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Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Energa SA Manage- ment Board report on the activity of the Group for the year ended 31 December 2017

Gdańsk, Publication date: 15 March 2018

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

TABLE OF CONTENTS 1. SUMMARY ...... 3 2. KEY INFORMATION ABOUT THE GROUP ...... 9 2.1. Activities of the Energa SA Group ...... 9 2.2. Key events and achievements of the Energa SA Group ...... 12 2.3. Energa SA Group's management model ...... 16 2.4. Energa SA Group's Strategy for 2016–2025 ...... 20 2.5. Research and development ...... 22 2.6. Risk management in the Energa SA Group ...... 27 2.7. Information on material agreements and transactions ...... 35 2.8. Proceedings pending before the court, arbitration bodies or public administration bodies ...... 39 2.9. HR and payroll situation ...... 51 2.10. Corporate social responsibility of the Energa SA Group ...... 53 2.11. Awards and recognitions for the Energa SA Group ...... 55 3. ANALYSIS OF THE FINANCIAL STANDING AND ASSETS ...... 58 3.1. Rules for preparing the annual consolidated financial statements ...... 58 3.2. Explanation of the economic and financial data disclosed in the annual consolidated financial statements ...... 58 3.3. Structure of assets and liabilities in the consolidated statement of financial position ...... 65 3.4. Description of significant off-balance sheet items ...... 66 3.5. Key operational data of the Energa SA Group ...... 66 3.6. Financial results by operating segments ...... 71 3.7. Projected financial results ...... 81 3.8. Ratings ...... 81 3.9. Dividend ...... 82 3.10. Information about the entity authorized to audit the financial statements ...... 82 4. ENVIRONMENT ...... 84 4.1. Macroeconomic situation ...... 84 4.2. Electricity market in Poland ...... 85 4.3. Regulatory environment ...... 91 4.4. Energa vs. the industry ...... 94 5. SHARES AND SHAREHOLDING STRUCTURE ...... 97 5.1. Energa's shareholding structure ...... 97 5.1. Company stock prices on the Warsaw Stock Exchange ...... 98 5.2. Investor relations in Energa SA ...... 99 5.3. Recommendations for the Company’s stock ...... 100 6. REPRESENTATION ON THE APPLICATION OF CORPORATE GOVERNANCE PRINCIPLES ...... 102 6.1. Corporate governance principles not applied in the Company ...... 102 6.2. Major shareholders ...... 102 6.3. Holders of securities giving special rights of control and description of these rights ...... 102 6.4. Restrictions regarding the exercise of voting rights ...... 103 6.5. Restrictions on the transfer of ownership title to securities ...... 103 6.6. Rules for amending the Company’s Articles of Association ...... 103 6.7. Company's corporate bodies ...... 104 6.8. Compensation of persons in management and supervisory bodies ...... 118 6.9. Diversity policy ...... 121 6.10. Primary attributes of the internal control and risk management systems in reference to preparing financial statements ...... 121 7. MANAGEMENT BOARD'S REPRESENTATION ...... 124 List of figures ...... 125 List of tables ...... 125 Glossary of terms and abbreviations ...... 127

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

1. SUMMARY

One of the leading energy groups and a reliable supplier of electricity and services for 1/4 of Poland, with a 36-percent of production from RES in own production.

22.1TWh 4.3 TWh 20.6 TWh volume of electricity gross production of retail sales supplied electricity

Prices of ENERGA SA’s shares

15 zł

Market capitalization:PLN 5.3 bn* 12 zł

9 October 2017 – payment date of a 9 zł dividend of PLN 0.19 per share.

6 zł * According to share price as at closing on 29 I II III IV V VI VII VIII IX X XI XII December 2017

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Distribution network Installed capacity 9 thous. with the length of 1.34 GWe employees

185 thous. km of which 38% falls to RES

Installed capacity 513 MWe

RES production 1,548 GWh

In 2017, the Energa SA Group executed investment projects worth PLN 1,402 m, of which almost PLN 1,247 m in the Distribution Business Line*.

As a result of completed investments, in 2017, nearly 51.7 thousand new customers were connected, 3,718 km of high, medium and low voltage lines were built and modernized and 32 MW of new renewable energy sources were connected to the grid.

* The Group changed the nomenclature from Segments to Business Lines in connection with signing the Cooperation Agreement in December 2017, described in Chapter 2.3. Energa SA Group's management model of this Report. 4

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c

Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

GROUP’S FINANCIAL AND OPERATIONAL HIGHLIGHTS FOR 2014-2017

EBITDA (PLN m) Revenues (PLN m)

EBITDA margin 10,804 10,590 10,181 10,534 22% 21% 20% 21% 2,357 2,216 2,027 2,160

2014 2015 2016 2017 2014 2015 2016 2017

Net profit (PLN m) EBITDA by Business Line (PLN m)

profit margin 2,216 2,027 2,357 2,160 131 173 10% 8% 40 85 7% 1,006 732 392 315 398 840 789

1% 1,537 1,688 1,720 1,723 147

2014 2015 2016 2017 2014 (43) 2015 ( 37) 2016 ( 48) 2017 ( 46) Distribution Generation Sales Other and adj.

Gross production of electricity Capital expenditures (PLN m) in GWh

5,103 1,583 1,567 4,136 4,280 1,477 3,945 1,402

2014 2015 2016 2017 2014 2015 2016 2017

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Distribution of electricity (GWh) Retail sales of electricity (GWh)

20,615 22,068 19,628 20,923 21,486 21,727 16,364 16,767

2014 2015 2016 2017 2014 2015 2016 2017

GROUP’S FINANCIAL AND OPERATIONAL HIGHLIGHTS FOR Q4 2017

EBITDA (PLN m) Revenues (PLN m)

EBITDA margin

18% 18% 2,808 2,817 498 517

Q4 2016 Q4 2017 Q4 2016 Q4 2017

Net profit (PLN m) EBITDA by Business Line (PLN m)

517 profit margin 498 61 8% 120 131 3% 230

410 382

73 (23) Q4 2016 Q4 2017 (57) (9) Q4 2016 Q4 2017 Distribution Generation Sales Other and adj.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Gross production of electricity Capital expenditures (PLN m) in GWh

1,231 608 1,160

452

Q4 2016 Q4 2017 Q4 2016 Q4 2017

Distribution of electricity (GWh) Retail sales of electricity (GWh)

5,603 5,442 5,382 5,262

Q4 2016 Q4 2017 Q4 2016 Q4 2017

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

2. KEY INFORMATION ABOUT THE GROUP

2.1. Activities of the Energa SA Group The core business of the Energa SA Group entails distribution, generation and sales of electricity and heat and concentrates on the following business lines1: Figure 1: Location of the Group’s operations and key assets

Distribution Business Line – the basic Business Line from the perspective of the Group’s operating profitability involving distribution of electricity in Poland is a regulated activity, conducted on the basis of tariffs approved by the President of the Energy Regulatory Office (ERO). The Energa SA Group has a natural monopoly position in the northern and central part of Poland, where its distribution assets are located, through which it supplies electricity to 3 million customers, approx. 2.8 million of which are customers with comprehensive agreements and 204 thousand are TPA customers. A breakdown of Energa-Operator SA’s customer by energy group is presented in Chapter 3.5. Key operational data. As at 31 December 2017, the total length of the power lines was over 185 thousand km and covered almost 75 thousand km², i.e. about 24% of the country’s landmass. Energa-Operator SA acts as the Leading Entity in this Line.

1 The Group changed the nomenclature from Segments to Business Lines in connection with signing the Cooperation Agree- ment in December 2017, described in Chapter 2.3. ENERGA SA Group's management model of this Report. 9

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Figure 2: Number of Energa-Operator SA’s customers (thousands)

3,043 3,007 2,966 2,972

As at 31 As at As at As at December 2014 31 December 2015 31 December 2016 31 December 2017

Generation Business Line operates on the basis of four Power Divisions2: the Ostrołęka Power Plant, Hydro, Wind and Other (including cogeneration – CHP). At the end of 2017, the total installed generation capacity in the Group’s power plants was approximately 1.3 GW.

The Group's gross electricity production was 1.2 TWh in Q4 2017 and 4.3 TWh in the whole year. Electricity was produced in power plants based on such sources as: hard coal, hydro, wind, biomass and photovoltaics. In Q4 2017, 55% of the Group’s gross electricity production originated from hard coal, 31% from hydro, 14% from wind and 1% from biomass. After 12 months of 2017 the Group generated 63% of its gross energy from hard coal, 25% from hydro, 11% from wind and 1% from biomass. The Leading Entity in this Business Line is Energa Wytwarzanie SA. The Energa SA Group owes its leading position in terms of the percentage of electricity from renewable energy sources in the total energy generated, primarily to the generation of energy in hydro power plants and wind power plants. Green energy is produced in 45 hydro power plants, 5 wind farms and in biomass-fired installations (in Energa Kogeneracja) and in photovoltaic installations. At the end of 2017, the Group had the installed capacity of 0.5 GW in renewable energy sources, with a gross production of 509 GWh of electricity in the fourth quarter of 2017 and 1.5 TWh in the whole 2017. Hard coal was the main fuel used by the Energa SA Group for electricity and heat production. Due to the low market prices of green property rights since 2016, the Group stopped biomass co-firing (Os- trołęka Power Plant). In 2017 the Group’s generation units consumed 1,280 thousand tons of hard coal and 46 thousand tons of biomass (burning 1,288 thousand tons of hard coal and 30 thousand tons of biomass the year before). The Group was supplied with hard coal mainly by 3 suppliers, i.e. Polska Grupa Górnicza, Lubelski Węgiel “Bogdanka” and Jastrzębska Spółka Węglowa.

The Sales Business Line, with Energa-Obrót SA as its leader, conducts sale of electricity, gas and additional services both as separate products and in packages to all customer segments – from industry, through big, medium-sized and small business, to households. At the end of 2017, the Energa SA Group supplied over 3 million customers, out of which over 2.7 million were G tariff customers and the remainder were customers from tariff groups: C, B and A, in a decreasing order.

2 The Group changed the nomenclature from Segments to Business Lines and the existing Business Lines to Power Divisions, in connection with signing the Cooperation Agreement in December 2017, described in Chapter 2.3. Energa SA Group's management model of this Report. 10

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Figure 3: Structure of Energa-Obrót’s end buyers by customer type

The company consistently aims to set market trends in the area of solutions for customers, responds to the activity of competitors, but first of all observes variable needs and preferences of customers and, consequently, adjusts its offering, contact channels and service forms to increase, on an ongoing basis, the level of customer satisfaction and trust in the Energa SA Group. In 2017 the Company focused on actions aimed at developing a comprehensive offer, adapted to individual customer segments and cost-optimized customer service. The company’s new products fitted directly the Integrator Business Model following from the Energa SA Group strategy adopted for 2017- 2025. The key products include: Professionals with Energy, Energetic Professionals, Business with Energy, Rescue with Energy, Family Entertainment, Entertainment with Energy, Energy Audit, Rebate Hunters, Benefit Zone, In touch with Energy, We give you positive Energy, EnerGO. In 2018 Energa – Obrót SA, as the leading entity of the Sales Business Line, together other Line companies, plans to launch further products which will help it diversify revenue sources and increase the customer portfolio. Last year the company consistently executed actions aimed at increasing the effectiveness of sales efforts and development of customer service infrastructure, which currently comprises: 9 own showrooms and 58 showrooms operated by external partners in cities with the largest concentration of En- erga-Obrót customers. The company continues to develop electronic customer service and sales channels. As at the end of December 2017, nearly 7,000 agreements with customers were executed using the electronic channel. After implementing the eCommerce transactional environment and modernizing the website www.energa.pl, the project named “System of Internet sales and customer service of Energa Obrót SA” was launched; the system had been developed in the omni-channel environment. The implemented project will bring customers many benefits and conveniences. In 2017, optimization of service processes was continued to reduce the number of complaints, shorten the time of their handling and identify actions to be completed while a customer contacts the company for the first time. The communication channels were also improved continuously and the available technical solutions were optimized. Due to analyzing customers’ needs and expectations and suggesting improvements, the Energa SA Group continuously optimizes channels and methods of customer service. One result of such actions is the appointment of Customer Ombudsman in August 2017. His tasks include:  educating customers about the use of the contact channels prepared for them,  participation in building a positive image of Energa among employees and external stakeholder groups – customers, regulatory institutions, and local, national and industry media,  mediations and developing solutions making it possible to satisfactorily handle the customers’ interventions and matters, taking into consideration the Company’s image and business interests,

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

 analyzing the customer service processes and recommending changes expected by customers,  gathering all sorts of suggestions and ideas regarding the activity of the Company and its individual organizational units, based on which the Ombudsman and his collaborators can put forward recommendations for organization, process or system improvements or other solutions optimizing customer service. The Company also continues to sell the dual fuel offer, both to business and to retail customers. Thanks to the initiatives completed in 2017, in the period from 1 January 2017 to 30 November 2017, the number of electricity offtake points increased by 71 thousand and exceeded 3 million. The increase results mainly from the acquisitions in the public institutions and business segment and new connections in the retail customer segment. 2.2. Key events and achievements of the Energa SA Group

Payment of a dividend from the profit generated in 2016

On 26 June 2017, the Annual General Meeting of Energa SA adopted a resolution on the distribution of net profit for the financial year covering the period from 1 January 2016 to 31 December 2016 in the amount of PLN 783,542,643.96, with the following allocation: 1) payment of a dividend to shareholders in the amount of PLN 78,672,751.66, i.e. PLN 0.19 per share (10% of profit), 2) allocation to supplementary capital in the amount of PLN 704,869,892.30 (90% of profit). The record date was set by a resolution at 25 September 2017 and the dividend payment date at 9 October 2017 (Current Report nos. 22/2017, 23/2017 and 28/2017). Initiation by the Energa SA Group of judicial and arbitral proceedings related to framework agreements for the sale of property rights arising from certificates of origin

Energa-Obrót SA has concluded that, among others, 22 long-term framework agreements for purchase of property rights following from certificates of origin (“CPA agreements”), including bundle agreements – linked to electricity sales agreements – concluded with the owners of wind farms with the total capacity of approx. 530 MW, were absolute invalid. The reason for the absolute invalidity of the CPA Agreements is the fact that they were inconsistent with the Act of 29 January 2004 entitled Public Procurement Law (Journal of Laws 2017.1579).

Consequently, as of 11 September 2017, the Company ceased o perform the CPA Agreements and filed claims with common and arbitration courts to declare these agreements invalid. CPA Agreements were concluded for a period of as much as 20 years of the date of commencement of generation of electricity in the given installation. The investment capital engaged in the wind farms comes from many countries, among others from Germany, US, Spain, Austria and Japan.

The sole basis for the Company’s claims regarding the invalidity of the CPA Agreements is provided by the legal determinants associated with conclusion of these agreements. The Company became convinced about the absolute invalidity of the CPA Agreements on the basis of the legal opinions prepared by renowned law firms. The Company took a decision to cease to perform the CPA Agreements and take legal action on the basis of these opinions.

The legal actions pertaining to invalidity of CPA Agreements are pending. The litigations were instigated in September 2017 (Current Report No. 37/2017); currently they are at the initial stage of proceedings before first instance courts.

The Company has received statements of defense from nearly all defendant wind farms and banks (assignees of the receivables under the CPA Agreements). An analysis of the counter-arguments

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017 raised against the Company’s claims leads to a conclusion that there are important arguments supporting the viability of the statements of claim made. Having analyzed the claims and allegations of the defendants, the Company continues to be convinced about the absolute invalidity of the CPA Agree- ments. This position was confirmed in the course of the initiated proceedings by independent experts from different areas of law, and by another law firm of international renown.

What is important, in the course of the instigated proceedings, the defendants started to show the will to resolve them amicably. Currently, the Company conducts negotiations with several entities which may lead to settlements and amicable resolution of the litigations.

Signing of hybrid financing agreements with European Investment Bank

On 4 September 2017, the Company and European Investment Bank (“EIB”) signed the following agreements:

a. project agreement, defining the detailed requirements regarding the financing of an investment project,

b. subscription agreement (“Subscription Agreement”) constituting the basis for issuing hybrid bonds for EUR 250 million (“Bonds”).

The said financing will be slated for execution of an investment program in the Distribution Business Line, consisting in modernization and expansion of the Energa SA Group’s distribution assets in 2017- 2019. The planned investments are aimed at increasing the security of electricity supplies while simultaneously reducing grid losses and improving service quality. The estimated qualified expenditures in this period will amount to approx. EUR 814 million.

The issued Bonds are subordinated, unsecured, coupon bearer securities which have been subscribed for by EIB under the European Fund for Strategic Investments launched by EIB jointly with the European Commission to execute the so-called Juncker Plan. The Bonds were issued on 12 Septem- ber 2017.

In accordance with the Subscription Agreement, the Bonds were issued in two tranches with the total nominal value of:

a. EUR 125 million, maturing in 16 years, with the first financing period set for 6 years from the issue date,

b. EUR 125 million, maturing in 20 years, with the first financing period set for 10 years from the issue date.

The Bonds earn interest at a fixed interest rate estimated according to the formula defined in the terms and conditions of issue.

In accordance with the characteristics of hybrid financing, in the first financing period the Company will not be able to redeem the Bonds early and EIB will not be able to sell the Bonds early to third parties (in both cases, subject to certain exceptions specified in the Agreement). In the same period the Com- pany may, at its sole discretion, opt to defer all or part of the Interest payments (Current Report No. 36/2017). On 1 September 2017, Fitch Ratings assigned a preliminary rating to the bond issue at the B+ level, which was confirmed on 13 September 2017. Assessment of the impact of amendments to the RES Act on the results of the Sales Business Line

In connection with the amendments to the RES Act, on 16 August 2017, the Company published estimates of the potential positive impact of the reduction in costs and revenues arising from deregulation

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017 of the amount of the substitution fee and serving as an offtaker of last resort at a level of PLN 150 m in 2018. The scope of this impact takes into account cuts in both costs and revenues arising from the role of an offtaker of last resort and the setting of the amount of the substitution fee at a market level in a portion of long-term contracts for the purchase of green certificates. The said calculations do not constitute a forecast of the Energa SA Group’s future performance and are based on the assumption that the volume of retail sales remains at the 2016 level (19 TWh) and the unit substitution fee in 2018 is PLN 43 per MWh (Current Report No. 34/2017).

Opting out from the acquisition process of EDF’s Polish assets

On 11 May 2017, the Company’s Management Board adopted a resolution on Energa SA’s resignation from the participation in the transaction to acquire Polish assets of EDF International SAS of EDF Investment II B.V. The decision followed in-depth analyses conducted in the Group, which supported a decision to focus Energa SA Group’s investments and acquisitions on projects that would offer more synergies with its current asset base and area of competence; ones that would allow the Group to strengthen its balance sheet and improve its asset management efficiency. Such investments will be considered a priority. Earlier, on 27 January 2017, the Company and its Business Partners signed a Memorandum of Un- derstanding with EDF concerning negotiation of the acquisition of EDF’s assets in Poland and due diligence in this respect. The transaction was to include: • acquisition of all EDF’s shares in EDF Polska S.A., which is the owner of, in particular, 4 CHP plants, i.e. Kraków, Gdańsk, Gdynia and Toruń, and the heat distribution network in Toruń, Rybnik Power Plant and • acquisition of all EDF’s shares in ZEC "Kogeneracja" S.A., which is the owner of 4 combined heat and power plants, i.e. in Wrocław, Zielona Góra, Czechnica and Zawidawie and heat distribution networks in Zielona Góra, Siechnice and Zawidawie. The Business Partners have agreed that a binding proposal, if any, will be submitted following a due diligence exercise, which will form grounds for making further decisions about the transaction (Current Report No. 8/2017). Subsequently, the Company’s Management Board reported that on 15 March 2017 the Company together with its Business Partners made changes to the previous Transaction structure under which: • PGNiG Termika S.A. opted out of the Transaction, • PGNiG Termika S.A.’s previously declared share in the Transaction was taken over by PGE Polska Grupa Energetyczna S.A., as a result of which PGE’s share in the Transaction increased to 60%, • the interest of ENEA S.A. and Energa SA in the Transaction remains at the same level of 20% per company. Execution of an investment agreement to recapitalize Polska Grupa Górnicza

On 29 March 2017, the Management Board of Energa SA made a directional decision on recapitaliz- ing Polska Grupa Górnicza Sp. z o.o. (“PGG”) with the amount of PLN 100 m by its subsidiary Energa Kogeneracja Sp. z o.o. (Current Report No. 18/2017). On 31 March 2017, the subsidiary Energa Kogeneracja Sp. z o.o. signed an Investment Agreement amending and supplementing the terms and conditions of the financial investment in Polska Grupa Górnicza Sp. z o.o. (Current Report No. 19/2017) laid down in the first investment agreement executed on 28 April 2016 (Current Report No. 17/2016). The parties to the Investment Agreement included: Energa Kogeneracja, Enea S.A., PGE Górnictwo i Energetyka Konwencjonalna S.A., PGNiG TERMIKA S.A., Węglokoks S.A., Towarzystwo Finansowe Silesia sp. z o.o., Fundusz Inwestycji Polskich Przedsiębiorstw Fundusz Inwestycyjny Zamknięty Ak- 14

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017 tywów Niepublicznych [Polish Corporates Mutual Fund – Private Assets Closed-End Mutual Fund] and PGG. The transaction assumed a recapitalization of PGG by the Investors (excluding Węglokoks S.A. and Fundusz Inwestycji Polskich Przedsiębiorstw) for the total amount of PLN 1 bn. As part of the investment in PGG, Energa Kogeneracja undertook to subscribe for new shares with the total par value of PLN 100 m in exchange for a cash contribution of PLN 100 m to be made in three tranches: 1. as part of the first tranche, in April 2017 the company subscribed for shares in PGG in exchange for a cash contribution of PLN 50 m, 2. as part of the second tranche, in June 2017 the company subscribed for shares in PGG in exchange for a cash contribution of PLN 20 m, 3. in the third tranche in Q1 2018 the company will subscribe for PGG’s shares in return for a cash contribution of PLN 30 m. After the most recent recapitalization, the company will hold a 15.32% stake in PGG’s share capital. The purpose of the investment was for PGG to obtain funds for financing the acquisition of the enterprise of Katowicki Holding Węglowy S.A. and to cover expenses associated with PGG’s planned capital expenditures. The Agreement also specifies the rules of operation for PGG and the governs the appointment of Su- pervisory Board members according to which each Investor and the State Treasury will be entitled to appoint one member of the Supervisory Board consisting of a maximum of eight persons (Current Report No. 19/2017). As at the preparation date of this Report, Energa Kogeneracja held a 15.76% stake in the share capital of PGG. Closing of a public subscription for Eurobonds issued by Energa Finance AB (publ)

On 1 March 2017, the Management Board of Energa SA announced the closing of the book-building process for Eurobonds issued within the framework of the company’s updated Eurobond Issue Pro- gram (“EMTN Program”). Information on the announcement of the intention to hold a public subscription for Eurobonds issued by Energa Finance AB (publ) was published on 20 February 2017 (Current Report No. 14/2017). The issue was executed by Energa Finance AB (publ) with its registered office in Stockholm, a wholly owned subsidiary of Energa SA, which will guarantee the issue. The following parameters were defined in the book-building process: 1. Issue amount: 300,000,000 (three hundred million), 2. Issue currency: EUR, 3. Maturity: 10 years, 4. Interest periods: annual, 5. Yield: 2.250%, 6. Coupon: 2.125%, 7. Issue price: 98.892%. Among the conditions for the completion of the transaction was the execution of a subscription agreement. The final settlement of the transaction was effected on 7 March 2017. The bonds are listed on the Luxembourg stock exchange. The funds raised through the bond issue will be applied to general corporate purposes, excluding investments in coal assets. In this context, they will support the implementation of the Energa SA Group’s Strategy for 2016-2025 in which more than 60% of expenditures are spent on the develop-

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017 ment and modernization of distribution networks and will serve the purpose of improving the Group’s financial security (Current Report No. 16/2017). Capital investment in Polimex Mostostal S.A. On 18 January 2017, with reference to a signed letter of intent regarding a potential investment in Polimex-Mostostal S.A. (Current Report No. 56/2016), the Company’s Management Board reported that the following agreements were signed: 1. The Investment Agreement with the Investors and Polimex-Mostostal S.A. under which, subject to the conditions precedent specified in the agreement (described in detail in Current Report No. 5/2017), the Investors undertook to make an investment in Polimex, i.e. subscribe for a total up to 150,000,000 series T common bearer shares with a par value of PLN 2 each, for the issue price of PLN 2 each issued by Polimex as part of the Polimex’s share capital increase up to PLN 300,000,000. Pursuant to the Investment Agreement, the Company undertook to subscribe for 37,500,000 New Issue Shares for the total issue price of PLN 75,000,000. 2. Agreement between the Investors setting out the rules of cooperation and the mutual rights and duties of the Investors during the execution of the investment project contemplated in the Investment Agreement. 3. Agreement between the Investors and SPV obligating the parties to the agreement, provided that the conditions precedent are satisfied, to conduct the transaction of selling a total of 6,000,001 Polimex shares by SPV Operator to the Investors, in which the Company undertook to purchase 1,500,000 Polimex shares. 4. Agreement between the Investors and TFS, under which TFS granted the Investors, against remuneration, an option to purchase Polimex shares from TFS if the TFS exercises its right to convert the convertible bonds issued by Polimex and undertook before the Investors not to convert its series A convertible bonds issued by Polimex without a prior written demand from the Investors. On 18 January 2017, having examined the application the President of UOKiK issued his approval for the concentration involving acquisition of joint control over Polimex by the Investors (Current Report No.: 5/2017). On 20 January 2017, in connection with the fulfillment of the conditions precedent set forth in the investment agreement signed on 18 January 2017, the Company accepted an offer made by the Po- limex Mostostal S.A. management board to subscribe for 37,500,000 series T common bearer shares with a par value of PLN 2 each issued by Polimex at the issue price of PLN 2 each and for the total issue price of PLN 75,000,000 in private subscription. On the same day, the Company purchased 1,500,000 shares of Polimex from SPV Operator (Current Report No. 6/2017). Changes to and members of the Energa SA governing bodies

A detailed description of changes to the Company’s governing bodies is presented in Chapter 6.7. Company's corporate bodies of this Report.

2.3. Energa SA Group's management model

Starting from 2013, the basic document in the Energa SA Group defining general principles of its management has been the Energa SA Group Corporate Governance. In October 2016 a team was appointed to develop a new document defining the cooperation rules between the Group companies. As a result of the works conducted in 2017 by the Corporate Management Department, on 20 Decem- ber, 31 companies from Energa SA Group decided to enter into an Energa SA Group Cooperation Agreement, which replaced the previously prevailing Energa SA Group’s Organizational Governance.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Changes to the Group’s and Energa SA’s management rules Energa SA Group’s Organizational Governance operated on the basis of a Energa SA’s Management Board and its application depended on the position of individual Group companies in this respect. The agreement that replaced this legal order is a civil-law act. It was concluded by 31 Group companies which voluntarily undertook to comply with the resulting obligations and draw the resulting benefits. At the same time, as a result of this change, in light of the law, each party to the agreement has the right to demand its due performance from the remaining parts thereto. Just like the Organizational Governance, the agreement comprehensively regulates the cooperation within the Group and significantly strengthens the supervisory role of Energa SA, compared to the previous status quo. It also introduces new institutions aimed at increasing the Group’s business flexibility and the principle according to which in parallel to the interests of each of the companies, they are obligated to act in the interests of the Group, among others, through using intra-group procurement centers, within the institutions established to this effect, referred to as Support Service Structures. Another important business change is that the segments and their Leaders were replaced with Busi- ness Lines with Leading Entities managing them, responsible for the results and attainment of the objectives of the Business Lines and the companies allocated to their Lines. The segments were a fixed structure, to which the companies belonged depending on the capital ownership (company, daughter company, granddaughter company), whereas participation in a Business Line does not have result from capital dependence. The bases of its operation in Energa SA are defined in the Energa SA Organizational Bylaws together with the organizational structure, which was approved in June 2017. The document regulates such areas as the Company management principles, organizational structure, and the scope of duties and responsibilities of individual cells. The chart below shows the structure of Energa SA up to the level of organizational units directly reporting to Management Board members, as at 31 December 2017.

Figure 4: Energa’s organizational structure chart as at 31 December 2017

In addition, in 2017 Energa SA had standing advisory bodies, supporting the Company’s Management Board in making strategic decisions, among others Risk Committee, Council for Counteracting Mob- bing and Discrimination, Ethics Council, Financial Risk Management Committee, IT Coordination Council, Program Council, and Security and Critical Infrastructure Council.

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Key changes in the Group’s structure and organization As at 31 December 2017, the Energa SA Group was composed of the parent company Energa SA and 34 subsidiaries. Figure 5: Simplified organizational structure chart of the Energa SA Group as at 31 December 2017

Following the signing of the investment agreement on the execution of the new power unit in Ostrołęka construction project (Current Report No. 49/2016), on 11 January 2017, the President of UOKiK issued an unconditional approval for the concentration and consequently on 1 February 2017, Energa SA and ENEA S.A. signed a share purchase agreement by ENEA S.A. Under the above agreements, Energa SA and Enea S.A. acquired joint control over Elektrownia Ostrołęka SA with its registered office in Ostrołęka; the company’s purpose is building and operating a new coal-fired unit. Both parties will hold a 50% stake in Elektrownia Ostrołęka SA and the same number of votes at the General Meet- ing. The Management Board and the Supervisory Board consist of the same number of representatives of both investors. Decisions on significant actions require unanimous consent of both shareholders who have the rights to Elektrownia Ostrołęka SA’s net assets. Given the above, the investment was classified as a joint venture and is captured using the equity method.

On 13 April 2017, the General Meeting of Elektrownia Ostrołęka SA adopted a resolution to increase the share capital by PLN 19,000,000; the new shares were subscribed for, half each, i.e. PLN 9,500,000 each, by Energa SA and Enea SA and covered by a cash contribution. On 30 May 2017, the increase was registered in KRS.

On 23 November 2017, the General Meeting of Elektrownia Ostrołęka SA, by virtue of resolution 1, resolved to transform this entity into a limited liability company. Registration is currently in progress in the National Court Register.

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On 11 May 2017, an increase in the share capital of Energa Kogeneracja Sp. z o.o. by PLN 38,326,000 up to PLN 400,989,000 was registered in KRS. Energa SA holds a 64.59% stake in the company’s share capital.

On 28 August 2017, a resolution was adopted by the Extraordinary General Meeting of ENSA PGK3 Sp. z o.o. to increase the share capital by PLN 1,490,000.00 i.e. up to PLN 1,500,000.00. The newly issued shares in the number of 2,980 were subscribed for by the sole shareholder, i.e. Energa SA, in exchange for a cash contribution. At the same time, at the Meeting, a resolution was also adopted to change the company’s name to Energa Ochrona Sp. z o.o. The changes were registered in KRS on 27 October 2017.

Also on 28 August 2017, a Meeting was held at which a resolution was adopted to increase the share capital of Energa Finance AB (publ), from EUR 20,000,000 up to EUR 24,200,000 by issuing 4,200,000 new shares of the nominal value of EUR 1 each, which were subscribed for by Energa SA and covered by it with its own contribution. The share capital of the company was increased on 19 September 2017.

On 31 August 2017, Energa SA entered into two agreements with its subsidiaries:

1) the first with Energa-Obrót SA regarding a transfer of ownership title to shares in Energa Oświetlenie Sp. z o.o. in exchange for redemption of bonds issued by Energa-Obrót SA, 2) the second with Energa-Operator SA regarding a transfer of ownership title to shares in Energa- Operator Logistyka Sp. z o.o. in exchange for redemption of bonds issued by Energa-Operator SA.

The redemption and the transfers of ownership titles to shares in Energa Oświetlenie Sp. z o.o. and Energa-Operator Logistyka Sp. z o.o. in favor of Energa SA took place on 6 September 2017 and 14 September 2017, respectively.

On 13 September 2017, the Extraordinary Partner Meeting of ENSA PGK1 Sp. z o.o. adopted a resolution to merge ENSA PGK1 Sp. z o.o. (the receiving company) with Energa Invest SA (the acquired company) - under the procedure of Article 492 §1 Item 1 of the Commercial Company Code - by trans- ferring all the assets of the acquired company worth PLN 67,700,000 onto the receiving company in exchange for 94,692 shares of the total nominal value of PLN 47,346,000. The merger was entered to KRS on 12 October 2017. At the same time, as at merger date, the business name of ENSA PGK1 Sp. z o.o. was changed to Energa Invest Sp. z o.o.

On 9 November 2017, the court entered in KRS the merger of Energa Wytwarzanie SA (acquiring company) with its subsidiaries, i.e. Elektrownia CCGT Grudziądz Sp. z o.o., Elektrownia CCGT Gdańsk Sp. z o.o. and AEGIR 4 Sp. z o.o. (acquired companies). The merger has been carried out without increasing the share capital of Energa Wytwarzanie SA.

On 1 December 2017, the takeover of Energa Obsługa i Sprzedaż Sp. z o.o. as a result of merger with Energa–Obrót SA without increasing the share capital of Energa–Obrót SA was registered in KRS.

The changes made by the resolution adopted by the Extraordinary General Meeting of EOB PGK2 Sp. z o.o. on 3 July 2017 to increase the share capital by PLN 290,000, i.e. up to PLN 300,000, were registered in KRS on 13 December 2017. The new 580 shares were subscribed for by Energa SA (the sole shareholder), which covered them with a cash contribution. On the same date, also the company’s business name was changed to Centrum Badawczo-Rozwojowe im. M. Faradaya Sp. z o.o.

On 12 December 2017, the Extraordinary General Meetings of ENSA PGK2 Sp. z o.o., ENSA PGK4 Sp. z o.o., ENSA PGK5 Sp. z o.o., ENSA PGK6 Sp. z o.o., ENSA PGK7 Sp. z o.o. (acquired companies) and ENSA PGK8 Sp. z o.o. (acquiring company) adopted resolutions on the merger of these companies. On 29 December 2017, the merger was registered in KRS.

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2.4. Energa SA Group's Strategy for 2016–2025 On 15 November 2016 the Company’s Supervisory Board adopted resolutions accepting the documents: “Strategy of the Energa SA Group for 2016-2025” and “Long-Term Plan of Strategic Invest- ments of the Energa SA Group for 2016–2025”.

Strategic objectives and programs

The Energa SA Group’s objective is to increase EBITDA to PLN 2.4 bn in 2020 and PLN 3.0 bn in 2025, with stable market conditions.

In order to solidify the position of the Energa SA Group as an innovative customer-oriented utility group, taking into account a stable business foundation based on predictable regulations, the Strategy assumes two areas of business development and value creation, namely Infrastructure and Customer, within which the following strategic objectives and programs of the Energa SA Group have been identified, which are currently executed:

Objective 1. Developing modern energy infrastructure in a way that makes it possible to have a stable revenue base, dependent mainly on the quality of services provided rather than on typical market drivers. The infrastructure will respond to the future requirements of the Polish electrical power system, and its development will enable to keep a balance between the interests of all stakeholders of the Energa SA Group.

Program 1 / Expansion of a smart and reliable electricity distribution grid affording opportunities to market energy storage and local management services. Program 2 / Development of infrastructure for broadband web access. Program 3 / Utilizing regulations to stabilize revenues in the Capacity Market and tariffs on heat. Program 4 / Maintaining a solid position in the RES area through the execution of (1) a hydro power plant construction project as part of the development of the second step dam on the Vistula River and (2) other RES-related projects. Objective 2. Customer-oriented business model facilitating effective customer value management based on a coherent product and service offering. Program 5 / Rolling out a new customer-oriented business model and developing new business areas – the program will result in the creation of approx. 100 new products dedicated to three customer segments: individual customers, business customers and local government and public administration units.

A visualization of the strategy is presented in the chart below.

Figure 6: Chart illustrating the objectives and programs under the updated Energa SA Group’s Strategy

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Implementation of the investment program in 2017 In 2017, capital expenditures in the Energa SA Group amounted to PLN 1,402 m, of which most investments were made in the Distribution Business Line – PLN 1,247 m. Investment projects in the Distribution Business Line included expansion of the grid to connect new clients and producers as well as modernization, which is aimed at improving the reliability of electricity supply. Expenditures were also made for innovative grid technologies and solutions. Work related to compliance with environmental requirements and modernization projects in the Os- trołęka B Power Plant constitute an important part of the Generation Business Line’s capital expenditures. Table 1: Execution of the capital expenditure program in 2017

Capital ex- Description of the project Location penditures Execution stage (PLN m)

Distribution Business Line

Distribution grid modernization to improve In progress con- Distribution areas 604.0 reliability of supply. tinuously Grid development related to connection of In progress con- Distribution areas 413.3 new customers. tinuously Smart metering and other elements imple- In progress con- menting the smart grid concept, including Distribution areas 62.4 tinuously AMI. Grid development related to the flows in the HV grid and connection of electricity In progress con- Distribution areas 29.7 sources tinuously

Distribution areas and Other capital expenditures, collisions and In progress con- Distribution Business Line 137.1 adjustments tinuously companies

Generation Business Line

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Stage I has been Overhauls of the Ostrołęka B Power Plant Ostrołęka 26.0 completed Construction of a NOx emission reduction Stage I has been Ostrołęka 10.2 installation at the Ostrołęka B Power Plant. completed The power division and Other capital expenditures Generation Business Line 51.4 - Companies

Sales Business Line

Business area of Energa Capital expenditures for lighting assets 19.6 In progress Oświetlenie Business area of the com- Sales Support System 19.0 In progress pany Sales Business Line Sales area and Sales Other capital expenditures 4.6 - Business Line companies

Other companies, projects and adjust- - 24.7 - ments

Total: 1,401.9

2.5. Research and development

The Energa SA Group consistently implements innovations in key areas of its operations. The performed projects make it possible for the Group to improve effectiveness of operations and for its customers to gain measureable benefits. In 2017 the Energa SA Group spent nearly PLN 50 m on innovations and over PLN 3.5 m on research and development activities. The above funds were spent mainly on continuation of earlier research and development projects. In 2017, the Energa SA Management Board appointed in the group structures a dedicated research and development entity under the name: „Centrum Badawczo-Rozwojowe im. M. Faradaya Sp. z o.o.” [M. Faraday Memorial Research and Development Center], which is tasked with practical execution of the objectives resulting from the key documents defining the activity in the area of innovations and research and development. In addition the Energa SA Group’s Innovation Strategy for 2017-2020 with an outlook for 2025+ and the Group’s R&D&I Policy were adopted. The Innovation Strategy defines the innovation areas in the Energa SA Group, starting with selection of the creativity profile to risk approach, and ending with selection of the positions on the axis of technological and business changes. The joint research and development and innovation policy, in turn aims to manage the research and development process in a manner that will contribute to implementation of an efficient operating model, ensuring sustainable growth of the value of the Energa SA Group, while reducing excessive risk exposure. The Energa SA Group’s work in the R&D&I area has been supported by the Science and Technology Council for Innovation. The Council is an opinion-issuing and advisory body within Energa SA appointed by the Company’s Management Board. The Council consists of five renowned Polish scien- tists specializing in electric power systems from Poland’s five leading academic centers: In 2017, Energa completed the first competition entitled “Energa Open Innovation 2017”. The competition aimed to look for Polish innovative solution and state of the art technological achievements in the power sector. The best project was submitted by the team of the Baltic Power Electronic Technologies Center and the Power Converter Unit at the Electrotechnology Institute and pertained to an innovative power decay compensator. The most important projects in Energa SA Group’s innovative activity

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NEDO Project – the objective of the project is to gain expertise and experience on the possibility of using the energy storage technology to increase the flexibility of operation of the National Power Sys- tem (NPS), their impact on improving the operating reliability of the NPS and identification of the energy storage warehouse operating scenarios which stand an opportunity to develop in Poland with the existing and future legal and economic regulations. The final project deliverable is the construction of a battery energy store in the Bystra Wind Farm. The construction of the energy store is part of the Smart Grid Demonstration Project in Poland executed by the Japanese governmental organization NEDO. An Energa group company is responsible for building the infrastructure required to erect the store elements, integration of the store with the NPS and operation of the store in the demonstration period. The planned completion date is 31 December 2020. Upgrid Project, i.e. municipal grid of the future – project subsidized by the European Union under the Horizon 2020 program. The purpose of the project is to analyze selected technologies for their potential to improve reliability and optimize operation of the MV and LV grids on a selected portion of the grid, with special focus on developing new IT solutions and utilization of data from IT systems, in particular the AMI system. Energa Living Lab – the aim of the Energa Living Lab project implemented by Enspirion is to demon- strate the effectiveness and to popularize demand-side response tools, using the formula of tests in a live laboratory consisting of 300 households in Gdynia. The project is co-financed by the European Commission and the National Fund for Environmental Protection and Water Management within the LIFE+ Instrument. In 2017 the test was continued in households, applications for gamification and view of the current electricity consumption were developed and a tariff simulator was devised.

Construction of a Local Balancing Area as an element enhancing security and energy efficiency of the operation of the distribution system – the project is aimed at developing and implementing the Local Balancing Area technology which, in a specified area of the electrical power system, allows for integrated management of its power resources. Implementation of the solution developed in the project will make it possible to increase the capability of connection to the distributed generation network based on RES, improve the efficiency of the use of electricity, reduce the costs of operation of the electrical power system and improve reliability and security of energy supplies, leading as a result to an environmental effect in the form of reduction of national CO2 emissions. In 2017 work was conducted to prepare the hardware for installation of the software for controlling the energy store. Implementation of a heating grid telemetry and telemechanics systems – the essence of the project was to improve the efficiency of the heating infrastructure of the City of Kalisz and increase its efficiency and functionality. The project was completed in 2017. Cooperation with partners As part of its R&D&I projects, the Energa SA Group cooperates with numerous scientific entities, including: the Energy Institute in Gdańsk, Warsaw University, Gdańsk University of Technology, War- saw University of Technology, the Fluid-Flow Machinery Institute of the Polish Academy of Sciences, the University of Varmia and Masuria, the Science and Technology Park in Gdańsk and the Pomera- nian Science and Technology Park.

In 2017 the Energa SA Group continued to publish the “Acta Energetica” science and technology quarterly. The quarterly is published in cooperation with the Gdańsk University of Technology, since 2009. It targets professionals: engineers and technicians, senior management, university employees and students of faculties related to the power sector. This magazine’s subject of interest is closely related to the R&D&I area in the power sector and the electrical power sector as well as neighboring fields.

Research and development prospects:

The main areas determining the development of the Energa SA Group also include R&D efforts focusing on the following areas: 23

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 smart grid, active customers, RES and balancing clusters;  energy storage;  improvement of reliability and continuity of supply;  customer service and marketing actions;  production and sale of energy;  system services for network operators;  development of diagnostic systems;  improvement of energy efficiency

Development prospects and strategy implementation in 2018

The overriding aim of the Company is growth of goodwill guaranteeing return on the invested capital for the shareholders. In addition, the Company carries out tasks related to ensuring Poland’s energy security. Due to the large share of regulated activity in the business structure, the Group continues to be a low risk profile enterprise. As a result, it is relatively immune to unfavorable changes on the electricity market. In response to evolving regulatory and business environment, in 2016, the Energa SA Management Board adopted a document entitled “Energa SA Group Strategy for 2016-2025”. Distribution Business Line The Energa SA Group consistently attempts to become a leader among distribution system operators by increasing effectiveness and grid reliability in conjunction with the highest quality of customer service. In 2018, in the Distribution Business Line, in accordance with the Long-Term Plan of Strategic Investments, capital expenditures are planned to increase up to PLN 1.3 bn. The key directions for investments in 2018 are associated with: - execution of initiatives contributing to improvement of the SAIDI/SAIFI indicators (including replacement of MV overhead power lines running through woodlands and wooded lands with cable lines). As a result of the storms that affected the power grid in 2017 causing major damage, the Company is determined to consistently follow the adopted strategic directions aiming to immunize the MV distribution network against external factors, – modernization of the MV/LV stations for the needs of station metering in accordance with the requirements of the ERO President, – replacement of the metering infrastructure for the needs of implementation of the capacity market act as part of the AMI smart metering system, – construction of the TETRA trunking communication system. For the needs of station metering, as part of the integration solution AMI/SmartGrid, it has been planned to commission further TAN B lines to allow for communication of the total of 35.9 thousand stations by the end of 2018. In 2018, it is planned to complete the modernization of the TAN A technological network from the standpoint of installation of stand-by teletransmission equipment in all the network nodes. This will significantly improve the continuity of operation of the SCADA system. It also planned to commence work on commissioning the virtualization in the technological network, ensuring separation and prioriti- zation of individual applications and services. Thanks to implementation of the network virtualization, the security of the TAN technological network will be significantly improved. 2018 will be a key year in the implementation of the TETRA network which is coming to an end. The last base stations will be built and the integration will be completed with the systems which directly impact the security of work in the network and continuity of operation of the SCADA technological line. 2018 will be also important from the perspective of implementation of the TETRA system for on-going production operation. The migration of disconnectors from the old Digicom system to the TETRA network will be completed and Energa-Operator will be the first DSO to put an end to the use of analogue trunking after over 20 years of operation.

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Actions associated with optimization of the network, its expansion and adaptation to the planned availability of surpluses will be an important element of the development efforts in the TETRA network. 2018 will also see the start of the installation and commissioning of the TETRA communication channel in the new facilities built as part of the Smart Grid project.

In 2018, the Energa SA Group will support and stimulate the development of electromobility in the area of its operations. This is a new energy market segment, with a dynamic growth prospects which requires, due to its uniqueness, developing independent energy distribution capacities. To ensure stable development of the new market segment, the Distribution Business Line will take actions in two areas: cooperation with the local governments and investments in the MV and LV networks from the perspective of connection of charging stations. 2018 will be another year of application of the “Distribution System Operator Regulation Strategy for 2016-2020”. These principles introduced far-reaching changes, among others, in calculation of return on employed capital, amount of operating expenses included in the tariff and qualitative regulation. The actual level of the efficiency indicators will have impact on the allowed revenue in the next periods – the actuals in 2017 will be reflected in the 2019 tariff. In this respect, in addition to the continuity indicators (SAIDI/SAIFI), it is key to maintain a high level of the CRP (connection delivery time). In 2018, a “Concept of operation of LV transmission grid and 110 kV distribution grid closed for the area of operation of Energa-Operator S.A. until 2030” will be developed together with PSE S.A. This document will make it possible to plan optimum development of the power grid infrastructure for the assumed capacity demand increase scenarios and planned connections to the power grid and will be the basis for preparation, in 2019, of the Company’s new Development Plan for 2020-2025.

The Distribution Business Line aspires to be a leader in implementing innovative technical, organizational and process solutions. The Energa SA Group implements innovative solutions in such areas as: implementation of the smart grid, smart metering, construction of a local balancing area, smart energy storage, international EDI (European Data Incubator) project, whose main objective is to incubate SME companies and start-ups interested in Open Source tools for processing and analysis of big, diversified data files (Big Data) coming from different sectors. In addition, efforts have been initiated to implement the FDIR system, whose task is to support dispatchers in operating the grid traffic through automatic reconfiguration of the MV grid system, single out the grid fragment and thanks to that, limiting the number of customers affected by emergency power cuts.

Generation Business Line In the Generation Business Line, according to the Long-Term Plan of Strategic Investments, capital expenditures planned to be incurred in 2018 amount to PLN 0.4 bn, however their level depends to a certain extent on the timing and outcomes of the RES energy auctions. The remaining expenditures result from the necessity to modernize the existing assets and conducted development activities. In accordance with the prevailing Energa SA Group Strategy, the key investments in the power division are: Ostrołęka C coal-fired power plants with the capacity of approx. 1,000 MWe and the plan to build a hydro power plant based on the second step dam on the Vistula River with the capacity of approx. 80 MWe. In December 2016, a competitive dialogue order was announced for selection of the contractor for the Ostrołęka C power plant, which was continued in 2017. In the course of the conducted activities, by 28 December 2017, three bids for construction of the Ostrołęka C power plant were submitted. Under the investment agreement signed on 8 December 2016, ENEA S.A. became a co-investor in the project. In 2017, the company increased its share in the project and in 2018 it plans to reach the target level of 50% of the shares in the special purpose vehicle Elektrownia Ostrołęka S.A. As regards the Vistula hydro power plant, in December 2017, three Ministries – Environment, Marine Economy and Inland Navigation and Energy, signed an agreement on construction of the Siar- zewo barrage. The next milestone for the project was the issue of a positive decision on environmental conditions for the project on 29 December 2017. Due to the long-term experience in managing the hydro power plant in Włocławek, the Energa SA Group will act in the capacity of an expert in the investment process and is interested in participation in the construction and operation of the hydro power plant on the Siarzewo barrage.

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Sales Business Line Energa-Obrót, as trading company, and Leading Entity of the Sales Business Line in the ENERGA SA Group, operates in the dynamically developing electricity market, explored by an increasing number of players, which results directly from the constant increase of the domestic increase in electricity consumption and increased gross domestic product growth. In 2018, it is expected that the competitiveness of the energy market will continue to increase, stimu- lated both by competition between the largest sellers belonging to 4 vertically integrated capital groups as well as by new smaller entities entering the market, whose number and market share keeps increasing. The ERO President appointed, for 2018, 181 offtakers of last resort in the area of operations of 181 distribution system operators. In the areas of operations of 5 big distribution system operators, the function of the offtaker of last resort will be performed in 2018 by trading companies from the same power groups. In response to the evolving market environment, dynamically emerging competition and potential market fragmentation, the “Energa SA Group strategy for 2016-2025” has been devised, defining also the tasks dedicated to the Sales Business Line captured in Program 5 entitled “Rolling out a new customer-oriented business model and developing new business areas” and appointing Energa-Obrót S.A. as the Program Leader. The new business model defined by the company provides for customer focus, putting the customer in the center of attention, and the resulting listening to their needs and developing dedicated products, services as well as service and communication methods. The business model defined this way requires execution of initiatives on many planes of the organization. The company intends to fully leverage the potential of its existing operations, based mainly on sales of electricity and gas, and at the same time introduce a model based on the function of the integration, cooperating with the technical partner with regard to sale of energy-related products for retail and business customers. The planned changes require ensuring modern and efficient solutions in the area of sales, post-sales service and marketing communication, supported by effective IT tools. Additionally the company has defined a number of process and tool improvements to enhance their efficiency. Implementation of the Integrator Business Model is planned for 2017-2025. The Sales Business Line in the Energa SA Group consistently takes actions aimed at constant increase of the profit levels and increase of the customer portfolio. The key internal initiatives, in addition to the aforementioned implementation of the Integrator Business Model, include:  development of an offering for retail and business customers,  loyalty and acquisition activities aimed at development of the customer portfolio,  undertaking initiatives and implementing tools streamlining and enhancing customer service efficiency and quality,  optimization of the organizational structure and processes,  providing analytical tools increasing managers’ awareness regarding the condition of the company,  implementation of a metering information management system, ensuring high quality of the data required to settle electricity consumption by customers,  introduction of strategic partnerships enhancing the attractiveness of the offering or expanding the sales network,  introduction of new segmentation in the company. The aforementioned actions, combined with an effective policy reducing the company’s financial bur- dens will increase profits and strengthen the position of Energa-Obrót in the market. The attainment of the assumed objectives is conditional upon transformation of the company’s organizational culture. It will ensure a synergy of the activities of the organizational cells and increase the employee awareness of the directions of the company’s development and hence their commitment to attainment of the expected results. Material factors relating to development of the energa SA Group In the opinion of the Energa SA Management Board, the following factors will have impact on the results and activity of the Company and the Energa SA Group at least for 2018: 26

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Figure 7: Material factors relating to Energa SA Group’s development at least for 2018

Entry into force of the amend- Consequences of the decision ments to the RES act signifi- Increasing competition to recognize long-term con- cantly reducing the costs of in the market of electricity tracts for the purchase of green discharging the function of the sellers certificates as invalid Offtaker of Last Resort as of 1 January 2018

Incurring expenditures on the Change in the structure of grid in connection with the distributed energy in relation to Electricity prices on the spot quality regulation requirements the structure set and balancing markets in the Distribution Business in the tariff Line

Must-run Amendment to the Renewable production level Weather and hydrometeorolo- Energy Sources Act changing at Energa Elektrownie Os- gical conditions the basis of the property tax trołęka

Share in the net result of PGG Actual rate received and the and Polimex-Mostostal and operating reserve volume valuation of the options for Polimex-Mostostal shares

2.6. Risk management in the Energa SA Group

Integrated Risk Management System in the Energa SA Group

The Integrated Risk Management System (ERM) has been operational in Energa SA Group’s key companies since 2011 and is supervised centrally by Energa SA.

ERM is executed on the basis of the risk management process unified across the whole group and it is based on international standards (ISO, COSO, FERMA), covering all of the Group’s organizational levels and business lines. The risk management process consists of various interrelated stages forming a continuous process. It starts at the level of organizational units and moves on to the top management and from the level of Group companies to Energa SA as the Holding Company.

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Figure 8: Risk management process in the Energa SA Group

The main document which is used by the Energa SA Group to conduct the risk management process is the Risk Management Policy and the risk management methodology, which define, among others, the unified approach, risk management rules and roles in the risk management process.

Management Board: defines the direction for risk management, accepts risk review results, accepts risk appetite

Risk Unit: coordinates the risk management process, conducts risk reviews and develops reports summarizing the risk identification and evaluation results and action plan reviews

Risk Owner: manages risk, develops and implements action plans, monitors risk, maintains risk within specific limits

Employees: provide information on risk and events and inefficiency of control mechanisms

Audit Committee: monitors the effectiveness of the existing internal control and risk management systems in the Energa SA Group

Internal Audit: Performs independent and objective assessment of the risk management system

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

As part of the Integrated Risk Management System, the Energa SA Group conducts the following activities: risk review – involving identification and assessment of risk and defining the risk management strategy [in semi-annual cycles]

review of the action plans – involving update of the risk management strategy and verification of the actions taken by the Risk Owners to mitigate the risk [in quarterly cycles]

current risk management – involving identification and assessment of risk and defining the risk management strategy, in the context of the current events pertaining to the Energa SA Group [on an ongoing basis]

Based on the risk reviews information is prepared concerning Energa SA Group’s risk exposure. On its basis, the Energa SA Management Board makes decisions pertaining to the level of risk appetite and accepts the key risk management policy. The results of risk reviews are communicated to the Risk Owners and reported to the Audit Committee. As part of ERM, in 2017 the Energa SA Group conducted activities to define more precisely and sort out the provisions of the “Risk Management Policy in the Energa SA Group” and training for risk coor- dinators in the Group entities regarding the tools supporting risk management. As part of the supervisory activities, the risk unit in Energa SA increased the frequency of execution of the action plans with reference to the risks, and prepared personalized guidelines for the risk management approach for each Group entity. Additionally, it carried out an identification and assessment of potential abuse scenarios to assess the abuse risk on the Energa SA Group level. Description of major factors and risks The key risks identified at the level of Energa SA and Group entities, broken down into four Energa SA Group Risk Model areas, together with a description of the main risk mitigation actions, are presented below. Strategic area

Description of the risk and its potential ef- Risk Control mechanisms used fects

Image risk Risk related to activities conducted by the Group  Internal regulations pertaining to affecting its image. Should this risk materialize, it communication and marketing and could cause deterioration of business relations, sponsorship activity of the competitive position of Group entities,  Cooperation with a PR agency and decline of the Group’s value (brand) and conse- creative agency quently to the loss of customers, investors or  Vision and plan of communication and business partners. promotion actions  Current cooperation and maintaining good relations with the stakeholders  Monitoring of the environment for the brand presence and ongoing response to changes regarding the image

Risk associated The risk pertains to the declining satisfaction of  Ongoing control of the customer ser- with service and customers with the services provided by Group vice standards, recommendation of relations with the entities, failure to meet customer service quality changes in the risk areas Energa SA standards and lower revenues on sales and  Monitoring the timeliness of respond- Group’s custom- distribution activity. ing in the complaint process and ers trends as regards customer loss  Mystery shopping research

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 Unification and standardization of service depending on the contact channel.

Investment risk The risk is associated with selecting incorrect  Long-Term Plan of Strategic Invest- investment directions. The risk concerns failure ments (clear guidelines regarding the to achieve an appropriate level of investment Group’s investment policy) profitability, problems associated with the financ-  Ongoing contacts with financial insti- ing of investments, failure to achieve the as- tutions sumed operational parameters and delays in  Reporting on the project performance investment project implementation. Risk materi- status on a regular basis, including alization may lead to, among others, the weak- risk analysis ening of the Group’s competitive position, the  Ongoing monitoring of performance of undermining of the economic ratios, necessity to investment projects write off the loss value of failed investments or lack of investment returns. In the case of investments subsidized from EU funds, risk mate- rialization may also entail the necessity to refund the subsidies received.

