KN Energies AB

Annual Report • Apr 27, 2018

AB KLAIPĖDOS NAFTA

2017

FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS AS ADOPTED BY THE EUROPEAN UNION, INDEPENDENT AUDITOR'S REPORT AND ANNUAL REPORT

FOR THE FINANCIAL YEAR ENDED ON 31 DECEMBER 2017

INDEPENDENT AUDITOR'S REPORT 3 – 7 FINANCIAL STATEMENTS 8 – 59 Statement of financial position 8 – 9 Statement of comprehensive income 10 Statement of changes in equity 11 Cash flow statement 12 – Explanatory note 14– CONFIRMATION OF RESPONSIBLE PERSONS 60 ANNUAL REPORT FOR THE YEAR 2017 61
	13
	59

STATEMENT OF FINANCIAL POSITION

	Notes	31-12-2017	31-12-2016
ASSETS
Non-current assets
Intangible assets	3	490	399
Property, plant and equipment	4	201,449	182,925
Long-term receivables and accrued income	8	2,628	3,160
Investment in subsidiaries	6	200	200
Investment in associates	7	210	211
Total non-current assets		204,977	186,895
Current assets
Inventories	9	1,126	1,394
Prepayments		246	723
Trade receivables	10	11,998	10,603
Prepaid income tax		384	156
Other receivables and accrued incomes	11	767	604
Short term deposits	12	65,000	-
Cash and cash equivalents	13	16,747	42,056
Total current assets		96,268	55,536
Total assets		301,245	242,431

(Cont'd on the next page)

STATEMENT OF FINANCIAL POSITION (CONT'D)

	Notes	31-12-2017	31-12-2016
EQUITY AND LIABILITIES
Equity
Share capital	1,14	110,376	110,376
Share premium		3,913	3,913
Legal reserve	14	9,899	9,209
Reserve for own shares	14	15,929	15,929
Other reserves	14	43,196	39,748
Retained earnings		17,031	13,794
Total equity		200,344	192,969
Non-current amounts payable and liabilities
Deferred income tax liability	25	363	1,320
Non-current employee benefits	15	291	277
Loans	16	76,105	29,693
Grants related to assets	2.20	4,006	2,781
Total non-current amounts payable and liabilities		80,765	34,071
Current amounts payable and liabilities
Loans	16	246	-
Loan interests	16	28	31
Trade payables	17	13,641	10,141
Payroll related liabilities	18	2,680	2,378
Prepayments received	29	2,642	2,358
Other payables and current liabilities	20	899	483
Total current amounts payable and liabilities		20,136	15,391
Total equity and liabilities		301,245	242,431

Chief Executive Officer	Mindaugas Jusius	13 March 2018
Chief Financial Officer	Marius Pulkauninkas	13 March 2018
Chief Accountant	Rasa Tamaliūnaitė	13 March 2018

STATEMENT OF COMPREHENSIVE INCOME

	Notes	2017	2016
Sales	21	106,484	103,839
Cost of sales	22	(82,739)	(83,042)
Gross profit		23,745	20,797
Operating expenses	23	(6,217)	(5,905)
Other income and (expenses)		79	(8)
Profit from operating activities		17,607	14,884
Income from financial activities	24	139	449
Expenses from financial activities	24	(285)	(305)
Share of the associate's profit or (loss)	7	52	67
Profit before income tax		17,513	15,095
Income tax (expenses)	25	(482)	(1,301)
Net profit		17,031	13,794
Other comprehensive income (expenses)		-	-
Items that will not be subsequently reclassified to profit or loss		-	-
Items that may be subsequently reclassified to profit or loss		-	-
Total comprehensive income		17,031	13,794
Basic and diluted earnings (losses) per share, in EUR	26	0.04	0.04

Chief Executive Officer	Mindaugas Jusius	13 March 2018
Chief Financial Officer	Marius Pulkauninkas	13 March 2018
Chief Accountant	Rasa Tamaliūnaitė	13 March 2018

STATEMENT OF CHANGES IN EQUITY

	Notes	Share capital	Share premium	Legal reserve	Reserve for own shares	Other reserves	Retained earnings	Total
Balance as at 31 December 2015		110,376	3,913	8,107	15,929	36,443	22,036	196,804
Net profit for the year		-	-	-	-	-	13,794	13,794
Other comprehensive income		-	-	-	-	-	-	-
Total comprehensive income		-	-	-	-	-	13,794	13,794
Dividends declared	27	-	-	-	-	-	(17,629)	(17,629)
Transfers between reserves		-	-	1,102	-	3,305	(4,407)	-
Balance as at 31 December 2016		110,376	3,913	9,209	15,929	39,748	13,794	192,969
Net profit for the year		-	-	-	-	-	17,031	17,031
Other comprehensive income		-	-	-	-	-	-	-
Total comprehensive income		-	-	-	-	-	17,031	17,031
Dividends declared	27	-	-	-	-	-	(9,656)	(9,656)
Transfers between reserves		-	-	690	-	3,448	(4,138)	-
Balance as at 31 December 2017		110,376	3,913	9,899	15,929	43,196	17,031	200,344

Chief Executive Officer	Mindaugas Jusius	13 March 2018
Chief Financial Officer	Marius Pulkauninkas	13 March 2018
Chief Accountant	Rasa Tamaliūnaitė	13 March 2018

CASH FLOW STATEMENT

	Notes	For the year ended 31 December 2017	For the year ended 31 December 2016
Cash flows from operating activities
Net profit	25	17,031	13,794
Adjustments for noncash items:
Depreciation and amortization	3, 4	13,644	13,197
Change in vacation reserve	18	163	137
Impairment and write-off (reversal) of non-current tangible assets	3, 4	(277)	9
Change in non-current liabilities for employees	15	14	75
Change in allowance in inventory	9	(8)	28
Other non-cash adjustments		226	(310)
Accrued income	8, 11	466	(272)
Income tax expenses	25	482	1,301
Share of (profit) or loss of equity-accounted investees	7	(52)	(67)
Change in allowance for doubtful trade and other receivables	10	769	(1)
Dividends (received)	7	-	(9)
Interest income	24	(35)	(11)
Interest expenses	24	198	-
		32,621	27,871
Changes in working capital
(Increase) decrease in inventories	9	285	259
Decrease (increase) in prepayments made		476	(308)
Decrease (increase) in trade and other accounts receivable	10	(2,140)	17,113
Decrease (increase) in other accounts receivable	11	(97)	(63)
Increase (decrease) in trade and other payables	17, 20	(100)	307
(Decrease) increase in prepayments received		284	1,536
Increase (decrease) in other current liabilities and payroll related	18
liabilities		(107)	124
		31,222	46,839
Income tax (paid)		(1,667)	(1,570)
Interest received	24	35	11
Net cash flows from (used in) operating activities		29,590	45,280
Cash flows from investing activities
(Acquisition) of property, plant, equipment and intangible assets	3, 4	(27,978)	(16,314)
Short term deposits placed	12	(65,000)	-
(Acquisition) of other investments	7	(4)	-
Sales of investments		-	4,350
Grants, subsidies received	2.20	1,225	2,572
Dividends received	7, 24	56	9
Net cash flows from (used in) investing activities		(91,701)	(9,383)

(Cont'd on the next page)

CASH FLOW STATEMENT (CONT'D)

	Notes	For the year ended	For the year ended
		31 December 2017	31 December 2016
Cash flows from financing activities
Dividends (paid)	27	(9,656)	(17,629)
Loans received (paid)	16	46,700	-
Interest and fee related to loans (paid)		(242)	-
Net cash flows from (used in) financing activities		36,802	(17,629)
Net increase (decrease) in cash flows		(25,309)	18,268
Cash and cash equivalents on 1 January	13	42,056	23,788
Cash and cash equivalents on 31 December	13	16,747	42,056
Other non-financial information related to cash flows: Liability for property, plant and equipment
outstanding as at year end		3,673	2,841
Accrual on construction-in-progress		338	-

Chief Executive Officer	Mindaugas Jusius	13 March 2018
Chief Financial Officer	Marius Pulkauninkas	13 March 2018
Chief Accountant	Rasa Tamaliūnaitė	13 March 2018

EXPLANATORY NOTES TO FINANCIAL STATEMENTS

1 GENERAL INFORMATION

AB Klaipėdos Nafta (hereinafter referred to as "the Company") is a public limited liability company registered in the Republic of Lithuania. The address of its registered office is as follows: Burių str. 19, 91003 Klaipėda, Lithuania.

The main activities of the Company include operation of oil terminal, oil products transhipment and other related services, as well as operation of the liquefied natural gas terminal (hereinafter referred to as "LNGT") with a purpose to receive and store liquefied natural gas, regasify it and supply it to Gas Grid.

National Commission for Energy Control and Prices (hereinafter referred to as "NCC") issued Natural Gas Regasification License to the Company on 27 November 2014. That was the start of the LNG terminal activity.

As of 31 December 2017 all the shares were owned by 2,178 shareholders (as of 31 December 2016 all the shares were owned by 1,993 shareholders). The Company's share capital – EUR 110,375,793.36 (one hundred ten million three hundred seventy-five thousand seven hundred ninety-three and 36 cents) is fully paid. It is divided into 380,606,184 (three hundred eighty million six hundred six thousand one hundred eighty-four) ordinary shares with a par value of twenty nine (0.29) euro cents, 72.32 % of the shares (275,241,290 shares) are owned by the State of Lithuania, represented by the Ministry of Energy.

The Company has not acquired any own shares and has arranged no deals regarding acquisition or transfer of its own shares during the years 2017 and 2016. The Company's shares are listed in the Baltic Main List on the NASDAQ Vilnius Stock Exchange (ISIN code LT0000111650, abbreviation KNF1L).

As of 31 December 2017 and 31 December 2016 the shareholders of the Company were:

		31 December 2017	31 December 2016
	Number of	Part of	Number of	Part of
	shares held	ownership	shares held	ownership
	(thousand)	(%)	(thousand)	(%)
State of Lithuania represented by the Ministry of Energy (Gediminas av, 38/2, Vilnius, 302308327)	275,241	72.32	275,241	72.32
Concern UAB Achemos grupė (Jonalaukis village, Jonava district, 156673480)	39,113	10.28	38,975	10.24
Other (less than 5 per cent each)	66,252	17.40	66,390	17.44
Total	380,606	100.00	380,606	100.00

The average number of employees in 2017 was 382 (370– in 2016).

Financial statements approval

The Company's management approved these financial statements on 13 March 2018. The Company's shareholders have a legal right to confirm these financial statements or not to confirm them and to require the management to prepare new financial statements.

2 ACCOUNTING PRINCIPLES

The financial statements are presented in Euro and all values are rounded to the nearest thousand (EUR 000), except when otherwise indicated.

These financial statements have been prepared on a historical cost basis unless otherwise stated in the accounting policies below.

The financial year of the Company coincides with the calendar year.

The numbers in tables may not coincide due to rounding of particular amounts to EUR thousand. Such rounding differences are not material to these financial statements.

The Management of the Company concluded that the subsidiary UAB SGD logistika shall be considered as immaterial to the Group, following provisions of the paragraph 2 of the article 6 of the section 3 of the Lithuanian Law No IX-576 dated 16 November 2011 on the Consolidated financial statements of the Groups of Companies, because its assets at the end of the financial year has not exceeded 5 percent of the Company's assets, and net sales for the reporting period did not exceed 5 percent of the Company's net sales for the corresponding period. Based on the above, as well as overall materiality assessment made the Company's management decided not to prepare consolidated financial statements and the consolidated annual report.

2.1. Basis for preparation of the financial statements

Statement of compliance

Annual financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (hereinafter the EU).

Adoption of new and/or changed IFRS and International Financial Reporting Interpretation Committee (IFRIC) interpretations

The accounting policies adopted are consistent with those of the previous financial year except for the following amended IFRSs which have been adopted by the Company as of 1 January 2017:

IAS 12: Recognition of Deferred Tax Assets for Unrealized Losses (Amendments)

The objective of the Amendments is to clarify the requirements of deferred tax assets for unrealized losses in order to address diversity in practice in the application of IAS 12 Income Taxes. The specific issues where diversity in practice existed relate to the existence of a deductible temporary difference upon a decrease in fair value, to recovering an asset for more than its carrying amount, to probable future taxable profit and to combined versus separate assessment. The Amendments to this standard did not have any impact on the financial statements, as the Company does not have deferred tax assets for unrealized losses.

IAS 7: Disclosure Initiative (Amendments)

The objective of the Amendments is to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. The Amendments specify that one way to fulfil the disclosure requirement is by providing a tabular reconciliation between the opening and closing balances in the statement of financial position for liabilities arising from financing activities, including changes from financing cash flows, changes arising from obtaining or losing control of subsidiaries or other businesses, the effect of changes in foreign exchange rates, changes in fair values and other changes. The Company applied the amendments and included mandatory disclosures in the financial statements (Note 16).

Standards issued but not yet effective and not early adopted

IFRS 9 Financial Instruments: Classification and Measurement

The standard is effective for annual periods beginning on or after 1 January 2018, with early application permitted. The final version of IFRS 9 Financial Instruments reflects all phases of the financial instruments project and replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. Based on preliminary assessment made by the Management, implementation of the standard is expected to have limited or no impact because the Company has only the type of financial instruments for which classification and measurement is not expected to change, mainly trade receivables and payables, short term deposits and bank loans taken. Since majority of the sales are made at market price, and considering that historically there have been very rare cases of impairments of receivables transferring from incurred credit loss model to expected credit loss model is considered to have limited or no impact to the Company's financial statements.

IFRS 15 Revenue from Contracts with Customers

The standard is effective for annual periods beginning on or after 1 January 2018. IFRS 15 establishes a five-step model that will apply to revenue earned from a contract with a customer (with limited exceptions), regardless of the type of revenue transaction or the industry. The standard's requirements will also apply to the recognition and measurement of gains and losses on the sale of some non-financial assets that are not an output of the entity's ordinary activities (e.g., sales of property, plant and equipment or intangibles). Extensive disclosures will be required, including disaggregation of total revenue; information about performance obligations; changes in contract asset and liability account balances between periods and key judgments and estimates.

2.1. Basis for preparation of the financial statements (cont'd)

Standards issued but not yet effective and not early adopted (cont'd)

The management of the Company made an assessment of the effect of the new Revenue standard IFRS 15 on the Company's financial statements. The main areas of potential effect identified were related to tiered pricing, take or pay and loading services in progress at the year-end where the management of the Company made further analysis. Based on the further management's assessment, the new Revenue standard IFRS 15 will have no material effect on the financial statements of the Company as of 1 January 2018.

IFRS 15: Revenue from Contracts with Customers (Clarifications)

The Clarifications apply for annual periods beginning on or after 1 January 2018 with earlier application permitted. The objective of the Clarifications is to clarify the IASB's intentions when developing the requirements in IFRS 15 Revenue from Contracts with Customers, particularly the accounting of identifying performance obligations amending the wording of the "separately identifiable" principle, of principal versus agent considerations including the assessment of whether an entity is a principal or an agent as well as applications of control principle and of licensing providing additional guidance for accounting of intellectual property and royalties. The Clarifications also provide additional practical expedients for entities that either apply IFRS 15 fully retrospectively or that elect to apply the modified retrospective approach.

IFRS 16: Leases

The standard is effective for annual periods beginning on or after 1 January 2019. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e. the customer ('lessee') and the supplier ('lessor'). The new standard requires lessees to recognize most leases on their financial statements. Lessees will have a single accounting model for all leases, with certain exemptions. Lessor accounting is substantially unchanged. The Company will adopt IFRS 16 for the financial year beginning as of 1 January 2019 and has preliminary assessed the impacts of its adoption on the financial statements (Note 29).

Amendment in IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture

The amendments address an acknowledged inconsistency between the requirements in IFRS 10 and those in IAS 28, in dealing with the sale or contribution of assets between an investor and its associate or joint venture. The main consequence of the amendments is that a full gain or loss is recognized when a transaction involves a business (whether it is housed in a subsidiary or not). A partial gain or loss is recognized when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. In December 2015 the IASB postponed the effective date of this amendment indefinitely pending the outcome of its research project on the equity method of accounting. The amendments have not yet been endorsed by the EU. The Company does not think that amendments to these standards will have any impact on the financial statements, as the Company does not prepare consolidated financial statements.

IFRS 2: Classification and Measurement of Share based Payment Transactions (Amendments)

The Amendments are effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. The Amendments provide requirements on the accounting for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments, for share-based payment transactions with a net settlement feature for withholding tax obligations and for modifications to the terms and conditions of a share-based payment that changes the classification of the transaction from cashsettled to equity-settled. These Amendments have not yet been endorsed by the EU. The Company does not think that amendments to these standards will have any impact on the financial statements, as the Company does not have share based payment transactions.

IAS 40: Transfers to Investment Property (Amendments)

The Amendments are effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. The Amendments clarify when an entity should transfer property, including property under construction or development into, or out of investment property.

The Amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. A mere change in management's intentions for the use of a property does not provide evidence of a change in use. These Amendments have not yet been endorsed by the EU. The Company does not think that amendments to these standards will have any impact on the financial statements, as the Company does not have investment property.

IFRS 9: Prepayment features with negative compensation (Amendment)

The Amendment is effective for annual reporting periods beginning on or after 1 January 2019 with earlier application permitted. The Amendment allows financial assets with prepayment features that permit or require a party to a contract either to pay or receive reasonable

2.1. Basis for preparation of the financial statements (cont'd)

Standards issued but not yet effective and not early adopted (cont'd)

IFRS 9: Prepayment features with negative compensation (Amendment) (cont'd)

compensation for the early termination of the contract (so that, from the perspective of the holder of the asset there may be 'negative compensation'), to be measured at amortized cost or at fair value through other comprehensive income. These Amendments have not yet been endorsed by the EU. The Company has not yet evaluated the impact of the implementation of this amendment to the financial statements.

IAS 28: Long-term Interests in Associates and Joint Ventures (Amendments)

The Amendments are effective for annual reporting periods beginning on or after 1 January 2019 with earlier application permitted. The Amendments relate to whether the measurement, in particular impairment requirements, of long term interests in associates and joint ventures that, in substance, form part of the 'net investment' in the associate or joint venture should be governed by IFRS 9, IAS 28 or a combination of both. The Amendments clarify that an entity applies IFRS 9 Financial Instruments, before it applies IAS 28, to such longterm interests for which the equity method is not applied. In applying IFRS 9, the entity does not take account of any adjustments to the carrying amount of long- term interests that arise from applying IAS 28. These Amendments have not yet been endorsed by the EU. The Company has not yet evaluated the impact of the implementation of this amendment to the financial statements.

IAS 19: Plan Amendment, Curtailment or Settlement (Amendments)

The Amendments are effective for annual periods beginning on or after 1 January 2019 with earlier application permitted. The Amendments require entities to use updated actuarial assumptions to determine current service cost and net interest for the remainder of the annual reporting period after a plan amendment, curtailment or settlement has occurred. The amendments also clarify how the accounting for a plan amendment, curtailment or settlement affects applying the asset ceiling requirements. These Amendments have not yet been endorsed by the EU. The Company has not yet evaluated the impact of the implementation of this amendment.

IFRIC INTERPETATION 22: Foreign Currency Transactions and Advance Consideration

The Interpretation is effective for annual periods beginning on or after 1 January 2018 with earlier application permitted. The Interpretation clarifies the accounting for transactions that include the receipt or payment of advance consideration in a foreign currency. The Interpretation covers foreign currency transactions when an entity recognizes a non-monetary asset or a non-monetary liability arising from the payment or receipt of advance consideration before the entity recognizes the related asset, expense or income. The Interpretation states that the date of the transaction, for the purpose of determining the exchange rate, is the date of initial recognition of the non-monetary prepayment asset or deferred income liability. If there are multiple payments or receipts in advance, then the entity must determine a date of the transactions for each payment or receipt of advance consideration. This Interpretation has not yet been endorsed by the EU. The Company does not think that amendments to these standards will have significant impact on the financial statements, as the Company does not have the receipt or payment of advance consideration in a foreign currency currently.

The IASB has issued the Annual Improvements to IFRSs 2014 – 2016 Cycle, which is a collection of amendments to IFRSs. The amendments are effective for annual periods beginning on or after 1 January 2017 for IFRS 12 Disclosure of Interests in Other Entities and on or after 1 January 2018 for IFRS 1 First-time Adoption of International Financial Reporting Standards and for IAS 28 Investments in Associates and Joint Ventures. Earlier application is permitted for IAS 28 Investments in Associates and Joint Ventures. The Company does not think that amendments to these standards will have any impact on the financial statements, as the Company does not have subsidiaries or joint ventures held for sale or associates measured at fair value, it does not have discontinued operations and it is not a first-time IFRS adopter.

• IFRS 12 Disclosure of Interests in Other Entities: The amendments clarify that the disclosure requirements in IFRS 12, other than those of summarized financial information for subsidiaries, joint ventures and associates, apply to an entity's interest in a subsidiary, a joint venture or an associate that is classified as held for sale, as held for distribution, or as discontinued operations in accordance with IFRS 5.
• IFRS 1 First-time Adoption of International Financial Reporting Standards: This improvement deletes the short-term exemptions regarding disclosures about financial instruments, employee benefits and investment entities, applicable for first time adopters.
• IAS 28 Investments in Associates and Joint Ventures: The amendments clarify that the election to measure at fair value through profit or loss an investment in an associate or a joint venture that is held by an entity that is venture capital organization, or other.

2.1. Basis for preparation of the financial statements (cont'd)

Standards issued but not yet effective and not early adopted (cont'd)

qualifying entity, is available for each investment in an associate or joint venture on an investment-by-investment basis, upon initial recognition.

IFRIC INTERPETATION 23: Uncertainty over Income Tax Treatments

The Interpretation is effective for annual periods beginning on or after 1 January 2019 with earlier application permitted. The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12. The Interpretation provides guidance on considering uncertain tax treatments separately or together, examination by tax authorities, the appropriate method to reflect uncertainty and accounting for changes in facts and circumstances. This Interpretation has not yet been endorsed by the EU. The Company has not yet evaluated the impact of the implementation of this interpretation.

The IASB has issued the Annual Improvements to IFRSs 2015 – 2017 Cycle, which is a collection of amendments to IFRSs. The amendments are effective for annual periods beginning on or after 1 January 2019 with earlier application permitted. These annual improvements have not yet been endorsed by the EU. The Company has not yet evaluated the impact of the implementation of these improvements.

• IFRS 3 Business Combinations and IFRS 11 Joint Arrangements: The amendments to IFRS 3 clarify that when an entity obtains control of a business that is a joint operation, it remeasures previously held interests in that business. The amendments to IFRS 11 clarify that when an entity obtains joint control of a business that is a joint operation, the entity does not remeasure previously held interests in that business.
• IAS 12 Income Taxes: The amendments clarify that the income tax consequences of payments on financial instruments classified as equity should be recognized according to where the past transactions or events that generated distributable profits has been recognized.
• IAS 23 Borrowing Costs: The amendments clarify paragraph 14 of the standard that, when a qualifying asset is ready for its intended use or sale, and some of the specific borrowing related to that qualifying asset remains outstanding at that point, that borrowing is to be included in the funds that an entity borrows generally.

The Company plans to adopt the above mentioned annual improvements not earlier than their effective date provided they are endorsed by the EU.

2.2. Foreign currency

Functional currency

The amounts shown in these financial statements are measured and presented in local currency, euro (EUR), which is the functional currency of the Company.

Transactions and balances

Foreign currency transactions are converted into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the conversion of monetary assets and liabilities denominated in foreign currencies using the exchange rate available at the reporting date are recognised in the statement of comprehensive income as finance income or expenses.

Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are converted using the exchange rate available at the date of the transaction.

2.3. Operating segments

Operating segment is a separated business constituent part, the business risks and profitability of which differ from other business constituent parts.

2.1. Operating segments (cont'd)

The Management making strategic decisions consists of a chief operating decision maker responsible for distribution of the Company's resources and evaluation of activity's results of the business segments.

The Management of the Company has identified the following business segments (note 5):

• KNF oil terminal in Klaipėda supplying oil products, providing transhipment and other related services.
• SGD LNG terminal in Klaipėda, which receives and stores liquefied natural gas, regasifies it and supplies to Gas Main.
• SNT Subačius oil terminal in Kupiškis district provides services of long-term storage of oil products and loading of auto-tankers.
• GDP LNG related business development which includes LNG reloading station activities and development and consulting of other LNG

2.2. Investment in subsidiaries

Investments in subsidiaries are carried at cost, less impairment. The Company determines at each reporting date whether there is any objective evidence that the investment in the subsidiary is impaired. If this is the case the Company calculates the amount of impairment as the difference between the recoverable amount of the subsidiary and its carrying value and recognises the amount in the profit (loss) in the statement of comprehensive income.

2.5. Investment in associates

The Company accounts for investments in associates using the equity method. An associate is an entity in which the Company has significant influence, but no control over the financial and operating policies. Significant influence is presumed to exist when the Company holds between 20% and 50% of the voting rights of another company.

Under the equity method the investment in the associate is carried in the Statement of Financial position at cost plus post acquisition changes in the Company's share of the associate's net assets. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment.

The share of profit (loss) of an associate is shown on the face of the statement of comprehensive income (loss).

The financial statements of the associate are prepared for the same reporting period as the Company. Where necessary, adjustments are made to bring the accounting policies in line with those of the Company. After application of the equity method the Company determines whether it is necessary to recognise an additional impairment loss on the Company's investment in its associate. The Company determines at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case the Company calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and recognises the amount in the caption "Share of the associate's profit or (loss)" in the statement of comprehensive income (Note 7).

Unrealized gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Company's interest to investee. Unrealized losses are eliminated the same way as unrealized gains, but only to the extent that there is no evidence of impairment.

2.6. Intangible assets

Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. The Company did not have assets with indefinite useful lives (as of 31 December 2017 and 31 December 2016). Intangible assets with finite lives are amortized over the useful economic lives of 3 years and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Amortisation periods and methods for intangible assets with finite useful lives are reviewed at least at each financial year-end (Note 3).

Costs associated with maintaining computer software programmes are recorded as an expense as incurred.

2 ACCOUNTING PRINCIPLES (CONT'D)

2.7. Property, plant and equipment

Tangible assets are attributed to property, plant and equipment if their useful life exceeds one year (Note 4).

Non-current tangible assets of the Company are stated at cost less accumulated depreciation and impairment losses. The initial cost of property, plant and equipment comprises its purchase price, including non-refundable purchase taxes, capitalised borrowing costs and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditures incurred after noncurrent tangible assets have been put into operation, such as repair and maintenance costs, are normally charged to profit or loss in the period the costs are incurred.

Where parts of an item of non-current tangible assets have different useful lives, they are accounted for as separate items (major components) of non-current tangible assets.

The useful lives, residual values and depreciation method are reviewed periodically to ensure that the period of depreciation and other estimates including borrowing costs are consistent with the expected pattern of economic benefits from items of non-current tangible assets. In case external and (or) internal impairment indications exist at the date of the statement of financial position, the Company performs detailed impairment testing in order to ensure that non-current tangible assets are accounted for at value not higher than their recoverable amount.

Construction-in-progress is stated at cost. This includes the cost of construction, plant and equipment and other directly attributable costs including borrowing cost. Construction-in-progress is not depreciated until the relevant assets are completed and available for their intended use. The Company determines at each reporting date whether there is any objective evidence that the construction-in-progress is impaired. The Company calculates the amount of impairment for suspended construction-in-progress.

When non-current tangible assets are retired or otherwise disposed, the cost and related depreciation are removed from the financial statements and any related gains or losses are included in the statement of comprehensive income. Gains and losses on disposal of property, plant and equipment are determined as a difference between proceeds and the carrying amount of the non-current tangible assets disposed and recorded in profit (loss).

Subsequent repair costs are included in the asset's carrying amount, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repair and maintenance costs are charged to profit or loss during the financial period in which they are incurred.

Spare parts of high value that are expected to use longer than one year are classified as property, plant and equipment. Spare parts are carried at acquisition cost, less accumulated depreciation and impairment. Depreciation is calculated on a straight-line basis over the estimated useful life of the related item of property, plant and equipment.

Non-current intangible assets	3
Software	3
Property, plant and equipment
Land	-
Buildings	38 – 60
Administrative, industrial and other buildings	60
Special purpose buildings	38
Constructions	15 – 30
Pump station	30
Operators and temporary buildings and other constructions	18
Pathway, yard, fences, gates, communication network	15

Depreciation is calculated on a straight-line basis over the following estimated useful lives (in years):

2.7. Property, plant and equipment (cont'd)

Depreciation is calculated on a straight-line basis over the following estimated useful lives (in years):

Technological machinery, equipment and systems	5 – 55
Connecting gas piping	55
Rail gantry, containers, storage tanks	30
Oil product filters	20
Grid system	18
Piping systems and fire protection systems	15
Other gas system of technological equipment, machinery and valves	13
Compressors, electric motors	13
Fans, heat exchangers, machine and oil pipeline valves	8
Loading/unloading arms and loading equipment	8
Other technological devices, equipment and systems	5
Furniture	4 - 6
Office equipment	4
Furniture	6
Measuring, controlling devices, tools	4 - 10
Gas sampling system and gas accounting system	9
Other measuring devices	4
Controlling devices	10
Computers and communication equipment	4
Vehicles and other tangible assets	6

2.8. Financial assets – initial recognition and measurement

Financial assets are classified either as financial assets at fair value through profit or loss, held-to-maturity financial assets, loans and receivables, and available-for-sale financial assets, as appropriate. The Company establishes classification of financial assets on initial recognition.

The purchases and sales of financial assets are recognised at the trade date.

When financial assets are recognised initially, they are measured at fair value, plus (in the case of financial assets not at fair value through profit or loss) directly attributable transaction costs. Financial assets of the Company include cash and short-term deposits, trade debts and other receivables, loans and other receivables, held-to-maturity investments.

Financial assets or financial liabilities at fair value through profit or loss

Financial assets and financial liabilities classified in this category are designated by the Management on initial recognition when the following criteria are met:

• the designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognising gains or losses on them on a different basis;
• the assets and liabilities are part of a group of financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis in accordance with a documented risk management or investment strategy;
• the financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded.

Financial assets and financial liabilities at fair value through profit or loss are measured in the statement of financial position at fair value. Related profit or loss on revaluation is charged directly through profit or loss. Interest income and expense and dividends on such investments are recognised as interest income and dividend income or interest expenses, respectively.

The Company did not have any financial assets and financial liabilities at fair value through profit or loss as of 31 December 2017 and as of 31 December 2016.

2.8. Financial assets – initial recognition and measurement (cont'd)

Loans and receivables

Loans and receivables (which are non-derivative financial instruments) are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method less any allowance for impairment. Gains and losses are recognised in the profit (loss) when the loans and receivables are derecognised or impaired, as well as through the amortisation process (Notes 10, 11).

2.9. Derecognition of financial assets and liabilities

Financial assets

A financial asset (or, where applicable a part of a financial asset) is derecognised when:

• the rights to receive cash flows from the asset have expired;
• the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a "pass through" arrangement; or
• the Company has transferred their rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Company has transferred its rights to receive cash flows from an asset and has not transferred substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Company's continuing involvement in the asset.

Financial liabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

2.10. Employee benefits

Social security contributions

The Company pays social security contributions to the State Social Security Fund (hereinafter the Fund) on behalf of its employees based on the legally defined contribution plan in accordance with the local legal requirements. A defined contribution plan is a plan under which the Company pays fixed contributions into the Fund and will have no legal or constructive obligations to pay further contributions if the Fund does not hold sufficient assets to pay all employees benefits related to employee service in the current and prior period. The social security contributions are recognised as an expense on an accrual basis and are included within staff costs.

Non-current employee benefits

The past service costs are recognised as an expense on a straight line basis over the average period until the benefits become vested. Any gains or losses appearing as a result of curtailment and/or settlement are recognised in the statement of comprehensive income as incurred. The past service costs are recognized in the statement of profit (loss) and other comprehensive income as incurred.

The above mentioned employee benefit obligation is calculated based on actuarial assumptions, using the projected unit credit method. Obligation is recognized in the statement of financial position and reflects the present value of these benefits on the preparation date of the statement of financial position. Present value of the non-current obligation to employees is determined by discounting estimated future cash flows using the discount rate which reflects the interest rate of the Government bonds of the same currency and similar maturity as the employment benefits. Actuarial gains and losses are recognized in the statement of profit (loss) and other comprehensive income as incurred.

2.11. Inventories

Inventories are measured at the lower of cost and net realisable value after impairment evaluation for obsolete and slow moving inventories. Net realisable value is estimated taking the selling price in the ordinary course of business, less the costs of completion, marketing and

2.11. Inventories (cont'd)

distribution. The cost of inventories consists of purchase price, transport, and other costs directly attributable to the cost of inventories. Cost is determined by the first-in, first-out (FIFO) method. Unrealisable inventory is written-off (Note 9).

2.12. Cash and cash equivalents

Cash includes cash in bank accounts. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less and that are subject to an insignificant risk of change in value (Note 13).

For the purposes of the cash flow statement, cash and cash equivalents comprise cash, deposits held at call with banks, and other short-term highly liquid investments with maturities of less than three months.

2.13. Short term deposits

Short term deposits include short-term bank deposits at the commercial banks with maturity of more than 3 months. Initially short-term bank deposits are recognised at cost. Subsequently short-term deposits are stated at acquisition cost less any allowance for impairment.

2.14. Borrowings and borrowing costs

Borrowings

Borrowings are recognised initially at the fair value of proceeds received, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost using the effective interest rate method; any difference between proceeds (net of transaction costs) and the redemption value is recognised in the Statement of Comprehensive income over the period of borrowings except for the capitalized part (Notes 4, 16 and 24).

Borrowing costs

Borrowing costs in relation to loans for acquisition of property, plant and equipment are recognised as part of transaction costs and added to the acquisition cost of the asset accordingly.

The borrowing costs, which represent a part of the cost price of a qualifying asset, the Company must begin to capitalize from the start of construction. Capitalization start is considered to be the day when the company meets the following conditions for the first time: incurs costs in respect of the asset, incurs borrowing costs, carries out activities required to prepare the asset for its intended use or sale.

The Company has to discontinue the capitalization of borrowing costs when virtually all the activities necessary to prepare a qualifying asset for its intended use or sale have been completed. Commonly, an asset is prepared for its intended use or sale when its physical construction has been completed, even if the routine administrative work is still carried out. Although small changes are still possible, such as finishing of the asset in accordance with the instructions of a purchaser or user, it indicates that, essentially, all the activities have already been completed.

During the years 2017 and 2016 the Company did not capitalize borrowing costs due to the reason that all outstanding borrowings were related to assets which were not qualifying for borrowing costs capitalization in accordance with IAS 23. Per management judgement made, such specific borrowings outstanding during financial year but with which related assets are already constructed (and not qualifying for borrowing costs capitalization) are not treated as part of general borrowings, and therefore, not allocated to other qualifying assets outstanding during the year.

2.15. Finance and operating lease

The decision of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception date of whether the fulfilment of the arrangement is dependent on the use of specific asset or assets or the arrangement conveys a right to use the asset.

AB KLAIPĖDOS NAFTA FINANCIAL STATEMENTS FOR THE YEAR ENDED ON 31 DECEMBER 2017 (all amounts are in EUR thousand unless otherwise stated)

2 ACCOUNTING PRINCIPLES (CONT'D)

2.15. Financial and operating lease (cont'd)

Finance leases

Finance leases, which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are reflected in the profit (loss).

Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term.

The Company did not have any finance lease contracts as of 31 December 2017 and as of 31 December 2016.

Operating leases

A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.

The Company as a lessee

Operating leases payments are recognized as expenses in the profit (loss) on a straight line basis over the lease term recognised in the statement of comprehensive income as cost of sales or operating expenses (Note 29).

The Company as a lessor

Assets leased under operating lease in the statement of financial position of the Company are accounted for depending on the type of assets. Income from operating lease is recognised as other income in the profit (loss) within the lease period using the straight-line method. All the discounts provided to the operating lessee are recognised using straight-line method during the lease period by reducing the lease income.

2.16. Income tax

Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities, including also adjustments in respect of prior years. The tax rates used to compute the amount are those that are enacted by the date of the Statement of Financial position.

Income tax charge is based on profit for the year and considers deferred taxation. Income tax is calculated based on the Lithuanian tax legislation.

The effective income tax rate applicable for companies of the Republic of Lithuania in 2017 was 15 % (15 % – in 2016) (Note 25).

Starting from 1 January 2014 deductible tax losses carried forward can be used to reduce the taxable income earned during the reporting year by maximum 70%. Tax losses can be carried forward for indefinite period, except for the losses incurred as a result of disposal of securities and/or derivative financial instruments. Such carrying forward is disrupted if the Company stops its activities due to which these losses were incurred except when the Company does not continue its activities due to reasons which do not depend on the Company itself.

The losses from disposal of securities and/or derivative financial instruments can be carried forward for 5 consecutive years and only be used to reduce the taxable income earned from the transactions of the same nature.

Deferred income tax is recognized in respect to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

2.16. Income tax (cont'd)

Deferred tax assets and liabilities are measured using the tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse based on tax rates enacted or substantively enacted at reporting date.

A deferred tax asset is recognised in the Statement of Financial position to the extent the Management believes it will be realised in the foreseeable future, based on taxable profit forecasts. If it is believed that part of the deferred tax asset is not going to be realised, this part of the deferred tax asset is not recognised in the financial statements.

Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.

2.17. Dividends

Dividends are recorded in the financial statements when they are declared by the Annual General Shareholders' Meeting.

2.18. Basic and diluted earnings per share

Basic earnings per share are calculated by dividing the net profit attributable to the shareholders by the weighted average of ordinary registered shares issued. Provided that the number of shares changes without causing a change in the economic resources, the weighted average of ordinary registered shares is adjusted in proportion to the change in the number of shares as if this change took place at the beginning of the previous period presented. Since there are no instruments reducing profit (loss) per share, there is no difference between the basic and diluted earnings per share (Note 26).

2.19. Provisions

General

Provisions are recognised when the Company has a present legal or constructive obligation in respect of past events and it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Where the Company expects the provision to be reimbursed the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. Expenses related to provisions are recorded in the statement of comprehensive income, net of compensation receivable.

Greenhouse gas (GHG) emissions

The Company applies a 'net liability' approach in accounting for the emission rights received. It records the emission allowances granted to it at a nominal (null) amount, as it is allowed by IAS 20 "Accounting for Government Grants and Disclosure of Government Assistance". Liabilities for emissions are recognised only as emissions are made (i.e. provisions are never made on the basis of expected future emissions) and only when the reporting entity has made emissions in excess of the rights held. Costs of allowances are recorded under cost of sales caption in the profit (loss) (Note 22).

2.20. Grants

Asset-related grants

Asset-related government and the European Union grants and third party compensations comprise grants received in the form of noncurrent assets or intended for the acquisition of non-current assets. Grants are initially recognised at fair value of the asset received and subsequently accounted for in the statement of comprehensive income by reducing the depreciation charge of related asset over the expected useful life of the asset.

The Company has received grants amounting up to EUR 1,226 thousand during the year 2017 (EUR 2,572 thousand - during the year 2016) to finance the acquisition of assets.

2.20. Grants (cont'd)

Asset-related grants

The Company has no unfulfilled conditions or contingencies attached to these grants as at 31 December 2017 and as at 31 December 2016.

Income-related grants

Government and the European Union grants received as a compensation for the expenses or unearned income of the current or previous reporting period, also, all other grants, which are not asset-related grants, are treated as income-related grants. The income-related grants are

recognised as used in parts to the extent of the expenses incurred during the reporting period or unearned income to be compensated by that grant. These grants are recognised in the statement of comprehensive income, net of related expenditure.

2.21. Revenue recognition

Revenues are recognized if it is expected that the Company will get economic benefit associated with a transaction and when the amount of the revenue can be measured reliably. Sales are recognised net of VAT and discounts (Note 21).

Income from oil products handling

The Company recognises revenues from oil transhipment taking into account the level of fulfilment of a service. The level of service provided is measured as percentage of transhipment cost expenses from the total cost of services. In the case reliable evaluation of the service agreement is impossible, the revenues are recognised only as a part of expenses incurred that can be recoverable.

Income from reservoirs rent

The rent income is recognized on a straight line basis over the lease term, i.e. the income is calculated on average tariff for all the leasing term.

Income from liquefied natural gas terminal services regulated by National Commission for Energy Control and Prices

Income from LNGT services are regulated by NCC. Based on LNG terminal law clause 5.2, all users of the natural gas transmission system, including final consumers, are obliged to pay the Additional Security supplement together with their other payments for the natural gas transmission service.

The revenue of the LNG terminal activity comprises from: i) LNG regasification tariff; ii) LNG reloading tariff and iii) liquefaction price fixed part which is collected through additional security supplement to the natural gas transmission price (hereinafter – LNG security supplement). Regasification and reloading revenue are collected directly from the clients after services are provided based on quantities. For the actual tariffs see the LNGT services in the annual report. The LNG security supplement is collected by the transmission service operator (hereinafter referred to as "TSO") either directly from the user or from suppliers of natural gas in case the user has no direct contractual obligations with the TSO. The Additional Security Supplement is calculated by the NCC on an annual basis in proportion to the planned natural gas consumption capacities as set out in National legislation in relation to gas market.

Prices set for the LNGT services for the years 2017 and 2016 are:

• LNG regasification service price fixed part is approved by the NCC based on LNG regasification service price cap set by NCC: - For the year 2016 set by the resolution No. O3-683 on 23 December 2015 and on 25 March 2016 it was adjusted for the period from 1 April 2016 until 31 December 2016 by the resolution No. O3-83. - For the year 2017 set by the resolution No. O3-369 on 17 November 2016.
• LNG regasification service price fixed cap is being adjusted on yearly basis.
• LNG reloading service price is set by NCC on 20 November, 2014 by the resolution No. O3-896. LNG reloading price is set for 5 years period.

Sales of goods

Revenues from sales of goods are recognised upon delivery and transfer of risks of products and customer acceptance.

2.21. Revenue recognition (cont'd)

Interest income

Interest income is recognised in profit (loss) on accrual basis (using the effective interest rate method).

Dividends income

Dividends income represents gross dividends from investment and recognised when the shareholder's rights to receive payment is established.

Rent income

Rent income is recognised over the lease term on a straight-line basis.

Income from fines and penalties

Income from fines and penalties is recognized when the Company has evidence that fines and penalties will be received and the probability that it would not be received is low or when money is already received.

2.22. Expenses recognition

Expenses are recognised on the basis of accrual and revenue and expense matching principles in the reporting period when the income related to these expenses was earned, irrespective of the time the money was spent. In those cases when the costs incurred cannot be directly attributed to the specific income and they will not bring income during the future periods, they are expensed as incurred.

The amount of expenses is usually accounted for as the amount paid or due, excluding VAT. In the cases when a long period of payment is established and the interest is not distinguished, the amount of expenses shall be estimated by discounting the amount of payment using the market interest rate.

2.23. Impairment of assets

Financial assets

Financial assets are reviewed for objective evidence of impairment at each statement of financial position date. The financial asset is impaired if there is an objective evidence of impairment as a result of a loss event that has occurred after the initial recognition of the asset and that loss event has an impact on the estimated future cash flows of the asset that can be reliably estimated.

For financial assets carried at amortised cost, whenever it is probable that the Company will not collect all amounts due according to the contractual terms of loans or receivables, an impairment or bad debt loss is recognised in the profit (loss). The reversal of impairment losses previously recognised is recorded when the decrease in impairment loss can be justified by an event occurring after the write-down. Such reversal is recorded in the profit (loss). However, the increased carrying amount is only recognised to the extent it does not exceed the amortised cost that would have been had the impairment not been recognised.

In relation to trade and other receivables, an allowance for impairment is made when there is objective evidence (such as the probability of insolvency or significant financial difficulties of the debtor) that the Company will not be able to collect all of the amounts due under the original terms of the contract. The carrying amount of the receivable is reduced through the use of an allowance account. Impaired debts are derecognised when they are assessed as uncollectible.

Financial assets not measured at fair value through profit or loss are assessed for impairment at least at each reporting date.

Non-financial assets

The Company reviews at least at each reporting date the carrying amounts of non-financial assets, excluding inventories and deferred income tax assets, in order to assess whether an indication of impairment exists. If such indication exists the Company estimates the asset's recoverable amount.

2.23. Impairment of assets (cont'd)

Non-financial assets (cont'd)

Non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that carrying amount of an asset may not be recoverable. Whenever the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognised in the profit

(loss). Reversal of impairment losses recognised in prior years is recorded when there is an indication that the impairment losses recognised for the asset no longer exist or have decreased. The reversal is accounted in the same caption of the profit (loss) as the impairment loss.

Recoverable amount of an asset or cash-generating unit is its value in use or fair value less costs to sell depending which is greater. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.

For impairment testing the asset that cannot be assessed individually is grouped into the minimum asset's group generating cash inflows during continuous use and that is independent from other asset or asset's groups generating cash flows (cash generating unit or CGU).

Where the carrying amount of an asset exceeds its recoverable amount the impairment loss is recognised in the profit (loss). Impairment losses related to the value of CGU are proportionally attributed to decrease the carrying amount of the asset, prescribed to the unit (unit group).

Previously recognised impairment losses are reversed only if there is any indication that such losses no longer exist or have decreased. The reversal is limited so that the carrying amount of the asset does not exceed the carrying amount that would have been determined net of depreciation or amortisation had no impairment loss been recognised for the asset in prior years. The reversal is accounted in the same caption of the profit (loss) as the impairment loss.

2.24. Use of estimates and judgements

The preparation of financial statements in conformity with International Financial Reporting Standards as adopted by the EU requires the Management to make estimates and assumptions that affect the application of accounting principles and figures related to assets, liabilities, income and expenses. The estimates and assumptions are based on historic experience and other factors complying with existing conditions and based on the results of which a conclusion is being made regarding carrying amounts of assets and liabilities that could not be derived at from any other resources. Actual results can differ from calculations.

Estimates and assumptions are regularly revised and are based on historic experience as well as on other factors including future expectations which are believed to be based on the existing circumstances.

Information on critical estimates and judgements are detailed below:

Useful lives of intangible assets and property, plant and equipment

Useful lives of assets are revised every year and if necessary are adjusted to reflect the present estimation of the remaining useful life taking into account technological changes, economic use of the asset in the future and its physical condition (Notes 2.7, 3 and 4).

