PGE Polska Grupa Energetyczna S.A. Consolidated financial statements for 2017

ended December 31, 2017 in accordance with IFRS (in PLN million)

	CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME4
	CONSOLIDATED STATEMENT OF FINANCIAL POSITION5
	CONSOLIDATED STATEMENT OF CHANGES IN EQUITY6
	CONSOLIDATED STATEMENT OF CASH FLOWS7
	GENERAL INFORMATION, BASIS FOR PREPARATION OF FINANCIAL STATEMENTS AND OTHER EXPLANATORY INFORMATION8
1.	General information8
1.1	Information about the parent company 8
1.2	Information on PGE Group8
1.3 1.4	Structure of the PGE Group9 Accounting for new acquisitions11
2.	Basis for preparation of the financial statements12
2.1	Statement of compliance12
2.2	Presentation and functional currency 13
2.3	New standards and interpretations published, not yet effective13
2.4	Professional judgment of management and estimates15
3.	The analysis of impairment of property, plant and equipment, intangible assets and goodwill 19
3.1 3.2	Analysis of impairment of the power generating assets of Conventional segment20 Analysis of impairment of the power generating assets of Renewables segment21
3.3	Distribution segment's property, plant and equipment22
4.	Significant accounting principles23
5.	Changes in accounting principles and data presentation32
	EXPLANATORY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS34
	EXPLANATORY NOTES TO OPERATING SEGMENTS 34
6.	Information on operating segments34
6.1	Information on business segments35
6.2	Information on geographical areas37
	EXPLANATORY NOTES TO THE CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME 38
7.	Revenues and expenses38
7.1 7.2	Sales revenues38 Cost by nature and function39
7.3	Other operating income and expenses41
7.4	Financial income and financial expenses42
7.5	Share of profit of associates and entities jointly controlled entities accounted for under the equity method 43
8.	Income tax43
8.1 8.2	Tax in the statement of comprehensive income43 Effective tax rate44
	EXPLANATORY NOTES TO THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION 45
9.	Property, plant and equipment45
10.	Investment properties46
11.	Intangible assets46
12.	Investments in associates and jointly controlled entities accounted for under the equity method 48
13.	Deferred tax in the statement of financial position49
13.1	Deferred tax assets49
13.2	Deferred tax liabilities49
14.	Inventories50
15.	CO2 emission rights for captive use50
16.	Other current and non-current assets51
16.1	Other non-current assets51
16.2	Other current assets51
17.	Cash and cash equivalents51
18.	Discontinued operations52
19.	Assets and liabilities of the Social Fund52

20.	Equity52
20.1	Share capital52
20.2	Reserve capital53
20.3	Hedging reserve53
20.4	Foreign exchange differences on translation of foreign entities53
20.5	Retained earnings and limitations on payment of dividend 54
20.6	Equity attributable to non-controlling interests54
20.7 20.8	Earnings per share54 Dividends paid and recommended for payment54

21.	Provisions55
21.1	Rehabilitation provision 56
21.2 21.3	Provision for shortage of CO2 emission allowances57 Provision for energy origin rights held for redemption57
21.4	Provision for non-contractual use of the property57
21.5	Other provisions57
22.	Employee benefits57
22.1	Post-employment and jubilee awards provision57
22.2	Other provisions for employee benefits57
23.	Deferred income and governments grants59
23.1	Non-current deferred income and government grants59
23.2	Current deferred income and governments grants59

24.	Other non-financial liabilities59
	EXPLANATORY NOTES TO FINANCIAL INSTRUMENTS 60
25.	Financial Instruments60
25.1	Description of significant items within particular classes of financial instruments60
25.2	Fair value of financial instruments64
25.3	Fair value hierarchy64
25.4	Statement of comprehensive income66
25.5	Collaterals for repayment of receivables and liabilities66
26.	Objectives and principles of financial risk management67
26.1	Market risk67
26.2	Liquidity risk71
26.3	Credit risk72
26.4 26.5	Market (financial) risk -sensitity analysis75 Hedge accounting 77

27.	Statement of cash flows77
27.1 27.2	Cash flows from operating activities77 Cash flows from investing activities78
27.3	Cash flows from financing activities79
	OTHER EXPLANATORY NOTES80

28.	Contingent liabilities and receivables. Legal claims80
28.1	Contingent liabilities80
28.2 28.3	Other significant issues related to contingent liabilities81 Contingent receivables81
28.4	Other legal claims and disputes81

29.	Future investment commitments83
30.	Lease84
30.1	Operating lease liabilities – the Group as a lessee84
30.2	Operating lease receivables – the Group as a lessor84
30.3 30.4	Finance lease liabilities and lease contracts with buy option84 Receivables from finance lease and lease agreement with a purchase option 84

31.	Tax settlements84
32.	Information on related parties86
32.1	Associates and jointly controlled entities86
32.2	State Treasury-controlled companies86
32.3	Management remuneration87
33.	Significant events during and after the reporting period87
33.1	Termination of long term contracts87
33.2	Agreement on financial investment in Polska Grupa Górnicza sp. z o.o88
33.3	Purchase of EDF's assets in Poland89
33.4	Equity investment in Polimex-Mostostal S.A89
33.5	Events after the reporting period 90
34.	Approval of financial statements91

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

		Year ended	Year ended
	Note	December 31, 2017	December 31, 2016
STATEMENT OF PROFIT OR LOSS

SALES REVENUES	7.1	23,100	28,092
Cost of goods sold	7.2	(17,615)	(23,174)
GROSS PROFIT ON SALES		5,485	4,918
Distribution and selling expenses	7.2	(1,220)	(1,429)
General and administrative expenses	7.2	(793)	(977)
Other operating income	7.3	403	1,171
Other operating expenses	7.3	(255)	(171)
OPERATING PROFIT		3,620	3,512
Finance income	7.4	191	191
Finance expenses	7.4	(561)	(384)
Share of profit/(loss) of entities accounted for using the equity method	7.5	40	(45)
PROFIT BEFORE TAX		3,290	3,274
Current income tax	8.1	(632)	(414)
Deferred income tax	8.1	9	(294)
NET PROFIT FOR THE REPORTING PERIOD		2,667	2,566

OTHER COMPREHENSIVE INCOME
Items that may be reclassified to profit or loss in the future:
Valuation of financial instruments	20.3	(5)	1
Valuation of hedging instruments	20.3	(74)	206
Foreign exchange differences on translation of foreign entities	20.4	(7)	4
Deferred tax	8.1	15	(39)
Items that may not be reclassified to profit or loss in the future:
Actuarial gains and losses from valuation of provisions for employee benefits	22	(101)	249
Deferred tax	8.1	19	(47)
Share of profit/(loss) of entities accounted for using the equity method	7.5	-	(2)
OTHER COMPREHENSIVE INCOME FOR THE REPORTING PERIOD, NET		(153)	372

TOTAL COMPREHENSIVE INCOME		2,514	2,938

NET PROFIT ATTRIBUTABLE TO:
– equity holders of the parent company		2,660	2,568
– non-controlling interests		7	(2)

COMPREHENSIVE INCOME ATTRIBUTABLE TO:
– equity holders of the parent company		2.507	2,940
– non-controlling interests		7	(2)

EARNINGS AND DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO EQUITY
HOLDERS OF THE PARENT COMPANY (IN PLN)	20.7	1.42	1.37

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

January 1, 2016 Note December 31, 2017 December 31, 2016 restated data restated data NON-CURRENT ASSETS Property, plant and equipment 58,620 51,365 47,068 9 Investment properties 47 27 30 10 Intangible assets 1,281 653 904 11 Financial receivables 158 237 142 25.1.1 Derivatives and other assets at fair value through profit or loss 222 356 43 25.1.2 Available-for-sale financial assets 47 37 15 25.1.3 Shares accounted for using the equity method 634 402 8 12 Other non-current assets 524 730 1,063 16.1 CO2 emission rights for captive use 402 1,157 1,322 15 Deferred tax assets 651 268 313 13.1 62,586 55,232 50,908 CURRENT ASSETS Inventories 14 1,879 1,596 1,959 CO2 emission rights for captive use 1,040 1,192 850 12 Income tax receivables 36 19 101 Derivatives 83 9 7 25.1.2 Trade and other financial receivables 3,522 6,325 3,748 25.1.1 Available-for-sale financial assets 5 4 4 25.1.3 Other current assets 391 416 599 16.2 Cash and cash equivalents 2,552 2,669 3,104 17 9,508 12,230 10,372 ASSETS CLASSIFIED AS HELD FOR SALE 12 12 16 TOTAL ASSETS 72,106 67,474 61,296 EQUITY Share capital 19,165 19,165 18,698 20.1 Reserve capital 15,328 13,730 13,009 20.2 Hedging reserve 83 147 (21) 20.3 Foreign exchange differences on translation of foreign entities (4) 3 (1) 20.4 Retained earnings 10,616 9,634 8,636 EQUITY ATTRIBUTED TO EQUITY HOLDERS OF THE PARENT 45,188 42,679 40,321 COMPANY Non-controlling interests 1,165 96 96 20.6 TOTAL EQUITY 46,353 42,775 40,417 NON-CURRENT LIABILITIES Non-current provisions 5,666 5,004 6,044 21 Loans, borrowings, bonds and lease 8,422 9,603 5,118 25.1.4 Derivatives 18 30 55 25.1.2 Deferred tax liabilities 1,250 1,191 852 13.2 Deferred income and government grants 1,038 1,141 1,192 23.1 Other financial liabilities 379 33 34 25.1.5 16,773 17,002 13,295 CURRENT LIABILITIES Current provisions 2,404 2,181 1,809 21 Loans, borrowings, bonds and lease 1,623 411 291 25.1.4 Derivatives 106 - 34 25.1.2 Trade and other financial liabilities 3,231 3,556 3,945 25.1.5 Income tax liabilities 196 6 5 Deferred income and government grants 115 119 112 23.2 Other non-financial liabilities 1,305 1,424 1,388 24 8,980 7,697 7,584 TOTAL LIABILITIES 25,753 24,699 20,879 TOTAL EQUITY AND LIABILITIES 72,106 67,474 61,296		As at	As at	As at

* restatement of comparative data is described in note 5 ofthese financialstatemens.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

	Share capital	Reseve capital	Hedging reserve	Foreign exchange differences from translation of foreign entities	Retained earnings	Total	Non-controlling interests	Total Equity
Note	20.1	20.2	20.3	20.4			20.6
JANUARY 1, 2016	18,698	13,009	(21)	(1)	8,636	40,321	96	40,417
Net profit for the reporting period	-	-	-	-	2,568	2,568	(2)	2,566
Other comprehensive income	-	-	168	4	200	372	-	372
COMPREHENSIVE INCOME	-	-	168	4	2,768	2,940	(2)	2,938
Retained earnings distribution	-	1,301	-	-	(1,301)	-	-	-
Dividend	-	-	-	-	(467)	(467)	(4)	(471)
Increase of share capital	467	(467)	-	-	-	-	-	-
Change in share in subsidiaries not resulting in loss of control	-	-	-	-	-	-	10	10
Tax related to the increase of the share capital	-	(110)	-	-	-	(110)	-	(110)
Acquisition of additional shares in subsidiaries	-	-	-	-	(2)	(2)	(4)	(6)
Other changes	-	(3)	-	-	-	(3)	-	(3)
TRANSACTIONS WITH OWNERS	467	721	-	-	(1,770)	(582)	2	(580)
DECEMBER 31, 2016	19,165	13,730	147	3	9,634	42,679	96	42,775
Net profit for the reporting period	-	-	-	-	2,660	2,660	7	2,667
Other comprehensive income	-	-	(64)	(7)	(82)	(153)	-	(153)
COMPREHENSIVE INCOME	-	-	(64)	(7)	2,578	2,507	7	2,514
Retained earnings distribution	-	1,598	-	-	(1,598)	-	-	-
Dividend	-	-	-	-	-	-	(2)	(2)
Purchase of new subsidiaries	-	-	-	-	-	-	1,067	1,067
Acquisition of additional shares in subsidiaries	-	-	-	-	2	2	(3)	(1)
TRANSACTIONS WITH OWNERS	-	1,598	-	-	(1,596)	2	1,062	1,064
DECEMBER 31, 2017	19,165	15,328	83	(4)	10,616	45,188	1,165	46,353

CONSOLIDATED STATEMENT OF CASH FLOWS

		Year ended	Year ended
	Note	December 31, 2017	December 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before tax		3,290	3,274
Income tax paid		(570)	(327)
Adjustments for:
Share of profit/(loss) of entities accounted for using the equity method		(40)	45
Depreciation, amortisation, disposal and impairment losses		4,030	3,864
Interest and dividend, net		151	116
(Profit) / loss on investing activities	27.1	132	(131)
Change in receivables	27.1	(434)	(275)
Change in inventories	27.1	115	342
Change in liabilities, excluding loans and borrowings	27.1	343	(169)
Change in other non-financial assets, prepayments and CO2 emission rights	27.1	874	(96)
Change in provisions	27.1	117	(244)
Other		(74)	(8)
NET CASH FROM OPERATING ACTIVITIES		7,934	6,391
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment and intangible assets		27	18
Acquisition of property, plant and equipment and intangible assets	27.2	(6,071)	(7,935)
Deposits with maturity over 3 months	27.2	(203)	(2,867)
Termination of deposits with maturity over 3 `months	27.2	2,486	566
Purchase of financial assets and increase in stake in Group companies	27.2	(213)	(467)
Purchase of subsidiaries after offsetting acquired cash	27.2	(4,091)	-
Sale of subsidiaries after offsetting sold cash	27.2	272	-
Other		18	29
NET CASH FROM INVESTING ACTIVITIES		(7,775)	(10,656)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from share of non-controlling interests		-	10
Proceeds from loans, borrowings and issue of bonds	27.3	192	4,652
Repayment of loans, borrowings, bonds and finance leasing	27.3	(193)	(203)
Dividends paid	27.3	(1)	(471)
Interest paid	27.3	(300)	(196)
Other		28	38
NET CASH FROM FINANCING ACTIVITIES		(274)	3,830

CHANGE IN CASH AND CASH EQUIVALENTS		(115)	(435)
Effect of movements in exchange rates on cash held		(3)	1
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF PERIOD CASH AND CASH EQUIVALENTS AT THE END OF PERIOD	17 17	2,666 2,551	3,101 2,666

GENERAL INFORMATION, BASIS FOR PREPARATION OF FINANCIAL STATEMENTS AND OTHER EXPLANATORYINFORMATION

1. Generalinformation

1.1 Informationabouttheparentcompany

PGE Polska Grupa Energetyczna S.A. ("parent company ," "the Company," "PGE S.A.") was founded on the basis of a notarial deed of August 2, 1990, and wasregistered in the District Court in Warsaw, XVI Commercial Department on September 28, 1990. The Company was registered in the National Court Register of the District Court for the capital city of Warsaw, XII Commercial Department, under no. KRS 0000059307. The Company'sregistered office isin Warsaw, Mysia 2 Street.

As at January 1, 2017 the composition of the Management Board was asfollows:

Henryk Baranowski the President of the Management Board,
Marta Gajęcka Vice- the President of the Management Board,
Bolesław Jankowski the Vice-President of the Management Board,
Marek Pastuszko the Vice-President of the Management Board,
Paweł Śliwa the Vice-President of the Management Board,
Ryszard Wasiłek the Vice-President of the Management Board,
Emil Wojtowicz the Vice-President of the Management Board.

on February 13, 2017, the Supervisory Board dismissed all members of the Management Board as of February 13, 2017. At the same time, on February 14, 2017, the Supervisory Board appointed for the 10th term of the Management Board Henryk Baranowski as President of the Management Board as well as Bolesław Jankowski, Wojciech Kowalczyk, Marek Pastuszko, Paweł Śliwa, Ryszard Wasiłek and Emil Wojtowicz as Vice-Presidents of the Management Board.

On June 20, 2017, Bolesław Jankowskiresigned effective from July 1, 2017.

As at December 31, 2017 and on the date on which these financialstatements were published, the Company's Management Board was asfollows:

Henryk Baranowski the President of the Management Board,
Wojciech Kowalczyk the Vice-President of the Management Board,
Marek Pastuszko the Vice-President of the Management Board,
Paweł Śliwa the Vice-President of the Management Board,
Ryszard Wasiłek the Vice-President of the Management Board,
Emil Wojtowicz the Vice-President of the Management Board.

Ownership structure

The parent's ownership structure was asfollows:

	State Treasury	Othershareholders	Total
As at December 31, 2016	57.39%	42.61%	100.00%
As at December 31, 2017	57.39%	42.61%	100.00%

The ownership structure as at particular reporting dates was prepared on the basis of data available to the Company.

According to information known to the Company as of the date on which these financial statements were prepared, the State Treasury wasthe only shareholder with at least 5% of votes at the general meeting of PGE S.A.

1.2 InformationonPGEGroup

PGE Group ("PGE Group,", "PGE Capita Group" "Group", "CG PGE") includes the parent, PGE Polska Grupa Energetyczna S.A.,58 consolidated subsidiaries, 3 associates and 1 jointly controlled entity. As described in note 33, in the present period the Group acquired significant control over Polimex-Mostostal S.A. and EDF's companies in Poland and consolidated them using the equity method. For additional information aboutsubordinated entitiesincluded in the consolidated financialstatements please referto note 1.3.

These consolidated financialstatements of the PGE Group comprise financial data for the period from January 1, 2017 to December 31, 2017 ("financial statements", "consolidated financial statements") and include comparative data for the period from January 1, 2016 to December 31, 2016.

The financial statements of all subordinated entities were prepared for the same reporting period as the financial statements of the parent company, using consistent accounting principles. Companies acquired in the course of the year were the exception, preparing financial data forthe period from the moment when PGE Group obtained control.

PGE Group companies' core activities are asfollows:

prodution of electricity,
distribution of electricity,
wholesale and retail trade in electricity, energy origin rights, CO² emission rights and gas,
production and distribution of heat,
rendering of other services related to these activities

Business activities are conducted under appropriate concessions granted to particular Group companies.

Going concern

These consolidated financial statements were prepared under the assumption that the Group companies will continue to operate as a going concern in the foreseeable future. As at the date of the approval of these consolidated financial statements, there is no evidence indicating that the significant Group companies will not be able to continue its business activities as a going concern.

1.3 StructureofthePGEGroup

During the reporting period, PGE Group consisted of the following subsidiaries, consolidated directly and indirectly:

	Entity	Entity holding share	Share of the Group entities as at December 31, 2017	Share of the Group entities as at December 31, 2016
	SEGMENT: SUPPLY
1.	PGE Polska Grupa Energetyczna S.A. Warsaw	Parent
2.	PGE Dom Maklerski S.A. Warsaw	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
3.	PGE Trading GmbH Berlin	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
4.	PGE Obrót S.A. Rzeszów	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
5.	ENESTA sp. z o.o. Stalowa Wola	PGE Obrót S.A.	87.33%	87.33%
6.	PGE Paliwa sp. z o.o. (formerly EDF Paliwa sp. z o.o.) Kraków	PGE Energia Ciepła S.A.	100.00%	-
	SEGMENT: CONVENTIONAL GENERATION
7.	PGE GiEK S.A. Bełchatów	PGE Polska Grupa Energetyczna S.A.	100.00%	99.98%
8.	PGE Energia Ciepła S.A. (formerly EDF Polska S.A.) Warsaw	PGE Polska Grupa Energetyczna S.A.	99.52%	-
9.	PGE Toruń S.A. (formerly EDF Toruń S.A.) Toruń	PGE Energia Ciepła S.A.	95.22%	-
10.	PGE Gaz Toruń sp. z o.o. (formerly EDF Gaz Toruń sp. z o.o.) Warsaw	PGE Energia Ciepła S.A.	50.04%	-
	Zespół Elektrociepłowni Wrocławskich	PGE Energia Ciepła S.A.	17.74%	-
11.	KOGENERACJA S.A.	Investment III B.V.	32.26%	-
	Wrocław Elektrociepłownia Zielona Góra S.A.	Zespół Elektrociepłowni Wrocławskich
12.	Zielona Góra	KOGENERACJA S.A.	98.40%	-
13.	ELBIS sp. z o.o. Rogowiec	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
14.	MEGAZEC sp. z o.o. Bydgoszcz	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
15.	MegaSerwis sp. z o.o. Bogatynia	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
16.	ELMEN sp. z o.o. Rogowiec	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
17.	"Przedsiębiorstwo Usługowo-Produkcyjne "ELTUR-SERWIS" sp. z o.o. Bogatynia"	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
18.	Przedsiębiorstwo Usługowo-Produkcyjne "TOP SERWIS" sp. z o.o. Bogatynia	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
19.	Przedsiębiorstwo Transportowo-Sprzętowe "BETRANS" sp. z o.o. Bełchatów	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
20.	Przedsiębiorstwo Wulkanizacji Taśm i Produkcji Wyrobów Gumowych BESTGUM POLSKA sp. z o.o. Rogowiec	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
21.	RAMB sp. z o.o. Piaski	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
22.	EPORE sp. z o.o. Bogatynia	PGE Górnictwo i Energetyka Konwencjonalna S.A	85.38%	85.38%

Applied accounting principles (policies) and explanatory notes are an integral part of the consolidated financial statements

			Share of the Group	Share of the Group
	Entity	Entity holding share	entities as at December 31, 2017	entities as at December 31, 2016
	"Energoserwis – Kleszczów" sp. z o.o.	PGE Górnictwo i Energetyka
23.	Rogowiec	Konwencjonalna S.A.	51.00%	51.00%
24.	Przedsiębiorstwo Energetyki Cieplnej sp. z o.o. Zgierz	PGE Górnictwo i Energetyka Konwencjonalna S.A.	50.98%	50.98%
	SEGMENT: RENEWABLES
25.	PGE Energia Odnawialna S.A.	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
	Warsaw
26.	Elektrownia Wiatrowa Baltica-1 sp. z o.o. Warsaw	PGE Energia Odnawialna S.A.	100.00%	100.00%
27.	Elektrownia Wiatrowa Baltica-2 sp. z o.o. Warsaw	PGE Energia Odnawialna S.A.	100.00%	100.00%
28.	Elektrownia Wiatrowa Baltica-3 sp. z o.o. Warsaw	PGE Energia Odnawialna S.A.	100.00%	100.00%
	PGE Energia Natury sp. z o.o. Warsaw	PGE Energia Odnawialna S.A.	-	100.00%
29.	PGE Energia Natury PEW sp. z o.o. Warsaw	PGE Energia Odnawialna S.A.	100.00%	100.00%
30.	PGE Klaster sp. z o.o. Warsaw	PGE Energia Odnawialna S.A.	100.00%	-
	SEGMENT: DISTRIBUTION
31.	PGE Dystrybucja S.A. Lublin	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
	SEGMENT: OTHER OPERATIONS
32.	PGE EJ 1 sp. z o.o. Warsaw	PGE Polska Grupa Energetyczna S.A.	70.00%	70.00%
33.	PGE Systemy S.A.	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
	Warsaw EXATEL S.A.
	Warsaw	PGE Polska Grupa Energetyczna S.A.	-	100.00%
34.	PGE Sweden AB (publ) Stockholm	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
35.	Investment III B.V. (formerly EDF Investment III B.V.) Amsterdam	PGE Energia Ciepła S.A.	100.00%	-
36.	PGE Obsługa Księgowo-Kadrowa sp. z o.o. Warsaw	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
37.	"Elbest" sp. z o.o. Bełchatów	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
38.	Elbest Security sp. z o.o. Bełchatów	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
39.	PGE Inwest 2 sp. z o.o. Warsaw	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
40.	PGE Inwest 5 sp. z o.o.	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
	Warsaw PGE Centrum sp. z o.o. (formerly PGE Inwest 6 sp. z
41.	o.o.) Warsaw	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
	PGE Ventures sp. z o.o. (formerly PGE Inwest 7 sp. z
42.	o.o.) Warsaw	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
43.	PGE Inwest 8 sp. z o.o. Warsaw	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
44.	PGE Inwest 9 sp. z o.o. Warsaw	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
45.	PGE Inwest 10 sp. z o.o. Warsaw	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
46.	PGE Inwest 11 sp. z o.o. Warsaw	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
47.	PGE Inwest 12 sp. z o.o. Warsaw	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
48.	PGE Inwest 13 S.A.	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
49.	Warsaw PGE Inwest 14 sp. z o.o.	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
	Warsaw PGE Nowa Energia sp. z o.o.
50.	(formerly PGE Inwest 15 sp. z o.o.) Warsaw	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
51.	PGE Inwest 16 sp. z o.o. Warsaw	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
52.	PGE Inwest 17 sp. z o.o. Warsaw	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%

Applied accounting principles (policies) and explanatory notes are an integral part of the consolidated financial statements

	Entity	Entity holding share	Share of the Group entities as at December 31, 2017	Share of the Group entities as at December 31, 2016
53.	PGE Inwest 18 sp. z o.o. Warsaw	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
54.	PGE Inwest 19 sp. z o.o. Warsaw	PGE Polska Grupa Energetyczna S.A.	100.00%	-
55.	PGE Towarzystwo Funduszy Inwestycyjnych S.A. Warsaw	PGE Polska Grupa Energetyczna S.A.	100.00%	100.00%
	ENERGO-TEL S.A. Warsaw	EXATEL S.A.	-	100.00%
56.	BIO-ENERGIA sp. z o.o. Warsaw	PGE Energia Odnawialna S.A.	100.00%	100.00%
57.	Przedsiębiorstwo Transportowo-Usługowe "ETRA" sp. z o.o. Białystok	PGE Dystrybucja S.A.	100.00%	100.00%
58.	Energetyczne Systemy Pomiarowe sp. z o.o. Białystok	PGE Dystrybucja S.A.	100.00%	100.00%
59.	PGE Ekoserwis sp. z o.o. (formerly EDF Ekoserwis sp. z o.o.) Wrocław	PGE Energia Ciepła S.A.	84.15%	-

The table above includes the following changes in the structure of PGE Group companies subject to full consolidation which took place during 2017:

On February 1, 2017 PGE Polska Grupa Energetyczna S.A. formed PGE Inwest 19 sp. z o.o. The company was registered at the National Court Register on February 24, 2017.
On March 29, 2017, an agreement was executed to sell 100% of EXATEL S.A. shares. Along with the sale of EXATEL S.A., the Group lost control over its subsidiary ENERGO-TEL S.A.
The transaction between PGE Polska Grupa Energetyczna S.A. and EDF International SAS and EDF Investment II B.V. concerning the sale of EDF's assets in Poland pursuant to a Conditional Share Sale Agreement of May 19, 2017, was finalised on November 13, 2017. As a result of the transaction, PGE S.A. acquired direct and indirect control over the following companies:
EDF Polska S.A. (currently PGE Energia Ciepła S.A.)
EDF Investment III B.V. (currently Investment III B.V.)
EDF Paliwa sp.z o.o. (currently PGE Paliwa sp.z o.o.)
EDF Toruń S.A. (currently PGE Toruń S.A.)
EDF Ekoserwis sp.z o.o. (currently PGE Ekoserwissp.z o.o.)
EDF Gaz Toruń sp. z o.o. (currently PGE Gaz Toruń sp.z o.o.)
Zespół Elektrociepłowni Wrocławskich KOGENERACJA S.A.
Elektrociepłownia Zielona Góra S.A.

The Group's share in capital and voting rights of the above companies as of November 13, 2017, wasthe same as PGE Group's % stake presented in the table above as at December 31, 2017. Details of the transaction are presented in note 33.3 to these financialstatements.

On November 30, 2017, the merger of PGE Energia Odnawialna S.A. (the acquiring company) and PGE Energia Natury sp. z o.o. (the acquired company) was registered at the National Court Register. The merger had no impact on these financial statements.
On November 17, 2017, a founding act for PGE Klaster sp. z o.o. wassigned. The company was registered at the National Court Register on December 6, 2017.

1.4 Accountingfornewacquisitions

Accounting for acquisition of EDF companiesin Poland

As described in note 33.3 to these financial statements, the transaction between PGE Polska Grupa Energetyczna S.A. and EDF International SAS and EDF Investment II B.V. concerning the sale of EDF's assets in Poland pursuant to a Conditional Share Sale Agreement of May 19, 2017, wasfinalised on November 13, 2017.

Pursuant to IFRS 3, PGE Group should finish accounting for the acquisition within 12 months from the acquisition date. Given that control over these companies was acquired in mid-November 2017, these financial statementsinclude a preliminary accounting for the acquired assets and assumed liabilities of these entities. The key adjustments intended to bring this assets and liabilities to fair value as at the acquisition date concerned:

Adjustment of value of property, plant and equipment and intangible assets at Rybnik Power Plant. Based on financial projections available to the Group, these assets were assigned a zero value as at the acquisition date.
Measurement of additional provisions.
Elimination ofselect deferred revenue items.
Appropriate adjustment of deferred tax resulting from recognition of above adjustments.

Aside as described above, the adjustments in the value of Rybnik Power Plant as at the date on which these financial statements were prepared, no measurement of the fair value of the acquired tangible and intangible assets was performed. For the purposes of initial recognition, book valuesfrom the acquired entities' financialstatements were taken.

The following table presents a summary of the recognised assets and liabilities as at the acquisition date.

	Value as at
	November 13, 2017
Property, plant and equipment and intangible assets	4,710
Other prefixed assets	951
Inventories	398
Cash	186
Other current assets	1,166
Total assets	7,411
Loans and borrowings	2,839
Provisions	478
Other liabilities	1,759
Total liabilities	5,076
Net assets of acquired entities	2,335

The following table presents preliminary accounting forthe acquisition and goodwill arising on consolidation.

	Value as at
	November 13, 2017
Net assets of acquired entities	2,335
Net assets attributable to non-controlling interests	(1,067)
Exclusion of liabilities (subrogation)	2,285
PGE Group's stake in net assets of acquired entities	3,553
Cash transferred	1,992
Subrogation of liabilities	2,285
Total acquisition price	4,277
Goodwill arising on consolidation	724

The goodwill recognised by PGE Group arises from the fact that in accordance with PGE Group's assumptions discounted cash flows from operating activitiesthat will be generated by the acquired assets will be higherthan the net asset value of the acquired companies, established in accordance with IFRS 3. The final amount of goodwill should be lower due to a planned measurement of property, plant and equipment and intangible assets.

The goodwillrecognised does not constitute goodwill fortax purposes.

Results of acquired entities

From November 13, 2017,to December 31, 2017, the share of the acquired companiesin PGE Group'sresults was asfollows:

Share in consolidated revenue PLN 837 million (after consolidation exclusions)
Share in comprehensive income PLN 129 million (after consolidation exclusions)

Throughout 2017, the acquired entitiesrecorded revenue from sale of PLN 6,893 million (without consolidation exclusions) and a loss of PLN 474 million (without consolidation exclusions). The loss resulted largely from the recognition of impairment losses on the generation assets at the Rybnik plant, which did not burden PGE Group's results. Without taking these impairment losses into account, the acquired entities would have posted PLN 593 million in 2017 (without consolidation exclusions).

Accounting for acquisition of Polimex-Mostostal S.A.

In 2017, PGE S.A. acquired 16.48% ofshares and thus gained significant influence over Polimex-Mostostal S.A. The acquired assets were recognised in the current period.

	Value as at December 31, 2016
Purchase price paid for 16.48% stake	81

Fair value of identified net assets	393
PGE'sshare in these assets	65
Goodwill	16

Because Polimex-Mostostal S.A.'s market capitalisation as at December 31, 2017, was higher than the valuation using the equity method, no indications of impairment were noted.

2. Basisforpreparationofthefinancialstatements

2.1 Statementofcompliance

These financial statements were prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU"). IFRS comprise standards and interpretations, approved by the International Accounting Standards Board ("IASB") and International Financial Reporting Interpretation Committee ("IFRIC").

2.2 Presentationandfunctionalcurrency

The functional currency of the parent company and the presentation currency of these consolidated financial statements is Polish Zloty ("PLN"). All amounts are in PLN millions(PLNm), unlessindicated otherwise.

For the purpose of translation at the reporting date of items denominated in currency other than PLN the following exchange rates were applied:

	December 31, 2017	December 31, 2016
USD	3.4813	4.1793
EUR	4.1709	4.4240

2.3 Newstandardsandinterpretationspublished,notyeteffective

The following standards, changes in already effective standards and interpretations are not endorsed by the European Union or are not effective as at January 1, 2017:

Standard	Description of changes	Effective date
IFRS 9 Financial Instruments and subsequent amendments	Changesto the classification and measurementrequirements. Changesto hedge accounting. These changes apply to the right of early repayment with negative fees.	January 1 2018 / January 1 2019
IFRS 14 Regulatory Deferral Accounts	Accounting and disclosure principlesforregulatory deferral accounts.	Standard in the current version will not be effective in the EU
Amendmentsto IFRS 10 and IAS 28	Deals with the sale or contribution of assets between an investor and its joint venture or associate.	Postponed indefinitely
IFRS 15 Revenue from Contracts with Customers and clarificationsto IFRS 15	The standard applies to all contracts with customers, except for those within the scope of other IFRSs (e.g. lease contracts, insurance contracts and financial instruments). IFRS 15 clarifies principles of revenue recognition.	January 1, 2018
IFRS 16 Leases	The standard eliminates the classification of leases as either operating or finance lease in the lessee's accounts. All contracts which meet the criteria of lease will be recognized asfinance lease.	January 1, 2019
IFRS 17 Insurance contracts	Defines a new approach to recognising revenue and profit/loss in the period in which insurance services are provided	January 1, 2021
Amendmentsto IFRS 2	Classification and measurement ofshare-based payment transactions	January 1, 2018
Amendmentsto IFRS 4	Application of IFRS 9 Financial instrumentsjointly with IFRS 4 Insurance contracts	January 1, 2018
Annual improvementsto IFRS (cycle 2014-2016)	A collection of amendments dealing with: IFRS 1 – elimination of short-term exemption for entities using IFRS for the first time; IAS 28 – valuation of entities, in which an investment has been made, at fair value through profit or loss or using an individual method.	January 1, 2018
Amendmentsto IAS 40	Changes to the classification of properties: i.e. transfer from investment property to other groups of assets.	January 1, 2018
IFRIC 22 Foreign Currency Transactions and Advance Consideration	Guidelines specifying determination of the date of a transaction and related spot foreign exchange rate to be used in case foreign currency payments are made or received in advance. Guidelinesspecifying determination of the date of a transaction and related spot foreign exchange rate to be used in case foreign currency payments aremade or received in advance.	January 1, 2018
IFRIC 23 Uncertainty over income tax treatments	This interpretation applies to establishing taxable revenue, tax base, unsettled tax losses, unused tax rebates and tax rates.	January 1, 2019
Amendmentsto IAS 28	This amendment concerns measurement of non-current investments in associates	January 1, 2019
Annual improvementsto IFRS (cycle 2015-2017)	A collection of amendments dealing with: IFRS 3 - measurement of existing stake in a joint operation; IFRS 11 - no measurement of existing stake in a joint operation; IFRS 12 - income tax consequences of dividends; IAS 23 - financing costs when an asset is ready for its intended use.	January 1, 2019
Amendmentsto IAS 19	Amendments concern defined-benefit plans.	January 1, 2019

PGE Group intends to adopt the above mentioned new standards, amendments to standards and interpretations published by the International Accounting Standards Board but not yet effective at the reporting date, when they become effective.