Development risk The risk is associated with lack of or misguided  Strategy and strategy performance approach to development of particular compa- control nies comprising the Energa SA Group. The  Feasibility analyses effects of the risk may involve, among other  Analysis of the external environment things, financial losses and losses to image, and internal conditions supporting reduction of production capacities or loss of part flexible response and adaptation to of the market. changing environment (scenario- based analysis)

Risk associated The risk pertains to ongoing monitoring and  Task force for the purposes of ongo- with investor’s control of fulfillment of the investment conditions ing monitoring and enforcement of in- oversight over by Polska Grupa Górnicza. The effects of the vestment terms in the PGG project Polska Grupa risk may lead to deterioration of the financial  Participation of an Energa Kogenera- Górnicza SA performance of Energa Kogeneracja Sp. z o.o. cja representative in the Monitoring (which is the direct investor) or prevent return Committee at the PGG Supervisory from invested capital. Board

Legal and regulatory area

Description of the risk and its potential ef- Risk Control mechanisms used fects

Regulatory risk The risk concerns legislative changes affecting  Monitoring changes in the law the functioning of the Energa SA Group’s individ-  Participation in the legislative pro- ual Business Lines. If the risk materializes, the cess performance of the investment plans may be  Participation of the Group’s repre- suspended or operating expenses may rise. The sentatives in the work of industry risk is also an opportunity to adopt the new legal associations solutions which could facilitate raising additional funds or ensure a support system for the Group’s assets.

Risk of the The risk involves, among other things, legal,  Monitoring changes in the law Group’s non- financial, organizational or image-related effects  Task forces on ensuring compli- compliance with of the Energa SA Group’s failure to comply with ance of the Group’s operations with new laws new laws or their incorrect interpretation. the changing laws (among others, GDPR)  Compliance management in the

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Energa SA Group

Risk associated Risk associated with conducting the operations in  Internal regulations with environmen- accordance with provisions of the environmental  Monitoring changes in the law on tal protection law, best environmental practices mitigating the an ongoing basis risks and ensuring compliance with the sustaina-  Analyses and measurements of ble development principles; providing information emissions and assurances to stakeholders about compli-  Controls and audits ance with the national environmental regulations  EMAS System implemented in the and the requirements of the EMAS Regulation. If Group’s main companies the risk materializes, the ISO 14001 certificate may be withdrawn and the ISO 50001 certificate may not be obtained. Failure to comply with environmental regulations may lead to an increase in the costs associated with removal of potential incidents affecting the environment, imposition of financial penalties and shutdown of elements of defective installations.

Risk of abuse The risk concerns situations and actions related  Internal regulations related to to abuse, including conflict of interest, corruption abuse and fraud, which can be committed by employ-  Training for employees (related to, ees of the Energa SA Group companies. The risk among others, corruption preven- involves potential threat of abuse and corrupt tion) practices in the operational processes. If the risk  The organization’s three lines of materializes, this may lead to emergence of defense (internal control system, financial losses and may involve the law en- risk management system, internal forcement authorities conducting procedures audit) against employees or bodies of the Group com-  External controls panies. The risk may have an adverse effect on  Explanatory actions the Energa SA Group’s image and reputation, and it may contribute to deterioration of the employees’ trust in their supervisors, colleagues and the organization as a whole.

Legal risk The risk is associated with court and administra-  Collaboration with law firms tive procedures conducted by or against the  The system for monitoring im- Group companies as well as criminal procedures portant matters conducted against employees in connection with  Internal regulations the performance of their professional duties. If the risk materializes, this may result in an obligation to pay damages and penalties, and also giving bonuses to customers resulting from failure to comply with the electricity quality standards prescribed by law.

Operating area

Description of the risk and its potential ef- Risk Control mechanisms used fects

Risk to the securi- Risk associated with unauthorized access to  Security Plans, including Critical In- ty of persons and facilities, including power equipment. The risk frastructure Security Plans property also applies to security of employees and third  Internal regulations related to security parties present on the premises of the Group’s  Operational Continuity Plans in the companies, as well as incidents related to terror- Group Companies ism and sabotage. Potential consequences of  Property insurance, third party liability the risk may involve threat to security of the insurance and insurance for lost rev- grid’s operation, loss/destruction of property or enues

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

interruption of operational continuity.  Physical and technical security systems in the Group’s facilities  Security incidents monitoring in the Group  Employee training

Risk associated Risk associated with ensuring the availability  Procedures for creating IT system with unreliability (incorrect operation and decrease in capacity), backups of IT systems integrity and confidentiality of ICT systems,  Internal regulations related to ICT including their interconnection/integration. If the security risk materializes, this may lead to increased  Service Level Agreements (SLA) and maintenance costs of the IT systems and the Service Agreements signed with the need to incur additional capital expenditures in IT service and hardware suppliers this respect. The risk may significantly hinder  Eliminating the possibility of entering and even prevent the Group companies from incorrect data in the system (system performing their basic tasks. validations and the authorizations system)  Training to improve specialist qualifications of the IT area employees  IT Audits

Risk of untimely Risk associated with lack of client database  Outsourcing of the handling of some customer and centralized in a single IT system and the cus- of the notifications seller service tomer service being conducted in contravention  Customer satisfaction surveys with the accepted standards. If the risk material-  Monitoring KPIs designated in the izes, this may erode the revenues and result in notifications handling process the need to pay fines, damages and give dis-  Processes and Rules for managing counts; it may also result in filing of civil law the points of contact of the processes lawsuits and deterioration of image. among the Energa SA Group companies  IT systems

Risk associated Risk is associated with the violation of the Com-  The provisions of the Compliance with a failure to pliance Program in place in Energa-Operator Program allowing for the pursuit of effect the Compli- SA. If the risk materializes, this may result in damages on general principles from ance Program complaints being filed by the system users to the the employee who breached his/her Energy Regulatory Office and the Office of duties, which resulted in a fine being Competition and Consumer Protection. The imposed by the ERO President effects of the risk involve increased workload  Provisions of the agreements related related to the preparation and conducting of to subcontractors’ and service provid- explanatory proceedings before the ERO Presi- ers’ conformity with the Compliance dent or the imposition of possible fines. Program  Training conducted on regular basis

Finance area

Description of the risk and its potential ef- Risk Control mechanisms used fects

Risk of tax settle- Risk associated with ineffective tax settlements,  Internal regulations related to transfer ments including within the Tax Group. If the risk mate- prices and tax management rializes, this may result in fines and interest  Collaboration with tax consultants being imposed, the need to make additional (permanent and incidental) payments to make up for the incorrectly accrued  Filing petitions with the Ministry of tax, or it may lead to loss of benefits attributable Finance to hand down individual tax to the Tax Group and absence of VAT deduc- rulings tions.  Employee training  Monitoring changes to tax laws

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

 Verification of agreements from tax standpoint before signing  Procedures protecting from criminal tax liability

Risk associated The risk associated with incorrect calculation of  Market analyses, conducted on an with the pricing sales prices and the ERO President’ s approval ongoing basis, from the standpoint of policy of the tariff rates at the level not guaranteeing changes taking place on the market profitability of sales. If the risk materializes, this and changes to the legal and regula- may result in losing the market share (margin, tory environment volume, revenue), loss of clients and if the tariff  Ongoing surveys of the planned fi- is not approved – inability to bill customers for nancial result and other selected rati- the sales. os, and ongoing analysis of the impact of the adopted price calculation rules on that result/ratios  Ongoing analyses of the offering mechanisms (including the Conjugate Model) and correctness of operation of IT trade systems and databases  Close collaboration to acquire the information necessary to shaping the pricing policy  Audits and controls  Offering monitoring system

Risk associated The risk is related to business decisions made  Macroeconomic guidelines and as- with reporting and on the basis of the following: sumptions for the price paths for fi- management ac- nancial models  budgeting and monitoring the performance of counting  Best practices the companies’ budgets, reports and man-  Analytical skills of the team agement information for the companies’ governing bodies and for the Group;  IT tools  feasibility analyses of the investment projects;  Management control matrices  impairment tests;  long-term modeling. If the risk materializes, this may result in making incorrect decisions on the execution or aban- doning of investment tasks, the need to make impairment losses and lost revenues or additional costs.

When implementing the provisions of the Energa SA Group Financial Policy, the Group companies conclude different kinds of financial agreements which entail financial and market risks. The most important ones include the interest rate risk, FX risk, credit risk and liquidity risk. The above risk categories determine the financial results of individual companies and the Energa SA Group.

Interest rate risk

The Energa SA Group companies finance their operating or investing activity with debt liabilities bearing interest at a floating or fixed interest rate. Interest rates are also associated with investment of surplus cash in floating or fixed interest rate assets.

The floating interest rate risk resulting from concluded debt liabilities applies to WIBOR-based rates only. In respect to liabilities denominated in EUR, the Energa SA Group has contracted financial debt under issued fixed-coupon Eurobonds.

According to the interest rate risk policy, risk of variation in interest rates is mitigated by maintaining a portion of debt with fixed interest rate. Under these assumptions, IRS floating interest rate hedging transactions are executed.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

In connection with implementation of hedge accounting, the Energa SA Group also identifies interest rate risk related to the concluded CCIRS and IRS hedging transactions, which however has no effect on the Group's financial result. Moreover, the level of interest rates has a direct effect on the WACC stated by the ERO President to calculate the return on RAB, which is included in the tariffs of Energa- Operator SA. Low interest rates result in a lower return on RAB and an increase in actuarial provisions. Foreign exchange risk In the financial area the FX risk is associated mainly with incurring and servicing Energa SA Group’s debt liabilities in foreign currencies under the EMTN Eurobond Issue Program as well as in connection with the issue of hybrid bonds. Additionally, selected Energa SA Group companies had foreign currency surpluses resulting from their operating activity or investing activity. The Energa SA Group monitors the foreign exchange risk and manages it primarily through contracted CCIRS hedge transactions and implemented hedge accounting. Credit risk Credit risk is associated with the counterparty’s potential permanent or temporary insolvency with regard to financial assets such as cash and cash equivalents and financial assets available for sale. The risk arises due to the contractual counterparty’s inability to make the payment and the maximum exposure to this risk equals the carrying amount of acquired instruments. In this respect, the ratings of financial institutions with which the Energa SA Group cooperates are monitored on a regular basis to minimize credit risk. Liquidity risk Risk of loss of financial liquidity – associated with the possibility of losing the ability to pay liabilities on time or losing possible benefits resulting from over-liquidity. Energa SA Group companies monitor the liquidity risk using a regular liquidity planning tool. The tool takes into account the payment due/maturity dates both for investment liabilities and financial assets and liabilities and projected cash flows from operating activity. The Group aims at maintaining the balance between continuity and flexibility of financing through use of various sources of financing, such as working capital and investment loans, local bonds and Eurobonds. Since the Group’s debt is centralized in Energa SA, this company monitors the fulfillment of covenants on an ongoing basis and their forecasts in the long term, which allows it to determine the Energa SA Group’s debt capacity, its capability to conduct capital expenditures and affects its capacity to pay liabilities on a timely basis in the longer term. In order to mitigate the liquidity risk, the Group companies may use the mechanism of issuing short- term bonds, and, as part of the established bonds issue programs, the purchase offers are made by the issuer – a Group company – only to other companies. The procedure is coordinated by Energa SA, which makes it possible to optimize the entire process in terms of its organization. The effectiveness is maximized through the zero-balancing cash pooling, implemented in January 2016, which involves utilization of Group’s cash surpluses to finance the current operations of individual Group companies. Energa SA also concluded loan agreements with several financial institutions, which represent an immediate liquidity reserve in case of any liquidity needs.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

2.7. Information on material agreements and transactions

Material agreements Updating the estimated value of the contract to supply coal to Ostrołęka B On 10 January 2018, the subsidiary Energa Elektrownie Ostrołęka SA signed an amendment letter to the contract to supply coal to Ostrołęka B (“Annex”) with Polska Grupa Górnicza S.A. (“PGG”), which was announced in Current Report No. 53/2016 on 27 December 2016. The amendment letter increased the volume of supplies up to 750 thousand tons of coal, with possible volume deviations by ±20%. For 2018, the Parties agreed on the supply of 750 thousand tons of the raw material. The Contract to which the Amendment Letter was signed had been executed for a definite term from 1 January 2017 to 31 December 2030, with an option to extend its term. In connection with a considerable change in the volume to be supplied, the estimated value of the Contract was updated and it now amounts to PLN 3.28 billion during the contractual term. As a result of the increase in the volume, PGG has become the majority coal supplier to Ostrołęka B power plant (Current Report No. 1/2018). Agreements for loans and borrowings Loan agreements with multilateral financial institutions Loans to finance the capital expenditure program at Energa-Operator SA for the years 2009-2012 In the years 2009-2010 Energa SA together with its subsidiary Energa-Operator SA entered into the following loan agreements to finance the expansion and modernization of the distribution grid in 2009- 2012: • with the European Investment Bank (EIB) with the limit of PLN 1,050 m; • with the European Bank for Reconstruction and Development (“EBRD”) with the limit of PLN 1,076 m; • with the Nordic Investment Bank (NIB) with the limit of PLN 200 m. The above funding has been fully utilized by the Company, of which the following amounts are still outstanding and remain to be repaid to: • EIB – PLN 634 m with final maturity of 15 December 2025, • EBRD – PLN 648 m with final maturity of 18 December 2024, • NIB – PLN 97 m with final maturity of 15 June 2022. Loans to finance the investment programme at Energa-Operator SA for the years 2012-2015

In 2013 Energa SA together with its subsidiary Energa–Operator SA entered into the following loan agreements to finance the capital expenditure program of Energa–Operator SA for the period of 2012- 2015 associated with the expansion and modernization of the distribution grid: • agreement with EBRD with a limit of PLN 800 m – as at 31 December 2017, PLN 667 m of the loan was utilized (of which PLN 264 m by Energa SA and PLN 403 m by Energa- Operator SA). The final maturity of the loan is 18 December 2024; • agreement with EIB with a limit of PLN 1,000 m – as at 31 December 2017, PLN 963 m of the loan was utilized (of which PLN 763 m by Energa SA and PLN 200 m by Energa- Operator SA). The final maturity of the loan is 15 September 2031. Nordic Investment Bank On 23 October 2014, Energa SA signed a loan agreement with a limit of PLN 67.5 m with the Nordic Investment Bank to finance a wind farm construction project in Myślino. The aggregate use of the loan as at 31 December 2017 was PLN 55 m. The final maturity of the loan is 15 September 2026.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Loans granted In June 2017, the Group’s special purpose vehicle, Energa Finance AB (publ), extended the EUR 200 m loan to Energa SA using the funds raised under a Eurobond (EMTN) issue carried out in March 2017. In addition, the two loans from 2013 for a total amount of EUR 499 m were continued; they were granted to Energa SA by the Group’s special purpose vehicle, Energa Finance AB (publ), using the funds raised under a Eurobond (EMTN) issue carried out in March 2013. In November 2017, Energa SA granted a short-term loan of PLN 10 million to Elektrownia Ostrołęka SA with the original maturity date of 31 January 2018, which was then extended until 30 March 2018.Moreover, during the reporting period, the Energa SA Group used the short-term bond issue facility, in which, to achieve efficient liquidity management, the Group company issuing the debt securities offered their purchase only to other Group companies. Acting on the basis of the Financial Policy adopted by the Energa SA Group and under the terms and conditions of internal bond issue facilities, in 2017 Energa SA purchased bonds issued by Energa- Operator SA. The main purpose of the issue was for the issuer – an Energa SA Group company – to raise funds to execute a capital expenditure program. The table below presents the nominal value of bonds subscribed by Energa and outstanding, broken down into individual issuers from the Energa SA Group, as at 31 December 2017. Table 2: Nominal value of bonds subscribed by Energa SA and outstanding, by issuer, as at 31 December 2017

Nominal value of subscribed bonds No. Company name (PLN 000s)

1. Energa-Operator SA 3,214,740.2

2. Energa Wytwarzanie SA 822,200.0

3. Energa Kogeneracja Sp. z o.o. 33,675.0

4. Energa Elektrownie Ostrołęka SA 92,000.0

TOTAL 4,162,615.2

Domestic bond issue program No changes in respect of the issue volume were made in the domestic bond issue program established in September 2012, in which Energa SA conducted the first bond issue of PLN 1,000 m. As part of the actions continued in 2017, the subsidiary Energa-Operator SA purchased on the secondary market another bundle of a total of 27,157 Energa SA bonds with a total par value of PLN 271.57 m. As at 31 December 2017, Energa-Operator SA held the bundle of a total of 82,969 Energa SA bonds with a total par value of PLN 829.69 m.

Eurobond issue program In Q1 2017, a subsidiary Energa Finance AB (publ) carried out a public subscription for the Eurobonds issued under the updated EMTN Program (the bookbuilding process was closed on 1 March 2017). It was EUR 300 m bond issue with the issue price of 98.892% and 10-year maturity. The 2.125% coupon will be payable annually, starting from March 2018, and, after the discount rate is taken into account, the yield for bondholders is 2.25%. The Eurobonds are listed on the Luxembourg stock exchange. The final settlement of the transaction was effected on 7 March 2017. Energa SA acts as the guarantor of the issue. The funds raised through the bond issue will be applied to general corporate purposes, excluding investments in coal assets.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Hybrid bond issue program

On 4 September 2017, Energa SA and the European Investment Bank entered into the following agreements: (i) subscription agreement, constituting the basis for issuing EUR 250 m hybrid bonds, and (ii) project agreement, defining detailed financing requirements of the investment project. The Bonds issue took place on 12 September 2017. The issued Bonds are subordinated, unsecured, coupon bearer securities which have been subscribed for by EIB under the European Fund for Strate- gic Investments launched by EIB jointly with the European Commission to execute the so-called Juncker Plan. In accordance with the Subscription Agreement, the Bonds were issued in two tranches with the total nominal value of: (i) EUR 125 million, maturing in 16 years, with the first financing period set for 6 years from the issue date, (ii) EUR 125 million, maturing in 20 years, with the first financing period set for 10 years from the issue date. The Bonds earn interest at a fixed interest rate estimated according to the formula defined in the terms and conditions of issue. Insurance contracts The Group has in place a joint insurance policy, which ensures insurance cover for the companies and their activities against risks associated with conducted operations and assets held in the highest standard available on the market and with a credibly estimated market premium. The adopted sums insured are established at the level adequate to risks and external factors, and they correspond to the profile of the Polish power sector companies. A joint Insurance Program is executed in collaboration with a brokerage firm. According to the adopted terms and conditions that were drafted as part of that Scheme, all the Energa SA Group companies have the same term of insurance, and the agreements are entered into for the term of three years. The Scheme allows for a standardized insurance cover for the risks covered by it, with customized agreements and extensions negotiated for unique needs of individual companies. Insurance contracts are concluded with the leading insurance companies operating in Poland. Curren- tly, GKE main partner in the insurance area is Towarzystwo Ubezpieczeń Wzajemnych Polski Zakład Ubezpieczeń Wzajemnych. Guarantees and sureties given

Table 3: Information on sureties and guarantees extended by Energa as at 31 December 2017

Entity in Amount of Entity for favor of liability secured Extension which the Form of the Surety or Term of the which the by the surety or date of the surety or surety or guarantee No. surety or guar- surety or guarantee as at surety or guarantee was guarantee amount antee guarantee 31 December guarantee granted (PLN m) was granted 2017

(PLN m) surety agree- Energa Finance 1 2012-11-15 2033-12-31 bondholders ment* 5,213.6 3,357.8 AB

Energa surety WFOŚiGW 2 2015-01-08 2024-12-31 Wytwarzanie - loan agree- Gdańsk 15.0 6.9 SA ment Surety agree- Energa Invest NFOŚiGW 3 2017-06-20 2021-02-28 ment 4.2 2.8 SA Warsaw

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Grupa Azoty Zakłady Surety agree- ENSPIRION 4 2017-11-14 2018-06-30 Azotowe ment 0.2 0.2 Sp. z o.o. Kędzierzyn SA State Treas- surety agree- Energa- 5 2017-11-22 2021-03-31 ury ment 40.00 40.0 Operator SA

surety agree- Energa Enea Trading 6 2017-11-28 2021-03-31 ment 25.00 00.0 Obrót SA Sp. z o.o.

Other EN- surety** ERGA SA - agreement to 7 Group Com- extend a guar- 14.2 4.8 panies antee

TOTAL 5,312.2 3,412.5

* on 15 November 2012, an EMTN Eurobond issue program was established for the amount up to EUR 1,000,000,000. Under the EMTN Program, Energa Finance AB (publ), a company registered under the Swedish law, acting as a wholly-owned subsidiary of Energa SA, may issue Eurobonds with maturities from 1 year to 10 years. Pursuant to the surety agreement of 15 No- vember 2012, amended on 16 February 2017, Energa SA unconditionally and irrevocably undertook to guarantee liabilities of Energa Finance AB (publ) resulting from Eurobonds up to EUR 1,250,000,000 until 31 December 2033 inclusive. On 19 March 2013, Energa Finance AB (publ) issued series I of Eurobonds in the amount of EUR 500,000,000 and maturing on 19 March 2020, and on 7 March 2017, it issued another series II of Eurobonds in the amount of EUR 300,000,000 and maturing on 7 March 2027. ** Civil law sureties extended by ENERGA SA for liabilities of Group companies arising from bank guarantees granted by PKO BP SA under guarantee facilities dedicated to Group companies. The facility may be used until 19 September 2022. Terms of validity of the guarantees granted under the facility limit may extend beyond this date. Repayment of liabilities is secured by a civil law surety. Other guarantees granted at the request of the Group companies included the following:  bank guarantees totaling PLN 153.8 m extended by Pekao SA, ING Bank Śląski SA and mBank SA to Energa-Obrót SA,  bank guarantee of PLN 17.7 m granted by PKO BP SA to Energa-Operator SA. Information on transactions of material importance with related parties on terms other than an arm’s length basis

All the transactions within the Energa SA Group are made on the basis of the market prices of goods, products or services based on their manufacturing costs. Detailed information on this subject is presented in Note 32 to the consolidated financial statements for the year ended 31 December 2017. Evaluation of financial resources management During the financial year, Energa SA Group had at its disposal cash guaranteeing timely service of all current and planned expenditures related to conducted operating and investing activity. Cash on hand as well as available credit facilities ensure that the liquidity management policy may be conducted in a flexible manner.

The execution of investment projects was based on the use of own funds and debt financing. The structuring of projects assumes the maintenance of financial security for the Energa SA Group mani- festing itself in the use of long-term debt financing, pursuit of a dividend policy consistent with the adopted strategy, maintenance of financial covenants at levels agreed upon with debt financing pro- viders and maintenance of investment-grade ratings. The last two elements are the limitations, which determine Energa Group’s capital expenditure capabilities, which are defined for the long term. Such a conservative approach allows the Group to implement its capital expenditure policy in a manner that minimizes the risk of violating financial covenants or having the rating downgraded, while optimizing the Group’s financial structure taking into account the current and predicted trends on the financial

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017 market. Based on the above conditions, the Energa Group is equipped with adequate financial resources and is financed with diverse long-term debt liabilities and it does not see any threats for the implementation of its planned capital expenditures.

The Company monitored the liquidity risk using the periodic liquidity planning tool that takes into account the payment due/maturity dates both for investment liabilities and financial assets and liabilities and projected cash flows from operating activity, in order to maintain balance between continuity and flexibility of financing through utilization of various sources of financing.

To efficiently manage liquidity, the Energa SA Group used – to a lesser extent than in previous years – the mechanism of issuing short-term bonds offered by the issuer – a Group company – only to other Group companies.

In 2017, the Energa SA Group continued optimization of the liquidity management process with utilization of the zero-balancing cash pooling service, which comprises functions associated with issue of short-term bonds, and additionally maximizes the possibility of using the Group’s cash surpluses to finance the current operations of individual Group companies.

2.8. Proceedings pending before the court, arbitration bodies or public administration bodies

As at 31 December 2017, the Energa SA Group was a party to 11,636 court procedures. The Group acted as a plaintiff in 9,936 cases, where the aggregated value of the disputed matters was approx. PLN 466.3 m. The Group acted as a defendant in 1,691 cases, where the aggregated amount of the disputed matters was approx. PLN 458.9 m. As at 31 December 2017, the total amount of claims for locating power installations on properties of other parties without the necessary legal title, awarded by final judgments, was approx. PLN 19 m in approx. 3,585 cases. There were 2,109 pending court cases and the value of the disputed matters in such pending cases was PLN 201.5 m. Based on the available data about the value of pending procedures, we assume that the actual amount to be paid after the disputes are resolved may reach PLN 74.7 m, with a reservation that this amount may change if new court cases related to placement of power devices on third party's real properties without the necessary legal title are launched against Energa-Operator SA. Moreover, these data do not include the cases in which court and enforcement-based collection is conducted on behalf and for Energa-Obrót SA as the Company pursues amounts due from its Cus- tomers and bankruptcy cases, with the exception of the case filed by Energa-Obrót SA against ERGO ENERGY Sp. z o.o. for the amount of approx. PLN 13 m. The aggregated amount of all such cases was approx. PLN 182.2 m as at 31 December 2017, including:

Balance as at 31 December 2017 Type of receivable (PLN m)

court and enforcement-based 114.7

bankruptcies 58.3

non-billing 7.0

Non-billing – bankruptcies 2.3

Total 182.2

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

None of the aforementioned proceedings pertaining to the liabilities or receivables of the Issuer or its subsidiary exceeded the minimum of 10% of the Issuer’s equity. No pecuniary penalty, fine or other financial liability measures were imposed either that would be equivalent to at least 5% of the consolidated EBITDA for the last financial year. The table below presents the continuation of proceedings with the highest value of the dispute, which remained pending in Q4 2017. The Company’s previous periodic reports and Prospectus contain information on legal steps taken in earlier periods.

Table 4: Proceedings pending before courts, arbitration bodies or public administration authorities

Parties Subject matter Description of the case

T- Matic Systems S.A., Lawsuit for payment of On 7 April 2015, a statement of claim was filed (the Arcus S.A. (defendant) contractual penalties aris- value of the disputed matter being PLN 23,152,481). Energa-Operator SA ing from the agreements On 10 June 2015, the defendants filed a statement of (plaintiff) defense, requesting it to be dismissed in its entirety, to supply and launch the arguing that the defendants are not to blame for the metering infrastructure (re: delays, while some of the delays were attributable to stage I of AMI). Energa-Operator SA, and invoking the operation of force majeure, that fact that Energa-Operator SA suf- fered no losses and grossly excessive amount of contractual penalties. In a letter of 30 September 2015, Energa-Operator SA filed a rejoinder to the statement of defense, responding in detail to all the charges and reporting new evidence. On 18 December 2015 the defendant filed a second rejoinder comprising similar argumentation to the one presented in the statement of defense, but extended to include a charge of invalidity of the agreements due to their lack of precision and contractual inequality of the parties. On 13 January 2016, a hearing was held at which the court obligated Energa-Operator S.A. to file a reply to the defendant’s second rejoinder within 45 days. The plaintiff’s pleading was sent on 25 February 2016. In H1 2016, a number of witness hearings were held. At the session held on 23 November 2016, the court, in accordance with the petition of the parties, issued a Decision to delay the hearing due to the pending negotiations. On 8 February 2017, a hearing was held in which the parties failed to reach an agreement. At further sessions, more witnesses were heard. The next court session dates were set at 5 and 6 April 2018.

T- Matic Systems S.A., Lawsuit to rule invalidity of On 8 February 2016, the statement of claim filed by T- Arcus S.A. (plaintiff) an agreement regarding Matic Systems SA and ARCUS SA was delivered to Energa-Operator SA stage II of AMI Energa-Operator SA. The case is pending before the (defendant) Regional Court in Gdańsk, under file ref. no. IX GC 893/15. The defendant’s representative filed a pleading  Counterclaim for to extend the court deadline for responding to the repayment of con- joinder. Because the time limit for the response tractual penalties elapsed on 1 July 2016 and the court failed to issue a for stage II of AMI decision to extend the time limit, the defendant sent a pleading of 1 August 2016 responding to the legal issues and another pleading of 1 September 2016 responding to the technical issues. On 7 November 2016, a counterclaim was filed against Arcus and T- Matic to pay PLN 157,063,142 on account of the pay-

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

ment of contractual penalties of PLN 156,060,200 and PLN 1,002,942 of a reduction in remuneration, in accordance with the demand for payment of 9 November 2015. On 30 January 2017, the court issued a decision to resume the proceedings, which were earlier suspended upon request of the parties. On 13 June 2017, the court decided to discontinue the grievance proceedings to dismiss the Plaintiff’s petition for injunctive relief in the form of a prohibition on the use of the insurance guarantee, in connection with a petition to withdraw the grievance. The files will be forwarded to the Regional Court in Gdańsk. In this case, evidence proceedings have started and further witnesses are being heard. The court set the session dates until the end of 2018; the nearest session date is on 18 March 2018. As regards the counterclaim, it was delivered to the plaintiffs (counterclaim defendants) who filed statements of defense. Evidence proceedings to examine this aspect have not commenced yet.

T- Matic Systems S.A., For payment of injunctive In connection with the inadequate performance of the Arcus S.A. (plaintiff) relief in the form of an agreement by the Consortium, Energa-Operator SA Energa-Operator SA insurance guarantee from submitted the insurance guarantee issued in its favor (defendant) for execution. On 3 March 2017, Hestia paid the guar- STU Hestia antee amount of PLN 9,597,702.30 to Energa-Operator SA. In connection with the Court’s decision to award injunctive relief, EOP returned the STU Hestia guarantee amount, subject to its refund. On 5 May 2017, EOP filed a grievance against this decision. Arcus SA and T- Matic SA applied to STU Hestia requesting it to issue a new payment guarantee and such a guarantee was delivered to EOP on 12 May 2017. On 22 June 2017, Energa-Operator SA received a statement of claim in writ of payment proceedings for payment of the injunctive relief in the form of an insurance guarantee from STU Hestia. On 26 June 2017, the Consortium’s response to the grievance was received. With a decision of 16 August 2017, the case was combined for joint examination with the case from files IX GC 893/15, while the petition to suspend the procedure was dismissed. With a decision of 26 September 2017, the Appellate Court examining the grievance filed by Ener- ga-Operator SA against the decision to award injunctive relief, dismissed the grievance in a legally final manner (case file I Acz 733/17).

T- Matic Systems S.A., For payment of compen- On 29 January 2018, Energa-Operator SA received a Arcus S.A. (plaintiff) sation for unlawful statement of claim from Arcus SA and T-Matic Sys- Energa-Operator SA acts/unfair competition tems SA for payment of PLN 174,111,458.96 for com- (defendant) pensation for unlawful acts allegedly committed by practices Energa-Operator SA. The compensation, as described in the statement of claim, concerns losses resulting from an unlawful act/unfair competition practice committed deliberately by EOP and involving illegal actions or omissions associated with the process of performing execution agreements for stage I and II of the AMI system. The justification to the document shows that the loss incurred by Arcus SA and T-Matic SA is connected with EOP’s calculation of contractual penalties, contrary to the law, as a result of which a dispute arose and was escalated, leading to numerous court proceedings, which caused a loss “which was connected with the occurrence of the circumstances [described in the statement of claim] concerning the conducted business activity.” The Company challenges the viability of the statement of claim and will petition

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

for dismissing it.

The Company filed a petition to extend the period for filing a statement of defense to 3 months (the original period was one month); at present, no steps in the proceedings have been taken.

Energa-Operator SA Suit for payment On 19 April 2016, the Appellate Court in Warsaw an- (plaintiff); nounced its judgment in the case brought by Energa- PKN ORLEN SA (de- Operator SA Branch in Płock against PKN Orlen S.A. fendant) The court partially dismissed the defendant’s appeal and consequently the judgment of the Regional Court in Warsaw of 27 October 2014, case file XVI GC 782/11 became final, awarding the plaintiff PLN 16.1 m with interest from 30 June 2004. The judgment is non- appealable. Energa-Operator SA applied for delivery of the judgment with a justification, which was delivered to the Plaintiff’s representative on 1 August 2016. On 29 September 2016, Energa-Operator SA filed a cassation complaint with the Supreme Court against the judgment of 19 April 2016 handed down by the Appel- late Court in Warsaw. On 24 October 2016, the representative of Energa-Operator SA received PKN OR- LEN’s cassation complaint filed against this judgment of the Appellate Court in Warsaw. Energa-Operator SA responded to the complaint in a pleading sent on the same date to the Appellate Court in Warsaw. The new date of the court session was set at 20 July 2017. The Supreme Court dismissed the complaint filed by the defendant PLN Orlen, while accepting the complaint by EOP SA, repealing the appealed decision of the Appel- late Court and referring the case to it for re- examination. On 1 August 2017, the judgment with a justification was received. The court session was set at 15 November 2017. The Appellate Court, re-examining the case, with a judgment of 15 November 2017 repealed the challenged decision of the Regional Court of 27 October 2014 in the part ordering PKN Orlen to pay PLN 30,093,882.82. Thus, the Appellate Court remanded the case for re-examination of this aspect to the Regional Court. The date of the hearing before the Regional Court has not yet been set.

Energa -Operator SA Pecuniary penalty im- Energa-Operator SA received a decision dated 21 (party); posed by the authority December 2016 in which the ERO President imposed PRESIDENT OF THE a fine of PLN 11 m on Energa-Operator SA for mis- ENERGY REGULATORY leading the ERO President. The Company appealed OFFICE (authority) against this decision and petitioned for it to be repealed in its entirety or, if it is not repealed in its entirety, to be changed by waiver of the fine or its reduction to PLN 50,000.00. The ERO President also responded to the appeal, requesting among others for it to be dismissed. By the date of this Report, the court handling the proceedings has not taken any further steps in the case.

Energa-Operator SA Pecuniary penalty im- Energa-Operator SA received the decision of 6 No- (party); PRESIDENT OF posed by the authority vember 2017 imposing fines in the total amount of PLN THE ENERGY REGU- 13,600,000 for breaching the Distribution Code by: (1) LATORY OFFICE (au- communication with trading companies using other thority) codes than provided for in the Distribution Code; (2) failure to meet the deadlines to provide measurement data to trading companies; (3) failure to meet the deadlines to review complaints from trading companies; (3) failure to meet the deadlines to verify reports on changing the seller; (4) failure to meet the deadlines for the final settlement of electricity sales agreements; (5)

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

failure to restart power supplies to one of the customers. The Company appealed against this decision and petitioned for it to be repealed or, if it is not repealed, to be changed by waiver of the fine or its reduction. The case is pending under file reference XVII AmE 68/18 and by the date of preparing this Report, no steps have been taken in it.

Office for Competition proceedings against En- On 9 March 2016, proceedings were initiated by the and Consumer Protection erga-Obrót SA in the mat- Office for Competition and Consumer Protection (UOKiK) (authority) vs. ter of practices violating (UOKiK) in the matter of practices violating collective ENERGA-OBRÓT SA collective consumer inter- consumer interests. UOKiK put forward 7 allegations (party) ests involving the sale of concerning failure to comply with reporting duties, the “Fixed price guaran- misrepresentation of the identity and circumstances of tee” (GSC) package a contract, failure to deliver a counterpart of a contract or annexes to or confirmation of a contract, misrepresentation of the time limit for withdrawal from a contract, activation of a contract despite formal defects, demand for payment for electricity sold in breach of the law, provision of information on a grossly excessive contractual penalty for terminating a contract before the end date of the offer.

On 11 April 2016, Energa-Obrót SA submitted an application for a binding decision, pursuant to Article 28 Section 1 of the Act on Competition and Consumer Protection, to take or discontinue certain actions aimed at ending the violation of collective consumer interests or removing the effects of such violations, together with a request to set a date for a meeting. Between April and October, the company held several meetings with UOKiK to present its arguments and determine the directions for commitments that the company would make to satisfy UOKiK’s requirements to reduce the amount of the penalty to a minimum.

In 2016, the date of the proceedings was postponed three times. In 2017, the Company held further meetings with UOKiK to discuss the directions for commitments and present arguments. Finally, the proceedings were postponed till 31 December 2017.

On 28 December 2017, a decision was issued, which became final and non-appealable on 6 February 2018. The decision presented a number of actions that Ener- ga-Obrót SA was obligated to take by set deadlines. These actions include: introduction of new content of sales scripts, a new process for executing contracts remotely, allowing Retail Consumers to terminate an Agreement free of charge, or informing Retail Con- sumers about their rights. After completing all the actions, Energa-Obrót SA is obligated to submit a report on the extent to which the obligations have been fulfilled and provide evidence for their fulfillment.

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Energa Kogeneracja Suit for payment for reduc- Case file: IX GC 494/17; on 22 June 2017, Energa Sp. z o.o. (plaintiff) - ing the contractual price Kogeneracja Sp. z o.o. filed a suit with the Regional Mostostal Warszawa S.A. Court in Gdańsk against Mostostal Warszawa S.A. to (defendant) award the amount of PLN 106,417,065.12 from the defendant to the plaintiff with statutory interest for the period from the date of filing the suit to the payment date. The subject matter of the statement of claim is reduction of the contractual price for EKO for performing CONTRACT no. EKO/86/201 by PLN 90,286,722.15 (legal basis: Article 637 § 2 of the Civil Code, in connection with Article 656 § 1 of the Civil Code). On 15 September 2017, the Regional Court in Gdańsk issued a decision to secure evidence in the form of an opinion from an expert (institute). Inquiries about the possibility of preparing a relevant opinion sent by the Court were met by refusals from the insti- tutes. The defendant was granted extension of the period for preparing a statement of defense until 15 December 2017. On 22 December 2017, Energa Kogeneracja Sp. z o.o. received a statement of defense with a counterclaim for PLN 7,753,230. Energa Kogeneracja Sp. z o.o. should file a response to the counterclaim by 18 March 2018.

Boryszewo Wind Invest Statement of claims for On 25 August 2017, Boryszewo Wind Invest filed a Sp. z o.o. (plaintiff) payment of damages for the statement of claim against Energa-Obrót S.A. to the Energa-Obrót SA (de- failure on the part of Ener- Regional Court in Gdańsk for payment of PLN fendant) ga-Obrót to perform part of 31,931,614.78 with interest on account of compensa- the agreement to purchase tion for the failure to perform part of the Framework property rights to certifi- Agreement for the Sale of Property Rights following cates of origin for electricity from Certificates of Origin no. W/HH/210/2010/1, which generated in RES. involved making a representation about partial termination of the agreement and refusal to acquire property rights from the certificates of origin. The claim amount includes the “losses” incurred by the plaintiff in connection with the necessity to sell the property rights at TGE with statutory interest (PLN 25,694,540.08) as well as the amount of additional costs in connection with debt service under a loan agreement (PLN 6,282,074.70).

The case was assigned the file number: IX GC 701/17.

On 11 September 2017, Boryszewo Wind Invest submitted a pleading supplementing the evidence.

On 30 October 2017, Energa-Obrót S.A. filed a statement of defense.

On 27 December 2017, a session was held at which Boryszewo Wind Invest withdrew the statement of claim with regard to the amount of PLN 150,000.00.

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Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - "RELAX tain the non-existence of statement of claim to the Regional Court in Warsaw, WIND PARK I" Sp. z the legal relationship that 16th Commercial Division. o.o. (defendant 1), Bank was allegedly established of China The case was assigned the file number: XVI GC Luxembourg as a result of Energa-Obrót 801/17. SA Company Akcyjna S.A. entering into an acting through its agreement for the sale of Branch Office in Poland property rights arising from Relax Wind Park I Sp. z o.o. and the Bank of China (defendant 2) certificates of origin (“CPA”) filed statements of claim. From Relax Wind Park I Sp. z o.o., a counterclaim was received.

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - "MEGA- tain the non-existence of statement of claim to the Court of Arbitration at the WATT BALTICA" S.A. the legal relationship that Polish Chamber of Commerce in Warsaw. (defendant 1), Po- was allegedly established wszechna Kasa Osz- The case was assigned file number SA 128/17. czędności Bank Polski as a result of Energa-Obrót S.A. (defendant 2) S.A. entering into an agreement for the sale of 5 December 2017 – Megawatt Baltica filed a statement property rights arising from of defense with a counterclaim and motion to secure certificates of origin (“CPA”) the claim. On the same date, PKO BP S.A. also filed a statement of defense.

On 7 February 2018, the first hearing was held.

On 29 January 2018, with the participation of Megawatt Baltica S.A., a session was held regarding a call for a settlement attempt. No settlement was signed.

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - ZAJĄCZ- tain the non-existence of statement of claim to the Regional Court in Gdańsk, KOWO WINDFARM sp. the legal relationship that 9th Commercial Division. z o.o. (defendant) was allegedly established

as a result of Energa-Obrót The case was assigned the file number: IX GC 737/17. S.A. entering into an agreement for the sale of On 14 November 2017, the defendant filed a statement property rights arising from of defense. certificates of origin (“CPA”)

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - EOLICA tain the non-existence of statement of claim to the Regional Court in Gdańsk, KISIELICE sp. z o.o. the legal relationship that 9th Commercial Division. (defendant 1), RAIF- was allegedly established FEISEN BANK POL- The case was assigned the file number: IX GC 739/17. SKA S.A. (defendant 2) as a result of Energa-Obrót S.A. entering into an agreement for the sale of On 7 November 2017, Energa-Obrót S.A. filed a plead- property rights arising from ing to specify the claim in more detail. certificates of origin (“CPA”)

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - PGE ENER- tain the non-existence of statement of claim to the Regional Court in Warsaw, GA ODNAWIALNA S.A. the legal relationship that 20th Commercial Division. (defendant) was allegedly established

as a result of Energa-Obrót The case was assigned the file number: IX GC 839/17. S.A. entering into an agreement for the sale of On 8 November 2017, PGE filed a statement of de- property rights arising from fense. certificates of origin (“CPA”)

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - C&C WIND tain the non-existence of statement of claim to the Court of Arbitration at the sp. z o.o. (defendant 1), the legal relationship that Polish Chamber of Commerce in Warsaw. Bank Ochrony Środowi- was allegedly established ska S.A. (defendant 2) as a result of Energa-Obrót The case was assigned the file number: SA 127/17. S.A. entering into an agreement for the sale of On 5 December 2017, C&C Wind filed a statement of property rights arising from defense with a counterclaim. certificates of origin (“CPA”) On 5 December 2017, BOŚ SA filed a statement of defense.

On 29 December 2017, Energa-Obrót S.A. withdrew the statement of claim against BOŚ.

In its decision of 16 January 2018, the Court of Arbitra- tion at the Polish Chamber of Commerce in Warsaw discontinued the proceeding against the defendant BOŚ SA because of the withdrawal of the statement of claim with reference to that entity.

On 7 February 2018, the first hearing was held.

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - BORYSZE- tain the non-existence of statement of claim to the Regional Court in Warsaw, WO WIND INVEST Sp. the legal relationship that 16th Commercial Division. z o.o. (defendant 1), was allegedly established MBANK S.A. (defendant The case was assigned the file number: XVI GC 2) as a result of Energa-Obrót S.A. entering into an 799/17. agreement for the sale of property rights arising from On 31 October 2017, MBANK filed a statement of certificates of origin (“CPA”) defense.

On 10 November 2017, Boryszewo Wind Invest filed a statement of defense.

On 21 December 2017, Energa-Obrót S.A. filed a reply to the statements of defense.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - JEŻYCZKI tain the non-existence of statement of claim to the Regional Court in Warsaw, WIND INVEST Sp. z the legal relationship that 16th Commercial Division. o.o. (defendant 1), was allegedly established MBANK S.A. (defendant The case was assigned the file number: XVI GC 2) as a result of Energa-Obrót S.A. entering into an 805/17. agreement for the sale of property rights arising from On 16 November 2017, MBANK and Jeżyczki Wind certificates of origin (“CPA”) Invest filed statements of defense.

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - WIND IN- tain the non-existence of statement of claim to the Regional Court in Warsaw, VEST Sp. z o.o. (de- the legal relationship that 16th Commercial Division. fendant 1), MBANK S.A. was allegedly established (defendant 2) as a result of Energa-ObróT The case was assigned the file number: XVI GC S.A. entering into an 798/17. agreement for the sale of property rights arising from On 28 November 2017, Wind Invest and MBANK filed certificates of origin (“CPA”) statements of defense.

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - STARY tain the non-existence of statement of claim to the Regional Court in Warsaw, JAROSŁAW WIND the legal relationship that 16th Commercial Division. INVEST Sp. z o.o. (de- was allegedly established fendant 1), MBANK S.A. The case was assigned the file number: XVI GC (defendant 2) as a result of Energa-Obrót S.A. entering into an 802/17. agreement for the sale of property rights arising from On 17 November 2017, Stary Jarosław Wind Invest certificates of origin (“CPA”) and MBANK filed statements of defense.

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - LIVING- tain the non-existence of statement of claim to the Regional Court in Warsaw, STONE Sp. z o.o. (de- the legal relationship that 26th Commercial Division. fendant 1), DNB BANK was allegedly established POLSKA SPÓŁKA The case was assigned the file number: XXVI GC AKCYJNA S.A. (de- as a result of Energa-Obrót 713/17. fendant 2) S.A. entering into an agreement for the sale of property rights arising from On 22 December 2017, Livingstone and DNB Bank certificates of origin (“CPA”) filed statements of defense.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

as a result of Energa-Obrót The case was assigned the file number: XX GC S.A. entering into an 842/17. agreement for the sale of property rights arising from On 24 November 2017, PGE filed a statement of de- certificates of origin (“CPA”) fense.

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - KRUPY tain the non-existence of statement of claim to the Regional Court in Warsaw, WIND INVEST Sp. z the legal relationship that 16th Commercial Division. o.o. (defendant 1), was allegedly established MBANK S.A. (defendant The case was assigned the file number: XVI GC 2) as a result of Energa-Obrót S.A. entering into an 803/17. agreement for the sale of property rights arising from On 24 November 2017, Krupy Wind Invest and certificates of origin (“CPA”) MBANK filed statements of defense.

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - PGE ENER- tain the non-existence of statement of claim to the Regional Court in Warsaw, GIA NATURY Sp. z o.o. the legal relationship that 20th Commercial Division. (defendant) was allegedly established

as a result of Energa-Obrót The case was assigned the file number: XX GC S.A. entering into an 841/17. agreement for the sale of property rights arising from On 16 November 2017, PGE filed a statement of de- certificates of origin (“CPA”) fense.

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - "WINDVEST tain the non-existence of statement of claim to the Regional Court in Warsaw, - POLAND" sp. z o.o. the legal relationship that 26th Commercial Division. (defendant 1), RAIF- was allegedly established FEISEN BANK POL- The case was assigned the file number: XXVI GC SKA S.A. (defendant 2) as a result of Energa-Obrót S.A. entering into an 711/17. agreement for the sale of property rights arising from On 22 December 2017, Windvest and Raiffeisen filed certificates of origin (“CPA”) statements of defense.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - NIDZICA Sp. tain the non-existence of statement of claim to the Regional Court in Warsaw, z o.o. (defendant 1), the legal relationship that 16th Commercial Division. BANK OCHRONY was allegedly established ŚRODOWISKA S.A. The case was assigned the file number: XVI GC (defendant 2) as a result of Energa-Obrót S.A. entering into an 800/17. agreement for the sale of property rights arising from On 6 November 2017, Nidzica filed a statement of certificates of origin (“CPA”) defense. On 23 November 2017 – notice of reassignment from BOŚ to Nidzica.

On 24 November 2017, Nidzica filed a supplement to its statement of defense.

On 24 November 2017, BOŚ filed a statement of defense by BOŚ [sic!].

On 11 December 2017, Energa-Obrót S.A. withdrew the statement of claim against BOŚ.

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - "SAGITTA- tain the non-existence of statement of claim to the Regional Court in Warsaw, RIUS SOLUTIONS" Sp. the legal relationship that 16th Commercial Division. z o.o. (defendant 1), was allegedly established RAIFFEISEN BANK The case was assigned the file number: XVI GC POLSKA S.A. (defend- as a result of Energa-Obrót 804/17. ant 2) S.A. entering into an agreement for the sale of property rights arising from On 22 December 2017, Sagittarius and Raiffeisen filed certificates of origin (“CPA”) a statement of defense.

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - "EW tain the non-existence of statement of claim to the Regional Court in Gdańsk, CZYŻEWO" Sp. z o.o. the legal relationship that 9th Commercial Division. (defendant 1), BANK was allegedly established BGŻ BNP PARIBAS The case was assigned the file number: IX GC 736/17. S.A. (defendant 2) as a result of Energa-Obrót S.A. entering into an agreement for the sale of On 5 December 2017 – Energa-Obrót S.A. filed a letter property rights arising from to specify the claim in more detail. certificates of origin (“CPA”) On 22 December 2017, EW Czyżewo filed a statement of defense with a counterclaim.

On 22 December 2017, BGŻ BNP filed a statement of defense.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - ELEK- tain the non-existence of statement of claim to the Regional Court in Warsaw, TROWNIA WIATROWA the legal relationship that 26th Commercial Division. EOL Sp. z o.o. (defen- was allegedly established dant 1), BANK ZA- The case was assigned the file number: XXVI GC CHODNI WBK S.A. as a result of Energa-Obrót 712/17. (defendant 2) S.A. entering into an agreement for the sale of property rights arising from On 21 November 2017, EW EOL filed a statement of certificates of origin (“CPA”) defense. On 14 November 2017, BZWBK filed a statement of defense.

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - WIELKO- tain the non-existence of statement of claim to the Regional Court in Gdańsk, POLSKIE ELEK- the legal relationship that 9th Commercial Division. TROWNIE WIATROWE was allegedly established Sp. z o.o. (defendant 1), The case was assigned the file number: IX GC 735/17. BANK BGŻ BNP PARI- as a result of Energa-Obrót BAS S.A. (defendant 2) S.A. entering into an agreement for the sale of On 7 November 2017 – Energa-Obrót S.A. filed a letter property rights arising from to specify the claim in more detail. certificates of origin (“CPA”) On 15 December 2017, Wielkopolskie Elektrownie Wiatrowe filed a statement of defense.

On 19 December 2017, BGŻ BNP filed a statement of defense.

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - "EW tain the non-existence of statement of claim to the Regional Court in Gdańsk, KOŹMIN" Sp. z o.o. the legal relationship that 9th Commercial Division. (defendant 1), BANK was allegedly established BGŻ BNP PARIBAS The case was assigned the file number: IX GC 738/17. S.A. (defendant 2) as a result of Energa-Obrót S.A. entering into an agreement for the sale of On 18 December 2017, EW Koźmin filed a statement property rights arising from of defense with a counterclaim. certificates of origin (“CPA”) On 18 December 2017, BGŻ BNP filed a statement of defense.

Energa-Obrót S.A. Statement of claim to ascer- On 11 September 2017, Energa-Obrót S.A. filed a (plaintiff) - "WIATROWA tain the non-existence of statement of claim to the Court of Arbitration at the BALTICA" Sp. z o.o. the legal relationship that Polish Chamber of Commerce in Warsaw. (defendant 1), Raif- was allegedly established feisen Bank Polska S.A. The case was assigned the file number: SA 129/17. (defendant 2) as a result of Energa-Obrót S.A. entering into an agreement for the sale of On 4 December 2017, Wiatrowa Baltica and Raiffeisen property rights arising from Bank filed a statement of defense with a counterclaim. certificates of origin (“CPA”) On 7 February 2018, the first hearing was held.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

2.9. HR and payroll situation

Headcount in the Energa SA Group As at the end of 2017, the Energa SA Group employed 8,970 persons. Compared to the end of 2016, the headcount increased by 229 persons or 2.6%. Changes to the headcount level in 2017 are mainly caused by taking actions aiming to counteract the so called competence gap affecting mainly the engineering and technical staff as well as implementing the policy of gradual replacement of outsourced services with services performed by human resources of the Energa SA Group.

In Q4 2017, the Group recorded a headcount increase by 134 persons or 1.5%. Figure 9: Headcount in the Energa SA Goup as at 31 December 2014, 2015, 2016 and 2017 (persons)*

5,435 5,257 5,452 5,527

1,558 1,511 1,501 1,550 0,965 1,140 1,116 1,181 585 592 672 712

DISTRIBUTION GENERATION SALES OTHERS 2014 2015 2016 2017

* refers to employment contracts, excluding unpaid, parental or rehabilitation leaves; the data for 2014-2016 are restated according to the structure of the Energa SA Group in force in 2017

The average headcount (FTEs) in the Energa SA Group in the January-December 2017 period was 8,820 FTEs, compared to 8,615 FTEs in the corresponding period of the previous year. The chart below presents the average headcount by business lines. Figure 10: Average headcount in the Energa SA Group in 2014, 2015, 2016 and 2017 (FTEs)*

5,672 5,320 5,318 5,463

1,648 1,542 1,542 1,545 1,140 1,024 1,147 1,151 684 586 626 661

DISTRIBUTION GENERATION SALES OTHERS 2014 2015 2016 2017

* refers to employment contracts, excluding unpaid, parental or rehabilitation leaves; the data for 2014-2016 are restated according to the structure of the Energa SA Group in force in 2017 51

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Detailed information about the headcount by gender, age and education is presented in the charts below. Figure 11: Headcount in the Energa SA Group as at 31 December 2017 (persons) by gender, education and age

Remuneration systems

The remuneration system in the Energa SA Group is decentralized and diversified. It is regulated by the Multi-Company Collective Bargaining Agreement for Employees of the Utilities Sector of 13 May 1993, the Company Collective Bargaining Agreements, the Remuneration Bylaws, the Labor Code and the collective bargaining agreements with trade unions. In 2017, there were no significant changes in the remuneration systems of any Energa SA Group companies.

Important information affecting the HR and payroll situation Rules for setting and monitoring objectives in the Energa SA Group Strategic objectives were set for Business Line Leading Entities and directors of Energa SA’s departments in the arrangement process in accordance with the ‘top to bottom’ principle which recognizes the Group’s strategic objectives as the basis for setting all objectives for managers covered by the system. Objectives for the leaders of the leading companies and department heads at Energa SA were prepared on the basis of the Energa SA Group’s Strategy, long-term financial plans and budgets for the given financial year of Energa SA. These objectives form the basis for payment of bonuses to the Energa SA Group’s managers.

Standardization of personnel processes in the Energa SA Group

In 2017, in the Energa SA Group, the actions aimed at the standardization of personnel processes at Group level were continued.

Employee benefits In 2017, the Energa SA Group had an extensive employee benefits system in place, of which the most important elements include: (1) ‘Employee tariff’ for electricity, available to employees with one year of professional experience in the utilities sector, (2) The company social benefits fund authorizing charges in the amount three times higher than the basic charge defined in the Act on Company Social Benefit Fund (ZFŚS), (3) Holidays gift certificates issued to employees for the Easter Holiday, the Power Industry Em- ployee's Day and Christmas, (4) The Employee Pension Plans operating in Group companies and funded by the employer in an amount equal to 7% of the remuneration of employees, (5) Additional Medicare Program. All employees are eligible for additional medical benefits under the Guaranteed Package funded by the employer.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

(6) Training offered by all Energa SA Group employers; various forms of employee development are aimed at preparing staff to perform tasks in the workplace, improve performance and increase their knowledge, motivation and commitment to work, (7) Agreement to secure employee, social and union rights of 18 September 2017. In the Energa SA Group companies subject to the Multi-Company Collective Bargaining Agreement of 13 May 1993, despite the fact that the Group Companies resolved not to apply this Agreement as of 31 December 2014, additional remuneration elements apply as vested rights, including: (1) Annual bonus constituting 8.5% of the annual payroll fund from last year, paid out pro rata to the length of employment, (2) Addition to base salary depending on seniority, (3) Cash equivalent of coal allowance, (4) ‘Employee tariff’ for electricity, available to employees with one year of professional experience in the utilities sector, (5) Benefit for work in hazardous conditions, (6) Jubilee awards. Changes of the terms of remuneration On 10 October 2017, in Energa Wytwarzanie SA, an Agreement was executed with the Trade Unions that are party to the Company Collective Bargaining Agreement (ZUZP), aiming to introduce amendments to the ZUZP. With an additional report, the ZUZP was amended as of 1 October 2017, by introducing a new tariff table for positions and a new table of base salaries for application. The regulations aimed to adjust the tariff table for job positions prevailing at the company to the actual state of affairs at the Employer and to counteract discrimination with regard to remuneration at comparable job positions, taking into consideration the right to the same remuneration for the same work or the same kind of work as provided for in Article 183c of the Labor Code. Group layoffs The Group Companies did not carry out any group layoffs in 2017. Collective disputes As at the end of 2017, there were thirty one trade union organizations in Energa SA Group companies. More than 5,100 Group employees were members of the trade unions as at 31 December 2017. In 2017, trade unions sent a number of statements to individual employers containing, among others, demands concerning: (1) raising wages and salaries in Group companies, (2) payment of awards or bonuses, (3) securing employee, social and union rights of Energa SA Group employees.