Impairment losses of property, plant and equipment

The Company at each reporting date inspects and reviews the physical condition and assesses the technical performance of property, plant and equipment. Other external indicators of possible impairment, such as technological changes in the market and operations, are also taken into account. If during the inspection an item of property, plant and equipment is found to be not operating as it was expected (or other traits that the item is obsolete or damaged are visible), the Company assesses its recoverable value and if found to be lower than its cost value, recognizes impairment expenses. If during the inspection it is concluded that previously impaired item can be reallocated to other technological line or it is possible to use it in other than previously expected activities, its impairment is reversed to the amount its recoverable amount exceeds its written down cost value. As assumptions of possible assets usage change, the uncertainty of estimations of their value exist and changes over the time based on new circumstances and new information available.

2.24. Use of estimates and judgements (cont'd)

Impairment losses of receivables

The Company at least once per quarter evaluates impairment of receivables. Evaluation of trade receivable debts is performed on individual basis taking into consideration change in receivable repayment. Information demonstrating negative change in receivable repayment serves as evidence for estimation of impairment losses of receivables.

The Company assesses whether there is any indication of decrease of future cash flows related to the receivables portfolio until impairment of the specific receivable in this portfolio will be estimated.

The Management estimates possible cash flows from debtors following its historic experience of losses, associated with risks of receivables or similar credit. Methods and assumptions applied for estimation of the amount and time of future cash flows are revised regularly for minimising differences between the calculated and actual amount of loss (Note 10).

Determination of classification between operating vs finance lease

At inception of an arrangement the Company determines whether such an arrangement is or contains a financial lease.

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.

Situations that individually or in combination would normally lead to a lease being classified as a finance lease are (IAS 17-10):

• the lease transfers ownership of the asset to the lessee by the end of these lease term;
• the lessee has the option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception of the lease, that the option will be exercised;
• the lease term is for the major part of the economic life of the asset even if title is not transferred;
• at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and
• the leased assets are of such a specialized nature that only the lessee can use them without major modifications.

At inception or on reassessment of the arrangement, the Company separates payments and other consideration required by such an arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Company concludes for a finance lease that is impracticable to separate the payments reliably, then an asset and a liability are recognised at an amount equal to the fair Management has assessed the estimated economic life to be 40 years, while FSRU lease period is of 10 years.

On 2 March 2012 the Company concluded Build, Operate and Transfer (BOT) lease contract with Hoegh LNG Ltd. regarding LNG Floating Storage and Regasification Unit (FSRU). FSRU has arrived to the Seaport of Klaipeda at 27 October 2014 and was taken over by the Company on 27 November 2014. Based on the contract, 2013 financial statements of the Company included the statement that the Contract preliminary meets the criteria of financial lease and on 31 December 2013, the total amount of future minimal lease payments totalled to EUR 263.978 thousand. The amount was not included into the Company's 31 December 2013 statement of financial position. However, Hoegh LNG Ltd. has provided certain new information including also on FSRU fair value valuation, whereas, on the Company's view, under IFRS FSRU lease shall be classified as operating lease from Hoegh LNG Ltd. to AB Klaipėdos Nafta under the Time Charter Party (TCP) entered into between the parties (Note 29).

Based on IFRS criteria, the following facts and circumstances were taken into consideration by the Management of the Company when concluding on the substance of the lease:

• A number of risks and rewards incidental to ownership are not transferred. Hoegh LNG Ltd carries a number of substantial risks attached to the FSRU in relation to the TCP;
• No financial investment decision has been accepted yet to exercise the purchase option;
• TCP contract was signed between unrelated third parties; consequently, TCP conditions reflect FSRU market price;
• There are no similar contracts in the market for comparison purposes;

2.24. Use of estimates and judgements (cont'd)

Determination of classification between operating vs finance lease (cont'd)

• The Company has an agreement on assignment of claim rights and a maximum pledge agreement with UAB Hoegh LNG Klaipėda which maximum amount of USD 50,000 thousand per one year as at 31 December 2017 and as at 31 December 2016. The said agreements are intended to secure obligations of the Company to Hoegh LNG Klaipėda under the Time Charter Party (Lease of a Floating Storage and Regasification Unit in conjunction with maintenance and operation services) agreement concluded on 2 March 2012.
• Based on Hoegh LNG Ltd. and the Company's calculations, at the inception of the lease the present value of the minimum FSRU lease payments does not amount to at least substantially all of the fair value of the leased asset;
• The FSRU can trade as an LNG carrier, or be a part of other regas projects without major modifications, that is not specific to the Company's business needs;
• The Company does not have a cancellation right, but a standard termination regime is applied under the TCP;
• Hoegh LNG Ltd. carries all residual value risk;
• No secondary charter period stated in the TCP.

On 9 March 2015 the Company concluded the Liquefied Natural Gas Terminal jetty usage agreement (hereinafter – Jetty rent) with the Klaipėda State Seaport Authority (hereinafter – KVJUD). The Agreement is concluded inter alia in accordance with the Decree of the Republic of Lithuania Government No. 864 dated 11 June 2012 "Regarding the Decree of the Republic of Lithuania dated 15 February 2012 No. 199 "Regarding the Construction of the LNGT" Amendment", which 6 clause determined that the execution company of the LNGT project and (or) LNGT operator shall use the jetty for mooring of the liquefied natural gas floating storage unit and shall pay the annual jetty fee calculated in accordance with the requirements of the present decree and other legal acts under basis of agreement with the Port Authority (Note 29).

Based on IFRS criteria, the following facts and circumstances were taken into consideration by the Management of the Company when concluding the jetty usage agreement on the substance of the lease:

• A number of risks and rewards incidental to ownership are not transferred. KVJUD carries a number of substantial risks attached to the jetty in relation to the jetty usage agreement;
• Jetty usage agreement was signed between unrelated third parties; consequently, jetty usage agreement conditions reflect rent market price;
• KVJUD allows the Company or any legal successors of the company to use the LNGT jetty for a fee;
• The lessee has no jetty asset purchase option;
• The usage term of the LNGT jetty 50 (fifty) years as for the LNGT jetty usage under common usage conditions by the Port Authority;
• The Management of the Company estimated the useful lives of the other Seaport jetties and considered that current jetty rent period (50 years) does not include a significant economic lifetime period of the jetty (useful lifetime period may be up to 70 years or more);
• The Parties shall have a right to terminate the Agreement only in case of enactment of the new laws of the Republic of Lithuania and / or other legal acts related to the regulation of legal terms regarding the usage of the LNGT jetty;
• KVJUD carries all residual value risk;
• The leased assets are a specialized nature, however, other market participants can use them without major modifications;
• The lessee has the ability to continue the lease for a secondary period at a rent that is substantially market rent;
• Based on the Company's calculations, at the inception of the lease the present value of the minimum jetty rent lease payments does not amount to at least substantially all of the fair value of the leased asset.

Provisions and contingent liabilities

The Company distinguishes between:

• provisions which are recognised as liabilities (assuming that a reliable estimate can be made) because they are present obligations and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligations; and
• contingent liabilities which are not recognised as liabilities because they are either:
• possible obligations, as it has yet to be confirmed whether the Company has a present obligation that could lead to an outflow of resources embodying economic benefits; or
• present obligations that do not meet provision recognition criteria (because either it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or a sufficiently reliable estimate of the amount of the obligation cannot be made).

2.24. Use of estimates and judgements (cont'd)

Provisions and contingent liabilities (cont'd)

The Management of the Company decides to recognise provisions or to disclose contingent liabilities related to legal disputes based on each legal dispute adverse impact probability, expected amount of the obligation, reliability of amount estimation. Analysis is performed together with the internal and (or) external lawyers (Note 29).

Current and deferred income tax

In determining the amount of current and deferred tax the Company takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. One of the key positions from which the Company recognizes deferred income tax is investment incentive. The Company recognizes deferred tax asset arising from the investment incentive only to the amount of budgeted forthcoming one year profit before taxes. This judgement is based on difficult to reliably forecast if the Company will earn sufficient taxable profit in the future to utilise the full investment incentive available (which can be utilised only if the company has taxable profit ). One of the main triggers for unavailability to reliably forecast the taxable profit is LNG activities which are regulated and its revenue is generated based on the tariff set by the regulator. The tariff for the subsequent year is set based on the budgeted expenses. If actual LNG expenses are higher than budgeted. this negatively affects pre-tax income. Due to the stated reasons, the management is able to forecast the pre-tax income for deferred tax realization purposes only for the one forthcoming year.

The Company believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. The assessment relies on estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Company to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expenses in the period that such determination is made (Note 25).

2.25. Contingent assets

A contingent asset is not recognised in the financial statements, but disclosed when an inflow of economic benefits is probable.

2.26. Financial guarantee contracts

Financial guarantee contracts issued by the Company are those contracts that require a payment to be made to reimburse the holder for a loss it incurs because the specified debtor fails to make a payment when due in accordance with the terms of a debt instrument. Financial guarantee contracts are recognised initially as a liability at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee. Subsequently, the liability is measured at the higher of the best estimate of the expenditure required to settle the present obligation at the reporting date and the amount recognised less cumulative amortisation.

2.27. Subsequent events

Subsequent events that provide additional information about the Company's position at the date of the statement of financial position (adjusting events) are reflected in the financial statements. Subsequent events that are not adjusting events are disclosed in the notes if material (Note 31).

2.28. Offsetting

When preparing the financial statements, assets and liabilities, as well as income and expenses are not set off, except the cases when certain International Financial Reporting Standard specifically allows such set-off.

2.29. Fair value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (Note 28).

2.29. Fair value (cont'd)

However, the objective of a fair value measurement in both cases is the same: to estimate the price at which an orderly transaction to sell the assets or to transfer the liability would take place between market participants at the measurement date under current market conditions (i.e. an ultimate price at the measurement date from the perspective of a market participant that holds the asset or owes the liability).

In determining the fair value of non-financial assets, market participant's ability to derive economic benefit from the assets in using it in the highest and best use or selling the asset to another market participant, who would use it according to the highest and best use, is taken into account.

In determining the fair value, a business entity should determine all of the following:

• the specific assets or liability, the fair value of which is determined (together with the appropriate unit of account);
• when non-financial asset is valuated, the valuation assumption, which is fit for the purpose of determining the fair value (along with the corresponding highest and best use of the non-financial asset);
• the principal (or most advantageous) market for the assets or liability;
• the valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participants would use when pricing the asset or liability and the level of the fair value hierarchy within which the inputs are categorised.

The objective of using a valuation technique is to estimate the price at which an orderly transaction to sell the assets or to transfer the liability would take place between market participants at the measurement date under current market conditions. Three widely used valuation techniques are the market approach, the cost approach and the income approach.

Market approach. A valuation technique that uses prices and other relevant information generated by market transactions involving identical or comparable (i.e. similar) assets, liabilities or a group of assets and liabilities, such as a business.

Cost approach. A valuation technique that reflects the amount that would be required currently to replace the service capacity of an asset (often referred to as current replacement cost).

Income approach. Valuation techniques that convert future amounts (e.g. cash flows or income and expenses) to a single current (i.e. discounted) amount. The fair value measurement is determined on the basis of the value indicated by current market expectations about those future amounts.

Fair value hierarchy. To increase consistency and comparability in fair value measurements and related disclosures, the IFRS 13 establishes a fair value hierarchy that categorises into three levels the inputs to valuation techniques used to measure fair value.

Level 1 inputs. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.

Level 2 inputs. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 inputs. Level 3 inputs are unobservable inputs for the asset or liability.

For assets and liabilities that are recognised in the financial statements at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

3 INTANGIBLE ASSETS

	Software
Acquisition:
Balance as of 31 December 2015	1,406
Acquisitions	116
Sold and written-off property	(18)
Balance as of 31 December 2016	1,504
Acquisitions	138
Sold and written-off property	(13)
Transfers from construction in progress	223
Balance as of 31 December 2017	1,852
Accumulated amortization and impairment:
Balance as of 31 December 2015	898
Amortization for the year	225
Sold and written-off property	(18)
Balance as of 31 December 2016	1,105
Amortization for the year	270
Sold and written-off property	(13)
Balance as of 31 December 2017	1,362
Net book value as of 31 December 2015	508
Net book value as of 31 December 2016	399
Net book value as of 31 December 2017	490

The non-current intangible asset amortization amounts to EUR 270 thousand for the year 2017 (EUR 225 thousand – in 2016). EUR 169 thousand of amortization has been included into cost of sales (EUR 140 thousand - in 2016) and the remaining amount has been included into operating expenses in the Statement of comprehensive income.

Part of the intangible asset with the acquisition cost of EUR 604 thousand as of 31 December 2017 was completely amortised (EUR 531 thousand on 31 December 2016), however, it was still in operation.

4 PROPERTY, PLANT AND EQUIPMENT

	Land	Buildings and	Machinery,	Other non	Construction	Total
		structures	plant and	current	in progress
			equipment	assets
Acquisition cost
Balance as of 31 December 2015	38	156,304	147,739	11,274	1,493	316,848
Acquisitions	-	(56)	236	613	15,965	16,758
Advance payments	-	-	21	-	2,260	2,281
Retirements and disposals	-	(54)	(624)	(63)	-	(741)
Transfers from inventories	-	-	-	-	73	73
Transfers from construction in progress	-	256	696	112	(1,064)	-
Balance as of 31 December 2016	38	156,450	148,068	11,936	18,727	335,219
Acquisitions	-	133	551	545	29,556	30,785
Advance payments	-	-	-	1	1,078	1,079
Retirements and disposals	-	(12)	(1,529)	(23)	-	(1,564)
Transfers from inventories	-	-	-	-	4	4
Transfer to construction in progress	-	-	(62)	-	62	-
Transfers from construction in progress	-	493	2,751	1,902	(5,146)	-
Transfer from construction in progress to intangible
assets	-	-	-	-	(223)	(223)
Transfer to inventory	-	-	-	-	(17)	(17)
Balance as of 31 December 2017	38	157,064	149,779	14,361	44,041	365,283
Accumulated depreciation and impairment:
Balance as of 31 December 2015	-	61,598	73,866	4,362	201	140,027
Depreciation for the year	-	4,616	6,301	2,082	-	12,999
Retirements and disposals	-	(23)	(615)	(61)	-	(699)
Impairment for the year (reversal)	-	(2)	(30)	(1)	-	(33)
Balance as of 31 December 2016	-	66,189	79,522	6,382	201	152,294
Depreciation for the year	-	4,548	6,580	2,254	-	13,382
Retirements and disposals	-	(11)	(1,371)	(19)	-	(1,401)
Impairment for the year (reversal)	-	(32)	(408)	(1)	-	(441)
Balance as of 31 December 2017	-	70,694	84,323	8,616	201	163,834
Net book value as of 31 December 2015	38	94,706	73,873	6,912	1,292	176,821
Net book value as of 31 December 2016	38	90,261	68,546	5,554	18,526	182,925
Net book value as of 31 December 2017	38	86,370	65,456	5,745	43,840	201,449

In 2017 the Company reviewed property, plant and equipment and reversed impairment of EUR 441 thousand for the assets (in 2016 the Company reviewed property, plant and equipment and reversed impairment of EUR 33 thousand), which were not in use due to the changed technological conditions and which was previously impaired. In current reporting period previously impaired non-current tangible asset was started to use or written off. The reversal of impairment of such non-current asset items was included into operating expenses in the Statement of comprehensive income during the year 2017 and 2016.

In 2017 and in 2016, the Company has reviewed whether there are indications for non-current tangible assets impairment. As no indications were identified, no further impairment testing was performed.

The depreciation of the non-current tangible assets amounts to EUR 13,382 thousand for the year 2017 (EUR 12,999 thousand – in 2016). EUR 9 thousand of depreciation charge was transferred to inventory value (EUR 27 thousand – in 2016), EUR 11 thousand was reimbursement of the costs according the grant agreement (EUR 21 thousand - in 2016), EUR 13,164 thousand of depreciation charge has been included into cost of sales (EUR 12,785 thousand - in 2016) and the remaining amount EUR 198 thousand (EUR 166 thousand – in 2016) has been included into operating expenses in the Statement of comprehensive income.

Part of the Company's property, plant and equipment with the acquisition cost of EUR 30,613 thousand as of 31 December 2017 was completely depreciated (EUR 30,299 thousand on 31 December 2016), however, it was still in operation.

4 PROPERTY, PLANT AND EQUIPMENT (CONT'D)

The Company's Liquefied natural gas terminal property, plant and equipment amounting to EUR 55,116 thousand was pledged to the Ministry of Finance of Republic of Lithuania for the state guarantee, given to European Investment Bank (hereinafter – EIB) and Nordic Investment Bank (hereinafter – NIB) as of 31 December 2017 (the Company had pledged asset amounting to EUR 60,520 thousand as of 31 December 2016).

During 2017 the Company continued works in the following projects:

Liquefied natural gas (LNG) onshore reloading station. The foreseen start of the Company's LNG reloading station activities and supply of services is the beginning of 2018. Currently, the business unit engaged in this activity required the construction of infrastructure projects and creation of business conditions. As of 31 December 2017 the value of constructions in progress amounted to EUR 28,837 thousand (During 2017 investment amounted to EUR 17,223 thousand). As of 31 December 2016 the value of constructions in progress amounted to EUR 11,614 thousand (During the year 2016 investment amounted to EUR 11,184 thousand).

LNG sampling system - in order to ensure the LNG quality parameters there were invested into LNG sampling system. As of 31 December 2017 and also as of 31 December 2016 the value of constructions in progress amounted to EUR 474 thousand (There was no investment in 2017 and in 2016).

Road tanker loading station development – this project was compted in 2017. As of 31 December 2016 the value of constructions in progress amounted to EUR 2,322 thousand (During the year 2016 investment amounted to 2,322 thousand).

Fuel oil tanks (2 x 4200 m3 construction). As of 31 December 2017 the value of constructions in progress amounted to EUR 2,880 thousand. As of 31 December 2016 the value of constructions in progress amounted to EUR 943 thousand.

LFO (i.e. light oil products) storage tanks park development. Investment for additional 7 (seven) storage tanks to build. As of 31 December 2017 the value of constructions in progress amounted to EUR 6,685 thousand. As of 31 December 2016 the value of construction in progress amounted to EUR 812 thousand.

Installation works of technological piping for small oil loading parts - the project was completed in 2017. As of 31 December 2016 the value of constructions in progress amounted to EUR 987 thousand.

The second stage investment in the expansion of the light oil products storage tank park. The project started in July 2017. As of 31 December 2017 the value of construction in progress, included prepayments, amounted to EUR 2,694 thousand.

Development of the railroad tracks (comprise of the acquired equipment). As of 31 December 2017 the value of construction in progress amounted to EUR 1,626 thousand. As of 31 December 2016 the value of construction in progress amounted to EUR 25 thousand.

Other projects under construction. As of 31 December 2017 the value of constructions in progress amounted to EUR 645 thousand. As of 31 December 2016 the value of construction in progress amounted to EUR 1,374 thousand.

5 INFORMATION ABOUT SEGMENTS

For management purposes, the Company's activities are organised based on the following business segments:

KNF – oil terminal in Klaipėda transhipment ofoil products, providing other related services.

SGD – LNG terminal in Klaipėda, which receives and stores liquefied natural gas, regasifies and supplies it to Gas National Grid.

SNT – Subačius oil terminal in Kupiškis district provides services of long-term storage of oil products and auto-tankers loading.

GDP – LNG related business development including LNG reloading station activities and development and consulting of other LNG projects.

As of 31 December 2017 there were three customers each of which generated revenues exceeding 10% of total Company's revenues and in total amounted to EUR 91,206 thousand:

Customer A – EUR 66,563 thousand (SGD – EUR EUR 66,563 thousand); Customer B – EUR 17,416 thousand (KNF – EUR 17,069 thousand and SNT – EUR 347 thousand); Customer C – EUR 7,227 thousand (KNF – EUR 7,227 thousand).

5 INFORMATION ABOUT SEGMENTS (CONT'D)

As of 31 December 2016 there were three customers each of which generated revenues exceeding 10% of total Company's revenues and in total amounted to EUR 95,453 thousand:

Customer A – EUR 65,467 thousand (SGD – EUR 65,467 thousand); Customer B – EUR 17,628 thousand (KNF – EUR 17,495 thousand and SNT – EUR 133 thousand); Customer C – EUR 12,358 thousand (KNF – EUR 12,358 thousand).

Main indicators of the business segments of the Company included in the statement of comprehensive income and Statement of financial position for the financial year 2017 and 2016 are described below:

For the year ended 31 December 2017	SGD	SNT	GDP	KNF	Total
Revenues from external customers	68,201	2,432	380	35,471	106,484
Profit before income tax	6,700	498	(1,595)	11,910	17,513
Segment net profit (loss)	6,516	484	(1,551)	11,582	17,031
Interest revenue	34	-	-	1	35
Interest expense	(177)	-	(14)	(7)	(198)
Depreciation and amortisation	(5,652)	(903)	(1)	(7,087)	(13,643)
Write-off of non-current tangible assets	(1)			(162)	(163)
Impairment of non-current tangible asset (reversal)		(30)		(411)	(441)
Net profit (loss) part in the associates	-	-	-	52	52
Acquisitions of tangible and intangible assets	388	208	17,341	12,986	30,923
Segment total assets	66,481	12,645	29,822	192,297	301,245
Loan and related liabilities	76,440	-	(61)	-	76,379
Segment total liabilities	84,168	158	9,092	7,483	100,901
For the year ended 31 December 2016	SGD	SNT	GDP	KNF	Total
Revenues from external customers	66,966	2,798	-	34,075	103,839
Profit before income tax	3,850	927	(531)	10,849	15,095
Segment net profit (loss)	3,518	847	(485)	9,914	13,794
Interest revenue	9	-	-	2	11
Interest expense	(177)	-	-	-	(177)
Depreciation and amortisation	(5,738)	(884)	-	(6,575)	(13,197)
Impairment and write-off of non-current tangible assets (reversal)	(3)	(7)	-	(740)	(750)
Net profit (loss) part in the associates	-	-	-	67	67
Acquisitions of tangible and intangible assets	(19)	301	9,308	7,284	16,874
Segment total assets	71,707	10,414	11,645	148,665	242,431
Loan and related liabilities	29,724	-	-	-	29,724
Segment total liabilities	38,831	626	4,656	5,349	49,462

The Company's customers are both Lithuanian and foreign. Sales revenue by geography in 2017 is as follows: Lithuanian clients – EUR 90,968 thousand, foreign clients – EUR 15,518 thousand (in 2016 – EUR 88,890 thousand and EUR 14,949 thousand, respectively). All property, plant and equipment is located in Lithuania.

The Company includes its investments in subsidiaries and associates to the segments which activities these entities are involved in: UAB "SGD logistika" – GDP, UAB ,Baltpool" and Sarmatia Sp. z. o. o. – KNF.

6 INVESTMENT IN SUBSIDIARIES

On 20 November 2015 the subsidiary of AB Klaipėdos Nafta - joint stock company - UAB SGD logistika (Burių str. 19, 91003 Klaipėda, 304139242) was established and registered. UAB SGD logistika's object is to perform activities of operating and managing a liquefied natural gas bunkering carrier.

6 INVESTMENT IN SUBSIDIARIES (CONT'D)

The authorized capital of UAB SGD logistika, is EUR 200 thousand (200 thousand ordinary registered shares), which has been formed by monetary contribution of the Company on 20 November 2015.

On 24 November 2015, UAB SGD logistika signed a joint venture agreement with partner Bomin Linde LNG GmbH & Co. KG (now - Nauticor GmbH & Co. KG) on joint performance of the activities of operating the LNG bunkering carrier, in which UAB SGD logistika held 20% of the authorised capital and Nauticor GmbH & Co. KG held 80% of the authorised capital. Under said joint venture UAB SGD logistika and Nauticor GmbH & Co. KG established two German legal entities: Blue LNG GmbH & Co. KG and Blue LNG Beteiligungsgesellschaft mbH.

This joint venture ordered construction of an LNG bunkering carrier. The LNG bunkering carrier will provide LNG fuel to clients of Nauticor GmbH & Co. KG both at sea and in the Klaipėda port, will offer safe and flexible transportation of LNG from the Klaipėda LNG terminal to the LNG distribution station in the Klaipėda port, will transport LNG to terminals in the North Sea and the Baltic Sea.

On 29 September 2016 UAB SGD logistika and Nauticor GmbH & Co. KG amended said joint venture agreement. Under amended joint venture agreement UAB SGD logistika holds 10% of the authorised capital and Nauticor GmbH & Co. KG holds 90% of the authorised capital in said joint venture as well as in Blue LNG GmbH & Co. KG and Blue LNG Beteiligungsgesellschaft mbH.

In 2017 the construction of the LNG bunkering carrier was carried out further, but not finalized yet.

As of 31 December 2017 there are no circumstances or information available to the management indicating that ,SGD Logistika" may be found liable for any significant liabilities arising from the aforementioned joint venture agreement which would lead to significant losses and as result of that – impairment of the Company's investment in ,,SGD Logistika".

Financial information regarding UAB SGD logistika is presented in the table below as of 31 December 2017 and 31 December 2016:

The subsidiary's financial position:

	UAB SGD logistika			UAB SGD logistika
	2017	2016		2017	2016
Non-current assets	46	3	Income	-	-
Current assets	192	195	(Losses)	(3)	(3)
Non-current liabilities	-	-	Profit (loss)	(3)	(3)
Current liabilities	43	-
Equity	195	198

	The subsidiary's comprehensive income:	The subsidiary's financial position:
--	----------------------------------------	--------------------------------------	--	--	--	--

UAB SGD logistika		UAB SGD logistika
2017	2016	2017	2016

7 INVESTMENT IN ASSOCIATES

Sarmatia Sp. z o.o.

As at 31 December 2017 and 2016 the Company owns 1% of the authorised capital of the international pipeline company Sarmatia Sp. z o.o. During the year 2017 the Company purchased 35 shares with per par value of PLN 500 each (EUR 4 thousand).

The Company is entitled to appoint one of five board members to the management of Sarmatia Sp. z o.o, thus it can have significant influence. Therefore, this investment was classified as an associate and measured using the equity method. Sarmatia Sp. z o.o is a private company not listed on the stock exchange.

UAB Baltpool

As at 31 December 2017 and 2016 the Company owns 33 percent of UAB BALTPOOL shares and their voting rights at the General Meeting of the Shareholders of UAB BALTPOOL. During the year 2017 and 2016 the Company did not have purchased additional shares of UAB BALTPOOL.

UAB BALTPOOL is the operator of the Lithuanian Energy Exchange entitled to organise trade of solid biofuel products. The Company also acts as the administrator of public service obligations (PSO) funds and is engaged in the collection, payment and administration of PSO funds.

7 INVESTMENT INTO ASSOCIATES (CONT'D)

Financial information regarding the Company's investments into Sarmatia Sp. z o. o. and UAB Baltpool is presented in the table below as of 31 December 2017 and 31 December 2016:

The associate's financial position:

	Sarmatia Sp. z o. o			UAB Baltpool	Total
	2017	2016	2017	2016	2017	2016
Non-current assets	-	-	37	27	37	27
Current assets	597	1,704	51,540	48,401	52,137	50,105
Non-current liabilities	-	(576)	-	-	-	(576)
Current liabilities	(748)	-	(50,986)	(47,822)	(51,734)	(47,822)
Equity	(151)	1,128	591	606	440	1,734

The associate's comprehensive income:

	Sarmatia Sp. z o. o		UAB Baltpool			Total
	2017	2016	2017	2016	2017	2016
Income	23	-	736	726	759	726
(Losses)	(382)	-	(579)	(496)	(961)	(496)
Profit (loss)	(359)	-	157	230	(202)	(230)

Structure of the Company's investments in the associates as at 31 December 2017 and 31 December 2016 was as follows:

	Ownership interest (%)		Investment value			Comprehensive income (loss)
	2017	2016	2017	2016		2017	2016
Sarmatia Sp. z o.o.	1.00	1.00	14	-		-	-
UAB Baltpool	33.00	33.00	196	200		52	76
Total	-	-	210	200		52	76

Investments into associates, net value:

	Sarmatia Sp. z o. o		UAB Baltpool		Total
	2017	2016	2017	2016	2017	2016
Book value at start period	11	-	200	133	211	133
Acquisition during the year	3	9	-	-	3	9
Change in value	-	2	52	76	52	78
Dividends	-	-	(56)	(9)	(56)	(9)
Book value at end of period	14	11	196	200	210	211

8 LONG-TERM RECEIVABLES AND ACCRUED INCOME

	31-12-2017	31-12-2016
Long-term accrued income	2,628	3,160

Subačius fuel storage reservoirs rent agreement signed with the Lithuanian petroleum products Agency in 2012 for the duration of 10 years is treated as an operating leasing contract. The rent tariffs are different for the first 5 years and for the remaining period. Therefore, the rent income is recognized on a straight line basis over the lease term, i.e. the incomes are calculated on average tariff of the all leasing term (10 years).

9 INVENTORIES

	31-12-2017	31-12-2016
Diesel fuel for the LNG Terminal purpose	770	918
Oil products for sale	-	197
Liquefied natural gas	221	50
Fuel for transport and other equipment	34	39
Spare parts, construction materials and other inventories	1,218	1,315
Total inventories	2,243	2,519
Write-down of spare parts, construction materials and other inventories	(1,117)	(1,125)
	1,126	1,394

As of 31 December 2017 the Company had accounted write-off of inventories in the amount of EUR 1,117 thousand (EUR 1,125 thousand on 31 December 2016), that have been written down to the net realisable value. The Company writes down the inventories to the net realisable value if they are not used for more than 6 months and in other occasions, if there's clear evidence that net realisable value is lower.

Write-off has been accounted for mostly construction materials and spare parts, which were not used during the reconstruction (1996 – 2005).

Reversal of write-off of inventories to the net realizable value amounts to EUR 8 thousand as of 31 December 2016 (write-off of inventories to the net realizable value amounts to EUR 28 thousand as of 31 December 2016 - EUR 28 thousand) are included under operating expenses in the profit (loss).

As of 31 December 2017 the Company stores 1,4 thousand MWh (as of 31 December 2016 – 1.4 thousand MWh) (the quantities are unaudited) natural gas in the connecting pipeline of the Liquefied natural gas terminal to ensure activities. As of 31 December 2017 in the Liquefied natural gas reloading station the Company held 4.6 thousand MWh (unaudited) natural gas for the purpose of debugging and commissioning works.

Oil products for sale are energy products collected in the Waste Water Treatment Facilities. As at 31 December 2017 the Company didn't have such products collected in its Waste Water Treatment Facilities (as of 31 December 2016 the Company stored– 2.8 thousand tons (unaudited)).

As of 31 December 2017 the Company stored 198 thousand tons of oil products delivered for transhipment in its storage tanks (182 thousand tons as on 31 December 2016) (the quantities are unaudited). Such oil products are not recognised in the Company's financial statements. They are accounted for in the off-balance sheet accounts as the Company has no ownership rights and risk attached to those oil products. The oil products belonged to third parties are insured by the Company in order to cover the loss or damages incurred (if any).

As of 31 December 2017 the Company stored 919 thousand MWh (as of 31 December 2016 – 1,094 thousand MWh) (the quantities are unaudited) of natural gas products delivered for transhipment in the Liquefied natural gas terminal. Such natural gas products are not recognised in the Company's financial statements. They are accounted for in the off-balance sheet accounts as the Company has no ownership rights and risk attached to those natural gas products. The Company is responsible for the insurance of the products.

As of 31 December 2017 in the Liquefied natural gas reloading station the Company stored 23 thousand MWh (unaudited) natural gas products, belonged to the third parties. Such natural gas products are not recognised in the Company's financial statements. They are accounted for in the off-balance sheet accounts as the Company has no ownership rights and risk attached to these products.

10 TRADE RECEIVABLES

	31-12-2017	31-12-2016
Receivables from LNG terminal activities	9,489	8,735
Receivables for transhipment of oil products and other related services	3,271	1,884
Less: impairment allowance	(762)	(16)
	11,998	10,603

Trade and other receivables are non-interest bearing and are generally settled on 6 - 15 days payment terms.

On 31 December 2017 and on 31 December 2016 the Company did not have any trade debts denominated in other currency.

10 TRADE RECEIVABLES (CONT'D)

The Company has recognized impairment allowance in the amount of EUR 762 thousand on 31 December 2017 (EUR 16 thousand on 31 December 2016). Allowance for trade and other accounts receivable is accounted for when the Company's management is uncertain that the amount will be collected.

Change in allowance for receivables for the years 2017 and 2016 has been included into operating expenses in the Statement of the comprehensive income.

The age analysis of trade receivables as of 31 December 2017 and 2016 is as follows:

Trade and other receivables neither past due		Trade receivables past due but not impaired					Total
nor impaired		Less than 30			90 – 359	More than
		days	30 – 59 days	60 – 89 days	days	360 days
2017	8,766	2,935	70	180	47	-	11,998
2016	6,654	3,420	-	-	529	-	10,603

Credit quality of financial assets neither past due nor impaired: with respect to trade receivables that are neither impaired nor past due, there are no indications as of the reporting date that the debtors will not meet their payment obligations since the Company trades only with recognised, creditworthy third parties.

All receivable amounts from the liquefied natural gas terminal services are pledged to UAB Hoegh LNG Klaipėda for 10 years period (Note 29).

11 OTHER RECEIVABLES AND ACCRUED INCOME

	31-12-2017	31-12-2016
Short-term accrued income for storage of oil products	597	530
Real estate tax receivable	33	-
Receivable grant	9	21
VAT receivable	4	32
Other receivables	124	21
	767	604

12 SHORT TERM DEPOSITS

	31-12-2017	31-12-2016
Short-term bank deposits at the commercial banks	65,000	-

As of 31 December 2017 the Company had 2 term deposits at banks, amounted to EUR 65,000 thousand, with maturity of more than 3 months. Annual interest rate range from 0 to 0.02 per cent.

13 CASH AND CASH EQUIVALENTS

	31-12-2017	31-12-2016
Cash at bank	16,747	42,056

As of 31 December 2017 and 2016 the Company had no one night term deposits.

13 CASH AND CASH EQUIVALENTS (CONT'D)

Calculated values of cash and cash equivalents are denominated in the following currencies:

Currency	31-12-2017	31-12-2016
EUR	12,374	37,034
USD	4,373	5,022
	16,747	42,056

The quality of cash and cash equivalents as well as investments held to maturity can be assessed using Fitch long - term borrowing ratings:

	31-12-2017	31-12-2016
A +	663	483
AA -	8,918	36,478
A	7,166	5,095
	16,747	42,056

The maximum exposure of these investments to credit risk at the reporting date was represented by carrying value of the securities and term deposits, classified as investments held to maturity.

14 ISSUED CAPITAL

During the year 2017 and 2016 the authorized capital of the Company did not change (Note 1).

A legal reserve is a compulsory reserve under Lithuanian legislation. Annual transfers of not less than 5 percent of net profit, calculated in accordance with International Financial Reporting Standards, are compulsory until the reserve reaches 10 per cent of the share capital.

Reserve to purchase own shares is concluded for acquisition of own shares. The Company's reserve to purchase own shares is made providing the possibility to buy up own shares.

Other (distributable) reserves are formed based on the decision of the General Shareholders' Meeting on profit distribution. These reserves can be used only for the purposes approved by the General Shareholders' Meeting. The largest portion of the Company's other reserves are formed for investments.

15 NON-CURRENT EMPLOYEE BENEFITS

Provisions for pension benefits represent payable amounts calculated in accordance with the Lithuanian laws. Each employee at retirement age is entitled to receive a payment of 2 monthly salaries upon retirement.

The Company does not think that short term provisions for pension benefits has significant impact on the financial statements, therefore do not recognise short term provisions for pension benefits during the year 2017 and 2016.

On 31 December 2017 the liabilities related to the defined benefit obligations to the employees terminating the employment on the normal retirement date were EUR 291 thousand (EUR 277 thousand – in 2016) as follows:

	2017	2016
Start of period	277	202
Calculated per year	67	241
Paid per year	(53)	(166)
End of period	291	277

15 NON-CURRENT EMPLOYEE BENEFITS (CONT'D)

The main preconditions applied to assess long-term employee benefit liability are presented below:

	31-12-2017	31-12-2016
Discount rate	1,43%	0.31 %
Staff turnover rate	7.65%	7.65%
Future salary increases	2,1%	2.8 %

16 LOANS

	31-12-2017	31-12-2016
European Investment Bank's loan	54,351	29,693
Nordic Investment Bank's loan	22,000	-
Payable loan interest	28	31
	76,379	29,724

A credit contract dated as at 9 July 2013 was concluded by the Company with EIB to grant a credit up to EUR 87,000 thousand to implement LNGT project. According to the contract, EIB finances up to 50% of necessary funds for project implementation. According to the contract, credit term is up to 20 years, interest rate is variable comprising bank margin and EURIBOR rate and is close to borrowing market interest rate, and whose margin will be submitted by the EIB in payment offers. The contract also provides that minimum credit tranche is EUR 15,000 thousand, and the whole credit sum must be paid to the Company over no more than 6 tranches. The performance of 100% of Company's contractual financial liabilities is ensured by the State Guarantee (Note 29).

On 20 December 2013, the Company received the first payment (tranche) in the amount of EUR 15,000 thousand. Repayment period from 20 December 2018 to 20 December 2033 is provided for the first payment in the amount of EUR 15,000 thousand. The loan must be repaid over 61 payments. The fixed variable interest rate provided by the EIB in payment offer: 3 months EURIBOR + fixed margin. The interest is paid quarterly. The effective interest rate has not significantly affected the Company's results, so it is not disclosed.

On 28 November 2014, the Company received the second payment (tranche) in the amount of EUR 15,000 thousand. Repayment period until 28 November 2034 is provided for the second payment in the amount of EUR 15,000 thousand. The loan must be repaid over 61 payments. The fixed variable interest rate provided by the EIB in payment offer: 3 months EURIBOR + margin. The interest is paid quarterly. The effective interest rate has not significantly affected the Company's results, so it is not disclosed.

On 15 December 2017, the Company received the last payment (tranche) in the amount of EUR 24,700 thousand. Repayment period until 20 September 2034 is provided for the third payment in the amount of EUR 24,700 thousand; the loan must be repaid over 57 payments. The fixed variable interest rate provided by the EIB in payment offer: 3 months EURIBOR + margin. Interest rate is considered as zero, if 3 months EURIBOR + margin is below zero. The interest is paid quarterly. The effective interest rate has not significantly affected the Company's results, so it is not disclosed.

The Company shall ensure that the ratio of EBITDA to Interest in respect of the period of twelve months ending on the last day of each of the Company's financial years shall not fall below 4,0:1,0. The Company complied with financial covenant as of 31 December 2017 and as of 31 December 2016.

Loan repayments:

	On demand	Less than 3 months	3 to 12 Months	1 to 5 years	More than 5 years	Total
Loan repayments 31 December 2017	-	-	246	16,709	59,745	76,700
Loan repayments 31 December 2016	-	-	-	5,410	24,590	30,000

16 LOANS (CONT'D)

On 27 November 2014 the Company has concluded the Credit Agreement with the Nordic Investment Bank (NIB) regarding granting a credit of up to EUR 34,754 thousand for the implementation of the project of the liquefied natural gas terminal. On 10 November 2015 there was signed NIB loan amount reduction to EUR 22,000 thousand.

According to the Loan contract, the term of the credit is up to 20 years, interest: floating, which particular rate will be provided in the NIB disbursement offer. The Loan contract also provides that the minimal payable amount of credit is EUR 7,000 thousand, and all the credit amount must be paid to the Company in no more than 5 payments. 100% of the Company's financial obligations under the Loan contract are secured by a State guarantee (Note 29).

On 31 August 2017, the Company have withdrawn the amount of EUR 22,000 thousand. Repayment period from 19 June 2019 to 19 June 2034 is provided for the amount of EUR 22,000 thousand; the loan must be repaid over 31 payments. The fixed variable interest rate provided by the EIB in payment offer: 6 months EURIBOR + fixed margin. The interest is paid quarterly. The effective interest rate has not significantly affected the Company's results, so it is not disclosed.

On 28 April 2017 the Company has concluded the Credit Agreement with the Nordic Investment Bank (NIB) regarding granting a credit of up to EUR 20,400 thousand for the implementation the liquefied natural gas (LNG) reloading station and oil terminal expansion investments in Klaipėda.

According to the Loan contract, the term of the credit is up to 11.5 years, interest: floating, which particular rate will be provided in the NIB disbursement offer. The Loan contract also provides that the minimal payable amount of credit is EUR 5,000 thousand, and all the credit amount must be paid to the Company in no more than 4 payments. The loan is available for drawing until 15 December 2019.

The Company did not use the loan from NIB during the year 2017.

The Company has EUR 20,400 thousand of undrawn loans as at 31 December 2017 and the amount fully consists of Nordic Investment Bank (NIB) loan. As at 31 December 2016, the Company had EUR 67,100 thousand of undrawn loans which consist of Nordic Investment Bank (NIB) loans – EUR 22,000 thousand and EUR 20,400 thousand and tranch No. 3 of European Investment Bank (EIB) loan of EUR 24,700 thousand.

The Company does not have any other financial liabilities upon other financial contracts.

In accordance with IAS 7 Disclosure Initiative requirements, the following table provides disclosure that enable users of financial statements to evaluate changes in liabilities arising from financing activities (loans taken), including both changes arising from cash flows and non-cash changes:

Non-current interest bearing loans and borrowings, including interest payable as at 1 January 2016	29,737
Additional loan disbursements (Cash flows)	-
Interest and loan administration fee charged	164
Interest and loan administration fee paid (Cash flows)	(177)
Other payments / reclassifications	-
Non-current interest bearing loans and borrowings,
including interest payable as at 31 December 2016	29,724
Additional loan disbursements (Cash flows)	46,700
Interest and loan administration fee charged	178
Interest and loan administration fee paid (Cash flows)	(242)
Other payments / reclassifications	19
Non-current interest bearing loans and borrowings, including interest payable as at 31 December 2017	76,379

17 TRADE PAYABLES

	31-12-2017	31-12-2016
Payables for FSRU operating leasing	3,994	4,527
Payable to contractors	7,185	3,512
Other payments related FSRU	488	501
Payable for rent of land	393	227
Payable for gas services	371	179
Payable for railway services	291	120
Other trade payables	919	1,075
	13,641	10,141

On 31 December 2017 trade payables of EUR 4,202 thousand were denominated in USD (EUR 4,746 thousand – on 31 December 2016).

Trade payables are non-interest bearing and are normally settled on 30-day payment terms.

18 PAYROLL RELATED LIABILITIES

	31-12-2017	31-12-2016
Accrual of annual bonuses	1,246	1,151
Accrued vacation reserve	1,052	888
Salaries payable	11	5
Social insurance payable	368	325
Income tax payable	3	5
Payable guarantee fund	-	2
Other deductions	-	2
	2,680	2,378

19 PROVISIONS

Greenhouse gas emission allowances in advance is distributed for the periods covering the next few years. The first period started from 2005 and ended in 2007, the next period started from 2008 and ended in 2012, the current period started from 2013 and ends in 2020. Companies that participate in the project from 2005 are obliged to report about real extent of pollution of each calendar year. When available allowances are not sufficient to cover actual pollution, then a penalty should be paid for each ton of excess carbon dioxide.

Emission rights are accounted for when evaluating the deficit between the emission allowances allocated under the national allocation plan for emission allowances and the actual pollution for the particular year. The quantity of used emission allowances is audited by external auditors each year.

As of 31 December 2017 the Company has accounted for a provision of EUR 148 thousand in regard to the emission made which exceed available at that time emission rights (as of 31 December 2016 – nil).

20 OTHER PAYABLES AND CURRENT LIABILITIES

	31-12-2017	31-12-2016
Accrued tax expenses and liabilities	289	140
Accrued expenses and liabilities	519	176
Other liabilities	91	167
	899	483

Other liabilities are non-interest bearing and have an average payment term of one month.

21 SALES

	2017	2016
Income from LNGT services regulated by NCC	68,210	66,966
Sales of oil transhipment services	34,357	34,449
Other sales related to transhipment	2,082	1,734
Sales of inventories	1,835	690
	106,484	103,839

The Company and BNK (UK) Limited which is an affiliate of the leading exporter of Belarusian oil products – ZAT Belaruskaja neftenaja kampanija, on 19 October 2016 have signed a long term contract on provision of oil products transshipment services through AB Klaipedos nafta terminal (hereinafter – the Contract). The terms of the Contract are valid until 31 October 2019 with an option to extend them based on mutual agreement. During this period BNK (UK) undertakes to transship heavy fuel oil produced in Belarusian oil refineries OAO Mozyrskij NPZ and ОАО Naftan through the Company's terminal.

On 31 January 2017 the Company and UAB Viada LT have signed a contract for provision of oil products transhipment services into trucks with obliging quantity of oil products for delivery and transhipment for 2017. The terms of the contract are valid until 31 December 2017 with an option to extend for 1 year.

On 22 December 2017 the Company and Neste Oyj have signed a contract for provision of oil products transhipment services into trucks with obliging quantity of oil products for delivery and transhipment for 2018 and 2019. The terms of the contract are valid until 31 December 2019 with an option to extend for 2 years.

Other sales income related to transhipment include services of moorage, sales of fresh water, transportation of crew and other transhipmentrelated income.

Income from LNGT services regulated by NCC contains income from LNG regasification service, LNG reloading service and Additional Security supplement (largest component). LNG regasification price cap is being adjusted on yearly basis, LNG reloading price is set for 5 years.

Terminal service	Price set
LNG regasification service tariff (set for year 2016-2017)	0.10 Eur/MWh, excl. VAT
LNG reloading service tariff (set for years 2015-2019)	1.14 Eur/MWh, excl. VAT
LNG terminal liquefaction price fixed part to the gas transmission tariff for the year 2016 with discount*	259,84 Eur/ (MWh/Day/Year), excl. VAT
LNG terminal liquefaction price fixed part to gas transmission tariff for the year 2017	361,84 Eur/ (MWh/Day/Year), excl. VAT
LNG terminal liquefaction price fixed part to gas transmission tariff for the year 2018	351,83 Eur/ (MWh/Day/Year), excl. VAT

* During the period of year 2013-2014 Security supplement has been collected to compensate LNG terminal project implementation costs (or part of it). The Government of the Republic of Lithuania by the resolution No. 1251 set on November 12, 2014, has decided to compensate already collected but not used funds by reducing Security supplement to Lithuania gas system users. Discount shall be applied in years 2015-2016.