Impact of new regulations on PGE Group's consolidated financialstatements

IFRS 9 Financial Instruments

In July 2014, the IASB published IFRS 9 Financial Instruments (IFRS 9). IFRS 9 covers three aspects related to financial instruments: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted.

The Group plansto use IFRS 9 from the date it entersinto force, withoutrestating its comparative data.

In 2017, the Group carried out a detailed analysis of the impact of IFRS 9 on the Group's accounting principles asit relatesto the Group's operations or financial results. This assessment is based on currently available information and may be subject to changes based on rational and possible to evidence additional information obtained in the period in which the Group appliesIFRS 9 forthe first time.

The Group does not expect that implementation of IFRS 9 will have a significant impact on its financial situation and equity, except for the recognition and calculation of the impairment allowance. The Group expects a slight increase in impairment losses, with a negative impact on equity, as discussed below. Moreoverthe classification of certain financial instruments will change.

The analysisshowsthat changes will mostly affect the following areas:

Classification of financial instruments the existing four categories resulting from IAS 39 Financial Instruments: Recognition and Measurement will be replaced with three categories: financial assets measured at amortised cost, at fair value through profit or loss and at fair value through other comprehensive income. This will result in presentation changes in financial statements but will have no impact on the Group's financial results.
Rules for estimating and recognition of impairment losses on financial assets (transition from incurred loss model to expected loss model):
for trade receivables from significant clients that are subject to a credit risk assessment procedure, the Group will estimate expected credit losses based on a model used to evaluate this risk on the basis of ratings assigned to counterparties; ratings have a likelihood of default assigned, which is adjusted to reflect impact of macroeconomic factors;
for receivables from other clients and from related parties, the Group will estimate expected credit losses based on an analysis of the likelihood of credit losses in each ageing structure;
for deposits in banks, the Group will estimate expected credit losses based on a model used to evaluate this risk on the basis of ratings assigned to banks by external institutions; ratings have a likelihood of default assigned, which is adjusted to reflect impact of macroeconomic factors;
for investments in other equity instruments, measurement will be at fair value; currently the Group does not have significant investments in equity instruments other than sharesin subsidiaries and associates.

Impairment of financial assets according to the above-mentioned rules as at December 31, 2017 would have been approx. PLN 4 million higher than those recognised in these financial statements. Equity as at December 31, 2017 would have decreased by about PLN 4 million gross, (with no impact on deferred tax).

Moreover, after analysis, the Group decided not to implement the changes resulting from IFRS 9 reffering to hedge accounting from January 1, 2018.

IFRS 15 Revenue from Contracts with Customers

IFRS 15 Revenue From Contracts with Customers, issued in May 2014 and amended in April 2016, introduces the Five Step Model for recognising revenue from contracts with customers. Revenue in IFRS 15 is recognised in the amount that - according to the entity's expectations- is due in exchange for delivery of the goods orservicesto the customer.

The new standard will replace all existing requirements concerning revenue recognition in compliance with IFRS. The standard is effective for annual periods beginning on or afterJanuary 1, 2018, with early adoption permitted.

The Group analysed the largest contracts with its customers in order to identify those that include provisions which could potentially have an impact on the moment of revenue recognition and the level of revenue in the given reporting period, in particular concerning: contractsfor the sale of electricity and gaseousfuel, multi-component contracts, mutually linked contracts and contracts containing the entity's commitment to deliver products or services to the client by another entity (intermediary vs principal), variable remuneration, trade bonuses as well as contractual penalties and bonuses.

The analysisshowsthat changes will mostly affect the following areas:

Revenue from connectionsto distribution network. Currently, revenues from connection fees are recognized at one time when they become due i.e. at the moment of connection. According to PGE Group, the new standard does not change this approach. However connection fees that prior to IFRIC 18 Transfers of Assets from Customers, i.e. prior to July 1, 2009, had been recognised as prepayments and settled over time, starting from January 1, 2018 they will be recognised at once as retained earnings. This adjustment reduces the amount of deferred income and increases the amount of retained earnings as at December 31, 2017, by PLN 647 million gross, i.e. without taking into account deferred tax impact.

Acting as payersfor the transition fee and renewablesfee, which are collected from end users by PGE Dystrybucja S.A. and PGE GiEK S.A. and then given to the Transmission System Operator ("TSO"). Both fees constitute a sort of energy quasi-tax, collected from recipients of electricity by PGE Dystrybucja on behalf of the TSO and therefore should not be treated as revenue in accordance with IFRS 15. The recognition of net revenue and expenses related to the transition and renewables fees in the financialstatementsfor 2017 would have decreased operating revenue and expenses by approx. PLN 701 million.

PGE Obrót S.A. acting as intermediary for gas distribution and transmission services. PGE Obrót has no influence over the key parameters of the services - this is governed by existing regulations concerning terms for the distribution of gas fuel. PGE Obrót is not responsible for failure to perform, or incorrect performance, of framework agreements to provide gas fuel distribution and transmission services. It also does not bear the risk ofstoring inventories prior to this service being provided to the client. It has no influence over the prices of distribution and transmission services. Given the above, in accordance with IFRS 15, revenue and costs related to distribution and transmission services will be recognised in net values. The recognition of net revenue and expensesrelated to distribution and transmission services in the financial statementsfor 2017 would have decreased operating revenue and expenses by approx. PLN 25 million.
Revenue from compensations received by PGE Dystrybucja S.A. in connection with damages to production assets will be recognised in other operating revenue. Pursuant to IFRS 15, this revenue does not meet the definition of revenue from sales therefore it should not be treated as such. Revenue from compensations that would have been subject to reclassification in the financialstatementsfor 2017 amounts to over PLN 7 million.

IFRS 16 Leases

The new standard changes principles for the recognition of contracts which meet the criteria of lease. The main change is to eliminate the classification of leases as either operating leases or finance leasesin the lessee's accounts. All contracts which meet the criteria of a lease will be recognised as a finance lease. Adoption of the standard will have the following effect:

in the statement of financial position: increase of non-financial non-current assets and financial liabilities,
in the statement of comprehensive income: decrease of operating expenses (other than depreciation/amortisation), increase of depreciation/amortisation and finance costs.
increase in net debt and net debt to EBITDA due to proportionally higher increase in financial liabilities than decrease in operating expenses other than depreciation

PGE is currently analysing the potential impact of IFRS 16 on its future financial statements. The analysis is especially focusing on the issue of potential impact of the standard on the receipt of free perpetual usufruct rights to land. In accordance with PGE Group's existing accounting policy, rights to perpetual usufruct of land were not recognised as contracts containing a lease component. Analysis of the standard is not finished yet but its application should not have a majorimpact on the Group'sfuture financialstatements.

Otherstandards

The otherstandards and amendmentsshould not have a majorimpact on PGE Group'sfuture financialstatements.

2.4 Professionaljudgmentofmanagementandestimates

In the process of applying accounting rules with regardsto the following issues, management has made judgements and estimatesthat affect the amounts presented in the financial statements, including in other explanatory information. The estimates were based on the best knowledge of the Management Board relating to current and future operations and events in particular areas. Detailed information on the assumptions made was presented below orin respective explanatory notes.

Recoverable amount of property, plant and equipment, intangible assets and goodwill

Changes in the electricity market may have a significant influence on the recoverable amount of power generating property, plant and equipment of particular PGE Group entities. If impairment indicators are identified, the Group estimatesthe recoverable amount of the respective property, plant and equipment. Estimates of recoverable amount of goodwill are performed once a year.

Impairment analysis of property, plant and equipment and goodwill is performed by estimating the recoverable amount of cash generating units. The analysisis based on a number ofsignificant assumptions,some of which are outside the control of the Group. Any significant change in these assumptions will impact the result of future impairment tests and as a consequence may lead to significant changes to the financial position and results of the Group. The impairment test carried out on PGE Group's selected assets is described in note 3 to these financialstatements.

Depreciation/amortisation period for property, plant and equipment and intangible assets

Depreciation rates are calculated on the basis of the estimated economic useful life of an item of property, plant and equipment or intangible assets as well as estimates of its residual value. Capitalised costs of major inspections and overhauls are depreciated throughout the period until the beginning of the next majorinspection or overhaul.

Estimated economic useful lives of assets are subject to verification at least once a year. Depreciation periods are presented in notes 4.8 and 4.9.

The verification of the economic useful lives of property, plant and equipment and intangible assets conducted in 2017 resulted in a increase in the depreciation and amortisation costsfor 2017 by approx. PLN 3 million.

Valuation of assets arising from capitalisation ofstripping costsin the production phase of a surface mine

The capitalisation ofstripping costsin the production phase is determined based on the excess of annual N:W ratio (ratio of the volume of overburden removed to the volume of coal extracted within a given year) over general N:W calculated for a particular deposit. The general N:W ratio is calculated by comparing the total volume of overburden still to be removed to the total volume of coal still to be extracted from the date of application of IFRIC 20 to the end of the exploitation of lignite from a particular deposit. This ratio is calculated at the end of each year based on the best knowledge of the technical experts employed in the mine and may be subject to change in case of acquisition of new information on the size of the deposit and the way it is located underground. Update of N:W ratio during 2017 caused an increase in costs of PLN 42 million.

Impact of assets arising from capitalization of the stripping costs in the production phase of a surface mine on property, plant and equipment and its depreciation is described in note 9 of these financialstatements.

Rehabilitation provision

The rehabilitation provision is calculated using estimates of future costs of rehabilitation together with all information available as at the reporting date. Provision is updated in case of change of estimated time or amounts of expenses necessary to conduct rehabilitation process, or in case of change of discount rate. Estimation of rehabilitation provision requires making technical, geological, environmental, legal and tax assumptions, as well as schedule, scope and the level of rehabilitation costs. Changes in assumptions mentioned above impact the value of rehabilitation provision and capitalized rehabilitation costs recognized in property, plant and equipment, as well asstatement of comprehensive income.

Measurement of provisionsfor employee benefits

Provisionsfor employee benefits were estimated using actuarial methods.

Key actuarial assumptionsrelated to the calculation of provisions as atthe reporting date are asfollows:

	As at	As at
	December 31, 2017	December 31, 2016
Expected inflation rate (%)	1.8%	1.30-1.80%
Discountrate (%)	3.4%	3.5%
Expected salary growth rate (%)	0.00-4.29%	0.00-3.57 %
Employee turnover(%)	0.27-9.57%	0.24 - 9.41%
Expectedmedical care costs growth rate (%)	1.8%	1.30-1.80%
Expected Social Fund (ZFŚS) allowance growth rate (%)	3.5%-5.0%	3.50-8.40%

The probability of employee attrition has been predicted on the basis of historical data related to Group's employee turnover ratio and statistical data on employee attrition in the industry.

Mortality and survival probability have been adopted from the Life Expectancy Tables published by Central Statistical Office of Poland, assuming that the population of the Group's employees corresponds, in respect of mortality, to the average in Poland.

Normal procedure of employees' retirement was assumed, in accordance with detailed rules included in the Law on State Social Insurance Pensions, with the exception of employees who meet the conditionsrequired to early retirement.
For discounting future benefit payments a discount rate of 3.4% was adopted (December 31, 2016: 3.5%), which corresponds to the profitability of long-term Treasury bondslisted on the Polish capital market.

Other provisions

As described in note 4.21 recognition of provisionsrequires estimates of the probable outflow of economic benefits and determination of the amount that shall be the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. Aside from the above, the most important provisions are:

CO² emission rights

provision for energy origin units held for redemption.

Sensitivity analysis for changes in assumptions used for calculation of carrying value of provisions, in particular a change in a discount rate, is presented in notes 21 and 22 of these financialstatements.

Contingent liabilities

In accordance with IAS 37 with respect to recognition and measurement of provisions and contingent liabilities, PGE Group estimates the probability of occurrence of potential liabilities. If the occurrence of unfavourable future event is probable, PGE Group recognises a provision in the appropriate amount. If the occurrence of unfavourable future event is estimated by PGE Group as not probable but possible, a contingent liability isrecognised.

Detailed information on contingent liabilities and legal claims and disputesis presented in note 28 of these financialstatements.

Impairment of receivables

As at the reporting date PGE Group entities assess whether there is an objective evidence for impairment of a receivable or a group of receivables. If the recoverable amount of an asset is lower than its carrying amount, PGE Group recognises an impairment allowance to the amount of the present value of expected cash flows.

Description of changes in impairment allowances on trade and other receivables is described in note 25.1.1 of these financial statements.

Electricity sales accrual

Readings from meters regarding the volume of electricity provided in retail sales including distribution services and its invoicing is performed mainly in periods different from the reporting periods. Taking into account the above, a retailsale company (PGE Obrót S.A.) and a distribution company (PGE Dystrybucja S.A.) that are part of the PGE Group perform certain revenues estimates at each reporting date that cover the period not covered by the metersreading. The estimates include also a change in the cost of purchase of electricity during the period of the estimates and reconciliation of the energy balance.

The carrying amount of the electricity sales accrual as at December 31, 2017 is described in note 25.1.1 of these financialstatements.

Measurement of fair values of acquired assets and liabilities, goodwill calculation

PGE Group identifies acquired assets and liabilities, measures their fair value and recognizes goodwill or gain on bargain purchase in accordance with IFRS 3 Business combinations. Measurement is based on a number of assumptions, which include inter alia: application of appropriate valuation method, management's plans relating to the use of acquired assets, financial projections (including price forecasts influencing main positions of revenues and expenses), changes in laws and regulations and other. On the other hand, the settlement of the transaction is also influenced by the appropriate determination of the consideration transferred (including contingent part). Assumptions applied may significantly impact fair values of acquired assets and liabilities, and calculation of goodwill or gain on bargain purchase. Goodwill istested forimpairment together with the respective cash generating units.

During the year ended December 31, 2017, PGE Group acquired EDF's assetsin Poland. As a result of initial recognition, goodwill of PLN 724 million was recognised. In addition, PGE Group during the current year began exercising significant influence over Polimex Mostostal S.A. The acquisition resulted in goodwill of PLN 16 million. This goodwill is recognised in the carrying amount of the investment. Details of the transaction are presented in note 1.4 to these financialstatements.

Uncertainty concerning tax settlements

Regulations concerning tax on goods and services, corporate income tax and burdensrelated to social insurance are subject to changes. These frequent changes result in a lack of reference points, inconsistent interpretations and few precedents that can be applied. The existing regulations also contain uncertainties that result in differing opinions as to legal interpretation of tax regulations both between state organs and between state organs and companies.

Tax settlements and other activity areas are conditioned by regulations (customs or currency controls) and can be subject to controls of respective authoritiesthat are authorised to issue fines and penalties, and all additional tax liabilities resulting from such audits must be paid with high interest. This meansthat tax risk in Poland is higherthan in countries with more stable tax systems.

As a consequence, the amounts presented and disclosed in financial statements may change in the future as a result of a final decision by a tax control organ.

On July 15, 2016, changes were introduced to the Tax Ordinance intended to take into account the provisions of General Anti-Abuse Rule (GAAR). GAAR is intended to prevent the formation and use of artificial legal structures created in order to avoid paying tax in Poland. GAAR defines tax avoidance as an activity performed primarily to obtain a tax benefit contrary under the circumstances to the subject and aim of the tax law. According to GAAR, such an activity does not result in a tax benefit if it is artificial. All proceedings regarding unjustified division of operations, involving intermediaries despite a lack of economic justification, mutually offsetting elements or other similar activities may be treated as a condition for the existence of artificial activities subject to GAAR. These new regulations willrequire a much greaterjudgement in assessing the tax effects of transactions.

The GAAR clause is to be applied in relation to transactions executed after its entry into force and to transactions that were executed prior to its entry into force but in the case of which tax benefits were or continue to be obtained after GAAR went into force. The implementation of these regulations will make it possible for Polish tax inspection authorities to question legal arrangements and agreements made by taxpayerssuch as group restructuring and reorganisation.

The Group recognises and measures current and deferred income tax assets and liabilities using IAS 12 Income tax based on profit (tax loss), tax base, unsettled tax losses, unused tax exemptions and tax rates, taking into account assessment of uncertainties related to tax settlements. If there is uncertainty over where or not and in whatscope the tax authority will accept tax accounting fortransactions, the Group recognisesthese settlementstaking into account an uncertainty assessment.

Impact of changesin select estimates on the statement of comprehensive income for 2017

	Impairmentlosses on property, plant and equipment, intangible assets	Change in actuarial provisions	Change in rehabilitation provision	Change in N:W ratio	Verification economical useful e life
REVENUE FROMSALE	-	-	-	-	-
Cost of goodssold	(957)	(58)	-	(42)	(3)
GROSS PROFIT/(LOSS)ONSALES	(957)	(58)	-	(42)	(3)
Distribution and selling expenses	-	(5)	-	-	-
General and administrative expenses	(37)	(8)	-	-	-
Other operating revenue	2	-	-	-	-
Other operating costs	-	-	(42)
OPERATINGPROFIT / (LOSS)	(992)	(71)	(42)	(42)	(3)
PROFIT/(LOSS) BEFORE TAX	(992)	(71)	(42)	(42)	(3)
Other comprehensive income	-	(101)	-	-	-

3. Theanalysisofimpairmentofproperty,plantandequipment,intangibleassetsandgoodwill

Property, plant and equipment is PGE Group's most significant group of assets. Due to changeable macroeconomic conditions PGE Group regularly verifies the impairment indicators of its assets. When assessing the market situation PGE Group uses both its own analytical tools and independent think tanks'support.

In previous reporting periods, PGE Group recognized substantial impairment allowances of property, plant and equipment of Conventional Generation segment and the Renewables segment. In the current reporting period, the Group analysed impairment indications and identified factorsthat could result in changesto the asset valuesin the above segments.

Regulatory assumptions

Entry into force on September 25, 2017, of updated Act on Renewables. The Act on Renewables changed the wording of art. 56, i.e. method for calculating substitute fees so that a unit substitute fee amounts to 125% of the annual average weighted price of property rights resulting from origin certificates (green certificates). Until now, the unit substitute fee was established through a decision of the President of the Energy Regulatory Office. Given the current prices of green certificates, the change in the updated Act on Renewablessignificantly reduced the substitute fee, which translated into further declines in market prices. This change made pricing terms for the contract executed with Enea S.A. for delivery of green certificates from Szczecin Power Plant in the Conventional Generation segment and wind farms in the Renewables segment substantially worse. It also has significant impact on forecast market prices for property rights. In combination with a persistent market oversupply of green certificates, which results in significant price declines, this reduces expected revenue and margins on generation from renewable sources.
Adoption by the Parliament on July 20, 2017 of the Water Law The act introduces new rules for water usage. In particular, the law introduces fees (fixed and variable) for using water and introduces higher maximum rates for water consumption and discharge of waste through installations belonging to PGE Group companies. These quasi-fiscal fees are a new expense for PGE Group's generating units.
Reduction of support for gas-fired generating units after 2018 vs assumptions adopted in 2015. This results from a significant decline in the prices of yellow certificates.
Lack of support for coal-fired CHP plants under the capacity market due to regulations introduced via the capacity market law of December 8, 2017.
Proposed legislative changes concerning the law on investment in wind farms of May 20, 2016, indicate that there are positive prospects for wind farm maintenance costs in the Renewables segment.¹ The draft law changes the definition of a structure by re-introducing the definition contained in the Construction Law of July 7, 1994, which in accordance with the draft's justification should clear up interpretation doubts with regard to property tax bases for wind farms, which arose after January 1, 2017. If the Act is changed in the aforementioned scope, wind farms will not be considered entirely as structures, which will translate into lower property tax expenses.

Macroeconomic assumptions

The key price assumptions, i.e. prices of electricity, certificates of origin, CO² emission rights, hard coal, until 2019 are based on the company'sfinancial plans.

Electricity price forecasts from 2020 are derived from a study prepared by an independent expert. The most probable energy price forecast was adopted, although in the part covered by contracts the prices and settlement terms used in these contracts during their validity were adopted. Electricity price forecasts assume growth in market prices during the forecast period.

The forecast for prices of property rights concerning certificates of origin was drafted by PGE S.A.'s team of in-house experts. Property right prices will be established by a demand-supply balance. It was assumed that auctions should be the dominant support mechanism. The forecast for prices of property rights concerning certificates of origin for renewable energy assume growth until 2021. In later years, prices will be in decline until 2025 (except for 2023) and will remain steady thereafter. For production covered by contracts the prices and settlement terms used in these contracts during their validity were adopted.

The forecast for revenue from the capacity market from 2021 was prepared by PGE S.A.'sin-house team based on results of the British capacity market, among otherthings.

Revenue from regulatory system services was based on existing bilateral agreements with PSE S.A.

Unit availability was estimated based on repair plans, taking into accountstatistical failure rates.

As a result of the above changes and other possible changes in macroeconomic factors, PGE Group is forecasting a decrease in cash flows generated in the future and identifying a risk of impairment atsome of its conventional and renewable generation assets.

¹ Draft act on amendment of act on renewables and certain other acts of June 16, 2017.

3.1 AnalysisofimpairmentofthepowergeneratingassetsofConventionalsegment

Impairment tests were conducted on November 30, 2017, on cash generating unit basis by establishing their recoverable amounts. Determining fair value for very large groups of assets for which there is no active market and there are few comparable transactions is very difficult in practice. In the case of power plants and minesfor which a value on the local marketshould be determined there are no observable fair values. Given the above, the recoverable value of the analysed assets was estimated on the basis of discounted net cash flow method which relied on financial projections prepared for the period from December 2017 to 2030. For conventional power generating units with expected periods of economic useful life in excess of 2030, a residual value was determined for the remaining service time. According to the Company, financial projectionslonger than five years are justified due to significant and long-term effects of projected changesin the regulatory environment. Using longer projections, recoverable amounts may be determined more reliably.

Detailed segment assumptions

Presented below are the key assumptions having impact on estimates of the useful value of CGU:

classification as CGU of the following:
Branch KWB Bełchatów and Branch Elektrownia Bełchatów ("Bełchatów complex").
Branch KWB Turów and Branch Elektrownia Turów ("Turów complex").

given the technological and economic links between these branches,

classification as three separate CGUs Dolna Odra Power Plant, Szczecin Power Plant and Pomorzany Power Plant, which are part of Branch Zespół Elektrowni Dolna Odra
assumptions concerning electricity production and demand until 2022 were based on a financial plan,
forecasts for prices of CO² emission allowances, assuming dynamic growth in market prices in the years to come (even over a dozen percent year-on-year in constant prices),
forecasts for hard coal prices, assuming strong growth in market prices in 2018-2019, resulting from lower supply; in 2020 the end of problems with limited supply was foreseen, resulting in a decline in coal prices; up from 2021 prices are expected to stabilise (growth by approx. 1% y/y in fixed prices),
receipt of a quantity of free-of-charge CO² emission allowances for the purposes of electricity generation for 2018-2020 for specific cash generating units in accordance with Poland's application for a transition allocation of free emission allowances for the modernisation of electricity generation activities pursuant to art. 10c sec. 5 of directive 2003/87/EC of the European Parliament and the Council (derogation application), which meets the requirements of Commission Decision of July 13, 2012. As regards heat generation, free-of-charge allowances were taken into account in accordance with the list of quantities of CO² emission allowances allocated for heat for 2013-2020 published by the Environment Ministry,
take into account the allocation of free CO² emission allowances in the period 2021-2030 only for system district heating and high-efficiency cogeneration, based on the 2020 level and assuming annual reduction by 2.2%,
take into account the support system for high-efficiency gas cogeneration in the entire forecast period and the end of the support system for coal high-efficiency cogeneration in 2018,
take into account work cost optimisation resulting from current work plans, among other things,
maintain production capacities as a result of replacement-type investments,
take into account development investments for which construction work has begun,
adopt WACC for the projection period at 7.56%.

Itshould also be added that as of December 31, 2017, and at the of date on which these financialstatements were prepared, no specific projects and plans existed for the Polish market related to the method and deadline for entry into force ofsupport mechanismsfor gasfired generation sources after 2018. Nonetheless, according to the Company, the adoption of such assumptions is justified given the expected changes in the regulatory framework. The assumptions that are reflected in cash flows constitute a real scenario in terms of method and period, according to the Company. However, it cannot be ruled out that the final shape and period for these solutions will be different from the assumptions.

Presented below are the results of tests on CGUs as at November 30, 2017.

As at November 30, 2017	Assets value before impairment	Impairment loss	Value after impairment
Bełchatów complex	15,514	-	15,514
Opole Power Plant	11,056	-	11,056
Turów complex	2,685	-	2,685
Gorzów CHP	734	-	734
Szczecin Power Plant	473	(473)	-
Rzeszów CHP	367	-	367
Lublin-Wrotków CHP	357	(155)	202
Pomorzany Power Plant	69	(69)	-
Dolna Odra Power Plant	58	-	58
Kielce CHP	23	-	23
Bydgoszcz CHP	7	-	7
Zgierz CHP	4	-	4
TOTAL	31,347	(697)	30,650

Presented above tested value isthe net book value of identifiable assets, lessrehabilitation provision as at that date.

As a result of the test, the Group identified a PLN 697 million loss of value of its generation assets. In addition, during 2017 the Group recognised PLN 146 million impairment losses. An impairment loss of PLN 843 million was recognised in operating expenses in the statement of comprehensive income.

Sensitivity analysis

The results of the sensitivity analysisshow that changesin estimatesregarding weighted average cost of capital as well assales prices of electricity and energy origin rights have the most significant impact on the recoverable amount of the measured assets. Useful value is to a lesser extent influenced by changes in the cost to purchase hard coal, prices of CO² emission allowances and changes in expected rates on the capacity market.

Presented below isthe impact of changesin key assumptions on asset impairment as at November 30, 2017.

		Impact on impairment loss
Parameter	Change	Increase in impairment loss	Decrease in impairment loss
	1%	-	836
Change in electricity prices throughout the forecast period	-1%	836	-
	+ 0,5 p.p.	1,215	-
Change in WACC	- 0,5 p.p.	-	884
	1%	196	-
Change in CO2 emission allowance prices during forecast period	-1%	-	196
	capacity market +5%	-	247
Assumptions regarding the capacity market	capacity market - 5%	247	-
	5%	0.3	-
Change in hard coal price throughout forecast period	-5%	-	0.1

3.2 AnalysisofimpairmentofthepowergeneratingassetsofRenewablessegment

Impairment tests were conducted on December 31, 2017, on cash generating unit basis by establishing their recoverable amounts. The recoverable value of the analysed assets was estimated on the basis of discounted net cash flow method which relied on the financial projections prepared for the assumed useful life of the particular CGU in the case of wind farms or for 2018-2037 in the case of other CGUs. According to the Group, financial projectslonger than five years are justified because the property, plant and equipment used by the tested entities have significant longer useful lives and also due to significant and long-term effects of projected changes in the regulatory environment.

Detailed segment assumptions

The key assumptions having impact on estimates of the useful value of CGU presented below are:

classification as CGU of the following:
Pumped-storage power plants
Other hydropower plants
Wind farms
production of electricity and property rights was estimated based on historic data and expert estimates prepared for investment purposes, adjusted by the availability of units;
recognition of cash flows concerning contractual penalties and damages awarded in disputes with Enea S.A. and Energa Obrót S.A. as described in Note 28, in amounts resulting from the contracts or calculated as the difference between the contract prices of property rights and market prices;
decline in property tax expenses up from 2019;
maintain production capacities as a result of replacement-type investments,
adopt WACC for the projection period at 7.56%.

Impairment of the power generating assets of Renewablessegment

Presented below are the results of tests on CGUs as at December 31, 2017.

As at December 31, 2017	Assets value before impairment	Impairment loss	Value after impairment
Renewables segment generating units
Pumped-storage power plants	747	-	747
Other hydropower plants	304	-	304
Wind farms	2,065	(133)	1,932
- recognition of impairment loss	1,327	(157)	1,170
- reversal of impairment	738	24	762
Goodwill	8	-	8
TOTAL	3,124	(133)	2,991
Unallocated and non-core assets	78	-	78
Property, plant and equipment and intangible assets under construction	120	-	120
(including onshore and offshore wind projects) TOTAL	3,322	(133)	3,189

The tested value presented above isthe net book value of identifiable assets.

Sensitivity analysis

The results of the sensitivity analysisshow that changesin estimatesregarding weighted average cost of capital as well assales prices of electricity and energy origin rights have the most significant impact on the recoverable amount of the measured assets. Presented below is the estimated impact of changes in key assumptions on changes in impairment losses in the Renewables segment as at December 31, 2017.

		Impact on impairment loss
Parameter	Change	Increase in impairment loss	Decrease in impairment loss
	1%	-	16
Change in electricity prices throughout the forecast period	-1%	16	-
	+ 0,5 p.p.	43	-
Change in WACC	- 0,5 p.p.	-	42
	1%	-	5
Change in property right prices throughout forecast period	-1%	5	-
No change in property tax from 2018 level		206	-
Adverse resolutions of disputes with Enea S.A. and Energa S.A.		78	-

3.3 Distributionsegment'sproperty,plantandequipment

As at the reporting date the carrying amount of property, plant and equipment related to the distribution activity amounted to more than PLN 17 billion and represented approx. 28% of total consolidated assets. Their recoverable amount depends mainly on tariffs granted by President of the Energy Regulatory Office. Regulated revenue (tariff) which is determined annually provides covering justified costs: operating costs, depreciation and amortisation, taxes, purchase of energy to cover balancing difference and transferred costs. It provides also a return on equity involved in the distribution activity at a justified level. Return on equity and depreciation charges are dependent on the so called Regulatory Asset Base.

As at the date of preparation of these consolidated financial statements, PGE Group did not identify any indications for impairment of property, plant and equipment allocated to Distribution segment.

4. Significantaccountingprinciples

These financial statements are prepared in accordance with the historic cost concept, except for selected categories of financial instruments and CO² emission allowance inventories purchased in order to generate the profit on market swings, which are recognised at fair value.

4.1 Consolidationrules

These consolidated financial statements of the PGE Group have been prepared on the basis of the financial statements of the parent company, financial statements of its subsidiaries, associates and joint ventures. The financial statements of consolidated entities are prepared for the same reporting period, based on unified accounting principles. Companies acquired in the course of the year were the exception, preparing financial data forthe period from the moment when PGE Group obtained control.

All balances, income and expenses arising between the Group entities and unrealized gains from intra-group transactions, were fully eliminated.

Subsidiaries are consolidated from the date of taking control over them by the Group, until the date of cessation of control. Control by a parent company occurs when this company owns, directly or indirectly through its subsidiaries, more than half of votes in the entity unless it is possible to prove that such ownership does not constitute control. Exercising control occurs when the company, due to its involvement in another entity holdsthe rightsto variable financial results and hasthe power to influence the amount of financial results by controlling the entity. Exercising control may also occur when the parent company does not own half of votesin a subsidiary.

Accounting forthe formation of PGE Group and later Group transformationsin the consolidated financialstatements

The mergers and acquisitions of business units are generally regulated by International Financial Reporting Standard 3 Business Combinations. However, the scope of this standard does not include transactions among business entities under common control. The entitiesthat later formed PGE Group were controlled by the State Treasury. Thistransaction thus, according to the Company, meetsthe definition of transaction underjoint control and istherefore excluded from IFRS 3.

The aforementioned mergers of the entities under common control were accounted for by the pooling of interests method and thus the consolidated financial statements reflect the fact of the common control continuity and does not present the changes in the net asset value to fair value (orrecognition of new assets), or valuation of the goodwill.

Further mergers and acquisitions within PGE Group were recognised as transactions concluded between jointly controlled entities, therefore should be accounted within the equity of PGE Group, not affecting the goodwill.

The purchase of companiesfrom third partiesis accounted using the acquisition method in line with IFRS 3.

Joint ventures and joint operations

Due to participation in a joint venture (a joint arrangement giving the right to the net assets of the arrangement) a joint venture accountsforitsinterest is a joint venture underthe equity method.

Joint control is the contractually agreed sharing of control in the framework of the contractual arrangement, which exists only when decisions aboutrelevant activitiesrequire the unanimous consent of the parties who share control.

Investmentsin associates

Associates are entities over which the parent company directly, or through the subsidiary, has significant influence and that are neither controlled nor jointly controlled. Investments in associates are recognised in the statement of financial position at cost increased or decreased to recognise the investor'sshare in the investee's net assets afterthe date of acquisition lessimpairment lossesif applicable. Investmentsin associates are recognised using the equity method.

4.2 Methodsappliedtoconvertpositionsdenominatedinforeigncurrencies

Transactions denominated in foreign currencies are translated into PLN at the rate on the transaction date. As at the reporting date:

monetary items are translated at the closing NBP rate;
non-monetary items are valued at historical cost in foreign currency at an exchange rate on the day of the transaction;
non-monetary items measured at fair value in foreign currency are translated at an exchange rate on the day of fair value measurement.

