Enea S.A. — Audit Report / Information 2018

Mar 21, 2019

TRANSLATORS' EXPLANATORY NOTE

The English content of this report is a free translation of the registered auditor's report of the below-mentioned Polish Company. In Poland statutory accounts as well as the auditor's report should be prepared and presented in Polish and in accordance with Polish legislation and the accounting principles and practices generally adopted in Poland. The accompanying translation has not been reclassified or adjusted in any way to conform to the accounting principles generally accepted in countries other than Poland, but certain terminology current in Anglo-Saxon countries has been adopted to the extent practicable. In the event of any discrepancies in interpreting the terminology, the Polish language version is binding.

Independent Registered Auditor's Report

to the General Shareholders' Meeting and the Supervisory Board of ENEA Spółka Akcyjna

Report on the audit of financial statements

Our opinion

In our opinion, the attached annual financial statements of ENEA S.A. ("the Company"):

• give a true and fair view of the financial position of the Company as at 31 December 2018 and its financial performance and its cash flows for the year then ended in accordance with the applicable International Financial Reporting Standards as adopted by the European Union and the adopted accounting policies;
• comply in terms of form and content with the laws applicable to the Company and the Company's Articles of Association;
• have been prepared on the basis of properly maintained books of account in accordance with the provisions of Chapter 2 of the Accounting Act of 29 September 1994 ("the Accounting Act" – Consolidated text: Journal of Laws of 2019, item 351, as amended).

Our opinion is consistent with our additional report to the Audit Committee issued on the date of this report.

Basis for opinion

Basis for opinion

We conducted our audit in accordance with the International Standards on Auditing as adopted as National Standards on Auditing by the National Council of Statutory Auditors ( "NSA") and pursuant to the Act of 11 May 2017 on Registered Auditors, Registered Audit Companies and Public Oversight ("the Act on Registered Auditors" – Journal of Laws

of 2017, item 1089 as amended) and Regulation (EU) No. 537/2014 of 16 April 2014 on specific requirements regarding the statutory audit of public-interest entities ("the EU Regulation" – Journal of Laws EU L158). Our responsibilities under those NSA are further described in the Auditor's responsibilities for the audit of the financial statements section of our report.

PricewaterhouseCoopers Polska spółka z ograniczoną odpowiedzialnością Audyt sp.k., (formerly: PricewaterhouseCoopers sp. z o.o.) ul. Polna 11, 00-633 Warsaw, Poland T: +48 (22) 746 4000, F: +48 (22) 742 4040, www.pwc.com

PricewaterhouseCoopers Polska spółka z ograniczoną odpowiedzialnością Audyt sp.k. (formerly: PricewaterhouseCoopers sp. z o.o.) is entered into the National Court Register (KRS) maintained by the District Court in Warsaw, with the reference number (KRS) 0000750050, and tax indentification number (NIP) 526-021-02-28. Headquarters in Warsaw, ul. Polna 11.

What we have audited

We have audited the annual financial statements of ENEA S.A. which comprise:

the statement of financial position as at 31 December 2018;

and the following prepared for the financial year from 1 January to 31 December 2018:

• the statement of profit and loss and other comprehensive income;
• the statement of changes in equity;
• the statement of cash flows, and
• the introduction to the financial statements and additional notes and explanations.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence and ethics

We are independent of the Company in accordance with the International Federation of Accountants' Code of Ethics for Professional Accountants ("the IFAC Code") as adopted by resolutions of the National Council of Statutory Auditors and other ethical

Our audit approach

Overview

requirements that are relevant to our audit of the financial statements in Poland. We have fulfilled our other ethical responsibilities in accordance with these requirements and the IFAC's Code. During the audit, the key registered auditor and the registered audit firm remained independent of the Company in accordance with the independence requirements set out in the Act on Registered Auditors and in the EU Regulation.

As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we considered where the Company's Management Board made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We also addressed the risk of management override of internal controls, including among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud.

Materiality

The scope of our audit was influenced by the adopted materiality level. Our audit was designed to obtain reasonable assurance that the financial statements as a whole are free from material misstatement. Misstatements may arise due to fraud or error.

They are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall materiality for the financial statements as a whole as presented below. These thresholds, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect

of misstatements, both individually and in aggregate on the financial statements as a whole.

The concept of materiality is used by the registered auditor both in planning and conducting an audit, as well as in assessing the effect of the misstatements identified during the audit and the unadjusted misstatements (if any), on the financial statements, and also

when forming the registered auditor's report. Therefore, all opinions, assertions and statements contained in the registered auditor's report have been made taking into consideration the quantitative and qualitative materiality levels determined in accordance with the audit standards and the registered auditor's professional judgement.