In 2017, there were 3 collective disputes in the Energa SA Group (one of them being a multi-company dispute concerning 27 Employers of the Energa SA Group, including Energa SA). The Multi-Company Collective Dispute initiated by the address given by the trade union organizations on 12 July 2017 regarding 27 employers from the Group ended with the signing of an agreement on 7 December 2017. The collective dispute at the Energa Serwis Sp. z o.o. employer that arose in connection with the address given by the trade union organizations on 28 July 2017 ended with the signing of an agreement on 16 August 2017. The collective dispute continued at the Energa Elektrownie Ostrołęka SA employer, initiated by the address given by the trade union organizations on 8 September 2017 is at the mediation stage now.

2.10. Corporate social responsibility of the Energa SA Group

The Energa SA Group pursues its vision, mission and objectives and builds shareholder value in an ethical, transparent and open-to-dialog manner, while striving to maintain an appropriate balance be-

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017 tween operational, ethical and environmental activities and the interests of its stakeholders: shareholders, customers, employees and local communities. Accordingly, our business objectives are supported by goals pursued in the area of sustainable development as laid down in the “Sustainable development and corporate social responsibility report” prepared by the Energa SA Group, which assumes the following:

 building responsible customer relations – development of relations with customers based on fair practices, transparency and openness, and ensuring the highest standards of service,  reduction of environmental impact – continuously improving energy efficiency, reducing emissions and rational use of resources,  development of distribution activity to improve the reliability and security of supplies,  care for employees and their safety – efforts aimed at reducing the number of accidents at work, ensuring a friendly and safe workplace, increasing satisfaction and involvement,  responsibility towards local communities – supporting local communities in consideration of their needs, building social partnerships and involvement in charitable activities,  national responsibility – contribution to the security of the country’s power system and social development, support for strategic resources.

Every year, the Group publishes information about all its activities associated with corporate social responsibility in CSR reports. Such reports are prepared on the basis of the guidelines from Global Reporting Initiative G4.0. at the CORE level (giving consideration to the ratios included in the supplement for utility sector companies). The basis for preparing such reports takes the form of a dialog with stakeholders, both internal and external. This year’s document entitled “Our Responsibility 2017” will cover the whole calendar year 2017 and all Energa SA Group companies.

Corporate social responsibility in the Energa SA Group also translates into our approach to environmental protection which forms one of the pillars of the Group’s strategy for 2016-2025. Development of new and modernization of the existing generation and grid infrastructure, climate-related obligations and diversification of supplies are the tasks that have a direct impact on the business pursued by the Group companies. In this respect, 2017 was a period of intensive efforts for the Group to improve its environmental management, among others including efforts to cover all the Group companies with EMAS and extend it to energy management based on the PN-EN ISO 50001:2012 standard. Measures have been taken to adjust the existing environmental management system to the requirements of the updated PN-EN ISO 14001:2015 standard. In the period from July to September 2017, an independent certification body conducted an audit of the environmental management system in the key Group companies. The system has been operating in the Group since 2015 and extends to 167 locations of the Companies. The positive result of the audit allowed the Group companies to maintain their entry in the prestigious EMAS register kept by the Ministry of the Environment. As part of the implementation of the integrated environmental and energy management system, in 2017 the Group companies conducted energy reviews that met the criteria of the PN-EN ISO 50001 standard and took into account the scope of the energy audit of the company referred to in the Energy Efficiency Act of 20 May 2016.

In December 2017, Energa SA was included for the fourth time in the RESPECT index (which groups listed companies committed to social responsibility and managed according to the best standards). Energa SA is also included in the FTSE4Good Emerging Index. This is an index grouping companies from more than 20 emerging economies that are selected on the basis of compliance of their operations with the environmental, corporate social responsibility and corporate governance criteria.

Energa SA was also included in the “Best Emerging Markets” ranking compiled by the rating agency Vigeo Eiris. The ranking presents 100 companies from emerging markets. It assesses numerous as- pects, especially corporate social responsibility. In this year’s edition, 850 companies from five conti-

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017 nents were examined. The ranking is updated every six months. The current one was issued on 1 December 2017. The research methodology was based on 330 indicators.

The companies selected for the ranking list originate from 19 countries and represent 27 sectors of the economy with employment above 5 million. They are distinguished by good practices in employment, protection of the environment, corporate governance, business ethics and their contribution to social and economic development in the geographic area where they operate.

Non-financial information as required by art. 49b of the Accounting Act (Journal of Laws 1994 No. 121 Item 591) can be found in the CSR Report published on the Group’s website on 15 March 2018.

2.11. Awards and recognitions for the Energa SA Group

Table 5: Prizes, awards and certificates received in 2017

2017

January 2017

The Federation of Consumers awards the prestigious Consumer Service Quality Certificates to Energa Operator.

March 2017

Energa SA Group receives the “2017 Children’s Friend” award from the Cultural Center 105 in Koszalin for support it provides to children.

April 2017

Energa receives a Leaders in the World of Energy distinction award in the Producer of the Year category.

May 2017

 Innovation Award 2017 given to Energa Informatyka i Technologie for efficient migration of data from SAP to SAP HANA and “SAP Excellence Award” for participation in the global SAP Enterprise Support Advisory Council programme aimed at developing new, innovative services for all SAP customers  The Imagine Cup Project sponsored by Energa to support Polish start-ups, receives a distinction in the ranking of Socially Engaged Companies published by Gazeta Bankowa.  CSR Golden Leaf awarded to the Energa SA Group. The award is granted by the “Polityka” weekly to companies paying close attention to corporate social responsibility.

June 2017

 Polish Power Exchange grants “Platinum Megawatts” to Energa Obrót for being the most active entity in international trade in 2016.  Ranked 15th on the list of largest companies of the Economic Patriotism Index prepared by the Rzeczpospolita newspaper.

August 2017

Editors of the Computerworld magazine recognize Energa Obrót as 2017 IT Leader for the In- dexed Offer Platform, an innovative IT system developed by the company’s in-house team to ser-

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

vice business customers.

September 2017

 The Energa Foundation receives Amber Cranes and the title of the Philanthropist of the Year 2016 for benevolence and helping other human beings. The award was granted by the Hos- pice Foundation and the Father Eugeniusz Dutkiewicz SAC Hospice.  Energa SA Group receives Golden Paddle 2017 for supporting Energa Manekin Toruń (now Energa KTS Toruń), a table tennis club.

October 2017

 Gazeta Bankowa editors award the 2017 Polish Compass to the Energa SA Group for efforts and determination in repairing the customer service system and damages resulting from natural disasters. The Group is also recognized for significant improvements in its performance.  Energa Informatyka i Technologie obtains the ISO27001 certificate in the field of information security.  Energa Centrum Usług Wspólnych Sp. z o. o. obtains the ISO 14001:2015 certificate for accounting, payroll and advisory services provided within the framework of the business conducted by the Energa SA Group.

November 2017

 The Energa SA Group is awarded the Statuette of a Patron of Sports in Toruń in recognition of its support for sports clubs in Toruń and their players.  Energa SA Group receives the Superbrands Polska – Brand of 2018 award. The distinction is based on consumer opinions. The title is awarded on the basis of the largest independent sur- vey of brands in Poland.

December 2017

 Energa SA is included in the “100 Emerging Markets” ranking compiled by the Vigeo Eiris rating agency. The ranking presents 100 companies from emerging markets with the highest environmental, social and corporate governance scores. The study included more than 850 companies from 37 sectors in 31 countries.  Energa Operator receives a certificate of compliance with the ISO 22301:2012 standard issued by Lloyd's Register Quality Assurance for the next 3 years.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

3. ANALYSIS OF THE FINANCIAL STANDING AND AS- SETS

3.1. Rules for preparing the annual consolidated financial statements

The Consolidated Financial Statements of the Energa SA Group for the year ended 31 December 2017 were prepared:  in accordance with the International Financial Reporting Standards which have been approved by the European Union,  on the historical cost basis except for financial instruments measured at fair value through profit or loss and hedging derivatives,  in PLN million (“PLN m”),  based on the assumption that the Group would continue as a going concern in the foreseeable future. As at the date of the financial statements there is no evidence indicating significant uncertainty as to the ability of the Group to continue its business activities as a going concern.

The Management Board of the Parent Company used its best knowledge in the application of standards and interpretations as well as measurement methods and principles for the individual items of the consolidated financial statements of the Energa SA Group in accordance with IFRS EU for the year ended 31 December 2017. All the tables and explanations have been prepared with due care.

The accounting (policy) principles used to prepare the annual consolidated financial statements are presented in Note 9 to the consolidated financial statements of the Energa SA Group for the year ended 31 December 2017.

3.2. Explanation of the economic and financial data disclosed in the annual consolidated financial statements

Table 6: Consolidated statement of profit or loss

Change Change PLN m 2014 2015 2016 2017 2017/2016 2017/2016 (%)

Sales revenues 10,590 10,804 10,181 10,534 353 3%

Cost of sales (8,464) (8,786) (8,846) (8,615) 231 3%

Gross profit on sales 2,126 2,018 1,335 1,919 584 44%

Other operating revenue 107 91 117 118 1 1%

Selling and distribution expenses (312) (336) (338) (341) (3) -1%

General and administrative expenses (350) (344) (318) (326) (8) -3%

Other operating expenses (125) (149) (309) (160) 149 48%

Operating profit 1,446 1,280 487 1,210 723 > 100%

Result on financial activity (198) (228) (230) (232) (2) -1%

Share in profit/(loss) of the entities meas- - - (52) 24 76 > 100% ured by the equity method Profit or loss before tax 1,248 1,052 205 1,002 797 > 100%

Income tax (239) (212) (58) (213) (155) < -100%

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Net profit or loss on continuing operations 1,009 840 147 789 642 > 100%

Net profit or loss on discontinued operations (3) - - - - -

Net profit or loss for the period 1,006 840 147 789 642 > 100%

EBITDA 2,357 2,216 2,027 2,160 133 7%

PLN m Q4 2016 Q4 2017 Change Change (%)

Sales revenues 2,808 2,817 9 0%

Cost of sales (2,459) (2,181) 278 11%

Gross profit on sales 349 636 287 82%

Other operating revenue 36 (26) (62) < -100%

Selling and distribution expenses (95) (85) 10 11%

General and administrative expenses (78) (88) (10) -13%

Other operating expenses (109) (53) 56 51%

Operating profit or loss 103 384 281 > 100%

Result on financial activity (55) (83) (28) -51% Share in profit/(loss) of the entities meas- 8 7 (1) -13% ured by the equity method Profit or loss before tax 56 308 252 > 100%

Income tax 17 (78) (95) < -100%

Net profit or loss for the period 73 230 157 > 100%

EBITDA 498 517 19 4%

Figure 12: EBITDA bridge, by business lines, 2014-2017 (PLN m)

151 340

6 32 133 2 83 77 11 45 2 508 3 2,537 2 210 2 210 2,216 2 158 2,160 2 075 2 115 2 027 2,027 2 027 2 030

EBITDA 2014 Sales Other Distribution Generation EBITDA 2016 Sales Other and adjustments and adjustments

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

In 2017, the Group’s sales revenues amounted to PLN 10,534 m and were 3%, or PLN 353 m higher than in 2016. The 6% increase in Distribution Business Line’s revenues was mainly caused by a higher average distribution rate and a higher volume of distributed electricity. An increase in sales revenues was also recorded by the Generation Business Line (an increase in revenues on selling green property rights and higher revenues on the sale of Regulatory System Services with the simultaneous decrease in the sales of electricity). A reverse trend was observed in the Sales Business Line, where the major factor for the decrease in the revenues were lower revenues on sales of electricity in wholesale market.

The Group's EBITDA in 2017 was PLN 2,160 m, which was 7% more than in the previous year. In 2017, an increase in EBITDA was recorded in all the Business Lines.

The Distribution Business Line contributed the most to the Group's EBITDA in 2017 (80%), while the Generation Business Line and the Sales Business Line accounted for 18% and 4%, respectively. The highest EBITDA growth was posted by the Generation Business Line (an increase by PLN 83 m to PLN 398 m), which was driven mainly by the aforementioned increase in sales revenue, partially offset by higher purchase cost of fuel. As regards the Sales Business Line, the EBITDA growth by PLN 45 m yoy resulted primarily from a non-recurring event – after an analysis of provisions of IFRS 9, impairment losses for disputable receivables were dissolved. On the other hand, the EBITDA growth in the Distribution Business Line followed from a more favorable margin on the sale of distribution services yoy, with a simultaneously higher level of OPEX costs.

The operating profit in 2017 rose by PLN 723 m compared to 2016. Apart from operating factors, the following ones contributed for the most part to the EBIT yoy level: the change in the level of impairment losses for non-financial non-current assets (presented mainly in the Generation Business Line), dissolution of impairment losses on account of disputable receivables in the Sales and Distribution Business Lines.

In 2017, a share in the results of associated entities and joint ventures of PLN 24 m was recognized. Compared to the loss recognized in 2016 in the amount of PLN 52 m, this represents a change by PLN 76 m.

The Group's net result in 2017 was PLN 789 m, which is an increase by PLN 642 m against 2016.

The Group's EBITDA in Q4 2017 was PLN 517 m and was 4% higher than in the corresponding period of the previous year. The main positive contributors to the Group's EBITDA levels were these Busi- ness Lines: Sales (increase of EBITDA by PLN 84 m yoy), which resulted mainly from non-recurring events (dissolution of impairment losses for disputable receivables and provisions), and Generation (increase of EBITDA by PLN 11 m). An adverse influence on the Group’s EBITDA was exerted by the Distribution Business Line (decrease of EBITDA by PLN 28 m), where the major driving factor was an increase in employee benefit expenses compared to the same period of the previous year, in which material actuarial provisions were dissolved. In Q4 2017, a significant contribution to the Group’s EBITDA structure was also made by the Services and Other Line (a negative share of 11%), which was connected with the final settlement of the purchase of shares of Polimex – Mostostal S.A.

Presented below is the impact of material events (the applied materiality criterion is PLN 25 m) of an unusual nature on EBITDA.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Table 7: EBITDA adjusted for material non-recurring events

EBITDA

(PLN m) 2017 EBITDA 2,160 Adjusted EBITDA 2,024 of which: Actuarial provisions (60) Dissolution of impairment losses on account of disputable receivables (IFRS 9) (60)

2016 EBITDA 2,027 Adjusted EBITDA 1,990 of which: Actuarial provisions (63) Dispute with a counterparty 26

EBITDA

(PLN m) Q4 2017 EBITDA 517 Adjusted EBITDA 456 of which: Bargain purchase gains 50 Actuarial provisions (35) Dissolution of impairment losses on account of disputable receivables (IFRS 9) (60)

Q4 2016 EBITDA 498 Adjusted EBITDA 482 of which: Actuarial provisions (42) Dispute with a counterparty 26

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Table 8: Consolidated statement of financial position

Balance Balance Balance Balance as at as at as at as at Change Change PLN m 31 De- 31 De- 31 De- 31 De- 2017/2016 2017/2016 cember cember cember cember (%) 2014* 2015 2016 2017 ASSETS

Non-current assets Property, plant and equipment 12,315 12,912 13,053 13,371 318 2% Intangible assets 393 395 383 338 (45) -12% Goodwill 143 143 26 15 (11) -42% Investments in associates and joint ventures measured by the equity - - 390 728 338 87% method Deferred tax assets 246 260 396 325 (71) -18% Other non-current financial assets 49 60 166 46 (120) -72% Other non-current assets 96 103 101 107 6 6% 13,242 13,873 14,515 14,930 415 3%

Current assets Inventories 296 513 472 352 (120) -25% Current tax receivables 76 47 111 31 (80) -72% Trade receivables 1,551 1,762 1,947 1,843 (104) -5% Portfolio of financial assets 764 322 2 - (2) -100% Other current financial assets 22 38 15 83 68 > 100% Cash and cash equivalents 1,932 1,669 1,471 3,641 2,170 > 100% Other current assets 208 232 198 176 (22) -11% Assets classified as held for sale 27 - - - - 4,876 4,583 4,216 6,126 1,910 45%

TOTAL ASSETS 18,118 18,456 18,731 21,056 2,325 12%

EQUITY AND LIABILITIES

Equity

Share capital 4,522 4,522 4,522 4,522 - - Foreign exchange differences from - - 4 (2) (6) < -100% translation of a foreign entity Reserve capital 447 447 1,018 1,018 - - Supplementary capital 607 661 728 1,433 705 97%

Cash flow hedge reserve (17) 6 41 2 (39) -95%

Retained earnings 2,957 3,134 2,464 2,436 (28) -1% Equity attributable to equity holders of 8,516 8,770 8,777 9,409 632 7% the Parent Non-controlling interest 37 44 40 56 16 40%

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

8,553 8,814 8,817 9,465 648 7% Non-current liabilities Loans and borrowings 2,390 2,475 3,086 2,720 (366) -12%

Bonds issued 3,117 3,116 2,639 4,520 1,881 71%

Non-current provisions 632 664 578 550 (28) -5% Deferred tax liability 553 591 593 596 3 1% Deferred income and non-current 526 531 515 501 (14) -3% grants Other non-current financial liabilities 32 25 6 81 75 > 100% 7,250 7,402 7,417 8,968 1,551 21% Current liabilities Trade payables 869 877 811 792 (19) -2% Current loans and borrowings 171 203 334 356 22 7%

Bonds issued 72 76 78 109 31 40%

Current income tax liability 50 2 3 11 8 > 100%

Deferred income and grants 158 161 170 182 12 7% Short-term provisions 374 471 711 571 (140) -20% Other financial liabilities 229 193 157 280 123 78% Other current liabilities 363 257 233 322 89 38% Liabilities related to assets classi- 29 - - - - - fied as held for sale 2,315 2,240 2,497 2,623 126 5%

Total liabilities 9,565 9,642 9,914 11,591 1,677 17%

TOTAL EQUITY AND LIABILITIES 18,118 18,456 18,731 21,056 2,325 12%

* restated data As at 31 December 2017, total assets of the Energa SA Group reached PLN 21,056 m and were PLN 2,325 m higher than on 31 December 2016.

In non-current assets, the most significant change pertained to investments in related entities and joint ventures measured by the equity method, which is associated with the Energa SA Group’s exposure to Polska Grupa Górnicza S.A., Polimex Mostostal S.A. and a change in the classification of the investment in Elektrownia Ostrołęka S.A., which as at the end of 2016 was recognized as a subsidiary. In current assets the most significant changes concerned: cash (the reasons for changes in cash are described further on in the part devoted to cash flows).

On the liabilities side, the material change concerned the balance of bonds issued (the increase in bonds issued was associated predominantly with the EUR 300 m issue of Eurobonds in Q1 2017 by Energa Finance AB (publ)) and issue of EUR 250 m hybrid bonds in Q3 2017 by Energa SA and repayment of loans and borrowings (decrease in long-term and short-term loans and borrowings in the total amount of PLN 344 m resulted mainly from repayment of the liabilities incurred in previous years).

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

The Energa SA Group’s equity as at 31 December 2017 was PLN 9,465 m and financed 45% of the Group’s assets. In connection with the distribution of Energa SA’s result for 2016, supplementary capital rose by PLN 705 m.

Table 9: Consolidated statement of cash flows

Change Change PLN m 2014* 2015 2016 2017 2017/2016 2017/2016 (%)

Net cash flow from operating activities 1,952 1,604 1,782 2,182 400 22%

Net cash flow from investing activities (1,580) (1,139) (1,689) (1,455) 234 14%

Net cash flow from financing activities (244) (718) (287) 1,452 1,739 > 100%

Net increase / (decrease) in cash 128 (253) (194) 2,179 2,373 > 100%

Cash and cash equivalents at the end of the 1,911 1,658 1,464 3,643 2,179 > 100% reporting period

* restated data

Figure 13: Group’s cash flows in 2014-2017 (PLN m)

PLN m 2,182 1,952 1,782 1,604 1,452

( 244) ( 287) (1,580) ( 718) (1,139) (1,455) (1,689)

2014* 2015 2016 2017

Net cash flow from operating activities

Net cash flow from investing activities

Net cash flow from financing activities

As at 31 December 2017, the balance of the Group's cash was PLN 3,643 m and was PLN 2,179 m higher than the cash balance one year earlier. The total net cash flows from the Company's operating, investing and financing activities in 2017 were positive at PLN 2,179 m, compared to negative cash flows at PLN 194 m in 2016.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Cash flow from operating activities increased by PLN 400 m compared to the previous year. The increase in cash flows from operating activities compared to 2016 was driven mainly by changes in working capital adjusted for non-cash items and lower amount of income tax paid. Net expenditures on investing activities in 2017 fell by PLN 234 m (i.e. by 14%). In 2017, lower expenditures were posted on the purchase of property, plant and equipment and intangible assets and also less was expended for investments in associates and joint ventures measured by the equity method; there were also lower proceeds from the sales of participation units in the Energa Trading fund. In the period in question, cash flows from financing activities were positive and amounted to PLN 1,452 m, or PLN 1,739 m more than in 2016. This increase resulted mainly from the EUR 300 m issue of Eurobonds and the issue of hybrid bonds in the amount of EUR 250 m.

3.3. Structure of assets and liabilities in the consolidated statement of financial position

Figure 14: Structure of assets and liabilities

* restated data

Table 10: Financial ratios of the Energa SA Group

Ratio Definition 2014 2015 2016 2017

Profitability operating result + amortization and depreciation + EBITDA margin impairment losses on non- 22.3% 20.5% 19.9% 20.5% financial non-current assets / sales revenue net profit for the period / return on equity (ROE) equity at the end of the 11.8% 9.5% 1.7% 8.3% period net profit for the period / return on sales (ROS) 9.5% 7.8% 1.4% 7.5% sales revenues net profit for the period / return on assets total assets at the end of the 5.6% 4.6% 0.8% 3.7% (ROA) period

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Balance as Balance as Balance as Balance as at at at at Ratio Definition 31 Decem- 31 Decem- 31 Decem- 31 Decem- ber 2014* ber 2015 ber 2016 ber 2017 Liquidity current assets/current liabili- current liquidity ratio 2.1 2.0 1.7 2.3 ties Indebtedness total liabilities under loans financial liabilities and borrowings and under 5,750 5,870 6,137 7,705 (PLN m) long- and short-term debt securities net financial liabilities financial liabilities - cash 3,818 4,201 4,666 4,064 (PLN m) and cash equivalents net debt / EBITDA net financial liabilities / 1.6 1.9 2.3 1.9 ratio EBITDA * restated data

The significant increase in the 2017 net result compared to the net result recorded by the Group in the year before (the net result in 2016 was strongly impacted by the impairment losses on the net value of non-financial non-current assets) contributed to a dynamic increase in profitability ratios. On the other hand, the EBITDA margin remains at a similar level.

Compared to the end of 2016, financial liabilities increased (by 26%). The lower level of the net debt to EBITDA ratio in relation to the end of last year was attributable to the change of net financial liabilities (down by 13%) and an improvement of the Group’s 2017 results compared to the previous year (by 7%). Additionally, the increase in the balance of cash associated with the launch of financing in Q1 and Q3 2017 had a favorable impact on the current liquidity ratio. 3.4. Description of significant off-balance sheet items

Information in this respect is presented in chapter 2.7. Information material agreements and transactions in this Report and in the consolidated financial statements – note 35: Contingent assets and liabilities. Operational leasing liabilities and receivables are described in notes 33.1 and 33.2 of the consolidated financial statements.

3.5. Key operational data of the Energa SA Group

Table 11: Distribution of electricity, by tariff group

Distribution of electricity, by Change tariff groups Change 2014 2015* 2016* 2017 2017/2016 (invoiced sales) 2017/2016 (%) in GWh Tariff Group A (HV) 4,143 4,280 3,981 3,512 (469) -12% Tariff Group B (MV) 7,210 7,531 7,981 8,436 455 6% Tariff Group C (LV) 4,246 4,283 4,243 4,620 377 9% Tariff Group G (LV) 5,323 5,392 5,522 5,500 (22) -0% Total distribution of energy 20,923 21,486 21,727 22,068 341 2%

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Distribution of electricity, by tariff groups Q4 2016* Q4 2017 Change Change (%) (invoiced sales) in GWh Tariff Group A (HV) 814 893 79 10% Tariff Group B (MV) 2,085 2,188 103 5% Tariff Group C (LV) 1,093 1,136 43 4% Tariff Group G (LV) 1,451 1,387 (64) -4% Total distribution of energy 5,442 5,603 161 3% *in the case of the 2016 data (for tariffs C and G), the data on invoiced sales were decreased by the volume invoiced this year in the part which related to 2015 (and which was not invoiced in 2015 due to postponement of invoicing caused by data migration to new billing systems).

In 2017, the volume of electricity supplied was higher than in the previous year, by 2% on average. The increase in volume was recorded mainly in the high-margin group C and group B, while in Group A (low-margin) we lost a significant customer (who switched to its own source of supply and the PSE network). As a result, the increase in the average distribution rate was approx. 5% yoy.

Table 12: SAIDI and SAIFI

SAIDI SAIFI

Unplanned incl. Unplanned incl. Total Total catastrophic Planned catastrophic Planned

Number of minutes per customer in the Disruptions per customer in the relevant relevant period period Q4 2016 59.0 15.7 74.7 0.7 0.1 0.8 Q4 2017 89.7 24.1 113.8 0.7 0.1 0.8 Change 30.7 8.4 39.1 (0.0) 0.0 0.0 Change (%) 52% 54% 52% -0% 37% 4% 2014 203.7 58.4 262.2 3.1 0.4 3.5 2015 239.4 46.4 285.8 3.1 0.3 3.4 2016 177.0 50.8 227.8 2.5 0.3 2.8 2017 298.0 55.4 353.3 2.7 0.3 3.0 Change 2017/2016 121.0 4.6 125.6 0.2 0.0 0.2 Change 2017/2016 (%) 68% 9% 55% 8% 2% 7%

As at the end of 2017, the Energa SA Group reached a level of SAIDI (planned and unplanned with catastrophic) higher than that of the previous year by 55%. SAIFI increased by 7% from the previous year. Such a significant deterioration of the ratios resulted from mass breakdowns, in particular catastrophic storms in August 2017 and the Ksawery and Grzegorz storm winds. In 2017, Energa-Operator SA recorded a 1% increase in the number of customers from the previous year. This number increased in tariff groups B and G but declined in tariff group C among small customers whereas the number the so-called big-offtake customers increased. At the same time tariff C saw an increase in consumption per customer yoy. As at the end of 2017, the Company had 3,043 thousand customers.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Table 13: Number of Energa-Operator SA’s customers in 2014-2017 (by tariff group)

Tariff groups As at 31 December Change Change in Energa Operator 2017/2016 2017/2016 (units) 2014 2015 2016 2017 (%)

Tariff Group A 72 90 90 91 1 1% Tariff Group B 6,540 6,777 7,024 7,181 157 2% Tariff Group C 299,190 295,030 291,611 288,727 (2,884) -1% Tariff Group G 2,660,526 2,670,053 2,708,406 2,746,711 38,305 1% TOTAL 2,966,328 2,971,950 3,007,131 3,042,710 35,579 1% Tariff group A – the biggest customers connected to the high voltage grid (110 kV), e.g. steelworks, shipyards and other big industrial facilities; Tariff group B – big industrial facilities connected to the medium voltage grid (from 1 kV to 60 kV), e.g. factories, hospitals, shopping centers, recreation and entertainment facilities; Tariff group C – institutional customers connected to the low voltage grid (up to 1 kV), e.g. banks, shops, clinics, points of sale, street lighting; Tariff group G – households and similar customers, regardless of the voltage. Table 14: Gross production of electricity in the Energa SA Group

Change Change Gross electricity produced (GWh) 2014 2015 2016 2017 2017/2016 2017/2016 (%) Power plants - coal-fired 3,109 2,226 2,580 2,586 7 0% Power plants - biomass co-fired 643 609 11 - (11) -100% CHP plants - coal-fired 153 131 114 115 1 1% CHP plants - biomass-fired 20 24 28 45 18 63% Power plants - hydro 837 687 804 1,027 223 28% Pumped-storage plant 34 37 33 31 (2) -6% Power plants - wind 308 419 371 471 101 27% Power plants - photovoltaics - 4 5 5 (0) -9% Total electricity production 5,103 4,136 3,945 4,280 335 8% incl. RES 1,808 1,743 1,218 1,548 329 27%

Gross electricity produced (GWh) Q4 2016 Q4 2017 Change Change (%)

Power plants - coal-fired 795 594 (200) -25%

Power plants - biomass co-fired 1 - (1) -100% CHP plants - coal-fired 43 38 (4) -10% CHP plants - biomass-fired 0 8 8 > 100% Power plants - hydro 248 337 90 36% Pumped-storage plant 12 18 6 53% Power plants - wind 133 163 31 23% Power plants - photovoltaics 0 0 0 6% Total electricity production 1,231 1,160 (72) -6% incl. RES 382 509 127 33%

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

In 2017, the Energa SA Group’s generation companies produced approx. 335 GWh (or 8%) more electricity than they did in the corresponding period of the previous year. The increase in production pertain primarily to all hydro and wind sources. The stable level of production in the Ostrołęka power plant (down by 4 GWh) was caused among others by a stable must-run production for the Transmis- sion System Operator in Poland. The higher production of energy in run-of-the-river hydro sources (by 221 GWh) resulted from better hydrological conditions, while the higher wind production (by 101 GWh) was caused by better weather conditions (higher windiness) and high availability of generation sources. Energy production in the Group’s combined heat and power plants was mainly a derivative of the production of heat which depends on the temperatures (determining the demand for heat reported by the Group’s local customers). At the same time, since the beginning of 2016, the quantity of property rights arising from renewable energy production is not the same as the RES production volume because the new RES Act reduced support for depreciated hydro sources with capacity exceeding 5 MW. As a result, the run-of-river power plant in Włocławek was eliminated from the support system. In addition, since 2017, 10 smaller hydro power plants have been selling the electricity they generate at guaranteed prices resulting from won energy auctions, and hence their energy is not subject to property rights. Comparing Q4 on a yoy basis, noticeable is a decrease in energy generation (by 6%) driven mainly by the lower production from the Ostrołęka power plant (by 201 MWh due to, among others, the lower availability of units forced by PSE), which was partly offset by higher production from hydro plants (better hydrological conditions) and wind plants (better weather conditions).

Table 15: Production of heat

Change Change Gross heat production in TJ 2014 2015 2016 2017 2017/2016 2017/2016 (%)

Energa Kogeneracja Sp. z o.o.* 2,264 2,226 2,326 2,400 74 3% Energa Elektrownie Ostrołęka S.A. 1,452 1,399 1,470 1,428 (42) -3% Ciepło Kaliskie Sp. z o.o. 137 280 313 312 (1) -0% Total gross heat production 3,853 3,905 4,109 4,140 31 1% * including EC Kalisz, whose assets were incorporated in Energa Kogeneracja Sp. z o.o. in 2014

Gross heat production in TJ Q4 2016 Q4 2017 Change Change (%)

Energa Kogeneracja Sp. z o.o. 782 767 (15) -2% Energa Elektrownie Ostrołęka S.A. 493 399 (94) -19% Ciepło Kaliskie Sp. z o.o. 106 116 10 9% Total gross heat production 1,380 1,281 (99) -7%

2017 saw a slight increase of heat production by approx. 31 TJ (1%) attributable to, among others, the temperatures which affect the demand for heat among the Group’s local customers. In Q4 2017, heat production decreased by approx. 99 TJ (7%) which was driven mainly by the decreasing demand on the local markets (the cities of Ostrołęka, Elbląg and Kalisz) recorded by two main companies: Energa Kogeneracja and Energa Elektrownie Ostrołęka.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Table 16: Volume and cost* of consumption of key fuels

Change Change Fuel consumption* 2014 2015 2016 2017 2017/2016 2017/2016 (%) Coal Quantity (thous. tons) 1,607 1,157 1,288 1,280 (7) -1% Cost (PLN m) 413 284 283 306 23 8% Biomass Quantity (thous. tons) 436 406 30 46 16 53% Cost (PLN m) 176 161 11 16 5 45% Total fuel consumption (PLN 589 445 294 322 28 10% m)

Fuel consumption* Q4 2016 Q4 2017 Change Change (%)

Coal Quantity (thous. tons) 400 312 (89) -22% Cost (PLN m) 84 73 (11) -13% Biomass Quantity (thous. tons) 1 8 7 > 100% Cost (PLN m) 0 3 2 > 100% Total fuel consumption (PLN m) 84 76 (9) -10% * including the cost of transportation

Significant increase in the cost of fuel consumption yoy of the Group’s generator (by PLN 28 m) is attributable mainly to the increased unit cost of coal consumption. In Q4 2017, the cost of consumption of key fuels for production was approx. PLN 9 m (10%) lower than in the corresponding period of 2016. The main reason was the lower volume of energy production from hard coal by the Ostrołęka power plant, which was partly offset by a higher coal purchase price.

Table 17: Sales of electricity by the Sales Business Line

Change Sales of electricity by the Sales Change 2014 2015 2016 2017 2017/2016 Business Line in GWh 2017/2016 (%)

Retail electricity sales 16,364 16,767 19,628 20,615 987 5% Electricity sales on the wholesale 9,720 8,892 4,973 3,200 (1,774) -36% market, of which: Electricity sales to the balancing mar- 331 428 399 476 76 19% ket Electricity sales to Energa-Operator to 1,561 (16) 1,520 - (1,520) -100% cover network losses* Other wholesale 7,828 8,480 3,054 2,724 (330) -11% Total electricity sales 26,084 25,658 24,602 23,815 (786) -3% * the negative volume in 2015 is an effect of settlement of a 2014 contract that was not extended to 2015

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Sales of electricity by the Sales Busi- Q4 2016 Q4 2017 Change Change (%) ness Line in GWh

Retail electricity sales 5,262 5,382 121 2% Electricity sales on the wholesale 1,894 1,215 (679) -36% market, of which: Electricity sales to the balancing mar- 117 33 (84) -72% ket Electricity sales to Energa-Operator to 398 - (398) -100% cover network losses Other wholesale 1,379 1,182 (197) -14% Total electricity sales 7,156 6,598 (558) -8%

In 2017, the total volume of electricity sold by the Sales Business Line decreased by 3% (or 0.8 TWh) compared to 2016, which is attributable to the decrease of the sales volume on the wholesale market by 36% (or 1.8 TWh), whereas retail sales volume increased by 5% (or 1.0 TWh) in relation to the previous year.

In retail sales in 2017, increases were recorded in volumes sold to customers on the Polish market (as a result of higher sales to business customers and slight decrease of sales to households), whereas on the Slovak market the sales volume declined (this is connected with the decision to extinguish the activity on the retail market in that country). The increase of the retail sales volume is the result of higher average number of customers (acquisition of a number of new business buyers and households) – in 2017 the Business Line exceeded 3 million customers – and increase in average electricity consumption by customers, which is consistent with the market trend (in 2017 electricity consumption in Poland increased by 2% yoy). In terms of volume, sales to households (tariff G) in 2017 accounted for 27% of the sales billed to end users by Energa Obrót SA (in 2016 this share was 28%).

In the analyzed period, electricity sales fell in the wholesale market (by 36%). This is attributable to non-performance of the electricity sales contract to cover network losses to Energa-Operator SA – as a result of the completed procedure a different provider of electricity was selected for 2017. Further- more, a better adjustment of forward contracting to the sales volume of electricity to end users resulted in a lower volume of surplus energy sold (other wholesale).

In Q4 2017, the overall volume of electricity sold by the Sales Business Line decreased by 8% (0.6 TWh) when compared to Q4 2016. In quarterly terms, the trends were similar to annual figures, i.e. retail sales increased (by 2%) and sales in the wholesale market clearly decreased (by 36%).

3.6. Financial results by operating segments

Table 18: EBITDA of the Energa SA Group, by Business Line

Change Change EBITDA (PLN m) 2014 2015 2016 2017 2017/2016 2017/2016 (%) DISTRIBUTION 1,537 1,688 1,720 1,723 3 0% GENERATION 732 392 315 398 83 26% SALES 131 173 40 85 45 > 100% OTHER and consolidation elimi- (43) (37) (48) (46) 2 4% nations and adjustments Total EBITDA 2,357 2,216 2,027 2,160 133 7%

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

EBITDA (PLN m) Q4 2016 Q4 2017 Change Change (%)

DISTRIBUTION 410 382 (28) -7% GENERATION 120 131 11 9% SALES (23) 61 84 > 100% OTHER and consolidation elim- (9) (57) (48) < -100% inations and adjustments Total EBITDA 498 517 19 4%

Distribution Business Line

Figure 15: Results of the Energa SA Group’s Distribution Business Line (PLN m)

4,392 4,255 4,143 3,997

1,688 1,720 1,723 1,537

977 984 844 959

Revenues EBITDA EBIT 2014 2015 2016 2017

Table 19: Results of the Distribution Business Line

Change Change PLN m 2014 2015 2016 2017 2017/2016 2017/2016 (%) Revenue 3,997 4,255 4,143 4,392 249 6% EBITDA 1,537 1,688 1,720 1,723 3 0% amortization and depreciation 692 711 736 764 28 4% impairment losses on non-financial 1 - - - - 0% non-current assets EBIT 844 977 984 959 (25) -3% Net result 599 667 703 674 (29) -4% CAPEX 1,148 1,123 1,263 1,247 (16) -1%

PLN m Q4 2016 Q4 2017 Change Change (%)

Revenue 1,066 1,124 58 5%

EBITDA 410 382 (28) -7%

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

amortization and depreciation 190 191 1 1%

impairment losses on non-financial - - - 0% non-current assets

EBIT 220 191 (29) -13%

Net result 151 132 (19) -13%

CAPEX 388 573 185 48%

Figure 16: EBITDA Bridge of the Distribution Business Line (PLN m)

51 1

11 83 17

1,720 1,723

EBITDA 2016 Distribution Connection Business line Property tax Other EBITDA 2017 margin revenues Distribution's (incl. grid losses) OPEX

During the entire 2017, the Distribution Business Line contributed 80% to Enea SA Group's EBITDA (nearly 85% in 2016). Revenues of the Distribution Business Line in 2017 were 6% higher than in the same period of the previous year. The increase in revenues was driven by an increase of the average distribution rate (by almost 5%) and higher volumes of distributed electricity (by 2%). EBITDA remained at a similar level yoy. The level of the operating result of PLN 959 m was significantly impacted by the increase of the distribution margin (including network losses of by PLN 83 m). This is primarily the effect of the favorable distribution services sales structure, i.e. increase of the volume in the high-margin C group and in B group, with simultaneous decrease in the low-margin A group. On the other hand, the costs of the property tax were higher by PLN 11 m, OPEX increased by PLN 51 m, mainly due to the higher costs of employee benefits compared to the low base in 2016, when significant actuarial provisions were reversed, and also due to increased headcount in connection with the efforts aimed at preventing the so-called competence gap. In addition the costs of operation and overhaul of the distribution network, which resulted from increased involvement of the engineering and installation staff in operational work. Reversal of some impairment losses for disputed receivables had a positive impact, following an analysis of the provisions of IFRS 9. The balance of other operating activity deteriorated by PLN 17 m. In 2016, the result was positively impacted by the awarded principal receivable received from PKN Orlen in the amount of PLN 16 m on account of the litigation pertaining to the system fee. Net profit in 2017 was PLN 29 m lower than the year before. It is attributable mainly to higher amortization and depreciation resulting from high capital expenditures.

Capital expenditures of the Distribution Business Line amounted to PLN 1,247 m, that is PLN 16 m less than the year before. The Q4 2017 EBITDA was shaped primarily by OPEX, which was higher than in Q4 2016 (by PLN 25 m, due to increase employee benefit expenses, as explained above). As a result, EBITDA fell from PLN 410 m to PLN 382 m.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Generation Business Line

Figure 17: Results of the Energa SA Group’s Generation Business Line (PLN m)

1,823

1,384

1,140 1,148

732 556 392 398 315 287 207

RevenuesPrzychody EBITDA EBIT

(441) 2014 2015 2016 2017

Table 20: Results of the Energa SA Group’s Generation Business Line

Change Change PLN m 2014 2015 2016 2017 2017/2016 2017/2016 (%) Revenue 1,823 1,384 1,140 1,148 8 1% EBITDA 732 392 315 398 83 26%

amortization and depreciation 142 168 183 164 (19) -10% impairment losses on non- < - 34 17 573 (53) (626) financial non-current assets 100% EBIT 556 207 (441) 287 728 > 100% Net result 384 115 (303) 172 475 > 100%

CAPEX 271 392 248 87 (161) -65%

PLN m Q4 2016 Q4 2017 Change Change (%)

Revenue 352 340 (12) -3%

EBITDA 120 131 11 9%

amortization and depreciation 50 41 (9) -18%

impairment losses on non-financial 132 (139) (271) < -100% non-current assets

EBIT (62) 229 291 > 100%

Net result (28) 168 196 > 100%

CAPEX 64 26 (38) -59%

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Figure 18: EBITDA Bridge of the Generation Business Line (PLN m)

* including net electricity trading (revenue less cost)

The table below presents a breakdown of EBITDA of the Generation Business Line by Power Division. This table includes unit data plus the management cost charge for managing the Line, elimination of transaction concluded between individual business areas and consolidation adjustments. The data presented may be different than the presented historical data, because the methodology for allocating Business Line results to individual Power Divisions changed slightly.

Table 21: EBITDA of the Generation Business Line, by Power Division

Change Change EBITDA (PLN m) 2014 2015 2016 2017 2017/2016 2017/2016 (%)

Hydro 283 155 93 127 33 36%

Wind 79 73 26 42 16 61%

Ostrołęka Power Plant 339 149 152 189 37 24%

Other and adjustments 32 15 43 40 (3) -6%

Total Generation 732 392 315 398 83 26%

EBITDA (PLN m) Q4 2016 Q4 2017 Change Change (%)

Hydro 26 43 16 62%

Wind 15 21 6 42%

Ostrołęka Power Plant 71 61 (10) -14%

Other and adjustments 8 6 (2) -19%

Total Generation 120 131 11 9%

In 2017, the Generation Business Line’s contribution to total EBITDA of the ENERGA SA Group was 18% (16% in the corresponding period of the year before). The EBITDA growth reached PLN 83 m and was driven mainly by the lower revenues on sales of electricity, property rights and regulatory

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017 system services. The above revenue increases were offset among others by the higher fuel consumption costs. The increase in revenues on sales of electricity was caused by two factors. First of all, electricity production rose yoy in the hydro sources (by 26%) and wind sources (by 27%) and in the Group’s CHP plants (by 13%), which was achievable thanks to the high availability of the generation sources. Sec- ondly, the increases were affected by the growing electricity sale prices in the Ostrołęka Power Plant Power Division. The increase in revenue on the sale of green property rights was caused by the sale of significant inventories of green property rights by the Business Line in 2016, which due to the falling prices pushed EBITDA further down in 2016 (the low base effect). Additionally, the Business Line increased its revenues on sales of Regulatory System Services, mainly the Operating Reserve of the Ostrołęka Power Plant, which resulted from the higher capacity reported to the Operator (higher availability of units and lower sales in physical delivery energy contracts) and higher market prices for the service. Those increases in revenues were partly offset by the increased consumption costs of key fuels used for production, which was due to, among others, the higher unit cost of coal consumption by the Line.

At the same time, there was a yoy increase in the cost of purchase of CO2 allowances (by PLN 5 m) as the Line was assigned a smaller pool of free allowances for production for 2017. In addition to the above factors contributing to the yoy pre-tax results of the Business Line, one should emphasize the recognition (in Q3) and reversal (in Q4) in 2017 of impairment losses on non-financial non-current assets in the Business Line with the total value of (+) PLN 53 m following from: • in Q3 2017, as a result of recognition of impairment losses on the existing wind farms in the total amount of PLN 71 m and planned wind farms in the amount of PLN 4 m and goodwill in the amount of PLN 11 m; • in Q4 2017, in connection with the changes in the regulatory environment, in particular the signing, by the President of Poland, of the Capacity Market Act (which guarantees support for generation units and the resulting update of the price path forecasts), from reversal of asset impairment losses for the total amount of PLN 138 m, including PLN 69 m for wind assets and PLN 69 m for the Ostrołęka B Power Plant. By the same token, in 2016, impairment losses on non-financial non-current assets in the Line with the total amount of (-) PLN 573 m were recognized. • change of the price paths in Q1 2016 and the related losses regarding operating and planned wind assets (PLN -305 m), including a goodwill loss resulting from the purchase of the wind farm portfolio in 2013 with the value of PLN 117 m; • entry into force of the act on wind farm investment projects in Q2 2016 (PLN -247 m); • reversal of the loss recognized in 2012 for the Ostrołęka C power plant construction project, in connection with the decision on execution of the project made in Q3 2016 (PLN +117 m); • from the new business model of the power plant adopted in the Group’s strategy and from the change of the price paths in Q4 2016 and the related loss on the Ostrołęka power plant assets (PLN -138 m). From the perspective of Q4 2017, the following items are noteworthy, among others: increase in the Business Line’s revenues on sales of Regulatory System Services, mainly the Operating Reserve of the Ostrołęka Power Plant, which resulted from the higher capacity reported to the Operator (higher availability of units and lower sales in physical delivery energy contracts) and higher market prices for the service. Among other factors influencing the results of the Business Line in Q4 yoy, one may list: lower energy production in Ostrołęka and no non-recurring events improving the result on the level of the other operating activity in Energa Kogeneracja and Energa Elektrownie in Ostrołęka in Q4 2016 (which pertained to settlements regarding renovation and construction works with the contractors).

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Hydro Table 22: Results of the Hydro Power Division

Change Change PLN m 2014 2015 2016 2017 2017/2016 2017/2016 (%)

Revenue 374 247 180 215 35 20%

EBITDA 283 155 93 127 33 36%

EBIT 255 124 61 94 33 54%

CAPEX 32 15 12 13 1 10%

PLN m Q4 2016 Q4 2017 Change Change (%)

Revenue 53 71 18 34% EBITDA 26 43 16 62% EBIT 18 35 16 88% CAPEX 8 7 (0) -2%

Wind Table 23: Results of the Wind Power Division

Change Change PLN m 2014 2015 2016 2017 2017/2016 2017/2016 (%) Revenue 120 112 69 94 25 37%

EBITDA 79 73 26 42 16 61%

EBIT 39 29 (279) 2 280 > 100%

CAPEX 4 9 1 0 (1) -63%

PLN m Q4 2016 Q4 2017 Change Change (%)

Revenue 28 35 7 25%

EBITDA 15 21 6 42%

EBIT 3 77 74 > 100%

CAPEX 1 0 (1) -92%

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Ostrołęka Power Plant

Table 24: Results of the Ostrołęka Power Plant Division

Change PLN m Change 2014 2015 2016 2017 2017/2016 2017/2016 (%) Revenue 1,159 844 715 659 (55) -8%

EBITDA 339 149 152 189 37 24%

EBIT 289 88 (56) 195 251 > 100%

CAPEX 42 175 182 49 (132) -73%

PLN m Q4 2016 Q4 2017 Change Change (%)

Revenue 215 178 (36) -17% EBITDA 71 61 (10) -14% EBIT (86) 114 199 > 100% CAPEX 38 13 (25) -65%

Other and adjustments

Table 25: Results of the Other and adjustments

Change Change PLN m 2014 2015 2016 2017 2017/2016 2017/2016 (%) Revenue 171 180 177 180 3 2%

EBITDA 32 15 43 40 (3) -6%

EBIT (27) (35) (168) (4) 164 98%

CAPEX 193 193 54 25 (29) -54%

PLN m Q4 2016 Q4 2017 Change Change (%)

Revenue 57 56 (1) -2%

EBITDA 8 6 (2) -25%

EBIT 2 3 1 50%

CAPEX 18 5 (12) -70%

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Sales Business Line

Figure 19: Results of the Energa SA Group’s Sales Business Line (PLN m)

5,715 5,740 5,626 5,316

173 131 138 85 101 40 38

Przychody EBITDA EBIT Revenues (3)

2014 2015 2016 2017

Table 26: Results of the Energa SA Group’s Sales Business Line

Change Change PLN m 2014 2015 2016 2017 2017/2016 2017/2016 (%) Revenue 5,715 5,740 5,626 5,316 (310) -6% EBITDA 131 173 40 85 45 > 100%

amortization and depreciation 30 34 39 43 4 10% impairment losses on non-financial - 1 4 4 - 0% non-current assets EBIT 101 138 (3) 38 41 > 100% Net result 108 119 (2) 29 31 > 100%

CAPEX 38 58 92 43 (49) -53%

PLN m Q4 2016 Q4 2017 Change Change (%)

Revenue 1,608 1,457 (151) -9% EBITDA (23) 61 84 > 100%

amortization and depreciation 12 11 (1) -8% impairment losses on non-financial 4 4 - 0% non-current assets EBIT (39) 46 85 > 100% Net result (30) 36 66 > 100%

CAPEX 16 12 (4) -25%

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Figure 20: EBITDA Bridge of the Sales Business Line (PLN m)

In 2017, the Sales Business Line earned EBITDA of PLN 85 m, or 4% of the Energa SA Group’s total EBITDA, compared to PLN 40 m in 2016, when the Business Line’s contribution to the Group’s EBITDA was 2%. The Sales Business Line’s revenues in 2017 stood at PLN 5,316 m, i.e. decreased by PLN 310 m (by 6%) compared to 2016. The largest contributing item to the Business Line’s revenues continues to be revenues on sales of electricity, which were 5% (or PLN 247 m) lower yoy in 2017. This situation resulted from the decrease in the revenue on wholesale electricity sales by PLN 319 m (41%) yoy, which was due to: a 36% decline in volume and a 8% drop in the average selling price. Revenues on sales of electricity on the retail market in 2017 were slightly higher by PLN 72 m (or 2%) than in 2016; this resulted from a 5% increase in volume and a 3% lower average selling price. The decline of the Busi- ness Line’s revenue was also driven by the revenue on sales of gas, which was PLN 71 m lower yoy in the analyzed period, mainly due to a lower volume of sales. The margin on electricity sales, which is the key contributor to the Business Line’s results, fell by PLN 30 m yoy. This was the effect of lower unit margins: average electricity sales prices to end users fell faster (-4% yoy) than the average unit variable cost, composed of the purchase cost of electricity, property rights and excise tax (-3% yoy) and the less advantageous structure of sales according to tariff groups. Presented below are the factors affecting the margin on the sale of electricity: a) Volume of retail sales – a 5% increase in volume contributed to the margin growth yoy. b) Structure of the sales volume by tariff groups (mix) – the change of the tariff mix adversely affected the margin as it increased the percentage of customers from tariff groups with a lower unit margin. c) Price for end users – the prices follow the changes in variable cost and are determined by market competition. The decrease in the average yoy sales price is a consequence of the declining prices of energy and green certificates in the market and reduction of tariff G for 2017 by ERO by over 4%. d) Cost of electricity purchase (in PLN/MWh) – the decrease in the average cost yoy (which fell more slowly than sales prices) is a result of a decline in market prices, which contributed to the reduction of contractual prices, and the lower costs connected with the “offtaker of last resort” function discharged by Energa Obrót SA. e) Cost of redemption of property rights – the average unit cost in 2017 was lower than in 2016. The key impact on the change in this factor is exerted by the redemption cost of green certificates, where the rate of decline was much lower than could be inferred from the decline in the market prices of green certificates (by 47%). This was caused predominantly by long-term contracts for the purchase of green certificates entered into many years earlier, under which the purchases were effected until September 2017 at prices based on a fixed substitution fee rather than on market prices. The yoy increase in the cost of property rights was also driven by the introduction, on 1 July 80

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

2016, of a new obligation associated with support for the producers of electricity from biogas (blue certificates); in 2017 the obligation was in effect for the entire financial year, compared to the second half of the year in 2016. In addition, the following factors had an adverse effect on the Business Line’s EBITDA: a) The gas trading business – the margin on the sale of this fuel dropped by PLN 16 m yoy. This resulted from lower sales volumes and lower unit margins. Compared to previous years, the profitability in this market decreased as a result of higher activity of the main gas seller in Poland, i.e. PGNiG, and introduction of less favorable trade rules in the gas wholesale market (necessity to incur fees for fuel storage in the case of imports). b) The increase in costs (included in the “Other” item in the above EBITDA bridge) resulted from the active sales policy. The Business Line’s 2017 EBITDA was driven upwards, in turn, by the following one-off and non-cash events, which more than doubled EBITDA in yoy terms: a) Reversal of impairment losses for disputed receivables in the amount of PLN 44 m; following the analysis of the IFRS 9 standard that changed the approach to the recognition of impairment losses for disputed receivables, the losses recognized previously were partially reversed, b) Reversal of a part of provisions for administrative and court proceedings recognized in December 2016 in the total amount of PLN 22 m; as a result of this event, EBITDA changed by +PLN 66 m yoy. In September this year, Energa Obrót SA decided to recognize long-term contracts for purchasing green certificates as invalid because of the procedure used to execute them (without a tender), including agreements that generated enormous losses for the Company (settlements based on the substitution fee rather than market prices). The decision has no material impact on the Sales Business Line’s results in 2017 because a substantial majority of the certificates for 2017 were redeemed before this decision. A favorable impact on the results should be expected in the following years but its occurrence and extent will depend on resolutions of court cases. This decision caused an improvement of the Business Line’s cash flows in Q4 2017, since the certificates were no longer purchased under long-term contracts. The best EBITDA in the whole year was reported in Q4 2017. It stood at PLN 61 m. This was caused by non-recurring events (reversal of impairment losses for disputed receivables and provisions in the total amount of PLN 66 m), as described above. Adjusted for the effects of these events, the Business Line’s EBITDA in Q4 2017 would stand at PLN -5 m. 3.7. Projected financial results The Management Board of Energa SA has not published projections for the Company’s and consolidated financial results for the financial year 2017. 3.8. Ratings On 28 November 2016, Fitch Ratings affirmed the Company's long-term ratings at the previous level of BBB: the Company’s long-term rating in local and foreign currencies and the rating for the Compa- ny’s junior unsecured debt in the local and foreign currencies. The rating outlook remained stable (Current Report No. 43/2016). On 9 February 2017, the Moody’s Investors Service rating agency affirmed the Company's ratings at Baa1: the Company’s long-term rating in domestic currency and rating for junior unsecured debt in domestic currency extended to the EMTN Program of the subsidiary Energa Finance AB (publ) with a total value of EUR 1 bn guaranteed by Energa. The rating outlook remained stable (Current Report No. 11/2017). At the end of October 2017, the agreement with Moody’s expired. Accordingly in subsequent reporting periods Energa will no longer publish information about the ratings awarded by that agency.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

On 13 September 2017, Fitch Ratings assigned rating of BB+ level to the issue of hybrid bonds described in Chapter 2.2. Key events and achievements of the Energa SA Group. In accordance with Fitch’s methodology (Non-Financial Corporates Hybrids Treatment and Notching Criteria), the bonds are classified, for the purposes of calculating financial leverage ratios, as equity in the amount of 50 percent of the financing. Table 27: Current ratings of Energa

Moody's Fitch

Company's long-term rating Baa1 BBB Rating outlook Stable Stable Rating date 23 December 2011 19 January 2012 Last change of rating - 12 October 2012 Last confirmation of rating 9 February 2017 28 November 2016

3.9. Dividend

By the date of approval of these financial statements for publication, the proposed distribution of the 2017 profit has not been adopted.

On 26 June 2017, the Annual General Meeting adopted a resolution to distribute the 2016 profit, out of which PLN 79 m, i.e. PLN 0.19 per share, was allocated to a dividend for the Company's shareholders. By the date of these statements, the entire declared amount has been paid out, including PLN 28 m on account of shares with voting preference.

3.10. Information about the entity authorized to audit the financial statements

The entity authorized to audit the Financial Statements of Energa SA and the Energa SA Group is KPMG Audyt Spółka z ograniczoną odpowiedzialnością spółka komandytowa ("KPMG").

The agreement between Energa SA and KPMG was entered into on 12 April 2017 and pertained to an audit of the Company's financial statements and the consolidated financial statements for 2017 and to a review of the financial statements for H1 2017.