For the year 2017 LNG terminal additional security supplement tariff is applied to Terminal users, who regasify gas via LNG terminal and use gas transmission system. LNG terminal additional security supplement tariff is set by NCC by the resolutions annually and is dedicated to cover operating costs of LNG terminal, its infrastructure and tie-in, independently from gas volumes regasified and submitted to gas transmission system. LNG terminal supplement tariff is calculated according to the formula and methodology set out in NCC Resolution No. O3-367 issued on 13 September, 2013 and its subsequent amendments.

During 2017 and 2016 the Company continued to work with its main LNG terminal users: UAB Lietuvos dujų tiekimas, AB Achema and UAB UAB LITGAS.

22 COST OF SALES

	2017	2016
FSRU rent and other expenses	49,547	50,786
Depreciation and amortization	13,487	12,925
Wages, salaries and social security	7,592	7,123
Railway services	2,526	3,043
Natural gas	2,937	2,323
Rent of land and quays	2,300	2,341
Electricity	1,196	1,257
Insurance of assets	454	479
Tax on environmental pollution	165	206
Tax on real estate	312	456
Repair and maintenance of non-current assets	713	617
Cost of sold inventories	265	256
Transport	274	241
Services for tankers	187	178
Work safety costs	105	105
Rent of facilities	70	63
Other	609	643
	82,739	83,042

23 OPERATING EXPENSES

	2017	2016
Salary, social security	3,665	3,244
Consulting and legal costs	258	434
Depreciation and amortisation (3, 4 Notes)	299	251
Expenses for Business trips	168	251
Charity	135	130
Communication costs	167	152
Advertising and external communication costs	247	403
Representation, advertising	89	99
Expenses for refresher courses	93	103
Long term asset impairment change, (reversal)	(441)	(33)
Expenses related to the management of securities	51	39
Impairment of doubtful receivables	769	32
Repair and maintenance of non-current assets	13	14
Other	704	786
	6,217	5,905

In 2017 operating expenses increased mainly due to the impairment of doubtful receivables done (in 2016 - due to the business development activities and projects related with LNG mainly).

2017 consulting and legal costs contain costs incurred for the services provided by the Company's auditors:

• Financial statutory audit and regulatory activities audit for the year ended 31 December 2017 – EUR 24 thousand in total (accrued costs).

• Real estate tax review for period of 2009 – 2014 and assessment of property values for taxation purposes provided in data base of Centre of Register (EUR 920).

24 INCOME (EXPENSES) FROM FINANCIAL AND INVESTMENT ACTIVITIES – NET

	2017	2016
Interest income	35	11
Fines income	104	119
Sales of investment result	-	310
Dividends received	-	9
Financial income, total	139	449
Penalty expenses	(8)	(23)
(Losses) from currency exchange	(79)	(56)
Interest (expenses)	(198)	(177)
Other financial activity (expenses)	-	(49)
Financial activity expenses, total	(285)	(305)

25 INCOME TAX

	2017	2016
Current income tax expense	1,439	1,308
Deferred tax expenses (income)	(957)	(7)
Income tax expense (income) recorded in the profit (loss)	482	1,301

Reconciliation between income tax expense of the Company and the result of taxable income of the Company multiplied by income tax rate for the years 2017 and 2016 is as follows:

	2017	2016
Accounting profit before tax	17,513	15,095
Applying 15 % profit tax rate of the Company	2,627	2,264
Deductible expenses of income tax (charity)	(40)	(39)
Investment projects' relief	(1,439)	(1,156)
Non-deductible expenses of income tax	439	404
Non-taxable income	(148)	(317)
Income tax from dividends	-	152
Applying 15% standard income tax	1,439	1,308
Effective rate	8.22%	8.67%

Deferred income tax consists of:

	Statement of Financial position		Statement of Comprehensive income
	2017	2016	2017	2016
Investment projects' relief	1,677	887	(790)	36
Accelerated depreciation for tax purposes	239	250	11	12
Write-offs of inventories to realizable value	168	169	1	(4)
Accrued annual bonuses	187	173	(14)	(20)
Impairment of non-current assets	47	113	66	5
Long-term employee benefit liability	44	42	(2)	(12)
Vacation reserve	38	32	(6)	(5)
Other temporary differences	21	11	(10)	(11)
Associates' equity method	6	5	(1)	10
Accrued income	(394)	(474)	(80)	114
Investment incentive of non-current assets	(2,396)	(2,528)	(132)	(132)
Deferred income tax expenses/ (income) recognised in profit (loss)	-	-
Deferred income tax assets/ (liabilities), net as at the year-end	(363)	(1,320)	(957)	(7)

25 INCOME TAX (CONT'D)

As of 31 December 2017 the Company's Management's judgement was not to recognize as deferred tax asset amounted up to EUR 4,399 thousand from the investment incentive in the amount of up to EUR 29,329 thousand, whose expiry date is 2021, up to EUR 2,269 thousand from the investment incentive in the amount of up to EUR 15,128 thousand, whose expiry date is 2020 and up to EUR 74 thousand from the investment incentive in the amount of up to EUR 492 thousand, whose expiry date is 2019 (as of 31 December 2016 amounted up to EUR 2,269 thousand from the investment incentive in the amount of up to EUR 15,128 thousand, whose expiry date is 2020, up to EUR 114 thousand from the investment incentive in the amount of up to EUR 761 thousand, whose expiry date is 2019 and up to EUR 2,188 thousand from the investment incentive in the amount of up to EUR 14,588 thousand, whose expiry date is 2018) as the Management does not expect to use investment incentive to decrease taxable profit in the future.

In the Statement of Financial position deferred income tax asset and deferred income tax liability are set-off as they both are related to the same tax authority.

While assessing deferred income tax asset and liability components as of 31 December 2017 and 2016 the Company has used the income tax rate of 15 %.

26 BASIC AND DILUTED EARNINGS (LOSSES) PER SHARE

Basic earnings per share are calculated by dividing net profit of the Company by the weighted average number of ordinary shares outstanding. Diluted earnings per share equal to basic earnings per share as the Company has no instruments issued that could dilute shares issued.

Basic and diluted earnings per share are as follows:

	2017	2016
Net profit attributable to shareholders	17,031	13,794
Weighted average number of ordinary shares (thousand)	380,606	380,606
Earnings and reduced earnings (in EUR)	0.04	0.04

27 DIVIDENDS

	2017	2016
Dividends declared	(9,656)	(17,629)
Weighted average number of shares (thousand)	380,606	380,606
Dividends declared per share (expressed in EUR per share)	0.0254	0.0463

The General Meeting of the Shareholders held on 21 April 2017 approved profit appropriation for the year 2016 and allocated to the Shareholders dividends in the amount of EUR 9,656 thousand for 2016. The General Meeting of the Shareholders held on 26 April 2016 approved profit appropriation for the year 2015 and allotted to the Shareholders dividends in the amount of EUR 17,629 thousand for 2015.

The outstanding amount of declared dividends to the shareholders, who were not reached from the stated addresses, is accounted as current amounts payable and liabilities in the Statement of financial position as of 31 December 2017. As of 31 December 2017 the outstanding amount of dividends not paid during the previous financial year amounted to EUR 72 thousand (EUR 62 thousand as of 31 December 2016).

28 FINANCIAL ASSETS AND LIABILITIES AND RISK MANAGEMENT

Credit risk

The Company has significant concentration of trading counterparties. Trade receivables from the main customer of the Company –AB Amber Grid – on 31 December 2017 accounted for approximately 74% (about 82% as of 31 December 2016), AB Orlen Lietuva – on 31 December 2017 accounted for approximately 8% (about 9% as of 31 December 2016), Atlantis Commodites Trading Pte. Ltd. - on 31 December 2017 accounted.

28 FINANCIAL ASSETS AND LIABILITIES AND RISK MANAGEMENT (CONT'D)

Credit risk (cont'd)

for approximately 3% (no trade receivable from this customer as of 31 December 2016) of the total Company's receivables from all its customers. The average payment term for AB Amber Grid is 15 calendar days, AB Orlen Lietuva - 10 calendar days, for Atlantis Commodites.

Trading Pte. Ltd. – 5 working days, VĮ Lietuvos naftos produktų agentūra – 20 calendar days, UAB LUKOIL BALTIJA – 15 calendar days, UAB Neste Lietuva – up to the 15th of the following month, whereas the usual payment terms for all other customers is 5 days. A possible credit risk for the Company's customers is managed by a continuous monitoring of outstanding balances.

The Company's procedures are in force to ensure on a permanent basis that services are provided to reliable customers and do not exceed an acceptable credit exposure limit. The Company trades only with reputable third parties, so there is no requirement for collateral.

On 29 September 2016 UAB SGD logistika, which is a wholly-owned subsidiary of the Company, signed the amendments of hereinabove mentioned joint venture agreement with partner Bomin Linde LNG GmbH & Co. KG (now - Nauticor GmbH & Co. KG ) on joint performance of the activities of operating the LNG vessel. Following the amended agreement, in Blue LNG GmbH & Co. KG - a joint venture, established in Germany, UAB SGD logistika holds 10% of the authorised capital - Nauticor GmbH & Co. KG holds 90% of the authorised capital. According to the amended joint venture agreement the Company hereby unconditionally and irrevocably guarantee to - Nauticor GmbH & Co. KG the due and punctual performance of all obligations of UAB SGD logistika. According to the amended joint venture agreement the Company 1) unconditionally and irrevocably guarantees to - Nauticor GmbH & Co. KG the due and punctual performance of all obligations of UAB SGD logistika. The estimated maximum amount obligations guaranteed by the Company decreased to up to EUR 4.000 thousand due to change in part in the joint venture as well as clarification of the charter rate; 2) shall guarantee under a first demand guarantee for the obligations of Blue LNG GmbH & Co. KG which would charter and operate a liquefied natural gas bunkering carrier, to pay the charter rate for the carrier to the extent that UAB SGD logistika undertakes to pay such charter rate.

In light of the above on 8 December 2016 the Company issued a guarantee, which shall not exceed the maximum amount of USD 4,000 thousand, up to on first demand to cover the obligations of Blue LNG GmbH & Co. KG to pay the charter fee under Time Charter Agreement.

The management believes that as of 31 December 2017 the risk related with the realization of the guarantees issued is low and therefore, there is no accrual accounted for in regard to this in the financial statements for the year ended 31 December 2017.

The maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial instruments, if any, in the Statement of Financial position. Consequently, the Company considers that its maximum exposure is reflected by the amount of trade receivables, net of allowance for doubtful accounts and cash and other short-term deposits recognised at the date of Statement of Financial position. In the Management's opinion there were no circumstances, which would raise additional obligations to the Company.

Interest rate risk

The Company's income and operating cash flows are influenced by changes in market interest rates, which are linked to EURIBOR.

The Company's results and cash flow are influenced by fluctuations of interest rate. Interest rate risk's increase is mainly affected by longterm loans. The currently granted EIB loan has floating interest rate, which is linked to EURIBOR. Interest rate related to EIB loan is minor, whereas the performance of 100% of the Company's contractual financial liabilities is ensured by the State Guarantee.

The Company's assets held to maturity bear fixed interest rates. The Company holds money and time deposits on the accounts of major Lithuanian banks, which are granted with Fitch Ratings A or higher external rating according to the foreign rating agents. Risk related to the funds in the bank is limited, because the Company carried out transactions with the banks that have high ratings provided by the foreign rating agents.

As of 31 December 2017 increase in EURIBOR interest rate by 10 basis points would increase yearly interest amount by EUR 76,7 thousand (as of 31 December 2016 – EUR 30 thousand).

Exchange rate risk

The Company is exposed to foreign currency fluctuations primarily related to the U.S. dollar. Foreign exchange risk arises from future commercial transactions as well as recognized assets and liabilities. Since 27 November 2014 FSRU was delivered into the Seaport of Klaipėda,

28 FINANCIAL ASSETS AND LIABILITIES AND RISK MANAGEMENT (CONT'D)

Exchange rate risk (cont'd)

Klaipėdos Nafta pays FSRU lease on monthly basis, whereas lease is calculated on a daily rate basis. Charter hire element, Opex element and Management fee are denominated in USD and total 146,050 USD/day.

As of 31 December 2017 and as of 31 December 2016 and during the 2017 and 2016 respectively changes in USD exchange rates did not have any material impact on the Company's profit before tax.

So far, the Company has not used any financial instruments to manage its foreign currency exposure risk due to unclear foreign currency fluctuations regulation by NCC.

Liquidity risk

The Company's policy is to maintain sufficient cash and cash equivalents or have available funding through an adequate amount of committed credit facilities to meet its commitments at a given date in accordance with its strategic plans.

The Company's liquidity (total current assets / total current liabilities) and quick ratios ((total current assets - inventories) / total current liabilities) as of 31 December 2017 were 4.78 and 4.72, respectively (3.61 and 3.52 as at 31 December 2016).

The Company's objective is to maintain a balance between continuity of funding and flexibility. The Company's activities generate sufficient amount of cash, therefore, the Managements' main responsibility is to monitor that the liquidity ratio of the Company is close to or higher than 1. During the years 2017 and 2016 the Company's liquidity is high because the Company has no financial commitments in the year 2017 and 2016 and accumulates cash funds for the performance of its strategic objectives.

The table below summarises the maturity profile of the Company's financial liabilities as of 31 December 2017 and 2016 assessed on contractual undiscounted payments:

	Carrying	On	Less than 3	3 to 12	1 to 5	More than 5	Total
	amount	demand	months	Months	years	years
Trade and other payables	13,641	-	9,619	4,022	-	-	13,641
Other current liabilities	607	-	254	353	-	-	607
Loan and interest	76,700	-	25	378	17,268	60,439	78,110
Balance as of 31 December 2017	90,948	-	9,898	4,753	17,268	60,439	92,358
	Carrying	On	Less than 3	3 to 12	1 to 5	More than 5	Total
	amount	demand	months	Months	years	years
Trade and other payables	10,141	-	8,740	1,401	-	-	10,141
Other current liabilities	342	-	250	92	-	-	342
Loan and interest	29,724	-	26	79	5,804	25,131	31,040
Balance as of 31 December 2016	40,207	-	9,016	1,572	5,804	25,131	41,523

EUR 4,021 thousand of the EUR 13,641 thousand as at 31 December 2017 (EUR 1,401 of the EUR 10,141 thousand amount as at 31 December 2016) is the retention amounts under contracts, which are paid for when all work under a contract has been completed. There is no possibility to forecast these payment terms.

EUR 76,700 thousand of EUR 90,948 thousand as at 31 December 2017 (EUR 29,724 thousand of EUR 40,207 thousand as at 31 December 2016) is repayable EIB and NIB loan.

The biggest trade ant other payable amounts are to PPS Pipeline Systems GmBH, UAB Hoegh LNG Klaipėda, UAB Arimetras, RAB SKH branch in Lithuania, SE Klaipėda State Seaport Authority as at 31 December 2017. The biggest trade and other payable amounts are to PPS Pipeline System GmBH, UAB Kauno dujotiekio statyba, UAB ABB, SE Klaipėda State Seaport Authority, UAB Lietuvos dujų tiekimas, UAB Hoegh LNG Klaipėda as at 31 December 2016.

Fair value of financial assets and liabilities

The Company's principal financial instruments not carried at fair value are trade and other receivables, trade and other payables, non-current and current borrowings.

28 FINANCIAL ASSETS AND LIABILITIES AND RISK MANAGEMENT (CONT'D)

Fair value of financial assets and liabilities (cont'd)

Fair value is stated as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Set out is a comparison by category of carrying amounts and fair values of all of the Company's financial instruments that are carried in the financial statements:

	Carrying amount		Fair value
	2017	2016	2017	2016
Financial assets
Trade receivables	11,998	10,603	11,998	10,603
Short term deposits	65,000	-	65,000	-
Cash	16,747	42,056	16,747	42,056
Short-term accrued income	774	550	774	550
Financial liabilities
Loan and interest	76,379	29,724	72,776	27,935
Trade payables	13,641	10,141	13,641	10,141
Accrued expenses	519	176	519	176

The following methods and assumptions are used to estimation the fair value of each class of financial assets and liabilities:

• The carrying amount of cash, current trade accounts receivable, current trade accounts payable approximates fair value (Level 3).
• The fair value of non-current debt is based on the quoted market price for the same or similar issues or on the current rates available for debt with the same maturity profile. Loans received by the Company are secured by State guarantee (Level 3).
• For the purpose of the fair value estimation of this loan the Company applied difference in interest rate on a difference between market and contractual interest rate (Level 3).

No transfers occurred between levels in the hierarchy by re-assesing categorisation as at 31 December 2017 compared to 31 December 2016.

Capital management

The primary objectives of the Company's capital management are to ensure that the Company complies with externally imposed capital requirements. Capital includes equity attributable to equity holders.

The Company manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares.

There were no changes in the authorised capital during the year 2017 and 2016.

The Company has to keep its equity at least up to 50% of its share capital, as imposed by the Law on Companies of Republic of Lithuania as of 31 December 2017 and as of 31 December 2016.

The Company's activities are financed using its equity and loan capital.

29 COMMITMENTS AND CONTINGENCIES

Operating lease commitments

On 4 November 2009 the Company has concluded a land rent contract with Klaipėda State Port Authorities until 2055.

The terms and condition of the contract with all later additions do not provide any restrictions on the Company's activities, associated with dividends, additional borrowings or additional long-term rent.

In 2017 the Company's land rent expenses amounted to EUR 790 thousand (EUR 792 thousand – in 2016).

Total amount of future minimum payments of land rent:

Operating lease commitments (cont'd)

	31-12-2017	31-12-2016
Within one year	790	792
From one to five years	3,160	3,168
After five years	25,280	26,136
	29,230	30,096

On 9 March 2015 the Company concluded the Liquefied Natural Gas Terminal jetty usage agreement with the Klaipėda State Seaport Authority (hereinafter – KVJUD) for 50 (fifty) years. The Parties shall have a right to terminate the Agreement only in case of enactment of the new laws of the Republic of Lithuania and / or other legal acts related to the regulation of legal terms regarding the usage of the LNGT jetty. The Agreement is concluded inter alia in accordance with the Decree of the Republic of Lithuania Government No. 864 dated 11 June 2012 "Regarding the Decree of the Republic of Lithuania dated 15 February 2012 No. 199 "Regarding the Construction of the LNGT" Amendment", which 6 clause determined that the execution company of the LNGT project and (or) LNGT operator shall use the jetty for mooring of the liquefied natural gas floating storage unit and shall pay the annual jetty fee calculated in accordance with the requirements of the present decree and other legal acts under basis of agreement with the Port Authority.

The terms and condition of the contract with all later additions do not provide any restrictions on the Company's activities, associated with dividends, additional borrowings or additional long-term rent.

In 2017 and in the 2016 the Company's jetty rent expenses amounted to EUR 165 thousand.

Total amount of future minimum payments of jetty rent:

	31-12-2017	31-12-2016
Within one year	165	165
From one to five years	660	660
After five years	6,927	7,092
	7,752	7,917

On 2 March 2012 the Company signed the 10 years Build, Operate and Transfer (BOT) lease contract with Hoegh LNG Ltd. regarding LNG Floating Storage and Regasification Unit (FSRU) with a purchase option. FSRU has arrived to the Seaport of Klaipėda at 27 October 2014 and was taken over by the Company on 27 November 2014. There were no changes in the BOT lease contract with Hoegh LNG Ltd. regarding LNG Floating Storage and Regasification Unit (FSRU) in the year 2017 and 2016, which would lead to changes in classification of this lease as at 31 December 2017 and 2016.

The terms and condition of the contract with all later additions do not provide any restrictions on the Company's activities, associated with dividends, additional borrowings or additional long-term rent.

FSRU operating lease payments include such elements:

• Charter Hire Element
• OPEX Element (Services, spares, consumables, insurance in FSRU mode, ship radio and communication)
• Management Fee
• Crew Costs or Maritime personnel expenses

FSRU operating lease costs accounted during the years 2017 and 2016:

	2017	2016
Charter Hire Element	44,297	45,758
OPEX Element	1,799	1,514
Management Fee	652	650
Crew Costs	2,720	2,750
	49,468	50,672

Operating lease commitments (cont'd)

On 31 December 2017, the total amount of future minimum payments of FSRU operating lease amounted to EUR 289,626 thousand (on 31 December 2016 – EUR 380,379 thousand):

	31-12-2017	31-12-2016
Within one year	41,908	48,082
From one to five years	167,748	192,461
After five years	79,971	139,836
	289,627	380,379

The Company will adopt IFRS 16 for the financial year beginning as of 1 January 2019, once adopted by the EU, and is currently assessing the impacts of its adoption on the financial statements. It is expected that modified retrospective approach will be applied.

On 31 December 2017 the Company has preliminarily assessed the impact of the implementation of this standard as of 1 January 2019. The Company has used future minimum lease payments as of 31 December 2018 for the assessment. Future minimum lease payments were not discounted to present value as the Management could not reliably determine the discount rate, which will be effective on 1 January 2019. Implicit interest rates or incremental borrowing rates will be assessed at the time of transition.

Based on preliminary assessment made by the Management of the Company, implementation of the standard is expected to significantly increase lease assets and financial liabilities. Estimated effect (currently undiscounted) on the Company's financial statements as at 1 January 2019 is stated below:

	Land rent	Jetty rent	FSRU lease	Total
Property, plant and equipment as at 1 January 2019	28,440	7,587	247,719	283,746
Long term financial liabilities as at 1 January 2019	27,650	7,422	205,811	240,883
Short term financial liabilities as at 1 January 2019	790	165	41,908	42,863

It is expected that the Company's EBITDA (non-IFRS measure) will increase because expenses for off balance sheet leases are excluded from it. Instead of rent costs the Company will record depreciation and interest costs from 1 January 2019. In light of the above, according to preliminary evaluation, the Company will have EUR 42,863 thousand depreciation costs for the year 2019 and no interest costs due to no discounting currently being performed for the purpose of this assessment as described above.

The terms and condition of the contracts mentioned above with all later additions do not provide any restrictions on the Company's activities, associated with dividends, additional borrowings or additional long-term rent.

Management's opinion is that the adoption of IFRS 16 will not have significant effect to the Company's compliance with financial covenants.

Long-term construction agreements

On 12 February 2016 consortium of PPS Pipeline Systems GmbH and Chart Ferox, a. s. (hereinafter – Consortium) and AB Klaipėdos Nafta concluded Engineering, procurement and construction works (EPC) for Klaipėda liquefied natural gas reloading station" contract whereby the Consortium undertook to complete all the works according to the contract on a lump sum amount of EUR 27,700 thousand excluding VAT and the board of AB Klaipėdos nafta approved conclusion of the EPC contract. The start of the operations of the natural gas reloading station is the beginning of 2018.

Legal disputes

By decision of the Court of Appeal of Lithuania rendered on 17 June 2014 in the case based on the lawsuit filed by UAB Naftos grupė against the Company for payment of alleged damages of EUR 5 million, returning of the excess petroleum products allegedly owned by UAB Naftos grupė and stored by the Company, and declaring the service agreement No 12-12-2005 of 22 December 2004 terminated due to alleged fault of the Company.

By the above-said decision of the Court of Appeals of Lithuania, decision of 20 May 2013 of the Vilnius Regional Court that had considered the case as a court of first instance, was partially changed as follows:

Legal disputes (cont'd)

• The clause of the Agreement granting the Claimant UAB Naftos grupė the exclusive right to tranship the vacuum gas oil was declared invalid by the court at the Company's request as it is in contravention of the imperative provisions of competition law;
• Payment of EUR 865 thousand as damages was awarded against the Defendant (the Company) for the benefit of the Claimant, together with 6% interest p. a. on the awarded amount for the period from the institution of the proceedings (18 April 2011) until complete
• execution of the court decision, i. e. only about one-half of the amount which had been awarded against the Company for the benefit of UAB Naftos grupė by the court of first instance, and UAB Naftos grupė claims for damages related to the loss of business was rejected;
• the litigation costs were allocated between the parties accordingly.
• On 25 July 2014, the Supreme Court of Lithuania decided to accept a cassation appeal filed by AB Klaipėdos nafta in which the Company requested the court to review part of the decision rendered by the Court of Appeal of Lithuania on 17 June 2014 in the case based on the above-mentioned lawsuit filed by UAB Naftos grupė and the Company's counter-claim against UAB Naftos grupė for declaring the Agreement invalid, payment of damages and unjustified enrichment. The Supreme Court of Lithuania has held that the cassation appeal filed by the Company meets the requirements laid down in the Code of Civil Procedure of the Republic of Lithuania, therefore, it was accepted for consideration in cassation proceedings.

By its judgment of 8 May 2015, the Supreme Court of Lithuania reversed the decisions of the court of first instance and the court of appeal and referred the case back to the court of first instance for re-consideration. By its decision of 11 September 2015, the Vilnius regional

Court renewed the trial and included the Competition Council of the Republic of Lithuania in the proceedings for the issue of a conclusion. No hearing of the Supreme Court of Lithuania has been scheduled as yet.

The Competition Council presented its conclusion in the civil case, stating that it cannot provide a detailed assessment of whether provisions of the Agreement are consistent with the Law on Competition due to insufficient evidence.

The civil case was suspended until decision is rendered in the criminal proceedings.

Management's opinion is that the Company is unlikely to suffer any material additional expenses related to the claim and therefore it is unnecessary to account for the provisions as on 31 December 2017 and as on 31 December 2016.

AB Klaipėdos nafta was recognised as a civil claimant (claim amount EUR 20,296 thousand) in the criminal case in which charges had been brought against former management of AB Klaipėdos nafta and against UAB Naftos grupė and UAB Artilona. The amount of the updated claim is EUR 20,884 thousand.

The trial started in September – October 2015: the indictment was brought against the accused and the updated statement of claim was filed.

All witnesses specified in the indictment were questioned and all telephone conversation recordings were heard. The accused were questioned.

On 27 December 2017, the Klaipėda Regional Court as the court of first instance handed down a conviction in the criminal case. The court ruled as follows:

• To award against Artūras Urbutis, Antanas Urbutis, Svetlana Popova, Andrejus Vaičiulis, Jurgis Aušra, Ričardas Milvydas and UAB Naftos grupė, jointly and severally, payment of damages amounting to EUR 20,884 thousand for the benefit of the Company, together with a 5 % interest p. a. on the awarded amount for the period from the effective date of the indictment until complete execution of the court decision on payment of damages;
• To award against Artūras Urbutis, Antanas Urbutis, Svetlana Popova, Andrejus Vaičiulis, Jurgis Aušra and Ričardas Milvydas payment of EUR 1,666.67 (one thousand six hundred sixty six euros and 67 cents) each for the benefit of the Company as representation costs.

Management of UAB Naftos grupė appealed against the judgment of Klaipėda Regional Court whereby actual custodial sentences had been imposed upon them; the case will be referred to a court of appeal.

Legal disputes (cont'd)

On 29 January 2013 the Company received a notice from the Vilnius Regional Administrative Court requesting to submit a reply to a complaint filed by AB Achema concerning resolutions of the National Commission for Energy Control and Prices (NCECP). The Company was included in the case as an interested third party.

In its complaint Achema requests to reverse:

Paragraphs 3.1 and 4 of NCECP Resolution No O3-317 of 19 October 2012 'On the determination of the amount of funds to be allocated for the compensation for the costs of construction and operation of the liquefied natural gas terminal, its infrastructure and connection in full or in part for 2013. In these paragraphs NCECP had determined the funds to be allocated for the compensation for the costs of construction and operation of the liquefied natural gas terminal, its infrastructure and connection in full or in part for 2013 (EUR 32,958

thousand) and the LNGT funds administration costs (EUR 87 thousand), stating that NCECP has the right to adjust the amounts in case of change in essential circumstances that have a significant impact upon funding and implementation of the LNGT project.

Paragraph 2 of NCECP Resolution No O3-330 of 26 October 2012 'On the adjustment of the upper limits of AB Lietuvos dujos natural gas transmission and distribution prices and the setting of the integral component to be added to the upper ceiling of the natural gas

transmission price (LNGT addition) for 2013'. By this paragraph NCECP had set an integral component to be added to the upper ceiling of the natural gas transmission price (LNGT addition) intended for the compensation for the costs of construction of the LNGT, its infrastructure and connection in 2013 (EUR 11 per '000 m3 (excluding VAT).

On 11 June 2015, AB Achema filed an appeal concerning the decision of the Vilnius Regional Administrative Court rendered on 28 May 2015 in the administrative case.

On 29 October 2015, AB Achema filed an application to the European Union Court of Justice (EUCJ) for a prejudicial ruling.

On 12 September 2016, AB Achema filed an application for suspending the case due to AB Achema's applying to the EUCJ. AB Klaipėdos nafta presented its replies to both applications of AB Achema.

The administrative case was suspended until consideration of AB Achema's application by the EUCJ. At present the EUCJ is examining the objections provided by the European Commission concerning the admissibility of Achema's complaint in court. No decision on the State of Lithuania and AB Klaipėdos nafta joining the proceedings has been taken as yet. The estimated period of consideration of the case if the case is considered on both instances is approximately 4 or 5 years.

As of 31 December 2017, AB Amber Grid has calculated for AB Achema interest and fines totalling EUR 2,611 thousand (as of 31 December 2016 amounting to EUR 2,339 thousand) for delayed payments of the security component to the upper ceiling of the natural gas transmission price. According to the contract and the law, Amber Grid AB applies payments received to fines and penalties in the first instance. The Company does not recognise such fines and penalties received as income until the court decision is rendered.

Management's opinion is that the Company is unlikely to suffer any material additional expenses related to the claim and therefore it is unnecessary to account for the provisions as on 31 December 2017 and as on 31 December 2016.

On 23 May 2014, the Company received a notice from the Vilnius Regional Court informing that UAB Rudesta has filed a lawsuit against the Company for payment of damages in the amount of EUR 315 thousand for additional works under the contract plus EUR 17 thousand as penalty. On 20 June 2014, the Company filed to the Vilnius Regional Court a counter-claim against UAB Rudesta requesting the court to award payment of penalty of EUR 169 thousand for the delay in performance of works under the contract against UAB Rudesta. As of 31 December 2015 the case is still pending; the case was referred to an expert examination.

On 12 December 2016, the Court of Appeal of Lithuania rendered a decision whereby the Company's and UAB Rudesta claims were satisfied in part: payment of EUR 13 thousand as penalty, EUR 7 thousand as litigation costs and EUR 3 as interest per day for the period from 25 June 2014 until the date of execution of the court decision was awarded against the Company for the benefit of UAB Rudesta and payment of EUR 34 thousand as penalty, EUR 13 thousand as litigation costs and EUR 8.08 as interest per day for the period from 25 June 2014 until the date of execution of the court decision was awarded against UAB Rudesta for the benefit of the company. UAB Rudesta applied for the reversal of the decision rendered by the Court of Appeal of Lithuania on 12 December 2016.

On 18 January 2017, the Supreme Court of Lithuania decided to accept UAB Rudesta cassation appeal for reviewing decision rendered by the Court of Appeal of Lithuania on 12 December 2016. UAB Rudesta is applying for the reversal of the said decision in the scope stated in its application.

Legal disputes (cont'd)

By its judgment of 2 June 2017, the Supreme Court of Lithuania upheld the decision of the Civil Division of the Supreme Court of Lithuania rendered on 12 December 2016.

In 2017 the Company paid EUR 23 thousand to Rudesta according to the Court of Appeal of Lithuania rendered decision. As at 31 December the Company accounted receivable amount up to EUR 55 thousand from UAB Rudesta.

• As of 31 December 2017 the Company had received 4 complaints, with the amount of damages claimed as a compensation for the establishment of servitudes totalling EUR 1,748 thousand. As of 31 December 2017, three cases are pending in courts of appeal and one case in a court of first instance.
• Management's opinion is that the Company is unlikely to suffer any material additional expenses related to the claim and therefore it is unnecessary to account for the provisions as on 31 December 2017 and as on 31 December 2016.
• On 19 September 2016 AB Klaipėdos Nafta received a notice from the Stockholm Commercial Arbitration informing about arbitration proceedings initiated by BMGS A/S. The latter was seeking an award of EUR 1,661 thousand (excluding VAT) against AB Klaipėdos nafta as costs that arose due to additional works. The need for additional works had arisen due to unforeseen geological conditions for the construction of the berth for the LNGT. BMGS A/S also claimed indemnification for litigation costs (the amount will be specified at a later date). The parties paid the preliminary arbitration costs (EUR 105 thousand). A panel of arbitrators was formed.

The proceedings were completed on 5 October 2017. By its award No 2016/136 of 8 December 2017, the Stockholm Commercial Arbitration decided to:

• Reject the claim filed by BMGS A/S;
• Award, against BMGS A/S, payment of litigation costs in full for the benefit of the Company.
• On 30 November 2016, AB Klaipėdos Nafta received a notice from the Vilnius Regional Court (the 'Court') informing that UAB Krovinių terminalas (the 'Claimant')) had filed a lawsuit against the Company and AB ORLEN Lietuva claiming payment of damages due to violations of competition law. On 1 December 2016 the Company published a notice of a material event regarding the lawsuit filed by UAB Krovinių terminalas.

The Claimant, inter alia, requests the Court to: (i) award payment of EUR 5,995 thousand as damages against the Company for the benefit of the Claimant; (ii) declare the agreement on the terminal concluded by and between the Company and AB ORLEN Lietuva on 17 November 2011 (as amended) (the 'Agreement') as null and void from the date of its conclusion; and (iii) apply a provisional injunction, i. e. to suspend execution of part of the provisions of the Agreement.

The Court examined the application for provisional injunction on 9 December 2016. In the opinion of the Company's management, the lawsuit is unjustified. The Company submitted a reply to the lawsuit within the set time limit. On 9 December 2016, the Company received the decision on provisional injunction rendered by the Vilnius Regional Court, whereby UAB Krovinių terminalas application for provisional injunction in the case concerning payment of damages for the violations of competition law was rejected. UAB Krovinių terminalas submitted a cross-appeal. The decision of 9 December 2016 was upheld by the Court of Appeal of Lithuania.

On 5 January 2018, UAB Krovinių terminalas filed an application for the reduction of the amount of claim and for inclusion of evidence in the case. UAB Krovinių terminalas is requesting the court:

• To award payment of EUR 4,823 thousand against AB Klaipėdos Nafta;
• Accept the explanations and include the evidence enclosed;
• Not to allow the Defendants and the third party to familiarise themselves with the contracts and the overview of the contracts presented by the Claimant.

The court decided to include the updated claim in the case.

Management's opinion is that the Company is unlikely to suffer any material additional expenses related to the claim and therefore it is unnecessary to account for the provisions as on 31 December 2017 and as on 31 December 2016.

Guarantees

• The Company has Guarantee Agreement with AB SEB bank for the amount of EUR 1,448 thousand as of 31 December 2017 (1,448 thousand as of 31 December 2016) in order to secure due fulfilment of custom tax obligations in the customs warehouse. The guarantee is valid until 31 December 2017.
• The Company has Guarantee Agreement with AB SEB bank for the amount of EUR 590 thousand as of 31 December 2017 (579 thousand as of 31 December 2016) in order to secure due fulfilment of excise tax obligations in the excise warehouse. The guarantee is valid until 3 November 2018.
• The Company has Guarantee Agreement with AB SEB bank for the amount of EUR 498 thousand as of 31 December 2017 (498 thousand as of 31 December 2016) only for ensuring of implementation of measures provided in the Company's waste management activity termination plan. The guarantee is valid until 12 January 2019.
• The Company has Guarantee Agreement with OP Corporate Bank plc Lithuania branch for the amount of 36 thousand as of 31 December 2017 in order to secure due fulfilment of transit procedure for LNG reloading. The guarantee is valid until 5 December 2018.
• The Company has Guarantee Agreement with Ministry of Finance of the Republic of Lithuania to secure the Company's contractual obligations including interest payable to EIB under the credit contract for up to 20 years on partial funding of the LNGT project dated 9 July 2013 (note 16). Thus, up to 50% of the investments related to LNGT project implementation will be financed by EIB under the contract.
• The Company has Guarantee Agreement with Ministry of Finance of the Republic of Lithuania to secure the Company's contractual obligations including interest payable to Nordic Investment Bank, under the credit contract for up to 20 years on partial funding of the LNGT project (note 16). The amount of maximum mortgage is equal to EUR 34,754 thousand.
• The Company has an agreement on assignment of claim rights and a maximum pledge agreement with UAB Hoegh LNG Klaipėda which maximum amount of USD 50,000 thousand per one year as at 31 December 2017 and as at 31 December 2016. The said agreements are intended to secure obligations of the Company to Hoegh LNG Klaipėda under the Time Charter Party (Lease of a Floating Storage and Regasification Unit in conjunction with maintenance and operation services) agreement concluded on 2 March 2012.
• In accordance with applicable laws, the State Tax Inspectorate may at any time inspect registers of the Company's accounting and records for 5 years before the accounting period and may calculate additional fees and sanctions. The Management of the Company is not aware of any circumstances, because of which significant additional tax liabilities should be calculated for the Company.
• Material contractual liabilities (acquisition of property, plant and equipment) amounted to EUR 19,037 thousand as of 31 December 2017 (EUR 32,018 thousand as of 31 December 2016).

Regulated profit of LNG terminal

LNG terminal, its infrastructure and its connection implementation as well as exploitation costs fully or partially are included into the natural gas transmission service price in accordance with the rules and guidance's set by the NCC based on the regulations set in the Energy Law, Natural Gas Law and other laws of the Republic of Lithuania related with energy prices regulation.

The total LNG terminal revenue level is confirmed by the NCC based on the approved methodics of Government regulated prices in the natural gas sector (hereinafter – Methodics). According to this Methodics total LNG terminal revenue level is calculated for upcoming year by summing 2 constitutes: 1) Estimated necessarily costs for the LNG terminal exploitation and operational assurance; 2) Forecasted LNG terminal infrastructure investment return.

The revenue of the LNG terminal activity comprises from 3 parts:

• - LNG regasification service price fixed part that is approved every year by the resolution of the National Control Commission for Prices and Energy. This part of the price is included into the additional Security Supplement added to the gas transmission price;
• - LNG regasification service price variable part that is received for the regasified volume directly from the clients and which tariff is approved by the NCC on an annual basis;
• - LNG reloading service revenue for reloaded LNG quantity.

LNG regasification service price variable part and LNG reloading service revenue are recognized at the moment of services provision according to existing tariffs.

Regulated profit of LNG terminal (cont'd)

Meanwhile the LNG Security Supplement tariff is set annually by the NCC based on the amount required to be collected (estimated LNG terminal revenue) and proportionally allocated for the forecasted gas consumption capacities. LNG security supplement is paid by the users of natural gas transmission system, including the end users, together with the other payments for the natural gas transmissions services. The payments are collected by the transmission service operator (hereinafter - TSO) either directly from the user or from suppliers of natural gas in case the user has no direct contractual obligations with the TSO.

Factual LNG Security Supplement collections and payments may differ from planned ones (calculated at the approval of Security Supplement) because of variation of consumption capacities and other differences.

As long as LNG terminal revenue in the financial accounting (under IFRS) are recognized based on the factual gas consumption capacities for the reporting period and correspondingly calculated factual LNG Security Supplement, the differences between the financial LNG terminal segment profit and regulated profit which is calculated based on the NCC methodics may arise.

LNG operating expenses are recognized in the relevant period when incurred.

The regulated LNG terminal profit is calculated adjusting the investment return for the period by the income or expenses not attributable for the regulated activities in terms of regulation (but have impact for the financial profit).

Below is the historical comparison of the LNG terminal regulated and financial profit:

In EUR thousand	2014	2015	2016	2017 (unaudited by NCC)
Financial LNG terminal profit	600	6,981	3,518	6,516
Regulated profit (in terms of Methodic)	267	3,525	3,329	3,214
Difference	333	3,456	189	3,301
Difference (cumulative)	333	3,789	3,978	7,280

According to the regulation additionally received amount shall be dedicated for compensation of the LNG terminal necessarily exploitation expenses for the future financial periods.

The decrease in regulated profit is related with the reducing amount of regulated asset base.

30 RELATED PARTY TRANSACTIONS

The related parties to the Company are defined as shareholders (refer to Note 1), employees, members of the Board, their close family members and companies that directly or indirectly (through the intermediary) control or are controlled by, or are under common control with, the Company, provided such relationship empowers one of the parties to exercise the control or significant influence over the other party in making financial and operating decisions.

The related parties of the Company and transactions with them in 2017 and 2016 were as follows:

30 RELATED PARTY TRANSACTIONS (CONT'D)

Transactions with Lithuanian State controlled enterprises and institutions

		Purchases	Sales	Receivables	Payables
State Enterprise Klaipėda State Seaport Authority owned by the	2017	2,317	-	-	393
State of Lithuania represented by the Ministry of transportation	2016	2,323	-	-	73
AB Lietuvos geležinkeliai owned by the State of Lithuania	2017	3,138	-	-	291
represented by the Ministry of transportation	2016	3,627	-	-	120
AB Lesto, owned by the State of Lithuania represented by the	2017	-	-	-	-
Ministry of Energy	2016	-	-	-	-
AB Lietuvos dujos	2017
	2016	-	-	-	-
UAB Lietuvos dujų tiekimas	2017	2,847	575	37	371
	2016	2,386	331	13	179
AB Amber Grid	2017	-	66,563	9,396	-
	2016	-	65,467	8,735	-
VĮ Lietuvos naftos produktų agentūra	2017	-	2,654	268	-
	2016	-	1,364	-	-
UAB LITGAS	2017	90	438	55	109
	2016	-	402	90	-
AB Energijos skirstymo operatorius	2017	575	-	-	79
	2016	611	-	-	70
UAB Energijos tiekimas	2017	617	-	-	87
	2016	645	-	-	75
Other related parties	2017	-	9	-	-
	2016	5	5	-	-
Transactions with related parties, in total:	2017	9,584	70,239	9,756	1,330
	2016	9,597	67,569	8,838	372

Purchases from State Klaipėda State Seaport Authority include land rent, jetty usage and FSRU port fee.

Purchases from AB Lietuvos geležinkeliai include purchases of railway services.

Purchases from UAB Lietuvos dujų tiekimas include purchases of natural gas.

Sales to AB Amber Grid include income from additional security supplement to the price of natural gas' transmission. Sales to AB Amber Grid do not include interest and fines for AB Achema for delayed payments of the security component to the upper ceiling of the natural gas transmission price. These amounts are recognized and accounted for as received prepayments (as of 31 December 2017 – EUR 2,611 thousand, as of 31 December 2016 – EUR 2,339 thousand) (note 29).

Sales to VĮ Lietuvos naftos produktų agentūra include income from rent of tanks.

Sales to UAB LITGAS include income from regasification services.

Purchases from AB Energijos skirstymo operatorius and UAB Energijos tiekimas include purchase of electricity power.

Management salaries and other payments

The following positions are considered as the Company's managing staff: Chief Executive Officer, Deputy Chief Executive Officer (till 29 May 2017), Heads of Divisions and Functional Managers.

	2017	2016
Labour related costs	2,595	2,400
Number of managers	37	37

During 2017 and 2016 the Management of the Company did not receive any loans, guarantees, and no other paid or accrued amounts or property was transferred.

31 SUBSEQUENT EVENTS

No significant subsequent events have occurred after the date of financial statements.

CONFIRMATION OF RESPONSIBLE PERSONS

Following Article 22 of the Law on Securities of the Republic of Lithuania and the Rules on Preparation and Submission of Periodic and Additional Information of the Lithuanian Securities Commission, we, Mindaugas Jusius, Chief Executive Officer of AB Klaipėdos Nafta, Marius Pulkauninkas, Chief Financial Officer of AB Klaipėdos Nafta, and Rasa Tamaliūnaitė, Chief Accountant, hereby confirm that to the best of our knowledge the above-presented Financial Statements of AB Klaipėdos Nafta for the year 2017, prepared in accordance with the International Financial Reporting Standards as adopted to be used in the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss and cash flows of AB Klaipėdos Nafta.

Chief Executive Officer Mindaugas Jusius Chief Financial Officer Marius Pulkauninkas

Chief Accountant Rasa Tamaliūnaitė

2017

AB KLAIPĖDOS NAFTA ANNUAL REPORT

FOR THE FINANCIAL YEAR ENDING ON 31 DECEMBER 2017

13 March 2018

2017 YEAR AB KLAIPĖDOS NAFTA GOVERNANCE REPORT126
2017 YEAR AB KLAIPĖDOS NAFTA SOCIAL RESPONSIBILITY REPORT100
OTHER INFORMATION99
INFORMATION ABOUT THE EMPLOYEES OF THE COMPANY96
INFORMATION ABOUT THE SHAREHOLDERS AND SHARES OF THE COMPANY92
ACTIVITY PLANS AND FORECASTS 90
INVESTMENTS 89
FINANCIAL RESULTS OF ACTIVITY82
BUSINESS ENVIRONMENT AND MARKET77
SIGNIFICANT EVENTS AFTER THE END OF THE REPORTING PERIOD76
SIGNIFICANT EVENTS OF THE REPORTING PERIOD75
THE COMPANY'S STRATEGY 73
INFORMATION ABOUT THE COMPANY AND ITS ACTIVITIES 66
A FOREWORD OF THE CEO 65
KEY OPERATING AND FINANCIAL INDICATORS OF AB KLAIPĖDOS NAFTA64
GENERAL INFORMATION63

GENERAL INFORMATION

Details about the Company (Issuer)

Name of the Company:	AB Klaipėdos nafta
Legal status:	Stock Company
Authorized share capital:	110,375,793 Eur
Date and place of registration:	27 September 1994 m., State Enterprise Centre of Registers
Company code:	110648893
Address:	Burių Street 19, 91003 Klaipėda
Register of the Company:	State Enterprise Centre of Registers
Telephone numbers:	+370 46 391772
Fax numbers:	+370 46 311399
E-mail address:	info@kn.lt
Internet site:	www.kn.lt

Reporting period

AB Klaipėdos nafta Annual Report for the year 2017 is prepared for the period from 1 January 2017 until 31 December 2017.

