PGE Polska Grupa Energetyczna S.A.

Regulatory Filings • Dec 13, 2017

Approval of the District Heating Strategy

The Management Board of PGE Polska Grupa Energetyczna S.A. ("PGE", the"Company") discloses that on December 13, 2017 it approved the PGECapital Group's District Heating Strategy for years 2018-2023 and 2030perspective (the "Strategy").

In this current report we present the most important elements of theDistrict Heating Strategy. The presentation on the District HeatingStrategy will be published on the PGE's corporate website.

The approval of the District Heating Strategy results directly from thePGE Group's Strategy involving carve-out of the Cogeneration businessline, that is to exploit the growth potential of the district heatingmarket. The foundation for the planned development of the PGE's districtheating is 16 combined heat and power plant operating within the PGEGroup, that have a total of close to 6.7 GWt and approx. 2.5 GWe ofinstalled capacities, as well as approx. 500 kilometres of districtheating grids.

The potential of the district heating market in Poland stems directlyfrom general conditions of the sector - the district heating fits inwith the vision of developing modern "energy of tomorrow", as well aslocal - Poland is one of the largest district heating markets in Europeand possesses well-developed infrastructure that enables connection ofnew customers, and providing heat supplies is as important as providingelectricity supply. At the same time, high efficiency of district heatgeneration is guaranteed by the cogeneration of heat and electricity. Itenhances the fuel efficiency, contributing to the protection ofenvironment and is one of key tools in action against increasing smogproblem in many Polish cities. At the same time it strengthens theenergy security of the country.

Main benefits of the District Heating Strategy for PGE include:

- Better response of PGE Group to new challenges and opportunities

- Rising management focus on district heating business - carve-out ofthe new business line - PGE Energia Ciepła

- Maximum utilization of the local growth potential

- Rising share of stable, regulated EBITDA

Mission and vision

PGE Group's mission in district heating segment assumes stimulation oftransformation and development of the domestic district heating,contributing to improvement of environment, competitiveness of theeconomy, social welfare and energy security on the local and countrylevel.

In accordance with the vision of development, PGE will become thedistrict heating company of first choice, the leader of the innovativedistrict heating development oriented towards customer, efficiency andcooperation with local governments.

The Strategy will be implemented in accordance with the PGE Group'svalues - Partnership, Growth and Responsibility.

Strategic goals

With a view to customers' thermal comfort and energy security and carefor improvement of environment, PGE intends to be:

- Most effective district heating company in Poland

- District heating company of first choice

- Largest producer and distributor of heat

- Initiator of changes in the sector

Key goals of the Strategy:

- Managing district heating networks in at least 2/3 of PGE EnergiaCiepła locations by 2023

- Construction of 1 000 MWe of new cogeneration capacities by 2030

- Increasing share of low-emission fuels in PGE Energia Ciepłageneration mix to 50% by 2030

- Reducing maintenance costs of generation assets by 10% until 2023 inrelations to 2017

Assumed additional annual EBITDA, resulting from the Strategyimplementation, is approx. PLN 0.25 billion in 2023 and approx. PLN 1.0billion from 2030. Assumed cumulated additional EBITDA until 2023 isapprox. PLN 0.7 billion and PLN 4.2 billion in 2024-2030.

The above values do not include profits from the district heating assetscurrently owned by the Group, which amounted to PLN 829 million after 9months of 2017.

Planned investments

Assumed capital expenditures in 2018-2023 will amount to approx. PLN 6.9billion, including capex for new initiatives development of approx. PLN3.2 billion and approx. PLN 0.8 billion for development of districtheating network and assets in current locations. The environmental andmaintenance expenditures will amount to approx. PLN 2.9 billion.

The planned capital expenditures in 2024-2030 amount to approx. PLN 10.6billion, including capex for development of approx. PLN 8.1 billion andPLN 2.5 billion of environmental and maintenance expenditures.

Investment directions and their scale are indicative and will be subjectto constant optimization, with changes in market and regulatoryenvironment taken into consideration as well as maintaining theinvestment credit rating of PGE.

Indicated capital expenditures for implementation of the Strategyinclude:

- Adaptation of existing assets to regulatory requirements (particularlyto BAT conclusions)

- Ongoing maintenance

- Development (also through acquisitions) of district heating networkand generation capacities

Planned capital expenditures relate to regulated activities withrelatively low operational risk. Investments in cogeneration assetsbased on low emission and zero emission sources constitute a significantstep towards diversification of PGE Group's fuel mix.

Investment projects will be financed in corporate model as well as usingproject finance structure, including, to the possible extent, EUfinancial instruments, domestic preferential funds and ETS-relatedfinancing (free CO2 allowances and Modernization Fund) beyond 2020.

Conditions of Strategy implementation

The Group evaluates that the implementation of the Strategy will dependon number of external conditions, among which the key ones are ofregulatory nature:

- Poland's energy policy

- Support schemes for cogeneration and renewable energy sources,Capacity Market

- EU Energy and climate policies

The Strategy will be periodically revised in response to the changes ofthe regulatory environment and new market opportunities.

The Management Board of PGE informs that in accordance with the Statuteof the Company, the approval of the Supervisory Board is required onlyfor the development strategy of the Company.