Foreign exchange differences resulting from translation are recognised in profit or loss or, in cases specified in the accounting policies applied, recorded in the value of assets.

Exchange differences resulting from translation of non-monetary items, such as equity instruments measured at fair value through profit or loss, are recognised as a change in fair value. Exchange differences resulting from translation of non-monetary items, such as equity instruments classified as financial assets available for sale, are recognised in other comprehensive income. Exchange differences resulting from translation of assets and liabilities of foreign entities with functional currency otherthan functional currency of the parent company are recognised in separate position of the equity.

4.3 Operatingsegments

An operating segment is a component of the Group:

that engagesin business activitiesfrom which it may earn revenues and incur expenses,
whose operating results are regularly reviewed by the entity's chief operating decision maker in the Group to make decisions about resources to be allocated to the segment and assess its performance,
for which discrete financial information is available.

Due to the types of production processes as well as the current system of regulation within PGE Group, the following segments are distinguished:

Conventional Generation,
Renewables,
Supply,

Distribution,
Other activities, which includes the activities of subsidiaries other than listed above, but not material enough to create separate segments.

Segment revenues are revenues, including both sales to external customers and inter-segment transfers within the Group that are presented in profit or loss of the Group and can be directly attributed to the segment together with a relevant portion of revenue that can be allocated on a reasonable basis to the segment. Segment expenses include cost of sales to external customers and the cost of inter-segment transfers within the Group, which results from operating activities of the segment and can be directly attributed to the segment together with a relevant portion of entity's expenses that can be allocated on a reasonable basis to the segment. Segment result is a difference between revenues and expenses of the segment.

Segment assets are those operating assets that are used by that segment in its operating activity and that can be directly attributed to the segment or can be allocated on a reasonable basis to the segment. Segment liabilities are those operating liabilities that result from operating activities of the segment and can be directly attributed to the segment or can be allocated on a reasonable basis to the segment. Segment assets and liabilities do not include settlements connected with income tax.

4.4 Revenues

Revenues are measured at the fair value of the consideration received or due. Revenues are recognised after deducting value added tax (VAT), excise tax and othersales-based taxes as well as discounts. When recognising revenue, the criteria specified below are also taken into account.

Revenue from sale of goods and products

Revenues from the sale of goods and merchandise are recognised when related risks and rewards have been transferred and when the amount of revenue can be reliably measured and costs incurred can be reliably estimated. In particular, revenues from the sale of electricity are recognised at the time of delivery.

Revenue from the sale of goods and products mainly includes:

amounts receivable from: wholesale and retail sales of electricity, sales of heat energy, gas, lignite, certificates of energy origin from renewable energy sources, certificates of production of energy in high efficiency cogeneration plants, greenhouse gas emission rights, distribution and transmission services and other services relevant to core business,
amountsreceivable from sales of materials and merchandise not mentioned above.

Revenue from sale ofservices

Revenue from services rendered is recognised when the service is performed. Revenue from the provision of unfinished long-term services in the period from contract date to reporting date - after subtracting revenue recognised in previous reporting period - is determined proportionally to the services'status, if thisstatus can be determined reliably.

When the outcome of a contract cannot be estimated reliably, the Group recognises revenue only to the extent of the expenses recognised that are recoverable.

Connection fees

PGE Dystrybucja S.A. generates revenues from connecting clients to the network, so-called connection fees. According to the interpretation IFRIC 18 Transfers of Assets from Customers, starting from July 1, 2009 these revenues are recognised at once when the service is performed. Feesreceived priorto July 1, 2009 are recognised as deferred income and settled through the period of 25 years.

Revenuesfrom LTC compensations

Producers of electric energy, who joined the program of early termination of long-term contractsfor sale of capacity and electricity, are entitled to receive compensationsto coverstranded costs. The compensations are paid in the form of annual advances asfour quarterly instalments which are adjusted on yearly basis. At the end of the adjustment period, the final amount of stranded costs will be determined. Due to the above, the producers of electricity of the PGE Group estimate and recognize the revenue from LTC compensationsin the amount in which it will be finally approved forthe given period, i.e. after annual and final adjustments expected as at the date of the preparation of the consolidated financial statements and the final adjustment. Allocation of the final adjustment to the respective reporting period is based on estimated schedule of sales of electricity and system services in the adjustment period, including the final adjustment.

Revenues adjustmentsin respect of LTC compensations arising from court decisions are presented in other operating activities.

4.5 Costofgoodssold

Cost of goodssold includes:

production costs incurred in the reporting period adjusted for related changes in inventories (finished goods, semi-finished products and production in progress) and costs related to production of goodsfor the Group's own use,
value of electricity, certificates of origin for energy and gassold, and goods and materials at purchase prices.

Coststhat can be directly attributable to revenuesrecognised by the Company are recognised in profit orlossforthe reporting period in which the revenues were recognised.

Coststhat can only be indirectly attributed to revenues or other economic benefitsrecognised by entities, are recognised in the profit or loss in the reporting periods, to which they relate in accordance with accrual basis of accounting, taking into account the principles of measurement of property, plant and equipment and inventories.

4.6 Taxes

Corporate income tax recognised in profit or loss comprises current income tax and deferred income tax, that are actual fiscal charges for the reporting period calculated by the Group entities in accordance with regulations of the Corporate Income Tax Act and the change in deferred tax assets and deferred tax liabilities otherthan the ones charged or credited directly to equity.

Deferred tax asset or deferred tax liability are calculated on the basis of temporary differences between the carrying amount of a given asset orliability and itstax base and tax lossthat isrecoverable in the future.

A deferred tax liabilitiesisrecognised for all taxable temporary differences.

A deferred tax asset is recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised.

The carrying amount of a deferred tax asset and deferred tax liability is reviewed at each reporting date. Deferred tax assets and deferred tax liabilities are classified aslong-term. The Group offsets deferred tax asset and liabilities, at the level of each company of the Group.

The Group reduces the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow deferred tax asset to be utilised partially or entirely.

4.7 Earningspershare

Earnings per share for each period is calculated by dividing profit or loss attributable to equity holders of the parent company by the weighted average number ofshares outstanding during the reporting period.

The entity calculates diluted earnings per share by dividing profit or loss attributable to ordinary equity holders of the Company (after deduction of interest on redeemable convertible preference shares) by the weighted average number of shares outstanding during the period (adjusted by the number of dilutive options or dilutive redeemable convertible preference shares).

4.8 Property,plantandequipment

Property, plant and equipment are assets:

held for use in the production orsupply of goods or services, for rental to others, or for administrative purposes and
expected to be used for more than one year.

After initial recognition, an item of property, plant and equipment is measured at carrying amount, i.e. initial value (or deemed cost for items of property, plant and equipment used before the transition to IFRS) less any accumulated depreciation and any impairment losses. Initial value comprises purchase price including all costs directly attributable to the purchase and bringing the asset into use. The cost comprises estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having it used for purposes other than to produce inventories. As at the date of acquiring or manufacturing of an item of property, plant and equipment, the Group identifies and distinguishes all components being a part of a respective asset that are significant as compared to the acquisition price, cost of manufacture or deemed cost, and depreciates them separately. The Group also recognises the costs of major overhauls, periodic inspectionsthat meet the definition of component as components of property, plant and equipment.

The depreciable amount is the cost of an asset less its residual value. Depreciation commences when the asset is available for use. Depreciation is based on a depreciation plan reflecting the future useful life of the asset. The depreciation method used reflects the pattern in which the asset's future economic benefits are expected to be consumed by the entity. Major inspection and overhauls recognised as a component of property, plant and equipment are depreciated starting from the next month after finishing the inspection/overhaul until the beginning of the next majorinspection/overhaul.

The following useful lives are adopted for particular groups of property, plant and equipment:

Group	Average remaining amortisation period in years	Most frequently applied total depreciation periods in years
Buildings and structures	15	20 – 67
Machinery and equipment	13	4 – 40
Vehicles	6	4 – 33
Other property, plant and equipment	3	3 – 27

Depreciation methods, depreciation rates and residual values of property, plant and equipment are verified at least each financial year. Changesidentified during verification are accounted for as a change in an accounting estimate and possible adjustmentsto depreciation amounts are recognised in the yearin which the verification took place and in the following periods.

If there is an impairment loss on property, plant and equipment to be recognised PGE Group applies principles described in note 4.11.

Investments relating to fixed assets under construction or assembly are recognised at cost of acquisition or cost of manufacturing less impairment losses. Property, plant and equipment under construction is not depreciated until the construction is completed and the items are available for use.

Stripping costs

Surface mines from the Group recognise stripping costs incurred during the construction and start of the mine as assets and present them as property, plant and equipment. From the beginning of lignite exploitation those capitalized cost are systematically depreciated using the natural method of depreciation based on the amount of the lignite extracted.

If the conditions of the IFRIC 20 interpretation are met, mines also recognize as a property, plant and equipment so-called deferred stripping cost, i.e. stripping costs incurred during the production phase. The value of the assets arising due to stripping costs in the production phase is determined based on the model that takesinto account, inter alia, the estimated value of the overall N-W ratio (the proportion of overburden to lignite) and annual real rate of N-W. An asset arising due to stripping costs is systematically depreciated using the natural method of depreciation based on the amount of lignite extracted from the given deposit.

Costs of rehabilitation of post-exploitation surface mining properties

Surface mines operating in the Group capitalize in the value of the corresponding component of fixed assets estimated costs of rehabilitation of post-exploitation mining properties in the proportion of the volume of the excavation resulting from stripping of overburden at the reporting date to the planned volume of excavation resulting from stripping of overburden at the end of exploitation period.

Capitalised costs of rehabilitation are systematically depreciated using the natural method of depreciation based on the amount of lignite extracted from a particularfield.

4.9 Intangibleassets

An intangible asset is an identifiable non-monetary asset without physicalsubstance,such as:

economic rights acquired by the Group entities and recognised in non-current assets, with an economic useful life exceeding one year intended to be used by the Group,
development costs,
goodwill excluding internally generated goodwill,
acquired right of perpetual usufruct of land,
easements acquired and set free.

The right of perpetual usufruct of land obtained free of charge by an administrative decision is not recognised in the statement of financial position.

As at the date of initial recognition, an intangible asset is measured at acquisition cost or production cost with respect to development costs. After initial recognition, an intangible asset shall be carried at its cost less any accumulated amortisation and any accumulated impairment losses. The cost of an internally generated intangible asset, except for development costs, are not capitalized and are recorded in profit orlossforthe period when the related cost wasincurred.

The Group assesses whether the useful life of intangible assets is definite or indefinite. If the useful life is definite, the Group estimates the length of useful period, the volume of production or other measures as the basis to define the useful life. An intangible asset is regarded as having an indefinite useful life when, based on an analysis of all of the relevant factors, there is no foreseeable limit to the period over which the asset is expected to generate net cash inflowsforthe Group.

The amortisable amount of an intangible asset with a definite useful life shall be allocated on a systematic basis over its useful life. Amortisation starts when the asset is available for use.

Intangible assets with a definite useful life are amortized over their useful life and analysed for potential impairment, if there are indications of impairment. Amortisation periods and amortisation methods of intangible assets with a definite useful life are verified at least each financial year. Changes in the expected useful lives and in the expected pattern of consumption of the future economic benefits embodied in the asset are treated as change of estimate.

Intangible assets with an indefinite useful life and those not being used are subject to impairment testing each year. The following useful lives are adopted forintangible assets:

Group	Average remaining amortisation	Most frequently applied total
	period in years	amortisation periods in years
Acquired patents and licences	2	3 – 20
Cost of finished development works	3	3 – 20
Other	16	3 – 25

An intangible asset arising from development phase of a projectshall be recognised if, and only if, the Group can demonstrate all of the following:

the technical feasibility of completing the intangible asset so that it will be available for use or sale,
its intention to complete the intangible asset and use or sell it,
its ability to use orsell the intangible asset,
how the intangible asset will generate probable future economic benefits,
the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset,
its ability to reliably measure the expenditure attributable to the intangible asset during its development.

4.10 Borrowingcosts

Borrowing costs are interest and other costs that the Group incurs in connection with the borrowing of funds. Borrowing coststhat are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. Other borrowing costs are recognised as an expense. Exchange differences arising from foreign currency borrowings the Group capitalizes to the extent that they are regarded as an adjustment to interest costs.

4.11 Impairmentofnon-financialassets

The Group assesses at each reporting date whether there is any indication that a component of non-financial assets may be impaired. If any such indication exists, or if there is a need to perform an annual impairment testing, the Group estimates the recoverable amount of the asset or cash-generating unit.

Recoverable amount is defined as the higher of an asset's or cash-generating unit's fair value less costs to sell and its value in use. Recoverable amount is determined for an individual asset, unlessthe asset does not generate cash inflowsthat are largely independent of those from other assets or groups of assets. If the carrying amount is higher than the recoverable amount, an impairment loss is recorded. When estimating the value in use of an asset, future cash flows are discounted to the present value using a discount rate before tax, which represents current market estimate of time value of money and risk relevant to an asset. Impairment losses applicable to assets used in continuing operations are recognised in costsrelating to the function of impaired assets.

4.12 Financialassets

Financial assets are classified in the following categories:

Held-to-maturity investments
Financial assets at fair value through profit or loss
Loans and receivables
Available-for-sale financial assets

Financial assets carried atfair value through profit or loss

A financial asset at fair value through profit or loss is a financial asset that meets either of the following conditions:

It is classified as held-for-sale. A financial asset is classified as held-for-sale if it is:
acquired or incurred principally for the purpose of selling in the near term,
part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking, or
a derivative, except for a derivative that is a designated and effective hedging instrument.
Upon initial recognition it is designated by the entity as at fair value through profit or loss. Any financial asset within the scope of this standard may be designated when initially recognized as a financial asset at fair value through profit or loss except for investments in equity instruments that do not have a quoted market price in an active market, and whose fair value cannot be reliably measured.

These instruments are measured at fair value as at the reporting date. Gain or loss on financial assets classified to the FVP portfolio are recognised in the financialresult and and not decreased by amount of interest.

Loans and receivables

Loans and receivables are financial assets other than derivatives with identified or identifiable payments, not listed on an active market. They are classified as current assets if their maturity does not exceed 12 months from the reporting date. Loans and receivables with maturity exceeding 12 months are classified as non-current assets. Loans and receivables are recognised at amortised cost.

Trade receivables are measured at least at each reporting date in the amount due, i.e. at the nominal value increased by applicable penalty interest, in accordance with the principle of prudence, i.e. less applicable impairment allowances. Impairment allowances on receivables are recognised as other operating expenses or finance costs. Non-current receivables are measured at present (discounted) value.

Available-for-sale assets

All other financial assets are available-for-sale financial assets. Financial assets available for sale are recognised at fair value as at each reporting date. Fair value of an instrument which does not have a quoted market price is estimated with regardsto another instrument of similar characteristics or based on future cash flows relevant to an investment asset (measurement using discounted cash flow method).

Positive and negative differences between fair value of available-for-sale financial assets (if their price is determinable on a regulated active market orif the fair value may be estimated by some otherreliable method) and cost, net of deferred tax, are recognised in other comprehensive income, except for:

impairment losses,
exchange gains and losses arising on monetary assets,
interest recognised using the effective interest rate method.

Dividends from equity instrument in the AFS portfolio are recognised in profit or loss on the date that the entity's right to receive payment is established.

4.13 Derivativesandhedginginstruments

The Group uses derivativesin order to hedge against interest rate risk and exchange rate risk. The most frequently used derivatives are forward contracts and interest rate swaps (IRS). Such derivatives are measured at fair value. Depending on whether the valuation of a derivative is positive or negative, it isrecognised as a financial asset orfinancial liability, respectively.

The gain or lossresulting from the change in fair value of a derivative not qualifying for hedge accounting, isrecognised directly in profit orloss.

The fair value of currency forward contracts is estimated with reference to current forward rates for contracts of similar maturity. Fair value of interestrate swapsis estimated with reference to the market value ofsimilarfinancial instruments.

4.14 Hedgeaccounting

Changes in fair value of derivative financial instruments designated as cash flow hedges CCIRS (Cross Currency Interest Rate Swap) and IRS (Interest Rate Swap) are recognised in hedging reserve in the portion determined to be an effective hedge, while the ineffective portion of the hedge isrecognised in profit orloss.

The accumulated changes in fair value of hedging instrument, previously recognised in hedging reserve are transferred to profit or loss in the period or periodsin which the hedged item affects profit or loss. Alternatively, if the hedge of a planned transaction resultsin the recognition of non-financial assets or non-financial liabilities, the Group excludes the amount from equity and includes it in the initial cost or other carrying amount of a non-financial asset orliability.

4.15 Inventories

Inventories are assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials orsuppliesto be consumed in the production process orin providing services.

Inventories comprise:

materials
finished goods
work in progress
energy origin rights purchased rights of origin for energy produced from renewable energy sources, rights of origin for energy relating to energy generated in cogeneration and rightsto energy efficiency certificates,

merchandise (especially CO² emission allowancesintended for re-sale).

Inventories are measured at lowerthe of cost and netrealizable value.

CO² emission rights acquired in order to realise profits from fluctuations in market prices are measured at fair value less costs of disposal.

Cost of usage of inventoriesis determined asfollows:

Materials and merchandise (except for CO² emission allowances) using FIFO method;
CO² emission allowances
acquired in order to realise profitsfrom fluctuations in market prices- using detailed identification method,
purchased for resale to conventional generating unitsin PGE Group according to the FIFO method.
Energy origin rights- using detailed identification method.

As at reporting date, the cost of inventories cannot be higher than net realisable value. Impairment losses on inventories are recognised in operating expenses. When the realisable value of a specific item of inventory is recovered fully or partially, its carrying amount is adjusted by decreasing revaluation adjustment.

4.16 CO2emissionrightsforcaptiveuse

European Union Allowances (EUA) for carbon dioxide emissions intended for captive use of power generating units and CO² emission rights are presented in a separate line in the statement of financial position. EUAs received free of charge are recognised in the statement of financial position in nominal value, which is zero. Purchased EUAs are recognised at purchase price. Use of CO² emission allowancesfor captive use is measured based on FIFO method.

4.17 Otherassets(includingprepayments)

The Group recognises an asset as a prepayment underthe following conditions:

an expense wasincurred in the past in relation to operating activity,
it can be reliably measured,

it refers to future reporting periods.

Prepayments are recognised atreliably measured amounts, relate to future periods and will generate future economic benefits.

Other assets include in particular state receivables, advances for deliveries (including advances for property, plant and equipment in progress) and services and dividend receivables.

4.18 Cashandcashequivalents

Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changesin value.

4.19 Non-currentassetsclassifiedasheldforsale

Non-current assets classified as held forsale are those which comply simultaneously with the following criteria:

the appropriate level of management (General Shareholders Meeting, Supervisory Board, Management Board) is committed to a plan to sell the asset,
the assets are available for immediate sale in their present condition,
an active program to locate a buyer has been initiated,
the sale transaction is highly probable and can be settled within 12 months following the decision,
the selling price is reasonable in relation to its current fair value,
it is unlikely that significant changes to the sales plan of these assets will be made.

Non-current assets (or disposal groups) classified as held for sale are not subject to depreciation. Non-current assets or group of assets classified as held forsale are measured at the lower of carrying amount and fair value less coststo sell. In the consolidated statement of financial position assets(or disposal groups) classified as held forsale are presented in separate line of current assets.

4.20 Equity

Equity isstated at nominal value, classified by nature, in accordance with legalregulations and the Company's Articles of Association.

Share capital, reserve capital and other capital reserves in the consolidated financial statements are the ones of the parent company. Hedging reserve, foreign exchange differences from translation on foreign entities and retained earnings include both the amounts deriving from the financial statements of the parent company and the relevant portion of the subsidiaries' equity, established in accordance with the consolidation principles. Declared, but not contributed, share capital contributions are recognised as outstanding share capital contributions as negative value.

In the consolidated statement of financial position equity is divided into:

Equity attributable to equity holders of the parent company,
Equity attributable to non-controlling interests

4.21 Provisions

The Group recognises provisions when there is present obligation (legal or constructive) that arises from past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

When the effect of the time value of money is significant, the amount of a provision is the present value of the expenditures expected to be required to settle the obligation. The discount rate is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The discount rate does not reflect risks for which future cash flow estimates have been adjusted.

Post-employment and jubilee awards provision

Depending on the entity, the Group's employees are entitled to the following post-employment benefits:

retirement and pension benefits paid once when the employee retires or becomes a pensioner,
post-mortem severance,
cash equivalent related to energy tariff for employees of power industry,
coal allowance given in nature or paid as a cash equivalent,
benefitsfrom the Social Fund,
medical benefits.

The Group's employees are also entitled to receive jubilee awards that are paid after an employee has worked for a specified period of time. The amount of awards paid depends on the period ofservice and the average remuneration of the employee.

The Group recognises a provision for future obligations relevant to past service costs and jubilee awards for the purpose of assigning coststo the periodsin which they are incurred. The provision raised isrecognised as an operating expense in the amount corresponding with accrued future employees' benefits. The present value of these obligationsis measured by an independent actuary.

Actuarial gains and losses arising from the change of actuarial assumptions (including change in discount rate) and ex post actuarial adjustments are recognised in other comprehensive income for post-employment benefits and in operating expenses of the current period forjubilee awards.

Rehabilitation provision

The mining companies which belong to the Group raise provisionsfor costs of rehabilitation of post-exploitation mining properties. The value of the provision is based on the estimated cost of rehabilitation and development works related to final excavations. This cost is divided into the part attributable to stripping cost and the part attributable to mined lignite. The provision is created:

for the part attributable to mined lignite: in the proportion of the extracted lignite as at the reporting date to the total planned volume of extraction over the period of the lignite deposit exploitation,
for the part attributable to the stripping cost: in the proportion of the volume of the excavation resulting from stripping of overburden as at the reporting date to the planned excavation volume resulting from stripping of overburden at the end of exploitation period.

In case of rehabilitation of ash storages (production waste from electricity production) the cost of provision is recognised in operating expensesin proportion to the extent ofstorage filling, whereasthe reversal of the discount isrecognised in the financial expenses.

Provision for rehabilitation of grounds after wind farms is created when the farm is brought into use in the present value of estimated costs of dismantling and removal of remaining devices, constructions and buildings and also cost of bringing grounds to condition as close to itsstate priorthe commissioning the farm as possible.

Estimates concerning expected costs of rehabilitation are subject to revaluation at least once in a 5-year-period. However, once a year the amount of provision is verified according to actual assumptions in terms of inflation rate, discount rate and the volume of lignite extraction orthe extent ofstorage filling, respectively.

The increase in the provision concerning the given year is recognised in operating expenses or in the initial value of property plant and equipment, respectively. The unwinding of the discount is recognised in financial expenses. Changes in the valuation of provisions resulting from the change of assumptions (e.g. macroeconomic factors, way of conducting the rehabilitation, date, etc.), are recognised in the following way:

for the provisions recognised as the part of the cost of property, plant and equipment: they are added to or deducted from the costs of the asset to which they relate, however the amount deducted from the cost of the asset should not exceed its carrying amount;
as other operating expenses or other operating income in other cases.

Provision for deficit of CO² emission allowances

The provision for deficit of CO² emission allowances is created by PGE Group entities for the shortfall of CO² emission allowances obtained free of charge. The provision is measured at the best estimate of the expenditure to be incurred to fulfil the existing obligations as atreporting date, taking into accountrecorded EUA obtained free of charge and EAU purchased.

Provisions are recognised in the statement of comprehensive income as operating expenses (as costs of goods sold in cost by function and taxes and chargesin cost by nature).

Provisionsfor energy origin rights held for redemption

The provision is created based on the requirement of the percentage share of the renewable energy and the energy generated in cogeneration units in the total sales of electricity to end users and the volume of sales to a end users. To the extent of owned energy origin rights held for redemption the provision is recognised at the value of those rights. The provision for the energy origin rights missing is measured at a reliably estimated amount of future obligation of redemption. When making the estimate, the Group takes into accountsubstitution fees and prices. The provision isrecognised in distribution and selling expenses.

4.22 Liabilities

Liabilities are the Group's present obligations, arising from past events, settlement of which will cause an outflow of resources embodying economic benefitsfrom the Group.

The Group dividesliabilitiesinto the following categories:

financial liabilities at fair value through profit or loss,
other financial liabilities measured at subsequent reporting dates at amortized cost,
non-financial liabilities.

When the effect of the time value of money issignificant, liabilities are presented at discounted value.

4.23 TheSocialFundandOtherSpecialFunds

The Social Fund Act of March 4, 1994 states that a Social Fund is created by employers employing over 20 employees (calculated using full time equivalents). The Group's entities create such a fund and make periodic contributions to it. The objective of the fund is to subsidize the social activity for employees of the Group, loans granted to its employees and other social expenses. Contributions to the Social Fund are recognised as an expense in the period in which they are incurred.

The assets and liabilities of the Social Fund are netted off in the financial statements. In addition, as described in note 22, the Group creates provision forthe post-employment benefitsfrom the Social Fund.

4.24 Deferredincomeandgovernmentgrants

Deferred income isrecognised underthe principle of prudence and accrual basis of accounting. Deferred income comprises:

amounts received or due from business partners to be realised in subsequent reporting periods. Deferred income form connection fees that were received before July 1, 2009 is amortised evenly to sales revenues,
funds obtained to finance acquisition or production of property, plant and equipment and intangible assets,
property, plant and equipment and intangible assets acquired free of charge. Deferred income is amortised to other operating income in line with the depreciation charges on these assets.

Government grants are recognised if there is a reasonable assurance that the grant will be received and all the related conditions will be met. Government grantsrelated to assets are amortized to other operating income proportionally to the depreciation charges on these assets.

4.25 Lease

Classification of the lease is made at the lease inception, based on the economic substance of the lease agreement.

A finance lease is a lease that transfers substantially all the risks and rewards incidental to the Group. At the commencement of a finance lease, the leased asset and the leased liability are recorded at the lower of the fair value of the leased asset or the present value of the minimum lease payments. Any initial direct costs of the lessee are added to the amount recognised as an asset. Lease payments shall be apportioned between reduction of the outstanding liability and the finance charge. Finance costs are recognised as finance costsin the statement of comprehensive income during the lease period.

An operating lease is a lease under which the lessor retainssignificant part of the risks and rewardsincidental to ownership of the asset. Lease payments under an operating lease are recognised as an expense on a straight-line basis over the lease term unless another systematic basisis more representative of the time pattern of the user's benefit.

4.26 Statementofcashflows

The statement of cash flowsis prepared using the indirect method.

5. Changesinaccountingprinciplesanddatapresentation

New standards and interpretations which became effective on January 1, 2017

The accounting principles applied in preparing these consolidated financial statements are consistent with those applied in preparing the Company's consolidated financial statements for the year ended December 31, 2016, except as stated below. The following amendments to IFRSs are applied in these financial statements as of their effective date however they did not have material impact on the presented and disclosed financial information orthey were not applicable to the Group'stransactions:

Amendmentsto IAS 7 Disclosure Initiative
Amendmentsto IAS 12 Recognition of deferred tax assetsfor unrealised losses
Amendments resulting from IFRS annual improvement cycle 2014-2016 amendments to IFRS 12 clarifications regarding the scope of the standard.

The Group decided not to apply early any other standards, interpretations or amendments that were published but are not yet effective.

CO² emission rightsfor captive use

In the consolidated statement of financial position for 2016, PGE Group presented CO² emission allowances for captive use as shortterm. In 2017, the Group changed this presentation method and in these financial statements divides these into short- and long-term. According to the Group's management, this amended presentation will more correctly reflect the nature of thisitem.

Given the above, PGE Group restated its comparative data presented in the statement of financial position. The restatement is presented in the table below. Information presented in note 15 to these financialstatements was also restated accordingly.

Assets classified as held forsale were presented in separate line.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

	As at January 1, 2016 published data	Change in presentation	As at January 1, 2016 restated data
NON-CURRENT ASSETS, including:
CO2 emission rights for captive use	-	1,322	1,322
TOTAL NON-CURRENT ASSETS	49,586	1,322	50,908
CURRENT ASSETS, including:
CO2 emission rights for captive use	2,172	(1,322)	850
Assets classified as held for sale	16	(16)	-
TOTAL CURRENT ASSETS	11,710	(1,338)	10,372
ASSETS CLASSIFIED AS HELD FOR SALE	-	16	16
TOTAL ASSETS	61,296	-	61,296

	As at December 31, 2016 published data	Change in presentation	As at December 31, 2016 restated data
NON-CURRENT ASSETS, including:
CO2 emission rights for captive use	-	1,157	1,157
TOTAL NON-CURRENT ASSETS	54,075	1,157	55,232
CURRENT ASSETS, including:
CO2 emission rights for captive use	2,349	(1,157)	1,192
Assets classified as held for sale	12	(12)	-
TOTAL CURRENT ASSETS	13,399	(1,169)	12,230
ASSETS CLASSIFIED AS HELD FOR SALE	-	12	12
TOTAL ASSETS	67,474	-	67,474

EXPLANATORYNOTESTOTHE CONSOLIDATEDFINANCIAL STATEMENTS

EXPLANATORY NOTES TO OPERATING SEGMENTS

6. Informationonoperatingsegments

PGE Group companies conduct their business activities based on relevant concessions, including primarily concession on: production, trading and distribution of electricity, generation, transmission and distribution of heat, granted by the President of Energy Regulatory Office and concessions for the extraction of lignite deposits, granted by the Minister of the Environment. Concessions, as a rule, are being issued forthe period between 10 and 50 years. PGE Group's key concessions expire in the years 2020-2038.

Relevant assets are assigned to the held concessions on lignite mining and generation and distribution of electricity and heat, which was presented in detailed information on operating segments. For its concessions concerning electricity and heat the Group incurs annual charges dependent on the level of turnover, whereasfor conducting licensed extraction of lignite the exploitation charges as well asfees for the use of mining are borne. The exploitation charges depend on the current rate and the volume of the extraction. In 2017, PGE Group's concessions costs amounted to PLN 6 million (PLN 5 million in 2016), exploitation charges and mining usufruct charges amount to PLN 129 million in 2017 and PLN123 million in 2016.

PGE Group presents information on operating segments in the current and comparative reporting period in accordance with IFRS 8 Operating Segments. PGE Group'ssegment reporting is based on the following businesssegments:

Conventional Generation comprises exploration and mining of lignite and production of electricity in the Group's power plants and heat and power plants as well as ancillary services,
Renewables comprise generation of electricity in pumped-storage power plants and from renewable sources,
Supply includes sales and purchases of electricity and gas on the wholesale market, trading in emissions certificates and energy origin rights,sales and purchases of fuel, as well assales of electricity and rendering services to end users,
Distribution comprises management over local distribution networks and transmission of electricity,
Other operations comprise services rendered by the subsidiaries for the Group, e.g. fund raising, IT, telecommunication, accounting and HR, and transport services. Additionally, the other operations segment comprises the activities of a subsidiary whose main business is preparation and implementation of a nuclear power plant construction project, investment is start-up and setting up e-mobility system.

Organisation and management over PGE Group is based on segment reporting separated by nature of the products and services provided. Each segment represents a strategic business unit, offering different products and serving different markets. Assignment of particular entitiesto operating segmentsis described in note 1.3 of these financial statements. As a rule, inter-segment transactions are disclosed as if they were concluded with third parties – under market conditions. An exception to this rule were new bonds issued by subsidiaries belonging the tax group with interest rates below market rates and settlements of tax losses within the tax group. From January 1, 2018 all transactions are on market terms.

When analysing the results of particular business segments the management of PGE Group draws attention primarily to EBITDA reached.

Seasonality of businesssegments

Main factors affecting the demand for electricity and heat are: weather conditions – air temperature, wind force, rainfall, socioeconomic factors – number of energy consumers, energy carriers prices, growth of GDP and technological factors – advances in technology, product manufacturing technology. Each of these factors has an impact on technical and economic conditions of production, distribution and transmission of energy carriers, thusinfluence the results obtained by PGE Group.

The level of electricity sales is variable throughout a year and depends especially on weather conditions - air temperature, length of the day. Growth in electricity demand is particularly evident in winter periods, while lower demands are observed during the summer months. Moreover, seasonal changes are evident among selected groups of end users. Seasonality effects are more significant for householdsthan forthe industrialsector.

In the Renewables segment, electricity is generated from natural resources such as water, wind and sun. Weather conditions are an important factor affecting electricity generation in thissegment.

Sales of heat depend in particular on air temperature and are higherin winter and lowerin summer.

6.1 Informationonbusinesssegments

Information on businesssegmentsforthe year ended December 31,2017

	Conventional generation	Renewables	Supply	Distribution	Other activity	Consolidation adjustments	Total
STATEMENTOF PROFITOR LOSS
Salesrevenuesfrom external customers	6,079	597	14,006	2,234	149	35	23,100
Inter-segmentsales	6,996	127	1,656	4,158	300	(13,237)	-
TOTAL SEGMENT REVENUE	13,075	724	15,662	6,392	449	(13,202)	23,100
Cost of goodssold	(10,439)	(738)	(13,582)	(4,974)	(428)	12,546	(17,615)
EBIT *)	1,754	(36)	784	1,166	(88)	40	3,620

Netfinancial income /(expenses) Share of profit/(loss) of entities							(370)
accounted for using the equitymethod							40
PROFIT BEFORE TAX							3,290
Income tax							(623)
NET PROFIT/(LOSS) FOR THE
REPORTINGPERIOD							2,667
Depreciation, amortisation, disposal and
impairmentlossesrecognised in profit	2,345	400	27	1,167	131	(40)	4,030
orloss
EBITDA **)	4,099	364	811	2,333	43	-	7,650
ASSETS AND LIABILITIES
Segment assets excluding trade	43,096	3,232	1,129	17,084	546	(903)	64,184
receivables
Trade receivables	1,459	107	3,009	859	75	(2,350)	3,159
Shares accounted for using the equity							634
method
Unallocated assets							4,129
TOTAL ASSETS							72,106
Segmentliabilities excluding trade	8,977	357	1,162	2,044	99	(151)	12,488
liabilities
Trade liabilities	1,356	41	2,084	324	31	(2,186)	1,650
Unallocated liabilities							11,615
TOTAL LIABILITIES							25,753
OTHER INFORMATIONONBUSINESS
SEGMENT
Capital expenditures	4,899	81	14	1,716	126	(85)	6,751
Acquisition of property, plant and
equipment, intangible assets as part of	5,426	-	2	-	24	-	5,452
acquisition of new companies***)
Impairment allowances on financial and non-financial assets	919	134	6	10	37	-	1,106
Other non-monetary expenses ****)	1,820	16	829	162	30	2	2,859

*) EBIT = operating profit(loss)

**) EBITDA = EBIT + depreciation, amortization, disposal and impairmentlosses(PPE, IA,IP, goodwill)that are recognised in profit orloss

***) Including goodwill arising on initialrecognition of assets acquired from EDF

***) Non-monetary expenses include mainly changes in provisions such as: rehabilitation provision, provision for CO² emission rights, provision for jubilee awards and employee tariffthat are recognised in profit orloss and other comprehensive income.