Annual Report for the year 2017 also includes:

• - 2017 year Social Responsibility Report;
• - 2017 year ManagementReport.

Confirmation of responsible persons

Referring to the Article 22 of the Law on Securities of the Republic of Lithuania and the Rules on Preparation and Submission of Periodic and Additional Information of the Bank of Lithuanian, Responsible Persons Mindaugas Jusius, Chief Executive Officer of AB Klaipėdos nafta, Marius Pulkauninkas, Chief Financial Officer of AB Klaipėdos nafta, and Rasa Tamaliūnaitė, Chief Accountant of AB Klaipėdos nafta, hereby confirm that to the best of our knowledge the Annual Report of AB Klaipėdos nafta for 2017 includes a fair review of the development and performance of the business and the present state of the Company together with the description of the main risks and uncertainties that are encountered

Persons responsible for the information submitted in the Annual Report

Job title	Full name	Telephone number
AB Klaipėdos nafta, Chief Executive Officer	Mindaugas Jusius	+370 52 127 733
AB Klaipėdos nafta, Chie Financial Officer	Marius Pulkauninkas	+370 52 502 879
AB Klaipėdos nafta, Chief Accountant	Rasa Tamaliūnaitė	+370 46 391 636

KEY OPERATING AND FINANCIAL INDICATORS OF AB KLAIPĖDOS NAFTA

				Change
		2017	2016	+/-	%
KEY OPERATING INDICATORS
Transhipment of oil products	thousand t	7,177	7,338	-161	-2.2%
LNG regasification and reloading	thousand MWh	12,646	14,611	-1,965	-13.5%
KEY FINANCIAL INDICATORS
Sales revenue	EUR`000	106,484	103,839	2,645	2.5%
Gross profit	EUR`000	23,745	20,797	2,948	14.2%
EBITDA 1)	EUR`000	31,339	28,446	2,893	10.2%
Net profit	EUR`000	17,031	13,794	3,237	23.5%
EBITDA margin	%	29.4%	27.4%	2.0 p. p.	-
Net profit margin	%	16.0%	13.3%	2.7 p. p.	-
		31-12-2017		Change
			31-12-2016	+/-	%
Total assets	EUR`000	301,245	242,431	58,814	24.3%
Shareholders' equity	EUR`000	200,344	192,969	7,375	3.8%
Financial debts	EUR`000	76.379	29.724	46,655	157,0%
Other debts	EUR`000	24.522	19.738	4,784	24,2%
Return on equity (ROE) 2)	%	8.7%	7.1%	1.6 p. p.	-
Return on assets (ROA) 3)	%	6.3%	5.7%	0.6 p. p.	-
Debt ratio 4)	-	0.50	0.26	0.24 p. p.	-
Capital to assets ratio	-	0.67	0.80	-0.13 p. p.	-
Gross liquidity ratio (current ratio) 5)	-	4.78	3,61	0.17 p. p.	-
Quick ratio 6)	-	4.73	3,52	1.21 p. p.	-

1 EBITDA = earnings before interest, taxation, depreciation and amortization;

2 Return on equity (ROE) = net profit of the last twelve moths / (total average equity at the end of the period + total average equity at the beginning of the period) / 2;

3 Return on assets (ROA) = net profit of the last twelve moths / (total average assets at the end of the period + total average assets at the beginning of the period) / 2;

⁴ Debt ratio = total current and non-current liabilities at the end of the period / total equity at the end of the period;

⁵ Gross liquidity ratio = total current assets at the end of the period / total current liabilities at the end of the period.

⁶ Quick ratio = (total current assets at the end of the period - Inventories at the end of the period) / total current liabilities at the end of the period.

A FOREWORD OF THE CEO

Dears,

We are delightful to present AB Klaipėdos nafta activity results for 2017 because despite the influence of strong external factors we were able to stabilize the flows of the cargos and to ensure good yearly ratios. At the same time, we did a number of works, the results of which benefits the Copany and will continue to provide it with competitive advantage, more efficient management of activities and increased involvement of employees.

KN as operator of the oil and LNG terminals measures its level of activity mainly through these ratios: transhipment of oil products, comprising 7,2 million t of oil products in 2017 and regasification and reloading of LNG comprising 12,6 million MWh in 2017 (LNG terminal).

In 2017, major challenges were related to oil product freights, especially during the first half of theyear due the geopolitical situation, tensions and stagnation in the logistics between neighbouring countries. However, the Company managed to restore freight volumes in the second half-year partially due to application of existing infrastructure and putting into operation a new infrastructure for different types of freight. Positive effect was also given by the restored geopolitical situation.

The activity of the LNG terminal significantly contributed to KN high results in 2017: for some periods the capacity utilisation of the terminal reached approx. 90 per cent. This is just about the best result among all LNG terminals in Europe. The gas from the Klaipeda LNG terminal was delivered to 7 countries. LNG was received from four continents: Europe, North and South America, and Africa. Lithuania was granted with an opportunity to buy gas from cheaper points.

Over the year of 2017 balanced freight volume brought good financial results to the Company and its shareholders. The total sales revenues of KN amounted 106.,5 million EUR in 2017. That is 2.5 per cent more than in 2016 Klaipėda and Subačius oil terminals earned EUR 37.9 million, which is 2.7 per cent more than in 2016 (EUR 36.9 million). The revenue of the LNG terminal amounted to EUR 68.2 million in 2017, which is similar as in 2016 (EUR 67 million). In 2017, the net profit of the Company amounted to EUR 17.0 million, which is by 23.5 per cent more compared to 2016, EBITDA reached EUR 31.3 million, which is by 10.2 per cent more than in 2016 (EUR 28.4 million).

The results achieved in 2017 again prove that team work and concentration can bring actual benefits both to the company and its shareholders, as well as to the public and the country. For the reporting period return on equity amounted to 8.7 per cent (7.1 per cent in 2016), EBITDA margin – 29.4 per cent (27.4 per cent in 2016).

During the year of 2017, the Company demonstrated not only financial growth but also was focused on human resources, internal processes and implementation of the investment projects. Last year, a major share of the Company's investments was allocated for the construction of the LNG small scale terminal (distribution station) and for development of Klaipėda oil terminal: new storage construction of tanks. In 2017, investments total amounted to EUR 32.9 million, and the first investment stage set out in the Company's strategy was in principle implemented, and the works of the second stage one were commenced.

Looking ahead to 2018, the Company's aim is to transship at Klaipėda oil terminal no less oil products than in 2017: 7.2 million t, while the plan of the LNG terminal for regasification for 2018 is 10.6 million MWh of natural gas. Maintenance of high profitability of the oil terminal will be the major challenge as today we encounter a tensed geopolitical situation in the market and sharp competition with other terminals of the Baltic countries and Ukraine. The Company is also going to continue the development of new activities that would earn additional revenue in the future: small volume LNG freight and international projects that for the time being are at early development stages and require additional resources.

Being a socially responsible company, KN shares its profit with social organizations whose activities are related to the Company and is regularly searching for and invests in environment protection processes seeking to manage possible pollution risks.

Company's long term success depends on engagement, professional expertise, and competences of its employees. Therefore, in 2018 KN is going to pay more attention to the higher level of organizational culture: implementation of new projects of values, strengthening relations with local communities and searching for solutions to enhance environmental quality.

Mindaugas Jusius Chief Executive Officer

INFORMATION ABOUT THE COMPANY AND ITS ACTIVITIES

AB Klaipėdos nafta – strategically important company in terms of energy security for the Lithuania and neighbour regions ensuring import opportunity of the liquefied natural gas into Lithuania and surrounding countries as well as storage of the compulsory oil products reserve of the Republic of Lithuania, also reliably and effectively reloading oil products in Klaipėda port. Besides activities mentioned above, the Company starts small scale LNG activities.

The Company's operations can be divided into 2 lines of activity and four separate activities: oil product transhipment (Klaipėda oil terminal), long term oil product storage (SNT), LNG terminal operation and LNG related activities development. The management assesses financial results of each activity and sets individual strategic goals.

Information about investment into other companies:

The Company has invested into the following companies as of 31 December 2017:

Name of the Company	Address	Ownership part, per cent	Activities
UAB SGD logistika	33-2 Gedimino str., LT-01109 Vilnius	100	Planned LNG transportation activities.
UAB BALTPOOL	9 A. Juozapavičiaus str., LT-09311, Vilnius	33	Development of activity of energy resources (bio-fuel, gas) exchange, administration of Public Interest Services (PIS) funds.
Sarmatia Sp. z o.o.	ul. Nowogrodzka 68, Prima court, 02-014 Warsaw, Poland	1	Analysis and engineering of possibilities to construct oil pipeline between Asian states and the Baltic sea.

KLAIPĖDA OIL TERMINAL

The Company is one of the largest oil reloading terminals in the Baltic States. The terminal's main activity is to transship oil products delivered by rail tank-cars into tankers.

The Company's Oil Terminal reloads these oil products:

• Light Oil Products (hereinafter LFO ):
• - Different types of diesel fuel;
• - Different types of gasoline;
• - Jet fuel.
• Heavy Oil Products (hereinafter HFO):
• - Different types of fuel oil;
• - Technological fuel;
• - Vacuum gas oil (VGO);
• - Crude oil.

Klaipėda oil terminal's characteristics
Location	Territory of Klaipėdos nafta oil terminal
Volume of the tanks	Total 30 tanks (+7 tanks from 2018 the beginning)
Volume of the tanks	Almost 475 cub. m thousand total volume (+20,6 cub. m thousand from 2018 the beginning)
The capacity of the oil terminal	Up to 800 thousand t / month
Jetties	2
Jetties' length	274 each
Harbour entrance depth:	14.5 m
Tanker batch	Up to 100,000 t with 12.5 m depth
Railway	Two double-track tank wagon loading racks
	Two tracks for petroleum products that do not require maintaining of specific temperature conditions (up to 2 x 30 tank wagons are services simultaneously);
	Two tracks for oil products that require maintaining of specific temperature conditions (up to 2 x 32 tank wagons are services simultaneously;
	One of the tracks is adapted to oil products of all types;
	124 tank wagons can be loaded at the same time.
Road tanker loading	4 loading points at the same time
Modern laboratory	Able to detect the main quality parameters of oil products
Biological Waste Water Treatment Facilities waste water collected treated annually	Up to 400 cub. m, thousand (160 m3 /h) and
Own boiler station of three boilers comprising total capacity	100 MWh

The processes of oil products transhipment service in the Company's oil terminal mainly include the following operations: i) reloading of oil products from rail tankcars, ii) temporary storage of oil products in the terminal's tankers and iii) loading oil products into tank vessels.

The Company is also capable to provide Lithuania with the imported oil products which are delivered at Klaipėda sea port by tankers. There is a road tanker loading station in the terminal.

Klaipėda oil terminal provides the following services:

• - Transhipment of crude oil and oil products from rail tank-cars into tankers;
• - Transhipment of crude oil and oil products from tankers into rail tank-cars;
• - Reloading of crude oil and oil products into road tankers;
• - Accumulation and storage of crude oil and oil products;
• - Collection of waste water from sea vessels which is contaminated with oil products;
• - Mooring of sea vessels;
• - Assessment of quality parameters of oil products;
• - Provides technology for adding chemical products into oil products;
• - Blending of heavy and light oil products;
• - Supply of fuel and water to sea vessels.

SUBAČIUS OIL TERMINAL

After the approval of the share emission agreement with the Republic of Lithuania on 11 June 2012, the Company started to manage Subačius oil terminal (SNT).

After the takeover of Subačius oil terminal infrastructure the Company's activity and services have been diversified and expanded including services of long term oil product storage.

Subačius oil terminal's characteristics
Location	In Kunčiai village, Kupiškis district
Volume of the tanks	Total 66 tanks
Volume of the tanks	Almost 338 cub. m thousand total volume
Railway	The rail trestle which can simultaneously handle 14 rail tanks;
Road tanker loading	Modern loading station of auto tank-cars
Modern laboratory	Able to detect the main quality parameters of oil products

Subačius oil terminal provides the following services:

• - Storage of oil product (fuel) stocks of the Lithuanian State to ensure the national energy security under the relevant legal acts;
• - Long-term storage of oil products (fuel);
• - Short-term storage and handling of oil products (petrol and diesel fuel) to both private and business customers;
• - Adding bio-additives and marking substances to oil products.

LIQUEFIED NATURAL GAS TERMINAL

The Law on Liquefied Natural Gas Terminal (hereinafter - LNGT) approved by the 12 June 2012 Resolution of the Parliament of the Republic of Lithuania (No XI-2053) on the highest juridical level establishes the requirements for LNGT construction in the territory of the Republic of Lithuania, general principles and requirements for its activities and operation, and forms legal, financial and organizational conditions for the implementation of LNGT Project. AB Klaipėdos nafta was assigned to implement the project. After two and a half year development process, the LNG terminal was launched on 27 November 2014 and the Company became the operator of the terminal. Operation of the LNGT was

Infrastructure of the Liquefied Natural Gas Terminal

The LNG terminal is based on Floating Storage and Regasification Unit technology. The LNG vessel-storage (FSRU) is leased by the Höegh LNG. Jetty of 450 m length to which the FSRU is permanently moored, has been built in the Curonian Lagoon in the southern part The results of activities of Subačius oil terminal for 2017 are present in the Explanatory note "Information of segments" of the Company's financial statements for 2017.

The infrastructure of Subačius oil terminal is continuously upgraded in order to ensure proper provision of high quality services to customers, as well as safe and reliable operation of the facility.

commenced on 27 November 2014 upon the obtainment of natural gas liquefaction license issued by the National Commission for Energy Control and Prices.

The LNG terminal supplements and expands the existing natural gas supply infrastructure, provides additional opportunities for supply diversification, eliminates the dependence on the single external supplier of natural gas, ensures safe natural gas supply, and complies with the requirements of the directive N-1 infrastructure standard, i.e., forms particular assumptions for independent gas supply in Lithuania, required in order to meet the unconventional demand.

of port of Klaipėda. The LNG terminal is connected to the transmission system operator's – AB Amber Grid – gas grid via 18 km long linking pipeline. The main function of the LNG terminal is to accept and store liquefied natural gas, regasify them and supply to the main gas system.

LNG terminal infrastructure

LNG vessel-storage with regasification unit

The LNG terminal is a LNG tank vessel (Independence), which, on the territory of Klaipėda seaport, accepts liquefied natural gas from LNG carriers, moored by the LNG terminal. The LNG is accumulated and following the schedules of the clients are pumped through special equipment in order to have it regasified and supplied to the national gas grid.

In 2012 the Company signed the 10 years FSRU lease agreement with a purchase option with the Norwegian company Höegh LNG. The FSRU was built by the South Korean shipyard Hyundai Heavy Industries Co., Ltd

Characteristics of the Floating Storage and Regasification Unit (Independence)*
Technology	Floating Storage and Regasification Unit (FSRU)
Place	southern part of Klaipėda state seaport, near Kiaules Nugara island
FSRU supplier	Norwegian company Höegh LNG
Tank	170,000 m³
Loading capacities	9,000 m³/h of LNG. Loading from vessel to vessel using flexible hoses
FSRU capacities	3.76 billion m³ of NG per year (10.24 million m³ per day)
Maximum LNG filling level	98 %, at 70kPag
Minimum operational LNG Heel level	3,500 m3 of LNG
Gas flow to the gas pipeline	10.24 million m³ per day
FSRU production date	2014 year
FSRU length	294 m
FSRU width	46 m
FSRU draught	12.6 m

* Technical Characteristics of Terminal are specified at reference conditions: temperature (combustion/measurement) – 25/0 °C, pressure – 1.01325 bar.

Jetty and its Facilities:

The FSRU is permanently moored to the jetty in order to receive LNG from the gas carriers. Special facilities are installed on the jetty: a high pressure platform, a service platform, berthing and mooring platforms, catwalks, firefighting towers, a control room, fire warning equipment, technical maintenance cranes, high pressure loading arms and other necessary equipment and systems.

Connecting Gas Pipeline of the LNG Terminal

The terminal is connected to the natural gas transmission system operator's AB Amber Grid gas transmission network via 18 km length 700 mm

The LNG Terminal services

The Terminal shall provide i) LNG regasification, ii) LNG reloading services. The LNG regasification service consists of the following related and mutually dependent services:

• - LNG reloading in the terms as determined in the Terminal usage schedule (see below);
• - LNG regasification at the regasification rate set in the Terminal user's schedule.

The LNG reloading service consists of the following related and mutually dependent services:

diameter connecting pipeline. Connection to the transmission network is equipped with the Gas Metering Station.

• - LNG acceptance opportunity to deliver LNG cargo by LNG carriers of 65,000 – 160,000 m³ capacity (if not agreed otherwise), to berth them to the jetty and unload LNG into the Terminal over a period of maximum 48 hours;
• - LNG storage at the Terminal until its reloading, but in any case not more than for 60 calendar days.

and not larger than 65,000 m³

over a

- LNG reloading (re-export) – loading of the LNG quantity set by the Terminal user's schedule into LNG carriers which cannot be smaller than

Prices set for Terminal services are:

period of maximum 48 hours.

5,000 m³

• - Fixed part of LNG regasification service price is approved by the resolution of the National Control Commission for Prices and Energy (hereinafter - NCC) every year. This part of the price is included into the additional Security Suplement added to the gas transmission price;
• - Variable part of LNG regasification service price is paid for the regasified volume by the clients and is approved by the NCC on an annual basis; - LNG reloading service price set by the NCC on 20 November 2014 by the resolution No O3-

	896 and is fixed for 5 years.
Terminal service	Price set
LNG regasification service* variable price (applicable for 2016-2018)	0.10 Eur/MWh excluding VAT
LNG reloading service price (set for year 2015-2019)	1.14 Eur/MWh excluding VAT

* Additional Security to the natural gas transmission price (security supplement) as approved by NCC is applied to LNG Terminal users transporting gas via gas transmission system.

The LNG terminal fully ensures the third party access requirements in accordance with EU laws. The terminal's activities are organized in observance with the Rules for Use of the Liquefied Natural Gas Terminal (hereinafter - Terminal rules), adopted after public consultations with

KLAIPĖDA SMALL-SCALE LNG TERMINAL

The Company has marked the symbolic opening of the LNG Reloading Station in autumn 2017, though the commissioning works continues in the beginning of 2018.

The purpose of the LNG Reloading Station is to create a small-scale LNG infrastructure in the Baltic States and Poland. That ensures energy supply for the off-grid locations, as well as brings clean energy benefits to the multiple users. It also enables the use of clean fuel in maritime industry and heavy road transport.

The facility is designed to accept LNG from the smallscale carriers, temporary store LNG, and load LNG to the market parties and agreed with the NCC. The terminal's capacities are provided to the potential users on the same conditions in the way of public and transparent annual capacity allocation procedure or during the ongoing period if there are any free capacities left.

trucks or bunker LNG fuelled ships. It consists of five 1.000 m³tanks, with possibility to expand the volume up to 10 tanks in future.

LNG Reloading Station allows the third party access.

As a part of the commissioning, two LNG cargos have been accepted in 2017, where the part of LNG was reloaded into the trucks and distributed to the clients of the two clients across Estonia, Latvia, Lithuania and Poland. The smaller portion of LNG was consumed by The Company internally.

The construction of the LNG Reloading Station commenced in February 2016. It is a commercial project implemented by The Company, financed by the company and EU program Motorways of the Seas (MoS).

Characteristics of the LNG Reloading Station

Commercial concept	Open access LNG terminal: LNG storage, truck loading, ship bunkering
Location	North of Klaipėda sea port, territory of Klaipėdos nafta oil terminal
Technology	Five bullet type storage tanks situated on the shore
Volume of the tanks	5 x 1.000 m3
Annual technological capacity	250.000 m3 a year
LNG receiving rate (from ship)	Up to 1.250 m3 /hour
Daily truck loading capacity	24 trucks
Tank filling level	90%
Tank heel	Up to 100 m3 per tank
Truck loading	2 truck loading bays (simultaneous load possible)
LNG truck loading rate	60 – 100 m3 /hour
Bunkering rate	250 – 500 m3 /hour
Boil of gas	Up to 0,07%/day as a part of total LNG tanks volume
Boil of gas management	Gas pipeline connection with the Company's boiler house
Jetty	Length: 250 meters

Planned activities:

• - Acceptance of LNG from LNG carriers and temporary storage;
• - Transhipment to LNG trucks;
• - LNG bunkering directly to vessels.

Use of LNG:

Liquefied natural gas is the cleanest fossil fuel. The LNG transhipped to LNG trucks at Klaipėda LNG reloading station shall be identical to the gas used at home or for industry purposes, however, it will be in a liquid state: cooled to -161 degrees and taking up to 600 times less space than in the gaseous state. LNG is an odourless, colourless, non-explosive, non-toxic and non-corrosive substance.

Energy

LNG comes into use in the areas that are not located within reach of pipelines. In terms of LNG supply, Klaipėda LNG reloading station is in a geographically attractive location not only for Lithuanian consumers, but also for those in the North-Eastern Poland, as well as for customers in the Baltic countries. Upon installation of regasification stations, LNG would be used for heat and electricity generation. Apart from that, the LNG with a temperature of -161 degrees is suitable for industrial installations.

Navigation

Globally, navigation tends to operate using a cleaner and more efficient fuel, and the LNG is a fuel that creates an alternative for the pollution causing petroleum products. With the growing demand for clean fuels, the fleet of LNG-powered ships is expanding rapidly around the world. Other transport sectors, navigation alike, are in search for alternatives. A number of countries, such as the Netherlands, have already developed LNG fillingstation networks. Both public and freight transport is LNG-fuelled

THE COMPANY'S STRATEGY

In 2016 the Board of AB Klaipėdos nafta approved the corporate strategy for period 2016 - 2020 (hereinafter the Strategy). The strategy analyses the Company environmental factors , updates the Company's mission and vision, establishes common strategic goals for the entire Company and for each individual activity, evaluates the historical financial information of the Company and establishes the strategic period's indicators that have to be reached.

The Strategy foresees that the Company will seek to become one of the most efficient companies in Europe, will strive for change, activity diversification, new projects and services, which will form the basis for the Company's sustainable growth. The Company's achievements are expected to be visible and evaluated at the level of the State of Lithuania.

The successful implementation of the LNG terminal project and the acquired experience provided the Company a unique opportunity to use the experience internationally and expand the geographical range of the Company's activities. A small scale LNG project implementation will be important for the whole Baltic Region. By implementing its strategy the Company aims to become attractive to investors, ensuring competitive return on investment by dividends and by the growth of its value when improving the financial results of its commercial activities.

The Strategy foresees that significant attention of the Company's management will be dedicated to social responsibility, employees' development, environmental protection and cooperation with Lithuania's educational institutions.

The general and individual activities' strategic goals for the period 2016 - 2020 are provided below.

General strategic objectives
Increasing value of the company		Secure, reliable and efficient operation of oil and LNG terminals	Growth and diversification of activities		Improvement of internal processes		Development of competence
			Strategic objectives for major activities
Oil terminal		LNG terminal			LNG small scale	Long term fuel storage facilities
•	Increase awareness and attractiveness to the • owners of oil products		Provide an alternative •		Create small scale LNG	•	Proper storage of national reserve of oil
Improve flexibility and • capacity of oil transshipment			source for the supply of natural gas to Lithuania		infrastructure		products
• provided	Enlarge the scope of • Assure minimal exploitation activities and services expense for the consumers of natural gas		•	Develop regional LNG	•	Increase long term
• Ensure safe operations of the oil terminal		• Develop services related to the activities of LNG terminal		market		storage capacity and volume of the activity

The Company aims to achieve the following targets within its main activities:

Oil terminal: transship oil products in a safe, reliable and competitive way; increase the terminal's attractiveness, flexibility in order to attract new clients as well as transhipment volumes.

Liquefied natural gas (LNG) terminal: ensure sustainable gas import opportunity into Lithuania and to increase the benefits provided by the LNG terminal for the Lithuania Republic and gas consumers. Targets are to be met by ensuring safe, uninterrupted and effective

The Company both in its daily activity and implementing its strategic goals, is being led by these values:

• - Proactivity. The Company seeks to identify market needs and business enlargement opportunities by creating new or modifying provided services.
• - Professionalism and reliability. AB Klaipėdos nafta operates oil and LNG terminals according to the highest professional standards, fast and efficiently. Internal processes and procedures for oil transhipment and LNG regasification are constantly revised; the quality of cargo is accurately monitored.
• - Transparency. The Company aims to comply with regulations for listed enterprises issued by

LNG terminal operation. At the same time the Strategy foreseen the reduction of LNG terminal costs was paid by the gas consumers.

LNG small scale activities: install an onshore LNG distribution station and commence the small scale LNG activities, actively search for the other LNG distribution station investment projects to the Baltic Sea region.

Long term fuel storage activity (Subačius oil terminal): secure effective storage of national mandatory oil product reserve as well as search for the activity development opportunities.

NASDAQ Vilnius, it is managed by the best corporate governance principles and provides important Company information to the society and investors comprehensively and timely.

- Social responsibility. The Company is governed by sustainable business growth principles that include corporate social responsibility and environmental protection initiatives. Therefore the Company invests in additional activities employing technologies that are increasing economic benefits to investors and are environment-friendly. The Company participates in various social projects.

SIGNIFICANT EVENTS OF THE REPORTING PERIOD

24th January 2017. The Supervisory Board elected Bjarke Palsson to the duties of independent Board Members of the Company to the vacancy from 24th January 2017 until the term of office of the acting Board of the Company (29th April 2018).

2nd March 2017. Allocated Liquefied Natural Gas Terminal Capacities to AB Achema (5,839.9 thousand MWh) for period: from the 1 April 2017 until the 30 September 2017.

29th March 2017. Mindaugas Jusius, the independent member of the Company's Board has announced to resign from the office of the Company's Board since 11 April 2017, from the date when he starts acting as Chief Executive Officer of the Company.

21st April 2017. Convened ordinary general meeting of shareholders of the Company adopted these decisions:

• - Approved the audited Financial Statements and Annual report of AB Klaipėdos nafta for the year 2016.
• - Distributed the Company's profit of EUR 13,794 thousand available for appropriation. Allocation of profit to dividends amounted EUR 9,656 thousand or EUR 0.025 per share.

21st April 2017. After the general meeting of the shareholders of AB Klaipėdos nafta the term of office of AB Klaipėdos nafta's Supervisory Board has expired, as provided in Article 31 Paragraph 4 of Law on Companies of Republic of Lithuania. The term of office of the Audit Committee has expired together with the term of office of the Supervisory Board.

28th April 2017. AB Klaipėdos nafta has concluded the Credit Agreement with the NIB regarding the credit of up to EUR 20 400 thousand to finance LNG reloading station's and the 1st stage of Klaipėda oil terminal expansion projects. Interest: floating comprising 6 months Euribor and the margin.

8th June 2017. AB Klaipėdos nafta has signed agreements with three LNG terminal users, i.e. UAB LITGAS, UAB Lietuvos dujų tiekimas and AB Achema, who have been allocated the part of terminal capacities before the upcoming Gas Year. UAB LITGAS and AB Achema have booked capacities from 1st October 2017 until 30th September 2018, UAB Lietuvos dujų tiekimas have booked capacities from 1st October 2017 until 31th August 2018.

27th June 2017. The additional 960 thousand MWh LNG terminal capacities were allocated to UAB Lietuvos dujų tiekimas during the period from 1 July 2017 until 30 September 2017.

4th July 2017. An extraordinary general meeting of the shareholders of the Company approved the decision to conclude two agreements of light oil products' tanks engineering, procurement and construction (EPC) contracts with the winner of public procurement tender:

• - Agreement regarding 2x10,000 m³ and 4x5,000 m 3 tanks was signed on 22 May 2017. The amount of the contract: EUR 7,473 thousand. The end of the works set in the agreement is 18 months as of the beginning of works.
• - Agreement regarding 6x20,000 m³ tanks was signed on 12 June 2017. The amount of the contract: EUR 11,453 thousand. The end of the works set in the agreement is 21 months as of the beginning of works.

12th July 2017. The additional 960 thousand MWh LNG terminal capacities were allocated to UAB Lietuvos dujų tiekimas for the period from 1 August 2017 until 31 October 2017.

17th October 2017. Performing the LNG reloading station commissioning works, the first LNG truck has been successfully loaded. The first truck of DUON LNG was accepted and filled with LNG.

25th October 2017. The Company announced a selection of candidates for independent members of the Supervisory Board of the Company: one for an independent member of the Supervisory Board in the field of finance and one for an independent member of the Supervisory Board in the field of strategic planning and management.

6th December 2017. An extraordinary general meeting of the shareholders of the Company approved to implement the reconstruction of oil terminal jetties No 1 and No 2 investment project for the total amount not exceeding EUR 16.5 million (without VAT).

27th December 2017. A court of a first instance - Klaipėda Regional Court adopted a judgement in the criminal case concerning Artūras Urbutis, Antanas Urbutis, Svetlana Popova, Andrejus Vaičiulis, former general manager of AB Klaipėdos nafta Jurgis Aušra, former director of commerce of the Company Ričardas Milvydas and UAB "Naftos grupė" accused of illegal activities in which the Company has filed the claim for damages for the total amount of EUR 20,883,558.16 caused by the illegal activities of the accused. First instance Klaipėda Regional Court has satisfied a civil claim, although it was appealed later on.

SIGNIFICANT EVENTS OCCURRED AFTER THE END OF THE REPORTING PERIOD

Information about public information

Following the requirements of the Law of the Republic of Lithuania, all main events concerning the Company and information about the time and venue of the General Meeting of Shareholders are published on the website of the Company www.kn.lt and in AB NASDAQ Vilnius (www.nasdaqomxbaltic.com) Stock Exchange.

BUSINESS ENVIRONMENT AND MARKET

Oil terminal business environment and market

The Company's oil products' transshipment activities are mostly affected by:

a) Oil products' reloading and storage infrastructure and level of the Company's readiness to use available infrastructure.

b) Economic attractiveness in the view of logistics (both transshipment tariffs and costs of the entire logistic chain).

c) Macroeconomic and geopolitical environment in regional and global oil processing and trade markets.

Main oil processing plants (oil refineries), which potentially provide oil products for transshipment through the Company's oil terminals are located in the East and Southeast directions, those are: Mažeikiai plant in Lithuania (managed by AB ORLEN Lietuva), Mozyr OJSC Mozyr and Novopolotsk OJSC Naftan oil refineries in Belarus as well as nearest located refineries in Russia.

Major Company's competitors are oil terminals operating in the eastern coast of the Baltic Sea and Odesa port in Ukraine.

Should be noted that competitive environment each year in the region's oil products transshipment market is getting more intensive especially for the Belarusian origin oil products. Main direct Company's competitors in Belarusian oil products transshipment segment are firstly oil terminals operating in the Baltic States – Ventspils, Riga, Klaipėda as well as Odessa port in Ukraine.

In the recent years oil products transsihpment market is noticing Russian's willingness to reroute not only Russian, but also Belarussian origin oil products towards Russian ports.

Oil products, refined in Russia oil refineries are attempted to be exported firstly via Russia's own seaports located on Finland Coast (St. Petersburg, Primorsk, Ust-Luga). Inter alia, it should be noted that

mainly through its own sea ports has been highlighted recently. Due to this fact Estonian, and especially Latvian ports are noticeably losing Russian oil products thus potentially making them a significant competitor to Company's oil Terminal.

Company faced major challenges in the first half of 2017 when, due to geopolitical reasons, Russian crude oil supply to key Belarus oil refineries was reduced twice, respectively making negative impact to transit oil products flows. Worth mentioning, that despite unfavourable situation in oil products transshipment market and intensive competitive environment, Company managed to maintain almost the same transshipment volumes as in 2016 through diversification of provided services portfolio as well as expansion of oil product and customers portfolio.

According to statistical data, oil terminals in the eastern coast of the Baltic Sea region handled total 94.6 million t of oil products in 2017 that is by 5.2 per cent less comparing to 2016 when region handled 99.7 million t of oil products.

Nevertheless, in 2017 Klaipėda seaport was one of the ports in the Baltic Sea where the handling volume of oil products' has increased. Klaipėda's port handled by 0,25 million t or by 2.8 per cent oil products more.

Comparison of the oil products' transshipment at the eastern Baltic Sea coast ports in 2016 – 2017, million t:

Prepared on the basis of Klaipėda Port Authority statistical data

Transshipment of oil products

In 2017 Company's oil terminals in total handled 7,177 thousand t of oil products. Klaipėda oil terminal handled 7,078 thousand t of oil, meanwhile Subačius oil terminal transshipment amounted to 98 thousand t.

Comparing 2017 to previous 2016 oil products transshipment via Company's oil terminals maintained nearly the same – it decreased by only 2.2 per cent. Following decrease in handling volumes has been mainly determined by lower volume of products delivered by the main client – AB ORLEN Lietuva.

Despite mentioned unfavorable geopolitical conditions, transit freights in 2017 year remained at the same level while HFO transit even increased by 5 per cent.

Major Company's customer of transit transshipment in 2017 was BNK (UK) Limited, owned by one of the largest Belarusian oil product exporters – ZAT Belaruskaja Neftenaja Kampanija (BNK). In order to ensure constant and interrupted oil products transit volumes at terminal, Company has concluded a long-term contract with BNK (UK) Limited on the provision of oil product transshipment services. The terms of the Contract are valid until 31 October 2019 with the possibility of extension.

In 2017 AB "ORLEN Lietuva" transshipped by 6.0 per cent less oil products via Company's oil terminal comparing to 2016. The most likely reason for such decrease is oil product realization in other markets due to favourable market conditions as well as planned maintenance works at Mažeikiai oil refinery at the beginning of the year. KN has a long-term contract with ORLEN Lietuva AB on provision oil product handling services till the end of 2024.

In 2017 the Company successfully maintained cooperation with widely known wholesalers in Lithuania importing oil products (gasoline and diesel), which leaded to almost by 4 times increase in import volumes through Company's road tanker loading unit within the last 4 years. KN handled approximately 18 per cent of the total fuel consumed in Lithuania (gasoline and diesel) in its road tankers loading unit during the year of 2017.

In 2017 there were 98.9 thousand t of oil products handled in Company's Subačius oil terminal (in 2016 – 93.9 thousand t). Despite intense competitive environment Subačius oil terminal managed to increase oil products amount by 5.3 thousand t.

LNG terminal activity environment review

LNG terminal operations are regulated therefore the regulatory environment defines the activity's scope of operations, profitability and guidelines.

On the 11th of December, 2017 the general manager of KN approved a new edition of the Terminal Regulations (it came into force on 28th of December, 2017), which include additional flexibility regarding the LNG regasification nominations, updated clauses regarding the allocation of regasified natural gas quantities and allowable LNG losses, removed requirement for smallscale LNG carriers (up to 160 meters) to hire tugs with fire-fighting equipment and other changes which reflect the commercial and operational issues which emerged during the LNG terminal operations.

One notable change in the LNG terminal regulatory environment is the change of the Natural Gas Law No VIII-1973 adopted on 7th of November 2017 which:

KN in order to expand oil terminals scope of activities and diversify transshipment portfolio are continuously cooperating and developing business relationships with international and regional oil products trading companies on provision oil products handling services via Company's oil Terminals.

• - Supplements the law with the regulation of small-scale LNG activities (LNG regasification units may be considered to be a part of natural gas distribution system depending on what kind of and how many of consumers will be supplied with the regasified natural gas);
• - Improve the mechanism of a guaranteed natural gas supply;
• - Removes the licensing requirement for natural gas supply;
• - Updates and improves the definitions used in the Natural Gas Law and other legal acts.

Also worth noting that the law on the change of articles 2, 4 and 11 of the LNG terminal law No XI-2053 was adopted on 7th of November, 2017 and it includes the changes of terms LNG liquefaction activity and LNG liquefaction licence to the terms LNG regasification activity and LNG regasification licence.

Allocated capacities	Terminal user	Amount of allocated capacities, kWh*	Period
	UAB Lietuvos dujų tiekimas	960,000,000	From 1 July 2017 till 30 September 2017
LNG Regasification	UAB Lietuvos dujų tiekimas	1.531,000,000	From 1 October 2017 till 31 August 2018
capacities**	UAB LITGAS	3,529,728,894	From 1 October 2017 till 30 September 2018
	AB Achema	5,611,730,000	From 1 April 2018 till 30 September 2018

Allocated LNG terminal capacities in 2017:

* NOTE: temperature (combustion/measurement) - 25/0 °C, pressure - 1.01325 bar. Natural gas upper heating value- 11.90 kWh/nm³ , LNG expansion coefficient- 1:578 (m³ LNG/ nm³ natural gas).

** LNG Regasification capacities may be changed to LNG Reloading capacities during the Gas year.

During 2017 in the LNG terminal:

• - 15 LNG carriers (2016 16 LNG carriers) have been accepted;
• - delivered 839.8 thousand tons of LNG (2016 m. – 1,000.6 thousand tons);
• - regasified and into gas transmission system supplied 1.053 billion m³ of natural gas;
• - approx 42.5 thousand m³ of LNG were reloaded to small-scale LNG carriers (total 6 LNG carriers).

LNG terminal revenues in 2017 comprise EUR 68,201 thousand (in 2016 – EUR 66.996 thousand).

In 2017 there were 3 LNG terminal users – designated natural gas supplier UAB "LITGAS", AB "Achema" and UAB "Lietuvos dujų tiekimas".

According to the approved Joint Annual Schedule of the Terminal for Gas year 2018 (October-October), it is planned to receive 12 LNG carriers which total will deliver around 1.65 M m 3 of LNG (around 743 thousand t) and regasify and into gas transmission system to supply around 960 M m 3 of natural gas.

In 2017 LNG to LNG terminal was supplied by 4 LNG suppliers (Statoil, Cheniere, Koch and Gas Natural Fenosa), meanwhile in 2016 LNG supplier was Statoil only.

The demand of the LNG terminal's capacities depends on the following principal criteria:

• - The overall need for gas in the Lithuania and other Baltic countries;
• - The pricing and supplied quantity of the competing source of natural gas (gas supplied by a pipeline);
• - The restrictions of Lithuania's natural gas infrastructure (capacities of the trunk gas pipelines);
• - LNG supply in the World market;
• - LNG prices in the region and in the world;
• - Terms and period of the Gas supply contracts;
• - LNG carriers' supply and freight costs.

LNG regasification in 2015-2017 volumes stated below in the charts:

LNG Carriers schedule at the LNG terminal:

Baltic States natural gas market

In case of need, the LNG terminal is able to supply natural gas to all three Baltic States. The total need for natural gas in Lithuania amounts to approximately 2.0- 2.2 billion m³ per year. In 2017 Lithuania consumed approximately 2.15 billion m³ (24.44 TWh) or 2.3 per cent more than in 2016 (23.88 TWh) of gas. Latvia's and Estonia's gas markets are significantly small and in 2016 they respectively consumed 1.4 and 0,518 billion m³of gas. By creating the conditions for attractive gas prices, the LNG terminal can become a real alternative to the existing natural gas providers in the Baltic States. After laying planned gas link between Lithuania and Poland (hereinafter – GIPL), there would be a possibility to supply LNG to Poland's market. The Polish market demonstrates clear potentials for considerably bigger gas consumption; however, it has to be admitted that the degree of competition between Poland and other

Gas pipeline projects in the Baltic States

The energy projects, executed in the Baltic Region would create preconditions for development of the LNG market and more efficient use of the available LNG terminal's capacities. One can distinguish the following energy projects, relating to gas supply, which are of strategic importance to the Company:

- GIPL;

states-gas suppliers is also more intense. In 2016, the decision was made to postpone the date of finalization of the GIPL project in the territory of the Republic of Lithuania to 2021. In 2016 Poland consumed approximately 17.3 billion m³ of gas. Poland through it LNG terminal imported approximately 11 per cent of total country gas consumption during a year.

Another gas pipeline project is planned to be executed in the Eastern Baltic region, which will connect Estonia and Finland (hereinafter – Baltic Connector). The project is foreseen to be completed in 2020. In case no new LNG terminal is constructed in the Gulf of Finland (which is also in the plans), the Company LNG terminal will get the possibility to expand the gas supply market to Finland, where the consumption reaches approximately 2.7 billion m 3 per year.

• - Increasing the capacities of the gas supply link between Lithuania and Latvia;
• - Increasing the capacities of the gas supply link between Latvia and Estonia;
• - The Baltic Connector gas supply link between Finland and Estonia;
• - Enlargement and modernization of Inčukalns Underground Gas Storage Facility.

FINANCIAL RESULTS OF ACTIVITY

Assets, MEUR

Gross profit and EBITDA, MEUR

___________________________________________________________________________________________________________________

EBITDA = earnings before interest, taxation, depreciation and amortization; EBIT= earnings before interest and taxation;

	2017	2016	2015	2014	2013
Transhipment of oil products (thousand t)	7,177	7,338	6,461	5,587	5,834
LNG regasification, thousand MWh	12,646	14,611	4,559	494	-
Investments (acquisitions of non-current assets):	32,858	16,874	6,809	40,130	28,577
Klaipėda oil terminal	13,089	7,284	809	1.183	10,065
LNG terminal	335	-19*	5,429	38,572	18,512
LNG reloading station	19,230	9,308	429	-	-
Subačius oil terminal	204	301	142	375	81
Financial figures
Sales revenue	106,484	103,839	109,702	39,775	36,741
Gross profit	23,745	20,797	29,123	13,150	14,704
EBITDA 1)	31,339	28,446	37,136	16,628	18,307
EBIT 2)	17,711	15,270	24,362	9,091	11,101
Financial and investment activities result	-94	211	-482	-285	-23
Profit before taxation (EBT)	17,513	15,095	24,104	9,069	11,101
Net profit	17,031	13,794	22,036	9,257	10,325
Current assets	96,268	55,536	58,713	32,687	44,067
Non-current assets	204,977	186,895	180,074	189,231	151,669
Total assets	301,245	242,431	238,787	221,918	195,735
Shareholders' equity	200,344	192,969	196,804	174,715	165,562
Profitability
Return on assets (ROA) 4)	6.3%	5.7%	9.6%	4.4%	5.8%
Return on equity (ROE) 3)	8.7%	7.1%	11.9%	5.4%	6.4%
Gross profit margin	22.3%	20.0%	26.5%	33.1%	40.0%
EBITDA margin	29.4%	27.4%	33.9%	41.8%	49.8%
EBIT margin	16.6%	14.7%	22.2%	22,9%	30.3%
EBT margin	16.4%	14.5%	22.0%	22.8%	30.2%
Net profit margin	16.0%	13.3%	20.1%	23.3%	28.1%
Turnover
Accounts receivable, days	41	37	92	17	32
Accounts payable, days	44	36	30	75	78
Financial structure
Debt ratio 5)	0.50	0.26	0.21	0.27	0.18
Capital to assets ratio	0.67	0.80	0.82	0.79	0.85
Gross liquidity ratio (current ratio) 6)	4.78	3.61	5.56	2.05	3.37
Quick ratio 7)	4.73	3.52	5.40	1.95	3.34
Market value ratios
Price-Earnings Ratio (P/E)	11.2	14.8	6.4	12.8	10.8
Earnings per share (EPS)	0.045	0.036	0.058	0.024	0.027

The key financial ratios of the Company (in EUR thousand, if not indicated otherwise):

* Acquisitions of the non-current assets of the LNG terminal are negative because have been adjusted by the insurance compensation (amounting EUR 119 thousand) related with the construction of the LNG terminal constructions.

1 EBITDA = earnings before interest, taxation, depreciation and amortization;

2 EBIT= earnings before interest and taxation;

3 Return on equity (ROE) = net profit of the last twelve moths / (total average equity at the end of the period + total average equity at the beginning of the period) / 2;

4 Return on assets (ROA) = net profit of the last twelve moths / (total average assets at the end of the period + total average assets at the beginning of the period) / 2;

⁵ Debt ratio = total current and non-current liabilities at the end of the period / total equity at the end of the period;

⁶ Gross liquidity ratio = total current assets at the end of the period / total current liabilities at the end of the period.

⁷ Quick ratio = (total current assets at the end of the period - Inventories at the end of the period) / total current liabilities at the end of the period,

P/E = The indicator describing the company's share price and earnings per share ratio.

Revenues

The sales revenues of the Company of year 2017 comprise EUR 106,484 thousand and comparing with the year 2016 (EUR 103,839 thousand) has increased by EUR 2,645 thousand (i.e. 2.5 per cent). The increase is related with the positive changes in revenues of the LNG and oil terminals.

The total revenues of the LNG terminal activity in 2017 amounted to EUR 68,201 thousand, and compared to 2016, increased by EUR 1,235 thousand or by 1.8 per cent. In 2017 the Company received additional (unplanned) revenue amounting EUR 2,182 thousand (Security Supplement) as a result of recalculation of gas consumption capacities of 2016 years. The activity of LNG terminal is regulated and with a price cap, therefore revenue and profit of LNG activity does not depend on re-gasification volume. For more information, concerning regulated revenues refer to the article below.

Sales revenues from the Oil terminal operations of 2017 amounted EUR 35,471 thousand and comparing to

2016 increased by EUR 1,666 thousand or by 4.1 per cent. Revenues have increased mainly from one-off realization of oil products accumulated over time in Klaipėda oil terminal (influence approx. EUR 1,292 thousand). Also more revenue earned for the temporary storage service (EUR 394 thousand).

Subačius oil terminal sales revenues of 2017 decreased by 13,1 per cent (or by EUR 366 thousand) because decreased the commercial long-term storage volumes.

Sales revenue by geography is provided herein. Sales revenue from foreign clients – are revenues from the clients registered not in Lithuania.

Expenses

Total cost of sales of the Company of 2017 comprises EUR 82,739 thousand, comparing to 2016 (EUR 83,042 thousand) it has decreased by 0.4 per cent or by EUR 303 thousand. This decrease is mainly explained by the reduced LNG terminal FSRU leasing and related expenses affected by change of currency exchange rate (USD).

The Company's operating expenses increased by 5.3 per cent or by EUR 312 thousand and comprised EUR 6,217 for 2017. The increase is related with expansion of new activities and development of projects.

