PGE Polska Grupa Energetyczna S.A.

Legal Proceedings Report • Aug 28, 2017

Decision of the ERO President on the final adjustment of LTCcompensations

The Management Board of PGE Polska Grupa Energetyczna S.A. ("PGE", the"Company") discloses that on August 28, 2017 the Decision of thePresident of the Energy Regulatory Office (the "ERO President") wasdelivered regarding the settlement of the final adjustment of strandedcosts for selected generators from PGE Capital Group ("PGE Group"),currently branches of PGE Górnictwo i Energetyka Konwencjonalna S.A.("PGE GiEK"), according to the Act of June 29, 2007 on coverage ofstranded costs resulting at generators in relation to acceleratedtermination of long-term contracts (the "LTC Act").

Due to termination of the long-term contracts for sale of capacity andelectricity ("LTC"), pursuant to the LTC Act, power generating units whoonce served as parties to such contracts have acquired the right tocompensations for the coverage of the so-called stranded costs (the "LTCcompensations"). Stranded costs, compensated under the rules set forthin the LTC Act, are the expenses of the power generating units, borneuntil May 1, 2004 for property, plant and equipment related to theproduction of electricity, uncovered by revenue from the sales of theelectricity produced, capacity reserves and system services on thecompetitive market, after the premature termination of the LTCs.

The stranded costs that arose in the assets of the given generating unitand LTC compensations received in advance to cover them are at firstsubject to settlements on a yearly basis (by decision of the EROPresident determining the amount of the yearly adjustment of thestranded costs for the subsequent years of participation of a givengenerating unit in the LTC compensations scheme).

Then, upon the completion of the participation of a given generatingunit in the LTC compensations scheme, the ERO President makes finalsettlement of LTC compensations received by a given generating unit anddue to that generating unit by way of decision determining the amount ofthe final adjustment of stranded costs.

In PGE Group, there were 6 generating units entitled to receivecompensations:

- Opole power plant

- Turów power plant

- ZEDO

- Gorzów CHP

- Lublin Wrotków CHP

- Rzeszów CHP

currently constituting the branches of PGE GiEK. Due to the terminationof participation of the above mentioned generating units in the LTCcompensations scheme as of December 16, 2016, on April 10, 2017 PGE GiEKreceived information about the initiation by the ERO President ofproceeding regarding the value of the final adjustment of stranded costsfor PGE GiEK as a legal successor of the above mentioned generatingunits. After the administration proceeding, with the decision of August25, 2017 the ERO President settled the amount of final adjustment of thestranded costs for each of the above mentioned generators, currentlyconstituting the branches of PGE GiEK, totaling PLN (+) 938 million.

The final adjustment of stranded costs will have an impact of PLN (+) 1212million on reported revenues and EBITDA of the PGE Group in 2017.

Impact on 2017 results is a difference between the amount of the finaladjustment recognized so far in PGE's accounts and amount of finaladjustment from the decision of the ERO President. LTC Act raised someserious interpretative doubt in some aspects, what was reflected interalia in court cases regarding annual adjustments. As a result, accordingto international accounting standards (IAS) PGE Group recognized onlyrevenues which were probable and did not recognize part which took risks.

The decision complies with the statement of the Court of Justice of theEuropean Union of September 15, 2016 on the merits of taking intoaccount changes in capital structure of generators and as a consequence,extending the period of LTC compensations until December 16, 2016.

The Management Board of PGE informs that, pursuant to the LTC Act, theamount of the final adjustment determined by the ERO President in theabove mentioned decision, i.e. PLN 938 million, will be paid to PGE GiEKby Zarządca Rozliczeń S.A. by December 31, 2017. The decision can beappealed at the District Court in Warsaw - Court of Competition andConsumers Protection, within two weeks of its delivery to PGE GiEK.Nevertheless, the amount of the final adjustment determined in thedecision is consistent with the Company's expectations.

The Management Board of PGE informs that the decision of the EROPresident settling the amount of the stranded costs, in case there's nodecision to appeal, determines the ultimate amount of LTC compensationsdue to PGE GiEK as a legal successor of the above mentioned generatingunits.