Information on businesssegmentsforthe year ended December 31,2016

	Conventional generation	Renewables	Supply	Distribution	Other activity	Consolidation adjustments	Total
STATEMENTOF PROFITOR LOSS
Salesto external customers	11,303	657	13,711	1,979	406	36	28,092
Inter-segmentsales	435	60	2,303	3,939	282	(7,019)	-
TOTAL SEGMENT REVENUE	11,738	717	16,014	5,918	688	(6,983)	28,092
Cost of goodssold	(9,077)	(1,215)	(14,095)	(4,534)	(633)	6,380	(23,174)
EBIT *)	2,691	(770)	473	1,104	(64)	78	3,512
Netfinancial income /(expenses)							(193)
Share of profit/(loss) of entities
accounted for using the equitymethod
							3,274
							(708)
							2,566

							3,864
orloss
EBITDA **)	4,182	365	500	2,230	67	32	7,376
ASSETS AND LIABILITIES
Segment assets excluding trade

							2,705
							402



							12,482
Trade payables	602	36	1,194	264	75	(1,195)	976
Unallocated liabilities							11,241
TOTAL LIABILITIES							24,699
OTHER INFORMATIONONBUSINESS
SEGMENT
							8,152
	104	865	(108)	11	1	(1)	872

PROFIT BEFORE TAX Income tax NET PROFIT/(LOSS) FOR THE REPORTINGPERIOD Depreciation, amortisation, disposal and impairmentlossesrecognised in profit receivables Trade receivables Shares accounted for using the equity method Unallocated assets TOTAL ASSETS Segmentliabilities excluding trade liabilities Capital expenditures Impairment allowances on financial and non-financial assets Other non-monetary expenses ***)	1,491 35,862 481 8,570 6,179 768	1,135 3,566 105 349 144 5	27 970 2,499 1,378 23 396	1,126 16,549 833 1,922 1,721 26	131 961 106 158 170 33	(46) (772) (1,319) 105 (85) -	(45) 57,136 7,231 67,474 1,228

*) EBIT = operating profit(loss)

**) EBITDA = EBIT + depreciation, amortization, disposal and impairmentlosses(PPE, IA,IP, goodwill)that are recognised in profit orloss

6.2 Informationongeographicalareas

Geographic distribution ofsalesrevenuesforthe year ended December 31, 2017 and December 31, 2016 is asfollows:

	Year ended	Year ended
	December 31, 2017	December 31, 2016
REVENUES FROM OPERATING ACTIVITIES
Domestic market	22,722	27,975
EU countries	334	106
Other countries	44	11
TOTAL REVENUES	23,100	28,092

Geographic distribution of assetsforthe year ended December 31, 2017 and December 31, 2016 is asfollows:

	As at	As at
	December 31, 2017	December 31, 2016
OTHER INFORMATION ON AREA
Domestic market	67,274	59,815
EU countries	67	25
Other countries	2	1
TOTAL SEGMENT ASSETS	67,343	59,841
Domestic market	3,622	7,184
EU countries	507	47
TOTAL UNALLOCATED ASSETS	4,129	7,231
Domestic market	634	402
SHARES ACCOUNTED FOR UNDER THE EQUITY METHOD	634	402
TOTAL
TOTAL ASSETS	72,106	67,474

EXPLANATORY NOTES TO THE CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

	Q1 unaudited	Q2 unaudited	Q3 unaudited	Q4 unaudited	Year ended December 31, 2017
Salesrevenues	5,741	4,879	6,073	6,407	23,100
Cost of goodssold	(4,149)	(3,723)	(3,759)	(5,984)	(17,615)
GROSS PROFIT/(LOSS)ONSALES	1,592	1,156	2,314	423	5,485
Net other operating income /(expenses)	89	40	7	12	148
EBIT –OPERATINGPROFIT / (LOSS)	1,201	731	1,883	(195)	3,620
Netfinancial income /(expenses)	(63)	(59)	(80)	(168)	(370)
Share of profit/(loss) of entities accounted for using the equitymethod	9	(8)	10	29	40
PROFIT/(LOSS) BEFORE TAX	1,147	664	1,813	(334)	3,290
Income tax	(184)	(132)	(351)	44	(623)
NET PROFIT/(LOSS) FOR THE REPORTING PERIOD	963	532	1,462	(290)	2,667

	Q1 unaudited	Q2 unaudited	Q3 unaudited	Q4 unaudited	Year ended December 31, 2016
Salesrevenues	7,133	6,533	6,897	7,529	28,092
Cost of goodssold	(5,605)	(6,217)	(5,517)	(5,835)	(23,174)
GROSS PROFIT/(LOSS)ONSALES	1,528	316	1,380	1,694	4,918
Net other operating revenue /(expenses)	157	77	28	738	1,000
EBIT –OPERATINGPROFIT / (LOSS)	1,123	(171)	895	1,665	3,512
Netfinancial income /(expenses)	(48)	(107)	(47)	9	(193)
Share of profit/(loss) of entities accounted for using the equitymethod	-	(42)	(19)	16	(45)
PROFIT/(LOSS) BEFORE TAX	1,075	(320)	829	1,690	3,274
Income tax	(206)	(6)	(173)	(323)	(708)
NET PROFIT/(LOSS) FOR THE REPORTING PERIOD	869	(326)	656	1,367	2,566

7. Revenuesandexpenses

7.1 Salesrevenues

	Q1 unaudited	Q2 unaudited	Q3 unaudited	Q4 unaudited	Year ended December 31, 2017
SALES REVENUES
Sales of merchandise and finished goods with excise tax duty	5,743	4,949	4,910	6,477	22,079
Excise tax	(125)	(116)	(114)	(128)	(483)
Revenues from sale of merchandise and finished goods, including:	5,618	4,833	4,796	6,349	21,596
Sale of electricity	3,221	2,814	2,910	3,488	12,433
Sale of distribution services	1,574	1,453	1,473	1,581	6,081
Sale of heat	285	129	88	485	987
Sale of energy origin rights	158	87	(7)	169	407
Regulatory system services	147	125	124	155	551
Sale of gas	146	135	92	211	584
Othersales of goods and materials	87	90	116	260	553
Revenue from sale ofservices	123	46	66	54	289
Revenuesfrom LTC compensations	-	-	1,211	4	1,215
TOTAL REVENUE FROM SALE	5,741	4,879	6,073	6,407	23,100

Applied accounting principles (policies) and explanatory notes are an integral part of the consolidated financial statements

	Q1	Q2	Q3	Q4	Year ended
	unaudited	unaudited	unaudited	unaudited	December 31, 2016
SALES REVENUES
Sales ofmerchandise and finished goods with excise tax
duty	7,001	6,400	6,751	7,393	27,545
Excise tax	(126)	(120)	(122)	(133)	(501)
Revenuesfrom sale of merchandise and finished goods,
including::	6,875	6,280	6,629	7,260	27,044
Sale of electricity	4,678	4,608	4,847	5,039	19,172
Sale of distribution services	1,433	1,332	1,365	1,464	5,594
Sale of heat	283	119	81	249	732
Sale of energy origin rights	185	(39)	59	156	361
Regulatory system services	137	113	123	140	513
Sale of gas	73	58	59	106	296
Othersales of goods and materials	86	89	95	106	376
Revenue from sale ofservices	128	130	137	133	528
Revenuesfrom LTC compensations	130	123	131	136	520
TOTAL REVENUE FROM SALE	7,133	6,533	6,897	7,529	28,092

The decrease in revenues from sale of electricity in 2017, as compared to 2016 is mainly due to a lower exchange commitment. The reduction in exchange commitment starting from 2017 resulted in a greater volume of electricity being sold directly between PGE Group companies. These transactions are eliminated at the level of consolidated financialstatements.

The issue of compensationsfrom LTCsis described in note 33.1 to these financialstatements.

7.2 Costbynatureandfunction

	Q1 unaudited	Q2 unaudited	Q3 unaudited	Q4 unaudited	Year ended December 31, 2017
COSTS BY NATURE
Depreciation, amortisation , disposal and impairmentlosses	778	797	808	1,758	4,141
Materials and energy	758	589	634	1,124	3,105
Externalservices	671	642	668	818	2,799
Taxes and charges	863	727	735	866	3,191
Employee benefits expenses	1,098	1,094	1,023	1,260	4,475
Other costs by nature	53	53	75	102	283
TOTAL COST BYNATURE	4,221	3,902	3,943	5,928	17,994
Change in inventories	(18)	2	8	4	(4)
Cost of products and servicesforthe entity's own needs	(190)	(246)	(244)	(321)	(1,001)
Distribution and selling expenses	(304)	(296)	(282)	(338)	(1,220)
General and administrative expenses	(176)	(169)	(156)	(292)	(793)
Value of goods andmaterialssold	616	530	490	1,003	2,639
COSTOFGOODS SOLD	4,149	3,723	3,759	5,984	17,615

The y/y decline in the value of goods and materialssold (mainly purchased electricity) in 2017 resulted mainly from the aforementioned decline in revenue from the sale of electricity.

	Q1 unaudited	Q2 unaudited	Q3 unaudited	Q4 unaudited	Year ended December 31, 2016
COSTS BY NATURE
Depreciation, amortisation , disposal and impairmentlosses	731	1,522	782	949	3,984
Materials and energy	840	655	588	734	2,817
Externalservices	593	617	638	721	2,569
Taxes and charges	811	773	873	868	3,325
Employee benefits expenses	1,117	1,059	1,022	1,039	4,237
Other costs by nature	63	65	66	73	267
TOTAL COST BYNATURE	4,155	4,691	3,969	4,384	17,199
Change in inventories	(29)	19	8	4	2
Cost of products and servicesforthe entity's own needs	(264)	(269)	(251)	(223)	(1,007)
Distribution and selling expenses	(379)	(348)	(350)	(352)	(1,429)
General and administrative expenses	(183)	(216)	(163)	(415)	(977)
Value of goods andmaterialssold	2,305	2,340	2,304	2,437	9,386
COSTOFGOODS SOLD	5,605	6,217	5,517	5,835	23,174

Applied accounting principles (policies) and explanatory notes are an integral part of the consolidated financial statements

7.2.1 Depreciation,amortisation,disposalandimpairmentlosses

The following presents depreciation, amortisation, disposals and impairment losses of property, plant and equipment, intangible assets, investment propertiesin the statement of comprehensive income.

Year ended	Depreciation, amortisation, disposal				Impairment losses
December 31, 2017	PPA	IA	IP	TOTAL	PPA	IA	IP	TOTAL
Cost of goods sold	2,894	87	2	2,983	958	2	(3)	957
Distribution and selling expenses	11	5	-	16	-	-	-	-
General and administrative expenses	23	14	-	37	-	37	-	37
Recognised in profit or loss	2,928	106	2	3,036	958	39	(3)	994
Cost of products and services for the entity's own needs	111	-	-	111	-	-	-	-
TOTAL	3,039	106	2	3,147	958	39	(3)	994
Other operating income	-	-	-	-	(2)	-	-	(2)

Year ended	Depreciation, amortisation, disposal				Impairment losses
December 31, 2016	PPA	IA	IP	TOTAL	PPA	IA	IP	TOTAL
Cost of goods sold	2,691	84	1	2,776	489	284	3	776
Distribution and selling expenses	12	5	-	17	-	-	-	-
General and administrative expenses	52	14	-	66	222	7	-	229
Recognised in profit or loss	2,755	103	1	2,859	711	291	3	1,005
Change in inventories	1	-	-	1	-	-	-	-
Cost of products and services for the entity's own needs	119	-	-	119	-	-	-	-
TOTAL	2,875	103	1	2,979	711	291	3	1,005

7.2.2 Materialsandenergy

	Year ended	Year ended
	December 31, 2017	December 31, 2016
Cost of production fuel	2,190	1,994
Renovation materials	513	475
Energy	161	148
Other	241	200
TOTALMATERIALS AND ENERGY	3,105	2,817

7.2.3 Externalservices

	Year ended	Year ended
	December 31, 2017	December 31, 2016
Transmission services	1,900	1,561
Externalservices-repairs and exploitation	282	309
Logisticsservices	124	85
Telecommunication services	79	232
Rent and lease	44	53
IT services	83	85
Consulting services	54	31
Other	233	213
TOTAL EXTERNAL SERVICES	2,799	2,569

7.2.4 Employeebenefitsexpensesandemploymentstructure

	Year ended	Year ended
	December 31, 2017	December 31, 2016
Payroll	3,239	3,154
Socialsecurity expenses	635	606
Retirement and pension expenses	17	11
Jubilee awards, coal benefits	105	102
Other post-employment benefits	37	37
Change in provisionsfor employee benefits	(14)	(146)
Cost of Voluntary Leave Programme	2	16
Other employee benefits	454	457
TOTAL EMPLOYEE BENEFITS EXPENSES, INCLUDING:	4,475	4,237
Included in costs of goodssold	3,443	3,123
Included in distribution and selling costs	264	259
Included in general and administrative expenses	490	504
Cost of products and servicesforthe entity's own needs	278	351

In the item Other costs of employee benefits the Group recognises the costs of employee pension schemes, contributions to Social Fund, cost of healthcare and training.

Employment at PGE Group (FTE) was asfollows:

	As at December 31, 2017	As at December 31, 2016
Conventional energy	25,382	22,788
Renewable energy	510	509
Sales	2,219	2,066
Distribution	10,200	10,239
Other consolidated companies	2,920	2,869
TOTAL EMPLOYMENT	41,231	38,471

The increase in employment in the Conventional Generation and Supply segments is related to the acquisition of assets from EDF in November 2017.

7.3 Otheroperatingincomeandexpenses

	Year ended	Year ended
	December 31, 2017	December 31, 2016
OTHEROPERATING INCOME
Penalties, fines and compensationsreceived	112	137
Adjustment ofrevenuesfrom LTC compensations	69	148
Reversal of other provisions	48	44
Gain on liquidation/disposal of current assets	43	37
Grantsreceived	38	43
Reversal of impairment allowances	21	24
Profit on disposal of property, plant and equipment/intangible assets	13	11
Property, plant and equipment, intangible assetsreceived free of charge	11	11
Revenue from illegal energy consumption	10	6
Surpluses/ asset disclosures	9	4
Compensation forlegal proceedings' costs	4	4
Change in rehabilitation provision	-	643
Other	25	59
TOTALOTHEROPERATINGINCOME	403	1,171

The issue of compensationsfrom LTCsis described in note 33.1 to these financialstatements.

	Year ended December 31, 2017	Year ended December 31, 2016
OTHEROPERATING EXPENSES
Donations granted	43	13
Change in rehabilitation provision	42	-
Recognition of impairmentlosses	37	49
Re-invoicing	27	16
Recognition of impairmentlosses on other assets	23	1
Recognition of other provisions	21	26
Damage /failure removal	18	19
Write-off of discontinued investments and disposal of current assets	12	5
Compensation	10	5
Disposal of property, plant and equipment, intangible assetsrelated to other activity	7	6
Legal proceedings' costs	6	6
Other	9	25
TOTALOTHEROPERATINGEXPENSES	255	171

7.4 Financialincomeandfinancialexpenses

	Year ended December 31, 2017	Year ended December 31, 2016
FINANCIAL INCOME FROM FINANCIAL INSTRUMENTS
Dividends	5	2
Interest	91	55
Revaluation of financial instruments	37	27
Reversal of impairment allowances	2	90
Foreign exchange gains	48	14
FINANCIAL INCOME FROM FINANCIAL INSTRUMENTS	183	188
OTHER FINANCIAL INCOME
Interest on statutory receivables	2	1
Reversal of provisions	4	1
Other	2	1
OTHER FINANCIAL INCOME	8	3
TOTAL FINANCIAL INCOME	191	191

The Group recognises interest income primarily on cash and receivables. Positive exchange differences were influenced mainly by foreign currency loans.

In the item 'Revaluation' PGE Group presents mainly measurement of hedging transactions in their ineffective part for instruments designated as cash flow hedges and in full as regards other instruments, as well as the measurement of a call option to purchase Polimex-Mostostal S.A.shares.

	Year ended	Year ended
	December 31, 2017	December 31, 2016
FINANCIAL EXPENSES RELATED TOFINANCIAL INSTRUMENTS
Interest	176	131
Revaluation of financial instruments	14	10
Impairmentloss	97	2
Loss on disposal of investment	93	-
Foreign exchange losses	6	33
FINANCIAL EXPENSES RELATED TOFINANCIAL INSTRUMENTS	386	176
OTHER FINANCIAL EXPENSES
Interest expenses, including unwinding of the discount	172	180
Interest on statutory liabilities	1	1
Provisions creatd	1	25
Other	1	2
OTHER FINANCIAL EXPENSES	175	208
TOTAL FINANCIAL EXPENSES	561	384

Interest expenses mainly relate to bonds issued and credit and loans taken out. Interest cost (discount unwinding) on non-financial itemsrelates mainly to rehabilitation provisions and employee benefit provisions.

During the reporting period, impairment included mainly the cost of estimated loss of value of bondsissued by Autostrada Wielkopolska S.A. of book value PLN 89 million.

Loss on disposal of investment, amounting to PLN 93 million, mainly due to the sale of EXATEL S.A.shares.

7.5 Shareofprofitofassociatesandentitiesjointlycontrolledentitiesaccountedforundertheequitymethod

SHARE INVOTES	PolskaGrupa Górnicza 15.76%	Polimex Mostostal 16.48%	ElectroMobility Poland 25.00%	PEC Bogatynia 34.93%
YEAR 2017
Revenue	8,236	2,068	-	14
Result on continuing operations	86	65	(3)	-
Share of profit of associates and jointly controlled entities	14	11	(1)	-
Elimination of unrealised gains and losses	21	(5)	-	-
SHAREOF PROFITOF ASSOCIATES ANDENTITIES JOINTLY CONTROLLED	35	6	(1)	-

	PolskaGrupaGórnicza	ElectroMobility Poland	PEC Bogatynia
SHARE INVOTES	until X.2016 15.66% XI-XII.2016 16.63%	25.00%	34.93%
YEAR 2016
Revenue	3,828	-	13
Result on continuing operations	(332)	-	(1)
Share of profit of associates and jointly controlled entities	(51)	-	-
Elimination of unrealised losses	6	-	-
SHAREOF PROFITOF ASSOCIATES ANDENTITIES JOINTLY CONTROLLED	(45)	-	-
Other comprehensive income	(11)	-	-
SHAREOF ASSOCIATES AND JOINTLY CONTROLLEDENTITIES INOTHER COMPREHENSIVE INCOME	(2)	-	-

Data of associate Polimex Mostostal S.A. consolidated from January 17, 2017.

The Group made a consolidation adjustment related to margin on sale of coal between PGG and the Group and an adjustment of margin on Polimex Mostostal's contractsforthe Group.

8. Incometax

8.1 Taxinthestatementofcomprehensiveincome

Main elements of income tax expense forthe years ended December 31, 2017 and December 31, 2016 are asfollows:

	Year ended	Year ended
	December 31, 2017	December 31, 2016
INCOME TAX RECOGNISED INSTATEMENTOF PROFITOR LOSS
Currentincome tax	632	398
Previous periods currentincome tax adjustments	-	16
Deferred income tax	(9)	294
INCOME TAX EXPENSE RECOGNISEDINSTATEMENTOF PROFITOR LOSS	623	708
INCOME TAX EXPENSE RECOGNISEDINOTHER COMPREHENSIVE INCOME
From actuarial gains and lossesfrom valuation of provisionsfor employee benefits	(19)	47
From valuation of hedging instruments	(15)	39
(TAX BENEFIT) / EXPENSE RECOGNIZEDINOTHER COMPREHENSIVE INCOME (EQUITY))	(34)	86

8.2 Effectivetaxrate

A reconciliation of the calculation of income tax on profit before tax at the statutory tax rate and income tax calculated according to the effective tax rate of the Group is asfollows:

	Year ended	Year ended
	December 31, 2017	December 31, 2016
PROFIT BEFORE TAX	3,290	3,274
Income tax according to Polish statutory tax rate of 19%	625	621
ITEMS ADJUSTINGINCOME TAX
Adjustmentsrelated to settlement of currentincome tax of previous years	-	16
Adjustments concerning deferred income tax from prior years	(4)	(36)
Costs notrecognised astax-deductible costs	42	119
Non-taxable income	(42)	(14)
Other	2	2
TAXAT EFFECTIVE TAX RATE
Income tax (expense) as presented in the consolidated financialstatements	623	708
EFFECTIVE TAX RATE	19%	22%

EXPLANATORY NOTES TO THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION

9. Property,plantandequipment

	As at	As at
	December 31, 2017	December 31, 2016
Land	242	236
Buildings and construction	20,575	19,061
Technical equipment	22,166	19,604
Vehicles	339	341
Other property, plant and equipment	2,952	2,522
Construction in progress	12,346	9,601
CARRYINGAMOUNTOF PROPERTY, PLANTAND EQUIPMENT	58,620	51,365

Changesin property, plant and equipment by type

	Land	Buildings and construction	Technical equipment	Vehicles	Other property, plant and equipment	Construction in progress	Total
GROSSBOOK VALUE
AS AT JANUARY 1, 2017	271	33,492	42,152	729	5,271	9,965	91,880
Capital expenditures	-	-	1	2	-	6,599	6,602
Transferfromconstruction in progress	4	1,994	2,269	54	398	(4,719)	-
Liquidation, disposal	-	(134)	(324)	(25)	(11)	-	(494)
Purchase of new subsidiaries	7	1,239	2,554	5	9	853	4,667
ChangesinPGEGroup	-	(406)	(505)	(5)	(41)	(33)	(990)
Other	2	(2)	6	(3)	184	94	281
AS AT DECEMBER 31, 2017	284	36,183	46,153	757	5,810	12,759	101,946
ACCUMULATEDDEPRIACIATIONAND IMPAIRMENT LOSSES
AS AT JANUARY 1, 2017	35	14,431	22,548	388	2,749	364	40,515
Depreciation and net value of liquidation presented in costs by nature	4	1,267	1,555	58	153	2	3,039
Impairment allowances	4	291	601	1	2	57	956
Liquidation, disposal	-	(121)	(289)	(23)	(11)	-	(444)
ChangesinPGEGroup	-	(246)	(386)	(3)	(35)	-	(670)
Other	(1)	(14)	(42)	(3)	-	(10)	(70)
AS AT DECEMBER 31, 2017	42	15,608	23,987	418	2,858	413	43,326
CARRYINGAMOUNTAS ATDECEMBER 31, 2017	242	20,575	22,166	339	2,952	12,346	58,620

	Land	Buildings and construction	Technical equipment	Vehicles	Other property, plant and equipment	Property, plant and equipment in progress	Total
GROSSCARRYINGAMOUNT
AS AT JANUARY 1, 2016	266	31,669	39,261	720	4,991	8,019	84,926
Capital expenditures	-	-	-	-	-	8,016	8,016
Transferfromconstruction in progress	16	2,003	3,546	59	476	(6,100)	-
Liquidation, disposal	(1)	(119)	(640)	(17)	(7)	(1)	(785)
Other	(10)	(61)	(15)	(33)	(189)	31	(277)
AS AT DECEMBER 31, 2016	271	33,492	42,152	729	5,271	9,965	91,880
DEPRECIATIONAND IMPAIRMENT LOSSES
AS AT JANUARY 1, 2016	23	13,204	21,487	395	2,601	148	37,858
Depreciation and net value of liquidation presented in costs by nature	5	1,203	1,445	57	164	1	2,875
Impairment allowances	9	195	293	1	2	211	711
Liquidation, disposal	-	(107)	(592)	(17)	(7)	-	(723)
Other	(2)	(64)	(85)	(48)	(11)	4	(206)
AS AT DECEMBER 31, 2016	35	14,431	22,548	388	2,749	364	40,515
CARRYINGAMOUNTAS ATDECEMBER, 2016	236	19,061	19,604	341	2,522	9,601	51,365

Applied accounting principles (policies) and explanatory notes are an integral part of the consolidated financial statements

Significant additions and disposals of property, plant and equipment

The largest expenditures were incurred in the Conventional Generation segment (PLN 4,713 million) and the Distribution segment (PLN 1,684 million). The key expenditures items were as follows: construction of units 5-6 at Opole Power Plant (PLN 1,808 million), construction of unit 11 at Turów Power Plant (PLN 967 million), modernisation of units 1-3 at Turów Power Plant (PLN 222 million), construction of thermal processing installation with energy recovery at Rzeszów CHP (PLN 104 million), connection of new customers (PLN 504million) and the modernisation and expansion of grid,stations and lines(PLN 868 million) in the Distribution segment.

The acquisition of new subsidiaries relates to the acquisition of companies from EDF group. Because the Group has not yet finished work on determining the fair value of property, plant and equipment as at the acquisition date, the values provided in the table above are not final.

During the present period, the Group sold 100% ofsharesin EXATEL S.A. With the same of EXATEL S.A., the Group also lost control over its subsidiary ENERGO-TEL S.A. As a result of these transactions, the value of the Group's property, plant and equipment and decreased by PLN 320 million.

Borrowing costs

During the year ended December 31, 2017 PGE Group capitalised in the value of property, plant and equipment and construction in progress borrowings costs of approx. PLN 159 million (PLN 103 million in the comparative period).

Capitalisation ofstripping costs

In the current period, in accordance with the requirements of IFRIC 20, the Group capitalized expenditures regarding stripping costs in the production phase of PLN 366 million. At the same time, the Group recognised depreciation of capitalised stripping costs of PLN 97 million. Capitalised stripping costs are presented as "other property, plant and equipment".

Capitalisation of changesin valuation ofrehabilitation provision

PGE Group recognises in the property, plant and equipment changes in the value of rehabilitation provision assigned to stripping of overburden, provision for rehabilitation of post-construction grounds of wind farms and provision for liquidation of property, plant and equipment. As at December 31, 2017 net value of capitalised rehabilitation provision amounted to PLN 792 million (including PLN 702 million of the provision for rehabilitation of post-exploitation mining properties). In comparative period net value of capitalised rehabilitation provision amounted to PLN 632 million (including PLN 543 million of the provision for rehabilitation of post-exploitation mining properties). Capitalised rehabilitation provision is presented in: "land" and "other property, plant and equipment".

10. Investmentproperties

Investment property in the PGE Group companies comprises mainly buildingslocated in the entity'slocations, leased fully or partially to third parties. Fair value of investment property is not significantly different than valuation determined under the historical cost convention in light of the materiality related to the consolidated financialstatements.

As a result of the acquisition of new subsidiaries, the value of the Group'sinvestment propertiesincreased as of December 31, 2017.

11. Intangibleassets

	As at December 31, 2017	As at December 31, 2016
Development costs	2	2
Goodwill	734	9
Software	49	73
Otherlicences and patents	139	132
Acquired right of perpetual usufruct of land	69	64
Otherintangible assets	151	134
Intangible assets not commissioned for use	137	239
CARRYING AMOUNT OF INTANGIBLE ASSETS	1,281	653

Change in intangible assets

	Development costs	Goodwill	Software	Otherlicences and patents	Acquiredright Other ofperpetual intangible usufruct of assets land		Intangible assets not commissioned for use	Total
GROSSBOOK VALUE
AS AT JANUARY 1, 2017	18	9	448	274	74	256	246	1,325
Capital expenditures	-	-	-	-	-	-	149	149
Intangible assets not commissioned for use	-	-	18	48	-	14	(80)	-
Liquidation, disposal	-	-	(11)	(19)	-	(7)	-	(37)
Purchase of new subsidiaries	1	724	-	25	13	3	-	766
ChangesinPGEGroup	-	-	(27)	(26)	(8)	(53)	(3)	(117)
Other	-	1	-	(1)	-	16	(167)	(151)
AS AT DECEMBER 31, 2017	19	734	428	301	79	229	145	1,935
ACCUMULATEDAMORTIZATIONANDIMPAIRMENT LOSSES
AS AT JANUARY 1, 2017	16	-	375	142	10	122	7	672
Amortisation	1	-	36	58	1	10	-	106
Impairment allowances	-	-	-	1	-	1	37	39
Liquidation, disposal	-	-	(11)	(19)	-	(7)	-	(37)
ChangesinPGEGroup	-	-	(21)	(20)	(1)	(53)	-	(95)
Other	-	-	-	-	-	5	(36)	(31)
AS AT DECEMBER 31, 2017	17	-	379	162	10	78	8	654
CARRYING AMOUNT AS AT DECEMBER 31, 2017	2	734	49	139	69	151	137	1,281

	Development costs	Goodwill	Software	Otherlicences and patents	Acquiredright ofperpetual usufruct of land	Other intangible assets	Intangible assets not commissioned for use	Total
GROSSBOOK VALUE
AS AT JANUARY 1, 2016	19	286	430	223	71	242	201	1,472
Capital expenditures	-	-	-	-	-	-	135	135
Intangible assets not commissioned for use	-	-	24	53	1	11	(89)	-
Liquidation, disposal	-	-	(6)	(3)	(1)	-	-	(10)
Other	(1)	(277)	-	1	3	3	(1)	(272)
AS AT DECEMBER 31, 2016	18	9	448	274	74	256	246	1,325
ACCUMULATEDAMORTIZATIONANDIMPAIRMENT LOSSES
AS AT JANUARY 1, 2016	17	-	337	96	10	107	1	568
Amortisation	1	-	44	48	1	9	-	103
Impairment	-	277	-	-	-	6	8	291
Liquidation, disposal	-	-	(6)	(3)	-	-	-	(9)
Other	(2)	(277)	-	1	(1)	-	(2)	(281)
AS AT DECEMBER 31, 2016	16	-	375	142	10	122	7	672
CARRYING AMOUNT AS AT DECEMBER 31, 2016	2	9	73	132	64	134	239	653

Intangible assets not commissioned for use

The presented amounts of intangible assets not commissioned for use as at December 31, 2017, related mainly to IT implementation programmes at the Group and expendituresrelated to deposit prospecting and evaluation at the Złoczew field.

The available financial projections do not indicate any impairment of intangible assets not commissioned for use.

Goodwill

Evaluation ofrecoverable amount of goodwill has been described in note 3 of these consolidated financialstatements.

In the item Acquisition of new subsidiaries the Group presents PLN 724 million as goodwill arising on initial recognition of the acquired EDF assets.

Atreporting period, December 31, 2017, goodwill was allocated to the following segments:

Conventional Generation PLN 730 million,
Renewables- PLN 4 million.

12. Investmentsinassociates andjointlycontrolledentitiesaccountedforundertheequitymethod

				As at December 31, 2017		As at December 31, 2016
Polska Grupa Górnicza Sp.z o.o.				533		391
Polimex Mostostal S.A.				91		-
ElectroMobility Poland S.A.				2		3
PEC Bogatynia Sp.z o.o.				8		8
EQUITY-ACCOUNTED INVESTMENTS				634		402
	PolskaGrupa Górnicza	Polimex Mostostal		ElectroMobility Poland		PEC Bogatynia
SHARE INVOTES	15.76%	16.48%		25.00%		34.93%
As at December 31, 2017
Current assets	1,876		1,586		7	4
Non-current assets	9,074		654		-	22
Currentliabilities	3,409		974		-	3
Non-currentliabilities	4,167		810		-	1
NET ASSETS	3,374		456		7	22
Share in net assets	532		75		2	8
Goodwill	1		16		-	-
INVESTMENTS ACCOUNTEDFORUNDER THE EQUITY METHOD	533		91		2	8

	PolskaGrupaGórnicza	ElectroMobility Poland	PEC Bogatynia
SHARE INVOTES	16.63%	25.00%	34.93%
As at December 31, 2016
Current assets	1,008	10	3
Non-current assets	6,277	-	22
Currentliabilities	2,516	-	2
Non-currentliabilities	2,442		-
NET ASSETS	2,327	10	23
Share in net assets	387	3	8
Goodwill	4	-	-
INVESTMENTS ACCOUNTED FOR UNDER THE EQUITY METHOD	391	3	8

The purchase ofsharesin Polimex Mostostal S.A. is described in note 33.4 to these financialstatements.