The entity authorized to audit the Financial Statements of Energa SA and the Energa SA Group for the year 2016 was PricewaterhouseCoopers Spółka z ograniczoną odpowiedzialnością spółka komandytowa (“PwC”).

Table 28: Statutory auditor’s fee for services provided to the Group (PLN 000s)

Year ended 31 De- Year ended 31 De- PLN 000s cember 2016 cember 2017

Audit of the annual financial statements 377 660

Other assurance services, including a review of financial 152 223 statements

Tax consulting services 55 -

Other services 135 18 Total 719 901

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

4. ENVIRONMENT

4.1. Macroeconomic situation

The domestic market is the main market on which the companies comprising the Energa SA Group operate. Accordingly, variations in business conditions measured by GDP change rates, inflation or unemployment rates translate to electricity, heat and gas prices and shape demand for products provided to customers.

According to the preliminary estimate of the Central Statistical Office (GUS), the gross domestic product (GDP) increased in real terms by 4.6% over the year 2017 (vs. 2.9% growth in 2016).

The growth rate of total industrial output sold in 2017 increased by 6.6% compared to the previous year. Compared to the same period in the previous year, growth was recorded in all the key sectors of the industry. For the production and supply of electricity, gas, steam and hot water, prices increased by 5.5% yoy, compared to a 3.5% decline the year before. On the other hand, decreases in production output continued in mining and quarrying, reaching 7.4% compared to 5.2% in 2016.

Positive sentiments in the industry are also confirmed by the PMI measure, which rose to 55 points in December 2017. This occurred on the back of the strongest, in nearly three years, improvement of economic conditions in the Polish industrial sector. The key contributors to this change included: faster growth of production output, employment and total number of new orders.

Figure 21: Annual changes in GDP, domestic demand, individual consumption and capital expenditures

Forecast 2018

Source: GUS data and forecasts by Bank Zachodni WBK (January 2018)

Domestic demand remains the driving force of the Polish economy, especially individual consumption, which increased by 4.8% over the year. Growing household income, record low unemployment rate, improving consumer sentiment and low interest rates contributed to an increase in the consumer spendings. Contrary to the previous year, the economy was also supported by investment demand and net exports. Gross expenditures on fixed assets increased by 5.4% yoy (compared to a 7.9% drop in 2016). The increase in investments was caused mainly by the higher growth of construction invest-

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017 ments. In foreign trade, the exchange of goods increased with all groups of countries. The largest growth was recorded in trade with Central and Eastern Europe, mainly Russia and Ukraine.

The good economic conditions globally provide strong support for Polish exports and improve its outlook.

Dynamic economic growth driven by an increasing domestic and international demand also affected the labor market situation. The average headcount in the enterprise sector in 2017 increased by 4.5% compared to last year. The average monthly (gross) remuneration grew by 5.9% yoy to the level of PLN 4,530.47. As at the end of December 2017, the registered unemployment rate was 6.6%, or 1.6 percentage points less than last year.

Shortage of qualified workers is increasingly identified as a barrier for the growth of businesses. This does affect the expected salary levels. The increase in salaries is however suppressed by the inflow of workers, among others from the Ukraine.

The price index of industrial output sold increased by 2.9% in 2017 compared to the same period of the previous year. Prices in all the sections were higher than the year before, including the highest growth observed in mining and extraction (by 19.4%). In the sector of generation and supply of electricity, gas, steam and hot water, prices grew at a level of 0.2%.

The overall average annual consumer price index in 2017 was 2.0% vs. 2016, when 0.6% deflation was recorded. According to analysts, the inflation drivers included the increasing prices of energy and energy fuels. The fuel prices also contributed to the variation in inflation rates (especially in the first half of the year). The Monetary Policy Council believes that the coming quarters will see the continuation of the good business conditions and inflation will approximate the inflation target (2.5% with a symmetrical deviation range of ±1 percentage point); accordingly at its most recent meeting, the Council chose not to change the interest rates, keeping the reference rate at 1.5%.

4.2. Electricity market in Poland

The situation in the market environment is vitally important for the Group’s market performance. With this respect, one should mention the prices of electricity, property rights, CO2 emission allowances and hard coal (which is the basic fuel for production). Additionally, the Group’s results were affected by regulatory drivers, such as the operating reserve, and non-regulatory drivers, e.g. weather conditions, especially hydrometeorological conditions and windiness. Domestic generation and consumption of electricity According to data published by PSE, in 2017 demand for electricity in Poland increased by 3.5 TWh compared to 2016, reaching a record high in the last 10 years of 168.1 TWh. The increase in demand was not satisfied by production in 2017, even though it was higher than last year, increasing by +3.3 TWh up to 165.9 TWh. Therefore, the significant increase in demand was not matched by production growth, as a result of which energy imports increased.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Figure 22: Production and consumption of electricity in Poland in 2008-2017 (TWh)

Source: PSE

2017 was another consecutive year of growth in wind energy generation. The share of wind sources in the production structure was approx. 8.4%, and the generation of electricity by these utilities increased by approx. 19% as compared to 2016. Higher windiness was the key contributor to higher production output of wind power plants; overall, the year 2017 was the windiest of the recent years. A significant number of wind farms operate in the operating area of Energa-Operator SA which translated in 2017 into a higher risk for the Energa SA Group in connection with the discharge of the function of the “offtaker of last resort” by Energa Obrót S.A.

Figure 23: Structure of production of electricity in Poland in 2008-2017 (TWh)

Source: PSE

In the past year, the greatest share in the electricity production structure was held by hard coal-fired public-grid power plants. Their share in total production was 48.2% and the share of lignite-fired commercial power plants was 31.4%. In 2017, the increase in wind farm production output was surpassed by gas-fired commercial power plants, which boosted their electricity production output by 24%, up to 7.2 TWh.

Poland’s inter-system exchange In 2017, imports declined compared to the previous year by 0.7 TWh. Also exports were lower by 1.0 TWh compared to 2016, which may be explained by the rapidly increasing demand for electricity, which in 2017 reached its highest level in the last 10 years at 168.1 TWh. The opening of the new interconnection LitPol Link in December 2015 between Poland and Lithuania and the Nordbalt interconnection between Lithuania and Sweden facilitated the flow of electricity not only between Poland and Lithuania but also increased the volume of electricity exchange with Sweden, treating Lithuania as

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017 a transit country. The volumes of energy flow from Ukraine also increased, which contributed to imports being just slightly lower than in 2016.

Figure 24: Annual volumes of inter-system exchange in Poland in 2008-2017 (TWh)

20 14.5 14.8 14.0 12.6 12.3 13.5 13.3 15 12.0 11.3 12.0 11.0 9.0 9.7 9.6 9.8 7.7 7.8 10 6.3 6.8 5 0.7 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Import Eksport

Source: PSE

Energy prices in neighboring countries In order to compare energy prices in Poland to those in the neighboring countries, spot market prices were used as reference levels. The price level in Poland, as compared with previous years, was significantly higher than in the neighboring countries. The highest price differences existed in relation to the Scandinavian market (+26.2%, or 32.78 PLN/MWh) and smaller differences in relation to the prices in the German market (+8.8%, i.e. 12.81 PLN/MWh). In January of the previous year and in the second half of the 4th quarter in particular, strong price hikes occurred in peak hours on the Polish market and in the neighboring countries. The second half of the 4th quarter is particularly noteworthy, as significant price drops and hikes could be observed along with higher price volatility related to the high level of wind farm energy production and the shutdowns in conventional, including nuclear, power generation in Germany and France.

Figure 25: Electricity prices on the spot market in Poland and in neighboring countries in 2017 (PLN/MWh)

Source: Bloomberg

Prices of hard coal in Poland

In recent years, the prices of hard coal have been systematically decreasing driven by global factors, that is the global reduction of prices of this raw material and its oversupply in Poland. The downward trend on global market was reversed in 2016 and very high prices of this commodity were maintained in main transshipment ports (ARA, Newcastle, Richards Bay) in 2017. The sales prices of coal for the commercial and industrial power sector on the Polish market increased only slightly as compared to the global trends. Accordingly, the negative effect of this factor on Energa SA Group’s performance was limited. 87

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Figure 26: Prices of hard coal inclusive of costs of transportation to hard coal-fired power plants in 2012- 2017 (PLN/GJ)

14 12.53

12 11.35 10.55 9.81

] 9.22 10 8.77

PLN/GJ [ 6

0 2012 2013 2014 2015 2016 2017

Source: Polski Rynek Węgla

Electricity Day-Ahead Market (DAM) in Poland The average price of electricity in the DAM in 2017 was slightly lower than the average price in 2016 (- 1.35 PLN/MWh). There is no doubt that the slight yoy decrease in energy prices in 2017 was caused by higher domestic production and the lack of extremely high temperatures in the summer. Figure 27: Energy prices in the Day-Ahead Market in 2016-2017 (PLN/MWh)

250 DAM electricity prices 209

200 169 171 170175 170 162 163 160 156 157 156 153 155 155 156 146147 151 152 150 150 140 141 140

100 (PLN/MWh)

0 styczeńJan Febluty marzecMar kwiecień Apr Maymaj czerwiec Jun lipiecJul sierpieńAug wrzesień Sep październik Oct listopad Nov grudzień Dec

2016 2017

Source: TGE

The highest average monthly price of electricity on the commodities market was recorded in October last year, where the average IRDN index reached PLN 174.52/MWh. We must note the yoy price difference in June where the significant increase in energy prices for that month in 2016 was driven by the increasing demand for energy in a period of very high temperatures. The minimum level of 141.09 PLN/MWh was reached in April 2017.

Electricity forward market in Poland To assess the forward market in Poland, the annual forward contract for delivery of base energy in the whole 2018 was used as a reference product (BASE 2018). In 2017, the contract’s price was highly volatile, reaching its minimum in February just below 160 PLN/MWh. From that moment, there is a

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017 clear upward trend on the BASE 2018 market, which pushed the December price up to slightly below 180 PLN/MWh. The trend on the forward market is particularly important from the perspective of the Group contracting process for the next year. Figure 28: Forward contract price – base with delivery in 2018

Source: TGE

Emission allowance market

In the beginning of 2017, there was a crash on the market for CO2 emission allowances, which led to a decline in prices from more than 6 EUR/ton to 4.36 EUR/ton in mid-May. From that time onward, the market made an effective attempt to increase the prices, ending the quotation of the DEC 2017 contract at 7.39 EUR/t. The upward trend, which started in May, may be explained by the acceleration of work on the reform of EU ETS (on 22 November, the EU Council supported the agreement) and an upward movement of prices of energy products (oil, coal, gas). Figure 29: Prices of emission allowances (EUA DEC 2017) in 2017

8,3

7,8

7,3

6,8

6,3

5,8 [EUR/ton]

5,3

4,8

4,3 sty 17 lut 17 mar 17 kwi 17 maj 17 cze 17 lip 17 sie 17 wrz 17 paź 17 lis 17 gru 17 Jan17 Feb17 Mar17 Apr17 May17 Jun17 Jul17 Aug17 Sep17 Oct17 Nov17 Dec17

Source: Bloomberg

Market for property rights The table below presents the average prices of property right indices listed on the Polish Power Ex- change. Table 29: Prices of property right indices listed on the Polish Power Exchange

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Substitution % fee Index value Obligation (PLN) Index (type of certificate) (%) 2016 (PLN/MWh) 2017 (PLN/MWh) with 2016 index with 2017 index

OZEX_A (green) 73.63 36.47 15.4* 300.03*

KGMX (yellow) 120.37 119.69 7.0* 120.00*

KECX (red) 10.72 10.17 23.2* 10.00*

* value of the substitution fee and redemption obligation in 2017

From the standpoint of the Group’s generation structure (high RES production) the quotations of so- called green property rights were the most important. In the first half of 2017 a systematic decrease of prices for this index was observed, which recorded the minimum level at the end of June at 22.46 PLN/MWh. This can be attributable to, among other factors, a surplus of certificates in the market. From that moment onward, the prices of RES property rights in session transactions continued to increase and ended the year at the level of 45.29 PLN/MWh.

Balancing and spot markets

The figure below presents the average daily electricity prices on the balancing market and on the spot market. Figure 30: Comparison of prices on the balancing market and spot markets (Exchange) in 2017 (PLN/MWh)

Source: PSE

The first 7 months of 2017 were peaceful on the balancing market and in terms of prices of instruments listed on the spot market; it was distorted mainly by severe fluctuations in wind power production, increasing demand for capacity and shutdowns in Poland and in the Western Europe. The average price level in 2017 on the balancing market was 167.27 PLN/MWh, compared to 164.16 PLN/MWh in 2016.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Operating reserve As of the beginning of 2014, the catalogue of system services provided to PSE was expanded to include an operating reserve. The operating reserve is made up by generation units which have free capacity not covered by energy sales contracts. Figure 31: Prices and generating capacity constituting operating reserve in 2017

Source: PSE In 2017, the operating reserve service was continued, while its level changed slightly compared to the previous year. The reference price was raised to 41.79 PLN/MWh and the budget rose by 11% compared to 2016.

4.3. Regulatory environment

Regulatory issues pending and completed in 2017

Table 30: List of legal acts affecting the Group

Legal act Purpose of changes Opportunities Threats

(1) Strive to (i) keep the current exemptions from new energy installation charges, or (ii) their significant reduction based on fair pricing arrangements during consultations (1) Possible technical and and meetings; (iii) lack organizational difficulties of fees or the rates with implementing the act The Water Implementation of the Water should be statutory ra- (measurement devices, Law Act of 20 Framework Directive re- ther than based on a developing contacts with July 2017 quirements in respect to the governmental regula- the new water administra- principles of water manage- tion. tion authority, i.e. Polish ment. (2) Rationalization and Water). stimulation of investments in the area of water management in Poland.

implementation of the Framework Water Di- rective to the Polish legal system Capacity Mar- (1) Risk that the Act may be notified for the second ket Act of 8 Ensuring support for imple- (1) Ensures long-term time to the EC following 91

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December mentation of investment energy security of Po- the entry into force of 2017* projects that increase the land the so-called Winter stability and security of the (2) Effect of incentives to Package and the need National Power System. build new and modern- to implement new re- ize existing generation quirements of EU law in installations. this act. Modernization and (2) No guarantee that the construction of new beneficiaries of the ca- electricity sources to pacity auctions for 2018- stabilize the National 2019 will retain acquired Power System and uti- rights. lize Polish resources of energy fuels. (3) Ensuring the possibility of executing the construction of the new Ostrołęka C power plant on market terms. Electromobility (1) Opportunity for dynamic growth of the and Alterna- Creation of the legal frame- (1) Competition with entities electromobility busi- tive Fuels Act work for the implementation that have well-developed ness (cars, municipal of 11 January of the government electro- technological and capital transport, access in- mobility and alternative fuel resources. The pace of 2018* frastructure) in which infrastructure development implementation of the le- the Energa SA Group programs gal changes is slow. has considerable experience * Asterisk marks the acts where the legislative process was formally completed in early 2018 (signed by the President and published in the Journal of Laws) but the content of these Acts did not change.

Regulatory issues in progress in 2017 and continuing in 2018

Table 31: List of legal acts affecting the Group

Legal act Purpose of changes Opportunities Threats Maintenance of EU’s competitiveness in the period of transformation of energy markets towards clean energy, the so- called Winter Package. Plans to reduce coal subsidies, to increase the energy efficiency (1) Risk that the Act may be notified for target to 30% and to reduce (1) Implementation of the second time to CO2 emissions by 40% before consistent regula- the EC following the 2030. The new regulations re- tions to improve entry into force of EU’s energy secu- Clean Energy for All quire approval by the EU Coun- the so-called Winter rity Europeans legislative cil and the European Parlia- Package and the (2) Establishment of a proposals, so-called ment. The Winter Package also need to implement Modernization new requirements of Winter Package. contains solutions that support Fund will enable fi- EU law in this act. COM/2016/0860 final the development of decentral- nancing of renew-

ized electricity production and able energy pro- (2) No guarantee that its storage to develop “civic duction projects the beneficiaries of (such as the Lower energy”. The important change the capacity auctions Vistula Cascade) for the energy markets in the EU for 2018-2019 will re- is the abolishment of the “priori- tain acquired rights. ty dispatch”, i.e. priority of access to the grid for RES before conventional sources. The amendment will come into effect after 2020.

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Work on amendments Change of the rules of financing (1) Implementation of (1) Absence of changes to the Energy Law Act street lighting in Poland. consistent princi- will result in the con- ples of financing tinuation of different street lighting. Def- rules of cooperation inition of the rules in different parts of on the develop- Poland. Risk that ment of lighting lighting assets may assets. be communalized by local government units. Government’s bill to Ensuring good regulatory and (1) Clarification of (1) Protruded proceed- amend the RES Act business environment for: prop- ambiguous provi- ings on this legisla- and Certain Other Acts erty tax payable on Wind Power sions (inconsistent tion. Possible colli- Plants and the possibility of jurisprudence of sion with EU legisla- developing RES with the as- Voivodship Courts tion, among others sumption of higher profitability. of Administration) the Winter Package. regarding the taxation of wind power plants. Develop- ment of RES with the possibility of the investments being based on financing mechanisms that ensure profitability of the projects. Government’s bill to The bill concerns the changes (1) Possibility of de- (1) Protruded proceed- amend the Financial that need to be introduced to the veloping sales of ings on this legisla- Instruments Trading national legal system in connec- new products. tion. Act and Certain Other tion with the entry into force of (2) Achievement of Acts European capital market regula- competitive ad- tions and will enable the appli- vantage through cation of EU regulations con- rapid implementa- cerning markets in financial tion of EU legisla- instruments (MiFID2 Directive tion. and MiFIR Regulation). The new solutions are designed to increase the competitiveness and efficiency of financial markets in Poland and the European Union and to increase safety of their participants.

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4.4. Energa vs. the industry The Energa SA Group is one of the four largest vertically integrated energy groups operating in Poland. The companies are separated geographically, in terms of the areas on which they conduct their electricity distribution activity. Energa’s distribution area covers northern and central Poland.

Figure 32: Distribution area of the main power-generating companies

In distribution, Energa SA Group ranks third behind the PGE and Tauron Groups in terms of the regulatory asset base, the volume of electricity supplied, as well as grid length and the number of customers. Thanks to intensive modernization efforts, the quality ratios of Energa’s networks are among the best in Poland. Among the largest energy companies, only Tauron achieves better SAIDI and SAIFI, which is a consequence of greater customer density in the south-western part of Poland.

Due to historical conditions, the range of the distribution grid translates into the number of customers in the sales area. In this respect Energa also ranks third. The volume of sales to end-users is more diverse than the number of customers and is dependent on the sales strategy towards the largest customers. In the first three quarters of 2017, Energa was ranked third in terms of sales volume behind PGE and Tauron, slightly ahead of Enea.

Compared with other companies, Energa has a small share in conventional energy generation. The Group has one system heat-generating unit with the maximum capacity of 681 MW (Ostrołęka B Pow- er Plant) This is significantly less than in the case of the remaining companies, among which PGE has the highest maximum capacity. The situation is different in the renewable energy area. In terms of production from renewable energy sources, Energa is at a level similar to the other energy groups.

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Figure 33: Comparison of operational data of Energa and other energy groups, Q1-Q3 2017

Electricity sales to end-users (TWh) Generation of electricity from RES (GWh)

35 1600

30 1400 1200 25 1000 20 800

TWh 15 GWh 600 10 Distribution (TWh) 400 SAIDI (min) 5 200 \ 40 350 0 0 35 PGE ENERGA Tauron ENEA 300 PGE ENERGA Tauron ENEA 30 250 25 200

20 min TWh 150 15

10 100 50 5 0 0 PGE ENERGA Tauron ENEA PGE ENERGA Tauron ENEA

Number of DSO’s customers (thous.)* Length of distribution lines, including connections (thous. km)* 6000 500 5000 450 400 4000 350 300 3000 250

thous. 200 2000 thous. km 150 100 1000 50 0 0 PGE ENERGA Tauron ENEA PGE ENERGA Tauron ENEA

*PTPiREE figures at the end of 2016

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

5. SHARES AND SHAREHOLDING STRUCTURE

5.1. Energa's shareholding structure

Table 32: Issuer's shares by series and types

Series Type of shares Shares (%) Votes (%)

AA ordinary bearer shares 269,139,114 65.00 269,139,114 48.15

registered preferred BB 144,928,000 35.00 289,856,000 51.85 shares*

TOTAL 414,067,114 100.00 558,995,114 100.00

* One preferred share entitles its holder to 2 votes at the General Meeting. These shares are owned by the State Treasury.

Table 33: Shareholding structure of Energa as at 9 November 2017, 31 December 2017 and the date of preparing these financial statements

Company's shareholding structure Shareholder’s name Shares (%) Votes (%)

State Treasury* 213,326,317 51.52 358,254,317 64.09

others 200,740,797 48.48 200,740,797 35.91

TOTAL 414,067,114 100.00 558,995,114 100.00

* The State Treasury holds 144,928,000 series BB registered shares preferred in terms of voting at the General Meeting in such a way that one share entitles the holder to 2 votes at the General Meeting.

Figure 34: Shareholding structure of Energa and structure of votes at the General Meeting as at 9 Novem- ber 2017, 31 December 2017 and the date of preparing these financial statements

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The Management Board is unaware of existence of any agreements (including any agreements which may have been concluded after the balance sheet date) which may result in future changes to the proportions of shares held by the current shareholders and bondholders. Also, the Issuer is not aware of any significant agreements concluded between shareholders. The Company does not have employee stock ownership programs. In 2017, the Company and subsidiaries did not purchase any treasury stock of Energa. As at 31 De- cember 2017, the Company and subsidiaries did not hold shares in Energa.

5.1. Company stock prices on the Warsaw Stock Exchange

Table 34: Data for Energa stock as at 31 December 2017

Data Value

Issue price PLN 17.00

Number of shares 414,067,114

Stock price at the end of the period PLN 12.73

Capitalization at the end of the period PLN 5.3 bn

Minimum at closing in Q4 PLN 11.50

Maximum at closing in Q4 PLN 13.26

Minimum at closing in 2017 PLN 8.89

Maximum at closing in 2017 PLN 14.38

Minimum in 2017 PLN 8.75

Maximum in 2017 PLN 14.38

Average trading value PLN 14.6 m

Average trading volume 1,279.6 thousand shares

Average number of trades 2.2 thousand

Source: Proprietary material based on data from www.infostrefa.com

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017

Figure 35: Energa SA stock price, in the period from IPO (i.e. 11 December 2013) to 31 December 2017

Source: Proprietary material based on data from infostrefa.com

Figure 36: Changes in Energa stock prices in comparison with changes in WIG, WIG20 and WIG-ENERGIA indices

70%

50%

30%

10%

-10%

-30%

-50%

-70% XII I II III IV V VI VII VIII IX X XI XII I II III IV V VI VII VIII IX X XI XII I II III IV V VI VII VIII IX X XI XII I II III IV V VI VII VIII IX X XI XII 2013 2014 2015 2016 2017

ENERGA WIG20 WIG WIG-ENERGIA

Source: Proprietary material based on data from infostrefa.com

As at 31 December 2017 Energa SA was listed in the following stock exchange indices: WIG, WIG20, WIG30, WIG-Energia, WIGdiv, WIG-Poland, RESPECT Index, FTSE All World, FTSE4Good Emerg- ing Index and MSCI Global Sustainability Indexes.

5.2. Investor relations in Energa SA

The investor relations team executes tasks aimed at boosting the effectiveness of communication in the capital market. In 2017 these were, the following activities, among others: (1) Publication of 41 current reports and 4 periodic reports, (2) More than 130 individual meetings with institutional investors: investor conferences or non- deal roadshows, (3) Thematic workshops on the Group’s activities for brokerage house analysts, (4) Online publication of the 2016 annual report, (5) 3 results conferences accompanied by online broadcast, (6) Cooperation with the Individual Investors Association to improve communication with individual investors, including participation in the Wall Street Conference in Karpacz, (7) Investors chat with a Management Board members (addressed mainly to individual investors),

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(8) Constant communication with analysts issuing recommendations on companies to their customers. In its activity, the Investor Relations Team uses a bilingual website, updated on an ongoing basis to include key information about the Group in the form of, among other things, quarterly results presenta- tions or factual summaries, the so-called factsheets. Market participants may familiarize themselves with the rules applied by the Company in investor relations - the website includes the Information Poli- cy.

5.3. Recommendations for the Company’s stock

In 2017, the analysts of brokerage houses and investment banks issued 15 recommendations for En- erga SA shares. A list of the recommendations can be found on the Company’s Investor Relations website.

Figure 37: Recommendations issued for Energa’s shares in 2017

5 Buy recommendations

15 4 Hold recommendations Analyst recommenda- 2 Neutral recommendations tions in 2017 2 Accumulate recommendations 2 Sell recommendations

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6. REPRESENTATION ON THE APPLICATION OF CORPO- RATE GOVERNANCE PRINCIPLES

In 2017, the Company and its authorities are subject to corporate governance rules, which are described in the set adopted by Resolution No. 26/1413/2015 of the Supervisory Board of the Warsaw Stock Exchange on 13 October 2015 as “Code of Best Practice for WSE Listed Companies 2016” (“Best Practice”, “DPSN”) and were posted on the Warsaw Stock Exchange's website and the Com- pany's website in the "Investor Relations" tab.

6.1. Corporate governance principles not applied in the Company

On 7 June 2017, Energa SA published information through the EBI system that the Company does not apply certain principles set out in the Best Practice, that is: - Principle III.Z.3 – the Company does not meet the requirement of standard 1110-1 only in respect to the organizational independence, that is appointment and dismissal of an Internal Audit Head and approval and changes of his/her remuneration. The standard mentioned above is defined in the International Standards for the Professional Practice of Internal Auditing by the Institute of Internal Auditors. Additionally the Internal Audit Head is not functionally subordinated to the Supervisory Board. - Principle V.Z.6 – The Company has implemented a Code of Ethics which lays down a number of rules that define the behaviors which the Company intends to follow in its relations with the external environment and within the Energa SA Group. The Company is of the position that issues related to the identification, prevention and resolution of conflicts of interest should also be addressed in its internal regulations. Accordingly, the Company will take steps to ensure that such provisions are included in its corporate documents. Since no decision on the publication of projections has been made, in light of the Finance Minister’s regulation on current and periodic information of 19 February 2009, detailed principle I.Z.1.10 was also not be applied.

6.2. Major shareholders

Information on the shareholding structure is presented in chapter 5.1. Energa SA’s shareholding structure of these financial statements.

6.3. Holders of securities giving special rights of control and description of these rights

According to the information presented in the previous sub-clause, the State Treasury is the holder of the majority block of shares and votes at the General Meeting. It held 144,928,000 series BB registered shares preferred in terms of voting at the General Meeting in such manner that one series BB share entitles the holder to two votes at the General Meeting. In addition, the State Treasury has the personal right to appoint and dismiss some members of the Company's Supervisory Board, and name the Supervisory Board Chairman, on the terms and conditions set forth in the Company’s Articles of Association. Detailed information in that regard is included in the sub-section entitled Rules for appointing and dismissing Supervisory Board members. At the same time, according to the Company’s Articles of Association, the State Treasury has the right to receive: 1) information on the Company and its Group in the form of a quarterly report in accordance with the current guidelines, subject to relevant provisions on disclosure of confidential information, 2) copies of announcements, which must be published in the Court and Economic Monitor,

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3) set of documents, which are to be examined at the Annual General Meeting pursuant to Article 395 § 2 of the Commercial Company Code ("CCC"), i.e. financial statements (consolidated financial statements of the Group), Management Board's report on the Company's activity (Man- agement Board's report on the activity of the Group) for the previous financial year, statutory auditor's opinion and report from the audit of the financial statements (consolidated financial statements of the Group), Supervisory Board's report, and the Management Board's motion on distribution of profit and coverage of loss, 4) consolidated version of the Articles of Association, within four weeks from the date of entering the amendments to the Articles of Association in the business register.

6.4. Restrictions regarding the exercise of voting rights

Provisions of § 27 of the Company’s Articles of Association contain restrictions on the voting rights by shareholders, users and pledgees holding shares giving more than 10% of total number of votes at the General Meeting, as at the date of holding the General Meeting. For the purposes of restricting the voting right, the votes of the shareholders connected by a parent or subsidiary relationship within the meaning of the following provisions are also accumulated by adding the votes held by those shareholders. If as a result of accumulation it becomes necessary to restrict the voting rights, this will be done by pro rata reduction of the votes of all shareholders connected by a parent or subsidiary relationship, and the votes of the shareholder with the largest bundle of shares will be rounded up or down. If it is not possible to round up or down because two or more shareholders hold the same number of votes, the Management Board will randomly select a shareholder, whose votes will be rounded up or down. The reduction cannot lead to depriving the shareholder of the voting rights in their entirety. The provisions governing the restriction on the voting rights do not apply to the State Treasury, which, pursuant to the Articles of Association, on the date of the restriction had entitlement under shares corresponding to more than 10% of the overall number of votes in the Company. Moreover, the foregoing restrictions do not contravene the requirements concerning the purchase of significant blocks of shares according to the Act on Public Offerings and the Terms and Conditions for Introducing Financial Instruments into an Organized Trading System and on Public Companies of 29 July 2005 (i.e. Journal of Laws of 2013, item 1382) (hereinafter referred to as the “Act on Public Offer- ing”). In a similar fashion, these provisions do not apply to the determination of obligations of the entities, which are purchasing or are to purchase significant blocks of shares. In addition to the foregoing mechanism and those described in the generally applicable provisions of law, including the Commercial Company Code, there are no additional mechanisms that would specif- ically restrict the exercise of voting rights.

6.5. Restrictions on the transfer of ownership title to securities

As at the date of preparation of this Report, there are no restrictions on the transfer of title to Compa- ny's securities.

6.6. Rules for amending the Company’s Articles of Association

The Company’s Articles of Association are amended as set forth in the Commercial Company Code; in particular: Articles of Association are amended by way of a resolution adopted by the General Meet- ing by the majority of three quarters of the votes and then must be entered in the business register. The Company’s General Meeting may authorize the Supervisory Board to agree upon the consolidated version of the Company's amended Articles of Association or introduce such other editorial changes as may be specified in a resolution of the General Meeting.

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Pursuant to § 27 section 8 and 9 of the Company’s Articles of Association: 1) resolutions adopted by the General Meeting (which also require amendments to the Articles of Association) on the following subjects: a) introduction of shares of various types, establishment of shares of a new type, b) change of the preference of shares, c) split-up of the Company, except for split-up through spinning-off, d) moving of the Company’s registered office, e) transformation of the Company, 2) reduction of share capital through redemption of part of shares unless the reduction takes place simultaneously with increase of share capital, require the majority of four fifth of the votes cast. a General Meeting resolution on a significant change of the Company's line of business may be adopted without buying up shares held by shareholders who oppose such change. On 26 June 2017, the Annual General Meeting of Energa SA among others amended the wording of the Company’s Articles of Association, which remains in effect up to this date.

6.7. Company's corporate bodies

General Meeting Rules of operation of the Company’s General Meeting are regulated by the Commercial Company Code and the Company’s Articles of Association. Additional issues related to the course of a General Meeting are defined in the General Meeting Bylaws (available on the Company’s corporate website). The Company’s shareholders also have rights related to the General Meeting, which arise from the applicable provisions of law. Manner of convening the General Meeting The General Meeting is convened through announcement made on the Company's website and in the manner specified for publication of current information according to the Act on Public Offering, i.e. in the form of current reports. The announcement should be made at least twenty six days before the date of the General Meeting, according to the regulations set forth in the Commercial Company Code. The Management Board convenes the General Meeting according to the Articles of Association. 1) at its own initiative, 2) at the written request the Supervisory Board, at the written request of a shareholder or shareholders representing at least one twentieth of the share capital or 3) at the written request of the State Treasury as long as the State Treasury remains a shareholder in the Company. By principle, the properly convened General Meeting is valid irrespective of the number of shares represented thereat. The General Meeting may be held in the Company’s registered office (in Gdańsk) or in Warsaw. Course of the General Meeting The Supervisory Board Chairman or Deputy Chairman and if absent - the President of the Manage- ment Board or a person appointed by the Management Board opens the General Meeting. Then the Chairperson of the General Meeting is elected from among the persons authorized to participate in the General Meeting, in accordance with the provisions of the General Meeting Bylaws. A resolution in matters not included in the agenda of the General Meeting may not be adopted, unless the Company's entire share capital is represented at the General Meeting and none of the persons present raises an objection to adopt a resolution. Votes shall be cast in an open ballot. Secret ballot will be ordered during elections and when voting on motions to dismiss members of the Company’s authorities or liquidators to hold them liable as well as

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WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017 in the case of personal matters. Furthermore, a secret ballot should be ordered at the request of at least one shareholder from among those present or represented at the General Meeting. Pursuant to the Company’s Articles of Association, the voting rights of the shareholders and the voting rights of the users and pledgees of shares is subject to restrictions described in detail in item Re- strictions regarding the exercise of voting rights. Resolutions of the General Meeting are adopted with the absolute majority of votes cast, unless the Commercial Company Code or the Articles of Association provide otherwise. The General Meeting may request an adjournment in the meeting (by a two-thirds majority of votes) which may not last more than thirty days in aggregate. Powers of the General Meeting The most important powers of the General Meeting defined by the Commercial Company Code and the Articles of Association include: 1) reviewing and approving the Management Board report on the Company’s activity and the financial statements for the completed financial year; 2) granting a discharge to members of the Company’s corporate bodies on the performance of their duties, 3) distributing profit or covering a loss, 4) changing the Company’s line of business, 5) amending the Company’s Articles of Association, 6) increasing or decreasing the Company's share capital, 7) merging, splitting up or transforming the Company, 8) dissolving or liquidating the Company, 9) issuing convertible bonds or bonds with a pre-emptive right, and on issuing subscription warrants, 10) selling or leasing an enterprise or an organized part thereof and establishing a limited right in rem thereon, 11) creating, using and liquidating the Company’s capitals and funds, 12) appointing or dismissing Supervisory Board members and setting their compensation levels, 13) depriving current Company shareholders of their pre-emptive rights, in whole or in part, 14) allowing the Company to purchase its treasury stock and authorizing the Management Board to purchase treasury stock for retirement, 15) allowing the Company to enter into a credit facility, loan, surety agreement or some other similar agreement with a Management Board Member, a Supervisory Board member, a general proxy or a liquidator or in favor of any such person, 16) purchasing real property, perpetual usufruct or share in real property or in perpetual usufruct, worth more than PLN 20 m, 17) purchasing non-current assets, except for real estate or right of perpetual usufruct, and except for purchasing and subscribing for shares in other companies, worth more than PLN 20 m, 18) disposing of non-current assets, including real estate, right of perpetual usufruct, or share in real estate or right of perpetual usufruct, except for shares in other companies, worth more than PLN 20 m; 19) changing the record date, wetting the dividend date or spreading the payment of dividend into installments. One General Meeting of the Company was held in 2017, i.e. Annual General Meeting held on 26 June 2017. The wording of resolutions adopted during that Meeting was published in the Current Report No. 30/2017 of 27 June 2017.

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Supervisory Board Composition In the 2017 financial year and until the date of this Report the Energa SA Supervisory Board operated in the following composition: 1) in the period from 1 January 2017 to 10 February 2017: a) Paula Ziemiecka-Księżak – Supervisory Board Chairwoman, b) Zbigniew Wtulich – Supervisory Board Deputy Chairman, c) Agnieszka Terlikowska-Kulesza – Supervisory Board Secretary, d) Andrzej Powałowski – Supervisory Board Member, e) Marek Szczepaniec – Supervisory Board Member, f) Maciej Żółtkiewicz – Supervisory Board Member, g) Jacek Kościelniak – Supervisory Board Member, 2) in the period from 10 February 2017 to 26 June 2017: a) Paula Ziemiecka-Księżak – Supervisory Board Chairwoman, b) Zbigniew Wtulich – Supervisory Board Deputy Chairman, c) Agnieszka Terlikowska-Kulesza – Supervisory Board Secretary, d) Andrzej Powałowski – Supervisory Board Member, e) Marek Szczepaniec – Supervisory Board Member, f) Maciej Żółtkiewicz – Supervisory Board Member, 3) in the period from 26 June 2017 to 22 August 2017: a) Paula Ziemiecka-Księżak – Supervisory Board Chairwoman, b) Zbigniew Wtulich – Supervisory Board Member, c) Agnieszka Terlikowska-Kulesza – Supervisory Board Member, d) Andrzej Powałowski – Supervisory Board Member, e) Marek Szczepaniec – Supervisory Board Member, f) Maciej Żółtkiewicz – Supervisory Board Member, 4) in the period from 22 August 2017 till the date of preparing this Report: a) Paula Ziemiecka-Księżak – Supervisory Board Chairwoman, b) Zbigniew Wtulich – Supervisory Board Deputy Chairman, c) Agnieszka Terlikowska-Kulesza – Supervisory Board Secretary, d) Andrzej Powałowski – Supervisory Board Member, e) Marek Szczepaniec – Supervisory Board member, f) Maciej Żółtkiewicz – Supervisory Board Member. On 17 January 2017, Mr. Jacek Kościelniak was delegated by the Company’s Supervisory Board to act temporarily in the capacity of a Management Board Member responsible for managing the Com- pany for a period of up to three months from the date of delegation. Then, in connection with his appointment to the Company’s Management Board, Mr. Jacek Kościelniak tendered his resignation from membership in the Supervisory Board as of 10 February 2017. In connection with the end of the Supervisory Board’s 4rd Term of Office, on 26 June 2017 the Annual General Meeting of Energa SA set the number of Supervisory Board Members and appointed three Supervisory Board members for the 5th Term of Office: Andrzej Powałowski, Marek Szczepaniec and Maciej Żółtkiewicz. By the representation from the Energy Minister made by the power of its personal rights, the following were appointed to the Supervisory Board on 26 June 2017: Paula Ziemiecka-Księżak (as Supervisory Board Chairwoman), Zbigniew Wtulich and Agnieszka Terlikowska-Kulesza. Mr. Marek Szczepaniec and Mr. Andrzej Powałowski satisfy the criteria envisaged for independent supervisory board members within the meaning of the Commission Recommendation of 15 February 2005 on the role of executive or supervisory directors of listed companies and on the committees of the (supervisory) board, taking into account the requirements following from the Code of Best Practice for WSE Listed Companies, and also for independent Audit Committee members within the meaning

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WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017 of the Act of 11 May 2017 on Statutory Auditors, Audit Firms and Public Oversight (Journal of Laws No. 2017, Item 1089). The current term of the Company’s Supervisory Board ends on 26 June 2020. Paula Ziemiecka-Księżak graduated from the Leon Koźmiński Entrepreneurship and Management College. In 1996 employed in the Ministry of the State Treasury. She has worked in the oversight departments for State Treasury-owned companies. She supervised companies from the road transportation, marine shipping and power sectors. She currently is a sub-department head in the Department of Supervision and Owner Policy at the Ministry of Energy. Her scope of duties comprises supervision of overall economic and legal issues associated with the activity of State Treasury-owned companies from, among others, the black coal mining and power sector. In addition, she gathered experience associated with corporate governance since 2002 discharging functions in the supervisory bodies of such companies as SIP-MOT SA in Zamość, PKS Ostrołęka SA and Opakomet SA with its registered office in Kraków and PERN SA with its registered office in Płock. She has been acting in the capacity of the Energa SA Supervisory Board Chairperson since 12 November 2015. Agnieszka Terlikowska-Kulesza is a graduate of the Agricultural Faculty of the Warsaw University of Life Sciences and post-graduate studies in finance and European economic and legal relations at Warsaw School of Economics. In February 1997 she joined the team of the State Treasury Ministry at the Commercialization and direct Privatization Department, the Tender Privatization Team. From Sep- tember 1997 to June 2002 she worked for the Privatization Agency in the Tender Team as chief specialist and then as Section Manager. During that period, she participated in the organization of tenders for the selection of entities performing pre-privatization analyses of companies with State Treasury holdings, she oversaw and executed privatization projects, conducted mainly through the invitation to tender procedure, she verified economic and financial analyses and valuations of companies with State Treasury holdings slated for privatization. From July 2002 to June 2016, she was chief specialist in State Treasury corporate supervision departments at the State Treasury Ministry. She supervised companies from the ceramic, construction and motorized transportation industries. In 2009-2016 she supervised chemical sector companies. Since July 2016, she has been chief specialist at the Depart- ment of Supervision and Owner Policy at the Energy Ministry, where she is overseeing mining sector companies. She gathered additional experience by serving from 2001 to 2016 on the supervisory bodies of companies with State Treasury holdings, such as: “Chłodnia Szczecińska” Sp. z o.o., Zakłady Ceramiczne “Bolesławiec” w Bolesławcu Sp. z o.o., Przedsiębiorstwo Komunikacji Samochodowej w Białymstoku S.A., Przedsiębiorstwo Robót Drogowych Sp. o.o. in Mielec, Przedsiębiorstwo Elektryfi- kacji i Robót Instalacyjnych “ELTOR-Warszawa” Sp. z o.o. in Wołomin.

Zbigniew Wtulich graduated from the Faculty of Drainage and Water Engineering at the Warsaw University of Life Sciences. He started his professional career in 1984 as a Designer Assistant in the Water Drainage Design Department. Then he became a construction engineer in the Regional Drain- age Projects Enterprise (in October 1984). He held this position until April 1988. From 1988 to 1991 he worked as an engineer in an international company doing business as “Amak” (construction industry) and from 1993 to 1997 he was employed by the State Treasury Agricultural Property Agency. Before appointment to the Company’s Supervisory Board, Zbigniew Wtulich served as a chief specialist at the State Treasury Department of Assets Records at the State Treasury Ministry (1997-1998), a chief specialist - team coordinator at the State Treasury Restitution and Compensation Department at the State Treasury Ministry (1998-2001), sub-department head in the Restitution and Equity Allocation Department at the State Treasury Ministry (2002-2006), sub-department head in the Department of Records, Restitution, Compensation and Equity Allocation (2006-2010). In 2010-2017 he was a sub- department head in the Property Department at the State Treasury. He also served as a Supervisory Board member in Zakłady Tworzyw Sztucznych “GAMRAT” SA (2011) and in Przedsiębiorstwo Gos- podarki Wodnej i Rekultywacji S.A. (2002-2009). Currently, the Minister's Advisor in the Department of Forestry in the Ministry of the Environment. Maciej Żółtkiewicz graduated from the Electrical Department of the Częstochowa University of Tech- nology and completed post-graduate studies at the European University of Law and Administration in 107

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Warsaw. He started his career in 1979 as a technical specialist in the Eastern Power Region in Ra- dom. He occupied this position until 1988. In 1988 – 1999 he was employed in Elektrociepłownia “Ra- dom” S.A. as an Automation and Measurement Specialist, Corporate Governance and Restructuring Department Manager, Chief Specialist on Organizational and Employee Matters and Management Board Member. In 1999-2000 he was a Management Board Member of Zakład Maszyn do Szycia “Łucznik” Sp. z o.o. in Radom. In 2001 – 2005 he discharged the following functions: Receiver of “Putis” in Milanówek, Privatization Proxy of “Transdrog” in Warsaw, Vice-President of the Management Board of P.W. “Mediainstal” Sp. z o.o. in Radom. In 2006 – 2008 he discharged the function of Presi- dent of the Management Board of Fabryka Łączników “Radom” S.A. From 2009 he was involved in internal control and audit in RTBS “Administrator” Sp. z o.o. in Radom, and from 2013 in “Radpec” S.A. in Radom. He gained experience related to overseeing the operations of State Treasury-owned companies by sitting in the supervisory boards of companies such as: Elektrociepłownia “Radom” S.A., Elektrownia Wodna Żarnowiec S.A., Fabryka Łączników “Radom” S.A. In 2009 – 2015 he sat in the supervisory board of PPUH “Radkom” Sp. z o.o. in Radom. Marek Szczepaniec graduated from the University of Gdańsk. Currently, he is a professor at the Uni- versity of Gdańsk (from 2008) and professor at the Kazimierz Wielki University in Bydgoszcz (from 2014). In 1993-2001 he worked as a consultant at the Polish-American Small Business Advisory Foundation. In 1992-2006 he was a consultant of the B.P.S. Consultants Poland. From 2006 he has been a co-owner and vice-president of a research firm called Qualifact. He specializes in research on entrepreneurship, human capital, economic growth, behavioral finance and corporate marketing strategies. He is the author of over 150 research reports, scientific articles and other publications. The following companies from the banking sector, among others, used his reports and studies: PKO Bank Polski, BZ WBK, Credit Agricole, BNP Paribas, Pekao SA, ING, mBank; from the insurance sector: PZU, Warta, Compensa, Allianz, Aviva; from the fuel sector: LOTOS Group, PKN Orlen, BP, Total. He managed market research for Elektrociepłownia Wybrzeże and the Energa SA Group and is the author of a study entitled “Energy company customer service models. Global trends”. Andrzej Powałowski studied from 1969 to 1973 at the Faculty of Law and Administration in the Nico- laus Copernicus University in Toruń. In 1973 he started to work as an assistant in the National Econ- omy Management Law Section at the Faculty of Law and Administration in the University of Gdańsk. In 1980 he obtained the title of doctor of legal sciences and was employed at the position of assistant professor. From 1992 he worked on the position of senior lecturer at the Public Economic Law Faculty and from 1994 at the Public Economic Law and Environmental Protection Faculty. In 2009 he obtained the title of habilitated doctor of legal sciences in the area of public economic law. In 2010 he was nom- inated to the position of associate professor of Gdańsk University. At the Law and Administration Fac- ulty in the University of Gdańsk he is currently the head of the Public Economic Law Section and head of the post-graduate study programs entitled “Legal conditions for conduct of economic activity” and “Public procurement law and system”. He is also a lecturer at the Off-Site Faculty of the Gdańsk School of Higher Education in Olsztyn. He was employed as an associate professor of the Baltic Col- lege of the Humanities and the Real Estate Management College. Author of numerous publications in the form of books and articles for scientific magazines; he is a member of the governing bodies of non- governmental organizations and scientific periodicals. He worked as a legal advisor and since 2010 he has been an advocate in his own law firm in Gdańsk. He discharges the function of arbitrator at the International Court of Arbitration at the Polish Chamber of Maritime Commerce. None of the Company’s aforementioned Supervisory Board Members is engaged in any business competitive to that of Energa SA, participates in a competitive entity as a partner in a civil law company or partnership or as a member of a corporate authority of a joint stock or limited liability company and does not participate in any other competitive legal person as a member of its corporate authority, or is listed in the Register of Insolvent Debtors kept pursuant to the National Court Register Act.

Supervisory Board’s powers

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The Supervisory Board’s powers include in particular: 1) evaluation of the Management Board's reports on the Company's activity and the Group’s activity and the financial statements for the previous financial year and the Group’s consolidated financial statements in terms of their compliance with the accounting ledgers and documents as well as the actual state of affairs, and the evaluation of the Management Board’s motion on the distribution of retained earnings, 2) submitting written reports to the General Meeting on the results of the activities referred to in item 1, 3) submitting the reports in connection with exercising the supervision over the Management Board's execution of investments, and the supervision over the correctness and effectiveness of spending funds on the investments, 4) preparing, at least once a year, along with a report from assessment of the annual financial statements and the consolidated financial statements of the Group, the Supervisory Board's opinion on the issue of economic justification for the Company's capital exposure to other commercial companies, made in the given financial year, 5) once a year preparing and presenting to the Annual General Meeting a concise assessment of the Company’s standing, including an evaluation of the internal audit system and the significant risk management system, 6) reviewing and opining the issues to be included in the resolutions of the General Meeting, 7) selecting a statutory auditor to audit the financial statements, 8) approving the strategy of the Company and its Group, 9) approving the annual/long-term material and financial plans and investing activity plans of the Company and its Group, 10) adopting bylaws defining in detail the Supervisory Board's functioning, 11) approving the Management Board bylaws, 12) approving the organizational bylaws of the Company's enterprise, 13) approving the rules for sponsorship activity conducted by the Company, 14) setting the rules and remuneration of the President and Members of the Management Board, subject to mandatory provisions of law, 15) delegating Supervisory Board members to temporarily perform the duties of Management Board Members who cannot perform their activities and setting their remuneration, 16) determining the manner in which the Company votes at general meetings of its subsidiaries. A detailed description of the Supervisory Board’s powers is included in the Company’s Articles of As- sociation posted on the corporate website. Operation of the Supervisory Board The Supervisory Board exercises permanent supervision over the Company’s activity, in accordance with the Commercial Company Code and the Company’s Articles of Association. The Supervisory Board Bylaws posted on the corporate website specify the detailed procedure for how it functions. The Supervisory Board performs its activities as a collective body. Supervisory Board members participate in meetings, exercise their rights and perform their duties in person. Supervisory Board Members are obligated to maintain confidentiality of information related to the Company’s activity, which they obtained when discharging their function or otherwise. By principle, the Supervisory Board adopts resolutions at its meetings, which are held at least once every two months. The Chairman or Deputy Chairman convenes Supervisory Board meetings presenting a detailed agenda. A meeting should also be convened at the request of any Supervisory Board member or at the request of the Management Board. Supervisory Board meetings are chaired by the Supervisory Board Chairman, and during his/her absence by the Supervisory Board Deputy Chairman.

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Supervisory Board members are allowed to participate in the meeting and vote on resolutions adopted during that meeting using remote means of direct communication, such as conference calls and video conference calls, with the reservation that there is at least one Supervisory Board member present at the location specified by the person convening the meeting and there is a technical possibility of ensuring a secure connection. Pursuant to the Articles of Association, the Supervisory Board adopts resolutions in matters envisaged by the agenda if at least one-half of its members is in attendance at the meeting and all members have been invited to the meeting. A change can be made to the proposed agenda if all Supervisory Board members are in attendance at the meeting and nobody raises an objection against the agenda. A matter not included in the agenda of the meeting, should be included in the agenda of the next meeting. The Supervisory Board may adopt resolutions outside of meetings, by following a written procedure or via remote means of direct communication, including in particular via e-mail. Such a resolution will be valid if all Supervisory Board members have been notified of the content of the draft resolution. Supervisory Board resolutions are adopted with the absolute majority of votes, and if the number of votes is equal, the vote cast by the Chairman will be decisive. By principle, the Supervisory Board adopts resolutions in an open ballot, however a secret ballot will be ordered on the motion of a Supervisory Board member and in personal matters. If secret ballot is ordered, it will not be possible to adopt resolutions by following a written procedure or via remote means of direct communication. The Supervisory Board may, for important reasons, delegate its specific members to perform specific oversight functions individually. The Supervisory Board may delegate its members for a period no longer than three months, to perform temporarily the duties of Management Board Members, who were dismissed, resigned or who cannot perform their duties for any other reason; A detailed description of the Supervisory Board’s activity in the past financial year is provided in the Supervisory Board activity report submitted each year to the General Meeting and published on the Company’s corporate website. The Supervisory Board shall elect, from among its members, an Audit Committee and a Nomination and Compensation Committee. In the period from 1 January to 31 December 2017, the Energa SA Supervisory Board held 14 meetings and adopted 124 resolutions. Four Supervisory Board meetings were held in 2017 with not all members in attendance. In each case Supervisory Board Members made a decisions in the form of a resolution to justify absences on the basis of information provided by the Supervisory Board Members on the reasons for their absences. The most important matters handled by the Supervisory Board in the 2017 financial year included, among others: 1) conducting executive recruitment procedures for Energa SA Management Board members and determining the rules for and amount of compensation for Energa SA Management Board members, 2) approving the “Organizational Bylaws of the Enterprise of Energa Spółka Akcyjna”, 3) analyzing the current economic and financial position of the Company and the Group and the execution and return on the investments conducted in the Energa SA Group, 4) adopting the consolidated version of the Articles of Association of Energa SA, 5) conducting supervisory activities related to development and deployment of the Sales Support System encompassing the billing system and the CRM system in the Energa SA Group.

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Additionally, in 2017, the Supervisory Board decided on how to vote during general meetings of subsidiaries in the scope resulting from the Company’s Articles of Association, approved the physical and financial plans of Energa SA and the Energa SA Group, evaluated financial statements and consolidated financial statements for the 2016 financial year with the motion to distribute profit and it monitored the Management Board’s execution of the sponsoring activity plan. Audit Committee The principles of the Audit Committee's operation are set forth in the Articles of Association of Energa SA and the Supervisory Board Bylaws are available on the Company’s website. The Audit Committee operates as a collective body and serves as an advisory and opining body of the Supervisory Board. The tasks of the Audit Committee include in particular the following: 1) monitoring the financial reporting process, 2) monitoring the reliability of financial information presented by the Company, 3) monitoring the effective operation of internal control, internal audit and risk management systems in place in the Company, 4) monitoring the performance of financial audit activities, 5) monitoring whether the auditor and the entity authorized to audit financial statements are independent and objective, including if they provide services other than financial review, 6) recommending an entity authorized to audit financial statements and to conduct financial review activities to the Supervisory Board. Tasks of the Audit Committee are performed by providing the Supervisory Board with its conclusions, recommendations, opinions and reports within its tasks, in the form of resolutions. The Audit Committee is independent from the Company’s Management Board, which cannot give the Committee any binding instructions relating to its tasks. The Audit Committee is composed of at least three Supervisory Board members, including at least one member who satisfies the independence criteria specified by the legal regulations and holds accounting or financial audit qualifications within the meaning of the Act on Statutory Auditors. According to the Articles of Association, such a person should meet the requirements set forth for independent Supervisory Board Members within the meaning of the Commission Recommendation of 15 February 2005 on the role of non-executive or supervisory directors of listed companies and on the committees of the (supervisory) board (2005/162/EC), taking into account the requirements following from the Code of Best Practice for WSE Listed Companies and also for independent Audit Committee members within the meaning of the Act of 11 May 2017 on Statutory Auditors, Audit Firms and Public Oversight (Journal of Laws No. 2017, Item 1089). In the 2017 financial year and to this date, the Audit Committee operated in the following composition: 1) in the period from 1 January 2017 to 26 June 2017: a) Marek Szczepaniec – Committee Chairman, b) Zbigniew Wtulich, c) Andrzej Powałowski, 2) in the period from 22 August 2017 to 18 October 2017: a) Paula Ziemiecka-Księżak, b) Marek Szczepaniec, c) Zbigniew Wtulich, d) Andrzej Powałowski, 3) in the period from 18 October 2017 to 20 October 2017: a) Marek Szczepaniec – Committee Chairman, b) Paula Ziemiecka-Księżak, c) Zbigniew Wtulich, d) Andrzej Powałowski, 111

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4) in the period from 20 October 2017 till the date of preparing this Report: a) Marek Szczepaniec – Committee Chairman, b) Zbigniew Wtulich, c) Andrzej Powałowski. In the period from 1 January 2017 to 26 June 2017, the function of the Audit Committee Chairman was discharged by Mr. Marek Szczepaniec. In connection with the appointment of the Supervisory Board of the 5th term of office by the Annual General Meeting of Energa SA on 26 June 2017, the following Supervisory Board Members were appointed to the Audit Committee on 22 August 2017: 1) Ms. Paula Ziemiecka-Księżak, 2) Mr. Marek Szczepaniec, 3) Mr. Zbigniew Wtulich. Subsequently, during the Supervisory Board meeting held on 18 October 2017, Mr. Andrzej Pow- ałowski was also appointed to the Committee. On the same date, at the Audit Committee meeting, Mr. Marek Szczepaniec was appointed the Committee Chairman. On 20 October 2017, Ms. Paula Ziemiecka-Księżak tendered her resignation from membership in the Committee. A description of the Audit Committee’s activity in the past financial year including a detailed description of the actions taken by the Committee is provided in the Audit Committee Activity Report attached to the Supervisory Board Activity Report submitted each year to the General Meeting and published on the Company’s corporate website. In 2017, the Audit Committee held 5 meetings with all members in attendance.

Nomination and Compensation Committee

The Energa SA Supervisory Board Nomination and Compensation Committee has been operating since 27 February 2015, when the Company’s Supervisory Board made a decision to appoint it and approve the Energa SA’s new Supervisory Board Bylaws in which it framed how it is to operate. The scope of the Nomination and Compensation Committee's operation covers giving opinions and conducting analyses to support the Supervisory Board in the performance of its duties defined by the Articles of Association in respect of the overall compensation policy for Management Board members, the Company’s upper level management and in the other companies in the Energa SA Group and to articulate recommendations on appointing Management Board members. The following tasks in particular fall among the powers and duties of the Nomination and Compensa- tion Committee: 1) conducting activities to recruit the Company’s Management Board members to the extent designated by the Supervisory Board, 2) preparing draft versions of contracts and other model documents in connection with serving as the Company’s Management Board members and overseeing the performance of the contractual obligations taken by the parties, 3) overseeing the implementation of the Management Board's compensation system, in particular preparing billing documents concerning variable and bonus elements of compensation for the purpose of submitting recommendations to the Supervisory Board; 4) monitoring and analyzing the compensation system for the Management Boards and management of companies in the Energa SA Group, 5) overseeing the correct execution of perks for the Company’s Management Board stemming from contracts, among others: personal and medical insurance, usage of company cars, apartment and others.