Overall materiality	PLN 47 million
Basis for determination	1% of revenue
Rationale for the materiality benchmark applied	We have initially considered profit before tax adjusted for dividend income, however after this elimination the Company's profitability is low and in our opinion does not reflect the size of the Company. Therefore bearing in mind two main Company's activities (electricity trade and holding operations) we have decided to adopt net sales revenue as a benchmark for determining materiality as a lower of two analysed: net sales revenue or net assets. We adopted the materiality threshold at 1% because based on our professional judgement it is within the acceptable quantitative materiality thresholds .

We agreed with the Company's Audit Committee that we would report to them misstatements identified during our audit of the financial

statements above PLN 3,3 million as well as any misstatements below that amount, that in our view, warranted reporting for qualitative reasons.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period. They include the most significant identified risks of material misstatements, including the identified risks of material misstatement resulting from fraud. These matters were addressed in the context

Key audit matter

Change in electricity pricing regulations in 2019

In note 39.1 to the financial statements, the Company presented disclosures regarding the estimated scale of possible impact on the financial statements of the electricity prices regulation for end consumers in 2019 resulting from the Act dated

of our audit of the financial statements as a whole, and in forming our opinion thereon. We summarized our response to these risks and, when deemed appropriate, presented the most important observations relating to these risks. We do not provide a separate opinion on these matters.

How our audit addressed the key audit matter

Our procedures included mainly:

Analysis of the provisions of the Pricing Act and its subsequent changes in terms of its impact on the Company's operations, including determining whether changes to the Pricing Act made in 2019 constitute an event that should adjust the status as of balance sheet date;

28 December 2018 amending the Act on excise duty and certain other acts ("The Pricing Act") and the amended Act dated 21 February 2019, limiting the possibility of increasing energy prices in 2019, and information on the provision for onerous contracts created as at 31 December 2018.

The balance sheet value of the provision for onerous contracts as at 31 December 2018 is PLN 79 million. As indicated in note 39.1, due to the lack of transitional provisions to the above-mentioned Act, in the opinion of the Management Board, both the calculation of the provision and presentation of the impact on the audited financial statements and future periods require significant judgments and estimates, in particular on legislative issues, sales volumes, energy purchase costs or determining what is the minimum unavoidable cost of fulfilling the obligation.

Bearing in mind the significance of the impact of the above matter, this issue was subject of our analysis.

• Review of analyzes prepared by the Management Board and analysis of uncertainty factors resulting from the lack of implementing regulations to the Pricing Act and amendments to this Act after the balance sheet date, which concern the level of sales prices for electricity consumers in 2019;
• Assessment of the assumptions made by the Management Board as well as the judgments and estimates done to determine whether as at 31 December 2018 there were contracts that give rise to charges and to determine the amount of provisions for such contracts, including, among others, the following:
  • sales level in 2019,
  • the method of determining the sale price of electricity for various groups of customers,
  • the method to determine the minimum unavoidable costs of fulfilling the obligation;
• Check of the mathematical correctness of the calculated provision for onerous contracts;
• Verification of numerical information of expected changes as a result of amending the Pricing Act in 2019;
• Consultation with internal experts on the correctness of the accounting treatment applied by the Company as well as the disclosure of information;
• Assessment of the Management Board's position regarding the non-recognition of assets related to compensations that the Company expects as a result of the Pricing Act;
• Assessment of the extent of disclosures required in these circumstances.

Based on the procedures performed, we have not found it necessary to make any material adjustments.

Impairment of investment in subsidiary dealing with energy production ENEA Wytwarzanie Sp. z o.o.

In the note 9 of the financial statements, the Company presented disclosures related to the impairment tests regarding shares in subsidiaries, including Enea Wytwarzanie Sp. z o.o. The note discloses the tests results, adopted assumptions used in calculating the asset's value in use and sensitivity analysis for reasonably possible change of assumptions used in calculating recoverable value.

Our procedures included mainly:

• Understanding and evaluation of assets impairment indicators identification process;
• Checking the mathematical accuracy and methodological consistency (with the use of internal PwC valuation specialists) of valuation model based on discounted cash flows prepared by the Management Board;

The carrying amount of the shares in ENEA Wytwarzanie Sp. z o.o. covered by impairment test as at 31 December 2018 is PLN 4.362 million (including cumulative total impairment loss of PLN 898 million). As a result of impairment tests carried out in 2018, the impairment loss on investment in subsidiaries recognized in previous years was reversed in total value PLN 207 million.

According to IAS 36 "Impairment of Assets" the Management Board performs analysis of impairment indicators at the end of reporting period and, for the assets with impairment indicators or with the decrease of previously recognized impairment loss, tests are carried out on given reporting date.