13. Deferredtaxinthestatementoffinancialposition

13.1 Deferredtaxassets

	As at	As at
	December 31, 2017	December 31, 2016
Difference between tax value and carrying amount of property, plant and equipment	2,403	1,559
Difference between tax value and carrying amount of financial assets	48	16
Difference between tax value and carrying amount of financial liabilities	268	272
Difference between tax value and carrying amount of inventories	17	15
LTC compensations	48	253
Rehabilitation provision	548	472
Provision for purchase ofCO2 emission rights	276	220
Provisionsfor employee benefits	571	529
Other provisions	122	129
Energy infrastructure acquired free of charge and connection paymentsreceived	111	129
Other	38	15
DEFERRED TAX ASSETS	4,450	3,609

Change in deferred tax - assets

	Year ended	Year ended
	December 31, 2017	December 31, 2016
AS AT JANUARY 1	3,609	3,703
Change in correspondence to financialresult	(113)	(39)
Change in correspondence to other comprehensive income	21	(52)
Purchase of new subsidiaries	971	-
Changesin PGE Group	(30)	-
Other changes	(8)	(3)
AS AT 31 DECEMBER 31	4,450	3,609

13.2 Deferredtaxliabilities

	As at	As at
	December 31, 2017	December 31, 2016
Difference between tax value and carrying amount of property, plant and equipment	4,188	2,945
Difference between tax value and carrying amount of energy origin units	46	65
Difference between tax value and carrying amount of financial assets	382	377
CO2 emission rights	274	439
LTC compensations	34	680
Other	125	26
DEFERRED TAX LIABILITIES	5,049	4,532

Change in deferred tax - liabilities

	Year ended December 31, 2017	Year ended December 31, 2016
AS AT JANUARY 1	4,532	4,242
Changesrecognized in profit orloss	(122)	255
Change in correspondence to other comprehensive income	(13)	34
Purchase of new subsidiaries	661	-
Other changes	(9)	1
AS AT 31 DECEMBER 31	5,049	4,532

AFTEROFF-SETOF THE ASSETAND THE LIABILITY INPARTICULAR COMPANIES THE GROUP'S DEFERRED TAX IS PRESENTEDAS:
Deferred tax assets	651	268
Deferred tax provision	(1,250)	(1,191)

14. Inventories

	As at December 31, 2017				As at December 31, 2016
	Historical cost	Impairment allowance	Carrying amount	Historical cost	Impairment allowance	Carrying amount
Renovationmaterials	689	(44)	645	664	(33)	631
Hard coal	512	-	512	232	-	232
Mazut	42	-	42	15	-	15
Investmentmaterials	1	-	1	14	-	14
Othermaterials	58	(13)	45	54	(19)	35
TOTALMATERIALS	1,302	(57)	1,245	979	(52)	927
Green energy origin rights	419	(143)	276	388	(33)	355
Yellow energy origin rights	178	(1)	177	148	(2)	146
Other energy origin rights	33	(1)	32	66	-	66
TOTAL ENERGYORIGINRIGHTS	630	(145)	485	602	(35)	567
Hard coal	71	-	71	-	-	-
CO2 emission rights	2	-	2	37	(8)	29
Other goods	8	(3)	5	7	(2)	5
TOTALGOODS	81	(3)	78	44	(10)	34
OTHER INVENTORIES	71	-	71	68	-	68
TOTAL INVENTORIES	2,084	(205)	1,879	1,693	(97)	1,596

	2017	2016
IMPAIRMENTALLOWANCEOF INVENTORIES AS AT JANUARY 1	(97)	(84)
Purchase of new subsidiaries	(14)	-
Fair valuemeasurement of CO2 emission rights	8	(46)
Recognition of impairmentlosses	(127)	(52)
Reversal of impairmentloss	20	66
Use of impairmentloss	5	16
Other changes	-	3
IMPAIRMENTALLOWANCEOF INVENTORIES AS AT DECEMBER 31	(205)	(97)

Measurement at netsale prices applied mainly to property rights described in detail in note 28.4 to these financialstatements.

As described in note 25.5 of these financial statements, PLN 45 million of inventories constituted a collateral for the repayment of liabilities or contingent liabilities.

15. CO² emissionrightsforcaptiveuse

CO² emission rights (EUA) are received power generating units belonging to the PGE Group, which are covered with the Act dated June 12, 2015 on a scheme for greenhouse gas emission allowance trading. Starting from 2013, only part of emission rightsfor production of heat will be granted unconditionally, while for production of electricity there is, as a rule, lack of free of charge EUA. Pursuant to art. 10c of Directive 2003/87/EC of the European Parliament and of the Council establishing a scheme for greenhouse gas emission allowance trading within the Community, the derogation is possible providing the realization of investment tasks included in National Investment Plan, which allow to reduce CO² emission. The condition under which free of charge CO² emission rights can be obtained is presentation of factual-financialstatementsfrom realization of tasksincluded in National Investment Plan.

In September 2017, PGE Group (including PGE Energia Ciepła S.A.) submitted another report on investments included in the National Investment Plan in order to obtain CO² EUA allocations for installationsthat generate electricity, justified with expenditures incurred to implement these investments in the period from July 1, 2016, to June 30, 2017. A formal assessment of the documents submitted began on November 30, 2017.

	2017		2016 restated data
EUA	Quantity (Mg million)	Value	Quantity (Mg million)	Value
AS AT JANUARY 1	85	2,349	77	2,172
Purchase of new subsidiaries	-	2	-	-
Purchase	12	247	40	937
Granted free of charge	21	-	26	-
Redemption	(56)	(1,156)	(58)	(760)
AS AT THE REPORTING DATE	62	1,442	85	2,349
Long-term	18	402	47	1,157
Short-term	44	1,040	38	1,192

The decline in the value of CO² emission allowances held by PGE Group as at December 31, 2017, results from the start of purchases on the derivative market.

16. Othercurrentandnon-currentassets

16.1 Othernon-currentassets

	As at	As at
	December 31, 2017	December 31, 2016
Advancesfor property, plant and equipment	432	713
Other non-current assets	92	17
TOTALOTHER ASSETS	524	730

Advances for construction in progress relate mainly to investment projects conducted by the Conventional Generation segment. An increase in other non-current assetsresultsfrom co-financing by PGE Energia Ciepła S.A. of an investment in district heating networks.

16.2 Othercurrentassets

	As at	As at
	December 31, 2017	December 31, 2016
		restated data
PREPAYMENTS
Fees, agency commission	36	34
Social Fund	3	2
Co-financing of investmentin development of district heating networks	15	-
Long-term contracts	20	3
Feesfor exclusion of land from agricultural production /forestry	-	4
IT services	8	6
Property and tortinsurance	21	2
Other prepayments	21	16
OTHER CURRENTASSETS
VAT receivables	216	222
Excise tax receivables	18	100
Advancesfor deliveries	8	6
Other current assets	25	21
TOTALOTHER ASSETS	391	416

The amount of VAT isrelated to an estimate of electricity sales, unread on metering equipment as of the reporting date. The amount of excise tax receivables regards the exemption from excise tax of electricity generated from renewable energy sources on the basis of a document confirming the redemption of the certificate of origin.

17. Cashandcashequivalents

Short-term deposits are made for different periods, from one day up to one month, depending on the Group's needs for cash, and are deposited at individually agreed interest rates.

The balance of cash and cash equivalents comprise the following positions:

	As at	As at
	December 31, 2017	December 31, 2016
Cash on hand and cash at bank	1,309	808
Overnight deposits	34	42
Short-term deposits	1,209	1,819
TOTAL	2,552	2,669
Interest accrued on cash, notreceived at the reporting date	-	(2)
Exchange differences on cash in foreign currencies	(1)	(1)
Cash and cash equivalents presented in the statement of cash flows	2,551	2,666

Undrawn borrowing facilities as at December 31	6,740	6,081
including overdraftfacilities	2,174	2,001

A detailed description of credit agreementsis presented in note 25.1.4 of these financialstatements.

Restricted cash in total amount of PLN 92 million (PLN 72 million in the comparative period) relate to cash deposit securing the settlements of PGE Group entities with Izba Rozliczeniowa Giełd Towarowych S.A. (Warsaw Commodity Clearing House).

18. Discontinuedoperations

During the year ended December 31, 2017 and December 31, 2016 the parent company and key subsidiaries did not discontinue any significant operations. However, there are some activities carried out in the PGE Group under which assets that are not closely related to core business are disposed.

19. AssetsandliabilitiesoftheSocialFund

The Social Fund is created by employers employing over 20 full time employees. The Group's entities create such a fund and make periodic contributions to it. The fund does not possess any property, plant and equipment. The objective of the fund is to subsidize the social activity for employees of theGroup, loans granted to its employees and othersocial expenses.

	As at	As at
	December 31, 2017	December 31, 2016
Property, plant and equipment contributed to the fund	1	-
Loans granted to employees	89	91
Cash	50	49
Otherfund assets	1	-
Fund liabilities	(135)	(138)
BALANCE AFTER COMPENSATION	6	2
Contributionsto the Social Fund	138	130

The assets and liabilities of the Social Fund, as recognised in these financial statements, netted off in the financial statements, appropriately in Other current assets or Other current liabilities.

20. Equity

The objective of equity management is to ensure a secure and effective financing structure that takes into account operational risk, investment expenditures and the interests ofshareholders and debt investors. Equity management takes places at Group level.

In line with commonly applicable practices, the Group monitorsits net debt to EBITDA ratio. Net debt is understood as short- and longterm financial debt (interest-bearing credit and loans, bonds and other debt instruments as well asfinance lease liabilities), less cash and cash equivalents and short-term deposits. Restricted cash is not include in calculating net debt.

The Group's aim isto maintain itsinvestment grade creditratings.

	Year ended	Year ended
	December 31, 2017	December 31, 2016
Net debt/ EBITDA	0.99x	0.69x
Net debt/share capitalratio	0.16x	0.12x

Taking into account the scale of of the whole PGE Group, net debtratio wasrelatively low during 2017: net debt to EBITDA ratio remains lowerthan 1.

In connection with an on-going investment programme, a gradual increase in financial leverage is expected as a result of which the Group will be more closely analysing the above ratio. The net debt to EBITDA ratio is a central element of the Group'sfinancial forecasts and plans.

20.1 Sharecapital

	As at	As at
	December 31, 2017	December 31, 2016
1,470,576,500 Series A ordinary Shares with a nominal value of PLN10.25 each	15,073	15,073
259,513,500 Series B ordinary Shares with a nominal value of PLN10.25 each	2,660	2,660
73,228,888 Series C ordinary Shares with a nominal value of PLN10.25 each	751	751
66,441,941 Series D ordinary Shares with a nominal value of PLN10.25 each	681	681
Totalshare capital	19,165	19,165

All of the Company'sshares are paid up.

After the reporting date and until the date of preparation of the foregoing financial statements there were no changes in the value of the Company'sshare capital.

Rights ofshareholders- State Treasury rights concerning the Company's activities

The Company is a part of the PGE Polska Grupa Energetyczna S.A. Group, to which State Treasury holds special rights as long as it remains a shareholder.

Special rights of the State Treasury that are applicable to the PGE Group entities derive from the Act of March 18, 2010 on special rights of the Minister of Energy and their performance in certain companies and groups operating in the electricity, oil and gaseous fuels sectors(Official Journal from 2016, item 2012). The aforesaid Actspecifiesthe particular rights entitled to the Minister of Energy related to companies and groups operating in the electricity, oil and gaseous fuels sectors whose property was disclosed within the register of buildings, installations, equipment and servicesincluded in critical infrastructure.

Based on this act the Minister of Energy hasthe right to object to any resolution orlegal action of the Management Board thatrelatesto the ability to dispose of a part of Company's property, which may result in threat to functioning, continuity of operations and integrity of critical infrastructure. The objection can also be expressed against any resolution adopted thatrelatesto:

Liquidation of the Company,

Changes of the use or discontinuance of exploitation of the Company's asset, which is a component of critical infrastructure,
Change in the scope of activities of the Company,
Sale or lease of the enterprise or its organised part or establishment of legal restrictions,
Approval of operational and financial plan, investment plan, or long-term strategic plan,
Movement of the Company'sseat abroad,

if the enforcement of such a resolution would result in an actual threat to functioning, continuity of operations and integrity of the critical infrastructure. The objection is expressed in the form of an administrative decision.

20.2 Reserve capital

Reserve capital results from statutory allocation of profits generated in previous reporting periods, from surplus of profit distribution in excess of the value ofstatutory allocations, as well asfrom merger of PGE S.A. with itssubsidiaries.

According to regulations of the Commercial Code, joint stock companies are obliged to create reserve capital to cover potential losses. At least 8% of the profit for the reporting year recognised in the Company's separate financial statements until this capital reached at least one-third of share capital. The part of reserve capital which amounts to one third of share capital can only be used to cover losses recognised in the separate financial statements and cannot be distributed for other purposes. The General Meeting decides on the use of reserve and reserve capital.

Reserve capitalsubject to distribution to shareholders amounted to PLN 8,940 million as at December 31, 2017 and to PLN 7,342 million as at December 31, 2016.

20.3 Hedgingreserve

	Year ended	Year ended
	December 31, 2017	December 31, 2016
AS AT JANUARY 1	147	(21)
Change in hedging reserve	(79)	207
Valuation of hedging instruments, including:	(74)	206
Deferral of changesin fair value of hedging financial instrumentsin the part considered as effective hedge	242	313
Accrued interest on derivativestransferred from hedging reserve and recognised in interest expenses	4	1
Currency revaluation of CCIRS transaction transferred from hedging reserve and recognised in the result on foreign exchange differences	(167)	(107)
Ineffective portion of changesin fair value of hedging derivativesrecognised in profit orloss	(5)	(1)
Valuation of otherfinancial instruments	(5)	1
Deferred tax	15	(39)
HEDGINGRESERVE AFTER DEFERRED TAX	83	147

Hedging reserve includes mainly valuation of hedging instrumentsto which cash flow hedge accounting is applied.

20.4 Foreignexchangedifferencesontranslationofforeignentities

Foreign exchange differences from translation of subsidiaries comprise the effect of translation into PLN of the financial statements of foreign companies belonging to the Group, i.e. PGE Trading GmbH and PGE Sweden AB (publ) and Investment III B.V. as part of consolidation procedures.

20.5 Retainedearningsandlimitationsonpaymentofdividend

Retained earnings which are notsubject to distribution are amountsthat cannot be paid in the form of dividends.

	As at December 31, 2017	As at December 31, 2016
Amountsincluded in retained earnings notsubjectto distribution by the parent company
 Retained earnings ofsubsidiaries, attributable to equity holders ofthe parent company, including consolidation adjustments	6,075	8,040
 Profit/lossrecognised by the parent company in retained earnings through other comprehensive income	(3)	(4)
Retained earningssubjectto distribution	4,544	1,598
TOTAL RETAINED EARNINGS PRESENTED IN THE STATEMENTOF FINANCIAL POSITION	10,616	9,634

For information regarding limitationsto payment of dividendsfrom reserve capital please refer to 20.2 of these financialstatements. As at December 31, 2017 there were no otherrestrictions on dividend payments.

20.6 Equityattributabletonon-controllinginterests

As at December 31, 2017, equity attributable to non-controlling interests related mainly to the non-controlling interests of EDF's assets in Poland, which is described in note 33.3 to these financialstatements.

The table below presents changesin non-controlling interestsin the reporting periods.

	As at	As at
	December 31, 2017	December 31, 2016
AS AT JANUARY 1	96	96
Share of net profit ofsubsidiaries	7	(2)
Dividends declared by subsidiaries	(2)	(4)
Purchase of new subsidiaries	1,067	-
Share capital increase and share purchase	-	10
Acquisition of non-controlling interests by the Group	(3)	(4)
AS AT 31 DECEMBER 31	1,165	96

20.7 Earningspershare

During current and comparative reporting period there was no dilutive effect on earnings pershare.

	Year ended	Year ended
	December 31, 2017	December 31, 2016
NET PROFIT/(LOSS)ATTRIBUTABLE TO:	2,667	2,566
equity holders of the parent company	2,660	2,568
non-controlling interests	7	(2)
NET PROFIT / (LOSS)ATTRIBUTABLE TOORDINARY EQUITY HOLDERSOF THE COMPANY USED TOCALCULATE EARNINGS PER SHARE	2,660	2,568
Number of ordinary shares atthe beginning ofthe reporting period	1,869,760,829	1,869,760,829
Number of ordinary shares atthe end of the reporting period	1,869,760,829	1,869,760,829
WEIGHTEDAVERAGE NUMBEROFORDINARY SHARESUSED TOCALCULATE EARNINGS / (LOSS) PER SHARE	1,869,760,829	1,869,760,829
EARNINGS AND DILUTEDEARNINGS PER SHARE ATTRIBUTABLE TOEQUITY HOLDERSOF THE PARENT COMPANY (INPLN)	1.42	1.37

20.8 Dividendspaidandrecommendedforpayment

Dividend from 2017 profit

During the reporting period and until the date of preparation of these financialstatementsthe Company made no advance payments of dividends.

On May 11, 2017 the Company's Management Board decided to change its dividend policy. In light of the need to finance an ambitious growth programme and with a view towards reducing debt growth, the Company's Management Board recommended the suspension of dividendsfrom profit for years 2016, 2017 and 2018.

After this period, the Company's Management Board intends to recommend to the General Meeting dividend payments to shareholders amounting to 40-50% of consolidated net profit attributable to the parent's shareholders, adjusted for impairment of tangible and intangible assets.

Dividend from 2016 profit

In line with the updated Dividend Policy, on June 27, 2017 the General Meeting of PGE S.A. adopted a resolution to transfer the entire profit generated in 2016 (PLN 1,598million) to the Company'ssupplementary capital.

21. Provisions

The carrying amount of provisionsis asfollows:

	As at December 31, 2017		As at December 31, 2016
	Non-current	Current	Non-current	Current
Employee benefits	2,316	626	2,148	543
Rehabilitation provision	3,082	4	2,666	4
Provision forshortage ofCO2 emission allowances	112	1,341	-	1,154
Provision for energy origin units held forredemption	-	340	-	416
Provision for non-contractual use ofthe property	72	11	91	12
Other provisions	84	82	99	52
TOTAL PROVISIONS	5,666	2,404	5,004	2,181

Changesin provisions

	Employee benefits	Rehabilitation provision	Provision for deficit of CO2 emission rights	Provisionsfor energy origin rights held forredemption	Provision for non-contractual use ofthe property	Other	Total
JANUARY 1, 2017	2,691	2,670	1,154	416	103	151	7,185
Actuarial gains and losses	148	-	-	-	-	-	148
Currentservice costs	65	-	-	-	-	-	65
Pastservice costs	(8)	-	-	-	-	-	(8)
Interest costs	82	89	-	-	-	-	171
Discountrate and other assumptions adjustment	24	65	-	-	-	-	89
Benefits paid / Provisions used	(737)	-	(1,156)	(864)	(1)	(24)	(2,782)
Provisionsreversed	(28)	(2)	-	(12)	(28)	(33)	(103)
Provisionsrecognised - costs	579	82	1,205	759	8	50	2,683
Provisionsrecognised - expenditures	-	70	-	-	-	-	70
Purchase of new subsidiaries	143	27	250	41	-	17	478
Changesin PGE Group	(8)	-	-	-	-	-	(8)
Other changes	(9)	85	-	-	1	5	82
DECEMBER 31, 2017	2,942	3,086	1,453	340	83	166	8,070
Change recognised in operating expenses	(679)	(65)	(1,205)	(747)	-	(25)	(2,721)
Change recognised in other operating income/(expenses)	-	(42)	-	-	18	6	(18)
Change recognised in other financial income/(expenses)	(82)	(89)	-	-	2	2	(167)
Change recognised in assets	-	(192)	-	-	-	-	(192)
Change recognised in other comprehensive income	(101)	-	-	-	-	-	(101)

	Employee benefits	Rehabilitation provision	Provision for deficit of CO2 emission rights	Provisionsfor energy origin rights held forredemption	Provision for non-contractual use ofthe property	Other	Total
JANUARY 1, 2016	3,013	3,350	760	380	117	233	7,853
Actuarial gains and losses	(175)	-	-	-	-	-	(175)
Currentservice costs	74	-	-	-	-	-	74
Pastservice costs	(23)	-	-	-	-	-	(23)
Interest costs	82	99	-	-	-	-	181
Discountrate and other assumptions adjustment	(121)	(460)	-	-	-	-	(581)
Benefits paid / Provisions used	(691)	(1)	(760)	(336)	-	(104)	(1,892)
Provisionsreversed	(59)	(449)	-	(3)	(30)	(27)	(568)
Provisionsrecognised - costs	577	34	1,154	375	16	67	2,223
Provisionsrecognised - expenditures	-	92	-	-	-	-	92
Other changes	14	5	-	-	-	(18)	1
DECEMBER 31, 2016	2,691	2,670	1,154	416	103	151	7,185
Change recognised in operating expenses	(536)	(37)	(1,154)	(372)	-	(3)	(2,102)
Change recognised in other operating income/ (expenses)	-	643	-	-	13	5	661
Change recognised in other financial income/(expenses)	(82)	(99)	-	-	1	(24)	(204)
Change recognised in assets	-	172	-	-	-	-	172
Change recognised in other comprehensive income	249	-	-	-	-	-	249

21.1 Rehabilitationprovision

Provision for rehabilitation of post-exploitation mining properties

After the completion of the lignite mining, the area of the surface mines belonging to PGE Group will be rehabilitated. According to the current plans, costs will be incurred in the years 2023 - 2069 (in case of PGE Górnictwo i Energetyka Konwencjonalna S.A. Branch Bełchatów Lignite Mine) and in the years 2045-2087 (in case of PGE Górnictwo i Energetyka Konwencjonalna S.A. Branch Turów Lignite Mine).

PGE Group creates provision for rehabilitation of post-exploitation mining properties. The amount of the provision recognised in the financial statements includes also the value of Mine Liquidation Fund created in accordance with the Geological and Mining Law Act. The value of the provision as at December 31, 2017 amounted to PLN 2,693 million and as at December 31, 2016 to PLN 2,366million.

Estimated influence of changesin discount rate on the value of rehabilitation provision:

		Discountrate
	Carrying amount	-1 p.p.	+1 p.p.
Provision forrehabilitation of post-exploitation mining properties	2,693	881	(889)

Provision for rehabilitation of ash storages

PGE Group power generating units raise provisions for rehabilitation of ash storages. As at December 31, 2017, this amounted to PLN 175 million (PLN 98 million at the end of the comparative period).

Provisionsfor rehabilitation of post-construction grounds of wind farms

Companies that own wind farms create provision for rehabilitation of post-construction grounds of wind farms. The provision amounted to PLN 53 million as of December 31, 2017 (PLN 49 million at December 31, 2016).

Liquidation of property, plant and equipment

The obligation to liquidate assets and rehabilitate the area resultsfrom "The integrated permission for running electric energy and heat energy producing installation" in which the restitution of the area was specified. As at the reporting date, the value of the provision amounts to PLN 165 million (PLN 157 million as at the end of the comparative period) and refers to some assets of the Conventional Generation and Renewablessegments.

The discount rate used for valuation of rehabilitation provisions as at December 31, 2017 amounted to 3.4% (3.5% in the comparative period).

21.2 ProvisionforshortageofCO2emissionallowances

The provision for deficit of CO² emission allowances is created by PGE Group entities for the shortfall of CO² emission allowances obtained free of charge. The amount of the provision takes into account purchased EUAs. As described in note 15 of these financial statements PGE Group is entitled to receive CO² emissions rights granted free of charge in connection to expenditures concerning investmentsincluded in National Investment Plan. The calculation of the provision includes also these rights.

21.3 Provisionforenergyoriginrightsheldforredemption

Companies within PGE Group create provision for energy origin rights related to sale realised during the reporting period or in prior reporting periods, in the amount of non-depreciated part until the reporting date. The total value of provision as at December 31, 2017 amounted to PLN 340million (PLN 416 million in the comparative period) and was created mainly by PGE Obrót S.A.

21.4 Provisionfornon-contractualuseoftheproperty

PGE Group companies recognise a provision for damages related to a non-contractual use of property. This issue mainly relates to distribution company, which owns distribution networks. As at the reporting date the provision amounted to approximately PLN 83 million (of which 38 million relate to litigations). In the comparative period the value of the provision amounted to PLN 103 million (of which PLN 43 million related to litigations).

21.5 Otherprovisions

Other provisions comprise mainly provisions raised for claims relating to real estate tax of PLN 81 million (PLN 90 million in the prior year).

22. Employeebenefits

	As at December 31, 2017		As at December 31, 2016
	Non-current	Current	Non-current	Current
Post-employment benefits	1,575	129	1,453	117
Jubilee awards	726	99	694	94
Other provisionsfor employee benefits	15	398	1	332
Total provisionsfor employee benefits	2,316	626	2,148	543

22.1 Post-employmentandjubileeawardsprovision

The amount of actuarial provisions for post-employment benefits recognised in the financial statements results from the valuation prepared by an independent actuary.

Carrying amount of the provisionsforthe post-employment benefits and jubilee awards:

		As at December 31, 2017	As at December 31, 2016
	Non-current	Current	Non-current	Current
Retirement, pension and post-mortem benefits	443	79	396	68
Coalsubsidy	138	9	138	9
Energy tariff	621	27	566	26
Social Fund	311	11	293	11
Medical benefits	62	3	60	3
Total post-employment benefits	1,575	129	1,453	117
Jubilee awards	726	99	694	94
TOTAL ACTUARIAL PROVISIONS	2,301	228	2,147	211

22.2 Otherprovisionsforemployeebenefits

	As at December 31, 2017		As at December 31, 2016
	Non-current	Current	Non-current	Current
Provision for Voluntary Leave Program costs	14	23	-	34
Annual bonus and other employee bonuses	-	196	-	153
Unused annual holiday leave	-	139	-	131
Other provisionsfor employee benefits	1	40	1	14
TOTALOTHER PROVISIONS FOR EMPLOYEE BENEFITS	15	398	1	332

Change in provisionsfor employee benefits

	Retirement, pension and post-mortem benefits	Coal allowance	Energy tariff	Social Fund	Medical benefits	Jubilee awards	Other employee benefits	Total
AS AT JANUARY 1, 2017	464	147	592	304	63	788	333	2,691
Actuarial gains and losses	24	(1)	51	8	-	66	-	148
Discountrate adjustment	4	1	9	4	1	5	-	24
Currentservice costs	16	1	7	5	1	35	-	65
Pastservice costs	(4)	-	(7)	3	-	-	-	(8)
Interest costs	16	7	20	11	2	26	-	82
Benefits paid / Provisions used	(17)	(8)	(24)	(11)	(3)	(95)	(579)	(737)
Provisionsreversed	-	-	-	-	-	-	(28)	(28)
Provisionsrecognised	-	-	-	-	-	-	579	579
Purchase of new subsidiaries	20	-	-	-	-	-	123	143
Changesin PGE Group	(1)	-	-	-	-	-	(7)	(8)
Other changes	-	-	-	(2)	1	-	(8)	(9)
ASATDECEMBER31, 2017	522	147	648	322	65	825	413	2,942
Change recognised in operating expenses	(12)	(1)	-	(8)	(1)	(106)	(551)	(679)
Change recognised in other financial income/(expenses)	(16)	(7)	(20)	(11)	(2)	(26)	-	(82)
Change recognised in other comprehensive income	(28)	-	(60)	(12)	(1)	-	-	(101)

	Retirement, pension and post-mortem benefits	Coal allowance	Energy tariff	Social Fund	Medical benefits	Jubilee awards	Other employee benefits	Total
AS AT JANUARY 1, 2016	492	160	693	312	64	953	339	3,013
Actuarial gains and losses	(33)	(9)	(105)	(7)	(1)	(21)	-	(176)
Discountrate adjustment	(20)	(8)	(43)	(20)	(3)	(27)	-	(121)
Currentservice costs	17	1	9	4	1	42	-	74
Pastservice costs	6	4	41	17	2	(93)	-	(23)
Interest costs	15	7	21	9	2	28	-	82
Benefits paid / Provisions used	(14)	(8)	(24)	(11)	(2)	(95)	(537)	(691)
Provisionsreversed	-	-	-	-	-	-	(59)	(59)
Provisionsrecognised	-	-	-	-	-	-	577	577
Other changes	1	-	-	-	-	1	13	15
ASATDECEMBER31, 2016	464	147	592	304	63	788	333	2,691
Change recognised in operating expenses	(24)	(5)	(50)	(21)	(3)	98	(531)	(536)
Change recognised in other financial income/(expenses)	(15)	(7)	(21)	(9)	(2)	(28)	-	(82)
Change recognised in other comprehensive income	53	17	148	27	4	-	-	249

Sensitivity analysis of the value of actuarial provisions as at December 31, 2017, for changesin key assumptions:

	Carrying	Discountrate		Expected average growth rate ofthe basis of calculation
	amount	-1 p.p.	+1 p.p.	-1 p.p.	+1 p.p.
Retirement, pension and post-mortem benefits	522	43	(35)	(36)	47
Coalsubsidy	147	15	(12)	(14)	16
Energy tariff	648	99	(79)	(80)	106
Social Fund	322	45	(37)	(39)	47
Medical benefits	65	7	(7)	(7)	7
Jubilee awards	825	55	(49)	(49)	60
TOTAL	2,529	264	(219)	(225)	283

Applied accounting principles (policies) and explanatory notes are an integral part of the consolidated financial statements

23. Deferredincomeandgovernmentsgrants

23.1 Non-currentdeferredincomeandgovernmentgrants

	As at	As at
	December 31, 2017	December 31, 2016
GOVERNMENTGRANTS
Grantsreceived from NFOŚiGW (environmental funds)	255	260
Redemption of loansfrom environmental funds	37	41
Other government grants	136	153
DEFERREDINCOME
Subsidiesreceived and connection fees	478	523
Donations and property, plant and equipment granted free of charge	78	86
Lease income	-	25
Other deferred income	54	53
NON-CURRENTGOVERNMENTGRANTS ANDDEFERRED INCOME, TOTAL	1,038	1,141

Subsidies received and connection fees presented in deferred income (current also) comprise mainly connection fees for connection to powerreceived until July 1, 2009,so before the interpretation of IFRIC 18 Transfers of Assetsfrom Customers became effective.

23.2 Currentdeferredincomeandgovernmentsgrants

	As at	As at
	December 31, 2017	December 31, 2016
GOVERNMENTGRANTS
Grantsreceived from NFOŚiGW (environmental funds)	13	12
Redemption of loansfrom environmental funds	3	2
Other government grants	10	8
DEFERREDINCOME
Subsidiesreceived and connection fees	68	79
Donations and property, plant and equipment granted free of charge	9	8
Lease income	-	3
Other deferred income	12	7
CURRENTGOVERNMENTGRANTS ANDDEFERREDINCOME, TOTAL	115	119

24. Othernon-financialliabilities

The main components of non-financial liabilities as atrespective reporting dates are asfollows:

	As at	As at
	December 31, 2017	December 31, 2016
Environmental fees	234	243
VAT liabilities	126	122
Excise tax liabilities	128	129
Payroll liabilities	266	239
Liabilitiesfrom social insurances	246	237
Personal income tax	85	80
Liabilities due to Voluntary Leave Programs	12	51
Advancesfor deliveries	147	143
Tax on share capital increase	-	110
Other	61	70
TOTALOTHER LIABILITIES	1,305	1,424

Environmental fees relate mainly to charges for the use of water and gas emission in conventional power plants as well as exploitation charges paid by coal mines.

The "Other" position comprises mainly payments to the Employment Pension Program, the Social Fund and the State Fund for Rehabilitation of Persons with Disabilities.

EXPLANATORY NOTES TO FINANCIAL INSTRUMENTS

25. FinancialInstruments

25.1 Descriptionofsignificantitemswithinparticularclassesoffinancialinstruments

25.1.1 Financialreceivables

	As at December 31, 2017		As at December 31, 2016
	Non-current	Current	Non-current	Current
Trade receivables	-	3,159	-	2,705
Deposits	148	6	136	2,300
LTC compensations	-	10	-	1,241
Debtsecuritiesincluding bonds	-	-	89	-
Bails and security deposits	-	95	2	12
Otherfinancialreceivables, included compensation	10	252	10	67
FINANCIAL RECEIVABLES	158	3,522	237	6,325

Trade receivables

The main component of trade receivables are receivables recognised by the company PGE Obrót S.A. Receivables from households account for about 10% of the consolidated balance of trade receivables, while receivables from the corporate clients of PGE Obrót S.A. represent about 63% of the consolidated balance of trade receivables. As at December 31, 2017, the share of the three mostsignificant customers of the PGE Group amounted to approximately 7% of the total consolidated balance. Additional information relating to trade receivablesis presented in note 26.6.1 of these financialstatements.

Trade receivables comprise also electricity sales accrual.

LTC compensations

LTC compensations are described in detail in note 33.1 of these financialstatements.

Other financialreceivables

The value of other financial receivables consists mainly of guarantee fund, compensation and disputed receivables described in note 28.4 of these financialstatements.

25.1.2 Derivatesandotherreceivablemeasuredatfairvaluethroughprofitorloss

All derivatives are recognised in the Company'sfinancialstatements at fair value.

		As at December 31, 2017
	Recognised in profit orloss	Recognised in other comprehensive income	Assets	Liabilities
DERIVATIVES AT FAIR VALUE THROUGH PROFITOR LOSS
Currency forwards	(32)	-	1	49
Commodity forwards	(4)	-	14	-
Commodity SWAP	5	-	64	7
Contractsfor purchase/sale of coal	-	-	9	20
IRS transactions	16	-	-	10
Options	17	-	24	-
HEDGING DERIVATIVES
CCIRS hedges	(168)	(22)	44	-
IRS hedges	(3)	(48)	98	5
Currency forwards	(23)	(4)	1	33
OTHER ASSETS CARRIED AT FAIR VALUE THROUGH PROFITOR LOSS
Investmentfund participation units	-	-	50	-
TOTAL	(192)	(74)	305	124
current			83	106
non-current			222	18

	As at December 31, 2016
	Recognised in profit orloss	Recognised in other comprehensive income	Assets	Liabilities
DERIVATIVES AT FAIR VALUE THROUGH PROFITOR LOSS
Currency forwards	(5)	-	1	-
Commodity forwards	(5)	-	8	-
IRS transactions	2	-	-	30
HEDGING DERIVATIVES
CCIRS hedges	48	80	231	-
IRS hedges	(1)	126	125	-
TOTAL	39	206	365	30
current			9	-
non-current			356	30

Commodity and currency forwards

Commodity and currency forward transactions mainly relate to trade in CO² emission rights.

Options

On January 20, 2017 PGE S.A. purchased a call option to purchase shares of Polimex-Mostostal S.A. from Towarzystwo Finansowe Silesia Sp.z o.o. The option was valued using the Black-Scholes method. The option exercise dates are: July 30, 2020, July 30, 2021 and July 30, 2022.