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In the 2017 financial year, the Nomination and Compensation Committee operated in the following composition: 1) in the period from 1 January 2017 to 26 June 2017: a) Paula Ziemiecka-Księżak – Committee Chairwoman, b) Agnieszka Terlikowska-Kulesza, c) Zbigniew Wtulich, 2) in the period from 22 August 2017 till the date of preparing this Report: a) Paula Ziemiecka-Księżak, b) Agnieszka Terlikowska-Kulesza, c) Zbigniew Wtulich. Two Nomination and Compensation Committee meetings were held in 2017 – all of them with all members in attendance. A description of the activity of the Nomination and Compensation Committee last year has been presented in the Activity Report of the Nomination and Compensation Committee forming an Attachment to the Supervisory Board Activity Report. Management Board Rules for appointing and dismissing Management Board Members The Management Board may be composed of one to five members, including the President of the Management Board and one to a few Vice-Presidents of the Management Board. The term of office of the Management Board is a joint term of three years. According to the Articles of Association, Management Board Members are appointed and dismissed by the Supervisory Board, which designates one of them as President of the Management Board and one or more of them as Executive Vice-President of the Management Board. A Management Board Member may be also: 1) dismissed or suspended by the General Meeting, 2) suspended by the Supervisory Board for important reasons. Pursuant to § 16 of the Articles of Association of Energa SA, the Supervisory Board appoints Man- agement Board Members after conducting a recruitment procedure.

A Management Board Member shall submit his or her resignation to another Management Board Member or to the commercial proxy or, if this is impossible, to the Supervisory Board. The notice of resignation should be submitted in writing. The resigning Management Board Member shall inform the Supervisory Board Chairman of his/her resignation

Composition In 2017 and up to the date of preparation of this Report, the Company’s Management Board operated with the following composition: 1) in the period from 1 January 2017 to 17 January 2017: a) Dariusz Kaśków – President of the Management Board, b) Grzegorz Ksepko – Vice-President of the Management Board for Corporate Mat- ters, c) Mariusz Rędaszka – Vice-President of the Management Board for Financial Mat- ters, d) Przemysław Piesiewicz – Vice-President of the Management Board for Development Strategy, e) Mariola Anna Zmudzińska – Vice-President of the Management Board for Investor Rela- tions,

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2) in the period from 17 January 2017 to 10 February 2017: a) Jacek Kościelniak – Energa SA Supervisory Board member delegated to perform temporarily the duties of a Management Board member acting in the capacity of President of the Management Board, b) Grzegorz Ksepko – Vice-President of the Management Board for Corporate Mat- ters, c) Mariola Anna Zmudzińska – Vice-President of the Management Board for Investor Rela- tions, 3) in the period from 11 February 2017 to 16 February 2017: a) Jacek Kościelniak – Vice-President of the Management Board for Financial Mat- ters, b) Grzegorz Ksepko – Vice-President of the Management Board for Corporate Mat- ters, c) Mariola Anna Zmudzińska – Vice-President of the Management Board for Investor Rela- tions, 4) in the period from 17 February 2017 to 1 March 2017: a) Jacek Kościelniak – Vice-President of the Management Board for Financial Mat- ters, b) Grzegorz Ksepko – Vice-President of the Management Board for Corporate Mat- ters, 5) in the period from 1 March 2017 to 2 March 2017: a) Alicja Barbara Klimiuk – Vice-President of the Management Board for Operations, b) Jacek Kościelniak – Vice-President of the Management Board for Financial Mat- ters, c) Grzegorz Ksepko – Vice-President of the Management Board for Corporate Mat- ters, 6) in the period from 2 March 2017 to 5 February 2018: a) Daniel Obajtek – President of the Management Board b) Alicja Barbara Klimiuk – Vice-President of the Management Board for Operations, c) Jacek Kościelniak – Vice-President of the Management Board for Financial Mat- ters, d) Grzegorz Ksepko – Vice-President of the Management Board for Corporate Mat- ters, On 17 January 2017, the Supervisory Board dismissed Mr. Dariusz Kaśków from the position of the President of the Energa SA Management Board, Mr. Przemysław Piesiewicz from the position of the Vice-President for Development Strategy and Mr. Mariusz Rędaszka from the position of the Vice- President for Financial Matters. On 17 January 2017, Mr. Jacek Kościelniak was delegated by the Company’s Supervisory Board to act temporarily in the capacity of a Management Board Member responsible for managing the Com- pany for a period of up to three months from the date of delegation. Also on 17 January 2017, the Energa SA Supervisory Board launched an executive search to recruit the Company’s Management Board members for its fifth term of office, i.e.: 1) President of the Management Board, 2) Vice-President of the Management Board for Financial Matters, 3) Vice-President of the Management Board for Operations.

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As a result of the executive search procedure, the Energa SA Supervisory Board appointed the following to the position of: 1) President of the Management Board – Mr. Daniel Obajtek, appointing him to the Energa SA Management Board as of 2 March 2017, 2) Vice-President of the Management Board for Financial Matters – Mr. Jacek Kościelniak, appointing him to the Energa SA Management Board as of 11 February 2017, 3) Vice-President of the Management Board for Operations – Ms. Alicja Barbara Klimiuk, appointing her to the Energa SA Management Board as of 1 March 2017. On 16 February 2017, the Company’s Supervisory Board adopted a resolution to dismiss from the Company’s Management Board Ms. Mariola Zmudzińska, who served as the Vice-President of the Energa SA Management Board for Investor Relations. On 5 February 2018, Mr. Daniel Obajtek tendered his resignation from the function of the President of the Energa SA Management Board as of the end of that date. The current fifth term of office of the Energa SA Management Board will elapse on 4 January 2019. Alicja Barbara Klimiuk – acting President of the Management Board, Vice-President for Opera- tions She graduated from the Management Department of the University of Gdansk. She completed the Post-Graduate Course in Management at the Warsaw School of Economics and the Post-Graduate Course in Controlling in Corporate Management at the University of Gdańsk. She has many years of professional experience in commercial law companies with State Treasury holdings, including Energa SA as the President of the Management Board. In the period of consolidating the Energa SA Group with the Ostrołęka Power Plant Complex, she oversaw the process of separating the distribution system operator, establishing an electricity trading company and restructuring the Energa SA Group subsidiaries. In 2006-2007, she also served as a member of Supervisory Boards of companies such as: Towarowa Giełda Energii S.A. in Warsaw, Zespół Elektrowni Ostrołęka S.A. and Cergia Energetyka Toruńska S.A. In the period from 1992 to 1998, as the Vice-President of the city of Suwałki, she oversaw the areas of finance, infrastructure investments, geodesy, zoning management and public utility companies. From 1998 to 2006, she was the President and Vice-President of the Special Economic Zone in Suwałki responsible, among others, for overseeing infrastructure construction and development on the Special Economic Zone site and monitoring compliance of the businesses with their per- mits. In the period from 2008 to 2013, she ran her own business, providing investment advice and consulting on the reports on the environmental impact of investment projects. Since 2014, she has been the Director of the Technology Transfer Center at the Higher Vocational School of prof. Edward F. Szczepanik in Suwałki, where she executed projects co-funded by the EU focusing on the research and development work for businesses and the transfer of technology from academic centers to the economy. Jacek Kościelniak – Vice-President of the Management Board for Financial Matters

He graduated from the Economic Academy (currently University of Economics) in Katowice, specializing in finance and accounting. In 1989 he began his professional career as an accountant, finance specialist and Chief Accountant in private limited liability companies. Then, from 1992 to 1998, he provided accounting, tax and legal and economic advisory services running his business activity. He conducted training workshops on the subject of taxes, accounting and mandatory prevention of the introduction of funds originating from illegal or undisclosed sources into financial circulation. He also worked as an auditor for the National Cooperative Savings and Loans Organization (Krajowa Spółdzielcza Kasa Oszczędnościowo-Kredytowa). From 1998 to 2002 he served as the Finance De- partment Director at the Silesian Voivodship Office. He was also the Supervisory Board chairman of the Upper Silesia Regional Development Agency and a supervisory board member of the Upper Sile- sia Restructuring Fund. He was elected as Member of the Parliament of the 5th Term and, during that 115

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017 period, he served as a member of the Parliamentary Public Finance Committee. From January to No- vember 2007 he was Secretary of the State in the Prime Minister’s Office and Deputy Chairman of the Standing Committee of the Council of Ministers. From 2007 to 2011 he served as the Vice-President of the Supreme Audit Chamber. He acted as an expert in the twin cooperation project to strengthen the audit potential of the Audit Authority in Georgia and Albania. Grzegorz Ksepko – Vice-President of the Management Board for Corporate Matters Graduate of the Faculty of Law and Administration at the University of Gdansk (2001). In 2004 he completed his public prosecutor trainee program in the District Public Prosecution Office in Gdansk and he passed the public prosecutor examination. In November 2005 he was entered on the list of advocates. In July 2006 he became a partner (equity partner) in the law firm Kancelaria Radców Prawnych i Adwokatów Głuchowski Siemiątkowski Zwara i Partnerzy. In November 2010 he became a senior partner, thereby taking a senior management position. In his law practice he specialized above all in company law, business services, criminal law, criminal revenue law, civil law, administrative law and in issues related to the functioning of the oil and power sector. He also provided services to other businesses, including advisory services in the area of corporate governance. From 2003 to 2007 he sat in the Supervisory Board of Agencja Rozwoju Pomorza S.A. He was one of the principal authors of the vetting bill and the amendment of the Act on the Institute of National Remembrance drafted in 2006. He also participated in work on the consumer bankruptcy bill, the amendment of the State Treasury Solicitors' Office Act, the amendment of the Press Law, the amendment of the Weapons and Ammunition Act and the amendment of the Criminal Code and he prepared draft regulations for the Minister of Regional Development on public aid. In 1996 he completed the Fourth Annual Summer School for Young Social and Political Leaders under the Polish Robert Schuman Foundation and in 1997 the English language school at the University of California Los Angeles. None of the Company’s Management Board Members mentioned above engages in any business competitive to that of Energa SA, participates in a competitive entity as a partner in a civil law company or partnership or as a member of a corporate authority of a joint stock or limited liability company and does not participate in any other competitive legal person as a member of its corporate authority, or is listed in the Register of Insolvent Debtors kept pursuant to the National Court Register Act. Management Board’s powers The Management Board operates in accordance with the Commercial Company Code and the Com- pany’s Articles of Association. The Management Board’s organization and operation, including detailed method of adopting resolutions, are determined by the Management Board Bylaws approved by the Supervisory Board and published on the Company’s corporate website. The Management Board runs the Company’s affairs and represents it. Two Management Board Mem- bers acting jointly or one Management Board Member acting jointly with a general proxy are authorized to submit representations of will and sign them on the Company's behalf. The powers of the Management Board comprise all the Company's matters which are not reserved by the regulations of law or the Company's Articles of Association for the authorities. According to Articles of Association, without prejudice to exceptions indicated therein, each Management Board member may conduct the Company's matters in the scope of his/her powers set forth in the Management Board Bylaws without prior resolution of the Management Board. If, however, before handling such matter, at least one of the remaining Management Board Members objects to the handling thereof, a prior Management Board resolution will be required. On the date of preparing this Report, the Management Board members have made a functional split of the specific areas of the Company’s business for the purpose of individually handling the affairs in the range of their powers and have entrusted: 1) functional oversight over the following areas of the Company’s business to the President of the Management Board: a) press support, b) audit and control, 116

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c) strategic risk management, d) legal support, e) security, f) Group’s personnel policy, including the hiring of members of corporate bodies of Energa SA Group Companies, g) marketing and sponsoring activity, h) management of an organization, i) social dialogue, 2) functional oversight over the following areas of the Company’s business to the Vice-President of the Management Board for Corporate Matters: a) institutional relations, b) corporate and ownership governance in the Group, c) management by objectives, d) internal communication, e) CSR and environmental policy, f) management of the Group’s organizational governance, 3) functional oversight over the following areas of the Company’s business to the Vice-President of the Management Board for Financial Matters: a) financial planning and analyses, b) financial reporting and consolidation, c) financial policy, d) management of the Group’s financial risk, e) business controlling, f) investor relations, g) stakeholder relations. 4) Functional oversight over the following areas of the Company’s business to the Vice-President of the Management Board for Operations: a) Energa SA Group’s Strategy, regulatory policy, b) strategic asset management, c) market analyses and the Group’s development, d) research and development and innovation, e) mergers and acquisitions, f) IT. Moreover, in connection with the resignation of Mr. Daniel Obajtek as President of the Management Board, on 6 February 2018, pursuant to§ 1 section 6 of edition IV of the Energa SA Management Board Bylaws, the Management Board entrusted Ms. Alicja Barbara Klimiuk, Vice-President of the Management Board for Operations to discharge the duties of the President of the Energa SA Man- agement Board. This decision was approved by the Company’s Supervisory Board. At the same time, the Management Board entrusted functional oversight over the following areas of the Company’s business to Ms. Alicja Barbara Klimiuk, Vice-President of the Management Board for Operations currently also the acting President of the Energa SA Management Board: 1) press support, 2) audit and control, 3) strategic risk management, 4) legal support, 5) security, 6) Group’s personnel policy, including the hiring of members of corporate bodies of Energa SA Group Companies, 7) marketing and sponsoring activity, 8) management of an organization, 9) social dialogue,

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Manner of the Management Board's functioning In principle, Management Board resolutions are adopted at its meetings. The meetings are held on the set date as needed, but no less frequently than once every two weeks. Management Board meetings are convened by the President of the Management Board or a Man- agement Board Member. Meetings held according to a fixed schedule adopted by a Management Board resolution do not require notifications. In addition, the Management Board meeting convened at the written request of a Management Board Member or Supervisory Board member should be convened within four days from the date of submitting the request to the President of the Management Board. In principle, the President of the Management Board presides over Management Board meetings. Management Board meetings are held in the Company's registered office or at another location indicated by the person convening the Management Board meeting. The Management Board Bylaws admit the possibility of Management Board Members' participation in the meeting and voting on resolutions adopted during a meeting using remote means of direct communication, such as conference and video conference calls, with the reservation that there is at least one Management Board Member present at the location specified by the person convening the meeting and there is a technical possibility of ensuring a connection. Management Board resolutions are adopted by an absolute majority of votes. If an equal number of votes is cast, the Management Board President’s vote will prevail. In order for the resolutions to be valid, all the Management Board Members must be correctly notified about the meeting, and more than one-half of the members must be in attendance if the Management Board is composed of at least three persons. If the Management Board is composed of two persons, all the Management Board Members must be in attendance in order for the resolutions to be valid. Voting, in principle, is by open ballot but at the request of Management Board member, a secret ballot may be called. In urgent situations it is permitted to adopt resolutions following the written procedure or by using remote means of direct communication such as fax or e-mail on the condition that all Management Board Members express their consent for it. The resolution will be valid if all Management Board Members have been notified of the content of the draft resolution following the written procedure or by using remote means of direct communication. In 2017 the Energa SA Management Board held 58 meetings and adopted 504 resolutions.

The Management Board’s most important actions and decisions were as follows: 1) actions aimed at stabilizing the implementation of the Sales Service System in the Energa SA Group, 2) issue of subordinated (hybrid) bonds, 3) implementation of the ISO/IEC 27001 “Information Security Management” standard in Energa SA, 4) launch of actions associated with entry into force of the General Data Protection Regulation, 5) actions aimed at implementation of an optimum structure of the Energa SA Group and standardization of procurement and logistic processes and streamlining of collections, 6) adoption of the “Organizational Bylaws of the Enterprise of Energa Spółka Akcyjna”.

6.8. Compensation of persons in management and supervisory bodies

Management Board On 15 December 2016, by the power of Resolution no. 27 adopted by the Extraordinary General Meeting, the rules for remunerating the Management Board Members to the provisions of the Act of 9 June 2016 on the Rules for Remunerating Persons Managing Certain Companies (Journal of Laws of 2016 Item 1202), As at the date of this report, the fixed part of compensation for work payable to the Members of the Energa SA Management Board was set within the range from 7 to 15 times the aver-

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WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017 age salary in the corporate segment without profit-sharing awards in the fourth quarter of the previous year, as announced by the President of the Main Statistical Office. Based on the adopted rules of compensation, management service contracts are signed with the managers, which provide for: 1) the right to compensation for refraining from conducting competitive activity (no-compete) for a period up to 12 months after the contract termination date, 2) the right to severance pay in the amount of three times the basic monthly salary if the manager is dismissed from the function of a Management Board member. The compensation paid individually to each of the Company's Management Board members in 2017 is presented in the table below.

Table 35: Compensation paid to the persons in the Energa SA Management Board in the period from 1 January to 31 December 2017 (PLN 000s)

Full name In office Compensation Other benefits Total*

from 1 March to Alicja Barbara 31 December 591 32 623 Klimiuk 2017 from 11 February Jacek Kościelniak to 31 December 658 51 709 2017 from 1 January to Grzegorz Ksepko 31 December 701 28 729 2017 from 2 March to Daniel Obajtek 31 December 632 57 689 2017

from 1 January to Dariusz Kaśków 350 18 368 17 January 2017

Mariusz Rędaszka from 1 January to 325 2 327 17 January 2017 Przemysław from 1 January to Piesiewicz 325 24 349 17 January 2017

Mariola Anna from 1 January to 390 0 390 Zmudzińska 16 February 2017 TOTAL 3,972 212 4,184

*the differences in sum are caused by rounding. In the previous year, the Management Board Members were also entitled to non-financial compensation elements, such as: 1) medical insurance for the Management Board member and his/her direct family and the right to select either life insurance or medical insurance, 2) company apartment in justified cases or a reimbursement of rental expenses, 3) covering or refinancing the costs of individual training related to the range of activities performed in favor of the Company, 4) benefiting from the Company’s asset items. The compensation system for members of the Energa SA Management Board members is based on the objective management system. The objectives are set on the basis of the existing Energa SA Group Strategy, Long-Term Plan of Strategic Investments and the challenges, both internal and exter-

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WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Energa SA Management Board report on the activity of the Group for the year ended 31 December 2017 nal, that the Group is facing. Payment of variable elements of compensation of Energa SA Manage- ment Board members is related to the extent and level to which the objectives have been fulfilled. Additionally, the objectives of Management Boards who are Business Line Leading Entities and the Company’s management are related to the objectives for the Energa SA Management Board and cas- caded in accordance with the “from top to bottom” methodology. The accepted model provides an incentive function and integrates the executive and management personnel around the objectives and gives them the sense of shared accountability for achieving them. A system designed in such a way combines focus on the activities that are important from the Group’s point of view, with effective achievement of its intentions. It is also important for the Company’s shareholders, since it allows to build a long-term boost in Energa’s value and ensures the Company’s stable operation. Supervisory Board According to the Articles of Association, Supervisory Board members are entitled to monthly compensation in the amount set by the General Meeting. The Company will also cover the costs incurred in connection with performance of the functions entrusted to Supervisory Board members, in particular the costs of transport to the Supervisory Board meeting, costs of exercise of personal oversight, and costs of food and lodging. The compensation will not be due for the month in which the Supervisory Board member did not at- tend any of the formally convened meetings and failed to provide any formal justification. The table below presents the compensation of Energa SA’s Supervisory Board members in 2017.

Table 36: Compensation of persons sitting in the Energa SA Supervisory Board in the period from 1 Jan- uary to 31 December 2017 (PLN 000s)

Period in office in Full name Compensation Other benefits Total 2017 from 1 January Paula Ziemiecka- to 31 December 90 0 90 Księżak 2017 from 1 January Zbigniew Wtulich to 31 December 79 0 79 2017 from 1 January Marek Szczepaniec to 31 December 79 0 79 2017 from 1 January Jacek Kościelniak to 10 February 4 0 4 2017 from 1 January Maciej Żółtkiewicz to 31 December 79 0 79 2017 from 1 January Agnieszka Terlikowska to 31 December 79 0 79 – Kulesza 2017 from 1 January Andrzej Powałowski to 31 December 79 0 79 2017 TOTAL* 489 0 489

*the differences in sum are caused by rounding.

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Number and nominal value of the Company’s shares and shares in the Company’s related companies held by persons in management and supervisory bodies

No member of Energa SA’s Management Board or Supervisory Board held shares in the Company as at 31 December 2017.

6.9. Diversity policy

Energa SA does not have a specific diversity policy in place. In 2017, the Company developed and implemented the Group’s Personnel Policy. The document regulates a number of issues in the HR area, however Energa SA bears in mind a description of the diversity area. The document will be ultimately expanded to include a description of diversity issues, which is currently being prepared by the Company.

6.10. Primary attributes of the internal control and risk management systems in reference to preparing financial statements

An important element of the internal control system is the internal audit function. The Company has an internal audit unit which carries out the audit and control tasks in the Energa SA Group. These tasks are carried out according to the Rules for conducting audits in the Energa SA Group. The internal audit function helps the organization maintain effective and efficient control mechanisms through their evaluation and promotion of constant improvements while following international standards of internal audit practices. The purpose of an effective internal control system in the financial reporting process is to ensure ade- quacy and correctness of financial information contained in periodic reports. For this purpose, the Company designed and implemented and applies the financial reporting process oversight matrices. The financial reporting area is additionally an element of the annual Assessment of the Internal Con- trol System, Risk Management and Compliance System in Energa SA, which in 2017 was effected with the participation of PricewaterhouseCoopers (“PwC”) – the work of the advisors pertaining to the financial reporting process was positive. The financial data, which are the basis of financial reports and Management Board's reports as well as Energa SA's monthly management and operational reporting, come from the Company's financial and accounting system. After the performance of all the pre-determined ledger closing processes at the end of each month, detailed financial and operational managerial reports are prepared. These reports are drafted with co-participation of middle and senior management of the individual organizational cells. As far as closed reporting periods are concerned, the Company's financial results are analyzed in detail and compared to the budget assumptions, and the identified deviations are properly explained. The financial reporting and the management reporting of the Company and the Energa SA Group are carried out on the basis of the accounting policy (according to International Financial Reporting Stand- ards), which is adopted by a resolution of the Company's Management Board and updated as needed. Annual reviews of strategies and economic and financial plans are carried out in the Company. The process of detailed planning and budgeting, which includes all the areas of the Company's functioning, involves middle and senior management. The economic and financial plan is accepted by the Compa- ny's Management Board and approved by the Supervisory Board. The Supervisory Board is responsible for selecting a statutory auditor to audit the Company’s financial statements and the Group’s consolidated financial statements. The auditor authorized to audit the Company's financial statements is the entity specified in the Act of 11 May 2017 on Statutory Auditors, Audit Firms and Public Oversight (Journal of Laws No. 2017, item 1089).

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The Company does not have a specific rule regarding an entity authorized to audit financial statements. According to § 23a of the Company's Articles of Association, the Audit Committee recom- mends to the Supervisory Board the entity authorized to perform the financial review of the Company, and the Supervisory Board chooses and changes such entity. In the past, the Company did not coop- erate with any of the entities authorized to audit financial statements for more than five years in a row. The entire auditor selection procedure is conducted by the Supervisory Board's Audit Committee, and it encompasses determining the auditor selection criteria, conducting the selection procedure and authorizing the Management Board to conclude with it an agreement to audit the financial statements. The Supervisory Board selects the proposal for auditing the financial statements after carrying out the procedure, whose aim is to select an independent statutory auditor and the proposal whose price that takes into account the auditor's efforts, the auditor's position on the market of auditing services, and knowledge of the industry in which the Company operates. In connection with the entry into force of the Regulation of the European Parliament and of the Council (UE) on specific requirements regarding statutory audit of public-interest entities and the expected enactment, by the Polish parliament, of an act implementing the EU regulations providing for the minimum period of two years for which a statutory audit agreement should be signed, the Supervisory Board decided to carry out a procedure to elect an auditor for the years 2017-2018. Following the procedure, on 20 December 2016 the Company’s Supervisory Board selected the authorized entity KPMG Audyt spółka z ograniczoną odpowiedzialnością sp.k. with its registered seat in Warsaw at ul. Inflancka 4A ("KPMG") as the statutory auditor to audit and review the financial statements and consolidated financial statements of Energa SA and the Energa SA Group for the annual periods ended on 31 December 2017 and 31 December 2018, respectively. Audit report is presented to the Management Board, the Audit Committee and the Supervisory Board. After the annual audit, the auditor sends to the Company the so-called Letter to the Management Board, which lists the failures and shortcomings found during the audit that have no material influence on the reliability and correctness of the financial statements prepared. Within the framework of the Integrated Risk Management System in place in the Energa SA Group, the financial reporting risk is identified and managed to ensure timely and error-free preparation of the Company’s and the Group’s financial statements and the reporting and management information risk related, among others, with collection and preparation of management, operational and financial information needed to make management decisions. The mechanisms to control these risks, as described above, are registered in the Risk Card and subject to periodic evaluation in respect to adequa- cy, efficiency and effectiveness. The risk management process, which is described in more detail in item 2.6 of this Report, encompasses all of the Group’s business lines and levels of organization. It assumes both ongoing and regular risk reviews as well as independent regular evaluation of the systems effectiveness and efficiency and continuous improvement based on the Deming cycle (PDCA). The results of the risk identification and evaluation process, including reporting risks, are accepted each time by the Company’s Management Board in the form of a Management Board Resolution, which sets the level of the organization’s risk appetite, accepts the management strategy for the individual risks and obligates the Risk Owners to implement action plans as recorded in the Risk Cards. Additionally, as part of the effectiveness monitoring process for the risk management system in the Energa SA Group, a report summarizing risk reviews in the Group is delivered to the Audit Committee operating within the Energa SA Supervisory Board.

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7. MANAGEMENT BOARD'S REPRESENTATION

Gdańsk, 14 March 2018

The Energa SA Management Board hereby represents that:

(1) according to the best knowledge, the annual consolidated financial statements and the comparative data were prepared in line with the accounting principles, and reflect, truly, reliably, and clearly, the asset and financial position of the Energa SA Group and its financial result. The Management Board Report on the activity of the Energa SA Group contains a true presentation of developments, achievements, and situation of the Group, including a description of key risks and threats;

(2) KPMG Audyt spółka z ograniczoną odpowiedzialnością sp.k., an entity authorized to audit the financial statements, which audited the consolidated financial statements of the Energa SA Group for the financial year ended 31 December 2017, was selected in accordance with the applicable regulations. That entity as well as the auditors who audited the aforementioned financial statements satisfied the conditions for expressing an unbiased and independent opinion about the audit of the consolidated financial statements as required by the binding regulations and professional norms.

Signatures of Energa SA Management Board Members

Alicja Klimiuk acting President of the Energa SA Management Board

Jacek Kościelniak Vice-President of the Energa SA Management Board for Financial Matters

Grzegorz Ksepko Vice-President of the Energa SA Management Board for Corporate Matters

Zbysław Dobrowolski Director of the Finance Department

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List of figures

Figure 1: Location of the Group’s operations and key assets 9 Figure 2: Number of Energa-Operator SA’s customers (thousands) 10 Figure 3: Structure of Energa-Obrót’s end buyers by customer type 11 Figure 4: Energa’s organizational structure chart as at 31 December 2017 17 Figure 5: Simplified organizational structure chart of the Energa SA Group as at 31 December 2017 18 Figure 6: Chart illustrating the objectives and programs under the updated Energa SA Group’s Strategy 20 Figure 7: Material factors relating to Energa SA Group’s development at least for 2018 27 Figure 8: Risk management process in the Energa SA Group 28 Figure 9: Headcount in the Energa SA Goup as at 31 December 2014, 2015, 2016 and 2017 (persons)* 51 Figure 10: Average headcount in the Energa SA Group in 2014, 2015, 2016 and 2017 (FTEs)* 51 Figure 11: Headcount in the Energa SA Group as at 31 December 2017 (persons) by gender, education and age 52 Figure 12: EBITDA bridge, by business lines, 2014-2017 (PLN m) 59 Figure 13: Group’s cash flows in 2014-2017 (PLN m) 64 Figure 14: Structure of assets and liabilities 65 Figure 15: Results of the Energa SA Group’s Distribution Business Line (PLN m) 72 Figure 16: EBITDA Bridge of the Distribution Business Line (PLN m) 73 Figure 17: Results of the Energa SA Group’s Generation Business Line (PLN m) 74 Figure 18: EBITDA Bridge of the Generation Business Line (PLN m) 75 Figure 19: Results of the Energa SA Group’s Sales Business Line (PLN m) 79 Figure 20: EBITDA Bridge of the Sales Business Line (PLN m) 80 Figure 21: Annual changes in GDP, domestic demand, individual consumption and capital expenditures 84 Figure 22: Production and consumption of electricity in Poland in 2008-2017 (TWh) 86 Figure 23: Structure of production of electricity in Poland in 2008-2017 (TWh) 86 Figure 24: Annual volumes of inter-system exchange in Poland in 2008-2017 (TWh) 87 Figure 25: Electricity prices on the spot market in Poland and in neighboring countries in 2017 (PLN/MWh) 87 Figure 26: Prices of hard coal inclusive of costs of transportation to hard coal-fired power plants in 2012-2017 (PLN/GJ) 88 Figure 27: Energy prices in the Day-Ahead Market in 2016-2017 (PLN/MWh) 88 Figure 28: Forward contract price – base with delivery in 2018 89 Figure 29: Prices of emission allowances (EUA DEC 2017) in 2017 89 Figure 30: Comparison of prices on the balancing market and spot markets (Exchange) in 2017 (PLN/MWh) 90 Figure 31: Prices and generating capacity constituting operating reserve in 2017 91 Figure 32: Distribution area of the main power-generating companies 94 Figure 33: Comparison of operational data of Energa and other energy groups, Q1-Q3 2017 95 Figure 34: Shareholding structure of Energa and structure of votes at the General Meeting as at 9 November 2017, 31 December 2017 and the date of preparing these financial statements 97 Figure 35: Energa SA stock price, in the period from IPO (i.e. 11 December 2013) to 31 December 2017 99 Figure 36: Changes in Energa stock prices in comparison with changes in WIG, WIG20 and WIG-ENERGIA indices 99 Figure 37: Recommendations issued for Energa’s shares in 2017 100

List of tables

Table 1: Execution of the capital expenditure program in 2017 21 Table 2: Nominal value of bonds subscribed by Energa SA and outstanding, by issuer, as at 31 December 2017 36 Table 3: Information on sureties and guarantees extended by Energa as at 31 December 2017 37 Table 4: Proceedings pending before courts, arbitration bodies or public administration authorities 40 Table 5: Prizes, awards and certificates received in 2017 55 Table 6: Consolidated statement of profit or loss 58 Table 7: EBITDA adjusted for material non-recurring events 61 Table 8: Consolidated statement of financial position 62 Table 9: Consolidated statement of cash flows 64 Table 10: Financial ratios of the Energa SA Group 65 Table 11: Distribution of electricity, by tariff group 66 Table 12: SAIDI and SAIFI 67 Table 13: Number of Energa-Operator SA’s customers in 2014-2017 (by tariff group) 68 Table 14: Gross production of electricity in the Energa SA Group 68 Table 15: Production of heat 69 Table 16: Volume and cost* of consumption of key fuels 70 Table 17: Sales of electricity by the Sales Business Line 70 Table 18: EBITDA of the Energa SA Group, by Business Line 71 Table 19: Results of the Distribution Business Line 72 Table 20: Results of the Energa SA Group’s Generation Business Line 74 Table 21: EBITDA of the Generation Business Line, by Power Division 75 Table 22: Results of the Hydro Power Division 77 Table 23: Results of the Wind Power Division 77 Table 24: Results of the Ostrołęka Power Plant Division 78 Table 25: Results of the Ostrołęka Power Plant Division 78 Table 26: Results of the Energa SA Group’s Sales Business Line 79 Table 27: Current ratings of Energa 82 125

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Table 28: Statutory auditor’s fee for services provided to the Group (PLN 000s) 82 Table 29: Prices of property right indices listed on the Polish Power Exchange 89 Table 30: List of legal acts affecting the Group 91 Table 31: List of legal acts affecting the Group 92 Table 32: Issuer's shares by series and types 97 Table 33: Shareholding structure of Energa as at 9 November 2017, 31 December 2017 and the date of preparing these financial statements 97 Table 34: Data for Energa stock as at 31 December 2017 98 Table 35: Compensation paid to the persons in the Energa SA Management Board in the period from 1 January to 31 December 2017 (PLN 000s) 119 Table 36: Compensation of persons sitting in the Energa SA Supervisory Board in the period from 1 January to 31 December 2017 (PLN 000s)120

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Glossary of terms and abbreviations

Integrated set of elements: intelligent electricity meters, communication modules and AMI, Advanced Metering Infrastructure systems providing the possibility to collect data regarding electricity consumption by specific customers. Itemized bill, statement of all fees for added services which a subscriber uses in a Billing given billing period Solid or liquid, biodegradable substances of plant or animal origin, originating from products, waste and remnants of agricultural and forestry production, the industry Biomass processing their products, and also a portion of other biodegradable waste, and especially agricultural raw materials. CAPEX Capital expenditures Currency Interest Rate Swap and Cross-Currency Interest Rate Swap transactions, in which payments will be made over a specified period with a specified frequency, CIRS, CCIRS based on variable interest rates, in two different currencies (CIRS) or in more currencies (CCIRS).

CO2 Carbon dioxide EIB European Investment Bank ENERGA SA defines EBITDA as operating profit/loss plus amortization and deprecia- EBITDA (Earnings Before Interest, tion and impairment losses for non-financial non-current assets. Since the EBITDA Taxes, Depreciation and Amortization) definition changed as of 2016, EBITDA for comparative periods (2013-2015) was calculated using the new definition. EBIT Operating profit EBRD European Bank for Reconstruction and Development Issuer, issuer ENERGA SA ENERGA SA, ENERGA, Energa SA Parent company in the ENERGA SA Group. ENERGA-OPERATOR, Energa Opera- ENERGA-OPERATOR SA – a subsidiary of ENERGA SA and the Leading Entity of tor SA, EOP the Distribution Business Line in the ENERGA SA Group. ENERGA-OBRÓT, Energa Obrót SA, ENERGA-OBRÓT SA – a subsidiary of ENERGA SA and the Leading Entity of the EOB Sales Business Line in the ENERGA SA Group EMTN Euro Medium Term Note issue program. EU European Union EUA Emission allowances European Union Greenhouse Gas Emission Trading Scheme The rules governing its EU ETS operation are stated in ETS Directive. EUR Euro, currency used in countries belonging to the European Union’s Eurozone WSE Warsaw Stock Exchange (Giełda Papierów Wartościowych w Warszawie S.A.) A group distributing, selling and generating electricity and heat. It also conducts ENERGA SA Group, Energa Group, activity related to street lighting, design, procurement of materials, grid-related ser- Group, ENERGA vices, specialized transport, hotel and IT services. Group of customers off-taking electricity or heat or using electricity or heat supply Tariff group services with respect to which a single set of prices or fee rates along with their terms and conditions are applicable. GUS Główny Urząd Statystyczny (Central Statistical Office) GW Gigawatt, unit of power in the International System of Units, 1 GW = 109 W GWe Gigawatt of electrical power GWh Gigawatt hour IBnGR Market Economy Research Institute (Instytut Badań nad Gospodarką Rynkową) IPO Initial Public Offering An interest rate swap agreement between two parties, under which the parties pay IRS (Interest Rate Swap) interest on the contractual nominal amount calculated according to a different interest rate. KNF Komisja Nadzoru Finansowego (Polish Financial Supervision Authority) Technological process of simultaneous combustion of heat and electricity or mechan- Cogeneration, CHP ical energy in the course of the very same technological process. Covenants Contractual clauses offering protection to lenders in loan agreements. KRS National Court Register Kilowatt hour, unit of electricity generated or used by equipment with 1 kW of power in kWh an hour; 1 kWh = 3,600,000 J = 3.6 MJ MEW Small hydropower plant MoT Ministry of Treasury MW Unit of power in the International System of Units, 1 MW = 106 W

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MWe Megawatt of electrical power MWh Megawatt hour MWt Megawatt of thermal power NBP National Bank of Poland, central bank in Poland National Centre for Research and Development (Narodowe Centrum Badań i NCBiR Rozwoju) NFOŚiGW National Fund for Environmental Protection and Water Management EGM Extraordinary General Meeting of ENERGA SA Sources converting the energy of the wind, solar radiation, geothermal energy, waves, currents and marine tides, run of rivers and energy obtained from biomass, Renewable Energy Sources, RES garbage dump biogas as well as biogas ensuing from waste removal or treatment processes or the degeneration of stored plant and animal remains to generate electricity. Utility dealing with the distribution of gaseous fuels or electricity, responsible for grid operation in the gaseous distribution system or in the electricity distribution system, DSO, Distribution System Operator the current and long-term operational safety of this system, the operation, maintenance, refurbishment and required expansion of the distribution grid, including connections with other gaseous systems or other electrical power systems. Utility dealing with the transmission of gaseous fuels or electricity, responsible for grid operation in the gaseous transmission system or in the electrical energy transmission TSO, Transmission System Operator system, the current and long-term operational safety of this system, the operation, maintenance, refurbishment and required expansion of the transmission grid, including connections with other gaseous systems or other electrical power systems. Volume-weighted average price using all transactions pertaining to the PMOZE_A OZEX_A contract on an exchange session PGE PGE Polska Grupa Energetyczna SA GDP Gross Domestic Product PLN Polish zloty, national currency Property rights to certificates of origin for electricity generated in RES whose period of PMOZE_A generation, as specified in the certificate of origin, commenced after 1 March 2009 pp. Percentage point Negotiable rights constituting a commodity arising from certificates of origin for energy Property rights generated from renewable energy sources and co-generation Utility or group of utilities whose reciprocal relationships are prescribed by Article 3 sec. 2 of the Regulation on the Control of Concentrations, dealing with (i) in respect of Vertically-integrated utility gaseous fuels: transmission or distribution, or storage, or condensation and generation or the sale of these fuels, or (ii) in respect of electricity: transmission or distribution and generation or the sale of this energy Polskie Sieci Elektroenergetyczne Spółka Akcyjna with its registered office in War- saw, entered in the register of entrepreneurs of the National Court Register under file number KRS 0000197596; company designated by ERO President decision No. PSE DPE-47-58(5)/4988/2007/BT of 24 December 2007 to be the electrical power transmission system operator in the Republic of Poland for the period from 1 January 2008 until 1 July 2014 yoy Year on year SAIDI System Average Interruption Duration Index SAIFI System Average Interruption Frequency Index SFIO Specialized Open-end Mutual Funds Electrical power system intelligently integrating the actions of all the participants in the processes of generation, transmission, distribution and usage to deliver electricity in Smart Grid an economical, reliable and safe manner. It entails comprehensive energy solutions making it possible to combine, facilitate reciprocal communication and control in an optimum way elements of power grids that have been diverse to date Day-Ahead Market (DAM) – energy market operating in the “day ahead” time interval Spot (DA) providing for energy supply on day D Certificate of origin from renewable sources and certificate of origin from co- Certificate of origin generation Document issued by the ERO President pursuant to art. 9I of the Energy Law con- firming the generation of electricity in highly-efficient co-generation generated in: (i) a co-generation unit fired with gaseous fuels or with the total installed electrical capacity at source being under 1 MW (known as a yellow certificate), (ii) a co-generation unit Certificate of origin from co-generation fired with methane released and drained in the course of underground mining activity in hard coal mines that are active, that are being shut down or that have been shut down or with gas obtained by processing biomass (known as a purple certificate), or (iii) some other co-generation unit (known as a red certificate) Certificate of origin from renewable Document issued by the ERO President pursuant to art. 9e of the Energy Law con-

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energy sources, green certificate firming the generation of electricity in a renewable energy source (known as a green certificate) Tariff G Tariff group for individual customers – households Polish Power Exchange S.A., a mercantile exchange on which commodities admitted to be traded on the exchange are traded, i.e. electricity, liquid and gaseous fuels, Polish Power Exchange, TGE mine gas, pollution emission limits and property rights ensuing from certificates of origin whose price is directly or indirectly dependent on the price of electricity, liquid or gaseous fuels and the quantity of pollution emissions Terawatt hour, a multiple unit of electricity in the International System of Units. 1 TWh TWh is 109 kWh EU European Union ERO Energy Regulatory Office

WACC Weighted average cost of capital

WIBOR Warsaw Interbank Offered Rate

Generation of electricity or heat using a process of simultaneous and joint combustion of biomass or biogas with other fuels in a single device; a portion of the energy gen- Cofiring erated in this manner may be deemed to be energy generated in a renewable energy source y

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WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c

Consolidated financial statements prepared in accordance with the International Financial Reporting Standards as endorsed by the European Union for the year ended

31 December 2017 WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c

Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (in millions of PLN)

TABLE OF CONTENTS

CONSOLIDATED STATEMENT OF PROFIT OR LOSS ...... 3 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME ...... 4 CONSOLIDATED STATEMENT OF FINANCIAL POSITION ...... 5 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ...... 7 CONSOLIDATED STATEMENT OF CASH FLOWS ...... 8 ACCOUNTING PRINCIPLES (POLICIES) AND OTHER EXPLANATORY INFORMATION ...... 9 1. General information ...... 9 2. Composition of the Group and its changes ...... 9 3. Composition of the Parent Company’s Management Board ...... 13 4. Approval of the financial statements ...... 13 5. Basis for preparation of the financial statements ...... 13 6. Material items subject to judgment and estimates ...... 14 7. Changes in estimates ...... 14 8. New standards and interpretations...... 15 9. Significant accounting policies ...... 16 NOTES ON OPERATING SEGMENTS ...... 26 10. Business lines (Operating segments) ...... 26 NOTES TO CONSOLIDATED STATEMENT OF PROFIT OR LOSS ...... 29 11. Revenues and expenses ...... 29 12. Income tax ...... 32 NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL POSITION ...... 35 13. Property, plant and equipment ...... 35 14. Intangible assets ...... 39 15. Goodwill...... 41 16. Investments in joint ventures and associates measured by the equity method ...... 41 17. Inventories ...... 43 18. CO2 emission allowances ...... 43 19. Cash and cash equivalents ...... 44 20. Other assets ...... 44 21. Share capital and other capital...... 44 22. Earnings per share ...... 46 23. Dividends ...... 46 24. Provisions ...... 46 25. Other liabilities ...... 49 26. Deferred income and grants ...... 49 27. Assets and liabilities of the Company Social Benefit Fund ...... 50 NOTES ON FINANCIAL INSTRUMENTS ...... 51 28. Financial instruments ...... 51 29. Financial risk management principles and objectives ...... 59 NOTES TO CONSOLIDATED STATEMENT OF CASH FLOWS ...... 64 30. Statement of cash flows ...... 64 OTHER NOTES ...... 65 31. Investment commitments ...... 65 32. Information on related parties ...... 65 33. Lease ...... 66 34. Capital management ...... 66 35. Contingent assets and liabilities ...... 67 36. Employment structure ...... 67 37. Other information significantly affecting the assessment of assets, financial position and the financial result of the Group ...... 68 38. Subsequent events ...... 68

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 2 (This is translation of the consolidated financial statements originally issued in Polish) WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (in millions of PLN)

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

Year ended Year ended 31 December 31 December Note 2017 2016

Sales revenues 11.1 10,534 10,181

Cost of sales 11.2 (8,615) (8,846)

Gross profit on sales 1,919 1,335

Other operating income 11.5 118 117 Selling and distribution expenses 11.2 (341) (338) General and administrative expenses 11.2 (326) (318) Other operating expenses 11.6 (160) (309) Financial income 11.7 88 54 Financial costs 11.8 (320) (284)

Share in profit/(loss) of the entities measured by the equity method 24 (52)

Profit or loss before tax 1,002 205

Income tax 12 (213) (58)

Net profit or loss for the period 789 147 Attributable to: Equity holders of the Parent Company 773 151 Non-controlling interest 16 (4)

Earnings or loss per share (in PLN) 22 - basic 1.87 0.36 - diluted 1.87 0.36

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 3 (This is translation of the consolidated financial statements originally issued in Polish) WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (in millions of PLN)

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Year ended Year ended Note 31 December 2017 31 December 2016

Net profit for the period 789 147

Items that will never be reclassified to profit or loss (20) 26

Actuarial gains and losses on defined benefit plans 24.1 (25) 33

Deferred tax 5 (7)

Items that are or may be reclassified subsequently to (45) 39 profit or loss

Foreign exchange differences from translation of (6) 4 foreign entities Cash flow hedges 28.6 (48) 43 Deferred tax 9 (8)

Share in other comprehensive income of the entities - (2) measured by the equity method

Net other comprehensive income (65) 63 Total comprehensive income 724 210 Attributable to: Equity holders of the Parent Company 708 214 Non-controlling interest 16 (4)

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 4 (This is translation of the consolidated financial statements originally issued in Polish) WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (in millions of PLN)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at As at Note 31 December 2017 31 December 2016

ASSETS

Non-current assets Property, plant and equipment 13 13,371 13,053 Intangible assets 14 338 383 Goodwill 15 15 26 Investments in associates and joint ventures measured by the 16 728 390 equity method Deferred tax assets 12.3 325 396 Other non-current financial assets 28.1 46 166 Other non-current assets 20.1 107 101 14,930 14,515

Current assets Inventories 17 352 472 Current tax receivables 31 111 Trade receivables 28.4.1 1,843 1,947 Portfolio of financial assets - 2 Other current financial assets 28.1 83 15 Cash and cash equivalents 19 3,641 1,471 Other current assets 20.2 176 198 6,126 4,216

TOTAL ASSETS 21,056 18,731

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 5 (This is translation of the consolidated financial statements originally issued in Polish) WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (in millions of PLN)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION (cont.)

As at As at 31 December 31 December Note 2017 2016 EQUITY AND LIABILITIES

Equity Share capital 21.1 4,522 4,522 Foreign exchange differences from translation of a foreign entity (2) 4 Reserve capital 21.4 1,018 1,018 Supplementary capital 21.5 1,433 728 Cash flow hedge reserve 21.6, 28.6 2 41 Retained earnings 21.7 2,436 2,464 Equity attributable to equity holders of the Parent Company 9,409 8,777 Non-controlling interest 21.8 56 40 9,465 8,817

Non-current liabilities Loans and borrowings 28.4.2 2,720 3,086 Bonds issued 28.4.2 4,520 2,639 Non-current provisions 24 550 578 Deferred tax liabilities 12.3 596 593 Deferred income and non-current grants 26 501 515 Other non-current financial liabilities 25.1 81 6 8,968 7,417 Current liabilities Trade liabilities 792 811 Current loans and borrowings 28.4.2 356 334 Bonds issued 28.4.2 109 78 Current income tax liability 11 3 Deferred income and grants 26 182 170 Short-term provisions 24 571 711 Other financial liabilities 28.1 280 157 Other current liabilities 25.2 322 233 2,623 2,497

Total liabilities 11,591 9,914

TOTAL EQUITY AND LIABILITIES 21,056 18,731

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 6 (This is translation of the consolidated financial statements originally issued in Polish) WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (in millions of PLN)

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Equity attributable to equity holders of the Parent Company

Foreign exchange differences Suppleme Non-controlling Share Reserve Cash flow hedge Retained Total equity Note from ntary Total interest capital capital reserve earnings translation of capital a foreign entity

As at 1 January 2017 4,522 4 1,018 728 41 2,464 8,777 40 8,817 Actuarial gains and losses on defined benefit 24.1 - - - - - (20) (20) - (20) plans Foreign exchange differences from translation of - (6) - - - - (6) - (6) foreign entities Cash flow hedges 28.6 - - - - (39) - (39) - (39) Net profit for the period - - - - - 773 773 16 789 Total comprehensive income for the period - (6) - - (39) 753 708 16 724 Retained earnings distribution - - - 705 - (705) - - - Dividends 23 - - - - - (79) (79) - (79) Changes in shares held - - - - 3 3 - 3 As at 31 December 2017 4,522 (2) 1,018 1,433 2 2,436 9,409 56 9,465

As at 1 January 2016 4,522 - 447 661 6 3,134 8,770 44 8,814 Actuarial gains and losses on defined benefit 24.1 - - - - - 26 26 - 26 plans Foreign exchange differences from translation of - 4 - - - - 4 - 4 foreign entities Cash flow hedges 28.6 - - - - 35 - 35 - 35 Share in other comprehensive income of the - - - - - (2) (2) - (2) entities measured by the equity method Net profit for the period - - - - - 151 151 (4) 147 Total comprehensive income for the period - 4 - - 35 175 214 (4) 210 Retained earnings distribution - - 571 67 - (638) - - - Dividends 23 - - - - - (203) (203) - (203) Changes in stakes held - - - - - (4) (4) - (4) As at 31 December 2016 4,522 4 1,018 728 41 2,464 8,777 40 8,817

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 7 (This is translation of the consolidated financial statements originally issued in Polish)

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (in millions of PLN)

CONSOLIDATED STATEMENT OF CASH FLOWS

Year ended Year ended 31 December 31 December Note 2017 2016 Cash flows from operating activities Profit/(loss) before tax 1,002 205 Adjustments for: Share in (profit)/loss of the entities measured by the equity method (24) 52 Foreign currency (gains)/losses (17) 11 Amortization and depreciation 11.3 973 957 Net interest and dividends 268 259 (Profit)/loss on investing activities, including goodwill impairment 30 (25) 611 allowance Changes in working capital: Change in receivables 30 113 (127) Change in inventories 120 41 Change in liabilities excluding loans and borrowings 30 33 (104) Change in prepayments and accruals (24) (29) Change in provisions 30 (198) 176 2,221 2,052 Income tax (39) (270) Net cash from operating activities 2,182 1,782

Cash flows from investing activities Disposal of property, plant and equipment and intangible assets 15 11 Purchase of property, plant and equipment and intangible assets (1,280) (1,580) Proceeds from deposits above 3m 125 - Establishment of deposits above 3m (127) - Sale of participation units in the ENERGA Trading fund 2 320 Disposal of subsidiary 43 - Investments in associates and joint ventures measured by the equity 2.2 (217) (443) method Loans granted (10) - Other (6) 3 Net cash from investing activities (1,455) (1,689)

Cash flows from financing activities Proceeds from debt incurred 2,313 1,286 Repayment of debt incurred (346) (575) Redemption of debt securities (272) (578) Dividends paid 23 (79) (203) Interest paid (206) (204) Grants received 49 - Other (7) (13) Net cash from financing activities 1 452 (287)

Net increase/(decrease) in cash and cash equivalents 2 179 (194) Cash and cash equivalents at the beginning of the period 19 1,464 1,658 Cash and cash equivalents at the end of the period 19 3,643 1,464

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 8

(This is translation of the consolidated financial statements originally issued in Polish) WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (in millions of PLN)

ACCOUNTING PRINCIPLES (POLICIES) AND OTHER EXPLANATORY INFORMATION

1. General information

The ENERGA SA Group (the “Group”) consists of ENERGA Spółka Akcyjna (“Parent Company”, “Company”) with its registered office in Gdańsk and its subsidiaries (see Note 2). The consolidated financial statements of the Group cover the year ended 31 December 2017 and contain appropriate comparative data. The Parent Company is entered in the Register of Entrepreneurs of the National Court Register held by the District Court Gdańsk- Północ, 7th Commercial Division of the National Court Register under number KRS 0000271591. The Parent Company's REGON statistical number is 220353024. The primary activities of the Group are as follows: 1. distribution and sales of electricity and heat, 2. production of electricity and heat, 3. trading in electricity. As at 31 December 2017, the Polish State Treasury is the Company's parent and ultimate controlling party of the ENERGA SA Group. 2. Composition of the Group and its changes

2.1. Composition of the Group at the end of the reporting period As at 31 December 2017, the Group consists of ENERGA SA and the following companies:

% held by the Group in Registered share capital as at No. Company name Line of business office 31 December 31 December 2017 2016

Distribution Business Line (Segment)

1 ENERGA-OPERATOR SA Gdańsk distribution of electricity 100 100

ENERGA-OPERATOR Eksploatacja 2 Elbląg grid operation 100 100 Elbląg Sp. z o.o. ENERGA-OPERATOR Eksploatacja 3 Gdańsk grid operation 100 100 Gdańsk Sp. z o.o. ENERGA-OPERATOR Eksploatacja 4 Kalisz grid operation 100 100 Kalisz Sp. z o.o. ENERGA-OPERATOR Eksploatacja 5 Płock grid operation 100 100 Płock Sp. z o.o. ENERGA-OPERATOR Eksploatacja 6 Słupsk grid operation 100 100 Słupsk Sp. z o.o. ENERGA-OPERATOR Eksploatacja 7 Toruń grid operation 100 100 Toruń Sp. z o.o. ENERGA-OPERATOR Techniczna technical customer 8 Koszalin 100 100 Obsługa Odbiorców Sp. z o.o. service Przedsiębiorstwo Budownictwa 9 Elektroenergetycznego ENBUD Słupsk Słupsk contracting and design 100 100 Sp. z o.o. Energetyka Kaliska – Usługi Techniczne 10 Kalisz contracting and design 100 100 Sp. z o.o. ZEP - Centrum Wykonawstwa 11 Płock contracting and design 100 100 Specjalistycznego Sp. z o.o. Zakład Budownictwa Energetycznego 12 Koszalin contracting and design 100 100 Sp. z o.o. ENERGA-OPERATOR Logistyka 13 Płock logistics and supply 100 100 Sp. z o.o. 1

Sales Business Line (Segment)

14 ENERGA-OBRÓT SA Gdańsk trading in electricity 100 100

15 ENERGA Obsługa i Sprzedaż Sp. z o.o. 2 Gdańsk customer service - 100

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 9

% held by the Group in Registered share capital as at No. Company name Line of business office 31 December 31 December 2017 2016

16 ENERGA Oświetlenie Sp. z o.o. Sopot lighting services 100 100

17 ENERGA SLOVAKIA s.r.o. Bratislava trading in electricity 100 100

Generation Business Line (Segment)

18 ENERGA Wytwarzanie SA Gdańsk production of energy 100 100

19 ENERGA Elektrownie Ostrołęka SA Ostrołęka production of energy 89.64 89.64

20 ENERGA Kogeneracja Sp. z o.o. Elbląg production of energy 100 100

21 ENERGA Ciepło Ostrołęka Sp. z o.o. Ostrołęka distribution of heat 100 100

repairs and maintenance 22 ENERGA Serwis Sp. z o.o. Ostrołęka 94.81 94.81 services

23 ENERGA Ciepło Kaliskie Sp. z o.o. Kalisz distribution of heat 91.24 91.24

investment project 24 ENERGA Invest Sp. z o.o.2 Gdańsk 100 100 management

25 AEGIR 4 Sp. z o.o. 2 Gdańsk production of energy - 100

26 Elektrownia CCGT Gdańsk Sp. z o.o. 2 Gdańsk production of energy - 100

27 Elektrownia CCGT Grudziądz Sp. z o.o. 2 Grudziądz production of energy - 100

Other Business Line (Segment)

ENERGA Centrum Usług Wspólnych accounting, payroll and 28 Gdańsk 100 100 Sp. z o.o. administrative services

29 ENERGA Finance AB (publ) Stockholm financing activity 100 100

information and ENERGA Informatyka i Technologie 30 Gdańsk communication 100 100 Sp. z o.o. technologies financing services and 31 RGK Sp. z o.o. Gdańsk 100 100 property management organization and management of 32 Enspirion Sp. z o.o. Gdańsk 100 100 development of innovative power projects

33 EOB PGK1 Sp. z o.o. Gdańsk financing services 100 100

Centrum Badawczo-Rozwojowe im. development activity in 34 M. Faradaya Sp. z o.o. (formerly Gdańsk 100 100 engineering EOB PGK2 Sp. z o.o.) 2

35 ENSA PGK1 Sp. z o.o. 2 Gdańsk financing services - 100

36 ENSA PGK2 Sp. z o.o. 2 Gdańsk financing services - 100

ENERGA Ochrona Sp. z o.o. (formerly 37 Gdańsk security activities 100 100 ENSA PGK3 Sp. z o.o.) 2

38 ENSA PGK4 Sp. z o.o. 2 Gdańsk financing services - 100

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 10

% held by the Group in Registered share capital as at No. Company name Line of business office 31 December 31 December 2017 2016

39 ENSA PGK5 Sp. z o.o. 2 Gdańsk financing services - 100

40 ENSA PGK6 Sp. z o.o. 2 Gdańsk financing services - 100

41 ENSA PGK7 Sp. z o.o. 2 Gdańsk financing services - 100

42 ENSA PGK8 Sp. z o.o. 2 Gdańsk financing services 100 100

1 On 23 February 2018 the company’s name was changed; its current name is ENERGA Logistyka Sp. z o.o. 2 See description in Note 2.2.