			The listing of the major expenses is presented below:

In EUR thousand	2017 m. 2016 m.					Change, %
	KNF	SGD	SNT	GDP	Total	KNF	SGD	SNT	GDP	Total
FSRU rent and other expenses	-	49,547	-		- 49,547	-	50,786	-	-	50,786	-2.4
Depreciation and amortization	7,087	5,652	903	29	13,643	6,75	5,738	884	0	13,197	3.4
Wages, salaries and social security	6,461	2,745	801	1,264	11,271	6,315	2,846	713	567	10,441	7.9
Variable costs (natural gas, electricity, railway services)	7,071	14	39	1	7,125	7,010	14	45	0	7,069	0.8
Rent of land and quays of the port	623	1,677	-	-	2,300	619	1,722	-	-	2,341	-1.8
Other cost of sales and operating expenses	2,657	1,553	204	671	5,085	2,447	1,732	265	692	5,136	-0.9
Total costs		23,899 61,188 1,947 1,937			88,971	22,966	62,838	1,907	1,259	88,970	0.0

In 2017 the total amount of LNG terminal's costs was EUR 61,282 thousand, the major part of which were the costs of rent of the vessel Independence and the expenses, related with the FSRU vessel's operation totally EUR 49,547 thousand. Other LNG costs (staff remuneration, depreciation, jetty lease costs) in comprised EUR 11,735 thousand and has decreased by 2.6 per cent comparing to year of 2016.

In 2017 the total amount of Klaipėda oil terminal's costs amounted to EUR 23.764 thousand (2016 – EUR 22,961 thousand) and increased by EUR 803 thousand. The oil terminal's variable costs (gas, electricity and railroad costs) remained at the same level (0.9 per cent increase). The effect of lower transshipment volume was eliminated by the higher gas purchase price in 2017.

Oil terminal staff costs increased by EUR 146 thousand or by 2.3 per cent comparing with 2016. Depreciation and amortization costs are grown by EUR 382 thousand. Increase in depreciation is affected of the investments made for oil terminal flexibility.

In 2017 the total amount of costs for Subačius oil terminal grew by 3.1 per cent or by EUR 59 thousand. The increase is related with the depreciation and amortization costs and the increase in salaries of employees.

Employees related costs increased by 7.9 per cent that was affected by both: increase in average salaries and increase in number of employees. Average salary per employee increased by 3.8 per cent and reflected changes in the labour market. The increase in employees is mainly explained by the expansion of Company's activities, primarily related with LNG reloading station and LNG projects.

Financial results

In 2017 the Company's net profit was EUR 17,031 thousand (EUR 13,794 thousand), compared to 2016, the net profit increased by 23.5 per cent or by EUR 3,237 thousand. The net profit margin for 2017 amounted to 16.0 per cent, the gross profit margin reached 22.3 per cent (in 2016 respectively 13.3 per cent and 20.0 per cent). The profit per one share amounted to EUR 0.045/share (EUR 0.036/share in 2016).

Changes in Company's net profit are mainly effected by the revenue changes described above:

• - Oil terminal net profit has increased by EUR 1,668 thousand up to EUR 11,582 thousand; increase related with revenues increase in oil product realisation and storage services (see above);
• - LNG terminal net profit increased to EUR 6,516 thousand in total both due to higher revenues and reduction of costs;
• - Subačius oil terminal net profit decreased by EUR 363 thousand or by 57 per cent to EUR 484 thousand in connection of significantly reduced oil products storage service;
• - LNG related activity results are negative loss of EUR 1,551 thousand.

In 2017 the financial activity loss is EUR 146 thousand (in 2016: EUR 144 thousand profit). Change is mainly related with the fact that in 2016 profit of sales of LITGAS shares was accounted of EUR 310 thousand. Income from financial activities in 2017 mainly comprise from: EUR 104 thousand fines and delays income, EUR 35 thousand interest on bank accounts. Costs mainly comprise from EUR 198 thousand interest costs, EUR 79 thousand exchange rate fluctuation costs.

Significant positive factor for the net profit in 2017 was the positive the change in deferred tax (EUR 950 thousand) accounted due to changes in income tax law.

In 2017 EBITDA comprised EUR 31,339 thousand compared to 2016 (EUR 28,446 thousand) it increased by 10,2 per cent or by EUR 2,893 thousand. EBITDA margin was 29.4 per cent, for 2016 – 27.4 per cent.

In 2017 the Company's annual return on equity (ROE) amounted to 8.7 per cent (7.1 per cent in 2016), the return on assets (ROA) – 6.3 per cent (5.7 per cent in 2016).

Regulated profit of LNG terminal

LNG terminal, its infrastructure and its connection implementation as well as exploitation costs fully or partially are included into the natural gas transmission service price in accordance with the rules and guidance's set by the NCC based on the regulations set in the Energy Law, Natural Gas Law and other laws of the Republic of Lithuania related with energy prices regulation.

The total LNG terminal revenue level is confirmed by the NCC based on the approved methodic of Government regulated prices in the natural gas sector (hereinafter – Methodic). According to this Methodic total LNG terminal revenue level is calculated for upcoming year by summing 2 constitutes: 1) Estimated necessarily costs for the LNG terminal exploitation and operational assurance; 2) Forecasted LNG terminal infrastructure investment return.

The revenue of the LNG terminal activity comprise from 3 parts:

• - Fixed part of LNG regasification service price that is approved every year by the resolution of the National Control Commission for Prices and Energy. This part of the price is included into the additional Security Supplement added to the gas transmission price;
• - Variable part of LNG regasification service price that is received for the regasified volume directly from the clients and which tariff is approved by the NCC on an annual basis;
• - LNG reloading service revenue for reloaded LNG quantity.

LNG regasification service price variable part and LNG reloading service revenue are recognized at the moment of services provision according to existing tariffs.

Meanwhile the LNG Security Supplement tariff is set annually by the NCC based on the amount required to be collected (estimated LNG terminal revenue) and proportionally allocated for the forecasted gas consumption capacities. LNG security supplement is paid by the users of natural gas transmission system, including the end users, together with the other payments for the natural gas transmissions services. The payments are collected by the transmission service operator (hereinafter - TSO) either directly from the user or from suppliers of natural gas in case the user has no direct contractual obligations with the TSO.

Factual LNG Security Supplement collections and payments may differ from planned ones (calculated at the approval of Security Supplement) because of variation of consumption capacities and other differences.

As long as LNG terminal revenue in the financial accounting (under IFRS) are recognized based on the factual gas consumption capacities for the reporting period and correspondingly calculated factual LNG Security Supplement, the differences between the financial LNG terminal segment profit and regulated profit which is calculated based on the NCC methodic may arise.

LNG operating expenses are recognized in the relevant period when incurred.

The regulated LNG terminal profit is calculated adjusting the investment return for the period by the income or expenses not attributable for the regulated activities in terms of regulation (but have impact for the financial profit).

In EUR thousand	2014	2015	2016	2017 (unaudited by NCC)
Financial LNG terminal profit	600	6,981	3,518	6,516
Regulated profit (in terms of Methodic)	267	3,525	3,329	3,214
Difference	333	3,456	189	3,301
Difference (cumulative)	333	3,789	3,978	7,280

Below is the historical comparison of the LNG terminal regulated and financial profit:

According to the regulation additionally received amount shall be dedicated for compensation of the LNG terminal necessarily exploitation expenses for the future financial periods.

The decrease in regulated profit is related with the reducing amount of regulated asset base.

Balance sheet items

In 2017 the Company's non-current assets increased by 9.7 per cent to EUR 204,977 thousand in total. The increased of non-current assets is related with investments and acquisition of property, plant and equipment that at the end of the year comprise EUR 201,449 thousand(31-12-2016 – EUR 182,925 thousand). The total amount of investments and acquisition of noncurrent assets in 2017 comprise EUR 32,858 thousand, including EUR 13,089 thousand for Klaipėda oil terminal, LNG reloading station - EUR 19,230 thousand, smaller investments were made into Subačius oil and LNG terminals respectively EUR 204 thousand and EUR 335 thousand.

In 2017 the current assets increased by EUR 40,732 thousand and at the end of the year amounted to EUR 96,268 thousand (31-12-2016 – EUR 55,536 thousand). The major part of the current assets comprise from financial asset – EUR 65,000 thousand (short-term bank deposits at the commercial banks), and from cash and cash equivalents – EUR 16,747 thousand. The trade receivables increased by 13.2 per cent to EUR 11,998 thousand (by EUR 10,603 thousand).

After the increase of the total current assets the liquidity ratio increased to 4,78 (in 2016 – 3,61), i.e. the current assets exceed the current liabilities by almost 5 times. As of 31 December 2017 the current assets comprised 32.0 per cent (31-12-2016 – 22.9 per cent) and the cash and its equivalent together with financial assets –27.1 per cent of total assets.

Changes in equity in 2017 were related with the net result of the financial year, payment of dividends for the previous year (EUR 9,656 thousand) and transfer between reserves (EUR 4,138). At the end of 2017 the Company's equity amounted to 66.5 per cent of the overall assets (79,6 per cent at the end of 2016). The detailed information about the share capital is provided in the chapter "Information about shareholders and shares of the Company".

The Company's long-term liabilities at the end of 2017 amounted to EUR 80,765 thousand (EUR 34,071 thousand at the end of 2016). Change is related with the withdrawn loans in 2017 from Nordic Investment Bank (EUR 22,000 thousand) and from European Investment Bank (EUR 24,700 thousand), received grants LNG reloading station which comprise EUR 4,006 thousand total at the year end. As at 31 December 2017 the total loan balance (at nominal value) comprise EUR 76,700 thousand: total EIB balance EUR 54,700 thousand (31 December 2016 EUR - 29,693 thousand), NIB - EUR 22,000 thousand (null as at 31 December 2016). The loan balance by EUR 246 thousand to be repaid in 2018 is accounted under short term liabilities.

The change in the current liabilities is resulted by the increase of payables to suppliers and at the end of the year total comprise EUR 20,136 thousand (EUR 15,391 thousand at the end of 2016).

INVESTMENTS

The most important investment, projects in 2017:

No.	Project	Investments in 2017 (incl. prepayments)	Project description
			AB Klaipėdos nafta continued construction of LNG reloading station (new infrastructure) in 2017. It's located in the Klaipėda port territory used by the Company. In the beginning of 2018 Company is expected the end of constructing works. Most significant works done in the 2017:
	LNG reloading	EUR 17.2	Build control building for LNG reloading station; -
1.	station construction	million	Completing mechanical completion procedures (inspection of - installed systems and buildings);
			The main equipment of LNG flow measurement, electricity, - automation and fire system is under testing stage;
			Implementing trial works of operations and commissioning - works.
2.	Light oil product tanks expansion	EUR 5.9 million	Part of the 1st stage of Klaipėda oil terminal expansion which purpose is to expand light oil product tanks park in the north of Company's 3 3 territory. New tanks capacities: 3 x 5,000 m and 4 x 1,400 m . Total 3 new tanks capacity 20.6 thousand m . In 2017 the most significant works were completed, for 2018 mainly formal completion procedures are left.
3.	Construction of fuel oil with water tanks	EUR 1.9 million	Part of the 1st stage of Klaipėda oil terminal expansion which project 3 consist 2 tanks x 4,200 m construction. New capacities will allow to take more fuel oil water and loosen tanks for the loading oil products. In 2017 the most significant works were completed.
4.	The 2nd stage of expansion of Light Oil Products (LFO) Park in Klaipėda oil terminal	EUR 4.3 million	Two contracts for LFO tanks construction works signed in 2017. 3 Contraction provides 12 new tanks with 160 thousand m total capacity. Amount of contracts: EUR 18,926 thousand. The 2nd stage of expansion also includes project of new rail road and trestle.
4.1	Constructing LFO tanks: 6x20.000 3 m	EUR 1.4 million	In June 2017 preparation and design works has started for tanks constructing, main materials were ordered. The end of the works – Q2 of 2019.
4.2	Constructing LFO tanks: 4x5.000 m3 and 2x10.000 m3	EUR 1.3 million	Preparation work, design for tanks constructing were started and main materials were ordered in 2017. The end of the works – Q2 of 2019.
4.3	Appliances and equipment for rail road and trestle expansion	EUR 1.6 million	Purpose of the project is - increase flexibility of oil products transhipment and opportunities to transhipped higher volume and different kind of oil products. The project comprise new trestle and two new rail roads, as well as technical equipment for oil products unloading.

ACTIVITY PLANS AND FORECASTS

AB Klaipėdos nafta goals and tasks for the year 2018 are firmly related with the continuation of the activities and project, implementation the Company strategy for the year 2018-2020.

In the long run, the Company will strive to maintain the status of a strategic importance entity, which purpose is to provide energy security to both Lithuania and nearby region – to ensure the supply of liquefied natural gas to Lithuania and neighbouring countries as well as securing the storage of the petroleum product reserves of the State (the 'Strategic Petroleum Product Reserves'). Herewith, AB Klaipėdos nafta is committed to implement efficient and reliable oil product handling operations in Klaipėda Seaport, at the same time increasing the attractiveness and competitiveness of Klaipėda Oil Terminal. Furthermore, the Company is planning to diversify its business activities by continuing to develop LNG logistics chain, established by AB Klaipėdos nafta, and by engaging specific LNG related knowledge in foreign markets.

The following goals are set for the year 2018:

• - To carry out safe and reliable transshipment of oil products in oil terminals, operated by the Company;
• - To conduct safe, efficient operation and exploitation of the LNG Terminal and ensure the possibility liquefied natural gas import to Lithuania and the neighbouring countries;
• - To start reloading station and successfully operate LNG reloading station infrastructure;
• - To ensure effective storage of the petroleum product reserves of the State;
• - To implement the II stage of the LFO terminal expansion;
• - To improve employees engagement level and to develop competencies of Company's employees.

Oil product transshipment is still considered as one of the prime activities of the Company during the year 2018, therefore, AB Klaipėdos nafta will continue to retain flow of oil products' at similar level as in previous year. At the moment, the main oil handling contracts are signed or renewed and the minimum quantities of transshipment are guaranteed for the year 2018. However, Company's budget is based more on conservative operating assumptions considering all potential risks that might occur in KN operating market. Essential threats, which were taken into account during the budgeting process, are dynamic global geopolitical situation, which is the main factor that causes deviation of oil transshipment quantities and constant change in crude oil market price. Despite the guaranteed transshipment quantities, the Company will put maximum effort into attracting strategic partners, willing to ensure significant oil product flow, and to extend attractiveness and competitiveness of Klaipėda Oil Terminal.

Next to the work over transshipment volumes the Company will make for making the terminal being even more efficient, flexibly adapting with the variety of products and retaining high level of profitability.

In order to achieve the goal, mentioned earlier, usage of advanced technologies with a focus on automation of processes is crucial. Therefore, II stage of LFO terminal expansion projects will be started to implement during the year 2018.

LNG terminal, operated by AB Klaipėdos nafta enabled consumers in Lithuania and other Baltic countries gas markets to acquire natural gas at the most competitive market price. Despite the fact, that allocated capacities for the year 2018 diminished, compared to the year 2017, the Company is properly prepared and ready to accept and re-gasify larger amounts of natural gas.

One of the key aims, regarding LNG terminal activity, regulated by the State, is to ensure that the LNG terminal, operated by the Company, would only incur only the necessary costs and the most acceptable price, by conducting public procurement efficiently, exercising strict control over costs, and using the Company's human resources and assets efficiently.

In order to reduce the LNG terminal's maintenance costs to the natural gas users, the Company will continue to develop gas reloading operations, as the reloading tariff revenues received will cover part of the costs. In the year 2018, construction of LNG reloading station will be finished and the infrastructure will be put into operation and AB Klaipėdos nafta will seek to sign LNG reloading agreements, in order to successfully exploit developed LNG logistics chain.

In 2018 a lot of attention will be paid for the solution allowing to optimize the rental costs of the FSRU and which could reduce LNG terminal costs for the gas users. Foreseen that in 2018 possible solutions shall be provided for the Government of the Republic of Lithuania.

Company's long-term vision is based on improvement of operational efficiency and business diversification. In order for the Company to enter different business markets, it is crucial to employ specific accumulated knowledge. During the year 2017, AB Klaipėdos nafta managed to earn additional consulting activity income from LNG terminal developers, operating in European, South American and Asian markets. Realization of international LNG project development will determine the success of Company's year 2018 activity plan implementation. International LNG projects should weigh up between one third and a quarter of total objectives of AB Klaipėdos nafta .

In order to maintain strong position in the market, the Company has an intention to continue the investment flow to technological development and upgrade of equipment.

During 2018 the Company intends to allocate approximately up to EUR 34 million for the infrastructure investments, including:

• - Approximately EUR 23.7 million into the II stage expansion of the LFO terminal;
• - Approximately EUR 6.6 million into acquisition or renewal of other oil terminal's equipment (including modernization of jetty related equipment);
• - Approximately EUR 3.7 million other terminal related and administrative investments.

AB KLAIPĖDOS NAFTA ANNUAL REPORT For the financial year ending on 31 December 2017

Undoubtedly, one of the essential long term strategic objectives and aims for the Company during the year 2018 is environmental safety. AB Klaipėdos nafta is seeking to assure sustainable growth of the business, therefore, environmental and social aspects are one of the Company's top priorities. The goal of the Management of the Company is to conciliate the aims of AB Klaipėdos nafta shareholders with society or other stakeholders. One of the essential objectives is to ensure the observance of environmental protection, occupational and fire safety requirements and efficient protection of the Company, its employees and the surrounding areas against air and environment contamination and accidents.

INFORMATION ABOUT THE SHAREHOLDERS AND SHARES OF THE COMPANY

Shareholders and Shares of the Company

The main data about Company's shares:
ISIN code	LT0000111650
Abbreviation	KNF1L
Share emission	380,606,184

As at 31 December 2017 all the shares of the Company were owned by 2,178 shareholders (on 31 December 2016 – 1,993). All shares of the Company are of one class ordinary registered shares granting their owners (shareholders) equal rights. One ordinary registered share of the Company grants one vote in the General meeting of Shareholders.

An ordinary registered share of the Company shall grant the following economic rights to its owners (shareholders):

• 1. To receive a part of the Company's profit (dividends);
• 1. To receive funds of the Company in the event the Authorized Capital of the Company is being reduced in order to pay funds of the Company to the shareholders;
• 1. To receive a part of the assets of the Company in case of liquidation;
• 1. To receive shares free of charge if the Authorized Capital is increased out of the funds of the Company (except in the cases specified by the imperative norms of the valid laws);
• 1. To have the preferential right in acquiring shares or convertible bonds issued by the Company except in cases when the General Shareholders' Meeting by a qualified majority of votes that shall not be less than 3/4 of the participating and voting shares for solution of this matter, resolves to withdraw the preferential right in acquiring the Company's newly issued shares or convertible bonds for all the shareholders;
• 1. To lend to the Company in the manner provided by law, however, when borrowing from its shareholders the Company has no right to pledge its assets to the shareholders. When the Company borrows from its shareholder, the

The Company's shares are traded on the regulated market; they are listed in the Baltic Main List of the Stock Exchange of AB NASDAQ Vilnius.

Shareholders of the Company

• interest rate may not be higher than the average interest rate offered by commercial banks of the location where the Lender has his place of residence or business, which was in effect on the day of conclusion of the Loan Agreement. In such a case the Company and its shareholders shall be prohibited from negotiating a higher interest rate;
• 1. Other economic rights established by the laws.

An ordinary registered share of the Company shall grant the following non-economic rights to its owner (shareholder):

• 1. To attend the General Shareholders' Meetings and to vote according to voting rights carried by their shares (unless otherwise provided for by the laws);
• 1. To receive information on the Company to the extent allowed by the imperative norms of the valid laws;
• 1. To file a claim with the court for reparation of damage resulting from misconduct by the Manager of the Company and Board members or noncompliance with their obligations prescribed by the laws and the Articles of Association of the Company as well as in other cases laid down by laws.
• 1. The right to vote at General Shareholders' Meetings may be withdrawn or restricted in cases established by laws, also in case share ownership is contested;
• 1. Other non-economic rights established by the laws and the Articles of Association of the Company.

The Company has not been informed about mutual agreements of its shareholders which could limit the transfer of securities and (or) right of vote.

Major shareholders of the Company having more than 5% of shares (each) of the Company as 31 December 2017 and 2016:

	31 December 2017		31 December 2016
Shareholder's name (company's name, address, company code of registration)	Number of owned shares (unit)	Part of authorized capital (%)	Number of owned shares (unit)	Part of authorized capital (%)
The Republic of Lithuania, represented by the Ministry of Energy of the Republic of Lithuania (Gediminas Ave. 38/2, Vilnius, 302308327)	275,241,290	72.32	275,241,290	72.32
Concern AB Achemos grupe (Vykinto st. 14, Vilnius, 156673480)	39,113,150	10.28	38,975,150	10.24
Other (each owning less than 5%)	66,251,744	17.40	66,389,744	17.44
Total	380,606,184	100.00	380,606,184	100.00

Shareholders structure in categories and to the regions:

Shareholders structure in categories:

Dynamics of KNF share price at NASDAQ Vilnius during 2013 – 2017

	2017	2016	2015	2014	2013
Highest share price in EUR	0.572	0.705	0.419	0.325	0.381
Lowest share price in EUR	0.428	0.360	0.315	0.280	0.289
Price per share at the end of the period in EUR	0.508	0.538	0.369	0.311	0.292
Average share price in EUR	0.490	0.505	0.373	0.295	0.344
Traded volume, pcs.	10,501,664	17,879,294	5,257,607	14,454,031	3,644,550
Turnover in EUR thousand	5,081	8,730	1,955	4,320	1,249
Capitalisation in EUR thousand	193,348	204,766	140,444	118,369	111,137

Authorized share capital of the Company

The Company's authorized share capital amounted to EUR 110,375,793 as of 31 December 2017 (EUR 110,375,793 as of 31 December 2016). All the shares of the Company are fully paid. The authorized capital is divided into 380,606,184 (three hundred eighty million

six hundred six thousand hundred and eighty-four) ordinary shares with a nominal value of EUR 0.29. The Company did not acquire own shares in 2016 and do not have any own shares as at period end.

Dividends

On 21th April 2017, the ordinary General Meeting of Shareholders was held which approved the audited financial reports and profit distribution of 2016. The Company allocated to the Shareholders dividends to the amount EUR 9,656 thousand or EUR 0.0254 for one share from the 2016 profit (in 2016 the Company allocated for payment of dividends EUR 17,629 thousand or EUR 0.0463 for one share). Dividends were paid to the shareholders in funds.

Below is the historical information about paid dividends in periods for the prior financial year:

	2017	2016	2015	2014	2013
Dividends in EUR thousand	9,656	17,629	92.6	103.2	118.8
Dividends per one share in EUR	0.0254	0.0463	0.0002	0.0003	0.0003
Net profit per 1 share in EUR	0.04	0.06	0.02	0.03	0.03
Dividends for net profit (of previous FY), %	70%	80%	1%	1%	1%

On 25th January 2016 the Board of AB Klaipėdos nafta has approved the Dividend Policy. The Dividend Policy provides that the Board of the Company shall, on the basis of net profit of previous financial year of the Company and General Manager's proposal regarding profit distribution, present the draft decision to approve the dividend allocation equal to 50per cent of the Company's annual net profit to the Company's shareholders.

During 2016-2020 the Company sets the goal to increase the shareholders' value and pay stable dividends. The main objectives for a newly created dividend policy are:

• - To create transparent dividend calculation procedure;
• - To ensure attractiveness of investment into the Company;
• - To balance short-term and long term interests of shareholders, that is to find a balance

between short term profit distribution and long term Company development, value growth.

The strategy for 2016 – 2020 estimates that the management of the Company would propose to shareholders meeting to approve the distribution as dividends not less than 50 per cent of its net profit, if such distribution will not disturb the implementation of strategic projects and ensure acceptable financial ratios.

The amount of dividends proposed may be adjusted if:

• - The significant change in Company's financial standing and forecasted financial ratios;
• - The Company has difficulties to collect compensation for the LNG terminal lease expenses;
• - The change of plans for the implementation of strategic projects, their scope or funding needs.

Agreements with intermediaries of public securities trading

The Company has an agreement with Financial Markets Department of AB SEB Bankas for accounting of the Company's securities and related services.

AB SEB bank Financial Markets Department:
Company code	112021238
Address	J.Balčikonis Street 7, LT-08247 Vilnius, Lithuania
Telephone	1528
E-mail	info@seb.lt
Website	www.seb.lt

INFORMATION ABOUT THE EMPLOYEES OF THE COMPANY

Personnel

The Company's main asset is its employees who are the most important link to the achievement of Company's goals. Company's personnel policy is focused on the development of teamwork, constant progress in professional and process development, the optimal use of work resources, training of qualified staff, and development of the Company's culture that creates additional value and improving internal communications.

As of 31 December 2017 there were 389 employees working at the Company (31 December 2016 - 374 employees).

The average number of employees in 2017 (total number 382) grew by 12 employees or 3.2 per cent compared with 2016 (370).

In 2017 (see the table below) from the total number of employees, workers comprised 43 per cent (in 2016 – 47 per cent), specialists - 47 per cent (in 2016 – 43 per cent), managing personnel - 10 per cent (in 2016 - 10 per cent.).

Employees of the Company according to categories

		Average number of employees
Employee category	2017	2016	cent
Managers 1)	37	37	-
Specialists	181	160	13.1
Workers	164	173	-5.2
Total	382	370	3,2

1) The Company's managers include: Chief Executive Officer (CEO), Heads of Service, Functional Manager and Heads of Divisions

As at 31 December 2017 in the Company were employed 75 per cent of males and 25 per cent of females (correspondingly 74 and 26 per cent as of 31 December 2016). The average ages of the Company's employees –

45 years. Detailed information about employees' age, work experience and education are provided in Figures herein.

Payroll system and Remuneration Policy

The Company seeks to create motivating, an efficient, and fair, transparent and understood by everyone compensation system which aims to attract, retain and motivate employees whose skills and work results will help the Company to successfully develop implement its mission and achieve strategic business objectives. For that reason, in September 2016 there has been formed and approved the Remuneration Policy and in September 2017 – The procedure of remuneration system formation. Starting from January 2018, the remuneration structure has been changed to increase employee engagement, linking directly the achievement of their yearly performance objectives with the company's annual objectives.

Average monthly salary according to employee groups

Employee category	Average monthly salary (gross), EUR	Change, %.
	2017	2016
Managers 1)	4,051	3,918	3.4
Specialists	1,812	1,755	3.2
Workers	1,248	1,235	1.1
Average of the Company 2)	1,782	1,717	3.8

1) The Company's managers include: Chief Executive Officer (CEO), Directors, Functional Managers and Heads of Divisions. The following sums were calculated for the remuneration to the Company's managers in 2017: EUR 2,595 thousand (in that amount taxes paid by the employer included EUR 616 thousand) when in 2015 – EUR 2,400 thousand (including EUR 570 thousand of taxes paid by the employer); on the average EUR 70 thousand to each manager of the Company per year (in 2016 EUR 65 thousand for manager).

2) The average monthly salary is calculated in accordance to average monthly wage calculation procedure as stated in the State companies' employees' average monthly salary calculation procedure approved by the Lithuania Government on 23 August 2002, resolution No. 1341 and its subsequent changes.

The Employee Remuneration Policy was approved by the Board of the Company on 9 September 2016. This policy (hereinafter referred to as the 'Remuneration Policy') defines the principles of the setting and payment of remuneration and the incentive of employees. The Remuneration Policy shall apply to all employees of the Company.

The purposes of the Remuneration Policy are to:

• - Establish clearly understandable, fair and transparent procedures for the setting and payment of remuneration and the incentive of employees, aiming at ensuring the Company's competitiveness in the labour market;
• - Encourage the employees to achieve the objectives set in the Company's strategy, to create value added and increase the returns to shareholders while fostering the values of the Company.

An employee's pay may consist of the following components: a fixed component, i. e. a monthly salary (or a wage) and a variable component payable for either short-term performance results or the annual results of the Company's/the employee's performance.

The Company's remuneration system is based on the Hay Group Methodology which measures jobs by relative size, nature and importance (in order to ensure that each job within the Company is fairly rewarded). The monthly salary/wage is set for a job upon evaluation of the level of knowledge and work experience required for the job, the complexity of functions, the degree of responsibility and management, the importance of the job for the Company's results and related risks, and working conditions. In order to ensure competitiveness of the employees' pay and to incentivize the staff to improve their performance, the setting of pay (both fixed and variable components) relies on the 50th and 75th percentiles' interval of Lithuanian companies with invested foreign capital. Employees in the same position can receive different monthly pay depending on qualifications, experience, capabilities, and functions and responsibilities assigned to the employee. The variable component is set according to the procedure laid down in the Remuneration Policy.

Each employee's pay is reviewed in relation to current trends on Lithuania's labour market once a year taking into consideration: the Company's performance results; the results of evaluation of the employees' performance; and the market supply and demand for the relevant jobs at the Company.

Details of the Company's management system of remuneration are provided in chapter "System of remuneration to the Company's management" in the AB Klaipėdos nafta 2017 year Governance Report.

www.kn.lt | 97

The procedures for employee performance evaluation and annual bonus allocation

The Company has implemented the procedures for annual employee performance evaluation and annual bonus allocation. These bonuses depend on the achievement of the goals set directly for the person or for the Company. Annual employee performance review together with periodic one to one meetings throughout the year is one of the most effective management and leadership techniques that increase employee engagement and help to achieve the organizational goals. Such practice creates collaborative and positive relationships between managers and their subordinates that allow to make it clear with employees while planning their careers, increasing their motivation and promoting continuous improvement in their professional field. Annual performance review at the Company is a tool for employee performance management and development that ensures that employees' personal goals are set in accordance with the Company's goals and values. The annual performance review helps to assess the employee's achievement of goals as well as set the new goals and form the feedback culture, strengthen collaboration and unity between a supervisor and a subordinate. During the review opportunities for competence development, learning, and career are being discussed.

For the last five years the Company conducts personnel surveys in order to determine the level of employee satisfaction with the work environment and the Company and the level of engagement as well as to improve relevant areas and working conditions of employees. The personnel surveys in 2017 revealed that 67,9 per cent of employees are satisfied with their work environment, the Company and its culture. Engaged and partially engaged Company's personnel in 2017 amounted 91,23 per cent.

The Company is measuring the level of engagement because it believes that colleagues who are engaged and like their job are more likely to do their job easier, feel happier and accordingly generate greater returns to shareholders by effectively implementing Company's strategy and achieving the goals.

OTHER INFORMATION

The activity of the Company is based on the Articles of Association, Civil Code and other laws and sub legislative acts of the Republic of Lithuania. Changes in the Articles

Transactions with related parties

The Company did not have any transactions or agreements with the members of its Supervisory Board and the Board. More information regarding transactions with related Parties is presented in the Explanatory note to the Company's financial statements for 2017. In 2017 of Association can be made by the General Meeting of Shareholders.

there were no changes in type of transactions with related parties, which could have made impact on the Company's financial activity. All transactions with the related parties have been performed under market conditions (following the arm's length principle).

Participation in Associations

The Company has been acting as a member of the following associations as at the end of the year 2017:

• - Klaipėda Chamber of Commerce, Industry and Crafts, http://www.kcci.lt/;
• - Association of Lithuanian Stevedoring Companies, www.ljkka.lt;

Information about the audit

During the General Meeting of Shareholders of the Company, in 21 April 2017, shareholders have appointed UAB Ernst & Young Baltic, UAB for the performance of the audit of the Financial Statements and Regulated Activities Statements of the Company and assessment of its Annual Report for the years 2017 and 2018. The shareholders authorized the General Manager of the Company to conclude the Agreement for provision of 2 years auditing services (financial audit and regulatory activities audit) for total amount of EUR 48 thousand (excl. VAT). UAB Ernst & Young Baltic performed financial

• - Lithuanian Confederation of Industrialists, www.lpk.lt;
• - Gas Infrastructure Europe (GIE) association Gas LNG Europe (GLE) group, www.gie.eu.com;
• - Lithuanian LNG cluster, http://www.lngcluster.eu

statements audit for the financial year 2014-2016. UAB KPMG Baltics, UAB performed the audit for the years 2008-2013.

The proposal regarding approval of the audit company is provided by the management of the Company based on public procurement procedures. To participate in procurement tender 4 international audit companies are invited (UAB Ernst & Young Baltic, UAB PricewaterhouseCoopers, UAB KPMG Baltics and UAB Deloitte Lietuva), the winner is selected based on the lowest price criteria.

2017

AB KLAIPĖDOS NAFTA SOCIAL RESPONSIBILITY REPORT

FOR THE FINANCIAL YEAR ENDING ON 31 DECEMBER 2017

SCOPE OF THE REPORT 102
STRATEGIC PRINCIPLES OF THE COMPANY'S SOCIAL RESPONSIBILITY 103
PRINCIPAL ACTIVITY 103
DESCRIPTION OF THE SUPPLY CHAIN 104
ECONOMIC RESPONSIBILITY 105
THE COMPANY'S STRATEGY 105
THE COMPANY'S MANAGEMENT STRUCTURE 106
FINANCIAL RESULTS OF ACTIVITY 107
REPORTING OF INFORMATION - ACCOUNTABILITY 108
THE FIGHT AGAINST CORRUPTION AND BRIBERY 109
FAIR TAXES 110
ANTI-MONOPOLY 111
ENVIRONMENTAL RESPONSIBILITY 112
PUBLIC INVOLVEMENT IN ENVIRONMENTAL PROTECTION 112
DIRECTIONS OF ENVIRONMENTAL PROTECTION 112
SOCIAL RESPONSIBILITY FOR EMPLOYEES 116
PERSONNEL'S POLICY PRINCIPLES 116
TRADE UNIONS 116
COLLECTIVE AGREEMENT 116
DEVELOPMENT OF COMPETENCIES 117
INTEGRATION OF NEW EMPLOYEES 118
OTHER GOOD INITIATIVES 118
HEALTH OF EMPLOYEES 118
WORK SAFETY 119
HUMAN RIGHT'S PROTECTION 119
GENDER EQUALITY 120
SOCIAL RESPONSIBILITY FOR SOCIETY 120
SPONSORSHIP 120
COOPERATION WITH SCIENCE INSTITUTIONS AND TECHNOLOGY PARKS 124

SCOPE OF THE REPORT

AB Klaipėdos nafta (hereinafter - Company) social responsibility (hereinafter - CSR) is based by its voluntariness in reaching economic, social and environment protection goals, taking into consideration all stakeholders' interests. The companies, operating in observance of the CSR principles and reaching for sustainability and efficiency of their activities, not only observe the applicable laws, international norms and ethics standards, but also nurture respect for human being, society and nature. The principal document, i.e. the corporate social responsibility report, is prepared for all stakeholders: business partners, investors, employees and trade unions, media representatives, social partners, residents and local communities, other related institutions. More stakeholders for the Company's activities are listed below. With this report it is seeking to provide transparent and comprehensive information on the Company's achievements by applying best social responsibility practices.

In 2016 Company's social responsibility report for 2015 was presented for the first time. The Company is seeking to become more transparent for the public, to share Company is considered responsible for these Stakeholders: Company's strategic goals, results, commercial and social activities. This Corporate social responsibility report (hereinafter - Report) provides the information on the social responsibility activities, performed by AB Klaipėdos nafta in 2017, as well as environment of protection activities and relations with the employees and the society. The Report describes the strategic directions, activities and changes in the area of social responsibility within the Company, which occurred in 2017.

The Report of the Company's socially responsible activities was prepared in accordance with the Global Reporting Initiative (GRI) guidelines, which help to evaluate activities for economic, environment protection, personnel, human rights, and society and market indicators.

Company's social responsibility report is prepared in Lithuanian and English languages; it is published on the Company's website www.kn.lt, as well as on Nasdaq Baltic's website. The employees also have the possibility to read the Report on the Company's intranet site.

STRATEGIC PRINCIPLES OF THE COMPANY'S SOCIAL RESPONSIBILITY

The Company acts under the guidance of the highest business ethics standards and social responsibility principles. The Company aims at keeping the status of a reliable social partner beyond Lithuania's seaport by contributing to resolving the relevant social issues, faced by the society.

The Company's responsibility is directed to the following main areas:

• - Economic responsibility: Company's transparency and accountability for stakeholders, the fight against corruption and bribery, ensuring conditions of competitiveness, fair tax payment;
• - Environmental responsibility: engagement of society in environmental protection, environmental protection by the Company

involving few different directions of responsibility;

- Social responsibility: responsibility in respect of Company's employees, their health, safety and equal rights, development of different social initiatives and projects in local communities and nationwide, cooperation with science institutions and technology parks.

The social responsibility and support projects are important in order keep good partnership relations with local communities and the society on the nationwide level. It is very important for state controlled companies to emphasize their social importance. The initiative is referred to as the "common welfare". In addition, the tasks, set for the state controlled companies is to become examples a successful fosteration of states principal values.

PRINCIPAL ACTIVITY

AB Klaipėdos nafta is one of the largest of logistics energy sources Company in the Baltic States, specialized in oil and LNG industry.

AB Klaipėdos nafta activity is divided into two operating directions (oil and LNG terminals) and four separate activities: oil product transshipment (Klaipėda oil terminal), long term oil product storage (SNT), LNG terminal operation and LNG related activities development.

Oil products are also imported through the Company's Oil Terminal, which involves the services of transferring oil products from oil tankers to the clients' facilities (tank

DESCRIPTION OF THE SUPPLY CHAIN

The purpose of AB Klaipėdos nafta Oil Terminal is to provide the services of handling (various schemes) of oil products supplied from/to oil refineries and storage of such products in the storage tank park of the terminal.

Supply chain of oil products

trucks and/or tank wagons).

LNG terminal has enabled the formation of a natural gas market in Lithuania and opened opportunities for the country to import natural gas from all over the world. Now customers can receive the gas from various suppliers at competitive prices.

FSRU (floating storage and regasification units) Independence is an LNG carrier designed as a FSRU. Moored at a berth in Klaipėda Seaport, that receives/transfers the LNG from/to the carriers coming to the port. The LNG is regasified in the heat exchangers of the FSRU.

In the end of the year 2017 trial operations and commissioning works in LNG Reloading Station has been started. In the beginning of 2018 the Company is planning to provide services of LNG Reloading station. General activities of the station are: acceptance of LNG from LNG carriers and temporary storage, transhipment to LNG trucks, LNG bunkering directly to vessels.

Supply chain of LNG

For more information for the infrastructure and activities of the Company see Information about the Company and its activities article in the annual report.

ECONOMIC RESPONSIBILITY

THE COMPANY'S STRATEGY

In order to make clear vision Company's directions, goals and objectives for Company's management bodies AB Klaipėdos nafta has the strategy of the Company, which is approved by the Board of the Company.

In latest approved Company's strategy for 2016-2020 is projected:

• - To become one of the most efficient companies in Europe,
• - To make organizational changes, diversity activities, implement new services and projects, which are main factors for sustainable value growth of the Company.
• - Main attention of Company's Managers will be allocated to social responsibility,

competences of employees, environment protection and cooperation with science institutions of Lithuania.

It is expected that achievements of the Company will be acknowledged and valued at the state level in Lithuania.

For more information see The Company's strategy article in the annual report.

In a Social responsibility report we highlight only the main directions, general strategic goals and objectives of Company's strategy which related with social responsibility.

The Company's goals

General strategic goals
Increasing value of the company	Secure, reliable and efficient operation of oil and LNG terminals	Growth and diversification of activities	Improvement of internal processes	Development of competence

Company's strategy for 2016-2020 is based on growth and diversification of activities, increasing value of the company, ensuring a safe working environment and development of employees competence. Strategy provides growth in Company's operational efficiency. Till the 2020 Company is planning to reach 10-15 per cent net profitability, dividends – 50 per cent from net profit, return on capital – not less than 5 - 8 per cent. For the implementation of the strategy goals the Company every year is investing in expanding terminals and improving the quality of services.

Company's mission, vision, values

Our mission

• Ensure reliable and effective supply of LNG and transhipment of oil products

Our vision

• A reliable operator of oil and LNG terminals that adds value through implemented projects and balanced expansion.

Our values

• Initiative, transparency, professionalism and reliability, social responsibility

Even in daily activities or implementation of strategic goals Company is guided by these Values of the Company:

• - Initiative. The Company seeks to identify market needs and business enlargement opportunities by adapting: creating new or modifying provided services accordingly.
• - Professionalism and reliability. AB Klaipėdos nafta operates oil and LNG terminals according to the highest professional standards, fast and efficiently. Internal processes and procedures for oil transshipment and LNG regasification are constantly enhanced, the quality of cargo is accurately monitored.
• - Transparency. The Company seeks to comply with regulations for listed enterprises issued by

THE COMPANY'S MANAGEMENT STRUCTURE

AB Klaipėdos nafta is striving for transparent, efficient and profitable operation with its management structure and internal processes. Company's internal control systems and management practice are in line with the best management practices.

In its activities the Company follows the Law on Stock Companies, the Law on Securities, Articles of Association of the Company, Corporate Governance Code for the Companies listed on NASDAQ Vilnius and other legal acts of the Republic of Lithuania. For more information see Management of the Company article in the annual report.

Organizational and management structure of the Company:

AB KLAIPĖDOS NAFTA SOCIAL RESPONSIBILITY REPORT For the financial year ending on 31 December 2017

stock exchange market NASDAQ OMX Baltics, it is managed by the best corporate governance principles and provides important Company information to the society and investors comprehensively and timely.

- Social responsibility. The Company is governed by sustainable business growth principles that include corporate social responsibility and environmental protection initiatives. Therefore the Company invests in additional activities employing technologies that are increasing economic benefits to investors and are environment-friendly. The Company participates in various social projects.

For more information see in the article The Company's strategy of the annual report.

From 7th of September 2017 management structure of AB Klaipėdos nafta was renewed and approved by the Boar of the Company. As to the new structure, services are the biggest organizational units of the Company, which could comprise from different units and professionals. The Company believes that these changes in management structure will help to combine management of related as well as not related activities, to ensure transparency, effectiveness in order to assure implementation of Company's strategical goals.

FINANCIAL RESULTS OF ACTIVITY

As mentioned before the activity of AB Klaipėdos nafta is divided into the separate activity units (segments): Klaipėda Oil terminal (KNT), Subačius Oil terminal (SNT),

The Company's sales revenues

The Company's sales revenues of year 2017 comprise EUR 106.484 thousand. Comparing with the year 2016 the revenues has increased by EUR 2,645 thousand or 2.5 per cent (EUR 103.839 thousand). The increase is related with the increase in revenues of the LNG and oil the Liquefied Natural Gas Terminal (SGD) and LNG reloading station (GDP). Importance of each segment over Company's financial results is provided herein:

terminals. Company's revenue comprise for regulated (LNG terminal) and non-regulated activity. Revenues from regulated activity (LNG terminal) consisted 64.0 per cent of all Company's revenue.

Sales revenue, EUR thousand

The Company's expenses

Total cost of sales of the Company of 2017 comprise EUR 82,739 thousand, comparing to 2016 (EUR 83,042 thousand) it has decreased by 0.4 per cent or by EUR 303 thousand. This decrease is mainly explained by the reduced LNG terminal FSRU leasing and related expenses affected by favourable change of currency exchange rate (USD).

Company's operating costs increased by EUR 312 thousand (5.3 per cent) and comprise EUR 6,217 thousand as at period end (in 2016 – EUR 5.905 thousand). The increase is related with expansion of new activities and development of projects.

Company's financial results

In 2017 EBITDA comprised EUR 31,339 thousand compared to 2016 (EUR 28,446 thousand) it increased by 10.2 per cent or by EUR 2,893 thousand. EBITDA margin was 29.4 per cent, for 2016 – 27.4 per cent.

In 2017 the Company's net profit was EUR 17.031 thousand (EUR 13.794 thousand), compared to 2016, the net profit dropped by -23.5 per cent or by EUR 3,237 thousand. Changes in Company's net profit are mainly by the revenue changes described above:

• - Oil terminal net profit has increased by EUR 1,668 thousand up to EUR 11,582 thousand; increase related with revenues increase in oil product realisation and storage services (see above);
• - LNG terminal net profit increased to EUR 6,516 thousand in total both due to higher revenues and reduction of costs;

The net profit margin for 2017 amounted to 16.0 per cent, the gross profit margin reached 22.3 per cent (in 2016 respectively 13.3 per cent and 20.0 per cent).

REPORTING OF INFORMATION - ACCOUNTABILITY

Reaching Company's accountability for stakeholders Company is:

22.0 13.8 17.0 20.1% 13.3% 16.0% 0.0% 10.0% 20.0% 30.0% 0.0 10.0 20.0 2015 2016 2017 MEUR Net profit, MEUR

AB KLAIPĖDOS NAFTA SOCIAL RESPONSIBILITY REPORT For the financial year ending on 31 December 2017

Net profit Net profit margin

Presents:

• Reporting:
• - Annual and interim financial information prepared in accordance with international financial reporting standards as adopted by the European Union;
• - Annual and interim reports;
• - Preliminary transshipment and revenue results of every month.

- Financial information every quarter in Investor Conference Webinar, which is hosted by Company's Management or General Manager of the Company.

Inform:

• - About material events in the Company: General meetings of Shareholders, changes in management structure, changes in management body;
• - Regarding concluded commercial and purchase contracts;
• - About approved investment projects, its budgets;
• - Other important information.

THE FIGHT AGAINST CORRUPTION AND BRIBERY

Corruption prevention

The Company does not tolerate any form of corruption or manifestations thereof, and aspires to ensure open competition, ethical business conditions and appropriate transparency and publicity of its activities.

The Company follows a Zero Tolerance Policy against Corruption approved by the General Manager (hereinafter – the Policy). The Policy is a clear and public declaration of the Company's stance against bribery, fraud, extortion, fake accounting, unofficial and inadequately documented transactions, fictitious expense schemes, the use of false documents, and other manifestations of corruption referred to in the United Nations Convention against Corruption. The provisions of the Policy are applicable to all of the Company's employees, members of the Company's management and supervisory bodies, and third parties which act on behalf of the Company. The Policy is continually being improved, updated and supplemented in response to regulatory changes. All of the Company's employees are acquainted with the Policy and have pledged to comply with its provisions.

The Company is politically neutral and does not pay any financial contributions. It does not provide any financial support to political parties, groups or politicians.

The Company has clearly defined rules for the giving and accepting of gifts. There are set circumstances under which it is permissible to give or accept gifts, or participate in events organized by third parties.

