius

100

8,370

Public procurement organisation and implementation, accounting, personnel administration services Gas supply

Sponsorship Fund of Lietuvos Energija

Žvejų g. 14, Vilnius

100

3

Vilniaus Kogeneracinė Jėgainė UAB

Žvejų g. 14, Vilnius

100

1,003

Modernisation of the district heating sector in the city of Vilnius

Kauno Kogeneracinė Jėgainė UAB

Žvejų g. 14, Vilnius

51

10,759

Modernisation of the district heating sector in the city of Kaunas

Tuuleenergia OU

Keskus, Helmküla, Varbla Rural Municipality, Pärnu County

100

499

Generation of electricity from renewable energy sources

Eurakras UAB

Vytenio g. 46, Vilnius

75

8,096

Generation of electricity from renewable energy sources

Energijos Sprendimų Centras UAB

Žvejų g. 14, Vilnius

100

10

47 INTERIM REPORT | I QUARTER 2017

Provision of payment collection services Electricity and natural gas supply, electricity import, export, balancing services

IT and telecommunication, and other services

Provision of financial support to projects, initiatives and activities significant for society

Provision of electricity saving services

Information on securities of the Group companies The shares of Energijos Skirstymo Operatorius and Lietuvos Energijos Gamyba have been listed on the Main List of NASDAQ Vilnius Stock Exchange. The trading of shares of the companies was started on 11 January 2016 and 1 September 2011, respectively. The shares of the companies are traded only at NASDAQ Vilnius Stock Exchange.

Structure of the authorised share capital and shareholders owning more than 5 per cent of the issuer’s authorised share capital as at 31 March 2017 Company

Total nominal value of shares (in EUR)

ISIN code

Securities' abbreviation

Trading list

Lietuvos Energijos Gamyba AB

184,174,248.35

LT0000128571

LNR1L

BALTIC MAIN LIST

Lietuvos Energija, UAB

96.75%

Energijos Skirstymo Operatorius AB

259,442,796.57

LT0000130023

ESO1L

BALTIC MAIN LIST

Lietuvos Energija, UAB

94.98%

Information about agreements with securities intermediaries Lietuvos Energija has not concluded any agreements with intermediaries of public trading in securities, because its securities are not traded on the stock exchange.

Group companies: Lietuvos Energijos Gamyba AB As at 31 March 2017, the company had issued 635,083,615 ordinary registered shares with the nominal value of EUR 0.29. Shares of Lietuvos Energijos Gamyba have been listed on the main list of NASDAQ OMX Vilnius stock exchange. ISIN code of the issue is LT0000128571.

48 INTERIM REPORT | I QUARTER 2017

Full name of the shareholder (name of the company)

Percentage of voting rights conferred by shares owned

Lietuvos Energijos Gamyba has concluded the securities accounting agreement on the accounting of securities issued and management of personal securities accounts with SEB Bankas AB. Energijos Skirstymo Operatorius AB As at 31 March 2017, the company had issued 894,630,333 ordinary registered shares with the nominal value of EUR 0.29. Shares of Energijos Skirstymo Operatorius AB have been listed on the main list of NASDAQ OMX Vilnius Stock Exchange. ISIN code of the issue is LT0000130023.

Energijos Skirstymo Operatorius AB has concluded the agreement on the accounting of securities issued by the company and management of personal securities accounts with SEB Bankas AB.

Main events at the Group that occurred until the date of the preparation of the Report 02/01/2017. LITGAS, in cooperation with LDT, provided the LNG loading services to the first small-scale LNG carrier Coral Energy at the Klaipėda LNG terminal. 15,000 cubic metres of LNG loaded to the carrier will be delivered to one of the small terminals in the Baltic Sea. The second reloading transaction was completed at the end of February.

06/01/2017. Mindaugas Gražys elected as a new Member of the Board, Adomas Birulis was recalled from the Members of the Board.

16/01/2017. A fee introduced for payment operations at manogile.lt – EUR 0.15 per one operation. The operation fee is not charged upon customers paying for electricity and gas. The fee for the services provided to the customers (collection of fees and distribution of the same to all providers) is collected by EMA. 17/01/2017. VKJ signed a contract with the company AF-Consult that will be providing Engineer services under the FIDIC contract.

20/01/2017. Ignas Pranskevičius appointed a Member of the Board of ESO and the Director of the Service Office.

25/01/2017. LEG started implementing the project on the dismantling the decommissioned Units 5 and 6 of the reserve power plant of the Elektrėnai Complex.

31/01/2017. EMA allocated 80,000 ESO fee payments and in this respect overtook SEB bank and now holds the 2nd position in the electronic payment market (21 % of the market, second after Swedbank holding 31 % of the market). Within the entire payment market (including the payments in cash), EMA is holding the fifth position with its 8 % of the market. The National Association of Electric Energy and the Association of Gas merged and became the National Power Association. (8 February 2016).