Coalswaps

In the current period, PGE Paliwa sp.z o.o. in orderto secure commodity risk related to the price of imported coal executed a number of transactionsto hedge thisrisk using commodity swapsfor coal. The number and value of these transactionsis correlated to the quantity and value of imported coal. Changesin fair value are recognised in profit orloss.

Purchase and sale contracts with physical delivery of coal

PGE Paliwa Sp. z o.o. measures all of its sales and purchase contracts with physical delivery of coal at fair value using the trader-broker model. As at the reporting date, the Company held contractsthat would be performed in 2018.

IRS transactions

In the present periods, PGE S.A. executed an IRS transaction to hedge interest rates on a credit facility with a nominal value of PLN 500 million. To recognise thisIRS transaction, the Company uses hedge accounting.

In 2016, PGE S.A. executed IRS transactionsto hedge interest rates on credit facilities with a total nominal value of PLN 4,630 million. To recognise these IRS transactions, the Company uses hedge accounting.

The impact of hedge accounting is presented in note 20.3 to these financialstatements.

In 2014, PGE S.A. concluded IRS transactions hedging the interest rate on issued bonds with a nominal value of PLN 1 billion. Payments arising from IRS transactions are correlated with interest payments on bonds. Changes in the fair value of IRS transactions are fully recognised in profit orloss.

In 2003, Elektrownia Turów S.A. (currently a branch of PGE Górnictwo i Energetyka Konwencjonalna S.A.) concluded an IRS hedge transactions - swap. This transaction hedges variable interest rates (USD LIBOR 6m) on an investment credit of USD 80 million taken from Nordic Investment Bank to finance investments in Turów power plant. Changes in the fair value of IRS transactions are fully recognised in profit orloss.

CCIRS hedges

In connection with loans received from PGE Sweden AB (publ), PGE S.A. concluded CCIRS transactions, hedging both the exchange rate and interest rate. In these transactions, banks - counterparties pay PGE S.A. interest based on a fixed rate in EUR and PGE S.A. pays interest based on a fixed rate in PLN. In the consolidated financial statements, a relevant part of the CCIRS transaction is treated as a hedge of bondsissued by PGE Sweden AB (publ).

To recognise these CCIRS transactions, the Group uses hedge accounting. The impact of hedge accounting is presented in note 20.3 to these financialstatements.

25.1.3 Available-for-salefinancialassets

The most significant positions of available-for-sale financial assets are shares in entities not quoted on active markets. PGE Group is not able to estimate reliably the fair value of shares not-quoted on an active markets, therefore they are measured at cost less impairment losses. As at December 31, 2017, and December 31, 2016, there was no need to recognise an impairment loss on available-for-sale financial assets.

25.1.4 Loans,borrowings,bondsandlease

	As at December 31, 2017		As at December 31, 2016
	Non-current	Current	Non-current	Current
Loans and borrowings	5,788	570	5,839	332
Bondsissued	2,632	1,051	3,764	78
Lease	2	2	-	1
TOTAL LOANS, BORROWINGS, BONDS AND LEASE	8,422	1,623	9,603	411

Currency position and interestrates

As at December 31, 2017

Currency	Reference rate	Value in currency	Value in PLN	Final maturity date
PLN	Variable	6,351	6,351	Credit, loans - October 2018 - December 2028; bonds - indefinite programme, maturity date for issued tranche - June 2018
Fixed		356	356	Credit, loans - October 2018 - December 2028
TOTAL PLN		6,707	6,707
	Variable	111	465	Credit and loans - June 2024
EUR	Fixed	643	2,682	Bonds - June 2019 - August 2029
TOTAL EUR		754	3,147
USD	Variable	55	191	Credit, loans - May 2019 - September 2020
TOTAL USD		55	191
TOTAL LOANS, BORROWINGS, BONDS AND LEASE			10,045

As at December 31, 2016

Currency	Reference rate	Value in currency	Value in PLN	Final maturity date
PLN	Variable	6,381	6,381	Credit, loans - September 2017 - December 2028; bonds - indefinite programme, maturity date for issued tranche - June 2018
	Fixed	121	121	credit, loans - December 2017 - December 2028
TOTAL PLN		6,502	6,502
	Variable	129	569	Credit and loans - June 2024
EUR	Fixed	642	2,842	Bonds - June 2019 - August 2029
TOTAL EUR		771	3,411
USD	Variable	24	101	Credit, loans - May 2019
TOTAL USD		24	101
	TOTAL LOANS, BORROWINGS, BONDS AND LEASE		10,014

Maturity of loans, borrowings, bonds and lease

	As at	As at
	December 31, 2017	December 31, 2016
Within 1 year	1,623	412
From 1 yearto 2 years	2,471	1,374
From 2 yearto 3 years	464	2,502
From 3 yearto 4 years	1,108	373
From 4 yearto 5 years	1,636	1,042
Over 5 years	2,743	4,311
TOTAL LOANS, BORROWINGS, BONDS AND LEASE	10,045	10,014

The following table illustrates changesin interest-bearing debt in the years ended December 31, 2017 and 2016:

	Year ended	Year ended
	December 31, 2017	December 31, 2016
AS AT JANUARY 1	10,014	5,409
CHANGE IN OVERDRAFTS	67	(7)
CHANGE IN LOANS, BORROWINGS, BONDS AND LEASE (excluding overdrafts)	(36)	4,612
Drawn loans, borrowings, leases / issued bonds	125	4,652
Repayment of loans, borrowings, leases / redemption of bonds	(193)	(196)
Accrued interest	226	134
Paid interest	(220)	(113)
Foreign exchange differences	(214)	135
Acquisition of new companies	240	-
AS AT DECEMBER 31	10,045	10,014

Loans and borrowings

Among loans and borrowings presented above as at December 31, 2017, PGE Group presents mainly the following facilities:

investment credit facility taken out by PGE Górnictwo i Energetyka Konwencjonalna S.A. from Nordic Investment Bank to finance construction of 858 MW power block in Bełchatów Power Plant of PLN 464 million;
investment credit facility taken out by PGE S.A. from Bank Gospodarstwa Krajowego S.A. of PLN 1 billion with a maturity date of December 31, 2027. As at December 31, 2017, the Group used all available credit.
long-term loan agreement with a syndicate of banks composed of: BNP Paribas S.A., Société Générale S.A., Bank Handlowy w Warszawie S.A., ING Bank Śląski S.A., Bank Zachodni WBK S.A., mBank S.A., Powszechna Kasa Oszczędności Bank Polski S.A. and Bank Polska Kasa Opieki S.A., executed on September 7, 2015. Subject matter of the agreement is granting a loan in two parts, i.e. term loan facility and revolving loan facility. As at December 31, 2017, PGE S.A. used the whole term loan facility of PLN 3,630 million which falls on September 30, 2023.

The revolving loan facility of up to PLN 1,870 million and falling on April 30, 2019 is available, but not used by PGE S.A.

loan agreementsigned by PGE S.A. on December 4, 2015 of PLN 500 million with Bank Gospodarstwa Krajowego S.A. with a maturity date ofDecember 31, 2028. As at December 31, 2017,the Company used all available credit.

Additionally, on October 27, 2015, PGE S.A. concluded two loan agreements with the European Investment Bank forthe total amount of nearly PLN 2 billion. The amount of PLN 1.5 billion, obtained on the basis of the first of the two agreements, will be used for projects relating to the modernisation and development of distribution grid. The funds from the second agreement, i.e. the remaining PLN 490 million, will be used to finance and refinance the construction of cogeneration units Gorzów CHP and Rzeszów CHP. The European Investment Bank loans will be available for disbursement over a period of up to 22 months from the date of signing of the agreements. The funds shall be repaid within 15 years from the date of the last tranche. As at December 31, 2017, the Company did not use these credit lines.

As at December 31, 2017, the value of the available overdrafts at significant PGE Group companies was PLN 2,174 million. The repayment date of used overdraft facilities of PGE Group's key companiesis February andApril 2018. The Group is working on extending the agreementsrelated to overdraft facilities.

Bondsissued

The Group hasthe ability to finance its own operationsthrough two bond issue programs:

The bond issue program for the amount of PLN 5 billion directed towards investors from the Polish capital market. On June 27, 2013, the first non-public issuance of 5-year bonds under this program took place, the coupon bearer bonds with a variable interest rate. The nominal value of the issue was PLN 1 billion and the maturity of the bonds is June 27, 2018. On August 29, 2013, the bonds were floated in the Alternative Trading System organized by BondSpot S.A. and Giełda Papierów Wartościowych w Warszawie S.A. (Warsaw Stock Exchange).
The medium term Eurobonds Issue Program of EUR 2 billion established on May 22, 2014 by PGE S.A. together with PGE Sweden AB (publ), a 100% subsidiary of PGE S.A. Under the Program, PGE Sweden AB (publ) may issue eurobonds up to the amount of EUR 2 billion with a minimum maturity of 1 year. On June 9, 2014, PGE Sweden AB (publ) issued Eurobonds in the total amount of EUR 500 million and a five year maturity and on August, 1 2014 it issued bonds in the amount of EUR 138 million, with 15 year maturity.

25.1.5 Tradeandotherfinancialliabilities

	As at December 31, 2017		As at December 31, 2016
	Non-current	Current	Non-current	Current
Trade liabilities	-	1,650	-	976
Purchase of property, plant and equipment and intangible assets	-	1,418	12	1,225
Bails and security depositsreceived	22	87	21	65
Liabilitiesrelated to LTC	332	-	-	1,253
Insurance	-	17	-	-
Other	25	59	-	37
TRADE ANDOTHER FINANCIAL LIABILITIES	379	3,231	33	3,556

25.2 Fairvalueoffinancialinstruments

The value of financial assets and liabilities measured at amortised cost is a rational approximation of their fair value, except for bonds issued by PGE Sweden AB (publ).

Bonds issued by PGE Sweden AB (publ) are based on a fixed interest rate. Their amortised cost presented in these financial statements as at December 31, 2017 amounted to EUR 643 million and their estimated fair value amounted to EUR 667 million. The indicators used in the valuation belong to Level 2 of fair value hierarchy.

Instruments not quoted on active markets, for which fair value cannot be estimated reliably

Basic assets of the Group classified as available-for-sale financial assets are sharesin entities not quoted on active markets. Forsharesin entities that are not quoted on the stock exchange, there is no active market nor possibility to use measurement techniques that will give reliable values. Due to the above, the Group is not able to establish reasonable fair value estimates. These assets are measured at purchase priceslessimpairment.

25.3 Fairvaluehierarchy

Inventories

During the reporting period the Group held CO² emission rights a part of which was purchased in order to benefit from market price swings. This part of the emission allowances is recognised in inventories at fair value less costs of disposal. Fair value is based on the market quotations(Level 1).

Derivatives

The Group measures derivatives at fair value using valuation models for financial instruments based on publicly available exchange rates, interest rates, discount curves in particular currencies (applicable also for commodities which prices are denominated in these currencies) derived from active markets. The fair value of derivatives is determined based on discounted future cash flows from transactions, calculated based on the difference between the forward rate and transaction price. Forward exchange rates are not modelled as separate risk factor, but are derived from the spot rate and appropriate forward interest rate for foreign currencies in relation to PLN.

In the category of financial assets at fair value through profit or loss, the Group presents derivatives related to greenhouse gases emission rights – currency and commodity forwards and IRS hedging transactions changing variable interest rate in PLN to fixed interest rate in PLN (Level 2).

			As at December 31, 2017 As at December 31, 2016
FAIR VALUE HIERARCHY	Level 1	Level 2	Level 1	Level 2
CO2 emission rights	-	-	29	-
Inventories	-		29	-
Currency forward	-	2	-	1
Commodity forward	-	14	-	8
Commodity SWAP	-	64	-	-
Contractsfor purchase/sale of coal	-	9		-
CCIRS valuation	-	44	-	231
IRS valuation	-	98	-	125
Options	-	24	-	-
Fund participation units	-	50	-	-
Financial assets	-	305	-	365
Currency forward	-	82	-	-
Commodity forward	-	-	-	-
Commodity SWAP	-	7	-	-
Contractsfor purchase/sale of coal	-	20	-	-
IRS valuation	-	15	-	30
Financial liabilities	-	124	-	30

In addition, the Group presents CCIRS derivative that hedgesforeign exchange rate and interestrate (Level 2).

Inventories are described in note 14 of these financial statements, whereas derivatives are presented in note 25.1.2 of these financial statements. During the current and comparative reporting periods, there were no transfers of financial instruments between the first and second level of fair value hierarchy.

Presented below are the terms of the derivative instruments and otherreceivables carried at fair value through profit orloss.

	As atDecember 31, 2017		As atDecember 31, 2016
	Value in financial statementsin PLN	Nominal value in currency	Value in financial statementsin PLN	nominal value in currency	Maturity
Currency forward - EUR			1	17	by January 2018
Commodity forward sale EUA - EUR		-		9	by March 2020
Commodity forward purchase EUA - EUR	-	-	8	-	by March 2020
		514		514	by June 2019
CCIRS – EUR to PLN	44	144	231	144	by July 2029
IRS – interestrate PLN	98	3,630	125	3,630	by September 2023
		1,000		1,000	by December 2027
Options	24	6	-	-	by July 2022
Investmentfund participation units	50	50	-	-	n/a
Commodity forward - EUR	14	219	-	-	by March 2020
		12	-	-
Currency forward - EUR	1	6	-	-	by April 2019
Commodity SWAP -USD	64	79	-	-	by December
		1	-	-	2018
Currency forward -USD	1	3	-	-	by January 2019
Contractsfor purchase -USD	9	100	-	-	by December
Contractsforsale -USD		26	-	-	2018
Financial assets	305	-	365
Currency forward - EUR	(19)	193	-	1	by March 2020
IRS – interestrate PLN	(13)	500	-	-	by December 2027
		1,000	23	1,000	by June 2018
IRS - interestrateUSD	(2)	16	(7)	24	by June 2018
Currency forward - EUR	(30)	137	-	-	by April 2020
Commodity SWAP -USD	(7)	1 12	- -	- -	by December 2018
Currency forward -USD		121	-	-
Currency forward - EUR	(28)	8	-	-	by January 2019
Currency forward -USD	(5)	25	-	-	byNovember 2018
Contractsfor purchase -USD	(20)	45	-	-	by December

Applied accounting principles (policies) and explanatory notes are an integral part of the consolidated financial statements

Contractsforsale -USD	53	-	2018 -
Financial liabilities	(124)	(30)

25.4 Statementofcomprehensiveincome

The table below presents the combined effect of the various categories of the financial instruments on the finance income and finance costs.

Year ended December 31, 2017	Cash	Financial instruments measured atfair value	Hedging derivatives	Available-for sale financial assets	Loans and receivables	Financial liabilities at amortised cost	TOTAL
Dividends	-	-	-	5	-	-	5
Interest income / (expenses)	67	(4)	(4)	-	16	(160)	(85)
Exchange differences	(4)	-	(166)	-	(2)	214	42
Reversal of impairment / revaluation	-	37	-	-	2	-	39
Recognition of impairment / revaluation	-	(12)	-		(92)	(7)	(111)
Loss on disposal of investment	-	-	-	(93)	-	-	(93)
TOTAL PROFIT/ (LOSS)	63	21	(170)	(88)	(76)	47	(203)

Year ended December 31, 2016	Cash	Financial instruments measured atfair value	Hedging derivatives	Available-for sale financial assets	Loans and receivables	Financial liabilities at amortised cost	TOTAL
Dividends	-	-	-	2	-	-	2
Interest income / (expenses)	22	(23)	(61)	-	28	(42)	(76)
Exchange differences	11	-	107	-	3	(140)	(19)
Reversal of impairment / revaluation	-	25	1	-	91	-	117
Recognition of impairment / revaluation	-	(10)	-	-	(2)	-	(12)
TOTAL PROFIT/ (LOSS)	33	(8)	47	2	120	(182)	12

25.5 Collateralsforrepaymentofreceivablesandliabilities

The Group uses many financial instruments and combinations thereof as collaterals for repayment of loans. The most frequently used are agreements for transfer of receivables, bills and execution statements. Additionally, the Group uses powers of attorney to bank accounts and assignments of receivables.

As at the reporting date, the following assets were used as collateral forrepayment of liabilities or contingent liabilities:

	As at	As at
	December 31, 2017	December 31, 2016
Property, plant and equipment	862	915
Inventories	45	51
Trade receivables	52	34
TOTALASSETS AS COLLATERAL FOR REPAYMENTOF LIABILITIES	959	1,000

Property, plant and equipment presented in the table above are collateralsfor repayment of drawn investment credits. As at December 31, 2017 and as at December 31, 2016 the most significant item is a collateral mortgage on the power unit 858 MW constructed in PGE Górnictwo i Energetyka Konwencjonalna S.A. Branch Bełchatów Power Plant.

Collateral on inventories comprise mainly pledgesrelated to loansreceived from environmental funds.

PGE Group companies are obliged to maintain a specified cash balance on its accounts held with PKO BP and Nordea Bank AB according to the rules of Izba Rozliczeniowa Giełd Towarowych S.A. (Warsaw Commodity Clearing House) and to participate in a guarantee fund. Cash from the two titles mentioned above is accounted for as restricted cash. As at December 31, 2017 it amounted to PLN 92 million (PLN 72 million in the comparative period).

26. Objectivesandprinciplesoffinancialriskmanagement

The main goal of financial risk management at PGE Group isto support the process of creating value forshareholders and to implement businessstrategies of the Group through maintaining the financialrisk at the level acceptable forthe Group management.

Responsibility for managing PGE Group's financial risk lies with the Management Board of PGE S.A. The Management Board specifies risk appetite, understood as an acceptable level of deterioration of PGE Group's financial results, taking into consideration its current and planned economic and financial situation. The Management Board also decided on the allocation of risk appetite to specific business areas.

The organisation of a function of financial risk management at PGE Group is based on the principle of independence of an entity responsible for measurement and control of risk at PGE Group (Risk Department at PGE Polska Grupa Energetyczna S.A.) vs business entities (risk owners) responsible for taking and managing the risk on an ongoing basis. Risk reports are submitted directly to the Risk Committee, Audit Committee and the Management Board of PGE S.A.

PGE Group has a Risk Committee that exercises oversight of the financial and corporate risk management process at PGE Group. The Risk Committee monitors PGE Group's exposure levels, sets limits for significant financial risks, accepts methodologies in financial risk resulting from trade and finance activities, permits expansions of activitiesin new business areas and makes key decisionsregarding risk management.

Financial risk is managed at Group level, in an integrated manner. This process is implemented and/or supervised by PGE Group's Corporate Centre, which is a centre of competences in this area. Exposures to risk generated by business areas are examined on a comprehensive basis, taking into account interdependencies, the possibility of using natural hedging effects and the overall impact on PGE Group'srisk profile and financialsituation.

The financialrisk management model includes:

collection and consolidation of data on exposure to particular categories of financial risk;
calculation of Value-at-Risk and Profit-at-Risk forspecific risk factors and overall for all risk factors;
management of the PGE Group's consolidated exposure in relation to capital at risk and risk limits established based on it (including the identification and implementation of hedging strategies).

In key areas of financialrisk, PGE Group hasimplemented internalregulationsfor managing these risks.

PGE Group is exposed to a variety of financial risks:

market risk (commodity risk, interest rate risk, currency risk);
liquidity risk;
credit risk.

PGE Group's exposure to specific financial risks depends on the scope of activitiesin commodity and financial markets.

26.1 Marketrisk

Marketrisk covers commodity risk, interestrate risk, currency risk.

The main objective of managing market risk at PGE Group is to retain a level of risk resulting from trade and finance activities at an acceptable level and to support businessstrategy and maximisation of the Group's value forshareholders.

PGE Group's proceduresfor managing specific marketrisk categoriesin trade and finance activitiesspecify the following:

objective,scope and rulesfor managing risk;
responsibility for managing risk;
management and operational processes within risk management in trade activities on electricity markets and electric product markets and as regardsfinance activities;
ways of identifying sources of exposure to risk;
methodsfor measuring and monitoring exposures to risk.

PGE Group's market risk management rules also specify ways to set risk appetite, limit exposures to market risk based on Profit-at-Risk and Value-at-Risk and mechanismsforlimiting risk when limits are exceeded.

26.1.1 Commodityrisk

Commodity risk isrelated to the possibility that financialresults deteriorate as a result of changesin commodity prices.

PGE Group companies' exposure to commodity risk relatesto the following commodity markets:

Electricity;

CO² emission rights;
rights to electricity origin certificates;
hard coal;
natural gas;
biomass and other fuels.

PGE Group owns lignite mines that deliver production fuel to two power plants operating within the PGE Group. Due to this fact, the Group's exposure to price risk in this area is notsignificant.

Selected types of commodity risk (including currency) that PGE Group is exposed to:

Risk associated with	Description	Example of exposure source
Risk of changesin electricity prices	 PGE Group has a natural long position due to its generation assets and a lack of possibility to place its production on the market at a pre-determined price.	 Cost to generate electricity,  Price of electricity sale contracts to retail clients,  Price of transactions to buy/sell energy on the wholesalemarket,
Risk of changesin the prices of property rights to electricity origin certificates;	 PGE Group has a net short position resulting from the obligation to redeem property rights related to the sale of electricity to end users.	 Price of transactions to buy/sell property rights on the wholesale market,
Risk of changesin the prices of CO2 emission allowances	 Risk related to changesin the prices of CO2 emission allowances in EUR and risk of changes in EUR/PLN exchange rate;  PGE Group has a short position given its electricity generation at units participating in the EU-ETS scheme.	 Use of generation sources not as planned due to their varying emission levels;  Uncertainty with regard to volume of free allowancesreceived in EU-ETS scheme;  Price of transactionsto buy/sell CO2 emission allowances on the wholesale market.
Risk of fuel price changes(including hard coal, natural gas, biomass, heating oil)	 Risk of commodity price changes, including commodities denominated in foreign currency (or indexed to foreign currency) and foreign currency risk;  PGE Group has a short position due to its need to purchase fuel on the market.	 Price of transactions to buy/sell fuel on the wholesalemarket.
Long-term volume risk	 Risk related to changes in demand for electricity in the National Power System.	 Macroeconomic situation, especially in energy-intensive industries;  Technological changes, especially in energy efficiency;  Climate changes;  Regulations, including preferences for specific sectors of the energy industry;  Degree of integration with foreign power systems.
Short-term volume risk	 Risk related to changes in planned electricity sales volumes as a result of changes in retail demand for electricity	 Trends among retail clients concerning changesin energy providers;  Regulations, including those pertaining to the opportunity to change energy providers;  Short-, mid-term weather changes;  Risk associated to the model for planning demand for energy and quality of source data used in planning.

Applied accounting principles (policies) and explanatory notes are an integral part of the consolidated financial statements

PGE Group has a strategy for hedging key exposures in trading electricity and related commodities adequately to the level of risk appetite over a mid-term horizon. The level of hedging for an open position isset taking into account risk appetite, results of monitoring the risk of electricity and related product prices, liquidity of specific markets as well as the financial situation of the Group and the Group'sstrategic objectives.

PGE Group's exposure to commodity price risk (as regards raw materials) reflects the volume of external purchases of each raw material, as presented in the table below:

	Year ended December 31, 2017		Year ended December 31, 2017
COMMODITY	Tonnage – external Purchase costs purchase (in (PLN million) thousand tonnes)		Tonnage – external purchase (in thousand tonnes)	Purchase costs (PLN million)
Hard coal	6,211	1,395	5,340	1,141
CO2 emission rights for capitive use	11,447	247	40,681	937
3 Natural gas [thousand m ]	756,850	527	659,542	454
Biomass	528	99	868	190
Fuel oil	36	51	41	41
TOTAL		2,319		2,763

As described in note 15 to these financialstatements, the Group changed rulesfor purchasing CO² emission allowances.

26.1.2 Interestraterisk

Interestrate risk isrelated to the possibility that financialresults deteriorate as a result of changesin interestrates.

PGE Group's exposure to interest rate risk results from the fact that PGE Group companies finance their operating and investing activities with financing at variable interest rates, in the form of credits, loans and bonds in domestic and foreign currency, or through investmentsin financial assets at variable orfixed interestrates.

PGE Group controlsinterest rate risk through a system of limits relating to the maximum potential loss due to changes in interest rates in related to consolidated exposure to interest rate risk by PGE Group companies. The interest rate risk measure is based on the Value at Risk methodology.

Moreover, PGE Group sets out hedging strategiesin relation to consolidated exposure to the Group's interest rate risk through hedging coefficients that are subject to approval by the Risk Committee and Management Board of PGE S.A. The hedging strategy and level of interestrate risk are subject to monitoring and are regularly reported to the Risk Committee.

PGE Group companies executes derivative transactions concerning instruments that are based on interest rate only in order to hedge identified risk exposures. Regulations applicable to PGE Group do not permit derivative transactions based on interest rate for the purposes of speculative transactions that would be intended to generate additional earnings resulting from changes in interest rates while exposing the Company to a risk of potential losses.

Bondsissued in the amount of PLN 1 billion under the Bonds issue program of PLN 5 billion are interest-bearing bonds at a variable rate in PLN. Payments underthese bonds are secured using Interest Rate Swaps.

Bonds issued under the medium term Eurobonds Issue Program, are interest bearing bonds at a fixed rate in EUR. Payments relating to these bonds are hedged by CCIRS transactions.

Long-term bank credit of PLN 1.5 billion under the terms of Credit Agreements signed on December 17, 2014, and December 4, 2015, with Bank Gospodarstwa Krajowego and syndicated loan (term loan facility tranche) of PLN 3.63 billion under the terms of Credit Agreementsigned on September 7, 2015. These credit facilities are based on variable interest ratesin PLN. Payments under these credit facilities are secured using Interest Rate Swaps.

Bond programmes are described in note 25.1.4, hedging instrumentsin note 25.1.4 to these financialstatements.

PGE Group's exposure to interestrate risk and concentration of thisrisk by currencies:

PGE Group's exposure to interestrate risk and concentration of thisrisk by currency:

		Type of interest	As at December 31, 2017	As at December 31, 2016
		Fixed	-	-
Derivatives - assets exposed to	PLN	Variable	122	125
interest rate risk		Fixed	-	-
	Other currencies	Variable	133	240
		Fixed	2,553	5,046
	PLN	Variable	4	-
Deposits, cash and debt securities		Fixed	153	59
	Other currencies	Variable	-	89
	PLN	Fixed	-	-
Derivatives – liabilities, exposed to		Variable	(13)	(23)
interest rate risk		Fixed	-	-
	Other currencies	Variable	(111)	(7)
		Fixed	(356)	(121)
	PLN	Variable	(6,351)	(6,381)
Loans, borrowings, bonds and lease		Fixed	(2,682)	(2,842)
	Other currencies	Variable	(655)	(670)
		Fixed	2,197	4,925
	PLN	Variable	(6,238)	(6,279)
Net exposure		Fixed	(2,529)	(2,783)
	Other currencies	Variable	(633)	(348)

Interest rates on variable interest rate financial instruments are updated in periods shorter than one year. Interest rates on fixed interestrate financial instruments are fixed throughout the whole period until maturity of these instruments.

26.1.3 Currencyrisk

Currency risk isrelated to the possibility that financialresults deteriorate as a result of changesin currency prices.

The main sources of PGE Group's exposure to currency risk are presented below:

capital expenditures denominated in or indexed to foreign currencies;
loans and borrowings denominated in foreign currencies;
sales of electricity denominated in foreign currencies(export);
fees denominated in or indexed to foreign currency relevant to purchase of transmission capacities;
sales and purchases of CO² emission rights and gas as well as purchases of hard coal denominated in or indexed to foreign currencies;
expensesrelated to current use of production goods denominated in or indexed to foreign currencies;
financial assets with deposit characteristics denominated in foreign currencies;
other operating flows denominated in or indexed to foreign currencies.

PGE Group controls currency risk through a system of limits relating to the maximum potential loss due to changes in exchange ratesin related to consolidated exposure to currency risk by PGE Group companies. The currency risk measure is based on the Value at Risk methodology.

Moreover, PGE Group sets out hedging strategies for the Group's currency risk using hedging ratios subject to approval by the Company's Risk Committee and Management Board. The hedging strategy and level of currency risk are subject to monitoring and are regularly reported to the Risk Committee.

PGE Group companies conclude derivative transactions concerning instruments that are based on interest rates only in order to hedge identified risk exposures.

Regulations applicable to PGE Group do not permit derivative transactions based on currency for the purposes of speculative transactions that would be intended to generate additional earnings resulting from changes in currencies while exposing the Company to a risk of potential losses.

The following tables present the Group's exposure to currency risk by class of financial instrument:

			CURRENCY POSITION AT DECEMBER 31, 2017
	Total value in financial	EUR		USD
	statements in PLN	Currency	PLN	Currency	PLN
FINANCIAL ASSETS
Trade and other financial receivables, including:	3,680	3	13	3	10
Trade receivables	3,159	-	-	3	10
Other receivables	350	3	13	-	-
Cash and cash equivalents	2,552	32	132	6	21
Derivatives, including:	305	720	3,004	23	79
Measured at fair value through profit or loss	89	9	38	23	79
Hedging instruments	44	711	2,966	-	-
FINANCIAL LIABILITIES
Loans, borrowings, bonds, including:	(10,045)	(753)	(3,306)	(55)	(191)
Interest bearing loans and borrowings	(6,358)	(111)	(464)	(55)	(191)
Bondsissued and debt securities	(3,683)	(642)	(2,842)	-	-
Trade and other financial liabilities measured at amortised cost	(3,610)	(8)	(34)	(22)	(76)
Trade liabilities	(1,650)	(1)	(5)	(22)	(76)
Liabilities due to purchase of property, plant and equipment, intangible assets	(1,418)	(1)	(4)	-	-
Other financial liabilities	(542)	(6)	(25)	-	-
Derivatives, including:	(124)	(338)	(1,405)	(167)	(583)
Measured at fair value through profit or loss	(106)	(338)	(1,405)	(140)	(488)
Hedging instruments	(5)	-	-	(27)	(95)
NET CURRENCY POSITION		(344)	(1,596)	(212)	(740)

The carrying amount of derivative instruments is their fair value. The value of currency risk exposure for forward derivatives is their nominal value at currency. The value of currency risk exposure for CCIRS derivativesisthe currency value of discounted cash flows of currency leg.

				CURRENCY POSITION AT DECEMBER 31, 2016
	Total value in financial		EUR	USD
	statements in PLN	Currency	PLN	Currency	PLN
FINANCIAL ASSETS
Trade and other financial receivables, including:	6,562	39	173	-	-
Bonds acquired, bills	89	20	89	-	-
Trade receivables	2,705	19	84	-	-
Cash and cash equivalents	2,669	13	59	-	-
Derivatives, including:	365	743	3,288	-	-
Measured at fair value through profit or loss	9	15	66	-	-
CCIRS hedging instuments	231	728	3,222	-	-
FINANCIAL LIABILITIES
Loans, borrowings, bonds, including:	(10,014)	(771)	(3,411)	(24)	(101)
Interest bearing loans and borrowings	(6,171)	(129)	(569)	(24)	(101)
Bonds issued and debt securities	(3,842)	(642)	(2,842)	-	-
Trade and other financial liabilities measured at amortised cost, including:	(3,589)	(16)	(65)	-	-
Trade liabilities	(976)	(8)	(33)	-	-
Liabilities due to purchase of property, plant and equipment, intangible assets	(1,237)	>(1)	(2)	-	-
Other financial liabilities	(123)	(7)	(30)
Derivatives, including:	(30)	-	-	(2)	(7)
Measured at fair value through profit or loss	(30)	-	-	(2)	(7)
NET CURRENCY POSITION		8	44	(26)	(108)

26.2 Liquidityrisk

Liquidity risk concerns a situation in which the company is unable to meet itsliabilities(current or non-current) when they become due.

The main objective of liquidity risk management at PGE Group is to ensure and maintain the companies' ability to meet their existing and future financial liabilities, taking into account the cost to obtain liquidity.

Liquidity risk management at PGE Group involves planning and monitoring short- and long-term cash flows from operating, investing and financing activities and taking action intended to secure funds for the activities of PGE Group, while limiting the cost of these actions.

Periodic planning and monitoring of liquidity makes it possible to secure funds for any liquidity gaps by allocating funds among PGE Group companies(cash pooling) as well as using external financing, including overdrafts.

Liquidity risk management in the long term allows PGE Group to define its borrowing capacity and supports decisions regarding the financing of long-term investments.

PGE Group has a central financing model in which, as a rule, agreements relating to external financing are executed by PGE S.A. PGE Group subsidiaries use various sources of intra-group financing such as loans, bonds, bank account consolidation agreements and real cash pooling agreements.

PGE Group uses various financing sources, such as overdrafts, term loans and investment loans, issue of domestic bonds and eurobonds.

The following table presents maturities of the Group's financial liabilities at reporting dates by maturity based on contractual nodiscounted payments

	Carrying amount	Total payments	Under 3 months	From 3 to 12 months	From 1 year to 5 years	Over 5 years
As at December 31, 2017
Loans and borrowings	6,358	7,103	90	499	3,871	2,643
Bonds issued	3,683	3,949	-	1,064	2,189	696
Trade and other financial liabilities	3,610	3,610	3,189	40	48	333
Finance lease liabilities and lease agreement with purchase option	4	4	1	1	2	-
Derivatives	124	125	15	81	33	(4)
TOTAL	13,779	14,791	3,295	1,685	6,143	3,668

As at December 31, 2016	Carrying amount	Total payments	Under 3 months	From 3 to 12 months	From 1 year to 5 years	Over 5 years
Loans and borrowings	6,171	6,887	69	278	2,084	4,456
Bonds issued	3,842	4,206	-	79	3,370	757

Bonds issued	3,842	4,206	-	79	3,370	757
Trade and other financial liabilities	3,589	3,589	2,263	1,293	33	-
Finance lease liabilities and lease agreement with purchase option	1	1	-	1	-	-
Derivatives	30	30	-	20	10	-
TOTAL	13,633	14,713	2,332	1,671	5,497	5,213

26.3 Creditrisk

Credit risk is connected with a potential credit event that can occur, such as insolvency of a customer, partial payment of a receivable, significant delay in receivable payment or other breaches of contract conditions (in particular the lack of delivery and acceptance of the goods as agreed in the contract and the possible non-payment for damages and contractual penalties).