There is also an approved procedure for providing support that is published on the Company's website. This procedure governs the allocation and provision of Company support funds for the public benefit, and also establishes the key principles and directions of providing support as well as the priorities and criteria for the allocation of support.

The Company has an approved procedure for completing the Employee Declaration of Private Interests form which is designed to establish the requirements of employee conduct when they are performing their jobs, the procedure for the declaration of private and Company interests, and the actions of employees in the event of a conflict of interest. Under the current provisions of the procedure, all employees in managerial positions are required to complete a declaration of private interests.

The Company has certain control mechanisms in place that are designed to identify, assess and monitor potential corruption risks. The internal control system is regularly reviewed and improved.

An employee has the right, and the Company shall provide him with a possibility to anonymously report any alleged actions of bribing and corruption or attempts of commission of such actions, or ether alleged or actual breaches of this Policy as well as breaches of requirements set in the Company's internal regulations and Internal Code of Conduct.

Employees are encouraged to report possible corruption cases or practices by e-mail: manrupi@kn.lt. This e-mail may be used by both the Company's employees and everybody whom it may concern.

Seeking to reduce the probability of corrupt practices, AB Klaipėdos Nafta also applies Diligent Verification procedures both with respect to its employees and partners.

Before assigning employees to official positions, KN, with due consideration of the functions of the future official and a relative corruption risk, shall take all possible measures in order to assure that only reliable personalities with an impeccable reputation would be employed KN. KN has an authorized staffing table in accordance with which the Special Investigation Service carries out its investigations.

Seeking to be sure as for the transparency and lawfulness of the partner's activity, before starting cooperation or during cooperation, KN may apply different Diligent Verification investigation procedures.

Public procurement

Regulation

During planning and implementation of procurements and the fulfilment of procurement contracts, the Company shall act in accordance with the provisions of the Law of the Republic of Lithuania on Procurement by Entities Operating in the Water, Energy, Transport and

Internal procedures

Procurement planning, execution, and completion in the Company shall be regulated by the following documents that have been specially developed for procurement regulation: the Bidding Rules, the Regulation of the Procurement Committee, and the Description of the Low Value Procurement Procedure.

All the procurements executed by the Company shall be subject to planning, while the summary list of

Transparency

All persons participating in the procurements organized by the Company or exercising direct or indirect influence thereon have assumed a commitment of impartiality and the obligation of confidentiality.

The Company shall publish sales contracts it has entered into in accordance with the procedure prescribed by the Law.

Postal Services Sectors (hereinafter – the Law), other legal acts regulating procurement and applicable to the Company, or in compliance with a good commercial practice unless the Law is not applicable to specific procurements.

procurements shall be published in accordance with the procedure prescribed by the Law. Generally, the procurements of the Company are executed by the Organizer of Procurements (in the events of low value procurements) or by the Procurement Committee (for procurements other than low value ones). All the actions taken during procurement shall be documented, while the procedure for adoption of decisions shall be subject to application of multi-level control measures.

The Company also shall prepare and submit to the Public Procurement Service of the Republic of Lithuania the following documentation:

• - A statement on procurements and procurement procedures per procurement effected;
• - A Statement on procurement contracts covering the procurement contracts concluded per calendar year.

FAIR TAXES

AB Klaipėdos nafta implementing fair business principles by responsible and right declare of paying all operating taxes. By the usual profit, income, VAT, social taxes the Company as owner of the excise warehouse is also ensure right declare of excise and customs taxes and payment for storage of clients oil products and natural gas. During the last 5 years no accusations for incorrect declaration or payments of taxes have been registered. KN does not adjust special optimization of taxes or artificial tax relief schemes.

ANTI-MONOPOLY

Competitive environment of oil terminal

AB Klaipėda Nafta oil terminal operates in the competitive environment. All of the oil product handling terminals operating at the ports of the eastern shore of the Baltic Sea and at Odessa (Ukraine) seaport shall be treated as the major competitors of the Company.

It should be noted that the competitive environment in the oil product transhipment market increases years. The foregoing specifically includes the traffic flow of Belarusian transit oil products.

Notwithstanding the competitive environment, the products accepted by Klaipėda terminal in 2017 were delivered from eight countries: Lithuania, Belarus, Russia, Estonia, Finland, Uzbekistan, Iran, and Netherlands.

Regulated activity of LNG terminal

The liquefied natural gas (LNG) terminal shall be considered as a nationwide strategic energy object, while the implementation of terminal thereof depends on the adopted Plan of Development, the implementation of which was assigned to AB Klaipėdos Nafta. The Company carries out its business activity in accordance with the Law of the Republic of Lithuania on the Liquefied Natural Gas Terminal, which sets forth that the LNG terminal and the LNG interconnection shall be deemed to be treated as installations that have strategic importance for national security. In addition to this, the LNG terminal operator shall be deemed to be an entity that has strategic importance for national security as this is set forth in the Law of the Republic of Lithuania on Enterprises and Facilities of Strategic Importance to National Security and Other Enterprises of Importance to Ensuring National Security. The operation of the LNG terminal is subject to regulation. Therefore the regulation environment of its operation defines the yields and profitability of this activity, milestones and the scope of the activity and pricing. Ensuring the opportunity to use LNG terminal for all market participants, the LNG terminal fully ensures the third party access requirements in accordance with EU laws. The terminal's activities are organized in observance with the Rules for Use of the Liquefied Natural Gas Terminal (hereinafter - Terminal rules), adopted after public consultations with market parties and agreed with the NCC. The terminal's capacities are provided to the potential users on the same conditions in the way of public and transparent annual capacity allocation procedure or during the ongoing period if there are any free capacities.

ENVIRONMENTAL RESPONSIBILITY

Environment of safety is one of the key areas of activities in terms of the Company's social responsibility. Funds are allocated for implementation of environment protection measures in close cooperation with Lithuanian and international companies, in order to implement all environment protection requirements, raised for both the oil terminal and for the liquefied natural gas terminal.

The directions of the Company's environment protection projects:

- The Company continuously implements environment protection measures: environment pollution prevention and control, fire safety and other systems.

PUBLIC INVOLVEMENT IN ENVIRONMENTAL PROTECTION

In planning new economic activities and the development or modernization of the existing terminals, the Company acts in accordance with the provisions of the Law on Environmental Impact Assessment of Proposed Economic Activity and the Law on Territorial Planning. In implementing environmental impact assessment procedures and spatial planning procedures, conditions are created as early as possible for the public to become acquainted with the proposed economic activities and to provide remarks and suggestions.

In 2017, the Company selected environment impact assessment for the scheduled economic activity: necessity of performance of assessment of the impact (hereinafter – EIA) made by the 2nd stage light fuel oil tank park expansion. It should be mentioned that the analysis of the risk of the scheduled economic activity was executed within the scope of EIA, this analysis assessed an individual and a social risk and determined

DIRECTIONS OF ENVIRONMENTAL PROTECTION

Air protection

The stationary air pollution sources (oil storage tanks, boiler room) at the Company's oil terminal are operating in accordance with an environmental permit issued by the responsible authority. The total amount of pollutants released into the air in 2017 did not exceed the annual emission allocation. In order to reduce the environmental impact of economic activities on air, the following environmental measures are applied during the loading and storage of oil products:

- Light distillates (petrol, diesel) are only loaded and stored in tanks fitted with floats (internal floating screens), and more than 50 per cent of the tanks that are used for heavy oil products (heavy fuel oil) are also fitted with floats – this

• - The Company saves natural resources.
• - The Company contributes to development of the market of LNG as environment friendly and safe fuel in Lithuania and the Baltic Region.

Both in planning new activities and in operating the existing oil terminals and LNG terminals, the Company is guided by the fundamental principles of environmental protection laid down in the National Environmental Protection Strategy. The Company is actively involved in EU support projects that promote the development of environmental policies in the region. One of the priority areas currently being developed is the promulgation of liquefied natural gas as a clean fuel in the Baltic region.

that the employees of adjacent entities and residents who live next to Klaipėda oil terminal fall into the publicly acceptable risk zone. After evaluating the EIA selection material, a competent institution proved an opinion of the selection that stated that the EIA is not mandatory for the 2nd stage light fuel oil tank park expansion. The adopted opinion regarding the necessity of selection of the EIA was notified to the public. All measures reducing an adverse environment impact, which were foreseen in the EIA selection document, will be implemented during construction and operation of new objects.

By informing the public about the projects that are planned to be implemented, the Company is ensuring the public's right to know and the right to participate in environmental decision-making as provided for by the Aarhus Convention.

reduces the emission of volatile organic compounds (VOC) into air;

• - When unloading petrol from the tank wagon into tanks at the railroad trestle, a VOC vapour recovery unit is used to reduce VOC emissions, and when loading ships with petrol, VOC vapours are directed to a fume incinerator. The effectiveness of these environmental measures is as much as 95 per cent.
• - Built 7 new tanks with pontoons for storage of oil products. These pontoons are effective measure for reducing VOC and smells into the environment.

These environment measures help to reduce the emission of pollutants into the air and intensity of the smell in the environment.

The passenger cars which are leased in order to carry out economic/commercial activities are equipped with functioning exhaust gas neutralisation systems that comply with Euro VI standards, and this way mobile source air pollution.

The Company performs monitoring of stationary air pollution sources from the oil terminal with the aim of assessing whether one-off emission standards are not exceeded in carrying out economic activities. Air quality monitoring is also carried out in order to ensure that air limit values for VOCs in the environment (beyond the Company's territorial limits) are not exceeded when

Surface water protection

The Company's oil terminal uses biological waste water treatment equipment that is designed to collect and clean the waste water and surface water that forms during economic activities. The waste water treatment is highly effective: approximately 58 per cent of total nitrogen is removed, 57 per cent of total phosphorus, 96 per cent of biodegradable organic matter and as much as 100 per cent of oil products. In order to preserve this high level of efficiency, the Company allocated EUR 75,140 in 2017 for the repair/upgrade of mechanical and

Groundwater and soil protection

Groundwater monitoring has been carried out at the oil terminal since 1996 with the purpose of monitoring changes in groundwater quality. Cumulative ground water observations show that the groundwater pollution that has formed over the years at the site is diminishing. Long-term ground water monitoring data suggests that the "historical" pollution of soil and groundwater with oil

Waste management

The Company's sewage disposal plants at Klaipėda state sea port operate as a port receiving units that receive the waste formed in vessels (waters polluted with oil products) and remnant freight. The Company is authorized to execute the treatment of specific dangerous waste, which is received from other entities and vessels waters polluted with oil products and liquid fuel mixtures and is engaged in the treatment of sludge formed during the Company's business activity in biological sewage disposal plants In 2017, the Company received and treated 4.89 thousand tons of dangerous waste (13.88 thousand tons in 2016). Some dangerous

AB KLAIPĖDOS NAFTA SOCIAL RESPONSIBILITY REPORT For the financial year ending on 31 December 2017

carrying out economic activities. The VOC air limit value for half an hour is 5 mg/Nm³ . The air quality monitoring conducted in 2017 shows that over the course of the year, the VOC air limit value for half an hour was never exceeded. Concentration of VOC in environment air was from 1.06 till 1.39 mg/m³ .

The results of the simulation of release of odour of the economic activity to the environment showed that odour concentration in the residential environment per one hour mean interval reaches 1 OEU/m³ (an odour unit) and does not reach 8 OEU/m³ limit value for the residential environment. It should be mentioned that an individual starts smelling odour of oil products (hydrocarbons) when their concentration is at least 0.3 mg/Nm³ .

biological waste water treatment equipment. Waste water discharge monitoring and surface water quality monitoring are conducted during which the condition of the Curonian Lagoon (Klaipėda Channel) above and below the discharge equipment is monitored.

The surface waste water that forms at Subačius oil terminal is collected from the potentially contaminated area (about 33 ha), cleaned in surface waste water treatment equipment to reach standard and then discharged into the surface water reservoir.

products within the territory of Klaipėda oil terminal is decreasing.

During 2017 Company has made and reconciled with responsible institution contaminated area management plan of cleaning up oil-contaminated area. During constructing of new trestle this area will be cleared.

waste was regenerated, which means that the waste polluted with oil products was converted into a product, namely, into liquid fuel mixture. 3.1 t (2.6 t in 2016) of the sludge formed in the biological sewage disposal plants was used for improvement of land condition in the territory of the terminal.

264.7 t of waste (576.1 in 2016) was formed at Klaipėdos Nafta terminal in 2017. The composition of this waste was the following: household waste – 45.7 t (the same volume in 2016), the recyclable material, which is paper and cardboard – 4.4 t (5.4 t in 2016), and metal scrap – 32.8 t (279.7 t in 2016).

85.0 t of waste (56.9 t in 2016) was formed at Subačius oil terminal. All waste formed during the operation of the Company is delivered to waste managers who are authorized to be engaged in waste treatment The Company's goal is to separate as much recycling material fit for treatment from waste as possible. Waste prevention principles are implemented via waste treatment (regeneration), using waste for improvement of condition of the environment, and separation the recycling material from waste.

The use of natural resources and raw materials

Seeking to reduce the usage of paper and to upgrade document management procedures and costs, the Company has implemented and is operating the document management e-system, which electronically manages and archives all documents. This system allows the Company to significantly reduce paper consumption.

Seeking to save fossil fuels and reduce environment pollution by vehicle exhaust gases, the Company organizes meetings between the Company's divisions, customers, service providers, contractors, and other entities via as telephone conferences or via telephone conference communication.

Seeking to save natural resources and to separate as much recycling material (paper, plastics, and glass) from the flow of household waste as possible, the Company has implemented a waste separation system – waste separation boxes in the Company's premises.

The Company has installed an electric car charging station in this way encouraging employees to use environmental friendly cars.

3

Sewage treatment

To implement all environment protection requirements, AB Klaipėdos Nafta assumed an obligation to receive polluted water from tanker vessels and other external suppliers for the treatment of this water at the Company's treatment plants. The quality of water after treatment must meet the requirements of the following legal acts:

• - Sewage Treatment Regulation (No 59-2013, 2006);
• - Order of the Minister of Environment Protection on Adoption of Provisions of Environment Monitoring of Entities (No 113-4831, 2009).

The samples of treated water for determination of the quality thereof are taken by AB Klaipėdos Nafta, while the analysis of treated water is performed by the sewage laboratory of AB Klaipėdos Vanduo. Sewage is discharged into the Curonian lagoon provided only that the amount of pollutants does not exceed permitted value.

The Company also assumed an obligation to deliver on the quarterly basis to the Environment Protection Agency a statement on the pollution of the Curonian lagoon at the point of discharge of the Company's waste before and after discharge of waste as well as a statement of monitoring of discharge of waste.

The amount of HFO from cleared sewages 2016 – 2017, t

SOCIAL RESPONSIBILITY FOR EMPLOYEES

PERSONNEL'S POLICY PRINCIPLES

The Company's main asset is its employees who are the most important link to the Company's achievement of goals. Company's personnel policy is focused on the development of teamwork and unity, improvement, the optimal use of work resources, training of competent staff, and development of the Company's culture that creates added value.

The Company and its personnel, being responsible to each other and to the society, apart from the Collective Agreement and the internal working procedures, act in observance of the following:

• - Personnel's policy;
• - Code of ethics;
• - Employees' activities assessment and rewarding procedure;
• - Remuneration policy;
• - Remuneration system formation policy;

TRADE UNIONS

The Company has an established trade union, of which 34 per cent of all of the Company's personnel are members. The trade union periodically arranges meetings with the Company's management, during

COLLECTIVE AGREEMENT

The Collective Agreement is concluded between the Employer (the Company) and the Employees; it establishes conditions applicable to work, payment for work, time for work and rest, personnel training, health and safety and other social and economic guarantees. The main purpose of the Agreement is to form proper conditions for the development of economic and business activity and ensure the standards of working conditions higher than required by the legal acts of the Republic of Lithuania.

The Collective Agreement, which will get valid in 2018, provided the following additional social guarantees for employees:

• - An annual one-time allowance equal to 2.5 MM is paid before the 1 September to an employee having three or more children under the age of 18;

• - Funeral allowance (1.5 MM) is paid to the employees of the Company after the death of a

• - Integration program for new employees

• - Qualification improvement guidelines;
• - Internal training organization procedure;
• - Human resources reserve policy.

which relevant issues, related to the Collective Agreement, are discussed. Such meetings are usually held two times per year.

family member (spouse, parent, child, adopted child);

• - A one-time funeral allowance is paid to the family of a deceased employee;
• - A one-time allowance equal to 2 MM is paid to an employee for the birth of a child on a day of his/her birth;
• - Other allowances are paid based on decisions of Administration in the following cases: employee's difficult material situation, employee suffered losses due to natural disasters, fire, flood, etc.;
• - Employees who reach their age of retirement and retire gets bigger retirement compensation as requires the national Labour code.

Within the 2017 year 56 employees (in 2016 – 43 employees) has taken advantages of these social benefits.

DEVELOPMENT OF COMPETENCIES

The Company continually organizes the following instruction, job qualification and other trainings for employees:

• - The experts of the Occupational Safety and Health Department and the Fire Safety and Environmental Protection Department of the Company conduct Introductory Occupational Safety and Health, Fire Safety and Civil Protection Instructions for new employees. Heads of Units of the Company instruct their employees on-site at least once per year.
• - External personnel carrying out works at the territory of the Company and customers' employees shall be acquainted (instructed) with the requirements on Occupational Safety and Health, Fire Safety and Civil Protection Instructions applicable at the terminals. In 2017 the Company instructed a total of 1,503 external employees (in 2016 – 1.214 employees).
• - The employees performing hazardous works as well as works involving operation of potentially hazardous machinery or its supervision are always taught safe methods following the written procedure guidance, which has been approved by the Company's CEO, concerning testing and assessing Employees' training and knowledge on occupational safety and health. In 2017 a total number of 412 employees were trained and/or certified. The employees operating energy machinery are periodically certified under the procedure provided in the Order of the Minister of Energy of the Republic of Lithuania.
• - In 2015 the procedure of internal trainings for the employees of production units was approved, and all the necessary programs, employee trainings and certification are designed under this procedure. 35 internal training programs in oil and LNG units were approved in 2015-2017 according to which employees were trained

and/or certified. Internal trainings as well as periodic certifications are organized for the purposes of acquiring and renewing professional knowledge, learning and testing skills of the Company's specific production technological processes and equipment, and maintaining employees' high professional standards.

• - The general trainings for the development of competencies of employees are performed by sending staff to the seminars and conferences organized by external parties or by organizing internal trainings. The annual employee training plans are made on the basis of the following: Company's strategy and strategic projects, improving of staff competencies, the objectives of human resources development, needs expressed by the staff of subdivisions, needs reflecting in the interviews about annual evaluation of employees as well as in the documents on evaluation given at the end of integration period of new-hires.
• - Each year, the improvement of internal communication and team unity is organized. Over 94 specialists and managers participated in these teamwork trainings in 2017. The main purpose was to emphasize and show the importance of the communication and influence cooperation for implementation of common goals and to show how good internal communication and strong cooperation could help to achieve desired results in more effective and easier way. Every unit in the Company has internal communication fund for unit social activities. It improves solidarity of units for the higher effectiveness of work.
• - In the year of 2017, on average employees had a training/improved their professional skills spending 9,096 working hours (or an average of 3 days a year per person for trainings):

Employee category	Working hours a year of training		Average days a year per person for trainings
	2017 2016		2017	2016
Managers	2,346	1,928	7.9	6.5
Specialists	5,330	5,392	3.7	4.3
Workers	1,420	1,602	1.1	1.1
Total	9,096	8,922	3.0	3.0

In 2017 Qualifications Improvement were prepared Guidelines for reaching transparency, internal fairness and clarity in area of qualification improvement. The Company is investing into competence strengthening and professional growth for those employees who are associate their carriers with the Company and helps to implement Company's strategic goals in the effective way. Every year the Company prepares plans to form human resources reserve educational for important and difficult job positions as this is essential in order to ensure the continuation of the Company's activities, and employee training plans.

INTEGRATION OF NEW EMPLOYEES

In order to ensure an appropriate process of integration of new employees, they undergo the integration programme, during which they are introduced to the Company's activities, oil and LNG terminals, employees and they are functions. The program is aimed at helping the new employees to learn and adapt to the Company's culture, integrate into the collective, understand the principles and activities and, as soon as possible, start creating value for the Company.

OTHER GOOD INITIATIVES

The Company encourages healthy way of life, sports activities and taking care of one's physical health. As the Company took care of the health of employees, in 2017, it provided its employees with private health insurance. Employees were afforded an opportunity to choose one of three heal insurance options. In this way every employee could take care of his health and health promotion to the fullest extent. Company also created favourable conditions for its personnel to go in for sports – the employees could choose between basketball and football in a rented sports hall. The Company sponsored the team, formed of its employees, which played in Klaipėda's basketball league.

HEALTH OF EMPLOYEES

The Company is one of the few companies in Lithuania that has a licensed health care center. It provides the first aid, initial preventive practical and theoretical health support, has established 35 first aid mobile stations (in units), where employees can get emergency medical treatment by themselves.

With help from equipment 4 first aid mobile stations employees are able to measure the temperature and arterial blood pressure, to locate the injured area of the body after being burnt or injured.

In Medical centre provides employees' with preventive health care, infection control, control of risk factors for hazards; first aid and hygiene skills training, the center also organizes medical check-up prior to employment and while being in employment.

In 2017 both employers and employees are advised on health matters:

• - Preventive employees' health care done for 176 employees.
• - 95 employees attended first aid and hygiene skills training.
• - Outpatient served in health center 270 employees.

Heads of units assign supervisors to new employees. The supervisors are experienced employees, able to provide their knowledge not only in their own area of specialization, but also information about the Company, its traditions and culture. The supervisors are responsible for the training, provided during the integration period and provision of information on the achievements to heads of their respective divisions.

The Company arranges different traditional festivities for its employees, their children and retired employees. In 2017 Christmas and Sea Festival were celebrated within the Company.

• - 500 units of rehabilitation procedures.
• - Employees were advised on health matters 122 times.

Physical medicine and rehabilitation room with modern science approved practice-proven equipment is set in the Company's health center. A range of physiotherapy treatments can be given based on the doctor's referral. During 2017 these services were used by 45 employees.

In its health center the Company organizes, at its own expense, preventive – rehabilitation treatment to employees that work in the increased pollution conditions.

All employees in the Company are able to use preventive health care, optics, dentistry, health service by using rehabilitation - prophylactic treatment in sanatorium. Also, they are given an opportunity to buy vitamins or other medical aid.

Company's employees are provided with free vaccines against tick-borne encephalitis, typhoid, influenza and other illnesses. In 2017, 275 employees were vaccinated (in 2016 – 212).

In 2017 all employees of the Company were insured by the Company's.

WORK SAFETY

Work safety is one of the Company's priorities because it strives to create safe and healthy working environment. Workplace risk assessment is carried out and the level of risk is determined prior to allowing employees to start their work in a new workplace. If workplace risk level is considered to be unacceptable or intolerable, measures needed to eliminate the risk or reduce it to an

Prevention for accidents

AB Klaipėdos Nafta admits that due the nature of its business activity the Company has a risk of causing big accidents and undertakes to manage these risks so that big accidents would be avoided and the Company's employees, contractors, customers, attendants, neighbours, and environment would be provided with high level safety and protection.

AB Klaipėdos Nafta assures compliance with the stringent safety standards and the safety policy by means of consistent development of the common safety management system (SMS). To avoid big malfunctions and accidents and to reduce the consequences thereof, the Company also assumes the obligation:

• - To create and maintain high safety and environment protection system and involve the employees of all levels in the SMS creation and monitoring procedures.
• - To provide employees and contractors with information required for conduction of training, including training in response to possible accidents, instructions, and maintenance.
• - To investigate accidents, hazardous situations, or incidents and to identify causes of such accidents, set adjustment actions with due consideration of the opinions made, seeking to avoid such accidents, hazardous situations, or incidents in the future or to mitigate these consequences.

HUMAN RIGHT'S PROTECTION

The Company carries out its activities in observance of the human rights protection principles and ensures that the Company itself is not a part of any human rights violations. The Company stands for fair and transparent work remuneration policy, observes the legal acts, regulating working time and overtime working, respects the employees' right to rest and does not tolerate harassment or abuse of any kind.

The Company stands against any discrimination or forced working. The Company's employees, independently of their gender, nationality, social or marital status, belonging to any social or political organization or their personal features, are provided equal possibilities to occupy managing positions, take acceptable level are proposed and implemented. Personal protective equipment against any risk factors existing at workplaces is provided to employees free of charge. Personal protective equipment list is coordinated by trade union and approved in the Company's Collective Agreement.

- To carry out the uninterrupted safety and environment protection monitoring.

In 2017, the Company adopted the new Procedure for Reporting Accidents, Professional Illnesses, and Incidents, which lays all employees under an obligation to report to the Employee Safety and Health with all hazardous events and possible safety and health incidents. It is expected that this procedure will enable to identify possible hazards in the business activity and to apply relative measures to reduce possible hazards.

In accordance with Regulations for Prevention, Elimination, and Investigation of Industrial Accidents adopted by Order No 966 of 17 August 2004 of the Government of the Republic of Lithuania, the Company consistently analyses the internal accident prevention plan for terminals and the efficiency thereof, including safety measures, warning, information sharing, and engagement in procedures that are aimed at reduction of the impact of big accidents and limitation of consequences thereof. To assure the safe performance of technological procedures and the safe operation of installations and plants, the risk assessment of newly planned business activities and development stages in progress was performed in 2017. After completion of risk assessments, the existing safety statements and internal accident prevention plans of Klaipėda Nafta terminal and the LNG terminal were updated.

part in decision-making and develop their professional qualifications

In 2017 no human right violations or any relating complaints have been registered. We will reach to further ensuring that human rights in the Company are properly protected.

GENDER EQUALITY

The Company supports gender equality. The majority of the Company's employees consist of men. This may be due to the specifics of pursued activities: fewer women choose work of the technical engineering profiles and jobs performed under outdoor conditions, and specialties directly associated with them.

In 2017 were the same number of woman who held managing positions as in 2016 (7 managers).

In the end of 2017 there were in specialist position of the Company 78 women and 115 men, comparing with 2016 number of specialist increased respectively 18.2 per cent and 11.7 per cent.

Specialists of the Company according to the gender 2016 – 2017

SOCIAL RESPONSIBILITY FOR SOCIETY

SPONSORSHIP

In its activities the Company follows the principles of business ethics and social responsibility of higher standards. The Company seeks to become reliable social partner in Klaipėda and contribute to solving of important social problems.

The funds of the Company are allocated to support cultural, infrastructural, health and social security projects associated with the region, where the Company conducts its activities. During to allocation of support fund for the year 2017 the Company followed the order of funds allocation procedure applied to the distribution of funds for public benefit purposes. The Company supported the following public sectors and activities:

• - Environmental protection;
• - Health care;
• - Education;
• - Social protection and labour;
• - Preservation of cultural, religious and ethical heritage;
• - Informal and civic education;
• - Sports;

Employees of the Company according to the gender 2016 – 2017

- Other public benefit purposes and selfless activities selected yearly by the Board of the Company.

Taken into account one of core goals, namely, compliance with stringent transparency standards during the selection of charity support projects, at the end of 2017, the Company's Board of Directors adopted a new procedure for allocation of a charity support.

When allocating a charity support, the Company focus on the purposes of the charitable support, which would assist in resolving or forming a value and benefits for the region of Klaipėda; a charity support project must form a clear and actual value for the public and a target group for the environment of which the project is intended; the activity of the support project must conform with KN strategic goals and values; the support must be allocated in accordance with the principles of transparency, publicity, social responsibility, sustainability and mutual confidence, public benefit, efficiency, and rationality after deliberately assessing the requests for charitable support of the support receivers.

More information about Company's support provision criteria in 2018 you may find here.

www.kn.lt | 120

Overview of 2017 sponsorship projects

In 2017 the Company allocated EUR 135 thousand for the different kind of sponsorship projects (in 2016 – EUR 130 thousand).

Focus on education

In 2017, Vytautas Paulauskas, the professor of the University of Klaipėda, Dr. habil. co-authored with KN published a unique book 'Transportation and Storage of Liquefied Natural Gas'. The book is intended for the students who have selected studies of LNG terminal engineering, transport engineering, shipping traffic management, port and transport planning, design, and management, as well as for the professionals engaged in these spheres of activity and other parties concerned. It is the first such a book published in Lithuania, which clearly, in detail, and briefly systemized information about LNG, its features, transportation, and etc. This information is particularly important for current and future students specialized in LNG terminal engineering and for everybody who has concern in LNG science and practice. Encouraging the dissemination of LNG knowledge in the country and the development of the LNG market, the Company felt the need for contribution to the publication of a scientific book of such importance, because the preparation and training of LNG competences is among the Company's priorities.

The LNG market and technology is a quite new and innovative sphere in Lithuania. Therefore one of KN goals includes efficient cooperation in the educational and scientific sphere. For this reason, KN in cooperation with the University of Klaipėda introduced the 'Liquefied Natural Gas Terminal Engineering course of study. A challenging engineering specialization with good prospects all over the world, the need of which was determined by the increasingly growing LNG market both in Lithuania after the establishment of the LNG terminal and all over the world, also predetermined the way of cooperation intended to encourage the students of this speciality, who boast the best academic results.

Focus on health care

AB Klaipėdos nafta continues to sponsor the Run for Hope solidarity event that began nine years ago. The support that has been provided by the Company for two years has helped this event grow into a large City of Hope series. Today, the City of Hope series is made up of 12 events: Run for Hope, Dance for Hope, Tennis for Hope, Gymnastics for Hope, the Hope Kayakathon, Strokes for Hope (a rowing regatta), Swim for Hope, 1,000 Kilometres of Hope (motorcyclists), Documentary films for Hope, Climb for Hope, Hike for Hope, Hope training day and others.

Brother Benediktas, who organizes the Run for Hope, has highlighted the significance of social partners for a solidarity event that brings the public together for a common goal. The financial support provided by the Company is an expression of this solidarity, which not only helps members of the community, but also promotes a healthy lifestyle and oncological diseases prevention.

Focus on social security

Klaipėda Home for Infants with Developmental Disorders takes in children who have lost their parents at an early age or who were abandoned at birth. One of the objectives of the institution is to create an environment for children who are left without their parents that is as cozy and safe as possible. The home is located near the Company's territory.

A project was also implemented in 2017 with the goal of improve hygiene premises conditions for disabled children. AB Klaipėdos nafta made it possible for this institution to improve the quality and accessibility of healthcare, social and educational services for those the most in need.

Regseda, a social enterprise for blind and partially sighted, is also enjoying cooperation with AB Klaipėdos nafta. Thanks to the support it received, renovation in

Focus on sports

AB Klaipėdos nafta is a partner of Klaipėda Football School, which is a budgetary institution. The international youth football tournament that is held in Klaipėda to compete for Klaipėda Mayor's Cup has already become a tradition. Thanks to the supporters, the international football tournament has attracted such large interest from foreign participants over the past few years, and this school's athletes were able to represent Klaipėda. The goal of the tournament is to ensure the fair organisation of an international tournament, welcome foreign teams, and promote Klaipėda's name outside of

KN continues to cooperate with Klaipėda Children's Hospital, the public institution. The support allocated by KN allows the hospital to replace some outdated children disease diagnostics and treatment equipment by state-of-the-art facilities. Children's health promotion and maintenance is among the most important directions of the public health policy. With due regard to the consistent contribution of Klaipėda Children's Hospital to this process, we feel a need to join this field of activity. In addition to this, we pay a great deal of attention to the health and disease prevention of our employees and clearly understand that health is a priceless value that is to be watched from ones youth.

Regseda created 20 workplaces with highest standards for disabled people. Some 85 per cent of the people working at Regseda are disabled (with most of them being blind or visually impaired).

The mission of the Vilnius University Legal Clinic, the public institution, is to consolidate the knowledge of law students, law tutors, and other law professionals for the benefit of the community. The Vilnius University Legal Clinic has been providing legal services for common people who cannot afford these services since 1998. For 19 years of practice, the Legal Clinic has provided services to over 50,000 customers. In 2017, the Legal Clinic started active integration with Lithuanian events, one such a public event was held in Klaipėda. Currently the Legal Clinic in cooperation with KN is going to open public access points for the provision of free legal advice.

Lithuania. The Company strives to contribute to the development of youth sports in Klaipėda and has made a financial contribution to the institution hosting this tournament.

BC Klaipėda is a public institution also known as the Neptunas-Akvaservis men basketball team. For many years, Neptunas-Akvaservis men's basketball team has been one of the best teams in the National Basketball League. The team is made up exclusively of young

basketball players from Klaipėda Region. The team had two main goals last year: to duly represent the city of Klaipėda and to secure a spot for the team in the National Basketball League Championship. The

Citizenship education

Klaipėda Children's Recreation Centre (KCRR) is located in Melnragė, nearby the Company. The centre has six clubs that provide after-school activities and informal learning for children. Some 1,300 children from all over Klaipėda participate in these activities every year. In view

Focus on culture

The Company contributes to fostering the city's cultural life and sponsors both traditional city events that are open to the public and closed events/shows in the city's theatres. Culture is an integral area of society's growth and development which the Company considers to be particularly important. According to AB Klaipėdos nafta's rules for the allocation of support, culture is one of the priority directions for financial aid, so we intend to continue contributing to the fostering of culture in the port city.

The Company continued its support of Klaipėda State Music Theatre and contributed to the creation of some popular shows. State funding is insufficient for creative activities, so the Company supports the development of new projects and performances. Each year, Klaipėda State Music Theatre entertains audiences with new shows, concert programs and events for children and adults alike. In 2017, the Company also contributed financially to the Drama Theatre for the presentation of new plays to Klaipėda theatregoers.

AB KLAIPĖDOS NAFTA SOCIAL RESPONSIBILITY REPORT For the financial year ending on 31 December 2017

Company's financial support makes it possible for the club to develop the team's activities and pursue high results.

of the fact that one of AB Klaipėdos nafta operational guidelines is to strengthen relations with the local community, the Company contributed to the Family Entertainment Port, which is a traditional autumn festival that the KCRR holds in Melnragė.

AB Klaipėdos nafta has been supporting the Sea Festival since 2000 and is proud to be one of the event's most loyal partners. This year, the Company treated the city to dancing fountains at Jonas Hill. The program also highlighted Klaipėda's - Lithuanian Capital of Culture symbol of the year.

The Company's decision to patronize innovative creative ideas more than paid off – the musical fountains were a sensation and sparked discussions about reviving the neglected bastion complex.

The company's financial support for the Sea Festival opens up opportunities to develop and realize ambitious ideas. However, it is also an important and meaningful opportunity for the Company's team to participate in the city's cultural life, and a sign of the Company's openness and sincere desire to be a part of society.

COOPERATION WITH SCIENCE INSTITUTIONS AND TECHNOLOGY PARKS

LNG cluster

LNG terminal operation and the exploitation of the LNG distribution station, which is as scheduled for 2018, opens doors for broad scientific and business partnership opportunities that enable to develop the regional sea LNG business in Klaipėda.

Seeking to exploit the LNG economic potential to the fullest possible extent, the LNG cluster, which by now is uniting 14 partners, was formed in 2016. From day to day the cluster increasingly develops its activity and turns into "a driver" for the provision of knowledge of technological and financial resources for innovative projects that enable to reduce CO2, sulphur, nitrogen oxides, and solid particles emissions in this way protecting the environment and contributing to efficient consumption of natural resources in a way meeting public interests. The activity of the LNG cluster will also be beneficial for Lithuanian engineering industry and science, creation, development, and commercialization of new products and technologies, establishment of working places that create a high added value, and preparation of new courses of studies and specialists.

After signing of an agreement in 2016, the LNG cluster started cooperation with one of the biggest Croatian universities, namely, the University of Rijeka. The latter agreement will ensure close cooperation in promoting the expansion of LNG-related studies and knowledge exchange in Lithuania. The contribution of the University of Rijeka, which has extraordinary and centuries-old traditions in LNG research and preparation of corresponding specialists, to the cooperation with KU will be a considerable step in creating, developing and opening the prospects of engineering studies related to LNG terminals in Klaipėda.

The idea of the cluster is supported by the Ministry of Energy and the Ministry of Education and Science. The agreement made all parties to cooperate by incorporating the potentials of studies and business which, in turn, determined the development of a new specialty in the port city. Taking care of social welfare, AB Klaipėdos nafta will finance eight slots of the targeted study programme introduced in Klaipėda University (KU) – Liquefied Natural Gas (LNG) Terminal Engineering.

In 2017, a great deal of attention was paid to the development of innovative technological projects, consolidation of scientific and business partnerships. On 26 April 2017, agreements on the establishment of the LNG cluster of countries of the Baltic Sea region and the Centre of LNG competencies of countries of the Baltic Sea region were concluded in Vilnius. Currently, the LNG cluster of the countries of the Baltic sea region Lithuania, Sweden, Norway, Denmark, Germany, and Poland, which have been joined together in order to boost the development of innovations, technologies, and the infrastructure in the LNG field in the region concerned.

On 15 November 2017, with the initiative of the Lithuanian LNG cluster, the first meeting of the cluster of countries of the Baltic Sea region was held in Klaipėda. The coordinators of national clusters and the delegates of business organizations from eight countries discussed the possibilities of LNG application in different transport sectors and consolidated cooperation relationship.

Technological projects

On 30 April 2017, the agreement on a prototype creation of a hybrid LNG railroad locomotive was concluded in Vilnius. This innovative project will open opportunities for the usage of clean fuel and reduce fuel consumption. The LNG locomotive prototype is designed by integrating efforts and expertise of the following members and partners of the LNG cluster: AB Lietuvos Geležinkeliai, Klaipėda stevedoring company BEGA, AB Klaipėdos Nafta, the Vilnius Gediminas Technical University, and the University of Klaipėda.

In addition to this, in 2017 the cluster initiated the project intended for improvement of LNG distribution terms and conditions with regard to the manufacture of a smart LNG transport container. The significant impulse to initiating this project was given by construction of the LNG distribution station carried out by AB Klaipėdos Nafta. Smart containers that are planned to be primarily

Possibilities of practice

The Company cooperates with educational institutions and creates conditions for university and college students to apply their theory knowledge and acquire practical skills.

The Company organizes educational training both for students from educational institutions according to scheduled practical training and for those students who want to do practical training on their own. In 2016, 15 students did their practical training at the Company, while in 2017 the number of students was 24. These students studied at the University of Klaipėda, Kaunas technological University, Vilnius University, Loughburough University (UK), Aberdeen University manufactured in Lithuania are intended for LNG storage and will be used for transportation of fuel. These reservoirs will be capable of being delivered both by roads and a railroad, and sea transport to customers in the countries of the Baltic Sea region and outside their borders.

The international consortium established on the initiative of the Lithuania LNG cluster is engaged in the design of a hybrid barge prototype that will be run on liquefied biogas (LBG) and an electric battery. It is expected that this barge prototype will be presented at the end of February 2018. To this day, there is no such an analogue of an inland water vessel in the world. This innovative technological project is implemented on the grounds of consolidated knowledge and resources of partners from Lithuania, Sweden, and Germany.

(Scotland), Klaipėda state college, Lithuanian higher nautical school, and Vilnius college. Some students who have the best academic results and are mostly motivated for practical training, who attend the Company not only to learn the business activity of the Company but also to master practical skills, have a good chance to be employed by the Company.

Students are also provided with the opportunity to fulfill the tasks of practical training according to those formal and informal occupational safety programs of other educational companies according to which the Company's employees are trained.

2017 AB KLAIPĖDOS NAFTA GOVERNANCE REPORT

AB KLAIPĖDOS NAFTA GOVERNANCE REPORT INFORMATION 128
RISK FACTORS AND RISK MANAGEMENT 129
MANAGEMENT OF THE COMPANY 131
OTHER GOVERNANCE INFORMATION 138
AB KLAIPĖDOS NAFTA COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE 139

AB KLAIPĖDOS NAFTA GOVERNANCE REPORT INFORMATION

The public limited liability company Klaipėdos nafta aims to make its corporate management and internal processes in a way to ensure transparent, effective and profitable activities and its activities retain the trust of our stakeholders. The internal control processes and management practices implemented within the Company are in line with the best management practice principles. In this report provided main information and principles regarding management and related processes.

Paragraph Risk factors and risk management describes the main risks the Company is facing in its activity, also short risks identification and they mitigation processes implemented within the Company are included.

The Company's management structure and managing and supervisory bodies are described in detail in the article Management of the Company of the annual report. This paragraph also contains information regarding corporate management and organizational scheme, connection with the other bodies and short description of the functions of the each managing body. Also mentioned paragraph provides the information regarding remuneration for service in the collegial bodies and amount accounted for the each member of the bodies.

In order for the management and supervision bodies of the Company to exactly and clearly understand the targets, directions and objectives the corporate strategy is being prepared with purpose to foreseen long term strategic goals and tasks. The Board of the Company is responsible for the approval of the strategy. AB Klaipėdos nafta strategic goals are described in the paragraph The Company's Strategy.

The Company, acting in compliance with Article 21(3) of the Law of the Republic of Lithuania on Securities and paragraph 24.5 of the Listing Rules of AB NASDAQ Vilnius, discloses how it complies with the Corporate Governance Code for the Companies listed on NASDAQ Vilnius as well as its specific provisions or recommendations in the paragraph AB Klaipėdos nafta Compliance with the Corporate Governance Code.

Company's annual report of the year 2017 along with Company's governance report and explanatory notes of the year 2017 financial statements are published in AB Klaipėdos nafta official website (www.kn.lt) and in AB NASDAQ Vilnius (www.nasdaqomxbaltic.com) Stock Exchange.

RISK FACTORS AND RISK MANAGEMENT

The Company's Board approved Risk Management Policy that regulates risk management, defines risk management principles and responsibilities, functions and responsibilities of the Chief Risk Officer as well as sets risk appetite and tolerance limits. The risk management system is developed in accordance with the ISO 31000 guidelines. The list of principal risks and the risk management plan are provided to and approved by the Company's Board each quarter. The Board actively participates in the principal risk management process by continuously monitoring the risk level changes and the risk management measures' action plans. The Company's high level management is responsible for shaping the personnel's attitude towards risk management, setting the risk management goals in the managed area, implementation of the control measures, implementation and monitoring the efficiency of the risk management measures. The medium level managers are responsible for implementation of the risk management process and provision of the results, as well as for reliability, correctness and impartiality of information.

Primary risk categories that the Company is exposed to while conducting its business:

• - Business risk. It is a risk category that is generally related with environment where the Company operates and has an impact on its financial results: Company's competitiveness comparing with other players on the oil products transshipment market, economic viability of the Company's key customers, political and economic environment in Belarus, changes in legal regulation of the LNG related activities and etc.;
• - Operational risk is probably the widest risk category including such risks that the Company is exposed to as safety and reliability of internal processes and executed activities, compliance, occupational and physical safety, cybersecurity, etc.
• - Reputational risk. It is a risk mostly related with the Company's decisions and behaviour of its employees.
• - Project risk. The Company is engaged in a number of large investment projects, therefore, highlighting the risks of achieving the goals, especially staying within the budget and implementation deadlines, and taking appropriate risk mitigation measures enables the Company achieving strategic objectives.

Some wider comments on the risk categories of the Company are provided below:

- Business risk

The Company works with several big clients in transshipment of oil products area. The main client of the Company is AB ORLEN Lietuva. Its transshipment volume during the year 2017 comprised 2/3 of the Company's terminal total transshipment. The Company has signed a long-term transshipment agreement with ORLEN Lietuva which is valid until 2024 and guarantees stable flows of oil products from ORLEN Lietuva. Nevertheless, the Company is enforced to look for other potential clients, flows of shipments and alternative activities because of constantly escalated topic on possible closing or suspension of ORLEN Lietuva refinery. Also the Company reviews existing expenses and constantly searches for costs optimization possibilities.

Annual transshipment volume of oil products from Belarusian and Russian oil refineries amounts approximately 1/3 in 2017 of the total transshipment volume of the Company. Since Belarus has no direct access to the sea, Belarus must use transit services of neighbouring countries and their ports in order to export oil products to the Western countries. Therefore, the cooperation with Belarusian companies and institutions is highly important in order to divert their transit of oil products through Klaipėda port. Due to the significant share of Belarusian transit of oil products in Company's activities there is a risk (including but not limited by political, economic, etc.) that the Belarusian oil refineries may decide to export oil products using ports of other countries (Latvia, Estonia or Ukraine). On the other hand, Belarusian companies are highly dependent on oil import from Russia and any disruption in supply chain may lead to decreased quantities of refined oil products, thus decreasing transshipment volume of the Company. The Company may not be able to find new customers within short period of time which would replace the lost transshipment volume and, therefore, may not be able to maintain the same volume of transshipment of oil products as in previous years.

The main competitors of the Company are the following terminals of Klaipėda and other Baltic Sea and Black Sea ports which are transshipping heavy and light oil products exported from Russia, Belarus and Lithuania: Kroviniu terminalas (Lithuania), Ventspils Nafta Terminals (Latvia), Ventbunkers (Latvia), BLB (Latvia), Naftimpex (Latvia), Alexela (Estonia), Vopak EOS (Estonia), Vesta (Estonia), Odessa, Sevastopol, Feodosia terminals (Ukraine), Peterburg Oil Terminal (Russia) and Ust-Luga terminal (Russia). The most significant factors influencing the competitiveness of the Company on the market are as follows: technical characteristics of the port and the terminal (number and depth of the jetties, maximum allowed draughts of sea vessels, capacities of terminal storages, efficiency of the loading equipment, etc.) and infrastructure servicing the terminal (roads, railway networks, etc.), cost of logistics.

It is reasonable to expect that the Company will maintain oil product freights because of the good reputation of the Company, technological advantages (in particular relation to HFO transshipment in winter conditions), investments into expansion of park of oil products' storage tanks, current market share, long-term agreements with cargo owners, and benefits of ice-free port.

The Company striving to manage its business risks by diversifying its income sources and widens the range of services it provides: operates liquefied natural gas (LNG) terminal, consults and participates in other forms in international projects related with the development of LNG terminals, completed development of LNG reloading station in 2017 and started providing completely new services to clients.