Additionally, as at 31 December 2017 the Group holds shares in joint ventures: Polska Grupa Górnicza Sp. z o.o. (“PGG”), Elektrownia Ostrołęka SA (on 27 February 2018 it was converted into a limited liability company) and in an associate – Polimex- Mostostal S.A. (“Polimex”) (see description in note 2.2). 2.2. Changes in the composition of the Group and investments in joint ventures and associates in the reporting period 2.2.1. Polska Grupa Górnicza On 28 April 2016, the subsidiary ENERGA Kogeneracja Sp. z o.o. signed an Investment Agreement (“Agreement”) defining the terms and conditions of the financial investment in Polska Grupa Górnicza Sp. z o.o. As part of the investment in PGG, ENERGA Kogeneracja Sp. z o.o. undertook to make contributions towards the newly-issued shares in PGG in the total amount of PLN 500 m. The capital contribution has been effected. On 31 March 2017, the subsidiary ENERGA Kogeneracja Sp. z o.o. signed an investment agreement (“Agreement”) defining the terms and conditions of the financial investment in Polska Grupa Górnicza Sp. z o.o. (“PGG”). The parties to the Investment Agreement are ENERGA Kogeneracja Sp. z o.o., ENEA S.A., PGE Górnictwo i Energetyka Konwencjonalna S.A., PGNiG TERMIKA S.A., Węglokoks S.A., Towarzystwo Finansowe Silesia Sp. z o.o., Fundusz Inwestycji Polskich Przedsiębiorstw [Polish Corporates Mutual Fund], Fundusz Inwestycyjny Zamknięty Aktywów Niepublicznych [Private Assets Closed-End Mutual Fund] (hereinafter jointly referred to as “Investors”) and PGG. The new Agreement amended and supplemented the terms and conditions of the investment made by the existing PGG shareholders as defined in the first investment agreement signed by the existing shareholders and the company on 28 April 2016. The transaction assumes a recapitalization of PGG by the Investors (excluding Węglokoks S.A. and Fundusz Inwestycji Polskich Przedsiębiorstw Private Assets Closed-End Mutual Fund) for the total amount of PLN 1 bn in three tranches. Under the new agreement, the Group undertook to subscribe for new shares with the total par value of PLN 100 m in exchange for a cash contribution made in three tranches: • in April 2017 – PLN 50 m (the increase has been effected), • in June 2017 – PLN 20 m (the increase has been effected), • in Q1 2018 – PLN 30 m (the payment was made on 14 February 2018) At the end of the current reporting period, capital contribution in the total amount of PLN 70 m was made, which results in the subscription of 15.76% of PGG’s share capital. Both the Investment Agreement of 28 April 2016 and the new Investment Agreement of 31 March 2017 provide for a number of mechanisms allowing investors to monitor the financial standing of PGG on an ongoing basis, which includes implementation of its business plan and taking of optimization measures, among others in the case of adverse changes in market conditions. These rights are exercised by PGG’s Supervisory Board, while according to the Agreement, each shareholder in PGG has the right to appoint, dismiss and suspend one Supervisory Board member (as a personal entitlement), while there are 7 Supervisory Board members in total. Additionally, PGE Górnictwo i Energetyka Konwencjonalna S.A., ENERGA Kogeneracja Sp. z o.o., PGNiG TERMIKA S.A. and Fundusz Inwestycji Polskich Przedsiębiorstw Fundusz Inwestycyjny Zamknięty Aktywów Niepublicznych [Polish Corporates Closed-End Mutual Fund] (hereinunder jointly referred to as “New Investors” signed a memorandum of agreement regarding PGG (“Memorandum of Agreement”). The purpose of the Memorandum of Agreement is to increase control of New Investors over PGG, since they jointly hold the majority of votes at PGG’s Shareholder Meeting. The Memorandum of Agreement assumes, among others, that a joint position will be agreed upon when the key decisions are made by PGG’s General Meeting and its Supervisory Board. On 29 June 2016, the Office of Competition and Consumer Protection (UOKiK) issued his approval for the concentration involving acquisition of joint control over PGG by the New Investors based on the Memorandum of Agreement. On 31 March 2017, by the power of the new Investment Agreement, Enea S.A. joined the group of investors in PGG. On 22 December 2017, UOKiK issued its approval for the concentration resulting from Enea S.A. joining the Agreement. On 29 December 2017, an entry was made in the National Court Register pertaining to the transformation of Polska Grupa Górnicza Sp. z o.o. into a joint stock company. PGG produces coal and therefore it offers access to rich resources of energy fuel that can be used by the Group’s production entities. The registered office of PGG is in Katowice.

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2. Composition of the Group and its changes (cont.) PGG is a privately held company and therefore there are no market quotes for its share prices. Following the transactions of taking up its shares in 2016 and 2017, the calculation of its goodwill fluctuated and as at 31 December 2017 its amount was PLN 1 m. Detailed information is presented in Note 16. 2.2.2. Polimex-Mostostal On 18 January 2017, the Management Board of ENERGA SA along with ENEA S.A., PGE S.A., PGNiG Technologie S.A. (“Investors”) and Polimex-Mostostal S.A. signed an investment agreement under which the Investors undertook to make an equity investment in Polimex. ENERGA SA subscribed to 37.5 m newly-issued shares with the par value of PLN 2 each, for the total amount of PLN 75 m and 1.5 m Polimex shares from SPV Operator sp. z o.o. which are approved for trading on WSE in a block transaction for the total amount of PLN 5.8 m. As a result of this transaction, its stake in the Company reached approximately 16.5%. The investment agreement allows the investors to influence Polimex’s financial and operational policy. These powers are exercised through the Supervisory Board. According to the agreement, the Supervisory Board will consist of 3 members named by the Investors. Moreover, the Investors signed a memorandum of agreement relating to the investment in Polimex (“Memorandum of Agreement”). The purpose of the Memorandum of Agreement is to ensure increased control over Polimex to the Investors, who jointly hold the majority of votes at PGG’s Shareholder Meeting (66%). The Memorandum of Agreement assumes, among others, that a joint position will be agreed upon by voting when the key decisions are made by the General Meeting and Supervisory Board of Polimex, including determination of the composition of Polimex’s Management Board. Because of the Investors’ powers mentioned above that result in significant influence, the stake held in Polimex was classified as an associate measured by the equity method. Polimex is an engineering and construction company, which is characterized by a broad range of services provided in the capacity of a general contractor. The Company’s registered office is in Warsaw. Polimex is listed on the Warsaw Stock Exchange. At session closing on 29 December 2017, the average price of Polimex’s stock was PLN 4.03; accordingly the fair value of the block of shares held by the Group was PLN 157 m. Fair value of acquired assets and liabilities as at the date of acquisition Following the analyses and valuations of the acquired assets and liabilities, the final fair value of PGG’s identifiable assets, liabilities and contingent liabilities was set at PLN 394 m. The Group’s share in Polimex’s net assets was 16.5%, or PLN 65 m. The measurement of the fair value of Polimex’s assets and liabilities was prepared by IPOPEMA Financial Advisory Sp. z o.o. Sp. k. The goodwill amount, that is the surplus of purchase cost over the Polimex’s net assets attributable to the Group, was calculated at PLN 17 m.

Value Identifiable net assets – 16.5% 65 Purchase price 82 Goodwill 17

2.2.3. Ostrołęka Power Plant On 8 December 2016, ENERGA SA, ENEA SA and Elektrownia Ostrołęka SA signed an investment agreement regarding the execution of the new power unit construction project in Ostrołęka. The condition precedent for the transaction was obtaining an approval from the President of the Office of Competition and Consumer Protection for the concentration involving the purchase of 50% of shares in the special-purpose vehicle Elektrownia Ostrołęka SA by Enea S.A. On 11 January 2017, the President of UOKiK issued an unconditional approval for the concentration and consequently on 1 February 2017, ENERGA SA and ENEA S.A. signed a share purchase agreement by ENEA S.A. Under the above agreements, ENERGA SA and ENEA S.A. acquired joint control over Elektrownia Ostrołęka SA with its registered office in Ostrołęka; the company’s purpose is building and operating a new coal-fired unit. Both parties will hold a 50% stake in Elektrownia Ostrołęka SA and the same number of votes at the General Meeting. The Management Board and the Supervisory Board will consist of the same number of representatives of both investors. Decisions on significant actions will require unanimous consent of both shareholders. Given the above, the investment was classified as a joint venture and is captured using the equity method. Elektrownia Ostrołęka SA is a privately held company and therefore there are no market quotes for its share prices. Also, as a result of this transaction the Group no longer controls Elektrownia Ostrołęka SA and therefore profit of PLN 6 m was recognized in financial income. On 13 April 2017, the company’s share capital was increased by PLN 19 m; the new shares were subscribed, half each, i.e. PLN 9.5 m each, by ENERGA SA and ENEA S.A. and covered by a cash contribution. 2.2.4. Other changes in the composition of the Group On 1 December 2017, ENERGA Obsługa i Sprzedaż Sp. z o.o. (acquired company) merged with ENERGA-OBRÓT SA (surviving company) without increasing the share capital. On 12 October 2017, ENSA PGK1 Sp. z o.o. (surviving company) was merged with ENERGA Invest SA (acquired company). The company’s current name is ENERGA Invest Sp. z o.o. Through the merger, the share capital was increased by PLN 47,346,000.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 12

2. Composition of the Group and its changes (cont.) On 9 November 2017, AEGIR4 Sp. z o.o., ENERGA CCGT Gdańsk Sp. z o.o. and ENERGA CCGT Grudziądz Sp. z o.o. (acquired companies) were merged with ENERGA Wytwarzanie SA (surviving company) without increasing the share capital. On 13 December 2017, a name change of EOB PGK2 Sp. z o.o. to Centrum Badawczo-Rozwojowe im. M. Faradaya Sp. z o.o., a change in its business and an increase of the company’s share capital by PLN 1,490,000 were all entered in the register. On 29 December 2017, an entry was made on the merger of ENSA PGK2 Sp. z o.o., ENSA PGK4 Sp. z o.o., ENSA PGK5 Sp. z o.o., ENSA PGK6 Sp. z o.o. i ENSA PGK7 Sp. z o.o. (acquired companies) and ENSA PGK8 Sp. z o.o. (surviving company). As a result of the merger, the share capital was increased by PLN 50,000. On 27 October 2017, a name change of ENSA PGK3 Sp. z o.o. to ENERGA Ochrona Sp. z o.o. and an increase of the company’s share capital by PLN 290,000 were registered. 3. Composition of the Parent Company’s Management Board As at the date of these consolidated financial statements, the composition of the Parent Company’s Management Board was as follows: • Alicja Klimiuk – Acting President of the Management Board, • Jacek Kościelniak – Vice-President of the Management Board for Finance, • Grzegorz Ksepko – Vice-President of the Management Board for Corporate Matters. The following changes in the Parent Company’s Management Board occurred in the current reporting period: • On 17 January 2017, the Company’s Supervisory Board adopted a resolution to dismiss Mr. Dariusz Kaśków, the previous President of the Management Board, Mr. Mariusz Rędaszka, the Vice-President of the Management Board for Financial Matters and Mr. Przemysław Piesiewicz, the Vice-President of the Management Board for Development Strategy. At the same time, Mr. Jacek Kościelniak was delegated to act as the President of the Management Board. • On 10 February 2017, the Company’s Supervisory Board adopted a resolution to appoint to the Management Board: Mr. Daniel Obajtek (as President of the Management Board), Ms. Alicja Klimiuk (as Vice-President of the Management Board for Operations) and Mr. Jacek Kościelniak (as Vice-President of the Management Board for Financial Matters). • On 16 February 2017, the Company’s Supervisory Board adopted a resolution to dismiss from the Company’s Management Board Ms. Mariola Zmudzińska, who served as the Vice-President of the Management Board for Investor Relations. Moreover, in connection with the resignation of Mr. Daniel Obajtek as President of the ENERGA SA Management Board on 5 February 2018, on 6 February 2018 the Management Board adopted a resolution and the Company’s Supervisory Board approved the decision to appoint Ms. Alicja Klimiuk as Acting President of the Management Board. 4. Approval of the financial statements These consolidated financial statements were approved for publication by the Company’s Management Board on 14 March 2018. 5. Basis for preparation of the financial statements These consolidated financial statements have been prepared on the historical cost basis except for financial instruments measured at fair value through profit or loss and hedging derivatives. These consolidated financial statements are presented in millions of zloty (“PLN m”). These consolidated financial statements have been prepared based on the assumption that the Group would continue as a going concern in the foreseeable future. As at the date of these financial statements there is no evidence indicating significant uncertainty as to the ability of the Group to continue its business activities as a going concern. 5.1. Statement of compliance These consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards ("IFRS") and IFRS approved by the European Union ("IFRS EU"). IFRS include standards and interpretations approved by the International Accounting Standards Board (“IASB”) and the International Financial Reporting Interpretations Committee (“IFRIC”). The Management Board of the Parent Company used its best knowledge in the application of standards and interpretations as well as measurement methods and principles for the individual items of the consolidated financial statements of the ENERGA SA Group in accordance with IFRS EU as at 31 December 2017. All the tables and explanations have been prepared with due care. 5.2. Functional and presentation currency The functional currency of the Parent Company and other Polish companies covered by these consolidated financial statements and the presentation currency of these consolidated financial statements is the Polish zloty except for ENERGA SLOVAKIA s.r.o. and ENERGA Finance AB (publ) where the functional currency of their financial statements is euro. For the purpose of these financial statements, the underlying accounts of the above-mentioned companies have been translated into PLN using the method described in note 9.5.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 13

6. Material items subject to judgment and estimates In the process of applying the accounting policies, one of the most important factors next to accounting estimates was the professional judgment of the management, which affected the amounts stated in the consolidated financial statements, including the notes. The assumptions adopted for the purposes of those estimates are based on the best knowledge of the Management Board regarding the current and future actions and events in individual areas. Detailed information on the assumptions is presented in the relevant notes in these consolidated financial statements. The key assumptions for the future and other main sources of uncertainty occurring as at the end of the reporting period, which entail a significant risk of considerable adjustment of the carrying amount of assets and liabilities in the next financial year, are presented below. Impairment of property, plant and equipment, intangible assets and goodwill The Group assesses whether there is any evidence of impairment of the Cash Generating Units ("CGU") and individual assets. This analysis covers external factors, including technological, market, economic or legal changes in the environment in which we conduct our business or on the markets where we use the Group's assets to serve our clients, as well as internal factors associated with the physical condition of property, plant and equipment components and changes in the way they are used. If we find any such evidence, we carry out an asset impairment test following the rules described in Note 9.9. Information on the impairment tests that we have conducted is presented in Notes 13 and 15. Measurement of provisions Provisions for employee benefits (provision for pensions and similar benefits, jubilee bonuses, energy tariff, additional allowances for the Company Social Benefit Fund to which employees of Group companies are entitled after their employment period) are estimated using actuarial methods. Other provisions are measure according to the best estimation of expenditures necessary to fulfill the existing duties. If the time value of money is important then the provision is equal to the present value of expenditures expected to be necessary to fulfill this duty. Detailed information about the accepted assumptions and provisions recognized are presented in Note 24. Depreciation rates Depreciation rates and charges are determined on the basis of the anticipated useful life of a property, plant and equipment component or intangible asset and estimates regarding their residual value. Every year, Group companies revise the assumed periods of useful life, based on the current estimates. Energy price paths Energy price paths developed by independent industry experts are an important element of the estimation of value in use of cash generating centers in the generation segment. They are also used to estimate provisions for post-employment benefits in the form of employee energy tariffs. When forecasting price paths, the Group has used reports prepared upon the Group’s commission by an independent specialist. The report includes assumptions and projections pertaining to the Polish market. Detailed information about the analysis of sensitivity to changes in the paths is disclosed in Notes 13 and 24. Deferred tax asset Deferred tax assets are measured using the tax rates that will be applied at the moment when the asset is utilized, based on the tax regulations in force on the end of the reporting period. The Group recognizes a deferred tax asset based on the assumption that tax profit would be recorded in the future, allowing the Group to use the asset. This assumption may prove to be unjustified if tax results deteriorate in the future. Details on the deferred tax asset are provided in Note 12.3. Fair value of financial instruments The fair value of financial instruments, for which no active markets exist, is measured by using appropriate valuation techniques. The Group applies professional judgment to the selection such appropriate methods and assumptions. The method used to determine fair value of individual financial instruments is presented in Note 28.3. Estimation of revenues on sales of electricity and distribution services Meter readings of electricity sold to retail customers are made in periods different from reporting periods. Therefore, the entities comprising the Group make estimations of electricity and distribution services sold as at every last day of the reporting period, for the period not covered by meter readings. The amount of revenues recognized as at 31 December 2017 on the basis of the estimations was PLN 290 m (PLN 371 m as at 31 December 2016). Impairment losses on receivables As at the end of the reporting period, the entity evaluates whether there is objective evidence of impairment of a receivable or a group of receivables. If a recoverable amount of an asset is lower from its carrying amount then the entity recognizes an impairment loss bringing it down to the present value of planned cash flows. Impairment losses are recognized based on the age analysis of receivables and an analysis of the financial standing of the individual debtors and history of repayments. The amounts of the impairment losses on receivables are provided in Note 28.4.1. 7. Changes in estimates During the periods covered by these consolidated financial statements, no changes were made in the scope or methods used in determining significant estimates. The changes in the amounts of the estimates resulted from events that occurred during the reporting periods.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 14

8. New standards and interpretations The accounting policies of the Group are applied on a continuous basis. 8.1. Standards and interpretations adopted for the first time in 2017 The following amendments to the existing standards published by the International Accounting Standards Board (IASB) and endorsed in the EU came into force in 2017: • Amendments to IAS 7 “Statement of Cash Flows” – Disclosure Initiative (applicable to annual periods beginning on or after 1 January 2017), • Amendments to IAS 12 “Income Taxes” – Detailed regulation of the recognition of deferred tax assets for unrealised losses (applicable to annual periods beginning on or after 1 January 2017). • Improvements to IFRS (2014-2016 cycle) - Amendments to IFRS 12 (applicable to annual periods beginning on or after 1 January 2017). These amendments to the standards have had no significant impact on the Group's accounting policies applied so far. 8.2. Standards and interpretations already published and endorsed in the EU, which have not come into effect The following standards and interpretations have already been published and endorsed in the EU, but have not yet come into effect: • IFRS 15 “Revenue from Contracts with Customers” (applicable to annual periods beginning on or after 1 January 2018), • IFRS 9 “Financial Instruments” (applicable to annual periods beginning on or after 1 January 2018), • IFRS 16 “Leases” (applicable to annual periods beginning on or after 1 January 2019), • Amendments to IFRS 4 “Insurance Contracts” – Applying changes introduced by IFRS 9 “Financial Instruments” (applicable to annual periods beginning on or after 1 January 2018), • Clarifications to IFRS 15 “Revenue from Contracts with Customers” (applicable to annual periods beginning on or after 1 January 2018), • Amendments to IFRS 2 “Share-based Payment” – Classification and Measurement of Share-based Payment Transactions (applicable to annual periods beginning on or after 1 January 2018), • Improvements to IFRSs (2014-2016 cycle) – Amendments to IFRS 1, IAS 28 (applicable to annual periods beginning on or after 1 January 2018). The Group has decided not to take advantage of the possibility of early application of the above standards, amendments to the existing standards. According to an analysis conducted in the Group companies, the above standards and amendments to the existing standards, effective from 1 January 2018, would have had no material influence on the financial statements had they been applied by the Group as at the balance sheet date. The Group continues to analyze contracts that will be subject to disclosure in accordance with IFRS 16 in the statement of financial position, as their amount and value is subject to constant changes. 8.3. Standards and interpretations adopted by the IASB but not yet endorsed in the EU IFRS as endorsed in the EU do not currently differ from the regulations adopted by the International Accounting Standards Board, with the exception of the following standards, amendments to standards and interpretations, which as at the date of approving these financial statements have not yet been adopted for application: • IFRS 14 “Regulatory Deferral Accounts” (applicable to annual periods beginning on or after 1 January 2016); the European Commission has decided not to endorse this transitional standard pending an appropriate standard, • IFRS 17 “Insurance Contracts” (applicable to annual periods beginning on or after 1 January 2021). • Amendments to IFRS 10 “Consolidated Financial Statements” and IAS 28 “Investments in Associates and Joint Ventures” - Sales or contributions of assets between an investor and its associate/joint venture (no effective date specified), • Amendments to IAS 19 "Employee benefits" - changes to a defined benefit plan (applicable to annual periods beginning on or after 1 January 2019), • IFRIC 22 interpretation: “Foreign Currency Transactions and Advance Consideration” (applicable to annual periods beginning on or after 1 January 2018), • Amendments to IAS 40 “Investment Property” – Transfers of Investment Property to other asset groups (applicable to annual periods beginning on or after 1 January 2018), • Interpretation IFRIC 23 “Uncertainty over Income Tax Treatments” (applicable to annual periods beginning on or after 1 January 2019), • Amendments to IFRS 9 “Financial Instruments” – Prepayment Features with Negative Compensation (applicable to annual periods beginning on or after 1 January 2019), • Amendments to IAS 28 "Investments in Associates and Joint Ventures" – Detailed scope of application of the standard for long-term interests in associates and joint ventures (applicable to annual periods beginning on or after 1 January 2019). • Amendments to various standards “Annual Improvements to IFRS (2015-2017 cycle)” – changes introduced during the annual cycle of improvements to IFRS (IFRS 3, IFRS 11, IAS 12 and IAS 23) aimed mainly at removing inconsistencies agreeing on the wording (applicable to annual periods beginning on or after 1 January 2019). The Group does not expect the amendments to IFRSs mentioned above to have a material influence on its financial statements.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 15

9. Significant accounting policies The key accounting policies used by the Company are presented below. The policies have been applied continuously. 9.1. Principles of consolidation This consolidated financial statements includes the financial statements of ENERGA SA and financial data of its subsidiaries prepared in each company for the year ended 31 December 2017. Subsidiaries are consolidated in the period from the date the Group took control over them and they cease to be consolidated on the date such control ceases. Control is exerted by the Parent Company when, because of its investment, it is subject to exposure to varying returns, or if it holds rights to the variable returns and can also influence those returns by effecting control over the subsidiary. The Group also considers whether to treat the part of the entity where the investment was made as a separate entity (a silo). If the Group controls the recognized separate entity then it consolidates the part of the entity where the investment was made. The Group settles transactions of taking control over subsidiaries undertakings by using the purchase method. A payment transferred within the framework of the transaction is determined as the fair value of transferred assets, accepted obligations towards previous owners of the entity being acquired and equities issued by the acquiring entity. The identifiable assets and liabilities of the acquired entity are measured as at the acquisition date at fair value. Non-controlling interest in an acquired entity is recognized at the amount of the proportionate percentage (corresponding to the non-controlling interest) of the identifiable, recognized net assets of the acquired entity. The goodwill that is created in a purchase transaction is calculated in accordance with the rules presented in Note 9.8. The costs related to the purchase of a subsidiary entity are recognized as the costs of the period. Unrealized profits from transactions concluded within the Group are eliminated in their entirety. Unrealized losses are ignored, unless they constitute a proof of impairment. Purchase or sale of minority interest, when control is not acquired or lost, is recognized as a transaction between shareholder and settled through equity. 9.2. Business combinations of entities under common control Business combinations of entities under common control are settled by summing up the various line items of the relevant assets and liabilities as well as the revenues and expenses of the merged companies, after first converting their values using uniform measurement methods and making the relevant exclusions. In the case of the acquired company, all the balance sheet and profit and loss items included in the financial statements of that company are added up in the amounts presented in the Group’s consolidated financial statements. The share capital of the company whose assets are transferred to another company, or of the companies that are stricken from the commercial register as a result of the business combination, is subject to exclusion. After effecting this exclusion, the pertinent line items of the equity of the company to which the assets of the merged companies or of the newly-formed company are transferred, are adjusted by the difference between the sum total of assets and liabilities and equity. All the account balances and transactions between the merging entities, including the profits or losses on business operations executed prior to the business combination and included in the assets and liabilities and equity undergoing combination are also subject to exclusion. 9.3. Investments in joint ventures A joint venture is a joint contractual arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Investments in joint ventures are recognized using the equity method after deducting impairment losses, if any. Application of the equity method involves the initial recognition of the investment at purchase price plus transaction costs. The Group’s share in the profit or loss of the entities measured by the equity method (calculated taking into account the impact of the fair value measurement as at the investment purchase date) starting from the purchase date is recognized in the Group’s profit or loss, while its share in other comprehensive income of such an entity, starting from the purchase date, is recognized in the Group’s other comprehensive income. Unrealized gains and losses on account of transactions between the investor and the joint venture are eliminated in the amount corresponding to the investor’s share in such gains/losses. 9.4. Investments in associates Associates are entities on which the Parent Company exerts, directly or through subsidiaries, significant influence but does not have control or joint control over them. Investments in associates are recognized using the equity method. Investments in associates are carried in the statement of financial position at purchase price plus transaction cost and subsequent changes in the parent company’s share in net assets of those entities less impairment losses, if any. The Group’s share in the profit or loss of the entities measured by the equity method (calculated taking into account the impact of the fair value measurement as at the investment purchase date) starting from the purchase date is recognized in the Group’s profit or loss, while its share in other comprehensive income of such an entity, starting from the purchase date, is recognized in the Group’s other comprehensive income. Unrealized gains and losses on account of transactions between the investor and the associate are eliminated in the amount corresponding to the investor’s share in such gains/losses.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 16

9. Significant accounting policies (cont.) 9.5. Conversion of items in foreign currencies Transactions denominated in currencies other than the Polish zloty are converted on initial recognition into Polish zloty using the exchange rate applicable on the date of the transaction. At the end of the reporting period: • cash is converted using the closing exchange (it is assumed that the closing exchange rate is the average exchange rate set for the currency by the National Bank of Poland for the day), • non-cash items measured at historical cost in a foreign currency are converted using the exchange rate in effect on the initial transaction date (exchange rate of the company's bank), and • non-cash items measured at fair value in a foreign currency are converted using the exchange rate from the date the fair value is determined. Exchange differences resulting from this conversion are recognized respectively as financial income (cost) items or, in the cases identified in the accounting principles (policies), they are capitalized as assets. Foreign exchange gains/losses on non-cash items such as equity instruments measured at fair value through profit or loss are recognized as changes in fair value. Assets and liabilities of foreign entities consolidated by the full method are converted to the Group's presentation currency at the rate in effect on the end of the reporting period and their statements of profit or loss are converted at the average weighted exchange rate for the reporting period. Foreign exchange gains/losses resulting from such a conversion are posted directly to other comprehensive income. When a foreign entity is sold, the accumulated deferred exchange differences recognized in other comprehensive income relating to that foreign entity are recognized in the statement of profit or loss. The following exchange rates were used for measurement purposes at the end of the reporting period: Exchange rate applicable on the last day of the period Currency 31 December 2017 31 December 2016 EUR 4.1709 4.4240

The weighted average exchange rates for each respective reporting period were as follows: Average exchange rate in the period 1 January - 1 January - Currency 31 December 2017 31 December 2016 EUR 4.2447 4.3757

9.6. Property, plant and equipment Property, plant and equipment is measured at its net values, i.e. the initial value less accumulated depreciation and impairment losses. The initial value of property, plant and equipment includes their cost price plus all the costs directly related to the purchase and bringing the asset to the condition necessary for its use. The cost also includes the expected cost of dismantling the property, plant and equipment, removal and restoration of the asset's location to its initial condition; the obligation to incur this cost arises upon installation of the asset or its use for purposes other than the production of inventories. The costs of purchase or manufacturing costs are capitalized until the asset is adapted to the place and conditions needed to begin its operation. As at the date of purchasing a component of property, plant and equipment, all relevant elements with different useful lives comprising the asset are identified and separated (components). Property, plant and equipment also includes costs of general overhauls, periodic inspections, provided that their value is significant, and cost of replacement of major parts. Depreciation charges are calculated on the basis of purchase price/manufacturing cost of the property, plant and equipment component less its residual value. Depreciation commences in the month following the month in which the asset becomes available for use. Property, plant and equipment is depreciated based on a depreciation plan defining the expected useful life of the property, plant and equipment item. The depreciation method used reflects the manner in which the business consumes economic benefits provided by the asset. Depreciation is calculated by the straight-line method for the estimated period of the asset's useful life, i.e. for respective groups of property, plant and equipment: • Buildings, premises and civil and marine engineering facilities, of which: 5 - 100 years - Buildings 10 - 100 years - Premises and civil and marine engineering facilities 5 - 50 years • Machinery and technical equipment 3 - 50 years • Vehicles 3 - 14 years • Office equipment, of which: 1 - 15 years - Computer hardware 1 - 5 years - Other 1 - 15 years • Other property, plant and equipment 2 - 15 years

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 17

9. Significant accounting policies (cont.) Depreciation methods, rates and residual values of property, plant and equipment are reviewed at least once a year at the end of each financial year. Any changes resulting from such reviews are recognized as changes of estimates, with possible adjustments of depreciation charges accounted for on a prospective basis. A property, plant and equipment item may be removed from the statement of financial position after its disposal or when no economic benefits are expected from further usage of such asset. All gains or losses arising from derecognition of an asset (calculated as a difference between the possible net sale price and the carrying amount of the item) are posted to the statement of profit or loss in the period when such derecognition took place. 9.7. Intangible assets The Group's intangible assets include identifiable non-cash assets, which have no physical form, including right of perpetual usufruct of land purchased for cash or as part of business combinations (right of perpetual usufruct to land received free of charge is treated as an operating lease and recognized off the balance sheet). Intangible assets are carried at purchase price or production cost, less accumulated amortization and impairment losses. Outlays incurred for intangible assets developed in-house, with the exception of the outlays incurred for development work, are not converted into assets and are recognized in the cost of the period in which they were incurred. Intangible assets with a limited useful life are subject to straight-line amortization throughout their useful lives and subjected to impairment tests each time when there are prerequisites indicating their impairment. Amortization commences in the month following the month in which the asset is available for use. The amortization period and method applied to intangible assets with limited useful lives must be reviewed at least at the end of each reporting period. Any changes in the expected useful life or in the expected consumption of economic benefits from the asset are recognized by changing the amortization period or method accordingly and treated as changes to estimated amounts. Gains or losses arising from derecognition of intangible assets from the statement of financial position are measured as the difference between net proceeds from their sale and the carrying amount of the asset and are posted to the statement of profit or loss upon derecognition. 9.8. Goodwill Goodwill from acquisition of a business is initially recognized at purchase price constituting the surplus of the price paid for shares in the acquired business plus the value of non-controlling interest, over the net fair value of identifiable assets, liabilities and contingent liabilities. On initial recognition, goodwill is recognized at purchase price less all the accumulated impairment losses. Goodwill is not amortized. The impairment test is carried out once a year, or more frequently if necessary. As at the date of acquisition, the acquired goodwill is allocated to each cash generating unit (or groups of units) which may benefit from merger synergies. An impairment loss is determined by estimating the recoverable amount of the cash generating unit to which the given goodwill has been allocated. If the recoverable amount of a cash generating unit is lower than its carrying amount then an impairment loss is recognized. 9.9. Impairment of non-financial non-current assets At the end of every reporting period, the Group determines whether there is any evidence of impairment of any non-financial non- current asset. If such evidence is found or when an annual impairment test must be carried out, the Group estimates the recoverable amount of such asset or cash generating unit ("CGU") to which such asset is allocated. Recoverable amount of an asset or a cash generating unit is equal to either: its fair value less the cost to sell such asset or cash generating unit, or its value in use, whichever is higher. Recoverable amount is determined for individual assets, unless the asset does not by itself generate any cash proceeds, which are mostly independent from those generated by other assets or asset groups. If the carrying amount of an asset is greater than its recoverable amount, impairment occurs and the value is written off to match the calculated recoverable amount. When estimating the value in use, the forecast cash flows are discounted to their present value using the discount rate before the effects of taxation are taken into account, which reflects the current market estimation of time value of money and risk typical for a given asset. Impairment losses on assets used in the continuing activity are recognized in those cost categories, which correspond to the function of the impaired asset. When estimating the fair value amount less selling cost, the Group takes into account the capacity of the market player to achieve economic benefits through the highest and most effective use of the asset or its sale to another market player, who would ensure such highest and most effective use of that asset. The previously recognized impairment loss is reversed only when the estimated values used to determine the recoverable amount of the asset changed since the last impairment allowance was recognized. In such a case, the carrying amount of the asset is increased to its recoverable amount. The increased amount must not exceed the carrying amount of the asset which would be calculated (after deducting accumulated depreciation) if the impairment loss had not been applied at all to such asset in previous years. A reversal of an asset impairment loss is recognized immediately as income in the statement of profit or loss. 9.10. External financing expenses External financing expenses are capitalized as a portion of the cost of constructing property, plant and equipment. External financing expenses consist of: interest and gains or losses on foreign exchange differences up to the amount corresponding to the interest cost adjustment. The capitalization of financing expenses commences when measures are taken that are necessary to prepare an asset for usage, capital expenditures and external financing costs are incurred for a given asset. When an investment in an asset is discontinued for a longer period, the capitalization of external financing expenses is suspended. Capitalization is stopped when all the measures required to adapt an asset for usage are in principle concluded.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 18

9. Significant accounting policies (cont.) Capitalization applies to the current expenses of special-purpose loans and borrowings less the revenues from temporarily investing surplus funds and the pertinent portion of the current expenses of general loans and borrowings, when the expenditures for property, plant and equipment exceed the value of special-purpose loans and borrowings. General financing expenses are capitalized in an amount equal to the product of the capitalization rate and the surplus expenditures for property, plant and equipment above special-purpose financing. The capitalization rate is determined as the weighted-average of external financing expenses pertaining to the loans and borrowings constituting the Group’s liabilities other than special-purpose loans and borrowings. The amount of external financing expenses capitalized in a period does not exceed the amount of external financing expenses incurred in the period. 9.11. Inventories Inventories include: • assets designated for sale in the regular course of business activity, • in production for sale, or • assets taking the form of raw materials used in the manufacturing process or in the provision of services. • as well as certificates of origin and CO2 emission allowances. Inventories are measured at the lower of: purchase price (manufacturing cost) and net realisable value. The purchase prices applied to the valuation at the end of the reporting period cannot be higher than the net realisable value of those assets. The net realisable value is a difference between the estimated sale price in the regular course of business activity and the estimated cost of completion and costs necessary to make the sale. The Group measures consumption of materials which are identical or considered identical due to similarity of their type and purpose, as follows:

• coal and CO2 emission allowances – according to the FIFO method, • materials purchased to fulfill orders – using a detailed price identification method, • other inventories – using the weighted average method. Certificates of origin The certificates of origin of electricity generated by the Group in the reporting period are measured on initial recognition at fair value on the date of recognition of that asset, i.e. the date when energy is generated from renewable sources or in the co-firing process, and recognized in sales revenues. Fair value is defined as the average weighted price of the certificates of origin from a given month, determined on the basis of listings on the Polish Power Exchange. The certificates of origin which are purchased are measured at purchase price.

CO2 emission allowances

The acquired CO2 emission allowances are measured at purchase price. The CO2 emission allowances received free of charge are measured at zero value and registered off-balance sheet. 9.12. Cash and cash equivalents Cash and cash equivalents include: • cash on hand and on current bank accounts, • other cash, including bank deposits with maturities no longer than 3 months. The balance of cash and cash equivalents shown in the consolidated statement of cash flows consists of the aforementioned cash and other cash less outstanding current account overdrafts. Bank deposits with initial maturities exceeding 3 months are presented by the Group as deposits. Cash is measured at par value. Other cash assets are measured according to the rules applicable to financial instruments. 9.13. Other assets Other non-financial assets recognized by the Group include also receivables on account of public and legal settlements (except for settlements on account of corporate income tax, presented as a separate item in the statement of financial position), surplus of assets over liabilities of the Company Social Benefit Fund and advances paid for future purchases of property, plant and equipment, intangible assets and inventories as well as biological assets. Advances are presented in line with the type of assets to which they refer – as non-current or current assets respectively. As non-pecuniary assets, advances are not discounted. Accruals and deferred income Prepayments are recorded at the level of incurred and reliably measured expenses that refer to future periods and will bring future economic benefits to the entities. Prepayments may be written off in proportion to the passage of time or benefits received. The time and manner of settlement is justified by the nature of the cost being settled, in keeping with the conservative valuation principle. At the end of a reporting period, the Group reviews prepayments to find whether the degree of certainty that the entity will achieve economic benefits after the elapse of the reporting period is sufficient to recognize the item as an asset component. 9.14. Assets classified as held for sale Non-current assets and groups to be sold are classified by the Group as held for sale, if their carrying amount is recovered as a result of a sale transaction rather than from their continued use. This condition is deemed satisfied only when the sale transaction is very probable and the asset (or group to be sold) is available for immediate sale in its current condition (according to generally accepted commercial terms). Classification of an asset as designated for sale assumes an intention to make a sale transaction within one year from the change in classification..

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 19

9. Significant accounting policies (cont.) If the Group intends to make a disposal leading to a loss of control over a subsidiary, all the assets and liabilities of that subsidiary are classified as held for sale if all of the above criteria are met and regardless of whether the Group retains any non-controlling stakes after the disposal. Non-current assets and groups to be sold classified as held for sale are measured at the lower of initial carrying amount or fair value, less cost to sell. 9.15. Equity Equity is carried at par value, broken down into types and according to the principles set forth by the law and by the Parent Company’s articles of association. In the consolidated financial statements, share capital is recognized at the amount stated in the Parent Company's articles of association. Retained earnings include net result of the current year, results carried forward from previous years, reserve capital and supplementary capital of subsidiaries, arising after the acquisition of control, IFRS transition adjustments and adjustments tied to a change in interests held in subsidiaries after the parent company acquired control over them. 9.16. Provisions for employee benefits In accordance with the regulations applicable in the individual companies, Group employees are eligible for certain benefits after their employment period and other long-term employee benefits - jubilee bonuses. The group recognizes provisions for employee benefits in order to allocate costs to the pertinent periods. The present value of those liabilities at the end of each reporting period is calculated by an actuary using the projected unit credit method. The liabilities are calculated as discounted future payments adjusted for employee turnover, and refer to the period up to the end of the reporting period. Demographic information and information on staff turnover are based on historical information. Provisions for pensions and other post-employment defined benefit plans The Group recognizes provisions for the following post-employment benefits: • pension and similar benefits are paid once, upon retirement/qualification for disability award, • cash equivalent resulting from employee tariff for energy industry employees. • benefits from the Company Social Benefit Fund. Provisions established are recognized in the statement of profit or loss (as operating expenses or financial costs, respectively – discount unwinding), except for actuarial gains and losses. Gains and losses on actuarial calculations are recognized fully in other comprehensive income. Provision for jubilee bonuses Employees of Group companies are eligible to jubilee bonuses paid out after they reach certain lengths of employment. Provisions established for jubilee bonuses are recognized fully in the statement of profit or loss (as operating expenses or financial costs, respectively – discount unwinding). Provision for employee restructuring In the previous reporting periods, voluntary departure programs (“PDO”) and individual termination rules (“ZIO”) were launched in Group companies. As employment restructuring provisions, the Group recognizes primarily the provisions for benefits for employment termination under a voluntary employment termination program and other employment restructuring measures, based on the expected number of employees to terminate work for Group companies and estimated value of severance awards or compensation. Provisions are recognized when the interested parties are notified about the main elements of the restructuring plan. 9.17. Other provisions Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that settlement of the obligation by the Group will require an outflow of economic benefits and a reliable estimate can be made of the amount of the obligation. Recognized provisions are classified as operating expenses, other operating expenses, financial costs, as required by the circumstances. If the time value of money is important then the provision is equal to the present value of expenditures expected to be necessary to fulfill this duty. A pre-tax discount rate is used that reflects the current market assessments of the time value of money and the risks specific to the liability. The discount rate is not adjusted for risk, since the estimates of future cash flows have been adjusted. If a discounting-based method has been used then an increase in the provision associated with passage of time is recognized as financial costs. Provision for land reclamation and for property, plant and equipment liquidation costs The provision for land reclamation and future costs of property, plant and equipment liquidation is established in the circumstances where the provisions of law require such assets to be dismantled and removed when they are no longer used and restore their locations to their previous state. The increase of the provision related to the passage of time (discount unwinding) is recognized in financial costs. The change in provision resulting from a change of the discount rate or the estimated reclamation/liquidation costs adjusts the value of the property, plant and equipment to which the provision refers.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 20

9. Significant accounting policies (cont.) Provision for liabilities for gas emissions

The provision for gas emissions is recognized gradually over the annual reporting period, based on actual CO2 emissions, while taking into account the free emission allowances according to the following rules and order: • in the part covered by the awarded free allowances (pro rata to the total quantity of free emission allowances awarded for the year) - at zero. • in the part covered by acquired allowances - at purchase price, • in the part not covered by allowances held or receivable - based on the contracted allowance purchase prices and then based on market prices of those allowances at the end of the reporting period. Provision for redemption of certificates The provision for redemption of certificates of origin of electricity generated from renewable energy sources, certificates of origin of electricity generated in the co-generation process and energy efficiency credits, is recognized: • in the part covered by the certificates of origin held at the end of the reporting period – at the value of certificates held, • in the part not covered by the certificates of origin held at the end of the reporting period – at the value of contracted property rights and the market value of certificates needed to fulfill the obligation at the end of the reporting period or at the amount of the substitution fee. 9.18. Other liabilities Other non-financial liabilities include in particular public tax liabilities and liabilities on account of received advance payments to be settled by deliveries of goods, services or property, plant and equipment. Other non-financial liabilities are recognized at the amount of the required payment. 9.19. Accrued costs and deferred income Accrued costs Accrued costs are liabilities payable for goods or services received/provided but not paid for, billed or formally agreed with the supplier, including amounts due to the employees. Even though it is sometimes necessary to estimate the amount or payment term of the accruals, the degree of uncertainty is in general considerably lower than in the case of provisions. Accrued costs, measured at the amount of reliably estimated and probable liabilities due in the current reporting period, resulting in particular from benefits provided to the Group by external contractors, is reported in the statement of financial position as trade liabilities. Deferred income Deferred income is recorded in keeping with the principle of conservative valuation and of commensurability of income and expenses. Deferred income includes: • equivalents of funds received or due from contractors for benefits to be delivered in subsequent reporting periods, • cash received in the form of a grant to finance a purchase or production of property, plant and equipment. These are settled by gradually increasing other operating income by an amount corresponding to depreciation on these assets, in the part financed by the mentioned cash. • property, plant and equipment accepted free of charge and intangible assets. These revenues are recorded in other operating income and also in depreciation charges on non-current assets received, As deferred income, the Group also posts revenues on the connection of customers to the grid, i.e. the “connection fees” received before 1 July 2009. Connection fees received after that date are recognized fully in the period’s revenues. 9.20. Grants Grants are recognized when there is sufficient certainty that the Group will meet the conditions associated with such grants and that the grants will be received. Grants related to assets are captured in deferred income and then written off regularly to the period’s revenues for the estimated period of economic life of the related asset. If the Group receives a loan or borrowing on preferential terms then, on initial recognition, such financial instrument is measured at fair value equal to the value of discounted cash flows, using market interest rates for similar instruments. The difference between the valuation amount calculated using this method and at amortized cost is recognized in the statement of financial position as a grant and amortized on a straight-line basis during the repayment period of the liability, charged to other operating income in the statement of profit or loss. 9.21. Lease Group as a lessee Financial lease agreements, which transfer to the Group essentially the entire risk and benefits derived from the possession of the leased item, are recognized in the statement of financial position as at the lease commencement date, at the lower of: fair value of the property, plant and equipment component which constitutes the leased item, or the present value of minimum leasing fees. Leasing fees are allocated between financial costs and reduction of principal lease debt balance, in the manner that allows us to receive a fixed interest rate on the outstanding debt. Financial costs are posted directly to the statement of profit or loss. Property, plant and equipment used under financial lease agreements are depreciated for the shorter of the two periods: estimated useful life of the asset or the term of the lease, if there is no certainty that the lessee obtains the ownership title before the end of the term of lease.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 21

9. Significant accounting policies (cont.) Lease agreements under which the lessor retains essentially all the risks and all the benefits derived from possession of the leased item are classified as operating lease agreements. Leasing fees under operating lease contracts and the subsequent leasing installments are recognized as expenses in the statement of profit or loss using the straight-line method throughout the term of lease. Group as a lessor Lease agreements under which the Group retains essentially all the risks and all the benefits derived from possession of the leased item are classified as operating lease agreements (see Note 33.2). Leasing payments are recognized as revenues in the statement of profit or loss using the straight-line method throughout the term of lease. 9.22. Financial instruments 9.22.1. Financial assets The Group identifies the following categories of financial assets: • Financial assets held to maturity • Financial assets at fair value through profit or loss, • Loans granted and receivables, • Assets available for sale. Financial assets held to maturity Assets held to maturity include financial assets with specified or determinable payments and a set maturity date, which the Group intends and is able to hold until such time. Financial assets held to maturity are measured at amortized cost using the effective interest rate method. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss must meet one of the following conditions: a) they are classified as 'held for trading'. Financial assets are classified as held for trading if: • they have been purchased primarily for sale in the near future, • they are part of the portfolio of specified financial instruments managed together where there is high probability that gains would be achieved in the short term, or • they are derivatives, except for derivatives under hedge accounting, b) they have been classified as such upon purchase. Upon purchase, a financial asset may be classified as measured at fair value, with any changes in value recognized through profit or loss (except for equity securities whose prices are not quoted on an active market and whose fair value cannot be measured reliably) if the following criteria are satisfied: • such classification eliminates or materially reduces inconsistencies in treatment, when both measurement and the rules for recognizing losses or gains are subject to other regulations; or • assets are part of a group of financial assets managed and measured based on their fair value in accordance with a documented risk management strategy; or • such financial assets contain embedded derivatives, which should be recognized separately. The Group’s financial assets at fair value through profit or loss include in particular other derivatives, including options to purchase shares in Polimex-Mostostal SA (call options). Financial assets in this category are initially measured at fair value. After initial recognition, the gains/losses on restatement to fair value are posted in profit or loss. Loans and receivables Loans granted and receivables include financial assets with determined or determinable payments, not listed on an active market, which are not classified as derivative instruments. Loans and receivables are initially measured at fair value plus transaction costs and after initial recognition they are measured at amortized cost. Assets available for sale All the remaining financial assets are assets available for sale. Assets available for sale are measured at fair value at the end of each reporting period, gains and losses on restatement to fair value (which do not constitute impairment) are recognized in other comprehensive income. The fair value of investments with no listed market price is determined in reference to the current market value of another instrument with generally the same features or based on the expected cash flows from the asset comprising the investment (discounted cash flow valuation). Financial asset sales transactions are recognized as at the settlement date. 9.22.2. Impairment of financial assets At the end of each reporting period, the Group evaluates whether there exists objective evidence of impairment of a financial asset or a group of financial assets. Such important objective evidence considered by the Group includes primarily: serious financial difficulties of the debtor, litigation against the debtor, significant or persisting decline of fair value below the purchase price, material adverse change in the economic, legal or market environment of the issuer of the financial instrument. Assets recognized at amortized cost If there exists objective evidence that a loss has been incurred on impairment of loans granted and receivables measured at amortized cost then the Group recognizes an impairment loss equal to the difference between the carrying amount of the financial asset and the present value of estimated future cash flows (excluding future losses on defaulted receivables, which have not yet been incurred), discounted using the initial effective interest rate (i.e. one determined on initial recognition). The amount of loss is recognized in the statement of profit or loss.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 22

9. Significant accounting policies (cont.) If impairment loss is reduced in the next period and the reduction may be objectively tied to an event occurring after the impairment loss was recognized then the previous impairment loss is reversed. A reversal of an impairment loss is recognized in the statement of profit or loss, provided however that the carrying amount of the asset on the reversal date must not exceed its amortized cost. Financial assets available for sale If there exists objective evidence that a financial asset available for sale has been impaired then the amount equal to the difference between the purchase price of that asset (less any principal repayments and, in the case of financial assets measured at amortized cost using the effective interest rate method, also amortization) and its present fair value, less any impairment losses previously recognized for this asset in the statement of profit or loss, is derecognized from equity and transferred to the statement of profit or loss. If the fair value of a debt instrument available for sale increases in the following period and the increase can be objectively tied to an event following the recognition of the impairment loss in the statement of profit or loss, the amount of the reversed charge is recognized in the statement of profit or loss. Impairment losses on equity instruments classified as available for sale cannot be reversed in the statement of profit or loss. 9.22.3. Financial liabilities The Group identifies financial liabilities measured at amortized cost Financial liabilities held at amortized cost include primarily trade liabilities, bank loans, borrowings and debt securities. On initial recognition, they are recognized at fair value less costs of with obtaining the loan or borrowing. After initial recognition, they are measured at amortized cost using the effective interest rate method. When calculating amortized cost, the cost of obtaining the loan or borrowing must be taken into account, as well as any discounts and bonuses obtained in connection with the liability. Revenues and costs are recognized in the statement of profit or loss upon derecognition of the liability from the statement of financial position and also as a result of a settlement using the effective interest rate method. The Group derecognizes a financial liability from its statement of financial position if the liability has expired, i.e. when the obligation defined in the respective agreement has been performed, has been canceled or has expired. 9.22.4. Hedge accounting Hedging derivatives and hedge accounting The Group may decide to designate selected derivatives as hedges under cash flow hedge accounting under any identified hedge relationship. The Group allows the use of cash flow hedge accounting only if certain criteria are met, i.e.: • at the inception of the hedge the Group formally designates and documents the hedging relationship and the risk management objective as well as strategy for undertaking the hedge. The documentation includes the identification of the hedging instrument, the hedged position, the nature of risk and the method for a current assessment of the effectiveness of the hedge in offsetting the risk of changes in cash flows associated with the hedged risk; • the hedge is expected to be highly effective in offsetting changes in cash flows attributable to the hedged risk, consistently with the originally documented risk management strategy for that particular hedging relationship; • the planned transaction, which is the subject of the hedge, must be highly probable and must be exposed to variations in cash flows that could ultimately affect the statement of profit or loss. • effectiveness of the hedge can be reliably assessed, i.e. cash flows related to the hedged position resulting from the hedged risk and the fair value of the hedge can be reliably measured; • the hedge is assessed on an ongoing basis and determined to have been highly effective throughout the reporting periods for which the hedge was designated. Applicable accounting principles for derivatives designated as hedges under cash flow hedge accounting Changes in the fair value measurement of derivative financial instruments designated as cash flow hedges, to the extent they are an effective hedge, are recognized in other comprehensive income, whereas any ineffective portion of the hedge is recognized in the statement of profit or loss. The accumulated amounts of hedging instrument revaluation to fair value, previously recognized in the cash flow hedge reserve, are recognized in the statement of profit or loss in the period or periods when the hedged position affects the statement of profit or loss. The Group ceases to use the cash flow hedge accounting principles in the event of one or more of the following events: • The hedging instrument expires or is sold, terminated or exercised (for this purpose, the replacement or rollover of a hedging instrument into another hedging instrument is not an expiration or termination if such replacement or rollover is part of the entity’s documented hedging strategy). In this case, the cumulative gain or loss on the hedging instrument, which is posted to other comprehensive income in the period when the hedge was effective remains recognized separately in equity until the planned transaction occurs; • the hedge no longer meets the hedge accounting criteria. In this case, the cumulative gain or loss on the hedging instrument, which is posted to other comprehensive income in the period when the hedge was effective, remains recognized separately in equity until the planned transaction occurs; • the planned transaction is no longer expected to occur, in which case any related cumulative gain or loss on the hedging instrument, which is posted to other comprehensive income in the period when the hedge was effective, is recognized in the statement of profit or loss. A planned transaction, which is no longer highly probable, may still be expected; • The Group cancels any hedging relationship. For hedges of planned transactions, the cumulative gain or loss on the hedging instrument posted to other comprehensive income in the period when the hedge was effective remains recognized in a separate equity item until the planned transaction occurs or is no longer expected to occur. If the transaction is no longer expected to occur, the cumulative gain or loss that was recognized directly in equity is recognized in the statement of profit or loss.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 23

9. Significant accounting policies (cont.) Presentation In connection with the use of cash flow hedge accounting, the Group applies the following presentation: • the effective portion of any change in the valuation of hedges is posted to other comprehensive income and accumulated in revaluation reserve, • interest on hedges is presented in the same item of the statement of profit or loss, which presents interest result on the hedged position, • any revaluation of hedges is presented in the same line of the statement of profit or loss in which the revaluation of the hedged position is presented, • the ineffective portion of changes in the valuation of hedging instruments is recognized in the result on financial instruments held for trading. 9.23. Income tax Income tax recognized in the statement of profit or loss includes the actual tax liability for the reporting period and a change in deferred tax assets and deferred tax liabilities which are not recognized in equity or other comprehensive income. Current tax liability The actual tax liability for the reporting period is calculated by Group companies according to the applicable provisions of the corporate income tax act. For companies comprising a tax capital group (see Note 12.4), income tax is calculated on income earned in the fiscal year equal to the surplus of aggregated income of all companies comprising the group over their aggregate losses. Deferred tax In connection with temporary differences between the value of assets and liabilities carried in accounting ledgers and their tax value and taxable loss that may be deducted in the future, the entity calculates and recognizes deferred income tax assets and liabilities. The deferred tax liability is established for all positive temporary differences except for cases where the deferred income tax liability follows from: • initial recognition of goodwill or an asset or liability in a transaction that is not a business combination, not affecting, at the moment of the transaction, either gross financial result before tax or taxable income (loss); and • positive temporary differences connected with investments in subsidiaries and associates, and interests in joint ventures, in which it is possible to control the reversal of the temporary differences and it is probable that those differences will not reverse in the foreseeable future. Deferred income tax assets are recognized with respect to all negative temporary differences to the extent to which it is probable that there will be sufficient taxable profits against which to deduct the negative temporary differences, except for: • cases where a deferred income tax asset results from an initial recognition of an asset or liability under a transaction other than business combination, which at the moment of the transaction has no effect on financial result before tax or taxable profit (loss); and • negative temporary differences connected with investments in subsidiaries and associates, and interests in joint ventures, where deferred income tax assets are recognized only to the extent that it is probable that those temporary differences will be reversed in the foreseeable future and that there will be sufficient taxable profits against which to utilize the benefits of the negative temporary differences. Deferred tax assets and liabilities are presented in the statement of financial position, after netting at the level of individual entities comprising the Group. 9.24. Sales revenues Sales revenues are recognized at the amount at which it is probable that the Group will obtain economic benefits tied to a specific transaction and where the amount of revenues may be measured reliably. Revenues are recognized net of value added tax (VAT), excise tax and other sales taxes or fees and discounts and rebates. Sales of products and goods for resale are recognized when the significant risk and benefits stemming from ownership title of merchandise and products have been surrendered to the buyer and when recovery of the due amount is probable and when the amount of revenues may be measured reliably and incurred costs may be reliably estimated. Revenues on sales of electricity distribution services and on sales of electricity to end users The sale of electricity distribution services or electricity occurs at the moment when the electricity distribution service or electricity is delivered to the customer, which is recorded by an electricity meter. In practice, the sale occurs on the date of reading a metering and billing system. If no actual meter reading was performed in the billing period then revenues are determined through estimation based on average daily consumption of electricity in the previous billing periods. Revenues are calculated using the price lists applicable in the period. Revenues on electricity sales on the wholesale market Wholesale electricity transactions are conducted when a supplier and a buyer declare to the Transmission System Operator (TSO) the quantity of electricity that the Group is contractually obligated to supply or ensure its supply (by purchasing electricity on the Balancing Market) and the buyer is obligated to accept in each hourly period. When a production unit generates electricity without a bilateral transaction signed (with a buyer) then the electricity is sold on the Balancing Market (to the TSO). TSO as a guarantor of volumes, ensures reliability of data in respect to the quantity of electricity supplied.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 24