PGE Group companies are exposed to credit risk arising in the following areas:

basic activities of entities the credit risk results from, among others, purchases and sales of electricity and heat, purchases and sales of energy origin rights and CO² emission rights, purchases of fuels etc. This relates primarily to the possibility of a default by the other party of the transaction, if fair value of the transaction is positive from the point of view of the Group;
investment activities of entities the credit risk results from transactions resulting from investment projects which depend on the financialsituation of the Group'ssuppliers;
investing free cash of entities the credit risk resultsfrom investing free cash of the PGE Group entitiesin securities bearing credit risk, i.e. financial instruments other than those issued by the State Treasury.

There are significant concentrations of credit risk within PGE Group related to trade receivables. The three most significant customers accounted for ca. 7% of the trade receivables balance.

Maximum creditrisk exposure resulting from PGE Group'sfinancial assetsis equal to the carrying value of these items.

	Year ended	Year ended
	December 31, 2017	December 31, 2016
Trade and other financial receivables	3,680	6,562
Cash and cash equivalents	2,552	2,669
Derivatives - assets	305	365
MAXIMUM EXPOSURE TOCREDIT RISK	6,537	9,596

26.3.1 Tradereceivables Otherloansandfinancialreceivables

The terms of payments for trade receivables are usually 2-3 weeks. In 2017 the PGE Group received payments for receivables on average after 49 days (debtors turnover ratio in the main companies of the PGE Group ranged between 12 and 61 days).. Trade receivables relate mainly to receivables for energy sold and distribution services. According to the management, due to current control overtrade receivables, there is no additional creditrisk that would exceed the levelreflected by allowancesforreceivables.

PGE Group reduces and controls credit risk related to commercial transactions in accordance with harmonised credit risk management rules implemented at all key PGE Group companies. In the case of trade transactions which due to high value may generate substantial loss in case of failure of business partner to comply with the agreement, the assessment of contractor is carried out before the transaction is conducted, taking into account contractor's financial analysis, its credit history and other factors. Based on the assessment, an internal rating isrecognised or PGE Group uses a rating determined by an independent reputable agency. A limit for the contractor is set based on the rating. Entering into contracts that would increase exposure above the limit, requires in principle the collateral in line with PGE Group'srules pertaining to creditrisk management. The level of used limit isregularly monitored and reported to the Risk Committee and if it is substantially exceeded, units responsible for contractor's risk are obliged to undertake measures to eliminate them. PGE Group regularly monitors payments of receivables and uses system of early vindication, taking into consideration deadlines arising from the energy law and high level of repayment of receivables with short term of expire. It also works with credit bureaus and debt collection companies.

Creditrisk relating to trade receivables by geographicalregion is presented in the table below:

	December 31, 2017		December 31, 2016
	Receivables balance	% share	Receivables balance	% share
Poland	3,070	97%	2,691	99%
Netherlands	59	2%	-	-
Other	30	1%	14	1%
TOTAL	3,159	100%	2,705	100%

Ageing of receivables and impairment

As at December 31, 2017 part of financial assets was covered by impairment allowances. The change in allowances accounts for these classes of financial instrumentsis presented in the table below:

Year ended December 31, 2017	Trade and otherreceivables	Otherfinancialreceivables	Bonds
Impairment as of January 1	(170)	(195)	(297)
Impairment allowance used	13	5	-
Reversal of impairment allowance	5	9	-
Recognition of impairment losses	(14)	(22)	(89)
Acquisition of companies	(16)	-	-
Sale of companies	7	-	-
Other changes	5	-	-
Impairment as of December 31	(170)	(203)	(386)
Value before impairment allowance	3,329	724	386
Net value (carrying amount)	3,159	521	-

Impairment of trade receivables concerns the supply and distribution segments. The total amount of trade receivables impairment at these companies as at December 31, 2017, was PLN 141 million (PLN 147 million in 2016).

Impairment lossesrecognised on bonds of PLN 89million relate to Autostrada Wielkopolska S.A.

There are no significant receivables in the Group that would be substantially past due and not covered by an impairment allowance, except for disputed claimsfrom ENEA S.A. described in detail in note 28.4 of these financialstatements.

Year ended December 31, 2016	Trade and otherreceivables	Otherfinancialreceivables	Bonds
Impairment as of January 1	(212)	(181)	(386)
Impairment allowance used	46	12	-
Reversal of impairment allowance	4	11	89
Recognition of impairment allowance	(16)	(25)	-
Other changes	8	(12)	-
Impairment as of December 31	(170)	(195)	(297)
Value before impairment allowance	2,875	3,963	386
Net value (carrying amount)	2,705	3,768	89

Analysis of ageing structure of trade receivables and other loans and receivables taking into account impairment allowances is presented below:

	DECEMBER 31, 2017			DECEMBER 31, 2016
	Gross	Impairment alowance	Carrying amount	Gross	Impairment allowance	Carrying amount
Receivables before due date	3,776	(449)	3,327	6,638	(360)	6,278
Past due <30 days	242	(9)	233	197	(2)	195
Past due 30-90 days	51	(2)	49	40	(1)	39
Past due 90-180 days	28	(7)	21	14	(8)	6
Past due 180-360 days	20	(15)	5	62	(19)	43
Past due >360 days	322	(277)	45	273	(272)	1
Receivables past due, total	663	(310)	353	586	(302)	284
Trade and other financial receivables	4,439	(759)	3,680	7,224	(662)	6,562

As at December 31, 2017, more than 55% of overdue trade receivables and other loans and receivables that were not covered by an impairment allowancesrelated to sale of energy to end-users.

26.3.2 Deposits,cashandcashequivalents

The Group manages credit risk related to cash and cash equivalents by diversification of banks in which surpluses of cash are allocated. All entities with which PGE Group concludes deposit transactions with operate in the financial sector. These can only be banks registered in Poland or divisions of foreign banks with high investment level ratings, adequate indicator ofsolvency and equity as well as strong, stable market position. The share of three major banks in which PGE Group allocated the most significant cash balances as at December 31, 2017, accounted for approximately 72% (80% in the comparative period).

26.3.3 Derivatives

All entities with which PGE Group concludes derivative transactions with operate in the financial sector. These are banks with investment ratings, adequate equity and strong,stable market position. As at the reporting date, PGE Group was party to the derivative transactions, described in detail in note 25.1.2 to these financialstatements.

26.3.4 Guaranteesandsuretiesissued

Guarantees and suretiesissued by PGE Group companies are presented in note 28 to these financialstatements.

26.4 Market(financial)risk-sensitityanalysis

PGE Group is exposed mainly to currency risk related to foreign exchange rates between EUR/PLN, USD/PLN and to interest rate risk related to referential interest rates of PLN, EUR, USD. PGE Group uses a script analysis method for the purpose of analysing sensitivity to changes of market risk factorsi.e. the Group uses experts'scriptsreflecting the subjective opinion in relation to future fluctuations of individual marketrisk factors.

The scenario analysis presented in this point is intended to analyse the influence of changes in market risk factors on consolidated financialresults. Only those itemsthat can be defined asfinancial instruments are subject to the analysis of interest and currency risk.

In sensitivity analysis related to interest rate risk, PGE Group applies parallel shift of interest rate curve related to a potential possible change of referential interestrates during the following year.

In case of sensitivity analysis of interest rates' fluctuations, the effect of risk factors' changes could be recorded in the consolidated statement of comprehensive income asincome or expenses or asrevaluation of financial instruments measured at fair value.

The sensitivity analysis related to all types of market risks PGE Group is exposed to as at the reporting date, indicating the potential influence of changes of individualrisk factors by class of financial assets and liabilities on profit before tax is presented below.

The currency risk exposure for derivative forward instruments is their nominal value together with accrued interest to the reporting date, translated into Polish zloty at the closing rate as at December 31, 2017 and December 31, 2016, without taking the discount into account. The book value of derivatives constitutestheirfair value measurement.

Sensitivity analysisfor currency risk

The table below presents sensitivity of financial instruments to reasonably possible changes in foreign currency exchange rates, under the assumption ofstability of otherrisk factors.

	SENSITIVITYANALYSIS FORCURRENCY RISKASATDECEMBER31, 2017
FINANCIAL INSTRUMENTS BY CLASS	Carrying amount in PLN	Amount exposed	EUR/PLN Impact on financial result / Equity		USD/PLN Impact on financial result / Equity
		to risk	+10%	-10%	+10%	-10%
Trade and other financial receivables	3,680	23	1	(1)	1	(1)
Cash and cash equivalents	2,552	153	13	(13)	2	(2)
Derivatives measured at fair value through profit or loss	89	117	13	(13)	2	(2)
Hedging derivatives	44	2,966	274	(274)	-	-
Interest bearing loans and borrowings	(6,358)	(655)	(46)	46	(19)	19
Bonds issued	(3,683)	(2,282)	(268)	268	-	-
Trade and other financial liabilities	(3,610)	(109)	(3)	3	(8)	8
Derivatives measured at fair value through profit or loss	(106)	(1,893)	(141)	141	(49)	49
IMPACT ON FINANCIAL RESULT			(157)	157	(71)	71
Hedging instruments	39	2,871	22	(22)	(10)	10
IMPACT ON REVALUATION RESERVE			22	(22)	(10)	10

			SENSITIVITYANALYSIS FORCURRENCY RISKASATDECEMBER31, 2016
			EUR/PLN		USD/PLN
	Carrying amount		Impact on financial result /		Impact on financial result /
FINANCIAL INSTRUMENTS BY CLASS	in PLN	Value at risk	equity		equity
			+10%	-10%	+10%	-10%
Trade and other financial receivables	6,562	172	17	(17)	-	-
Cash and cash equivalents	2,669	59	6	(6)	-	-
Derivatives - assets	9	66	7	(7)	-	-
CCIRS hedges	231	3,222	291	(291)	-	-
Interest bearing loans and borrowings	(6,171)	(670)	(57)	57	(10)	10
Bonds issued	(3,842)	(2,842)	(284)	284	-	-
Trade and other financial payables	(3,589)	(65)	(7)	7	-	-
Derivatives - liabilities	(30)	(7)	-	-	(1)	1
Impact on financial result			(27)	27	(11)	11
CCIRS hedges	231	3,222	31	(31)	-	-
Impact on revaluation reserve			31	(31)	-	-

Sensitivity analysisfor interestrate risk

The Group identifies exposure to interest rate risk related to WIBOR, EURIBOR and LIBOR. The table below presents the sensitivity of financial instrumentsto reasonably possible changesin interestrates, under assumption ofstability of otherrisk factors.

FINANCIALASSETSANDLIABILITIES	Carrying amount in PLN	Value at risk	WIBOR Impact on financial result / equity +50bp	-50bp	EURIBOR Impact on financial result / equity +25bp	-25bp	LIBOR USD Impact on financial result / equity +25bp* -25bp
Derivatives measured at fair value through profit or loss - assets	305	111	<1	<(1)	<1	<(1)	<1	<(1)
Interest bearing loans and borrowings	(6,358)	(6,002)	(27)	27	(1)	1	<(1)	<1
Bondsissued	(3,683)	(1,000)	(5)	5	-	-	-	-
Lease	(4)	(4)	-	-	-	-	-	-
Derivatives measured at fair value through profit or loss - liabilities	(114)	(27)	-	-	-	-	-	-
Impact on financial result			(32)	32	(1)	1	-	-
CCIRS hedges	44	44	46	(48)	(27)	27	-	-
IRS hedges - assets	98	98	109	(113)	-	-	-	-
IRS hedges - liabilities	(5)	(5)	(12)	16	-	-	-	-
Impact on revaluation reserve			143	(145)	(27)	27	-	-

SENSITIVITYANALYSIS FORINTEREST RATERISK ASATDECEMBER 31, 2016

SENSITIVITYANALYSIS FORINTEREST RATERISK ASATDECEMBER 31, 2017

FINANCIALASSETSANDLIABILITIES	Carrying amount in PLN	Value at risk	WIBOR Impact on financial result / equity		EURIBOR Impact on financial result / equity		LIBOR USD Impact on financial result / equity
			+50bp	-50bp	+25bp	-25bp	+25bp* -25bp
Trade and other receivables	6,562	88	-	-	<1	<(1)	-	-
Derivatives measured at fair value through profit or loss - assets	365	9	-	-	-	-	-	-
Interest bearing loans and borrowings	(6,171)	(6,050)	(10)	10	(1)	1	-	-
Bondsissued	(3,842)	(1,000)	(5)	5	-	-	-	-
Lease	(1)	(1)	-	-	-	-	-	-
Derivatives measured at fair value through profit or loss - liabilities	(30)	(30)	5	(5)	-	-	<1	<(1)
Impact on financial result			(10)	10	(1)	1	-	-
CCIRS hedges	231	231	60	(62)	(37)	37	-	-
IRS hedges	125	125	128	(133)	-	-	-	-
Impact on revaluation reserve			188	(195)	(37)	37	-	-

Sensitivity analysisfor commodity price risk

The Group identifies exposure to commodity price risk, including commodities to produce electricity and heat using the Group's generating assets.

The table below presentsthe sensitivity analysisto changes of the purchase cost ofselected commodities by 10%:

	AS AT DECEMBER 31, 2017			AS AT DECEMBER 31, 2016
		Impact on financial result			Impact on financial result
COMMODITY	Purchase cost	+10%	-10%	Purchase cost	+10%	-10%
Hard coal	1,395	140	(140)	1,141	114	(114)
CO2 emission allowances for captive use	247	25	(25)	937	94	(94)
Natural gas [m3 000s]	527	53	(53)	454	45	(45)
Biomass	99	10	(10)	190	19	(19)
Fuel oil	51	5	(5)	41	4	(4)
TOTAL	2,319	233	(233)	2,763	276	(276)

26.5 Hedgeaccounting

In connection with loans received from PGE Sweden AB (publ), PGE S.A. concluded CCIRS transactions, hedging the exchange rate. In these transactions, banks- counterparties pay PGE S.A. interest based on a fixed rate in EUR and PGE S.A. paysinterest based on a fixed rate in PLN. In the consolidated financial statements, a relevant part of the CCIRS transaction is treated as a hedge of bonds issued by PGE Sweden AB (publ).

PGE S.A. secures cash flow risk resulting from exchange rates related to forward contracts to purchase CO² emission allowances, the price of which is expressed in EUR.

Hedge accounting is also applied to the IRS transactions hedging interest rate due to the financial liabilities under credit agreements such as the Credit Agreement with a syndicate of banks signed on September 7, 2015 and Credit Agreement with Bank Gospodarstwa Krajowego signed on December 17, 2014. In these transactions, banks - counterparties pay PGE S.A. interest based on a fixed rate in EUR and PGE S.A. paysinterest based on a fixed rate in PLN.

To recognise these CCIRS transactions, PGE Group uses hedge accounting. The impact of hedge accounting on the revaluation reserve is presented in note 20.3 to these financialstatements.

27. Statementofcashflows

27.1 Cashflowsfromoperatingactivities

(Profit) / loss on investing activities

	Year ended	Year ended
	December 31, 2017	December 31, 2016
(Profit)/loss on sale of property, plant and equipment	(13)	(11)
(Profit)/loss on disposal of financial non-current assets	93	-
Change in impairment ofshares and otherfinancial assets	90	(84)
Matching costmeasurement of derivatives	(76)	(62)
Other	38	26
(PROFIT) / LOSSONINVESTING ACTIVITIES, TOTAL	132	(131)

Change in receivables

	Year ended	Year ended
	December 31, 2017	December 31, 2016
Change in trade receivables and otherfinancialreceivables	2,882	(2,672)
Adjustmentfor changesin purchased bonds	(88)	89
Adjustmentfor deposits	(2,282)	2,311
Netting of LTC receivables/liabilities	(1,241)	-
Adjustmentfor acquisition ofsubsidiaries	321	-
Other	(26)	(3)
TOTAL CHANGE INRECEIVABLES	(434)	(275)

Change in inventories

	Year ended	Year ended
	December 31, 2017	December 31, 2016
Change in inventories	(283)	363
Adjustmentfortransfer of investmentmaterialsto property, plant and equipment	(2)	(12)
Adjustmentfor property rightsfrom trialstartup	-	(9)
Adjustmentfor acquisition ofsubsidiaries	398	-
Other	2	-
TOTAL CHANGE ININVENTORIES	115	342

Change in liabilities, excluding loans and borrowings

	Year ended December 31, 2017	Year ended December 31, 2016
Change in trade and otherfinancial payables	21	(390)
Change in other non-financial liabilities	(119)	36
Adjustmentfor change in investmentliabilities	(101)	298
Adjustmentfor changesin tax liabilities due to share capital increase	110	(110)
Netting of LTC receivables/liabilities	1,241	-
Adjustmentfor acquisition ofsubsidiaries	(829)	-
Other	20	(3)
TOTAL CHANGE INLIABILITIES	343	(169)

Change in other non-financial assets, prepayments and CO² emission allowances

	Year ended	Year ended
	December 31, 2017	December 31, 2016
Change in other assets	231	516
Change in CO2 emission allowances	907	(177)
Change in deferred income	(107)	(44)
Change in advancesfor construction in progress	(285)	(329)
Change in balance concerning financing/investing activities	(15)	(45)
Adjustmentfor acquisition ofsubsidiaries	144	-
Other	(1)	(17)
CHANGE INOTHER NON-FINANCIALASSETS, PREPAYMENTS AND CO2 EMISSIONRIGHTS, TOTAL	874	(96)

Change in provisions

	Year ended December 31, 2017	Year ended December 31, 2016
Change in provisions	885	(668)
Change in actuarial provisionsrecognised in other comprehensive income	(101)	249
Change in rehabilitation provision recognised in assets	(192)	174
Adjustmentfor acquisition ofsubsidiaries	(478)	-
Other	3	1
TOTAL CHANGE INPROVISIONS	117	(244)

27.2 Cashflowsfrominvestingactivities

Purchase of property, plant and equipment and intangible assets

In 2017, the most significant capital expenditures were incurred by Conventional Generation segment (PLN 4,200 million, of which PLN 1,605 million is related to construction of units 5 and 6 at Opole Power Plant,PLN 830 million is related to construction of unit 11 at Turów Power Plant, PLN 184 million on modernisation of units 1-3 at Turów Power Plant, PLN 174 million on change in combustion waste storage technology and related installations at Bełchatów Power Plant) and the Distribution segment (PLN 1,619 million, most of which concerns connection of new clients as well as modernisation and expansion of power grid,stations.

In 2016, the Conventional Generation segment incurred PLN 5,788 million in expenditures and the Distribution segment PLN 1,730 million.

Purchase of financial assets and increase in stake in Group companies

Expendituresincurred in 2017 amounting to PLN 213 million related to the investment in Polska Grupa Górnicza (PLN 126 million) and in Polimex-Mostostal S.A. (described in notes 33.2 and 33.4 to these financialstatements, respectively).

In 2016, the amount of PLN 467 million concerns mainly investments in Polska Grupa Górnicza (PLN 444 million) and prepayments for BOŚ'sshares and acquisition ofsharesin an associate ElectroMobility.

Recognition and release of deposits with maturity over 3 months

In 2017, PGE S.A. released deposits with a maturity over 3 months at the total amount of PLN 2,340 million. In 2016, PGE S.A. concluded deposits with maturity over 3 monthsin the total amount of PLN 2,290million.

Additionally, companies belonging to Conventional Generation segment are obliged to hold cash of the Mine Liquidation Fund, which is collected and deposited asrequired by the Geological and Mining Law Act.

Purchase ofsubsidiaries after offsetting acquired cash

The Group recognised expenditures on the acquisition of EDF's companies in Poland. Funds paid PLN 1,992 million, subrogation of liabilities PLN 2,285 million, adjusted by acquired cash PLN 186 million. Details are presented in note 1.4 of these financialstatements.

Sale ofsubsidiaries after offsetting sold cash

On March 29, 2017 an agreement to sell 100% of EXATEL S.A. shares was executed. Along with the sale of EXATEL S.A., the Group lost control overitssubsidiary ENERGO-TEL S.A. The sale price amounting to PLN 369 million was adjusted by cash handed over.

27.3 Cashflowsfromfinancingactivities

Proceedsfrom loans

In 2017, companies in the Conventional Generation segment received credits and loans from environmental funds worth a total of approx. PLN 116 million. PGE Paliwa sp. z o.o. increased its credit line debt by PLN 67 million. In 2016 the Group has used all of the credits available within the agreementssigned in previous years by PGE S.A. with Bank Gospodarstwa Krajowego and Syndicate of Banks in the total amount of PLN 4,630million.

Repayment of loans, borrowings, bonds and finance leasing

This position includes mainly repayment of loans from environmental funds obtained by Conventional Generation segment in the total amount of approximately PLN 193million and PLN 203 in the preceding reporting period.

Dividends paid

As described in note 20.8 to these financial statements, according to an updated dividend policy, the Group postponed the payment of dividendsfrom profit for 2016, 2017 and 2018.

In 2016, PGE S.A.'s General Meeting resolved to distribute PLN 467 million from the net profit of 2015 as a dividend. The remaining amount of PLN 4 million isrelated to dividends paid to non-controlling shareholders.

Interest paid

In 2017, this item included mainly interest on loans and credit of PLN 143 million, interest on bonds of PLN 77 million and interest on CCIRS and IRS of PLN 75 million.

In 2016, the Group paid interest mainly on: loans and credit (PLN 34 million), bonds (PLN 79 million) and financial instruments (CCIRS and IRS, PLN 83 million).

OTHER EXPLANATORY NOTES

28. Contingentliabilitiesandreceivables.Legalclaims

28.1 Contingentliabilities

	As at	As at
	December 31, 2017	December 31, 2016
Contingentreturn of grantsfrom environmental funds	753	469
Legal claims	188	73
Bank guarantee liabilities	223	-
Contingentreturn of CO2 emission rightsreceived free of charge	-	115
Contractual fines and penalties	12	12
Employees' claims	2	1
Other contingentliabilities	74	61
Total contingentliabilities	1,252	731

Contingentreturn of grantsfrom environmental funds

The liabilities represent the value of possible future reimbursements of funds received by PGE Group companies from environmental funds for the particular investments. The funds will be reimbursed, if investments for which they were granted, will not bring the expected environmental effect.

Legal claims

Dispute with WorleyParsons

The contingent liability is mainly related to the dispute with WorleyParsons. WorleyParsons made a claim for payment of PLN 59 million due to the claimant and for the return of the amount that in the claimant's opinion was unduly collected by PGE EJ 1 sp. z o.o. from a bank guarantee. PGE EJ 1 sp.z o.o. filed a response to the lawsuit. Moreover, the value of the claims mentioned in the WorleyParsons' lawsuit of PLN 54 million was included in a request for payment of PLN 92 million related to termination of the agreement, that was filed by WorleyParsons on March 13, 2015. Through a letter of March 24, 2017, WorleyParsons expanded its claim from PLN 59 million to PLN 104 million (i.e. by PLN 45 million). The Court-ordered deadline for responding to the letter from WorleyParsons expanding the lawsuit is March 31, 2018. The Group does not accept the claim and regardsits possible admission by the court as unlikely.

Claimsrelated to property rightsale contracts executed by Energa-Obrót S.A.

In October 2017, PGE Energia Odnawialna S.A. and PGE Energia Natury sp. z o. o. (currently acquired by PGE Energia Odnawialna S.A.) received lawsuits in which Energa-Obrót S.A. demanded the annulment of legal relations that were to arise as a result of the execution of agreements to sell property rights resulting from electricity origin certificates from FW Kisielice in 2009, FW Koniecwałd (Malbork) and FW Galicja (a wind firm owned by PGE Energia Natury sp. z o.o.). The demands in all of Energa-Obrót S.A.'s lawsuits were based on the accusation that implementing agreements (agreement to sell specific property rights) were executed in circumvention of the Public Procurement Law. Alternatively, if framework agreements are considered as agreements on award of a public procurement, Energa-Obrót S.A. claimed absolute invalidity of such agreements due to them being executed in a way that violated the Public Procurement Law. In November 2017, these PGE companies submitted their responses to the lawsuits, stating that Energa-Obrót S.A.'s accusations are groundless. Proceedings in these cases are in progress.

In addition, through motions of September 2017, Energa-Obrót S.A. summoned PGE Energia Odnawialna S.A. and PGE Energia Natury sp. z o.o. (currently acquired by PGE Energia Odnawialna S.A.) to amicably resolve disputes regarding payment of a claim totalling PLN 71 million for undue considerations paid based on invalid agreements from 2009. No agreement was reached at hearings that took place in November and December 2017. In connection with this, a PLN 71 million claim is recognised as a contingent liability in these financial statements. The Group does not accept the claims and regards their possible admission by the court as unlikely.

Citing invalidity of the agreements from 2009, Energa-Obrót S.A. refused to purchase property rights generated in connection with the generation of renewable electricity at wind farms FW Kisielice, FW Koniecwałd (Malbork) and FW Galicja, which constituted a breach of contractual terms and resulted in contractual penalty claims that were recognised as revenue in the current period, amounting to PLN 16 million. In light of the refusal to pay contractual penalties, PGE Energia Odnawialna S.A. intends to seek their payment in court.

Estimated volume of the green certificates covered by the aforementioned contracts with Energa-Obrót S.A. amountsto 836 000 MWh. This volume was calculated based on the volume of production in the period from July 2017 (FW Koniecwałd/Malbork) or from August 2017 (other farms) to the end of the expected support periods for each of the farms.

Bank guarantee liabilities

These liabilities for the most part present bank guarantees provided as collateral for stock market transactions resulting from membership in the Stock Exchange Clearninghouse. As at December 31, 2017, the total amount of bank guarantees was PLN 215 million.

Contractual fines and penalties

The contingent liability comprises mainly accrued contractual fines relating to the delay in realization of the investment issued by the Mayor of the City and Municipality of Gryfino to Zespół Elektrowni Dolna Odra S.A. (currently PGE Górnictwo i Energetyka Konwencjonalna S.A.). The Group committed to the Municipality of Gryfino to accomplish two investments with the total value of not lessthan almost PLN 8 million until the end of 2018. Failure to realize investmentsincluded in the agreement willresult in claimsrelating to contractual fines and penalties by the Municipality of Gryfino.

Other contingentliabilities

Other contingent liabilities comprise the value of potential claim from WorleyParsons of PLN 33 million, which was described above, as well as PLN 31 million related to risk of additional costsrelated to PGE Group's debt financing programmes.

28.2 Othersignificantissuesrelatedtocontingentliabilities

Non-contractual use of property

As described in note 21.4 of these financial statements the PGE Group recognises provision for disputes under court proceedings, concerning non-contractual use of properties for distribution activities. In addition, in the PGE Group, there are disputes at an earlier stage of proceedings and it cannot be excluded that the number and value ofsimilar disputes will grow in the future.

Contractual liabilitiesrelated to purchase of fuels

According to the concluded agreements on the purchase of fuels(mainly coal and gas), the PGE Group companies are obliged to collect the minimum volume of fuels and not to exceed the maximum level of collection of gasfuel in particular hours and months. A failure to collect a minimum volume of fuels specified in the contracts, may result in a necessity to pay some extra fee (in case of gas fuel, the volume not collected by power plants but paid up, may be collected within the next three contractual years).

In the PGE Group's opinion, the terms and conditions of fuel deliveries to its power generating units as described above do not differ from terms and conditions of fuel deliveriesto other power generating units on the Polish market.

28.3 Contingentreceivables

As at the reporting date, PGE Group held PLN 10 million in contingent receivables related to non-balancing of purchase and sale of energy on the domestic market. In the preceding year, as at December 31, 2016, this was a contingent liability and amounted to PLN 19 million.

28.4 Otherlegalclaimsanddisputes

Compensation for conversion ofshares

Former shareholders of PGE Górnictwo i Energetyka S.A. are presenting to the courts motions to summon PGE S.A. to a conciliation hearing concerning payment of compensation for incorrect (in their opinion) determination of the exchange ratio of shares of PGE Górnictwo i Energetyka S.A. into shares of PGE S.A. during a consolidation process that took place in 2010. The total value of claims resulting from summons to a conciliation hearing directed by the former shareholders of PGE Górnictwo i Energetyka S.A. amounts to over PLN 10million.

Regardless of the above, on November 12, 2014 Socrates Investment S.A. (an entity which purchased claims from former PGE Górnictwo i Energetyka S.A. shareholders) filed a lawsuit to impose a compensation in the total amount of over PLN 493 million (plus interest) for damages incurred in respect of incorrect (in their opinion) determination of the exchange ratio of shares in the merger of PGE Górnictwo i Energetyka S.A. and PGE S.A. The Company filed a response to the lawsuit. Currently the proceedings before the court of first instance are in progress.

A similar claim was raised by Pozwy sp. z o.o., an entity that purchased claims from former PGE Elektrownia Opole S.A. shareholders. Pozwy sp.z o.o. hasfiled a claim at the District Court in Warsaw against PGE Górnictwo i Energetyka Konwencjonalna S.A., PGE S.A. and PwC Polska sp. z o.o. ("Defendants"), demanding from the Defendants, in solidum, or jointly damages for Pozwy sp. z o.o. totalling over PLN 260 million with interest for allegedly incorrect (in its opinion) determination of exchange ratio for PGE Elektrownia Opole S.A. shares for PGE Górnictwo i Energetyka Konwencjonalna S.A. shares in a merger of these companies. This lawsuit was delivered to PGE S.A. on March 9, 2017, and the deadline for responding to it wasset by the court asJuly 9, 2017. On July 8, 2017, PGE S.A. and PGE GiEK S.A.submitted a response to the claim and the lawsuit is currently being proceeded in the first instance.

PGE Group companies do not recognise the claims being raised by Socrates Investment S.A., Pozwy sp. z o.o. and other shareholders requesting conciliatory settlements. According to PGE S.A., these claims are groundless and the entire consolidation process was conducted fairly and properly. The value of the shares, which were subject to the process of consolidation (merger), was established by an independent company PwC Polska sp. z o.o. Additionally, merger plans of the companies mentioned above, including the exchange ratios were examined for accuracy and reliability by an expert appointed by the registration court; no irregularities were found. Then, the courtregistered the mergers of the companies mentioned above. PGE Group has notrecognised a provision forthis claim.

Claimsfor annulment of General Meeting resolutions

On April 1, 2014, PGE S.A. received a copy of a lawsuit filed to the District Court of Warsaw by one of itsshareholders. In the lawsuit, the shareholder isseeking for annulment of the resolutions 1, 2 and 4 of the Company's Extraordinary General Meeting held on February 6, 2014. The Company filed a response to the claim. On June 22, 2015, the District Court in Warsaw issued a judgment dismissing the shareholder's claim in its entirety. The shareholder appealed, and the Company filed a reply to the appeal. On March 24, 2017, a hearing was held at the Appellate Court in Warsaw. The court discontinued the proceedings due to the lawsuit being withdrawn without relinquishing the claim.

On August 21, 2015, PGE S.A. received a copy of a lawsuit filed to the District Court of Warsaw by one of itsshareholders. In the lawsuit, the shareholder is seeking for annulment of resolution 5 of the Company's Ordinary General Meeting held on June 24, 2015. The Company filed a response to the claim. On April 26, 2016, the District Court in Warsaw issued a judgment dismissing the shareholder's claim. On April 3, 2017, the shareholder appealed. Through a ruling of April 18, 2017, the District Court rejected the appeal due to the appeal deadline having been exceeded. The ruling became final on May 6, 2017.

On September 17, 2014, PGE S.A. received a copy of a lawsuit filed to the District Court of Warsaw by one of its shareholders. In the lawsuit, the shareholder is seeking for annulment of resolution 4 of the Company's Ordinary General Meeting held on June 6, 2014. The Company filed a response to the claim. On August 13, 2015, the District Court in Warsaw issued a judgment dismissing the shareholder's claim in its entirety. The shareholder appealed, and the Company filed a reply to the appeal. Through a ruling of March 2, 2017, the Appeals Court in Warsaw dismissed the shareholder's appeal. The shareholder filed a cassation claim dated June 10, 2017. On August 3, 2017, the Company filed a response to the cassation claim. In a ruling of January 10, 2018, the Supreme Courtrejected the shareholder's cassation claim.

On October 23, 2015, PGE S.A. received a copy of a lawsuit filed to the District Court of Warsaw by one of its shareholders. In the lawsuit, the shareholder is seeking for annulment of resolution 1 of the Company's Extraordinary General Meeting held on September 14, 2015. The Company filed a response to the claim. A hearing before the District Court in Warsaw was held on April 24, 2017. In a ruling of May 8, 2017, the court dismissed the shareholder's claim. On July 3, 2017, the shareholder appealed. On August 27, 2017, the District Courtruled to dismissthe shareholder's appeal. The ruling became final on September 13, 2017.

On May 20, 2016, PGE S.A. received a copy of a lawsuit filed to the District Court of Warsaw by one of its shareholders. In the lawsuit, the shareholder is seeking for annulment of resolution 1 of the Company's Extraordinary General Meeting held on March 1, 2016. The Company filed a response to the claim. The proceedings were discontinued through a ruling of March 14, 2017 after the withdrawal of the claim priorto the first hearing.

On September 12, 2016, PGE S.A. received a copy of lawsuit filed to the District Court in Warsaw by one of its shareholders. In the lawsuit, the shareholder is seeking for annulment of the resolution 1 of the Company's Ordinary General Meeting held on June 28, 2016. The Company filed a response to the claim. The proceedings were discontinued through a ruling of March 14, 2017 after the withdrawal of the claim priorto the first hearing.