The Law of the Liquefied Natural Gas terminal approved on 12 June 2012 by the Parliament of the Republic of Lithuania establishes development of the LNGT at the territory of the Republic of Lithuania, main principles and requirements for its operation and exploitation, also composes legal, financial and organizational facilities for the LNGT operation. The inadequate change of the mentioned law and other already adopted laws regulating activity and exploitation of the LNGT could result in significant losses concerning the financial and/or legal liabilities that already have been taken. Therefore Company's lawyers actively participate in different meetings with state institutions striving to emphasize the consequences the potential decisions.

- Operational risk

Operational risk is considered as risk, directly related to the increase of losses, loss of prestige, changes in confidence caused by the external factors (for example, natural disasters, illegal acts of the third parties, etc.) or internal factors (for example, ineffective activity and management, improper and inefficient utilization of funds, internal control deficiencies, ineffective procedures, malfunctions of information systems, unduly allocation of functions or responsibilities, etc.).

In order to manage operational risk the Company implemented required organizational measures and procedures as well as information systems to be used for support of business processes that collectively ensure proper functioning of internal control system and duly

AB KLAIPĖDOS NAFTA GOVERNANCE REPORT For the financial year ending on 31 December 2017

cooperation with the third parties concerned. The Company applies the following means of internal control: separation of decision making and controlling functions, control of transactions and accountancy, limitation of decision making powers and control of their execution, collegial decision making in crucial issues, etc.

The Company strives to minimize legal compliance risk and assure that its operations are compliant with the applicable legal requirements and standards. Therefore Company lawyers actively take part in decision making processes of the Company; participate while drafting internal legal acts and agreements.

Infrastructure, as well as management and safety processes, cooperation with the third parties and control system has been positively evaluated by the representatives of potential clients of the terminals.

- Reputational risk

The Company cherishes its reputation and good name and employs risk mitigation means. The Company values' revision project was launched in 2017 that involved all employees of the Company. The goal of the project is to purify Company values and achieve highest possible engagement level of Company's employees. Implementation of project should help to assure that behaviour of employees is in line with values and Company's code of ethics. The Company pays substantial attention for minimizing corruption risk and implements relevant internal processes.

- Project risk

Investment project management is an important part of the Company's business. The Company invests into the expansion of tanks for light oil product storage, development of the system of relevant connecting pipes and pumps, development of tanks for mixtures of oil and water, reconstruction of jetties, development of liquidated natural gas reloading station, etc. In order to attain the economic value that investment projects are supposed to generate it is important to assure that the projects are implemented within the defined budget and timeframe. Company's Board have set 10 per cent tolerance limit for deviations, therefore Company's management constantly monitors implementation statuses of the important projects, related risks and their mitigation measures.

MANAGEMENT OF THE COMPANY

Management structure

The Company follows the Law on Stock Companies, the Law on Securities, Articles of Association of the Company and other legal acts of the Republic of Lithuania during its operation.

The Company's Articles of Association are registered in the Register of Legal Entities and indicate the

Organizational and management structure of the Company:

following management bodies:

• - The General Meeting of Shareholders,
• - The Supervisory Board,
• - The Board,
• - Chief Executive Officer (CEO, General Manager).

The General Meeting of Shareholders is a management body, solving the essential issues of the Company's activity. Competences of the General Meeting of Shareholders of the Company, Shareholders' rights, their implementation are identified in the Law on Stock Companies and in the Article of Association of the Company.

The current head of the Company, who no longer belongs to the Board of the Company (from 11 April 2017), or authorised Director of any other department of the Company always participates in the Shareholders Meetings while the member of the Supervisory board and the CFO participate depending on the questions addressed.

In the last general meeting of Shareholders the following representatives of the Company took part: General Manager of the Company, Chief financial officer, head of the legal division, member of the Board: Giedrius Dusevičius and auditor of independent Audit Company.

The Supervisory Board is a supervisory body which consists of 3 (three) members, elected for the period of four years in the General Meeting of Shareholders according to the procedure established by the Law on Stock Companies. The number of the terms of office a member may serve on the Supervisory Board is not limited. The CEO of the Company, a member of the Board of the Company and a person, who under the legal acts is not entitled to serve in this office, shall not serve on the Supervisory Board. The Supervisory Board is a collegial body supervising the activities of the Company, its status, competence and functions have been defined by the Law on Stock Companies and the Articles of Association of the Company. Functions, rights and duties of the Supervisory Board are detailed in the Working Regulations of the Supervisory Board.

Upon convention of the Company's General Meeting of Shareholders on 21 April 2017, the term of office of the Company's Supervisory Board was terminated, as provided in Article 31(4) of the Republic of Lithuania Law on Companies. The term of office of the members of the Audit Committee was terminated together with the term of office of the Supervisory Board. Selection of candidates to the Company's Supervisory Board is carried out in accordance with Resolution No. 631 of the

Government of the Republic of Lithuania of 17 June 2015 "On approval of the description of the selection of candidates to the board of a state or municipal enterprise and candidates to a collegial supervisory or management body elected by the general meeting of shareholders of a state- or municipality-owned company". The Company's General Meeting of Shareholders will adopt a decision on the election of members to the Supervisory Board. After the Supervisory Board is elected, it will pass a decision on the selection of members to the Audit Committee. Expiry of mandates of the Supervisory Board and the Audit Committee has not affected the activities of a collegial management body – during the reporting period the mandate of the member of the Board in the Company has been fulfilled by the number of Board members required for decisionmaking. The decisions passed by both the Board and the Head of the Company have been based on the benefit to the Company and its shareholders, on compliance with laws and other legal acts, and on the Company's Articles of Association.

The Supervisory Board by its decision has established an Audit Committee as an advisory body. According to the part 4 of the Republic of Lithuania Law on Stock Companies article 31, Members of Audit Committee term of office has also expired along with Supervisory Board term of office. Until 21 April 2017 the Audit Committee consisted of 3 (three) members elected for the office term of the Supervisory Board. The "Rules of formation and conduct of the Audit Committee of AB Klaipėdos nafta, approved by the Company's Supervisory Board, regulate functions, rights and duties of the Audit Committee. The key functions of this committee are: observe preparation process of the Company's Financial Statements, observe the process of audit performance, analyse efficiency of the systems of internal audit and risk management.

By decision of 19 September 2016, the Supervisory Board of the Company set up a committee on the Nomination committee of candidates for the post of independent Board members of public limited liability company Klaipėdos Nafta which serves as an advisory body to the Supervisory Board. The selection committee is comprised of 4 (four) members – Agnė Amelija Kairytė, Romas Švedas, Eimantas Kiudulas, Audrius Misevičius – and the experts Šarūnas Dyburis and Paulius Martinkus. The functions, rights and responsibilities of the Selection Committee are set forth in the Regulations of the Committee on the Selection of Candidates to the Post of

AB KLAIPĖDOS NAFTA GOVERNANCE REPORT For the financial year ending on 31 December 2017

Independent Board Members of Public Limited Liability Company Klaipėdos Nafta approved by the Supervisory Board, in the documents on the activities of the Supervisory Board and the Selection Committee. The major functions of the Selection Committee are to announce a public selection of candidates for the post of independent board members, to assess the eligibility of the candidates and submit the selected candidacies to the Supervisory Board.

The Nomination committee, which was formed in 19 of September, 2016, had the power of attorney until the election of independent members of the Board, however, no longer than the end of the cadence of the Supervisory Board.

After the election of independent Board members by the Supervisory Board of the Company in 30 December, 2016 and 24 January, 2017, the Nomination committee has lost the power of attorney.

The Board is a management body of the Company consisting of 5 (five) members, who are elected by the Supervisory Board for the period of 4 (four) years. (Note: During the period of time starting from 1 January, 2017 4 out of 5 Board members of the Company were acting. After Supervisory Board elected Bjarke Pålsson a member of Board, from 24 January, 2017 to 10 April, 2017, 5 members were acting in the Board of the Company, as established at the Articles of Association. From 11 April, 2017, after the resignation of Mindaugas Jusius, 4 out of 5 Board members of the Company were acting.

The Board members elect the Chairman of the Board (Note: During the period of time from 29 April, 2014 till 31 December 2017 including, constant Chairman of the Board has not been elected, therefore, every time by the principle ad hoc the Chairman of the Board was elected from the acting members of the Board). The number of the terms of office a member may serve on the Board is not limited. A person who is a member of the Supervisory Board of the Company or who under the legal acts may has no rights to be elected cannot serve as a member of the Board. The power of attorney of the Board members and scope of activity of the CEO have been determined by the Law of Stock Companies and the Articles of Association of the Company.

The Company is managed by the Chief Executive Officer (CEO) which is a single-person managing body of the Company. The CEO is the main person managing and representing the Company. The duties and competence of the CEO have been determined by the Law on Stock Companies and the Articles of Association of the Company.

The Supervisory Board as at 31 December 2017

On 21 April 2017, after the ordinary General Meeting of Shareholders, Company's Supervisory Board term of office has expired, by the Republic of Lithuania Law on Stock Companies article 31 part 4. Members of Audit Committee term of office has also expired along with Supervisory Board term of office.

New members until the 31th of December, 2017 have not been appointed.

On 25 October, 2017, by the resolution of the Ministry of Energy of Republic of Lithuania, the selection of independent members of the Board was announced.

The selection of candidates to the Company's collegial body is carried out according to the selection of candidates to the collegial management or supervision body elected by the general shareholder meeting of a company, managed by a state or municipality, procedure No. 631, approved by The Government of the Republic of Lithuania on 17 June, 2015.

Until 21 April 2017, 3 Supervisory Board conferences took place; all Supervisory Board members have participated.

Name	Position in the Company	The independence criteria	Cadence commencement date
Agnė Amelija Kairytė	Chairman of the Supervisory Board	-	From the 11 February 2013 until 21 April 2017
Romas Švedas	Member of the Supervisory Board	Independent	From the 11 February 2013 until 21 April 2017
Eimantas Kiudulas	Member of the Supervisory Board	Independent	From the 11 February 2013 until 21 April 2017

Members of the Supervisory Board did not receive any salaries and other monetary amounts, related to the duties of a member of the Supervisory Board, loans, guarantees or assets for the year 2017. Remuneration for E. Kiudulas comprise amounts only work as member of audit committee.

Audit Committee

On 21 April 2017, after the ordinary General Meeting of Shareholders, Company's Supervisory Board term of office has expired, by the Republic of Lithuania Law on Stock Companies article 31 part 4. Members of Audit Committee term of office has also expired along with Supervisory Board term of office. New members until the 31th of December, 2017 have not been appointed.

Until 21 April 2017, 2 Audit Committee conferences have been arranged; all Audit Committee members have participated.

Name	Position in the Company	The independence criteria	Totals remuneration including tax, thousand Eur	Cadence commencement date
Linas Sasnauskas	Chairman of the Audit Committee (from 21 September 2015)	Independent	3,5	From the 21 September 2015 (previously served as a member of the Audit Committee) until 21 April 2017
Eimantas Kiudulas	Member of Audit Committee	Independent	3,5	From the 18 March 2013 until 21 April 2017
Kasparas Žebrauskas	Member of Audit Committee	Independent	3,5	From the 14 September 2015 until 21 April 2017

During 2017 the calculated total remuneration for the Audit Committee members for the work in the Audit Committee amounts to EUR 10.5 thousand (in 2016 – EUR 21.7 thousand). Members of the Audit Committee did not receive any loans, guarantees or assets, unpaid

AB KLAIPĖDOS NAFTA GOVERNANCE REPORT For the financial year ending on 31 December 2017

bonuses, tantjems and other benefits. The members of the Audit Committee are remunerated according to the Remuneration payment order for the activity of independent audit committee members of AB Klaipėdos nafta, determined by the Supervisory Board.

Members of the Board as at 31 December 2017

Dainius Bražiūnas

(born 1983) – Member of the Board of the Company since 25 August, 2014, until the term of office of the acting Board of Company. Education: Vilnius Gediminas Technical University, Bachelor in energy (2005). Employment – head of the Oil and Gas Division of the Ministry of Energy of the Republic of Lithuania. Participation in the activity of other companies: head of Koturna association, member of the Board and member of the Board of No. 599 homeowner community. Has no direct interest in the share capital of the Company; no shareholding (above 5 per cent) in the related companies of AB Klaipėdos nafta.

Mantas Bartuška

(born 1984) – Board member of the Company since 25 September 2014, elected by the Supervisory Board until the term of office of the acting Board of Company. Until 2 January 2017 was CEO of AB Klaipėdos nafta. Education: Vilnius University, faculty of economics, diploma of management and business administration (2007). Since 16 December 2016 works as general manager at AB Lietuvos geležinkeliai. Participation in the activity of other companies: since 14 December, 2016 member of the Board of the AB Lietuvos gelezinkeliai, member of Presidium of Lietuvos pramoninkų konfederacija. Has no direct interest in the share capital of the Company; no shareholding (above 5 per cent) in the related companies of AB Klaipėdos nafta.

Giedrius Dusevičius

(born 1971) – Independent member of the Board since 30 December, 2016, elected till the end of the Board of Company cadence. Education: Vilnius University, Faculty of Economics, (1989); Vilnius University, Institute of International Relations and Political Science (1994); INSEAD, Management Programme (AMP, 2006). Participation in the management of other companies – member of the Board of UAB ACC Distribution, member and chairman of the council of Vilnius University institute of international relations and political science Alumni society. Has no direct interest in the share capital of the Company; no shareholding (above 5 per cent) in the related companies of AB Klaipėdos nafta.

Bjarke Pålsson

(born 1968) – Independent member of Board since 24 January 2017, elected till the end of the Board of Company cadence. Education: University of St. Gallen (HSG) in Switzerland, CEMS Master's Study Programme of Quantitative Economics and Finance. Copenhagen Business School in Denmark, Master's in Finance (excl. thesis) (1992). Copenhagen Business School in Denmark, Bachelor's in Economics. Employed: Managing Director of Financial Strategy & Origination in the company Nykredit (Denmark). Has no direct interest in the share capital of the Company; no shareholding (above 5 per cent) in the related companies of AB Klaipėdos nafta.

Name	Position in the Company	The independence criteria	Totals remuneration including tax, thousand EUR	Board member from the date
Dainius Bražiūnas	Member of the Board	-	-	From the 25 July 2014
Mantas Bartuška	Member of the Board till the 16 December 2016, Head manager of the Company	-	-	From the 25 September 2014
Giedrius Dusevičius	Member of the Board	Independent	20.9	From the 30 December 2016
Bjarke Pålsson	Member of the Board	Independent	20.3	From the 24 January 2017
Mindaugas Jusius	Member of the Board (until 10 April 2017)	Independent (until 29 march 2017)	5.4	From the 24 October 2011 until 10 April 2017

All members of the Board of the Company attended all 17 Board meetings held during the year 2017.

Independent members of the Board are paid based on the agreement concluded with the Company that is approved by the Supervisory Board. Member of the Board M. Jusius was paid for work as the Board member until 11 April 2017. M. Jusius after he started his work as General Manager of the Company received remuneration for the work according to employment contract and internal payroll system. In 2017 for the independent members of the Board total remuneration amount comprise of EUR 46.6 thousand. (2016 - EUR 21.1 thousand.)

Members of the Board in 2017 did not receive any loans, guarantees or assets, were not paid bonuses, premiums tantiemes or any other benefits for work as members of the Bord. For the member of the board M. Bartuška the amounts paid in 2017 are only related with his work as CEO of the Company.

The Directors of the Company as at 31 December 2017

Mindaugas Jusius

(born 1979) – Chief Executive Officer of AB Klaipėdos nafta since 11 April, 2017, member of the Board from 24 October, 2011 till 10 April, 2017 (independent member of the Board till 29 March, 2017). Education: Vilnius University, Master in Banking (2003), ISM University of Management and Economics, EMBA (2008). London Business School, leadership programme (2008), Baltic Institute of Corporate Governance: chairman program of corporate governance (2013) and executive program of corporate governance (2010). Participation in the activity of other companies: Member of management body of foreign legal entity Swedbank Life Insurance SE. Has no direct interest in the share capital of the Company; no shareholding (above 5 per cent) in the related companies of AB Klaipėdos nafta.

Marius Pulkauninkas

(born 1978) – Chief Financial Officer, since 3 January 2017 temporarily served as General Manager till 10 April 2017. Works at the Company since 20 October 2014. Education: Vilnius University Faculty of Economy, bachelor in Business administration and management (2000) and master in the same field (2002). Marius Pulkauninkas has no direct interest in the share capital of the Company; no shareholding (above 5 per cent) in the related companies of AB Klaipėdos nafta.

Tadas Matulionis

(born 1977) - LNG Business Director. Works at the Company since 2 April 2013. Education: Kaunas University of Technology, BA in Telecommunications (2000); Vytautas Magnum University, MA in Management (2004); Baltic Management Institute, EMBA (2004), Project Management Institute, Project Management Professional (PMP) (2007), Prince2 Practitioner (2012), Baltic Institute of Corporate Governance, programme for Professional Board Members (2014).Tadas Matulionis has no direct interest in the share capital of the Company; no shareholding (above 5 per cent) in the related companies of AB Klaipėdos nafta.

Genadijus Andrejevas

(born 1974) – Technical Director (since 1 October 2015). Works at the Company since 4 May 2011. Education: Vilniaus Gediminas Technical university, Master of Engineering computer science (1999), Kaunas university of Technology, bachelor of thermal engineering (1996). No participation in other companies management. Genadijus Andrejevas has no direct interest in the share capital of the Company; no shareholding (above 5 per cent) in the related companies of AB Klaipėdos nafta.

Darius Šilenskis

(born 1981) – Oil Business Director since 28 September 2015. Education: Baltic Management Institute, Master of executives international business management (EMBA), (2013), Vytautas Magnus University, Master of business administration (2013), Mykolas Riomeris university, Master of law (2006, Law and management studies), Bachelor of law (2004, International law if the Sea studies). No participation in other companies management. Darius Šilenskis has no direct interest in the share capital of the Company; no shareholding (above 5 per cent) in the related companies of AB Klaipėdos nafta.

Rytis Valūnas

(born 1985 m.) - Chief Administrative Officer and General Counsel since 15 September 2012. Education: Baltic Institute of Corporate Governance, Professional Board Member Certificate (2015); The Fletcher School of Law and Diplomacy/Harvard Law School, LL.M. (2011); Mykolas Romeris University/Ghent University, MA in International Law (2009); Mykolas Romeris University, BA in Law (2007).Rytis Valūnas has no direct interest in the share capital of the Company; no shareholding (above 5 per cent) in the related companies of AB Klaipėdos nafta

No members of the Company's management have been convicted of crimes against property, business or finances. Information about leading managers' salary for the year 2017 is stated in chapter "Information about the

employees of the Company" in the Annual Report.

From 2017 April 11 Mindaugas Jusius has been appointed as Chief Executive Officer of the Company.

System of remuneration to the Company's management

The Board of the Company sets the salary of the Chief Executive Officer (hereinafter referred to as the 'CEO'), the pay ceiling for employees directly subordinate to the CEO, and the procedure for incentive of management personnel for both, short-term and annual results.

For the purposes of incentive of the management personnel, the Board of the Company has approved the Procedure for Rewarding AB Klaipėdos Nafta Management Personnel, which is aimed at encouraging managers to exceed the corporate annual targets instead of just meeting them. The fund of annual bonuses to the Company's management is set depending on (i) the percentage by which the net profit is exceeded; and (ii) the degree of meeting of the annual corporate targets. In any case, however, the total amount of bonus fund for all management personnel may not exceed the sum of their salaries for four months.

No compensations are paid to the CEO and the Directors of Departments in the case of resignation or recalling

OTHER GOVERNANCE INFORMATION

Information on major share packages controlled either directly or indirectly

Details of the shares are provided in chapter "Information about investment into other companies" in the Annual Report.

Information on transactions with related parties

No transactions with related parties as provided for in art. 37(2) of the Law on Companies of the Republic of Lithuania were concluded in 2017.

Information on shareholders having special control rights

All shares of the Company are of one class ordinary registered shares granting their owners (shareholders) equal rights. Details of the shares are provided in chapter "Shareholders and Shares of the Company" in the Annual Report.

Information of amendments to the Company's Articles of Association

In 2017, no amendments were made to the Company's Articles of Association.

Information on all agreements between shareholders

The Company does not have any information on agreements between shareholders.

from the post. Also, there are no additional payments/compensations in the form of shares, or any other form, for their work at the Company at the time of leaving it.

The monthly salary for the General Manager of the set out by the Board of the Company comprise 6,500 EUR. Following the Remuneration policy approved by the Board of the Company and the Company's Procedure for Rewarding Management Personnel there can be paid variable part of the salary for the CEO - annual bonus depending on the results of the Company and achievement volume of annual goals. The maximum bonus in case all targets are achieved comprise of 3 monthly salaries. Also there is an opportunity to get additional premium of 1 monthly salary once the year for the extraordinary achievements based on the decision of the Board of the Company.

Information on the varied policy applicable to the election of the Company's chief manager, the members of governing and supervisory boards

The Company does not have the variety policy applicable to the election of the chief manager and the members of governing and supervisory bodies. During the procedure of selection of candidates to the Company's board of directors, governing and supervisory boards, the candidates shall be subject to requirements that do not discriminate a candidate on grounds of age, sex, education, or professional experience. During the selection of a candidate, the Company does not set any restrictions for nomination of a candidature on grounds of sex or age.

Considering the specificity of the Company's business activity and the status of a state-owned company, unbiased requirements which are only related to the functions and competences of the members of a governing or supervisory boards and the professional experience and education proportionate to these functions and competences are set.

General and independence requirements to candidates to the Company's supervisory board are set by the Description of Selection of Candidates to the Boards of State or Municipal Companies and Candidates to the Collegial Supervisory or Governing Board of a Company That Is under Control of a State or Municipal Company Elected by the General Meeting as adopted by Decision No 631 of 17 June 2015 of the Government of the Republic of Lithuania.

AB KLAIPĖDOS NAFTA COMPLIANCE WITH THE CORPORATE GOVERNANCE CODE

The public limited liability company AB Klaipėdos nafta (hereinafter referred to as the "Company"), acting in compliance with Article 22(3) of the Law of the Republic of Lithuania on Securities and paragraph 24.5 of the Listing Rules of AB NASDAQ Vilnius, hereby discloses how it complies with the Corporate Governance Code for the Companies listed on NASDAQ Vilnius as well as its specific provisions or recommendations. In case of non-compliance with this Code or some of its provisions or recommendations, the specific provisions or recommendations that are not complied with must be indicated and the reasons for such noncompliance must be specified. In addition, other explanatory information indicated in this form must be provided.

Form of the management report of the Company:

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
Principle I: Basic Provisions The overriding objective of a company should be to operate in common interests of all the shareholders by optimizing over time shareholder value.
1.1. A company should adopt and make public the company's development strategy and objectives by clearly declaring how the company intends to meet the interests of its shareholders and optimize shareholder value.	Yes	The development strategy and objectives of AB Klaipėdos nafta have been set up in its internal documents (Annual Report placed publicly on the website of AB NASDAQ Vilnius) according to the separate directions and objectives of its activities. The Company updates its development plans subject to the situation on the market as well as to the changes in the regulatory environment, declaring how it plans to act in the interests of the shareholders and increase shareholders' equity.
		The Articles of Association of the Company are publically announced on NASDAQ Vilnius Stock Exchange's and Company's website, according to the procedures defined for the companies listed on the regulated market.
1.2. All management bodies of a company should act in furtherance of the declared strategic objectives in view of the need to optimize shareholder value.	Yes	The General Meeting of Shareholders and the Board of the Company adopt the main strategic resolutions, making impact on the shareholders' value increase.
		During the year under review, the General Meeting of Shareholders of the Company and the Board adopted decisions related with implementation of the strategic projects of the Company, core decisions related with activities of the Company.
		The Company's Supervisory Board and its advisory body, Audit Committee ensures active monitoring and supervision of the Company's activity.
1.3. A company's supervisory and management bodies should act in close co-operation in order to attain maximum benefit for the company and its shareholders.	Yes	The Company's Supervisory Board, its advisory body - Audit Committee, the Company's Board and the Company's General Manager implement this recommendation. The documents regulating the activities of the management and supervisory bodies were approved providing the principles and procedures for the cooperation between the Company's management and supervisory bodies, and regular supervision and control carried out by the
		supervisory bodies additionally ensure the proper functioning of the governing bodies in order to maximize

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
		the benefit for the company and its shareholders. If necessary, general meetings are organized, where the members of the Company's Board, Supervisory Board, and Audit Committee are invited.
1.4. A company's supervisory and management bodies should ensure that the rights and interests of persons other than the company's shareholders (e.g. employees, creditors,	Yes	The Company's bodies respect the rights and interests of the persons participating in or connected with the Company's operation:
suppliers, clients, local community), participating in or connected with the company's operation, are duly respected.		1. Employees – since its establishment the Company has been cooperating and performing social partnership with the representatives of its employees (the Board of the Company by its resolutions assigns additional means for the execution of the Collective Agreement and extra stimulation of the employees, etc.);
		2. Creditors the Company takes on and fulfils its financial and other obligations in accordance with the budget approved by the Board of the Company and the general commercial agreements;
		3. Suppliers – the Company's Board adopts the decisions on the conclusion of the contracts with the suppliers, also on approval and change of the main conditions of these contracts in the cases defined in the Articles of Association;
		4. Clients – the Company's Board adopts the decisions on the approval of the conditions of the contracts concluded with the clients and approves the minimum prices and service rates for loading of oil products in the cases defined in the Articles of Association;
		5. Other persons (local society) – by the resolution of general shareholders meeting part of the Company's profit is annually dedicated to support (social, art, cultural, sports activities, etc.). The Company's Board adopts the decisions on the annual support budget, including the projects plan which is made based on the principles that the prioritized support for Klaipėda region and focusing on the support to be annually dedicated for both local companies and institutions and organizations located near the Company.

Principle II: The corporate governance framework

The corporate governance framework should ensure the strategic guidance of the company, the effective oversight of the company's management bodies, an appropriate balance and distribution of functions between the company's bodies, protection of the shareholders' interests.

2.1. Besides obligatory bodies provided for in	Yes	The Company has set up a collegial supervisory body -
the Law on Companies of the Republic of		the Supervisory Board and a collegial management body
Lithuania – a general shareholders' meeting		- the Board of the Company. According to the decision
and the chief executive officer, it is		of the Supervisory Board, the advisory body of the
recommended that a company should set up		Supervisory Board, i.e. the Audit Committee, is formed
both a collegial supervisory body and a		within the Company.

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
collegial management body. The setting up of collegial bodies for supervision and management facilitates clear separation of management and supervisory functions in the company, accountability and control on the part of the chief executive officer, which, in its turn, facilitate a more efficient and transparent management process.
2.2. A collegial management body is responsible for the strategic management of the company and performs other key functions of corporate governance. A collegial supervisory body is responsible for the effective supervision of the company's management bodies.	Yes	The Supervisory Board of the Company is responsible for the effective supervision of the activities of the Company's management bodies (it elects and recalls members of the Board; should the Company operate in the red it should discuss fitness of the members for the position; it supervises the activities of the Board and the Chief Executive Officer; submits proposals and comments to the General Meeting of Shareholders regarding the strategy of the Company's operation1 , the activities of the Board and the Chief Executive Officer; performs other activities attributed to it by the laws and other legal acts). The Board of the Company is responsible for the effective
		strategic management of the Company (approves the strategy of its operation2 ; approves the annual budget, annual policy plan and operational objectives, funds investment procedure, adopts the most relevant resolutions provided for by the legal acts regarding corporate governance framework, significant transactions, realization of rights of the Legal Entity's member within the companies under control, different commitments, etc.).
		The Company's Audit Committee performs separate supervisory functions assigned by the Supervisory Board (monitors and supervises the preparation of Company's financial reports and the processes of the audit, carries the analysis of the systems for the internal control and risk management, ensures the existing system for internal control and risk management).
2.3. Where a company chooses to form only one collegial body, it is recommended that it should be a supervisory body, i.e. the supervisory board. In such a case, the supervisory board is responsible for the effective monitoring of the functions performed by the company's chief executive officer.	Yes	The Company has set up a collegial supervisory body - the Supervisory Board and a collegial management body - the Board of the Company.

¹The competence of the supervisory board is specified in the articles of the Company. As to the Law on Stock Companies, approved on 28 November 2017, the strategy of the company is approved and submitted by the supervisory board of a company, the implementation of approved strategy is analysed and information submitted to the ordinary general meeting of shareholders.

² The competence of the supervisory board is specified in the articles of the Company. As to the Law on Stock Companies, approved on 28 November 2017, the board of the companies, which has a formed supervisory board, analyses and assesses the project of company's strategy and information of implementation of the strategy, which is provided to the supervisory board by the head of the company.

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
2.4. The collegial supervisory body to be elected by the general shareholders' meeting should be set up and should act in the manner defined in Principles III and IV. Where a company should decide not to set up a collegial supervisory body but rather a collegial management body, i.e. the board, Principles III and IV should apply to the board as long as that does not contradict the essence and	Yes	The Company has set up a collegial supervisory body - the Supervisory Board. The internal regulations for election of collegial body the Supervisory Board by the Company's shareholders meeting are set in the way ensuring: minor shareholders' interests are properly represented, this body accountability to the shareholders and objective supervision of the Company's activity and its managing bodies.
purpose of this body.		The management system of the Company ensures that collegial supervisory body elected by the shareholders operates properly and effectively, and the rights assigned to it has to ensure effective supervision of the managing bodies and protection of the all shareholders interests.
2.5. Company's management and supervisory bodies should comprise such number of board	Yes	The Board of the Company is comprised of five members elected by the Supervisory Board3
(executive directors) and supervisory (non executive directors) board members that no individual or small group of individuals can dominate decision-making on the part of these bodies.		The Supervisory Board is comprised of three members elected by the General Meeting of Shareholders of the Company4
		The Audit Committee of the Company is comprised of three members elected by the Supervisory Board.
		None of the Company's management or supervisory bodies are comprised of that number of members that a separate person or group of persons could dominate them adopting the decisions.
2.6. Non-executive directors or members of the supervisory board should be appointed for specified terms subject to individual re-election, at maximum intervals provided for in the Lithuanian legislation with a view to ensuring necessary development of professional	Yes	The opportunity to recall both separate members of collegial bodies and the whole collegial body in corpore, before the end of the term of office is provided in the documents regulating activity of the management and supervisory bodies and the Company's Articles of Association.
experience and sufficiently frequent reconfirmation of their status. A possibility to remove them should also be stipulated however this procedure should not be easier than the removal procedure for an executive director or a member of the management board.		The Board members (one or all) have the right to recall the Supervisory Board, and the General Meeting of Shareholders has the right to recall the Supervisory Board members (one or all).
		The members of the Supervisory Board are elected for the maximum term of four years provided for in the Law on Companies of the Republic of Lithuania. There are no limitations for re-election of the members; however, the restrictions on the candidates to the Supervisory Board are applied according to the applicable legal acts ensuring an appropriate rotation of the members of these bodies, necessary development of their professional experience and rather often additional approval of their status.

³ Note: From the 1 January Member of Board responsibilities were acting 4 out of 5 Members of Board, since 24 January 2017 till 10 April 2017 all 5 members of the Board of the Company were acting, as established at the Articles of Association, and From the 11 April 2017 Member of Board responsibilities were acting 4 out of 5 Members of Board.

⁴21 April 2017, after the ordinary general meeting of the Company shareholder, the term of office of AB Klaipėdos nafta has ended as stated in the part 4 of the Republic of Lithuania Law on Stock Companies article 31. Members of Audit Committee term of office has also expired along with Supervisory Board term of office.

	Audit Committee corresponds to the term of office of the Supervisory Board by which it was elected and which can also recall members of the Audit committee before the
	end of the term of office.
	Thus, the procedure of recall of the members of the Company's supervisory bodies is not easier than the procedure of dismissal of the Company's Executive Director (General Manager) or the Board member.
Yes	The chairperson of the Company's Board and the Chief Executive Officer of the Company has not been the same person, however, the Chief Executive Officer of the Company has been a member of the Board of the Company, until the person was elected as a head of the Company (till 11 April 2017). The chairperson of the Company's Supervisory Board or its members has never been Board members or the General Managers of the Company.
	Principle III: The order of the formation of a collegial body to be elected by a general shareholders' meeting The order of the formation a collegial body to be elected by a general shareholders' meeting should ensure representation of minority shareholders, accountability of this body to the shareholders and objective monitoring

of the company's operation and its management bodies.
3.1. The mechanism of the formation of a collegial body to be elected by a general shareholders' meeting (hereinafter in this Principle referred to as the 'collegial body') should ensure objective and fair monitoring of the company's management bodies as well as representation of minority shareholders.	Yes	The collegial body of the Company is elected following the order established by the Law on Companies of the Republic of Lithuania and the Articles of Association of the Company. The selection of candidates to the Company's collegial body is carried out according to the selection of candidates to the collegial management or supervision body elected by the general shareholder meeting of a Company, managed by a state or municipality procedure No. 631, approved by The Government of the Republic of Lithuania on 17 June, 2015. Additional, candidates for the members of the collegial body elected by the General Meeting of Shareholders, according to the procedures defined, can be delegated by all shareholders holding the amount of shares giving them not less than 1/20 of the total votes.
3.2. Names and surnames of the candidates to become members of a collegial body, information about their education, qualification, professional background, positions taken and potential conflicts of interest should be disclosed early enough before the general	Yes	Information about the candidates to become members of a collegial body is presented in advance publishing this information on the website of AB Nasdaq Vilnius before the General Meeting of Shareholders or publishing it during the meeting for the shareholders participating in the General Meeting of Shareholders if the shareholders

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
shareholders' meeting so that the shareholders would have sufficient time to make an informed voting decision. All factors affecting the candidate's independence, the sample list of which is set out in Recommendation 3.7, should be also disclosed. The collegial body should also be informed on any subsequent changes in the provided information. The collegial body should, on yearly basis, collect data provided in this item on its members and disclose this in the company's annual report.		holding the amount of shares giving them not less than 1/20 of the total votes delegate the additional candidate for the members of Company's Bodies during the meeting. All members of the collegial bodies must immediately inform the body by which they were appointed (elected) of any new circumstances that may lead to the conflict of interest, and for this purpose they submit declarations about the absence of conflict of interest and are obliged to immediately inform the body by which they were elected of any new circumstances that may lead to the conflict of interest.
		The Company informs the public of the positions by the collegial body in its annual and six month interim report in order that the Company's shareholders and interested persons be informed of the important changes of the members of the Company's bodies.
3.3. Should a person be nominated for members of a collegial body, such nomination should be followed by the disclosure of information on candidate's particular competences relevant to his/her service on the collegial body. In order shareholders and investors are able to ascertain whether member's competence is further relevant, the collegial body should, in its annual report,	Yes	All applicants for the Company's collegial body members shall in advance submit their CVs and declarations of interests to the Company's body that elects them. The objective is that the skills of a particular candidate were related directly to the work in the correspondent collegial body. The information about the composition of the Company's collegial bodies and the competences of their members are publicly disclosed to the shareholders in AB Nasdaq
disclose the information on its composition and particular competences of individual members which are relevant to their service on the collegial body.		Vilnius Stock Exchange website (in 2017 there were no changes in the Audit committee, which is concluded by the collegial supervising bodies), AB Klaipėdos nafta web page (www.kn.lt) and also 2017 annual report of the year. Investors' relations tools are to be developed further regarding these questions.
3.4 In order to maintain a proper balance in terms of the current qualifications possessed by its members, the desired composition of the collegial body shall be determined with regard to the company's structure and activities, and have this periodically evaluated. The collegial body should ensure that it is composed of members who, as a whole, have the required diversity of knowledge, judgment and experience to complete their tasks properly. The members of the audit committee, collectively, should have a recent knowledge and relevant experience in the fields of finance, accounting and/or audit for the stock exchange listed companies. At least one of the members of the remuneration committee should have knowledge of and experience in the field of remuneration policy.	Yes	The collegial body ensures that its members are competent. During the year 2017, the collegial body has executed an evaluation of its activity and approved the plan of improvement of collegial supervising body activity. The Company ensures the diversity of knowledge, opinions and experience in the composition of the collegial supervising bodies by including the independent members with relevant knowledge and experience. The members of the Company's Audit Committee are appointed questioning if Audit Committee, acting collegially, shall has recent knowledge and experience in the fields of finance and accounting, and (or) audit in the companies listed on the regulated market.

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
3.5. All new members of the collegial body should be offered a tailored program focused on introducing a member with his/her duties, corporate organization and activities. The collegial body should conduct an annual review to identify fields where its members need to	Not applicable	The members of the collegial body are regularly informed at its meetings and individually if required about the Company's operation and its changes, about the essential changes of the legal acts, regulating the Company's operation, and of other circumstances influencing its operation.
update their skills and knowledge.		Up to now there has been neither need nor practice in the Company to offer a special tailored program focused on introducing all new members of the Supervisory Board with their duties, corporate organization and activities and to organize annual examinations. However, the Company's chief executive officers personally inform and introduce the Company's organization and activity to the new members of the collegial bodies.
3.6. In order to ensure that all material conflicts of interest related with a member of the collegial body are resolved properly, the collegial body should comprise a sufficient number of independent members.	Yes	Since more than 70 per cent of the Company's shares are owned by the State represented by the Ministry of Economy of the Republic of Lithuania, the major part of the members of the Supervisory Board are elected by the General Meeting of Shareholders taking into account interests of the controlling shareholder. The Company's Articles of Association provide that, at least 2 of the Supervisory Board members shall be independent, as well as that at least one member of the Audit Committee shall be independent.
		During the year under review, the Company's Board had 2 independent members (out of 4 acting member), Audit Committee had 3 independent members (out of 3), and the Supervisory Board had 2 independent member (out of 3).

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
3.7. A member of the collegial body should be considered to be independent only if he is free of any business, family or other relationship with the company, its controlling shareholder or the management of either, that creates a conflict of interest such as to impair his judgment. Since all cases when member of the collegial body is likely to become dependent are impossible to list, moreover, relationships and circumstances associated with the determination of independence may vary amongst companies and the best practices of solving this problem are yet to evolve in the course of time, assessment of independence of a member of the collegial body should be based on the contents of the relationship and circumstances rather than their form. The key criteria for identifying whether a member of the collegial body can be considered to be independent are the following: 1) He/she is not an executive director or member of the board (if a collegial body elected by the general shareholders' meeting is the supervisory board) of the company or any associated company and has not been such during the last five years; 2) He/she is not an employee of the company or some any company and has not been such during the last three years, except for cases when a member of the collegial body does not belong to the senior management and was elected to the collegial body as a representative of the employees; 3) He/she is not receiving or has been not receiving significant additional remuneration from the company or associated company other than remuneration for the office in the collegial body. Such additional remuneration includes participation in share options or some other performance based pay systems; it does not include compensation payments for the previous office in the company (provided that such payment is no way related with later position) as per pension plans (inclusive of deferred compensations); 4) He/she is not a controlling shareholder or representative of such shareholder (control as defined in the Council Directive 83/349/EEC Article 1 Part 1); 5) He/she does not have and did not have any material business relations with the company or associated company within the past year directly or as a partner, shareholder, director or superior employee of the subject having such relationship. A subject is considered to have business relations when it is a major supplier or service provider (inclusive of financial, legal, counselling and	Yes	The criteria of independence of the collegial bodies have not been determined in the documents of the operation of the Company's collegial bodies, however, the appointment of the independent members for collegial bodies is governed by the applicable requirements of legal act, including the requirements of the Governance Code of the companies listed on the regulated market by SC Nasdaq Vilnius. In determining whether an audit committee member may be independent, the main criteria are applied that were established by the Independence Criteria defined by the Requirement for Audit Committees that were approved by the Resolution No. 03-14 of the Board of the Bank of Lithuania on 24 January 2017. The independent members of the collegial supervising bodies are also appointed (elected) in compliance with the provisions of the selection of candidates to the collegial management or supervision body elected by the general shareholder meeting of a company, managed by a state or municipality procedure No. 631, approved by The Government of the Republic of Lithuania on 17 June, 2015. In order to evaluate the independence of the candidates for the Company's collegial bodies, all candidates shall submit their declarations of interest to the appointing (electing) body and shall immediately inform the body by which they were appointed (elected) of any new circumstances that may lead to the conflict of interest of the collegial body and the Company. The independent members of the Company's Board and Audit Committee comply with all the criteria provided, moreover, according to the criteria provided, it can be stated that independent member of the Company's Supervisory Board member complies with the criteria of independence, such evaluation of independence basing on the relation and circumstance content but not the form.

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
consulting services), major client or organization receiving significant payments from the company or its group;
6) He/she is not and has not been, during the last three years, partner or employee of the current or former external audit company of the company or associated company;
7) He/she is not an executive director or member of the board in some other company where executive director of the company or member of the board (if a collegial body elected by the general shareholders' meeting is the supervisory board) is non-executive director or member of the supervisory board, he/she may not also have any other material relationships with executive directors of the company that arise from their participation in activities of other companies or bodies;
8) He/she has not been in the position of a member of the collegial body for over than 12 years;
9) He/she is not a close relative to an executive director or member of the board (if a collegial body elected by the general shareholders' meeting is the supervisory board) or to any person listed in above items 1 to 8. Close relative is considered to be a spouse (common-law spouse), children and parents.
3.8. The determination of what constitutes independence is fundamentally an issue for the collegial body itself to determine. The collegial body may decide that, despite a particular member meets all the criteria of independence laid down in this Code, he cannot be considered independent due to special personal or company-related circumstances.	Yes	Refer to the comment regarding the item 3.7 above. In addition, the concept of the independence of the member of the Company's collegial body is defined in the documents governing the activities of the Company's collegial bodies and in the Company's Articles of Association. The selection of candidates to the Company's collegial body is carried out according to the selection of candidates to the collegial management or supervision body elected by the general shareholder meeting of a company, managed by a state or municipality procedure No. 631, approved by The Government of the Republic of Lithuania on 17 June, 2015.
3.9. Necessary information on conclusions the collegial body has come to in its determination of whether a particular member of the body should be considered to be independent should be disclosed. (When a person is nominated to become a member of the collegial body, the company should disclose whether it considers the person to be independent.) When a particular member of the collegial body does not meet one or more criteria of independence set out in this Code, the company should disclose its reasons for nevertheless	Not applicable	Refer to the comment submitted regarding the item 3.6 above. The Company has not yet applied in practice disclosure of the criteria of independence of the members of collegial bodies set out in the Code.

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
considering the member to be independent. In addition, the company should annually disclose which members of the collegial body it considers to be independent.
3.10. When one or more criteria of independence set out in this Code has not been met throughout the year, the company should disclose its reasons for considering a particular member of the collegial body to be independent. To ensure accuracy of the information disclosed in relation with the independence of the members of the collegial body, the company should require independent members to have their independence periodically re-confirmed.	Yes	There have not so far been such cases in the Company that would result in the need to apply the provided evaluation of the independence of the members of collegial bodies and to publish such information.
		The Company regularly specify in its published periodical reports the relation of the Company's collegial bodies to the Company, as well as information about possession (absence) of the Company's shares
		The documents governing the activities of the Company's collegial bodies obliges all members of collegial bodies to inform the body which elected them and the Company immediately of any new circumstances that may lead to the conflict of interest between them and the Company.
3.11. In order to remunerate members of a collegial body for their work and participation in the meetings of the collegial body, they may be remunerated from the company's funds. The general shareholders' meeting should approve the amount of such remuneration.	Yes	Some of the members of the collegial body are remunerated from the Company's funds for their participation and work in the meetings with a fixed monthly remuneration.
		The size and procedures of the reward for the independent members of the Board and Audit Committee is regulated by the corresponding decisions of the Supervisory Board.
		The General Meeting of Shareholders has a right to reward (pay tantiemes) the work of independent members of the Supervisory board members for their work participation in the meetings of the Supervisory but only using the net profit and in compliance with applicable legal acts and the Company's Articles of Association.

Principle IV: The duties and liabilities of a collegial body elected by the general shareholders' meeting

The corporate governance framework should ensure proper and effective functioning of the collegial body elected by the general shareholders' meeting, and the powers granted to the collegial body should ensure effective monitoring of the company's management bodies and protection of interests of all the company's shareholders.

4.1. The collegial body elected by the general	Yes	The Company's Board approves the business
shareholders' meeting (hereinafter in this Principle		strategy5 of Company's activities, annual budget and
referred to as the 'collegial body') should ensure		business plan, annual report, the order of
integrity and transparency of the company's		investments of the Company's funds and order and
financial statements and the control system. The		the amendments to the documents listed. The
collegial body should issue recommendations to		Company's Board also analyses and evaluates the
the company's management bodies and monitor		implementation of the Company's strategy,
and control the company's management		organization of activities, the company's financial
performance.		condition, results of business activities, and other

5 See Note 4

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
		significant information.
		In addition, the Board analyses and evaluates the Company's financial statements and the profit (loss) of the draft report and, after the Board approval, takes decisions on these projects and the submission of the Company's annual report to the Supervisory Board and the General Meeting of Shareholders.
		The Board regularly analyses and assesses financial status of the Company, as well as periodic financial results, submits recommendations on the appropriate management of the Company to the Company's managing bodies and adopts other decisions, as provided in the Law on Companies of the Republic of Lithuania.
4.2. Members of the collegial body should act in good faith, with care and responsibility for the benefit and in the interests of the company and its shareholders with due regard to the interests of employees and public welfare. Independent members of the collegial body should (a) under all circumstances maintain independence of their analysis, decision-making and actions (b) do not seek and accept any unjustified privileges that might compromise their independence, and (c) clearly express their objections should a member consider that decision of the collegial body is against the interests of the company. Should a collegial body have passed decisions independent member has serious doubts about, the member should make adequate conclusions. Should an independent member resign from his office, he should explain the reasons in a letter addressed to the collegial body or audit committee and, if necessary, respective company-not-pertaining body (institution).	Yes	According to the information available to the Company all the members of the collegial body act in good faith for the benefit and in the interests of the Company but not in their own or third parties' interests seeking to maintain their independence in decision-making, as well as taking into account employees' interests and public welfare. Independent members maintain their analyses, as well as independence in decision-making, and acting.
4.3. Each member should devote sufficient time and attention to perform his duties as a member of the collegial body. Each member of the collegial body should limit other professional obligations of his (in particular any directorships held in other companies) in such a manner they do not interfere with proper performance of duties of a member of the collegial body. In the event a member of the collegial body should be present in less than a half of the meetings of the collegial body throughout the financial year of the company, shareholders of the company should be notified.	Yes	The members of the collegial body duly perform their functions: they actively attend the meetings and devote sufficient time and attention to perform their duties as members of the collegial body. The members of the collegial bodies actively participate in the ongoing meetings both directly and voting in advance in written or by telecommunication means. During the year under review, neither of the Company's collegial bodies missed so many meetings that hence it would have participated less than in the half of the meetings of the respective collegial body.