9. Significant accounting policies (cont.) 9.25. Operating expenses Cost of sales is comprised of the following: • cost of manufacturing products and providing services incurred in a reporting period, adjusted for a change in products and adjusted for the cost of manufacturing products for own needs, • value of electricity and materials sold, at purchase prices, • recognition/reversal of impairment losses on property, plant and equipment, intangible assets, receivables and inventories, Selling and distribution expenses include expenses related to customer service and customer acquisition as well as marketing and advertising expenses. General and administrative expenses include expenses related to the governance and administration of the Group as a whole and the companies comprising the Group. 9.26. Other operating income and expenses Other operating income and expenses include in particular items associated with: • disposals of property, plant and equipment, intangible assets, • recognition and reversal of provisions, except for provisions tied to financial operations or recognized in operating expenses, • giving or receiving assets, including cash, free of charge, also as a donation, • with damages, penalties and fines and other costs not associated with ordinary operations. 9.27. Financial income and costs Financial income and costs include in particular income and costs associated with: • disposal of financial assets, • restatement of financial instruments, excluding financial assets available for sale, for which the effects of restatement are recognized in other comprehensive income, • revenues from profit-sharing in other entities, • interest, • change in provision resulting from the approaching date of incurring the cost (unwinding discount effect), • exchange differences resulting from operations performed during the reporting period and book valuation of assets and liabilities at the end of the reporting period, except for exchange differences recognized in the initial value of property, plant and equipment, to the extent they are recognized as adjustment of interest cost and exchange differences from measurement of equity instruments denominated in foreign currencies and classified in the available-for-sale portfolio, • other items related to financing activity. Interest income and interest expense are recognized gradually as they accrue (taking the effective interest rate method into account) in relation to the net carrying amount of the financial instrument and in line with the materiality principle. Dividends are recognized when the title of shareholders to receive them are determined. 9.28. Earnings per share Earnings per share for each period are calculated by dividing the net profit allocated to shareholders of the Parent Company for the period by the weighted average number of shares in the reporting period. In the case of a split or reverse split of shares, the number of shares after the split or reverse split is applied to the calculation retrospectively. 9.29. Statement of cash flows The statement of cash flows is prepared using the indirect method.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 25

NOTES ON OPERATING SEGMENTS

10. Business lines (Operating segments)

The Group presents segment information in accordance with IFRS 8 Operating Segments for the current and for comparative reporting periods. The Group is organized and managed within operating segments, which are divided according to the types of products offered. The Group’s disclosures are divided into the following operating segments named according to the Group’s glossary introduced by the Cooperation Agreement signed on 20 December 2017; business lines: • Distribution – distribution of electricity by ENERGA-OPERATOR SA (Distribution System Operator), as well as operations directly associated with the distribution operations conducted by other Group companies; • Generation – production of electricity from conventional and renewable sources, production and distribution of heat and maintenance and repair activity, related directly to the production of energy; • Sales - trading in electricity (wholesale trading and retail sales) and lighting services. • Other - shared services centers in the accounting, HR and salary, administration and ITC areas as well as financing activity and real estate management areas. The Parent Company has also been classified as belonging to the other segment. The key measures used by the ENERGA SA Management Board to assess the performance of the business lines is net profit and EBITDA, i.e. operating profit /(loss) (calculated as the profit /(loss) before tax adjusted by the share of profit/(loss) of an entity measured by the equity method, financial income and financial costs) plus amortization and depreciation and impairment losses on non-financial non-current assets. The rules applied to the determination of business line results and measure the business line’s assets and liabilities are consistent with the rules used to prepare the consolidated financial statements. The share in the result of the entities measured by the equity method is recognized in consolidation eliminations and adjustments. Transactions between business lines are settled on market terms. The Group does not present information by geographic segments since its operations conducted for international clients and its international assets do not have a significant impact on the Group’s results. The tables below show the breakdown of revenues and expenses for the period from 1 January to 31 December 2017 and assets and liabilities as at 31 December 2017, by individual reporting segments, together with appropriate comparative information.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 26

10. Business lines (Operating segments) (cont.)

Consolidation Year ended 31 December 2017 Distribution Sales Generation Other Total eliminations and Total activity or as at 31 December 2017 adjustments

Revenue Sales to external clients 4,347 5,287 894 6 10,534 - 10,534 Inter-segment sales 45 29 254 183 511 (511) - Total segment revenues 4,392 5,316 1,148 189 11,045 (511) 10,534

EBITDA 1,723 85 398 (45) 2,161 (1) 2,160 Amortization and depreciation 764 43 164 18 989 (16) 973 Impairment losses on non-financial non-current - 4 (53) 26 (23) - (23) assets Operating profit or loss 959 38 287 (89) 1,195 15 1,210 Net finance income/expense (118) 9 (60) 143 (26) (206) (232) Share in profit/(loss) of the entities measured by the - - - - - 24 24 equity method Profit or loss before tax 841 47 227 54 1,169 (167) 1,002 Income tax (167) (18) (55) 28 (212) (1) (213) Net profit or loss 674 29 172 82 957 (168) 789 Assets and liabilities

Cash and cash equivalents 50 38 3 3,550 3,641 - 3,641 Total assets 13,404 2,284 4,106 16,051 35,845 (14,789) 21,056

Financial liabilities 3,865 - 991 7,932 12,788 (5,083) 7,705 Total liabilities 6,631 1,568 1,507 8,715 18,421 (6,830) 11,591

Other segment information

Capital expenditures 1,247 43 87 38 1,415 (13) 1,402

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 27 (This is translation of the consolidated financial statements originally issued in Polish)

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (PLN m)

10. Business lines (Operating segments) (cont.)

Consolidation Year ended 31 December 2016 Distribution Sales Generation Other Total eliminations and Total activity or as at 31 December 2016 adjustments

Revenue Sales to external clients 4,096 5,267 812 6 10,181 - 10,181 Sales between business lines 47 359 328 145 879 (879) - Total business line revenues 4,143 5,626 1,140 151 11,060 (879) 10,181

EBITDA 1,720 40 315 (47) 2,028 (1) 2,027 Amortization and depreciation 736 39 183 18 976 (19) 957 Impairment losses on non-financial non-current - 4 573 6 583 - 583 assets Operating profit or loss 984 (3) (441) (71) 469 18 487 Net finance income/expense (114) 4 41 842 773 (1,003) (230) Share in profit/(loss) of the entities measured by the - - - - - (52) (52) equity method Profit or loss before tax 870 1 (400) 771 1 242 (1,037) 205 Income tax (167) (3) 97 15 (58) - (58) Net profit or loss 703 (2) (303) 786 1,184 (1,037) 147 Assets and liabilities

Cash and cash equivalents 4 42 2 1,423 1,471 - 1,471 Total assets 13,393 2,803 4,163 14,639 34,998 (16,267) 18,731

Financial liabilities 4,825 5 1,057 6,017 11,904 (5,767) 6,137

Total liabilities 7,072 2,069 1,590 7,280 18,011 (8,097) 9,914

Other business line information

Capital expenditures 1,263 92 248 77 1,680 (113) 1,567

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 28 (This is translation of the consolidated financial statements originally issued in Polish)

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (PLN m)

NOTES TO CONSOLIDATED STATEMENT OF PROFIT OR LOSS

11. Revenues and expenses

11.1. Sales revenues

Year ended Year ended 31 December 2017 31 December 2016 Revenues on sales of products and goods for resale and materials, 6,038 5,892 including: Electricity 5,816 5,686 Certificates of origin 28 - Gas 144 216 Other products, goods for resale and materials 328 288 Excise tax (278) (298) Revenues on sales of services, including: 4,496 4,289 Distribution and transit services 4,087 3,904 Customer connection fees 62 62 Rental income 79 80 Other services 268 243 TOTAL 10,534 10,181

11.2. Costs by nature

Year ended Year ended 31 December 2017 31 December 2016 Depreciation and amortization of property, plant and equipment, intangible 973 957 assets and investment properties Impairment losses on property, plant and equipment, intangible assets and (34) 466 investment property (including advances paid) Consumption of materials and energy 687 651 External services 1,580 1,400 Taxes and fees 414 393 Employee benefit expenses 907 873 Impairment loss on inventories - 5 Impairment loss on trade receivables 4 62 Other costs by nature 67 72 Change in product inventories 1 (5) Cost of producing services for own needs (121) (90) Cost of products and materials sold 4,804 4,718 Total operating expenses 9,282 9,502 incl.: Cost of sales 8,615 8,846 Selling and distribution expenses 341 338 General and administrative expenses 326 318

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 29

11. Revenues and expenses (cont.) 11.3. Cost of depreciation and impairment losses recognized on non-financial non-current assets in the statement of profit or loss

Year ended Year ended

31 December 2017 31 December 2016 Items included in cost of sales: 893 1,390 Depreciation of property, plant and equipment 860 848 Impairment loss on property, plant and equipment (60) 460 Amortization of intangible assets 67 75 Impairment loss for intangible assets 25 - Depreciation of investment property 1 1 Impairment losses on investment property - 6 Items included in selling and distribution expenses: 26 12 Depreciation of property, plant and equipment 8 5 Amortization of intangible assets 18 7 Items included in general and administrative expenses: 20 21 Depreciation of property, plant and equipment 6 8 Amortization of intangible assets 13 13 Impairment loss for intangible assets 1 -

11.4. Employee benefit expenses

Year ended Year ended 31 December 2017 31 December 2016 Wages and salaries 679 670 Social security contributions 138 126 Post-employment benefits and jubilee bonuses (38) (44) Other employee benefit expenses, including: 128 121 Energy tariff - current costs 11 11 Company Social Benefit Fund - charges for the current financial year 34 30 Employee Pension Plan 39 38 Employee training 9 10 Expenses related to health and safety 7 7 Other 28 25 TOTAL 907 873

11.5. Other operating income

Year ended Year ended

31 December 2017 31 December 2016

Penalties, fines, indemnities received 34 62 Grants 23 22 Reversal of provisions (e.g. court cases) 45 18 Revenues related to illegal energy consumption 9 7 Infrastructure acquired free of charge 4 4 Other 3 4 TOTAL 118 117

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 30

11. Revenues and expenses (cont.) 11.6. Other operating expenses

Year ended Year ended

31 December 2017 31 December 2016 Loss on disposal/liquidation of property, plant and equipment/intangible 17 27 assets Cost of remedying chance losses 54 29 Donations 13 11 Recognition of impairment losses for assets 1 - Recognition of provisions 32 88 Indemnities 17 24 Costs related to illegal energy consumption 4 6 Litigation expenses 7 4 Goodwill impairment allowance 11 117 Other 4 3 TOTAL 160 309

11.7. Financial income

Year ended Year ended

31 December 2017 31 December 2016 Income on financial instruments, including: 80 53 Interest income 50 53 Measurement of derivative instruments 17 - Foreign exchange differences 13 - Profit from disposals of shares in subsidiaries 6 - Other financial income 2 1 TOTAL 88 54

11.8. Financial costs

Year ended Year ended

31 December 2017 31 December 2016

Costs of financial instruments, including: 289 244 Interest expenses 287 237 Revaluation of financial assets (including recognition of impairment 2 - losses) Foreign exchange differences - 7 Other financial costs, of which: 31 40 Actuarial and other interest 23 21 Other 8 19 TOTAL 320 284

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 31

12. Income tax

12.1. Tax liabilities The key components of the tax liability for the year ended 31 December 2017 are as follows: Year ended Year ended

31 December 2017 31 December 2016

Statement of profit or loss Current income tax expense (131) (210) Adjustments to income tax for prior years 6 3 Deferred tax (88) 149 Tax expense recognized in the statement of profit or loss (213) (58)

Statement of comprehensive income Deferred tax 14 (15) Tax expense recognized in the statement of comprehensive income 14 (15)

With regard to income tax, the Group was principally subject to the general regulations in 2017. Except for the ENERGA Tax Group (see description in Note 12.4), there were no other occurrences that would require calculation of tax liabilities using methods different from the general regulations in this respect. The expiration date of the right to settle a tax loss by ENERGA Group companies is no later than 31 December 2022. As at 31 December 2017, the total amount of temporary differences related to investments in subsidiaries, for which no deferred tax liabilities have been recognized, is PLN 3,370 m. 12.2. Reconciliation of effective tax rate Reconciliation of income tax calculated on financial result before tax before tax using the statutory tax rate to income tax calculated according to the Group's effective tax rate is as follows:

Year ended Year ended

31 December 2017 31 December 2016 Profit before tax 1,002 205 Tax liability at Poland’s statutory rate of 19% (190) (39) Adjustments to income tax for prior years 6 3 Tax liability on permanently non tax-deductible expenses (26) (28) Tax liability on permanently non-taxable income 5 29 Tax liabilities on profit-sharing in entities measured by the equity method 4 (10) Tax losses (3) (4) Temporary differences for which no deferred tax asset was recognized (9) (9) Tax liability at the effective tax rate in the statement of profit or loss (213) (58)

Current tax liability is calculated on the basis of the applicable tax regulations. Application of those regulations causes differences between the tax profit (loss) and accounting net profit (loss) because of non-taxable revenues and non-deductible expenses and items of income or expense which are never taxable. Tax liabilities are calculated on the basis of tax rates applicable in the given financial year. A 19% tax rate was applicable in 2017 and 2016. Current regulations do not provide for differentiated tax rates for future periods. Both the fiscal year and the reporting period of these financial statements are the same as the calendar year.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 32

12. Income tax (cont.) 12.3. Deferred tax The deferred tax results from the following items:

As at As at 31 December 2017 31 December 2016

Deferred tax assets 610 696 On the difference between the tax and carrying value of property, plant and 193 236 equipment, intangible assets and inventories On the difference between the tax and carrying value of financial assets and 82 97 liabilities Power infrastructure received free of charge and connection fees received 64 63 On provisions for post-employment benefits 61 67 On provisions for jubilee bonuses 41 40 On provisions for redemption of certificates of origin 57 76 On provisions for reclamation and decommissioning costs of property, plant 11 9 and equipment On provision gas emission liabilities 9 8 Unpaid employee salaries and benefits 4 4 On other provisions 42 46 Accrued expenses 32 33 Tax losses 4 5 Other 10 12 Set-off (285) (300) Deferred tax assets after set-off 325 396

As at As at

31 December 2017 31 December 2016 Deferred tax liability 881 893 on the difference between the tax and carrying value of property, plant and 822 799 equipment and intangible assets accrued revenues 29 40

on the difference between the tax and carrying value of energy certificates 2 4

on the difference between the tax and carrying value of financial assets and 25 49 liabilities other 3 1 Set-off (285) (300)

Deferred tax liability after set-off 596 593

The Group did not include in the balance sheet the deferred income tax asset on the value of outstanding tax losses incurred in 2012 - 2017 for the total amount of PLN 31 m.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 33

12. Income tax (cont.) Changes in deferred tax assets and liabilities are presented in the table below:

Year ended Year ended

31 December 2017 31 December 2016

Deferred tax assets At the beginning of the reporting period 696 520 Increases 18 185 recognized in profit or loss 13 185 recognized in other comprehensive income 5 - Decreases (104) (9) recognized in profit or loss (104) (2) recognized in other comprehensive income - (7) At the end of the reporting period 610 696 Set-off (285) (300)

Deferred tax asset at the end of the reporting period 325 396

Deferred tax liability At the beginning of the reporting period 893 851 Increases 41 88 recognized in profit or loss 41 80 recognized in other comprehensive income - 8 Decreases (53) (46) recognized in profit or loss (44) (46) recognized in other comprehensive income (9) - At the end of the reporting period 881 893 Set-off (285) (300)

Deferred tax liability at the end of the reporting period 596 593

12.4. ENERGA Tax Group On 27 January 2015, ENERGA SA and its related parties: ENERGA-OPERATOR SA, ENERGA-OBRÓT SA, ENERGA Wytwarzanie SA, ENERGA Informatyka i Technologie Sp. z o.o., ENERGA Centrum Usług Wspólnych Sp. z o.o., RGK Sp. z o.o., ENSA PGK1 Sp. z o.o., ENSA PGK2 Sp. z o.o., ENSA PGK3 Sp. z o.o., ENSA PGK4 Sp. z o.o., ENSA PGK5 Sp. z o.o., ENSA PGK6 Sp. z o.o., ENSA PGK7 Sp. z o.o., ENSA PGK8 Sp. z o.o., EOB PGK1 Sp. z o.o. and EOB PGK2 Sp. z o.o. entered into a tax capital group agreement under the name of ENERGA Tax Group (PGK ENERGA). The agreement was registered by the Head of the Pomorski Tax Authority on 27 February 2015. ENERGA SA was selected as the company representing the ENERGA Tax Group in respect to the duties arising from the Corporate Income Tax Act and the Tax Ordinance Act. The launch date of ENERGA Tax Group’s activity was 1 May 2015. The agreement was concluded for 3 fiscal years, that is until 31 December 2017. In a tax group, income tax is calculated on income earned in the fiscal year equal to the surplus of aggregated income of all companies comprising the group over their aggregate losses. On 25 September 2017, ENERGA SA together with its related parties: ENERGA-OPERATOR SA, ENERGA-OBRÓT SA, ENERGA Wytwarzanie SA, ENERGA Informatyka i Technologie Sp. z o.o., ENERGA Centrum Usług Wspólnych Sp. z o.o., ENERGA-OPERATOR Logistyka Sp. z o.o., ENERGA Oświetlenie sp. z o.o., Enspirion Sp. z o.o., ENSA PGK1 Sp. z o.o. (since 12 October 2017 under the name of ENERGA Invest Sp. z o.o.), ENSA PGK3 Sp. z o.o. (since 27 October 2017 under the name of ENERGA Ochrona Sp. z o.o.), ENSA PGK8 Sp. z o.o., EOB PGK1 Sp. z o.o., EOB PGK2 Sp. z o.o. (since 13 December 2017 under the name of Centrum Badawczo-Rozwojowe im. M.Faradaya Sp. z o.o.) signed a tax group agreement under the name of 2018 ENERGA Tax Group (PGK ENERGA 2018). The agreement was registered by the Head of the Pomorski Tax Authority on 26 October 2017. ENERGA SA was selected as the company representing the 2018 ENERGA Tax Group in respect to the duties arising from the Corporate Income Tax Act and the Tax Ordinance Act. The launch date of ENERGA Tax Group’s activity was 1 January 2018. The agreement was concluded for 3 fiscal years, that is until 31 December 2020. In a tax group, income tax is calculated on income earned in the fiscal year equal to the surplus of aggregated income of all companies comprising the group over their aggregate losses.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 34

NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL POSITION

13. Property, plant and equipment

Buildings, premises and Property, plant Other civil and Plant and and equipment Own land Vehicles property, plant Total marine equipment under and equipment engineering construction facilities Gross value As at 1 January 2017 157 12,328 5,863 294 829 1,063 20,534 Direct purchase - - 1 5 - 1 315 1 321 Settlement of property, plant and equipment under construction 3 737 448 21 68 (1 277) - Sale, disposal (3) (10) (13) (6) (6) - (38) Liquidation - (34) (27) (2) (5) (133) (201) Received free of charge - 10 - - - - 10 Reclassification between groups - 5 (4) - (1) - - Disposal of subsidiary (59) (4) (1) - - (110) (174) Provision for land reclamation and liquidation costs - 5 - - - - 5 Other changes - - - - - 1 1 As at 31 December 2017 98 13,037 6,267 312 885 859 21,458

Accumulated depreciation and impairment losses As at 1 January 2017 - (4,420) (2,255) (203) (443) (160) (7,481) Amortization for the period - (460) (299) (27) (88) - (874) Recognized impairment losses - (30) (45) - - (4) (79) Other increase in impairment losses - - (1) - - - (1) Reversed impairment losses - 44 89 - - 6 139 Other decrease in impairment losses - 2 - - - 128 130 Sale, disposal - 6 12 6 5 - 29 Liquidation - 20 23 2 5 - 50 As at 31 December 2017 - (4,838) (2,476) (222) (521) (30) (8,087)

Net value as at 1 January 2017 157 7,908 3,608 91 386 903 13,053 Net value as at 31 December 2017 98 8,199 3,791 90 364 829 13,371

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 35 (This is translation of the consolidated financial statements originally issued in Polish)

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (PLN m)

13. Property, plant and equipment (cont.)

Buildings, premises and Property, plant Other property, civil and Plant and and equipment Own land Vehicles plant and Total marine equipment under equipment engineering construction facilities Gross value As at 1 January 2016 153 11,616 5,236 288 767 1,113 19,173 Direct purchase 4 - 1 4 - 1,471 1,480 Settlement of property, plant and equipment under construction - 769 673 10 75 (1,527) - Sale, disposal - (7) (4) (5) (11) - (27) Liquidation - (55) (50) (3) (2) (1) (111) Received free of charge - 5 - - - - 5 Reclassification between groups - (8) 8 - - - - Capitalized financing expenses - - - - - 2 2 Provision for land reclamation and liquidation costs - 10 - - - - 10 Other changes - (2) (1) - - 5 2 As at 31 December 2016 157 12,328 5,863 294 829 1,063 20,534

Accumulated depreciation and impairment losses As at 1 January 2016 - (3,839) (1,704) (182) (370) (166) (6,261) Amortization for the period - (451) (297) (29) (84) - (861) Increase in impairment losses - (172) (300) - (1) (104) (577) Decrease in impairment losses - 5 3 - - 110 118 Sale, disposal - 3 3 5 10 - 21 Liquidation - 31 42 3 2 - 78 Other changes - 3 (2) - - - 1 As at 31 December 2016 - (4,420) (2,255) (203) (443) (160) (7,481)

Net value as at 1 January 2016 153 7,777 3,532 106 397 947 12,912 Net value as at 31 December 2016 157 7,908 3,608 91 386 903 13,053

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 36 (This is translation of the consolidated financial statements originally issued in Polish)

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (PLN m)

13. Property, plant and equipment (cont.) In Q4 2017, an assessment was made whether there is any indication that the recoverable amount of property, plant and equipment and goodwill may be impaired. In connection with changes occurring in its market and regulatory environment in Q4 2017, in particular the capacity market act signed by the President of the Republic of Poland, which guarantees support for production units and the resulting updates of projected price paths, certain indications have been identified that may result in an increase of the recoverable amount of property, plant and equipment of Group companies and impairment tests were conducted. The impairment tests for cash generating units (“CGUs”) were performed using the income method, determining the value in use based on the discounted value of estimated cash flows from operating activities, taking into account, among others, the following assumptions:

• price forecasts have been adopted for electricity, coal, CO2 allowances and for certificates of origin for the Polish market, based on a report prepared for the Group by an independent agency; the forecast was prepared with the timeframe until 2065; • assumptions adopted for costless CO2 emission allowances for 2015-2021 as specified in the Regulation of the Council of Ministers of 31 March 2014 (Item 439) and 8 April 2014 (Item 472), • assumptions made for capital expenditures at the levels allowing for maintenance of the production capacity of the existing non-current assets after replacement investments, including capital expenditures to adjust industrial emission levels to the requirements of Directive 2010/75/EU of the European Parliament and of the Council of 24 November 2010 on industrial emissions and the Commission Implementing Decision (EU) 2017/1442 establishing best available techniques (BAT) conclusions, which was published on 17 August 2017, • support maintained for production of energy from the existing renewable sources in accordance with the Renewable Energy Sources Act of 20 February 2015, as amended (Journal of Laws, 2017 No. 0, Item 1148), • support system maintained for high-efficient co-generation throughout the forecast period, • maintenance of the Operating Reserve in the period until 2020 and support to be received under the Capacity Market from 2021 to the end of the projection period, • the length of forecasts for the individual CGUs has been adopted in such a way to ensure that the cash flow used to calculate residual value was as similar as possible to the cash flows expected in the coming years. Wind Farms (CGU Karcino, CGU Karścino, CGU Bystra, CGU Myślino, CGU Parsówek) The impairment tests for the wind farms were conducted as at 31 August and 31 December 2017. The tests were performed for the remaining period of useful life, which was set at 25 years from the moment a wind farm is commissioned for use. The standard projection period of 5 years was extended to the full remaining useful life of the wind farms, which allowed for a more reliable valuation of the units, the total useful life of which is known and predictable. The calculations of value in use cover the period from December 2017 to the last year of the farm’s operation, i.e. between 2034 and 2040, depending on a particular CGU. The discount rates set on the basis of the pre-tax weighted-average cost of capital (WACC), used for the calculation in December, fell within the range from 7.71% to 7.94% (on average 6.47% after tax). Based on the results of the tests performed in Q3 2017, it was determined that impairment losses must be recognized on the wind farms in the amount of PLN 71 m (mainly for technical machinery and equipment). The recoverable amount was set at PLN 524 m. The tests conducted on CGU Myślino have also shown the necessity to write down the entire goodwill that was recognized following the acquisition of the wind farm in 2012, in the amount of PLN 11 m. Based on the results of the tests performed in Q4 2017, recoverable amount was determined to be PLN 577 m and as a result, PLN 63 m of the impairment losses recognized in previous years (mainly for technical machinery and equipment) were reversed. Photovoltaic farms (CGU PV Delta, PV Czernikowo) The impairment tests for photovoltaic farms were conducted as at 31 August and 31 December 2017. The tests were performed for the remaining period of useful life, which was set at 25 years from the moment a wind farm is commissioned for use. The standard projection period of 5 years was extended to the full remaining useful life of the wind farms, which allowed for a more reliable valuation of the units, the total useful life of which is known and predictable. The calculations of value in use cover the period from December 2017 to December 2039. The discount rates set on the basis of the pre-tax weighted-average cost of capital (WACC), used for the calculation in December, fell within the range from 6.85% to 7.08% (on average 6.47% after tax). Based on the impairment tests conducted in December, it was determined that impairment losses must be recognized for the photovoltaic farms in the amount of PLN 0.2 million (mainly for technical equipment and machinery). The recoverable amount was set at PLN 12 m.

Combined Heat and Power Plant Elbląg with BB20 installation (“CGU CHP Elbląg”)

The impairment test for CGU CHP Elbląg (including the BB20 installation) was conducted as at 31 August and 31 December 2017. The value in use was calculated on the basis of financial projections for the period of December 2017 - December 2031 and residual value. The standard projection period of 5 years was extended until 2031 because the support for the BB20 in the form of green certificates is available and significant renovation expenditures are incurred in this period. The year 2031 is the first representative period, which may be used to calculate the residual value. The discount rate set on the basis of the pre-tax weighted-average cost of capital (WACC), used for the calculation in December, was 7.13% (6.42% after tax). 2.0% growth rate was used to extrapolate cash flow forecasts beyond 2031; this is not higher than the average long-term inflation rates in Poland.

Accounting principles (policies) and notes 37 to the consolidated financial statements constitute an integral part thereof (This is translation of the consolidated financial statements originally issued in Polish) WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (PLN m)

13. Property, plant and equipment (cont.) Elektrociepłownia Kalisz (CGU CHP Kalisz) The impairment test for CGU CHP Kalisz was conducted as at 31 August and 31 December 2017. The value in use was calculated on the basis of financial projections for the period of December 2017 - December 2023 and residual value. The discount rate set on the basis of the pre-tax weighted-average cost of capital (WACC), used for the calculation, was 7.05% (6.42% after tax). The growth rate used to extrapolate cash flow projections beyond the period covered by detailed planning was adopted at the level of 2.0% which does not exceed the average long-term inflation growth rates in Poland. Based on the results of the tests, no need was found to recognize impairment losses on CGU CHP Kalisz. Ostrołęka B Power Plant (CGU Ostrołęka B) The impairment test for CGU Ostrołęka B was conducted as at 31 December 2017. The value in use was calculated on the basis of financial projections for the period of December 2017 - December 2027 and residual value (the projection period was extended because of the factors that distorted the reliability, including termination of must-run production and expiration of the period in which support is obtained within the framework of the capacity market as an upgraded unit). The projections were prepared taking into account the changes in the Ostrołęka B Power Plant’s business model, including change of the 2+1 system operating model to 3-unit operation. To calculate value in use of CGU Ostrołęka B, a discount rate was applied, which was calculated on the basis of the weighted average cost of capital (WACC) at 7.10% (6.96% after tax). The growth rate used to extrapolate cash flow projections beyond the period covered by detailed planning was adopted at the level of 2.0% which does not exceed the average long-term inflation growth rates in Poland. Based on the results of the test performed in Q4 2017, recoverable amount was determined to be PLN 654 m and as a result, the impairment loss of PLN 69 m recognized in previous years (mainly for technical machinery and equipment) was reversed. Sensitivity analysis The estimated impact of the change of selected parameters on the overall valuation of the above-mentioned assets is presented below. The sensitivity analyses show that the factors with the highest impact on the estimated value in use of the above CGUs are: electricity prices, discount rates and, in the case of wind assets, legislative changes in the Renewable Energy Sources Act. A change in those factors could require recognition or reversal of impairment losses in the total amount specified below. The sensitivity analysis takes into account the change of the factors over the entire forecast period.

Impact on overall appraisal value of Change in Amount and tested CGUs [PLN m] impairment . Parameter direction of loss/reversal change Increase in value Decrease in value amount [PLN m] [+ 1%] 178.6 166.5 Electricity prices [- 1%] (204.4) (192.3) [+ 0.5 p.p.] (151.7) (91.8) Discount rates [- 0.5 p.p.] 183.9 109.5 Amendment to the Renewable Energy Effective date of Sources Act changing the basis of the 133.4 125.8 the act property tax

If market conditions change, there is a risk that test results will be different in the future.

Accounting principles (policies) and notes 38 to the consolidated financial statements constitute an integral part thereof (This is translation of the consolidated financial statements originally issued in Polish) WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (PLN m)

14. Intangible assets

Software, licenses Right of perpetual Other intangible Intangible assets Total and patents usufruct of land assets not in use

Gross value As at 1 January 2017 705 87 56 62 910 Direct purchase 1 - - 80 81 Settlement of intangible assets not in use 45 1 15 (61) - Sale, disposal (1) - - - (1) Liquidation (2) - - - (2) As at 31 December 2017 748 88 71 81 988

Accumulated depreciation and impairment losses As at 1 January 2017 (483) (23) (21) - (527) Amortization for the period (87) (2) (9) - (98) Increase in impairment losses - - (1) (25) (26) Liquidation 1 - - - 1 Reclassification between groups 1 - (1) - - Other changes (1) - 1 - - As at 31 December 2017 (569) (25) (31) (25) (650)

Net value as at 1 January 2017 222 64 35 62 383 Net value as at 31 December 2017 179 63 40 56 338

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 39 (This is translation of the consolidated financial statements originally issued in Polish)

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (PLN m)

14. Intangible assets (cont.)

Software, licenses Right of perpetual Other intangible Intangible assets Total and patents usufruct of land assets not in use

Gross value As at 1 January 2016 594 87 52 103 836 Direct purchase 2 1 - 82 85 Settlement of intangible assets not in use 115 - 10 (125) - Sale, disposal (4) (1) - - (5) Liquidation (9) - - - (9) Reclassification between groups 7 - (7) - - Other changes - - 1 2 3 As at 31 December 2016 705 87 56 62 910

Accumulated depreciation and impairment losses As at 1 January 2016 (402) (21) (18) - (441) Amortization for the period (85) (2) (8) - (95) Liquidation 9 - - - 9 Reclassification between groups (5) - 5 - - As at 31 December 2016 (483) (23) (21) - (527)

Net value as at 1 January 2016 192 66 34 103 395 Net value as at 31 December 2016 222 64 35 62 383

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 40 (This is translation of the consolidated financial statements originally issued in Polish)

WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (PLN m)

15. Goodwill

In the current reporting period, based on the results of tests performed on CGU Myślino in Q3 2017, it was determined that the entire goodwill that was recognized following the acquisition of the wind farm in 2012, in the amount of PLN 11 m, must be written off. The key assumptions adopted for the tests are consistent with the assumptions for impairment tests for property, plant and equipment and are described in Note 13. In the previous year, in connection with the impairment test conducted with respect to the wind farms acquired in 2013, the entire goodwill amount of PLN 117 m recognized upon acquisition of the wind farm portfolio was written off. 16. Investments in joint ventures and associates measured by the equity method The key information about investments in joint ventures and the associate are presented in Note 2.2. As at As at Investments measured by the equity method 31 December 2017 31 December 2016 Polska Grupa Górnicza Sp. z o.o. 533 390 Elektrownia Ostrołęka SA 103 - Polimex-Mostostal S.A. 92 - Total 728 390

Below we present condensed financial information of the companies measured by the equity method, and reconciliation of the financial information to the carrying amount of the shares in the companies recognized in the Group’s consolidated financial statements. Polska Grupa Elektrownia Polimex- Górnicza Sp. Ostrołęka SA Mostostal S.A.** Condensed statement of comprehensive income z o.o. 2017 Revenue 8,346 0 2,069 Amortization and depreciation 1,717 0 26 Interest income 20 0 9 Interest expenses 150 0 24 (Loss)/profit before tax from continuing operations 153 (2) 88 Income tax 67 - 23 Net (loss)/profit on continuing operations 86 (2) 65 Net profit on discontinued operations - - - Other comprehensive income 5 - (3) Total comprehensive income 91 (2) 62 Dividends paid - - - ** data for Polimex-Mostostal S.A. are presented accordingly for the period ended 30 November 2017 or as at 30 November 2017; data for the entire year are not available; The Group assumes that the data for 12 months should not significantly differ from the data for 11 months. Polska Grupa Elektrownia Polimex- Condensed statement of comprehensive income Górnicza Sp. Ostrołęka SA Mostostal S.A. z o.o.* 2016 Revenue 3,828 - - Amortization and depreciation 910 - - Interest income 9 - - Interest expenses 48 - - (Loss)/profit before tax from continuing operations (387) - - Income tax (55) - - Net (loss)/profit on continuing operations (332) - - Net profit on discontinued operations - - - Other comprehensive income (11) - - Total comprehensive income (343) - - Dividends paid - - - * for 8 months ended 31 December 2016

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 41 (This is translation of the consolidated financial statements originally issued in Polish) WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (PLN m)

16. Investments in joint ventures and associates measured by the equity method (cont.)

Polska Grupa Elektrownia Polimex- Condensed balance sheet Górnicza Sp. Ostrołęka SA Mostostal S.A.** z o.o. 31 December 2017 Cash and cash equivalents 788 21 563 Other current assets (excl. cash) 1,088 5 1,023 Total current assets 1,876 26 1,586 Non-current assets 9,074 214 654

Financial liabilities (excl. trade liabilities) 151 33 25 Others current liabilities (incl. trade liabilities) 3,258 - 949 Total current liabilities 3,409 33 974 Financial liabilities 2,280 - 400 Other liabilities 1,887 1 410 Total non-current liabilities 4,167 1 810

Net assets 3,374 206 456 ** comment as above Polska Grupa Elektrownia Polimex- Condensed balance sheet Górnicza Sp. Ostrołęka SA Mostostal S.A. z o.o. 31 December 2016 Cash and cash equivalents 310 - - Other current assets (excl. cash) 697 - - Total current assets 1,007 - - Non-current assets 6,277 - -

Financial liabilities (excl. trade liabilities) 92 - - Others current liabilities (incl. trade liabilities) 2,424 - - Total current liabilities 2,516 - - Financial liabilities 1,148 - - Other liabilities 1,294 - - Total non-current liabilities 2,442 - -

Net assets 2,326 - -

Polska Grupa Elektrownia Polimex- Condensed financial information Górnicza Sp. Ostrołęka SA Mostostal S.A.** z o.o. 2017 Net assets of the joint venture/associate at the beginning of 2,326 189 394 the period Net profit/(loss) for the period 86 (2) 65 Other comprehensive income 5 - (3) Recapitalization by investors 944 19 - Other differences 13 - - Net assets of the joint venture/associate at the end of the 3,374 206 456 period Stake held by the Group in the joint venture/associate 15.76% 50.00% 16.48% Interest in the joint venture/associate 532 103 75 Goodwill 1 - 17 Carrying amount of shares 533 103 92 ** comment as above

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 42 (This is translation of the consolidated financial statements originally issued in Polish) WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (PLN m)

16. Investments in joint ventures and associates measured by the equity method (cont.)

Polska Grupa Elektrownia Polimex- Condensed financial information Górnicza Sp. Ostrołęka SA Mostostal S.A. z o.o. 2016 Net assets of the joint venture/associate at the beginning of the 2,302 - - period Net profit/(loss) for the period (332) - - Other comprehensive income (11) - - Recapitalization by investors 367 - - Other differences - - - Net assets of the joint venture/associate at the end of the period 2,326 - - Stake held by the Group in the joint venture/associate 16.63% 0.00% 0.00% Interest in the joint venture/associate 387 - - Goodwill 3 - - Carrying amount of shares 390 - - ** data for Polimex-Mostostal S.A. are presented accordingly for the period ended 30 November 2017 or as at 30 November 2017; data for the entire year are not available There are no contingent liabilities or any other contractual liabilities related to the Group’s shares in joint ventures and associates, other than those described in Note 2.2. Dividend payments to PGG shareholders is restricted by the bond issue program agreement (“Agreement”) signed between PGG and its bondholders. The Agreement and the terms and conditions of issue of participation bonds allow for a dividend payment only when all of the following conditions are satisfied: • in the settlement period when the dividend is paid out, a cash sweep redemption installment will be paid (a cash sweep may be effected in 2019 or later and will constitute in total 60% of the surplus cash flow for the previous financial year), • there is no default on the specified financial ratios, • the payment will not cause a default on the specified forecast financial ratios, and • the dividend will be paid out to shareholders and holders of participation bonds, pro rata to their involvement in financing PGG.

In the case of dividend payments to shareholders of Polimex Mostostal S.A. and Elektrownia Ostrołęka S.A., there are no specific restrictions on dividend distributions. 17. Inventories

31 December 2017 31 December 2016 Historical Impairment Historical Impairment Net Net value cost losses cost losses value Energy certificates of origin 198 - 198 330 - 330 Materials 78 (1) 77 66 (1) 65 CO2 emission allowances 40 - 40 38 - 38 Semi-finished products and production 9 - 9 15 - 15 in progress Merchandise 28 - 28 25 (1) 24 TOTAL 353 (1) 352 474 (2) 472 Group companies recognize impairment losses on inventories based on the loss of their economic usefulness determined by aging and turnover, down to the amount of the achievable net sale price.

18. CO2 emission allowances Emission volumes and greenhouse gas emission allowances awarded free of charge are presented in the table below: Year ended Year ended CO₂ emission allowances 31 December 2017 31 December 2016 (000s of tons) CO₂ emissions from all installations (thousands of tons), including: 2,650 2,640 Number of emission allowances received free of charge 831 1,084 Number of emission allowances paid for 1,819 1,556

Cost of the obligation to redeem CO₂ emission allowances (PLN m) 49 43

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 43 (This is translation of the consolidated financial statements originally issued in Polish) WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (PLN m)

19. Cash and cash equivalents

Cash in the bank earns interest at variable interest rates negotiated with banks, the level of which depends on the interest rate applicable to overnight bank deposits. Short-term deposits are made for different periods, from one day to three months, depending on the Group’s current cash requirements and earn interest at interest rates negotiated individually with banks. The balance of cash and cash equivalents presented in the statement of cash flows comprises the following items: As at As at

31 December 2017 31 December 2016 Cash at bank and in hand 2,187 633 Short-term deposits up to 3 months 1,454 838 Total cash and cash equivalents presented in the statement of 3,641 1,471 financial position Unrealized foreign exchange differences and interest 2 (3) Current account overdraft - (4) Total cash and cash equivalents presented in the statement of 3,643 1,464 cash flows including restricted cash 31 29

20. Other assets

20.1. Other non-current assets

As at As at

31 December 2017 31 December 2016 Long-term prepayments and accrued expenses 61 60 Investment property 32 33 Advances for property, plant and equipment under construction and 7 5 Longintangible-term assetsreceivables 7 3 TOTAL 107 101

20.2. Other current assets

As at As at

31 December 2017 31 December 2016 VAT receivables 106 106 Advances for deliveries 12 31 Deferred costs 57 53 Other tax receivables - 7 Surplus of Company Social Benefit Fund’s assets over liabilities 1 - Other current assets - 1 TOTAL 176 198

21. Share capital and other capital

21.1. Share capital As at 31 December 2017, the share capital of ENERGA SA amounted to PLN 4,522 m and was divided into shares as specified below: As at As at 31 December 31 December 2017 2016

AA series bearer shares with par value of PLN 10.92 each 269,139,114 269,139,114 BB series registered shares with par value of PLN 10.92 each 144,928,000 144,928,000 Total number of shares 414,067,114 414,067,114

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 44 (This is translation of the consolidated financial statements originally issued in Polish) WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (PLN m)

21. Share capital and other capital (cont.) 21.2. Major shareholders

Year ended Year ended

31 December 31 December 2017 2016 State Treasury share in capital 51.52% 51.52% share in voting rights 64.09% 64.09% Other shareholders share in capital 48.48% 48.48% share in voting rights 35.91% 35.91% 21.3. Shareholders’ rights At the end of the reporting period, the State Treasury owned 213,326,317 shares of the Company, constituting 51.52% of its share capital and entitling to exercise 358,254,317 votes at the General Meeting, which makes up 64.09% of the total number of votes at the General Meeting (including 144,928,000 registered series BB shares, preferred with respect to the voting right at the General Meeting in such manner that one BB series share gives the right to two votes at the General Meeting). According to the Parent Company’s articles of association in effect on the date of these financial statements, Supervisory Board members are appointed and dismissed by the General Meeting, but the State Treasury is personally entitled to appoint and dismiss Supervisory Board members so that the State Treasury has an absolute majority of the votes in the Supervisory Board. The above entitlement expires on the date on which the State Treasury’s share in the share capital falls below 20%. 21.4. Reserve capital Reserve capital was created as a result of the share capital reduction made in connection with the reverse split of the parent company’s shares in 2013 and upon distribution of the parent company’s net profit for 2015. Reserve capital may be used only to cover future losses or to raise the parent company’s share capital. 21.5. Supplementary capital Supplementary capital was created from allowances from profit generated by the Parent Company in previous reporting periods. Pursuant to the requirements of the Commercial Company Code, joint stock companies are required to create supplementary capital to cover losses. At least 8% of the company’s profit for a given financial year presented in the company's financial statements is transferred to supplementary capital until the capital reaches at least one third of the company's share capital. The use of the supplementary capital is decided by the General Meeting, however, the portion of the supplementary capital representing one-third of the share capital may only be used to cover a loss posted in the financial statements and cannot be allocated to other purposes. 21.6. Cash flow hedge reserve The cash flow hedge reserve follows from the valuation of cross-currency interest rate swap (CCIRS) transactions concluded to hedge currency exchange risk associated with Eurobonds issued by the subsidiary, ENERGA Finance AB (publ), and with hybrid bonds issued by ENERGA SA and IRS interest rate swaps concluded to hedge interest rate risk associated with the external financing used (see the description in Note 28.6). 21.7. Retained earnings and restrictions on dividend payment The Group’s retained earnings include amounts that are not subject to distribution, or cannot be paid out as dividend by the parent company. This refers, in particular, to the retained earnings of subsidiaries (taking into account consolidation adjustments), adjustments resulting from the transition of the parent company’s financial statements from the Accounting Act to IFRS EU and actuarial gains and losses from the valuation of provisions for post-employment benefits recognized in other comprehensive income. 21.8. Non-controlling interest As at 31 December 2017, equity attributable to non-controlling interest refer to minority shareholders of companies in the generation segment, in particular ENERGA Elektrownie Ostrołęka SA.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 45 (This is translation of the consolidated financial statements originally issued in Polish) WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (PLN m)

22. Earnings per share

There were no diluting instruments in the Parent Company and therefore diluted earnings per share are equal to basic earnings per share. The data used to calculate earnings per share are presented below.

Year ended Year ended 31 December 2017 31 December 2016 Net profit or loss on continuing operations attributable to equity holders of 773 151 the Parent Company Net profit or loss attributable to common equity holders of the Parent 773 151 Company

Number of shares at the end of the reporting period (millions) 414 414 Number of shares used to calculate earnings per share (millions) 414 414 Earnings or loss per share on continuing operations (basic and diluted) 1.87 0.36 (in PLN)

23. Dividends

Year ended Year ended 31 December 2017 31 December 2016 Dividends declared in the period dividend declared by subsidiaries - - dividend declared by the Parent Company 79 203 TOTAL 79 203 Dividends paid in the period dividends paid in the period by subsidiaries to non-controlling interest - - dividends paid in the period by the Parent Company 79 203 of which attributable to preferred shares 28 71 TOTAL 79 203

On 26 June 2017, the Annual General Meeting adopted a resolution to distribute the 2016 profit, out of which PLN 79 m, i.e. PLN 0.19 per share, was allocated for a dividend to the Company's shareholders (the dividend in 2016 was PLN 0.49 per share). By the date of approval of these financial statements for publication, the proposed distribution of the 2017 profit has not been adopted. 24. Provisions

24.1. Provisions for employee benefits The Group measures provisions for post-employment benefits and for jubilee bonuses (see description in note 9.16) using actuarial methods. The amounts of provisions for employee benefits and the reconciliation of changes to the balances are presented in the tables below. Company Pension and Social Jubilee similar Energy tariff Restructuring TOTAL Benefit bonuses benefits Fund As at 1 January 2017 118 166 69 213 1 567 Current service cost 5 3 2 12 - 22 Past service cost (5) (2) (57) (6) - (70) Actuarial gains and losses, of which arising from changes in 5 5 15 10 - 35 assumptions: financial (1) (4) 9 (1) - 3 demographic 5 5 2 10 - 22 other 1 4 4 1 - 10 Benefits paid (4) (10) (2) (22) - (38) Interest costs 4 5 2 8 - 19 Reversed - - - - (1) (1) As at 31 December 2017, 123 167 29 215 - 534 including: Short-term 10 9 1 21 - 41 Long-term 113 158 28 194 - 493

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 46 (This is translation of the consolidated financial statements originally issued in Polish) WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (PLN m)

24. Provisions (cont.) Company Pension Energy Social Jubilee and similar Restructuring TOTAL tariff Benefit bonuses benefits Fund As at 1 January 2016 120 223 59 261 2 665 Current service cost 5 3 2 11 - 21 Past service cost (1) - - (1) (2) Actuarial gains and losses, of which arising from changes in (6) (36) 9 (43) - (76) assumptions: financial (15) (11) (6) (22) - (54) demographic 7 (17) 16 (23) - (17) other 2 (8) (1) 2 - (5) Benefits paid (3) (10) (3) (22) - (38) Interest costs 3 6 2 7 - 18 Reversed - (20) - - - (20) Used - - - - (1) (1) As at 31 December 2016, including: 118 166 69 213 1 567 Short-term 8 9 3 19 1 40 Long-term 110 157 66 194 - 527

Key assumptions adopted by the actuary to calculate the liability amounts at the end of the reporting period are as follows: Year ended Year ended

31 December 2017 31 December 2016 Discount rate 3.36% 3.29% Employee turnover rate 3.80% 3.96% Expected salary growth rate 3.00% 3.00% Expected growth rate of the Company Social Benefit Fund charge 3.80% 3.00% Base of the Company Social Benefit Fund charge 3.80% 3.00% Expected energy equivalent growth rate 1.04% 0.80% Based on data received from the actuary, the Group estimates that the change in assumptions would affect the amount of provisions for pension and similar benefits, jubilee bonuses, the employee benefit fund and the energy tariff as follows: Analysis of Analysis of Analysis of sensitivity to sensitivity to salary sensitivity to Carrying discount rate growth rate energy equivalent Actuarial provisions amount changes changes changes PLN deviation in PLN +0.5 p.p. -0.5 p.p. +0.5% -0.5% +0.5% -0.5% As at 31 December 2017 Provision for pension and similar benefits 123 (6) 7 7 (6) - - Energy tariff 167 (10) 11 - - 12 (11) Company Social Benefit Fund 29 (2) 2 2 (2) - - Jubilee bonuses 215 (8) 8 8 (8) - - TOTAL 534 (26) 28 17 (16) 12 (11) Contribution to profit before tax 8 (8) (8) 8 - -

As at 31 December 2016 Provision for pension and similar benefits 118 (6) 6 7 (6) - - Energy tariff 166 (11) 12 - - 7 (6) Company Social Benefit Fund 69 (5) 6 5 (4) - - Jubilee bonuses 213 (8) 9 8 (8) - - TOTAL 566 (30) 33 20 (18) 7 (6) Contribution to profit before tax 8 (9) (8) 8 - -

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 47 (This is translation of the consolidated financial statements originally issued in Polish) WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (PLN m)

24. Provisions (cont.) 24.2. Other provisions Land Obligation to Legal Liabilities for Other reclamation and redeem TOTAL claims gas emissions provisions liquidation costs certificates As at 1 January 2017 131 50 41 405 95 722 Interest costs - 2 - - - 2 Recognized 30 5 49 304 46 434 Reversed (34) - (1) (10) (15) (60) Used (24) - (43) (400) (44) (511) Reclassified 11 - - - (11) - As at 31 December 2017, 114 57 46 299 71 587 including: Short-term 114 - 46 299 71 530 Long-term - 57 - - - 57

* The amount of the recognized provision for reclamation and liquidation costs in 2017 arises mainly from a change in the discount rate to 3.12%. Land reclamation Obligation to Legal Liabilities for Other and redeem TOTAL claims gas emissions provisions liquidation certificates costs As at 1 January 2016 97 38 33 247 55 470 Interest costs - 2 - - - 2 Recognized 53 13 44 409 82 601 Reversed (17) (3) - - (4) (24) Used (2) - (36) (251) (38) (327) As at 31 December 2016, 131 50 41 405 95 722 including: Short-term 131 - 41 405 94 671 Long-term - 50 - - 1 51 * The amount of the recognized provision for reclamation and liquidation costs in 2016 results from a change in the estimation amount, while the provision reversal amount results mainly from a change in the discount rate to 3.62%. Provision for land reclamation and liquidation costs In 2008, ENERGA Elektrownie Ostrołęka SA recognized the provision for ash landfills reclamation, which will be amortized until 2050. This category also presents provisions for the dismantling costs of the following wind farms: • FW Bystra – provision recognized in 2012 and amortized until 2037, • FW Karścino, FW Mołtowo, FW Krukowo – provisions recognized in 2009 and amortized until 2034, • FW Karcino – provision recognized in 2010 and amortized until 2035, • FW Myślino – provision recognized in 2015 and amortized until 2040. • FW Parsówek – provision recognized in 2016 and amortized until 2041. Provisions for legal claims As a result of transition to a different political system, in the 1990s, serious problems arose in the present legal and economic system with transmission installations built in the former legal system on private properties. The main purpose of the provisions for legal claims are the court cases relating to power infrastructure located on private land without the necessary legal titles. The balance of these provisions was PLN 75 m at the end of 2017 and PLN 82 m at the end of 2016. Other provisions This category contains mainly provisions for excise tax, that is tax liability calculated on the quantities of electricity sold to end users and property tax.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 48 (This is translation of the consolidated financial statements originally issued in Polish) WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (PLN m)

25. Other liabilities

25.1 Other non-current liabilities

As at As at

31 December 2017 31 December 2016 Other financial liabilities 80 4 Derivative financial instruments 78 - Finance lease liabilities 2 4 Other non-financial liabilities 1 2 Total 81 6

25.2 Other current liabilities

As at As at

31 December 2017 31 December 2016 Liabilities on account of taxes, customs duties, social security, 161 108 salaries and others VAT 46 36 Liabilities on social security insurance 45 43 Excise tax 38 - Personal income tax 17 16 Environmental and other fees 13 12 Other 2 1 Other non-financial liabilities 161 125 Amounts paid by business partners relating to future periods and 85 92 advances received Payroll liabilities 33 31 Liabilities under grants received 42 - Other 1 2 TOTAL 322 233

26. Deferred income and grants

As at As at

31 December 2017 31 December 2016 Connection fees 253 267 Grants received 198 203 Property, plant and equipment acquired free of charge 71 65 Rental income 14 15

Accruals for annual bonus and other employee bonuses 95 95

Accruals for unused holiday leaves 31 29 Awards for Management Boards 12 9 Other prepayments and accruals 9 2 TOTAL, of which: 683 685 Long-term 501 515 Short-term 182 170 As at 31 December 2017, the Group recognizes as grants: primarily, the valuation effect of the preferential loan from the European Investment Bank in the amount of PLN 78 m, which is recognized over the loan repayment period (see descriptions in Notes 9.20 and 28.5) and co-financing of PLN 31 m received to execute the biomass-fired power unit building project in Elbląg, which is recognized over the depreciation period of the assets until 2054. In the case of the co-financing of the construction of the unit in Elbląg, the Group is obligated to achieve appropriate performance ratios (specified production of electricity and heat) throughout the duration of the project (see description in Note 35.1; in other cases, as at the date of these financial statements, the conditions of grants have been satisfied). Additionally, companies from the Generation segment received funding from the National Fund for Environmental Protection and Water Management in the amount of PLN 32 m to rebuild district heating networks.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 49 (This is translation of the consolidated financial statements originally issued in Polish) WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (PLN m)

27. Assets and liabilities of the Company Social Benefit Fund

Pursuant to the Social Benefit Fund Act of 4 March 1994, as amended, the Company Social Benefit Fund is established by employers (companies) employing more than 20 employees on a full time equivalent basis. Group companies establish such funds and make periodic allowances. The funds of ENERGA SA Group companies contain no property, plant and equipment. The purpose of the Funds is to subsidize the social activity of the individual Group companies, grant loans to employees and subsidize other social expenses, such as co-payments to employee holidays. Group companies have offset the Fund’s assets with their liabilities towards the Fund on the individual level, because these assets do not constitute separate assets of the companies.

The table below presents the structure of the Funds' assets, liabilities and expenses. As at As at

31 December 2017 31 December 2016 Loans granted to employees 10 10 Cash 5 4 Fund’s liabilities 14 14 Balance after set-off 1 - Charges to the fund in the period 34 30

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 50 (This is translation of the consolidated financial statements originally issued in Polish) WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c Consolidated financial statements for the year ended ENERGA SA Group 31 December 2017 (PLN m)

NOTES ON FINANCIAL INSTRUMENTS

28. Financial instruments

28.1. Carrying amount of financial instruments by category and class Financial As at Financial instruments Financial assets at Cash and 31 December 2017 Loans and liabilities Hedging excluded fair value through cash TOTAL receivables measured at derivatives from the profit or loss equivalents amortized cost scope of IAS 39 Assets Trade receivables - 1,843 - - - - 1,843 Cash and cash equivalents - - 3,641 - - - 3,641 Other financial assets 24 96 - - 9 - 129 Bonds, treasury bills and other debt instruments - 14 - - - - 14 Derivative financial instruments 24 - - - 9 - 33 Other - 82 - - - - 82 TOTAL 24 1,939 3,641 - 9 - 5,613 Liabilities Loans and borrowings - - - 3,076 - - 3,076 Preferential loans and borrowings - - - 1,570 - - 1,570 Loans and borrowings - - - 1,506 - - 1,506 Bonds issued - - - 4,629 - - 4,629 Trade liabilities - - - 792 - - 792 Other financial liabilities - - - 278 78 5 361 Liabilities on purchase of property, plant and equipment and - - - 255 - - 255 intangible assets Derivative financial instruments - - - - 78 - 78 Dividend liabilities - - - 2 - - 2 Other - - - 21 - 5 26 TOTAL - - - 8,775 78 5 8,858

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 51

28. Financial instruments (cont.)

Financial instruments Financial assets at Financial liabilities Loans and Cash and cash Hedging excluded As at fair value through measured at TOTAL receivables equivalents derivatives from the 31 December 2016 profit or loss amortized cost scope of IAS 39

Assets Trade receivables - 1,947 - - - - 1,947 Portfolio of financial assets 2 - - - - - 2 Cash and cash equivalents - - 1,471 - - - 1,471 Other financial assets - 34 - - 147 - 181 Bonds, treasury bills and other debt instruments - 17 - - - - 17 Derivative financial instruments - - - - 147 - 147 Other - 17 - - - - 17 TOTAL 2 1,981 1,471 - 147 - 3,601 Liabilities Loans and borrowings - - - 3,420 - - 3,420 Preferential loans and borrowings - - - 1,488 - - 1,488 Loans and borrowings - - - 1,928 - - 1,928 Current account overdraft - - - 4 - - 4 Bonds issued - - - 2,717 - - 2,717 Trade liabilities - - - 811 - - 811 Other financial liabilities - - - 151 - 12 163 Liabilities on purchase of property, plant and equipment and - - - 132 - - 132 intangible assets Other - - - 19 - 12 31 TOTAL - - - 7,099 - 12 7,111

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 52

28. Financial instruments (cont.) 28.2. Items of income, expenses, profits and losses recognized in the statement of comprehensive income, by category of financial instruments Assets Financial measured at fair Loans and Cash and cash liabilities Year ended 31 December 2017 Derivatives TOTAL value through receivables equivalents measured at profit or loss amortized cost Interest income/(cost) - 18 28 (229) (54) (237) Foreign exchange differences - - (3) 156 (140) 13 Reversal of impairment losses/increase in value - 92 - - - 92 Recognition of impairment losses/decrease in value - (98) - - - (98) Other 17 - - - - 17 Net profit/(loss) 17 12 25 (73) (194) (213) Other comprehensive income - - - - (48) (48) Comprehensive income 17 12 25 (73) (242) (261)

Assets Financial measured at fair Loans and Cash and cash liabilities Year ended 31 December 2016 Derivatives TOTAL value through receivables equivalents measured at profit or loss amortized cost Interest income/(cost) 3 41 9 (201) (36) (184) Foreign exchange differences - - 5 (81) 69 (7) Reversal of impairment losses/increase in value - 35 - - - 35 Recognition of impairment losses/decrease in value - (97) - - - (97) Net profit/(loss) 3 (21) 14 (282) 33 (253) Other comprehensive income - - - - 43 43 Comprehensive income 3 (21) 14 (282) 76 (210)

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 53

28. Financial instruments (cont.) 28.3. Fair value of financial instruments 28.3.1. Financial instruments measured at fair value on an ongoing basis Some of the Group's financial assets and liabilities are measured at fair value at the end of each reporting period. The table below analyses fair value measurements for financial assets and financial liabilities categorised into three level hierarchy: • level 1 – fair value based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the Group can access at the measurement date; • level 2 – fair value based on inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly; • level 3 – fair value based on unobservable inputs for the asset or liability.