The calculation of the recoverable amount requires an adoption of a number of assumptions and judgments made by the Management Board concerning, among others, the Group's adopted strategy, financial plans and cash flow forecasts for subsequent years, as well as macroeconomic and market assumptions (mainly regarding electricity prices, fuel prices, prices of CO2 emission rights, support system for renewable energy sources and the power market).

Being aware of significance of balance in the financial statement, as well as the sensitivity of results of the abovementioned test for the taken assumptions, this matter was subject to our analyzes.

Adoption of IFRS 15 Revenue from Contracts with Customers in first year of application

In note 27 and 47.25 of the financial statements the Company presented disclosures related to the Revenue and in note 3 of the financial statements the description of implementation process of new standard – IFRS 15.

The amount of net sales revenue in the financial statements in 2018 in amounted to PLN 4.702 million.

• Critical evaluation of the assumptions and estimates done by the Management Board to determine the recoverable value of non-current assets including:
  • projection period of future cash flows and assumed level of revenues, operating margin and expenditures necessary to keep the operations unchanged,
  • applied discount rate (based on weighted average cost of capital);
  • growth rate after the projection period, in situations it was applied to determine the recoverable amount.
• Assessment of the Management Board's sensitivity analysis of assumptions that could have impact on the valuation results;
• Assessment of the accuracy and completeness of disclosures in the financial statements.

Based on performed procedures, we assessed the assumptions made by the Management Board as rational and supported with obtained documentation. As a result of procedures we have not identified necessity for material adjustments. We assessed the disclosures related to impairment tests and provided our comments regarding details of those disclosures. We have not identified any irregularities significantly misstating the financial statements.

Our procedures included mainly:

Understanding and evaluation of the process carried out by the Management Board for identifying differences between previously applied accounting policies regarding measurement and recognition of revenue and IFRS 15 requirements and for evaluating the impact of the new IFRS 15 standard on the financial statements;

In the financial year ended at 31 December 2018 the Company generated revenue mainly from the sale of electricity.

First-time adoption of the IFRS 15 "Revenue from contracts with customers" ("IFRS 15") required a comprehensive contracts analysis, including making assumptions and accounting judgements, main part of the Company's revenue is recognized using IT systems (in particular billing systems).

Bearing in mind the above and the significance of this financial statements line item, as well as due to sensitivity of recognized revenue for assumptions and accounting judgements made during the contracts analysis, this issue was the subject of our analyzes.

• Review of the report prepared for the Company by its external advisor with identification of areas being impacted by IFRS 15;
• Critical evaluation of the key accounting assumptions adopted by the Management Board, including identification of the role of the Company in transactions made with clients (role of an agent), identification of separate obligations and other aspects affecting the recognition and measurement of revenue;
• Understanding and evaluation of the internal control environment, including the IT controls, related to measurement, recognition and presentation of revenue streams, including those recorded in billing systems;
• Detailed testing on targetly and haphazardly selected samples of sales agreements concluded by the Company, verifying completeness of the Company's analysis of contracts for the needs of revenue recognition according to IFRS 15;
• Detailed testing on targetly and haphazardly selected samples to verify correctness of revenue recognized in financial statements, including estimated sales for the period between last invoice and the end of the financial year;
• Verifying accuracy and completeness of disclosures according with reporting standards.

As a result of performed audit producers we have not identified significant issues that would require a adjustment in financial statements.

Responsibility of the Management and Supervisory Board for the financial statements

The Management Board of the Company is responsible for the preparation, based on the properly maintained books of account of annual financial statements that give a true and fair view of the Company's financial position and results of operations, in accordance with the International Financial Reporting Standards as adopted by the European Union, the adopted accounting policies, the applicable laws and the Company's Articles of Association, and for such internal control as the Management Board determines is necessary to enable the preparation of financial statements that are

free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the Company's Management Board is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Management Board either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

The Company's Management Board and members of its Supervisory Board are obliged to ensure that the financial statements comply with the requirements specified in the Accounting Act. Members of the Supervisory Board are responsible for overseeing the financial reporting process.

Auditor's responsibility for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the NSA will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence economic decisions of users taken on the basis of these financial statements.

The scope of the audit does not cover an assurance on the Company's future profitability or the efficiency and effectiveness of the Company's Management Board conducting its affairs, now or in future.

As part of an audit in accordance with the NSA, we exercise professional judgement and maintain professional scepticism throughout the audit.

We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness

of accounting estimates and related disclosures made by the Company's Management Board.

• Conclude on the appropriateness of the Company's Management Board's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Company to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

We communicate with the Audit Committee regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the Audit Committee with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated to the Audit Committee, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters.

We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report

because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Other information, including the Report on the operations

Other information

Other information comprises a Report on the Company's operations for the financial year ended 31 December 2018 ("the Report on the operations") and the corporate governance statement and the statement on nonfinancial information referred to in Article 49b (1) of the Accounting Act which are separate parts of the Report on the operations, and the Annual Report for the financial year ended 31 December 2018 ("the Annual Report") (together "Other Information").