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
4.4. Where decisions of a collegial body may have a different effect on the company's shareholders, the collegial body should treat all shareholders impartially and fairly. It should ensure that shareholders are properly informed on the company's affairs, strategies, risk management and resolution of conflicts of interest. The company should have a clearly established role of members of the collegial body when communicating with and committing to shareholders.	Yes	The Company follows the stated recommendations. The members of the collegial body before making decisions, the criteria of which have been determined in the Articles of Association of the Company, discuss their possible effect on the shareholders. The Company's Articles of Association obliges the Company's collegial bodies, and each of their members to operate beneficially for the Company's shareholders. The Board is accountable to the Supervisory Board and the General Meeting of Shareholders. According to the Company's Articles of Association, in certain cases the most important decisions of the Company shall be taken only after the decision of the Board of the Company is approved by the General Meeting of Shareholders. All information regarding insider information related to the Company's activity are publicly available according to the procedure prescribed by law for the Company's shareholders on the website of SC Nasdaq Vilnius Stock Exchange and in official website of the Company. Additional informing of the shareholders except that provided in the legal acts is not carried.
4.5. It is recommended that transactions (except insignificant ones due to their low value or concluded when carrying out routine operations in the company under usual conditions), concluded between the company and its shareholders, members of the supervisory or managing bodies or other natural or legal persons that exert or may exert influence on the company's management should be subject to approval of the collegial body. The decision concerning approval of such transactions should be deemed adopted only provided the majority of the independent members of the collegial body voted for such a decision.	Yes	According to the general practice of the Company, the majority of the independent members of the collegial bodies vote for the conclusion of corresponding contracts.
4.6. The collegial body should be independent in passing decisions that are significant for the company's operations and strategy. Taken separately, the collegial body should be independent of the company's management bodies6 . Members of the collegial body should act and pass decisions without an outside influence from the persons who have elected it. Companies should ensure that the collegial body and its committees are provided with sufficient administrative and financial resources to discharge their duties, including the right to obtain, in particular from employees of the company, all the necessary information or to seek independent legal,	Yes	The Company's collegial bodies are independent from the Company's managing bodies and, according to the Company's data, remain independent while adopting the decisions affecting the Company's activity and strategies The Company's collegial bodies are provided with all the necessary resources including the right to approach and receive consultations by third parties on the issues that fall under the collegial body's or (and) its committees' competence.

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
accounting or any other advice on issues pertaining to the competence of the collegial body and its committees. When using the services of a consultant with a view to obtaining information on market standards for remuneration systems, the remuneration committee should ensure that the consultant concerned does not at the same time advice the human resources department, executive directors or collegial management organs of the company concerned. 4.7. Activities of the collegial body should be	Yes	The advisory body, i.e. Audit Committee, elected by
organized in a manner that independent members of the collegial body could have major influence in relevant areas where chances of occurrence of conflicts of interest are very high. Such areas to be considered as highly relevant are issues of nomination of company's directors, determination of directors' remuneration and control and assessment of company's audit. Therefore when the mentioned issues are attributable to the competence of the collegial body, it is recommended that the collegial body should establish nomination, remuneration, and audit committees. Companies should ensure that the functions attributable to the nomination, remuneration, and audit committees are carried out. However they may decide to merge these		the Supervisory Body is formed within the Company. The Supervisory Body determined its functions, rights, obligations and remuneration procedure. The Company's Audit Committee has been assigned with advisory functions related to the audit control and assessment and covering supervision of financial reports preparation and audit execution process, examination of its effectiveness and implementation of recommendations, analysis of need of internal audit functions and other functions, as provided by the Resolution No. 03-14 of the Board of the Bank of Lithuania on 24 January 2017, observes the integrity of the financial information provided by the Company, paying special attention to the relevance and transparency of the accounting methods used by the Company and its group.
functions and set up less than three committees. In such case a company should explain in detail reasons behind the selection of alternative approach and how the selected approach complies with the objectives set forth for the three different committees. Should the collegial body of the company comprise small number of members, the functions assigned to the three committees may be performed by the collegial body itself, provided that it meets composition requirements advocated for the committees and that adequate information is provided in this respect. In such case provisions of this Code relating to the committees of the collegial body (in particular with respect to their role, operation, and transparency) should apply, where relevant, to the collegial body as a whole.		Other specialized committees are not established within the Company, however collegial management body, i.e. the Company's Board, is responsible for the issues related to the appointment of the Company's directors and determination of the remuneration for the Company's directors. The Board appoints and dismisses the Company's Chief Executive Officer, regularly evaluates skills, knowledge and experience of other Company's directors; discusses general application policy of remuneration (including stimulation) systems; determines remuneration of all Company's management personnel as it is defined in the Description of the Company's the highest Management Structure (or in the list of staff positions) approved by the Board and its bonus procedure. According to the practice established within the
		Company, the majority of independent Board members vote for the adoption of the decisions on the relative issues.
4.8. The key objective of the committees is to increase efficiency of the activities of the collegial body by ensuring that decisions are based on due consideration, and to help organize its work with a view to ensuring that the decisions it takes are free	Yes	The advisory body, i.e. Audit Committee, consist of three members.

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
of material conflicts of interest. Committees should exercise independent judgement and integrity when exercising its functions as well as present the collegial body with recommendations concerning the decisions of the collegial body. Nevertheless the final decision shall be adopted by the collegial body. The recommendation on creation of committees is not intended, in principle, to constrict the competence of the collegial body or to remove the matters considered from the purview of the collegial body itself, which remains fully responsible for the decisions taken in its field of competence.
4.9. Committees established by the collegial body should normally be composed of at least three members. In companies with small number of members of the collegial body, they could exceptionally be composed of two members. Majority of the members of each committee should be constituted from independent members of the collegial body. In cases when the company chooses not to set up a supervisory board, remuneration and audit committees should be entirely comprised of non-executive directors. Chairmanship and membership of the committees should be decided with due regard to the need to ensure that committee membership is refreshed and that undue reliance is not placed on particular individuals. Chairmanship and membership of the committees should be decided with due regard to the need to ensure that committee membership is refreshed and that undue reliance is not placed on particular individuals.	Yes	Refer to the comment submitted regarding the item 4.7 above. The advisory body, the Audit Committee, formed by the Supervisory Board, comprises of three members. All of the acting members of Audit Committee were independent.
4.10. Authority of each of the committees should be determined by the collegial body. Committees should perform their duties in line with authority delegated to them and inform the collegial body on their activities and performance on regular basis. Authority of every committee stipulating the role and rights and duties of the committee should be made public at least once a year (as part of the information disclosed by the company annually on its corporate governance structures and practices). Companies should also make public annually a statement by existing committees on their composition, number of meetings and attendance over the year, and their main activities. Audit committee should confirm that it is satisfied with the independence of the audit process and describe briefly the actions it has taken to reach this conclusion.	Yes	Refer to the comment submitted regarding the item 4.7 above. The documents of the operation of the Company determine that the Audit Committee has to regularly (at least two times per year) inform the Supervisory Board about its operation, and to provide the Supervisory Board with its operation report one time per year. The main information about the Company's Audit Committee and its composition is published in the Company's annual report (governance report).

PRINCIPLES / RECOMMENDATIONS	Yes and No	COMMENTARY
	Not applicable
4.11. In order to ensure independence and impartiality of the committees, members of the collegial body that are not members of the committee should commonly have a right to participate in the meetings of the committee only if invited by the committee. A committee may invite or demand participation in the meeting of particular officers or experts. Chairman of each of the committees should have a possibility to maintain direct communication with the shareholders. Events when such are to be performed should be specified in the regulations for committee activities.	Yes	Refer to the comment submitted regarding the item 4.7 above. The documents of the operation of the Company provide the right for the members of the Audit Committee according to the need to invite at its discretion to its meetings the Company's responsible persons and receive from them necessary explanations. The system of anonymous postings about the violations done in the Company is also provided and introduced in the Company.
4.12. Nomination Committee.	Yes	The documents of the operation of the Company
4.12.1. Key functions of the nomination committee		provide the right for the purpose of members of Board to create Nomination committee.
should be the following: 1) Identify and recommend, for the approval of the collegial body, candidates to fill board vacancies. The nomination committee should evaluate the balance of skills, knowledge and experience on the management body, prepare a description of the roles and capabilities required to assume a particular office, and assess the time commitment expected. Nomination committee can also consider candidates to members of the collegial body delegated by the shareholders of the company; 2) Assess on regular basis the structure, size, composition and performance of the supervisory and management bodies, and make recommendations to the collegial body regarding the means of achieving necessary changes; 3) Assess on regular basis the skills, knowledge and experience of individual directors and report on this to the collegial body; 4) Properly consider issues related to succession planning; 5) Review the policy of the management bodies for selection and appointment of senior management. 4.12.2. Nomination committee should consider proposals by other parties, including management and shareholders. When dealing with issues related to executive directors or members of the board (if a		For the purpose of one-off selection of candidates for Company's independent Members of Board Nomination committee was created on 16 September 2016 by the Supervisory Board. Nomination committee functions were determined by Nominated committee work regulations confirmed of Supervisory Board. Members and experts of Nomination committee select Supervisory Board. By the Supervisory board approved competency requirements for the candidates, Nomination committee prepare and approve candidates for Company's independent Members of Board nomination description, publish and carries public candidates nomination, analyses, assess and consider candidates applications and documents, organize and coordinate conversations with candidates and also nominate candidates to the independent Members of Board, offered for the Supervisory Board.
collegial body elected by the general shareholders' meeting is the supervisory board) and senior management, chief executive officer of the company should be consulted by, and entitled to submit proposals to the nomination committee.

PRINCIPLES / RECOMMENDATIONS	Yes and No	COMMENTARY
	Not applicable
4.13. Remuneration Committee. 4.13.1. Key functions of the remuneration committee should be the following:	Not applicable	Refer to the comment submitted regarding the item 4.7 above.
1) Make proposals, for the approval of the collegial body, on the remuneration policy for members of management bodies and executive directors. Such policy should address all forms of compensation, including the fixed remuneration, performance based remuneration schemes, pension arrangements, and termination payments. Proposals considering performance-based remuneration schemes should be accompanied with recommendations on the related objectives and evaluation criteria, with a view to properly aligning the pay of executive director and members of the management bodies with the long-term interests of the shareholders and the objectives set by the collegial body;
2) Make proposals to the collegial body on the individual remuneration for executive directors and member of management bodies in order their remunerations are consistent with company's remuneration policy and the evaluation of the performance of these persons concerned. In doing so, the committee should be properly informed on the total compensation obtained by executive directors and members of the management bodies from the affiliated companies;
3) Ensure that remuneration of individual executive directors or members of management body is proportionate to the remuneration of other executive directors or members of management body and other staff members of the company;
4) Periodically review the remuneration policy for executive directors or members of management body, including the policy regarding share-based remuneration, and its implementation;
5) Make proposals to the collegial body on suitable forms of contracts for executive directors and members of the management bodies;
6) Assist the collegial body in overseeing how the company complies with applicable provisions regarding the remuneration-related information disclosure (in particular the remuneration policy applied and individual remuneration of directors);
7) Make general recommendations to the executive directors and members of the management bodies on the level and structure of remuneration for senior management (as defined by the collegial body) with regard to the respective information provided by the executive directors and members

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
of the management bodies.
4.13.2. With respect to stock options and other share-based incentives which may be granted to directors or other employees, the committee should:
1) Consider general policy regarding the granting of the above mentioned schemes, in particular stock options, and make any related proposals to the collegial body;
2) Examine the related information that is given in the company's annual report and documents intended for the use during the shareholders meeting;
3) Make proposals to the collegial body regarding the choice between granting options to subscribe shares or granting options to purchase shares, specifying the reasons for its choice as well as the consequences that this choice has.
4.13.3. Upon resolution of the issues attributable to the competence of the remuneration committee, the committee should at least address the chairman of the collegial body and/or chief executive officer of the company for their opinion on the remuneration of other executive directors or members of the management bodies.
4.13.4. The remuneration committee should report on the exercise of its functions to the shareholders and be present at the annual general meeting for this purpose.
4.14. Audit Committee.	Yes	Refer to the comments submitted regarding the
4.14.1. Key functions of the audit committee should be the following:		items 4.7 - 4.10 above.
1) Observe the integrity of the financial information provided by the company, in particular by reviewing the relevance and consistency of the accounting methods used by the company and its group (including the criteria for the consolidation of the accounts of companies in the group);
2) At least once a year review the systems of internal control and risk management to ensure that the key risks (inclusive of the risks in relation with compliance with existing laws and regulations) are properly identified, managed and reflected in the information provided;
3) Ensure the efficiency of the internal audit function, among other things, by making recommendations on the selection, appointment, reappointment and removal of the head of the internal audit department and on the budget of the department, and by monitoring the responsiveness

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
of the management to its findings and recommendations. Should there be no internal audit authority in the company, the need for one should be reviewed at least annually;
4) Make recommendations to the collegial body related with selection, appointment, reappointment and removal of the external auditor (to be done by the general shareholders' meeting) and with the terms and conditions of his engagement. The committee should investigate situations that lead to a resignation of the audit company or auditor and make recommendations on required actions in such situations;
5) Monitor independence and impartiality of the external auditor, in particular by reviewing the audit company's compliance with applicable guidance relating to the rotation of audit partners, the level of fees paid by the company, and similar issues. In order to prevent occurrence of material conflicts of interest, the committee, based on the auditor's disclosed inter alia data on all remunerations paid by the company to the auditor and network, should at all times monitor nature and extent of the non audit services. Having regard to the principals and guidelines established in the 16 May 2002 Commission Recommendation 2002/590/EC, the committee should determine and apply a formal policy establishing types of non-audit services that are (a) excluded, (b) permissible only after review by the committee, and (c) permissible without referral to the committee;
6) Review efficiency of the external audit process and responsiveness of management to recommendations made in the external auditor's management letter.
4.14.2. All members of the committee should be furnished with complete information on particulars of accounting, financial and other operations of the company. Company's management should inform the audit committee of the methods used to account for significant and unusual transactions where the accounting treatment may be open to different approaches. In such case a special consideration should be given to company's operations in offshore centers and/or activities carried out through special purpose vehicles (organizations) and justification of such operations.
4.14.3. The audit committee should decide whether participation of the chairman of the collegial body, chief executive officer of the company, chief financial officer (or superior employees in charge of finances, treasury and accounting), or internal and external auditors in the meetings of the committee

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
is required (if required, when). The committee should be entitled, when needed, to meet with any relevant person without executive directors and members of the management bodies present.
4.14.4. Internal and external auditors should be secured with not only effective working relationship with management, but also with free access to the collegial body. For this purpose the audit committee should act as the principal contact person for the internal and external auditors.
4.14.5. The audit committee should be informed of the internal auditor's work program, and should be furnished with internal audit's reports or periodic summaries. The audit committee should also be informed of the work program of the external auditor and should be furnished with report disclosing all relationships between the independent auditor and the company and its group. The committee should be timely furnished information on all issues arising from the audit.
4.14.6. The audit committee should examine whether the company is following applicable provisions regarding the possibility for employees to report alleged significant irregularities in the company, by way of complaints or through anonymous submissions (normally to an independent member of the collegial body), and should ensure that there is a procedure established for proportionate and independent investigation of these issues and for appropriate follow-up action.
4.14.7. The audit committee should report on its activities to the collegial body at least once in every six months, at the time the yearly and half-yearly statements are approved.
4.15. Every year the collegial body should conduct the assessment of its activities. The assessment	Yes	Refer to the comment submitted regarding the item 3.4 above
should include evaluation of collegial body's structure, work organization and ability to act as a group, evaluation of each of the collegial body member's and committee's competence and work efficiency and assessment whether the collegial body has achieved its objectives. The collegial body		The internal documents of the Company do not directly provide for a separate assessment for the collegial body, acting the supervision functions, activities because it was not required by the legal acts of the Republic of Lithuania.
should, at least once a year, make public (as part of the information the company annually discloses on its management structures and practices) respective information on its internal organization and working procedures, and specify what material		In the year 2017 collegial supervising body of the Company have carried out its activity assessment and adopted an improvement plan of collegial supervising body activity.
changes were made as a result of the assessment of the collegial body of its own activities.		Started from 12 June 2015, the Board of the Company performs annual assessment of its activity.
		The assessment is designed to evaluate organizational, teamwork, skills, competencies and performance efficiency aspects and whether the set

PRINCIPLES / RECOMMENDATIONS	Yes and No	COMMENTARY
	Not applicable
		goals have been achieved,
		Information about the collegial bodies' organization itself and activity procedures are disclosed periodically in the annual (governance) report.
		The Company sets the goal for 2018 to improve more the information announcement procedures of Company's internal organization indicating what essential changes were made based on the self assessment results.
Principle V: The working procedure of the company's collegial bodies
operation of these bodies and decision-making and encourage active co-operation between the company's bodies.		The working procedure of supervisory and management bodies established in the company should ensure efficient
5.1. The company's supervisory and management bodies (hereinafter in this Principle the concept 'collegial bodies' covers both the collegial bodies of supervision and the collegial bodies of management) should be chaired by chairpersons of these bodies. The chairperson of a collegial body is	Yes	A chairperson of the collegial body of supervision - the Supervisory Board and a chairperson of the collegial body of management - the Board implement this provision in the Company.
responsible for proper convocation of the collegial body meetings. The chairperson should ensure that information about the meeting being convened and its agenda are communicated to all members of the body. The chairperson of a collegial body should ensure appropriate conducting of the meetings of the collegial body. The chairperson should ensure order and working atmosphere during the meeting.		In 2017 there was no chairperson of the Board, therefore, every time one of the Board members is elected as the chairperson of the Board under the principle ad hoc. The Company's Chief Executive Officer was four times elected as the chairperson of the meeting ad hoc.
5.2. It is recommended that meetings of the company's collegial bodies should be carried out according to the schedule approved in advance at certain intervals of time. Each company is free to decide how often to convene meetings of the collegial bodies, but it is recommended that these meetings should be convened at such intervals, which would guarantee an interrupted resolution of the essential corporate governance issues. Meetings of the company's supervisory board should be convened at least once in a quarter, and the company's board should meet at least once a month.	Yes	The documents of the operation of the Company provides that the meetings of the Company's Supervisory Board are convened at least once in a quarter according to need, and the ordinary meetings of the Company's Board are carried out according to the schedule approved by the Board, which during the reporting period provided frequency of the Board meetings, i.e. once in a calendar month or more often, thereby ensuring continuous solution of the essential Company's management issues.
5.3. Members of a collegial body should be notified about the meeting being convened in advance in order to allow sufficient time for proper preparation for the issues on the agenda of the meeting and to ensure fruitful discussion and adoption of appropriate decisions. Alongside with the notice about the meeting being convened, all the documents relevant to the issues on the agenda of the meeting should be submitted to the members of the collegial body. The agenda of the meeting should not be changed or supplemented during the meeting, unless all members of the collegial body	Yes	The Company observes provisions stated in this recommendation. The members of the collegial body together with the convocation to the meeting receive a notice on the agenda of the meeting convened. According to the procedure and the terms provided in the documents of the operation of the Company, the Company's collegial bodies receive according to the set form written information about the matter under consideration when the decision is adopted, and when information is submitted only to collegial body's knowledge – on

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
are present or certain issues of great importance to the company require immediate resolution.		demand. In the Company's practice, the meeting agenda during the meeting is changed and supplemented only in cases when all members of the collegial body participate in the meeting and it is necessary to immediately solve important Company's issues and all members of the collegial body agreed with this agenda change and supplement.
5.4. In order to co-ordinate operation of the company's collegial bodies and ensure effective decision-making process, chairpersons of the company's collegial bodies of supervision and management should closely co-operate by co coordinating dates of the meetings, their agendas and resolving other issues of corporate governance. Members of the company's board should be free to attend meetings of the company's supervisory board, especially where issues concerning removal of the board members, their liability or remuneration are discussed.	Yes	The Company observes provisions stated in this recommendation. If necessary, in the Company's determined practice, the general Company's management and supervision bodies' meetings are also convened.
Principle VI: The equitable treatment of shareholders and shareholder rights and foreign shareholders. The corporate governance framework should protect the rights of the shareholders.		The corporate governance framework should ensure the equitable treatment of all shareholders, including minority
6.1. It is recommended that the company's capital should consist only of the shares that grant the same rights to voting, ownership, dividend and other rights to all their holders.	Yes	The Company's capital consists of ordinary registered shares that grant the same rights to all their holders.
6.2. It is recommended that investors should have access to the information concerning the rights attached to the shares of the new issue or those issued earlier in advance, i.e. before they purchase shares.	Yes	The Company observes provisions stated in this recommendation.
6.3. Transactions that are important to the company and its shareholders, such as transfer, investment, and pledge of the company's assets or any other type of encumbrance should be subject to approval of the general shareholders' meeting. All shareholders should be furnished with equal opportunity to familiarize with and participate in the decision-making process when significant corporate issues, including approval of transactions referred to above, are discussed.	Yes	According to the Law on Companies of the Republic of Lithuania and Articles of Association all important transactions, and in set cases the key conditions of these transactions are approved by the Board, and also in cases prescribed by the Law on Companies an approval of the General Meeting of Shareholders is additionally received for such Board's decisions.
6.4. Procedures of convening and conducting a general shareholders' meeting should ensure equal opportunities for the shareholders to effectively participate at the meetings and should not prejudice the rights and interests of the shareholders. The venue, date, and time of the shareholders' meeting should not hinder wide	Yes	All the shareholders of the Company are informed about the venue, date and time of the General Meeting of Shareholders publicly in advance according to the procedure prescribed within the terms established by the legal acts publishing about the convened General Meeting of Shareholders, its agenda in the information disclosure system of SC

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
attendance of the shareholders.		Nasdaq Vilnius Stock Exchange and on the Company's website (www.kn.lt).
		Prior to the General Meeting of Shareholders all the shareholders of the Company are furnished with opportunity to receive information on the issues on the agenda of the General Meeting of Shareholders, to ask questions related to the agenda of the General Meeting of Shareholders, to receive answers to them.
6.5. If is possible, in order to ensure shareholders living abroad the right to access to the information, it is recommended that documents on the course of the general shareholders' meeting should be placed on the publicly accessible website of the company not only in Lithuanian language, but in English and /or other foreign languages in advance. It is recommended that the minutes of the general shareholders' meeting after signing them and/or adopted resolutions should be also placed on the publicly accessible website of the company. Seeking to ensure the right of foreigners to familiarize with the information, whenever feasible, documents referred to in this recommendation should be published in Lithuanian, English and/or other foreign languages. Documents referred to in this recommendation may be published on the publicly accessible website of the company to the extent that publishing of these documents is not	Yes	Within the terms set by the legal acts, the Company in advance publicly disclose the documents on the course of the General Meeting of Shareholders, including draft resolutions of the meeting, through the information disclosure system of SC Nasdaq Vilnius Stock Exchange and it is planned to place them constantly on the website of the Company www.kn.lt). The adopted decisions of the General Meeting of Shareholders are also disclosed through the information disclosure systems of SC Nasdaq Vilnius Stock Exchange and it is planned to place them constantly on the website of the Company (www.kn.lt). Information indicated and the documents are published in the information disclosure system of SC Nasdaq Vilnius Stock Exchange in Lithuanian and English languages.
detrimental to the company or the company's commercial secrets are not revealed.
6.6. Shareholders should be furnished with the opportunity to vote in the general shareholders' meeting in person and in absentia. Shareholders should not be prevented from voting in writing in advance by completing the general voting ballot.	Yes	The shareholders of the Company can implement their right to participate at the meeting of the shareholders both in person and through a representative should he be duly authorised according to the procedure established by the legal acts.
		The Company also furnishes its shareholders with the opportunity to vote in advance in written by completing and submitting to the Company the general voting ballot.
6.7. With a view to increasing the shareholders' opportunities to participate effectively at shareholders' meetings, the companies are recommended to expand use of modern technologies by allowing the shareholders to participate and vote in general meetings via electronic means of communication. In such cases security of transmitted information and a possibility to identify the identity of the participating and voting person should be guaranteed. Moreover, companies could furnish its shareholders, especially shareholders living abroad, with the opportunity to watch shareholder meetings by means of modern	Not applicable	Taking into account the structure of the shareholders (controlling interest is owned by the Government of the Republic of Lithuania) and the valid regulations for organisation of the meeting of shareholders ensuring full advance publication of the material of the General Meeting of Shareholders and publicity of the decisions adopted by the shareholders (publishing all this information on the website of SC Nasdaq Vilnius Stock Exchange) and the opportunity to vote in advance, there is no necessity to additionally install costly system of IT, which would give the opportunity for the shareholders to vote during the meeting of the

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
technologies.		shareholders using telecommunication terminal equipment.
Principle VII: The avoidance of conflicts of interest and their disclosure
the corporate bodies.		The corporate governance framework should encourage members of the corporate bodies to avoid conflicts of interest and assure transparent and effective mechanism of disclosure of conflicts of interest regarding members of
7.1. Any member of the company's supervisory and management body should avoid a situation, in which his/her personal interests are in conflict or may be in conflict with the company's interests. In case such a situation did occur, a member of the company's supervisory and management body should, within reasonable time, inform other	Yes	The members of the Company's supervisory and management bodies oblige to act in such a manner so as to avoid conflict of interests with the Company. This is determined in the Articles of Association of the Company and in other documents of operation of the Company.
members of the same collegial body or the company's body that has elected him/her, or to the company's shareholders about a situation of a conflict of interest, indicate the nature of the conflict and value, where possible.		For this purpose, the member of the Company's supervisory and management bodies submit to the Company's body that elected them and the Company the declarations about the absence of the conflict of interests and oblige to immediately inform about any change of the circumstances revealed in these declarations.
		Member of the Board of the Company, M. Jusius, after the decision to be designated as the head of the Company, withdrew himself from voting on questions, according to which the Board of the Company adopted decisions (on 29 March 2017). During the reporting period, there are no cases identified of conflict of interests between the Company and the member of its supervisory and management. A Member of Board M. Bartuška, since his appointment of AB Lietuvos geležinkeliai member of management body, he withdrew from voting at the Company's Board conferences considering about loading and other questions, related with oil terminal operations.
7.2. Any member of the company's supervisory and management body may not mix the company's assets, the use of which has not been mutually agreed upon, with his/her personal assets or use them or the information which he/she learns by virtue of his/her position as a member of a corporate body for his/her personal benefit or for the benefit of any third person without a prior agreement of the general shareholders' meeting or any other corporate body authorized by the meeting.	Yes	Refer to the comment submitted regarding the item 7.1 above.

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
7.3. Any member of the company's supervisory and management body may conclude a transaction with the company, a member of a corporate body of which he/she is. Such a transaction (except insignificant ones due to their low value or concluded when carrying out routine operations in the company under usual conditions) must be immediately reported in writing or orally, by recording this in the minutes of the meeting, to other members of the same corporate body or to the corporate body that has elected him/her or to the company's shareholders. Transactions specified in this recommendation are also subject to recommendation 4.5.	Yes	During the reporting period, the members of the Company's supervisory and management bodies concluded with the Company only the following transactions: non-disclosure agreement (obligations) and the independent members of the collegial bodies - also concerning remuneration for the work in the Company's collegial body according to the conditions established by the body that elected them. The General Manager of the Company has also concluded the Employment Contract with the Company under the conditions approved by the Company's Board. During the year under review, no other transactions between the Company and the members of its collegial bodies were concluded.
7.4. Any member of the company's supervisory and management body should abstain from voting when decisions concerning transactions or other issues of personal or business interest are voted on.	Yes	The members of the Company's Board have been familiarised with these provisions and they oblige to observe these recommendations. According to the practice established in the Company, the members of the Company's management and supervisory bodies withdraw both when the decisions adopted and in the cases when the transactions and (or) issues related to the member of the collegial body by personal or business interest are considered (as for information) in the collegial body. For detailed information refer to the comment in item 7.1 above.

Principle VIII: Company's remuneration policy

Remuneration policy and procedure for approval, revision and disclosure of directors' remuneration established in the company should prevent potential conflicts of interest and abuse in determining remuneration of directors, in addition it should ensure publicity and transparency both of company's remuneration policy and remuneration of directors.

8.1. A company should make a public statement of the company's remuneration policy (hereinafter the remuneration statement) which should be clear and easily understandable. This remuneration statement should be published as a part of the company's annual statement as well as posted on the company's website.	Yes	The Company has an approved employee remuneration policy, which has an aim to determine remuneration, promotion principles and procedure for all employees, including senior executives. The remuneration policy of Company is published to the employees of the Company. The information about the Company's accrued average monthly remuneration (including according to the different categories of the employee) during the year under review is published on the website www.kn.lt .
8.2. Remuneration statement should mainly focus on directors' remuneration policy for the following year and, if appropriate, the subsequent years. The statement should contain a summary of the implementation of the remuneration policy in the previous financial year. Special attention should be given to any significant changes in company's	Yes	Refer to the comment in item 8.1 above. (The Company's directors' remuneration policy for the subsequent years has been provided in the annual report.) The annual (governance) report contains information about the amount of money (or other compensations, if there was any) accrued for the members of the Company's bodies and

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
remuneration policy as compared to the previous financial year.		directors'.
8.3. Remuneration statement should leastwise include the following information:	Yes	The information is presented in the annual (governance) report.
1) Explanation of the relative importance of the variable and non-variable components of directors' remuneration;
2) Sufficient information on performance criteria that entitles directors to share options, shares or variable components of remuneration;
3) An explanation how the choice of performance criteria contributes to the long-term interests of the company;
4) An explanation of the methods, applied in order to determine whether performance criteria have been fulfilled;
5) Sufficient information on deferment periods with regard to variable components of remuneration;
6) Sufficient information on the linkage between the remuneration and performance;
7) The main parameters and rationale for any annual bonus scheme and any other non-cash benefits;
8) Sufficient information on the policy regarding termination payments;
9) Sufficient information with regard to vesting periods for share-based remuneration, as referred to in point 8.13 of this Code;
10) Sufficient information on the policy regarding retention of shares after vesting, as referred to in point 8.15 of this Code;
11) Sufficient information on the composition of peer groups of companies the remuneration policy of which has been examined in relation to the establishment of the remuneration policy of the company concerned;
12) A description of the main characteristics of supplementary pension or early retirement schemes for directors;
13) Remuneration statement should not include commercially sensitive information.

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
8.4. Remuneration statement should also summarize and explain company's policy regarding the terms of the contracts executed with executive directors and members of the management bodies. It should include, inter alia, information on the duration of contracts with executive directors and members of the management bodies, the applicable notice periods and details of provisions for termination payments linked to early termination under contracts for executive directors and members of the management bodies.	Yes	The information is presented in the annual (governance) report (if there was any such case).
8.5. Remuneration statement should also contain detailed information on the entire amount of remuneration, inclusive of other benefits, that was paid to individual directors over the relevant financial year. This document should list at least the information set out in items 8.5.1 to 8.5.4 for each person who has served as a director of the company at any time during the relevant financial year. 8.5.1. The following remuneration and/or	Yes	The information is presented in the annual (governance) report. However, information about remuneration is not provided for each director individually, though the average amount for all managing personnel is provided.
emoluments-related information should be disclosed: 1) The total amount of remuneration paid or due to the director for services performed during the relevant financial year, inclusive of, where relevant, attendance fees fixed by the annual general shareholders meeting;
2) The remuneration and advantages received from any undertaking belonging to the same group;
3) The remuneration paid in the form of profit sharing and/or bonus payments and the reasons why such bonus payments and/or profit sharing were granted;
4) If permissible by the law, any significant additional remuneration paid to directors for special services outside the scope of the usual functions of a director;
5) Compensation receivable or paid to each former executive director or member of the management body as a result of his resignation from the office during the previous financial year;
6) Total estimated value of non-cash benefits considered as remuneration, other than the items covered in the above points.

PRINCIPLES / RECOMMENDATIONS	Yes and No	COMMENTARY
	Not applicable
8.5.2. As regards shares and/or rights to acquire share options and/or all other share-incentive schemes, the following information should be disclosed:
1) The number of share options offered or shares granted by the company during the relevant financial year and their conditions of application;
2) The number of shares options exercised during the relevant financial year and, for each of them, the number of shares involved and the exercise price or the value of the interest in the share incentive scheme at the end of the financial year;
3) The number of share options unexercised at the end of the financial year; their exercise price, the exercise date and the main conditions for the exercise of the rights;
4) All changes in the terms and conditions of existing share options occurring during the financial year.
8.5.3. The following supplementary pension schemes-related information should be disclosed:
1) When the pension scheme is a defined-benefit scheme, changes in the directors' accrued benefits under that scheme during the relevant financial year;
2) When the pension scheme is defined contribution scheme, detailed information on contributions paid or payable by the company in respect of that director during the relevant financial year.
8.5.4. The statement should also state amounts that the company or any subsidiary company or entity included in the consolidated annual financial report of the company has paid to each person who has served as a director in the company at any time during the relevant financial year in the form of loans, advance payments or guarantees, including the amount outstanding and the interest rate.
8.6. Where the remuneration policy includes variable components of remuneration, companies should set limits on the variable component(s). The non-variable component of remuneration should be sufficient to allow the company to withhold variable components of remuneration when performance criteria are not met.	Not applicable	Refer to the comment in item 8.1 above.
8.7. Award of variable components of remuneration should be subject to predetermined and measurable performance criteria.	Yes	The amount of annual bonuses depends on the predetermined and measurable performance criteria, i.e. on the level of the budgeted net profit achievement and realization of the set annual goals.

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
8.8. Where a variable component of remuneration is awarded, a major part of the variable component should be deferred for a minimum period of time. The part of the variable component subject to deferment should be determined in relation to the relative weight of the variable component compared to the non-variable component of remuneration.	Not applicable	During the year under review the Company has not applied any schemes anticipating remuneration of directors in shares, share options or any other right to purchase shares or be remunerated on the basis of share price movements. This has not been provided for neither by the existing Management personnel remuneration procedure nor employment contracts with directors and other employees of the Company.
8.9. Contractual arrangements with executive or managing directors should include provisions that permit the company to reclaim variable components of remuneration that were awarded on the basis of data which subsequently proved to be manifestly misstated.	Not applicable	Refer to the comment submitted regarding the item 8.8 above.
8.10. Termination payments should not exceed a fixed amount or fixed number of years of annual remuneration, which should, in general, not be higher than two years of the non-variable component of remuneration or the equivalent thereof.
8.11. Termination payments should not be paid if the termination is due to inadequate performance.
8.12. The information on preparatory and decision making processes, during which a policy of remuneration of directors is being established, should also be disclosed. Information should include data, if applicable, on authorities and composition of the remuneration committee, names and surnames of external consultants whose services have been used in determination of the remuneration policy as well as the role of shareholders' annual general meeting.
8.13. Shares should not vest for at least three years after their award.	Not applicable	Refer to the comment submitted regarding the item 8.8 above.

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
8.14. Share options or any other right to acquire shares or to be remunerated on the basis of share price movements should not be exercisable for at least three years after their award. Vesting of shares and the right to exercise share options or any other right to acquire shares or to be remunerated on the basis of share price movements, should be subject to predetermined and measurable performance criteria.	Not applicable	Refer to the comment submitted regarding the item 8.8 above.
8.15. After vesting, directors should retain a number of shares, until the end of their mandate, subject to the need to finance any costs related to acquisition of the shares. The number of shares to be retained should be fixed, for example, twice the value of total annual remuneration (the non-variable plus the variable components).	Not applicable	Refer to the comment submitted regarding the item 8.8 above.
8.16. Remuneration of non-executive or supervisory directors should not include share options.	Not applicable	Refer to the comment submitted regarding the item 8.8 above.
8.17. Shareholders, in particular institutional shareholders, should be encouraged to attend general meetings where appropriate and make considered use of their votes regarding directors' remuneration.	Not applicable	Directors' remuneration setting function is performed by the Board of the Company. Shareholders are invited in all meeting of Shareholders where they can raise questions regarding remuneration of the Directors.
8.18. Without prejudice to the role and organization of the relevant bodies responsible for setting directors' remunerations, the remuneration policy or any other significant change in remuneration policy should be included into the agenda of the shareholders' annual general meeting. Remuneration statement should be put for voting in shareholders' annual general meeting. The vote may be either mandatory or advisory.	Not applicable	General principles of the remuneration are disclosed in the annual (governance) report.
8.19. Schemes anticipating remuneration of directors in shares, share options or any other right to purchase shares or be remunerated on the basis of share price movements should be subject to the prior approval of shareholders' annual general meeting by way of a resolution prior to their adoption. The approval of scheme should be related with the scheme itself and not to the grant of such share-based benefits under that scheme to individual directors. All significant changes in scheme provisions should also be subject to shareholders' approval prior to their adoption; the approval decision should be made in shareholders' annual general meeting. In such case shareholders should be notified on all terms of suggested changes and get an explanation on the impact of the suggested changes.	Not applicable	Refer to the comment submitted regarding the item 8.8 above.

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
8.20. The following issues should be subject to approval by the shareholders' annual general meeting:	Not applicable	Refer to the comment submitted regarding the item 8.8 above.
1) Grant of share-based schemes, including share options, to directors;
2) Determination of maximum number of shares and main conditions of share granting;
3) The term within which options can be exercised;
4) The conditions for any subsequent change in the exercise of the options, if permissible by law;
5) All other long-term incentive schemes for which directors are eligible and which are not available to other employees of the company under similar terms. Annual general meeting should also set the deadline within which the body responsible for remuneration of directors may award compensations listed in this article to individual directors.
8.21. Should national law or company's Articles of Association allow, any discounted option arrangement under which any rights are granted to subscribe to shares at a price lower than the market value of the share prevailing on the day of the price determination, or the average of the market values over a number of days preceding the date when the exercise price is determined, should also be subject to the shareholders' approval.	Not applicable	Refer to the comment submitted regarding the item 8.8 above.
8.22. Provisions of Articles 8.19 and 8.20 should not be applicable to schemes allowing for participation under similar conditions to company's employees or employees of any subsidiary company whose employees are eligible to participate in the scheme and which has been approved in the shareholders' annual general meeting.	Not applicable	Refer to the comment submitted regarding the item 8.8 above.

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
8.23. Prior to the annual general meeting that is intended to consider decision stipulated in Article 8.19, the shareholders must be provided an opportunity to familiarize with draft resolution and project-related notice (the documents should be posted on the company's website). The notice should contain the full text of the share-based remuneration schemes or a description of their key terms, as well as full names of the participants in the schemes. Notice should also specify the relationship of the schemes and the overall remuneration policy of the directors. Draft resolution must have a clear reference to the scheme itself or to the summary of its key terms. Shareholders must also be presented with information on how the company intends to provide for the shares required to meet its obligations under incentive schemes. It should be clearly stated whether the company intends to buy shares in the market, hold the shares in reserve or issue new ones. There should also be a summary on scheme-related expenses the company will suffer due to the anticipated application of the scheme. All information given in this article must be posted on the company's website.	Not applicable	Refer to the comment submitted regarding the item 8.8 above.

Principle IX: The role of stakeholders in corporate governance

The corporate governance framework should recognize the rights of stakeholders as established by law and encourage active co-operation between companies and stakeholders in creating the company value, jobs and financial sustainability. For the purposes of this Principle, the concept "stakeholders" includes investors, employees, creditors, suppliers, clients, local community and other persons having certain interest in the company concerned.

9.1. The corporate governance framework should assure that the rights of stakeholders that are protected by law are respected.	Yes	The execution of this recommendation is ensured by the accurate supervision and control of the state institutions and organisations regulating and controlling the Company's activities.
9.2. The corporate governance framework should create conditions for the stakeholders to participate in corporate governance in the manner prescribed by law. Examples of mechanisms of stakeholder participation in corporate governance include: employee participation in adoption of certain key decisions for the company; consulting the employees on corporate governance and other important issues; employee participation in the company's share capital; creditor involvement in governance in the context of the company's insolvency, etc.		The management bodies consult with the employees on corporate governance and other important issues, (employee) participation in the Company's share capital is not limited. Publicity of the essential information about the Company's activity creates the conditions for the holders of interests to participate in the management of the Company according to the procedure established by the law and the Article of Association, as well as for the Company's employees also according to the Collective Agreement of the
9.3. Where stakeholders participate in the corporate governance process, they should have access to relevant information.		Company.

Principle X: Information disclosure and transparency

The corporate governance framework should ensure that timely and accurate disclosure is made on all material information regarding the company, including the financial situation, performance and governance of the company.

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
10.1. The company should disclose information on:	Yes	Performance and corporate governance is regularly
The financial and operating results of the company;		disclosed by distributing press posts about publicly undisclosed information, related to the Company on
Company objectives;		SC Nasdaq Vilnius Stock Exchange website, as well
Persons holding by the right of ownership or in control of a block of shares in the company;		as in the Company's annual reports and financial statements, press releases published in the exchange and in other public presentations of the
Members of the company's supervisory and management bodies, chief executive officer of the company and their remuneration;		Company activity. The Company is not limited only by disclosure of
Material foreseeable risk factors;		minimum necessary public information and also publishes other important information about the
Transactions between the company and connected persons, as well as transactions concluded outside the course of the company's regular operations;		Company's activity. The documents that contain certain information are published in Lithuanian and English on the publicly
Material issues regarding employees and other stakeholders;		accessible website of the SC Nasdaq Vilnius Stock Exchange.
Governance structures and strategy.
This list should be deemed as a minimum recommendation, while the companies are encouraged not to limit themselves to disclosure of the information specified in this list.
10.2. It is recommended to the company, which is the parent of other companies, that consolidated results of the whole group to which the company belongs should be disclosed when information specified in item 1 of Recommendation 10.1 is under disclosure.
10.3. It is recommended that information on the professional background, qualifications of the members of supervisory and management bodies, chief executive officer of the company should be disclosed as well as potential conflicts of interest that may have an effect on their decisions when information specified in item 4 of Recommendation 10.1 about the members of the company's supervisory and management bodies is under disclosure. It is also recommended that information about the amount of remuneration received from the company and other income should be disclosed with regard to members of the company's supervisory and management bodies and chief executive officer as per Principle VIII.
10.4. It is recommended that information about the links between the company and its stakeholders, including employees, creditors, suppliers, local community, as well as the company's policy with regard to human resources, employee participation schemes in the company's share capital, etc. should be disclosed when information specified in item 7 of Recommendation 10.1 is under disclosure.

PRINCIPLES / RECOMMENDATIONS	Yes and No	COMMENTARY
	Not applicable
10.5. Information should be disclosed in such a way that neither shareholders nor investors are discriminated with regard to the manner or scope of access to information. Information should be disclosed to all simultaneously. It is recommended that notices about material events should be announced before or after a trading session on the Vilnius Stock Exchange, so that all the company's shareholders and investors should have equal access to the information and make informed investing decisions.	Yes	The Company discloses information in Lithuanian and English simultaneously through the information disclosure system of SC Nasdaq Vilnius Stock Exchange so that the submitted identical information in both languages could simultaneously be announced thus guaranteeing its simultaneous dissemination to all Company's shareholders so that all Company's shareholders and investors have the same opportunities to familiarize with information and adopt certain investment decisions.
		In its practice the Company focuses on publication of notifications about publicly undisclosed information, related to the Company before or after SC Nasdaq Vilnius Stock Exchange trading session.
10.6. Channels for disseminating information should	Yes	Refer to the comment in item 10.5 above.
provide for fair, timely and cost-efficient or in cases provided by the legal acts free of charge access to relevant information by users. It is recommended that information technologies should be employed for wider dissemination of information, for instance, by placing the information on the company's website. It is recommended that information should be published and placed on the company's website not only in Lithuanian, but also in English, and, whenever possible and necessary, in other languages as well.		Similarly to published information in the system of SC Nasdaq Vilnius Stock Exchange, information is also published on the Company's website. Access to information in the system of SC Nasdaq Vilnius Stock Exchange and on the Company's website is free for the shareholders.
10.7. It is recommended that the company's annual reports and other periodical accounts prepared by the company should be placed on the company's website. It is recommended that the company should announce information about material events and changes in the price of the company's shares on the Stock Exchange on the company's website too.	Yes	The Company's annual reports, other periodical accounts prepared by the company and publicly undisclosed information, related to the Company are placed on the company's website

Principle XI: The selection of the company's auditor

The mechanism of the selection of the company's auditor should ensure independence of the firm of auditor's conclusion and opinion.

11.1. An annual audit of the company's financial reports and interim reports should be conducted by an independent firm of auditors in order to provide an external and objective opinion on the company's financial statements.	Yes	The Company observes this recommendation, annually, an independent firm of auditors conducts an audit of the Company's annual financial statements and report according to the International Accounting Standards and submits an independent auditor's report concerning financial statements.
11.2. It is recommended that the company's supervisory board and, where it is not set up, the company's board should propose a candidate firm of auditors to the general shareholders' meeting.	Yes	The Company's Board (a collegial body) proposes a candidate firm of auditors to the General Meeting of Shareholders taking into account the results of publicly carried out procurement of acquiring audit services. According to the practice established in the Company, the Company's Supervisory Board is informed about the offered choice of the firm of auditors before the General Meeting of Shareholders

PRINCIPLES / RECOMMENDATIONS	Yes and No Not applicable	COMMENTARY
		adopts a decision concerning election of the firm of auditors for execution of the audit of the annual financial reports and determination of conditions of payment for the audit services.
		The Supervisory Board according to the Articles of Association of the Company can make their comments and suggestions over the Company's annual financial statements, annual report and profit allocation draft.
11.3. It is recommended that the company should disclose to its shareholders the level of fees paid to the firm of auditors for non-audit services rendered to the company. This information should be also known to the company's supervisory board and, where it is not formed, the company's board upon their consideration which firm of auditors to propose for the general shareholders' meeting.	Yes	The information about the payments to the audit company is presented to the Company's Audit committee which share that information with the Supervisory Boards as much as they consider it to be important.