PGE Polska Grupa Energetyczna S.A.

Management Reports • Oct 19, 2020

Adoption of the PGE Group's strategy until 2030 with prospects until 2050

The Management Board of PGE Polska Grupa Energetyczna S.A. ("PGE", the"Company") disloses that on October 19, 2020 the Management Board of PGEadopted and the Supervisory Board approved PGE Group's (the "Group")Strategy until 2030 with prospects until 2050 ("Strategy"). In thereport below, we present the most important elements of the newStrategy. At the same time, the Management Board of the Company informsthat the presentation on the Strategy will be published on the PGEwebsite.

Objectives of the Strategy

The Strategy is a response of the PGE Group to deep changes in thesector that have occurred in recent years, as well as to the socialexpectations, which according to the assessment of the Management willdetermine the sector's future. PGE wants to play a leadership role inthe transition and modernisation of the energy sector in Poland andsupport building a market environment conducive to energy transition.PGE Group's objective is to balance all aspects of the business,maximizing the added value for stakeholders.

Key directions in development and areas of activity restriction.

Key directions in development of the PGE Group will be offshore,onshore, PV, low-emission heating and energy services. Divestment areasand activity restrictions will include coal generation, nuclear energyprogram, hard coal trading and support areas outside the core business.

Mission and vision.

PGE's mission is to provide energy for a safe future. In accordance withits long term vision PGE is to become a leader in sustainable energytransition in Poland. Vision of the PGE Group translates into threestrategic priorities, including:

- generation of environmentally friendly energy

- rendering of modern energy services

- efficient and effective functioning of the Group

Environmentally friendly energy.

As a leader of transition, PGE declares to reduce its impact on thenatural environment by achieving climate neutrality by 2050. We plan toreduce the production emissions by changing the technology, expandingthe renewable energy portfolio and enabling our clients to participatein the transition thanks to attractive product offerings. By 2030 zero-and low-emission sources will constitute 85% of the generation portfolioand share of renewable energy will amount to 50% of the totalgeneration. PGE wants to achieve climate neutrality by 2050 and provide100% RES energy for PGE's customers.

The PGE Group is ready to carry out the transition process of thesector: preparing the conventional electrical power system base tofunction in a new ownership structure. The PGE Group will be a pioneerin development and exploitation of offshore wind energy sector. Offshorewind capacity installed in the Baltic Sea should amount to 2.5 GW in2030 and thanks to preparation of further projects in new locations-exceed 6.5GW by 2040. At the same time the programme of building powerin onshore wind farms and photovoltaics will be continued and expectednew capacity should be increased by 2030 by more than 1 GW and more than3 GW respectively. In the District Heating segment the Group planstransition of district heating towards low and zero-emission sources(share in heat production over 70% in 2030). At the same time PGE willpromote connections of individual heat sources or replacement forenvironmentally friendly installations.

Important role in energy transition is performed by implementation ofthe principles of circular economy in all areas and minimization of theimpact on the natural environment.

Modern energy services.

Reliable network infrastructure and partnership with customers are thefoundation of the energy transition. In Distribution segment theimprovement of quality of services in the field of energy supplies isassumed (the time of interruptions in energy supplies will be reduced by8% in the cities and by 50% in other areas in 2025, cost efficiency,efficiency of performance and transparency of connection processes willbe streamlined).

Grid modernisation and new energy storage units (planned 800 MW by 2030)are needed for the full use of distributed power sources and ensuring asecure operation of the transmission system. Financial stability anddeveloping a new DSO regulatory model that guarantees meeting thechallenges of transition are necessary to purse those goals, whichshould improve expected FCFF (Free Cash Flow to Firm) by PLN 0.7 bn.

PGE wants to maintain the highest in the market customer satisfactionlevel resulting from the quality of energy offerings and services. Theissue is addressed by development of professional energy services andintegration of contact and service channels. Assumed increase in marginin the retail segment amounts to PLN 0.4 bn (annual average).

The company plans to build additional value by enabling customers toactively participate in the energy transition offering among otherthings RES installations for the clients and market access services (1.0GW in market services). The new services should contribute to 25% risein EBITDA of retail sales.

Efficient and effective organisation.

In order to meet the challenges resulting from decarbonisation,decentralisation and competition, PGE Group must improve its operationalefficiency. The Group assumes reduction of fixed cost by 15% until 2025and 25% by 2030 (compared to 2019, the figures do not include the effectin the conventional energy segment). The PGE Group's business profilewill evolve towards requiring less work and changing key competences.Effective ICT area will be a lever for improving the efficiency of thePGE Group's operations through process automation and digitisation.Demographic trends will affect the employment level in the PGE Group andemployee career paths, which will require effective implementation ofprojects in the area of human capital management . Assumed employmentreduction will be at 15% in 2030 and 50% in 2050. Further staffdevelopment will be oriented to renewable energy and modern energyservices.

Investments.

Investments of the PGE Group will be focused on the development ofrenewable energy, transition of district heating and gridinfrastructure. There will be no new coal investments (both mining andgeneration) and investment decisions on gas sources will be made in 2025at the latest. Total expected capex in years 2021-2030 will amount toPLN 75bn and approx. 50% is allocated to renewable energy sources(offshore wind farms, onshore wind farms and photovoltaics,zero-emission cogeneration sources). Another key important area ofspending is regulated activity, including grid infrastructure andlow-emission cogeneration sources.

Expected financial results of the strategy.

As a result of the strategy PGE wants to build stable EBITDA with theevolution of the structure towards green and regulated directions andlimit its exposure to market risks. EBITDA is expected to rise from overPLN 5bn in 2025 up to over PLN 6bn in 2030.

Implementation of an ambitious transition plan will be pursued whilemaintaining a stable level of debt and current rating score (BBB+/Baa1).The goal of the PGE Group is a full use of dedicated financing optionsfor green investments and off-balance sheet financing. Share of aidfunds in the financial needs of the PGE Group until 2030 should amountto at least 25%.

Alternative Performance Measure used in the strategy

EBITDA (Earnings before interest, taxes, depreciation and amortization)- operating profit before interest on debt (loans, bonds), taxes,amortization and depreciation.

Regulated EBITDA - EBITDA from regulated business activity, whichparameters of income are regulated by tariffs approved by relevantregulatory body, (for example the President of Energy Regulatory Officeapproves tariffs for heat and Distribution System Operators.

Net financial debt - Short term financial debt and long term financialdebt adjusted by cash and equivalents, short term deposits andrestricted cash.