31 December 2017 31 December 2016

Level 2 Level 2 Assets Portfolio of financial assets - 2 Hedging derivatives (CCIRS I) 7 135 Hedging derivatives (CCIRS II) <1 8 Hedging derivatives (IRS) 2 4 Other derivatives 24 - Liabilities Hedging derivatives (CCIRS III) 49 - Hedging derivatives (CCIRS IV) 29 -

The Group measured participation units in the ENERGA Trading SFIO fund as the product of their quantity and the value of a single participation unit, as measured by the fund management company pursuant to the Mutual Funds Act of 27 May 2004. As at 31 December 2017, the Group no longer holds the participation units. Cross Currency Interest Rate Swaps (CCIRSs) and Interest Rate Swaps (IRSs) are measured at fair value by discounting future cash flows. The interest rates and the basis spread used in discounting are obtained from Bloomberg. Other derivatives include options to purchase shares in Polimex-Mostostal SA. The options were purchased from Towarzystwo Finansowe Silesia Sp. z o.o. under the agreement of 18 January 2017 and refer to the purchase, in three tranches, a total of 9 million shares of Polimex-Mostostal SA, at the nominal price of PLN 2 per share. The option exercise dates were set at: 30 July 2020, 30 July 2021 and 30 July 2022. The fair value measurement of the call options to purchase shares of Polimex- Mostostal SA was carried out using the Black-Scholes model. The measurement considered the current price and historic volatility of the company’s share prices. The risk-free rate was determined on the basis of the yield of treasury bonds with maturities similar to the option expiration date. 28.3.2. Financial instruments not measured at fair value on an ongoing basis Except for the information given in the table below, the carrying amounts of financial assets and liabilities do not depart in a material way from their fair values.

Liabilities arising from the issue of Fair value Eurobonds and hybrid bonds Carrying amount Level 1 Level 2 Level 3 As at 31 December 2017 4,433 3,508 1,152 - As at 31 December 2016 2,261 2,408 - -

Fair value measurement of liabilities arising from the bonds issued in the Euro was estimated: in the case of Eurobonds on the basis of quotations from the Bloomberg system from 29 December 2017, which are determined based on transactions on the Luxembourg stock exchange and over-the-counter trading, while in the case of hybrid bonds based on the analysis of future cash flows discounted using the interest rates in effect as at 29 December 2017. The Group also holds bonds bearing a floating interest rate, which are listed on a regulated market operated by BondSpot S.A. The market is not liquid and transactions on this market are very rare; consequently, the listed prices do not reflect the fair value of the bonds.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 54

28. Financial instruments (cont.) 28.4. Description of material items in individual categories of financial instruments 28.4.1. Financial assets Loans and receivables The main item of the loans and receivables category are trade receivables. Overdue (days) Trade receivables Not overdue Total <30 30–90 90-180 180-360 >360

As at 31 December 2017 Before impairment losses 1,545 139 68 36 58 278 2,124 Impairment losses (2) (3) (5) (8) (38) (225) (281) After impairment losses 1,543 136 63 28 20 53 1,843

As at 31 December 2016 Before impairment losses 1,658 152 93 41 46 262 2,252 Impairment losses (1) (3) (4) (5) (31) (261) (305) After impairment losses 1,657 149 89 36 15 1 1,947 Hedging derivatives Hedging derivatives, CCIRS and IRS, are described in detail in Note 28.6. Financial assets at fair value through profit or loss The Group classifies its investments in the portfolio of financial assets, which consisted of participation units in the ENERGA Trading SFIO Fund, as financial assets at fair value through profit or loss and currently the option to purchase shares in Polimex- Mostostal. Impairment losses on financial assets

Impairment losses Impairment losses for bonds, treasury on trade receivables bills and other debt instruments

Impairment loss as at 1 January 2017 305 25 Recognition of impairment losses 96 - Used (28) - Unused amounts written off (reversal of the allowance) (92) - Impairment losses as at 31 December 2017 281 25

Impairment losses as at 1 January 2016 286 25 Recognition of impairment losses 97 - Used (43) - Unused amounts written off (reversal of the allowance) (35) - Impairment losses as at 31 December 2016 305 25

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 55

28. Financial instruments (cont.) 28.4.2. Financial liabilities All of the Group's financial liabilities are classified as financial liabilities measured at amortized cost, except for hedging derivatives. This category of the Group's financial instruments includes primarily contracted loans and borrowings and issued bonds.

Loans and Total financing Bonds issued borrowings liabilities

As at 31 December 2016 3,420 2,717 6,137 Disbursement - 2,313 2,313 Repayment/Redemption (346) (272) (618) Foreign currency differences - (162) (162) Payment of interest (94) (112) (206) Other changes 96 145 241 As at 31 December 2017 3,076 4,629 7,705

Loans and borrowings As at As at

31 December 2017 31 December 2016 Currency PLN Reference rate WIBOR, Rediscount rate Value of the loan/borrowing 3,076 3,420 of which maturing in: up to 1 year (short-term) 356 334 1 to 2 years 373 357 2 to 3 years 392 372 3 to 5 years 763 776 over 5 years 1,192 1,581 As at 31 December 2017 and 31 December 2016, the amount of credit limits available to the Group was PLN 4,086 m (75.8% used) and PLN 4,326 m (79.6% used), respectively. Detailed information on contracted loans and borrowings is presented in Note 28.5. Liabilities under bonds issued As at As at

31 December 2017 31 December 2016 Currency PLN Reference rate WIBOR Value of the issue 183 456 of which maturing in: up to 1 year (short-term) 12 14 2 to 3 years 171 442

As at As at 31 December 2017 31 December 2016 Currency EUR Reference rate fixed Value of the issue in currency 1,066 511 in PLN 4,446 2,261 of which maturing in: up to 1 year (short-term) 97 64 2 to 3 years 2,085 - 3 to 5 years - 2,197 over 5 years 2,264 - Detailed information on bonds issued is provided in Note 28.5.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 56

28. Financial instruments (cont.) 28.5. Available external financing In Q1 2017, a subsidiary ENERGA Finance AB (publ) carried out a public subscription for the Eurobonds issued under the updated EMTN Program. It was EUR 300 m bond issue with the issue price of 98.892% and 10-year maturity. The 2.125% coupon will be payable annually. The Eurobonds are listed on the Luxembourg stock exchange. The funds raised through the bond issue will be applied to general corporate purposes. In Q3 2017, ENERGA SA, pursuant to agreements signed with the European Investment Bank (“EIB”) conducted a public subscription of EUR 250 m hybrid bond issue (“Bonds”) in two tranches: - EUR 125 million, maturing in 16 years, with the first financing period set for 6 years from the issue date, - EUR 125 million, maturing in 20 years, with the first financing period set for 10 years from the issue date. The issued Bonds are subordinated, unsecured, coupon bearer securities which have been subscribed for by EIB under the European Fund for Strategic Investments launched by EIB jointly with the European Commission to execute the so-called Juncker Plan. The Bonds earn interest at a fixed interest rate estimated according to the formula defined in the terms and conditions of issue. The said financing will be slated for execution of an investment program in the Distribution segment, consisting in modernization and expansion of the ENERGA SA Group’s distribution assets in 2017-2019. In the current reporting period and as at the last day of the reporting period and as at the date of approving these financial statements for publication, there were no events of default on contractual obligations under the terms and conditions of any external funding acquired.

Date of Available Nominal debt Financing Type of Purpose of Financing Repayment the financing as at institution liability financing limit date agreement amount 31.12.2017

ENERGA- European Loan OPERATOR SA 16-12-2009 1,050 - 634 15-12-2025 Investment Bank Investment Program ENERGA- European Loan OPERATOR SA 10-07-2013 1,000 - 963 15-09-2031 Investment Bank Investment Program European Bank for ENERGA- Reconstruction and Loan OPERATOR SA 29-04-2010 1,076 - 648 18-12-2024 Development Investment Program

European Bank for ENERGA- Reconstruction and Loan OPERATOR SA 26-06-2013 800 - 667 18-12-2024 Development Investment Program ENERGA- Nordic Investment Loan OPERATOR SA 30-04-2010 200 - 97 15-06-2022 Bank Investment Program General corporate Bondholders Eurobonds 19-03-2013 2 085* - 2 085* 19-03-2020 purposes

General corporate Bondholders Eurobonds 07-03-2017 1 251* - 1 251* 07-03-2027 purposes

Domestic General corporate Bondholders 19-10-2012 1,000 - 170 19-10-2019 bonds purposes

PKO Bank Polski General corporate Credit limit 30-08-2011 2 - 2 31-12-2019 SA purposes

PKO Bank Polski General corporate Credit limit 12-10-2011 300 300 - 07-06-2021 SA purposes

ENERGA Elektrownie PKO Bank Polski Bonds Ostrołęka SA 30-05-2012 100 56 - 31-12-2022 SA Investment Program

PKO Bank Polski General corporate Credit limit 20-09-2012 200 189 11** 19-09-2022 SA purposes

Renewable General corporate Bank PEKAO SA 13-10-2011 500 500 - 29-05-2020 loan purposes

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 57

Date of Available Nominal debt Financing Type of Purpose of Financing Repayment the financing as at institution liability financing limit date agreement amount 31.12.2017

ENERGA Elektrownie Bank PEKAO SA Loan Ostrołęka SA 30-05-2012 85 - 17 29-05-2022 Investment Program

Nordic Investment FW Myślino Loan 23-10-2014 68 - 55 15-09-2026 Bank construction Energa-Obrót SA NFOSiGW Loan 25-03-2011 0 - 0 31-12-2020 Investment Program ENERGA WFOŚiWG Loan Wytwarzanie SA 23-12-2014 7 - 7 30-06-2021 Investment Program Elektrownia CCGT WFOŚiWG Loan Gdańsk Sp. z o.o. 27-06-2014 7 - 7 30-06-2024 Investment Program

ENERGA- European Hybrid bonds OPERATOR SA 04-09-2017 1 043*** 1 043*** 12-09-2037 Investment Bank Investment Program

TOTAL 10,774 1,045 7,657

* liability under Eurobonds in the total amount of EUR 800 m converted using the average NBP exchange rate of 29 December 2017 ** the limit amount used in the form of a guarantee (utilization of guarantee limits awarded under execution agreements) *** hybrid bonds liability of EUR 250 m converted using the average NBP exchange rate of 29 December 2017

28.6. Cash flow hedge accounting FX risk hedging The special purpose vehicle ENERGA Finance AB (publ) and ENERGA SA have signed three loan agreements denominated in EUR for the total amount of EUR 699 m. In order to hedge currency risk under these loans, in 2013, in July 2014 and April 2017, the Group concluded cross-currency interest rate swap transactions with nominal values of EUR 400 m (“CCIRS I”), EUR 25 m (“CCIRS II”) and EUR 200 m (“CCIRS III”), respectively. As a hedged position under the above hedging relationships the Group designated the foreign currency risk arising from intra- group loans denominated in EUR. The foreign currency risk is hedged at the level of 89% of the total nominal amount of loans. As the hedge the Group designated CCIRS transactions under which the Group receives fixed-rate cash flows in EUR and pays fixed-rate cash flows in PLN. Cash flows received by the Group correspond with the cash flows under the intra-group loans. The Group expects that the hedged cash flows will continue until June 2027. In September 2017, ENERGA SA issued hybrid bonds for the total amount of EUR 250 m. In order to hedge the currency risk under these bonds, the Company concluded CCIRS transactions (“CCIRS IV”). As a hedged position under the above hedging relationships the Company designated the foreign currency risk arising from the issue of hybrid bonds denominated in EUR. The foreign currency risk is hedged at the level of 100% of the total nominal amount of the issued bonds. As the hedge the Company designated CCIRS transactions under which the Company receives fixed-rate cash flows in EUR and pays fixed-rate cash flows in PLN. Cash flows received by the Company correspond with the cash flows under the bonds issued. The Company expects that the hedged cash flows will continue until September 2027. Interest rate risk hedging In August 2016, the Group additionally concluded IRS transactions with similar characteristics for the following: • loan agreement concluded with EBRD in 2010 – PLN 150 m; • loan agreement concluded with EBRD in 2013 – PLN 150 m; • loan agreement concluded with EIB in 2013 – PLN 150 m. As hedged positions under hedging relationships, the Group designated the risk related to the WIBOR 3M interest rate arising from interest payments on the financial liabilities stated above in the period no longer than 2 years from the date of the hedging transactions. In the case of the PLN 150 m transaction pertaining to the 2013 EIB loan agreement, this is a four-year period. As the hedge the Group designated the IRS transactions under which the Group receives floating-rate cash flows in PLN and pays fixed-rate cash flows in PLN. Interest cash flows received by the Group correspond with interest cash flows under the hedged financial liabilities. The Group expects that the hedged cash flows will continue until June 2020 and not longer.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 58

28. Financial instruments (cont.) Fair value of hedges The fair value of hedges was:

Value Recognition in the statement of financial position

As at 31 December 2017 CCIRS I 7 Non-current assets – Other financial assets CCIRS II <1 Non-current assets – Other financial assets CCIRS III 49 Liabilities – Other financial liabilities CCIRS IV 29 Liabilities – Other financial liabilities IRS 2 Non-current assets – Other financial assets As at 31 December 2016 CCIRS I 135 Non-current assets – Other financial assets CCIRS II 8 Non-current assets – Other financial assets IRS 4 Non-current assets – Other financial assets

Under cash flow hedge accounting, the cash flow hedge reserve (the effective portion of changes in the value of the hedge, less deferred tax) decreased in the reporting period by PLN 39 m. The table below presents changes in the cash flow hedge reserve resulting from the hedge accounting in the reporting period: Change in cash flow hedge reserve during the reporting Year ended Year ended period 31 December 2017 31 December 2016 At the beginning of the reporting period 41 6

Amount recognized in the cash flow hedge reserve in the period, (216) 112 equal to the change in the fair value of hedging instruments

Accrued interest transferred from the reserve to financial 23 - income/costs Revaluation of hedging instruments transferred from the reserve 145 (69) to financial income/costs Income tax on other comprehensive income 9 (8) At the end of the reporting period 2 41

As at 31 December 2017, no inefficiencies were identified resulting from the applied cash flow hedge accounting. 28.7. Collateral securing repayment of liabilities At the end of the reporting period and as at 31 December 2016, there were no material assets securing repayment of liabilities or contingent liabilities. 29. Financial risk management principles and objectives

The major financial instruments used by the Group include bank loans, bonds, cash, short-term investments and hedging instruments. The main purpose of these financial instruments is to secure funds to finance the Group’s operations or to mitigate financial risks. Key risks generated by the Group's financial instruments include: • market risk, • liquidity risk, • credit risk.

The Management Board verifies and agrees the principles of managing these risks. On 20 December 2017, the Management Board of ENERGA SA signed with ENERGA SA Group companies a Cooperation Agreement, whose integral elements include Liquidity Management Policy and the ENERGA Group Market Risk Management Policy (for FX risk and interest rate risk). Thus both documents have been introduced across the ENERGA Group, which allows the holding company to manage these risks effectively. Both documents define financial risk management procedures for individual Group companies and introduce appropriate reporting obligations.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 59

29. Financial risk management principles and objectives (cont.) 29.1. Market risk The Group identifies the following major market risks to which it is exposed: • interest rate risk, • foreign exchange risk, • commodity price risk. For the purposes of sensitivity analysis to changes in market risk factors, the ENERGA Group uses scenario analysis method, which uses expert scenarios reflecting the Group's subjective judgment on how individual market risk factors will develop in the future. Scenario analyses presented in this item aim to analyze the impact of changes in market risk factors on the Group’s financial results. Only those items, which satisfying the definition of financial instruments, are subject to analysis. Interest rate risk The ENERGA Group is exposed to interest rate risk in connection with the fact that it holds assets and liabilities for which income and expenses are calculated on the basis of market interest rates, which are subject to change. The Group identifies exposure to the risk of WIBOR interest rate changes, which involves primarily long-term financial debt. The Group’s financial policy envisages that the risk of changing interest rates is mitigated by keeping a portion of debt at fixed rates. Additionally, at the holding company level the ENERGA Group has entered into a number of transaction hedging the interest rate risk (IRS). As at 31 December 2017, 64% of financial debt (2016: 51%) recorded in the statement of financial position (loans and borrowings and bonds issued) bore a fixed interest rate or was hedged against interest rate risk with IRS transactions. In interest rate risk sensitivity analysis, the Group uses a parallel shift of the interest rate curve by the possible change in reference interest rates in the coming year. The levels of reference interest rates on the final day of a reporting period were used for this purpose. The extent of potential changes to interest rates was assessed on the basis of volatility of implied options per interest rate quoted on the inter-bank market. in the case of WIBOR, due to the low liquidity of the interest rate option market, the shift of the yield curve has been assumed arbitrarily. In the case of analysis of sensitivity to interest rate changes, the effect of changes to risk factors would be carried to: • other comprehensive income for hedging derivatives, • interest income/cost for other financial instruments. The table below presents sensitivity of financial result before tax and other comprehensive income to reasonably possible interest rate changes, assuming that there are no variations in other risk factors for these financial instrument classes that are exposed to interest rate risk:

Interest rate risk sensitivity analysis as at 31 December 2017 31 December 2017 Carrying Value at Financial assets and liabilities WIBOR EURIBOR amount risk

WIBOR WIBOR EURIBOR EURIBOR PLN PLN +50 bp -50 bp +20 bp -20 bp Assets Cash and cash equivalents 3,641 3,641 18 (18) - - Other derivatives 24 24 - - - - Liabilities - - - - Preferential loans and borrowings 1,570 1,570 8 (8) - - 1,506 1,506 8 (8) - - Loans and borrowings granted on market terms Bonds and debt securities issued 4,629 183 1 (1) - - Change in profit before tax 35 (35) - -

Hedging derivatives (assets) 9 9 22 (22) (8) 8

Hedging derivatives (liabilities) 78 78 71 (74) (32) 33

Change in other comprehensive income 93 (96) (40) 41

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 60

29. Financial risk management principles and objectives (cont.) Interest rate risk sensitivity analysis as at 31 December 2016 31 December 2016 Carrying Value at Financial assets and liabilities WIBOR EURIBOR amount risk WIBOR WIBOR EURIBOR EURIBOR PLN PLN +50 bp -50 bp +20 bp -20 bp Assets Cash and cash equivalents 1,471 1,471 7 (7) (1) 1 Liabilities Preferential loans and borrowings 1,488 1,488 (7) 7 - - Loans and borrowings granted on market terms 1,928 1,928 (10) 10 - - Bonds and debt securities issued 2,717 456 (2) 2 - - Current account overdraft 4 4 - - - - Change in profit before tax (12) 12 (1) 1

Hedging derivatives (assets) 147 147 35 (35) (14) 14 Change in other comprehensive income 35 (35) (14) 14 Foreign exchange risk The Group is exposed to foreign currency risk on account of trade and financial transactions that it concludes. The risk arises as a result of the Group companies entering into purchase and sale transactions or incurring financial liabilities in currencies other than the valuation currency or holding financial assets in such currencies. The Group identifies primarily the exposure to the risk of changes in the EUR/PLN exchange rate. In the foreign exchange risk sensitivity analysis, the possible fluctuations of currency exchange rates were calculated on the basis of annual variability implied for currency options quoted on the inter-bank market for the given currency pair at the date ending the reporting period. The table below presents sensitivity of the financial result before tax and other comprehensive income to reasonably possible changes of exchange rates, assuming that there are no changes of other risk factors for such classes of financial instruments which are exposed to the exchange rate change risk:

FX risk sensitivity analysis 31 December 2017 as at 31 December 2017 Carrying Financial assets and liabilities Value at risk EUR/PLN amount

EUR/PLN EUR/PLN rate PLN PLN rate -6.00% +6.00% Assets Trade receivables 1,843 18 1 (1) 1 3,641 635 (38) Cash and cash equivalents 38

9 1,932 (116) Hedging derivatives (assets) 116 Liabilities Trade liabilities 792 10 (1) 1 Bonds and debt securities issued 4,629 4,446 (267) 267 Hedging derivatives (liabilities) 78 2,148 129 (129) Change in profit before tax (9) 9

(26) Change in other comprehensive income* 26

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 61

29. Financial risk management principles and objectives (cont.)

FX risk sensitivity analysis 31 December 2016 as at 31 December 2016

Carrying Financial assets and liabilities Value at risk EUR/PLN amount

EUR/PLN EUR/PLN PLN PLN rate rate +8.0% -8.0% Assets Trade receivables 1,947 22 2 (2) Cash and cash equivalents 1,471 255 20 (20) Hedging derivatives 147 2,120 170 (170)

Liabilities Trade liabilities 811 11 (1) 1 Bonds and debt securities issued 2,717 2,261 (181) 181 Change in profit before tax (9) 9 Change in other comprehensive income* 19 (19) * in respect to hedging derivatives With regard to trade transactions, the Group is not exposed, to a material extent, to the exchange rate risk because the Group’s cash settlements are mainly in PLN. With regard to financial transactions, the Group is exposed to currency exchange risk because of loans within the Group connected with issued Eurobonds. To hedge that risk, the Group has entered into cross-currency interest rate swap (CCIRS) transactions and has implemented hedge accounting (see the description in Note 28.6). Commodity risk The Group is exposed to risks tied to variation in prices of commodities used in the operating activity. The most significant risk is the risk of changing purchase prices of electricity and certificates of origin on the wholesale market in long-, medium- and short-term contracts executed by ENERGA-OBRÓT SA on the Polish market, and financial instruments on foreign markets, such as futures/forward contracts for electricity, CO2 emission allowances. Accordingly, it is important to refer the actual risk exposure to the assumed financial result for the year. Market risk exposure arises on all open positions (transactions) and it is mitigated using the Value at Risk (VaR) risk management model. The model mitigates market risk related to, among others, volatility of electricity prices, prices of CO2 certificates or property rights. The model assumes that risk is incurred within the acceptable boundaries only for an open position of the product portfolio, by imposing risk exposure limits on each portfolio and for ENERGA-OBRÓT SA as a whole. Value at Risk (VaR) is regularly monitored and reported to make sure that it does not exceed the set levels and takes into account, among others, the open position volume (difference between volume sold and bought), volatility of product prices and correlation between individual products in the portfolio. Additionally, to mitigate the risk associated with the volatility of electricity purchase prices on the wholesale end user contracting market, the following hedging measures are taken: • the open position on the electricity portfolio is minimized; this involves coordination and optimization of the purchasing and selling process to ensure that the difference between volumes purchased and sold do not exceed the pre-defined levels. • contracts are concluded in specific proportions and for different products, • volume limits are set for the open position for participation on selected markets, minimizing risk related to large fluctuations of electricity prices on the market. • mark to market valuation of the open position.

Additionally, as part of the trading activity on CO2 emission allowances (EUA) and emission reduction certificates (CER), to reduce the possible loss, Stop Loss and Take Profit (SL/TP) levels are set for each transaction and are monitored on an ongoing basis. 29.2. Credit risk In the Group, credit risk is defined as the probability that a counterparty defaults on its financial obligations. Credit risk is minimized by actions aiming at value-based risk assessment, monitoring the counterparties’ financial standing and securing trade credit by available instruments such as bank guarantees, sureties, etc. Credit risk is reduced in the case of counterparties having the highest turnover, or the portfolios of wholesalers and strategic clients. The following are of special importance in this respect: credit rating, trade limits, special provisions in agreements with counterparties and obtaining security from clients with a low credit rating. In the Group, appropriate procedures have been established to minimize the risk of counterparties’ insolvency. On the wholesale energy market, the procedures set the limits for possible electricity sales without requiring security. Transactions above the limit require security, such as bank guarantees. For sales to strategic and business clients, the procedures impose the duty to rate clients’ creditworthiness. For clients with a low credit rating, the sales may begin on the condition that security acceptable to the seller is obtained.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 62

29. Financial risk management principles and objectives (cont.) Moreover, thanks to the ongoing monitoring of the status of receivables, the Group’s exposure to the risk of uncollectable receivables is minor. With respect to the Group’s other financial assets, such as cash and cash equivalents and certain derivatives, the Group’s credit risk arises when the other party to a contract is unable to make a payment and the maximum exposure to this risk equals the carrying amount of such instruments. In the financial area, credit risk is limited through ongoing monitoring of the ratings of financial institutions and by limiting the risk of concentrating cash surpluses in a single financial institution. No significant concentrations of credit risk exist within the Group. The carrying amount of financial instruments, by category and class, is presented in Note 28.1. 29.3. Liquidity risk The Group monitors the risk of insufficient funds, which are required to settle the liabilities at maturity dates, using a tool for periodic liquidity planning. This tool is based on projected cash flows from operating, investing and financing activities, which are prepared by all Group companies. Additionally regular reviews are conducted to test reliability of the projections. On 4 January 2016, a one-way zero-balancing cash pooling service was launched in the ENERGA Group for funds in Polish zloty. This tool allows the holding company to manage the Group’s liquidity in an efficient fashion. According to the assumptions about the structure, at the end of each business day, cash owned by the Group’s companies is consolidated on ENERGA SA’s accounts and on the following day it may be used to finance payment liabilities of the individual participants. This tool makes it possible to finance the operations first of all with the funds generated by the Group and only then with debt financing. In respect to liquidity risk management, the Group aims at maintaining the balance between continuity and flexibility of financing through use of various sources of financing, such as overdrafts, bank loans, bonds, Eurobonds and financial lease agreements. Detailed information on contracted external financing obtained by the Group is set out in Note 28.5. The table below presents the Group’s financial liabilities by maturity dates, based on contractual, undiscounted payments (at nominal values, including payments of possible interest).

Less than 3 3 to 12 1 to 5 years Over 5 years Total months months

31 December 2017 Interest-bearing loans and borrowings 111 339 1,793 1,284 3,527 Bonds 90 49 2,666 2,563 5,368 Trade liabilities 787 5 - - 792 Other financial liabilities 275 5 3 78 361 TOTAL 1,263 398 4,462 3,925 10,048

31 December 2016 Interest-bearing loans and borrowings 104 333 1,816 1,717 3,970 Bonds 81 26 3,502 - 3,609 Trade liabilities 811 - - - 811 Other financial liabilities 146 10 7 - 163 TOTAL 1,142 369 5,325 1,717 8,553

The Group’s financial assets are highly liquid. They are comprised mainly of cash and cash equivalents and trade receivables. The structure of cash and cash equivalents is presented in note 19. Aging analysis of trade receivables is presented in Note 28.4.1.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 63

NOTES TO CONSOLIDATED STATEMENT OF CASH FLOWS

30. Statement of cash flows

Loss on investing activities Year ended Year ended 31 December 2017 31 December 2016 Result on disposal of property, plant and equipment and intangible assets 17 28

Impairment losses for property, plant and equipment and intangible assets (34) 459 Goodwill impairment allowance (11) 117 Other 3 7 TOTAL (25) 611

Change in receivables Year ended Year ended 31 December 2017 31 December 2016 Change in trade receivables 104 (185) Change in VAT receivables - 9 Change in advances for deliveries 19 27 Other (10) 22 TOTAL 113 (127)

Change in payables excluding loans and borrowings Year ended Year ended 31 December 2017 31 December 2016 Change in trade liabilities (19) (66) Change in other non-current financial liabilities 75 (19) Change in other financial liabilities 123 (36) Change in other current liabilities 89 (24) Adjustment by the change in investment commitments (123) 23 Adjustment by the change in liabilities on measurement of hedging (78) - derivatives Adjustment by the change in liabilities under grants received (42) - Other 8 18 TOTAL 33 (104)

Change in provisions Year ended Year ended 31 December 2017 31 December 2016 Change in non-current provisions (28) (86) Change in current provisions (140) 240 Adjustment by the change in actuarial provisions recognized in other (25) 32 comprehensive income Other (5) (10) TOTAL (198) 176

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 64

OTHER NOTES

31. Investment commitments

At the end of the reporting period, the Group's commitments to incur expenditures for the purchase of property, plant and equipment and intangible non-current assets, which have not yet been included in the statement of financial position, were about PLN 5,960 m, of which: • undertakings covered by the development plan of ENERGA-OPERATOR SA to satisfy the current and future demand for electricity in the years 2017-2022 (agreed upon with the President of the Energy Regulatory Office) – approx. 5,683 m; • undertakings executed in the Ostrołęka Power Plant (among others: modernization of power units, construction of a flue gas denitrification installation) – approx. PLN 83 m; • execution of the Przykona Wind Farm project – approx. PLN 134 m; • biomass-fired unit’s steam boiler optimization project implemented in ENERGA Kogeneracja Sp. z o.o. – approx. PLN 38 m, • combined cycle power plants in Grudziądz and Gdańsk – approx. PLN 22 m. 32. Information on related parties

Related party transactions are made based on market prices of goods, products or services delivered resulting from their manufacturing costs. 32.1. Transactions involving parties related to the State Treasury The Group's controlling entity is the State Treasury. Accordingly, other parties related to the State Treasury are treated by the Group as related parties. Transactions with parties related to the State Treasury were concluded in regular business dealings and pertained mainly to the purchase and sale of electricity and property rights, sale of electricity distribution services (including transit), settlements with the transmission system operator in the balancing market, for transmission services, system services and intervention work services and the purchase and transportation of fuel (mainly coal). The Group does not keep records that would allow it to aggregate the value of all transactions concluded with all state institutions and with subsidiaries of the State Treasury. 32.2. Transactions with joint ventures and associates Sale of ENERGA SA Group companies to associates and joint ventures in the period ended 31 December 2017 amounted to PLN 151 m (in the corresponding period of the previous year, sales to associates and joint ventures was PLN 17 m). Additionally, in the third quarter of 2017, property, plant and equipment worth PLN 3 m was sold to Elektrownia Ostrołęka SA. Purchases from associates and joint ventures in the period ended 31 December 2017 amounted to PLN 180 m (in the corresponding period of the previous year, the level of purchases from associates and joint ventures was PLN 33 m). The amount of receivables as at 31 December 2017 was PLN 48 m (as at 31 December 2016, the receivables amounted to PLN 5 m). The amount of liabilities as at 31 December 2017 was PLN 15 m, compared to PLN 2 m as at 31 December 2016. With the exception of sales and the value of receivables where counterparts also include Elektrownia Ostrołęka SA (receivables of PLN 10 m, sales of PLN 1 m and the sale of property, plant and equipment as mentioned above), all other transactions were effected with Polska Grupa Górnicza Sp. z o.o. and pertained in particular to the purchase of coal and sale of electricity. 32.3. Transactions with Parent Company’s Management Board members During the reporting period, the Parent Company did not conclude material transactions with Management Board members. 32.4. Compensation paid or due to key management and Supervisory Boards of Group companies

Year ended Year ended 31 December 2017 31 December 2016

Management Board of the parent company 4 6 Supervisory Board of the parent company <1 <1 Management Boards of subsidiaries 31 31 Supervisory Boards of subsidiaries 3 2 Other key management 24 16 TOTAL 62 55

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 65

33. Lease

33.1. Operating lease liabilities The Group does not have any material operating lease liabilities. 33.2. Operating lease receivables Future receivables on account of minimum leasing fees resulting from non-cancellable operating lease agreements are presented in the table below.

Leasing fees receivable as at

31 December 2017 31 December 2016 Up to 1 year 30 30 Within 1 to 5 years 59 59 TOTAL 89 89

The leasing fees mentioned above refer mainly to machines of the pumped-storage plant in Żydowo, through which peak-load operation is provided in favor of PSE SA (Transmission System Operator, "TSO"). The service involves the TSO having the plant at its disposal and using it to intervene to balance active and reactive power and to control load-flows in the power grid of the National Power System. The service includes intervention reserve of active power and regulation of voltage and reactive power. The property used to provide the service remains exclusively at the TSO’s disposal and the TSO has the right to use the generating units of the power plant. The agreement pursuant to which the service is provided has sufficient features, as defined in KIMSF4, to be recognized as leasing, but does not transfer the entire risk and benefits associated with the leased property to the TSO. 33.3. Liabilities under financial lease agreements The future minimum leasing fees for the agreements and the present value of the minimum net leasing fees are as follows: Leasing fees payable as at 31 December 2017 31 December 2016 Minimum lease Current value of Minimum lease Current value of payments payments payments payments Up to 1 year 4 4 9 8 Within 1 to 5 years 2 2 4 4

Total minimum lease payments 6 6 13 12

Less financial costs - - 1 -

Present value of the lease payments 6 6 12 12

34. Capital management

The Group manages its capital in order to maintain investment-grade credit rating and safe financial ratios to support the Group’s operating activity and increase its value for shareholders. This goal is achieved through the internal regulations adopted in the Group. The parent company is responsible for managing the Group’s debt policy. The Group monitors its basic debt ratio, that is net debt to EBITDA, estimated on the consolidated basis. As at the balance sheet date, this ratio was 1.90, while the financing agreements called for the level of 3.5. The level of the ratio is also regularly monitored by institutions financing the Group and by rating agencies; therefore, it has a significant influence on the evaluation of the Group’s credit rating and consequently the availability and cost of debt financing. As at As at 31 December 2017 31 December 2016

Interest-bearing loans and borrowings 3,076 3,420 Bonds and debt securities issued 4,629 2,717 Cash and cash equivalents, excluding restricted cash (3,610) (1,442) Net debt 4,095 4,695

EBITDA 2,160 2,027

Net debt / EBITDA 1.90 2.32

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 66

35. Contingent assets and liabilities

35.1. Contingent liabilities As at 31 December 2017, the Group recognizes contingent liabilities of PLN 320 m (PLN 255 m as at 31 December 2016), including mainly the contingent liabilities relating to disputes involving ENERGA Group companies, where a victory by the company is probable and no provision has been recognized for these cases. The largest contingent liability item consists of disputes relating to power infrastructure of ENERGA-OPERATOR SA where it is located on private land. The Group recognizes provisions for reported legal claims. If there is uncertainty whether a claim amount or legal title to land is justified, the Group recognizes contingent liabilities. As at 31 December 2017, the estimated value of those claims recognized as contingent liabilities is PLN 210 m, compared with PLN 214 m on 31 December 2016. The amounts are estimated by the Group’s lawyers, who consider the risk of a situation in which liability arises to be below 50%. An important issue is also the Agreement to co-finance the project entitled “Construction of a biomass-fired power unit by Energa Kogeneracja Sp. z o.o. in Elbląg” which sets out the performance ratios relating to the volume of electricity and heat produced in 2014-2018. If the ratios are not satisfied then it is likely that a refund of the awarded grant will be requested. However because of the cure activities, which are monitored by the Energy Ministry, the Group expects that by the end of 2018 the BB20 will be optimized in a way enabling full production capacities and thus the performance ratios will be satisfied within the required deadline, i.e. by the end of 2019 and the grants will not have to be refunded. The Management Board of ENERGA Kogeneracja Sp. z o.o. informs the Ministry of Energy on an ongoing basis about the performance of the contract. In order to secure the performance of obligations under the financing agreement ENERGA Kogeneracja Sp. z o.o. issued a blank promissory note amount of PLN 40 m with interest. Additionally, ENERGA-OBRÓT SA reached a conclusion on unconditional invalidity of, among others 22 long-term master contracts to purchase property rights arising from certificates of origin (“CPAs”), including bundled agreements – linked to electricity sales agreements – concluded with the owners of wind farms with aggregate capacity of about 530 MW. The reason for unconditional invalidity of CPAs is that they stand in contradiction to the Public Procurement Law Act of 29 January 2004 (Journal of Laws 2017.1579). Because of the above, as at 11 September 2017, the Company ceased to perform CPAs and filed claims to common and arbitration courts to rule invalidity of those agreements. CPAs had been concluded for period of up to 20 years from the commencement of production of electricity in an installation. The investment capital engaged in the wind farms originated from numerous countries, including Germany, USA, Spain, Austria, Japan. The only basis of assertions by ENERGA-OBRÓT SA that the CPAs are invalid are the legal conditions related to the signing of the agreements. The Company’s conviction that CPAs are unconditionally invalid is based on legal opinions prepared by reputable law firms. The decision to cease the performance of CPAs and file claims with the court was made by the Company on the basis of these opinions. The court cases pertaining to the invalidity of CPA Agreement are pending. The disputes were launched in September 2017; currently they are at the pre-hearing stage before 1st instance courts. ENERGA-OBRÓT SA has received statements of defense from almost all of the defendant wind farms and banks (which are assigns of receivables arising under CPAs). The analysis of counter-arguments submitted in response to the Company’s assertions leads to a conclusion that there are important reasons supporting the Company’s claims. Having analyzed the claims and allegations of the defendants, the Company remains convinced of the absolute invalidity of CPAs. This position has been confirmed in the course of the proceedings by independent experts from different fields of law and also by another reputable international law firm. It is important that during the proceedings, some of the defendants started to indicate their willingness to end the proceedings amicably. At present, ENERGA-OBRÓT SA is negotiating with several entities, as a result of which it may be possible to sign settlements and resolve the disputes amicably. The estimated value of contingent liabilities arising from the termination of the CPA agreements is PLN 26.5 m. 35.2. Contingent assets At the end of the reporting period and as at 31 December 2016, there were no material contingent assets.

36. Employment structure

The average headcount in the Group was as follows: Year ended Year ended

31 December 2017 31 December 2016 Blue collar employees 3,029 2,971 Non-blue collar employees 5,791 5,644 TOTAL 8,820 8,615

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 67

37. Other information significantly affecting the assessment of assets, financial position and the financial result of the Group

On 11 May 2017, the Management Board of ENERGA SA adopted a resolution on resignation from the participation in the transaction to acquire Polish assets of EDF International SAS of EDF Investment II B.V. The decision followed in-depth analyses, which supported a decision to focus ENERGA SA Group’s investments and acquisitions on projects that would offer more synergies with its current asset base and area of competence; ones that would allow the Group to strengthen its balance sheet and improve its asset management efficiency. On 1 August 2017, the Social Agreement securing employee rights and interests in the ENERGA SA Group’s consolidation and restructuring process (“Social Agreement”) signed on 19 July 2007 expired. On 18 September 2017, the “Agreement to secure employee, social and union rights for ENERGA SA Group employees”. The agreement came into effect on 19 September 2017 and will be in effect until 31 December 2023. 38. Subsequent events

After the final day of the reporting period, there were no material events.

Accounting principles (policies) and notes to the consolidated financial statements constitute an integral part thereof 68

Signatures of ENERGA SA Management Board Members:

Alicja Klimiuk ………………………………………… Acting President of the Management Board

Jacek Kościelniak ………………………………………… Vice-President of the Management Board for Financial Matters

Grzegorz Ksepko ………………………………………… Vice-President of the Management Board for Corporate Matters

Person responsible for the preparation of the statements:

Małgorzata Guzińska-Błońska ………………………………………… Manager of the Financial Reporting Unit – Chief Accountant

Gdańsk, 14 March 2018

(This is translation of the consolidated financial statements originally issued in Polish) WorldReginfo - c47e6995-7181-4c30-bde8-e87658e1446c

ENERGA SA Group

Independent Auditor’s Report

Financial Year ended

31 December 2017

© 2018 KPMG Audyt Spółka z ograniczoną odpowiedzialnością sp.k. a Polish limited partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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This document is a free translation of the Polish original. Terminology current in Anglo-Saxon countries has been used where practicable for the purposes of this translation in order to aid understanding. The binding Polish original should be referred to in matters of interpretation.

INDEPENDENT AUDITOR’S REPORT

To the General Shareholders’ Meeting of ENERGA SA

Report on the Audit of the Annual Consolidated Financial Statements

We have audited the accompanying annual consolidated financial statements of the Group, whose parent entity is ENERGA SA with its registered office in Gdańsk, al. Grunwaldzka 472, which comprise the consolidated statement of financial position as at 31 December 2017 the consolidated statement of profit or loss, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended and notes comprising a summary of significant accounting policies and other explanatory information (the “consolidated financial statements”).

Responsibility of the Management Board and Supervisory Board of the Parent Entity for the consolidated financial statements

The Management Board of the Parent Entity is responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards, as adopted by the European Union (“IFRS EU”) and other applicable laws. The Management Board of the Parent Entity is also responsible for such internal control as the Management Board determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

According to the accounting act dated 29 September 1994 (Official Journal from 2018, item 395) (the “Accounting Act”), the Management Board and members of the Supervisory Board of the Parent Entity are required to ensure that the consolidated financial statements are in compliance with the requirements set forth in the Accounting Act.

Auditor’s Responsibility for the audit of the consolidated financial statements

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with:  the act on certified auditors, audit firms and public oversight dated 11 May 2017 (Official Journal from 2017, item 1089) (the „Act on certified auditors”);  International Standards on Auditing as adopted by the resolution dated 10 February 2015 of the National Council of Certified Auditors as National Standards on Assurance; and

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 Regulation (EU) No 537/2014 of the European Parliament and of the Council of 16 April 2014 on specific requirements regarding statutory audit of public-listed entities and repealing Commission Decision 2005/909/EC (Official Journal of the European Union L 158 from 27.05.2014, page 77 and Official Journal of the European Union L 170 from 11.06.2014, page 66) (the “EU Regulation”).

Those regulations require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the regulations mentioned above will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. The risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting a material misstatement resulting from error because fraud may involve collusion, forgery, deliberate omission, intentional misrepresentations or override of internal controls.

The scope of audit does not include assurance on the future viability of the Group or on the efficiency or effectiveness with which the Management Board has conducted or will conduct the affairs of the Group.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Group’s preparation of the consolidated financial statements that give a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Management Board of the Parent Entity, as well as evaluating the overall presentation of the consolidated financial statements.

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

The most significant assessed risks of material misstatements

During our audit we identified the most significant assessed risks of material misstatements (the “key audit matters”), including those due to fraud, described below and we performed appropriate audit procedures to address these matters. Key audit matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We have determined the following key audit matters:

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Key audit matters Our procedures

Impairment of property, plant and equipment

Net book value of property, plant and equipment as at 31 December 2017 amounts to PLN 13.371 million, while recognized impairment loss on tangible fixed assets as at 31 December 2017 amounts to PLN 660 million.

Reference to the consolidated financial statements: Note 6 "Material items subject to judgment and estimates", Note 9.6 "Property, plant and equipment", Note 9.9 "Impairment of non-financial non-current assets", Note 11.2 "Costs by nature", Note 11.3 "Cost of depreciation and impairment losses recognized on non-financial non-current assets in the statement of profit or loss", Note 13 "Property, plant and equipment" As described in the note 13 of the Our procedures included: consolidated financial statements, in relation  Assessment of compliance of the accounting with the identified indications of possible policies adopted by the Group with regard to impairment of property, plant and equipment, identification and recognition of impairment of the Group decided to perform impairment property, plant and equipment dependent on tests for property, plant and equipment of the the corresponding financial reporting energy production sector, in particular, power standards; generation assets belonging to ENERGA  Assessment of the internal controls system in Wytwarzanie SA, ENERGA Elektrownie regard to identification of indicators of Ostrołęka SA and ENERGA Kogeneracja Sp.z o.o. impairment and testing for impairment of property, plant and equipment; The Group has performed an estimation of  Assessment of Group’s judgements in regard the recoverable amount of property, plant to grouping assets into cash generating units; and equipment of the power generation sector based on the corresponding value in  Critical assessment of rationality of use of cash generating units using the judgements and assumptions made by the discounted cash flow model. Group, and the estimations of recoverable amount of property, plant and equipment in Impairment of property, plant and equipment the power generation sector, and as a has been recognized as a key audit matter consequence, the value of identified due to the fact that the estimation of their impairment loss, with the ongoing support of recoverable amount is based on a range on our internal valuation specialists, including: assumptions and estimates, most notably in relation to the future cash flows and the  assessment of the discounted cash flow adopted discount rate. model prepared by the Group with regard to its compliance with the correspondent

financial reporting standards, compliance The projected cash flows are highly sensitive with the commonly used impairment tests on the assumptions based on the electrical models, and the internal integrity of the energy prices, coal prices, prices of energy certificates of origin and CO2 emission rights. used methodology, The validity of the assumptions made in this  assessment of the rationality of the key regard is considered to be burdened with a macroeconomic and discount rate significant risk taking into consideration the assumptions made by the Group and potential regulatory variability and uncertainty comparing them to external sources, of their effect on economy of functioning of  critical assessment of the rationality of the energy production sector. projections of future cash flows, including the assumed levels of revenues, costs,

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investment expenditures by comparing the adopted assumptions to the historical financial information, and by analyzing actions taken by the Group and its subsidiaries until the audit,  assessment of whether the Group’s assumptions regarding future regulatory conditions were based on a rational model of power sector and renewable energy sources support system;  assessment of the correctness of the assumptions regarding the prices of electricity by comparing them to the results of analyzes of external experts ordered by the Group, whose competences, experience and objectivity we assessed.  Assessment of correctness and completeness of disclosures in the consolidated financial statements with regard to impairment tests, including the assessment of the sensitivity of cash flow model prepared by the Group to changes in its key assumptions, such as discount rate, inflation rate, prices of electric energy, revenues of the power market.

Revenue recognition

Sales revenues for the financial year ended 31 December 2017 amount to PLN 10.534 million, trade receivables as at 31 December 2017 amount to PLN 1.834 million.

Reference to the consolidated financial statements: Note 6 “Material items subject to judgment and estimates”, Note 9.22.1. "Financial assets", Note 9.24 "Revenue", Note 11.1 "Sales revenues", Note 28 "Financial instruments"

In the year ended 31 December 2017, the Our procedures included: Group generated revenues primarily from  Updating our understanding the sale of electricity to the end users and on and assessment of the process of recognizing the wholesale market, electricity distribution sales revenues and conducting internal control services and gas sales. tests in this area, in particular regarding the correctness of invoicing customers for energy The issue of recognition of sales revenues consumption based on reading from the was the subject of our special attention due meter; to the fact that the application of appropriate  Evaluation of the accounting policy regarding financial reporting standards is complex and the recognition of revenues in terms of their requires the Management to make compliance with the relevant requirements of accounting estimates and judgments about the financial reporting standards; the value of supplied electricity and

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distribution service where no bill has been  With the support of our internal Information issued at the balance sheet date. Meter Risk Management specialists, assessment of readings regarding the value of electricity selected IT systems used by the Group in sold to end users are made mostly in periods relation to automated controls in the area of different from the reporting period. program changes and access to the above In connection with the above, the entities systems, including billing systems used in the belonging to the ENERGA Group make process of revenue recognition; estimates of electricity sales and distribution  Comparison the amount of revenues included services for each day ending the reporting in the books to billing data and revenues period, for the period not covered by the recognized on the basis of estimates made by reading. the Group regarding the value of electricity and

the realized non-billed distribution service at The recognition of sales revenues is also the balance sheet date with actual data based on the use of complex IT systems for available after the end of the reporting period; data processing (in particular billing systems) that process large volumes of data  Evaluation of the reasonableness of the with a combination of different tariffs and amount of sales revenues by building periods of reading the actual value of independent expectations regarding these electricity sold. revenues: - for distribution services - based on the For these reasons, this area has been analysis of revenues from the previous year, recognized by us as a key audit matter. updated with the effect of changing the distribution tariff; - for electricity sales services based on the analysis of revenues from the previous year, updated with the effect of changes in volume and price in individual tariff groups. Comparison of our expectations to sales revenues recognized by the Group for the sales business line;  For a selected sample of the Group's clients, obtaining receipts of receivables balances as at October 30, 2017; Reconciliation of changes in the balance of receivables from October 30, 2017 until the balance sheet date.  Reconciliation of data on the amount of electricity consumed for a selected sample of invoices for customers with information in billing systems based on reading from meters, including checking the receipt of payment for selected items from each billing system.

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Claims for cessation of performance of long-term contracts for purchase of property rights resulting from certificates of origin of energy from renewable sources

The value of disclosed contingent liabilities due to the cessation of long-term agreements for the purchase of property rights as at December 31, 2017 amounts to PLN 26.5 million;

Reference to the consolidated financial statements: Note 35.1 "Contingent liabilities"

As described in Note 35.1 to the consolidated Our procedures included: financial statements, the subsidiary  Assessment of compliance of the Group's ENERGA-OBRÓT SA (the "Subsidiary") has accounting policy regarding the disclosure of come to the conviction of non-existence of the contingent liabilities as a result of cessation of legal relationship related to multi-annual the performance of the CPAs with appropriate framework agreements for the purchase of financial reporting standards; property rights arising from certificates of  Analysis of the content of selected contracts origin ("CPAs"). In the opinion of the for the purchase of green certificates, Subsidiary, the reason for the non-existence including of the CPA Agreements is their inconsistency in particular in the context of the legal basis set with the Act of 29 January 2004 - Public out by the Entity invalidity, and collected up to Procurement Law (Dz.U.2017.1579). the date of audit court trial documentation, in order to assess the risk for the Entity in Because of the above, as of September 11, resolving disputes related to the cessation of 2017, the Company ceased to perform the these contracts; CPA Agreements and initiated a court and  Analysis of legal opinions obtained by the arbitration proceedings which subject-matter Entity and letters independently received by us is to be determination of the non-existence of from lawyers servicing the Entity regarding CPAs. Litigation regarding invalidity of CPA reported claims and court proceedings contracts are pending. Disputes were initiated pending in this respect, discussion of selected in September 2017 and they are currently at issues with the Entity’s Management Board; the initial stage of the proceedings.  Analysis of the legal opinion prepared at our request by an independent law firm not There is significant uncertainty as to the previously involved in the proceedings outcome of the final settlement of court assessing the most probable outcome of the disputes regarding the legal grounds for dispute as well as possible further recognition of their non-existence and consequences for the Entity, both acceptance reported claims, which requires a detailed and rejection by the court of applications for analysis and a number of assumptions and absolute termination of contracts; judgments. The value of claims may be  An analysis of the facts and arguments of the significant, and the determination of any parties prepared by our internal law specialist; amount that should be recognized or  Critical assessment of the Enitiy's disclosed in the financial statements is assumptions and estimates (including the subjective in nature, therefore the reported probability of negative settlement of court and potential claims for cessation of contracts disputes) based on the above analyzes; for the purchase of property rights arising  Critical evaluation of the reasonableness of from certificates of origin have been cost calculation due to cessation of contracts recognized by us as the key audit matter. in the event of unfavorable settlement of disputes, by building expectations based on the estimated volume of unrealized purchase of green certificates and average contract prices for the purchase of green certificates

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and their comparison to the amount determined by the Company;  Assessment of the correctness and completeness of disclosures in the consolidated financial statements regarding contingent liabilities from ceasing to carry out contracts for the purchase of green certificates.

Opinion

In our opinion the accompanying consolidated financial statements of ENERGA SA Group:  give a true and fair view of the consolidated financial position of the Group as at 31 December 2017 and of its consolidated financial performance and its consolidated cash flows for the year then in accordance with IFRS EU and the adopted accounting policy;  comply, in all material respects, with regard to form and content, with applicable laws and the provisions of the Parent Entity’s articles of association.

Other Matters

The consolidated financial statements of the Group as at and for the year ended 31 December 2016 were audited by another audit firm who expressed an unmodified opinion as at 29 March 2017

Report on other legal and regulatory requirements

Report on the Group activities

Our opinion on the consolidated financial statements does not cover the report on the Group’s activities (the “report on activities”).

The Management Board of the Parent Entity is responsible for the preparation of the report on activities in accordance with the requirements of the Accounting Act and other applicable laws. Furthermore, the Management Board and members of the Supervisory Board of the Parent Entity are also required to ensure that the report on activities is in compliance with the requirements set forth in the Accounting Act.

In accordance with Act on certified auditors our responsibility was to determine if the report on activities was prepared in accordance with applicable laws and the information given in the report on activities is consistent with the consolidated financial statements. Our responsibility was also to state, if based on our knowledge about the Group and its environment obtained in the audit, we have identified material misstatements in the report on the activities and describe the nature of each material misstatement.

Based on the work undertaken in the course of our audit of the consolidated financial statements, in our opinion, the accompanying report on activities, in all material respects:  has been prepared in accordance with applicable laws, and

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 is consistent with the consolidated financial statements. Furthermore, based on our knowledge about the Group and its environment obtained in the audit, we have not identified material misstatements in the report on activities.

Opinion on corporate governance statement

The Management Board and members of the Supervisory of the Parent Entity are responsible for preparation of the corporate governance statement in accordance with the applicable laws.

In connection with the audit of the consolidated financial statements, our responsibility in accordance with the requirements of the Act on certified auditors was to report whether the issuer of securities obliged to prepare a corporate governance statement, constituting a separate part of the report on activities, included information required by the applicable laws and regulations, and in relation to specific information indicated in these laws or regulations, to determine whether it complies with the applicable laws and whether it is consistent with the consolidated financial statements.

In our opinion the corporate governance statement, which is a separate part of the report on the the Group’s activities, includes the information required by paragraph 91 subparagraph 5 point 4 letter a, b, j, k and letter l of the Decree of the Ministry of Finance dated 19 February 2009 on current and periodic information provided by issuers of securities and the conditions for recognition as equivalent of information required by the laws of a non-member state (Official Journal from 2014, item 133 with amendments) (the “decree”). Furthermore, in our opinion the information identified in paragraph 91 subparagraph 5 point 4 letter c-f, h and letter i of the decree of the regulations, included in the corporate governance statement, in all material respects:  has been prepared in accordance with the applicable laws; and  is consistent with the consolidated financial statements.

Information about non-financial statement

In accordance with the requirements of the Act on certified auditors, we report that the Parent Entity has prepared a statement on non-financial information referred to in art. 49b paragraph 9 of the Accounting Act.

We have not performed any assurance procedures in relation to the non-financial statement of the Group and, accordingly, we do not express any assurance conclusion thereon.

Independence and the appointment of the audit firm

Our opinion on the audit of consolidated financial statements is consistent with our report to the audit committee.

During our audit the key certified auditors and the audit firm remained independent of the Group in accordance with requirements of the Act on certified auditors, the EU Regulation and the Code of Ethics for Professional Accountants of the International Ethics Standards Board for Accountants’ (IFAC) as adopted by the resolutions of National Council of Certified Auditors.

We declare that, to the best of our knowledge and belief, we did not provide prohibited non- audit services referred to in art. 5 paragraph 1 second subparagraph of the EU Regulation and art. 136 including transitional provisions in art. 285 of the act on certified auditors.

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The key statutory auditors or the audit firm did not provide any other services to the Group that were not statutory audits of the financial statements, except those disclosed in the report on operations.

The audit of the consolidated financial statements was carried out on the basis of a resolution of the Supervisory Board of December 20, 2016.

Our total uninterrupted period of engagement is 1 year, beginning from the periods ending at 31 December 2017.

On behalf of audit firm KPMG Audyt Spółka z ograniczoną odpowiedzialnością sp.k. Registration No. 3546 ul. Inflancka 4A 00-189 Warsaw

Signed on the Polish original Signed on the Polish original ...... Zbigniew Libera Natalia Markowska Key Certified Auditor Key Certified Auditor Registration No. 90047 Registration No. 10853 Limited partner

14 March 2018

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