Responsibility of the Management and Supervisory Board

The Management Board of the Company is responsible for preparing Other Information in accordance with the law.

The Company's Management Board and the members of the Supervisory Board are obliged to ensure that the Report on the Company's operations including its separate parts complies with the requirements of the Accounting Act.

Registered auditor's responsibility

Our opinion on the audit of the financial statements does not cover Other Information.

In connection with our audit of the financial statements, our responsibility is to read Other Information and, in doing so, consider whether it is materially inconsistent with the information in the financial statements, our knowledge obtained in our audit, or otherwise appears to be materially misstated. If, based on the work performed, we identified a material misstatement in Other Information, we are obliged to inform about it in our audit report. In accordance with the requirements of the Act on the Registered Auditors, we are also obliged to issue an opinion on whether the Report on the operations has been prepared in accordance with the law and is consistent with information included in annual financial statements.

Moreover, we are obliged to issue an opinion on whether the Company provided the required information in its corporate governance statement and to inform whether the Company prepared a statement on non-financial information.

We obtained the Report on the Company's operations before the date of this audit report, and the Annual Report will become available after that date.

If we identify a material misstatement in the Annual Report, we are obliged to inform the Company's Supervisory Board of this fact.

Opinion on the Report on the operations

Based on the work we carried out during the audit, in our opinion, the Report on the Company's operations:

• has been prepared in accordance with the requirements of Article 49 of the Accounting Act and para. 70 of the Regulation of the Minister of Finance dated 29 March 2018 on current and periodical information submitted by issuers of securities and conditions for considering as equivalent the information required under the legislation of a non-Member State ("Regulation on current information" – Journal of Laws 2018, item 757);
• is consistent with the information in the financial statements.

Moreover, based on the knowledge of the Company and its environment obtained during our audit, we have not identified any material misstatements in the Report on the Company's operations.

Opinion on the corporate governance statement

In our opinion, in its corporate governance statement, the Company included information set out in para. 70.6 (5) of the Regulation on current

information. In addition, in our opinion, information specified in paragraph 70.6 (5) (c)– (f), (h) and (i) of the said Regulation included in the corporate governance statement are consistent with the applicable provisions of the law and with information included in the financial statements.

Information on non-financial information

In accordance with the requirements of the Act on the Registered Auditors, we confirm that

the Company has prepared a statement on non-financial information referred to in Article 49b(1) of the Accounting Act as a separate section of the Report on the operations.

We have not performed any assurance work relating to the statement on non-financial information and we do not provide any assurance with regard to it.

Report on other legal and regulatory requirements

Opinion on the requirements of Article 44 of the Power Industry Law

The Management Board of the Company is responsible for preparing regulatory financial information in accordance with the requirements of Article 44 of the Energy Law of 10 April 1997 ("Energy Law" – Journal of Laws of 2018, item 755, as amended).

In accordance with Article 44 of the Energy Law, we are obliged to audit regulatory financial information and to issue an opinion required by the Power Industry Law.

Regulatory financial information has been presented in Note 45 to the financial statements. Our audit did not cover an evaluation as to whether the information required to be disclosed under the Energy Law is sufficient to ensure equal treatment of consumers and to eliminate cross-subsidization between segments.

In our opinion, the relevant balance sheet items as at 31 December 2018 included in the regulatory financial information (explanatory note no. 45) and income statements for the year then ended prepared separately for each of the operating segments comply, in all material respects, with the requirements referred to in Article 44(2) of the Energy Law, in terms of ensuring the equal treatment of users and elimination of cross-subsidization between segments.

Statement on the provision of non-audit services

To the best of our knowledge and belief, we declare that the non-audit services we have provided to the Company and its subsidiaries are in accordance with the laws and regulations applicable in Poland and that we have not provided any non-audit services prohibited under Article 5(1) of the EU regulation and Article 136 of the Act on Registered Auditors.

The non-audit services which we have provided to the Company and its subsidiaries in the audited period are disclosed in the Report on the Company's operations to the financial statements.

Appointment

We have been appointed to audit the annual financial statements of the Company for 2018-2020 by Resolution of the Supervisory Board dated 19 December 2017. The financial statements of the Company were audited by us for the first time.

The Key Registered Auditor responsible for the audit on behalf of PricewaterhouseCoopers Polska spółka z ograniczoną odpowiedzialnością Audyt sp.k. (formerly: PricewaterhouseCoopers sp. z o.o.), a company entered on the list of Registered Audit Companies with the number 144., is Piotr Bejger.

_____________________ Piotr Bejger

Key Registered Auditor No. 10950

Warsaw, 20 March 2019