On December 30, 2016, PGE S.A. received a copy of lawsuit filed to the District Court in Warsaw by one of its shareholders. In the lawsuit, the shareholder is seeking for annulment of resolution 1 of the Company's Extraordinary General Meeting held on September 5, 2016. The Company filed a response to the claim. The proceedings were discontinued through a ruling of March 16, 2017 after the withdrawal of the claim priorto the first hearing.

On March 15, 2017, PGE S.A. received a copy of a lawsuit filed to the District Court of Warsaw by one of itsshareholders. In the lawsuit, the shareholder is seeking for annulment of resolution 4 of the Company's Extraordinary General Meeting held on September 5, 2016. The Company filed a response to the claim. Having examined the shareholder's claim at a closed-door hearing on October 11, 2017, the District Court in Warsaw ruled to refer the case for mediation. PGE S.A. decided not to agree to mediation. On March 1, 2018 a hearing was held -the date of the judgment was postponed until March 15, 2018.

Termination of long-term contractsfor purchase of energy origin rights by Enea S.A.

In October 2016 and November 2016, PGE Górnictwo i Energetyka Konwencjonalna S.A., PGE Energia Odnawialna S.A. and PGE Energia Natury PEW sp. z o.o. received from Enea S.A. a notice of termination of long-term contracts for the purchase of renewable energy origin rights, so called "green certificates." In its justification, Enea S.A. stated that these companies severely breached contractual provisions by failing to re-negotiate contract provisions in accordance with the adaptation clause, as requested by Enea S.A. in July 2015 in connection with an alleged change in legal regulations having impact on the performance of these contracts.

In the opinion of PGE Group, the notices of termination sent by Enea S.A. were submitted in violation of contractual terms. The companies took appropriate steps to enforce their rights. In light of Enea S.A.'s refusal to perform the long-term contracts by purchasing property rights resulting from certificates of origin received by PGE Group companies in connection with the generation of renewable electricity, PGE Górnictwo i Energetyka Konwencjonalna S.A. and PGE Energia Natury PEW sp. z o.o. demanded payment of contractual penalties by Enea S.A., while PGE Energia Odnawialna S.A. demanded the payment of compensation for damages. In light of a refusal to pay these debts, the Companies intend to seek their payment in court. In a lawsuit filed by PGE Energia Natury PEW sp. z o.o., the District Court in Poznań, 9th Commercial Department, fully accepted the lawsuit's demand and issued a payment order in writ-ofpayment proceedings. Following an appeal submitted by Enea S.A. the payment order legally had no power. The proceedings are in progress. The next hearing is scheduled for April 2018.

Due to the fact that according to PGE Group the declarations on termination of the agreements presented by Enea S.A. were submitted in breach of contractual terms, as at the reporting date the Group recognised contractual penalty receivables of PLN 128 million. As the same time, property rights inventories that were initially measured at values resulting from the agreements were revalued to market prices. According to PGE Group companies, based on available legal analysis, a favourable resolution in the above disputes is more probable then a negative resolution.

Estimated volume of the green certificates covered by the contracts with Enea S.A. amounts to approximately 2 662 000 MWh. The above amount was calculated for the period from the date the contracts were terminated to the end of the expected initial term of the contracts.

Additionally, PGE Górnictwo i Energetyka Konwencjonalna S.A., PGE Energia Odnawialna S.A. and PGE Energia Natury PEW sp. z o.o. riled lawsuits against Enea S.A. for the payment of receivables totalling PLN 47 million for invoices issued to Enea S.A. concerning sale of property rights under the contracts. Enea S.A. refused to pay these receivables, claiming that they were successfully offset against its debts towards the Group's companies concerning compensation for alleged damages arising from the failure to re-negotiate the contracts. According to the Group companies, these setoffs are invalid because Enea S.A.'s receivables never materialised and there are no grounds to accept Enea S.A.'s claim that the companies breached any sort of contractual terms. The proceedings are in progress. The next hearings are scheduled for April 2018.

29. Futureinvestmentcommitments

As at December 31, 2017, PGE Group committed to incur capital expenditures on property, plant and equipment of approximately PLN 5,891 million. These amounts relate mainly to construction of new power units, modernisation of Group's assets and purchase of machinery and equipment.

	As at December 31, 2017	As at December 31, 2016 restated data*
Conventional energy	4,755	7,647
Distribution	897	796
Renewable energy	67	38
Sales	1	2
Other activity	171	201
TOTAL FUTURE INVESTMENT COMMITMENTS	5,891	8,684

*Data as atDecember 31, 2016, does notinclude the option scope of an advisory agreement executed by PGE EJ1 sp.z o.o.

The mostsignificant future investment commitments concern:

Conventional Generation:
Branch Opole Power Plant construction of power units no. 5 and 6 approximately PLN 1,290 million,
Branch Turów Power Plant construction of new power unit approximately PLN 2,282 million,
Branch Turów Power Plant modernisation of power units no. 1-3 approximately PLN 442 million,
Branch Rzeszów Heat and Power Plant construction of Thermal Processing Installation with Energy Recovery approximately PLN 173 million,
Distribution investment commitments related to network distribution assets with the total value of approximately PLN 897 million,
Other activity, PGE EJ1 sp. z o.o. agreement for owners engineer in the investment process related to construction of the first Polish nuclear power plant – approximately PLN 159 million (basic scope) An optional scope includes the amount of approx. PLN 1,121 million.

30. Lease

30.1 Operatingleaseliabilities–theGroupasalessee

As at December 31, 2017, and December 31, 2016, the future minimum lease payments related to irrevocable lease agreements amounted to asfollows:

	As at	As at
	December 31, 2017	December 31, 2016
Within 1 year	9	9
1-5 years	37	37
Over 5 years	134	147
TOTAL FUTURE LIABILITIES	180	193

PGE Group entities incur costs related to fees for perpetual usufruct of land. The value of these costs for the year ended December 31, 2017, amounted to PLN 18 million and PLN 18 million in the comparative period.

30.2 Operatingleasereceivables–theGroupasalessor

PGE Group companies have signed agreements with Polskie Sieci Elektroenergetyczne S.A. on rendering intervention servicesrelated to administration and use of production units by the system operator in order to balance active and passive power on an intervention basis in the National Power System. This aims at ensuring proper and safe operation of the system. The above mentioned agreements, although not having a legal form of a lease, give the right to use the assetsfor a series of payments.

As at December 31, 2017, and December 31, 2016, the future minimum lease payments related to irrevocable lease agreements amounted to asfollows:

	As at	As at
	December 31, 2017	December 31, 2016
Within 1 year	252	249
1-5 years	-	252
TOTAL FUTURE RECEIVABLES	252	501

30.3 Financeleaseliabilitiesandleasecontractswithbuyoption

As at the reporting date the present value of the minimum current lease payments amounted to approximately PLN 2 million, while in the corresponding period the present value of the minimum current and non-current lease payments amounted to approximately PLN 1 million.

30.4 Receivablesfromfinanceleaseandleaseagreementwithapurchaseoption

At the reporting date, and in the comparative period the Group identified receivables from short- and long-term finance lease agreements of PLN 1 million and PLN 3 million, respectively. During the reporting period, the Group did not identify significant receivables.

31. Taxsettlements

Tax obligations and rights are specified in the Constitution of the Republic of Poland, tax regulations and rectified international agreements. According to the tax ordinance, tax is defined as public, unpaid, obligatory and non-returnable cash liability toward the State Treasury, provincial or other regional authorities resulting from the tax regulation. Taking into account the subject criterion, current taxesin Poland can be divided into five groups: taxation of incomes, taxation of turnover, taxation of assets, taxation of activities and other, not classified elsewhere.

From the point of view of business entities, the most important is the taxation of incomes (corporate income tax), taxation of turnover (value added tax, excise tax) followed by taxation of assets (real estate tax and vehicle tax). Other payments classified as quasi – taxes must also be mentioned Among these there are socialsecurity charges.

Basic tax rates were as follows in 2017: corporate income tax rate – 19%, basic value added tax rate – 23%, reduced: 8%, 5%, 0%, furthermore some goods and products are subject to a VAT tax exemption.

The tax system in Poland is characterized by a significant changeability of tax regulations, their high complexity, high potential fees for commitment of a tax crime or violation. Tax settlements and other activity areas are conditioned by regulations (customs or currency controls) and can be subject to controls of respective authorities that are entitled to issue fines and penalties with penalty interest. Controls may covertax settlementsforthe period of 5 years afterthe end of calendar yearin which the tax was due.

Tax group

An agreement for a tax group named PGK PGE 2015, for which PGE S.A. is the representative, was signed on September 18, 2014, for a period of 25 years.

Companies included in the tax group must meet a number of requirements covering: appropriate level of equity, parent's stake in PGK companies of at least 95% (75% from 2018), lack of capital ties between subsidiaries, no tax arrears,share in totalrevenue of at least 3% (counted for the entire tax group, 2% from 2018 on), and execution of transactions with related parties from outside the tax group only on market terms. Violating these requirements would mean the dissolution of the tax group and loss of its taxpayer status. When the tax group is dissolved, each of its member companies becomes an individual payer of corporate income tax.

Changesin corporate income tax in effect from January 1, 2018

As a result of changesin legislation,starting from 2018 taxpayer revenue is divided into two sources: economic (operating) activities and capital gains. This means that each source of revenue will be settled separately and that companies may not offset losses incurred in one source using revenue from the othersource. The capital gainssource includes: dividends, income obtained as a result of mergers of de-mergers, in-kind contributions, share disposals, disposal of debt claims, income from property rights (authors' rights, licences) and income from securities.

According to existing estimates, the introduction of two income sourcesshould notsubstantially affect the PGE Group'stax burden.

VAT split payment mechanism

Starting from July 1, 2018, a VAT split payment mechanism will be introduced. This solution is intended to seal off the tax system by separating VAT amounts from bank transfers being made by buyers of products and services and directing these to sellers' dedicated VAT accounts. Funds collected in these VAT accounts may only be used for VAT settlements concerning invoices received and VAT settlements with the tax office. Using split VAT payments will not be the buyer'sright butrather an obligation.

Funds collected at the VAT account will constitute restricted cash. Given the above, the introduction of a split payment mechanism might increase net debt and increase net debt to EBITDA. At the date on which these financialstatements were prepared, there was no set practice as to how cash in VAT accounts will be taken into account when calculating debt ratios that are presented to financing institutions. PGE Group intends to effectively use the funds received from counterparties in VAT accounts to pay its liabilities that contain VAT. The level of fundsin these VAT accounts will depend mainly on how many of PGE Group's counterparties decide to use this mechanism and the relation between receivables and liabilities payment dates. According to the Group's estimates, the average level of cash in VAT accounts might be in the range of PLN 100-200million.

Excise tax

In connection with an incorrect implementation of EU regulationsin the Polish legal system, PGE GiEK S.A. in 2009 initiated proceedings regarding reimbursement of improperly paid excise tax for the period January 2006 - February 2009. The irregularity consisted of taxing electricity at the firststage ofsale, i.e. by producers, whereassalesto end usersshould have been taxed.

Examining the company's complaints with regard to the restitution claims against decisionsissued by tax authoritiesrefusing to confirm overpayment of excise tax, administrative courts ruled that the company did not bear the economic burden of the improperly calculated excise tax (which in the context of the resolution by the Supreme Administrative Court of June 22, 2011, file no. I GPS 1/11, precludes the return of overpaid amounts). According to the Supreme Administrative Court, the claims that the company sought, especially using economic analyses, are of an offsetting nature and therefore may be sought only in civil courts. Given the above, PGE GiEK S.A. decided to withdraw from the proceedings as regards restitution claims. Currently, the issue of overpaid excise tax is in civil courts and the intention isto reach a settlement with the State Treasury asregardsrestitution claims.

Given the significant uncertainty over the final ruling in this issue, the Group does not recognise in its financial statements any effects related to potential compensation in civil courtsin connection with the improperly paid excise tax.

Real estate tax

Considering pending disputes, PGE Group established at the reporting date the provision for property tax in the amount of PLN 81 million. The provision relates mainly to tax proceedings with regard to property tax in selected power plants. The dispute is related to the subject of taxation and concerns mainly a decision whether installations in buildings and detached technical machinery should be taxed as autonomous constructions. Tax proceedings are currently at various stages of tax authorities proceedings, i.e. in front of first instance authorities(village mayor, mayor), local government board of appeals and administrative courts.

In addition, on July 15, 2016, the Act on investments in wind farms entered into force. The act defined a "wind farm" as foundation, mast and technical equipment (technical equipment include rotor with blades, gondola, control system). The act introduced amendments to the Construction Law and thus on the amount of property tax because the act on local taxes and feesrefersto this act. By the end of 2016 (based on rulings on the basis of the amended Construction Law) it was commonly accepted that property tax is only applicable to the construction parts of wind farms, i.e. foundation and tower, whereas the wind farm's technical equipment is exempt from property tax. The tax consequencesrelated to the act went into force on January 1, 2017.

The changes in the act caused the necessity to tax the entire wind farm, which increased tax property expenses by more than PLN 39 million in the year. According to PGE Group, there are legal argumentsthat indicate that the updated Construction Law did not lead to a change in the tax object or that the value of the tax object should be established again. In the course of 2017, the Group received two negative interpretations concerning wind farm tax according to rules in effect from January 1, 2017. Proceedings regarding these interpretations are on-going in first and second instance courts.

Given the fact that advanced work on amendment of these provisions is on-going, which would result in the return to the wind farm taxation methods in effect prior to January 1, 2017, the Group suspends the process of filing tax corrections for 2017 until these amendments enterinto force.

32. Informationonrelatedparties

PGE Group's transactions with related entities are concluded based on market prices for provided goods, products and services or are based on the cost of manufacturing.

32.1 Associatesandjointlycontrolledentities

The total value of transactions with such entitiesis presented in the table below.

	Year ended December 31, 2017	Year ended December 31, 2016
Salesto associates and jointly controlled entities	14	88
Purchasesfrom associates and jointly controlled entities	1,854	571

	As at December 31, 2017	As at December 31, 2016
Trade receivablesfrom associates and jointly controlled entities	9	41
Trade liabilitiesto associates and jointly controlled entities	180	16

The increase in turnover and balancesresultsfrom the inclusion of Polska Grupa Górnicza sp.z o.o. and Polimex-Mostostal S.A. in these financialstatements.

32.2 StateTreasury-controlledcompanies

The State Treasury isthe dominantshareholder of PGE Polska Grupa Energetyczna S.A. and as a result in accordance with IAS 24 Related Party Disclosures, State Treasury companies are treated as related entities. PGE Group entities identify in detail transactions with approximately 40 of the biggest State Treasury subsidiaries.

The total value of transactions with such entitiesis presented in the table below:

	Year ended	Year ended
	December 31, 2017	December 31, 2016
Salesto related parties	2,164	2,137
Purchasesfrom related parties	3,987	3,579



	As at December 31, 2017	As at December 31, 2016
Trade receivablesfrom related parties	280	313

The largest transactions with State Treasury companies involve Polskie Sieci Elektroenergetyczne S.A., PGNiG S.A., Energa Group companies, Enea Group companies, Grupa Azoty Zakłady Azotowe Puławy S.A., PKN Orlen S.A. and certain Polish coal mines.

Moreover, PGE Group concludes significant transactions on the energy market via Towarowa Giełda Energii S.A. (Polish Power Exchange). Due to the fact that this entity only deals with the organization of trading, purchases and salestransacted through this entity are notrecognised astransactions with related parties.

On March 29, 2017 an agreement to sell 100% of EXATEL S.A. shares was executed. The sale amounted to PLN 369 million and is not included in the above lists.

32.3 Managementremuneration

The key management includesthe Management Boards and Supervisory Boards of the parent company and significant Group entities.

	Year ended	Year ended
PLN 000s	December 31, 2017	December 31, 2016
Short-term employee benefits(salaries and salary related costs)	31,433	32,508
Post-employment benefits	2,427	9,446
TOTAL REMUNERATIONOF KEY MANAGEMENT PERSONNEL	33,860	41,954
Remuneration of keymanagement personnel of entities of non-core operations	15,858	15,395
TOTAL REMUNERATIONOF KEY MANAGEMENT PERSONNEL	49,718	57,349

	Year ended	Year ended
PLN 000s	December 31, 2017	December 31, 2016
Management Board ofthe parent company	7,454	11,669
Post-employment benefits	168	3,066
Supervisory Board ofthe parent company	760	510
Management Boards – subsidiaries	23,192	27,448
Supervisory Boards – subsidiaries	2,454	2,327
TOTAL	33,860	41,954
Remuneration of keymanagement personnel of entities of non-core operations	15,858	15,395
TOTAL REMUNERATIONOF KEY MANAGEMENT PERSONNEL	49,718	57,349

Until June 30, 2017, members of the management boards of PGE Group companies were employed based on civil contracts and employment contracts. From the end of June 2017, PGE Group companies (direct and indirect subsidiaries) apply a rule according to which management board members are employed on the basis of managementservices contracts.

The above remuneration isincluded in other costs by nature disclosed in note 7.2 Costs by nature and function.

33. Significanteventsduringandafterthereportingperiod

33.1 Terminationoflongtermcontracts

Due to the termination of long-term contracts for sale of capacity and electricity ("LTC"), pursuant to the LTC Act, power generating units who once served as parties to such contracts have acquired the right to compensations for the coverage of the so-called stranded costs. Stranded costs are the expenses of the power generating units, borne until May 1, 2004 for property, plant and equipment related to the production of electricity, uncovered by revenue from the sales of the electricity produced, capacity reserves and system services on the competitive market, after the premature termination of the long-term contract. The LTC Act limits the total resources which can be paid out to all power generating units to cover stranded costs discounted as of January 1, 2007 to the sum of PLN 11.6 billion.

Basic data for Group power generating units assumed with the LTC Act.

Power generating unit	Effective term of LTC	Maximum stranded and extra costs
		(PLN million)
Turów Power Plant	until 2016	2,571
Opole Power Plant	until 2012	1,966
Dolna Odra Power Plant Complex	until 2010	633
Lublin Wrotków CHP	until 2010	617
Rzeszów CHP	until 2012	422
Gorzów CHP	until 2009	108
TOTAL PGEGiEK S.A. branches		6,317
Elektrociepłownia Zielona Góra S.A.	until 2024	778

Decisions of the President of the Energy Regulatory Office related to realisation of the LTC Act for PGE GiEK S.A.

In December 2016, the adjustment period for producers covered by the compensation system at PGE GiEK S.A. ended.

The process of determining the amount of annual correction of stranded costs for 2016 was finished through a decision of the URE President of July 31, 2017, while the process of determining the final correction of stranded costs - through a decision by the URE President of August 25, 2017. Given a lack of contested issues in these processes, the URE President's decisions ended the participation of PGE GiEK S.A.'s generation unitsin the compensation system:

annual correction ofstranded costs for 2016 is positive and amounted to (+) PLN 276 million
final correction of stranded costs is positive and amounted to (+) PLN 937.8 million

The above amounts were paid to the account of PGE GiEK S.A. in September and December 2017.

The amount of funds collected throughout the entire correction period reached PLN 9,035 million, including stranded costs of PLN 8,749 million and gas costs of PLN 286 million.

Throughout the correction period, numerous court cases took place related to disputes resulting from URE President's decision. As at the date on which these financialstatements were prepared, all of these court proceedings were finished.

During the period from 2009 to December 31, 2017:

At the initiative of PGE GiEK S.A. 19 court proceedings were initiated, including: concerning unfavourable decisions regarding the amount of annual corrections of stranded costs - 14 cases, regarding unfavourable decisions regarding annual corrections of gas costs- 5 cases,
7 cases finished with a positive ruling for PGE GiEK; 5 cases finished with a positive ruling for the URE President; 7 cases was partially favourable to PGE GiEK.

On August 28, 2017, PGE GiEK S.A. withdrew its appeal from the Appeals Court and thus withdrew from seeking compensation from the State Treasury - URE President in connection with the URE President's decision for PGE GiEK S.A. on the annual corrections of stranded costs and gas costs.

Compensation due for Elektrociepłownia Zielona Góra S.A.

Given the acquisition of control over Elektrociepłownia Zielona Góra S.A., compensation due for this company is recognised in financial statementsfrom November 13, 2017 (i.e. from the acquisition date).

Impact on financialstatementsfor the year 2017

In accordance with the adopted accounting rules, the amount of final correction forecast for PGE GiEK S.A. was settled in 2008-2016. A decision issued in 2017 on the final correction differed from the forecasts. This was connected mainly with the URE President taking into account a CJEU ruling of September 15, 2016, which pointed to a dynamic approach to the aspect of group in LTC settlements. Therefore the decision took into account an extension of the correction period for all generating units. In addition, the URE President in the final correction applied a liquid approach, taking into account the funds collected in the form of advances and annual corrections, which was also favourable to PGE GiEK SA.

Moreover, court rulings that took place until December 31, 2017, resulted in a correction of LTC compensation settlements in the financial statements by PLN 69 million. The amount of corrections was recognised in the statement of comprehensive income after offsetting, in the item other operating income.

In the financialstatementsforthe year 2017, PGE Group recognised the following LTC revenue:

	PGE GiEK S.A.	Elektrociepłownia Zielona Góra S.A.	Total
Revenue from sale	1,211	4	1,215
Other operating income	69	-	69
TOTAL	1,280	4	1,284

33.2 AgreementonfinancialinvestmentinPolskaGrupaGórniczasp.zo.o.

On March 31, 2017, PGE GiEK S.A. executed another agreement on financial investment in Polska Grupa Górnicza sp. z o.o. ("PGG," currently Polska Grupa Górnicza S.A.) ("Investment") ("Investment Agreement").

The parties of the Agreement are: PGE Górnictwo i Energetyka Konwencjonalna S.A., ENERGA Kogeneracja sp. z o.o., PGNiG TERMIKA S.A., Węglokoks S.A., Towarzystwo Finansowe "Silesia" Sp. z o.o., Fundusz Inwestycji Polskich Przedsiębiorstw FIZAN (jointly referred later to asthe "Investors") and PGG. Under the Investment Agreement, PGG will purchase certain mining assetsfrom Katowicki Holding Węglowy S.A. pursuant to a preliminary agreement executed on April 1, 2017.

The Investment Agreement regulates the manner in which the Investment will be implemented, operational rules for PGG and its organs as well asrulesforthe Investor's exit from the Investment. The Investment Agreement includes a recapitalisation of PGG in three stages by PGE GiEK, Enea S.A., ENERGA Kogeneracja sp. z o.o., PGNiG TERMIKA S.A. and Towarzystwo Finansowe Silesia sp. z o.o. by a total of PLN 1 billion.

As part of the PGG recapitalisation, PGE GiEK S.A. committed to purchase new PGG shares with a total nominal value of PLN 100 million in exchange for a cash contribution of PLN 100 million, in three stages:

as part of the first stage, PGE GiEK S.A. purchased new PGG shares in exchange for a PLN 50 million cash contribution. The firststage recapitalisation took place on April 6, 2017,
as part of the second stage, PGE GiEK S.A. purchased new PGG shares in exchange for a PLN 20 million cash contribution. The second-stage recapitalisation took place on June 23, 2017,
as part of the third stage, PGE GiEK S.A. purchased new PGG shares in exchange for a PLN 30 million cash contribution. The third-stage recapitalisation took place on February 13, 2018,

After the acquisition of the above shares in the third stage, PGE GiEK S.A. will hold a 15.3% stake in PGG, compared to 15.8% as of December 31, 2017.

33.3 PurchaseofEDF'sassetsinPoland

On May 11, 2017, PGE S.A. and EDF International SAS and EDF Investment II B.V. (together "EDF") signed a put option agreement concerning the sale of EDF's assetsin Poland. Under the put option agreement, EDF obtain the option to call for PGE S.A. to sign a share sale agreement concerning the following assets once certain conditions are met, including EDF securing corporate approvalsforthe sale transaction.

On May 19, 2017, as a result of EDF exercising its put option under the put option agreement, EDF and PGE signed a conditional sale agreement.

The sale agreement concerned in particular:

purchase of 99.52% of shares in EDF Polska S.A.,
purchase of 100% of shares in EDF Investment III B.V.,
indirect purchase of 50% and 1 share of ZEW Kogeneracja S.A. (shares held by EDF Polska S.A. and EDF Investment III B.V.) and purchase of sharesin EDF Polska S.A. subsidiaries engaged in support activities.

Once all of the conditions precedent were met, the transaction was conducted on November 13, 2017.

As a result of the agreement, PGE S.A. purchase a number of generating assets, including: 8 CHP plants, i.e. Kraków, Gdańsk, Gdynia, Toruń, Wrocław, Zielona Góra, Czechnica i Zawidawie, district heating distribution networks in Toruń, Zielona Góra, Siechnice and Zawidawie as well asthe Rybnik power plant.

The final value of the transaction was approx. PLN 4.27 billion. PGE's overall expendituresrelated to the transactionsincluded:

value of equity of approx. PLN 2.45 billion, establishing using the Locked-Box formula as of December 31, 2016,
intra-group debt as of November 13, 2017, of approx. PLN 1.68 billion and approx. USD 10 million,
cost of interest on equity accrued on a pro rata basis counting from January 1, 2017 to the transaction date of PLN 93.27 million on account of the purchased companies having generated economic gains within the scope of the transaction after the price had been set, i.e. December 31, 2016,
interest payable, as of the transaction closure date, on intra-group debt (and other fees) amounting to PLN 18.21 million and PLN 0.05 million, respectively.

In connection with the closure of the Transaction and the indirect purchase of shares in Zespół Elektrociepłowni Wrocławskich KOGENERACJA S.A. ("KOGENERACJA"), resulting in PGE exceeding the 33% threshold of votes in KOGENERACJA, on February 1, 2018, PGE S.A. announced a tender offer to subscribe forthe sale of 2 383 999 dematerialised ordinary bearersharesissued by KOGENERACJA at PLN 81.80 per share, which entitled to 16.00% votes at KOGENERACJA's general meeting. PGE Energia Ciepła S.A. is the buyer. After the tender offer, the buyer together with subsidiary Investment III B.V. intends to hold a total of 66% of votes at KOGENERACJA's general meeting, which correspondsto 9,834,000 shares of KOGENERACJA.

Initial recognition of the acquisition of EDF's assets was done for the purposes of these financial statements. Details are presented in note 1.4 to these financialstatements.

33.4 EquityinvestmentinPolimex-MostostalS.A.

On January 18, 2017, PGE S.A. executed agreements concerning an equity investment in Polimex-Mostostal S.A. ("Polimex"):

investment agreement with ENEA S.A., Energa S.A., PGNiG Technologie S.A. ( jointly refereed as to "Investors") and Polimex, on the basis of which, subject to conditions precedent specified in the agreement, Investors are obligated to make an investment in Polimex. The investment includes taking up 150,000,000 of series T ordinary shares with a nominal value of PLN 2 each and an issue price of PLN 2 each (" New Shares") issued by Polimex as the increase of share capital of Polimex by up to PLN 300 million. Under the terms of the Agreement PGE committed to purchase 37,500,000 New Shares at the total issue price amounting to PLN 75 million;
agreement between Investors, defining the terms of cooperation together with mutual rights and responsibilities of Investors relating to the investment carried out on the basis of Investment Agreement;
agreement between Investors and SPV Operator Sp. z o.o. obliging the parties, subject to fulfilment of conditions precedent, to conduct a sale transaction of 6,000,001 Polimex shares by SPV Operator to Investors, whereas PGE obligated to acquire 1,500,001 Polimex shares;
agreement between Investors and TFS whereby TFS granted Investors, for remuneration, a possibility to acquire Polimex shares provided that TFS realizes conversion right in respect of convertible bonds issued by Polimex. Moreover, TFS has committed not to converse possessed convertible bonds of series A issued by Polimex without prior written request made by Investors.

On January 18, 2017, President of the Office for Competition and Consumer Protection granted approval for Investors to take joint control over Polimex.

On January 20, 2017, due to the fulfilment of conditions precedent specified in the Investment Agreement, PGE accepted the offer made by Polimex's Management Board to acquire 37,500,000 series T ordinary shares issued by Polimex with a nominal value of PLN 2 each and an issue price of PLN 2 each and the total issue price of PLN 75 million.

Additionally, on the terms of agreement with SPV Operator and due to the fulfilment of conditions precedent, the Company acquired 1,500,001 Polimex sharesfrom SPV Operatorfor approx. PLN 5.6 million.

On March 21, 2017, Investors announced a tender offer to subscribe for the sale of Polimex sharesin a number that would result in the 66% threshold of total votes being exceeded, as a result of which PGE S.A. would be able to purchase up to 42 102 shares of Polimex for PLN 4.90 per share. On March 28, 2017, Investors adjusted the price proposed in the tender offer from PLN 4.90 to PLN 4.91 per one Polimex share. The share purchase was cleared by the National Depository for Securities on April 28, 2017. As a result of the Tender Offer, PGE S.A. purchased 24 sharesfor PLN 117.84 and holds a total of 39 000 025 shares constituting 16.48% of Polimex'sshare capital and entitling to 16.48% of votes at Polimex's general meeting.

The investment agreement givesInvestorsinfluence over Polimex'sfinancial and operational policy. These entitlements are exercised by the Supervisory Board. As per the agreement, the Supervisory Board will consist of up to 7 members, 4 of which will be appointed by Investors. Moreover, Investors signed an agreement concerning the investment in Polimex. The aim of this agreement is to ensure increased control over Polimex for Investors, who hold a majority share of votes at Polimex's general meeting (65.93%). The agreement stipulatesthat joint positions will be agreed on through voting on key decisions of the general meeting and supervisory board, including the appointment of Polimex's management board.

Given the Investors' above-mentioned entitlements, which constitute significant influence, the stake in Polimex has been classified as an associate.

As at December 31, 2017, the Group completed work on the allocation of the purchase price of Polimex in accordance with IFRS 3. Details are presented in note 1.4 to these financialstatements.

33.5 Events after the reporting period

As at the date on which these financialstatements were approved, no significant eventstook place afterthe end of the reporting period the impact or disclosure of which is not included in these financialstatements.

34. Approvaloffinancialstatements

These consolidated financialstatements were approved for publication by the Management Board on March 6, 2018.

Warsaw, March 6, 2018

Signatures of members of the Management Board of PGE Polska Grupa Energetyczna S.A.

President of the
Management Board	Henryk Baranowski

Vice-President of the
Management Board	Wojciech Kowalczyk

Vice-President of the
Management Board	Marek Pastuszko

Vice-President of the
Management Board	Paweł Śliwa

Vice-President of the
Management Board	Ryszard Wasiłek

Vice-President of the
Management Board	Emil Wojtowicz

Signature of person responsible for drafting these financialstatements Michał Skiba - Director, Reporting and Tax Department

AI Terminal

PGE Polska Grupa Energetyczna S.A.

5758_rns_2018-03-06_8701954e-af5e-465d-92bf-53e32de948d6.pdf

PGE Polska Grupa Energetyczna S.A. Consolidated financial statements for 2017

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED STATEMENT OF CASH FLOWS

GENERAL INFORMATION, BASIS FOR PREPARATION OF FINANCIAL STATEMENTS AND OTHER EXPLANATORYINFORMATION

1. Generalinformation

1.1 Informationabouttheparentcompany

Ownership structure

1.2 InformationonPGEGroup

Going concern

1.3 StructureofthePGEGroup

1.4 Accountingfornewacquisitions

Accounting for acquisition of EDF companiesin Poland

Results of acquired entities

Accounting for acquisition of Polimex-Mostostal S.A.

2. Basisforpreparationofthefinancialstatements

2.1 Statementofcompliance

2.2 Presentationandfunctionalcurrency

2.3 Newstandardsandinterpretationspublished,notyeteffective

Impact of new regulations on PGE Group's consolidated financialstatements

IFRS 9 Financial Instruments

IFRS 15 Revenue from Contracts with Customers

IFRS 16 Leases

Otherstandards

2.4 Professionaljudgmentofmanagementandestimates

Recoverable amount of property, plant and equipment, intangible assets and goodwill

Depreciation/amortisation period for property, plant and equipment and intangible assets

Valuation of assets arising from capitalisation ofstripping costsin the production phase of a surface mine

Rehabilitation provision

Measurement of provisionsfor employee benefits

Other provisions

Contingent liabilities

Impairment of receivables

Electricity sales accrual

Measurement of fair values of acquired assets and liabilities, goodwill calculation

Uncertainty concerning tax settlements

Impact of changesin select estimates on the statement of comprehensive income for 2017

3. Theanalysisofimpairmentofproperty,plantandequipment,intangibleassetsandgoodwill

Regulatory assumptions

Macroeconomic assumptions

3.1 AnalysisofimpairmentofthepowergeneratingassetsofConventionalsegment

Detailed segment assumptions

Sensitivity analysis

3.2 AnalysisofimpairmentofthepowergeneratingassetsofRenewablessegment

Detailed segment assumptions

Impairment of the power generating assets of Renewablessegment

Sensitivity analysis

3.3 Distributionsegment'sproperty,plantandequipment

4. Significantaccountingprinciples

4.1 Consolidationrules

Accounting forthe formation of PGE Group and later Group transformationsin the consolidated financialstatements

Joint ventures and joint operations

Investmentsin associates

4.2 Methodsappliedtoconvertpositionsdenominatedinforeigncurrencies

4.3 Operatingsegments

4.4 Revenues

Revenue from sale of goods and products

Revenue from sale ofservices

Connection fees

Revenuesfrom LTC compensations

4.5 Costofgoodssold

4.6 Taxes

4.7 Earningspershare

4.8 Property,plantandequipment

Stripping costs

Costs of rehabilitation of post-exploitation surface mining properties

4.9 Intangibleassets

4.10 Borrowingcosts

4.11 Impairmentofnon-financialassets

4.12 Financialassets

Financial assets carried atfair value through profit or loss

Loans and receivables

Available-for-sale assets

4.13 Derivativesandhedginginstruments

4.14 Hedgeaccounting

4.15 Inventories

Provision for deficit of CO² emission allowances

CO² emission rightsfor captive use

15. CO² emissionrightsforcaptiveuse