08/02/2017. NTV announced a public immovable property auction offering to sell 29 objects the total value of which accounted for EUR 17.8 million.

14/02/2017. EMA achieved an agreement with TELIA – manogile.lt customers will be able to pay for the services provided by the TELIA group.

24/02/2017. LITGAS optimised the dedicated supply LNG freight schedule in 2017.

This will enable the Company to earn up to EUR 1 million. The amount will directly reduce the natural gas infrastructure maintenance costs for business and residents.

27/07/2017. The European Commission (EC) closed the case against Lithuania regarding the decision of the Government in 2014 decided to allow incineration of waste in State-owned plants only. The Decision of the EC means that the projects in Vilnius and Kaunas of construction of new CHP plants launched by the energy group Lietuvos energija can be continued. The decision of the Government was appealed to the Commission by Reenergy managed by the concern Icor and the City of Vilnius and a German capital company Danpower.

27/02/2017. EnePRO started providing gas pipeline design and construction works services.

28/02/2017. Publication of the ESO performance results for 2016: the operating costs decreased by 11.5 % (from EUR 113.3 million to EUR 98.6 million), the net profit increased by 8.2 % (from EUR 85.5 million to EUR 92.5 million), and the revenues increased by 1.9 % (from EUR 637.9 million to EUR 650.1 million).

02/02/2017. For the purpose of further specifying its activities, Lietuvos energija started the EMC sale procedure.

28/02/2017. Publication of the performance results of LEG for 2016: the corporate income for 2016 accounted for EUR 172.9 million and was by 19.3 % lower than in 2015 (EUR 2014.4 million). The Company’s sales revenues decreased by 25 % to a largest extent due to decreased output of electric energy at Elektrėnai Complex.

Having abolished support to electric energy production, the Elektrėnai Complex produced only half of the volume of electric energy compared to 2015 (respectively, 0.491 TWh and 1.067 TWh). The decrease in the sales income was partly compensated by the proceeds from the sale of part of the business.

03/02/2017. With a view to ensuring a reliable supply of natural gas in Druskininkai, ESO intends to build a liquefied natural gas (LNG) regasification station.

28/02/2017. Publication of Lietuvos energija Group results for 2016: EBITDA was recorded at EUR 256.3 million, i.e. 16 % or EUR 35.2 million more than in the

49 INTERIM REPORT | I QUARTER 2017

accounting period of 2015, when EBITDA was equal to EUR 221.1 million. During 2016, revenues of Lietuvos energija Group, increased by EUR 7.9 million on a year-on-year basis and totalled EUR 1,103.7 million. During the nine months of 2016, Lietuvos energija Group earned EUR 122 million in net profit, i.e. up by EUR 66.7 million yearon-year (EUR 55.3 million). During 2016, the Group’s operating costs totalled EUR 136.3 million, i.e. a fall by 9.2 % (EUR 13.8 million)..

01/03/2017. With a view to diversifying the debt portfolio, Lietuvos energija announced its intention to place its bonds up to EUR 200 million in value. Lietuvos energija intends to invest the proceeds from the bond placement in green energy projects.

01/03/2017. The servicing of VAC customers in Alytus, Marijampolė, Utena, and Visaginas transferred to the remote channels – www.manogile.lt and customer service telephone. Physical customer service places were closed as of March 1.

10/03/2017. Lietuvos energija, a company managing its subsidiaries having strategic importance to national security, and the Police Department will cooperate in the fight against perpetrators and will be working on joint prevention projects. The agreement providing for the cooperation of the two entities was signed by Dalius Misiūnas, Director General of Lietuvos energija, and Linas Pernavas, the Police Commissioner General.

10/03/2017. Idle immovable property (NT) worth nearly EUR 1.2 million (incl. VAT) no longer used in the operations of the energy company group of Lietuvos energija was sold at the fifth public auction. The company successfully realised six objects at the public auction of immovable property. Total 29 objects were offered for sale at the auction and the remaining items will be repeatedly offered at other auctions.

17/03/2017. KKJ concluded the agreements regarding the supply of the equipment required for the new power plan, provision of design, procurement, and construction management services (EPCM).

24/03/2017. LEG shareholders decided to allocate EUR 12.7 million as dividends for H2 2016 and ESO declared EUR 51.8 million in dividends. In H2, LE Group proposed to disburse EUR 59.8 million to its shareholders; the dividends for 2016 will total EUR 100.7 million.

27/03/2017. The Court approved the peace arrangement between VKJ and First Opportunity (FO), regarding a crane of FO located in the plot of land owned by VKJ. The crane must be dismantled by 22 April 2017.

50 INTERIM REPORT | I QUARTER 2017

28/03/2017. ESO hosted in Vilnius a public discussion about the ways to support the development of electric energy producing customers and ensure their sustainable integration. ESO for the first time presented the plan for promotion of electricity producing customers, including the proposals to remove bureaucratic barriers and create the eco-system.

30/03/2017. The Seimas adopted the amendments to the Law on Natural Gas that will allow shortening the term for connecting customers to gas pipelines to 55 days.

The amendments to the Law establish that low and medium-pressure gas pipelines, most of which in Lithuania are operated by the electricity and gas distribution company ESO, will be treated as movable items.

30/03/2017. EMA concluded the fee collection contracts with UAB Vilniaus šilumos tinklai and started the collection of fees on the manogile.lt portal.

31/03/2017. After the Government amended the Description of the Road Maintenance Procedure, the works of connecting to electricity and gas distribution networks will be carried throughout the year, irrespective of the season. Thus, the electricity and gas distribution company ESO will be able to faster complete the electricity and gas connection works to some 5,000 customers every year.

31/03/2017. The ESCO company modernised the lighting of one class-room at Adomas Mickevičius Gymnasium in Vilnius by using LED lamps. Within the first month alone, the class-room used four times less electric energy than in an identical classroom with the old-type lighting system. The estimations concluded that a replacement of old-type lamps at schools of Vilnius by modern LED lamps would lead to saving of more than EUR 2 million per year, without any initial investment.

31/03/2017. LEG completed the project on the dismantling the decommissioned Units 1 and 2 of the reserve power plant of the Elektrėnai Complex.Lietuvos Energija announced the ranking of potential implementers of the integrated business management system that participated in the international procurement. The consortium of companies with the best proposal will be offered to sign the agreement.

The price of the best proposal is EUR 18.8 million (excl. VAT) and it was presented by NESS Czech s.r.o and InnoForce UAB, companies operating as a joint venture. During the implementation period NESS Czech s.r.o. will act as a responsible partner of the joint venture thus ensuring the use of the best practice accumulated by the implementer in introducing analogous SAP solutions in the energy sector in the Group’s project.

Beyond the accounting period: 04/04/2017. A meeting of VKJ with representatives of the public took place. The agenda of the meeting included presentation of the status of the Project, monitoring of the environment pollution, and a discussion on the way to present the monitoring data to the society.

05/04/2017. Due to excessive prices ESO rejected the tenders submitted by participants of the public procurement procedure regarding the building of a LNG regasification station in Druskininkai.

10/04/2017. Ieva Lauraitytė, currently heading the Legal Service of Lietuvos energija, was nominated the Director General of the Group company NT Valdos. Upon the completion of the public tender the candidacy of Ieva Lauraitytė was approved by the Appointment and Remuneration Committee and the Supervisory Board of Lietuvos energija. Officially Ieva Lauraitytė would perform the functions of the Head of NT Valdos after all the requisite formal procedures are completed.

11/04/2017. ESO received a letter of Lietuvos energija notifying ESO that the Supervisory Board approved the candidacy of Saulius Vaičekauskas (area – grid operation) promoted by the Board of Lietuvos energija to the Board of ESO. 13/04/2017. State-owned energy company group Lietuvos energija announced that in the course of the past four years of operations not only it successfully reorganised and specified the activities of the Group, but also ensured significant return to its shareholder – the State of Lithuania. Since 2013 Lietuvos energija is estimated to have paid in excess of EUR 180 million to the State budget. In the meantime for H2 2016 Lietuvos energija proposed to pay EUR 59.8 million as dividends, thus, subject to the

approval of the shareholder, the amount of dividends paid in the course of the past years would exceed EUR 100 million.

14/04/2017. The ESO company was the first one in the Baltic States to test integrated smart accounting of gas and electricity. In 50 houses using electricity and natural gas in Vilnius the company installed smart devices remotely transmitting energy consumption data to the ESO accounting system.

14/04/2017. The National Commission for Energy Control and Prices (NCECP) passed a decision to refuse to approve the SMP investment project due to its complexity and substantial cross-subsidizing risk, arising because of the investment intended under one project and designed to enhance the efficiency of regulated and non-regulated activities. As provided in the procurement conditions, should the NCECP approval be not received, an application will be filed to VPT regarding the discontinuation of the SMP procurement.

26/04/2017. The relevant public authorities of Vilnius authorised the construction of a CHP plant, the City of Vilnius approved the cooperation agreement between the City, VŠT, and Lietuvos energija, providing that the holding should take over TEC-3 by October 1 and approved a bigger height of the plant.

27/04/2017. During Q1 2017, ESO signed more than 3,200 contracts on customer connection to gas pipelines, which is by 1.7 times more than during January-March 2016, when such contracts were signed by 1,900 customers.

27/04/2017. LEG applied to the Competition Council and the transmission system operator with a request to provide an explanation regarding whether or not the effective market regulation creates different conditions for economic entities operating therein and thus contradicts the Law on Competition.

Dr Dalius Misiūnas Chairman of the Board and the Chief Executive Officer of Lietuvos Energija UAB 31 March 2017

51 INTERIM REPORT | I QUARTER 2017